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 the Three Months ended June 30, 1999 Commission File No. 0-6436
BLOCK DRUG COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New Jersey 22-1375645
(STATE OR OTHER JURISDICTION (I.R.S. Employer Identification No.)
OF INCORPORATION OR ORGANIZATION)
257 Cornelison Avenue,
Jersey City, New Jersey 07302-9988
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (201) 434-3000
Indicate by check mark whether Registrant (1) has filed all Commission 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 periods that the
Registrant is 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 close of the period covered by this report.
(CLASS) (OUTSTANDING AT JUNE 30, 1999)
Common Stock - Class A 14,467,258
Common Stock - Class B 8,418,808
<PAGE>
BLOCK DRUG COMPANY, INC.
INDEX TO FORM 10-Q
JUNE 30, 1999
Part I. Financial Information - Unaudited Page No.
Consolidated Balance Sheets - June 30, 1999 and
March 31, 1999 3
Consolidated Statements of Income for the three
months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive
Income for the three months ended June 30, 1999 and 1998. 5
Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-9
Management's Discussion and Analysis of
Operating Results and Financial Condition 10-15
Part II. Other Information 16
<PAGE>
<TABLE>
BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
ASSETS 06/30/99 03/31/99
<S> <C> <C>
Current Assets:
Cash................................................................ $ 42,500,000 $ 48,363,000
Marketable securities, at market.................................... 16,839,000 29,994,000
Accounts receivable, less allowances of $4,736,000 (6/30/99) and
$4,750,000 (3/31/99).............................................. 153,216,000 153,470,000
Inventory .......................................................... 148,346,000 135,947,000
Other current assets................................................ 48,061,000 41,867,000
------------- -------------
Total current Assets............................................ 408,962,000 409,641,000
------------- -------------
Property, plant and equipment, less accumulated
depreciation of $138,199,000 (6/30/99)
and $135,261,000 (3/31/99)........................................ 250,038,000 252,270,000
Long term securities, at market..................................... 265,138,000 257,082,000
Goodwill and other intangible assets - net of amortization.......... 218,612,000 239,818,000
Other assets........................................................ 7,142,000 7,952,000
------------- -------------
Total Assets.................................................... $1,149,892,000 $1,166,763,000
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes and bonds payable............................................. 136,042,000 143,740,000
Accounts payable & accrued expenses................................. 185,534,000 185,270,000
Income taxes payable................................................ 14,965,000 13,532,000
Dividends payable................................................... 5,527,000 5,521,000
------------- -------------
Total Current Liabilities....................................... 342,068,000 348,063,000
------------- -------------
Notes and bonds payable............................................. 105,920,000 107,012,000
Deferred compensation and other liabilities......................... 20,355,000 19,648,000
Deferred income taxes............................................... 7,540,000 8,155,000
------------- ------------
Total Liabilities............................................... 475,883,000 482,878,000
------------- ------------
Shareholders' Equity:
Class A common stock, non-voting, par
value $.10-20,000,000 shares authorized,
14,467,000 (6/30/99) and 14,455,000
(3/31/99) shares issued and outstanding........................... 1,447,000 1,445,000
Class B common stock par value $.10-
40,000,000 shares authorized, 8,419,000
shares issued and outstanding................................... 842,000 842,000
Capital in excess of par value...................................... 304,440,000 306,433,000
Retained earnings.................................................. 395,027,000 384,952,000
Other comprehensive income.......................................... (27,747,000) (9,787,000)
------------- -------------
Total Shareholders' Equity........................................ 674,009,000 683,885,000
------------- -------------
Total Liabilities & Shareholder's Equity.......................... $1,149,892,000 $1,166,763,000
============== ==============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30
1999 1998
--------------- --------------
Revenues:
<S> <C> <C>
Net sales.................................. $200,895,000 $189,447,000
Interest, dividends and other income....... 6,618,000 13,219,000
------------- --------------
207,513,000 202,666,000
Cost and Expenses:
Cost of goods sold........................ 60,910,000 56,390,000
Selling, general and administrative....... 125,062,000 126,554,000
Interest expense.......................... 3,257,000 3,528,000
-------------- -------------
189,229,000 186,472,000
Income before taxes......................... 18,284,000 16,194,000
Provision for federal, foreign and state
income taxes............................. 5,137,000 4,259,000
------------- -------------
Net Income................................. $ 13,147,000 $ 11,935,000
============ ==============
Average number of shares outstanding...... 22,881,789 22,834,763 (1)
============= ==============
Net income per share......................... $ .57 $ .52 (1)
=================================
Cash dividends per share of
Class A Common Stock..................... $ .3175 $ .315
Cash dividends per share of
Class A Common Stock...................... $ .110625 $ .11
(1) Restated to reflect 3% stock dividend declared November 1998.
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
BLOCK DRUG COMPANY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30
1999 1998
-------------- -------------
<S> <C> <C>
Net income .................................. $ 13,147,000 $11,935,000
Other comprehensive income/(loss):
Foreign currency translation adjustments *... (15,350,000) (5,679,000)
Unrealized holding (loss) gain on
marketable securities........................ (2,610,000) 156,000
-------------- ------------
Other comprehensive income/(loss)............... (17,960,000) (5,523,000)
------------- ------------
Comprehensive income/(loss).................... $ (4,813,000) $ 6 ,412,000
============== ============
</TABLE>
* The Company does not provide for U.S. income taxes on foreign currency
translation adjustments because it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
See notes to consolidated financial statements.
<PAGE>
<TABLE>
BLOCK DRUG COMPANY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOW FROM CONTINUING OPERATING ACTIVITIES.......$ 1,516,000 $ 9,448,000
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds form Product divestiture................. 19,000,000
Additions to Property, Plant and Equipment........ (8,848,000) (11,358,000)
Proceeds from Sales of Assets..................... 31,790,000
Proceeds from Sales of long-term Securities....... 6,439,000 73,918,000
Purchase of long-term Securities.................. (17,580,000) (80,543,000)
Decrease in Marketable Securities................. 12,812,000 3,022,000
Payments for Product Acquired..................... (3,493,000) (7,000,000)
------------ -----------
Net Cash Used in Investing Activities............... 8,330,000 9,829,000
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to Shareholders.................. (5,527,000) (5,308,000)
Payments of Notes Payable....................... (1,190,000)
Decrease in short-term Debt..................... (7,600,000) (38,609,000)
------------ ------------
Net Cash (Used) in Provided in Financing Activities.. (14,317,000) (43,917,000)
------------ ------------
Effect of Exchange Rates on Cash..................... (1,392,000) 1,831,000
------------ ------------
Decrease in Cash.................................... (5,863,000) (22,809,000)
Cash, Beginning of Period........................... 48,363,000 37,320,000
------------ -----------
Cash, End of Period................................ $42,500,000 $14,511,000
============ ===========
SUPPLEMENTAL CASH FLOW DATA:
Cash Paid during the Year:
Interest..................................... $1,783,000 $ 2,795,000
Income taxes................................. $5,723,000 $ 1,193,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements reflect all normal recurring
adjustments which, in management's opinion, are necessary for a fair
presentation of the results for interim periods.
2. Provision for certain expenses, including income taxes, media advertising,
and consumer promotions, are based on full year assumptions. Such expenses
are charged to operations in the year incurred and are included in the
accompanying consolidated financial statements in proportion with the
passage of time or with estimated annual sales or annual tax rates.
3. Inventories by major classes were as follows:
June 30, 1999 March 31, 1999
------------- --------------
Raw and packaging materials $ 47,519,000 $ 30,997,000
Finished goods 100,827,000 104,950,000
------------ -------------
$148,346,000 $135,947,000
============ ============
4. Under the provisions of SFAS No. 130 "Reporting Comprehensive Income", the
Company has included a statement of Comprehensive Income in the
accompanying financial statements. Comprehensive income is comprised
primarily of net earnings, unrealized gain (loss) on marketable securities
and currency translation gains and losses.
5. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and
for hedging activities. In June 1999, the FASB issued SFAS No. 137,
"Accounting For Derivatives and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133," which makes SFAS No. 133 effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company
is currently evaluating the impact of the new statement on its financial
position, results of operations and disclosures for fiscal 2002.
6. In April 1999, the Company sold the Lava hand soap brand for approximately
$19 million. Management does not anticipate any material
impact on its financial position, results of operations and liquidity as a
result of this sale.
7. During the quarter the Company acquired the Pelo Libre line of
pediculicides in Argentina. In the U.K. the Company acquired the Louis
Marcel a depilatory brand. The aggregate amount spent was $3.7 million
which also represents the goodwill recorded for the acquistions.
8. During the three months ended June 30, 1999, the Company reduced its net
borrowings by $8.8 million mainly from lines of credit from various banks
bearing interest at variable rates.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
9. During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS 131 establishes
standards for the way public business enterprises report information about
operating segments in reports to shareholders. The adoption of SFAS 131 did
not affect results of operations or financial position but did affect the
disclosure of segment information. At the end of fiscal 1999 the segments
were divided into three geographic areas: United States; Europe, Africa,
Middle East, and Latin America, Canada, Asia/Pacific. During the current
quarter,the operations are divided into two geographic areas: Americas,
covering USA, Canada and Latin America, and International, covering Europe,
Asia/Pacific, Africa and Middle East. Prior year data has been restated
for comparability purposes.
Three Months ended June 30,
(1999) (1998)
(in thousands)
Net Sales
Americas $102,225 $98,904
International 98,670 90,543
---------- ----------
Total consolidated sales $200,895 $189,447
========== ==========
Operating Income:
Americas $ 13,575 $ 11,810
International 9,967 9,738
----------- -----------
23,542 21,548
General corporate expenses (5,258) (5,354)
----------- ------------
Consolidated income before
income taxes $ 18,284 $ 16,194
============= =============
<PAGE>
10. In February 1997, the Company announced the consolidation of its
manufacturing operations by planning to close six of its twelve
production facilities in various parts of the world over a two year
period. The worldwide manufacturing restructuring and re-engineering
program resulted in a pre-tax charge of $72.5 million ($55.7 million net
of tax), or $2.60 per share after taxes in fiscal 1997, of which 8.9
million remains as a current liability as of June 30, 1999.
The following table displays a rollforward of the liabilities for the
manufacturing restructuring from inception to June 30, 1999.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Amount
Original Amounts Amount Amount Amount Utilized
Provision Utilized Remaining Utilized Remaining Utilized Reversed Ending in First Ending *
Fiscal in Fiscal Balance in Fiscal Balance in Fiscal in Fiscal Balance Quarter Balance
Type Cost 1997 1997 3-31-97 1998 Other 3-31-98 1999 1999 3-31-99 Fiscal 2000 6-30-99
- --------- --------- --------- --------- ---------- -------- --------- --------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Employee $15,454(a) - $15,454 ($7,516) ($3,300) $ 4,638 ($2,637) ($2,001) - - -
severance
and
related
costs
Plant 32,978(b) ($24,468) 8,510 - (8,510) - - - - - -
closing
and
related
asset
write-offs
Re-eng-
ineering 7,184(c) (7,184) - - - - - -
Contractual 16,834(d) (5,042) 11,792 (7,500) 11,110 15,402 (562) (5,640) $9,200 (250) 8,950
obligations
and other
------- --------- ------- --------- -------- ------- -------- -------- ------ ------- -------
$72,450 ($36,694) $35,756 ($15,016) ($700) $20,040 ($3,199) ($7,641) $9,200 ( 250) $8,950
======= ========= ======= ======== ======= ======== ======= ======= ====== ===== =======
</TABLE>
*The balance at the end of the quarter is classified as a current liability.
(a) Represents severance costs for approximately 450 production employees
at six facilities. Estimates were based on calculations derived by attorneys who
considered the local labor laws at each location.
(b) Represents estimated impairment losses on land and buildings to be sold
($15 million) and machinery and equipment to be disposed ($14 million). Also
included is the estimate of site cleanup costs ($4 million). Estimates were
based principally on appraisals from third-party appraisers.
(c) Principally represents consulting costs, as well as limited training
and maintenance costs, which were expensed during 1997.
(d) Represents consulting and legal fees and other costs.
As of June 30, 1999, the Company's remaining obligation of $8.9 million consists
of its contractual obligation to produce a product for another entity at a plant
that is scheduled for closure. The majority of this accrual relates to
management's estimate of the costs to transfer production to a continuing plant
to meet the contractual obligation. Management believes that the remaining
manufacturing reserves are adequate to complete its plan during fiscal 2000.
11. Subsequent to the close of the quarter,in Holland,the Company acquired
Chlorhexamed(R),a medicated mouthwash for the German market.In Latin
America,the Company acquired Silidron(R) and Espasmo Silidron(R),two
anti-gas medicines sold in Brazil.In Korea,the Company acquired the balance
of certain marketing rights to the Parodontax(R) brand toothpaste. The
aggregate amount spent on these acquisitions was $51.9 million. Goodwill
recorded in connection with these acquisitions amounted to $51.3 million.
<PAGE>
BLOCK DRUG COMPANY, INC. & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL CONDITION
Operating Results:
- ------------------
Consolidated worldwide sales for the first quarter ended June 30, 1999 were
$200.9 million were up by 6% compared to prior year first quarter sales of
$189.4 million. During the quarter the Company sold the Lava brand hand soap,
its remaining household product. During the fiscal year ended March 31, 1999 the
Company sold three of its household product brands. Excluding the effects of the
divestitures, consolidated sales were $200.4 million up by 10% compared to prior
year first quarter sales of $182.2 million. The operations are divided into two
divisions: Americas, covering the Western Hemisphere markets, and International,
covering Europe, Asia/Pacific, Africa and the Middle East.
Americas sales for the quarter ended June 30, 1999 were up by 5% compared to the
prior year quarter. Total U.S. Division sales were up by 14%. Excluding the
divestiture, sales increased 20%. The sales growth was due to strong Consumer
Product Sales, plus the introduction of Polident Whitening Mouthwash. The sales
of Oral Health Care products were up 31%, primarily due to newly-introduced
products, e.g. Atridox, Aphthasol, Targon Fresh Mint and Sensodyne Whitening.
Sensodyne sales were up 27%. Latin America sales were down 27% mainly due to a
recessive economy in Brazil and a major currency devaluation. Sales in Canada
were down by 24% primarily due to divestiture of Household products and timing
of major promotions.
Total International Division sales increased 9% primarily due to strong growth
in Europe. Europe sales were up 13% primarily due to introduction of new
products acquired since the close of the first quarter of fiscal 1999, e.g.
Strep, Agevit, and Louis Marcel.
Interest, dividends and other income of $6.6 million decreased by about 50%
compared to the first quarter of the prior year income of $13.2 million. The
decrease is primarily because the prior year income included a gain on the sale
of Household products and a partial reversal of restructuring and re-engineering
liability.
The cost of goods sold percentage to sales was 30.3% and 29.8% in the first
quarter of the current and prior year, respectively. The cost of goods sold for
the Americas Division was 32.9% for the first quarter of the current year
compared to 30.4% for the first quarter of the prior year. The cost of goods
sold for International Division was 27.9% for the first quarter of the current
year compared to 29.0% for the first quarter of prior year. The change in the
cost of goods sold was primarily due to changes in product mix.
Selling, general and administrative expenses represented 62.3% and 66.8% of
sales for the first quarter of current year and prior year, respectively. The
major portion is related to advertising and promotional activities. These
expenses reflect major spending programs to meet significant competion and build
brand equities. Selling, general and administrative expenses declined during the
current quarter primarily due to exchange gains in Brazil,partially offset by
increased advertising expenses.
Interest expense was slightly lower in the first quarter of the current year
compared to the first quarter in the prior year. A portion of the proceeds from
the divestiture of the Lava brand hand soap was used to repay the debt. The
decrease was partially offset by additional financing obtained for product
acquisitions.
<PAGE>
BLOCK DRUG COMPANY, INC. & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL CONDITION
Operating Results: (Cont'd)
- ----------------------------
The Company's foreign exchange exposures derive primarily from the activities of
its foreign subsidiaries and affiliates which sell products to customers
generating accounts receivable both in their own local currency and in other
currencies. Certain subsidiaries, principally manufacturing locations in the
United Kingdom, Ireland and Brazil, also incur significant costs denominated in
currencies other than their functional currency.
Additionally, the Company is exposed to the risk that the results of operations
of its foreign affiliates may translate to lower than expected net income for
inclusion in the Company's consolidated results.
Interest rate cap agreements and foreign currency options are the only types of
derivatives used by the Company for risk management. The costs and benefits
derived from the interest rate caps are taken into income over the terms of the
agreements.
The Company manages its most significant foreign currency exposures, principally
inventory purchases, by purchasing average rate currency options that protect
against the fiscal year average value of each currency declining more than an
acceptable amount from the average for the prior year. Currencies that are
highly correlated to the U.S. dollar and those that are liquid or have high
interest rates (and therefore hedging cost) are not hedged. However, certain
affiliates in high interest rate environments maintain cash balances in U.S.
Dollars. If the affiliate's functional currency declines against the dollar,
such balances would produce incremental income, thereby offsetting the declining
dollar value of the affiliate's results included in the Company's net income.
The cost of foreign currency options are expensed over the period to which they
relate and any benefits, to the extent of options deemed effective hedges, are
treated as an adjustment to the related costs of inventory when purchased.
Worldwide Earnings by Geographic Region (Dollars in Thousands):
Three Months ended June 30,
1999 1998
-------- --------
Americas $13,575 $11,810
International 9,967 9,738
----- -----
23,542 21,548
General corporate expenses (5,258) (5,354)
-------- --------
Consolidated income before income taxes $18,284 $16,194
======== ========
<PAGE>
BLOCK DRUG COMPANY, INC. & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL CONDITION
Operating Results: (Cont'd)
- ---------------------------
Consolidated operating income increased 9.3%. Americas income increased 14.9%
and International income increased 2.4%. The increase in the Americas region was
primarily due to divestiture of Household product brands, acquisition of new
products and strong U.S. sales. The International area had a moderate increase
due to mix of products sold, new products acquired during the quarter, partially
offset by economic recession and weak currencies.
Due to the above factors, income before taxes was 9.1% of sales during the three
months ended June 30, 1999 as compared to 8.5% during the three months ended
June 30, 1998.
The effective income tax rates of 28.1% and 26.3% for the three months ended
June 30, 1999 and 1998, respectively, reflect tax exempt interest from
government securities and income from the lower tax areas of Puerto Rico and
Ireland. Increase in the tax rate was primarily due to increased income in
higher taxed jurisdictions.
It is difficult to predict future exchange movement. If exchange rates continue
at current levels, management does not anticipate any major material effect on
the Company's future financial condition or liquidity.
In February 1997, the Company announced the consolidation of its manufacturing
operations by planning to close six of its twelve production facilities in
various parts of the world over a two year period. The worldwide manufacturing
restructuring and re-engineering program resulted in a pre-tax charge of $72.5
million ($55.7 million net of tax), or $2.60 per share after taxes in fiscal
1997. As of June 30, 1999, the Company's remaining obligation of $8.9 million
consists of its contractual obligation to produce a product for another entity.
Management believes that the remaining manufacturing reserves are adequate to
complete its plan during fiscal 2000. (See Note 10)
During the quarter the Company acquired the Pelo Libre line of pediculicides in
Argentina. In the U.K. the Company acquired the Louis Marcel a depilatory
brand. The aggregate amount spent on these acquisitions was $3.7 million, which
also represents the goodwill recorded for the acquisitions.
Year 2000
- ----------
As many computer systems and other equipment or processors with embedded
chips (collectively, "Business Systems") use only two digits to represent the
year, they may be unable to accurately process certain data, before during or
after the year 2000. As a result, business and government entities are at risk
for possible miscalculations or systems failures causing disruption in their
business operations. This is commonly know as the year 2000 (Y2K Millennium Bug
or Y2K problem). The Y2K problem can arise at any point in the Company's supply,
manufacturing, processing, distribution and financial chains.
Block Drug Company and each of its operating subsidiaries are in the process
of implementing a Y2K compliance readiness program with the objective of having
all of their significant
<PAGE>
Business Systems, including those that affect facilities and manufacturing
activities, functioning properly with respect to the Y2K problem before
January 1, 2000. All operating subsidiaries are in the remediation stage of Y2K
readiness.
The first component of the Y2K compliance program is to identify the internal
Business Systems of the Company and its operating subsidiaries that are
susceptible to system failures or processing errors as a result of the Y2K
problem. This effort is substantially complete with all operating subsidiaries
having identified the Business Systems that may require remediation or
replacement and established priorities for repair or replacement. Those Business
Systems considered most critical to continuing operations are being given the
highest priority.
The second component of the Y2K compliance program involves the actual
remediation and replacement of Business Systems. The Company and its operating
subsidiaries are using both internal and external resources to complete this
process. The Business Systems ranked highest in priority have either been
remediated, replaced or scheduled for remediation or replacement. Business
Systems previously earmarked for retirement and replacement without regard to
the Y2K problem have been evaluated for early replacement with Y2K compliant
systems or programs or, in the alternative, remediation. The Company is in the
process of implementing Y2K compliant software/hardware wherever needed in the
US as well as fixing or replacing hardware and software where warranted, with
Y2K compliant solutions in our Affiliates. The Company completed all remediation
and replacement of its U.S. based internal Business Systems in March 1999. The
Company is at the final stage of testing and certification for Y2K readiness,
and the contingency plans will be prepared by September 1999.
As part of the Y2K compliance program, significant service providers,
vendors, suppliers, customers and government entities that are believed to be
critical to business operations after January 1, 2000, ("Key Business Partners")
have been identified and contacted through questionnaires, interviews or on-site
visits to ascertain their stage of Y2K readiness. Wherever we have electronic or
computer to computer communications with Key Partners, we plan to jointly test
these interfaces. In conjunction with this effort, key government agencies and
utilities upon which the Company and its subsidiaries rely are being approached
on a worldwide basis to identify their level of Y2K preparedness. In many cases
these entities, particularly those outside North America, have a lower level of
Y2K awareness and are less willing to provide information concerning their state
of Y2K readiness.
Because of the vast number of Business Systems used by the Company and its
operating subsidiaries, the significant number of Key Business Partners and
extent of the Company's foreign operations, the Company presently believes that
it may experience some disruption in its business due to the Y2K problem. More
specifically, because of the interdependent nature of Business Systems, the
Company and its operating subsidiaries could be materially adversely affected if
utilities and government entities with which they do business or that provide
essential services are not Y2K ready. The Company currently believes that the
greatest risk of disruption in its businesses exists in certain international
markets. The possible consequences of the Company or Key Business Partners not
being fully Y2K compliant by January 1, 2000 include, among other things,
temporary plant closings, delay in the delivery of products, delay in receipt of
supplies, invoice and collection errors, and inventory and supply obsolescence.
Concurrently, the business and results of operations of the Company could be
materially adversely affected by a temporary inability of the Company and its
operating subsidiaries to conduct their businesses in the ordinary course for a
period of time after January 1, 2000. However, the Company believes
<PAGE>
that its Y2K readiness program, including the contingency planning discussed
below, should significantly reduce the adverse effect of such disruptions.
Concurrently, with the Y2K readiness measures described above, the Company
and its operating subsidiaries are developing contingency plans intended to
mitigate the disruption in business operations that may result from Y2K
problems, and are developing cost estimates for such plans. Contingency plans
may include stockpiling raw and packaging materials, increasing inventory
levels, securing alternate sources of supply, adjusting facility shut-down and
start-up schedules and other appropriate measures. Once developed, contingency
plans and related cost estimates will be continually refined as additional
information becomes available.
The Company's original investment was estimated at $14 million to address its
Y2K effort as well as other business information requirements. This has been
revised, and it is expected that Y2K related expenses will reach a total of
about $16.9 million. To date, the Company has spent approximately $15.6 million.
These amounts do not include any costs associated with the implementation of
contingency plans, which are in the process of being developed.
The Company's Y2K compliance program is an ongoing process. Therefore, the
estimates of costs and completion dates for various components of the Y2K
compliance program are subject to change. The Company is, however, making every
effort to ensure that costs are forecasted as accurately as possible and
scheduled completion dates are achieved.
The estimates and conclusions herein contain forward-looking statements and
are based on management's best estimates of future events. The risks to
completing the plan include the availability of resources at specific facilities
and the ability of suppliers to bring their systems into Year 2000 compliance.
Euro Currency Adoption
- ----------------------
As result of the European Economic and Monetary Union, a single currency (the
"Euro") will replace the national currencies of many of the European countries
in which the Company conducts business. The conversion rates between the Euro
and the participating nations' currencies were fixed as of January 1, 1999, with
the participating national currencies scheduled to be removed from circulation
between January 1, and June 30, 2002, and replaced by Euro notes and coinage.
During the transition period from January 1, 1999 through December 31, 2001,
public and private entities as well as individuals may pay for goods and
services using either checks, drafts, or wire transfers denominated in Euros or
the participating country's national currency. We do not expect the Euro
conversion to have a material negative impact on operations in fiscal 2000. All
affiliates can operate within the Euro market.
We are currently upgrading our computer systems so that we can operate more
efficiently within the Euro market in fiscal 2000.
Financial Condition
- -------------------
Cash decreased in the current quarter ended June 30, 1999 from the year-ended
March 31, 1999 by $6 million. The decrease resulted primarily form an increase
in inventories, and other current assets partially offset by proceeds from the
divestiture of Lava soap. The proceeds from the divestiture were utilized
primarily to reduce short-term debt, to fund acquisitions and purchases
<PAGE>
of manufacturing equipment and computers. In the prior year first quarter
ended June 30, 1998 cash decreased by $23 million. The decrease resulted
primarily from a reduction of short-term debt, the payments for products
acquired and an increase in other current assets partially offset by the
sale of assets and a decrease in accounts receivable.
Reporting on Comprehensive Income
- ----------------------------------
Effective April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income". SFAS 130
establishes standards for the reporting of comprehensive income, and requires
that an enterprise classify items of other comprehensive income by their nature
in a financial statement, and display the accumulated balance of other
comprehensive income in the statement of financial position. Other comprehensive
income consists of movements in the company's cumulative translation adjustment
and unrealized holding gains and losses on marketable securities.
New Accounting Standards
- ------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and
for hedging activities. In June 1999, the FASB issued SFAS No. 137,
"Accounting For Derivatives and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133," which makes SFAS No. 133 effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company
is currently evaluating the impact of the new statement on its financial
position, results of operations and disclosures for fiscal 2002.
Subsequent Events
- ------------------
Subsequent to the close of the quarter,in Holland,the Company acquired
Chlorhexamed(R),a medicated mouthwash for German market.In Latin America,
the Company acquired Silidron(R) and Espasmo Silidron(R),two anti-gas medicines
sold in Brazil.In Korea,the Company acquired the balance of certain marketing
rights to the Parodontax(R) brand toothpaste. The aggregate amount spent on
these acquisitions was $51.9 million. Goodwill recorded in connection with
these acquisitions amounted to $51.3 million.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K
(a) The exhibits filed as part of this report are listed below:
Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8K
There were no reports on Form 8K for the three months ended
June 30, 1999.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
BLOCK DRUG COMPANY, INC.
(Registrant)
PETER ANDERSON
August 11, 1999 ---------------------
Peter Anderson
Senior Vice President &
Chief Financial Officer
<PAGE>
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