FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 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 1-3608
WARNER-LAMBERT COMPANY
(Exact name of registrant as specified in its charter)
Delaware 22-1598912
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Tabor Road, Morris Plains, New Jersey
(Address of principal executive offices)
07950
(Zip Code)
Registrant's telephone number, including area code: (973) 540-2000
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of
the issuer's classes of Common Stock, as of the latest
practicable date.
CLASS Outstanding at October 31, 1999
----- -------------------------------
Common Stock, $1 par value 858,661,329
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WARNER-LAMBERT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
(Dollars in millions)
ASSETS:
Cash and cash equivalents $ 1,012.9 $ 945.8
Short-term investments 587.3 42.2
Receivables 1,778.1 1,681.5
Inventories 1,023.0 992.8
Prepaid expenses and other current assets 648.1 586.6
--------- ---------
Total current assets 5,049.4 4,248.9
Investments and other assets 711.1 718.9
Property, plant and equipment 3,149.5 2,821.9
Intangible assets 1,627.6 1,730.4
--------- ---------
Total assets $10,537.6 $ 9,520.1
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term debt $ 233.1 $ 264.2
Accounts payable, trade 1,718.3 1,518.2
Accrued compensation 259.1 233.3
Other current liabilities 941.6 980.1
Federal, state and foreign income taxes 225.8 248.2
--------- ---------
Total current liabilities 3,377.9 3,244.0
Long-term debt 1,280.8 1,266.7
Deferred income taxes and other
noncurrent liabilities 1,297.2 1,129.1
Shareholders' equity:
Preferred stock - none issued - -
Common stock - 961,981,608 shares issued 962.0 962.0
Capital in excess of par 707.9 520.6
Retained earnings 4,782.6 4,038.5
Accumulated other comprehensive income (622.4) (399.3)
Treasury stock, at cost: 1999 - (106,177,190
shares; 1998 - 112,073,966 shares) (1,248.4) (1,241.5)
--------- ---------
Total shareholders' equity 4,581.7 3,880.3
--------- ---------
Total liabilities and shareholders'
equity $10,537.6 $ 9,520.1
========= =========
See accompanying notes to consolidated financial statements.
WARNER-LAMBERT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in millions, except per share amounts)
NET SALES $3,237.6 $2,694.1 $9,394.3 $7,707.7
COSTS AND EXPENSES:
Cost of goods sold 767.2 703.3 2,242.8 2,063.8
Selling, general and
administrative 1,493.3 1,219.2 4,306.0 3,430.1
Research and development 346.6 256.6 902.4 725.3
Other expense (income), net 43.1 90.5 188.3 186.9
-------- -------- -------- --------
Total costs and expenses 2,650.2 2,269.6 7,639.5 6,406.1
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 587.4 424.5 1,754.8 1,301.6
Provision for income taxes 170.4 122.0 508.9 377.2
-------- -------- -------- --------
NET INCOME $ 417.0 $ 302.5 $1,245.9 $ 924.4
======== ======== ======== ========
NET INCOME PER COMMON SHARE:
Basic $ .49 $ .36 $ 1.46 $ 1.09
Diluted $ .47 $ .34 $ 1.41 $ 1.05
DIVIDENDS PER COMMON SHARE $ .20 $ .16 $ .60 $ .48
See accompanying notes to consolidated financial statements.
WARNER-LAMBERT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------------
1999 1998
---- ----
(Dollars in millions)
OPERATING ACTIVITIES:
Net income $ 1,245.9 $ 924.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 258.3 224.0
Deferred income taxes (6.4) (66.7)
Changes in assets and liabilities, net of
effects from disposition of business:
Receivables (151.7) (225.5)
Inventories (53.2) (207.0)
Accounts payable and
accrued liabilities 326.1 546.9
Other, net 190.2 26.3
--------- ---------
Net cash provided by operating activities 1,809.2 1,222.4
--------- ---------
INVESTING ACTIVITIES:
Purchases of investments (567.3) (93.6)
Proceeds from maturities/sales of investments 55.4 167.8
Capital expenditures (651.9) (458.8)
Proceeds from disposition of business - 125.0
Other, net (78.9) 57.9
--------- ---------
Net cash used by investing activities (1,242.7) (201.7)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from borrowings 501.5 885.2
Principal payments on borrowings (510.8) (1,529.7)
Purchases of treasury stock (40.5) (160.7)
Cash dividends paid (500.1) (393.2)
Proceeds from stock option exercises 108.2 82.5
--------- ---------
Net cash used by financing activities (441.7) (1,115.9)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents (57.7) 10.4
--------- ---------
Net increase (decrease) in cash
and cash equivalents 67.1 (84.8)
Cash and cash equivalents at beginning of year 945.8 786.0
--------- ---------
Cash and cash equivalents at end of period $ 1,012.9 $ 701.2
========= =========
See accompanying notes to consolidated financial statements.
WARNER-LAMBERT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in millions, except per share amounts)
NOTE A: The interim financial statements presented herein should be read
in conjunction with Warner-Lambert Company's 1998 Annual Report
on Form 10-K/A and Agouron Pharmaceuticals, Inc.'s (Agouron) 1998
Annual Report.
NOTE B: The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
NOTE C: In the opinion of management, all adjustments considered
necessary for a fair presentation of the results for the interim
periods have been included in the consolidated financial
statements.
NOTE D: Certain prior year amounts have been reclassified to conform
with the current year presentation.
NOTE E: In May 1999, Warner-Lambert acquired Agouron, an integrated
pharmaceutical company committed to the discovery and
development of innovative therapeutic products for treatment of
cancer, AIDS and other serious diseases. Warner-Lambert
exchanged 28.8 million shares of its common stock for all of the
common stock of Agouron. Each outstanding share of Agouron
common stock was exchanged for .8934 shares of Warner-Lambert
common stock. In addition, Agouron's employee stock options
outstanding were converted at the same rate and resulted in
options to purchase 7.5 million shares of Warner-Lambert common
stock.
The transaction was accounted for as a pooling of interests
under Accounting Principles Board Opinion No. 16 and qualified
as a tax-free exchange. Accordingly, all prior period
consolidated financial statements presented have been restated
to include combined results of operations, financial position
and cash flows of Agouron as though it had always been a part of
Warner-Lambert. Dividends per common share are equal to Warner-
Lambert's historical dividends per common share since Agouron
has never declared or paid cash dividends on its common stock.
Prior to the merger, Agouron's fiscal year ended on June 30. As
a result, Agouron's prior period financial statements have been
restated to conform with Warner-Lambert's December 31 year end.
No adjustments were necessary to conform Agouron's accounting
policies, however, certain reclassifications were made to the
Agouron financial statements to conform to Warner-Lambert's
presentation.
The results of operations for the separate companies and the
combined amounts presented in the consolidated financial
statements for the most recent quarter prior to the merger and
the applicable three and nine-month periods from the prior year
are shown below:
Three Months Ended Three Months Ended Nine Months Ended
March 31, 1999 September 30, 1998 September 30, 1998
------------------ ------------------ ------------------
Net Sales:
Warner-Lambert $2,860.0 $2,560.2 $7,335.8
Agouron 146.0 133.9 371.9
-------- -------- --------
Combined $3,006.0 $2,694.1 $7,707.7
======== ======== ========
Net Income:
Warner-Lambert $ 381.1 $ 295.5 $ 912.9
Agouron .9 7.0 11.5
-------- -------- --------
Combined $ 382.0 $ 302.5 $ 924.4
======== ======== ========
For the nine months ended September 30, 1999, the company recorded a
$32.6 charge to Other expense (income) for costs related to the
transaction, consisting primarily of professional fees.
NOTE F: In the first quarter of 1998, the company sold its Rochester,
Michigan pharmaceutical manufacturing plant as well as certain
minor prescription products for approximately $125.0. The
resulting pretax gain of $66.6 was offset by costs related to
the company's plans to close two of its foreign manufacturing
facilities. The results of these transactions were recorded in
Other expense (income) for the nine months ended September 30, 1998.
NOTE G: Total comprehensive income includes net income and other
comprehensive income which consists primarily of foreign currency
translation adjustments. Total comprehensive income was $425.9 and
$386.2 for the third quarters of 1999 and 1998, respectively.
Total comprehensive income for the nine-month periods ended
September 30, 1999 and 1998 was $1,022.8 and $975.7, respectively.
The (decrease) increase in foreign currency translation adjustments
was $(237.9)and $53.7 for the nine months ended September 30, 1999
and 1998, respectively.
NOTE H: The Net income per common share computations were as follows:
(Shares in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Basic:
Net income $417.0 $302.5 $1,245.9 $924.4
Average common shares
outstanding 855,124 848,448 853,008 847,061
------- ------- ------- -------
$.49 $.36 $1.46 $1.09
======= ======= ======= =======
Diluted:
Net income $417.0 $302.5 $1,245.9 $924.5
Average common shares
outstanding 855,124 848,448 853,008 847,061
Impact of potential future
stock option exercises,
net of shares repurchased 28,347 32,582 29,924 30,773
------- ------- ------- -------
Average common shares
outstanding - assuming
dilution 883,471 881,030 882,932 877,834
------- ------- ------- -------
$.47 $.34 $1.41 $1.05
======= ======= ======= =======
NOTE I: Major classes of inventories were as follows:
September 30, 1999 December 31, 1998
------------------ -----------------
Raw materials $ 160.5 $165.0
Finishing supplies 45.9 48.8
Work in process 313.9 308.4
Finished goods 502.7 470.6
------ ------
$1,023.0 $992.8
======== ======
NOTE J: Property, plant and equipment balances were as follows:
September 30, 1999 December 31, 1998
------------------ -----------------
Property, plant and equipment $ 4,921.6 $ 4,541.7
Less accumulated depreciation (1,772.1) (1,719.8)
. --------- ---------
Net $ 3,149.5 $ 2,821.9
========= =========
NOTE K: Intangible asset balances were as follows:
September 30, 1999 December 31, 1998
------------------ -----------------
Goodwill $ 1,250.1 $ 1,299.0
Trademarks and other
intangibles 643.6 666.4
Less accumulated amortization (266.1) (235.0)
--------- ---------
Net $ 1,627.6 $ 1,730.4
========= =========
NOTE L: Other expense (income) includes interest expense of $37.1 and $26.0
for the third quarters of 1999 and 1998, respectively. Interest
expense for the first nine months of 1999 and 1998 was $106.4 and
$88.4, respectively.
NOTE M: In 1998 the company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which
requires reporting certain financial information regarding
operating segments on the basis used internally by management to
evaluate segment performance. In 1999, the Statement also
requires quarterly disclosure of certain segment information.
Segment net sales and income before taxes were as follows:
Net Sales
--------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Pharmaceutical $1,995 $1,534 $5,743 $4,310
Consumer Health Care 761 690 2,227 2,015
Confectionery 482 470 1,424 1,383
------ ------ ------ ------
Consolidated Total $3,238 $2,694 $9,394 $7,708
====== ====== ====== ======
Income Before Taxes
--------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Pharmaceutical $ 492 $334 $1,475 $1,087
Consumer Health Care 155 135 421 366
Confectionery 43 45 150 117
---- ---- ------ ----
Total Segments 690 514 2,046 1,570
Corporate (103) (89) (291) (268)
---- ---- ------ ------
Consolidated Total $ 587 $425 $1,755 $1,302
==== ==== ====== ======
NOTE N: On November 4, 1999, Warner-Lambert, American Home Products
Corporation (AHP) and a wholly-owned subsidiary of AHP entered into a
definitive merger agreement. The combined company will be called
AmericanWarner, Inc. Under the terms of the merger-of-equals
transaction, which has been unanimously approved by both companies'
Boards of Directors, each share of Warner-Lambert common stock will
be converted into 1.4919 shares of AmericanWarner, Inc. AHP shares
will be converted into AmericanWarner, Inc. shares on a one-for-one
basis. The transaction is contingent upon qualifying as a tax-free
reorganization and being accounted for under the pooling of interests
method of accounting. The transaction is expected to close during
2000, subject to antitrust clearance, approval by both companies'
shareholders and other customary conditions.
On November 4, 1999, subsequent to the announcement of the agreement
to form AmericanWarner, Inc., Pfizer, Inc. (Pfizer) made an
unsolicited, conditional all stock offer for all of the outstanding
common shares of Warner-Lambert. The offer is for 2.5 shares of
Pfizer for each share of Warner-Lambert common stock. Pfizer's offer
is conditioned upon the elimination of certain "break-up fee and
stock option provisions" included in the merger agreement between
Warner-Lambert and AHP. Pfizer has filed suit against Warner-
Lambert, the Warner-Lambert Board of Directors and AHP in the state
of Delaware to invalidate these provisions. In addition, certain
shareholder groups have filed suits in the state of Delaware claiming
that Warner- Lambert's Board of Directors breached its fiduciary duty
by entering into a merger agreement containing these provisions and
that the consideration to be paid to the company's shareholders in
the proposed merger is inadequate.
After careful review of the proposal made by Pfizer, Warner-Lambert's
Board of Directors determined that, based on the provisions of
Warner-Lambert's contract with AHP and the conditions contained in
Pfizer's proposal, Warner-Lambert is not in a position at this time
to take any action with respect to the Pfizer proposal. Warner-
Lambert's Board of Directors believes that the strategic transaction
entered into with AHP represents the best long-term interests of its
shareholders. Warner-Lambert is continuing to pursue the merger with
AHP.
In light of actions taken by Pfizer, the company is reviewing
Pfizer's actions and assessing the steps it should take with respect
to the Lipitor agreements as discussed in the Company's press release
under Exhibit 99(a).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999
- -------------------------------------------------
COMPARED WITH CORRESPONDING PERIODS IN 1998
- -------------------------------------------
NET SALES
- ---------
Sales for the third quarter of 1999 of $3.2 billion were 20 percent
above 1998 third quarter sales. For the first nine months of 1999
sales rose 22 percent to $9.4 billion compared to the same period
one year ago. Adjusting for the unfavorable impact of foreign
exchange rate changes, sales increased 21 percent for the quarter
and 23 percent for the nine-month period. Sales growth was driven
by unit volume growth of 18 percent for the third quarter and 21
percent for the first nine months of 1999.
U.S. sales increased $406 million or 25 percent to $2.0 billion for
the quarter and increased $1.2 billion or 26 percent to $5.7 billion
for the first nine months of 1999 compared to the same periods one
year ago. International sales increased $138 million or 13 percent
to $1.2 billion for the third quarter and increased $513 million or
16 percent to $3.7 billion for the first nine months of 1999
compared to the same periods one year ago. At constant exchange
rates, international sales increased 16 percent and 19 percent for
the third quarter and first nine months of 1999, respectively.
SEGMENT SALES Three Months Ended Nine Months Ended
(Dollars in September 30, September 30,
Millions) ------------------------- -------------------------
Percent Percent
1999 1998 Increase 1999 1998 Increase
---- ---- -------- ---- ---- --------
Pharmaceutical $1,995 $1,534 30 % $5,743 $4,310 33 %
Consumer Health
Care 761 690 10 2,227 2,015 11
Confectionery 482 470 2 1,424 1,383 3
------ ------ ------ ------
Consolidated
Net Sales $3,238 $2,694 20 % $9,394 $7,708 22 %
====== ====== ====== ======
Worldwide pharmaceutical sales increased 30 percent to $2.0 billion
in the third quarter of 1999 and increased 33 percent to $5.7
billion for the first nine months of 1999 compared to the same
periods one year ago. During the second quarter of 1999, Warner-
Lambert completed the acquisition of Agouron Pharmaceuticals Inc.
VIRACEPT (nelfinavir mesylate), Agouron's first commercial product
and the U.S.'s leading protease inhibitor for the treatment of HIV
and AIDS, now joins Warner-Lambert's major pharmaceutical products
which achieved worldwide sales as follows:
Three months ended Nine months ended
September 30, 1999 September 30, 1999
------------------ ------------------
(Dollars in Millions)
LIPITOR $981 $2,618
NEURONTIN 237 619
REZULIN 134 489
VIRACEPT 112 407
ACCUPRIL 135 377
Pharmaceutical sales in the U.S. increased 33 percent to $1.4
billion in the third quarter of 1999 and 34 percent to $3.9 billion
for the first nine months of 1999. International pharmaceutical
sales increased 23 percent to $593 million or 26 percent at constant
exchange rates in the third quarter. For the first nine months of
1999, international pharmaceutical sales increased 32 percent to
$1.8 billion or 33 percent at constant exchange rates.
Worldwide sales of LIPITOR grew 72 percent to $981 million for the
third quarter of 1999 and grew 77 percent to $2.6 billion for the
first nine months of 1999. Warner-Lambert has co-promoted LIPITOR
with Pfizer Inc. (Pfizer) since its launch in 1997. In June 1999,
the two companies announced the signing of a letter of intent to
continue and expand this marketing alliance. However, in light of
actions recently taken by Pfizer relating to Warner-Lambert and its
pending business combination with American Home Products Corporation
(AHP) as discussed in the "Subsequent Events" section of this
document, the company is reviewing Pfizer's actions and assessing
the steps it should take with respect to the Lipitor agreements.
Worldwide sales of NEURONTIN were $237 million in the third quarter
of 1999, an increase of 79% over the same period one year ago and
$619 million an increase of 77% for the first nine months of 1999.
The company is currently conducting a clinical trial in pediatric
patients at the request of the FDA. If the FDA finds that the study
fairly responds to the request, a six-month extension of the
NEURONTIN epilepsy use patent protection from generic competition
through mid-July 2000 could be granted. The company also has two
other patents covering NEURONTIN whose expiration dates go well
beyond 2000 that are the subject of litigation with potential
generic competitors. The protection from generic competition
provided by these patents would also be extended should pediatric
exclusivity be granted. Additionally, the company plans to
introduce new tablet formulations of NEURONTIN to offer patients
more convenient dosing.
For the third quarter, REZULIN achieved worldwide sales of $134
million, a decrease of 26 percent from the same period one year ago.
For the first nine months of 1999 sales were $489 million, a
decrease of 10 percent. REZULIN sales are being adversely impacted
by the FDA approval of two competing drugs during the year.
Additionally, in June 1999, the company withdrew the indication for
REZULIN as initial single agent therapy. Warner-Lambert estimates
that sales of REZULIN for this indication may approximate 15% of
total sales. With respect to other indications, an FDA Advisory
Committee recently determined that the benefits of REZULIN outweigh
associated risks for appropriate type 2 diabetes patients when used
in combination with certain other diabetes drugs. REZULIN continues
to be sold for these indications.
Worldwide consumer health care sales increased 10 percent to $761
million in the third quarter of 1999 and increased 11 percent to
$2.2 billion for the first nine months of 1999 compared to the same
periods one year ago. Consumer health care sales in the U.S.
increased 13 percent to $427 million in the quarter and 15 percent
to $1.3 billion for the first nine months of 1999. International
consumer health care segment sales increased 7 percent to $334
million for the third quarter and 6 percent to $974 million for the
first nine months of 1999. Sales increases were not affected by
changes in foreign currency exchange rates.
At the end of 1998, Warner-Lambert acquired exclusive rights to
over-the-counter Zantac [R] products in the U.S. and Canada as part
of the dissolution of its joint venture arrangements with Glaxo
Wellcome plc. Prior to 1999, sales of the Glaxo Wellcome/Warner-
Lambert joint venture, including Zantac 75 [R], were not reflected
in Warner-Lambert's reported sales. Zantac 75 [R] sales were $36
million for the quarter ended September 30, 1999 and $124 million
for the nine-month period. Worldwide sales of LISTERINE mouthwashes
increased 12% to $356 million for the nine-month period due to the
1999 launch in the U.S. of Tartar Control LISTERINE that had sales
of $49 million. Sales of shaving products increased 6 percent to
$591 million for the first nine months of 1999 driven by strong
sales of the LADY PROTECTOR/SILK EFFECTS razor that increased $19
million to $78 million. Sales of TETRA pet care products increased
6 percent to $152 million for the nine-month period.
Worldwide confectionery sales increased 2 percent to $482 million in
the third quarter of 1999 and increased 3 percent to $1.4 billion
for the first nine months of 1999 compared to the same periods one
year ago. Confectionery sales in the U.S. increased 4 percent to
$169 million in the quarter and 4 percent to $487 million for the
first nine months of 1999. International confectionery sales
increased 2 percent to $313 million for the third quarter and 2
percent to $937 million for the first nine months of 1999. At
constant exchange rates, international confectionery sales increased
9 percent for the third quarter and 10 percent for the nine-month
period. The negative impact of exchange is primarily due to the
Brazilian currency devaluation.
Sales growth in the U.S. for the first nine months of 1999 was
partially attributable to $13 million in sales of TRIDENT ADVANTAGE,
which was launched in the third quarter of 1998, and the continued
success of DENTYNE ICE, where sales increased 54 percent to $56
million. Higher international sales of confectionery products are
attributable to Mexico where nine-month sales increased $28 million
due to stronger gum sales.
COSTS AND EXPENSES
- ------------------
As a percentage of net sales, cost of goods sold fell to 23.7% in
the third quarter of 1999 from 26.1% in the third quarter of 1998
and to 23.9% for the first nine months of 1999 from 26.8% in the
same period one year ago. The improvement in the ratio for both
reporting periods is mostly attributable to an increase in
pharmaceutical segment product sales, with generally higher margins
than consumer health care or confectionery products, as a percentage
of total company sales. Also contributing to the improvement in the
ratio is a favorable product mix within the pharmaceutical segment
and ongoing productivity improvements in all business segments.
Selling, general and administrative expense in the third quarter of
1999 increased $274 million or 22 percent compared with the third
quarter of 1998 and $876 million or 26 percent for the first nine
months of 1999 compared with the nine-month period one year ago. As
a percentage of net sales, selling, general and administrative
expense for the quarter increased to 46.1% compared with 45.3% for
the same quarter last year and for the first nine months of 1999
increased to 45.8% compared with 44.5% for the same time period last
year. Pharmaceutical segment expenses significantly increased to
support key products. Quarterly settlements of co-promotion
agreements related to LIPITOR and REZULIN are recorded in selling
expense and increased $168 million for the quarter and $439 million
for the nine-month period. In addition, total company advertising
and promotion expense increased $56 million and $188 million for the
quarter and nine-month period respectively in support of products in
all segments. Management expects that selling, general and
administrative expenses will remain at or slightly above this level
as a percent of sales for the full year.
Research and development expense in the third quarter and first nine
months of 1999 increased 35 percent and 24 percent, respectively,
over the same periods one year ago. As a percentage of net sales,
research and development for the quarter increased to 10.7% compared
with 9.5% for the same quarter last year and for the first nine
months of 1999 increased to 9.6% compared with 9.4% for the same
time period last year. For 1999 the company plans to invest in
excess of $1.2 billion in research and development, a projected
increase of over 20 percent compared with 1998.
Other expense of $43 million in the third quarter compared favorably
by $47 million to the third quarter of 1998. The favorability is
primarily attributable to a $21 million charge in 1998 for the
closure of a foreign manufacturing facility. Other expense of $188
million for the first nine months of 1999 was essentially the same
as the comparable period in 1998.
INCOME TAXES
- ------------
The effective tax rate for the third quarter and first nine months
of 1999 was 29%, unchanged from the same periods in 1998.
NET INCOME
- ----------
Net income increased 38 percent to $417 million and 35 percent to
$1.2 billion for the third quarter and the first nine months of
1999, respectively compared to the same periods one year ago.
Diluted earnings per share for the third quarter of 1999 increased
38 percent to $0.47 and increased 34 percent to $1.41 for the first
nine months of 1999. Based on current planning assumptions, the
company expects to increase earnings per share by 30 percent this
year to approximately $1.92.
LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------
Selected data:
September 30, December 31,
1999 1998
------------- ------------
Net cash/(debt) (in millions) $112 $(474)
Net debt to net capital(equity
and net debt) - % 12%
Net cash/(debt) (total debt less cash and cash equivalents and other
nonequity securities) improved $586 million from December 31, 1998.
Cash and cash equivalents were $1.0 billion at September 30, 1999,
an increase of $67 million from December 31, 1998. The company also
held $612 million in nonequity securities, included in short-term
investments and investments and other assets, that management views
as cash equivalents, representing an increase of $502 million from
December 31, 1998. The total increase in cash and cash equivalents
of $568 million, coupled with a decrease in total debt of $17
million, reflects the company's strengthening cash flow and
financial condition.
Cash provided by operating activities for the first nine months of
1999 of $1.8 billion was more than sufficient to fund capital
expenditures of $652 million and pay dividends of $500 million.
Planned capital expenditures for 1999 are estimated to be nearly $1
billion in support of additional manufacturing operations and
expanded research facilities. The company believes that the amounts
available from operating cash flow and future borrowings will be
sufficient to meet expected operating needs and planned capital
expenditures for the foreseeable future.
OTHER MATTERS
- -------------
Year 2000
The company continues to follow the five-step approach described in
the 1998 Annual Report for achieving Year 2000 (Y2K) compliance with
its internal technology systems and business stakeholders. The
company has closed out its internal technology systems projects, and
will be monitoring those projects through year-end to maintain on-
going compliance. In addition, the company has instituted a freeze
on implementation of new internal technology systems, effective for
the fourth quarter of 1999 and the first quarter of 2000, to
maintain control over the Y2K-compliant operating environment.
Systems deemed necessary for business operations will be excepted
from the freeze but will be subject to the same five-step Y2K
compliance process applied to existing systems and will be monitored
for on-going compliance through year-end.
The company plans to pursue its program of assessing, verifying,
auditing and monitoring the Y2K compliance of its business
stakeholders, as necessary. In addition, the company has evaluated
its mission critical business stakeholders, and will monitor those
stakeholders through year-end, as necessary.
As described in the 1998 Annual Report, the company has developed
company-wide business continuity plans encompassing its high
priority internal systems and supply chain of business stakeholders.
Those plans will continue to be monitored and adjusted, as
necessary, through year-end. The company has also developed
emergency response plans, and is running simulations of those plans
at critical company locations world-wide. The emergency response
plans will also continue to be monitored and adjusted, as necessary,
through year-end. In developing both its business continuity plans
and emergency response plans, the company has sought to exercise
sound business judgment and to engage in the appropriate
cost/benefit analysis of the risks posed by Y2K and its resolution
of those risks.
Year 2000-related maintenance and modification costs are expensed as
incurred, while the cost of new information technology is
capitalized and amortized in accordance with company policy.
Management currently estimates incremental expenditures of
approximately $125 million will be necessary to address and
remediate Year 2000 compliance issues, of which approximately $106
million has been incurred as of September 30, 1999. Management does
not see any material change in the cost estimate at this time;
however, currently unforeseen developments or delays could cause
this cost estimate to change. Of the costs incurred to date, $90
million has been charged to expense and $16 million has been
capitalized.
Although management believes that its Year 2000 compliance program
reduces the risk of an internal compliance failure and is taking a
proactive approach with business stakeholders, there can be no
assurances that the company or its business stakeholders will
achieve Year 2000 compliance or that such noncompliance will not
have a material adverse impact on the company.
Restructuring
In 1998, the company recorded pretax restructuring charges of $93
million for three foreign plant closures due to a consolidation of
certain product manufacturing resources in Europe. Additionally, in
1993 and 1991, the company recorded pretax restructuring charges of
$525 million and $544 million, respectively, for the worldwide
rationalization of manufacturing and distribution facilities and for
organizational restructuring. At September 30, 1999 the company had
a combined reserve balance related to these programs of $67 million.
Management expects that substantially all amounts related to these
activities will be expended by the end of 1999.
Acquisition
In May 1999, Warner-Lambert acquired Agouron, an integrated
pharmaceutical company committed to the discovery and development of
innovative therapeutic products for treatment of cancer, AIDS and
other serious diseases. Warner-Lambert exchanged 28.8 million
shares of its common stock for all of the common stock of Agouron.
Each outstanding share of Agouron common stock was exchanged for
.8934 shares of Warner-Lambert common stock. In addition, Agouron's
employee stock options outstanding were converted at the same rate
and resulted in options to purchase 7.5 million shares of Warner-
Lambert common stock.
The transaction was accounted for as a pooling of interests under
Accounting Principles Board Opinion No. 16 and qualified as a tax-
free exchange. Accordingly, all prior period consolidated financial
statements presented have been restated to include combined results
of operations, financial position and cash flows of Agouron as
though it had always been a part of Warner-Lambert. Dividends per
common share are equal to Warner-Lambert's historical dividends per
common share since Agouron has never declared or paid cash dividends
on its stock.
Subsequent Event
On November 4, 1999, Warner-Lambert, AHP and a wholly-owned
subsidiary of AHP entered into a definitive merger agreement. The
combined company will be called AmericanWarner, Inc. Under the
terms of the merger-of-equals transaction, which has been
unanimously approved by both companies' Boards of Directors, each
share of Warner-Lambert common stock will be converted into 1.4919
shares of AmericanWarner, Inc. AHP shares will be converted into
AmericanWarner, Inc. shares on a one-for-one basis. The transaction
is contingent upon qualifying as a tax-free reorganization and being
accounted for under the pooling of interests method of accounting.
The transaction is expected to close during 2000, subject to
antitrust clearance, approval by both companies' shareholders and
other customary conditions.
On November 4, 1999, subsequent to the announcement of the agreement
to form AmericanWarner, Inc., Pfizer made an unsolicited,
conditional all stock offer for all of the outstanding common shares
of Warner-Lambert. The offer is for 2.5 shares of Pfizer for each
share of Warner-Lambert common stock. Pfizer's offer is conditioned
upon the elimination of certain "break-up fee and stock option
provisions" included in the merger agreement between Warner-Lambert
and AHP. Pfizer has filed suit against Warner-Lambert, the Warner-
Lambert Board of Directors and AHP in the state of Delaware to
invalidate these provisions. In addition, certain shareholder
groups have filed suits in the state of Delaware claiming that
Warner-Lambert's Board of Directors breached its fiduciary duty by
entering into a merger agreement containing these provisions and
that the consideration to be paid to the company's shareholders in
the proposed merger is inadequate.
After careful review of the proposal made by Pfizer, Warner-
Lambert's Board of Directors determined that, based on the
provisions of Warner-Lambert's contract with AHP and the conditions
contained in Pfizer's proposal, Warner-Lambert is not in a position
at this time to take any action with respect to the Pfizer proposal.
Warner-Lambert's Board of Directors believes that the strategic
transaction entered into with AHP represents the best long-term
interests of its shareholders. Warner-Lambert is continuing to
pursue the merger with AHP. The company, however, cannot predict
the outcome of the litigation or shareholder votes or the impact
they may have on the company's stock.
In light of actions taken by Pfizer, the company is reviewing
Pfizer's actions and assessing the steps it should take with respect
to the Lipitor agreements as discussed in the Company's press
release under Exhibit 99(a).
Statements made in this report that state "we believe," "we expect"
or otherwise state the company's predictions for the future are
forward-looking statements. Actual results might differ materially
from those projected in the forward-looking statements. Additional
information concerning factors that could cause actual results to
materially differ from those in the forward-looking statements is
contained in Exhibit 99 of the company's December 31, 1998 Form 10-
K/A filed with the Securities and Exchange Commission. Exhibit 99
to the Form 10-K/A is incorporated by reference herein.
All product names appearing in capital letters are registered
trademarks of Warner-Lambert Company, its affiliates, related
companies or its licensors. Zantac [R] and Zantac 75 [R] are
registered trademarks of the Glaxo Wellcome group of companies.
Relpax [R] is a registered trademark of Pfizer Inc., its affiliates,
related companies or its licensors.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
In November, 1999, Pfizer Inc. sued the Company, its Directors and
American Home Products Corp. in Delaware Chancery Court. Pfizer
alleges that the Company and its Directors breached their fiduciary
duties by entering into a merger agreement with American Home
Products (the "Merger Agreement") which contains break-up fee and
cross-option provisions. Pfizer alleges that the Merger Agreement,
if terminated, (1) requires the payment of a break-up fee of $2
billion and (2) grants to American Home the option to purchase in
excess of 10% of the Company's stock, thereby purportedly preventing
a third party interested in acquiring the Company from utilizing an
accounting method known as a pooling of interests. Pfizer is
seeking a declaration that the break-up fee and option provisions in
the Merger Agreement are invalid and should be enjoined from
implementation. The Company believes this lawsuit to be without
merit and is defending it vigorously.
The Company, its Directors and American Home Products Corp. have
been named in approximately 31 lawsuits in Delaware Chancery Court
and one lawsuit in Morris County, New Jersey, brought on behalf of
purported classes of the Company's shareholders. These lawsuits
involve allegations similar to those contained in Pfizer's lawsuit,
described above, and contain additional allegations, including that
the consideration to be paid to the Company's shareholders in the
proposed merger is inadequate. Since the Company has not been
served with all of these lawsuits, additional, related allegations
may be forthcoming. The Company believes these lawsuits to be
without merit and will defend them vigorously.
In late 1993, Warner-Lambert, along with numerous other
pharmaceutical manufacturers and wholesalers, was sued in a number
of state and federal antitrust lawsuits seeking damages (including
trebled and statutory damages, where applicable) and injunctive
relief. These actions arose from allegations that the defendant
drug companies, acting alone or in concert, engaged in differential
pricing whereby they favored institutions, managed care entities,
mail order pharmacies and other buyers with lower prices for brand
name prescription drugs than those afforded to retailer pharmacies.
The federal cases, which were brought by retailers, were
consolidated by the Judicial Panel on Multidistrict Litigation and
transferred to the U.S. District Court for the Northern District of
Illinois for pre-trial proceedings. In June 1996, the Court
approved Warner-Lambert's agreement to settle part of the
consolidated federal cases, specifically, the class action
conspiracy lawsuit, for a total of $15.1 million. This settlement
also contains certain commitments regarding Warner-Lambert's pricing
of brand name prescription drugs. Appeals of the District Court's
approval of this settlement were unsuccessful, and the commitments
have become effective. Certain other rulings of the judge presiding
in this case were also appealed, and the judge was reversed on all
rulings. The cases were remanded to the District Court, and trial
of the class action conspiracy action against the non-settling
defendant pharmaceutical manufacturers and wholesalers was concluded
in November, 1998 with a directed verdict for the defendants and
dismissal of the class plaintiffs' case. That decision was appealed
to the 7th Circuit Court of Appeals and was substantially affirmed
with a remand for consideration of limited issues. In April 1997,
after execution of the federal class settlement referred to above
but prior to the formal effectiveness of its pricing commitments,
the same plaintiff-class members brought a new purported class
action relating to the time period subsequent to the execution of
the settlement. This new class suit sought only injunctive relief.
At present, Warner-Lambert cannot predict the outcome of this and
the other remaining federal lawsuits in which it is a defendant.
In addition, the Company has settled the vast majority of the
Robinson-Patman Act lawsuits brought by those retail pharmacies
which opted out of the class action conspiracy lawsuit. The amount
of these settlements is not material.
The state cases pending in California, brought by classes of
pharmacies and consumers, have been coordinated in the Superior
Court of California, County of San Francisco. The Company, with the
majority of the other drug company defendants, has agreed to settle
the California consumer class action and this settlement has
received court approval. The amount of this settlement is not
material. Warner-Lambert has also been named as a defendant in
actions in state courts filed in Alabama, Minnesota, Mississippi and
Wisconsin brought by classes of pharmacies, each arising from the
same allegations of differential pricing. With its co-defendants,
the Company has settled the Minnesota and Wisconsin actions. The
Company's share of these settlements, which have been approved, are
not material. In addition, the Company was named in class action
complaints filed in Alabama, Arizona, Florida, Kansas, Maine,
Michigan, Minnesota, New York, North Carolina, Tennessee, Wisconsin
and the District of Columbia, brought by classes of consumers who
purchased brand name prescription drugs at retail pharmacies. With
its co-defendants, the Company has agreed to settle these state
consumer class actions. The Company's share of these settlements,
which have been approved by all of the above courts, is not
material.
The Company has also been made a party to another class action in
Tennessee, purportedly on behalf of consumers in Alabama, Arizona,
Florida, Kansas, Maine, Michigan, Minnesota, New Mexico, North
Carolina, North Dakota, South Dakota, Tennessee, West Virginia and
Wisconsin, who purchased brand name prescription drugs from retail
pharmacies, and in similar class actions in New Mexico, North
Dakota, South Dakota and West Virginia on behalf of consumers in
those states. Although it is not possible at this early stage to
predict the outcome of these lawsuits, it is unlikely that their
ultimate disposition will have a material adverse effect on Warner-
Lambert's financial position, liquidity, cash flows or results of
operations.
The Federal Trade Commission (the "FTC") is conducting an
investigation to determine whether Warner-Lambert and twenty-one
other pharmaceutical manufacturers have engaged in concerted
activities to raise the prices of pharmaceutical products in the
United States. Warner-Lambert was served with and responded to two
subpoenas from the FTC in 1996 and 1997, respectively, and has
cooperated with this investigation. Warner-Lambert cannot at
present predict the outcome of this investigation.
Warner-Lambert is involved in various administrative or judicial
proceedings related to environmental actions initiated by the
Environmental Protection Agency under the Comprehensive
Environmental Response, Compensation and Liability Act (also known
as Superfund) or by state authorities under similar state
legislation, or by third parties. While it is not possible to
predict with certainty the outcome of such matters or the total cost
of remediation, Warner-Lambert believes it is unlikely that their
ultimate disposition will have a material adverse effect on Warner-
Lambert's financial position, liquidity, cash flows or results of
operations for any year.
Warner-Lambert Inc., a wholly-owned subsidiary of Warner-Lambert,
has been named as a defendant in class actions filed in Puerto Rico
Superior Court by current and former employees from the Vega Baja,
Carolina and Fajardo plants, as well as Kelly Services temporary
employees assigned to those plants. The lawsuits seek monetary
relief for alleged violations of local statutes and decrees relating
to meal period payments, minimum wage, overtime and vacation pay.
Warner-Lambert believes that these actions are without merit and
will defend these actions vigorously. Although it is too early to
predict the outcome of these actions, Warner-Lambert does not at
present expect these lawsuits to have a material adverse effect on
the Company's financial position, liquidity, cash flows or results
of operations.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
(12) Computation of Ratio of Earnings to Fixed
Charges.
(27) Financial Data Schedule - September 30, 1999.
(99) Additonal Exhibits
(a)Warner-Lambert Company Press Release dated
November 15, 1999 - `Warner-Lambert
Company Reviewing Lipitor Agreements With
Pfizer Inc'
(b) Reports on Form 8-K
-------------------
Warner-Lambert has not filed any reports on
Form 8-K for the quarter ended September 30,
1999.
S I G N A T U R E S
-------------------
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned thereunto duly
authorized.
WARNER-LAMBERT COMPANY
(Registrant)
Date: November 15, 1999 By: Ernest J. Larini
----------------
Chief Financial Officer and
Executive Vice President,
Administration
(Principal Financial Officer)
Date: November 15, 1999 By: Joseph E. Lynch
---------------
Vice President and Controller
(Chief Accounting Officer)
EXHIBIT INDEX
-------------
Exhibit No. Exhibit
- ----------- -------
(12) Computation of Ratio of Earnings to Fixed
Charges.
(27) Financial Data Schedule (Filed electronically)-
September 30, 1999.
(99) Additional Exhibits
(a) Warner-Lambert Company Press Release dated
November 15, 1999 - `Warner-Lambert
Company Reviewing Lipitor Agreements With
Pfizer Inc'
<TABLE>
EXHIBIT 12
WARNER-LAMBERT COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Years Ended December 31,
Nine Months Ended ------------------------------------------------
September 30, 1999 1998 1997 1996 1995 1994
------------------ ---- ---- ---- ---- ----
Earnings before income taxes and
accounting changes (less
<S> <C> <C> <C> <C> <C> <C>
minority interests) $1,754.8 $1,791.0 $1,188.8 $1,138.1 $1,004.1 $ 905.9
Add:
Interest on indebtedness-
excluding amount capitalized 106.4 114.3 167.5 145.9 122.7 93.7
Amortization of debt expense .5 .8 .4 .5 .4 .4
Interest factor in rent
expense (a) 29.5 39.4 32.1 28.5 27.7 26.9
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Adjusted earnings $1,891.2 $1,945.5 $1,388.8 $1,313.0 $1,154.9 $1,026.9
======== ======== ======== ======== ======== ========
Fixed Charges:
Interest on indebtedness $ 106.4 $ 114.3 $ 167.5 $ 145.9 $ 122.7 $ 93.7
Capitalized interest 18.5 19.2 8.3 9.6 10.1 9.4
Amortization of debt expense .5 .8 .4 .5 .4 .4
Interest factor in rent
expense (a) 29.5 39.4 32.1 28.5 27.7 26.9
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total fixed charges $ 154.9 $ 173.7 $ 208.3 $ 184.5 $ 160.9 $ 130.4
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges 12.2 11.2 6.7 7.1 7.2 7.9
======== ======== ======== ======== ======== ========
(a) Represents one third of rental expense, which the Company believes is a reasonable
approximation.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND FROM THE RELATED
CONSOLIDATED STATEMENT OF INCOME FOR THE 9 MONTH PERIOD ENDED SEPTEMBER 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,013
<SECURITIES> 587
<RECEIVABLES> 1,778
<ALLOWANCES> 0
<INVENTORY> 1,023
<CURRENT-ASSETS> 5,049
<PP&E> 4,922
<DEPRECIATION> 1,772
<TOTAL-ASSETS> 10,538
<CURRENT-LIABILITIES> 3,378
<BONDS> 1,281
0
0
<COMMON> 962
<OTHER-SE> 3,620
<TOTAL-LIABILITY-AND-EQUITY> 10,538
<SALES> 9,394
<TOTAL-REVENUES> 9,394
<CGS> 2,243
<TOTAL-COSTS> 2,243
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> 1,755
<INCOME-TAX> 509
<INCOME-CONTINUING> 1,246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,246
<EPS-BASIC> 1.46<F1>
<EPS-DILUTED> 1.41
<FN>
<F1>Amount represents basic earnings per share.
</FN>
</TABLE>
Exhibit 99(a)
FOR IMMEDIATE RELEASE
Media Contact:
Carol Goodrich (973) 540-3620
Investor Relations Contact:
George Shields (973) 540-6916
John Howarth (973) 540-4874
WARNER-LAMBERT COMPANY REVIEWING LIPITOR AGREEMENTS
WITH PFIZER INC
MORRIS PLAINS, N.J. November 15, 1999 -- Warner-Lambert
Company (NYSE:WLA) announced today that in light of actions
recently taken by Pfizer Inc relating to Warner-Lambert and
its pending business combination with American Home
Products, the Company is taking the following steps:
1) In order to determine what is in the best interests of
Warner-Lambert's shareholders, we are reviewing Pfizer's
actions and assessing the steps we should take in light of
any breaches of the Lipitor agreements determined to have
occurred as a result of such actions. In recognition of
the significant enhancement to shareholder value which
could result, among the steps being considered by Warner-
Lambert is termination of its Lipitor agreements with
Pfizer.
2) We are also seeking to make public, for the benefit of
Warner-Lambert and Pfizer shareholders, confidential
information relating to the arrangements between Pfizer and
Warner-Lambert regarding Lipitor which Pfizer currently
possesses and is using to its advantage in connection with
its interest in acquiring Warner-Lambert.
3) In this regard, Warner-Lambert has requested Pfizer's
concurrence to the immediate public release of the Lipitor
Collaboration, International Collaboration, International
Co-Promotion, International License and Option Agreements.
In so doing, Warner-Lambert has not waived any right to
disclose any of such information if Pfizer refuses to
concur.
Warner-Lambert is a global company devoted to discovering,
developing, manufacturing, and marketing quality
pharmaceutical, consumer health care, and confectionery
products. In 1999, its revenues are expected to exceed $12
billion and the company will invest more than $1.2 billion
in research and development. It employs more than 43,000
people worldwide.
Note to Editors: Warner-Lambert's press releases can be
found on our Website at www.warner-lambert.com or through
Business Wire at www.businesswire.com
