Exhibit 99.1
THE FOLLOWING INFORMATION WILL BE DISCLOSED BY THE COMPANY IN A PROPOSED
PRIVATE PLACEMENT OF CONVERTIBLE SUBORDINATED NOTES.
FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this report contains some forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. Forward-looking statements provide our current expectations or forecasts
of future events. You can identify these statements by the fact that they do not
relate strictly to historical or current facts. Such statements may include
words such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," "hope," and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. In particular,
these include, among others, statements about:
- our ability to consummate the Lafon acquisition;
- the impact of the Lafon acquisition on our business, operations, and
financial condition and performance;
- our sales, EBITDA and earnings per share projections for 2002, including
the impact on such measures as a result of the acquisition of the Group
Lafon business;
- the accuracy, completeness or reliability of the financial information
supplied to us by Group Lafon; and
- other statements regarding matters that are not historical facts or
statements of current condition.
Any or all of our forward-looking statements in this report may turn out to
be wrong. They can be affected by inaccurate assumptions we might make or by
known or unknown risks and uncertainties. Therefore, you should not place undue
reliance on any such forward-looking statements. Some of the factors that could
cause actual results to differ from those expressed or implied by our
forward-looking statements include, among others:
- the various conditions to closing the Lafon acquisition;
- our ability to integrate the Group Lafon operations into our business to
achieve synergies following integration; and
- the existence of material adjustments to the Group Lafon financial
information contained herein or other changes to information concerning
Group Lafon and the impact of its acquisition on us upon completion of
the audit of the consolidated financial statements.
We do not intend to update publicly any forward-looking statement, except
as required by law. Risks that we anticipate are discussed in more detail in the
section entitled "Risk Factors."
INFORMATION CONCERNING GROUP LAFON
The financial and non-financial information concerning Group Lafon
contained in this report has been taken from, or is based upon, documents and
other information provided to us directly by Group Lafon. We assume no
responsibility for the accuracy of the information contained in such documents
or otherwise provided to us, or for any failure by Group Lafon to disclose to us
matters that may affect the significance or accuracy of any such information.
GROUP LAFON ACQUISITION
On December 3, 2001, we signed an agreement to acquire a group of related
companies (collectively "Group Lafon") owned by the Lafon family of Paris for an
aggregate consideration of $450 million in cash. Group Lafon is a privately held
French pharmaceutical company with unaudited sales and net income (including
minority interest) for the nine months ended September 30, 2001 of approximately
FRF 600.1 million and FRF 61.0 million, respectively.
We are not required to close the Lafon acquisition unless certain
conditions are met. In addition to customary conditions such as receipt of any
necessary regulatory approvals, we will not be required to consummate the Lafon
acquisition if we have not secured at least $150 million of financing by
December 24, 2001. If we terminate the acquisition agreement on this basis, we
will be required to pay a termination fee of $5 million to the sellers. We have
secured a commitment from an affiliate of Credit Suisse First Boston Corporation
to finance up to $100 million of the purchase price. This amount, together with
our available cash on hand, will be sufficient to fund the purchase price. We
may determine, however, not to draw on this commitment to fund the acquisition.
The closing of the acquisition also is conditioned on our receipt of an
unqualified audit opinion as to the consolidated financial statements of Group
Lafon as of and for the years ended December 31, 1998, 1999 and 2000 and our
receipt of a review report on the interim financial statements of Group Lafon as
of and for the nine months ended September 30, 2000 and 2001 (in each case
prepared in accordance with French generally accepted accounting principles with
a reconciliation to U.S. generally accepted accounting principles applied on a
consistent basis). If the acquisition is not consummated by December 28, 2001
for any reason, other than our failure to satisfy our obligations under the
acquisition agreement, we may terminate the acquisition agreement without any
resulting obligation to Group Lafon.
The Lafon acquisition price of $450 million will be adjusted downward
following the closing if Group Lafon's shareholders' equity as of the date of
closing and cash and investment securities as of September 30, 2001 are less
than specified amounts, and its obligations to banks and other miscellaneous
borrowing and financial obligations as of September 30, 2001 are greater than a
specified amount. To secure the payment of these and other post-closing
adjustments, including any indemnification claims, to the extent such claims
exceed $3 million in the aggregate, $45 million of the purchase price will be
held in escrow and released to the sellers (absent any claims) over an 18-month
period. The indemnification obligations of the sellers are limited to $180
million in the aggregate, except that in cases of fraud, such obligations are
limited to $450 million. We also may withhold a portion of the purchase price
(up to $262,500) if the sellers do not deliver on the closing date all of the
minority interests in Group Lafon. The minority interests constitute
substantially less than 1% of the outstanding equity in Group Lafon.
Group Lafon was founded in 1951. It currently has approximately 500
employees in France, including a 150-person sales force that details its
products to hospitals, doctors and pharmacists. In addition to its headquarters
and research facilities located in Paris, Group Lafon operates two manufacturing
facilities, a packaging and distribution facility and various warehouses in
France.
For the nine months ended September 30, 2001, Group Lafon had sales of
approximately FRF 600.1 million. Of that amount, approximately FRF 451.5
million, or 75.2%, were derived from sales of three products: SPASFON, FONZYLANE
and MODIODAL. SPASFON, a pain drug approved in France for biliary/urinary tract
spasm and irritable bowel syndrome, accounted for approximately FRF 251.5
million of sales in the nine months ended September 30, 2001. FONZYLANE, a
vasodilator indicated for cerebral vascular disorders, accounted for
approximately FRF 157.4 million of sales for the nine months ended September 30,
2001. MODIODAL, which is the brand name for modafinil in France, generated sales
of approximately FRF 42.6 million for the nine months ended September 30, 2001.
The remaining Group Lafon sales of FRF 148.6 million, or 24.8% of total sales
for the nine months ended September 30, 2001, consist of FRF 52.3 million of
sales of eight other pharmaceutical products and FRF 96.3 million of sales of
modafinil (the active drug substance in PROVIGIL) to Cephalon. We licensed
rights to PROVIGIL from Group Lafon for the U.S. market in 1993. Group Lafon
also has licensed from us the marketing rights to ACTIQ in France, which it
expects to launch in 2002.
Our acquisition of Group Lafon is driven by a number of strategic
considerations. We sell our highest revenue product, PROVIGIL, under a license
from Group Lafon. By acquiring Group Lafon, we expect to reduce our 2002 cost of
goods sold related to PROVIGIL from approximately 17% of net PROVIGIL sales
(including the cost of purchasing the active drug substance modafinil and
royalty payments) to approximately
5% of net PROVIGIL sales. Following the acquisition, we will have worldwide
control of the intellectual property, marketing and manufacturing rights
relating to modafinil. Finally, we also will acquire a substantial
pharmaceutical business in France, which includes both mature products, and
products such as MODIODAL with potential for growth. We expect to leverage this
critical mass to further develop our European business by acquiring or licensing
additional products.
On December 3, 2001, we issued a press release announcing the Lafon
acquisition and updating our guidance for our financial performance in 2002. Due
to the elimination of the intercompany sales of modafinil to Cephalon, on a pro
forma basis giving effect to the Lafon acquisition, our sales will be less than
the sum of our stand-alone historical sales and Group Lafon's stand-alone
historical sales. However, our PROVIGIL gross margins, on a pro forma basis
giving effect to the Lafon acquisition, are expected to improve from
approximately 78% of net PROVIGIL sales to approximately 93% of net PROVIGIL
sales. We anticipate taking a one-time charge on the quarter ending December 31,
2001, for the cost of acquired in-process research and development associated
with the acquisition. We have not yet determined the amount of the charge.
We expect the Lafon acquisition to increase our 2002 estimated net sales by
$80 million to between $400 and $410 million, and our 2002 estimated earnings
before income taxes, depreciation and amortization (EBITDA) by $20 million to
$100 million. After giving effect to purchase accounting adjustments, we expect
the Lafon acquisition to increase our 2002 estimated diluted earnings per share
by $0.03 to approximately $1.03 per share. EBITDA is not a measurement of
financial performance under U.S. GAAP. EBITDA is presented because we believe it
is an indicator of our ability to incur and service debt. However, EBITDA should
not be considered as an alternative to cash flow from operating activities as a
measure of liquidity or as an alternative to net income as a measure of
operating results in accordance with U.S. GAAP.
The foregoing expectations assume certain purchase accounting adjustments,
including an assumption that approximately $175 million of the purchase price
will be allocated to identified intangible assets to be amortized over a period
averaging 15 years. However, as no formal appraisal of Group Lafon's assets and
liabilities has yet been performed, such assumptions are subject to change. In
addition, based on the structure of the acquisition, we believe, and the
foregoing expectations assume, that certain tax and other synergies are likely
to be realized.
RISK FACTORS
RISKS RELATED TO THE LAFON ACQUISITION
THIS REPORT CONTAINS ONLY LIMITED UNAUDITED FINANCIAL INFORMATION OF
GROUP LAFON, WHICH MAY PROVIDE AN INSUFFICIENT BASIS TO EVALUATE GROUP LAFON'S
EXISTING BUSINESS AND THE IMPACT OF THE LAFON ACQUISITION ON OUR BUSINESS.
This report contains only limited financial information on which to base an
evaluation of the existing business of Group Lafon and the impact of the Lafon
acquisition on our business. The limited unaudited historical financial
information of Group Lafon that it provided to us and is contained in this
report has been prepared in accordance with French generally accepted accounting
principles and not U.S. generally accepted accounting principles. Moreover, this
information was prepared without our participation, and we have not verified its
accuracy or completeness. In addition, pro forma financial statements of
Cephalon that give effect to the Lafon acquisition are not currently available.
As a condition to closing the Lafon acquisition, Cephalon must receive an
unqualified audit opinion as to the consolidated financial statements of Group
Lafon for the years ended December 31, 1998, 1999 and 2000 and a review report
as to its interim financial statements as of and for the nine-month periods
ended September 30, 2000 and 2001 (in each case prepared in accordance with
French GAAP with a reconciliation to U.S. GAAP applied on a consistent basis).
As a result, the information contained in such financial statements, when they
become available, will differ from the financial information contained in this
report, and such differences could be material. While we have provided estimates
of the expected incremental impact of the Lafon acquisition on certain of our
previously announced financial forecasts for 2002, these estimates are based in
large part on the financial and other information provided to us by Group Lafon
and are subject to significant risks, uncertainties and assumptions.
Accordingly, you should not place undue reliance on these forward-looking
statements.
THE FAILURE TO SUCCESSFULLY INTEGRATE OUR OPERATIONS AFTER THE LAFON ACQUISITION
COULD NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.
The integration of Group Lafon's operations following the acquisition will
involve a number of risks and present financial, managerial and operational
challenges, including:
- diversion of management attention from our existing business and
operations;
- difficulty with integration of personnel and financial and other systems;
and
- increased foreign operations that may be difficult to assimilate,
especially since we have limited experience operating in France.
We may not be able to integrate successfully the operations and personnel
of Group Lafon. Customer dissatisfaction or manufacturing, supply or
distribution problems associated with Group Lafon's products or businesses also
could have a material adverse effect on our reputation and business. In
addition, Group Lafon's pharmaceutical business in France could underperform
relative to our expectations, including as a result of disruptions associated
with the integration of our businesses. We also could experience financial or
other setbacks if Group Lafon's businesses have problems or liabilities of which
we are not aware or are substantially greater than we anticipate.
Following the closing of the Lafon acquisition, we will be finalizing our
strategic review of Group Lafon's businesses and our plans to integrate the
operations of Group Lafon. We expect that the integration of the operations of
Group Lafon will include certain merger and integration costs that, in turn,
could result in a charge to earnings of the combined company.
THE CONSUMMATION OF THE LAFON ACQUISITION IS SUBJECT TO A NUMBER OF CLOSING
CONDITIONS THAT COULD PREVENT US FROM CONSUMMATING THE TRANSACTION IN ACCORDANCE
WITH OUR CURRENT EXPECTATIONS, IF AT ALL.
The acquisition of Group Lafon is subject to a number of closing
conditions, including our having secured financing of at least $150 million. If
this condition is not satisfied by December 24, 2001, we have the right to
terminate the acquisition agreement, subject only to our obligation to pay a
termination fee to the sellers in the amount of $5 million. In addition, if the
closing does not occur by December 28, 2001 for any reason other than our
failure to perform our obligations under the acquisition agreement, including
the failure of Group Lafon to deliver to us at or prior to closing certain
audited and reviewed consolidated financial statements of Group Lafon, we may
terminate the acquisition agreement without any resulting obligation of any
party to any other. While the acquisition agreement provides for post-closing
purchase price adjustments based on the substance and amount of shareholders'
equity as of the closing date and the substance and amounts of cash and
investment securities and borrowings and other financial obligations of Group
Lafon as of September 30, 2001, all determined in accordance with French GAAP,
we will not have the ability to terminate the acquisition agreement based solely
on the financial condition, results of operations or cash flows of Group Lafon
as reflected in the consolidated financial statements to be delivered to us as a
condition to closing. The transaction is expected to close by the end of
December 2001. However, we cannot assure you that we will consummate the Lafon
acquisition on this timetable, if at all.
WE MAY NOT ACHIEVE THE EXPECTED COST SAVINGS AND OTHER BENEFITS OF THE LAFON
ACQUISITION.
We currently sell PROVIGIL, which represented approximately 70% of our
revenue for the nine months ended September 30, 2001, under a license from Group
Lafon. By acquiring worldwide control of the intellectual property, marketing
and manufacturing rights relating to modafinial, the active drug substance in
PROVIGIL, and thereby eliminating bulk purchases from and royalty payments to
Group Lafon, we expect to reduce our cost of goods sold related to PROVIGIL from
approximately 17% of net PROVIGIL sales to approximately 5% of net PROVIGIL
sales. While we believe these expected cost savings to be reasonable, they are
estimates that are inherently difficult to predict and are necessarily
speculative in nature. In addition, we cannot assure you that unforeseen factors
will not offset the estimated cost savings or other anticipated benefits of the
Lafon acquisition. As a result, our actual cost savings, if any, and other
anticipated benefits could differ or be delayed, compared to our estimates and
from the other information contained in this offering circular.
IF WE CONSUMMATE THE LAFON ACQUISITION, A PORTION OF OUR REVENUES WILL BE
SUBJECT TO EXCHANGE RATE FLUCTUATIONS IN THE NORMAL COURSE OF BUSINESS THAT
COULD ADVERSELY AFFECT OUR REPORTED RESULTS OF OPERATIONS.
A portion of our revenue following the Lafon acquisition will be earned in
euros and other local currencies but will be reported in U.S. dollars. We will
translate revenue earned into U.S. dollars at the average exchange rate during
the relevant period. A strengthening of the dollar could, therefore, reduce our
earnings. Consequently, fluctuations in the rate of exchange between the U.S.
dollar and the euro and other local currencies will affect period-to-period
comparisons of our operating results. In addition, the balance sheet of Group
Lafon after the acquisition will be translated into U.S. dollars at the period
end exchange rate. This will result in changes to the translated value of assets
and liabilities, with the impact of the translation included as a component of
shareholders' equity.
SELECTED UNAUDITED CONSOLIDATED FINANCIAL DATA OF GROUP LAFON
The following selected historical consolidated financial data as of
December 31, 1999 and 2000 and for the years ended December 31, 1998, 1999 and
2000 has been derived from the statutory consolidated financial statements of
Group Lafon. The consolidated financial statements have been prepared in
accordance with French generally accepted accounting principles.
The selected historical consolidated financial data as of and for the nine
months ended September 30, 2000 and 2001 has been derived from consolidated
financial statements prepared by Group Lafon. The interim consolidated financial
statements have been prepared in accordance with French GAAP.
An audit of Group Lafon's consolidated financial statements as of December
31, 1999 and 2000 and for the years ended December 31, 1998, 1999 and 2000 in
accordance with U.S. generally accepted auditing standards is currently in
process. These audited consolidated financial statements will be prepared in
accordance with French GAAP with a reconciliation to U.S. GAAP applied on a
consistent basis. A review in accordance with U.S. generally accepted auditing
standards on the unaudited interim financial statements as of and for the nine
months ended September 30, 2000 and 2001 has not been completed. As a result,
the information contained in the U.S. GAAP financial statements, when they
become available and when the audit and review are completed, will differ from
the financial information derived from the statutory consolidated financial
statements and unaudited consolidated interim financial statements prepared by
Group Lafon and contained in this report, and such differences could be
material. For a discussion of the material differences between French GAAP and
U.S. GAAP, see "-- Summary of Material Differences Between French GAAP and U.S.
GAAP" below.
<Table>
<Caption>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1998 1999 2000 2000 2001
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS) (IN THOUSANDS)
INCOME STATEMENT DATA:
Sales(1)................ FRF 703,583 FRF 796,717 FRF 871,906 FRF 642,765 FRF 600,142
Net income(2)........... 15,011 63,573 121,401 94,345 60,969
</Table>
<Table>
<Caption>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------- -------------------------
1999 2000 2000 2001
----------- ----------- ----------- -----------
BALANCE SHEET DATA:
Cash and cash equivalents............ FRF 44,360 FRF 55,267 FRF 41,215 FRF 75,464
Total assets(3)...................... 664,867 702,633 696,058 709,700
Financial debt(4).................... 84,232 47,497 45,920 62,892
Total equity(3)(5)(6)................ 390,408 475,564 448,593 465,984
</Table>
- ------------
(1) Under French GAAP, sales include sales of pharmaceutical products and
services but does not include "license fees received." Royalties received by
Group Lafon from Cephalon on its sales of PROVIGIL are included in license
fees received and not in sales.
(2) As reported, net income reflects total net income prior to any allocations
to minority shareholders. Under the acquisition agreement relating to the
Lafon acquisition, Cephalon expects to purchase the entire existing minority
interest in a subsidiary of Group Lafon.
(3) Under French GAAP, Group Lafon recorded approximately FRF 282.1 million of
goodwill. Under U.S. GAAP, it is likely that up to FRF 129.6 million of
unamortized net goodwill at December 31, 2000 will be written off, reducing
total assets and total equity by this amount.
(4) Includes loans, bank overdrafts and other financial debt, including FRF 42.0
million of debt that will be repaid by Group Lafon immediately prior to the
closing of the acquisition.
(5) Group Lafon has not recorded any liabilities related to certain pension
commitments and other benefits. Under French GAAP, the commitments total
approximately FRF 55.1 million.
(6) Total equity includes minority interest and other equity. Cephalon will
purchase all or substantially all of the minority interest at the closing of
the acquisition. Other equity in each period presented includes FRF 3.5
million of research and development expenditures that were funded by the
French government. This amount could be refundable to the French government
under certain circumstances and, as such, financial debt may be increased
and shareholders' equity may be decreased by this amount.
ANALYSIS OF GROUP LAFON SALES
The following has been prepared based on discussions with management of
Group Lafon and data provided to us from the financial books and records of
Group Lafon. We have been advised that the information has been prepared in
accordance with French GAAP, and that there may be differences with U.S. GAAP,
but that those differences have not been finally determined or quantified.
MODIODAL
MODIODAL (modafinil) is a selective non-amphetamine wake-promoting agent
indicated for the treatment of excessive daytime sleepiness associated with
narcolepsy and is marketed by Cephalon in the United States under the trade name
PROVIGIL. Group Lafon currently details MODIODAL in France directly through
approximately 25 representatives and in approximately 20 countries through
licensees and distributors. For the nine months ended September 30, 2001,
MODIODAL sales increased 23.8% to FRF 42.6 million, compared to FRF 34.4 million
for the nine months ended September 30, 2000. MODIODAL sales for the year ended
December 31, 2000 increased 26.4% to FRF 48.4 million, compared to FRF 38.3
million in the prior year. The MODIODAL sales increases in each period are
attributable, in part, to increased market penetration.
FONZYLANE
FONZYLANE is a peripheral vasodilator indicated for the treatment of
cerebral vascular disorders, Reynaud's phenomenon and chronic occlusive arterial
disease of the leg. Group Lafon currently details FONZYLANE in France directly
through 160 representatives and in 40 other countries through licensees.
FONZYLANE sales for the nine months ended September 30, 2001 decreased 20% to
FRF 157.5 million, compared to FRF 196.9 million for the nine months ended
September 30, 2000. FONZYLANE sales in 2000 decreased 17.4% to FRF 257.4
million, compared to FRF 311.8 million in 1999. This decline in FONZYLANE sales
is due primarily to (1) a decrease in volume as a result of additional
competition from competing generic products, which entered the vasodilator
market in late 1999 and (2) a French government-imposed price decrease of
approximately 4% to 5%. We expect both of these trends to have a continued
negative impact on FONZYLANE sales and on FONZYLANE margins.
SPASFON
SPASFON is an antimuscarinic, antispasmodic muscle relaxant indicated for
biliary tract spasms, Irritable Bowel Syndrome, urinary tract spasm and the
treatment of certain gynecological-related spasms. The product is sold in a
variety of formats, including solid oral tablets, fast dissolve tablets and
suppositories. SPASFON sales for the nine months ended September 30, 2001
increased 4.7% to FRF 251.5 million, compared to FRF 240.2 million for the nine
months ended September 30, 2000. SPASFON sales in 2000 increased 1.4% to
FRF 342.1 million, compared to FRF 337.3 million in 1999. SPASFON's sales growth
in France was primarily attributable to increased unit volume resulting from
increased sales force experience and efficiency. This unit volume increase was
partially offset by continued SPASFON price reductions, which may continue and
which have a negative impact on SPASFON sales and on SPASFON margins.
OTHER
Other sales consist of sales of Group Lafon's eight other pharmaceutical
products and sales of modafinil (the active drug substance in PROVIGIL) to
Cephalon. For the nine months ended September 30, 2001, modafinil sales
decreased 22.5% to FRF 96.3 million, compared to FRF 124.3 million for the same
period last year. For the year ended December 31, 2000, modafinil sales
increased 304.0% to FRF 162.0 million, compared to FRF 40.1 million for the
prior year. The changes in each of these periods were the result of fluctuations
in product orders from Cephalon driven by demand and inventory levels. For the
nine months ended September 30, 2001, sales of Group Lafon's eight other
pharmaceutical products increased 11.3% to FRF 52.3 million, compared to
FRF 47.0 million for the same period last year. For the year ended December 31,
2000, sales of these products decreased 10.4% to FRF 62.1 million, compared to
FRF 69.3 million in the prior year.
For the nine months ended September 30, 2001 and the year ended December
31, 2000, approximately FRF 72.9 million and FRF 46.2 million, respectively, of
royalties were earned by Group Lafon on Cephalon's sale of PROVIGIL. These
royalties are not included in Group Lafon sales, but are included in Group
Lafon's net income.
SUMMARY OF MATERIAL DIFFERENCES BETWEEN FRENCH GAAP AND U.S. GAAP
Group Lafon reports its financial results under French GAAP, which differs
from U.S. GAAP. The discussion set forth below summarizes certain differences
between French GAAP, as applied by Group Lafon, and U.S. GAAP which, following a
limited analysis of both sets of principles, were identified as potentially
having an impact on consolidated net income and shareholders' equity. There can
be no assurance that these are the only differences in accounting principles
that would have an impact on Group Lafon's consolidated net income and
shareholders' equity.
These differences relate solely to Group Lafon's consolidated financial
statements and do not address potential differences in the application of
accounting principles related to Cephalon.
There also may be significant differences between the presentation of Group
Lafon's consolidated French GAAP financial statements and notes and the
presentation that would be required under U.S. GAAP.
For all differences, the accounting treatments to be adopted for U.S. GAAP
and the potential impact of the differences involved have not yet been
determined.
PRINCIPLES AND METHODS OF CONSOLIDATION
French principles regarding consolidation allow for the financial
statements of companies that are controlled jointly with other shareholders or
parties to be consolidated using the proportionate consolidation method. Under
U.S. GAAP, the proportionate consolidation method is generally not used and such
investment would be accounted for using the equity method. This difference does
not impact net income or shareholders' equity but would affect reported
consolidated revenues and expenses.
BUSINESS COMBINATIONS AND REORGANIZATIONS
Under French GAAP, Group Lafon recorded a corporate reorganization
completed in 1987 as an acquisition and recorded goodwill for this transaction.
Under U.S. GAAP, such corporate reorganization is not considered a business
combination and would be recorded on a historical basis of accounting. As a
result, shareholders' equity under French GAAP is higher than under U.S. GAAP.
In addition, amortization of goodwill from this transaction would be eliminated
resulting in higher reported net income under U.S. GAAP.
In addition, in 1996 Group Lafon purchased shares of a related party entity
and recorded a step-up in values in accordance with French GAAP. Under U.S.
GAAP, the purchase of shares from a related party should also be recorded on a
historical basis of accounting. This also results in higher shareholders' equity
under French GAAP than under U.S. GAAP.
ASSET REEVALUATION
As permitted under French GAAP, in 1976 Group Lafon made an adjustment to
increase the carrying value of land to the then current market value in
conformity with French regulations. Such reevaluations are not permitted under
U.S. GAAP and the asset would continue to be reported at historical cost.
Property, plant and equipment and shareholders' equity would be reduced under
U.S. GAAP.
LOANS AND ADVANCES RECEIVABLE
Group Lafon has made loans and advances and recorded an asset for these
receivables. The loans and advances are non-interest bearing or bear interest at
below market rates. Under U.S. GAAP, the loans and advances should be recorded
as a receivable on a present value basis, using a market interest rate to
discount the expected loan payments to present value. This would result in a
reduced amount of receivables and shareholders' equity under U.S. GAAP than
under French GAAP.
PENSION COMMITMENTS
Under French GAAP, pension commitments and other benefits are calculated in
accordance with the practice prevailing in each country and are generally
disclosed as a contingency. For U.S. GAAP purposes, pension and other post
retirement benefits are computed using certain assumptions and actuarial
valuation methods. The resulting obligation is recorded as a liability in the
consolidated financial statements and an expense is recognized over the period
in which services are provided by employees. Recording pension commitments under
U.S. GAAP would result in an increase in liabilities and reduction in
shareholders' equity.
PRESENTATION OF CONSOLIDATED BALANCE SHEETS
The classification of certain items in, and the format of, Group Lafon's
consolidated balance sheets vary to some extent from U.S. GAAP as follows:
- Under French GAAP, deferred tax assets that are not likely to be realized
in the future are not recorded as assets. Under U.S. GAAP, such deferred
tax assets would be recorded and a valuation allowance would reduce the
net value of the asset to the portion more likely than not to be realized
in the future.
- As discussed in "-- Principles and Methods of Consolidation," an
investment that is proportionally consolidated under French GAAP would
have been reported using the equity method under U.S. GAAP. Under U.S.
GAAP, this would reduce consolidated assets and liabilities by the same
amount.
PRESENTATION OF CONSOLIDATED INCOME STATEMENTS
The classification of certain items in, and the format of, Group Lafon's
consolidated income statements vary to some extent from U.S. GAAP as follows:
- As discussed in "-- Principles and Methods of Consolidation," the
investment that was proportionally consolidated would be recorded under
the equity method under U.S. GAAP. As such, under U.S. GAAP, reported
sales and expenses would be reduced and equity in income of investee
would be increased by the same amount.
- Under French GAAP, "sales" include sales of pharmaceutical products and
services but does not include "license fees received." Royalties received
by Group Lafon from Cephalon on its sales of PROVIGIL are included in
"license fees received" and not in "sales."