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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 005-52501
WARNER CHILCOTT PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
Ireland N/A
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Lincoln House, Lincoln Place, Dublin 2, Ireland
(Address of principal executive offices)
353 1 662-4962
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
American Depositary Shares, representing Ordinary Shares, par value $.05 each;
Ordinary Shares, par value $.05 each; 12,366,808 Ordinary Shares outstanding at
March 31, 1999.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
Table of Contents
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Part I - Financial Information
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 2
Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 4
Notes to the Unaudited Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II - Other Information
Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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Part I - Financial Information
Item 1. Financial Statements
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998
(in thousands of U.S. dollars)
(UNAUDITED)
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March 31, December 31,
1999 1998
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ASSETS
Current Assets:
Cash and cash equivalents $ 42,961 $ 43,133
Accounts receivable 10,870 18,050
Inventories 11,046 13,099
Prepaid expense and other assets 3,462 7,403
Due from Elan Corporation, plc and subsidiaries 1,363 -
----------- ----------
Total current assets 69,702 81,685
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Fixed Assets:
Equipment, furniture and fixtures 1,061 1,076
Other Assets:
Intangible assets 72,913 74,256
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Total assets $ 143,676 $ 157,017
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LIABILITIES
Current Liabilities:
Accounts payable $ 9,956 $ 8,833
Accrued liabilities 3,529 6,254
Due to Elan Corporation, plc and subsidiaries - 7,697
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Total current liabilities 13,485 22,784
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Other Liabilities:
Working capital facility 18,193 20,393
Long-term debt 8,897 8,897
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Total liabilities 40,575 52,074
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SHAREHOLDERS' EQUITY
Ordinary Shares, par value $.05 per share; 50,000,000 shares
authorized, 12,366,808 shares issued and outstanding at March
31, 1999 and December 31, 1998 618 618
Deferred Shares, par value IR(pound)1 per share; 30,000 shares
authorized, 30,000 shares issued and outstanding at March 31,
1999 and December 31, 1998 45 45
Additional paid-in capital 208,939 208,939
Accumulated deficit (105,575) (103,578)
Deferred compensation (926) (1,081)
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Total shareholders' equity 103,101 104,943
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Total liabilities and shareholders' equity $ 143,676 $ 157,017
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See accompanying notes to unaudited consolidated financial statements.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Statements of Operations for the Three Months
Ended March 31, 1999 and 1998
(in thousands of U.S. dollars, except per share data)
(UNAUDITED)
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Three Months Ended March 31,
1999 1998
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REVENUES
Branded product sales $ 8,300 $ 3,328
Generic product sales 5,566 10,539
Marketing alliances and other revenue 7,182 -
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Total revenues 21,048 13,867
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OPERATING EXPENSES
Cost of goods sold 8,449 10,381
Selling, general and administrative 12,111 8,726
Depreciation and amortization 1,412 1,403
Research and development 841 837
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Total operating expenses 22,813 21,347
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OPERATING LOSS BEFORE TAXES (1,765) (7,480)
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OTHER INCOME (EXPENSE)
Interest income 539 725
Interest expense (771) (640)
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Total other income (expense) (232) 85
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NET LOSS BEFORE TAXES (1,997) (7,395)
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Income taxes - -
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NET LOSS $ (1,997) $ (7,395)
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Net loss per ordinary share
Basic and Dilutive $ (0.16) $ (0.60)
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Weighted average ordinary shares outstanding 12,366,808 12,366,808
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See accompanying notes to unaudited consolidated financial statements.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Statements of Cash Flows
(in thousands of U.S. dollars)
(UNAUDITED)
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Three Months Ended March 31,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,997) $ (7,395)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation and amortization 1,412 1,403
Accretion of loan discount - 277
Stock compensation expense 155 154
Changes in assets and liabilities:
Decrease in accounts receivable, prepaid expense and other
assets 11,121 832
Decrease in inventories 2,053 1,394
Increase in due from Elan Corporation, plc and subsidiaries (1,363) -
Decrease in accounts payable and accrued liabilities (1,602) (1,448)
(Decrease) increase in due to Elan Corporation, plc and
subsidiaries (7,697) 314
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Net cash provided by (used in) operating activities 2,082 (4,469)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of tangible fixed assets (54) (40)
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Net cash used in investing activities (54) (40)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Working capital facility (repayment) proceeds, net (2,200) 19,330
Short-term debt repayment - (14,511)
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Net cash (used in) provided by financing activities (2,200) 4,819
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Net (decrease) increase in cash and cash equivalents (172) 310
Cash and cash equivalents, beginning of period 43,133 52,786
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Cash and cash equivalents, end of period $ 42,961 $ 53,096
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See accompanying notes to unaudited consolidated financial statements.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
Notes to the Unaudited Consolidated Financial Statements
March 31, 1999
NOTE 1: BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Certain information and footnote
disclosure normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The statements should be read in
conjunction with the accounting policies and notes to the consolidated financial
statements included in Warner Chilcott Public Limited Company's (the "Company"
or "Warner Chilcott") 1998 Annual Report on Form 10-K.
The Company is an Irish public limited company with operations in Dublin,
Ireland and Rockaway, NJ, USA. The Company's financial statements include the
financial statements for Warner Chilcott Public Limited Company and all of its
subsidiaries and are prepared in U.S. dollars in conformity with United States
generally accepted accounting principles.
In the opinion of management, the financial statements reflect all adjustments
necessary for a fair statement of the operations for the interim periods
presented.
NOTE 2: INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
principally on the basis of first-in, first-out or standards that approximate
average cost.
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March 31, 1999 December 31, 1998
(in thousands of U.S. dollars)
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Raw materials $ 1,801 $ 1,897
Finishing supplies 3 3
Work in process 683 932
Finished goods 9,469 11,597
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11,956 14,429
Less: Reserve for obsolescense 910 1,330
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Inventories $ 11,046 $ 13,099
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NOTE 3: SCHERING-PLOUGH AGREEMENT
In July 1998 the Company entered into an agreement under which Warner Chilcott
promotes certain branded pharmaceutical products on behalf of Schering-Plough.
This agreement was amended retroactive to January 1, 1999 to change the mix of
products to be promoted by Warner Chilcott and the means of calculating
royalties earned by Warner Chilcott based upon the performance of the promoted
products. Revenue from this arrangement is included in the Statement of
Operations under the caption "Marketing alliances and other revenue."
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NOTE 4: ELAN AGREEMENTS
In March 1999 the Company reached a binding agreement with Elan Corporation, plc
under which Elan agreed to acquire Warner Chilcott's marketing rights to an
extended-release generic nifedipine product. Under terms of the agreement, as
of March 31, 1999 Elan was obligated to make a non-refundable payment of $3.0
million to Warner Chilcott. Such amount was included in the Statement of
Operations under the caption "Marketing alliances and other revenue" and on the
balance sheet as of March 31, 1999 included in the amount under the caption "Due
from Elan Corporation, plc and subsidiaries." Additional license fees would be
due to Warner Chilcott upon completion of certain milestones including the
completion of a definitive license agreement, FDA approval of the ANDA pending
for the product and other future events. Warner Chilcott would also be entitled
to receive royalties based upon revenues derived from the extended-release
nifedipine product.
In March 1999 the Company also reached a binding agreement with Elan under which
Elan acquired the marketing rights to an isosorbide-5-mononitrate product
("IS5MN-PM") that Elan had been developing for Warner Chilcott. Under terms of
the agreement, as of March 31, 1999 Elan was obligated to make a payment to
Warner Chilcott in an amount equal to Warner Chilcott's remaining contractual
obligation relating to the development of IS5MN-PM. Such amount had been
carried by Warner Chilcott as an asset in "Prepaid expense and other assets" and
as a liability in "Due to Elan Corporation, plc and subsidiaries." In
concluding this transaction and reducing both the related asset and liability,
Warner Chilcott did not recognize any net income statement effect.
NOTE 5: NET LOSS PER ORDINARY SHARE
Basic net income per ordinary share has been computed by dividing net income
available to ordinary shareholders by the weighted average number of ordinary
shares outstanding during the period. Diluted net income per ordinary share is
computed by adjusting the weighted average number of ordinary shares outstanding
during the period for all potentially dilutive ordinary shares outstanding
during the period and adjusting net income for any changes in income or loss
that would result from the conversion of such potential ordinary shares. Net
loss and weighted average shares outstanding used for computing diluted loss per
share were the same as that used for computing basic loss per share for the
three months ended March 31, 1999 and 1998. Stock options and warrants have
not been included in the calculation since the inclusion of such shares would be
antidilutive.
NOTE 6: COMPREHENSIVE INCOME
In June 1997 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
Comprehensive income is defined as the total change in shareholders' equity
during the period other than from transactions with shareholders. For the
Company, comprehensive loss is comprised solely of net loss.
NOTE 7: CONTINGENCIES
The Company is involved in various legal proceedings of a nature considered
normal to its business including patent litigation, product liability and other
matters. In the event of the adverse outcome of these proceedings, resulting
liabilities are either covered by insurance,
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established reserves or, in the opinion of management, would not have a material
adverse effect on the financial condition or results of operations of the
Company.
NOTE 8: UNITED STATES FEDERAL INCOME TAXES
The Company operates in Ireland and the United States and is subject to various
taxes on income in both jurisdictions. Warner Chilcott's wholly-owned United
States subsidiary, Warner Chilcott, Inc., is a United States corporation and, as
such, is subject to United States taxation. Ultimate utilization or availability
of net operating losses and certain deferred tax assets may be limited if a
significant change in ownership occurs, as defined by rules enacted with the
United States Tax Reform Act of 1986. The Company did not accrue any liability
for Federal income taxes in 1999 or 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and is subject to the safe harbors created
by those sections. These forward-looking statements are subject to significant
risks and uncertainties, including those identified in the section of this Form
10-Q entitled "Factors That May Affect Future Operating Results" and in the
Company's 1998 Annual Report on Form 10-K filed with the Securities and Exchange
Commission, which may cause actual results to differ materially from those
discussed in such forward-looking statements. The forward-looking statements
within this Form 10-Q are identified by words such as "believes", "anticipates",
"expects", "intends", "may", "will" and other similar expressions. However,
these words are not the exclusive means of identifying such statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. The Company undertakes no obligation to release publicly the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances occurring subsequent to the filing of this Form
10-Q with the Securities and Exchange Commission. Readers are urged to review
and consider carefully the various disclosures made by the Company in this
report and in the Company's other reports filed with the Securities and Exchange
Commission that attempt to advise interested parties of the risks and factors
that may affect the Company's business.
Set forth below is the discussion of the financial condition and results of
operations of the Company for the three months ended March 31, 1999 and 1998.
This discussion should be read in conjunction with the consolidated unaudited
financial statements and the related notes, appearing in Item 1.
OVERVIEW
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The Company is primarily engaged in the development, marketing, sale and
distribution of prescription pharmaceutical products in the United States. The
Company's current focus is on branded products targeted for four specialty
segments: women's health care, urology, cardiology and dermatology. All of the
Company's branded products are promoted by the Company's sales force.
The Company currently markets a portfolio of branded products including:
NATAFORT(R), a prescription prenatal vitamin designed to improve patient
compliance by virtue of its smaller size relative to competing products;
PYRIDIUM(R) PLUS, an oral urinary tract analgesic and antispasmodic agent used
for irritative bladder conditions; VECTRIN(R), an antibiotic used most
frequently for the treatment of acne; DORYX(R), a broad spectrum antibiotic;
LOCHOLEST(R), a lipid regulator for the reduction of LDL cholesterol levels;
ESTRACE(R) VAGINAL CREAM, a hormone replacement product; OVCON(R) 35, an oral
contraceptive; K-DUR(R), a sustained release potassium supplement; NITRODUR(R),
a nitroglycerin patch for the treatment of angina; and LOTRISONE(R), a
corticosteroid / antifungal cream. NataFort(R), Pyridium(R) Plus, Vectrin(R),
Doryx(R) and LoCholest(R) are products owned by the Company. Estrace(R) vaginal
cream and Ovcon(R) 35 are products owned by Bristol-Myers Squibb and promoted by
the Company under a promotion agreement (the "BMS Agreement"). K-Dur(R),
NitroDur(R) and Lotrisone(R) are products owned by Schering-Plough and promoted
by the Company under a promotion agreement (the "Schering-Plough Agreement").
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The Company plans to add additional products to its portfolio of branded
products through internal development, co-promotion agreements, in-licensing,
acquisition and development collaborations with other companies.
Revenue from the sale of branded products accounted for 39.4% and 24.0% of total
revenue for the periods ended March 31, 1999 and 1998, respectively. Revenues
from marketing alliances were first generated in the third quarter of 1998 and
accounted for 34.1% of total revenue for the three months ended March 31, 1999.
Revenue associated with the sale of non-differentiated generic products in the
first quarter of 1999 accounted for 26.5% of total revenue, down from 76.0% in
the first quarter of 1998.
The foundation for the Company's future success is its sales and marketing
organization. The Company began to build its sales force in early 1997. During
1998 the Company's sales force grew from 175 professionals at year-end 1997 to
270 at the end of 1998. Through the first quarter of 1999 the Company maintained
a similar sales force as that at year-end 1998. The Company's target for its
sales force is approximately 295 comprised of 250 representatives in the
Company's primary care sales force, 25 in the dermatology sales force and 20 in
sales force management.
Future revenue growth will be dependent on the Company increasing the sales of
its existing portfolio of promoted products and adding new products through
acquisition, in-licensing, marketing alliances or self-development.
HISTORY
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The Company is an Irish public limited company founded in 1992 as Nale
Laboratories Limited ("Nale"). In March 1996 Nale acquired certain assets and
assumed certain liabilities (the "Acquisition") of Warner Chilcott Laboratories,
a division of the Warner-Lambert Company (the "Division"). Following the
Acquisition, Nale changed its name to Warner Chilcott Public Limited Company.
The principal purpose of the Acquisition was to provide the Company with
channels of distribution in the United States. The Company also gained an
established reputation in the pharmaceutical industry, a portfolio of existing
products, and a functioning organization. The Company's customer base includes
all major national wholesalers and pharmacy chains. In addition, the Company
utilizes the services of an outside telemarketing organization to cover almost
5,000 independent pharmacies. The assets and liabilities of the Division
acquired in the Acquisition are now organized in the United States as Warner
Chilcott, Inc., a wholly-owned subsidiary of Warner Chilcott Public Limited
Company.
The Company's revenues are currently generated in the United States and the U.S.
dollar is the functional currency of the Company. Accordingly, the Company's
exposure to currency fluctuation is limited. Product sourcing from vendors and
research and development agreements are normally contracted in U.S. dollars. As
a company operating in multiple jurisdictions, the Company will be subject to
taxation on its earnings in the jurisdictions in which it operates. At present,
such jurisdictions include Ireland and the United States.
RESULTS OF OPERATIONS
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THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Total revenue for the quarter ended March 31, 1999 increased 51.8% to $21.0
million from $13.9 million for the same period in 1998. Increased sales of the
Company's branded products and the
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addition of significant revenues from marketing alliances more than made up for
the decline in sales of non-differentiated generic products.
Sales of branded products in the first quarter increased by $5.0 million to $8.3
million, a 149.4% gain over the prior year. NataFort(R), Doryx(R) and Vectrin(R)
all generated increases over the same quarter in the prior year. Contributing to
the year-over-year increase was the launch of Pyridium(R) Plus, an oral urinary
tract analgesic antispasmodic agent used for irritative bladder conditions. The
Company initiated the promotion of Pyridium(R) Plus in March 1999 and benefited
from the loading of the product into the channels of distribution.
Revenue from marketing alliances totaled $7.2 million for the first quarter and
included royalties earned: (1) under the Schering-Plough Agreement related to
the promotion of K-Dur(R), NitroDur(R) and Lotrisone(R), (2) under the
Company's distribution arrangement for IS5MN with Apothecon, a Bristol-Myers
Squibb company, (3) under an agreement with Barr Laboratories for sales of
generic minocycline, and (4) from the agreement to license marketing rights to
an extended-release nifedipine product to Elan for $3.0 million. No revenue from
marketing alliances was recorded in the first quarter of 1998.
The Company continues to decrease its focus on its non-differentiated generic
products in favor of its portfolio of higher-margin branded products. Sales of
generic products during the quarter declined $5.0 million to $5.6 million.
Gross profit on product sales increased $1.9 million to $5.4 million in the
first quarter of 1999 from $3.5 million in the prior year. The increase in gross
profit dollars was entirely attributable to an improvement in gross profit
margin. Total product sales in the first quarter of 1999 were $13.9 million,
essentially equal to product sales in the first quarter of 1998. The gross
margin on product sales increased to 39.1% in the quarter as compared with 25.1%
in the first quarter of 1998. The increase in gross profit margin reflects a
more favorable mix of products sold with higher-margin branded products making
up 60.0% of total product sales in the first quarter of 1999 as compared with
24.0% of product sales for the first quarter of 1998.
Selling, general and administrative expenses for the quarter rose $3.4 million
compared with the same quarter in the prior year, an increase of 38.8%. This
increase was primarily due to the expansion of the Company's sales force and the
addition of general and administrative staff to support the Company's broader
scope of activities. The sales force operated at an average strength of 259
during the first quarter of 1999, up from 126 for the same quarter in the prior
year.
Research and development costs for the quarter of $0.8 million were consistent
with the first quarter 1998 reflecting the Company's continuing focus on
development projects with near-term revenue potential and relatively low funding
requirements. These projects include the development of line extensions for both
the Company's own branded products and for the oral contraceptive Ovcon(R) 35
under a license agreement with Bristol-Myers Squibb.
Interest income declined slightly to $0.5 million from $0.7 million due to the
decrease in cash on hand. Interest expense increased slightly from the first
quarter 1998 to $0.8 million from $0.6 million reflecting an increase in the
interest rate associated with the Company's outstanding senior subordinated
notes.
The net result of the factors outlined above was that the net loss for the
quarter decreased to $2.0 million as compared to a net loss of $7.4 million for
the first quarter of 1998. The increased
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contribution from sales of the Company's own branded products, combined with the
addition of substantial revenue from various marketing alliances, more than
offset the increased costs of the Company's expanded sales force and
administrative organization. The loss per ordinary share for the quarter
decreased to ($0.16) from ($0.60) on an equal number of shares.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Following is a discussion of some of the risks and historical facts which should
be considered when evaluating the current and future results of the Company.
This discussion is not intended to include all risks and historical facts that
could produce adverse results.
The Company has a history of operating losses. Operating losses have been
posted since the formation of the Company in 1992. As of March 31, 1999, the
Company's accumulated deficit was $105.6 million. The Company has invested in
the corporate infrastructure and sales organization needed to support the
marketing and product development activities that management believes necessary
for the success of the Company. However, there can be no assurance that these
efforts will be sufficient and, thus, future profitability is uncertain.
The future capital needs and additional funding activities of the Company are
uncertain. Warner Chilcott has experienced negative cash flows from operations
and has funded its activities to date from the issuance of equity and debt
securities. The Company has expended, and will continue to be required to
expend, substantial funds for promotional activities for products, to continue
research and development of product candidates, to in-license and acquire
additional products and to undertake sales and marketing efforts of its current
or future products. Although the Company may seek additional funding through the
public or private capital markets, there can be no assurance that any such
funding will be available to the Company.
Intense competition exists within the pharmaceutical industry. Many companies,
some with greater financial, marketing and development capabilities than the
Company, are engaged in developing, marketing and selling products that compete
with the products offered by Warner Chilcott. Other products now in use or under
development by others may be more effective or have fewer side effects than the
Company's current or future products. The industry is characterized by rapid
technological change, and competitors may develop their products more rapidly
than the Company. Competitors may also be able to complete the regulatory
process sooner and, therefore, may begin to market their products in advance of
the Company's products. There can be no assurance that developments by others
will not render any product or technology the Company produces to be obsolete or
otherwise noncompetitive.
The clinical development, manufacture, marketing and sale of pharmaceutical
products is subject to extensive federal, state and local regulation in the
United States and similar regulation outside the United States. FDA approval is
required before most drug products can be marketed. FDA filings can be time
consuming and expensive without assurance that the results will be adequate to
justify approval. There can be substantial delays in the process, including the
need to provide additional data. There can be no assurance that approvals for
filings already made by the Company, or to be made in the future, can be
obtained in a timely manner, if at all, or that the regulatory requirements for
any such proposed products can be met. In addition, new regulations may
adversely affect the Company's operations or competitive position in the future.
The distribution network for pharmaceutical products has in recent years been
subject to increasing consolidation. As a result, a few large wholesale
distributors control a significant share of the market. In addition, the number
of independent drug stores and small chains has
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decreased as retail pharmacy consolidation has occurred. Continued consolidation
of either wholesale distributors or retail pharmacies may adversely affect the
Company's operations.
The Company depends on third parties for the manufacture of its current and
future products. Currently, the Company does not possess the facilities or
resources needed for these activities. The Company's strategy for development,
commercialization and manufacturing of certain of its products entails entering
into various arrangements with corporate collaborators, licensors and others. If
any of the Company's corporate collaborators were unable to satisfy their
contractual obligations to the Company, there can be no assurance that the
Company would be able to negotiate similar arrangements with other third
parties.
Many of the principal components of the Company's products are available only
from single source suppliers. There can be no assurance that the Company will
establish or, if established, maintain good relationships with such suppliers or
that such suppliers will continue to exist or be able to supply ingredients in
conformity with regulatory requirements.
The Company is engaged in the manufacture and marketing of products that may
give rise to the development of certain legal actions and proceedings. The
Company carries product liability insurance and umbrella liability insurance.
There can be no assurance that this coverage is adequate to cover potential
liability claims or that additional insurance coverage will be available in the
future if the Company manufactures and markets new products. The Company's
financial condition and results of operations could be materially adversely
affected by the unfavorable outcome of legal actions and proceedings.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company ended the quarter with $43.0 million of cash and cash equivalents on
hand as compared with $43.1 million at year-end 1998. The cash provided by
operations totaled $2.1 million in the quarter, a significant improvement from a
use of $4.5 million in the first quarter of 1998. Amounts outstanding under the
Company's working capital credit facility decreased to $18.2 million from $20.4
million at year-end 1998. Generally, the quarter's net loss and decrease in bank
debt were funded by decreased investment in working capital. Accounts receivable
declined $7.2 million from year-end 1998 primarily due to the timing of receipts
related to the Schering-Plough Agreement. Investment in inventories decreased by
$2.1 million due to the continued winding down of the Company's generic
business.
On March 30, 1998, the Company entered into a $30 million working capital credit
facility with a syndicate of banks led by PNC Business Credit to fund a portion
of its investment in inventories and accounts receivable. Credit availability
under the PNC facility is based on the balances of certain inventory, accounts
receivable and other assets of Warner Chilcott, Inc., the Company's wholly-owned
United States operating subsidiary.
The Company posted a loss for the three months ended March 31, 1999 and losses
may continue throughout 1999 and beyond. In addition, the Company may invest in
additional working capital or make capital expenditures to support its various
business activities. Management believes the combination of the Company's cash
balances ($43.0 million at March 31, 1999) and availability under its working
capital credit facility provide Warner Chilcott with access to sufficient
capital to meet its requirements for at least the next two years. There can be
no assurance, however, that such funds will be sufficient. Beyond such period,
and in the absence of the Company generating cash from operations, the Company
would need to raise additional funds. The Company expects that it would seek
additional funding through public or private equity or debt financings or
through collaborations. To the extent the Company raises additional capital by
issuing equity
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securities, ownership dilution to existing shareholders will result and future
investors may be granted rights superior to those of existing shareholders.
There can be no assurance that additional funding will be available on
acceptable terms, or at all.
INFLATION
- ----------
Inflation had no material impact on Warner Chilcott's operations during the
three months ended March 31, 1999.
YEAR 2000
- ---------
During 1997 the Company initiated a plan to identify, assess and remediate "Year
2000" issues. This plan consists of three phases as follows: Phase I -
identification of all internal business critical systems and applications, key
vendors, and major customers. Although completed in June 1998, Phase I includes
the ongoing assessment of new vendors and customers as they become associated
with the Company's business activities. Phase II - assessment of Year 2000
compliance for all systems and activities identified in Phase I. Phase II was
completed by December 31, 1998. Phase III - remediation and/or development of
contingency plans for non-compliant systems and activities. While contingency
plans have been developed for third party vendors, Phase III will continue to be
addressed through the transition of Year 2000 to ensure a smooth implementation
of contingency plans, if required.
The Company's primary information technology systems are used in the finance,
administration, billing, distribution and selling systems operated in the
Company's U.S. operating subsidiary, Warner Chilcott, Inc. Since the
Acquisition in March 1996, the Company has put into place new systems to replace
those systems previously provided by Warner-Lambert Company to the former
Division. As a result, the Company's computer systems and applications have
been recently developed. Year 2000 upgrades of network software and hardware,
and financial software are complete with the exception of the Company's WAN
Firewall which the Company is currently working on. All internal business
critical systems and applications are Year 2000 compliant. The Company expects
that the WAN Firewall will be Year 2000 compliant by the end of the second
quarter of 1999, and expects the associated costs to be immaterial.
The Company has sent written inquiries to its key vendors and major customers as
to their progress in identifying and addressing Year 2000 compliance issues.
Those vendors and customers who have responded have reported that they expect to
be Year 2000 compliant well before the critical date.
The Company does not expect the costs associated with Year 2000 compliance to be
material. As of March 31, 1999, the Company incurred less than $100,000 in the
above mentioned system and application upgrades. These costs were paid from
available funds. The Company does not expect to incur additional costs of
significance and has not deferred information systems projects in order to
address Year 2000 issues.
The most significant Year 2000 risk faced by the Company is compliance on the
part of third party vendors with whom the Company does business. Warner Chilcott
utilizes third party vendors to perform a variety of functions including, but
not limited to, warehousing, distribution, billing services, product
manufacture, market research and sales force recruitment. Although these vendors
have supplied the Company with written confirmation of their anticipation of
Year 2000 compliance, the Company is developing contingency plans to address
potential problems should their efforts prove unsuccessful.
13
<PAGE>
Based on the Company's assessment efforts to date, the Company believes that
Year 2000 issues will not be disruptive to its operations, nor have a material
adverse effect on its financial condition or results of operations. The
Company's beliefs and expectations, however, are based on certain assumptions
and expectations that ultimately may prove to be inaccurate. There can be no
assurance that the failure to ensure Year 2000 compliance by a third party would
not have a material adverse effect on the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our exposure in market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of U.S. corporate debt,
foreign corporate debt, U.S. and state government debt, foreign
government/agency guaranteed debt, bank deposits and certificates of deposit,
and commercial paper. All such instruments are classified as securities
available for sale. We do not invest in portfolio equity securities or
commodities or use financial derivatives for trading purposes. Our debt
security portfolio represents funds held temporarily pending use in our business
and operations. We manage these funds accordingly. We seek reasonable
assuredness of the safety of principal and market liquidity by investing in
fixed rate income securities while at the same time seeking to achieve a
favorable rate of return. Our market risk exposure consists principally of
exposure to changes in interest rates. Our holdings are also exposed to the
risks of changes in the credit quality of issuers. We invest in the shorter-end
of the maturity spectrum, and at March 31, 1999, 100% of such holdings matured
in one year or less.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business, including product liability claims.
The most material of these proceedings were described in the Company's 1998
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
There have been no significant developments in these proceedings, nor, has the
Company become involved in additional material proceedings.
ITEM 5. OTHER INFORMATION
Pursuant to newly adopted rules of the Securities and Exchange Commission, any
company shareholder who intends to present a proposal at the Company's Annual
General Meeting of shareholders in 2000 without requesting that the Company
include such proposal in the Company's proxy materials should be aware that he
or she must notify the Company not later than January 25, 2000 of his or her
intention to present such proposal. Otherwise, the Company may exercise
discretionary voting with respect to such shareholder proposal pursuant to
authority conferred on the Company by proxies delivered to the Company in
connection with the meeting.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS - THE FOLLOWING EXHIBITS ARE FILED WITH THIS DOCUMENT:
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
B. REPORTS ON FORM 8-K:
No report was filed during the three months ended March 31, 1999.
15
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
WARNER CHILCOTT PUBLIC LIMITED COMPANY
(Registrant)
May 14, 1999 /s/ Paul S. Herendeen
--------------------------------
Paul S. Herendeen
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
May 14, 1999 /s/ David G. Kelly
--------------------------------
David G. Kelly
Group Vice President, Finance
(Principal Accounting Officer)
16
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