-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HNdw8gOXpB8TcnDua40t6bckBi+PHWeYyt5RDsO/RV8QH2iiO/gXTjr0v/TMdiic z/nt5evQ3vbdB5GmFTktbw== 0000012654-97-000004.txt : 19970701 0000012654-97-000004.hdr.sgml : 19970701 ACCESSION NUMBER: 0000012654-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970630 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLOCK DRUG CO INC CENTRAL INDEX KEY: 0000012654 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 221375645 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-06436 FILM NUMBER: 97632838 BUSINESS ADDRESS: STREET 1: 257 CORNELISON AVE CITY: JERSEY CITY STATE: NJ ZIP: 07302 BUSINESS PHONE: 2014343000 MAIL ADDRESS: STREET 1: 257 CORNELISON AVENUE CITY: JERSEY CITY STATE: NJ ZIP: 07302 10-K 1 BLOCK DRUG CO.INC.10-K,FOR THE YEAR ENDED 3/31/97 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1997 Commission File No. 0-6436 BLOCK DRUG COMPANY, INC. (Exact name of registrant as specified in its charter) New Jersey (State or other jurisdiction of incorporation or organization) 22-1375645 (I.R.S. Employer Identification No.) 257 Cornelison Avenue, Jersey City, New Jersey (Address of principal executive offices) 07302-9988 (Zip Code) Registrant's telephone number, including area code (201) 434-3000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class None Name of each exchange on which registered None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock - $.10 par value (Title of Class) Indicate by check mark whether 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, and (2) has been subject to such filing requirements for the past 90 days.Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes x No As of June 3, 1997, nonaffiliates held no voting shares of the Registrant; therefore, the aggregate market value of voting shares held by nonaffiliates is zero. As of June 3, 1997, there were 13,547,894 shares of Class A Common Stock and 7,935,532 shares of Class B Common Stock of Registrant outstanding. Documents Incorporated by Reference: None Exhibit Index: Page 53 1 PART I Item 1. Business REVIEW OF OPERATIONS Block Drug Company, Inc. is a worldwide manufacturer and marketer of denture care products, oral health care products, consumer over-the-counter medicines and specialty household products. DENTURE CARE PRODUCTS Denture care products are a foundation for Block Drug Company's worldwide success and an important part of the Company's tradition. Our denture care products continue to be category leaders and recognized names throughout the world. In fiscal 1997, Polident brand strengthened its position as the number one denture cleanser in the U.S., widening its lead over its nearest competitor. Line extensions most notably Polident Overnight have contributed to the line's ongoing success. In other parts of the world, our denture cleansers Polident, Corega and Dentu-Creme are leaders in many markets and are key products for each of their international subsidiaries. In Japan, for example, Polident, Nisohdent and Smoker's Polident lead the denture cleanser category. The Company's denture adhesive brand Poli-Grip continued to gain market share. Poli-Grip Free, an adhesive with no artificial flavors or colors, continued its impressive growth in the U.S. Poli-Grip and Corega are number one denture adhesive brands in a number of countries including Japan, the U.K. and France. ORAL HEALTH CARE PRODUCTS The Company's top-selling worldwide brand, Sensodyne toothpaste for sensitive teeth, is the number one desensitizing dentifrice in the U.S. and in virtually every country in which it is marketed. Sensodyne is recommended by dentists more often than any other brand for the treatment of dentinal hypersensitivity. Line extensions continue to contribute to this brand's market dominance. For example, Sensodyne Tartar Control, the newest line extension, increased overall brand sales since its introduction in fiscal 1997. Parodontax brand toothpaste, acquired in fiscal 1996, is an important addition to the Company's dental care line outside the U.S. This specialty gum care toothpaste formulated from natural ingredients, is sold in thirty countries. Targon Smoker's Mouthwash, a specialty mouthrinse targeted to smokers, is a new product for the Company, the exclusive rights to which were acquired this fiscal year. Targon will reach retail stores this summer. The Company's Serious Dental Medicines marketed to the dental professional include the PerioGlas brand, a bioactive glass used in the treatment of periodontal disease, for which the Company holds an exclusive license, and Lodine *, the leading analgesic (NSAID) prescribed by dentists, co-promoted through an agreement with Wyeth-Ayerst, Inc. 2 New, advanced dental products marketed through the Professional Dental Sales Force include Atrisorb barrier for guided tissue regeneration, Atridox *1 is a subgingival anti-infective treatment in the latter stages of development. Both are used in the treatment of periodontal disease. The Company has an exclusive agreement with Atrix Laboratories, Inc. for the marketing of these innovative dental treatments. These products are based on Atrix's proprietary Atrigel *1 biodegradable polymeric drug delivery system. While this technology is new to the market, initial reaction among dental professionals has been favorable. In December, 1996, the Company received Food and Drug Administration (FDA) approval for Aphthasol, a new chemical entity for the treatment of aphthous ulcers, commonly known as canker sores. Developed in conjunction with the Company's Research and Technology team, this new chemical compound treats a common condition for which no other prescription medication exists. Marketing of this line of oral health care products to the profession is accomplished by the Company's trained force of consultants who call on dentists, oral surgeons and periodontists throughout the U.S. The Company maintains a similar force in most major markets worldwide. Trained telephone sales representatives supplement this effort in the U.S. CONSUMER OVER-THE-COUNTER PRODUCTS Well- known brands that meet defined consumer needs form the core of the Company's Consumer Products Division. The unique style of meaningful product differentiation supported by effective advertising engenders customer satisfaction and strong loyalty to these brands. During fiscal 1997, this Division contributed significantly to corporate sales and earnings. Certain brands acquired or licensed recently experienced impressive growth this year. Notable among these was Balmex brand diaper rash ointment in the U.S. Now available nationwide and in several international markets, the Balmex brand was the fastest growing diaper rash baby ointment in 1996, and the fastest growing product in the Division. The Baby's Own line of baby care products, sold throughout Canada, was acquired in fiscal 1997 and recently introduced into the U.S. market. In the U.K., the Company acquired Piriton allergy relief brand during fiscal 1997, and has grown this leading brand's market share in a short period of time. Setler's Antacid, sold throughout the U.K., benefited from the addition of fruit flavor varieties and new Setler's Wind-Ease gas relief formula is expected to contribute to brand growth. *Lodine is a registered trademark of Wyeth-Ayerst, Inc. *1Atridox and Atrigel are registered trademarks of Atrix Laboratories, Inc. The Company introduced new Nytol Natural, the first and only homeopathic sleep-aid with an established brand name, buttressing the Company's product line in the over-the-counter sleep aid category. The U.K., Nytol Herbal joined our market-leading sleep-aid line this year. In the digestive aid category is Nature's Remedy, a natural laxative brand. 3 Headache powders are specialty analgesics sold by the Company throughout the Southern U.S. where there is a strong tradition of taking pain relief medication in powder form. Goody's and BC brands lead the powdered analgesic market. Despite competitive pressures due to the introduction of a variety of new analgesic products and formulations in the over-the-counter pain reliever market, our brands built share. A new nighttime analgesic and sleep-aid introduced this fiscal year is Goody's PM, a line extension which will help broaden the appeal of this brand name. SPECIALTY HOUSEHOLD PRODUCTS Fiscal 1997 was a year in which the Company's Household Products Division absorbed and relaunched two major brands acquired in the prior fiscal year Lava brand hand soap and Carpet Fresh brand rug and room deodorizers. As a well-known and respected brand name for over 100 years, Lava has enjoyed widespread consumer recognition as a soap for getting extra-dirty hands really clean. Sales were strong thanks in part to a successful new advertising effort. Lava Liquid, a new line extension formulated by the Company's Research and Technology team, was introduced at the end of fiscal 1997. The Carpet Fresh brand was restaged during fiscal 1997 with new packaging and additional fragrances introduced. Sales of Carpet Fresh were in line with the Company's expectations. Marketing support should help propel this brand throughout the coming years. One of the Company's first household products, the 2000 Flushes line of automatic toilet bowl cleaners, remains an important brand in the Household Products Division. In the household cleaner market, the X-14 brand is a strong name for a full line of hard surface cleaners. REGULATORY AFFAIRS The Company is subject to worldwide governmental regulations and controls relating to product safety, efficacy, packaging, labelling and distribution. While not all of the products which the Company plans to introduce into the market are "new drugs" or "new devices," those fitting the regulatory definitions are subject to a stringent premarket approval process in most countries. Submission of a substantial amount of preclinical and clinical information prior to market introduction significantly increases the amount of time and related costs incurred for preparing such products for market. The Company submits data to the Food and Drug Administration as necessary in response to the ongoing monograph review of the safety and efficacy of all over-the-counter drug products marketed in the U.S. As a responsible manufacturer, the Company is alert to the possibility that the final monographs to be issued in the foreseeable future may require formula modifications of certain of its products to maintain compliance with these regulations, a possibility facing competitive products as well. Manufacturing companies, especially those engaged in health care related fields, are subject to a wide range of federal, state and local laws and regulations. Concern for maintaining compliance with federal, state, local and foreign regulations on environmental protection, hazardous waste management, occupational safety and industrial hygiene has also increased substantially. The Company's policies and practices in the areas of environmental quality, product safety, loss prevention, occupational health and safety are tempered by the many laws and regulations affecting these areas. 4 The Company cannot predict what additional legislation or governmental action, if any, will be enacted or taken with respect to the above matters and what its effect, if any, will be on the Company's consolidated financial position, results of operations or cash flows. MARKETING The Company commits a substantial portion of its gross income to advertising, promotion, market research and test marketing. Its consumer, dental, personal care and household products are advertised directly to consumers on network, cable and spot television, network and spot radio, and in magazines and newspapers. The largest expenditures by the Company are for the purchase of television time. Oral hygiene and professional dental products are promoted by the Company through dental journals. A team of Dental Sales Consultants sells products directly to dentists and a TeleSales group at headquarters services dental accounts by telephone. The Company sells its consumer denture, dental care, oral hygiene and personal care products through its national sales force. Sales are made directly to food and drug chains, wholesalers, mass merchandisers and independent food and drug stores. Food brokers are retained for sales of household products. In addition, the Company employs marketing and sales representatives in international markets. PATENT AND TRADEMARKS Certain of the Company's products are covered by patents owned by the Company or manufactured under license from others. While the Company believes its patents, licenses and formulae to be of material value, it does not consider its business as a whole to be dependent upon patent protection. The Company's principal trademarks are of material importance to its business. These trademarks are owned by the Company or its wholly-owned subsidiaries. COMPETITION The Company markets products in highly competitive fields. For many of its products, its competitors include significantly larger corporations with substantially greater resources. The high degree of trademark recognition and goodwill associated with many of the Company's brand names are important factors in its ability to compete effectively. While larger competitors are able to commit significantly greater revenue to national advertising, the Company believes its advertising and marketing expertise enable it to compete effectively. The primary competitive factors affecting proprietary over-the-counter medicines, consumer oral care products and household products are product formulation, reputation, advertising and consumer promotion. MANUFACTURING Most of the principal raw materials used by the Company in its domestic manufacturing operations are purchased domestically and are generally obtainable from a number of sources at competitive prices. Certain raw materials are available only from single sources of supply and in these cases the Company sees no likelihood of the termination of such sources of supply. The Company maintains adequate inventories of raw materials. 5 During the course of the fiscal year ended March 31, 1997, there were no substantial raw material shortages. The Company was able to obtain at competitive prices all raw materials required for its normal operations. The Company manufactures the majority of its products. Some products are manufactured by independent third parties. Item 2. Properties The worldwide executive and administrative offices, manufacturing, research and development, warehousing and distribution facilities of the Company and its subsidiaries use an aggregate of approximately 2,510,000 square feet. This figure does not include undeveloped land on which its facilities are located or land adjacent to certain properties. The Company or its subsidiaries own substantially all the properties. Among these properties are the following: (1) corporate headquarters, Jersey City, New Jersey; (2) dental product manufacturing: Humacao, Puerto Rico (Dentco, Inc.); Glendale, Wisconsin (leased); Dungarvan, Ireland; and Cwmbran, Wales; (3) manufacturing plants for more than one product group: Memphis, Tennessee; South Brunswick, New Jersey: Humacao, Puerto Rico (Reedco, Inc.); Mississauga, Canada; Plymouth, Great Britain; Oevel, Belgium; Sydney, Australia; Buenos Aires, Argentina; and Rio de Janeiro, Brazil. The Company owns land contiguous to the Memphis, South Brunswick, Toronto, Plymouth, Oevel and Dungarvan facilities. Additional warehouse and distribution facilities are in Memphis, Tennessee, Dayton, New Jersey, Plymouth, England, Zaragoza, Spain and Mexico City, Mexico. The Company also has offices in buildings which it owns in Welwyn Garden City, Great Britain and Ratingen, Germany. The Company's plants and facilities, in the opinion of management, are in good condition and, together with expansions and alterations recently completed, or in the process of being completed as part of the manufacturing restructuring and reengineering program, are regarded by management as adequate for current requirements and for those of the next several years. Item 3. Legal Proceedings The Company is involved in various routine litigation incidental to its business. While the significance of these matters cannot be fully assessed at this time, management, on advice of counsel, does not believe that any liability that may arise from these proceedings will have a material adverse impact on the Company's consolidated financial position, results of operations or cash flows. Item 4. Submission of Matters to a Vote of Security Holders On May 20, 1997 by waiver and unanimous consent of the Class B shareholders of the Company, the Board of Directors, consisting of the persons named in Item 10, was elected in its entirety. Leonard N. Block, James A. Block and Thomas R. Block were reappointed Members of the Executive Committee of the Board of Directors which, upon unanimous consent of all its Members, may exercise all the authority of the Board of Directors, subject to certain statutory limitations. 6 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters STOCK PRICE AND DIVIDEND INFORMATION Market Price Cash Dividends Range of Class A Declared Per Common Stock* Share Fiscal Year Ended March 31, 1997 High Low First Quarter $45 3/4 $36 1/2 $0.29 Class A Shares $0.10 Class B Shares Second Quarter 46 3/4 40 1/2 $0.29 Class A Shares $0.10 Class B Shares Third Quarter 48 44 1/8 $0.31 Class A Shares $0.1075 Class B Shares Fourth Quarter 48 1/4 42 $0.31 Class A Shares** $0.1075 Class B Shares** Fiscal Year Ended March 31, 1996 High Low First Quarter $37 1/4 $32 1/4 $0.27 Class A Shares Second Quarter 40 33 3/4 $0.27 Class A Shares $0.10 Class B Shares Third Quarter 40 34 $0.29 Class A Shares $0.10 Class B Shares Fourth Quarter 42 3/8 33 $0.29 Class A Shares*** $0.10 Class B Shares*** * These are high and low bid quotes and reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. ** In addition, a 3% stock dividend was paid on January 2, 1997 to Class A and B shareholders in Class A and B Common Stock, respectively. *** In addition, a 3% stock dividend was paid on January 2, 1996 to Class A and B shareholders in Class A Common Stock. The following table indicates the approximate number of shareholders of each class of the Company's equity securities as of June 3, 1997: Title of Class Number of Shareholders Common Stock, Class A (non-voting) 507 Common Stock, Class B (voting) 5 7 Item 6. Selected Financial Data
Fiscal Year Ended March 31 1997(2) 1996 1995 1994 1993 Net Sales from Continuing Operations $862,471,000 $715,242,000 $621,139,000 $566,772,000 $577,305,000 Interest, Dividends & Other Income 28,335,000 30,157,000 23,026,000 23,383,000 26,490,000 Income from Continuing Operations before Income Taxes 10,817,000 65,501,000 57,870,000 54,147,000 69,446,000 Income Taxes 2,210,000 11,798,000 11,944,000 8,135,000 13,026,000 Income from Continuing Operations 8,607,000 53,703,000 45,926,000 46,012,000 56,420,000 Average Number of Common Shares Outstanding(1) 21,459,000 21,420,000 21,375,000 21,340,000 21,313,000 Income from Continuing Operations, Per Share of Common Stock(1) $0.40 $2.51 $2.15 $2.16 $2.65 Net Income Per Share of Common Stock(1) $0.40 $4.14 $2.36 $2.24 $2.89 Cash Dividends Declared Per Share of Class A Common $1.20 $1.12 $1.06 $1.02 $ .95 Cash Dividends Declared Per Share of Class B Common $0.415 $0.30 - -- Stock Dividends Declared Per Share of Class A Common 3% 3% 3% 3% 3% Stock Dividends Declared Per Share of Class B Common 3% 3% 3% 3% 3% Depreciation $20,210,000 $ 19,012,000 $ 16,031,000 $ 13,580,000 $ 10,727,000 Working Capital $90,172,000 $106,050,000 $ 26,095,000 $ 32,637,000 $ 51,203,000 Current Ratio 1.3 1.5 1.1 1.2 1.3 Total Assets $1,014,923,000 $929,117,000 $871,320,000 $771,068,000 $726,497,000 Long-Term Debt and Notes Payable $ 55,943,000 $ 56,143,000 $ 15,273,000 $ 17,880,000 $ 19,160,000 Shareholders' Equity $631,320,000 $641,042,000 $562,531,000 $515,121,000 $485,298,000 Number of Employees 3,703 3,600 3,521 3,491 3,505
Management's Discussion and Analysis of Operating Results and Financial Condition is presented on pages 9 to 12 of this report. (1) Restated to reflect stock dividends declared on Class A and Class B Common Stock by the Company in 1997 and previously. 8 (2) Fiscal 1997 income statement numbers reflect a pre-tax provision of $72,450,000 for manufacturing restructuring and re-engineering. Additionally, these amounts reflect the consolidation of the Block Drug Company (Japan) Inc. subsidiary, which had been previously accounted for as a 50%-owned equity joint venture. The Company acquired the remaining 50% share in fiscal year 1997. Item 7. Management's Discussion and Analysis of Operating Results and Financial Condition Operating Results: Consolidated worldwide net sales for the fiscal year ended March 31, 1997 were $862.5 million, an increase of 21% from the prior fiscal year 1996 which recorded an increase of 15%. Domestic and international sales increased in both fiscal 1997 and 1996 over the preceding year. International sales in fiscal 1997 increased 35% due to new products and the inclusion of Japanese operations as a wholly-owned subsidiary. Excluding the impact of foreign currency exchange rate fluctuations, fiscal year 1997 international sales would have risen 41%. Domestic sales in fiscal 1997 increased 4%, reflecting a volume growth of 2%. The Company's largest business segments, dental products, increased 25% to $621 million, following a 13% increase in the prior year. Consumer products sales increased to $241 million, a 10% increase, compared to a 22% increase in the previous year. Interest, dividends and other income decreased in the current year predominantly due to the termination of the Company's joint venture in Japan which is now a wholly-owned subsidiary. The cost of goods sold percentage to sales was 32.4% in fiscal 1997 compared to 32.8% in fiscal 1996 and 33.5% in fiscal 1995. These improved percentages reflect improved manufacturing operations and mix of products sold, in addition to selective price increases. Selling, general and administrative expenses represent 61.2%, 62.2% and 60.9% of sales in fiscal 1997, 1996, and 1995 respectively. The major portion is related to advertising and promotional activities. These expenses reflect a major spending program to meet significant competition and build brand equities. In February 1997, the Company announced it will consolidate its manufacturing operations by closing six of its twelve production facilities in various parts of the world over the next two years. As a result, there will be a reduction of over 400 employees at the Company's manufacturing facilities, representing approximately 12% of its worldwide workforce. This action is expected to generate approximately $25 million in additional annual cost savings which will be reinvested to support the Company's brands, recent acquisitions and new products, and strengthen the Company's presence in major markets and to enable us to penetrate new geographic areas worldwide. The worldwide manufacturing restructuring and re-engineering program resulted in a fourth quarter pre-tax charge of $72.5 million ($55.7 million net of tax) or $2.60 per share after taxes for the year, of which $35.7 million remains as liability as of March 31, 1997. 9 Due to the above factors, income before taxes (excluding restructuring) was 9.7% of sales in fiscal 1997 as compared to 9.2% and 9.3% in fiscal 1996 and 1995, respectively. The effective income tax rates of 20.4%, 18.0% and 20.6% in fiscal 1997, 1996 and 1995, respectively, reflect tax exempt interest from government securities and income from the lower tax areas of Puerto Rico and Ireland. For additional information see "Income Taxes" in the Notes to Consolidated Financial Statements. Item 7. Management's Discussion and Analysis of Operating Results and Financial Condition Operating Results: (Cont'd) The Company's international operations, which represent approximately 60% of the Company's business, measure profitability in terms of U.S. dollars and are subject to foreign exchange risk. If the U.S. dollar strengthens, the profitability of operations can be affected adversely. The profitably of foreign operations will benefit, however, if the U.S. dollar weakens. During fiscal 1997, the U.S. dollar generally strengthened compared to fiscal 1996. This had an unfavorable impact on profits for fiscal 1997 compared to a favorable impact for fiscal 1996. Although inflation has been moderate throughout fiscal 1997 and 1996, the Company continues to utilize selective price increases and budgetary monitoring of advertising, personnel and other operating expenses to control its operating margins. Research and development outlays have been increased in the continuing effort to develop new and improved products and line extensions. During fiscal 1997, the Company acquired or licensed a number of products including the Baby's Own line of baby care products for the Canadian market. This further extends our commitment to providing quality baby care products. This line joins our other baby care brands including Balmex brand Diaper Rash Ointment and Phazyme brand Infant Drops. Piriton allergy relief brand was acquired during the fiscal year and is marketed through the Company's UK subsidiary. Atrisorb , a guided tissue regeneration product for the treatment of periodontal disease, was acquired during fiscal 1997, which furthers our long-term commitment to serious dental medicines. The Company also acquired exclusive rights for the worldwide license of Targon Smoker's Mouthwash. Liquidity and Capital Resources: Cash decreased to $13.9 million at March 31, 1997 from $16.4 million at March 31, 1996 which had increased from $13.7 million at March 31, 1995. Net cash flow from operating activities was $58 million in fiscal 1997, $16 million more than the prior year. Earnings net of non-cash expenses more than offset increases in accounts receivable and inventories. These increases were mostly caused by the consolidation of the Company's business in Japan. In fiscal 1996, net cash flows from operating activities were $43 million, $7 million less than the prior year. The sale of the U.S. Reed & Carnrick Division accounted for a $19 million reduction, which together with increases in accounts receivable and inventories, more than offset increases in accounts payable. Accounts receivable at fiscal year-end 1997, 1996 and 1995 represent 2.3, 2.1 and 2.1 average months of sales, respectively. Inventory levels comprised 6.0, 6.4 and 6.2 months supply at year-end 1997, 1996 and 1995 respectively. 10 Net cash used in investing activities in fiscal 1997 was $84 million, compared to net cash provided of $16 million in fiscal 1996. In fiscal 1997, additions to property, plant and equipment, payment for products acquired and purchases of marketable securities more than offset the proceeds from the sale of securities and property, plant and equipment. In fiscal 1996, the sale of the U.S. Reed and Carnrick Division provided $64 million and together with net proceeds from securities more than offset payments for products acquired and additions to property, plant and equipment. In fiscal 1995, the net cash outflow for investing activity was $70 million. The Company is implementing a Production Optimization Program which will consolidate manufacturing facilities, closing six locations while expanding and upgrading others. Net capital expenditures of $38 million in fiscal 1997 are approximately $5 million higher than in fiscal 1996 and $3 million higher than fiscal 1995. Domestically, major projects over the three year period have been the modernization and expansion of laboratories and office facilities at the Jersey City, New Jersey corporate headquarters. The Company has made a substantial investment in computer modernization and business process reengineering. The production and warehouse facilities in Memphis, Tennessee and in Puerto Rico have undergone expansion and modernization projects that will continue as a result of the Company's manufacturing restructuring and re-engineering. The Company's international facilities were also expanded in fiscal 1997 to accomodate manufacturing for the Company's wholly-owned subsidiary in Japan and the continued expansion and modernization of the production facility in Dungarvan, Ireland. The Dungarvan facility will continue to undergo expansion as a result of the Company's manufacturing restructuring and re-engineering program. The Company anticipates future capital spending to approximate 5% of net sales, and expects to fund modernization and expansion through internally generated funds and through short-term borrowings as appropriate. Net cash provided by financing activities was $23 million in fiscal 1997, compared to net cash used of $56 million in fiscal 1996. In fiscal 1995, there was a net cash inflow of $25 million. The financial inflows in fiscal 1997 arose from the proceeds from debt issuance of $51 million which more than offset dividends paid to shareholders and debt repayment. The financial outflows in fiscal 1996 were the result of debt repayment funded mostly with the proceeds from the sale of the domestic Reed & Carnrick Division. The financial inflows in fiscal 1995 arose from the proceeds from debt issuance to help finance the acquisition of Goody's Pharmaceuticals, Inc., which more than offset dividends to shareholders and debt repayment. An overall strengthening of the U.S. dollar in relation to foreign currencies resulted in net foreign currency translation gains of $4.5 million in fiscal 1997. In fiscal 1996, net foreign currency translation gains were $578,000. These amounts were charged directly to Shareholders' Equity in the balance sheet. The Company uses financial instruments to manage interest rate and foreign exchange exposures. It does not take speculative positions. The cost of these transactions is amortized over the respective periods covered and is limited to fixed amounts determined at the dates of execution. See Note 5 for additional information. The Company has classified all long-term securities as "available for sale." These long-term securities are reported at fair market value resulting in unrealized holding gains of $551,000 net of taxes of $254,000 as of March 31, 1997 and $6 million, net of taxes of $1.3 million as of March 31, 1996. 11 The Company anticipates that sufficient funds will be provided from operating and borrowing capabilities for capital expenditures, dividend payments and other cash needs in fiscal 1998. The Company has uncommitted lines of credit totaling $240 million and $303 million at March 31, 1997 and 1996, respectively. In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to these assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. It requires assets to be held and used by an entity to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and assets to be disposed of to be reported at the lower of carrying amount or fair value less cost to sell. During fiscal year 1997, the Company adopted this statement and determined that no impairment loss need be recognized for applicable assets of continuing operations. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which simplifies existing computational guidelines, revises disclosure requirements and increases the comparability of earnings per share data on an international basis. SFAS No. 128 is effective for financial statements for periods ending after December 15, 1997 and requires restatement of all prior period earnings per share data presented. The Company is currently evaluating the new statement; however, the impact of adoption of SFAS No. 128 on the Company's financial statements is not expected to be significant. Information Concerning Forward-Looking Statements: This annual report contains forward-looking statements and statements of historical fact. These forward-looking statements are based on management's current expectations and assessments of risks and uncertainties. Actual results could differ from those anticipated by the forward-looking statements. Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT ACCOUNTANTS We have audited the accompanying consolidated financial statements and the financial statement schedules of Block Drug Company, Inc. and subsidiaries listed in the index on page 53 of this Form 10-K. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain foreign subsidiaries and branches, which statements reflect total assets and total revenues constituting approximately 15 percent and 37 percent, respectively, in the year ended March 31, 1997, 11 percent and 28 percent, respectively, in the year ended March 31, 1996 and 10 percent and 26 percent, respectively, in the year ended March 31, 1995 of the corresponding consolidated totals. These statements were audited by other auditors whose reports thereon were furnished to us. Our opinion expressed herein, insofar as it relates to the amounts for such subsidiaries and branches, is based solely upon such reports. 12 We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Block Drug Company, Inc. and subsidiaries as of March 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 1997 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. New York, New York June 3, 1997. 13 BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31 1997 1996 ASSETS Current Assets: Cash. . . . . . . . . . . . . . . . . . . . . . . $ 13,862,000 $ 16,388,000 Marketable securities, at market (Note 4) . . . . 24,923,000 13,433,000 Accounts receivable, less allowances of $4,504,000 (1997) and $4,188,000 (1996) . . . .. . . . . . . 164,104,000 124,816,000 Inventories (Note 1 and 2). . . . . . . . . . . . 138,679,000 124,368,000 Other current assets. . . . . . . . . . . . . . . 51,508,000 33,200,000 Total current assets. . . . . . . . . . . . . . 393,076,000 312,205,000 Property, plant and equipment, less accumulated depreciation (Notes 1 and 3) . . . .. . . . . . 235,486,000 242,552,000 Long-term securities, at market (Note 4). . . . . 225,999,000 222,667,000 Goodwill and other intangible assets, less accumulated amortization of $14,046,000 (1997) and $9,627,000 (1996) (Note 1). . . . . . . . . 153,425,000 127,047,000 Other assets. . . . . . . . . . . . . . . . . . . 6,937,000 24,646,000 Total assets. . . . . . . . . . . . . . . . . . $1,014,923,000 $929,117,000 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes and bonds payable (Note 6). . . . . . . . $ 118,522,000 $ 75,559,000 Accounts payable and accrued expenses (Note 7). 167,744,000 118,273,000 Income taxes payable (Note 8) . . . . . . . . . 11,612,000 7,751,000 Dividend payable. . . . . . . . . . . . . . . . 5,026,000 4,572,000 Total current liabilities. . . . . . . . . . . 302,904,000 206,155,000 Notes and bonds payable (Note 6). . . . . . . . . 55,943,000 56,143,000 Deferred income taxes (Note 8). . . . . . . . . . 8,744,000 10,413,000 Deferred compensation and other liabilities (Notes 1 and 9) 16,012,000 15,364,000 Total liabilities. . . . . . . . . . . . . . . 383,603,000 288,075,000 Shareholders' equity (Notes 1 and 10): Class A common stock non-voting par value $.10-15,000,000 shares (1997 and 1996) authorized, 13,544,460 (1997) and 13,111,962 (1996) shares issued and outstanding . . 1,354,000 1,311,000 Class B common stock, par value $.10-30,000,000 shares authorized, 7,935,532 (1997) and 7,704,400 (1996) shares issued and outstanding. . 794,000 770,000 Capital in excess of par value. . . . . . . . . . . 249,375,000 219,207,000 Retained earnings . . . . . . . . . . . . . . . . . 377,202,000 416,200,000 Cumulative foreign currency translation adjustment (Note 1). . . . . . . . . . . . . . . . . . . . 2,044,000 (2,476,000) Unrealized holding gain on marketable securities (Note 4) . . . . . 551,000 6,030,000 Total shareholders' equity. . . . . . . . . . . . 631,320,000 641,042,000 Total liabilities and shareholders' equity. . . $1,014,923,000 $929,117,000
See notes to consolidated financial statements. 14 BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For the Years Ended March 31, 1997, 1996 and 1995
1997 1996 1995 Revenues: Net sales . . . . . . . . . . . . . $862,471,000 $715,242,000 $621,139,000 Interest, dividends and other income. . 28,335,000 30,157,000 23,026,000 890,806,000 745,399,000 644,165,000 Cost and Expenses: Cost of goods sold. . . . . . . . . 279,334,000 234,782,000 207,793,000 Selling, general and administrative . . 528,205,000 445,116,000 378,502,000 Manufacturing restructuring and re-engineering costs.. . . . . . . 72,450,000 - - 879,989,000 679,898,000 586,295,000 Income from Continuing Operations before income taxes . . . . . . . . 10,817,000 65,501,000 57,870,000 Income Taxes (Note 8): Current . . . . . . . . . . . . . . 14,112,000 17,602,000 11,225,000 Deferred. . . . . . . . . . . . . . (11,902,000) (5,804,000) 719,000 2,210,000 11,798,000 11,944,000 Income from Continuing Operations. . 8,607,000 53,703,000 45,926,000 Discontinued Operations (Note 12): Income from discontinued operations, net of taxes of $0 (1997), $32,000 (1996) and $1,336,000 (1995) . . . . . . . 52,000 4,443,000 Gain on sale of division, net of taxes of $21,406,000. . . . . . . . . . . 34,925,000 Income from discontinued operations 34,977,000 4,443,000 Net Income . . . . . . . . . . . . . 8,607,000 88,680,000 50,369,000 Retained earnings at beginning of year.. 416,200,000 367,325,000 349,500,000 Less: Cash dividends declared-$1.20 (1997), $1.12 (1996) and $1.06 (1995) per share of Class A common stock (15,881,000) (14,164,000) (12,731,000) Cash dividends $.415 (1997) and $0.30 (1996) per share of Class B common stock . . . . . . . . . . . . . . . (3,197,000) (2,311,000) Stock dividends 3% (1997, 1996 and 1995) to Class A shareholders payable in Class A common stock . . (17,982,000) (14,431,000) (12,012,000) Stock dividends 3% to Class B shareholders payable in Class B common stock (1997) and in Class A common stock (1996 and 1995). . (10,545,000) (8,899,000) (7,801,000) Retained earnings at end of year . . $377,202,000 $416,200,000 $367,325,000 Earnings per share of common stock (Notes 1 and 10): From Continuing Operations. . . . . $ 0.40 $ 2.51 $ 2.15 From Discontinued Operations. . . . 1.63 .21 Net Earnings Per Share . . . . . . . $ 0.40 $ 4.14 $ 2.36
See notes to consolidated financial statements. 15 BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW For the Years Ended March 31, 1997, 1996 and 1995
1997 1996 1995 CASH FLOW FROM OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . . $ 8,607,000 $88,680,000 $50,369,000 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of discontinued operation. . (34,925,000) Depreciation and amortization . . . . . 24,629,000 21,470,000 17,071,000 Deferred income tax provision . . . . . (11,902,000) (5,804,000) 719,000 Deferred compensation provision . . . . 2,110,000 1,979,000 2,700,000 Equity in net income of joint venture . (4,111,000) (2,836,000) (Gain) loss on sales of long-term securities (3,136,000) (919,000) 10,000 Restructuring and re-engineering charges. . . 67,415,000 Employee savings plan provision . . . . 1,707,000 1,515,000 1,303,000 Other, net. . . . . . . . . . . . . . . 963,000 986,000 644,000 Changes in assets and liabilities that provided (used) cash, net of effects from purchase of products acquired Accounts receivable . . . . . . . . . . (38,291,000) (10,817,000) (11,311,000) Inventories . . . . . . . . . . . . . . (17,705,000) (10,725,000) (20,108,000) Accounts payable and accrued expenses . 12,682,000 16,173,000 11,122,000 Other current assets. . . . . . . . . . (8,441,000) (923,000) 5,873,000 Other assets. . . . . . . . . . . . . . 15,950,000 275,000 (1,656,000) Income taxes and dividends payable. . . 4,946,000 249,000 (1,738,000) Payments of deferred compensation and other noncurrent liabilities. . . . . (1,210,000) (1,381,000) (2,453,000) Changes from sale of division, net. . . (19,063,000) Net cash flow from operating activities. . 58,324,000 42,659,000 49,709,000 CASH FLOW FROM INVESTING ACTIVITIES Proceeds from sales of U.S. Pharmaceutical Division, net of cash expenses. . . . . . 64,431,000 Additions to property, plant and equipment . (45,418,000) (32,693,000) (34,542,000) Proceeds from sale of property, plant and equipment . . . . . . . . . . . . . . 7,555,000 (Increase) decrease in marketable securities, net . . . . . . . . . . . . . (11,537,000) 4,924,000 3,951,000 Dispositions of long-term securities . . . 49,039,000 74,808,000 37,807,000 Purchase of long-term securities . . . . . (55,771,000) (25,858,000) (28,686,000) Payment for products acquired. . . . . . . (28,171,000) (69,870,000) (48,957,000) Net cash (used in) provided by investing activities. . . . . . . . . . . . . . . . (84,303,000) 15,742,000 (70,427,000) CASH FLOW FROM FINANCING ACTIVITIES Dividends paid to shareholders . . . . . . (19,078,000) (16,475,000) (12,731,000) Proceeds from issuance of debt . . . . . . 51,190,000 50,000,000 40,570,000 Payment of debt. . . . . . . . . . . . . . (9,005,000) (89,288,000) (2,612,000) Net cash provided by (used in) financing activities. . . . . . . . . . . 23,107,000 (55,763,000) 25,227,000 Effects of exchange rates on cash. . . . . 346,000 44,000 301,000 (Decrease) increase in cash. . . . . . . . (2,526,000) 2,682,000 4,810,000 Cash, beginning of year. . . . . . . . . . 16,388,000 13,706,000 8,896,000 Cash, end of year. . . . . . . . . . . . . $ 13,862,000 $16,388,000 $ 13,706,000
See notes to consolidated financial statements. 16 BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended March 31, 1997, 1996 and 1995
1997 1996 1995 SUPPLEMENTAL CASH FLOW DATA Cash Paid During the Year: Interest. . . . . . . . . . . . . . . . . $10,381,000 $ 8,850,000 $ 7,676,000 Income Taxes. . . . . . . . . . . . . . . $ 9,560,000 $39,812,000 $13,646,000
See notes to consolidated financial statements. 17 BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies: Basis of consolidation: The accompanying consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries, all of which are wholly-owned With the exception of the March 31 year-end accounts of Germany and Colombia branches, all other accounts of foreign subsidiaries have been included on the basis of fiscal years ended December 31 in order to be available for inclusion in the consolidation. All material intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition The Company recognizes revenue from product sales when the goods are shipped to the customer. Foreign currency translation: All assets and liabilities, other than those of highly inflationary countries, are translated at year-end exchange rates. In such cases, translation gains and losses are recorded as a separate component of shareholders' equity and are not included in the determination of net income. For subsidiaries that are considered to be operating in highly inflationary countries (Brazil), certain assets and liabilities are translated at historical exchange rates and resulting translation gains and losses are included in the determination of net income. In all cases, foreign currency transaction gains and losses are included in the determination of net income. Net foreign exchange gains and (losses) of ($3,940,000), $379,000 and ($2,951,000), were included in selling, general and administrative expenses in the determination of net income for fiscal years 1997, 1996 and 1995, respectively. 1997 1996 1995 Transactions $(3,805,000) $ 826,000 ($ 649,000) Translation relating to highly inflationary countries (135,000)( 447,000) ( 2,302,000) Total $(3,940,000) $ 379,000 ($2,951,000) CUMULATIVE TRANSLATION ADJUSTMENT RECONCILIATION 1997 1996 1995 Balance -Beginning $(2,476,000)$(3,054,000) $(9,705,000) Translation Adjustment 4,520,000 578,000 6,651,000 Balance-Ending $ 2,044,000 $(2,476,000) $(3,054,000) 18 Inventories: Inventories are stated at the lower of cost or market. Cost is determined principally by the average cost and first-in, first-out methods. Property, plant and equipment and depreciation: Property, plant and equipment is recorded at cost. Depreciation is provided over estimated lives using the straight-line method. Average useful lives are 50 years for buildings and building additions, 12 years for equipment and 5 years for computers. The cost of maintenance, repairs and minor renewals of property, plant and equipment are charged to operations; major renewal and betterments are capitalized. Goodwill and other intangible assets: Goodwill and other intangible assets represent the excess of cost over the fair value of net tangible assets of companies or products purchased. Goodwill acquired prior to October 31, 1970 is not being amortized since, in management's opinion, its value has not diminished. Goodwill acquired subsequent to that date is being amortized using the straight-line method over the years estimated to be benefited, but not to exceed 40 years. Other intangible assets are recorded at cost and amortized over their estimated useful lives on the straight line method. Intangible assets are periodically reviewed to determine the recoverability of unamortized balances using undiscounted cash flows. Amortization of goodwill and other intangible assets was $4,419,000, $2,458,000 and $1,040,000 in the years ended March 31, 1997, 1996 and 1995, respectively. Marketable Securities and fair value of financial instruments: Marketable securities classified as current assets include cash equivalents (i.e. interest bearing securities with maturities of 90 days or less at time of purchase) that are recorded at cost (which approximates market) and other debt instruments with less than one year remaining until maturity that are treated as available for sale and recorded at market value. Long-term securities are also treated as available for sale and are recorded at market value. Unrealized holding gains and losses on securities classified as available for sale are recorded in a separate component of shareholders equity. The fair values of such securities are determined by independent pricing services and/or securities dealers. Retirement plans and deferred compensation agreements: Pension costs recorded as charges to operations include actuarially determined current service costs and an amount equivalent to amortization of prior service costs in accordance with the provisions set forth in Statement of Financial Accounting Standards (SFAS) No. 87, "Employer's Accounting for Pensions." It is the Company's policy to fund pension costs in accordance with the Internal Revenue Service full funding limitation. 19 The Company accounts for postretirement benefits other than pensions in accordance with Statement of Financial Accounting Standards No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions." The Company accounts for the cost of these benefits, which are for health care, by accruing them during the employee's active working career. The Company has elected to amortize the unfunded obligation existing at April 1, 1993 (transition obligation) over a period of 20 years. The Company has agreements with certain key executives which provide deferred compensation depending on length of service and average salary level. Benefits payable in the future to these executives under these agreements are charged to operations on an actuarially determined basis over the attribution period which equals the estimated period of active employment of such executives. Concentration of Credit Risk The Company sells a broad range of products in many countries of the world. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. Ongoing credit evaluations of customer's financial condition are performed and, generally, no collateral is required. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management's expectations. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Research and development expenditures: Research and development expenditures are charged to operations as incurred. The charges for the years ended March 31, 1997, 1996 and 1995 were $28,180,000, $23,959,000 and $23,465,000, respectively. Net income per share of common stock: Net income per share of common stock is based on the combined weighted average number of shares of Class A and Class B Common Stock outstanding during each period, which was 21,459,000, 21,420,000 and 21,375,000 in fiscal year 1997, 1996 and 1995, respectively. New accounting standards: In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to these assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. It requires assets to be held and used by an entity to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and assets to be disposed of to be reported at the lower of carrying amount or fair value less cost to sell. During fiscal year 1997, the Company adopted this statement and determined that no impairment loss need be recognized for applicable assets of continuing operations. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which simplifies existing computational guidelines, revises disclosure requirements and increases the comparability of earnings-per-share-data on an international basis. SFAS No. 128 is effective for financial statements for periods ending after December 15, 1997 and requires restatement of all prior-period earnings-per-share data presented. The Company is currently evaluating the new statement; however, the impact of adoption of SFAS No 128 on the Company's financial statements is not expected to be significant. 20 Risk and Uncertainties: The Company markets products in highly competitive fields. For many of its products, its competitors include significantly larger corporations with substantially greater resources. The high degree of trademark recognition and goodwill associated with many of the Company's brand names is an important factor in its ability to compete effectively. While larger competitors are able to commit significantly greater revenues to national advertising, the Company believes its advertising and marketing expertise enable it to compete effectively. The primary competitive factors affecting proprietary over-the-counter brands are product formulation, reputation and advertising and consumer promotions. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual amounts are not expected to differ from those estimates. Reclassification: Certain prior year amounts have been reclassified to conform with current year presentation. Note 2. Inventories: Major classes of inventories comprise: March 31 1997 1996 Raw and packaging materials. . . . . . . . . . $44,334,000 $ 42,868,000 Finished goods . . . . . . . . . . . . . . . . 94,345,000 81,500,000 Total . . . . . . . . . . . . . . . . . . . . $138,679,000 $124,368,000 Note 3. Property, Plant and Equipment: Major classes of property, plant and equipment are summarized as follows: March 31 1997 1996 Land . $22,182,000 $ 21,066,000 Building and related improvements. . . . . . . 138,546,000 149,274,000 Machinery and equipment. . . . . . . . . . . . 141,442,000 136,408,000 Furniture and fixtures . . . . . . . . . . . 45,550,000 44,951,000 Construction in progress . . . . . . . . . . . 9,861,000 5,577,000 357,581,000 357,276,000 Less: Accumulated depreciation 122,095,000 114,724,000 Total $235,486,000 $242,552,000 21 Depreciation expense for the years ended March 31, 1997, 1996 and 1995 was $20,210,000 , $19,012,000 and $16,031,000, respectively. Certain of the above properties are pledged as collateral for the bonds (Note 6). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4. Marketable Securities: The Company accounts for marketable securities in accordance with SFAS No. 115. "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). Prior to January 1, 1995, it classified its marketable securities as hold-to-maturity and reported at amortized cost. On January 1, 1995, the Company reclassified all of its marketable securities as available-for-sale. This reclassification is primarily a result of changing economic circumstances. As a result of this change in classification, on January 1, 1995, the Company recorded an unrealized holding loss of $4,020,000, net of a tax effect of $127,000, in a separate component of shareholders' equity. There was no effect on net income as a result of this adoption or change in portfolio classification The marketable securities, both current and noncurrent, as of March 31, 1997 consisted of the following: Unrealized Holding Fair Value Gains Losses U.S government and its agencies $127,606,000 $1,275,000 $3,048,000 Municipal and state 98,393,000 2,581,000 3,000 Other, principally money market 24,923,000 $250,922,000 $3,856,000 $3,051,000 The above unrealized holding gains and losses, net of income taxes of $254,000, are reflected as "unrealized holding gain on marketable securities" in shareholders' equity. The marketable securities, both current and noncurrent, as of March 31, 1996 consisted of the following: Unrealized Holding Fair Value Gains Losses U.S government and its agencies $ 93,280,000 $2,818,000 $ 1,378,000 Municipal and state 132,314,000 5,894,000 Other, principally money market 10,506,000 $236,100,000 $8,712,000 $ 1,378,000 The above unrealized holding gains and losses, net of income taxes of $1,304,000, are reflected as "unrealized holding gain on marketable securities" in shareholders' equity. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The maturities of the Company's investment in debt securities, at fair value, as of March 31, 1997 and 1996 were as follows: 1997 1996 Within 1 year $ 24,923,000 $ 13,433,000 After 1 year through 5 years 57,063,000 53,115,000 After 5 years through 10 years 38,258,000 70,099,000 After 10 years 130,678,000 99,453,000 $250,922,000 $236,100,000 The proceeds from the sales of available-for-sale securities (excluding normal principal payments on government agency obligations, bond redemptions and maturities) were $41,028,000 and $60,558,000 for the years ended March 31, 1997 and 1996, respectively. Gross realized gains and gross realized losses from these transactions were $3,110,000 and $0 for the year ended March 31, 1997 and $1,066,000 and $89,000 for the year ended March 31, 1996, respectively. The cost of marketable securities sold was determined by specific identification. Note 5. Financial Instruments The Company uses financial instruments to reduce exposures to market risks resulting from fluctuations in interest rates and foreign exchange. The Company does not enter into financial instruments for trading or speculative purposes. In November 1996, the Company entered into two series of Japanese Yen put options to establish a minimize exchange rate conversion between the Japanese Yen, U.S. Dollar and Irish Punt on anticipated intercompany sales during calendar year 1997. One series gives the Company the right to sell 200 million yen monthly in 1997 for U.S. dollars at a rate of 115 yen per US dollar. The other series gives the Company the right to sell 100 million yen monthly in 1997 for punt at the rate of 188 yen per punt. The cost of the options are amortized during the period in which the option are exercisable. Gain on the contract will be recognized in the month of settlement. As of the year end, the combined fair market value of these option contract were $734,000. The Company has interest rate cap agreements to reduce the impact of increases in interest rates on its short-term floating rate debt. They cover a $100 million notional value for the period 6/1/93 to 6/1/02 and an additional $50 million for the period 6/1/95 to 6/1/02. The agreements, which are spread equally among six counterparties, entitle the Company to receive quarterly amounts, if any, by which interest on the notional value at the 90 day LIBOR rate exceeds 4% at quarterly reset dates during the year beginning 6/1/93, 5% during the year beginning 6/1/94, 7% during the two years beginning 6/1/95 and 9% during the five years beginning 6/1/97. The premium is paid for the term of the agreements in quarterly installments of $127,236 on the $100 million beginning 6/1/93 and $116,013 on the $50 million beginning 6/1/95. The additional $50 million cap protection was discontinued in July, 1995. As of March 31, 1997, the fair market value of the $100 million notional amount of these agreements, net of the present value of premium installment payments due, was an off-balance sheet liability of $1,236,000. 23 Note 6. Notes and Bonds Payable: Short-term notes payable consist primarily of borrowings from various banks at interest rates ranging from 4.2% to 13.6%. At March 31, 1997 and 1996, the Company maintained short term uncommitted bank lines of credit aggregating $240,000,000 and $303,384,000, respectively. Of these amounts, $166,825,000 and $235,559,000 was unused at March 31, 1997 and 1996, respectively. The fair value of the short-term notes payable approximates book value. Long-term notes and bonds payable are comprised of the following: March 31 1997 1996 7.0% Notes due fiscal 2000 $ 1,493,000 1,693,000 6.47% Senior note due fiscal 2006 50,000,000 50,000,000 Variable rate bonds (currently 4.2%), due fiscal 2010 4,450,000 4,450,000 $55,943,000 $56,143,000 Certain properties of the Company (approximate book value $4,962,000) are pledged as collateral for the bonds (Note 3). The requirements of the bond indentures include the maintenance by the Company of minimum consolidated net worth and net working capital including long-term marketable securities of $250,000,000 and $50,000,000, respectively. Interest expense on all borrowings aggregated $10,146,000 in fiscal 1997, $8,374,000 in fiscal 1996 and $8,292,000 in fiscal 1995. Long-term debt at March 31, 1997 is payable as follows: Year ended March 31 2000 $ 1,493,000 2001 and later 54,450,000 $55,943,000 The fair value of the long-term debt was $3,745,000 less than the book value as of March 31, 1997. Note 7. Accounts Payable and Accrued Expenses: Accounts payable and accrued expenses are comprised of the following: March 31 1997 1996 Accounts payable - trade $ 38,013,000 $ 29,323,000 Accrued salaries, wages, vacation pay and bonuses 35,483,000 31,936,000 Accrued advertising and selling expenses 23,656,000 28,071,000 Restructuring and re-engineering 35,756,000 Other current liabilities 34,836,000 28,943,000 $167,744,000 $118,273,000 24 Note 8. Income Taxes: Income taxes on continuing operations consisted of: Current Deferred Total For the year ended March 31, 1997 Federal $11,164,000 $(12,397,000) $(1,233,000) Foreign 2,033,000 1,558,000 3,591,000 State 915,000 (1,063,000) (148,000) $14,112,000 $(11,902,000) $ 2,210,000 For the year ended March 31, 1996 Federal $ 7,361,000 $(6,115,000) $ 1,246,000 Foreign 9,466,000 835,000 10,301,000 State 775,000 (524,000) 251,000 $17,602,000 $(5,804,000) $11,798,000 For the year ended March 31, 1995 Federal $ 2,095,000 $ 1,123,000 $ 3,218,000 Foreign 7,836,000 (500,000) 7,336,000 State 1,294,000 96,000 1,390,000 $11,225,000 $ 719,000 $11,944,000 Deferred income tax expenses result from temporary differences in the recognition of revenue and expense for tax and financial statement purposes. The source and the tax effect of these differences were as follows: 1997 1996 1995 For the year ended March 31: Depreciation $ 651,000 $2,025,000 $2,140,000 Expenses (not) currently deductible for tax purposes (14,111,000) (7,999,000) (699,000) Other 1,558,000 170,000 (722,000) ($11,902,000) ($5,804,000) $719,000 A reconciliation of the provision for income taxes on income from continuing operations and the amount that would be computed using statutory federal income tax rates on income before income taxes for the years ended March 31 is as follows: (In millions) 1997 1996 1995 For the year ended March 31: Tax at U.S. Federal statutory rate of 35% $ 3.8 $ 22.9 $ 20.3 Tax exempt state and municipal bond income (3.2) (3.9) (3.5) Irish operating income taxed at lower rate (4.8) (3.5) (2.8) Reduction in taxes resulting from Puerto Rico source income subject to lower tax rate (2.9) (4.5) (2.3) Foreign Tax Rate Differential 3.4 2.0 1.4 Foreign Tax Credit (2.9) Non-Deductible Restructuring Charges 9.2 - - Other, net (.4) (1.2) (1.2) Total $ 2.2 $11.8 $11.9 25 The Company's subsidiaries in Puerto Rico have agreements which commenced in fiscal 1988 and expire in 2002, which provide for a 90% exemption from income taxes on operating income. The Company's subsidiary in Ireland has a 10% tax rate on export sales. The Company has not accrued U.S. federal income taxes on cumulative undistributed earnings of foreign subsidiaries of $244,837,000 as of March 31, 1997, since the majority of such earnings are expected to be permanently reinvested abroad. Where it is the intention to remit earnings, the related U.S. income taxes on these earnings, after giving effect to available tax credits, would not be material. Deferred tax assets and liabilities consisted of the following:* Deferred tax assets: March 31, 1997 1996 Coupon accrual, sales discounts, and workers compensation $2,763,000 $3,816,000 Employee benefits 7,284,000 5,982,000 Accrual on vacation 1,531,000 1,489,000 Deferred compensation 3,993,000 3,049,000 Capital gain 4,660,000 7,801,000 Accrued restructuring 16,763,000 - Other 1,633,000 894,000 $38,627,000 $23,031,000 Deferred tax liabilities: Property, plant and equipment $17,986,000 $17,768,000 SFAS No. 115 adjustment 231,000 1,304,000 Other 7,324,000 2,775,000 $25,541,000 $21,847,000 * As of March 31, 1997 and 1996, recoverable income taxes reflected in the balance sheet in "Other current assets" included current deferred tax assets of $21,830,000 and $11,597,000, respectively. The remaining deferred tax liabilities, net of deferred tax assets, were reflected in the balance sheet as "Deferred income taxes". Note 9. Retirement and Deferred Compensation Plans: The Company and its subsidiaries have several pension plans covering substantially all domestic employees and certain employees in foreign countries. The Company makes annual contributions to the plan equal to the amounts allowable under the Internal Revenue Service maximum full funding limitation. The domestic plan benefits are primarily based upon the employee's compensation during the sixty highest consecutive months of the last 120 months of employment and the number of years of service. Net pension expense includes the following components: 1997 1996 1995 Service cost $ 5,473,000 $ 5,196,000 $4,822,000 Interest cost on projected benefit obligation 5,618,000 5,399,000 4,404,000 Actual return on plan assets (9,297,000) (12,860,000) (1,216,000) Net amortization and deferral 2,717,000 6,697,000) (4,928,000) Net periodic pension cost $ 4,511,000 $4,432,000 $3,082,000 26 The following table sets forth the present value of benefit obligations and funded status for the Company's foreign and domestic plans: 1997 1996 Actuarial present value of benefit obligations, including vested benefits of $56,065,000 in 1997 and $51,091,000 in 1996 $57,215,000 $52,304,000 Projected benefit obligations $77,229,000 $72,154,000 Plan assets at fair value (primarily invested in stocks, bonds and government obligations) $89,416,000 $79,693,000 Add: Unrecognized prior service cost 5,526,000 3,352,000 Less: Unrecognized, net gain on assets 29,037,000 19,204,000 Unamortized transition asset established as of February 28, 1985 2,295,000 3,002,000 Adjustment for minimum liability 581,000 399,000 63,029,000 60,440,000 Net pension liability $14,200,000 $11,714,000 The expected long-term rate of return on plan assets was 8% for 1997 and 1996. The weighted average discount rate was 8% for 1997 and 7.5% in 1996. The rate of increase in future compensation levels used in determining the actuarial present value of projected benefit obligations was 5.0% for 1997 and 1996. The domestic plans are fully funded. Plan assets consist primarily of government bonds, corporate bonds and common stocks. The Company's foreign subsidiaries have plans under which funds are deposited with trustees or annuities are purchased. The Company has a Special Stock Unit Plan (the "Plan") whereby selected participants receive the right to deferred compensation based on the growth in the Company's average earnings per share, as defined in the Plan, and the value of the awards is adjusted to reflect the dilutive effect of stock dividends. Charges under the Plan for the years ended March 31, 1997, 1996 and 1995 were $3,289,000, $923,000 and $559,000, respectively. Deferred compensation payable included $3,482,000 at March 31, 1997 and $3,124,000 at March 31, 1996, respectively. Such amounts represent the actuarially determined present value of the vested benefits. The Company has employment contracts with four executives of the Company. These contracts specify the payment of benefits to the individual or beneficiary upon the termination of their employment or death. In addition to providing pension benefits the Company provides certain retiree health care benefits for substantially all non-union employees (excluding Puerto Rico) who reach retirement age while working for the Company. Health care benefits are provided by Blue Cross Blue Shield of New Jersey and selected Health Maintenance Organizations. The Company reserves the right to change or discontinue these benefits in whole or in part at any time. 27 The postretirement benefit liability as of March 31, 1997 and 1996 is as follows: 1997 1996 Retirees $4,080,000 $3,664,000 Fully eligible active plan participants 819,000 860,000 Other active plan participants 3,394,000 3,661,000 Total accumulated postretirement benefit obligation 8,293,000 8,185,000 Less: Plan assets at fair value and accruals - - Unrecognized net (gain) loss from past experience different from that assumed and from changes in assumptions (278,000) 374,000 Unrecognized transition obligation 4,491,000 4,772,000 Accrued postretirement benefit cost recognized in the Balance Sheet $4,080,000 $3,039,000 The cost of providing postretirement benefits for the period ending March 31, 1997 and March 31, 1996 includes the following: 1997 1996 Service cost benefits attributed to service during the period $ 296,000 $ 288,000 Interest cost on the accumulated postretirement benefit obligation 587,000 572,000 Estimated return on plan assets - - Amortization of transition obligation 281,000 281,000 Net periodic postretirement benefit cost $1,164,000 $1,141,000 The accumulated postretirement benefits obligation was determined by application of the terms of the medical plan together with relevant actuarial assumptions and a health-care cost trend rate of 8% in 1996 decreasing gradually to 5.5% in 2001 and thereafter. These costs also reflect the implementation of a $2,000 per year cost cap and contribution schedule of 0% to 75% of cost based on years of service at retirement for new retirements after October 1, 1993. The effect of a 1% annual increase in these assumed cost trend rates would have a minimal effect due to the cost cap. The increase in the accumulated postretirement benefit obligation would be approximately $500,000 and the aggregate of the service and interest cost components of net postretirement health care cost for 1997 would be approximately $30,000. Measurement of the accumulated postretirement benefit obligation was based on an assumed discount rate of 8.0% for 1997 and 7.5% for 1996. 28 Note 10. Shareholders' Equity: The two classes of the Company's Common Stock are identical in all respects except that (a) all voting rights are held by the owners of Class B Common Stock and (b) holders of Class A Common Stock are entitled to receive dividends, when and if declared by the Board of Directors whether or not dividends are declared in respect of the Class B Common Stock, but in the event of the declaration of a dividend in respect of the Class B Common Stock, a dividend of at least the same amount must be declared in respect of the Class A Common Stock. The Company's Certificate of Incorporation provides that upon an affirmative vote of the holders of two-thirds of the outstanding Class B Common Stock, all shares of Class A Common Stock will be converted into Class B Common Stock. The conversion terms are one share of Class A Common Stock for one share of Class B Common Stock subject to certain antidilutive or other capital reorganization provisions. On November 5, 1996, the Company declared an increased cash dividend of $.31 on the Class A Common Stock and an extra Common Stock dividend of 3% on both the Class A and Class B Common Stock, and an increased cash dividend of $.10 3/4 per share on the Class B Common Stock, payable on January 2, 1997 to shareholders of record as of December 2, 1996. On October 31, 1995, the Company declared an increased cash dividend of $.29 on the Class A Common Stock and a Class A Common Stock dividend of 3% on both the Class A and Class B Common Stock, payable on January 2, 1996 to shareholders of record as of December 1, 1995. On August 8, 1995 the Company declared an increased cash dividend of $.10 on the Class B Common Stock. On October 25, 1994, the Company declared an increased cash dividend of $.27 on the Class A Common Stock and a Class A Common Stock dividend of 3% on both the Class A and Class B Common Stock, payable on January 3, 1995 to shareholders of record as of December 1, 1994. Net income per share of common stock has been restated to reflect the current and prior years' stock dividends. Changes in Class A Common Stock, Class B Common Stock and capital in excess of par value during fiscal 1997, 1996 and 1995 were as follows: CLASS A CLASS B COMMON STOCK COMMON STOCK Capital in Issued Issued Excess of Shares Amount Shares Amount Par Value Balance, March 31, 1994 11,839,000 $1,184,000 7,704,000 $770,000 $173,372,000 3% Stock Dividend 587,000 $ 59,000 $ 19,755,000 Savings Incentive Plan(1) 40,000 4,000 1,299,000 Repurchase of Shares Balance, March 31, 1995 12,466,000 $1,247,000 7,704,000 $770,000 $194,426,000 3% Stock Dividend 606,000 $ 60,000 $ 23,269,000 Savings Incentive Plan(1) 40,000 4,000 1,512,000 Balance, March 31, 1996 13,112,000 $1,311,000 7,704,000 $770,000 $219,207,000 3% Stock Dividend 394,000 39,000 232,000 24,000 28,465,000 Savings Incentive Plan(1) 38,000 4,000 1,703,000 Balance, March 31, 1997 13,544,000 $1,354,000 7,936,000 $794,000 $249,375,000 29 (1) The Company has a voluntary savings incentive plan for eligible domestic employees. Company contributions to this 401(K) plan are made in the form of the Company's Class A Common Stock. Note 11. Legal Proceedings: The Company is involved in various routine litigation incidental to its continuing and discontinued operations. While the significance of these matters cannot be fully assessed at this time, management, on advice of counsel, does not believe that any liability that may arise from these proceedings will have a material adverse impact on the Company's consolidated financial position or results of operations. Note 12. Discontinued Operations: On June 30, 1995, the Company sold its U.S. Reed & Carnrick Pharmaceutical Division. In connection therewith, the Company recorded a gain on disposal of $34,925,000, net of taxes of $21,406,000 ($1.63 per share). The U.S. Reed & Carnrick Pharmaceutical business is reported as a discontinued operation for all periods presented. The statements of consolidated income and related notes to consolidated financial statements have been restated to conform to the discontinued operations presentation. The sales for the U.S. Reed & Carnrick Pharmaceutical business for the quarter ended June 30, 1995 (through the date of disposition) were $10,039,000. Sales for the fiscal years ended March 31, 1995 and 1994, were $48,715,000 and $46,511,000, respectively. Income from discontinued operations for the fiscal years ended March 31, 1997, 1996, 1995, net of taxes, was $0, $52,000 and $4,443,000, respectively. Note 13. Restructured Operations: In February 1997, the Company announced it will consolidate its manufacturing operations by closing six of its twelve production facilities in various parts of the world. The manufacturing restructuring and re-engineering is designed to further enhance profitable growth over several years by generating significant efficiencies and improving competitiveness. This will result in a reduction of over 400 employees at the Company's manufacturing facilities, representing approximately 12% of its worldwide work force. The manufacturing restructuring and re-engineering program resulted in a pre-tax charge of $72,450,000 ($55,687,000 net of tax) or $2.60 per share after taxes for the year. 30 Below is a summary of the manufacturing restructuring and re-engineering reserve: Amounts Utilized Remaining Balance Provision In Fiscal 1997 at March 31, 1997 Employee severance & related costs $15,454,000 - $15,454,000 Plant Closings & related asset write-offs 32,978,000 24,468,000 8,510,000 Re-engineering 7,184,000 7,184,000 - Contractual Obligations and other 16,834,000 5,042,000 11,792,000 $72,450,000 $36,694,000 $35,756,000 Balance at the end of the year is classified as a current liability. Note 14. Acquisition of Joint Venture: In fiscal year 1997, the Company acquired the remaining 50% share of the Kobayashi-Block Company Ltd. joint venture. Previously, the Company's investment in the joint venture was accounted for under the equity method, with the investment classified as an other asset in the balance sheet. For the year ended March 31, 1997 sales for the wholly-owned subsidary were $99,277,000. In fiscal year 1996, the equity in the net income of the joint venture, which was recorded in interest, dividends and other income, was $4,111,000. Note 15. Product Segments: The Company develops, manufactures and sells products classified into two segments. The dental segment includes products used for cleansing and retention of dentures, toothpastes, toothbrushes and other products for general dental care. The consumer product segment consists of a variety of household cleaning products, over-the-counter products including anti-gas preparations, headache powders, sleep-aid tablets, digestive aids, diaper rash ointments and medicated shampoos. 31 The following table presents information concerning the Company's continuing operations by product segment and geographic area for the years ended March 31, 1997, 1996 and 1995.
PRODUCT SEGMENTS 1997 1996 1995 (in thousands) Net Sales: Dental $ 621,103 $495,798 $440,531 Consumer Products and other 241,368 219,444 180,608 Consolidated net sales $ 862,471 $715,242 $621,139 Operating Income: Dental $ 28,987 $ 60,170 $ 58,742 Consumer Products and other 18,286 31,623 19,929 Total operating income 47,273 91,793 78,671 General corporate expenses (36,456) (26,292) (20,801) Consolidated income before income taxes $ 10,817 $ 65,501 $ 57,870 Assets: Dental $ 475,176 $376,988 $333,188 Consumer Products and other 286,252 302,466 228,035 Total identifiable assets 761,428 679,454 561,223 General corporate assets 253,495 249,663 310,097 Consolidated assets $1,014,923 $929,117 $871,320 Depreciation and Amortization: Dental $ 13,647 $ 13,389 $ 9,951 Consumer Products and other 10,982 8,081 7,120 Consolidated depreciation and amortization $ 24,629 $ 21,470 $ 17,071 Capital Expenditures: Dental $ 33,565 $ 23,406 $ 22,234 Consumer Products and other 11,853 9,287 12,308 Consolidated capital expenditures $ 45,418 $ 32,693 $ 34,542 GEOGRAPHIC AREA Net Sales: United States $ 347,523 $334,614 $291,313 Europe 295,774 285,245 242,424 Asia/Pacific 121,931 19,784 16,763 Other 97,243 75,599 70,639 Consolidated net sales $ 862,471 $715,242 $621,139 Operating income: United States $ 31,317 $ 45,564 $ 36,022 Europe 24,173 32,834 29,932 Asia/Pacific 7,235 (1,044) (181) Other (15,452) 14,439 12,898 Total operating income 47,273 91,793 78,671 General corporate expenses (36,456) $(26,292) (20,801) Consolidated income before income taxes $ 10,817 $ 65,501 $ 57,870 Assets: United States $ 377,667 $361,543 $314,149 Europe 307,113 270,641 212,830 Asia/Pacific 43,231 9,191 8,892 Other 33,417 38,079 25,352 Total identifiable assets 761,428 679,454 561,223 General corporate assets 253,495 249,663 310,097 Consolidated assets $1,014,923 $929,117 $871,320
32 General corporate expenses consist of administrative expenses, translation losses relating to highly inflationary countries and interest less investment income. General corporate assets consist principally of marketable and long-term securities. 1996 and 1995 amounts are reclassified to conform to 1997 presentation. QUARTERLY FINANCIAL INFORMATION (Unaudited) The following is a tabulation of quarterly results of operations for the years ended March 31, 1997 and 1996 (in thousands, except per share amounts): Fiscal 1997 Quarters First Second Third Fourth Net sales $205,507,000 $203,523,000 $216,409,000 $237,032,000 Gross profit 140,999,000 139,996,000 145,074,000 157,068,000 Income (Loss) from Continuing Operations Before Income Taxes 21,990,000 21,401,000 19,152,000 (51,726,000)(2) Net Income (Loss) 15,415,000 15,262,000 16,230,000 (38,300,000)(2) Earnings per share of Common Stock From Continuing Operations(1) $0.72 $0.71 $0.76 ($1.79)(2) Fiscal 1996 Quarters First Second Third Fourth Net sales $178,810,000 $172,234,000 $174,351,000 $189,847,000 Gross profit 123,130,000 113,573,000 116,261,000 127,496,000 Income from Continuing Operations Before Income Taxes 17,926,000 16,178,000 17,412,000 13,985,000 Income from Continuing Operations 14,248,000 12,899,000 13,087,000 13,469,000 Income (Loss) from Discontinued Operations 43,088,000 (79,000) (1,241,000) (6,791,000) Net Income 57,336,000 12,820,000 11,846,000 6,678,000 Earnings per share of Common Stock From Continuing Operations(1) $0.69 $0.62 $0.63 $0.64 Earnings per share of Common stock From Discontinued Operations(1) $2.07 $0.00 ($0.06) ($0.33) 33 (1) Restated to reflect the three percent stock dividends (see Note 10). (2) The fourth quarter of fiscal 1997 includes a provision for manufacturing restructuring and re-engineering costs of $72,450,000 ($55,687,000 or $2.60 per share, after tax). Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant: (a) Directors of the Registrant The following is a list of each director of the Company, the date their present terms of office will expire and all other positions presently held with the Company: Name Age Date Term Expires Other Positions Held (or principal occupation) Leonard Block 85 6/98 Senior Chairman of the Board* James A. Block 60 6/98 Chairman of the Board* Thomas R. Block 52 6/98 President and Treasurer* ** Donald H. LeSieur 61 6/98 Executive Vice President and President, International Division Michael C. Alfano, D.M.D., Ph.D. 49 6/98 Senior Vice President, Research and Technology Peter M. Block 30 6/98 President, European Division Alfred E. Brown, Ph.D. 80 6/98 Director of Scientific Affairs** Celanese Corporation (Retired) Peggy Danziger 57 6/98 Private Investor William T. Golden 87 6/98 Corporate Director and Trustee** Melvin Kopp 67 6/98 Senior Vice President and Chief Financial Officer Peter Mann 55 6/98 President, U.S. Division John E. Peters 55 6/98 Senior Vice President, General Counsel and Secretary Peter J. Repetti 79 6/98 Member, Fulbright & Jaworski L.L.P. (Retired) Susan B. Stearns 52 6/97 Private Investor Mary C. Tanner 47 6/98 Managing Director, Lehman Brothers 34 * Member of the Executive Committee ** Member of the Audit Committee The following family relationships exist among the Directors of the Company: Leonard Block is the father of Thomas R. Block and Peggy Danziger, the uncle of James A. Block and great uncle of Peter M. Block. James A. Block is the father of Peter M. Block. Thomas R. Block and Peggy Danziger are brother and sister and are first cousins of James A. Block and second cousins of Peter M. Block. Each director of the Company has been employed by the Company for the past five years except for (i) William T. Golden who is a director and trustee of Verde Exploration Ltd, (ii) Alfred E. Brown, Ph.D., formerly Director, Scientific Affairs, Celanese Corporation, now retired, (iii) Peter J. Repetti who is an attorney and a retired member of the New York law firm of Fulbright & Jaworski L.L.P., (iv) Peggy Danziger who is a private investor, and (v) Mary C. Tanner, a Managing Director of Lehman Brothers. All Directors have served as Directors for a period in excess of five (5) years, except for Peter C. Mann, President of the Company's U.S. Division, and Mary C. Tanner, who were elected in fiscal 1996, and Peter M. Block, who was elected in fiscal 1998. None of the Directors serve on the Boards of Directors of any other public corporation, except for William T. Golden who serves on the Board of Directors of Verde Exploration Ltd. On October 31, 1977, Leonard Block and James A. Block executed a document setting forth their mutual intent concerning the representation of the Melvin Block family group and the Leonard Block family group on the Board of Directors of the Company. Melvin Block (deceased) is the father of James A. Block and brother of Leonard Block. They stated their intention as shareholders and not as directors to maintain equal representation of the Melvin Block family group and the Leonard Block family group on the Board of Directors. They further stated their awareness that the sentiments expressed in the letter did not constitute a binding agreement between them and that all actions taken in the future by them in whatever capacity to elect directors must and would be those which, in their judgment, would be in the best interest of the Company. At present, the Melvin Block family group has three (3) representatives on the Board of Directors: James A. Block, Peter M. Block, and Peter J. Repetti (attorney); and the Leonard Block family group has three (3) representatives on the Board of Directors: Leonard Block, Thomas Block, and Peggy Danziger. (b) Executive Officers of the Registrant The following is a list of each executive officer of the Company, the date his present term of office will expire, and all other positions presently held with the Company: 35 Name Age Date of Date Term Positions Appointment Expires Leonard N. Block 85 10/88 6/98 Senior Chairman of the Board* James A. Block 60 10/88 6/98 Chairman of the Board* Thomas R. Block 52 10/88 6/98 President and Treasurer* Donald H. LeSieur 61 10/88 6/98 Executive Vice President and President, International Division*(2) Michael C. Alfano, D.M.D., Ph.D. 49 5/87 6/98 Senior Vice President, Research and Technology (1)(2) Peter M. Block 30 5/97 6/98 President, European Division Melvin Kopp 67 10/72 6/98 Senior Vice President and Chief Financial Officer (1)(2) Peter C. Mann 55 11/79 6/98 President, U.S. Division (1)(2) John E. Peters 55 12/78 6/98 Senior Vice President, General Counsel and Secretary (1)(2) Gilbert Seymann 58 5/84 6/98 Senior Vice President, Operations (1)(2) Leonard N. Block is Senior Chairman of the Board of Directors, a Member of the Executive Committee and the Office of the Chief Executive. James A. Block is Chairman of the Board, a Member of the Executive Committee, the Office of the Chief Executive, and is directly responsible for U.S. marketing, sales, corporate development, research and development and corporate quality. Thomas R. Block is President and Treasurer of the Company, a Member of the Executive Committee, the Office of the Chief Executive, and is directly responsible for all operations, including manufacturing, engineering and corporate, financial and administrative functions. Donald H. LeSieur is Executive Vice President and President, International Division, a Member of the Office of the Chief Executive, and has direct responsibility for all international operations. * Member - Office of the Chief Executive (1) Consultant - Office of the Chief Executive (2) Covered under the Change in Control Agreement described in Item 13. 36 Michael C. Alfano, D.M.D., Ph.D., Senior Vice President - Director Research and Technology, is responsible for all research, development and quality assurance activities of the Company. Peter M, Block is President, European Division, a Consultant to the Office of the Chief Executive, and is responsible for supervision of the Managing Directors of the Company's European businesses. Melvin Kopp, Senior Vice President, is the Chief Financial Officer of the Company. Peter C. Mann, President, U.S. Division, is responsible for all domestic marketing, sales and corporate development. John E. Peters, Senior Vice President, General Counsel and Secretary, is the Chief Legal Officer of the Company. Gilbert Seymann, Senior Vice President - Operations, is responsible for manufacturing and corporate engineering. All executive officers of the Company have been employed by the Company in the same or similar capacities for at least the last five years. No family relationships exist between the executive officers of the Company, except as noted above between the Directors who are also executive officers. Item 11. Executive Compensation
Long Term Compensation Annual Compensation Awards Payouts Other Restricted All Annual Stock Options LTIP Other Name and Principal Fiscal Salary Bonus Compen Award(s) /SARs Payouts Compensation Position Year $ $ sation ($) ($) ($) ($) ($) Leonard Block (1) 1997 375,768 165,000 * * * * 35,144 Senior Chairman of 1996 362,347 136,500 34,950 the Board 1995 357,469 89,500 34,537 James A. Block (2) 1997 346,345 167,500 * * * * 10,500 Chairman of the 1996 336,252 119,600 9,449 Board 1995 327,948 88,900 9,099 Thomas R. Block (2) 1997 346,345 168,400 * * * * 7,181 President and 1996 336,252 125,400 6,702 Treasurer 1995 327,948 92,000 6,641 Donald H. LeSieur (4) 1997 402,369 405,400 * * * _ 13,560 Executive 1996 393,248 243,800 13,074 Vice President, 1995 342,288 148,100 122,031 9,981 Pres. International Division Peter C. Mann 1997 309,992 175,700 * * * 14,905 7,549 President, U.S. 1996 297,300 184,600 92,986 6,687 Division 1995 258,638 94,500 78,941 6,269
*None to be reported 37 (1) On January 1, 1981, the Company entered into an Employment Agreement with Leonard N. Block, which was amended to run through April 30, 2007. The agreement provides for a minimum annual base salary of $209,242.00, which will be adjusted in accordance with certain economic factors. Mr. Block may, for a period not to exceed twenty years, elect to perform his services on a reduced basis at a reduced level of compensation. The agreement provides for payment of an amount (based upon an average of Mr. Block's salary for the three years in which the highest salary was paid) to certain designated beneficiaries for a period not to exceed twenty years. Leonard Block has been employed by the Company since 1933. (2) On September 1, 1984, the Company entered into an Employment Agreement with James A. Block, which was amended to run through April 30, 2007. The agreement provides for a minimum annual base salary of $164,792.00, which will be adjusted in accordance with certain economic factors. The terms of this employment agreement are substantially identical to the above described employment agreement with Leonard Block. James A. Block has been employed by the Company since 1959. (3) On May 1, 1987, the Company entered into an Employment Agreement with Thomas R. Block, which was amended to run through April 30, 2007. Pursuant to the agreement, Thomas R. Block's annual base salary is to be no less than $234,451.00, which will be adjusted in accordance with certain economic factors. The terms of this employment agreement are substantially identical to the above described employment agreement with Leonard Block. Thomas R. Block has been employed by the Company since 1968. (4) The Company entered into an Employment Agreement, effective July 1, 1997, with Donald H. LeSieur for a minimum of one and a maximum of three and one-half years whereby Mr. LeSieur will reduce his time commitment to the Company but will work for the Company for a minimum of 125 days in each calendar year. Mr. LeSieur's compensation for each day of service will be equivalent to the daily cost to the Company if he continued as a full-time employee. His compensation will be adjusted annually in accordance with the Company's salary administration policy. Mr. LeSieur's deferred compensation, pension, and other benefits will be calculated as though he was a full-time employee earning his gross salary ($430,718) as of June 30, 1997, as adjusted ("Adjusted Salary"). Mr. LeSieur will receive deferred compensation equal to one-third of his average annual Adjusted Salary for three years prior to his termination, which compensation vests at the rate of 1 1/4% per quarter, except that such compensation will become 100% vested if termination occurs due to death or disability. Such payment shall continue for a maximum of 13 1/2 years. Should termination occur by Company action other than for cause, a further payment equal to one-half his annual Adjusted Salary, as of the date of termination, shall be paid for a maximum of five years or until his 65th birthday, whichever first occurs. Donald H. LeSieur has been employed by the Company since 1973. 38 During calendar year 1996, the director's annual fee was $8,500 and remains unchanged for calendar year 1997. Executive officers who are directors receive no director's, attendance, audit committee or compensation committee fees. During calendar year 1996, six directors each received attendance fees of $950 per meeting. The fee of $950 per meeting was increased to $1,050 for calendar year 1997. During the calendar year 1996, two directors each received audit committee attendance fees of $900. The fee of $900 per meeting remains unchanged for calendar 1997. During the calendar year 1996, two directors each received compensation committee attendance fees of $450. The fee of $450 per meeting remains unchanged for calendar 1997. The total includes payments of $8,500 made to each of seven directors, including three payments to each of seven such directors of $2,125, in calendar year 1996 and one payment of $2,125 to each of seven such directors during the first quarter of calendar year 1997. This total further includes an aggregate of $20,450 paid to six directors as director's attendance fees, an aggregate of $7,200 paid to two directors as audit committee member fees, and an aggregate of $3,600 paid to two directors as compensation committee member fees. The Company maintains defined benefit pension plans under which annual costs are actuarially computed based on the overall assets in these plans and the actuary's estimates of the present value of overall benefits. The following table sets forth benefits that will be received under these plans based on the participants' final average compensation and years of service: 1997 Table of Annual Pension Benefits by Final Average Compensation and Service Classifications Years of Service at Age 65 Final Average Compensation 10 20 30 40 $ 50,000 $ 5,251.80 $10,503.60 $15,755.40 $22,506.00 100,000 12,600.00 25,200.00 37,800.00 52,000.00 150,000 20,100.00 40,200.00 60,300.00 82,000.00 200,000 27,600.00 55,200.00 82,800.00 112,000.00 250,000 35,100.00 70,200.00 105,300.00 125,000.00* 300,000 42,600.00 85,200.00 125,000.00* 125,000.00* 350,000 50,100.00 100,200.00 125,000.00* 125,000.00* * Maximum permissible benefit under IRC Sec. 415, effective January 1, 1997. The Company's domestic pension expense for the fiscal years ended March 31, 1997 and 1996 was $2,565,431 and $2,745,938, respectively. The plans are in a fully funded status, and accordingly, the Company's financial statements do not reflect a domestic pension funding contribution for the fiscal year ended March 31, 1997. The remuneration covered by these plans is the total regular salary excluding any bonuses, overtime or other special compensation. Benefits payable from these plans are based on the Final Average Compensation for the 60 highest consecutive months of the last 120 months of employment, the years of service as a member of these plans and the primary Federal Social Security Benefit. 39 With respect to the figures of the table on page 34, the accrual of pension benefits is estimated using only the individual's base salary. The base salaries used for the estimation of pension benefits for the individuals listed in the table are: James A. Block ($343,702.23); Thomas R. Block ($343,702.23); Donald H. LeSieur ($399,539.41); and Peter C. Mann ($306,530.74). Leonard Block reached age 65 in December, 1976. In accordance with the terms of this plan he elected to receive a lump sum benefit. The actuarial equivalent of his pension at that time as adjusted through December 31, 1980 was segregated into a separate account. No additional benefits have accrued for Leonard Block since December 31, 1980. Upon retirement or death the balance in the segregated account will be distributed to him or his designated beneficiaries subject to limitations set forth in the provisions of Section 415 of the Internal Revenue Code. As of March 31, 1997, the five (5) employees described in Item 10 had the following credited years of service in these plans: Leonard Block, 48 years; James A. Block, 35 years; Thomas R. Block, 27 years; Donald H. LeSieur, 23 years; and Peter C. Mann, 24 years. Special Stock Unit Plan This plan is intended to provide greater motivation and incentive for those eligible employees of the Company and its Subsidiaries who are making and can continue to make significant contributions to the success of the business, to attract and to retain employees of outstanding caliber and competence and to enhance the identity of interests between the shareholders of the Company and the employees who are participants in this plan. The purpose of the plan is to provide supplemental income, at intervals specified in the plan, to participants during their employment and to provide deferred compensation, which is considered as qualified retirement benefits, to participants upon their retirement. Under this plan, units (the value of which is based on a formula, the key component of which is a multiple of earnings per share of Class A Common Stock) may be awarded from time to time to employees by the Committee administering this plan. The participant (or beneficiary in the case of death) will be entitled to receive, subject to certain conditions, an amount reflecting the maximum appreciation in value of such units (as determined under this plan) between the date of the award and the dates provided in this plan for valuing units. As of March 31, 1997, the units were valued at $99.80. The total number of units which may be credited to all participants in this plan at any one time, exclusive of units awarded to former employees, cannot exceed five percent of the total number of the then outstanding shares of all classes of Common Stock. As of March 31, 1997, a total of 320,282 units had been awarded having an average value of $90.13 per unit. Of those 320,282 units, 75,834 units at an average value of $95.37 per unit were awarded during the past fiscal year. During fiscal year 1997, the following units were awarded to executives: 3,189 units at $96.90 per unit and 436 units at $96.50 per unit to Peter C. Mann. During the year ended March 31, 1997, $1,108,543 was paid in lump sum payments to the participants in the Special Stock Unit plan. 40 Long-Term Incentive Plans - Awards In Last Fiscal Year Estimated Future Payouts Under Non-Stock Price-Based Plans Performance or Name No. of Shares, Other Period * ** Units or Other Until Maturity Threshold Target Maximum Rights or Payout ($) ($) ($) Peter C. Mann 3,285 5 Years 941 189,000 - 436 72 26,000 * Minimum value as of March 31, 1997 ** Projected value at maturity, based on assumed 10% annual compounded Earnings Per Share increase over the five-year period from inception of the award to maturity. Note: See accompanying description of Plan above. Item 12. Securities Ownership of Certain Beneficial Owners and Management (a) Securities ownership of certain beneficial owners: The following table sets forth, as of June 3, 1997, each person who owns of record, or is known by the Company to beneficially own more than 5% of the outstanding Class B Common Stock of the Company, which stock is the only class of voting securities of the Company. Name and Address Amount and Nature Title of Class of Beneficial Owner of Beneficial Percent Ownership of Class Class B Common Leonard Block, Representative 3,967,766 (1) 50% Leonard Block Family Shareholders Agreement dated April 18, 1991 257 Cornelison Avenue Jersey City, N.J. 07302-9988 Class B Common James A. Block, Trustee 3,967,766(2) 50% Voting Trust Agreement dated January 11, 1990 257 Cornelison Avenue Jersey City, N.J. 07302-9988 (1) Pursuant to a shareholders' agreement, dated April 18, 1991, Leonard Block has sole voting power with respect to these shares. The following shares are all subject to the shareholders' agreement beneficially owned by the Leonard Block Trust, the Thomas Block Trust and the Peggy Danziger Trust, respectively, 396,986; 1,785,390; and 1,785,390. (2) James A. Block has sole voting power with respect to these shares as a result of a voting trust agreement entered into as of January 11, 1990. The voting trust agreement grants the trustee the power to vote the shares which are subject to the agreement. The voting trust agreement is for a 21 year term. James A. Block is a co-trustee of the trusts which are parties to the voting trust agreement and pursuant to these trusts, James A. Block has sole investment power with respect to these shares. James A. Block disclaims beneficial ownership to all 1,983,883 shares held in trust for the benefit of Susan B. Stearns. 41 (b) Securities ownership of management: The following table sets forth, as of June 3, 1997, the securities ownership of all directors, naming them, and all Directors and Officers of the Company, as a group, without naming them: BLOCK DRUG COMPANY, INC. SECURITIES BENEFICIALLY OWNED Class A Common Stock Benefically Owned Class B Common
Stock Benefically Owned Name of Beneficial No Shared Shared Owner Investment Investment 401-K Percentage Power Power Plan Owned Holdings Leonard Block 1,110,531 - 932 9% 3,967,766 - 50% (1) (4) (5) James A. Block 2,505,649 - 1,878 14% 3,967,766 - 50% (2) (3) Thomas Block 143,105 2,238,552 1,242 17% - Donald H. LeSieur 106 530 1,912 - - Michael C. Alfano - - 1,521 - - Peter M. Block (2) 1,237,762 - 274 5% - Alfred E. Brown (6) 1,336 - - - - Peggy Danziger 194,184 1,298,956 - 10% - (5) (8) William T. Golden 6,220 13,986 - - - Melvin Kopp 2,145 - - - - Peter C. Mann 842 106 1,674 - - John E. Peters - 2,090 1,421 - - Peter J. Repetti (7) 264 - - - - Gilbert M. Seymann 1,151 - 1,318 - - Susan B. Stearns - - - - - (2) (3) Mary C. Tanner - - - - -
42 As of June 3, 1997, all directors and officers as a group owned 54% of the Company's Class A Common Stock. The number of shareholders of Class A Common Stock is 507. (1) Leonard Block owns 343,723 shares (not including 401-K Plan Holdings); is deemed to be the beneficial owner of but disclaims ownership of: 762,682 shares owned by Adlen Corporation, of which Leonard Block is the sole shareholder; 4,126 shares owned by Adele Block, his wife. (2) James A. Block owns 116 shares (not including 401-K Plan Holdings); is deemed to be the beneficial owner of: 173,241 shares owned by a trust for the benefit of James A. Block of which he is a co-trustee (with Peter and Valerie Block, his children) and has sole investment powers with respect to the shares held by such trust; 1,064,449 shares owned by a trust for the benefit of James A. Block of which he is a co-trustee (with Susan B. Stearns, his sister, and Peter and Valerie Block, his children). James A. Block has sole investment powers with respect to the shares held by such trust. For the purpose of reporting shares for which a beneficial owner has no shared investment power in the tabular presentation on page 40, all 1,237,690 shares of these two trust have been included in the total number of shares reported for both James A. Block and Peter Block, and as a result such shares have been reported twice; and 1,267,843 shares owned by two trusts for the benefit of Susan B. Stearns of which James A. Block is the co-trustee (with Susan B. Stearns) and has sole investment powers with respect to the shares held by such trusts. James A. Block disclaims ownership to all 1,267,843 Class A shares and 1,983,883 Class B shares owned by the trusts for the benefit of Susan B. Stearns of which he is a trustee or co-trustee. In computing the percentage of Class A shares owned by a beneficial owner, 618,845 shares (representing one-half of the total shares owned by the two trusts in which Peter Block is a co-trustee with James A. Block) were allocated to James A. Block and 618,845 shares were allocated to Peter Block. The impact of this treatment of these shares on the percentage reported for James A. Block and Peter Block is negligible. In computing the aggregate number of shares owned by directors and officers as a group, the 1,237,690 shares owned by these two trusts were counted only once. (3) James A. Block has sole voting power with respect to the Class B shares as a result of voting trust agreement entered into as of January 11, 1990. The voting trust agreement grants the trustee the power to vote the shares which are subject to the agreement. The voting trust agreement is for a 21 year term. James A. Block is a co-trustee of the trusts which are parties to the voting trust agreement and pursuant to these trusts, James A. Block has sole investment power with respect to the Class B shares. James A. Block disclaims beneficial ownership to all 1,983,883 shares held in trust for the benefit of Susan B. Stearns. (4) Thomas Block owns 80,345 shares (not including 401-K Plan Holdings); is deemed to be the beneficial owner but disclaims ownership of: 23,870 shares owned by Marilyn Friedman, his wife; 38,890 shares held by Marilyn Friedman, as Custodian under the New York State Uniform Gifts to Minors Act for Jonathan Block and Alison Block, the children of Thomas Block; 124,562 shares owned by two trusts for the benefit of Jonathan Block and Alison Block, his children, of which Thomas Block is a co-trustee (with Marilyn Friedman, his wife) and shares investment powers with respect to the shares held by such trusts; 1,859,216 shares owned by a trust for the benefit of Thomas Block of which Thomas Block is a co-trustee (with Adele Block, his mother, and Peggy Danziger, his sister) and shares investment powers with respect to the shares held by such trust; 254,774 shares owned by four trusts of which Thomas Block is a co-trustee (with Peggy Danziger, his sister) and shares investment powers with respect to the shares held by such trusts; for the purposes of reporting shares for which a beneficial owner shares investment power in the tabular presentation on page 38, all 254,774 shares of these four trusts have been included in the total number of shares reported for Thomas Block and Peggy Danziger, 43 Item 12. Securities Ownership of Certain Beneficial Owners and Management (Cont'd) and as a result have been reported twice. In computing the percentage of Class A shares owned by a beneficial owner, 127,387 shares (representing one-half of the total shares owned by the four trusts) were allocated to Thomas Block and 127,387 shares were allocated to Peggy Danziger. The impact of this treatment of these shares on the percentages reported for Thomas Block and Peggy Danziger is negligible. In computing the aggregate number of shares owned by directors and officers as a group, the 254,774 shares owned by these four trusts were counted only once. Thomas Block disclaims ownership of those shares in which he shares investment powers with Peggy Danziger. (5) Peggy Danziger owns 194,184 shares; 1,039,998 shares owned by a trust for the benefit of Peggy Danziger of which she is a co-trustee (with Michael Danziger, her son, and Katherine Danziger-Horowitz, her daughter) and of which she shares investment powers with respect to the shares held by such trusts; 254,774 shares owned by four trusts of which Peggy Danziger is a co-trustee (with Thomas Block, her brother) and shares investment powers with respect to the shares held by such trusts; for the purposes of reporting shares for which a beneficial owner shares investment power in the tabular presentation on page 38, all 254,774 shares of these four trusts have been included in the total number of shares reported for both such shares Thomas Block and Peggy Danziger, and as a result such shares have been reported twice; and all 4,184 shares owned by two testamentary trusts of which Richard Danziger, her husband, is a co-trustee with another party having shared investment powers with respect to the shares held by such trusts. In computing the percentage of Class A shares owned by a beneficial owner, 127,387 shares (representing one-half of the total shares owned by the four trusts in which Peggy Danziger is a co-trustee with Thomas Block) were allocated to Thomas Block and 127,387 shares were allocated to Peggy Danziger. The impact of this treatment of these shares on the percentages reported for Thomas Block and Peggy Danziger is negligible. In computing the aggregate number of shares owned by directors and officers as a group, the 254,774 shares owned by these four trusts were counted only once. Peggy Danziger disclaims beneficial ownership of one-half of the shares for which she is co-trustee. (6) Alfred E. Brown disclaims beneficial ownership to all 1,336 shares owned by his wife. (7) Peter J. Repetti disclaims beneficial ownership to 264 shares owned by his wife. (8) Peggy Danziger disclaims beneficial ownership to all 4,184 shares of which Richard M. Danziger, her husband is co-trustee with a third party. 44 Item 13. Certain Relationships and Related Transactions On March 1, 1989, Donald H. LeSieur, Executive Vice President, United States, gave a promissory note to the Company in the amount of $200,000 pursuant to an agreement under which two previous loans were consolidated into a single loan evidenced by a single promissory note. Under the terms of the consolidated loan agreement the previous loans were cancelled. On May 26, 1989, Mr. LeSieur received an additional loan in the amount of $20,000 also secured by a promissory note. These loans are collateralized by sums to which Mr. LeSieur is entitled as deferred compensation under the Company's Special Stock Unit Plan or under any other deferred compensation program in which Mr. LeSieur participates and a mortgage on certain real estate owned by Mr. LeSieur and his wife. The principal of each loan is payable on or before June 30, 2007. Interest on the unpaid principal balance accrues at the seven year Treasury Bill rate as published by The New York Times, said interest to be adjusted semi- annually on July 1 and January 1 of each year. Interest only on the unpaid principal balance is due and payable monthly. Principal of the consolidated loan is to be repaid at the rate of $12,000 per annum. Principal of the May 26, 1989 loan is to be repaid at the rate of $1,200 per annum, commencing June 1, 1991. The loan agreement provides for immediate repayment of the unpaid principal balance upon the occurrence of any one of a number of specified events. Effective May 1, 1997, the Company entered into the following agreements with Melvin Kopp, (i) a revised Consulting Agreement which expires on February 28, 2005. Under this agreement, Mr. Kopp, now retired, will continue to provide the Company with his services for a minimum of one hundred days annually. Mr. Kopp's compensation for each day of service as a Consultant will be equivalent to the daily cost to the Company if he continued as an employee after his retirement in 1995. His compensation will be adjusted annually in accordance with the Company's salary administration policy, (ii) a Change in Control Agreement (CIC) which mirrors the provisions of the CICs entered into with key executives of the Company, and (iii) a Deferred Compensation Agreement, the provisions of which mirror the terms of the Company's Special Stock Unit Plan. On June 1, 1993, John E. Peters, Senior Vice President, General Counsel and Secretary, gave a Promissory Note to the Company in the amount of $100,000.00 pursuant to an agreement under which the Company loaned $100,000.00 to Mr. Peters. This loan is collateralized by sums to which Mr. Peters is entitled as deferred compensation under the Company's Special Stock Unit Plan and by a mortgage on certain real estate owned by Mr. Peters and his wife. The principal of the loan is payable on or before May 31, 1998. Interest on the unpaid principal balance accrues at the seven year Treasury Bill rate as published in The New York Times, said interest to be adjusted semi-annually on July 1 and January 1 of each year. Interest only on the unpaid principal balance is due and payable semi-monthly. Principal is to be repaid at the rate of $5,000.00 per annum, which is to be deducted from sums to which Mr. Peters is entitled under the Company's Executive Incentive Plan. The loan agreement provides for immediate repayment of the unpaid principal balance upon the occurrence of any one of a number of specified events. On January 26, 1994, the Company entered into an agreement with Peter Mann, President, U.S. Division, under which the minimum value of the 1991 special stock unit award to Mr. Mann, and only the 1991 special stock unit award, under the Company's Special Stock Unit Plan would, subject to the vesting rules under the Plan, be guaranteed to be no less than $83.30 per special stock unit. Change in Control Agreement Certain key executives have entered into a Change-In-Control Agreement (CIC) with the Company to assure continuity in management in the event the Block family divests itself of more than fifty percent (50%) of the Company's voting stock. 45 The Agreement expired on December 31, 1995, or upon the covered executive's sixty-fifth (65) birthday, but provided for automatic extensions which effectively create a continuing rolling five year term. The Agreement also provides for an automatic three (3) year extension. The Agreement defines the formula by which a covered Executive's severance, compensation and benefits will be calculated and paid in the event Executive's employment is either: terminated within one year of the change in control; if circumstances of Executive's employment are changed within three (3) years of the change in control; or if the Executive's employment is terminated 180 days prior to the execution of an agreement which, if concluded, will activate the CIC. Compensation Committee Interlocks and Insider Participation The Company does not have a Compensation and Benefits Committee which determines the compensation of its Executive Officers. The Company utilizes the services of independent expert compensation consultants to evaluate the total compensation of the Company's Executive Officers. The consultants' recommendations are submitted to the members of Office of the Chief Executive for consideration. During fiscal year 1997, Leonard Block, James A. Block, Thomas R. Block and Donald H. LeSieur were members of the Office of the Chief Executive. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as a part of this report: 1. Financial Statements and Supplementary Data: Report of Independent Accountants Consolidated Balance Sheets - March 3l, 1997 and 1996, Consolidated Statements of Income and Retained Earnings for the Years ended March 3l, 1997, 1996 and 1995, Consolidated Statements of Cash Flows for the Years ended March 3l, 1997, 1996 and 1995, Notes to Consolidated Financial Statements Supplementary Data: Selected quarterly data for the two years ended March 3l, 1997. 2. Additional Financial Statement Data: Supplemental Auditors' Reports 3. Financial Statement Schedule: II Schedules other than those listed above are omitted because they are not required or not applicable. 4. Exhibits: The Exhibits Index is on page 53. 46 (b) Reports on Form 8-K. No reports on Form 8-K have been filed during the last quarter of the period covered by this report. To the Board of Directors of STAFFORD-MILLER CONTINENTAL N.V. Nijverheidsstraat 9 2260 OEVEL-WESTERLO Dear Sirs, We have audited the accompanying balance sheets of Stafford-Miller Continental N.V. as of December 31, 1996 and 1995, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly in all material respects the financial position of Stafford-Miller Continental N.V. at December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with accounting principles generally accepted in the United States of America. Ernst & Young J. Englishstraat 54 2140 Borgerhout (Antwerpen) April 9, 1997 47 REPORT OF INDEPENDENT AUDITORS The Board of Directors Stafford-Miller Nederland B.V. We have audited the accompanying balance sheets of Stafford-Miller Nederland B.V. at December 31, 1996 and 1995, and the statements of income and retained earnings and cash flows for the years 1996, 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of Stafford-Miller Nederland B.V. at December 31, 1996 and 1995, and the results of its operations and its cash flows for the years 1996, 1995 and 1994 in conformity with accounting principles generally accepted in the United States of America. Our audits have been made primarily for the purpose of expressing an opinion on the basic financial statements taken as a whole. The accompanying additional information is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such additional information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, and in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Moret Ernst & Young Accountants Drentestraat 20 1083 HK Amsterdam, The Netherlands PO Box 7883 1008 AB Amsterdam February 12, 1997 48 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Stafford-Miller S.r.l. We have audited the accompanying balance sheets of Stafford Miller S.r.l. as of December 31, 1996 and 1995 and the related statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stafford Miller S.r.l. at December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with accounting principles generally accepted in the United States. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplementary information for the year ending December 31, 1996, is presented for the purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Reconta Ernst & Young Via Torino 68 20123 Milano February 12, 1997 49 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Stockholders and the Board of Directors Block Drug Co. (Philippines) Inc. We have audited the accompanying balance sheets of Block Drug Co. (Philippines) Inc. (a wholly owned subsidiary of Block Drug Company, Inc.) as of December 31, 1996 and 1995, and the related statements of income and retained earnings and cash flows for each of the three years in the period ended December 31,1996.These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Block Drug Co. (Philippines), Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31,1996, in conformity with United States generally accepted accounting principles. Our audits have been made primarily for the purpose of expressing an opinion on the basic financial statements taken as a whole. The supplementary information accompanying the financial statements is not necessary for the fair presentation of the financial position, results of operations, and cash flows of Block Drug Co. (Philippines), Inc., in conformity with generally accepted accounting principles. The supplementary information is presented only for purposes of additional analysis. The supplementary information has been subjected to the auditing procedures applied in the audit of the basic financial statments and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Sycip, Gorres,Velayo & Co. PTR No. 8886537 Makati City Makati City January 31, 1997 50 REPORT OF INDEPENDENT AUDITORS The Management Block Drug Company, Inc. Ratingen Branch We have audited the accompanying balance sheets of Block Drug Company, Inc., Ratingen Branch, as of March 31, 1997 and 1996 and the related statements of income and retained earnings and cash flows for each of the three years in the period ended March 31, 1997. These financial statements are the responsibility of the Branch's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Block Drug Company, Inc., Ratingen Branch, as of March 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1997, in conformity with accounting principles generally accepted in the United States of America. Our audits have been made primarily for the purpose of expressing an opinion on the basic financial statements taken as a whole. The accompanying supplementary information (pages 1 to 16) is presented for purposes of additional analysis and is not a required part of the basic financial statements. The supplementary information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Ernst & Young GmbH Wirtschaftsprufungsgesellschaft Hans Dingler Reinhard Beyer Wirtschaftsprufer Wirtschaftsprufer (Independent Public (Independent Public Accountant) Accountant) Dusseldorf, April 23, 1997 51 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders of Laboratoires Stafford-Miller, S.A.R.L. We have audited the accompanying balance sheets of Laboratoires Stafford-Miller, S.A.R.L. (the Company) at December 31, 1996 and 1995, and the related statements of income and retained earnings and cash flows for the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all materials respects, the financial position of Laboratoires Stafford-Miller, S.A.R.L. at December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with accounting principles generally accepted in the United States of America. Our audits have been made primarily for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying additional information is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such additional information has been subjected to the auditing procedures applied in our audits of the basic financial statements mentioned above and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ERNST & YOUNG Entrepreneurs Department d'E&Y Audit Christian Colineau February 10, 1997 52 REPORT OF INDEPENDENT ACCOUNTANTS Buenos Aires, February 7, 1997 The Board of Directors of Stafford Miller Argentina S.A. In our opinion, the accompanying balance sheets of Stafford Miller Argentina S.A. at December 31, 1996 and 1995 and the related statements of income and retained earnings and of cash flows for those years, expressed in historical pesos, are presented fairly, in all material respects, for purposes of consolidation on the bases described in Note 1. Our audits of the financial statements expressed in historical pesos were made in conjunction with our audits of the restated local currency statutory financial statements. These financial statements are the responsibility of Stafford Miller Argentina S.A. management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have also audited the restated local currency financial statements of Stafford Miller Argentina S.A. for the years ended December 31, 1996 and 1995, not submitted herewith, prepared on the basis of accounting principles generally accepted in Argentina. An unqualified report will be issued once the financial statements at December 31, 1996 are approved by the Company's Board of Directors. On April 30, 1996 we issued our unqualified report on the financial statements at December 31, 1995. The financial statements of Stafford Miller Argentina S.A. for the year ended December 31, 1994, submitted herewith, were audited by other independent accountants whose report dated February 6, 1995 expressed an unqualified opinion on those statements. Because of the limited purpose of the financial statements expressed in historical pesos, this report is intended solely for the use of management of Stafford Miller Argentina S.A. and Block Drug Company, Inc. PRICE WATERHOUSE & CO. by (Partner) Dr. Osyaldo H. Bort 53 Schedule II BLOCK DRUG COMPANY, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years Ended March 31, 1997, 1996 and 1995 Additions Balance at Charged to Beginning Costs and Balance at Description of Period Expenses Deductions End of Period 1997 Allowances for discounts, doubtful accounts and returns $4,188,000 $27,867,000 $27,551,000 $4,504,000 1996 Allowances for discounts, doubtful accounts and returns $3,222,000 $23,645,000 $22,679,000 $4,188,000 1995 Allowances for discounts, doubtful accounts and returns $2,709,000 $38,826,000 $38,313,000 $3,222,000 INDEX TO EXHIBITS Exhibit No. Description 22 Subsidiaries of Registrant. 54 EXHIBIT 22 Subsidiaries of Registrant The following list shows the Company and its subsidiaries, all of which (except as indicated) are wholly owned and included in the Consolidated Financial Statements in this report. Jurisdiction Identification of Incorporation Block Drug Company, Inc. New Jersey Stafford-Miller International, Inc. New Jersey Reedco, Inc. Delaware Dentco, Inc. Delaware Block Drug Corporation New Jersey Block Austria Gmbh Austria Block Uruguay, S.A. Uruguay Block Drug Company (Canada) Limited Ontario, Canada Block Drug Company (Japan), Inc. Japan Block Drug Company (Philippines), Inc. Manila, Philippines Block Drug Company (Thailand) Limited Thailand Block Drug Company (Korea) Limited Korea The Guangzhou Representative Office of China Block Drug Company, Inc. (China) Laboratoires Stafford-Miller S.A.R.L. (a) France Stafford Miller Argentina S.A. Argentina Stafford-Miller (Canada) Inc. (b) Ontario, Canada Stafford-Miller Chile Limitada Santiago, Chile Stafford-Miller Continental, NV-SA Belgium Stafford-Miller de Espana, S.A. Spain Stafford-Miller de Mexico, S.A. de C.V. Mexico Stafford-Miller Industria Ltda. Brazil Stafford-Miller Foreign Sales Corporation St. Thomas, Virgin Islands Stafford-Miller (Ireland) Limited Ireland Stafford-Miller (Japan) Limited Japan Stafford-Miller Limited Great Britain Stafford-Miller Nederland B.V. Netherlands Stafford-Miller (N.Z.) Limited New Zealand Stafford-Miller (Portugal) Portugal Quimico-Farmaceutica, Lda. Stafford-Miller RE Limited (b) Great Britain Stafford-Miller S.r.l. Italy Stafford-Miller Scandinavia Aktiebolag Sweden (a) Wholly-owned subsidiary of Stafford-Miller Continental, NV-SA. (b) Wholly-owned subsidiary of Stafford-Miller (Ireland) Limited. 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 3rd day of June, 1997. BLOCK DRUG COMPANY, INC. (Registrant) MELVIN KOPP BY Melvin Kopp Senior Vice President & Chief Financial Officer Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 3rd day of June, 1997. Principal Executive Officer: LEONARD N. BLOCK Leonard N. Block Senior Chairman Principal Financial and Accounting Officer: MELVIN KOPP Melvin Kopp Senior Vice President & Chief Financial Officer Directors: LEONARD N. BLOCK JAMES A. BLOCK Leonard N. Block James A. Block THOMAS R. BLOCK PETER M. BLOCK Thomas R. Block Peter M. Block PEGGY DANZIGER MELVIN KOPP Peggy Danziger Melvin Kopp DONALD H. LESIEUR PETER J. REPETTI Donald H. LeSieur Peter J. Repetti ALFRED E. BROWN, PH.D JOHN E. PETERS Alfred E. Brown, Ph.D. John E. Peters MICHAEL C. ALFANO, D.M.D., PH.D. WILLIAM T. GOLDEN Michael C. Alfano, D.M.D., Ph.D. William T. Golden PETER C. MANN MARY C. TANNER Peter C. Mann Mary C. Tanner EX-27 2
5 1000 12-MOS MAR-31-1997 MAR-31-1997 13862 24923 168608 4504 138679 393076 357581 122095 1014923 302904 0 0 0 2148 629172 1014923 862471 890806 279334 279334 590509 0 10146 10817 2210 8607 0 0 0 8607 0.40 0.40
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