U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
PRESTIGE BRANDS HOLDINGS, INC.
Delaware 20-1297589 001-32433
(State of Incorporation) (I.R.S. Employer (Commission File Number)
Identification No.)
PRESTIGE BRANDS INTERNATIONAL, LLC
Delaware 20-0941337 333-11715218-18
(State of Incorporation) (I.R.S. Employer (Commission File Number)
Identification No.)
(Exact name of Registrants as specified in their charters)
90 North Broadway
Irvington, New York 10533 (914) 524-6810
(Address of Principal Executive Offices) (Registrants' telephone number,
including area code)
----------------
This Quarterly Report on Form 10-Q is a combined quarterly report being filed
separately by Prestige Brands Holdings, Inc. and Prestige Brands International
LLC, both registrants. Prestige Brands International, LLC, an indirect wholly
owned subsidiary of Prestige Brands Holdings, Inc. is the indirect parent
company of Prestige Brands, Inc., the issuer of our 9 1/4% senior subordinated
notes due 2012, and the parent guarantor of such notes. As the indirect holding
company of Prestige Brands International, LLC, Prestige Brands Holdings, Inc.
does not conduct ongoing business operations. As a result, the financial
information for Prestige Brands Holdings, Inc. and Prestige Brands
International, LLC is identical for the purposes of the discussion of operating
results in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Unless otherwise indicated, we have presented
information throughout this Form 10-Q for Prestige Brands Holdings, Inc. and its
consolidated subsidiaries, including Prestige Brands International, LLC. The
information contained herein relating to each individual registrant is filed by
such registrant on its own behalf. Neither registrant makes any representation
as to information relating to the other registrant. Prestige Brands
International, LLC meets the conditions set forth in general instructions
(H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the
reduced disclosure format.
Indicate by check mark whether the Registrants (1) have 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
Registrants were 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 whether the Registrants are accelerated filers (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
As of November 21, 2005, Prestige Brands Holdings, Inc. had 50,040,890 shares of
common stock outstanding. As of such date, Prestige International Holdings, LLC,
a wholly owned subsidiary of Prestige Brands Holdings, Inc., owned 100% of the
uncertificated ownership interests of Prestige Brands International, LLC.
Prestige Brands Holdings, Inc.
Form 10-Q
Index
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Prestige Brands Holdings, Inc.
Consolidated Balance Sheets - September 30, 2005 (unaudited) and
March 31, 2005 2
Consolidated Statements of Operations - three months ended
September 30, 2005 and 2004 and six months ended September 30,
2005 and 2004 (unaudited) 3
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income - six months ended September 30, 2005
(unaudited) 4
Consolidated Statements of Cash Flows - six months ended September
30, 2005 and 2004 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Prestige Brands International, LLC
Consolidated Balance Sheets - September 30, 2005 (unaudited) and
March 31, 2005 32
Consolidated Statements of Operations - three months ended
September 30, 2005 and 2004 and six months ended September 30,
2005 and 2004 (unaudited) 33
Consolidated Statement of Changes in Members' Equity - six months
ended September 30, 2005 (unaudited) 34
Consolidated Statements of Cash Flows - six months ended September
30, 2005 and 2004 (unaudited) 35
Notes to Unaudited Consolidated Financial Statements 36
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation 63
Item 3. Quantitative and Qualitative Disclosure About Market Risk 75
Item 4. Controls and Procedures 76
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 78
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 80
Item 3. Defaults Upon Senior Securities 80
Item 4. Submission of Matters to a Vote of Security Holders 80
Item 5. Other Information 80
Item 6. Exhibits 80
Signatures 81
1
Prestige Brands Holdings, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands)
September 30, 2005 March 31, 2005
--------------------- ----------------------
Assets (Restated)
Current assets
Cash $ 27,585 $ 5,334
Accounts receivable 32,552 35,918
Inventories 32,887 24,833
Deferred income tax assets 6,682 5,699
Prepaid expenses and other current assets 3,256 3,152
--------------------- ----------------------
Total current assets 102,962 74,936
Property and equipment 1,647 2,324
Goodwill 294,731 294,731
Intangible assets 604,316 608,613
Other long-term assets 14,718 15,996
--------------------- ----------------------
Total Assets $ 1,018,374 $ 996,600
===================== ======================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 22,725 $ 21,705
Accrued liabilities 12,110 11,589
Current portion of long-term debt 3,730 3,730
--------------------- ----------------------
Total current liabilities 38,565 37,024
Long-term debt 489,765 491,630
Deferred income tax liabilities 94,759 85,899
--------------------- ----------------------
Total liabilities 623,089 614,553
--------------------- ----------------------
Commitments and Contingencies - Note 12
Shareholders' Equity
Preferred stock - $0.01 par value
Authorized - 5,000 shares
Issued and outstanding - None -- --
Common stock - $.01 par value
Authorized - 250,000 shares
Issued and outstanding - 50,056 shares at September 30, 2005 and
50,000 March 31, 2005 501 500
Additional paid-in capital 378,297 378,251
Treasury stock, at cost - 15 shares at September 30, 2005 and 2
shares at March 31, 2005 (25) (4)
Accumulated other comprehensive income 229 320
Retained earnings 16,283 2,980
--------------------- ----------------------
Total shareholders' equity 395,285 382,047
--------------------- ----------------------
Total Liabilities and Shareholders' Equity $ 1,018,374 $ 996,600
===================== ======================
See accompanying notes.
2
Prestige Brands Holdings, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Six Months
Ended September 30 Ended September 30
-------------------------------------- ---------------------------------------
(In thousands, except per share data) 2005 2004 2005 2004
------------------- ---------------- ----------------- -------------------
(Restated) (Restated)
Revenues
Net sales $ 73,320 $ 79,932 $ 136,748 $ 138,612
Other revenues 25 26 50 101
------------------- ---------------- ----------------- -------------------
Total revenues 73,345 79,958 136,798 138,713
------------------- ---------------- ----------------- -------------------
Cost of Sales
Costs of sales 35,549 37,941 64,498 71,079
------------------- ---------------- ----------------- -------------------
Gross profit 37,796 42,017 72,300 67,634
------------------- ---------------- ----------------- -------------------
Operating Expenses
Advertising and promotion 10,217 8,449 18,922 19,234
General and administrative 4,117 4,502 9,023 9,423
Depreciation 487 452 975 938
Amortization of intangible assets 2,148 1,802 4,296 3,605
------------------- ---------------- ----------------- -------------------
Total operating expenses 16,969 15,205 33,216 33,200
------------------- ---------------- ----------------- -------------------
Operating income 20,827 26,812 39,084 34,434
------------------- ---------------- ----------------- -------------------
Other income (expense)
Interest income 226 59 307 87
Interest expense (8,897) (10,893) (17,488) (21,970)
Loss on extinguishment of debt -- -- -- (7,567)
------------------- ---------------- ----------------- -------------------
Total other income (expense) (8,671) (10,834) (17,181) (29,450)
------------------- ---------------- ----------------- -------------------
Income before provision for
income taxes 12,156 15,978 21,903 4,984
Provision for income taxes 4,782 6,076 8,600 2,173
------------------- ---------------- ----------------- -------------------
Net income 7,374 9,902 13,303 2,811
Cumulative preferred dividends on Senior
Preferred and Class B Preferred Units -- (3,827) -- (7,446)
------------------- ---------------- ----------------- -------------------
Net income (loss) available to members and
common shareholders $ 7,374 $ 6,075 $ 13,303 $ (4,635)
=================== ================ ================= ===================
Basic earnings per share $ 0.15 $ 0.25 $ 0.27 $ (0.19)
=================== ================ ================= ===================
Diluted earnings per share $ 0.15 $ 0.23 $ 0.27 $ (0.19)
=================== ================ ================= ===================
Weighted average shares outstanding:
Basic 48,791 24,615 48,757 24,563
=================== ================ ================= ===================
Diluted 49,949 26,512 49,932 24,563
=================== ================ ================= ===================
See accompanying notes.
3
Prestige Brands Holdings, Inc.
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income
Six Months Ended September 30, 2005
(Unaudited)
Accumulated
Common Stock Additional Other
Par Paid-in Treasury Stock Comprehensive Retained
Shares Value Capital Shares Amount Income Earnings Totals
---------- ---------- ------------ ---------- ---------- ----------------- ------------ ----------
(In thousands)
Balances - March 31, 2005
(Restated) 50,000 $ 500 $378,251 2 $ (4) $ 320 $ 2,980 $ 382,047
Additional costs associated
with initial public offering (63) (63)
Issuance of common stock and
options to officers and
directors 56 1 109 110
Repurchase of common stock 13 (21) (21)
Components of comprehensive
income
Net income 13,303 13,303
Unrealized loss on interest
rate cap, net of income
tax benefit of $116 (91) (91)
----------
Total comprehensive income 13,212
---------- ---------- ------------ ---------- ---------- ----------------- ------------ ----------
Balances - September 30, 2005 50,056 $ 501 $378,297 15 $ (25) $ 229 $ 16,283 $ 395,285
========== ========== ============ ========== ========== ================= ============ ==========
See accompanying notes.
4
Prestige Brands Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) Six Months Ended September 30
----------------------------------------
2005 2004
------------------ ------------------
Operating Activities (Restated)
Net income $ 13,303 $ 2,811
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,271 4,543
Deferred income taxes 7,961 8,219
Amortization of deferred financing costs 1,136 1,502
Stock-based compensation 110 --
Loss on extinguishment of debt -- 7,567
Changes in operating assets and liabilities, net of
effects of purchases of businesses
Accounts receivable 3,366 (6,629)
Inventories (8,054) 5,268
Prepaid expenses and other assets (104) 442
Accounts payable 1,020 3,127
Account payable - related parties -- 1,000
Accrued expenses 521 (1,445)
------------------ ------------------
Net cash provided by operating activities 24,530 26,405
------------------ ------------------
Investing Activities
Purchase of equipment (297) (143)
Purchase of business, net of cash acquired -- (373,250)
------------------ ------------------
Net cash used for investing activities (297) (373,393)
------------------ ------------------
Financing Activities
Proceeds from the issuance of notes -- 668,512
Payment of deferred financing costs (33) (22,922)
Repayment of notes (1,865) (331,673)
Proceeds from the issuance of equity securities -- 58,487
Purchase of shares for treasury (21) --
Additional costs associated with initial public offering (63) --
------------------ ------------------
Net cash provided by (used for) financing activities (1,982) 372,404
------------------ ------------------
Increase in cash 22,251 25,416
Cash - beginning of period 5,334 3,393
------------------ ------------------
Cash - end of period $ 27,585 $ 28,809
================== ==================
Supplemental Cash Flow Information
Fair value of assets acquired, net of cash acquired $ -- $ 602,774
Fair value of liabilities assumed -- (229,432)
Purchase price funded with non-cash contributions -- (92)
------------------ ------------------
Cash paid to purchase business $ -- $ 373,250
================== ==================
Interest paid $ 16,408 $ 20,468
================== ==================
Income taxes paid $ 565 $ 388
================== ==================
See accompanying notes.
5
Prestige Brands Holdings, Inc.
Notes to Consolidated Financial Statements
1. Business and Basis of Presentation
Nature of Business
Prestige Brands Holdings, Inc. ("the Company") and its subsidiaries are engaged
in the marketing, sales and distribution of over-the-counter drug, personal care
and household cleaning brands to mass merchandisers, drug stores, supermarkets
and club stores primarily in the United States. In February 2005, the Company
completed an initial public offering.
Basis of Presentation
The unaudited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the financial statements
include all adjustments, consisting only of normal recurring adjustments that
are considered necessary for a fair presentation of the Company's financial
position, results of operations and cash flows for the interim periods.
Operating results for the three and six month periods ended September 30, 2005
are not necessarily indicative of results that may be expected for the year
ending March 31, 2006. This financial information should be read in conjunction
with the Company's financial statements and notes thereto included in the
Company's Annual Report on Form 10-K/A for the year ended March 31, 2005, as
well as the Company's Current Report on Form 8-K filed on November 15, 2005 (see
Note 2). As noted in the Company's Current Report on Form 8-K, the Company will
file an amended Form 10-K/A to reflect the restatement of the prior period
financial statements as soon as it is practicable.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Although these estimates are based on the
Company's knowledge of current events and actions that the Company may undertake
in the future, actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all short-term deposits and investments with original
maturities of three months or less to be cash equivalents. Substantially all of
the Company's cash is held by one bank located in Wyoming. The Company does not
believe that, as a result of this concentration, it is subject to any unusual
financial risk beyond the normal risk associated with commercial banking
relationships.
Accounts Receivable
The Company extends non-interest bearing trade credit to its customers in the
ordinary course of business. To minimize credit risk, ongoing evaluations of
customers' financial condition are performed; however, collateral is not
required. The Company maintains an allowance for doubtful accounts based on its
historical collections experience, as well as its evaluation of current and
expected conditions and trends affecting its customers.
Sales Returns
The Company must make estimates of potential future product returns related to
current period sales. In order to do this, the Company analyzes historical
returns, current economic trends, changes in customer demand and acceptance of
the Company's products when evaluating the adequacy of the Company's allowance
6
for returns in any accounting period. If actual returns are greater than those
estimated by management, the Company's financial statements in future periods
may be adversely affected.
Inventories
Inventories are stated at the lower of cost or fair value where cost is
determined by using the first-in, first-out method. The Company provides an
allowance for slow moving and obsolete inventory.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method based on the following estimated useful lives:
Years
--------------
Machinery 5
Computer equipment 3
Furniture and fixtures 7
Expenditures for maintenance and repairs are charged to expense as incurred.
When an asset is sold or otherwise disposed of, the cost and associated
accumulated depreciation are removed from the accounts and the resulting gain or
loss is recognized in the consolidated statement of operations.
Property and equipment are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. An impairment loss is recognized if the carrying amount of the
asset exceeds its fair value.
Goodwill
The excess of the purchase price over the fair market value of assets acquired
and liabilities assumed in acquisition transactions is classified as goodwill.
In accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("Statement") No. 142, "Goodwill and Other
Intangible Assets," the Company does not amortize goodwill, but performs
impairment tests of the carrying value at least annually.
Intangible Assets
Intangible assets are stated at the lesser of cost or fair value less
accumulated amortization. For intangible assets with finite lives, amortization
is computed on the straight-line method over estimated useful lives ranging from
five to 30 years.
Indefinite lived intangible assets are tested for impairment at least annually,
while intangible assets with finite lives are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. An impairment loss is recognized if the carrying
amount of the asset exceeds its fair value.
Deferred Financing Costs
The Company has incurred debt issuance costs in connection with its long-term
debt. These costs are capitalized as deferred financing costs and amortized
using the effective interest method over the term of the related debt.
Revenue Recognition
Revenues are recognized when the following revenue recognition criteria are met:
(1) persuasive evidence of an arrangement exists; (2) there is a fixed or
determinable price; (3) the product has been shipped and the customer takes
ownership and assumes risk of loss; and (4) collectibility of the resulting
receivable is reasonably assured. The Company has determined that the risk of
loss generally occurs when product is received by the customer and, accordingly,
recognizes revenue at that time. Provision is made for estimated customer
discounts and returns at the time of sale based on the Company's historical
experience.
7
The Company frequently participates in the promotional programs of its
customers, as is customary in this industry. The ultimate cost of these
promotional programs varies based on the actual number of units sold during a
finite period of time. These programs may include coupons, scan downs, temporary
price reductions or other price guarantee vehicles. The Company estimates the
cost of such promotional programs at their inception based on historical
experience and current market conditions and reduces sales by such estimates. At
the completion of the promotional program, the estimated amounts are adjusted to
actual results.
Costs of Sales
Costs of sales include product costs, warehousing costs, inbound and outbound
shipping costs, and handling and storage costs. Shipping, warehousing and
handling costs were $6.5 million and $6.4 million for the three month periods
ended September 30, 2005 and 2004, respectively, and $12.0 million and $11.4
million for the six month periods ended September 30, 2005 and 2004,
respectively.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. Slotting fees
associated with products are recognized as a reduction of sales. Under slotting
arrangements, the retailers allow the Company's products to be placed on the
stores' shelves in exchange for such fees. Direct reimbursements of advertising
costs are reflected as a reduction of advertising costs in the period earned.
Stock-based Compensation
During the three month period ended September 30, 2005, the Company adopted
FASB, Statement No. 123(R), "Share-Based Payment" ("Statement No. 123(R)") with
the initial grants of restricted stock and options to purchase common stock to
employees and directors in accordance with the provisions of the Company's
Long-Term Equity Incentive Plan ("the Plan"). Statement No. 123(R) requires the
Company to measure the cost of services to be rendered based on the grant-date
fair value of the equity award. Compensation expense is to be recognized over
the period which an employee is required to provide service in exchange for the
award, generally referred to as the vesting period. The Company recorded a
non-cash charge of $110,000 during the three month period ended September 30,
2005.
Income Taxes
Income taxes are recorded in accordance with the provisions of FASB Statement
No. 109, "Accounting for Income Taxes" ("Statement No. 109"). Pursuant to
Statement No. 109, deferred tax assets and liabilities are determined
based on the differences between the financial reporting and tax
bases of assets and liabilities using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. A valuation allowance
is established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Derivative Instruments
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("Statement No. 133"), requires companies to recognize derivative
instruments as either assets or liabilities in the balance sheet at fair value.
The accounting for changes in the fair value of a derivative instrument depends
on whether it has been designated and qualifies as part of a hedging
relationship and further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging instruments, a
company must designate the hedging instrument, based upon the exposure being
hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment
in an international operation.
The Company has designated its derivative financial instruments as cash flow
hedges because they hedge exposure to variability in expected future cash flows
that are attributable to interest rate risk. For these hedges, the effective
portion of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income (loss) and reclassified into earnings in
the same line item associated with the forecasted transaction in the same period
or periods during which the hedged transaction affects earnings. Any ineffective
portion of the gain or loss on the derivative instruments is recorded in results
of operations immediately.
8
Earnings Per Share
Basic and diluted earnings per share are calculated based on income (loss)
available to common shareholders and the weighted-average number of shares
outstanding during the reported period. For the period ended September 30, 2004,
the weighted average number of common shares outstanding includes the Company's
common units as if the common units had been converted to common stock using the
February 2005 initial public offering conversion ratio of one common unit to
0.4543 shares of common stock.
Recently Issued Accounting Standards
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47") which clarifies guidance
provided by Statement No. 143, "Accounting for Asset Retirement Obligations."
FIN 47 is effective for the Company no later than March 31, 2006. The adoption
of FIN 47 is not expected to have a significant impact on the Company's
financial position, results of operations or cash flows.
In May 2005, the FASB issued Statement of Financial Accounting Standards
No. 154, "Accounting Changes and Error Corrections" ("Statement No. 154") which
replaces Accounting Principles Board Opinion No. 20, "Accounting Changes" ("APB
Opinion No. 20") and FASB Statement No. 3, "Reporting Accounting Changes in
Interim Financial Statements." Statement No. 154 requires that voluntary changes
in accounting principle be applied retrospectively to the balances of assets and
liabilities as of the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustments be made to the
opening balance of retained earnings. APB Opinion No. 20 had required that most
voluntary changes in accounting principle be recognized by including in net
income the cumulative effect of changing to the new principle. Statement No. 154
is effective for all accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
2. Restatement of Financial Statements
On November 15, 2005, the Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission ("SEC") in which it announced that it was
restating previously reported financial results for the fiscal years ended March
31, 2003, 2004 and 2005, and the quarterly data for the years ended March 31,
2005 and 2004 included in the Company's Annual Report on Form 10-K/A for the
year ended March 31, 2005 and the financial statements for the quarters ended
June 30, 2005 and 2004 included in the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2005.
As a result of a review of certain accounting practices performed in
conjunction with the Company's assessment of internal controls over financial
reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and the
preparation of its financial statements for the quarter ended September 30,
2005, the Company determined it erroneously applied generally accepted
accounting principles as they relate to the recognition of revenue, the
classification of certain trade promotion allowances, the compuation of deferred
income taxes and the computation of earnings per share.
With respect to revenue recognition, Staff Accounting Bulletin No. 104 sets
forth the criteria for revenue recognition, one of which is that risk of loss
has passed to the customer. The Company, consistent with its published pricing
and shipping terms, has historically recognized revenue upon shipment of product
to the customer. Upon closer examination of its shipping practices and terms,
the Company determined that it often was unclear when, from a legal standpoint,
risk of loss of its products passed to its customers. Accordingly, the Company
has concluded that revenue should not be recognized until product is received by
its customers (referred to as "FOB destination point"), unless the risk of loss
transfers to the customer at the point of shipment. The Company will restate its
previously issued financial statements to correct this erroneous application of
generally accepted accounting principles. The effects of these adjustments for
each fiscal period are reflected in the schedules that follow. These adjustments
had no impact on net cash flows provided by or used in operating activities.
9
With respect to the classification of trade promotions and allowances,
Emerging Issues Task Force Issue 01-09 sets forth the criteria for classifying
such promotions and allowances as an expense or a reduction of revenue. Upon
review, the Company determined that it had incorrectly classified certain
promotion and allowance amounts as expense rather than as a reduction of
revenue. The Company's restated financial statements will correct these
misclassifications. These adjustments do not affect the balance sheet, net
income, operating income or cash flows from operations. The effects of these
adjustments for each fiscal period are reflected in the schedules that follow.
With respect to the provision for income taxes and related deferred taxes,
Statement of Financial Accounting Standards No. 109 sets forth the criteria by
which such amounts are to be recognized. During the preparation of the financial
statements for the quarter ended September 30, 2005, the Company determined that
the increase in deferred income taxes related to the increase in graduated
federal income tax rates from 34% to 35% should have been recognized in the
period in which it filed its first consolidated federal income tax return. The
Company's restated financial statements will recognize this increase in the
quarter and year ended March 31, 2005. Previously, the Company had recorded this
increase in the three month period ended June 30, 2005. The effect of this
adjustment for each fiscal period is reflected in the schedules that follow.
With respect to earnings per share, Statement of Financial Accounting Standards
No. 128 sets forth the criteria for computing basic and diluted earnings per
share. Upon examination of its earnings per share calculations, the Company
determined that certain issued and outstanding, but unvested, shares held by
management were improperly reflected in the basic earnings per share
computations. The effects of these adjustments for each fiscal period are
reflected in the schedules that follow.
10
Consolidated Statements of Operations
Three Months Ended June 30, 2005
-----------------------------------------------------------------------------------------
(In thousands, except Previously Revenue Cooperative Income
per share data) Reported Recognition Advertising Taxes As Restated
-----------------------------------------------------------------------------------------
Revenues
Net sales $ 63,530 $ 1,928 $ (2,030) $ -- $ 63,428
Other revenues 25 25
-----------------------------------------------------------------------------------------
Total revenues 63,555 1,928 (2,030) -- 63,453
Cost of Sales
Costs of sales 28,339 610 28,949
-----------------------------------------------------------------------------------------
Gross profit 35,216 1,318 (2,030) -- 34,504
-----------------------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 10,714 21 (2,030) 8,705
General and administrative 4,911 4,911
Depreciation 483 483
Amortization of intangible assets 2,148 2,148
-----------------------------------------------------------------------------------------
Total operating expenses 18,256 21 (2,030) -- 16,247
-----------------------------------------------------------------------------------------
Operating income 16,960 1,297 -- -- 18,257
-----------------------------------------------------------------------------------------
Other income (expense)
Interest income 81 81
Interest expense (8,591) (8,591)
-----------------------------------------------------------------------------------------
Total other income (expense) (8,510) -- -- -- (8,510)
-----------------------------------------------------------------------------------------
Income before provision for
income taxes 8,450 1,297 -- -- 9,747
Provision for income taxes 4,443 522 (1,147) 3,818
-----------------------------------------------------------------------------------------
Net income $ 4,007 $ 775 $ -- $ 1,147 $ 5,929
=========================================================================================
Basic earnings per share $ 0.08 $ 0.12
=================== =================
Diluted earnings per share $ 0.08 $ 0.12
=================== =================
Average shares outstanding:
Basic 49,998 48,722
=================== =================
Diluted 49,998 49,998
=================== =================
11
Consolidated Statements of Operations
Fiscal Year Ended March 31, 2005
-----------------------------------------------------------------------------------------
(In thousands, except Previously Revenue Cooperative Income
per share data) Reported Recognition Advertising Taxes As Restated
-----------------------------------------------------------------------------------------
Revenues
Net sales $ 303,167 $ (5,611) $ (8,638) $ -- $ 288,918
Other revenues 151 151
-----------------------------------------------------------------------------------------
Total revenues 303,318 (5,611) (8,638) -- 289,069
Cost of Sales
Costs of sales 141,348 (2,339) 139,009
-----------------------------------------------------------------------------------------
Gross profit 161,970 (3,272) (8,638) -- 150,060
-----------------------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 38,402 (67) (8,638) 29,697
General and administrative 20,198 20,198
Depreciation 1,899 1,899
Amortization of intangible assets 7,901 7,901
-----------------------------------------------------------------------------------------
Total operating expenses 68,400 (67) (8,638) -- 59,695
-----------------------------------------------------------------------------------------
Operating income 93,570 (3,205) -- -- 90,365
-----------------------------------------------------------------------------------------
Other income (expense)
Interest income 371 371
Interest expense (45,097) (45,097)
Loss on extinguishment of debt (26,863) (26,863)
-----------------------------------------------------------------------------------------
Total other income (expense) (71,589) -- -- -- (71,589)
-----------------------------------------------------------------------------------------
Income before provision for
income taxes 21,981 (3,205) -- -- 18,776
Provision for income taxes 8,522 (1,113) -- 1,147 8,556
-----------------------------------------------------------------------------------------
Net income 13,459 (2,092) -- (1,147) 10,220
Cumulative preferred dividend on Senior
Preferred and Class B Preferred Units (25,395) (25,395)
-----------------------------------------------------------------------------------------
Net loss available to common shareholders $ (11,936) $ (2,092) $ -- $ (1,147) (15,175)
=========================================================================================
Basic earnings per share $ (0.41) $ (0.55)
=================== ===================
Diluted earnings per share $ (0.41) $ (0.55)
=================== ===================
Average shares outstanding:
Basic 29,389 27,546
=================== ===================
Diluted 29,389 27,546
=================== ===================
12
Consolidated Statements of Operations
Six Months Ended September 30, 2004
--------------------------------------------------------------------------
(In thousands, except Previously Revenue Cooperative
per share data) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 149,002 $ (5,641) $ (4,749) $ 138,612
Other revenues 101 101
--------------------------------------------------------------------------
Total revenues 149,103 (5,641) (4,749) 138,713
Cost of Sales
Costs of sales 73,966 (2,887) 71,079
--------------------------------------------------------------------------
Gross profit 75,137 (2,754) (4,749) 67,634
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 24,075 (92) (4,749) 19,234
General and administrative 9,423 9,423
Depreciation 938 938
Amortization of intangible assets 3,605 3,605
--------------------------------------------------------------------------
Total operating expenses 38,041 (92) (4,749) 33,200
--------------------------------------------------------------------------
Operating income 37,096 (2,662) -- 34,434
--------------------------------------------------------------------------
Other income (expense)
Interest income 87 87
Interest expense (21,970) (21,970)
Loss on extinguishment of debt (7,567) (7,567)
--------------------------------------------------------------------------
Total other income (expense) (29,450) -- -- (29,450)
--------------------------------------------------------------------------
Income before provision for
income taxes 7,646 (2,662) 4,984
Provision for income taxes 3,110 (937) 2,173
--------------------------------------------------------------------------
Net income 4,536 (1,725) -- 2,811
Cumulative preferred dividend on Senior
Preferred and Class B Preferred Units (7,446) (7,446)
--------------------------------------------------------------------------
Net loss available to common shareholders
$(2,910) $ (1,725) $ -- $ (4,635)
==========================================================================
Basic earnings per share $ (0.11) $ (0.19)
=================== ===================
Diluted earnings per share $ (0.11) $ (0.19)
=================== ===================
Average shares outstanding:
Basic 26,514 24,563
=================== ===================
Diluted 26,514 24,563
=================== ===================
13
Consolidated Statements of Operations
Three Months Ended September 30, 2004
--------------------------------------------------------------------------
(In thousands, except Previously Revenue Cooperative
per share data) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 81,320 $ 501 $ (1,889) $ 79,932
Other revenues 26 26
--------------------------------------------------------------------------
Total revenues 81,346 501 (1,889) 79,958
Cost of Sales
Costs of sales 37,843 98 37,941
--------------------------------------------------------------------------
Gross profit 43,503 403 (1,889) 42,017
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 10,304 34 (1,889) 8,449
General and administrative 4,502 4,502
Depreciation 452 452
Amortization of intangible assets 1,802 1,802
--------------------------------------------------------------------------
Total operating expenses 17,060 34 (1,889) 15,205
--------------------------------------------------------------------------
Operating income 26,443 369 -- 26,812
--------------------------------------------------------------------------
Other income (expense)
Interest income 59 59
Interest expense (10,893) (10,893)
--------------------------------------------------------------------------
Total other income (expense) (10,834) -- -- (10,834)
--------------------------------------------------------------------------
Income before provision for
income taxes 15,609 369 15,978
Provision for income taxes 5,936 140 -- 6,076
--------------------------------------------------------------------------
Net income 9,673 229 -- 9,902
Cumulative preferred dividend on Senior
Preferred and Class B Preferred Units
(3,827) (3,827)
--------------------------------------------------------------------------
Net loss available to common shareholders
$ 5,846 $ 229 $ -- $ 6,075
==========================================================================
Basic earnings per share $ 0.22 $ 0.25
=================== ===================
Diluted earnings per share $ 0.22 $ 0.23
=================== ===================
Average shares outstanding:
Basic 26,512 24,615
=================== ===================
Diluted 26,512 26,512
=================== ===================
14
Consolidated Statements of Operations
Three Months Ended June 30, 2004
--------------------------------------------------------------------------
(In thousands, except Previously Revenue Cooperative
per share data) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 67,682 $ (6,142) $ (2,860) $ 58,680
Other revenues 75 75
--------------------------------------------------------------------------
Total revenues 67,757 (6,142) (2,860) 58,755
Cost of Sales
Costs of sales 36,123 (2,985) 33,138
--------------------------------------------------------------------------
Gross profit 31,634 (3,157) (2,860) 25,617
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 13,771 (126) (2,860) 10,785
General and administrative 4,921 4,921
Depreciation 486 486
Amortization of intangible assets 1,803 1,803
--------------------------------------------------------------------------
Total operating expenses 20,981 (126) (2,860) 17,995
--------------------------------------------------------------------------
Operating income 10,653 (3,031) - 7,622
--------------------------------------------------------------------------
Other income (expense)
Interest income 28 28
Interest expense (11,077) (11,077)
Loss on extinguishment of debt (7,567) (7,567)
--------------------------------------------------------------------------
Total other income (expense) (18,616) -- -- (18,616)
--------------------------------------------------------------------------
Loss before benefit for
income taxes (7,963) (3,031) (10,994)
Benefit for income taxes 2,826 1,076 3,902
--------------------------------------------------------------------------
Net loss (5,137) (1,955) -- (7,092)
Cumulative preferred dividend on Senior
Preferred and Class B Preferred Units (3,619) (3,619)
--------------------------------------------------------------------------
Net loss available to common shareholders
$ (8,756) $ (1,955) $ -- $ (10,711)
==========================================================================
Basic earnings per share $ (0.33) $ (0.44)
=================== ===================
Diluted earnings per share $ (0.33) $ (0.44)
=================== ===================
Average shares outstanding:
Basic 26,516 24,511
=================== ===================
Diluted 26,516 24,511
=================== ===================
15
Consolidated Statements of Operations
Period February 6, 2004 to March 31, 2004
(Successor)
--------------------------------------------------------------------------
(In thousands, except Previously Revenue Cooperative
per share data) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 18,807 $ (1,597) $ (388) $ 16,822
Other revenues 54 54
--------------------------------------------------------------------------
Total revenues 18,861 (1,597) (388) 16,876
Cost of Sales
Costs of sales 10,023 (672) 9,351
--------------------------------------------------------------------------
Gross profit 8,838 (925) (388) 7,525
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 1,689 (34) (388) 1,267
General and administrative 1,649 1,649
Depreciation 41 41
Amortization of intangible assets 890 890
--------------------------------------------------------------------------
Total operating expenses 4,269 (34) (388) 3,847
--------------------------------------------------------------------------
Operating income 4,569 (891) -- 3,678
--------------------------------------------------------------------------
Other income (expense)
Interest income 10 10
Interest expense (1,735) (1,735)
------------------- ----------------- ---------------- -------------------
Total other income (expense) (1,725) -- -- (1,725)
--------------------------------------------------------------------------
Income before provision for
income taxes 2,844 (891) 1,953
Provision for income taxes 1,054 (330) 724
--------------------------------------------------------------------------
Net income 1,790 (561) -- 1,229
Cumulative preferred dividend on Senior
Preferred and Class B Preferred Units
(1,390) (1,390)
--------------------------------------------------------------------------
Net loss available to common shareholders
$ 400 $ (561) $ -- $ (161)
==========================================================================
Basic earnings per share $ 0.02 $ (0.01)
=================== ===================
Diluted earnings per share $ 0.02 $ (0.01)
=================== ===================
Average shares outstanding:
Basic 26,571 24,472
=================== ===================
Diluted 26,571 24,472
=================== ===================
16
Consolidated Statements of Operations
Period April 1, 2003 to February 5, 2004
(Predecessor)
--------------------------------------------------------------------------
Previously Revenue Cooperative
(In thousands) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 68,726 $ 1,930 $ (2,587) $ 68,069
Other revenues 333 333
--------------------------------------------------------------------------
Total revenues 69,059 1,930 (2,587) 68,402
Cost of Sales
Costs of sales 26,254 601 26,855
--------------------------------------------------------------------------
Gross profit 42,805 1,329 (2,587) 41,547
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 12,601 47 (2,587) 10,061
General and administrative 12,068 12,068
Depreciation 247 247
Amortization of intangible assets 4,251 4,251
Loss on forgiveness of related party
receivable 1,404 1,404
--------------------------------------------------------------------------
Total operating expenses 30,571 47 (2,587) 28,031
--------------------------------------------------------------------------
Operating income 12,234 1,282 -- 13,516
--------------------------------------------------------------------------
Other income (expense)
Interest income 38 38
Interest expense (8,195) (8,195)
------------------- ----------------- ---------------- -------------------
Total other income (expense) (8,157) -- -- (8,157)
--------------------------------------------------------------------------
Income before provision for
income taxes 4,077 1,282 5,359
Provision for income taxes 1,684 530 2,214
--------------------------------------------------------------------------
Net income $ 2,393 $ 752 $ -- $ 3,145
==========================================================================
17
Consolidated Statements of Operations
Fiscal Year Ended March 31, 2003
(Predecessor)
--------------------------------------------------------------------------
Previously Revenue Cooperative
(In thousands) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 76,048 $ (1,567) $ (3,138) $ 71,343
Other revenues 391 391
--------------------------------------------------------------------------
Total revenues 76,439 (1,567) (3,138) 71,734
Cost of Sales
Costs of sales 27,475 (458) 27,017
--------------------------------------------------------------------------
Gross profit 48,964 (1,109) (3,138) 44,717
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 14,274 (20) (3,138) 11,116
General and administrative 12,075 12,075
Depreciation 301 301
Amortization of intangible assets 4,973 4,973
--------------------------------------------------------------------------
Total operating expenses 31,623 (20) (3,138) 28,465
--------------------------------------------------------------------------
Operating income 17,341 (1,089) -- 16,252
--------------------------------------------------------------------------
Other income (expense)
Interest income 59 59
Interest expense (9,806) (9,806)
Loss on extinguishment of debt (685) (685)
--------------------------------------------------------------------------
Total other income (expense) (10,432) -- -- (10,432)
--------------------------------------------------------------------------
Income before provision for
income taxes 6,909 (1,089) 5,820
Provision for income taxes 3,902 (615) -- 3,287
--------------------------------------------------------------------------
Income from continuing operations
3,007 (474) 2,533
Discontinued Operations
Loss from operations of discontinued
Pecos reporting unit, net of tax
benefit of $1,848 (3,385) (3,385)
Loss on disposal of Pecos reporting
unit, net of income tax benefit of
$1,233 (2,259) (2,259)
--------------------------------------------------------------------------
Loss before cumulative effect of change
in accounting principle (2,637) (474) -- (3,111)
Cumulative effect of change in
accounting principle, net of income
tax benefit of $6,567 (11,785) (11,785)
--------------------------------------------------------------------------
Net loss $ (14,422) $ (474) $ -- $ (14,896)
==========================================================================
18
Consolidated Balance Sheet
(In thousands) June 30, 2005
--------------------------------------------
As Previously
Assets Reported As Restated
-------------------- -------------------
Current assets
Cash $ 13,945 $ 13,945
Accounts receivable 32,489 26,442
Inventories 27,946 30,589
Deferred income tax assets 6,965 6,965
Prepaid expenses and other current assets 4,039 4,039
-------------------- -------------------
Total current assets 85,384 81,980
Property and equipment 2,043 2,043
Goodwill 294,544 294,731
Intangible assets 606,465 606,465
Other long-term assets 14,344 14,344
-------------------- -------------------
Total Assets $ 1,002,780 $ 999,563
==================== ===================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 18,626 $ 18,626
Accrued liabilities 10,705 9,365
Current portion of long-term debt 3,730 3,730
-------------------- -------------------
Total current liabilities 33,061 31,721
Long-term debt 490,698 490,698
Deferred income tax liabilities 89,916 89,916
-------------------- -------------------
Total liabilities 613,675 612,335
-------------------- -------------------
Shareholders' Equity
Preferred stock - $0.01 par value
Authorized - 5,000 shares
Issued and outstanding - None -- --
Common stock - $.01 par value
Authorized - 250,000 shares
Issued and outstanding - 50,000 shares 500 500
Additional paid-in capital 378,188 378,188
Treasury stock - 2 shares at cost (4) (4)
Accumulated other comprehensive loss (365) (365)
Retained earnings 10,786 8,909
-------------------- -------------------
Total shareholders' equity 389,105 387,228
-------------------- -------------------
Total Liabilities and Shareholders' Equity $ 1,002,780 $ 999,563
==================== ===================
19
Consolidated Balance Sheet
(In thousands) March 31, 2005
--------------------------------------------
As Previously
Assets Reported As Restated
-------------------- -------------------
Current assets
Cash $ 5,334 $ 5,334
Accounts receivable 43,893 35,918
Inventories 21,580 24,833
Deferred income tax assets 5,699 5,699
Prepaid expenses and other current assets 3,152 3,152
-------------------- -------------------
Total current assets 79,658 74,936
Property and equipment 2,324 2,324
Goodwill 294,544 294,731
Intangible assets 608,613 608,613
Other long-term assets 15,996 15,996
-------------------- -------------------
Total Assets $ 1,001,135 $ 996,600
==================== ===================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 21,705 $ 21,705
Accrued liabilities 13,472 11,589
Current portion of long-term debt 3,730 3,730
-------------------- -------------------
Total current liabilities 38,907 37,024
Long-term debt 491,630 491,630
Deferred income tax liabilities 84,752 85,899
-------------------- -------------------
Total liabilities 615,289 614,553
-------------------- -------------------
Shareholders' Equity
Preferred stock - $0.01 par value
Authorized - 5,000 shares
Issued and outstanding - None -- --
Common stock - $.01 par value
Authorized - 250,000 shares
Issued and outstanding - 50,000 shares 500 500
Additional paid-in capital 378,251 378,251
Treasury stock - 2 shares at cost (4) (4)
Accumulated other comprehensive income 320 320
Retained earnings 6,779 2,980
-------------------- -------------------
Total shareholders' equity 385,846 382,047
-------------------- -------------------
Total Liabilities and Shareholders' Equity $ 1,001,135 $ 996,600
==================== ===================
20
Consolidated Balance Sheet
(In thousands) March 31, 2004
--------------------------------------------
As Previously
Assets Reported As Restated
-------------------- -------------------
Current assets
Cash $ 3,393 $ 3,393
Accounts receivable 15,732 13,369
Inventories 9,748 10,660
Deferred income tax assets 1,647 1,647
Prepaid expenses and other current assets 234 234
-------------------- -------------------
Total current assets 30,754 29,303
Property and equipment 880 880
Goodwill 55,594 55,781
Intangible assets 236,611 236,611
Other long-term assets 2,783 2,783
-------------------- -------------------
Total Assets $ 326,622 $ 325,358
==================== ===================
Liabilities and Members' Equity
Current liabilities
Accounts payable $ 5,281 $ 5,281
Accrued liabilities 7,264 6,561
Current portion of long-term debt 2,000 2,000
-------------------- -------------------
Total current liabilities 14,545 13,842
Long-term debt 146,694 146,694
Deferred income tax liabilities 38,874 38,874
-------------------- -------------------
Total liabilities 200,113 199,410
-------------------- -------------------
Members' Equity
Senior Preferred Units - 23 units issued and outstanding 17,768 17,768
Class B Preferred Units - 107 units issued and outstanding 96,807 96,807
Common Units - 57,902 units issued and outstanding 5,273 5,273
Additional paid-in capital 4,871 4,871
Retained earnings 1,790 1,229
-------------------- -------------------
Total members' equity 126,509 125,948
-------------------- -------------------
Total Liabilities and Members' Equity $ 326,622 $ 325,358
==================== ===================
In addition, the consolidated statements of cash flows for all periods
noted above will be restated to reflect the change in net income or loss and
accounts receivable, inventory, accrued liabilities and deferred income taxes as
discussed above. The restatements did not affect net cash flows from operating,
investing or financing activities as previously reported.
21
3. Accounts Receivable
The components of accounts receivable consist of the following (in thousands):
September 30, 2005 March 31, 2005
------------------- -----------------
(Restated)
Accounts receivable $ 33,992 $ 36,985
Other receivables 867 835
------------------- -----------------
34,859 37,820
Less allowances for discounts, returns and
uncollectible accounts (2,307) (1,902)
------------------- -----------------
$ 32,552 $ 35,918
=================== =================
4. Inventories
Inventories consist of the following (in thousands):
September 30, 2005 March 31, 2005
------------------- -----------------
(Restated)
Packaging and raw materials $ 4,132 $ 3,587
Finished goods 28,755 21,246
------------------- -----------------
$ 32,887 $ 24,833
=================== =================
Inventories are shown net of allowances for obsolete and slow moving inventory
of $0.9 million and $1.5 million at September 30, 2005 and March 31, 2005,
respectively.
5. Property and Equipment
Property and equipment consist of the following (in thousands):
September 30, 2005 March 31, 2005
------------------- ----------------
Machinery $ 2,860 $ 2,828
Computer equipment 811 771
Furniture and fixtures 573 515
Leasehold improvements 340 173
------------------- ----------------
4,584 4,287
Accumulated depreciation (2,937) (1,963)
------------------- ----------------
$ 1,647 $ 2,324
=================== ================
22
6. Intangible Assets
Intangible assets consist of the following (in thousands):
September 30, 2005
--------------------------------------------------------------
Gross Accumulated Net
Amount Amortization Amount
------------------- ------------------- -----------------
Indefinite lived trademarks $ 522,346 $ -- $ 522,346
------------------- ------------------- -----------------
Amortizable intangible assets
Trademarks 94,900 (13,056) 81,844
Non-compete agreement 158 (32) 126
------------------- ------------------- -----------------
95,058 (13,088) 81,970
------------------- ------------------- -----------------
$ 617,404 $ (13,088) $ 604,316
=================== =================== =================
March 31, 2005
--------------------------------------------------------------
Gross Accumulated Net
Amount Amortization Amount
------------------- ------------------- -----------------
Indefinite lived trademarks $ 522,346 $ -- $ 522,346
------------------- ------------------- -----------------
Amortizable intangible assets
Trademarks 94,900 (8,775) 86,125
Non-compete agreement 158 (16) 142
------------------- ------------------- -----------------
95,058 (8,791) 86,267
------------------- ------------------- -----------------
$ 617,404 $ (8,791) $ 608,613
=================== =================== =================
At September 30, 2005, intangible assets are expected to be amortized over a
period of five to 30 years as follows (in thousands):
Twelve Months Ending September 30
2006 $ 8,592
2007 8,592
2008 8,592
2009 8,592
2010 7,168
Thereafter 40,434
-------------------
$ 81,970
===================
23
7. Long-Term Debt
Long-term debt consists of the following (in thousands): September 30, 2005 March 31, 2005
------------------- -----------------
Senior revolving credit facility ("Revolving Credit Facility"), which
expires on April 6, 2009, is available for maximum borrowings of up to
$60.0 million. The Revolving Credit Facility bears interest at the
Company's option at either the prime rate plus a variable margin or LIBOR
plus a variable margin. The variable margin ranges from 0.75% to 2.50% and
at September 30, 2005, the interest rate on the Revolving Credit Facility
was 8.0% per annum. The Company is also required to pay a variable
commitment fee on the unused portion of the Revolving Credit Facility. At
September 30, 2005, the commitment fee was 0.50% of the unused line. The
Revolving Credit Facility is collateralized by substantially all of the
Company's assets. $ -- $ --
Senior secured term loan facility, ("Tranche B Term Loan Facility") bears
interest at the Company's option at either the prime rate or LIBOR plus a
variable margin of 2.25%. At September 30, 2005, the weighted average
applicable interest rate on the Tranche B Term Loan Facility was 6.28%.
Principal payments of $933 and interest are payable quarterly. In February
2005, the Tranche B Term Loan Facility was amended to increase the amount
available thereunder by $200.0 million, all of which is available at
September 30, 2005. Current amounts outstanding under the Tranche B Term
Loan Facility mature on April 6, 2011, while amounts borrowed pursuant to
the amendment will mature on October 6, 2011. The Tranche B Term Loan
Facility is collateralized by substantially all of the Company's assets. 367,495 369,360
Senior Subordinated Notes ("Senior Notes") that bear interest at 9.25%
which is payable on April 15th and October 15th of each year. The Senior
Notes mature on April 15, 2012; however, the Company may redeem some or all
of the Senior Notes on or prior to April 15, 2008 at a redemption price
equal to 100%, plus a make-whole premium, and on or after April 15, 2008 at
redemption prices set forth in the indenture governing the Senior Notes.
The Senior Notes are unconditionally guaranteed by Prestige Brands
International, LLC ("Prestige International"), a wholly owned subsidiary,
and Prestige International's wholly owned subsidiaries (other than the
issuer). Each of these guarantees is joint and several. There are no
significant restrictions on the ability of any of the guarantors to obtain
funds from their subsidiaries. 126,000 126,000
------------------- -----------------
493,495 495,360
Current portion of long-term debt (3,730) (3,730)
------------------- -----------------
$ 489,765 $ 491,630
=================== =================
24
The Revolving Credit Facility and the Tranche B Term Loan Facility (together the
"Senior Credit Facility") contain various financial covenants, including
provisions that require the Company to maintain certain leverage ratios,
interest coverage ratios and fixed charge coverage ratios. Additionally, the
Senior Credit Facility contains provisions that restrict the Company from
undertaking specified corporate actions, such as asset dispositions,
acquisitions, dividend payments, changes of control, incurrence of indebtedness,
creation of liens and transactions with affiliates. The Company was in
compliance with its financial and restrictive covenants under the Senior Credit
Facility at September 30, 2005.
Future principal payments required in accordance with the terms of the Senior
Credit Facility and the Senior Notes are as follows (in thousands):
Twelve Months Ending September 30
2006 $ 3,730
2007 3,730
2008 3,730
2009 3,730
2010 3,730
Thereafter 474,845
-------------------
$ 493,495
===================
The Company entered into a 5% interest rate cap agreement with a financial
institution to mitigate the impact of changing interest rates. The agreement
provides for a notional amount of $20.0 million and terminates in June 2006. The
Company also entered into interest rate cap agreements with another financial
institution that became effective on August 30, 2005, with a total notional
amount of $180.0 million and cap rates ranging from 3.25% to 3.75%. The
agreements terminate on May 30, 2006, 2007 and 2008 as to $50.0 million, $80.0
million and $50.0 million, respectively. The Company is accounting for the
interest rate cap agreements as cash flow hedges. The fair value of the interest
rate cap agreements was $2.6 million at September 30, 2005.
8. Shareholders' Equity
In connection with the Company's IPO, the Board of Directors adopted the 2005
Long-Term Equity Incentive Plan ("the Plan"). The Plan provides for grants of
stock options, restricted stock, restricted stock units, deferred stock units
and other equity-based awards. Directors, officers and other employees of the
Company and its subsidiaries, as well as others performing services for the
Company, are eligible for grants under the Plan. At September 30, 2005, there
were 4.9 million shares available for issuance under the Plan.
Pursuant to the provisions of the Plan, on July 29, 2005, each of the Company's
four independent members of the Board of Directors received an award of 6,222
shares of common stock in connection with Company's directors' compensation
arrangements. Of such amount, 1,778 shares represent a one-time grant of
unrestricted shares, while the remaining 4,444 shares represent restricted
shares that vest over a two year period.
On August 4, 2005, Frank Palantoni joined the Company as President and Chief
Operating Officer. In connection therewith, the Board of Directors granted Mr.
Palantoni 30,888 shares of restricted common stock and options to purchase an
additional 61,776 shares of common stock at an exercise price of $12.95 per
share. The options vest over a period of five years while the restricted shares
will vest contingent upon the attainment of certain performance-based
benchmarks.
25
In September 2005, the Company repurchased 13,000 shares of restricted common
stock from former employees pursuant to the provisions of the various employee
stock purchase agreements. The average purchase price of the shares was $1.70
per share.
9. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands):
Three Months Ended Six Months Ended
September 30 September 30
-------------------------------------- -----------------------------------
2005 2004 2005 2004
-------------------------------------- -----------------------------------
(Restated) (Restated)
Numerator
Net income (loss) available to member
and common shareholders
$ 7,374 $ 6,075 $ 13,303 $ (4,635)
====================================== ===================================
Denominator
Denominator for basic earnings per
share - weighted average shares
48,791 24,615 48,757 24,563
Dilutive effect of unvested restricted
common stock issued to employee and
directors 1,158 1,897 1,175 --
-------------------------------------- -----------------------------------
Denominator for diluted earnings per
share 49,949 26,512 49,932 24,563
====================================== ===================================
Earnings per Common Share:
Basic $ 0.15 $ 0.25 $ 0.27 $ (0.19)
====================================== ===================================
Diluted $ 0.15 $ 0.23 $ 0.27 $ (0.19)
=================== ================== ================ ==================
Outstanding employee stock options to purchase an aggregate of 61,776 shares of
common stock at September 30, 2005 were not included in the computation of
diluted earnings per share because their exercise price was greater than the
average market price of the common stock, and therefore, would be antidilutive.
At September 30, 2005, 1.1 million restricted shares issued to management and
employees are unvested.
10. Related Party Transactions
The Company had entered in an agreement with an affiliate of GTCR Golder Rauner
II, LLC ("GTCR"), a private equity firm and an investor in the Company, whereby
the GTCR affiliate was to provide management and advisory services to the
Company for an aggregate annual compensation of $4.0 million. The agreement was
terminated in February 2005. During the three month and six month periods ended
September 30, 2004, the Company paid the affiliate of GTCR a management fee of
$0.9 million and $1.9 million, respectively.
26
11. Income Taxes
Income taxes are recorded in the Company's quarterly financial statements
based on the Company's estimated annual effective income tax rate. The effective
rates used in the calculation of income taxes were 39.3% and 38.0% for the three
month periods ended September 30, 2005 and 2004, respectively. For the six month
periods ended September 30, 2005 and 2004, the effective tax rates were 39.3%
and 43.6%, respectively. The increase in the effective tax rate for the three
month period ended September 30, 2005 results from the increase in the Company's
graduated federal income tax rate from 34% to 35%, due to the formation of the
Company in February 2005 and the election to file a consolidated federal income
tax return. The difference in the effective tax rates for the six month periods
ended September 30, 2005 and 2004 results primarily from the computation of
taxes on a separate company basis during the six month period ended September
30, 2004.
12. Commitments and Contingencies
In July 2002, the Company entered into a ten year manufacturing and supply
agreement with an unrelated company. Pursuant to this agreement, the Company
agreed to purchase certain minimum quantities of product over the initial three
years of the agreement or to pay liquidated damages of up to $360,000. The
Company had recorded a liability of $308,000 at March 31, 2005, which
represented its estimate of the probable liquidated damages. Such estimate was
based on historical and expected purchases during the initial three years of the
agreement. The Company settled this obligation in August 2005 for an amount
slightly in excess of its recorded liability.
In June 2003, Dr. Jason Theodosakis filed a lawsuit, Theodosakis v. Walgreens,
et al., in Federal District Court in Arizona, alleging that two of the Company's
subsidiaries, Medtech Products and Pecos Pharmaceutical, as well as other
unrelated parties, infringed the trade dress of two of his published books.
Specifically, Dr. Theodosakis published "The Arthritis Cure" and "Maximizing the
Arthritis Cure" regarding the use of dietary supplements to treat arthritis
patients. Dr. Theodosakis alleged that his books have a distinctive trade dress,
or cover layout, design, color and typeface, and those products that the
defendants sold under the ARTHx trademarks infringed the books' trade dress and
constituted unfair competition and false designation of origin. Additionally,
Dr. Theodosakis alleged that the defendants made false endorsements of the
products by referencing his books on the product packaging and that the use of
his name, books and trade dress invaded his right to publicity. The Company sold
the ARTHx trademarks, goodwill and inventory to a third party, Contract
Pharmacal Corporation, in March 2003. On January 12, 2005, the court granted the
Company's motion for summary judgment and dismissed all claims against Pecos and
Medtech. The plaintiff has filed an appeal in the U.S. Court of Appeals which is
pending.
On January 3, 2005, the Company was served with process by its former lead
counsel in the Theodosakis litigation seeking $679,000 plus interest. The case
was filed in the Supreme Court of New York and is styled as Dickstein Shapiro et
al v. Medtech Products, Inc. In February 2005, the plaintiffs filed an amended
complaint naming the Pecos Pharmaceutical Company as defendant. The Company has
answered and filed a counterclaim against Dickstein and also filed a third party
complaint against the Lexington Insurance Company, the Company's product
liability carrier. The Company believes that if there is any obligation to the
Dickstein firm relating to this matter, it is an obligation of Lexington and not
the Company.
On May 9, 2005, the Company was served with a complaint in a class action
lawsuit filed in Essex County, Massachusetts, styled as Dawn Thompson v. Wyeth,
Inc. relating to the Company's Little Remedies pediatric cough products. The
Company is one of several corporate defendants, all of whom market
over-the-counter cough syrup products for pediatric use. The complaint alleges
that the ingredient dextromethorphan is no more effective than a placebo. There
is no allegation of physical injury caused by the product or the ingredient. In
June 2005, the Company was served in a second class action complaint involving
dextromethorphan. The second case, styled Tina Yescavage v. Wyeth was filed in
Lee County Florida and similarly involves multiple corporate defendants. Both
the Thompson and Yescavage suits were dismissed in September 2005.
27
The Company and certain of its officers and directors are defendants in a
consolidated putative securities class action lawsuit filed in the United States
District Court for the Southern District of New York (he "Consolidated Action").
The first of the six consolidated cases was filed on August 3, 2005. Plaintiffs
purport to represent a class of shareholders of the Company who purchased shares
between February 9, 2005 through July 27, 2005. Plaintiffs also name as
defendants the underwriters in the Company's initial public offering and a
private equity fund that was a selling shareholder in the offering.
The various complaints on file in the Consolidated Action collectively
include claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933
and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiff's
generally allege that the Company issued a series of materially false and
misleading statements in connection with its initial public offering and
thereafter by failing to disclose that demand for certain of the Company's
products was declining and that the Company was planning to withdraw several
products from the market. Plaintiffs seek an unspecified amount of damages. The
district court has appointed a Lead Plaintiff and ordered it to file a
consolidated complaint by December 5, 2005. The Company's management believes
the allegations to be unfounded, will vigorously pursue its defenses, and cannot
reasonably estimate the potential range of loss, if any.
On September 6, 2005, another putative securities class action lawsuit
substantially similar to the Consolidated Action was filed against the same
defendants in the Circuit Court of Cook County, Illinois (the "Chicago Action").
In light of the first-filed Consolidated Action, proceedings in the Chicago
Action have been stayed until a ruling on defendants' anticipated motions to
dismiss the consolidated complaint in the Consolidated Action. The Company's
management believes the allegations to be unfounded and will vigorously pursue
its defenses, and cannot reasonably estimate the potential range of loss, if
any.
The Company is also involved from time to time in routine legal matters and
other claims incidental to its business. When it appears probable in
management's judgment that the Company will incur monetary damages or other
costs in connection with such claims and proceedings, and such costs can be
reasonably estimated, liabilities are recorded in the financial statements and
charges are recorded against earnings. The Company believes the resolution of
such routine matters and other incidental claims, taking into account reserves
and insurance, will not have a material adverse effect on its financial
condition or results of operation.
13. Concentrations of Risk
The Company's sales are concentrated in the areas of over-the-counter
pharmaceutical products, personal care products and household cleaning products.
The Company sells its products to mass merchandisers, food and drug accounts,
and dollar and club stores. During the three and six month periods ended
September 30, 2005, approximately 65.0% and 63.4%, respectively, of the
Company's total sales were derived from its four major brands while during the
three and six month periods ended September 30, 2004, approximately 66.9% and
64.5%, respectively, of the Company's total sales were derived from these four
brands. During the three and six month periods ended September 30, 2005,
approximately 22.3% and 23.2%, respectively, of the Company's net sales were
made to one customer, while during the three and six month periods ended
September 30, 2004, 26.8% and 26.3% of net sales were to this customer. At
September 30, 2005, approximately 19.6% of accounts receivable were owed by one
customer.
The Company manages product distribution in the continental United States
through a main distribution center in St. Louis, Missouri. A serious disruption,
such as a flood or fire, to the main distribution center could damage the
Company's inventory and could materially impair the Company's ability to
distribute its products to customers in a timely manner or at a reasonable cost.
The Company could incur significantly higher costs and experience longer lead
times associated with the distribution of its products to its customers during
the time that it takes the Company to reopen or replace its distribution center.
As a result, any such disruption could have a material adverse effect on the
Company's sales and profitability.
28
14. Business Segments
Segment information has been prepared in accordance with FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company's operating segments are based on its product lines and consist of (i)
Over-the-Counter Drugs, (ii) Personal Care and (iii) Household Cleaning.
Accordingly, within each reportable segment are operations that have similar
economic characteristics, including the nature of their products, production
process, type of customer and method of distribution.
There were no inter-segment sales or transfers during the periods ended
September 30, 2005 and 2004. The Company evaluates the performance of its
product lines and allocates resources to them based primarily on contribution
margin. The table below summarizes information about reportable segments (in
thousands).
Quarter Ended September 30, 2005
------------------------------------------------------------------------------
Over-the-Counter Personal Household
Drug Care Cleaning Consolidated
---------------- ---------------- ------------------ ----------------
Net sales $ 40,759 $ 7,332 $ 25,229 $ 73,320
Other revenues 25 25
---------------- ---------------- ------------------ ----------------
Total revenues 40,759 7,332 25,254 73,345
Cost of sales 15,558 4,456 15,535 35,549
---------------- ---------------- ------------------ ----------------
Gross profit 25,201 2,876 9,719 37,796
Advertising and promotion 7,127 1,350 1,740 10,217
---------------- ---------------- ------------------ ----------------
Contribution margin $ 18,074 $ 1,526 $ 7,979 27,579
================ ================ ==================
Other operating expenses 6,752
----------------
Operating income 20,827
Other income (expense) (8,671)
Provision for income taxes (4,782)
----------------
Net income $ 7,374
================
29
Six Months Ended September 30, 2005
------------------------------------------------------------------------------
Over-the-Counter Personal Household
Drug Care Cleaning Consolidated
---------------- ---------------- ------------------ ----------------
Net sales $ 74,148 $ 14,588 $ 48,012 $ 136,748
Other revenues 50 50
---------------- ---------------- ------------------ ----------------
Total revenues 74,148 14,588 48,062 136,798
Cost of sales 27,223 8,353 28,922 64,498
---------------- ---------------- ------------------ ----------------
Gross profit 46,925 6,235 19,140 72,300
Advertising and promotion 13,266 2,146 3,510 18,922
---------------- ---------------- ------------------ ----------------
Contribution margin $ 33,659 $ 4,089 $ 15,630 53,378
================ ================ ==================
Other operating expenses 14,294
----------------
Operating income 39,084
Other income (expense) (17,181)
Provision for income taxes (8,600)
----------------
Net income $ 13,303
================
Quarter Ended September 30, 2004
(Restated)
------------------------------------------------------------------------------
Over-the-Counter Personal Household
Drug Care Cleaning Consolidated
---------------- ---------------- ------------------ ----------------
Net sales $ 42,707 $ 9,678 $ 27,547 $ 79,932
Other revenues 26 26
---------------- ---------------- ------------------ ----------------
Total revenues 42,707 9,678 27,573 79,958
Cost of sales 16,365 4,888 16,688 37,941
---------------- ---------------- ------------------ ----------------
Gross profit 26,342 4,790 10,885 42,017
Advertising and promotion 5,798 1,500 1,151 8,449
---------------- ---------------- ------------------ ----------------
Contribution margin $ 20,544 $ 3,290 $ 9,734 33,568
================ ================ ==================
Other operating expenses 6,756
----------------
Operating income 26,812
Other income (expense) (10,834)
Provision for income taxes (6,076)
----------------
Net Income $ 9,902
================
30
Six Months Ended September 30, 2004
(Restated)
------------------------------------------------------------------------------
Over-the-Counter Personal Household
Drug Care Cleaning Consolidated
---------------- ---------------- ------------------ ----------------
Net sales $ 72,102 $ 16,982 $ 49,528 $ 138,612
Other revenues 101 101
---------------- ---------------- ------------------ ----------------
Total revenues 72,102 16,982 49,629 138,713
Cost of sales 29,530 9,119 32,430 71,079
---------------- ---------------- ------------------ ----------------
Gross profit 42,572 7,863 17,199 67,634
Advertising and promotion 12,351 3,417 3,466 19,234
---------------- ---------------- ------------------ ----------------
Contribution margin $ 30,221 $ 4,446 $ 13,733 48,400
================ ================ ==================
Other operating expenses 13,966
----------------
Operating income 34,434
Other income (expense) (29,450)
Provision for income taxes (2,173)
----------------
Net income $ 2,811
================
During the six month periods ended September 2005 and 2004, 97.9% and 97.8%,
respectively, of sales were made to customers in the United States and Canada.
No individual geographical area accounted for more than 10% of net sales in any
of the periods presented. At September 30, 2005 and 2004, all of the Company's
long-term assets were located in the United States of America and have not been
allocated between segments.
16. Subsequent Events
Effective October 1, 2005, the Company authorized the issuance of 123,377 shares
of restricted stock with a fair market value of $12.32 per share, the closing
price of the Company's common stock on September 30, 2005, to employees. In the
event that an employee terminates his or her employment with the Company prior
to October 1, 2008, the vesting date, the shares will be forfeited.
On November 2, 2005, the Company completed the previously announced acquisition
of the Chore Boy line of household cleaning products from Reckett Beckiser, Inc.
and Reckett Benckiser (Canada) for aggregate consideration of $22.3 million.
On November 9, 2005, the Company completed the acquisition of all of the
outstanding membership interests of Dental Concepts, LLC, a marketer of
therapeutic oral care products. The purchase price of $30.6 million was funded
through the Company's existing bank lines of credit.
31
Prestige Brands International, LLC
Consolidated Balance Sheets
(Unaudited)
(In thousands)
September 30, 2005 March 31, 2005
--------------------- ----------------------
Assets (Restated)
Current assets
Cash $ 27,585 $ 5,334
Accounts receivable 32,552 35,918
Inventories 32,887 24,833
Deferred income tax assets 6,682 5,699
Prepaid expenses and other current assets 3,256 3,152
--------------------- ----------------------
Total current assets 102,962 74,936
Property and equipment 1,647 2,324
Goodwill 294,731 294,731
Intangible assets 604,316 608,613
Other long-term assets 14,718 15,996
--------------------- ----------------------
Total Assets $ 1,018,374 $ 996,600
===================== ======================
Liabilities and Members' Equity
Current liabilities
Accounts payable $ 22,725 $ 21,705
Accrued liabilities 12,110 11,589
Current portion of long-term debt 3,730 3,730
--------------------- ----------------------
Total current liabilities 38,565 37,024
Long-term debt 489,765 491,630
Deferred income tax liabilities 94,759 85,899
--------------------- ----------------------
Total liabilities 623,089 614,553
--------------------- ----------------------
Commitments and Contingencies - Note 11
Members' Equity
Contributed capital - Prestige Holdings 370,303 370,277
Accumulated other comprehensive income 229 320
Retained earnings 24,753 11,450
--------------------- ----------------------
Total members' equity 395,285 382,047
--------------------- ----------------------
Total liabilities and members' equity $ 1,018,374 $ 996,600
===================== ======================
See accompanying notes.
32
Prestige Brands International, LLC
Consolidated Statements of Operations
(Unaudited)
Three Months Six Months
Ended September 30 Ended September 30
-------------------------------------- ---------------------------------------
(In thousands) 2005 2004 2005 2004
------------------- ---------------- ----------------- -------------------
(Restated) (Restated)
Revenues
Net sales $ 73,320 $ 79,932 $ 136,748 $ 138,612
Other revenues 25 26 50 101
------------------- ---------------- ----------------- -------------------
Total revenues 73,345 79,958 136,798 138,713
------------------- ---------------- ----------------- -------------------
Cost of Sales
Costs of sales 35,549 37,941 64,498 71,079
------------------- ---------------- ----------------- -------------------
Gross profit 37,796 42,017 72,300 67,634
------------------- ---------------- ----------------- -------------------
Operating Expenses
Advertising and promotion 10,217 8,449 18,922 19,234
General and administrative 4,117 4,502 9,028 9,423
Depreciation 487 452 970 938
Amortization of intangible assets 2,148 1,802 4,296 3,605
------------------- ---------------- ----------------- -------------------
Total operating expenses 16,969 15,205 33,216 33,200
------------------- ---------------- ----------------- -------------------
Operating income 20,827 26,812 39,084 34,434
------------------- ---------------- ----------------- -------------------
Other income (expense)
Interest income 226 59 307 87
Interest expense (8,897) (10,893) (17,488) (21,970)
Loss on extinguishment of debt -- -- -- (7,567)
------------------- ---------------- ----------------- -------------------
Total other income (expense) (8,671) (10,834) (17,181) (29,450)
------------------- ---------------- ----------------- -------------------
Income before provision for
income taxes 12,156 15,978 21,903 4,984
Provision for income taxes 4,782 6,076 8,600 2,173
------------------- ---------------- ----------------- -------------------
Net income $ 7,374 $ 9,902 $ 13,303 $ 2,811
=================== ================ ================= ===================
See accompanying notes.
33
Prestige Brands International, LLC
Consolidated Statement of Changes in Members' Equity
and Comprehensive Income
Six Months Ended September 30, 2005
(Unaudited)
Contributed Accumulated
Capital Other
Prestige Comprehensive Retained
Holdings Income Earnings Totals
-------------- ---------------- ------------- ---------------
(In thousands)
Balances - March 31, 2005 (Restated) $ 370,277 $ 320 $ 11,450 $ 382,047
Additional costs associated with capital
contributions from Prestige Brands Holdings (63) (63)
Capital contributions from Prestige Brands
Holdings in connection with compensation
of officers and directors 110 110
Repurchase of equity units (21) (21)
Components of comprehensive income
Net income for the period 13,303 13,303
Unrealized loss on interest rate cap, net
of tax benefit of $116 (91) (91)
---------------
Total Comprehensive Income 13,212
-------------- ---------------- ------------- ---------------
Balances - September 30, 2005 $ 370,303 $ 229 $ 24,753 $ 395,285
============== ================ ============= ===============
See accompanying notes.
34
Prestige Brands International, LLC
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) Six Months Ended September 30
----------------------------------------
2005 2004
------------------ ------------------
Operating Activities (Restated)
Net income $ 13,303 $ 2,811
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,271 4,543
Deferred income taxes 7,961 8,219
Amortization of deferred financing costs 1,136 1,502
Stock-based compensation 110 --
Loss on extinguishment of debt -- 7,567
Changes in operating assets and liabilities, net of
effects of purchases of businesses
Accounts receivable 3,366 (6,629)
Inventories (8,054) 5,268
Prepaid expenses and other assets (104) 442
Accounts payable 1,020 3,127
Account payable - related parties -- 1,000
Accrued expenses 521 (1,445)
------------------ ------------------
Net cash provided by operating activities 24,530 26,405
------------------ ------------------
Investing Activities
Purchase of equipment (297) (143)
Purchase of business, net of cash acquired -- (373,250)
------------------ ------------------
Net cash used for investing activities (297) (373,393)
------------------ ------------------
Financing Activities
Proceeds from the issuance of notes -- 668,512
Payment of deferred financing costs (33) (22,922)
Repayment of notes (1,865) (331,673)
Proceeds from capital contributions -- 58,487
Repayment of capital contributions (21) --
Additional costs associated with initial public offering (63) --
------------------ ------------------
Net cash provided by (used for) financing activities (1,982) 372,404
------------------ ------------------
Increase in cash 22,251 25,416
Cash - beginning of period 5,334 3,393
------------------ ------------------
Cash - end of period $ 27,585 $ 28,809
================== ==================
Supplemental Cash Flow Information
Fair value of assets acquired, net of cash acquired $ -- $ 602,774
Fair value of liabilities assumed -- (229,432)
Purchase price funded with non-cash contributions -- (92)
------------------ ------------------
Cash paid to purchase business $ -- $ 373,250
================== ==================
Interest paid $ 16,408 $ 20,468
================== ==================
Income taxes paid $ 565 $ 388
================== ==================
See accompanying notes.
35
Prestige Brands International, LLC
Notes to Consolidated Financial Statements
1. Business and Basis of Presentation
Nature of Business
Prestige Brands International, LLC, ("Prestige International" or the "Company")
is an indirect wholly owned subsidiary of Prestige Brands Holdings, Inc.
("Prestige Holdings") and the indirect parent company of Prestige Brands, Inc.,
the issuer of the 9.25% senior subordinated notes due 2012 ("Senior Notes") and
the borrower under the senior credit facility consisting of a Revolving Credit
Facility, Tranche B Term Loan Facility and a Tranche C Term Loan Facility
(together the "Senior Credit Facility"). Prestige International is a holding
company with no assets or operations and is also the parent guarantor of the
Senior Notes and Senior Credit Facility. Prestige Holdings and its subsidiaries
are engaged in the marketing, sales and distribution of over-the-counter drug,
personal care and household cleaning brands to mass merchandisers, drug stores,
supermarkets and club stores primarily in the United States.
Basis of Presentation
The unaudited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the financial statements
include all adjustments, consisting only of normal recurring adjustments that
are considered necessary for a fair presentation of the Company's financial
position, results of operations and cash flows for the interim periods.
Operating results for the three and six month periods ended September 30, 2005
are not necessarily indicative of results that may be expected for the year
ending March 31, 2006. This financial information should be read in conjunction
with the Company's financial statements and notes thereto included in the
Company's Annual Report on Form 10-K/A for the year ended March 31, 2005. The
Company will file an amended Form 10-K/A to reflect the restatement of the prior
period financial statements (see Note 2) as soon as it is practicable.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Although these estimates are based on the
Company's knowledge of current events and actions that the Company may undertake
in the future, actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all short-term deposits and investments with original
maturities of three months or less to be cash equivalents. Substantially all of
the Company's cash is held by one bank located in Wyoming. The Company does not
believe that, as a result of this concentration, it is subject to any unusual
financial risk beyond the normal risk associated with commercial banking
relationships.
Accounts Receivable
The Company extends non-interest bearing trade credit to its customers in the
ordinary course of business. To minimize credit risk, ongoing evaluations of
customers' financial condition are performed; however, collateral is not
required. The Company maintains an allowance for doubtful accounts based on its
historical collections experience, as well as its evaluation of current and
expected conditions and trends affecting its customers.
36
Sales Returns
The Company must make estimates of potential future product returns related to
current period sales. In order to do this, the Company analyzes historical
returns, current economic trends, changes in customer demand and acceptance of
the Company's products when evaluating the adequacy of the Company's allowance
for returns in any accounting period. If actual returns are greater than those
estimated by management, the Company's financial statements in future periods
may be adversely affected.
Inventories
Inventories are stated at the lower of cost or fair value where cost is
determined by using the first-in, first-out method. The Company provides an
allowance for slow moving and obsolete inventory.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method based on the following estimated useful lives:
Years
--------------
Machinery 5
Computer equipment 3
Furniture and fixtures 7
Expenditures for maintenance and repairs are charged to expense as incurred.
When an asset is sold or otherwise disposed of, the cost and associated
accumulated depreciation are removed from the accounts and the resulting gain or
loss is recognized in the consolidated statement of operations.
Property and equipment are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. An impairment loss is recognized if the carrying amount of the
asset exceeds its fair value.
Goodwill
The excess of the purchase price over the fair market value of assets acquired
and liabilities assumed in acquisition transactions is classified as goodwill.
In accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("Statement") No. 142, "Goodwill and Other
Intangible Assets," the Company does not amortize goodwill, but performs
impairment tests of the carrying value at least annually.
Intangible Assets
Intangible assets are stated at the lesser of cost or fair value less
accumulated amortization. For intangible assets with finite lives, amortization
is computed on the straight-line method over estimated useful lives ranging from
five to 30 years.
Indefinite lived intangible assets are tested for impairment at least annually,
while intangible assets with finite lives are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. An impairment loss is recognized if the carrying
amount of the asset exceeds its fair value.
Deferred Financing Costs
The Company has incurred debt issuance costs in connection with its long-term
debt. These costs are capitalized as deferred financing costs and amortized
using the effective interest method over the term of the related debt.
Revenue Recognition
Revenues are recognized when the following revenue recognition criteria are met:
(1) persuasive evidence of an arrangement exists; (2) there is a fixed or
determinable price; (3) the product has been shipped and the customer takes
ownership and assumes risk of loss; and (4) collectibility of the resulting
receivable is reasonably assured. The Company has determined that the risk of
loss generally occurs when product is received by the customer and, accordingly,
recognizes revenue at that time. Provision is made for estimated customer
37
discounts and returns at the time of sale based on the Company's historical
experience.
The Company frequently participates in the promotional programs of its
customers, as is customary in this industry. The ultimate cost of these
promotional programs varies based on the actual number of units sold during a
finite period of time. These programs may include coupons, scan downs, temporary
price reductions or other price guarantee vehicles. The Company estimates the
cost of such promotional programs at their inception based on historical
experience and current market conditions and reduces sales by such estimates. At
the completion of the promotional program, the estimated amounts are adjusted to
actual results.
Costs of Sales
Costs of sales include product costs, warehousing costs, inbound and outbound
shipping costs, and handling and storage costs. Shipping, warehousing and
handling costs were $6.5 million and $6.4 million for the three month periods
ended September 30, 2005 and 2004, respectively, and $12.0 million and $11.4
million for the six month periods ended September 30, 2005 and 2004,
respectively.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. Slotting fees
associated with products are recognized as a reduction of sales. Under slotting
arrangements, the retailers allow the Company's products to be placed on the
stores' shelves in exchange for such fees. Direct reimbursements of advertising
costs are reflected as a reduction of advertising costs in the period earned.
Stock-based Compensation
During the three month period ended September 30, 2005, the Company adopted
FASB, Statement No. 123(R), "Share-Based Payment" ("Statement No. 123(R)") with
the initial grants of Prestige Brands Holdings restricted stock and options to
purchase common stock to employees and directors in accordance with the
provisions of the Prestige Brands Holdings' Long-Term Equity Incentive Plan
("the Plan"). Statement No. 123(R) requires the Company to measure the cost of
services to be rendered based on the grant-date fair value of the equity award.
Compensation expense is to be recognized over the period which an employee is
required to provide service in exchange for the award, generally referred to as
the vesting period. The Company recorded a non-cash charge of $110,000 during
the three month period ended September 30, 2005.
Income Taxes
Income taxes are recorded in accordance with the provisions of FASB Statement
No. 109, "Accounting for Income Taxes" ("Statement No. 109"). Pursuant to
Statement No. 109, deferred tax assets and liabilities are determined
based on the differences between the financial reporting and tax
bases of assets and liabilities using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. A valuation allowance
is established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Derivative Instruments
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("Statement No. 133"), requires companies to recognize derivative
instruments as either assets or liabilities in the balance sheet at fair value.
The accounting for changes in the fair value of a derivative instrument depends
on whether it has been designated and qualifies as part of a hedging
relationship and further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging instruments, a
company must designate the hedging instrument, based upon the exposure being
hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment
in an international operation.
The Company has designated its derivative financial instruments as cash flow
hedges because they hedge exposure to variability in expected future cash flows
that are attributable to interest rate risk. For these hedges, the effective
portion of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income (loss) and reclassified into earnings in
38
the same line item associated with the forecasted transaction in the same period
or periods during which the hedged transaction affects earnings. Any ineffective
portion of the gain or loss on the derivative instruments is recorded in results
of operations immediately.
Recently Issued Accounting Standards
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47") which clarifies guidance
provided by Statement No. 143, "Accounting for Asset Retirement Obligations."
FIN 47 is effective for the Company no later than March 31, 2006. The adoption
of FIN 47 is not expected to have a significant impact on the Company's
financial position, results of operations or cash flows.
In May 2005, the FASB issued Statement of Financial Accounting Standards
No. 154, "Accounting Changes and Error Corrections" ("Statement No. 154") which
replaces Accounting Principles Board Opinion No. 20, "Accounting Changes" ("APB
Opinion No. 20") and FASB Statement No. 3, "Reporting Accounting Changes in
Interim Financial Statements." Statement No. 154 requires that voluntary changes
in accounting principle be applied retrospectively to the balances of assets and
liabilities as of the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustments be made to the
opening balance of retained earnings. APB Opinion No. 20 had required that most
voluntary changes in accounting principle be recognized by including in net
income the cumulative effect of changing to the new principle. Statement No. 154
is effective for all accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
2. Restatement of Financial Statements
On November 15, 2005, Prestige Holdings filed a Current Report on Form 8-K with
the Securities and Exchange Commission ("SEC") in which it announced that it was
restating previously reported financial results for the fiscal years ended March
31, 2003, 2004 and 2005, and the quarterly data for the years ended March 31,
2005 and 2004 included in the Company's Annual Report on Form 10-K/A for the
year ended March 31, 2005 and the financial statements for the quarters ended
June 30, 2005 and 2004 included in the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2005. The restatement of financial
statements by Prestige Holdings has also resulted in a restatement of the
financial statements previously issued by the Company.
As a result of a review of certain accounting practices performed in
conjunction with the Company's assessment of internal controls over financial
reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and the
preparation of financial statements for the quarter ended September 30, 2005,
the Company determined it erroneously applied generally accepted accounting
principles as they relate to the recognition of revenue, the classification of
certain trade promotion allowances, and the computation of deferred income
taxes.
With respect to revenue recognition, Staff Accounting Bulletin No. 104 sets
forth the criteria for revenue recognition, one of which is that risk of loss
has passed to the customer. The Company, consistent with its published pricing
and shipping terms, has historically recognized revenue upon shipment of product
to the customer. Upon closer examination of its shipping practices and terms,
the Company determined that it often was unclear when, from a legal standpoint,
risk of loss of its products passed to its customers. Accordingly, the Company
has concluded that revenue should not be recognized until product is received by
its customers (referred to as "FOB destination point"), unless the risk of loss
transfers to the customer at the point of shipment. The Company will restate its
previously issued financial statements to correct this erroneous application of
generally accepted accounting principles. The effects of these adjustments for
each fiscal period are reflected in the schedules that follow. These adjustments
had no impact on net cash flows provided by or used in operating activities.
With respect to the classification of trade promotions and allowances, Emerging
Issues Task Force Issue 01-09 sets forth the criteria for classifying such
promotions and allowances as an expense or a reduction of revenue. Upon review,
the Company determined that it had incorrectly classified certain promotion and
39
allowance amounts as expense rather than as a reduction of revenue. The
Company's restated financial statements will correct these misclassifications.
These adjustments do not affect the balance sheet, net income, operating income
or cash flows from operations. The effects of these adjustments for each fiscal
period are reflected in the schedules that follow.
With respect to the provision for income taxes and related deferred taxes,
Statement of Financial Accounting Standards No. 109 sets forth the criteria by
which such amounts are to be recognized. During the preparation of its financial
statements for the quarter ended September 30, 2005, the Company determined that
the increase in deferred income taxes related to the increase in graduated
federal income tax rates from 34% to 35% should have been recognized in the
period for which it filed its first consolidated federal income tax return. The
Company's restated financial statements will recognize this increase in the
quarter and year ended March 31, 2005. Previously, the Company had recorded this
increase in the three month period ended June 30, 2005. The effect of this
adjustment for each fiscal period is reflected in the schedules that follow.
Consolidated Statements of Operations
Three Months Ended June 30, 2005
-----------------------------------------------------------------------------------------
(In thousands, except Previously Revenue Cooperative Income
per share data) Reported Recognition Advertising Taxes As Restated
-----------------------------------------------------------------------------------------
Revenues
Net sales $ 63,530 $ 1,928 $ (2,030) $ -- $ 63,428
Other revenues 25 25
-----------------------------------------------------------------------------------------
Total revenues 63,555 1,928 (2,030) -- 63,453
Cost of Sales
Costs of sales 28,339 610 28,949
-----------------------------------------------------------------------------------------
Gross profit 35,216 1,318 (2,030) -- 34,504
-----------------------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 10,714 21 (2,030) 8,705
General and administrative 4,911 4,911
Depreciation 483 483
Amortization of intangible assets 2,148 2,148
-----------------------------------------------------------------------------------------
Total operating expenses 18,256 21 (2,030) -- 16,247
-----------------------------------------------------------------------------------------
Operating income 16,960 1,297 -- -- 18,257
-----------------------------------------------------------------------------------------
Other income (expense)
Interest income 81 81
Interest expense (8,591) (8,591)
-----------------------------------------------------------------------------------------
Total other income (expense) (8,510) -- -- -- (8,510)
-----------------------------------------------------------------------------------------
Income before provision for
income taxes 8,450 1,297 -- -- 9,747
Provision for income taxes 4,443 522 (1,147) 3,818
-----------------------------------------------------------------------------------------
Net income $ 4,007 $ 775 $ -- $ 1,147 $ 5,929
=========================================================================================
40
Consolidated Statements of Operations
Fiscal Year Ended March 31, 2005
-----------------------------------------------------------------------------------------
(In thousands, except Previously Revenue Cooperative Income
per share data) Reported Recognition Advertising Taxes As Restated
-----------------------------------------------------------------------------------------
Revenues
Net sales $ 303,167 $ (5,611) $ (8,638) $ -- $ 288,918
Other revenues 151 151
-----------------------------------------------------------------------------------------
Total revenues 303,318 (5,611) (8,638) -- 289,069
Cost of Sales
Costs of sales 141,348 (2,339) 139,009
-----------------------------------------------------------------------------------------
Gross profit 161,970 (3,272) (8,638) -- 150,060
-----------------------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 38,402 (67) (8,638) 29,697
General and administrative 20,198 20,198
Depreciation 1,899 1,899
Amortization of intangible assets 7,901 7,901
-----------------------------------------------------------------------------------------
Total operating expenses 68,400 (67) (8,638) -- 59,695
-----------------------------------------------------------------------------------------
Operating income 93,570 (3,205) -- -- 90,365
-----------------------------------------------------------------------------------------
Other income (expense)
Interest income 371 371
Interest expense (45,097) (45,097)
Loss on extinguishment of debt (26,863) (26,863)
-----------------------------------------------------------------------------------------
Total other income (expense) (71,589) -- -- -- (71,589)
-----------------------------------------------------------------------------------------
Income before provision for
income taxes 21,981 (3,205) -- -- 18,776
Provision for income taxes 8,522 (1,113) -- 1,147 8,556
-----------------------------------------------------------------------------------------
Net income $ 13,459 $ (2,092) $ -- $ (1,147) $ 10,220
=========================================================================================
41
Consolidated Statements of Operations
Nine Months Ended December 31, 2004
--------------------------------------------------------------------------
Previously Revenue Cooperative
(In thousands) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 224,831 $ (6,373) $ (6,828) $ 211,630
Other revenues 126 126
--------------------------------------------------------------------------
Total revenues 224,957 (6,373) (6,828) 211,756
Cost of Sales
Costs of sales 107,889 (3,569) 104,320
--------------------------------------------------------------------------
Gross profit 117,068 (2,804) (6,828) 107,436
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 31,340 (110) (6,828) 24,402
General and administrative 15,113 15,113
Depreciation 1,395 1,395
Amortization of intangible assets 5,753 5,753
--------------------------------------------------------------------------
Total operating expenses 53,601 (110) (6,828) 46,663
--------------------------------------------------------------------------
Operating income 63,467 (2,694) -- 60,773
--------------------------------------------------------------------------
Other income (expense)
Interest income 135 135
Interest expense (34,012) (34,012)
Loss on extinguishment of debt (7,567) (7,567)
--------------------------------------------------------------------------
Total other income (expense) (41,444) -- -- (41,444)
--------------------------------------------------------------------------
Income before provision for
income taxes 22,023 (2,694) 19,329
Provision for income taxes 8,340 (948) 7,392
--------------------------------------------------------------------------
Net income $ 13,683 $ (1,746) $ -- $ 11,937
==========================================================================
42
Consolidated Statements of Operations
Three Months Ended December 31, 2004
--------------------------------------------------------------------------
Previously Revenue Cooperative
(In thousands) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 75,829 $ (732) $ (2,079) $ 73,018
Other revenues 25 25
--------------------------------------------------------------------------
Total revenues 75,854 (732) (2,079) 73,043
Cost of Sales
Costs of sales 33,923 (682) 33,241
--------------------------------------------------------------------------
Gross profit 41,931 (50) (2,079) 39,802
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 7,265 (18) (2,079) 5,168
General and administrative 5,690 5,690
Depreciation 457 457
Amortization of intangible assets 2,148 2,148
--------------------------------------------------------------------------
Total operating expenses 15,560 (18) (2,079) 13,463
--------------------------------------------------------------------------
Operating income 26,371 (32) -- 26,339
--------------------------------------------------------------------------
Other income (expense)
Interest income 48 48
Interest expense (12,042) (12,042)
------------------- ----------------- ---------------- -------------------
Total other income (expense) (11,994) -- -- (11,994)
--------------------------------------------------------------------------
Income before provision for
income taxes 14,377 (32) 14,345
Provision for income taxes 5,230 (12) 5,218
--------------------------------------------------------------------------
Net income $ 9,147 $ (20) $ -- $ 9,127
==========================================================================
43
Consolidated Statements of Operations
Six Months Ended September 30, 2004
--------------------------------------------------------------------------
Previously Revenue Cooperative
(In thousands) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 149,002 $ (5,641) $ (4,749) $ 138,612
Other revenues 101 101
--------------------------------------------------------------------------
Total revenues 149,103 (5,641) (4,749) 138,713
Cost of Sales
Costs of sales 73,966 (2,887) 71,079
--------------------------------------------------------------------------
Gross profit 75,137 (2,754) (4,749) 67,634
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 24,075 (92) (4,749) 19,234
General and administrative 9,423 9,423
Depreciation 938 938
Amortization of intangible assets 3,605 3,605
--------------------------------------------------------------------------
Total operating expenses 38,041 (92) (4,749) 33,200
--------------------------------------------------------------------------
Operating income 37,096 (2,662) -- 34,434
--------------------------------------------------------------------------
Other income (expense)
Interest income 87 87
Interest expense (21,970) (21,970)
Loss on extinguishment of debt (7,567) (7,567)
--------------------------------------------------------------------------
Total other income (expense)
(29,450) -- -- (29,450)
--------------------------------------------------------------------------
Income before provision for
income taxes 7,646 (2,662) 4,984
Provision for income taxes 3,110 (937) 2,173
--------------------------------------------------------------------------
Net income $ 4,536 $ (1,725) $ -- $ 2,811
==========================================================================
44
Consolidated Statements of Operations
Three Months Ended September 30, 2004
--------------------------------------------------------------------------
Previously Revenue Cooperative
(In thousands) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 81,320 $ 501 $ (1,889) $ 79,932
Other revenues 26 26
--------------------------------------------------------------------------
Total revenues 81,346 501 (1,889) 79,958
Cost of Sales
Costs of sales 37,843 98 37,941
--------------------------------------------------------------------------
Gross profit 43,503 403 (1,889) 42,017
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 10,304 34 (1,889) 8,449
General and administrative 4,502 4,502
Depreciation 452 452
Amortization of intangible assets 1,802 1,802
--------------------------------------------------------------------------
Total operating expenses
17,060 34 (1,889) 15,205
--------------------------------------------------------------------------
Operating income 26,443 369 -- 26,812
--------------------------------------------------------------------------
Other income (expense)
Interest income 59 59
Interest expense (10,893) (10,893)
--------------------------------------------------------------------------
Total other income (expense) (10,834) -- -- (10,834)
--------------------------------------------------------------------------
Income before provision for
income taxes 15,609 369 15,978
Provision for income taxes 5,936 140 -- 6,076
--------------------------------------------------------------------------
Net income $ 9,673 $ 229 $ -- $ 9,902
==========================================================================
45
Consolidated Statements of Operations
Three Months Ended June 30, 2004
--------------------------------------------------------------------------
Previously Revenue Cooperative
(In thousands) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 67,682 $ (6,142) $ (2,860) $ 58,680
Other revenues 75 75
--------------------------------------------------------------------------
Total revenues 67,757 (6,142) (2,860) 58,755
Cost of Sales
Costs of sales 36,123 (2,985) 33,138
--------------------------------------------------------------------------
Gross profit 31,634 (3,157) (2,860) 25,617
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 13,771 (126) (2,860) 10,785
General and administrative 4,921 4,921
Depreciation 486 486
Amortization of intangible assets 1,803 1,803
--------------------------------------------------------------------------
Total operating expenses 20,981 (126) (2,860) 17,995
--------------------------------------------------------------------------
Operating income 10,653 (3,031) - 7,622
--------------------------------------------------------------------------
Other income (expense)
Interest income 28 28
Interest expense (11,077) (11,077)
Loss on extinguishment of debt (7,567) (7,567)
--------------------------------------------------------------------------
Total other income (expense) (18,616) -- -- (18,616)
--------------------------------------------------------------------------
Income before provision for
income taxes (7,963) (3,031) (10,994)
Income tax benefit 2,826 1,076 3,902
--------------------------------------------------------------------------
Net loss $ (5,137) $ (1,955) $ -- $ (7,092)
==========================================================================
46
Consolidated Statements of Operations
Period February 6, 2004 to March 31, 2004
(Successor)
--------------------------------------------------------------------------
Previously Revenue Cooperative
(In thousands) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 18,807 $ (1,597) $ (388) $ 16,822
Other revenues 54 54
--------------------------------------------------------------------------
Total revenues 18,861 (1,597) (388) 16,876
Cost of Sales
Costs of sales 10,023 (672) 9,351
--------------------------------------------------------------------------
Gross profit 8,838 (925) (388) 7,525
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 1,689 (34) (388) 1,267
General and administrative 1,649 1,649
Depreciation 41 41
Amortization of intangible assets 890 890
--------------------------------------------------------------------------
Total operating expenses 4,269 (34) (388) 3,847
--------------------------------------------------------------------------
Operating income 4,569 (891) -- 3,678
--------------------------------------------------------------------------
Other income (expense)
Interest income 10 10
Interest expense (1,735) (1,735)
--------------------------------------------------------------------------
Total other income (expense) (1,725) -- -- (1,725)
--------------------------------------------------------------------------
Income before provision for
income taxes 2,844 (891) 1,953
Provision for income taxes 1,054 (330) 724
--------------------------------------------------------------------------
Net income $ 1,790 $ (561) $ -- $ 1,229
==========================================================================
47
Consolidated Statements of Operations
Period April 1, 2003 to February 5, 2004
(Predecessor)
--------------------------------------------------------------------------
Previously Revenue Cooperative
(In thousands) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 68,726 $ 1,930 $ (2,587) $ 68,069
Other revenues 333 333
--------------------------------------------------------------------------
Total revenues 69,059 1,930 (2,587) 68,402
Cost of Sales
Costs of sales 26,254 601 26,855
--------------------------------------------------------------------------
Gross profit 42,805 1,329 (2,587) 41,547
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 12,601 47 (2,587) 10,061
General and administrative 12,068 12,068
Depreciation 247 247
Amortization of intangible assets 4,251 4,251
Loss on forgiveness of related party
receivable 1,404 1,404
--------------------------------------------------------------------------
Total operating expenses 30,571 47 (2,587) 28,031
--------------------------------------------------------------------------
Operating income 12,234 1,282 -- 13,516
--------------------------------------------------------------------------
Other income (expense)
Interest income 38 38
Interest expense (8,195) (8,195)
--------------------------------------------------------------------------
Total other income (expense) (8,157) -- -- (8,157)
--------------------------------------------------------------------------
Income before provision for
income taxes 4,077 1,282 5,359
Provision for income taxes 1,684 530 2,214
--------------------------------------------------------------------------
Net income $ 2,393 $ 752 $ -- $ 3,145
==========================================================================
48
Consolidated Statements of Operations
Fiscal Year Ended March 31, 2003
(Predecessor)
--------------------------------------------------------------------------
Previously Revenue Cooperative
(In thousands) Reported Recognition Advertising As Restated
--------------------------------------------------------------------------
Revenues
Net sales $ 76,048 $ (1,567) $ (3,138) $ 71,343
Other revenues 391 391
--------------------------------------------------------------------------
Total revenues 76,439 (1,567) (3,138) 71,734
Cost of Sales
Costs of sales 27,475 (458) 27,017
--------------------------------------------------------------------------
Gross profit 48,964 (1,109) (3,138) 44,717
--------------------------------------------------------------------------
Operating Expenses
Advertising and promotion 14,274 (20) (3,138) 11,116
General and administrative 12,075 12,075
Depreciation 301 301
Amortization of intangible assets 4,973 4,973
--------------------------------------------------------------------------
Total operating expenses 31,623 (20) (3,138) 28,465
--------------------------------------------------------------------------
Operating income 17,341 (1,089) -- 16,252
--------------------------------------------------------------------------
Other income (expense)
Interest income 59 59
Interest expense (9,806) (9,806)
Loss on extinguishment of debt (685) (685)
--------------------------------------------------------------------------
Total other income (expense) (10,432) -- -- (10,432)
--------------------------------------------------------------------------
Income before provision for
income taxes 6,909 (1,089) 5,820
Provision for income taxes 3,902 (615) -- 3,287
--------------------------------------------------------------------------
Income from continuing operations 3,007 (474) 2,533
Discontinued Operations
Loss from operations of discontinued
Pecos reporting unit, net of tax
benefit of $1,848 (3,385) (3,385)
Loss on disposal of Pecos reporting
unit, net of income tax benefit of
$1,233 (2,259) (2,259)
--------------------------------------------------------------------------
Loss before cumulative effect of change
in accounting principle (2,637) (474) -- (3,111)
Cumulative effect of change in
accounting principle, net of income
tax benefit of $6,567 (11,785) (11,785)
--------------------------------------------------------------------------
Net loss $ (14,422) $ (474) $ -- $ (14,896)
==========================================================================
49
Consolidated Balance Sheet
(In thousands) June 30, 2005
--------------------------------------------
As Previously
Assets Reported As Restated
-------------------- -------------------
Current assets
Cash $ 13,945 $ 13,945
Accounts receivable 32,489 26,442
Inventories 27,946 30,589
Deferred income tax assets 6,965 6,965
Prepaid expenses and other current assets 4,039 4,039
-------------------- -------------------
Total current assets 85,384 81,980
Property and equipment 2,043 2,043
Goodwill 294,544 294,731
Intangible assets 606,465 606,465
Other long-term assets 14,344 14,344
-------------------- -------------------
Total Assets $ 1,002,780 $ 999,563
==================== ===================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 18,626 $ 18,626
Accrued liabilities 10,705 9,365
Current portion of long-term debt 3,730 3,730
-------------------- -------------------
Total current liabilities 33,061 31,721
Long-term debt 490,698 490,698
Deferred income tax liabilities 89,916 89,916
-------------------- -------------------
Total liabilities 613,675 612,335
-------------------- -------------------
Members' Equity
Contributed capital - Prestige Holdings 370,214 370,214
Accumulated other comprehensive loss (365) (365)
Retained earnings 19,256 17,379
-------------------- -------------------
Total members' equity 389,105 387,228
-------------------- -------------------
Total liabilities and members' equity $ 1,002,780 $ 999,563
==================== ===================
50
Consolidated Balance Sheet
(In thousands) March 31, 2005
--------------------------------------------
As Previously
Assets Reported As Restated
-------------------- -------------------
Current assets
Cash $ 5,334 $ 5,334
Accounts receivable 43,893 35,918
Inventories 21,580 24,833
Deferred income tax assets 5,699 5,699
Prepaid expenses and other current assets 3,152 3,152
-------------------- -------------------
Total current assets 79,658 74,936
Property and equipment 2,324 2,324
Goodwill 294,544 294,731
Intangible assets 608,613 608,613
Other long-term assets 15,996 15,996
-------------------- -------------------
Total Assets $ 1,001,135 $ 996,600
==================== ===================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 21,705 $ 21,705
Accrued liabilities 13,472 11,589
Current portion of long-term debt 3,730 3,730
-------------------- -------------------
Total current liabilities 38,907 37,024
Long-term debt 491,630 491,630
Deferred income tax liabilities 84,752 85,899
-------------------- -------------------
Total liabilities 615,289 614,553
-------------------- -------------------
Members' Equity
Contributed capital - Prestige Holdings 370,277 370,277
Accumulated other comprehensive income 320 320
Retained earnings 15,249 11,450
-------------------- -------------------
Total members' equity 385,846 382,047
-------------------- -------------------
Total liabilities and members' equity $ 1,001,135 $ 996,600
==================== ===================
51
Consolidated Balance Sheet
(In thousands) March 31, 2004
--------------------------------------------
As Previously
Assets Reported As Restated
-------------------- -------------------
Current assets
Cash $ 3,393 $ 3,393
Accounts receivable 15,732 13,369
Inventories 9,748 10,660
Deferred income tax assets 1,647 1,647
Prepaid expenses and other current assets 234 234
-------------------- -------------------
Total current assets 30,754 29,303
Property and equipment 880 880
Goodwill 55,594 55,781
Intangible assets 236,611 236,611
Other long-term assets 2,783 2,783
-------------------- -------------------
Total Assets $ 326,622 $ 325,358
==================== ===================
Liabilities and Members' Equity
Current liabilities
Accounts payable $ 5,281 $ 5,281
Accrued liabilities 7,264 6,561
Current portion of long-term debt 2,000 2,000
-------------------- -------------------
Total current liabilities 14,545 13,842
Long-term debt 146,694 146,694
Deferred income tax liabilities 38,874 38,874
-------------------- -------------------
Total liabilities 200,113 199,410
-------------------- -------------------
Members' Equity
Contributed capital - Prestige Holdings 124,719 124,719
Retained earnings 1,790 1,229
-------------------- -------------------
Total members' equity 126,509 125,948
-------------------- -------------------
Total liabilities and members' equity $ 326,622 $ 325,358
==================== ===================
In addition, the consolidated statements of cash flows for all periods
noted above will be restated to reflect the change in net income or loss and
accounts receivable, inventory, accrued liabilities and deferred income taxes as
discussed above. The restatements did not affect net cash flows from operating,
investing or financing activities as previously reported.
52
3. Accounts Receivable
The components of accounts receivable consist of the following (in thousands):
September 30, 2005 March 31, 2005
------------------- -----------------
(Restated)
Accounts receivable $ 33,992 $ 36,985
Other receivables 867 835
------------------- -----------------
34,859 37,820
Less allowances for discounts, returns and
uncollectible accounts (2,307) (1,902)
------------------- -----------------
$ 32,552 $ 35,918
=================== =================
4. Inventories
Inventories consist of the following (in thousands):
September 30, 2005 March 31, 2005
------------------- -----------------
(Restated)
Packaging and raw materials $ 4,132 $ 3,587
Finished goods 28,755 21,246
------------------- -----------------
$ 32,887 $ 24,833
=================== =================
Inventories are shown net of allowances for obsolete and slow moving inventory
of $0.9 million and $1.5 million at September 30, 2005 and March 31, 2005,
respectively.
5. Property and Equipment
Property and equipment consist of the following (in thousands):
September 30, 2005 March 31, 2005
------------------- ----------------
Machinery $ 2,860 $ 2,828
Computer equipment 811 771
Furniture and fixtures 573 515
Leasehold improvements 340 173
------------------- ----------------
4,584 4,287
Accumulated depreciation (2,937) (1,963)
------------------- ----------------
$ 1,647 $ 2,324
=================== ================
53
6. Intangible Assets
Intangible assets consist of the following (in thousands):
September 30, 2005
--------------------------------------------------------------
Gross Accumulated Net
Amount Amortization Amount
------------------- ------------------- -----------------
Indefinite lived trademarks $ 522,346 $ -- $ 522,346
------------------- ------------------- -----------------
Amortizable intangible assets
Trademarks 94,900 (13,056) 81,844
Non-compete agreement 158 (32) 126
------------------- ------------------- -----------------
95,058 (13,088) 81,970
------------------- ------------------- -----------------
$ 617,404 $ (13,088) $ 604,316
=================== =================== =================
March 31, 2005
--------------------------------------------------------------
Gross Accumulated Net
Amount Amortization Amount
------------------- ------------------- -----------------
Indefinite lived trademarks $ 522,346 $ -- $ 522,346
------------------- ------------------- -----------------
Amortizable intangible assets
Trademarks 94,900 (8,775) 86,125
Non-compete agreement 158 (16) 142
------------------- ------------------- -----------------
95,058 (8,791) 86,267
------------------- ------------------- -----------------
$ 617,404 $ (8,791) $ 608,613
=================== =================== =================
At September 30, 2005, intangible assets are expected to be amortized over a
period of five to 30 years as follows (in thousands):
Twelve Months Ending September 30
2006 $ 8,592
2007 8,592
2008 8,592
2009 8,592
2010 7,168
Thereafter 40,434
-------------------
$ 81,970
===================
54
7. Long-Term Debt
Long-term debt consists of the following (in thousands): September 30, 2005 March 31, 2005
------------------- -----------------
Senior revolving credit facility ("Revolving Credit Facility"), which
expires on April 6, 2009, is available for maximum borrowings of up to
$60.0 million. The Revolving Credit Facility bears interest at the
Company's option at either the prime rate plus a variable margin or LIBOR
plus a variable margin. The variable margin ranges from 0.75% to 2.50% and
at September 30, 2005, the interest rate on the Revolving Credit Facility
was 8.0% per annum. The Company is also required to pay a variable
commitment fee on the unused portion of the Revolving Credit Facility. At
September 30, 2005, the commitment fee was 0.50% of the unused line. The
Revolving Credit Facility is collateralized by substantially all of the
Company's assets. $ -- $ --
Senior secured term loan facility, ("Tranche B Term Loan Facility") bears
interest at the Company's option at either the prime rate or LIBOR plus a
variable margin of 2.25%. At September 30, 2005, the weighted average
applicable interest rate on the Tranche B Term Loan Facility was 6.28%.
Principal payments of $933 and interest are payable quarterly. In February
2005, the Tranche B Term Loan Facility was amended to increase the amount
available thereunder by $200.0 million, all of which is available at
September 30, 2005. Current amounts outstanding under the Tranche B Term
Loan Facility mature on April 6, 2011, while amounts borrowed pursuant to
the amendment will mature on October 6, 2011. The Tranche B Term Loan
Facility is collateralized by substantially all of the Company's assets. 367,495 369,360
Senior Subordinated Notes ("Senior Notes") that bear interest at 9.25%
which is payable on April 15th and October 15th of each year. The Senior
Notes mature on April 15, 2012; however, the Company may redeem some or all
of the Senior Notes on or prior to April 15, 2008 at a redemption price
equal to 100% plus a make-whole premium, and on or after April 15, 2008 at
redemption prices set forth in the indenture governing the Senior Notes.
The Senior Notes are unconditionally guaranteed by Prestige Brands
International, LLC ("Prestige International"), a wholly owned subsidiary,
and Prestige International's wholly owned subsidiaries (other than the
issuer). Each of these guarantees is joint and several. There are no
significant restrictions on the ability of any of the guarantors to obtain
funds from their subsidiaries. 126,000 126,000
------------------- -----------------
493,495 495,360
Current portion of long-term debt (3,730) (3,730)
------------------- -----------------
$ 489,765 $ 491,630
=================== =================
55
The Revolving Credit Facility and the Tranche B Term Loan Facility (together the
"Senior Credit Facility") contain various financial covenants, including
provisions that require the Company to maintain certain leverage ratios,
interest coverage ratios and fixed charge coverage ratios. Additionally, the
Senior Credit Facility contains provisions that restrict the Company from
undertaking specified corporate actions, such as asset dispositions,
acquisitions, dividend payments, changes of control, incurrence of indebtedness,
creation of liens and transactions with affiliates. The Company was in
compliance with its financial and restrictive covenants under the Senior Credit
Facility at September 30, 2005.
Future principal payments required in accordance with the terms of the Senior
Credit Facility and the Senior Notes are as follows (in thousands):
Twelve Months Ending September 30
2006 $ 3,730
2007 3,730
2008 3,730
2009 3,730
2010 3,730
Thereafter 474,845
-------------------
$ 493,495
===================
The Company entered into a 5% interest rate cap agreement with a financial
institution to mitigate the impact of changing interest rates. The agreement
provides for a notional amount of $20.0 million and terminates in June 2006. The
Company also entered into interest rate cap agreements with another financial
institution that became effective on August 30, 2005, with a total notional
amount of $180.0 million and cap rates ranging from 3.25% to 3.75%. The
agreements terminate on May 30, 2006, 2007 and 2008 as to $50.0 million, $80.0
million and $50.0 million, respectively. The Company is accounting for the
interest rate cap agreements as cash flow hedges. The fair value of the interest
rate cap agreements was $2.6 million at September 30, 2005.
8. Shareholders' Equity
In connection with the Prestige Brands Holdings' IPO, the Board of Directors
adopted the 2005 Long-Term Equity Incentive Plan ("the Plan"). The Plan provides
for grants of stock options, restricted stock, restricted stock units, deferred
stock units and other equity-based awards to employees. Directors, officers and
other employees of the Company and its subsidiaries, as well as others
performing services for the Company, are eligible for grants under the Plan. At
September 30, 2005, there were 4.9 million shares available for issuance under
the Plan.
Pursuant to the provisions of the Plan, on July 29, 2005, each of the Company's
four independent members of the Board of Directors received an award of 6,222
shares of Prestige Brands Holdings' common stock in connection with Company's
directors' compensation arrangements. Of such amount, 1,778 shares represent a
one-time grant of unrestricted shares, while the remaining 4,444 shares
represent restricted shares that vest over a two year period. The benefits, as
well as the costs associated with these relationships were contributed to the
Company.
On August 4, 2005, Frank Palantoni joined the Company as President and Chief
Operating Officer. In connection therewith, the Board of Directors granted Mr.
Palantoni 30,888 shares of Prestige Brands Holdings' restricted common stock and
options to purchase an additional 61,776 shares of Prestige Brands Holdings'
common stock at an exercise price of $12.95 per share. The options vest over a
period of five years while the restricted shares will vest contingent upon the
attainment of certain performance-based benchmarks. The benefits, as well as the
costs associated with these relationships were contributed to the Company.
56
In September 2005, the Company repurchased 13,000 shares of Prestige Brands
Holdings' restricted common stock from former employees pursuant to the
provisions of the various employee stock purchase agreements. The average
purchase price of the shares was $1.70 per share. The benefits associated with
these transactions were contributed to the Company.
9. Related Party Transactions
The Company had entered in an agreement with an affiliate of GTCR Golder Rauner
II, LLC ("GTCR"), a private equity firm and an investor in the Company, whereby
the GTCR affiliate was to provide management and advisory services to the
Company for an aggregate annual compensation of $4.0 million. The agreement was
terminated in February 2005. During the three month and six month periods ended
September 30, 2004, the Company paid the affiliate of GTCR a management fee of
$0.9 million and $1.9 million, respectively.
10. Income Taxes
Income taxes are recorded in the Company's quarterly financial statements
based on the Company's estimated annual effective income tax rate. The effective
rates used in the calculation of income taxes were 39.3% and 38.0% for the three
month periods ended September 30, 2005 and 2004, respectively. For the six month
periods ended September 30, 2005 and 2004, the effective tax rates were 39.3%
and 43.6%, respectively. The increase in the effective tax rate for the three
month period ended September 30, 2005 results from the increase in the Company's
graduated federal income tax rate from 34% to 35% due to the formation of
Prestige Holdings in February 2005 and the election to file a consolidated
federal income tax return. The difference in the effective tax rates for the six
month periods ended September 30, 2005 and 2004 results primarily from the
computation of taxes on a separate company basis during the six month period
ended September 30, 2004.
11. Commitments and Contingencies
In July 2002, the Company entered into a ten year manufacturing and supply
agreement with an unrelated company. Pursuant to this agreement, the Company
agreed to purchase certain minimum quantities of product over the initial three
years of the agreement or to pay liquidated damages of up to $360,000. The
Company had recorded a liability of $308,000 at March 31, 2005, which
represented its estimate of the probable liquidated damages. Such estimate was
based on historical and expected purchases during the initial three years of the
agreement. The Company settled this obligation in August 2005 for an amount
slightly in excess of its recorded liability.
In June 2003, Dr. Jason Theodosakis filed a lawsuit, Theodosakis v. Walgreens,
et al., in Federal District Court in Arizona, alleging that two of the Company's
subsidiaries, Medtech Products and Pecos Pharmaceutical, as well as other
unrelated parties, infringed the trade dress of two of his published books.
Specifically, Dr. Theodosakis published "The Arthritis Cure" and "Maximizing the
Arthritis Cure" regarding the use of dietary supplements to treat arthritis
patients. Dr. Theodosakis alleged that his books have a distinctive trade dress,
or cover layout, design, color and typeface, and those products that the
defendants sold under the ARTHx trademarks infringed the books' trade dress and
constituted unfair competition and false designation of origin. Additionally,
Dr. Theodosakis alleged that the defendants made false endorsements of the
products by referencing his books on the product packaging and that the use of
his name, books and trade dress invaded his right to publicity. The Company sold
the ARTHx trademarks, goodwill and inventory to a third party, Contract
Pharmacal Corporation, in March 2003. On January 12, 2005, the court granted the
Company's motion for summary judgment and dismissed all claims against Pecos and
Medtech. The plaintiff has filed an appeal in the U.S. Court of Appeals which is
pending.
57
On January 3, 2005, the Company was served with process by its former lead
counsel in the Theodosakis litigation seeking $679,000 plus interest. The case
was filed in the Supreme Court of New York and is styled as Dickstein Shapiro et
al v. Medtech Products, Inc. In February 2005, the plaintiffs filed an amended
complaint naming the Pecos Pharmaceutical Company as defendant. The Company has
answered and filed a counterclaim against Dickstein and also filed a third party
complaint against the Lexington Insurance Company, the Company's product
liability carrier. The Company believes that if there is any obligation to the
Dickstein firm relating to this matter, it is an obligation of Lexington and not
the Company.
On May 9, 2005, the Company was served with a complaint in a class action
lawsuit filed in Essex County, Massachusetts, styled as Dawn Thompson v. Wyeth,
Inc. relating to the Company's Little Remedies pediatric cough products. The
Company is one of several corporate defendants, all of whom market
over-the-counter cough syrup products for pediatric use. The complaint alleges
that the ingredient dextromethorphan is no more effective than a placebo. There
is no allegation of physical injury caused by the product or the ingredient. In
June 2005, the Company was served in a second class action complaint involving
dextromethorphan. The second case, styled Tina Yescavage v. Wyeth was filed in
Lee County Florida and similarly involves multiple corporate defendants. Both
the Thompson and Yescavage suits were dismissed in September 2005.
The Company and certain of its officers and directors are defendants in a
consolidated putative securities class action lawsuit filed in the United States
District Court for the Southern District of New York (he "Consolidated Action").
The first of the six consolidated cases was filed on August 3, 2005. Plaintiffs
purport to represent a class of shareholders of the Company who purchased shares
between February 9, 2005 through July 27, 2005. Plaintiffs also name as
defendants the underwriters in the Company's initial public offering and a
private equity fund that was a selling shareholder in the offering.
The various complaints on file in the Consolidated Action collectively
include claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933
and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiff's
generally allege that the Company issued a series of materially false and
misleading statements in connection with its initial public offering and
thereafter by failing to disclose that demand for certain of the Company's
products was declining and that the Company was planning to withdraw several
products from the market. Plaintiffs seek an unspecified amount of damages. The
district court has appointed a Lead Plaintiff and ordered it to file a
consolidated complaint by December 5, 2005. The Company's management believes
the allegations to be unfounded, will vigorously pursue its defenses, and cannot
reasonably estimate the potential range of loss, if any.
On September 6, 2005, another putative securities class action lawsuit
substantially similar to the Consolidated Action was filed against the same
defendants in the Circuit Court of Cook County, Illinois (the "Chicago Action").
In light of the first-filed Consolidated Action, proceedings in the Chicago
Action have been stayed until a ruling on defendants' anticipated motions to
dismiss the consolidated complaint in the Consolidated Action. The Company's
management believes the allegations to be unfounded and will vigorously pursue
its defenses, and cannot reasonably estimate the potential range of loss, if
any.
The Company is also involved from time to time in routine legal matters and
other claims incidental to its business. When it appears probable in
management's judgment that the Company will incur monetary damages or other
costs in connection with such claims and proceedings, and such costs can be
reasonably estimated, liabilities are recorded in the financial statements and
charges are recorded against earnings. The Company believes the resolution of
such routine matters and other incidental claims, taking into account reserves
and insurance, will not have a material adverse effect on its financial
condition or results of operation.
58
12. Concentrations of Risk
The Company's sales are concentrated in the areas of over-the-counter
pharmaceutical products, personal care products and household cleaning products.
The Company sells its products to mass merchandisers, food and drug accounts,
and dollar and club stores. During the three and six month periods ended
September 30, 2005, approximately 65.0% and 63.4%, respectively, of the
Company's total sales were derived from its four major brands while during the
three and six month periods ended September 30, 2004, approximately 66.9% and
64.5%, respectively, of the Company's total sales were derived from these four
brands. During the three and six month periods ended September 30, 2005,
approximately 22.3% and 23.2%, respectively, of the Company's net sales were
made to one customer, while during the three and six month periods ended
September 30, 2004, 26.8% and 26.3% of net sales were to this customer. At
September 30, 2005, approximately 19.6% of accounts receivable were owed by one
customer.
The Company manages product distribution in the continental United States
through a main distribution center in St. Louis, Missouri. A serious disruption,
such as a flood or fire, to the main distribution center could damage the
Company's inventory and could materially impair the Company's ability to
distribute its products to customers in a timely manner or at a reasonable cost.
The Company could incur significantly higher costs and experience longer lead
times associated with the distribution of its products to its customers during
the time that it takes the Company to reopen or replace its distribution center.
As a result, any such disruption could have a material adverse effect on the
Company's sales and profitability.
13. Business Segments
Segment information has been prepared in accordance with FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company's operating segments are based on its product lines and consist of (i)
Over-the-Counter Drugs, (ii) Personal Care and (iii) Household Cleaning.
Accordingly, within each reportable segment are operations that have similar
economic characteristics, including the nature of their products, production
process, type of customer and method of distribution.
There were no inter-segment sales or transfers during the periods ended
September 30, 2005 and 2004. The Company evaluates the performance of its
product lines and allocates resources to them based primarily on contribution
margin. The table below summarizes information about reportable segments (in
thousands).
59
Quarter Ended September 30, 2005
------------------------------------------------------------------------------
Over-the-Counter Personal Household
Drug Care Cleaning Consolidated
---------------- ---------------- ------------------ ----------------
Net sales $ 40,759 $ 7,332 $ 25,229 $ 73,320
Other revenues 25 25
---------------- ---------------- ------------------ ----------------
Total revenues 40,759 7,332 25,254 73,345
Cost of sales 15,558 4,456 15,535 35,549
---------------- ---------------- ------------------ ----------------
Gross profit 25,201 2,876 9,719 37,796
Advertising and promotion 7,127 1,350 1,740 10,217
---------------- ---------------- ------------------ ----------------
Contribution margin $ 18,074 $ 1,526 $ 7,979 27,579
================ ================ ==================
Other operating expenses 6,752
----------------
Operating income 20,827
Other income (expense) (8,671)
Provision for income taxes (4,782)
----------------
Net income $ 7,374
================
Six Months Ended September 30, 2005
------------------------------------------------------------------------------
Over-the-Counter Personal Household
Drug Care Cleaning Consolidated
---------------- ---------------- ------------------ ----------------
Net sales $ 74,148 $ 14,588 $ 48,012 $ 136,748
Other revenues 50 50
---------------- ---------------- ------------------ ----------------
Total revenues 74,148 14,588 48,062 136,798
Cost of sales 27,223 8,353 28,922 64,498
---------------- ---------------- ------------------ ----------------
Gross profit 46,925 6,235 19,140 72,300
Advertising and promotion 13,266 2,146 3,510 18,922
---------------- ---------------- ------------------ ----------------
Contribution margin $ 33,659 $ 4,089 $ 15,630 53,378
================ ================ ==================
Other operating expenses 14,294
----------------
Operating income 39,084
Other income (expense) (17,181)
Provision for income taxes (8,600)
----------------
Net income $ 13,303
================
60
Quarter Ended September 30, 2004
(Restated)
------------------------------------------------------------------------------
Over-the-Counter Personal Household
Drug Care Cleaning Consolidated
---------------- ---------------- ------------------ ----------------
Net sales $ 42,707 $ 9,678 $ 27,547 $ 79,932
Other revenues 26 26
---------------- ---------------- ------------------ ----------------
Total revenues 42,707 9,678 27,573 79,958
Cost of sales 16,365 4,888 16,688 37,941
---------------- ---------------- ------------------ ----------------
Gross profit 26,342 4,790 10,885 42,017
Advertising and promotion 5,798 1,500 1,151 8,449
---------------- ---------------- ------------------ ----------------
Contribution margin $ 20,544 $ 3,290 $ 9,734 33,568
================ ================ ==================
Other operating expenses 6,756
----------------
Operating income 26,812
Other income (expense) (10,834)
Provision for income taxes (6,076)
----------------
Net Income $ 9,902
================
Six Months Ended September 30, 2004
(Restated)
------------------------------------------------------------------------------
Over-the-Counter Personal Household
Drug Care Cleaning Consolidated
---------------- ---------------- ------------------ ----------------
Net sales $ 72,102 $ 16,982 $ 49,528 $ 138,612
Other revenues 101 101
---------------- ---------------- ------------------ ----------------
Total revenues 72,102 16,982 49,629 138,713
Cost of sales 29,530 9,119 32,430 71,079
---------------- ---------------- ------------------ ----------------
Gross profit 42,572 7,863 17,199 67,634
Advertising and promotion 12,351 3,417 3,466 19,234
---------------- ---------------- ------------------ ----------------
Contribution margin $ 30,221 $ 4,446 $ 13,733 48,400
================ ================ ==================
Other operating expenses 13,966
----------------
Operating income 34,434
Other income (expense) (29,450)
Provision for income taxes (2,173)
----------------
Net income $ 2,811
================
During the six month periods ended September 2005 and 2004, 97.9% and 97.8%,
respectively, of sales were made to customers in the United States and Canada.
No individual geographical area accounted for more than 10% of net sales in any
of the periods presented. At September 30, 2005 and 2004, all of the Company's
long-term assets were located in the United States of America and have not been
allocated between segments.
61
14. Subsequent Events
Effective October 1, 2005, Prestige Brands Holdings authorized the issuance of
123,377 shares of restricted stock with a fair market value of $12.32 per share,
the closing price of its common stock on September 30, 2005, to employees of its
operating subsidiaries. In the event that an employee terminates his or her
employment with such operating subsidiary prior to October 1, 2008, the vesting
date, the shares will be forfeited.
On November 2, 2005, the Prestige Brands Holdings completed the previously
announced acquisition of the Chore Boy line of household cleaning products from
Reckett Beckiser, Inc. and Reckett Benckiser (Canada) for aggregate
consideration of $22.3 million.
On November 9, 2005, the Prestige Brands Holdings completed the acquisition of
all of the outstanding membership interests of Dental Concepts, LLC, a marketer
of therapeutic oral care products. The purchase price of $30.6 million was
funded through the Company's existing bank lines of credit.
62
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company, as the indirect holding company of Prestige Brands International,
LLC ("Prestige International") does not conduct ongoing business operations. As
a result, the financial information for Prestige Brands Holdings, Inc. and
Prestige International is identical for the purposes of the discussion of
operating results in Management's Discussion and Analysis of Financial Condition
and Results of Operations. Prestige International is an indirect wholly owned
subsidiary of Prestige Brands Holdings, Inc. and the parent company of Prestige
Brands, Inc., the issuer of our 9.25% senior subordinated notes due 2012
("Senior Notes") and the borrower under the senior credit facility, consisting
of a Revolving Credit Facility, Tranche B Term Loan Facility and a Tranche C
Term Loan Facility (together the "Senior Credit Facility"). Prestige
International is also the parent guarantor of the obligations.
This document should be read in conjunction with the Management's Discussion and
Analysis section of Amendment No. 1 to our Annual Report on Form 10-K/A for the
fiscal year ended March 31, 2005, as well as the Company's Current Report on
Form 8-K filed on November 15, 2005. All items within Management's Discussion
and Analysis that were affected by the restatement of prior period financial
statements (see Note 2) have been appropriately restated.
General
We sell well-recognized, brand name over-the-counter drug, household cleaning
and personal care products. We operate in niche segments of these categories
where we can use the strength of our brands, our established retail distribution
network, a low-cost operating model and our experienced management team as a
competitive advantage to grow our presence in these categories and, as a result,
grow our sales and profits.
We have grown our brand portfolio by acquiring strong and well-recognized brands
from larger consumer products and pharmaceutical companies, as well as other
brands from smaller private companies. While the brands we have purchased from
larger consumer products and pharmaceutical companies have long histories of
support and brand development, we believe that at the time we acquired them they
were considered "non-core" by their previous owners and did not benefit from the
focus of senior level management or strong marketing support. We believe that
the brands we have purchased from smaller private companies have been
constrained by the limited resources of their prior owners. After acquiring a
brand, we seek to increase its sales, market share and distribution in both
existing and new channels. We pursue this growth through increased spending on
advertising and promotion, new marketing strategies, improved packaging and
formulations and innovative new products.
In February 2005, we raised $448.0 million through an initial public offering of
28,000,000 shares of common stock. The net proceeds of the offering were $416.8
million after deducting $28.0 million of underwriters' discounts and commissions
and $3.2 million of offering expenses. The net proceeds of $416.8 million plus
$3.0 million from our revolving credit facility and $8.8 million of cash on hand
went to repay $100.0 million of our existing senior indebtedness (plus a
repayment premium of $3.0 million and accrued interest of $0.5 million as of
February 15, 2005), to redeem $84.0 million in aggregate principal amount of our
existing 9.25% senior subordinated notes (plus a redemption premium of $7.8
million and accrued interest of $3.3 million as of March 18, 2005), to
repurchase an aggregate of 4,397,950 shares of our common stock held by the GTCR
funds and the TCW/Crescent funds for $30.2 million, and to contribute $199.8
million to Prestige International Holdings, LLC, which was used to redeem all of
its outstanding senior preferred units and class B preferred units. We did not
receive any of the proceeds from the sale of 4,200,000 shares by the selling
stockholders as a result of the underwriters exercising their over-allotment
options.
63
Restatement of Prior Period Financial Statements
As a result of a review of certain accounting practices performed in
conjunction with the Company's assessment of internal controls over financial
reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and the
preparation of the financial statements for the quarter ended September 30,
2005, the Company determined it erroneously applied generally accepted
accounting principles as they relate to the recognition of revenue, the
classification of certain trade promotion allowances, the computation of
deferred income taxes, and the computation of earnings per share.
With respect to revenue recognition, Staff Accounting Bulletin No. 104 sets
forth the criteria for revenue recognition, one of which is that risk of loss
has passed to the customer. The Company, consistent with its published pricing
and shipping terms, has historically recognized revenue upon shipment of product
to the customer. Upon closer examination of its shipping practices and terms,
the Company determined that it often was unclear when, from a legal standpoint,
risk of loss of its products passed to its customers. Accordingly, the Company
has concluded that revenue should not be recognized until product is received by
its customers (referred to as "FOB destination point"), unless the risk of loss
transfers to the customer at the point of shipment. The Company will restate its
previously issued financial statements to correct this erroneous application of
generally accepted accounting principles. The effects of these adjustments for
each fiscal period are reflected in the schedules as set forth in Note 2 to the
financial statements.
With respect to the classification of trade promotions and allowances,
Emerging Issues Task Force Issue 01-09 sets forth the criteria for classifying
such promotions and allowances as an expense or a reduction of revenue. Upon
review, the Company determined that it had incorrectly classified certain
promotion and allowance amounts as expense rather than as a reduction of
revenue. The Company's restated financial statements will correct these
misclassifications. These adjustments do not affect the balance sheet, net
income, operating income or cash flows from operations. The effects of these
adjustments for each fiscal period are reflected in the schedules as set forth
in Note 2 to the financial statements.
With respect to the provision for income taxes and related deferred taxes,
Statement of Financial Accounting Standards No. 109 sets forth the criteria by
which such amounts are to be recognized. During the preparation of the financial
statements for the quarter ended September 30, 2005, the Company determined that
the increase in the deferred income taxes related to the increase in graduated
federal income tax rates from 34% to 35% should have been recognized in the
period in which it filed its first consolidated federal income tax return. The
Company's restated financial statements will recognize this increase in the
quarter and year ended March 31, 2005. Previously, the Company had recorded this
increase in the three month period ended June 30, 2005. The effect of this
adjustment for each fiscal period is reflected in the schedules as set forth in
Note 2 to the financial statements.
With respect to earnings per share, Statement of Financial Accounting Standards
No. 128 sets forth the criteria for computing basic and diluted earnings per
share. Upon examination of its earnings per share calculations, the Company
determined that certain issued and outstanding, but unvested, shares held by
management were improperly reflected in the earnings per share computations. The
effects of these adjustments for each fiscal period are reflected in the
schedules as set forth in Note 2 to the financial statements.
Quarterly Period Ended September 30, 2005 compared to the Quarterly
Period Ended September 30, 2004
Net Sales
Net sales for the period ended September 30, 2005 were $73.3 million compared to
$79.9 million for the comparable period of the prior year. This represented a
decrease of $6.6 million or 9.0% from the prior period. All three operating
segments experienced sales declines during the period. The Over-the-Counter Drug
segment had net sales of $40.8 million for the period ended September 30, 2005,
64
a decrease of $1.9 million, or 4.6% below net sales of $42.7 million for the
period ended September 30, 2004. The Household Cleaning segment had net sales of
$25.2 million for the period ended September 30, 2005, a decrease of $2.3
million, or 8.4% below net sales of $27.5 million for the period ended September
30, 2004. The Personal Care segment had net sales of $7.3 million for the period
ended September 30, 2005, a decrease of $2.3 million, or 24.2% below net sales
of $9.7 million for the period ended September 30, 2004.
Over-the-Counter Drug Segment
Net sales in the Over-the-Counter Drug segment were $40.8 million for the period
ended September 30, 2005 versus $42.7 million for the comparable period of the
prior year. This represented a decrease of $1.9 million or 4.6% from the prior
period. The sales decrease was the result of declines in Compound W and New Skin
partially offset by Little Remedies, which is not included in the September 30,
2004 results, and gains on Chloraseptic. The decline in Compound W is primarily
a result of continued softness in the retail wart remover category and increased
competition. The decline in New Skin is a result of the contraction in sales in
the retail liquid bandage category. The Little Remedies brand was acquired in
the Vetco acquisition in October 2004. The Chloraseptic gains are a result of
continued strong retail consumer consumption and introduction of new items
during the period.
Personal Care Segment
Net sales of the Personal Care segment were $7.3 million for the period ended
September 30, 2005 versus $9.7 million for the comparable period of the prior
year. This represented a decrease of $2.3 million or 24.2% from the prior
period. The sales decrease is a result of the continued decline of the nail
polish remover category on Cutex and Denorex brand's continued decline in
consumer consumption.
Household Cleaning Segment
Net sales of the Household Cleaning segment were $25.2 million for the period
ended September 30, 2005 versus $27.5 million for the comparable period of the
prior year. This represented a decrease of $2.3 million or 8.4% from the prior
period. The sales decrease was primarily a result of declines on the Comet
brand. The decrease in Comet sales is largely attributable to the discontinuance
of the Clean & Flush toilet bowl product during 2004 and a one-time inventory
level adjustment by a large customer. Retail movement on the core Comet product
line - powder, sprays and cream - continued to strengthen during the period. The
Spic and Span brand was down slightly from last year's second quarter.
Gross Profit
Gross profit for the period ended September 30, 2005 was $37.8 million compared
to $42.0 million for the comparable period of the prior year. This represented a
decrease of $4.2 million or 10.0% from the prior period. The decrease in gross
profit is primarily a result of the sales shortfall. Gross profit as a percent
of sales was 51.5% for the period ended September 30, 2005 versus 52.5% for the
comparable period of the prior year. The decrease in gross profit percentage is
a result of higher transportation costs and $0.3 million of costs related to the
Company's change to a new logistics provider during the quarter. Those increases
were partially offset by favorable sales mix to higher gross margin brands.
Over-the-Counter Drug Segment
Gross profit of the Over-the-Counter segment was $25.2 million for the period
ended September 30, 2005 versus $26.3 million for the comparable period of the
prior year. This represented a decrease of $1.1 million or 4.3% from the prior
period. Gross profit as a percent of sales was 61.8% for the period ended
September 30, 2005 versus 61.7% for the comparable period of the prior year. The
increase in gross profit percentage is a result of favorable sales mix partially
offset by increased transportation and warehouse costs. Compound W Freeze-off
has a lower gross profit percentage than the average product in the
Over-the-Counter Drug segment and a smaller proportion of the sales in the
period ended September 30, 2005 than in the comparable period of the prior year.
Personal Care Segment
Gross profit of the personal care segment was $2.9 million for the period ended
September 30, 2005 versus $4.8 million for the comparable period of the prior
year. This represented a decrease of $1.9 million or 40.0% from the prior
65
period. Gross profit as a percent of sales was 39.2% for the period ended
September 30, 2005 versus 49.5% for the comparable period of the prior year. The
gross profit decrease is due to the sales shortfall, increased costs of goods,
higher transportation costs and cost related to warehouse relocation. The
increased cost of goods is primarily a result of higher petroleum prices related
to the Cutex product line and higher costs associated with the increased value
size for Denorex which was introduced last fall.
Household Cleaning Segment
Gross profit of the Household Cleaning segment was $9.7 million for the period
ended September 30, 2005 versus $10.9 million for the comparable period of the
prior year. This represented a decrease of $1.2 million or 10.7% from the prior
period. The decrease in gross profit is primarily a result of the sales
shortfall. Gross profit as a percent of sales was 38.5% for the period ended
September 30, 2005 versus 39.5% for the comparable period of the prior year as a
result of increased transportation costs.
Contribution Margin
Contribution margin was $27.6 million for the period ended September 30, 2005
versus $33.6 million for the comparable period of the prior year. This
represented a decrease of $6.0 million or 17.8% from the prior period. The
contribution margin decrease is a result of lower sales and gross margin as
discussed above and a $1.8 million increase in advertising and promotion
spending in the period ended September 30, 2005 versus the same period in the
prior year.
Over-the-Counter Drug Segment
Contribution margin of the Over-the-Counter drug segment was $18.1 million for
the period ended September 30, 2005 versus $20.5 million for the comparable
period of the prior year. The contribution margin decrease is a result of the
gross profit decline as discussed above and a $1.3 million increase in
advertising and promotion spending in the period ended September 30, 2005 versus
the same period of the prior year. Advertising and promotion spending increased
during the period ended September 30, 2005 on Chloraseptic, Clear Eyes, Compound
W, New Skin and Little Remedies compared to the period ended September 30, 2004.
Personal Care Segment
Contribution margin of the personal care segment was $1.5 million for the period
ended September 30, 2005 versus $3.3 million for the comparable period of the
prior year. This represented a decrease of $1.8 million or 53.6% from the prior
period. The contribution margin decrease is a result of the gross profit decline
discussed above, partially offset by a $0.1 million reduction in advertising and
promotion spending in the period ended September 30, 2005 versus the same period
of the prior year.
Household Cleaning Segment
Contribution margin of the Household Cleaning segment was $8.0 million for the
period ended September 30, 2005 versus $9.7 million for the comparable period of
the prior year. This represented a decrease of $1.7 million or 18.0% from the
prior period. The contribution margin decrease is a result of the gross profit
decline as discussed above and a $0.5 million increase in advertising and
promotion spending in the period ended September 30, 2005 versus the same period
of the prior year. The increased advertising and promotion is primarily related
to Comet media spending.
General and Administrative
General and administrative expenses were $4.1 million for the period ended
September 30, 2005 versus $4.5 million for the comparable period of the prior
year. Synergies achieved with the Medtech, Bonita Bay and Spic and Span
acquisitions were partially offset by an increase in costs associated with being
a public company, including, Sarbanes-Oxley reporting compliance, regulatory
filings and legal fees.
Depreciation and Amortization
Depreciation and amortization expense was $2.6 million for the period ended
September 30, 2005 versus $2.3 million for the comparable period of the prior
year. The increase was due to amortization of intangible assets related to the
Vetco acquisition.
66
Interest Expense, net
Net interest expense was $8.7 million for the period ended September 30, 2005
versus $10.8 million for the comparable period of the prior year. This
represented a decrease of $2.1 million or 20.0% from the prior period. The
decrease in interest expense is due to the reduction of indebtedness
outstanding.
Income Taxes
The income tax provision for the period ended September 30, 2005 was $4.8
million, with an effective rate of 39.3%, compared to $6.1 million, with
an effective rate of 38.0% for period ended September 30, 2004. The increase
in effective tax rate is primarily the result of an increase in the graduated
federal income tax rate from 34% to 35%, effective March 31, 2005.
Six Month Period Ended September 30, 2005 compared to the Six Month
Period Ended September 30, 2004
Net Sales
Net sales for the six month period ended September 30, 2005 were $136.8 million
compared to $138.7 million for the comparable period of the prior year. This
represented a decrease of $1.9 million or 1.4% from the prior period. The
Over-the-Counter Drug segment had net sales of $74.1 million for the six month
period ended September 30, 2005, an increase of $2.0 million, or 2.8% above net
sales of $72.1 million for the six month period ended September 30, 2004. The
Household Cleaning segment had net sales of $48.1 million for the six month
period ended September 30, 2005, a decrease of $1.5 million, or 3.2% below net
sales of $49.6 million for the six month period ended September 30, 2004. The
Personal Care segment had net sales of $14.6 million for the six month period
ended September 30, 2005, a decrease of $2.4 million, or 14.1% below net sales
of $17.0 million for the six month period ended September 30, 2004.
Over-the-Counter Drug Segment
Net sales in the Over-the-Counter Drug segment were $74.1 million for the six
month period ended September 30, 2005 versus $72.1 million for the comparable
period of the prior year. This represented an increase of $2.0 million or 2.8%
from the prior period. The sales increase resulted from year-over-year sales
gains for the Chloraseptic and Clear Eyes brands and the addition of Little
Remedies in fiscal year 2006 compared to no sales the prior year (Little
Remedies was acquired in October 2004) partially offset by a decline in sales of
Compound W. The decline in Compound W is primarily a result of softness in the
retail wart remover category and increased competition. The decline in New Skin
is a result of the drop in sales in the retail liquid bandage category. The
Little Remedies brand was acquired in the Vetco acquisition in October 2004. The
Chloraseptic and Clear Eyes gains are a result of continued strong retail
consumer consumption during the period.
Personal Care Segment
Net sales of the Personal Care segment were $14.6 million for the six month
period ended September 30, 2005 versus $17.0 million for the comparable period
of the prior year. This represented a decrease of $2.4 million or 14.1% from the
prior period. The sales decrease is primarily attributable to the Denorex
brand's continued decline in consumer consumption and lower Cutex sales due to
softness in the nail polish remover category.
Household Cleaning Segment
Net sales of the Household Cleaning segment were $48.1 million for the six month
period ended September 30, 2005 versus $49.6 million for the comparable period
of the prior year. This represented a decrease of $1.5 million or 3.2% from the
prior period. The sales decrease was the result of declines in both household
brands - Comet and Spic and Span. The decrease in Comet sales is largely
attributable to the discontinuance of the Clean & Flush toilet bowl product
during 2004 and a one-time inventory level adjustment by a large customer during
the period ended September 30, 2005. Retail movement for the on-going Comet
product line - powder, sprays and cream - continued to strengthened during the
period.
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Gross Profit
Gross profit for the six month period ended September 30, 2005 was $72.3 million
compared to $67.6 million for the comparable period of the prior year. This
represented an increase of $4.7 million or 6.9% from the prior period. The six
month period ended September 30, 2004 included inventory step-up costs
associated with the acquisitions of the businesses of approximately $5.2
million. Excluding costs associated with the inventory step-up in the period
ended September 30, 2004, gross profit decreased by $0.6 million or 0.8% for the
six month period ended September 30, 2005. The decrease in gross profit is
primarily a result of the sales shortfall. Gross profit as a percent of sales
was 52.9% for the six month period ended September 30, 2005 versus 48.8% for the
comparable period of the prior year. Excluding the inventory step-up charge,
gross profit in the prior year period was 52.5%. The increase in gross profit
percentage is primarily a result of a favorable sales mix partially offset by
higher transportation costs..
Over-the-Counter Drug Segment
Gross profit for the Over-the-Counter segment was $46.9 million for the six
month period ended September 30, 2005 versus $42.6 million for the comparable
period of the prior year. This represented an increase of $4.3 million or 10.1%
from the prior period. Excluding $2.6 million of cost associated with the
inventory step-up in the six month period ended September 30, 2004, gross profit
increased by $1.7 million or 3.8% for the six month period ended September 30,
2005. Gross profit as a percent of sales was 63.3% for the six month period
ended September 30, 2005 versus 59.0% for the comparable period of the prior
year. Excluding the inventory step up charge, gross profit in the prior period
was 62.6%. The increase in gross profit as a percent of sales, excluding cost of
inventory step-up, was due to favorable sales mix, partially offset by higher
transportation costs. Compound W Freeze-off has a lower gross profit percentage
than the average product in the Over-the-Counter Drug segment and a smaller
proportion of the sales in the six month period ended September 30, 2005 than in
the comparable period of the prior year.
Personal Care Segment
Gross profit of the personal care segment was $6.2 million for the six month
period ended September 30, 2005 versus $7.8 million for the comparable period of
the prior year. This represented a decrease of $1.6 million or 20.7% from the
prior period. Excluding $0.2 million of costs associated with the inventory
step-up in the six month period ended September 30, 2004, gross profit decreased
by $1.8 million or 23.1% for the six month period ended September 30, 2005. The
gross profit decrease is primarily due to the sales shortfall. Gross profit as a
percent of sales was 42.7% for the six month period ended September 30, 2005
versus 46.3% for the comparable period of the prior year. Excluding the
inventory step-up charge, gross profit in the prior year period was 47.8%. The
gross profit decrease is due to the sales shortfall, increased costs of goods
and higher transportation costs. The increased cost of goods is primarily a
result of higher petroleum prices related to the Cutex product line and the
higher cost value size for Denorex which was introduced last fall.
Household Cleaning Segment
Gross profit of the Household Cleaning segment was $19.1 million for the six
month period ended September 30, 2005 versus $17.2 million for the comparable
period of the prior year. This represented an increase of $1.9 million or 11.3%
from the prior period. Excluding $2.4 million of costs associated with the
inventory step-up in the six month period ended September 30, 2004, gross profit
decreased by $0.5 million or 2.4% for the six month period ended September 30,
2005. The decrease in gross profit is a result of the sales shortfall, partially
offset by improved gross profit as a percent of sales due to discontinuance of
the lower margin Clean & Flush toilet bowl product and sales of certain obsolete
Spic and Span inventory. Gross profit as a percent of sales was 39.8% for the
period ended September 30, 2005 versus 34.7% for the comparable period of the
prior year. Excluding the inventory step-up charge, gross profit in the prior
year period was 39.5%.
Contribution Margin
Contribution margin was $53.4 million for the six month period ended September
30, 2005 versus $48.4 million for the comparable period of the prior year. This
represented an increase of $5.0 million or 10.3% from the prior period.
68
Excluding costs associated with the inventory step-up mentioned above,
contribution margin decreased by $0.2 million or 0.5% for the six month period
ended September 30, 2005 versus the comparable period of the prior year. The
contribution margin decrease is a result of lower sales and gross margin as
discussed above and a $0.3 million reduction in advertising and promotion
spending in the six month period ended September 30, 2005 versus the same period
in the prior year.
Over-the-Counter Drug Segment
Contribution margin for the Over-the-Counter drug segment was $33.6 million for
the six month period ended September 30, 2005 versus $30.2 million for the
comparable period of the prior year. Excluding costs associated with the
inventory step-up mentioned above, contribution margin increased by $0.8 million
or 2.6% for the six month period ended September 30, 2005 versus the comparable
period of the prior year. The contribution margin increase is a result of the
increase in sales and gross profit discussed above and partially offset by $0.9
million increase in advertising and promotion spending in the six month period
ended September 30, 2005 versus the same period of the prior year. Advertising
and promotion increased during the period primarily on Clear Eyes for Dry Eyes
and Compound W partially offset by a Chloraseptic media test program aimed at
the allergy season in the six month period ended September 30, 2004 which was
not repeated in the period ended September 30, 2005.
Personal Care Segment
Contribution margin for the personal care segment was $4.1 million for the six
month period ended September 30, 2005 versus $4.4 million for the comparable
period of the prior year. This represented a decrease of $0.4 million or 8.0%
from the prior period. Excluding costs associated with the inventory step-up
mentioned above, contribution margin decreased by $0.6 million. The contribution
margin decrease is a result of lower sales and gross margin as discussed above
partially offset by a $1.3 million reduction in advertising and promotion
spending in the six month period ended September 30, 2005. The reduction in
advertising and promotion was primarily a result of a shift in Cutex advertising
from television to print media.
Household Cleaning Segment
Contribution margin of the Household Cleaning segment was $15.6 million for the
six month period ended September 30, 2005 versus $13.7 million for the
comparable period of the prior year. This represented an increase of $1.9
million or 13.8% from the prior period. Excluding costs associated with the
inventory step-up mentioned above, contribution margin decreased by $0.5 million
or 3.2% for the six month period ended September 30, 2005 versus the comparable
period of the prior year. The contribution margin decrease is a result of lower
sales and gross margin as discussed above. Advertising and promotion spending
was flat in the six month period end September 30, 2005 from the comparable
period of the prior year.
General and Administrative
General and administrative expenses were $9.0 million for the six month period
ended September 30, 2005 versus $9.4 million for the comparable period of the
prior year. Synergies achieved with the integration of the Medtech, Bonita Bay
and Spic and Span acquisitions were partially offset by an increase in costs
associated with being a public company, including, Sarbanes-Oxley reporting
compliance, regulatory filings and legal fees. The six month period ended
September 30, 2005 includes additional expenses associated with adding the
Little Remedies brand in the Vetco acquisition that was completed in October
2004.
Depreciation and Amortization
Depreciation and amortization expense was $5.3 million for the six month period
ended September 30, 2005 versus $4.5 million for the comparable period of the
prior year. The increase was due to amortization of intangible assets related to
the Vetco acquisition.
69
Interest Expense, net
Net interest expense was $17.2 million for the six month period ended September
30, 2005 versus $29.5 million for the comparable period of the prior year. This
represented a decrease of $12.3 million or 21.5% from the prior period. The
decrease in interest expense is due to the reduction of indebtedness
outstanding.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $0 for the six month period ended September
30, 2005 versus $7.6 million for the comparable period of the prior year. The
$7.6 million for the six month period ended September 30, 2004 related to the
write-off of deferred financing costs and debt discounts associated with the
borrowings retired in connection with the Bonita Bay acquisition.
Income Taxes
The income tax provision for the six month period ended September 30, 2005
was $8.6 million, with an effective rate of 39.3%, compared to $2.2 million,
with an effective rate of 43.6% for the six month period ended September 30,
2004. The difference in the effective tax rates for the six month periods ended
September 30, 2005 and 2004 results primarily from the computation of taxes on a
separate company basis during the six month period ended September 30, 2004.
Liquidity and Capital Resources
We have historically financed our operations with a combination of internally
generated funds and borrowings. In February 2005, we completed an initial public
offering that provided the Company with net proceeds of $416.8 million which
were used to repay $184.0 million of indebtedness, to repurchase common stock
held by the GTCR funds and the TCW/Crescent funds, and to redeem all of the
outstanding senior preferred units and class B preferred units held by previous
investors. Our principal uses of cash are for operating expenses, debt service,
acquisitions, working capital, and capital expenditures.
Net cash provided by operating activities was $24.5 million for period ended
September 30, 2005 compared to $26.4 million for comparable period of the prior
year. The $1.9 million increase was primarily due to net income of $13.3
million, adjusted for non-cash items of $14.5 million in 2005, compared to net
income of $2.8 million, adjusted for non-cash items of $21.8 million for the
period ended September 30, 2004, offset by working capital changes. Working
capital increased by $3.3 million for period ended September 30, 2005, primarily
due to an increase in inventory of $8.1 million as a result of the build-up of
Chloraseptic and Little Remedies inventory in advance of the cold and flu
season, as well as higher than normal inventory levels of Compound W resulting
from the sales shortfall during the period, offset by a decrease in accounts
receivable of $3.4 million and increase in accounts payable and accrued expenses
of $1.5 million.
Net cash used in investing activities was $0.3 million for period ended
September 30, 2005 compared to net cash used of $373.4 million for the
comparable period of the prior year. The net cash used in investing activities
for the September 30, 2005 period was primarily a result of leasehold
improvements on the Company's Irvington, New York offices. The net cash used in
investing activities for the period ended June 30, 2004 was for the acquisition
of Bonita Bay on April 6, 2004.
Net cash used in financing activities was $2.0 million for the period ended
September 30, 2005 compared to $372.4 million for the period ended September 30,
2004. Net cash used in financing activities for September 30, 2005 was primarily
due to mandatory scheduled payments on the senior secured term loan facility. In
the period ended September 30, 2004, to finance the acquisitions of Bonita Bay,
the Company borrowed $668.5 million and issued preferred units and common units
of $58.5 million. The increase in debt was partially offset by the payment of
deferred financing costs of $22.9 million, repayment of the debt incurred in
February 2004 at the time of the Medtech/Denorex acquisition, the pay down of
the revolving credit facility and scheduled payments on current debt which all
totaled $331.7 million.
70
Capital Resources
On February 15, 2005, the Company completed an initial public offering of common
stock which resulted in net proceeds of $416.8 million. The proceeds were used
to repay the $100.0 million outstanding under the Tranche C Term Loan Facility
(plus a repayment premium of $3.0 million and accrued interest of $0.5 million
as of February 15, 2005), and to redeem $84.0 million in aggregate principal
amount of our existing 9.25% Senior Notes (plus a redemption premium of $7.8
million and accrued interest of $3.3 million as of March 18, 2005). Effective
upon the completion of the initial public offering, we entered into an amendment
to the credit agreement that, among other things, allows us to increase the
indebtedness under our Tranche B Term Loan Facility by $200.0 million and allows
for an increase in our Revolving Credit Facility up to $60.0 million.
As of September 30, 2005, we had an aggregate of $493.5 million of outstanding
indebtedness, which consisted of (i) an aggregate of $367.5 million of
borrowings under the Tranche B Term Loan Facility, and (ii) $126.0 million of
9.25% Senior Notes due 2012. We had $60.0 million of borrowing capacity under
the Revolving Credit Facility available at such time.
All loans under the Senior Credit Facility bear interest at floating rates,
which can be either (i) based on the prime rate, or (ii) LIBOR rate, plus an
applicable margin. As of September 30, 2005, an aggregate of $367.5 million was
outstanding under the term loans at a weighted average interest rate of 5.9%.
On June 30, 2004, we paid $52,000 for a 5% interest rate cap agreement with a
notional amount of $20 million. The interest rate cap terminates in June 2006.
On March 7, 2005, we paid $2.3 million for interest rate cap agreements that
became effective August 30, 2005, with a total notional amount of $180 million
and LIBOR cap rates ranging from 3.25% to 3.75%. The interest rate cap
agreements terminate on May 30, 2006, 2007 and 2008 as to $50.0 million, $80.0
million and $50.0 million, respectively. The fair value of the interest rate cap
agreements was $2.6 million at September 30, 2005.
The Tranche B Term Loan Facility matures in April 2011. We must make quarterly
amortization payments on the term loan facility equal to 0.25% of the initial
principal amount of the term loan. The Revolving Credit Facility matures and the
commitments relating to the Revolving Credit Facility terminate in April 2009.
The obligations under the Senior Credit Facility are guaranteed on a senior
basis by Prestige International and all of its domestic subsidiaries, other than
the issuer (Prestige Brands, Inc.), and are secured by substantially all of our
assets.
The Senior Credit Facility contains various financial covenants, including
financial covenants that require us to maintain certain leverage ratios,
interest coverage ratios and fixed charge coverage ratios, as well as covenants
restricting us from undertaking specified corporate actions, including asset
dispositions, acquisitions, payment of dividends and other specified payments,
changes of control, incurrence of indebtedness, creation of liens, making loans
and investments and transactions with affiliates. Our Senior Notes require that
adjusted EBITDA (as defined in the indenture governing such notes) be used as
the basis for calculating our leverage and interest coverage ratios. We were in
compliance with our financial and restrictive covenants under the credit
facility at September 30, 2005.
Our principal sources of funds are anticipated to be cash flows from operating
activities and available borrowings under the Revolving Credit Facility. We
believe that these funds will provide us with sufficient liquidity and capital
resources for us to meet our current and future financial obligations, as well
as to provide funds for working capital, capital expenditures and other needs
for at least the next 12 months. We regularly review acquisition opportunities
and other potential strategic transactions, which may require additional debt or
equity financing.
71
Commitments
As of September 30, 2005, we had ongoing commitments under various contractual
and commercial obligations as follows:
Less than 1 to 3 4 to 5 After 5
Contractual Obligations Total 1 Year Years Years Years
------------- -------------- ------------ ------------ -------------
(in millions)
Long-term debt $ 493.5 $ 3.7 $ 7.5 $ 7.5 $ 474.8
Interest on long-term debt (1) 203.1 31.7 62.5 62.1 46.8
Operating leases 1.4 0.4 0.8 0.2 --
------------- -------------- ----------- ------------ -------------
Total Contractual Obligations $ 698.0 $ 35.8 $ 70.8 $ 69.8 $ 521.6
============= ============== =========== ============ =============
- -------------------
(1) Represents the estimated interest obligations on the outstanding
balance of the Tranche B Term Loan Facility and the outstanding balance
of the Senior Notes, together, assuming scheduled principal payments
(based on the terms of the loan agreements) were made and assuming a
weighted average interest rate of 6.4%. Estimated interest obligations
would be different under different assumptions regarding interest rates
or timing of principal payments. If interest rates on borrowings with
variable rates increased by 1%, interest expense would increase
approximately $3.7 million, in the first year.
72
Critical Accounting Policies and Estimates
The significant accounting policies are described in the notes of the unaudited
financial statements included elsewhere in this document. While all significant
accounting policies are important to our consolidated financial statements, some
of these policies may be viewed as being critical. Such policies are those that
are both most important to the portrayal of our financial condition and require
our most difficult, subjective and complex estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, expenses and the related
disclosure of contingent assets and liabilities. These estimates are based upon
our historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions. The most critical
accounting policies are as follows:
Allowance for doubtful accounts and the allowance for obsolete and damaged
inventory
In the ordinary course of business, we grant non-interest bearing trade credit
to our customers on normal credit terms. To reduce our credit risk, we perform
ongoing credit evaluations of our customers' financial condition. In addition,
we maintain an allowance for doubtful accounts receivable based upon our
historical collection experience and expected collectibility of our accounts
receivable. If uncollectible account balances exceed our estimates, our
financial statements would be adversely affected.
We write down our inventory for estimated obsolescence or damage equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Valuation of long-lived and intangible assets and goodwill
Pursuant to FASB Statement No. 141, "Business Combinations" ("Statement No.
141") and Statement No. 142, "Goodwill and Other Intangible Assets" ("Statement
No. 142") goodwill and indefinite-lived intangible assets are no longer
amortized, but must be tested for impairment at least annually. Intangible
assets with finite lives are amortized over their respective estimated useful
lives. We are required to make judgments regarding the value assigned to
acquired intangible assets and their respective useful lives. Our determination
of the values and lives was based on our analysis of the requirements of
Statements No. 141 and No. 142, as well as an independent evaluation of such
assets. We have determined that a significant portion of our trademarks have
indefinite lives. If we determine that any of these assets has a finite life, we
would amortize the value of that asset over the remainder of such finite life.
Intangible assets with finite lives and other long-lived assets must also be
evaluated for impairment when management believes that the carrying value of the
asset will not be recovered. Adverse changes in market conditions or poor
operating results could result in a future impairment charge. There were no
impairments of goodwill, indefinite-lived intangible assets or other long-lived
assets during the period ended September 30, 2005. Goodwill and other intangible
assets amounted to $899.0 million at September 30, 2005.
Revenue Recognition
We comply with the provisions Securities and Exchange Commission of Staff
Accounting Bulletin 104 "Revenue Recognition," which states that revenue should
be recognized when the following revenue recognition criteria are met: (1)
persuasive evidence of an arrangement exists; (2) the product has been shipped
and the customer takes ownership and assumes the risk of loss; (3) the selling
price is fixed or determinable; and (4) collection of the resulting receivable
is reasonably assured. The Company has determined that the risk of loss
generally occurs when product is received by the customer and, accordingly,
recognizes revenue at that time.
We must make estimates of potential future product returns related to current
period sales. In order to do this, we analyze historical returns, current
economic trends and changes in customer demand and acceptance of our products
when evaluating the adequacy of our allowance for returns in any accounting
period. If actual returns are greater than those estimated by management, our
financial statements in future periods would be adversely affected.
73
The Company frequently participates in the promotional programs of its
customers, as is customary in this industry. The ultimate cost of these
promotional programs varies based on the actual number of units sold during a
finite period of time. These programs may include coupons, scan downs, temporary
price reductions or other price guarantee vehicles. The Company estimates the
cost of such promotional programs at their inception based on historical
experience and current market conditions and reduces sales by such estimates. At
the completion of the promotional program, the estimated amounts are adjusted to
actual results.
Recent Accounting Pronouncements
In March 2005, the FASB issued FIN 47 which clarifies guidance provided by
Statement No. 143, "Accounting for Asset Retirement Obligations." FIN 47 is
effective for the Company no later than March 31, 2006. The adoption of FIN 47
is not expected to have a significant impact on our financial position, results
of operations or cash flows.
In May 2005, the FASB issued Statement No. 154 which replaces APB Opinion No. 20
and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements." Statement No. 154 requires that voluntary changes in accounting
principle be applied retrospectively to the balances of assets and liabilities
as of the beginning of the earliest period for which retrospective application
is practicable and that a corresponding adjustment be made to the opening
balance of retained earnings. APB Opinion No. 20 had required that most
voluntary changes in accounting principle be recognized by including in net
income the cumulative effect of changing to the new principle. Statement No. 154
is effective for all accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or financing activities with
special-purpose entities.
Inflation
Inflationary factors such as increases in the costs of raw materials, packaging
materials, purchased product and overhead may adversely affect our operating
results. Although we do not believe that inflation has had a material impact on
our financial position or results of operations for the periods referred to
above, a high rate of inflation in the future may have an adverse effect on us
and our operating results.
Seasonality
The first quarter of our fiscal year typically has the lowest level of revenue
due to the seasonal nature of certain of our brands relative to the summer and
winter months. In addition, the first quarter is the least profitable quarter
due the increased advertising and promotional spending to support those brands
with a summer season, such as, Compound W, Cutex and New Skin. The Company's
advertising and promotional campaign in the third quarter influence sales in the
fourth quarter winter months. Additionally, the fourth quarter has the lowest
level of advertising and promotional spending as a percent of revenue.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report of Form 10-Q contains forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"),
including information within Management's Discussion and Analysis of Financial
Condition and Results of Operations. The following cautionary statements are
being made pursuant to the provisions of the Act and with the intention to
obtaining the benefits of the "safe harbor" provisions of the Act. Although we
believe that our expectations are based on reasonable assumptions, actual
results may differ materially from those in the forward looking statement.
These forward-looking statements may or may not contain the words "believe,"
"anticipate," "expect," "estimate," "project," "will be," "will continue," "will
likely result," or other similar words and phrases. Forward-looking statements
74
and our plans and expectations are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
anticipated, including, but not limited to the following:
o general economic conditions affecting our products and their respective
markets,
o the high level of competition in our industry and markets,
o our dependence on a limited number of customers for a large portion of
our sales,
o disruptions in our distribution center,
o acquisitions or other strategic transactions diverting managerial
resources, or incurrence of additional liabilities or integration
problems associated with such transactions,
o changing consumer trends, pricing pressures which may cause us to lower
our prices,
o increases in supplier prices,
o changes in our senior management team,
o our ability to protect our intellectual property rights,
o our dependency on the reputation of our brand names,
o shortages of supply of sourced goods or interruptions in the
manufacturing of our products,
o our level of debt, and ability to service our debt,
o our ability to obtain additional financing, and
o the restrictions imposed by our senior credit facility and the indenture
on our operations.
Forward-looking statements speak only as of the date of this quarterly report on
Form 10-Q. Except as required under federal securities laws and the rules and
regulations of the Securities and Exchange Commission, we do not have any
intention to update any forward-looking statements to reflect events or
circumstances arising after the date of this Form 10-Q, whether as a result of
new information, future events or otherwise. As a result of these risks and
uncertainties, readers are cautioned not to place undue reliance on
forward-looking statements included in this Form 10-Q or that may be made
elsewhere from time to time by, or on behalf of, us. All forward-looking
statements attributable to us are expressly qualified by these cautionary
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates because our senior credit facility
is variable rate debt. Interest rate changes, therefore, generally do not affect
the market value of such debt, but do impact the amount of our interest payments
and, therefore, our future earnings and cash flows, assuming other factors are
held constant. At September 30, 2005, we had variable rate debt of approximately
$367.5 million related to our Tranche B Term Loan. There were no borrowings
outstanding at September 30, 2005 related to our Revolving Credit Facility.
Holding other variables constant, including levels of indebtedness, a one
percentage point increase in interest rates on our variable debt would have an
adverse impact on pre-tax earnings and cash flows for the next year of
approximately $3.7 million.
However, on June 30, 2004, we paid $52,000 for a 5% interest rate cap agreement
with a notional amount of $20.0 million that terminates in June 2006.
Additionally, on March 7, 2005 we paid $2.3 million for interest rate cap
agreements that become effective August 30, 2005, with a total notional amount
of $180.0 million and LIBOR cap rates ranging from 3.25% to 3.75%. These
interest rate cap agreements terminate on May 30, 2006, 2007 and 2008 as to
$50.0 million, $80.0 million and $50.0 million, respectively. Given the
protection afforded by the interest rate cap agreements, the impact on pre-tax
earnings and cash flows during the next year of a one percentage point increase
75
in interest rates would be limited to $2.0 million. The fair value of the
interest rate cap agreements was $2.6 million at September 30, 2005.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
- ----------------------------------
As of the end of the period covered by this report, September 30, 2005, an
evaluation was carried out by our management, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer of the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company's disclosure controls and procedures
are designed to ensure that information required to be disclosed in reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and that
such information is accumulated and communicated to management, including the
Chief Executive Officer and Chief Financial Officer, to allow timely discussions
regarding required disclosure. Based on this evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that because
certain deficiencies in the Company's internal control over financial reporting
that are described below and in Note 2 to the consolidated condensed financial
statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q,
Item 4.02(a) of the Company's Current Report on Form 8-K filed with the
Commission on November 15, 2005 (the "Restatement 8-K") and the Company's
Notification of Late Filing on Form 12b-25 with respect to this Quarterly Report
on Form 10-Q (the "12b-25 Notice") filed with the Commission on November 15,
2005 constituted material weaknesses that existed at September 30, 2005, and
because the Company was unable to file its Quarterly Report on Form 10-Q within
the time period specified in the Commission's rules, the Company's disclosure
controls and procedures were not effective as of September 30, 2005. The
Company's management nevertheless has concluded that the consolidated financial
statements included in this report present fairly, in all material respects, the
Company's financial position, and results of operation and cash flows for the
periods presented in conformity with accounting principles generally accepted in
the United States of America.
Internal Control Over Financial Reporting
- -----------------------------------------
Management, with the oversight of the Audit Committee of the Company's
Board of Directors, recently conducted an internal review of the Company's books
and records. As a result of the findings of that review (including with respect
to effects of the above referenced control deficiencies), as noted above, the
Company will restate its audited consolidated financial statements for the years
ended March 31, 2005, 2004 and 2003 and the quarterly data for the years ended
March 31, 2005 and 2004 included in the Company's Annual Report on Forms 10-K
and 10-K/A for the year ended March 31, 2005, and the financial statements for
the quarters ended June 30, 2005 and 2004 included in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2005. According to
PCAOB Accounting Standard No. 2, An Audit Of Internal Control Over Financial
Reporting Performed in Conjunction With an Audit of Financial Statements, a
restatement of previously-issued financial statements is at least a significant
deficiency and a strong indicator that a material weakness exists with respect
to internal control over financial reporting. As noted above, management
concluded that the control deficiencies listed below constituted material
weaknesses as of September 30, 2005. Material weaknesses are control
deficiencies, or a combination of control deficiencies, that result in more than
a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The control deficiencies
that the Company identified were as follows:
a) The Company did not maintain effective controls over the completeness
and accuracy of revenue in accordance with the requirements of SAB No. 104.
Specifically, the Company's controls failed to ensure that risk of loss had
passed to the customer before revenue was recognized.
76
b) The Company did not maintain effective controls over the classification
of promotions and allowances in accordance with the requirements of EITF 01-09.
Specifically, the Company's controls failed to prevent or detect the incorrect
classification of promotions and allowances as an operating expense instead of
as a reduction of revenue.
c) The Company did not maintain effective controls over the completeness
and accuracy of deferred income tax balances. Specifically, the Company's
controls failed to ensure that adjustments to deferred income taxes for
increases in graduated federal income tax rates were timely recognized in the
Company's financial statements.
d) The Company did not maintain effective controls over the accuracy of the
computation of earnings per share. Specifically, the Company's controls failed
to ensure that unvested restricted shares of common stock were properly
considered in the computation of earnings per share.
Management, with the oversight of the Audit Committee of the Board of
Directors, is devoting and intends to continue to devote considerable effort to
making improvements in the Company's internal control over financial reporting.
These improvements have included appointing a new Corporate Controller in June
2005 who reports to the Company's Chief Financial Officer. Additionally, in July
2005, the Company engaged an independent tax consultant to provide guidance with
regard to the determination of corporate tax obligations. This consultant
reports directly to the Corporate Controller. Specifically related to the
control deficiencies referenced above and described in the Restatement 8-K and
the 12b-25 Notice that constituted material weaknesses, the Company's
remediation plan includes the following:
o The Company is enhancing its guidelines and implementing controls in
connection with the issuance of trade promotional allowances. Additionally, the
Company will provide training to employees on the proper accounting and
documentation policies related to trade promotional allowances and implement new
policies to ensure compliance throughout the year.
o The Company is taking measures to enhance the controls over the
selection, application and monitoring of its accounting policies to ensure
consistent application of accounting policies that are generally accepted in the
United States of America. The Company is also integrating reporting lines,
increasing communication and supervision across operating and accounting
organizations, and increasing the review of existing accounting policies.
Specifically as it relates to the accounting for revenue recognition, the
Company is changing its controls and accounting policies surrounding the review,
analysis and recording of shipments and shipping terms with customers, including
the selection and monitoring of appropriate assumptions and guidelines to be
applied during the review and analysis of all customer terms. Specifically, the
Company is implementing controls over the accounting, monitoring, and analysis
of all customer shipping terms and conditions to ensure transactions are
recorded consistent with generally accepted accounting principles.
o With respect to the computation of earnings per share, the Company will
provide training to employees on the proper accounting related to the proper
treatment of unvested shares in the basic and diluted computations.
The above-described remedial efforts all began following the completion of
the Company's quarter ended September 30, 2005. There were no changes in
the Company's internal control over financial reporting during the quarter ended
September 30, 2005 that materially affected or are reasonably likely to
materially affect internal control over financial reporting.
Management is not required to report on the assessment of its internal
control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002 until it files its Annual Report on Form 10-K for the fiscal year
ended March 31, 2006. Although it expects its internal control over financial
reporting to be effective at that time, if it fails to remediate any condition
constituting a material weakness on or before March 31, 2006, the presence of a
77
material weakness at that time would cause management to conclude that its
internal controls over financial reporting are ineffective and would cause its
external auditors to issue an adverse opinion on the effectiveness of such
internal controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2002, the Company entered into a ten year manufacturing and supply
agreement with an unrelated company. Pursuant to this agreement, the Company
agreed to purchase certain minimum quantities of product over the initial three
years of the agreement or to pay liquidated damages of up to $360,000. The
Company had recorded a liability of $308,000 at March 31, 2005, which
represented its estimate of the probable liquidated damages. Such estimate was
based on historical and expected purchases during the initial three years of the
agreement. The Company settled this obligation in August 2005 for an amount
slightly in excess of its recorded liability.
In June 2003, Dr. Jason Theodosakis filed a lawsuit, Theodosakis v. Walgreens,
et al., in Federal District Court in Arizona, alleging that two of the Company's
subsidiaries, Medtech Products and Pecos Pharmaceutical, as well as other
unrelated parties, infringed the trade dress of two of his published books.
Specifically, Dr. Theodosakis published "The Arthritis Cure" and "Maximizing the
Arthritis Cure" regarding the use of dietary supplements to treat arthritis
patients. Dr. Theodosakis alleged that his books have a distinctive trade dress,
or cover layout, design, color and typeface, and those products that the
defendants sold under the ARTHx trademarks infringed the books' trade dress and
constituted unfair competition and false designation of origin. Additionally,
Dr. Theodosakis alleged that the defendants made false endorsements of the
products by referencing his books on the product packaging and that the use of
his name, books and trade dress invaded his right to publicity. The Company sold
the ARTHx trademarks, goodwill and inventory to a third party, Contract
Pharmacal Corporation, in March 2003. On January 12, 2005, the court granted the
Company's motion for summary judgment and dismissed all claims against Pecos and
Medtech. The plaintiff has filed an appeal in the U.S. Court of Appeals which is
pending.
On January 3, 2005, the Company was served with process by its former lead
counsel in the Theodosakis litigation seeking $67,000 plus interest. The case
was filed in the Supreme Court of New York and is styled as Dickstein Shapiro et
al v. Medtech Products, Inc. In February 2005, the plaintiffs filed an amended
complaint naming the Pecos Pharmaceutical Company as defendant. The Company has
answered and filed a counterclaim against Dickstein and also filed a third party
complaint against the Lexington Insurance Company, the Company's product
liability carrier. The Company believes that if there is any obligation to the
Dickstein firm relating to this matter, it is an obligation of Lexington and not
the Company.
On May 9, 2005, the Company was served with a complaint in a class action
lawsuit filed in Essex County, Massachusetts, styled as Dawn Thompson v. Wyeth,
Inc. relating to the Company's Little Remedies pediatric cough products. The
Company is one of several corporate defendants, all of whom market
over-the-counter cough syrup products for pediatric use. The complaint alleges
that the ingredient dextromethorphan is no more effective than a placebo. There
is no allegation of physical injury caused by the product or the ingredient. In
June 2005, the Company was served in a second class action complaint involving
dextromethorphan. The second case, styled Tina Yescavage v. Wyeth was filed in
Lee County Florida and similarly involves multiple corporate defendants. Both
the Thompson and Yescavage suits were dismissed in September 2005.
The Company and certain of its officers and directors are defendants in a
consolidated putative securities class action lawsuit filed in the United States
District Court for the Southern District of New York (he "Consolidated Action").
The first of the six consolidated cases was filed on August 3, 2005. Plaintiffs
purport to represent a class of shareholders of the Company who purchased shares
between February 9, 2005 through July 27, 2005. Plaintiffs also name as
78
defendants the underwriters in the Company's initial public offering and a
private equity fund that was selling shareholder in the offering.
The various complaints on file in the Consolidated Action collectively
include claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933
and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiff's
generally allege that the Company issued a series of materially false and
misleading statements in connection with its initial public offering and
thereafter by failing to disclose that demand for certain of the Company's
products was declining and that the Company was planning to withdraw several
products from the market. Plaintiffs seek an unspecified amount of damages. The
district court has appointed a Lead Plaintiff and ordered it to file a
consolidated complaint by December 5, 2005. The Company's management believes
the allegations to be unfounded, will vigorously pursue its defenses, and cannot
reasonably estimate the potential range of loss, if any.
On September 6, 2005, another putative securities class action lawsuit
substantially similar to the Consolidated Action was filed against the same
defendants in the Circuit Court of Cook County, Illinois (the "Chicago Action").
In light of the first-filed Consolidated Action, proceedings in the Chicago
Action have been stayed until a ruling on defendants' anticipated motions to
dismiss the consolidated complaint in the Consolidated Action. The Company's
management believes the allegations to be unfounded, will vigorously pursue its
defenses, and cannot reasonably estimate the potential range of loss, if any.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no equity securities sold by the Company during the period covered by
this Quarterly Report on Form 10-Q that were not registered under the Securities
Act of 1933, as amended.
The following table sets forth information with respect to purchases of shares
of the Company's common stock made during the quarter ended September 30, 2005
by or on behalf of the Company or any "affiliated purchaser," as defined by Rule
10b-18(a)(3) of the Exchange Act:
Issuer Purchases of Equity Securities
--------------------------------------------------------------------------------------------------------
Total Number Maximum
of Shares Number of
Purchased as Shares that
Part of May Yet Be
Publicly Purchased
Total Number Average Announced Under the
of Shares Price Paid Per Plans or Plans or
Period Purchased Share Programs Programs
--------------------------------------------------------------------------------------------------------
7/1/05 - 7/31/05
8/1/05 - 8/31/05
9/1/05 - 9/30/05 12,533 $ 1.70 -- --
------------------- ------------------- ------------------ ---------------------
Total 12,533 $ 1.70 -- --
=================== =================== ================== =====================
79
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Part II, Item 4 of the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2005 filed with the Commission on August 9, 2005 is incorporated
herein by this reference.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
See Exhibit Index immediately following signature page.
80
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
Prestige Brand Holdings, Inc.
-----------------------------------------------
Registrant
Date: November 29, 2005 /s/ PETER J. ANDERSON
----------------------------------------------
Peter J. Anderson
Chief Financial Officer
Prestige Brands International, LLC
-----------------------------------------------
Registrant
Date: November 29, 2005 /s/ PETER J. ANDERSON
-----------------------------------------------
Peter J. Anderson
Chief Financial Officer
81
Exhibit Index
-----------------
10.1 Form of Restricted Stock Agreement, incorporated by reference to the
combined Form 10-Q filed separately by Prestige Brands Holdings,Inc.
and Prestige Brands International, LLC for the quarterly period
ended June 30, 2005.
10.2 Executive Employment Agreement, dated August 4, 2005, by and among
Prestige Brands Holdings, Inc., Prestige Brands, Inc. and Frank P.
Palantoni, incorporated by reference to Form 8-K of Prestige
Brands Holdings, Inc. filed on August 9, 2005.
10.3 Asset Sale and Purchase Agreement, dated July 22, 2005, by and
among Reckitt Benckiser Inc., Reckitt Benckiser (Canada) Inc.,
Prestige Brands Holdings, Inc. and the Spic and Span Company,
incorporated by reference to the Form 8-K of Prestige Brands
Holdings, Inc. filed on July 28, 2005.
10.4 Trademark License and Option to Purchase Agreement between Prestige
Brands Holdings, Inc. and The Procter & Gamble Company, dated
September 8, 2005, incorporated by reference to the Current Report
on Form 8-K of Prestige Brands Holding, Inc. filed on September 12,
2005.
31.1 Rule 13a-14(a)/ 15d-14(a) Certification, executed by Peter C. Mann,
Chairman, President and Chief Executive Officer of Prestige Brands
Holdings, Inc.
31.2 Rule 13a-14(a)/ 15d-14(a) Certification, executed by Peter J.
Anderson, Chief Financial Officer of Prestige Brands Holdings, Inc.
31.3 Rule 13a-14(a)/ 15d-14(a) Certification, executed by Peter C. Mann,
Manager, President and Chief Executive Officer of Prestige Brands
International, LLC.
31.4 Rule 13a-14(a)/ 15d-14(a) Certification, executed by Peter J.
Anderson, Chief Financial Officer of Prestige Brands International,
LLC.
32.1 Certification required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code 302
(18 U.S.C. 1350), executed by Peter C. Mann, Chairman, President
and Chief Executive Officer of Prestige Brands Holdings, Inc.
32.2 Certification required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code 302
(18 U.S.C. 1350) executed by Peter J. Anderson, Chief Financial
Officer of Prestige Brands Holdings, Inc.
32.3 Certification required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code 302
(18 U.S.C. 1350), executed by Peter C. Mann, Manager, President
and Chief Executive Officer of Prestige Brands International, LLC.
32.4 Certification required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code 302
(18 U.S.C. 1350) executed by Peter J. Anderson, Chief Financial
Officer of Prestige Brands International, LLC.