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 June 30, 1997 ( ) 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 (Zip Code) 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 June 30, 1997 were 33,940,700 and 12,388,100, respectively. CARTER-WALLACE, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q JUNE 30, 1997 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Statements of Earnings for the three months ended June 30, 1997 and 1996 1 Condensed Consolidated Balance Sheets at June 30, 1997 and March 31, 1997 2 Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 1997 and 1996 3 Notes to Condensed Consolidated Financial Statements 4 Report by KPMG Peat Marwick LLP on their limited review 5 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 6 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 8 Item 6 - Exhibits and Reports on Form 8-K 8 Signatures 9 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS CARTER-WALLACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Three Months Ended June 30, 1997 1996 Revenues: Net sales $170,115,000 $169,889,000 Other revenues 1,423,000 1,912,000 171,538,000 171,801,000 Cost and expenses: Cost of goods sold 59,982,000 62,463,000 Advertising, marketing & other selling expenses 65,878,000 63,728,000 Research & development expenses 6,227,000 6,648,000 General, administrative & other expenses 22,854,000 22,181,000 Interest expense 1,080,000 1,086,000 156,021,000 156,106,000 Earnings before taxes on income 15,517,000 15,695,000 Provision for taxes on income 6,207,000 6,435,000 Net earnings $ 9,310,000 $ 9,260,000 Net earnings per average share of common stock outstanding $ .20 $ .20 Cash dividends per share $ .04 $ .04 Average shares of common stock outstanding 46,338,000 46,387,000 CARTER-WALLACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, March 31, 1997 1997 Assets (Unaudited) Current Assets: Cash and cash equivalents $ 38,921,000 $ 35,124,000 Short-term investments 12,729,000 18,667,000 Accounts and other receivables less allowances of $6,650,000 at June 30, 1997 and $6,730,000 at March 31, 1997 123,642,000 122,685,000 Inventories: Finished goods 50,603,000 50,918,000 Work in process 12,614,000 11,744,000 Raw materials and supplies 26,781,000 24,559,000 89,998,000 87,221,000 Deferred taxes, prepaid expenses and other current assets 41,557,000 37,459,000 Total Current Assets 306,847,000 301,156,000 Property, plant and equipment, at cost 291,407,000 291,486,000 Less: accumulated depreciation and amortization 140,404,000 136,642,000 151,003,000 154,844,000 Intangible assets 121,395,000 123,339,000 Deferred taxes and other assets 93,113,000 106,583,000 Total Assets $672,358,000 $685,922,000 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 36,749,000 $ 34,867,000 Accrued expenses 106,579,000 120,059,000 Notes payable 3,059,000 3,258,000 Total Current Liabilities 146,387,000 158,184,000 Long-Term Liabilities: Long-term debt 50,666,000 51,025,000 Deferred compensation 15,958,000 14,631,000 Accrued postretirement benefit obligation 69,604,000 69,432,000 Other long-term liabilities 32,927,000 43,496,000 Total Long-Term Liabilities 169,155,000 178,584,000 Stockholders' Equity: Common stock 34,663,000 34,655,000 Class B common stock 12,542,000 12,550,000 Capital in excess of par value 4,204,000 3,588,000 Retained earnings 337,362,000 329,906,000 Less: Foreign currency translation adjustment and other 21,080,000 20,965,000 Treasury stock, at cost 10,875,000 10,580,000 Total Stockholders' Equity 356,816,000 349,154,000 Total Liabilities and Stockholders' Equity $672,358,000 $685,922,000 CARTER-WALLACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (Unaudited) 1997 1996 Cash flows from operations: Net earnings $ 9,310,000 $ 9,260,000 Cash payments for one-time charges (7,637,000) (8,081,000) Changes in assets and liabilities (8,772,000) (5,681,000) Depreciation and amortization 6,009,000 5,724,000 (1,090,000) 1,222,000 Cash flows used in investing activities: Additions to property, plant and equipment (3,799,000) (9,754,000) Decrease in short-term investments 5,984,000 7,700,000 Proceeds from sale of property, plant and equipment 5,940,000 187,000 8,125,000 (1,867,000) Cash flows used in financing activities: Dividends paid (1,854,000) (1,855,000) Increase in borrowings - 1,629,000 Payments of debt (515,000) (1,254,000) Purchase of treasury stock (796,000) (134,000) (3,165,000) (1,614,000) Effect of exchange rate changes on cash and cash equivalents (73,000) (118,000) Increase (decrease) in cash and cash equivalents $ 3,797,000 $ (2,377,000) CARTER-WALLACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 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 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. A copy of their report on this limited review is included in this Form. Note 3: Felbatol As previously reported, in the year ended March 31, 1995 the Company incurred a one-time charge to pre-tax earnings of $37,780,000 related to use restrictions for Felbatol. This charge was adjusted by $8,200,000 to $45,980,000 in the quarter ended March 31, 1996. Depending on future sales levels, additional inventory write-offs may be required. If for any reason the product at some future date should no longer be 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 and anticipated returns of product currently in the market, will be in the range of $20,000,000 to $25,000,000 on a pre-tax basis. Note 4: Litigation Information regarding Legal Proceedings involving the Company is presented in Note 19 "Litigation Including Environmental Matters" of the Notes to the Consolidated Financial Statements on pages 28 to 31 of the Company's 1997 Annual Report to Stockholders incorporated by reference in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997 and is herein expressly incorporated by reference. The Company continues to believe, based upon opinion of counsel, that it has good defenses to all of the above pending actions and should prevail. <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 June 30, 1997, and the related condensed consolidated statements of earnings for the three month periods ended June 30, 1997 and 1996 and the condensed consolidated statements of cash flows for the three month periods ended June 30, 1997 and 1996. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical 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, 1997, 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 May 27, 1997, 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, 1997 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG PEAT MARWICK LLP New York, New York July 24, 1997 </AUDIT-REPORT> CARTER-WALLACE, INC. ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - Three months ended June 30, 1997 compared to three months ended June 30, 1996 Consolidated earnings after taxes in the three months ended June 30, 1997 were $9,310,000 or $.20 per share compared with net earnings of $9,260,000 or $.20 per share in the three months ended June 30, 1996. Net sales increased $226,000 (0.1%) in the current year period as compared to net sales in the prior year period. The higher sales level resulted primarily from selling price increases, largely in the Health Care segment. Unit volume in the Consumer Products segment was higher; however unit volume in the Health Care segment was lower despite sales of Astelin Nasal Spray, which was launched in the fourth quarter of fiscal 1997. Sales of other pharmaceutical products in the Health Care segment continue to be adversely impacted by generic competition. Sales and earnings from foreign operations are subject to fluctuations in exchange rates. Lower foreign exchange rates, primarily in Italy and France, had the effect of decreasing sales in the current year period by approximately $2,900,000. The effect of changes in foreign exchange on earnings was not material. Other revenues decreased $489,000 (25.6%) from $1,912,000 in the prior year period to $1,423,000 in the current year period due largely to reduced interest income. Cost of goods sold as a percentage of net sales decreased from 36.8% in the prior year period to 35.3% in the current year period primarily due to changes in product mix. Advertising, marketing and other selling expenses increased by $2,150,000 or 3.4% versus the prior year period due to increased expenses in the Health care segment related to the introduction of Astelin Nasal Spray which was launched in the fourth quarter of fiscal 1997. Spending in the Consumer Products segment was slightly lower. Research and development expenses decreased by $421,000 or 6.3% versus the prior year period due to lower spending in the Health Care segment. General, administrative and other expenses increased $673,000 or 3.0% versus the prior year period. The estimated annual effective tax rate applied in the current year period was 40%, as compared to a 41% rate in the prior fiscal year due primarily to the mix of domestic and international income. (Continued) CARTER-WALLACE, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Company is required to adopt Statement of Financial Accounting Standards No. 128, "Earnings Per Share" as of December 31, 1997. Adoption of this statement is not expected to have a material effect on the Company's earnings per share. Felbatol As previously reported, in the year ended March 31, 1995 the Company incurred a one-time charge to pre-tax earnings of $37,780,000 related to use restrictions for Felbatol. This charge was adjusted by $8,200,000 to $45,980,000 in the quarter ended March 31, 1996. Depending on future sales levels, additional inventory write-offs may be required. If for any reason the product at some future date should no longer be 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 and anticipated returns of product currently in the market, will be in the range of $20,000,000 to $25,000,000 on a pre-tax basis. 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. Approximately 15% of the Company's debt is financed at variable interest rates. Changes in interest rates could affect interest expense in future periods. In the Statement of Cash Flows the cash outflow from the change in assets and liabilities in the current year period compared to that in the prior year period is due primarily to increased working capital requirements in the current year. Cash outlays in the three months ended June 30, 1997 relating to prior years one-time charges amount to $7,637,000 as compared to $8,081,000 in the prior year. PART II - OTHER INFORMATION Item 1 - Legal Proceedings Please refer to Note 4: "Litigation" of Notes to Condensed Consolidated Financial Statements for information regarding legal proceedings. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit 27 Financial Data Schedule (EDGAR filing only) (b) Reports on Form 8-K - No reports on Form 8-K have been filed during the quarter ended June 30, 1997 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: July 24, 1997 s/Ralph Levine Ralph Levine President & Chief Operating Officer Date: July 24, 1997 s/Paul A. Veteri Paul A. Veteri Executive Vice President, Finance & Chief Financial Officer