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 quarter ended September 30, 1994
( ) Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Act of 1934
For the transition period from to
Commission File Number 1-5910
CARTER-WALLACE, INC.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
(Exact name of registrant as specified in its charter)
Delaware 13-4986583
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1345 Avenue of the Americas
New York, New York 10105
(Address of principal executive
offices)
Registrant's telephone number, including area code: 212-339-5000
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
The number of shares of the registrant's Common Stock and Class B common
stock outstanding at September 30, 1994 were 33,481,100 and 12,577,900,
respectively.
CARTER-WALLACE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
SEPTEMBER 30, 1994
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Earnings for the
three and six months ended September 30, 1994 and 1993 1
Condensed Consolidated Balance Sheets at
September 30, 1994 and March 31, 1994 3
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 1994 and 1993 4
Notes to Condensed Consolidated Financial Statements 5
Report by KPMG Peat Marwick LLP on their Limited Review 12
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 4 - Submission of Matters to a Vote of Security Holders 22
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 23
CARTER-WALLACE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
September 30, September 30,
1994 1993 1994 1993 *
Revenues:
Net sales $168,111,000 $150,266,000 $351,415,000 $313,016,000
Other revenues 1,460,000 1,257,000 2,828,000 2,572,000
169,571,000 151,523,000 354,243,000 315,588,000
Cost and expenses:
Cost of goods sold 63,710,000 54,568,000 125,993,000 110,922,000
Advertising,
marketing & other
selling expenses 61,697,000 64,904,000 130,907,000 130,685,000
Research & develop-
ment expenses 12,527,000 12,033,000 25,725,000 24,674,000
General, administra-
tive & other expenses 22,881,000 18,768,000 44,333,000 39,014,000
Provision for
restructuring 49,000,000 - 49,000,000 -
Provision for loss
on Felbatol 36,640,000 - 36,640,000 -
Provision for loss
on discontinuance
of the Organidin
(iodinated glycerol)
product line - - 17,500,000 -
Interest expense 478,000 432,000 868,000 1,019,000
246,933,000 150,705,000 430,966,000 306,314,000
Earnings (loss) before
taxes on income (77,362,000) 818,000 (76,723,000) 9,274,000
Provision (benefit)
for taxes on income (30,120,000) (561,000) (29,922,000) 2,060,000
Net earnings (loss)
before cumulative
effect of accounting
changes (47,242,000) 1,379,000 (46,801,000) 7,214,000
Cumulative effect of
accounting changes,
net of tax - - - (46,639,000)
Net earnings (loss) $(47,242,000) $ 1,379,000 $(46,801,000) $(39,425,000)
(Continued)
PART I - FINANCIAL INFORMATION
CARTER-WALLACE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Continued)
Three Months Ended Six Months Ended
September 30, September 30,
1994 1993 1994 1993 *
Net earnings (loss)
per average share of
common stock outstanding:
Before cumulative
effect of accounting
changes $(1.03) $ .03 $(1.02) $ .16
Cumulative effect of
accounting changes - - - (1.02)
Net earnings (loss) $(1.03) $ .03 $(1.02) $ (.86)
Cash dividends per share $ .0833 $ .0833 $ .1666 $ .1666
Average shares of
common stock
outstanding 46,059,000 45,773,000 46,064,000 45,776,000
[FN]
* Restated to reflect change in accounting for postemployment benefits.
CARTER-WALLACE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, March 31,
1994 1994
Assets (Unaudited)
Current Assets:
Cash and cash equivalents $ 21,318,000 $ 23,311,000
Short-term investments 33,179,000 32,883,000
Accounts and other receivables
less allowances of $7,803,000
at September 30, 1994 and
$5,955,000 at March 31, 1994 131,740,000 117,070,000
Inventories:
Finished goods 41,403,000 60,515,000
Work in process 21,200,000 22,121,000
Raw materials and supplies 45,290,000 39,553,000
107,893,000 122,189,000
Prepaid expenses, deferred taxes
and other current assets 30,735,000 19,973,000
Total Current Assets 324,865,000 315,426,000
Property, plant and equipment, at cost 247,445,000 279,040,000
Less: accumulated depreciation and
amortization 107,600,000 121,981,000
139,845,000 157,059,000
Intangible assets 132,643,000 110,213,000
Other assets 59,193,000 45,864,000
Total Assets $656,546,000 $628,562,000
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 34,376,000 $ 27,844,000
Accrued expenses 130,306,000 96,714,000
Notes payable 12,702,000 5,709,000
Total Current Liabilities 177,384,000 130,267,000
Long-Term Liabilities:
Long-term debt 23,635,000 9,309,000
Deferred compensation 9,411,000 7,661,000
Accrued postretirement benefit obligation 68,352,000 71,804,000
Other long-term liabilities 35,398,000 16,013,000
Total Long-Term Liabilities 136,796,000 104,787,000
Stockholders' Equity:
Common stock 34,627,000 34,432,000
Class B common stock 12,578,000 12,773,000
Capital in excess of par value 1,975,000 1,972,000
Retained earnings 325,572,000 380,047,000
Less: Foreign currency translation
adjustment 16,863,000 20,404,000
Treasury stock, at cost 15,523,000 15,312,000
Total Stockholders' Equity 342,366,000 393,508,000
Total Liabilities and Stockholders' Equity $656,546,000 $628,562,000
CARTER-WALLACE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(Unaudited)
1994 1993 *
Net (loss) $(46,801,000) $(39,425,000)
Provision for restructuring 49,000,000 -
Provision for loss on Felbatol 36,640,000 -
Provision for loss on discontinuance
of the Organidin (iodinated glycerol)
product line 17,500,000 -
Cumulative effect of accounting
changes - 46,639,000
Changes in assets and liabilities (39,138,000) (4,252,000)
Other changes 14,303,000 13,688,000
Cash flows from operations 31,504,000 16,650,000
Cash flows used in investing activities:
Additions to property, plant and
equipment (10,256,000) (13,131,000)
Payments for international
acquisitions, net of cash received:
The Sante Beaute line in France (19,807,000) -
Technogenetics in Italy (4,878,000) -
The Curash line in Australia (3,660,000) -
Decrease (increase) in short-term
investments 471,000 (2,633,000)
Other investing activities (193,000) (156,000)
(38,323,000) (15,920,000)
Cash flows used in financing activities:
Dividends paid (7,674,000) (7,630,000)
Increase in borrowings 16,042,000 2,755,000
Payments of debt (4,093,000) (761,000)
Purchase of treasury stock (189,000) (278,000)
4,086,000 (5,914,000)
Effect of exchange rate changes on
cash and cash equivalents 740,000 (529,000)
(Decrease) in cash and cash equivalents $ (1,993,000) $ (5,713,000)
[FN]
* Restated to reflect change in accounting for postemployment benefits.
CARTER-WALLACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994 AND 1993
Note 1: Interim Reports
The results of the interim periods are not necessarily indicative of
results expected for a full year's operations. In the opinion of
management, all adjustments necessary for a fair statement of results of
these interim periods have been reflected in these financial statements
and, except as separately disclosed herein, are of a normal recurring
nature.
Note 2: Review of Independent Auditors
The financial information included in this report has been reviewed by KPMG
Peat Marwick LLP, independent auditors, in accordance with standards and
procedures established by the American Institute of Certified Public
Accountants. All adjustments or additional disclosures proposed by KPMG
Peat Marwick LLP have been reflected in the data presented and a copy of
their report on this limited review is included in this Form.
Note 3: Acquisitions
In August, 1994, the Company acquired the Sante Beaute line of products in
France for approximately $21,200,000. This business consists of the Email
Diamant oral hygiene products, Lineance body care products and other skin
and bath products.
In August, 1994, the Company acquired Technogenetics S.r.l., a subsidiary
of Recordati S.p.A. for approximately $5,900,000 in Italy. Technogenetics
manufactures and sells diagnostic test kits used by clinical laboratories
for the diagnosis of human diseases.
In July, 1994, the Company acquired for approximately $3,700,000 the Curash
line of baby care and other consumer products in Australia.
These acquisitions are being accounted for by the purchase method and,
accordingly, the results of operations for these lines are included in the
Company's results of operations from the acquisition date. Pro forma
results of operations are not presented since the effect would not be
material.
(Continued)
CARTER-WALLACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994 AND 1993
(Continued)
Note 4: Restructuring of Operations and Facilities
The Company is currently engaged in restructuring its Wallace Laboratories
Division and the consolidation of certain manufacturing facilities which
are intended to reduce costs and increase efficiencies. These actions were
prompted by the discontinuance of its line of iodinated glycerol
formulation of Organidin products and by the significant adverse effect on
existing and potential sales of Felbatol (felbamate) due to use
restrictions required by the Federal Food and Drug Administration ("FDA").
As a result of the restructuring, the Company has substantially reduced its
pharmaceutical sales force and marketing support staff and virtually
eliminated its Wallace Laboratories Division internal research and
development capability. However, the Company will continue its research
and development of Astelin (azelastine) for rhinitis and asthma, and
taurolidine, an antitoxin for the treatment of sepsis, and to the extent
such work exceeds the Company's remaining internal research and development
resources, such work will be done through independent research facilities.
The consolidation of its manufacturing operations in the U.S. and Puerto
Rico, when completed, will result in the closure of certain of the
Company's plants and significantly reduced production at one plant.
In connection with the restructuring described above, the Company incurred
a one-time pre-tax charge in the quarter ended September 30, 1994 of
$49,000,000, consisting primarily of plant closing costs, employee
termination costs and related charges. The planned reduction in the number
of employees through 1995 is approximately 630 including 60 vacancies that
will not be filled and which represents 41% of its pharmaceutical sales
force and 23% of the Company's total domestic workforce.
The Company is continuing to review its operations and may take other steps
to reduce costs in the future which may result in additional one-time
charges.
Note 5: Felbatol (felbamate)
On August 1, 1994, the Company disclosed that it had sent a letter to
approximately 240,000 physicians recommending, in conjunction with the FDA,
the immediate withdrawal of patients from treatment with Felbatol
(felbamate), unless, in the physician's judgment, an abrupt withdrawal
would be deemed to pose a more serious risk to the patient.
(Continued)
CARTER-WALLACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994 AND 1993
(Continued)
Note 5: Felbatol (felbamate) (Continued)
Carter-Wallace's recommendation was prompted by reports of ten cases of
aplastic anemia in association with the use of Felbatol. No such cases
were observed during the premarketing, clinical testing and development of
Felbatol.
On September 21, 1994, after discussions with the FDA, the Company mailed a
letter alerting physicians to the risk of acute liver failure in
association with the use of Felbatol and the need to monitor liver function
in all patients who are still taking the drug.
On September 27, 1994, the FDA's Peripheral and Central Nervous System
Drugs Advisory Committee met to discuss the continued availability of
Felbatol. The Committee recommended that the drug remain available only
for patients with severe epilepsy for whom the benefits outweigh the risks,
and that changes be made to the product's labeling to reflect the risk of
acute liver failure.
Carter-Wallace introduced Felbatol in September, 1993 for the treatment of
partial seizures with and without secondary generalization in adults and
for Lennox-Gastaut Syndrome, a serious form of childhood epilepsy.
Due to substantial introductory spending levels and continued research and
development, the Company incurred losses with respect to Felbatol since
introduction and for the three months and six months ended September 30,
1994.
As a result of the matters discussed above, the Company incurred in the
quarter ended September 30, 1994 a one-time pre-tax charge of $36,640,000
primarily related to inventory write-offs, purchase commitments and
anticipated product returns. At the present time Felbatol continues to be
available on the market. If, as a result of the matters discussed above,
the product at some future date is no longer available in the market, the
Company will incur an additional one-time charge that would have a material
adverse effect on the Company's results of operations and possibly on its
financial condition. Should the product no longer be available, the
Company currently estimates that the additional one-time charge consisting
primarily of inventory write-offs, purchase commitments and anticipated
returns of product currently in the market, will be in the range of
$30,000,000 to $35,000,000 on a pre-tax basis.
(Continued)
CARTER-WALLACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994 AND 1993
(Continued)
Note 5: Felbatol (felbamate) (Continued)
As previously reported, the Company entered into a licensing agreement with
Schering-Plough Corporation, granting Schering-Plough exclusive marketing
rights in all markets except the United States and its territories and
possessions, Canada and Mexico, to Felbatol. Separately, Schering-Plough
and Carter-Wallace agreed that, under certain circumstances, they will put
into effect a co-promotional arrangement with respect to a Schering-Plough
pharmaceutical product to be determined in the future. The matters
discussed above will likely result in a significant adverse effect on the
amount of royalties and fees, if any, to be received from Schering-Plough
in the future under these agreements.
Note 6: Discontinuance of the Organidin (Iodinated Glycerol) Product Line
In June, 1994, the Company and the FDA reached an agreement to discontinue
the manufacture and shipment of the Organidin (iodinated glycerol) line of
products. The agreement between the Company and the FDA permits the
continued shipping, prescribing and dispensing of existing stocks of
Organidin (iodinated glycerol) product currently in channels of
distribution. As previously disclosed by the Company, in April, 1993 the
Company received a letter from the FDA requesting that it discontinue
marketing Organidin (iodinated glycerol) products. Subsequent meetings
between the Company and FDA resulted in this agreement.
As a result of the agreement noted above, the Company incurred in the
quarter ended June 30, 1994 a one-time charge to pre-tax earnings of
$17,500,000 primarily related to a provision for any product returns and
for inventory write-offs.
Sales and pre-tax operating profits of the Organidin (iodinated glycerol)
line included in the six months ended September 30, 1994 were $20,800,000
and $11,400,000, respectively, compared to sales and pre-tax operating
profits included in the six months ended September 30, 1993 of $19,000,000
and $1,400,000, respectively.
Sales and pre-tax operating profits of the Organidin (iodinated glycerol)
line of products were $59,900,000 and $22,200,000 for the fiscal year ended
March 31, 1992, $43,400,000 and $7,600,000 for the fiscal year ended March
31, 1993 and $74,400,000 and $31,600,000 for the fiscal year ended March
31, 1994. Operating profits were computed on a basis consistent with that
used to report operating profits for the Health Care business segment in
the Company's Annual Report.
(Continued)
CARTER-WALLACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994 AND 1993
(Continued)
Note 7: Litigation
Two federal securities class action suits have been filed by stockholders
against the Company and certain of its present and former officers in the
United States District Court, Southern District of New York. The first
action, filed in August, 1994, purports to be on behalf of all persons who
purchased the Company stock in the period from June 6, 1994 through July
31, 1994. The second action, filed in October, 1994, seeks to represent a
class of persons who purchased the Company stock from August 24, 1993
through August 1, 1994. Both complaints allege that certain statements
made by the Company with respect to future sales and marketing prospects
for Felbatol were false and fraudulent, and that the Company omitted to
state material facts necessary to make the statements made not misleading.
Both complaints seek damages in an unspecified amount. In one action, the
complaint alleges that a major stockholder and a former officer of the
Company sold Company stock while in possession of material non-public
information and seeks disgorgement of the profits made from such sales.
A product liability class action was filed against the Company in August,
1994, in the United States District Court, Northern District of California.
The complaint, which was amended in September, 1994, purports to be on
behalf of all persons who suffered or may suffer an injury as a result of
using Felbatol. The complaint alleges that the Company is liable for
strict product liability, negligence, breach of express and implied
warranty and negligent misrepresentation related to side effects of
Felbatol. The complaint seeks compensatory and punitive damages and
injunctive relief.
A product liability class action was filed against the Company in October,
1994 in the United States District Court for the Eastern District of
Pennsylvania. The complaint purports to be on behalf of the plaintiff and
all others similarly situated who it is alleged suffered an injury as a
result of using Felbatol. The complaint alleges that the Company is liable
for strict liability, negligence, breach of express and implied warranty,
negligent infliction of emotional distress and violation of state consumer
protection laws. The complaint seeks compensatory and punitive damages and
establishment of a medical monitoring program.
The Company along with numerous other drug manufacturers has been named in
a consolidated and amended class action suit filed in August, 1994 in the
California Superior Court, San Francisco County, brought on behalf of all
California community retail pharmacists who have purchased any brand name
prescription drugs since August, 1989. The complaint alleges that drug
manufacturers, including the Company, entered into a conspiracy to fix
prices for brand-name prescription drugs and gave lower prices to certain
favored purchasers while the alleged favored prices were denied to the
plaintiffs. The complaint seeks injunctive relief and trebled compensatory
damages, restitution of amounts by which defendants were unjustly enriched
and litigation costs.
(Continued)
CARTER-WALLACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994 AND 1993
(Continued)
Note 7: Litigation (Continued)
The Company along with numerous other drug manufacturers has been named in
a class action suit filed July, 1994 in California Superior Court, County
of San Francisco, brought on behalf of a class of California consumers who
purchased drugs from independent retail pharmacies alleging that certain
drug manufacturers, including the Company, conspired to fix prices for
brand-name prescription drugs that were sold to California independent
retail pharmacists. The complaint seeks trebled compensatory damages
relating to overcharges, restitution of amounts by which defendants were
unjustly enriched and litigation costs.
The Company along with numerous other drug manufacturers, an Alabama drug
wholesaler and a national mail-order pharmacy, is named in a class action
suit filed May, 1994 in the Alabama Circuit Court, Green County, brought on
behalf of a class of independent drug stores and pharmacies alleging that a
drug wholesaler, a national mail order pharmacy and certain drug
manufacturers, including the Company, discriminated against the plaintiffs
in according more favorable prices to mail-order pharmacies and large
health care providers pursuant to an alleged conspiracy to regulate or fix
the price or limit the quantity of prescription drugs that are sold in the
State of Alabama. The complaint seeks compensatory and punitive damages
and litigation costs as well as injunctive and declaratory relief.
In June, 1993, a suit was filed by Becton Dickinson & Co., in the United
States District Court, Eastern District of North Carolina, against several
companies, including the Company, alleging patent infringement by certain
of the Company's diagnostic products. The complaint seeks injunctive
relief, compensatory damages and litigation costs.
In October, 1992, a suit was filed by Unilever against the Company's
subsidiary in the United Kingdom alleging patent infringement by certain of
the Company's diagnostic products. The complaint seeks injunctive relief
and compensatory damages.
The Company believes, based on opinion of counsel, it has good defenses to
each of the above-described legal actions.
Additional product liability claims related to Felbatol use have been
threatened against the Company. At this point, the Company cannot evaluate
the merits of such claims and does not know whether or to what extent legal
actions will arise from such claims and, therefore, is unable to predict
the financial impact they may have.
(Continued)
CARTER-WALLACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994 AND 1993
(Continued)
Note 8: Accounting Changes
The Company provides certain health care and life insurance benefits for
retired employees. Effective April 1, 1993, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions".
SFAS No. 106 requires companies to accrue postretirement benefits during
the years the employees render service until they attain full eligibility
for those benefits. Previously, these costs were recognized as expense as
the premiums were paid. The postretirement benefit plans are unfunded.
The cumulative effect of adopting SFAS No. 106 as of April 1, 1993,
resulted in a charge of $69,554,000 before taxes or $43,819,000 after taxes
($.96 per share). This non-cash charge represents the accumulated benefit
obligation which the Company has elected to recognize immediately. The
initial postretirement benefit obligation was subsequently reduced as a
result of plan modifications made effective July 1, 1993. In accordance
with SFAS No. 106, this reduction in the obligation is being amortized as a
component of the net periodic postretirement expense in current and future
years.
During the quarter ended March 31, 1994, the Company adopted SFAS No. 112
"Employers' Accounting for Postemployment Benefits" effective April 1,
1993. SFAS No. 112 requires accrual accounting for benefits provided to
former or inactive employees after employment but before retirement.
Accordingly, results of operations in the three months ended June 30, 1993
and the six months ended September 30, 1993 have been restated to reflect
the cumulative effect of adopting SFAS No. 112 of $4,700,000 before taxes
or $2,820,000 after taxes ($.06 per share). Annual ongoing costs for these
benefits related to the adoption of this statement are not material.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Carter-Wallace, Inc.:
We have reviewed the condensed consolidated balance sheet of
Carter-Wallace, Inc. and subsidiaries as of September 30, 1994, and the
related condensed consolidated statements of earnings for the three-month
and six month periods ended September 30, 1994 and 1993 and the condensed
consolidated statements of cash flows for the six-month periods ended
September 30, 1994 and 1993 in accordance with standards established by the
American Institute of Certified Public Accountants. These condensed
consolidated financial statements are the responsibility of the Company's
management.
A review of interim financial information consists principally of applying
analytical review procedures to financial data, and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Carter-Wallace, Inc. and
subsidiaries as of March 31, 1994, and the related consolidated statements
of earnings and retained earnings, and cash flows for the year then ended
(not presented herein); and in our report dated June 6, 1994, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of March 31, 1994 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which
it has been derived.
As discussed in note 8 to the condensed consolidated financial statements,
the Company adopted the provisions of the Financial Accounting Standards
Board's Statements No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" and No. 112 "Employers' Accounting for
Postemployment Benefits" in 1994.
(Continued)
INDEPENDENT AUDITORS' REPORT
(Continued)
As discussed in note 5 to the condensed consolidated financial statements,
on September 27, 1994, the Federal Food and Drug Administration (FDA)
Peripheral and Central Nervous System Drugs Advisory Committee met to
discuss the continued availability of Felbatol due to reports of aplastic
anemia and the risk of acute liver failure associated with the use of
Felbatol. The FDA recommended that the drug remain available only for
patients with severe epilepsy for whom the benefits outweigh the risks and
that changes be made to the product's labeling to reflect the risk of acute
liver failure. As a result of the matters discussed above, the Company
incurred in the quarter ended September 30, 1994 a one-time pre-tax charge
of $36,640,000 primarily related to inventory write-offs, purchase
commitments and anticipated products returns. If, as a result of the
matters discussed above, the product at some future date is no longer
available on the market, the Company will incur an additional one-time
charge that would have a material adverse effect on the Company's results
of operations and possibly on its financial condition. The Company
currently estimates that the additional one-time charge consisting
primarily of inventory write-offs, purchase commitments and anticipated
returns of product currently in the market, will be in the range of
$30,000,000 to $35,000,000 on a pre-tax basis. The ultimate outcome of
this matter cannot presently be determined. Accordingly, no provision for
any liability related to this additional one-time charge has been
recognized in the accompanying financial statements.
As discussed in note 7 to the condensed consolidated financial statements,
the Company is a defendant in several lawsuits including two product
liability class action suits and two federal securities class action suits
related to Felbatol, three class action suits involving alleged price
fixing within the pharmaceutical industry and two patent infringement suits
involving the Company's diagnostic products. The Company believes, based
on opinion of counsel, it has good defenses for each of the above-described
legal actions. In addition, product liability claims related to Felbatol
use have been threatened against the Company. At this point, the Company
cannot evaluate the merits of such claims and does not know whether or to
what extent legal actions will arise from such claims, and therefore, is
unable to predict the financial impact they may have. The ultimate outcome
of all of these matters cannot presently be determined. Accordingly, no
provision for any liability has been recognized in the accompanying
financial statements.
KPMG Peat Marwick LLP
November 10, 1994
New York, New York
</AUDIT-REPORT>
CARTER-WALLACE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Three months ended September 30, 1994 compared to
three months ended September 30, 1993
Consolidated earnings after taxes in the three months ended September 30,
1994 ("fiscal 1995 period") before the one-time restructuring charge and
the provision for the loss on Felbatol (felbamate), an anti-epileptic drug
for the treatment of certain seizure disorders, were approximately
$4,700,000 or $.10 per share as compared to net earnings of approximately
$1,400,000 or $.03 per share in the three months ended September 30, 1993
("fiscal 1994 period"). One-time charges for restructuring and Felbatol
resulted in a pre-tax charge of $85,640,000 ($52,000,000 after tax or $1.13
per share) in the three months ended September 30, 1994. The one-time
charge for Organidin (iodinated glycerol) was previously reported in the
quarter ended June 30, 1994. (See detailed comments below relating to the
discontinuance of Organidin (iodinated glycerol) sales, restructuring
charges and Felbatol developments).
Net sales increased $17,845,000 (11.9%) in the fiscal 1995 period as
compared to net sales in the fiscal 1994 period. The higher sales level
was primarily attributable to increased sales in the Consumer Products
segment with sales also increasing in the Health Care segment. The sales
increase in the Consumer Products segment was predominately due to unit
volume gains, although selling price increases also had a favorable effect
on sales. The increase in the Health Care segment was due to selling price
increases and to a lesser extent higher unit volume. Health Care sales,
which included sales of Felbatol which the Company introduced in September,
1993, were negatively impacted by the discontinuance of Organidin
(iodinated glycerol) sales in June, 1994. Sales in both the Consumer
Products and Health Care segments were positively affected by the recently
acquired international businesses in France, Italy and Australia. The
timing and amount of future price increases in the Health Care segment may
be negatively influenced by competitive pressures and the possibility of
government regulation. Sales of pharmaceutical products in the Health Care
segment continue to be adversely impacted by generic erosion.
Higher foreign exchange rates in comparison with the prior year had the
effect of increasing sales in the fiscal 1995 period by $800,000. The
effect of changes in foreign exchange rates on results of operations in the
fiscal 1995 period compared to the prior year period was not significant.
Other revenues increased $203,000 or 16.1% in the fiscal 1995 period as
compared to the fiscal 1994 period.
Cost of goods sold as a percentage of net sales increased from 36.3% in the
fiscal 1994 period to 37.9% in the 1995 period primarily due to changes in
product mix.
(Continued)
CARTER-WALLACE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Advertising, marketing and other selling expenses decreased by $3,207,000
or 4.9% due to a reduced level of spending in the Health Care segment.
This decrease was primarily related to lower spending for Organidin
(iodinated glycerol) and Felbatol. Advertising, marketing and other
selling expenses increased in support of products in the Consumer Products
segment.
Research and development expenses increased by $494,000 or 4.1%. Research
spending, most of which was in the Health Care segment, was primarily
related to Felbatol for the treatment of seizures associated with epilepsy
and Astelin for the relief of asthma and allergic rhinitis. The Company
announced that in October, 1994 it virtually eliminated its Wallace
Laboratories internal research and development capability. See
"Restructuring of Operations and Facilities" in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
General, administrative and other expenses increased $4,113,000 or 21.9% in
the fiscal 1995 period as compared to the fiscal 1994 period. This
increase was primarily due to provisions for a foreign patent claim and a
trade receivable reserve related to the bankruptcy of a pharmaceutical
wholesaler, as well as increased employee benefits and other administrative
costs.
Interest expense increased $46,000 (10.6%) in the fiscal 1995 period as
compared to the fiscal 1994 period.
In the fiscal 1995 period, the Company had a 39% annual effective net tax
benefit on its reported consolidated loss. The tax benefit of 39% is
higher than the prior year's tax provision on operations of 31% because
most of the one-time charges are U.S. related and will be deductible for
federal and state income tax purposes. If further one-time charges to
operations are required as a result of the Felbatol issues and/or the
ongoing review of operations and facilities noted below, the annual
effective tax rate in subsequent quarters and for the fiscal 1995 period
could vary from the 39% tax benefit applied in the period ended September
30, 1994. Tax rates in the current and future years are and will be
adversely affected by lower tax savings resulting from substantially
reduced Puerto Rican operations and the absence of research and development
tax credits.
During the three months ended September 30, 1993, the Company adjusted its
net deferred tax asset to reflect a change in federal corporate income tax
rates. As a result, the provision for income taxes in the fiscal 1994
period includes a one-time credit of $815,000 or $.02 per share as required
by Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes". The effect of the tax law change on the provision for
income taxes in the fiscal 1994 period was not significant.
(Continued)
CARTER-WALLACE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Six months ended September 30, 1994 compared to
six months ended September 30, 1993
Consolidated earnings after taxes in the six months ended September 30,
1994 ("fiscal 1995 period") before the provision for the loss on the
discontinuance of the Organidin (iodinated glycerol) product line, the one-
time restructuring charge and the provision for loss on Felbatol
(felbamate), an antiepileptic drug for the treatment of certain seizure
disorders, were approximately $15,800,000 or $.34 per share as compared to
net earnings before the cumulative effect of the accounting changes of
approximately $7,200,000 or $.16 per share in the six months ended
September 30, 1993 ("fiscal 1994 period"). The net earnings in the 1995
period were substantially favorably impacted by the increase in sales of
the Organidin line. The one-time charges noted above resulted in a pre-tax
charge to income of $103,140,000 ($62,600,000 after tax or $1.36 per share)
in the six months ended September 30, 1994. (See detailed comments below
related to the discontinuance of Organidin (iodinated glycerol) sales,
restructuring charges and the Felbatol developments).
Net sales increased $38,399,000 (12.3%) in the fiscal 1995 period as
compared to net sales in the fiscal 1994 period. The higher sales level
was attributable to increased sales in both the Health Care and Consumer
Products segments. The sales increase in the Health Care segment was due
to unit volume gains and to a lesser extent selling price increases. The
unit volume increase in Health Care sales was primarily attributable to
sales of Felbatol (felbamate), which the Company introduced in September,
1993. Sales in both the Consumer Products and Health Care segments were
positively affected by the recently acquired international businesses in
France, Italy and Australia. The timing and amount of future price
increases in the Health Care segment may be negatively influenced by
competitive pressures and the possibility of government regulation. Sales
of other pharmaceutical products in the Health Care segment continue to be
adversely impacted by generic erosion. The higher sales level in the
Consumer Products segment was due to both unit volume gains and selling
price increases.
Lower foreign exchange rates in comparison with the prior year had the
effect of decreasing sales in the fiscal 1995 period by $1,600,000. The
effect of changes in foreign exchange rates on results of operations in the
fiscal 1995 period compared to the prior year period was not significant.
Other revenues increased $256,000 or 10.0% in the fiscal 1995 period as
compared to the fiscal 1994 period.
(Continued)
CARTER-WALLACE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Cost of goods sold as a percentage of net sales increased from 35.4% in the
fiscal 1994 period to 35.9% in the 1995 period primarily due to changes in
product mix.
Advertising, marketing and other selling expenses increased by $222,000 due
to increased spending in the Consumer Products segment. However, these
expenses in the Health Care segment were lower than the prior year period.
Research and development expenses increased by $1,051,000 or 4.3%.
Research spending, most of which was in the Health Care segment, was
primarily related to Felbatol for the treatment of seizures associated with
epilepsy and Astelin for the relief of asthma and allergic rhinitis. The
Company announced that in October, 1994 it virtually eliminated its Wallace
Laboratories internal research and development capability. See
"Restructuring of Operations and Facilities" in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
General, administrative and other expenses increased $5,319,000 or 13.6% in
the fiscal 1995 period as compared to the fiscal 1994 period. This
increase was primarily due to provisions for a foreign patent claim and a
trade receivable reserve related to the bankruptcy of a pharmaceutical
wholesaler, as well as increased employee benefits and other administrative
costs.
Interest expense decreased $151,000 (14.8%) in the fiscal 1995 period as
compared to the fiscal 1994 period.
In the fiscal 1995 period, the Company had a 39% annual effective net tax
benefit on its reported consolidated loss. The tax benefit of 39% is
higher than the prior year's tax provision on operations of 31% because
most of the one-time charges are U.S. related and will be deductible for
federal and state income tax purposes. If further one-time charges to
operations are required as a result of the Felbatol issues and/or the
ongoing review of operations and facilities noted below, the annual
effective tax rate in subsequent quarters and for the fiscal 1995 period
could vary from the 39% tax benefit applied in the period ended September
30, 1994. Tax rates in the current and future years are and will be
adversely affected by lower tax savings resulting from substantially
reduced Puerto Rican operations and the absence of research and development
tax credits.
During the six months ended September 30, 1993, the Company adjusted its
net deferred tax asset to reflect a change in federal corporate income tax
rates. As a result, the provision for income taxes in the fiscal 1994
period includes a one-time credit of $815,000 or $.02 per share as required
by Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes". The effect of the tax law change on the provision for
income taxes in the fiscal 1994 period was not significant.
(Continued)
CARTER-WALLACE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Restructuring of Operations and Facilities
The Company is currently engaged in restructuring its Wallace Laboratories
Division and the consolidation of certain manufacturing facilities which
are intended to reduce costs and increase efficiencies. These actions were
prompted by the discontinuance of its line of iodinated glycerol
formulation of Organidin products and by the significant adverse effect on
existing and potential sales of Felbatol (felbamate) due to use
restrictions required by the FDA.
As a result of the restructuring, the Company has substantially reduced its
pharmaceutical sales force and marketing support staff and virtually
eliminated its Wallace Laboratories Division internal research and
development capability. However, the Company will continue its research
and development of Astelin (azelastine) for rhinitis and asthma, and
taurolidine, an antitoxin for the treatment of sepsis, and to the extent
such work exceeds the Company's remaining internal research and development
resources, such work will be done through independent research facilities.
The consolidation of its manufacturing operations in the U.S. and Puerto
Rico, when completed, will result in the closure of certain of the
Company's plants and significantly reduced production at one plant.
In connection with the restructuring described above, the Company incurred
a one-time pre-tax charge in the quarter ended September 30, 1994 of
$49,000,000, consisting primarily of plant closing costs, employee
termination costs and related charges. The planned reduction in the number
of employees through 1995 is approximately 630 including 60 vacancies that
will not be filled and which represents 41% of its pharmaceutical sales
force and 23% of the Company's total domestic workforce.
The Company is continuing to review its operations and may take other steps
to reduce costs in the future which may result in additional one-time
charges.
Felbatol (felbamate)
On August 1, 1994, the Company disclosed that it had sent a letter to
approximately 240,000 physicians recommending, in conjunction with the
Federal Food and Drug Administration, the immediate withdrawal of patients
from treatment with Felbatol (felbamate), unless, in the physician's
judgment, an abrupt withdrawal would be deemed to pose a more serious risk
to the patient.
Carter-Wallace's recommendation was prompted by reports of ten cases of
aplastic anemia in association with the use of Felbatol. No such cases
were observed during the premarketing, clinical testing and development of
Felbatol.
(Continued)
CARTER-WALLACE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Felbatol (felbamate) (Continued)
On September 21, 1994, after discussions with the FDA, the Company mailed a
letter alerting physicians to the risk of acute liver failure in
association with the use of Felbatol and the need to monitor liver function
in all patients who are still taking the drug.
On September 27, 1994, the FDA's Peripheral and Central Nervous System
Drugs Advisory Committee met to discuss the continued availability of
Felbatol. The Committee recommended that the drug remain available only
for patients with severe epilepsy for whom the benefits outweigh the risks,
and that changes be made to the product's labeling to reflect the risk of
acute liver failure.
Carter-Wallace introduced Felbatol in September, 1993 for the treatment of
partial seizures with and without secondary generalization in adults and
for Lennox-Gastaut Syndrome, a serious form of childhood epilepsy.
Due to substantial introductory spending levels and continued research and
development, the Company incurred losses with respect to Felbatol since
introduction and for the three months and six months ended September 30,
1994.
As a result of the Felbatol matters discussed above, the Company incurred
in the quarter ended September 30, 1994 a one-time pre-tax charge of
$36,640,000 primarily related to inventory write-offs, purchase commitments
and anticipated product returns. At the present time Felbatol continues to
be available on the market. If, as a result of the matters discussed
above, the product at some future date is no longer available in the
market, the Company will incur an additional one-time charge that would
have a material adverse effect on the Company's results of operations and
possibly on its financial condition. Should the product no longer be
available, the Company currently estimates that the additional one-time
charge consisting primarily of inventory write-offs, purchase commitments
and anticipated returns of product currently in the market, will be in the
range of $30,000,000 to $35,000,000 on a pre-tax basis. See the discussion
above of the Company's income tax rate.
As previously reported, the Company entered into a licensing agreement with
Schering-Plough Corporation, granting Schering-Plough exclusive marketing
rights in all markets except the United States and its territories and
possessions, Canada and Mexico, to Felbatol. Separately, Schering-Plough
and Carter-Wallace agreed that, under certain circumstances, they will put
into effect a co-promotional arrangement with respect to a Schering-Plough
pharmaceutical product to be determined in the future. The matters
discussed above will likely result in a significant adverse effect on the
amount of royalties and fees, if any, to be received from Schering-Plough
in the future under these agreements.
(Continued)
CARTER-WALLACE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Discontinuance of the Organidin (Iodinated Glycerol) Product Line
In June, 1994, the Company and the Food and Drug Administration ("FDA")
reached an agreement to discontinue the manufacture and shipment of the
Organidin (iodinated glycerol) line of products. The agreement between the
Company and the FDA permits the continued shipping, prescribing and
dispensing of existing stocks of Organidin (iodinated glycerol) product
currently in channels of distribution. As previously disclosed by the
Company, in April, 1993 the Company received a letter from the FDA
requesting that it discontinue marketing Organidin (iodinated glycerol)
products. Subsequent meetings between the Company and FDA resulted in this
agreement.
As a result of the agreement noted above, the Company incurred in the
quarter ended June 30, 1994 a one-time charge to pre-tax earnings of
$17,500,000 primarily related to a provision for any product returns and
for inventory write-offs.
Sales and pre-tax operating profits of the Organidin (iodinated glycerol)
line included in the six months ended September 30, 1994 were $20,800,000
and $11,400,000, respectively, compared to sales and pre-tax operating
profits included in the six months ended September 30, 1993 of $19,000,000
and $1,400,000, respectively.
Sales and pre-tax operating profits of the Organidin (iodinated glycerol)
line of products were $59,900,000 and $22,200,000 for the fiscal year ended
March 31, 1992, $43,400,000 and $7,600,000 for the fiscal year ended March
31, 1993 and $74,400,000 and $31,600,000 for the fiscal year ended March
31, 1994. Operating profits were computed on a basis consistent with that
used to report operating profits for the Health Care business segment in
the Company's Annual Report.
Astelin
In July, 1994 the Company received a "non-approval" letter from the FDA for
the Astelin tablet New Drug Application (NDA) for rhinitis. The scientific
issues raised in this letter as well as those raised in the "non-approval"
letters previously received with respect to Astelin nasal spray for
rhinitis and Astelin tablets for asthma were discussed with the FDA in
meetings in July and August. Responses to all outstanding issues raised by
the FDA are being prepared by the Company. The Company is currently
analyzing two additional asthma efficacy studies. As a result of the
meetings with the FDA, the Company is unable at this time to determine when
Astelin will be reviewed by the appropriate FDA advisory panel and when and
if the NDAs will be approved.
(Continued)
CARTER-WALLACE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Accounting Changes
During the fiscal 1994 period the Company adopted Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" and elected to immediately recognize the
transition obligation of $69,554,000 before taxes or $43,819,000 after
taxes ($.96 per share). Effective July 1, 1993, the Company amended its
postretirement benefit plan which reduced the annual ongoing costs of these
benefits.
During the quarter ended March 31, 1994, the Company adopted Statement of
Financial Accounting Standards No. 112 "Employers' Accounting for
Postemployment Benefits" effective April 1, 1993. Accordingly, results of
operations in the three months ended June 30, 1993 and the six months ended
September 30, 1993 have been restated to reflect a one-time pre-tax charge
to earnings of $4,700,000 or $2,820,000 after taxes ($.06 per share).
Liquidity and Capital Resources
Funds provided from operations are used for capital expenditures,
acquisitions, the purchase of treasury stock, the payment of dividends and
working capital requirements. External borrowings are incurred as needed
to satisfy cash requirements relating to seasonal business fluctuations, to
finance major facility expansion programs and to finance major
acquisitions.
The Company is a party to a $75,000,000 revolving credit facility with a
group of banks. During November, 1994 the Company and the banks amended
the credit agreement to exclude from the material adverse change provisions
the one-time charges for Organidin and the restructuring program, as well
as the current and any further one-time charges for Felbatol should the
product no longer be available. Consequently, the Company is now able to
access its revolving credit line.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Please refer to Note 7 "Litigation" of Notes to Condensed Consolidated
Financial Statements for information regarding legal proceedings.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of Carter-Wallace, Inc. was
held on July 19, 1994.
(b) At the Annual Meeting the following proposals were submitted to
a vote of security holders:
(1) To amend the 1977 Restricted Stock Award Plan, as amended,
to increase the number of common shares covered by the Plan
by 2,000,000 shares. The number of votes cast in favor of
this proposal was 141,575,797 and the number of votes cast
against this proposal was 4,961,963.
(2) To require that the Company make disclosures on certain
employees previously employed in governmental capacities.
The number of votes cast in favor of this proposal was
4,165,737 and the number of votes cast against this proposal
was 142,366,260.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - During the quarter ended September 30,
1994, the Company filed a report on Form 8-K dated August 1,
1994 reporting that the Company had sent a letter to
approximately 240,000 physicians recommending, in conjunction
with the Federal Food and Drug Administration, the immediate
withdrawal of patients from treatment with Felbatol (felbamate),
unless, in the physician's judgment, an abrupt withdrawal would
be deemed to pose a more serious risk to the patient.
SIGNATURES
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.
Carter-Wallace, Inc.
(Registrant)
Date: November 10, 1994 s/Daniel J. Black
Daniel J. Black
President & Chief
Operating Officer
Date: November 10, 1994 s/Paul A. Veteri
Paul A. Veteri
Vice President, Finance
& Chief Financial
Officer