UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 1998
( ) Transition Report Pursuant to Section 13 or 15 (d) of the Securities Act
of 1934
For the transition period from to
Commission File Number 1-5910
CARTER-WALLACE, INC.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
(Exact name of registrant as specified in its charter)
Delaware 13-4986583
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1345 Avenue of the Americas
New York, New York 10105
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 212-339-5000
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
The number of shares of the registrant's Common Stock and Class B Common Stock
outstanding at September 30, 1998 were 32,930,900 and 12,337,800, respectively.
CARTER-WALLACE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
SEPTEMBER 30, 1998
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Earnings for
the three and six months ended September 30, 1998 and 1997 1
Condensed Consolidated Balance Sheets at
September 30, 1998 and March 31, 1998 2
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Report by KPMG Peat Marwick LLP on their limited review 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 11
Item 4 - Submission of Matters to a Vote of Security Holders 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 12
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CARTER-WALLACE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenues:
<S> <C> <C> <C> <C>
Net sales $169,169,000 $168,459,000 $338,831,000 $338,574,000
Other revenues 4,840,000 1,452,000 7,924,000 2,875,000
174,009,000 169,911,000 346,755,000 341,449,000
Cost and expenses:
Cost of goods sold 66,767,000 62,340,000 130,182,000 122,322,000
Advertising, marketing &
other selling expenses 65,824,000 68,954,000 129,190,000 134,832,000
Research & development
expenses 6,289,000 7,923,000 12,977,000 14,150,000
General, administrative
& other expenses 24,138,000 21,704,000 46,587,000 44,558,000
Interest expense 1,292,000 1,114,000 2,558,000 2,194,000
164,310,000 162,035,000 321,494,000 318,056,000
Earnings before taxes
on income 9,699,000 7,876,000 25,261,000 23,393,000
Provision for taxes
on income 3,783,000 3,150,000 9,852,000 9,357,000
Net earnings $ 5,916,000 $ 4,726,000 $ 15,409,000 $ 14,036,000
Earnings per share -
Basic and Diluted $ .13 $ .10 $ .34 $ .30
Cash dividends per share $ .06 $ .04 $ .10 $ .08
Average shares of common
stock outstanding 45,314,000 46,329,000 45,328,000 46,334,000
</TABLE>
<TABLE>
CARTER-WALLACE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, March 31,
1998 1998
Assets (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 56,936,000 $ 51,661,000
Short-term investments 29,131,000 25,826,000
Accounts and other receivables less
allowances of $7,321,000 at September 30,
1998 and $7,306,000 at March 31, 1998 128,318,000 133,011,000
Inventories:
Finished goods 41,418,000 45,811,000
Work in process 10,109,000 9,751,000
Raw materials and supplies 27,309,000 25,408,000
78,836,000 80,970,000
Deferred taxes, prepaid expenses
and other current assets 30,293,000 28,470,000
Total Current Assets 323,514,000 319,938,000
Property, plant and equipment, at cost 306,978,000 300,051,000
Less: accumulated depreciation and amortization 158,304,000 149,828,000
148,674,000 150,223,000
Intangible assets 124,787,000 124,542,000
Deferred taxes and other assets 99,825,000 98,910,000
Total Assets $696,800,000 $693,613,000
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 36,335,000 $ 32,506,000
Accrued expenses 117,105,000 123,863,000
Notes payable 14,503,000 17,854,000
Total Current Liabilities 167,943,000 174,223,000
Long-Term Liabilities:
Long-term debt 51,143,000 48,887,000
Deferred compensation 17,233,000 17,553,000
Accrued postretirement benefit obligation 69,533,000 69,292,000
Other long-term liabilities 34,170,000 34,008,000
Total Long-Term Liabilities 172,079,000 169,740,000
Stockholders' Equity:
Common stock 34,714,000 34,698,000
Class B common stock 12,491,000 12,507,000
Capital in excess of par value 4,399,000 4,204,000
Retained earnings 360,691,000 349,815,000
Less: Foreign currency translation
adjustment 26,821,000 24,811,000
Treasury stock, at cost 28,696,000 26,763,000
Total Stockholders' Equity 356,778,000 349,650,000
Total Liabilities and Stockholders' Equity $696,800,000 $693,613,000
</TABLE>
<TABLE>
CARTER-WALLACE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<CAPTION>
1998 1997
Cash flows from operations:
<S> <C> <C>
Net earnings $ 15,409,000 $ 14,036,000
Cash payments for one-time charges
incurred in prior years (1,953,000) (11,092,000)
Changes in assets and liabilities 4,806,000 (5,949,000)
Depreciation and amortization 13,188,000 12,044,000
31,450,000 9,039,000
Cash flows used in investing activities:
Additions to property, plant and equipment (6,757,000) (8,138,000)
Cash paid for acquisitions (3,633,000) -
(Increase) in short-term investments (4,405,000) (1,051,000)
Proceeds from sale of property, plant
and equipment 15,000 6,142,000
(14,780,000) (3,047,000)
Cash flows used in financing activities:
Dividends paid (4,533,000) (3,707,000)
Increase in borrowings 3,875,000 34,000
Payments of debt (5,628,000) (1,837,000)
Purchase of treasury stock (2,196,000) (796,000)
(8,482,000) (6,306,000)
Effect of exchange rate changes on
cash and cash equivalents (2,913,000) (355,000)
Increase (decrease) in cash and
cash equivalents $ 5,275,000 $ (669,000)
</TABLE>
CARTER-WALLACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
Note 1: Interim Reports
The results of the interim periods are not necessarily indicative of results
expected for a full year's operations. In the opinion of management, all
adjustments necessary for a fair statement of results of these interim periods
have been reflected in these financial statements and are of a normal recurring
nature.
Note 2: Review of Independent Auditors
The financial information included in this Form has been reviewed by KPMG Peat
Marwick LLP, independent auditors. A copy of their report on this limited
review is included in this Form.
Note 3: Felbatol
As previously reported, in the fiscal years ended March 31, 1995 and 1996 the
Company incurred one-time charges to pre-tax earnings totaling $45,980,000
related to use restrictions for Felbatol. Depending on future sales levels,
additional inventory write-offs may be required. If for any reason the product
at some future date should no longer be available in the market, the Company
will incur an additional one-time charge, consisting primarily of inventory
write-offs and anticipated returns of product currently in the market, in the
range of $20,000,000 on a pre-tax basis.
Note 4: Litigation
Information regarding Legal Proceedings involving the Company is presented in
Note 19 "Litigation Including Environmental Matters" of the Notes to the
Consolidated Financial Statements on pages 28 to 31 of the Company's 1998 Annual
Report to Stockholders incorporated by reference in the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1998 and is herein expressly
incorporated by reference.
In July 1998, the United States Court of Appeals for the Second Circuit affirmed
in part and reversed and remanded in part the decision of the United States
District Court, Southern District of New York, which had dismissed with
prejudice the Second Amended Class Action Complaint alleging that certain
statements made by the Company with respect to the safety and anticipated future
sales of its anti-epilepsy drug Felbatol were false and misleading.
The Company continues to believe, based upon opinion of counsel, that it has
good defenses to all of the above pending actions and should prevail.
(Continued)
CARTER-WALLACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(Continued)
Note 5: Accounting Pronouncement
The Company has adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income". This Statement establishes standards for
reporting and displaying comprehensive income and its components. Comprehensive
income for the three months and six months ended September 30, 1998 was
$5,097,000 and $13,399,000, respectively. This compares to comprehensive income
for the three months and six months ended September 30, 1997 of $1,302,000 and
$10,497,000, respectively.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Carter-Wallace, Inc.:
We have reviewed the condensed consolidated balance sheet of Carter-Wallace,
Inc. and subsidiaries as of September 30, 1998, and the related condensed
consolidated statements of earnings for the three month and six month periods
ended September 30, 1998 and 1997 and the condensed consolidated statements of
cash flows for the six month periods ended September 30, 1998 and 1997. These
condensed consolidated 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 condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Carter-Wallace, Inc. and
subsidiaries as of March 31, 1998, and the related consolidated statements of
earnings and retained earnings, and cash flows for the year then ended
(not presented herein); and in our report dated May 7, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of March 31, 1998 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
KPMG PEAT MARWICK LLP
New York, New York
October 27, 1998
</AUDIT-REPORT>
CARTER-WALLACE, INC.
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations - Three months ended September 30, 1998 compared to three
months ended September 30, 1997
Consolidated earnings after taxes in the three months ended September 30, 1998
were $5,916,000 or $.13 per share compared with net earnings of $4,726,000 or
$.10 per share in the three months ended September 30, 1997.
Net sales increased $710,000 (0.4%) in the current year period as compared to
net sales in the prior year period. The improvement was due primarily to
increased unit volume in the Consumer Products segment and selling price
increases in both the Health Care and Consumer Products segments. Unit volume
in the Health Care segment was lower than in the prior year period. Sales of
pharmaceutical products in the Health Care segment continue to be adversely
impacted by generic competition.
Sales and earnings from foreign operations are subject to fluctuations in
exchange rates. Lower foreign exchange rates had the effect of decreasing sales
in the current year period by approximately $1,800,000. The effect of changes
in foreign exchange rates on earnings was not material.
Other revenues increased by $3,388,000 from $1,452,000 in the prior year period
to $4,840,000 in the current year period. Included in the current year period
is a credit related to joint venture operations as well as increased interest
income.
Cost of goods sold as a percentage of net sales increased from 37.0% in the
prior year period to 39.5% in the current year period primarily due to changes
in product mix.
Advertising, marketing and other selling expenses decreased by $3,130,000 or
4.5% versus the prior year period due primarily to reduced spending in the
Consumer Products segment.
Research and development expenses decreased by $1,634,000 or 20.6% versus the
prior year period due primarily to lower spending in both the Consumer Products
and Health Care segments. The decline in the Consumer Products segment is
largely related to prior year employee termination costs.
General, administrative and other expenses increased $2,434,000 or 11.2% versus
the prior year period due largely to employee termination costs related to
organizational changes.
The estimated annual effective tax rate applied in the three months ended
September 30, 1998 was 39%, the same as the fiscal 1998 annual tax rate.
However, this rate is lower than the 40% rate applied in the three months ended
September 30, 1997.
(Continued)
CARTER-WALLACE, INC.
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
Results of Operations - Six months ended September 30, 1998 compared to six
months ended September 30, 1997
Consolidated earnings after taxes in the six months ended September 30, 1998
were $15,409,000 or $.34 per share compared with net earnings of $14,036,000 or
$.30 per share in the six months ended September 30, 1997.
Net sales increased $257,000 (0.1%) in the current year period as compared to
net sales in the prior year period. The improvement was due primarily to
increased unit volume in the Consumer Products segment and selling price
increases in both the Health Care and Consumer Products segments. Unit volume
in the Health Care segment was lower than in the prior year period. Sales of
pharmaceutical products in the Health Care segment continue to be adversely
impacted by generic competition.
Sales and earnings from foreign operations are subject to fluctuations in
exchange rates. Lower foreign exchange rates had the effect of decreasing sales
in the current year period by approximately $4,600,000. The effect of changes
in foreign exchange on earnings was not material.
Other revenues increased by $5,049,000 from $2,875,000 in the prior year period
to $7,924,000 in the current year period. Included in the current year period
is a credit related to joint venture operations as well as increased interest
income.
Cost of goods sold as a percentage of net sales increased from 36.1% in the
prior year period to 38.4% in the current year period primarily due to changes
in product mix.
Advertising, marketing and other selling expenses decreased by $5,642,000 or
4.2% versus the prior year period due to reduced spending in both the Consumer
Products and Health Care segments.
Research and development expenses decreased by $1,173,000 or 8.3% versus the
prior year period due primarily to decreased spending in the Consumer Products
segment as a result of prior year employee termination costs.
General, administrative and other expenses increased $2,029,000 or 4.6% versus
the prior year period due largely to employee termination costs related to
organizational changes.
The estimated annual effective tax rate applied in the six months ended
September 30, 1998 was 39%, the same as the fiscal 1998 annual tax rate.
However, this rate is lower than the 40% rate applied in the six months ended
September 30, 1997.
(Continued)
CARTER-WALLACE, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
Astelin
In July 1998, the Company entered into a joint venture agreement with ASTA
Medica AG with an effective date of November, 1997. Under the terms of the
agreement the Company is responsible for all manufacturing, selling, marketing
and administrative activities for Astelin and Depen, another product licensed
from ASTA Medica AG, and receives compensation for these activities from the
joint venture.
Felbatol
As previously reported, in the fiscal years ended March 31, 1995 and 1996 the
Company incurred one-time charges to pre-tax earnings totaling $45,980,000
related to use restrictions for Felbatol. Depending on future sales levels,
additional inventory write-offs may be required. If for any reason the product
at some future date should no longer be available in the market, the Company
will incur an additional one-time charge, consisting primarily of inventory
write-offs and anticipated returns of product currently in the market, in the
range of $20,000,000 on a pre-tax basis.
Year 2000 Compliance
The Company is implementing a plan which addresses Year 2000 technology
compliance for its information technology ("IT") and non-IT systems. The plan
includes a review of the Company's suppliers and customers to assure that they
are working toward Year 2000 compliance.
Internal IT systems are expected to be made compliant by the first quarter of
the next fiscal year. Non-IT systems are expected to be made compliant by the
second quarter of the next fiscal year. Material third party vendors have been
contacted and asked to attest to Year 2000 compliance. Alternate vendors will
be evaluated as potential replacements for non-compliant or non-responsive
vendors. The entire project is expected to cost between $1,000,000 and
$2,000,000 on a pre-tax basis.
If IT and non-IT systems affected by the Year 2000 were not addressed as the
Company is doing, they could conceivably cause technological failures throughout
the Company, disrupting normal business operations. These theoretical
consequences are generally shared with other manufacturing companies.
Management does not believe that the Company's business will be materially
affected by Year 2000 issues. Nevertheless, the Company expects to have
contingency plans that address the most reasonably likely worst case Year 2000
scenarios. Contingency plans include a possible increase in key inventory items
in anticipation of vendors not being able to supply stock and, where
appropriate, a review of manual operations to provide back-up for critical
areas.
(Continued)
CARTER-WALLACE, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
Liquidity and Capital Resources
Funds provided from operations are used for capital expenditures, acquisitions,
the purchase of treasury stock, the payment of dividends and working capital
requirements. External borrowings are incurred as needed to satisfy cash
requirements relating to seasonal business fluctuations, to finance major
facility expansion programs and to finance major acquisitions.
Approximately 15% of the Company's debt is financed at variable interest rates.
Changes in interest rates could affect interest expense in future periods.
In the Statement of Cash Flows, the change in assets and liabilities in the
current year period compared to that in the prior year period is due primarily
to decreased working capital requirements in the current year, primarily
accounts receivable.
In September 1998, the Company's Board of Directors approved repurchase by the
Company of up to 1,000,000 shares of its outstanding common stock in the open
market or in privately negotiated transactions. Under this program the Company
has repurchased 60,000 shares at a total cost of $910,000 through September 30,
1998.
Under the stock repurchase program approved in October 1997, the Company
repurchased 945,000 shares at a total cost of $15,890,000 through March 31,
1998, and 55,000 shares in April 1998, at a total cost of $985,000.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Please refer to Note 4: "Litigation" of Notes to Condensed Consolidated
Financial Statements for information regarding legal proceedings.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Company was held on July 21, 1998.
(b) At the Annual Meeting the following matters were submitted to a vote of
security holders:
(1) Each person named below received the number of votes set opposite his
or her name for election as Director of the Company to serve until the
next Annual Meeting of Stockholders and until his or her successor
shall have been elected and qualified:
David M. Baldwin 144,996,405
Daniel J. Black 144,998,260
Richard L. Cruess 144,995,995
Suzanne H. Garcia 145,002,580
Henry H. Hoyt, Jr. 144,980,728
Scott C. Hoyt 144,983,912
Ralph Levine 145,016,618
Herbert M. Rinaldi 144,485,551
Paul A. Veteri 145,016,172
6,831,297 votes were withheld from voting on Directors.
(2) On the resolution relating to the appointment of KPMG Peat Marwick LLP,
independent auditors, to audit the financial statements of the Company
for the fiscal year ending March 31, 1999, the number of votes cast in
favor of this proposal was 146,882,023 and the number of votes cast
against this proposal was 544,465.
(3) On the resolution relating to maximizing shareholder value, the number
of votes cast in favor of this proposal was 3,610,151 and the number
of votes cast against this proposal was 138,181,149.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K - No reports on Form 8-K have been filed during the
quarter ended September 30, 1998.
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.
Carter-Wallace, Inc.
(Registrant)
Date: October 27, 1998 /s/Ralph Levine
Ralph Levine
President & Chief
Operating Officer
Date: October 27, 1998 /s/Paul A. Veteri
Paul A. Veteri
Executive Vice President
& Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 56,936,000
<SECURITIES> 29,131,000
<RECEIVABLES> 135,639,000
<ALLOWANCES> 7,321,000
<INVENTORY> 78,836,000
<CURRENT-ASSETS> 323,514,000
<PP&E> 306,978,000
<DEPRECIATION> 158,304,000
<TOTAL-ASSETS> 696,800,000
<CURRENT-LIABILITIES> 167,943,000
<BONDS> 65,646,000
0
0
<COMMON> 47,205,000
<OTHER-SE> 309,573,000
<TOTAL-LIABILITY-AND-EQUITY> 696,800,000
<SALES> 338,831,000
<TOTAL-REVENUES> 346,755,000
<CGS> 130,182,000
<TOTAL-COSTS> 321,494,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,558,000
<INCOME-PRETAX> 25,261,000
<INCOME-TAX> 9,852,000
<INCOME-CONTINUING> 15,409,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,409,000
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
