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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
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Commission File Number 333-07063
SMITHKLINE BEECHAM HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0374608
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
1403 Foulk Road, Suite 102, P.O. Box 7108, Wilmington, Delaware 19803-2775
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(302) 479-5801 Securities Registered Pursuant to
Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of class)
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 twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate 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 the 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 X
-----
The aggregate market value of the Registrant's voting stock held by
non-affiliates was $1,150,000,000 as of March 19, 1997.
The number of shares outstanding of Common Stock as of March
19, 1997 was 2,925.2.
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TABLE OF CONTENTS
ITEM NUMBER AND CAPTION
PART I
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Item Pages
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1. Business.......................................................................................... 2-10
2. Properties........................................................................................ 10
3. Legal Proceedings................................................................................. 11
4. Submission of Matters to a Vote of Security Holders............................................... 11
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters......................... 11
6. Selected Financial Data........................................................................... 12
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 13-17
8. Financial Statements and Supplementary Data....................................................... 18-36
9. Disagreements with Accountants on Accounting and Financial Disclosure............................. 37
PART III
10. Directors and Executive Officers of the Registrant................................................ 37-38
11. Executive Compensation............................................................................ 38
12. Security Ownership of Certain Beneficial Owners and Management.................................... 38-39
13. Certain Relationships and Related Transactions.................................................... 39
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. 40-45
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PART I
ITEM 1 BUSINESS
INTRODUCTION
On May 20, 1996, SmithKline Beecham Holdings Corporation (the
"Company") was formed with the intent of holding the stock of certain
subsidiaries of SmithKline Beecham International Co., a Delaware Corporation
("Intco"), SmithKline Beecham Corporation, a Pennsylvania Corporation ("SB
Corp"), and SBCL, Inc., a Delaware Corporation ("SBCL"), (collectively, Intco,
SB Corp and SBCL are referred to as the "Transferors"). The Company, SB Corp,
Intco and SBCL are owned by SmithKline Beecham plc, a public limited company
registered in England ("SmithKline Beecham"). On June 20, 1996, a share exchange
agreement was executed by the Company and the Transferors whereas the
Transferors recorded or otherwise gave full legal effect to transfer to
SmithKline Beecham Holdings Corporation the shares of capital stock of certain
subsidiaries in consideration for shares of common stock and junior preferred
stock of the Company. The principal purpose of the formation of the Company was
to acquire, own and manage certain non-U.S. assets of the Transferors, primarily
in the pharmaceutical business.
On June 28, 1996, the Company filed a registration statement with the
Securities and Exchange Commission in connection with an initial public offering
of Flexible Auction Market Preferred Stock ("AMPS") and Flexible Money Market
Cumulative Preferred Stock ("MMP") (collectively the "Shares"). In a series of
transactions occurring between July 15, 1996 and August 1, 1996, the Company
issued 7,500 shares of the AMPS and 4,000 shares of the MMP. At the option of
the Company, the shares of AMPS and MMP may be redeemed except during the
initial dividend period or any non-call period. The net proceeds from the sale
of the AMPS and MMP were loaned by the Company to other companies owned by
SmithKline Beecham.
On October 18, 1996, the Company formed a new subsidiary, SmithKline
Beecham Holdings Capital Inc. ("Holdings Capital"), a Delaware Corporation. The
principal purpose of the formation of Holdings Capital was to own and manage the
loan portfolio of the Company. In November 1996, the Company contributed $1,147
million of loans receivable to Holdings Capital in consideration for Holdings
Capital common stock.
The Company is a holding company and conducts its operations through
approximately 50 subsidiaries. The Company's primary activities consist of the
manufacture and sale of pharmaceuticals (prescription medicines) and the
manufacture and sale of certain consumer healthcare products, such as
over-the-counter ("OTC") medicines, oral care products and nutritional drinks,
as part of the worldwide business of SmithKline Beecham and its subsidiaries
(collectively SmithKline Beecham and subsidiaries are referred to as the
"SmithKline Beecham Group"). The Company's holdings also include fixed rate
cumulative preferred stock of SmithKline Beecham Biologicals S.A., an indirect
Belgian pharmaceutical subsidiary of SmithKline Beecham ("SB Biologicals"),
having an aggregate redemption price of $650 million (the "SB Biologicals
Preferred Stock"). See Business - SB Biologicals. The Company also engages in
intercompany lending to other companies within SmithKline Beecham Group.
RELATIONSHIP WITH SMITHKLINE BEECHAM AND SUBSIDIARIES
SmithKline Beecham conducts its pharmaceutical and consumer healthcare
businesses on a worldwide basis directly and through subsidiaries, including the
Company and its subsidiaries. The operations of the Company and its subsidiaries
are fully integrated with those of SmithKline Beecham Group as a whole through a
series of intercompany arrangements including purchases and sales of active
ingredients and finished products, product and intellectual property licenses,
intercompany loans and management and shared services agreements. For example,
the Company's manufacturing operations produce certain pharmaceutical and
consumer healthcare products for sale by SmithKline Beecham Group marketing
units worldwide. Other operations produce the raw materials or semi-finished
ingredients which are sold to other SmithKline Beecham Group entities for use in
the manufacture of other products, which may in turn be sold back to the
Company's subsidiaries in finished form for marketing and sale to end users.
SmithKline Beecham Group also supplies a substantial portion of the raw
materials used by the Company in manufacturing finished products. In addition,
the Company and other members of SmithKline Beecham Group generally share the
results of their research and development efforts through mutual licensing
agreements or arrangements.
SmithKline Beecham has committed not to dispose of any shares of Common
Stock of the Company so long as any Shares are outstanding. If however, at any
time, SmithKline Beecham shall cease to own, directly or indirectly, shares of
the common stock of the Company representing more than 50.0 percent of the
voting power of all outstanding
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common shares, the AMPS and MMP securities will be subject to mandatory
redemption in whole, at a redemption price of $100 thousand per share plus
accumulated and unpaid dividends. In addition, SmithKline Beecham's policy is
that the Company will have sufficient earnings and profits to pay dividends on
the Shares, and sufficient assets to perform its obligations with respect to the
Shares. This policy does not constitute a guarantee or other legal obligation.
See Business - Guarantee and Support Arrangements.
While there may be no direct correlation between the financial results
of the Company and those of SmithKline Beecham in any particular period, the
overall performance of the Company is interdependent with the performance of
other units of SmithKline Beecham Group. Moreover, the Company is dependent upon
other members of SmithKline Beecham Group with respect to new product
development, the addition of any resulting new products to the Company's product
line and the expansion of the Company's marketing and distribution activities.
The Company believes that the agreements and arrangements between the
Company and its subsidiaries, on the one hand, and other members of SmithKline
Beecham Group, on the other hand, are on arm's length terms. There can be no
assurance that the Company or its subsidiaries will be requested to produce or
market any particular product or to engage in any particular business of
SmithKline Beecham Group, or that any existing business relationship between the
Company and its subsidiaries, on the one hand, and other members of SmithKline
Beecham Group, on the other hand, will not be modified or terminated. SmithKline
Beecham will have the ability to modify or terminate business relationships
affecting the Company without seeking the approval of the holders of Shares.
The Company and SmithKline Beecham have entered into a number of
arrangements relating to the ongoing relationship between them. The Company and
SmithKline Beecham believe that such arrangements and transactions, taken as a
whole, accommodate the parties' interests in a manner that is fair to both
parties and their respective economic interests, and that the terms and
conditions of such arrangements are consistent with those that would result from
arm's length dealings.
General Services Agreement
The Company, SmithKline Beecham and SB Corp entered into a management
and services agreement (the "General Services Agreement") under which SmithKline
Beecham and SB Corp provide executive management services to the Company.
The General Services Agreement also provides that SmithKline Beecham,
SB Corp and certain of their subsidiaries will provide various services to the
Company. Such services include executive management, legal, corporate
accounting, tax, treasury, internal audit, information resources, corporate
affairs and risk management. In addition to the other services provided under
the General Services Agreement, SmithKline Beecham will continue to provide the
Company with insurance coverage under SmithKline Beecham's policies and self
insurance programs as long as SmithKline Beecham owns all the outstanding Common
Stock of the Company. Such insurance includes coverage for public liability,
worker's compensation, environmental impairment liability, property damage,
business interruption, directors' and officers' liability, criminal liability,
fiduciary liability and surety bonds. The charge to the Company for such
insurance will constitute an allocation of the costs of SmithKline Beecham of
maintaining the various policies. This charge will be renegotiated annually
based upon SmithKline Beecham's cost for the insurance and the Company's loss
experience.
The Company may terminate any type of service which it receives under
the General Services Agreement at any time upon 60 days prior written notice.
The Company will reimburse SmithKline Beecham for reasonable charges for
services under the General Services Agreement. The annualized service charge for
1996 was approximately $1 million.
The Company, like other members of SmithKline Beecham Group, is party
to a number of shared service arrangements with other members of SmithKline
Beecham Group, including human resources, information resources and finance. The
amounts paid by members of SmithKline Beecham Group, including the Company, for
such shared services are generally determined by allocating the full cost of the
services based on the usage by the SmithKline Beecham Group member.
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Product Agreements
Within SmithKline Beecham Group, there are a number of supply and
license agreements between and among SmithKline Beecham and its subsidiaries,
including the Company and its subsidiaries. The historical financial information
in the Consolidated Financial Statements reflects the financial effect of these
arrangements. Generally such arrangements are subject to termination on notice
of 30 to 180 days without provision for compensation with regard to such
termination. Product sale prices are typically based on an estimate of market
prices and a reasonable margin for the purchaser. The Company's subsidiaries pay
royalties to SmithKline Beecham Group based on a percentage of the Company's
third party sales for numerous products, based on patent, trademark, know-how or
other intellectual property rights retained by SmithKline Beecham Group. As a
general matter, the Company and its subsidiaries do not have license or
distribution rights to new SmithKline Beecham products within their respective
geographic markets.
Intercompany Finance
A substantial portion of the Company's assets, and interest income
consist of or are derived from loans made by the Company to other members of
SmithKline Beecham Group. The aggregate principal amount of loans made by the
Company to members of SmithKline Beecham Group (other than the Company's
subsidiaries), outstanding at December 31, 1996 and 1995 were $1,929 and $1,144
million, respectively, and the Company recorded interest income of $60 and $33
million, respectively, on such loans for each of the years ended December 31,
1996 and 1995. The Company increased the amount of these loans substantially by
lending a significant portion of the proceeds of the preference share offering
to members of the SmithKline Beecham Group. Such new loans are fully and
unconditionally guaranteed by SmithKline Beecham. The intercompany loans will
generally mature within one year and bear interest at rates based upon the
London Interbank Offered Rate ("LIBOR"), such rates will, in the Company's view,
be no less favorable to the Company in the aggregate than those offered by third
parties for similar loans.
Guarantee and Support Arrangements
SmithKline Beecham unconditionally and irrevocably guarantees (the
"Guarantee") the due and punctual payment by the Company of dividends on the
Shares to the extent that such dividends have been declared by the Company's
Board of Directors out of funds legally available therefore and remain unpaid,
and entered into a support agreement with the Company which will require it to
make additional capital contributions to the Company (the "Support Agreement")
in certain circumstances. The rights of holders of Shares under the Guarantee
are limited and subordinated to the rights of other creditors of SmithKline
Beecham. Similarly, the rights of the Company under the Support Agreement are
subordinated to the rights of other creditors of SmithKline Beecham. SmithKline
Beecham will in no event be required to make any payment pursuant to the
Guarantee or to make, or cause to be made, a capital increase under the Support
Agreement at any time in an amount that would exceed the adjusted distributable
reserves of SmithKline Beecham at such time. See Form of Guarantee of SmithKline
Beecham plc and Form of Support Agreement of SmithKline Beecham plc previously
filed as Exhibit 4.3 and 4.4, respectively, to Registration Statement No.
333-07063 on Form F-3.
In addition, SmithKline Beecham's obligations under the Support
Agreement are limited initially to an aggregate amount of $3 billion, which
shall be increased to a limited extent if the aggregate liquidation preference
of the Shares issued by the Company exceeds $1,150 million, and will be reduced
to the extent of any payments made under a similar support agreement for SB
Biologicals. See Business - SB Biologicals. The Support Agreement is not a
guarantee by SmithKline Beecham of any obligation, liability or indebtedness of
the Company, including the Shares. SmithKline Beecham will not, by virtue of the
Support Agreement, have any obligation or liability to any holder of Shares and,
accordingly, the Support Agreement is not enforceable directly by any such
holder.
SB Biologicals
The Company's assets include 53,629 shares of Class A 6.5% preferred
shares of SB Biologicals with an aggregate liquidation preference of $550
million and 2,627,821 shares of Class B 5.5% preferred shares of SB Biologicals
with an aggregate liquidation preference of $100 million. All of SB Biologicals'
common stock is owned indirectly by SmithKline Beecham. The SB Biologicals
preferred stock is redeemable at the option of SB Biologicals at an aggregate
redemption price of $650 million, and represents, in the aggregate, 50% of the
combined voting power of all classes of capital stock of SB Biologicals. There
are no other preferred shares of SB Biologicals outstanding.
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SB Biologicals is a vertically integrated company engaged in the
research and development, manufacture, marketing and selling of the full range
of SmithKline Beecham vaccine products. SB Biologicals sells directly to certain
categories of customers and to customers located in certain countries; in
others, vaccine products are sold to SmithKline Beecham affiliates on an
intercompany basis.
In connection with the issuance of the SB Biologicals preferred stock,
SmithKline Beecham issued a guarantee (the "SB Biologicals Guarantee"), pursuant
to which SmithKline Beecham has guaranteed the payment to the Company by SB
Biologicals of dividends declared by SB Biologicals on the shares of SB
Biologicals preferred stock held by the Company, and entered into a support
agreement (the "SB Biologicals Support Agreement"), under which SmithKline
Beecham agreed to make additional capital contributions to SB Biologicals in
certain circumstances in order to enable SB Biologicals to declare and pay
dividends on the SB Biologicals preferred stock. The terms and provisions of the
SB Biologicals Guarantee and the SB Biologicals Support Agreement are
substantially identical to those of the Guarantee and the Support Agreement,
respectively. See Form of Guarantee of SmithKline Beecham plc and Form of
Support Agreement of SmithKline Beecham plc previously filed as Exhibit 4.3 and
4.4, respectively, to Registration Statement No. 333-07063 on Form F-3. The
obligations of SmithKline Beecham under the SB Biologicals Support Agreement is
limited to an aggregate amount of $1 billion. The SB Biologicals Support
Agreement is not a guarantee of any obligation, liability or indebtedness of SB
Biologicals, including the SB Biologicals preferred stock. Accordingly,
SmithKline Beecham does not, by virtue of the SB Biologicals Support Agreement,
have any obligation to the Company or any holder of the SB Biologicals preferred
stock, and the SB Biologicals Support Agreement is not enforceable directly by
the Company or any such holder.
BUSINESS SEGMENTS
The Company operates in two business segments: pharmaceutical and
consumer healthcare. For financial information about business segments, see Note
13 to Consolidated Financial Statements.
PRODUCTS
Pharmaceuticals
In 1996 and 1995, the Company's total pharmaceutical sales were $1,243
million and $1,445 million or approximately 83 percent and 85 percent of total
sales, respectively. Approximately 83 percent of these sales were made outside
of SmithKline Beecham Group in 1996 compared to 78 percent in 1995.
The Company's main anti-infective products marketed and sold to third
parties are AUGMENTIN (amoxicillin and potassium clavulanate), a leading
broad-spectrum anti-infective against many penicillin-resistant organisms, and
AMOXIL (amoxicillin), another antibiotic with a wide range of applications. The
leading vaccine products are ENGERIX-B, a hepatitis B vaccine, and HAVRIX, a
hepatitis A vaccine. During 1996 and 1995, the Company's antibiotic and vaccines
business accounted for approximately 67 and 72 percent, respectively, of its
third party pharmaceutical sales.
SEROXAT (paroxetine), belonging to the class of selective seratonin
reuptake inhibitors ("SSRI"), a treatment for depression, panic disorder and
anxiety, is the Company's leading neuroscience product. Sales of neuroscience
products represented approximately 14 and 8 percent, respectively, of the
Company's third party pharmaceuticals sales during 1996 and 1995.
TAGAMET (cimetidine), an H2 receptor antagonist product used in the
treatment of ulcer and other gastrointestinal disease, is the Company's
principal gastrointestinal product. Sales of gastrointestinal products
represented approximately 12 percent of the Company's third party
pharmaceuticals sales during 1996 and 1995.
Consumer Healthcare
The Company markets a varied range of OTC medicines, nutritional drinks
and oral care products. During 1996 and 1995, the Company's consumer healthcare
sales amounted to $261 and $253 million, respectively, or approximately 17 and
15 percent, respectively, of total sales, substantially all of which were made
to third parties.
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The Company's OTC medicines include a range of respiratory tract,
gastrointestinal and analgesic medicines, skin care products, vitamins and
natural medicines. The most significant of these products are CONTAC, for the
treatment of colds and influenza; ENO, an effervescent antacid; SONRISAL, an
antacid, and SYNTHOL, a dermatological product. Leading oral care products
include AQUAFRESH and ODOL. The principal nutritional drink product is LUCOZADE,
a glucose-based energy replacement drink.
PRINCIPAL MARKETS
The Company's sales are made throughout the world, the principal
markets being France, Brazil, Portugal, Ireland, Africa, Austria, Switzerland
and Japan. Sales in these countries together accounted for approximately 75 and
78 percent of the Company's sales during 1996 and 1995, respectively. France is
the most important country for the sale of the Company's prescription medicines,
with total sales in France accounting for approximately 36 and 40 percent of the
Company's total sales during 1996 and 1995, respectively. See Note 13 to the
Consolidated Financial Statements.
PRODUCTION
SmithKline Beecham's prescription medicines are manufactured at its
bulk chemical and secondary pharmaceuticals production facilities. The Company
is involved in both types of manufacturing.
Bulk chemical production involves the manufacture, in quantity, of
therapeutically active compounds, principally through the application of
chemical synthesis or biologicals processes, such as fermentation. The Company's
principal bulk chemical production operations are located in Ireland and
Singapore.
Production facilities for prescription drugs and OTC products are
engaged in the formulation of active ingredients and packaging into finished
dosage forms, including oral dosage forms, such as capsules, syrups and tablets,
and injectable dosage forms. The Company maintains its principal production
plants in France, Brazil, Austria, and Pakistan.
The Company or other members of SmithKline Beecham Group manufacture
most of the active ingredients contained in the Company's pharmaceutical
products and therefore the Company is generally not dependent on third-party
suppliers for these materials. The Company procures CONTAC for the Japanese
market and toothbrushes from third party manufacturers.
Approximately $240 million, or 16 percent, of the Company's total sales
were derived from production activities for members of SmithKline Beecham Group
(other than the Company's subsidiaries) in 1996.
MARKETING AND DISTRIBUTION
The Company sells its prescription medicines primarily to wholesale
drug distributors, independent and chain retail drug outlets, physicians,
hospitals, clinics, government entities and other institutions. These products
are ordinarily dispensed to the public through pharmacies on the prescription of
a physician. Promotion of these products is directed primarily to physicians,
hospitals and pharmacists through personal visits by sales representatives
employed by the Company. Promotion of these products is supplemented by
scientific seminars, advertising in medical and other journals, the provision of
samples and the direct mailing of printed material.
The Company's OTC and oral care products are distributed to retail
outlets directly or through wholesalers who are not necessarily drug
specialists. Methods of selling are constantly under review to take advantage of
changes in market conditions.
Distribution of nutritional drinks is made to a wide selection of
outlets, either directly or through wholesalers. The organization of the selling
teams is very dependent on the outlet pattern of individual countries. Consumer
acceptance of the products is supported by specific advertising associated with
outlet promotions.
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COMPETITION
The pharmaceutical industry is highly competitive. The principal
competitors of the Company are large international companies with substantial
resources operating in a worldwide marketplace. Some of these companies and
their major competing products are mentioned below. As an affiliate of one of
the largest pharmaceutical companies in the world, the Company believes it has
access to the resources to compete effectively and efficiently in those markets
and for the products for which its serves as the SmithKline Beecham marketing
organization.
A drug may be subject to competition from alternative therapies during
the period of patent protection and thereafter from generic copies. The
manufacturers of generic products typically do not bear the related research and
development costs and consequently are able to offer such products at
considerably lower prices than the branded equivalents. A research and
development-based pharmaceutical company will therefore normally seek to achieve
a sufficiently high profit margin and sales volume during the period of patent
protection to justify the original investment and to fund research for the
future. There are, however, a number of factors which enable products to remain
profitable once patent protection has ceased. These include the establishment of
a strong brand image with the prescriber or the consumer, supported by an active
trademark registration and enforcement policy, and the development of a broader
range of alternative formulations than the manufacturers of generic products
typically supply.
As is the case for the pharmaceutical industry in general, the
introduction of new products and processes by competitors may affect pricing
levels or result in product replacement for existing products, and there can be
no assurance that any of the Company's products may not become outmoded,
notwithstanding patent or trademark protection. In addition, increasing
governmental and other pressure towards the dispensing of generic products in
substitution for brand-name drugs may increase competition for products no
longer covered by patents.
Major products competing with the Company's semi-synthetic penicillins
(AUGMENTIN and AMOXIL) are other anti-infectives, including, but not limited to,
generic brands, cephalosporins and, to an increasing degree, quinolones. AMOXIL,
the Company's second largest selling product in 1996, has been without patent
protection for a number of years and is subject to competition from generic
brands. SEROXAT's major competitors in the SSRI market are Prozac from Eli
Lilly, Zoloft from Pfizer and Efexor from Wyeth-Ayerst. TAGAMET faces
competitions from generic cimetidine products and other branded H2 receptor
antagonists, including Zantac from Glaxo Wellcome and Pepcid from Merck.
Competition from generic products generally occurs as patents in major
markets expire; in other markets the absence of patent protection permits
generic competition shortly after product launch. Strenuous efforts to counter
the effects of this competition are directed at three main areas: first, the
introduction of new ranges of products into as many markets as possible, second,
accelerating the process by which new compounds under development are brought to
the market, and third, increasing brand awareness among consumers. Ultimately,
the Company believes that its competitive position in the markets in which its
prescription drugs compete, is dependent upon the discovery and development of
new products, together with effective marketing of existing and future products.
The major competitors in the consumer healthcare markets are Procter
and Gamble, Colgate-Pamolive, American Home Products, Unilever, Rhone Poulenc
Rorer, Bristol Myers Squibb, Warner Lambert and Johnson & Johnson. All of these
companies are major international companies and continue to be extremely active
in what is a highly competitive market. In addition, there are many other large
and small companies which compete with the Company in selected markets.
The consumer healthcare business of the Company has grown through the
development of high quality branded products with good consumer acceptance,
supported by advertising and brand promotion, line extensions, new formulations
and packaging innovations. The Company's ability to compete effectively is
dependent on its skills in developing new scientifically supported products and
line extensions with performance superior to those of its competitors.
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RESEARCH AND DEVELOPMENT ("R&D")
The Company conducts no significant research and development activities
and is dependent upon SmithKline Beecham Group for such activities. A discussion
of SmithKline Beecham Group's research and development activities follows.
SmithKline Beecham's principal pharmaceutical research and development
activities are conducted in the U.S., the U.K., Belgium, Japan, France, Italy
and Spain. The largest R&D centers are located in the U.S. and the U.K. During
1996, construction of the first phase was completed at the new R&D facilities at
Harlow, U.K. The occupation of the new facilities marks the achievement of a
long-standing goal to bring together the majority of SmithKline Beecham's U.K.
research and development activities on one site.
SmithKline Beecham Group's total expenditure for pharmaceutical
research and development amounted to $1,097 million in 1996 compared to $935
million in 1995 and $813 million in 1994. In 1996, $287 million of capital
expenditure was incurred on R&D, principally in the U.K.
SmithKline Beecham Group's objective is to maintain leadership
positions in the areas of its traditional strengths, while at the same time
increasing the number and broadening the range of products in other key
therapeutic areas. However, the high cost of developing new medicines precludes
SmithKline Beecham Group, like other pharmaceutical companies, from entering
into the full spectrum of medical research. As a result, SmithKline Beecham
Group is constantly looking beyond its own research capacity to ensure timely
access to new product opportunities and emerging technologies. The SmithKline
Beecham Group's R&D effects in genomic research combined with activities in
combinatorial chemistry and automated high-throughput molecular screening
technologies promise to generate an unparalleled pool of drug candidates over
the next few years.
In response to the alarming growth of antibiotic-resistant bacteria and
the emerging risk of new epidemics, SmithKline Beecham implemented a new
organizational structure for its worldwide anti-infectives Discovery
organization and entered into a bacterial genome collaboration with Glaxo
Wellcome. SmithKline Beecham Group's goal is to identify and register at least
two entirely new classes of antibiotic within the next seven years.
For SmithKline Beecham to maintain its competitive edge in R&D,
innovation and speed in drug discovery need to be complemented by an
acceleration of the development process. SmithKline Beecham's goal is to
substantially reduce cycle time for developing high potential compounds. Once
developed, the products need to be quickly brought to market. To facilitate
this, transnational regulatory initiatives are also being implemented.
SmithKline Beecham Group is focusing on four therapeutic areas:
neurosciences; inflammation and tissue repair; anti-infectives and biologicals
(vaccines); and cardiopulmonary. Worldwide research is organized on a matrix
system, with research units focusing either on a specific therapeutic area, such
as neuroscience, or in core technologies, such as biotechnology, that are
applicable to all therapeutic areas.
INTELLECTUAL PROPERTY
The Company is dependent upon SmithKline Beecham Group for intellectual
property rights in connection with its products, principally by way of licensing
agreements.
Patents
SmithKline Beecham Group has obtained patents in many countries for the
significant products discovered or developed throughout its research and
development activities. Patent protection is available in the U.S., the U.K.,
Japan and most other developed countries for new active ingredients, as well as
for pharmaceutical formulations, manufacturing processes or uses. In certain
other countries, patent protection is available only for manufacturing
processes.
The Company has patent protection through licensing agreements with
other members of SmithKline Beecham Group for one or more forms of most of its
important existing pharmaceutical products in its major markets and, also
through SmithKline Beecham Group, either has obtained patents or anticipates
that patent protection will be granted for the new drugs which are under
development. However, the absence of effective patent protection for
pharmaceuticals in
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some developing countries continues to have an adverse effect on pharmaceutical
companies, including the Company, that conduct business in those countries.
The patent expiry date for the active ingredient in SEROXAT is on or
after 2005 in major countries around the world. The patent situation on
potassium clavulanate (AUGMENTIN) is complex. Although patents on the compound
expired in some markets in 1995, patent extension regulations in France provide
protection beyond 2000. Useful secondary protection in important markets also
lasts until 2000 or beyond. The patent on AMOXIL has expired. Patents on TAGAMET
(cimetidine) have expired in most countries. The patent positions on ENGERIX-B
and HAVRIX are complex but in general, the Company believes that key patents for
both products will extend into the next decade.
Trademarks
All of the Company's significant pharmaceutical products in its major
markets are protected by registered trademarks in its major markets held by
SmithKline Beecham Group. SmithKline Beecham Group pursues a policy of enforcing
its trademark rights vigorously against infringements and other unauthorized
uses. These trademarks are used in many countries, although there may be local
variations for each of these trademarks.
Trademark protection continues in some countries as long as a trademark
is used and, in other countries as long as a trademark is registered. The
Company's trademark rights with respect to a pharmaceutical product generally
assumes increasing importance when the patent for such product expires.
The Company's consumer healthcare businesses are brand-oriented, and
therefore the Company considers trademark rights for these products to be of
particular value. Most of its consumer brands are protected by trademarks held
by SmithKline Beecham Group in the majority of the markets where those brands
are sold and SmithKline Beecham Group vigorously protects these trademarks from
infringement.
REGULATIONS
The international pharmaceutical industry is highly regulated. National
drug regulatory authorities administer numerous laws and regulations governing
the testing, approval, manufacturing, importing, labeling and marketing of drugs
and also review the safety and efficacy of pharmaceutical products. Consumer
healthcare products are subject to similar laws, regulations and review. These
regulatory requirements are a major factor in determining whether a substance
can be developed into a marketable product and can also determine the amount of
time and expense associated with such development.
The national regulatory authorities in many countries, including those
of continental Europe and Japan, have high standards of technical appraisal and,
consequently, the introduction of new pharmaceutical and consumer healthcare
products generally entails a lengthy approval process. Of particular importance
is the requirement in all major countries that products be authorized or
registered prior to marketing and that such authorization or registration be
subsequently maintained. The Company anticipates that the introduction of new
products will continue to require substantial effort, time and expense in order
to comply with applicable regulatory requirements. National regulatory
authorization is also required to approve the switch of products from
prescription to OTC use. The process required to switch products from
prescription to OTC use requires a number of basic requirements. These include
the long-term experience of the quality, safety and efficacy of the product in a
wide patient population and data to confirm that the relevant condition is both
self-limiting and can easily be diagnosed by the patient.
The European Medicines Evaluation Agency has been established in the
U.K. and has been operational from January 1, 1995. From that date, two new
registration systems, the Centralized Procedure and the Decentralized Procedure,
have been introduced. Both of these procedures can lead to a binding decision
allowing a new product to be marketed simultaneously in all European Union
countries.
The overall cost of providing healthcare services has been and will
continue to be subject to review. Prices for products are sometimes subject to
direct price controls and drug reimbursement programs which have varying price
control mechanisms. Elsewhere, in many countries the prices of
9
<PAGE> 11
pharmaceutical products are controlled by law. In some countries, such as
France, the prices of individual products are regulated. Governments may also
influence the prices of pharmaceutical products through their control of
national healthcare organizations which may bear a large part of the cost of
supply of such products to consumers.
At the end of 1995, the French government imposed a special aggregate
contribution of $500 million on the pharmaceutical industry, which was aimed at
reducing the social security deficit. The Company paid its portion of this
special contribution in 1996. In April 1996, the French government announced a
series of measures to curb doctor prescribing. These measures established a
global ceiling on healthcare expenditure which allowed a total increase in 1996
spending of 2.1 percent over 1995. The global ceiling set for 1997 allows a 2.0
percent increase over 1996. The previously negotiated Convention (a price
contract agreement between industry and government) expired on December 31,
1996. A new Convention, running from 1997-1999, is expected to be finalized
early in 1997.
The Company is unable to predict whether, and the extent to which, its
business may be affected in the future by legislative and regulatory
developments relating to specific products and to the pricing of such products.
ENVIRONMENTAL MATTERS
SmithKline Beecham Group has a worldwide program of corporate
environmental standards. These standards ensure that environmental protection is
a key business objective and they detail the purpose, scope, procedures and
responsibilities of every environmental concern throughout SmithKline Beecham
Group's worldwide operations. The Company is committed to adhering to these
standards and to being an environmentally responsible member in the local,
national and worldwide community in which it operates.
The Company believes that its operations comply in all material
respects with applicable environmental laws and regulations. Although the
Company makes ongoing capital expenditures for environmental protection
equipment, as well as cash expenditures for site remediation and the operation
and maintenance of environmental facilities, it does not anticipate any such
expenditures to have a material impact upon the Company's capital expenditures,
cash flow or financial position.
The Company does not expect that its liability for environmental
matters will have a material impact on its financial condition, results of
operations or liquidity.
EMPLOYEES
On December 31, 1996, the Company and its subsidiaries had
approximately 5,000 employees. Employees in several countries, including France,
are represented by unions or work councils. The Company's subsidiaries have not
experienced any material work stoppages in recent years, and they consider their
employee relations to be good.
NON-U.S. OPERATIONS
Non-U.S. operations of the Company and its subsidiaries are subject in
varying degrees to a number of risks inherent in conducting business outside of
the United States. These include fluctuating currency exchange rates and the
possibility of nationalization, expropriation or restrictive actions by local
governments. The Company, in general, does not currently consider these factors
to be deterrents to maintaining or expanding such operations.
ITEM 2 PROPERTIES
The Company's headquarters and principal executive offices are located
at 1403 Foulk Road, Wilmington, Delaware.
The Company owns or leases nine production facilities, with its
principal facilities being located in France, Ireland, Singapore and Brazil.
10
<PAGE> 12
ITEM 3 LEGAL PROCEEDINGS
The Company is involved in various legal and administrative proceedings
considered normal to its business, including suits claiming damages as a result
of the use of the Company's products and other matters. Although the outcome of
claims, legal proceedings and other matters in which the Company is involved
cannot be predicted with any certainty, the Company does not expect its ultimate
liability for such matters to have a material adverse effect on its financial
condition, results of operations or liquidity.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is not traded nor listed on any stock
exchange and is indirectly wholly owned by SmithKline Beecham.
11
<PAGE> 13
ITEM 6 SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected financial data of the
Company for the five years in the period ended December 31, 1996. The historical
selected financial data of the Company as of and for each of the years ended
December 31, 1996, 1995, and 1994, are derived from the audited consolidated
financial statements of the Company included elsewhere in this report. The
selected consolidated financial data as of and for the year ended December 31,
1993 is derived from the audited financial statements of the Company not
included herein. The selected financial data as of and for the year ended
December 31, 1992 was derived from unaudited financial statements of the Company
and, in the opinion of management, includes all adjustments (consisting only of
normal recurring adjustments) which are necessary to present fairly the results
of operations and the financial position of the Company in accordance with
generally accepted accounting principles. The selected financial data should be
read in connection with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
(IN MILLIONS)
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
STATEMENT OF OPERATIONS DATA: (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales .......................... $ 1,504 $ 1,698 $ 1,490 $ 1,281 $ 1,221
Operating costs and expenses:
Cost of sales .................... 766 867 783 629 607
Marketing, administrative and
general ........................ 466 531 449 412 388
Research and development ......... 21 22 18 16 14
Restructuring .................... 57 60 -- -- --
------- ------- ------- ------- -------
Operating income ................... 194 218 240 224 212
Non-operating income (expense):
Interest expense ................. (2) (3) (13) (19) (22)
Interest income .................. 62 33 20 33 35
Minority interests ............... (32) (45) (45) (42) (52)
Equity in net income of affiliates 18 21 9 20 21
Other, net ....................... (29) (5) 19 (5) --
------- ------- ------- ------- -------
Income before income taxes ......... 211 219 230 211 194
Provision for income taxes ......... 89 109 81 61 87
------- ------- ------- ------- -------
Net income ......................... $ 122 $ 110 $ 149 $ 150 $ 107
======= ======= ======= ======= =======
Ratio of earnings to combined fixed
charges and preferred stock
dividends ....................... 3.5x 50.3x 16.7x 10.5x 8.5x
</TABLE>
<TABLE>
<CAPTION>
(IN MILLIONS)
AT DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (UNAUDITED)
Total assets ....................... $ 3,526 $ 2,615 $ 1,853 $ 1,582 $ 1,487
Total liabilities .................. 866 1,182 731 688 696
Net intercompany loans receivable .. 1,806 676 265 139 71
Total shareholders' equity ......... 1,518 1,433 1,122 894 791
</TABLE>
12
<PAGE> 14
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
On May, 20, 1996, SmithKline Beecham Holdings Corporation (the
"Company") was formed with the intent of holding the stock of certain
subsidiaries of SmithKline Beecham International Co., a Delaware Corporation
("Intco"), SmithKline Beecham Corporation, a Pennsylvania Corporation ("SB
Corp"), and SBCL, Inc., a Delaware Corporation ("SBCL"), (collectively, Intco,
SB Corp and SBCL are referred to as the "Transferors"). The Company, SB Corp,
Intco and SBCL are owned by SmithKline Beecham plc, a public limited company
registered in England ("SmithKline Beecham"). On June 20, 1996, a share exchange
agreement was executed by the Company and the Transferors whereas the
Transferors recorded or otherwise gave full legal effect to transfer to
SmithKline Beecham Holdings Corporation the shares of capital stock of certain
subsidiaries in consideration for shares of common stock and junior preferred
stock of the Company. The principal purpose of the formation of the Company was
to acquire, own and manage certain non-U.S. assets of the Transferors, primarily
in the pharmaceutical business. The Company also engages in intercompany lending
to other companies of SmithKline Beecham.
The Company is a holding company and conducts its operations through
approximately 50 subsidiaries. The Company's holdings also include fixed rate
cumulative preferred stock of SmithKline Beecham Biologicals S.A., an indirect
Belgian pharmaceuticals subsidiary of SmithKline Beecham ("SB Biologicals"),
having an aggregate redemption price of $650 million (the "SB Biologicals
Preferred Stock"). See Business - SB Biologicals. The Company's primary
activities consist of the manufacture and sale of pharmaceuticals (prescription
medicines) and the manufacture and sale of certain consumer healthcare products,
such as over-the-counter ("OTC") medicines, oral care products and nutritional
drinks, as part of the worldwide business of SmithKline Beecham and its
subsidiaries (collectively "SmithKline Beecham Group").
The international pharmaceutical industry is highly regulated. National
drug regulatory authorities administer numerous laws and regulations governing
the testing, approval, manufacturing, importing, labeling and marketing of drugs
and also review the safety and efficacy of pharmaceutical products. The Company
is unable to predict whether, and the extent to which, its business may be
affected in the future by legislative and regulatory developments relating to
specific products and to the pricing of such products.
The operations of the Company are conducted in international markets
and therefore the consolidated financial results of the Company are subject to
exchange rate fluctuation involving the United States dollar and a number of
foreign currencies. The functional currency for the majority of the Company's
foreign operations is the applicable local currency. The principal functional
currencies of the Company's non-US operations are French franc, Japanese yen,
British pound, Singapore dollar, Belgian franc, Canadian dollar, Swiss franc and
the Irish punt. The Company also makes loans to affiliated companies,
denominated in the functional currency of the affiliate. The Company's foreign
subsidiaries enter into foreign exchange contracts to hedge against fluctuating
exchange rates for certain transactions. All such transactions are undertaken to
manage the risks arising from underlying business activity, rather than to
speculate. The Company's operations in Brazil and Venezuela operate in highly
inflationary economies and are re-measured as if the functional currency were
the U.S. dollar. Inflation in more highly developed economies is at reduced
levels in recent years. However, inflation continues to raise the cost of goods
and services used by the Company. Although the Company attempts to fully recover
higher costs through increased selling prices, the competitive environment as
well as government health policy in certain major markets may restrict this
ability. The Company is unable to predict what effect inflation and pricing
restrictions may ultimately have on its business.
While there may be no direct correlation between the financial results
of the Company and those of SmithKline Beecham in any particular period, the
overall performance of the Company is interdependent with the performance of
other units of SmithKline Beecham Group. Moreover, the Company is dependent upon
other members of SmithKline Beecham Group with respect to new product
development, the addition of any resulting new products to the Company's product
line and the expansion of the Company's marketing and distribution activities.
13
<PAGE> 15
Results of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
SALES
Pharmaceuticals $1,243 $1,445 $1,285
Consumer Healthcare 261 253 205
------ ------ ------
Total sales $1,504 $1,698 $1,490
====== ====== ======
OPERATING INCOME
Pharmaceuticals $ 151 $ 201 $ 225
Consumer Healthcare 43 17 15
------ ------ ------
Total operating income $ 194 $ 218 $ 240
====== ====== ======
</TABLE>
The descriptions below of the Company's two principal business segments
- - pharmaceuticals and consumer healthcare - summarize the Company's role in
SmithKline Beecham Group and should be read in conjunction with the description
of SmithKline Beecham's business contained in SmithKline Beecham's Form 20-F.
The Company's pharmaceuticals segment, in conjunction with other
members of SmithKline Beecham Group, manufactures and sells prescription
medicines concentrated in three therapeutic areas: anti-infectives/biologicals
(vaccines), gastrointestinal and neurosciences. The Company's pharmaceuticals
sales represented approximately 83 and 85 percent of total sales for the years
ended December 31, 1996 and 1995, respectively.
The Company's main anti-infective products marketed and sold to third
parties are AUGMENTIN (amoxicillin and potassium clavulanate), a leading
broad-spectrum anti-infective against many penicillin-resistant organisms, and
AMOXIL (amoxicillin), another antibiotic with a wide range of applications. The
leading vaccine products are ENGERIX-B, a hepatitis B vaccine, and HAVRIX, a
hepatitis A vaccine. During 1996 and 1995, the Company's
anti-infectives/biologicals business accounted for approximately 67 and 72
percent of its third party pharmaceuticals sales, respectively.
SEROXAT (paroxetine), belonging to the class of selective seratonin
reuptake inhibitors, is a treatment for depression and anxiety and for panic
disorder. SEROXAT is the Company's leading neurosciences product. Sales of
neuroscience products represented approximately 14 percent of the Company's
third party pharmaceuticals sales during 1996 and 8 percent during 1995.
TAGAMET (cimetidine), an H2 receptor antagonist product used in the
treatment of ulcer and other gastrointestinal disease, is the Company's
principal gastrointestinal product. Sales of gastrointestinal products
represented approximately 12 percent of the Company's third party
pharmaceuticals sales during 1996 and 1995.
SmithKline Beecham's prescription medicines are manufactured at its
bulk chemical and secondary pharmaceutical production facilities. The Company is
involved in both types of manufacturing.
Bulk chemical production involves the manufacture of therapeutically
active compounds, principally through the application of chemical synthesis or
biological processes, such as fermentation. The Company's principal bulk
chemical production operations are located in Ireland and Singapore.
The Company or other members of SmithKline Beecham Group manufacture
most of the active ingredients contained in the Company's pharmaceutical
products and therefore the Company is generally not dependent on third-party
suppliers for these materials.
The Company's consumer healthcare segment markets a varied range of OTC
medicines, nutritional drinks and oral care products. During 1996 and 1995, the
Company's consumer healthcare sales were approximately 17 percent and 15 percent
of total sales, respectively.
14
<PAGE> 16
FISCAL YEARS 1996 AND 1995 (GROWTH AMOUNTS AND RATES ARE AT COMPARABLE EXCHANGE
RATES UNLESS OTHERWISE STATED.)
The Company's sales for 1996 decreased $194 million, or 11 percent, at
actual exchange rates and $155 million, or 9 percent, at comparable exchange
rates compared with 1995. Sales inside Europe declined $140 million, or 12
percent, principally due to lower volumes of vaccines and antibiotics. Sales
inside Latin America grew $18 million, or 8 percent, driven by continued strong
sales growth in Brazil which continues to experience economic stability. Rest of
world sales declined $14 million, or 8 percent, due to lower sales in Africa
principally due to reduced volumes, while sales inside Asia remained relatively
stable.
Pharmaceuticals sales for 1996 were $1,243 million, compared with
$1,445 during 1995 experiencing a 12 percent decline at comparable exchange
rates.
France, the most important country for the sale of the Company's
prescription medicines, experienced declining sales of vaccines and antibiotics
due to the completion of the French mandated hepatitis B vaccination campaign
and increased government pressures on antibiotic pricing and prescribing
practices. Sales in France of ENGERIX-B, AUGMENTIN and AMOXIL declined $96
million, $12 million and $10 million, respectively, in 1996. SEROXAT sales in
France continued to increase with sales of $76 million. Sales in other parts of
Europe were also adversely impacted due to the termination of a sterile
antibiotic manufacturing and selling agreement to affiliated companies. The
Company's total pharmaceutical sales to affiliates decreased approximately $72
million in 1996.
Brazil, the Company's largest market for sales in Latin America,
experienced pharmaceutical sales growth of $24 million, or 22 percent, in 1996
compared with 1995. Leading this sales growth was AUGMENTIN and AMOXIL which
increased $6 million, or 48 percent, and $8 million, or 15 percent,
respectively, in 1996.
AMOXIL sales in Africa declined $7 million, or 31 percent, in 1996
compared with 1995. Social unrest in Algeria and other parts of Africa caused
the decreased sales volume in this geographic area.
Thailand, one of the Company's fastest growing markets, reported
pharmaceuticals sales growth of over $4 million, or 28 percent, in 1996. The
Company continues to increase its presence in Thailand through additional
promotional activities and the introduction of new products.
Company sales of consumer healthcare products increased $17 million, or
7 percent, in 1996 compared with 1995. The increase is principally due to a $22
million increase in sales to affiliates partially offset by a $4 million decline
in CONTAC sales in Japan due to reduced volumes.
Cost of sales for 1996 was 50.9 percent of sales compared with 51.1
percent for 1995. The decrease in cost of sales for 1996 reflects lower factory
costs resulting from restructuring activity and a sales mix that decreased
revenues from lower margin sales of antibiotics to affiliates.
Marketing, administrative and general operating expenses were 30.9
percent of sales in 1996 and 31.3 percent of sales in 1995. Administration,
selling and distribution expenses decreased reflecting efficiencies realized
from restructuring activity and completion of the French vaccination campaign.
The Company recorded $57 million in restructuring and other
non-recurring charges in 1996 and $60 million in 1995. The 1996 restructuring
provision was principally provided to cover the costs of pharmaceutical
manufacturing plant closures. The 1995 restructuring provision principally
provided for costs of integrating consumer healthcare organizations and the
creation of shares services across all of the business operations in finance,
information resources, human resources and purchasing. See Note 14 of the Notes
to Consolidated Financial Statements.
SmithKline Beecham continually analyzes its operational structure and
supply chain and explores possible opportunities to reduce operating costs and
increase manufacturing efficiencies. The Company is not aware of any event or
change in circumstances that would indicate that the recoverability of the
carrying amount of assets is impaired. Further restructuring of the Company's
operations may occur as SmithKline Beecham continues to explore opportunities to
increase efficiencies.
15
<PAGE> 17
The Company's total net non-operating income for 1996 was $17 million
compared with $1 million in 1995. The $16 million increase in interest income
primarily reflects increased interest income from loan activity to affiliates
generated from the preferred share issuance proceeds. Other net non-operating
expense increased due to exchange losses realized on related party loan
activity.
The effective tax rate was 42.3 percent and 49.8 percent for 1996 and
1995, respectively. The decrease in the effective tax rate was principally due
to restructuring charges incurred in jurisdictions with higher effective tax
rates and 1996 not being impacted by the French exceptional surcharge tax.
FISCAL YEARS 1995 AND 1994 (GROWTH AMOUNTS AND RATES ARE AT COMPARABLE EXCHANGE
RATES UNLESS OTHERWISE STATED.)
The Company achieved pharmaceutical sales of $1,445 million in 1995, an
increase of 3 percent at comparable rates and 12 percent at actual rates over
the previous year. The growth was due primarily to strong anti-infective sales,
changing market dynamics in Brazil and increased new product sales. The growth
was partially offset by a reduction of related party raw material sales.
The Company's anti-infective products, including AMOXIL, AUGMENTIN and
BACTROBAN, increased $100 million. Sales of AUGMENTIN increased $58 million,
with Brazil, Switzerland, Portugal and Austria each reporting growth rates in
excess of 15 percent over 1994.
Brazil's economic stability was maintained in 1995 and strengthened by
change directed at the privatization of government-owned companies,
acknowledgment of industrial patents and intellectual property rights, and
removal of importation barriers. Sales for Brazil increased by over 50 percent,
resulting in Brazil being the Company's second largest market. The increase over
1994 is due primarily to a change in the market dynamics as a result of the
stabilization program. The Company believes that Brazil's stabilization program
has improved purchasing power of the consumer and assisted in segments of the
population moving into the middle and upper income classes.
New products represented 11 percent of total product sales in 1995, up
from 8 percent in 1994. The key performer was the antidepressant SEROXAT, with
sales increasing $50 million to $57 million. In France, the Company's largest
market, the Company launched SEROXAT, accounting for $40 million of the
increase. Also launched in 1995 was INFANRIX, the combined acellular vaccine for
diphtheria, tetanus and pertussis (whooping cough) in Switzerland. HAVRIX
continued its success as a new product, reporting 22 percent growth over 1994.
Related party sales of active ingredients decreased by $101 million due
principally to the expiration of a related party manufacturing agreement for
paroxetine, the active ingredient in SEROXAT, and termination of a related party
manufacturing agreement for famciclovir, the active ingredient in FAMVIR. The
Irish manufacturing operation disposed of $74 million of assets associated with
the manufacturing activity of paroxetine and famciclovir in 1995.
Pharmaceutical operating income in 1995 was adversely affected by
restructuring and one-time government-mandated social levy costs and the
expiration and termination of manufacturing agreements. The impact of the
preceding items was partially offset by lower monetary costs in Brazil.
The Company's consumer healthcare sales in 1995 were $253 million
compared to $205 million in 1994. The increase is primarily attributable to the
inclusion of 12 months of sales activity for products acquired via the Sterling
acquisition, as opposed to inclusion of 2 months of sales activity in 1994.
Sales of the CONTAC line in Japan increased by $6 million, or 6 percent,
reflecting the launch of two line extensions, CONTAC Cough and CONTAC Day.
CONTAC sales account for over 90 percent of the Company's consumer healthcare
sales in Japan. Other contributors to the growth in consumer healthcare 1995
sales were LUCOZADE and AQUAFRESH in Ireland, which grew by 23 and 20 percent,
respectively. LUCOZADE accounted for 54 percent of the consumer healthcare
sales in Ireland.
The consumer healthcare segment commenced restructuring programs in
both Brazil and Japan in 1995. The restructuring program in Brazil includes the
integration of the consumer healthcare organizations, restructuring of existing
manufacturing facilities, and the disposal of personal care products. The
program also includes co-location of existing operations. Staffing levels were
reduced in Japan by approximately 35 percent in 1995, redirecting the investment
towards promotional activity.
16
<PAGE> 18
Consumer healthcare operating income increased by $2 million in 1995,
or 13 percent at actual rates. The increase is due to the full year inclusion of
operating income related to the businesses acquired by the Sterling acquisition,
and a significant reduction of currency devaluation costs in Brazil offset by
restructuring charges.
Net interest income for 1995 was $30 million (an increase of $23
million), due to the settlement of related party loans. A significant amount of
the settlement relates to loans associated with a stock redemption program. In
addition, the Company's pharmaceutical operation in France loaned additional
funds to related parties.
Other net non-operating expense of $5 million in 1995 compares to an
other net non-operating income of $19 million in 1994. The reduction is
primarily the result of the inclusion in 1994 of $16 million of income
associated with the gain on disposal of fixed assets.
The effective income tax rate increased from 35.2 percent in 1994 to
49.8 percent in 1995. The significant items impacting the 1995 income tax rate
are net operating losses, reduction in foreign tax exempt income, the French
exceptional tax, and the effects of increased income in operations experiencing
higher effective tax rates.
Net income declined to $110 million in 1995, a reduction of 26 percent
at actual rates over 1994. The decline is primarily attributed to restructuring
charges.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $153 million in 1996, as
compared with $227 million in 1995. The decrease from 1995 was due primarily to
the timing of payments of certain operating expenses such as income taxes and
payroll taxes.
During 1996, the Company paid $70 million to affiliated companies for
the purchase of the remaining 87.72 percent of the common shares of SB Seiyaku.
In 1995, the Company sold certain large fixed assets to an affiliated entity
which provided $74 million in cash; no such similar sale was made during 1996.
In the third quarter of 1996, the Company issued preferred stock which
provided the Company with net cash proceeds of $1,142 million. Substantially all
of the proceeds from this stock issuance were subsequently loaned by the Company
to other subsidiaries of SmithKline Beecham. Also in 1996, the Company paid $31
million in dividends on the preferred stock.
The Company expects its future cash requirements to include capital
expenditures, payment of restructuring costs and dividends on preferred stock,
as well as funding ongoing operations. These anticipated cash requirements will
be funded primarily by cash flow from operations, supplemented by dividends on
the Company's investment in the preferred stock of SmithKline Beecham
Biologicals S.A., interest payments and principal repayments on loans to
affiliates, and the utilization of local lines of credit for small daily cash
activities in certain countries. Management believes that these sources will be
sufficient to fund the cash needs of the Company's business for the foreseeable
future.
17
<PAGE> 19
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SMITHKLINE BEECHAM HOLDINGS CORPORATION
-------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
<S> <C>
Report of Independent Accountants........................................................... 19
Consolidated Balance Sheets as of December 31, 1996 and 1995................................ 20
Consolidated Statements of Operations for the years ended December 31, 1996, 1995
and 1994.................................................................................... 21
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994.................................................................................... 22
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996,
1995 and 1994............................................................................... 23
Notes to Consolidated Financial Statements.................................................. 24-35
Schedule supporting the consolidated financial statements for the years
ended December 31, 1996, 1995, and 1994:
II. Valuation and Qualifying Accounts....................................................... 36
</TABLE>
18
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of SmithKline Beecham Holdings Corporation
We have audited the accompanying consolidated financial statements and
the financial statement schedule of SmithKline Beecham Holdings Corporation (the
Company) listed in the index on page 18 of this Form 10-K. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
SmithKline Beecham Holdings Corporation as of December 31, 1996 and 1995, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 19, 1997
19
<PAGE> 21
SMITHKLINE BEECHAM HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------ ------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................ $ 76 $ 120
Trade receivables (net of allowance for doubtful accounts $12 and $12,
respectively) .................................................... 348 252
Inventories .......................................................... 177 195
Receivables from affiliates .......................................... 23 84
Loans receivable from affiliates ..................................... 1,929 1,144
Other current assets ................................................. 57 55
------ ------
Total current assets ............................................... 2,610 1,850
Property, plant and equipment, net ..................................... 200 190
Investments in affiliates .............................................. 195 152
Deferred income taxes .................................................. 28 15
Goodwill, net .......................................................... 474 401
Other assets ........................................................... 19 7
------ ------
Total ................................................................ $3,526 $2,615
====== ======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable ..................................................... $ 78 $ 65
Payables to affiliates ............................................... 62 105
Loans payable to affiliates .......................................... 123 468
Accrued payroll and payroll taxes .................................... 54 66
Income taxes payable ................................................. 47 62
Accrued restructuring ................................................ 36 35
Other current liabilities ............................................ 114 116
------ ------
Total current liabilities .......................................... 514 917
Minority interests ..................................................... 285 188
Deferred income taxes .................................................. 7 7
Other liabilities ...................................................... 60 70
------ ------
Total liabilities .................................................. 866 1,182
------ ------
Commitments and contingent liabilities
Mandatorily redeemable preferred stock, no par value, $100,000
redemption value per share, 11,500 shares issued and outstanding ... 1,142 --
------ ------
Shareholders' equity:
Cumulative foreign currency translation adjustment ................... (19) 23
Junior preferred stock, no par value, $100,000 liquidation
preference per share, 9.7 shares issued and outstanding ............ 15 --
Common stock, no par value, 2,925.2 shares issued and
outstanding ........................................................ 1,485 --
SmithKline Beecham plc equity ........................................ -- 1,410
Retained earnings .................................................... 37 --
------ ------
Total shareholders' equity ......................................... 1,518 1,433
------ ------
Total .............................................................. $3,526 $2,615
====== ======
</TABLE>
See accompanying notes.
20
<PAGE> 22
SMITHKLINE BEECHAM HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net sales .................................. $ 1,504 $ 1,698 $ 1,490
Operating costs and expenses:
Cost of sales ............................ 766 867 783
Marketing, administrative and general .... 466 531 449
Research and development ................. 21 22 18
Restructuring ............................ 57 60 --
-------- -------- -------
Operating income ........................... 194 218 240
Non-operating income (expense):
Interest expense ......................... (2) (3) (13)
Interest income .......................... 62 33 20
Minority interests ....................... (32) (45) (45)
Equity in net income of affiliates ....... 18 21 9
Other, net ............................... (29) (5) 19
-------- -------- -------
Income before income taxes ................. 211 219 230
Provision for income taxes ................. 89 109 81
-------- -------- -------
Net income ................................. 122 110 149
Dividends on preferred stock ............... 31 -- --
-------- -------- -------
Net income applicable to common shareholders $ 91 $ 110 $ 149
======== ======== =======
Earnings per common share (1) .............. $ 31,109 $ 37,604
======== ========
</TABLE>
(1) Pro-forma prior to June 20, 1996. See Note 2 for description of calculation.
See accompanying notes.
21
<PAGE> 23
SMITHKLINE BEECHAM HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------- ----- -----
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net income ................................................................ $ 122 $ 110 $ 149
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................................... 33 36 34
Gain on sale of fixed assets .......................................... (9) (5) (16)
Minority interests .................................................... 32 45 45
Equity in net income of affiliates .................................... (18) (21) (9)
Changes in assets and liabilities net of effects from purchase of SB
Seiyaku in 1996:
Decrease (increase) in trade receivables ........................... -- 27 (45)
Decrease (increase) in net receivables from/payables to
affiliates ..................................................... 21 (1) (63)
Decrease (increase) in inventories ................................. 26 (20) (30)
Increase in other assets ........................................... (17) (4) (13)
(Decrease) increase in accounts payable, other
liabilities and income taxes ................................... (37) 60 47
------- ----- -----
Net cash provided by operating activities ................................. 153 227 99
------- ----- -----
Cash flows (used in) provided by investing activities:
Capital expenditures ...................................................... (36) (26) (54)
Payment for purchase of SB Seiyaku, net of cash acquired .................. (69) -- --
Proceeds from sale of fixed assets ........................................ 34 86 41
------- ----- -----
Net cash (used in) provided by investing activities ....................... (71) 60 (13)
------- ----- -----
Cash flows provided by (used in) financing activities:
Increase in net intercompany loans ........................................ (1,236) (411) (117)
Issuance of preferred stock ............................................... 1,142 -- --
Dividends on preferred stock .............................................. (31) -- --
Net capitalization from SmithKline Beecham ................................ -- 184 33
------- ----- -----
Net cash used in financing activities ..................................... (125) (227) (84)
------- ----- -----
Effect of exchange rate changes on cash ................................... (1) 15 1
------- ----- -----
Change in cash and cash equivalents ....................................... (44) 75 3
Cash and cash equivalents -- beginning of period .......................... 120 45 42
======= ===== =====
Cash and cash equivalents -- end of period ................................ $ 76 $ 120 $ 45
======= ===== =====
Supplemental cash flow information:
Cash paid for:
Income taxes .......................................................... $ 149 $ 118 $ 62
Interest .............................................................. $ 2 $ 3 $ 12
</TABLE>
See accompanying notes.
22
<PAGE> 24
SMITHKLINE BEECHAM HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
CUMULATIVE
JUNIOR FOREIGN CURRENCY SMITHKLINE TOTAL
PREFERRED COMMON TRANSLATION BEECHAM PLC RETAINED SHAREHOLDERS'
STOCK STOCK ADJUSTMENT EQUITY EARNINGS EQUITY
----- ----- ---------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 ...... -- -- $(72) $ 966 -- $ 894
Translation adjustments ........... -- -- 42 -- -- 42
Net income ........................ -- -- -- 149 -- 149
Net transfers from affiliates ..... -- -- -- 37 -- 37
--- ------ ---- ------- ---- -------
Balance at December 31, 1994 ...... -- -- (30) 1,152 -- 1,122
Translation adjustments ........... -- -- 53 -- -- 53
Net income ........................ -- -- -- 110 -- 110
Net transfers from affiliates ..... -- -- -- 148 -- 148
--- ------ ---- ------- ---- -------
Balance at December 31, 1995 ...... -- -- 23 1,410 -- 1,433
Translation adjustments ........... -- -- (42) -- -- (42)
Net income ........................ -- -- -- 54 $ 68 122
Net transfers from affiliates ..... -- $ 15 -- 21 -- 36
Issuance of stock ................. $15 1,470 -- (1,485) -- --
Dividends ......................... -- -- -- -- (31) (31)
--- ------ ---- ------- ---- -------
Balance at December 31, 1996 ...... $15 $1,485 $(19) -- $ 37 $ 1,518
=== ====== ==== ======= ==== =======
</TABLE>
See accompanying notes.
23
<PAGE> 25
SMITHKLINE BEECHAM HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS SHOWN IN MILLIONS EXCEPT PER SHARE INFORMATION)
(1) BACKGROUND
On May 20, 1996, SmithKline Beecham Holdings Corporation (the
"Company") was formed with the intent of holding the stock of certain
subsidiaries of SmithKline Beecham International Co., a Delaware Corporation
("Intco"), SmithKline Beecham Corporation, a Pennsylvania Corporation ("SB
Corp"), and SBCL, Inc., a Delaware Corporation ("SBCL"), (collectively, Intco,
SB Corp and SBCL are referred to as the "Transferors"). The Company, SB Corp,
Intco and SBCL are owned by SmithKline Beecham plc, a public limited company
registered in England ("SmithKline Beecham"). On June 20, 1996, a share exchange
agreement was executed by the Company and the Transferors whereas the
Transferors recorded or otherwise gave full legal effect to transfer to
SmithKline Beecham Holdings Corporation the shares of capital stock of certain
subsidiaries in consideration for shares of common stock and junior preferred
stock of the Company. The principal purpose of the formation of the Company was
to acquire, own and manage certain non-U.S. assets of the Transferors, primarily
in the pharmaceutical business.
The Company's principal activities are the manufacture and marketing of
pharmaceuticals and over-the-counter ("OTC") medicines and health-related
consumer products operating in two principal industry segments of
pharmaceuticals and consumer healthcare. In addition, the Company participates
in related party lending activity. The Company's principal markets are France,
Brazil, Portugal, Ireland, Africa, Austria, Switzerland and Japan, which
together accounted for 75 percent, 78 percent, and 68 percent of sales for 1996,
1995, and 1994 respectively. Since the operations of the Company are conducted
in international markets, the consolidated financial results of the Company are
subject to exchange rate fluctuations involving the United States dollar and a
number of foreign currencies.
The Company's operations are fully integrated with those of SmithKline
Beecham and its subsidiaries (the "SmithKline Beecham Group") and its overall
performance is largely dependent upon the performance of other units of
SmithKline Beecham Group. Moreover, the Company is dependent upon SmithKline
Beecham with respect to new product development, the addition of new products to
the Company's product line and the expansion of the Company's marketing and
distribution activities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Investments in
common stock of companies which are 20-50 percent owned by the Company are
accounted for using the equity method of accounting. Investments in common stock
of companies that are less than 20 percent owned by the Company for which the
remaining shares are owned by SmithKline Beecham or its other subsidiaries are
also accounted for using the equity method of accounting as they are considered
to be under common control. All other investments are accounted for using the
cost method.
All financial information at dates and for periods prior to the
formation of the Company was prepared as if the Company had existed and operated
as a separate business at such dates and during such periods. Subsequent to the
formation, the Company operates as a separate business with changes in the
ownership of shares of capital stock of subsidiaries of SmithKline Beecham
reported prospectively from the date of such change.
The consolidated financial information reflects operating expenses
incurred by SmithKline Beecham Group that are specifically identifiable to the
Company, and certain corporate overhead allocations that management believes
represent the value of the services performed on behalf of the Company. These
allocations are not significant to the Company's operating expenses.
The Company had no significant third-party borrowings and there has
been no allocation of SmithKline Beecham's borrowings and related interest
expense. Amounts included in the consolidated balance sheet as receivables from
or payables to affiliates relate to amounts receivable or payable from various
SmithKline Beecham entities (which are not among the entities that comprise the
Company) for transactions entered into during the normal course of business.
24
<PAGE> 26
Foreign Currency Translation
The functional currency for the majority of the Company's foreign
operations is the applicable local currency. The consolidated financial results
of the Company are subject to exchange rate fluctuations involving the U.S.
dollar and a number of foreign currencies. The translation from the applicable
foreign currencies to U.S. dollars is performed for balance sheet accounts using
the rates of exchange at the balance sheet date and for revenue and expense
accounts using average rates of exchange for the period. The resulting
translation adjustments are accumulated as a separate component of shareholders'
equity.
The financial statements of foreign subsidiaries located in highly
inflationary economies are remeasured as if the functional currency were the
U.S. dollar. Adjustments resulting from the remeasurement of these entities are
included in the results of operations. Net exchange losses (gains) in 1996,
1995, and 1994 resulting from foreign currency transactions were $33, $(20) and
$24, respectively, (including $0, $2 and $30, respectively, of translation
losses related to subsidiaries located in highly inflationary economies) and are
included in operating income.
Financial Instruments
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. Unless
otherwise disclosed, the fair value of financial instruments approximates its
recorded value.
Cash and Cash Equivalents
Cash and cash equivalents are considered to be all highly liquid
investments that have maturities of three months or less. The carrying amount of
cash and cash equivalents is a reasonable estimate of the fair value at December
31, 1996 and 1995.
Inventories
Inventories are valued at the lower of cost or market, with cost being
determined on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated
depreciation and include interest on funds borrowed to finance construction. The
cost of additions and improvements are capitalized, while maintenance and
repairs are expensed as incurred. Depreciation is computed on the straight-line
method over the estimated useful lives of the assets. Useful lives are estimated
to be 20-50 years for buildings and 2-20 years for machinery and equipment.
Goodwill and Other Intangibles
Goodwill represents the excess of acquisition costs over the fair value
of net assets of purchased businesses and is amortized using the straight-line
method over 40 years.
In 1989, Beecham Group plc purchased SmithKline Beckman Corporation.
The Company has included goodwill related to this acquisition in its financial
statements. Management determined the amount of this goodwill based on its
evaluation of the respective businesses at the time of the acquisition.
Management's estimate of the allocated goodwill was based on a number of
factors, primarily the proportion of the Company's sales of SmithKline Beckman
Corporation products to the Company's total sales. Goodwill recorded subsequent
to the formation of the Company, as a result of related party transactions,
reflects SmithKline Beecham's historical cost basis. Recoverability of goodwill
is evaluated based primarily on undiscounted cash flows from operations.
Income Taxes
Income taxes were determined on a separate company basis in the
consolidated financial statements and reflect the application of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, for all
periods presented. Substantially all unremitted earnings of the Company's
subsidiaries are deemed to be permanently reinvested and as a result,
withholdings and U.S. income taxes have not been provided thereon.
25
<PAGE> 27
Earnings Per Common Share
Earnings per share amounts were computed using 2,925.2 common shares
for all periods presented. All shares of common stock currently outstanding were
issued by the Company to subsidiaries of SmithKline Beecham on June 20, 1996.
For comparative purposes, 2,925.2 common shares were used in the pro-forma
calculations for 1995, as the Company had no capital structure
prior to formation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Reclassifications of prior period amounts have been made to conform to
current period presentation.
Advertising Costs
All costs associated with advertising and promoting products are
expensed in the year incurred, and were $32, $26, and $19 in 1996, 1995, and
1994, respectively.
Revenue Recognition
Revenue from sales of products is generally recognized upon shipment to
customers. All intercompany revenue is eliminated in consolidation. Revenues
from royalty contracts are recognized in earnings over the terms of the specific
contracts. Interest income is recognized as earned.
(3) SMITHKLINE BEECHAM REORGANIZATIONS
In December 1996, SmithKline Beecham Corporation (Panama) ("SB Corp -
Panama"), Eskaylad Holdings Limited ("Eskaylad"), and SmithKline Beecham
International Ltd. ("SBIL") each issued additional shares of common stock to
SmithKline Beecham entities not included in SmithKline Beecham Holdings
Corporation. This stock issuance had the effect of reducing the Company's
ownership interest from 100% in each entity to 45%, 45%, and 43%, respectively.
Consequently, as of December 31, 1996, the Company's investment in these
entities and their subsidiaries is reflected in the balance sheet using the
equity method; and, full years' results of operations are consolidated in the
Company's statements of operations. Also in December 1996, three subsidiaries
of the Company paid an aggregate price of $70 to another SmithKline Beecham
entity in exchange for an additional 87.72% of the outstanding common shares of
SmithKline Beecham Seiyaku K.K. ("SB Seiyaku"). As a result of this
transaction, the Company increased its ownership of SB Seiyaku to 100%. The
assets and liabilities of SB Seiyaku are included in the Company's balance
sheet at December 31, 1996 and SB Seiyaku's results of operations are included
in the Company's 1996 Consolidated Statement of Operations using the equity
method.
26
<PAGE> 28
(4) RELATED PARTY TRANSACTIONS
The Company is indirectly majority owned by SmithKline Beecham and its
operations are integrated with SmithKline Beecham's other operations on a
worldwide basis. The Company is involved in various transactions with SmithKline
Beecham affiliates as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Royalties to SmithKline Beecham affiliates ............................. $ 67 $ 75 $ 67
Royalties from SmithKline Beecham affiliates ........................... $ 38 $ 18 $ 11
Sales to SmithKline Beecham affiliates ................................. $240 $318 $437
Cost of sales to SmithKline Beecham affiliates ......................... $172 $222 $302
Purchases of raw materials and finished goods from SmithKline Beecham
affiliates ......................................................... $497 $589 $486
Interest income attributable to SmithKline Beecham affiliates .......... $ 60 $ 33 $ 18
Interest expense attributable to SmithKline Beecham affiliates ......... $ 2 $ 2 $ 12
</TABLE>
The Company and SmithKline Beecham have entered into a number of supply
and license agreements, subject to termination on notice of 30 to 180 days.
The Company also entered into borrowing and lending transactions
(approximately 17 percent are denominated in foreign currency) with SmithKline
Beecham Group. These transactions bear interest at prevailing market rates,
based on a nominal spread to the London Interbank Offered Rates, and are settled
on a periodic basis. The London Interbank Offering Rate as of December 31, 1996
and 1995 was 5.617% and 5.625%, respectively.
(5) INVESTMENTS IN AFFILIATES
The Company owns shares of the common and preferred stock of various
affiliated entities. The Company's preferred stock investments include a 50%
voting interest in SmithKline Beecham Biologicals S.A. ("SB Biologicals"), a
Belgian affiliate. As stated in Note 2, investments in the preferred stock of
affiliates are shown at cost in the balance sheet. The following table provides
information on the Company's affiliated equity investments accounted for by the
equity method at December 31, 1996 and 1995. Ownership percentages represent
the Company's ownership of the common stock of the investee.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ ------------------------
OWNERSHIP INVESTMENT OWNERSHIP INVESTMENT
PERCENTAGE AMOUNT PERCENTAGE AMOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SmithKline and French Laboratories
Ltd ........................... -- -- 4.40% $72
SmithKline Beecham Overseas (No. 2)
Ltd ........................... 40.00% $48 40.00% 41
SmithKline Beecham Seiyaku
K.K ........................... -- -- 12.28% 19
Eskaylad Holdings Limited ......... 45.00% 34 -- --
SmithKline Beecham
Corporation (Panama) .......... 45.00% 11 -- --
SmithKline Beecham International,
Ltd ........................... 43.00% 81 -- --
------- ------
$ 174 $ 132
======== ======
</TABLE>
As stated in Note 3, the Company's ownership in Eskaylad, SB Corp -
Panama, and SBIL was reduced from 100% to the percentage shown above during
1996. In addition, the Company's ownership in SB Seiyaku increased from 12.28%
to 100% during the year. Because SmithKline and French Laboratories Ltd. ("SK&F
Labs. Ltd.") is a direct subsidiary of SBIL, the Company's investment in SK&F
Labs. Ltd. is aggregated with the Company's investment in SBIL for 1996
presentation.
27
<PAGE> 29
Summarized financial information for the Company's equity investees and
their wholly-owned subsidiaries is shown below on a 100 percent basis.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------ ------
<S> <C> <C>
BALANCE SHEET:
Current assets ................................. $3,158 $2,386
Noncurrent assets .............................. 709 358
------ ------
Total assets ............................... $3,867 $2,744
====== ======
Current liabilities ............................ $ 985 $ 868
Noncurrent liabilities ......................... 20 2
------ ------
Total liabilities .......................... $1,005 $ 870
====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Net sales ..................... $444 $1,253 $1,233
Operating income .............. $300 $ 395 $ 324
Income before income taxes .... $440 $ 572 $ 363
Net income .................... $277 $ 386 $ 195
</TABLE>
(6) FINANCIAL INSTRUMENTS AND FOREIGN INVESTMENT
The Company's foreign subsidiaries enter into foreign exchange
contracts with related parties to hedge against fluctuating exchange rates for
certain transactions (such as export sales, raw material purchases, and short
term intercompany financing) denominated in a currency other than their local
currency, primarily British Pound, French Franc, Belgian Franc, Irish Punt and
Singapore Dollar. All transactions are undertaken to manage the risks arising
from underlying business activities, rather than to speculate. At December 31,
1996 and 1995, the Company had contracts outstanding totaling $180 and $648,
respectively, which mature primarily over a twelve-month period. Gains and
losses on transactions in other than the functional currency are included in
income when incurred. Cash flows from these contracts are classified in the same
category as the hedged transactions. The Company estimates the aggregate
contract value to be representative of the fair value of these instruments.
The Company has entered into a interest rate swap agreement with SB
Corp to hedge against fluctuations in interest rates. Under the agreement, the
Company agrees with SB Corp to exchange, on a quarterly basis, the difference
between fixed rate interest of 6.77% and floating rate interest of U.S. dollar
three-month London Interbank Offered Rates calculated by reference to an agreed
upon notional principal amount of $750, without the trade of underlying notional
principal amounts. The estimated fair value of the Company's interest rate swap
agreement at December 31, 1996 is $5.
28
<PAGE> 30
The Company's principal foreign currency net investment exposures are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------ -----------------------------------
LOCAL U.S. DOLLAR LOCAL U.S. DOLLAR
CURRENCY EQUIVALENT CURRENCY EQUIVALENT
------------------- ----------- ------------------ -----------
<S> <C> <C> <C> <C>
France .......... FF 2,841 $543 FF 1,988 $406
United Kingdom .. BP 86 $146 BP 67 $108
Switzerland ..... SF 60 $ 45 SF 90 $ 78
Japan ........... JY 30,443 $261 JY 6,026 $ 59
Ireland ......... IP 35 $ 60 IP 29 $ 46
Belgium ......... BF 1,576 $ 49 BF 1,187 $ 40
Brazil .......... BR 134 $129 BR 42 $ 44
Singapore ....... SD 91 $ 65 SD 60 $ 43
Italy ........... IL 235,978 $155 IL -- $ --
Canada .......... CD 63 $ 46 CD 25 $ 19
</TABLE>
(7) INVENTORIES
Inventories consist of the following and are shown net of total
inventory reserves of $8 and $9 at December 31, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
------------ ------------
1996 1995
------------ ------------
<S> <C> <C>
Finished products ........................ $ 47 $ 93
Work in process .......................... 29 35
Raw materials and supplies ............... 101 67
---- ----
$177 $195
==== ====
</TABLE>
(8) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
------------ ------------
1996 1995
------------ ------------
<S> <C> <C>
Land ................................... $ 19 $ 8
Buildings .............................. 109 95
Machinery and equipment ................ 254 274
----- -----
382 377
Less: accumulated depreciation ......... (182) (187)
----- -----
$ 200 $ 190
===== =====
</TABLE>
During 1995, in addition to other fixed asset sales, the Company sold
fixed assets with a book value of $74 to an affiliated entity for an amount that
approximated cost. Depreciation expense for the Company was approximately $19 in
1996, $23 in 1995 and $23 in 1994.
29
<PAGE> 31
(9) GOODWILL
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
------------ ------------
1996 1995
------------ ------------
<S> <C> <C>
Goodwill at cost ......................... $ 580 $ 473
Less: accumulated amortization .......... (106) (72)
----- -----
$ 474 $ 401
===== =====
</TABLE>
As a result of the acquisition of 87.72% of SB Seiyaku common shares in
1996, the Company recorded goodwill of $89 (net of accumulated amortization of
$19) at December 31, 1996 which relates to goodwill reflected in the historical
cost basis of SmithKline Beecham. A portion of the Company's goodwill from the
1989 acquisition of SmithKline Beckman Corporation by Beecham plc (as described
in Note 2) was allocated to the Company's equity investments and is included as
part of Investments in affiliates in the Company's balance sheet. Amortization
expense for goodwill was $14 in 1996, $13 in 1995 and $11 in 1994.
(10) INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total current U.S. tax expense .................... $ 16 -- --
Total current non-U.S. tax expense ................ 78 $124 $ 76
Total deferred non-U.S. tax expense ............... (5) (15) 5
---- ---- ----
$ 89 $109 $ 81
==== ==== ====
</TABLE>
The reconciliation between the U.S. federal statutory income tax rate
and the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----- ----- ----
<S> <C> <C> <C>
U.S. federal statutory income tax rate ............ 35.0% 35.0% 35.0%
Tax exempt foreign income ......................... 1.3 1.8 (.3)
Higher (lower) rates in foreign jurisdictions ..... (2.7) 2.3 (5.3)
Minority interest ................................. 5.8 6.9 7.6
Net operating losses .............................. -- -- (2.4)
Equity income in subsidiaries ..................... (2.8) (3.1) (1.3)
Incentive credits ................................. -- (.3) (1.3)
French exceptional surcharge tax .................. -- 2.1 --
Other ............................................. 5.7 5.1 3.2
==== ==== ====
42.3% 49.8% 35.2%
==== ==== ====
</TABLE>
30
<PAGE> 32
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The following
is a summary of the significant components of the Company's deferred tax assets
and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
------------ ------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating losses ........ $ 19 $ 7
Restructuring ............... 11 6
Other accrued liabilities ... 16 9
---- ----
46 22
Valuation allowance ......... (18) (7)
---- ----
28 15
Deferred tax liabilities:
Depreciation ................ (7) (7)
==== ====
Net deferred income tax asset ... $ 21 $ 8
==== ====
</TABLE>
The increase in the deferred tax asset attributable to net operating
losses, which is substantially reserved, is due primarily to operations in
Singapore and Belgium. The portion of the deferred tax asset attributable to
other accrued liabilities increased primarily as a result of deferred tax assets
acquired as part of SB Seiyaku.
(11) RETIREMENT PLANS
In accordance with local country practices, the Company contributes to
statutory retirement programs as required by law. In certain locations, the
Company may also operate various types of Company sponsored retirement plans,
which include defined benefit plans. Contributions to the defined benefit plans
are determined in accordance with independent actuarial advice primarily using
the projected unit credit method. The discount rate, salary increase rate, rate
of return on assets and other assumptions used in actuarial calculations vary by
country and are based on local economic conditions. The assets of the Company
sponsored plans are generally held in separately administered trusts or are
insured. Retirement plan assets are managed by independent professional
investment managers. It is the Company's policy that none of the assets of the
funds are invested directly or indirectly in any affiliated company. Actuarial
valuations were calculated in local currency and translated at exchange rates in
accordance with the Company's foreign currency translation policy. Any exchange
rate fluctuations are not expected to have a material effect on the actuarially
determined amounts.
Total retirement plan (income) expense for the Company was $(1), $2,
and $1 in 1996, 1995, and 1994, respectively. The total pension liability
recorded at December 31, 1996 and 1995 was $5 and $11. The geographic breakout
of the total pension liability (asset) is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
---- ---
<S> <C> <C>
Austria ............................ $ 4 $ 4
Portugal ........................... 3 3
Switzerland ........................ -- 3
Japan .............................. 1 --
Belgium ............................ -- 1
Ireland ............................ (3) --
---- ---
$ 5 $11
==== ===
</TABLE>
31
<PAGE> 33
(12) COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases certain facilities, equipment and automobiles.
Certain of the leases provide for the payment of taxes, insurance and other
charges by the lessee. Rental expense was $9, $11 and $12 in 1996, 1995 and
1994, respectively. Future minimum rental payments required under
non-cancellable operating leases that have initial or remaining terms of more
than one year as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................... $ 11
1998........................................... 10
1999........................................... 10
2000........................................... 10
2001 and thereafter............................ 21
---------
Total minimum lease payments................... $ 62
=========
</TABLE>
At December 31, 1996 the Company has approximately $62 in letters of
credit outstanding which are required by Canadian taxation authorities with
respect to pending litigation and are unconditionally guaranteed by SB Corp. The
commitment fee on the letters of credit is not material to the Company. In the
opinion of management, any liabilities related to the pending tax litigation, in
excess of those reflected in the financial statements, would not be material to
the Company's combined financial position at December 31, 1996.
The Company is the guarantor of a loan made by a Brazilian bank to Alfa
Industria, Comercio, Construcoes e Representacoes Ltda. ("Alfa"), a Brazilian
pharmaceutical manufacturer in the amount of $2 plus accumulated interest. In
the event that Alfa is unable to repay the bank, the Company has committed to
settle on Alfa's behalf. In March 1997, the Company repaid the loan plus
accumulated interest and received, from Alfa, trademarks valued at $4.
The Company believes that it is substantially in compliance with
environmental laws and regulations in the various countries of operation. The
Company incurs routine annual costs aimed at ensuring continued compliance,
which were $2 in 1996, and $5 in 1995 and 1994. In addition, the Company makes
annual capital expenditures to install or improve waste treatment processes as
considered necessary. Such expenditures were less than $1 in 1996 and
approximately $3 in 1995.
The Company is involved in various legal and administrative proceedings
related to its business. Although the outcome of claims, legal proceedings and
other matters in which the Company is involved cannot be predicted with any
certainty, management does not expect the Company's ultimate liability for such
matters to have a material adverse effect on its financial condition.
32
<PAGE> 34
(13) BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
Financial information about the Company's business segments is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net sales:
Pharmaceuticals .......... $1,243 $1,445 $1,285
Consumer Healthcare ...... 261 253 205
------ ------ ------
Total ........... $1,504 $1,698 $1,490
====== ====== ======
Operating income:
Pharmaceuticals .......... $ 151 $ 201 $ 225
Consumer Healthcare ...... 43 17 15
------ ------ ------
Total ........... $ 194 $ 218 $ 240
====== ====== ======
Identifiable assets at December 31:
Pharmaceuticals .......... $1,724 $1,228 $1,138
Consumer Healthcare ...... 202 159 230
Corporate ................ 1,600 1,228 485
------ ------ ------
Total ........... $3,526 $2,615 $1,853
====== ====== ======
Capital expenditures:
Pharmaceuticals .......... $ 18 $ 25 $ 52
Consumer Healthcare ...... 18 1 2
------ ------ ------
Total ........... $ 36 $ 26 $ 54
====== ====== ======
Depreciation and amortization:
Pharmaceuticals .......... $ 27 $ 29 $ 28
Consumer Healthcare ...... 6 7 6
------ ------ ------
Total ........... $ 33 $ 36 $ 34
====== ====== ======
</TABLE>
33
<PAGE> 35
Financial information about the Company's continuing operations in
different geographic areas is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net sales to customers:
Europe ................... $ 960 $1,128 $1,064
Latin America ............ 253 235 153
Asia ..................... 134 156 119
Rest of the world ........ 157 179 154
------ ------ ------
Total ........... $1,504 $1,698 $1,490
====== ====== ======
Operating income:
Europe ................... $ 114 $ 112 $ 158
Latin America ............ 40 50 27
Asia ..................... 29 23 20
Rest of the world ........ 11 33 35
------ ------ ------
Total ........... $ 194 $ 218 $ 240
====== ====== ======
Identifiable assets at December 31:
Europe ................... $1,497 $2,146 $1,447
Latin America ............ 232 187 135
Asia ..................... 438 207 194
United States of America . 1,199 -- --
Rest of the world ........ 160 75 77
------ ------ ------
Total ........... $3,526 $2,615 $1,853
====== ====== ======
</TABLE>
(14) RESTRUCTURING
During 1996, the Company recorded $57 in restructuring and other non
recurring charges, $21 of which was paid during 1996 and $36 of which is
expected to be paid in future periods.
Of the $21 in restructuring and related costs paid during 1996, $9
relates to the closure and sale of a manufacturing plant in France, $4 relates
to costs to create shared services across all business operations in finance,
information resources, human resources, and purchasing, and $3 relates to the
integration of Consumer Healthcare operations.
Of the $36 restructuring reserve established in 1996, $25 relates to
costs associated with the restructuring of a manufacturing plant in Belgium.
Under this restructuring plan, a total of 90 employees are expected to leave
SmithKline Beecham Group, primarily through early retirement, and 53 employees
are expected to assume positions with other SmithKline Beecham Group companies.
The $25 recorded by the Company relates to a portion of the severance costs
associated with these terminations or transfers, as agreed upon in a production
agreement between the Company and another affiliated SmithKline Beecham entity.
Also included in the $36 reserve is $3 for a restructuring plan in Portugal
which is expected to result in a reduction of 43 employees. Through December 31,
1996, no employees have left the Company in connection with either the Belgium
or Portugal plans. The remaining $8 of the reserve relates to the closure and
sale of manufacturing plants in France, through which no material employee
separation costs are expected to be incurred.
In 1995, the Company recorded a restructuring charge of $60. This
related principally to the reorganization of the Company's supply chain in
Singapore, the integration of Consumer Healthcare operations, and the creation
of shared services across all business operations in finance, information
resources, human resources and purchasing. All amounts associated with this
reserve were spent by the Company as of December 31, 1996.
(15) MANDATORILY REDEEMABLE SECURITIES
On June 28, 1996 the Company filed a registration statement with the
Securities and Exchange Commission in connection with an initial public offering
of Flexible Auction Market Preferred Stock ("AMPS") and Flexible Money Market
Cumulative Preferred Stock ("MMP"). In a series of transactions occurring
between July 15, 1996 and August 1, 1996 the Company issued 7,500 shares of the
34
<PAGE> 36
AMPS (with an aggregate redemption value of $750) and 4,000 shares of the MMP
(with an aggregate redemption value of $400). The dividend rate for the AMPS at
December 31, 1996 was 5.58%, 5.99%, and 6.33% for Series A, B, and C,
respectively. Dividend rates will be reset at the first auction date which is
July 14, 1999 for Series A, July 12, 2001 for Series B, and July 14, 2003 for
Series C. The dividend rates for the MMP at December 31, 1996 ranged from 4.05%
to 4.19%. These rates are reset periodically at auctions taking place at 49 day
intervals beginning from the date of original issue.
At the option of the Company, the shares of AMPS and MMP may be
redeemed except during the initial dividend period or any non-call period as
defined. If however, at any time, SmithKline Beecham shall cease to own,
directly or indirectly, shares of the common stock of the Company representing
more than 50 percent of the voting power of all outstanding common shares, the
AMPS and MMP securities will be subject to mandatory redemption in whole, at a
redemption price of $100 thousand per share plus accumulated and unpaid
dividends. The amount of mandatorily redeemable securities reflected on the
balance sheet is shown net of aggregate issue costs of $8, which are being
amortized over the initial term of the securities.
Substantially all of the proceeds from the sale of the AMPS and MMP
were loaned by the Company to other companies within SmithKline Beecham Group.
Additional interest income recorded by the Company as a result of the increased
lending was approximately $29 at December 31, 1996.
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of quarterly financial data for the years ended
December 31, 1996 and 1995. Quarterly earnings per share amounts are pro-forma
prior to June 20, 1996. See Note 2 for a description of the calculation.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales .................... $ 389 $ 363 $ 350 $ 402
Gross profit ................. $ 190 $ 179 $ 170 $ 199
Net income ................... $ 19 $ 35 $ 39 $ 29
Net income per common share .. $6,495 $11,965 $13,332 $9,914
1995
- ----
Net sales .................... $ 418 $ 408 $ 411 $ 461
Gross profit ................. $ 199 $ 208 $ 195 $ 229
Net income ................... $ 10 $ 40 $ 36 $ 24
Net income per common share .. $3,419 $13,674 $12,307 $8,205
</TABLE>
(17) STOCK COMPENSATION PLANS
SmithKline Beecham follows the method of accounting for employee stock
compensation plans prescribed by APB No. 25, which is permitted by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). In accordance with APB No. 25, SmithKline
Beecham has not recognized compensation expense for stock options because the
exercise price of the options equals the market price of the underlying stock on
the date of grant, which is the measurement date. Certain management personnel
of the Company receive SmithKline Beecham stock options. If the alternative
method of accounting for employee stock compensation plans prescribed by SFAS
No. 123 had been followed, and SmithKline Beecham were to allocate an
appropriate portion to the Company, the impact on the Company's pro-forma net
income applicable to common shareholders and pro-forma earnings per common share
for 1996 would not have been material.
35
<PAGE> 37
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT (CREDITED) TO
BEGINNING OF COSTS AND TRANSLATION OTHER BALANCE AT END
YEAR EXPENSES ADJUSTMENTS MOVEMENTS OF YEAR
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Allowance for doubtful receivables ....... $12 1 -- (1) $12
Reserve for inventory obsolescence ....... $ 9 -- -- (1) $ 8
Deferred tax asset valuation allowance ... $ 7 11 -- -- $18
Year Ended December 31, 1995:
Allowance for doubtful receivables ....... $14 (1) 1 (2) $12
Reserve for inventory obsolescence ....... $ 8 -- 1 -- $ 9
Deferred tax asset valuation allowance ... $10 (3) -- -- $ 7
Year Ended December 31, 1994:
Allowance for doubtful receivables ....... $11 1 2 -- $14
Reserve for inventory obsolescence ....... $ 8 2 (1) (1) $ 8
Deferred tax asset valuation allowance ... $ 3 7 -- -- $10
</TABLE>
36
<PAGE> 38
ITEM 9 DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
Directors of the Company are elected at the annual meeting and serve
until successors are elected and qualified. Holders of the Common Stock and the
Shares are entitled to vote in each such election, and through the exercise of
cumulative voting rights, holders of the Shares have the power to elect up to
approximately 27% of the Company's directors. As the indirect holder of all
shares of Common Stock, SmithKline Beecham has the ability to elect the
remainder of the Company's directors. Currently, eight individuals have been
elected to the Board of Directors. Officers are elected annually by the Board of
Directors and serve at the discretion of the Board. Set forth below is
information with respect to each person who is a director or executive officer
of the Company as of March 19, 1997.
<TABLE>
<CAPTION>
NAME POSITION WITH COMPANY
- ---- ---------------------
<S> <C>
Hugh R. Collum........................................ Director, Vice President and Chief Financial Officer
William J. Creelman................................... Director
Jean-Pierre Garnier, Ph.D............................. Director and Vice President
Jan Leschly........................................... Director, President and Chief Executive Officer
Donald F. Parman...................................... Director, Vice President and Secretary
George H. Poste, D.V.M., Ph.D......................... Director and Vice President
William J. Shulby..................................... Director, Treasurer and Assistant Secretary
Tadataka Yamada, M.D.................................. Director and Vice President
</TABLE>
HUGH R. COLLUM, 56, DIRECTOR, VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER. Mr. Collum was appointed a director and Vice President and Chief
Financial Officer of the Company at the Company's inception in May 1996. He has
been a director and Chief Financial Officer of SmithKline Beecham since July
1989. Mr. Collum is also a director of M&G Group plc.
WILLIAM J. CREELMAN, 42, DIRECTOR. Mr. Creelman was appointed a
director of the Company at the Company's inception in May 1996. Mr. Creelman has
been Vice President and Director of Tax Planning and Audits of SB Corp since
October 1996. Prior thereto, he was Director of Audits and Tax Counsel - U.S. of
SB Corp.
JEAN-PIERRE GARNIER, PH.D., 49, DIRECTOR AND VICE PRESIDENT. Dr.
Garnier was appointed a director and Vice President of the Company at the
Company's inception in May 1996. Dr. Garnier has served as President, SmithKline
Beecham Pharmaceuticals since April 1994 and Chief Operating Officer of
SmithKline Beecham since October 1995. Prior thereto he had been Executive Vice
President, SmithKline Beecham Pharmaceuticals since April 1993 and President,
North America Pharmaceuticals from September 1990 to April 1993. Dr. Garnier has
been a director of SmithKline Beecham since 1992.
JAN LESCHLY, 56, DIRECTOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER. Mr.
Leschly was appointed a director and President and Chief Executive Officer of
the Company at the Company's inception in May 1996. Mr. Leschly has been Chief
Executive of SmithKline Beecham since April 1994. He joined SmithKline Beecham
as a director and Chairman, SmithKline Beecham Pharmaceuticals in June 1990.
DONALD F. PARMAN, 46, DIRECTOR, VICE PRESIDENT AND SECRETARY. Mr.
Parman was appointed a director and Secretary of the Company at the Company's
inception in May 1996 and a Vice President of the Company in June 1996. He has
been the Secretary and Associate General Counsel of SB Corp since July 1994.
Prior thereto he has been Assistant Secretary and Associate General Counsel of
SB Corp.
37
<PAGE> 39
GEORGE H. POSTE, D.V.M., PH.D., 52, DIRECTOR AND VICE PRESIDENT. Dr.
Poste was appointed a director and Vice President of the Company at the
Company's inception in May 1996. Dr. Poste has served as Chairman,
Pharmaceuticals Research and Development, since 1991. He has held several senior
R&D positions prior to his appointments as Vice Chairman and Executive Vice
President, R&D, in 1990. Dr. Poste has been a director of SmithKline Beecham
since 1992.
WILLIAM J. SHULBY, 40, DIRECTOR, TREASURER AND ASSISTANT SECRETARY. Mr.
Shulby was appointed a director and Treasurer of the Company at the Company's
inception in May 1996 and an Assistant Secretary of the Company in June 1996. He
has served as Assistant Treasurer of SB Corp since July 1993. Mr. Shulby joined
SB Corp as Director, Corporate Finance in June 1992. Prior thereto, he was a
Senior Audit Manager with Coopers & Lybrand.
TADATAKA YAMADA, M.D., 51 DIRECTOR AND VICE PRESIDENT. Dr. Yamada was
appointed a director and Vice President of the Company at the Company's
inception in May 1996. Dr. Yamada joined SmithKline Beecham as President,
SmithKline Beecham Healthcare Services in February 1996. Prior thereto he had
been the John G. Searle Professor and Chairman of the Department of Internal
Medicine, Professor and Physician-in-Chief at the University of Michigan Medical
Center since 1990. Dr. Yamada has been a director of SmithKline Beecham since
February 1994.
ITEM 11 EXECUTIVE COMPENSATION
Executive management services are provided to the Company by SmithKline
Beecham under the General Services Agreement. The Company does not separately
compensate any of its directors or officers. Information concerning the
compensation of directors and officers of SmithKline Beecham is reported in
Item 11 (Compensation of Directors and Officers) of the SmithKline Beecham 1996
Form 20-F.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of Common Stock and Junior Preferred Stock. The Company does not know
any other person to be the beneficial owner of more than five percent of any
class of the Company's voting Securities.
38
<PAGE> 40
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES OWNED PERCENT OWNED
- ------------------------------------ ---------------------- -------------
<S> <C> <C>
COMMON STOCK
SmithKline Beecham International Co. 2,860.0 97.8
1403 Foulk Road
Suite 102
Wilmington, Delaware 19803-2775
JUNIOR PREFERRED STOCK
SmithKline Beecham International Co. 9.188 94.5
1403 Foulk Road
Suite 102
Wilmington, Delaware 19803-2775
</TABLE>
The Company does not issue stock options. The following table sets
forth, as of December 31, 1996, the beneficial interest of the Company's
directors individually and for current directors and executive officers as a
group in the voting securities of SmithKline Beecham. As of December 31, 1996,
all of the Company's directors and executive officers as a group owned less
than 1.0 percent of the Ordinary Shares of Smithkline Beecham.
<TABLE>
<CAPTION>
Number of Ordingary Shares of
Name of Beneficial Owner SmithKline Beecham Beneficially Owned (1) (2)
- ------------------------ ---------------------------------------------
<S> <C>
Hugh R. Collum......................... 640,142 (3)
William J. Creelman.................... 25,961
Jean-Pierre Garnier Ph.D................ 426,765
Jan Leschly............................ 1,183,026
Donald F. Parman....................... 132,129
George Poste, D.V.M., Ph.D............. 456,240
William J. Shulby...................... 16,642
Tadataka Yamada, M.D................... 15,150
All current directors and officers as
a group (eight persons).............. 2,896,055
</TABLE>
- -------------
(1) To the extent that the Company's directors and executive officers
beneficially own American Depository Receipts ("ADRs"), the table reflects
ownership of the underlying shares, i.e., ownership of 100 Ordinary
Share ADRs would be shown as ownership of 500 Ordinary Shares.
(2) The table also includes Ordinary Shares issuable under employee stock option
plans exercisable within 60 days as follows: Mr. Collum, 298,785 shares; Mr.
Creelman, 20,615 shares; Dr. Garnier, 420,170 shares; Mr. Leschly, 768,851
shares; Mr. Parman, 112,780 shares; Dr. Poste, 447,315 shares; Mr. Shulby,
14,440; Dr. Yamada, none; and all directors and officers as a group, 2,082,956
Ordinary Shares.
(3) Includes 1,968 shares held in trust through which Mr. Collum has voting and
investment power as a trustee as to which Mr. Collum disclaims beneficial
ownership.
At December 31, 1996 wholly-owned subsidiaries of SmithKline Beecham
owned all the outstanding shares of the Company's Common Stock. Under the rules
of the Commission, in their capacity as directors of SmithKline Beecham or such
subsidiaries, Messrs. Collum, Creelman, Garnier, Leschly, Parman, Poste, Shulby
and Yamada may be deemed to benefically own such shares.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is included in Item 1,
Business - Relationship with SmithKline Beecham and Subsidiaries and Note 4 of
the notes to Consolidated Financial Statements, included elsewhere in the Form
10-K.
39
<PAGE> 41
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a). 1. Financial Statements.
Financial Statements of the Registrant are listed in the index to
Consolidated Financial Statements and filed under Item 8, Financial
Statements and Supplementary Data, included elsewhere in the Form
10-K.
2. Financial Statement Schedule.
Financial Statement Schedule of the Registrant is listed in the index
to Consolidated Financial Statements and filed under Item 8, Financial
Statements and Supplementary Data, included elsewhere in this Form
10-K.
3. Exhibits.
3.1 Certificate of Incorporation of SmithKline Beecham Holdings
Corporation, previously filed as Exhibit 3.1 to Registration Statement
No.333-07063 on Form F-3, which is incorporated herein by reference.
3.2 Bylaws of SmithKline Beecham Holdings Corporation, previously filed
as Exhibit 3.2 to Registration Statement No.333-07063 on Form F-3,
which is incorporated herein by reference.
4.1 Form of Certificate of Designations of Flexible Auction Rate Preferred
Stock of SmithKline Beecham Holdings Corporation, previously filed as
Exhibit 4.1 to Registration Statement No.333-07063 on Form F-3, which
is incorporated herein by reference.
4.2 Form of Stock Certificate for SmithKline Beecham Holdings Corporation
Flexible Auction Rate Preferred Stock, previously filed as Exhibit 4.2
to Registration Statement No.333-07063 on Form F-3, which is
incorporated herein by reference.
4.3 Form of Guarantee of SmithKline Beecham plc, previously filed as
Exhibit 4.3 to Registration Statement No.333-07063 on Form F-3, which
is incorporated herein by reference.
4.4 Form of Support Agreement of SmithKline Beecham plc, previously filed
as Exhibit 4.4 to Registration Statement No.333-07063 on Form F-3,
which is incorporated herein by reference.
10.1 Form of General Services Agreement between SmithKline Beecham plc and
SmithKline Beecham Holdings Corporation, previously filed as Exhibit
10.1 to Registration Statement No.333-07063 on Form F-3, which is
incorporated herein by reference.
10.2 Share Exchange Agreement, dated June 20, 1996, between SmithKline
Beecham Holdings Corporation and SmithKline Beecham International Co.,
SmithKline Beecham Corporation and SBCL, Inc, previously filed as
Exhibit 10.2 to Registration Statement No.333-07063 on Form F-3, which
is incorporated herein by reference.
12. Statement of Computation of Ratios for SmithKline Beecham Holdings
Corporation.
21. List of Subsidiaries.
23. Consent of Coopers & Lybrand L.L.P.
27. Financial Data Schedule.
40
<PAGE> 42
(b) Reports on Form 8-K in Fourth Quarter
None
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.
SMITHKLINE BEECHAM HOLDINGS CORPORATION
By /s/ Jan Leschly
---------------------------------
Jan Leschly
President
Date: March 27, 1997
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 capabilities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jan Leschly
- ------------------------------------
/s/ Jan Leschly Director and Principal Executive Officer March 27, 1997
/s/ Hugh R. Collum
- ------------------------------------
/s/ Hugh R. Collum Director and Principal Financial Officer March 27, 1997
/s/ William J. Creelman
- ------------------------------------
/s/ William J. Creelman Director March 27, 1997
/s/ Donald F. Parman
- ------------------------------------
/s/ Donald F. Parman Director March 27, 1997
/s/ William J. Shulby
- ------------------------------------
/s/ William J. Shulby Director March 27, 1997
</TABLE>
41
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page No.
- ------- --------
<S> <C> <C>
12 Statement of Computation of Ratios 43
21 List of Subsidiaries 44
23 Consent of Coopers & Lybrand L.L.P. 45
27 Financial Data Schedule 46
</TABLE>
42
<PAGE> 1
EXHIBIT 12
SMITHKLINE BEECHAM HOLDINGS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
(IN MILLIONS EXCEPT RATIO)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income before income taxes ................ $ 211 $ 219 $ 230 $ 211 $ 194
Less: Equity in net income and losses
of affiliates ......................... (18) (21) (9) (20) (21)
Add: Interest expense .................... 2 3 13 19 22
===== ===== ===== ===== =====
Income, as adjusted ....................... $ 195 $ 201 $ 234 $ 210 $ 195
===== ===== ===== ===== =====
Fixed charges:
Interest expensed and capitalized ......... $ 2 $ 4 $ 14 $ 20 $ 23
Preferred stock dividend requirement ...... 54 -- -- -- --
----- ----- ----- ----- -----
Total fixed charges and preferred stock
dividends ............................. $ 56 $ 4 $ 14 $ 20 $ 23
===== ===== ===== ===== =====
Ratio of earnings to combined fixed charges
and preferred stock dividends ............. 3.5x 50.3x 16.7x 10.5x 8.5x
===== ===== ===== ===== =====
</TABLE>
43
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF
SMITHKLINE BEECHAM HOLDINGS CORPORATION
<TABLE>
<S> <C>
NAME JURISDICTION OF ORGANIZATION
SmithKline Beecham Holdings Corporation Delaware
Penn Chemicals Ltd. Ireland
SmithKline Beecham Consumer Healthcare K.K. Japan
SmithKline Beecham Animal Health Inc. Canada
Franklin Chemicals Ltd. Bahamas
SmithKline Beecham Seiyaku K.K. Japan
Smith Kline & French of Pakistan Ltd. Pakistan
SmithKline Beecham Holdings Capital Inc. Delaware
Smith Kline & French B.V. Netherlands
SmithKline Beecham Venezuela C.A. Venezuela
SmithKline Beecham Consumer Healthcare Pte. Ltd Singapore
SmithKline Beecham AG Switzerland
SmithKline Beecham Markenartikel AG Switzerland
S.R. One International B.V. Netherlands
Beecham Pharmaceuticals (Pte) Limited Singapore
SmithKline Beecham Markenartikel G.m.b.H. Austria
Medisana Pharmazeutisch Drogen-Handel Ges.m.b.H. Austria
SmithKline Beecham Markenartikel G.m.b.H. & Co. Austria
SmithKline Beecham Manufacturing Ltd. Ireland
SmithKline Beecham (Ireland) Ltd. Ireland
SmithKline Beecham Pharmaceuticals Ltd. Ireland
SmithKline Beecham Consumer Brands Ltd. Ireland
Beecham Products (Ireland) Ltd. Ireland
SmithKline Beecham Laboratories Pharmaceutiques SA France
Groupement de Production Pharmaceutique France
Laboratoires Pharmaceutique Algeriens Algeria
Beecham Portuguesa Produtos Farmaceuticos E Quimicos Ltda. Portugal
Instituto Luso-Farmaco S.A. Portugal
Paola Cocco Lda. Portugal
Fournex S.A. Belgium
SmithKline Beecham Pharma G.m.b.H. Austria
SmithKline Beecham Laboratorios Ltda. Brazil
The Syndey Ross Co. Farmaceutica Ltda. Brazil
White Industria e Comercio Ltda. Brazil
Publimark Publicidade e Marketing Ltda. Brazil
PCL Produtos Cosmeticos Ltda. Brazil
SmithKline Beecham Animal Health Ltd. Ireland
Bridge Pharmaceuticals Ireland Limited Ireland
Compagnie Industrielle de Specialites S.A. France
SmithKline Beecham Pharmacie Sante S.A. France
SmithKline Beecham Holdings S.A. Switzerland
Walnut Insurance Company Ltd. Bermuda
SBCL Holdings, Ltd. Canada
Smith Kline & French (Far East) Co. Delaware
Valmont Ltd. Thailand
Smith Kline & French (Thailand) Ltd. Thailand
Sterling Drug International, Inc. Arkansas
SmithKline Beecham (UK) Ltd England
</TABLE>
44
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
SmithKline Beecham Holdings Corporation on Form F-3 (File No. 333-07063) of our
report dated March 19, 1997, on our audits of the consolidated financial
statements and financial statement schedule of SmithKline Beecham Holdings
Corporation as of December 31, 1996 and 1995, and for the years ended December
31, 1996, 1995, and 1994, which report is included in this Annual Report on Form
10-K.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Philadelphia, PA
March 26, 1997
45
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1,142
15
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