EXHIBIT 13. ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR
ENDED DECEMBER 31, 2000
REVIEW OF OPERATIONS
OPERATING RESULTS FROM CONTINUING OPERATIONS - 2000
SUMMARY
- -------
Income from continuing operations was $3.06 billion, or $2.79 per share, in 2000
and $2.55 billion, or $2.30 per share, in 1999. Comparisons between 2000 and
1999 are made difficult by the impact of several unusual items that are
reflected in the company's operating results for both years. Excluding these
unusual items, which are discussed further below, income from continuing
operations for 2000 and 1999 would have been $2.90 billion, or $2.65 per share,
and $2.52 billion, or $2.28 per share, respectively. This represents an
increase in net income and earnings per share of 15 percent and 16 percent,
respectively. The 2000 increases are attributed to growth in sales, improved
gross margin, and increased interest income, offset by increases in operating
expenses at a rate greater than sales growth. Earnings per share also benefited
from a decrease in the number of shares outstanding as a result of the share
repurchase plan.
UNUSUAL ITEMS
- -------------
As noted above, several unusual items are reflected in the company's operating
results for 2000 and 1999. These transactions are summarized as follows (see
Note 3, Note 5, and Note 13 to the consolidated financial statements for
additional information):
- - A gain of $214.4 million on the sale of its interest in Kinetra LLC to
WebMD Corporation (WebMD) and the subsequent sale of WebMD stock, which
increased earnings per share by approximately $.20 in the first quarter of
2000
- - Approximately $91 million in additional product sales in 1999 as a result
of year-2000-related wholesaler buying that normally would have been
realized during the first quarter of 2000, which increased earnings per
share by approximately $.06 in the fourth quarter of 1999 and reduced
earnings per share by the same amount in the first quarter of 2000
- - A pretax gain of $110.0 million in settlement of litigation with
Biochimica Opos S.p.A., which increased earnings per share by
approximately $.06 in the fourth quarter of 1999
- - A pretax charge of $26.0 million associated with the decommissioning of
manufacturing facilities and other site charges, which decreased earnings
per share by approximately $.02 in the fourth quarter of 1999
- - A pretax gain of $67.8 million on the sale of U.S. and Puerto Rican
Lorabid marketing rights, which increased earnings per share by
approximately $.05 in the third quarter of 1999
- - A pretax charge of $150.0 million as the result of a contribution to Eli
Lilly and Company Foundation, which decreased earnings per share by
approximately $.09 in the first quarter of 1999
- - A pretax charge of $61.4 million associated with the impairment of certain
manufacturing assets, which decreased earnings per share by approximately
$.04 in the first quarter of 1999.
SALES
- -----
The company's reported worldwide sales for 2000 increased 9 percent, to $10.86
billion. Worldwide sales for 1999 included approximately $91 million of sales
relating to year-2000 wholesaler buying that normally would have been recognized
in 2000. Adjusting for the impact of year-2000 wholesaler buying, sales growth
for 2000 would have been 10 percent. Sales growth was led by Zyprexa, a
treatment for schizophrenia and related psychoses; diabetes care products;
Evista, an osteoporosis treatment and prevention agent; and Gemzar, an oncolytic
product. Sales in the U.S. increased 12 percent, to $7.00 billion. Sales
outside the U.S. increased 2 percent, to $3.86 billion. Worldwide sales
reflected volume growth of 11 percent, partially offset by a 2 percent decrease
in exchange rates while prices remained flat.
Page 1
Prozac and Sarafem had combined worldwide sales of $2.57 billion, representing a
decrease of 2 percent. Sarafem, launched in the U.S. in August 2000 for the
treatment of premenstrual dysphoric disorder (PMDD), had sales of $14.6 million
in 2000. Combined sales of Prozac, an antidepressant, and Sarafem in the U.S.
increased 7 percent, to $2.23 billion. The U.S. sales comparison benefited, in
part, from wholesaler inventory reductions in 1999. Prozac sales outside the
U.S. decreased 35 percent, to $341.0 million, primarily due to continuing
generic competition in the U.K. On August 9, 2000, the Court of Appeals for the
Federal Circuit affirmed a lower court decision upholding the company's February
2001 U.S. patent on Prozac but ruled that the company's December 2003 patent is
invalid. Reference is made to the discussion of the Prozac patent litigation
under "Legal and Environmental Matters." For additional information on the
expected financial impact of the ruling, see the "Financial Expectations for
2001" section below.
Zyprexa had worldwide sales of $2.35 billion in 2000, representing an increase
of 25 percent. Sales in the U.S. increased 23 percent, to $1.69 billion. Sales
in 2000 benefited from the U.S. Food and Drug Administration (FDA) approval of
Zyprexa for the treatment of acute mania associated with bipolar disorder in the
first quarter of 2000. Sales outside the U.S. increased 28 percent, to $659.3
million.
Gemzar had worldwide sales of $559.3 million in 2000, representing an increase
of 23 percent. Sales in the U.S. increased 20 percent, to $315.9 million.
Sales outside the U.S. increased 27 percent, to $243.3 million.
Evista had worldwide sales of $521.5 million in 2000, representing an increase
of 60 percent. Sales in the U.S. increased 52 percent, to $433.8 million.
Increases in sales in the U.S. were due, in part, to the FDA approval of Evista
for the treatment of postmenopausal osteoporosis in the U.S., which was granted
in September 1999. Sales outside the U.S. increased 115 percent, to $87.7
million.
ReoPro had worldwide sales of $418.1 million in 2000, representing a decrease of
7 percent. Sales in the U.S. decreased 12 percent, to $315.1 million. Sales
outside the U.S. increased 15 percent, to $102.9 million. The decline in sales
was due to increased competition in the U.S.
Diabetes care products, composed primarily of Humulin, the company's
biosynthetic human insulin; Humalog, the company's insulin analog; and Actos, an
oral diabetes agent introduced in the U.S. in 1999, had worldwide revenues of
$1.76 billion in 2000, representing an increase of 22 percent. Diabetes care
revenues in the U.S. increased 21 percent, to $1.08 billion. Diabetes care
revenues outside the U.S. increased 22 percent, to $685.8 million. Humulin had
worldwide sales of $1.11 billion, representing an increase of 2 percent. Humulin
sales in the U.S. decreased 6 percent, to $617.4 million, largely as a result of
patients shifting to Humalog and Humalog mixture products. Humulin sales outside
the U.S. increased 15 percent, to $497.0 million. Humalog had worldwide sales of
$350.2 million, representing an increase of 56 percent. Sales of Humalog
benefited from the U.S. launch of Humalog Mix75/25(TM) Pen in the first quarter
of 2000. The company received service revenues of $223.0 million in 2000
relating to sales of Actos. Actos, an oral agent for the treatment of type 2
diabetes, was introduced to the U.S. diabetes market in the third quarter of
1999. Actos is manufactured and sold in the U.S. by Takeda Chemical Industries,
Ltd., and is copromoted by Takeda and the company.
Anti-infectives had worldwide sales of $894.3 million in 2000, representing a
decrease of 13 percent, due to continuing competitive pressures. Cefaclor and
Lorabid accounted for the majority of the decline. Sales in the U.S. decreased
12 percent, to $189.4 million. Sales outside the U.S. decreased 13 percent, to
$702.9 million.
Animal health products had worldwide sales of $668.5 million in 2000,
representing an increase of 6 percent. Sales in the U.S. increased 8 percent, to
$307.5 million. Sales outside the U.S. increased 5 percent, to $360.9 million.
The increases were balanced across the product line.
The company's payments under federally mandated Medicaid rebate programs reduced
2000 sales by approximately $464.0 million compared with approximately $352.5
million in 1999.
Page 2
GROSS MARGIN, COSTS, AND EXPENSES
- ---------------------------------
The 2000 gross margin improved to 81.1 percent of sales compared with 79.0
percent for 1999. This increase was attributed primarily to favorable changes in
product mix due to growth in sales of newer products and, to a lesser extent,
increased production volume.
Operating expenses (the aggregate of research and development and marketing and
administrative expenses) increased 16 percent in 2000. Research and development
expenses increased 13 percent, to $2.02 billion, in 2000 as the company
continued to invest in both the early and late stages of its internal product
pipeline and external collaborations. Marketing and administrative expenses
increased 17 percent primarily due to sales force expansions and increased
marketing efforts to support the company's newer products.
Net other income for 2000 was $267.9 million, an increase of $142.8 million,
excluding the gain on the sale of Kinetra LLC in 2000 and the gains from the
litigation settlement and the sale of Lorabid marketing rights and a charge for
the contribution to Eli Lilly and Company Foundation in 1999. The increase was
primarily due to an increase in interest income.
The company's effective tax rate for 2000 was 20.8 percent compared with 21.5
percent for 1999. Excluding the unusual items discussed previously, the
effective tax rate for both 2000 and 1999 was 22.0 percent. See Note 11 to the
consolidated financial statements for additional information.
OPERATING RESULTS FROM CONTINUING OPERATIONS - 1999
SUMMARY
- -------
Income from continuing operations was $2.55 billion, or $2.30 per share, in 1999
and $2.10 billion, or $1.87 per share, in 1998 (before the 1998 extraordinary
charge of $7.2 million, or $.01 per share). Comparisons between 1999 and 1998
are made difficult by the impact of several unusual items that are reflected in
the company's operating results for both years. Excluding these unusual items,
which are discussed further below, income from continuing operations before
extraordinary item for 1999 and 1998 would have been $2.52 billion, or $2.28 per
share, and $2.17 billion, or $1.94 per share, respectively. This represents an
increase in net income and earnings per share of 16 percent and 18 percent,
respectively. The 1999 increases are attributed to increased sales, improved
gross margin, and increases in operating expenses at a rate less than sales
growth. Earnings per share also benefited from a decrease in the number of
shares outstanding as a result of the share repurchase plan.
UNUSUAL ITEMS
- -------------
As noted above, several unusual items are reflected in the company's operating
results for 1999 and 1998. The unusual items relating to 1999 are summarized
under Operating Results From Continuing Operations - 2000. During 1998, the
company recognized a pretax charge of $127.5 million for acquired in-process
technology associated with a collaboration with ICOS Corporation, which reduced
earnings per share by approximately $.07 net of tax. See Note 3 to the
consolidated financial statements for additional information.
SALES
- -----
The company's reported worldwide sales for 1999 increased 8 percent, to $10.0
billion. Approximately $91 million of worldwide sales were related to year-2000
wholesaler buying. Sales growth was led by Zyprexa, Evista, Gemzar, diabetes
care products, and ReoPro. Sales in the U.S. were $6.23 billion, a 7 percent
increase, while sales outside the U.S. were $3.77 billion, an 11 percent
increase. Worldwide sales reflected volume growth of 9 percent and a 1 percent
increase in prices, partially offset by a 2 percent decrease in exchange rates.
Worldwide sales of Prozac in 1999 were $2.61 billion, representing a decrease of
7 percent. Approximately $12 million of worldwide Prozac sales were related to
year-2000 wholesaler buying. Prozac sales in the
Page 3
U.S. decreased 8 percent, to $2.09 billion. Sales of Prozac outside the U.S.
decreased 3 percent, to $525.1 million. The decline in U.S. sales was largely
caused by wholesaler stocking that occurred during 1998, creating a significant
adverse impact on sales comparisons in 1999. Prozac sales in the U.S. were also
adversely affected by increased competition from new antidepressants.
Zyprexa posted worldwide sales of $1.89 billion in 1999, representing an
increase of 31 percent. Approximately $17 million of worldwide Zyprexa sales
were related to year-2000 wholesaler buying. U.S. sales of Zyprexa increased 22
percent, to $1.37 billion. Sales outside the U.S. increased 62 percent, to
$513.9 million.
Worldwide Gemzar sales of $455.8 million in 1999 reflected an increase of 49
percent. Sales in the U.S. increased 57 percent, to $264.2 million, and sales
outside the U.S. increased 38 percent, to $191.6 million.
Worldwide ReoPro sales of $447.3 million in 1999 reflected an increase of 22
percent. U.S. sales of ReoPro increased 18 percent, to $357.5 million. ReoPro
sales outside the U.S. increased 43 percent, to $89.8 million.
Worldwide diabetes care revenues, composed of Humulin, Humalog, Iletin, and
Actos, increased 19 percent, to $1.38 billion, in 1999. Approximately $23
million of worldwide diabetes care revenues were related to year-2000 wholesaler
buying. Diabetes care revenue in the U.S. increased 18 percent, to $827.7
million. Diabetes care revenue outside the U.S. increased 21 percent, to $547.5
million. Worldwide Humulin sales increased 13 percent, to $1.09 billion. U.S.
Humulin sales increased 12 percent and Humulin sales outside the U.S. increased
15 percent. Worldwide Humalog sales were $224.5 million, representing an
increase of 73 percent. The company received service revenues of $37.9 million
in 1999 relating to sales of Actos.
Worldwide sales of anti-infectives decreased 12 percent in 1999, to $1.02
billion, as a result of continuing competitive pressures. U.S. and
international anti-infectives sales declined 22 percent and 8 percent,
respectively. Cefaclor and Lorabid accounted for the majority of the decline in
anti-infectives sales, offsetting growth in Vancocin outside the U.S.
Evista sales increased $182.0 million, or 126 percent, to $326.1 million in
1999. Evista was launched in the first quarter of 1998 in the U.S. for the
prevention of osteoporosis in postmenopausal women. During 1999, the company
received approval from the FDA to promote Evista for the treatment of
postmenopausal osteoporosis. While most of the sales dollar growth for Evista
occurred in the U.S., international Evista sales reflected strong percentage
growth.
Worldwide sales of animal health products of $627.8 million in 1999 reflected a
2 percent increase. Sales were flat in the U.S. and increased 4 percent outside
the U.S.
The company's payments under federally mandated Medicaid rebate programs reduced
1999 sales by approximately $352.5 million compared with approximately $278.6
million in 1998.
GROSS MARGIN, COSTS, AND EXPENSES
- ---------------------------------
The 1999 gross margin improved to 79.0 percent of sales compared with 78.2
percent for 1998. This increase was attributed primarily to production
efficiencies and, to a lesser extent, favorable changes in product mix, as well
as the expiration of Humulin and Humalog royalties in August 1998.
Operating expenses (the aggregate of research and development and marketing and
administrative expenses) increased 3 percent in 1999. Research and development
investments increased 3 percent, to $1.78 billion, in 1999 as the company
continued to build internal and external capabilities. Reduced incentive
compensation significantly offset the expense growth. In addition, Phase III
clinical trials for certain compounds were discontinued in the first half of
1999, which contributed to the reduction in the growth rate. Marketing and
administrative expenses increased 4 percent due to increased spending to support
new product launches around the world and enhancements in the company's global
information technology systems, including year-2000 readiness efforts. However,
the impact of these increases was mitigated by expense management initiatives
and reduced incentive compensation.
Page 4
Excluding the gains from the litigation settlement, the sale of Lorabid
marketing rights, and the charge for the contribution to Eli Lilly and Company
Foundation, net other income for 1999 was $125.1 million, which represents a
decrease of $24.2 million. Other income in 1998 benefited from gains generated
from the sale of investments.
The company's effective tax rate for 1999 was 21.5 percent compared with 21.3
percent for 1998. Excluding the unusual items discussed previously, the
effective tax rates for 1999 and 1998 were 22.0 percent and 22.2 percent,
respectively.
DISCONTINUED OPERATIONS
Discontinued operations consist of the company's PCS health-care-management
business. In November 1998, the company entered into an agreement to sell PCS
for $1.60 billion in cash. The sale was closed in January 1999 and the
resulting net gain on disposal of $174.3 million, net of $8.7 million tax
benefit, was recognized in the first quarter of 1999. See Note 4 to the
consolidated financial statements for further information.
FINANCIAL CONDITION
As of December 31, 2000, cash, cash equivalents, and short-term investments
totaled approximately $4.62 billion compared with $3.84 billion at December 31,
1999. The increase in cash was primarily due to cash generated from operations,
partially offset by dividends paid, share repurchases, and capital expenditures.
The company acquired approximately 14.8 million shares, for approximately $1.09
billion, during 2000 pursuant to its previously announced $3 billion share
repurchase program. Total debt at December 31, 2000, was $2.82 billion, a
decrease of $235.4 million. The company believes that cash generated from
operations, along with available cash and cash equivalents, will be sufficient
to fund essentially all the company's operating needs, including debt service,
capital expenditures, and dividends in 2001.
The company believes that amounts available through existing commercial paper
programs should be adequate to fund maturities of short-term borrowings. The
company's commercial paper program is also backed by $2.02 billion of committed
bank credit facilities.
In the normal course of business, operations of the company are exposed to
fluctuations in interest rates. These fluctuations can vary the costs of
financing, investing, and operating. The company addresses a portion of these
risks through a controlled program of risk management that includes the use of
derivative financial instruments. The objective of controlling these risks is
to limit the impact on earnings of fluctuations in interest rates. All
derivative activities are for purposes other than trading.
The company's primary interest rate risk exposure results from changes in short-
term U.S. dollar interest rates. In an effort to manage interest rate
exposures, the company strives to achieve an acceptable balance between fixed
and floating rate debt positions and may enter into interest rate swaps to help
maintain that balance. Based on the company's overall interest rate exposure at
December 31, 2000, including derivatives and other interest rate risk sensitive
instruments, a hypothetical 10 percent change in interest rates applied to the
fair value of the instruments as of December 31, 2000, would have no material
impact on earnings, cash flows, or fair values of interest rate risk sensitive
instruments over a one-year period. Similarly, a hypothetical 10 percent change
in interest rates from 1999 applied to the fair value of the instruments as of
December 31, 1999, would have had no material impact on earnings, cash flows, or
fair values of interest rate risk sensitive instruments during 2000.
Capital expenditures of $677.9 million during 2000 were $149.6 million more than
in 1999 as the company continued to invest in manufacturing and research and
development initiatives and related infrastructure. The company expects near-
term capital expenditures to increase from 2000 levels. Sufficient cash flows
exist to meet these near-term requirements.
Dividends of $1.04 per share were paid in 2000, an increase of 13 percent from
the $.92 per share paid in 1999. In the fourth quarter of 2000, effective for
the first-quarter dividend in 2001, the quarterly dividend
Page 5
was increased to $.28 per share (8 percent), resulting in an indicated annual
rate for 2001 of $1.12 per share. The year 2000 was the 116th consecutive year
in which the company made dividend payments and the 33rd consecutive year in
which dividends have been increased.
EURO CONVERSION
On January 1, 1999, 11 European nations adopted a common currency, the euro, and
formed the European Economic and Monetary Union (EMU). For a three-year
transition period, both the euro and individual participants' currencies will
remain in circulation. After July 1, 2002, at the latest, the euro will be the
sole legal tender for EMU countries. Greece has joined the original 11
countries adopting the euro in 2002. The adoption of the euro affects a
multitude of financial systems and business applications as the commerce of
these nations is transacted in the euro and the existing national currency.
The company has created the capability to transact in both the euro and the
legacy currency and has converted the underlying information systems within the
EMU countries from the legacy currencies to the euro. The company will continue
to address euro-related issues and their impact on information systems, currency
exchange rate risk, taxation, contracts, competition, and pricing. Action plans
currently being implemented are expected to result in compliance with all laws
and regulations; however, there can be no certainty that such plans will be
successfully implemented or that external factors will not have an adverse
effect on the company's operations. Any costs of compliance associated with the
adoption of the euro are expensed as incurred and the company does not expect
these costs to be material to its results of operations, financial condition, or
liquidity.
FINANCIAL EXPECTATIONS FOR 2001
As noted above, a federal appeals court has upheld the company's February 2001
U.S. Prozac patent but ruled that the 2003 patent is invalid. In addition, the
FDA has granted the company an additional six months of market exclusivity for
Prozac under a federal statute encouraging pediatric studies of certain
medicines, extending market exclusivity for Prozac to August 2, 2001, assuming
the 2003 Prozac patent ruling is not overturned. The company expects a very
substantial decline in Prozac sales in the U.S. in the 12 months following the
entry of generic fluoxetine in the U.S. market. Prozac sales in the U.S.
represent a significant portion of the company's overall sales, accounting for
approximately 20 percent of the company's consolidated worldwide sales in 2000.
As a result of the above, excluding any unusual items, the company anticipates
earnings per share for 2001 to be in the range of $2.75 to $2.85, assuming the
entry of generic fluoxetine in the U.S. in August 2001. Strong earnings growth
in the first half of 2001 is expected to more than offset declines in the second
half, resulting in single-digit earnings growth for the full year compared with
2000 earnings per share of $2.65, excluding unusual items.
In addition, excluding any unusual items, the company expects to post single-
digit sales growth in 2001. Excluding worldwide sales of Prozac, the company
expects sales to grow in the mid-teens for 2001. Several key products are
expected to contribute to this growth, including Zyprexa; Evista; Gemzar;
diabetes care products; and drotrecogin alfa (activated), also known by the
proposed trade name Zovant, a therapy for sepsis, which was submitted for
regulatory approval in early 2001 and is expected to launch in the second half
of 2001. The growth in these products is anticipated to more than offset the
very substantial expected decline of Prozac sales and continuing decreases in
sales of anti-infectives and ReoPro.
Gross margins as a percent of sales are expected to decline in 2001 in the range
of .5 to 1.0 percentage points as a result of the decline in Prozac sales. The
company anticipates marketing and administrative expenses will grow in the low-
to-mid single digits. Underlying marketing expenses for continuing products,
excluding Prozac, are expected to grow in the double digits as the company
continues to invest in sales force expansions and increased marketing efforts.
Research and development expenses are expected to grow in the low double digits,
demonstrating the company's continued commitment to invest in scientific
innovation. The tax rate is expected to remain at approximately 22 percent for
the full year.
Page 6
The company believes that the loss of Prozac market exclusivity will not have a
material adverse effect on the company's consolidated financial position or
liquidity. The actual impact will depend on, among other things, the outcome of
the appeal of the Federal Circuit ruling; the timing, number of entrants, and
pricing strategies of generic competitors; the continuing growth of the
company's other currently marketed products; developments with competitive
products; the timing of regulatory approvals; and the expected introduction of
new products.
LEGAL AND ENVIRONMENTAL MATTERS
Barr Laboratories, Inc. (Barr), and Geneva Pharmaceuticals, Inc. (Geneva), have
each submitted an Abbreviated New Drug Application (ANDA) seeking FDA approval
to market generic forms of Prozac before the expiration of the company's
patents. The ANDAs assert that two U.S. patents held by Lilly covering Prozac
are invalid and unenforceable. The company filed suit against Barr and Geneva
in federal court in Indianapolis seeking a ruling that Barr's challenge to
Lilly's patents is without merit. In January 1999, the trial court granted
summary judgment in favor of Lilly on two of the four claims raised by Barr and
Geneva against Lilly's patents. That decision was appealed to the Court of
Appeals for the Federal Circuit. Barr and Geneva dismissed their other two
claims in exchange for a $4 million payment. On August 9, 2000, the Court of
Appeals upheld the 2001 compound patent but held that the 2003 method of use
patent was invalid. The company has filed a petition requesting a rehearing by
the Court of Appeals.
Several other generic manufacturers have also filed ANDAs for generic forms of
Prozac, challenging one or both of the patents. In late 1998, Zenith Goldline
Pharmaceuticals, Inc.; Teva Pharmaceuticals USA (Teva); and Cheminor Drugs,
Ltd., together with one of its subsidiaries (Cheminor), notified the company
that they had filed ANDAs challenging the 2003 patent. Also in 1998, Novex
Pharma, a division of Apotex, Inc., notified the company that it had filed an
ANDA challenging both patents. In 1999, Cheminor notified the company that it
had filed an ANDA for a different dosage form. In 2000, Barr and Teva both
notified the company that they had filed additional ANDAs for the different
dosage form, and Alphapharm Pty. Ltd. also notified the company that it had
filed ANDAs for two dosage forms.
The company has filed lawsuits in the United States District Court of the
Southern District of Indiana seeking rulings that all these challenges to the
patent(s) are without merit. The cases are awaiting resolution of the petition
for rehearing by the Court of Appeals in the original Barr case.
For additional information on the impact of the Prozac patent litigation, see
the "Financial Expectations for 2001" section above.
In addition, the company is a defendant in numerous product liability suits
involving primarily two products, diethylstilbestrol (DES) and Prozac. See Note
13 to the consolidated financial statements for further information on those
matters.
The company's worldwide operations are subject to complex and changing
environmental and health and safety laws and regulations, which will continue to
require capital investment and operational expenses. The company has also been
designated a potentially responsible party with respect to fewer than 10 sites
under the federal environmental law commonly known as Superfund. For more
information on those matters, see Note 13 to the consolidated financial
statements.
While it is not possible to predict or determine the outcome of the patent,
product liability, or other legal actions brought against the company or the
ultimate cost of environmental matters, the company believes that, except as
noted above with respect to the Prozac patent litigation, 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.
Page 7
OTHER MATTERS
On October 28, 2000, President Clinton signed the Agriculture, Rural
Development, Food and Drug Administration, and Related Agencies Appropriations
Act for fiscal year 2001. This legislation includes a provision that repeals
the federal ban on the reimportation of most prescription drugs by anyone other
than the manufacturer. Consequently, under the new law, wholesalers and
pharmacists may be permitted to reimport certain drugs approved for sale in the
U.S. and originally sold abroad, subject to several conditions. The law
authorizes reimportation from select jurisdictions, including Australia, Canada,
the European Union, Israel, Japan, New Zealand, South Africa, and Switzerland.
Before the law takes effect, the secretary of Health and Human Services (HHS)
must "demonstrate" to Congress that the law poses no additional risk to public
health and safety and will result in significant reductions in drug costs for
American consumers. If HHS can make that demonstration, then the FDA must draft
regulations prior to implementing the law. In December 2000, the secretary of
HHS stated that she would be unable to make the demonstration required by the
law. It is uncertain what action, if any, may be taken on this bill by the
incoming secretary of HHS or whether Congress will modify the legislation.
The company cannot predict at this time the extent to which it will be affected
by this legislation or potential future legislative or regulatory developments
in this area. However, if widespread reimportation of the company's products
were to occur, this could have a material adverse effect on the company's
results of operations.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - -
A CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
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, including those made in this document, are
based on management's expectations at the time they are made, but they are
subject to risks and uncertainties that may cause actual results to differ
materially from those projected. Economic, competitive, governmental,
technological, and other factors that may affect the company's operations and
prospects are discussed in Exhibit 99 to the company's most recent report on
Forms 10-Q and 10-K filed with the Securities and Exchange Commission.
Page 8
Consolidated Statements of Income
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
Net sales...................................... $10,862.2 $10,002.9 $9,236.8
Cost of sales.................................. 2,055.7 2,098.0 2,015.1
Research and development....................... 2,018.5 1,783.6 1,738.9
Marketing and administrative................... 3,228.3 2,757.6 2,658.3
Acquired in-process technology (Note 3)........ - - 127.5
Asset impairment and other site charges
(Note 5)..................................... - 87.4 -
Interest expense............................... 182.3 183.8 181.3
Other income--net.............................. (481.3) (152.9) (149.3)
------------------------------
7,003.5 6,757.5 6,571.8
------------------------------
Income from continuing operations before
income taxes and extraordinary item.......... 3,858.7 3,245.4 2,665.0
Income taxes (Note 11)......................... 800.9 698.7 568.7
------------------------------
Income from continuing operations before
extraordinary item........................... 3,057.8 2,546.7 2,096.3
Income from discontinued operations,
net of tax (Note 4).......................... - 174.3 8.8
Extraordinary item, net of tax (Note 7)........ - - (7.2)
------------------------------
Net income..................................... $ 3,057.8 $ 2,721.0 $2,097.9
==============================
Earnings per share - basic (Note 10):
Income from continuing operations
before extraordinary item.................. $ 2.83 $ 2.34 $ 1.91
Income from discontinued operations.......... - .16 .01
Extraordinary item........................... - - (.01)
------------------------------
Net income................................... $ 2.83 $ 2.50 $ 1.91
==============================
Earnings per share - diluted (Note 10):
Income from continuing operations
before extraordinary item.................. $ 2.79 $ 2.30 $ 1.87
Income from discontinued operations.......... - .16 .01
Extraordinary item........................... - - (.01)
------------------------------
Net income................................... $ 2.79 $ 2.46 $ 1.87
==============================
See notes to consolidated financial statements.
Page 9
Consolidated Balance Sheets
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
December 31 2000 1999
- -----------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents....................... $ 4,114.9 $ 3,700.4
Short-term investments.......................... 503.3 135.6
Accounts receivable, net of allowances of
$115.3 (2000) and $79.9 (1999)............... 1,630.7 1,443.2
Other receivables............................... 335.4 399.6
Inventories..................................... 883.1 899.6
Deferred income taxes (Note 11)................. 269.5 240.3
Prepaid expenses................................ 206.1 236.8
-------------------------
Total current assets......................... 7,943.0 7,055.5
Other Assets
Prepaid retirement (Note 12).................... 1,032.5 741.1
Investments..................................... 395.7 180.3
Sundry.......................................... 1,143.0 866.8
-------------------------
2,571.2 1,788.2
Property and Equipment.......................... 4,176.6 3,981.5
-------------------------
$14,690.8 $12,825.2
=========================
Page 10
Consolidated Balance Sheets
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions) - Con't.
December 31 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Short-term borrowings (Note 7).............................................. $ 184.3 $ 241.5
Accounts payable............................................................ 661.9 445.5
Employee compensation....................................................... 468.3 489.3
Dividends payable........................................................... 315.4 283.0
Income taxes payable (Note 11).............................................. 2,200.2 1,445.3
Other liabilities........................................................... 1,130.6 1,030.8
--------------------------------
Total current liabilities................................................ 4,960.7 3,935.4
Other Liabilities
Long-term debt (Note 7)..................................................... 2,633.7 2,811.9
Deferred income taxes (Note 11)............................................. 91.6 137.0
Retiree medical benefit obligation (Note 12)................................ 83.3 115.7
Other noncurrent liabilities................................................ 874.6 812.2
--------------------------------
3,683.2 3,876.8
Commitments and contingencies (Note 13)..................................... - -
Shareholders' Equity (Notes 8 and 9)
Common stock - no par value
Authorized shares: 3,200,000,000
Issued shares: 1,126,567,407 (2000)
and 1,091,226,806 (1999)..................................... 704.4 682.0
Additional paid-in capital.................................................. 2,610.0 -
Retained earnings........................................................... 6,223.2 4,985.6
Employee benefit trust...................................................... (2,635.0) -
Deferred costs - ESOP....................................................... (135.0) (139.9)
Accumulated other comprehensive income (Note 14)............................ (611.2) (406.4)
--------------------------------
6,156.4 5,121.3
Less cost of common stock in treasury:
2000 - 1,007,235 shares
1999 - 988,902 shares.............................................. 109.5 108.3
--------------------------------
6,046.9 5,013.0
--------------------------------
$14,690.8 $12,825.2
================================
See notes to consolidated financial statements.
Page 11
Consolidated Statements of Cash Flows
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
Year Ended December 31 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income.......................................................... $ 3,057.8 $ 2,721.0 $ 2,097.9
Adjustments To Reconcile Net Income to
Cash Flows From Operating Activities
Depreciation and amortization..................................... 435.8 439.7 490.4
Change in deferred taxes.......................................... (442.7) 27.1 25.4
Gain on sale of Kinetra, net of tax............................... (214.4) - -
Gain on sale of PCS, net of tax................................... - (174.3) -
Asset impairment and other site charges, net of tax............... - 58.1 -
Other, net........................................................ 117.3 96.6 153.5
--------------------------------------------------
2,953.8 3,168.2 2,767.2
Changes in operating assets and liabilities:
Receivables - increase......................................... (165.4) (179.0) (403.6)
Inventories - (increase) decrease.............................. 9.8 16.9 (55.6)
Other assets - increase........................................ (210.5) (88.8) (81.1)
Accounts payable and other liabilities - increase (decrease)... 1,143.8 (174.9) 649.4
--------------------------------------------------
777.7 (425.8) 109.1
--------------------------------------------------
Net Cash Provided by Operating Activities........................... 3,731.5 2,742.4 2,876.3
Cash Flows From Investing Activities
Purchase of property and equipment.................................. (677.9) (528.3) (419.9)
Disposals of property and equipment................................. 5.1 78.3 30.6
Proceeds from sale of investments................................... 983.9 216.1 273.1
Purchase of investments............................................. (1,233.2) (162.8) (57.6)
Proceeds from sale of PCS........................................... - 1,600.0 -
Other, net.......................................................... (134.4) (116.6) (195.1)
--------------------------------------------------
Net Cash Provided by (Used in) Investing Activities................. (1,056.5) 1,086.7 (368.9)
Cash Flows From Financing Activities
Dividends paid...................................................... (1,126.0) (1,000.5) (877.7)
Purchase of common stock and other
capital transactions............................................. (1,052.8) (1,453.0) (1,999.8)
Issuances under stock plans......................................... 178.4 187.5 242.5
Redemption of subsidiary stock...................................... - - (172.8)
Net change in short-term borrowings................................. (203.0) (139.4) (170.0)
Proceeds from issuance of long-term debt............................ 1.1 843.5 23.8
Repayments of long-term debt........................................ (27.2) (13.5) (30.2)
--------------------------------------------------
Net Cash Used for Financing Activities.............................. (2,229.5) (1,575.4) (2,984.2)
Effect of exchange rate changes on cash............................. (31.0) (49.0) 25.0
--------------------------------------------------
Net increase (decrease) in cash and
cash equivalents................................................. 414.5 2,204.7 (451.8)
Cash and cash equivalents at beginning of year...................... 3,700.4 1,495.7 1,947.5
--------------------------------------------------
Cash and cash equivalents at end of year............................ $ 4,114.9 $ 3,700.4 $ 1,495.7
==================================================
See notes to consolidated financial statements.
Page 12
aConsolidated Statements of Comprehensive Income
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
Year Ended December 31 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Net income..................................................... $3,057.8 $2,721.0 $2,097.9
Other comprehensive income (loss):
Foreign currency translation adjustments..................... (170.7) (177.7) 69.2
Net unrealized gains (losses) on securities (Note 14)........ (20.5) 27.8 (2.6)
Minimum pension liability adjustment......................... (33.6) (26.7) (30.8)
--------------------------------------------------------
Other comprehensive income (loss) before income taxes.......... (224.8) (176.6) 35.8
Provision for income taxes related to other comprehensive
income items................................................. 20.0 - 15.6
--------------------------------------------------------
Other comprehensive income (loss).............................. (204.8) (176.6) 51.4
--------------------------------------------------------
Comprehensive income........................................... $2,853.0 $2,544.4 $2,149.3
========================================================
See notes to consolidated financial statements.
Page 13
Segment Information
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
The company operates in one significant business segment - pharmaceutical
products. Operations of the animal health business segment are not material and
share many of the same economic and operating characteristics as pharmaceutical
products. Therefore, they are included with pharmaceutical products for
purposes of segment reporting.
Year Ended December 31 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Net sales - to unaffiliated customers
Neurosciences................................................ $ 5,157.6 $ 4,729.3 $4,487.8
Endocrinology................................................ 2,583.5 2,075.5 1,626.6
Anti-infectives.............................................. 894.3 1,022.3 1,160.9
Animal health................................................ 668.5 627.8 614.4
Cardiovascular............................................... 587.9 637.6 536.9
Oncology..................................................... 580.5 486.1 339.2
Gastrointestinal............................................. 321.4 354.7 418.0
Other pharmaceutical......................................... 68.5 69.6 53.0
---------------------------------------------------------
Net sales.......................................................... $10,862.2 $10,002.9 $9,236.8
=========================================================
Geographic Information
Net sales - to unaffiliated customers/1/:
United States.................................................. $ 7,002.9 $ 6,226.4 $5,836.2
Western Europe................................................. 1,773.9 1,888.0 1,692.3
Other foreign countries........................................ 2,085.4 1,888.5 1,708.3
---------------------------------------------------------
$10,862.2 $10,002.9 $9,236.8
=========================================================
Long-lived assets:
United States.................................................. $ 3,621.0 $ 3,416.8 $3,363.5
Western Europe................................................. 735.3 744.2 808.4
Other foreign countries........................................ 472.1 470.3 459.3
---------------------------------------------------------
$ 4,828.4 $ 4,631.3 $4,631.2
=========================================================
/1/ Net sales are attributed to the countries based on the location of the
subsidiary making the sale.
The largest category of products is the neurosciences group, which includes
Prozac, Zyprexa, Permax, and Darvon. Endocrinology products consist primarily of
Humulin, Evista, Humalog, Humatrope, and Actos. Anti-infectives include
primarily Ceclor, Vancocin, Keflex, Nebcin, and Lorabid. Cardiovascular products
consist primarily of ReoPro and Dobutrex. The gastrointestinal category is
entirely composed of Axid. Oncology products consist primarily of Gemzar. Animal
health products include Tylan, Rumensin, Micotil, Surmax, Coban, and other
products for livestock and poultry. The other pharmaceutical product group
includes other miscellaneous pharmaceutical products and services.
Most of the pharmaceutical products are distributed through wholesalers that
serve physicians and other health care professionals, pharmacies, and hospitals.
In 2000, the company's three largest wholesalers each accounted for between 14
percent and 18 percent of consolidated net sales. Animal health products are
sold primarily to wholesale distributors.
The company's business segments are distinguished by the ultimate end user of
the product: humans or animals. Performance is evaluated based on profit or
loss from operations before income taxes. The accounting policies of the
individual segments are substantially the same as those described in the summary
of significant accounting policies in Note 1. Income before taxes for the
animal health business was approximately $180.0 million, $165.0 million, and
$141.0 million in 2000, 1999, and 1998, respectively. The assets of the animal
health business are intermixed with those of the pharmaceutical products
Page 14
business and are not separately determinable. Long-lived assets disclosed above
consist of property and equipment and certain sundry assets of the continuing
operations.
The company is exposed to the risk of changes in social, political, and economic
conditions inherent in foreign operations, and the company's results of
operations and the value of its foreign assets are affected by fluctuations in
foreign currency exchange rates.
Page 15
Selected Quarterly Data (unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
2000 Fourth Third Second First
- -------------------------------------------------------------------------------------------
Net sales........................................ $2,977.7 $2,811.9 $2,621.5 $2,451.1
Cost of sales.................................... 565.2 490.1 491.7 508.7
Operating expenses............................... 1,489.4 1,306.4 1,304.2 1,146.8
Other (income) expense - net..................... (60.6) 17.0 (28.5) (226.9)
Income before income taxes....................... 983.7 998.4 854.1 1,022.5
Net income....................................... 767.3 778.8 666.2 845.5
Earnings per share - basic....................... .71 .72 .62 .78
Earnings per share - diluted..................... .70 .71 .61 .77
Dividends paid per share......................... .26 .26 .26 .26
Common stock prices:
High.......................................... 94.50 108.24 101.33 70.86
Low........................................... 80.64 67.18 64.13 54.34
1999 Fourth Third Second First
- -------------------------------------------------------------------------------------------
Net sales........................................ $2,820.5 $2,585.2 $2,341.6 $2,255.6
Cost of sales.................................... 565.2 548.2 491.1 493.5
Operating expenses............................... 1,285.8 1,139.3 1,110.1 1,006.0
Asset impairment and other site charges.......... 26.0 - - 61.4
Other (income) expense - net..................... (80.2) (41.5) 1.4 151.2
Income from continuing operations before income
taxes.......................................... 1,023.7 939.2 739.0 543.5
Income from:
Continuing operations.......................... 786.3 732.6 576.4 451.4
Discontinued operations........................ - - - 174.3
Net income..................................... 786.3 732.6 576.4 625.7
Earnings per share - basic:
Continuing operations.......................... .73 .68 .53 .41
Discontinued operations........................ - - - .16
Net income..................................... .73 .68 .53 .57
Earnings per share - diluted:
Continuing operations.......................... .71 .67 .52 .40
Discontinued operations........................ - - - .16
Net income..................................... .71 .67 .52 .56
Dividends paid per share......................... .23 .23 .23 .23
Common stock prices:
High.......................................... 77.38 77.19 90.25 97.44
Low........................................... 64.13 61.50 65.19 76.19
The company's common stock is listed on the New York, London, Tokyo, and other
stock exchanges.
Page 16
Selected Financial Data (unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
2000 1999 1998 1997 1996
-------------------------------------------------------------------------
Operations
Net sales............................. $ 10,862.2 $ 10,002.9 $ 9,236.8 $ 7,987.7 $ 6,998.3
Research and development.............. 2,018.5 1,783.6 1,738.9 1,370.2 1,189.5
Other costs and expenses.............. 4,985.0 4,973.9 4,832.9 4,348.2 3,677.5
Gain on sale of DowElanco............. - - - (631.8) -
Income from continuing
operations before taxes
and extraordinary item............... 3,858.7 3,245.4 2,665.0 2,901.1 2,131.3
Income taxes.......................... 800.9 698.7 568.7 885.2 505.6
Income (loss) from:
Continuing operations
before extraordinary
item................................ 3,057.8 2,546.7 2,096.3 2,015.9 1,625.7
Discontinued operations.............. - 174.3 8.8 (2,401.0) (102.2)
Net income (loss).................... 3,057.8 2,721.0 2,097.2/2/ (385.1) 1,523.5
Income from continuing
operations before
extraordinary item as
a percent of sales................... 28.2% 25.5% 22.7% 25.2% 23.2%
Per-share data - diluted:
Income (loss) from:
Continuing operations
before extraordinary
item............................... $ 2.79 $ 2.30 $ 1.87 $ 1.78 $ 1.45
Discontinued operations............. - .16 .01 (2.12) (.09)
Net income (loss)................... 2.79 2.46 1.87/2/ (.34) 1.36
Dividends declared per share.......... 1.06 .95 .83 .76 .694
Weighted-average number of
shares outstanding -
diluted (thousands).................. 1,097,725 1,106,055 1,121,486 1,130,579 1,117,110
-------------------------------------------------------------------------
Financial Position
Current assets........................ $ 7,943.0 $ 7,055.5 $ 5,406.8 $ 5,320.7 $ 3,891.3
Current liabilities................... 4,960.7 3,935.4 4,607.2 4,191.6 4,222.2
Property and equipment - net.......... 4,176.6 3,981.5 4,096.3 4,101.7 4,307.0
Total assets.......................... 14,690.8 12,825.2 12,595.5 12,577.4 14,307.2
Long-term debt........................ 2,633.7 2,811.9 2,185.5 2,326.1 2,516.5
Shareholders' equity.................. 6,046.9 5,013.0 4,429.6 4,645.6 6,100.1
-------------------------------------------------------------------------
Supplementary Data/1/
Return on shareholders'
equity............................... 55.3% 53.9% 46.2% 37.5% 28.2%
Return on assets...................... 22.9% 21.3% 17.0% 15.4% 11.4%
Capital expenditures.................. $ 677.9 $ 528.3 $ 419.9 $ 366.3 $ 443.9
Depreciation and
amortization......................... 435.8 439.7 490.4 509.8 543.5
Effective tax rate.................... 20.8% 21.5% 21.3% 30.5%/3/ 23.7%
Number of employees................... 35,700 31,300 29,800 28,900 27,400
Number of shareholders of
record............................... 59,190 62,300 62,300 58,200 54,500
-------------------------------------------------------------------------
Page 17
/1/ All supplementary financial data have been computed using income from
continuing operations except for capital expenditures and depreciation and
amortization, which include amounts from discontinued operations. The number of
employees reflects continuing operations, including controlled joint ventures.
/2/ Reflects the impact of an extraordinary item (see Note 7).
/3/ Excluding the impacts of the unusual transactions reflected in 1997, the
effective tax rate would have been 24.1 percent.
Page 18
Notes to Consolidated Financial Statements
ELILILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
Note 1: Summary of Significant Accounting Policies
Basis of presentation: The accounts of all wholly owned and majority-owned
subsidiaries are included in the consolidated financial statements. All
intercompany balances and transactions have been eliminated.
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.
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).
Reclassifications: Certain reclassifications have been made to prior-year
amounts to conform with current-year presentation.
Cash equivalents: The company considers all highly liquid investments, generally
with a maturity of three months or less, to be cash equivalents. The cost of
these investments approximates fair value.
Inventories: The company states all its inventories at the lower of cost or
market. The company uses the last-in, first-out (LIFO) method for substantially
all its inventories located in the continental United States, or approximately
60 percent of its total inventories. Other inventories are valued by the first-
in, first-out (FIFO) method. Inventories at December 31 consisted of the
following:
2000 1999
-----------------------
Finished products................................ $284.3 $295.1
Work in process.................................. 380.6 372.7
Raw materials and supplies....................... 230.1 224.7
-----------------------
895.0 892.5
Increase (decrease) to LIFO cost................. (11.9) 7.1
-----------------------
$883.1 $899.6
=======================
Investments: All short-term debt securities are classified as held-to-maturity
because the company has the positive intent and ability to hold the securities
to maturity. Held-to-maturity securities are stated at amortized cost, adjusted
for amortization of premiums and accretion of discounts to maturity.
Substantially all long-term debt and marketable equity securities are classified
as available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in other
comprehensive income. Realized gains and losses on sales of available-for-sale
securities are computed based upon initial cost adjusted for any other than
temporary declines in fair value. The company owns no investments that are
considered to be trading securities.
Derivative financial instruments: The company's derivative activities, all of
which are for purposes other than trading, are initiated within the guidelines
of documented corporate risk-management policies and do not create additional
risk because gains and losses on derivative contracts offset losses and gains on
the assets, liabilities, and transactions being hedged. As derivative contracts
are initiated, the company designates the instruments individually as hedges of
underlying financial instruments or anticipated transactions (i.e., underlying
exposures). Management reviews the correlation and effectiveness of its
derivatives on a periodic basis. Derivative contracts that do not qualify for
deferral hedge accounting are marked to market.
Page 19
For terminations of derivatives receiving deferral accounting, gains and losses
are deferred when the related underlying exposures remain outstanding and are
included in the measurement of the related transaction or balance. In addition,
upon termination of the underlying exposures, the derivative is marked to market
and the resulting gain or loss is included with the gain or loss on the related
transaction. The company may redesignate the remaining derivative instruments as
hedges of other underlying exposures.
The company enters into foreign currency forward and option contracts to reduce
the effect of fluctuating currency exchange rates (principally the Japanese yen
and the euro). Generally, foreign currency derivatives used for hedging are put
in place using the same or like currencies and duration as the underlying
exposures. Forward contracts are principally used to manage exposures arising
from affiliate foreign currency balances. These contracts are marked to market
with gains and losses recognized currently in income to offset the respective
losses and gains recognized on the underlying exposures. The company also enters
into purchased option contracts to hedge anticipated foreign currency
transactions, primarily intercompany inventory activities expected to occur
within the next year, and foreign currency forward contracts and currency swaps
to hedge firm commitments. The contracts are designated and effective as hedges
of those future transactions. Gains and losses on these contracts that qualify
as hedges are deferred and recognized as an adjustment of the subsequent
transaction when it occurs. Forward and option contracts generally have
maturities not exceeding 12 months.
The company also enters into interest rate swaps to manage interest rate
exposures. The company designates the interest rate swaps as hedges of the
underlying debt. Interest expense on the debt is adjusted to include the
payments made or received under the swap agreements.
Goodwill and other intangibles: Goodwill and other intangibles arising from
acquisitions and research alliances are amortized over their estimated useful
lives, ranging from 5-25 years, using the straight-line method. Goodwill and
other intangibles are reviewed to assess recoverability when impairment
indicators are present. Assets are considered to be impaired and are written
down to fair value if expected future operating cash flows of the related assets
are less than their carrying amounts. Fair value is the present value of the
expected future cash flows of the related assets using a discount rate
commensurate with the risk involved. Assets are grouped at the lowest level for
which there are identifiable cash flows for purposes of impairment testing.
Goodwill and other intangibles and the related allowances for amortization were
$233.2 million and $117.8 million, respectively, at December 31, 2000, and
$226.2 million and $107.6 million, respectively, at December 31, 1999, and are
included in sundry assets in the consolidated balance sheets.
Property and equipment: Property and equipment is stated on the basis of cost.
Provisions for depreciation of buildings and equipment are computed generally by
the straight-line method at rates based on their estimated useful lives
(generally 12 to 50 years for buildings and 5 to 18 years for equipment). At
December 31, property and equipment consisted of the following:
2000 1999
----------------------
Land................................................. $ 103.5 $ 104.6
Buildings............................................ 2,395.1 2,255.8
Equipment............................................ 4,638.5 4,458.9
Construction in progress............................. 647.6 528.0
----------------------
7,784.7 7,347.3
Less allowances for depreciation..................... 3,608.1 3,365.8
----------------------
$4,176.6 $3,981.5
======================
Depreciation expense related to continuing operations for 2000, 1999, and 1998
was $393.5 million, $406.7 million, and $393.4 million, respectively.
Approximately $43.1 million, $29.0 million, and $17.0 million of interest costs
were capitalized as part of property and equipment in 2000, 1999, and 1998,
respectively. Total rental expense for all leases related to continuing
operations, including contingent rentals (not material), amounted to
approximately $172.3 million for 2000, $154.9 million for 1999, and $134.8
million for 1998. Capital leases included in property and equipment in the
consolidated balance
Page 20
sheets, capital lease obligations entered into, and future minimum rental
commitments are not material.
Revenue recognition: Revenue from sales of products is recognized at the time
title of goods passes to the buyer and the buyer assumes the risks and rewards
of ownership. This is generally at the time products are shipped to the
customer. Revenue from copromotion services is recognized at the time the
copromotion partner records sales.
Income taxes: Deferred taxes are recognized for the future tax effects of
temporary differences between financial and income tax reporting based on
enacted tax laws and rates. Federal income taxes are provided on the portion of
the income of foreign subsidiaries that is expected to be remitted to the United
States and be taxable.
Earnings per share: Basic earnings per share are calculated based on the
weighted-average number of outstanding common shares and incremental shares.
Diluted earnings per share are calculated based on the weighted-average number
of outstanding common shares plus the effect of dilutive stock options and other
incremental shares.
Note 2: Implementation of New Financial Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued.
Statement 133 was amended in June 1999 and is now required to be adopted in
years beginning after June 15, 2000. The company will adopt Statement 133
effective as of January 1, 2001. 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 estimates that the adoption of Statement 133
will not have a material effect on the consolidated results of operations or
financial position of the company.
Note 3: Collaboration and Dispositions
During the first quarter of 2000, the company sold its interest in Kinetra LLC,
a joint venture between the company and EDS, to WebMD Corporation (WebMD) in
exchange for shares of WebMD common stock. A gain of $214.4 million was
recognized on the combined effect of the transaction and the subsequent sale of
the majority of those shares of WebMD stock. The gain is included in other
income in the consolidated statements of income.
During 1999, the company recognized a pretax gain of $67.8 million on the sale
of the U.S. and Puerto Rican marketing rights of Lorabid, an antibiotic used in
the treatment of bacterial infections, to King Pharmaceuticals, Inc. The gain
has been included in other income in the consolidated statements of income. The
company has an opportunity to receive additional payments if certain sales
performance milestones are achieved.
During 1998, the company announced a collaboration with ICOS Corporation to
jointly develop and globally commercialize a phosphodiesterase type 5 (PDE5)
inhibitor as an oral therapeutic agent for the treatment of male erectile
dysfunction and female sexual dysfunction. The compound was in the development
phase (Phase II clinical trials) and no alternative future uses were identified.
As with many Phase II compounds, launch of the product, if successful, was not
expected in the near term. The company's payments to acquire rights to this
compound were required to be charged as an expense of $127.5 million.
Page 21
Note 4: Discontinued Operations
In January 1999, the company sold PCS, its health-care-management subsidiary, to
Rite Aid Corporation for $1.6 billion in cash. The transaction generated a gain
of $174.3 million ($.16 per share), net of $8.7 million tax benefit, in the
first quarter of 1999.
The results of operations of PCS have been classified as discontinued operations
in the consolidated statements of income. Selected 1998 income statement
information for PCS follows:
Revenues........................................................ $814.5
Income tax expense.............................................. 32.2
Income from discontinued operations............................. 8.8
Note 5: Asset Impairment and Other Site Charges
The company recognized two separate asset impairments and other site charges
totaling $87.4 million in 1999 ($61.4 million and $26.0 million in the first and
fourth quarters, respectively). The impairment charges were necessary to adjust
the carrying value of certain manufacturing assets to fair value. The major
portion of the charges ($75.0 million) related to the decommissioning of
manufacturing buildings and the related equipment, which resulted from the
consolidation of certain manufacturing processes. The company plans to continue
ownership of the vacated buildings although no planned future uses have been
identified. The fair values of the facilities were estimated based upon
anticipated future cash flows, discounted at a rate commensurate with the risk
involved.
Note 6: Financial Instruments
Risk-Management Instruments and Off-Balance-Sheet Risk
In the normal course of business, operations of the company are exposed to
fluctuations in currency values and interest rates. These fluctuations can vary
the costs of financing, investing, and operating. The company addresses a
portion of these risks through a controlled program of risk management that
includes the use of derivative financial instruments.
The notional amounts of derivatives summarized in the following paragraphs do
not represent amounts exchanged by the parties and thus are not a measure of the
exposure of the company through its use of derivatives. The company is exposed
to credit-related losses in the event of nonperformance by counterparties to
financial instruments, but it does not expect any counterparties to fail to meet
their obligations given their high credit ratings.
At December 31, the stated, or notional, amounts of the company's outstanding
derivative financial instruments were as follows:
2000 1999
------------------
Forward exchange contracts............................. $1,384.9 $608.7
Foreign currency options - purchased................... 639.8 756.0
Interest rate swaps.................................... 445.0 295.0
Financial instruments that potentially subject the company to credit risk
consist principally of trade receivables and interest-bearing investments.
Wholesale distributors of life-sciences products and managed care organizations
account for a substantial portion of trade receivables; collateral is generally
not required. The risk associated with this concentration is mitigated by the
company's ongoing credit review procedures. The company places substantially all
its interest-bearing investments with major financial institutions, in U.S.
government securities, or with top-rated corporate issuers. In accordance with
documented corporate policies, the company limits the amount of credit exposure
to any one financial institution.
Page 22
Fair Value of Financial Instruments
A summary of the company's outstanding financial instruments at December 31
follows. As summarized, "cost" relates to investments while "carrying amount"
relates to long-term debt.
2000 1999
--------------------------------------------------------------------
Cost/ Cost/
Carrying Amount Fair Value Carrying Amount Fair Value
--------------------------------------------------------------------
Short-term investments:
Debt securities............................ $ 503.3 $ 504.3 $ 135.6 $ 136.0
Noncurrent investments:
Marketable equity.......................... 79.8 90.1 63.9 96.8
Debt securities............................ 266.2 271.2 35.6 35.6
Nonmarketable equity....................... 7.5 7.5 14.9 14.9
Long-term debt, including
current portion............................. 2,796.6 2,861.7 3,026.7 2,990.6
The company determines fair values based on quoted market values where available
or discounted cash flow analyses (principally long-term debt). The fair values
of nonmarketable equity securities, which represent either equity investments in
start-up technology companies or partnerships that invest in start-up technology
companies, are estimated based on the fair value information provided by these
ventures. The fair value and carrying amount of risk-management instruments were
not material at December 31, 2000 and 1999.
At December 31, 2000 and 1999, the gross unrealized holding gains on available-
for-sale securities were $24.3 million and $42.5 million, respectively, and the
gross unrealized holding losses were $14.9 million and $12.6 million,
respectively. Substantially all these gains and losses are associated with the
marketable equity securities. The proceeds from sales of available-for-sale
securities totaled $773.8 million, $56.2 million, and $36.3 million in 2000,
1999, and 1998, respectively. Purchases of available-for-sale securities totaled
$443.0 million in 2000 and were not material in 1999 and 1998. Realized gains on
sales of available-for-sale securities were $71.6 million, $25.0 million, and
$20.6 million in 2000, 1999, and 1998, respectively. Realized losses on sales of
available-for-sale securities were $16.5 million, negligible, and $2.5 million
in 2000, 1999, and 1998, respectively. The net adjustment to unrealized gains
and losses on available-for-sale securities decreased other comprehensive income
by $12.3 million in 2000 and increased other comprehensive income by $18.6
million in 1999.
Note 7: Borrowings
Long-term debt at December 31 consisted of the following:
2000 1999
----------------------
6.57 to 7.13 percent notes (due 2016-2036)............ $1,000.0 $1,000.0
6.25 to 8.38 percent notes (due 2001-2006)............ 650.0 650.0
Floating rate capital securities (due 2029)........... 525.0 525.0
8.38 percent eurodollar bonds (due 2005).............. 150.0 350.0
Resettable coupon capital securities (due 2029)....... 300.0 300.0
6.55 percent ESOP debentures (due 2017)............... 97.6 98.6
Other, including capitalized leases................... 74.0 103.1
----------------------
2,796.6 3,026.7
Less current portion.................................. 162.9 214.8
----------------------
$2,633.7 $2,811.9
======================
On August 5, 1999, the company issued $525.0 million floating rate capital
securities and $300.0 million adjustable rate capital securities. These capital
securities are subordinated to the notes, bonds, and debentures listed above.
The floating rate capital securities pay cumulative interest at an annual rate
Page 23
equal to LIBOR plus a predetermined spread, reset quarterly. The rates at
December 31, 2000 and 1999, were 7.951 percent and 7.355 percent, respectively.
The securities may be redeemed any time on or after August 5, 2004, for a
defined redemption price. The resettable coupon capital securities pay
cumulative interest at an annual rate of 7.717 percent until August 1, 2004. At
this date and every fifth anniversary thereafter, the interest rate will be
reset equal to the weekly average interest rate of U.S. treasury securities
having an index maturity of five years for the week immediately preceding the
reset date plus a predetermined spread. The securities may be redeemed on August
1, 2004, and anytime thereafter for a defined redemption price.
The 6.55 percent Employee Stock Ownership Plan (ESOP) debentures are obligations
of the ESOP but are shown on the consolidated balance sheet because they are
guaranteed by the company. The principal and interest on the debt are funded by
contributions from the company and by dividends received on certain shares held
by the ESOP. Because of the amortizing feature of the ESOP debt, bondholders
will receive both interest and principal payments each quarter. These debentures
replaced other ESOP debentures pursuant to a refinancing in March 1998. An
extraordinary charge of $7.2 million, net of a $4.8 million income tax benefit,
was recorded as a result of this refinancing.
The aggregate amounts of maturities on long-term debt for the next five years
are as follows: 2001, $162.9 million; 2002, $13.5 million; 2003, $212.0 million;
2004, $8.8 million; and 2005, $157.9 million.
At December 31, 2000 and 1999, short-term borrowings included $21.4 million and
$26.7 million, respectively, of notes payable to banks. At December 31, 2000,
unused committed lines of credit totaled approximately $2.01 billion.
Compensating balances and commitment fees are not material, and there are no
conditions that are probable of occurring under which the lines may be
withdrawn.
Cash payments of interest on borrowings totaled $195.9 million, $170.6 million,
and $188.2 million in 2000, 1999, and 1998, respectively.
Note 8: Stock Plans
Stock options are granted to employees at exercise prices equal to the fair
market value of the company's stock at the dates of grant. Generally, options
vest 100 percent three years from the grant date and have a term of 10 years.
Performance awards are granted to officers and key employees and are payable in
shares of the company's common stock. The number of performance award shares
actually issued varies depending upon the achievement of certain earnings
targets. In general, performance awards vest 100 percent at the end of the
second fiscal year following the grant date.
In 1999, the company issued its third grant under the GlobalShares program.
Essentially all employees were given an option to buy 100 shares of the
company's stock at a price equal to the fair market value of the company's stock
on the date of the grant. Options to purchase approximately 2.8 million shares
were granted as part of the program. Individual grants generally become
exercisable on or after the third anniversary of the grant date and have a term
of 10 years.
The company has elected to follow Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock options and performance awards. Under APB No. 25,
because the exercise price of the company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. Total compensation expense for stock-based performance
awards reflected in income on a pretax basis was $88.3 million, $117.1 million,
and $257.8 million in 2000, 1999, and 1998, respectively. However, SFAS No. 123,
"Accounting for Stock-Based Compensation," requires presentation of pro forma
information as if the company had accounted for its employee stock options and
performance awards granted subsequent to December 31, 1994, under the fair value
method of that statement. For purposes of pro forma disclosure, the estimated
fair value of the options and performance awards at the date of the grant is
amortized to expense over the vesting period. Under the fair value method, the
company's net income and earnings per share would have been as follows:
Page 24
2000 1999 1998
---------------------------------------
Net income............................... $2,969.3 $2,639.6 $2,120.9
Earnings per share - diluted............. 2.70 2.39 1.89
The weighted-average per-share fair value of the individual options and
performance awards granted during 2000, 1999, and 1998 were as follows on the
date of grant:
2000 1999 1998
--------------------------------
Employee stock options..................... $29.25 $20.27 $16.64
Performance awards......................... 93.06 66.50 88.88
The fair values of the options were determined using a Black-Scholes option-
pricing model with the following assumptions:
2000 1999 1998
-----------------------------------
Dividend yield............................. 2.26% 2.73% 2.96%
Volatility................................. 32.7 % 25.2 % 23.5 %
Risk-free interest rate.................... 5.02% 6.15% 4.29%
Forfeiture rate............................ 0 0 0
Expected life.............................. 7 years 7 years 7 years
Stock option activity during 1998-2000 is summarized below:
Shares of
Common Stock Weighted-Average
Attributable to Options Exercise
(in thousands) Price of Options
----------------------------------------------------
Unexercised at January 1, 1998................ 60,894 $24.05
Granted....................................... 6,803 74.18
Exercised..................................... (13,697) 16.88
Forfeited..................................... (1,047) 24.29
-------
Unexercised at December 31, 1998.............. 52,953 32.35
Granted....................................... 12,494 68.22
Exercised..................................... (10,849) 19.04
Forfeited..................................... (875) 50.46
-------
Unexercised at December 31, 1999.............. 53,723 43.08
Granted....................................... 1,315 86.75
Exercised..................................... (9,242) 22.33
Forfeited..................................... (671) 64.97
-------
Unexercised at December 31, 2000.............. 45,125 48.28
=======
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2000 (shares in millions, contractual life
in years):
Options Outstanding Options Exercisable
--------------------------------------- -------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ----------------------------------------------------- -------------------------
$10 - $25 16.27 2.82 13.56 16.27 13.56
$25 - $65 9.13 5.55 38.23 9.04 38.11
$65 - $95 19.73 8.50 71.39 .82 71.97
Shares exercisable at December 31, 2000, were 26.1 million (1999 - 29.9 million
shares, 1998 - 35.8 million shares).
Page 25
As noted above, the number of shares ultimately issued pursuant to the
performance award program is dependent upon the earnings achieved during the
vesting period. Pursuant to this plan, approximately 1.2 million shares, 2.2
million shares, and 1.5 million shares were issued in 2000, 1999, and 1998,
respectively. At December 31, 2000, plan participants had the right to receive
up to 4.1 million additional shares (reduced to the extent necessary to satisfy
payroll tax withholdings), contingent upon earnings achieved.
At December 31, 2000, additional options, performance awards, or restricted
stock grants may be granted under the 1998 Lilly Stock Plan and the Lilly
GlobalShares Stock Plan for not more than 32.8 million shares and 7.9 million
shares, respectively.
Note 9: Shareholders' Equity
Changes in certain components of shareholders' equity were as follows:
Additional Deferred Common Stock in Treasury
Paid-in Retained Costs - -----------------------------------
Capital Earnings ESOP Shares Amount
(in thousands)
--------------------------------------------------------------------------------------
Balance at January 1,1998........ $ - $ 4,497.3 $(155.7) 1,000 $ 109.5
Net income....................... 2,097.9
Cash dividends
declared per share:
$.83........................... (908.9)
Retirement of treasury shares.... (2,035.2) (29,010) (2,053.3)
Purchase for treasury............ 28,350 2,005.8
Issuance of stock under
employee stock plans........... 558.7 660 47.5
ESOP transactions................ 23.6 8.8
Other............................ 5.4 (10.0) (5) (0.5)
Reclassification................. 1,447.5 (1,447.5)
----------------------------------------------------------------------------------
Balance at December 31, 1998..... - 4,228.8 (146.9) 995 109.0
Net income....................... 2,721.0
Cash dividends
declared per share:
$.95........................... (1,030.5)
Retirement of treasury shares.... (1,488.4) (19,689) (1,500.8)
Purchase for treasury............ 19,147 1,455.1
Issuance of stock under
employee stock plans........... 530.6 542 45.7
ESOP transactions................ 20.8 7.0
Other............................ 3.3 (6) (0.7)
Reclassification................. 933.7 (933.7)
----------------------------------------------------------------------------------
Balance at December 31,1999...... - 4,985.6 (139.9) 989 108.3
Net income....................... 3,057.8
Cash dividends
declared per share:
$1.06.......................... (1,158.4)
Retirement of treasury share..... (1,117.6) (15,256) (1,126.9)
Purchase for treasury............ 14,794 1,089.8
Issuance of stock under
employee stock plans........... 405.6 494 39.8
Page 26
Issuance of stock for
employee benefit trust.......... 2,610.0
ESOP transactions................. 16.7 4.9
Other............................. 33.7 (0.2) (14) (1.5)
Reclassification.................. 661.6 (661.6)
--------------------------------------------------------------------------------
Balance at December 31, 2000...... $ 2,610.0 $ 6,223.2 $(135.0) 1,007 $ 109.5
================================================================================
As shown above, the company completed $1.09 billion of its announced $3.0
billion share repurchase program in 2000. A $1.5 billion share repurchase
program was completed in 1999. The company acquired approximately 14.8 million
and 19.1 million shares in 2000 and 1999, respectively, pursuant to these
programs.
In connection with the share repurchase program, the company has entered into
agreements to purchase shares of the company's stock. As of December 31, 2000,
the company has agreements to purchase up to approximately 4.0 million shares of
company stock from an independent third party at various times through the
expiration of the agreements in December 2002, at prices ranging from $83 to
$100 per share. The number of shares to be purchased will be reduced ratably
each quarter through the expiration of the agreements. In addition, as of
December 31, 2000, written equity put options, purchased call options, and other
derivative contracts, which provide for purchase of a total of approximately 4.6
million shares, remain outstanding at prices ranging from $69 to $98 per share
with expiration dates ranging from February 2001 to November 2002. If the
options are exercised, the contracts allow the company, at its option, to
repurchase the shares for cash or deliver to the holder cash or shares for the
difference between the contractual exercise price and the market price of the
company's stock. The company's objective with the above agreements is to reduce
the average price of repurchased shares.
During the second quarter of 2000, the company funded an employee benefit trust
with 40 million shares of Lilly common stock to provide a source of funds to
assist the company in meeting its obligations under various employee benefit
plans. The funding had no net impact on shareholders' equity as the employee
benefit trust is consolidated with the company. The cost basis of the shares
held in the trust was $2.64 billion and is shown as a reduction in shareholders'
equity, which offsets the resulting increases of $2.61 billion in additional
paid-in capital and $25 million in common stock. Any dividend transactions
between the company and the trust are eliminated. Stock held by the trust is
not considered outstanding in the computation of earnings per share.
The company has an ESOP as a funding vehicle for the existing employee savings
plan. The ESOP used the proceeds of a loan from the company to purchase shares
of common stock from the treasury. The ESOP issued $200 million of third-party
debt, repayment of which was guaranteed by the company (see Note 7). The
proceeds were used to purchase shares of the company's common stock on the open
market. Shares of common stock held by the ESOP will be allocated to
participating employees annually through 2017 as part of the company's savings
plan contribution. The fair value of shares allocated each period is recognized
as compensation expense.
Under a Shareholder Rights Plan adopted by the company's board of directors in
1998, all shareholders receive along with each common share owned a preferred
stock purchase right entitling them to purchase from the company one one-
thousandth of a share of Series B Junior Participating Preferred Stock (the
"Preferred Stock") at a price of $325. The rights are not exercisable until
after the "Distribution Date," which is generally the 10th business day after
the date of a public announcement that a person (the "Acquiring Person") has
acquired ownership of 15 percent or more of the company's common stock. The
company may redeem the rights for $.005 per right up to and including the
Distribution Date. The rights will expire on July 28, 2008, unless redeemed
earlier by the company.
The plan provides that, if an Acquiring Person acquires 15 percent or more of
the outstanding common stock of the company and the company's redemption right
has expired, generally each holder of a right (other than the Acquiring Person)
will have the right to purchase at the exercise price the number of shares of
common stock of the company as have a value of two times the exercise price.
Page 27
Alternatively, if, in a transaction not approved by the board of directors, the
company is acquired in a business combination transaction or sells 50 percent or
more of its assets or earning power after a Distribution Date, generally each
holder of a right (other than the Acquiring Person) will have the right to
purchase at the exercise price the number of shares of common stock of the
acquiring company as have a value of two times the exercise price.
At any time after an Acquiring Person has acquired 15 percent or more but less
than 50 percent of the company's outstanding common stock, the board of
directors may exchange the rights (other than those owned by the Acquiring
Person) for company common stock or Preferred Stock at an exchange ratio of one
common share (or one one-thousandth of a share of Preferred Stock) per right.
Note 10: Earnings per Share
The following is a reconciliation of the numerators and denominators used in
computing earnings per share from continuing operations before extraordinary
item:
2000 1999 1998
-------------------------------------------------------------
(Shares in thousands)
Income from continuing operations before
extraordinary item available to
common shareholders:
Income from continuing operations
before extraordinary item.................................. $ 3,057.8 $ 2,546.7 $ 2,096.3
Preferred stock dividends.................................. - (0.1) (1.7)
-------------------------------------------------------------
Income from continuing operations
before extraordinary item available
to common shareholders..................................... $ 3,057.8 $ 2,546.6 $ 2,094.6
=============================================================
Basic earnings per share:
Weighted-average number of common
shares outstanding, including
incremental shares........................................ 1,081,559 1,087,652 1,095,834
=============================================================
Basic earnings per share from
continuing operations before
extraordinary item........................................ $ 2.83 $ 2.34 $ 1.91
=============================================================
Diluted earnings per share:
Weighted-average number of common
shares outstanding........................................ 1,081,409 1,087,368 1,095,537
Stock options and other incremental
shares.................................................... 16,316 18,687 25,949
-------------------------------------------------------------
Weighted-average number of common
shares outstanding - diluted.............................. 1,097,725 1,106,055 1,121,486
=============================================================
Diluted earnings per share from
continuing operations before
extraordinary item........................................ $ 2.79 $ 2.30 $ 1.87
=============================================================
Page 28
Note 11: Income Taxes
Following is the composition of income taxes attributable to continuing
operations before extraordinary item:
2000 1999 1998
----------------------------------------------------------
Current:
Federal................................................ $ 928.4 $ 439.2 $ 322.1
Foreign................................................ 322.4 260.4 238.9
State.................................................. (7.2) (4.9) (8.9)
----------------------------------------------------------
1,243.6 694.7 552.1
Deferred:
Federal................................................. (81.2) 104.0 36.3
Foreign................................................. (58.6) 22.4 9.4
State................................................... 0.9 2.7 9.6
----------------------------------------------------------
(138.9) 129.1 55.3
Utilization of capital loss carryforwards.................. (303.8) (125.1) (38.7)
-----------------------------------------------------------
Income taxes............................................... $ 800.9 $ 698.7 $ 568.7
===========================================================
Significant components of the company's deferred tax assets and liabilities as
of December 31 are as follows:
2000 1999
---------------------------------------------------
Deferred tax assets:
Tax credit carryforwards and
carrybacks................................................... $ 734.5 $ 496.0
Other carryforwards............................................ 450.4 243.9
Sale of intangibles............................................ 230.6 76.5
Capital loss carryforward...................................... 158.8 561.7
Compensation and benefits...................................... 109.0 188.8
Inventory...................................................... 70.2 172.9
Other.......................................................... 378.6 300.4
---------------------------------------------------
2,132.1 2,040.2
Valuation allowances........................................... (408.0) (703.4)
---------------------------------------------------
Total deferred tax assets................................... 1,724.1 1,336.8
Deferred tax liabilities:
Property and equipment......................................... (527.7) (527.2)
Prepaid employee benefits...................................... (429.2) (257.4)
Unremitted earnings............................................ (182.0) (381.9)
Other.......................................................... (29.2) (65.1)
---------------------------------------------------
Total deferred tax liabilities.............................. (1,168.1) (1,231.6)
---------------------------------------------------
Deferred tax assets - net......................................... $ 556.0 $ 105.2
===================================================
At December 31, 2000, the company had capital loss and other carryforwards for
income tax purposes of $694.7 million: $643.4 million will expire within five
years and $43.9 million thereafter; $7.4 million of the carryforwards will never
expire. The company also has tax credit carryforwards of $734.5 million
available to reduce future income taxes: $495.1 million will expire within five
years and $183.2 million thereafter; $56.2 million of the tax credit
carryforwards will never expire.
As discussed in Note 4, the company sold its PCS health-care-management
subsidiary in January 1999. As a consequence of the sale, the company recorded
a deferred tax asset of $655.3 million for the tax
Page 29
capital loss that resulted from this transaction. A portion of this loss
carryforward has been used; the remainder can be carried forward four more
years. A valuation allowance was established for this asset due to the uncertain
realization of the benefit.
Domestic and Puerto Rican companies contributed approximately 56 percent, 56
percent, and 60 percent in 2000, 1999, and 1998, respectively, to consolidated
income from continuing operations before income taxes and extraordinary item.
Unremitted earnings of foreign subsidiaries that have been, or are intended to
be, permanently reinvested for continued use in foreign operations and that, if
distributed, would result in taxes at approximately the U.S. statutory rate
aggregated $5.2 billion at December 31, 2000. Cash payments of income taxes
totaled $294.0 million, $252.0 million, and $273.0 million in 2000, 1999, and
1998, respectively.
Following is a reconciliation of the effective income tax rate applicable to
income from continuing operations:
2000 1999 1998
--------------------------
United States federal statutory tax rate......... 35.0% 35.0% 35.0%
Add (deduct):
International operations, including
Puerto Rico................................... (12.9) (7.5) (10.5)
General business credits........................ (1.2) (1.6) (2.4)
Sundry.......................................... (0.1) (4.4) (0.8)
--------------------------
Effective income tax rate........................ 20.8% 21.5% 21.3%
==========================
Note 12: Retirement Benefits
The change in benefit obligation, change in plan assets, funded status, and
amounts recognized in the consolidated balance sheets at December 31 for the
company's defined benefit pension and retiree health benefit plans were as
follows:
Defined Benefit
Pension Plans Retiree Health Benefits
2000 1999 2000 1999
-----------------------------------------------------
Change in benefit obligation:
Benefit obligation at
beginning of year............................... $3,004.4 $2,898.8 $ 687.6 $ 621.5
Service cost..................................... 130.1 127.7 23.2 16.8
Interest cost.................................... 219.6 193.7 49.6 41.5
Actuarial loss................................... 144.3 16.5 51.4 60.5
Benefits paid.................................... (179.8) (175.0) (61.5) (48.5)
Foreign currency exchange rate
changes and other adjustments.................. 61.5 (57.3) 1.0 (4.2)
---------------------------------------------------
Benefit obligation at end of
year............................................ 3,380.1 3,004.4 751.3 687.6
Change in plan assets:
Fair value of plan assets at
beginning of year............................... 3,532.0 3,069.6 332.1 252.5
Actual return on plan assets..................... 138.7 543.6 (16.4) 80.4
Employer contribution............................ 270.0 122.1 95.0 47.7
Benefits paid.................................... (179.8) (175.0) (61.5) (48.5)
Foreign currency exchange rate
changes and other adjustments................... (28.8) (28.3) - -
---------------------------------------------------
Fair value of plan assets at end of year......... 3,732.1 3,532.0 349.2 332.1
Page 30
Funded status..................................... 352.0 527.6 (402.1) (355.5)
Unrecognized net actuarial (gain) loss............ 298.8 (36.0) 317.1 240.9
Unrecognized prior service cost (benefit)......... 227.2 119.3 (0.1) (1.1)
Unrecognized net obligation at January 1, 1986.... 1.7 2.0 1.8 -
---------------------------------------------------
Net amount recognized............................. $ 879.7 $ 612.9 $ (83.3) $(115.7)
===================================================
Amounts recognized in the
consolidated balance sheet
consisted of:
Prepaid benefit cost............................ $1,032.5 $ 741.1 $ - $ -
Accrued benefit liability....................... (302.9) (237.6) (83.3) (115.7)
Intangible asset................................ 41.1 34.0 - -
Accumulated other comprehensive income before
income taxes.................................. 109.0 75.4 - -
---------------------------------------------------
Net amount recognized........................... $ 879.7 $ 612.9 $ (83.3) $(115.7)
===================================================
Defined Benefit Retiree Health
Pension Plans Benefits
2000 1999 2000 1999
---------------------------------------------------
(Percents)
Weighted-average assumptions
as of December 31:
Discount rate................................... 7.4 7.4 7.5 7.5
Expected return on plan assets.................. 10.5 10.5 10.5 10.5
Rate of compensation increase................... 3.5-8.0 3.5-8.0 - -
Health-care-cost trend rates were assumed to increase at an annual rate of 6.5
percent in 2001 for participants under age 65, decreasing one-half percent to
6.0 percent in 2002 and thereafter. For participants over age 65, the rate was
assumed to increase 6.0 percent in 2001 and thereafter.
The projected benefit obligation, accumulated benefit obligation, and fair value
of the plan assets for the defined benefit pension plans with projected benefit
obligations in excess of plan assets were $736.8 million, $616.8 million, and
$381.6 million, respectively, as of December 31, 2000, and $637.1 million,
$539.0 million, and $364.5 million, respectively, as of December 31, 1999.
Net pension and retiree health benefit expense included the following components
related to continuing operations:
Page 31
Defined Benefit Retiree Health
Pension Plans Benefits
2000 1999 1998 2000 1999 1998
--------------------------------------------------------
Components of net periodic
benefit cost:
Service cost........................... $ 130.1 $ 127.7 $ 112.9 $ 23.2 $ 16.8 $ 12.8
Interest cost.......................... 219.6 193.7 184.2 49.6 41.5 34.3
Expected return on plan
assets............................... (341.0) (295.1) (277.1) (30.1) (24.2) (23.0)
Amortization of prior
service cost (benefit)............... 16.9 11.5 9.7 0.1 - (3.3)
Recognized actuarial
loss................................. 5.9 3.7 3.4 21.9 17.6 7.3
------------------------------------------------------
Net periodic benefit
cost................................. $ 31.5 $ 41.5 $ 33.1 $ 64.7 $ 51.7 $ 28.1
======================================================
The assumed health-care-cost trend rates have a significant effect on the
amounts reported. If these trend rates were to be increased by one percentage
point each future year, the December 31, 2000, accumulated postretirement
benefit obligation would increase by 13 percent and the aggregate of the service
cost and interest cost components of 2000 annual expense would increase by 15
percent. A one-percentage-point decrease in these rates would decrease the
December 31, 2000, accumulated postretirement benefit obligation by 12 percent
and the aggregate of the 2000 service cost and interest cost by 13 percent.
The company has defined contribution savings plans that cover its eligible
employees worldwide. The purpose of these defined contribution plans is
generally to provide additional financial security during retirement by
providing employees with an incentive to make regular savings. Company
contributions to the plan are based on employee contributions and the level of
company match. Expenses under the plans related to continuing operations totaled
$65.2 million, $56.4 million, and $50.3 million for the years 2000, 1999, and
1998, respectively.
The company provides certain other postemployment benefits primarily related to
disability benefits and accrues for the related cost over the service lives of
the employees. Expenses associated with these benefit plans in 2000, 1999, and
1998 were not significant.
Note 13: Contingencies
Barr Laboratories, Inc. (Barr), and Geneva Pharmaceuticals, Inc. (Geneva), have
each submitted an Abbreviated New Drug Application (ANDA) seeking FDA approval
to market generic forms of Prozac before the expiration of the company's
patents. The ANDAs assert that two U.S. patents held by Lilly covering Prozac
are invalid and unenforceable. The company filed suit against Barr and Geneva in
federal court in Indianapolis seeking a ruling that Barr's challenge to Lilly's
patents is without merit. In January 1999, the trial court granted summary
judgment in favor of Lilly on two of the four claims raised by Barr and Geneva
against Lilly's patents. That decision was appealed to the Court of Appeals for
the Federal Circuit. Barr and Geneva dismissed their other two claims in
exchange for a $4 million payment. On August 9, 2000, the Court of Appeals
upheld the 2001 compound patent but held that the 2003 method of use patent was
invalid. The company has filed a petition requesting a rehearing by the Court of
Appeals.
Several other generic manufacturers have also filed ANDAs for generic forms of
Prozac, challenging one or both of the patents. In late 1998, Zenith Goldline
Pharmaceuticals, Inc.; Teva Pharmaceuticals USA (Teva); and Cheminor Drugs,
Ltd., together with one of its subsidiaries (Cheminor), notified the company
that they had filed ANDAs challenging the 2003 patent. Also in 1998, Novex
Pharma, a division of Apotex, Inc., notified the company that it had filed an
ANDA challenging both patents. In 1999, Cheminor notified the company that it
had filed an ANDA for a different dosage form. In 2000, Barr and Teva both
notified the company that they had filed additional ANDAs for the different
dosage form, and Alphapharm Pty. Ltd. also notified the company that it had
filed ANDAs for two dosage forms.
Page 32
The company has filed lawsuits in the United States District Court of the
Southern District of Indiana seeking rulings that all these challenges to the
patent(s) are without merit. The cases are awaiting resolution of the petition
for rehearing by the Court of Appeals in the original Barr case.
Assuming the Prozac patent ruling is not overturned, the company expects a very
substantial decline in Prozac sales in the U.S. in the 12 months following the
entry of generic fluoxetine in the U.S. market in August 2001. Prozac sales in
the U.S. represent a significant portion of the company's overall sales,
accounting for approximately 20 percent of the company's consolidated worldwide
sales in 2000. The company believes that the Prozac patent litigation will not
have a material adverse effect on the company's consolidated financial position
or liquidity.
The company has been named as a defendant in numerous product liability lawsuits
involving primarily two products, diethylstilbestrol (DES) and Prozac. The
company has accrued for its estimated exposure with respect to all current
product liability claims. In addition, the company has accrued for certain
claims incurred, but not filed, 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 fewer than 10 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 primary liability insurance carrier and certain excess carriers
providing for coverage for certain environmental liabilities. Litigation seeking
coverage from certain other excess carriers is ongoing.
The environmental liabilities and litigation accruals have been reflected in the
company's consolidated balance sheet at the gross amount of approximately $138.9
million at December 31, 2000. Estimated insurance recoverables of approximately
$74.1 million at December 31, 2000, have been reflected as assets in the
consolidated balance sheet.
The company recognized a pretax gain of $110.0 million as a result of a cash
payment received in settlement of litigation with Biochimica Opos S.p.A.
relating to the manufacture, sale, or distribution of cefaclor and certain other
products made by Biochimica Opos S.p.A. The gain, which was recorded in other
income, increased earnings per share by approximately $.06 in the fourth quarter
of 1999.
While it is not possible to predict or determine the outcome of the patent,
product liability, or other legal actions brought against the company or the
ultimate cost of environmental matters, the company believes that, except as
noted above with respect to the Prozac patent litigation, 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.
Page 33
Note 14: Other Comprehensive Income
The accumulated balances related to each component of other comprehensive income
were as follows:
Minimum Accumulated
Foreign Unrealized Pension Other
Currency Gains (Losses) Liability Comprehensive
Translation on Securities Adjustment Income
----------------------------------------------------------------------
Beginning balance at
January 1, 2000.................... $(375.6) $ 20.1 $(50.9) $(406.4)
Other comprehensive
income (loss)...................... (170.7) (12.3) (21.8) (204.8)
---------------------------------------------------------------------
Balance at
December 31, 2000.................. $(546.3) $ 7.8 $(72.7) $(611.2)
=====================================================================
The amounts above are net of income taxes. The income taxes related to other
comprehensive income were not significant as income taxes were generally not
provided for foreign currency translation.
The unrealized gains (losses) on securities is net of reclassification
adjustments of $43.9 million, $8.5 million, and $4.8 million, net of tax, in
2000, 1999, and 1998, respectively, for realized gains and losses on sales of
securities included in net income.
Generally, the assets and liabilities of foreign operations are translated into
U.S. dollars using the current exchange rate. For those operations, changes in
exchange rates generally do not affect cash flows; therefore, resulting
translation adjustments are made to shareholders' equity rather than to income.
Page 34
Responsibility for Financial Statements
Eli Lilly and Company and Subsidiaries
The consolidated financial statements and related notes have been prepared by
management, who are responsible for their integrity and objectivity. The
statements have been prepared in accordance with generally accepted accounting
principles and include amounts based on judgments and estimates by management.
The other financial information in this annual report is consistent with that in
the financial statements.
The company maintains internal accounting control systems that are designed to
provide reasonable assurance that assets are safeguarded, that transactions are
executed in accordance with management's authorization and are properly
recorded, and that accounting records are adequate for preparation of financial
statements and other financial information. The design, monitoring, and revision
of internal accounting control systems involve, among other things, management's
judgments with respect to the relative cost and expected benefits of specific
control measures. A staff of internal auditors regularly monitors, on a
worldwide basis, the adequacy and effectiveness of internal accounting controls.
In addition to the system of internal accounting controls, the company maintains
guidelines of company policy emphasizing proper overall business conduct,
possible conflicts of interest, compliance with laws, and confidentiality of
proprietary information. The guidelines are reviewed on a periodic basis with
employees worldwide.
The financial statements have been audited by Ernst & Young LLP, independent
auditors. Their responsibility is to examine the company's financial statements
in accordance with generally accepted auditing standards and to express their
opinion with respect to the fairness of presentation of the statements.
The members of the audit committee of the board of directors, none of whom are
employees of the company, recommend independent auditors for appointment by the
board of directors, review the services performed by the independent auditors,
and receive and review the reports submitted by them. The audit committee meets
several times during the year with management, the internal auditors, and the
independent auditors to discuss audit activities, internal controls, and
financial reporting matters. The internal auditors and the independent auditors
have full and free access to the committee.
Sidney Taurel
Chairman of the Board,
President, and Chief Executive Officer
Charles E. Golden
Executive Vice President and
Chief Financial Officer
January 29, 2001
Page 35
Report of Independent Auditors
Board of Directors and Shareholders
Eli Lilly and Company
We have audited the accompanying consolidated balance sheets of Eli Lilly and
Company and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, cash flows, and comprehensive income for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Eli Lilly and
Company and subsidiaries at December 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
Indianapolis, Indiana
January 29, 2001
Page 36
Appendix to Exhibit 13
Graphs in Annual Report to Shareholders
for the Year Ended December 31, 2000
Set forth below, converted to tabular format, are the graphs contained in the
paper format of the Company's Annual Report to Shareholders that are contained
in Exhibit 13.
Graph #1--Net Sales
($ millions)
Class Amount
- -------------------------------------
Prozac/Sarafem $2,573.7
Zyprexa 2,349.5
Humulin 1,114.5
Gemzar 559.3
Evista 521.5
ReoPro 418.1
Humalog 350.2
Axid 321.4
Humatrope 300.7
Ceclor 285.4
Actos 223.0
Vancocin 205.0
In total, 12 products, spanning various therapeutic classes, had annual revenues
in excess of $200 million.
Graph #2--Lilly's Decreasing Dependency on Prozac
(Percentages represent the Prozac share of total net sales)
Year Percent
- -----------------------------
1996 34%
1997 32%
1998 30%
1999 26%
2000 24%
Through strong growth of newer products, Lilly is consistently lessening its
reliance on sales of Prozac. In 2000, Prozac (including Sarafem) accounted for
24 percent of Lilly's total net sales, down from 34 percent in 1996.
Graph #3--Revenue Growth of Newer Products
($ millions; growth percentages represent change from 1999)
Percent Change
Product Amount from 1999
- ----------------------------------------------
Zyprexa $465 25%
Evista 195 60%
Actos 185 489%
Humalog 126 56%
Gemzar 104 23%
Five of the company's newer products - Zyprexa, Evista, Actos, Humalog, and
Gemzar - generated $4.0 billion in revenues in 2000. These newer products and
ReoPro now represent 41 percent of total net sales compared with 34 percent in
1999 and 26 percent in 1998. During the fourth quarter of 2000, Zyprexa became
the company's top selling product.
Page 37
Graph #4--Gross Margin
(as a percent of total net sales)
Year Amount
- ----------------------------
1996 73.2%
1997 75.6%
1998 78.2%
1999 79.0%
2000 81.1%
In 2000, gross margin improved by 2.1 percentage points, primarily due to
favorable changes in product mix and, to a lesser extent, increased production
volume. This continuous improvement in gross margin has enabled the company to
aggressively fund investments in research and development, sales, and marketing.
Graph #5--Research and Development
($ millions)
Year Amount
- --------------------------------------
1996 $1,189.5
1997 1,370.2
1998 1,738.9
1999 1,783.6
2000 2,018.5
Worldwide research and development expenditures increased 13 percent in 2000 in
support of the company's strong pipeline. Research and development expenditures
represented 19 percent of total net sales in 2000 compared with 18 percent in
1999. The late-stage pipeline includes 10 new products for a wide range of
serious, unmet medical needs that are expected to be launched during the period
from 2001 to 2004.
Graph #6--Capital Expenditures
($ millions)
Year Amount
- -----------------------------
1996 $443.9
1997 366.3
1998 419.9
1999 528.3
2000 677.9
Capital expenditures increased 28 percent from the 1999 level, primarily due to
the increased support of various manufacturing and research initiatives and
related infrastructure. The company expects near-term capital expenditures to
increase from 2000 levels due to continuing investment in research and
manufacturing capacity to support its growing portfolio.
Page 38
Graph #7--Dividends Paid per Share
(dollars)
Year Amount
- ------------------------
1996 $0.685
1997 0.740
1998 0.800
1999 0.920
2000 1.040
Dividends paid during 2000 increased 13 percent over 1999. The year 2000 became
the 33rd consecutive year in which dividends were increased. The continued
earnings growth in 2000 enabled the company to declare a first-quarter 2001
dividend of $.28 per share, an 8 percent increase over 2000. The increase
reflects the company's continued commitment to delivering shareholder value.
Graph #8--Economic Value Added
($ millions)
Year Amount
- --------------------------------------
1996 $ 460
1997 751
1998 1,429
1999 1,584
2000 1,776
In 2000, Lilly's Economic Valued Added (EVA) was $1.8 billion, an increase of 12
percent, reflecting the company's commitment to effective asset management and
focus on earnings growth in order to deliver shareholder value.
Page 39