UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 005-52501
WARNER CHILCOTT PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
Ireland N/A
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Lincoln House, Lincoln Place, Dublin 2, Ireland
(Address of principal executive offices)
353 1 662-4962
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
American Depositary Shares, representing Ordinary Shares, par value $.05 each;
Ordinary Shares, par value $.05 each; 12,366,808 Ordinary Shares outstanding at
June 30, 1998.
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Table of contents
PAGE NO.
Part I - Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 2-3
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 5
Notes to the Unaudited Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 8-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II - Other Information
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14-15
Item 6. Exhibits and Reports on Form 8-K 15-16
Signatures 17
Part I - Financial Information
Item 1. Financial Statements
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997
Assets
(in thousands of U.S. dollars)
(UNAUDITED)
June 30, December 31,
1998 1997
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 47,215 $ 52,786
Accounts receivable 12,385 14,599
Inventories 17,818 16,175
Prepaid expense and other assets 7,183 7,399
-------- --------
Total current assets 84,601 90,959
-------- --------
Fixed Assets:
Property, plant and equipment (net) 1,103 1,148
Other Assets:
Intangible assets 76,942 79,630
-------- --------
Total assets $162,646 $171,737
======== ========
See notes to unaudited consolidated financial statements.
2
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997
Liabilities and Shareholders' Equity
(in thousands of U.S. dollars)
(UNAUDITED)
June 30, December 31,
1998 1997
--------- ---------
LIABILITIES
Current Liabilities:
Short-term debt $ 19,712 $ 14,511
Accounts payable 13,735 11,417
Accrued liabilities 4,532 7,994
Due to Elan Corporation, plc and subsidiaries 5,583 5,267
--------- ---------
Total current liabilities 43,562 39,189
--------- ---------
Other Liabilities:
Long-term debt 8,466 7,902
--------- ---------
Total liabilities 52,028 47,091
--------- ---------
SHAREHOLDERS' EQUITY
Ordinary Shares, par value $.05 per share;
50,000,000 shares authorized, 12,366,808 shares
issued and outstanding at June 30, 1998 and
December 31, 1997 618 618
Deferred Shares, par value IR(pound)1 per share;
30,000 shares authorized, 30,000 shares issued
and outstanding at June 30, 1998 and
December 31, 1997 45 45
Additional paid-in capital 208,962 208,962
Shareholders' accumulated deficit:
Accumulated deficit, beginning of period (83,281) (54,907)
Current period loss (14,337) (28,374)
--------- ---------
Accumulated deficit, end of period (97,618) (83,281)
--------- ---------
Deferred compensation (1,389) (1,698)
--------- ---------
Total shareholders' equity 110,618 124,646
--------- ---------
Total liabilities and shareholders' equity $ 162,646 $ 171,737
========= =========
See notes to unaudited consolidated financial statements.
3
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 1998 and 1997
(in thousands of U.S. dollars, except per share data)
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
REVENUES
Branded product sales $ 4,416 $ 4,193 $ 7,745 $ 4,193
Generic product sales 8,022 16,421 18,560 35,456
----------- ---------- ----------- ----------
Total revenues 12,438 20,614 26,305 39,649
----------- ---------- ----------- ----------
COSTS AND EXPENSES
Cost of goods sold 7,819 16,851 18,200 33,286
Selling, general and administrative 9,393 3,962 18,119 7,215
Depreciation and amortization 1,404 1,598 2,808 2,650
Research and development 721 1,270 1,558 4,571
----------- ---------- ----------- ----------
Total costs and expenses 19,337 23,681 40,685 47,722
----------- ---------- ----------- ----------
OPERATING LOSS (6,899) (3,067) (14,380) (8,073)
----------- ---------- ----------- ----------
Interest income 679 30 1,405 64
Interest expense (722) (2,523) (1,362) (4,972)
----------- ---------- ----------- ----------
LOSS BEFORE INCOME TAXES (6,942) (5,560) (14,337) (12,981)
----------- ---------- ----------- ----------
Income taxes -- -- -- --
----------- ---------- ----------- ----------
NET LOSS $ (6,942) $ (5,560) $ (14,337) $ (12,981)
=========== ========== =========== ==========
Net loss per ordinary share $ (0.56) $ (0.97) $ (1.16) $ (2.48)
----------- ---------- ----------- ----------
Weighted average ordinary shares outstanding 12,366,808 5,706,978 12,366,808 5,235,771
=========== ========== =========== ==========
See notes to unaudited consolidated financial statements.
4
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997
(in thousands of U.S. dollars)
(UNAUDITED)
Six Months Ended June 30,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,337) $(12,981)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 2,808 2,650
Accretion of loan discount 564 3,934
Stock compensation expense 309 464
Loss on sale of fixed assets -- 98
Changes in assets and liabilities:
Decrease (increase) in accounts receivable and
prepaid expense 2,430 (1,459)
(Increase) decrease in inventories (1,643) 4,157
(Decrease) increase in accounts payable and
accrued liabilities (828) 18,444
-------- --------
Net cash (used) provided by operating activities (10,697) 15,307
-------- --------
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Purchase of tangible fixed assets (75) (454)
Purchase of intangible fixed assets -- (12,225)
Sale of tangible fixed assets -- 1,168
-------- --------
Net cash used in investing activities (75) (11,511)
-------- --------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Working capital facility proceeds (repayment) 5,201 (3,006)
-------- --------
Net cash provided by (used in) financing activities 5,201 (3,006)
-------- --------
Net (decrease) increase in cash and cash equivalents (5,571) 790
Cash and cash equivalents, beginning of period 52,786 2,663
-------- --------
Cash and cash equivalents, end of period $ 47,215 $ 3,453
-------- --------
See notes to unaudited consolidated financial statements.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
Notes to the Unaudited Consolidated Financial Statements
June 30, 1998
NOTE 1: BASIS OF PRESENTATION
The unaudited financial statements included herein have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission for
reporting on Form 10-Q. Certain information and footnote disclosure normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The statements should be read in conjunction with the
accounting policies and notes to consolidated financial statements included in
Warner Chilcott Public Limited Company's (the "Company" or "Warner Chilcott")
1997 Annual Report on Form 20-F.
The Company is an Irish public limited company with operations in Dublin,
Ireland and Rockaway, NJ, USA. The Company's financial statements include the
financial statements for Warner Chilcott, plc and all of its subsidiaries and
are prepared in U.S. dollars in conformity with United States generally accepted
accounting principles.
In the opinion of management, the financial statements reflect all adjustments
necessary for a fair statement of the operations for the interim periods
presented.
NOTE 2: INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
principally on the basis of first-in, first-out or standards that approximate
average cost.
June 30, 1998 December 31, 1997
------------- -----------------
(in thousands of U.S. dollars)
Raw materials $ 2,960 $ 3,687
Finishing supplies -- 7
Work in process 979 492
Finished goods 14,941 12,460
-------- --------
18,880 16,646
Less: Reserve for obsolescence 1,062 471
-------- --------
Inventories $ 17,818 $ 16,175
======== ========
NOTE 3: EARNINGS PER SHARE
The Company adopted the provisions of SFAS No. 128, Earnings Per Share on
December 31, 1997. This statement requires that all prior-period net income per
ordinary share calculations be restated to conform with the provisions of this
Statement. Basic net income per ordinary share has been computed by dividing net
income available to ordinary shareholders by the weighted average number of
ordinary shares outstanding during the period. Diluted net income per ordinary
share is computed by adjusting the weighted average number of ordinary shares
6
outstanding during the period for all potentially dilutive ordinary shares
outstanding during the period and adjusting net income for any changes in income
or loss that would result from the conversion of such potential ordinary shares.
The per share amount for the six months ended June 30, 1997 was retroactively
restated to give effect to SFAS No. 128. Net loss and weighted average shares
outstanding used for computing diluted loss per share were the same as that used
for computing basic loss per share for the three and six months ended June 30,
1998 and 1997. Stock options and warrants have not been included in the
calculation since the inclusion of such shares would be antidilutive.
NOTE 4: COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." Comprehensive income is defined as the total change in shareholders'
equity during the period other than from transactions with shareholders. For the
Company, comprehensive income is comprised solely of net income (loss).
NOTE 5: CONTINGENCIES
The Company is involved in various legal proceedings of a nature considered
normal to its business including patent litigation, product liability and other
matters. In the event of the adverse outcome of these proceedings, resulting
liabilities are either covered by insurance, established reserves or, in the
opinion of management, would not have a material adverse effect on the financial
condition or results of operations of the Company.
NOTE 6: UNITED STATES FEDERAL INCOME TAXES
The Company operates in Ireland and the United States and is subject to various
taxes on income in both jurisdictions. Warner Chilcott's wholly owned United
States subsidiary, Warner Chilcott, Inc., is a United States corporation and, as
such, is subject to United States taxation. The Company expects that some or all
of the net operating loss carryforward which Warner Chilcott, Inc. has
accumulated could be used to offset future taxable earnings.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and is subject to the safe harbors created
by those sections. These forward-looking statements are subject to significant
risks and uncertainties, including those identified in the section of this Form
10-Q entitled "Factors That May Affect Future Operating Results", in the
Company's 1997 Annual Report on Form 20-F filed with the Securities and Exchange
Commission on May 15, 1998 and in the Company's Final Prospectus for its initial
public offering filed with the Securities and Exchange Commission on August 8,
1997, which may cause actual results to differ materially from those discussed
in such forward-looking statements. The forward-looking statements within this
Form 10-Q are identified by words such as "believes", "anticipates", "expects",
"intends", "may", "will" and other similar expressions. However theses words are
not the exclusive means of identifying such statements. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. The Company
undertakes no obligation to release publicly the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances occurring subsequent to the filing of this Form 10-Q with the
Securities and Exchange Commission. Readers are urged to review and consider
carefully the various disclosures made by the Company in this report and in the
Company's other reports filed with the Securities and Exchange Commission that
attempt to advise interested parties of the risks and factors that may affect
the Company's business.
Set forth below is the discussion of the financial condition and results of
operations of the Company for the three and six months ended June 30, 1998. This
discussion should be read in conjunction with the consolidated unaudited
financial statements and the related notes, appearing in Item 1.
OVERVIEW
Warner Chilcott is engaged in the development, marketing, sale and distribution
of prescription pharmaceutical products in the United States. The Company's
current focus is on branded products targeted for three specialty segments:
dermatology, cardiology, and women's health care. All of the Company's branded
products are promoted by the Company's specialty sales force. Warner Chilcott's
current portfolio of branded products includes Vectrin(R), an antibiotic used
most frequently for the treatment of acne, LoCholest(TM), a lipid regulator for
the reduction of LDL cholesterol levels, and NataFort(R), a prenatal vitamin
designed to improve patient compliance by virtue of its smaller size relative to
competing products. Warner Chilcott plans to add additional products to its
portfolio of branded products through internal development, acquisition,
in-licensing, collaboration with other companies and co-promotion agreements.
Warner Chilcott is also pursuing approval of a number of complex generic
pharmaceutical products.
HISTORY
The Company is an Irish public limited company founded in 1992 as Nale
Laboratories Limited. In March 1996 Nale acquired certain assets and assumed
certain liabilities (the "Acquisition") of Warner Chilcott Laboratories, a
division of Warner-Lambert Company (the "Division"). From 1987 to the date of
the Acquisition, the Division engaged in the sale and distribution of generic
8
products for Warner-Lambert Company. Following the Acquisition, Nale changed its
name to Warner Chilcott Public Limited Company.
The principal purpose of the Acquisition was to provide the Company with
channels of distribution in the United States. In addition, the Company gained
an established reputation in the pharmaceutical industry, a portfolio of
existing products, and a functioning organization. The Company's customer base
includes all major national wholesalers and pharmacy chains. In addition, a
telemarketing organization covers almost 5,000 independent pharmacies. The
certain assets and liabilities of the Division acquired in the Acquisition are
now organized in the United States as Warner Chilcott, Inc., a wholly-owned
subsidiary of Warner Chilcott Public Limited Company. The cost of the
Acquisition, approximately $145 million, was financed through the private
placement of senior subordinated debt and equity securities, borrowings under a
working capital facility and cash on hand. Subsequently, 87% of the subordinated
notes were converted into ordinary shares.
The Company's revenues are currently generated in the United States and the U.S.
dollar is the functional currency of the Company. Accordingly the Company's
exposure to currency fluctuation is limited. Product sourcing from vendors and
research and development agreements are normally contracted in U.S. dollars. As
a company operating in multiple jurisdictions, the Company will be subject to
taxation on its earnings in the jurisdictions in which it operates. At present,
such jurisdictions include Ireland and the United States.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 and 1997
Total revenue for the six months ended June 30, 1998 declined 33.7% to $26.3
million from $39.6 million for the same period in 1997. Branded sales in the
period increased 84.7% to $7.7 million from $4.2 million in the prior year.
Branded products sold throughout the 1998 period included: Vectrin(R),
LoCholest(TM), NataFort(R) and several branded products acquired from
Warner-Lambert in June 1997. Branded sales in the 1997 period included only
Vectrin and LoCholest, both of which were launched in the second calendar
quarter of 1997. Sales of non-differentiated generic products during the period
declined $16.9 million to $18.6 million due to the out-licensing of the
Company's generic minocycline product to Barr Laboratories beginning in the
third quarter of 1997 and decreased emphasis on generic products in favor of the
Company's branded offerings.
Despite the decline in total revenue, an improved gross margin on sales produced
a 27.4% increase in gross profit dollars to $8.1 million compared to $6.4
million in 1997. Gross margin percentage increased by 14.8 points to 30.8% from
16.0% for the six months ended June 30, 1997. The improvement in both gross
profit dollars and gross margin percentage reflect the shift in the mix of the
Company's revenues toward higher-margin branded products.
Selling, general and administrative expenses totaled $18.1 million for the
period compared to $7.2 million in 1997, an increase of 151%. The most
significant factors contributing to the increase in the 1998 period versus 1997
were: the expansion and development of the company's sales force from 30
professionals at June 30, 1997 to over 175 at June 30, 1998, increased
promotional spending in support of the launch of NataFort beginning in January
1998 and increased costs associated with the litigation of patent challenges
related to the Company's ANDA filings for nifedipine CC and terazosin
hydrochloride.
9
Research and development expense declined from $4.6 million for the six months
ended June 30, 1997 to $1.6 million for the same period in 1998. Research and
development expense includes both internal product development efforts and the
costs of collaborations with development partners. During the 1997 period, the
company made a number of milestone payments to product development partners
related to several complex generic products. In addition, beginning in late
1997, Warner Chilcott shifted its overall product development focus to
concentrate on lower cost internal projects.
The net result of the factors outlined above was that the Company's operating
loss for the six months ended June 30, 1998 increased to $14.4 million from $8.1
million in 1997. The improvement in gross profit dollars and reduction in
research and development costs were more than offset by the increased costs of
building the Company's sales force and promoting its branded products.
Interest income during the period increased to $1.4 million from $0.1 million
due to the infusion of capital in connection with the Company's initial public
offering in August 1997. Interest expense declined to $1.4 million from $5.0
million in 1997 primarily due to the exchange of $49.5 million of senior
subordinated discount notes for ordinary shares in June 1997.
The net loss for the six months ended June 30, 1998 increased by 10.4% to $14.3
million as compared to a net loss of $13.0 million in the same period in 1997.
The loss per ordinary share for the period decreased to ($1.16) on 12.4 million
shares from ($2.48) on 5.2 million shares. The increase in the weighted average
ordinary shares outstanding reflects the issuance of ordinary shares in
connection with the Company's initial public offering in August 1997 and related
financings.
Three months ended June 30, 1998 and 1997
Total revenues for the quarter ended June 30, 1998 declined to $12.4 million
from $20.6 million for the same period in 1997. Sales of branded products for
the 1998 quarter increased $0.2 million or 5.3% to $4.4 million compared with
$4.2 million in 1997. 1998 second quarter revenues include sales of Vectrin,
LoCholest, NataFort and several branded products acquired from Warner-Lambert
Company 1997. Sales of branded products in the second quarter of 1997 included
only Vectrin and LoCholest, but were unusually high as the Company launched both
products during the quarter and benefited from the stocking of the trade. Sales
of non-differentiated generic products during the quarter declined $8.4 million
to $8.0 million due to the out-licensing of the Company's generic minocycline
product to Barr Laboratories beginning in the third quarter of 1997 and
decreased emphasis on generic products in favor of the Company's branded
offerings.
Despite the decline in total revenue, an improved gross margin on sales resulted
in gross profit dollars increasing 22.7% to $4.6 million compared to $3.8
million in 1997. Gross margin percentage increased by 18.8 points from 18.3% in
1997 to 37.1% for the quarter ended June 30, 1998. The improvement in both gross
profit dollars and gross margin percentage reflect the shift in the mix of
revenues toward higher-margin branded products.
Selling, general and administrative expenses during the quarter rose $5.4
million to $9.4 million, an increase of 137%. The increase reflects the
expansion of the Company's sales force, increased promotional costs associated
with NataFort and higher legal costs in connection with the litigation of
various patent challenges.
10
Research and development expenses declined $0.5 million due to the Company's
decision to focus on lower-cost internal product development projects during the
period.
The net result of the factors outlined above was that Company's operating loss
for the quarter increased 125% to $6.9 million compared with the second quarter
of 1997. The improvement in gross profit dollars and reduction in research and
development expenses were more than offset by increased costs of building and
maintaining the Company's sales force and other expenses.
Interest income in the quarter increased to $0.7 million due to the availability
of funds for investment following the Company's initial public offering.
Interest expense declined to $0.7 million from $2.5 million in 1997 primarily
due to the exchange of $49.5 million of senior subordinated discount notes for
ordinary shares in June 1997.
The net loss for the quarter ended June 30, 1998 increased by 24.9% to $6.9
million as compared to a net loss of $5.6 million for the second quarter of
1997. The loss per ordinary share for the quarter decreased to ($0.56) on 12.4
million shares from ($0.97) on 5.7 million shares in 1997. The increase in the
weighted average ordinary shares outstanding reflects the issuance of ordinary
shares in connection with the Company's initial public offering in August 1997
and related financings.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS:
Following is a discussion of some the risks and historical facts which should be
considered when evaluating the current and future results of the Company. This
discussion is not intended to include all risks and historical facts that could
produce adverse results.
Warner Chilcott has a history of operating losses. Operating losses have been
posted since the formation of the Company in 1992. As of June 30, 1998, the
Company's accumulated deficit was $97.6 million. The Company has invested in the
corporate infrastructure and sales organization needed to support the marketing
and product development activities that management believes necessary for the
success of the Company. However, there can be no assurance that these efforts
will be sufficient and, thus, future profitability is uncertain.
The future capital needs and additional funding activities of the Company are
uncertain. Warner Chilcott has experienced negative cash flows from operations
and has funded its activities to date from the issuance of equity and debt
securities. The Company has expended, and will continue to be required to
expend, substantial funds for promotional activities for products, to continue
research and development of product candidates, to in-license and acquire
additional products and to undertake sales and marketing efforts of its current
or future products. Although the Company may seek additional funding through the
public or private capital markets, there can be no assurance that any such
funding will be available to the Company.
Intense competition exists within the pharmaceutical industry. Many companies,
some with greater financial, marketing and development capabilities than the
Company, are engaged in developing, marketing and selling products that compete
with the products offered by Warner Chilcott. Other products now in use or under
development by others may be more effective or have fewer side effects than the
Company's current or future products. The industry is characterized by rapid
technological change, and competitors may develop their products more rapidly
than the Company. Competitors may also be able to complete the regulatory
process sooner and, therefore, may begin to market their products in advance of
the Company's products.
11
There can be no assurance that developments by others will not render any
product or technology the Company produces to be obsolete or otherwise
noncompetitive.
The clinical development, manufacture, marketing and sale of pharmaceutical
products is subject to extensive federal, state and local regulation in the
United States and similar regulation outside the United States. FDA approval is
required before most drug products can be marketed. FDA filings can be time
consuming and expensive without assurance that the results will be adequate to
justify approval. There can be substantial delays in the process, including the
need to provide additional data. There can be no assurance that approvals for
filings already made by the Company, or to be made in the future, can be
obtained in a timely manner, if at all, or that the regulatory requirements for
any such proposed products can be met. In addition, new regulations may
adversely affect the Company's operations or competitive position in the future.
The distribution network for pharmaceutical products has in recent years been
subject to increasing consolidation. As a result, a few large wholesale
distributors control a significant share of the market. In addition, the number
of independent drug stores and small chains has decreased as retail pharmacy
consolidation has occurred. Continued consolidation of either wholesale
distributors or retail pharmacies may adversely effect the Company's operations.
The Company depends on third parties for the manufacture of its current and
future products. Currently the Company does not possess the facilities or
resources needed for these activities. The Company's strategy for development,
commercialization and manufacturing of certain of its products entails entering
into various arrangements with corporate collaborators, licensors and others. If
any of the Company's corporate collaborators were unable to satisfy their
contractual obligations to the Company, there can be no assurance that the
Company would be able to negotiate similar arrangements with other third
parties.
Many of the principal components of the Company's products are available only
from single source suppliers. There can be no assurance that the Company will
establish or, if established, maintain good relationships with such suppliers or
that such suppliers will continue to exist or be able to supply ingredients in
conformity with regulatory requirements.
Warner Chilcott is engaged in the manufacture and marketing of products that may
give rise to the development of certain legal actions and proceedings. The
Company carries product liability insurance and umbrella liability insurance.
There can be no assurance that this coverage is adequate to cover potential
liability claims or that additional insurance coverage will be available in the
future if the Company manufactures and markets new products. The Company's
financial condition and results of operations could be materially adversely
affected by the unfavorable outcome of legal actions and proceedings.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, cash and cash equivalents amounted to $47.2 million. This
balance is primarily the result of the infusion of capital from the Company's
initial public offering in August 1997 and related financings totaling
approximately $74.6 million. Proceeds from the IPO have been used to fund
ongoing working capital requirements. The Company's working capital, adjusted to
exclude cash and short-term debt balances, remained the same at June 30, 1998 as
compared with December 31, 1997. Adjusted working capital on these dates
amounted to $13.5 million.
On March 30, 1998, the Company entered into a $30 million senior secured working
capital agreement with a syndicate of banks led by PNC Business Credit to fund a
portion of its
12
investment in inventories and accounts receivable. At June 30, 1998, the Company
had $19.7 million outstanding under this bank credit agreement, an increase of
$5.2 million over the balance at December 31, 1997 of $14.5 million. Working
capital availability is contingent upon the balances of certain inventory,
accounts receivable and other assets of Warner Chilcott, Inc., the Company's
wholly owned United States operating subsidiary. Prior to March 30, 1998, a
syndicate of banks led by BT Commercial Corporation provided the Company's
working capital facility.
The Company posted a substantial loss for the six months ended June 30, 1998 and
losses may continue throughout 1998 and beyond. In addition, the Company may
invest in additional working capital or make capital expenditures to support its
various business activities. Management believes the combination of the
Company's cash balances ($47.2 million at June 30, 1998) and availability under
its working capital facility provide Warner Chilcott with access to sufficient
capital to meet its requirements for at least the next 12 months. There can be
no assurance, however, that such funds will be sufficient. Beyond such period,
and in the absence of the Company generating cash from operations, the Company
would need to raise additional funds. The Company expects that it would seek
additional funding through public or private equity or debt financings or
through collaborations. To the extent the Company raises additional capital by
issuing equity securities, ownership dilution to existing shareholders will
result and future investors may be granted rights superior to those of existing
shareholders. There can be no assurance that additional funding will be
available on acceptable terms, or at all.
INFLATION
Inflation had no material impact on Warner Chilcott's operations during the six
months ended June 30, 1998.
YEAR 2000
The Company's primary information technology systems are used in the finance,
administration, billing, distribution and selling systems operated in the
Company's U.S. operating subsidiary, Warner Chilcott, Inc.. Since the
acquisition in March 1996, the Company has had to put in place new systems to
replace those systems previously provided by Warner-Lambert Company to the
former Division. As a result, the Company has put in place computer systems,
which have been recently developed by their vendors, and has requested
certification from their vendors that these systems are Year 2000 compliant.
Since April 1, 1998, the Company has been contracting out warehousing,
distribution, billing and prime vendor charge back services to Livingston
Healthcare Services Inc., a specialist provider of distribution and other
services to the pharmaceutical industry. The Company is being kept appraised of
Livingston's efforts to ensure that their systems are Year 2000 compliant. The
Company therefore believes that it has taken steps to minimize any material
adverse consequences of Year 2000 problems, although there can be no assurance
at this time that such problems may not arise. Costs associated with the
exercise are not expected to be material and will be expensed as incurred.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
13
Part II - Other Information
Item 1. Legal Proceedings
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business, including product liability claims.
During April 1998, Abbott Laboratories filed a lawsuit against the Company for
alleged infringement of certain patents related to Warner Chilcott's ANDA filing
for terazosin hydrochloride. Abbott markets terazosin hydrochloride under the
brand name Hytrin(R). Management of the Company believes that the Abbott action
is without merit and is vigorously contesting it.
Other than outlined above, the Company is not party to any litigation or other
legal proceedings which the Company believes could reasonably be expected to
have a material adverse effect on the Company's business, results of operations,
or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual General Meeting of shareholders was held on April 2, 1998
in Dublin, Ireland. Following are the matters brought to vote and the results:
Broker
Board of Director Elections For Against Abstain Non-votes
--------------------------- --------- ------- ------- ---------
Donald E. Panoz 5,731,972 0 0 0
Thomas G. Lynch 5,731,972 0 0 0
James H. Bloom 5,731,972 0 0 0
Bruce L. Downey 5,731,972 0 0 0
Roger M. Boissonneault 5,731,972 0 0 0
Proposals to authorize the Board of Directors to fix the remuneration of the
Auditors and approve the Directors' Report and Financial Statements for the year
ended December 31, 1997 together with the Auditor's Report were approved with
5,731,972 votes for, no votes against, no abstentions and no broker non-votes.
In addition, each of the following proposals were approved with 5,730,972 votes
for, 1000 votes against, no abstentions and no broker non-votes.
(i) to authorize the Board of Directors to allot and issue shares up to
an aggregate nominal amount equal to the authorized but unissued
share capital of the Company;
(ii) to authorize the Board of Directors to allot equity securities for
cash; and
(iii) to authorize the Board of Directors to capitalize any part of the
amount standing to the credit of the share premium account at the
time of such capitalization, and to apply the capitalized sum in
paying up in full unissued shares for distribution to Ordinary
shareholders pro rata to their existing stockholdings.
Finally, the proposal to adopt the amended 1997 Incentive Share Option Scheme
was approved with 5,579,872 votes for, 152,100 votes against, no abstentions and
no broker non-votes.
Item 5. Other Information
Pursuant to newly adopted rules of the Securities and Exchange Commission, any
company shareholder who intends to present a proposal at the Company's Annual
General Meeting of shareholders in 1999 without requesting the Company to
include such proposal in the Company's
14
proxy materials should be aware that he must notify the Company not later than
January 25, 1999 of his intention to present the proposal. Otherwise, the
Company may exercise discretionary voting with respect to such shareholder
proposal pursuant to authority conferred on the Company by proxies delivered to
the Company in connection with the meeting.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - The following exhibits are filed with this document:
Exhibit No. Description
- - ----------- -----------
10.1 Employment agreement between the Company and James G. Andress,
dated March 3, 1997
10.2 Employment agreement between the Company and Roger M.
Boissonneault, dated March 3, 1997
10.3 Employment agreement between the Company and Paul S. Herendeen,
dated February 3, 1998
10.4 Warrant Certificate agreement between the Company and James G.
Andress, dated October 31, 1996
10.5 Warrant Certificate agreement between the Company and James G.
Andress, dated October 31, 1996
10.6 Warrant Certificate agreement between the Company and Roger M.
Boissonneault, and dated October 31, 1996
10.7 Warrant Certificate agreement between the Company and Roger M.
Boissonneault, and dated October 31, 1996
10.8 Warrant Certificate agreement between the Company and Paul S.
Herendeen, and dated February 3, 1998
10.9 Revolving Credit and security Agreement, dated March 30, 1998,
among Warner Chilcott, Inc. PNC Bank, National Association and
the Lenders thereto
10.10 Financial Support Undertaking, dated March 30, 1998, made by
Warner Chilcott Public Limited Company and Warner Chilcott
(Bermuda) Limited in favor of PNC Bank, National Association
10.11 Continuing Limited Non-Recourse and Collateralized Guaranty,
dated March 30, 1998, made by Warner Chilcott (Bermuda) Limited
in favor of PNC Bank, National Association
10.12 Trademark Collateral Assignment and Security Agreement, from
Warner Chilcott, Inc. to PNC Bank, National Association, dated
March 30, 1998
15
10.13 Trademark Collateral Assignment and Security Agreement, from
Warner Chilcott (Bermuda) Limited to PNC Bank, National
Association, dated March 30, 1998
27 Financial Data Schedule
b. Reports on Form 8-K:
No report was filed during the three months ended June 30, 1998.
16
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 CHILCOTT PUBLIC LIMITED COMPANY
(Registrant)
August 14, 1998 /s/ Paul S. Herendeen
---------------------
Paul S. Herendeen
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
August 14, 1998 /s/ David G. Kelly
------------------
David G. Kelly
Group Vice President, Finance
(Principal Accounting Officer)
17