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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 JUNE 30, 2000
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)
<TABLE>
<S> <C>
IRELAND N/A
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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; 12,413,683 Ordinary Shares
outstanding at June 30, 2000.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Part I -- Financial Information
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 2000 and December
31, 1999.................................................. 2
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 1999....................... 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999.............................. 4
Notes to the Unaudited Consolidated Financial Statements.... 5-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13-20
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 20
Part II-- Other Information
Item 1. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 21
Signatures............................................................. 22
</TABLE>
1
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 54,189 $ 50,954
Accounts receivable, net............................... 19,123 11,526
Inventories............................................ 4,354 4,025
Prepaid expense and other assets....................... 1,801 864
--------- ---------
Total current assets................................. 79,467 67,369
--------- ---------
Fixed Assets:
Equipment, furniture and fixtures, net................. 1,104 1,177
Intangible assets, net.................................... 233,048 63,865
Other assets.............................................. 7,940 51
--------- ---------
Total assets......................................... $ 321,559 $ 132,462
========= =========
LIABILITIES
Current Liabilities:
Accounts payable....................................... $ 3,036 $ 3,204
Accrued liabilities.................................... 9,258 7,145
Accrued interest....................................... 9,469 293
Due to Elan Corporation, plc and subsidiaries.......... 305 262
--------- ---------
Total current liabilities............................ 22,068 10,904
--------- ---------
Other Liabilities:
Working capital facility............................... 799 12,098
Long-term debt......................................... 196,440 10,476
--------- ---------
Total liabilities.................................... 219,307 33,478
--------- ---------
SHAREHOLDERS' EQUITY
Ordinary Shares, par value $.05 per share; 50,000,000
shares authorized, 12,413,683 shares issued and
outstanding at June 30, 2000, and 12,377,034 issued and
outstanding at December 31, 1999....................... 621 619
Deferred Shares, par value IRL1 per share; 30,000 shares
authorized, 30,000 shares issued and outstanding at
June 30, 2000 and December 31, 1999.................... 45 45
Additional paid-in capital................................ 210,025 209,062
Accumulated deficit....................................... (108,285) (110,279)
Deferred compensation..................................... (154) (463)
--------- ---------
Total shareholders' equity............................. 102,252 98,984
--------- ---------
Total liabilities and shareholders' equity........... $ 321,559 $ 132,462
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Branded product sales................... $ 21,404 $ 7,957 $ 35,572 $ 16,257
Generic product sales................... 2,363 4,271 5,730 9,837
Marketing alliance and other revenue.... 7,817 7,348 16,361 14,530
---------- ---------- ---------- ----------
Total revenues....................... 31,584 19,576 57,663 40,624
---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of goods sold...................... 5,485 7,289 11,612 15,738
Selling, general and administrative..... 13,554 11,594 26,201 23,705
Depreciation and amortization........... 3,517 1,420 5,938 2,832
Research and development................ 750 788 1,219 1,629
Merger-related costs.................... 929 -- 929 --
---------- ---------- ---------- ----------
Total operating expenses............. 24,235 21,091 45,899 43,904
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS ).................. 7,349 (1,515) 11,764 (3,280)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income......................... 734 508 1,299 1,047
Interest expense........................ (6,670) (805) (10,338) (1,576)
---------- ---------- ---------- ----------
Total other income (expense)......... (5,936) (297) (9,039) (529)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE TAXES AND
EXTRAORDINARY ITEM...................... 1,413 (1,812) 2,725 (3,809)
---------- ---------- ---------- ----------
Income taxes.............................. -- -- -- --
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM... 1,413 (1,812) 2,725 (3,809)
---------- ---------- ---------- ----------
Extraordinary item........................ -- -- (731) --
---------- ---------- ---------- ----------
NET INCOME (LOSS)......................... $ 1,413 $ (1,812) $ 1,994 $ (3,809)
========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE:
Basic
Income (loss) before extraordinary
item................................. $ 0.11 $ (0.15) $ 0.22 $ (0.31)
Extraordinary item...................... $ -- $ -- $ (0.06) $ --
Net income (loss)....................... $ 0.11 $ (0.15) $ 0.16 $ (0.31)
========== ========== ========== ==========
Diluted
Income (loss) before extraordinary
item................................. $ 0.11 $ (0.15) $ 0.21 $ (0.31)
Extraordinary item...................... $ -- $ -- $ (0.05) $ --
Net income (loss)....................... $ 0.11 $ (0.15) $ 0.16 $ (0.31)
========== ========== ========== ==========
WEIGHTED AVERAGE ORDINARY SHARES
OUTSTANDING:
Basic................................... 12,402,018 12,366,808 12,392,380 12,366,808
========== ========== ========== ==========
Diluted................................. 12,970,769 12,366,808 12,848,510 12,366,808
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 5
WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
--------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,994 $(3,809)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization.......................... 5,938 2,832
Amortization of discount on senior notes............... 103 --
Deferred financing cost write-off...................... 207 --
Stock compensation expense............................. 960 309
Notes issued in lieu of cash interest payment.......... -- 768
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, prepaid
expense and other assets............................ (8,797) 10,935
(Increase) decrease in inventories................... (329) 4,987
Increase (decrease) in accounts payable, accrued
liabilities and accrued interest.................... 11,121 (7,376)
Increase (decrease) in due to Elan Corporation, plc
and subsidiaries.................................... 43 (7,557)
--------- -------
Net cash provided by operating activities......... 11,240 1,089
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible assets............................. (175,054) --
Purchase of short-term investment......................... -- (4,892)
Purchase of fixed assets.................................. (86) (302)
--------- -------
Net cash used in investing activities.................. (175,140) (5,194)
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Working capital facility (repayment) proceeds, net........ (11,299) 163
Proceeds from issuance of senior notes due 2008........... 196,337 --
Redemption of senior subordinated discount notes due
2001................................................... (10,476) --
Increase in other assets.................................. (7,740) --
Net proceeds from issuance of share capital -- stock
option exercises....................................... 313 52
--------- -------
Net cash provided by financing activities.............. 167,135 215
--------- -------
Net increase (decrease) in cash and cash equivalents........ 3,235 (3,890)
Cash and cash equivalents, beginning of period............ 50,954 43,133
--------- -------
Cash and cash equivalents, end of period.................. $ 54,189 $39,243
========= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 6
WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS)
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")
1999 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.
2. RECENT DEVELOPMENT
On May 4, 2000 the Company entered into an agreement with Galen Holdings,
plc ("Galen") under which the Company would be acquired by Galen. The
acquisition would be effected through a scheme of arrangement under the laws of
the Republic of Ireland. Under the agreement Galen proposes to issue 2.5 new
Galen ordinary shares for each of the Company's ordinary shares. The acquisition
is subject to various conditions, including, among other things, sanction by the
High Court of Ireland, regulatory approval, approval by the Company's and
Galen's shareholders and Galen obtaining a listing of its shares, in American
Depositary Share form, on NASDAQ. During the six months ended June 30, 2000 the
Company has incurred a total of $929 in legal and other fees in connection with
the proposed acquisition. These costs are included under the caption "Operating
Expenses" in the Company's Statement of Operations for the three and six months
ended June 30, 2000.
The proposed transaction with Galen would constitute a change in control
under the 12 5/8 senior note indenture. Accordingly, holders of the $200,000
face amount of senior notes would have the right to require that Warner
Chilcott, Inc. ("WCI"), the Company's wholly-owned subsidiary, repurchase the
senior notes at a purchase price equal to 101% of the principal amount (see note
4). While this obligation will not be triggered until the consummation of the
transaction, WCI will potentially be required to repurchase the senior notes for
an aggregate cash consideration of $202,000. Under the transaction agreement,
Galen is required to ensure that WCI has sufficient financial resources with
which to repurchase the senior notes in the event the senior note holders
require WCI to repurchase the senior notes. Galen has obtained commitments from
certain financial institutions to provide additional debt financing to Galen, if
required.
5
<PAGE> 7
WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
3. 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.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Raw materials............................................... $ 17 $ 17
Finishing supplies.......................................... 12 3
Work in process............................................. -- 957
Finished goods.............................................. 4,852 3,936
------ ------
4,881 4,913
Less: Reserves for obsolescence............................. 527 888
------ ------
Inventories............................................... $4,354 $4,025
====== ======
</TABLE>
4. DEBT
Issuance of Senior Notes Due 2008
On February 15, 2000 Warner Chilcott, Inc., the Company's wholly-owned U.S.
operating subsidiary ("WCI"), issued $200,000 of 12 5/8% senior notes due 2008
at a discount of $3,663 to yield 13% (the "Notes"). Interest payments on the
Notes are due semi-annually in arrears on each February 15th and August 15th
beginning August 15, 2000. Proceeds from the issuance of the Notes, net of the
discount and estimated transaction expenses, were approximately $188,300, and
were utilized to fund the acquisition of three branded pharmaceutical products
from Bristol-Myers Squibb Company (see note 6). The Notes are included in the
Company's Balance Sheet net of the discount. The discount and transaction fees
are being amortized to interest expense over the eight-year term of the Notes.
The Notes are unconditionally guaranteed by Warner Chilcott, plc, WCI's parent
company.
On or after February 15, 2004 the Notes are redeemable at the option of
WCI, in whole or part, prior to maturity at redemption prices that decrease
annually and range from 106.3125% to 100% of the principal amount of the Notes
plus accrued interest. In addition, before February 15, 2003 up to 35% of the
aggregate principal amount of the Notes are redeemable at the option of WCI from
the proceeds of one or more public equity offerings of the Company at a
redemption price of 112.625% plus accrued interest. If the Company were to
undergo a change of control, each Note holder would have the right to require
that WCI repurchase the Notes at a purchase price equal to 101% of the principal
amount plus accrued interest. The Note indenture limits the Company's ability to
incur or guarantee additional debt, as well as to pay dividends or distributions
on, or redeem or repurchase, capital stock.
Redemption of Senior Subordinated Discount Notes Due 2001
On February 14, 2000 the Company prepaid all $10,476 of the senior
subordinated discount notes outstanding at a redemption price equal to 105% of
the principal amount outstanding. The redemption premium of $524 and the
write-off of the deferred financing costs of $93 associated with theses notes
are included in the extraordinary item in the Company's Statement of Operations
for the six months ended June 30, 2000.
6
<PAGE> 8
WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
Amendment to Working Capital Credit Facility
On February 18, 2000 WCI prepaid all amounts outstanding under its senior
secured working capital credit facility. On February 28, 2000 WCI amended its
credit facility to reduce the maximum amount available to $10,000 from $30,000
and to extend the expiration date to February 28, 2002. Warner Chilcott, plc
unconditionally guaranteed WCI's obligation under the amended credit facility.
Other terms of the amended credit facility, provided by PNC Business Credit, are
substantially the same as the previous credit facility. The write-off of the
deferred financing costs of $114 associated with the previous credit facility is
included in the extraordinary item in the Company's Statement of Operations for
the six months ended June 30, 2000.
5. INCENTIVE SHARE OPTION SCHEME
In April 1997 the Company adopted an Incentive Share Option Scheme for
officers, directors and employees that provides for stock options. In June 1999
the Scheme was amended to provide for grants to consultants and members of the
Company's medical advisory board. The option exercise price is the fair market
value at the date of grant. Options generally vest over four years and expire on
the earlier of ten years from the date of grant or after a specified period
following the participant's separation from the Company. In May 2000 the Scheme
was amended to increase the number of authorized shares available for awards
from 1,500,000 to a total of 3,000,000 shares.
6. PRODUCT ACQUISITIONS
On February 15, 2000 the Company completed the acquisition of three branded
pharmaceutical products from Bristol-Myers Squibb Company ("BMS") for a purchase
price of $175,054. The products acquired were Estrace(R) cream, Ovcon(R) 35 and
Ovcon(R) 50. In connection with the acquisition, the Company entered into
transitional support and supply agreements with BMS under which BMS will supply
the Company with its requirements for Estrace(R) cream, Ovcon(R) 35 and Ovcon(R)
50 for a period of up to 10 years. The Company acquired all of the intangible
assets associated with the three products including the trademarks, regulatory
files, manufacturing know-how and other intellectual property. The acquisition
of the products is being accounted for as a purchase. Under purchase accounting,
the purchase price is allocated to the tangible and intangible assets acquired
based upon their respective fair values as of the purchase date in accordance
with Accounting Principles Board Opinion No. 16. The allocation of the purchase
price for the branded pharmaceutical products from BMS resulted in an allocation
of $168,000 to the products and $7,054 to goodwill, as there were no tangible
assets acquired. No value was assigned to the supply agreements for the acquired
products as the product purchase prices under the agreements approximate the
prices the Company would expect to pay to third party contract manufacturers.
The acquired intangible assets are being amortized over 20 years, their
estimated useful life.
The following unaudited pro forma information has been prepared as if the
February 2000 acquisition of the products, the issuance of the senior notes due
2008, the early redemption of senior subordinated discount notes due 2001 and
the prepayment of amounts outstanding under the working capital credit facility
(see note 4) had occurred on January 1, 1999. The unaudited pro forma
information does not purport to represent
7
<PAGE> 9
WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
the Company's consolidated results of operations that would have been achieved
had the transactions to which pro forma effect is given been consummated as of
the date or period indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
2000 1999
-------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Revenues.......................................... $57,663 $57,247 $40,624 $61,092
Income (Loss) before extraordinary item........... $ 2,725 $(1,838) $(3,809) $(1,849)
Earnings (Loss) per share -- before extraordinary
item -- Basic................................... $ 0.22 $ (0.15) $ (0.31) $ (0.15)
Earnings (Loss) per share -- before extraordinary
item -- Diluted................................. $ 0.21 $ (0.14) $ (0.31) $ (0.15)
</TABLE>
7. SCHERING-PLOUGH AGREEMENT
During the six months ended June 30, 2000 and 1999 the Company derived 14%
and 17%, respectively, of its total revenue from the promotion of certain
products on behalf of Schering-Plough Corporation. The Company's sales force
promotes these Schering-Plough products to a targeted physician population and
in return receives a fixed royalty plus incentive amounts based on market
performance of the products. Revenue from this agreement is included in the
Statement of Operations under the caption "Marketing alliance and other
revenue." On July 19, 2000 the Company announced that this agreement will
terminate on September 30, 2000. The Company intends to use the sales force and
other capacity currently dedicated to this agreement to pursue other revenue
generating activities, including new co-promotion agreements and/or the
acquisition of additional branded pharmaceutical products.
8. ELAN AGREEMENT
In March 1999 the Company reached a binding agreement with Elan
Corporation, plc ("Elan") under which Elan agreed to acquire the Company's
marketing rights to an extended-release nifedipine product. Under terms of the
agreement, as of March 31, 1999 Elan was obligated to make a non-refundable
payment, which was received, of $3,000 to the Company and such amount was
recorded as revenue in the first quarter of 1999. In June 1999 the Company
executed the definitive agreement licensing the extended-release nifedipine
product to Elan and received an additional $4,000 that was recorded as revenue
in the second quarter of 1999. Under the agreement, additional license fees may
be earned by the Company upon the completion of certain milestones including FDA
approval of the ANDA for the product. The Company is also entitled to receive
royalties based upon U.S. sales of the product. Other than the $7,000 described
above, the Company earned no additional fees or royalties under this agreement
during the year ended December 31, 1999. In March 2000 the product received FDA
approval and was launched in the U.S. The approval triggered a series of
milestone payments and royalties that totaled $1,700 for the second quarter of
2000 and $4,300 for the six months ended June 30, 2000. All amounts earned from
this agreement are included under the caption "Marketing alliance and other
revenue."
9. SALE OF VECTRIN(R)
During September 1999 the Company completed the sale of its Vectrin(R)
product line including certain inventory, samples and the related FDA approval,
and received $11,000 in cash at closing. The Company reported a pre-tax gain of
$2,744 from the sale. As part of the sale and purchase agreement, the Company is
also entitled to receive royalties and milestone payments based on certain
future events. The Company earned milestone and royalty payments totaling $1,501
for the second quarter 2000 and $3,545 for the six months
8
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
ended June 30, 2000. Both the milestone and royalty revenues are included in the
Statement of Operations under the caption "Marketing alliance and other
revenue."
10. NET INCOME (LOSS) PER ORDINARY SHARE
Basic net income (loss) per ordinary share has been computed by dividing
net income (loss) 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 that would result from the conversion of such potential ordinary
shares.
The amount of dilution attributable to share options and warrants issued by
the Company is computed under the treasury stock method and depends on the
average market price of the Company's ordinary shares for the period. For the
three and six months ended June 30, 2000 an additional 568,752 and 456,130
shares, respectively, were added to the weighted average number of ordinary
shares outstanding in computing diluted earnings per share. Net income used for
computing diluted earnings per share was the same as that used for computing
basic earnings per share for the three and six months ended June 30, 2000. Net
loss and weighted average shares outstanding used for computing basic and
diluted loss per share for the three and six months ended June 30, 1999 were the
same. Stock options and warrants were not included in the diluted calculation
since the inclusion of such shares would be antidilutive.
11. 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 income is comprised solely of net
income.
12. 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, 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.
13. 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. The Company'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 a liability for
Federal or State income taxes in the six months ended June 30, 2000 as a result
of the anticipated utilization of these net operating loss carryforwards.
9
<PAGE> 11
WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
14. CONSOLIDATING SCHEDULE
Following are consolidating schedules reflecting Balance Sheet and
Statement of Operations information for the Company as of June 30, 2000, and for
the three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
WARNER WARNER
CHILCOTT CHILCOTT
WARNER (BERMUDA), WARNER LABORATORIES ELIMINATION
CHILCOTT, PLC LTD. CHILCOTT, INC. IRELAND LTD. ENTRIES CONSOLIDATED
------------- ---------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, 2000
BALANCE SHEET INFORMATION:
ASSETS
Cash and cash
equivalents............ $ 25 $ 7,640 $ 46,522 $ 2 $ -- $ 54,189
Accounts receivable....... -- -- 18,148 975 -- 19,123
Inventories............... -- -- 4,354 -- -- 4,354
Other assets.............. 26 -- 1,775 -- -- 1,801
-------- -------- -------- ------- --------- --------
Total current assets... 51 7,640 70,799 977 -- 79,467
-------- -------- -------- ------- --------- --------
Long-term assets.......... -- -- 238,448 3,644 -- 242,092
Investment in
subsidiaries........... 185,594 -- -- -- (185,594) --
-------- -------- -------- ------- --------- --------
Total assets........... $185,645 $ 7,640 $309,247 $ 4,621 $(185,594) $321,559
======== ======== ======== ======= ========= ========
LIABILITIES AND EQUITY
Current liabilities....... $ 763 $ -- $ 20,985 $ 320 $ -- $ 22,068
Inter-company accounts.... 20,446 (14,205) (4,975) (1,266) -- --
Working capital
facility............... -- -- 799 -- -- 799
Long-term debt............ -- -- 196,440 -- -- 196,440
Shareholders' equity...... 164,436 21,845 95,998 5,567 (185,594) 102,252
-------- -------- -------- ------- --------- --------
Total liabilities and
shareholders'
equity............... $185,645 $ 7,640 $309,247 $ 4,621 $(185,594) $321,559
======== ======== ======== ======= ========= ========
THREE MONTHS ENDED JUNE 30,
2000
STATEMENT OF OPERATIONS
INFORMATION:
REVENUES
Product sales............. $ -- $ -- $ 23,767 $ -- $ -- $ 23,767
Marketing alliance and
other revenue.......... -- -- 6,171 1,700 (54) 7,817
-------- -------- -------- ------- --------- --------
Total revenues......... -- -- 29,938 1,700 (54) 31,584
-------- -------- -------- ------- --------- --------
OPERATING EXPENSES
Cost of goods sold........ -- -- 5,485 -- -- 5,485
Selling, general &
administration......... 748 -- 12,769 37 -- 13,554
</TABLE>
10
<PAGE> 12
WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
WARNER WARNER
CHILCOTT CHILCOTT
WARNER (BERMUDA), WARNER LABORATORIES ELIMINATION
CHILCOTT, PLC LTD. CHILCOTT, INC. IRELAND LTD. ENTRIES CONSOLIDATED
------------- ---------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Depreciation and
amortization........... -- -- 3,439 78 -- 3,517
Research and
development............ -- -- 22 782 (54) 750
Merger-related costs...... 929 -- -- -- -- 929
-------- -------- -------- ------- --------- --------
Total operating
expenses............. 1,677 -- 21,715 897 (54) 24,235
-------- -------- -------- ------- --------- --------
Interest income (expense),
net.................... -- 103 (6,039) -- -- (5,936)
Income taxes.............. -- -- -- -- -- --
-------- -------- -------- ------- --------- --------
NET INCOME (LOSS)...... $ (1,677) $ 103 $ 2,184 $ 803 $ -- $ 1,413
======== ======== ======== ======= ========= ========
SIX MONTHS ENDED JUNE 30,
2000
STATEMENT OF OPERATIONS
INFORMATION:
REVENUES
Product sales.......... $ -- $ -- $ 41,302 $ -- $ -- $ 41,302
Marketing alliance and
other revenue........ -- -- 12,146 4,300 (85) 16,361
-------- -------- -------- ------- --------- --------
Total revenues......... -- -- 53,448 4,300 (85) 57,663
-------- -------- -------- ------- --------- --------
OPERATING EXPENSES
Cost of goods sold........ -- -- 11,612 -- -- 11,612
Selling, general &
administration......... 1,247 6 24,874 74 -- 26,201
Depreciation and
amortization........... -- -- 5,782 156 -- 5,938
Research and
development............ -- -- 46 1,258 (85) 1,219
Merger-related costs...... 929 -- -- -- -- 929
-------- -------- -------- ------- --------- --------
Total operating
expenses............. 2,176 6 42,314 1,488 (85) 45,899
-------- -------- -------- ------- --------- --------
Interest income (expense),
net.................... -- 337 (9,376) -- -- (9,039)
Income taxes.............. -- -- -- -- -- --
Extraordinary item........ -- -- (731) -- -- (731)
-------- -------- -------- ------- --------- --------
NET INCOME (LOSS)...... $ (2,176) $ 331 $ 1,027 $ 2,812 $ -- $ 1,994
======== ======== ======== ======= ========= ========
THREE MONTHS ENDED JUNE 30,
1999
STATEMENT OF OPERATIONS
INFORMATION:
REVENUES
Product sales.......... $ -- $ -- $ 12,228 $ -- $ -- $ 12,228
Marketing alliance and
other revenue........ -- -- 3,672 3,723 (47) 7,348
-------- -------- -------- ------- --------- --------
Total revenues......... -- -- 15,900 3,723 (47) 19,576
-------- -------- -------- ------- --------- --------
</TABLE>
11
<PAGE> 13
WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
WARNER WARNER
CHILCOTT CHILCOTT
WARNER (BERMUDA), WARNER LABORATORIES ELIMINATION
CHILCOTT, PLC LTD. CHILCOTT, INC. IRELAND LTD. ENTRIES CONSOLIDATED
------------- ---------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Cost of goods sold........ -- -- 7,289 -- -- 7,289
Selling, general &
administration......... 287 -- 11,381 (74) -- 11,594
Depreciation and
amortization........... -- -- 1,342 78 -- 1,420
Research and
development............ -- -- 105 730 (47) 788
-------- -------- -------- ------- --------- --------
Total operating
expenses............. 287 -- 20,117 734 (47) 21,091
-------- -------- -------- ------- --------- --------
Interest income (expense),
net.................... -- 327 (624) -- -- (297)
Income taxes.............. -- -- -- -- -- --
-------- -------- -------- ------- --------- --------
NET INCOME (LOSS)...... $ (287) $ 327 $ (4,841) $ 2,989 $ -- $ (1,812)
======== ======== ======== ======= ========= ========
SIX MONTHS ENDED JUNE 30,
1999
STATEMENT OF OPERATIONS
INFORMATION:
REVENUES
Product sales.......... $ -- $ -- $ 26,094 $ -- $ -- $ 26,094
Marketing alliance and
other revenue........ -- -- 7,525 7,102 (97) 14,530
-------- -------- -------- ------- --------- --------
Total revenues......... -- -- 33,619 7,102 (97) 40,624
-------- -------- -------- ------- --------- --------
OPERATING EXPENSES
Cost of goods sold........ -- -- 15,738 -- -- 15,738
Selling, general &
administration......... 557 6 22,868 274 -- 23,705
Depreciation and
amortization........... -- -- 2,676 156 -- 2,832
Research and
development............ -- -- 236 1,490 (97) 1,629
-------- -------- -------- ------- --------- --------
Total operating
expenses............. 557 6 41,518 1,920 (97) 43,904
-------- -------- -------- ------- --------- --------
Interest income (expense),
net.................... -- 676 (1,205) -- -- (529)
Income taxes.............. -- -- -- -- -- --
-------- -------- -------- ------- --------- --------
NET INCOME (LOSS)...... $ (557) $ 670 $ (9,104) $ 5,182 $ -- $ (3,809)
======== ======== ======== ======= ========= ========
</TABLE>
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies.
These forward-looking statements are identified by their use of terms and
phrases, such as "anticipate", "believe", "could", "estimate", "expect",
"intend", "may", "plan", "predict", "project", "will", and similar terms and
phrases, including references to assumptions. However, these words are not the
exclusive means of identifying such statements. These statements are subject to
significant risks and uncertainties, including those identified in the section
of this Form 10-Q entitled "Risk Factors" and in our 1999 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. We do not undertake to update our forward-looking statements to
reflect future events or circumstances.
The following discussion should be read in conjunction with the
consolidated unaudited financial statements and notes thereto, appearing in Item
1 of this Form 10-Q.
OVERVIEW
We develop and market branded prescription pharmaceutical products in the
United States. Our primary area of focus is the large and growing women's health
and urology therapeutic categories. We also participate in the cardiology and
dermatology categories. Through our national sales force of over 260
representatives, we market branded pharmaceutical products directly to physician
specialists across the United States, including obstetrician/gynecologists,
urologists, cardiologists, dermatologists and high-prescribing general/family
practitioners. We have an experienced management team with significant
pharmaceutical industry expertise, specifically in the marketing of prescription
pharmaceutical brands.
An important part of our strategy is to acquire established branded
pharmaceutical products and to increase their sales through enhanced promotion
targeted to high-prescribing physicians. We also internally develop branded
products as well as product line extensions for our existing products, such as
new formulations, dosages or new indications. Line extensions are particularly
valuable because they may enable us to extend the growth potential of our
brands.
We currently market 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; NataChew(TM), a prescription
strength chewable prenatal vitamin; Estrace(R), a hormone replacement vaginal
cream; Ovcon(R) 35 and Ovcon(R) 50, two oral contraceptives; Pyridium Plus(R),
an orally active urinary tract analgesic antispasmodic agent used for irritative
bladder conditions; Doryx(R), a broad spectrum antibiotic; LoCholest(R), a lipid
regulator for the reduction of LDL cholesterol levels; K-Dur(R), a
sustained-release potassium supplement; Nitro-Dur(R), a nitroglycerin patch for
the treatment of angina; and Lotrisone(R), a topical combination
antifungal/corticosteroid. NataFort(R), NataChew(TM), Estrace(R), Ovcon(R) 35,
Ovcon(R) 50, Pyridium Plus(R), Doryx(R) and LoCholest(R) are products owned by
us; K-Dur(R), Nitro-Dur(R), and Lotrisone(R) are products owned by
Schering-Plough Corporation and promoted by us under an agreement with Schering-
Plough that will terminate on September 30, 2000.
As a result of our efforts to expand our branded product sales, gross
margins improved from 40.4% for the three months ended June 30, 1999 to 76.9%
for the current quarter. Branded products generally generate significantly
higher gross margins than generic products.
HISTORY
We are an Irish public limited company founded in 1992 as Nale Laboratories
Limited. In March 1996 Nale acquired certain assets and assumed certain
liabilities of Warner Chilcott Laboratories, a division of the Warner-Lambert
Company. Following this transaction, Nale changed its name to Warner Chilcott
Public
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<PAGE> 15
Limited Company and the assets and liabilities acquired from Warner-Lambert are
now organized in the United States in our wholly-owned subsidiary Warner
Chilcott, Inc.
As part of the acquisition of Warner Chilcott Laboratories, we acquired a
portfolio of seventy generic pharmaceutical products. In 1997 we launched our
branded product initiative and switched our primary focus to the development,
acquisition and in-licensing of branded pharmaceutical products, and began to
reduce our generic pharmaceutical business. Today branded products dominate our
activities. Of the original seventy generic products we acquired in the Warner
Chilcott Laboratories transaction, we currently distribute less than ten.
Our revenues are primarily generated in the United States and the U.S.
dollar is our functional currency. Accordingly, our 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, we will be subject to taxation on our
earnings in the jurisdictions in which we operate. At present, such
jurisdictions include Ireland and the United States.
RECENT DEVELOPMENTS
On May 4, 2000 we entered into an agreement with Galen Holdings, plc under
which we would be acquired by Galen Holdings, plc. The acquisition would be
effected through a scheme of arrangement under the laws of the Republic of
Ireland. Under the agreement Galen Holdings, plc proposes to issue 2.5 new Galen
ordinary shares for each of our ordinary shares. The acquisition is subject to
various conditions, including, among other things, sanction by the High Court of
Ireland, regulatory approval, approval by our and Galen's shareholders and Galen
obtaining a listing of its shares, in American Depositary Share form, on NASDAQ.
On July 19, 2000 we announced that our promotion agreement with
Schering-Plough Corporation will terminate on September 30, 2000. Revenue earned
by us under the agreement with Schering-Plough accounted for 12% and 14% of
total revenues for the three and six months ended June 30, 2000, respectively.
Our costs of generating this revenue were the costs of allocating significant
portions of the capacity of our field sales force, marketing and administrative
departments. We intend to use the capacity that will become available after
September 30, 2000 to pursue other revenue generating activities, including new
promotion agreements and the possible acquisition of additional branded
products.
RESULTS OF OPERATIONS
Three months ended June 30, 2000 and 1999
Our second quarter total revenues of $31.6 million increased $12.0 million,
or 61%, as compared to the prior year period. During both the second quarter of
2000 and 1999 our revenues were generated from three sources: (1) sales of our
branded products, (2) marketing alliances and license agreements, and (3) sales
of generic products. The driving force behind the increase in revenues was
higher sales of branded products, which increased 169% as compared to 1999.
Our branded product sales increased $13.4 million to $21.4 million from
$7.9 million in the second quarter 1999. The three branded women's healthcare
products acquired from Bristol-Myers Squibb Company in February 2000, Estrace(R)
cream, Ovcon(R) 35 and Ovcon(R) 50, were the primary contributors to the
increase. However, all of the brands actively promoted during the second
quarters of both years posted sales increases. Results for the second quarter of
1999 included sales of Vectrin(R) branded minocycline totaling $1.1 million. We
sold Vectrin(R) to Medicis Pharmaceutical Corp. in September 1999. Sales of
generic products of $2.4 million declined $1.9 million, or 45%, from $4.3
million as we continued our planned exit from this low-margin business.
Gross profit on product sales increased $13.3 million to $18.3 million, as
compared with $4.9 million in the second quarter of 1999, driven by the $11.5
million increase in total product sales and a significant improvement in the
average gross profit margin on those sales. Gross margin increased from 40.4% in
the year-ago quarter to 76.9% in the second quarter of 2000 due to the high
margins earned on the three products
14
<PAGE> 16
acquired from Bristol-Myers Squibb Company during the quarter and high-margin
branded products accounting for a greater percentage of total product sales.
Marketing alliance and other revenue totaled $7.8 million in the quarter,
up $0.5 million, or 6%, from $7.3 million in 1999. In the second quarter of
2000, this revenue was generated from four sources: (1) royalties under our
promotion agreement with Schering-Plough Corporation, (2) milestone payments and
royalties under our license agreement with Elan Corporation, plc for an
extended-release nifedipine product, (3) milestone payments and royalties under
our agreement with Medicis Pharmaceutical Corp. relating to a 75mg minocycline
product, and (4) royalties earned as part of the winding-up of a promotion
agreement with Bristol-Myers Squibb Company. Under the agreement with
Schering-Plough, we earn a fixed royalty plus incentive amounts based upon the
market share performance of three branded products: K-Dur(R), Lotrisone(R) and
NitroDur(R). During the second quarter of 2000 we earned incentive amounts on
K-Dur(R) and Lotrisone(R). In March 2000 the extended-release nifedipine product
received FDA approval and was launched in the United States. The approval
triggered a series of milestone payments and the payment of royalties to us
based upon U.S. net sales of the nifedipine product. During the quarter, an
additional milestone was achieved and, together with the royalty on net sales of
the nifedipine product, we earned a total of $1.7 million. Also during the
quarter, certain milestones were achieved related to the 75mg minocycline
product and we continued to earn royalties based upon Medicis' sales of that
product. In the second quarter of 1999, marketing alliance and other revenue was
predominately comprised of royalties earned under our promotion agreement with
Schering-Plough and $4.0 million earned by us under our license agreement with
Elan for the extended-release nifedipine product.
Selling, general and administrative expenses of $13.6 million were 17%
higher than the $11.6 million incurred in the second quarter of 1999. Selling
costs rose $0.6 million mainly the result of increased promotional expenses in
support of our larger portfolio of branded products. Our field sales force was
approximately the same size in the second quarter of 2000 as in the year ago
quarter. Administrative expenses increased $1.4 million compared with the prior
year, with $0.9 million of the increase due to unusually high litigation costs
in the second quarter of 2000 associated with our defense of our actions in
support of one of our brands. An additional $0.4 million of the increase in
administrative costs was due to the addition of several senior management
functions. Expenses associated with our proposed merger with Galen totaled $0.9
million in the quarter and include the costs of our financial, legal and
accounting advisors. Depreciation and amortization of $3.5 million was $2.1
million higher than in the second quarter of 1999 primarily due to the
amortization of the intangible assets associated with the recently acquired
Estrace(R) and Ovcon(R) brands.
Research and development costs of $0.8 million were consistent with the
prior year. We continue to focus on product development projects with near-term
revenue potential and relatively low funding requirements including, for
example, line extensions of our existing branded products.
Interest income of $0.7 million was $0.2 million higher than in the prior
year period due to an increase in funds available for investment. Interest
expense of $6.7 million increased $5.9 million as compared to the prior year
period. This increase was primarily due to the interest expense related to the
issuance in February 2000 of $200 million of 12 5/8% senior subordinated notes
due 2008 offset by the reduction in interest expense from the concurrent
prepayment of substantially all of our other funded debt. Interest expense
related to our working capital credit facility was less than $0.1 million in the
quarter. Following the issuance of the senior notes in February 2000, our
borrowings under our working capital credit facility have been minimal.
For the second quarter of 2000 we posted net income of $1.4 million, or
$0.11 per ordinary share on a diluted basis. This is an improvement of $3.2
million compared to a net loss of $1.8 million, or $0.15 per ordinary share on a
diluted basis, for the same period in 1999. Increased sales of our branded
products, particularly from the acquisition of the three products from
Bristol-Myers Squibb, improved gross profit on product sales and increased
revenues from marketing alliances more than offset the increased costs
associated with the acquired Estrace(R) and Ovcon(R) brands.
15
<PAGE> 17
Six months ended June 30, 2000 and 1999
Total revenue for the six months ended June 30, 2000 increased $17.0
million, or 42%, as compared to the prior year period. During the six-month
periods in both 2000 and 1999 our revenues were generated from three sources:
(1) sales of our branded products, (2) marketing alliances and license
agreements, and (3) sales of generic products. The driving force behind the
increase in revenues in the period was higher sales of branded products, which
increased 119% as compared to the prior year.
Our branded product sales increased $19.3 million to $35.6 million from
$16.3 million in the prior year period. The three branded women's healthcare
products acquired from Bristol-Myers Squibb Company in February 2000, Estrace(R)
cream, Ovcon(R) 35 and Ovcon(R) 50, were the primary contributors to the
increase. However, all of the brands we actively promoted during the six-month
periods of both years posted sales increases. Results for the 1999 period
included sales of Vectrin(R) branded minocycline totaling $2.1 million. We sold
Vectrin(R) to Medicis Pharmaceutical Corp. in September 1999. Sales of generic
products of $5.7 million declined $4.1 million, or 42%, from $9.8 million as we
continued our planned exit from this low-margin business.
Gross profit on product sales increased $19.3 million to $29.7 million, as
compared with $10.4 million in the prior year period, driven by the $15.2
million increase in total product sales and a significant improvement in the
average gross profit margin on those sales. Gross margin increased from 39.7% in
the year-ago period to 71.9% in the six months ended June 30, 2000 due to the
high margins earned on the three products acquired from Bristol-Myers Squibb
Company during the quarter and high-margin branded products accounting for a
greater percentage of total product sales.
Marketing alliance and other revenue totaled $16.4 million in the period,
up $1.8 million, or 13% from $14.5 million in the 1999 period. In the first half
of 2000, this revenue was generated from four sources: (1) royalties under our
promotion agreement with Schering-Plough Corporation, (2) milestone payments and
royalties under our license agreement with Elan Corporation, plc for an
extended-release nifedipine product, (3) milestone and royalties under our
agreement with Medicis Pharmaceutical Corp. relating to a 75mg minocycline
product, and (4) royalties earned as part of the winding-up of a promotion
agreement with Bristol-Myers Squibb Company. Under the agreement with
Schering-Plough, we earn a fixed royalty plus incentive amounts based upon the
market share performance of three branded products: K-Dur(R), Lotrisone(R) and
NitroDur(R). During the first half of 2000 we earned incentive amounts on
K-Dur(R) and Lotrisone(R). In March 2000 the extended-release nifedipine product
received FDA approval and was launched in the United States. The approval
triggered a series of milestone payments and the payment of royalties to us
based upon U.S. net sales of the nifedipine product. During the period we earned
milestones and royalties totaling $4.3 million. Also during the period, certain
milestones were achieved related to the 75mg minocycline product and we
continued to earn royalties based upon Medicis' sales of that product. In the
first half of 1999, marketing alliance and other revenue was predominately
comprised of royalties earned under our promotion agreement with Schering-Plough
and $7.0 million earned by us under our license agreement with Elan for the
extended-release nifedipine product.
Selling, general and administrative expenses of $26.2 million were 11%
higher than the $23.7 million incurred in the first half of 1999. A rise in
selling costs of $1.1 million was mainly the result of increased promotional
expenses in support of our larger portfolio of branded products. Our field sales
force was approximately the same size during the first half of 2000 as in the
first half of 1999. Administrative expenses increased $1.4 million compared with
the prior year, with $0.9 million of the increase due to unusually high
litigation costs incurred during the year 2000 period associated with our
defense of our actions in support of one of our brands. Administrative personnel
costs increased $0.9 million compared with the prior year period due to the
addition of several senior management functions. The increased litigation and
personnel costs were partly offset by decreased office expenses and less use of
outside consultants. Expenses associated with our proposed merger with Galen
totaled $0.9 million in the period and include the costs of our financial, legal
and accounting advisors. Depreciation and amortization of $5.9 million was $3.1
million higher than in the 1999 period primarily due to the amortization of the
intangible assets associated with the acquired Estrace(R) and Ovcon(R) brands.
16
<PAGE> 18
Research and development costs of $1.2 million were $0.4 million less than
in the prior year period. In the first half of 1999 we were actively working on
the 75mg minocycline project and incurred $0.8 million of related costs during
the period. The 75mg minocycline project was completed in the third quarter of
1999 and the FDA approved the product in September 1999. The approval triggered
the start of milestone payments and royalties from Medicis Pharmaceutical Corp.
to us that are included in marketing alliance and other revenue and are
discussed above. We continue to focus on product development projects with
near-term revenue potential and relatively low funding requirements including,
for example, line extensions of our existing branded products.
Interest income for the first half of 2000 of $1.3 million was $0.3 million
higher than in the prior year period as we had more funds available for
investment during the period. Interest expense of $10.3 million increased $8.8
million as compared to the prior year period. This increase was primarily due to
the interest expense related to the issuance in February 2000 of $200 million of
12 5/8% senior subordinated notes due 2008, offset by the reduction in interest
expense from the concurrent prepayment of substantially all of our other funded
debt. Interest expense related to our working capital credit facility was less
than $0.2 million in the period. Following the issuance of the senior notes in
February 2000, our borrowings under our working capital credit facility have
been minimal.
For the first half of 2000 we posted net income of $2.0 million, or $0.16
per ordinary share on a diluted basis. This is an improvement of $5.8 million
compared to a net loss of $3.8 million, or $0.31 per ordinary share on a diluted
basis, for the same period in 1999. Increased sales of our branded products,
particularly from the acquisition of the three products from Bristol-Myers
Squibb, improved gross profit on product sales and increased revenues from
marketing alliances more than offset the increased costs associated with the
acquired Estrace(R) and Ovcon(R) brands.
NET OPERATING LOSS CARRYFORWARDS
We did not record any taxes on income in the three-month or six-month
periods ended June 30, 2000 or 1999. As of December 31, 1999, we had available
net operating loss carryforwards for United States Federal income tax reporting
purposes of approximately $62 million, which begin expiring in 2011. At December
31, 1999 we had net operating loss carryforwards for state income tax reporting
purposes of approximately $40 million which expire at various dates.
LIQUIDITY AND CAPITAL RESOURCES
We became profitable and generated a positive cash flow for the first time
in the first quarter of 2000. We continued to operate at a profit and to
generate cash in the second quarter. Our cash flow (which we define as net
income/loss plus depreciation and amortization) in the six months ended June 30,
2000 was $7.9 million as compared with a cash outflow of $1.0 million for the
same period in 1999. This improvement was the result of our increased sales of
branded products from the acquisition of the Estrace(R) cream and Ovcon(R)
brands, sales growth for our existing products and increased gross profit
margins on product sales. Offsetting some of these revenue gains were increases
in our selling expenses, mainly for promotion of our expanded portfolio of
products, increased administrative expenses as we have continued to build our
management infrastructure, increased legal costs spent in defense of our brands
and increased interest costs associated with the financing of the acquisition of
the Estrace(R) and Ovcon(R) brands.
The most significant event during the six months ended June 30, 2000 was
our acquisition of the Estrace(R) cream and Ovcon(R) brands from Bristol-Myers
Squibb Company for an initial purchase price of $180.0 million. The acquisition
was funded through the issuance by Warner Chilcott, Inc., our wholly-owned U.S.
operating subsidiary, of $200.0 million face amount of 12 5/8% senior notes at a
discount of $3.7 million to yield 13.0%. Interest payments on the senior notes
are due semi-annually in arrears on each February 15th and August 15th beginning
August 15th 2000. Warner Chilcott, plc, the parent company of Warner Chilcott,
Inc., unconditionally guaranteed the senior notes.
Proceeds from the issuance of the senior notes, net of the discount and an
estimated $8.0 million of transaction expenses, were approximately $188.3
million. The net proceeds, together with some of our cash on
17
<PAGE> 19
hand, were used: (i) to acquire the Estrace(R) and Ovcon(R) brands, (ii) to
prepay all $10.5 million of the senior subordinated discount notes due 2001,
plus a prepayment penalty of $0.5 million on those notes and (iii) to repay
amounts outstanding under our working capital facility.
On February 28, 2000 Warner Chilcott, Inc. amended its working capital
facility to reduce the maximum amount available from $30.0 million to $10.0
million. In connection with the amendment of the working capital facility the
parent company, Warner Chilcott, plc, unconditionally guaranteed Warner
Chilcott, Inc.'s obligation under the working capital facility. At June 30 2000,
$0.8 million was outstanding under the working capital facility. We intend to
utilize the working capital facility to provide for short-term liquidity
requirements and expect average borrowings under the facility to be modest.
In March 2000 the purchase price we paid for the Estrace(R) and Ovcon(R)
brands was reduced by $4.9 million from $180.0 million to $175.1 million. Under
the terms of the asset purchase agreement the purchase price was subject to
downward adjustment based on estimates of the amount of inventory of the
acquired brands held by wholesalers and distributors as of January 31, 2000. The
$4.9 million adjustment to the purchase price was recorded in the first quarter
of 2000 and in April 2000 we received payment of that amount from Bristol-Myers
Squibb Company.
The acquisition of the Estrace(R) and Ovcon(R) brands was accounted for as
a purchase and the $175.1 million purchase price was allocated as follows:
$168.0 million to intangible assets identified with the brands and $7.1 million
to goodwill. No hard assets were acquired in the transaction. Both the
intangible assets and goodwill are being amortized over 20 years, their
estimated useful lives. As part of the purchase of the products, Bristol-Myers
Squibb entered into transitional support and supply agreements under which
Bristol-Myers Squibb agreed to supply us with all of our requirements for the
products for up to ten years. No value was assigned to these supply agreements
as the product purchase costs under the agreements approximate the prices we
would expect to pay to third party contract manufacturers.
Our investment in adjusted working capital (current assets other than cash
and equivalents minus current liabilities) decreased from $5.5 million at
December 31, 1999 to $3.2 million at June 30, 2000. Accounts receivable
increased $7.6 million mainly due to the increased level of product sales but
also due to the timing of amounts earned under our license agreements with Elan
and Medicis. Inventories increased a modest $0.3 million which reflects the
offsetting impact of higher inventory requirements to support the acquired
Estrace(R) cream and Ovcon(R) brands and the lesser investment in the inventory
of generic products. Current liabilities increased $11.2 million from December
31, 1999 with $9.5 million of the increase due to the interest accrual for the
12 5/8% senior notes issued in February 2000. The first interest payment on the
notes is due August 15, 2000. Also contributing to the increase in current
liabilities were significant accruals for legal expenses including both
litigation expenses and costs related to the proposed transaction with Galen.
These increases were slightly offset by a $2.3 million decrease in our incentive
plan accrual. We accrue the cost of our incentive plans throughout the year with
the payout made in the first quarter of the following year. Accordingly, the
incentive accrual is near its peak at December 31st each year, at its low point
as of March 31st and increases from that point through the remainder of the
year.
We ended the quarter with $54.2 million of cash and equivalents on hand as
compared with $51.0 million at December 31, 1999. We became profitable and cash
flow positive during the six months ended June 30, 2000 and expect to continue
to be profitable and cash flow positive. We intend to fund our future liquidity
needs through a combination of cash generated from operations, cash balances on
hand and availability under our working capital facility. We believe that these
sources will be sufficient to fund our anticipated working capital needs for the
foreseeable future. However, in the event that we make significant future
acquisitions, we may be required to raise additional funds through the issuance
of additional debt or equity securities.
As a result of the consummation of the proposed merger with Galen, the
holders of the senior notes will have the right to require Warner Chilcott, Inc.
to repurchase the notes at a purchase price of 101% of their face value. There
are $200.0 million in principal amount of senior notes outstanding. While this
obligation will not be triggered until the consummation of the transaction,
Warner Chilcott, Inc. will potentially be required to repurchase the senior
notes for an aggregate cash consideration of $202.0 million. Under the
transaction agreement, Galen is required to ensure that Warner Chilcott, Inc.
has sufficient financial resources with which
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to repurchase the senior notes in the event the senior note holders require
Warner Chilcott, Inc. to repurchase their senior notes. Galen has obtained
commitments from certain financial institutions to provide additional debt
financing to Galen, if required.
INFLATION
Inflation had no material impact on our operations during the three months
ended June 30, 2000.
RISK FACTORS
Following is a discussion of some of the risks and historical facts that
should be considered when evaluating our current and future results. This
discussion is not intended to include all risks and historical facts that could
produce adverse results.
We have a history of operating losses. Prior to the first half of 2000,
operating losses were posted since the formation of the Company in 1992. As of
June 30, 2000 our accumulated deficit was $108.3 million. Our ability to
maintain profitability will depend upon, among other things, the success of our
branded product portfolio, including the Estrace(R) cream and Ovcon(R) brands
acquired in February 2000, and our ability to develop revenue sources to offset
the impact of the termination of the Schering-Plough marketing alliance
effective September 30, 2000. Since July 1998 we have promoted branded products
for Schering-Plough Corporation. Revenue generated under this agreement
represented 14% of our gross revenues for the six months ended June 30, 2000. On
July 19, 2000, we announced our agreement with Schering-Plough to terminate this
alliance. We are actively pursing a number of strategies to generate revenues
through the allocation of sales force and other capacity currently dedicated to
servicing the Schering-Plough agreement, including new co-promotion agreements
and/or the acquisition of additional branded pharmaceutical products. Our
inability to successfully execute these strategies would have a significant
effect on our financial performance.
With the issuance of the $200.0 million face amount of 12 5/8% senior notes
on February 15, 2000 we have a significant amount of indebtedness. Our
substantial indebtedness could limit our ability to raise additional funding
needed to execute our growth strategy. Although we may seek additional funding
through the public or private capital markets, there can be no assurance that
any such funding will be available to us, if needed. Our ability to pay
principal and interest on our indebtedness depends on our financial and
operating performance, each of which is subject to prevailing economic
conditions and financial, business and other factors, some of which are beyond
our control.
Intense competition exists within the pharmaceutical industry. Many
companies, some with greater financial, marketing and development capabilities
than us, are engaged in developing, marketing and selling products that compete
with the products we offer. Other products now in use or under development by
others may be more effective or have fewer side effects than our current or
future products. The industry is characterized by rapid technological change,
and competitors may develop their products more rapidly than us. Competitors may
also be able to complete the regulatory process sooner and, therefore, may begin
to market their products in advance of our products. Product developments by
others may render one or more of our products 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 us, 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
our operations or competitive position in the future.
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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 decreased as retail pharmacy
consolidation has occurred. Continued consolidation of either wholesale
distributors or retail pharmacies may adversely effect our operations.
We depend on third parties for the manufacture of our products, including
the Estrace(R) cream and Ovcon(R) brands acquired in February 2000. Currently we
do not possess the facilities or resources needed for these activities. Our
strategy for development, commercialization and manufacturing of certain of our
products entails entering into various arrangements with corporate
collaborators, licensors and others. If any of our corporate collaborators were
unable to satisfy their contractual obligations to us, there can be no assurance
that we would be able to negotiate similar arrangements with other third
parties.
Many of the principal components of our products are available only from
single source suppliers. There can be no assurance that we 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.
We are engaged in the manufacture and marketing of products that may give
rise to the development of certain legal actions and proceedings. We carry
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 we
manufacture and market new products. Our financial condition and results of
operations could be materially adversely affected by the unfavorable outcome of
legal actions and proceedings.
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 rated fixed 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 June 30, 2000 100% of such holdings matured in one year or less.
We financed the February 2000 acquisition of the Bristol-Myers Squibb
products through the sale of senior notes by our Warner Chilcott, Inc.
subsidiary. On February 15, 2000 Warner Chilcott, Inc. issued $200 million of
12 5/8% senior notes due 2008 at a discount of $3.7 million to yield 13%.
Interest payments on the senior notes are due semi-annually in arrears on each
February 15th and August 15th beginning August 15, 2000.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in litigation relating to claims arising out of our
operations in the normal course of business, including product liability claims.
There have been no significant developments in the proceedings described in our
1999 Annual Report on Form 10-K filed with the Securities and Exchange
Commission, and we have not become involved in any additional material
proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Our Annual General Meeting of Shareholders was held on May 16, 2000 in
Dublin, Ireland.
(b) All of the nominees for director were elected by a vote of shares as
follows. Mr. Andress and Mr. Herendeen were re-elected to the board. Dr. Haney
is replacing Mr. Donald E. Panoz who retired from the board by rotation. There
were no broker non-votes.
<TABLE>
<CAPTION>
NAME FOR AGAINST ABSTAIN
---- --------- ------- -------
<S> <C> <C> <C>
James G. Andress............................... 3,387,847 7,776 0
Paul S. Herendeen.............................. 3,387,847 7,776 0
Arthur F. Haney, M.D........................... 3,387,867 7,756 0
</TABLE>
(c) The following matters were brought to vote:
i. The Financial Statements for the year ended December 31, 1999
together with the reports of the directors and auditors thereon were
presented to the shareholders and were approved with 3,392,923 votes for,
2,700 votes against, no abstentions and no broker non-votes.
ii. The board of directors was authorized to fix the remuneration of
the auditors by a vote of shareholders of 3,387,317 votes for, 8,306 votes
against, no abstentions and no broker non-votes.
iii. The proposal to amend our 1997 Incentive Share Option Scheme, as
amended, to increase the number of authorized shares available for awards
there under by 1,500,000 shares was presented to the shareholders and
approved with 2,178,207 votes for, 1,217,416 votes against, no abstentions
and no broker non-votes.
iv. The ordinary resolution conferring upon the board of directors
the power to allot shares, grant share subscription rights and rights to
convert loans and other obligations into stock was presented to the
shareholders and approved with 3,359,297 votes for, 36,326 votes against,
no abstentions and no broker non-votes.
v. The special resolution to eliminate pre-emptive rights of existing
shareholders for a five-year period was presented to the shareholders and
approved with 3,083,777 votes for, 311,846 votes against, no abstentions
and no broker non-votes.
vi. The authorization to transact such business as may be transacted
at an Annual General Meeting was presented to the shareholders with
2,268,567 votes for, 1,127,056 votes against, no abstentions and no broker
non-votes.
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 our Annual General
Meeting of shareholders in 2001 without requesting that we include such proposal
in our proxy materials should be aware that he or she must notify us no later
than January 25, 2001 of his or her intention to present such proposal.
Otherwise, we may exercise discretionary voting with respect to such shareholder
proposal pursuant to authority conferred on us by proxies delivered to us in
connection with the meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits -- The following exhibit is filed with this document:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
b. Reports on Form 8-K:
On May 15, 2000 we filed a Form 8-K Report dated May 4, 2000, which
announced our intention to become a wholly owned subsidiary of Galen Holdings,
plc.
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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)
<TABLE>
<S> <C>
August 14, 2000 /s/ PAUL S. HERENDEEN
--------------------------------------------------------------
Paul S. Herendeen
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
August 14, 2000 /s/ DAVID G. KELLY
--------------------------------------------------------------
David G. Kelly
Group Vice President, Finance
(Principal Accounting Officer)
</TABLE>
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