________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997 COMMISSION FILE NUMBER 1-10395
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FIRST BRANDS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 06-1171404
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
83 WOOSTER HEIGHTS ROAD
BUILDING 301, P.O. BOX 1911
DANBURY, CONNECTICUT 06813-1911
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(203) 731-2300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------------------------------- --------------------------------------------------------
Common Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
At September 2, 1997, the number of shares outstanding of the registrant's
common stock was 40,056,544 (par value $.01), and the aggregate market value of
the voting stock held by non-affiliates was $1,001,296,158.
DOCUMENTS INCORPORATED BY REFERENCE:
Registrants Proxy Statement for the Annual Stockholders Meeting to be held
October 24, 1997 is incorporated by reference for Part III
________________________________________________________________________________
TABLE OF CONTENTS
PAGE
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PART I
Item 1: Business....................................................................................... 1
Item 2: Properties..................................................................................... 3
Item 3: Legal Proceedings.............................................................................. 4
Item 4: Submission of Matters to a Vote of Security Holders............................................ 4
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters.......................... 5
Item 6: Selected Financial Data........................................................................ 6
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 7
Item 8: Financial Statements and Supplementary Data.................................................... 11
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 11
PART III
Item 10: Directors and Executive Officers of the Registrant............................................. 12
Item 11: Executive Compensation......................................................................... 14
Item 12: Security Ownership of Certain Beneficial Owners and Management................................. 14
Item 13: Certain Relationships and Related Transactions................................................. 14
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 15
Signatures................................................................................................ 32
ITEM 1 -- BUSINESS
First Brands Corporation ('First Brands' or 'the Company'), a Delaware
corporation, was organized in March, 1986 to acquire the worldwide home and
automotive products business of Union Carbide Corporation ('Union Carbide') in a
leveraged buy out which was effective as of July 1, 1986. The Company is
primarily engaged in the development, manufacture, marketing and sale of branded
and private label consumer products for the household and automotive markets.
The Company's products can be found in large merchandise and chain supermarkets
and other retail outlets. The Company believes that the significant market
positions occupied by its products are attributable to brand name recognition, a
comprehensive offering of quality products, continued product innovation, strong
emphasis on vendor support and aggressive advertising and promotion.
Home products include the most complete line of branded plastic wrap, bags
and drinking straws in the United States, Australia and Canada, which are sold
under the GLAD and GLAD-LOCK brands. Plastic bags are also sold in Canada under
the SURTEC brand and in Australia, plastic wrap and bags as well as aluminum
foils are sold under the OSO brand. In the Australian and New Zealand market,
the Company sells wiping cloths and scouring pads under the CHUX brand. Cat
litter products are sold in the U.S. and various countries under the SCOOP AWAY,
EVER CLEAN, JONNY CAT and EVER FRESH brands. Automotive performance and
appearance products are sold worldwide under the STP brand.
Through its subsidiary, Himolene Incorporated ('Himolene'), the Company is
a leading producer in the United States of high molecular weight, high density
polyethylene plastic trash can liners for the institutional and industrial
markets.
A&M Products, Inc. ('A&M'), a wholly owned subsidiary, manufactures and
markets SCOOP AWAY and EVER CLEAN cat litter, the leading brands of clumping cat
litter in the United States. During fiscal 1995, A&M acquired the cat litter and
absorbent mineral assets of Excel Mineral Inc. and Excel International Inc.
('Excel'). The assets acquired from Excel include the JONNY CAT brand of cat
care products.
In March, 1996 the Company purchased substantially all of the assets and
assumed the liabilities of Forest Technology Corporation ('Forest Technology').
Forest Technology manufactures and markets STARTERLOGG, the leading brand of
wood starter fire products, and HEARTHLOGG firelogs.
On December 26, 1996 the Company sold its SIMONIZ wax and polish business
to Syndet Products Incorporated. The impact of the divestiture did not have a
material effect on the Company, nor is it expected to in the future.
On March 14, 1997, the Company purchased, for approximately $160,000,000,
the NationalPak business in Australia and New Zealand from National Foods
Limited. NationalPak manufactures and markets consumer products such as plastic
wrap and bags, cleaning cloths and aluminum foil under the GLAD, CHUX, OSO, MONO
and ROTA brand names. The acquisition was funded by long-term borrowings in the
United States, Canada, Australia and New Zealand.
First Brands operates in foreign countries through subsidiaries in
Australia, New Zealand, Canada, South Africa, Zimbabwe, the United Kingdom,
Spain, Hong Kong, China, Mexico, Puerto Rico and the Philippines. In addition to
its foreign operations, First Brands exports to over one hundred countries and
its products are sold in twelve languages. Through its Hong Kong subsidiary,
First Brands holds a 51% interest in a joint venture in China which is engaged
in the manufacture and sale of plastic wrap and bags and automotive products.
During fiscal 1997, the Company acquired an additional 11% of its South African
subsidiary, bringing the total investment to 93% of that company's outstanding
capital stock. The Company's South African business acquired 76% of the
outstanding stock of Sealapac (PVT) Ltd., a Zimbabwe manufacturer and marketer
of plastic film products for consumers and the packaging industry, during fiscal
1997.
On August 26, 1994, the Company sold its PRESTONE antifreeze/coolant and
car care business ('the Prestone Business') to Prestone Products Corporation, a
newly formed corporation, for $142,000,000 in cash, and a $13,000,000, 7 1/2%
subordinated debenture maturing in 2003. On June 9, 1997, the $13,000,000
debenture was paid in full to the Company.
The Company was engaged in the automotive service market through the
operation of its service centers which featured its branded automotive products.
After evaluating their performance, the Company decided to phase out these
service centers. During fiscal 1995, the Company sold off all remaining assets
of its automotive service centers.
1
MANUFACTURING AND DISTRIBUTION
In general First Brands does not produce against a backlog of firm orders.
Production is geared primarily to the level of incoming orders and to
projections of future demand. Sufficient inventories of finished products,
work-in-process and raw materials are maintained to meet delivery requirements
of customers and First Brands production schedules.
There is no significant seasonal fluctuation in sales of the Company's
home, automotive, cat litter, institutional and industrial products. The
majority of fire starter and fire log sales occur during the first half of the
Company's fiscal year due to strong consumer demand during the fall and winter.
The Company's products are sold directly to retailers and to wholesalers
and can be found in large mass merchandise stores and chain supermarkets as well
as other retail outlets, including automotive supply stores, grocery stores and
price clubs. While the Company's sales are not dependent upon a single customer,
the top 25 customers account for approximately 45% of total sales, and sales to
its largest customer, the Wal-Mart Stores and Sams Wholesale Club stores, are
approximately 12% of total sales.
Sales to food outlets, which account for approximately 67% of domestic
sales of plastic wrap and bags as well as cat litter, are handled through a
network of brokers; sales to mass merchandisers are handled by First Brands'
direct sales force. Sales of automotive products are primarily handled through
First Brands' direct sales force and sold to auto supply outlets and mass
merchandisers. Himolene's sales to the institutional and industrial markets are
handled by that subsidiary's direct sales force as well as through distributors.
Sales of the Company's products in Canada are generally handled in the same
manner as domestic sales. Sales within the Australian and New Zealand markets
are primarily handled by a direct sales force. Other international sales are
handled primarily through distributors.
The following table sets forth net sales by class of products:
1997 1996 1995
(Dollars in thousands) Dollars Percent Dollars Percent Dollars Percent
- ------------------------------------------------------------------------------------------------------------------
Household Products $ 747,939 67% $ 693,406 65% $ 645,674 62%
Automotive Products 212,467 19 213,900 19 213,912 21
Pet Products 156,858 14 149,186 14 127,160 12
Divested/Discontinued Products (1) 2,634 -- 16,530 2 49,769 5
- ------------------------------------------------------------------------------------------------------------------
$1,119,898 100% $1,073,022 100% $1,036,515 100%
- ------------------------------------------------------------------------------------------------------------------
(1) Represents sales from the divested SIMONIZ business (December, 1996) and
sales from the divested PRESTONE business (August, 1994) along with sales from
the phased-out Contract Packaging business and associated operations which
related to the divested PRESTONE business.
Financial information relating to international and domestic operations and
export sales are included in Note 16 to the Company's Consolidated Financial
Statements.
The Company believes its manufacturing facilities employ state-of-the-art
technology. The plastic wrap and bag manufacturing process employs advanced
extrusion and conversion technologies. The Company's strategy is to update and
expand its manufacturing facilities with internally developed technologies (some
of which are patented) and state-of-the-art technology acquired from third-party
sources. Through improvements in existing process technologies and the
acquisition of additional equipment the Company continually strives to enhance
its production capacity and efficiency.
RAW MATERIALS AND OTHER SUPPLIES
The Company currently purchases a substantial portion of its plastic wrap
and bags raw materials pursuant to a long-term polyethylene resin requirements
contract with Union Carbide which runs through December 31, 1999. Union Carbide
is the Company's largest single supplier and the Company believes that it is
also Union Carbide's largest customer for polyethylene resin. The Company also
has contracts for the purchase of certain raw materials, including polyethylene
resin, from other suppliers, and makes purchases on the open market as well. The
pricing provisions in the Company's present supply contracts are designed to be
responsive to market conditions and the cost of relevant raw materials.
Although the Company believes that based on industry estimates and
projections, raw material costs will over the long-term remain relatively
stable, it is unable to predict with any certainty its costs of raw materials on
a month by month basis which due to market conditions may be materially higher
or lower than those experienced in past periods. To the extent raw material
costs are higher, the Company's margins on the relevant products could be
adversely affected if it is unable to increase prices, effect offsetting cost
savings, or reduce prices to meet competition. As a consequence, the Company may
be adversely affected by changes in raw material markets. The Company from time
to time is able to fix its prices on raw materials either through agreements
with suppliers or financial, commodity based contracts which in the aggregate
have not been significant to date. The Company believes that, if there were an
industry wide shortage of raw materials, it might enjoy a competitive advantage
over certain of its competitors as a result of its assured source of supply for
a substantial portion of its raw materials.
Most of the raw materials used by First Brands' home and automotive
businesses are petrochemical derivatives primarily produced from ethylene and
refined oil which in turn is largely produced from natural gas in the United
States and Canada. Historically, petrochemical and refined oil derivatives have
been subject to price fluctuations due to various factors. There can be no
assurances that future events will not precipitate price increases. The factors
which will affect the cost of raw materials to the
2
Company will generally affect competitors' raw material costs as well. However,
because several of the Company's major competitors are units of vertically
integrated enterprises or part of the much larger and financially stronger
entities, with the ability to vary internal pricing arrangements in order to
mitigate adverse movements in raw material prices, they may enjoy a competitive
advantage in their end product markets.
Most other raw materials are generally available in the marketplace and
First Brands believes that it has contracts and commitments, or a readily
available source of supply, to meet its anticipated needs in all major product
areas.
EMPLOYEES
First Brands currently employs approximately 4,800 persons worldwide, of
which about 3,300 are in the United States. The Company's employees are not
unionized with the exception of approximately 525 hourly workers at one domestic
plastic wrap and bag plant who are represented by the United Paperworkers
International Union ('UPI Union'), and approximately 600 international
employees. The contract with the UPI Union runs through November, 1999. The
Company has not experienced any significant interruptions or curtailments of
operations due to labor disputes, and considers its labor relations to be
satisfactory.
COMPETITION
First Brands operates in highly competitive markets where success is
dependent upon brand recognition, product innovation and performance, and price.
In several instances, the competitors are larger, more integrated companies with
greater financial resources than First Brands.
ENVIRONMENTAL MATTERS
Certain of the Company's operations are subject to federal, state and local
environmental laws and regulations which impose limitations on the discharge of
pollutants into the air and water and establish standards for the treatment,
storage and disposal of solid and hazardous wastes. During fiscal 1997, 1996 and
1995, First Brands made expenditures of approximately $1,818,000, $1,330,000,
and $2,950,000, respectively, for environmental compliance at its facilities,
and currently estimates that it will make expenditures for environmental
compliance of approximately $1,800,000 in fiscal 1998. The Company believes that
it is in substantial compliance with all applicable environmental laws and
regulations.
RESEARCH AND DEVELOPMENT
To enhance market share and facilitate growth, the Company continually
strives for product innovations and improvements. Through research and
development, management is committed to developing process technologies and new
products which are critical to the Company's objective of providing high
quality, innovative consumer products at costs which the Company believes are
equal to or less than those of its competitors. The Company spent $5,043,000,
$4,789,000, and $4,941,000 during fiscal 1997, 1996 and 1995, respectively, on
research and development. Included in these figures were expenditures relating
to the divested Prestone Business of $498,000, for fiscal year 1995. In addition
to state-of-the-art equipment and facilities, each business has its own Research
and Development Director and research staff to focus on its business
opportunities.
Through the use of its high molecular weight, high density polyethylene
technology, First Brands and Himolene produce stronger plastic bags with less
raw material, resulting in a conservation of resources and a reduction of
materials that eventually go into landfills. The Company presently uses recycled
plastic trimmings, post consumer recycled material and scrap in its GLAD and STP
manufacturing facilities. Packaging for all GLAD products is made with
paperboard containing reclaimed material.
ITEM 2 -- PROPERTIES
First Brands uses various owned or leased plants, technical facilities,
warehouses, distribution centers and offices in the United States, Puerto Rico,
Australia, New Zealand, Canada, South Africa, Zimbabwe, Hong Kong, China,
Mexico, the United Kingdom, Spain and the Philippines. The Company's world
headquarters is located in Danbury, Connecticut.
First Brands believes current facilities, together with planned
expenditures for normal maintenance, capacity and technological improvements,
will provide adequate production capacity to meet expected demand for its
products. Management believes that First Brands' properties and those of its
subsidiaries are in good operating condition and are suitable for the purposes
for which they are being used.
3
Listed below are the principal manufacturing facilities operated by First
Brands and its consolidated subsidiaries worldwide during fiscal 1997:
LOCATION CITY PRINCIPAL PRODUCTS
- ------------------------------- ---------------- ---------------------------------------
Domestic
Arkansas* Rogers Plastic wrap and bags
California Bell Plastic bags
California Taft Cat litter
Georgia Cartersville Plastic wrap and bags
Georgia Wrens Cat litter
Illinois West Chicago Plastic bags
Kansas Spring Hill Cat litter
Mississippi Tupelo Plastic bags
New Jersey Paulsboro Auto specialty products
Ohio Akron Fire starters and fire logs
Ohio Painesville Auto specialty products
Vermont Rutland Plastic bags
Virginia* Amherst Plastic wrap and bags
International
Australia Sydney Plastic wrap and bags
Canada Orangeville Plastic wrap and bags
China Conghua Plastic wrap and bags
New Zealand Auckland Plastic wrap and bags
Philippines Manila Auto specialty products
South Africa Babelegi Plastic film products
South Africa Cape Town Plastic film products
Wales Rassau Auto specialty products
Zimbabwe Harare Plastic film products
- ------------
* The Company has entered into agreements for the sale and leaseback of certain
production equipment at its domestic plastic wrap and bag facilities. The
Company retained the ownership of the real property and certain personal
property at each site but has leased such real property or granted easements
appurtenant thereto for 10-year terms to the facility lessor at the Arkansas
plant who, in turn, has agreed to have the Company operate and maintain such
real property and equipment facilities and has sublet such real property back
to the Company during the term of the facility lease. Subsequent to year end,
the Company repurchased all previously leased equipment at its Amherst
Virginia facility. See Notes 10 and 11 to the Company's Consolidated Financial
Statements.
Domestically, the West Chicago, Illinois, Bell, California and Akron, Ohio
plants are leased facilities, with terms which expire between 1999 and 2002.
Internationally, the New Zealand, Philippine, South African, Welsh and
Zimbabwian production facilities are leased from third parties, with lease terms
expiring between 1997 and 2016. The Philippine subsidiary, whose lease expires
in 1997, has contracted for the construction of a new facility (which is
expected to be completed in December, 1997) with a 10 year lease term. All other
production plants are owned by the Company or its wholly-owned subsidiaries.
First Brands maintains research and development facilities for its home
products and litter businesses in Willowbrook, Illinois, and for its automotive
products in Danbury, Connecticut; both facilities are under lease with terms
expiring in 2008 and 1997, respectively. The Company has contracted for the
construction of a new automotive research and development facility in
Brookfield, Connecticut. Upon its completion, which is expected in September of
1997, the Company has committed to a fifteen year lease. In addition to the
properties referenced above, First Brands maintains numerous domestic and
international administrative and sales offices and warehouses. The majority of
these premises are either leased under relatively short-term leases or owned.
ITEM 3 -- LEGAL PROCEEDINGS
The Company is subject to various claims and contingencies related to
lawsuits, taxes, environmental and other matters arising out of the normal
course of business. Management believes that the ultimate liability, if any,
arising from these and other claims and contingencies is not likely to have a
material adverse effect on the Company's annual results of operations or
financial condition.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
4
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York, Philadelphia, Midwest
and Pacific Stock Exchanges under the symbol 'FBR'. On February 5, 1996, the
Company effected a two-for-one stock split, in the form of a 100 percent stock
dividend. The following table, which has been restated to reflect the
two-for-one stock split, sets forth the high and low sales price per share of
the Common Stock during the fiscal periods indicated as reported by the NYSE and
the dividend per share paid during such fiscal periods. The approximate number
of holders of Common Stock of record as of June 30, 1997 was 653.
HIGH LOW DIVIDEND
-------------- ------------- --------
Fiscal 1997
First Quarter................................................................. 27 1/2 21 .0625
Second Quarter................................................................ 29 3/8 26 .0800
Third Quarter................................................................. 28 3/8 23 1/2 .0800
Fourth Quarter................................................................ 26 5/8 20 1/8 .0800
Fiscal 1996
First Quarter................................................................. 22 5/8 19 3/4 .0500
Second Quarter................................................................ 23 15/16 21 5/16 .0625
Third Quarter................................................................. 29 1/2 23 .0625
Fourth Quarter................................................................ 28 1/4 24 .0625
The amount of cash dividends on common stock which may be paid by the
Company is limited by the restrictions under its credit agreement. See Note 10
to the Company's Consolidated Financial Statements.
5
ITEM 6 -- SELECTED FINANCIAL DATA
The following table includes selected financial data for the five years ended
June 30, 1997 that are derived from and more fully described in the Consolidated
Financial Statements and Notes.
Years Ended (1)
- ------------------------------------------------------------------------------------------------------------------
JUNE 30, June 30, June 30, June 30, June 30,
(Dollars in millions, except per share amounts) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
Net sales $1,119.9 $1,073.0 $1,036.5 $1,086.3 $1,041.9
Operating expenses (2) 981.8 928.8 901.2 935.5 904.1
Amortization and other depreciation 13.5 15.6 16.5 20.3 19.1
Restructuring expense (3) 19.0 -- -- -- --
Interest expense and amortization of debt discount
and expense 20.4 17.5 18.8 22.4 25.6
Discount on sale of receivables (4) 4.0 4.0 4.0 4.3 4.1
Other income (expense), net (5) 2.1 1.8 (21.2) (0.1) 0.1
Income before extraordinary item (6) 50.8 65.1 43.2 60.1 52.7
Net income $ 50.2 $ 65.1 $ 38.7 $ 60.1 $ 52.7
- ------------------------------------------------------------------------------------------------------------------
Per common and common equivalent share (7):
Income before extraordinary item $ 1.22 $ 1.53 $ 1.01 $ 1.36 $ 1.20
Net income $ 1.20 $ 1.53 $ 0.91 $ 1.36 $ 1.20
Cash dividends per common share (7) $ 0.30 $ 0.24 $ 0.19 $ 0.15 $ 0.10
- ------------------------------------------------------------------------------------------------------------------
Total assets $1,053.6 $ 860.9 $ 839.9 $ 814.0 $ 830.2
Long-term debt (including current maturities) (8) $ 383.3 $ 199.5 $ 167.2 $ 153.5 $ 231.3
- ------------------------------------------------------------------------------------------------------------------
(1) Fiscal 1997 results include the operations for the NationalPak business
since its acquisition in March, 1997. Results for fiscal 1996 reflects three
months of operations for the Forest Technology business, which was acquired in
March, 1996. Fiscal 1995 results include the operations of the acquired JONNY
CAT and Multifoil businesses for twelve and two months, respectively. On August
26, 1994, the Company sold the Prestone antifreeze/coolant and car care business
("the Prestone business"), accordingly results for fiscal 1995 include only
eight weeks of operations for the Prestone business (See Note 3 to the Company's
Consolidated Financial Statements).
(2) Operating expenses include that portion of depreciation expense associated
with the production of inventory.
(3) During fiscal 1997, the Company announced a restructuring plan that is
primarily composed of the closing of a distribution and office facility and an
early retirement program. A provision of $19.0 million was made to cover the
cost of closing and disposing of the facility and personnel expenses associated
with the retirement program (See Note 2 to the Company's Consolidated Financial
Statements).
(4) Reflects costs associated with the sale of a fractional ownership interest
in the Company's accounts receivable (See Note 4 to the Company's Consolidated
Financial Statements).
(5) Other income (expense), net, for the year ended June 30, 1995 includes a
$20.4 million charge relating to the write-off of assets and the costs
associated with litigation proceedings and settlements pertaining to the
Company's formerly operated mobile recycling business. Also included is the gain
associated with the sale of the Prestone business and the loss on the disposal
of the Company's automotive service centers (See Note 15 to the Company's
Consolidated Financial Statements).
(6) Income before extraordinary item excludes the premium and the write-off of
unamortized issuance costs related to the repurchase of subordinated debt, net
of taxes, for the years ended June 30, 1997 and 1995 (See Note 10 to the
Company's Consolidated Financial Statements).
(7) All per share figures have been retroactively restated to reflect the
two-for-one stock split that was effective February 5, 1996 (See Notes 1 and 12
to the Company's Consolidated Financial Statements). Net income per common share
and common equivalent share has been computed using the weighted average number
of common shares and common share equivalents outstanding for each period.
(8) Long-term debt excludes other long-term obligations and long-term operating
lease commitments (See Notes 10 and 11 to the Company's Consolidated Financial
Statements).
6
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated results of operations
for the fiscal years ended June 30, 1997 and 1996 and the financial condition at
June 30, 1997 should be read in conjunction with the Consolidated Financial
Statements and Notes thereto of First Brands.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
The following table sets forth the components of income and expense for the two
years ended June 30, 1997, on a dollar and percentage basis.
JUNE 30, 1997 June 30, 1996
IN THOUSANDS PERCENT In Thousands Percent
- --------------------------------------------------------------------------------------------------------------
Net sales $1,119,898 100.0% $1,073,022 100.0%
Cost of goods sold (including depreciation and rent expense) 713,686 63.7 687,103 64.0
- --------------------------------------------------------------------------------------------------------------
Gross profit 406,212 36.3 385,919 36.0
Selling, general and administrative expenses 268,086 23.9 241,711 22.5
Amortization and other depreciation 13,478 1.3 15,607 1.5
Restructuring expense 19,000 1.7 -- --
Interest expense and amortization of debt discount and expenses 20,383 1.8 17,546 1.6
Discount on sale of receivables 3,992 0.4 3,963 0.4
Other income (expense), net 2,125 0.2 1,827 0.2
- --------------------------------------------------------------------------------------------------------------
Income before provision for income taxes and extraordinary item 83,398 7.4 108,919 10.2
Provision for income taxes 32,533 2.9 43,819 4.1
- --------------------------------------------------------------------------------------------------------------
Income before extraordinary item 50,865 4.5 65,100 6.1
Extraordinary loss relating to the repurchase of subordinated
debt, net of taxes (633) (0.0) -- --
- --------------------------------------------------------------------------------------------------------------
Net income $ 50,232 4.5% $ 65,100 6.1%
- --------------------------------------------------------------------------------------------------------------
Sales for the fiscal year ended June 30, 1997 were $1,119,898,000, 4% above
the prior year's sales of $1,073,022,000. Excluding the effect of acquisitions
and divestitures, sales for fiscal 1997 were slightly ahead of last year.
Sales in the household products business increased due to a full year of
sales from the new fire log and fire starter business, strong export sales
(primarily to Japan), higher international sales (resulting from the recently
acquired NationalPak business) and a slight increase in domestic unit volumes
and sales. Internationally, increased sales resulting from the aforementioned
NationalPak acquisition were partially offset by lower Canadian sales as well as
unfavorable exchange rates, primarily in South Africa. Sales of automotive
products (excluding sales from the Company's discontinued contract packaging and
other divested businesses) declined slightly during fiscal 1997 due to a soft
domestic retail market and an inventory reduction program instituted by the
Company's largest customer. Pet product sales dollars and quantities increased
as a result of continued market share growth and product introductions.
Cost of goods sold in fiscal 1997 was $713,686,000 compared to $687,103,000
in fiscal 1996. The 4% increase in costs primarily reflects higher volume sales
and increased polyethylene costs. Gross profit for the year was $406,212,000
(36% of sales), 105% of last year's $385,919,000 (36% of sales). Gross profit
dollars increased during the year due to higher sales volumes, while the gross
margin percentage was maintained between years as manufacturing efficiencies and
product mix offset increased raw material costs.
Selling, general and administrative expenses of $268,086,000 was 11% above
last year's $241,711,000. Increased spending in the domestic businesses
reflected marketing initiatives aimed at supporting new product introductions,
expanded distribution and line extensions. Internationally, excluding the recent
acquisition, spending in the current year was down slightly as marketing
programs were cut back to offset lower sales. Overhead increases also reflected
the Company's new Australia and New Zealand businesses, as well as the first
full year of operations of the new fire starter and fire log business.
Amortization and other depreciation expense of $13,478,000 was 86% of last
year's $15,607,000. The lower expense for the year reflects the impact of assets
that were fully amortized during the prior fiscal year. Amortization expense
largely relates to intangibles recorded in 1986 when the Company acquired its
businesses from Union Carbide, as well as subsequent business acquisitions. The
after-tax amounts for amortization expense on a per share basis were $0.17 and
$0.19 in fiscal 1997
7
and 1996, respectively, a portion of which is not deductible for income tax
purposes. Interest expense of $20,383,000 was 116% of last year's $17,546,000,
primarily due to borrowing costs associated with the NationalPak acquisition and
higher average borrowings during the current year, which were partially offset
by lower rates. Interest expense also includes the amortization of various
financing and legal costs that were incurred in the issuance of Company debt.
The discount on sale of receivables reflects the costs associated with the sale
of a fractional ownership interest, without recourse, in a defined pool of the
Company's eligible trade accounts receivable.
Restructuring expense in 1997 relates to the Company's $19,000,000 charge
($11,590,000 after taxes, or $0.28 per share) for initiatives aimed at
streamlining certain operating and administrative functions, reducing costs and
improving operating efficiencies. The charge is composed of employee related
costs, primarily an early retirement package, as well as asset write-downs and
disposals, mainly of a distribution facility and adjacent office center. The
Company expects that the restructuring program will be completed by December,
1998.
Other income (expense), net in 1997 primarily reflects the gain associated
with the early repayment of a long-term note receivable along with interest
income from the note that was partially offset by foreign exchange losses and
other one-time non-operating expenses. In 1996, other income (expense), net
primarily reflected accrued interest that was reversed as a result of a tax
audit settlement and interest income received on a long-term note receivable.
The Company's effective tax rate for fiscal 1997 was 39.5% compared to 40.2%
in fiscal 1996, reflecting higher favorable permanent tax differences, a lower
blended state tax rate and the inclusion of more international income taxed at
rates lower than the U.S. The provision for income taxes of $32,533,000 was 74%
of 1996's $43,819,000 because of reduced pre-tax earnings and the lower
effective tax rate.
The extraordinary loss of $633,000 or $0.02 per share resulted from the costs
associated with the repurchase of the Company's previously outstanding
$100,000,000 91/8% Senior Subordinated Notes.
Inflation was not considered to be a significant factor in the Company's
operations during fiscal 1997.
In February, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This statement simplifies the standards for computing earnings per share
("EPS") previously found in Accounting Principles Board Opinion No. 16 "Earnings
per Share," and makes them comparable to international EPS standards. SFAS No.
128 replaces primary EPS with basic EPS, and requires dual presentation of basic
and diluted EPS on the face of the income statement for all companies with
complex capital structures. The pronouncement becomes effective for financial
statements for fiscal periods ending after December 15, 1997, including interim
periods; early application is not permitted.
In June, 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way companies report information about operating segments in annual and interim
financial reports to shareholders. It also establishes standards for related
disclosures about products, geographic areas and major customers. This statement
is effective for periods beginning after December 15, 1997.
8
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
The following table sets forth the components of income and expense for the two
years ended June 30, 1996, on a dollar and percentage basis.
JUNE 30, 1996 June 30, 1995
IN THOUSANDS PERCENT In Thousands Percent
- --------------------------------------------------------------------------------------------------------------
Net sales $1,073,022 100.0% $1,036,515 100.0%
Cost of goods sold (including depreciation and rent expense) 687,103 64.0 645,886 62.3
- --------------------------------------------------------------------------------------------------------------
Gross profit 385,919 36.0 390,629 37.7
Selling, general and administrative expenses 241,711 22.5 255,283 24.6
Amortization and other depreciation 15,607 1.5 16,499 1.6
Interest expense and amortization of debt discount and expenses 17,546 1.6 18,819 1.8
Discount on sale of receivables 3,963 0.4 3,979 0.4
Other income (expense), net 1,827 0.2 (21,225) (2.1)
- --------------------------------------------------------------------------------------------------------------
Income before provision for income taxes and extraordinary item 108,919 10.2 74,824 7.2
Provision for income taxes 43,819 4.1 31,634 3.1
- --------------------------------------------------------------------------------------------------------------
Income before extraordinary item 65,100 6.1 43,190 4.1
Extraordinary loss relating to the repurchase of subordinated
debt, net of taxes -- -- (4,493) (0.4)
- --------------------------------------------------------------------------------------------------------------
Net income $ 65,100 6.1% $ 38,697 3.7%
- --------------------------------------------------------------------------------------------------------------
Sales for the fiscal year ended June 30, 1996 were $1,073,022,000, 4% above
fiscal 1995's sales of $1,036,515,000. Excluding sales from the Prestone
business, which was sold on August 26, 1994, sales increased 7% over fiscal
1995.
Increased sales in the plastic wrap and bag business resulted from higher
unit volumes and a better product mix, as well as strong international sales.
Strong sales of premium products led the increase in domestic sales, while
increases in the international business primarily reflected higher sales in
Canada as well as a full year of operations from the Company's South African
subsidiary, which was acquired in late fiscal 1995. Sales of automotive and
specialty appearance products, excluding sales from the Company's discontinued
contract packaging business and automotive service centers, were slightly below
fiscal 1995's level reflecting decreases in both the domestic and international
market (primarily Mexico), due to market softness. Pet product sales dollars and
quantities increased due to continued market and share growth as well as
distribution gains.
Cost of goods sold in fiscal 1996 was $687,103,000, 106% of fiscal 1995's
$645,886,000. The increased costs during fiscal 1996 reflects higher volume
sales and increased polyethylene costs. Gross profit for the year was
$385,919,000 (36% of sales), 99% of fiscal 1995's $390,629,000 (38% of sales).
Excluding the fiscal 1995 profit associated with the Prestone business, gross
profit for the year was 102% of 1995's $380,113,000 (38% of sales). The higher
gross profit dollars resulted from higher sales volumes while the lower gross
margin primarily reflects the increased raw material costs and higher trade
promotions in certain product lines.
Selling, general, and administrative expenses of $241,711,000 was 95% of
fiscal 1995's $255,283,000. Excluding the Prestone business, fiscal 1995
expenses were $247,443,000, 2% above fiscal 1996. The lower spending level in
fiscal 1996 reflects reductions in selected marketing programs for both the
plastic wrap and bag and automotive segments, which were partially offset by
higher spending in the pet products business. Reductions in marketing programs
were instituted to offset the higher raw material costs and higher trade
promotions incurred during fiscal 1996. Selling and marketing expenditures
increased in the cat litter business as the Company continued to support the
sales growth and distribution gains with new marketing programs.
Amortization and other depreciation expense of $15,607,000 for fiscal 1996
was 95% of 1995's $16,499,000. Excluding amortization and depreciation expenses
associated with the Prestone business, fiscal 1995 expense was $15,887,000.
Amortization expense largely relates to intangibles recorded in 1986 when the
Company acquired its businesses from Union Carbide, as well as subsequent
business acquisitions. The after-tax amounts for amortization expense on a per
share basis were $0.19 and $0.21 in fiscal 1996 and 1995, respectively, a
portion of which is not deductible for income tax purposes. Fiscal 1996 interest
expense of $17,546,000 was 93% of 1995's $18,819,000 due to lower interest
rates. Interest expense also includes the amortization of various financing and
legal costs that were incurred in the issuance of Company debt. Discount on sale
of receivables reflects the costs associated with the sale of a fractional
ownership interest, without recourse, in a defined pool of the Company's
eligible trade accounts receivable.
9
Other income (expense), net in 1996 primarily reflects accrued interest that
was reversed as a result of a tax audit settlement and interest income received
on a long-term note receivable. In 1995, other income (expense), net reflects a
$20,350,000 charge relating to the write-off of assets and the estimated costs
associated with litigation proceedings and settlements pertaining to the
Company's formerly operated mobile antifreeze recycling business. Also included
in 1995 was the gain on the sale of the Prestone business and a loss on the
disposal of the Company's automotive service centers.
The Company's effective tax rate was 40% for fiscal 1996 compared to 42% for
1995, reflecting higher favorable permanent tax differences in 1996. The
provision for income taxes of $43,819,000 was 139% of 1995's $31,634,000 due to
higher pre-tax earnings.
Inflation was not considered to be a significant factor in the Company's
operations during fiscal 1996.
FINANCIAL CONDITION
At June 30, 1997 worldwide credit facilities in place aggregated $422,521,000 of
which $183,543,000 was available but unused. Excluding any leased asset or stock
repurchases, the Company expects to repay up to $60,000,000 on these credit
facilities over the next twelve months by utilizing positive cash flow generated
by its operations. The Company also has the option to sell up to $100,000,000 of
fractional ownership interest, without recourse, in a defined pool of eligible
accounts receivable. As of June 30, 1997, $85,000,000 had been sold (See Note
4). As of June 30, 1996, the Company had long-term debt outstanding of
$380,467,000. Principal payments due on long-term debt (including current
maturities) total $32,053,000 for the five-year period beginning July 1, 1997.
During fiscal 1997, the Company repurchased, at par value, all of its
outstanding $100,000,000 91/8% Senior Subordinated Notes. The costs associated
with the repurchase are reflected as an extraordinary loss, net of taxes, of
$633,000. The funds to repurchase this debt came from operating cash flows and
the issuance of $150,000,000 71/4% Senior Notes, which become due in 2007.
To balance its exposure to fluctuations in interest rates, foreign currencies
and polyethylene resin pricing, the Company periodically enters into interest
rate swaps and foreign currency and raw material contracts. At June 30, 1997 the
Company was party to two interest swap agreements, one with a notional amount of
$50,000,000, which will expire in August, 1997 and a second with a notional
amount of $11,300,000, which will mature in 2002. The Company has entered into a
contract to fix the price of approximately 20% of its polyethylene resin
requirements for its domestic GLAD plastic wrap and bag business through
December 31, 2000. To reduce its foreign exchange risk, the Company entered into
foreign currency contracts that will limit the impact of exchange rate
fluctuations resulting from anticipated inventory purchases and intercompany
transactions. (See Note 9).
Capital expenditures, including capitalized interest, were $41,379,000 during
fiscal 1997, and $42,293,000 in fiscal 1996. The additions to property, plant
and equipment relate to the Company's emphasis on continued enhancements in
product quality, reductions in manufacturing costs, product development and
technology improvements. During fiscal 1997, the Company also acquired
previously leased equipment totaling $22,320,000.
The Company's fiscal 1998 plan reflects capital expenditures and associated
capitalized interest of approximately $42,500,000 and fixed payments (interest,
principal, receivable financing costs and lease payments) of approximately
$47,000,000.
The Company's debt agreements have restrictions on the Company's ability to
incur certain indebtedness; however, based on its working capital requirements,
the current availability under its credit facilities, and its ability to
generate positive cash flows from operations, the Company does not believe that
such limitations will have a material effect on the Company's long-term
liquidity. The Company believes that it will have the funds necessary to meet
all of its above described financing requirements and all other fixed
obligations. Should the Company undertake strategic acquisitions, requiring
funds in excess of its internally generated cash flow, it might be required to
incur additional debt.
Certain of the Company's operations are subject to federal, state and local
environmental laws and regulations which impose limitations on the discharge of
pollutants into the air and water and establish standards for the treatment,
storage and disposal of solid and hazardous wastes. The Company believes that it
is in compliance with all applicable environmental laws and regulations.
Certain forward-looking statements are contained within this report,
reflecting management's current estimate of future events. These forward-looking
statements are based on many assumptions, primarily related to the Company's
expected operating performance. Any variance from these assumptions may result
in significantly different results. There can be no assurance that future
developments will be in accordance with these estimates and assumptions.
10
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related documents of the Company and the
financial statement schedule of the Company and related documents are included
in Part IV, Item 14, of this Report.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The principal executive officers and directors of the Company are as
follows:
NAME AGE POSITION HELD WITH THE CORPORATION
- -------------------------------------------- --- ----------------------------------------------------
William V. Stephenson(4,5).................. 56 Chairman, President, Chief Executive Officer and
Director
Thomas H. Rowland(4)........................ 52 Executive Vice President, President Home Products
and Director
Donald A. DeSantis.......................... 47 Senior Vice President, Chief Financial Officer and
Treasurer
James S. Gracie............................. 39 Vice President, President of First Brands
International, Inc.
Mark E. Haglund............................. 46 Vice President, President of STP Products Inc.
Patrick J. O'Brien.......................... 41 Vice President, President of A&M Products Inc.
Ronald F. Dainton........................... 58 Vice President, Human Resources
Joseph B. Furey............................. 51 Vice President, Controller and Secretary
Einar M. Rod................................ 45 Vice President and General Counsel
A. R. (Bud) McClellan....................... 43 Assistant Controller and Assistant Secretary
Richard J. Mosback.......................... 44 Assistant Treasurer
Alfred E. Dudley(4*,5)...................... 69 Director
John C. Ferries(2,3)........................ 59 Director
James R. Maher(2,3)......................... 47 Director
James R. McManus(1,5)....................... 63 Director
Denis Newman(3*,4).......................... 67 Director
Ervin R. Shames(1*,5)....................... 57 Director
Robert G. Tobin(1,2*)....................... 59 Director
- ------------
* Denotes Chairman of Committee
(1) Member, Compensation Committee
(2) Member, Pension Committee
(3) Member, Audit Committee
(4) Member, Executive Committee
(5) Member, Nominating Committee
------------------------
The Certificate of Incorporation provides for the classification of the
Board of Directors into three classes of membership with terms expiring on
different Annual Meeting dates. Approximately one-third of the members of the
Board of Directors are nominated each year to serve as directors for a term of
three years. Directors are elected at the Annual Meeting of Stockholders for the
terms specified and continue in office until their respective successors have
been elected and have qualified. The terms of office of Messrs. Ferries, Maher,
Stephenson and Tobin expire at the Annual Meeting of Stockholders in October,
1997, the terms of office of Messrs. Newman and Shames expire at the Annual
Meeting of Stockholders in October, 1998, and the terms of office of Messrs.
Dudley, McManus and Rowland expire at the Annual Meeting of Stockholders in
October, 1999. On June 5, 1997, Mr. Dwight C. Minton resigned from the Board of
Directors and the Board elected Mr. John C. Ferries to fill the vacancy.
Executive officers and key employees are elected annually by, and serve at the
pleasure of, the Board of Directors. There are no family relationships between
any directors, executive officers or key employees of First Brands.
12
Mr. Stephenson became Chairman of the Board on January 1, 1997. He has been
President and Chief Executive Officer of the Company since September 1, 1994. He
was President and Chief Operating Officer from August, 1992 to September, 1994.
Mr. Rowland was elected President of Himolene Incorporated, a wholly owned
subsidiary of the Company on June 1, 1989. He was elected Executive Vice
President of the Company on August 11, 1992, and simultaneously was appointed
President of the Home Products Division. On November 1, 1996 he was elected a
Director of the Company.
Mr. DeSantis was elected Chief Financial Officer and Treasurer of the
Company on June 19, 1986. He relinquished the title of Treasurer on November 17,
1987 and was elected Vice President on May 26, 1988 and Senior Vice President on
November 5, 1993. He re-assumed the title of Treasurer on August 9, 1994.
Mr. Gracie was elected Vice President on August 6, 1997 and simultaneously
appointed President of First Brands International, Inc. He is also Chief
Executive Officer of First Brands (Canada) Corporation. He was Senior Vice
President, First Brands International from May, 1996 until August, 1997. Prior
to that he was CEO and President of First Brands (Canada) Corporation from
November, 1994 to May, 1996. He was Vice President, Home Products in Canada,
from March 1993 to October 1994. Mr. Gracie was Marketing Manager -- Home
Products in Canada from October 1990 to February 1993.
Mr. Haglund was appointed Vice President of Marketing for the Automotive
Products Division in March, 1992. He was appointed President of STP Products,
Incorporated on September 1, 1995, after serving as Senior Vice President and
General Manager since August 1, 1994. He was elected Vice President of the
Company on October 27, 1995.
Mr. O'Brien was appointed President of A&M Products, Incorporated on
September 1, 1995, after serving as Vice President and General Manager since
May, 1992. He was elected Vice President of the Company on October 27, 1995.
Mr. Dainton was Director of Employee Relations at First Brands from 1986 to
1989; he was elected Vice President, Human Resources of the Company on May 24,
1989.
Mr. Furey was elected Controller and Assistant Secretary of the Company on
June 19, 1986, and Vice President on November 5, 1993. He resigned as Assistant
Secretary and was elected Secretary on January 20, 1995.
Mr. Rod became General Counsel to the Company on May 20, 1996. He was
previously an attorney with PepsiCo, Inc. a manufacturer and distributor of
consumer products and provided legal counsel to PepsiCo's divisions, Pepsi-Cola
North America and Pepsi-Cola International since before 1991. He was elected
Vice President effective June 1, 1997.
Mr. McClellan served as Director of Accounting from 1992 to 1995. He was
elected Assistant Controller on January 20, 1995 and was elected Assistant
Secretary on January 26, 1996.
Mr. Mosback served as Manager of Internal Audits from 1986 to 1992. He
became Director of Finance and Internal Audits in 1993 and served in that
capacity until January, 1995. He was elected Assistant Treasurer on January 20,
1995.
Mr. Dudley was elected Chairman and Chief Executive Officer on June 19,
1986. He relinquished the title of Chief Executive Officer effective September
1, 1994 and the title of Chairman on January 1, 1997. He has been a Director of
the Company since June 19, 1986.
Mr. Ferries has been Executive Vice President of DMB&B Inc., an advertising
agency, since mid-1997, and was President of DMB&B Americas from 1993 to 1997.
Prior to that, Mr. Ferries served as President of DMB&B's Asia-Pacific and
Africa regions from 1991 to 1993. Mr. Ferries is on the Board of Directors of
DMB&B Inc. and its Executive Committee. He was elected a Director of the Company
on June 5, 1997.
Mr. Maher has been President and Chief Executive Officer of MAFCO
Consolidated Group, Inc., a diversified manufacturer, since July, 1995. He was
Chairman of Laboratory Corporation of America, a health services company, from
April, 1995 to April 1996. He was President and Chief Executive Officer
13
of Laboratory Corporation of America from December, 1992 to April, 1995. He was
elected a Director of the Company on May 26, 1988.
Mr. McManus has been Chairman, Chief Executive Officer and founder of
Marketing Corporation of America, a marketing services firm, since prior to
1986. He also serves on the Board of Au Bon Pain, Inc. On February 1, 1994, Mr.
McManus resigned as President and Chief Executive Officer of Business Express,
Inc. a regional airline operating in the Northeastern United States. On January
22, 1996, a petition for Chapter IX Bankruptcy Protection was filed against
Business Express in Federal Court in Manchester, New Hampshire by Saab Aircraft
of America and two of its operating subsidiaries. He was elected a Director of
the Company on November 18, 1986.
Mr. Newman has been a Managing Director of MidMark Associates, Inc., a
private investment firm since December, 1989. He also serves as a director of
Clearview Cinema Group, Inc. He was elected a Director of the Company on May 30,
1986.
Mr. Shames has been Chairman of Select Comfort Corporation, a mattress
manufacturer and retailer, since April, 1996 and was appointed Visiting Lecturer
at the University of Virginia's Darden Graduate School of Business in September,
1996. He was a private investor and consultant from January, 1995 to April,
1996. He was President and Chief Executive Officer of Borden, Inc., a consumer
products manufacturer, from December, 1993 to January, 1995, and was President
and Chief Operating Officer of Borden, Inc. from July, 1993 until December,
1993. Mr. Shames was Chairman and Chief Executive Officer of The Stride Rite
Corporation, a footwear manufacturer, from June, 1992 to July, 1993. He was
elected a Director of the Company on May 28, 1987.
Mr. Tobin has been Chairman and Chief Executive Officer of The Stop & Shop
Supermarket Companies, Inc. and The Stop & Shop Supermarket Company, a retail
food company, since January, 1995. He was President and Chief Executive Officer
of The Stop & Shop Supermarket Company from May, 1994 to January, 1995. He was
President and Chief Operating Officer of The Stop & Shop Supermarket Companies,
Inc. and The Stop & Shop Supermarket Company, a wholly owned subsidiary, since
March 1993 and November 1989, respectively. He was elected a Director of the
Company on September 6, 1991.
ITEM 11 -- EXECUTIVE COMPENSATION
Incorporated by reference to the section entitled 'Executive Compensation'
in the Company's Proxy Statement, dated September 22, 1997, for its 1997 Annual
Meeting of Stockholders.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the section entitled 'Beneficial Ownership of
Voting Securities' in the Company's Proxy Statement, dated September 22, 1997,
for its 1997 Annual Meeting of Stockholders.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
14
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
PAGE
----
Report of Management................................................................... 16
Independent Auditors' Report........................................................... 16
Consolidated Statements of Income -- For the Years Ended June 30, 1997, 1996 and
1995............................................................................... 17
Consolidated Balance Sheets -- June 30, 1997 and 1996.................................. 18
Consolidated Statements of Stockholders' Equity -- For the Years Ended June 30, 1997,
1996 and 1995...................................................................... 19
Consolidated Statements of Cash Flows -- For the Years Ended June 30, 1997, 1996 and
1995............................................................................... 20
Notes to Consolidated Financial Statements............................................. 21-29
(a) (2) Financial Statement Schedules
Independent Auditors' Report On Schedules............................................... 30
The following financial statement schedule of the Company as set forth
below is filed with this Report on Form 10-K:
Valuation and Qualifying Accounts (Schedule VIII) For the Years Ended June 30, 1997,
1996 and 1995..................................................................... 31
All other schedules are omitted as the required information is
inapplicable or the information is presented in the Consolidated
Financial Statements or related Notes.
(a) (3) Exhibits -- See Exhibit Index on Pages 33-34 for exhibits filed with
the Annual Report on Form 10-K, as submitted with the Securities and
Exchange Commission.
(b) Reports on Form 8-K
A Form 8-K items 5 and 7, dated February 28, 1997, reporting the Company's
intention to redeem its $100 million 9 1/8% Senior Subordinated Notes
Due 1999, subject to the completion of a private placement of $150
million 7 1/4% Senior Notes.
A Form 8-K items 2 and 7, dated March 14, 1997, reporting the acquisition
of the NationalPak business in Australia and New Zealand from National
Foods Ltd.
15
First Brands Corporation and Subsidiaries
REPORT OF MANAGEMENT
Management of First Brands Corporation is responsible for the financial and
operating information contained in the Annual Report including the financial
statements covered by the independent auditors' report. These statements were
prepared in conformity with United States generally accepted accounting
principles and include, where necessary, informed estimates and judgments.
The Company maintains systems of accounting and internal control designed to
provide reasonable assurance that assets are safeguarded against loss, and that
transactions are executed and recorded properly so as to ensure that the
financial records are reliable for preparing financial statements.
Elements of these control systems are the establishment and communication of
accounting and administrative policies and procedures, the selection and
training of qualified personnel, and continuous programs of internal audits.
The Company's financial statements are reviewed by its Audit Committee, which
is composed entirely of non-employee Directors. This Committee meets
periodically with the independent auditors, management, and the corporate
internal auditor to review the scope and results of the annual audit, interim
reviews, internal controls, internal auditing, and financial reporting matters.
The independent auditors and the corporate internal auditor have direct access
to the Audit Committee.
/s/ WILLIAM V. STEPHENSON /s/ DONALD A. DESANTIS
W. V. Stephenson D.A. DeSantis
Chairman, President and Chief Executive Officer Senior Vice President,
Chief Financial Officer
and Treasurer
August 1, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of First Brands Corporation:
We have audited the accompanying consolidated balance sheets of First Brands
Corporation and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended June 30, 1997. 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 First Brands
Corporation and subsidiaries as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
New York, New York
August 1, 1997
16
First Brands Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 1997, 1996, and 1995
(Dollars in thousands, except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Net sales $1,119,898 $1,073,022 $1,036,515
Cost of goods sold (including depreciation and rent expense of
$38,785, $36,837 and $38,447) 713,686 687,103 645,886
Selling, general and administrative expenses 268,086 241,711 255,283
Amortization and other depreciation 13,478 15,607 16,499
Restructuring expense (Note 2) 19,000 -- --
Interest expense and amortization of debt discount and expenses 20,383 17,546 18,819
Discount on sale of receivables (Note 4) 3,992 3,963 3,979
Other income (expense), net 2,125 1,827 (21,225)
- -------------------------------------------------------------------------------------------------------------
Income before provision for income taxes and extraordinary item 83,398 108,919 74,824
Provision for income taxes (Note 13) 32,533 43,819 31,634
- -------------------------------------------------------------------------------------------------------------
Income before extraordinary item 50,865 65,100 43,190
Extraordinary loss relating to the repurchase of subordinated
debt, net of taxes (Note 10) (633) -- (4,493)
- -------------------------------------------------------------------------------------------------------------
Net income $ 50,232 $ 65,100 $ 38,697
- -------------------------------------------------------------------------------------------------------------
Per common and common equivalent share (Note 1)
Income before extraordinary item $ 1.22 $ 1.53 $ 1.01
Extraordinary item (0.02) -- (0.10)
- -------------------------------------------------------------------------------------------------------------
Net Income $ 1.20 $ 1.53 $ 0.91
- -------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares
outstanding (Note 1) 41,756,802 42,600,021 42,915,198
- -------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
17
First Brands Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, 1997, and 1996
(Dollars in thousands, except per share amounts) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 7,465 $ 8,326
Accounts and notes receivable (net of allowances for doubtful accounts and
discounts of $6,842 and $6,036) (Note 4) 137,380 125,126
Inventories (Note 1) 151,976 146,002
Deferred tax assets (Note 13) 24,702 20,155
Prepaid expenses 7,551 4,662
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 329,074 304,271
Property, plant and equipment (net of accumulated depreciation of $141,691
and $111,401) (Notes 1, 5 and 11) 377,128 319,677
Patents, trademarks, proprietary technology and other intangibles (net of
accumulated amortization of $192,631 and $181,929) (Notes 1 and 6) 310,095 204,422
Deferred charges and other assets (net of accumulated amortization
of $52,029 and $50,965) 37,311 32,510
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,053,608 $ 860,880
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable (Note 7) $ 8,432 $ 4,013
Current maturities of long-term debt (Note 10) 2,811 116
Accrued income and other taxes (Note 13) 7,373 3,474
Accounts payable 61,877 61,168
Accrued liabilities (Note 8) 104,201 110,522
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 184,694 179,293
Long-term debt (Note 10) 380,467 199,355
Deferred tax liability (Note 13) 74,058 66,300
Other long-term obligations (Note 14) 20,325 16,050
Deferred gain on sale of assets (Note 11) 148 1,057
Stockholders' equity (Notes 1 and 12):
Preferred stock, $1 par value, 10,000,000 shares authorized; none issued -- --
Common stock, $0.01 par value, 120,000,000 shares authorized and 43,394,044
shares issued at June 30, 1997 and 50,000,000 shares authorized and
43,140,586 shares issued at June 30, 1996 434 431
Capital in excess of par value 130,994 126,432
Cumulative foreign currency translation adjustment (12,455) (9,321)
Common stock in treasury, at cost; 3,355,000 shares at June 30, 1997 and
1,490,000 shares at June 30, 1996 (96,837) (52,563)
Retained earnings 371,780 333,846
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 393,916 398,825
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,053,608 $ 860,880
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
18
First Brands Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 1997, 1996 and 1995
Cumulative
Common Stock Capital Foreign
--------------------------- In Excess Currency
Shares Par of Par Translation Retained Treasury
(Dollars in thousands) Outstanding Value Value Adjustment Earnings Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1994 22,005,656 $ 220 $ 117,085 $ (4,542) $ 247,967 -- $ 360,730
Cash dividends (Note 1) -- -- -- -- (8,015) -- (8,015)
Exercise of stock options 140,358 1 3,400 -- -- -- 3,401
Tax benefit related to the
exercise of employee stock
options -- -- 429 -- -- -- 429
Net income -- -- -- -- 38,697 -- 38,697
Purchase of treasury stock (1,210,700) -- -- -- -- (40,433) (40,433)
Foreign currency translation
adjustment -- -- -- (2,631) -- -- (2,631)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1995 20,935,314 $ 221 $ 120,914 $ (7,173) $ 278,649 $ (40,433) $ 352,178
Cash dividends (Note 1) -- -- -- -- (9,903) -- (9,903)
Exercise of stock options 199,195 2 4,470 -- -- -- 4,472
Tax benefit related to the
exercise of employee stock
options -- -- 1,256 -- -- -- 1,256
Net income -- -- -- -- 65,100 -- 65,100
Purchase of treasury stock (279,300) -- -- -- -- (12,130) (12,130)
Foreign currency translation
adjustment -- -- -- (2,148) -- -- (2,148)
Two-for-one stock split 20,795,376 208 (208) -- -- -- --
(Notes 1 and 12)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1996 41,650,586 $ 431 $ 126,432 $ (9,321) $ 333,846 $ (52,563) $ 398,825
Cash dividends (Note 1) -- -- -- -- (12,298) -- (12,298)
Exercise of stock options 253,458 3 3,350 -- -- -- 3,353
Tax benefit related to the
exercise of employee stock
options -- -- 1,212 -- -- -- 1,212
Net income -- -- -- -- 50,232 -- 50,232
Purchase of treasury stock (1,865,000) -- -- -- -- (44,274) (44,274)
Foreign currency translation
adjustment -- -- -- (3,134) -- -- (3,134)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1997 40,039,044 $ 434 $ 130,994 $ (12,455) $ 371,780 $ (96,837) $ 393,916
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
19
First Brands Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1997, 1996 and 1995
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 50,232 $ 65,100 $ 38,697
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 41,448 38,282 36,467
Restructuring expense 19,000 -- --
Deferred income taxes 5,808 25,808 1,585
Amortization of gain on sale/leaseback (909) (1,580) (1,551)
Loss on disposal of automotive service centers, net of gain on sale
of the Prestone business -- -- 792
Loss on repurchase of subordinated notes 1,048 -- 7,463
Change in non-cash current assets and liabilities, net of
effect of businesses sold and acquired:
(Increase) in accounts receivable (25,327) (12,052) (27,831)
Decrease (increase) in inventories 5,269 11,836 (23,009)
(Increase) decrease in prepaid expenses (2,076) (1,048) 2,252
Increase (decrease) in accrued income and other taxes 3,899 (7,263) (8,451)
(Decrease) increase in accounts payable (9,016) (10,937) 17,160
(Decrease) increase in accrued liabilities (16,036) (36,171) 19,292
Net change in current assets and current liabilities of businesses sold -- -- (20,718)
Other changes (2,869) (3,687) (6,176)
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustments 20,239 3,188 (2,725)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 70,471 68,288 35,972
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (41,379) (42,293) (47,029)
Acquisition of leased assets (22,320) (9,797) (13,240)
Acquisition of businesses, net of cash acquired (160,210) (32,255) (52,568)
Proceeds from sale of antifreeze and car care business, net of note received -- -- 142,000
Proceeds from sale of automotive service centers -- -- 5,326
Retirements of plant and equipment 1,109 1,072 1,494
Purchase and installation of information system (10,564) (5,518) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (233,364) (88,791) 35,983
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving credit facilities, net 134,346 35,000 56,300
Increase (decrease) in other borrowings, net 3,880 (3,835) 748
Increase (decrease) in securitization of accounts receivable, net 15,000 10,000 (40,000)
Issuance of 7 1/4% senior subordinated notes, net of underwriting discount 149,025 -- --
Repurchase of 9 1/8% senior subordinated notes (100,000) -- --
Repurchase of 13 1/4% subordinated notes -- -- (52,115)
Proceeds from settlement of Prestone note receivable 13,000 -- --
Proceeds from exercise of stock options 3,353 4,472 3,401
Purchase of common stock for treasury (44,274) (12,130) (40,433
Dividends paid (12,298) (9,903) (8,015)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 162,032 23,604 (80,114)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (861) 3,101 (8,159)
Cash and cash equivalents at beginning of year 8,326 5,225 13,384
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 7,465 $ 8,326 $ 5,225
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
20
First Brands Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Brands Corporation and subsidiaries ("First Brands" or the "Company")
engages in the development, manufacture, marketing and sale of consumer products
sold under branded and private labels. Principal branded products include: GLAD
and GLAD-LOCK (plastic wrap and bags); STP (oil and fuel additives and other
specialty automotive appearance products); SCOOP AWAY, EVER CLEAN, EVERFRESH and
JONNY CAT (cat litters) and STARTERLOGG and HEARTHLOGG (wood fire starters and
fire logs).
BASIS OF PRESENTATION
The accompanying financial statements reflect the consolidated accounts of the
Company for all periods presented. All material intercompany transactions and
balances have been eliminated. To prepare financial statements in conformity
with generally accepted accounting principles, management must make a number of
assumptions and estimates which affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statement, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. All
information presented is for a fiscal year, unless otherwise noted.
ACCOUNTING CHANGES
Effective July 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for Long-Lived Assets to Be Disposed
Of," which had no material effect on the consolidated financial statements of
the Company. The Company utilizes the undiscounted cash flow method to determine
impairment in the carrying value of its long-lived assets. Measurement of an
impairment loss is determined by reducing the carrying value of assets to fair
value. Assets to be disposed of by sale or abandonment, as part of a plan
committed to and approved by management, are recorded at the lower of the
carrying value or the fair value less the cost to sell.
In fiscal 1997, the Company adopted the provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." SFAS No. 123 allows companies to
either continue using the intrinsic value method permitted by Accounting
Principles Board Opinion ("APB") No. 25 "Accounting for Stock Issued to
Employees," or permits companies to measure employee stock compensation plans
under a fair value based method of accounting. The Company has elected to
continue using the measurement principles of APB No. 25 and to adopt the
expanded disclosure requirements of SFAS No. 123.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method for substantially all inventories in the
United States. In general, the average cost or FIFO method is used by the
international operations.
Inventories were comprised of the following as of June 30, 1997 and 1996:
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Raw materials $ 34,518 $ 28,549
Work in process 5,795 4,809
Finished goods 111,663 112,644
- --------------------------------------------------------------------------------
Total $151,976 $146,002
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Expenditures for replacements
are capitalized and the replaced assets are retired. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the respective
assets for accounting purposes. The Company capitalizes interest on major fixed
asset additions during construction. Interest capitalized totaled $1,864,000,
$2,017,000 and $849,000 in 1997, 1996 and 1995, respectively.
PATENTS, TRADEMARKS, PROPRIETARY TECHNOLOGY AND
OTHER INTANGIBLES
Patents, trademarks, proprietary technology and other intangibles are carried at
cost less accumulated amortization which is calculated on a straight-line basis
over the estimated useful lives of the assets, not to exceed 40 years.
DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets include financing costs that are amortized
over the terms of the respective financing agreements, as well as long-term note
receivables, purchased software, investments and assets relating to the
securitization of accounts receivable.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to expense as incurred.
Expenditures were $5,043,000, $4,789,000 and $4,941,000 in 1997, 1996 and 1995,
respectively. Included in the 1995 figure are $498,000 of expenditures relating
to the Prestone business (see Note 3).
INCOME AND DIVIDENDS PER SHARE
Net income per share is based on the weighted average number of shares of common
stock and common stock equivalents outstanding. Outstanding stock options do not
have a significant dilutive effect. On February 5, 1996, a two-for-one stock
split of the Company's common stock was effected in the form of a 100 percent
stock dividend. Accordingly, all historical weighted average share and per share
amounts have been restated to reflect the stock split. Cash dividends for fiscal
1997 and 1996 were $0.30 and
21
First Brands Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
$0.24 per share, respectively. Cash dividends for the year ended June 30,
1995 were $0.38 per share on a pre-split basis and $0.19 per share on a
post-split basis
Statement of Cash Flows
For purposes of the Statements of Cash Flows, the Company considers all highly
liquid investments with a maturity of three months or less at the date of
purchase to be cash equivalents.
Supplemental disclosure of cash flow information:
(In thousands) 1997 1996 1995
- --------------------------------------------------------------
Cash paid during the year for:
Interest $18,821 $23,674 $18,947
Income taxes $27,385 $34,380 $35,363
- ---------------------------------------------------------------
Interest payments during fiscal 1996 include $6,325,000 paid in settlement of an
IRS audit.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to the customer.
Risk Management
The Company periodically enters into various hedging transactions to minimize
the effect of fluctuations in currency exchange rates, raw material pricing and
interest rates. The foreign currency forward contracts limit the Company's
exposure to currency fluctuations associated with certain transactions, while
raw material contracts stabilize a portion of the costs associated with the
Company's resin purchases. Interest rate swaps allow the Company to better
balance its interest rate exposure between fixed and floating interest rates.
The Company does not hold or issue these financial instruments for trading
purposes.
Foreign Currency Translation
The assets and liabilities of the international subsidiaries are translated to
U.S. dollars using the exchange rates in effect at the balance sheet date.
Results of operations are translated at the average monthly exchange rate.
Resulting adjustments are recorded in a separate component of stockholders'
equity as "Cumulative foreign currency translation adjustment."
Reclassification
Certain amounts for fiscal 1996 and 1995 have been reclassified to conform to
the fiscal year 1997 classifications.
2. Restructuring
During the fourth quarter of fiscal 1997, the Company recorded a $19,000,000
restructuring charge, $11,590,000 after taxes, for initiatives aimed at
streamlining certain operating and administrative functions, reducing costs and
improving operating efficiencies. The $19,000,000 charge is composed of a
$7,300,000 charge for employee related costs, primarily an early retirement
package and related costs to obtain personnel reductions, and $11,700,000 that
is largely related to asset write-downs and disposals, mainly of a distribution
facility and adjacent office center in East Hartford, Connecticut. The Company
expects that the restructuring program will be completed by December, 1998.
3. ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
On March 14, 1997, the Company purchased, for approximately $160,000,000, the
NationalPak business in Australia and New Zealand from National Foods Limited.
NationalPak manufactures and markets consumer products such as plastic wrap and
bags, aluminum foil and cleaning cloths under the GLAD, CHUX, OSO, MONO and ROTA
brand names. The acquisition was funded by long-term borrowings in the United
States, Canada, Australia and New Zealand (see Note 10).
On March 19, 1996, the Company purchased, for approximately $32,000,000, the
net assets of Forest Technology Incorporated, the manufacturer and marketer of
the STARTERLOGG and HEARTHLOGG brand of wood fire starters and fire logs.
Effective May 1, 1995, the Company purchased, for approximately $8,700,000,
79% of the capital stock of Multifoil Holding (PTY) LTD, a South African
manufacturer and marketer of plastic film products for consumers and the
packaging industry. During fiscal 1997 and 1996, the Company acquired an
additional 11% and 3%, respectively, of Multifoil's outstanding capital stock
bringing its total investment to 93%. Effective July 1, 1996, Multifoil
acquired, for approximately $750,000, 76% of the outstanding stock of Sealapac
(PVT) LTD, a Zimbabwe manufacturer and marketer of plastic film products for the
consumer products and commercial markets.
All of the above acquisitions have been accounted for by the purchase method,
and accordingly, the results of operations of NationalPak, Forest Technology,
Multifoil and Sealapac are included in the Company's Consolidated Statements of
Income from the respective dates of acquisition. The excess of costs over net
assets acquired for the above acquisitions were $63,135,000, $30,055,000,
$5,600,000 and $570,000, respectively, and are being amortized over a forty year
period on a straight-line basis.
DIVESTITURES
During fiscal 1997, the Company sold its SIMONIZ wax and polish business to
Syndet Products Incorporated. The impact of the divestiture did not have a
material effect on the Company, nor is it expected to in the future.
22
First Brands Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On August 26, 1994, First Brands sold the Prestone antifreeze/coolant and car
care business (the "Prestone business") to Prestone Products Corporation
("Prestone"), a company organized and controlled by a private investment firm,
for $142,000,000 in cash and a $13,000,000, 7 1/2% subordinated debenture
maturing in 2003, which for financial statement purposes was valued at
$9,000,000. During fiscal 1997, Prestone repaid the entire $13,000,000 loan
resulting in a gain of approximately $2,700,000 which along with the gain
associated with the sale of the Prestone business is reflected in Other income
(expense), net, in the Consolidated Statement of Income for fiscal years 1997
and 1995, respectively.
In addition to the sale of the Prestone business, the Company sold all
remaining assets associated with its automotive service centers. The loss
associated with the disposal of this business is reflected in Other income
(expense), net, in the fiscal 1995 Consolidated Statement of Income.
4. ACCOUNTS RECEIVABLE
The Company is engaged in a program to sell, without recourse, up to
$100,000,000 in fractional ownership interest in a defined pool of eligible
trade accounts receivable. Under the current program there is an automatic
yearly renewal of the facility. As of June 30, 1997 $85,000,000 had been sold,
reflecting an additional sale of $15,000,000 during fiscal 1997. The amounts
sold are presented as reductions in accounts receivable on the accompanying
Consolidated Balance Sheets. The costs associated with this program are reported
as "Discount on sale of receivables." The purchasers' level of investment is
subject to change based on the level of eligible accounts receivable.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of June 30, 1997 and 1996 consisted of:
Useful
(In thousands) 1997 1996 Lives
- ----------------------------------------------------------------
Land and
improvements $ 18,713 $ 14,286 --
Buildings 77,847 72,274 30-40 years
Machinery
and equipment 404,019 329,185 13-15 years
Other 18,240 15,333 3-5 years
- ----------------------------------------------------------------
518,819 431,078
Less: Accumulated
depreciation (141,691) (111,401)
- ----------------------------------------------------------------
$ 377,128 $ 319,677
- ----------------------------------------------------------------
6. PATENTS, TRADEMARKS, PROPRIETARY TECHNOLOGY AND
OTHER INTANGIBLES
The Company reviews the carrying value of intangible assets whenever
circumstances dictate that the carrying amount of an asset may not be
recoverable. The primary indicators of recoverability are current or forecasted
profitability of the related acquired business, measured as profit before
interest and amortization of the related intangible assets compared to their
carrying values. For the three-year period ended June 30, 1997, 1996 and 1995
there were no material adjustments to the carrying values of intangible assets
resulting from these evaluations.
Patents, trademarks, proprietary technology and other intangibles as of June
30, 1997 and 1996 consisted of:
Useful
(In thousands) 1997 1996 Lives
- ----------------------------------------------------------------
Trademarks $ 116,866 $ 66,271 40 years
Patents, proprietary
technology and
other intangibles 162,658 162,705 10-17 years
Excess of cost over
net assets acquired 223,202 157,375 40 years
- ----------------------------------------------------------------
502,726 386,351
Less: Accumulated
amortization (192,631) (181,929)
- ----------------------------------------------------------------
$ 310,095 $ 204,422
- ----------------------------------------------------------------
7. NOTES PAYABLE
Notes payable consisted of international subsidiaries' working capital
borrowings with local banks totaling $8,432,000 and $4,013,000 at June 30, 1997
and 1996, respectively. The international credit facilities, which aggregate
$19,705,000, are generally secured by the assets of the respective international
subsidiary, with approximately $1,472,000 at one international subsidiary
guaranteed by First Brands Corporation (U.S.). The Company also borrows against
an unsecured domestic line of credit and at June 30, 1997 and 1996, the entire
$15,000,000 available under this facility was unused. The average borrowings
outstanding and average interest rates charged during fiscal 1997 and 1996 were
$10,750,000 at 10.2% and $8,981,000 at 8.9%, respectively.
23
First Brands Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. ACCRUED LIABILITIES
Accrued liabilities as of June 30, 1997 and 1996 consisted of the following:
(In thousands) 1997 1996
- ----------------------------------------------------------------
Interest 6,494 4,280
Employee benefits and wages 9,295 8,220
Marketing and sales programs 52,501 58,247
Raw material purchases 14,314 17,882
Other 21,597 21,893
- ----------------------------------------------------------------
$104,201 $110,522
- ----------------------------------------------------------------
9. FINANCIAL INSTRUMENTS
During Fiscal 1997, the Company's Australian subsidiary entered into interest
rate swaps to transform a portion of its variable rate debt into fixed rate
obligations. According to the provisions of these agreements, the Company will
pay between 6.44% and 7.07% fixed interest for up to five years and will receive
floating rate counter payments (5.35% at June 30, 1997). The difference between
interest paid and received is included as an adjustment to interest expense. The
notional amount of the contracts is $11,300,000. The Company's other interest
rate swap transaction, where the Company paid a variable rate which averaged
5.3% and received a fixed rate of 5.03% on a notional value of $50,000,000, will
expire in August, 1997. The fair value of each swap agreement may generate a
gain or loss depending on the estimated amounts that the Company would pay to
terminate the agreement based on the prevailing and anticipated interest rates
at the reporting dates.
At June 30, 1997, the Company had outstanding foreign exchange contracts
totaling $40,875,000, which will mature over the next 7 years. At June 30, 1996,
the Company had $4,500,000 in foreign exchange contracts outstanding, all of
which matured during the first quarter of fiscal 1997. These currency contracts
are used to limit the impact of exchange rate fluctuations resulting from
anticipated inventory purchases and intercompany transactions.
In May, 1997, the Company entered into a contract to fix the price of about
20% of its polyethylene resin requirements for its domestic GLAD plastic wrap
and bag business through December 31, 2000. This contract stabilizes the costs
associated with a portion of the Company's raw material needs. The counterparty
has an option to extend the contract on an annual basis through 2003. The fixed
contract price is just below the market average for the past four years.
The Company considers the risk associated with its interest, currency and
resin contracts to be relatively low because of the Company's policy to only
enter into agreements with strong credit worthy counterparties. Deferred gains
and losses on the above contracts are recognized into earnings when the related
transactions being hedged are completed. There was no significant gain or loss
associated with these contracts in fiscal 1997 and 1996.
Other financial instruments include cash and cash equivalents, accounts and
notes receivable, notes payable, accounts payable and long-term debt. Because of
the short-term nature of cash and cash equivalents, accounts and notes
receivable, notes payable and accounts payable, their carrying value
approximates fair value. A portion of the Company's long-term debt consists of
variable rate instruments, therefore the carrying value approximates fair value.
The fair value of the Company's long-term fixed rate debt approximates the
carrying value as of June 30, 1997 and 1996.
10. LONG-TERM DEBT
First Brands had the following long-term debt as of June 30, 1997 and 1996:
(In thousands) 1997 1996
- ----------------------------------------------------------------------
>
Senior Debt(a):
$300,000,000 Revolving Credit
Facility, 5 year term expiring
February 2002, interest at prime
rate, LIBOR plus .275% or CD
rate plus .4%; facility fee
of .15% $162,000 $95,000
$75,380,000 Australian and
New Zealand Credit Facility,
7 year term expiring March 2004,
interest at local Bill Rate plus .7% 58,727 --
$11,586,000 Canadian Credit Facility,
5 year term expiring March 2002,
interest at Canadian prime rate,
LIBOR plus .425% or Canadian Bankers
Acceptance plus .425% 8,619 --
Other 3,932 4,471
- ----------------------------------------------------------------------
233,278 99,471
Less current maturities (2,811) (116)
- ----------------------------------------------------------------------
Senior Debt 230,467 99,355
Subordinated Debt (b):
71/4% Senior Notes Due 2007 150,000 --
91/8% Senior Subordinated
Notes due 1999 -- 100,000
- ----------------------------------------------------------------------
Total Long-term Debt $380,467 $199,355
- ----------------------------------------------------------------------
(a) The Company amended its domestic revolving credit facility effective
February 28, 1997. The amendments to the facility provide the Company with more
favorable borrowing rates, reduce certain restrictive covenants pertaining to
the ratio of debt to equity, and extend the facility to February 28, 2002 from
December 31, 1999. Additionally, the facility permits a greater amount of
restricted payments
24
First Brands Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
such as dividends and stock repurchases, grants more
flexibility to foreign subsidiaries for borrowing money and in some
circumstances, excludes certain foreign subsidiaries from financial covenant
calculations.
The seven-year $75,380,000 Australian and New Zealand credit facility is
composed of two parts; one of which was used to acquire the NationalPak business
(see Note 3) and a second part that can be used for working capital needs. There
are fixed periodic payments associated with the acquisition borrowing and the
working capital borrowing can be drawn on and repaid at NationalPak's
discretion. The facility is secured by the accounts receivable, inventory and
fixed assets of NationalPak.
The five-year $11,586,000 Canadian credit facility requires fixed periodic
payments. The facility is secured by the accounts receivable, inventory and
fixed assets of the Canadian business.
(b) During fiscal 1997, the Company issued $150,000,000 of 71/4% Senior Notes
(the "71/4% Notes") which will become due on March 1, 2007. Proceeds from the
sale of the 71/4% Notes were used to redeem all of the Company's 91/8% Senior
Subordinated Notes (the "91/8% Notes") and to reduce bank debt. The Company
elected to redeem its 91/8% Notes and accordingly all notes were called and
repurchased, at par value, during fiscal 1997. The write-off of unamortized
issuance costs and other expenses associated with the repurchase of the 91/8%
Notes has been recorded as an extraordinary charge on the Company's Consolidated
Statement of Income.
The 71/4% Note Indenture contains certain restrictive covenants and
limitations the most significant of which relates to the Company's right to
incur debt and to engage in certain sale and leaseback transactions.
First Brands was in compliance with all the covenants of the senior and
subordinated debt agreements at June 30, 1997.
Principal payments due on long-term debt (including current maturities) will
require the following future payments: $2,811,000 in fiscal 1998, $3,747,000 in
fiscal 1999, $6,149,000 in fiscal 2000, $7,033,000 in fiscal 2001, $12,313,000
in fiscal 2002 and $351,225,000 thereafter.
11. LEASES
The Company has entered into agreements for the sale and leaseback of certain
production equipment at its domestic plastic wrap and bag plants. The Company
has purchase and lease renewal options at projected future fair market values
under the agreements. The leases are classified as operating leases in
accordance with SFAS No. 13 "Accounting for Leases."
Equipment under lease as of June 30, 1997 had an original net book value of
$72,147,000 at the lease origination date. The value was removed from the
balance sheet, and the gains realized on the sale transactions totaling
$2,492,000 have been deferred and are being credited to income as rent expense
adjustments over the lease terms. The average yearly lease payments associated
with this equipment are $11,545,000.
The Company is in compliance with all covenants associated with its lease
agreements as of June 30, 1997.
The Company and its subsidiaries also maintain operating leases for various
warehouses, office facilities and equipment generally over periods ranging from
one to fifteen years with options to renew.
Lease commitments under non-cancelable operating leases extending for one
year or more require the following future payments: $10,439,000 in 1998,
$4,489,000 in 1999, $3,327,000 in 2000, $2,505,000 in 2001, $2,464,000 in 2002
and $10,873,000 thereafter. The total rental expense under operating leases was
$16,035,000, $20,856,000 and $24,345,000 for the years ended June 30, 1997, 1996
and 1995, respectively.
12. CAPITAL STOCK
Share amounts presented in the Consolidated Balance Sheets and Consolidated
Statements of Stockholders' Equity reflect the actual share amounts outstanding
for each period presented. On February 5, 1996, the Company effected a two
- -for-one split of common stocks. The following share and per share amounts for
options granted, exercised, canceled and outstanding have been restated to
reflect the two-for-one stock split.
During 1989, the Company established the 1989 Long-Term Incentive Plan (the
"1989 Plan") under which awards of non-qualified stock options were granted to
certain key employees of the Company. The 2,810,000 options associated with the
1989 Plan have been granted and are fully vested. During 1994, the Company
established the 1994 Performance Stock Option and Incentive Plan (the "1994
Plan"), which awarded key employees non-qualified stock options, as well as
restricted and limited stock appreciation rights. The maximum number of shares
of Common Stock that could be granted under the 1994 Plan is 2,180,000. Through
June 30, 1997, 1,960,000 options have been granted under the 1994 Plan, of which
764,000 have vested. During 1995, the Company established the Non-Employee
Director Stock Option Plan (the "1995 Plan"), which awards each non-employee
director options to purchase shares of the Company's Common Stock. The maximum
number of shares of Common Stock that could be granted under the 1995 Plan is
120,000. Through June 30, 1997, 46,000 options have been granted under the 1995
Plan, but none have vested. Stock options granted under the 1989, 1994 or 1995
Plans have terms not in excess of ten years. The exercise price for stock
options may not be less than the fair market value of the Common Stock on the
date of grant and such options will vest over a period determined by the
Compensation Committee.
25
First Brands Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the options transactions for the years ended June 30, 1997, 1996
and 1995 follows:
1997 1996 1995
- ---------------------------------------------------------------------------
Options outstanding,
beginning of fiscal
year 2,943,822 2,613,380 2,023,596
Options granted--
per share:
$28.25 14,000 -- --
$26.00 559,000 -- --
$22.53 -- 637,000 --
$22.69 -- 32,000 --
$16.38 -- -- 882,000
Options exercised--
per share $9.50 to
$16.38 (253,350) (328,558) (280,716)
Options canceled--
per share $14.72 to
$28.25 (6,000) (10,000) (11,500)
Options outstanding,
end of fiscal year 3,257,472 2,943,822 2,613,380
Exercise price range $9.50 to $9.50 to $9.50 to
per share $28.25 $22.69 $16.38
Exercisable at June 30 2,028,472 2,287,822 1,744,380
Available for grant at
June 30 211,152 718,152 1,317,152
- ---------------------------------------------------------------------------
The following tables set forth information regarding stock options
outstanding and those options which are exercisable as of June 30, 1997:
OUTSTANDING Weighted Weighted
Stock Average Average
Range of Options Exercise Remaining
Exercise Prices Outstanding Price Life
- ---------------------------------------------------------------------------
$9.50-$12.66 790,972 $11.67 3.6
$14.66-$16.38 1,237,500 $15.71 6.7
$22.53-$28.25 1,229,000 $24.17 9.1
- ---------------------------------------------------------------------------
3,257,472 $17.92 6.8
- ---------------------------------------------------------------------------
EXERCISABLE Weighted
Stock Average
Range of Options Exercise
Exercise Prices Exercisable Price
- ---------------------------------------------------------------------------
$9.50-$12.66 790,972 $11.67
$14.66-$16.38 1,237,500 $15.71
$22.53-$28.25 0 $24.17
- ---------------------------------------------------------------------------
2,028,472 $14.14
- ---------------------------------------------------------------------------
Limited stock appreciation rights may be granted in tandem with a stock
option grant or at any time following the stock option grant and are only
exercisable upon a change of control of the Company. A limited stock
appreciation right will exercise automatically following certain changes in
control of the Company, and upon such exercise the grantee, in cancellation of
the underlying stock options, will receive cash equal to the excess of the fair
market value of each share of Common Stock subject to the limited stock
appreciation right over the exercise price of the underlying stock option.
Limited stock appreciation rights have been granted with respect to 1,228,000
shares.
The Company applies APB No. 25 in accounting for its stock based compensation
plans. Accordingly, no compensation cost has been recognized for its time vested
option plans. Had compensation cost for the Company's stock based compensation
plans been determined by the fair-value method prescribed by SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below.
(In thousands JUNE 30, June 30,
except per share amounts) 1997 1996
- ---------------------------------------------------------------------------
Income before
extraordinary item
As Reported $50,865 $65,100
Pro Forma $49,641 $64,115
Earnings Per Share
As Reported $1.22 $1.53
Pro Forma $1.19 $1.51
- ---------------------------------------------------------------------------
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model method. The following weighted-average
assumptions were used for grants in fiscal 1997 and 1996, respectively: dividend
yield of 1.3% for both years; expected volatility of 25.8% and 21.9%; risk free
interest rate of 5.25% for both years; and expected lives of 9.9 years for both
years.
13. INCOME TAXES
The components of earnings before income taxes and extraordinary item are as
follows:
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
United States $75,790 $100,236 $68,222
International 7,608 8,683 6,602
- ---------------------------------------------------------------------------
Income before taxes
and extraordinary
items $83,398 $108,919 $74,824
- ---------------------------------------------------------------------------
26
First Brands Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Total income taxes for the years ended June 30, 1997, 1996 and 1995 were
allocated as follows:
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
Income taxes before
extraordinary loss $32,533 $43,819 $31,634
Extraordinary loss (415) -- (2,970)
Stockholders' equity-
tax benefit related
to the exercise
of employee stock
options (1,212) (1,256) (429)
- ---------------------------------------------------------------------------
Total income taxes $30,906 $42,563 $28,235
- ---------------------------------------------------------------------------
Income tax expense attributable to income before taxes and extraordinary loss
for the years ended June 30, 1997, 1996 and 1995 consists of the following:
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
Current:
Federal $20,418 $11,640 $22,718
State 3,539 2,566 4,995
Foreign 2,768 3,805 2,336
- ---------------------------------------------------------------------------
Total current 26,725 18,011 30,049
- ---------------------------------------------------------------------------
Deferred:
Federal 4,638 20,916 1,442
State 1,028 5,275 320
Foreign 142 (383) (177)
- ---------------------------------------------------------------------------
Total deferred 5,808 25,808 1,585
- ---------------------------------------------------------------------------
Total provision $32,533 $43,819 $31,634
- ---------------------------------------------------------------------------
Income tax expense attributable to income before extraordinary loss differs
from the amounts computed by applying the U.S. federal tax rate of 35 percent to
pre-tax income before extraordinary loss as a result of the following:
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
Computed "expected"
tax expense $29,189 $38,122 $26,188
Adjustments to income
taxes resulting from:
Amortization of
goodwill 703 440 1,701
State income taxes,
net of Federal income
tax benefit 2,919 4,713 3,455
Foreign income tax in
excess of statutory rate 238 478 42
Other, net (516) 66 248
- ---------------------------------------------------------------------------
Actual tax expense $32,533 $43,819 $31,634
- ---------------------------------------------------------------------------
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1997 and 1996 are presented below:
(In thousands) 1997 1996
- ---------------------------------------------------------------------------
Current deferred tax assets:
Accounts receivable reserves $2,969 $3,743
Difference between book and
tax basis of inventories 3,882 3,749
Accrued liabilities, not
deductible until paid 17,851 12,663
- ---------------------------------------------------------------------------
Total current deferred tax assets 24,702 20,155
- ---------------------------------------------------------------------------
Long-term deferred tax assets
and liabilities:
Pension liability,
past service cost 3,142 3,344
Intangible asset, not
amortized for tax 6,441 6,587
Deferred gain on sale
of assets 58 420
- ---------------------------------------------------------------------------
Total long-term deferred
tax assets 9,641 10,351
- ---------------------------------------------------------------------------
Plant and equipment,
principally due to
differences in depreciation (77,869) (68,916)
Purchase accounting and
other, net (4,168) (4,052)
Foreign subsidiaries (1,662) (3,683)
- ---------------------------------------------------------------------------
Total long-term deferred
tax liabilities (83,699) (76,651)
- ---------------------------------------------------------------------------
Long-term deferred tax
liability, net (74,058) (66,300)
- ---------------------------------------------------------------------------
Net deferred tax liability $(49,356) $(46,145)
- ---------------------------------------------------------------------------
Management of the Company has determined, based on the Company's history of
operating earnings and its expected income, that operating income will more
likely than not be sufficient to fully utilize these deferred tax assets as they
mature.
The Company has not provided for Federal income taxes on the undistributed
income of its international subsidiaries because it is the Company's intention
to reinvest such undistributed income. Cumulative undistributed earnings for
which no U.S. tax has been provided were $48,787,000, $44,921,000 and
$40,002,000 for the years ended June 30, 1997, 1996 and 1995 respectively.
27
First Brands Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. EMPLOYEE BENEFITS
RETIREMENT PLANS
First Brands maintains a non-contributory defined benefit retirement plan
("pension plan") and defined contribution pre and post-tax savings plans
("savings plan"). During fiscal 1995, the Board of Directors approved amendments
to the Company's U.S. pension and savings plans. These amendments did not result
in any significant change to overall costs.
The Company contributes to the savings plan account of each eligible
employee. Any regular employee of First Brands or its domestic subsidiaries is
eligible to participate in the amended savings plan. The Company matches 50% of
employee contributions up to the lower of statutory limits or 3% of base pay.
Savings plan expense for the years ended June 30, 1997, 1996 and 1995 totaled
$2,194,000, $2,028,000 and $1,375,000, respectively. Beginning in fiscal 1996,
the Company maintains a noncontributory profit sharing plan, to which it
provides a profit sharing contribution to each eligible employee's account in
the savings plan. The contribution is discretionary and is based on the
Company's operating performance. The Company's profit sharing contributions are
in the form of existing issued and outstanding shares of First Brands Common
Stock. The costs associated with the profit sharing plan were $445,000 and
$730,000 for the fiscal years ended June 30, 1997 and 1996, respectively.
The pension plan for First Brands and several of its subsidiaries provides
defined benefits that are based on years of credited service, highest average
compensation (as defined) and the primary social security benefit. The U.S.
pension plan amendment changes this formula, effective January, 2000, to a
defined benefit based on years of credited service and career average
compensation. Pension plan assets primarily consist of corporate equities, as
well as corporate and government fixed income obligations. Contributions to the
plan are based upon the projected unit credit actuarial cost funding method and
are limited to amounts that are currently deductible for tax purposes. Prior
service costs are amortized on a straight-line basis over the average remaining
service period for active plan participants.
During fiscal 1997, the Company announced an early retirement program (see
Note 2) for which it recorded a special termination charge of $1,400,000. The
Company's Canadian subsidiary terminated its defined pension plan and
transferred all eligible employees to a new group registered retirement savings
plan which provides essentially the same benefits as the former plan. As a
result of the plan termination, the Company recognized a $530,000 curtailment
gain during fiscal 1997. The sale of the Prestone business resulted in a
settlement loss of $54,000 during fiscal 1995.
The following table sets forth the combined U.S., Australian and Canadian
plans' net pension cost, funded status and amounts recognized in the Company's
Consolidated Financial Statements at June 30, 1997, 1996 and 1995:
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
Net pension cost
included the following
components:
Service cost--
benefits earned
during the period $3,275 $3,455 $3,734
Interest cost on
projected benefit
obligations 6,177 4,984 4,910
Actual return on plan
assets (6,898) (6,838) (7,435)
Net amortization and
deferral (816) (81) 1,469
Cost of special
termination benefit 1,400 -- --
Curtailment (gain) (530) -- --
Settlement loss -- -- 54
- -----------------------------------------------------------------------------
Total $2,608 $1,520 $2,732
- -----------------------------------------------------------------------------
(In thousands) 1997 1996
- -----------------------------------------------------------------------------
Reconciliation of funded status:
Vested accumulated benefit
obligation $63,796 $52,374
Non-vested accumulated benefit
obligation 6,753 6,268
- -----------------------------------------------------------------------------
Accumulated benefit obligation 70,549 58,642
Additional liability based on
projected compensation 18,251 10,092
- -----------------------------------------------------------------------------
Projected benefit obligation 88,800 68,734
Fair value of plan assets 89,381 73,006
- -----------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 581 4,272
Unrecognized prior service
(benefits) (7,025) (8,496)
Unrecognized net loss (gain) 206 (3,699)
Projected benefit obligation in
excess of plan assets--
recorded at acquisition date 9,554 9,595
Prepaid cost (3,316) (1,672)
- -----------------------------------------------------------------------------
Accrued pension cost included
in accrued liabilities $0 $0
- -----------------------------------------------------------------------------
28
First Brands Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
To calculate the expense and liability associated with its pension plans, the
Company utilizes certain assumptions. For the U.S. pension plan, the weighted
average discount rate, the rate of increase in compensation and the expected
long-term rate of return on plan assets was 8.0%, 4.5% and 9.5%, respectively,
for 1997, 1996 and 1995. For the Canadian pension plan, the weighted average
discount rate, the compensation increase rate and the rate of return on plan
assets was 8.5%, 5.0% and 8.5%, respectively, for 1997, 1996 and 1995. For the
Australian pension plan, the weighted average discount rate, the compensation
increase rate and the rate of return on plan assets was 6.0%, 4.0% and 7.5% for
1997.
Federal law restricts the amount of benefits that can be paid from a
qualified plan. First Brands maintains an unfunded non-qualified plan, the
effect of which is to award retirement benefits to all employees on a uniform
basis. Expenses associated with this plan were $564,000 $297,000, $189,000
during 1997, 1996 and 1995, respectively.
POSTRETIREMENT BENEFITS
The Company provides certain medical and life insurance benefits for retirees
and their dependents in the United States. Employees who have reached the age of
55, and have met the Company's minimum service requirements, become eligible for
these benefits. The medical and life insurance benefits available are partially
contributory in nature, and it is the Company's practice to fund these benefits
as incurred. Retirees outside the United States are generally covered by locally
sponsored government programs.
Following is an analysis of postretirement benefit costs for fiscal 1997,
1996 and 1995:
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------
Service cost $ 370 $ 297 $ 386
Interest cost 1,129 1,112 1,378
Unrecognized net (gain) (36) -- --
Amortization of
prior service cost 92 -- --
Amortization of
transition obligation 583 583 770
- ----------------------------------------------------------------
Net postretirement
benefit cost 2,138 1,992 2,534
Cost of special
termination benefit 1,600 -- --
Curtailment loss -- -- 1,050
- ----------------------------------------------------------------
Total postretirement
benefit cost $3,738 $1,992 $3,584
- ----------------------------------------------------------------
During fiscal 1997, the Company announced an early retirement program (see
Note 2) for which it has recorded a special termination charge of $1,600,000. As
a result of the Prestone business sale, during fiscal 1995 the Company
recognized a one-time postretirement curtailment loss of $1,050,000.
The Company's accumulated postretirement benefit obligation (the transition
obligation) at June 30, 1997 and 1996 is composed of the following components:
(In thousands) 1997 1996
- ----------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $ 7,926 $ 8,771
Fully eligible active plan
participants 3,011 2,005
Active plan participants not fully
eligible 5,770 4,058
- ----------------------------------------------------------------
Total 16,707 14,834
Unrecognized transition obligation (9,381) (9,964)
Unrecognized prior service cost (1,232) --
Unrecognized gain 2,202 631
- ----------------------------------------------------------------
Accrued unfunded postretirement
benefit cost $ 8,296 $ 5,501
- ----------------------------------------------------------------
The discount rate used in determining the accumulated postretirement benefit
obligation was 8% for fiscal 1997 and 1996. The assumed health care cost trend
rate used to measure the accumulated postretirement benefit obligation was 10%
in 1997 and is expected to gradually decline .5% per year to an ultimate rate of
5% in fiscal year 2007. A 1% increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
as of June 30, 1997 by $493,000 and increase the service and interest cost for
1997 by $50,000.
15. COMMITMENTS AND CONTINGENCIES
LITIGATION
During fiscal 1995, the Company established a reserve of $20,350,000 for the
write-off of assets and the costs associated with litigation proceedings and
settlements associated with its formerly operated mobile antifreeze recycling
business. As of June 30, 1997, the entire reserve has been utilized. The related
charge is included in Other income (expense), net, in the fiscal 1995
Consolidated Statement of Income.
The Company is subject to various claims and contingencies related to
lawsuits, taxes, environmental and other matters arising out of the normal
course of business. Management believes that the ultimate liability, if any,
arising from these claims and contingencies is not likely to have a material
adverse effect on the Company's annual results of operations or financial
condition.
28
First Brands Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
OTHER
The Company is a party to a contract with Union Carbide that provides for the
purchase of a substantial portion of the Company's primary raw material
requirements for plastic wrap and bags through December 31, 1999. The pricing
provisions in the Company's present supply contracts are designed to be
responsive to market conditions of the relevant raw materials.
16. GEOGRAPHIC SEGMENT DATA
The following is a summary of net sales, operating profit, and identifiable
assets in the United States and internationally in 1997, 1996 and 1995:
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Revenues:
United States $ 954,411 $ 932,183 $ 926,166
International 165,487 140,839 110,349
- -------------------------------------------------------------------------------
Total $1,119,898 $1,073,022 $1,036,515
- -------------------------------------------------------------------------------
Operating profit:
United States $ 129,482 $ 135,500 $ 129,069
International 15,355 12,513 9,181
Corporate
Expense (20,189) (19,412) (19,403)
Restructuring
Expense (19,000) -- --
- -------------------------------------------------------------------------------
Total $ 105,648 $ 128,601 $ 118,847
- -------------------------------------------------------------------------------
Identifiable assets:
United States $ 842,648 $ 775,447 $ 754,220
International 210,960 85,433 85,726
- -------------------------------------------------------------------------------
Total $1,053,608 $ 860,880 $ 839,946
- -------------------------------------------------------------------------------
Operating profit reflects net sales less cost of goods sold, selling, general
and administrative expenses, amortization and other depreciation and
restructuring expenses.
Included in U.S. revenues are export sales totaling $42,076,000, $37,055,000
and $37,201,000 during the years ended June 30, 1997, 1996 and 1995,
respectively. The Company does not believe that it is dependent on any single
customer, however, net sales to its largest customer accounted for approximately
12% of total sales for the years ended June 30, 1997, 1996 and 1995.
17. INTERIM REPORTING (UNAUDITED)
YEAR ENDED JUNE 30, 1997
(In thousands,
except per share
amounts) Quarters Ended
-------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30,
1996 1996 1997 1997
- -------------------------------------------------------------------------------
Net sales $255,597 $279,952 $264,886 $319,463
Gross profit 88,189 101,719 96,122 120,182
Income before
extraordinary
item (a) 18,007 15,351 16,054 1,453
Net income $ 18,007 $ 15,351 $ 15,421 $ 1,453
Per common share:
Income before
extraordinary
item $ 0.43 $ 0.37 $ 0.39 $ 0.04
Net income $ 0.43 $ 0.37 $ 0.37 $ 0.04
- -------------------------------------------------------------------------------
(a) -- Fiscal 1997's fourth quarter income includes a $19,000 charge for
restructuring expenses
YEAR ENDED JUNE 30, 1996
(In thousands,
except per share
amounts) Quarters Ended
- -------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30,
1995 1995 1996 1996
- -------------------------------------------------------------------------------
Net sales $250,789 $263,084 $262,207 $296,942
Gross profit 84,562 90,128 97,115 114,114
Net income $15,533 $ 14,637 $16,689 $ 18,241
Net income
per common
share $ 0.37 $ 0.34 $ 0.39 $ 0.43
- -------------------------------------------------------------------------------
29
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
The Board of Directors and Stockholders
FIRST BRANDS CORPORATION:
Under date of August 1, 1997, we reported on the consolidated balance
sheets of First Brands Corporation and subsidiaries as of June 30, 1997 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended June 30,
1997, as incorporated by reference in the annual report on Form 10-K for the
year 1997. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related financial statement
schedule as listed in Item 14 of the annual report on Form 10-K for the year
1997. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
...............................
KPMG PEAT MARWICK LLP
New York, New York
August 1, 1997
30
SCHEDULE VIII
FIRST BRANDS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END
OF PERIOD EXPENSES DEDUCTIONS(a) OF PERIOD
---------- ---------- ------------- ---------
(IN THOUSANDS)
FOR THE YEAR ENDED JUNE 30, 1997
---------------------------------------------------------
Allowance for doubtful accounts and discounts............. $6,036 $ 39,732 $ (38,926) $ 6,842
---------- ---------- ------------- ---------
---------- ---------- ------------- ---------
FOR THE YEAR ENDED JUNE 30, 1996
---------------------------------------------------------
Allowance for doubtful accounts and discounts............. $6,154 $ 36,590 $ (36,708) $ 6,036
---------- ---------- ------------- ---------
---------- ---------- ------------- ---------
FOR THE YEAR ENDED JUNE 30, 1995
---------------------------------------------------------
Allowance for doubtful accounts and discounts............. $5,269 $ 35,648 $ (34,763) $ 6,154
---------- ---------- ------------- ---------
---------- ---------- ------------- ---------
- ------------
(a) Deductions represent write-offs and discounts net of recoveries of amounts
previously written off.
31
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST BRANDS CORPORATION
By /s/ JOSEPH B. FUREY
..................................
JOSEPH B. FUREY
VICE PRESIDENT AND CONTROLLER
August 6, 1997
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has also been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
/S/ WILLIAM V. STEPHENSON Chairman, President, Chief Executive Officer August 6, 1997
......................................... and Director
(WILLIAM V. STEPHENSON)
/S/ DONALD A. DESANTIS Senior Vice President, Chief Financial August 6, 1997
......................................... Officer and Treasurer
(DONALD A. DESANTIS)
/S/ THOMAS H. ROWLAND Executive Vice President and Director August 6, 1997
.........................................
(THOMAS H. ROWLAND)
/S/ ALFRED E. DUDLEY Director August 6, 1997
.........................................
(ALFRED E. DUDLEY)
/S/ JOHN C. FERRIES Director August 6, 1997
.........................................
(JOHN C. FERRIES)
/S/ JAMES R. MAHER Director August 6, 1997
.........................................
(JAMES R. MAHER)
/S/ JAMES R. MCMANUS Director August 6, 1997
.........................................
(JAMES R. MCMANUS)
/S/ DENIS NEWMAN Director August 6, 1997
.........................................
(DENIS NEWMAN)
/S/ ERVIN R. SHAMES Director August 6, 1997
.........................................
(ERVIN R. SHAMES)
/S/ ROBERT G. TOBIN Director August 6, 1997
.........................................
(ROBERT G. TOBIN)
32
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ----------------------------------------------------------------------------------------------------------
3.1 --Restated Certificate of Incorporation of the Company, as amended to November 6, 1996. Incorporated by
reference to Exhibit 4(a) to the Company's Registration Statement on Form S-8 filed by the Company on
February 3, 1997.
3.2 --By-Laws of the Company, as amended to January 20, 1995. Incorporated by reference to Exhibit 3.2 of the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (Commission File No.
1-10395).
4.1 --Indenture dated as of March 1, 1997 between the Company and The Bank of New York, relating to the 7.25%
Senior Notes due 2007. Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-4 filed by the Company on April 24, 1997.
4.2 --Purchase Agreement dated as of March 5, 1997 among the Company, Bear Stearns & Co. Inc., TD Securities
(USA) Inc., Credit Lyonnais Securities (USA) Inc. and First Union Capital Markets Corp., relating to the
7.25% Senior Notes due 2007. Incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-4 filed by the Company on April 24, 1997.
4.3 --Registration Rights Agreement dated as of March 5, 1997 among the Company, Bear Stearns & Co. Inc., TD
Securities (USA) Inc., Credit Lyonnais Securities (USA) Inc. and First Union Capital Markets Corp.,
relating to the 7.25% Senior Notes due 2007. Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-4 filed by the Company on April 24, 1997.
4.4 --Rights Agreement, dated as of March 22, 1996, between the Company and Continental Stock Transfer &
Trust Company, as Rights Agent, including the form of Certificate of Designation, Preferences and Rights
of Junior Participating Preferred Stock, Series A, attached thereto as Exhibit A, the form of Rights
Certificate attached thereto as Exhibit B and the Summary of Rights attached thereto as Exhibit C.
Incorporated by reference to Exhibit 1.1 to the Company's Registration Statement on Form 8-A dated March
22, 1996.
10.1 --Amended and Restated Credit Agreement, dated as of February 28, 1997, among the Company, The Chase
Manhattan Bank, as Agent, and The Several Lenders Parties thereto. Incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-4 filed by the Company on April 24, 1997.
10.2 (a) --Equipment Lease Agreement, dated as of October 15, 1993, between the Company and PNC Leasing Corp,
relating to its Glad Plastic Bag and Wrap facility in Rogers, Arkansas. Incorporated by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for Quarter ended December 31, 1993
(Commission File No. 1-10395).
(b --First Amendment thereto, dated as of October 15, 1995. Incorporated by reference to Exhibit 10.3(b) to
the Company's Quarterly Report on Form 10-Q for Quarter ended December 31, 1995 (Commission File No.
1-10395).
10.3 (a) --Pooling and Servicing Agreement, dated as of May 21, 1992, between the Company, First Brands Funding
Inc and Chemical Bank, as Trustee, relating to First Brands Funding Master Trust trade
receivables-backed financing. Incorporated by reference to Exhibit 10.20(a) to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1992 (Commission File No. 1-10395).
(b) --Variable Funding Supplement thereto, dated as of May 21, 1992. Incorporated by reference to Exhibit
10.20(b) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992 (Commission
File No. 1-10395).
(c) --Amendment No. 1 thereto, dated as of December 22, 1993. Incorporated by reference to Exhibit 10.18(c)
to the Company's Annual Report on Form 10-Q for Quarter ended December 31, 1993 (Commission File No.
1-10395).
10.4 --Asset Purchase and Sale Agreement, dated as of May 21, 1992, between the Company and First Brands
Funding Inc, relating to First Brands Funding Master Trust trade receivables-backed financing.
Incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1992 (Commission File No. 1-10395).
10.5 --Asset Purchase and Sale Agreement, dated as of May 21, 1992, between the Company and Himolene
Incorporated, relating to First Brands Funding Master Trust trade receivables-backed financing.
Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1992 (Commission File No. 1-10395).
33
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ----------------------------------------------------------------------------------------------------------
10.6 --Asset Purchase and Sale Agreement, dated as of June 27, 1996, between the Company and A & M Products
Inc., relating to First Brands Funding Master Trust trade receivables-backed financing. Incorporated by
reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1996 (Commission File No. 1-10395).
10.7 --Second Amended and Restated Letter of Credit Reimbursement Agreement, dated as of April 22, 1996,
between the Company, Credit Suisse, First Brands Funding Inc and First Brands Funding Master Trust,
amending and restating the Amended and Restated Letter of Credit Reimbursement Agreement, dated as of
December 2, 1993, relating to First Brands Funding Master Trust trade receivables-backed financing.
Incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (Commission File No. 1-10395).
10.8 --Amended Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1990 (Commission File No. 1-10395).
10.9 --First Brands Corporation 1994 Performance Stock Option and Incentive Plan. Incorporated by reference to
Exhibit A to the Definitive Proxy Statement for Annual Meeting of Stockholders, filed by the Company on
September 28, 1993 (Commission File No. 1-10395).
10.10 --First Brands Corporation Non-Employee Directors Stock Option Plan. Incorporated by reference to Exhibit
A to the Definitive Proxy Statement for Annual Meeting of Stockholders, filed by the Company on
September 26, 1995 (Commission File No. 1-10395).
10.11 --First Brands Corporation Annual Incentive Plan. Incorporated by reference to Exhibit A to the
Definitive Proxy Statement for Annual Meeting of Stockholders, filed by the Company on September 26,
1995 (Commission File No. 1-10395).
10.12 (a) --Purchase and Sale Agreement, dated as of June 30, 1994, between the Company and Vestar/Freeze Holdings
Corporation and Vestar Equity Partners, L.P., relating to the sale by the Company of its businesses of
developing, manufacturing, marketing, selling and/or distributing automotive antifreeze, cooling system
tools, cooling system chemicals for cleaning and sealing leaks in automotive cooling systems,
ice-fighting products, PRESTONE brake fluid products, PRESTONE power steering fluid products, and
PRESTONE transmission stop leak fluid products, and antifreeze recycling business. Incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, filed by the Company on September
12, 1994 (Commission File No. 1-10395).
(b) --Amendment No. 1 thereto, dated as of August 25, 1994. Incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K filed by the Company on September 12, 1994 (Commission File No.
1-10395).
11* --Computation of Net Income Per Common Share.
21* --Subsidiaries of Registrant.
23* --Consent of KPMG Peat Marwick.
27* --EDGAR Financial Data Schedule.
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* Filed herewith
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