-----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, NZIq8+UzRjDYWMxXrEV5+Hx05L18QDHtswO4cV9ctcCYHh+27G5BKMsuWQ7YrVEh iZb+uk+IF7cISnVe+oHVFg== 0000890163-99-000180.txt : 19990618 0000890163-99-000180.hdr.sgml : 19990618 ACCESSION NUMBER: 0000890163-99-000180 CONFORMED SUBMISSION TYPE: 10KT405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990617 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARTER WALLACE INC /DE/ CENTRAL INDEX KEY: 0000018000 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 134986583 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KT405 SEC ACT: SEC FILE NUMBER: 001-05910 FILM NUMBER: 99648128 BUSINESS ADDRESS: STREET 1: 1345 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10105 BUSINESS PHONE: 2123395000 10KT405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended March 31, 1999 Commission File Number 1-5910 CARTER-WALLACE, INC. (Exact name of registrant as specified in its charter) Delaware 13-4986583 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1345 Avenue of the Americas, New York, NY 10105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 212-339-5000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock Par value $1.00 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Class B Common Stock, par value $1.00 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate 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 of any amendment to this Form 10-K. (X) The number of shares of the registrant's Common Stock and Class B Common Stock outstanding at June 7, 1999 was 32,678,400 and 12,303,700, respectively. The aggregate market value of voting stock held by non-affiliates of the registrant as of June 7, 1999 was approximately $385,174,000. Documents Incorporated by Reference ----------------------------------- Annual Report to Stockholders for the fiscal year ended March 31, 1999 Parts I & II Proxy Statement for the Annual Meeting of Stockholders to be held July 20, 1999 Parts III & IV Part I Item 1. Business Carter-Wallace, Inc. (the "Company") is engaged in the manufacture and sale of a diversified line of products in the Domestic Consumer Products, Domestic Health Care and International segments. Additional information is presented on page 11 "Description of Business Segments" of the 1999 Annual Report to Stockholders and is herein expressly incorporated by reference. Business Segments and Geographic Data Financial information about the Company's business segments and geographic areas for the three years ended March 31, 1999 is presented on page 8 under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition - Net Sales and Earnings" and also on pages 24 and 25, note 11, "Business Segments" of the Notes to Consolidated Financial Statements, both included in the 1999 Annual Report to Stockholders and herein expressly incorporated by reference. Foreign Operations Foreign operations are generally subject to certain political and economic risks that are not present in domestic operations. Such risks may include expropriation of assets, restrictions on earnings remittances and fluctuating exchange rates. Changes in foreign exchange rates had the effect of decreasing sales by $6,700,000 in the fiscal year ended March 31, 1999 in comparison to the prior year. Additional information is presented on page 18, note 4, "Foreign Operations" of the Notes to Consolidated Financial Statements in the 1999 Annual Report to Stockholders and is herein expressly incorporated by reference. Competition The three business segments in which the Company operates are extremely competitive and include larger corporations with greater resources for research, product development and promotion. The Company competes on the basis of price, advertising, promotion, quality of product and other methods relevant to the business. In fiscal 1999, the Company's "Arrid" line of anti-perspirants and deodorants is believed to have accounted for an estimated 6.2% share of the domestic anti-perspirant and deodorant market. The Company's worldwide antiperspirant and deodorant sales were approximately $101,600,000, $105,800,000 and $111,900,000 in the fiscal years ended March 31, 1999, 1998 and 1997, respectively. The "Trojan", "Class Act" and "Naturalamb" condom brands are estimated to have accounted for over 65% of total domestic retail condom sales. The Company's worldwide condom sales were approximately $114,100,000, $104,700,000 and $95,400,000 in the fiscal years ended March 31, 1999, 1998 and 1997, respectively. Additional information is presented on page 8 under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition - Net Sales and Earnings" in the 1999 Annual Report to Stockholders and is herein expressly incorporated by reference. 1 Raw Materials The Company's major raw materials are chemicals, plastics, latex, steel cans and packaging materials. These materials are generally available from several sources and the Company has had no significant supply problems to date. The Company generally has two or more approved suppliers for production materials and issues purchase commitments to provide its suppliers with adequate lead time. Patents and Licenses The Company owns or is licensed under a number of patents and patent applications covering several of its products. The expiration or any other change in any of these patents or patent applications will not materially affect the Company's business. Royalty income does not constitute a material portion of total revenue. Felbatol (Felbamate) Information regarding the effect of "Felbatol" matters on the Company's business is presented on page 10 under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition - Felbatol (Felbamate)", on page 28 in note 14, "Litigation Including Environmental Matter" and on Page 30 in note 16 "Felbatol (Felbamate)" of the Notes to Consolidated Financial Statements, all included in the 1999 Annual Report to Stockholders and herein expressly incorporated by reference. Environmental Matter Information regarding the environmental matter is presented on pages 27 and 28 in note 14, "Litigation Including Environmental Matter" of the Notes to Consolidated Financial Statements, included in the 1999 Annual Report to Stockholders and herein expressly incorporated by reference. Research and Development Expenditures for research and development totaled $25,846,000 in 1999, $28,785,000 in 1998 and $27,284,000 in 1997. Research and development expenses in 1999 decreased by $2,939,000 or 10.2%, primarily as a result of lower spending in the Domestic Consumer Products segment related to non-recurring prior year employee termination costs. In 1998 research and development expenses increased $1,501,000 or 5.5% from the prior year as a result of higher spending in the Domestic Consumer Products segment due in part to employee termination costs related to organizational changes. Research and development expenses in the Domestic Health Care segment were higher than the prior year, while International research and development expenses were lower than the prior year. Work on taurolidine for its use against vancomycin-resistant enterococcus and a number of other potential indications has continued. Two multicenter Phase III studies are underway to determine if "Astelin" Nasal Spray is effective for treating non-allergic vasomotor rhinitis. A Supplemental New Drug Application will be submitted for the use of "Astelin" Nasal Spray in children less than 12 years old. The "Astelin" tablet NDA for allergic rhinitis is pending at the FDA. The Company has not decided whether to seek final approval for this NDA. 2 Results from three clinical studies demonstrated "Astelin" is as effective as the combination of loratadine tablets (Claritin) and beclomethasone nasal spray (Beconnase) in relieving symptoms of seasonal allergies among patients who do not respond adequately to monotherapy with either an oral antihistamine or inhaled nasal steroid. The results of these studies were published in the June 1999 issue of the peer review journal, Annals of Allergy, Asthma & Immunology. Approximately 120 employees are employed in research and development activities. Employees The Company, together with its subsidiaries, employed approximately 3,310 people worldwide at March 31, 1999. Acquisitions Information regarding acquisitions is presented on page 24 in note 9, "Acquisitions" of the Notes to Consolidated Financial Statements, included in the 1999 Annual Report to Stockholders and is herein expressly incorporated by reference. Item 2. Properties The executive offices of the Company are located at 1345 Avenue of the Americas, New York, New York, in space leased until May, 2011. A portion of this space has been subleased. The following are the other principal facilities of the Company: Area Location Products Manufactured (Sq. Feet) Owned in Fee: Manufacturing Facilities and Offices: Cranbury, New Jersey Pharmaceuticals, toiletries and pet products 734,000 Colonial Heights, Virginia Condoms 220,000 Decatur, Illinois Pharmaceuticals and Pet Products 108,000 Winsted, Connecticut Pet products 45,000 Montreal, Canada Pharmaceuticals 157,000 Folkestone, England Toiletries 76,000 Milan, Italy Pharmaceuticals and diagnostics 52,000 Mexico City, Mexico Pharmaceuticals and diagnostics 63,000 New Plymouth, New Zealand Condom processing 31,000 3 Warehouse and Offices: Toronto, Canada 52,000 Leased: Manufacturing Facilities and Offices: Santa Ana, California Toiletries 10,400 Mexico City, Mexico Toiletries 13,000 Barcelona, Spain Toiletries 58,400 Milan, Italy Diagnostics 19,000 Warehouse and Offices: Dayton, New Jersey 200,000 Momence, Illinois 43,000 Plainsboro, New Jersey * 23,300 Sydney, Australia 24,900 Folkestone, England 58,600 Levallois, France * 20,400 Revel, France 35,500 * Offices only The Company has agreements with several agents throughout the world for the manufacture of certain products to its specifications. The Company has several other short-term leases for manufacturing plants, warehousing space and sales offices. With minor exceptions, all facilities are operating at normal capacity. An expansion of the Company's condom manufacturing facility in Colonial Heights, Virginia was approved in fiscal 1998. The additional capacity was warranted by the increase in demand for Trojan latex condoms. At the end of fiscal 1999, the expansion approached completion with the installation of new equipment. Item 3. Legal Proceedings Information regarding Legal Proceedings involving the Company is presented on pages 27 through 29 in note 14, "Litigation Including Environmental Matter" of the Notes to Consolidated Financial Statements, included in the 1999 Annual Report to Stockholders and herein expressly incorporated by reference. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 4 Executive Officers of the Registrant * Executive Officers of the Registrant are as follows: Held Present Name Age Office Office Since Henry H. Hoyt, Jr. 71 Chairman of the Board and Chief Executive Officer 1974 Ralph Levine 63 President and Chief Operating Officer 1997 Paul A. Veteri 57 Executive Vice President and Chief Financial Officer 1997 T. Rosie Albright 52 Vice President, Consumer Products, U.S. 1995 John Bridgen, Ph.D. 52 Vice President, Diagnostics, U.S. 1984 James C. Costin, M.D. 55 Vice President, Medical and Scientific Affairs 1999 Donald R. Daoust, Ph.D. 63 Vice President, Quality Control 1978 Thomas G. Gerstmyer 56 Vice President, Pharmaceuticals, U.S. 1999 Peter J. Griffin 56 Vice President and Controller 1983 Adrian J. L. Huns 51 Vice President, International 1996 Michael J. Kopec 59 Vice President, Manufacturing 1978 Stephen R. Lang 64 Vice President, Secretary and General Counsel 1997 Thomas B. Moorhead 65 Vice President, Human Resources 1987 C. Richard Stafford 63 Vice President, Corporate Development 1977 James L. Wagar 64 Vice President and Treasurer 1981 Mark Wertlieb 43 Vice President, Taxes 1996 Each officer holds office until the first meeting of the Board of Directors following each Annual Meeting of the Stockholders and until his successor has been duly elected and qualified (except that the Board of Directors may at any meeting elect additional officers), unless his term is earlier terminated through death, resignation, removal or otherwise. The next Annual Meeting of the Stockholders is scheduled to be held July 20, 1999. * All executive officers have held their present office for the last five years except those noted on the following page. 5 Executive Officers of the Registrant (Cont'd) Thomas G. Gerstmyer was appointed Corporate Vice President, Pharmaceuticals, U.S. in January, 1999. He was appointed President, Wallace Laboratories Division in August, 1998. Mr. Gerstmyer was previously Vice President of Marketing, Wallace Laboratories since prior to 1994. James C. Costin, M.D., was appointed Corporate Vice President, Medical and Scientific Affairs in January, 1999. Dr. Costin will continue to be responsible for the Wallace Laboratories' Research and Development department, where he was previously Vice President, Research and Development, a position he held since prior to 1994. Ralph Levine was appointed President and Chief Operating Officer in April, 1997. Mr. Levine was previously Vice President, Secretary and General Counsel since prior to 1994. Paul A. Veteri was appointed Executive Vice President and Chief Financial Officer, in April, 1997. Mr. Veteri was previously Vice President and Chief Financial Officer since prior to 1994. Stephen R. Lang was appointed Corporate Vice President in March, 1997 and Secretary and General Counsel in April, 1997. Mr. Lang was previously a Partner and Chairman of the Litigation Department of Whitman Breed Abbott & Morgan since prior to 1994. Mark Wertlieb was appointed Corporate Vice President, Taxes in August, 1996. Mr. Wertlieb was previously a Tax Partner at KPMG LLP since prior to 1994. T. Rosie Albright was appointed Corporate Vice President, Consumer Products, U.S. and President, Carter Products Division, in December, 1995. Ms. Albright was previously General Manager and Executive Vice President, Beauty Care with Revlon, Inc. prior to 1994. Adrian J. L. Huns was appointed Corporate Vice President, International and President, International Division in May, 1996. Mr. Huns was Managing Director of Carter-Wallace Ltd., a subsidiary of Carter-Wallace, Inc., since prior to 1994. 6 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information required by this item is presented on pages 1 and 7 of the 1999 Annual Report to Stockholders and is herein expressly incorporated by reference. Item 6. Selected Financial Data Information required by this item is incorporated herein by reference to page 7 of the 1999 Annual Report to Stockholders. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Information required by this item is incorporated herein by reference to pages 8 through 10 of the 1999 Annual Report to Stockholders. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not Applicable. Part III Item 8. Financial Statements and Supplementary Data Information required by this item is incorporated herein by reference to pages 12 through 31 of the 1999 Annual Report to Stockholders. Item 9. Disagreements on Accounting and Financial Disclosure Not applicable. Item 10. Directors and Executive Officers of the Registrant Information with respect to Directors of the Company is incorporated by reference to the Company's Proxy Statement, dated June 18, 1999, for the Annual Meeting of Stockholders to be held July 20, 1999, under the captions "Stock Ownership", "Election of Directors" and "Board of Directors and Committees". Information with respect to Executive Officers of the Registrant is set forth under the heading "Executive Officers of the Registrant" in Part I on pages 5 and 6 of this Form 10-K. 7 Item 11. Executive Compensation Information required by this item is incorporated herein by reference to the Company's Proxy Statement, dated June 18, 1999, for the Annual Meeting of Stockholders to be held July 20, 1999, under the caption "Executive Compensation and Other Information". Item 12. Security Ownership of Certain Beneficial Owners and Management Information pertaining to the security ownership of certain beneficial owners and management is incorporated herein by reference to the Company's Proxy Statement, dated June 18, 1999, for the Annual Meeting of Stockholders to be held July 20, 1999, under the captions "Voting Rights" and "Stock Ownership". Item 13. Certain Relationships and Related Transactions Information required by this item is incorporated herein by reference to the Company's Proxy Statement, dated June 18, 1999, for the Annual Meeting of Stockholders to be held July 20, 1999, under the caption "Election of Directors". Part IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K (a)(1),(a)(2) Financial Statements and Financial Statement Schedule The financial statements and financial statement schedule filed as part of this report are listed or incorporated by reference in the "Index of Financial Statements and Financial Statement Schedule" on page 13 of this Form. (a)(3) Exhibits 3.1 Certificate of Incorporation, as amended, of the Company (incorporated herein by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1992). 3.2 By-Laws of the Company, as amended through 5/15/97 (incorporated herein by reference to Exhibit 3.2 of the Company's Annual Report on Form 10K for the fiscal year ended March 31, 1998). 10.2 1977 Restricted Stock Award Plan, as amended (incorporated herein by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1990). 10.3 Employees' Retirement Plan, as amended (incorporated herein by reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993). (Continued) 8 (a)(3) Exhibits (cont'd) 10.4 Profit Sharing Plan (incorporated herein by reference to the description of such plan set forth in the Company's Proxy Statement dated June 18, 1993, for the Annual Meeting of Stockholders to be held July 20, 1993, under the caption "Executive Compensation and Other Information"). 10.5 Executives' Additional Compensation Plan (incorporated herein by reference to the description of such plan set forth in the Company's Proxy Statement dated June 18, 1993, for the Annual Meeting of Stockholders to be held July 20, 1993, under the caption "Executive Compensation and Other Information"). 10.6 Employment Agreement, dated June 4, 1998, between the Company and Ralph Levine (incorporated herein by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998). 10.7 Employment Agreement, dated June 4, 1998, between the Company and Paul A. Veteri (incorporated herein by reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998). 10.10 Supplemental Death Benefit Agreement, as amended (incorporated herein by reference to Exhibit 10.10 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993). 10.11 Lease Agreement, dated December 2, 1988, between the Company and Fisher - Sixth Avenue Company and Hawaiian Sixth Avenue Corporation (incorporated herein by reference to Exhibit 10.10 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1989). 10.12 Corporate Officer Medical Expense Reimbursement Plan (incorporated herein by reference to Exhibit 10.12 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993). 10.13 Executive Medical Expense Reimbursement Plan, as amended (incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993). 10.14 Executive Pension Benefits Plan, as amended (incorporated herein by reference to Exhibit 10.14 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995). (Continued) 9 Exhibits (cont'd) 10.15 Executive Savings Plan (incorporated herein by reference to Exhibit 10.15 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994). 10.16 Amendment to Revolving Credit Agreement, dated as of October 1, 1995 (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 10.17 Note Agreement, dated as of December 1, 1995 (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995). 10.18 1996 Long-Term Incentive Plan, as amended. 10.19 Employment Agreement, dated September 11, 1996, between the Company and T. Rosie Albright (incorporated herein by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 10.21 Letter Agreement, dated September 14, 1998, between the Company and T. Rosie Albright. 10.22 Letter Agreement, dated June 4, 1998 between the Company and Stephen R. Lang. 13 Annual Report to Stockholders for the fiscal year ended March 31, 1999 21 Subsidiaries. 23 KPMG LLP Independent Auditors' Consent 27 Financial Data Schedule (EDGAR filing only) (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter ended March 31, 1999. 10 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. CARTER-WALLACE, INC. (Registrant) DATED: June 11, 1999 BY: /s/Ralph Levine ------------- ------------------- Ralph Levine President and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the respective dates indicated: Signature Title Date /s/Henry H. Hoyt, Jr. Chairman of the Board and June 11, 1999 Henry H. Hoyt, Jr. Chief Executive Officer, Director (Principal Execu- tive Officer) /s/David M. Baldwin Director June 11, 1999 David M. Baldwin /s/Dr. Richard L. Cruess Director June 11, 1999 - -------------------------- Dr. Richard L. Cruess /s/Suzanne H. Garcia Director June 11, 1999 Suzanne H. Garcia 11 Signature Title Date /s/Scott C. Hoyt Director June 11, 1999 Scott C. Hoyt /s/Ralph Levine President and Chief June 11, 1999 - ------------------------- Operating Officer, Ralph Levine Director /s/Herbert M. Rinaldi Director June 11, 1999 Herbert M. Rinaldi /s/Paul A. Veteri Executive Vice President June 11, 1999 - ------------------------- and Chief Financial Officer, Paul A. Veteri Director (Principal Financial Officer) /s/Peter J. Griffin Vice President and June 11, 1999 Peter J. Griffin Controller (Principal Accounting Officer) 12 CARTER-WALLACE, INC. AND SUBSIDIARIES INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE The consolidated financial statements and the related report of KPMG LLP dated May 5, 1999 appearing on pages 12 through 31 of the 1999 Annual Report to Stockholders are incorporated herein by reference in this Form 10-K Annual Report. The following are set forth in this Annual Report on Form 10-K: Page Independent Auditors' Report on Supporting Financial Statement Schedule 14 Schedule II - Valuation and qualifying accounts for each of the three years ended March 31, 1999 15 All other financial statement schedules are omitted because they are not applicable or not required or because the information is included in the consolidated financial statements or related notes. 13 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Carter-Wallace, Inc.: Under date of May 5, 1999, we reported on the consolidated balance sheets of Carter-Wallace, Inc. and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of earnings, retained earnings and comprehensive earnings, and cash flows, for each of the years in the three-year period ended March 31, 1999, as contained in the 1999 Annual Report to Stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the Annual Report on Form 10-K for the year 1999. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP New York, New York May 5, 1999 14 SCHEDULE II CARTER-WALLACE, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Three Years Ended March 31, 1999 (in thousands of dollars) Balance at Charged to Charged Balance beginning costs and to other at end Description of period expenses accounts Deductions of period Year ended March 31, 1999: Deducted from assets to which they apply: Allowance for doubtful accounts $ 5,716 $ 752 $ - $ 505(a) $ 5,963 Allowance for cash discounts 1,590 8,737 - 8,875(b) 1,452 ------- ------- ------ ------- ------- $ 7,306 $ 9,489 $ - $ 9,380 $ 7,415 ------- ------- ------ ------- ------- Year ended March 31, 1998: Deducted from assets to which they apply: Allowance for doubtful accounts $ 5,314 $ 1,134 $ - $ 732(a) $ 5,716 Allowance for cash discounts 1,416 8,741 - 8,567(b) 1,590 ------- ------- ------ ------- ------- $ 6,730 $ 9,875 $ - $ 9,299 $ 7,306 ------- ------- ------ ------- ------- Year ended March 31, 1997: Deducted from assets to which they apply: Allowance for doubtful accounts $ 5,358 $ 1,182(c) $ - $ 1,226(a)(c) $ 5,314 Allowance for cash discounts 1,358 8,048 - 7,990(b) 1,416 ------- ------- ------ ------- ------- $ 6,716 $ 9,230 $ - $ 9,216 $ 6,730 ------- ------- ------ ------- ------- Notes: (a) Accounts written off and recovered. (b) Net discounts allowed to customers. (c) Includes $508 related to trade receivables from a wholesaler who filed for bankruptcy. 15 EX-13 2 ANNUAL REPORT CARTER-WALLACE ANNUAL REPORT FOR THE YEAR ENDED MARCH 31 1999 EXECUTIVE OFFICES 1345 Avenue of the Americas, New York, N.Y. 10105 212-339-5000 RESEARCH LABORATORIES Cranbury, New Jersey Montreal, Canada MANUFACTURING PLANTS Cranbury, New Jersey Colonial Heights, Virginia Decatur, Illinois Santa Ana, California Winsted, Connecticut Montreal, Canada Folkestone, England Milan, Italy Mexico City, Mexico New Plymouth, New Zealand Barcelona, Spain TRANSFER AND DISBURSING AGENT The Bank of New York 101 Barclay Street New York, N.Y. 10286 800-524-4458 REGISTRAR OF STOCK The Bank of New York 101 Barclay Street New York, N.Y. 10286 SHAREHOLDER RELATIONS Ruder Finn, Inc. 800-984-1777 CARTER-WALLACE, INC. ANNUAL REPORT For the year ended March 31, 1999
FINANCIAL HIGHLIGHTS 1999 1998 Net sales $668,872,000 $662,229,000 Earnings before taxes 46,244,000 44,755,000 Net earnings 28,209,000 27,301,000 Earnings per share--basic and diluted $ .62 $ .59 Dividends 9,931,000 7,392,000 Dividends per share $ .22 $ .16 Average shares outstanding 45,180,000 46,093,000 Number of stockholders of record Common 2,108 2,340 Class B common 1,241 1,343
[LOGO] The Company markets toiletries, pharmaceuticals, diagnostic specialties, proprietary drugs and pet products CONTENTS Report to Stockholders 2 Summary of Selected Financial Data 7 Management's Discussion and Analysis of Results of Operations and Financial Condition 8 Description of Business Segments 11 Consolidated Balance Sheets 12 Consolidated Statements of Earnings, Retained Earnings and Comprehensive Earnings 14 Consolidated Statements of Cash Flows 15 Notes to Consolidated Financial Statements 16 Independent Auditors' Report 31 Directors and Officers 32 REPORT TO SHAREHOLDERS In the fiscal year ended March 31, 1999, the Company's consolidated sales were $668,872,000 compared to prior year's sales of $662,229,000. The Company earned $.62 per share for the fiscal year ended March 31, 1999 compared to $.59 per share in the prior year. SALES Sales in the Company's three business segments were Domestic Consumer Products $283,228,000, Domestic Health Care $181,157,000 and International $204,487,000. Domestic Consumer Products were 42%, Domestic Health Care were 27% and International were 31% of total sales. These sales compare to a year ago of $276,681,000, $188,961,000 and $196,587,000, respectively. Lower foreign exchange rates had the effect of decreasing International sales by approximately $6,700,000. DIVIDENDS Dividends of $.22 per share were paid in the fiscal year ended March 31, 1999 compared to $.16 per share in the prior year. The Company has paid dividends for 116 consecutive years. CARTER PRODUCTS DIVISION The Division achieved increased sales revenues for the year through innovative new product introductions and the strengthening of several core franchises. This performance was achieved even as the retail industry continued to consolidate, particularly the drug and food classes. The Division's key brand segments remained prominent in the market and several Carter Products were the number one brand in their category. Factory shipments of the Division's Trojan brand condoms reached another record high. Market share for the Division's condom brands climbed to over 65% of total condom category sales. Both Trojan and Naturalamb brands increased their market position. Leadership advertising, effective promotion, comprehensive educational programs and innovative line extensions helped improve the Division's leading position in this market. The Nair line of hair removal products continues to be the number one brand in this category with increased sales volume in the depilatory and wax segments. Nair Precision Wax Strips, the Nair Buff-Off Kit and Nair 3-in-1 Brush-on Cream were successfully introduced in the latter part of the year, further expanding Nair's presence in the fast growing home hair removal category. Sales volume for the Arrid line of anti-perspirants and deodorants softened somewhat as competition in these markets expanded. The Arrid brand introduced a new, large size Arrid XX Ultra Clear Solid. Arrid also introduced a successful new advertising campaign, focusing on the powerful protection of Arrid in stressful situations. Pearl Drops continues to be competitive in the specialty tooth whitening category. This segment faces competition from mainstream brands that have introduced whitening line extensions. The Division continues to be one of the leading marketers of at-home pregnancy and ovulation test kits. Sales of the First Response and Answer pregnancy and ovulation test kits each performed well although private label brands continue to find buyers in the price/value segment of the product category. On a combined basis, First Response and Answer ovulation test kits are number one in this category. WALLACE LABORATORIES DIVISION Astelin Nasal Spray, in its second year on the market, continues to post sales increases. It remains the only 2 prescription antihistamine nasal spray in the U.S. market. Results from three clinical studies demonstrated Astelin is as effective as the combination of loratadine tablets (Claritin(R)) and beclomethasone nasal spray (Beconnase(R)) in relieving symptoms of seasonal allergies among patients who do not respond adequately to monotherapy with either an oral antihistamine or inhaled nasal steroid. The results of these studies were published in the June 1999 issue of the peer review journal, Annals of Allergy, Asthma & Immunology. A joint venture agreement with ASTA Medica AG was formed with an effective date of November 1997. Under this agreement, the Company, through the Wallace Laboratories Division, is responsible for all manufacturing, selling, marketing and administrative services for Astelin and is compensated by the joint company for these activities. Astelin Nasal Spray was the primary product promoted by Wallace Laboratories and received major promotional support, especially during the spring and fall allergy seasons. Astelin was also promoted by the sales force of Muro Pharmaceutical, Inc., a subsidiary of ASTA Medica AG, and a part-time sales force. The Division's introduction of Tussi-12, a prescription cough/cold product, in December 1998, was well received. The product contains an antitussive, antihistamine and a decongestant. The Division also concentrated its sales and marketing efforts on products that have responded to promotion. These products include the Soma line of muscle relaxants and Rynatan and Rynatuss cough/ cold product lines. An agreement was entered into with the Warrick Division of Schering-Plough Corporation under which the Division's Rynatan tablet was reformulated to include the antihistamine, azatadine, and the decongestant, pseudoephedrine. The reformulated product was introduced in May 1999. The Division continues to explore new pharmaceutical products and acquisition opportunities that would broaden or complement existing product lines, as well as co-promotion agreements with other companies. WAMPOLE LABORATORIES DIVISION For the fiscal year 1999, Wampole products achieved double-digit sales gains. The Division's strategy of emphasizing its breadth of products for an expanding, automated testing market, along with the continuous introduction of new products in other areas of its businesses took sales to record levels. Enzyme immunoassay products showed strong growth in virtually all categories. Particularly impressive gains were noted in tests for the presence of H. pylori, a bacterium indicative of peptic ulcers and for C. difficile, an intestinal pathogen. Customers were also enthusiastic about the Division's tests for a broad range of autoimmune diseases. In October 1998 the Division entered into an agreement to market the MicroTrak line of enzyme and fluorescent immunoassay products. These tests are primarily used in the detection of sexually transmitted diseases. Wampole also continued to build its point of care business with the introduction in October, 1998 of the Analyst physician office chemistry system. In September 1998, Wampole introduced Macra Lp(a), an enzyme immunoassay for the detection of lipoprotein(a) in cardiovascular risk assessment. This is the first of several such products that the Division plans to introduce. Sales of Mono-plus, a rapid test for the detection of infectious mononucleosis, continued to show strong gains. The Division is actively developing a number of other opportunities to increase its presence in the rapid test and point of care markets. The diagnostic market remains competitive and complex due to government actions, rapid development 3 of new products and the consumer demand for efficiency and quality at lower prices. Wampole Laboratories has established an outstanding reputation for products and distribution in the niches it occupies. LAMBERT KAY DIVISION Lambert Kay achieved increased sales through the introduction of new products and line extensions, the acquisition of the Mr. Spats' line of cat products and sales increases in the Lassie and Tiny Tiger mass market brands. Lambert Kay's pet products fall into seven broad categories: grooming, nutrition, medical, training products, flea and tick control, hardware and toys. These product categories are further separated into two marketing segments: the Lambert Kay brands are sold through independent and chain pet stores, and the Lassie and Tiny Tiger products are sold through mass market outlets and grocery stores. The Division continued to broaden its product mix during the year. Two new shampoos were brought to market as extensions to the popular Fun Family shampoo line: Old Reliable Oatmeal Shampoo with Aloe and Special Agent Citronella Natural Flea Shampoo. In the medical and training products categories, new products included: Boundary Bitters Long Lasting Deterrent, a spray-on treatment that stops a pet from chewing itself, and Lambert Kay Anti Itch Gel and Spray, products that relieve pain and itching and deter wound biting. Following FDA approval, the Division introduced Evict DS liquid wormer for dogs. This double strength formula which eliminates roundworms and hookworms is an extension of the popular Evict product. In the nutrition category, Lassie and Tiny Tiger Shedtrol were introduced. This skin and coat supplement stops excessive shedding, which is one of the most mentioned problems among pet owners. New hardware included the Tuff On Tangles cat brush for removing difficult matting and tangling and the Twinco nail trimmer for small dogs. In December, 1998 Lambert Kay acquired the Mr. Spats' line of cat products. This line includes the Scratch'r Cizer and Scratch'n Roll sisal scratchers, Corner Diner feeding bowl, Private Reserve gourmet catnip, Lazy Cat Lodge habitat and the Purrsuit play game. INTERNATIONAL DIVISION International Division sales advanced in the past year, although the strong U.S. dollar exerted some negative pressure on results. The Division benefited from higher unit volumes for a number of existing products, selective price increases and the full year impact of several consumer product line acquisitions. Strong sales results were achieved in subsidiary operations, particularly in Australia, England, France, Italy and Spain. Consumer product sales continued to advance in a number of areas. Pearl Drops toothpolish sales increased substantially in England, Italy and Australia as a result of the successful introduction of new premium whitening products. Arrid anti-perspirant deodorant sales showed notable growth in Canada following the introduction of Arrid XX Ultra Clear Solid and Arrid XX Sport. Arrid also advanced in England in response to increased advertising and promotional support. Our depilatory lines performed extremely well with Nair achieving double-digit growth in Canada, Australia and Mexico, and Taky depilatories showing significant market share gains in Spain. A full line of depilatory products was introduced under the Nair trademark in France near the end of the fiscal year. Also in France, Lineance, a line of anti-cellulite skin care products, showed strong growth due to the launch of several new products and effective media and promotional support. Advances were also achieved in France for Email Diamant toothpolish and Bi-Solution acne treatment. 4 The Trojan brand of condoms increased its already leading market share in Canada, while Antiphlogistine Rub A-535 maintained its leading position in the topical analgesic market. Dencorub continued to perform well in the Australian topical analgesic category. Consumer sales benefited from the acquisitions of Femfresh, a line of feminine hygiene products sold in England, France and Australia, Anne French, a line of facial cleansing products sold in England and Ireland and Orasiv, a line of denture adhesive products sold in Italy. At the end of the fiscal year, our French subsidiary acquired the Barbara Gould line of facial skin care products and our Australian subsidiary acquired Ultrafresh, a line of oral hygiene products. The Division's line of health care products maintained strong positions in a number of foreign markets. In Canada, Gravol antinauseant maintained a leading market share in spite of continuing competition from generic brands. Ovol, an antiflatulent product line in Canada, added a soft gel capsule offering. In France, Sterimar, a nasal decongestant, showed growth due to the addition of new products to the Sterimar line and continued consumer advertising and promotional activity. In Italy, sales gains were achieved for Cerulisina, a preparation to remove ear wax and Neo Emocicatrol, a topical coagulant. Pharmaceutical sales in Mexico grew to record levels led by strong unit volume advances for the Pangavit line of vitamin supplements and Colfur antidiarrheal. In the professional diagnostics sector, our French subsidiary realized an increase in sales and maintained a leadership position in rapid tests for parasitology. New products containing color change technology for ease of use and better interpretation of results continue to sell well. Our subsidiary in Italy introduced several new products to expand their test menu for identification of infectious diseases. The new generation of ELISA products aids in early detection of the disease and provides more clinical information on disease history and progress. Several additional products for detection of autoimmune diseases and for use in research laboratories were introduced as a result of successful strategic alliances. The Isolator microbiology product line achieved growth in European markets. RESEARCH & DEVELOPMENT Expenses for research and development totaled $25,846,000 for the fiscal year ended March 31, 1999, compared to $28,785,000 in the prior year. Research and development activities continue to produce valuable information and direction for future projects. These efforts will continue using independent research facilities managed by the Company's internal supervisory personnel. Work on taurolidine for its use against vancomycin-resistant enterococcus and a number of other potential indications has continued. Two multicenter Phase III studies are underway to determine if Astelin Nasal Spray is effective for treating non-allergic vasomotor rhinitis. A Supplemental New Drug Application will be submitted for the use of Astelin Nasal Spray in children less than 12 years old. The Astelin tablet NDA for allergic rhinitis is pending at the FDA. The Company has not decided whether to seek final approval for this NDA. The Felbatol (felbamate) Patient Registry, introduced in July 1997, is providing useful patient data to help determine if a certain metabolite level could be used as a monitoring test that would then allow Felbatol to be prescribed with greater safety for patients with epilepsy. FACILITIES A 22,000 square foot expansion to our condom manufacturing facility in Colonial Heights, Virginia was approved in fiscal 1998. The additional capacity was warranted by the increase in demand for Trojan latex condoms. At the end of fiscal 1999, the expansion approached completion with the installation of new equipment. The additional square feet of manufacturing area represents a significant increase to this facility. 5 PEOPLE Thomas G. Gerstmyer was appointed Corporate Vice President, Pharmaceuticals, U.S. and President, Wallace Laboratories Division. Mr. Gerstmyer has been with the Company for seventeen years, most recently as Vice President, Marketing, Wallace Laboratories. He succeeded Herbert Sosman who retired after 21 years of service. James C. Costin, M.D., Vice President, Research and Development for Wallace Laboratories, was appointed Corporate Vice President, Medical and Scientific Affairs. In this position, Dr. Costin will be the Company's senior medical and scientific affairs officer. In addition to his new duties, he will continue to be responsible for the Wallace Laboratories Research and Development department. * * * We appreciate the ongoing trust and confidence of the consumers and professionals who use our products, and the loyal support of our employees, shareholders and suppliers. We thank them for their interest and confidence in Carter-Wallace. Henry H. Hoyt, Jr., Chairman of the Board and Chief Executive Officer Ralph Levine, President and Chief Operating Officer June 11, 1999 6 Carter-Wallace, Inc. and Subsidiaries SUMMARY OF SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------
YEARS ENDED MARCH 31 ---------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE DATA) OPERATIONS Net sales $668,872 $662,229 $648,755 $658,940 $663,642 Earnings before one-time charges in 1996 and 1995 and taxes 46,244 44,755 45,349 54,797 42,310 Net earnings (loss) 28,209 27,301 26,756 7,550(a) (56,268)(b) Earnings (loss) per share--basic and diluted .62 .59 .58 .16(a) (1.22)(b) Dividends per share .22 .16 .16 .16 .29 Average common shares outstanding 45,180 46,093 46,389 46,160 46,108 FINANCIAL POSITION Working capital $159,549 $145,715 $142,972 $137,083 $100,596 Net property, plant and equipment 150,596 150,223 154,844 139,273 137,608 Total assets 721,952 693,613 685,922 718,925 680,224 Long-term debt 64,861 48,887 51,025 55,928 23,115 Stockholders' equity 359,156 349,650 349,154 332,896 327,139 OTHER DATA Capital expenditures $ 17,271 $ 15,676 $ 31,066 $ 35,228 $ 18,853 Book value per share 7.98 7.70 7.53 7.18 7.08 Number of employees 3,310 3,360 3,460 3,610 3,670
(a) Reflects one-time charges against pre-tax earnings of $42,000 ($24,780 after tax or $.54 per share) related to the closure of the Trenton facility, restructuring charges and net adjustments to the provision for loss on Felbatol (felbamate) and the discontinuance of the Organidin (iodinated glycerol) product line. (b) Reflects one-time charges against pre-tax earnings of $129,340 ($80,566 after tax or $1.75 per share) related to the discontinuance of the Organidin (iodinated glycerol) product line, the provision for loss on Felbatol (felbamate) and restructuring charges. ------------------------------------------------------ QUARTERLY DATA ON COMMON STOCK The high and low selling prices of the Company's common stock, principally traded on the New York Stock Exchange (symbol CAR), for the two most recent fiscal years were as follows: FISCAL YEARS ENDED MARCH 31 --------------------------------------------------- 1999 1998 ----------------------- ----------------------- QUARTER ENDED HIGH LOW HIGH LOW -------- --------- -------- ------- June 30 $18 9/16 $16 13/16 $19 $12 3/4 September 30 19 1/2 14 5/8 19 3/4 15 3/8 December 31 19 11/16 14 3/8 17 3/8 14 March 31 19 5/8 15 1/2 18 3/4 16 A dividend of $.04 per share was declared in the first quarter of 1999 and $.06 per share was declared in the second, third and fourth quarters of 1999. A dividend of $.04 per share was declared in all four quarters of 1998. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - -------------------------------------------------------------------------------- NET SALES AND EARNINGS Net earnings were $28,209,000 or $.62 per share in the year ended March 31, 1999, compared to net earnings of $27,301,000 or $.59 per share in the prior year. Net sales in 1999 were $668,872,000 compared to prior year's sales of $662,229,000. The Company has adopted Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information." Adoption of this statement has resulted in a change to the Company's reportable business segments. Previously, the reportable business segments were Consumer Products and Health Care. As a result of the adoption of this new standard, the reportable business segments are Domestic Consumer Products, Domestic Health Care and International. Prior year segment data is presented in the new format. Sales of Domestic Consumer Products increased $6,547,000 or 2.4% in 1999 almost entirely due to higher unit volume. Domestic condom sales increased 10.8% over the prior year. Market share for the Company's condom brands, principally Trojan, has climbed to over 65% of the domestic condom market. Domestic anti-perspirant and deodorant sales declined 5.5% in comparison to the prior year. Domestic Health Care sales decreased $7,804,000 or 4.1% in 1999 due to reduced unit volume. However, sales of Astelin Nasal Spray were higher than in the prior year. Selling price increases had a positive effect on sales in this segment. Sales of most pharmaceutical products in the Domestic Health Care segment continue to be adversely affected by generic competition. Sales of International products increased $7,900,000 or 4.0% in 1999 versus the prior year due to higher unit volume and selling price increases. A portion of the unit volume increase related to acquisitions of consumer products in the United Kingdom and Italy. Lower foreign exchange rates had the effect of decreasing sales in the current year period by approximately $6,700,000. Net sales in 1998 were $662,229,000 compared to prior year's sales of $648,755,000. Sales of Domestic Consumer Products increased $5,765,000 or 2.1% in 1998 due to higher unit volume and to a lesser extent, selling price increases. Condom sales were higher than the prior year. Domestic Health Care sales increased $24,387,000 or 14.8% in 1998 from the prior year due to selling price increases and higher unit volume. Sales in this segment benefited from a full year's sales of Astelin Nasal Spray for seasonal allergic rhinitis which was launched in the fourth quarter of fiscal year 1997. Sales of International products decreased $16,678,000 or 7.8% in 1998 versus the prior year due primarily to lower foreign exchange rates, which had the effect of decreasing foreign sales by approximately $13,500,000. Unit volume was lower in this segment, while selling price increases had a positive effect on sales. Interest income increased in 1999 by $813,000 or 21% from the prior year due to an increase in interest bearing investments. In 1998 interest income was lower than 1997 due to a reduced level of interest bearing investments. Other income increased by $8,291,000 versus the prior year. See comments in the Astelin section below. COSTS AND EXPENSES Cost of goods sold as a percentage of net sales was 37.9% in 1999, 36.4% in 1998 and 37.6% in 1997. The variations from year to year were due primarily to changes in product mix. Throughout this period the Company has taken steps to minimize the effects of higher costs by selective price increases and cost control and reduction measures. Advertising, marketing and other selling expenses in 1999 increased $988,000 or 0.4% as a result of higher spending in the Domestic Health Care and International segments. Spending was lower in the Domestic Consumer Products segment, primarily media advertising. In 1998, advertising, marketing and other selling expenses increased from the prior year by $10,884,000 or 4.4% due to increased expenditures in 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) - -------------------------------------------------------------------------------- the Domestic Health Care segment related to the introduction of Astelin Nasal Spray for seasonal allergic rhinitis which was launched in the fourth quarter of 1997. Spending in the Domestic Consumer Products segment in 1998 was higher than in the prior year. In International, spending in 1998 was lower than in the prior year. In 1999, research and development expenses decreased $2,939,000 or 10.2%, primarily as a result of lower spending in the Domestic Consumer Products segment related to non-recurring prior year employee termination costs. In the Domestic Health Care segment work on taurolidine for its use against vancomycin-resistant enterococcus and a number of other potential indications has continued. In April 1998 a large scale, multi-centered clinical efficacy trial for the use of Taurolin intravenously in treating sepsis was terminated when it was determined that the results did not support efficacy. Research and development expenses in 1998 increased $1,501,000 or 5.5% versus the prior year as a result of higher spending in the Domestic Consumer Products segment due in part to employee termination costs related to organizational changes. Research and development expenses in the Domestic Health Care segment were higher than the prior year, while International research and development expenses were lower than the prior year. General and administrative expenses increased $2,153,000 or 2.6% in 1999 due largely to employee termination costs related to organizational changes. In 1998, general and administrative expenses increased $3,525,000, or 4.4% due largely to higher product liability and group insurance costs. Interest expense increased in 1999 by $184,000 or 4.3%. In 1998, interest expense increased by $122,000 or 2.9% over the prior year. Both of these increases related to higher levels of borrowing. Other expenses increased in 1999 by $1,614,000 or 26.1% due to higher non-cash charges related to incentive plans and amortization of intangibles. In 1998, other expenses decreased by $226,000 or 3.5% from the prior year. The consolidated income tax rate in 1999 and 1998 was 39%. In 1997 the consolidated income tax rate was 41%. The reduced rate in 1999 and 1998 compared with 1997 was due primarily to a change in the mix of domestic and international taxable income. ASTELIN Astelin Nasal Spray, in its second year on the market, recorded higher sales. Promotional support for Astelin continued at the high introductory level of the prior year. In addition to the promotional support provided by the Wallace Laboratories Division, this product was also promoted by the sales force of Muro Pharmaceutical, Inc., a subsidiary of ASTA Medica AG, and a part-time sales force. In July 1998, the Company entered into a joint venture agreement with ASTA Medica AG with an effective date of November, 1997. Under the terms of the agreement the Company is responsible for all manufacturing, selling, marketing and administrative activities for Astelin and Depen, another product licensed from ASTA Medica AG, and receives compensation for these activities from the joint venture. Included in other income is $6,782,000 in the current year and $645,000 in the prior year related to ASTA Medica's share of joint venture operations. YEAR 2000 COMPLIANCE The Company is implementing a plan which addresses Year 2000 technology compliance for its information technology ("IT") and non-IT systems. The plan includes a review of the Company's suppliers and customers to determine that they are working toward Year 2000 compliance. Internal IT systems are expected to be made compliant by September 1999. Material third party vendors have been contacted and asked to attest to Year 2000 compliance. Alternate vendors will be evaluated as potential replacements for non-compliant or non-responsive vendors. The Year 2000 project is expected to cost between $1,000,000 and $2,000,000 on a pre-tax basis. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) - -------------------------------------------------------------------------------- If IT and non-IT systems affected by the Year 2000 were not addressed as the Company is doing, they could conceivably cause technological failures throughout the Company, disrupting normal business operations. These theoretical consequences are generally shared with other manufacturing companies. Management does not believe that the Company's business will be materially affected by Year 2000 issues. Nevertheless, the Company expects to have contingency plans that address the most reasonably likely worst case Year 2000 scenarios. Contingency plans include a possible increase in key product inventories in anticipation of vendors not being able to supply stock and, where appropriate, the development of plans to use manual operations as a back-up for critical automated areas. FELBATOL (FELBAMATE) As previously reported, in the years ended March 31, 1995 and 1996 the Company incurred one-time charges to pre-tax earnings totaling $45,980,000 related to use restrictions for Felbatol. Depending on future sales levels, additional inventory write-offs may be required. If for any reason the product at some future date should no longer be available in the market, the Company will incur an additional one-time charge, consisting primarily of inventory write-offs and anticipated returns of product currently in the market, in the range of $20,000,000 on a pre-tax basis. LIQUIDITY AND CAPITAL RESOURCES Funds provided from operations and the Company's short-term investments and cash equivalents are the main source for financing working capital requirements, additions to property, plant and equipment, the payment of dividends and the purchases of treasury stock. External borrowings are incurred as needed to satisfy cash requirements relating to seasonal business fluctuations and to finance major facility expansion programs and major acquisitions. At March 31, 1999, the Company had available various bank credit lines amounting to $196,000,000 consisting of $175,000,000 in domestic credit lines and $21,000,000 in foreign credit lines, of which $2,752,000 of the foreign lines were utilized at March 31, 1999. There were no domestic borrowings under credit lines at March 31, 1999. The domestic lines are made up of a $150,000,000 revolving credit facility expiring on October 1, 2000 and $25,000,000 in an uncommitted credit line. In fiscal 1999 the Company borrowed approximately $15,200,000 to finance International acquisitions. Inventory levels increased in 1999 over the previous year due to a planned increase in condom inventory as well as new product introductions and acquisitions. Under stock repurchase programs approved by the Company's Board of Directors, the Company purchased 246,000 shares at a cost of $3,885,000 in the year ended March 31, 1999 and 945,000 shares at a cost of $15,890,000 in the year ended March 31, 1998. CAPITAL EXPENDITURES Capital expenditures were $17,271,000 in 1999, $15,676,000 in 1998 and $31,066,000 in 1997. 10 DESCRIPTION OF BUSINESS SEGMENTS - -------------------------------------------------------------------------------- The Company is engaged in the manufacture and sale of a diversified line of products in the Domestic Consumer Products, Domestic Health Care and International business segments described below: DOMESTIC CONSUMER PRODUCTS These products are promoted directly to the consumer by television and other advertising media and are sold to wholesalers and various retailers. They are manufactured and sold by our consumer products divisions and some are sold throughout the rest of the world by various subsidiaries and distributors. Principal products include: * Arrid Extra Dry and Arrid XX anti-perspirants and deodorants * Lady's Choice anti-perspirants and deodorants * Answer and First Response at-home pregnancy and ovulation test kits * Carter's laxative * H-R lubricating jelly * Nair depilatories, waxes and bleach * Pearl Drops whitening toothpolish and whitening toothpaste * Rigident denture adhesive * Trojan, Class Act and Naturalamb condoms * Boundary dog and cat repellants * Color Guard chain products * Fresh 'n Clean grooming products, stain and odor remover and puppy housebreaking pads * Lassie and Tiny Tiger pet product lines * Linatone food supplement * Twinco chains, slicker brushes and combs * Vermont Style chew toys DOMESTIC HEALTH CARE Health care products are promoted primarily to physicians, pharmacists, hospitals, laboratories and clinics by a staff of specially trained professional sales representatives and by advertising in professional journals. These products are manufactured and sold by our professional products divisions and some are sold throughout the rest of the world by various subsidiaries and distributors. Principal products include: * Astelin Nasal Spray for the treatment of symptoms of seasonal allergic rhinitis * Felbatol for the treatment of seizures associated with epilepsy * Organidin NR family of expectorants/antitussives * Ryna line of cough/cold products * Tussi-12 cough/cold product * Soma brand muscle relaxants * Butisol sedative hypnotic * Depen penicillamine for severe rheumatoid arthritis * Doral sedative hypnotic * Lufyllin xanthine bronchodilator * Maltsupex laxative * Vo-SoL topical antibacterial and antifungal agent * Analyst physician office chemistry system * Clearview product line of rapid tests for the determination of pregnancy, group A streptococcus, chlamydia and C. difficile * Impact, FIAX and other branded enzyme and fluorescent immunoassay tests to detect a broad range of infectious and autoimmune diseases * Isostat product line to aid in the detection of micro-organisms in blood * MicroTrak line of immunoassay products for the detection of sexually transmitted diseases, primarily chlamydia * Mono-Test, Mono-Latex and Mono-plus for the detection of mononucleosis * Stat-Crit portable instrument for use in measuring blood hematocrit levels -------------------------- INTERNATIONAL In addition to many of the products listed above, the Company sells the following products exclusively in certain International markets: CONSUMER PRODUCTS * Anne French facial cleansing products * Barbara Gould facial beauty and cleansing products * Bi-Solution acne treatment products * Cerox adhesive tapes and bandages * Confidelle, Discover and Gravix at-home pregnancy test kits * Cossack line of men's grooming products * Curash line of skin care products * Email Diamant toothpastes * Eudermin line of skin care and toiletry products * Femfresh line of feminine hygiene products * GranVista non-prescription eyeglasses * Lineance line of anti-cellulite and associated skin care products * Odontovax line of oral hygiene products * Orasiv denture adhesive * Poupina line of skin care and toiletry products * Taky depilatories and waxes * Ultrafresh mouthwash and breath freshening products HEALTH CARE * Antiphlogistine Rub A-535 and Dencorub topical analgesics * Atasol analgesic/antipyretic * Bentasil medicated throat lozenges * Cerulisina otic solution * Diovol antacid products * Gravol antinauseant * Jordan toothbrushes * Maltlevol and Pangavit vitamin supplements * Ovol antiflatulent * Sterimar nasal decongestant * Technogenetics line of diagnostic tests for thyroid metabolism, fertility/pregnancy conditions and other hormonal (endocrine) disorders 11 Carter-Wallace, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1999 AND 1998
ASSETS 1999 1998 - -------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 49,382,000 $ 51,661,000 Short-term investments 31,870,000 25,826,000 Accounts receivable-trade, less allowances of $7,415,000 in 1999 and $7,306,000 in 1998 122,196,000 126,579,000 Other receivables 7,164,000 6,432,000 Inventories Finished goods 54,019,000 45,811,000 Work in process 10,875,000 9,751,000 Raw materials and supplies 25,714,000 25,408,000 ------------ ------------ 90,608,000 80,970,000 ------------ ------------ Deferred taxes 17,128,000 20,591,000 Prepaid expenses and other current assets 11,242,000 7,879,000 ------------ ------------ TOTAL CURRENT ASSETS 329,590,000 319,938,000 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT, AT COST Land 3,880,000 3,070,000 Buildings and improvements 111,625,000 106,737,000 Machinery, equipment and fixtures 178,354,000 168,041,000 Leasehold improvements 22,900,000 22,203,000 ------------ ------------ 316,759,000 300,051,000 Accumulated depreciation and amortization 166,163,000 149,828,000 ------------ ------------ 150,596,000 150,223,000 ------------ ------------ INTANGIBLE ASSETS Excess of purchase price of businesses acquired over the net assets at date of acquisition, less amortization 84,463,000 87,658,000 Patents, trademarks, contracts and formulae, less amortization 51,926,000 36,884,000 ------------ ------------ 136,389,000 124,542,000 ------------ ------------ DEFERRED TAXES 39,366,000 37,901,000 OTHER ASSETS 66,011,000 61,009,000 ------------ ------------ $721,952,000 $693,613,000 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 12
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 - -------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable $ 44,084,000 $ 32,506,000 Accrued expenses 107,267,000 106,851,000 Notes payable 8,134,000 17,854,000 Taxes on income 10,556,000 17,012,000 ------------ ------------ TOTAL CURRENT LIABILITIES 170,041,000 174,223,000 ------------ ------------ LONG-TERM LIABILITIES Long-term debt 64,861,000 48,887,000 Deferred compensation 19,931,000 17,553,000 Accrued postretirement benefit obligation 69,241,000 69,292,000 Other long-term liabilities 38,722,000 34,008,000 ------------ ------------ TOTAL LONG-TERM LIABILITIES 192,755,000 169,740,000 ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock, authorized 1,000,000 shares, without par value; issued--none -- -- Common stock, authorized 80,000,000 shares, par value $1 per share, one vote per share; issued 34,740,000 shares in 1999 and 34,698,000 shares in 1998 34,740,000 34,698,000 Class B common stock, authorized 13,056,800 shares, par value $1 per share, ten votes per share; issued 12,465,000 shares in 1999 and 12,507,000 in 1998 12,465,000 12,507,000 Capital in excess of par value 4,483,000 4,204,000 Retained earnings 368,093,000 349,815,000 ------------ ------------ 419,781,000 401,224,000 Less: Accumulated other comprehensive loss Foreign currency translation adjustment 27,785,000 24,811,000 Treasury stock at cost--2,069,300 common and 153,600 Class B common shares in 1999 and 1,667,400 common and 153,600 Class B common shares in 1998 32,840,000 26,763,000 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 359,156,000 349,650,000 ------------ ------------ $721,952,000 $693,613,000 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 13 Carter-Wallace, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS, RETAINED EARNINGS AND COMPREHENSIVE EARNINGS THREE YEARS ENDED MARCH 31, 1999
1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF EARNINGS Net sales $668,872,000 $662,229,000 $648,755,000 Interest income 4,682,000 3,869,000 4,226,000 Other income 11,118,000 2,827,000 3,200,000 ------------ ------------ ------------ 684,672,000 668,925,000 656,181,000 ------------ ------------ ------------ Cost and Expenses: Cost of goods sold 253,447,000 241,189,000 243,657,000 Advertising and promotion 131,684,000 134,478,000 122,407,000 Marketing and other selling 130,039,000 126,257,000 127,444,000 Research and development 25,846,000 28,785,000 27,284,000 General and administrative 85,118,000 82,965,000 79,440,000 Interest 4,492,000 4,308,000 4,186,000 Other 7,802,000 6,188,000 6,414,000 ------------ ------------ ------------ 638,428,000 624,170,000 610,832,000 ------------ ------------ ------------ Earnings before taxes on income 46,244,000 44,755,000 45,349,000 Provision for taxes on income 18,035,000 17,454,000 18,593,000 ------------ ------------ ------------ Net earnings $ 28,209,000 $ 27,301,000 $ 26,756,000 ------------ ------------ ------------ ------------ ------------ ------------ Earnings per share--basic and diluted $ .62 $ .59 $ .58 ------------ ------------ ------------ ------------ ------------ ------------ CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Amount at beginning of year $349,815,000 $329,906,000 $310,573,000 Net earnings 28,209,000 27,301,000 26,756,000 ------------ ------------ ------------ 378,024,000 357,207,000 337,329,000 Dividends--$.22 per share in 1999 and $.16 per share in 1998 and 1997 (9,931,000) (7,392,000) (7,423,000) ------------ ------------ ------------ Amount at end of year $368,093,000 $349,815,000 $329,906,000 ------------ ------------ ------------ ------------ ------------ ------------ CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS Net earnings $ 28,209,000 $ 27,301,000 $ 26,756,000 Other comprehensive (loss) earnings Foreign currency translation adjustment (2,974,000) (3,846,000) (3,720,000) Minimum pension liability adjustment, net of tax -- -- 814,000 ------------ ------------ ------------ Total comprehensive earnings $ 25,235,000 $ 23,455,000 $ 23,850,000 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 14 CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED MARCH 31, 1999
1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- Net earnings $ 28,209,000 $ 27,301,000 $ 26,756,000 Adjustments to reconcile net earnings to cash flows provided by operating activities: Cash payments for one-time charges (2,318,000) (12,495,000) (31,302,000) Depreciation and amortization 16,372,000 15,746,000 14,604,000 Amortization of patents, trademarks, contracts and formulae 6,199,000 4,996,000 4,645,000 Amortization of excess of purchase price of businesses acquired over the net assets at date of acquisition 4,178,000 3,994,000 4,088,000 Other changes in assets and liabilities: Decrease (increase) in accounts and other receivables 3,602,000 (13,151,000) 5,787,000 (Increase) decrease in inventories (10,289,000) 5,110,000 3,918,000 (Increase) decrease in prepaid expenses (3,647,000) 1,743,000 (635,000) Increase (decrease) in accounts payable and accrued expenses 8,795,000 15,131,000 (6,152,000) Increase in deferred compensation 2,548,000 1,797,000 803,000 Decrease in deferred taxes 1,998,000 11,329,000 12,847,000 Other changes (7,263,000) (10,362,000) (6,181,000) ------------ ------------ ------------ Cash flows provided by operating activities 48,384,000 51,139,000 29,178,000 ------------ ------------ ------------ Cash flows used in investing activities: Additions to property, plant and equipment (17,271,000) (15,676,000) (31,066,000) Payments for international acquisitions, net of cash received: Barbara Gould product line in France (15,129,000) -- -- Femfresh product line in the U.K. (3,633,000) -- -- Sanodent S.r.l. in Italy -- (3,717,000) -- Anne French product line in the U.K. -- (1,613,000) -- Acquisition of product lines from BioWhittaker, Inc. and Clark Laboratories -- -- (500,000) (Increase) decrease in short-term investments (6,273,000) (7,790,000) 1,043,000 Proceeds from sale of property, plant and equipment 371,000 5,881,000 186,000 ------------ ------------ ------------ Cash flows used in investing activities (41,935,000) (22,915,000) (30,337,000) ------------ ------------ ------------ Cash flows used in financing activities: Dividends paid (9,931,000) (7,392,000) (7,423,000) Increase in borrowings 17,385,000 15,719,000 347,000 Payments of debt (11,569,000) (2,644,000) (6,624,000) Purchase of treasury stock (4,381,000) (16,685,000) (380,000) ------------ ------------ ------------ Cash flows used in financing activities (8,496,000) (11,002,000) (14,080,000) ------------ ------------ ------------ Effect of foreign exchange rate changes on cash and cash equivalents (232,000) (685,000) (822,000) ------------ ------------ ------------ (Decrease) increase in cash and cash equivalents $ (2,279,000) $ 16,537,000 $(16,061,000) ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 15 Carter-Wallace, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Carter-Wallace, Inc. and all of its subsidiaries (the "Company"). All significant intercompany transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and use assumptions that affect certain reported amounts and disclosures. Actual amounts may differ. Cash Equivalents and Short-term Investments Cash equivalents consist of short-term securities with maturities of three months or less when purchased. Investments with a maturity of greater than three months but less than one year are classified as short-term investments. The carrying value of cash equivalents and short-term investments approximated fair value at March 31, 1999 and 1998. Inventories Inventories are valued at the lower of cost or market on the first-in, first-out (FIFO) method, except for certain domestic inventories which are stated at cost on the last-in, first-out (LIFO) method. Property, Plant and Equipment Depreciation is provided over the estimated useful lives of the assets, principally using the straight line method. Machinery, equipment and fixtures are depreciated over a period ranging from five to twenty years. Buildings and improvements are depreciated over a period ranging from twenty to forty years. Leasehold improvements are amortized on a straight line basis over the life of the related asset or the life of the lease, whichever is shorter. Expenditures for renewals and betterments are capitalized. Upon sale or retirement of assets, the appropriate asset and related accumulated depreciation accounts are adjusted and the resultant gain or loss is reflected in earnings. Maintenance and repairs are charged to expense as incurred. Intangible Assets The excess of purchase price of businesses acquired over net assets at date of acquisition is assessed to the product or group of products which constitute the business acquired and amortized over no longer than 40 years for amounts relating to acquisitions subsequent to October 31, 1970. The cost of patents, formulae and contracts is amortized on a straight line basis over their legal or contractual lives. The cost of trademarks is being amortized over no longer than 40 years for amounts relating to acquisitions subsequent to October 31, 1970. Amounts related to intangibles acquired prior to October 31, 1970 are not material. The Company's policy in assessing the recoverability of intangible assets is to compare the carrying value of the intangible asset with cash flow generated by products related to the intangible asset. In addition, the Company continually evaluates whether adverse developments indicate that an intangible asset may be impaired. Income Taxes Deferred income taxes are determined using the liability method based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Advertising and Marketing Costs Advertising, promotion and other marketing costs are charged to earnings in the period in which they are incurred. Earnings per Common Share Basic earnings per share is based on the average number of common and Class B common shares outstanding during the year: 45,180,000 in 1999, 46,093,000 in 1998, and 46,389,000 in 1997. The calculation of basic and fully diluted earnings per share resulted in the same per share amount for all periods presented. 2. INVENTORIES Inventories computed on the last-in, first-out (LIFO) method comprised 13% and 11% of inventories included in current assets at year end 1999 and 1998, respectively. If these inventories had been valued on the FIFO inventory method (which approximates current or replacement cost), total inventories would have been approximately $10,100,000 and $9,900,000 higher than reported at March 31, 1999 and 1998, respectively. Felbatol inventories of $8,275,000 at March 31, 1999 and $10,750,000 at March 31, 1998, not expected to be sold in the next fiscal year, are included in Other Assets. 16 3. TAXES ON INCOME The provision for taxes on earnings was as follows:
1999 1998 1997 ----------- ----------- ----------- Current: Domestic $ 8,648,000 $ (563,000) $ 1,474,000 Foreign 7,305,000 6,606,000 4,496,000 ----------- ----------- ----------- 15,953,000 6,043,000 5,970,000 ----------- ----------- ----------- Deferred: Domestic 1,869,000 11,436,000 10,486,000 Foreign 213,000 (25,000) 2,137,000 ----------- ----------- ----------- 2,082,000 11,411,000 12,623,000 ----------- ----------- ----------- Total $18,035,000 $17,454,000 $18,593,000 ----------- ----------- ----------- ----------- ----------- -----------
The components of income before taxes were as follows: Domestic $27,478,000 $27,367,000 $26,824,000 Foreign 18,766,000 17,388,000 18,525,000 ----------- ----------- ----------- Total $46,244,000 $44,755,000 $45,349,000 ----------- ----------- ----------- ----------- ----------- -----------
Deferred income taxes are provided for temporary differences between the financial statement and tax bases of the Company's assets and liabilities. The temporary differences gave rise to the following deferred tax assets and liabilities at March 31:
1999 1998 ----------- ----------- Postretirement benefit plans $29,726,000 $30,333,000 Employee benefit plans 11,245,000 8,805,000 Accrued liabilities 16,607,000 18,899,000 Asset valuation accounts 16,458,000 17,350,000 All other 7,698,000 8,024,000 Valuation allowances (3,247,000) (3,247,000) ----------- ----------- Total deferred tax assets 78,487,000 80,164,000 ----------- ----------- Depreciation 14,200,000 13,817,000 All other 7,793,000 7,855,000 ----------- ----------- Total deferred tax liabilities 21,993,000 21,672,000 ----------- ----------- Net deferred tax assets $56,494,000 $58,492,000 ----------- -----------
Realization of the Company's deferred tax assets is dependent on generating sufficient taxable income in future years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized, except for the valuation allowance amount. However, the deferred tax assets could be reduced if estimates of future taxable income are lowered. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. 17 The effective tax rate of the provision for taxes on earnings as compared with the U.S. Federal statutory income tax rate was as follows:
1999 1998 1997 ---------------------- ---------------------- ----------------------- % TO % TO % TO TAX PRE-TAX TAX PRE-TAX TAX PRE-TAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME ----------- ----- ----------- ----- ------------ ----- Computed tax expense $16,185,000 35.0% $15,664,000 35.0% $ 15,872,000 35.0% Foreign income taxed at a different effective rate 1,619,000 3.5 987,000 2.2 1,581,000 3.5 State income taxes, net of federal tax benefit 1,345,000 2.9 2,082,000 4.7 1,145,000 2.5 Amortization of intangibles 534,000 1.2 534,000 1.2 534,000 1.2 Other (1,648,000) (3.6) (1,813,000) (4.1) (539,000) (1.2) ----------- ----- ----------- ----- ------------ ----- $18,035,000 39.0% $17,454,000 39.0% $ 18,593,000 41.0% ----------- ----- ----------- ----- ------------ ----- ----------- ----- ----------- ----- ------------ -----
The U.S. Internal Revenue Service completed its examination of the Company's tax returns through fiscal year 1995 resulting in no material impact on the Company. 4. FOREIGN OPERATIONS Net current assets and net sales of the Company's foreign subsidiaries and branches operating outside of the United States, and the Company's equity in net assets and net earnings of such operations were:
1999 1998 1997 ------------ ------------ ------------ Net current assets $ 99,535,000 $ 94,378,000 $ 83,540,000 Equity in net assets 140,992,000 132,718,000 125,757,000 Net sales 202,799,000 194,780,000 210,606,000 Net earnings 11,248,000 10,807,000 11,892,000
The equity adjustment from foreign currency translation is comprised of the following:
YEARS ENDED MARCH 31 ---------------------------------- 1999 1998 ----------- ----------- Opening balance $24,811,000 $20,965,000 Current year 2,974,000 3,846,000 ----------- ----------- Ending balance $27,785,000 $24,811,000 ----------- ----------- ----------- -----------
5. NOTES PAYABLE AND LONG-TERM DEBT Notes Payable Notes payable consisting of borrowings from banks under available lines of credit were $2,752,000, $3,402,000 and $347,000 and the current portion of long-term debt was $3,103,000, $8,471,000 and $2,911,000 at March 31, 1999, 1998 and 1997, respectively. In addition, other short-term notes payable in international operations amounted to $2,279,000 and $5,981,000 at March 31, 1999 and 1998. Additional data related to the amount of short-term borrowings is not presented since it is immaterial. 18 The Company has available various bank credit lines amounting to $196,000,000 of which $175,000,000 is for domestic borrowings and $21,000,000 is for international borrowings. The availability of the lines of credit is subject to review by the banks involved. Commitment fees are immaterial. Long-Term Debt Long-term debt at March 31 is summarized below:
1999 1998 ----------- ----------- Promissory Notes, 7.62%, payable in equal annual installments of $7,000,000 from December 21, 2003 through December 21, 2007 $35,000,000 $35,000,000 Unsecured Euro term loan, 4.10%, payable in installments beginning June 1, 2002 through March 1, 2004 10,143,000 -- Unsecured French Franc term loan, 4.10%, payable in installments through February 25, 2006 5,043,000 -- Unsecured Italian lira term loan, 6.30% payable in installments through December 31, 2004 3,416,000 3,354,000 Unsecured French franc loan, 5.10%, payable February 24, 2003 3,362,000 3,284,000 City of Decatur, Illinois adjustable rate Industrial Revenue Bond, payable December 1, 2010 3,000,000 3,000,000 Secured Italian lira term loans, adjustable rate, payable in installments through July 1, 2001 2,780,000 3,727,000 Unsecured French Franc loan, adjustable rate, payable in installments through September 18, 2003 1,849,000 -- Promissory Notes, 5.42%, payable no later than September 12, 2000 1,630,000 1,811,000 Unsecured French franc loans, 7.5% to 7.75%, payable in installments through August 5, 2001 1,192,000 2,048,000 Connecticut Development Authority Industrial Development Bond, 6.75% repaid October 1, 1998 -- 4,300,000 Other Long-Term Debt 549,000 834,000 ----------- ----------- 67,964,000 57,358,000 Less, current portion of long-term debt included in notes payable (3,103,000) (8,471,000) ----------- ----------- $64,861,000 $48,887,000 ----------- ----------- ----------- -----------
Maturities of long-term debt for each of the four fiscal years 2001 through 2004 are $4,444,000, $2,598,000, $9,040,000 and $13,969,000, respectively. With respect to the French Franc loan payable February 24, 2003, interest is adjustable based on the Paris Interbank Offered Rate plus a nominal increment, adjusted quarterly and was converted to a fixed rate at the inception of the loan. Interest on the City of Decatur, Illinois Industrial Revenue Bond is 70% of the prime rate through December, 2000, adjustable thereafter. 19 The Italian lira loans due July 1, 2001 are secured by irrevocable letters of credit. Commitment fees are immaterial. Interest on these loans is the Milan Interbank Offered Rate plus a nominal increment, adjusted quarterly. The Company issued promissory notes, payable no later than September 12, 2000, in connection with the acquisition of the net assets of Youngs Drug Products Corporation and affiliates. Prepayments of all or portions of the notes are required as certain contractual conditions are satisfied. With respect to the French franc loans payable through August 5, 2001, arrangements were made at the inception of the loans to convert a portion of the loans from an adjustable rate to a fixed rate. Certain of the Company's long-term debt agreements contain covenants which require the Company to maintain a minimum level of net worth and limit total long-term liabilities to a stated percentage of total capitalization. The fair value of long-term debt, including current maturities, was $70,532,000 at March 31, 1999 and $59,025,000 at March 31, 1998. 6. COMMON STOCK, CLASS B COMMON STOCK AND CAPITAL IN EXCESS OF PAR VALUE The Company has two classes of common stock with a par value of $1.00 per share. Class B common stock generally has ten votes per share on all matters and votes as a class with common stock which has one vote per share. The transfer of Class B common stock is restricted; however, Class B common stock is at all times convertible into shares of common stock on a share-for-share basis. Common stock and Class B common stock have identical rights with respect to cash dividends and upon liquidation. Activity for the years ended March 31, 1999, 1998 and 1997 was as follows:
CLASS B CAPITAL IN COMMON COMMON EXCESS OF STOCK STOCK PAR VALUE ----------- ----------- ----------- Balance at March 31, 1996 $34,613,000 $12,592,000 $ 3,268,000 Conversion of Class B common stock to Common Stock 42,000 (42,000) -- Cost of treasury stock under market value at date of award or issuance -- -- 320,000 ----------- ----------- ----------- Balance at March 31, 1997 34,655,000 12,550,000 3,588,000 Conversion of Class B common stock to Common Stock 43,000 (43,000) -- Cost of treasury stock under market value at date of award or issuance -- -- 616,000 ----------- ----------- ----------- Balance at March 31, 1998 34,698,000 12,507,000 4,204,000 Conversion of Class B common stock to Common Stock 42,000 (42,000) -- Cost of treasury stock under market value at date of award or issuance -- -- 279,000 ----------- ----------- ----------- Balance at March 31, 1999 $34,740,000 $12,465,000 $ 4,483,000 ----------- ----------- ----------- ----------- ----------- -----------
The cost of treasury stock over or under the market value of the stock on the date of the award or issuance has been applied to capital in excess of par value, as well as any tax benefit on the appreciation of restricted stock awards. Shares issued from treasury stock for stock awards amounted to 28,000, 36,400 and 32,700 shares at a cost of $429,000, $502,000 and $447,000 in 1999, 1998 and 1997, respectively. Shares purchased and added to treasury stock amounted to 274,400, 993,000 and 26,000 shares at a cost of $4,381,000, $16,685,000 and $380,000 in 1999, 1998 and 1997, respectively. In 1999, the Company exchanged 155,500 shares with a value of $2,125,000 previously issued as restricted stock awards for an equivalent number of deferred stock awards. 7. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS (DOLLARS IN THOUSANDS) The Company has several contributory and non-contributory pension plans in which substantially all employees with over one year of service participate. The Company's funding policy is to make annual contributions to these plans in amounts equal to the minimum required by applicable regulations. The plans' assets are invested primarily in common stocks and corporate and government bonds. The Company also provides certain health care and insurance benefits for retired employees. The cost of the benefits is accrued during the years the employees render service until they attain full eligibility for those benefits. 20 The components of the pension and postretirement benefit expense for the years ended March 31, 1999, 1998 and 1997 were:
RETIREMENT PLANS OTHER POSTRETIREMENT BENEFITS ------------------------------- ------------------------------- 1999 1998 1997 1999 1998 1997 ------- ------- ------- ------- ------- ------- Service cost $ 8,332 $ 7,511 $ 8,127 $ 1,924 $ 1,689 $ 1,914 Interest cost 14,846 14,785 14,721 3,775 3,871 3,659 Expected return on assets (20,179) (18,743) (17,803) -- -- -- Amortization of prior service cost 2,270 2,253 2,198 (3,415) (3,452) (3,414) Amortization of transition cost (2,065) (2,086) (2,096) -- -- -- Amortization of actuarial (gain)/loss (153) (10) 89 (328) (308) Settlement losses -- 728 106 -- -- -- ------- ------- ------- ------- ------- ------- Total benefit expense $ 3,051 $ 4,438 $ 5,342 $ 1,956 $ 1,800 $ 2,159 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
The Company recognized settlement losses of $728,000 in 1998 and $106,000 in 1997 in conjunction with retirements. The components of the changes in the benefit obligation were as follows:
OTHER POSTRETIREMENT RETIREMENT PLANS BENEFITS ----------------------- ----------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Benefit obligation at beginning of year $213,311 $195,355 $ 55,344 $ 52,817 Service cost 8,332 7,511 1,924 1,689 Interest cost 14,846 14,785 3,775 3,871 Plan participants' contributions 331 395 -- -- Amendments 849 889 -- -- Actuarial (gain)/loss 10,255 19,802 (1,369) (1,129) Effect of exchange rate changes (1,138) (354) (78) (46) Benefits paid (16,901) (25,072) (1,820) (1,858) -------- -------- -------- -------- Benefit obligation at end of year $229,885 $213,311 $ 57,776 $ 55,344 -------- -------- -------- -------- -------- -------- -------- --------
The components of the changes in plan assets were as follows: Fair value of plan assets at beginning of year $241,454 $216,215 -- -- Actual return on plan assets 36,859 39,339 -- -- Employer contributions 2,257 10,879 $ 1,820 $ 1,858 Plan participants' contributions 331 395 -- -- Effect of exchange rate changes (432) (302) -- -- Benefits paid (16,901) (25,072) (1,820) (1,858) -------- -------- -------- -------- Fair value of plan assets at end of year $263,568 $241,454 -- -- -------- -------- -------- -------- -------- -------- -------- --------
The following is a reconciliation of the funded status of the plans to the Company's balance sheets at March 31: Funded status $ 33,683 $ 28,143 $(57,776) $(55,344) Unrecognized actuarial (gain)/loss (43,255) (36,140) (9,805) (9,029) Unrecognized prior service cost 10,353 11,756 (1,660) (4,919) Unrecognized transition obligation (1,801) (3,899) -- -- Minimum liability adjustment (5,509) (6,718) -- -- -------- -------- -------- -------- Accrued benefit cost $ (6,529) $ (6,858) $(69,241) $(69,292) -------- -------- -------- -------- -------- -------- -------- --------
Amounts recognized in the Company's balance sheets at March 31 were as follows: Other assets $ 24,745 $ 21,489 -- -- Accrued expenses (14,093) (14,101) -- -- Long-term liabilites (17,181) (14,246) $(69,241) $(69,292) Intangible assets 5,509 6,718 -- -- -------- -------- -------- -------- Net amount recognized $ (1,020) $ (140) $(69,241) $(69,292) -------- -------- -------- -------- -------- -------- -------- --------
21 The values at March 31 for pension plans with accumulated benefit obligations in excess of plan assets were as follows: 1999 1998 ------- ------- Projected Benefit Obligation $39,248 $34,545 ------- ------- ------- ------- Accumulated Benefit Obligation $28,303 $25,941 ------- ------- ------- ------- These are unfunded non-qualified plans which had no assets at March 31. The principal assumptions used in determining 1999, 1998 and 1997 actuarial values were: Discount rate 6.75 - 8% Rate of increase in compensation levels 4 - 6% Expected long-term rate of return on plan assets 8 -10% Expense for the employee savings plan under which the Company matches the contributions of participating employees up to a designated level was $1,478,000, $1,473,000 and $1,421,000 in 1999, 1998 and 1997 respectively. The assumed health care cost trend rate used to measure the accumulated postretirement benefit obligation for those over age 65 is 10 percent for 1999 trending to 5 percent over a five year period. For those under age 65, the trend rate is 7.1 percent for 1999 trending to 5 percent over a five year period. A one percent increase in the assumed respective annual medical cost trend rate would increase the accumulated postretirement benefit obligation by approximately $3,000,000 and the service and interest components of net postretirement benefit expense by $300,000. 8. LONG-TERM INCENTIVE PLANS 1977 Restricted Stock Award Plan The plan as amended provides for awards of not more than 2,750,000 shares of common stock, subject to adjustments for stock splits, stock dividends and other changes in the Company's capitalization, to key employees, to be issued either immediately after the award or at a future date. As a result of the three-for-one stock split in April, 1992 and the issuance of the Class B common stock in 1987, the 2,750,000 shares of common stock provided for in the Plan have been adjusted to 5,593,154 shares. As provided in the Plan and subject to restrictions, shares awarded may not be disposed of by the recipients for a period of five years from the date of the award. Cash dividends on shares awarded are held by the Company for the benefit of the recipients, subject to the same restrictions as the award. Such dividends (without interest) are paid to the recipients upon lapse of the restrictions. The cost of the awards, equal to the fair market value at the date of award, is being charged to operations in equal annual amounts over a five year period commencing at the date of the award. Cumulative awards as of March 31, 1999 amount to 3,466,250 shares. There were no new awards granted in any of the past three fiscal years. The financial statements reflect the transfer of the awarded shares from treasury stock as of the date of their issuance. Outstanding awards of 27,692 shares at March 31, 1999 will be issued at a future date no later than five years from the date of the award. For shares that have been issued, the market value at the date of the awards was $708,000, $1,118,000 and $680,000 in 1999, 1998, and 1997, respectively. The cost of treasury stock for these awards was $429,000, $502,000 and $346,000 in 1999, 1998 and 1997, respectively. 1996 Long-Term Incentive Plan The plan provides for awards of not more than 4,500,000 shares of common stock, subject to adjustment for stock splits, stock dividends and other changes in the Company's capitalization, to key employees, to be issued either immediately after the award or at a future date. The awards consist of restricted and/or deferred stock or options, or a combination thereof. At March 31, 1999, 4,493,841 shares had been granted under the 1996 long-term incentive plan, with an additional grant of 87,355 shares made subject to shareholder approval of a proposal to amend the Company's 1996 long-term incentive plan to increase the number of shares authorized for issuance under the plan by 4,500,000 shares. 22 Stock Options Under the plan, both qualified and non-qualified options may be granted to key executive employees at fair market value at the date of grant. The right to exercise the options, in installments, commences one year from the date of grant and expires ten years after that date. Effective April 1, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". As permitted by the Statement, the Company has chosen to continue to account for options granted under the plan using the intrinsic value method. Accordingly, no compensation expense has been recognized for these options. Had the fair value method of accounting, as defined in SFAS No. 123, been applied to the Company's stock options, the Company's net income would have been reduced by approximately $3,390,000 or $.08 per share in 1999, $1,940,000 or $.04 per share in 1998 and $1,020,000 or $.02 per share in 1997. The weighted-average fair market value of options granted was $7.71, $7.31 and $6.54 in 1999, 1998 and 1997, respectively. For purposes of fair market value disclosures, the fair market value of an option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1999 1998 1997 ---- ---- ---- Risk-Free Interest Rate 4.9% 5.9% 6.4% Expected Life 8 yrs. 8 yrs. 8 yrs. Volatility 35.4% 36.3% 41.0% Dividend Yield 1.1% 1.3% 1.5%
A summary of the status of stock options granted under the plan as of March 31, 1999, 1998 and 1997 and changes during the years ended on those dates is presented below:
1999 1998 1997 -------------------------- -------------------------- -------------------------- WEIGHTED-AVG. WEIGHTED-AVG. WEIGHTED-AVG. OPTION EXERCISE OPTION EXERCISE OPTION EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- ------- --------- ------- --------- ------- Outstanding April 1 2,479,601 $ 14.70 1,432,220 $ 13.63 1,054,080 $ 13.75 Granted 1,192,542 17.77 1,047,381 16.16 549,860 13.43 Exercised -- -- -- -- -- -- Forfeited -- -- -- -- (171,720) 13.75 --------- --------- --------- Outstanding March 31 3,672,143 $ 15.70 2,479,601 $ 14.70 1,432,220 $ 13.63 --------- --------- --------- --------- --------- ---------
The following table summarizes information about stock options outstanding at March 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- ------------------------------- RANGE OF NUMBER WEIGHTED-AVG. WEIGHTED-AVG. NUMBER WEIGHTED-AVG. EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE PRICES AT 3/31/99 LIFE PRICE AT 3/31/99 PRICE - ------------- --------- --------- ------- --------- ------- $12.13 to $19.69 3,672,143 8.6 years $ 15.70 1,212,855 $ 14.20
Stock Awards Restricted and/or deferred stock awards which are awarded subject to restrictions, may not be disposed of by the recipient for a period of four years from the date of the award. Cash dividends on shares awarded are held by the Company for the benefit of the recipients, subject to the same restrictions as the award. Such dividends (without interest) are paid to the recipients upon lapse of the restrictions. The cost of the awards, equal to the fair market value at the date of award, is being charged to operations in equal annual amounts over a four-year period commencing at the date of the award. Award transactions for the past three years were:
SHARES ------------------------------------------- 1999 1998 1997 ------- ------- ------- Cumulative Awards--Beginning of Year 606,689 361,168 263,520 New Awards 302,364 245,521 172,800 Forfeited Awards -- -- (75,152) ------- ------- ------- Cumulative Awards--End of Year 909,053 606,689 361,168 ------- ------- ------- ------- ------- -------
23 The financial statements reflect the transfer of the awarded shares from treasury stock as of the date of their issuance. Outstanding awards of 891,625 shares at March 31, 1999 will be issued at a future date no later than four years from the date of the award. For shares that have been issued, the market value at the date of the award was $91,000 in 1997. The cost of treasury stock for this award was $101,000 in 1997. Awards forfeited during 1997 and returned to treasury stock consisted of 40,707 shares valued at $556,000. The differences between the market value at the date of the awards and the cost of the treasury stock were included in capital in excess of par value or retained earnings. 9. ACQUISITIONS At the beginning of fiscal 1999, the Company acquired the Femfresh line of feminine hygiene products in England for approximately $3,600,000. In February, 1999, the Company acquired the Barbara Gould line of skin care products in France for approximately $15,100,000. Sales of this product line will commence in the fiscal year beginning April 1, 1999. In December, 1997, the Company acquired Sanodent S.r.l. in Italy for approximately $3,800,000. Sanodent manufactures and sells denture adhesives under the Orasiv brand name. In February, 1998, the Company acquired the Anne French line of skin care products in England for approximately $1,600,000. These acquisitions are being accounted for by the purchase method and, accordingly, their results of operations are included in the Company's results of operations from the acquisition date. Pro forma results of operations are not presented since the effect would not be material. 10. SHORT-TERM INVESTMENTS At March 31, 1999 and 1998, short-term investments were intended to be held to maturity and have remaining maturities of less than one year. The amortized cost approximated fair value. The amortized cost of certificates of deposit were $12,977,000 and $23,768,000, respectively, in 1999 and 1998. The amortized cost of commercial paper was $13,174,000 in 1999. In addition, included in 1999 and 1998 are Canadian government securities in the amount of $5,719,000 and $2,058,000, respectively. 11. BUSINESS SEGMENTS (DOLLARS IN THOUSANDS) The Company has adopted Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information." Adoption of this statement has resulted in a change to the Company's reportable business segments. Previously, the reportable business segments were Consumer Products and Health Care. As a result of the adoption of this new standard, the reportable business segments are Domestic Consumer Products, Domestic Health Care and International. Prior year segment data is presented in the new format. Domestic Consumer Products primarily include anti-perspirants and deodorants, condoms, at-home pregnancy and ovulation test kits, hair removal products, tooth whitening products and various pet products. These products are promoted directly to the consumer by television and other advertising media and are sold to wholesalers and various retailers. They are manufactured and sold by the Company's consumer products divisions. Domestic Health Care products primarily include prescription pharmaceuticals as well as professional diagnostic products. These products are promoted to physicians, pharmacists, hospitals, laboratories and clinics by a staff of specially trained professional sales representatives and by advertising in professional journals. These products are manufactured and sold by the Company's health care products divisions. International products primarily include consumer products such as anti-perspirants and deodorants, condoms, at-home pregnancy and ovulation test kits, skin care and oral hygiene products, as well as health care products such as over the counter pharmaceuticals and diagnostic products. These products are sold throughout the world by various subsidiaries and distributors. International products include many of the same consumer and health care products which are sold domestically, as well as certain consumer and health care products which are sold exclusively in international markets. 24 Some of the Company's domestic divisions sell to a small number of high volume customers, the largest of which accounted for approximately 9.6% of consolidated net sales during fiscal 1999.
MARCH 31 --------------------------------------------------------- 1999 1998 1997 --------- -------- -------- Sales Domestic Consumer Products $ 283,228 $276,681 $270,916 Domestic Health Care 181,157 188,961 164,574 International 204,487 196,587 213,265 --------- -------- -------- Consolidated $ 668,872 $662,229 $648,755 --------- -------- -------- --------- -------- -------- Operating Profit Domestic Consumer Products $ 44,807 $ 33,409 $ 32,938 Domestic Health Care 40,282 49,115 40,850 International 14,969 13,664 15,093 Domestic net interest expense (2,037) (2,044) (807) Other (expense) net of other income (12,091) (7,606) (2,633) General Corporate expenses (39,686) (41,783) (40,092) --------- -------- -------- Earnings before taxes on income $ 46,244 $ 44,755 $ 45,349 --------- -------- -------- --------- -------- -------- Identifiable Assets Domestic Consumer Products $ 211,776 $210,011 $219,761 Domestic Health Care 119,783 122,784 116,979 International 177,759 154,501 158,395 Corporate Assets 212,634 206,317 190,787 --------- -------- -------- Total Assets $ 721,952 $693,613 $685,922 --------- -------- -------- --------- -------- -------- Depreciation and Amortization Domestic Consumer Products $ 10,805 $ 10,139 $ 9,172 Domestic Health Care 6,187 6,027 5,561 International 5,339 5,195 5,389 --------- -------- -------- Total Operating Segments $ 22,331 $ 21,361 $ 20,122 --------- -------- -------- --------- -------- -------- Capital Expenditures Domestic Consumer Products $ 12,553 $ 8,038 $ 23,334 Domestic Health Care 1,678 4,094 2,876 International 2,838 3,102 3,626 --------- -------- -------- Total Operating Segments $ 17,069 $ 15,234 $ 29,836 --------- -------- -------- --------- -------- --------
Corporate assets include principally cash and cash equivalents, short-term investments, miscellaneous receivables, deferred taxes and other miscellaneous assets. 25 12. RENTAL EXPENSE AND LEASE COMMITMENTS (DOLLARS IN THOUSANDS) Rental expense for operating leases with a term greater than one year for 1999, 1998 and 1997 was as follows:
REAL PROPERTY RENTAL REAL SUB-RENTAL NET REAL EQUIPMENT EXPENSE PROPERTY INCOME PROPERTY AND OTHER - --------------- -------- ------------- ------------- -------------- 1999 $ 8,021 $ (2,702) $ 5,319 $ 6,837 1998 8,056 (2,749) 5,307 6,615 1997 6,600 (1,640) 4,960 6,260
The real property rental expense for 1999, 1998 and 1997 excludes approximately $1,000, $900 and $2,200, respectively, of rental costs which have been charged to the one-time charges for restructuring of operations and facilities. Minimum rental commitments, in thousands of dollars, under non-cancellable leases in effect at March 31, 1999 were as follows:
REAL PROPERTY MINIMUM RENTAL REAL SUB-RENTAL NET REAL EQUIPMENT CAPITAL LEASE COMMITMENTS PROPERTY INCOME PROPERTY AND OTHER OBLIGATIONS - --------------- -------- ------------- ------------- -------------- ------------- 2000 $ 9,222 $ (3,071) $ 6,151 $ 578 $ 496 2001 9,783 (3,154) 6,629 271 427 2002 9,122 (3,381) 5,741 75 373 2003 8,102 (3,381) 4,721 31 211 2004 7,465 (3,381) 4,084 4 168 2005-2012 55,071 (25,609) 29,462 -- 320 ------- 1,995 Less interest and executory cost (342) ------- Present value of minimum lease payments (of which $400 is included in current liabilities) $ 1,653 ------- -------
Included in the real property rental commitments indicated above is approximately $15,100 of future rental costs which were included in the one-time charges for restructuring of operations and facilities. These costs are associated with the subleasing of office space on which the Company holds a long-term lease. 26 13. SUPPLEMENTAL FINANCIAL INFORMATION The following is presented in support of balance sheet captions:
MARCH 31 -------------------------------- 1999 1998 -------- -------- (dollars in thousands) Intangible Assets: Excess of purchase price of businesses acquired over the net assets at date of acquisition $121,339 $120,348 Trademarks 48,714 29,090 Other 32,525 33,832 -------- -------- 202,578 183,270 Accumulated amortization 66,189 58,728 -------- -------- $136,389 $124,542 -------- -------- -------- -------- Accounts Payable: Trade $ 43,388 $ 31,943 Other 696 563 -------- -------- $ 44,084 $ 32,506 -------- -------- -------- -------- Accrued Expenses: Salaries and wages $ 32,920 $ 30,388 Advertising and promotion 21,144 19,042 One-time charges 1,476 2,592 Retirement and related plans 15,411 14,794 Other 36,316 40,035 -------- -------- $107,267 $106,851 -------- -------- -------- -------- Other Long-Term Liabilities: Retirement plans $ 17,181 $ 14,246 One-time charges 9,867 11,036 Other 11,674 8,726 -------- -------- $ 38,722 $ 34,008 -------- -------- -------- --------
Income taxes paid were $21,959,000, $6,584,000 and $10,240,000 in 1999, 1998 and 1997 respectively. Interest paid was $4,527,000, $4,047,000 and $4,498,000 in 1999, 1998 and 1997, respectively. 14. LITIGATION INCLUDING ENVIRONMENTAL MATTER Environmental Matter The Company faces potential liability involving waste material generated by the Lambert Kay division at its former manufacturing facility in Winsted, Connecticut. In May 1991, the United States Environmental Protection Agency ("EPA") issued special notice letters under the Comprehensive Environmental Response, Compensation and Liability Act to Lambert Kay and about 50 other potentially responsible parties ("PRPs") notifying them of potential liability with respect to waste deposited at the Barkhamsted-New Hartford landfill in Barkhamsted, Connecticut. In September 1991 and in February 1994, the Company and 21 other PRPs, without admitting liability, entered into consent agreements under which the PRPs agreed to perform certain investigation and engineering evaluation work at the site, including the remedial investigation and feasibility study, and to reimburse EPA for certain costs. The estimated cost of this work is about $4.1 million. The Company's share of this cost is estimated to be $157,000, which includes an allowance for insolvency or nonpayment of other PRP's shares. To date the Company has paid or received credit for about $140,000. In addition, the Company and other settling PRPs have sued certain nonsettlors for their share of these costs and have obtained some settlement recoveries. Based on preliminary information from the site investigation work (which is not completed), the total cost for performing the current and future work 27 at Barkhamsted, including the site investigation work, is estimated to be from $6 to $32 million. In June 1995, the Connecticut legislature authorized the issuance of bonds to pay for approximately $7 million of the future cleanup costs at the site. The issuance of these bonds is expected to reduce by that amount those cleanup costs subject to PRP funding. Based on expected PRP participation in future cleanup work and other factors, the Company anticipates that its share of projected cleanup costs subject to PRP funding (including costs incurred to date) will be not more than 4 to 5% of total cleanup costs, and that the Company's total expenditure will therefore range from about $250,000 to $1,500,000. Thus, although applicable environmental law provides for joint and several liability for the cost of cleanup work, based on present estimates, the Company believes that the other PRPs will pay substantially all of their allocated percentage shares of cleanup costs. The Company believes, based upon the information available at this time, that the environmental matter discussed above will not have a material effect on its financial statements. Litigation Two federal securities class action suits filed in 1994 by stockholders against the Company and certain of its present and former officers in the United States District Court, Southern District of New York, were consolidated for all purposes. A Consolidated Amended Complaint was filed, followed by a Second Amended Class Action Complaint. The consolidated action purports to be on behalf of all persons who purchased the Company stock in the period from January 20, 1994 through July 31, 1994. The complaint alleges that certain statements made by the Company with respect to the safety and anticipated future sales of its anti-epilepsy drug Felbatol were false and misleading. Both the Consolidated Amended Complaint and the Second Amended Class Action Complaint, which seek damages in an unspecified amount, were dismissed by the District Court for failure to state a claim upon which relief can be granted. The United States Court of Appeals for the Second Circuit affirmed the dismissal on all claims except those based on allegedly false statements in medical journal advertisements. The Company then moved for judgment on the pleadings with respect to those remaining claims. This motion is currently awaiting decision. There are three pending product liability actions against the Company alleging various adverse reactions and other injuries suffered as a result of using Felbatol. Damages are alleged in these actions from unspecified amounts up to $67,000,000. The Company believes it has adequate product liability insurance with respect to these actions. While the Company also believes that its product liability insurance would cover punitive damages judgments, its insurance carriers have neither confirmed nor denied this belief. In the law of certain states there is an expressed public policy against the enforceability of insurance covering punitive damages. The Company, along with numerous other drug manufacturers, wholesalers and suppliers, was named in a series of class action suits, the first of which was filed in August, 1994 in the California Superior Court, San Francisco County. These suits were brought on behalf of all California independent retail pharmacists who had purchased any brand name prescription drugs since August, 1989. The complaint alleged that the defendants, including the Company, entered into a conspiracy to fix prices for brand-name prescription drugs and gave lower prices to certain favored purchasers, while the alleged favored prices were denied to the plaintiffs. Plaintiffs are seeking injunctive relief and unspecified trebled compensatory damages, restitution of unspecified amounts by which defendants are alleged to be unjustly enriched and litigation costs, interest and attorney's fees. Class certification of the price-fixing conspiracy claims was granted by order dated June 23, 1995, establishing a class of independent retail pharmacists and small chains with ten or fewer California locations. An individual action brought by two mid-size chain pharmacies was subsequently coordinated with the consolidated class action as an "add-on" case asserting virtually identical claims and demands for relief. Plaintiffs in that action have amended their complaint to seek class certification, which has not been granted. There has been no activity in these cases since 1996. The Company, along with numerous other drug manufacturers, has been named in a class action suit filed in July, 1994 in California Superior Court, County of San Francisco, brought on behalf of a class of California consumers who purchased drugs from independent retail pharmacies. The complaint alleges that certain drug manufacturers, wholesalers and suppliers, including the Company, conspired to fix prices for brand-name prescription drugs that were sold to California independent retail pharmacists. The complaint seeks unspecified trebled compensatory damages relating to overcharges, restitution of amounts by which defendants were allegedly unjustly enriched and litigation costs, interest and attorney's fees. By court order dated August 16, 1995, class certification was granted to the extent of certifying a class of California consumers who purchased 28 drugs from independent retail pharmacies and pharmacy chains with ten or fewer California locations. Two "add-on" class action complaints were thereafter filed and coordinated with the consolidated class action, seeking to expand the class to include consumers who purchased drugs from chain pharmacies with more than ten locations in California. The expanded class has not been certified. On February 4, 1999 the Company, together with a majority of the defendants, entered into an agreement to settle the consumer class actions, and the settlement has been approved by the Court. This settlement did not have a material adverse effect on the Company's financial statements. The Company, along with numerous other drug manufacturers, an Alabama drug wholesaler and a national mail-order pharmacy, had initially been named in a class action suit filed in May, 1994 in the Alabama Circuit Court, Greene County. This suit was brought on behalf of a class of independent drug stores and pharmacies, and alleged that the named (and certain unnamed) defendants discriminated against the plaintiffs in according more favorable prices to mail-order pharmacies and large health care providers pursuant to an alleged conspiracy to regulate or fix the price, or limit the quantity, of prescription drugs sold in the State of Alabama in violation of Alabama law. By a First Amended Complaint dated January 17, 1995, the three named plaintiffs retracted all class claims. In subsequent, amended pleadings, plaintiffs have sought to reassert their class action claims, alleging that the defendant drug manufacturers, wholesalers and health maintenance organizations had engaged in a price-fixing conspiracy, monopolization and attempted monopolization, fraud and civil conspiracy, in violation of Alabama statutory and common law, and seeking a declaratory judgment, statutory damages of $500 per instance of alleged injury, unspecified actual and punitive damages, litigation costs and interest. The court granted defendants' motion to change the venue of the action and the case has been transferred to the Alabama Circuit Court for Tuscaloosa County. Plaintiffs' motion for class certification and defendants' motion to strike the class action allegations are now pending before the court. Defendants filed a motion for judgement on the pleadings on the ground that Alabama antitrust law only applies to intrastate commerce. That motion was denied by the Circuit Court, but granted by the Alabama Supreme Court on appeal. The Alabama Supreme Court then ordered a rehearing after one Judge recused himself. No date has yet been set for rehearing. The Company, along with numerous other drug manufacturers was named in a class action lawsuit filed in January, 1996 in Alabama Circuit Court, Clarke County, brought on behalf of a class of consumers who purchased brand-name prescription drugs from independent retail pharmacies in jurisdictions alleged to grant standing to "indirect purchasers" to bring suit upon price overcharge claims. These jurisdictions include Alabama, the District of Columbia, Kansas, Maine, Michigan, Minnesota, Mississippi, New Mexico and Wisconsin. Plaintiffs allege that defendants, in violation of Alabama law, conspired to sell brand-name prescription drugs to mail-order pharmacies at lower prices than those charged to independent retail drug pharmacies, and that as a result plaintiffs have paid higher than competitive prices for brand-name prescription drugs. Plaintiffs seek unspecified compensatory and punitive damages, an injunction, litigation costs and attorney's fees. The case was certified for class treatment by the state court, but was then removed by defendants to federal court and transferred to the Northern District of Illinois. The federal court vacated the class certification order of the state court. An appeal by plaintiffs from the federal court's refusal to remand the case to Alabama state court was granted and the district court's order reversed. As a result, the case was remanded to Alabama state court. Defendants have filed two motions to dismiss the complaint, but these motions have not yet been argued. On December 17, 1998 the court stayed this action pending proceedings in the Alabama Supreme Court in the retailer class action litigation described above. The Company believes, based on opinion of counsel, that it has good defenses to each of the above-described legal actions and should prevail. The Company might at some point in time elect to attempt to settle one or more of these cases. At this stage, however, the Company does not know whether these cases, or any of them, will be settled or at what amounts. The Company is engaged in litigation with Tambrands Inc. in Supreme Court of the State and County of New York arising out of a patent infringement and misappropriation suit previously filed against both companies in the United States District Court, Southern District of New York, by New Horizons Diagnostics Corporation ("NHDC"), et al. The NHDC suit, which was settled and discontinued in July 1996, asserted claims with respect to certain "gold sol" technology (used in the Company's First Response and Answer home pregnancy and ovulation predictor test kits) that the Company had acquired from Tambrands pursuant to a written purchase agreement in March 1990. The Company paid an immaterial amount toward that settlement. In the pending Supreme Court action, Tambrands seeks reimbursement from the Company of an unspecified portion of the amount paid by Tambrands in settlement of the NHDC suit, and for defense costs. The parties are presently engaged in discovery. The Company believes it has good defenses, under the terms of the purchase agreement, to Tambrands' claim. 29 15. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly net sales, gross margin, net earnings and earnings per share are set forth in the following table (dollars in thousands, except per share amounts).
QUARTER ENDED -------------------------------------------------- 1999 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 TOTAL YEAR - ---- -------- -------- -------- -------- ---------- Net sales $169,662 $169,169 $162,241 $167,800 $668,872 Gross margin 106,247 102,402 99,517 107,259 415,425 Net earnings 9,493 5,916 7,839 4,961 28,209 Earnings per share--basic and diluted .21 .13 .17 .11 .62 1998 - ---- Net sales $170,115 $168,459 $152,521 $171,134 $662,229 Gross margin 110,133 106,119 95,855 108,933 421,040 Net earnings 9,310 4,726 6,819 6,446 27,301 Earnings per share--basic and diluted .20 .10 .15 .14 .59
16. FELBATOL (FELBAMATE) As previously reported, in the years ended March 31, 1995 and 1996 the Company incurred one-time charges to pre-tax earnings totaling $45,980,000 related to use restrictions for Felbatol. Depending on future sales levels, additional inventory write-offs may be required. If for any reason the product at some future date should no longer be available in the market, the Company will incur an additional one-time charge, consisting primarily of inventory write-offs and anticipated returns of product currently in the market, in the range of $20,000,000 on a pre-tax basis. 30 INDEPENDENT AUDITORS' REPORT [KPMG LOGO] 345 Park Avenue New York, NY 10154 The Board of Directors and Stockholders Carter-Wallace, Inc.: We have audited the accompanying consolidated balance sheets of Carter-Wallace, Inc. and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of earnings, retained earnings and comprehensive earnings, and cash flows, for each of the years in the three-year period ended March 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carter-Wallace, Inc. and subsidiaries as of March 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1999, in conformity with generally accepted accounting principles. May 5, 1999 31 Carter-Wallace, Inc. and Subsidiaries BOARD OF DIRECTORS Henry H. Hoyt, Jr. Chairman and Chief Executive Officer Ralph Levine President and Chief Operating Officer Paul A. Veteri Executive Vice President and Chief Financial Officer David M. Baldwin Chairman, David M. Baldwin Realty Company, Inc. Dr. Richard L. Cruess Professor of Surgery, Center for Medical Education, McGill University Montreal, Quebec, Canada Suzanne H. Garcia Owner, La Tierra Beneficiaries (real estate development) and Santa Fe Ranch Scott C. Hoyt Vice President, New Products Carter Products Division of the Company Herbert M. Rinaldi Of Counsel Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein SCIENTIFIC ADVISORY BOARD Joseph S. Harun, M.D., Chairman Former Vice President, Medical and Scientific Affairs Carter-Wallace, Inc. Paul Calabresi, M.D. Professor of Medicine and Chairman Emeritus, Department of Medicine Brown University Director, Brown-Tufts Cancer Center Providence, RI - Boston, MA Robert E. Canfield, M.D. Irving Professor of Medicine Columbia University, College of Physicians and Surgeons New York, NY Barton F. Haynes, M.D. Chairman, Department of Medicine Duke University Medical Center Durham, NC Noel Rose, M.D., Ph.D. Professor of Pathology, Molecular Microbiology and Immunology Director of Immunology Johns Hopkins University, Schools of Medicine and Public Health Baltimore, MD Morton K. Schwartz, Ph.D. Chairman, Department of Clinical Laboratories Memorial Sloan Kettering Cancer Center New York, NY EXECUTIVE OFFICERS Henry H. Hoyt, Jr. Chairman of the Board and Chief Executive Officer Ralph Levine President and Chief Operating Officer Paul A. Veteri Executive Vice President and Chief Financial Officer T. Rosie Albright Vice President, Consumer Products, U.S. John Bridgen, Ph.D. Vice President, Diagnostics, U.S. James C. Costin, M.D. Vice President, Medical and Scientific Affairs Donald R. Daoust, Ph.D. Vice President, Quality Control Thomas G. Gerstmyer Vice President, Pharmaceuticals, U.S. Peter J. Griffin Vice President and Controller Adrian J. L. Huns Vice President, International Michael J. Kopec Vice President, Manufacturing Stephen R. Lang Vice President, Secretary and General Counsel Thomas B. Moorhead Vice President, Human Resources C. Richard Stafford Vice President, Corporate Development James L. Wagar Vice President and Treasurer Mark Wertlieb Vice President, Taxes DIVISIONAL MANAGEMENT T. Rosie Albright, President, Carter Products John Bridgen, Ph.D., President, Wampole Laboratories Thomas G. Gerstmyer, President, Wallace Laboratories Adrian J. L. Huns, President, International Michael J. Kopec, President, Manufacturing Thomas M. McShane, President, Lambert Kay PRINCIPAL SUBSIDIARIES Howard E. Cocker, Managing Director, Carter-Wallace Limited (United Kingdom) Francois Depoil, President, Laboratoires Fumouze S. A. (France) Gregory J. Drohan, President, Carter-Horner Inc. (Canada) Alan W. Nash, Managing Director, Carter-Wallace (Australia) Pty. Limited Jordi Pruja, Managing Director, Icart S.A. (Spain) Stephen W. Riley, President, Carter Wallace, S. A. (Mexico) Lino Santambrogio, Managing Director, S.p.A. Italiana Laboratori Bouty (Italy) 32 Printed in U.S.A. CARTER-WALLACE, INC. 1345 Avenue of the Americas New York, NY 10105 EX-10 3 EXHIBIT 10.18 Carter-Wallace, Inc. 1996 Long-Term Incentive Plan (As Amended Effective May 20, 1999*) 1. Purpose. The purpose of this Carter-Wallace, Inc. 1996 Long-Term Incentive Plan (the "Plan") is to advance the interests of Carter-Wallace, Inc. (the "Company") and its shareholders by providing corporate officers of the Company with a larger personal and financial interest in the success of the Company through the grant of stock-based incentive compensation. 2. Administration. The Plan shall be administered by a committee (the "Committee") consisting of at least two members of the Board of Directors of the Company (the "Board"). The Committee shall be constituted in such a manner as to satisfy the requirements of applicable law, the provisions of Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act") or any successor rule, and the provisions of Section 162(m)(4)(C)(i) of the Internal Revenue Code of 1986, as amended (the "Code"). The Committee shall be appointed, and vacancies shall be filled, by the Board. The Committee shall have full power and authority to (i) select the individuals to whom awards may be granted under the Plan; (ii) determine the amount of each award and the terms and conditions, not inconsistent with the provisions of the Plan, governing such award; (iii) interpret the Plan and any award granted thereunder; (iv) establish such rules and regulations as it deems appropriate for the administration of the Plan; and (v) take such other action as it deems necessary or desirable for the administration of the Plan. Any action of the Committee with respect to the administration of the Plan shall be taken by majority vote. The Committee's interpretation and construction of any provision of the Plan or the terms of any award shall be conclusive and binding on all parties. 3. Participants. Awards may be granted under the Plan to any employee, whether or not a director, who is a corporate officer of the Company. 4. The Shares. The shares that may be delivered or purchased under the Plan shall not exceed an aggregate of 9,000,000 shares* (subject to adjustment pursuant to Section 11) of common stock, par value $1 per share, of the Company (the "Common Stock"). Such shares of Common Stock may be set aside out of the authorized but unissued shares of Common Stock not reserved for any other purpose or out of previously issued shares acquired by the Company and held in its treasury. Any shares of Common Stock which, by reason of the termination, expiration, or forfeiture of an award or otherwise, are no longer subject to an award granted under the Plan may again be subjected to an award under the Plan. 5. Awards. Awards under the Plan shall consist of Options, Restricted Stock, Deferred Stock or a combination of the foregoing. * The increase in the number of shares that may be delivered under the Plan from 4,500,000 shares to 9,000,000 shares is subject to approval of stockholders at the 1999 Annual Meeting to be held on July 20, 1999. 6. Options. Options to purchase Common Stock ("Options") shall be evidenced by option agreements which shall be subject to the terms and conditions set forth in the Plan and such other terms and conditions not inconsistent herewith as the Committee may approve. (a) Types of Options. Options granted under the Plan shall, as determined by the Committee at the time of grant, be either Options intended to qualify as incentive stock options under Section 422 of the Code ("Incentive Stock Options") or Options not intended to so qualify ("Nonstatutory Stock Options"). Each option agreement shall identify the Option as an Incentive Stock Option or as a Nonstatutory Stock Option. (b) Price. The price at which shares of Common Stock may be purchased upon the exercise of an Option granted under the Plan shall be the fair market value of such shares on the date of grant of such Option; provided, however, that an Incentive Stock Option granted to an employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company shall have a purchase price for the underlying shares equal to 110% of the fair market value of the Common Stock on the date of grant. For purposes of the Plan, the fair market value of a share of Common Stock on a specified date shall be the closing price on such date of the Common Stock on the New York Stock Exchange or, if no such sale of Common Stock occurs on such date, the fair market value of the Common Stock as determined by the Committee in good faith. (c) Per-Participant Limit. No participant may be granted Options during any consecutive 60-month period on more than 1,000,000 shares of Common Stock (subject to adjustment pursuant to Section 11). (d) Limitation on Incentive Stock Options. The aggregate fair market value (determined on the date of grant) of Common Stock for which a participant is granted Incentive Stock Options that first become exercisable during any given calendar year shall be limited to $100,000. To the extent such limitation is exceeded, an Option shall be treated as a Nonstatutory Stock Option. (e) Nontransferability. Options granted under the Plan shall not be transferable other than by will or by the laws of descent and distribution, and, during a participant's lifetime, shall be exercisable only by the participant. Notwithstanding the foregoing, a participant may transfer any Nonstatutory Option granted under the Plan to the participant's spouse, children and/or grandchildren, or to one or more trusts for the benefit of such family members, if the agreement evidencing such Option so provides and the participant does not receive any consideration for the transfer. Any Option so transferred shall continue to be subject to the same terms and conditions that applied to such Option immediately prior to its transfer (except that such transferred Option shall not be further transferable by the transferee during the transferee's lifetime). (f) Term and Exercisability of Options. Options may be granted for terms of not more than 10 years and shall be exercisable in accordance with such terms and conditions as are set forth in the option agreements evidencing the grant of such Options. In no event shall an Incentive Stock Option granted to an employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company be exercisable after the expiration of five years from the date such Incentive Stock Option is granted. (g) Termination of Employment. An Option may not be exercised following a participant's termination of employment except as set forth in this Section 6(g). (i) Retirement, Death, or Disability. If a participant's employment terminates by reason of retirement at any time after first becoming eligible to elect an immediate retirement benefit under the Company's pension plan, or by reason of death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the participant's Options may be exercised at any time prior to their expiration with respect to all shares of Common Stock subject thereto (whether or not the right of exercise had accrued at the time of termination of employment). (ii) Termination for Cause. No Options may be exercised following a participant's termination of employment by the Company for Cause. For purposes of the Plan, "Cause" shall mean theft, conviction of a felony, insubordination, breach of any non-competition or confidentiality covenant contained in an employment agreement between the participant and the Company, habitual drunkenness, or excessive absenteeism not related to illness. (iii) Other Circumstances. If a participant's employment terminates under circumstances not described in clause (i) or (ii) above, such participant's Options may only be exercised within three months following the date of such termination and with respect only to such number of shares as to which the right of exercise had accrued at the time of termination of employment. Notwithstanding the foregoing, in individual instances the Board or the Committee may, in its discretion, waive or modify the foregoing vesting and exercisability restrictions applicable following a participant's termination of employment. In no event may an Option be exercised after the expiration of the term of such Option. Except in the event of a participant's death, an Incentive Stock Option exercised more than three months (one year if the participant is permanently disabled) following the participant's termination of employment will be treated as a Nonstatutory Stock Option. (h) Payment. Full payment of the purchase price for shares of Common Stock purchased upon the exercise, in whole or in part, of an Option granted under the Plan shall be made at the time of such exercise. The purchase price may be paid in cash or in shares of Common Stock valued at their fair market value on the date of purchase. Alternatively, an Option may be exercised in whole or in part by delivering a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds necessary to pay the purchase price and applicable withholding taxes, and such other documents as the Committee may determine. 7. Restricted Stock. Restricted Stock shall be evidenced by restricted stock agreements which shall be subject to the terms and conditions set forth in the Plan and such other terms and conditions not inconsistent herewith as the Committee may approve. (a) Awards and Certificates. As a condition to receiving any Restricted Stock award, the participant shall execute an agreement evidencing the award and reflecting the conditions imposed upon such award. The Company shall issue a certificate in respect of the shares of Common Stock covered by each Restricted Stock award. Such certificate shall be registered in the name of the Company, which shall hold it on behalf of the participant as the beneficial owner thereof pending the vesting or forfeiture of such Restricted Stock, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award. Upon the vesting of the Restricted Stock award, a new certificate for the shares of Common Stock covered by the award shall be issued in the name of the Participant. (b) Rights as Shareholder. Except as otherwise provided in this Section 7, a participant shall have, with respect to shares of Restricted Stock, all of the rights of a shareholder of the Company, other than the right to vote shares. Cash dividends paid with respect to shares of Restricted Stock shall be deferred and shall be paid to the participant, without any interest thereon and less any amounts due to the Company, upon the vesting of such Restricted Stock. (c) Vesting of Restricted Stock. Except as otherwise provided in this Section 7 and in Section 9, Restricted Stock shall vest only at the end of the four-year period commencing with the date of such award, and only if the participant shall have remained employed by the Company throughout such period. Prior to the vesting of shares of Restricted Stock, the participant shall not be permitted to sell, transfer, pledge, or assign such shares of the Restricted Stock, and any attempt to so sell, transfer, pledge, or assign such shares shall be ineffective. (i) Retirement, Death or Disability. If a participant's employment terminates by reason of retirement at any time after first becoming eligible to elect an immediate retirement benefit under the Company's pension plan, or by reason of death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the participant's Restricted Stock shall immediately vest. (ii) Voluntary Termination or Termination for Cause. If a participant not described in clause (i) voluntarily terminates employment, or if such participant's employment is terminated by the Company for Cause, any shares of Restricted Stock held by the participant shall be forfeited. (iii) Other Circumstances. If a participant's employment terminates under circumstances not described in clause (i) or (ii) above, any Restricted Stock award held by such participant shall vest with respect to a number of shares determined by multiplying the total number of shares covered by the Restricted Stock award by a fraction, the numerator of which is equal to the number of days from the date of the award to the date of termination, and the denominator of which is 1,461; any remaining shares of Restricted Stock shall be forfeited. For purposes hereof, any fraction of a share shall be disregarded and restrictions shall lapse on Restricted Stock in accordance with the foregoing to the nearest whole number of shares. Notwithstanding the foregoing, in individual instances the Board or the Committee may, in its discretion, waive or modify the foregoing vesting restrictions applicable following a participant's termination of employment. 8. Deferred Stock. Deferred Stock, representing the Company's unfunded promise to transfer shares of Common Stock in the future, shall be evidenced by deferred stock agreements which shall be subject to the terms and conditions set forth in the Plan and such other terms and conditions not inconsistent herewith as the Committee may approve. A participant shall have no rights with respect to Deferred Stock that are greater than those of a general creditor of the Company. (a) Awards and Certificates. As a condition to receiving any Deferred Stock award, the participant shall execute an agreement evidencing the award and reflecting the conditions imposed upon such award. Upon the vesting of a Deferred Stock award, the participant shall be issued a stock certificate for a number of shares of Common Stock equal to the number of shares of Deferred Stock. (b) Deferred Dividends. An amount equal to any cash dividends paid with respect to the number of shares of Common Stock covered by a deferred stock award shall be paid to the participant, without any interest thereon and less any amounts due to the Company, upon the vesting of such Deferred Stock. (c) Vesting of Deferred Stock. Except as otherwise provided in this Section 8 and in Section 9, Deferred Stock shall vest only at the end of the four-year period commencing with the date of such award and only if the participant shall have remained employed by the Company throughout such period. Prior to the vesting of shares of Deferred Stock, the participant shall not be permitted to sell, transfer, pledge, or assign such Deferred Stock, and any attempt to so sell, transfer, pledge, or assign such Deferred Stock shall be ineffective. (i) Retirement, Death, or Disability. If a participant's employment terminates by reason of retirement at any time after first becoming eligible to elect an immediate retirement benefit under the Company's pension plan, or by reason of death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the participant's Deferred Stock shall immediately vest. (ii) Voluntary Termination or Termination for Cause. If a participant not described in clause (i) voluntarily terminates employment, or if such participant's employment is terminated by the Company for Cause, any Deferred Stock held by the participant shall be forfeited. (iii) Other Circumstances. If a participant's employment terminates under circumstances not described in clause (i) or (ii) above, any Deferred Stock award held by such participant shall vest with respect to a number of shares determined by multiplying the total number of shares covered by the Deferred Stock award by a fraction, the numerator of which is equal to the number of days from the date of the award to the date of termination, and the denominator of which is 1,461; any remaining shares of Deferred Stock shall be forfeited. For purposes hereof, any fraction of a share shall be disregarded and restrictions shall lapse on Deferred Stock in accordance with the foregoing to the nearest whole number of shares. Notwithstanding the foregoing, in individual instances the Board or the Committee may, in its discretion, waive or modify the foregoing vesting restrictions applicable following a participant's termination of employment. 9. Change in Control. In the event of a Change in Control (as defined in Section 9(c)), the provisions of this Section 9 shall apply notwithstanding any contrary provision in the Plan. (a) Options. Upon the occurrence of a Change in Control, each outstanding Option shall become immediately exercisable, and upon a participant's termination of employment following such Change in Control any Option held by such participant shall remain exercisable for the balance of its term. Upon the exercise of an Option within one year after the occurrence of a Change in Control, the participant shall be entitled to receive, in addition to the shares of Common Stock thereby purchased, a cash payment equal to the excess of (i) the aggregate Change in Control Price (as defined in Section 9(d)) of the number of shares of Common Stock purchased upon such exercise (or which would have been so purchased but for the substitution or addition of other shares or securities pursuant to Section 11) over (ii) the fair market value on the date of exercise of the shares of Common Stock (or other securities) purchased upon such exercise. (b) Restricted Stock and Deferred Stock. Upon the occurrence of a Change in Control, any outstanding awards of Restricted Stock or Deferred Stock shall become fully vested. (c) Change in Control Defined. For purposes of this Plan, a Change in Control shall be deemed to have occurred if: (i) any Person (other than the Company, the Hoyt family, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company immediately prior to the occurrence with respect to which the evaluation is being made in substantially the same proportions as their ownership of the common stock of the Company) becomes the Beneficial Owner (except that a Person shall be deemed to be the Beneficial Owner of all shares that any such Person has the right to acquire pursuant to any agreement or arrangement or upon exercise of conversion rights, warrants or options or otherwise, without regard to the sixty day period referred to in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or any Significant Subsidiary (as defined below), representing 25% or more of the combined voting power of the Company's or such Subsidiary's then outstanding securities; provided, however, that such event shall not constitute a Change in Control unless or until the percentage of such securities owned beneficially, directly or indirectly, by such Person is equal to or more than all such securities owned beneficially, directly or indirectly, by the Hoyt Family; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved but excluding for this purpose any such new director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an individual, corporation, partnership, group, associate or other entity or Person other than the Board, cease for any reason to constitute at least a majority of the Board; provided, however, that such event shall not constitute a Change in Control unless or until the percentage of voting securities of the Company owned beneficially, directly or indirectly, by the Hoyt Family is less than 50% of all such outstanding securities; (iii) the consummation of a merger or consolidation of the Company or any subsidiary or subsidiaries owning directly or indirectly all or substantially all of the consolidated assets of the Company (individually and collectively, a "Significant Subsidiary") with any other entity, other than a merger or consolidation which would result in the voting securities of the Company or a Significant Subsidiary outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or resulting entity) more than 50% of the combined voting power of the surviving or resulting entity outstanding immediately after such merger or consolidation; (iv) the stockholders of the Company approve a plan or agreement for the sale or disposition of all or substantially all of the consolidated assets of the Company (other than such a sale or disposition immediately after which such assets will be owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company immediately prior to such sale or disposition), in which case the Board shall determine the effective date of the Change in Control resulting therefrom; or (v) any other event occurs which the Board determines, in its discretion, would materially alter the structure of the Company or its ownership. For purposes of this definition: (A) The term "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act (including any successor to such Rule). (B) The term "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including "group" as defined in Section 13(d) thereof. (C) The term the "Hoyt Family" shall mean the family of Henry H. Hoyt, Sr., his descendants, and members of such descendants' families. (d) Change in Control Price. The "Change in Control Price" shall mean the highest price per share paid in any transaction reported on the New York Stock Exchange Composite Index, or paid or offered in any bona fide transaction related directly, or in any way indirectly, to a Change in Control, at any time during the six-month period immediately preceding the occurrence of the Change in Control. 10. Withholding. No later than the date as of which an amount first becomes includible in the gross income of a participant for Federal income tax purposes with respect to any award under the Plan, the participant shall pay to the Company, or make arrangement satisfactory to the Committee regarding the payment of, any Federal, state, or local taxes required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations may be settled with Common Stock, including Common Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind due to the participant. Any election made by a participant subject to Section 16(b) of the Exchange Act to have shares of Common Stock withheld in satisfaction of the withholding requirement with respect to such participant's award shall be subject to the approval of the Committee and shall be in accordance with the requirements of Rule 16b-3 under such Act. 11. Changes in Capital Structure, etc. In the event of any change in the outstanding Common Stock by reason of any stock dividend, stock split, combination of shares, recapitalization, or other similar change in the capital stock of the Company, or in the event of the merger or consolidation of the Company into or with any other corporation or the reorganization of the Company, the number of shares covered by each outstanding award granted under the Plan, the option price per share of each Option granted under the Plan, the total number of shares for which awards may be granted under the Plan, and the maximum number of shares for which Options may be granted to a single participant, shall be appropriately adjusted by the Board to preserve the value of the award. 12. Effective Date and Termination of Plan. The Plan shall become effective on the date of its adoption by the Board, subject to the ratification of the Plan by the affirmative vote or consent of holders of a majority of the issued and outstanding shares of Common Stock. The Plan shall terminate 10 years from the date of its adoption or such earlier date as the Board may determine. Any award outstanding under the Plan at the time of its termination shall remain in effect in accordance with its terms and conditions and those of the Plan. 13. Amendment. The Board may amend the Plan in any respect from time to time; provided, however, that no amendment shall become effective unless approved by affirmative vote of the Company's shareholders if such approval is necessary for the continued validity of the Plan or if the failure to obtain such approval would adversely affect the compliance of the Plan with Rule 16b-3 under the Exchange Act or any other rule or regulation. No amendment may, without the consent of a participant, impair such participant's rights under any award previously granted under the Plan. The Committee may, with a participant's consent, substitute a deferred stock award for a previously granted restricted stock award, or a restricted stock award for a previously granted deferred stock award, provided in either case that both the award being substituted and the original award cover the same number of shares of Common Stock and vest on the same date. 14. Legal and Regulatory Requirements. No Option shall be exercisable and no shares will be delivered under the Plan except in compliance with all applicable federal and state laws and regulations including, without limitation, compliance with withholding tax requirements and with the rules of all domestic stock exchanges on which the Common Stock may be listed. Any share certificate issued to evidence shares for which an Option is exercised may bear such legends and statements as the Committee shall deem advisable to assure compliance with federal and state laws and regulations. No Option shall be exercisable, and no shares shall be delivered under the Plan, until the Company has obtained consent or approval from regulatory bodies, federal or state, having jurisdiction over such matters as the Committee may deem advisable. 15. General Provisions. (a) Nothing contained in the Plan, or in any award granted pursuant to the Plan, shall confer upon any employee any right to the continuation of the employee's employment or services. (b) Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of New York. Exhibit 10.21 September 14, 1998 Ms. T. Rosie Albright 85 Mayapple Road Stamford, Connecticut 06903 Dear Rosie: Carter-Wallace, Inc. (the "Company") recognizes that your contribution to the success of the Company has been substantial and wishes to reinforce and encourage your continued attention and dedication to your assigned duties without distraction by entering into compensation arrangements with you that will provide you with additional financial security to that provided in your current employment arrangement set forth in the Executive Employment Agreement, dated as of September 11, 1996, between the Company and you (the "Existing Agreement") in the event of a pending or threatened Change in Control (as defined below). In order to accomplish these objectives, the Company has entered into this letter agreement (the "Agreement"). 1. Certain Definitions. (a) "Cause" shall mean (i) the willful and material breach of Sections 5 or 6 of this Agreement by you; (ii) your conviction of a felony; or (iii) your engagement in conduct that constitutes willful gross neglect or willful gross misconduct in carrying out your duties under this Agreement, resulting, in either case, in material harm to the financial condition or reputation of the Company. For purposes of this Agreement, an act or failure to act on your part shall be considered "willful" if it was done or omitted to be done by you not in good faith, and shall not include any act or failure to act resulting from any incapacity of you. Notwithstanding the foregoing, a termination for "cause" shall not take effect unless you have been given written notice by the Company of its intention to terminate you for "cause," such notice (A) to state in detail the particular act or acts or failure or failures to act that constitute the grounds on which the proposed termination for "cause" is based and (B) to be given within 90 days of the Company's learning of such act or acts or failure or failures to act. You shall have 20 days after the date that such written notice has been given to you in which to cure such conduct, to the extent such cure is possible. If you fail to cure such conduct, you shall then be entitled to a hearing before the Board of Directors of the Company (the "Board") at which you and your counsel are entitled to appear. Such hearing shall be held within 25 days of such notice to you, provided you request such hearing within 10 days of the written notice from the Company of the intention to terminate you for "cause". If, within five days following such hearing, you are furnished written notice by the Board confirming that, in its judgment, grounds for "cause" on the basis of the original notice exist, you shall thereupon be terminated for "cause." (b) A "Change in Control" shall be deemed to have occurred if: (i) any Person (other than the Company, the Hoyt family, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company immediately prior to the occurrence with respect to which the evaluation is being made in substantially the same proportions as their ownership of the common stock of the Company) becomes the Beneficial Owner (except that a Person shall be deemed to be the Beneficial Owner of all shares that any such Person has the right to acquire pursuant to any agreement or arrangement or upon exercise of conversion rights, warrants or options or otherwise, without regard to the sixty day period referred to in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or any Significant Subsidiary (as defined below), representing 25% or more of the combined voting power of the Company's or such Subsidiary's then outstanding securities; provided, however, that such event shall not constitute a Change in Control unless or until the percentage of such securities owned beneficially, directly or indirectly, by such Person is equal to or more than all such securities owned beneficially, directly or indirectly, by the Hoyt Family; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved but excluding for this purpose any such new director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an individual, corporation, partnership, group, associate or other entity or Person other than the Board, cease for any reason to constitute at least a majority of the Board; provided, however, that such event shall not constitute a Change in Control unless or until the percentage of voting securities of the Company owned beneficially, directly or indirectly, by the Hoyt Family is less than 50% of all such outstanding securities; (iii) the consummation of a merger or consolidation of the Company or any subsidiary or subsidiaries owning directly or indirectly all or substantially all of the consolidated assets of the Company (individually and collectively, a "Significant Subsidiary") with any other entity, other than a merger or consolidation which would result in the voting securities of the Company or a Significant Subsidiary outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or resulting entity) more than 50% of the combined voting power of the surviving or resulting entity outstanding immediately after such merger or consolidation; (iv) the stockholders of the Company approve a plan or agreement for the sale or disposition of all or substantially all of the consolidated assets of the Company (other 2 than such a sale or disposition immediately after which such assets will be owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company immediately prior to such sale or disposition), in which case the Board shall determine the effective date of the Change in Control resulting therefrom; or (v) any other event occurs which the Board determines, in its discretion, would materially alter the structure of the Company or its ownership. For purposes of this definition: (A) The term "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act (including any successor to such Rule). (B) The term "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. (C) The term "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including "group" as defined in Section 13(d) thereof. (D) The term the "Hoyt Family" shall mean the family of Henry H. Hoyt, Sr., his descendants, and members of such descendants' families. (c) The "Effective Date" shall be the date on which a Change in Control occurs; provided, however, that if your employment with the Company is terminated prior to the date on which a Change in Control occurs and it is reasonably demonstrated that such termination was at the request of a third party that has taken steps reasonably calculated to effect a Change in Control or otherwise arose in connection with or anticipation of a Change in Control, then for all purposes of this Agreement the "Effective Date" shall be the date immediately prior to the date of such termination. (d) "Good Reason" shall mean (i) the assignment to you of any duties inconsistent in any respect with your position (including status, offices, titles and reporting relationships), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement or any other action by the Company that results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith that is remedied by the Company promptly after receipt of notice thereof given by you; (ii) the transfer or attempted assignment of you without your consent to a location outside the area described in Section 3(a)(ii) of this Agreement or the assignment to you of duties that require that you be absent from such location on business for more than the average number of days of business-related travel in the preceding three fiscal years; or (iii) any failure of the Company to comply with and satisfy Section 10(c) of this Agreement or any other material breach of this Agreement by the Company. 3 2. Employment Period. The period commencing on the Effective Date and ending on the second anniversary of such date or on such earlier date of termination as provided herein shall be referred to herein as the "Employment Period". The Company hereby agrees to continue you in its employ, and you hereby agree to remain in the employ of the Company, during the Employment Period. 3. Terms of Employment. (a) Position and Duties. During the Employment Period, (i) your position, status, authority, duties and responsibilities shall be at least equal to those of the position held by you immediately prior to the Effective Date and (ii) your services shall be performed at the location where you were employed immediately preceding the Effective Date or any office or location less than twenty-five (25) miles from such location. During the Employment Period, you agree to devote your best efforts to the service of the Company and the performance of such duties and responsibilities. (b) Compensation. (i) Base Salary. During the Employment Period, you shall receive a base salary ("Base Salary") at an annual rate at least equal to the highest annual base salary paid to you by the Company with respect to any of the three fiscal years immediately preceding the year in which the Effective Date occurs or, if greater, the base salary in effect for the year in which the Effective Date occurs. (ii) Annual Bonus. In addition to Base Salary, you shall be awarded, for each fiscal year during the Employment Period, an annual bonus (an "Annual Bonus") in cash at least equal to the greater of (x) the highest bonus earned by you in any of the three fiscal years immediately preceding the fiscal year in which the Effective Date occurs and (y) the target bonus (based on the assumed attainment of 100% of the performance objectives) for the fiscal year in which the Effective Date occurs. (iii) Benefit Plans. During the Employment Period, you and your family shall be entitled to participate in, on a basis consistent with your position with the Company, and shall receive benefits under plans, practices, policies and programs provided by the Company (including, without limitation, retirement, pension, profit sharing, stock option and long-term incentive plans, and death and life insurance benefits and medical insurance programs) at least as favorable as the most favorable of such plans, practices, policies and programs in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable, as in effect from time to time thereafter with respect to senior executives of the Company and their families. In the case of a retirement on or after the Effective Date, all of your then outstanding options to purchase common stock of the Company shall become immediately vested and exercisable for the remaining term of the option and all of your then outstanding restricted and deferred stock grants relating to common stock of the Company shall become immediately vested. For purposes of this Agreement, "retire" or "retirement" shall mean your voluntary termination of employment with the Company after attaining age 65 or, if earlier, the date which you are eligible to terminate employment with the 4 provided in accordance with the welfare benefit plans, programs, practices and policies of the Company if your employment had not been terminated, including medical, dental, disability and group life insurance plans and programs, in accordance with the most favorable plans, practices, programs or policies of the Company during the 90-day period immediately preceding the Effective Date or, if more favorable, as in effect from time to time thereafter with respect to other senior executives of the Company and their families and, for purposes of eligibility for retiree benefits pursuant to such plans, practices, programs and policies, you shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period. (d) Stock Options and Awards. All of your then outstanding options to purchase common stock of the Company shall become immediately vested and exercisable for the remaining term of the option and all of your then outstanding restricted and deferred stock grants relating to common stock of the Company shall become immediately vested. (e) Outplacement. The Company agrees to provide you with reasonable outplacement assistance through the Company's Human Resources Department. The Company further agrees to reimburse you for reasonable job search expenses. All job search expenses in excess of one hundred dollars ($100.00) are subject to prior approval by the Company. (f) Release. You agree, as a condition to receipt of the termination payments and benefits provided for in this Section 4, that you will execute a release agreement, in a form reasonably satisfactory to the Company and you, releasing any and all claims arising out of your employment (other than enforcement of this Agreement, your rights under any of the Company's incentive compensation and employee benefit plans and programs to which you are entitled under this Agreement or otherwise, and any claim for any tort for personal injury not arising out of or related to your termination of employment). 5. Covenant Not to Compete; Nonsolicitation. (a) Except with the prior written consent of the Company authorized by a resolution adopted by the Board, while employed by the Company, you will not, and will not permit any corporation, partnership or other business entity in which you have a financial interest to, engage directly or indirectly in any business which is competitive with the business of the Company; provided that the ownership by you of not more than one percent of the capital stock of any other corporation or a one percent interest in any partnership or other business entity shall not be deemed to be a violation of this Section 5. (b) While employed by the Company and for a period of one year after the termination of your employment for any reason, you shall not personally (and shall not personally cause others to) (i) take any action to solicit or divert any material business or customers away from the Company, (ii) induce customers, potential customers, suppliers, agents or other persons under contract or otherwise associated or doing business with the Company to terminate, reduce or alter any such association or business, or (iii) induce any person employed by the Company to (A) terminate such employment arrangement, (B) accept employment with another person, or (C) interfere with the customers or suppliers or otherwise with the Company in any manner. 6 6. Secrecy; Nondisparagement. (a) You recognize and acknowledge that the information (such as, but not limited to, financial information), trade secrets, formulae, manufacturing methods, technical data, know-how and secret processes of the Company as acquired and used by the Company are special, valuable and unique assets of the Company. You will not, while employed by the Company or at any time thereafter, disclose any such information, trade secrets, formulae, manufacturing methods, technical data, know-how and secret processes to any person, firm, corporation, association or any other entity for any reason or purpose whatsoever without the prior written consent of the Company, unless such information shall have previously become public knowledge. (b) You agree that you will not make any disparaging statements about the Company or the directors, officers or employees of the Company; provided that this Section 6(b) shall not apply to truthful testimony as a witness, compliance with other legal obligations, or truthful assertion of or defense against any claim or breach of this Agreement, or to your truthful statements or disclosures to officers or directors of the Company, and shall not require you to make false statements or disclosures. The Company agrees that neither the directors nor the officers of the Company nor any spokesperson for the Company shall make any disparaging statements about you; provided that this Section 6(b) shall not apply to truthful testimony as a witness, compliance with other legal obligations, truthful assertion of or defense against any claim of breach of this Agreement, or truthful statements or disclosures to you, and shall not require false statements or disclosures to be made. 7. Excise Tax Gross-Up. If you become entitled to one or more payments (including, without limitation, the vesting of any non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company (all such amounts, exclusive of additional payments pursuant to this Section 7, being referred to herein as the "Total Payments"), which are or become subject to the tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be imposed) (the "Excise Tax"), the Company shall pay to you at the time specified below an additional amount (the "Gross-Up Payment") such that the net amount retained by you, after reduction for (x) any Excise Tax (including any penalties or interest thereon) on the Total Payments and on the Gross-Up Payment and (y) any federal, state, or local income or employment tax on the Gross-Up Payment, shall be equal to the sum of (a) the Total Payments, and (b) an amount equal to the product of any deductions disallowed for federal, state, or local income tax purposes because of the inclusion of the Gross-Up Payment in your adjusted gross income multiplied by the highest applicable marginal rate of federal, state, or local income taxation, respectively, for the calendar year in which the Gross-Up Payment is to be made. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the written opinion of independent tax counsel or auditors of nationally recognized standing selected by the Company and reasonably acceptable to you ("Independent Advisors"), the Total Payments do not 7 constitute parachute payments, or such excess parachute payments in excess of the base amount within the meaning of Section 280G(b)(3) of the Code represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code or are otherwise not subject to the Excise Tax; and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Independent Advisors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. If more than one Gross-Up Payment is made (including for this purpose any parachute excise tax gross-up payment pursuant to the terms of any other plan, arrangement, or agreement with the Company), the amount of each Gross-Up Payment shall be computed so as not to duplicate any prior Gross-Up Payment. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed (A) to pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made; (B) to pay any applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of your adjusted gross income); and (C) to have otherwise allowable deductions for federal, state, and local income tax purposes at least equal to those disallowed because of the inclusion of the Gross-Up Payment in your adjusted gross income. The Gross-Up Payment shall be paid on or before the earlier of (i) the 30th day after it has been determined that the Total Payments (or any portion thereof) are subject to the Excise Tax, or (ii) the date on which the Excise Tax becomes due and payable to the taxing authorities; provided, however, that if the amount of such Gross-Up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined by the Independent Advisors, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined by the Independent Advisors to have been due, you shall repay to the Company the amount of such excess, plus interest at the rate provided in Section 1274(b)(2)(B) of the Code, within five days following the Company's demand therefor. In the event that the Excise Tax is subsequently determined, in a final judicial determination or a final administrative settlement to which you are a party (a "Final Determination"), to be less than the amount taken into account hereunder at the time the Gross-Up Payment is made, you shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined (but, if previously paid to the taxing authorities, not prior to the time the amount of such reduction is refunded to you or otherwise realized as a benefit by you), the portion of the Gross-Up Payment that would not have been paid if such Excise Tax as finally determined had been applied in initially calculating the Gross-Up Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined in a Final Determination to exceed the amount taken into account hereunder at the time the Gross-Up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such 8 excess (plus any interest and penalties payable with respect to such excess) at the time that the amount of such excess if finally determined. The Company shall have the right to control all proceedings with the Internal Revenue Service that may arise in connection with the determination and assessment of any Excise Tax and, at its sole option, the Company may pursue or forego any and all administrative appeals, proceedings, hearings, and conferences with any taxing authority in respect of such Excise Tax (including any interest or penalties thereon); provided, however, that the Company's control over any such proceedings shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and you shall be entitled to settle or contest any other issue raised by the Internal Revenue Service or any other taxing authority. You shall cooperate with the Company in any proceedings relating to the determination and assessment of any Excise Tax and shall not take any position or action that would materially increase the amount of any Gross-Up Payment hereunder. 8. Relationship to Existing Agreement. The Existing Agreement shall remain in full force and effect unless and until the Effective Date occurs, at which time the provisions of the Existing Agreement shall be superseded by the provisions of this Agreement during the Employment Period. In the event you remain in the employ of the Company at the second anniversary of the Effective Date and such date is prior to December 3, 2000, the Existing Agreement shall be reinstated and the provisions thereof shall be in full force and effect as provided therein. 9. Remedies. In the event of a breach or threatened breach by you of the provisions of Section 5 or Section 6 of this Agreement, the Company shall be entitled to seek an injunction restraining you from violating either of said provisions, or any other remedy, including the recovery of damages from you. If you shall breach any of the provisions of Section 5 or Section 6 of this Agreement, nothing herein shall be construed as preventing the Company from withholding any payment or payments required to be made hereunder to you. 10. Assistance in Litigation. You shall, upon reasonable notice, furnish such information and proper assistance to the Company as may reasonably be required by the Company in connection with any litigation in which it or any of its subsidiaries or affiliates is or may become a party. 11. Successors. (a) This Agreement is personal to you and, without the prior written consent of the Company, shall not be assignable by you otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by your legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to 9 the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 12. Notices. All communications hereunder shall be in writing and delivered or mailed by registered mail to the Company at 1345 Avenue of the Americas, New York, New York 10105, Attention: Board of Directors, and to you, at your address set forth above, unless another address has been given to the other party hereto in writing. 13. Interpretation. No provision of this Agreement may be altered or waived except in writing and executed by the other party hereto. This Agreement constitutes the entire contract between the parties hereto and cancels and supersedes all prior agreements, written or oral, relating to your employment with the Company. No party shall be bound in any manner by any warranties, representations or guarantees, except as specifically set forth in this Agreement. This Agreement shall be interpreted under the laws of the State of New York. 14. Arbitration. The parties agree that any dispute or controversy arising under or in connection with this Agreement shall be submitted to and determined by arbitration in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association and agree to be bound by the decision in any such arbitration provision. 15. Other Benefits. Nothing in this Agreement shall be interpreted as reducing or eliminating any benefits to which you or your beneficiaries are entitled, without regard to this Agreement, under any plan or program of the Company other than the Existing Agreement following a termination of employment for any reason. 16. No Duty to Mitigate. In the event of any termination of employment under Section 4 of this Agreement, you shall be under no obligation to seek other employment, and there shall be no offset against any amounts due to you under this Agreement on account of the remuneration attributable to any subsequent employment that you may obtain. Any amounts due under Section 4 are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty. 17. Fees and Expenses. The Company shall pay fees and expenses reasonably incurred by you as a result of your seeking to obtain or enforce any right or benefit provided by this Agreement, promptly and from time to time, at your request as such fees and expenses are incurred unless your actions in such regard are determined to be frivolous or in bad faith. Very truly yours, CARTER-WALLACE, INC. By _______________________ Chairman of the Board 10 Agreed and consented to as of the date set forth above - ------------------------------ T. Rosie Albright Exhibit 10.22 June 4, 1998 Stephen R. Lang, Esq. 1020 Park Avenue, Apt. 2D New York, NY 10028 Dear Steve: Carter-Wallace, Inc. (the "Company") recognizes that your contribution to the success of the Company has been substantial and wishes to reinforce and encourage your continued attention and dedication to your assigned duties without distraction by entering into compensation arrangements with you that will provide you with individual financial security in the event of a pending or threatened Change in Control (as defined below). In order to accomplish these objectives, the Company has entered into this letter agreement (the "Agreement"). 1. Certain Definitions. (a) "Cause" shall mean (i) the willful and material breach of Sections 6 or 7 of this Agreement by you; (ii) your conviction of a felony; or (iii) your engagement in conduct that constitutes willful gross neglect or willful gross misconduct in carrying out your duties under this Agreement, resulting, in either case, in material harm to the financial condition or reputation of the Company. For purposes of this Agreement, an act or failure to act on your part shall be considered "willful" if it was done or omitted to be done by you not in good faith, and shall not include any act or failure to act resulting from any incapacity of you. Notwithstanding the foregoing, a termination for "cause" shall not take effect unless you have been given written notice by the Company of its intention to terminate you for "cause," such notice (A) to state in detail the particular act or acts or failure or failures to act that constitute the grounds on which the proposed termination for "cause" is based and (B) to be given within 90 days of the Company's learning of such act or acts or failure or failures to act. You shall have 20 days after the date that such written notice has been given to you in which to cure such conduct, to the extent such cure is possible. If you fail to cure such conduct, you shall then be entitled to a hearing before the Board of Directors of the Company (the "Board") at which you and your counsel are entitled to appear. Such hearing shall be held within 25 days of such notice to you, provided you request such hearing within 10 days of the written notice from the Company of the intention to terminate you for "cause". If, within five days following such hearing, you are furnished written notice by the Board confirming that, in its judgment, grounds for "cause" on the basis of the original notice exist, you shall thereupon be terminated for "cause." (b) A "Change in Control" shall be deemed to have occurred if: (i) any Person (other than the Company, the Hoyt family, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company immediately prior to the occurrence with respect to which the evaluation is being made in substantially the same proportions as their ownership of the common stock of the Company) becomes the Beneficial Owner (except that a Person shall be deemed to be the Beneficial Owner of all shares that any such Person has the right to acquire pursuant to any agreement or arrangement or upon exercise of conversion rights, warrants or options or otherwise, without regard to the sixty day period referred to in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or any Significant Subsidiary (as defined below), representing 25% or more of the combined voting power of the Company's or such Subsidiary's then outstanding securities; provided, however, that such event shall not constitute a Change in Control unless or until the percentage of such securities owned beneficially, directly or indirectly, by such Person is equal to or more than all such securities owned beneficially, directly or indirectly, by the Hoyt Family; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved but excluding for this purpose any such new director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an individual, corporation, partnership, group, associate or other entity or Person other than the Board, cease for any reason to constitute at least a majority of the Board; provided, however, that such event shall not constitute a Change in Control unless or until the percentage of voting securities of the Company owned beneficially, directly or indirectly, by the Hoyt Family is less than 50% of all such outstanding securities; (iii) the consummation of a merger or consolidation of the Company or any subsidiary or subsidiaries owning directly or indirectly all or substantially all of the consolidated assets of the Company (individually and collectively, a "Significant Subsidiary") with any other entity, other than a merger or consolidation which would result in the voting securities of the Company or a Significant Subsidiary outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or resulting entity) more than 50% of the combined voting power of the surviving or resulting entity outstanding immediately after such merger or consolidation; (iv) the stockholders of the Company approve a plan or agreement for the sale or disposition of all or substantially all of the consolidated assets of the Company (other than such a sale or disposition immediately after which such assets will be owned directly or indirectly by the stockholders of the Company in substantially the same proportions as 2 their ownership of the common stock of the Company immediately prior to such sale or disposition), in which case the Board shall determine the effective date of the Change in Control resulting therefrom; or (v) any other event occurs which the Board determines, in its discretion, would materially alter the structure of the Company or its ownership. For purposes of this definition: (A) The term "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act (including any successor to such Rule). (B) The term "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. (C) The term "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14)d) thereof, including "group" as defined in Section 13(d) thereof. (D) The term the "Hoyt Family" shall mean the family of Henry H. Hoyt, Sr., his descendants, and members of such descendants' families. (c) The "Effective Date" shall be the date on which a Change in Control occurs; provided, however, that if your employment with the Company is terminated prior to the date on which a Change in Control occurs and it is reasonably demonstrated that such termination was at the request of a third party that has taken steps reasonably calculated to effect a Change in Control or otherwise arose in connection with or anticipation of a Change in Control, then for all purposes of this Agreement the "Effective Date" shall be the date immediately prior to the date of such termination. (d) "Good Reason" shall mean (i) the assignment to you of any duties inconsistent in any respect with your position (including status, offices, titles and reporting relationships), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement or any other action by the Company that results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith that is remedied by the Company promptly after receipt of notice thereof given by you; (ii) the transfer or attempted assignment of you without your consent to a location outside the area described in Section 3(a)(ii) of this Agreement or the assignment to you of duties that require that you be absent from such location on business for more than the average number of days of business-related travel in the preceding three fiscal years; or (iii) any failure of the Company to comply with and satisfy Section 10(c) of this Agreement or any other material breach of this Agreement by the Company. 3 2. Employment Period. The period commencing on the Effective Date and ending on the second anniversary of such date or on such earlier date of termination as provided herein shall be referred to herein as the "Employment Period". The Company hereby agrees to continue you in its employ, and you hereby agree to remain in the employ of the Company, during the Employment Period. 3. Terms of Employment. (a) Position and Duties. During the Employment Period, (i) your position, status, authority, duties and responsibilities shall be at least equal to those of the position held by you immediately prior to the Effective Date and (ii) your services shall be performed at the location where you were employed immediately preceding the Effective Date or any office or location less than twenty-five (25) miles from such location. During the Employment Period, you agree to devote your best efforts to the service of the Company and the performance of such duties and responsibilities. (b) Compensation. (i) Base Salary. During the Employment Period, you shall receive a base salary ("Base Salary") at an annual rate at least equal to the highest annual base salary paid to you by the Company with respect to any of the three fiscal years immediately preceding the year in which the Effective Date occurs or, if greater, the base salary in effect for the year in which the Effective Date occurs. (ii) Annual Bonus. In addition to Base Salary, you shall be awarded, for each fiscal year during the Employment Period, an annual bonus (an "Annual Bonus") in cash at least equal to the greater of (x) the highest bonus earned by you in any of the three fiscal years immediately preceding the fiscal year in which the Effective Date occurs and (y) the target bonus (based on the assumed attainment of 100% of the performance objectives) for the fiscal year in which the Effective Date occurs. (iii) Benefit Plans. During the Employment Period, you and your family shall be entitled to participate in, on a basis consistent with your position with the Company, and shall receive benefits under plans, practices, policies and programs provided by the Company (including, without limitation, retirement, pension, profit sharing, stock option and long-term incentive plans, and death and life insurance benefits and medical insurance programs) at least as favorable as the most favorable of such plans, practices, policies and programs in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable, as in effect from time to time thereafter with respect to senior executives of the Company and their families. In the case of a retirement on or after the Effective Date, all of your then outstanding options to purchase common stock of the Company shall become immediately vested and exercisable for the remaining term of the option and all of your then outstanding restricted and deferred stock grants relating to common stock of the Company shall become immediately vested. For purposes of this Agreement, "retire" or "retirement" shall mean your voluntary termination of employment with the Company after attaining age 65 or, if earlier, the date which you are eligible to terminate employment with the 4 Company and promptly thereafter commence receiving retirement benefits pursuant to any pension plan maintained by the Company without any reduction for the failure to attain a prescribed age. (iv) Vacation. During the Employment Period, you shall be entitled to paid vacation in accordance with the policies of the Company in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable, as in effect from time to time thereafter with respect to other senior executives of the Company. 4. Obligations of the Company upon Termination. If, during the Employment Period, the Company shall terminate your employment other than for Cause, or if you shall terminate your employment for Good Reason: (a) Lump-Sum Payment. The Company shall pay to you in a lump sum in cash within 7 days after the date of termination the aggregate of the following amounts: (i) The full amount due to you and not theretofore paid for base salary up to the date of such termination, the amount of any accrued but unpaid bonus on account of the last full fiscal year preceding the date of such termination and accrued vacation pay; (ii) Two times your Final Compensation. For purposes of this Agreement, Final Compensation means the sum of (A) your annual base salary as in effect immediately prior to the termination and (B) the greater of (x) the highest bonus earned by you in any of the three full fiscal years preceding the date of termination and (y) the target bonus (based on the assumed attainment of 100% of the performance objectives) for the year in which the termination occurs; and (iii) An amount equal to the increase in the lump-sum benefit to which you would be entitled under the Carter-Wallace, Inc. Executive Pension Benefits Plan (assuming for this purpose that you had elected a lump-sum benefit payable upon your termination) if the calculation of the gross benefit thereunder (but not of any offset amounts) were modified by (A) increasing your number of years of benefit service by three, (B) substituting your Final Compensation for your "Modified Average Compensation" in the benefit formula and (C) treating such gross benefit as fully vested. Notwithstanding the foregoing, the aggregate lump-sum payment made pursuant to clauses (ii) and (iii) above shall in no event be less than $1,000,000. (b) Pro-Rated Bonus. As soon as practicable following the end of the fiscal year in which the termination of your employment occurs, the Company shall pay to you a pro-rated bonus reflecting the number of months (treating any partial month as a full month for this purpose) in such fiscal year during which you were employed. (c) Welfare Benefits. For two years following the termination of your employment, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to you and/or your family at least equal to those which would have been provided in accordance with the welfare benefit plans, programs, practices and policies of the 5 Company if your employment had not been terminated, including medical, dental, disability and group life insurance plans and programs, in accordance with the most favorable plans, practices, programs or policies of the Company during the 90-day period immediately preceding the Effective Date or, if more favorable, as in effect from time to time thereafter with respect to other senior executives of the Company and their families and, for purposes of eligibility for retiree benefits pursuant to such plans, practices, programs and policies, you shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period. (d) Stock Options and Awards. All of your then outstanding options to purchase common stock of the Company shall become immediately vested and exercisable for the remaining term of the option and all of your then outstanding restricted and deferred stock grants relating to common stock of the Company shall become immediately vested. (e) Outplacement. The Company agrees to provide you with reasonable outplacement assistance through the Company's Human Resources Department. The Company further agrees to reimburse you for reasonable job search expenses. All job search expenses in excess of one hundred dollars ($100.00) are subject to prior approval by the Company. (f) Release. You agree, as a condition to receipt of the termination payments and benefits provided for in this Section 4, that you will execute a release agreement, in a form reasonably satisfactory to the Company and you, releasing any and all claims arising out of your employment (other than enforcement of this Agreement, your rights under any of the Company's incentive compensation and employee benefit plans and programs to which you are entitled under this Agreement or otherwise, and any claim for any tort for personal injury not arising out of or related to your termination of employment). 5. Covenant Not to Compete; Nonsolicitation. (a) Except with the prior written consent of the Company authorized by a resolution adopted by the Board, while employed by the Company, you will not, and will not permit any corporation, partnership or other business entity in which you have a financial interest to, engage directly or indirectly in any business which is competitive with the business of the Company; provided that the ownership by you of not more than one percent of the capital stock of any other corporation or a one percent interest in any partnership or other business entity shall not be deemed to be a violation of this Section 5. (b) While employed by the Company and for a period of one year after the termination of your employment for any reason, you shall not personally (and shall not personally cause others to) (i) take any action to solicit or divert any material business or customers away from the Company, (ii) induce customers, potential customers, suppliers, agents or other persons under contract or otherwise associated or doing business with the Company to terminate, reduce or alter any such association or business, or (iii) induce any person employed by the Company to (A) terminate such employment arrangement, (B) accept employment with another person, or (C) interfere with the customers or suppliers or otherwise with the Company in any manner. 6 6. Secrecy; Nondisparagement. (a) You recognize and acknowledge that the information (such as, but not limited to, financial information), trade secrets, formulae, manufacturing methods, technical data, know-how and secret processes of the Company as acquired and used by the Company are special, valuable and unique assets of the Company. You will not, while employed by the Company or at any time thereafter, disclose any such information, trade secrets, formulae, manufacturing methods, technical data, know-how and secret processes to any person, firm, corporation, association or any other entity for any reason or purpose whatsoever without the prior written consent of the Company, unless such information shall have previously become public knowledge. (b) You agree that you will not make any disparaging statements about the Company or the directors, officers or employees of the Company; provided that this Section 6(b) shall not apply to truthful testimony as a witness, compliance with other legal obligations, or truthful assertion of or defense against any claim or breach of this Agreement, or to your truthful statements or disclosures to officers or directors of the Company, and shall not require you to make false statements or disclosures. The Company agrees that neither the directors nor the officers of the Company nor any spokesperson for the Company shall make any disparaging statements about you; provided that this Section 6(b) shall not apply to truthful testimony as a witness, compliance with other legal obligations, truthful assertion of or defense against any claim of breach of this Agreement, or truthful statements or disclosures to you, and shall not require false statements or disclosures to be made. 7. Excise Tax Gross-Up. If you become entitled to one or more payments (including, without limitation, the vesting of any non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company (all such amounts, exclusive of additional payments pursuant to this Section 7, being referred to herein as the "Total Payments"), which are or become subject to the tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be imposed) (the "Excise Tax"), the Company shall pay to you at the time specified below an additional amount (the "Gross-Up Payment") such that the net amount retained by you, after reduction for (x) any Excise Tax (including any penalties or interest thereon) on the Total Payments and on the Gross-Up Payment and (y) any federal, state, or local income or employment tax on the Gross-Up Payment, shall be equal to the sum of (a) the Total Payments, and (b) an amount equal to the product of any deductions disallowed for federal, state, or local income tax purposes because of the inclusion of the Gross-Up Payment in your adjusted gross income multiplied by the highest applicable marginal rate of federal, state, or local income taxation, respectively, for the calendar year in which the Gross-Up Payment is to be made. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the written opinion of independent tax counsel or auditors of nationally recognized standing selected by the Company and reasonably acceptable to you ("Independent Advisors"), the Total Payments do not 7 constitute parachute payments, or such excess parachute payments in excess of the base amount within the meaning of Section 280G(b)(3) of the Code represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code or are otherwise not subject to the Excise Tax; and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Independent Advisors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. If more than one Gross-Up Payment is made (including for this purpose any parachute excise tax gross-up payment pursuant to the terms of any other plan, arrangement, or agreement with the Company), the amount of each Gross-Up Payment shall be computed so as not to duplicate any prior Gross-Up Payment. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed (A) to pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made; (B) to pay any applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of your adjusted gross income); and (C) to have otherwise allowable deductions for federal, state, and local income tax purposes at least equal to those disallowed because of the inclusion of the Gross-Up Payment in your adjusted gross income. The Gross-Up Payment shall be paid on or before the earlier of (i) the 30th day after it has been determined that the Total Payments (or any portion thereof) are subject to the Excise Tax, or (ii) the date on which the Excise Tax becomes due and payable to the taxing authorities; provided, however, that if the amount of such Gross-Up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined by the Independent Advisors, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined by the Independent Advisors to have been due, you shall repay to the Company the amount of such excess, plus interest at the rate provided in Section 1274(b)(2)(B) of the Code, within five days following the Company's demand therefor. In the event that the Excise Tax is subsequently determined, in a final judicial determination or a final administrative settlement to which you are a party (a "Final Determination"), to be less than the amount taken into account hereunder at the time the Gross-Up Payment is made, you shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined (but, if previously paid to the taxing authorities, not prior to the time the amount of such reduction is refunded to you or otherwise realized as a benefit by you), the portion of the Gross-Up Payment that would not have been paid if such Excise Tax as finally determined had been applied in initially calculating the Gross-Up Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined in a Final Determination to exceed the amount taken into account hereunder at the time the Gross-Up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such 8 excess (plus any interest and penalties payable with respect to such excess) at the time that the amount of such excess if finally determined. The Company shall have the right to control all proceedings with the Internal Revenue Service that may arise in connection with the determination and assessment of any Excise Tax and, at its sole option, the Company may pursue or forego any and all administrative appeals, proceedings, hearings, and conferences with any taxing authority in respect of such Excise Tax (including any interest or penalties thereon); provided, however, that the Company's control over any such proceedings shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and you shall be entitled to settle or contest any other issue raised by the Internal Revenue Service or any other taxing authority. You shall cooperate with the Company in any proceedings relating to the determination and assessment of any Excise Tax and shall not take any position or action that would materially increase the amount of any Gross-Up Payment hereunder. 8. Remedies. In the event of a breach or threatened breach by you of the provisions of Section 5 or Section 6 of this Agreement, the Company shall be entitled to seek an injunction restraining you from violating either of said provisions, or any other remedy, including the recovery of damages from you. If you shall breach any of the provisions of Section 5 or Section 6 of this Agreement, nothing herein shall be construed as preventing the Company from withholding any payment or payments required to be made hereunder to you. 9. Assistance in Litigation. You shall, upon reasonable notice, furnish such information and proper assistance to the Company as may reasonably be required by the Company in connection with any litigation in which it or any of its subsidiaries or affiliates is or may become a party. 10. Successors. (a) This Agreement is personal to you and, without the prior written consent of the Company, shall not be assignable by you otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by your legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 11. Notices. All communications hereunder shall be in writing and delivered or mailed by registered mail to the Company at 1345 Avenue of the Americas, New York, New 9 York 10105, Attention: Board of Directors, and to you, at your address set forth above, unless another address has been given to the other party hereto in writing. 12. Interpretation. No provision of this Agreement may be altered or waived except in writing and executed by the other party hereto. This Agreement constitutes the entire contract between the parties hereto and cancels and supersedes all prior agreements, written or oral, relating to your employment with the Company. No party shall be bound in any manner by any warranties, representations or guarantees, except as specifically set forth in this Agreement. This Agreement shall be interpreted under the laws of the State of New York. 13. Arbitration. The parties agree that any dispute or controversy arising under or in connection with this Agreement shall be submitted to and determined by arbitration in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association and agree to be bound by the decision in any such arbitration provision. 14. Other Benefits. Nothing in this Agreement shall be interpreted as reducing or eliminating any benefits to which you or your beneficiaries are entitled, without regard to this Agreement, under any plan or program of the Company following a termination of employment for any reason. 15. No Duty to Mitigate. In the event of any termination of employment under Section 4 of this Agreement, you shall be under no obligation to seek other employment, and there shall be no offset against any amounts due to you under this Agreement on account of the remuneration attributable to any subsequent employment that you may obtain. Any amounts due under Section 4 are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty. 16. Fees and Expenses. The Company shall pay fees and expenses reasonably incurred by you as a result of your seeking to obtain or enforce any right or benefit provided by this Agreement, promptly and from time to time, 10 at your request as such fees and expenses are incurred unless your actions in such regard are determined to be frivolous or in bad faith. Very truly yours, CARTER-WALLACE, INC. By _______________________ Chairman of the Board Agreed and consented to as of the date set forth above - ------------------------------ Stephen R. Lang 11 EX-21 4 SUBSIDIARIES EXHIBIT 21 Subsidiaries of the Company The following is a list of the active subsidiaries of the Company showing the jurisdiction of incorporation and the percentage of voting securities owned by the Company or by wholly-owned subsidiaries of the Company as of March 31, 1999: Jurisdiction Percentage of of Voting Name of Corporation Incorporation Securities Barbara Gould S.A. France 100% Carter-Wallace, N.S. Inc. Delaware 100% Carter-Wallace, O.S. Inc. Delaware 100% Carter-Wallace Limited England 100% Carter-Wallace (Australia) Pty, Limited Australia 100% Carter-Wallace, S.A. Mexico 100% Carter-Wallace FSC Corp. Virgin Islands 100% Carter-Horner Inc. Canada 100% Icart, S.A. Spain 100% International Biological Laboratories, Inc. Maryland 95% Laboratoires Fumouze, S.A. France 100% Sante Beaute S.A. France 100% Sofibel S.A.R.L. France 100% S.p.A. Italiana Laboratori Bouty Italy 100% Technogenetics S.r.l. Italy 100% Tripharma S.A.R.L. France 100% All of the above subsidiaries are included in the consolidated financial statements of the Company. EX-23 5 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Stockholders Carter-Wallace, Inc. We consent to incorporation by reference in the registration statement (No. 333-00499) on Form S-8 of Carter-Wallace, Inc. of our report dated May 5, 1999, relating to the consolidated balance sheets of Carter-Wallace, Inc. and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of earnings, retained earnings and comprehensive earnings, and cash flows, for each of the years in the three-year period ended March 31, 1999, and related financial statement schedule which report appears in the March 31, 1999 Annual Report on Form 10-K of Carter-Wallace, Inc. KPMG LLP New York, New York June 11, 1999 EX-27 6 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27
5 12-MOS MAR-31-1999 MAR-31-1999 49,382,000 31,870,000 136,775,000 7,415,000 90,608,000 329,590,000 316,759,000 166,163,000 721,952,000 170,041,000 72,995,000 0 0 47,205,000 311,951,000 721,952,000 668,872,000 684,672,000 253,447,000 638,428,000 7,802,000 0 4,492,000 46,244,000 18,035,000 28,209,000 0 0 0 28,209,000 .62 .62
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