CARTER-WALLACE
ANNUAL REPORT FOR THE YEAR
ENDED MARCH 31 1996
CARTER-WALLACE, INC.
ANNUAL REPORT
For the year ended March 31, 1996
FINANCIAL HIGHLIGHTS 1996 1995
Net sales $658,940,000 $663,642,000
Earnings before one-time charges and
taxes 54,797,000 42,310,000
Earnings (loss) before taxes 12,797,000 (87,030,000)
Net earnings (loss) 7,550,000 (56,268,000)
Earnings per share before one-time
charges $ .70 $ .53
Earnings (loss) per share $ .16 $(1.22)
Dividends 7,384,000 13,372,000
Dividends per share $ .16 $ .29
Average shares outstanding 46,160,000 46,108,000
Number of stockholders of record
Common 2,894 3,247
Class B common 1,605 1,797
C/W
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 35
Directors and Officers 36
REPORT TO STOCKHOLDERS
In the fiscal year ended March 31, 1996 the Company's consolidated sales were
$658,940,000 compared to the prior year's sales of $663,642,000.
The Company earned $.16 per share for the fiscal year ended March 31, 1996
compared to a loss of $1.22 per share in the prior year after consideration of
one-time charges in both years. Excluding these one-time charges, earnings per
share were $.70 for the fiscal year ended March 31, 1996 compared with earnings
of $.53 per share for the fiscal year ended March 31, 1995, an increase of 32%.
SALES
Sales in the Company's two business segments were Consumer Products $412,362,000
and Health Care Products $246,578,000. Consumer Products were 63% and Health
Care Products were 37% of total sales. These sales compare to a year ago of
$400,857,000 and $262,785,000, respectively.
Foreign sales by subsidiaries and branches operating outside the United States
were $206,576,000 for fiscal year ended March 31, 1996 compared with
$182,190,000 the previous year. This represents 31% and 27%, respectively of
total sales. Health Care Products accounted for 39% and Consumer Products 61% of
foreign sales. Lower foreign exchange rates had the effect of decreasing foreign
sales by approximately $2,400,000.
DIVIDENDS
Dividends of $.16 per share were paid in the fiscal year ended March 31, 1996
compared to $.29 per share in the prior year. The Company has paid dividends for
113 consecutive years.
CARTER PRODUCTS DIVISION
Pressures on pricing and strict control of inventory levels in our retail
distribution channels, trends that began to emerge in the early part of this
decade, continued this past year. Exacerbating these developments were the
waning of consumer brand loyalties and consumers' continuing preference for
economy pricing. We have faced these challenges with consistent efforts to offer
quality products at attractive prices through a new streamlined distribution
system.
Our Arrid brand deodorant and anti-perspirant product line continued to enjoy
good brand recognition in the anti-perspirant/deodorant market, although some
weakness in volume was apparent. Arrid XX and Arrid XX Glide-On remained popular
with consumers and sustained their prominent position, despite intense
competition in this category. Keeping a product line refreshed with new scents
is a major element in the marketing of personal products and Arrid introduced
the new, improved Arrid XX Baby Fresh Scent solid in the last quarter of the
fiscal year.
Three out of five condoms purchased in the United States were manufactured by
Carter-Wallace. Our Trojan, Class Act and Naturalamb condom brands remained
leaders in the condom market again this year, with an overall market share of
over 60%. The growing consumer popularity of our newest products, Trojan Ultra
Texture condom and Trojan Very Thin condom, have helped maintain the leadership
position of the Trojan brand. Class Act condoms continue to gain increasing
favor in the price/value segment of the condom market.
With over a 45% market share, our Nair line of depilatories remained the
preferred brand in this market segment. All forms of Nair -- lotion, cream and
roll-on -- have found their distinct niche with consumers. Nair Bleach and Nair
Wax hair remover were successfully introduced this year, rounding out our
offerings in this product category.
The First Response and Answer pregnancy and ovulation diagnostic test kit lines
continued to achieve a substantial share of their respective markets. Using
modified formulations of the product, the First Response and Answer Pregnancy
Test Kits were improved to enhance accuracy and shorten the timing of results.
The Pearl Drops toothpaste product line was updated with more distinct packaging
and improved with a
2
new formulation which features a Triple Action Whitening System.
WALLACE LABORATORIES DIVISION
The Division completed the final phase of its restructuring efforts, which began
in 1994, according to schedule. Now operating as a leaner organization, emphasis
is on those products that have demonstrated promotional responsiveness such as
the cough/cold product lines Rynatan and Organidin NR, and the Soma line of
muscle relaxants.
The Division curtailed wide promotion of Felbatol (felbamate) in August of 1994.
This antiepileptic drug remains available for those patients whose epilepsy is
not controlled by other medication and when the risk of its use is deemed
acceptable in light of the benefits it confers. Sales have stabilized with an
estimated 8,00010,000 patients receiving Felbatol therapy.
Three Astelin (azelastine) New Drug Applications ("NDAs") are pending at the
FDA. Following a unanimous recommendation for approval of the Astelin Nasal
Spray NDA for seasonal allergic rhinitis by the FDA's Pulmonary Advisory
Committee in November, 1995, the Company received an "approvable letter" in
January, 1996. The letter included a request for additional chemistry
information that has been developed and will be submitted in June, 1996.
Additional formulation work is needed in connection with the Astelin tablet NDA
for rhinitis. The Company is unable to determine when and if the Astelin
rhinitis NDAs will be approved by the FDA. The Astelin tablet for asthma NDA
will be withdrawn as soon as it is determined it is no longer needed to support
the rhinitis NDAs.
The Division is actively pursuing pharmaceutical product and company
acquisitions as well as co-promotional agreements.
WAMPOLE LABORATORIES
The Division reported a satisfactory performance this past year due to a more
stable environment within this segment of the healthcare industry and because
of several opportune acquisitions.
A strong contributor to Divisional results this year was the December, 1995
acquisition of the enzyme immunoassay and the immunofluorescent lines of
diagnostic products from BioWhittaker, Inc. The immunoassay line includes a
broad range of tests for infectious and autoimmune diseases, including products
for the growing markets of Lyme disease and H. pylori testing. Concurrently, the
Division entered into a separate agreement with Clark Laboratories, Inc. to
obtain exclusive marketing rights in the United States for their line of enzyme
immunoassay diagnostic tests. In addition, the Division received rights to
distribute the Centocor line of IgM capture assays along with a line of tests to
detect intestinal pathogens, including C. difficile from Tech Lab, Inc. These
agreements strengthen the Division and provide Carter-Wallace with a stronger
leadership position in the growing market for enzyme immunoassay testing.
The Division enhanced its market position in the rapid testing segment with the
introduction of Rubella-Plus in the March quarter. Rubella-Plus, a rapid assay
for the determination of immunity to rubella infections, complements the
Division's Mono-Plus, a rapid test for infectious mononucleosis, that was
introduced in 1994. The Mono-Plus test continued to post strong sales and has
made a significant impact on the Division's success in this segment. Clearview
products for pregnancy testing also showed strong gains. However, sales of
comparable tests for chlamydia infections were adversely affected by reduced
testing in the physician's office.
The Isostat product line for the rapid detection of micro-organisms in the
blood, the Stat-Crit system for the rapid measurement of hematocrit levels, and
the Zeus Scientific line of immunofluorescent tests all continued to be strong
contributors to the Division's success.
3
LAMBERT KAY
The entire landscape of the pet supply market has undergone enormous changes in
the past few years. The Division has been quick to respond to the shifts in
distribution channels from the local independent pet store to the pet products
warehouse-sized superstore while remaining sensitive to the needs and
preferences of the independent pet store.
The Division successfully introduced forty new products and sizes. The stuffed
chew toy line was expanded by the addition of a collection of barnyard animals,
including cows, pigs, and lambs, and a collection of jungle animals, including
elephants, tigers, leopards, koalas, monkeys and other assorted species. The
Mother's Helper line of infant animal milk replacers (formulas) for kittens,
puppies and orphaned wild animals was well received by the pet trade. Citrus
Scented flea and tick collars for cats and dogs which come in assorted colors
and containing d-Limonene, were introduced in time for the flea and tick season.
The X-O-TROL line was expanded with the addition of flea and tick powder for
dogs and cats. Boundary granular repellent was added to the well established
Boundary line.
Tuff On Tangles, a new hair brush designed to be effective on mats and tangles
in pet coats, was successfully introduced as was the new, improved Fresh'n Clean
puppy housebreaking pads containing
Ammonia Guard. Our new Color Guard choke chains
and leads in metallic colors were also well received.
The Lassie and Tiny Tiger pet product lines were offered in expanded
distribution channels. A popular Lassie and Tiny Tiger product is the new
identification flea and tick collar. These collars are favored because they have
a serial number imprinted on the collar which is a valuable aid in helping pet
owners find their lost pets.
INTERNATIONAL DIVISION
The International Division's sales for the last year advanced to record levels.
The strong results were due to the full year benefit of acquisitions completed
in 1994 in France, Australia and Italy as well as continued expansion of our
business in Latin America. Demand for core products was steady with some
revenue improvement derived from price increases in selected product lines.
Sales of consumer products displayed gains in a number of product lines and
geographic areas. Strong results were recorded in France in the Sante Beaute
personal care lines, with key products such as Email Diamant toothpolish and the
Lineance line of cosmetic products performing best. Pearl Drops toothpaste
continued to increase unit sales in Australia, England, Germany, and a number of
other European countries due to an aggressive marketing and advertising program.
The Arrid product line continued to achieve volume gains in the highly
competitive UK market. Trojan condoms, which hold a 32% market share in Canada,
successfully launched Trojan Thins in that country. The topical analgesics,
Antiphlogistine Rub A-535 marketed in Canada and Dencorub marketed in Australia,
both performed well, maintaining their market strength. The GranVista line of
nonprescription reading glasses realized notable growth in Italy following the
introduction of a new line of glasses with aspheric lenses.
The Division's line of healthcare and pharmaceutical products displayed strong
gains in several markets. In Canada, higher sales were achieved by Gravol
anti-nauseant and Ovol an anti-flatulent product. In France, Sterimar nasal
decongestant showed impressive sales gains from the previous year following an
innovative advertising program that was aimed directly at the consumer. This was
the first time such an approach had been tried and we were pleased with the
results. In Italy, Cerulisina, an OTC preparation to remove ear wax, and
Dentovax, a line of toothcare products, posted significant gains. In Mexico, the
pharmaceutical products Pangavit vitamin supplements, Colfur, an antidiarrheal,
and Hidramox, a broad-spectrum antibiotic, continued to show positive growth.
4
Professional diagnostic sales in Italy posted substantial growth, in part due to
the full-year benefit of the Technogenetics S.r.l. acquisition which occurred in
August, 1994. Technogenetics produces and distributes a line of diagnostic test
kits that are used for thyroid metabolism irregularities, fertility/pregnancy
conditions and other hormonal (endocrine) disorders. In Mexico, the diagnostics
line was supported by substantially higher sales of professional pregnancy
tests.
RESEARCH AND DEVELOPMENT
Expenses for research and development totaled $26,494,000 for the fiscal year
ended March 31, 1996 compared to $41,315,000 in the prior fiscal year. This
decline was primarily due to lower spending in the Health Care segment where the
termination of Organidin and Felbatol clinical activities was coupled with a
reduction in Astelin clinical activities.
In October of 1994, the Company virtually eliminated its Wallace Laboratories
Division's internal research and development capabilities. However, the Company
has continued its research and development of Astelin (azelastine) for rhinitis,
and Taurolin (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.
Three Astelin (azelastine) New Drug Applications ("NDAs") are pending at the
FDA. Following a unanimous recommendation for approval of the Astelin Nasal
Spray NDA for seasonal allergic rhinitis by the FDA's Pulmonary Advisory
Committee in November, 1995, the Company received an "approvable letter" in
January, 1996. The letter included a request for additional chemistry
information that has been developed and will be submitted in June, 1996.
Additional formulation work is needed in connection with the Astelin tablet NDA
for rhinitis. The Company is unable to determine when and if the Astelin
rhinitis NDAs will be approved by the FDA. The Astelin tablet for asthma NDA
will be withdrawn as soon as it is determined it is no longer needed to support
the rhinitis NDAs.
A large scale, multi-centered clinical efficacy trial for taurolidine, an
antitoxin for the treatment of sepsis, is ongoing.
FACILITIES
The realignment of production, distribution and office facilities that was part
of the restructuring plan formulated in the fall of 1994 was refined and
completed in 1995.
Our East Windsor, New Jersey facility was closed by the end of October, 1995 and
the diagnostic products that had been produced at the facility are now being
outsourced to a number of manufacturers. Non-production activities have been
consolidated within existing Carter-Wallace facilities in Cranbury and Dayton,
New Jersey.
With renovations completed at the Wallace building in Cranbury, New Jersey,
Wallace R&D personnel formerly housed in leased facilities in Plainsboro, New
Jersey have been relocated to Cranbury.
The 68,000 square foot condom manufacturing facility in Colonial Heights,
Virginia, purchased in April, 1995 is being expanded to 200,000 square feet. The
plant will house all of the Company's condom manufacturing operations and is
scheduled to be in full operation prior to December, 1996. When the major
portion of the Colonial Heights expansion was completed in April, 1996, the
Company began to relocate operations and equipment from the Trenton, New Jersey
facility to Colonial Heights. When complete, the facility will be one of the
finest condom manufacturing plants in the world.
LITIGATION
The Company is a defendant in certain actions which are discussed in Note 20,
"Litigation Including Environmental Matters" of the notes to the Consolidated
Financial Statements (pages 31 to 33).
5
PEOPLE
We are delighted that T. Rosie Albright has rejoined Carter-Wallace as President
of the Carter Products Division. From 1992 to 1993, Ms. Albright had served as
Executive Vice President for Carter Products. Before rejoining Carter-Wallace,
Ms. Albright was General Manager and Executive Vice President, Beauty Care at
Revlon, Inc.
Miguel Fernandez, Corporate Vice President, International, and President,
International Division, retired in May, 1996. Mr. Fernandez has made significant
contributions to the Company in marketing, operations and the international
product arena throughout his 16 years of service with Carter-Wallace.
We are fortunate in having another international executive, Adrian J.L. Huns, to
succeed Mr. Fernandez. Mr. Huns has served since 1989 as Managing Director of
Carter-Wallace Ltd., the Company's subsidiary in the United Kingdom, and is well
qualified to manage this multinational, multiproduct area of our business.
Howard Cocker was appointed Managing Director of Carter-Wallace Ltd., succeeding
Adrian J. L. Huns. Mr. Cocker was formerly Financial Director, Carter-Wallace
Ltd.
* * *
As we continued to follow the course we charted last year, we are grateful for
the ongoing trust and confidence of the consumers and professionals who use our
products and for the continued loyal 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 13, 1996
6
Carter-Wallace, Inc. and Subsidiaries
SUMMARY OF SELECTED FINANCIAL DATA
------------------- ----------------------------------------------------------
YEARS ENDED MARCH 31
----------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE DATA)
OPERATIONS
Net sales $658,940 $663,642 $664,789 $653,511 $673,390
Earnings before one-time charges in 1996
and 1995, taxes and the cumulative
effect of accounting changes in 1994 54,797 42,310 37,382 68,406 67,265
Net earnings (loss) before the
cumulative effect of accounting
changes 7,550(a) (56,268)(b) 26,609 47,200(c) 45,740(d)
Net earnings (loss) 7,550(a) (56,268)(b) (20,030) 47,200(c) 45,740(d)
Net earnings (loss) per share before the
cumulative effect of accounting
changes in 1994 .16(a) (1.22)(b) .58 1.03(c) 1.00(d)(e)
Net earnings (loss) per average share
of common stock outstanding .16(a) (1.22)(b) (.44) 1.03(c) 1.00(d)(e)
Dividends per share .16 .29 .33 .33 .33(e)
Average common shares outstanding 46,160 46,108 45,900 45,786 45,783(e)
FINANCIAL POSITION
Working capital $137,083 $100,596 $185,159 $184,175(f) $170,279(f)
Net property, plant and equipment 139,273 137,608 157,059 150,070 142,854
Total assets 718,925 680,224 628,562 595,550(f) 577,181(f)
Long-term debt 55,928 23,115 9,309 13,184 14,927
Stockholders' equity 332,896 327,139 393,508 429,161(f) 407,261(f)
OTHER DATA
Capital expenditures $ 35,228 $ 18,853 $ 24,305 $ 25,500 $ 22,313
Book value per share 7.18 7.08 8.54 9.37(f) 8.89(e)(f)
Number of employees 3,610 3,670 4,060 4,020 4,170
<FN>
(a) Includes one-time charges against pre-tax earnings of $42,000 ($24,780 after
tax or $.54 per share) related to the planned closure of the Trenton
facility, restructuring charges and net adjustments to the provision for
loss on Felbatol (felbamate) and the discontinuance of the Organidin
(iodinated glycerol) product line.
(b) 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.
(c) 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).
(d) 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.
(e) Reflects a three-for-one stock split in April, 1992.
(f) 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
----------------------------------------------------
1996 1995
---------------------- ----------------------
QUARTER ENDED HIGH LOW HIGH LOW
----------- ----------- ----------- -----------
June 30 13 3/8 10 1/4 25 5/8 16 1/4
September 30 13 1/2 10 1/8 18 7/8 9 7/8
December 31 13 1/8 10 1/8 15 3/8 12 1/8
March 31 16 3/4 11 1/8 13 7/8 10 1/2
<FN>
A dividend of $.04 per share was declared in all four
quarters of 1996. 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.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
- --------------------------------------------------------------------------------
NET SALES AND EARNINGS
Net earnings were $7,550,000 or $.16 per share in the year ended March 31, 1996
compared with a loss of $56,268,000 or $1.22 a share in the prior year. One time
pre-tax charges described below amounted to $42,000,000 in the current year and
$129,340,000 last year. Excluding the one-time charges, earnings per share were
$.70 in the year ended March 31, 1996 and $.53 a year earlier.
Net sales in 1996 were $658,940,000 compared to prior year's sales of
$663,642,000. Domestic sales decreased $29,088,000 or 6% and foreign sales
increased $24,386,000 or 13% from the prior year. Lower foreign exchange rates
had the effect of decreasing foreign sales by approximately $2,400,000.
Sales of Consumer Products increased $11,505,000 or 3% due to higher volume in
international operations. Acquisitions in France and Australia made in the prior
year as well as higher sales of existing products in Europe and Latin America
contributed a substantial portion of the international sales growth of Consumer
Products. Condom sales exceeded the prior year principally in the domestic
market. Factory sales of worldwide antiperspirant and deodorant products were
$110,147,000 in 1996, or 10.6% lower than the $123,146,000 sales level in 1995.
This decline was due to reduced unit volume.
Health Care sales declined $16,207,000 or 6% from the prior year due to lower
unit volume largely as a result of reduced sales of Felbatol (felbamate). In the
prior year, sales of Organidin Iodinated Glycerol ("I.G."), which was
discontinued in June 1994, amounted to approximately $21,000,000. Current year
sales of Organidin NR, a reformulated version of Organidin which was introduced
in September, 1994 amount to approximately $30,100,000, an increase of
$18,100,000 over the prior year. Sales of the Company's pharmaceutical products
continue to be adversely affected by generic competition. Future sales of
Organidin NR may be particularly affected by generic competition. Selling price
increases had a positive effect on sales in this segment. Health Care sales
benefited from the acquisitions of the BioWhittaker and Clark diagnostic lines
in 1996 and the Technogenetics line of diagnostic products in Italy in 1995. The
Company continues to maintain the $8,000,000 provision established in the prior
year for possible Organidin NR returns. The Company will continue to evaluate
the adequacy of this reserve.
Net sales in 1995 were $663,642,000 a decrease of $1,147,000 from 1994. Domestic
sales decreased $23,883,000 or 5% and foreign sales increased $22,736,000 or 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 $32,689,000 or 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. Acquisitions made in 1995 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.
In 1995, Health Care sales declined $33,836,000 or 11% from 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 introduced a reformulated line of Organidin products,
marketed as Organidin NR. Sales of the Company's pharmaceutical products were
adversely affected by generic competition.
Interest income increased in 1996 compared to the previous two years due to a
higher level of interest bearing investments.
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 in this region was due entirely to lower foreign
exchange rates in Mexico and Canada.
COST AND EXPENSES
Cost of goods sold as a percentage of net sales was 37.4% in 1996 compared to
36.2% in 1995. This increase was principally as a result of changes in product
mix and cost increases. The cost of goods sold percentage in 1995 increased over
the 35.0% in 1994 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.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
Advertising, marketing and other selling expenses decreased from the prior year
level by $4,264,000 or 2% in 1996 and by $10,080,000 or 4% in 1995. The
decreases in 1996 and 1995 relate to lower expenses in the Health Care segment.
In 1994, Felbatol (felbamate) was supported by substantial introductory spending
levels. Advertising, marketing and other selling expense in the Consumer
Products segment increased in both 1996 and 1995 over the prior year. The
increase in 1996 was due principally to higher expenses in international
operations in support of recent acquisitions.
The Company announced that in October, 1994 it virtually eliminated its Wallace
Laboratories Division internal research and development capability. In 1996
research and development expenses decreased by $14,821,000 or 36% from the prior
year due primarily to lower spending for felbamate as well as the completion of
Astelin (azelastine) clinical trials. The $10,963,000 or 21% decline in 1995
compared to 1994 was due to the significant reduction of felbamate clinical
studies and the termination of Organidin I.G. clinical studies. The Company is
continuing its research and development of Astelin (azelastine) for rhinitis,
and Taurolin (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.
General and administrative expenses decreased $2,687,000 or 3% in 1996 primarily
as a result of lower rent and reduced employee benefit costs. General and
administrative expenses increased $4,384,000 or 6% in 1995 primarily due to
higher employee benefits costs, legal fees and provisions for write-offs of
trade receivables.
Interest expense increased in 1996 by $1,377,000 as a result of the financing of
international acquisitions made in 1995 and interest costs related to expansion
of the condom manufacturing facility in Colonial Heights, VA. Interest expense
increased in 1995 by $536,000 over the prior year as a result of financing
related to international acquisitions.
Other expenses decreased by $495,000 or 5% in 1996 from the prior year
principally as a result of lower expense for long-term incentive awards. Other
expenses in 1996 include an approximate $2,400,000 charge related to a write-off
of the carrying value of a product that is being discontinued. The increase in
other expenses in 1995 of $3,152,000 was principally due to provisions for
settlements of disputed patent claims, including $2,000,000 related to the
Becton Dickinson litigation.
The consolidated income tax rate in 1996 was 41%. In 1995, the Company had a
35.3% tax benefit on its reported consolidated loss. The tax rate in 1994 was
28.8%, including a favorable adjustment of deferred taxes of $815,000 to reflect
a change in federal corporate income tax rates. Tax rates in 1995, 1996 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 December, 1995 the Auditing Standards Board issued Statement on Auditing
Standards No. 79, "Amendment to Statement on Auditing Standards No. 58, Reports
on Audited Financial Statements". This statement established new standards for
reports by certified public accountants on audited financial statements. As a
result of this new auditing standard, the references to uncertainties are in
general no longer required in the independent auditors' report.
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company is required to adopt this statement no later than the
fiscal year ending March 31, 1997. Adoption of this statement is not expected to
have a material impact on the Company's financial statements.
PLANNED CLOSURE OF THE TRENTON CONDOM
MANUFACTURING FACILITY
As previously announced, the Company decided to close its condom manufacturing
plant in Trenton, New Jersey. It is anticipated that the closing will occur in
fiscal year 1997. The condom production currently performed at Trenton will be
transferred to the Company's facility in Colonial Heights, VA. The decision to
close the Trenton plant resulted in a one-time charge to pre-tax earnings in the
year ended March 31, 1996 of $23,100,000 ($13,630,000 after taxes or $.30 per
share), consisting of plant closing costs including equipment write-offs
($17,800,000) and employee termination costs ($5,300,000).
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
engaged in a restructuring program beginning in the year ended March 31, 1995
with the intent of reducing costs and increasing efficiencies.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
As part of the restructuring program, the Company 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 Taurolin (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 closure of its East Windsor, New Jersey facility. In
addition, the Company relocated one of its divisions to its Cranbury, New Jersey
facility and is in the process of consolidating its two Canadian operations.
In connection with the restructuring described above, the Company incurred
one-time pre-tax charges of $16,500,000 in the year ended March 31, 1996 and
$74,060,000 in the year ended March 31, 1995. The restructuring charges of
$90,560,000 recorded over the two years consist primarily of estimated employee
termination costs ($30,800,000), estimated plant closing costs including
equipment write-offs ($26,000,000) and costs associated with the planned
subleasing of office space on which the Company holds a long-term lease
($27,800,000).
The total anticipated reduction in the number of worldwide employees will be
approximately 990 including 120 vacancies that will not be filled. Through March
31, 1996, 710 employees have been terminated with employee termination costs of
$21,700,000 applied against the restructuring liability. In addition,
approximately 110 positions have been eliminated as a result of voluntary
resignations.
Net plant closing costs of $25,100,000, as well as $5,000,000 in costs
associated with the subleasing of office space on which the Company holds a
long-term lease have been applied against the restructuring liability.
Approximately $33,900,000 of the $90,560,000 provision for restructuring charges
remain to be utilized in future periods. Substantially all of the $33,900,000
represents expected future cash outlays for employee severance and subleasing
costs.
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 from
introduction through 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). In the year ended March 31,
1996 an adjustment was made to increase the provision for loss on Felbatol by
$8,200,000 as a result of higher than anticipated costs associated with ongoing
Felbatol litigation ($5,700,000) and increased product returns ($2,500,000).
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.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
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
$25,000,000 to $30,000,000 on a pre-tax basis.
DISCONTINUANCE OF THE ORGANIDIN (IODINATED
GLYCEROL) PRODUCT LINE
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. In September 1994, the Company introduced a
reformulation of the Organidin expectorant/antitussive products marketed as
Organidin NR.
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). In the year ended March 31, 1996 an adjustment was made
to reduce the provision for loss on Organidin by $5,800,000 largely as a result
of smaller than anticipated product returns.
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.
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 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. In June, 1995, the Connecticut
legislature authorized the issuance of bonds to pay for approximately $7 million
of the future cleanup costs at the site. The issuance of these bonds is expected
to reduce the amount of cleanup costs subject to PRP funding by that amount.
Based on expected PRP participation in future cleanup work and other factors,
the Company anticipates that its share of all cleanup costs subject to PRP
funding (including costs incurred to date) will be not more than 4 to 5% or
about $252,000 to $1,715,000. 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 matter discussed above will not
have a material effect on its financial statements.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
ASTELIN
Three Astelin (azelastine) New Drug Applications ("NDAs") are pending at the
FDA. Following a unanimous recommendation for approval of the Astelin Nasal
Spray NDA for seasonal allergic rhinitis by the FDA's Pulmonary Advisory
Committee in November, 1995, the Company received an "approvable letter" in
January, 1996. The letter included a request for additional chemistry
information that has been developed and will be submitted in June, 1996.
Additional formulation work is needed in connection with the Astelin tablet NDA
for rhinitis. The Company is unable to determine when and if the Astelin
rhinitis NDAs will be approved by the FDA. The Astelin tablet for asthma NDA
will be withdrawn as soon as it is determined it is no longer needed to support
the rhinitis NDAs.
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.
In December, 1995, the Company entered into a long-term private placement
financing in the amount of $35,000,000. The proceeds of this loan are primarily
being used to finance the expansion of the condom manufacturing facility in
Colonial Heights, VA.
At March 31, 1996, the Company had available various bank credit lines amounting
to $237,000,000 consisting of $215,000,000 in domestic credit lines and
$22,000,000 in foreign credit lines, of which $746,000 of the foreign lines were
utilized at March 31, 1996. There were no domestic borrowings under credit lines
at March 31, 1996. The domestic lines are made up of a $150,000,000 revolving
credit facility expiring on October 1, 2000 and $65,000,000 in uncommitted
credit lines from various banks.
The pre-tax one-time charges of $171,340,000 recorded in the years ended March
31, 1995 and March 31, 1996, consist of net cash requirements of $115,000,000
and non-cash write-offs of $56,340,000. Approximately $28,800,000 of the total
cash requirements of $115,000,000 was paid in 1995, $35,100,000 was paid in 1996
and $31,300,000 is expected to be paid in the fiscal year ending March 31, 1997.
The anticipated cash benefit from income taxes related to these one-time charges
is estimated to be $66,000,000 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 $49,000,000.
CAPITAL RESOURCES
Capital expenditures were $35,230,000 in 1996, $18,850,000 in 1995 and
$24,300,000 in 1994.
In April, 1995 the Company purchased a condom manufacturing facility in Colonial
Heights, VA. Expansion of this facility is being financed through long-term
borrowing.
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
* Boundary dog and cat repellant
* Color Guard flea and tick collars and chain products
* 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 Style 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 antifungal agent
* Clearview product line of rapid tests for the determination of pregnancy,
group A streptococcus and chlamydia
* Impact, FIAX and other branded immunoassay tests to detect a broad range of
infectious and autoimmune diseases
* 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
--------------------------
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
* 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, 1996 AND 1995
ASSETS 1996 1995
- ---------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 51,185,000 $ 40,098,000
Short-term investments, principally certificates of deposit
and government securities 20,034,000 18,188,000
Accounts receivable-trade, less allowances of
$6,716,000 in 1996 and $6,344,000 in 1995 126,288,000 119,077,000
Other receivables 5,643,000 4,728,000
Inventories
Finished goods 55,427,000 55,499,000
Work in process 13,327,000 12,359,000
Raw materials and supplies 23,450,000 21,359,000
------------ ------------
92,204,000 89,217,000
------------ ------------
Deferred taxes 32,408,000 24,832,000
Prepaid expenses and other current assets 9,011,000 7,177,000
------------ ------------
TOTAL CURRENT ASSETS 336,773,000 303,317,000
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 2,956,000 2,519,000
Buildings and improvements 99,331,000 99,128,000
Machinery, equipment and fixtures 137,645,000 126,887,000
Leasehold improvements 21,323,000 23,692,000
------------ ------------
261,255,000 252,226,000
Accumulated depreciation and amortization 121,982,000 114,618,000
------------ ------------
139,273,000 137,608,000
------------ ------------
INTANGIBLE ASSETS
Excess of purchase price of businesses acquired over the
net assets at date of acquisition, less amortization 95,628,000 90,352,000
Patents, trademarks, contracts and formulae, less
amortization 35,794,000 39,500,000
------------ ------------
131,422,000 129,852,000
------------ ------------
DEFERRED TAXES 50,803,000 57,752,000
OTHER ASSETS 60,654,000 51,695,000
------------ ------------
$718,925,000 $680,224,000
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
14
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ---------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 38,941,000 $ 31,318,000
Accrued expenses 132,331,000 134,425,000
Notes payable 6,054,000 5,416,000
Taxes on income 22,364,000 31,562,000
------------ ------------
TOTAL CURRENT LIABILITIES 199,690,000 202,721,000
------------ ------------
LONG-TERM LIABILITIES
Long-term debt 55,928,000 23,115,000
Deferred compensation 13,503,000 10,216,000
Accrued postretirement benefit obligation 68,588,000 68,969,000
Other long-term liabilities 48,320,000 48,064,000
------------ ------------
TOTAL LONG-TERM LIABILITIES 186,339,000 150,364,000
------------ ------------
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
34,613,000 shares in 1996 and 34,528,000 shares in 1995 34,613,000 34,528,000
Class B common stock, authorized 13,056,800 shares, par
value $1 per share, ten votes per share; issued 12,592,000
shares in 1996 and 12,677,000 in 1995 12,592,000 12,677,000
Capital in excess of par value 3,268,000 2,184,000
Retained earnings 310,573,000 310,407,000
------------ ------------
361,046,000 359,796,000
Less:
Foreign currency translation adjustment and other 18,059,000 18,949,000
Treasury stock at cost--676,800 common and 153,600
Class B common shares in 1996 and 872,500 common
and 153,600 Class B common shares in 1995 10,091,000 13,708,000
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 332,896,000 327,139,000
------------ ------------
$718,925,000 $680,224,000
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
15
Carter-Wallace, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF
EARNINGS AND RETAINED EARNINGS
THREE YEARS ENDED MARCH 31, 1996
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
Revenues:
Net sales $658,940,000 $663,642,000 $664,789,000
Interest income 5,128,000 3,574,000 2,339,000
Royalty and other income 3,409,000 2,762,000 3,135,000
------------ ------------ ------------
667,477,000 669,978,000 670,263,000
------------ ------------ ------------
Cost and Expenses:
Cost of goods sold 246,220,000 240,318,000 232,560,000
Advertising and promotion 123,573,000 125,450,000 128,917,000
Marketing and other selling 124,765,000 127,152,000 133,765,000
Research and development 26,494,000 41,315,000 52,278,000
General and administrative 78,634,000 81,321,000 76,937,000
Provision for restructuring of operations and
facilities 16,500,000 74,060,000 --
Provision for condom plant closing 23,100,000 -- --
Provision for loss on Felbatol 8,200,000 37,780,000 --
Provision for loss on discontinuance of the Organidin
(iodinated glycerol) product line (5,800,000) 17,500,000 --
Interest 3,889,000 2,512,000 1,976,000
Other 9,105,000 9,600,000 6,448,000
------------ ------------ ------------
654,680,000 757,008,000 632,881,000
------------ ------------ ------------
Earnings (loss) before taxes on income and cumulative
effect of accounting changes 12,797,000 (87,030,000) 37,382,000
Provision (benefit) for taxes on income 5,247,000 (30,762,000) 10,773,000
------------ ------------ ------------
Net earnings (loss) before cumulative effect of
accounting changes 7,550,000 (56,268,000) 26,609,000
Cumulative effect of accounting changes, net of tax -- -- (46,639,000)
------------ ------------ ------------
Net earnings (loss) $ 7,550,000 $(56,268,000) $(20,030,000)
------------ ------------ ------------
------------ ------------ ------------
Net earnings (loss) per average share of common stock
before
cumulative effect of accounting changes $ .16 $ (1.22) $ .58
Cumulative effect of accounting changes -- -- (1.02)
------------ ------------ ------------
Net earnings (loss) per average share of common stock $ .16 $ (1.22) $ (.44)
------------ ------------ ------------
------------ ------------ ------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Amount at beginning of year $310,407,000 $380,047,000 $415,369,000
Net earnings (loss) 7,550,000 (56,268,000) (20,030,000)
------------ ------------ ------------
317,957,000 323,779,000 395,339,000
Dividends--$.16 per share in 1996, $.29 per share in 1995
and $.33 per share in 1994 (7,384,000) (13,372,000) (15,292,000)
------------ ------------ ------------
Amount at end of year $310,573,000 $310,407,000 $380,047,000
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
16
CONSOLIDATED STATEMENTS OF
CASH FLOWS
THREE YEARS ENDED MARCH 31, 1996
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 7,550,000 $(56,268,000) $(20,030,000)
Adjustments to reconcile net earnings (loss) to cash
flows provided by operating activities:
Current period one-time charges 42,000,000 129,340,000 --
Cash payments for current and prior year one-time
charges (35,063,000) (28,819,000) --
Cumulative effect of accounting changes -- -- 46,639,000
Depreciation and amortization 15,356,000 16,359,000 15,707,000
Amortization of patents, trademarks, contracts and
formulae 6,090,000 8,723,000 9,720,000
Amortization of excess of purchase price of
businesses acquired over the net assets at date
of acquisition 3,474,000 2,760,000 2,015,000
Other changes in assets and liabilities:
(Increase) decrease in accounts and other
receivables (6,217,000) 13,845,000 19,548,000
(Increase) decrease in inventories (986,000) 1,058,000 (9,086,000)
(Increase) decrease in prepaid expenses (1,810,000) 1,301,000 1,240,000
Increase (decrease) in accounts payable and
accrued expenses 12,343,000 28,498,000 (3,237,000)
Increase (decrease) in deferred compensation 4,762,000 2,493,000 (28,000)
(Increase) decrease in deferred taxes (84,000) (45,939,000) 1,101,000
Other changes (9,605,000) (11,796,000) (566,000)
------------ ------------ ------------
Cash flows provided by operating activities 37,810,000 61,555,000 63,023,000
------------ ------------ ------------
Cash flows used in investing activities:
Additions to property, plant and equipment (35,228,000) (18,853,000) (24,305,000)
Acquisition of product lines from BioWhittaker, Inc.
and Clark Laboratories (12,977,000) -- --
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) --
Payments for the acquisition of other businesses and
licensing agreements (250,000) (1,000,000) (1,196,000)
(Increase) decrease in short-term investments (1,451,000) 14,081,000 (6,341,000)
Other investing activities 2,089,000 856,000 1,078,000
------------ ------------ ------------
Cash flows used in investing activities (47,817,000) (33,174,000) (30,764,000)
------------ ------------ ------------
Cash flows used in financing activities:
Dividends paid (7,384,000) (13,372,000) (15,292,000)
Increase in borrowings 37,033,000 6,801,000 1,343,000
Payments of debt (4,280,000) (4,348,000) (1,237,000)
Purchase of treasury stock (4,216,000) (838,000) (436,000)
------------ ------------ ------------
Cash flows used in financing activities 21,153,000 (11,757,000) (15,622,000)
------------ ------------ ------------
Effect of foreign exchange rate changes on cash
and cash equivalents (59,000) 163,000 (1,557,000)
------------ ------------ ------------
Increase in cash and cash equivalents $ 11,087,000 $ 16,787,000 $ 15,080,000
------------ ------------ ------------
------------ ------------ ------------
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and use assumptions
that affect certain reported amounts and disclosures. Actual amounts may differ.
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, 1996 and 1995.
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 no longer than 40 years for amounts
relating to acquisitions subsequent to October 31, 1970. 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.
Amounts related to intangibles acquired prior to October 31, 1970 are not
material.
The Company's policy in assessing the recoverability of intangible assets is to
compare the carrying value of the intangible assets with 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.
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed Of ". Adoption of this statement had no material impact on the
Company's financial statements.
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: 46,160,000 in
1996, 46,108,000 in 1995 and 45,900,000 in 1994. Inclusion of shares issuable
under stock option plans would not reduce reported net earnings per share.
2. INVENTORIES
Inventories computed on the last-in, first-out (LIFO) method comprised 8% and
13% of inventories included in current assets at year end 1996 and 1995,
respectively. If these inventories had been valued on the FIFO inventory method
(which approximates current or replacement cost), total inventories would have
been approximately $10,000,000 and $10,900,000 higher than reported at March 31,
1996 and 1995, respectively. Felbatol inventories of $15,350,000 at March 31,
1996 and $20,800,000 at March 31, 1995, not expected to be sold in the next
fiscal year, are included in Other Assets.
18
3. TAXES ON INCOME
The provision (benefit) for taxes on earnings before the cumulative effect of
accounting changes was as follows:
1996 1995 1994
------------- ------------- -----------
Current:
Domestic $ 415,000 $ 8,361,000 $ 5,236,000
Foreign 5,517,000 6,356,000 5,414,000
------------- ------------- -----------
5,932,000 14,717,000 10,650,000
------------- ------------- -----------
Deferred:
Domestic 816,000 (45,791,000) 455,000
Foreign (1,501,000) 312,000 (332,000)
------------- ------------- -----------
(685,000) (45,479,000) 123,000
------------- ------------- -----------
Total $ 5,247,000 $ (30,762,000) $10,773,000
------------- ------------- -----------
------------- ------------- -----------
The components of income (loss) before taxes
and the cumulative effect of accounting
changes were as follows:
Domestic $ 909,000 $(102,936,000) $24,303,000
Foreign 11,888,000 15,906,000 13,079,000
------------- ------------- -----------
Total $ 12,797,000 $ (87,030,000) $37,382,000
------------- ------------- -----------
------------- ------------- -----------
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:
1996 1995
------------ ------------
Postretirement benefit plans $ 29,193,000 $ 27,621,000
Employee benefit plans 12,455,000 13,137,000
Accrued liabilities 31,330,000 35,855,000
Asset valuation accounts 19,735,000 15,191,000
All other 15,370,000 11,871,000
Valuation allowances (3,247,000) (2,298,000)
------------ ------------
Total deferred tax assets 104,836,000 101,377,000
------------ ------------
Depreciation 13,424,000 13,218,000
All other 8,201,000 5,575,000
------------ ------------
Total deferred tax liabilities 21,625,000 18,793,000
------------ ------------
Net deferred tax assets $ 83,211,000 $ 82,584,000
------------ ------------
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
Realization of the Company's deferred tax asset of $83,211,000 is dependent on
generating sufficient taxable income in future years. Although realization is
not assured, management believes it is more likely than not that all of the
deferred tax asset will be realized, except for the valuation allowance amount.
However, the deferred tax asset could be reduced if estimates of future taxable
income are lowered. A valuation allowance is provided when it is more likely
than not that some portion of the deferred tax assets will not be realized.
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:
1996 1995 1994
----------------------- ----------------------- ----------------------
% TO % TO % TO
TAX PRE-TAX TAX PRE-TAX TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------------ ------- ------------ ------- ----------- -------
Computed tax expense (benefit) $ 4,479,000 35.0% $(30,461,000) (35.0%) $13,084,000 35.0%
Puerto Rican income (9,000) -- (910,000) (1.0) (2,855,000) (7.6)
Foreign income taxed at a
different
effective rate (8,000) -- 1,438,000 1.7 315,000 .8
State income taxes, net of
federal tax benefit 339,000 2.6 (4,989,000) (5.7) 878,000 2.4
Amortization of intangibles 606,000 4.7 829,000 .9 839,000 2.2
Valuation allowance 949,000 7.4 2,298,000 2.6 -- --
Deferred tax adjustment due to
federal tax rate change -- -- -- -- (815,000) (2.2)
Other (1,109,000) (8.7) 1,033,000 1.2 (673,000) (1.8)
------------ ------- ------------ ------ ----------- ------
$ 5,247,000 41.0% $(30,762,000) (35.3%) $10,773,000 28.8%
------------ ------- ------------ ------ ----------- ------
------------ ------- ------------ ------ ----------- ------
The U.S. Internal Revenue Service completed its examination of the Company's tax
returns through fiscal year 1995 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:
1996 1995 1994
------------ ------------ ------------
Net current assets $ 88,440,000 $ 80,147,000 $ 89,307,000
Equity in net assets 117,585,000 108,009,000 97,316,000
Net sales 206,576,000 182,190,000 159,454,000
Net earnings 7,872,000 9,238,000 7,997,000
The equity adjustment from foreign currency translation is comprised of the
following:
YEARS ENDED MARCH 31
-------------------------------
1996 1995
----------- -----------
Opening balance $18,949,000 $20,404,000
Current year (1,704,000) (1,455,000)
----------- -----------
Ending balance $17,245,000 $18,949,000
----------- -----------
----------- -----------
At March 31, 1996, the Company had entered into forward foreign exchange
contracts in the amount of $15,100,000 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.
The contracts mature in February 1997.
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes Payable
Notes payable consisting of borrowings from banks under available lines of
credit were $746,000, $4,096,000 and $1,834,000 and the current portion of
long-term debt was $5,308,000, $1,320,000 and $3,875,000 at March 31, 1996, 1995
and 1994, respectively. Data related to the amount of short-term borrowings
outstanding during the year is not presented since it is immaterial.
The Company has available various bank credit lines amounting to $237,000,000 of
which $215,000,000 is for domestic borrowings and $22,000,000 is for
international borrowings. The availability of the lines of credit is subject to
review by the banks involved. Commitment fees are immaterial.
20
Long-Term Debt
Long-term debt at March 31 is summarized below:
1996 1995
----------- -----------
Promissory Notes, 7.62%, payable in equal annual installments of
$7,000,000 from December 21, 2003 through December 21, 2007 $35,000,000 $ --
Unsecured French franc loans, at fixed and variable rates, payable in
installments through August 5, 2001 8,126,000 4,868,000
Secured Italian lira term loans, adjustable rate payable in installments
through
July 1, 2001 6,427,000 6,020,000
Connecticut Development Authority Industrial Development Bond, 6.75%
payable October 1, 1998 4,300,000 4,300,000
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 2,266,000 2,633,000
Unsecured Australian dollar term loan, 9.64%, payable in equal annual
installments through July 28, 1998 1,147,000 1,479,000
Unsecured Italian lira loans, rates of 4.5%-5.5%, payable in semi-annual
installments through July 2002 970,000 1,460,000
New Jersey Economic Development Authority Bonds, 7 3/8%, repaid in
December 1995 -- 675,000
----------- -----------
61,236,000 24,435,000
Less, current portion of long-term debt included in notes payable (5,308,000) (1,320,000)
----------- -----------
$55,928,000 $23,115,000
----------- -----------
----------- -----------
Maturities of long-term debt for each of the four fiscal years 1998 through 2001
are $3,099,000, $7,406,000, $2,734,000 and $2,803,000, respectively.
With respect to the French franc loans, interest on the adjustable rate loans is
the Paris Interbank Offered Rate plus a nominal increment, adjusted quarterly.
Fixed rates are from 7.5% to 7.75%. Arrangements were made at the inception of
the loans to convert a portion of the loans from adjustable rate to fixed rate.
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.
Interest on the Decatur, Illinois Industrial Revenue Bond is 70% of the prime
rate through December, 2000, adjustable thereafter.
The Company issued promissory notes, payable no later than September 12, 1996,
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.
Certain of the Company's long-term debt agreements contain covenants which
require the Company to maintain a minimum level of net worth and limit total
long-term liabilities to a stated percentage of total capitalization.
The fair value of long-term debt, including current maturities was $61,139,000
at March 31, 1996 and $24,633,000 at March 31, 1995.
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.
Activity for the years ended March 31, 1996, 1995 and 1994 was as follows:
CLASS B CAPITAL IN
COMMON COMMON EXCESS OF
STOCK STOCK PAR VALUE
----------- ----------- -----------
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
Conversion of Class B common stock to Common Stock 85,000 (85,000) --
Cost of treasury stock under market value at date of
award or issuance -- -- 1,084,000
----------- ----------- -----------
Balance at March 31, 1996 $34,613,000 $12,592,000 $ 3,268,000
----------- ----------- -----------
----------- ----------- -----------
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 1996, 1995 and 1994 included the
following components:
1996 1995 1994
----------- ----------- -----------
Service cost-benefits earned during the period $ 6,839,000 $ 8,019,000 $ 7,416,000
Interest cost on projected benefit obligation 14,484,000 13,689,000 11,474,000
Actual return on assets (42,145,000) (1,449,000) (16,799,000)
Net amortization and deferral 25,385,000 (15,441,000) (299,000)
Curtailment/settlement (gain) loss 1,611,000 (549,000) --
----------- ----------- -----------
Total pension expense $ 6,174,000 $ 4,269,000 $ 1,792,000
----------- ----------- -----------
----------- ----------- -----------
During the year ended March 31, 1996 the Company recognized curtailment and
settlement losses of $1,611,000 in conjunction with the planned closure of the
Trenton manufacturing plant and the Canadian facilities integration. These
losses were included as components of the respective one-time charges.
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, 1996
and 1995:
PLANS IN WHICH
-------------------------------------------------------------------
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
----------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
Actuarial present value of benefit
obligations:
Vested $113,945,000 $ 91,567,000 $ 48,981,000 $ 34,468,000
Nonvested 1,790,000 1,992,000 751,000 1,573,000
------------ ------------ ------------ ------------
Accumulated benefit obligation $115,735,000 $ 93,559,000 $ 49,732,000 $ 36,041,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Projected benefit obligation $136,445,000 $114,112,000 $ 71,480,000 $ 49,912,000
Plan assets at fair value 177,154,000 149,507,000 25,881,000 20,274,000
------------ ------------ ------------ ------------
Plan assets in excess of (less than)
projected benefit obligation 40,709,000 35,395,000 (45,599,000) (29,638,000)
Unrecognized net (gain) or loss (14,005,000) (8,554,000) 5,744,000 (2,613,000)
Prior service not recognized in pension
costs (1,442,000) (1,156,000) 14,903,000 13,619,000
Unrecognized net transition (asset)
liability (8,635,000) (10,880,000) 260,000 384,000
Minimum liability adjustment -- -- (1,357,000) (444,000)
------------ ------------ ------------ ------------
Prepaid (accrued) pension costs recognized
in the consolidated balance sheets $ 16,627,000 $ 14,805,000 $(26,049,000) $(18,692,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
The principal assumptions used in determining 1996, 1995 and 1994 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%
An amount equal to the minimum liability adjustment of $1,357,000 accrued in the
year ended March 31, 1996 has been recorded, net of anticipated tax benefits of
$543,000, as a reduction of Stockholders' Equity and included on the Balance
Sheet in the Stockholders' Equity section under the caption "Foreign currency
translation adjustment and other."
Expense for the employee savings plan under which the Company matches the
contributions of participating employees up to a designated level was
$1,506,000, $1,597,000 and $1,488,000 in 1996, 1995 and 1994 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 components of the postretirement benefit expense for the years ended March
31, 1996, 1995 and 1994 are:
1996 1995 1994
----------- ----------- -----------
Service cost -- benefits earned during the year $ 1,615,000 $ 2,068,000 $ 2,416,000
Interest cost on accumulated postretirement benefit
obligation 3,697,000 3,770,000 4,531,000
Net amortization and deferral (3,540,000) (3,198,000) (2,516,000)
Curtailment gain (1,313,000) (3,357,000) --
----------- ----------- -----------
Net periodic postretirement benefit expense (income) $ 459,000 $ (717,000) $ 4,431,000
----------- ----------- -----------
----------- ----------- -----------
23
During the year ended March 31, 1996 the Company recognized curtailment gains of
$1,313,000 in conjunction with the planned closure of the Trenton manufacturing
facility and the Canadian facilities integration. These gains were included as
credits to the respective one-time charges.
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.
The following table sets forth the accumulated postretirement benefit obligation
of the plans at March 31, 1996 and 1995:
1996 1995
----------- -----------
Retirees $26,174,000 $24,584,000
Active participants eligible for retirement 11,327,000 10,322,000
Other active participants 13,268,000 12,673,000
----------- -----------
Accumulated postretirement benefit obligation 50,769,000 47,579,000
Unrecognized net gain 7,131,000 9,826,000
Unrecognized prior service credit 10,688,000 11,564,000
----------- -----------
Accrued postretirement benefit obligation $68,588,000 $68,969,000
----------- -----------
----------- -----------
The assumed health care cost trend rate used to measure the accumulated
postretirement benefit obligation for retirees is 13 percent for 1996 trending
to 5 percent over an eight-year period. For active employees, the trend rate is
8 percent for 1996 trending to 5 percent over an eight year period. A one
percent increase in the assumed respective annual medical cost trend rate would
increase the accumulated postretirement benefit obligation by approximately
$2,800,000 and the service and interest components of net postretirement benefit
expense by $300,000.
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 1996,
1995 and 1994 under the plan.
10. LONG-TERM INCENTIVE PLANS
1977 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.
24
Award transactions for the past three years were:
SHARES
---------------------------------------------
1996 1995 1994
--------- --------- ---------
Cumulative awards--beginning of year 3,466,250 3,417,122 3,384,227
New awards -- 49,128 32,895
--------- --------- ---------
Cumulative awards--end of year 3,466,250 3,466,250 3,417,122
--------- --------- ---------
--------- --------- ---------
The financial statements reflect the transfer of the awarded shares from
treasury stock as of the date of their issuance. Outstanding awards of 151,565
shares at March 31, 1996 will 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 $6,080,000, $2,672,000 and $4,924,000 in
1996, 1995, and 1994, respectively. The cost of treasury stock for these awards
was $5,015,000, $2,463,000 and $4,434,000 in 1996, 1995 and 1994, respectively.
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.
1996 Long-Term Incentive Plan
During fiscal year 1996, the Board of Directors and subsequently the
stockholders approved the 1996 Long-Term Incentive Plan. The plan provides for
awards of not more than 4,500,000 shares of common stock, subject to adjustment
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. The awards consist of a combination of options and
restricted stock and/or deferred stock. 80% of the shares of Common Stock
covered by an award will be in the form of an Option and 20% will be in the form
of Restricted Stock and/or Deferred Stock. At March 31, 1996 there were
3,182,400 shares available for grant under the 1996 long-term incentive plan.
Options under this plan, under which both qualified and non-qualified options
may be granted, have been granted to key executive employees at fair market
value at date of grant. The right to exercise the options, in installments,
commences one year from the date of grant and expires ten years after that date.
During fiscal year 1996, options for 1,054,080 shares issued under the 1996 Plan
were granted at a price of $13.75. None of these options was exercisable at
March 31, 1996.
Restricted and/or deferred stock awards which are awarded subject to
restrictions, may not be disposed of by the recipient for a period of four 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 four year period commencing at the date of the award. During
fiscal year 1996 awards of an aggregate of 263,520 shares were made. At March
31, 1996, 57,240 of these shares have been deferred and will be issued at a
future date no later than four years from the date of the award. For shares that
have been issued in 1996 the market value on the date of the awards was
$2,836,000. The cost of treasury stock for these awards was $2,817,000. 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 December, 1995, the Company acquired the enzyme immunoassay and
immunofluorescent lines of diagnostic products from BioWhittaker, Inc. The
purchase price for these product lines was $10,000,000. The Company also agreed
to purchase certain inventories at cost.
In a separate transaction with Clark Laboratories in December, 1995, the Company
has obtained exclusive sales and marketing rights to Clark's line of enzyme
immunoassay diagnostic products in the United States and has entered into a
long-term supply agreement with Clark related to the manufacture of certain
diagnostic products. The fee for these rights was $2,000,000, a portion of which
will be paid over the next two years.
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.
25
In July, 1994, the Company acquired for approximately $3,700,000 the Curash line
of baby care and other consumer products in Australia.
These acquisitions are being accounted for by the purchase method and,
accordingly, 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
At March 31, 1996 and 1995, short-term 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
$18,577,000 and $1,457,000, respectively, in 1996, and $9,286,000 and
$8,902,000, respectively in 1995.
13. PLANNED CLOSURE OF THE TRENTON CONDOM MANUFACTURING FACILITY
As previously announced, the Company decided to close its condom manufacturing
plant in Trenton, New Jersey. It is anticipated that the closing will occur in
fiscal year 1997. The condom production currently performed at Trenton will be
transferred to the Company's facility in Colonial Heights, VA. The decision to
close the Trenton plant resulted in a one-time charge to pre-tax earnings in the
year ended March 31, 1996 of $23,100,000 ($13,630,000 after taxes or $.30 per
share), consisting of plant closing costs including equipment write-offs
($17,800,000) and employee termination costs ($5,300,000).
14. 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
engaged in a restructuring program beginning in the year ended March 31, 1995
with the intent of reducing costs and increasing efficiencies.
As part of the restructuring program, the Company 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 Taurolin (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 closure of its East Windsor, New Jersey facility. In
addition, the Company relocated one of its divisions to its Cranbury, New Jersey
facility and is in the process of consolidating its two Canadian operations.
In connection with the restructuring described above, the Company incurred
one-time pre-tax charges of $16,500,000 in the year ended March 31, 1996 and
$74,060,000 in the year ended March 31, 1995. The restructuring charges of
$90,560,000 recorded over the two years consist primarily of estimated employee
termination costs ($30,800,000), estimated plant closing costs including
equipment write-offs ($26,000,000) and costs associated with the planned
subleasing of office space on which the Company holds a long-term lease
($27,800,000).
The total anticipated reduction in the number of worldwide employees will be
approximately 990 including 120 vacancies that will not be filled. Through March
31, 1996, 710 employees have been terminated with employee termination costs of
$21,700,000 applied against the restructuring liability. In addition,
approximately 110 positions have been eliminated as a result of voluntary
resignations.
Net plant closing costs of $25,100,000, as well as $5,000,000 in costs
associated with the subleasing of office space on which the Company holds a
long-term lease have been applied against the restructuring liability.
Approximately $33,900,000 of the $90,560,000 provision for restructuring charges
remain to be utilized in future periods. Substantially all of the $33,900,000
represents expected future cash outlays for employee severance and subleasing
costs.
26
15. 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).
Carter-Wallace, Inc. is engaged in the manufacture and sale of a diversified
line of products in the Consumer Products and Health Care business segments. A
listing of the major products in each segment is included in "Description of
Business Segments" on page 13.
Consumer 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 the Company's consumer products divisions
and some are sold throughout the rest of the world by various subsidiaries and
distributors.
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 the Company's professional
products divisions and some are sold throughout the rest of the world by various
subsidiaries and distributors.
The Company sells its diversified line of products worldwide. Some of the
Company's domestic divisions sell to a small number of high volume customers,
the largest of which accounted for approximately 8.7% of consolidated net sales
during fiscal 1996.
Business Segments MARCH 31
---------------------------------------------------------
1996 1995 1994
--------- -------- --------
Sales
Health Care $ 246,578 $262,785 $296,621
Consumer
Anti-Perspirants and Deodorants 110,147 123,146 124,547
Other Consumer Products 302,215 277,711 243,621
--------- -------- --------
Consolidated $ 658,940 $663,642 $664,789
--------- -------- --------
--------- -------- --------
Operating Profit
Health Care $ 53,477 (a) $(51,222)(e) $ 37,223
Consumer
Anti-Perspirants and Deodorants (12,073)(b) (10,758)(f) (4,766)
Other Consumer Products 18,881 (c) 31,547 (g) 53,473
Interest income net of interest (expense) 1,239 1,062 363
Other (expense) net of other income (1,629) (1,765) (6,614)
General corporate expenses (47,098)(d) (55,894)(h) (42,297)
--------- -------- --------
Earnings before taxes on income $ 12,797 $(87,030) $ 37,382
--------- -------- --------
--------- -------- --------
Identifiable Assets
Health Care $ 190,926 $188,316 $219,920
Consumer
Anti-Perspirants and Deodorants 61,323 72,620 81,347
Other Consumer Products 251,544 231,525 197,550
Corporate Assets 215,132 187,763 129,745
--------- -------- --------
Total Assets $ 718,925 $680,224 $628,562
--------- -------- --------
--------- -------- --------
<FN>
(a) Includes one-time pre-tax charges of $3,743 related to restructuring and
adjustments to prior year one-time charges for Organidin (iodinated
glycerol) and Felbatol.
(b) Includes one-time pre-tax charge of $3,916 related to restructuring.
(c) Includes one-time pre-tax charge of $30,330 related to restructuring and
the planned closure of the Trenton condom manufacturing facility.
(d) Includes one-time pre-tax charge of $4,011 related to restructuring.
(e) Includes one-time pre-tax charges of $92,977 related to Organidin
(iodinated glycerol), Felbatol and restructuring.
(f) Includes one-time pre-tax charge of $5,503 related to restructuring.
(g) Includes one-time pre-tax charge of $18,685 related to restructuring.
(h) Includes one-time pre-tax charge of $12,175 related to restructuring.
27
Business Segments Continued MARCH 31
---------------------------------------------------------
1996 1995 1994
--------- -------- --------
Depreciation and Amortization
and Capital Expenditures
Depreciation and Amortization
Health Care $ 9,726 $ 11,521 $ 11,314
Consumer
Anti-Perspirants and Deodorants 3,481 3,808 3,764
Other Consumer Products 8,570 8,002 6,908
--------- -------- --------
Total Operating Segments $ 21,777 $ 23,331 $ 21,986
--------- -------- --------
--------- -------- --------
Capital Expenditures
Health Care $ 3,020 $ 4,640 $ 5,261
Consumer
Anti-Perspirants and Deodorants 1,141 1,877 7,400
Other Consumer Products 30,705 11,631 9,412
--------- -------- --------
Total Operating Segments $ 34,866 $ 18,148 $ 22,073
--------- -------- --------
--------- -------- --------
Geographic Areas
Sales
U.S.A. $ 452,364 $481,452 $505,335
Other North America 58,637 60,841 62,470
Other Countries 147,939 121,349 96,984
--------- -------- --------
Consolidated $ 658,940 $663,642 $664,789
--------- -------- --------
--------- -------- --------
Operating Profit
U.S.A. $ 47,128 (a) $(43,765)(d) $ 72,732
Other North America 1,658 (b) 5,887 (e) 5,564
Other Countries 11,499 7,445 (f) 7,634
Interest income net of interest (expense) 1,239 1,062 363
Other (expense) net of other income (1,629) (1,765) (6,614)
General corporate expenses (47,098)(c) (55,894)(g) (42,297)
--------- -------- --------
Earnings (loss) before taxes on income $ 12,797 $(87,030) $ 37,382
--------- -------- --------
--------- -------- --------
Identifiable Assets
U.S.A. $ 331,339 $330,493 $384,413
Other North America 39,342 37,474 40,608
Other Countries 133,112 124,494 73,796
Corporate Assets 215,132 187,763 129,745
--------- -------- --------
Total Assets $ 718,925 $680,224 $628,562
--------- -------- --------
--------- -------- --------
<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 $31,987 related to restructuring, the
planned closure of the Trenton condom manufacturing facility and adjustments
to prior year one-time charges for Organidin (iodinated glycerol) and
Felbatol.
(b) Includes one-time pre-tax charges of $6,002 related to restructuring and an
adjustment to the prior year one-time charge for Felbatol.
(c) Includes one-time pre-tax charges of $4,011 related to restructuring.
(d) Includes one-time pre-tax charges of $115,315 related to restructuring,
Organidin (iodinated glycerol) and Felbatol.
(e) Includes one-time pre-tax charge of $950 related to Felbatol.
(f) Includes one-time pre-tax charge of $900 related to restructuring.
(g) Includes one-time pre-tax charge of $12,175 related to restructuring.
28
16. RENTAL EXPENSE AND LEASE COMMITMENTS
Rental expense, in thousands of dollars, for operating leases with a term
greater than one year for 1996, 1995 and 1994 was
as follows:
REAL PROPERTY
RENTAL REAL SUB-RENTAL NET REAL EQUIPMENT
EXPENSE PROPERTY INCOME PROPERTY AND OTHER
- --------------- -------- ------------- -------- ---------
1996 $ 6,308 $ (484) $ 5,824 $ 2,169
1995 8,320 (688) 7,632 6,389
1994 8,322 (688) 7,634 7,250
The real property rental expense for 1996 excludes approximately $2,400 of
rental costs which have been charged to the one-time charges for restructuring
of operations and facilities.
Minimum rental commitments, in thousands of dollars, under non-cancellable
leases in effect at March 31, 1996 were as follows:
REAL PROPERTY
MINIMUM RENTAL REAL SUB-RENTAL NET REAL EQUIPMENT CAPITAL LEASE
COMMITMENTS PROPERTY INCOME PROPERTY AND OTHER OBLIGATIONS
- --------------- -------- ------------- -------- --------- -------------
1997 $ 8,632 $ (1,767) $ 6,865 $ 309 $ 49
1998 8,416 (2,968) 5,448 199 29
1999 8,241 (2,968) 5,273 137 25
2000 8,015 (2,968) 5,047 59 21
2001 8,304 (3,050) 5,254 2 18
2002-2012 74,873 (34,710) 40,163 -- 23
-------------
165
Less interest and executory cost (33)
-------------
Present value of minimum lease payments (of which $38 is included in
current liabilities) $ 132
-------------
-------------
Included in the real property rental commitments indicated above is
approximately $19,300 of future rental costs which were included in the one-time
charges for restructuring of operations and facilities. These costs are
associated with the subleasing of office space on which the Company holds a
long-term lease.
17. SUPPLEMENTAL FINANCIAL INFORMATION
The following is presented in support of balance sheet captions:
MARCH 31
--------------------------------
1996 1995
-------- --------
Intangible Assets: (dollars in thousands)
Excess of purchase price of businesses acquired over the
net assets at date of acquisition $119,836 $111,145
Trademarks 29,033 30,159
Other 32,459 35,231
-------- --------
181,328 176,535
Accumulated amortization 49,906 46,683
-------- --------
$131,422 $129,852
-------- --------
-------- --------
Accounts Payable:
Trade $ 37,464 $ 28,596
Other 1,477 2,722
-------- --------
$ 38,941 $ 31,318
-------- --------
-------- --------
Accrued Expenses:
Salaries and wages $ 28,222 $ 23,390
Advertising and promotion 17,597 20,678
One-time charges 31,272 32,617
Retirement plans 10,035 17,063
Other 45,205 40,677
-------- --------
$132,331 $134,425
-------- --------
-------- --------
Other Long-Term Liabilities:
One-time charges $ 24,011 $ 31,438
Other 24,309 16,626
-------- --------
$ 48,320 $ 48,064
-------- --------
-------- --------
Income taxes paid were $14,204,000, $7,700,000 and $11,004,000 in 1996, 1995,
and 1994 respectively. Interest paid was
$3,256,000, $2,213,000 and $1,617,000 in 1996, 1995 and 1994, respectively.
29
18. 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 from
introduction through 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). In the year ended March 31,
1996 an adjustment was made to increase the provision for loss on Felbatol by
$8,200,000 as a result of higher than anticipated costs associated with ongoing
Felbatol litigation ($5,700,000) and increased product returns ($2,500,000).
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 $25,000,000 to $30,000,000 on a pre-tax basis.
19. DISCONTINUANCE OF THE ORGANIDIN (IODINATED GLYCEROL) PRODUCT LINE
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. In September 1994, the Company introduced a
reformulation of the Organidin expectorant/antitussive products marketed as
Organidin NR.
30
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). In the year ended March 31, 1996 an adjustment was made
to reduce the provision for loss on Organidin by $5,800,000 largely as a result
of smaller than anticipated product returns.
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.
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.
20. 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 $7.0 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 $11.4 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 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 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. In June, 1995,
the Connecticut legislature authorized the issuance of bonds to pay for
approximately $7 million of the future cleanup costs at the site. The issuance
of these bonds is expected to reduce the amount of cleanup costs subject to PRP
funding by that amount. Based on expected PRP participation in future cleanup
work and other factors, the Company anticipates that its share of all cleanup
costs subject to PRP funding (including costs incurred to date) will be not more
than 4 to 5% or about $252,000 to $1,715,000. 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.
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 and a
second Amended Class Action 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
31
prospects for Felbatol were false and fraudulent, and that the Company omitted
to state material facts necessary to make 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 started using Felbatol prior to August, 1994. The complaint alleges
that the Company is liable for strict product liability, negligence, breach of
express and implied warranty, negligent infliction of emotional distress 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, thirty two individual product liability actions
related to Felbatol have been filed against the Company. Damages are specified
in fifteen of those actions ranging from $100,000 to $82,000,000. In the
aggregate the complaints seek $55,000,000 in compensatory damages and
$217,000,000 in punitive damages. In the other actions, the damages sought are
unspecified.
The Company has product liability insurance in the amount of $88,000,000 for
claims made in the year ended March 31, 1995 and has obtained comparable limits
of insurance coverage for claims made in the fiscal years ending March 31, 1996
and March 31, 1997, with certain exceptions relating to the nature of the
claimed injury. The Company believes its product liability insurance would cover
punitive damages but has not been advised by its insurance carriers what
position they might take if this were to become an issue because of the
expressed public policy of certain states against the enforceability of
insurance covering punitive damages.
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. A Second and Third Consolidated and Amended
Complaint were filed in December, 1994 and May, 1995 repeating these price
claims and, like their predecessor, seeking injunctive relief and unspecified
trebled compensatory damages, restitution of unspecified amounts by which
defendants are alleged to be unjustly enriched and litigation costs, interest
and attorney's fees. Class certification of the price-fixing conspiracy claims
was granted by order dated June 23, 1995, and an individual action brought by
two mid-size chain pharmacies was subsequently coordinated with the consolidated
class action as an add-on case asserting virtually identical claims and demands
for relief.
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 allegedly unjustly enriched and litigation costs, interest and
attorney's fees. By court order August 16, 1995, class certification was granted
to the extent of certifying a class of California consumers who purchased drugs
from independent retail pharmacies and pharmacy chains with ten or fewer
California locations. Two add-on putative class actions
32
were thereafter filed and coordinated with the consolidated class action,
seeking to expand the class to include consumers who purchased drugs from chain
pharmacies with more than ten locations in California. The expanded class has
not been certified.
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 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. In subsequent,
amended pleadings, plaintiffs have sought to reassert their class action claims,
alleging that the defendant drug manufacturers, wholesalers and health
maintenance organizations had engaged in a price-fixing conspiracy,
monopolization and attempted monopolization, fraud and civil conspiracy, in
violation of Alabama statutory and common law, and seeking a declaratory
judgment, statutory damages of $500 per instance of alleged injury, unspecified
actual and punitive damages, litigation costs and interest. No class has been
certified and defendant's motion to strike the class action allegations is now
pending before the court.
The Company along with numerous other drug manufacturers was named in a class
action lawsuit filed January, 1996 in Alabama Circuit Court, Clarke County,
brought on behalf of a class of consumers who purchased brand-name prescription
drugs from independent retail pharmacies in jurisdictions alleged to grant
standing to "indirect purchasers" to bring suit upon price overcharge claims,
including Alabama, the District of Columbia, Kansas, Maine, Michigan, Minnesota,
Mississippi, New Mexico and Wisconsin. Plaintiffs allege that, in violation of
Alabama law, defendants conspired to sell brand-name prescription drugs to
mail-order pharmacies at lower prices than those charged to independent retail
drug pharmacies and that as a result, plaintiffs have paid supra-competitive
prices for brand-name prescription drugs. The case was certified for class
treatment, remanded to federal court and conditionally transferred to the
Northern District of Illinois for consolidation with In re: Brand Name
Prescription Drugs Antitrust Litigation, MDC No. 997. Plaintiffs seek
unspecified compensatory and punitive damages, an injunction, litigation costs
and attorney's fees.
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. The Company might at
some point in time elect to attempt to settle one or more of these cases. At
this stage, however, the Company does not know whether these cases, or any of
them, will be settled or at what amounts.
The Company has been named as a defendant along with Tambrands, Inc. in a suit
filed by New Horizons Diagnostic Corporation (NHDC) et al. filed in United
States District Court, Southern District of New York. The Complaint alleges that
certain technology embodied in the Company's First Response and Answer pregnancy
test kits and ovulation predictor test kits "cup tests", which the Company
purchased from Tambrands, was misappropriated from NHDC, and that the technology
infringes certain patents owned by NHDC. In addition, the complaint alleges that
the Company's First Response and Answer pregnancy detection "stick tests"
infringe the NHDC patents, and embody certain technology misappropriated from
NHDC. The Complaint seeks an injunction against further infringement and
damages.
The Company believes it is indemnified, pursuant to a written agreement with
Tambrands, for any damages it may suffer including legal fees, up to a cap of
$12,500,000, resulting from any infringement of NHDC's patent by the Company's
pregnancy detection or ovulation prediction "cup tests", or any holding that
those products incorporate any technology misappropriated from NHDC. Tambrands
alleges that it did not misappropriate technology belonging to NHDC and,
therefore, the "cup tests" acquired from Tambrands do not infringe the NHDC
patent. The Company believes that its "stick tests" do not infringe on NHDC's
patent.
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.
33
21. 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
-----------------------------------------------
1996 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 TOTAL YEAR
- ---- -------- -------- -------- -------- ----------
Net sales $177,037 $154,810 $162,004 $165,089 $658,940
Gross margin 114,645 95,098 103,143 99,834 412,720
Net earnings (loss) 861 (4,524) 10,278 935 7,550
Earnings (loss) per share .02 (.10) .22 .02 .16
1995
- ----
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)
The quarter ended June 30, 1995 includes one-time charges to pre-tax earnings of
$20,100 for the planned closure of the Trenton condom manufacturing facility.
The quarter ended September 30, 1995 includes one-time charges to pre-tax
earnings of $16,500 consisting of $10,200 for restructuring and $6,300 related
to the consolidation of two Canadian operations.
The quarter ended March 31, 1996 includes one-time charges to pre-tax earnings
of $5,400 related to the planned closure of the Trenton condom manufacturing
plant ($3,000) and a net adjustment of the prior year one-time charges for
Felbatol (an additional $8,200) and for Organidin (a reduction of $5,800). Also
included in the quarter is an approximate $2,400 charge related to a write-off
of the carrying value of a product that is being discontinued.
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.
34
INDEPENDENT AUDITORS' REPORT
CERTIFIED PUBLIC ACCOUNTANTS
KPMG Peat Marwick LLP 345 Park Avenue
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, 1996 and 1995 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, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1996, 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.
May 6, 1996
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
T. Rosie Albright
Vice President, Consumer Products, U.S.
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
Peter J. Griffin
Vice President and Controller
Adrian J. L. Huns
Vice President, International
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
T. Rosie Albright, President, Carter Products
John Bridgen, Ph.D., President, Wampole Laboratories
Robert A. Cuthbert, President, Lambert Kay
Adrian J. L. Huns, President, International
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)
Howard E. Cocker, 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)
36
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
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