SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) NOVEMBER 21, 1994
ELI LILLY AND COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INDIANA 1-6351 35-0470950
(STATE OR OTHER JURISDIC- (COMMISSION (IRS EMPLOYER
TION OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (317) 276-2000
NO CHANGE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On November 21, 1994, ECO Acquisition Corporation, a Delaware corporation
("ECO") and a wholly-owned subsidiary of Eli Lilly and Company, an Indiana
corporation ("Lilly") pursuant to its Offer to Purchase, dated July 15, 1994
(the "Offer"), purchased 42,640,622 shares of the common stock, par value $2.00
per share (the "Shares"), of McKesson Corporation, a Delaware corporation
("McKesson") for $76.00 net per Share. The Shares so purchased represented
approximately 94.9% of the Shares outstanding on such date. Of such Shares,
2,933,458 Shares (approximately 6.5% of the Shares outstanding) were tendered
pursuant to notices of guaranteed delivery. The amount and nature of the
consideration was the result of arms-length negotiation between Lilly and
McKesson.
Pursuant to the Agreement and Plan of Merger, dated July 10, 1994, as
amended, by and among ECO, Lilly and McKesson (the "Merger Agreement"), Lilly
intends to effect a merger of ECO with and into McKesson (the "Merger")
pursuant to Section 253 of the Delaware General Corporation Law as soon as
practicable. Upon the consummation of the Merger, each outstanding Share (other
than Shares acquired by ECO in the Offer, Shares owned by a subsidiary of
McKesson and Shares as to which appraisal rights are perfected) will be
converted into the right to receive $76.00 in cash. Prior to the expiration of
the Offer, McKesson completed a spin-off to its stockholders of record on
November 19 of the common stock of a newly created corporation that held all of
McKesson's businesses and subsidiaries other than its pharmaceutical benefits
management business (the "PCS Group"). Accordingly, upon consummation of the
Offer and the Merger, McKesson, then consisting solely of the PCS Group, will
become a wholly-owned subsidiary of Lilly.
Lilly funded the acquisition of Shares pursuant to the Offer and the payment
of approximately $630 million to McKesson (as required by the Merger
Agreement), and expects to fund the Merger and all transaction-related fees and
expenses (all of which are expected to total approximately $4.1 billion), with
the proceeds of a $4.0 billion commercial paper program and internally
generated funds.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired
2
PCS GROUP
CONDENSED COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED SEPTEMBER 30,
---------------------
1994 1993
---------- ---------
Revenues................................................. $ 103,136 $ 76,363
---------- ---------
Expenses
Cost of services rendered............................... 56,350 36,236
Selling, general and administrative..................... 26,654 17,908
Interest (income) expense--net.......................... (453) (13)
---------- ---------
Total expenses........................................ 82,551 54,131
---------- ---------
Income before taxes on income............................ 20,585 22,232
Taxes on income.......................................... 8,646 9,538
---------- ---------
Net income............................................... $ 11,939 $ 12,694
========== =========
See accompanying notes to condensed combined financial statements.
3
PCS GROUP
CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30,
1994
-------------
ASSETS
Current Assets
Cash and short-term investments................................. $ 2,990
--------
Receivables
Service fees.................................................. 45,806
Claim reimbursements and rebate receivables................... 353,821
Other, including officers and employees....................... 1,460
Allowance for doubtful accounts............................... (1,684)
--------
Receivables--net............................................ 399,403
Prepaids and other.............................................. 6,816
Deferred income taxes........................................... 3,136
--------
Current assets.............................................. 412,345
--------
Property--net..................................................... 84,386
Goodwill--net..................................................... 65,360
Other Assets...................................................... 23,140
--------
Total Assets $585,231
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Claims and rebates payable...................................... $174,386
Checks outstanding.............................................. 212,958
Due to McKesson................................................. 57,602
Deposits........................................................ 20,439
Accrued and other liabilities................................... 22,947
--------
Current liabilities......................................... 488,332
--------
Non Current Liabilities
Deferred income taxes........................................... 5,970
Postretirement obligations...................................... 900
Deferred compensation........................................... 2,052
--------
Non current liabilities..................................... 8,922
--------
Commitments and Contingencies (Note 4)
Stockholder's Equity
Combined common stock and other capital......................... 45,614
Combined retained earnings...................................... 42,363
--------
Stockholder's equity........................................ 87,977
--------
Total Liabilities and Stockholder's Equity................ $585,231
========
See accompanying notes to condensed combined financial statements.
4
PCS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------
1994 1993
--------- --------
Operating Activities
Net income.............................................. $ 11,939 $ 12,694
Adjustments to reconcile to net cash provided (used) by
operating activities
Depreciation and amortization......................... 8,032 6,243
Deferred income taxes................................. 470 2,111
--------- --------
Total............................................... 20,441 21,048
--------- --------
Effect of changes in
Receivables........................................... (107,211) (43,089)
Claims and rebates payable............................ (76,004) 44,704
Checks outstanding.................................... 164,040 (10,501)
Accrued and other liabilities......................... (4,036) (3,789)
Other................................................. (4,130) (685)
--------- --------
Total............................................... (27,341) (13,360)
--------- --------
Net cash provided (used) by operating activities.... (6,900) 7,688
--------- --------
Investing Activities
Acquisition of businesses............................. (553) (34,704)
Capital expenditures.................................. (6,518) (12,206)
Property retirements.................................. 674 --
Other................................................. (3,284) (320)
--------- --------
Net cash used by investing activities............... (9,681) (47,230)
--------- --------
Financing Activities
Short-term borrowings from McKesson................... 12,602 43,681
Deferred compensation................................. 999 412
--------- --------
Net cash provided by financing activities........... 13,601 44,093
--------- --------
Net increase (decrease) in cash and short-term
investments............................................ (2,980) 4,551
Cash and short-term investments at beginning of period.. 5,970 8,305
--------- --------
Cash and short-term investments at end of period........ $ 2,990 $ 12,856
========= ========
See accompanying notes to condensed combined financial statements.
5
PCS GROUP
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying condensed combined financial statements include PCS Health
Systems, Inc. and its subsidiaries ("PCS"), Clinical Pharmaceuticals, Inc. and
its subsidiary ("CPI") and an equity interest in Integrated Medical Systems
("IMS"), collectively defined as the "PCS Group" or the "Company". McKesson
Corporation ("McKesson") at September 30, 1994 owned 100% of the outstanding
common stock of PCS and CPI and the equity interest in IMS. On July 10, 1994,
McKesson entered into an Agreement and Plan of Merger ("Agreement") to sell the
PCS Group, see Note 3. The accompanying condensed combined financial statements
have been prepared in connection with this Agreement.
All significant intercompany balances and transactions have been eliminated.
2. Interim Financial Statements
In the opinion of the Company, these unaudited condensed combined financial
statements include all adjustments necessary to a fair presentation of the
Company's financial position as of September 30, 1994 and the results of its
operations and its cash flows for the six months then ended. Such adjustments
were of a normal recurring nature.
The results of operations for the six months ended September 30, 1994 and
1993 are not necessarily indicative of the results for the full year.
It is suggested that these financial statements be read in conjunction with
the financial statements, accounting policies and financial notes thereto
included in the Company's March 31, 1994 annual financial statements.
3. Proposed Sale of the PCS Group
On July 10, 1994, McKesson entered into an Agreement providing for the
acquisition by Eli Lilly and Company ("Lilly") of the PCS Group. On November
21, 1994, a Lilly subsidiary acquired through a tender offer approximately 95%
of McKesson after the distribution by McKesson of all its businesses other than
the PCS Group.
4. Contingencies
The Company has entered into capitation contracts with certain customers in
the ordinary course of business. These contracts provide that the Company
assume varying percentages of the risk associated with claims experience
differing from fixed fee arrangements under managed care programs. During the
six months ended September 30, 1994, the Company recorded loss provisions
totalling $6,400,000 related to these contracts.
6
INDEPENDENT AUDITORS' REPORT
To the Stockholder of PCS Group:
We have audited the accompanying combined balance sheets of PCS Group
(defined in Note 1 to the combined financial statements) as of March 31, 1994,
1993 and 1992, and the related combined statements of income, stockholder's
equity and cash flows for the years then ended. The companies defined in Note 1
to the combined financial statements are under common ownership and common
management. These financial statements are the responsibility of PCS Group's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of PCS Group at March 31, 1994, 1993
and 1992, and the combined results of their operations and their combined cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the combined financial statements, in 1992 PCS
Group changed its method of accounting for postretirement benefits other than
pensions to conform with Statement of Financial Accounting Standards No. 106.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
August 19, 1994
7
PCS GROUP
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
YEAR ENDED MARCH 31,
-----------------------------
1994 1993 1992
--------- --------- ---------
Revenues (Note 1)............................... $ 173,495 $ 111,457 $ 102,463
--------- --------- ---------
Expenses (Note 1)
Cost of services rendered..................... 84,668 43,423 40,106
Selling, general and administrative........... 43,901 35,947 31,800
Interest expense.............................. 68 73 2,424
--------- --------- ---------
Total expenses.............................. 128,637 79,443 74,330
--------- --------- ---------
Income before taxes on income................... 44,858 32,014 28,133
Taxes on income (Note 3)........................ 19,252 13,378 11,845
--------- --------- ---------
Income before cumulative effect of accounting
change......................................... 25,606 18,636 16,288
Cumulative effect of accounting change (Note 1). -- -- (540)
--------- --------- ---------
Net income...................................... $ 25,606 $ 18,636 $ 15,748
========= ========= =========
See accompanying notes to combined financial statements.
8
PCS GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
ASSETS
Current Assets
Cash and short-term investments (Note 1).... $ 5,970 $ 8,305 $ 280
--------- --------- ---------
Receivables
Service fees.............................. 13,056 11,852 8,778
Claim reimbursements and rebate
receivables (Note 1)..................... 280,444 119,343 102,212
Other, including officers and employees... 705 537 435
Allowance for doubtful accounts........... (2,013) (2,726) (1,469)
--------- --------- ---------
Receivables--net........................ 292,192 129,006 109,956
Prepaids and other.......................... 6,686 1,271 1,623
Deferred income taxes (Note 3).............. 1,619 1,844 729
--------- --------- ---------
Current assets.......................... 306,467 140,426 112,588
--------- --------- ---------
Property--net (Notes 1 and 4)............... 85,348 69,886 65,088
Goodwill--net (Notes 1 and 2)............... 70,106 38,352 39,564
Other Assets (Note 2)....................... 15,225 7,327 2,379
--------- --------- ---------
Total Assets............................ $ 477,146 $ 255,991 $ 219,619
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Claims and rebates payable (Note 1)......... $ 250,390 $ 105,889 $ 87,980
Checks outstanding (Note 1)................. 48,918 57,682 57,302
Due to McKesson (Note 5).................... 45,000 4,365 7,464
Deposits.................................... 20,980 20,075 19,855
Accrued and other liabilities............... 26,442 11,675 10,373
--------- --------- ---------
Current liabilities..................... 391,730 199,686 182,974
--------- --------- ---------
Non Current Liabilities
Deferred income taxes (Note 3).............. 7,425 4,735 4,229
Postretirement obligations (Note 1)......... 900 900 900
Deferred compensation....................... 1,053 666 148
--------- --------- ---------
Non current liabilities................. 9,378 6,301 5,277
--------- --------- ---------
Commitments and Contingencies (Notes 7 and 8)
Stockholder's Equity
Combined common stock and other capital..... 45,614 45,614 45,614
Combined retained earnings (deficit)........ 30,424 4,390 (14,246)
--------- --------- ---------
Stockholder's equity.................... 76,038 50,004 31,368
--------- --------- ---------
Total Liabilities and Stockholder's
Equity................................. $ 477,146 $ 255,991 $ 219,619
========= ========= =========
See accompanying notes to combined financial statements.
9
PCS GROUP
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
COMMON STOCK RETAINED COMBINED TOTAL
NUMBER OF SHARES OTHER EARNINGS (DEFICIT) RETAINED STOCK-
---------------- CAPITAL ---------------------EARNINGS HOLDER'S
PCS CPI PCS PCS CPI (DEFICIT) EQUITY
-------- -------- -------- ---------- ------------------ --------
Balances, March 31, 1991
(Note 1)............... 100 $ 45,614 $ (29,994) $ $ (29,994) $ 15,620
Net income.............. 15,748 15,748 15,748
-------- -------- -------- ---------- -------- --------- --------
Balances, March 31, 1992 100 45,614 (14,246) (14,246) 31,368
Net income.............. 18,636 18,636 18,636
-------- -------- -------- ---------- -------- --------- --------
Balances, March 31,
1993................... 100 45,614 4,390 4,390 50,004
Acquisition of CPI (Note
2)..................... 100
Net income.............. 24,050 1,556 25,606 25,606
Other................... 428 428 428
-------- -------- -------- ---------- -------- --------- --------
Balances, March 31,
1994................... 100 100 $ 45,614 $ 28,868 $ 1,556 $ 30,424 $ 76,038
======== ======== ======== ========== ======== ========= ========
PCS's capital structure includes $0.01 par value preferred stock; 10,000,000
shares authorized; no shares outstanding and $0.01 par value common stock;
1,000 shares authorized; 100 shares outstanding.
CPI's capital structure includes $0.01 par value common stock; 1,000 shares
authorized; 100 shares outstanding.
See accompanying notes to combined financial statements.
10
PCS GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
----------------------------
1994 1993 1992
-------- -------- --------
Operating Activities
Income before cumulative effect of accounting
change........................................ $ 25,606 $ 18,636 $ 16,288
Adjustments to reconcile to net cash provided
by operating activities
Depreciation and amortization................ 13,394 9,350 11,064
Provision for losses on receivables.......... (178) 546 1,347
Deferred income taxes........................ 2,915 (609) (313)
-------- -------- --------
Total...................................... 41,737 27,923 28,386
-------- -------- --------
Effect of changes in
Receivables.................................... (156,707) (19,596) 2,265
Claims and rebates payable..................... 144,507 17,909 24,133
Checks outstanding............................. (8,764) 380 (38,214)
Accrued and other liabilities.................. 8,084 1,521 3,623
Other.......................................... (5,393) 352 (149)
-------- -------- --------
Total...................................... (18,273) 566 (8,342)
-------- -------- --------
Net cash provided by operating activities.. 23,464 28,489 20,044
-------- -------- --------
Investing Activities
Acquisition of businesses (Note 2)............. (40,335) -- --
Capital expenditures........................... (26,122) (12,994) (2,298)
Property retirements........................... 68 58 5
Other.......................................... (432) (4,947) (1,563)
-------- -------- --------
Net cash used by investing activities...... (66,821) (17,883) (3,856)
-------- -------- --------
Financing Activities
Short-term borrowings from McKesson (Note 5)... 40,635 (3,099) 7,734
Deferred compensation.......................... 387 518 79
Payments for retirement of debt................ -- -- (24,150)
-------- -------- --------
Net cash provided (used) by investing
activities................................ 41,022 (2,581) (16,337)
-------- -------- --------
Net increase (decrease) in cash and short-term
investments..................................... (2,335) 8,025 (149)
Cash and short-term investments at beginning of
year............................................ 8,305 280 429
-------- -------- --------
Cash and short-term investments at end of year... $ 5,970 $ 8,305 $ 280
======== ======== ========
See accompanying notes to combined financial statements.
11
PCS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Basis of Presentation--The accompanying combined financial statements include
PCS Health Systems, Inc. and its subsidiaries ("PCS"), Clinical
Pharmaceuticals, Inc. and its subsidiary ("CPI") and an equity interest in
Integrated Medical Systems ("IMS"), collectively defined as the "PCS Group" or
the "Company". CPI and IMS have been included in the accompanying financial
statements since their respective dates of acquisition (see Note 2). McKesson
Corporation ("McKesson") at March 31, 1994 owned 100% of the outstanding common
stock of PCS and CPI and the equity interest in IMS. On July 10, 1994, McKesson
entered into an Agreement and Plan of Merger ("Agreement") to sell the PCS
Group, see Proposed Sale of the Company below. The accompanying combined
financial statements have been prepared in connection with this Agreement.
All significant intercompany balances and transactions have been eliminated.
Business--The Company provides computer-based prescription drug claims
processing and pharmacy benefit design, administration and management services
to health plan sponsors, including, insurance companies, third party
administrators, self-insured employers, and health maintenance and Blue
Cross/Blue Shield organizations that underwrite or administer prescription
benefit plans. The Company helps these customers manage the cost of
prescription plans by providing drug utilization reviews, clinically-based
formularies and generic substitution programs. The Company also operates an on-
line electronic network to transmit medical, hospital, laboratory, clinical and
billing information that links health care providers (physicians, hospitals and
clinics) with health plan sponsors. RECAP (TM), the Company's on-line
prescription claims management system, is linked with over 95% of retail
pharmacies in the U.S.
Transactions with McKesson Corporation--Certain expenses, principally
employee benefits, are paid on behalf of, and charged to the Company by
McKesson. In addition, the Company uses certain resources and administrative
staff of McKesson, including financial, legal, tax, internal audit, accounting
advice, and certain personnel and financial systems data processing and
employee benefit services. The Company is charged a fee for these and other
services and general liability and workers' compensation insurance premiums at
an amount based on actual time or costs incurred. The Company paid McKesson
$1,294,000, $946,000 and $979,000 in fiscal years 1994, 1993 and 1992,
respectively, for the services; and, $400,000, $75,000 and $115,000 in fiscal
years 1994, 1993 and 1992, respectively, for the insurance premiums.
The Company participated in McKesson's cash management program as described
in Note 5 and also participates in certain McKesson employee benefit plans, as
described in Note 6.
The accompanying financial statements reflect a distribution, retroactive to
fiscal 1991, of a dividend (reflected as a reduction to the March 31, 1991 PCS
retained earnings balance) to McKesson totalling $93,567,000.
Proposed Sale of the Company--On July 10, 1994, McKesson entered into an
Agreement providing for the acquisition by a subsidiary of Eli Lilly and
Company ("Lilly") of the PCS Group. This transaction is subject to various
conditions including provisions of the Hart-Scott-Rodino Act.
Income Taxes--The Company accounts for income taxes under the liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes".
Cash and Short-Term Investments include all highly liquid debt instruments
purchased with a maturity of three months or less.
12
PCS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Property is stated at cost and depreciated on the straight-line method over
estimated useful lives of three to ten years. The buildings are depreciated
over their estimated useful life of 35 years (see Note 4).
Goodwill is amortized over 3 to 40 years and is stated net of accumulated
amortization of $7,532,000, $5,158,000 and $3,946,000 at March 31, 1994, 1993
and 1992, respectively (see Note 2).
Capitalized Software included in other assets reflects costs related to
internally developed or purchased software for projects in excess of $100,000
that are capitalized and amortized on a straight-line basis over periods not
exceeding five years.
Claim Reimbursements Receivable and Claims Payable are recorded when the
reimbursement request is received from a member pharmacy. Reimbursements for
claim payments are not included in revenues, and payments to member pharmacies
are not included in expenses. Checks outstanding are classified as liabilities
because they are drawn on zero balance accounts.
Revenues include claims processing fees that are accrued when the related
claim is processed and approved for payment. Other revenues are generally
recognized as the services are performed.
Changes in Accounting Principles--During 1994, the Company adopted SFAS No.
112, "Employer's Accounting for Postemployment Benefits". This accounting
change did not have a material effect on the Company's consolidated financial
statements. In 1992, the Company adopted SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". The cumulative effect of
adopting this new standard resulted in a charge to net income of $540,000 net
of a $360,000 tax benefit.
2. Acquisitions
In April 1993, McKesson purchased all the outstanding shares of CPI, an
administrator of clinically based managed prescription drug benefit programs.
The cost of the shares, which was paid in cash, was approximately $34,079,000
including transaction related costs. The acquisition, which has been accounted
for as a purchase, resulted in additional goodwill of $34,820,000 which is
being amortized over 25 years. The accompanying combined financial statements
include CPI from the date of acquisition.
In January 1994, McKesson purchased an approximate 15% interest in IMS, a
developer of community medical information systems. IMS's networks link
physicians with other health care providers, managed care organizations and
health plan sponsors. McKesson paid an aggregate cash purchase price of
$6,256,000 for 50,000 common shares and 1,250,000 convertible preferred shares
(convertible 1 to 1 into common) of outstanding IMS stock. Such investment is
accounted for under the cost method and is included in other assets. In
addition, McKesson placed a $4,000,000 deposit in escrow toward the purchase of
an additional 1,000,000 convertible preferred shares. On July 12, 1994,
McKesson used the $4,000,000 deposit to acquire the additional convertible
preferred shares, increasing the Company's ownership interest in IMS to
approximately 24%.
The impact on fiscal 1994 and 1993 revenues and net income, had the
acquisitions occurred at the beginning of fiscal 1993, is not material.
3. Taxes on Income
The Company is included in McKesson's consolidated federal income tax return.
The Company's tax provision has been computed as if the Company filed separate
income tax returns. The provision for income taxes is made up of the following
components:
13
PCS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED MARCH 31,
---------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
Current
Federal.................................... $ 12,787 $ 11,099 $ 9,403
State...................................... 3,503 2,868 2,406
Foreign.................................... 47 20 (11)
-------- -------- --------
Total current............................ 16,337 13,987 11,798
======== ======== ========
Deferred
Federal.................................... 2,294 (616) 113
State...................................... 621 7 (66)
-------- -------- --------
Total deferred........................... 2,915 (609) 47
-------- -------- --------
Total.................................. $ 19,252 $ 13,378 $ 11,845
======== ======== ========
Deferred income taxes arise from temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial
statements. The Company's effective tax rate differs from the statutory federal
income tax rate as follows:
YEAR ENDED MARCH 31,
----------------------
1994 1993 1992
------ ------ ------
Statutory federal income tax rate................. 35.0% 34.0% 34.0%
State income taxes................................ 6.0 6.0 5.5
Goodwill amortization and other................... 1.9 1.8 2.6
------ ------ ------
Effective tax rate............................ 42.9% 41.8% 42.1%
====== ====== ======
The deferred tax balances consisted of the following:
YEAR ENDED MARCH 31,
-------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
Current Assets:
Nondeductible accrual for:
Allowances................................ $ 608 $1,084 $ 618
Accrued vacation pay...................... 560 443 311
Other....................................... 451 317 (200)
------- ------- -------
Total................................... $ 1,619 $ 1,844 $ 729
======= ======= =======
Noncurrent Liabilities:
Nondeductible accrual for:
Deferred compensation..................... $ (424) $ (265) $ (58)
Postretirement plan....................... (366) (358) (360)
Accelerated depreciation.................... 4,949 4,719 4,086
Capitalized software........................ 2,149 956 387
Deferred costs of new programs.............. 1,174 (358) --
CPI net operating loss carryforward......... (3,442) -- --
Reserve--CPI net operating loss
carryforward............................... 3,442 -- --
Other....................................... (57) 41 174
------- ------- -------
Total................................... $ 7,425 $ 4,735 $ 4,229
======= ======= =======
As the benefit of CPI's net operating loss is realized in future periods, a
corresponding reduction in goodwill will be recorded.
14
PCS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. Property
Property is summarized as follows:
YEAR ENDED MARCH 31,
----------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
Land........................................ $ 25,744 $ 25,744 $ 25,744
Buildings and improvements.................. 29,069 27,204 26,791
Equipment................................... 64,934 51,181 42,580
Furniture and fixtures...................... 10,108 8,220 7,262
-------- -------- --------
Total..................................... 129,855 112,349 102,377
Accumulated depreciation.................... (44,507) (42,463) (37,289)
-------- -------- --------
Property--net............................. $ 85,348 $ 69,886 $ 65,088
======== ======== ========
Depreciation expense was $11,020,000, $8,138,000 and $9,059,000 in fiscal
1994, 1993 and 1992, respectively.
5. Due to McKesson
The Company participated in McKesson's cash management program whereby the
Company's cash receipts were transferred daily to a McKesson bank account and
the Company's cash disbursements were funded by McKesson. The Company was
charged interest expense on funds advanced by McKesson and received interest
income on funds provided to McKesson, at McKesson's short-term borrowing rates.
At March 31, 1994, McKesson converted the excess of disbursements funded by
McKesson over cash receipts to a short-term credit line which is due on demand
and bears interest at McKesson's short-term borrowing rates. During the three
year period ended March 31, 1994, the amounts by which the Company's
disbursements that McKesson funded, net of the Company's cash receipts,
averaged $0 on a daily basis.
6. Employee Benefit Plans
The Company's employees are eligible to participate in a profit-sharing plan.
The Company's contributions to the plan were $949,000, $625,000 and $548,000 in
fiscal 1994, 1993 and 1992, respectively. The Company's employees are also
eligible to participate in McKesson's health, retirement and certain other
employee benefit plans. The expense of these benefit plans was approximately
$5,720,000, $4,663,000 and $3,946,000 ($4,925,000, $3,995,000 and $3,442,000
for the health plan benefit) in fiscal 1994, 1993 and 1992, respectively.
7. Lease Commitments
The Company leases facilities and equipment under operating leases that
expire on various dates through September 2000. Rent expense was $4,051,000,
$2,127,000 and $1,912,000 in fiscal 1994, 1993 and 1992, respectively. As of
March 31, 1994, future minimum lease payments are as follows:
YEAR ENDING MARCH 31
--------------------
(IN THOUSANDS)
1995............................................... $ 1,136
1996............................................... 1,135
1997............................................... 925
1998............................................... 723
1999 and thereafter................................ 1,331
-------
Total............................................ $ 5,250
=======
15
PCS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. CONTINGENCIES
Subsequent to year end, the Company entered into capitation contracts with
certain customers in the ordinary course of business. These contracts provide
that the Company assume varying percentages of the risk associated with claims
experience differing from fixed fee arrangements under managed care programs.
During the three months ended June 30, 1994, the Company recorded loss
provisions totalling $3,700,000 related to these contracts.
The Company is subject to various claims, including claims related to certain
sales/use tax matters, and possible legal actions brought by plan sponsors for
alleged errors or omissions arising out of the ordinary course of business. The
Company has in place insurance to cover certain claims subject to a $1,000,000
deductible. Management believes that it has adequate reserves against potential
losses and that the outcome of such claims will not have a material adverse
effect on the Company's combined financial position or results of operations.
9. SUPPLEMENTAL CASH FLOW DISCLOSURES
Income taxes totalling $16,806,000, $15,140,000 and $14,792,000 were paid,
primarily to McKesson in fiscal 1994, 1993 and 1992, respectively. Interest
totalling $18,000, $81,000 and $2,433,000 was paid in fiscal 1994, 1993 and
1992, respectively.
10. SIGNIFICANT CUSTOMER
During 1994 one customer accounted for 17% of the Company's revenues.
11. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT
On November 21, 1994, a subsidiary of Lilly acquired through a tender offer
approximately 95% of McKesson after the distribution by McKesson of all of its
businesses other than the PCS Group.
16
(b) Pro Forma Financial Information
The Unaudited Pro Forma Combined Condensed Balance Sheet assumes that the
Merger was consummated on September 30, 1994, and the Unaudited Pro Forma
Combined Condensed Statements of Income assume the Merger was consummated on
January 1, 1993. The fiscal year of Eli Lilly and Company ends on December 31,
and the fiscal year of McKesson ends on March 31. For purposes of presenting
the Unaudited Pro Forma Combined Condensed Statements of Income for the year
ended December 31, 1993, the PCS Group results for the period from April 1,
1993 to March 31, 1994 were included. The Pro Forma Combined Condensed
Statement of Income for the nine months ended September 30, 1994 includes the
period from January 1, 1994 to September 30, 1994 for both Lilly and the PCS
Group. Therefore, the PCS Group results for January 1, 1994 through March 31,
1994 were included in both statements.
ELI LILLY AND COMPANY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA)
HISTORICAL
------------------
GUIDANT PCS PRO FORMA
LILLY PCS ADJUSTMENTS ADJUSTMENTS COMBINED
--------- ------- ----------- ----------- ---------
Net Sales............... $ 5,132.9 $ 153.8 $ (0.2)(3) $ 5,286.5
Cost of sales........... 1,620.5 81.7 1,702.2
Research and
development............ 738.4 -- 738.4
Acquired research....... 58.4 -- 58.4
Marketing and
administrative......... 1,257.6 41.3 (0.2)(3) 1,298.7
Special charges......... 66.0 -- 66.0
Other income--net....... (62.0) (0.3) $ 14.8 (1) 73.8 (4) 207.8
181.5 (5)
--------- ------- ------- -------- ---------
3,678.9 122.7 14.8 255.1 4,071.5
Income before income
taxes and
minority interest...... 1,454.0 31.1 (14.8) (255.3) 1,215.0
Income taxes............ 458.0 13.2 (5.9)(8) (72.6)(8) 392.7
Minority interest....... -- -- 10.6 (2) 10.6
--------- ------- ------- -------- ---------
Net income.............. $ 996.0 $ 17.9 $ (19.5) $ (182.7) $ 811.7
========= ======= ======= ======== =========
Earning per share of
common stock........... $ 3.44 -- -- -- $ 2.81
Weighted average number
of common shares
outstanding............ 289.2 289.2
17
ELI LILLY AND COMPANY
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA)
HISTORICAL
------------------ GUIDANT PCS PRO FORMA
LILLY PCS ADJUSTMENTS ADJUSTMENTS COMBINED
--------- ------- ----------- ----------- ---------
Net Sales............... $ 6,452.4 $ 173.5 $ 6,625.9
Cost of sales........... 1,959.0 84.7 2,043.7
Research and
development............ 954.6 -- 954.6
Marketing and
administrative......... 1,713.5 43.9 1,757.4
Restructuring and
special charges........ 1,172.7 -- 1,172.7
Other income-net........ (49.3) -- $ 25.6 (1) $ 98.4 (4) 316.7
242.0 (5)
--------- ------- ------- -------- ---------
5,750.5 128.6 25.6 340.4 6,245.1
Income before income
taxes, minority
interest and cumulative
effect of changes in
accounting principles.. 701.9 44.9 (25.6) (340.4) 380.8
Income taxes............ 210.8 19.3 (10.2)(8) (96.8)(8) 123.1
Minority interest....... -- -- 6.5 (2) 6.5
--------- ------- ------- -------- ---------
Income before cumulative
effect of changes in
accounting principles.. $ 491.1 $ 25.6 $ (21.9) $ (243.6) $ 251.2
========= ======= ======= ======== =========
Earnings per share of
common stock before
cumulative effect of
changes in accounting
principles............. $1.67 -- -- -- $0.85
Weighted average number
of common shares
outstanding............ 294.3 294.3
18
ELI LILLY AND COMPANY
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1994
(DOLLARS IN MILLIONS)
HISTORICAL
------------------ GUIDANT PCS PRO FORMA
LILLY PCS ADJUSTMENTS ADJUSTMENTS COMBINED
---------- ------- ----------- ----------- ----------
ASSETS
Current Assets
Cash and cash
equivalents.......... $ 999.6 $ 3.0 $ 382.2(1) $ 1,384.8
Short-term
investments.......... 461.9 -- 461.9
Accounts receivable--
net.................. 1,090.1 399.4 $ (3.7)(3) 1,485.8
Inventories........... 1,041.9 -- 1,041.9
Deferred income taxes. 243.8 3.1 246.9
Other current assets.. 339.4 6.8 346.2
---------- ------- ------- --------- ----------
Total current
assets............. 4,176.7 412.3 382.2 (3.7) 4,967.5
Other Assets
Prepaid retirement.... 405.9 -- 405.9
Investments........... 297.9 -- 297.9
Goodwill and other
intangibles--net..... 400.5 65.4 3,937.0 (4) 4,402.9
Sundry................ 934.1 23.1 957.2
Property and
equipment--net....... 4,292.6 84.4 4,377.0
---------- ------- ------- --------- ----------
$ 10,507.7 $ 585.2 $ 382.2 $ 3,933.3 $ 15,408.4
========== ======= ======= ========= ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities
Short-term borrowings. $ 738.5 -- $ 3,200.0 (5) $ 3,938.5
Accounts payable...... 207.6 $ 387.3 25.0 (6) 619.9
Employee compensation. 279.3 -- 279.3
Other liabilities..... 1,020.7 101.0 (3.7)(6) 1,118.0
Income taxes payable.. 476.7 -- 476.7
---------- ------- ------- --------- ----------
Total current
liabilities........ 2,722.8 488.3 3,221.3 6,432.4
Long-term Debt.......... 1,174.4 -- $ 189.0(1) 800.0 (5) 2,163.4
Deferred income taxes... 164.2 6.0 170.2
Retiree medical benefit
obligation............. 198.7 0.9 199.6
Other noncurrent
liabilities............ 932.9 2.0 934.9
Minority interest....... 41.4 (2) 41.4
Shareholders' equity.... 5,314.7 88.0 193.2 (1) (88.0)(7) 5,466.5
(41.4)(2)
---------- ------- ------- --------- ----------
$ 10,507.7 $ 585.2 $ 382.2 $ 3,933.3 $ 15,408.4
========== ======= ======= ========= ==========
19
ELI LILLY AND COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET AND INCOME STATEMENTS
The Unaudited Pro Forma Combined Condensed Balance Sheet was prepared to
reflect the Merger, which was accounted for under the purchase method of
accounting, as if the Merger occurred on September 30, 1994.
The Unaudited Pro Forma Combined Condensed Statements of Income have been
prepared to reflect the Merger as if the Merger occurred January 1, 1993. The
excess of the purchase price over the fair value of the net assets acquired is
being amortized on a straight-line basis over a 40-year period.
The Unaudited Pro Forma Combined Condensed Balance Sheet and Statements of
Income also include adjustments relating to an initial public offering for up
to 20% of the shares of Guidant Corporation ("Guidant"), a newly formed company
comprising five of Lilly's medical device and diagnostics (MDD) businesses.
This IPO is currently scheduled for the fourth quarter of 1994 and is part of
Lilly's previously announced intent to divest itself of its MDD businesses.
Included in Lilly's historical Statement of Income for the year ended
December 31, 1993, is a pretax restructuring and special charge of $1,172.7
million. This charge represents provisions by Lilly to reduce its workforce
through early retirement programs, as well as initiate actions to consolidate
certain manufacturing operations around the world, implement revised product
distribution strategies and to streamline its core pharmaceutical operations.
Included in Lilly's historical Statement of Income for the nine months ended
September 30, 1994, is a pretax special charge of $66.0 million relating to the
March 31, 1994, voluntary recall of three of Lilly's liquid oral antibiotics as
well as a nonrecurring pretax charge of $58.4 million for acquired research
associated with Lilly's acquisition of Sphinx Pharmaceuticals, Inc. in
September, 1994.
The following is a summary of reclassifications and adjustments reflected in
the Unaudited Pro Forma Combined Condensed Balance Sheet and Statements of
Income:
(1) Represents the pro forma adjustments included in the Guidant S-1
filing, as amended, that affect the consolidated Eli Lilly and Company
financial statements. These adjustments reflect the projected
outstanding debt of Guidant as well as the increase in interest expense
associated with such debt and the projected receipts of the initial
public offering of $193.2 million. The assumed interest rate of the
long-term debt of 5.05% considers Lilly to be a guarantor of such debt.
(2) As documented in the Guidant S-1, as amended, it is assumed that Lilly
will beneficially own 82.3% of Guidant's outstanding common stock upon
completion of the IPO. This adjustment recognizes the minority interest
of 17.7%. The unaudited pro forma financial statements contained in the
Guidant S-1 filing, as amended, have been adjusted for the difference
in interest rates between Lilly's rate (see Note 1) and Guidant's
stand-alone rate used in the S-1, as well as interest income on
intercompany advances.
(3) Represents the elimination of intercompany receivables and payables
between PCS and Lilly at September 30, 1994 as well as intercompany
revenue and expense between PCS and Lilly.
(4) Represents the preliminary estimate of excess purchase price over the
book value of PCS net assets acquired (goodwill). The purchase price
has been adjusted to include acquisition-related expenses (see Note 6).
The amortization period reflected in the Statements of Income for such
goodwill is 40 years.
(5) Represents the issuance of short-term and long-term debt to finance the
cash acquisition. The Statements of Income reflect the increase in
interest expense based on issuance of short-term debt at an assumed
interest rate of 5.5% and long-term debt at an assumed interest rate of
8.25%. It is assumed that there are no significant debt issuance costs,
that all debt was issued on January 1, 1993 and was outstanding through
September 30, 1994 and that the short-term debt was refinanced in 1994
with the same interest rate assumptions.
20
(6) Represents the amount of estimated acquisition fees for legal and
investment banker advisory services related to the Merger.
(7) Represents the elimination of PCS historical equity.
(8) Represents the tax effect of the Statements of Income adjustments,
excluding the goodwill amortization, based upon the statutory rate in
effect for the periods shown.
(c) Exhibits
2.1 Agreement and Plan of Merger, dated as of July 10, 1994, as amended, by
and among ECO Acquisition Corporation, a wholly-owned subsidiary of Eli
Lilly and Company, Eli Lilly and Company and McKesson Corporation.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Eli Lilly and Company
(REGISTRANT)
/s/ James M. Cornelius
By: _________________________________
James M. Cornelius
Vice President and Chief Financial
Officer
Dated: November 23, 1994
22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
------- ---------------------- ----
*2.1 Agreement and Plan of Merger, dated as of July 10, 1994, as
amended, by and among ECO Acquisition Corporation, a wholly-
owned subsidiary of Eli Lilly and Company, Eli Lilly and Company
and McKesson Corporation........................................
- --------
* Pursuant to Rule 12b-32 of the Securities Exchange Act of 1934, as amended,
Exhibit 2.1 is hereby incorporated by reference to the Schedule 14D-1, as
amended, filed by ECO Acquisition Corporation and Eli Lilly and Company with
respect to their tender offer for shares of common stock of McKesson
Corporation with the Securities and Exchange Commission on July 15, 1994.
