SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
_________________
Commission file number 0-7623
NEUTROGENA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2221471
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5760 WEST 96th STREET, LOS ANGELES, CALIFORNIA 90045
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 642-1150
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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
At August 31, 1994 there were outstanding 25,717,859 shares Common Stock, par
value $.001 per share.
NEUTROGENA CORPORATION
AND SUBSIDIARIES
I N D E X
Page
Number
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
July 31, 1994 and October 31, 1993
(Unaudited)
Condensed Consolidated Statements of
Income and Retained Earnings
Three Months Ended July 31, 1994 4
and 1993 (Unaudited)
Nine Months Ended July 31, 1994 5
and 1993 (Unaudited)
Condensed Consolidated Statements of Cash
Flows
Nine Months Ended July 31, 1994 and 6
1993 (Unaudited)
Notes to Condensed Consolidated Financial 7
Statements (Unaudited)
Independent Accountants' Review Report 10
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 13
<TABLE>
NEUTROGENA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
(UNAUDITED)
<CAPTION>
July 31, October 31,
1994 1993
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,896 $ 10,274
Temporary investments, at cost, which
approximates market 21,891 32,450
Accounts receivable, less allowance
for doubtful accounts of $774
(1994) and $743 (1993) 50,322 54,638
Inventories (Note C) 31,360 22,137
Prepaid income taxes (Note D) 1,720 1,837
Prepaid expenses and other
current assets 10,001 6,921
Total current assets 119,190 128,257
FIXED ASSETS, less accumulated depreciation
and amortization of $30,473 (1994)
and $26,704 (1993) 60,025 56,022
OTHER ASSETS, net 11,859 12,051
TOTAL ASSETS $191,074 $196,330
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term borrowings $ 7,380 $ 9,601
Accounts payable 16,930 17,624
Accrued liabilities 22,778 32,864
Income taxes payable (Note D) 297 3,540
Total current liabilities 47,385 63,629
DEFERRED COMPENSATION 3,859 3,098
DEFERRED INCOME TAXES PAYABLE (NOTE D) 975 975
Total liabilities 52,219 67,702
STOCKHOLDERS' EQUITY:
Series A Preferred stock, $.001 par value,
authorized 310,713 shares, none issued - -
Preferred stock, $.001 par value,
authorized 6,689,287 shares,
none issued - -
Common stock, $.001 par value,
authorized 100,000,000 shares,
issued 26,724,844 shares (1994 and 1993) 27 27
Common stock in excess of par value 15,935 15,876
Retained earnings 141,352 133,130
Cumulative translation adjustments (391) (1,258)
Treasury stock, at cost, 1,009,095 shares
(1994) and 1,069,794 shares (1993) (Note E) (18,068) (19,147)
Total stockholders' equity 138,855 128,628
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $191,074 $196,330
See notes to condensed consolidated financial statements.
* Condensed from Audited Consolidated Balance Sheet
</TABLE>
<PAGE>
<TABLE>
NEUTROGENA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In thousands except share and per share amounts)
(UNAUDITED)
<CAPTION>
For the Three Months
Ended July 31,
1994 1993
<S> <C> <C>
NET SALES $ 77,622 $ 61,656
COST OF SALES 19,573 16,964
GROSS PROFIT 58,049 44,692
OPERATING EXPENSES:
Marketing and selling 43,917 30,500
General and administrative 3,994 3,948
INCOME FROM OPERATIONS 10,138 10,244
OTHER INCOME (EXPENSE), NET 56 (91)
INCOME BEFORE INCOME TAXES 10,194 10,153
PROVISION FOR INCOME TAXES (NOTE D) 3,771 4,054
NET INCOME 6,423 6,099
RETAINED EARNINGS, beginning of period 134,937 116,485
TREASURY STOCK ISSUED FOR STOCK
OPTIONS EXERCISED (8) (16)
RETAINED EARNINGS, end of period $141,352 $122,568
NET INCOME PER SHARE $ .25 $ .23
WEIGHTED AVERAGE NUMBER OF SHARES
AND EQUIVALENT SHARES OUTSTANDING 25,922,217 26,341,734
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
NEUTROGENA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In thousands except share and per share amounts)
(UNAUDITED)
<CAPTION>
For the Nine Months
Ended July 31,
1994 1993
<S> <C> <C>
NET SALES $211,310 $198,464
COST OF SALES 54,026 51,994
GROSS PROFIT 157,284 146,470
OPERATING EXPENSES:
Marketing and selling 123,275 113,051
General and administrative 10,077 11,112
INCOME FROM OPERATIONS 23,932 22,307
OTHER INCOME, NET 1,007 892
INCOME BEFORE INCOME TAXES 24,939 23,199
PROVISION FOR INCOME TAXES (NOTE D) 9,227 8,816
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 15,712 14,383
CUMULATIVE EFFECT ON PRIOR YEARS OF
CHANGE IN ACCOUNTING FOR INCOME
TAXES (NOTE D) - 1,069
NET INCOME 15,712 15,452
RETAINED EARNINGS, beginning of period 133,130 114,594
CASH DIVIDENDS ($.27 per share in 1994;
$.24 per share in 1993) (6,935) (6,344)
TREASURY STOCK ISSUED FOR STOCK
OPTIONS EXERCISED (555) (1,134)
RETAINED EARNINGS, end of period $141,352 $122,568
PER SHARE AMOUNTS:
Income before cumulative effect
of accounting change $ .61 $ .54
Cumulative effect of change in
accounting for income taxes - .04
Net income $ .61 $ .58
WEIGHTED AVERAGE NUMBER OF SHARES
AND EQUIVALENT SHARES OUTSTANDING 25,934,159 26,460,426
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
NEUTROGENA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<CAPTION>
For the Nine Months
Ended July 31,
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $15,712 $15,452
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 4,780 4,075
Loss (gain) on sale of fixed assets 20 (26)
Deferred income taxes payable 59 (665)
Deferred compensation 761 645
Decrease in accounts receivable 4,316 5,661
(Increase) decrease in inventories (9,223) 704
Increase in prepaid expenses and
other current assets (2,963) (1,952)
Decrease in accounts payable (357) (5,798)
Decrease in accrued liabilities (9,074) (10,890)
(Decrease) Increase in income taxes payable (3,243) 230
Net cash provided by operating activities 788 7,436
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,804) (9,835)
Proceeds from sale of fixed assets 88 546
Purchase of short-term investments (1,619) (1,486)
Sale of short-term investments 12,178 17,125
Increase in other assets (1,244) (2,890)
Net cash provided by investing activities 599 3,460
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term borrowings (2,221) 6,986
Proceeds from exercise of employee stock options 524 371
Dividends paid (6,935) (6,344)
Common stock repurchased - (11,201)
Net cash used in financing activities (8,632) (10,188)
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,245) 708
CASH AND CASH EQUIVALENTS, beginning of period 10,274 11,893
Effect of translation rate changes on cash 867 (1,048)
CASH AND CASH EQUIVALENTS, end of period $ 3,896 $11,553
Cash paid during the period:
Interest expense $ 610 $ 416
Income taxes $12,238 $ 9,001
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
NEUTROGENA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE A -
The condensed consolidated balance sheet as of July 31, 1994, the related
statements of income and retained earnings for the three and nine months ended
July 31, 1994 and 1993 and cash flows for the nine months ended July 31, 1994
and 1993 have been prepared by Neutrogena Corporation (the "Company") without
audit. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) have been made which are necessary to present fairly the
financial position, results of operations and cash flows of the Company and its
consolidated subsidiaries at July 31, l994 and for all periods presented.
Although the Company believes that the disclosure in the condensed consolidated
financial statements is adequate for a fair presentation thereof, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The October 31, 1993 audited statements were included in
the Company's annual report on Form 10-K under the Securities Exchange Act of
1934. These condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto contained in
that annual report.
The results of operations for the period ended July 31, 1994 are not necessarily
indicative of the results for the full year.
NOTE B -
Financial information relative to the foreign operations (includes subsidiaries,
branches, U.S. export and U.S. international administration) as of July 31, 1994
and 1993, and for the nine months then ended, follows (in thousands):
1994 1993
Net sales $44,607 $41,901
Net loss $ (518) $ (334)
Total assets $25,962 $23,717
NOTE C -
Inventories comprised the following (in thousands):
July 31, October 31,
1994 1993
Raw materials $12,875 $ 7,816
Work in process 611 815
Finished goods 17,874 13,506
$31,360 $22,137
<PAGE>
NEUTROGENA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
(Continued)
NOTE D -
The Company adopted, effective November 1, 1992, Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," issued in
February 1992. Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The adoption of SFAS 109 increased net income, on a one-time basis, for the nine
months ended July 31, 1993 by $1,069 or $.04 per share.
NOTE E -
On September 21, 1993, the Board of Directors authorized the Company to purchase
up to 1,000,000 shares of its Common Stock from time to time in the open market
and in privately negotiated transactions. As of July 31, 1994, the Company has
not purchased any shares under this authorization.
NOTE F -
On August 22, 1994, the Company announced that it has entered into a definitive
agreement with Johnson & Johnson whereby, Johnson & Johnson through a wholly-
owned subsidiary, will acquire the Company. The Board of Directors of both
Johnson & Johnson and the Company have given approval to the acquisition.
Under the agreement, Johnson & Johnson, through a cash tender offer has offerred
to buy all of the outstanding shares of the Company for $35.25 per share. Any
shares not purchased in the offer will be acquired for the same price in cash,
in a second-step merger. The offer began on August 26, 1994 and is scheduled to
expire at 12:00 midnight, New York City time, on September 23, 1994 unless the
offer is extended.
Mr. Lloyd E. Cotsen, Chairman and Chief Executive Officer of the Company, has
entered into an agreement with Johnson & Johnson under which he has agreed to
tender all 9,868,996 shares beneficially owned by him in the offer.
<PAGE>
NEUTROGENA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
(Continued)
The current directors and executive officers of the Company as a group hold
stock options granted under the Option Plans to purchase an aggregate of
1,793,179 Shares at exercise prices ranging from $7.644 to $26.400 per Share.
In addition, the current directors and executive officers of the Company as a
group hold SARs granted under the Option Plans covering 1,205,054 Shares at
an appreciation base per share ranging from $7.644 to $26.400 per Share.
In accordance with the terms of the Merger Agreement, (i) each holder of a stock
option granted under the Option Plans which is outstanding immediately prior to
the consummation of the Offer, whether or not then exercisable, will be entitled
to receive from the Company an amount in cash equal to the product of (y) the
number of Shares subject to such stock option immediately prior to consummation
of the Offer and (z) the excess of the price per Share to be paid in the Offer
over the per Share exercise price of such stock option and (ii) each holder of
a SAR granted under the Option Plans which is outstanding immediately prior to
the consummation of the Offer will be entitled to receive from the Company an
amount of cash equal to the product of (y) the number of Shares covered by
such SAR and (z) the excess of the price per Share to be paid in the Offer over
the appreciation base per Share of such SAR.
The offer and merger are subject to the purchase of a majority of the
outstanding shares of the Company's Common Stock, as well as other customary
conditions including clearance under the Hart-Scott-Rodino Anti-Trust
Improvements Act.
Lehman Brothers Inc. provided financial advisory services to the Company's Board
of Directors and has rendered a fairness opinion on this transaction. Lehman
Brothers was paid a fee of $500,000 upon delivery of its written opinion. Such
fee will be credited against the aggregate fee of approximately $7.4 million to
be paid to Lehman Brothers by the Company pursuant to the letter agreement dated
June 8, 1994. In the event an unsolicited alternative transaction is agreed to
by the Company, there would be a total fee payable to Johnson & Johnson of $27.5
million, including $2.5 million of expenses.
Reference is made to the Schedule 14D-9 and exhibits thereto and the offer to
purchase for cash which has been filed with the Securities and Exchange
Commission for additional information concerning this transaction.
NOTE G -
On August 17, 1994, Mr. Daniel C. Lapouyade's employment with the Company was
terminated. In that regard, Mr. Lapouyade and the Company entered into a
settlement agreement with respect to Mr. Lapouyade's employment related claims
on August 19, 1994. Mr. Lapouyade had served as the President of the Company's
European operations.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Neutrogena Corporation:
We have reviewed the condensed consolidated balance sheet of Neutrogena
Corporation as of July 31, 1994, and the related condensed consolidated
statements of income and cash flows for the three-month and nine-month periods
ended July 31, 1994 in accordance with Statements on Standards for Accounting
and Review Services issued by the American Institute of Certified Public
Accountants. All information included in these condensed consolidated
financial statements is the representation of management of Neutrogena
Corporation.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit 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 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 Neutrogena Corporation as of
October 31, 1993, and the related consolidated statements of income and cash
flows for the year then ended (not presented herein); and in our report dated
November 30, 1993, 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 October 31, 1993, is
fairly presented, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
KPMG Peat Marwick LLP
Los Angeles, California
August 16, 1994
<PAGE>
NEUTROGENA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1994 COMPARED WITH THREE MONTHS ENDED JULY 31, 1993
Net sales for the three months ended July 31, 1994 reached $77.6 million for an
increase of $16.0 million or 25.9%. New product sales reached $8.1 million (a
product is defined as a new product until it has completed one full fiscal year
of sales). Volume on existing products increased $10.0 million in part because
of increased U.S. promotional activity during the quarter.
Sales in the United States reached $63.5 million for an increase of $14.1
million or 28.6%. International sales (which includes U.S. based export)
reached $14.1 million for an increase of $1.8 million or 14.9%.
Gross profit margin increased to 74.8% of sales from 72.5%. This increase in
gross profit margin was due to operating efficiencies, lower procurement costs
and changes in product mix. Marketing and selling expense increased to 56.6% of
sales from 49.5%. This increase was due to a concentration of television and
print advertising and other promotional support which helped increase sales.
These marketing and selling support expenses were low during the third quarter
of the prior year. General and Administrative expense decreased to 5.1% of
sales compared to 6.4% in the prior year.
Income from operations remained essentially flat due to the planned promotional
calendar during the quarter and a reduction in International Division results
due in part, to the poor economic condition in Southern Europe.
The effective tax rate for the quarter was 37.0% as compared to 39.9% in the
prior year. The effective tax rate was principally effected by increased sales
volume manufactured in the Company's facility located in a tax free zone in
France.
NINE MONTHS ENDED JULY 31, 1994 COMPARED WITH NINE MONTHS ENDED JULY 31, 1993
Net sales for the first nine months reached $211.3 million for an increase of
$12.8 million or 6.5%. New product sales contributed $19.5 million, while
volume on existing products fell by $4.2 million. Translation of foreign
currency into U.S. dollars decreased sales by $1.3 million.
Sales in the United States totaled $166.7 million for an increase of $10.1
million or 6.5%.
International sales reached $44.6 million for an increase of $2.7 million or
6.5%.
NINE MONTHS ENDED JULY 31, 1994 COMPARED WITH NINE MONTHS ENDED JULY 31, 1993
(Continued)
Gross profit margin for the first nine months was 74.4% of sales compared to
73.8% during 1993. The increase in gross profit margin was principally due to
increased operating efficiencies and lower procurement costs. Marketing and
selling expense increased by 1.3% to 58.3% of sales due to increased promotional
support expenses for the new products.
Income from operations remained constant at approximately 11% of sales.
The effective tax rate for the nine months was 37.0% compared to 38.0% during
1993. The effective tax rate was impacted by the effect of sales volume
manufactured in the Company's facility located in a tax-free zone in France.
Net income (before the cumulative effect of changes in accounting for income
taxes SFAS 109) increased by 9.2%.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended July 31, 1994, cash and temporary investments
decreased by $16.9 million. This decrease was caused by annual payments of
trade allowance programs, dividends, and acquisition of fixed assets offset by
cash generated from operations.
The Company continues to use short-term debt in Europe to, in part, assist in
foreign exchange management. As of July 31, 1994, the debt balance was $7.4
million. Additional borrowing may be made as deemed necessary.
The Company believes its current cash position, the working capital generated by
future operations and the ability to borrow from financial institutions should
be adequate to meet its financing requirements for current operations and the
foreseeable future.
SUBSEQUENT EVENT
Reference is made to Note F of the Condensed Consolidated Financial Statements
included elsewhere in this Form 10-Q for a description of the definitive
agreement with Johnson & Johnson whereby, Johnson & Johnson will acquire the
Company.
<PAGE>
NEUTROGENA CORPORATION
AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit:
11.1 Statement re: computation of per share earnings
15.1 Letter re: unaudited interim financial information
(b) Reports on Form 8-K:
None
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.
NEUTROGENA CORPORATION
September 9, 1994 /s/ Donald R. Schort
Date Donald R. Schort
Senior Vice President and
Chief Financial Officer
<PAGE>
<TABLE>
NEUTROGENA CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
Three Months Nine Months
Ended July 31, Ended July 31,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
PRIMARY SHARES:
Weighted average shares
outstanding 25,708,152 26,161,930 25,708,152 26,161,930
Dilutive effect of stock
options after application
of Treasury stock method 214,065 179,804 226,007 298,496
Total 25,922,217 26,341,734 25,934,159 26,460,426
Income before cumulative
effect of accounting change $ 6,423 $ 6,099 $ 15,712 $ 14,383
Cumulative effect on prior
years of change in accounting
for income taxes - - - 1,069
Net income $ 6,423 $ 6,099 $ 15,712 $ 15,452
PER SHARE AMOUNTS:
PRIMARY:
Income before cumulative
effect of accounting change $ .25 $ .23 $ .61 $ .54
Cumulative effect of change in
accounting for income taxes - - - .04
Net income $ .25 $ .23 $ .61 $ .58
Fully dilutive shares are not shown because the difference between primary
and fully dilutive shares is immaterial.
</TABLE>
<PAGE>
Exhibit 11.1
INDEPENDENT AUDITORS' CONSENT
Neutrogena Corporation
Los Angeles, California
Gentlemen:
Re: Registration Statement No. 33-18115 on Form S-8, Registration Statement
No. 33-18116 on Form S-8, Registration Statement No. 33-38535 on Form S-8,
and Registration Statement No. 33-18160-3 on Form S-3
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated August 16, 1994 related to our
review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
Very truly yours,
KPMG Peat Marwick LLP
Los Angeles, California
September 9, 1994
Exhibit 15.1
