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 March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From To
------- -------
Commission File Number 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) 385-2000
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 April 30, 2000
----- -----------------------------
Common Stock, $1 par value 885,284,680
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WARNER-LAMBERT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2000 1999
------------- ------------
(Dollars in millions)
ASSETS:
Cash and cash equivalents $ 2,309.9 $ 1,633.6
Short-term investments 116.2 309.6
Receivables 1,721.4 1,981.2
Inventories 923.8 979.2
Prepaid expenses and other current assets 804.9 786.5
--------- ---------
Total current assets 5,876.2 5,690.1
Investments and other assets 1,196.3 793.4
Property, plant and equipment 3,353.9 3,341.9
Intangible assets 1,581.7 1,616.1
--------- ---------
Total assets $12,008.1 $11,441.5
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term debt $ 262.9 $ 297.1
Accounts payable, trade 1,821.5 1,881.5
Accrued compensation 224.3 236.1
Other current liabilities 939.3 990.1
Federal, state and foreign income taxes 340.0 283.7
--------- ---------
Total current liabilities 3,588.0 3,688.5
Long-term debt 2,811.6 1,249.5
Deferred income taxes and other
noncurrent liabilities 1,460.9 1,405.2
Shareholders' equity:
Preferred stock - none issued - -
Common stock - 961,981,608 shares issued 962.0 962.0
Capital in excess of par 1,483.2 897.2
Retained earnings 3,492.3 5,098.1
Accumulated other comprehensive income (665.4) (645.4)
Treasury stock, at cost: (2000 - 84,755,520
shares; 1999 - 99,934,571 shares) (1,124.5) (1,213.6)
--------- ---------
Total shareholders' equity 4,147.6 5,098.3
--------- ---------
Total liabilities and shareholders'
equity $12,008.1 $11,441.5
========= =========
See accompanying notes to consolidated financial statements.
WARNER-LAMBERT COMPANY
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(Unaudited)
Three Months Ended
March 31,
------------------
2000 1999
---- ----
(Dollars in millions, except per share amounts)
NET SALES $ 3,407.1 $3,006.0
COSTS AND EXPENSES:
Cost of goods sold 752.2 752.4
Selling, general and
administrative 1,564.1 1,363.5
Research and development 348.8 274.1
Merger/termination costs 1,838.0 -
Other expense (income), net 124.1 78.2
--------- --------
Total costs and expenses 4,627.2 2,468.2
--------- --------
(LOSS)INCOME BEFORE INCOME TAXES (1,220.1) 537.8
Provision for income taxes 178.2 155.8
--------- --------
NET (LOSS) INCOME $(1,398.3) $ 382.0
========= ========
NET (LOSS) INCOME PER COMMON SHARE:
Basic $ (1.61) $ .45
Diluted $ (1.61) $ .43
DIVIDENDS PER COMMON SHARE $ .24 $ .20
See accompanying notes to consolidated financial statements.
WARNER-LAMBERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
---------------
2000 1999
---- ----
(Dollars in millions)
OPERATING ACTIVITIES:
Net (loss) income $(1,398.3) $ 382.0
Adjustments to reconcile net (loss) income to net
cash (used) provided by operating activities:
Depreciation and amortization 96.3 86.4
Deferred income taxes 16.9 (17.2)
Changes in assets and liabilities
Receivables 227.0 (35.1)
Inventories 39.2 7.2
Accounts payable and
accrued liabilities (22.6) 269.6
Other, net 82.1 40.9
--------- --------
Net cash (used) provided by operating
activities (959.4) 733.8
--------- --------
INVESTING ACTIVITIES:
Purchases of investments (36.5) (20.0)
Proceeds from maturities/sales of investments 227.5 8.7
Capital expenditures (136.3) (198.8)
Other, net 13.3 (3.7)
--------- --------
Net cash provided (used) by investing
activities 68.0 (213.8)
--------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings 1,540.3 189.6
Principal payments on borrowings (1.4) (202.8)
Purchases of treasury stock (.3) (37.8)
Cash dividends paid (207.5) (164.4)
Proceeds from stock option exercises 240.5 34.3
--------- --------
Net cash provided (used) by financing
activities 1,571.6 (181.1)
--------- --------
Effect of exchange rate changes on cash
and cash equivalents (3.9) (59.8)
--------- --------
Net increase in cash
and cash equivalents 676.3 279.1
Cash and cash equivalents at beginning of year 1,633.6 945.8
--------- --------
Cash and cash equivalents at end of period $ 2,309.9 $1,224.9
========= ========
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 1999 Annual Report
on Form 10-K.
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 the 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 Pharmaceuticals, Inc.
(Agouron), an integrated pharmaceutical company committed to the
discovery and development of innovative therapeutic products for
treatment of cancer, AIDS and other serious diseases.
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 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 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.
NOTE F: Total comprehensive (loss) income includes net (loss) income and
other comprehensive income which consists primarily of
foreign currency translation adjustments. Total comprehensive
(loss) income was $(1,418.3) and $179.3 for the first quarter of
2000 and 1999, respectively. The increase in foreign currency
translation adjustments was $56.4 and $201.2 for the three months
ended March 31, 2000 and 1999, respectively.
The Net income per common share computations were as follows:
(Shares in thousands)
Three Months Ended
March 31,
------------------
2000 1999
---- ----
Basic:
Net (loss) income $(1,398.3) $ 382.0
Average common shares outstanding 868,047 851,089
--------- --------
$ (1.61) $ .45
========= ========
Diluted:
Net (loss) income $(1,398.3) $ 382.0
Average common shares outstanding 868,047 851,089
Impact of potential future stock
option exercises, net of shares
repurchased (1) - 31,552
--------- --------
Average common shares outstanding -
assuming dilution (1) 868,047 882,641
--------- --------
$ (1.61) $ .43
========= ========
(1) Since the company had a net loss for the three months ended
March 31, 2000, the impact of potential future stock option
exercises would have an antidilutive effect on the calculation
of diluted loss per share. As a result, the average number of
common shares outstanding used in calculating diluted loss per
share in 2000 is the same as for basic loss per share.
NOTE G: Major classes of inventories were as follows:
March 31, 2000 December 31, 1999
-------------- -----------------
Raw materials $132.9 $128.9
Finishing supplies 44.2 42.1
Work in process 247.4 266.8
Finished goods 499.3 541.4
------ ------
$923.8 $979.2
====== ======
NOTE H: Property, plant and equipment balances were as follows:
March 31, 2000 December 31, 1999
-------------- -----------------
Property, plant and equipment $ 5,193.0 $ 5,154.1
Less accumulated depreciation (1,839.1) (1,812.2)
--------- ---------
Net $ 3,353.9 $ 3,341.9
========= =========
NOTE I: Intangible asset balances were as follows:
March 31, 2000 December 31, 1999
------------------ -----------------
Goodwill $ 1,223.3 $ 1,234.5
Trademarks and other
intangibles 642.1 655.7
Less accumulated amortization (283.7) (274.1)
--------- ---------
Net $ 1,581.7 $ 1,616.1
========= =========
NOTE J: Other expense (income) includes interest expense of $57.9 and $32.5
for the first quarters of 2000 and 1999, respectively.
NOTE K: On March 21, 2000, the company announced that it was voluntarily
discontinuing the sale of REZULIN. The one-time costs associated
with the withdrawal of $103.4 ($91.0 after tax or $.10 per share)
consist primarily of product returns and inventory write-off, and
were recorded in Other expense (income).
NOTE L: On February 6, 2000, the merger agreement entered into between
Warner-Lambert and American Home Products Corporation (AHP) on
November 3, 1999 was terminated, and the stock option agreements
issued in connection with that transaction were cancelled by Warner-
Lambert and AHP with no consideration paid for their cancellations.
In connection with the termination of the AHP merger agreement,
Warner-Lambert incurred Merger/termination costs of $1,838.0
($1,823.0 after tax or $2.10 per share). These costs include a
termination fee of $1.8 billion and other expenses related to the
proposed merger with AHP. Payment of the termination fee was
financed primarily with commercial paper, which is classified as
Long-term debt due to the company's intent and ability to refinance
on a long-term basis.
NOTE M: Segment net sales and income before taxes were as follows:
Net Sales Income Before Taxes
Three months ended Three months ended
March 31, March 31,
--------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
Pharmaceutical $2,159.1 $1,810.3 $ 490.3(1) $457.7
Consumer Health Care 747.7 735.7 147.0 140.0
Confectionery 500.3 460.0 52.6 40.5
-------- -------- --------- ------
Total Segments 3,407.1 3,006.0 689.9 638.2
Corporate (2) - - (1,910.0) (100.4)
-------- -------- --------- -----
Consolidated Total $3,407.1 $3,006.0 $(1,220.1) $537.8
======== ======== ========= ======
(1) Includes REZULIN withdrawal costs of $103.4.
(2) Corporate expense includes general corporate income and expense,
corporate investment income and interest expense. Corporate
expense in 2000 includes AHP Merger/termination costs of $1,838.0.
NOTE N: On April 27, 2000, the shareholders of Pfizer Inc. (Pfizer) approved
the issuance of the shares of Pfizer common stock to be issued in
the merger between Warner-Lambert and Pfizer. On May 12, 2000,
Warner-Lambert shareholders will vote to approve and adopt the merger
agreement and the merger with Pfizer. This transaction is subject
to customary conditions, including qualifying as a tax-free
reorganization and usual regulatory approvals. The transaction,
which will be accounted for using the pooling-of-interests method of
accounting, is expected to close by the end of May 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FIRST QUARTER ENDED MARCH 31, 2000
- -----------------------------------
COMPARED WITH CORRESPONDING PERIOD IN 1999
- ------------------------------------------
MERGER EVENTS
- -------------
On February 6, 2000, the merger agreement entered into between
Warner-Lambert and American Home Products Corporation (AHP) on
November 3, 1999 was terminated, and the stock option agreements
issued in connection with that transaction were cancelled by Warner-
Lambert and AHP with no consideration paid for their cancellations.
In accordance with the termination provisions of the AHP Merger
Agreement, Warner-Lambert paid AHP a termination fee of $1.8
billion. The company recorded, as a separate component of income
before income taxes, merger/termination costs of $1,838 million
($1,823 million after-tax or $2.10 per share), which consist of the
$1.8 billion termination fee and certain other expenses related to
the proposed AHP merger.
Thereafter, Warner-Lambert, Pfizer Inc. (Pfizer) and a wholly-owned
subsidiary of Pfizer entered into a definitive merger agreement
dated as of February 6, 2000. Under the terms of the proposed
transaction, which has been approved by the Board of Directors of
both Warner-Lambert and Pfizer, each share of Warner-Lambert common
stock will be exchanged for 2.75 shares of Pfizer common stock. On
April 27, 2000, the shareholders of Pfizer approved the issuance of
the shares of Pfizer common stock to be issued in the merger between
Warner-Lambert and Pfizer. On May 12, 2000, Warner-Lambert
shareholders will vote to approve and adopt the merger agreement and
the merger with Pfizer. This transaction is subject to customary
conditions, including qualifying as a tax-free reorganization and
usual regulatory approvals. The transaction, which will be
accounted for using the pooling-of-interests method of accounting,
is expected to close by the end of May 2000.
The following discussion and analysis reflects the results of
operations and financial condition of Warner-Lambert and does not
consider the impact of the proposed merger with Pfizer.
NET SALES
- ---------
Sales for the first quarter of 2000 of $3.4 billion were 13 percent
above 1999 first quarter sales. Sales increased 15 percent,
adjusting for the unfavorable impact of foreign exchange rate
changes. Unit volume grew by 12 percent coupled with price
increases of 3 percent.
U.S. sales increased $318 million or 18 percent to $2.1 billion in
the first quarter of 2000. International sales increased $83
million or 7 percent to $1.3 billion. At constant exchange rates,
international sales were 11 percent above the same period last year.
SEGMENT SALES Three Months Ended March 31,
- ------------- ------------------------------
Percent
Increase/
(Dollars in Millions) 2000 1999 (Decrease)
------ ------ --------
Pharmaceutical $2,159 $1,810 19%
Consumer Health Care 748 736 2
Confectionery 500 460 9
------ ------
Consolidated Net Sales $3,407 $3,006 13%
====== ======
Worldwide pharmaceutical sales increased 19 percent to $2.2 billion
in the first quarter of 2000. The sales increase was attributable
to the continued growth of the cholesterol-lowering agent LIPITOR,
the anticonvulsant NEURONTIN and the antihypertensive ACCUPRIL.
Partially offsetting this growth was a decline in the sales of the
oral agent for the treatment of type 2 diabetes, REZULIN and the
protease inhibitor for the treatment of HIV and AIDS, VIRACEPT. The
following table sets forth worldwide sales of these products with a
comparison to prior year:
Three Months Ended March 31,
----------------------------
2000 1999
(Dollars in millions) ------ ----
LIPITOR $1,097 $751
NEURONTIN 301 176
ACCUPRIL 129 116
VIRACEPT 111 146
REZULIN 103 184
Pharmaceutical sales in the U.S. increased 26 percent to $1.5
billion in the first quarter of 2000. International pharmaceutical
sales increased 6 percent to $645 million in 2000 or 13 percent at
constant exchange rates.
Worldwide sales of LIPITOR increased 46 percent to $1.1 billion in
the first quarter of 2000 compared to 1999. LIPITOR continues to be
the most prescribed cholesterol-lowering agent in the U.S., holding
a 44 percent share of total prescriptions in the cholesterol-
lowering market. LIPITOR is now sold in all major world markets
except Japan. In January 2000, LIPITOR was recommended for approval
by regulatory authorities in Japan, the world's second-largest
cholesterol-lowering market. The company looks forward to launching
LIPITOR in Japan once all necessary approvals have been received.
LIPITOR will be co-promoted in Japan with Yamanouchi Pharmaceutical
Co. Inc., the third-largest pharmaceutical company in Japan.
Warner-Lambert has co-promoted LIPITOR in most other markets with
Pfizer since its launch in 1997.
Worldwide sales of NEURONTIN were $301 million in the first quarter
of 2000, an increase of 71 percent over the same period one year
ago. At the request of the FDA, the company has recently conducted
a clinical trial of NEURONTIN in pediatric patients. Based on the
company's completion of that study, the FDA, in January 2000,
granted a six-month extension of the NEURONTIN epilepsy use patent
protection through mid-July 2000. The company also has two other
patents covering NEURONTIN with expiration dates well beyond 2000
that are the subject of litigation with potential generic
competitors. Additionally, the company has introduced new tablet
formulations of NEURONTIN to offer patients more convenient dosing.
NEURONTIN now holds a market-leading 25 percent share of total
prescriptions in the U.S. antiepileptic market.
Worldwide sales of VIRACEPT in the first quarter of 2000 were $111
million, a decrease of 24 percent from 1999 sales. VIRACEPT is sold
in collaboration with F. Hoffmann-LaRoche Ltd. (Roche). Warner-
Lambert sells the product in North America and Roche has the
licensing rights in most other markets. The reported 2000 sales
figure reflects the planned progression of our agreement with Roche,
whereby Roche is now manufacturing most of its product needs for
sale in its licensed territory instead of purchasing VIRACEPT from
Warner-Lambert. The company receives royalty revenue from Roche's
subsequent commercial sales of VIRACEPT which is recorded in other
income.
REZULIN achieved worldwide sales of $103 million in the first
quarter of 2000, a decrease of 44 percent from 1999 sales. Warner-
Lambert marketed REZULIN in the U.S. with an affiliate of Sankyo
Company, Ltd. (Sankyo), from whom the company licenses the product
for North America and other areas. REZULIN sales were adversely
affected by two competing drugs approved by the FDA during 1999.
Additionally, in June 1999, the company withdrew the indication for
REZULIN as initial single agent therapy, but continued to sell
REZULIN for other indications.
On March 21, 2000, the company announced that it was voluntarily
discontinuing the sale of REZULIN, although the company continues to
believe that the benefits of the drug outweigh its associated risks.
The company believed that repeated media reports sensationalizing
the risks associated with REZULIN therapy created an environment in
which patients and physicians were unable to make well-informed
decisions regarding the safety and efficacy of REZULIN. Under these
circumstances, and after an unexpected request from the FDA on March
21 to consider removing the drug from the market, the company
decided to discontinue marketing REZULIN.
Consumer health care product sales in the U.S. of $415 million were
consistent with the same period one year ago. Sales of BENADRYL
increased $11 million to $44 million and SUDAFED rose $3 million to
$42 million. These favorable performances were primarily offset by
a decrease in ZANTAC sales of $11 million to $30 million, mainly due
to the introduction of generic competition at the end of 1999.
International consumer health care sales increased 4 percent to $333
million and 8 percent at constant exchange rates.
Confectionery sales in the U.S. increased 5 percent to $162 million
in the first quarter of 2000 primarily due to sales of $6 million of
HALLS DEFENSE Vitamin C cough drops which was launched in the third
quarter of 1999 and the continued strength of Dentyne ICE, whose
sales increased $8 million to $23 million.
International confectionery sales were $339 million, an increase of
11 percent or 12 percent at constant exchange rates. The
international sales increase is primarily attributable to Mexico,
where sales increased $28 million as compared to the same period
last year due to stronger gum and cough drop sales.
COSTS AND EXPENSES
- ------------------
As a percentage of net sales, cost of goods sold improved to 22.1%
from 25.0% in 1999. The improvement in the ratio was attributable
to an increase in pharmaceutical segment product sales, with
generally lower costs of goods sold than consumer health care or
confectionery products, as a percentage of total company sales.
Also contributing to the improvement was a favorable product mix in
the pharmaceutical segment.
Selling, general and administrative expense in the first quarter of
2000 increased $201 million or 15 percent. As a percentage of net
sales, selling, general and administrative expense for the quarter
slightly increased to 45.9% from 45.4% for the same quarter last
year. Pharmaceutical segment expenses increased to support key
products. Quarterly settlements of co-promotion agreements related
to LIPITOR are recorded in selling expense and increased $146
million compared to the first quarter of 1999. Management expects
that selling, general and administrative expenses as a percentage of
net sales will remain at or slightly above this level for the full
year.
Research and development expense increased 27 percent in the first
quarter of 2000. As a percentage of net sales, research and
development expense was 10.2% in the first quarter of 2000 and 9.1%
in the first quarter of 1999. For 2000 the company plans to invest
approximately $1.5 billion in research and development, a projected
increase of 19 percent compared with 1999.
Other expense (income) in the first quarter of 2000 compared
unfavorably to the first quarter of 1999 by $46 million. The
unfavorability is primarily attributable to the $103 million one-
time costs associated with the REZULIN withdrawal.
INCOME TAXES
- ------------
The effective tax rate for the first quarter of 2000, excluding the
effect of the AHP merger/termination costs and the REZULIN
withdrawal costs, was 28.5% compared with 29.0% for the same period
in 1999.
NET INCOME
- ----------
Net loss and diluted loss per share for the first quarter of 2000
were $1,398 million and $1.61 per share, respectively. Adjusting
for the previously discussed AHP merger/termination costs ($1,823
million after-tax or $2.10 per share) and the REZULIN withdrawal
costs ($91 million after-tax or $.10 per share) and a $.01 per share
effect of not including the dilutive impact of common stock
equivalents, net income and diluted earnings per share increased 35
percent to $516 million and $.58 per share, respectively, compared
to the same period one year ago.
LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------
Selected data:
March 31, December 31,
2000 1999
------ ------
Net debt/(cash) (in millions) $637 $(408)
Debt to total capital 43% 23%
The net debt position of $637 million (total debt less cash and cash
equivalents and other nonequity securities) changed $1.0 billion
from a net cash position at December 31, 1999, primarily due to the
financing of the $1.8 billion termination fee payment to AHP.
Warner-Lambert funded the payment out of its existing cash resources
and other credit arrangements including the issuance of commercial
paper.
Cash and cash equivalents were $2.3 billion at March 31, 2000, an
increase of $676 million from December 31, 1999. The company also
held $127 million in nonequity securities, included in other asset
categories that management views as cash equivalents, representing a
decrease of $194 million from December 31, 1999. The net increase
in cash and cash equivalents of $482 million was offset by an
increase in total debt of $1.5 billion, which accounted for the
overall increase in net debt.
Excluding the $1.8 billion termination fee paid to AHP, which was
funded as described above, operating activities for the first
quarter of 2000 provided sufficient cash to fund capital
expenditures of $136 million and pay dividends of $208 million.
Planned capital expenditures for 2000 are estimated to be $1.2
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 completed its five-step approach for achieving Year 2000
(Y2K) compliance with its internal technology systems and mission-
critical business stakeholders. The company experienced a
successful transition to the Year 2000. Worldwide operations were
resumed as scheduled after the millennial rollover.
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, 1999 Form 10-K
filed with the Securities and Exchange Commission. Exhibit 99 to
the Form 10-K 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 is a registered trademark of
Glaxo Wellcome plc, its affiliates, related companies or its
licensors.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
The Company is involved in various administrative or judicial
proceedings related to environmental actions initiated by the
Environmental Protection Agency ("EPA") 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. For 11 sites, generally those
which the Company currently owns or previously owned, the Company
may be the sole party responsible for clean-up costs. For other
sites, other parties (defined as potentially responsible parties)
may be jointly and severally responsible, along with Warner-Lambert,
to pay remediation and other related expenses. While it is not
possible to predict with certainty the outcome of such matters or
the total cost of remediation, management believes it is unlikely
that their ultimate disposition will have a material adverse effect
on the Company's financial position, liquidity, cash flows or
results of operations for any year.
In November 1999, following the announcement by the Company of its
execution of the American Home Products Corporation ("AHP") Merger
Agreement, Pfizer filed suit against the Company, its board of
directors and AHP, seeking to invalidate certain provisions in the
AHP Merger Agreement and enjoin their implementation. The lawsuit
claimed, among other things, that the termination fee, reciprocal
stock option agreements and a provision preventing Warner-Lambert's
directors from amending its shareholder rights plan were invalid,
and that the members of the Company's board of directors breached
their fiduciary duties to the Company's shareholders by entering
into the AHP Merger Agreement. Pursuant to a settlement agreement
executed on February 6, 2000 in connection with the termination of
the AHP Merger Agreement and the execution of the Pfizer Merger
Agreement, the Company, AHP and Pfizer entered into settlement
agreements with respect to this litigation. Shortly thereafter the
litigation against AHP was dismissed with prejudice and the
litigation between Pfizer and the Company was dismissed without
prejudice.
The Company, its Directors and AHP have been named in approximately
40 lawsuits in Delaware Chancery Court, one lawsuit in Morris
County, New Jersey, and two lawsuits in federal court in 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 that was to
be paid to the Company's shareholders in the proposed merger with
AHP was inadequate. The Company believes these lawsuits to be
without merit and is defending them vigorously. Following the
termination of the AHP Merger Agreement, the Company has begun to
seek disposition of these claims.
On November 23, 1999, Pfizer filed suit against the Company in the
Delaware Court of Chancery relating to certain contracts between
Pfizer and the Company for the marketing and co-promotion of
LIPITOR. Pfizer alleged that the execution of the AHP Merger
Agreement violated certain provision in those agreements. The
Company counterclaimed on November 29, 1999 and sought a declaratory
judgment that the Company was entitled to terminate the LIPITOR
agreements. Pursuant to a settlement agreement executed on February
6, 2000 in connection with the termination of the AHP Merger
Agreement and the execution of the Pfizer Merger Agreement, the
Company and Pfizer entered into a settlement agreement with respect
to the LIPITOR litigation. The litigation was dismissed without
prejudice shortly thereafter.
Following the adverse media publicity concerning REZULIN's
withdrawal from the market, the number of lawsuits against the
Company alleging liver and other unspecified personal injuries
resulting from the ingestion of REZULIN has substantially increased.
As of May 8, 2000, approximately 72 REZULIN lawsuits were pending,
including approximately 27 purported class actions. The purported
class actions assert claims for medical monitoring or personal
injuries. The Company is defending these lawsuits vigorously.
Certain employees of Warner-Lambert were served with subpoenas in
January, 2000, by the U.S. Attorney's office in Boston,
Massachusetts, directing them to provide testimony before a federal
grand jury in Boston. The U.S. Attorney's office is conducting an
inquiry into Warner-Lambert's promotion of NEURONTIN. Warner-
Lambert is cooperating with the inquiry and cannot predict what the
outcome of the investigation will be.
In addition, a former employee of the company has commenced a civil
lawsuit against the company, on behalf of the United States, under
31 U.S.C. 3730. The lawsuit alleges that the company has violated
the Federal False Claims Act based on certain alleged sales and
marketing practices concerning its drugs, NEURONTIN and ACCUPRIL.
Warner-Lambert believes that this action is without merit and will
defend it 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 retail 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 have been 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 affirmed
in substantial part by the 7th Circuit Court of Appeals. 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, settled the
California consumer class action and this settlement 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 several states and
to additional class actions in New Mexico, North Dakota, South
Dakota and West Virginia, who purchased brand name prescription
drugs from retail pharmacies. 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 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 (filed electronically)
(b) Reports on Form 8-K
-------------------
(1)A Current Report on Form 8-K was filed with the
Securities and Exchange Commission on January 19,
2000 in connection with the Company's press release
reporting the sales and earnings for fourth quarter
and year ended December 31, 1999.
(2)A Current Report on Form 8-K was filed with the
Securities and Exchange Commission on February 18,
2000 in connection with the Company's entering into
an Agreement and Plan of Merger with Pfizer Inc. and
Seminole Acquisition Sub Corp., a wholly-owned
subsidiary of Pfizer.
(3) A Current Report on Form 8-K was filed with the
Securities and Exchange Commission on February 22,
2000 in connection with the Company's Consolidated
Balance Sheets as of December 31, 1999 and 1998, and
Consolidated Statements of Income and Comprehensive
Income and of Cash Flows for the years ended
December 31, 1999, 1998 and 1997, and related notes
thereto.
(4) A Current Report on Form 8-K was filed with the
Securities and Exchange Commission on March 23, 2000
in connection with the Company's announcement that
it was voluntarily discontinuing the sale of REZULIN
(troglitazone) Tablets, its therapy for the
treatment of type 2 diabetes, although the Company
continues to believe that the benefits of the drug
outweigh its associated risks.
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: May 10, 2000 By: Ernest J. Larini
----------------
Chief Financial Officer and
Executive Vice President,
Administration
(Principal Financial Officer)
Date: May 10, 2000 By: Joseph E. Lynch
---------------
Vice President and Controller
(Principal Accounting Officer)
EXHIBIT INDEX
-------------
Exhibit No. Exhibit
- ----------- -------
(12) Computation of Ratio of Earnings to Fixed
Charges.
(27) Financial Data Schedule (Filed electronically)
<TABLE>
EXHIBIT 12
WARNER-LAMBERT COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Years Ended December 31,
Three Months Ended ------------------------------------------------
March 31, 2000 1999 1998 1997 1996 1995
---------------- ---- ---- ---- ---- ----
Earnings before income taxes and
accounting changes (less
<S> <C> <C> <C> <C> <C> <C>
minority interests) $(1,220.1) $2,441.2 $1,791.0 $1,188.8 $1,069.1 $1,004.1
Add:
Interest on indebtedness-
excluding amount capitalized 57.9 140.3 114.3 167.5 145.9 122.7
Amortization of debt expense .2 .6 .8 .4 .5 .4
Interest factor in rent
expense (a) 11.5 45.8 39.4 32.1 28.5 27.7
--------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Adjusted earnings $(1,150.5) $2,627.9 $1,945.5 $1,388.8 $1,244.0 $1,154.9
========= ======== ======== ======== ======== ========
Fixed Charges:
Interest on indebtedness $ 57.9 $ 140.3 $ 114.3 $ 167.5 $ 145.9 $ 122.7
Capitalized interest 6.7 27.1 19.2 8.3 9.6 10.1
Amortization of debt expense .2 .6 .8 .4 .5 .4
Interest factor in rent
expense (a) 11.5 45.8 39.4 32.1 28.5 27.7
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total fixed charges $ 76.3 $ 213.8 $ 173.7 $ 208.3 $ 184.5 $ 160.9
========= ======== ======== ======== ======== ========
Ratio of earnings to
fixed charges (b) - 12.3 11.2 6.7 6.7 7.2
========= ======== ======== ======== ======== ========
(a) Represents one third of rental expense, which the Company believes is a
reasonable approximation.
(b) The results of operations for the three months ended March 31, 2000 are
inadequate to cover total fixed charges as defined. Excluding the AHP
merger/termination costs of $1,838.0 million and costs associated with the
voluntary withdrawal of Rezulin of $103.4 million the pro forma ratio of
earnings to fixed charges would be 10.4 for the three months ended
March 31, 2000.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 AND FROM THE RELATED CONSOLIDATED
STATEMENT OF INCOME FOR THE 3 MONTH PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,310
<SECURITIES> 116
<RECEIVABLES> 1,721
<ALLOWANCES> 0
<INVENTORY> 924
<CURRENT-ASSETS> 5,876
<PP&E> 5,193
<DEPRECIATION> 1,839
<TOTAL-ASSETS> 12,008
<CURRENT-LIABILITIES> 3,588
<BONDS> 2,812
0
0
<COMMON> 962
<OTHER-SE> 3,186
<TOTAL-LIABILITY-AND-EQUITY> 12,008
<SALES> 3,407
<TOTAL-REVENUES> 3,407
<CGS> 752
<TOTAL-COSTS> 752
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> (1,220)
<INCOME-TAX> 178
<INCOME-CONTINUING> (1,398)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,398)
<EPS-BASIC> (1.61)
<EPS-DILUTED> (1.61)
<FN>
</FN>
</TABLE>
