SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[xxx] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1994
or
[___] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-5829
Marion Merrell Dow Inc.
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(Exact Name of Registrant as specified in its charter)
Delaware 44-0565557
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
9300 Ward Parkway, Kansas City, Missouri 64114
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 816-966-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 17, 1995, the Registrant had outstanding 277,033,030 shares of
Common Stock. The aggregate market value of the voting stock held by non-
affiliates of the Registrant as of such date was $1,945,120,464, this
amount having been computed based upon the closing price on March 17, 1995,
on the New York Stock Exchange of one share of Common Stock of the
Registrant.
Exhibit Index is located at Sequential Page 90
Page 1 of 122 pages
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
ITEM 1. BUSINESS.
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GENERAL:
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Marion Merrell Dow Inc., a Delaware corporation (together with its
subsidiaries, the "Company"), is a global research-based company dedicated
to improving the longevity and quality of human life through
pharmaceutical-based health care. The Company was founded in 1952 under
the name Marion Laboratories, Inc. ("Marion") and reorganized as a Delaware
corporation in 1964. In 1989, The Dow Chemical Company ("Dow") acquired 67
percent of the then outstanding shares of Marion's common stock (since
increased to approximately 71 percent), Marion acquired 100 percent of the
outstanding shares of common stock of Dow's then wholly-owned subsidiary
Merrell Dow Pharmaceuticals Inc. ("Merrell Dow"), and Marion changed its
name to Marion Merrell Dow Inc.
The Company is engaged in the discovery, development, manufacture, and
sale of proprietary (or "brand name") and generic pharmaceutical products
(respectively, "Proprietary Products" and "Generic Products"). These
products are marketed through programs targeted to reach medical and health
care professionals, managed health care providers, institutions, and
pharmacies primarily in the United States, Australia/New Zealand, Canada,
France, Germany, Italy, Japan, Spain and the United Kingdom, as well as in
other countries. As of December 31, 1994, the Company had 9,421 associates
(employees).
The year 1994 began with a significant, planned transition in top
management. Effective January 1, 1994, Chairman of the Board Joseph G.
Temple, Jr., and Executive Vice President and Chief Operating Officer David
B. Sharrock retired from their respective positions. Both continued as
directors of the Company, Mr. Temple in the role of Vice Chairman of the
Board. Fred W. Lyons, Jr., previously President and Chief Executive
Officer, became Chairman and Chief Executive Officer while Richard J.
Markham, a director of the Company since 1993 and formerly President and
Chief Operating Officer of Merck & Co., Inc., was appointed President and
Chief Operating Officer of the Company.
As challenging business conditions continued to affect the Company and
the pharmaceutical industry in 1994, efforts continued to implement the
Company's strategy, initiated in 1993, of better positioning the Company to
compete in evolving global health care markets characterized by increased
emphasis on cost control. This strategy emphasizes three key goals: (i)
maximizing key franchises in therapeutic areas (products), in geographic
areas, and among health care providers around the world; (ii) anticipating
changes in the global health care market and building market coalitions to
ensure patient access to the Company's products; and (iii) creating a
steady flow of commercially attractive new products.
Many conditions that led to the development of this strategy also
affected the Company in 1994, including the continuing decline of sales of
the Seldane (registered trademark) (terfenadine) family of antiallergy
<PAGE> 3
medications, the decline of the nicotine transdermal patch market, a
substantial shift in Cardizem (registered trademark) (diltiazem) sales from
Cardizem tablets and Cardizem SR to less-expensive Cardizem CD, generic
competition for Cardizem tablets and Cardizem SR, fluctuations in foreign
currency exchange rates, government-mandated price discounts and rebates,
the increasing purchasing power of institutions and managed health care
organizations, and the Company's policy of voluntarily holding overall U.S.
price increases for prescription products in line with the anticipated rate
of inflation (see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations"). Strong competitive
pressures on the Cardizem, Seldane, and Carafate (registered trademark)
(sucralfate) product lines also continued in 1994. Significant U.S. patent
and regulatory protection for the Seldane family of products expired during
the year, although additional patents remain in effect (see "Patents,
Licenses and Trademarks").
During 1994, the Company continued to restructure its global
organization, reduce its U.S. workforce, and refocus research and
development ("R&D") on the highest priority projects in the new product
pipeline (see "Research and Development"). Efforts also continued to
reduce costs, accelerate development of new products, develop new strategic
relationships, acquire rights to new products, exploit manufacturing
synergies, reduce cycle time for manufacturing and product development, and
improve organizational and operating efficiencies.
The Company's ongoing efforts to assess and adjust its corporate
structure and business mix in order to remain competitive by keeping pace
with rapid changes in the pharmaceutical industry also continued in 1994.
As part of this process, the Company continually evaluates acquisition
candidates, possible joint marketing arrangements, potential business
combinations and alliances, and other strategic alternatives with the goal
of improving the Company's position within the industry. In August 1994,
the Company announced it had asked its investment banker for advice in this
area and that Dow had likewise retained an investment banker for advice on
strategic opportunities that might arise for the Company.
On February 28, 1995, the Company, Dow, and The Hoechst Group
("Hoechst") announced that they were engaged in discussions concerning the
possible negotiated acquisition by Hoechst of all of the Company's
outstanding Common Stock at a price of $25.75 per share in cash, and that
Dow and Hoechst also were discussing Hoechst's possible acquisition of
Dow's Latin American pharmaceutical business for $200 million. Although
discussions are ongoing, as of March 17, 1995, no agreements had been
reached, and there can be no assurance that such discussions will result in
any agreement or transaction.
There can be no assurance that the foregoing or any other actions
taken by the Company will be successful in improving the Company's
competitive position or contributing to the Company's sales and earnings.
Since January 1, 1994, the Company has completed the following
strategic acquisitions:
o Kodama Ltd. ("Kodama"), a Japanese pharmaceutical company, which
was merged with Marion Merrell Dow K.K., the Company's principal
Japanese subsidiary, in January 1995.
<PAGE> 4
o Clinidata Inc., a leading Canadian provider of medical
information systems databases to healthcare professionals and
institutions, in November 1994.
o Selectide Corporation ("Selectide"), a leader in combinatorial
chemistry and rapid screening technologies for pharmaceutical
research, in January 1995. See "Research and Development".
During the same period, the Company completed the following
marketing arrangements:
o Effective in January 1994, agreement with Synthelabo SA
("Synthelabo") for exclusive co-marketing in France of Ivadal
(registered trademark) (zolpidem), an insomnia treatment.
o In February 1994, co-promotion with Sandoz Pharmaceutical
Corporation ("Sandoz") of the Sandoz product Lescol (registered
trademark) (fluvastatin sodium), a synthetic cholesterol-lowering
agent already approved for marketing in the U.S., and the
Company's product Sabril (registered trademark) (vigabatrin), an
antiepilepsy drug currently marketed in a number of foreign
countries, which is under regulatory review for U.S. marketing
approval (see "Sales, Marketing and Distribution").
o In June 1994, exclusive license from Nexstar, Inc. ("Nexstar"),
to market AmBisome (registered trademark) (liposomal amphotericin
B), a new product for the treatment of life-threatening fungal
infections, in Italy.
o In December 1994, co-promotion with Astra Merck Inc. ("Astra
Merck") of Astra Merck's Prilosec (registered trademark)
(omeprazole), a unique once-daily product for short-term
treatment of gastroesophageal reflux disease and esophagitis,
duodenal ulcer, and hypersecretory conditions, which is already
marketed in the U.S.
o In March 1995, collaboration with Teva Pharmaceutical Industries
Limited ("Teva") for North American marketing of Copaxone
(registered trademark) (copolymer-1), Teva's investigational new
product for the treatment of multiple sclerosis.
The Company also evaluated its equity investments in various companies
and began to reduce its ownership interest in certain companies that are no
longer considered strategic to the Company.
In 1994, the Company received clearance from the FDA for U.S.
marketing of Rifater (registered trademark) (rifampin, isoniazid,
pyrazinamide), the only triple-combination product available for once-daily
therapy during the initial two-month intensive treatment phase of pulmonary
tuberculosis. Four New Drug Applications ("NDAs") were filed with the FDA
in 1994, including Sabril, Nicorette (registered trademark) OTC (for
reclassification from prescription to over-the-counter status), Cardizem
Lyo-Ject (trademark) (an injectable form with an improved delivery system),
and an enalapril-diltiazem combination once-a-day product for the treatment
of hypertension in patients for whom single-drug therapy may be
inappropriate. Investigational New Drug Applications ("INDs") for two
compounds were filed with the FDA in 1994. More than 40 product approvals
were received worldwide.
<PAGE> 5
In the first quarter, the Company commenced construction of new global
headquarters and research and development facilities in Kansas City,
Missouri, which are expected to improve organizational efficiency and
effectiveness by consolidating substantially all Kansas City-based
functions at a single site. Portions of the project are expected to be
available for occupancy as early as December 1995.
Also during 1994, the Company's generic pharmaceuticals subsidiary,
The Rugby Group, Inc. ("Rugby"), consolidated its sales and marketing
administrative group in Atlanta, Georgia, while Rugby's product development
group moved from New York to new facilities at the Company's discovery
research center in Cincinnati, Ohio. The distribution services formerly
performed at Rugby's New York site were transferred to other existing sites
and to a new leased facility in Harrisburg, Pennsylvania.
The Company continued its efforts to defend key product rights in
1994. Among other developments: a competitor's nicotine patch patent was
declared invalid and the Company is now pursuing a patent infringement
action against the competitor; the diltiazem manufacturing process patent
was upheld by the U.S. Patent and Trademark Office, but an administrative
law judge of the International Trade Commission subsequently ruled it
invalid (the ruling is being appealed); the Company continues to prosecute
a lawsuit to enforce patents related to Cardizem CD against a company
proposing to market a once-a-day diltiazem product; and lawsuits were filed
to enforce the Company's terfenadine metabolite patent against two
prospective marketers of generic terfenadine products, and to prevent FDA
approval of products the Company believes infringe the metabolite patent.
In January 1995, the FDA denied the Company's citizen petition seeking to
require prospective marketers of generic terfenadine products to certify
noninfringement of the metabolite patent. As a result, the Company has
resumed its legal action against the FDA seeking similar relief (see Item
3, "Legal Proceedings").
PRODUCTS:
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Business operations are confined within the pharmaceutical industry.
The Company's pharmaceutical product lines consist of more than 140
different Proprietary Products and an extensive line of Generic Products,
in a broad range of therapeutic categories. The Cardizem, Seldane,
Carafate, and smoking cessation families of products were the Company's
leading product categories based on sales for the year ended December 31,
1994.
The Cardizem (diltiazem) family of cardiovascular products marketed in
the United States, Canada, and other countries (sometimes under other
trademarks) includes Cardizem tablets, indicated for the treatment of
chronic stable angina and angina due to coronary artery spasm; Cardizem SR,
a sustained release capsule indicated for the treatment of hypertension;
Cardizem CD, a once-a-day dosage form indicated for the treatment of
hypertension or angina; and Cardizem Injectable, an intravenous dosage form
used to control heart rate during atrial fibrillation/atrial flutter and
conditions that result in rapid, irregular heartbeat. Sales of the
Cardizem family of products have shifted toward the newer and less
expensive Cardizem CD, which became the predominant dosage form in 1993.
The Cardizem family of products accounted for 30 percent of net sales in
1994 and 32 percent of net sales in 1993 and 1992.
<PAGE> 6
The Seldane (terfenadine) family of nonsedating antihistamine products
includes Seldane and Seldane-D (registered trademark), which are sold by
prescription in the United States for the treatment of seasonal allergic
rhinitis. Seldane-D is a combination of terfenadine and pseudoephedrine
HCl, a decongestant, and was the first nonsedating antihistamine-
decongestant product approved for marketing in the United States. In other
countries, terfenadine products are marketed as Seldane or under other
trademarks, are available in prescription and nonprescription forms, and
are used for the treatment of allergic rhinitis, urticaria, or asthma. The
Company continues to explore potential new anti-allergy products such as a
terfenadine acid metabolite, which is in Phase III clinical trials. The
Seldane family of products accounted for 23 percent of net sales in 1994,
27 percent in 1993 and 26 percent in 1992.
The Carafate (sucralfate) family of prescription antiulcer products
marketed primarily in the U.S. and Canada includes Carafate tablets for
treatment of duodenal ulcers and for ulcer maintenance therapy, and
Carafate Suspension, a liquid dosage form for treatment of duodenal ulcers.
The Company's family of smoking cessation products, which are sold in
the United States and other countries, includes Nicoderm (registered
trademark), a prescription transdermal nicotine patch; Nicorette, a resin-
nicotine complex incorporated into a gum base; and Nicorette DS, a stronger
version of Nicorette gum. Effective January 1, 1994, U.S. marketing of
Nicorette was transferred to SmithKline Beecham Consumer Healthcare, L.P.
("SKBCHC"), the Company's consumer products partnership with SmithKline
Beecham. Sales of Nicorette by SKBCHC are not included in the Company's
1994 sales. Although marketed by SKBCHC as a prescription product,
Nicorette currently is under review by the FDA for over-the-counter ("OTC")
status.
The Company also sells the Proprietary Products Bentyl (registered
trademark) (an antispasmodic), Cephulac (registered trademark) (for
treatment of hepatic coma), Cerocral (registered trademark) (a cerebral
vasodilator), Chronulac (registered trademark) (a prescription laxative),
Clomid (registered trademark) (a fertility inducer), deflazacort (a
prescription anti-inflammatory product marketed under the brand names
Flantadin (registered trademark) and Calcort (registered trademark)),
Ditropan (registered trademark) (for treatment of some bladder conditions,
including urinary incontinence), Lorelco (registered trademark) (a
prescription product for cholesterol reduction), Norpramin (registered
trademark) (an antidepressant), Pentasa (registered trademark) (for active
ulcerative colitis), Rifadin (registered trademark) (a prescription
antibiotic for pulmonary tuberculosis), Rifater (registered trademark) (a
triple-combination product for once-daily intensive treatment of pulmonary
tuberculosis), Sabril (registered trademark) (for the treatment of
refractory epilepsy), Silvadene (registered trademark) (a topical
antimicrobial burn cream), Targocid (registered trademark) (a gram-positive
antibiotic), and Tenuate (registered trademark) (for appetite control).
Outside the United States, the Company sells the OTC products Cepacol
(registered trademark) and Cepastat (registered trademark) (OTC oral
hygiene products), Citrucel (registered trademark) (an OTC bulk fiber
laxative), Gaviscon (registered trademark) (an OTC antacid product
available in tablet and liquid form), Novahistine (registered trademark)
(OTC cough/cold/allergy products) and Os-Cal (registered trademark) (an OTC
calcium supplement). U.S. rights to the Company's OTC Proprietary Products
were transferred to SKBCHC in 1992.
<PAGE> 7
Rugby sells an extensive line of prescription and OTC Generic Products
in the U.S., in a broad range of therapeutic categories. A number of
additional Generic Products and product line extensions are in various
phases of development.
SALES, MARKETING AND DISTRIBUTION:
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Proprietary Products are sold and distributed in the United States
primarily through the efforts of the Company's sales and marketing
organization. In the U.S., OTC products are marketed through SKBCHC while
Rugby markets Generic Products and its own line of OTC products. Although
the Company and its subsidiaries sell or distribute products in over 100
countries and maintain a direct sales force in 15 countries, the Company
concentrates its sales and marketing efforts in the United States,
Australia/New Zealand, Canada, France, Germany, Italy, Japan, Spain and the
United Kingdom.
In North America, Europe, and Australia/New Zealand, the Company sells
its Proprietary Products primarily to pharmaceutical wholesale distributors
for resale to retailers, hospitals, and health care institutions. The
promotion of Proprietary Products is directed primarily to physicians and
purchasers of products for institutions and managed health care
organizations. The Company promotes Proprietary Products by advertising in
medical journals, other publications, and on radio and television, as well
as by the selective distribution of samples and product information. In
Japan, prescription pharmaceutical products are sold primarily to wholesale
distributors who resell them to physicians for patients' use.
A substantial portion of the Company's Generic Products are sold
directly to independent pharmacies and pharmacy chains. Promotion of
Generic Products is conducted principally through marketing and
telemarketing directed primarily to major drug wholesalers, pharmacy
chains, independent pharmacies, and managed health care organizations. Six
regional warehouse and distribution centers in the U.S. are maintained for
distribution of Generic Products.
In February 1994, the Company and Sandoz agreed to co-promote two
prescription products in the U. S. market. Under the arrangement, the
Company is assisting in the U.S. promotion of the Sandoz product Lescol
(registered trademark) (fluvastatin sodium), a synthetic cholesterol-
lowering agent that received marketing clearance from the FDA in December
1993, and Sandoz will assist in the U.S. promotion of the Company's product
Sabril (registered trademark) (vigabatrin), an anti-epilepsy drug that is
currently marketed by the Company in more than forty foreign countries and
is under review by the FDA for U.S. marketing approval. The co-promotion,
which is to last for an initial period of six years from the U.S. launch of
each product, will permit the application of Sandoz's strength in
neurological medicine to the marketing of Sabril and the Company's
strengths in cardiovascular medicine and managed health care to the
marketing of Lescol.
In November 1994, the Company and Astra Merck agreed to co-promote for
three years Astra Merck's Prilosec (registered trademark) (omeprazole), a
unique once-daily product already marketed in the U.S. for short-term
treatment of gastroesophageal reflux disease and esophagitis, duodenal
ulcer, and hypersecretory conditions.
<PAGE> 8
The Company also launched Ivadal (registered trademark) (zolpidem), an
insomnia treatment, in France pursuant to an exclusive co-marketing
agreement with Synthelabo and obtained an exclusive license from Nexstar to
market AmBisome, a new product for the treatment of life-threatening fungal
infections, in Italy.
Information regarding sales, profits and assets attributable to
different geographic areas of the world is set forth at Note 16 to the
Company's Consolidated Financial Statements for the year ended December 31,
1994 (see Item 8, "Financial Statements and Supplementary Data"). For a
discussion of risks attendant to foreign operations, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the caption "International Sales".
McKesson Corporation and Bergen Brunswig Corporation, wholesale
distributors, accounted for approximately 17 percent and 11 percent,
respectively, of net sales of the Company during 1994. No other single
customer accounted for more than 10 percent of net sales during this
period.
MANUFACTURING AND SUPPLIES:
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Diltiazem, the active ingredient in the manufacture of Cardizem,
Cardizem SR, Cardizem CD and Cardizem Injectable, is obtained by the
Company under an exclusive supply agreement (with respect to North America)
with Tanabe Seiyaku Company, Ltd., a Japanese corporation ("Tanabe"), which
expires on December 31, 1998, subject to automatic renewal for successive
two-year terms unless terminated by 180 days' prior written notice by
either party. Currently, there are no domestic sources of supply
identified for diltiazem. Although alternative suppliers exist outside the
United States, and some of these suppliers' plants have been inspected by
the FDA (a prerequisite for manufacturing pharmaceutical products to be
sold in the United States), no alternative supplier's compound has been
qualified for use in the Company's manufacturing processes. In addition,
the Company and Tanabe currently are involved in patent litigation against
the principal alternative suppliers of diltiazem (see Item 3, "Legal
Proceedings"). Such alternative suppliers may, as a result, be unwilling
to supply the Company with diltiazem if requested to do so.
The Company has been assured by Tanabe that it (i) has sufficient
capacity to meet the Company's diltiazem needs, (ii) has several
manufacturing sites available for future diltiazem production and (iii)
maintains inventory safety stocks of diltiazem. The loss of the Company's
supply agreement for diltiazem, if not promptly replaced, or the inability
of Tanabe to provide an adequate supply of diltiazem to the Company, would
have a material adverse effect on the Company's ability to produce its
Cardizem product line and, accordingly, on the Company's financial
condition and results of operations.
Terfenadine, the active ingredient in Seldane and Seldane-D, is
manufactured from terfenadone, a precursor compound manufactured at the
Company's Dow-operated facility in Garessio, Italy. During 1992,
construction commenced on a new terfenadone manufacturing plant in Midland,
Michigan. This facility was substantially completed in 1994, although it
is not expected to be placed in service immediately (see Item 2.
"Properties"). These will be the Company's only facilities capable of
manufacturing terfenadone, although these and other Company facilities can
process terfenadone into terfenadine. The Company believes that it
<PAGE> 9
maintains sufficient safety stocks of raw materials and finished goods for
terfenadine products. The inability of the Company's facilities to provide
adequate supplies of terfenadone or terfenadine, if the Company was unable
to obtain supplies of such substances from third parties, would have a
material adverse effect on the Company's ability to produce its Seldane
product line and, accordingly, on the Company's financial condition and
results of operations.
The Company acquires sucralfate, used in the manufacture of Carafate,
from Chugai Pharmaceutical Company, Ltd., a Japanese corporation
("Chugai"). Alternative suppliers for sucralfate have been identified in
various countries outside the United States. Although some of these
identified suppliers' plants have been inspected by the FDA, no alternative
supplier's compound has been qualified for use in the Company's
manufacturing process. At present there are no domestic sources of supply
identified for this compound. The sucralfate supply agreement with Chugai
expires on April 1, 1995, subject to automatic renewal for successive one-
year terms unless terminated by one-year prior written notice by either
party. As of March 24, 1995, no such notice had been given or received by
the Company, and discussions were underway with Chugai concerning the terms
of an extension. The Company has been assured by Chugai that it has
sufficient capacity to meet the Company's sucralfate needs. The loss of
the Company's supply agreement for sucralfate, if not promptly replaced, or
the inability of Chugai to provide an adequate supply of sucralfate to the
Company, would have a material adverse effect on the Company's ability to
produce Carafate and a substantial adverse effect on the Company's
financial condition and results of operations.
Nicorette gum is manufactured for the Company in finished dose form at
two plant locations by its developer and licensor, Kabi Pharmacia AB
("Kabi") of Sweden, pursuant to exclusive distributorship agreements for
the United States and Canada and a semi-exclusive distributorship agreement
for Japan. An alternative supplier is not available for Nicorette.
Nicoderm is manufactured for the Company by ALZA Corporation ("ALZA")
at its facility in Vacaville, California, pursuant to development, license,
and supply agreements between ALZA and the Company. The Company and ALZA
co-developed the transdermal nicotine patch. An alternative supplier is
not available for Nicoderm.
The active ingredients for the Company's other products are
manufactured by the Company or by third party suppliers. Alternative
sources of supply are available for most other active ingredients that are
not produced by the Company. Except as set forth above, the loss of any
single source of supply would not have a material adverse effect on the
Company's business.
RESEARCH AND DEVELOPMENT:
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The Company continued implementation, begun in 1992, of a series of
actions designed to increase the synergy between global R&D locations and
functions and to reduce or eliminate obvious redundancies and achieve
economies of scale. In 1994, these actions included continued
consolidation of pharmacy research sciences, pharmacokinetics/drug
metabolism, biostatistics/clinical data management, clinical, global
regulatory affairs, and medical functions in Kansas City; and establishment
of development implementation teams to focus resources on selected late-
stage development projects. Further development in these areas is expected
<PAGE> 10
to continue in 1995. Construction of new R&D facilities in Kansas City
began during the first quarter of 1994, with completion scheduled for late
1996 or early 1997.
The Company completed implementation of a new Global Clinical Data
Management ("GCDM") system in 1994, which provides R&D with a common
process, common system, and common global standards to manage clinical
trial data globally. The system is designed to ensure globally integrated
databases and to expedite simultaneous submissions of applications for
regulatory approval and other information to regulatory authorities in
major countries.
Rugby maintains a separate R&D organization to develop generic
versions of pharmaceutical products. During 1994, Rugby moved its Product
Development department from New York to the Company's Cincinnati, Ohio,
site. See "Government Regulation".
To supplement its discovery research, the Company has formed alliances
with several biopharmaceutical companies whose product development efforts
are in areas of interest to the Company. These include:
o Affymax N.V. -- a research and development agreement entered into
in 1991, with respect to use of its advanced proprietary computer
technology to assist in the Company's "rational drug design"
efforts;
o Alteon, Inc. -- an equity investment and joint product
development and marketing agreement entered into in 1990, with
respect to a potential new drug, Pimagedine (registered
trademark)(aminoguanidine), for the treatment of diabetic
complications, which currently is in Phase II and Phase III
clinical trials;
o Cortech, Inc. -- an equity investment and research and
development agreement entered into in 1987 with respect to
neutrophil elastase inhibitors for the treatment of inflammatory
conditions with a right of first refusal on other technologies;
o ImmuLogic Pharmaceutical Corporation -- an equity investment and
product development and marketing collaboration agreement entered
into in 1992, with respect to proposed allergy treatment
compounds;
o Kyowa Hakko Kogyo Co. -- a product development and marketing
agreement entered into in 1993 with respect to a potential new
drug for the treatment of solid tumors;
o Merck & Co., Inc. -- acquisition in 1993 of rights to develop and
market two drugs currently under review by the FDA for U.S.
marketing approval: a once-a-day tablet combining diltiazem
malate, a variation of the active ingredient in Cardizem, with
enalapril, the active ingredient in Merck's Vasotec (registered
trademark), which is being developed as a second-line therapy for
hypertension,; and an extended-release formulation of diltiazem
maleate alone;
<PAGE> 11
o Mitsubishi Chemical -- a development and marketing collaboration
entered into in 1993 with respect to North American development
and marketing of pharmaceutical compounds discovered by
Mitsubishi Chemical;
o Oncogene Science, Inc. -- an equity investment and research and
license agreement entered into in December 1992, with respect to
gene transcription technology and its application to the
treatment of cardiovascular diseases;
o Scios Nova Inc. -- an equity investment made in 1992, and
research collaboration announced in July 1992 focusing on
potential new treatments for Alzheimer's disease.
The Company also has formed collaborations with other companies
engaged in discovery research in order to acquire rights to additional
compounds.
In January 1995, the Company acquired Selectide, a leader in
combinatorial chemistry and rapid screening technologies for pharmaceutical
research. The Company believes Selectide's technologies will help
accelerate the Company's drug discovery research by allowing scientists to
generate millions of compounds through synthetic organic chemistry, rapidly
screen compounds and identify those that show promise, and explore large
numbers of chemical analogues for beneficial characteristics.
The process of developing a successful pharmaceutical product is
complex, expensive, time-consuming, heavily regulated, and subject to
innumerable uncertainties. Of the vast number of chemical compounds
screened in discovery research, only a few survive the many years of
scientific analysis, animal studies, human clinical trials, and regulatory
review necessary to become marketable products. Before a pharmaceutical
product can be marketed in the U.S., the FDA must review the safety and
efficacy data resulting from the Company's studies and trials. Similar
regulatory processes exist in many foreign countries (and foreign
regulatory approval does not necessarily mean a drug will be approved in
the U.S.). In the current climate of health care reform and cost
containment, it is possible that additional factors (such as price) may
become part of the regulatory approval process in the United States in the
future. Price approval is already a requirement in many foreign countries.
A chemical compound may be abandoned at any stage in the development or
regulatory approval process if it demonstrates undesirable safety or
efficacy characteristics or side effects, or if the compound's sales
potential is threatened by other factors such as the introduction of new
competitive products or the discovery of new alternative therapies. Once
approved for marketing, a drug's sales success depends on a number of
factors, including the medical need for the drug's therapeutic benefit, the
precise medical indications for which the drug is approved by regulatory
authorities, the availability of alternative therapies (including
competitive drugs) for the drug's approved medical indications, the
relative price and medical efficacy of the drug compared with alternative
therapies, the length of time remaining after regulatory approval of the
drug until its patent or regulatory exclusivity expires, the ability of the
Company to develop and obtain regulatory approval for new product forms and
additional medical indications, and the post-marketing incidence of
previously undiscovered side effects or a greater-than-anticipated
incidence or severity of previously known side effects. As a result of
such uncertainties, there can be no assurance that any new chemical
compound or product identified as a result of the Company's discovery
<PAGE> 12
research or strategic alliances will be developed further or that, if
developed, any product will be approved for marketing, or that, if
approved, any marketed product will remain marketable indefinitely or
without significant competition for all or any part of its sales life, or
that the sales potential of any such product will be achieved.
R&D expenditures by the Company were $462 million in 1994, $451
million in 1993, and $465 million in 1992.
PATENTS, LICENSES AND TRADEMARKS:
- ---------------------------------
The Company owns or has applications pending for many patents relating
to a wide variety of products and product uses in the United States and
foreign countries. The Company also licenses specific products and related
patents, where applicable, and has supply agreements for specific products.
The Company believes that, except for the patents and licenses (together
with related supply agreements) relating to Cardizem, Seldane, and
Carafate, no one of these licenses, patents, or supply agreements is
material to the Company's business as a whole.
Certain legal actions currently are pending relating to patents and
other proprietary rights of the Company. See Item 3 "Legal Proceedings" of
this report for descriptions of legal proceedings relating to alleged
infringement of the Company's patent covering the metabolite of terfenadine
that is believed to be primarily responsible for beneficial effects of
Seldane and Seldane D; alleged infringement of patented technology for
Cardizem CD capsules; advertising claims concerning a product competing
with Cardizem CD; and alleged infringement of Tanabe's U.S. patent rights
on its diltiazem production process by certain producers and U.S. marketers
of diltiazem.
The United States patent on the compound diltiazem, the active
ingredient in Cardizem, expired in February 1988. Regulatory exclusivity
pursuant to the Drug Price Competition and Patent Term Restoration Act of
1984, commonly referred to as the Waxman-Hatch Act (the "Waxman-Hatch
Act"), preventing generic competition, expired with respect to immediate
release Cardizem tablets and Cardizem SR twice-a-day capsules in November
1992, and generic competition for those products has begun. In February
1994, the Company was granted a U.S. patent for its Cardizem CD
formulation, which will prevent generic competition using that specific
formulation until after the patent expires in 2011.
In November 1992, in connection with the expiration of Waxman-Hatch
Act protection for immediate release and twice-a-day formulations
containing diltiazem, the Company began distributing generic diltiazem
tablets through Rugby (which was not then a subsidiary of the Company). A
number of other generic distributors have since begun selling competing
generic diltiazem tablets. Generic competition has had a significant
negative effect on the Company's sales of Cardizem tablets.
The Company's U.S. patent on the basic compound terfenadine, the
active ingredient in Seldane, expired in April 1994. A patent covering the
metabolite of terfenadine that is believed to be primarily responsible for
beneficial effects of Seldane and Seldane D expires in April 1999. Waxman-
Hatch Act regulatory exclusivity for Seldane-D expired in August 1994. Two
patents on specific formulations for Seldane-D tablets expire in 2007 and
2008. The Company believes that abbreviated new drug applications
("ANDAs") have been submitted to the FDA by others seeking approval to
<PAGE> 13
market immediate release formulations containing terfenadine, although the
Company is not aware as of March 1, 1995, that any such ANDA has been
approved. The Company believes further that the sale of such products or
other products with formulations containing terfenadine will infringe the
Company's patent covering the terfenadine metabolite, and the Company
intends to take, and is taking, appropriate action to prevent such
infringement (see Item 3, "Legal Proceedings"). Patents on the basic
compound terfenadine expired in 1991 in Germany, and in 1992 in Canada and
the United Kingdom. Patent protection for the basic compound terfenadine
expires in France in December 1995, in Japan in May 1996, and in Australia
in December 1998. The Company has patents covering the terfenadine
metabolite in a number of foreign countries. Patent infringement lawsuits
seeking to enforce such patents against sellers of terfenadine products in
foreign countries have resulted in a final adverse determination in Germany
in October 1994 and an adverse ruling in the United Kingdom that has been
appealed, with an appellate hearing scheduled for June 1995.
Sucralfate (Carafate) has not had patent protection since 1986. The
Company believes that a number of companies have filed applications with
the FDA for generic versions of sucralfate tablets, and generic competition
for products containing sucralfate could occur if any such applications are
approved. Carafate Suspension has certain regulatory exclusivity under the
Waxman-Hatch Act until December 1996.
Kabi's U.S. patent covering nicotine polacrilex, the active ingredient
in Nicorette, expired in 1992, and regulatory exclusivity under the Waxman-
Hatch Act expired in January 1994. The Company's exclusive distributorship
agreements with Kabi for the United States and Canada expire at the end of
1999, and the Company's exclusive distributorship agreement with Kabi for
Japan expires in 2004, in each case subject to renewal. U.S. marketing
rights for Nicorette were transferred to SKBCHC effective January 1, 1994.
The Company acquired rights to Nicoderm pursuant to exclusive
worldwide development, license, and supply agreements between ALZA and the
Company. These agreements expire in April 2008 with respect to the
Company's rights in the United States, and at such other times with respect
to the Company's rights in other countries as the relevant patent, if any,
expires in such country. A U.S. patent on Nicoderm also expires in April
2008.
In addition to the significant negative effect generic competition has
had on sales of Cardizem tablets, generic competition likely would
negatively affect sales of the Company's other Proprietary Products, the
severity of which would depend on a number of factors, including the forms
approved, the prices charged, the perceived quality of the competing dosage
forms, and the sales and marketing effort invested in promoting the
competing products.
Certain rights in the products Cardizem CD and Nicoderm are licensed
to the Company by Carderm Capital L.P. ("Carderm"), an affiliate of the
Company. Information regarding this arrangement is set forth at Note 14 to
the Company's Consolidated Financial Statements for the year ended December
31, 1994 (see Item 8, "Financial Statements and Supplementary Data").
The Company maintains numerous registrations of trademarks for its
Proprietary Products in most countries of the world. All of the Company's
Proprietary Products are marketed under trademarks owned or licensed by the
Company. Generic Products are marketed by Rugby under the trade name
<PAGE> 14
"Rugby Laboratories, Inc." Currently, there are no significant disputes
with respect to trademarks.
SEASONALITY:
- ------------
In general, the Company does not consider its business to be seasonal,
although terfenadine sales tend to increase somewhat during allergy
seasons each year. However, the launch of a new product, the introduction
of a new dosage form, or the approval of a significant new indication for a
major product such as Cardizem or Seldane may have a one-time noticeable
positive effect on sales.
WORKING CAPITAL PRACTICES:
- --------------------------
In connection with the sale of most products manufactured or
distributed by the Company, the Company extends to its customers the
provisional right to return merchandise. Given this policy, the Company
carries a financial reserve for the estimated levels of product returns.
The impact of this policy has not been material. The Company does,
however, regularly monitor the quantity of product in its distribution
channels as a control measure in the overall conduct of its business.
COMPETITION:
- ------------
Most of the Company's products are subject to strong competition from
brand-name and generic products in the United States and abroad. The
Company's competition includes a large number of companies ranging from
development stage companies with limited aims and resources to research-
based global manufacturing and marketing organizations, many with
substantially greater resources than the Company. Research-based
pharmaceutical companies such as the Company compete in a number of ways,
principally including product development, sales and marketing, customer
service, and cost. Product development includes discovery research and the
development of or acquisition of rights to market patented or exclusively-
licensed drugs or therapies that meet substantial medical needs and are
novel or unique, more effective, more convenient, less expensive, or have
better side effects profiles than existing or competing drugs or therapies.
Sales and marketing includes the maintenance of a sales organization that
is knowledgeable concerning drugs and therapies and the medical conditions
for which they are indicated as well as the needs of customers and
patients, and has the ability to make effective presentations to physicians
and purchasing managers. Customer service includes the ability to respond
to individual customers' needs promptly and effectively. Cost includes not
only purchase price comparisons, as in the case of drugs that are
generically substitutable, but also the relative costs and benefits of
alternative courses of therapy.
Positive factors pertaining to the Company's competitive position
include the medical utility and market acceptance of the Company's
Cardizem, Seldane, Carafate, and smoking cessation product lines, the size
of the market for such products, and the Company's ability to develop new
forms of such products; the quality of the Company's products; the extent
to which the Company's products have marketing advantages due to patent
protection or regulatory exclusivity; the Company's recognized leadership
in marketing to the growing U.S. managed health care market; the Company's
highly trained and knowledgeable sales representatives; the Company's
<PAGE> 15
ability to offer a broad range of generic pharmaceutical products; the
Company's policy of limiting price increases to the anticipated rate of
inflation; the recent restructuring of the Company's R&D organization and
its refocus on the most promising compounds in the new product pipeline;
the number of potential new products in the late stages of clinical
development; recent success the Company has had in reducing cycle times in
product development, manufacturing, inventory management; and the Company's
growing presence in the Pacific area.
Negative factors pertaining to the Company's competitive position
include the number and size of the Company's competitors and the ability of
larger competitors to commit greater resources to research and development;
the recent and potential loss of patent protection and regulatory
exclusivity affecting the Company's Cardizem and Seldane product lines and
the resulting increased competition from generic products and alternative
therapies; the Company's limited number of key product lines; the residual
effects of negative publicity about the 1992 relabeling of Seldane
products; the limited number of NDAs the Company currently has under review
for approval by the FDA; and increased competition for the Company's key
product lines as newer drugs and alternative therapies are introduced in
the same therapeutic areas. Of particular concern, the Company believes
that the FDA has been asked to designate a competing once-a-day diltiazem
product as generically substitutable for Cardizem CD. Such a designation
for this or any other once-a-day diltiazem product could have a material
adverse effect on sales of Cardizem CD and, accordingly, on the financial
results of the Company. See "Government Regulation".
GOVERNMENT REGULATION:
- ----------------------
In the United States, the Federal Food, Drug and Cosmetic Act and
related regulations govern approval, testing, production, labeling, and
advertising of the Company's products. Foreign governments also
significantly and broadly regulate the Company's products and prices.
FDA regulations have the greatest impact on the Company. The FDA
requires extensive pre-approval testing for new products to demonstrate, to
the satisfaction of the FDA, that such products are both safe and effective
in treating the indications for which approval is sought. The results of
such testing are submitted to the FDA in an NDA seeking approval to market
a pharmaceutical product for treatment of specific medical indications.
FDA approval also must be obtained before any prescription drug can be
switched to OTC status. The FDA drug approval process requires a
substantial investment in time and money to develop and market
pharmaceutical products in the United States. Pre-marketing approval
processes also exist in other countries and markets outside the United
States.
In order to receive FDA approval to market a generic version of a
drug, an ANDA must be submitted to the FDA demonstrating that, on the basis
of trials, the proposed generic product is bioequivalent to the proprietary
drug for which the generic version is being developed.
On an ongoing basis, the FDA reviews the safety of marketed drugs and
monitors labeling, advertising and other matters related to the promotion
of such drugs. As discussed previously in the Company's public filings, in
July 1992 the FDA requested that the Company modify labeling for
terfenadine products (Seldane and Seldane-D in the United States) to
strengthen existing warnings for patients with certain risk factors. In
<PAGE> 16
connection with such labeling change, the Company took steps to explain the
effect of the relabeling to health care professionals and patients in the
U.S., Canada and Europe, and has submitted a comprehensive package of
safety studies with respect to Seldane for review by the FDA.
In December 1993, Chelsea Laboratories, Inc. ("Chelsea"), the research
and manufacturing subsidiary of Rugby, reached an agreement with the FDA
pursuant to which Chelsea was released from the FDA's "application
integrity policy" and is again eligible to receive FDA approvals of ANDAs.
The agreement followed a series of FDA inspections of Chelsea's
manufacturing and research sites prior to the Company's acquisition of
Rugby in October 1993. The FDA had suspended substantive scientific review
of Chelsea's ANDAs in 1991 after an audit identified a number of ANDAs that
were alleged to contain data falsified by former Chelsea employees. In
1992, Chelsea pleaded guilty to a single count of shipping an adulterated
drug product and paid a fine of $500,000. Chelsea also withdrew a number
of ANDAs and recalled products covered by them. Chelsea submitted several
new ANDAs for FDA review in 1993 and 1994 and plans additional submissions
in 1995. FDA approval of new ANDAs would permit Chelsea to manufacture
additional products that currently are not marketed by Rugby or that are
supplied by third-party manufacturers, although there is no assurance that
any such ANDAs will be approved.
The federal and state governments in the United States, as well as
many foreign governments, institutions, and managed health care providers,
are exploring ways to reduce medical care costs. This effort has resulted
in, among other things, government policies that encourage the use of
generic equivalents rather than brand-name products to reduce drug
reimbursement costs. Virtually every state in the United States has a
generic substitution law, which permits, and in some cases requires, a
dispensing pharmacist to substitute a generic equivalent drug for the
brand-name product prescribed. Many foreign countries have legislation or
regulations that either encourage or require competition by generic drug
companies.
The Prudent Pharmaceutical Purchasing Act ("PPPA"), enacted in 1990,
altered the manner in which drugs are provided and reimbursed under state
Medicaid programs. In general, PPPA requires pharmaceutical companies to
rebate to each state Medicaid agency the difference between a company's
average manufacturer price (as defined in PPPA) obtained from buyers and
the "best price" at which any Proprietary Product is sold to any customer
(up to a maximum of 15.2 percent of the average manufacturer price), plus
an additional rebate to reflect the increase in the Consumer Price Index
since 1990. In the case of Generic Products, a rebate of 11 percent of the
average manufacturer price is required. In addition, the Veterans Health
Care Act of 1992 requires pharmaceutical manufacturers to enter into
agreements with the Department of Veterans Affairs and the Public Health
Service providing for similar drug price rebates to specified entities.
This legislation has had and is expected to continue to have a negative
impact on the Company's sales by reducing net selling prices to such
agencies to the Company's lowest prices or to the established discounted
prices.
The overall cost of providing health care services has been, and is
expected to continue to be, a subject of concern by governmental,
legislative and private bodies in the major world markets. Governmental
efforts in the U.S. to slow the increase in costs of health care services
are a major consideration in the Company's pricing decisions. The Company
has committed to keep its U.S. price increases in line with anticipated
<PAGE> 17
inflation. Prices for the Company's products are sometimes subject to
direct price controls and to drug reimbursement programs that have varying
price control mechanisms. The Company is unable to predict what effect
such programs may ultimately have on its business, but believes that such
programs will continue to impose price pressures on the Company's
prescription products. It is reasonable to assume that additional
restrictions on the Company's ability to manage its product prices in the
United States, and perhaps foreign countries, are probable.
In 1993, the Clinton administration presented to Congress a proposal
(known as the "Health Security Act") for reforming the U. S. health care
system. Other health care proposals also have been advanced by members of
Congress. Although neither the Clinton proposal nor any other such
proposal was enacted in 1994, the Company believes federal health care
reform proposals are likely to continue to be considered by Congress, and
may include provisions similar to those of the Health Security Act or
alternative proposals. Among other provisions, the Health Security Act
proposed to make health insurance coverage generally available, establish a
standard health insurance benefits package, and extend outpatient
prescription drug coverage to Medicare recipients, with the intention of
assuring health care quality and security and holding down health care
costs. The proposed act also contained a mechanism for regulating the
prices of pharmaceutical products through cost-effectiveness reviews,
negotiated and mandated rebates from pharmaceutical manufacturers,
exclusion from Medicare coverage of certain drugs deemed "not cost-
effective", and prior government approval before prescribing or dispensing
under Medicare certain drugs deemed "not cost-effective". The Health
Security Act also would have limited the legal liability of health care
providers for medical malpractice, but not the liability of manufacturers
or suppliers of medical devices and medicines for product defects, thus
effectively shifting much of the risk of litigation and liability for
health-care-related injuries from health care providers to manufacturers
and suppliers such as the Company. Although the Company supports many of
the goals of the various health care reform proposals, the Company believes
that mechanisms for regulating the prices of pharmaceutical products and
shifting the risk of liability for patient injuries could have a negative
effect on the quality of health care in the U.S., as well as on the
profitability of U.S. pharmaceutical manufacturers, by making less money
available for research and development and discouraging difficult research
at the frontiers of science where the risk of failure - and frequently the
potential for medical progress - is greatest. Currently it is not
possible to predict with certainty the effects of any federal health care
reform legislation that ultimately may be adopted. Such legislation,
depending on its terms, could have an effect (which might be substantial)
on the financial condition and results of operations of the Company as well
as the amount of money the Company is able to devote to research and
development.
Late in 1993, negotiations were concluded for the North American Free
Trade Agreement ("NAFTA") among the United States, Canada, and Mexico, and
for the Uruguay Round of the General Agreement on Tariffs and Trade
("GATT") among more than 100 countries including the United States. NAFTA,
which has been ratified by the U. S. Senate, provides for the removal of
all trade barriers among the U.S., Canada, and Mexico over a 15-year
period. Late in 1994, legislation for implementation of GATT in the U.S.
was enacted. GATT will effect numerous changes in international trade
among the contracting countries, the most relevant to the pharmaceutical
industry being additional protection for intellectual property (such as
patents) in developing countries and the elimination of tariffs on
<PAGE> 18
virtually all products traded among Canada, the European Community, the
European Free Trade Association, Japan, and the United States. The Company
has noted a significant reduction in tariff expense due to GATT. The
Company believes that the effect on the Company of NAFTA in 1994, although
not material, was positive. Although it is not possible at this time to
predict with certainty the ultimate effect of NAFTA and GATT on the Company
and on the pharmaceutical industry in general, the Company believes that
the overall effect of both may be beneficial to the Company and the
industry.
ENVIRONMENTAL REGULATIONS:
- --------------------------
The Company's operations are in substantial compliance with applicable
national, state, and local environmental laws and regulations. In
connection with the sale of the Company's facility in Limay, France, in
1993, the Company has undertaken certain financial and other
responsibilities for remediation of environmental conditions at the site.
Environmental remediation currently is underway at a Rugby manufacturing
facility in Monroe, North Carolina, for which the Company is indemnified by
a prior owner of the site and the prior owner of Rugby. Neither of these
events is expected to have a material effect on the Company.
Chemical processing and formulation of pharmaceuticals is a highly
regulated industry, and the Company expects that it will make additional
capital expenditures from time to time for environmental compliance. The
Company does not, however, anticipate that any such expenditures will have
a material impact upon its earnings or competitive position.
ITEM 2. PROPERTIES.
- ---------------------
The Company or its subsidiaries own principal manufacturing facilities
located in Cincinnati, Ohio; Kansas City, Missouri; Midland, Michigan;
Laval, Quebec; Bourgoin, France; Anagni, Brindisi and Garessio, Italy; and
Hirakata, Japan. Additional manufacturing facilities are owned in Midland,
Michigan; Monroe, North Carolina; Bayamon, Puerto Rico; Sakai, Japan;
Berlin, Germany; and Alcala, Spain; and leased in Manati, Puerto Rico. In
March 1995, the Company agreed to purchase the Manati facility.
Construction was substantially completed in 1994 on an additional
manufacturing facility in Midland, Michigan, which has not yet been placed
in service. The Brindisi, Garessio, and Midland facilities are staffed and
managed by Dow.
The Company or its subsidiaries own principal R&D facilities located
in Cincinnati, Ohio; Kansas City, Missouri; Laval, Quebec; Strasbourg,
France; Gerenzano, Italy; Hirakata, Japan; and Winnersh, United Kingdom.
Additional R&D facilities are owned in Berlin, Germany, and Matsudo, Japan,
and leased in Tucson, Arizona.
The Company leases its principal executive offices in Kansas City,
Missouri, together with certain other training, administrative,
distribution and R&D facilities. Additional facilities used for
administrative, telemarketing, warehouse, distribution or other purposes
are owned or leased in Tucson, Arizona; City of Commerce, California; North
Pompano Beach, Florida; Norcross, Georgia; Glenview, Illinois; West
Hempstead, New York; Cincinnati, Ohio; Middleburg Heights, Ohio;
Harrisburg, Pennsylvania; Carrollton, Texas; and Tokyo, Osaka, and Sakai,
Japan.
<PAGE> 19
In the first quarter of 1994, the Company began construction of new
offices and R&D facilities adjacent to the Company's current manufacturing
and operations facilities in Kansas City, Missouri. The project will
consolidate all Kansas City executive, administrative, training, R&D, and
manufacturing functions at a single site owned by the Company. Completion
of the office facility is scheduled for early 1996, and of the R&D
facilities in late 1996 or early 1997. The estimated cost of the project,
which is not expected to affect the Company's use of facilities outside the
Kansas City area, is approximately $157 million. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
The Company believes that the foregoing facilities are (or will be
when completed) adequate and suitable for the manufacturing, distribution,
R&D, and administrative activities of the Company. The Company further
believes that it has sufficient productive capacity across its facilities
to meet anticipated demand for its products in the marketplace.
ITEM 3. LEGAL PROCEEDINGS.
- ----------------------------
Given the nature of the Company's pharmaceutical business, the Company
is routinely confronted with claims and lawsuits primarily brought by
private parties for personal injury or commercial losses, including actions
involving present products, such as Seldane and Norpramin, and discontinued
products such as diethylstilbestrol ("DES") and Bendectin (registered
trademark). On occasion some of these claims and lawsuits may be asserted
or brought by governmental agencies concerning regulatory and other
matters, including environmental matters and regulation of advertising and
product promotion.
Over the years, the Company has developed expertise in the management
of such claims and litigation, including the evaluation of claims and
lawsuits, and the defense and disposition of lawsuits where appropriate.
As a consequence, some claims and lawsuits are resolved through settlement,
while others are litigated extensively. In view of the Company's
substantial experience with these circumstances, management deems such
claims and lawsuits to be ordinary incidents of its business susceptible to
overall management and evaluation, notwithstanding that the asserted
damages are at times extraordinary and that the Company's ultimate
liability, if any, in any individual case, may not be capable of
calculation as of a particular date. The Company also is subject to
litigation outside the ordinary course of its business. From time to time,
the Company's insurers have reserved and may reserve their rights to deny
coverage in certain cases due to differing theories of policy language
interpretation and trigger of coverage. In addition, the Company actively
defends and asserts its patent and other intellectual property rights.
The following descriptions apply to certain specific lawsuits:
As of December 31, 1994, there were 46 lawsuits pending against the
Company in various state, federal, and foreign trial and appellate courts
(21 in the United States and 25 in foreign countries) in which the
plaintiffs allege that Bendectin, an antinauseant formerly marketed by the
Company, was the cause of birth defects. Most suits in the United States
include a claim for punitive damages. Of the U.S. cases, settlement or
dismissal was pending in two cases, five cases were involved with some
post-judgment or appeal process, and 14 suits were pending in trial courts.
One foreign judgment in favor of the Company has been appealed. The
remaining 24 foreign suits were pending but inactive in trial courts.
<PAGE> 20
During 1994, three new cases were filed or refiled and seven were settled,
dismissed, or finally resolved in favor of the Company.
In June 1994, a jury in a Philadelphia, Pennsylvania, Bendectin case
returned a verdict against the Company for $4.2 million compensatory
damages and $15 million punitive damages. Disposition of post-trial
motions is pending.
In 1992 a judgment was entered against the Company for $20.2 million
(including $15 million punitive damages) based on a 1991 jury verdict in a
Corpus Christi, Texas, Bendectin case. In March 1994, the judgment was
reversed on appeal and judgment was entered for the Company. In August
1994, the Texas Court of Appeals granted plaintiff's motion for a rehearing
en banc and the case was reargued before the full appeals court in
September. No decision has been rendered.
In June 1993, the U.S. Supreme Court vacated a 1991 Ninth U.S. Circuit
Court of Appeals ruling in two Bendectin lawsuits upholding an earlier
ruling by the U.S. District Court in San Diego, California, based on a
finding of insufficient admissible evidence. The Ninth Circuit had
followed three other federal circuits in holding that evidence based on a
scientific methodology that diverged from what is generally recognized as
acceptable in the field is inadmissible. The Supreme Court ruled that such
general acceptance is not the sole criterion for the admissibility of
scientific evidence, but that trial courts are required to determine the
reliability of purported scientific testimony before it can be admitted
into evidence. The case was remanded to the Ninth Circuit for further
proceedings and, on January 4, 1995, the Ninth Circuit affirmed the trial
court's grant of summary judgment in favor of the Company. The plaintiffs
have petitioned for a rehearing.
In 1989, the U.S. Supreme Court declined to review a 1988 federal
appeals court affirmance of a federal trial court decision that Bendectin
does not cause birth defects, which resolved the claims of more than 1,100
plaintiffs in favor of the Company.
The Company believes strongly that the Bendectin lawsuits are without
merit and will continue to contest them vigorously. Although the outcome
of such litigation cannot be predicted with any certainty, the Company does
not believe that it would have material exposure financially, even if these
cases were decided unfavorably.
After the Company, Dow, and Hoechst announced on February 28, 1995,
that they were engaged in discussions concerning the possible negotiated
acquisition by Hoechst of all of the Company's outstanding Common Stock at
a price of $25.75 per share in cash and that Dow and Hoechst also were
discussing Hoechst's possible acquisition of Dow's Latin American
pharmaceutical business for $200 million, a number of lawsuits were filed
by shareholders of the Company in the New Castle County, Delaware, Court of
Chancery against the Company, its directors, and Dow (as the Company's
majority shareholder) alleging that the defendants have breached their
fiduciary and common law duties to minority shareholders in connection with
such discussions. In general, the various complaints contend that Dow is
to receive consideration for the sale of its shares different from that to
be received by the minority shareholders and that the Company's Board of
Directors has failed to auction the Company to obtain the highest price for
the Company's shares. Hoechst also is a defendant in one such action. The
actions seek class certification status; injunctive relief; an evaluation
of alternatives to the proposed transaction; the protection of minority
<PAGE> 21
shareholders against alleged conflicts of interest; the appointment of
either an independent committee to protect the interests of minority
shareholders or a shareholder committee to review offers to acquire the
Company; and unspecified damages and other relief. The Company believes
that the allegations of the various complaints are without merit and
intends to contest them vigorously.
In January 1995, the Company filed suit in Jackson County, Missouri,
Circuit Court against two former associates of the Company (whose
employment was terminated in January) seeking unspecified damages for
fraud, breach of contract, misappropriation of valuable trade secrets
related to manufacturing technology for Cardizem CD, and other serious
actions damaging to the Company. The Company intends to prosecute this
action vigorously.
In October 1994, a lawsuit was filed in U.S. District Court for the
District of Puerto Rico against the Company, Carderm, and four senior
executives of the Company by Biovail Corporation International ("Biovail"),
a Canadian pharmaceutical company, alleging violations of U.S. and Puerto
Rico antitrust laws and other tortious or unlawful conduct in connection
with the Company's assertion of rights related to its once-a-day sustained-
release formulation for Cardizem CD. The suit alleges that the Company has
engaged in sham litigation, abuse of legal and regulatory processes, and
other conduct designed to delay approval by the FDA of Biovail's once-a-day
sustained-release formulation of diltiazem in order to unlawfully maintain
the Company's position in the market for sustained-release formulations of
diltiazem. The suit seeks in excess of $480 million in actual damages plus
trebled, punitive, and exemplary damages, costs, and attorneys' fees. In
December 1994, the Company filed a motion to dismiss the suit. The Company
believes this action is without merit and intends to defend it vigorously.
According to the complaint, Biovail's diltiazem formulation has been
licensed to Hoechst-Roussel Pharmaceuticals Inc. ("Hoechst-Roussel") and is
the subject of the Company's pending patent infringement lawsuit against
Hoechst-Roussel (see below).
In March 1994, the Company filed suit in the U. S. District Court for
the District of Colorado against Geneva Pharmaceuticals, Inc. ("Geneva"),
regarding a proposed terfenadine product for which Geneva is seeking U.S.
marketing approval from the FDA. The suit alleges that the commercial
manufacture, use, and sale of terfenadine by Geneva would actively induce
infringement of the Company's patent (which expires in April 1999) covering
the metabolite of terfenadine that is believed to be primarily responsible
for beneficial effects of Seldane and Seldane D. The Company believes
that, under provisions of the Waxman-Hatch Act, the FDA cannot approve
Geneva's ANDA for a period of up to 30 months from the filing of the
lawsuit, pending the outcome of the litigation. Geneva's motion for
summary judgment based on alleged invalidity of the terfenadine metabolite
patent was denied in December 1994. Trial has been scheduled tentatively
for October 1995. The Company intends to prosecute this action vigorously.
In April 1994, the Company petitioned the FDA to require that all ANDA
applicants seeking approval to market proposed terfenadine products must
certify noninfringement of the patent for the terfenadine metabolite and
that all ANDA approvals for terfenadine be stayed until the FDA responds to
the Company's petition. In August 1994, the Company filed suit in the U.S.
District Court for the District of Columbia against the U.S. Commissioner
of Food and Drugs and the U.S. Secretary of Health and Human Services
seeking a declaration that all ANDAs pending with the FDA for terfenadine
products must certify noninfringement of the patent for the terfenadine
<PAGE> 22
metabolite, as well as an injunction and temporary restraining order
against approval by the FDA of any ANDA for terfenadine that does not so
certify. The action was stayed while the FDA considered the Company's
petition upon FDA's agreement to notify the Company at least five business
days prior to approving any such ANDA. The Company's petition was denied
in January 1995 and the stay was lifted. In February 1995, the Company
moved for summary judgment. Briefing on the motion is expected to be
completed in April 1995.
In June 1994, the Company filed suit in the U.S. District Court for
the Southern District of Florida against Baker Norton Pharmaceuticals Inc.
("Baker Norton") regarding a proposed terfenadine product for which Baker
Norton has filed an ANDA. The allegations of the suit are similar to those
in the action against Geneva. Baker Norton's motion for summary judgment
based on alleged invalidity of the Company's terfenadine metabolite patent
was denied in March 1995 by a magistrate judge, subject to approval by the
District Court.
In April 1994, the Company filed suit in the U.S. District Court for
the Western District of Missouri against Askin Capital Management, L.P.
("Askin"), and certain related parties seeking an unspecified amount of
damages for breach of contract, violations of federal securities laws, and
other actions in connection with Askin's engagement as investment manager
for a portion of the Company's investment portfolio. The suit alleges that
the Company was damaged as a result of Askin's failure to invest funds
entrusted to it either in accordance with the terms of the agreement
between the Company and Askin or in accordance with the representations
made by Askin to induce the Company to engage Askin to provide investment
management services. Discovery is underway.
In May 1994, the Company filed suit in the Circuit Court of Jackson
County, Missouri, against Smith Barney Shearson, Inc. ("Smith Barney") in
connection with the Company's investment with Askin. The suit seeks
unspecified damages for breach of contract by Smith Barney, which allegedly
failed to monitor Askin's management of the Company's investment portfolio
as required by the terms of a Services Agreement between Smith Barney and
the Company, and for Smith Barney's alleged negligence and breach of
fiduciary duty. Also in May 1994, Smith Barney filed an action in the
Supreme Court of New York County, New York, seeking a declaratory judgment
to the effect that the Services Agreement did not apply to the Company's
Askin portfolio, that Smith Barney is not liable for damages if the
Services Agreement did apply, and that Smith Barney did not breach any duty
to the Company in connection with the investment. In January 1995, after
the parties had engaged in an informal voluntary exchange of information in
an effort to resolve the dispute, the Company moved to dismiss the New York
action and Smith Barney moved the New York court to enjoin prosecution of
the Missouri action. The parties await rulings on both motions.
In late 1993 and early 1994, class action lawsuits were filed in
multiple federal district courts (all now consolidated in the U. S.
District Court for the Northern District of Illinois) by retail pharmacies
against multiple defendants (principally pharmaceutical manufacturers and
wholesale distributors), including the Company, alleging violations of
federal antitrust laws and seeking unquantified trebled damages and
injunctive relief. Individual actions also were filed by approximately
3000 retail pharmacies in various courts. The suits allege violations of
federal and state antitrust and unfair competition laws by the defendant
pharmaceutical manufacturers and wholesale distributors regarding the
prices of brand name drugs sold to retail pharmacies. Pretrial discovery
<PAGE> 23
is underway. Management believes that the allegations of the various
complaints are without merit as to the Company and intends to contest them
vigorously. Neither the outcome of the litigation nor the Company's
potential financial exposure can be predicted with certainty at this time.
In November 1993, the Company, Carderm, and Elan Plc filed suit
against Hoechst-Roussel in the U.S. District Court for the District of New
Jersey alleging that Hoechst-Roussel is seeking FDA approval for a
sustained-release product that infringes formulation patents covering
Cardizem CD capsules. Hoechst-Roussel's motion to dismiss was denied in
May 1994. In February 1995, Hoechst-Roussel moved for summary judgment.
Discovery is underway.
Following the Company's announcement on March 16, 1993, that sales and
earnings for the first quarter of 1993 were expected to be down
substantially from the first quarter of 1992, class action lawsuits (now
consolidated) were filed in the U.S. District Court for the Western
District of Missouri against the Company and certain of its officers and
directors alleging violations of federal securities laws and asserting
common law claims as a result of alleged materially false and misleading
statements and material omissions by the Company and its officers and
directors, seeking unspecified damages. Following the court's dismissal of
the individual plaintiffs' claims in July 1994, the parties agreed to a
settlement of all claims of the plaintiff class, which was approved by the
court in December 1994. The Company contributed $500,000 to a settlement
fund and the plaintiffs agreed not to appeal the court's decision.
In February 1993, Rhone-Poulenc Rorer Pharmaceuticals, Inc. ("RPR")
filed suit against the Company in the U.S. District Court for the Western
District of Missouri regarding the Company's advertising claims for
Cardizem CD. The Company counterclaimed regarding RPR's advertising claims
for Dilacor XR (registered trademark), RPR's once-a-day formulation
containing diltiazem. In September 1994, the court entered an order
prohibiting both parties from using advertisements prior to their approval
by the FDA and granting certain other nonmonetary relief to each party.
Post-trial motions by both parties are pending. This action is being
contested vigorously.
In 1992, the Company and Tanabe filed suit in multiple federal
district courts against certain overseas producers of diltiazem, the active
ingredient in the Company's Cardizem family of cardiovascular medications,
and certain U.S. companies that market products in the U.S. containing
diltiazem manufactured by such overseas producers. The suits allege
infringement of Tanabe's U.S. patent rights by producing and marketing in
the U.S. diltiazem manufactured using Tanabe's patented manufacturing
process. The suits seek permanent injunctions against the defendants,
unspecified damages, and costs. In February 1995, pursuant to a settlement
agreement, actions against two of the defendants and their respective
counterclaims were dismissed with prejudice. In February 1993, the Company
and Tanabe filed a complaint with the International Trade Commission
("ITC") seeking to halt the importation of diltiazem manufactured overseas
by those companies in violation of U.S. trade and patent laws. The ITC
postponed trial pending the results of a re-examination of Tanabe's patent
by the U.S. Patent and Trademark Office ("PTO") for patentability over
newly discovered prior art. In May 1994, the PTO concluded its
reexamination and held that all claims of Tanabe were patentable. In late
1994, trial was held before an administrative law judge of the ITC, who
ruled against the Company and Tanabe in February 1995. A petition for
review of the judge's decision by the ITC was submitted in February 1995.
<PAGE> 24
If the petition is accepted, the ITC's decision will be due in May 1995.
Further proceedings thereafter are possible.
In July 1992, after the Company's announcement of plans to modify the
labeling for its Seldane family of prescription antiallergy products at the
request of the FDA, class action lawsuits (now consolidated in one suit)
were filed in the U.S. District Court for the Western District of Missouri
against the Company, certain of its officers and directors and certain
other persons and entities alleging violations of the federal securities
laws and common law claims as a result of alleged materially false and
misleading statements and material omissions by the Company and its
officers and directors concerning Seldane and seeking unquantified damages.
Discovery is underway. Management believes this action is without merit
and is defending it vigorously.
The Company received clearance to market Nicoderm in November 1991 and
Ciba-Geigy Corporation ("Ciba-Geigy") received marketing approval for its
competing nicotine patch product Habitrol (registered trademark) shortly
thereafter. In December 1991, Ciba-Geigy filed suit against the Company
and ALZA in the U.S. District Court for the District of New Jersey alleging
infringement of Ciba-Geigy's U.S. patent relating to Habitrol and seeking
an injunction prohibiting future sales of Nicoderm by the Company and
treble damages for sales of Nicoderm up to the time an injunction is
issued. The Company counterclaimed and moved for summary judgment. In
October 1994, Ciba-Geigy's patent was declared invalid and the Company's
motion for summary judgment was granted. Ciba-Geigy has appealed. This
lawsuit is being contested vigorously.
In January 1995, the Company, ALZA, and Carderm filed suit in the U.S.
District Court for the Southern District of New York against Ciba-Geigy and
Lohmann Therapy Systems Corp. alleging that the manufacture, use, and sale
of Habitrol in the U.S. infringes ALZA's U.S. patents relating to Nicoderm.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER
- ------- --------------------------------------------------------------
MATTERS.
--------
The Company's Common Stock is traded on The New York Stock Exchange
under the symbol "MKC". Information regarding the high and low sales
prices for the Common Stock on The New York Stock Exchange for each quarter
of 1994 and 1993 and the frequency and amount of dividends declared by the
Company during that period is set forth in Note 17, "Quarterly Financial
Data", to the Company's Consolidated Financial Statements for the year
ended December 31, 1994 (see Item 8, "Financial Statements and
Supplementary Data"). The approximate number of holders of shares of
Common Stock is set forth under the caption "Financial Position" in Item 6,
"Selected Financial Data".
<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
Summary of Operations 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------
(Millions of Dollars, Except for Per Share Data)
<S> <C> <C> <C> <C> <C>
Net sales................................................. $3,060 $2,818 $3,320 $2,851 $2,462
====== ====== ====== ====== ======
Income before income taxes, minority interest and
cumulative effect of changes in accounting principles... 615 507<F1> 1,017 896 751
====== ====== ====== ====== ======
Minority interest......................................... 14 3 -- -- --
====== ====== ====== ====== ======
Income before cumulative effect of changes
in accounting principles................................ 438 362 685 585 487
Cumulative effect of changes in accounting principles, net -- -- 21 -- --
------ ------ ------ ------ ------
Net income .......................................... 438 362 706 585 487
Preferred stock dividends................................. 5 5 6 5 3
------ ------ ------ ------ ------
Net income-common stockholders....................... $ 433 $ 357 $ 700 $ 580 $ 484
====== ====== ====== ====== ======
Weighted average number of outstanding common shares--
assuming full dilution.................................. 278 278 280 282 282
====== ====== ====== ====== ======
Earnings per share, before cumulative
effect of changes in accounting principles--
assuming full dilution.................................. $ 1.57 $ 1.30 $ 2.44 $ 2.07 $ 1.72
Per share cumulative effect of changes in accounting
principles, net......................................... -- -- .07 -- --
------ ------ ------ ------ ------
Earnings per common share--assuming full dilution......... $ 1.57 $ 1.30<F1>$ 2.51 $ 2.07 $ 1.72
====== ====== ====== ====== ======
Cash dividends per common share........................... $ 1.00 $ 1.00 $ .98 $ .89 $ .70
====== ====== ====== ====== ======
</TABLE>
<PAGE> 26
SELECTED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
As of December 31
------------------------------------------------
Financial Position 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------
(Millions of Dollars, Except for Per Share Data)
<S> <C> <C> <C> <C> <C>
Current assets........................................... $2,049 $1,822 $1,752 $1,785 $1,352
====== ====== ====== ====== ======
Total assets............................................. 4,100 3,795 3,183 2,762 2,160
====== ====== ====== ====== ======
Current liabilities...................................... 1,462 1,301 985 912 661
====== ====== ====== ====== ======
Long-term debt........................................... 99 122 149 216 152
====== ====== ====== ====== ======
Total liabilities........................................ 1,808 1,624 1,301 1,175 907
====== ====== ====== ====== ======
Minority interest in subsidiary companies................ 173 175 2 2 --
====== ====== ====== ====== ======
Temporary capital........................................ 10 7 5 2 --
====== ====== ====== ====== ======
Stockholders' equity..................................... 2,109 1,989 1,875 1,583 1,253
====== ====== ====== ====== ======
Working capital.......................................... 587 521 767 873 691
====== ====== ====== ====== ======
Book value per common share.............................. $ 7.61 $ 7.26 $ 6.84 $ 5.73 $ 4.53
====== ====== ====== ====== ======
Number of shareholders <F2>.............................. 28,707 29,103 21,841 20,210 19,843
Number of associates..................................... 9,421 9,827 9,808 9,170 9,122
<FN>
<F1> Includes a $180 million pre-tax special charge which had an effect on earnings per share of $.46.
<F2> Shareholder accounts as reported by the transfer agent. The Company believes there are approximately 60,000
to 75,000 additional shareholder accounts held in nominee names.
</TABLE>
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------------
Percent change Percent of Net Sales
-------------------- ------------------------
1994 1993 1992 1994/1993 1993/1992 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars, Except for Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $3,060 $2,818 $3,320 9 (15) 100 100 100
Cost of sales........................... 984 722 771 36 (6) 32 26 23
------ ------ ------ --- --- ---
Gross profit.......................... 2,076 2,096 2,549 (1) (18) 68 74 77
Operating expenses:
Research and development.............. 462 451 465 2 (3) 15 16 14
Selling, general and administrative... 1,034 1,026 1,130 1 (9) 34 37 34
Special charge........................ -- 180 -- (100) -- -- 6 --
------ ------ ------ --- --- ---
Total operating expenses.............. 1,496 1,657 1,595 (10) 4 49 59 48
------ ------ ------ --- --- ---
Operating income................... 580 439 954 32 (54) 19 15 29
Other income, net....................... 52 81 72 (36) 13 2 3 2
Interest expense........................ 17 13 9 31 44 1 -- --
------ ------ ------ --- --- ---
Income before income taxes, minority
interest and cumulative effect of
changes in accounting principles.... 615 507 1,017 21 (50) 20 18 31
Income taxes............................ 163 142 332 15 (57) 6 5 10
Minority interest....................... 14 3 -- 367 -- -- -- --
------ ------ ------ --- --- ---
Income before cumulative effect of
changes in accounting principles... 438 362 685 21 (47) 14 13 21
Cumulative effect of changes in
accounting principles, net............ -- -- 21 -- (100) -- -- --
------ ------ ------ --- --- ---
Net income............................ 438 362 706 21 (49) 14 13 21
Less preferred stock dividends.......... 5 5 6 -- (17) -- -- --
------ ------ ------ --- --- ---
Net income -- common stockholders..... $ 433 $ 357 $ 700 21 (49) 14 13 21
====== ====== ====== === === ===
Earnings per share before cumulative
effect of changes in accounting
principles -- assuming full dilution.. $ 1.57 $ 1.30 $ 2.44 21 (47)
Per share cumulative effect of changes
in accounting principles, net......... -- -- .07 -- (100)
------ ------ ------
Earnings per common share --
assuming full dilution................ $ 1.57 $ 1.30 $ 2.51 21 (48)
====== ====== ======
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Year Ended December 31
--------------------------------------------------------------------------
Percent change Percent of Net Sales
------------------- ------------------------
Major Product Sales 1994 1993 1992 1994/1993 1993/1992 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cardizem family $ 933 $ 913 $1,053 2 (13) 30 32 32
Seldane family 698 747 878 (7) (15) 23 27 26
Carafate 147 177 203 (17) (13) 5 6 6
Smoking cessation <F1> 96 156 286 (38) (45) 3 5 9
All other <F2> 1,186 825 900 44 (8) 39 30 27
------ ----- ----- --- --- ---
Total $3,060 $2,818 $3,320 9 (15) 100 100 100
====== ====== ====== === === ===
<FN>
<F1> On January 1, 1994, the U.S. marketing rights for Nicorette were transferred to SmithKline Beecham Consumer Healthcare, L.P.,
a consumer products partnership in which the Company has a minority interest.
<F2> Over-the-counter products sold in the U.S. are excluded after August 1992. Over-the-counter products sold in foreign markets
are included.
</TABLE>
The following discussion and analysis provide information which management
believes is relevant to understanding the Company's consolidated results of
operations and financial condition. This should be read in conjunction
with the consolidated financial statements and notes.
SALES. Full-year 1994 net sales increased nine percent to $3.1 billion
from sales of $2.8 billion in 1993. Net sales in 1993 declined 15.1
percent from $3.3 billion in 1992. Sales changes can be attributed to the
following:
1994 1993 1992
- ---------------------------------------------------------------------------
Percent change
Unit volume..................................... 10.0% (13.5)% 13.5%
Currency........................................ 1.0 (1.8) 0.7
Price increases, net of rebates................. (2.0) 0.2 2.3
----- ---- ----
Total sales change.............................. 9.0% (15.1)% 16.5%
===== ==== ====
Unit volume, up 10 percent, accounted for the majority of the increase
in 1994 versus 1993. The unit volume increase was primarily attributable
to the effect on 1994 sales of the acquisitions of The Rugby Group, Inc.
("Rugby") and Kodama Ltd.("Kodama"). The change in currency in 1994 versus
1993 was not substantial with the largest impact resulting from
fluctuations in Japan. Currency fluctuations in Europe did not have a
measurable impact on sales. The impact of price increases, net of rebates,
on sales growth continued to decline in 1994 as was the case in 1993. The
<PAGE> 29
majority of the sales decrease in 1993 versus 1992 was attributable to a
decline in unit volume. Product sales contributing to this volume decline
included Cardizem tablets, Cardizem SR, Nicoderm, and Seldane, partially
offset by increased sales of Cardizem CD. Rebates increased in 1994 over
1993 and 1992 primarily due to a greater volume of contract sales subject
to discount to hospitals and managed care providers and a change in the
method by which governmental organizations purchase product.
The Company's net sales continue to be subject to increasing price
pressures from the purchasing power of governmental entities, managed care
organizations, pharmacy chains, and other large purchasers, which resulted
in fewer and smaller price increases, legally required "best price" sales,
price rebates, and increasing competitive pressures on key products.
CARDIZEM FAMILY. Sales of the Cardizem family increased to $933 million in
1994 compared with $913 million in 1993 and $1,053 million in 1992. Once-
a-day Cardizem CD contributed $708 million in sales in 1994, compared with
$546 million in 1993, and $260 million in 1992. Generic competition for
Cardizem tablets in the U.S. began in November 1992. The increase in sales
of Cardizem CD, which became the predominant dosage form in 1993 and
accounted for 76 percent of Cardizem family sales in 1994, partially offset
the erosion of sales of older forms of Cardizem. Demand has shifted to the
more convenient, less expensive Cardizem CD and to generic and competing
products.
U.S. regulatory exclusivity for Cardizem Injectable and Cardizem CD
expired in October 1994 and December 1994, respectively, and additional
competition is expected. The Company's U.S. patent for its once-a-day
formulation of Cardizem CD will prevent other products from using that
patented formulation until expiration of the patent in 2011. However,
competition from other once-a-day diltiazem formulations that do not
infringe the patent and from generic products has begun and is expected to
continue to exert pressure on sales of the Cardizem family. The Company
believes that the U.S. Food and Drug Administration ("FDA") has been asked
to designate a competing once-a-day diltiazem product as generically
substitutable for Cardizem CD. Such a designation for this or any other
once-a-day diltiazem product could have a material adverse effect on sales
of Cardizem CD.
SELDANE FAMILY. Global sales of terfenadine, marketed as Seldane and
Seldane-D in the United States, were $698 million in 1994, down seven
percent from 1993, and $747 million in 1993, 15 percent less than 1992.
The overall decrease in terfenadine sales beginning in the third quarter of
1992 primarily reflects adverse publicity in North America (which began in
July 1992) concerning the relabeling of the product at the request of the
FDA to strengthen warnings about certain rare but serious side effects;
restrictions on U.S. promotion following the relabeling; pressures from
competing products; and a mild 1993 allergy season in Europe. Lower
European and North American sales in 1993 and 1994 were partially offset by
Japanese sales, which continued to show strong growth in 1994. Forty-three
percent of 1994 terfenadine sales were generated outside the United States,
compared with 36 percent in 1993 and 30 percent in 1992.
Significant U.S. regulatory exclusivity for Seldane and Seldane-D
expired in April 1994 and August 1994, respectively. An additional patent
covering terfenadine products expires in March 1998, but the extent of its
protection currently is the subject of litigation. Seldane and Seldane-D
continue to lose market share under increasing pressure from competing
products. U.S. sales of terfenadine are expected to continue to decline,
perhaps substantially in the event of generic competition.
<PAGE> 30
CARAFATE. Sales of sucralfate, marketed as Carafate and Carafate
Suspension in the U.S., declined 17 percent to $147 million in 1994, from
$177 million in 1993. Sales declined 13 percent from 1992 to 1993. The
declining sales are primarily the result of continuing pressure from a
growing number of products in a highly competitive market.
Carafate Suspension, a liquid form launched in the U.S. in the first
quarter of 1994, contributed $19 million in sales for the year.
SMOKING CESSATION. Sales of smoking cessation products, including
Nicorette (nicotine gum) and the Nicoderm patch, were $96 million in 1994,
a decrease of $60 million, or 38 percent, from $156 million in 1993. This
decline is attributable primarily to the transfer of U.S. marketing rights
for Nicorette to SmithKline Beecham Consumer Healthcare, L.P. ("SKBCHC"),
the Company's consumer products partnership with SmithKline Beecham,
effective January 1, 1994, and to a lesser extent to reduced demand for
Nicoderm. In exchange for the Nicorette marketing rights, the Company will
receive a larger share of partnership profits, which are recorded in other
income, net. Sales of smoking cessation products declined 45 percent from
1992 to 1993, reflecting a substantial drop in demand for nicotine patch
products in 1993 and severe shrinkage of the entire smoking cessation
market.
RUGBY GENERIC PRODUCTS. Rugby, which became a wholly owned subsidiary of
the Company on October 4, 1993, recorded 1994 sales of $296 million.
Fourth-quarter 1994 sales were $76 million, down seven percent from sales
of $82 million in the fourth quarter of 1993, due primarily to initial
sales of a product in December 1993 without a comparable launch in late
1994. Because generic products have substantially lower margins than the
Company's other products, Rugby sales should not be viewed as having an
impact on earnings equivalent to an equal amount of sales of the Company's
non-generic products.
INTERNATIONAL SALES. In January 1994, the Company acquired a majority
ownership interest in Kodama Ltd., and by December 31, 1994, had increased
its ownership to 99.8 percent. Kodama's financial results for the full
year are reflected in the consolidated financial statements of the Company.
Kodama contributed $161 million to 1994 sales. Kodama's sales were not
included in consolidated sales of the Company prior to January 1994.
Effective in January 1995, Kodama and Marion Merrell Dow K.K., the
Company's principal Japanese subsidiary, merged their organizations to take
advantage of marketing and other synergies.
Sales in international markets were $1.2 billion, up 19 percent from
the prior year primarily due to the addition of Kodama sales and increased
sales of Seldane in Japan. International sales were 40, 36, and 33 percent
of total sales in 1994, 1993, and 1992, respectively. The trend toward
increasing international sales affects sales and earnings, since sales
outside the U.S. generally have lower margins and may be subject to
currency fluctuations.
As in the United States, reducing the cost of health care continues to
be an important issue in other countries. Other countries have used direct
controls on prices and indirect controls, such as health care budgeting, to
restrict spending on pharmaceuticals. Although it is not possible to
predict with certainty what actions will be taken by authorities in the
future, it is reasonable to assume the Company will become increasingly
subject to a variety of downward pressures on prices internationally.
COSTS AND EXPENSES. Cost of sales as a percentage of net sales was 32
percent in 1994 versus 26 percent in 1993, and 23 percent in 1992. The
1994 and 1993 increases in cost of sales, as a percentage of net sales, are
<PAGE> 31
due to a greater percentage of international sales (which generally have
higher cost of sales) and the U.S. sale of lower-margin prescription
products (primarily due to sales of Rugby generic products and the
increasing purchasing power of hospitals, managed care providers and
government agencies). The 1994 cost of sales for Rugby and Kodama were
$239 million (81 percent of sales) and $77 million (48 percent of sales),
respectively. Fourth quarter 1994 cost of sales for Rugby were $63 million
(83 percent of sales) compared to fourth quarter 1993 cost of sales of $62
million (76 percent of sales). The lower 1992 cost of sales percentage
resulted from favorable product mix in both Europe and the Pacific and
favorable manufacturing variances in Europe.
Research and development ("R&D") expenses were $462 million, $451
million, and $465 million in 1994, 1993, and 1992, respectively. As a
percent of net sales, R&D spending was 15 percent in 1994, 16 percent in
1993 and 14 percent in 1992. The decreases in R&D spending for 1993 and
1994 relative to 1992 are attributable primarily to cost savings resulting
from implementation of global R&D synergies. The $11 million or two
percent increase in research and development expense in 1994 over 1993 is
primarily attributable to R&D expenses related to Rugby and Kodama,
incentive compensation, an increase in amortization costs related to new
products and costs associated with patent rights.
Selling, general and administrative expenses were $1,034 million,
$1,026 million, and $1,130 million, in 1994, 1993, and 1992, respectively.
The one percent increase from 1993 to 1994 is due to the inclusion of an
entire year of expenses in 1994 related to Rugby and Kodama of
approximately $125 million, offset partially by cost savings in promotion
and advertising of about $80 million and the remaining savings being
attributable to the related salary and benefits savings from the reductions
in force in 1993 and 1994. The nine percent decline from 1992 to 1993 is
attributable to an overall commitment to reduced spending levels due to the
corporate restructuring that began in 1993.
During the second quarter of 1993, a pre-tax special charge of $180
million was taken which reduced 1993 earnings per share by $.46. The
special charge included the estimated cost of a number of strategies
designed to decrease the number of associates, reduce and consolidate
facilities, focus R&D on the highest priority projects in the product
pipeline and redesign the U.S. business to address the changing health care
market. See discussion of the special charge under "Liquidity and Capital
Resources."
OTHER INCOME, NET. Other income, net, for 1994 was $52 million as compared
to $81 million for 1993. The reduction was due primarily to the decline in
market value of the Company's investment portfolio of mortgage derivative
securities [formerly managed by Askin Capital Management, L.P. ("Askin")
now in bankruptcy proceedings] in 1994, and to a lesser extent to the
impairment of the Company's portfolio of investments in biotechnology
companies, partially offset by gains from sales of certain biotechnology
stocks and income from the SKBCHC partnership. The Company has begun to
reduce its holdings of mortgage derivative securities and to dispose of
securities of certain biotechnology companies in which the Company no
longer has a strategic interest. In the first quarter of 1995, the Company
divested its remaining holdings of mortgage derivatives without an impact
on earnings.
The increase in other income, net, from 1992 to 1993 can be attributed
primarily to income from the SKBCHC partnership and asset sales in Japan,
partially offset by a decrease in investment income due to lower interest
rates and a reduction in funds available for investments.
Income from partnerships and co-promotion agreements is included in
other income, net.
<PAGE> 32
INCOME TAXES. The Company s effective income tax rate in 1994 was 26.5
percent versus 28.0 percent in 1993 and 32.6 percent in 1992. The 1994
effective tax rate declined versus 1993 due to the effect of the Company's
interest in Carderm Capital L.P. (the "Partnership"), a limited partnership
in which a subsidiary of the Company is the general partner and another
subsidiary of the Company is the principal limited partner. For financial
reporting purposes, the assets, liabilities, results of operations and cash
flows of the Partnership and its subsidiary are included in the Company's
consolidated financial statements and outside investors' limited
partnership interests are reflected as minority interests. For income tax
purposes, the outside investors' limited partnership interests are not
included. See Notes to Consolidated Financial Statements - Note 13 for a
reconciliation of the U.S. statutory income tax rate to the Company s
effective rate. The 1993 effective tax rate declined versus 1992 primarily
due to increased production from the Company's operations in Puerto Rico,
utilization of foreign tax credits and a decline in sales of the Company's
major products in the United States. The Omnibus Budget Reconciliation Act
became law in August 1993 and affected many aspects of corporate tax law;
for example, it increased the corporate tax rate and reduced certain income
tax benefits related to manufacturing in Puerto Rico. The Company's
effective tax rate in 1995 is expected to be higher than in 1994 due to the
decline in benefits to be derived from manufacturing done in Puerto Rico
and the expense related to acquired research of Selectide Corporation which
is not tax deductible.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Net cash provided by operating activities was $699 million in
1994, compared with $593 million in 1993, and $706 million in 1992. With
the adoption of Financial Accounting Standards Board Statement No. 115
("SFAS No. 115") "Accounting for Certain Investments in Debt and Equity
Securities," purchases and sales of trading securities are now classified
as part of operating activities versus investing activities.
Net cash used for investing activities was $466 million in 1994, $346
million in 1993, and $425 million in 1992.
In 1994, investment funds were used primarily to increase investments
through purchases, net of sales, of $221 million, purchase businesses for
$120 million and property, plant and equipment for $90 million.
In 1993, investment funds were used primarily to purchase a business
for $271 million; property, plant and equipment for $176 million and shares
in an equity company for $76 million.
In 1992, investment funds were used primarily to purchase a business
for $250 million and property, plant and equipment for $173 million.
During 1992, the Company invested $36 million to acquire an existing
production facility in Midland, Michigan, from The Dow Chemical Company
(Dow), which is now managed by Dow.
The Company has commitments with Dow to build research and development
pilot facilities and a bulk chemical manufacturing facility in Midland,
Michigan. Total capital authorized for these two projects was $75 million,
of which $68 million had been expended through December 31, 1994. The
pilot facility was completed in 1994. The bulk chemical manufacturing
facility is now substantially complete but is not expected to be placed
into service immediately.
Cash flow used for financing activities was $244 million in 1994, $276
million in 1993, and $132 million in 1992. Principal financing activities
were dividend payments aggregating $282 million in 1994 and 1993 and $273
million in 1992, and short-term loans to Dow, which on a net basis used $25
million in 1994, and provided $55 million and $185 million in 1993 and
1992, respectively.
<PAGE> 33
The Board of Directors authorized the purchase of up to 7.8 million
shares of the Company s common stock. Through December 31, 1994,
approximately 4.9 million shares had been purchased. The shares are used
to fund benefit plans for associates, as well as for general business
purposes.
Cash dividends per common share declared were $1.00 in 1994, $1.00 in
1993, and $.98 in 1992. As of December 31, 1994, the Company s quarterly
dividend was $.25 per common share ($1.00 on an annualized basis).
Working capital was $587 million in 1994, $521 million in 1993 and
$767 million in 1992. The increase in working capital from 1993 to 1994 is
primarily attributable to the improved management of inventory quantities
and net proceeds resulting from transactions in trading securities. The
decrease in working capital from 1992 to 1993 was primarily due to the
Company's acquisition of Rugby, the special charge recorded in June 1993
and the acquisition of an equity interest in Kodama.
In April 1993, two wholly owned subsidiaries of the Company
contributed assets with a fair value of approximately $1 billion to the
Partnership. In October 1993, outside investors acquired limited partner
interests in the Partnership for $180 million. Following this transaction,
the Company owns an approximate 85% interest in the Partnership. The
assets, liabilities, results of operations and cash flows of the
Partnership are included in the Company's consolidated financial
statements. See Notes to Consolidated Financial Statements - Note 14.
SPECIAL CHARGE. In June 1993, the Company recorded a special charge of
$180 million. The following table details the remaining liability balance
as of December 31, 1994 (millions of dollars).
Employee termination and realignment costs related to
severance and benefits $ 39
Business relocation costs for North America manufacturing,
research and development and corporate offices
(estimated completion in spring of 1996) 11
Information systems development costs necessary for U.S.
business reengineering 12
Asset write-downs covering manufacturing and research and
development site closings, leasehold improvements and
product licenses 7
-----
Balance at December 31, 1994 $ 69
=====
The special charge liability has been reduced by total cash
expenditures of $107 million ($65 million in 1994, $42 million in 1993),
all of which have been funded from operations. Asset write-downs have been
$4 million. During 1994, the Company reevaluated its estimates for plant
closings and anticipated expenditures for severance and benefit costs,
primarily health care benefits. The changes in these estimates were
offsetting.
As of December 31, 1994, the Company's global work force has been
reduced by approximately 1,650 associates, of which 1,290 associates were
terminated involuntarily with severance packages, resulting in $69 million
of direct severance costs. Additional payments for relocation and out-
placement services and other termination benefits have totaled $21 million.
The Company is obligated under its plan to provide health care benefits for
associates involuntarily terminated up to a maximum of five years. Cash
<PAGE> 34
outflows related to health care benefit extensions are expected to be
approximately $13 million through 1999. Work force reduction efforts are
expected to result in estimated payroll and benefit cost savings of $127
million in 1995.
Expenditures in 1994 largely consisted of research and development
restructuring and associate severance pay and benefits. The actions
contemplated under the special charge are expected to be substantially
complete by December 31, 1995. Expected cash outflows of approximately $41
million in 1995 will be funded from operations.
CAPITAL RESOURCES. In August 1994 the Company announced certain steps it
is taking to keep pace with the rapid changes taking place in the
pharmaceutical industry. The Company is constantly assessing and adjusting
its corporate structure and business mix in an effort to remain
competitive. As part of this process, the Company continually evaluates
acquisition candidates, possible joint marketing arrangements, potential
business combinations and alliances, and other strategic alternatives with
the goal of improving its position within the industry. The Company has
retained an investment banker to advise it with respect to such
alternatives. Dow, which owns approximately 71 percent of the Company's
outstanding Common Stock, also has retained an investment banker to advise
it with respect to strategic opportunities for the Company. In addition,
the Company intends to continue its efforts to build long-term value by
focusing on the expanding needs of the growing managed care market in the
United States. See Notes to Consolidated Financial Statements--Note 15 for
a discussion on the possible negotiated acquisition by the Hoechst Group of
all the outstanding shares of the Company.
In December 1992, the City of Kansas City, Missouri, approved the
Company's proposal to construct facilities in Kansas City with the
assistance of tax increment financing, which provides for partial
reimbursement of project costs. As revised in 1993 to reflect the
Company's new global strategy, the project will consolidate substantially
all Kansas City-based functions at a single site. Construction of the
facilities began in early 1994 and is expected to be completed in 1996-97.
The Company entered into an arrangement providing for a third party to
construct and own the facilities, which are estimated to cost approximately
$117 million and to lease such facilities to the Company upon completion.
The Company has an option to purchase the facilities at the end of the
lease term. The Company expects to finance the remaining cost of the
project, estimated to be not more than $40 million, with cash from
operations.
Cash flows from operating activities are expected to be sufficient to
meet planned capital expenditures, dividends and other normal operating
activities of the Company.
OTHER ITEMS
PRICING/INFLATION. The Company has a policy that it will not raise prices
on its overall product line beyond the expected annual rate of inflation in
any given year as measured by the "Blue Chip Economic Indicators" forecast.
RECENT BUSINESS CONDITIONS. The overall cost of health care is expected to
continue to be of concern to governmental and private institutions in major
world markets and efforts in this area are expected to continue to be a
major consideration in the Company's pricing decisions. Anticipated U.S.
health care legislation did not materialize in 1994 and the change in
control of Congress with the 1994 election makes the prospects for such
legislation uncertain. If enacted, however, any such legislation could
include mechanisms designed to control prices. With or without such
<PAGE> 35
legislation, the influence of government entities, managed care
organizations, volume purchasers, insurers and others over purchasing and
prescribing decisions is expected to continue to exert increasing pressure
on the pricing of pharmaceutical products.
The North American Free Trade Agreement ("NAFTA"), effective in 1994,
provides for the removal of trade barriers among the U.S., Canada and
Mexico over a 15-year period. Although the effect of NAFTA on the Company,
which is believed to have been positive, was immaterial in 1994, it may
increase in the future. Legislation implementing the General Agreement on
Tariffs and Trade ("GATT") in the U.S. was enacted late in 1994. GATT is
expected to benefit the Company, primarily due to its additional protection
for intellectual property and the elimination of many trade tariffs among
the U.S. and certain of its principal trading partners. The Company has
noted a significant reduction in tariff expense due to GATT.
EVENTS OF 1995. In January 1995, the Company acquired Selectide
Corporation ("Selectide") for $58 million as part of the Company's strategy
to accelerate research and development. Selectide brings experience in
combinatorial chemistry and rapid screening technologies for pharmaceutical
research. The Company will record a one-time charge for the cost of
acquired research. This charge, equivalent to the amount of the
acquisition price in excess of the net identifiable assets of Selectide,
will reduce earnings per share by approximately $.17 in the first quarter
of 1995.
On March 7, 1995, the Company and Teva Pharmaceutical Industries
Limited ("Teva") signed definitive agreements for the North American
marketing of Copaxone (registered trademark)(Copolymer-1), Teva's
investigational new product for multiple sclerosis.
During the first quarter of 1995, the Company's board of directors
approved the construction and purchase of two manufacturing sites for a
cost of approximately $50 million.
As discussed previously, see Notes to Consolidated Financial
Statements--Note 15 for a discussion on the possible negotiated acquisition
by the Hoechst Group of all the outstanding shares of the Company.
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
(Millions of Dollars, Except for Per Share Data)
<S> <C> <C> <C>
Net sales........................................................................... $3,060 $2,818 $3,320
Cost of sales....................................................................... 984 722 771
------ ------ ------
Gross profit................................................................... 2,076 2,096 2,549
------ ------ ------
Operating expenses:
Research and development.......................................................... 462 451 465
Selling, general and administrative............................................... 1,034 1,026 1,130
Special charge.................................................................... -- 180 --
------ ------ ------
Total operating expenses....................................................... 1,496 1,657 1,595
------ ------ ------
Operating income............................................................... 580 439 954
Other income, net................................................................... 52 81 72
Interest expense.................................................................... 17 13 9
------ ------ ------
Income before income taxes, minority interest and cumulative effect of
changes in accounting principles............................................. 615 507 1,017
Income taxes........................................................................ 163 142 332
Minority interest................................................................... 14 3 --
------ ------ ------
Income before cumulative effect of changes in accounting principles............ 438 362 685
Cumulative effect of change in accounting principle -- income taxes................. -- -- 54
Cumulative effect of change in accounting principle -- postretirement benefits...... -- -- (33)
------ ------ ------
Net income..................................................................... 438 362 706
Less preferred stock dividends...................................................... 5 5 6
------ ------ ------
Net income -- common stockholders.............................................. $ 433 $ 357 $ 700
====== ====== ======
Earnings per share, before cumulative effect of changes in
accounting principles -- assuming full dilution................................... $ 1.57 $ 1.30 $ 2.44
Per share cumulative effect of change in accounting
principle -- income taxes......................................................... -- -- .19
Per share cumulative effect of change in accounting
principle -- postretirement benefits.............................................. -- -- (.12)
------ ------ ------
Earnings per common share -- assuming full dilution................................. $ 1.57 $ 1.30 $ 2.51
====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 37
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------
Assets 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars, Except for Per Share Data)
Current assets:
<S> <C> <C>
Cash and cash equivalents................................................................................ $ 95 $ 147
Short-term investments................................................................................... 399 252
Accounts and notes receivable, net....................................................................... 626 491
Notes receivable from Dow................................................................................ 435 364
Inventories.............................................................................................. 323 382
Prepaid expenses......................................................................................... 25 19
Income taxes receivable.................................................................................. 23 25
Deferred income tax benefits............................................................................. 123 142
------ ------
Total current assets.................................................................................. 2,049 1,822
Property, plant and equipment, net....................................................................... 739 677
Intangibles, net......................................................................................... 813 631
Long-term marketable securities.......................................................................... 212 382
Deferred income tax benefits............................................................................. 149 59
Other assets............................................................................................. 138 224
------ ------
Total assets............................................................................................. $4,100 $3,795
====== ======
</TABLE>
<PAGE> 38
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
December 31
----------------
Liabilities and Stockholders' Equity 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
<S> <C> <C>
Accounts and notes payable............................................................................... $ 327 $ 409
Accounts and notes payable to Dow........................................................................ 442 277
Accrued expenses......................................................................................... 220 233
Income taxes payable..................................................................................... 63 --
Associate compensation and incentive plans............................................................... 128 76
Dividends payable........................................................................................ 69 69
Other current liabilities................................................................................ 213 237
------ ------
Total current liabilities............................................................................. 1,462 1,301
Long-term debt............................................................................................. 99 122
Deferred income taxes...................................................................................... 84 55
Other liabilities.......................................................................................... 163 146
Commitments and contingent liabilities.....................................................................
------ ------
Total liabilities..................................................................................... 1,808 1,624
------ ------
Minority interest in subsidiary companies.................................................................. 173 175
------ ------
Temporary capital:
ASOP convertible preferred stock at $1 par value per share;
issued 2,794,896 shares (2,866,873 shares issued at December 31, 1993).................................. 3 3
Paid-in capital.......................................................................................... 97 99
Less guaranteed ASOP obligation.......................................................................... (90) (95)
------ ------
Total temporary capital............................................................................... 10 7
------ ------
Stockholders' equity:
Preferred stock at $1 par value per share
Authorized 8,000,000 shares; 5,072,360 shares undesignated............................................ -- --
Common stock at $.10 par value per share
Authorized 350,000,000 shares; issued 278,781,723 shares (278,781,949 shares at December 31, 1993).... 28 28
Paid-in capital.......................................................................................... 614 639
Cumulative translation adjustments....................................................................... (51) (78)
Unrealized gain (loss) on certain equity and debt investments............................................ (1) 82
Retained earnings........................................................................................ 1,613 1,456
------ ------
2,203 2,127
Less:
2,074,735 shares of common stock in treasury, at cost
(4,781,157 shares at December 31, 1993)................................................................ (50) (138)
Unearned compensation-restricted stock awards............................................................ (44) --
------ ------
Total stockholders' equity............................................................................ 2,109 1,989
------ ------
Total liabilities and stockholders' equity................................................................. $4,100 $3,795
====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 39
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income.................................................................................... $ 438 $ 362 $ 706
Non-cash items included in net income:
Depreciation and amortization.............................................................. 119 107 101
Undistributed earnings of affiliates....................................................... (31) (15) (5)
Deferred tax provision..................................................................... (3) (25) (80)
Unrealized (gain) loss on trading securities............................................... 5 -- --
Other...................................................................................... 64 (28) 19
Changes in assets and liabilities:
Accounts and notes receivable, net......................................................... (35) 93 (41)
Accounts receivable from Dow............................................................... 5 (8) 10
Accounts receivable from other related companies........................................... -- (8) (7)
Inventories................................................................................ 86 17 (84)
Trading investments-purchases.............................................................. (313) -- --
Trading investments-proceeds from sale or maturity......................................... 342 -- --
Accounts and notes payable................................................................. (89) 46 33
Accounts payable to Dow.................................................................... 1 7 (5)
Income taxes payable....................................................................... 53 (44) (12)
Other, net................................................................................. 57 89 71
------ ------ ------
Net cash provided by operating activities............................................. 699 593 706
------ ------ ------
Cash flows from investing activities:
Purchase of investments..................................................................... (1,148) (1,833) (1,466)
Proceeds from the sale and maturity of investments.......................................... 927 1,840 1,483
Proceeds from outside investors in limited partnership...................................... -- 180 --
Property, plant and equipment additions..................................................... (90) (176) (173)
Acquisition of businesses, net of cash and cash equivalents acquired........................ (120) (271) (250)
Investment in an equity interest............................................................ -- (76) --
Other, net.................................................................................. (35) (10) (19)
------ ------ ------
Net cash used by investing activities.................................................. (466) (346) (425)
------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................................................... 11 -- 74
Repayment of long-term debt................................................................. (77) (115) (98)
Repayment of short-term loans to Dow........................................................ 245 480 755
Short-term loans to Dow..................................................................... (270) (425) (570)
Change in notes receivable from Dow......................................................... (47) (143) 31
Change in notes payable to Dow.............................................................. 164 216 8
Dividends paid on common and preferred shares............................................... (282) (282) (273)
Purchase of treasury stock.................................................................. (8) (7) (59)
Proceeds from treasury stock................................................................ 20 -- --
------ ------ ------
Net cash used by financing activities.................................................. (244) (276) (132)
------ ------ ------
</TABLE>
<PAGE> 40
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
<S> <C> <C> <C>
Exchange rate effect on cash and cash equivalents................................................ (41) (15) (7)
------ ------ ------
Increase (decrease) in cash and cash equivalents................................................. (52) (44) 142
Cash and cash equivalents at beginning of period................................................. 147 191 49
------ ------ ------
Cash and cash equivalents at end of period....................................................... $ 95 $ 147 $ 191
====== ====== ======
Supplemental cash flow information:
Interest paid............................................................................... $ 15 $ 12 $ 9
====== ====== ======
Income taxes paid........................................................................... $ 137 $ 144 $ 353
====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 41
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars, Except for Per Share Data)
Preferred stock:
<S> <C> <C> <C>
Balance at beginning and end of period.........................................................$ -- $ -- $ --
------ ------ ------
Common stock:
Balance at beginning and end of period......................................................... 28 28 28
------ ------ ------
Paid-in capital:
Balance at beginning of period................................................................. 639 639 639
Associate incentive plans common stock issuances............................................... (25) -- --
------ ------ ------
Balance at end of period....................................................................... 614 639 639
------ ------ ------
Cumulative translation adjustments:
Balance at beginning of period................................................................. (78) (33) 47
Foreign currency translation adjustments....................................................... 27 (45) (80)
------ ------ ------
Balance at end of period....................................................................... (51) (78) (33)
------ ------ ------
Unrealized gain (loss) on certain equity and debt investments.................................... (1) 82 --
------ ------ ------
Retained earnings:
Balance at beginning of period................................................................. 1,456 1,373 942
Net income..................................................................................... 438 362 706
Common stock dividends declared
($1.00, $1.00, and $.98 per common share, respectively)...................................... (276) (274) (270)
Preferred stock dividends declared, net........................................................ (5) (5) (5)
------ ------ ------
Balance at end of period....................................................................... 1,613 1,456 1,373
------ ------ ------
</TABLE>
<PAGE> 42
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
Common stock in treasury:
Balance at beginning of period
<S> <C> <C> <C>
(4,781,157; 4,512,640; and 2,467,763 shares, respectively)................................... (138) (132) (73)
Purchases of common stock for treasury
(452,300; 360,200; and 2,068,300 shares, respectively)....................................... (8) (7) (59)
Associate incentive plans common stock issuances
(3,158,722; 91,683; and 23,423 shares, respectively)......................................... 96 1 --
------ ------ ------
Balance at end of period
(2,074,735; 4,781,157; and 4,512,640 shares, respectively)................................... (50) (138) (132)
------ ------ ------
Unearned compensation-restricted stock awards:
Stock issuances................................................................................ (44) -- --
------ ------ ------
Balance at end of period (2,017,800 shares).................................................... (44) -- --
------ ------ ------
Total stockholders' equity............................................................................ $2,109 $1,989 $1,875
====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------------------
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
profits, transactions and account balances have been eliminated in
consolidation. The Company s investments in affiliates, consisting
primarily of the Company s joint venture with SmithKline Beecham, are
recorded on an equity basis and are included in Other assets.
Cash and cash equivalents include cash and investment securities with
original maturities of three months or less. As discussed in Note 5, the
Company changed its method of accounting for investments in certain debt
and equity securities in 1993. The cost of investments sold is determined
by the specific identification method. To meet the reporting requirements
of Statement of Financial Accounting Standards ("SFAS") No. 107
Disclosures About Fair Value of Financial Instruments, the Company
calculates the fair value of financial instruments and includes this
additional information in the notes to financial statements. The Company
uses quoted market prices whenever available to calculate fair values.
When quoted market prices are not available, the Company uses standard
pricing models for various types of financial instruments (such as forward
exchange contracts) which take into account the present value of estimated
future cash flows.
Inventories are stated at the lower of cost or market. Cost is
determined on the basis of either the last-in, first-out ("LIFO") method or
on the first-in, first-out ("FIFO") method.
Property, plant and equipment are recorded at cost. Maintenance and
repairs are expensed as incurred. Depreciation is provided over the
estimated useful lives of the assets, principally using the straight-line
method. For tax purposes, accelerated methods are used.
Goodwill is amortized on a straight-line basis over its useful life
ranging from 15 to 40 years. Costs of product rights, patents and
trademarks are amortized on a straight-line basis over useful lives ranging
from 5 to 17 years. The Company evaluates the carrying value of goodwill
based upon the undiscounted cash flows of the related entity over the
remaining amortization period.
Substantially all international operations use local currency as the
functional currency. Translation gains and losses of these operations are
included as a separate component of Stockholders equity.
Accruals for environmental matters are recorded in operating expenses
when it is probable that a liability has been incurred and the amount can
be reasonably estimated. Accruals for environmental liabilities are
generally included in the balance sheet as Other liabilities (non-current)
at undiscounted amounts. In general, costs related to environmental
compliance are charged to expense. Environmental expenditures are
capitalized if they increase the value of the property and/or prevent
environmental hazards from occurring in future operations.
Provision is made for taxes on unremitted earnings of foreign
subsidiaries to the extent that such earnings are not deemed to be
permanently invested. Regulations governing the determination of income
taxes for certain domestic and foreign jurisdictions provide for investment
credits for acquisition of qualified facilities. Such credits are
reflected as a reduction of income tax expense on the flow-through basis in
the year in which they are earned. In addition, certain foreign countries
provide incentive grants to encourage new investment. Generally, such
grants are credited to income when received. Research and experimentation
credits are reflected as a reduction in income taxes when realized under
the applicable tax laws.
<PAGE> 44
The difference between the proceeds from the exercise of stock options
and the par value of authorized but unissued common stock of the Company,
or cost of reacquired shares issued to optionees, is reflected in the paid-
in capital account. No charges or credits are made to earnings in
connection with options.
The Company has reflected the guaranteed Associate Stock Ownership
Plan ("ASOP") borrowing as long-term debt on its balance sheet. The Series
A Preferred Stock issued to the ASOP for cash was recorded in the temporary
capital section.
Earnings per common share assuming full dilution are based on the
weighted average number of outstanding common shares, common share
equivalents (primarily associate stock options) and the assumed conversion
of outstanding convertible preferred stock (see Note 12). Primary earnings
per common share have not been presented because they would not differ
significantly.
During 1994, the Company adopted SFAS No. 112 "Employers' Accounting
for Postemployment Benefits." The impact was not material. The disclosure
requirements of SFAS No. 119, "Disclosures about Derivative Financial
Instruments and Fair Value of Financial Instruments," have been
incorporated in the Notes to Consolidated Financial Statements where
appropriate.
Certain prior-period amounts have been reclassified to conform with
the December 31, 1994 financial statement presentation.
2. TRANSACTIONS WITH DOW (Millions of dollars)
- ---------------------------------------------------------------------------
As of December 31, 1994, The Dow Chemical Company ("Dow") owned 197 million
shares of the Company's common stock, approximately 71% of the outstanding
shares. Transactions with Dow are included in the Consolidated Balance
Sheets as follows:
December 31
--------------------
1994 1993
- ---------------------------------------------------------------------------
Accounts receivable................................... $ 11 $ 16
Current notes receivable.............................. 435 364
Accounts and notes payable............................ 442 277
The Company is a party to a Master Service Agreement with Dow under
which Dow provides various materials and services to the Company and its
subsidiaries. The Company and Dow are also parties to an agreement under
which Dow manufactures various chemical substances used in the manufacture
of some of the Company s pharmaceutical products. Generally these
agreements do not require the Company to do business with Dow or restrict
the Company s ability to do business with independent third parties, except
to the extent that Dow may be the sole source of a particular material or
service.
Expenses for services purchased from Dow, primarily manufacturing,
insurance, and R&D services amounted to $95, $109, and $109 for the years
ended December 31, 1994, 1993, and 1992, respectively. Services charged to
Dow, recorded as reductions to the Company's cost of services, amounted to
$2 for each of the years ended December 31, 1994, 1993 and 1992.
Sales of products to Dow amounted to $7, $3, and $4 for the years
ended December 31, 1994, 1993, and 1992, respectively. Materials purchased
from Dow, consisting primarily of chemicals used in manufacturing, amounted
to $1, $2, and $27 for the years ended December 31, 1994, 1993, and 1992,
respectively. As noted below, in 1992 the Company acquired a manufacturing
<PAGE> 45
facility from Dow. This facility is the source of most of the materials
purchased from Dow in previous years.
Current notes receivable and payable from/to Dow result from
intercompany financing arrangements. These notes bear interest based upon
the prevailing market rate within the country of issuance and are payable
on demand or have terms of less than one year. Of the $435 current notes
receivable, $200 is related to year end loans to Dow which were repaid on
January 3, 1995. In connection with these loans, the Company entered into
an interest rate contract with Dow, in which the Company received fixed
rate payments and was obligated for variable rate payments on the face
amount of $170. The contract expired on March 15, 1995. The increase in
current notes payable is largely attributable to the Company's investment
in Kodama Ltd., along with additional working capital for the Company's
operations in Japan.
In December 1993, the Company sold its Indianapolis facility to Dow
for net book value of $8 which approximated market value. In connection
with this sale, the Company has contracted with Dow to obtain certain
research and development services conducted at this facility and to
reimburse Dow for the cost of the services. The Company paid $7.5 to Dow
for services during 1994, and is obligated for a minimum of $6 in services
to be provided in 1995.
In 1992, the Company acquired a manufacturing facility from Dow and
has engaged Dow to operate it on behalf of the Company. In addition,
certain other manufacturing and research facilities were designed and
constructed by Dow for the Company. In connection with these transactions,
the Company has expended approximately $104 through 1994.
3. ACCOUNTS AND NOTES RECEIVABLE, NET
- ---------------------------------------------------------------------------
Accounts and notes receivable, net, consist of the following:
December 31 <F1>
--------------------
1994 1993
- ---------------------------------------------------------------------------
(Millions of Dollars)
Trade receivables...................................... $ 586 $ 465
Accounts with Dow...................................... 11 16
Other.................................................. 83 54
---- ----
680 535
Less allowances for returns
and doubtful accounts............................. 54 44
---- ----
$ 626 $ 491
==== ====
<F1> Market value approximates cost.
<PAGE> 46
4. INVENTORIES
- ---------------------------------------------------------------------------
Inventories consist of the following:
December 31
-----------------
1994 1993
- ---------------------------------------------------------------------------
(Millions of Dollars)
Raw materials.......................................... $ 48 $ 53
Work-in-process........................................ 91 139
Finished goods......................................... 188 190
Supplies............................................... 12 15
----- ----
339 397
Less excess of FIFO cost over
LIFO cost for LIFO inventory......................... 16 15
----- ----
$ 323 $ 382
===== =====
LIFO inventories represented 28% and 36% of consolidated inventories as of
December 31, 1994 and 1993, respectively.
5. INVESTMENTS IN MARKETABLE SECURITIES (Millions of dollars)
- ---------------------------------------------------------------------------
Effective December 31, 1993, the Company adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 requires that certain investments be categorized as trading,
available-for-sale, or held-to-maturity and that cash flows from purchases
and sales of trading investments be classified as cash flows from operating
activities. Trading investments are carried at fair value with unrealized
gains and losses included in income. Available-for-sale investments are
carried at fair value with unrealized gains and losses recorded in
stockholders' equity. Held-to-maturity investments are carried at
amortized cost. The Company's investments are classified as follows:
December 31, 1994 Unrealized
- ----------------- ----------------
Cost Gains Losses Fair Value
---- ----- ------ ----------
Trading:
Debt securities $ 58 $ 58
Equity securities 10 10
Available-for-sale:
Mortgage derivatives 17 $ 2 15
Debt securities 24 1 23
Equity securities 84 $ 11 8 87
Held-to-maturity 476 2 474
--- --- --- ---
$669 $ 11 $ 13 $667
=== === === ===
<PAGE> 47
December 31, 1993 Unrealized
- ----------------- ----------------
Cost Gains Losses Fair Value
---- ----- ------ ----------
Trading:
Debt securities $197 $197
Equity securities 66 $ 5 $ 2 69
Mortgage derivatives 62 62
Available-for-sale:
Debt securities 42 42
Equity securities 101 134 5 230
Held-to-maturity 169 3 172
--- --- --- ---
Subtotal 637 142 7 772
Open positions <F1> (135) 3 1 (133)
--- --- --- ---
$502 $145 $ 8 $639
=== === === ===
<F1> Represents funds received on short positions and/or sales of
securities under repurchase agreements.
At December 31, 1994, total investments are included in the
consolidated balance sheet as cash equivalents ($58), short-term
investments ($399), and long-term investments ($212).
Trading securities consist of investments in various near-term, liquid
investments. Available-for-sale securities consist primarily of
investments in biotechnology companies with whom the Company has ongoing
collaborative research projects ("biotechnology investments"), and mortgage
derivative securities. Held-to-maturity securities consist primarily of
investments in municipal bonds. During 1994, the Company divested of its
trading portfolio of hedged equity and convertible debt securities.
During 1994, net unrealized gains on available-for-sale securities
have declined by $129, primarily caused by a decrease in net unrealized
gains on biotechnology investments of $126. The decline in net unrealized
holding gains results in a reduction to stockholders' equity of $83, net of
tax effect. During 1994, the Company recognized impairment losses of $12
on biotechnology investments. The Company sold a portion of its holdings
in biotechnology investments during 1994, receiving sales proceeds of $28,
and realizing gains of $14.
Mortgage derivative securities were reclassified as available-for-sale
securities in March 1994. During 1994, the Company recognized losses of
$37 related to declines in the market value of mortgage derivatives,
received interest income of $8, and sold a portion of its holdings
receiving sales proceeds of $11, and realizing gains of $1. The Company
disposed of its remaining holdings of mortgage derivatives in the first
quarter of 1995, without an impact on earnings.
As of December 31, 1994, mortgage derivative securities had maturities
estimated at longer than ten years. Remaining debt securities in the
available-for-sale category mature within one year. In the held-to-
maturity category, $388 in securities mature within one year, and the
remainder have maturities ranging from one to five years.
Open positions at December 31, 1993, consisted of repurchase
agreements ($69), short positions ($43), unsettled trades ($21) and are
classified as accounts payable.
<PAGE> 48
6. PROPERTY, PLANT AND EQUIPMENT, NET (Millions of dollars)
- ---------------------------------------------------------------------------
Property, plant and equipment, net, consists of the following:
December 31
-----------------
1994 1993
- --------------------------------------------------------------------------
Land and land improvements............................. $ 75 $ 43
Buildings.............................................. 345 298
Machinery and equipment................................ 820 747
Construction in progress............................... 124 116
----- -----
1,364 1,204
Less accumulated depreciation.......................... 625 527
----- -----
$ 739 $ 677
===== =====
Depreciation expense during the years ended December 31, 1994, 1993,
and 1992, was $94, $88 and $79, respectively.
7. INTANGIBLE ASSETS AND AMORTIZATION
- ---------------------------------------------------------------------------
Intangible assets consist of the following:
December 31
-----------------
1994 1993
- ---------------------------------------------------------------------------
(Millions of Dollars)
Goodwill, net of accumulated amortization of
$102 ($78 in 1993)................................... $ 711 $ 554
Product rights and trademarks, net of accumulated
amortization of $30 ($37 in 1993).................... 102 77
----- -----
$ 813 $ 631
===== =====
<PAGE> 49
8. OTHER CURRENT LIABILITIES
- --------------------------------------------------------------------------
Other current liabilities consist of the following:
December 31
-----------------
1994 1993
- ---------------------------------------------------------------------------
(Millions of Dollars)
Sales rebates payable.................................. $ 128 $ 74
Special charge......................................... 69 138
Current portion of long-term debt...................... 16 25
----- -----
$ 213 $ 237
===== =====
In June 1993, a special charge of $180 million pre-tax was taken by
the Company. The special charge liability reflects the remaining
obligations related to the Company's continuing plan to reduce costs and to
position the Company for the future. The impact of the special charge on
1993 earnings per share was $.46.
9. NOTES PAYABLE, LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES
(Millions of dollars)
- ---------------------------------------------------------------------------
Notes payable at December 31, 1994 and 1993, consisted of obligations
due banks ($7 and $18, respectively) and Dow and affiliates ($405 and $241,
respectively) within one year with various interest rates. Unused and
available credit facilities with various U.S. and foreign banks totaled $65
at December 31, 1994. Costs of the credit facilities are negligible.
Foreign currency loans have interest rates varying from 5% to 12%.
Long-term debt consists of the following:
December 31
-----------------
1994 1993
- ---------------------------------------------------------------------------
9.11% guaranteed ASOP
debentures; final maturity - 2005.................... $ 90 $ 95
Foreign currency loans with
various banks; final maturity - 2005................. 25 52
----- -----
Total debt............................................. 115 147
Less payments due within one year <F1>................. 16 25
----- -----
Total long-term debt <F2>......................... $ 99 $ 122
===== =====
<F1> Market value approximates cost in 1994 and 1993.
<F2> Market value approximates $102 and $133 in 1994 and 1993,
respectively.
The average interest rate on long-term debt was 8.3 percent in 1994
and 6.9 percent in 1993. Annual installments on long-term debt for the
next five years are $16, $10, $10, $10, and $10.
<PAGE> 50
10. COMMITMENTS AND CONTINGENT LIABILITIES
- ---------------------------------------------------------------------------
The Company is party to various legal actions primarily involving
product liability claims and lawsuits arising in the normal course of
business. As of December 31, 1994, the Company is involved in litigation
including, but not limited to:
Approximately 46 lawsuits pending against the Company in various
state, federal, and foreign trial and appellate courts in which the
plaintiffs allege that Bendectin, an antinauseant formerly marketed by a
subsidiary of the Company, was the cause of birth defects. Although the
outcome of such litigation cannot be predicted with certainty,
substantially all such claims (more than 1,900) have been resolved in the
Company's favor in the past. As of December 31, 1994, judgments for and
against the Company were pending in six and two cases, respectively, all of
which are subject to further trial or appellate proceedings. The Company
does not believe that it would have material exposure financially, even if
these cases were decided unfavorably.
A consolidated class action lawsuit alleging violations of federal
securities laws and common law claims as a result of alleged materially
false and misleading statements and material omissions by the Company and
its officers and directors concerning Seldane, seeking unquantified
damages.
A lawsuit alleging violations of U.S. and Puerto Rico antitrust laws
and other tortious or unlawful conduct concerning the Company's assertion
of rights related to its once-a-day sustained release formulation of
diltiazem, seeking actual damages in excess of $480 million plus trebled,
punitive and exemplary damages.
A lawsuit by Ciba-Geigy Corporation claiming infringement by the
Company of Ciba-Geigy's patent relating to its nicotine transdermal system
and seeking to prohibit future sales of Nicoderm and to recover damages for
the Company's Nicoderm sales, in which an appeal is pending of a summary
judgment rendered in favor of the Company.
Class action antitrust and related lawsuits alleging that multiple
defendants (principally pharmaceutical manufacturers and wholesale
distributors), including the Company, engaged in unlawful price
discrimination practices to the detriment of certain retail pharmacists and
consumers.
The Company strongly believes that the claims against the Company in
the above actions are without merit and will continue to defend such
actions vigorously.
Certain other claims, suits and complaints have been filed or are
pending against the Company, all of which, in the opinion of management,
are adequately covered by insurance or are without merit, or are of such
kind or involve such amounts as would not have a material effect on the
financial position of the Company if disposed of unfavorably.
Rental expense under operating leases in the years ended December 31,
1994, 1993, and 1992, was (in millions) $58, $55 and $54, respectively.
Following is a schedule of the minimum annual rental commitments of the
Company for buildings, automobiles and various equipment under existing
operating leases at December 31, 1994.
<PAGE> 51
Year Ending Minimum
December 31 Annual Rental
- ---------------------------------------------------------------------------
(Millions of Dollars) 1995 $ 24
1996 15
1997 10
1998 7
1999 5
Later Years 105
-----
$ 166
=====
The Company uses forward exchange contracts to hedge risks related to
firm foreign currency commitments. Gains, losses and premiums on these
contracts are deferred and included in the cost of the related transaction.
As of December 31, 1994, the Company had contracts outstanding amounting to
approximately $109 million ($54 million with Dow), principally denominated
in Japanese yen, Italian lira, French francs and Canadian dollars, maturing
at various dates through March 1995. Forward exchange contracts
outstanding as of December 31, 1993, amounted to $122 million ($43 million
with Dow), principally denominated in Japanese yen, French francs and
Italian lira.
The Company entered into interest-rate cap agreements to reduce the
impact of rising interest rates on cash flows from its mortgage derivative
portfolio. The agreements provided for the Company to receive interest
payments as certain market rates increased. Net cash flows under these
agreements were recorded as interest income and amounted to less than
$100,000. The Company disposed of the interest-rate caps in connection
with divesting its mortgage derivative portfolio in the first quarter of
1995.
Retained earnings are legally restricted in certain countries from
payment as a dividend. The legal restriction was less than two percent of
retained earnings at December 31, 1994.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments, municipal bonds, trade receivables and receivables from Dow.
The Company places its temporary cash investments with well capitalized
financial institutions and, by policy, limits the amount of credit exposure
to any one municipality. The Company s products are sold primarily to
pharmaceutical wholesale distributors. The Company performs ongoing credit
evaluations of its customers financial condition and generally does not
require collateral. The Company maintains a reserve for potential credit
losses.
11. STOCK OPTIONS & RESTRICTED STOCK AWARDS
- ---------------------------------------------------------------------------
The 1992 Incentive Compensation Plan (the "Plan") authorizes the
granting of stock options, restricted stock awards and performance shares
covering a total of 20 million shares of the Company s common stock. Stock
options, restricted stock awards and performance shares have been granted
and are currently outstanding under this plan, and stock options are
outstanding from prior plans. Options are exercisable at varying times
from the first through the twelfth year after the grant date. Optionees
may exercise their options with cash and, under certain conditions, with
shares of the Company s common stock. Upon a change of control event, as
defined in the Plan, holders of options granted under the Plan may elect to
surrender their options in exchange for a cash payment equal to the
difference between the option exercise price per share and, as applicable,
<PAGE> 52
either the final takeover price per share of common stock or the closing
market price per share on the day shareholders formally approve the change
of control event (the Change of Control Benefit). Stock appreciation
rights (SARs) have been granted in tandem with stock options and become
exercisable in the event of a change of control (as defined in the Plan or
prior plans). Each SAR entitles the holder to receive a cash payment
either equal to (for SARs under prior plans) or not exceeding (for SARs
under the Plan) the amount of the Change of Control Benefit. The exercise
or surrender of an option extinguishes the SAR with which it is granted in
tandem, and vice versa. Options to purchase approximately 10 million
shares of common stock were exercisable as of December 31, 1994. Option
transactions under all plans over the past three years are summarized as
follows:
Number Option Price
of Shares (Range Per Share)
- ----------------------------------------------------------------------
Outstanding at
January 1, 1992....... 10,316,221 $ 1.13 - $37.88
Granted.............. 1,542,167 26.13 - 36.00
Exercised............ (58,126) 1.63 - 25.50
Expired.............. (674,497) 5.69 - 37.88
----------
Outstanding at
December 31, 1992..... 11,125,765 1.13 - 37.88
Granted.............. 18,772,210 16.88 - 25.88
Exercised............ (21,546) 3.01 - 28.50
Expired.............. (2,694,215) 1.13 - 37.88
Outstanding at
December 31, 1993..... 27,182,214 3.78 - 37.88
Granted.............. 605,733 16.50 - 36.00
Exercised............ (1,020,613) 3.78 - 26.88
Expired.............. (2,161,625) 10.81 - 37.88
----------
Outstanding at
December 31, 1994..... 24,605,709 $ 6.66 - $37.88
==========
During 1994, restricted stock awards covering 2 million shares were
granted to certain officers and other associates of the Company.
Restrictions lapse after five years from the date of grant or earlier if
certain Company goals are attained. Deferred compensation costs resulting
from the grant of restricted stock are reflected as a reduction to
stockholders' equity and are being amortized over four years. Also during
1994, the Company granted a total of 464,500 performance shares to certain
associates. Each performance share provides a payment, in either cash or
Company stock, equivalent to the value of one share of Company stock. The
performance shares will vest only if certain Company and associate goals
are achieved within five years of the grant date. Deferred compensation
costs resulting from the grant of performance shares are being amortized
over five years.
Upon a change of control event, as defined in the Plan or prior plans,
all conditions, restrictions and limitations in effect on stock options,
restricted stock and performance shares would immediately lapse. In
addition, all outstanding options, restricted stock awards and performance
shares would automatically become one hundred percent vested, and the
<PAGE> 53
Company would make full payment to each holder of performance shares,
deliver stock certificates for each restricted stock award, and permit the
exercise or surrender of options and/or SARs, respectively.
12. ASSOCIATE BENEFIT PLANS
- ---------------------------------------------------------------------------
The Company has defined benefit plans which cover associates in the
U.S. and a number of foreign countries. The Company's funding policy is
consistent with the requirements of federal and local laws and regulations.
Plans covering U.S. based associates are the largest plans. Generally,
these plans provide benefits based on either eligible compensation and
annual credits or compensation and years of service. Benefits for the
Company's plans outside the U.S. are based on compensation and years of
service.
Net periodic pension costs for the Company's defined benefit pension
plans were as follows:
1994 1993 1992
- ---------------------------------------------------------------------------
(Millions of Dollars)
Service costs - benefits earned during the period... $ 20 $ 19 $ 18
Interest cost on projected benefit obligation....... 13 11 9
Less return on assets............................... -- (9) (2)
Net amortization and deferral....................... (12) 1 (4)
Prior service costs................................. 3 -- --
----- ----- -----
Net periodic pension cost........................... $ 24 $ 22 $ 21
===== ===== =====
The funded status and amounts recognized in the consolidated balance
sheet for the Company's defined benefit pension plans were as follows:
December 31
--------------------
1994 1993
- ---------------------------------------------------------------------------
(Millions of Dollars)
Plan assets at fair value, primarily listed stocks
and bonds........................................... $ 153 $ 120
----- -----
Actuarial present value of benefit obligations -
Vested benefits..................................... 172 117
Nonvested benefits.................................. 13 20
----- -----
Accumulated benefit obligation........................ 185 137
Effect of projected future salary increases......... 36 47
----- -----
Projected benefit obligations......................... 221 184
----- -----
Funded status......................................... (68) (64)
Unrecognized net loss................................. 19 30
Unrecognized prior service cost....................... 9 6
Transition obligation................................. 3 2
Additional minimum liability.......................... (11) (5)
----- -----
Accrued pension cost.................................. $ (48) $ (31)
===== =====
<PAGE> 54
For the U.S. plans, the weighted average discount rate and rate of
increase in future compensation used to determine the actuarial present
value of the projected benefit obligation were 8.25 percent and 5 percent,
respectively, for 1994 and 7.25 percent and 6 percent, respectively, for
1993. The assumed long-term rate of return on assets was 9 percent for
1994 and 1993. For plans outside the U.S., the assumptions used in
determining the actuarial present value of the projected benefit
obligations are consistent with (but not identical to) those of the U.S.
plans.
The Company's retirement plans also include a Savings Plan for all
associates. The Savings Plan consists of a profit sharing component, under
which the Company may make annual contributions of up to 6 percent of each
participant s eligible compensation, and an elective deferral component
[401(k)] for voluntary participant contributions. The Company matches
participant contributions up to the first 3 percent of eligible pay, via an
allocation of preferred stock held by the Marion Merrell Dow Associate
Stock Ownership Plan (ASOP) Trust. Contributions to the Savings Plan and
ASOP, net of accumulated forfeitures, charged to cost of sales and
operating expenses during the years ended December 31, 1994, 1993 and 1992
were $22 million, $24 million and $25 million, respectively.
In 1990, the ASOP purchased 2,927,640 shares of the Company s Series A
Preferred Stock with the proceeds of a bank loan. The bank loan was repaid
with the proceeds from the issuance by the ASOP of 9.11 percent Guaranteed
Amortizing ESOP Notes due August 1, 2005 in the aggregate principal amount
of $104,663,130 (the Notes). Each share of Series A Preferred Stock is
convertible into no less than one share of Common Stock. Dividends of 7.75
percent per annum of the liquidation price per share of $35.75 are
cumulative. The Series A Preferred Stock is redeemable at the Company s
option after July 31, 1993 at a premium and after July 31, 2000 without a
premium. Each year, preferred stock held by the ASOP is allocated to
participants accounts based on principal and interest payments.
The Company's annual contributions to the ASOP plus dividends paid on
the Series A Preferred Stock will be used to service the Notes. As the
principal on the Notes is repaid, the Guaranteed ASOP Obligation is
reduced accordingly.
The Notes are unconditionally guaranteed by the Company as to payment
of principal and interest when and as the same shall become due and
payable, whether at maturity, upon redemption or otherwise. The holder of
a Note is entitled to enforce the guarantee without taking any action
against the ASOP. The holders of Notes have no recourse against the ASOP
nor are ASOP assets available to them, except that the trustee and the
holders generally have rights to payment out of cash contributions made by
the Company to the ASOP and earnings attributable to the investment of such
contributions.
As of December 31, 1994 and 1993, the ASOP held as assets 2,794,896
shares and 2,866,873 shares of Series A ESOP convertible preferred stock
and had liabilities comprised of the remaining principal on the Notes of
$90 million and $95 million, accrued interest payable on the Notes of $3
million and $4 million, and amounts due to vested plan participants of $.2
million and $.1 million, respectively.
The Company adopted SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions, in the fourth quarter of
1992. Upon adoption, the Company elected to record the transition
obligation of $52 million pretax ($33 million after tax or $.12 per share)
as a one-time charge against earnings, rather than amortize it over a
longer period. This obligation is primarily related to the health care
plan for Merrell Dow retirees. The Company has agreed to reimburse Dow on
an ongoing basis for retiree health care plan benefits paid by Dow to
certain Merrell Dow retirees.
<PAGE> 55
The net periodic benefit cost of postretirement plans includes the
following:
1994 1993 1992
- ---------------------------------------------------------------------------
(Millions of Dollars)
Service costs-benefits earned
during the period......................... $ -- $ -- $ --
Interest cost on accumulated postretirement
benefit obligation........................ 3 4 4
---- ---- ----
Net periodic postretirement expense......... $ 3 $ 4 $ 4
==== ==== ====
The accumulated postretirement benefits cost consists of the
following:
December 31
---------------
1994 1993
- ---------------------------------------------------------------------------
(Millions of Dollars)
Retirees................................................... $ (38) $(51)
Fully eligible active participants......................... -- (1)
Other active participants.................................. (1) (1)
---- ----
Unfunded accumulated obligation............................ (39) (53)
Unrecognized net (gain).................................... (5) (1)
Unrecognized prior service costs........................... (6) (2)
---- ----
Accrued postretirement benefits cost....................... $ (50) $(56)
==== ====
The principal assumptions used to measure the accumulated
postretirement benefit obligation include a discount rate of 7.75 percent
and 7.25 percent for 1994 and 1993, respectively. The health care cost
trend rate used was 10.4 percent declining to 5.75 percent in 2004,
remaining level thereafter (11 percent declining to 5.25 percent for 1993).
The health care cost trend rate impact on the benefit obligation is
illustrated as follows. A one percent increase in the health care cost
trend rate would increase the accumulated postretirement benefit obligation
by $1 million and increase the net periodic cost for 1994 by $.1 million.
13. INCOME TAXES
- ---------------------------------------------------------------------------
During 1992 the Company adopted SFAS No. 109, Accounting For Income
Taxes. This statement requires the asset/liability method of accounting
for income taxes, in which deferred income taxes are recognized for the tax
consequences of "temporary differences" between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Temporary differences as determined under SFAS No. 109 are generally more
inclusive than timing differences determined under previously applicable
accounting principles. The cumulative effect on prior years for this
accounting change increased net earnings in 1992 by $54 million, or $.19
per share.
<PAGE> 56
Domestic and foreign components of income before income taxes are as
follows:
1994 1993 1992
- ---------------------------------------------------------------------------
(Millions of Dollars)
Domestic.......................................... $ 495 $ 432 $ 876
Foreign........................................... 120 75 141
----- ----- -----
$ 615 $ 507 $1,017
===== ===== =====
Income taxes (benefits) consist of the following:
1994 1993 1992
- --------------------------------------------------------------------------
(Millions of Dollars)
Federal
Current.......................................... $128 $125 $306
Deferred......................................... (10) (18) (43)
---- ---- ----
118 107 263
---- ---- ----
State and local
Current.......................................... 10 15 29
Deferred......................................... (1) (2) (3)
---- ---- ----
9 13 26
---- ---- ----
Foreign
Current.......................................... 32 25 72
Deferred......................................... 4 (3) (29)
---- ---- ----
36 22 43
---- ---- ----
Total taxes..................................... $163 $142 $332
==== ==== ====
<PAGE> 57
Temporary differences and carryforwards which give rise to a
significant portion of deferred income tax benefits and liabilities are as
follows:
1994 1993
--------------------- ---------------------
Benefits Liabilities Benefits Liabilities
- ---------------------------------------------------------------------------
(Millions of Dollars)
Accounts and notes receivable $ 24 $ -- $ 22 $ --
Inventories.................. 24 (1) 36 (1)
Property, plant and equipment 15 (58) 9 (36)
Other current liabilities.... 94 (6) 113 (5)
Compensation and incentive
plan liabilities.......... 21 -- 8 --
Postretirement benefits
liabilities............... 22 -- 18 --
Tax credit and tax loss
carryforwards............. 79 -- 25 --
Investments.................. 43 (64) 25 (68)
Other........................ -- (5) 5 (5)
----- ----- ----- -----
$ 322 $(134) $ 261 $(115)
===== =====
Valuation allowance -- --
----- -----
Total...................... $ 322 $ 261
===== =====
The effective income tax rates differ from the U.S. statutory rate of
35 percent (34 percent in 1992) for the following reasons:
1994 1993 1992
- ---------------------------------------------------------------------------
(Millions of Dollars)
Expected tax at U.S. statutory income tax rate.. $215 $177 $346
State and local, net of federal tax benefit..... 6 8 17
Separate tax reporting entity impact............ (28) (6) --
Puerto Rico exemption........................... (19) (16) (22)
Taxes on foreign operations at rates different
from U.S. statutory rates..................... (15) (17) (8)
Other........................................... 4 (4) (1)
---- ---- ----
$163 $142 $332
==== ==== ====
Effective income tax rate........................ 26.5% 28.0% 32.6%
The financial statements do not include a provision for U.S. taxes on
unremitted earnings of foreign subsidiaries which are deemed to be
permanently invested. Such unremitted earnings aggregated $346 million at
December 31, 1994. Management believes that the cost to repatriate these
earnings would be immaterial.
<PAGE> 58
Tax loss carryforwards at December 31, 1994, amounted to $191 million
of which $4 million is subject to expiration in 1998. The balance has an
indefinite carryforward period.
14. ACQUISITIONS AND INVESTMENT INTERESTS
- ---------------------------------------------------------------------------
In November 1994, the Company acquired Clinidata, Inc. ("Clinidata")
for a purchase price of approximately $6 million. Clinidata, headquartered
in Montreal, Canada, provides medical information databases to health
professionals and institutions in Canada.
During January and February of 1994, Marion Merrell Dow K.K.
("MMDKK"), the Company's subsidiary in Japan, increased its ownership in
Kodama Ltd.("Kodama"), a Japanese pharmaceutical corporation headquartered
in Tokyo, Japan, to approximately 91 percent for a cost of approximately
$97 million. The transaction was accounted for as a purchase. The pro
forma effects of combining the results of operations of the Company and
Kodama are not presented as the effects are not material. As of December
31, 1994, MMDKK's ownership of Kodama was approximately 99.8 percent.
On October 4, 1993, the Company completed the acquisition of The Rugby
Group, Inc. ("Rugby"), the generic drug business of privately held Rugby-
Darby Group Companies, Inc. Rugby is a leading distributor of generic
drugs in the United States. The following unaudited data provides the pro
forma effect of combining the results of operations of the Company and
Rugby as if the acquisition had occurred at the beginning of 1992. For
1993: net sales of $3.0 billion, earnings before accounting changes of
$362 million, net income-common stockholders of $357 million, and earnings
per share of $1.30. For 1992: net sales of $3.6 billion, income before
accounting changes of $676 million, net income-common stockholders of $691
million, and earnings per share of $2.48. The pro forma adjustments
include amortization of goodwill and other intangibles, decreased interest
income due to the acquisition, and related income tax effects.
These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations that
would actually have resulted or that may result in the future.
In April 1993, two wholly-owned subsidiaries of the Company
contributed assets with an aggregate fair value of approximately $1 billion
to Carderm Capital L.P., a newly-formed Delaware limited partnership (the
"Partnership"), in exchange for a 1 percent general partner interest and a
99% limited partner interest in the Partnership. Marion Merrell Dow
(Europe) A.G., a wholly-owned subsidiary of the Company, as general
partner, directs the business activities of the Partnership and has
fiduciary responsibilities to the Partnership and its partners.
In October 1993, outside investors acquired a portion of the limited
partner interest in exchange for making a contribution to the Partnership
of $180 million. Following this transaction, subsidiaries of the Company
own an approximate 85 percent interest in the Partnership.
The assets, liabilities, results of operations and cash flows of the
Partnership and its subsidiary are included in the Company's consolidated
financial statements (after eliminating intercompany transactions), and the
outside investors' limited partner interests are reflected as minority
interests.
The Partnership and its wholly-owned subsidiary are separate and
distinct legal entities from the Company and its affiliates (including,
without limitation, the general and limited partners of the Partnership)
and have separate assets related to Cardizem CD and Nicoderm which are
licensed to the Company and a subsidiary of the Company, floating rate
demand notes due from the Company and its affiliates (which are guaranteed
by the Company), investments in municipal bonds and cash. At December 31,
<PAGE> 59
1994, the Company, its affiliates and Dow had outstanding borrowings of
$403 million from the Partnership and its subsidiary.
The outside investors will receive a cumulative, annual priority
return of $11 million and participate in residual earnings. Dow has
guaranteed the Company's performance under the license and partnership
agreements.
The Partnership will not terminate unless a termination or liquidation
event occurs. One such event, which is within the control of the outside
investors, may occur following an optional liquidation event on June 8,
2000. In addition, the Partnership Agreement provides for various windup
provisions wherein subsidiaries of the Company may purchase at any time the
limited partner interests of the outside investors. Upon windup,
liquidation or termination, the partners' capital accounts will be cashed
out at current fair values.
15. SUBSEQUENT EVENTS
- ---------------------------------------------------------------------------
On February 28, 1995, the Company, Dow and the Hoechst Group announced
they were engaged in discussions concerning the possible negotiated
acquisition of all the outstanding shares of the Company by the Hoechst
Group at a price of $25.75 per share, and that Dow and Hoechst also were
discussing Hoechst's possible acquisition of Dow's Latin American
pharmaceutical business. As of March 10, 1995, the Company's board of
directors had not met to consider the possible transaction, no agreements
had been reached and there can be no assurance that any agreements will be
reached or that any transactions will be consummated. Following the
announcement, a number of lawsuits were filed by shareholders of the
Company against Dow, the Company and its directors seeking injunctive and
other relief.
In January 1995, the Company completed the acquisition of Selectide
Corporation, a pharmaceutical research company, for a purchase price of
approximately $58 million. The transaction will be accounted for as a
purchase. The portion of the purchase price attributed to acquired
research will be charged to earnings in the first quarter of 1995 and is
expected to approximate $.17 per share.
16. INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
- ---------------------------------------------------------------------------
The Company operates exclusively in one industry segment,
pharmaceuticals, selling its prescription products primarily to
pharmaceutical wholesale distributors for resale to retail pharmacies and
chains, hospitals and other health care providers. A portion of the
Company's generic pharmaceutical products are sold directly to independent
pharmacies and pharmacy chains. The Company conducts its worldwide
operations through separate geographic area organizations which represent
major markets or combinations of major markets. Transfers between areas
are valued at selling price minus a reasonable profit margin. Corporate
assets include, principally: cash and cash equivalents, investment
securities, short-term loans to Dow and goodwill.
<PAGE> 60
<TABLE>
<CAPTION>
United Rest of Eliminations
Year Ended December 31, 1994 States <F1> Europe Pacific World & Corporate Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers.............. $1,834 $ 516 $ 517 $ 193 $ -- $3,060
Transfers between areas.......................... 151 19 -- -- (170) --
Operating income (loss).......................... 422 71 123 77 (113) 580
Identifiable assets.............................. 1,577 575 397 113 1,438 4,100
<CAPTION>
Year Ended December 31, 1993
- -----------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers.............. $1,792 $ 534 $ 287 $ 205 $ -- $2,818
Transfers between areas.......................... 196 14 -- -- (210) --
Operating income (loss).......................... 461 43 94 76 (235) 439
Identifiable assets.............................. 1,526 524 295 118 1,332 3,795
<CAPTION>
Year Ended December 31, 1992
- -----------------------------------------------------------------------------------------------------------------------------
(Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers.............. $2,207 $ 613 $ 255 $ 245 $ -- $3,320
Transfers between areas.......................... 172 52 -- -- (224) --
Operating income (loss).......................... 831 60 87 101 (125) 954
Identifiable assets.............................. 1,249 588 151 106 1,089 3,183
<FN>
<F1> Export sales from the Company's United States operations were less than 10% of U.S. net sales to unaffiliated customers.
</TABLE>
The Company has the following customers from which 10% or more of its net sales
were derived:
Year Ended
December 31
-------------------------
1994 1993 1992
- ---------------------------------------------------------------------------
(Millions of Dollars)
McKesson Corporation...................... $521 $486 $594
Bergen Brunswig Corporation............... 340 258 367
<PAGE> 61
<TABLE>
<CAPTION>
17. QUARTERLY FINANCIAL DATA - UNAUDITED
- ------------------------------------------------------------------------------------------------------------------------------
1994 Quarter Ended 1993 Quarter Ended
---------------------------------------- -----------------------------------------
March 31 June 30 Sept 30 Dec 31 March 31 June 30<F3> Sept 30 Dec 31
- ------------------------------------------ ----------------------------------------- -----------------------------------------
(Millions of Dollars,
Except for Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. $ 708 $ 764 $ 783 $ 805 $ 617 $ 750 $ 709 $ 742
Gross profit.......................... 473 519 524 560 463 590 515 528
Net income............................ 86 118 126 108 74 29 143 116
Earnings per common share............. .31 .43 .45 .38 .26 .10 .51 .42
--assuming full dilution <F1>
Cash dividends per common share <F2>.. .25 .25 .25 .25 .25 .25 .25 .25
Stock price range:
High.............................18 7/8 19 3/4 24 1/2 27 3/8 26 19 3/4 20 1/4 21 1/4
Low..............................15 5/8 16 1/4 17 3/4 19 7/8 17 3/4 16 1/4 16 5/8 17 1/8
<FN>
<F1> Quarterly per share amounts may not add to annual amounts because of the dilutive effects of the convertible preferred
stock and associate stock options.
<F2> Cash dividends declared on common shares were $276 million and $274 million in the years ended December 31, 1994 and 1993,
respectively.
<F3> 1993 includes a $180 million pre-tax special charge which had an effect on earnings per share of $.46.
</TABLE>
<PAGE> 62
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Marion Merrell Dow Inc.:
We have audited the accompanying consolidated balance sheets of Marion
Merrell Dow Inc. and its subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of income, stockholders equity, and
cash flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the Company s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Marion Merrell Dow Inc.
and its subsidiaries at December 31, 1994 and 1993, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1994 in conformity with generally accepted
accounting principles.
As discussed in Notes 5, 12 and 13 to the consolidated financial
statements, the Company changed its methods of accounting for certain
investments in debt and equity securities in 1993 and for post-retirement
benefits other than pensions and for income taxes in 1992.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
- -------------------------
Kansas City, Missouri
February 8, 1995 (March 10, 1995
as to the first paragraph of Note 15)
<PAGE> 63
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The consolidated financial statements appearing in this annual report
have been prepared by the Company in conformity with generally accepted
accounting principles and necessarily include amounts based on estimates
and informed judgements with due consideration given to materiality.
Marion Merrell Dow Inc. maintains a system of internal control over
financial reporting, which is designed to provide reasonable assurance to
the Company's management and board of directors regarding the preparation
of reliable published financial statements. The system contains monitoring
mechanisms, and actions are taken to correct deficiencies as they are
identified. Even an effective internal control system, no matter how well
designed, has inherent limitations -- including the possibility of the
circumvention or overriding of controls -- and therefore can provide only
reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, internal controls system
effectiveness may vary over time. The Company maintains a strong internal
auditing program that independently assesses the effectiveness of the
internal controls and recommends possible improvements.
The consolidated financial statements have been audited by the
independent accounting firm of Deloitte & Touche LLP, whose responsibility
is to examine records, transactions and the system of internal accounting
controls to the extent required by generally accepted auditing standards
and render an opinion as to the fair presentation of the consolidated
financial statements.
The board of directors pursues its review of auditing, internal
controls, and financial statements through its audit committee, consisting
of directors who are not associates of the Company. In the exercise of its
responsibilities, the audit committee meets periodically with management,
with the internal auditors and with the independent accountants to review
the scope and results of examinations. Both the internal auditors and
independent accountants have free access to the committee with or without
the presence of management.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------- ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
- -------- ------------------------------------------------
DIRECTORS OF THE COMPANY:
- -------------------------
The Company's Board of Directors consists of sixteen directors and one
nonvoting advisory director. Directors are elected to hold office until
the next annual meeting of shareholders or until their successors are
elected. The advisory director is appointed by the Board to serve during
the term of office of the directors.
The following information sets forth, as to the current directors and
advisory director of the Company, their names, ages, offices held, and,
where applicable, previous positions:
<PAGE> 64
FRED W. LYONS, JR., 59, Director since 1971, Chairman and Chief Executive
Officer of the Company since January 1994. President and Chief Executive
from 1989 to 1992. President and Chief Executive Officer of the Company
from 1984 until 1989. Director of the Federal Reserve Bank of Kansas City
from 1985 through 1991 (Chairman of the Board from 1989 through 1991). Mr.
Lyons has been a member of the Board of Directors of Dow since 1991, and is
also a director of the Pharmaceutical Research and Manufacturers of America
and a trustee of the Midwest Research Institute.
RICHARD J. MARKHAM, 44, Director since 1993, President and Chief Operating
Officer of the Company since January 1994. President and Chief Operating
Officer of Merck & Co., Inc. ("Merck") from January 1993 to July 1993 and
Senior Vice President of Merck from 1991 through 1992. From 1973 to 1991,
served in various positions in marketing with Merck. Mr. Markham was a
director of the Pharmaceutical Research and Manufacturers of America from
1991 to 1993 and has been a member of the Dean's Advisory Council of the
Purdue University School of Pharmacy and Pharmacal Sciences since 1989.
JOSEPH G. TEMPLE, JR., 65, Director since 1989, Vice Chairman of the Board
of the Company since January 1994. Chairman of the Board of the Company
from 1992 through 1993. Chairman and Chief Executive Officer of the
Company from 1989 through 1991. Chairman and Chief Executive Officer of
Merrell Dow from 1988 through 1989, and President from 1981 to 1988.
Director of Dow from 1979 to 1994, and Executive Vice President of Dow from
1983 through 1989.
JOHN A. BILES, Ph.D., 71, Director since 1984, Dean Emeritus since 1994,
Dean from 1968 to 1994, and Professor of Pharmaceutical Sciences since 1957
of the School of Pharmacy at the University of Southern California, Los
Angeles, California. Fellow of the Academy of Pharmaceutical Sciences
since 1967 and of the Academy of Pharmaceutical Scientists since 1986. Dr.
Biles is also a past President of the American Association of Colleges of
Pharmacy.
FRANK L. DOUGLAS, Ph.D., M.D., 51, Director since 1992, Executive Vice
President, Research and Development of the Company since 1992. Senior Vice
President and Director of Research of Ciba-Geigy Corporation from 1988 to
1992. From 1984 until 1988, served in numerous positions in management and
research with Ciba-Geigy Corporation. Dr. Douglas is also a director of
the Industrial Research Institute, the National Association of Biomedical
Research, and a member of the Board of Scientific Counselors of the
National Institute of Mental Health.
ENRIQUE C. FALLA, 55, Director since 1989, Executive Vice President of Dow
since 1991, Chief Financial Officer of Dow since 1987, and a director of
Dow since 1985. Financial Vice President of Dow from 1984 to 1991.
Previously served in a number of financial and management positions with
Dow. Mr. Falla is also a director of Kmart Corporation.
JAMES H. GARDNER, Ph.D., 70, Director since 1976, Professor of Management
since 1975, and Dean from 1980 to 1983, of the David Eccles School of
Business, The University of Utah, Salt Lake City, Utah. From 1965 to 1975,
served as President of Armak Company, Chicago, Illinois, a manufacturer of
specialty organic chemicals.
<PAGE> 65
JUDITH A. HEMBERGER, Ph.D., 47, Vice President, Global Medical Affairs and
Commercial Development and Advisory Director since 1994. Director from
1993 to 1994, Vice President, Global Regulatory and Medical Affairs from
1992 to 1994, Vice President, Regulatory Affairs and Scientific
Communications from 1986 to 1992. Previously served in clinical research,
professional education, and scientific communications positions since
joining the Company in 1979. Dr. Hemberger has been a Regent of Rockhurst
College since 1991 and a member of the University of Kansas City Board of
Trustees since 1994.
PETER W. LADELL, 51, Director since 1994, President, Marion Merrell Dow
North America since May 1993. President, Marion Merrell Dow International
from 1992 to May 1993. President of Marion Merrell Dow Europe from 1991 to
1992, Vice President, Marion Merrell Dow International from 1990 to 1991
and Vice President, Marketing of Marion Merrell Dow Europe from 1987 to
1990. Mr. Ladell has been a member of the National Development Advisory
Board of the University of Florida College of Pharmacy since 1993 and a
member of the board of directors of the Mid-America President, Marion
Merrell Dow Coalition on Health Care since January, North America and
Director 1994.
KEITH R. McKENNON, 61, Director since 1994 and from 1989 to 1992, Director
of PacifiCorp since 1990 and Chairman since 1994, director of Tektronix,
Inc. since 1991, and director of the Company since October 1994 and from
1989 to 1992. Director from 1987 to 1994 and Chairman and Chief Executive
Officer from 1992 to 1994 of Dow Corning Corporation, which is 50 percent
owned by Dow. Director of Chemical Financial Corporation from 1986 to 1994
and director of Dow from 1983 to 1992. From 1955 to 1992, served in
various research, management and executive positions at Dow.
EDWARD W. MEHRER, 56, Director since 1991, Executive Vice President, Chief
Financial and Administrative Officer of the Company since 1992. Vice
President and Chief Financial Officer of the Company from 1989 to 1992.
Vice President-Finance and Treasurer from 1988 to 1989 and Vice President-
Finance from 1987 to 1988. Joined the Company in 1986 as Vice President-
Accounting and Financial Reporting. Previously, Mr. Mehrer was a partner
with the public Financial and Administrative accounting firm of Peat,
Marwick, Mitchell & Co., Kansas City, Missouri.
FRANK P. POPOFF, 59, Director since 1989, Chairman of the Board of Dow
since 1992, Chief Executive Officer of Dow since 1987 and director of Dow
since 1982. President of Dow from 1987 until 1993. Chief Operating
Officer of Dow in 1987. Previously served in other management positions
with Dow. Mr. Popoff is also a director of American Express Company, U S
WEST, Inc. and Chemical Financial Corporation.
The Honorable PAUL G. ROGERS, 73, Director since 1992, Partner in the law
firm of Hogan & Hartson, Washington, D.C. since 1979, emphasizing health
law practice. Mr. Rogers served in the U.S. House of Representatives for
twenty-four years, and was Chairman of the House Subcommittee on Health and
the Environment for eight years. He also is a director of Salick Health
Care Inc., Chairman of The Scripps Research Institute, the National
Osteoporosis Foundation and the National Council on Patient Information and
Education, and Co-Chairman of the National Leadership Coalition on Health
Care Reform. Mr. Rogers is a member of the Institute of Medicine of the
National Academy of Sciences.
DAVID B. SHARROCK, 58, Executive Vice President of the Company from 1989
through 1993 and Chief Operating Officer from 1990 through 1993. President
<PAGE> 66
and Chief Operating Officer of Merrell Dow from 1988 to 1990. From 1982
through 1987, Mr. Sharrock was Vice President of Merrell Dow and President
of Merrell Dow Pharmaceuticals USA. Mr. Sharrock is a director of
Cincinnati Bell Inc., Ohio State University Foundation, Unitog, Inc. and
Interneuron Pharmaceuticals Inc.
WILLIAM S. STAVROPOULOS, Ph.D., 55, Director since 1992, President and
Chief Operating Officer of Dow since April 1993, and director of Dow since
1990. Senior Vice President of Dow from 1991 to 1993, and President of Dow
U.S.A. from 1990 until 1993. Chairman of Essex Specialty Products, a
wholly owned subsidiary of Dow, from 1988 to 1992. Vice President of
Dow from 1990 to 1991, and Group Vice President, Plastics and Hydrocarbons
of Dow U.S.A., an operating unit of Dow, from 1987 to 1990. Previously,
Dr. Stavropoulos served in a number of research and management positions
with Dow. Dr. Stavropoulos is also a director of Chemical Bank and Trust
Company, American Plastics Council (serving as Chairman), Chemical
Financial Corporation and Chemical Manufacturers Association.
GAIL R. WILENSKY, Ph.D., 51, Director since 1994, Senior Fellow at the
international health foundation, Project HOPE, since 1993 and a director of
the Company since July 1994. Deputy Assistant to the President of the
United States for Policy Development from 1992 to 1993. Administrator of
the Health Care Financing Administration from 1990 to 1992. Vice President
of Health Affairs at Project HOPE from 1983 to 1990. Dr. Wilensky is also
a director of Advance Tissue Sciences, Inc., Coram Healthcare Corporation,
Syncor International Corporation, United Healthcare Corporation and St.
Jude Medical, Inc.
JAMES B. WYNGAARDEN, M.D., 70, Director since 1990, Professor of Medicine
Emeritus at Duke University since 1994. Foreign Secretary of the National
Academy of Sciences from 1990 to 1994. Associate Director for Life
Sciences, White House Office of Science and Technology Policy from 1989 to
1990. Director of the National Institutes of Health from 1982 to 1989.
Member of the Council of the Government-University-Industry Research
Roundtable from 1984 to 1989. Dr. Wyngaarden is also a director of
Hybridon, Inc. and Human Genome Sciences, Inc.
EXECUTIVE OFFICERS OF THE COMPANY:
- ----------------------------------
The following information sets forth, as to current executive officers
of the Company who are not directors, their names, ages, offices held, and,
where applicable, previous positions:
MICHAEL V. AYLOTT, Ph.D., 54, President, Marion Merrell Dow Pacific, an
operating unit of the Company, since 1993. President and Chief Executive
Officer, Marion Merrell Dow K.K., a Japanese subsidiary of the Company,
since 1992. President, Merrell Dow Funai K.K., a Japanese subsidiary of
the Company, from 1991 to 1992, and Vice President from 1990 to 1991.
President, Merrell Dow Pharmaceuticals K.K., a Japanese subsidiary of the
Company, from 1987 to 1990, and Vice President from 1986 to 1987.
Previously served in a number of other positions with Merrell Dow and Dow
since 1974.
RICHARD J. BAILEY, JR., Ph.D., 49, Vice President, Human Resources since
1992. Joined Marion in the Human Resources Department in 1985, and held a
number of positions there before being promoted to Managing Director, Human
Resources for Corporate Research and Development in 1990.
<PAGE> 67
CHRISTIAN M. ERTLE, 47, Vice President, Global Operations since 1992. Vice
President, Manufacturing from 1991 to 1992. From 1973 to 1991, served in
numerous technical and management positions at Dow.
WILLIAM K. HOSKINS, 60, Vice President, General Counsel and Corporate
Secretary since 1989, a position he had held with Marion since 1982.
ROBERT W. LAFFERTY, 50, Vice President, Finance, Treasurer, and Controller
since January 1994, having previously served as Vice President, Treasurer,
from 1991 to 1993 and Treasurer from 1989 to 1991. Treasurer and Director
of Economic and Financial Services for Merrell Dow in 1989. Joined Dow in
1973 and served in a number of accounting and treasury positions until
1989.
BENEFICIAL OWNERSHIP REPORTING:
- -------------------------------
Based solely on its review of copies of reports required to be filed
with the Securities and Exchange Commission by directors, officers and
beneficial owners of 10% or more of the Common Stock regarding their
beneficial ownership of the Company's securities, and on written
representations concerning such reports, the Company believes that a single
transaction by Dr. Biles involving only a change in form of his beneficial
ownership of certain shares of Common Stock was not timely reported.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
DIRECTOR COMPENSATION:
- ----------------------
Non-officer Board members currently receive an annual retainer of
$28,000 and an additional $1,000 for each meeting of the Board attended,
together with reimbursement of their expenses incurred in attending. The
Chairmen of the Audit and Compensation Committees and the Committee on
Directors each receive an additional $5,000 per year. All members of
committees of the Board who are not officers of the Company, including
committee chairmen, receive $1,500 for each committee meeting attended.
No fees are paid with respect to Executive Committee meetings.
Board members who are officers of the Company do not receive any
compensation or fees for attending Board or Committee meetings other than
their compensation as officers. Non-officer Board members are permitted to
defer receipt of up to 100% of their annual retainer and committee
participation compensation. Amounts so deferred bear interest until paid
out upon death, total disability, or termination of service as a director.
In addition, non-officer Board members are entitled to receive an annual
defined benefit upon their retirement from five or more years of Board
service.
The 1992 Incentive Compensation Plan, approved by shareholders in May
1992, provides for the grant of stock options to non-officer Board members.
Each non-officer Board member receives an annual grant of an option to
purchase 1,000 shares at an exercise price equal to the fair market value
of the Common Stock on the date of grant. The options expire ten years
from the date of grant and become exercisable one year from the date of
grant.
<PAGE> 68
EXECUTIVE COMPENSATION:
- -----------------------
SUMMARY COMPENSATION. The following table summarizes, for each
of the three years ended December 31, 1994, 1993 and 1992, the compensation
awarded to, paid to or earned by the Chief Executive Officer (the "CEO") of
the Company and each of the four most highly compensated executive officers
(other than the CEO) who served as executive officers of the Company as of
December 31, 1994.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------------- --------------------------
NUMBER OF
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
OTHER ANNUAL STOCK OPTION/SAR COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION<F4> AWARDS<6> AWARDS <F7>
- --------------------------- ---- ----------- ---------- ---------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fred W. Lyons, Jr. 1994 $741,667 $236,714<F3> $ 0 $3,004,500 0 $474,632
Chairman and Chief Executive 1993 $675,000 $ 0 $ 72.45 $ 0 130,000 $191,930
Officer and Director 1992 $550,000<F1> $975,000 $107.12 $ 0 40,285<F1> $154,935
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard J. Markham 1994 $500,000 $392,080 $284,180<F5> $1,527,500 0 $ 10,290
President and Chief Operating 1993 $128,846 $ 0 $474,392<F5> $ 0 75,000 $ 0
Officer and Director 1992 <F2> <F2> <F2> <F2> <F2> <F2>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Frank L. Douglas, Ph.D., M.D. 1994 $391,667 $283,504 $ 0 $1,366,250 0 $ 43,023
Executive Vice President, 1993 $320,833 $ 0 $ 8.75 $ 0 85,000 $ 62,058
Research and Development and 1992 $264,599 $396,899 $ 54,820<F5> $ 0 55,000 $ 0
Director
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Edward W. Mehrer 1994 $326,667 $236,455 $ 0 $883,750 0 $ 35,223
Executive Vice President, Chief 1993 $291,500 $ 0 $ 8.75 $ 0 64,850 $ 71,842
Financial and Administrative 1992 $269,000 $357,769 $ 0 $ 0 15,000 $ 61,566
Officer and Director
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Peter W. Ladell 1994 $266,670 $176,941 $ 62,380 $715,125 0 $ 0
President, Marion Merrell Dow 1993 $215,416 $ 0 $ 20,501 $ 0 5,000 $ 0
North America and Director 1992 $178,980 $201,353 $193,740<F5> $ 0 38,400 $ 0
<FN>
<F1> At his request, Mr. Lyons was awarded options to purchase 10,285 shares of Common Stock at $35.00 per share in lieu of a
portion of his cash salary earned in 1992. Had such options not been awarded, Mr. Lyons' salary would have been $650,000. The
remaining options to purchase 30,000 shares were awarded in recognition of Mr. Lyons' promotion to Chief Executive Officer in 1992.
<PAGE> 69
<F2> Mr. Markham did not render services to the Company or its subsidiaries prior to 1993.
<F3> A portion of Mr. Lyons' 1994 bonus was deferred pursuant to a Deferred Compensation Agreement dated March 31, 1994.
<F4> Perquisites and other personal benefits for 1994 and 1993 paid to Messrs. Lyons, Douglas, Mehrer and Ladell and for 1992 paid
to Messrs. Lyons and Mehrer did not, as to any of them, exceed the lesser of $50,000 or 10% of the sum of their respective
salary and bonus.
<F5> Includes payments of relocation expense of $161,664 to Mr. Markham in 1994, $344,697 to Mr. Markham in 1993, $52,520 to Dr.
Douglas in 1992, and $66,121 to Mr. Ladell in 1992, which amounts respectively exceed 25% of the total of such perquisites and
other personal benefits paid to such individuals.
<F6> Of these awards, 25% of the following portions will vest each year after the March 15, 1994 date of grant: Mr. Lyons, 37,000;
Mr. Markham, 5,000; Dr. Douglas, 10,000; Mr. Ladell, 7,000; and Mr. Mehrer, 10,000. The number and value of the aggregate
restricted stock holdings as of December 31, 1994 are, with respect to Mr. Lyons, 137,000 shares at $3,004,500; Mr. Markham,
65,000 at $1,527,500; Dr. Douglas, 60,000 at $1,366,250; Mr. Mehrer, 40,000 at $883,750; and Mr. Ladell, 32,000 at $715,125.
Dividends are payable with respect to all such restricted stock holdings.
<F7> Each number in this column consists of contribution allocations to the Company's defined contribution plans, as follows (Mr.
Markham was ineligible in 1993 and 1992 and Dr. Douglas was ineligible in 1992, and Mr. Ladell was ineligible in all years):
the Marion Merrell Dow Inc. Savings Plan ("Savings Plan"), to which the Company may contribute up to, and for 1994, 1993 and
1992 did contribute, 6% of a participant's annual compensation; the Marion Merrell Dow Inc. Associate Stock Ownership Plan, to
which the Company contributes up to 3% of a participant's annual compensation as a matching contribution to the participant's
elective deferrals to the Savings Plan (each eligible named executive officer, except Mr. Markham with respect to 1993 and 1992
and Dr. Douglas with respect to 1992, received a 3% contribution allocation with respect to 1994, 1993 and 1992); the Marion
Merrell Dow Inc. Supplemental Executive Profit Sharing and Retirement Plan, a non-qualified plan to which the Company may
allocate up to, and for 1994, 1993 and 1992 did allocate, 12% of a participant's compensation in excess of the annual Internal
Revenue Code limits on qualified plan covered compensation; and, with respect to Mr. Lyons, the Deferred Compensation Agreement
dated March 31, 1994.
</TABLE>
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. The following table presents
information relating to holdings at December 31, 1994 by the named executive
officers of unexercised Stock Options and Stock Appreciation Rights ("SARs")
granted pursuant to the 1992 Incentive Compensation Plan and the Company's Non-
Qualified Employee Stock Option Plan ("Non-Qualified Plan"). No Stock Options
or SARs were held by the named executive officers other than pursuant to the
1992 Incentive Compensation Plan and the Non-Qualified Plan. None of the named
executive officers exercised any options in 1994.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR VALUES AT DECEMBER 31, 1994
---------------------------------------------------
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
AT DECEMBER 31, 1994 AT DECEMBER 31, 1994
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Fred W. Lyons, Jr. 160,285 110,000 $ 0 $ 0
Richard J. Markham 37,500 37,500 60,938 60,938
Frank L. Douglas, Ph.D., M.D. 45,000 95,000 0 0
Edward W. Mehrer 64,850 55,000 0 0
Peter W. Ladell 41,200 37,200 4,400 33,750
</TABLE>
<PAGE> 70
LONG-TERM INCENTIVE AWARDS. The following table presents information for
1994 relating to awards of performance shares pursuant to the 1992 Incentive
Compensation Plan.
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR <F1>
---------------------------------------------------------
NUMBER OF SHARES, PERFORMANCE OR OTHER PERIOD
UNITS OR OTHER RIGHTS UNTIL MATURATION OR PAYOUT
--------------------- ----------------------------
<S> <C> <C>
Fred W. Lyons, Jr. 62,500 8/19/94 - 3/15/99
Richard J. Markham 41,700 8/19/94 - 3/15/99
Frank L. Douglas, Ph.D., M.D. 27,800 8/19/94 - 3/15/99
Edward W. Mehrer 22,900 8/19/94 - 3/15/99
Peter W. Ladell 19,100 8/19/94 - 3/15/99
<FN>
<F1> The performance shares vest upon achievement by the Company, as determined by the Compensation Committee, of previously
established performance objectives during the performance period. The performance objectives are based on return on capital,
growth in equity and cash flow coverage over debt. If the performance objectives are not achieved within five years, no vesting
will occur.
</TABLE>
DEFINED BENEFIT PLANS.
PENSION PLAN TABLE. The following table shows estimated annual
benefits payable as a joint and 60% survivor annuity upon retirement at age
65 under the Retirement Plan for Associates of Marion Merrell Dow Canada
Inc. ("MMD Canada") ("Retirement Plan"), the participants of which consist
of all MMD Canada associates including associates formerly employed by
Merrell Dow. The Retirement Plan provides benefits on the basis of the
participant's highest consecutive three-year average earnings. Benefits
are limited to $1,228 for each year of credited service. The covered
compensation for 1994 for Mr. Ladell, who is the only named executive
officer eligible to participate in the Retirement Plan, was $145,000, which
is more than 10% less than his annual compensation set forth in the Summary
Compensation Table. Mr. Ladell had 24.33 credited years of service under
the Retirement Plan as of December 31, 1994. These benefits are not
subject to reduction for Social Security payments or any other offset.
Pension Plan Table
------------------
Remuneration Annual Benefit
------------ --------------
$266,670 $29,874
$320,004 $29,874
GUARANTEED RETIREMENT INCOME PLAN. In 1994, the named executive
officers (except for Mr. Ladell, who was ineligible) participated in the
Marion Merrell Dow Inc. Guaranteed Retirement Income Plan pursuant to which
an estimated annual straight life annuity benefit would be payable at
normal retirement age (60) as follows: Mr. Lyons, $5,091; Mr. Markham,
$551; Dr. Douglas, $1,938; and Mr. Mehrer, $4,757. Benefits are based on
annual accruals of 6% of the participant's covered compensation, not in
<PAGE> 71
excess of, for the 1994 plan year, $150,000, credited with interest
annually at a rate no less than 4% until retirement.
SUPPLEMENTAL RETIREMENT BENEFIT. The following named executive
officers also have vested accrued benefits under a non-qualified plan of
deferred compensation pursuant to which a 15-year annual installment
annuity benefit would be payable at normal retirement age (65) as follows:
Mr. Lyons, $27,996 and Mr. Mehrer, $68,578. Such annual life annuity
benefits are specified in an individual agreement between such executive
and the Company.
INDIVIDUAL RETIREMENT ARRANGEMENT. Mr. Lyons has a vested accrued
benefit under a non-qualified plan of deferred compensation pursuant to
which a 15-year annual installment annuity benefit of $58,000 would be
payable at normal retirement age (65), as specified in the Executive
Compensation Agreement between the Company and Mr. Lyons. Mr. Ladell also
has a vested accrued benefit under a non-qualified plan of deferred
compensation pursuant to which a 15-year annual installment annuity benefit
of $100,000 would be payable at normal retirement age (65), as specified in
the Executive Compensation Agreement between the Company and Mr. Ladell.
<PAGE> 72
COMPARISON OF FIVE-YEAR AND TEN-YEAR CUMULATIVE TOTAL RETURN
MARION MERRELL DOW INC., S&P 500 STOCK INDEX,
AND DOW JONES PHARMACEUTICALS PEER GROUP <F1><F2>
The following two tables compare the yearly change in the Company's
cumulative total shareholder return on its Common Stock (assuming reinvestment
of dividends) with the cumulative total return of the Standard & Poor's 500
Stock Index and the companies included (as of December 31, 1994) in the Dow
Jones Pharmaceutical Industry Index, for the five-year period from December 31,
1989, to December 31, 1994, and for the ten-year period from December 31, 1984,
to December 31, 1994, respectively.
<TABLE>
<CAPTION>
CUMULATIVE RETURN (DOLLARS) AS OF DECEMBER 31,
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Marion Merrell Dow 100 137.46 141.59 104.65 76.51 91.14
Inc. Common Stock
S&P 500 Stock Index 100 96.89 126.28 135.88 149.52 151.55
Dow Jones Pharmaceu-
tical Industry Index 100 115.98 181.01 151.05 140.64 159.78
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE RETURN (DOLLARS) AS OF DECEMBER 31,
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Marion Merrell Dow 100 213.28 354.01 462.61 386.07 682.57 938.26 966.45 714.31 522.23 622.09
Inc. Common Stock
S&P 500 Stock Index 100 131.64 156.15 164.24 191.33 251.77 243.94 317.94 342.11 376.45 381.56
Dow Jones Pharmaceu-
tical Industry Index 100 144.58 199.52 216.41 250.15 351.07 407.17 635.47 530.29 493.74 560.94
<FN>
<F1> Peer Group consists of the companies currently comprising the Dow Jones Pharmaceutical Industry Index.
<F2> Assumes $100 invested on December 31, 1984 and December 31, 1989 in Marion Merrell Dow Inc. Common Stock, the S&P 500, and Peer
Group, with reinvestment of dividends on a quarterly basis.
</TABLE>
<PAGE> 73
COMPENSATION COMMITTEE REPORT ON 1994 EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors ("Committee"),
under authority delegated by the Board of Directors, adopts executive
compensation philosophies and policies, approves the design of executive
compensation programs, evaluates executive performance, reviews and
approves remuneration for approximately 24 senior executives, and
administers incentive compensation plans. This report describes the
Committee's compensation philosophy, the Committee's policies applicable to
the various elements of executive compensation, and the specific bases for
the 1994 compensation paid to the Company's Chief Executive Officer, Fred
W. Lyons, Jr.
COMPENSATION PHILOSOPHY
The Committee's overall philosophy on executive compensation is that
rewards should be commensurate with the performance of both the individual
and the Company -- one of the Company's core values. The Committee also
believes that executive compensation should encourage the enhancement of
long-term shareholder value. Therefore, the executive compensation program
generally is designed to:
o attract, retain, and encourage the development of highly
qualified executives,
o reward superior individual performance, and
o provide incentives for performance that leads to positive
shareholder returns.
To meet these objectives, the Company developed an executive
compensation program for 1994 comprising three components: base salary,
short-term incentives, and long-term incentives. Specifically, for 1994,
the Committee emphasized long-term incentive compensation over short-term
cash awards as part of its strategy to provide a strong link between
management's interests and those of the Company's shareholders.
The Committee believes that compensation should be comparable to
executive compensation at companies with which the Company competes. Thus,
the Committee considered executive compensation of a comparator group of
major U.S.-based and global pharmaceutical companies in businesses and
markets similar to the Company's. The comparator group consisted primarily
of companies in the Dow Jones Pharmaceutical Industry Index for which
executive compensation data were available. The comparator group also
included the other pharmaceutical companies for which data were available
to insure a sufficiently broad base of data that reflects the Company's
global position in the industry.
For 1994, the Committee benchmarked executive compensation using a
statistical model derived from data from the comparator group of companies
that reflects adjustments for either sales volume, number of associates, or
other measures of relative accountability. In setting 1994 benchmark
compensation levels relative to comparator group data, the Committee
evaluated the Company's performance relative to that of companies in the
comparator group. The 1994 benchmark levels for each element of an
executive's compensation were generally consistent with the compensation
for a similar position at the comparator group of companies, as adjusted.
<PAGE> 74
The Committee has taken all action necessary to maximize the
deductibility of 1994 executive compensation under Section 162(m) of the
Internal Revenue Code.
COMPONENTS OF COMPENSATION
BASE SALARY. The Committee established each executive's 1994 base
salary in relation to the applicable comparator group benchmark base salary
depending on the executive's level of responsibility, experience and
knowledge and internal equity issues, such as comparative individual
performance. Management evaluated each executive's performance by
assessing his or her contribution to the profitability of the Company and
achievement of its business objectives and his or her achievement of
individual goals.
The Committee established Mr. Lyons' 1994 base salary by considering
the comparator group benchmark base salary and subjectively evaluating and
recognizing Mr. Lyons' leadership and direction of the Company in 1993 as
reflected by: (1) the extent to which the Company achieved its 1993
financial goals, including sales, earnings, return on assets, and net
profit margin; and (2) the Company's completion of key strategic business
goals, such as the acquisition of Kodama Ltd. of Japan as part of the
Company's strategy to strengthen its presence in international markets; the
acquisition of The Rugby Group, Inc., a leading generic pharmaceutical
company with a broad line of quality generic products; an agreement with
Sandoz Pharmaceuticals Corporation to co-promote two products; and the
implementation of re-engineering the Company's U.S. business processes to
improve the Company's effectiveness in meeting its customers' needs.
SHORT-TERM INCENTIVES. The Company's 1994 short-term incentive
program consisted of a cash bonus, determined as a percentage of base
salary, that was dependent on the earnings per share achieved by the
Company. This program reflected the Committee's view that: (1) an
executive's contribution to medium- and long-term Company performance is
reflected in part by annual earnings per share of the Common Stock; and (2)
a portion of executive compensation should be linked to Company
performance, creating both an upside potential and a downside potential for
an executive's total cash compensation.
The Committee selected target cash bonus percentages that would yield
a bonus equal to the comparator group benchmark bonus if the Company
achieved a target annual earnings per share, referred to as "Good
Performance." If the Company exceeded "Good Performance" by a pre-
determined percentage, the bonus payable was relatively higher;
alternatively, if the Company did not attain "Good Performance," a
relatively lower bonus would have been payable as long as the Company
attained a pre-determined threshold percentage of "Good Performance."
Mr. Lyons' bonus percentage was determined in the same manner as that
of other executive officers. The Committee established Mr. Lyons' target
bonus percentage at a level that would result in a bonus percentage equal
to the comparator group benchmark bonus if the Company achieved "Good
Performance." Likewise, if the Company failed to attain a minimum
percentage of "Good Performance," achieved higher than the threshold but
not "Good Performance" or exceeded "Good Performance," Mr. Lyons' bonus
percentage would be zero, relatively lower than benchmark, or relatively
higher than benchmark, respectively.
<PAGE> 75
LONG-TERM INCENTIVES. Long-term incentive compensation is intended to
focus executives' attention on the Company's future and align executives'
financial interests with those of shareholders. Thus, the Committee
determined that a significant portion of executive compensation for 1994
should provide rewards that are maximized upon the Company's long-term
success as measured by long-term increase in the Company's stock price.
The Committee considered the retention value as well as the incentive value
of long-term incentive compensation tools in designing this element of 1994
executive compensation. Accordingly, 1994 executive compensation included
awards of restricted stock, the vesting of some of which is linked in part
to the Company's achievement of certain performance goals, and performance
shares, the vesting of which is linked entirely to the Company's
achievement of performance goals.
The Committee determined the benchmark number of restricted stock and
performance shares to be awarded to each executive by valuing the relevant
comparator group long-term incentive compensation. The Committee then
adjusted that value for 1994 long term incentive compensation already paid
(as discussed in last year's Compensation Committee Report) and considered
projections of comparator group short- and long-term incentive compensation
for a pre-determined future period. The number of restricted stock and
performance shares actually awarded to an executive for 1994 was determined
by adjusting the benchmark numbers to reflect management's judgment of
individual performance and responsibilities critical to the long-term
success of the Company.
Similarly, Mr. Lyons' long-term incentive awards were determined
primarily by considering the comparator group long-term incentive
compensation, 1994 long-term incentive compensation already paid, and
projections of comparator group short- and long-term incentive compensation
in the same manner described above for all executive officers. This
benchmark number was adjusted subjectively to reflect Mr. Lyons' individual
performance and his contributions to the achievement of the Company's
specific 1993 and long-term corporate objectives referenced in the
discussion with respect to his base salary.
Respectfully submitted by the Compensation Committee of the Board of
Directors:
Keith R. McKennon, Chairman
James H. Gardner, Ph.D.
William S. Stavropoulos, Ph.D.
Joseph G. Temple, Jr.
James B. Wyngaarden, M.D.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Directors Gardner, McKennon, Stavropoulos, Temple and Wyngaarden were
the only persons who served as members of the Compensation Committee in
1994. During that year, Dr. Stavropoulos was an executive officer of Dow
as well as a member of the Company's Compensation Committee. Mr. Temple
was a director of Dow and an officer of the Company as well as a member of
the Company's Compensation Committee during 1994. Mr. Lyons, who was not a
member of the Compensation Committee, was a director of Dow and an
executive officer of the Company during 1994.
<PAGE> 76
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS:
- ---------------------------------------------
The following table sets forth as of January 31, 1995, certain information
concerning the beneficial ownership of Common Stock and Series A Preferred Stock
by all shareholders known to the Company to be beneficial owners of more than
five percent of the outstanding shares of each class:
<TABLE>
<CAPTION>
COMMON STOCK SERIES A PREFERRED PERCENT OF CLASS
BENEFICIAL OWNER BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED BENEFICIALLY OWNED
- ----------------------------- ------------------ ------------------------ ------------------
<S> <C> <C> <C>
The Dow Chemical Company <F1> 196,865,790 0 71.1%
The Marion Merrell Dow Inc.
Associate Stock Ownership 0 2,327,606 83.5%
Plan Trust<F2>
<FN>
<F1> Includes 55,934,100 shares owned by RH Acquisition Corp., a Delaware corporation, and 75,000,000 shares owned by Dow Holdings
Inc., a Delaware corporation, both of which are wholly-owned subsidiaries of Dow. The mailing address for The Dow Chemical
Company is 2030 Dow Center, Midland, MI 48674.
<F2> As of January 31, 1995, the Series A Preferred Stock represented the only series of preferred stock designated and issued. The
number of votes represented by Series A Preferred Stock represents approximately 1% of the aggregate of all issued and
outstanding shares of Common Stock and Series A Preferred Stock when considered together as a single class. The mailing
address of the Trust is P.O. Box 8480, Kansas City, MO 64114.
</TABLE>
<PAGE> 77
SECURITY OWNERSHIP OF MANAGEMENT
- --------------------------------
The following table sets forth certain information concerning the
beneficial ownership of shares of Common Stock, Series A Preferred Stock, and
the common stock and Series A ESOP Convertible Preferred Stock ("Dow Preferred
Stock") of Dow by all directors, by the persons named in the Summary
Compensation Table set forth herein in the section entitled "EXECUTIVE
COMPENSATION", and by all directors and executive officers as a group, as of
January 31, 1995.
<TABLE>
<CAPTION>
COMPANY STOCK DOW STOCK
------------------------------------------------ -------------------------------------------
COMMON STOCK SERIES A COMMON STOCK DOW PREFERRED
------------------------------- PREFERRED STOCK -------------------------- STOCK
BENEFICIALLY RIGHTS TO BENEFICIALLY BENEFICIALLY RIGHTS TO BENEFICIALLY
OWNED<F1><F2> ACQUIRE<F3> OWNED<F4> OWNED<F5> ACQUIRE<F6> OWNED
----------------- ----------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fred W. Lyons, Jr. 354,842<F8> 167,785 577 1,500 0 0
Richard J. Markham 66,000 37,500 0 0 0 0
Joseph G. Temple, Jr. 20,000 150,000 577 70,748 0 0
John A. Biles, Ph.D. 6,160<F7> 3,000 0 0 0 0
Frank L. Douglas, Ph.D., M.D. 62,973 61,500 196 0 0 0
Enrique C. Falla 1,000<F8> 3,000 0 60,919<F9> 282,500 108
James H. Gardner, Ph.D. 6,029<F7> 3,000 0 500 0 0
Peter W. Ladell 32,500 44,200 0 338 2,700 0
Keith R. McKennon 1,000 0 0 32,507 145,500 61
Edward W. Mehrer 43,361 69,350 577 0 0 0
Frank P. Popoff 6,000<F8> 3,000 0 92,640 782,000 108
Paul G. Rogers 1,119 3,000 0 0 0 0
David B. Sharrock 12,000 89,000 0 10,417 36,000 0
William S. Stavropoulos, Ph.D. 820<F7><F8> 3,000 0 33,287 323,725 108
Gail R. Wilensky, Ph.D. 0 0 0 0 0 0
James B. Wyngaarden, M.D. 347 3,000 0 100 0 0
All directors and executive officers
as a group (23 persons) 787,205<F7> 878,535 4,711 312,735<F10> 1,588,234 385
<FN>
<F1> Includes as beneficially owned all shares of Common Stock held for the account of each person in the Marion Merrell Dow Inc.
Savings Plan Trust. Also includes shares owned by the spouse and minor children of certain persons, as to which each such
person disclaims beneficial ownership. The percentages of Common Stock beneficially owned by each person individually, and by
all directors and executive officers as a group, are less than 1%.
<F2> Does not include as beneficially owned shares of Common Stock issuable upon conversion of Series A Preferred Stock incident to
retirement or other termination of employment at the rate of at least one share of Common Stock for each share of Series A
Preferred Stock, depending on the conversion ratio then in effect.
<F3> Includes shares each person has the right to acquire through April 1, 1995, upon the exercise of stock options but not upon
conversion of Series A Preferred Stock.
<F4> Represents shares held for the respective accounts of such persons by the Company's Associate Stock Ownership Plan Trust. Each
such person is entitled to one vote for each share of Series A Preferred Stock allocated to his or her respective account.
Series A Preferred Stock votes together with the Common Stock as a single class on all matters and as a separate class with
respect to matters that affect the Series A Preferred Stock as a class. The percentages of Series A Preferred Stock
beneficially owned are: all named persons, less than 1% each; all directors and executive officers as a group, less than 1% in
the aggregate.
<PAGE> 78
<F5> Includes as beneficially owned all shares held in trust for the benefit of each such person in the Dow Salaried Employees'
Savings Plan. Also includes shares held by the spouse and other members of each such person's immediate family who share his
or her household. The beneficial ownership of Dow common stock by directors and executive officers of the Company is less than
1% of the shares outstanding for each individual, and for all such persons in the aggregate. Does not include shares of Dow
Preferred Stock held in trust as of January 31, 1995, for the respective accounts of Messrs. Falla, Popoff and Stavropoulos
under Dow's Salaried Employees' Savings Plan, as to which each such person has sole voting power. Dow Preferred Stock is
convertible into Dow common stock upon retirement or other termination of employment, on March 13, 1995, at the rate of 1.331
shares of Dow common stock for each share of Dow Preferred Stock. The number of shares of Dow Preferred Stock owned by each
such person, and by all directors, executive officers and director nominee as a group does not exceed 1% of the number of
shares of such stock outstanding.
<F6> Includes shares each person has the right to acquire through April 1, 1995 by the exercise of an option granted by Dow or the
distribution of shares under a Deferred Stock Agreement with Dow.
<F7> Voting and investment power is shared as to the following: Dr. Biles, 5,766 shares; Dr. Gardner, 4,664 shares; Dr.
Stavropoulos, 20 shares; and all directors and executive officers as a group, 17,278 shares.
<F8> Does not include 196,865,790 shares beneficially owned by Dow. Messrs. Falla, Lyons, Popoff and Stavropoulos are directors of
Dow. Messrs. Falla, Popoff and Stavropoulos have shared voting power over 65,931,690 shares owned directly by Dow, and Mr.
Falla has shared voting power over 75,000,000 shares owned directly by Dow Holdings Inc. Mr. Lyons does not have voting power
over any such shares. Each such person disclaims beneficial ownership of shares beneficially owned by Dow.
<F9> Mr. Falla is a member of the Investment Policy Committee of the Dow Board of Directors, which has shared investment and voting
power over shares of Dow common stock held in the Dow Employees' Retirement Plan Trust (the "Dow ERP"). As of January 31,
1995, the Dow ERP owned 2,353,785 shares of Dow common stock that were subject to investment or voting power by Dow's
Investment Policy Committee. None of these shares are included as beneficially owned by Mr. Falla, and he disclaims beneficial
ownership thereof.
<F10> Voting and investment power is shared as to all directors, executive officers and director nominee as a group, 62,771 shares.
</TABLE>
<PAGE> 79
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
TRANSACTIONS WITH DOW. The Company maintains a number of arrangements
with Dow that generally continue arrangements between Merrell Dow and Dow
that were in effect prior to the Company's acquisition of Merrell Dow from
Dow. Such arrangements are consistent with prior practices between Merrell
Dow and Dow and are subject to similar terms and conditions. Such of these
arrangements as are deemed material to the Company, which are described in
this section, have been approved by the Company's Board of Directors after
consideration and recommendation by the Audit Committee. Generally, such
arrangements do not require the Company to do business with Dow or restrict
the Company's ability to do business with independent third parties, except
to the extent that Dow may be the sole source of a particular material or
service. The Company expects to continue such arrangements and from time
to time to consider new arrangements with Dow that are deemed appropriate.
The charges to the Company under existing arrangements are believed to be,
and the terms and conditions of any future arrangements are expected to be,
commercially reasonable and no less favorable to the Company than the terms
and conditions on which the Company would likely obtain such materials and
services from independent third parties.
The Company and Merrell Dow are parties to respective Master Service
Agreements with Dow pursuant to which Dow makes various materials and
services available to the Company and its subsidiaries.
The Company also maintains certain arrangements with Dow regarding
former subsidiaries of Merrell Dow in Latin America that are now
subsidiaries of Dow. In return for royalty payments, the former
subsidiaries have certain rights to continue production and marketing in
certain Latin American countries of various Merrell Dow products that were
marketed by the former subsidiaries prior to their conveyance to Dow by
Merrell Dow, as well as certain rights to line extensions of such products
and to products undergoing regulatory review. In addition, the Company
provides certain materials and services to such former subsidiaries.
The Company and Dow also have agreed to cooperate and share costs in
connection with certain research and development, patent and licensing
activities. Pursuant to such arrangements, the Company and Dow have agreed
that chemical compounds developed by either of them will be made available
to the Company for pharmaceutical applications, and to Dow for industrial
applications, subject to negotiation of appropriate licensing or other
legal arrangements. A similar reciprocal arrangement exists with respect
to DowElanco, a partnership of which Dow is a partner, for compounds having
pharmaceutical applications (to be licensed to the Company) or agricultural
applications (to be licensed to DowElanco).
Pursuant to the foregoing arrangements during 1994, the Company and
its subsidiaries purchased from Dow approximately $1,000,000 in materials,
consisting primarily of chemical drug substances, and incurred expenses of
approximately $95,000,000, primarily for manufacturing, R&D and general and
administrative services and insurance coverage provided by Dow. During
1994, the Company sold to Dow and its subsidiaries approximately $7,000,000
of materials and $2,000,000 of services.
The Company and Dow have also extended credit to each other from time
to time in the past, with interest payable generally based on the prime
short-term lending rate in the country where credit is extended. In
addition, the Company and Dow have loaned money to each other, subject to
<PAGE> 80
criteria established by the Company to assure that the terms and conditions
thereof are commercially reasonable and no less favorable to the Company
than the terms and conditions that would be obtained from independent third
parties in similar transactions. Pursuant to such arrangements as of
December 31, 1994, the total amount receivable by the Company from Dow was
approximately $435,000,000, all of which matures in 1995 (including loans
from the Company to Dow of $132,000,000 and $68,000,000 on December 31,
1994, with interest at the annual rate of 6.68%, both of which were repaid
in full on January 3, 1995), and the total amount payable by the Company to
Dow was approximately $413,000,000, substantially all of which matures in
1995.
In connection with the Company's sale of its Indianapolis facility to
Dow in December 1993, the Company has contracted with Dow to obtain certain
research and development services at this facility. The Company paid
approximately $7,500,000 to Dow for such services in 1994.
In 1992, the Company acquired a manufacturing facility from Dow and
has engaged Dow to operate it on behalf of the Company. In addition, the
Company and Dow have entered into agreements for the design and
construction of certain other manufacturing and research facilities by Dow
for the Company. In connection with these transactions, the Company's
Board of Directors has authorized expenditures aggregating $111,000,000, of
which approximately $104,000,000 had been expended through 1994, including
$7,000,000 expended in 1994. In February 1995, the Company's Board of
Directors authorized the construction and eventual operation by Dow of an
additional manufacturing facility having a projected total cost of
$36,500,000, of which the Company and a strategic partner each will pay
one-half.
The Company's arrangements with Dow generally provide for termination
by either party by giving written notice of termination, and in some cases
upon a change of control of the Company. Although most such arrangements
require notice of termination to be given in advance of the termination
date and some provide for specific transition periods after termination
during which certain arrangements are to continue in effect, there can be
no assurance that any period of advance notice of termination, or any
transition period, will be sufficient for the Company to obtain
satisfactory replacement arrangements in any specific case.
BUSINESS RELATIONSHIP WITH DIRECTOR. Mr. Rogers, a director of the
Company, is a partner in the law firm of Hogan & Hartson, Washington, D.C.,
which the Company has retained to provide legal representation and
services. The amount paid or payable by the Company for such
representation and services in 1994 did not exceed, and for 1995 is not
expected to exceed, five percent of such law firm's gross revenues for that
firm's last full fiscal year.
<PAGE> 81
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------- -----------------------------------------------------------------
(a) 1. Financial Statements.
--------------------
The following financial statements are filed as part of this
report:
A. The Consolidated Statements of Income of the Company and its
subsidiaries for the years ended December 31, 1994, 1993,
and 1992.
B. The Consolidated Balance Sheets of the Company and its
subsidiaries at December 31, 1994 and 1993.
C. The Consolidated Statements of Cash Flows of the Company and
its subsidiaries for the years ended December 31, 1994,
1993, and 1992.
D. The Consolidated Statements of Stockholders' Equity of the
Company and its subsidiaries for the years ended
December 31, 1994, 1993, and 1992.
(a) 2. Financial Statement Schedules.
-----------------------------
The following additional financial information should be read in
conjunction with the consolidated financial statements set forth
herein. Schedules not included with these additional financial
statement schedules have been omitted because they are not
applicable or the required information is set forth in the
financial statements or notes thereto.
Independent Auditors' Report on Consolidated Financial
Statement Schedule.
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1994, 1993, and 1992.
(a) 3. Exhibits.
---------
Regulation
S-K Exhibit
Number: Document:
- ----------- --------
3(a) Complete copy of the Restated Certificate of Incorporation
of the Company, as amended effective May 24, 1991, including
Certificate of Designation, Rights and Preferences of Series
A ESOP Convertible Preferred Stock (incorporated herein by
reference from Exhibit 3(b) to the Quarterly Report on Form
10-Q of the Company for the quarter ended June 30, 1991 (the
"June 30, 1991 Form 10-Q"))
<PAGE> 82
3(b) Complete copy of the Company's Bylaws, as amended effective
March 17, 1995
4(a) Article FOURTH of the Company's Restated Certificate of
Incorporation (incorporated herein by reference to Exhibit
3(a) to the June 30, 1991 Form 10-Q)
4(b) Certificate of Designation, Rights and Preferences of Series
A ESOP Convertible Preferred Stock (incorporated herein by
reference to Exhibit 3(b) to the June 30, 1991 Form 10-Q)
10(a) Redacted version of the Company's Supply Agreement with
Chugai Pharmaceutical Co., Ltd. dated April 1, 1985, as
amended (incorporated herein by reference to Exhibit 10(a)
to the Annual Report on Form 10-K of the Company for the
fiscal year ended June 30, 1988 (the "1988 Form 10-K"))
10(b) Redacted version of the Company's Supply Agreement with
Tanabe Seiyaku Co., Ltd., dated October 1, 1976
(incorporated herein by reference to Exhibit 10(b) to the
1988 Form 10-K)
10(c) Master Service Agreement between Merrell Dow Pharmaceuticals
Inc. and The Dow Chemical Company dated as of December 2,
1989 (incorporated herein by reference to Exhibit 10(b) to
the Transition Report on Form 10-K of the Company for the
transition period July 1, 1989, through December 31, 1989
(the "1989 Transition Form 10-K"))
10(d) Amendment dated August 23, 1989 to the Company's April 1,
1985 Supply Agreement with Chugai Pharmaceutical Co. Ltd.
(incorporated herein by reference to Exhibit 10(a) to the
Annual Report on Form 10-K of the Company for the year ended
June 30, 1989 (the "1989 Form 10-K"))
10(e) Amendment dated December 26, 1988 to the Company's
October 1, 1976 Supply Agreement with Tanabe Seiyaku Co.,
Ltd. (incorporated herein by reference to Exhibit 10(b) to
the 1989 Form 10-K)
10(f) Letter Agreement dated June 19, 1987, and Amendment thereto
dated March 10, 1988, between Merrell Dow Pharmaceuticals
Inc. and David B. Sharrock, and confirming Letter Agreement
dated February 1, 1990, between the Company and David B.
Sharrock (incorporated herein by reference to Exhibit 10(k)
to the Annual Report on Form 10-K of the Company for the
year ended December 31, 1990 (the "1990 Form 10-K")
10(g) Form of Deferred Bonus Agreement dated August 17, 1990,
between the Company and certain of its officers
(incorporated herein by reference to Exhibit 10(m) to the
Annual Report on Form 10-K of the Company for the year ended
December 31, 1991 (the "1991 Form 10-K"))
<PAGE> 83
10(h) Marion Merrell Dow Inc. Non-Qualified Employee Stock Option
Plan and amendment thereto effective as to executive
officers on May 18, 1993 (incorporated herein by reference
to Exhibit 10(l) to the Annual Report on Form 10-K of the
Company for the year ended December 31, 1992 (the "1992 Form
10-K"))
10(i) Executive Compensation Agreement dated September 26, 1978,
and amendments thereto dated November 2, 1979, and June 24,
1982, between the Company and Fred W. Lyons, Jr.
(incorporated herein by reference to Exhibit 10(m) to the
1992 Form 10-K)
10(j) Form of Executive Supplemental Retirement Income Plan
between the Company and certain of its officers
(incorporated herein by reference to Exhibit 10(n) to the
1992 Form 10-K)
10(k) Marion Merrell Dow Inc. Supplemental Executive Profit
Sharing and Retirement Plan effective as of January 1, 1991
(incorporated herein by reference to Exhibit 10(o) to the
1992 Form 10-K)
10(l) Marion Merrell Dow Inc. Director Deferral Plan effective as
of January 1, 1992 (incorporated herein by reference to
Exhibit 10(p) to the 1992 Form 10-K)
10(m) Form of Marion Merrell Dow Inc. Notice of Restricted Stock
Award with Terms and Conditions (incorporated herein by
reference to Exhibit 10(o) to the Annual Report on Form 10-K
of the Company for the year ended December 31, 1993 (the
"1993 Form 10-K"))
10(n) Marion Merrell Dow Inc. 1994 Executive Bonus Plan
(incorporated herein by reference to Exhibit 10(p) to the
1993 Form 10-K)
10(o) Marion Merrell Dow Inc. Board of Directors Retirement Plan
(incorporated herein by reference to Exhibit 10(q) to the
1993 Form 10-K)
10(p) Description of David B. Sharrock Retirement Arrangement
(incorporated herein by reference to Exhibit 10(a) to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994 (the "June 30, 1994 Form 10-Q"))
10(q) Lease dated as of May 4, 1994, between the Company and W.
Jeffrey Kramer (as Co-Trustee) (incorporated herein by
reference to Exhibit 10(b) to the June 30, 1994 Form 10-Q)
10(r) Form of Marion Merrell Dow Inc. Notice of Restricted Stock
Award with Terms and Conditions for awards granted August
19, 1994 (incorporated herein by reference to Exhibit 10(a)
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994 (the "September 30, 1994
Form 10-Q"))
<PAGE> 84
10(s) Form of Marion Merrell Dow Inc. Notice of Performance Shares
Award with Terms and Conditions for awards granted August
19, 1994 (incorporated herein by reference to Exhibit 10(b)
to the September 30, 1994 Form 10-Q)
10(t) Marion Merrell Dow Inc. 1995 Incentive Compensation Plan
10(u) Marion Merrell Dow 1995 Executive Bonus Plan
11 Statement regarding computation of Earnings per Common Share
- Assuming Full Dilution
21 Subsidiaries of the Company
23 Independent Auditors' Consent of Deloitte & Touche LLP
27 Financial Data Schedule
99 Indenture dated as of January 10, 1991 by and among the
Marion Merrell Dow Inc. Employee Stock Ownership Plan Trust,
the Company, and Continental Bank, N.A., as trustee
(incorporated herein by reference to Exhibit A to the
Current Report on Form 8-K of the Company dated January 10,
1991)
(a) 4. Executive Compensation Plans and Arrangements.
----------------------------------------------
Document: Location:
--------- ---------
Letter Agreement dated June 19, 1987, Exhibit 10(k) to the 1990
and Amendment thereto dated March 10, Form 10-K
1988, between Merrell Dow
Pharmaceuticals Inc. and David B.
Sharrock, and confirming Letter
Agreement dated February 1, 1990,
between the Company and David B.
Sharrock
Form of Deferred Bonus Agreement Exhibit 10(m) to the 1991
dated August 17, 1990, between the 10-K
Company and certain officers
Marion Merrell Dow Inc. Non-Qualified Exhibit 10(l) to the
Employee Stock Option Plan and amend- 1992 Form 10-K
ment thereto proposed to be effective
as to executive officers May 18, 1993
Executive Compensation Agreement Exhibit 10(m) to the 1992
dated September 26, 1978, and Form 10-K
amendments thereto dated November 2,
1979, and June 24, 1982, between the
Company and Fred W. Lyons, Jr.
<PAGE> 85
Form of Executive Supplemental Exhibit 10(n) to the 1992
Retirement Income Plan between the Form 10-K
Company and certain of its officers
Marion Merrell Dow Inc. Supplemental Exhibit 10(o) to the 1992
Executive Profit Sharing and retire- Form 10-K
ment Plan effective January 1, 1991
Marion Merrell Dow Inc. Director Exhibit 10(p) to the 1992
Deferral Plan effective January 1, Form 10-K
1992
Form of Marion Merrell Dow Inc. Exhibit 10(o) to the 1993
Notice of Restricted Stock Award Form 10-K
with Terms and Conditions
Marion Merrell Dow Inc. 1994 Exhibit 10(p) to the 1993
Executive Bonus Plan Form 10-K
Marion Merrell Dow Inc. Board of Exhibit 10(q) to the 1993
Directors Retirement Plan Form 10-K
David B. Sharrock Retirement Exhibit 10(a) to the
Arrangement June 30, 1994 Form 10-Q
Form of Marion Merrell Dow Inc. Exhibit 10(a) to the
Notice of Restricted Stock Award September 30, 1994
with Terms and Conditions for Form 10-Q
awards granted August 19, 1994
Form of Marion Merrell Dow Inc. Exhibit 10(b) to the
Notice of Performance Shares Award September 30, 1994
with Terms and Conditions for awards Form 10-Q
granted August 19, 1994
Marion Merrell Dow Inc. 1995 Exhibit 10(t) to the
Incentive Compensation Plan 1994 Form 10-K
Marion Merrell Dow 1995 Executive Exhibit 10(u) to the
Bonus Plan 1994 Form 10-K
(b) CURRENT REPORTS ON FORM 8-K.
----------------------------
None.
<PAGE> 86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MARION MERRELL DOW INC.
(Registrant)
By: /s/ Fred W. Lyons, Jr.
-----------------------------
Fred W. Lyons, Jr.
March 28, 1995 Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Capacities in Which
Name of Signatory Signing Date
- ----------------- ------------------- ----
/s/ Fred W. Lyons, Jr. Chairman and Chief March 28, 1995
- ---------------------- Executive Officer
Fred W. Lyons, Jr. and Director
/s/ Richard J. Markham President and Chief March 28, 1995
- ---------------------- Operating Officer
Richard J. Markham and Director
/s/ Joseph G. Temple, Jr. Vice Chairman of the Board March 28, 1995
- ------------------------- and Director
Joseph G. Temple, Jr.
/s/ John A. Biles Director March 28, 1995
- ------------------
John A. Biles, Ph.D.
/s/ Frank L. Douglas M.D. Executive Vice March 28, 1995
- ------------------------- President, Research
Frank L. Douglas, Ph.D., and Development and
M.D. Director
/s/ Enrique C. Falla Director March 28, 1995
- --------------------
Enrique C. Falla
<PAGE> 87
/s/ James H. Gardner Director March 28, 1995
- --------------------
James H. Gardner, Ph.D.
/s/ Peter W. Ladell President, Marion March 28, 1995
- --------------------- Merrell Dow North
Peter W. Ladell America and Director
/s/ Edward W. Mehrer Executive Vice President, March 28, 1995
- --------------------- Chief Financial and
Edward W. Mehrer Administrative Officer
and Director
/s/ Keith R. McKennon Director March 28, 1995
- ---------------------
Keith R. McKennon
/s/ Frank P. Popoff Director March 28, 1995
- -------------------
Frank P. Popoff
/s/ Paul G. Rogers Director March 28, 1995
- ------------------
Paul G. Rogers
/s/ David B. Sharrock Director March 28, 1995
- ---------------------
David B. Sharrock
/s/ W. S. Stavropoulos Director March 28, 1995
- ----------------------
William S. Stavropoulos,
Ph.D.
/s/ Gail R. Wilensky Director March 28, 1995
- ---------------------
Gail R. Wilensky
/s/ James B. Wyngaarden Director March 28, 1995
- -----------------------
James B. Wyngaarden, M.D.
/s/ Robert W. Lafferty Vice President, Finance, March 28, 1995
- ---------------- Treasurer, and Controller
Robert W. Lafferty
<PAGE> 88
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of
Directors of Marion Merrell Dow Inc.:
We have audited the consolidated financial statements of Marion Merrell Dow
Inc. and its subsidiaries as of December 31, 1994 and 1993 and for each of
the three years in the period ended December 31, 1994, and have issued our
report thereon dated February 8, 1995 (March 10, 1995, as to the first
paragraph of Note 15), which expresses an unqualified opinion and includes
an explanatory paragraph relating to changes in methods of accounting for
certain investments in debt and equity securities in 1993 and for
postretirement benefits other than pensions and for income taxes in 1992;
such report is included elsewhere in this Form 10-K. Our audits also
included the consolidated financial statement schedule of Marion Merrell
Dow Inc. and its subsidiaries, listed on Item 14(a) 2. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our
opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
- -----------------------
Kansas City, Missouri
February 8, 1995
MARION MERRELL DOW INC. AND SUBSIDIARIES
<PAGE> 89
<TABLE>
<CAPTION>
MARION MERRELL DOW INC. AND SUBSIDIARIES
----------------------------------------
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1994, 1993 and 1992
(Thousands of Dollars)
Additions Actual losses Effect of
Balance at ---------------------------------- charged off Foreign Balance at
beginning Charged to costs Charged to net of Currency end of
of period and expenses other accounts recoveries Translation period
---------- ---------------- -------------- ------------ ----------- ----------
Allowance for returns,
cash discounts,
and doubtful accounts
<S> <C> <C> <C> <C> <C> <C>
December 31, 1994..... $ 44,366 $ 4,907 $ 6,762 <F2> $ 1,426 $ (278) $ 54,887
========== ================ ========== =========== =========== ==========
December 31, 1993..... $ 36,891 $ 1,205 $ 7,034 <F1><F3> $ 529 $ 235 $ 44,366
========== ================ ========== =========== =========== ==========
December 31, 1992..... $ 37,756 $ 1,597 $ 630 <F1> $ 2,542 $ 550 $ 36,891
========== ================ ========== =========== =========== ==========
<FN>
<F1> The provision for returned goods and cash discounts has been charged to net sales. The amount of goods
expected to be returned to inventory has been charged to inventory at estimated inventory cost.
<F2> In 1994, the acquisition of Kodama Ltd. added approximately $.7 million to the consolidated allowance for returns cash
discounts and doubtful accounts.
<F3> In 1993, the acquisition of The Rugby Group, Inc. added approximately $7 million to the consolidated allowance for returns,
cash discounts and doubtful accounts.
</TABLE>
<PAGE>
<PAGE> 90
EXHIBIT INDEX
-------------
Regulation Sequential Page
S-K Exhibit Number Where Located
Number: Document: In This Report
- ----------- -------- --------------------
3(a) Complete copy of the Restated Certificate
of Incorporation of the Company, as
amended, effective May 24, 1991,
including Certificate of Designation,
Rights and Preferences of Series A
ESOP Convertible Preferred Stock
(incorporated herein by reference
to Exhibit 3(b) to the June 30, 1991
Form 10-Q)
3(b) Complete copy of the Company's Bylaws, 93
as amended, effective March 17, 1995
4(a) Article FOURTH of the Company's Restated
Certificate of Incorporation (incorporated
herein by reference to Exhibit 3(a) to the
June 30, 1991 Form 10-Q)
4(b) Certificate of Designation, Rights and
Preferences of Series A ESOP Convertible
Preferred Stock (incorporated herein by
reference to Exhibit 3(b) to the June 30,
1991 Form 10-Q)
10(a) Redacted version of the Company's Supply
Agreement with Chugai Pharmaceutical Co.,
Ltd. dated April 1, 1985, as amended
(incorporated herein by reference to
Exhibit 10(a) to the 1988 Form 10-K)
10(b) Redacted version of the Company's Supply
Agreement with Tanabe Seiyaku Co., Ltd.,
dated October 1, 1976 (incorporated herein
by reference to Exhibit 10(b) to the 1988
Form 10-K)
10(c) Master Service Agreement between Merrell
Dow Pharmaceuticals Inc. and The Dow
Chemical Company dated as of December 2,
1989 (incorporated herein by reference
to Exhibit 10(b) to the 1989 Transition
Form 10-K)
10(d) Amendment dated August 23, 1989 to the
Company's April 1, 1985 Supply Agreement
with Chugai Pharmaceutical Co. Ltd.
(incorporated herein by reference to
Exhibit 10(a) to the 1989 Form 10-K)
<PAGE> 91
10(e) Amendment dated December 26, 1988 to the
Company's October 1, 1976 Supply Agreement
with Tanabe Seiyaku Co., Ltd. (incorporated
herein by reference to Exhibit 10(b) to the
1989 Form 10-K)
10(f) Letter Agreement dated June 19, 1987, and
Amendment thereto dated March 10, 1988,
between Merrell Dow Pharmaceuticals Inc.
and David B. Sharrock, and confirming
Letter Agreement dated February 1, 1990,
between the Company and David B. Sharrock
(incorporated herein by reference to Exhibit
10(k) to the 1990 Form 10-K)
10(g) Form of Deferred Bonus Agreement dated August
17, 1990, between the Company and certain of
its officers (incorporated herein by
reference to Exhibit 10(m) to the 1991
Form 10-K)
10(h) Marion Merrell Dow Inc. Non-Qualified
Employee Stock Option Plan and amendment
thereto effective as to executive officers
on May 18, 1993 (incorporated herein by
reference to Exhibit 10(l) to the 1992
Form 10-K)
10(i) Executive Compensation Agreement dated
September 26, 1978, and amendments thereto
dated November 2, 1979, and June 24, 1982,
between the Company and Fred W. Lyons, Jr.
(incorporated herein by reference to
Exhibit 10(m) to the 1992 Form 10-K)
10(j) Form of Executive Supplemental Retirement
Income Plan between the Company and
certain of its officers (incorporated
herein by reference to Exhibit 10(n) to
the 1992 Form 10-K)
10(k) Marion Merrell Dow Inc. Supplemental
Executive Profit Sharing and Retirement
Plan effective as of January 1, 1991
(incorporated herein by reference to
Exhibit 10(o) to the 1992 Form 10-K)
10(l) Marion Merrell Dow Inc. Director Deferral
Plan effective as of January 1, 1992
(incorporated herein by reference to
Exhibit 10(p) to the 1992 Form 10-K)
10(m) Form of Marion Merrell Dow Inc. Notice
of Restricted Stock Award with Terms and
Conditions (incorporated herein by
reference to Exhibit 10(o) to the 1993
Form 10-K)
<PAGE> 92
10(n) Marion Merrell Dow Inc. 1994 Executive
Bonus Plan (incorporated herein by
reference to Exhibit 10(p) to the 1993
Form 10-K)
10(o) Marion Merrell Dow Inc. Board of
Directors Retirement Plan (incorporated
herein by reference to Exhibit 10(q) to
the 1993 Form 10-K)
10(p) Description of David B. Sharrock Retirement
Arrangement (incorporated herein by reference
to Exhibit 10(a) to the June 30, 1994 Form 10-Q)
10(q) Lease dated as of May 4, 1994, between the
Company and W. Jeffrey Kramer (as Co-Trustee)
(incorporated herein by reference to
Exhibit 10(b) to the June 30, 1994 Form 10-Q)
10(r) Form of Marion Merrell Dow Inc. Notice of
Restricted Stock Award with Terms and
Conditions for awards granted August
19, 1994 (incorporated herein by reference
to Exhibit 10(a) to the September 30, 1994
Form 10-Q)
10(s) Form of Marion Merrell Dow Inc. Notice of
Performance Shares Award with Terms and
Conditions for awards granted August 19,
1994 (incorporated herein by reference
to Exhibit 10(b) to the September 30, 1994
Form 10-Q)
10(t) Marion Merrell Dow Inc. 1995 Incentive 110
Compensation Plan
10(u) Marion Merrell Dow 1995 Executive Bonus Plan 114
11 Statement regarding computation of 115
Earnings per Common Share - Assuming
Full Dilution
21 Subsidiaries of the Company 117
23 Independent Auditors' Consent of 121
Deloitte & Touche LLP
27 Financial Data Schedule 122
99 Indenture dated as of January 10, 1991
by and among the Marion Merrell Dow Inc.
Employee Stock Ownership Plan Trust, the
Company, and Continental Bank, N.A., as
trustee (incorporated herein by reference
to Exhibit A to the Current Report on
Form 8-K of the Company dated January 10,
1991)
<PAGE> 93
EXHIBIT 3.(b)
BYLAWS
OF
MARION MERRELL DOW INC.
(Formerly Marion Laboratories, Inc.)
(As Readopted in Full on November 18, 1991)
OFFICES
1. REGISTERED OFFICE AND REGISTERED AGENT. The location of the
registered office and the name of the registered agent of the corporation
in the State of Delaware shall be such as shall be determined from time to
time by resolution of the Board of Directors and on file in the appropriate
public offices of the State of Delaware pursuant to applicable provisions
of law.
2. CORPORATE OFFICES. The corporation may have such other corporate
offices and places of business anywhere within or without the State of
Delaware as the Board of Directors may from time to time designate or the
business of the corporation may require.
SEAL
3. CORPORATE SEAL. The corporate seal shall have inscribed thereon
the name of the corporation and the words "Corporate Seal, Delaware". The
corporate seal may be used by causing it or a facsimile thereof to be
impressed, affixed, reproduced, or otherwise inscribed or attached.
STOCKHOLDERS' MEETINGS
4. PLACE OF MEETINGS. All meetings of the stockholders shall be
held at the offices of the corporation in the City of Kansas City, State of
Missouri, or at such other place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors
and stated in the notice of the meeting or in a duly executed waiver of
notice thereof.
5. ANNUAL MEETING. The annual meeting of stockholders for the
election of Directors and the transaction of other proper business shall be
held during the month of May each year at a time and place, within or
without Delaware, as determined by the Board of Directors, or in such other
month or time as the Board of Directors in its discretion may determine.
6. SPECIAL MEETINGS. Special meetings of the stockholders may be
held for any purpose or purposes, unless otherwise prescribed by statute or
by the certificate of incorporation, and may be called by the Chairman of
the Board, by the President, by the Secretary, by the Board of Directors,
or by the holders of, or by any officer or stockholder upon the written
request of the holders of, not less than twenty-five per cent (25%) of the
outstanding stock entitled to vote at such meeting, and shall be called by
any officer directed to do so by the Board of Directors or requested to do
so in writing by a majority of the Board of Directors. Any such written
request shall state the purpose or purposes of the proposed meeting.
<PAGE> 94
The "call" and the "notice" of any such meeting shall be deemed to be
synonymous.
7. VOTING. At all meetings of stockholders, every stockholder
having the right to vote shall be entitled to vote in person, or by proxy
appointed by an instrument in writing subscribed by such stockholder and
bearing a date not more than three years prior to said meeting, unless said
instrument shall provide for a longer period. Unless otherwise provided by
the certificate of incorporation or, in the case of Preferred Stock, by the
duly adopted resolution or resolutions of the Board of Directors fixing the
designations, powers, preferences, and rights of such Preferred Stock as
provided in the certificate of incorporation, each stockholder shall have
one vote for each share of stock that is entitled to vote at such meeting
and is registered in the name of such stockholder on the books of the
corporation. At all meetings of stockholders the voting may be viva voce,
except that, unless otherwise provided by the certificate of incorporation,
voting for the election of directors shall be by written ballot and except
that any qualified voter may demand a vote by ballot on any other matter,
in which event such vote shall be taken by ballot.
8. QUORUM. The holders of a majority of the stock (or, as to any
matter with respect to which voting by class of stock is required, of the
shares of each class of stock) issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of any
business, except as otherwise provided by law, by the certificate of
incorporation, by these bylaws, or by duly adopted resolution or resolu-
tions of the Board of Directors fixing the designations, powers, prefer-
ences, and rights of Preferred Stock as provided in the certificate of
incorporation. Every decision of a majority in amount of stock (or, as to
any matter with respect to which voting by class of stock is required, of
the shares of each class of stock) of such quorum shall be valid as a
corporate act, except in those specific instances in which a larger vote is
required by law, by the certificate of incorporation, by these bylaws, or
by duly adopted resolution or resolutions of the Board of Directors fixing
the designations, powers, preferences, and rights of Preferred Stock as
provided in the certificate of incorporation.
If the holders of not less than twenty-five per cent (25%) of the
outstanding stock entitled to vote at any meeting are present in person or
by proxy at a meeting at which a quorum shall not be present, the holders
of a majority of the stock present in person or by proxy at such meeting
shall have power successively to adjourn the meeting from time to time to a
specified time and place, without notice to anyone other than announcement
at the meeting, until a quorum shall be present in person or by proxy. At
such adjourned meeting at which a quorum shall be present in person or by
proxy, any business may be transacted that could have been transacted at
the meeting as it was originally scheduled had such meeting not been
adjourned. If the adjournment is for more than thirty (30) days, or if
after adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
9. STOCK LEDGER. The original or duplicate stock ledger shall be
the only evidence as to who are the stockholders entitled to examine the
stock ledger, the list required under section 10 of these bylaws, or the
books of the corporation, or to vote in person or by proxy at any meeting
of the stockholders.
<PAGE> 95
10. STOCKHOLDERS' LISTS. The Secretary or Assistant Secretary, who
shall have charge of the stock ledger, shall prepare and make, at least ten
(10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days
prior to the meeting, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the meeting,
or, if not so specified, at the place where the meeting is to be held. The
list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who
is present.
11. NOTICE. Written or printed notice of each meeting of the
stockholders, whether annual or special, stating the place, date and hour
of the meeting, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be given to each stock-
holder of record of the corporation entitled to vote at such meeting,
either personally or by mail, not less than ten (10) days nor more than
sixty (60) days prior to the meeting. The Board of Directors may fix in
advance a date, which shall not precede the date upon which the resolution
fixing such date is adopted by the Board of Directors and which shall not
be more than sixty (60) nor less than ten (10) days preceding the date of
any meeting of the stockholders, as a record date for the determination of
the stockholders entitled to notice of, and to vote at, any such meeting
and any adjournment thereof; provided, however, that the Board of Directors
may fix a new record date for any adjourned meeting.
12. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Unless otherwise
provided in the certificate of incorporation, any action either required or
permitted to be taken at any annual or special meeting of stockholders of
the corporation may be taken without a meeting, without prior notice, and
without a vote, if a consent or consents in writing, setting forth the
action so taken, shall be signed by all of the holders of outstanding stock
who would have been entitled to vote on such action at such a meeting. If
the certificate of incorporation expressly authorizes action to be taken by
stockholders with the written consent of fewer than all of the holders of
outstanding stock who would have been entitled to vote on such action at
such a meeting, any such action may be taken without a meeting, without
prior notice, and without a vote if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holders of not
less than the minimum number of shares required to constitute the
percentage of shares specified by the certificate of incorporation or by
law for such action, provided that prompt notice of the taking of corporate
action without a meeting by less than unanimous written consent must be
given to all stockholders not signing such consent or consents.
BOARD OF DIRECTORS
13. MANAGEMENT. The business and affairs of the corporation shall be
managed by or under the direction of a Board of Directors. The authorized
number of Directors shall be not less than eleven (11) nor more than
sixteen (16), as fixed by the Board from time to time. Unless required by
the certificate of incorporation, Directors need not be stockholders.
<PAGE> 96
At each annual meeting of stockholders, the Board of Directors
shall be elected to hold office for a term expiring at the next succeeding
annual meeting of stockholders. Each Director shall hold office for the
term for which he was elected and until his successor is elected and
qualified or until his earlier resignation or removal. Directors of the
corporation may be removed only for cause.
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:
(a) To authorize and cause to be executed
mortgages and liens upon the real and personal property of the corporation.
(b) To set apart out of any funds of the corporation available for
dividends a reserve or reserves for any proper purpose and to abolish any
such reserve in the manner in which it was created.
(c) When and as authorized by the stockholders' vote required under
the provisions of Article FIFTEENTH of the certificate of incorporation, to
sell, lease or exchange all of the property or assets of the corporation,
including its goodwill and its corporate franchises, upon such terms and
conditions and for such consideration, which may be in whole or in part
shares of stock in, or other securities of (or both), any other corporation
or corporations as its Board of Directors may deem expedient and for the
best interest of the corporation.
(d) To sell, issue or otherwise dispose of common stock or any other
securities of the corporation, including preferred stock, debentures,
bonds, mortgages, notes, certificates, and any and all other securities
whatsoever, for such consideration as the Board of Directors in its
discretion shall determine; provided, however, that no shares of stock
shall be sold for any consideration not in accordance with the laws of the
State of Delaware.
This corporation may in these bylaws confer powers additional to the
foregoing upon the directors, in addition to the powers, authorities and
duties expressly conferred upon them by law.
14. VACANCIES AND NEWLY-CREATED DIRECTORSHIPS. Vacancies and newly
created directorships resulting from any increase in the authorized number
of Directors may be filled by a majority of the Directors then in office,
although less than a quorum, or by a sole remaining Director. Directors so
chosen shall hold office until the next election of Directors or until
their earlier resignation or removal.
15. MEETINGS OF THE NEWLY-ELECTED BOARD - ACCEPTANCE. The first
meeting of the members of each newly-elected Board of Directors shall be
held without notice immediately following the annual meeting of
stockholders for the election of officers and the transaction of such other
business as may come before it. Every Director of the corporation, upon
his election, shall qualify by accepting the office of Director, and his
attendance at, or his written approval of the minutes of, any meeting of
the Board subsequent to his election shall constitute his acceptance of
such office; or he may execute such acceptance by a separate writing, which
shall be placed in the minute book.
<PAGE> 97
16. REGULAR MEETING. Regular meetings of the Board of Directors may
be held without notice at such times and places either within or without
the State of Delaware as shall from time to time be determined by the Board
of Directors. Any business may be transacted at a regular meeting.
17. SPECIAL MEETINGS. Special meetings of the Board of Directors may
be called at any time by the Chairman of the Board, the President, any
Executive Vice President, any Senior Vice President, any Vice President, or
the Secretary or by any two (2) or more of the Directors. The place of the
special meeting may be within or without the State of Delaware as
designated in the notice of the special meeting.
18. MEETINGS BY CONFERENCE TELEPHONE OR SIMILAR COMMUNICATIONS
EQUIPMENT. Unless otherwise restricted by the certificate of incorporation
or these bylaws, members of the Board of Directors of the corporation, or
any committee designated by such Board, may participate in a meeting of
such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant hereto
shall constitute presence in person at such meeting.
19. NOTICE OF SPECIAL MEETINGS. Written or printed notice of each
special meeting of the Board, stating the place, day and hour of the
meeting and the purpose or purposes thereof, shall be mailed or shipped by
overnight courier to each Director addressed to him at his residence or
usual place of business at least three (3) days before the day on which the
meeting is to be held, or shall be sent to him by telegram, facsimile
transmission, or delivered personally, at least two (2) days before the day
on which the meeting is to be held. The notice may be given by any officer
having authority to call the meeting. "Notice" and "call" with respect to
such meetings shall be deemed to be synonymous. Any meeting of the Board
of Directors shall be a legal meeting without any notice thereof having
been given if all Directors shall be present thereat.
20. QUORUM. Unless otherwise required by law, the certificate of
incorporation or these bylaws, a majority of the authorized number of
Directors, as fixed by the Board from time to time, shall be necessary at
all meetings to constitute a quorum for the transaction of business, and
except as may be otherwise provided by law, the certificate of
incorporation or these bylaws, the act of a majority of the Directors
present at any meeting at which there is a quorum shall be the act of the
Board of Directors.
If at least two Directors or one-third of the whole Board of
Directors, whichever is greater, is present at any meeting at which a
quorum is not present, a majority of the Directors present at such meeting
shall have power successively to adjourn the meeting from time to time to a
subsequent date, without notice to any Director other than announcement at
the meeting. At such adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at the original
meeting which was adjourned.
21. ACTION WITHOUT A MEETING. Except as otherwise provided in these
bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or any committee thereof, may be taken without a
meeting if written consent thereto is signed by all members of the Board or
of such committee, as the case may be, and such written consent is filed
with the minutes of proceedings of the Board or committee.
<PAGE> 98
22. (a) STANDING OR TEMPORARY COMMITTEES. The standing committees
of the Board of Directors shall be an Executive Committee, an Audit
Committee, a Compensation Committee, and a Committee on Directors, having
the respective duties assigned to each in this section 22 and any other
duties assigned to such committee by resolution passed by a majority of the
entire Board of Directors from time to time. Each such standing committee
shall consist of one or more Directors as regular members and such other
ex-officio members as the Board of Directors shall from time to time deter-
mine. The Chairman of each standing committee shall be one of such
committee's regular members who shall be designated as that committee's
chairman by a majority of the entire Board of Directors. Members of each
standing committee shall be elected by a majority of the entire Board of
Directors at its first meeting after each annual meeting of stockholders.
Vacancies in any standing committee shall be filled by a majority vote of
the entire Board of Directors. The Board of Directors may appoint
Directors or executive associates of the Corporation or its subsidiaries to
be ex-officio members of any standing committee. Ex-officio members of
standing committees shall be entitled to be present at all meetings of
their respective committees and to participate in committee discussions but
shall not be entitled to vote on any matter considered by the committee.
Each standing committee shall fix its own rules of procedure and shall meet
where and as provided by such rules, but the presence of a majority of its
regular members shall be necessary to constitute a quorum. The Board of
Directors may from time to time appoint such special committees with such
powers and such members as it may designate in a resolution or resolutions
adopted by a majority of the entire Board of Directors. All committees
appointed by the Board of Directors shall, unless otherwise provided by the
Board of Directors, keep regular minutes of the transactions of their
meetings and shall cause them to be recorded in books kept for that purpose
in the office of the corporation and shall report the same to the Board of
Directors at its next meeting.
(b) EXECUTIVE COMMITTEE. During the intervals between meetings
of the Board of Directors, the Executive Committee shall have and may
exercise all of the powers and authority of the Board of Directors in the
management of the business and affairs of this corporation, and any
exceptions to that authority shall be adopted by a majority of the entire
Board of Directors as required from time to time. The Executive Committee
shall consist of the Chairman of the Board, the President, and not less
than three other Directors. The Executive Committee shall keep regular
minutes of its meetings, which shall be filed in the minute book of this
corporation, and shall deliver a copy of the minutes of each such meeting
to each of the members of the Board of Directors of this corporation and
shall make a report of its proceedings to the Board of Directors at the
next meeting thereof immediately following such Executive Committee meeting
or meetings.
(c) AUDIT COMMITTEE. The Audit Committee shall consist of two
or more regular members, all of whom shall be independent of management of
the corporation as provided in the New York Stock Exchange Listed Company
Manual. The Audit Committee shall: (1) prior to each annual meeting of
stockholders, review the qualifications and performance of independent
public accountants proposed to be retained to conduct the annual audit of
the financial statements of the corporation and submit a recommendation to
the Board of Directors for the selection of independent public accountants
to be appointed for such purpose by the Board of Directors and submitted
for ratification or rejection by the stockholders at such annual meeting;
(2) annually consult with the independent public accountants retained by
the corporation with regard to the proposed plan of audit; (3) from time to
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time consult privately with such independent public accountants, the
corporation's internal auditor, Controller, and Chief Financial Officer to
review the accounting practices of the corporation and the adequacy of
internal controls; and (4) upon completion of the audit by the independent
public accountants and prior to the annual meeting of stockholders, review
the year-end financial statements of the corporation and meet with the
independent public accountants to review the nature and scope of their
audit, the results of such audit, and any recommendations resulting from
such audit.
(d) COMPENSATION COMMITTEE. The Compensation Committee shall
consist of three or more regular members, a majority of whom shall be
"disinterested persons" as defined in rule 16b-3 of the Securities and
Exchange Commission (the "SEC"). The Compensation Committee shall: (1)
adopt compensation philosophies, policies, and objectives applicable to all
"officers" (as defined in SEC rule 16a-1) of the Corporation, and to such
other personnel as the Board of Directors may from time to time delegate to
the Committee; (2) establish the levels, amounts, and types of compensa-
tion and other remuneration to be paid to the Chairman of the Board, the
President and all other such "officers" of the Corporation; (3) review and
approve compensation and benefit plan design; (4) report annually to the
shareholders of the Corporation concerning the compensation of the Chief
Executive Officer and on the policies applicable to executive compensation
in general, as required by applicable SEC rules; and (5) constitute the
membership and exercise all the powers of the administrative committees of
the Corporation's incentive compensation and stock option plans; provided
that with respect to any such plan in which Directors or Officers of the
Corporation are eligible to receive awards of "equity securities" or
"derivative securities" (as such terms are used in SEC rule 16a-1) of the
Corporation other than pursuant to a "formula" plan (as defined in SEC rule
16b-3), the members of the Compensation Committee who are not "dis-
interested persons" shall be nonvoting ex-officio members of the
administrative committee of such plan.
(e) COMMITTEE ON DIRECTORS. The Committee on Directors shall
(1) recommend to the Board the individuals to constitute nominees to the
Board of the Directors for election at the next annual meeting of stock-
holders and who will be named as such nominees named in the proxy statement
used in solicitation of proxies by the Board; (2) recommend and nominate an
individual for Director to fill the unexpired term of any vacancy existing
in the Board of Directors or created by an increase in the size of the
Board; (3) conduct continuing studies of the size and composition of the
Board of Directors and from time to time make recommendations to the Board
for enlargement or reduction in size of the Board; and (4) recommend and
nominate individuals for election as officers and members of committees;
and (5) conduct studies of the cash and non-cash compensation of the Board
of Directors and from time to time make recommendations to the Board for
increases or reductions in such compensation.
23. COMPENSATION. Unless otherwise restricted by the certificate of
incorporation, the Board of Directors may, by resolution, fix the
compensation to be paid Directors for serving as Directors of this
corporation and may, by resolution, fix a sum which shall be allowed and
paid for attendance at each meeting of the Board of Directors and in such
case may provide for reimbursement of expenses incurred by Directors in
attending each meeting; provided that nothing herein contained shall be
construed to preclude any Director from serving this corporation in any
other capacity and receiving his regular compensation therefor. Members of
<PAGE> 100
special or standing committees may be allowed like compensation for
attending committee meetings.
24. RESIGNATIONS. Any Director may resign at any time by giving a
written notice to the Chairman of the Board, the President, or the
Secretary of the corporation. Such resignation shall take effect at the
time specified therein; and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
25. INDEMNIFICATION AND LIABILITY OF DIRECTORS, OFFICERS, AND
EMPLOYEES. The corporation may, up to the full extent permitted or
authorized by applicable laws of the State of Delaware and subject to the
provisions thereof and of the certificate of incorporation, indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit or proceeding, whether
civil, criminal, administrative, or investigative, including any action by
or in the right of the corporation or any of its subsidiaries, by reason of
the fact that such person is or was a Director, officer, employee, or agent
of the corporation or of any subsidiary of the corporation, or is or was
serving at the request of the corporation as a Director, officer, employee,
or agent of another corporation (other than a subsidiary), partnership,
joint venture, trust, or other enterprise including, by way of example but
not by way of limitation, the corporation's profit sharing plan trust,
associate stock ownership plan trust, comprehensive health care plan trust,
or other associate benefit plans (all of which entities shall hereinafter
be collectively referred to as "other corporations or enterprises"),
against expenses, (including attorneys' fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit, or proceeding.
Without limiting the foregoing or any other provision of these bylaws
or of the certificate of incorporation, no person shall be liable to the
corporation or any of its subsidiaries for any loss, damage, liability, or
expense suffered by it on account of any action taken or omitted to be
taken by such person as a Director, officer, or employee of the
corporation, any of its subsidiaries, or of any other corporations or
enterprises where such person served as a Director, officer, employee at
the request of the corporation, if such person took or omitted to take such
action in reliance upon advice of counsel for the corporation or any of its
subsidiaries, or for such other corporations or enterprises, or upon state-
ments made or information furnished by Directors, officers, employees, or
agents of the corporation or any of its subsidiaries, or of such other
corporations or enterprises, which such person had no reasonable grounds to
disbelieve.
The corporation may, up to the full extent permitted or authorized by
applicable laws of the State of Delaware and subject to the provisions
thereof and of the certificate of incorporation, pay in advance of final
disposition the expenses (including attorneys' fees) incurred by a
Director, officer, employee, or agent of the corporation in defending any
civil, criminal, administrative, or investigative action, suit, or
proceeding with respect to which such person might ultimately be indemni-
fied hereunder; provided that in the case of any Director or officer, the
corporation shall have received an undertaking by or on behalf of such
person to repay all amounts so advanced if and to the extent it shall
ultimately be determined that such Director or officer is not entitled to
be indemnified by the corporation under applicable law.
The indemnification and advancement of expenses provided by, or
<PAGE> 101
granted pursuant to, this section 25 shall not be deemed exclusive of any
other rights to which one seeking indemnification or advancement of
expenses may be entitled under any applicable law, the certificate of
incorporation, any bylaw, agreement, vote of stockholders or disinterested
Directors, or otherwise, both as to action in such person's official
capacity and as to action in any other capacity while holding such office.
The indemnification and advancement of expenses provided by, or
granted pursuant to, this section 25 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
Director, officer, employee, or agent of the corporation or any of its
subsidiaries or a Director, officer, employee, or agent of any other
corporations or enterprises and shall inure to the benefit of the heirs,
executors, and administrators of such a person.
26. ADVISORY BOARD OF DIRECTORS. The Board of Directors may, by
resolution passed by a majority of the whole Board, appoint one (1) or more
officers of this corporation, who at the time of their appointment are not
members of the Board of Directors, to serve as members of an Advisory Board
of Directors. The Advisory Directors shall attend all meetings of the
Board of Directors, may participate in the deliberations of the Board, and
shall inform and counsel the Board of Directors on such matters as the
Board may deem appropriate. The Advisory Directors, however, shall not be
entitled to vote on any matter considered by the Board of Directors. An
Advisory Director shall serve until the next following annual meeting of
stockholders after his appointment or until his successor is appointed by
the Board of Directors, whichever is the latter to occur. Advisory
Directors may be appointed for an unlimited number of terms by the Board.
OFFICERS
27. (a) OFFICERS; WHO SHALL CONSTITUTE. The officers of the
corporation shall be a Chairman of the Board, a President, one or more
Executive Vice Presidents, one or more Senior Vice Presidents, one or more
Vice Presidents, a Secretary, and a Treasurer each of whom shall be elected
by the Board of Directors at their first meeting after the annual meeting
of stockholders. The Board of Directors may also designate additional
Assistant Secretaries and Assistant Treasurers. In the discretion of the
Board of Directors (and subject to election by vote of the stockholders or
otherwise as provided in these bylaws), the incumbent Chairman of the Board
(if any) shall at all times be, and other officers may be, members of the
Board of Directors. Any two or more offices may be held by the same
person.
(b) TERM OF OFFICE. Each officer of the corporation shall hold
his office at the pleasure of the Board of Directors or for such other
period as the Board may specify at the time of his election or appointment,
or until his death, resignation or removal by the Board, whichever first
occurs. In any event, each officer of the corporation who is not re-
elected or reappointed at the annual meeting of the Board next succeeding
his election or appointment and at which any officer of the corporation is
elected or appointed shall be deemed to have been removed by the Board,
unless the Board provides otherwise at the time of his election or
appointment.
(c) OTHER OFFICERS AND AGENTS. The Board from time to time may
also appoint such other officers and agents for the corporation as it shall
deem necessary or advisable, each of whom shall serve at the pleasure of
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the Board or for such period as the Board may specify, and shall exercise
such powers, have such titles and perform such duties as shall be
determined from time to time by the Board or by any officer empowered by
the Board to make such determinations.
(d) ORDER OF SUCCESSION. In the event of the disability,
inability, or refusal of both the Chairman of the Board, and the President
to act, the Secretary of the corporation shall, immediately upon occurrence
of such event, call a special meeting of the Board of Directors for the
express purpose of electing a successor Chairman of the Board and a
successor President of the corporation each of whom shall be vested with
all powers and perform all duties of the respective offices to which such
persons are hereunder elected.
28. THE CHAIRMAN OF THE BOARD. The Chairman of the Board shall have
such executive powers and duties of supervision and management as are
usually vested in the office of Chairman of the Board, shall carry into
effect all directions and resolutions of the Board and shall be in general
and active charge of the business and affairs of the corporation. He shall
preside at all meetings of the stockholders and Directors at which he may
be present, be consulted on all quarterly report decision items, have
approval power on the commencement or conclusion of significant litigation
involving the corporation. In addition, he shall serve as Chairman of the
Executive Committee of the Board of Directors. He shall have such other
duties, powers and authority as may be prescribed elsewhere in these bylaws
or delegated to him by the Board of Directors, other than those conferred
by law exclusively on the President. He may further execute all bonds,
notes, debentures, mortgages, and other instruments for and in the name of
the corporation, and may cause the corporate seal to be affixed thereto.
The Chairman of the Board, or any person designated in writing by him,
shall have full power and authority on behalf of this corporation (i) to
attend and to vote or take action at any meeting of the holders of
securities of corporations in which this corporation may hold securities,
and at such meetings shall possess and may exercise any and all rights and
powers incident to being a holder of such securities and which as the
holder thereof this corporation may have possessed and exercised if
present, and (ii) to execute and deliver waivers of notice and proxies for
and in the name of the corporation with respect to any such securities held
by this corporation.
He shall, unless the Board or these bylaws otherwise provide, be ex-
officio a member of all standing committees.
29. PRESIDENT. The President shall perform such duties as may be
specifically delegated to him by the Board of Directors and as are
conferred exclusively upon him by the laws of Delaware. In the absence of
the Chairman of the Board or in the event of his disability, inability or
refusal to act, the President shall perform the duties and exercise the
powers of the Chairman of the Board. In addition, the President shall have
general executive powers and duties with respect to the purchase and
operation of corporation aircraft.
The President may execute all bonds, notes, debentures, mortgages, and
other instruments for and in the name of the corporation, and may cause the
corporate seal to be affixed thereto.
In the absence of the Chairman of the Board, the President or any
person designated in writing by him shall have full power and authority on
<PAGE> 103
behalf of this corporation (i) to attend and to vote or take action at any
meeting of the holders of securities of corporations in which this
corporation may hold securities, and at such meetings shall possess and may
exercise any and all rights and powers incident to being a holder of such
securities and which as the holder thereof this corporation may have pos-
sessed and exercised if present, and (ii) to execute and deliver waivers of
notice and proxies for and in the name of the corporation with respect to
any such securities held by this corporation.
He shall have such other or further duties and authority as may be
prescribed elsewhere in these bylaws or from time to time by the Board of
Directors.
30. EXECUTIVE VICE PRESIDENT. The Board of Directors may designate
one or more Executive Vice Presidents who shall have such powers and duties
in support of the President as are usually vested in the office of
Executive Vice President. An Executive Vice President shall perform such
other duties as the Board of Directors, the Chairman of the Board, or the
President may from time to time assign or delegate to him.
31. SENIOR VICE PRESIDENT. The Board of Directors may designate one
or more Senior Vice Presidents who shall have such powers and duties of
supervision and management as are usually vested in the office of Senior
Vice President. A Senior Vice President shall perform such other duties as
the Board of Directors, the Chairman of the Board, or the President may
from time to time assign or delegate to him.
32. CHIEF FINANCIAL OFFICER. Unless the Board of Directors otherwise
provides, one of the Vice Presidents shall also be the Chief Financial
Officer of the corporation with such general administrative powers and
duties of supervision and management as are usually vested in the office of
the Chief Financial Officer of a corporation, and he shall carry into
effect all directions and resolutions of the Board as may be directed to
his office. The Chief Financial Officer shall be responsible for all
financial matters of the corporation and shall keep or cause to be kept and
audited all accounting records of the corporation. He shall perform such
other duties and shall have such other responsibilities and authority as
may be prescribed elsewhere in these bylaws or from time to time by the
Board of Directors.
33. PRESIDENT OF AN OPERATING UNIT. The Board of Directors may
designate one or more Presidents of operating units of the corporation who
shall have such powers and duties of supervision and management as are
usually vested in the office of the President of an operating unit. The
President of an operating unit shall perform such other duties as the Board
of Directors, the Chairman of the Board, or the President may from time to
time prescribe or designate to him.
34. VICE PRESIDENT-GENERAL COUNSEL. Unless the Board otherwise
provides, the Vice President--General Counsel shall be the Chief Legal
Officer of the corporation with such general administrative powers and
duties of supervision and management as are usually vested in the office of
the Chief Legal Officer and he shall carry into effect all directions and
resolutions of the Board.
35. VICE PRESIDENT. The Board of Directors may designate one or more
Vice Presidents who shall have such powers and duties of supervision and
management as are usually vested in the office of the Vice President. The
Vice President shall perform such other duties as the Board of Directors,
<PAGE> 104
the Chairman of the Board, or the President may from time to time prescribe
or designate to him.
36. SECRETARY AND ASSISTANT SECRETARIES. The Secretary may attend
all sessions of the Board and all meetings of the stockholders, and shall
record or cause to be recorded all votes taken and the minutes of all
proceedings in a minute book of the corporation to be kept for that
purpose. He shall perform like duties for the Executive and other standing
committees when requested by the Board or any such committee to do so.
It shall be the principal responsibility of the Secretary to give, or
cause to be given, notice of all meetings of the stockholders and of the
Board of Directors, but this shall not lessen the authority of others to
give such notice as is authorized elsewhere in these bylaws.
The Secretary shall see that all books, records, lists and
information, or duplicates, required to be maintained in Delaware, or
elsewhere, are so maintained.
The Secretary shall keep in safe custody the seal of the corporation,
and shall have authority to affix the seal to any instrument requiring it,
and when so affixed, he shall attest the seal by his signature. The Board
of Directors may give general authority to any other officer to affix the
seal of the corporation and to attest the affixing by his signature.
The Secretary shall perform such other duties and have such other
authority as may be prescribed elsewhere in these bylaws or from time to
time by the Board of Directors or the Chairman of the Board of the corpora-
tion, under whose direct supervision he shall be.
In the absence of the Secretary or in the event of his disability,
inability or refusal to act, the Assistant Secretary (or in the event there
be more than one Assistant Secretary, the Assistant Secretaries in the
order designated by the Board, or in the absence of any designation, then
in the order of their election) may perform the duties and exercise the
powers of the Secretary, and shall perform such other duties as the Board
of Directors may from time to time prescribe.
37. THE TREASURER AND ASSISTANT TREASURERS. The Treasurer shall have
responsibility for the safekeeping of the funds and securities of the
corporation, shall keep or cause to be kept full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
keep, or cause to be kept, all other books of account and accounting
records of the corporation. He shall deposit or cause to be deposited all
moneys and other valuable effects in the name and to the credit of the
corporation in such depositories as may be designated by the Board of
Directors or by any officer of the corporation to whom such authority has
been granted by the Board of Directors.
He shall disburse, or permit to be disbursed, the funds of the
corporation as may be ordered, or authorized generally, by the Board, and
shall render to the Chairman of the Board of the corporation and the
Directors, whenever they may require it, an account of all his transactions
as Treasurer and of those under his jurisdiction, and of the financial
condition of the corporation.
He shall perform such other duties and shall have such other
responsibility and authority as may be prescribed elsewhere in these bylaws
or from time to time by the Board of Directors.
<PAGE> 105
He shall have the general duties, powers and responsibility of a
Treasurer of a corporation.
If required by the Board, he shall give the corporation a bond in a
sum and with one or more sureties satisfactory to the Board, for the
faithful performance of the duties of his office, and for the restoration
to the corporation, in the case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other
property of whatever kind in his possession or under his control which
belong to the corporation.
In the absence of the Treasurer or in the event of his disability,
inability or refusal to act, the Assistant Treasurer (or in the event there
be more than one Assistant Treasurer, the Assistant Treasurers in the order
designated by the board, or in the absence of any designation, then in the
order of their election) may perform the duties and exercise the powers of
the Treasurer, and shall perform such other duties and have such other
authority as the Board of Directors may from time to time prescribe.
38. DUTIES OF OFFICERS MAY BE DELEGATED. If any officer of the
corporation be absent or unable to act, or for any other reason that the
Board may deem sufficient, the Board may delegate for the time being, some
or all of the functions, duties, powers and responsibilities of any officer
to any other officer, or to any other agent or employee of the corporation
or other responsible person, provided a majority of the whole Board concurs
therein.
39. REMOVAL. Any officer or agent elected or appointed by the Board
of Directors, and any employee, may be removed or discharged at any time by
the affirmative vote of a majority of the Board of Directors, but such
removal or discharge shall be without prejudice to the contract rights, if
any, of the person so removed or discharged.
40. SALARIES AND COMPENSATION. Salaries and compensation of all
"officers" (as defined in SEC rule 16a-1) of the corporation shall be
fixed, increased or decreased by the Compensation Committee. Salaries and
compensation of all other appointed officers, agents and employees of the
corporation may be fixed, increased or decreased by the Board of Directors,
the Chairman of the Board, the President, or such other officer or commit-
tee as may be designated by the Board of Directors to do so.
41. DELEGATION OF AUTHORITY TO HIRE, DISCHARGE AND DESIGNATE DUTIES.
The Board from time to time may delegate to the Chairman of the Board, the
President, or other officer or executive employee of the corporation,
authority to hire, discharge, and fix and modify the duties, salary or
other compensation of employees of the corporation under their juris-
diction, and the Board may delegate to such officer or executive employee
similar authority with respect to obtaining and retaining for the corpo-
ration the services of attorneys, accountants and other experts.
STOCK
42. CERTIFICATES OF STOCK. Certificates of stock shall be issued in
numerical order, and each stockholder shall be entitled to a certificate
signed by the Chairman of the Board, or the President, an Executive Vice
President or a Senior Vice President, or a Vice President, and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary, certifying the number of shares owned by him. Any or all of the
<PAGE> 106
signatures on such certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, such
certificate may nevertheless be issued by the corporation with the same
effect as if such officer, transfer agent or registrar who signed the
certificate, or whose facsimile signature shall have been used thereon, had
not ceased to be such officer, transfer agent or registrar of the corpo-
ration.
43. TRANSFER OF STOCK. Transfers of stock shall be made only upon
the transfer books of the corporation, kept at the office of the
corporation or respective transfer agents designated to transfer the
several classes of stock, and before a new certificate is issued the old
certificate shall be surrendered for cancellation. Until and unless the
board appoints some other person, firm or corporation as its transfer agent
or transfer clerk (and upon the revocation of any such appointment, there-
after until a new appointment is similarly made) the secretary of the
corporation shall be the transfer agent or transfer clerk of the
corporation without the necessity of any formal action of the Board, and
the Secretary, or any person designated by him, shall perform all of the
duties thereof.
44. REGISTERED STOCKHOLDERS. Registered stockholders only shall be
entitled to be treated by the corporation as the holders and owners in fact
of the shares standing in their respective names and the corporation shall
not be bound to recognize any equitable or other claim to or interest in
such shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as expressly provided by the laws
of Delaware.
45. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation, alleged to have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate or certificates to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or his legal repre-
sentative, to give the corporation and its transfer agents and registrars,
if any, a bond in such sum as it may direct to indemnify it against any
claim that may be made against it with respect to the certificate or
certificates alleged to have been lost, stolen or destroyed or the issuance
of such new certificate or certificates.
46. REGULATIONS. The Board of Directors shall have power and
authority to make all such rules and regulations as it may deem expedient
concerning the issue, transfer, conversion and registration of certificates
for shares of the capital stock of the corporation, not inconsistent with
the laws of Delaware, the certificate of incorporation, and these bylaws.
47. FIXING RECORD DATE. In order that the corporation may determine
the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of
stock or for the purpose of any other lawful action, the Board of Directors
<PAGE> 107
may fix, in advance, a record date, which shall not be more than sixty (60)
nor less than ten (10) days before the date of such meeting, nor more than
sixty (60) days prior to any other action, and which shall not precede the
date upon which the resolution fixing such date is adopted by the Board of
Directors. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; providing, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
DIVIDENDS AND FINANCE
48. DIVIDENDS; CANCELLATION OF STOCK. Dividends upon the outstanding
shares of the corporation, subject to the provisions of the certificate of
incorporation and of any applicable law and of these bylaws, may be
declared by the Board of Directors at any meeting. Subject to such
provisions, dividends may be paid in cash, in property, or in shares of the
capital stock of the corporation; provided, however, that:
(a) The Secretary, acting on behalf of the corporation, is hereby
authorized to instruct the transfer agent and registrar of the corporation
to cancel any shares of its capital stock, pursuant to the provisions of
the certificate of incorporation of the corporation, of a holder or owner
whose address remains unknown to the corporation or its stock transfer
agent for a period of at least twenty-four (24) consecutive calendar
months. Any shares of capital stock shall not thereafter be deemed to be
issued or outstanding until such time as the lawful holder or owner thereof
establishes ownership rights as set forth in these bylaws; and
(b) No dividend shall be paid on any shares of the capital stock of
the corporation to a holder or owner whose shares of corporate stock have
been canceled under paragraph (a) above.
49. PROCEDURE. So long as the corporation, in the opinion of its
Chief Legal Officer, is not otherwise prohibited by law or by any order of
any court of competent jurisdiction, the corporation shall, under the terms
of these bylaws, issue to a bona fide owner shares of its capital stock, in
replacement of shares canceled by the corporation under authority of the
certificate of incorporation and/or pay to such owner dividends thereon
which had not heretofore been paid, if each of the following conditions are
fully met, to the satisfaction of the Chief Legal Officer of the
corporation, by such owner:
(a) The owner (or the heir, devisee, assignee, or legal
representative thereof, hereinafter referred to as the "applicant") shall
execute and deliver a written application to and on a form prepared by the
corporation, requesting that the corporation reissue such canceled shares
of capital stock and/or pay dividends thereon for such period or periods
during which no dividends from the corporation have been received by said
applicant;
(b) The applicant executes and delivers to the corporation a duly
notarized affidavit in which the applicant shall, under oath, swear to and
state in writing (and to which affidavit there are attached documents or
papers which are satisfactory in the opinion of the Chief Legal Officer for
the corporation to show) that applicant is the true and lawful owner of all
right, title, and interest in and to the shares of capital stock of the
corporation sought by the applicant to be reissued by the corporation and
that the applicant is entitled to receive all dividends thereon not
<PAGE> 108
received by said applicant during the period of the applicant's ownership
of shares of capital stock of the corporation; and
(c) The Chief Legal Officer is hereby directed to implement the
procedures adopted from time to time by the corporation, consistent with
protecting the interests of the corporation and its stockholders, with a
view to expediting the review and approval by the corporation of any
applications and affidavits submitted by any stockholder pursuant to these
bylaws.
50. CREATION OF RESERVES. The Directors may set apart out of any of
the funds of the corporation available for dividends a reserve or reserves
for any proper purpose or may abolish any such reserve in the manner in
which it was created.
51. MONEYS. The moneys of the corporation shall be deposited in the
name of the corporation in such bank or banks or trust company or trust
companies as the Board of Directors shall designate, and shall be drawn out
only by check signed by persons designated by resolution adopted by the
Board of Directors, except that the Board of Directors may delegate said
powers in the manner hereinafter provided in this bylaw 51. The Board of
Directors may by resolution authorize an officer or officers of the
corporation to designate any bank or banks or trust company or trust
companies in which moneys of the corporation may be deposited, and to
designate the persons who may sign checks drawn on any particular bank
account or bank accounts of the corporation, whether created by direct
designation of the Board of Directors or by an authorized officer or
officers as aforesaid.
52. FISCAL YEAR. The Board of Directors shall have power to fix and
from time to time change the fiscal year of the corporation. In the
absence of action by the Board of Directors, however, the fiscal year of
the corporation shall end each year on December 31 until such time, if any,
as the fiscal year shall be changed by the Board of Directors.
53. DIRECTORS' ANNUAL STATEMENT. The Board of Directors may present
at each annual meeting of the stockholders, and when called for by vote of
the stockholders shall present to any annual or special meeting of the
stockholders, a full and clear statement of the business and condition of
the corporation.
BOOKS AND RECORDS
54. BOOKS, ACCOUNTS AND RECORDS. The books, accounts and records of
the corporation, except as may be otherwise required by the laws of the
State of Delaware, may be kept outside of the State of Delaware, at such
place or places as the Board of Directors may from time to time determine.
The Board of Directors shall determine whether, to what extent and the
conditions upon which the accounts and books of the corporation, or any of
them, shall be open to the inspection of the stockholders, and no
stockholder shall have any right to inspect any account or book or document
of the corporation, except as conferred by law or by resolution of the
stockholders or directors.
<PAGE> 109
NOTICES
55. PROVISIONS. Whenever the provisions of the statutes of the State
of Delaware, the certificate of incorporation or these bylaws require
notice to be given to any Director, officer or stockholder, they shall not
be construed to require actual personal notice. Notice by mail or
overnight courier may be given in writing by depositing the same in a post
office or letter box, or with an overnight courier or in a parcel pickup
box, as appropriate to the carrier selected, postage or other charges
prepaid or provided for, in a sealed wrapper, addressed to such Director,
officer or stockholder at his or her address as the same appears in the
books of the corporation, and the time when the same shall be so deposited
shall be deemed to be the time of the giving of such notice. If notice is
given by telegraph, such notice shall be deemed to be given when the same
is delivered to the telegraph company. If notice is given by facsimile
transmission, such notice shall be deemed to be given when transmission
thereof is completed.
56. WAIVER. Whenever any notice is required to be given under the
provisions of the statutes of Delaware or of the certificate of
incorporation or of these bylaws, a waiver thereof in writing, signed by
the person or persons entitled to said notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting,
except when a person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither
the business to be transacted at, nor the purpose of, any regular or
special meeting of the stockholders, Directors, or members of a committee
of Directors need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
MISCELLANEOUS
57. CONTRACTS. Whenever the management of this corporation decides
that a contract should be signed in the ordinary course of business of this
corporation, the Chairman of the Board, the President, any Executive Vice
President, any Senior Vice President, any President of an Operating Unit,
any Vice President or the Treasurer of the corporation or any of their
delegates, shall have the authority to execute such a contract and the
Secretary or any Assistant Secretary shall have the authority to attest
thereto. Whenever the management of this corporation decides that a
contract should be signed which is not deemed to be in the ordinary course
of business of this corporation, the Board of Directors, or the Executive
Committee within the limits of authority delegated to it by the Board of
Directors, may authorize any officer or officers, agent or agents, to enter
into any such contract or execute and deliver any instrument in the name of
and on behalf of the corporation, and such authority may be general or
confined to specific instances.
<PAGE> 110
EXHIBIT 10.(t)
MARION MERRELL DOW INC.
1995 INCENTIVE COMPENSATION PLAN
PART I
Purpose: To provide an annual cash bonus for successful progress
toward individual goals related to the MMD Tactical Plan.
Eligibility: All associates participate in this part of the plan.
Method: The following chart illustrates the 1995 participation level
in the U.S. and Canada. Other countries may participate at
lower levels.
Amounts: % OF BASE
SALARY
---------
Support 5% x 60% 3%
Professional 10% x 60% 6%
Manager 15% x 60% 9%
Director 20% x 60% 12%
Vice President A 30% x 60% 18%
Vice President B 40% x 60% 24%
Executive Staff 50--70% x 60% 30--42%
Top performing associates through the director level could
receive more as the following examples illustrate:
1995 BONUS
Most Top
1995 Associates Performers
Bonus 80-90% 10-20%
----- ---------- ----------
Administrative 3.0% 2.5% 5.0%
Assistants
Scientist 6.0% 5.0% 10.0%
Accounting 9.0% 7.5% 15.0%
Manager
Director 12.0% 10.0% 20.0%
Production
Associates at the vice president levels would receive the
bonus according to the schedule unless goals were not
satisfactorily met, in which case it would be reduced. Top
performers in this group have been identified as
participants under Parts II and III (along with associates
from the above group.)
<PAGE> 111
PART II - ASSOCIATE RETENTION PLAN
Purpose: To build future value while retaining talent and human
resources vital to our long term success.
Eligibility: Approximately 550 associates identified by the Management
Committee and approved by the Executive Salary Committee as
follows:
-- Associates who possess critical skills not readily
available.
-- Associates who are assigned to critical projects
related to MMD Tactical Plan.
-- Associates who have the capability to assume greater
responsibilities in the future and/or possess multi-
disciplinary skills and experience.
Method: A restricted grant for MMD stock will be issued in the
associate s name, held by MMD until vesting, at which time
the shares will be delivered to the associate and may be
held or sold. Dividends will be paid on these shares to the
associate beginning immediately.
Amount: Individual stock grants would range as follows:
Professional Associates: 1,000 shares
Director Associates: 3,000 shares
Vice President Associates: 4-5,000 shares
Executive Staff: 10,000 shares+
A small number of associates were identified as deserving
special consideration. Their grants are recommended at 20%
above the levels listed. In total, we have identified 550
associates for participation. It s important to note that
80%+ associates participating in this portion of the plan
are those who represent primary core competency areas for
MMD defined as Operations, Sales & Marketing, and Research &
Development groups. Corporate staff groups participate at
the same level, but with fewer people proportionately.
Measurement/
Vesting: The primary objective of this plan is retention, with an
ultimate distribution of restricted stock shares at the end
of 5 years, however, an accelerated vesting along with an
additional grant could be achieved if the participants were
to accomplish significant results. The proposal is that the
5 year projection of possible opportunities would be
delineated with point values assigned. The successful
completion of 400 points would result in an accelerated
vesting of 3--4 years rather than 5 and an additional 20%
grant. (See MMD Tactical Plan.)
<PAGE> 112
Part III - BUILDING LONG RANGE FINANCIAL STRENGTH
Purpose: To motivate selected associates to take actions which will
result in long range financial strength and shareholder
value.
Eligibility: Management Committee members and selected other associates
(58 in total) who are the leaders, engineers of MMD.
Method: A performance share approach will be utilized for this part
of the plan. Performance shares are stock equivalent units
calculated by the company on a specific date and then paid
at a future stock price when the targets are achieved.
Vesting: The awards are paid in either MMD shares or cash on the date
when the financial targets are achieved or the stock price
reaches $30 (excluding speculative price movement),
whichever comes first and within a five year period ending
December 31, 1999. The financial targets used will be based
upon the Freidheim approach considering earnings, growth in
financial base, and financial strength.
Amounts: The number of performance shares are determined by
multiplying a percent of annual salary (30% to 150%) and
then converting this amount to equivalent shares using an
$18 stock price.
Additional shares can be earned by achieving a return on
capital that exceeds 14% (for 2 consecutive years) as
follows:
1/2% above 14% = 10% additional performance shares
1% above 14% = 20% additional performance shares
1 1/2% above 14% = 30% additional performance shares
2% above 14% = 40% additional performance shares
2 1/2% above 14% = 50% additional performance shares
3% above 14% = 60% maximum
OTHER ISSUES:
RETIREMENT:
For individuals who choose to retire after age 55 + 10, the following
provisions will apply:
PART II
Associates who retire will receive a prorated number of shares based on
milestones achieved or time vested, whichever is greater, under Part II of
the plan subject to a non-compete provision. These shares would be
distributed at the same time as all other participants.
PART III
All benefits under Part III will be forfeited for those electing to retire
during the Plan.
<PAGE> 113
CHANGE OF CONTROL:
In the event of change of control as defined under the Omnibus Plan, Parts
II and III will become 100% vested.
NEW PARTICIPANTS:
Annually, Management Committee members will be asked to review participants
in Parts II and III to determine whether additional associates meet
eligibility criteria set forth above. It is not envisioned that the Part
II plan would ever exceed approximately 550 associates, or 60 associates in
Part III, but spaces in the program may become vacant due to turnover.
Management Committee will bring nominees to the Executive Salary Committee,
who will review and approve all associates added. If approved,
participation would be prorated based upon time (assuming a 5 year plan).
For example, a director level associate added to Part II and Part III in
the second year:
3,000 x 80% = 2,400 shares Part II
30% x 80% = 24% of salary Part III
Finally, it should be noted that while only a small group of associates is
included in Part III of the plan, ALL ASSOCIATES may benefit through stock
option gains.
<PAGE> 114
EXHIBIT 10.(u)
MARION MERRELL DOW, INC.
EXECUTIVE BONUS PLAN 1995
PLAN OBJECTIVES:
The plan is intended to:
1) Provide an incentive to meet or exceed individual performance goals in
a team environment.
2) Complement base salary and long-term incentive so as to provide total
direct compensation competitive with leading firms within the
industry.
3) Reinforce executive performance on achieving elements of the 5 year
Tactical Plan.
PLAN PERIOD:
The plan covers the calendar year 1995.
PLAN ADMINISTRATION:
The Compensation Committee of the Board of Directors authorizes G. D.
Muhlenpoh, vice president Compensation and Benefits, as Plan Administrator.
The Plan Administrator is charged with interpretation of plan guidelines
and establishing appropriate administrative rules to govern the plan s
operation. The Executive Compensation Committee is comprised of Fred
Lyons, Richard Markham, Frank Douglas, Ed Mehrer, Rich Bailey and Gene
Muhlenpoh. This committee is used as a forum for reviewing and formulating
management recommendations to the Compensation Committee of the Board of
Directors.
MMD and the Board reserves the right to modify or terminate the plan at any
time.
PLAN PARTICIPATION:
MMD associates worldwide whose jobs have been evaluated at the vice
president level or higher and whose performance is deemed satisfactory or
better.
PLAN PAYOUTS:
The plan provides an annual cash payout to participants based on
achievement of individual and team goals. Payouts may vary from target
levels based on manager review and evaluation of performance to goals.
<PAGE> 115
EXHIBIT 11
<TABLE>
<CAPTION>
MARION MERRELL DOW INC. AND SUBSIDIARIES
Exhibit 11-Computation of Earnings per Common and
Common Equivalent Share
(Millions of Dollars, Except for Per Share Data)
Year Ended December 31
-------------------------------------------------
1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------
PRIMARY:
<S> <C> <C> <C> <C> <C>
Net income $ 438 $ 362 $ 706 $ 585 $ 487
Dividends on preferred shares, net of income tax benefits (5) (5) (6) (5) (3)
---- ----- ---- ---- ----
Net income - common stockholders $ 433 $ 357 $ 700 $ 580 $ 484
==== ==== ==== ==== ====
Weighted average number of outstanding common shares 275 274 276 276 278
Number of common shares issuable assuming exercise of
stock options 2 0 1 3 1
---- ---- ---- ---- ----
Weighted average number of outstanding common and
common equivalent shares 277 274 277 279 279
==== ==== ==== ==== ====
Net income - common stockholders $ 433 $ 357 $ 700 $ 580 $ 484
Divided by the weighted average number of outstanding
common and common equivalent shares 277 274 277 279 279
---- ---- ---- ---- ----
Earnings per common and common
equivalent share - primary <1> $1.56 $1.30 $2.53 $2.08 $1.73
==== ==== ==== ==== ====
<FN>
<F1> Earnings per share are computed by dividing net earnings by the weighted average number of outstanding common and common
share equivalents.
</TABLE>
<PAGE> 116
<TABLE>
<CAPTION>
MARION MERRELL DOW INC. AND SUBSIDIARIES
Exhibit 11-Computation of Earnings Per Common and
Common Equivalent Share
(Millions of Dollars, Except for Per Share Data)
Year Ended December 31
----------------------------------------------
1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------
FULLY DILUTED:
<S> <C> <C> <C> <C> <C>
Net income $ 438 $ 362 $ 706 $ 585 $ 487
Less ASOP contribution assumed to be required if
preferred shares are converted into common shares,
net of income tax benefits (5) (5) (6) (5) (3)
As if converted common stock dividends on
preferred stock 3 3 3 3 -
Income tax benefits on common share dividends - - - - -
---- ---- ---- ---- ----
Net income - common stockholders $ 436 $ 360 $ 703 $ 583 $ 484
==== ==== ==== ==== ====
Weighted average number of outstanding common shares 275 274 276 276 278
Number of common shares issuable assuming exercise of
stock options 2 - 1 3 3
Number of common shares issuable assuming conversion
of preferred shares 1 4 3 3 1
---- ---- ---- ---- ----
Weighted average number of outstanding common and
common equivalent shares - assuming full dilution 278 278 280 282 282
==== ==== ==== ==== ====
Net income - common stockholders $ 436 $ 360 $ 703 $ 583 $ 484
Divided by the weighted average number of outstanding
common and common equivalent shares -
assuming full dilution 278 278 280 282 282
---- ---- ---- ---- ----
Earnings per common share - assuming full
dilution <F1> $1.57 $1.30 $2.51 $2.07 $1.72
==== ==== ==== ==== ====
<FN>
<F1> Earnings per share are computed by dividing net earnings by the weighted average number of outstanding common and common
share equivalents.
</TABLE>
<PAGE> 117
EXHIBIT 21
SUBSIDIARIES OF MARION MERRELL DOW INC.
---------------------------------------
Percentage of
Voting Securities
Name and Jurisdiction of Incorporation Owned
- -------------------------------------- -----------------
1. Agri-Chem, Inc. (U.S.-Missouri) 100%
2. Blue Ridge Laboratories, Inc. (U.S.-Delaware) 100%
3. Marion & Company (U.S.-Delaware) 100%
4. Marion Merrell Dow Canada Health Management Inc. 71.4%
(Canada)
5. Clinidata Inc. (Canada) 100%
6. Marion Merrell Dow Canada Inc. (Canada) 100%
7. Canada Pharmacal Limited (Canada) 100%
8. J.C.P. Laboratories Inc. (Canada) 100%
9. Marion Merrell Dow Internacional 50%
Servicios de Gestao LDA (Portugal)
10. MMD International Finance Company (Ireland) 90%
11. Marion Merrell Dow Canada Research Inc. (Canada) 100%
12. MMD International Finance Company (Ireland) 10%
13. Marion Merrell Dow Canada Services Inc. (Canada) 100%
14. Marion Merrell Dow Intercontinental Ltd. 100%
(U.S.-Delaware)
15. Marisub, Inc. (U.S.-Delaware) 100%
16. The Rugby Group, Inc. (U.S.-New York) 100%
17. Chelsea Laboratories, Inc. (U.S.-New York) 100%
18. Chelsea Laboratories Caribe, Inc. 100%
(U.S.-Delaware)
19. M & R Advertising, Inc. (U.S.-Delaware) 100%
20. Modern Wholesale Drug Cleveland, Inc. 100%
(U.S.-Ohio)
21. Modern Wholesale Drug Co. Inc. 100%
(U.S.-New York)
22. Modern Wholesale Drug Company Atlanta 100%
Incorporated (U.S.-Georgia)
<PAGE> 118
23. Modern Wholesale Drug Company Midwest 100%
Incorporated (U.S.-Illinois)
24. Modern Wholesale Drug Company Southern 100%
Incorporated (U.S.-Florida)
25. Modern Wholesale Drug Company Texas, 100%
Inc. (U.S.-Texas)
26. Modern Wholesale Drug Company Western, 100%
Inc. (U.S.-California)
27. Rugby Laboratories, Inc. (U.S.-New York) 100%
28. Marisub V, Inc. (U.S.-Delaware) 82.6%
29. Carderm Capital L.P. (U.S.-Delaware) 84.4%
30. Carderm Investments Inc. (U.S.-Delaware) 100%
31. TWFC, Inc. (U.S.-Delaware) 100%
32. Marisub VII, Inc. (U.S.-Delaware) 100%
33. Merrell Dow Pharmaceuticals Inc. (U.S.-Delaware) 100%
34. Biochimica Del Salento S.p.A. (Italy) 100%
35. Marion Merrell Dow Internacional Servicios 50%
de Gestao LDA (Portugal)
36. Gruppo Lepetit S.p.A. (Italy) 99.95%
37. Gruppo Lepetit Trading Srl (Italy) 100%
38. Hammer Pharma S.p.A. (Italy) 100%
39. Marion Merrell Dow Australia Pty. Limited 100%
(Australia)
40. Marion Merrell Dow Canada Health Management 28.6%
Inc. (Canada)
41. Clinidata Inc. (Canada) 100%
42. Marion Merrell Dow Canada Inc. (Canada) 100%
43. Canada Pharmacal Limited (Canada) 100%
44. J.C.P. Laboratories Inc. (Canada) 100%
45. Marion Merrell Dow Internacional 50%
Servicios de Gestao LDA (Portugal)
46. MMD International Finance Company 90%
(Ireland)
<PAGE> 119
47. Marion Merrell Dow Canada Research Inc. 100%
(Canada)
48. MMD International Finance Company 10%
(Ireland)
49. Marion Merrell Dow Canada Services Inc. 100%
(Canada)
50. Marion Merrell Dow Consumer Products Inc. 100%
(U.S.-Delaware)
51. Marion Merrell Dow et Cie (SNC) (France) .05%
52. Marion Merrell Dow (Europe) A.G. (Switzerland) 100%
53. Carderm Capital L.P. (U.S.-Delaware) 1%
54. Carderm Investments Inc. 100%
(U.S.-Delaware)
55. Marion Merrell Dow GmbH (Germany) 100%
56. Henning Berlin GmbH (Germany) 100%
57. Henning Berlin Anlagen GmbH (Germany) 100%
58. Dynopharm GmbH Pharmaceutica 100%
(Germany)
59. Marion Merrell Dow K.K.(Japan) 98.92%
60. Kopharm, Inc. (U.S.-California) 100%
61. Marion Merrell Dow Limited (United Kingdom) 100%
62. Marion Merrell Dow N.V./S.A. (Belgium) 100%
63. Marion Merrell Dow (N.Z.) Limited 100%
(New Zealand)
64. Marion Merrell Dow Puerto Rico, Inc. 100%
(Puerto Rico)
65. Marion Merrell Dow S.A. (France) 99.85%
66. Marion Merrell Dow et Cie (SNC) (France) 99.95%
67. Marion Merrell Dow S.A. (Spain) 99.90%
68. Marion Merrell Dow Sociedade Quimica, S.A. 100%
(Portugal)
69. Marisub FSC, Inc. (Barbados) 100%
70. Marisub V, Inc. (U.S.-Delaware) 17.4%
71. Carderm Capital L.P. (U.S.-Delaware) 84.4%
<PAGE> 120
72. Carderm Investments Inc. 100%
(U.S.-Delaware)
73. TWFC, Inc. (U.S.-Delaware) 100%
74. Selectide Corporation (U.S.-Delaware) 100%
<PAGE> 121
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the following Registration
Statements of Marion Merrell Dow Inc. of our report dated February 8, 1995
(March 10, 1995 as to the first paragraph of Note 15) (which expresses an
unqualified opinion and includes an explanatory paragraph relating to
changes in methods of accounting for certain investments in debt and equity
securities in 1993 and for postretirement benefits other than pensions and
for income taxes in 1992), which is included in the Annual Report on Form
10-K of Marion Merrell Dow Inc. for the year ended December 31, 1994:
No. 2-80475 on Form S-8 (Nonqualified Employee Stock Option Plan)
No. 33-35133 on Form S-8 (Nonqualified Employee Stock Option
Plan)
No. 33-13706 on Form S-8 (1985 Associate Stock Option Plan)
No. 33-35134 on Form S-8 (1985 Associate Stock Option Plan)
No. 33-37329 and 33-37329-01 on Form S-3 (Associate Stock
Ownership Plan Trust)
No. 33-38221 on Form S-8 (Savings Plan)
No. 33-47983 on Form S-8 (1992 Incentive Compensation Plan)
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
- -------------------------
Kansas City, Missouri
March 27, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF THE REGISTRANT FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 1994 AS
SET FORTH IN THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 95
<SECURITIES> 399
<RECEIVABLES> 680
<ALLOWANCES> 54
<INVENTORY> 323
<CURRENT-ASSETS> 2049
<PP&E> 1364
<DEPRECIATION> 625
<TOTAL-ASSETS> 4100
<CURRENT-LIABILITIES> 1462
<BONDS> 99
<COMMON> 28
0<F1>
0<F1>
<OTHER-SE> 2081
<TOTAL-LIABILITY-AND-EQUITY> 4100
<SALES> 3060
<TOTAL-REVENUES> 3060
<CGS> 984
<TOTAL-COSTS> 984
<OTHER-EXPENSES> 462
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 615
<INCOME-TAX> 163
<INCOME-CONTINUING> 438
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> 438
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
<FN>
<F1>NOT APPLICABLE
</FN>
</TABLE>
