CARTER-WALLACE
ANNUAL REPORT
FOR THE YEAR
ENDED MARCH 31
1995
CARTER-WALLACE, INC.
ANNUAL REPORT
For the year ended March 31, 1995
FINANCIAL HIGHLIGHTS 1995 1994
Net sales $663,642,000 $664,789,000
Earnings before one-time charges in
1995, taxes and the cumulative effect
of accounting changes in 1994 42,310,000 37,382,000
Earnings (loss) before taxes (87,030,000) 37,382,000
Net earnings (loss) before the
cumulative effect of accounting
changes (56,268,000) 26,609,000
Net earnings (loss) (56,268,000) (20,030,000)
Earnings per share before one-time
charges in 1995 and the cumulative
effect of accounting changes in
1994 $ .53 $ .58
Loss per share $(1.22) $ (.44)
Dividends 13,372,000 15,292,000
Dividends per share $ .29 $ .33
Average shares outstanding 46,108,000 45,900,000
Number of stockholders of record
Common 3,247 3,305
Class B common 1,797 1,919
[LOGO]
The Company markets
toiletries, pharmaceuticals,
diagnostic specialties,
proprietary drugs and pet products
CONTENTS
Report to Stockholders 2
Summary of Selected Financial Data 7
Management's Discussion and
Analysis of Results of Operations
and Financial Condition 8
Description of Business Segments 13
Consolidated Balance Sheets 14
Consolidated Statements of Earnings
and Retained Earnings 16
Consolidated Statements of Cash Flows 17
Notes to Consolidated Financial Statements 18
Independent Auditors' Report 34
Directors and Officers 36
REPORT TO STOCKHOLDERS
In the fiscal year ended March 31, 1995 the Company's consolidated sales were
$663,642,000 compared to the prior year's sales of $664,789,000.
The Company incurred a loss of $1.22 a share this year as a result of one-time
charges related to the Felbatol (felbamate) and Organidin (iodinated glycerol)
products as well as charges for restructuring of operations and facilities.
Excluding these one-time charges in the current year and the accounting changes
in the prior year, earnings were $.53 a share in the current year compared with
$.58 a share a year earlier.
SALES
Sales in the Company's two business segments were Consumer Products $400,857,000
and Health Care Products $262,785,000. Consumer Products were 60% and Health
Care Products were 40% of total sales. These sales compare to a year ago of
$368,168,000 and $296,621,000, respectively.
Foreign sales by subsidiaries and branches operating outside the United States
were $182,190,000 compared with $159,454,000 the previous year. This represents
27% and 24%, respectively of total sales. Health Care Products accounted for 43%
and Consumer Products 57% of foreign sales. Lower foreign exchange rates had the
effect of decreasing foreign sales by approximately $1,300,000.
DIVIDENDS
Dividends of $.29 per share were paid in the current year compared to $.33 last
year. The Company has paid dividends for 112 consecutive years.
CARTER PRODUCTS DIVISION
The business environment this year was punctuated by the increasing demands of
the retail trade, the consolidation of brands at the manufacturer's level and
the price competition of private label brands in the Division's key categories.
In spite of these pressures, the Division was able to maintain or increase the
market share of most of its major brands.
The Arrid line performed well in the highly competitive
anti-perspirant/deodorant market. The teen subsegment of the market proved to be
smaller than anticipated and the Teen Image brand line suffered some volume
declines. The Arrid XX business, however, exhibited strong gains and was a major
factor in overall increased volume and market share for the core Arrid franchise
over last year.
The Trojan line continues to lead the condom market with over a 60% market
share. Trojan Ultra Texture Ribbed condoms, launched late last year, helped the
brand maintain its leadership position in the market. Class Act, the Division's
"price value" brand exceeded expectations. The addition of Class Act Ribbed
Lubricated and Spermicidal condoms will broaden the appeal of the product line
next year.
The Nair line increased its leadership position in the depilatory market with a
share in excess of 45%. Women continue to buy Nair at a rate of over two to one
over the next leading brand.
The First Response and Answer lines combined to give the Division approximately
a 25% share of the pregnancy test kit market in the U.S.
The Pearl Drops line was able to maintain its number two position in the
Whitening/Polish segment of the dentifrice market in spite of a number of new
entries into the segment by major toothpaste brands.
A decision was made to relocate all Carter Products Division functions from the
New York office to the Cranbury, New Jersey facility. This move will result in
greater operational efficiencies in that all Carter Products Division
disciplines will be located within the same facility.
WALLACE LABORATORIES DIVISION
The past year posed many challenges for the Wallace Division. In June
Carter-Wallace entered into a consent decree with the Food and Drug
Administration to discontinue sales of the Organidin family of products
containing iodinated glycerol. The Division is currently selling a
reformulated version
2
of Organidin containing guaifenesin. This product line is being marketed as
Organidin NR.
In August, Wallace Laboratories, in conjunction with the FDA, because of reports
of aplastic anemia associated with its use, recommended that physicians remove
patients from the antiepileptic drug Felbatol (felbamate) unless in the
physician's judgment, an abrupt withdrawal would be deemed to pose a more
serious risk to the patient. No cases of aplastic anemia were observed during
premarketing, clinical testing and development. In September, 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. An FDA
advisory committee then reviewed the safety experience with Felbatol. The
committee recommended continued marketing of Felbatol with appropriate labeling
changes. As a result, Felbatol remains available for those patients whose
epilepsy is not controlled by other medications and where the risk of its use is
deemed acceptable in light of the benefits it confers.
The discontinuation of the Division's iodinated glycerol formulation of
Organidin products and the significant adverse effect on existing and potential
sales of Felbatol due to use restrictions has led to a substantial reduction of
the Division's pharmaceutical sales force and marketing support staff and
virtual elimination of its internal R&D capability. The Division will, however,
continue its research and development of Astelin (azelastine) nasal spray for
rhinitis, and taurolidine, an antitoxin for the treatment of sepsis.
Following the restructuring, the Division has refocused its marketing emphasis
on those products that have demonstrated promotional responsiveness such as the
Soma line of muscle relaxants and Rynatan antihistamines with decongestants.
The Division is actively pursuing pharmaceutical product or company acquisitions
and co-promotional arrangements.
WAMPOLE LABORATORIES
Although the past year proved to be another challenging year for the entire
health care industry, the Division was able to either maintain or strengthen its
position in most of its market areas.
Sales of serological test products were unusually strong. The Division
maintained its market leadership position with Streptozyme, a test for
streptococcal antibodies, Rheumaton, a test to detect rheumatoid factor and in
mononucleosis testing where sales increased 25% over last year. Mono Plus, a
rapid assay for infectious mononucleosis which was introduced in June, 1994,
contributed significantly to the gain. In addition, Wampole Impact Rubella, for
the determination of immunity to rubella infections and Wampole Impact RPR for
the serologic detection of syphilis, both more than doubled prior year sales
levels.
The Division was further strengthened by the mid-year implementation of a
marketing agreement with Baxter Healthcare, the nation's largest distributor of
health care products. This partnership expands Wampole's distribution network.
The Zeus Scientific line of immunoassay tests also showed good growth.
Particularly strong gains were recorded in the enzyme immunoassay area with
sales up by almost 60% over prior year. A range of products for the differential
diagnosis of various autoimmune diseases was introduced in the second half of
the year and these are expected to contribute substantially to future growth of
the Zeus line.
The Isostat product line for the rapid detection of micro-organisms in the blood
and the Stat-Crit system for the measurement of hematocrit levels continued to
be strong contributors to the Division's results. The Stat-Crit system, along
with the Clearview products for chlamydia and pregnancy testing, continued to be
impacted by the effects of the Clinical Laboratories Improvement Act, although
sales of the Clearview group A streptococcus test grew substantially.
3
LAMBERT KAY
Double-digit gains pushed the Division's sales to record levels this year with
virtually all product categories exceeding year ago levels.
The gains were fueled primarily by successful new product introductions, with 25
new products and sizes introduced into pet stores this year, focusing primarily
on flea and tick control. One new product was the Pet Fone flea and tick collar
which is imprinted with a serial number that enables lost pets to be reunited
with their owners.
The Fresh 'n Clean scented shampoo line was expanded with the addition of a flea
and tick shampoo. The Shield line of longer-lasting flea killers was enhanced
with a cream rinse -- the only such product available to pet stores. The
innovative X-O-TROL line of flea and tick products was broadened with the
addition of a unique inverted spray for households, a cat spray, yard spray, and
repellents for dogs and cats.
The toy line was expanded with the introduction of Ghosts, Twinco Heart Man, and
Lambert Kay Lions, plus an award winning prepacked display of a variety of
animal faces.
The Lassie and Tiny Tiger line of products, designed for mass merchandisers, had
major sales gains due to expanded distribution and new product introductions.
Virtually all discount chains, as well as many food and drug stores, now sell
the Lassie and Tiny Tiger brands. Other new products introduced included a
complete line of puppy, kitten and orphaned wild animals line of milk replacers
(formulas), new plastic backed "mini" flea combs and insect growth regulator
products.
INTERNATIONAL DIVISION
The Division's sales showed substantial growth and advanced to a record level.
The strong performance is primarily the result of the acquisition of new product
lines in France, Australia and Italy, as well as the expansion of our business
in Latin America. Sales of existing products were steady with some growth due to
selective selling price increases.
Consumer product sales continued to advance in several areas. The Arrid product
line showed exceptional growth in the United Kingdom and Arrid Clear in solid
and gel formats was successfully launched in Canada. In spite of a number of new
competitive entries, Pearl Drops was able to achieve growth in Canada, Italy,
and Germany, as well as a number of other European countries. The Company's
dominant position in the OTC pregnancy test market was maintained in Canada,
Mexico and Australia where our products remain leading brands. Market strength
in topical analgesics was maintained in Canada with Antiphlogistine Rub A-535
and in Australia with Dencorub. The Trojan line of condoms also showed
significant gains in Canada, retaining its leading market position. In Spain,
Eudermin hand cream showed renewed growth following a restage of the line, while
Taky depilatories maintained their strong position in the market. The
acquisition of Sante Beaute in France substantially enhanced our consumer
product business. The major products offered by Sante Beaute are Email Diamant,
a toothpolish, and Lineance, a line of cosmetic creams and lotions. The
acquisition of Curash, a line of baby and adult powders in Australia,
complements our existing range of personal care items.
The Division's line of healthcare products sustained a strong position in
several foreign markets. In Canada, higher sales were achieved for Gravol anti-
nauseant and Ovol antiflatulent. Sales of our ethical products increased in
Italy. We have also maintained our significant market share for Sterimar nasal
decongestant in France.
Professional diagnostic sales showed substantial growth in Italy as a result of
the acquisition of Technogenetics. The products manufactured and sold by
Technogenetics consist of diagnostic kits which are used by hospitals and
clinical laboratories for testing body fluids to detect and characterize certain
human diseases and conditions. Sales of Isolator, a microbiological test used
for the isolation of bacteria in patients with suspected sepsis, increased
worldwide.
4
RESEARCH AND DEVELOPMENT
Expenses for research and development totaled $41,315,000 compared to
$52,278,000 a year ago. This decline was due to the significant reduction of
felbamate clinical studies and the termination of Organidin (iodinated glycerol)
clinical studies.
The three Astelin (azelastine) New Drug Applications ("NDA") are pending at the
FDA. Answers to all outstanding questions for the Astelin Nasal Spray
non-approvable letter will be submitted to the FDA in June, 1995 and remaining
chemistry work is expected to be completed by September 1995. The FDA has
suggested that a fall, 1995 Advisory Committee meeting for the Astelin Nasal
Spray NDA might be possible pending satisfactory review of our June responses.
Additional formulation work will be required to satisfactorily complete work on
the Astelin tablet for rhinitis NDA which will remain pending during fiscal year
1996. The Astelin tablet for asthma NDA will be withdrawn following the recently
completed analysis of two steroid sparing trials which did not support the
product's efficacy in treating asthma.
A large scale, multi-center clinical efficacy trial was initiated for
taurolidine, an antitoxin for the treatment of sepsis, in October, 1994.
D-23129, a new chemical entity with anticonvulsant activity in preclinical
testing, was accepted by Carter-Wallace as a development compound from ASTA
Medica AG during fiscal year 1994. ASTA Medica will begin Phase I clinical
trials in Germany during 1995. Discussions are underway with ASTA regarding what
role, if any, Carter-Wallace will play in the future development of this product
in the United States.
FACILITIES
The Company's manufacturing facilities were profoundly affected by the
restructuring the Company began this year. A review of the Company's existing
facilities and future strategy resulted in a series of plant closings, shifts in
manufacturing operations and relocation of personnel.
Due to the phasing-out of the iodinated glycerol Organidin formulation, our
Humacao, Puerto Rico plant was closed at the end of December and subsequently
sold. The new Organidin NR formulations are now being produced at the Decatur,
Illinois plant where we are also planning to produce the VoSoL line of otic
solution products that had been produced at Humacao.
Operations of our Carter P.D. affiliate at Rincon, Puerto Rico were ceased in
March, 1995. The Pearl Drops and Arrid Cream products produced there will be
sourced from our United Kingdom operation in Folkestone, England and Arrid
Roll-On will be sourced from a U.S.-based contract manufacturer. We have also
ceased testing and packaging operations for our Trojan brand condoms at this
site. The lease of this facility will be ended shortly.
In April, 1995, the Company purchased the former Safetex condom manufacturing
plant in Colonial Heights, Virginia from Aladan, a glove and condom manufacturer
based in Alabama. Apart from acquiring a modern facility that continues in
operation, the Company secured new state-of-the-art equipment. Some of the
equipment from Rincon will be employed in Colonial Heights to supplement what is
already in place in order to provide additional capacity for production of the
Company's Trojan brand condoms.
The Company decided in mid-May, 1995 to close its condom manufacturing plant in
Trenton, New Jersey over a projected period of eighteen to twenty-four months.
The condom production currently performed at Trenton will be transferred to the
Company's facility in Colonial Heights, Va.
In October, 1994 the Company announced the planned closing of its East Windsor,
New Jersey facility. This facility produces much of the production of the
Company's diagnostic products and is used for the distribution of certain
product lines. It also provides office and laboratory space for support staffs.
The facility, which is listed for sale, is scheduled to close during the fall of
1995. The transfer of the products to contract manufacturers is underway and the
non-production operations that remain will
5
be consolidated within existing Company facilities in Cranbury and Dayton, New
Jersey.
At Cranbury, New Jersey, renovations are underway within office areas in the
main manufacturing building and the Wallace Research building. These changes are
being made to accommodate various groups currently located at our East Windsor,
New Jersey facility which is being closed, as well as the Carter Products
personnel who are moving from our New York headquarters location in July.
LITIGATION
The Company is a defendant in certain Felbatol related actions which are
discussed in the "Other Litigation" section of Note 19 to the Consolidated
Financial Statements (pages 31 to 32).
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 unspecified
compensatory damages.
The Company along with numerous other drug manufacturers, wholesalers and
suppliers is a defendant in three anti-trust cases.
The Company believes, based on opinion of counsel, it has good defenses to each
of the above-described legal actions and should prevail.
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 Company has settled this litigation by paying
$2,000,000 for alleged prior infringements and will pay on-going royalties on
future sales of the covered products.
The Company along with several other companies is also a defendant in two
environmental cases.
PEOPLE
Barton F. Haynes, M.D. has been appointed to the Scientific Advisory Board. Dr.
Haynes is Chairman, Department of Medicine, Duke University Medical Center.
* * *
This past year was an unusual and challenging one for our Company. The speed,
dedication and thoroughness with which each and every employee attacked the
tasks before them were most rewarding and demonstrate the skills and quality we
are fortunate to find so prevalent within our organization.
We are grateful for the ongoing trust and confidence of the consumers and
professionals who use our products and for the continued strong support of our
shareholders and our suppliers. We thank them for their interest and confidence
in Carter-Wallace.
Henry H. Hoyt, Jr.,
Chairman of the Board and
Chief Executive Officer
Daniel J. Black,
President and
Chief Operating Officer
June 15, 1995
6
Carter-Wallace, Inc. and Subsidiaries
SUMMARY OF SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
YEARS ENDED MARCH 31
----------------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE DATA)
OPERATIONS
Net sales $663,642 $664,789 $653,511 $673,390 $634,890
Earnings before one-time charges in
1995, taxes and the cumulative effect
of accounting changes in 1994 42,310 37,382 68,406 67,265 76,103
Net earnings (loss) before the
cumulative effect of accounting
changes (56,268)(a) 26,609 47,200(b) 45,740(c) 51,750
Net earnings (loss) (56,268)(a) (20,030) 47,200(b) 45,740(c) 51,750
Net earnings (loss) per share before the
cumulative effect of accounting
changes in 1994 (d) (1.22)(a) .58 1.03(b) 1.00(c) 1.12
Net earnings (loss) per average share
of common stock outstanding (d) (1.22)(a) (.44) 1.03(b) 1.00(c) 1.12
Dividends per share (d) .29 .33 .33 .33 .30
Average common shares outstanding (d) 46,108 45,900 45,786 45,783 46,029
FINANCIAL POSITION
Working capital(e) $100,596 $185,159 $184,175 $170,279 $151,735
Net property, plant and equipment 137,608 157,059 150,070 142,854 136,345
Total assets(e) 680,224 628,562 595,550 577,181 557,301
Long-term debt 23,115 9,309 13,184 14,927 16,576
Stockholders' equity(e) 327,139 393,508 429,161 407,261 380,630
OTHER DATA
Capital expenditures $ 18,853 $ 24,305 $ 25,500 $ 22,313 $ 18,735
Book value per share (d)(e) 7.08 8.54 9.37 8.89 8.31
Number of employees 3,670 4,060 4,020 4,170 4,270
<FN>
(a) Includes one-time charges against pre-tax earnings of $129,340 ($80,566
after tax or $1.75 per share) related to the discontinuance of the Organidin
(iodinated glycerol) product line, the provision for loss on Felbatol
(felbamate) and restructuring charges.
(b) Includes income of $10,000 before taxes, or $6,000 after taxes ($.13 per
share) related to a licensing agreement with Schering-Plough Corporation
granting exclusive marketing rights in all markets except the United States
and its territories and possessions, Canada and Mexico, to Felbatol
(felbamate).
(c) Includes a one-time charge against earnings of $12,400 before taxes, or
$8,400 after taxes ($.18 per share) related to the discontinuance of the
Answer self-monitoring blood glucose system.
(d) Reflects a three-for-one stock split in April, 1992.
(e) Fiscal years 1993, 1992 and 1991 were restated to reflect the change in
accounting for income taxes.
------------------------------------------------------
QUARTERLY DATA ON COMMON STOCK
The high and low selling prices of the Company's
common stock, principally traded on the New York Stock
Exchange (symbol CAR), for the two most recent fiscal
years were as follows:
FISCAL YEARS ENDED MARCH 31
----------------------------------------------------
1995 1994
---------------------- ----------------------
QUARTER ENDED HIGH LOW HIGH LOW
----------- ----------- ----------- -----------
June 30 25 5/8 16 1/4 30 3/8 23 7/8
September 30 18 7/8 9 7/8 33 3/4 26 1/4
December 31 15 3/8 12 1/8 32 7/8 20 1/8
March 31 13 7/8 10 1/2 26 3/8 19 7/8
A dividend of $.08 1/3 per share was declared in each
of the first three quarters of 1995 and a dividend of
$.04 per share was declared in the fourth quarter. A
dividend of $.08 1/3 per share was declared in all
four quarters of 1994.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
- --------------------------------------------------------------------------------
NET SALES AND EARNINGS
The Company incurred a loss of $56,268,000 or $1.22 a share in the year ended
March 31, 1995 as a result of one-time charges related to the Felbatol and
Organidin Iodinated Glycerol (I.G.) products as well as charges for
restructuring of operations and facilities. This compares to a loss of
$20,030,000 or $.44 a share in the prior year. Excluding the one-time charges in
the current year and the accounting changes in the prior year, earnings were
$.53 a share in the current year compared with $.58 a share a year earlier.
Net sales in 1995 were $663,642,000 compared to the prior year's sales of
$664,789,000. Domestic sales decreased 5% and foreign sales increased 14% from
the prior year. Lower foreign exchange rates had the effect of decreasing
foreign sales by approximately $1,300,000.
Sales of Consumer Products increased 9% in 1995 due to higher volume in both
domestic and international operations. The increase in domestic Consumer
Products sales resulted from selling price increases and unit volume gains.
Recent acquisitions contributed a substantial portion of the international sales
growth of Consumer Products. Factory sales of worldwide antiperspirant and
deodorant products were $123,146,000 in 1995 or 1% lower than the $124,547,000
sales level in 1994.
Health Care sales were 11% lower than the prior year resulting from reduced
sales of Organidin I.G. offset in part by selling price increases. In June, 1994
the Company and the Food and Drug Administration (FDA) reached an agreement to
discontinue the manufacture and shipment of this product. The Company has
introduced a reformulated line of Organidin products, marketed as Organidin NR.
Because the Company believes that initial ordering of this reformulated line
resulted in overstocked trade inventory levels, a provision in the amount of
$8,000,000 for possible returns of this reformulated product has been
established at March 31, 1995. The Company will continue to evaluate the
adequacy of this reserve. Sales of the Company's pharmaceutical products
continue to be adversely affected by generic erosion.
In 1994 net earnings before the cumulative effect of the accounting changes were
$26,609,000 or $.58 a share compared to earnings of $47,200,000 or $1.03 a share
a year earlier. Consolidated net loss after the cumulative effect of the
accounting changes in 1994 was $20,030,000 or $.44 a share. See Note 8
"Postretirement Benefits Other Than Pensions and Postemployment Benefits" of
Notes to the Consolidated Financial Statements on page 23 for discussion of the
accounting changes.
Net sales in 1994 were $664,789,000 an increase of $11,278,000 or 2% from 1993.
This increase was due to higher sales in the Health Care segment. Domestic sales
increased 4% and foreign sales decreased 6% from the prior year. Lower foreign
exchange rates had the effect of decreasing foreign sales by approximately
$16,300,000. Without the negative foreign exchange effect, foreign sales would
have increased by 4%.
Consumer Products sales decreased 1% in 1994 due to the negative effect of
foreign exchange rates. Without the effect of foreign exchange rates, Consumer
Products sales would have increased 1%. Factory sales of worldwide
antiperspirant and deodorant products were $124,547,000 in 1994, or 3% lower
than the $128,321,000 sales level in 1993.
In 1994, Health Care sales were 6% higher than the prior year due to selling
price increases in the Health Care segment which were implemented in the prior
year. Unit volume declined slightly in the Health Care segment from the prior
year. Included in the Health Care unit volume were greater than planned
introductory sales of Felbatol (felbamate) which the Company began marketing in
August, 1993 and higher sales of Organidin I.G. products. The unit volume gain
in Organidin I.G. products was due primarily to a decline in sales of
competitive products. Sales of Organidin I.G. products represented approximately
11% of consolidated sales in the fiscal 1994 period compared to 7% in the fiscal
1993 period. The Company's 1994 net earnings were substantially favorably
impacted by the increase in sales of Organidin I.G. products. Sales of other
pharmaceutical products in the Health Care segment continue to be adversely
impacted by generic erosion.
Included in earnings in 1993 was an initial, non-refundable payment of
$10,000,000 before taxes or $6,000,000 after taxes ($.13 per share) related to a
licensing agreement with Schering-Plough Corporation. This agreement grants
Schering-Plough exclusive marketing rights in all markets except the United
States and its territories and possessions, Canada and Mexico, to Felbatol. See
discussion of Felbatol (felbamate) on pages 10 and 11.
Interest income increased in 1995 compared to the previous two years due to a
higher level of interest bearing investments.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
Operating profits in Other North American countries increased by 6% in 1995
while sales declined by 3%. The profit improvement was due to increased Canadian
profits. The sales decline was due entirely to lower foreign exchange rates in
Mexico and Canada.
During 1993, the Company incurred costs of $14,800,000 before taxes or
$8,880,000 after taxes ($.19 per share) related to pre-launch activity,
exclusive of research and development, for Felbatol.
COST AND EXPENSES
Cost of goods sold as a percentage of net sales was 36.2% in 1995, 35.0% in
1994, and 34.2% in 1993. The increases in the cost of goods sold percentage were
due primarily to changes in product mix, including in 1995 reduced sales of
Organidin I.G., whose cost of goods sold was lower than the Company's overall
cost of goods sold percentage. Throughout this period, the Company has attempted
to minimize the effects of higher costs by selective price increases and cost
control measures.
Advertising, marketing and other selling expenses decreased 4% in 1995 and
increased 7% in 1994. The decrease in 1995 relates to lower expense in the
Health Care segment. Advertising, marketing and other selling expense in the
Consumer Products segment increased in 1995 over the prior year. The increase in
1994 was due to higher advertising and promotional support of products in both
business segments. Also, in 1994, Felbatol (felbamate) was supported by
substantial introductory spending levels. The higher level of spending in the
Consumer Products segment in 1994 is primarily a result of the marketing support
for line extensions of anti-perspirant and deodorant products.
Research and development expenses decreased 21% in 1995 compared with the prior
year. This decline was due to the significant reduction of felbamate clinical
studies and the termination of Organidin I.G. clinical studies. The Company
announced that in October, 1994 it 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
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. In
1994 research and development expenses increased 5% compared with the prior
year. Research spending, most of which was in the Health Care segment, was
principally related to Felbatol for the treatment of seizures associated with
epilepsy and Astelin (azelastine) for rhinitis and asthma.
General and administrative expenses increased 6% in 1995 and 4% in 1994. The
increase in 1995 was primarily due to higher employee benefits costs, legal fees
and provisions for write-offs of trade receivables. The increase in 1994 was
principally due to increased compensation including a higher charge for
postretirement benefit expense.
The increase in other expenses in 1995 was principally due to provisions for
settlements of disputed patent claims, including $2,000,000 related to the
Becton Dickinson litigation.
Interest expense increased in 1995 over the prior year as a result of financing
related to international acquisitions.
In 1995, the Company had a 35.3% tax benefit on its reported consolidated loss.
The tax benefit of 35.3% is higher than the prior year's tax provision on
operations of 31% because most of the one-time charges in 1995 are U.S. related
and will be deductible for federal and state income tax purposes. Tax rates in
1995 and future years are and will be adversely affected by the cessation of
Puerto Rico operations and the absence of research and development tax credits.
In 1994, the Company adjusted its net deferred tax asset to reflect the recently
enacted 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 current provision for income taxes was not significant. Excluding
the effect of this one-time adjustment of deferred taxes, the estimated annual
effective consolidated income tax rate on operations in the fiscal 1994 period
was 31%, the same as the fiscal 1993 consolidated income tax rate.
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ". The Company is
required to adopt this Statement no later than fiscal year ending March 31,
1997. The American Institute of Certified Public Accountants has recently issued
Statement of Position 93-7 "Reporting on Advertising Costs". The Company is
required to adopt this statement no later
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
than fiscal year ending March 31, 1996. Adoption of these statements is not
expected to have a material impact on the Company's financial statements.
RESTRUCTURING OF OPERATIONS AND FACILITIES
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, the Company is
engaged in a restructuring program which is intended to reduce costs and
increase efficiencies.
As part of the restructuring program, 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 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 resulted
in the closure of the Company's plants in Humacao and Rincon, Puerto Rico and
the planned closure of its East Winsor, New Jersey facility. In addition, the
Company is in the process of relocating one of its divisions to its Cranbury,
New Jersey facility.
In connection with the restructuring described above, the Company incurred
one-time pre-tax charges in the year ended March 31, 1995 of $74,060,000
consisting primarily of employee termination costs ($28,000,000), plant closing
costs including equipment write-offs ($23,000,000) and costs associated with the
planned subleasing of office space on which the Company holds a long-term lease
($19,400,000). A $1,800,000 charge related to the office relocation is expected
to be incurred in the fiscal year ending March 31, 1996.
The Company has closed and disposed of its Humacao and Rincon, Puerto Rico
facilities. The East Windsor, New Jersey plant is scheduled to be closed by
October, 1995. Net plant closing costs of $5,000,000 have been charged against
the restructuring liability through March 31, 1995.
The total anticipated reduction in the number of employees will be approximately
910 including 95 vacancies that will not be filled and represents 31% of the
Company's total domestic workforce, including 41% of its pharmaceutical sales
force.
Of the total planned staff reductions, 417 employees have been terminated
through March 31, 1995 with employee termination costs of $8,600,000 charged
against the restructuring liability. In addition, approximately 40 positions
have been eliminated as a result of voluntary resignations.
The Company is continuing to review its operations and may take other steps to
reduce costs and increase efficiencies 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 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.
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 fiscal 1995 period.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
As a result of the Felbatol matters discussed above, the Company incurred in the
year ended March 31, 1995 a one-time charge to pre-tax earnings of $37,780,000,
primarily related to inventory write-offs ($15,400,000) in excess of sales
projections, purchase and other commitments ($9,900,000) and anticipated product
returns including trade announcements ($4,500,000). Depending on future sales
levels, additional inventory write-offs may be required. At the present time
Felbatol continues to be available on the market. If for any reason 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 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.
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.
REGULATORY MATTERS
In connection with the Food and Drug Administration Drug Efficacy Study
implementation program, the FDA initiated a review of the safety and efficacy of
the Organidin (iodinated glycerol) products. An FDA Advisory Committee
recommended on March 23, 1992 that the products remain on the market pending
further FDA review, that certain changes in the product's labeling be made and
that doctors be appropriately notified of these labeling changes. The Company
implemented these FDA Advisory Committee recommendations and initiated
development of additional data to support the safety and efficacy of the
products.
On April 22, 1993, the Company received a letter from the FDA requesting that
the Company discontinue the marketing of the Organidin (iodinated glycerol)
products. Subsequent meetings between the Company and the FDA resulted in an
agreement reached in June, 1994, under which the Company discontinued the
manufacture and shipment of the Organidin (iodinated glycerol) products. The
agreement permitted the continued shipping, prescribing and dispensing of
existing stocks of Organidin (iodinated glycerol) product then currently in
channels of distribution. As noted, the Company has introduced a reformulation
of the Organidin expectorant/antitussive products.
As a result of the agreement noted above, the Company incurred in the year ended
March 31, 1995 a one-time charge to pre-tax earnings of $17,500,000 primarily
related to a provision for any product returns ($8,500,000) and for inventory
write-offs ($3,600,000).
Sales and pre-tax operating profits of the Organidin (iodinated glycerol) line
included in the year ended March 31, 1995 were $20,800,000 and $11,400,000,
respectively, compared to sales and pre-tax operating profits included in the
year ended March 31, 1994 of $74,400,000 and $31,600,000, respectively. Sales
and pre-tax operating profits for the fiscal year ended March 31, 1993 were
$43,400,000 and $7,600,000, respectively. Organidin 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.
ENVIRONMENTAL MATTER
The Company faces potential liability involving waste material generated by the
Lambert Kay division at its former manufacturing facility in Winsted,
Connecticut. In May, 1991, EPA issued special notice letters under the
Comprehensive Environmental Response, Compensation and Liability Act to Lambert
Kay and about 50 other potentially responsible parties ("PRPs") notifying them
of potential liability with respect to waste deposited at the Barkhamsted-New
Hartford landfill in Barkhamsted, Connecticut. In September, 1991 and in
February, 1994, the Company and 21 other PRPs, without admitting liability,
entered into consent agreements under which the PRPs agreed to perform certain
investigation and engineering evaluation work at the site including the remedial
investigation and feasibility study and to reimburse EPA for certain costs. The
estimated cost of this work is about $4 million. The Company's share of this
cost is estimated to be $114,500 to $129,400, of which the Company has paid
about $99,000. In addition, the Company and other settling PRPs have sued
certain nonsettlors
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
for their share of these costs and have obtained some settlement recoveries.
Based on preliminary information from the investigation work (which is not
completed) the total cost for performing the current and future cleanup work at
Barkhamsted, including the investigation work, is estimated to be $13.3 to $41.3
million. Based on expected PRP participation in future cleanup work and other
factors, the Company anticipates that its share of all cleanup costs (including
costs incurred to date) will be not more than 4 to 5% or about $532,000 to
$2,065,000. Thus, although applicable environmental law generally provides for
joint and several liability for the cost of cleanup work, the Company believes,
based on present estimates, that substantially all of the cleanup costs will be
paid by other PRPs. The Company believes, based upon the information available
at this time, that the matter discussed above will not have a material effect on
its financial statements.
LIQUIDITY
Funds provided from operations and the Company's short-term investments and cash
equivalents are the main source for financing working capital requirements,
additions to property, plant and equipment, the payment of dividends and the
purchases of treasury stock. External borrowings are incurred as needed to
satisfy cash requirements relating to seasonal business fluctuations and to
finance major facility expansion programs and major acquisitions.
At March 31, 1995, the Company had available various bank credit lines amounting
to $185,500,000, consisting of $160,000,000 in domestic credit lines and
$25,500,000 in foreign credit lines, of which $4,100,000 of the foreign lines
were utilized at March 31, 1995. There were no domestic borrowings under credit
lines at March 31, 1995. The domestic lines are made up of a $75,000,000
revolving credit facility expiring in September, 1996 and $85,000,000 in
uncommitted credit lines from various banks.
The pre-tax one-time charges of $129,340,000 recorded through March 31, 1995,
consist of net cash requirements of $86,700,000 and non-cash write-offs of
$42,640,000. Approximately $28,800,000 of the total cash requirements of
$86,700,000 was paid in 1995 and $32,600,000 is expected to be paid in the
fiscal year ended March 31, 1996. The anticipated cash benefit from income taxes
related to these one-time charges is estimated to be $48,800,000 which will be
received over a period of years. The net cash outlay for the one-time charges
after consideration of the tax benefits is approximately $37,900,000.
The decrease in inventories in 1995 is primarily due to the reclassification of
$20,800,000 of Felbatol inventories, not expected to be sold in the next fiscal
year, to Other Assets.
The decrease in accounts receivable in 1994 is primarily due to the timing of
sales and collections.
CAPITAL RESOURCES
Capital expenditures were $18,850,000 in 1995, $24,300,000 in 1994 and
$25,500,000 in 1993.
In April, 1995 the Company purchased a condom manufacturing facility in Colonial
Heights, VA. Expansion of this facility will require significant capital
resources that are expected to be financed through long-term borrowing.
The Company decided in mid-May, 1995 to close its condom manufacturing plant in
Trenton, New Jersey over a projected period of eighteen to twenty-four months.
The condom production currently performed at Trenton will be transferred to the
Company's facility in Colonial Heights, VA. The Company expects that the
decision to close the Trenton plant will result in future pre-tax one-time
charges to earnings of approximately $22,000,000. Most of these charges will be
incurred in fiscal year ending March 31, 1996.
12
DESCRIPTION OF BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
The Company is engaged in the manufacture and sale of a diversified line of
products in the Consumer Products and Health Care business segments described
below:
CONSUMER PRODUCTS
These products are promoted directly to the consumer by television and other
advertising media and are sold to wholesalers and various retailers. They are
manufactured and sold domestically by our consumer products divisions and some
are sold throughout the rest of the world by various subsidiaries and
distributors. Principal products include:
ANTI-PERSPIRANTS AND DEODORANTS
* Arrid Extra Dry and Arrid XX
* Lady's Choice
OTHER CONSUMER PRODUCTS
* Answer and First Response at-home pregnancy and ovulation test kits
* Carter's laxative
* H-R lubricating jelly
* Nair depilatories and waxes
* Pearl Drops whitening toothpolish and whitening toothpaste
* Rigident denture adhesive
* Trojan, Class Act, Mentor and Naturalamb condoms
* Color Guard flea and tick collars
* Fresh 'n Clean grooming products,
stain and odor remover and puppy housebreaking pads
* Lassie and Tiny Tiger pet product lines
* Linatone food supplement
* Twinco chains, slicker brushes and combs
* Vermont Chewman pet chew toys
* X-O-Trol flea and tick household and dog sprays and household foggers
HEALTH CARE
Health care products are promoted primarily to physicians, pharmacists,
hospitals, laboratories and clinics by a staff of specially trained professional
sales representatives and by advertising in professional journals. These
products are manufactured and sold domestically by our professional products
divisions and some are sold throughout the rest of the world by various
subsidiaries and distributors. Principal products include:
* Felbatol for the treatment of seizures associated with epilepsy
* Organidin NR family of expectorants/antitussives
* Ryna line of cough/cold products
* Soma brand muscle relaxants
* Butisol sedative hypnotic
* Depen penicillamine for severe rheumatoid arthritis
* Doral sedative hypnotic
* Lufyllin xanthine bronchodilator
* Maltsupex laxative
* VoSoL topical antibacterial and anti-fungal agent
* Clearview product line of rapid tests for the determination of pregnancy,
group A streptococcus and chlamydia
* Isostat product line to aid in the detection of micro-organisms in blood
* Mono-Test and Mono-Latex for the detection of mononucleosis
* Rheumaton and Rheumatex for the detection of rheumatoid factor
* Stat-Crit, a portable instrument for use in measuring blood hematocrit levels
* Streptozyme for the detection of streptococcal antibodies
* Zeus Scientific line of immunofluorescent and ELISA test systems for the
detection of autoimmune, viral and bacterial diseases including Lyme
disease
--------------------------
INTERNATIONAL PRODUCT LINES
In addition to many of the products listed above, the Company sells the
following products exclusively in certain International markets:
CONSUMER PRODUCTS
* Bi-Solution acne treatment products
* Cerox adhesive tapes and bandages
* Confidelle, Discover and Gravix at-home pregnancy test kits
* Cossack line of men's grooming products
* Curash line of skin care products
* Dentovax line of oral hygiene products
* Email Diamant toothpastes
* Eudermin line of skin care and toiletry products
* GranVista non-prescription eyeglasses
* Lineance line of anti-cellulite and associated skin care products
* Poupina line of skin care and toiletry products
* Taky depilatories and waxes
HEALTH CARE
* Antiphlogistine Rub A-535 and Dencorub topical analgesics
* Atasol analgesic/antipyretic
* Bentasil medicated throat lozenges
* Cerulisina otic solution
* Colfur antidiarrheal
* Diovol antacid products
* Gravol antinauseant
* Jordan toothbrushes
* Maltlevol and Pangavit vitamin supplements
* Ovol antiflatulent
* Sterimar nasal decongestant
* Technogenetics line of diagnostic tests for thyroid metabolism,
fertility/pregnancy conditions and other hormonal (endocrine) disorders
13
Carter-Wallace, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 1995 AND 1994
ASSETS 1995 1994
- ---------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 40,098,000 $ 23,311,000
Short-term investments, principally government securities and
certificates of deposit 18,188,000 32,883,000
Accounts receivable-trade, less allowances of
$6,344,000 in 1995 and $5,955,000 in 1994 119,077,000 112,367,000
Other receivables 4,728,000 4,703,000
Inventories
Finished goods 55,499,000 60,515,000
Work in process 12,359,000 22,121,000
Raw materials and supplies 21,359,000 39,553,000
------------ ------------
89,217,000 122,189,000
------------ ------------
Deferred taxes 24,832,000 10,051,000
Prepaid expenses and other current assets 7,177,000 9,922,000
------------ ------------
TOTAL CURRENT ASSETS 303,317,000 315,426,000
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 2,519,000 3,544,000
Buildings and improvements 99,128,000 108,033,000
Machinery, equipment and fixtures 126,887,000 142,354,000
Leasehold improvements 23,692,000 25,109,000
------------ ------------
252,226,000 279,040,000
Accumulated depreciation and amortization 114,618,000 121,981,000
------------ ------------
137,608,000 157,059,000
------------ ------------
INTANGIBLE ASSETS
Excess of purchase price of businesses acquired over the
net assets at date of acquisition, less amortization 90,352,000 68,292,000
Patents, trademarks, contracts and formulae, less
amortization 39,500,000 41,921,000
------------ ------------
129,852,000 110,213,000
------------ ------------
DEFERRED TAXES 57,752,000 26,594,000
OTHER ASSETS 51,695,000 19,270,000
------------ ------------
$680,224,000 $628,562,000
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
14
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- ---------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 31,318,000 $ 27,844,000
Accrued expenses 134,425,000 72,041,000
Notes payable 5,416,000 5,709,000
Taxes on income 31,562,000 24,673,000
------------ ------------
TOTAL CURRENT LIABILITIES 202,721,000 130,267,000
------------ ------------
LONG-TERM LIABILITIES
Long-term debt 23,115,000 9,309,000
Deferred compensation 10,216,000 7,661,000
Accrued postretirement benefit obligation 68,969,000 71,804,000
Other long-term liabilities 48,064,000 16,013,000
------------ ------------
TOTAL LONG-TERM LIABILITIES 150,364,000 104,787,000
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 1,000,000 shares,
without par value; issued--none -- --
Common stock, authorized 80,000,000 shares,
par value $1 per share, one vote per share; issued
34,528,000 shares in 1995 and 34,432,000 shares in 1994 34,528,000 34,432,000
Class B common stock, authorized 13,056,800 shares, par
value $1 per share, ten votes per share; issued 12,677,000
shares in 1995 and 12,773,000 in 1994
12,677,000 12,773,000
Capital in excess of par value 2,184,000 1,972,000
Retained earnings 310,407,000 380,047,000
------------ ------------
359,796,000 429,224,000
Less:
Foreign currency translation adjustment 18,949,000 20,404,000
Treasury stock at cost--872,500 common and 153,600
Class B common shares in 1995 and 981,900 common
and 153,600 Class B common shares in 1994 13,708,000 15,312,000
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 327,139,000 393,508,000
------------ ------------
$680,224,000 $628,562,000
------------ ------------
------------ ------------
15
Carter-Wallace, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF
EARNINGS AND RETAINED EARNINGS
THREE YEARS ENDED MARCH 31, 1995
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
Revenues:
Net sales $663,642,000 $664,789,000 $653,511,000
Interest income 3,574,000 2,339,000 2,989,000
Royalty and other income 2,762,000 3,135,000 2,698,000
Income from licensing agreement -- -- 10,000,000
------------ ------------ ------------
669,978,000 670,263,000 669,198,000
------------ ------------ ------------
Cost and Expenses:
Cost of goods sold 240,318,000 232,560,000 223,358,000
Advertising and promotion 125,450,000 128,917,000 114,932,000
Marketing and other selling 127,152,000 133,765,000 129,763,000
Research and development 41,315,000 52,278,000 49,903,000
General and administrative 81,321,000 76,937,000 74,125,000
Provision for restructuring of operations and
facilities 74,060,000 -- --
Provision for loss on Felbatol 37,780,000 -- --
Provision for loss on discontinuance of the Organidin
(iodinated glycerol) product line 17,500,000 -- --
Interest 2,512,000 1,976,000 1,789,000
Other 9,600,000 6,448,000 6,922,000
------------ ------------ ------------
757,008,000 632,881,000 600,792,000
------------ ------------ ------------
Earnings (loss) before taxes on income and cumulative
effect of accounting changes (87,030,000) 37,382,000 68,406,000
Provision (benefit) for taxes on income (30,762,000) 10,773,000 21,206,000
------------ ------------ ------------
Net earnings (loss) before cumulative effect of
accounting changes (56,268,000) 26,609,000 47,200,000
Cumulative effect of accounting changes, net of tax -- (46,639,000) --
------------ ------------ ------------
Net earnings (loss) $(56,268,000) $(20,030,000) $ 47,200,000
------------ ------------ ------------
------------ ------------ ------------
Net earnings (loss) per average share of common stock
before cumulative effect of accounting changes $ (1.22) $ .58 $ 1.03
Cumulative effect of accounting changes -- (1.02) --
------------ ------------ ------------
Net earnings (loss) per average share of common stock $ (1.22) $ (.44) $ 1.03
------------ ------------ ------------
------------ ------------ ------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Amount at beginning of year* $380,047,000 $415,369,000 $383,435,000
Net earnings (loss) (56,268,000) (20,030,000) 47,200,000
------------ ------------ ------------
323,779,000 395,339,000 430,635,000
Dividends--$.29 per share in 1995 and $.33 per share in
1994 and 1993 (13,372,000) (15,292,000) (15,256,000)
Cost of treasury stock (over) market value at date of
award or issuance -- -- (10,000)
------------ ------------ ------------
Amount at end of year $310,407,000 $380,047,000 $415,369,000
------------ ------------ ------------
------------ ------------ ------------
<FN>
See accompanying notes to consolidated financial statements.
*Retained earnings in 1993 were restated to reflect the change in accounting for
income taxes.
16
CONSOLIDATED STATEMENTS OF
CASH FLOWS
THREE YEARS ENDED MARCH 31, 1995
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss) $(56,268,000) $(20,030,000) $ 47,200,000
Adjustments to reconcile net earnings (loss) to cash
flows provided by operating activities:
One-time charges of $129,340,000, net of cash
outlays to date of $28,819,000 100,521,000 -- --
Cumulative effect of accounting changes -- 46,639,000 --
Depreciation and amortization 16,359,000 15,707,000 15,250,000
Amortization of patents, trademarks, contracts and
formulae 8,723,000 9,720,000 8,623,000
Amortization of excess of purchase price of
businesses acquired over the net assets at date of
acquisition 2,760,000 2,015,000 1,968,000
Other changes in assets and liabilities:
Decrease (increase) in accounts and other
receivables 13,845,000 19,548,000 (6,883,000)
Decrease (increase) in inventories 1,058,000 (9,086,000) (16,317,000)
Decrease in prepaid expenses 1,301,000 1,240,000 2,062,000
Increase (decrease) in accounts payable and
accrued expenses 28,498,000 (3,237,000) 61,000
Increase (decrease) in deferred compensation 2,493,000 (28,000) 383,000
(Increase) decrease in deferred taxes (45,939,000) 1,101,000 (488,000)
Other changes (11,796,000) (566,000) (4,469,000)
------------ ------------ ------------
Cash flows provided by operating activities 61,555,000 63,023,000 47,390,000
------------ ------------ ------------
Cash flows used in investing activities:
Additions to property, plant and equipment (18,853,000) (24,305,000) (25,500,000)
Payments for international acquisitions, net of cash
received:
The Sante Beaute line in France (19,670,000) -- --
Technogenetics in Italy (4,928,000) -- --
The Curash line in Australia (3,660,000) -- --
Icart, S.A. in Spain -- -- (7,432,000)
Payments for the acquisition of other businesses and
licensing agreements (1,000,000) (1,196,000) (1,783,000)
Decrease (increase) in short-term investments 14,081,000 (6,341,000) (6,512,000)
Other investing activities 856,000 1,078,000 3,994,000
------------ ------------ ------------
Cash flows used in investing activities (33,174,000) (30,764,000) (37,233,000)
------------ ------------ ------------
Cash flows used in financing activities:
Dividends paid (13,372,000) (15,292,000) (15,256,000)
Increase in borrowings 6,801,000 1,343,000 1,783,000
Payments of debt (4,348,000) (1,237,000) (2,607,000)
Purchase of treasury stock (838,000) (436,000) (834,000)
------------ ------------ ------------
Cash flows used in financing activities (11,757,000) (15,622,000) (16,914,000)
------------ ------------ ------------
Effect of foreign exchange rate changes on cash
and cash equivalents 163,000 (1,557,000) (856,000)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents $ 16,787,000 $ 15,080,000 $ (7,613,000)
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
17
Carter-Wallace, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Carter-Wallace,
Inc. and all of its subsidiaries (the "Company"). All significant intercompany
transactions have been eliminated.
Cash Equivalents and Short-term Investments
Cash equivalents consist of certificates of deposit and other short-term
securities with maturities of three months or less when purchased. Investments
with a maturity of greater than three months but less than one year are
classified as short-term investments. The carrying value of cash equivalents and
short-term investments approximated fair value at March 31, 1995 and 1994.
Inventories
Inventories are valued at the lower of cost or market on the first-in, first-out
(FIFO) method, except for certain domestic inventories which are stated at cost
on the last-in, first-out (LIFO) method.
Property, Plant and Equipment
Depreciation is provided over the estimated useful lives of the assets,
principally using the straight line method. Leasehold improvements are amortized
on a straight line basis over the life of the related asset or the life of the
lease, whichever is shorter. Expenditures for renewals and betterments are
capitalized. Upon sale or retirement of assets, the appropriate asset and
related accumulated depreciation accounts are adjusted and the resultant gain or
loss is reflected in earnings. Maintenance and repairs are charged to expense as
incurred.
Intangible Assets
The excess of purchase price of businesses acquired over net assets at date of
acquisition is assessed to the product or group of products which constitute the
business acquired and amortized over 40 years for amounts relating to
acquisitions subsequent to October 31, 1970. The excess purchase price,
$6,459,000 related to companies acquired prior to that date, is not being
amortized. The cost of patents, formulae and contracts is amortized on a
straight line basis over their legal or contractual lives. The cost of
trademarks is being amortized over no longer than 40 years for amounts relating
to acquisitions subsequent to October 31, 1970. Trademarks of $2,756,000 related
to products acquired prior to that date are not being amortized.
The Company's policy in assessing the recoverability of intangible assets is to
compare the carrying value of the intangible assets with profit and cash flow
generated by products which comprise the intangible assets. In addition, the
Company continually evaluates whether adverse developments indicate that an
intangible asset may be impaired.
Income Taxes
Deferred income taxes are determined using the liability method based on the
estimated future tax effects of differences between the financial statement and
tax bases of assets and liabilities given the provisions of enacted tax laws.
Advertising and Marketing Costs
Advertising, promotion and other marketing costs are charged to earnings in the
period in which they are incurred.
Earnings per Common Share
Net earnings (loss) per share of common stock is based on the average number of
common and Class B common shares outstanding during the year: 46,108,000 in
1995, 45,900,000 in 1994 and 45,786,000 in 1993. The average number of shares
and all per share amounts reflect the three-for-one stock split in April 1992.
2. INVENTORIES
Inventories computed on the last-in, first-out (LIFO) method comprised 13% and
14% of inventories included in current assets at year end 1995 and 1994,
respectively. If these inventories had been valued on the FIFO inventory method
(which approximates current or replacement cost), total inventories would have
been approximately $10,900,000 and $11,000,000 higher than reported at March 31,
1995 and 1994, respectively. Felbatol inventories of $20,800,000 not expected to
be sold in the next fiscal year have been reclassified to Other Assets.
18
3. TAXES ON INCOME
The provision (benefit) for taxes on earnings before the cumulative effect of
accounting changes was as follows:
1995 1994 1993
------------- ----------- -----------
Current:
Domestic $ 8,361,000 $ 5,236,000 $15,774,000
Foreign 6,356,000 5,414,000 5,867,000
------------- ----------- -----------
14,717,000 10,650,000 21,641,000
------------- ----------- -----------
Deferred:
Domestic (45,791,000) 455,000 (363,000)
Foreign 312,000 (332,000) (72,000)
------------- ----------- -----------
(45,479,000) 123,000 (435,000)
------------- ----------- -----------
Total $ (30,762,000) $10,773,000 $21,206,000
------------- ----------- -----------
------------- ----------- -----------
The components of income (loss) before taxes
and the cumulative effect of accounting changes
were as follows:
Domestic $(102,936,000) $24,303,000 $53,103,000
Foreign 15,906,000 13,079,000 15,303,000
------------- ----------- -----------
Total $ (87,030,000) $37,382,000 $68,406,000
------------- ----------- -----------
------------- ----------- -----------
The Company's Puerto Rican subsidiaries were liquidated as part of the Company's
restructuring program during fiscal 1995 and the early part of fiscal 1996. The
undistributed earnings of these subsidiaries were repatriated free of United
States income taxes upon liquidation.
Deferred income taxes are provided for temporary differences between the book
and tax bases of the Company's assets and liabilities. The temporary differences
gave rise to the following deferred tax assets and liabilities at March 31:
1995 1994
----------- -----------
Postretirement benefit plans $27,621,000 $27,304,000
Employee benefit plans 13,137,000 11,453,000
Accrued liabilities 35,855,000 8,008,000
Asset valuation accounts 15,191,000 2,107,000
All other 11,871,000 4,388,000
Valuation allowance (2,298,000) --
----------- -----------
Total deferred tax assets 101,377,000 53,260,000
----------- -----------
Depreciation 13,218,000 12,175,000
All other 5,575,000 4,440,000
----------- -----------
Total deferred tax liabilities 18,793,000 16,615,000
----------- -----------
Net deferred tax assets $82,584,000 $36,645,000
----------- -----------
Effective April 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109 "Accounting for Income Taxes". This statement
requires a change in the method of accounting for income taxes from the deferred
method to the liability method.
The effect of adopting this statement was a one-time non-cash charge of
$1,970,000 which was recognized on a restated basis in the year ended March 31,
1989. Accordingly, retained earnings as of March 31, 1989 through 1993 have been
restated to reflect the adoption. In addition, as a result of the restatement of
acquisitions made subsequent to March 31, 1989, intangible assets have been
restated and reduced by $800,000.
During 1994, the enacted federal statutory tax rate increased from 34% to 35%.
In accordance with SFAS No. 109, deferred income taxes were adjusted to reflect
this change which resulted in a credit to the income tax provision of $815,000.
The effect of the tax law change on the current provision was not significant.
19
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes,
based on the Company's history of prior and current operating earnings, that the
Company will realize the benefits of the existing deferred tax assets except for
the valuation allowance amount.
The effective tax rate of the provision (benefit) for taxes on earnings before
the cumulative effect of accounting changes as compared with the U.S. Federal
statutory income tax rate was as follows:
1995 1994 1993
----------------------- ---------------------- ----------------------
% TO % TO % TO
TAX PRE-TAX TAX PRE-TAX TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------------ ------- ----------- ------- ----------- -------
Computed tax expense (benefit) $(30,461,000) (35.0%) $13,084,000 35.0% $23,258,000 34.0%
Puerto Rican income (910,000) (1.0) (2,855,000) (7.6) (2,786,000) (4.1)
Foreign income taxed at a
different effective rate 1,438,000 1.7 315,000 .8 (1,476,000) (2.2)
State income taxes, net of
federal tax benefit (4,989,000) (5.7) 878,000 2.4 2,141,000 3.1
Amortization of intangibles 829,000 .9 839,000 2.2 781,000 1.2
Valuation allowance 2,298,000 2.6 -- -- -- --
Deferred tax adjustment due to
federal tax rate change -- (815,000) (2.2) -- --
Other 1,033,000 1.2 (673,000) (1.8) (712,000) (1.0)
------------ ----------- -----------
$30,762,000) (35.3%) $10,773,000 28.8% $21,206,000 31.0%
------------ ----- ----------- ----- ----------- -----
------------ ----- ----------- ----- ----------- -----
The U.S. Internal Revenue Service completed its examination of the Company's tax
returns through the fiscal year 1989 and for fiscal year 1991 resulting in no
material impact on the Company.
4. FOREIGN OPERATIONS
Net current assets and net sales of the Company's foreign subsidiaries and
branches operating outside of the United States, and the Company's equity in net
assets and net earnings of such operations were:
1995 1994 1993
------------ ------------ ------------
Net current assets $ 80,147,000 $ 89,307,000 $ 88,063,000
Equity in net assets 108,009,000 97,316,000 94,984,000
Net sales 182,190,000 159,454,000 169,032,000
Net earnings 9,238,000 7,997,000 9,508,000
The equity adjustment from foreign currency translation is comprised of the
following:
YEARS ENDED MARCH 31
-------------------------------
1995 1994
----------- -----------
Opening balance $20,404,000 $14,739,000
Current year (1,455,000) 5,665,000
----------- -----------
Ending balance $18,949,000 $20,404,000
----------- -----------
----------- -----------
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
119 "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments." At March 31, 1995, the Company has entered into forward
foreign exchange contracts in the amount of $13,700,000 related to intercompany
loans between certain of its subsidiaries. The forward exchange contracts are
intended to reduce the risk of fluctuating exchange rates on intercompany loan
arrangements. In April, 1995, $7,000,000 of forward foreign exchange contracts
matured. The remaining contracts totaling $6,700,000 mature in March, 1996.
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes Payable
Notes payable consisting of borrowings from banks under available lines of
credit were $4,096,000, $1,834,000 and $645,000 and the current portion of
long-term debt was $1,320,000, $3,875,000 and $1,305,000 at March 31, 1995, 1994
and 1993, respectively. Data related to the amount of short-term borrowings
outstanding during the year and related interest rates are not presented since
they are immaterial.
20
The Company has available various bank credit lines amounting to $185,500,000 of
which $160,000,000 is for domestic borrowings and $25,500,000 is for
international borrowings. The availability of the lines of credit is subject to
review by the banks involved. Commitment fees are immaterial.
Long-Term Debt
Long-term debt at March 31 is summarized below:
1995 1994
----------- -----------
Connecticut Development Authority Industrial Development Bond, 6.75%
payable October 1, 1998 $ 4,300,000 $ 4,300,000
Secured Italian lira term loan, adjustable rate payable in quarterly
installments from April 1, 1996 to July 1, 2001 3,010,000 --
Secured Italian lira term loan, adjustable rate payable in quarterly
installments from March 31, 1996 to June 30, 2001 3,010,000 --
City of Decatur, Illinois adjustable rate Industrial Revenue Bond
payable December 1, 2010 3,000,000 3,000,000
Promissory Notes, 5.86%, payable no later than September 12, 1996 2,633,000 2,940,000
Unsecured French franc term loan, 7.59%, payable August 6, 2001 2,434,000 --
Unsecured French franc term loan, 7.75%, payable August 6, 2001 2,434,000 --
Unsecured Australian dollar term loan, 9.64%, payable in equal annual
installments from July 28, 1995 to July 28, 1998 1,479,000 --
Unsecured Italian lira loans, rates of 4.5%-10.8%, payable in
semi-annual installments through July 2002 1,460,000 2,200,000
New Jersey Economic Development Authority Bonds, 7 3/8%, payable in
annual installments of $65,000 through 1999, and $70,000 through
September 1, 2004 675,000 740,000
Other -- 4,000
----------- -----------
24,435,000 13,184,000
Less, current portion of long-term debt included in notes payable (1,320,000) (3,875,000)
----------- -----------
$23,115,000 $ 9,309,000
----------- -----------
----------- -----------
Maturities of long-term debt for each of the four fiscal years 1997 through 2000
are $2,917,000, $4,927,000, $584,000 and $169,000, respectively.
Interest on the Decatur, Illinois Industrial Revenue Bond is 72% of the prime
rate (unless earlier converted to a fixed rate at the Company's option) through
December, 1995, adjustable thereafter.
The secured Italian lira loans are secured by irrevocable Letters of Credit and
expire 30 days after the loan maturity. Commitment fees are immaterial. Interest
on these loans is the Milan Interbank Offered Rate plus a nominal increment,
adjusted quarterly.
The Company issued promissory notes in connection with the acquisition of the
net assets of Youngs Drug Products Corporation and affiliates. Prepayments of
all or portions of the notes are required as certain contractual conditions are
satisfied.
The Company's revolving credit facility and the Connecticut Development
Authority Industrial Development Bond contain covenants which require that total
long-term liabilities will not exceed 40% of total capitalization and that net
worth, defined as total stockholders' equity, exclusive of foreign currency
translation adjustment and treasury stock, may not be less than $300,000,000.
The fair value of long-term debt, including current maturities was $24,633,000
at March 31, 1995 and $13,543,000 at March 31, 1994.
21
6. COMMON STOCK, CLASS B COMMON STOCK AND CAPITAL IN EXCESS OF PAR VALUE
The Company has two classes of common stock with a par value of $1.00 per share.
Class B common stock generally has ten votes per share on all matters and votes
as a class with common stock which has one vote per share. The transfer of Class
B common stock is restricted; however, Class B common stock is at all times
convertible into shares of common stock on a share-for-share basis. Common stock
and Class B common stock have identical rights with respect to cash dividends
and upon liquidation.
Effective April 27, 1992, the Company's stockholders approved an amendment to
the Certificate of Incorporation increasing the authorized common shares to
80,000,000 and Class B common shares to 13,056,800. The Company subsequently
issued 22,815,000 shares of common stock and 8,655,000 shares of Class B common
stock including 940,400 shares added to treasury stock in connection with a
three-for-one stock split. At March 31, 1992, stockholders' equity reflects the
three-for-one stock split effective April 27, 1992.
Activity for the years ended March 31, 1995, 1994 and 1993 was as follows:
CLASS B CAPITAL IN
COMMON COMMON EXCESS OF
STOCK STOCK PAR VALUE
----------- ----------- -----------
Balance at March 31, 1992 $34,223,000 $12,982,000 $ --
Conversion of Class B common stock to Common Stock 150,000 (150,000) --
Tax benefit on appreciation of restricted stock
awards -- -- 637,000
----------- ----------- -----------
Balance at March 31, 1993 34,373,000 12,832,000 637,000
Conversion of Class B common stock to Common Stock 59,000 (59,000) --
Tax benefit on appreciation of restricted stock
awards -- -- 845,000
Cost of treasury stock under market value at date of
award or issuance -- -- 490,000
----------- ----------- -----------
Balance at March 31, 1994 34,432,000 12,773,000 1,972,000
Conversion of Class B common stock to Common Stock 96,000 (96,000) --
Cost of treasury stock under market value at date of
award or issuance -- -- 212,000
----------- ----------- -----------
Balance at March 31, 1995 $34,528,000 $12,677,000 $ 2,184,000
----------- ----------- -----------
----------- ----------- -----------
The tax benefit on the appreciation of restricted stock awards and the cost of
treasury stock over or under the market value of the stock on the date of the
award or issuance have been applied to capital in excess of par value. To the
extent that charges from the cost of treasury stock over the market value at the
date of the award exceed accumulated credits to capital in excess of par value
in the prior years, the excess is charged to retained earnings.
7. RETIREMENT PLANS
The Company has several contributory and non-contributory pension plans in which
substantially all employees with over one year of service participate. The
Company's funding policy is to make annual contributions to these plans in
amounts equal to the minimum required by applicable regulations. The plans'
assets are invested primarily in common stocks and corporate and government
bonds.
The pension expense for the years ended 1995, 1994 and 1993 included the
following components:
1995 1994 1993
----------- ----------- -----------
Service cost-benefits earned during the period $ 8,019,000 $ 7,416,000 $ 6,398,000
Interest cost on projected benefit obligation 13,689,000 11,474,000 10,983,000
Actual return on assets (1,449,000) (16,799,000) (15,149,000)
Net amortization and deferral (15,441,000) (299,000) (1,173,000)
Curtailment gain (549,000) -- --
----------- ----------- -----------
Total pension expense $ 4,269,000 $ 1,792,000 $ 1,059,000
----------- ----------- -----------
----------- ----------- -----------
During the year ended March 31, 1995 the Company recognized a curtailment gain
of $549,000 in conjunction with the restructuring program. This gain was
included as a credit to the one-time charges for restructuring of operations and
facilities.
22
The following table sets forth the funded status of the plans at March 31, 1995
and 1994:
PLANS IN WHICH
-------------------------------------------------------------------
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
----------------------------- -----------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
Actuarial present value of benefit
obligations:
Vested $ 91,567,000 $105,300,000 $ 34,468,000 $ 31,215,000
Nonvested 1,992,000 1,840,000 1,573,000 832,000
------------ ------------ ------------ ------------
Accumulated benefit obligation $ 93,559,000 $107,140,000 $ 36,041,000 $ 32,047,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Projected benefit obligation $114,112,000 $127,785,000 $ 49,912,000 $ 45,196,000
Plan assets at fair value 149,507,000 156,792,000 20,274,000 23,603,000
------------ ------------ ------------ ------------
Plan assets in excess of (less than)
projected benefit obligation 35,395,000 29,007,000 (29,638,000) (21,593,000)
Unrecognized net (gain) or loss (8,554,000) (41,000) (2,613,000) 3,854,000
Prior service not recognized in pension
costs (1,156,000) (6,561,000) 13,619,000 7,524,000
Unrecognized net transition (asset)
liability (10,880,000) (12,908,000) 384,000 262,000
Minimum liability adjustment -- -- (444,000) (374,000)
------------ ------------ ------------ ------------
Prepaid (accrued) pension costs recognized
in the consolidated balance sheets $ 14,805,000 $ 9,497,000 $(18,692,000) $(10,327,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
The principal assumptions used in determining 1995, 1994 and 1993 actuarial
values were:
Discount rate 7 - 9%
Rate of increase in compensation levels 4 - 6%
Expected long-term rate of return on plan assets. 8 -10%
Expense for the employee savings plan under which the Company matches the
contributions of participating employees up to a designated level was
$1,597,000, $1,488,000 and $1,340,000 in 1995, 1994 and 1993 respectively.
8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS AND POSTEMPLOYMENT BENEFITS
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 cumulative effect of adopting SFAS No. 106 as of April 1, 1993, resulted in
a pre-tax charge of $69,554,000 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
benefit expense in current and future years. The effect of adopting SFAS No. 106
and the subsequent amendment of the plan increased 1994 postretirement benefit
expense by approximately $2,500,000 before taxes or $1,700,000 after taxes ($.04
per share).
The components of the postretirement benefit expense for the years ended March
31, 1995 and 1994 are:
1995 1994
----------- -----------
Service cost -- benefits earned during the year $ 2,068,000 $ 2,416,000
Interest cost on accumulated postretirement benefit
obligation 3,770,000 4,531,000
Net amortization and deferral (3,198,000) (2,516,000)
Curtailment gain (3,357,000) --
----------- -----------
Net periodic postretirement benefit expense (income) $ (717,000) $ 4,431,000
----------- -----------
----------- -----------
During the year ended March 31, 1995 the Company recognized a curtailment gain
of $3,357,000 in conjunction with the restructuring program. This gain was
included as a credit to the one-time charges for restructuring of operations and
facilities.
23
The following table sets forth the accumulated postretirement benefit obligation
of the plans at March 31, 1995 and 1994:
1995 1994
----------- -----------
Retirees $24,584,000 $30,425,000
Active participants eligible for retirement 10,322,000 13,366,000
Other active participants 12,673,000 18,020,000
----------- -----------
Accumulated postretirement benefit obligation 47,579,000 61,811,000
Unrecognized net gain (loss) 9,826,000 (7,281,000)
Unrecognized prior service credit 11,564,000 17,274,000
----------- -----------
Accrued postretirement benefit obligation $68,969,000 $71,804,000
----------- -----------
----------- -----------
The assumed health care cost trend rate used to measure the accumulated
postretirement benefit obligation is 14 percent for 1995 trending to 5 percent
over a nine-year period. A one percent increase in the assumed respective annual
medical cost trend rate would increase the accumulated postretirement benefit
obligation by approximately $3,000,000 and the service and interest components
of net postretirement benefit expense by $400,000.
Other principal actuarial assumptions used in determining the accumulated
postretirement benefit obligation were:
Discount rate 7-9%
Rate of increase in compensation levels 4-6%
Effective April 1, 1993, the Company also adopted SFAS No. 112 "Employers'
Accounting for Postemployment Benefits". SFAS No. 112 requires accrual
accounting for benefits provided to former or inactive employees after
employment but before retirement. The cumulative effect of adopting SFAS No. 112
resulted in a pre-tax charge of $4,700,000 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.
9. DEFERRED COMPENSATION
Under provisions of a deferred compensation plan, the Company may, at the
discretion of the Board of Directors, award additional compensation to officers
and employees whose regular compensation is $10,000 or more per year. The
aggregate of such awards in any year may not exceed 7 1/2% of the bonus net
income of the Company before any income taxes as determined by the Board of
Directors, less 10% of capital employed in the business, as defined in the plan.
As to participants awarded more than $7,500, partial payment is made in the year
of the grant, and the balance is payable with interest in ten annual
installments starting after death, disability, retirement or discharge, or in
reduced amounts after voluntary resignation. There were no awards made in 1995,
1994 and 1993 under the plan.
10. RESTRICTED STOCK AWARD PLAN
The plan as amended provides for awards of not more than 2,750,000 shares of
common stock, subject to adjustments for stock splits, stock dividends and other
changes in the Company's capitalization to key employees, to be issued either
immediately after the award or at a future date. As a result of the
three-for-one stock split in April 1992 and the issuance of the Class B common
stock in 1987, the 2,750,000 shares of common stock provided for in the Plan has
been adjusted to 5,593,154 shares. As provided in the Plan and subject to
restrictions, shares awarded may not be disposed of by the recipients for a
period of five years from the date of the award. Cash dividends on shares
awarded are held by the Company for the benefit of the recipients, subject to
the same restrictions as the award. Such dividends (without interest) are paid
to the recipients upon lapse of the restrictions. The cost of the awards, equal
to the fair market value at the date of award, is being charged to operations in
equal annual amounts over a five year period commencing at the date of the
award.
Award transactions for the past three years were:
SHARES
---------------------------------------------
1995 1994 1993
--------- --------- ---------
Cumulative awards--beginning of year 3,417,122 3,384,227 3,314,685
New awards 49,128 32,895 69,542
--------- --------- ---------
Cumulative awards--end of year 3,466,250 3,417,122 3,384,227
--------- --------- ---------
--------- --------- ---------
24
The financial statements reflect the transfer of the awarded shares from
treasury stock as of the date of their issuance. Included in total outstanding
awards of 672,326 shares at March 31, 1995 are 505,760 shares to be issued at a
future date no later than five years from the date of the award. For shares that
have been issued, the market value at the date of the awards was $2,672,000,
$4,924,000 and $250,000 in 1995, 1994, and 1993, respectively. The cost of
treasury stock for these awards was $2,463,000, $4,434,000 and $260,000 in 1995,
1994 and 1993, respectively. Awards forfeited during the year and returned to
treasury stock consisted of 1,453 shares valued at $21,300. The differences
between the market value at the date of the awards and the cost of the treasury
stock were included in capital in excess of par value or retained earnings.
11. ACQUISITIONS
In August, 1994, the Company acquired the Sante Beaute line of products in
France for approximately $21,000,000. 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.
In March, 1993, the Company acquired Icart, S.A. for approximately $8,300,000.
Icart, S.A. manufactures and markets a line of depilatory products, hand and
body creams and lotions, footcare products and other toiletries in Spain.
These acquisitions are being accounted for by the purchase method and,
accordingly, their results of operations 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.
12. SHORT-TERM INVESTMENTS
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities".
At March 31, 1995, all such investments were intended to be held to maturity as
defined in SFAS No. 115 and have contractual maturities of less than one year.
The amortized cost approximated fair value. The amortized cost of certificates
of deposit and securities issued by the Canadian government were $9,286,000 and
$8,902,000, respectively, and are classified in "Short-Term Investments".
13. RESTRUCTURING OF OPERATIONS AND FACILITIES
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, the Company is
engaged in a restructuring program which is intended to reduce costs and
increase efficiencies.
As part of the restructuring program, 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 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 resulted
in the closure of the Company's plants in Humacao and Rincon, Puerto Rico and
the planned closure of its East Windsor, New Jersey facility. In addition, the
Company is in the process of relocating one of its divisions to its Cranbury,
New Jersey facility.
In connection with the restructuring described above, the Company incurred
one-time pre-tax charges in the year ended March 31, 1995 of $74,060,000
consisting primarily of employee termination costs ($28,000,000), plant closing
costs including equipment write-offs ($23,000,000) and costs associated with the
planned subleasing of office space on which the Company holds a long-term lease
($19,400,000). A $1,800,000 charge related to the office relocation is expected
to be incurred in the fiscal year ending March 31, 1996.
25
The Company has closed and disposed of its Humacao and Rincon, Puerto Rico
facilities. The East Windsor, New Jersey plant is scheduled to be closed by
October, 1995. Net plant closing costs of $5,000,000 have been charged against
the restructuring liability through March 31, 1995.
The total anticipated reduction in the number of employees will be approximately
910 including 95 vacancies that will not be filled and represents 31% of the
Company's total domestic workforce, including 41% of its pharmaceutical sales
force.
Of the total planned staff reductions, 417 employees have been terminated
through March 31, 1995 with employee termination costs of $8,600,000 charged
against the restructuring liability. In addition, approximately 40 positions
have been eliminated as a result of voluntary resignations.
Approximately $61,600,000 of the $74,060,000 in restructuring charges remain to
be utilized in future periods.
The Company is continuing to review its operations and may take other steps to
reduce costs and increase efficiencies in the future which may result in
additional one-time charges.
14. BUSINESS SEGMENTS
Information on the Company's Business Segments is presented below--dollars in
thousands. (See also "Management's Discussion and Analysis of Results of
Operations and Financial Condition" on page 8 and "Description of Business
Segments" on page 13). Fiscal year 1993 identifiable asset information has been
restated to reflect the change in accounting for income taxes.
Business Segments MARCH 31
-----------------------------------------------
1995 1994 1993
--------- -------- --------
Sales
Health Care $ 262,785 $296,621 $281,036
Consumer
Anti-Perspirants and Deodorants 123,146 124,547 128,321
Other Consumer Products 277,711 243,621 244,154
--------- -------- --------
Consolidated $ 663,642 $664,789 $653,511
--------- -------- --------
--------- -------- --------
Operating Profit
Health Care $ (51,222)(a) $ 37,223 $ 56,465(e)
Consumer
Anti-Perspirants and Deodorants (10,758)(b) (4,766) (1,512)
Other Consumer Products 31,547 (c) 53,473 58,292
Interest income net of interest (expense) 1,062 363 1,200
Other (expense) net of other income (1,765) (6,614) (7,039)
General corporate expenses (55,894)(d) (42,297) (39,000)
--------- -------- --------
Earnings before taxes on income $ (87,030) $ 37,382 $ 68,406
--------- -------- --------
--------- -------- --------
Identifiable Assets
Health Care $ 188,316 $219,920 $241,819
Consumer
Anti-Perspirants and Deodorants 72,620 81,347 79,597
Other Consumer Products 231,525 197,550 195,290
Corporate Assets 187,763 129,745 78,844
--------- -------- --------
Total Assets $ 680,224 $628,562 $595,550
--------- -------- --------
--------- -------- --------
<FN>
(a) Includes one-time pre-tax charges of $17,500 related to the discontinuance
of the Organidin (iodinated glycerol) line, $37,780 related to the provision
for loss on Felbatol and $37,697 related to restructuring.
(b) Includes one-time pre-tax charge of $5,503 related to restructuring.
(c) Includes one-time pre-tax charge of $18,685 related to restructuring.
(d) Includes one-time pre-tax charge of $12,175 related to restructuring.
(e) Includes non-recurring income of $10,000 related to a licensing agreement.
26
Business Segments Continued MARCH 31
-----------------------------------------------
1995 1994 1993
--------- -------- --------
Depreciation and Amortization
and Capital Expenditures
Depreciation and Amortization
Health Care $ 11,521 $ 11,314 $ 10,228
Consumer
Anti-Perspirants and Deodorants 3,808 3,764 3,656
Other Consumer Products 8,002 6,908 7,095
--------- -------- --------
Total Operating Segments $ 23,331 $ 21,986 $ 20,979
--------- -------- --------
--------- -------- --------
Capital Expenditures
Health Care $ 4,640 $ 5,261 $ 12,373
Consumer
Anti-Perspirants and Deodorants 1,877 7,400 2,652
Other Consumer Products 11,631 9,412 9,598
--------- -------- --------
Total Operating Segments $ 18,148 $ 22,073 $ 24,623
--------- -------- --------
--------- -------- --------
Geographic Areas
Sales
U.S.A. $ 481,452 $505,335 $484,479
Other North America 60,841 62,470 68,698
Other Countries 121,349 96,984 100,334
--------- -------- --------
Consolidated $ 663,642 $664,789 $653,511
--------- -------- --------
--------- -------- --------
Operating Profit
U.S.A. $ (43,765)(a) $ 72,732 $ 97,870(e)
Other North America 5,887 (b) 5,564 7,461
Other Countries 7,445 (c) 7,634 7,914
Interest income net of interest (expense) 1,062 363 1,200
Other (expense) net of other income (1,765) (6,614) (7,039)
General corporate expenses (55,894)(d) (42,297) (39,000)
--------- -------- --------
Earnings (loss) before taxes on income $ (87,030) $ 37,382 $ 68,406
--------- -------- --------
--------- -------- --------
Identifiable Assets
U.S.A. $ 330,493 $384,413 $403,447
Other North America 37,474 40,608 45,578
Other Countries 124,494 73,796 67,681
Corporate Assets 187,763 129,745 78,844
--------- -------- --------
Total Assets $ 680,224 $628,562 $595,550
--------- -------- --------
--------- -------- --------
<FN>
Corporate assets include principally cash and cash equivalents, short-term
investments, miscellaneous receivables, deferred taxes and other miscellaneous
assets.
(a) Includes one-time pre-tax charges of $17,500 related to the discontinuance
of the Organidin (iodinated glycerol) line, $36,830 related to the provision
for loss on Felbatol and $60,985 related to restructuring.
(b) Includes a one-time pre-tax charge of $950 related to the provision for loss
on Felbatol.
(c) Includes a one-time pre-tax charge of $900 related to restructuring.
(d) Includes a one-time pre-tax charge of $12,175 related to restructuring.
(e) Includes non-recurring income of $10,000 related to a licensing agreement.
27
15. RENTAL EXPENSE AND LEASE COMMITMENTS
Rental expense, in thousands of dollars, for operating leases with a term
greater than one year for 1995, 1994 and 1993 was as follows:
REAL PROPERTY
YEAR ENDED REAL SUB-RENTAL NET REAL EQUIPMENT
MARCH 31 PROPERTY INCOME PROPERTY AND OTHER
- ----------- -------- ------------- -------- ---------
1995 $8,320 $(688) $7,632 $ 6,389
1994 8,322 (688) 7,634 7,250
1993 8,809 (690) 8,119 7,051
Minimum rental commitments, in thousands of dollars, under non-cancellable
leases in effect at March 31, 1995 were as follows:
MINIMUM RENTAL REAL EQUIPMENT CAPITAL LEASE
COMMITMENTS PROPERTY AND OTHER OBLIGATIONS
- --------------- -------- --------- -------------
1996 $ 8,183 $ 319 $ 52
1997 7,457 182 49
1998 7,270 68 28
1999 7,089 11 24
2000 6,776 -- 21
2001-2012 80,916 -- 38
-------------
212
Less interest and executory cost (44)
-------------
Present value of minimum lease payments
(of which $37 is
included in current liabilities) $ 168
-------------
-------------
The one-time charges for restructuring of operations and facilities recorded in
the year ended March 31, 1995 include approximately $15,900,000 of rental costs
associated with subleasing office space on which the Company holds a long-term
lease. This amount is included in the real property rental commitments indicated
above.
16. SUPPLEMENTAL FINANCIAL INFORMATION
The following is presented in support of balance sheet captions:
MARCH 31
--------------------------
1995 1994
-------- --------
Intangible Assets: (dollars in thousands)
Excess of purchase price of businesses acquired over the
net assets at date of acquisition $111,145 $ 86,572
Trademarks 30,159 28,782
Other 35,231 38,342
-------- --------
176,535 153,696
Accumulated amortization 46,683 43,483
-------- --------
$129,852 $110,213
-------- --------
-------- --------
Accounts Payable:
Trade $ 28,596 $ 26,609
Other 2,722 1,235
-------- --------
$ 31,318 $ 27,844
-------- --------
-------- --------
Accrued Expenses:
Salaries and wages $ 23,390 $ 25,313
Advertising and promotion 20,678 13,330
One-time charges 32,617 --
Retirement plans 17,063 8,578
Other 40,677 24,820
-------- --------
$134,425 $ 72,041
-------- --------
-------- --------
Other Long-Term Liabilities:
One-time charges $ 31,438 $ --
Other 16,626 16,013
-------- --------
$ 48,064 $ 16,013
-------- --------
-------- --------
28
17. 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.
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 fiscal 1995 period.
As a result of the Felbatol matters discussed above, the Company incurred in the
year ended March 31, 1995 a one-time charge to pre-tax earnings of $37,780,000,
primarily related to inventory write-offs ($15,400,000) in excess of sales
projections, purchase and other commitments ($9,900,000) and anticipated product
returns including trade announcements ($4,500,000). Depending on future sales
levels, additional inventory write-offs may be required. At the present time
Felbatol continues to be available on the market. If for any reason 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 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.
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.
18. REGULATORY MATTERS
In connection with the Food and Drug Administration Drug Efficacy Study
implementation program, the FDA initiated a review of the safety and efficacy of
the Organidin (iodinated glycerol) products. An FDA Advisory Committee
recommended on March 23, 1992 that the products remain on the market pending
further FDA review, that certain changes in the product's labeling be made and
that doctors be appropriately notified of these labeling changes. The Company
implemented these FDA Advisory Committee recommendations and initiated
development of additional data to support the safety and efficacy of the
products.
On April 22, 1993, the Company received a letter from the FDA requesting that
the Company discontinue the marketing of the Organidin (iodinated glycerol)
products. Subsequent meetings between the Company and the FDA resulted in an
agreement
29
reached in June, 1994, under which the Company discontinued the manufacture and
shipment of the Organidin (iodinated glycerol) products. The agreement permitted
the continued shipping, prescribing and dispensing of existing stocks of
Organidin (iodinated glycerol) product then currently in channels of
distribution. As noted, the Company has introduced a reformulation of the
Organidin expectorant/ antitussive products.
As a result of the agreement noted above, the Company incurred in the year ended
March 31, 1995 a one-time charge to pre-tax earnings of $17,500,000 primarily
related to a provision for any product returns ($8,500,000) and for inventory
write-offs ($3,600,000).
Sales and pre-tax operating profits of the Organidin (iodinated glycerol) line
included in the year ended March 31, 1995 were $20,800,000 and $11,400,000,
respectively, compared to sales and pre-tax operating profits included in the
year ended March 31, 1994 of $74,400,000 and $31,600,000, respectively. Sales
and pre-tax operating profits for the fiscal year ended March 31, 1993 were
$43,400,000 and $7,600,000, respectively. Organidin 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.
19. LITIGATION INCLUDING ENVIRONMENTAL MATTERS
Environmental Matters
The United States Environmental Protection Agency ("EPA") advised Carter-Wallace
Inc. and over 200 other companies in 1982 that they may be potentially
responsible parties ("PRPs") under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") with respect to waste deposited at the
Lone Pine Landfill in Freehold, N.J. The Company and over 115 other companies
without admitting liability, have entered into two consent decrees with EPA
agreeing to conduct a cleanup of the Lone Pine Landfill and the cleanup is in
progress. The total estimated cost of the cleanup is $103 to $124 million in
current dollars. Carter-Wallace's share of the cleanup is estimated to be $8.4
to $10.2 million, of which it has paid about $6.9 million to date. In August,
1989, the Company instituted suit in New Jersey state court against twenty-two
insurers to recover, inter alia, the Company's share of costs at Lone Pine. The
Company has reached settlements in this case with 18 of the insurers. To date,
the Company has received approximately $10.4 million in settlement payments,
including reimbursement of certain legal fees, and is scheduled to receive
additional amounts over the next two years. Thus, the Company expects to be
fully reimbursed for its share of the currently estimated costs at Lone Pine.
The Company faces potential liability involving waste material generated by the
Lambert Kay division at its former manufacturing facility in Winsted,
Connecticut. In May, 1991, EPA issued special notice letters under CERCLA to
Lambert Kay and about 50 other PRPs notifying them of potential liability with
respect to waste deposited at the Barkhamsted-New Hartford landfill in
Barkhamsted, Connecticut. In September, 1991 and in February, 1994, the Company
and 21 other PRPs, without admitting liability, entered into consent agreements
under which the PRPs agreed to perform certain investigation and engineering
evaluation work at the site including the remedial investigation and feasability
study and to reimburse EPA for certain costs. The estimated cost of this work is
about $4 million. The Company's share of this cost is estimated to be $114,500
to $129,400, of which the company has paid about $99,000. In addition, the
Company and other settling PRPs have sued certain nonsettlors for their share of
these costs and have obtained some settlement recoveries. Based on preliminary
information from the investigation work (which is not completed), the total cost
for performing the current and future work at Barkhamsted, including the
investigation work, is estimated to be $13.3 to $41.3 million. Based on expected
PRP participation in future cleanup work and other factors, the Company
anticipates that its share of all cleanup costs (including costs incurred to
date) will be not more than 4 to 5% or about $532,000 to $2,065,000. Thus,
although applicable environmental law provides for joint and several liability
for the cost of cleanup work, the Company believes, based on present estimates,
that substantially all of the cleanup costs will be paid by other PRPs.
The Company believes, based upon the information available at this time, that
the matters discussed above will not have a material effect on its financial
statements.
30
Other Litigation
Two federal securities class action suits filed in 1994 by stockholders against
the Company and certain of its present and former officers in the United States
District Court, Southern District of New York have been consolidated for all
purposes and the plaintiffs have filed a Consolidated Amended Complaint. The
consolidated action purports to be on behalf of all persons who purchased the
Company stock in the period from January 20, 1994 through July 31, 1994. The
complaint alleges 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. The complaint seeks damages in an unspecified
amount.
In December, 1994, an alleged shareholder of the Company instituted an action in
the Supreme Court of the State and County of New York which purports to be
brought derivatively on behalf and for the benefit of the Company against the
directors of the Company for breach of fiduciary duty, gross mismanagement and
waste of corporate assets in connection with the development and marketing of
Felbatol. The complaint seeks unspecified compensatory and punitive damages.
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 early 1995, 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
unspecified compensatory and punitive damages and injunctive relief. The
District Court order certifying the case as a class action is on appeal to the
U.S. Court of Appeals for the Ninth Circuit.
A product liability class action against the Company in the United States
District Court for the Eastern District of Pennsylvania for injury allegedly
suffered as a result of using Felbatol has been consolidated with the action in
the Northern District of California.
In addition to the above, one state court class action and seven individual
product liability actions related to Felbatol have been filed against the
Company. The complaints in certain of the actions seek compensatory and punitive
damages ranging from $10,000 to $56,000,000 and in the aggregate $10,400,000 in
compensatory damages and $52,100,000 in punitive damages and the remainder of
the cases seek unspecified damages. The Company has product liability insurance
in the amount of $88,000,000 applicable to these actions.
The Company along with numerous other drug manufacturers, wholesalers and
suppliers, was 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 alleged that the
defendants, 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. Upon
defendants' motion, the plaintiffs' class claims of price discrimination were
stricken from the complaint and a Second Consolidated and Amended Complaint
("Second Amended Complaint") filed in December, 1994 repeating these price
discrimination counts as individual claims. The second Amended Complaint
contains the same substantive class price fixing claims and, like its
predecessor, seeks injunctive relief and unspecified trebled compensatory
damages, restitution of amounts by which defendants were unjustly enriched and
litigation costs.
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 and wholesalers and suppliers, including the Company, conspired to
fix prices for brand-name prescription drugs that were sold to California
independent retail pharmacists. The complaint seeks unspecified 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, had initially been named in a
class action suit filed May, 1994 in the Alabama Circuit Court, Greene County,
brought on behalf of a class of independent drug stores and pharmacies and
alleging that the named, and certain unnamed, defendants
31
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 sold in the State of Alabama in violation of Alabama law. By a First
Amended Complaint dated January 17, 1995, the three named plaintiffs retracted
all class claims, restated each of the aforementioned allegations as individual
claims against each of the previously-named defendants, and added the following
two additional state common-law counts:
(i) fraudulent suppression (alleging that the defendants had fraudulently
suppressed the fact that they had charged less to mail-order pharmacies,
wholesale distributors and/or large health care providers); and
(ii) civil conspiracy (claiming that the defendants had conspired to restrain or
monopolize trade and essentially repeating the state statutory conspiracy
claim). The First Amended Complaint, like its predecessor, seeks
unspecified compensatory and punitive damages and litigation costs, as well
as injunctive and declaratory relief.
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 unspecified
compensatory damages.
The Company believes, based on opinion of counsel, it has good defenses to each
of the above-described legal actions and should prevail.
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 Company has settled this litigation by paying
$2,000,000 for alleged prior infringements and will pay on-going royalties on
future sales of the covered products.
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.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly net sales, gross margin, net earnings (loss) and earnings (loss) per
share are set forth in the following table (dollars in thousands, except per
share amounts).
QUARTER ENDED
-----------------------------------------------
1995 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 TOTAL YEAR
- ---- ------- -------- ------- -------- ----------
Net sales $183,304 $168,111 $156,680 $155,547 $663,642
Gross margin 121,021 104,401 102,642 95,260 423,324
Net earnings (loss) 441 (47,242) (4,662) (4,805 ) (56,268)
Earnings (loss) per share .01 (1.03) (.10) (.10 ) (1.22)
1994
- ----
Net sales $162,750 $150,266 $176,459 $175,314 $664,789
Gross margin 106,396 95,698 119,361 110,774 432,229
Net earnings before cumulative effect
of accounting changes 5,835 1,379 12,889 6,506 26,609
Cumulative effect of accounting changes (46,639) -- -- -- (46,639)
Net earnings (loss) (40,804) 1,379 12,889 6,506 (20,030)
Earnings per share before cumulative
effect of accounting changes .13 .03 .28 .14 .58
Cumulative effect of accounting changes (1.02) -- -- -- (1.02)
Earnings (loss) per share (.89) .03 .28 .14 (.44)
32
The quarter ended June 30, 1994 includes one-time charges to pre-tax earnings of
$17,500 related to the discontinuance of the Organidin (iodinated glycerol)
product line.
The quarter ended September 30, 1994 includes one-time charges to pre-tax
earnings of $85,640 consisting of $49,000 for restructuring and $36,640 related
to the provision for loss on Felbatol.
The quarter ended December 31, 1994 includes a one-time charge to pre-tax
earnings of $20,500 as part of a restructuring program.
The quarter ended March 31, 1995 includes one-time charges to pre-tax earnings
of $5,700 consisting of restructuring charges of $9,560 and an addition to the
provision for loss on Felbatol of $1,140 reduced in part by a $5,000 reduction
to the previously announced restructuring charges, largely the result of a
smaller than anticipated loss on the sale of one of the Company's manufacturing
facilities. Also included is a $2,000 charge related to settlement of the Becton
Dickinson litigation. The effective tax rate benefit for the twelve months ended
March 31, 1995 was lower than that reported for the nine months ended December
31, 1994 reflecting finalization of the full year results. This year-end
determination resulted in an increase in the provision for income taxes in the
quarter ended March 31, 1995.
The quarter ended June 30, 1993 includes one-time charges to earnings reflecting
the adoption of SFAS No. 106 "Employers' Accounting for Postretirement Benefits
other than Pensions" of $43,819 after taxes or $.96 per share and SFAS No. 112
"Employers' Accounting for Postemployment Benefits" of $2,820 after taxes or
$.06 per share.
21. SUBSEQUENT EVENT (UNAUDITED)
In April, 1995 the Company purchased a condom manufacturing facility in Colonial
Heights, VA. Expansion of this facility will require significant capital
resources that are expected to be financed through long-term borrowing.
The Company decided in mid-May, 1995 to close its condom manufacturing plant in
Trenton, New Jersey over a projected period of eighteen to twenty-four months.
The condom production currently performed at Trenton will be transferred to the
Company's facility in Colonial Heights, VA. The Company expects that the
decision to close the Trenton plant will result in future pre-tax one-time
charges to earnings of approximately $22,000,000. Most of these charges will be
incurred in fiscal year ending March 31, 1996.
------------------------
33
INDEPENDENT AUDITORS' REPORT
CERTIFIED PUBLIC ACCOUNTANTS
345 Park Avenue
KPMG PEAT MARWICK LLP New York, NY 10154
The Board of Directors and Stockholders
Carter-Wallace, Inc.:
We have audited the accompanying consolidated balance sheets of Carter-Wallace,
Inc. and subsidiaries as of March 31, 1995 and 1994 and the related consolidated
statements of earnings and retained earnings and cash flows for each of the
years in the three-year period ended March 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Carter-Wallace, Inc.
and subsidiaries as of March 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Notes 3 and 8 to the 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", No. 109 "Accounting for Income Taxes" and No. 112 "Employers'
Accounting for Postemployment Benefits" in 1994.
As a result of the Felbatol matters discussed in Note 17 to the consolidated
financial statements, the Company incurred in the year ended March 31, 1995 a
one-time charge to pre-tax earnings of $37,780,000. As further discussed,
depending on future sales levels, additional inventory write-offs may be
required. At the present time Felbatol continues to be available on the market.
If for any reason 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 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.
34
As discussed in Note 19 to the consolidated financial statements, the Company is
a defendant in several lawsuits including two product liability class action
suits, two federal securities class action suits, one state court class action
suit and seven individual product liability suits related to Felbatol, three
class action suits involving alleged price fixing within the pharmaceutical
industry and a patent infringement suit involving the Company's diagnostic
products. In addition, an alleged shareholder of the Company instituted an
action which purports to be brought derivatively on behalf and for the benefit
of the Company against the directors of the Company for breach of fiduciary
duty, gross mismanagement and waste of corporate assets in connection with the
development and marketing of Felbatol. The Company believes, based on opinion of
counsel, it has good defenses to each of the above-described legal actions and
should prevail. 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.
May 3, 1995
35
Carter-Wallace, Inc. and Subsidiaries
BOARD OF DIRECTORS
Henry H. Hoyt, Jr.
Chairman and Chief Executive Officer
Daniel J. Black
President and Chief Operating Officer
David M. Baldwin
Chairman, David M. Baldwin Realty Company, Inc.
Dr. Richard L. Cruess
Professor of Surgery, Center for Medical Education,
McGill University
Montreal, Quebec, Canada
Scott C. Hoyt
Vice President, New Products
Carter Products Division of the Company
Ralph Levine
Vice President, Secretary and General Counsel
Herbert M. Rinaldi
Partner
Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein
Paul A. Veteri
Vice President, Finance and Chief Financial Officer
SCIENTIFIC ADVISORY BOARD
Joseph S. Harun, M.D., Chairman
Former Vice President, Medical and Scientific Affairs
Carter-Wallace, Inc.
Paul Calabresi, M.D.
Professor of Medicine and Chairman Emeritus,
Department of Medicine
Brown University
Providence, RI
Robert E. Canfield, M.D.
Irving Professor of Medicine
Columbia University, College of Physicians and Surgeons
New York, NY
Barton F. Haynes, M.D.
Chairman, Department of Medicine
Duke University Medical Center
Durham, NC
Noel Rose, M.D., Ph.D.
Professor of Pathology, Molecular Microbiology and Immunology
Director of Immunology
Johns Hopkins University, Schools of Medicine and Public Health
Baltimore, MD
Morton K. Schwartz, Ph.D.
Chairman, Department of Clinical Chemistry
Memorial Sloan Kettering Cancer Center
New York, NY
EXECUTIVE OFFICERS
Henry H. Hoyt, Jr.
Chairman of the Board and Chief Executive Officer
Daniel J. Black
President and Chief Operating Officer
John Bridgen, Ph.D.
Vice President, Diagnostics, U.S.
Robert A. Cuthbert
Vice President, Pet Products, U.S.
Donald R. Daoust, Ph.D.
Vice President, Quality Control
Miguel Fernandez
Vice President, International
Peter J. Griffin
Vice President and Controller
John R. Hughes
Vice President, Consumer Products, U.S.
Michael J. Kopec
Vice President, Manufacturing
Ralph Levine
Vice President, Secretary and General Counsel
Thomas B. Moorhead
Vice President, Human Resources
George H. Ohye
Vice President, Compliance and Regulatory
Herbert Sosman
Vice President, Pharmaceuticals, U.S.
Donald J. Stack
Vice President, Taxes
C. Richard Stafford
Vice President, Corporate Development
Paul A. Veteri
Vice President, Finance and Chief Financial Officer
James L. Wagar
Vice President and Treasurer
DIVISIONAL MANAGEMENT
John Bridgen, Ph.D., President, Wampole Laboratories
Robert A. Cuthbert, President, Lambert Kay
Miguel Fernandez, President, International
John R. Hughes, President, Carter Products
Michael J. Kopec, President, Manufacturing
Herbert Sosman, President, Wallace Laboratories
PRINCIPAL SUBSIDIARIES
Francois Depoil, President, Laboratoires Fumouze, S. A. (France)
Gregory J. Drohan, President, Carter Products, Canada
J. Robert Fraser, President, Frank W. Horner, Inc. (Canada)
Adrian J.L. Huns, Managing Director, Carter-Wallace,
Limited (United Kingdom)
Jose Maria Icart, Managing Director, Icart, S.A. (Spain)
Alan W. Nash, Managing Director, Carter-Wallace
(Australia) Pty. Limited
Lino Santambrogio, Managing Director, S.p.A. Italiana
Laboratori Bouty (Italy)
Francis Santiago, President, Carter-Wallace, S. A. (Mexico)
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EXECUTIVE OFFICES
1345 Avenue of the Americas, New York, N.Y. 10105
212-339-5000
RESEARCH LABORATORIES
Cranbury, New Jersey
Montreal, Canada
MANUFACTURING PLANTS
Colonial Heights, Virginia
Cranbury, New Jersey
Decatur, Illinois
Santa Ana, California
Trenton, New Jersey
Winsted, Connecticut
Montreal, Canada
Toronto, Canada
Folkestone, England
Milan, Italy
Pisa, Italy
Mexico City, Mexico
Barcelona, Spain
TRANSFER AND DISBURSING AGENTS
The Bank of New York
101 Barclay Street
New York, N.Y. 10286
800-524-4458
Midlantic National Bank
499 Thornall Street
Edison, N.J. 08818
908-321-8000
REGISTRAR OF STOCK
The Bank of New York
101 Barclay Street
New York, N.Y. 10286
SHAREHOLDER RELATIONS
Ruder Finn, Inc.
800-984-1777
CARTER-WALLACE, INC.
1345 Avenue of the Americas
New York, NY 10105