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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR QUARTER ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 1-6351
---
ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its
charter)
INDIANA 35-0470950
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
(Address of principal executive offices)
Registrant's telephone number, including area
code (317) 276-2000
Indicate by check mark whether the Registrant (1)
has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has
been subject to such filing requirements for the
past 90 days.
Yes X No
-------- -----
The number of shares of common stock outstanding as
of October 31, 1996:
Class Number of Shares Outstanding
----- ----------------------------
Common 551,804,518
1
PART I FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
------------------------------------------
(Dollars in millions except per-share data)
Net Sales................... $1,803.9 $1,631.9 $5,285.5 $4,964.0
Cost of sales............... 502.9 419.7 1,526.0 1,391.6
Research & development...... 290.7 260.6 840.1 757.8
Marketing & administrative.. 473.1 444.1 1,412.1 1,287.6
Interest expense............ 74.1 75.6 219.5 214.2
Other income - net.......... (96.3) (5.4) (260.7) (89.0)
------- ------- ------ -------
1,244.5 1,194.6 3,737.0 3,562.2
------- ------- ------- -------
Income from continuing
operations before income taxes 559.4 437.3 1,548.5 1,401.8
Income taxes................ 143.8 126.8 398.0 406.5
----- ----- ------- -------
Income from continuing operations 415.6 310.5 1,150.5 995.3
Income from discontinued
operations, net of tax...... - 917.5 - 953.0
----- ------- ------ -------
Net Income.................. $ 415.6 $1,228.0 $1,150.5 $1,948.3
====== ======= ======= =======
Earnings per share:
Income from continuing operations $ .76 $ .54 $2.10 $1.73
Income from discontinued
operations............. - 1.60 - 1.65
---- ---- ---- ----
Net income.................. $ .76 $2.14 $2.10 $3.38
==== ==== ==== ====
Dividends paid per share.... $ .3425 $ .3225 $1.0275 $.9675
See Notes to Consolidated Condensed Financial Statements.
2
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Eli Lilly and Company and Subsidiaries
September 30, December 31,
1996 1995
------------------------
(Millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............... $738.1 $999.5
Short-term investments .................. 128.3 84.6
Accounts receivable, net of allowances
of $77.0 (1996) and $55.1 (1995) ...... 1,616.4 1,520.5
Other receivables ....................... 174.9 287.9
Inventories ............................. 878.3 839.6
Deferred income taxes ................... 156.5 259.2
Prepaid expenses ........................ 168.3 147.3
------- -------
TOTAL CURRENT ASSETS .................... 3,860.8 4,138.6
OTHER ASSETS
Prepaid retirement ...................... 513.9 484.2
Investments ............................. 429.4 573.8
Goodwill and other intangibles, net of
allowances for amortization of
$280.6 (1996) and $192.2 (1995) ...... 4,039.1 4,105.2
Sundry .................................. 923.8 871.4
------- -------
5,906.2 6,034.6
PROPERTY AND EQUIPMENT
Land, buildings, equipment, and
construction-in-progress ............. 7,007.9 6,828.3
Less allowances for depreciation ........ 2,722.1 2,589.0
------- -------
4,285.8 4,239.3
------- -------
$14,052.8 $14,412.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings ................... $1,499.4 $1,908.8
Accounts payable ........................ 707.5 1,018.0
Employee compensation ................... 308.9 316.0
Dividends payable ....................... - 189.1
Income taxes payable .................... 719.8 660.5
Other liabilities ....................... 958.5 874.6
------- -------
TOTAL CURRENT LIABILITIES ............... 4,194.1 4,967.0
LONG-TERM DEBT ............................. 2,582.3 2,592.9
DEFERRED INCOME TAXES ...................... 332.3 295.5
RETIREE MEDICAL BENEFIT OBLIGATION ......... 129.4 147.8
OTHER NONCURRENT LIABILITIES ............... 788.0 976.7
COMMITMENTS AND CONTINGENCIES .............. - -
SHAREHOLDERS' EQUITY
Common stock ............................ 355.6 355.6
Additional paid-in capital .............. 154.5 418.3
Retained earnings ....................... 7,231.9 6,484.3
Deferred costs-ESOP ..................... (188.7) (199.5)
Currency translation adjustments ........ (54.1) (0.6)
-------- ---------
7,499.2 7,058.1
Less cost of common stock in treasury ... 1,472.5 1,625.5
------- -------
6,026.7 5,432.6
------- -------
$14,052.8 $14,412.5
======== ========
See Notes to Consolidated Condensed Financial Statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Eli Lilly and Company and Subsidiaries
Nine Months Ended
September 30,
1996 1995
---------------
(Millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................$1,150.5 $1,948.3
Adjustments to reconcile net income
to cash flows from operating activities
Net gain on disposition of discontinued
operations ............................... - (910.0)
Changes in operating assets and liabilities . (259.6) (473.0)
Change in deferred taxes .................... 147.9 136.3
Depreciation and amortization ............... 404.8 419.8
Other items, net ............................ (155.6) (63.4)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES ... 1,288.0 1,058.0
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment ..... (360.9) (393.1)
Additions to sundry assets and intangibles .. (32.1) (1.7)
Reduction of investments .................... 330.1 327.7
Additions to investments .................... (192.2) (228.1)
Acquisitions ................................. (93.3) -
------- ------
NET CASH USED BY INVESTING ACTIVITIES ........ (348.4) (295.2)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid .............................. (562.3) (559.9)
Purchase of common stock and other capital
transactions .............................. (171.8) (49.9)
Net reductions to short-term borrowings ...... (439.4) (236.1)
Net additions to long-term debt ............. 8.9 504.5
------- ------
NET CASH USED BY FINANCING ACTIVITIES ....... (1,164.6) (341.4)
Effect of exchange rate changes on cash ..... (36.4) 17.9
------ -----
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ............................. (261.4) 439.3
Cash and cash equivalents at January 1 ...... 999.5 536.9
----- -----
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 ... $738.1 $976.2
===== =====
See Notes to Consolidated Condensed Financial Statements.
4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with the
requirements of Form 10-Q and therefore do not include all
information and footnotes necessary for a fair presentation of
financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. In
the opinion of management, the financial statements reflect all
adjustments (consisting only of normal recurring accruals) that
are necessary to a fair statement of the results for the periods
shown. 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, liabilities, revenues, expenses and
related disclosures at the date of the financial statements and
during the reporting period. Actual results could differ from
those estimates.
As a consequence of the 1995 divestiture, the operating results
of the Medical Device and Diagnostics businesses have been
reflected as `discontinued operations'' in the Company's 1995
financial statements and have been excluded from consolidated
sales and expenses reflected therein.
As presented herein, sales include sales of the Company's life-
sciences products and service revenues from PCS Health Systems,
Inc. (PCS) and Integrated Medical Systems, Inc.
CONTINGENCIES
The Company has been named as a defendant in numerous product
liability lawsuits involving primarily two products,
diethylstilbestrol and Prozac (REGISTERED). The Company has
accrued for its estimated exposure, including costs of litigation,
with respect to all current product liability claims. In addition,
the Company has accrued for certain future anticipated product
liability claims to the extent the Company can formulate a
reasonable estimate of their costs. The Company's estimates of
these expenses are based primarily on historical claims
experience and data regarding product usage. The Company expects
the cash amounts related to the accruals to be paid out over the
next several years. The majority of costs associated with
defending and disposing of these suits are covered by insurance.
The Company's estimate of insurance recoverables is based on
existing deductibles, coverage limits, and the existing and
projected future level of insolvencies among its insurance
carriers.
Under the Comprehensive Environmental Response, Compensation, and
Liability Act, commonly known as Superfund, the Company has been
designated as one of several potentially responsible parties with
respect to certain sites. Under Superfund, each responsible
party may be jointly and severally liable for the entire amount
of the cleanup. The Company also continues remediation of
certain of its own sites. The Company has accrued for estimated
Superfund cleanup costs, remediation, and certain other
environmental matters, taking into account, as applicable,
available information regarding site conditions, potential
cleanup methods, estimated costs, and the extent to which other
parties can be expected to contribute to payment of those costs.
The Company has reached a settlement with its liability insurance
carriers providing for coverage for certain environmental
liabilities. However, because of uncertainties with respect to
the timing and ultimate realization of recoveries under the
policies, the Company has not recorded any environmental
insurance recoverables.
The Company has been named, along with numerous other U.S.
prescription drug manufacturers, as a defendant in a large number
of related actions brought by retail pharmacies alleging
violations of federal and state antitrust and pricing laws. The
federal suits include a class action on behalf of the majority of
U.S. retail pharmacies. The Company and several other
manufacturers agreed to settle the federal class action case and
the anticipated settlement was accrued in the fourth quarter of
1995. The settlement has been approved by the U.S. District
Court but certain class members have appealed that decision.
Other related suits, brought in federal and several state courts
by several thousand pharmacies, involve claims of price
discrimination or claims under other pricing laws. Additional
cases have been brought on behalf of consumers in several states.
5
The environmental liabilities and litigation accruals have been
reflected in the Company's consolidated balance sheet at the
gross amount of approximately $273 million at September 30, 1996.
Estimated insurance recoverables have been reflected as assets in
the consolidated balance sheet of approximately $97 million at
September 30, 1996.
Barr Laboratories, Inc. (Barr) has asserted a claim that the U.S.
patents covering Prozac, which are material to the Company, are
invalid and unenforceable. The Company has filed suit in federal
court in Indianapolis seeking a ruling that Barr's challenge to
Lilly's patents is without merit. While the Company believes
Barr's claims are without merit, there can be no assurance that
the Company will prevail. An unfavorable outcome of this claim
could have a material adverse effect on the Company's
consolidated financial position, liquidity, or results of
operations.
While it is not possible to predict or determine the outcome of
the product liability, patent, antitrust, or other legal actions
brought against the Company, or the ultimate cost of
environmental matters, the Company believes that except as noted
above, the costs associated with all such matters will not have a
material adverse effect on its consolidated financial position or
liquidity but could possibly be material to the consolidated
results of operations in any one accounting period.
EARNINGS PER SHARE
Earnings per share are calculated based on the weighted-average
number of outstanding common shares. The number of shares of
common stock and per-share data for previously reported periods
have been restated to reflect the impact of the Company's two-
for-one stock split in the fourth quarter of 1995.
ACCOUNTING CHANGES
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" This statement requires that impairments,
measured using fair market value, are recognized whenever events
or changes in circumstances indicate that the carrying amount of
long-lived assets may not be recoverable and the future
undiscounted cash flows attributable to the asset are less than
its carrying value. Adoption of this statement did not impact
the Company's consolidated results of operations.
Effective January 1, 1996, the Company adopted SFAS No. 123,
"Stock Based Compensation". This statement requires a company
to choose between two different methods of accounting for stock
options. The statement defines a fair-value-based method of
accounting for stock options but allows an entity to continue to
measure compensation cost for stock options using the accounting
prescribed by APB No. 25 (APB 25), "Accounting for Stock Issued
to Employees". The Company has elected to continue applying
accounting prescribed by APB 25.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
OPERATING RESULTS OF CONTINUING OPERATIONS:
The Company's sales for the third quarter increased 11 percent
from the third quarter of 1995. Overall, sales inside and
outside the United States increased 15 percent and 4 percent
respectively. Compared with the third quarter of 1995, volume
increased sales 13 percent, while foreign exchange rates and
selling prices combined to decrease sales 2 percent.
6
The Company's sales for the first nine months of 1996 increased 6
percent when compared with the same period in 1995. Sales in the
United States increased 8 percent, while sales outside the United
States increased 5 percent. Compared with the first nine months
of 1995, volume increased sales 8 percent while foreign exchange
rates and selling prices decreased sales by 1 percent each.
Worldwide sales of pharmaceutical products increased 11 percent
and 7 percent for the third quarter and nine months,
respectively, as compared with the same periods of 1995. Sales
growth was led by Prozac, Humulin (REGISTERED) and two of the
Company's newer products, Gemzar (REGISTERED) and ReoPro
(TRADEMARK). In addition, the quarter and year-to-date sales
benefited from increased health care management service revenues.
Worldwide Prozac sales improved 10 percent to $637.5 million for
the third quarter and 13 percent to $1.8 billion for the nine
months. These sales increases were achieved despite continuing
competition from generic forms of Prozac in Canada and substantial
competitive pressures in France. Humulin sales increased 15
percent to $225.6 million for the third quarter and 11 percent to
$645.3 million for the first nine months of 1996. ReoPro, a
cardiovascular product launched in February 1995, experienced
strong growth with sales of $38.5 million in the third quarter.
For the first nine months of 1996, sales of ReoPro aggregated
$98.5 million. Health care management service revenues were
$94.8 million for the quarter, an increase of 49 percent.
The quarter and year to date sales growth was offset in part by
decreased sales of Axid (REGISTERED), which declined 4
percent and 1 percent respectively from the prior periods, and
anti-infectives, which were 4 percent and 15 percent below the
third quarter and nine months of 1995, respectively. Axid sales
for the quarter and nine months were $126.9 million and $394.4
million, respectively. The Company anticipates that Axid sales
for 1996 will likely reflect a decline as the product faces
increased competitive pressures. The decline in anti-infective
sales was principally the result of cefaclor sales which
reflected decreases of $14.2 million (12 percent) and $153.9
million (29 percent) for the quarter and nine month periods,
respectively.
U.S. pharmaceutical sales growth of 17 percent during the quarter
was due to increased volume and reflects a 15 percent increase in
Prozac sales, a 12 percent increase in Humulin sales, a 49
percent increase in health care management service revenues and
strong ReoPro sales which aggregated $33.9 million. However,
lower anti-infectives sales, which reflected a 9 percent decrease
from the third quarter of 1995, and a decline in Axid sales of 3
percent from third quarter of last year partially offset the
sales growth. For the nine months, U.S. pharmaceutical sales
grew 8 percent, substantially all of which was due to increased
volume. Major products contributing to this growth were Prozac,
which had an increase of $190.8 million or 17 percent and ReoPro,
which had an increase of $78.6 million over 1995. This growth
was somewhat offset by a 39% decline in sales of anti-infectives
due primarily to continued generic competition for cefaclor.
International pharmaceutical sales volume growth of 11 percent
for the third quarter was substantially offset by unfavorable
foreign exchange rates (5 percent) and reduced selling prices (3
percent), resulting in overall sales growth of 3 percent. For
the nine months, international pharmaceutical sales reflected a 4
percent increase. International sales growth for the quarter was
primarily due to increased sales of Gemzar, Humulin, ReoPro, and
Permax (REGISTERED), offset, in part, by a decline in Prozac sales
due to generic competition in Canada and general competitive
pressures in France. Year-to-date sales growth was primarily due
to Gemzar, Humulin, Permax and Prozac.
Worldwide sales of animal health products increased 2 percent in
the third quarter and 4 percent in the first nine months compared
with the same periods last year. These increases resulted from
increased performance across a majority of the product line,
primarily driven by increased international sales which were
offset somewhat by decreased sales in the U.S.
Cost of sales was 27.9 percent of sales for the third quarter and
28.9 percent of sales for the first nine months, as compared to
25.7 percent and 28 percent for the third quarter and nine
months of 1995, respectively. The increase as compared to the
third quarter of 1995 reflects the impacts of increased health
care management service revenues, which have lower margins than
pharmaceuticals, reduced production volumes as the Company
endeavors to reduce inventory levels and a sales mix that
included increased revenues from lower margin product lines, such
as ReoPro. The increase for the nine months primarily reflects
the impacts of increased health care management service revenues.
7
Total operating expenses increased 8 percent for the third
quarter and 10 percent for the nine months compared to the same
periods in 1995. Research and development grew 12 percent and 11
percent for the third quarter and nine months, respectively, over
the same periods in 1995. The large number of compounds in the
later and most expensive phases of clinical trials, primarily
raloxifene, drove the increase in research and development
expenses for both periods. Assuming business conditions remain
stable, the Company expects spending in research and development
to increase approximately 12 to 14 percent for the year compared
with 1995. The increase in the marketing and administrative
expenses (7 percent for the third quarter and 10 percent for the
nine months compared to the same periods in 1995) was caused
primarily by higher costs associated with new product launches of
Gemzar and Humalog (REGISTERED), the anticipated launch of Zyprexa
(TRADEMARK) and reserves taken to cover outstanding receivables
from FoxMeyer Health Corporation, a pharmaceutical wholesaler
which filed for bankruptcy in the third quarter. The Company's
continued efforts to expand globally, especially in emerging
markets, as well as investments in increased information technology
capabilities also contributed to the increase. In the second
quarter of 1996, the Company implemented cost-containment programs
designed to reduce the overall rate of expense growth while
directing greater funding to new product launches and globalization
efforts. These programs helped slow the rate of marketing and
administrative expense growth to 7 percent for the third quarter
compared to 10 percent for the second quarter and year to date.
Net other income of $96.3 million for the third quarter and
$260.7 million for the nine months was $90.9 million higher and
$171.7 million higher than the same periods in 1995. The third
quarter was favorably impacted by the sale of the U.S. marketing
rights of Ceclor (REGISTERED) CD and Keftab (REGISTERED) to Dura
Pharmaceuticals, Inc. for approximately $100 million or $.12 per
share. In addition to the above, the other income increase for
the nine months reflects non-recurring income received under
royalty, co-development and co-marketing contracts, the sale of
marketing rights for ReoPro in Japan and Tapazole (REGISTERED)
in the U.S., and the sale of certain equity securities.
The Company's estimated tax rate for both the third quarter and
nine months of 1996 was 25.7 percent compared to 29 percent for
the same periods in 1995. The decline is primarily the result of
increased earnings in jurisdictions with lower tax rates and the
effectiveness of various tax strategies. The estimated effective
tax rate for the first nine months of 1996 essentially equals the
annual 1995 rate of 26 percent. The Company expects current tax
strategies will allow its 1996 rate to remain approximately the
same as the 1995 annual rate.
Income from continuing operations was $415.6 million and $.76 per
share for the third quarter, representing increases of 34 percent
and 41 percent, respectively, as compared with the same periods
in 1995. For the first nine months of 1996, income from
continuing operations was $1.2 billion and $2.10 per share,
increases of 16 percent and 21 percent respectively, from last
year. For the quarter, income was favorably impacted by
increased sales, a lower growth rate of operating expenses,
increased other income and the reduced effective tax rate,
offset, in part, by increased costs of goods sold as a percent of
sales. For the first nine months of 1996, operating expenses
grew at a faster rate than sales, but the negative income impact
was more than offset by the reduced estimated tax rate and
increased other income.
DISCONTINUED OPERATIONS AND NET INCOME:
The Company completed its divestiture of all its Medical Devices
and Diagnostics Division subsidiaries in 1995. As a result,
reported net income and earnings per share in 1996 do not include
income from discontinued operations. The Company realized a net
gain on the divestitures of $910 million during the third quarter
of 1995 which added $1.60 in earnings per share. As a
consequence, net income in 1996 reflects decreases of 66 percent
and 41 percent for the three month and nine month periods,
respectively, as compared with the same periods in 1995.
Further, earnings per share for the quarter and nine months
decreased 64 percent and 38 percent.
8
FINANCIAL CONDITION:
As of September 30, 1996, cash, cash equivalents and short-term
investments totaled $866.4 million as compared with $1,084.1
million at December 31, 1995. Total debt at September 30, 1996,
was $4,081.7 million, a decrease of $420 million from
December 31, 1995. The decrease in debt was primarily the result
of using cash flows from operations and excess cash to reduce
short-term borrowings. Short-term debt aggregating $1,499.4 million
is primarily in the form of commercial paper.
The Company believes that cash generated from operations in 1996,
along with available cash and cash equivalents, will be
sufficient to fund essentially all of the 1996 operating needs,
including debt service, capital expenditures, and dividends. The
Company believes that amounts available through existing
commercial paper programs should be adequate to fund maturities
of short-term borrowings. The outstanding commercial paper is
also backed up by committed bank credit facilities.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
Under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions investors
that any forward-looking statements or projections made by the
Company are subject to risks and uncertainties which may cause
actual results to differ materially from those projected.
Economic, competitive, governmental, technological and other
factors which may affect the Company's operations are discussed
in Exhibit 99 to this Form 10-Q filing.
9
PART II OTHER INFORMATION
--------------------------
Item 1.Legal Proceedings
In October 1996, the Federal Trade Commission issued a subpoena
to the Company and PCS requesting production of certain documents
in connection with a non-public investigation reviewing whether
the relationships and activities between pharmacy benefit
management companies and pharmaceutical companies have violated
federal antitrust laws, including a review of whether the Company
has violated the consent decree it entered into at the time it
acquired PCS. The Company believes that all of its actions and
those of PCS have been lawful, proper and in accordance with the
PCS consent decree.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are filed as
-------- exhibits to this Report:
10. 1994 Lilly Stock Plan, as amended through October 21, 1996
11. Statement re: Computation of Earnings Per Share on
Primary and Fully Diluted Bases
12. Statement re: Computation of Ratio of Earnings to
Fixed Charges
27. Financial Data Schedule
99. Cautionary Statement Under Private Securities
Litigation Reform Act of 1995 - ``Safe Harbor'' for
Forward Looking Disclosures
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the third
quarter of 1996.
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 thereunto duly authorized.
ELI LILLY AND COMPANY
---------------------
(Registrant)
Date November 11, 1996 s/Daniel P. Carmichael
----------------- -------------------------------------
Daniel P. Carmichael
Secretary and Deputy General Counsel
Date November 11, 1996 s/Arnold C. Hanish
----------------- ----------------------------------
Arnold C. Hanish
Director, Corporate Accounting and
Chief Accounting Officer
10
INDEX TO EXHIBITS
The following documents are filed as a part of this Report:
Exhibit Page
------- ----
10. 1994 Lilly Stock Plan, as amended 13-19
through October 21, 1996
11. Statement re:
Computation of Earnings Per Share
on Primary and Fully Diluted Bases 20
12. Statement re:
Computation of Ratio of Earnings
to Fixed Charges 21
27. Financial Data Schedule 22-23
99. Cautionary Statement Under Private
Securities Litigation Reform Act of
1995 - ``Safe Harbor'' for Forward
Looking Disclosures 24
11
EXHIBIT 10.
1994
LILLY STOCK PLAN,
as amended through
October 21, 1996
The 1994 Lilly Stock Plan ("1994 Plan") authorizes the
Compensation and Management Development Committee
("Committee") to provide officers and other key
executive, management, professional, and administrative
employees of Eli Lilly and Company and its subsidiaries
with certain rights to acquire shares of Eli Lilly and
Company common stock ("Lilly Stock"). The Company
believes that this incentive program will benefit the
Company's shareholders by allowing the Company to
attract, motivate, and retain key employees and by
causing those employees, through stock-based incentives,
to contribute materially to the growth and success of the
Company. For purposes of the 1994 Plan, the term
"Company" shall mean Eli Lilly and Company and its
subsidiaries, unless the context requires otherwise.
1. Administration.
The 1994 Plan shall be administered and interpreted by
the Committee consisting of not less than three persons
appointed by the Board of Directors of the Company from
among its members. A person may serve on the Committee
only if he or she (i) is a "Non-employee Director" for
purposes of Rule 16b-3 under the Securities Exchange Act
of 1934, as amended (the "1934 Act"), and (ii) satisfies
the requirements of an "outside director" for purposes
of Section 162(m) of the Internal Revenue Code of 1986,
as amended (the "Code"). The Committee shall determine
the fair market value of Lilly Stock for purposes of the
1994 Plan. The Committee may, subject to the provisions
of the 1994 Plan, from time to time establish such rules
and regulations and delegate such authority to administer
the 1994 Plan as it deems appropriate for the proper
administration of the Plan. The decisions of the
Committee or its authorized delegatees shall be final,
conclusive, and binding with respect to the
interpretation and administration of the 1994 Plan and
any Grant made under it.
2. Grants.
Incentives under the 1994 Plan shall consist of incentive
stock options, nonqualified stock options, performance
awards, and restricted stock grants (collectively,
"Grants"). All Grants shall be subject to the terms and
conditions consistent with the 1994 Plan as the Committee
deems appropriate. The Committee shall approve the form
and provisions of each Grant. Grants under a particular
section of the 1994 Plan need not be uniform and Grants
under two or more sections may be combined in one
instrument.
1
3. Eligibility for Grants.
Grants may be made to any employee of the Company who is
an officer or other key executive, managerial,
professional, or administrative employee, including a
person who is also a member of the Board of Directors
("Eligible Employee"). The Committee shall select the
persons to receive Grants ("Grantees") from among the
Eligible Employees and determine the number of shares
subject to any particular Grant.
4. Shares Available for Grant.
(a) Shares Subject to Issuance or Transfer. Subject
to adjustment as provided in Section 4(b), the aggregate
number of shares of Lilly Stock that may be issued or
transferred under the 1994 Plan is 25,000,000. The
shares may be authorized but unissued shares or treasury
shares. The number of shares available for Grants at any
given time shall be 25,000,000, reduced by the aggregate
of all shares previously issued or transferred and of
shares which may become subject to issuance or transfer
under then-outstanding Grants. Payment in cash in lieu
of shares shall be deemed to be an issuance of the shares
for purposes of determining the number of shares
available for Grants under the 1994 Plan as a whole or to
any individual Grantee.
(b) Adjustment Provisions. If any subdivision or
combination of shares of Lilly Stock or any stock
dividend, reorganization, recapitalization, or
consolidation or merger with Eli Lilly and Company as the
surviving corporation occurs, or if additional shares or
new or different shares or other securities of the
Company or any other issuer are distributed with respect
to the shares of Lilly Stock through a spin-off or other
extraordinary distribution, the Committee shall make such
adjustments as it determines appropriate in the number of
shares of Lilly Stock that may be issued or transferred
in the future under Sections 4(a), 5(f), and 6(f). The
Committee shall also adjust as it determines appropriate
the number of shares and Option Price in outstanding
Grants made before the event.
5. Stock Options.
The Committee may grant options qualifying as incentive
stock options under the Code ("Incentive Stock Options"),
and nonqualified stock options (collectively, "Stock
Options"). The following provisions are applicable to
Stock Options:
(a) Option Price. The Committee shall determine the
price at which Lilly Stock may be purchased by the
Grantee under a Stock Option ("Option Price") which shall
be not less than the fair market value of Lilly Stock on
the date the Stock Option is granted (the "Grant Date").
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In the Committee's discretion, the Grant Date of a Stock
Option may be established as the date on which Committee
action approving the Stock Option is taken or any later
date specified by the Committee.
(b) Option Exercise Period. The Committee shall
determine the option exercise period of each Stock
Option. The period shall not exceed ten years from the
Grant Date.
(c) Exercise of Option. A Stock Option will be
deemed exercised by a Grantee upon delivery of (i) a
notice of exercise to the Company or its representative
as designated by the Committee, and (ii) accompanying
payment of the Option Price if the Stock Option requires
such payment at the time of exercise. The notice of
exercise, once delivered, shall be irrevocable.
(d) Satisfaction of Option Price. A Stock Option
may require payment of the Option Price upon exercise or
may specify a period not to exceed 30 days following
exercise within which payment must be made ("Payment
Period"). The Grantee shall pay or cause to be paid the
Option Price in cash, or with the Committee's permission,
by delivering (or providing adequate evidence of
ownership of) shares of Lilly Stock already owned by the
Grantee and having a fair market value on the date of
exercise equal to the Option Price, or a combination of
cash and such shares. If the Grantee fails to pay the
Option Price within the Payment Period, the Committee
shall have the right to take whatever action it deems
appropriate, including voiding the option exercise or
voiding that part of the Stock Option for which payment
was not timely received. The Company shall not deliver
shares of Lilly Stock upon exercise of a Stock Option
until the Option Price and any required withholding tax
are fully paid.
(e) Share Withholding. With respect to any
nonqualified option, the Committee may, in its discretion
and subject to such rules as the Committee may adopt,
permit or require the Grantee to satisfy, in whole or in
part, any withholding tax obligation which may arise in
connection with the exercise of the nonqualified option
by having the Company withhold shares of Lilly Stock
having a fair market value equal to the amount of the
withholding tax.
(f) Limits on Individual Grants. No individual
Grantee may be granted Stock Options under the 1994 Plan
for more than 1,500,000 shares of Lilly Stock in any
three consecutive calendar years.
(g) Limits on Incentive Stock Options. The
aggregate fair market value of the stock covered by
Incentive Stock Options granted under the 1994 Plan or
any other stock option plan of the Company or any
subsidiary or parent of the Company that become
exercisable for the first time by any employee in any
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calendar year shall not exceed $100,000. The aggregate
fair market value will be determined at the Grant Date.
An Incentive Stock Option shall not be granted to any
Eligible Employee who, on the Grant Date, owns stock
possessing more than 10% of the total combined voting
power of all classes of stock of the Company or any
subsidiary or parent of the Company.
6. Performance Awards.
The Committee may grant Performance Awards which shall be
denominated at the time of grant either in shares of
Lilly Stock ("Stock Performance Awards") or in dollar
amounts ("Dollar Performance Awards"). Payment under a
Stock Performance Award or a Dollar Performance Award
shall be made, at the discretion of the Committee, in
shares of Lilly Stock ("Performance Shares"), or in cash
or in any combination thereof, if the financial
performance of the Company or any subsidiary, division,
or other unit of the Company ("Business Unit") selected
by the Committee meets certain financial goals
established by the Committee for the Award Period. The
following provisions are applicable to Performance
Awards:
(a) Award Period. The Committee shall determine and
include in the Grant the period of time (which shall be
four or more consecutive fiscal quarters) for which a
Performance Award is made ("Award Period"). Grants of
Performance Awards need not be uniform with respect to
the length of the Award Period. Award Periods for
different Grants may overlap. A Performance Award may
not be granted for a given Award Period after one half
(1/2) or more of such period has elapsed.
(b) Performance Goals and Payment. Before a Grant
is made, the Committee shall establish objectives
("Performance Goals") that must be met by the Business
Unit during the Award Period as a condition to payment
being made under the Performance Award. The Performance
Goals, which must be set out in the Grant, are limited to
earnings per share, divisional income, net income, or any
of the foregoing before the effect of acquisitions,
divestitures, accounting changes, and restructuring and
special charges (determined according to criteria
established by the Committee). The Committee shall also
set forth in the Grant the number of Performance Shares
or the amount of payment to be made under a Performance
Award if the Performance Goals are met or exceeded,
including the fixing of a maximum payment (subject to
Section 6(f)).
(c) Computation of Payment. After an Award Period,
the financial performance of the Business Unit during the
period shall be measured against the Performance Goals.
If the Performance Goals are not met, no payment shall be
made under a Performance Award. If the Performance Goals
are met or exceeded, the Committee shall certify that
fact in writing and certify the number of Performance
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Shares or the amount of payment to be made under a
Performance Award in accordance with the grant for each
Grantee. The Committee, in its sole discretion, may
elect to pay part or all of the Performance Award in cash
in lieu of issuing or transferring Performance Shares.
The cash payment shall be based on the fair market value
of Lilly Stock on the date of payment (subject to Section
6(f)). The Company shall promptly notify each Grantee of
the number of Performance Shares and the amount of cash,
if any, he or she is to receive.
(d) Revisions for Significant Events. At any time
before payment is made, the Committee may revise the
Performance Goals and the computation of payment if
unforeseen events occur during an Award Period which have
a substantial effect on the Performance Goals and which
in the judgment of the Committee make the application of
the Performance Goals unfair unless a revision is made;
provided, however, that no such revision shall be made
with respect to a Performance Award to the extent that
the Committee determines the revision would cause payment
under the Award to fail to be fully deductible by the
Company under Section 162 (m) of the Code.
(e) Requirement of Employment. To be entitled to
receive payment under a Performance Award, a Grantee must
remain in the employment of the Company to the end of the
Award Period, except that the Committee may provide for
partial or complete exceptions to this requirement as it
deems equitable in its sole discretion.
(f) Maximum Payment. No individual may receive
Performance Award payments in respect of Stock
Performance Awards in excess of 60,000 shares of Lilly
Stock in any calendar year or payments in respect of
Dollar Performance Awards in excess of $2,000,000 in any
calendar year. No individual may receive both a Stock
Performance Award and a Dollar Performance Award for the
same Award Period.
7. Restricted Stock Grants.
The Committee may issue or transfer shares of Lilly Stock
to a Grantee under a Restricted Stock Grant. Upon the
issuance or transfer, the Grantee shall be entitled to
vote the shares and to receive any dividends paid. The
following provisions are applicable to Restricted Stock
Grants:
(a) Requirement of Employment. If the Grantee's
employment terminates during the period designated in the
Grant as the "Restriction Period," the Restricted Stock
Grant terminates. However, the Committee may provide for
partial or complete exceptions to this requirement as it
deems equitable.
5
(b) Restrictions on Transfer. During the
Restriction Period, a Grantee may not sell, assign,
transfer, pledge, or otherwise dispose of the shares of
Lilly Stock except to a Successor Grantee under Section
10(a). Each certificate for shares issued or transferred
under a Restricted Stock Grant shall be held in escrow by
the Company until the expiration of the Restriction
Period.
(c) Withholding Tax. Before delivering the
certificate for shares of Lilly Stock to the Grantee,
Lilly may require the Grantee to pay to the Company any
required withholding tax. The Committee may, in its
discretion and subject to such rules as the Committee may
adopt, permit or require the Grantee to satisfy, in whole
or in part, any withholding tax requirement by having the
Company withhold shares of Lilly Stock from the Grant
having a fair market value equal to the amount of the
withholding tax. In the event the Grantee fails to pay
the withholding tax within the time period specified in
the Grant, the Committee may take whatever action it
deems appropriate, including withholding or selling
sufficient shares from the Grant to pay the tax and
assessing interest or late fees to the Grantee.
(d) Lapse of Restrictions. All restrictions imposed
under the Restricted Stock Grant shall lapse (i) upon the
expiration of the Restriction Period if all conditions
stated in Sections 7(a), (b) and (c) have been met or
(ii) as provided under Section 9(a)(ii). The Grantee
shall then be entitled to delivery of the certificate.
8. Amendment and Termination of the 1994 Plan.
(a) Amendment. The Company's Board of Directors may
amend or terminate the 1994 Plan, but no amendment shall
withdraw from the Committee the right to select Grantees
under Section 3.
(b) Termination of 1994 Plan. The 1994 Plan shall
terminate on the fifth anniversary of its effective date
unless terminated earlier by the Board or unless extended
by the Board.
(c) Termination and Amendment of Outstanding Grants.
A termination or amendment of the 1994 Plan that occurs
after a Grant is made shall not result in the termination
or amendment of the Grant unless the Grantee consents or
unless the Committee acts under Section 10(e). The
termination of the 1994 Plan shall not impair the power
and authority of the Committee with respect to
outstanding Grants. Whether or not the 1994 Plan has
terminated, an outstanding Grant may be terminated or
amended under Section 10(e) or may be amended (i) by
agreement of the Company and the Grantee consistent with
the 1994 Plan or (ii) by action of the Committee provided
that the amendment is consistent with the 1994 Plan and
is found by the Committee not to impair the rights of the
Grantee under the Grant.
6
9. Change in Control.
(a) Effect on Grants. Unless the Committee shall
otherwise expressly provide in the agreement relating to
a Grant, upon the occurrence of a Change in Control (as
defined below):
(i) In the case of Stock Options, (y) each
outstanding Stock Option that is not then fully
exercisable shall automatically become fully exercisable
until the termination of the option exercise period of
the Stock Option (as modified by subsection (i)(z) that
follows), and (z) in the event the Grantee's employment
is terminated within two years after a Change in Control,
his or her outstanding Stock Options at that date of
termination shall be immediately exercisable for a period
of three months following such termination, provided,
however, that, to the extent the Stock Option by its
terms otherwise permits a longer option exercise period
after such termination, such longer period shall govern,
and provided further that in no event shall a Stock
Option be exercisable more than 10 years after the Grant
Date;
(ii) The Restriction Period on all outstanding
Restricted Stock Grants shall automatically expire and
all restrictions imposed under such Restricted Stock
Grants shall immediately lapse; and
(iii) Each Grantee of a Performance Award for an
Award Period that has not been completed at the time of
the Change in Control shall be deemed to have earned a
minimum Performance Award equal to the product of (y)
such Grantee's maximum award opportunity for such
Performance Award, and (z) a fraction, the numerator of
which is the number of full and partial months that have
elapsed since the beginning of such Award Period to the
date on which the Change in Control occurs, and the
denominator of which is the total number of months in
such Award Period.
(b) Change in Control. For purposes of the 1994
Plan, a Change in Control shall mean the happening of any
of the following events:
(i) The acquisition by any "person," as that term
is used in Sections 13(d) and 14(d) of the 1934 Act
(other than (w) the Company, (x) any subsidiary of the
Company, (y) any employee benefit plan or employee stock
plan of the Company or a subsidiary of the Company or any
trustee or fiduciary with respect to any such plan when
acting in that capacity, or (z) Lilly Endowment, Inc.,)
of "beneficial ownership," as defined in Rule 13d-3
under the 1934 Act, directly or indirectly, of 20% or
more of the shares of the Company's capital stock the
holders of which have general voting power under ordinary
circumstances to elect at least a majority of the Board
of Directors of the Company (or which would have such
voting power but for the application of the Indiana
Control Share Statute) ("Voting Stock");
7
(ii) the first day on which less than two-thirds of
the total membership of the Board of Directors of the
Company shall be Continuing Directors (as that term is
defined in Article 13(f) of the Company's Articles of
Incorporation);
(iii) approval by the shareholders of the Company of
a merger, share exchange, or consolidation of the Company
(a "Transaction"), other than a Transaction which would
result in the Voting Stock of the Company outstanding
immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 50%
of the Voting Stock of the Company or such surviving
entity immediately after such Transaction; or
(iv) approval by the shareholders of the Company of
a complete liquidation of the Company or a sale or
disposition of all or substantially all the assets of the
Company.
10. General Provisions.
(a) Prohibitions Against Transfer. (i) Except as
provided in part (ii) of this subparagraph, only a
Grantee or his or her authorized legal representative may
exercise rights under a Grant. Such persons may not
transfer those rights. The rights under a Grant may not
be disposed of by transfer, alienation, pledge,
encumbrance, assignment, or any other means, whether
voluntary, involuntary, or by operation of law, and any
such attempted disposition shall be void; provided,
however, that when a Grantee dies, the personal
representative or other person entitled under a Grant
under the 1994 Plan to succeed to the rights of the
Grantee ("Successor Grantee") may exercise the rights. A
Successor Grantee must furnish proof satisfactory to the
Company of his or her right to receive the Grant under
the Grantee's will or under the applicable laws of
descent and distribution.
(ii) Notwithstanding the foregoing, the Committee
may, in its discretion and subject to such limitations
and conditions as the Committee deems appropriate, grant
non-qualified stock options on terms which permit the
Grantee to transfer all or part of the stock option, for
estate or tax planning purposes or for donative purposes,
and without consideration, to a member of the Grantee's
immediate family (as defined by the Committee), a trust
for the exclusive benefit of such immediate family
members, or a partnership, corporation or limited
liability company the equity interests of which are owned
exclusively by the Grantee and/or one or more members of
his or her immediate family. No such stock option or any
other Grant shall be transferable incident to divorce.
Subsequent transfers of a stock option transferred under
this part (ii) shall be prohibited except for transfers
to a Successor Grantee upon the death of the transferee.
8
(b) Substitute Grants. The Committee may make a
Grant to an employee of another corporation who becomes
an Eligible Employee by reason of a corporate merger,
consolidation, acquisition of stock or property,
reorganization or liquidation involving the Company in
substitution for a stock option, performance award, or
restricted stock grant granted by such other corporation
("Substituted Stock Incentive"). The terms and
conditions of the substitute Grant may vary from the
terms and conditions that would otherwise be required by
the 1994 Plan and from those of the Substituted Stock
Incentives. The Committee shall prescribe the exact
provisions of the substitute Grants, preserving where
possible the provisions of the Substituted Stock
Incentives. The Committee shall also determine the
number of shares of Lilly Stock to be taken into account
under Section 4.
(c) Subsidiaries. The term "subsidiary" means a
corporation of which Eli Lilly and Company owns directly
or indirectly 50% or more of the voting power.
(d) Fractional Shares. Fractional shares shall not
be issued or transferred under a Grant, but the Committee
may pay cash in lieu of a fraction or round the fraction.
(e) Compliance with Law. The 1994 Plan, the
exercise of Grants, and the obligations of the Company to
issue or transfer shares of Lilly Stock under Grants
shall be subject to all applicable laws and regulations
and to approvals by any governmental or regulatory agency
as may be required. The Committee may revoke any Grant
if it is contrary to law or modify a Grant to bring it
into compliance with any valid and mandatory law or
government regulation. The Committee may also adopt
rules regarding the withholding of taxes on payment to
Grantees.
(f) Ownership of Stock. A Grantee or Successor
Grantee shall have no rights as a shareholder of the
Company with respect to any shares of Lilly Stock covered
by a Grant until the shares are issued or transferred to
the Grantee or Successor Grantee on the Company's books.
(g) No Right to Employment. The 1994 Plan and the
Grants under it shall not confer upon any Grantee the
right to continue in the employment of the Company or
affect in any way the right of the Company to terminate
the employment of a Grantee at any time, with or without
notice or cause.
(h) Foreign Jurisdictions. The Committee may
adopt, amend, and terminate such arrangements and make
such Grants, not inconsistent with the intent of the 1994
Plan, as it may deem necessary or desirable to make
available tax or other benefits of the laws of foreign
jurisdictions to Grantees who are subject to such laws.
The terms and conditions of such foreign Grants may vary
from the terms and conditions that would otherwise be
required by the 1994 Plan.
9
(i) Governing Law. The 1994 Plan and all Grants
made under it shall be governed by and interpreted in
accordance with the laws of the State of Indiana,
regardless of the laws that might otherwise govern under
applicable Indiana conflict-of-laws principles.
(j) Effective Date of the 1994 Plan. The 1994 Plan
shall become effective upon its approval by the Company's
shareholders at the annual meeting to be held on April
18, 1994, or any adjournment of the meeting.
10
EXHIBIT 11. STATEMENT RE: COMPUTATION OF EARNINGS PER
SHARE ON PRIMARY AND FULLY DILUTED BASES
(Unaudited)
Eli Lilly and Company and Subsidiaries
EXHIBIT 12. STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS
FROM CONTINUING OPERATIONS TO FIXED CHARGES
(Unaudited)
Eli Lilly and Company and Subsidiaries
(Dollars in Millions)
EXHIBIT 99 CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 - "SAFE HARBOR" FOR
FORWARD LOOKING DISCLOSURES
Certain forward-looking statements are included in this Form
10-Q and may be made by Company spokespersons based on
current expectations of management. All forward-looking
statements made by the Company are subject to risks and
uncertainties. Certain factors, including but not limited
to those listed below, may cause actual results to differ
materially from current expectations and historical results.
- Economic factors over which the Company has no control,
including changes in inflation, interest rates and foreign
currency exchange rates.
- Competitive factors including generic competition as
patents on key products, such as Prozac, expire; pricing
pressures, both in the U.S. and abroad, primarily from
managed care groups and government agencies; and
technological advances and patents obtained by competitors.
- Governmental factors including laws and regulations and
judicial decisions at the state and federal level related to
Medicare, Medicaid and healthcare reform; and laws and
regulations affecting international operations.
- The difficulties and uncertainties inherent in new
product development. New product candidates that appear
promising in development may fail to reach the market
because of efficacy or safety concerns, inability to obtain
necessary regulatory approvals, difficulty or excessive
costs to manufacture, or infringement of the patents or
intellectual property rights of others.
- Delays and uncertainties in the FDA approval process and
the approval processes in other countries, resulting in lost
market opportunity.
- Unexpected safety or efficacy concerns arising with
respect to marketed products, whether or not scientifically
justified, leading to product recalls, withdrawals or
declining sales.
- Legal factors including unanticipated litigation of
product liability claims; antitrust litigation;
environmental matters; and patent disputes with competitors
which could preclude commercialization of products or
negatively affect the profitability of existing products.
- Future difficulties obtaining or the inability to obtain
existing levels of product liability insurance.
- Changes in tax laws, including the amendment to the
Section 936 income tax credit, and future changes in tax
laws related to the remittance of foreign earnings or
investments in foreign countries with favorable tax rates.
- Changes in accounting standards promulgated by the
Financial Accounting Standards Board, the Securities and
Exchange Commission, and the American Institute of Certified
Public Accountants which are adverse to the Company.
- Internal factors such as changes in business strategies
and the impact of restructurings and business combinations.