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 June 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 July 31, 1999
----- ----------------------------
Common Stock, $1 par value 854,723,580
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WARNER-LAMBERT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1999 1998
--------- -----------
(Dollars in millions)
ASSETS:
Cash and cash equivalents $ 1,300.0 $ 945.8
Receivables 1,949.1 1,784.5
Inventories 1,027.4 992.8
Prepaid expenses and other current assets 724.8 628.8
--------- ---------
Total current assets 5,001.3 4,351.9
Investments and other assets 674.8 718.9
Property, plant and equipment 3,006.7 2,821.9
Intangible assets 1,643.6 1,730.4
--------- ---------
Total assets $10,326.4 $ 9,623.1
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term debt $ 196.8 $ 264.2
Accounts payable, trade 1,699.9 1,621.2
Accrued compensation 214.3 233.3
Other current liabilities 932.4 980.1
Federal, state and foreign income taxes 205.0 248.2
--------- ---------
Total current liabilities 3,248.4 3,347.0
Long-term debt 1,636.2 1,266.7
Deferred income taxes and other
noncurrent liabilities 1,213.7 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 625.0 520.6
Retained earnings 4,536.4 4,038.5
Accumulated other comprehensive income (631.5) (399.3)
Treasury stock, at cost: 1999 - 109,161,740
shares; 1998 - 112,073,966 shares) (1,263.8) (1,241.5)
--------- ---------
Total shareholders' equity 4,228.1 3,880.3
--------- ---------
Total liabilities and shareholders'
equity $10,326.4 $ 9,623.1
========= =========
See accompanying notes to consolidated financial statements.
WARNER-LAMBERT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in millions, except per share amounts)
NET SALES $3,150.7 $2,682.7 $6,156.7 $5,013.6
COSTS AND EXPENSES:
Cost of goods sold 723.2 706.9 1,475.6 1,360.5
Selling, general and
administrative 1,449.2 1,186.6 2,812.7 2,210.9
Research and development 281.8 260.8 555.8 468.6
Other expense (income), net 66.9 67.2 145.2 96.4
-------- -------- -------- --------
Total costs and expenses 2,521.1 2,221.5 4,989.3 4,136.4
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 629.6 461.2 1,167.4 877.2
Provision for income taxes 182.7 132.1 338.5 255.2
-------- -------- -------- --------
NET INCOME $ 446.9 $ 329.1 $ 828.9 $ 622.0
======== ======== ======== ========
NET INCOME PER COMMON SHARE:
Basic $ .52 $ .39 $ .97 $ .73
Diluted $ .51 $ .37 $ .94 $ .71
DIVIDENDS PER COMMON SHARE $ .20 $ .16 $ .40 $ .32
See accompanying notes to consolidated financial statements.
WARNER-LAMBERT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
---------------
1999 1998
---- ----
(Dollars in millions)
OPERATING ACTIVITIES:
Net income $ 828.9 $ 622.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 169.1 145.8
Deferred income taxes 2.3 (42.1)
Changes in assets and liabilities, net of
effects from disposition of business:
Receivables (233.2) (278.4)
Inventories (58.1) (122.1)
Accounts payable and
accrued liabilities 91.7 211.3
Other, net 95.5 47.7
-------- ---------
Net cash provided by operating activities 896.2 584.2
-------- ---------
INVESTING ACTIVITIES:
Purchases of investments (79.1) (98.1)
Proceeds from maturities/sales of investments 40.5 131.4
Capital expenditures (416.4) (263.8)
Proceeds from disposition of business - 125.0
Other, net (19.9) 37.3
-------- ---------
Net cash used by investing activities (474.9) (68.2)
-------- ---------
FINANCING ACTIVITIES:
Proceeds from borrowings 720.0 722.1
Principal payments on borrowings (402.5) (1,003.0)
Purchases of treasury stock (39.0) (96.7)
Cash dividends paid (329.1) (262.0)
Proceeds from stock option exercises 63.2 55.0
-------- ---------
Net cash provided (used) by financing
activities 12.6 (584.6)
-------- ---------
Effect of exchange rate changes on cash
and cash equivalents (79.7) (8.2)
-------- ---------
Net increase (decrease) in cash
and cash equivalents 354.2 (76.8)
Cash and cash equivalents at beginning of year 945.8 786.0
-------- ---------
Cash and cash equivalents at end of period $1,300.0 $ 709.2
======== =========
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 six-month periods from the prior year
are shown below:
Three Months Ended Three Months Ended Six Months Ended
March 31, 1999 June 30, 1998 June 30, 1998
------------------ ------------------ ----------------
Net Sales:
Warner-Lambert $2,860.0 $2,556.7 $4,775.6
Agouron 146.0 126.0 238.0
-------- -------- --------
Combined $3,006.0 $2,682.7 $5,013.6
======== ======== ========
Net Income:
Warner-Lambert $ 381.1 $ 338.1 $ 617.4
Agouron .9 (9.0) 4.6
-------- -------- --------
Combined $ 382.0 $ 329.1 $ 622.0
======== ======== ========
For the six months ended June 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 six months ended June 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 $417.5 and
$315.8 for the second quarters of 1999 and 1998, respectively.
Total comprehensive income for the six-month periods ended June 30,
1999 and 1998 was $596.7 and $589.5, respectively. The increase in
foreign currency translation adjustments was $232.1 and $37.1 for
the six months ended June 30, 1999 and 1998, respectively.
NOTE H: The Net income per common share computations were as follows:
(Shares in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
Basic:
Net income $446.9 $329.1 $828.9 $622.0
Average common shares
outstanding 852,578 847,174 851,832 846,323
------- ------- ------- -------
$.52 $.39 $.97 $.73
======= ======= ======= =======
Diluted:
Net income $446.9 $329.1 $828.9 $622.0
Average common shares
outstanding 852,578 847,174 851,832 846,323
Impact of potential future
stock option exercises,
net of shares repurchased 29,790 31,527 30,646 29,921
------- ------- ------- -------
Average common shares
outstanding - assuming
dilution 882,368 878,701 882,478 876,244
------- ------- ------- -------
$.51 $.37 $.94 $.71
======= ======= ======= =======
NOTE I: Major classes of inventories were as follows:
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials $ 177.4 $165.0
Finishing supplies 46.9 48.8
Work in process 284.6 308.4
Finished goods 518.5 470.6
------ ------
$1,027.4 $992.8
======== ======
NOTE J: Property, plant and equipment balances were as follows:
June 30, 1999 December 31, 1998
------------- -----------------
Property, plant and equipment $ 4,749.7 $ 4,541.7
Less accumulated depreciation (1,743.0) (1,719.8)
--------- ---------
Net $ 3,006.7 $ 2,821.9
========= =========
NOTE K: Intangible asset balances were as follows:
June 30, 1999 December 31, 1998
------------- -----------------
Goodwill $ 1,249.9 $ 1,299.0
Trademarks and other
intangibles 642.9 666.4
Less accumulated amortization (249.2) (235.0)
--------- ---------
Net $ 1,643.6 $ 1,730.4
========= =========
NOTE L: Other expense (income) includes interest expense of $36.8 and $26.4
for the second quarters of 1999 and 1998, respectively. Interest
expense for the first six months of 1999 and 1998 was $69.3 and
$62.4, 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 Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Pharmaceutical $1,938 $1,539 $3,748 $2,776
Consumer Health Care 730 676 1,466 1,325
Confectionery 483 468 943 913
------ ------ ------ ------
Consolidated Total $3,151 $2,683 $6,157 $5,014
====== ====== ====== ======
Income Before Taxes
--------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Pharmaceutical $526 $401 $ 983 $ 753
Consumer Health Care 125 106 265 232
Confectionery 66 43 107 71
---- ---- ------ ----
Total Segments 717 550 1,355 1,056
Corporate (87) (89) (188) (179)
---- ---- ------ ------
Consolidated Total $630 $461 $1,167 $ 877
==== ==== ====== ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1999
- -------------------------------------------------
COMPARED WITH CORRESPONDING PERIODS IN 1998
- -------------------------------------------
NET SALES
- ---------
Sales for the second quarter of 1999 of $3,151 million were 17
percent above 1998 second quarter sales. For the first six months
of 1999 sales rose 23 percent to $6,157 million compared to the same
period one year ago. Adjusting for the unfavorable impact of
foreign exchange rate changes sales increased 19 percent for the
quarter and 24 percent for the six-month period. Sales growth was
driven by unit volume growth of 18 percent for the second quarter
and 23 percent for the first six months of 1999.
U.S. sales increased $303 million or 19 percent to $1,890 million
for the quarter and $768 million or 27 percent to $3,663 million for
the first six months of 1999 compared to the same periods one year
ago. International sales increased $164 million or 15 percent to
$1,261 million for the second quarter and increased $375 million or
18 percent to $2,494 million for the first six months of 1999
compared to the same periods one year ago. At constant exchange
rates, international sales increased 19 percent and 21 percent for
the second quarter and first six months of 1999, respectively.
SEGMENT SALES Three Months Ended Six Months Ended
(Dollars in June 30, June 30,
Millions) ----------------------- -----------------------
Percent Percent
Increase/ Increase/
1999 1998 (Decrease) 1999 1998 (Decrease)
---- ---- -------- ---- ---- --------
Pharmaceutical $1,938 $1,539 26 % $3,748 $2,776 35 %
Consumer Health
Care 730 676 8 1,466 1,325 11
Confectionery 483 468 3 943 913 3
------ ------ ------ ------
Consolidated
Net Sales $3,151 $2,683 17 % $6,157 $5,014 23 %
====== ====== ====== ======
Worldwide pharmaceutical sales increased 26 percent to $1,938
million in the second quarter of 1999 and increased 35 percent to
$3,748 million for the first six months of 1999 compared to the same
periods one year ago. During the quarter Warner-Lambert completed
the acquisition of Agouron Pharmaceuticals Inc. VIRACEPT
(nelfinavir mesylate), Agouron's first commercial product and the
country'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 Six months ended
June 30, 1999 June 30, 1999
------------------ ----------------
(Dollars in Millions)
LIPITOR $886 $1,637
NEURONTIN 206 382
REZULIN 171 356
VIRACEPT 149 295
ACCUPRIL 127 243
Pharmaceutical sales in the U.S. increased 23 percent to $1,315
million in the second quarter of 1999 and 35 percent to $2,518
million for the first six months of 1999. International
pharmaceutical sales increased 32 percent to $623 million or 36
percent at constant exchange rates in the second quarter. For the
first six months of 1999 international pharmaceutical sales
increased 36 percent to $1,229 million or 37 percent at constant
exchange rates.
Worldwide sales of LIPITOR grew 66 percent to $886 million for the
second quarter and grew 80 percent to $1,637 million for the first
six months of 1999. Warner-Lambert has co-promoted LIPITOR with
Pfizer Inc. since its launch in 1997. During the quarter the two
companies announced the signing of a letter of intent to continue
and expand this highly successful marketing alliance. Under the
proposed arrangement, the companies will continue to co-promote
LIPITOR for a total of ten years from launch of the product.
Further, the companies plan to explore LIPITOR line extensions and
product combinations. As part of the expanded collaboration,
Warner-Lambert and Pfizer also plan to co-promote Pfizer's migraine
drug Relpax [R] (eletriptan) for ten years. Relpax [R] represents a
potentially significant therapy for the treatment of acute migraine
headaches. Regulatory applications seeking marketing clearance for
Relpax [R] were filed in Europe in September 1998 and in the U.S. in
October 1998. Terms of the proposed co-promotion have not yet been
finalized.
Worldwide sales of NEURONTIN were $206 million in the second quarter
of 1999, an increase of 69% over the same period one year ago and
$382 million an increase of 76% for the first six 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 second quarter, REZULIN achieved worldwide sales of $171
million, a decrease of 24 percent from the same period one year ago.
For the first six months of 1999 sales were $356 million, a decrease
of two percent. REZULIN sales are being adversely impacted by the
FDA approval of a competing drug during the second quarter.
Additionally, in June 1999, Warner-Lambert and the FDA agreed that
REZULIN would no longer be indicated as initial single agent
therapy. Warner-Lambert estimates that sales of REZULIN for this
indication 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 8 percent to $731
million in the second quarter of 1999 and increased 11 percent to
$1,466 million for the first six months of 1999 compared to the same
periods one year ago. Consumer health care sales in the U.S.
increased 13 percent to $411 million in the quarter and 15 percent
to $826 million for the first six months of 1999. International
consumer health care segment sales increased 2 percent to $320
million for the second quarter and 5 percent to $640 million for the
first six months of 1999. At constant exchange rates, international
segment sales increased 4 percent for the second quarter and 6
percent for the six-month period.
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 $47
million for the quarter ended June 30, 1999 and $88 million for the
six-month period. Worldwide sales of LISTERINE mouthwashes
increased 15% to $240 million for the six-month period due to the
1999 launch in the U.S. of Tartar Control LISTERINE that had sales
of $36 million. Sales of shaving products increased 4 percent to
$379 million for the first six months of 1999 driven by strong sales
of the SILK EFFECTS razor that increased $10 million. Sales of
TETRA pet care products increased 3 percent to $100 million for the
six-month period.
Worldwide confectionery sales increased 3 percent to $483 million in
the second quarter of 1999 and increased 3 percent to $943 million
for the first six months of 1999 compared to the same periods one
year ago. Confectionery sales in the U.S. increased 6 percent to
$165 million in the quarter and 4 percent to $319 million for the
first six months of 1999. International confectionery sales
increased 2 percent to $318 million for the second quarter and 3
percent to $624 million for the first six months of 1999. At
constant exchange rates, international confectionery sales increased
10 percent for the second quarter and 11 percent for the six-month
period.
In the U.S., the sales increase is attributed to the continued
growth of gum sales. Higher international sales of confectionery
products are attributable to Mexico where six-month sales increased
$17 million due to stronger gum sales.
COSTS AND EXPENSES
- ------------------
As a percentage of net sales, cost of goods sold fell to 23.0% in
the second quarter of 1999 from 26.4% in the second quarter of 1998
and to 24.0% for the first six months of 1999 from 27.1% 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.
Selling, general and administrative expense in the second quarter of
1999 increased $263 million or 22 percent compared with the second
quarter of 1998 and $602 million or 27 percent for the first six
months of 1999 compared with the six-month period one year ago. As
a percentage of net sales, selling, general and administrative
expense for the quarter increased to 46.0% compared with 44.2% for
the same quarter last year and for the first six months of 1999
increased to 45.7% compared with 44.1% 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 $139 million for the quarter and $271 million
for the six-month period. In addition, total company advertising
and promotion expense increased $34 million and $132 million for the
quarter and six-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 second quarter and first six
months of 1999 increased 8 percent and 19 percent, respectively,
over the same periods one year ago. However, as a percentage of net
sales, research and development expense has remained constant at
approximately 9%. 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 (income) of $67 million in the second quarter was
essentially the same as the second quarter of 1998. Other expense
(income) of $145 million for the first six months of 1999 compared
unfavorably by $49 million to the same period in 1998. The major
fluctuations for the six-month period result from VIRACEPT profit
sharing payments that increased $19 million and the inclusion in
1999 of $33 million in costs related to the acquisition of Agouron
Pharmaceuticals, Inc.
INCOME TAXES
- ------------
The effective tax rate for the second quarter and first six months
of 1999 remained at 29% from the same period in 1998.
NET INCOME
- ----------
Net income increased 36 percent to $447 million and 33 percent to
$829 million for the second quarter and the first six months of
1999, respectively compared to the same periods one year ago.
Diluted earnings per share for the second quarter of 1999 increased
38 percent to $0.51 and increased 32 percent to $0.94 for the first
six 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:
June 30, December 31,
1999 1998
------- ------------
Net debt (in millions) $388 $474
Net debt to net capital(equity
and net debt) 9% 12%
Net debt (total debt less cash and cash equivalents and other
nonequity securities) decreased $86 million from December 31, 1998.
Cash and cash equivalents were $1.3 billion at June 30, 1999, an
increase of $354 million from December 31, 1998. The company also
held $145 million in nonequity securities, included in other current
assets and investments and other assets, that management views as
cash equivalents, representing an increase of $34 million from
December 31, 1998. The total increase in cash and cash equivalents
of $388 million is offset by an increase in total debt of $302
million.
Cash provided by operating activities for the first six months of
1999 of $896 million was more than sufficient to fund capital
expenditures of $416 million and pay dividends of $329 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 has continued to make considerable progress towards
achieving Year 2000 (Y2K) compliance by following its five-step
approach, as described in the 1998 Annual Report, for internal
technology systems and business stakeholders. The company has
substantially completed its internal technology systems projects and
plans to complete the remainder of its internal technology systems
projects by September 30, 1999.
With respect to its business stakeholders, the company is continuing
its program of assessing, verifying, auditing and monitoring their
Y2K compliance, through the use of written questionnaires, oral
inquiries, on-site visits and other means, and is factoring that
information into its plans. The company has received responses from
most of its mission critical business stakeholders and continues to
pursue responses from the remainder. The company will continue
assessing, verifying and auditing, through site visits and other
means, the Y2K compliance of its business stakeholders through
September 30, 1999, and beyond, if necessary. In addition, the
company will continue monitoring its business stakeholders
throughout 1999.
As described in the 1998 Annual Report, the company also has been
developing company-wide business continuity plans encompassing its
high priority internal systems and supply chain of business
stakeholders. The company is also developing emergency response
plans. 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 $86
million has been incurred as of June 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, $71 million has
been charged to expense and $15 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 timely 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 June 30, 1999 the company had a
combined reserve balance related to these programs of $68 million.
Management expects expenditures related to these activities to occur
throughout 1999 with substantially all amounts 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.
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 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 Schedules (EDGAR filing only).
(a) Financial Data Schedule - June 30, 1999.
(b) Restated Financial Data Schedules - 1996
and 1997.
(c) Restated Financial Data Schedules - 1998
and 1999.
(b) Reports on Form 8-K
-------------------
A Current Report on Form 8-K dated May 17,
1999 was filed with the Securities and
Exchange Commission in May 1999 in connection
with the consummation of the merger of WLC
Acquisition Corporation, a California
corporation and wholly-owned subsidiary of
Warner-Lambert Company, and Agouron
Pharmaceuticals, Inc., a California
corporation.
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: August 11, 1999 By: Ernest J. Larini
----------------
Chief Financial Officer and
Executive Vice President,
Administration
(Principal Financial Officer)
EXHIBIT INDEX
-------------
Exhibit No. Exhibit
- ----------- -------
(12) Computation of Ratio of Earnings to Fixed
Charges.
(27) Financial Data Schedules (filed electronically).
(a) Financial Data Schedule - June 30, 1999.
(b) Restated Financial Data Schedules - 1996
and 1997.
(c) Restated Financial Data Schedules - 1998
and 1999.
<TABLE>
EXHIBIT 12
WARNER-LAMBERT COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Years Ended December 31,
Six Months Ended ------------------------------------------------
June 30, 1999 1998 1997 1996 1995 1994
---------------- ---- ---- ---- ---- ----
Earnings before income taxes and
accounting changes (less
<S> <C> <C> <C> <C> <C> <C>
minority interests) $1,167.4 $1,791.0 $1,188.8 $1,138.1 $1,004.1 $ 905.9
Add:
Interest on indebtedness-
excluding amount capitalized 69.3 114.3 167.5 145.9 122.7 93.7
Amortization of debt expense .3 .8 .4 .5 .4 .4
Interest factor in rent
expense (a) 19.7 39.4 32.1 28.5 27.7 26.9
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Adjusted earnings $1,256.7 $1,945.5 $1,388.8 $1,313.0 $1,154.9 $1,026.9
======== ======== ======== ======== ======== ========
Fixed Charges:
Interest on indebtedness $ 69.3 $ 114.3 $ 167.5 $ 145.9 $ 122.7 $ 93.7
Capitalized interest 12.1 19.2 8.3 9.6 10.1 9.4
Amortization of debt expense .3 .8 .4 .5 .4 .4
Interest factor in rent
expense (a) 19.7 39.4 32.1 28.5 27.7 26.9
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total fixed charges $ 101.4 $ 173.7 $ 208.3 $ 184.5 $ 160.9 $ 130.4
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges 12.4 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 JUNE 30, 1999 AND FROM THE RELATED CONSOLIDATED
STATEMENT OF INCOME FOR THE 6 MONTH PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,300
<SECURITIES> 0
<RECEIVABLES> 1,949
<ALLOWANCES> 0
<INVENTORY> 1,027
<CURRENT-ASSETS> 5,001
<PP&E> 4,750
<DEPRECIATION> 1,743
<TOTAL-ASSETS> 10,326
<CURRENT-LIABILITIES> 3,248
<BONDS> 1,636
0
0
<COMMON> 962
<OTHER-SE> 3,266
<TOTAL-LIABILITY-AND-EQUITY> 10,326
<SALES> 6,157
<TOTAL-REVENUES> 6,157
<CGS> 1,476
<TOTAL-COSTS> 1,476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> 1,167
<INCOME-TAX> 338
<INCOME-CONTINUING> 829
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 829
<EPS-BASIC> .97<F1>
<EPS-DILUTED> .94
<FN>
<F1>AMOUNT REPRESENTS BASIC EARNINGS PER SHARE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THESE RESTATED SCHEDULES CONTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1996 AND 1997 AND MARCH 31, JUNE
30 AND SEPTEMBER 30, 1997, AND THE RELATED CONSOLIDATION STATEMENTS OF INCOME
FOR THE 12 MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997 AND THE 3, 6, AND 9
MONTH PERIODS ENDED MARCH 31, JUNE 30 AND SEPT. 30, 1997, RESPECTIVELY. <F2>
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 12-MOS 3-MOS 6-MOS 9-MOS
12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997
DEC-31-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997
DEC-31-1997
<CASH> 408 424 597 714
786
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 1,154 1,362 1,474 1,523
1,213
<ALLOWANCES> 0 0 0 0
0
<INVENTORY> 668 697 819 808
822
<CURRENT-ASSETS> 2,916 2,966 3,437 3583
3,542
<PP&E> 3,682 3,646 3,843 3,896
4,017
<DEPRECIATION> 1,505 1,486 1,514 1,535
1,562
<TOTAL-ASSETS> 7,345 7,311 8,096 8,260
8,373
<CURRENT-LIABILITIES> 2,155 2,166 2,370 2,695
2,658
<BONDS> 1,721 1,718 2,099 1,936
1,836
0 0 0 0
0
0 0 0 0
0
<COMMON> 321 321 321 321
321
<OTHER-SE> 2,387 2,363 2,561 2,610
2,730
<TOTAL-LIABILITY-AND-EQUITY> 7,345 7,311 8,096 8,260
8,373
<SALES> 7,231 1,791 3,801 5,989
8,408
<TOTAL-REVENUES> 7,231 1,791 3,801 5,989
8,408
<CGS> 2,347 555 1,167 1,814
2,503
<TOTAL-COSTS> 2,347 555 1,167 1,814
2,503
<OTHER-EXPENSES> 0 0 0 0
0
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 146 39 87 130
168
<INCOME-PRETAX> 1,138 287 563 853
1,189
<INCOME-TAX> 323 88 143 231
326
<INCOME-CONTINUING> 747 199 420 622
863
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 747 199 420 622
863
<EPS-BASIC> .89<F1> .24 .50
.74 1.03
<EPS-DILUTED> .88 .23 .49
.72 .99
<FN>
<F1>AMOUNTS REPRESENT BASIC EARNINGS PER SHARE.
<F2>THE FINANCIAL DATA SCHEDULES HAVE BEEN RESTATED UNDER THE POOLING OF INTERESTS
METHOD OF ACCOUNTING TO INCLUDE THE FINANCIAL RESULTS OF AGOURON
PHARMACEUTICALS, INC. ACQUIRED ON MAY 17, 1999. THESE RESTATED SCHEDULES ARE
QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THESE RESTATED SCHEDULES CONTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS AT MARCH 31, JUNE 30, SEPTEMBER 30 AND DECEMBER
31, 1998 AND MARCH 31, 1999, AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME
FOR THE 3, 6, 9 AND 12 MONTH PERIODS ENDED MARCH 31, JUNE 30, SEPTEMBER 30 AND
DECEMBER 31 1998, RESPECTIVELY AND THE 3 MONTH PERIOD ENDED MARCH 31, 1999.<F2>
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
DEC-31-1998 DEC-31-1999
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998 DEC-31-1998
MAR-31-1999
<CASH> 590 709 701 946
1,225
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 1,316 1,662 1,624 1,476
1,766
<ALLOWANCES> 0 0 0 0
0
<INVENTORY> 884 934 1,031 993
970
<CURRENT-ASSETS> 3,318 3,835 3,940 4,352
4,611
<PP&E> 3,989 4,132 4,320 4,542
4,566
<DEPRECIATION> 1,593 1,660 1,706 1,719
1,711
<TOTAL-ASSETS> 8,093 8,671 8,932 9,623
9,837
<CURRENT-LIABILITIES> 2,662 3,087 3,131 3,347
3,475
<BONDS> 1,414 1,363 1,289 1,267
1,280
0 0 0 0
0
0 0 0 0
0
<COMMON> 962 962 962 962
962
<OTHER-SE> 2,264 2,452 2,715 2,918
2,962
<TOTAL-LIABILITY-AND-EQUITY> 8,093 8,671 8,932 9,623
9,837
<SALES> 2,331 5,013 7,708 10,744
3,006
<TOTAL-REVENUES> 2,331 5,013 7,708 10,744
3,006
<CGS> 654 1,361 2,064 2,860
752
<TOTAL-COSTS> 654 1,361 2,064 2,860
752
<OTHER-EXPENSES> 0 0 0 0
0
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 36 62 88 114
33
<INCOME-PRETAX> 416 877 1,302 1,791
538
<INCOME-TAX> 123 255 377 518
156
<INCOME-CONTINUING> 293 622 925 1,273
382
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 293 622 925 1,273
382
<EPS-BASIC> .35<F1> .73 1.09
1.50 .45
<EPS-DILUTED> .34 .71 1.05 1.45
.43
<FN>
<F1>AMOUNTS REPRESENT BASIC EARNINGS PER SHARE.
<F2>THE FINANCIAL DATA SCHEDULES HAVE BEEN RESTATED UNDER THE POOLING OF INTERESTS
METHOD OF ACCOUNTING TO INCLUDE THE FINANCIAL RESULTS OF AGOURON
PHARMACEUTICALS, INC. ACQUIRED ON MAY 17, 1999. THESE RESTATED SCHEDULES ARE
QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</FN>
</TABLE>
