SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER
1-10395
FIRST BRANDS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1171404
- ------------------------ -------------------
State of Incorporation (IRS Employer
Identification No.)
83 Wooster Heights Rd., Building 301
P.O. Box 1911
Danbury, Connecticut 06813-1911
- --------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 203-731-2300
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding at February 1, 1998
- ---------------------------------- -------------------------------
Common Stock, $.01 par value 39,647,762 shares
FIRST BRANDS CORPORATION
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income -
For the Three Month Periods
Ended December 31, 1997 and 1996..................... 3
Consolidated Condensed Statements of Income -
For the Six Month Periods
Ended December 31, 1997 and 1996..................... 4
Consolidated Condensed Balance Sheets -
December 31, 1997 and June 30, 1997.................. 5
Consolidated Condensed Statement of Stockholders'
Equity - For the Six Month Period
Ended December 31, 1997.............................. 6
Consolidated Condensed Statements of Cash
Flows - For the Six Month Periods
Ended December 31, 1997 and 1996..................... 7
Notes to Consolidated Condensed Financial
Statements........................................... 8-11
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition............................................. 12-14
Independent Auditors' Review Report................... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................. 16
Items 2 - 6........................................... 16-17
SIGNATURE............................................. 18
-2-
FIRST BRANDS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
----------- ----------
(in thousands - except per share
amounts)
Net sales............................ $ 309,282 $ 279,952
Cost of goods sold................... 196,994 178,233
Selling, general and
administrative expenses............ 75,406 67,902
Amortization and other depreciation.. 3,595 3,017
Restructuring expense................ 2,700 --
Interest expense and amortization
of debt discount and expense....... 7,843 4,626
Discount on sale of receivables...... 1,149 1,131
Other income (expense), net.......... 259 373
-------- --------
Income before provision for income
taxes and cumulative effect of
change in accounting principles.... 21,854 25,416
Provision for income taxes........... 8,547 10,065
-------- --------
Income before cumulative effect of
change in accounting principle..... 13,307 15,351
Cumulative effect of change
in accounting principle,
net of taxes ..................... (6,922) --
-------- --------
Net income........................... $ 6,385 $ 15,351
======== ========
Basic earnings per common share
(Note 7):
Income before cumulative effect of
change in accounting principle.. $ 0.33 $ 0.38
Cumulative effect of change in
accounting principle .......... (0.17) --
-------- --------
Net income.......................... $ 0.16 $ 0.38
======== ========
Based on the following number
of shares.......................... 39,696 40,848
======== ========
Diluted earnings per common
share (Note 7):
Income before cumulative effect of
change in accounting principle... $ 0.33 $ 0.37
Cumulative effect of change in
accounting principle ........... (0.17) --
-------- --------
Net income........................... $ 0.16 $ 0.37
======== ========
Based on the following number
of shares........................... 40,644 41,898
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-3-
FIRST BRANDS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
--------- ---------
(in thousands - except per
share amounts)
Net sales............................ $ 578,762 $ 535,549
Cost of goods sold................... 380,189 345,641
Selling, general and
administrative expenses........... 129,317 118,121
Amortization and other depreciation.. 7,455 6,271
Restructuring expense................ 2,700 --
Interest expense and amortization
of debt discount and expense....... 14,957 8,875
Discount on sale of receivables...... 2,296 2,151
Other income (expense), net.......... (29) 958
--------- ---------
Income before provision for income
taxes and cumulative effect of
change in accounting principles.... 41,819 55,448
Provision for income taxes........... 16,339 22,090
--------- ---------
Income before cumulative effect of
change in accounting principle..... 25,480 33,358
Cumulative effect of change in
accounting principle, net of taxes.. (6,922) --
--------- ---------
Net income........................... $ 18,558 $ 33,358
========= =========
Basic earnings per common share
(Note 7):
Income before cumulative effect
of change in accounting
principle................... $ 0.63 $ 0.82
Cumulative effect of change in
accounting principle ....... (0.17) --
--------- ---------
Net income........................... $ 0.46 $ 0.82
========= =========
Based on the following number
of shares........................... 39,819 41,087
========= =========
Diluted earnings per common
share (Note 7):
Income before cumulative effect
of change in accounting
principle .................... $ 0.63 $ 0.80
Cumulative effect of change in
accounting principle ......... (0.17) --
--------- ---------
Net income........................... $ 0.46 $ 0.80
========= =========
Based on the following number
of shares.......................... 40,703 42,062
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-4-
FIRST BRANDS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1997 1997
----------- ----------
(UNAUDITED)
(dollars in thousands, except
share amounts)
ASSETS:
Cash and cash equivalents................... $ 9,129 $ 7,465
Accounts and notes receivable - net......... 132,400 137,380
Inventories................................. 158,624 151,976
Deferred tax assets......................... 22,441 24,702
Prepaid expenses............................ 6,761 7,551
--------- ----------
Total current assets...................... 329,355 329,074
Property, plant and equipment (net of
accumulated depreciation of $156,834 and
$141,691)................................. 416,577 377,128
Patents, trademarks, proprietary technology
and other intangibles (net of accumulated
amortization of $198,457 and $192,631).... 294,222 310,095
Deferred charges and other assets (net of
accumulated amortization of $52,283
and $52,029).............................. 31,493 37,311
--------- ----------
Total assets...................... $1,071,647 $1,053,608
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities
Notes payable............................... $ 18,626 $ 8,432
Current maturities of long-term debt........ 2,742 2,811
Accrued income and other taxes.............. 930 7,373
Accounts payable............................ 43,317 61,877
Accrued liabilities......................... 69,996 104,201
--------- ----------
Total current liabilities.............. 135,611 184,694
Long-term debt.............................. 452,733 380,467
Deferred taxes payable...................... 77,817 74,058
Deferred gain on sale of assets............. 74 148
Other long-term obligations................. 20,654 20,325
Stockholders' Equity
Preferred stock, $1 par value, 10,000,000
shares authorized; none issued............ -- --
Common stock, $0.01 par value, 120,000,000
shares authorized at December 31, 1997
and June 30, 1997; issued 43,500,762
shares at December 31, 1997 and
43,394,044 shares at June 30, 1997
(Note 7).................................. 435 434
Capital in excess of par value.............. 132,344 130,994
Cumulative foreign currency translation
adjustment................................ (21,799) (12,455)
Common stock in treasury, at cost; 3,859,000
shares at December 31, 1997 and
3,355,000 at June 30, 1997................ (109,388) (96,837)
Retained earnings........................... 383,166 371,780
--------- ----------
Total stockholders' equity............. 384,758 393,916
--------- ----------
Total liabilities and stockholders'
equity......................... $1,071,647 $1,053,608
========= ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-5-
FIRST BRANDS CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 1997
(UNAUDITED)
Cumulative
Capital Foreign
Common in Excess Currency
Stock of Par Translation Treasury Retained
(in thousands) Par Value Value Adjustment Stock Earnings Total
---------- -------- ----------- ------- --------- ------
Balance as of
June 30, 1997 ............ $ 434 $130,994 $(12,455) $(96,837) $371,780 $393,916
Exercise of
Stock Options............. 1 1,350 -- -- -- 1,351
Cash Dividends............. -- -- -- -- (7,172) (7,172)
Purchase of
Treasury Stock............ -- -- -- (12,551) -- (12,551)
Net Income................. -- -- -- -- 18,558 18,558
Foreign Currency
Translation Adjustment.... -- -- (9,344) -- -- (9,344)
----- -------- --------- ---------- ------- --------
Balance as of
December 31, 1997......... $ 435 $132,344 $ (21,799) $ (109,388) $383,166 $384,758
===== ======== ========= ========== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-6-
FIRST BRANDS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(in thousands)
Cash flows from operating activities:
Net income........................... $ 18,558 $ 33,358
Adjustments to reconcile net income
to net cash provided by
operating activities:
Cumulative effect of change in
accounting principle................. 6,922 --
Depreciation and amortization........ 22,570 20,277
Deferred income taxes................ 6,055 3,280
Restructuring expense................ 2,700 --
Change in certain non-cash current
assets and liabilities:
Decrease in accounts receivable...... 21,896 5,454
(Increase) decrease in inventories... (6,648) 9,044
Decrease in prepaid expenses........ 790 2,543
(Decrease) increase in accrued
income and other taxes............ (1,915) 8,651
(Decrease) in accounts payable......... (18,560) (30,981)
(Decrease) in accrued liabilities...... (36,905) (45,019)
Other changes.......................... 3,044 (708)
---------- ----------
Total adjustments.................. (51) (27,459)
---------- ----------
Net cash provided by operating
activities.......................... 18,507 5,899
Cash flows from investing activities:
Capital expenditures................. (17,089) (14,000)
Acquisition of leased assets......... (44,208) (22,320)
Purchase and installation of
information system................... (4,565) (4,368)
---------- ---------
Net cash (used for) investing
activities........................... (65,862) (40,688)
---------- ----------
Cash flows from financing activities:
Increase in credit facility
borrowings, net................... 70,529 45,000
Increase in other borrowings, net.... 11,862 5,889
(Decrease) increase in
securitization of accounts
receivable........................ (15,000) 10,000
Proceeds from exercise of stock
options........................... 1,351 2,099
Purchase of common stock for
treasury.......................... (12,551) (23,089)
Dividends paid......................... (7,172) (5,828)
---------- ----------
Net cash provided by financing
activities........................... 49,019 34,071
---------- ----------
Net increase (decrease) in cash and
cash equivalents..................... 1,664 (718)
Cash and cash equivalents at beginning
of period............................ 7,465 8,326
---------- ----------
Cash and cash equivalents at end of
period............................... $ 9,129 $ 7,608
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-7-
FIRST BRANDS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated condensed
financial statements include all adjustments (all of which were of a normal
recurring nature) necessary to fairly present the results of operations for the
interim periods. All material intercompany transactions and balances have been
eliminated. The results of operations for the three and six month periods ended
December 31, 1997 are not necessarily indicative of the results for a full year.
First Brands Corporation ("First Brands" or the "Company") is engaged in the
development, manufacture, marketing and sale of consumer products 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 products); SCOOP AWAY, EVER CLEAN, EVERFRESH and JONNY CAT (cat
litters) and STARTERLOGG (fire starters) and HEARTHLOGG (fire logs).
INVENTORIES
Inventories were comprised of:
December 31, June 30,
1997 1997
------------ ---------
(in thousands)
Raw materials....................... $ 37,092 $ 34,518
Work-in-process..................... 6,295 5,795
Finished goods...................... 115,237 111,663
--------- ---------
Total........................... $ 158,624 $ 151,976
========= =========
2. RESTRUCTURING
During the second quarter of fiscal 1998, the Company recorded an additional
restructuring charge of $2,700,000, increasing the $19,000,000 restructuring
charge established during the fourth quarter of fiscal 1997. The restructuring
reserve included expenses for employee related costs, primarily an early
retirement package and other costs to obtain personnel reductions, and certain
asset write down and disposal expenses largely related to a distribution
facility and office center in East Hartford, CT. The additional charge is due to
greater than anticipated participation in the early retirement program and
revision of earlier estimates.
-8-
3. LONG-TERM DEBT
First Brands had long-term debt outstanding as of December 31, 1997 and June 30,
1997 as follows:
December 31, June 30,
1997 1997
----------- ---------
Senior Debt: (in thousands)
$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%.............................................. $240,000 $162,000
$65,080,000 Australian and New Zealand Credit
Facility, 7 year term expiring March 2004,
interest at local Bill Rate plus .7%..................... 50,804 58,727
$11,232,000 Canadian Credit Facility, 5 year
term expiring March 2002, interest at Canadian
prime rate, LIBOR plus .425% or Canadian
Bankers Acceptance plus .425% ........................... 9,071 8,619
Other....................................................... 5,600 3,932
--------- ---------
305,475 233,278
Less: current maturities................................... (2,742) (2,811)
--------- ---------
Senior Debt............................................. 302.733 230,467
--------- ---------
Subordinated Debt:
7 1/4% Senior Notes Due 2007.............................. 150,000 150,000
--------- ---------
Total Long-term debt.................................... $ 452,733 $ 380,467
========= =========
The Company's revolving credit facility is unsecured, however, it does contain
certain restrictive covenants pertaining to the ratio of debt to equity,
dividend payments and stock repurchases.
The Australian and New Zealand credit facility is composed of two parts; one of
which was used to acquire the NationalPak business and a second part which can
be used for working capital needs. There are fixed periodic payments associated
with the acquisition borrowing, 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 Canadian credit facility requires fixed periodic payments. The facility is
secured by the accounts receivable, inventory and fixed assets of the Canadian
business.
The 7 1/4% Note Indenture contains certain restrictive covenants and limitations
principally relating to the Company's right to incur debt and to engage in
certain sale and leaseback transactions.
First Brands was in compliance with the covenants of all debt agreements at
December 31, 1997.
4. ACCOUNTS RECEIVABLE
The Company is engaged in a program to sell up to $100,000,000 in fractional
ownership interest, without recourse, in a defined pool of eligible trade
accounts receivable. Under the current terms of this agreement, the facility
automatically renews each year. The fractional interest sold as of December 31,
1997 totaled $70,000,000. The amounts sold are reflected as a reduction in
accounts receivable on the accompanying Consolidated Condensed Balance Sheets
and costs associated with this program are recorded on the Consolidated
Condensed Statements of Income as discount on sale of receivables.
-9-
5. NOTES PAYABLE
Notes payable at December 31, 1997 of $18,626,000 consisted of $10,700,000 of a
$15,000,000 unsecured domestic line of credit and $7,926,000 of the Company's
international subsidiaries' working capital borrowings with local lenders. The
Company's international working capital credit facilities aggregated
$18,769,000, of which $10,843,000 was available at December 31, 1997. The
international facilities are generally secured by the assets of the respective
subsidiaries, with approximately $2,000,000 of the availability at one
subsidiary being guaranteed by First Brands Corporation (U.S.).
6. TAXES
The provision for income tax expense for the three and six-months ended December
31, 1997 and 1996 consists of the following:
Three Months Six Months
Ended Ended
December 31, December 31,
------------------ -------------------
1997 1996 1997 1996
------- -------- ------- ------
(in thousands)
Current:
Federal.............. $ 3,632 $ 6,321 $ 6,832 $14,225
State ............... 715 1,477 1,469 3,254
Foreign ............. 1,142 624 1,983 1,331
------- ------- -------- -------
Total current.... 5,489 8,422 10,284 18,810
Deferred:
Federal.............. 2,379 1,398 4,776 2,796
State................ 188 310 719 620
Foreign.............. 491 (65) 560 (136)
------- ------- -------- -------
Total deferred... 3,058 1,643 6,055 3,280
------- ------- -------- -------
Total provision $ 8,547 $10,065 $16,339 $22,090
======= ======= ======== ========
7. EARNINGS PER SHARE AND DIVIDENDS
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No. 128
establishes standards for computing and presenting both basic and diluted
earnings per share ("EPS"). Basic EPS represents the earnings available to each
common share outstanding during the reporting period. Diluted EPS reflects the
earnings available to each common share after the affect of all potentially
dilutive common shares, such as stock options and convertible securities. SFAS
No. 128 requires a reconciliation between of the basic and diluted EPS numerator
and denominator. For the Company, the numerator is constant for both the basic
and diluted calculation. The denominator used in the diluted EPS calculation was
increased by 948,000 and 884,000 common share equivalents pertaining to stock
options for the three and six-month periods ended December 31, 1997,
respectively, and 1,050,000 and 975,000 common share equivalents pertaining to
stock options for the three and six-month periods ended December 31, 1996,
respectively.
The Company has paid its shareholders quarterly cash dividends of $0.08 and
$0.10 per share for the first and second quarters of fiscal 1998, respectively,
and $0.0625 and $0.08 per share for the first and second quarters of fiscal
1997, respectively.
-10-
8. CHANGE IN ACCOUNTING PRINCIPLE
During the second quarter of fiscal 1998 the Company recorded a $11,450,000
pre-tax charge. This charge relates to a change in accounting as required under
a consensus published by the FASB's Emerging Issues Task Force regarding Issue
No. 97-13 (November 1997), that requires immediate expensing of costs related to
certain business process re-engineering activities and information technology
transformations which have been previously capitalized.
9. FINANCIAL INSTRUMENTS
During the second quarter of fiscal 1998 the Company entered into a contract to
fix the price of an additional 17% of its domestic polyethylene resin
requirements for the GLAD plastic wrap and bag business. With this new
agreement, the Company's contracts currently cover approximately 37% of its
domestic resin requirements until December 31, 2000. Starting in 2001, the
counter party has an annual option to extend one of the contracts, which today
covers approximately 20% of the domestic requirements, through 2003. The
contract prices are less than the market average for the last four years.
-11-
FIRST BRANDS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis of the consolidated results of operations
for the three and six month periods ended December 31, 1997 should be read in
conjunction with the accompanying unaudited Consolidated Condensed Financial
Statements and related Notes. The Company is primarily engaged in the
development, manufacture, marketing and sale of leading consumer products. The
Company's products which include "GLAD", "GLAD-LOCK", "STP", "SCOOP AWAY",
"EVERFRESH", "EVER CLEAN", "JONNY CAT", "STARTERLOGG" and "HEARTHLOGG" can be
found in large mass merchandise stores, chain supermarkets and other retail
outlets. The Company believes that the significant market positions occupied by
its products are attributable to brand name recognition, comprehensive product
offerings, continued product innovation, strong emphasis on vendor support and
aggressive advertising and promotion.
RESULTS OF OPERATIONS
The following table sets forth the percentages of net sales of the Company
represented by the components of income and expense for the three and six month
periods ended December 31, 1997 and 1996:
Three Months Six Months
Ended Ended
December 31, December 31,
----------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales...................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............. 63.7 63.7 65.7 64.5
------ ----- ------ ------
Gross profit................... 36.3 36.3 34.3 35.5
Selling, general, and
administrative expenses...... 24.4 24.2 22.3 22.1
Amortization and other
depreciation ................ 1.1 1.1 1.3 1.2
Restructuring expense.......... 0.9 -- 0.5 --
Interest expense and
amortization of debt
discount and expense......... 2.5 1.6 2.6 1.7
Discount on sale of receivables 0.3 0.4 0.4 0.4
Other income (expense), net.... 0.0 0.1 0.0 0.2
------ ----- ------ ------
Income before provision
for income taxes
and cumulative effect of
change in accounting
principle.................... 7.1 9.1 7.2 10.3
Provision for income taxes..... 2.8 3.6 2.8 4.1
------ ----- ------ ------
Income before cumulative effect
of change in accounting
principle..................... 4.3 5.5 4.4 6.2
Cumulative effect of change in
accounting principle.......... (2.2) -- (1.2) --
------ ----- ------ ------
Net income..................... 2.1% 5.5% 3.2% 6.2%
====== ===== ====== ======
-12-
QUARTER AND SIX MONTHS ENDED DECEMBER 31 1997 COMPARED TO THE QUARTER AND
SIX MONTHS ENDED DECEMBER 31, 1996
Sales for the three month period ended December 31, 1997 were $309,282,000, 10%
ahead of last year's $279,952,000. For the six month period, sales were
$578,762,000, 8% above the prior year's $535,549,000. Household product sales
for the quarter increased 13%, reflecting sales from recent acquisitions
(NationalPak) along with higher fireplace product sales. Plastic wrap and bag
sales, excluding acquisitions, were off 4% primarily due to the move of a major
GLAD promotion to the third fiscal quarter where it is expected to be more
successful. Year-to-date, household product sales are 12% ahead of the prior
year. Automotive product sales were flat for the quarter, with domestic sales up
slightly, and international and export sales off due to weakening demand in
Asian markets. Year-to-date automotive sales are down 7% due to the residual
effects of inventory reductions by a major customer, as well as the timing of
certain customer orders. Quarterly and year-to-date sales of pet product grew
14% and 13%, respectively, over the prior year due to continued market growth,
market share increases and new products.
Cost of goods sold for the quarter was $196,994,000, 111% of last year's
$178,233,000. Year-to -date, cost of goods sold was $380,189,000, 110% of the
prior year's $345,641,000. Higher volumes generated from the NationalPak
acquisition resulted in increased costs for the quarter and year-to-date.
Increased polyethylene resin costs also affected the year-to-date results.
Gross profit for the quarter of $112,288,000 (36.3% of sales) was 110% of last
year's $101,719,000 (36.3% of sales). Year-to-date, gross profit of $198,573,000
(34.3% of sales) was 105% of last year's $189,908,000 (35.5% of sales).
Selling, general and administrative expenses during the quarter of $75,406,000
(24.4% of sales), were 111% of last year's $67,902,000 (24.2% of sales).
Year-to-date, expenses of $129,317,000 (22.3% of sales), were 109% of last
year's $118,121,000 (22.1% of sales). The increase over last year reflects
expenses associated with the NationalPak business as well as new product
marketing costs.
Amortization and other depreciation expense for the quarter was $3,595,000, 119%
of the prior year's $3,017,000, and for the six months was $7,455,000, 119% of
the prior year's $6,271,000. The higher cost primarily reflects amortization
expense associated with the NationalPak acquisition. Interest expense of
$7,843,000 for the quarter and $14,957,000 for the six month period was roughly
70% above the same period last year due to borrowing costs associated with the
NationalPak acquisition. 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.
The Company's effective tax rate for the quarter and six months was 39%,
compared to the prior year's rate of 40%. Lower rates in the current year
reflects a geographic change in the composition of worldwide pre-tax income,
with a larger share of income coming from foreign operations with lower
effective tax rates.
FINANCIAL CONDITION
Worldwide credit facilities in place at December 31, 1997 aggregated
$412,950,000 of which $91,580,000 was available, but unused. Excluding costs
associated with acquisitions and stock repurchases, the Company expects to repay
up to $60,000,000 on these credit facilities over the next twelve months by
utilizing the positive cash flow generated by its businesses. During the second
quarter and first half of fiscal 1998, the Company repurchased common shares
valued at $6,924,000 and $12,551,000, respectively. During the first half of
fiscal 1998, the Company also acquired previously leased equipment totaling
$44,208,000.
-13-
The Company's current forecast for the 1998 fiscal year reflects capital
expenditures of approximately $42,500,000, and fixed payments (interest,
principal, discount on sale of receivables and lease payments) of approximately
$47,000,000.
Based on the Company's ability to generate funds from operations and the
availability of credit under its financing facilities, management believes it
will have the funds necessary to meet all of its described financing
requirements and all other financial obligations.
CAUTIONARY STATEMENT AND "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 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, and contain a number of risks and uncertainties including
changes in consumer demand, changes in prices of raw materials, changes in
distribution channels and competitive conditions, consumer acceptance of new
product lines, the company's ability to control internal costs, the successful
development of new technologies, the implementation of strategic initiatives and
general economic conditions. Accordingly, such forward-looking statements should
not be relied upon as a prediction of actual results.
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
First Brands' independent certified public accountants have performed a limited
review of the financial information furnished herein in accordance with
standards established by the American Institute of Certified Public Accountants.
The Independent Auditors' Review Report is presented on Page 14 of this report.
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Independent Auditors' Review Report
The Board of Directors
First Brands Corporation:
We have reviewed the consolidated condensed balance sheet of First Brands
Corporation and subsidiaries as of December 31, 1997, and the related
consolidated condensed statements of income for the three and six-month periods
ended December 31, 1997 and 1996, the consolidated condensed statements of cash
flows for the six-month periods ended December 31, 1997 and 1996, and the
consolidated condensed statement of stockholders' equity for the six-month
period ended December 31, 1997. These consolidated condensed financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
As discussed in note 8, the Company changed its method of accounting for
business process reengineering costs effective October 1, 1997.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of First Brands Corporation and
subsidiaries as of June 30, 1997, and the related consolidated statement of
income, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated August 1, 1997, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated condensed balance
sheet as of June 30, 1997, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
New York, New York
January 29, 1998
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Submitted at the Annual Meeting of Stockholders,
October 24, 1997.
1) Election of four Directors, each to serve for a three-year
term expiring on the date of the Annual Meeting of Stockholders
in 2000 and/or until his successor is duly elected or appointed
and qualified:
Name For Withheld
---- --- --------
John C. Ferries 36,057,048 93,866
James R. Maher 35,981,003 169,911
William V. Stephenson 35,953,023 197,891
Robert G. Tobin 36,006,773 144,141
2. Ratification of the selection by the Board of Directors of
KPMG Peat Marwick LLP as independent auditors of the Company for
the fiscal year 1998:
Abstentions and
For Against Broker Non-Votes
---------- ------- ----------------
36,036,198 49,214 65,502
3. Ratification of the First Brands Corporation 1998 Performance
Stock Option and Incentive Plan.
Abstentions and
For Against Broker Non-Votes
--- ------- ----------------
34,091,100 1,947,085 112,729
Item 5. Other Information
None.
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Item 6. Exhibits and Reports on Form 8-K
A. Exhibit Index:
Exhibit
Number Description of Exhibit
- -------- -----------------------
11* -- Computation of Net Income Per Common Share
15* -- Accountants' Acknowledgment
27* -- EDGAR Financial Data Schedule
- ------------
* Filed herewith
B. Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BRANDS CORPORATION
(Registrant)
Date: February 12, 1998 By: /s/ Donald A. DeSantis
-----------------------
Donald A. DeSantis
Senior Vice President and
Chief Financial Officer
(Principal Accounting
and Duly Authorized
Officer)
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