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North American trial. The company will continue to
favorable exchange, which was partially offset by
medically evaluate patients in both the North Ameri-
continuing price erosion in that market. Restructur-
can and European trials for six months following
ing did not have a signi¬cant adverse effect on
treatment. The data from both trials will be analyzed
earnings in the Japan and Paci¬c geographic area
to assess the therapeutic bene¬t of FREEDOX in the
in 1993. In other international markets, increases in
treatment of severe to moderate head injury and to
sales volume, which were offset somewhat by
determine the reason for the difference in mortality
exchange, and expense savings led to the signi¬cant
encountered in the North American trial. Analysis of
increase in earnings before taxes from 1993 levels.
the results of other clinical trials of FREEDOX for
The cost of restructuring reduced earnings in other
subarachnoid hemorrhage, spinal cord injury and
international markets in 1993.
stroke has not identi¬ed any safety concerns and
these trials will continue.
Nonoperating Income and Expense
Marketing and administrative expense as a percent
of sales in 1994 was comparable to both 1993 and The favorable interest income to interest expense
1992. Savings from the 1993 and 1992 restructur- relationships have increased in each of the years
ings realized in this expense category were offset by 1992 through 1994. Nonoperating income in 1994
increases in other costs related to various marketing also bene¬ted from the favorable resolution of a
programs and by other expenses. A portion of the coverage dispute with an insurance carrier and the
increased costs in 1994 resulted from new-product gain on the sale of a joint venture. The 1993 mea-
marketing expenses related to LUVOX, the treatment sure includes a nonoperating gain on the sale of a
635
Mergers and Acquisitions




15-39 Part 3 Business Analysis and Valuation Applications




cough/cold medicine trademark. There were no announced a common stock repurchase program,
such gains in 1992. to be completed in 1995, which will utilize approxi-
mately $300 million. The working capital increase
and improvement in the current ratio realized at the
Income Taxes
end of 1993 was because the proceeds of medium-
The effective tax rate for 1994 was 24 percent, com-
term notes had been used during the year to reduce
pared to 17.5 percent and 21.7 percent in 1993
outstanding commercial paper.
and 1992, respectively. When the tax bene¬ts
related to restructuring are excluded, the 1993 rate The 1994 ratio of debt to total capitalization bene-
would have been 22 percent. The increase in 1994 ¬ted from the increase in total shareholders™ equity
The Uphohn Company




is the result of a higher proportion of earnings from when compared to a consistent level of year-to-year
international operations, which are taxed at rela- total borrowing. The improvement in 1993 when
tively higher rates, and a lower proportion of total compared to 1992, resulted from lower total debt.
earnings from operations in Puerto Rico. The major
The 1994 improvement in return on average equity
products encountering U.S. generic competition are
before accounting changes was due to the favorable
manufactured in Puerto Rico.
earnings comparison. Net earnings in 1993 and
The Omnibus Budget Reconciliation Act of 1993 will
1992 were reduced by the after-tax expense associ-
have a signi¬cant impact on the company™s net
ated with restructuring, totaling $154.6 and $13.4
earnings beginning in 1995. The Act ultimately
million, respectively. Excluding the cost of restructur-
reduces tax bene¬ts from operations in Puerto Rico
ings, return on average equity would have been
under Section 936 of the Internal Revenue Code by
27.5 percent in 1993 and 27.9 percent in 1992.
60 percent. The change had little effect on the tax
rate for 1994. Net cash provided by operations was $710 million
in 1994 compared to $780 million and $597 mil-
SFAS No. 109 was adopted effective January 1,
lion in 1993 and 1992, respectively. Signi¬cant
1992. The cumulative effect of this accounting
adjustments were made to 1993 cash provided by
change was a favorable adjustment to 1992 net
net earnings to re¬‚ect the non-cash effects of
earnings of $13 million, resulting primarily from
restructuring charges. Spending against the related
adjusting deferred tax balances to re¬‚ect current tax
restructuring reserves reduced the 1994 measure by
rates.
$72 million. This spending was primarily the result
of the reduction in personnel and is expected to be
Financial Condition
less than $35 million in 1995. Cash provided by
1994 1993 1992
1992 net earnings was adjusted to re¬‚ect the non-
cash effects of a restructuring and a signi¬cant
Working capital (millions) $1,011 $678 $582
Current ratio 1.9 1.7 1.5 accounting change. Nonoperating uses of cash in
26.0% 28.1% 30.3%
Debt to total capitalization
1994 included purchase of investments; the addi-
Return on average equity-
tion of property, plant and equipment; the payment
continuing operations
of dividends to shareholders; and the purchase of
before accounting
21.9% 19.3% 26.2%
changes
treasury stock. The largest source of cash from non-
operating activities was realized from the sale of the
The signi¬cant increase in working capital and the Asgrow Seed Company.
corresponding improvement in the current ratio
were largely the result of the year-end 1994 receipt In 1993, proceeds of a $200 million 5.875% debt
of the proceeds from the sale of the Asgrow Seed issue under a 1993 shelf registration were utilized to
Company which were temporarily invested in cash redeem $200 million 8% notes that were called at
equivalents. Also contributing to the improvement in par on July 1, 1993. Medium-term borrowing at the
these measures was the increase in short-term end of 1994 was unchanged from 1993 at $466
investments, which were classi¬ed on the balance million and compared to $138 million in 1992. The
sheet as other current assets. The company recently company had $134 million available for future bor-
636 Mergers and Acquisitions




15-40
Mergers and Acquisitions




rowing under the 1993 and 1991 shelf registrations Patent Expirations
at the end of 1994.
A U.S. Food and Drug Administration (FDA) morato-
rium on the approval of Abbreviated New Drug
The company utilizes derivative ¬nancial instruments
Applications (ANDAs) for products containing gly-
in conjunction with its foreign currency risk manage-
buride, the generic name for MICRONASE, expired
ment programs. These programs employ over-the-
in May 1994. Patent protection of ANSAID, CLEO-
counter forward exchange contracts and purchased
CIN T, XANAX, and HALCION expired in 1993. No
foreign currency options to hedge existing net trans-
signi¬cant patent protection remains on PROVERA.
action exposure and certain existing obligations in
The company began marketing generic equivalents
several subsidiary locations. These exposures arise




The Uphohn Company
for most of these products in 1993 and 1994. U.S.
both from intercompany and third-party transac-
sales of these six products, including that of the
tions. Foreign currency options are occasionally uti-
generic equivalents, declined from $1,068 million in
lized to hedge anticipated transactions. Risk of loss
1993 to $672 million in 1994. While it is antici-
in the hedging of anticipated transactions is mini-
pated that sales of these products will continue to
mized through the exclusive use of purchased for-
decrease over the next several years, the decline is
eign currency options.
expected to be lower than that experienced in 1994.
The hedging activities seek to protect operating
FDA moratoriums on the approval of ANDAs protect
results and cash ¬‚ows from the potential adverse
exclusivity for GLYNASE until March 1995 and for
effects of foreign currency ¬‚uctuations. This is done
DEPO-PROVERA until November 1995. U.S. patent
by offsetting the gains or losses on the underlying
protection for ROGAINE will expire in February
exposures with losses and gains on the instruments
1996.
utilized to create the hedge. The company does not
Sales growth of other existing products, the acquisi-
utilize derivative ¬nancial instruments for trading
tion and development of new products, the market-
purposes.
ing of generic equivalents, and efforts to control
The company is obligated to make contributions to costs and enhance revenues are expected to offset
certain employee bene¬t programs and may elect to much of the effects of the loss of patent and ANDA
continue funding one other program. The com- protection. Therefore, the combined earnings
pany™s cash ¬‚ow requirements under the Employee impact of the patent expirations, offset by these
Stock Ownership Plan will begin to accelerate in strategies and actions, are not expected to be as
1996 from current levels, and there will be a mini- severe in 1995 as in 1994. Earnings in years subse-
mum contribution required for the U.S. pension plan quent to 1995 depend on the success of new prod-
of approximately $25 million. In each of the years ucts and the strategies noted above.
1992 through 1994, the company has made contri-
butions to a Voluntary Employee Bene¬t Association Other Items
to partially prefund postretirement bene¬t obliga-
The company is subject to environmental legislation
tions. Future contributions are discretionary.
and regulation. Environmental compliance costs,
The company has committed to make a series of including capital expenditures related to future pro-
investments in a company that intends to manufac- ductions, have been increasing each year. Spending
ture a hemoglobin-based oxygen carrier as certain at the Kalamazoo, Mich., production site is expected
progress goals are met. in the near future related to groundwater remedia-
tion and improved control of surface water dis-
The company™s future cash provided by operations
charges.
and borrowing capacity are expected to cover nor-
Other projects related to the prevention, mitigation
mal cash ¬‚ow needs and planned capital additions
and elimination of environmental effects are being
for the foreseeable future, despite the adverse
planned and implemented worldwide.
effects of the expiration of patents and other product
protection discussed below. The company is involved in several administrative
637
Mergers and Acquisitions




15-41 Part 3 Business Analysis and Valuation Applications




and judicial proceedings relating to environmental ical patterns of resolution of such issues, the ultimate
matters, including actions brought by the U.S. Envi- liability should not have a material adverse effect on
ronmental Protection Agency (EPA) and state envi- the company™s results of operations or liquidity.
ronmental agencies for cleanup at approximately
Studies directed toward a ¬nal remediation plan for
40 “Superfund” or comparable sites, including the
the site of the company™s discontinued industrial
West KL Avenue Land¬ll in Kalamazoo County,
chemical operations in North Haven, Conn., are in
Mich. The company™s estimate of the ultimate cost to
process. Issues related to removal of a sludge pile
be incurred in connection with these environmental
located on the site due to zoning violations have
situations could change due to the potential exist-
been resolved with the town. The ¬nal plan of reme-
The Uphohn Company




ence of joint and several liability, possible recovery
diation of the pile will be worked out among the
from other potentially responsible parties, the levels
company, the Connecticut Department of Environ-
of cleanup to be required and the technologies to be
mental Protection and the U.S. EPA with input from
employed. An accrual has been recorded, but
the public. The company cannot at the present time
added costs could be incurred in connection with the
predict the ¬nal resolution of the sludge pile issue
various remedial actions. Although the company
and has not established any reserves for the cost of
cannot predict the outcome of these matters, the
off-site disposal. The company believes that it has
ultimate liability should not have a material effect on
established suf¬cient reserves to cover the costs of
the company™s consolidated ¬nancial position; and
other remedial activities that may be required.
unless there is a signi¬cant deviation from the histor-




Selected Financial Data (Dollar amounts in millions, except per-share data)
Years ended December 31 1994 1993 1992 1991 1990

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