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 THE QUARTER ENDED JUNE 30, 1998
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 July 31, 1998:
Class Number of Shares Outstanding
----- ----------------------------
Common 1,101,311,973
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS)
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
-------------------------------------------------------------
(Dollars in millions except per-share data)
Net sales......................................... $2,340.7 $1,988.7 $4,609.8 $3,941.7
Cost of sales..................................... 626.1 548.8 1,228.2 1,090.1
Research and development.......................... 418.7 326.7 783.4 627.9
Marketing and administrative...................... 654.1 572.7 1,220.1 1,044.4
Asset impairment.................................. - 2,443.0 - 2,443.0
Gain on sale of DowElanco......................... - (618.2) - (618.2)
Interest expense.................................. 43.1 62.5 91.7 123.1
Other income - net................................ (56.4) (57.9) (73.1) (56.5)
------- ------- ----- -------
1,685.6 3,277.6 3,250.3 4,653.8
------- ------- ------- -------
Income (loss) before income taxes
and extraordinary item......................... 655.1 (1,288.9) 1,359.5 (712.1)
Income taxes...................................... 163.8 443.2 339.9 587.4
------- ------- ------- -------
Income (loss) before
extraordinary item............................. 491.3 (1,732.1) 1,019.6 (1,299.5)
------- ------- ------- -------
Extraordinary item -
Loss on early redemption
of debt, net of tax............................ - - (7.2) -
------- ------ -------- -----
Net income (loss)................................. $ 491.3 $(1,732.1) $1,012.4 $(1,299.5)
======= ======== ======= ========
Earnings (loss) per share
Income (loss) before
extraordinary item........................... $ 0.45 $ (1.57) $ 0.93 $ (1.18)
Extraordinary item............................. 0.00 0.00 (0.01) 0.00
-------- -------- ------- --------
Net income (loss).............................. $ 0.45 $ (1.57) $ 0.92 $ (1.18)
======== ======== ======= ========
Earnings (loss) per share - Diluted
Income (loss) before
extraordinary item........................... $ 0.44 $ 1.57 $ 0.91 $ (1.18)
Extraordinary item............................. 0.00 0.00 (0.01) 0.00
------- ------- -------- -------
Net income (loss).............................. $ 0.44 $ (1.57) $ 0.90 $ (1.18)
======= ======= ======= =======
Dividends paid per share $ 0.20 $ 0.18 $ 0.40 $ 0.36
======= ======= ======= =======
See Notes to Consolidated Condensed Financial Statements.
2
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
-----------------------------------------------------------------
(Dollars in millions except per-share data)
Net income (loss).............................. $491.3 $(1,732.1) $1,012.4 $(1,299.5)
Other comprehensive income..................... (27.6) (47.9) (32.4) (130.1)
---- ---- ---- -----
Comprehensive income (loss)........................$463.7........$(1,780.0) $ 980.0 $(1,429.6)
===== ======= ======= =======
3
See Notes to Consolidated Condensed Financial Statements.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Eli Lilly and Company and Subsidiaries
June 30, December 31,
1998 1997
----------------------
(Millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................. $ 1,315.2 $ 1,947.5
Short-term investments.................................................... 67.6 77.1
Accounts receivable, net of allowances for
doubtful amounts of $51.1 (1998)
and $53.3 (1997)........................................................ 1,650.0 1,544.3
Other receivables......................................................... 168.3 338.9
Inventories............................................................... 985.2 900.7
Deferred income taxes..................................................... 320.0 325.7
Prepaid expenses.......................................................... 291.7 186.5
-------- --------
TOTAL CURRENT ASSETS...................................................... 4,798.0 5,320.7
OTHER ASSETS
Prepaid retirement........................................................ 592.0 579.1
Investments............................................................... 300.7 465.6
Goodwill and other intangibles, net of
allowances for amortization of
$143.8 (1998) and $119.3 (1997)......................................... 1,508.0 1,550.5
Sundry.................................................................... 625.3 559.8
-------- --------
3,026.0 3,155.0
PROPERTY AND EQUIPMENT
Land, buildings, equipment and
construction-in-progress................................................ 7,091.7 7,034.9
Less allowances for depreciation.......................................... 3,047.0 2,933.2
-------- --------
4,044.7 4,101.7
-------- --------
$11,868.7 $12,577.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings..................................................... $ 195.1 $ 227.6
Accounts payable.......................................................... 897.1 985.5
Employee compensation..................................................... 433.6 456.6
Dividends payable......................................................... - 221.7
Income taxes payable...................................................... 1,082.1 1,188.0
Other liabilities......................................................... 839.1 1,112.2
-------- --------
TOTAL CURRENT LIABILITIES................................................. 3,447.0 4,191.6
LONG-TERM DEBT................................................................ 2,307.5 2,326.1
DEFERRED INCOME TAXES........................................................ 408.2 215.5
RETIREE MEDICAL BENEFIT OBLIGATION........................................... 107.4 118.3
OTHER NONCURRENT LIABILITIES................................................. 797.0 920.3
-------- --------
3,620.1 3,580.2
COMMITMENTS AND CONTINGENCIES................................................ - -
MINORITY INTEREST IN SUBSIDIARY.............................................. 160.0 160.0
SHAREHOLDERS' EQUITY
Common stock.............................................................. 688.9 694.7
Retained earnings......................................................... 4,524.5 4,497.3
Deferred costs - ESOP..................................................... (149.2) (155.7)
Accumulated comprehensive income.......................................... (313.6) (281.2)
-------- --------
4,750.6 4,755.1
Less cost of common stock in treasury..................................... 109.0 109.5
-------- --------
4,641.6 4,645.6
-------- --------
$11,868.7 $12,577.4
======== ========
See Notes to Consolidated Condensed Financial Statements.
4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Eli Lilly and Company and Subsidiaries
Six Months Ended
June 30,
1998 1997
---------------------------
(Millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(loss)................................................................... $1,012.4 $(1,299.5)
Adjustments to Reconcile Net Income (Loss) to Cash
Flows from Operating Activities:
Changes in operating assets and liabilities........................................ (612.5) (140.3)
Change in deferred taxes........................................................... 204.6 11.5
Depreciation and amortization...................................................... 236.4 275.0
Net gain from sale of DowElanco.................................................... - (295.6)
Asset impairment, net of tax...................................................... - 2,429.6
Other items, net.................................................................. (49.5) (33.6)
------- -------
NET CASH FLOWS FROM OPERATING ACTIVITIES........................................... 791.4 947.1
INVESTING ACTIVITIES
Net additions to property and equipment............................................ (177.5) (136.0)
Additions to sundry assets and intangibles......................................... (35.3) (18.5)
Reduction of investments........................................................... 160.7 180.9
Additions to investments........................................................... (28.3) (124.8)
Proceeds from sale of DowElanco.................................................... - 1,200.0
------ -------
NET CASH FROM (USED FOR) INVESTING ACTIVITIES...................................... (80.4) 1,101.6
FINANCING ACTIVITIES
Dividends paid..................................................................... (440.7) (396.8)
Purchases of common stock and other capital
transactions..................................................................... (864.0) 97.5
Net reductions to short-term borrowings............................................ (14.4) (643.0)
Net additions (reductions) to long-term debt....................................... (23.0) 6.4
------- -------
NET CASH USED FOR FINANCING ACTIVITIES............................................. (1,342.1) (935.9)
Effect of exchange rate changes on cash............................................ (1.2) (73.5)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... (632.3) 1,039.3
Cash and cash equivalents at January 1............................................. 1,947.5 813.7
------- -------
CASH AND CASH EQUIVALENTS AT JUNE 30............................................... $1,315.2 $1,853.0
======= =======
See Notes to Consolidated Condensed Financial Statements.
5
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 that are necessary for 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 presented herein, sales include sales of the Company's life-sciences products
and service revenue from the Company's health-care management operations,
primarily PCS Health Systems, Inc. (PCS).
CONTINGENCIES
The Company has been named as a defendant in numerous product liability lawsuits
involving primarily two products, diethylstilbestrol and Prozac'r'. 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 recoveries 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 the payment of those costs. The Company has reached a
settlement with its primary liability insurance carrier providing for coverage
for certain environmental liabilities and has instituted litigation seeking
coverage from certain excess carriers.
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. The Company has also settled with a large number
of the remaining retail pharmacies. Still
6
pending are related suits brought in federal and some state courts by a large
number of retail pharmacies involving claims of price discrimination or claims
under other pricing laws. Additional cases have been brought on behalf of
consumers in several states.
The environmental liabilities and litigation accruals have been reflected in the
Company's consolidated balance sheet at the gross amount of approximately $325
million at June 30, 1998. Estimated insurance recoverables have been reflected
as assets in the consolidated balance sheet of approximately $241 million at
June 30, 1998.
Barr Laboratories, Inc. (Barr) and Geneva Pharmaceuticals, Inc. (Geneva) have
each submitted Abbreviated New Drug Applications (ANDAs) seeking FDA approval to
market generic forms of Prozac before the expiration of the Company's patents.
The ANDAs assert that Lilly's U.S. patents covering Prozac are invalid and
unenforceable. In April 1996, the Company filed suit against Barr in federal
court in Indianapolis seeking a ruling that Barr's challenge to Lilly's patents
is without merit. In June 1997, the Company filed a similar suit against Geneva
in the same court. The patent validity aspects of the case are currently set for
trial in January 1999. While the Company believes that the claims of Barr and
Geneva are without merit, there can be no assurance that the Company will
prevail. An unfavorable outcome of this litigation 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, antitrust, patent, 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
To reflect the impact of the Company's September 1997 stock split, previously
reported outstanding and weighted-average number of shares of common stock and
per share data have been adjusted.
At December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share",
which requires presentation of both basic earnings per share and diluted
earnings per share on the income statement. Accordingly, earnings per share data
for previous periods has been restated. All per share amounts, unless otherwise
noted in the footnotes, are presented on a diluted basis, that is, based on the
weighted-average number of outstanding common shares and the effect of all
potentially dilutive common shares (primarily unexercised stock options).
ACCOUNTING CHANGES
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". Under provisions of
this statement, the Company has included a financial statement presentation of
comprehensive income to conform to these new requirements. SFAS No. 130 requires
unrealized gains or losses on the Company's available-for-sale securities,
minimum pension liability adjustments and foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity to be included in other comprehensive
7
income. As a consequence of this change, certain balance sheet reclassifications
were necessary for previously reported amounts to achieve the required
presentation of comprehensive income. Implementation of this disclosure standard
did not affect the Company's financial position or results of operations.
Effective January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants' (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The statement requires capitalization of certain costs incurred
in the development of internal-use software, including external direct material
and service costs, employee payroll and payroll-related costs, and capitalized
interest. Prior to adoption of SOP 98-1, the Company expensed these costs as
incurred. The effect of this change in accounting principle on consolidated
earnings during the current period is immaterial.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information", was issued. The statement must be adopted by the Company
on December 31, 1998. Under provisions of this statement, the Company will be
required to modify or expand the financial statement disclosures for operating
segments, products and services, and geographic areas. Implementation of this
disclosure standard will not affect the Company's financial position or results
of operations.
In December 1997, SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", was issued and is effective for the Company's 1998
fiscal year. The statement revises current disclosure requirements for
employers' pensions and other retirees benefits. Implementation of this
disclosure standard will not affect the Company's financial position or results
of operations.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. Statement No. 133 is required to be adopted in years
beginning after June 15, 1999. The statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The statement will require
the company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Hedge ineffectiveness, the amount by which the change in the value of
a hedge does not exactly offset the change in the value of the hedged item, will
be immediately recognized in earnings.
The Company has not yet determined what the effect of Statement No. 133 will be
on the Company or when the statement will be adopted.
8
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
OPERATING RESULTS:
The Company's sales for the second quarter of 1998 increased 18 percent compared
with the second quarter of 1997. Sales inside the United States increased 25
percent while sales outside of the United States increased 7 percent. Compared
with the second quarter of 1997, worldwide sales reflected volume growth of 17.2
percent and a 3.1 percent increase in selling prices which were partially offset
by the unfavorable impact of exchange rates of 2.6 percent.
The Company's sales for the first six months of 1998 increased 17 percent
compared with the same period in 1997. Sales inside the United States increased
22 percent while sales outside the United States increased 8 percent. Compared
with the first six months of 1997, worldwide sales reflected volume growth of
17.2 percent and a 2.4 percent increase in selling prices which were partially
offset by unfavorable exchange rate comparisons of 2.6 percent.
Worldwide pharmaceutical sales and services for the quarter were $2,204 million
and for the six month period were $4,327 million, reflecting increases of 19
percent and 18 percent, respectively, compared with the same periods of 1997.
Sales growth in both periods was led by Prozac and three of the Company's newer
products, Gemzar'r', ReoPro'r', and Zyprexa'r'. Revenue growth for both the
quarter and the six month period was partially offset by lower sales of
anti-infective products and Axid'r', due to continuing generic competition and
competitive pressures. Total U.S. pharmaceutical sales and services for the
quarter increased 25 percent to $1,458 million and for the six month period
increased 23 percent to $2,851 million. Growth in both periods was driven
primarily by increased volumes. International pharmaceutical sales for the
quarter increased 7 percent to $746 million and for the six month period
increased 9 percent to $1,476 million. Strong volume growth drove these
increases, offset by the effect of unfavorable exchange rates with selling
prices remaining stable. The exchange rate impact in the Asia Pacific region did
not have a material impact on worldwide sales.
Worldwide sales of Prozac for the quarter were $666 million and for the six
month period were $1,284 million, representing increases over the same periods
of 1997 of 12 percent and 11 percent, respectively. Prozac sales in the U.S.
increased 16 percent to $531 million for the quarter and 13 percent to $1,015
million for the six month period. Sales of Prozac outside the U.S. declined 2
percent to $136 million for the quarter, but reflected an increase of 1 percent
to $269 million for the six month period. Both periods were affected by
unfavorable exchange rates and continued competitive pressures.
Zyprexa posted worldwide sales for the quarter of $328 million and $615 million
for the six month period, representing increases of $172 million and $354
million, respectively, over the same periods of 1997. U.S. sales of Zyprexa
increased $130 million to $256 million for the quarter and increased $269
million to $486 million for the six month period. Sales outside the U.S.
increased $42 million to $72 million for the quarter and increased $84 million
to $129 million for the six month period.
Worldwide insulin sales, composed of Humulin'r', Humalog'r', and Iletin'r',
increased in the quarter by 16 percent to $291 million and, for the six month
9
period, increased 8 percent to $528 million. Insulin sales in the U.S. for the
quarter increased by 16 percent to $177 million and for the six month period
increased 4 percent to $308 million. Insulin sales outside the U.S. increased by
16 percent to $114 million for the quarter and increased 14 percent to $221
million for the six month period. Worldwide Humulin sales increased 12 percent
for the quarter and 3 percent for the six month period. U.S. Humulin sales
increased for the quarter by 12 percent, but for the six month period decreased
by 1 percent. Humulin sales outside the U.S. increased by 11 percent and 9
percent for the quarter and six month period, respectively, despite unfavorable
exchange rates. The Company expects Humulin sales for the full year to increase
from 3 to 5 percent over 1997 levels. Worldwide Humalog sales were $30 million
for the quarter and $54 million for the six month period, representing increases
over the same periods of 1997.
Worldwide sales of anti-infectives decreased by 11 percent to $250 million for
the quarter and by 12 percent to $545 million for the six month period. U.S.
anti-infective sales declined 21 percent for the quarter and 29 percent for the
six month period. International anti-infective sales declined by 7 percent and 6
percent for the same time periods. These declines were due in part to continued
generic competition in certain markets and the impact of unfavorable exchange
rates. Cefaclor accounted for the majority of the decline in anti-infective
sales. Sales of cefaclor declined 11 percent for the quarter and 14 percent for
the six month period.
Worldwide Axid sales decreased by 35 percent to $77 million for the quarter and
by 22 percent to $222 million for the six month period due to continuing generic
competition and competitive pressures.
Worldwide ReoPro sales of $101 million for the quarter and $171 million for the
six month period reflected increases of $41 million and $59 million over the
same periods of 1997, respectively.
Worldwide Gemzar sales of $85 million for the quarter and $143 million for the
six month period reflected increases of $44 million and $68 million over the
same periods of 1997, respectively.
Evista'r', launched in the first quarter, had worldwide sales of $15 million for
the quarter and $49 million for the six month period. The Company expects to
have introduced Evista in approximately 30 countries by the end of 1998.
Assuming that current new prescription trends continue, the Company anticipates
worldwide Evista sales for the full year of 1998 to be in the range of $125
million to $150 million.
Health-care management revenues increased 35 percent for the quarter to $180
million and 44 percent for the six month period of 1998 to $361 million, driven
largely by increased mail order pharmacy sales.
Worldwide sales of animal health products increased 6 percent over the second
quarter of 1997 to $135 million and 7 percent for the six month period to $279
million. This sales growth was driven primarily by Micotil'r'.
Cost of sales decreased in the second quarter to 26.7 percent of sales as
compared with 27.6 percent of sales in the same quarter of 1997. Cost of sales
for the first six months of 1998 was 26.6 percent of sales as compared with 27.7
percent in the prior year. The decreases for both periods were primarily the
result of favorable changes in product mix, continued productivity improvements,
and enhanced plant utilization. These improvements were offset in part by
increased health-care-management service revenues,
10
which have lower margins than pharmaceutical products. For the year, the Company
anticipates that cost of sales as a percent of sales will be below 1997 levels.
In both periods comparisons of operating expenses benefited by the inclusion of
the settlement of a significant portion of the company's remaining retail
pharmacy pricing litigation in the second quarter of 1997. Excluding the impact
of the 1997 pricing litigation, operating expenses for 1998 increased 22 percent
for the second quarter and 21 percent for the first half of the year. The
increases reflect 28 percent and 25 percent growth rates in research and
development for the second quarter and six month periods, respectively. This
growth is the result of greater investments in both internal research efforts
and external research collaborations. The Company expects research and
development expenses for the full year to increase from 20 to 22 percent over
1997 levels. Excluding the impact of the 1997 pricing litigation, marketing and
administrative expenses increased 18 percent over the second quarter of 1997 and
19 percent over the first six months. This increase was driven by increased
expenditures to support continued new product launches around the world,
including the U.S. launch of Evista, enhancements of the Company's global
information technology capabilities, including expenditures relating to the
Company's development and implementation of the year 2000 computer initiatives,
and direct-to-consumer advertising campaigns in the U.S.
In the second quarter of 1997 the Company recognized an asset impairment (a
noncash charge) of approximately $2.4 billion to adjust the carrying value of
PCS health-care-management businesses (PCS) long-lived assets, primarily
goodwill, to their fair value of approximately $1.5 billion. The Company
determined that PCS' estimated future undiscounted cash flows were below the
carrying value of PCS' long-lived assets. As a consequence, the carrying value
was adjusted to estimated fair value based on anticipated future cash flows,
discounted at a rate commensurate with the risk involved.
On June 30, 1997, The Dow Chemical Company acquired the Company's 40 percent
interest in DowElanco. The cash purchase price was $1.2 billion resulting in a
gain in the second quarter of 1997 of $618.2 million ($295.6 million after-tax).
Compared to the second quarter and first six months of 1997, interest expense
decreased $19 million (31 percent) and $31 million (26 percent), respectively,
due largely to declines in the Company's short-term borrowings.
Net other income for the quarter of $56 million reflected a decrease of $2
million from 1997. Net other income for the six month period was $73 million, an
increase of $16 million over 1997. The first six months of 1998 benefited from a
decrease in goodwill amortization expense, gains on the sale of certain
investments, the exchange of Somatogen stock for Baxter stock as part of their
merger, and increased interest income. Also, the first six months comparison
benefited from the inclusion in the 1997 amount of the charges associated with
the discontinuance of a collaboration with Somatogen, Inc. These increases were
partially offset by the absence of DowElanco joint venture income in the first
six months.
The Company's effective tax rate for both the second quarter and first six
months was 25 percent. For the first six months of 1997 the Company's effective
tax rate was distorted by the impacts of the PCS impairment and the gain from
the sale of DowElanco. The Company's estimated tax rate for the
11
first six months of 1997, excluding the impacts of these items, was 25 percent.
Second quarter net income was $491 million, or $0.44 per share, compared to a
$1,732 million net loss ($1.57 per share) for the second quarter of 1997. For
the six month period, net income was $1,012 million, or $0.90 per share,
compared to a $1,299 million net loss ($1.18 per share) for the same period in
1997. The second quarter 1997 results were impacted by the three non-recurring
significant events described above: the PCS asset impairment, the retail
pharmacy pricing litigation settlement and the DowElanco sale. Excluding these
non-recurring significant events, second quarter net income increased 18 percent
as compared to 1997 and for the six month period, net income increased 17
percent over the first six months of 1997. For the second quarter, net income
was favorably impacted by increased sales and improved gross margin, offset
somewhat by higher research and development expenses as a percent of sales.
FINANCIAL CONDITION:
As of June 30, 1998, cash, cash equivalents and short-term investments totaled
$1,383 million as compared with $2,025 million at December 31, 1997, a net
decrease of $642 million. The decrease in cash was due primarily to stock
repurchases. Total debt at June 30, 1998, was $2,503 million, a decrease of $51
million from December 31, 1997.
The Company believes that cash generated from operations in 1998, along with
available cash and cash equivalents, will be sufficient to fund essentially all
of the 1998 operating needs, including debt service, repayment of short term
borrowing, capital expenditures, and dividends.
Many of the Company's computer systems and laboratory and process automation
devices will require modification or replacement over the next 18 months in
order to render the systems ready for the Year 2000. Modifications of some
systems have already occurred and others are in various stages of activity
ranging from evaluation to testing. The Company is also assessing how it could
be affected by the failure of third parties (e.g., vendors and customers) to
mitigate their own Year 2000 issues. Management currently believes that the
incremental costs of addressing these issues will not materially affect the
Company's consolidated financial position, liquidity or results of operations
through December 31, 1999. The Company believes it will be able to resolve all
major Year 2000 issues by the end of 1999. However, if the Company is not able
to do so, the impact on business operations could be material to the Company's
consolidated results of operations.
Barr Laboratories, Inc. (Barr) and Geneva Pharmaceuticals, Inc. (Geneva) have
each submitted Abbreviated New Drug Applications (ANDAs) seeking FDA approval to
market generic forms of Prozac before the expiration of the Company's patents.
The ANDAs assert that Lilly's U.S. patents covering Prozac are invalid and
unenforceable. The Company has filed suit in federal court in Indianapolis
against both Barr and Geneva seeking a ruling that both challenges are without
merit. The patent validity aspects of the case are currently set for trial in
January 1999. While the Company believes that the claims of Barr and Geneva are
without merit, there can be no assurance that the Company will prevail. An
unfavorable outcome of this litigation could have a material adverse effect on
the Company's consolidated financial position, liquidity, or results of
operations.
12
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 and elsewhere in this Form 10-Q
filing.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the discussion of the patent litigation with Barr
Laboratories, Inc. and Geneva Pharmaceuticals, Inc. involving two U.S. Prozac
patents contained in the Company's 1997 Form 10-K under Item 3, "Legal
Proceedings -- Prozac Patent Litigation." The patent validity aspects of this
case are currently scheduled for trial in January 1999.
Reference is made to the discussion of In re Brand Name Prescription Drugs
Antitrust Litigation (MDL No. 997) and related cases contained in the Company's
1997 Form 10-K under Item 3, "Legal Proceedings -- Pricing Litigation." In the
second quarter of 1998, the Company reached a confidential settlement with an
additional large group of chain pharmacies.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on April 20, 1998. The
following is a summary of the matters voted on at the meeting.
(a) The four management nominees for Director were elected to serve three-
year terms ending in 2001, as follows:
Nominee For Withhold Vote
------- --- -------------
Steven C. Beering, M.D. 976,085,424 11,869,332
Franklyn G. Prendergast, M.D., Ph.D. 977,726,066 10,228,690
Kathi P. Seifert 977,242,554 10,712,202
Randall L. Tobias 976,297,077 11,657,679
The terms of office of the following directors continued after the
meeting: Evan Bayh, Alfred G. Gilman, M.D., Charles E. Golden, Karen
N. Horn, Ph.D., J. Clayburn La Force, Jr., Ph.D., Kenneth L. Lay,
Ph.D., Sidney Taurel, August M. Watanabe, M.D. and Alva O. Way. Dr. La
Force retired from the Board of Directors effective April 20, 1998.
(b) By the following vote, the shareholders approved amendments to the
Articles of Incorporation recommended by the Board of Directors to
increase the number of authorized shares of common stock:
For: 933,218,245
Against: 50,245,716
Abstain: 4,490,795
13
(c) By the following vote, the shareholders approved the 1998 Lilly Stock
Plan:
For: 948,864,916
Against: 33,887,457
Abstain: 5,202,383
(d) By the following vote, the shareholders approved the Eli Lilly and
Company EVA Bonus Plan:
For: 959,782,831
Against: 21,835,595
Abstain: 6,336,330
(e) The appointment of Ernst & Young LLP as the Company's principal
independent auditors was ratified by the following shareholder vote:
For: 984,011,833
Against: 1,746,191
Abstain: 2,196,732
14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are filed as exhibits to this
Report:
3. By-laws (as amended through July 1, 1998)
11. Statement re: Computation of Basic Earnings Per Share
and Diluted Earnings Per Share
12. Statement re: Computation of Ratio of Earnings from
Continuing Operations 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 second quarter of
1998.
15
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 August 12, 1998 /s/ Daniel P. Carmichael
--------------- ------------------------
Daniel P. Carmichael
Secretary and Deputy General Counsel
Date August 12, 1998 /s/ Arnold C. Hanish
--------------- ----------------------
Arnold C. Hanish
Director, Corporate Accounting and
Chief Accounting Officer
16
INDEX TO EXHIBITS
The following documents are filed as a part of this Report:
Exhibit
-------
3. By-laws (as amended through July 1, 1998)
11. Statement re: Computation of Basic Earnings Per
Share and Diluted Earnings Per Share
12. Statement re: Computation of Ratio of Earnings
from Continuing Operations to Fixed Charges
27. Financial Data Schedule
99. Cautionary Statement Under Private Securities Litigation
Reform Act of 1995 - "Safe Harbor" for Forward-Looking
Disclosures
17
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as ..............'r'