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 September 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
September 30, 1998.
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Table of contents
PAGE NO.
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Part I - Financial Information
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 2-3
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 8-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II - Other Information
Item 1. Legal Proceedings 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Part I - Financial Information
Item 1. Financial Statements
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997
Assets
(in thousands of U.S. dollars)
(UNAUDITED)
September 30, December 31,
1998 1997
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 43,346 $ 52,786
Accounts receivable 19,934 14,599
Inventories 16,896 16,175
Prepaid expense and other assets 7,284 7,399
-------- --------
Total current assets 87,460 90,959
-------- --------
Fixed Assets:
Property, plant and equipment (net) 1,069 1,148
Other Assets:
Intangible assets 75,600 79,630
-------- --------
Total assets $164,129 $171,737
======== ========
See notes to unaudited consolidated financial statements.
2
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997
Liabilities and Shareholders' Equity
(in thousands of U.S. dollars)
(UNAUDITED)
September 30, December 31,
1998 1997
------------- ------------
LIABILITIES
Current Liabilities:
Short-term debt $ 20,172 $ 14,511
Accounts payable 16,571 11,417
Accrued liabilities 6,025 7,994
Due to Elan Corporation, plc and subsidiaries 5,325 5,267
--------- ---------
Total current liabilities 48,093 39,189
--------- ---------
Other Liabilities:
Long-term debt 8,764 7,902
--------- ---------
Total liabilities 56,857 47,091
--------- ---------
SHAREHOLDERS' EQUITY
Ordinary Shares, par value $.05 per share;
50,000,000 shares authorized,
12,366,808 shares issued and outstanding
at September 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 September 30, 1998 and December 31, 1997 45 45
Additional paid-in capital 208,939 208,962
Shareholders' accumulated deficit:
Accumulated deficit, beginning of period (83,281) (54,907)
Current period loss (17,814) (28,374)
--------- ---------
Accumulated deficit, end of period (101,095) (83,281)
--------- ---------
Deferred compensation (1,235) (1,698)
--------- ---------
Total shareholders' equity 107,272 124,646
--------- ---------
Total liabilities and
shareholders' equity $ 164,129 $ 171,737
========= =========
See notes to unaudited consolidated financial statements.
3
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1998 and 1997
(in thousands of U.S. dollars, except per share data)
(UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
Branded product sales $ 3,109 $ 1,864 $ 10,854 $ 6,057
Generic product sales 6,228 19,658 24,788 55,114
Marketing alliances and other revenue 7,764 -- 7,764 --
------------ ------------ ------------ ------------
Total revenues 17,101 21,522 43,406 61,171
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of goods sold 7,987 17,742 26,187 51,028
Selling, general and administrative 10,245 7,942 28,364 15,157
Depreciation and amortization 1,405 1,400 4,213 4,050
Research and development 796 1,258 2,354 5,829
Interest expense, net 145 107 102 5,015
------------ ------------ ------------ ------------
Total costs and expenses 20,578 28,449 61,220 81,079
------------ ------------ ------------ ------------
NET LOSS BEFORE TAXES (3,477) (6,927) (17,814) (19,908)
------------ ------------ ------------ ------------
Income taxes -- -- -- --
------------ ------------ ------------ ------------
NET LOSS $ (3,477) $ (6,927) $ (17,814) $ (19,908)
============ ============ ============ ============
Net loss per ordinary share $ (0.28) $ (0.65) $ (1.44) $ (2.84)
------------ ------------ ------------ ------------
Weighted average ordinary shares outstanding 12,366,808 10,590,000 12,366,808 7,022,000
============ ============ ============ ============
See notes to unaudited consolidated financial statements.
4
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997
(in thousands of U.S. dollars)
(UNAUDITED)
Nine Months Ended September 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(17,814) $(19,908)
Adjustments to reconcile net
loss to net cash provided by
operating activities
Depreciation and amortization 4,213 4,050
Accretion of loan discount 862 3,907
Stock compensation expense 463 618
Loss on sale of fixed assets -- 98
Changes in assets and liabilities:
Increase in accounts receivable
and prepaid expense (5,220) (5,198)
(Increase) decrease in inventories (721) 6,960
Increase in accounts payable and
accrued liabilities 3,185 11,132
-------- --------
Net cash (used) provided by
operating activities (15,032) 1,659
-------- --------
CASH FLOWS (USED IN) PROVIDED
BY INVESTING ACTIVITIES:
Purchase of tangible fixed assets (104) (489)
Purchase of intangible fixed assets -- (16,888)
Sale of tangible fixed assets -- 1,180
-------- --------
Net cash used in investing activities (104) (16,197)
-------- --------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Working capital facility proceeds 5,661 283
Loan proceeds (repayment) - Elan
Corporation, plc 58 (4,729)
(Miscellaneous costs) proceeds from
sale of share capital (23) 74,677
-------- --------
Net cash provided by financing activities 5,696 70,231
-------- --------
Net (decrease) increase in cash and cash
equivalents (9,440) 55,693
Cash and cash equivalents,
beginning of period 52,786 2,663
-------- --------
Cash and cash equivalents, end of period $ 43,346 $ 58,356
======== ========
See notes to unaudited consolidated financial statements.
5
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Notes to the Unaudited Consolidated Financial Statements
September 30, 1998
NOTE 1: BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Certain information and footnote
disclosure normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The statements should be read in
conjunction with the accounting policies and notes to the consolidated financial
statements included in Warner Chilcott Public Limited Company's (the "Company"
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 Public Limited Company and all of its
subsidiaries and are prepared in U.S. dollars in conformity with United States
generally accepted accounting principles.
In the opinion of management, the financial statements reflect all adjustments
necessary for a fair statement of the operations for the interim periods
presented.
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.
September 30, 1998 December 31, 1997
(in thousands of U.S. dollars)
------------------ -----------------
Raw materials $ 2,010 $ 3,687
Finishing supplies -- 7
Work in process 1,269 492
Finished goods 14,564 12,460
------- -------
17,843 16,646
Less: Valuation reserves 947 471
------- -------
Inventories $16,896 $16,175
======= =======
NOTE 3: SCHERING PLOUGH AGREEMENT
The Company entered into an agreement with Schering Plough under which Warner
Chilcott promotes two Schering Plough cardiovascular products. This agreement
was effective July 1, 1998 and revenue from this arrangement is included in the
Statement of Operations under the caption "Marketing alliances and other
revenue."
6
NOTE 4: 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
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 nine months ended September 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 nine
months ended September 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 5: 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 6: 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 7: 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" and in the
Company's 1997 Annual Report on Form 20-F filed with the Securities and Exchange
Commission, 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 these
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 nine months ended September 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:
cardiology, women's health care and dermatology. All of the Company's branded
products are promoted by the Company's specialty sales force.
Warner Chilcott currently markets a portfolio of branded products including:
NataFort(R), a prescription prenatal vitamin designed to improve patient
compliance by virtue of its smaller size relative to competing products,
IMDUR(R), a once-daily oral nitrate for angina, K-DUR(R), a sustained release
potassium supplement, Vectrin(R), an antibiotic used most frequently for the
treatment of acne, and LoCholest(TM), a lipid regulator for the reduction of LDL
cholesterol levels. NataFort, Vectrin and LoCholest are owned by Warner Chilcott
while IMDUR(R) and K-DUR(R) are products owned by Schering Plough and promoted
by Warner Chilcott under a co-promotion agreement.
Warner Chilcott plans to add additional products to its portfolio of branded
products through internal development, co-promotion agreements, in-licensing,
acquisition and development collaborations with other companies. Warner Chilcott
is also pursuing approval of a number of complex generic pharmaceutical
products.
8
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
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 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
Three months ended September 30, 1998 and 1997
Total revenue for the quarter ended September 30, 1998 declined to $17.1 million
from $21.5 million for the same period in 1997. Sales of branded products for
the 1998 quarter increased $1.2 million or 66.8% to $3.1 million compared with
$1.9 million in 1997 primarily due to continuing sales of NataFart (R) that was
launched in January 1998. Sales of non-differentiated generic products during
the quarter declined $13.4 million to $6.2 million due to the out-licensing of
the Company's generic minocycline product to Barr Laboratories beginning in the
fourth quarter of 1997 and decreased emphasis on generic products in favor of
the Company's branded offerings.
Gross profit on product sales decreased 64.3% or $2.4 million to $1.4 million in
1998 from $3.8 million in 1997. Gross profit declined due to several factors
including: unfavorable trends in gross margin percentages on the sale of
non-differentiated generic products, returns of short-dated branded goods during
the quarter and increases in valuation reserves associated with inventory of
certain generic products. Gross margin percentage on product sales declined to
14.5% for the third quarter versus 17.6% for the same period in 1997 for the
same reasons.
The Company began marketing IMDUR(R) and K-DUR(R) as of July 1, 1998 in
accordance with an agreement with Schering Plough. Revenue from this activity
was largely responsible for the increase in marketing alliances and other
revenue.
Selling, general and administrative expenses for the quarter rose $2.3 million
compared with the same quarter in the prior year, an increase of 29%. This
increase was due to the expansion of the Company's sales force and the addition
of general and administrative staff to support the Company's broader scope of
activities. Also contributing to the increase were costs associated
9
with the litigation of patent challenges related to the Company's ANDA filings
for nifedipine CC and terazosin hydrochloride. The increases in sales force and
litigation costs were offset somewhat by decreased promotional spending as
compared with the 1997 period, particularly lower spending against
LoCholest(TM).
Research and development expenses declined $0.5 million as compared with the
same quarter in 1997 due to the Company's decision to pursue lower-cost internal
product development projects during 1998.
The net loss for the quarter ended September 30, 1998 decreased by 49.8% to $3.5
million as compared to a net loss of $6.9 million for the third quarter of 1997.
Revenue from marketing alliances more than offset the increased costs of the
Company's sales force and increased administrative expense. The loss per
ordinary share for the quarter decreased to ($0.28) on 12.4 million shares from
($0.65) on 10.6 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.
Nine Months Ended September 30, 1998 and 1997
Total revenue for the nine months ended September 30, 1998 declined 29% to $43.4
million from $61.2 million for the same period in 1997. Branded sales in the
period increased 79.2% to $10.9 million from $6.1 million in the prior year.
Branded products sold throughout the 1998 period included: NataFort(R),
LoCholest(TM), Vectrin(R) and several branded products acquired from
Warner-Lambert in June 1997. Branded sales in the 1997 period included LoCholest
and Vectrin, both of which were launched in the second calendar quarter of 1997,
and the several branded products acquired from Warner-Lambert which were sold by
Warner Chilcott beginning in the third calendar quarter of 1997. Sales of
non-differentiated generic products during the period declined $30.3 million or
55% to $24.8 million due to the out-licensing of the Company's generic
minocycline product to Barr Laboratories beginning in the fourth quarter of 1997
and decreased emphasis on generic products in favor of the Company's branded
offerings.
Gross profit on product sales was $9.5 million for the nine months ended
September 30, 1998 as compared to $10.1 million for the 1997 period. Increased
gross profit dollars resulting from increased sales of branded products were
more than offset by declines in gross profit from dollars from
non-differentiated generic product sales. The impact of the decreased sales of
generic products was exacerbated by a reduction in the gross margin percentage
realized on those sales. The blended gross margin percentage in the period
increased by 9.9 points to 26.5% from 16.6% for the nine months ended September
30, 1997 reflecting the shift in the mix of the Company's revenues toward
higher-margin branded products.
The Company began marketing IMDUR(R) and K-DUR(R) as of July 1, 1998 in
accordance with an agreement with Schering Plough. Revenue from this activity
was largely responsible for the increase in marketing alliances and other
revenue.
Selling, general and administrative expenses totaled $28.4 million for the
period compared to $15.2 million in 1997, an increase of 87.1%. The most
significant factor contributing to the increase was the expansion of the
company's sales force and related infrastructure. During the second quarter of
1997 the Company established its sales force with 64 sales representatives, and
ended the third quarter 1997 with 111 sales representatives. The Company began
1998 with 167 sales representatives, and ended the third quarter 1998 with 228
representatives. In addition, general and administrative expenses increased as
the company added staff to support the increased breadth of the Company's
activities. Lastly, in 1998 the Company incurred substantial
10
expenses associated with the litigation of patent challenges related to the
Company's ANDA filings for nifedipine CC and terazosin hydrochloride.
Research and development expense declined from $5.8 million for the nine months
ended September 30, 1997 to $2.4 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 one-time milestone payments to product development
partners related to several complex generic products which the Company continues
to pursue. In addition, beginning in late 1997, Warner Chilcott shifted its
overall product development focus to concentrate on lower cost internal
projects.
Net interest expense in the period decreased to $0.1 million in the 1998 period
from $5.0 million for the same period in 1997. The decrease reflects the
exchange and conversion of $49.5 million of Senior Subordinated Discount Notes
into ordinary shares in June 1997 and interest income earned on the net proceeds
from the Company's IPO and related financings in August of 1997.
The net result of the factors outlined above was that the net loss for the nine
months ended September 30, 1998 decreased by 10.5% to $17.8 million as compared
to a net loss of $19.9 million for the same period in 1997. Increased sales of
branded products combined with the revenue from marketing alliances more than
offset the increased costs of the Company's sales force and increased
administrative expense. The loss per ordinary share for the period decreased to
($1.44) on 12.4 million shares from ($2.84) on 7.0 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, and the conversion of senior subordinated
discount notes for ordinary shares.
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 September 30, 1998, the
Company's accumulated deficit was $101.1 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
11
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. 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 September 30, 1998, cash and cash equivalents on hand amounted to $43.3
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 operating losses and ongoing working capital requirements. The Company's
working capital, adjusted to exclude cash and short-term debt balances,
increased to $16.2 million
12
at September 30, 1998 from $13.5 million at December 31, 1997. The growth in
adjusted working capital was primarily due to an increased investment in
accounts receivable at September 30, 1998 related to the Schering Plough
promotion agreement.
On March 30, 1998, the Company entered into a $30 million senior secured credit
agreement with a syndicate of banks led by PNC Business Credit to fund a portion
of its investment in inventories and accounts receivable. At September 30, 1998,
the Company had $20.2 million outstanding under this credit facility, an
increase of $5.7 million over the $14.5 million owed on the predecessor credit
facility at December 31, 1997. Credit availability under the PNC facility is
based on the balances of certain inventory, accounts receivable and other assets
of Warner Chilcott, Inc., the Company's wholly owned United States operating
subsidiary.
The Company posted a substantial loss for the nine months ended September 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 ($43.3 million at September 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 18
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 nine
months ended September 30, 1998.
Year 2000
During 1997 the Company adopted a three-phase year 2000 plan consisting of:
Phase I - identification of all internal business critical systems and
applications, key vendors, and major customers. Although completed in June 1998,
Phase I includes the ongoing assessment of new vendors and customers as they
become associated with the Company's business activities. Phase II - assessment
of year 2000 compliance for all systems and activities identified in Phase I.
Phase II is currently in progress and is expected to be completed by the end of
1998. Phase III - remediation and/or development of contingency plans for
non-compliant systems and activities. Phase III is currently in progress and is
expected to be completed by the end of the first quarter of 1999.
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 put into place new systems to replace those
systems previously provided by Warner-Lambert Company to the former Division. As
a result, the Company's computer systems and applications have been recently
developed. Year 2000 upgrades of network software and hardware, and financial
software were completed during this year. With the exception of the Company's
voice mail system, all internal
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business critical systems and applications are now year 2000 compliant. The
voice mail system upgrade is expected to be completed during the first quarter
of 1999.
The Company has sent written inquiries to its key vendors and major customers as
to their progress in identifying and addressing year 2000 compliance issues.
Those vendors and customers who have responded have reported that they expect to
be year 2000 compliant well before the critical date. During the fourth quarter
of 1998, the Company plans to send follow-up inquiries to those key vendors and
major customers who have not as yet responded to the Company. The Company also
plans to follow-up with all key vendors and customers to obtain an update on
their year 2000 programs.
The Company does not expect the costs associated with year 2000 compliance to be
material. As of September 30, 1998, the Company incurred less than $100,000 in
the above mentioned system and application upgrades. These costs were paid from
available funds. The Company does not expect to incur additional costs and has
not deferred information systems projects in order to address year 2000 issues.
The most significant year 2000 risk faced by Warner Chilcott is compliance on
the part of third party vendors with whom the Company does business. Warner
Chilcott utilizes third party vendors to perform a variety of functions
including, but not limited to, warehousing, distribution, billing services,
product manufacture, market research and sales force recruitment. Although these
vendors have supplied the Company with written confirmation of their
anticipation of year 2000 compliance, the Company is developing contingency
plans to address potential problems should their efforts prove unsuccessful.
Based on Warner Chilcott's assessment efforts to date, the Company believes that
year 2000 issues will not be disruptive to its operations, nor have a material
adverse effect on its financial condition or results of operations. The
Company's beliefs and expectations, however, are based on certain assumptions
and expectations that ultimately may prove to be inaccurate. There can be no
assurance that the failure to ensure year 2000 compliance by a third party would
not have a material adverse effect on the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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.
The most material of these proceedings were described in the Company's 1997
Annual Report on Form 20-F filed with the Securities and Exchange Commission.
There have been no significant developments in these proceedings, nor, has the
Company become involved in additional material proceedings.
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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 that the Company
include such proposal in the Company's proxy materials should be aware that he
or she must notify the Company not later than January 25, 1999 of his or her
intention to present such 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 Promotion Agreement between Schering Corporation and Warner Chilcott
PLC dated July 16, 1998
10.2 Amendment to Promotion Agreement dated September 3, 1998
27 Financial Data Schedule
b. Reports on Form 8-K:
No report was filed during the three months ended September 30, 1998.
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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)
November 13, 1998 /s/ Paul S. Herendeen
------------------------------------------
Paul S. Herendeen
Executive Vice President & Chief Financial
Officer
(Principal Financial Officer)
November 13, 1998 /s/ David G. Kelly
-----------------------------------------
David G. Kelly
Group Vice President, Finance
(Principal Accounting Officer)
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