Warner-Lambert Company and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
- ----------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------
(Dollars in millions, except per share amounts)
NET INCOME
Net sales $12,928.9 $10,743.8 $8,408.1
- ----------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 3,041.9 2,860.2 2,502.9
Selling, general and
administrative 5,958.5 4,852.2 3,726.5
Research and development 1,259.0 1,025.6 730.7
Other expense, net 228.3 214.8 259.2
- ----------------------------------------------------------------------
Total costs and expenses 10,487.7 8,952.8 7,219.3
- ----------------------------------------------------------------------
Income before income taxes 2,441.2 1,791.0 1,188.8
Provision for income taxes 708.0 517.8 326.4
- ----------------------------------------------------------------------
Net income $ 1,733.2 $ 1,273.2 $ 862.4
- ----------------------------------------------------------------------
Net income per common share:
Basic $ 2.03 $ 1.50 $ 1.03
Diluted $ 1.96 $ 1.45 $ .99
- ----------------------------------------------------------------------
Cash dividends per common share $ .80 $ .64 $ .51
- ----------------------------------------------------------------------
COMPREHENSIVE INCOME
Net income $ 1,733.2 $ 1,273.2 $ 862.4
Other comprehensive income
(net of tax):
Foreign currency translation (280.9) 57.7 (193.8)
Other 34.8 (18.3) (14.6)
- ----------------------------------------------------------------------
Total other comprehensive income (246.1) 39.4 (208.4)
- ----------------------------------------------------------------------
Comprehensive income $ 1,487.1 $ 1,312.6 $ 654.0
- ----------------------------------------------------------------------
All amounts have been restated under the pooling of interests method of
accounting to include the financial results of Agouron Pharmaceuticals,
Inc. acquired on May 17, 1999.
See notes to consolidated financial statements.
Warner-Lambert Company and Subsidiaries
Consolidated Balance Sheets
- ---------------------------------------------------------------------
December 31, 1999 1998
- ---------------------------------------------------------------------
(Dollars in millions)
Assets:
Cash and cash equivalents $ 1,633.6 $ 945.8
Short-term investments 309.6 42.2
Accounts receivable, less allowances of
$39.4 in 1999 and $30.6 in 1998 1,722.5 1,475.9
Other receivables 258.7 205.6
Inventories 979.2 992.8
Prepaid expenses and other current assets 786.5 586.6
- ---------------------------------------------------------------------
Total current assets 5,690.1 4,248.9
Investments and other assets 793.4 718.9
Property, plant and equipment, net 3,341.9 2,821.9
Intangible assets 1,616.1 1,730.4
- ---------------------------------------------------------------------
$11,441.5 $ 9,520.1
- ---------------------------------------------------------------------
Liabilities and shareholders' equity:
Short-term debt $ 297.1 $ 264.2
Accounts payable, trade 1,881.5 1,518.2
Accrued compensation 236.1 233.3
Other current liabilities 990.1 980.1
Federal, state and foreign income taxes 283.7 248.2
- ---------------------------------------------------------------------
Total current liabilities 3,688.5 3,244.0
Long-term debt 1,249.5 1,266.7
Deferred income taxes and other
noncurrent liabilities 1,405.2 1,129.1
Shareholders' equity:
Preferred stock - none issued - -
Common stock issued:
1999 and 1998 - 961,981,608 shares 962.0 962.0
Capital in excess of par value 897.2 520.6
Retained earnings 5,098.1 4,038.5
Accumulated other comprehensive income (645.4) (399.3)
Treasury stock, at cost:
1999 - 99,934,571 shares;
1998 - 112,073,966 shares (1,213.6) (1,241.5)
- ---------------------------------------------------------------------
Total shareholders' equity 5,098.3 3,880.3
- ---------------------------------------------------------------------
$11,441.5 $ 9,520.1
- ---------------------------------------------------------------------
All amounts have been restated under the pooling of interests method of
accounting to include the financial results of Agouron Pharmaceuticals,
Inc. acquired on May 17, 1999.
See notes to consolidated financial statements.
Warner-Lambert Company and Subsidiaries
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------
(Dollars in millions)
Operating Activities:
Net income $ 1,733.2 $ 1,273.2 $ 862.4
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and amortization 362.8 308.4 281.9
Deferred income taxes (207.5) (164.5) (65.1)
Changes in assets and liabilities,
net of effects from acquisitions/
dispositions of businesses:
Receivables (378.1) (331.4) (169.8)
Inventories (38.2) (158.6) (167.4)
Accounts payable and accrued
liabilities 737.0 749.1 705.1
Other, net 227.8 277.3 129.5
- -------------------------------------------------------------------------
Net cash provided by operating
activities 2,437.0 1,953.5 1,576.6
- -------------------------------------------------------------------------
Investing Activities:
Purchases of investments (637.0) (105.6) (145.2)
Proceeds from maturities/sales of
investments 421.7 218.1 245.6
Capital expenditures (931.9) (753.2) (512.5)
Acquisitions of businesses - - (228.4)
Proceeds from dispositions of businesses - 125.0 -
Other, net (87.1) 66.0 (16.8)
- -------------------------------------------------------------------------
Net cash used by investing
activities (1,234.3) (449.7) (657.3)
- -------------------------------------------------------------------------
Financing Activities:
Proceeds from borrowings 516.2 871.3 1,577.5
Principal payments on borrowings (497.7) (1,562.3) (1,622.7)
Purchases of treasury stock (42.1) (265.2) (135.2)
Cash dividends paid (671.8) (524.6) (413.1)
Proceeds from stock option exercises 195.3 117.1 84.3
- -------------------------------------------------------------------------
Net cash used by financing
activities (500.1) (1,363.7) (509.2)
- -------------------------------------------------------------------------
Effect of exchange rate changes on
cash and cash equivalents (14.8) 19.7 (31.7)
- -------------------------------------------------------------------------
Net increase in cash and cash equivalents 687.8 159.8 378.4
Cash and cash equivalents at beginning
of year 945.8 786.0 407.6
- -------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,633.6 $ 945.8 $ 786.0
- -------------------------------------------------------------------------
All amounts have been restated under the pooling of interests method of
accounting to include the financial results of Agouron Pharmaceuticals,
Inc. acquired on May 17, 1999.
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Warner-Lambert Company and Subsidiaries
(Dollars in millions, except per share amounts)
Note 1 - Significant Accounting Policies:
Basis of consolidation - The consolidated financial statements include the
accounts of Warner-Lambert Company and all controlled, majority-owned
subsidiaries ("Warner-Lambert" or the "company"). Investments in companies
in which Warner-Lambert's interest is between 20 percent and 50 percent are
accounted for using the equity method.
Reclassification - Certain prior year amounts have been reclassified to
conform with current year presentation.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and use assumptions that affect certain reported amounts. Actual
amounts could differ from those estimates.
Revenue recognition - Sales are recorded as product is shipped and title
passes to customers. Provisions for discounts, returns and other allowances
are recorded in the same period the related sales are recognized.
Cash equivalents - Cash equivalents include nonequity short-term
investments with original maturity dates of 90 days or less.
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.
Property, plant and equipment - Property, plant and equipment are recorded
at cost. The cost of maintenance, repairs, minor renewals and betterments
and minor equipment items is charged to income; the cost of major renewals
and betterments is capitalized. Depreciation is calculated generally on the
straight-line method over the estimated useful lives of the various classes
of assets.
Intangible assets - Intangible assets are recorded at cost and are
amortized on the straight-line method over appropriate periods not
exceeding 40 years. The company continually reviews goodwill and other
intangible assets to evaluate whether events or changes have occurred that
would suggest an impairment of carrying value. An impairment would be
recognized when expected future operating cash flows are lower than the
carrying value.
Advertising costs - Advertising costs are expensed as incurred and amounted
to $1,056.1 in 1999, $927.5 in 1998, and $840.1 in 1997.
Newly issued accounting standards - In June 1999, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133."
This pronouncement deferred the effective date of SFAS No. 133 to the first
quarter of 2001. The adoption of SFAS No. 133 is not expected to have a
material effect on the company's consolidated financial position,
liquidity, cash flows or results of operations.
Note 2 - Net Income Per Common Share:
The earnings per share (EPS) computations are as follows:
(Shares in thousands)
- ---------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------
Basic EPS computation:
Net income $1,733.2 $1,273.2 $862.4
Average common shares outstanding 854,894 847,733 841,112
- ---------------------------------------------------------------------
$ 2.03 $ 1.50 $ 1.03
- ---------------------------------------------------------------------
Diluted EPS computation:
Net income $1,733.2 $1,273.2 $862.4
Average common shares outstanding 854,894 847,733 841,112
Impact of potential future stock
option exercises, net of shares
repurchased 29,749 31,226 26,974
- ---------------------------------------------------------------------
Average common shares outstanding -
assuming dilution 884,643 878,959 868,086
- ---------------------------------------------------------------------
$ 1.96 $ 1.45 $ .99
- ---------------------------------------------------------------------
The diluted EPS computation includes the potential impact on the average
number of common shares outstanding if all common stock options issued are
exercised. The dilutive effect of stock options is computed using the
treasury stock method, which assumes the repurchase of common shares by the
company at the average market price for the period.
Note 3 - Interest Income and Interest Expense:
Interest income and interest expense are included in Other expense, net.
Interest income totaled $126.5, $56.6 and $46.9 and interest expense
totaled $140.3, $114.3 and $167.5 in 1999, 1998 and 1997, respectively.
Total interest paid was $141.0, $103.9 and $152.3 and interest costs of
$27.1, $19.2 and $8.3 have been capitalized and included in Property, plant
and equipment for those respective periods.
Note 4 - Restructuring and Plant Closures:
In 1993 and 1991, the company recorded, as a separate income statement
component, restructuring charges of $525.2 and $544.0, respectively. The
total of $1,069.2 was recorded for worldwide rationalization of
manufacturing and distribution facilities and for organizational
restructuring and related workforce reductions of about 5,500 positions. As
of December 31, 1999, all aspects of these rationalization programs were
complete and all reserves were fully utilized. In total, approximately
4,900 positions were eliminated and 26 plants were closed.
In 1998, the company committed to a plan to close three foreign
manufacturing facilities. The planned closures are due to a consolidation
of certain product manufacturing resources in Europe. The costs of the
three closings consist of $47.0 for severance and related expenses, $35.0
for asset write-offs and $11.0 for other costs. The provisions for these
costs are reflected in Other expense, net for the year ended December 31,
1998. The charges were funded by operations and do not have a material
impact on liquidity. As of December 31, 1999, the severance and other
amounts that have not been expended of $13.5 and $3.0 are reflected in
Other current liabilities and Deferred income taxes and other noncurrent
liabilities, respectively. The $35.0 in asset write-offs has been reflected
as a reduction of Property, plant and equipment. Cost savings associated
with these closures, which is expected to be realized in 2000, are
estimated to be approximately $28.0 annually. As of December 31, 1999,
manufacturing operations at all three plants have ceased. Management plans
to sell the plants in 2000. Proceeds from the sales are not expected to be
material.
Note 5 - Acquisitions and Divestitures:
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. Warner-Lambert exchanged 28.8 million
shares of its common stock for all of the common stock of Agouron. Each
outstanding share of Agouron common stock was exchanged for .8934 shares of
Warner-Lambert common stock. In addition, Agouron's employee stock options
outstanding were converted at the same rate and resulted in options to
purchase 7.5 million shares of Warner-Lambert common stock.
The transaction was accounted for as a pooling of interests under
Accounting Principles Board Opinion (APB) 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.
The results of operations for the separate companies and the combined
amounts for the most recent quarter prior to the merger and the prior years
presented in the consolidated financial statements are shown below:
- ----------------------------------------------------------------------------
Three Months Year Ended Year Ended
Ended March 31, December 31, December 31,
1999 1998 1997
- ----------------------------------------------------------------------------
Net Sales:
Warner-Lambert $2,860.0 $10,213.7 $8,179.8
Agouron 146.0 530.1 228.3
- ---------------------------------------------------------------------------
Combined $3,006.0 $10,743.8 $8,408.1
------------------------------------------------------------------------
Net Income:
Warner-Lambert $ 381.1 $ 1,254.0 $ 869.5
Agouron .9 19.2 (7.1)
------------------------------------------------------------------------
Combined $ 382.0 $ 1,273.2 $ 862.4
- ---------------------------------------------------------------------------
On December 31, 1998, Warner-Lambert and certain of its affiliates and
Glaxo Wellcome plc and certain of its affiliates (Glaxo Wellcome) entered
into transactions in various countries whereby Glaxo Wellcome transferred
to Warner-Lambert rights to over-the-counter (OTC) ZANTAC products in the
U.S. and Canada, and Warner-Lambert principally transferred to Glaxo
Wellcome its rights to OTC ZANTAC products in all other markets and its
rights to OTC ZOVIRAX, OTC BECONASE and future Glaxo Wellcome prescription
to OTC switch products in all markets. These OTC products had been marketed
through joint ventures between Warner-Lambert and Glaxo Wellcome that were
formed to develop, seek approval of and market OTC versions of Glaxo
Wellcome prescription drugs. These joint ventures were accounted for as
equity method investments. For financial reporting purposes, the December
31, 1998 transactions, which ended the joint venture relationships between
Warner-Lambert and Glaxo Wellcome, were accounted for as a nonmonetary
exchange of similar assets with no gain or loss recognized.
On May 21, 1997, Warner-Lambert purchased the remaining 66 percent of the
Jouveinal group it did not already own. Consideration for this acquisition,
including estimated acquisition costs, net of cash acquired and proceeds
from the sale of certain acquired assets, was approximately $117.0. In
January 1993, Warner-Lambert initially acquired a 34 percent interest in
Jouveinal, a privately held French pharmaceutical group. Prior to the
acquisition of the remaining interest, Jouveinal was accounted for as an
equity method investment. In addition, the company acquired two Irish
manufacturing facilities from Hickson Pharmachem Limited and Plaistow
Limited, respectively, during the second quarter of 1997 for approximately
$118.0. The consideration for these three acquisitions was primarily
charged to intangible assets and is being amortized over periods of 40
years for goodwill and five to 20 years for trademarks and other
intangibles. The transactions were financed with a long-term credit
facility.
All completed acquisitions, except the rights exchange with Glaxo Wellcome
and the merger with Agouron, have been accounted for under the purchase
method. The excess of purchase price over the estimated fair values of net
tangible and identifiable intangible assets acquired has been treated as
goodwill. Net assets and results of operations of all acquisitions have
been included in the consolidated financial statements since the effective
acquisition dates. The completed acquisitions did not have a material pro
forma impact on consolidated earnings.
In the first quarter of 1998, the company sold its Rochester, Michigan,
pharmaceutical manufacturing plant as well as certain minor prescription
products for approximately $125.0. The resulting pretax gain of $66.6 was
offset by costs related to the company's plans to close certain foreign
manufacturing facilities. The results of these transactions are recorded in
Other expense, net for the year ended December 31, 1998.
Note 6 - Merger Events:
On November 3, 1999, Warner-Lambert, American Home Products Corporation
(AHP) and a wholly-owned subsidiary of AHP entered into a definitive merger
agreement. Subsequent to the announcement of the agreement, Pfizer Inc.
(Pfizer) made an unsolicited, conditional all stock offer for all of the
outstanding common stock of Warner-Lambert.
On January 13, 2000, Warner-Lambert's Board of Directors authorized the
company's management to enter into discussions with Pfizer to explore a
possible business combination.
On February 6, 2000, the merger agreement between Warner-Lambert and AHP
was terminated, and the stock option agreements issued in connection with
that transaction were rescinded by Warner-Lambert and AHP without
consideration. In connection with the termination of the AHP merger
agreement, and in accordance with the terms thereof, Warner-Lambert paid
AHP a termination fee of $1.8 billion, which will be reflected in the
company's results in the first quarter of 2000.
On February 6, 2000, Warner-Lambert, Pfizer and a wholly-owned subsidiary
of Pfizer entered into a definitive merger agreement. Under the terms of
the proposed transaction, which has been unanimously 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. The transaction is contingent upon qualifying as a tax-free
reorganization and being accounted for under the pooling of interests
method of accounting. The transaction is scheduled to close during 2000,
subject to antitrust clearance, approval by both companies' shareholders
and other customary conditions.
Note 7 -International Operations:
In translating foreign currency financial statements, local currencies of
foreign subsidiaries and branches have generally been determined to be the
functional currencies, except for those in hyperinflationary economies,
principally in Latin America. Net aggregate exchange losses (gains)
resulting from foreign currency transactions and translation adjustments
related to subsidiaries operating in highly inflationary countries amounted
to $8.6, $13.6 and $(18.2) in 1999, 1998 and 1997, respectively.
Note 8 - Inventories:
- ---------------------------------------------------------------------
December 31, 1999 1998
- ---------------------------------------------------------------------
Raw materials $128.9 $165.1
Finishing supplies 42.1 48.8
Work in process 266.8 308.4
Finished goods 541.4 470.5
- ---------------------------------------------------------------------
$979.2 $992.8
- ---------------------------------------------------------------------
Note 9 - Property, Plant and Equipment:
- ---------------------------------------------------------------------
December 31, 1999 1998
- ---------------------------------------------------------------------
Land $ 49.7 $ 45.7
Buildings 1,561.6 1,387.0
Machinery, furniture and fixtures 3,542.8 3,109.0
- ---------------------------------------------------------------------
5,154.1 4,541.7
Less accumulated depreciation (1,812.2) (1,719.8)
- ---------------------------------------------------------------------
$ 3,341.9 $ 2,821.9
- ---------------------------------------------------------------------
Depreciation expense totaled $299.5, $248.0 and $224.8 in 1999, 1998 and
1997, respectively. Depreciation expense is charged to various income
statement line items based upon the functions utilizing the assets.
Note 10 - Intangible Assets:
- ---------------------------------------------------------------------
December 31, 1999 1998
- ---------------------------------------------------------------------
Goodwill $ 1,234.5 $ 1,299.0
Trademarks and other intangibles 655.7 666.4
- ---------------------------------------------------------------------
1,890.2 1,965.4
Less accumulated amortization (274.1) (235.0)
- ---------------------------------------------------------------------
$ 1,616.1 $ 1,730.4
- ---------------------------------------------------------------------
Amortization expense, which is reflected primarily in Other expense, net,
totaled $63.3, $60.4 and $57.1 in 1999, 1998 and 1997, respectively.
At December 31, 1999 and 1998, goodwill is being amortized primarily over
40 years and trademarks and other intangibles are being amortized over a
weighted average of approximately 33 years.
Note 11 - Debt:
The components of Short-term debt were as follows:
- ---------------------------------------------------------------------
December 31, 1999 1998
- ---------------------------------------------------------------------
Notes payable $275.0 $245.9
Current portion of long-term debt 22.1 18.3
- ---------------------------------------------------------------------
$297.1 $264.2
- ---------------------------------------------------------------------
The weighted-average interest rate for notes payable outstanding at
December 31, 1999 and 1998 was 5.7 percent and 6.9 percent, respectively.
The company has lines-of-credit arrangements with numerous banks with
interest rates generally equal to the best prevailing rate. At December 31,
1999, worldwide unused lines of credit amounted to $830.0.
The components of Long-term debt were as follows:
- ---------------------------------------------------------------------
December 31, 1999 1998
- ---------------------------------------------------------------------
Commercial paper $ 408.1 $ 383.4
Variable-rate master note 100.0 100.0
6 5/8% notes due 2002 199.8 199.8
5 3/4% notes due 2003 250.0 250.0
6% notes due 2008 249.5 249.5
7.6% industrial revenue bonds due 2014 - 24.5
Other 42.1 59.5
- ---------------------------------------------------------------------
$1,249.5 $1,266.7
- ---------------------------------------------------------------------
At December 31, 1999, all commercial paper and the master note have been
classified as long-term debt due to the company's intent and ability to
refinance on a long-term basis. These instruments are supported by lines of
credit. At December 31, 1999, the weighted-average interest rate was 5.8
percent for commercial paper outstanding. The interest rate on the master
note at December 31, 1999 was 6.3 percent.
The aggregate annual maturities of long-term debt at December 31, 1999,
payable in each of the years 2000 through 2003, excluding short-term
borrowings reclassified to long-term, are $19.7, $208.3, $257.5 and $1.2,
respectively.
Note 12 - Financial Instruments:
The estimated fair values of financial instruments were as follows:
- ---------------------------------------------------------------------
December 31, 1999 1998
- ---------------------------------------------------------------------
Carrying Fair Carrying Fair
( ) = Liability Amount Value Amount Value
- ---------------------------------------------------------------------
Investment securities $ 149.3 $ 149.1 $ 165.6 $ 165.2
Long-term debt (1,249.5) (1,222.1) (1,266.7) (1,294.7)
Foreign exchange
contracts (.2) (16.3) .3 (8.5)
- ---------------------------------------------------------------------
Investment securities and Long-term debt were valued at quoted market
prices for similar instruments. The fair values of the remaining financial
instruments in the preceding table are based on dealer quotes and reflect
the estimated amounts that the company would pay or receive to terminate
the contracts. The carrying values of all other financial instruments in
the Consolidated Balance Sheets approximate fair values.
The investment securities were reported in the following balance sheet
categories:
- -------------------------------------------------------------------
December 31, 1999 1998
- -------------------------------------------------------------------
Cash and cash equivalents $ 48.2 $ 40.3
Short-term investments 35.5 32.3
Investments and other assets 65.6 93.0
- -------------------------------------------------------------------
$149.3 $165.6
- -------------------------------------------------------------------
The investment securities portfolio was primarily comprised of negotiable
certificates of deposit, U.S. and Puerto Rico government securities and
guaranteed collateralized mortgage obligations as of year-end 1999 and
1998. These securities are classified as "held-to-maturity."
As of December 31, 1999 and 1998, the long-term investments of $65.6 and
$93.0 include a $4.1 interest-bearing, mortgage-backed security maturing
beyond 10 years and "available-for-sale" equity securities with a fair
value of $54.1 and $24.3, respectively.
Financial instruments that potentially subject the company to
concentrations of credit risk are trade receivables and interest-bearing
investments. The company sells a broad range of products in the
pharmaceutical, consumer health care and confectionery businesses
worldwide. The company's products are distributed to wholesalers and
directly or indirectly to pharmacies, chain food stores, mass
merchandisers, smaller independent retailers, hospitals, government
agencies, health maintenance organizations and other managed care entities.
Due to the large number and diversity of the company's customer base,
concentrations of credit risk with respect to trade receivables are
limited. The company does not normally require collateral. One customer
balance accounted for approximately 12% of total trade receivables at
December 31, 1999. No customer balances accounted for greater than 10% of
total trade receivables at December 31, 1998. The company's
interest-bearing investments are high-quality liquid instruments, such as
certificates of deposit issued by major banks, or securities issued or
guaranteed by the U.S. or other governments. The company limits the amount
of credit exposure to any one issuer.
The company does not hold or issue financial instruments for trading
purposes nor is it a party to leveraged derivatives. The company uses
derivatives, particularly interest rate swaps and forward or purchased
option foreign exchange contracts, that are relatively straightforward and
involve little complexity as hedge instruments to manage interest rate and
foreign currency risks.
The company's foreign exchange risk management objectives are to stabilize
cash flows and reported income from the effect of foreign currency
fluctuations and reduce the overall foreign exchange exposure to
insignificant levels. Extensive international business activities result in
a variety of foreign currency exposures including foreign currency
denominated assets and liabilities, firm commitments, anticipated
intercompany sales and purchases of goods and services, intercompany
lending, net investments in foreign subsidiaries and anticipated net income
of foreign affiliates. The company continually monitors its exposures and
enters into foreign exchange contracts for periods of up to two years to
hedge such exposures.
At December 31, 1999 and 1998, the company had forward or purchased option
foreign exchange contracts with contractual amounts of $595.2 and $552.0,
respectively. These contracts principally exchange Japanese yen, Canadian
dollars, South African rands, Thailand baht and Australian dollars for U.S.
dollars; U.S. dollars for euros and British pounds in 1999; Japanese yen,
Australian dollars and Portuguese escudos for U.S. dollars; Canadian
dollars for U.S. dollars and Irish punts; Australian dollars for Irish
punts; and U.S. dollars for German marks in 1998.
The company's interest rate risk management objectives are to manage the
interest cost of debt by using a mix of long-term fixed rate and short-term
variable rate instruments and entering into certain interest rate swap
agreements. Interest rate swap agreements were not material during 1999 or
1998.
The counterparties to the company's derivatives consist of major
international financial institutions. Because of the number of these
institutions and their high credit ratings, management believes derivatives
do not present significant credit risk to the company.
Gains and losses related to derivatives designated as effective hedges of
firm commitments are deferred and recognized in income as part of, and
concurrent with, the underlying hedged transaction. Other derivative
instruments primarily relate to hedging foreign currency denominated assets
and liabilities and anticipated net income of foreign subsidiaries. Hedges
of anticipated net income are marked to market on a current basis with
gains and losses recognized in Other expense, net. Cash flows associated
with derivative financial instruments are classified as operating in the
Consolidated Statements of Cash Flows.
Note 13 - Leases:
The company rents various facilities and equipment. Rental expense amounted
to $137.5, $119.0 and $96.4 in 1999, 1998 and 1997, respectively.
The future minimum rental commitments under noncancellable capital and
operating leases at December 31, 1999 are summarized below:
- --------------------------------------------------------------------
Capital Operating
- --------------------------------------------------------------------
2000 $ 2.1 $ 99.7
2001 2.0 78.6
2002 1.5 51.6
2003 1.2 28.8
2004 1.2 23.8
Remaining years 5.8 149.7
- --------------------------------------------------------------------
Total minimum lease payments 13.8 432.3
Less minimum sublease income - (28.7)
------------------------
Net minimum lease payments 13.8 $403.6
-------
Less amount representing interest (3.5)
- -----------------------------------------------------
Present value of minimum lease payments $10.3
- -----------------------------------------------------
Property, plant and equipment included capitalized leases of $126.7, less
accumulated depreciation of $9.9, at December 31, 1999 and $71.8, less
accumulated depreciation of $7.8, at December 31, 1998. Long-term debt
included capitalized lease obligations of $12.8 and $8.9 at those
respective dates.
Note 14 - Pensions and Other Postretirement Benefits:
The company has various pension plans covering substantially all of its
employees in the U.S. and certain foreign subsidiaries.
The company provides other postretirement benefits, primarily health
insurance, to qualifying retirees and their dependents. These plans are
currently noncontributory for domestic employees who retired prior to
January 1, 1992. Effective January 1, 1998, the company expanded the health
insurance program by offering contributory benefits to all domestic
employees who have retired after December 31, 1991 and their dependents,
and future retirees meeting minimum age and service requirements. This
amendment increased the accumulated postretirement benefit obligation by
$88.8 million as of December 31, 1997. This amount is being amortized to
expense over the average remaining employee service period of six years to
reach eligibility at age 55.
The following tables present the benefit obligation and funded status of
the plans:
- -----------------------------------------------------------------------
Pension Postretirement
- -----------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at
beginning of year $2,593.5 $2,276.6 $ 283.7 $ 273.1
Service cost 71.5 60.0 6.6 6.2
Interest cost 167.9 160.1 19.6 19.9
Plan participants' contributions 3.0 2.4 .3 .2
Amendments 2.1 11.6 - (3.5)
Actuarial (gain) loss (48.4) 221.7 (6.2) 10.5
Benefits paid (155.4) (138.9) (27.0) (22.7)
- -----------------------------------------------------------------------
Benefit obligation
at end of year $2,634.2 $2,593.5 $ 277.0 $ 283.7
- -----------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets
at beginning of year $2,423.8 $2,276.6 $ - $ -
Actual return on plan assets 305.5 230.1 - -
Company contributions 67.3 53.6 26.7 22.5
Plan participants' contributions 3.0 2.4 0.3 0.2
Benefits paid (155.4) (138.9) (27.0) (22.7)
- -----------------------------------------------------------------------
Fair value of plan assets at
end of year $2,644.2 $2,423.8 $ - $ -
- -----------------------------------------------------------------------
Funded status $ 10.0 $ (169.7) $(277.0) $(283.7)
Unrecognized actuarial loss 32.8 197.3 45.0 59.8
Unrecognized prior service
cost 34.7 40.9 63.2 78.1
Unrecognized net transition
obligation (1.5) (1.9) - -
- -----------------------------------------------------------------------
Net amount recognized $ 76.0 $ 66.6 $(168.8) $(145.8)
- -----------------------------------------------------------------------
Amounts recognized in the Consolidated Balance Sheets consist of:
Prepaid benefit cost $ 219.1 $ 197.7 $ - $ -
Accrued benefit liability (161.1) (154.7) (168.8) (145.8)
Intangible asset 3.5 1.8 - -
Accumulated other
comprehensive income 14.5 21.8 - -
- -----------------------------------------------------------------------
Net amount recognized $ 76.0 $ 66.6 $(168.8) $(145.8)
- -----------------------------------------------------------------------
Foreign pension plan assets at fair value included in the preceding table
were $779.1 in 1999 and $757.5 in 1998. The foreign pension plan projected
benefit obligation was $840.9 in 1999 and $784.0 in 1998.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $218.9, $172.4 and $34.5,
respectively as of December 31, 1999, and $197.5, $161.1 and $26.1,
respectively as of December 31, 1998.
The following table presents the annual cost related to the plans:
- ------------------------------------------------------------------------
Pension Postretirement
- ------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------
COMPONENTS OF NET PENSION
AND POSTRETIREMENT COSTS:
Service cost $ 71.5 $ 60.0 $ 53.5 $ 6.6 $ 6.2 $ .4
Interest cost 167.9 160.1 156.0 19.6 19.9 14.0
Expected return on plan
assets (200.6) (187.3) (175.5) - - -
Amortization of prior
service cost and net
transition obligation 8.0 7.5 7.2 20.7 14.7 .6
Recognized actuarial loss 13.7 3.6 4.0 2.8 2.6 2.5
Curtailment and special
benefit charge - 5.3 - - - -
- ------------------------------------------------------------------------
Net pension and post-
retirement costs $ 60.5 $ 49.2 $ 45.2 $49.7 $43.4 $17.5
- ------------------------------------------------------------------------
The sale of the Rochester plant, as discussed in Note 5, resulted in a
curtailment and special benefit charge of $5.3 in 1998. Included in
amortization of prior service cost and net transition obligation for 1999
is $5.8 representing the transition charge for a Canadian postretirement
plan.
The assumptions for the U.S. pension and postretirement plans included an
expected increase in salary levels of 4.25 percent for the year ended
December 31, 1999 and 4.0 percent for each of the years ended December 31,
1998 and 1997. The weighted-average discount rate was 8.0, 7.25 and 7.75
percent for 1999, 1998 and 1997, respectively. The expected long-term rate
of return on U.S. pension plan assets was 10.5 percent for each of the
years ended December 31, 1999, 1998 and 1997. Assumptions for foreign
pension plans did not vary significantly from the U.S. plans.
Net pension expense attributable to foreign plans included in the preceding
table was $20.2, $15.0 and $14.8 in 1999, 1998 and 1997, respectively.
Separate assumed health care cost trend rates have been used in the
valuation of domestic postretirement health insurance benefits. The foreign
postretirement benefit obligation is not material. Accordingly, the
following disclosures consider domestic postretirement plans only.
- ---------------------------------------------------------------------
HEALTH CARE TREND RATES: 1999 1998 1997
- ---------------------------------------------------------------------
Employees retiring before
January 1, 1992
- Under age 65 (1) 8.6% 9.2% 9.8%
- Age 65 and over (2) 5.5% 5.9% 6.3%
Employees retiring after
December 31, 1991 (3) 6.3%-8.0% 6.7%-8.8% 7.0%-9.5%
(1) Rate declines to 5.5% in 2005
(2) Rate remains at 5.5% for all years after 1999
(3) Rate declines to 5.0% in 2004
A one percentage point increase in health care cost trend rates in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1999 by $14.4 and the net periodic postretirement benefit cost
by $1.9. A one percentage point decrease in the health care cost trend
rates in each year would decrease the accumulated postretirement benefit
obligation as of December 31, 1999 by $14.3 and the net periodic
postretirement benefit cost for 1999 by $1.9.
Other postretirement benefits for foreign plans expensed under the cash
method in 1999, 1998 and 1997 were not material.
Note 15 - Income Taxes:
The components of Income before income taxes were:
- ---------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------
U.S. and Puerto Rico $1,011.5 $ 951.6 $ 515.9
Foreign 1,429.7 839.4 672.9
- ---------------------------------------------------------------------
$2,441.2 $1,791.0 $1,188.8
- ---------------------------------------------------------------------
The Provision for income taxes consisted of:
- ----------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------
Current:
Federal $ 472.1 $ 342.4 $132.9
Foreign 409.2 290.6 219.5
State and Puerto Rico 34.2 49.3 39.1
- ----------------------------------------------------------------------
915.5 682.3 391.5
- ----------------------------------------------------------------------
Deferred:
Federal $(134.5) $(100.5) $(58.5)
Foreign (37.0) (60.8) (1.9)
State and Puerto Rico (36.0) (3.2) (4.7)
- ----------------------------------------------------------------------
$(207.5) $(164.5) $(65.1)
- ----------------------------------------------------------------------
Provision for income taxes $ 708.0 $ 517.8 $326.4
- ----------------------------------------------------------------------
The tax effects of significant temporary differences, which comprise the
deferred tax assets and liabilities, were as follows:
- ----------------------------------------------------------------------
December 31, 1999 1998
- ----------------------------------------------------------------------
Assets Liabilities Assets Liabilities
- ----------------------------------------------------------------------
Restructuring reserves $ - $ - $ 30.3 $ -
Compensation/benefits 137.6 - 118.0 -
Postretirement/post-
employment obligations 75.8 - 69.6 -
Inventory 153.4 14.2 125.3 13.1
Tax loss and other
carryforwards 162.4 - 101.3 -
Research tax credit and
other carryforwards 127.6 - 57.9 -
Pensions 13.7 84.0 13.2 65.9
Property, plant and equip-
ment 25.4 179.4 33.9 211.4
Intangibles 48.5 90.5 52.4 93.3
Foreign tax credit
carryforwards 89.1 - - -
Other 231.4 95.0 249.6 84.9
- ----------------------------------------------------------------------
1,064.9 463.1 851.5 468.6
Valuation allowance (45.2) - (34.4) -
- ----------------------------------------------------------------------
$1,019.7 $463.1 $817.1 $468.6
- ----------------------------------------------------------------------
The company has research tax credit carryforwards of $115.3 as of December
31, 1999. The carryforwards expire in 2000 through 2019. The foreign tax
credit carryforwards of $89.1 expire in 2004.
A valuation allowance on deferred tax assets is provided if it is more
likely than not that some portion or all of the deferred asset will not be
realized. The 1999 increase in the valuation allowance was primarily due to
the increase in tax loss carryforwards of foreign affiliates in certain
jurisdictions that have limited carryforward periods.
At December 31, 1999, for income tax purposes, Agouron had approximately
$224.4 of net operating loss carryforwards. Due to the acquisition of
Agouron, there will be limitations on the amount of those net operating
losses that can be utilized in any given year against certain future
taxable income. The carryforwards expire in 2000 through 2018. In addition,
there are tax loss carryforwards of $113.3 in foreign jurisdictions, which
have various expiration dates.
Income taxes of $279.2 and $288.1 were paid during 1999 and 1998,
respectively. Prepaid expenses and other current assets included deferred
income taxes of $462.1 and $337.1 at December 31, 1999 and 1998,
respectively.
The earnings of Warner-Lambert's operations in Puerto Rico are subject to
tax pursuant to a grant, effective through December 31, 2012. The grant
provides for certain tax relief if certain conditions are met. The company
continued to be in compliance with these conditions at December 31, 1999.
Earnings of foreign subsidiaries considered to be reinvested for an
indefinite period at December 31, 1999 were approximately $2.5 billion. No
additional U.S. income taxes or foreign withholding taxes have been
provided on these earnings. It would be impractical to compute the
estimated deferred tax liability on these earnings.
The Provision for income taxes in 1997 was reduced by 1.4 percentage points
due to the favorable tax impact of the liquidation of a foreign affiliate.
Also, in 1997 Agouron reduced its valuation allowance by $42.5 million,
caused by changes to future income projections and tax planning strategies.
As of December 31, 1999, Warner-Lambert's U.S. federal income tax returns
through 1992 have been examined and settled with the Internal Revenue
Service. Agouron's U.S. federal income tax returns are open from 1986 to
the present.
The company's effective income tax rate differed from the U.S. statutory
tax rate as follows:
- --------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------
U.S. statutory tax rate 35.0% 35.0% 35.0%
Benefit from U.S. possession tax credit (1.5) (1.8) (3.5)
Foreign income subject to increased
(reduced) tax rates including
taxes on repatriation (4.4) (3.7) 1.0
U.S. research tax credit, net (1.1) (1.4) (1.3)
State and local taxes, net .2 1.1 .8
Valuation allowance .4 .3 (3.5)
Other items, net .4 (.6) (1.0)
- --------------------------------------------------------------------
Effective tax rate 29.0% 28.9% 27.5%
- --------------------------------------------------------------------
Note 16 - Shareholders' Equity:
The authorized preferred stock of Warner-Lambert is 5 million shares with a
par value of $1.00 per share, of which there are no shares issued.
Par value of common stock issued was $962.0, $962.0 and $320.7 at December
31, 1999, 1998 and 1997, respectively.
On April 28, 1998 the stockholders approved an increase in the number of
authorized shares of common stock from 500 million to 1.2 billion to
effectuate a three-for-one stock split effective May 8, 1998. Par value
remained at $1.00 per share.
Changes in certain components of shareholders' equity are summarized as
follows:
- --------------------------------------------------------------------------
Treasury Stock
Capital in --------------------
Excess of Shares in Retained
Par Value Thousands Cost Earnings
- --------------------------------------------------------------------------
Balance at December 31, 1996 $ 119.9 (49,456) $(1,065.5) $3,436.2
Adjustment for pooling of
interests 213.2 8,076 125.2 (210.9)
- --------------------------------------------------------------------------
Adjusted balance
at December 31, 1996 333.1 (41,380) (940.3) 3,225.3
Shares repurchased, at cost - (1,436) (135.2) -
Employee benefit plans, net of tax 159.9 3,072 45.7 (7.7)
Issuance of stock for acquisition
of Alanex by Agouron 37.9 430 6.7 (5.6)
Net income - - - 862.4
Cash dividends paid - - - (413.1)
- --------------------------------------------------------------------------
Balance at December 31, 1997 530.9 (39,314) (1,023.1) 3,661.3
Three-for-one stock split (274.2) (78,629) - (367.1)
Shares repurchased, at cost - (4,050) (265.2) -
Employee benefit plans, net of tax 263.9 9,919 46.8 (4.3)
Net income - - - 1,273.2
Cash dividends paid - - - (524.6)
- --------------------------------------------------------------------------
Balance at December 31, 1998 520.6 (112,074) (1,241.5) 4,038.5
Shares repurchased, at cost - (592) (42.1) -
Employee benefit plans, net of tax 376.6 12,731 70.0 (1.8)
Net income - - - 1,733.2
Cash dividends paid - - - (671.8)
- --------------------------------------------------------------------------
Balance at December 31, 1999 $ 897.2 (99,935) $(1,213.6) $5,098.1
- --------------------------------------------------------------------------
Pursuant to the company's Stockholder Rights Plan, as amended March 25,
1997, a right is attached to each outstanding share of common stock. In the
event that any person or group acquires 15 percent or more of the
outstanding common shares, or acquires the company in a merger or other
business combination, each right (other than those held by the "Acquiring
Person") will entitle its holder to purchase, for a specified purchase
price, stock of the company or the Acquiring Person having a market value
of twice such purchase price. The rights expire on March 25, 2007 and can
be redeemed for $.003 per right by the Board of Directors prior to the time
the rights become exercisable.
Tax benefits credited to Capital in excess of par value for employee stock
options exercised were $242.1, $165.2 and $64.8 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Total comprehensive income includes net income and other comprehensive
income, which consists of foreign currency translation adjustments,
unrealized net gains (losses) on investments and minimum pension liability
adjustments. The components of other comprehensive income were as follows:
- -----------------------------------------------------------------------
Foreign Other Accumulated
Currency Items, Other
Translation Net of Comprehensive
Adjustments Tax Income
- -----------------------------------------------------------------------
Balance at December 31, 1996 $(236.2) $ 5.9 $(230.3)
Current period change (193.8) (14.6) (208.4)
- -----------------------------------------------------------------------
Balance at December 31, 1997 (430.0) (8.7) (438.7)
Current period change 57.7 (18.3) 39.4
- -----------------------------------------------------------------------
Balance at December 31, 1998 (372.3) (27.0) (399.3)
Current period change (280.9) 34.8 (246.1)
- -----------------------------------------------------------------------
Balance at December 31, 1999 $(653.2) $ 7.8 $(645.4)
- -----------------------------------------------------------------------
Note 17 - Stock Options and Awards:
Warner-Lambert has stock awards outstanding at December 31, 1999 granted
under various stock plans. Future grants may be issued under the 1996 Stock
Plan, which became effective January 1, 1997. The 1996 Stock Plan provides
for the granting of stock awards to employees in the form of options to
purchase shares of common stock at a price equal to fair market value on
the date of the grant, restricted stock and performance awards. Options
generally become exercisable in installments of 25 percent per year on each
of the first through the fourth anniversaries of the grant date and have a
maximum term of 10 years. Restricted stock granted to employees is
delivered upon the expiration of restricted periods established at the time
of grant. Performance awards, which are also subject to restricted periods,
provide for the recipient to receive payment in shares, cash or any
combination thereof equivalent to the award being granted. The 1996 Stock
Plan provides that in the event of a change in control of Warner-Lambert,
the ability to exercise stock options is accelerated.
The aggregate number of shares of common stock that may be awarded under
the 1996 Stock Plan in any year is not more than 1.65 percent of the issued
shares on January 1 of the year of the grant. In any year in which stock
awards are granted for less than the maximum permissible number of shares,
the balance of unused shares will be added to the number of shares
permitted to be granted during the following year. No stock awards may be
made under the 1996 Stock Plan after April 23, 2007.
The company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its stock awards.
Accordingly, no compensation cost has been recognized for stock options.
Compensation expense is recorded over the vesting period for restricted
stock and performance awards. Expenses of $5.7, $17.0 and $13.3 for
restricted stock and performance awards were charged to income in 1999,
1998 and 1997, respectively. Had compensation cost been recorded as an
alternative provided by FASB Statement No. 123, "Accounting for Stock-Based
Compensation," for options granted in 1999, 1998 and 1997, the company's
net income and earnings per share would have been reduced to the proforma
amounts below:
- ---------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------
Net income:
As reported $1,733.2 $1,273.2 $862.4
Pro forma 1,642.8 1.203.6 816.5
Basic earnings per share:
As reported $2.03 $1.50 $1.03
Pro forma 1.92 1.42 0.97
Diluted earnings per share:
As reported $1.96 $1.45 $0.99
Pro forma 1.86 1.37 0.94
These amounts are for disclosure purposes only and may not be
representative of future calculations, since the estimated fair value of
stock options would be amortized to expense over the vesting period, and
additional options may be granted in future years. The fair value for these
options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for
1999, 1998 and 1997:
- ---------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------
Dividend yield 1.90% 2.37% 2.81%
Expected volatility 26.85% 24.21% 20.59%
Risk-free interest rate 4.53% 5.55% 6.21%
Expected life (years) 5.75 5.90 5.90
Transactions involving stock options are summarized as follows:
- ---------------------------------------------------------------------
Number Weighted-
of Average
Shares Exercise
(in thousands) Price
- ---------------------------------------------------------------------
Stock options outstanding, December 31, 1996 69,418 $13.37
Granted 16,704 30.36
Exercised (8,787) 9.59
Forfeited (1,510) 20.72
- ---------------------------------------------------------------------
Stock options outstanding, December 31, 1997 75,825 17.37
Granted 9,696 46.43
Exercised (9,716) 12.05
Forfeited (1,364) 27.31
- ---------------------------------------------------------------------
Stock options outstanding, December 31, 1998 74,441 21.67
Granted 9,529 68.80
Exercised (12,490) 15.64
Forfeited (980) 41.07
- ---------------------------------------------------------------------
Stock options outstanding, December 31, 1999 70,500 28.84
- ---------------------------------------------------------------------
Weighted-average fair value of stock options:
Granted during 1997 8.84
Granted during 1998 12.94
Granted during 1999 19.69
Shares available for annual stock award grants at:
December 31, 1997 17,212
December 31, 1998 25,366
December 31, 1999 32,345
- -----------------------------------------------------------
The following table summarizes outstanding and exercisable stock options as
of December 31, 1999:
- ------------------------------------------------------------------------
Stock Options Outstanding Stock Options Exercisable
- ------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (in thousands) Life (years) Price (in thousands) Price
- ------------------------------------------------------------------------
$ .33-22.00 35,261 4.4 $13.80 33,462 $13.50
23.00-45.00 18,086 7.2 29.30 10,309 28.80
46.00-68.00 16,395 8.6 58.80 3,027 52.00
69.00-93.00 758 9.4 71.10 14 75.20
- ------------------------------------------------------------------------
.33-93.00 70,500 6.2 28.84 46,812 19.40
- ------------------------------------------------------------------------
Note 18 - Contingencies and Environmental Liabilities:
Various claims, suits and complaints, such as those involving government
regulations, patents and trademarks and product liability, arise in the
ordinary course of Warner-Lambert's business. In the opinion of management,
all such pending matters are without merit or are of such kind, or involve
such amounts, as would not have a material adverse effect on the company's
consolidated financial position, liquidity, cash flows or results of
operations for any year.
The company is involved in various environmental matters including actions
initiated by the Environmental Protection Agency under the Comprehensive
Environmental Response, Compensation and Liability Act (i.e., CERCLA or
Superfund and similar legislation), various state environmental
organizations and other parties. The company is presently engaged in
environmental remediation at certain sites, including sites previously
owned.
The company accrues costs for an estimated environmental liability when
management becomes aware that a liability is probable and is able to
reasonably estimate the company's share. Generally, that occurs no later
than when feasibility studies and related cost assessments of remedial
techniques are completed, and the extent to which other potentially
responsible parties (PRPs) can be expected to contribute is determined. For
most sites, there are other PRPs that may be jointly and severally liable
to pay all cleanup costs. As of December 31, 1999 and 1998, the accrual for
environmental liabilities was approximately $28 and $34 covering 53 and 50
sites, respectively. Outside consultants are generally used to assess the
costs of remediation. Accruals are established based on current technology
and are not discounted. While it is reasonably possible that additional
costs may be incurred beyond the amounts accrued as a result of new
information, those costs, if any, cannot be estimated currently.
Some portion of the liabilities associated with the company's environmental
actions may be covered by insurance. The company is currently in litigation
with respect to the scope and extent of liability coverage from certain
insurance companies; however, recoveries will not be recorded as income
until there is assurance that recoveries are forthcoming.
In management's opinion, the liabilities for all environmental matters
mentioned above that are probable and reasonably estimable are adequately
accrued. Although it is not possible to predict with certainty the outcome
of these matters or the ultimate costs of remediation, management believes
it is unlikely that their ultimate disposition will have a material adverse
effect on the company's consolidated financial position, liquidity, cash
flows or results of operations for any year.
Note 19 - Segment Information:
Reportable segments are comprised as follows: Pharmaceutical - consisting
of ethical pharmaceuticals, biologicals and empty hard-gelatin capsules;
Consumer Health Care - consisting of OTC, shaving and pet care products;
Confectionery - consisting of chewing gums, breath mints and cough tablets.
The company's pharmaceutical products are promoted primarily to health care
professionals and are sold either directly or through wholesalers. Consumer
Health Care products are promoted principally through consumer advertising
and promotional programs. They are sold principally to drug wholesalers,
pharmacies, food stores, mass merchandisers, physician supply houses and
hospitals. Confectionery products are promoted primarily through consumer
advertising and in-store promotions and are sold directly to food stores,
pharmacies and mass merchandisers, which in turn sell to consumers.
With the significant growth of the cholesterol-lowering agent LIPITOR, the
pharmaceutical segment has become the company's largest segment.
Warner-Lambert has copromoted LIPITOR, which achieved worldwide sales of
$3.7 billion, in most markets with Pfizer since its launch in 1997. The
agreements with Pfizer cover many countries and consist of three broad
categories: markets in which Warner-Lambert and Pfizer copromote LIPITOR
under a single brand name, markets in which the two companies comarket the
product under separate brand names in competition with each other and
markets in which Pfizer has exclusive rights. Pfizer does not have rights
to the product in France and Japan. The copromotion agreement applies in
most major markets, including the U.S., Canada, Germany and the U.K. Under
the agreement, the parties generally share certain product expenses and
sales force efforts. Pfizer is compensated on a sliding percentage-of-sales
basis depending on achieving certain sales objectives. The agreements
generally run, on a country-by-country basis, for 10 years from the date of
product launch in each respective country.
During 1999, total sales to one pharmaceutical and health care products
wholesaler accounted for 12 percent of the company's consolidated net
sales. The majority of sales to this customer were in the Pharmaceutical
segment. In 1998 and 1997, no individual customer accounted for more than
10 percent of consolidated net sales.
The accounting policies of the segments are the same as those described in
the "Significant Accounting Policies." Segments are determined based on
product categories. The company evaluates performance based on profit or
loss before income taxes.
Reportable Segment Data
Net Sales Income Before Taxes
------------------------ ------------------------
1999 1998 1997 1999 1998 1997
------ ------- ------ ------ ------ ------
Pharmaceutical $ 7,982 $ 6,134 $3,848 $2,059 $1,495 $ 781
Consumer Health Care 2,996 2,722 2,691 548 510 549
Confectionery 1,951 1,888 1,869 182 159 185
------- ------- ------ ------ ------ ------
Total Segments 12,929 10,744 8,408 2,789 2,164 1,515
Corporate (1) - - - (348) (373) (326)
------- ------- ------ ------ ------ ------
Consolidated Total $12,929 $10,744 $8,408 $2,441 $1,791 $1,189
======= ======= ====== ====== ====== ======
Segment Assets (2) Depreciation/Amortization Capital Expenditures
------------------------ ------------------------- ------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------- ------- ------ ------ ------ ------ ------ ------ ------
Pharmaceutical $ 4,009 $ 3,418 $2,788 $ 160 $ 139 $ 120 $ 651 $ 523 $ 269
Consumer Health Care 2,442 2,471 2,384 95 85 83 116 90 108
Confectionery 966 960 908 61 49 51 88 78 80
------- ------- ------ ------ ------ ------ ------ ------ ------
Total Segments 7,417 6,849 6,080 316 273 254 855 691 457
Corporate (3) 4,025 2,671 2,272 47 35 28 77 62 56
------- ------- ------ ------ ------ ------ ------ ------ ------
Consolidated Total $11,442 $ 9,520 $8,352 $ 363 $ 308 $ 282 $ 932 $ 753 $ 513
======= ======= ====== ====== ====== ====== ====== ====== ======
(1) Corporate expense includes general corporate income and expense,
corporate investment income and interest expense. Corporate expense in
1998 includes a pretax gain on the sale of the company's Rochester,
Michigan, manufacturing plant and certain minor prescription products
of $67 which was offset by costs related to the company's plans to
close certain foreign manufacturing facilities.
(2) Segment assets consist of Accounts receivable, Inventories, Property,
plant and equipment, Intangible assets and certain investments.
(3) Corporate assets include Cash and cash equivalents, investments and
other unallocated assets.
Geographic Data
1999 1998 1997 1999 1998 1997
---- ----- ----- ---- ---- ----
Net Sales: (a) Long-Lived Assets:
United States $ 7,862 $ 6,304 $4,416 United States $1,794 $1,562 $1,433
Foreign 5,067 4,440 3,992 Ireland 589 311 125
------- ------- ------ Germany 235 248 205
Total $12,929 $10,744 $8,408 All other foreign 724 701 692
======= ======= ====== ------ ------ ------
Total $3,342 $2,822 $2,455
======= ====== ======
(a) Net sales are attributed to countries based on location of customer.
No single foreign country was material to consolidated Net sales.
Report of Independent Accountants
PRICEWATERHOUSECOOPERS LLP
To the Board of Directors and Shareholders of Warner-Lambert Company
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and comprehensive income and of
cash flows present fairly, in all material respects, the financial position
of Warner-Lambert Company and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These
financial statements are the responsibility of the company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
- --------------------------
400 Campus Drive
Florham Park, New Jersey
January 24, 2000, except for Note 6,
as to which the date is February 7, 2000