UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x Annual
Report Pursuant to Section 13 or 15(d)
of the
Securities Exchange Act of 1934 for the Fiscal year ended March 31,
2007
OR
o Transition
Report Pursuant to Section 13 or 15(d)
of the
Securities Exchange Act of 1934 for the transition period from ______ to
______
Commission
File Number: 001-32433
|
PRESTIGE
BRANDS HOLDINGS, INC.
|
||||||
|
(Exact
name of Registrant as specified in its charter)
|
||||||
|
Delaware
(State
or other jurisdiction of incorporation or organization)
|
20-1297589
(I.R.S.
Employer Identification No.)
|
|||||
|
90
North Broadway
Irvington,
New York 10533
(Address
of Principal Executive Offices, including zip code)
|
||||||
|
(914)
524-6810
(Registrant’s
telephone number, including area code)
|
||||||
|
Securities
registered pursuant to Section 12(b) of the Act:
|
||||||
|
Title
of each class:
|
Name
on each exchange on which registered:
|
|||||
|
Common
Stock, par value $.01 per share
|
New
York Stock Exchange
|
|||||
|
Securities
registered pursuant to Section 12(g) of the Act: None
|
||||||
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o No
þ
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
o
No
þ
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
þ
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. þ
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b -2 of the Exchange Act. (Check
one)
Large
accelerated filer o Accelerated
filer þ Non-accelerated
filero
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No
þ
The
aggregate market value of voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
last sold as of the last business day of the Registrant’s most recently
completed second fiscal quarter ended September 30, 2006 was $369.7
million.
As
of
June 1, 2007, the Registrant had 50,005,000 shares of common stock
outstanding.
Documents
Incorporated by Reference
Portions
of the Registrant’s Definitive Proxy Statement for the 2007 Annual Meeting of
Stockholders (the “2007 Proxy Statement”) are incorporated by reference into
Part III of this Annual Report on Form 10-K to the extent described
herein.
Table
of Contents
|
Page
|
||
|
Part
I
|
||
|
Item
1.
|
Business
|
1
|
|
Item
1A.
|
Risk
Factors
|
16
|
|
Item
1B.
|
Unresolved
Staff Comments
|
25
|
|
Item
2.
|
Properties
|
25
|
|
Item
3.
|
Legal
Proceedings
|
26
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
27
|
|
Part
II
|
||
|
Item
5.
|
Market
for Registrants’ Common Equity, Related Stockholder
Matters
and Issuer Purchases of Equity Securities
|
28
|
|
Item
6.
|
Selected
Financial Data
|
30
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations
|
33
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
51
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
51
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting
and
Financial Disclosure
|
51
|
|
Item
9A.
|
Controls
and Procedures
|
51
|
|
Item
9B.
|
Other
Information
|
52
|
|
Part
III
|
||
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
53
|
|
Item
11.
|
Executive
Compensation
|
53
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management
and
Related Stockholder Matters
|
53
|
|
Item
13.
|
Certain
Relationships and Related Transactions,
and Director Independence
|
53
|
|
Item
14.
|
Principal
Accounting Fees and Services
|
53
|
|
|
||
|
Part
IV
|
|
|
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
54
|
|
|
||
|
Trademarks
and Trade Names
|
|
|
|
Trademarks
and trade names used in this Annual Report on Form 10-K are the property
of Prestige Brands Holdings, Inc. or its subsidiaries, as the case
may be.
We have utilized the ® and TM
symbols the first time each trademark or trade name appears in this
Annual
Report on Form 10-K.
|
|
|
Part
I.
ITEM
1. BUSINESS
Overview
Unless
otherwise indicated by the context, all references in this Annual Report on
Form
10-K to “we”, “us”, “our”, “Company” or “Prestige” refer to Prestige Brands
Holdings, Inc. and its subsidiaries. Similarly, reference to a year (e.g.
“2007”) refers to our fiscal year ended March 31 of that year.
We
sell
well-recognized, brand name over-the-counter healthcare, household cleaning
and
personal care products in a global marketplace. 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. Our ultimate success
is
dependent on our ability to:
| · |
Develop
effective sales, advertising and marketing
programs,
|
| · |
Grow
our existing products lines,
|
| · |
Acquire
new brands, and
|
| · |
Respond
to the technological advances and product introductions of our
competitors.
|
Our
fourteen major brands, set forth in the table below, have strong levels of
consumer awareness and retail distribution across all major channels. These
brands accounted for approximately 94.1% and 93.3% of our net revenues for
2007
and 2006, respectively.
|
Major Brands
|
Market
Position(1)
|
Market Segment
|
Market
Share
(1)
(%)
|
ACV(1)
(%)
|
||||
|
Over-the-Counter
Healthcare:
|
||||||||
|
Chloraseptic®
|
#1
|
Liquid
Sore Throat Relief
|
44.9
|
95
|
||||
|
Clear
Eyes®
|
#2
|
Redness
Relief
|
16.0
|
87
|
||||
|
Compound
W®
|
#2
|
Wart
Removal
|
32.1
|
85
|
||||
|
Wartner®
|
#3
|
Wart
Removal
|
12.1
|
67
|
||||
|
The
Doctor’s® NightGuard™
|
#1
|
Bruxism
(Teeth Grinding)
|
99.5
|
63
|
||||
|
The
Doctor’s® Brushpicks™
|
#2
|
Interdental
Picks
|
27.6
|
47
|
||||
|
Murine®
|
#3
|
Personal
Ear Care
|
13.4
|
65
|
||||
|
Little
Remedies®(2)
|
N/A
|
Pediatric
Healthcare
|
N/A
|
70
|
||||
|
New-Skin®
|
#1
|
Liquid
Bandages
|
37.1
|
80
|
||||
|
Dermoplast®
|
#3
|
Pain
Relief Sprays
|
31.2
|
62
|
||||
|
|
||||||||
|
Household
Cleaning:
|
||||||||
|
Comet®
|
#2
|
Abrasive
Tub and Tile Cleaner
|
30.3
|
99
|
||||
|
Chore
Boy®
|
#1
|
Soap
Free Metal Scrubbers
|
32.8
|
40
|
||||
|
Spic
and Span®
|
#6
|
All
Purpose Cleaner
|
3.9
|
58
|
||||
|
Personal
Care:
|
||||||||
|
Cutex®
|
#1
|
Nail
Polish Remover
|
27.4
|
93
|
||||
|
Denorex®
|
#4
|
Medicated
Shampoo
|
5.5
|
48
|
| (1) |
The
data included in this Annual Report on Form 10-K regarding the market
share and ranking for our brands, is based on an analysis conducted
by the
Company, based in part on data generated by the independent market
research firm, Information Resources, Inc. (“Information Resources”).
Information Resources reports retail sales data in the food, drug
and mass
merchandise markets. However, Information Resources’ data does not include
Wal-Mart point of sale data, as Wal-Mart ceased providing sales data
to
the industry in 2001. Although Wal-Mart represents a significant
portion
of the mass merchandise market for us, as well as our competitors,
we
believe that Wal-Mart’s exclusion from the Information Resources data
analyzed by the Company above does not significantly change our market
share or ranking relative to our competitors. “Market share” or “market
position” is based on sales dollars
in
the United States, as calculated
|
-1-
Our
products are sold through multiple channels, including mass merchandisers and
drug, grocery, dollar and club stores, which allows us to effectively launch
new
products across all distribution channels and reduce our exposure to any single
distribution channel. We focus our internal resources on our core competencies:
(i) marketing, (ii) sales, (iii) customer service and (iv) product development.
While we perform the production planning and oversee the quality control aspects
of the manufacturing, warehousing and distribution of our products, we outsource
the operating elements of these functions to entities which offer expertise
in
such areas and cost efficiencies due to economies of scale. Our operating model
allows us to focus on marketing and product development, which we believe
enables us to achieve attractive margins while minimizing capital expenditures
and working capital requirements.
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. Consequently, they did not
benefit from the focus of senior level management or strong marketing support.
We also believe that the brands we have purchased from smaller private companies
have been constrained by the limited resources of their prior owners. After
adding a brand to our portfolio, we seek to increase its sales, market share
and
distribution in both new and existing channels through our established retail
distribution network. We pursue this growth through increased advertising and
promotion, new marketing strategies, improved packaging and formulations and
innovative new products. Our business and business model, however, are faced
with various risks that are described in “Risk Factors” in Item 1A of this
Annual Report on Form 10-K.
Competitive
Strengths
Diversified
Portfolio of Well-Recognized and Established Consumer
Brands
We
own
and market well-recognized consumer brands, many of which were established
over
60 years ago. Our diverse portfolio of products provides us with multiple
sources of growth and minimizes our reliance on any one product or category.
We
provide significant marketing support to our brands in order to grow our sales
and our long-term profitability. The markets in which we sell our products,
however, are highly competitive and include numerous national and global
manufacturers, distributors, marketers and retailers, many of which have greater
resources than we do and may be able to spend more aggressively on advertising
and marketing, which may have an adverse effect on our competitive
position.
Strong
Competitor in Attractive, Niche Categories
We
strategically choose to compete in niche product categories that address
recurring consumer needs and that we believe are considered “non-core” to larger
consumer products and pharmaceutical companies. We believe we are well
positioned in these categories due to the long history and consumer awareness
of
our brands, our strong market positions and our low-cost operating model.
However, a significant increase in the number of product introductions by our
competitors in these niche markets could have a material adverse effect on
our
business, financial condition and results from operations.
by
Information Resources for the 52 weeks ended March 25, 2007. “ACV” refers
to the All Commodity Volume Food Drug Mass Index, as calculated by Information
Resources for the 52 weeks ended March 25, 2007. ACV measures the weighted
sales
volume of stores that sell a particular product out of all the stores that
sell
products in that market segment generally. For example, if a product is sold
by
50% of the stores that sell products in that market segment, but those stores
account for 85% of the sales volume in that market segment, that product would
have an ACV of 85%. We believe that ACV is a measure of a product’s importance
to major retailers. We believe that a high ACV evidences a product’s
attractiveness to consumers, as major national and regional retailers will
carry
products that are attractive to their customers. Lower ACV measures would
indicate that a product is not as available to consumers because the major
retailers do not carry products for which consumer demand may not be as high.
For these reasons, we believe that ACV is an important measure for investors
to
gauge consumer awareness of the Company’s product offerings.
|
(2)
|
Market
share information for market segments in which
Little Remedies
products compete is not available from Information
Resources.
|
-2-
Proven
Ability to Develop and Introduce New Products
We
focus
our marketing and product development efforts on identifying underserved
consumer needs and then designing products that directly address those needs.
Keeping with that philosophy, in late 2007, we introduced Clear
Eyes
Maximum
Redness Relief®,
a fast
acting formula that lubricates as it relieves redness, and Little
Tummys Gripe
Water, an herbal supplement with ginger and fennel for safe, gentle relief
of
infant colic, hiccups and upset stomach. The above were designed to augment
our
2006 product introductions that included: Clear
Eyes Triple Action Relief,
formulated to remove redness, moisturize and relieve irritation; Clear
Eyes for Dry Eyes ACR Relief,
for
long lasting relief from pollen, dust and ragweed;
Dermoplast Poison Ivy Treatment, a
non-irritating wash that controls the itch and removes oils that cause the
rash;
as well
as Murine
Homeopathic Earache Relief,
formulated to promote the body’s natural ability to relieve ear pain. Looking
forward, in early 2008, we will introduce Comet
Spray
Gel, a high viscosity mildew stain remover spray, as well as the Murine
Earigate®
Ear
Cleaning System, a natural and hypoallergenic wax removal system with a patented
“reverse spray action” that safely rinses away ear wax buildup without harming
the user's sensitive eardrums. Although
line extensions and new product introductions are important to the overall
growth of a brand, our efforts may reduce sales of existing products within
that
brand. In addition, certain of our product introductions may not be successful,
such as Murine
Homeopathic Allergy Eye Relief, Murine Homeopathic
Tired Eye Relief and Chloraseptic Daily Defense Strips,
all
of
which were introduced in 2006 and discontinued in 2007, as well as
Little Teethers® Oral Pain Relief Swabs,
which
we introduced in February 2005 and discontinued in February
2006.
Efficient
Operating Model
To
gain
operating efficiencies, we directly manage the production planning and quality
control aspects of the manufacturing, warehousing and distribution of our
products, while we outsource the operating elements of these functions to
well-established, lower-cost, third-party providers. This approach allows us
to
benefit from the core competencies of our third-party providers and maintain
a
highly variable cost structure, with low overhead, limited working capital
requirements and minimal investment in capital expenditures. During 2007, our
aggregate gross margin was approximately 52% while our general and
administrative expense and our capital expenditures represented less than 9%
and
1% of net sales, respectively. This compares slightly less favorably to 2006,
when our aggregate gross margin was approximately 53%, and our general and
administrative expenses and our capital expenditures represented less than
8%
and 1% of net sales, respectively. Our gross margin was impacted by the
obsolescence reserves associated with our Chloraseptic inventory and
our general and administrative expenses were impacted by the overall growth
of
the organization. Our operating model, however, requires us to depend on
third-party providers for manufacturing and logistics services. The inability
or
unwillingness of our third-party providers to supply or ship our products may
have a material adverse effect on our business, financial condition and results
from operations.
Management
Team with Proven Ability to Acquire, Integrate and Grow
Brands
Our
management team has significant experience in consumer product marketing, sales,
product development and customer service. We have grown our business through
acquisition, integration and expansion of the brands we purchased. Unlike many
larger consumer products companies which we believe often entrust their smaller
brands to rotating junior employees, we dedicate experienced managers to
specific brands. Since the Company has fewer than 100 employees, we seek more
experienced personnel to carry the substantial responsibility of brand
management. These managers nurture the brands as they grow and
evolve.
Growth
Strategy
In
order
to continue to enhance our brands and drive growth we focus our growth strategy
on our core competencies: (i) marketing, (ii) sales, (iii) customer service,
and
(iv) product development efforts. We plan to execute this strategy
through:
| · |
Investing
in Advertising and
Promotion.
|
We
will
continue to invest in advertising and promotion to drive the growth of our
brands. Our marketing strategy is focused primarily on consumer-oriented
programs that include media advertising, targeted coupon programs and in-store
advertising. While the absolute level of marketing expenditures differs by
brand
and category, we typically have increased the amount of investment in our brands
after acquiring
-3-
them.
For example, after the acquisition of the
Dental Concepts line of products in 2006, we expanded consumer promotion
programs and increased advertising, which resulted in domestic annual brand
sales growth of approximately 26% during 2007. In 2007, we introduced our first
dual-action product, Chloraseptic Sore Throat plus Cough Lozenges, as
well as 2 sugar free sore throat lozenges. Looking forward, our sore throat
relief strip product, originally introduced in 2003, will be reintroduced in
June 2007 with a new and improved formulation and new packaging. Given the
competition in our industry, there is a risk that our marketing efforts may
not
result in increased sales and profitability. Additionally, no assurance can
be
given that we can maintain these increased sales and profitability levels once
attained.
| · |
Growing
our Categories and Market Share with Innovative New
Products
|
Our
strategy is to broaden the categories in which we participate and our share
within those categories through ongoing product innovation. As an example,
we
followed our successful launch in 2005 of an artificial tears product
called
Clear Eyes for Dry Eyes
with
another innovative product called Clear
Eyes Triple Action Relief,
formulated to remove redness, moisturize and relieve irritation in 2006, with
yet another product, Clear
Eyes
Maximum
Redness Relief in late 2007. These successful product introductions were the
primary drivers of the brand’s continued growth. While
there is always a risk that sales of existing products may be reduced by new
product introductions, our goal is to grow the overall sales of our
brands.
| · |
Increasing
Distribution Across Multiple
Channels
|
Our
broad
distribution base ensures that our products are well positioned across all
available channels and that we are able to participate in changing consumer
retail trends. In 2005, we expanded our sales in wholesale club stores,
introducing customized packaging and sizes of our products designed specifically
for this higher growth channel. Comet
grew
approximately 18% in this channel during 2006. There is a risk however, that
we
may not be able to maintain or enhance our relationships across distribution
channels, which could adversely impact our sales, business, financial condition
and results from operations.
| · |
Growing
Our International
Business
|
We
intend
to increase our focus on growing our international business. International
sales
outside of North America represented approximately 4.6% of revenues in 2007
and
approximately 3.4% of our revenues in 2006. We have designed and developed
both
product and packaging for specific international markets and expect our
international revenues to continue to grow as a percentage of total revenues.
In
addition to Clear
Eyes,
Murine
and
Chloraseptic
which
are currently sold internationally, we license The Procter & Gamble Company
to market the Comet
brand in
Eastern Europe. Since a number of our other brands have previously been sold
internationally, we intend to expand the number of brands sold through our
existing international distribution network and are actively seeking additional
distribution partners for further expansion into other international markets.
There is a risk, however, that increasing our focus on international growth
may
divert attention and resources from implementing our domestic business
strategy. There
are
additional risks associated with the increase of our international business,
such as changes in regulatory requirements and currency exchange controls.
See
“Risk Factors” in Item 1A of this Annual Report on Form
10-K.
| · |
Pursuing
Strategic
Acquisitions
|
We
have
an active corporate development program and intend to continue to investigate
strategic add-on acquisitions that enhance our product portfolio. Our management
team has a long track record of successfully identifying, acquiring and
integrating new brands and we will continue to investigate the acquisition
of
highly complementary, recognized brands in attractive categories and channels.
For example, during 2007 we purchased the Wartner
brand of
over-the-counter wart treatment products to augment our ownership of
Compound
W,
the
number two selling brand in the wart treatment category. Additionally, during
2006, we purchased the
Chore Boy
brand,
which competes in the scrubber and sponge sector of the household cleaning
segment, and The
Doctor’s
brand,
which competes in the dental accessories sector of the oral health category,
where we previously had a limited presence. While we believe that there will
continue to be a strong pipeline of acquisition candidates for us to
investigate, strategic fit and relative cost are of the utmost importance in
our
decision to pursue such opportunities. We believe our business model will allow
us to integrate these future acquisitions in an efficient manner, while also
providing opportunities to realize significant cost savings. However, there
is a
risk
-4-
that
our
operating results could be adversely affected in the event we do not realize
all
of the anticipated operating synergies and cost savings from any future
acquisitions, we do not successfully integrate such acquisitions or we pay
too
much for these acquisitions. Provisions in our senior credit facility and the
indenture governing our senior subordinated notes may limit our ability to
engage in strategic acquisitions as well.
Market
Position
During
2007, approximately 77% of our net sales were from brands with a number one
or
number two market position, while during 2006, approximately 74% of our net
sales were from brands with a number one or number two market position. Such
brands include
Chloraseptic,
Clear Eyes,
Chore Boy, Comet,
Compound W,
Cutex, Dermoplast
(number
two in the
Pain
Relief Spray category in 2006),
The
Doctor’s and
New-Skin.
See
the
“Business” section on page 1 of this document for information regarding market
share and ACV calculations.
Our
History and Accomplishments
The
Company, through its predecessors-in-interest, was originally formed in 1996,
as
a joint venture of Medtech Labs and The Shansby Group, to acquire
over-the-counter drug brands from American Home Products. Since 2001, our
Company’s portfolio of brand name products has expanded from over-the-counter
drugs to include household cleaning and personal care products. We have added
brands to our portfolio principally by acquiring strong and well-recognized
brands from larger consumer products and pharmaceutical companies. In February
2004, GTCR Golder Rauner II, LLC (“GTCR”), a private equity firm, acquired
our business from the owners of Medtech Labs and The Shansby Group. In addition,
we acquired the Spic & Span business in March 2004.
In
April 2004, we acquired Bonita Bay Holdings, Inc., the parent holding
company of Prestige Brands International, Inc., which conducted its
business under the “Prestige” name. After we completed the Bonita Bay
acquisition, we began to conduct our business under the “Prestige” name as well.
The Bonita Bay brand portfolio included Chloraseptic,
Comet, Clear Eyes
and
Murine.
In
October 2004, we acquired the rights to the
Little Remedies
brands
through our purchase of Vetco, Inc. Vetco is engaged in the development,
distribution and marketing of pediatric over-the-counter healthcare products,
primarily marketed under the
Little Remedies
brand
name. Vetco’s products include
Little Noses®
nasal
products,
Little Tummys®
digestive health products,
Little Colds®
cough/cold remedies and
Little Remedies New Parents Survival Kits.
The
Little Remedies
products
deliver relief from common childhood ailments without unnecessary additives
such
as saccharin, alcohol, artificial flavors, coloring dyes or harmful
preservatives.
In
February 2005, we raised $448.0 million through an initial public offering
of 28.0 million shares of common stock. We used the net proceeds of the
offering, which were $416.8 million, plus $3.0 million from our revolving
credit facility and $8.8 million of cash on hand to (i) repay $100.0 million
of
our existing senior indebtedness, (ii) to redeem $84.0 million in aggregate
principal amount of our existing 9 1/4% senior subordinated notes, (iii) to
repurchase an aggregate of 4.7 million shares of our common stock held by the
investment funds affiliated with GTCR and TCW/Crescent Mezzanine, LLC
(“TWC/Crescent”) for $30.2 million, and (iv) to contribute $199.8 million to our
subsidiary, Prestige International Holdings, LLC, which was used to redeem
all of its outstanding senior preferred units and class B preferred units.
In
October 2005, we acquired the rights to the “Chore
Boy”
brand
of
metal
cleaning pads, scrubbing sponges, and non-metal soap pads. The brand has over
84
years of history in the scouring pad and cleaning accessories
categories.
In
November 2005, we acquired Dental Concepts LLC (“Dental Concepts”), a marketer
of therapeutic oral care products sold under “The
Doctor’s”
brand.
The business is driven primarily by two niche segments, bruxism
-5-
(nighttime
teeth grinding) and interdental cleaning. The
Doctor’s NightGuard
brand
was the first FDA-approved OTC treatment for bruxism and The
Doctor’s BrushPicks™
are
disposable interdental toothpicks.
In
September 2006, we completed the acquisition of Wartner USA B.V. (“Wartner”),
the owner of the Wartner
brand of
over-the-counter wart treatment products. The Company expects that the
Wartner
brand,
which is the number three brand in the United States over-the-counter wart
treatment category, will enhance the Company’s leadership position in the
category.
During
the second half of 2007, we did not consummate any corporate or brand
acquisitions. However, in accordance with our strategic plan, we repaid $26.4
million of our senior debt with free cash flow generated from operations. This
serves to reduce our interest costs on a going-forward basis, as well as to
favorably impact our interest coverage and our debt-to-equity
ratios.
Products
We
conduct our operations through three principal business segments: (i)
over-the-counter healthcare, (ii) household cleaning and (iii) personal
care.
Over-the-Counter
Healthcare Segment
Our
portfolio of over-the-counter healthcare products consists primarily
of
Clear Eyes, Murine, Chloraseptic, Compound W,
Wartner,
the
Little Remedies
line of
pediatric healthcare products, The
Doctor’s
brand of
oral care products and first aid products such as
New-Skin
and
Dermoplast.
Our
other brands in this category include
Percogesic®,
Momentum®,
Freezone®, Mosco®, Outgro®,
Sleep-Eze®, Compoz®
and
Heet®.
In 2007,
the over-the-counter healthcare segment accounted for 54.8% of our revenues,
while in 2006, the over-the-counter healthcare segment accounted for 54.3%
of
our revenues.
Clear
Eyes and Murine
The
Clear Eyes
and
Murine
brands
were purchased by Bonita Bay Holdings from Abbott Laboratories in
December 2002. Since its introduction in 1968, the
Clear Eyes
brand
has been marketed as an effective eye care product that helps take redness
away
and helps moisturize the eye.
Clear Eyes
has an
ACV of 87%. In February 2007, we introduced Clear
Eyes Maximum
Redness Relief, while in February 2006, we introduced Clear
Eyes
Triple
Action Relief, and in March 2006 the Clear
Eyes
for Dry
Eyes line was expanded with a new seasonal relief product, Clear
Eyes
plus ACR
Relief. The
Murine
brand is
over 100 years old and its products consist of lubricating, soothing eye drops
and ear wax removal aids. The brand was expanded into redness relief in March
2006 with the introduction of Murine
for
Redness Relief. Clear
Eyes and Murine Eye Care are
leading brands in the over-the-counter personal eye care category. The
0.5 oz. size of
Clear Eyes
redness
relief eye drops is the number two selling product in the eye redness relief
category and
Clear Eyes
is the
number two brand in that category with 16.0 % market share.
Murine
Ear Care
is the
third leading brand in the over-the-counter ear care category with a market
share of 13.4%. The ear drop category is composed of products that loosen
earwax, treat trapped water (swimmer’s ear) and treat ear aches. In 2008, we
look to expand our market share in the ear care category with the introduction
of Murine
Earigate,
Ear
Cleaning System, a natural and hypoallergenic wax removal system with a patented
“reverse spray action” that safely rinses away ear wax build-up with out harming
the user’s sensitive eardrums.
Chloraseptic
Chloraseptic
was
acquired by Bonita Bay Holdings in March 2000 from Procter &
Gamble and was originally developed by a dentist in 1957 to relieve sore throats
and mouth pain.
Chloraseptic’s
6 oz. cherry liquid sore throat spray is the number one selling product in
the sore throat liquids/sprays segment. The
Chloraseptic
brand
has an ACV of 95% and is number one in sore throat liquids/sprays with a 44.9%
market share.
Historically,
Chloraseptic
products
were limited to sore throat lozenges and traditional sore throat sprays that
were stored and used at home. Since its acquisition, the
Chloraseptic
product
line has been expanded to include portable sprays, gargle, mouth pain sprays
and
relief strips. In 2007, we introduced our first dual-action product,
Chloraseptic
Sore
Throat plus Cough Lozenges, and our relief strip product, originally introduced
in 2003, will be
-6-
reintroduced
in June 2007 with a new formulation and new packaging. These product
introductions enable us to market
Chloraseptic
products
as a system, encourage consumers to buy multiple types of
Chloraseptic
products, and increase volume for the entire product line.
Compound
W
We
acquired
Compound W
from
American Home Products in 1996. The
Compound W
brand
has a long heritage; its wart removal products having been introduced almost
50 years ago. Compound
W
products
are specially designed to provide relief from common and plantar warts and
are
sold in multiple forms of treatment depending on the consumer’s need, including
Fast-Acting Liquid, Fast-Acting Gel, One Step Pads for Kids, One Step Pads
for
Adults and Freeze
Off®.
We
believe that
Compound W
is one
of the most trusted names in wart removal.
Compound
W
is the
number two wart removal brand in the United States with a 32.1% market share
and
an ACV of 85%. Since
Compound W’s
acquisition, we have successfully expanded the wart remover category and
enhanced the value associated with the
Compound W
brand by
introducing several new products, such as Compound
W Freeze Off,
Fast
Acting Liquid, One Step Pads for Kids, Waterproof One Step Pads and Invisible
Strips Pads. Compound
W Freeze Off,
a
cryogenic wart removal product, has achieved high trade acceptance, as it allows
consumers to use a wart freezing treatment similar to that used by
doctors.
Wartner
Wartner
is the
number three brand in the wart removal category with a 12.1% share of the
cryogenic segment and an ACV rating of 67%. Launched in 2003, Wartner
is
recognized by consumers and the trade as the first ever over-the-counter wart
freezing (cryogenic therapy) treatment in the U. S and Canada. The brand was
acquired from Lil’
Drug
Store Products, Inc. in September 2006.
The
Doctor’s
The
Doctor’s
is a
line of products designed to help consumers who are highly engaged in oral
care
wellness to maintain good oral hygiene in between dental office visits. The
product line was purchased in November 2005 with the acquisition of Dental
Concepts. The business is driven primarily by two niche segments, bruxism
(nighttime teeth grinding) and interdental cleaning. The
Doctor’s NightGuard
brand
was the first FDA-approved OTC treatment for bruxism and The
Doctor’s BrushPicks
are
disposable interdental toothpicks. The
Doctor’s OraPik
is a
permanent, interdental pick and mirror. The entire line is supported by national
advertising, is distributed in leading food, drug and mass merchandiser
retailers and continues to experience sales growth in excess of the dental
accessories category.
Little
Remedies
Little
Remedies
markets
a full line of pediatric over-the-counter products that contain
no alcohol, saccharin, artificial flavors or coloring dyes
including: (i) Little
Noses,
a
product line consisting of saline nasal spray/drops, decongestant nose drops,
a
nasal aspirator for the removal of mucous from nasal passages and moisturizing
nasal gel, (ii) Little
Colds, a product
line consisting of a multi-symptom cold relief formula, sore throat
relief
Saf-T-Pops®,
a cough
relief formula, and a combined decongestant plus cough relief formula, and
(iii)
Little
Tummys,
a
product line consisting of gas relief drops, laxative drops, a nausea relief
aid, as well as the recently introduced gripe water, an herbal supplement used
to ease discomfort often associated with colic and hiccups.
New-Skin
The
brand
has a long heritage, with the core product believed by management to be over
100 years old. New-Skin
products
consist of liquid bandages for small cuts and scrapes that are designed to
replace traditional bandages in an effective and easy to use form.
Each
New-Skin
product
works by forming a thin, clear, protective covering after it is applied to
the
skin.
New-Skin
competes
in the liquid bandage segment of the first aid bandage category where it has
a
37.1% market share and an 80% ACV.
Dermoplast
We
acquired
Dermoplast
from
American Home Products in 1996.
Dermoplast
is an
aerosol spray anesthetic for minor topical pain that was traditionally a
“hospital-only” brand dispensed to mothers after giving birth. The primary use
in hospitals is for post episiotomy pain, post-partum hemorrhoid pain, and
for
the relief of female genital itching.
-7-
Since
Dermoplast’s
acquisition, we have introduced retail versions of the product, a move that
has
approximately doubled the size of the business. Dermoplast
enjoys
significant distribution across the drug and mass merchandise channels, with
an
ACV of 62%. In addition to the traditional hospital uses mentioned
above,
Dermoplast
offers
sanitary, convenient first aid relief for pain and itching from minor skin
irritations, including sunburn, insect bites, minor cuts, scrapes and burns.
Dermoplast
is
currently offered in two formulas: regular strength and antibacterial strength.
In February 2006, we introduced Dermoplast
Poison
Ivy Treatment as the only poison ivy wash that also contains over-the-counter
medicine.
Household
Cleaning Segment
Our
portfolio of household cleaning brands includes the
Comet,
Chore
Boy and Spic and Span brands.
In 2007, the household cleaning segment accounted for 37.4 % of our revenues,
while in 2006, the household cleaning segment accounted for 36.3% of our
revenues.
Comet
Bonita
Bay Holdings acquired
Comet
from
Procter & Gamble in October 2001.
Comet
was
originally introduced in 1956 and is one of the most widely recognized household
cleaning brands, with an ACV of 99%. Comet
products
include different varieties of cleaning powders, sprays and cream, some of
which
are abrasive and some of which are non-abrasive.
Comet
competes
in the abrasive and non-abrasive tub and tile cleaner sub-category of the
household cleaning category that includes abrasive powders and liquids and
non-abrasive sprays. The non-abrasive tub and tile cleaner segment is more
fragmented and competitive than the abrasive sector and we have been
attempting to build momentum in our efforts to increase Comet’s
market
share in the non-abrasive tub and tile cleaner sector through focused
advertising and promotions, including free-standing insert coupons and
television advertising.
Since
the
Comet
acquisition, we have expanded the brand’s distribution, increased advertising
and promotion and implemented focused marketing initiatives. During 2007, we
introduced Comet
Spray
Gel, a unique mildew stain remover spray product that offers increased cleaning
power due to its high viscosity. Previously, we introduced new fragrances,
including Comet
Lavender
Powder Abrasive Cleanser and Comet
Orange.
We have also extended the brand into underdeveloped demographic targets, and
employed new inverted bottle packaging for Comet
Soft
Cleanser Cream, which improves ease of use. Additionally, multi-packs have
been
introduced in the warehouse club trade class and an 8oz. Soft Cleanser Cream
has
been introduced into the dollar store channel extending the brand’s distribution
and increasing usage.
Chore
Boy
The
Chore
Boy
brand of
scrubbing pads and sponges was initially launched in the 1920's. Over the years
the line has grown to include metal and non-metal scrubbers that are used for
a
variety of household cleaning tasks. While many of the brand’s products find use
in the kitchen, with cooking clean up in particular, they are also used in
clean
up jobs in the home work shop, garage, and other areas, including outdoor grill
cleaning. The newest additions to the line, launched in 2004, consist of
patented mesh materials that clean most surfaces without scratching.
Chore
Boy
products
currently are sold in food stores, by mass merchandisers, and in hardware and
convenience stores. We acquired the Chore
Boy
brand in
October 2005.
Spic
and Span
Spic
and Span
was
introduced in 1925 and is marketed as the complete home cleaner with two product
lines consisting of (i) dilutables and (ii) hard surface sprays for counter
tops
and glass. Each of these products can be used for multi-room and multi-surface
cleaning. Since January 2001, the product line has grown from eight to 33
separate items and we have expanded distribution into new channels such as
dollar stores.
Personal
Care Segment
Our
major
personal care brands include Denorex
dandruff
shampoo,
Cutex
nail
products and
Prell®
shampoo.
Other portfolio brands in this segment include
EZO®
denture
cushion,
Oxipor VHC®
skin-care lotion,
Cloverine®
skin
salve,
Zincon®
shampoo
and
Kerodex®
barrier
cream. While the personal care segment has
-8-
been
deemphasized, it accounted for 7.8% of our revenues in 2007 and 9.4% of our
revenues in 2006.
Denorex
We
acquired Denorex
in
connection with the Medtech acquisition in February 2004. The
Denorex
brand
was originally launched in 1971 as an effective solution to scalp problems.
Denorex
competes
in the therapeutic segment of the dandruff shampoo category and holds a 5.5%
market share. The current lineup of
Denorex
products
includes Daily, for moderate dandruff sufferers and for those with more serious
dandruff conditions, Extra Strength, Extra Strength with Conditioner,
Therapeutic Strength and Therapeutic Strength with Conditioner.
Cutex
Cutex
is an
established and trusted brand of nail polish remover. Cutex,
with an
ACV rating of 93%, has four product lines: (i) Quick and Gentle Liquid Nail
Polish Remover, (ii)
Cutex
Essential Care®
Advanced
Liquid, also available with a new Pump Action Bottle, (iii) Essential
Care
Advanced
Nail Polish Remover Pads and (iv)
Essential Care
Twister
Nail Polish Remover. Cutex
is the
number one brand in the nail polish remover category and has a leading 27.4%
market share. The main competition comes from a number of private label brands,
which collectively have a 54.0% market share.
Prell
Bonita
Bay Holdings acquired Prell
from
Procter & Gamble in November 1999.
Prell,
which
competes in the shampoo category, was launched in 1947 and is a highly
recognized shampoo brand. While the shampoo category is fragmented and populated
by hundreds of brands, placing a premium on distribution, brand recognition
and
positioning, we believe
Prell
has a
loyal base of consumers seeking shampoo at the mid-price point
segment.
For
financial information concerning our business segments, please refer to Item
7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operation and Note 17 to the Consolidated Financial Statements included
elsewhere in this Annual Report on Form 10-K.
Marketing
and Sales
Our
marketing strategy is based upon the acquisition and the rejuvenation of
established consumer brands that possess what we believe to be significant
brand
value and unrealized potential. Our marketing objective is to increase sales
and
market share by developing and executing professionally designed, creative
and
cost-effective advertising and promotional programs. After we acquire a brand,
we implement a brand building strategy that uses the brand’s existing consumer
awareness to maximize sales of current products and provides for brand growth
through product innovation. This brand building process involves the evaluation
and enhancement of the existing brand name, the development and introduction
of
innovative new products and the professional execution of support programs.
To
ensure consistent growth, all new product concepts are thoroughly researched
before launch and supported by an integrated trade, consumer and advertising
effort, although advertising is used selectively. Recognizing that financial
resources are limited, we allocate our resources to focus on those brands that
we
believe have the greatest opportunities for growth and financial success.
Brand priorities vary from year-to-year and generally revolve around new product
introductions.
Customers
Our
senior management team and dedicated sales force strive to maintain
long-standing relationships with our top 50 domestic customers, which accounted
for approximately 77.1% of our combined gross sales for 2007 and 77.9% for
2006.
Our sales management team consists of ten people, who focus on our key customer
relationships. We also contract with third-party sales management organizations
that interface directly with our remaining customers and report directly to
members of our sales management team.
We
enjoy
broad distribution across each of the major retail channels, including mass
merchandisers, drug, food, dollar and club stores. The following table sets
forth the percentage of gross sales to our top 50 customers across our five
major distribution channels during the most recent three-year
period:
-9-
|
|
|
Percentage
of
Gross
Sales to
Top
50 Customers (1)
|
||||
|
Channel of Distribution
|
|
2007
|
2006
|
2005
|
||
|
Mass
|
|
40.1%
|
|
39.1%
|
|
39.1%
|
|
Food
|
|
20.4
|
|
22.4
|
|
23.0
|
|
Drug
|
|
25.8
|
|
23.1
|
|
23.9
|
|
Dollar
|
|
8.1
|
|
9.6
|
|
9.4
|
|
Club
|
|
2.6
|
|
3.3
|
|
2.8
|
|
Other
|
|
2.9
|
|
2.5
|
|
1.8
|
(1) Includes
estimates for some of our wholesale customers that service more than one
distribution channel.
Due
to
the diversity of our product line, we believe that each of these channels is
important to our business and we continue to seek opportunities for growth
in
each channel.
Our
principal customer relationships include Wal-Mart, Walgreens, CVS, Target and
Dollar General. For 2007, our top five and ten customers accounted for
approximately 43% and 53%, respectively, of our gross sales, while in 2006,
our
top five and ten customers accounted for approximately 41% and 51%,
respectively, of our gross sales. No single customer other than Wal-Mart
accounted for more than 10% of our gross sales in either of the two most recent
fiscal years and none of our other top five customers accounted for less than
3%
of our gross sales in either of the two most recent fiscal years. Our top
fifteen customers each purchase products from virtually all of our major product
lines.
Our
strong customer relationships and product recognition provide us with a number
of important benefits including minimizing slotting fees, facilitating new
product introductions, ensuring prominent shelf space and shortening payment
time after invoicing. We believe that management’s emphasis on strong customer
relationships, speed and flexibility, leading sales technology capabilities,
including electronic data interchange, e-mail, the Internet, integrated retail
coverage, consistent marketing support programs and ongoing product innovation
will continue to maximize our competitiveness in the increasingly complex retail
environment.
The
following table sets forth a list of our primary distribution channels and
our
principal customers for each channel:
|
Distribution
Channel
|
|
Customers
|
Distribution
Channel
|
|
Customers
|
|
|
Mass
|
|
Kmart
|
Drug
|
|
CVS
|
|
|
|
|
Meijer
|
|
|
Rite
Aid
|
|
|
|
|
Target
|
|
|
Walgreens
|
|
|
|
|
Wal-Mart
|
||||
|
Dollar
|
|
Dollar
General
|
||||
|
Food
|
|
Ahold
|
|
|
Family
Dollar
|
|
|
|
|
Kroger
|
|
|
Dollar
Tree
|
|
|
|
|
Publix
|
||||
|
|
|
Safeway
|
Club
|
|
Costco
|
|
|
|
|
Supervalu
|
|
|
Sam’s
Club
|
|
|
|
|
|
|
BJ’s
Wholesale Club
|
||
Outsourcing
and Manufacturing
In
order
to maximize our competitiveness and efficiently allocate our resources,
third-party manufacturers fulfill all of our manufacturing needs. We have found
that contract manufacturing maximizes our flexibility and responsiveness to
industry and consumer trends while minimizing the need for capital expenditures.
We select contract manufacturers based on their core competencies and our
perception of the best overall value, including
-10-
factors
such as (i) depth of services, (ii) the management team, (iii) manufacturing
flexibility, (iv) regulatory compliance and (v) competitive pricing. We also
conduct thorough reviews of each potential manufacturer’s facilities, quality
standards, capacity and financial stability. We generally only purchase finished
products from our manufacturers.
Our
primary contract manufacturers provide comprehensive services from product
development through the manufacturing of finished goods. They are responsible
for such matters as (i) production planning, (ii) product research and
development, (iii) procurement, (iv) production, (v) quality testing, and (vi)
almost all capital expenditures. In most instances, we provide our contract
manufacturers with guidance in the form of (i) product development, (ii)
performance criteria, (iii) regulatory guidance, (iv) sourcing of packaging
materials and (v) monthly master production schedules. This management approach
results in minimal capital expenditures and maximizes our cash flow, which
is
reinvested to support our marketing initiatives or used for brand acquisitions
and/or to repay outstanding indebtedness.
We
have
relationships with over 40 third-party manufacturers. Of those, our top 10
manufacturers produce items that accounted for 78% of our sales for 2007. We
do
not have long-term contracts with the manufacturers of products that account
for
approximately 35% of our sales in 2007. The lack of manufacturing agreements
for
these products exposes us to the risk that the manufacturer could stop producing
our products at any time, for any reason or fail to provide us with the level
of
products we need to meet our customers’ demands. Should one or more of our
manufacturers stop producing product on our behalf, it could
have a material adverse effect on our business, financial condition and results
from operations.
At
March
31, 2007, our largest suppliers of manufactured goods included (i) Vijon
Laboratories, (ii) Abbott Laboratories, (iii) Kolmar Canada, (iv)
Procter & Gamble, (v) OraSure Technologies and (vi) Humco Holdings. We
enter into manufacturing agreements for a majority of our products by sales
volume, each of which vary based on the third-party manufacturer and the
products being supplied. These agreements explicitly outline the manufacturer’s
obligations and product specifications with respect to the brand or brands
being
produced. The prices for purchase of products under these agreements are subject
to change pursuant to the terms of these agreements due to fluctuations in
raw
material, packaging and labor costs. All of our other products are manufactured
on a purchase order basis which are generally based on batch sizes and result
in
no long-term obligations or commitments.
Warehousing
and Distribution
We
receive orders from retailers and/or brokers primarily by electronic data
interchange, which automatically enters each order into our computer systems
and
then routes the order to our distribution center. The distribution center will,
in turn, send a confirmation that the order was received, fill the order and
ship the order to the customer, while sending a shipment confirmation to us.
Upon receipt of the confirmation, we send an invoice to the
customer.
We
manage
product distribution in the mainland United States through one facility located
in St. Louis, owned and operated by Jacobson / Arthur Wells, Inc. Jacobson
/ Arthur Wells handles all finished goods storage, as well as the receipt and
disposition of customer returns through their Warehousing Specialists subsidiary
(“WSI”), and all customer shipments through their Nationwide Logistics
subsidiary (“NLI”).
The
Storage and Handling Agreement provides that, for the three-year period
beginning June 2005, WSI shall provide warehouse services, including without
limitation, storage, handling and shipping with respect to our full line of
products. The Transportation Management Agreement provides that, for the
three-year period beginning August 2005, NLI shall provide (i) complete
management services, (ii) claims administration, (iii) proof of delivery, (iv)
procurement, (v) report generation, and (vi) automation and tariff compliance
services with respect to our full line of products.
If
WSI or
NLI abruptly stopped providing storage or logistics services to us, our business
operations could suffer a temporary disruption while new service providers
are
engaged. We believe this process could be completed quickly and any temporary
disruption resulting therefrom would have an insignificant effect on our
operating results and financial condition. However, a
serious
disruption, such as a flood or fire, to our distribution center
-11-
could
damage our inventory and could materially impair our ability to distribute
our
products to customers in a timely manner or at a reasonable cost. We could
incur
significantly higher costs and experience longer lead times associated with
the
distribution of our products to our customers during the time required to reopen
or replace our distribution center. As a result, any such serious or prolonged
disruption could have a material adverse effect on our business, financial
condition and results from operations.
Competition
The
business of selling brand name consumer products in the over-the-counter
healthcare, household cleaning and personal care categories is highly
competitive. These markets include numerous manufacturers, distributors,
marketers and retailers that actively compete for consumers’ business both in
the United States and abroad. Many of these competitors are larger and have
substantially greater resources than we do, and may therefore have the ability
to spend more aggressively on advertising and marketing and to respond more
effectively to changing business and economic conditions. If this were to occur,
our sales, operating results and profitability would be adversely
affected.
Our
principal competitors vary by industry category. Competitors in the over-the
counter healthcare category include Johnson & Johnson, maker of
Visine®,
which
competes with our
Clear Eyes
and
Murine
brands;
McNeill-PPC, maker of
Tylenol®
Sore
Throat, and Procter & Gamble, maker of Vicks®, each of which
compete with our
Chloraseptic
brand;
Schering-Plough, maker of
Dr. Scholl’s®,
which
competes with our
Compound W
and
Wartner
brands;
Johnson & Johnson, maker of
BAND-AID®
Brand
Liquid Bandage, which competes with our
New-Skin
brand;
GlaxoSmithKline, maker of
Debrox®,
which
competes with our
Murine
brand;
Sunstar America, Inc., maker of GUM®
line
of
oral care products; as
well
as DenTek® Oral Care, Inc., Power Products, Inc. and Ranir LLC, each of which
markets a dental protector for nighttime teeth grinding, and competes with
The
Doctor’s
brand.
Competitors
in the household cleaning category include Henkel, maker of
Soft
Scrub®,
and
Clorox, maker of
Tilex®,
each
of which competes with our
Comet
brand,
Clorox’s
Pine
Sol®,
which
competes with our
Spic
and Span
brand
and 3M, maker of Scotch-Brite®
and
O-Cel-O®,
which
compete with our Chore
Boy
brand.
Competitors
in the personal care category include Johnson & Johnson, maker
of
T-Gel®
shampoo, and Chattem, maker of Selsun
Blue®,
which
compete with our
Denorex
brand,
as well as Del Laboratories, maker of
Sally Hansen®,
which
competes with our
Cutex
brand.
We
compete on the basis of numerous factors, including brand recognition, product
quality, performance, price and product availability at the retail level.
Advertising, promotion, merchandising and packaging, the timing of new product
introductions and line extensions also have a significant impact on customers’
buying decisions and, as a result, on our sales. The structure and quality
of
our sales force, as well as sell-through of our products, affects in-store
position, wall display space and inventory levels in retail outlets. If we
are
unable to maintain the inventory levels and in-store positioning of our products
in retail stores, our sales and operating results will be adversely affected.
Our markets also are highly sensitive to the introduction of new products,
which
may rapidly capture a significant share of the market. An increase in the amount
of product introductions by our competitors could have a material adverse effect
on our business, financial condition and results from operations.
Regulation
Product
Regulation
The
formulation, manufacturing, packaging, labeling, distribution, importation,
sale
and storage of our products are subject to extensive regulation by various
federal agencies, including the Food and Drug Administration (“FDA”), the
Federal Trade Commission (“FTC”), the Consumer Product Safety Commission
(“CPSC”), the Environmental Protection Agency (“EPA”), and by various agencies
of the states, localities and foreign countries in which our products are
manufactured, distributed and sold. Regulatory matters are overseen by a team
with appropriate legal and regulatory experience. Our Regulatory and Operations
teams work closely with our third-party manufacturers on quality related matters
while we monitor their compliance with FDA regulations and perform periodic
audits to ensure such compliance. Our management intends to continue this
procedure across all of our brands. This continual evaluation process ensures
that our manufacturing processes and products are of the
-12-
highest
quality and in compliance with all known regulatory requirements. When and
if
the FDA chooses to audit a particular manufacturing facility, we are notified
immediately and updated on the progress of the audit as it proceeds. If we
or
our manufacturers fail to comply with applicable regulations, we could become
subject to significant claims or penalties, which could have a material adverse
effect our business, financial condition and results from operations. In
addition, the adoption of new regulations or changes in the interpretations
of
existing regulations may result in significant additional compliance costs
or
discontinuation of product sales and may also have a material adverse effect
on
our business, financial condition and results from operations.
All
of
our over-the-counter drug products are regulated pursuant to the FDA’s monograph
system. The monographs, both tentative and final, set out the active ingredients
and labeling indications that are permitted for certain broad categories of
over-the-counter drug products. When the FDA has finalized a particular
monograph, it has concluded that a properly labeled product formulation is
generally recognized as safe and effective and not misbranded. A tentative
final
monograph indicates that the FDA has not made a final determination about
products in a category to establish safety and efficacy for a product and its
uses. However, unless there is a serious safety or efficacy issue, the FDA
will
typically exercise enforcement discretion and permit companies to sell products
conforming to a tentative final monograph until the final monograph is
published. Products that comply with either final or tentative final monograph
standards do not require pre-market approval from the FDA.
The
Company’s over-the-counter device products are regulated by FDA through a system
which usually involves pre-market clearance of new device products. During
the
review process, the FDA makes an affirmative determination as to the sufficiency
of the label directions, cautions and warnings for the devices in
question.
In
accordance with the Federal Food, Drug and Cosmetic Act (“FDC Act”) and FDA
regulations, the manufacturing processes of our third-party drug and device
manufacturers must also comply with the FDA’s current Good Manufacturing
Processes (“cGMPs”). The FDA inspects our facilities and those of our
third-party manufacturers periodically to determine if we and our third-party
manufacturers are complying with cGMPs.
Other
Regulations
We
are
also subject to a variety of other regulations in various foreign markets,
including regulations pertaining to import/export regulations and antitrust
issues. To the extent we decide to commence or expand operations in additional
countries, we may be required to obtain an approval, license or certification
from the country’s ministry of health or comparable agency. We must also comply
with product labeling and packaging regulations that may vary from
country-to-country. Government regulations in both our domestic and
international markets can delay or prevent the introduction, or require the
reformulation or withdrawal, of some of our products. Our failure to comply
with
these regulations can result in a product being removed from sale in a
particular market, either temporarily or permanently. In addition, we are
subject to FTC and state regulations, as well as foreign regulations, relating
to our product claims and advertising. If we fail to comply with these
regulations, we could be subject to enforcement actions and the imposition
of
penalties which could have a material adverse effect on our business, financial
condition and results from operations.
Intellectual
Property
We
own a
number of trademark registrations and applications in the United States, Canada
and other foreign countries. The following are some of the most important
registered trademarks we own in the United States:
Chloraseptic, Chore Boy, Clear Eyes, Cinch, Cloverine, Comet, Compound W,
Freeze Off, Compoz, Cutex, The Doctor’s, Denorex, Dermoplast, Essential Care,
Freezone, Heet, Kerodex, Little Remedies, Longlast, Momentum, Mosco, Murine,
New-Skin, Outgro, Oxipor, Percogesic, Prell, Simple Pad, Simplegel, Sleep-Eze,
Spic and Span, Wartner, Vacuum Grip
and
Zincon.
In
addition, we have an exclusive royalty bearing license to use the
EZO
trademark in the United States for the ten year term ending on December 31,
2012, at which time we shall have the right to purchase the trademark for
$1,000. While we own the U.S. trademark registration for
Kerodex,
we have
an obligation to pay royalties to Unilever/Scientific with respect to the
manufacture and sale of barrier creams sold in the United States under
the
Kerodex
trademark. This royalty obligation, at 1% of Kerodex
sales,
will continue as long as we make, use or sell products utilizing the
Kerodex
trademark in the United States.
Our
trademarks and trade names are how we convey that the products we sell are
“brand name” products. Our ownership of these trademarks and trade names allows
us to compete based on the value associated with them.
-13-
Enforcing
our proprietary rights in these trademarks and trade names is expensive and
if
we are not able to effectively enforce our rights, others may be able to dilute
our trademarks and trade names and diminish the value associated with our
brands, which could have a material adverse effect on our business, financial
condition and results from operations.
Other
intellectual property rights were acquired from Procter & Gamble and
Abbott Laboratories when we acquired the trademarks related to the
Comet,
Chloraseptic,
Clear Eyes,
Murine
and
Prell
product
lines; however, we did not in all cases obtain title to all of the intellectual
property used to manufacture and sell those products. Therefore, we are
dependent upon Procter & Gamble, Abbott Laboratories and other third
parties for intellectual property used in the manufacture and sale of certain
of
our products.
We
have
granted MF Distributions, Inc. an exclusive license (with an option to
purchase) to sell
Spic
and Span
and
Cinch
products
in Canada for a royalty. In 2003, we assigned our Italian trademark applications
and registrations for
Spic
and Span
and
Cinch
to
Conter, S.p.A., and entered into a concurrent use agreement with Conter with
respect to such marks. Conter is also a licensee of the Spic
and Span
trademark in Benelux, Portugal, Romania and Malta.
We
have
licensed to Procter & Gamble the right to use the
Comet, Spic and Span
and
Chlorinol®
trademarks in the commercial/institutional/industrial segment in the United
States and Canada until 2019. We have also licensed to Procter & Gamble the
Comet
and
Chlorinol
brands
in Russia and specified Eastern European countries until 2015.
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 selling season, such as Compound
W,
Wartner
and
New-Skin.
The
Company’s advertising and promotional campaigns in the third quarter influence
sales in the fourth quarter winter months. Additionally, the fourth quarter
typically has the lowest level of advertising and promotional spending as a
percent of revenue.
Employees
We
employed 92 individuals as of March 31, 2007. None of our employees are party
to
collective bargaining agreements. Management believes that its relations with
its employees are good.
Backlog
Orders
The
Company had no backlog orders at March 31, 2006 or 2007.
Available
Information
Our
Internet address is www.prestigebrandsinc.com. We make available free of charge
on or through our Internet website our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those
reports, and the Proxy Statement for our annual stockholders’ meetings, as soon
as reasonably practicable after we electronically file such material with,
or
furnish it to, the Securities and Exchange Commission (the “SEC”). The
information found on our website shall not be deemed incorporated by reference
by any general statement incorporating by reference this Annual Report on Form
10-K into any filing under the Securities Act of 1933, as amended (the
“Securities Act”), or under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and shall not otherwise be deemed filed under such Acts.
Information on our Internet website does not constitute a part of this Annual
Report on Form 10-K and is not incorporated herein by reference.
We
have
adopted a Code of Conduct Policy, Code of Ethics for Senior Financial Employees,
Complaint Procedures for Accounting and Auditing Matters, Corporate Governance
Guidelines, Audit Committee Pre-Approval Policy, and Charters for our Audit,
Compensation, Nominating and Governance, and Strategic Planning Committees.
We
will provide to any person without charge, upon request, a copy of the foregoing
materials. Any
-14-
requests
for the foregoing documents from us should be made in writing to:
Prestige
Brands Holdings, Inc.
90
North
Broadway
Irvington,
New York 10533
Attention:
Secretary
We
intend
to disclose future amendments to the provisions of the foregoing documents,
policies and guidelines and waivers therefrom, if any, on our Internet website
and/or through the filing of a Current Report on Form 8-K with the SEC to the
extent required under the Exchange Act.
-15-
ITEM
1A. RISK
FACTORS
The
high level of competition in our industry,
much of which comes from competitors with greater resources, could
adversely affect our business, financial condition and results from
operations.
The
business of selling brand name consumer products in the over-the-counter
healthcare, household cleaning and personal care categories is highly
competitive. These markets include numerous manufacturers, distributors,
marketers and retailers that actively compete for consumers’ business both in
the United States and abroad. Many of these competitors are larger and have
substantially greater resources than we do, and may therefore have the ability
to spend more aggressively on research and development, advertising and
marketing, and to respond more effectively to changing business and economic
conditions. If this were to occur, it could have a material adverse effect
on
our business, financial condition and results from operations.
Our
principal competitors vary by industry category. Competitors in the over-the
counter healthcare category include Johnson & Johnson, maker of
Visine®,
which
competes with our
Clear Eyes
and
Murine
brands;
McNeill-PPC, maker of
Tylenol®
Sore
Throat and Procter and Gamble, maker of Vicks®, each of which compete
with our
Chloraseptic
brand;
Schering-Plough, maker of
Dr. Scholl’s®,
which
competes with our
Compound W
and
Wartner
brands;
Johnson & Johnson, maker of
BAND-AID®
Brand
Liquid Bandage, which competes with our
New-Skin
brand;
GlaxoSmithKline, maker of
Debrox®,
which
competes with our
Murine
brand;
Sunstar America, Inc., maker of GUM®
line
of
oral care products; as well as DenTek® Oral Care, Inc., Power Products, Inc. and
Ranir LLC, each of which markets a dental protector for nighttime teeth
grinding, and competes with The
Doctor’s
brand.
Competitors
in the household cleaning category include Henkel, maker of
Soft
Scrub®,
and
Clorox, maker of
Tilex®,
each
of which competes with our
Comet
brand.
In addition, Clorox’s
Pine
Sol®
competes with our
Spic
and Span
brand
and 3M, maker of Scotch-Brite®
and
O-Cel-O®,
compete
with our Chore
Boy
brand.
Competitors
in the personal care category include Johnson & Johnson, maker
of
T-Gel®
shampoo,
and Chattem, maker of Selsun
Blue®
which
compete with our
Denorex
brand,
as well as Del Laboratories, maker of
Sally Hansen®,
which
competes with our
Cutex
brand.
Certain
of our product lines that account for a large percentage of our sales have
a
small market share relative to our competitors. For example, while
Clear Eyes
has a
number two market share position of 16.0% within the allergy/redness eye drop
segment, its top competitor,
Visine®,
has a
market share of 41.4%. In contrast, certain of our brands with number two market
positions have a similar market share relative to our competitors. For
example,
Compound W
has a
number two market position of 32.1% and its top competitor,
Dr. Scholl’s Clear Away®
and
Freeze
Away®,
have a
market position of 43.3%. Also, while
Cutex
is the
number one brand name nail polish remover with a market share of 27.4%,
non-branded, private label nail polish removers account, in the aggregate,
for
54.0% of the market. Finally, while our
New-Skin
liquid
bandage product has a number one market position of 37.1%, the size of the
liquid bandage market is relatively small, particularly when compared to the
much larger bandage category. See “Business” section on page 1 of this document
for information regarding market share calculations.
We
compete for customers’ attention based on a number of factors, including brand
recognition, product quality, performance, price and product availability at
the
retail level. Advertising, promotion, merchandising and packaging, the timing
of
new product introductions and line extensions also have a significant impact
on
consumer buying decisions and, as a result, on our sales. The structure and
quality of our sales force, as well as sell-through of our products affects
in-store position, wall display space and inventory levels in retail stores.
If
we are unable to maintain the inventory levels and in-store positioning of
our
products in retail stores, our sales and operating results will be adversely
affected. Our markets also are highly sensitive to the introduction of new
products, which may rapidly capture a significant share of the market. An
increase in the amount of product introductions by our competitors could have
a
material adverse effect on our business, financial condition and results from
operations.
In
addition, competitors may attempt to gain market share by offering products
at
prices at or below those typically offered by us. Competitive pricing may
require us to reduce prices which may result in lost sales or a
-16-
reduction
of our profit margins. Future price adjustments, product changes or new product
introductions by our competitors or our inability to react with price
adjustments, product changes or new product introductions of our own could
result in a loss of market share which could have a material adverse effect
on
our business, financial condition and results from operations.
We
depend on a limited number of customers for a large portion of our gross sales
and the loss of one or more of these customers could reduce our gross sales
and
therefore, could have a material adverse effect on our business, financial
condition and results of operations.
For
2007,
our
top
five and ten customers accounted for approximately 43% and 53% of our sales,
respectively,
while
during 2006, our top five and ten customers accounted for approximately 41%
and
51% of our sales, respectively. Wal-Mart, which itself accounted for
approximately 24.0% and 21.0% in 2007 and 2006, respectively, of our sales,
is
our only customer that accounted for 10% or more of our sales. We expect that
for 2008 and future periods, our top five and ten customers, including Wal-Mart,
will, in the aggregate, continue to account for a large portion of our sales.
The loss of one or more of our top customers, any significant decrease in sales
to these customers, or a significant decrease in our retail display space in
any
of these customers’ stores, could reduce our sales, and therefore, could have a
material adverse effect on our business, financial condition and results from
operations.
In
addition, our business is based primarily upon individual sales orders. We
typically do not enter into long-term contracts with our customers. Accordingly,
our customers could cease buying products from us at any time and for any
reason. The fact that we do not have long-term contracts with our customers
means that we have no recourse in the event a customer no longer wants to
purchase products from us. If a significant number of our smaller customers,
or
any of our significant customers, elect not to purchase products from us, our
business, financial condition and results from operations could be adversely
affected.
Our
risk of doing business internationally increases as we expand our international
footprint.
During
2007 and 2006, approximately 4.6% and 3.4%, respectively, of our total revenues
were attributable to our international business. We operate in several regions
and countries where we have little or no experience, and generally rely on
brokers and distributors for the sale of our products. In addition to the risks
associated with political instability, changes in the outlook for economic
prosperity in these countries could adversely affect the sales of our products
in these countries. Other risks of doing business internationally
include:
| · |
Changes
in the legislative or regulatory requirements of the countries or
regions
where we do business,
|
| · |
Currency
controls which restrict or prohibit the repatriation of earnings
to the
United States or fluctuations in foreign exchange rates resulting
in
unfavorable increases in the price of our products or cause increases
in
the cost of certain products purchased from our foreign third-party
manufacturers,
|
| · |
Regulatory
oversight and its impact on our ability to get products registered
for
sale in certain markets,
|
| · |
Potential
trade restrictions and exchange
controls,
|
| · |
Inability
to protect our intellectual property rights in these markets,
and
|
| · |
Increased
costs of compliance with general business and tax regulations in
these
countries or regions.
|
We
depend on third-party manufacturers to produce the products we sell. If we
are
unable to maintain these manufacturing relationships or fail to enter into
additional relationships, as necessary, we may be unable to meet customer demand
and our sales and profitability could suffer as a
result.
All
of
our products are produced by third-party manufacturers. Our ability to retain
our current manufacturing relationships and engage in new relationships is
critical to our ability to deliver quality products to our customers in a timely
manner. Without adequate supplies of quality merchandise, sales would decrease
materially and our business would suffer. In the event that our primary
third-party manufacturers are unable or unwilling to ship products to us in
a
timely manner, we would have to rely on secondary manufacturing relationships
or
identify and qualify new manufacturing relationships. We might not be able
to
identify or qualify such manufacturers for existing or new products in a timely
manner and such manufacturers may not allocate sufficient capacity to us in
-17-
order
that we may meet our commitments to customers. In addition, identifying
alternative manufacturers without adequate lead times can compromise required
product validation and stability protocol, which may involve additional
manufacturing expense, delay in production or product disadvantage in the
marketplace. The consequences of not securing adequate and timely supplies
of
merchandise would negatively impact inventory levels, sales and gross margins,
and could have a material adverse effect on our business, financial condition
and results from operations.
In
addition, even if our current manufacturers continue to manufacture our
products, they may not maintain adequate quality controls, and therefore, may
not be able to continue to produce products that are consistent with our
standards or applicable regulatory requirements. If we are forced to rely on
products of inferior quality, then our brand recognition and customer
satisfaction would likely suffer, leading to a reduction in sales. This sales
reduction could have a material adverse effect on our business, financial
condition and results from operations. These manufacturers may also increase
the
cost of the products we purchase which could adversely affect our margins in
the
event we are unable to pass along these increased costs to our customers. A
situation such as this could also have a material adverse effect on our
business, financial condition and results from operations.
At
March
31, 2007, we
had
relationships with over 40 third-party manufacturers. Of those, our top 10
manufacturers produced items that accounted for 78% of our sales for 2007.
We do
not have long-term contracts with the manufacturers of products that accounted
for approximately 35% of our sales for 2007.
The fact
that we do not have long-term contracts with these manufacturers means that
they
could cease manufacturing these products at any time and for any reason, which
could have a material adverse effect on our business, financial condition and
results from operations.
Disruption
in our main distribution center may prevent us from meeting customer demand
and
our sales and profitability may suffer as a result.
We
manage
our product distribution in the continental United States through a primary
distribution center in St. Louis, Missouri. A serious disruption, such as a
flood or fire, to our primary distribution center could damage our inventory
and
could materially impair our ability to distribute our products to customers
in a
timely manner or at a reasonable cost. We could incur significantly higher
costs
and experience longer lead times during the time required to reopen or replace
our primary distribution center. As a result, any such serious disruption could
have a material adverse effect on our business, financial condition and results
from operations.
Achievement
of our strategic objectives requires the acquisition, or potentially the
disposition, of certain brands or product lines. Efforts to affect such
acquisitions or dispositions may divert our managerial resources away from
our
business operations.
The
majority of our growth has been driven by acquiring other brands and companies.
At any given time, we may be engaged in discussions with respect to possible
acquisitions that are intended to enhance our product portfolio, enable us
to
realize cost savings and further diversify our category, customer and channel
focus. Our ability to successfully grow through acquisitions depends on our
ability to identify, negotiate, complete and integrate suitable acquisition
candidates and to obtain any necessary financing. These efforts could divert
the
attention of our management and key personnel from our business operations.
If
we complete acquisitions, we may also experience:
| · |
Difficulties
achieving, or an inability to achieve, our expected
returns,
|
| · |
Difficulties
in integrating any acquired companies, personnel and products into
our
existing business,
|
| · |
Delays
in realizing the benefits of the acquired company or
products,
|
| · |
Higher
costs of integration than we
anticipated,
|
| · |
Difficulties
in retaining key employees of the acquired business who are necessary
to
manage the business,
|
| · |
Difficulties
in maintaining uniform standards, controls, procedures and policies
throughout our acquired companies,
or
|
-18-
| · |
Adverse
customer or shareholder reaction to the
acquisition.
|
In
addition, an acquisition could adversely affect our operating results as a
result of higher interest costs from the acquisition related debt and higher
amortization expenses related to the acquired intangible assets. The diversion
of management’s attention to pursue acquisitions, or our failure to successfully
integrate acquired companies into our business, could have a material adverse
effect on our business, financial condition and results from
operations.
In
the
event that we decide to sell a brand or product line, we may encounter
difficulty finding, or be unable to find, a buyer on acceptable terms in a
timely manner. This could cause a delay in our efforts to achieve our strategic
objectives.
Regulatory
matters governing our industry could have a significant negative effect on
our
sales and operating costs.
In
both
our U.S. and foreign markets, we are affected by extensive laws, governmental
regulations, administrative determinations, court decisions and similar
constraints. Such laws, regulations and other constraints exist at the federal,
state or local levels in the United States and at analogous levels of government
in foreign jurisdictions.
The
formulation, manufacturing, packaging, labeling, distribution, importation,
sale
and storage of our products are subject to extensive regulation by various
federal agencies, including (i) the FDA, (ii) the FTC, (iii) the CPSC, (iv)
the
EPA, and by (v) various agencies of the states, localities and foreign countries
in which our products are manufactured, distributed, stored and sold. If we
or
our third-party manufacturers fail to comply with those regulations, we could
become subject to significant penalties or claims, which could materially
adversely affect our business, financial condition and results from operations.
In addition, the adoption of new regulations or changes in the interpretations
of existing regulations may result in significant compliance costs or the
cessation of product sales and may adversely affect the marketing of our
products, resulting in a significant loss of revenues which could have a
material adverse effect on our business, financial condition and results from
operations.
In
accordance with the FDC Act and FDA regulations, the manufacturing processes
of
our third-party manufacturers must also comply with the FDA’s cGMPs. The FDA
inspects our facilities and those of our third-party manufacturers periodically
to determine if we and our third-party manufacturers are complying with cGMPs.
A
history of past compliance is not a guarantee that future cGMPs will not mandate
other compliance steps and associated expense.
If
we or
our third party-manufacturers fail to comply with federal, state or foreign
regulations, we could be required to:
| · |
Suspend
manufacturing operations,
|
| · |
Modify
product formulations or processes,
|
| · |
Suspend
the sale of products with non-complying
specifications,
|
| · |
Initiate
product recalls, or
|
| · |
Change
product labeling, packaging or advertising or take other corrective
action.
|
Any
of
the foregoing actions could have a material adverse effect on our business,
financial condition and results from operations.
In
addition, our failure to comply with FTC or any other federal and state
regulations, or with similar regulations in foreign markets, that cover our
product claims and advertising, including direct claims and advertising by
us,
may result in enforcement actions and imposition of penalties or otherwise
materially adversely affect the distribution and sale of our products, which
could have a material adverse effect on our business, financial condition and
results from operations.
-19-
Product
liability claims and
related negative publicity could adversely affect our sales and
operating results.
We
may be
required to pay for losses or injuries purportedly caused by our products.
From
time-to-time we have been and may again be subjected to various product
liability claims. Claims could be based on allegations that, among other things,
our products contain contaminants, include inadequate instructions or
warnings regarding their use or inadequate warnings concerning side effects
and interactions with other substances. For example,
Denorex
products
contain coal tar which the State of California has determined allegedly causes
cancer. Consequently, in order to comply with California law and to mitigate
our
risks, the Denorex
packaging contains a warning to that effect. Any product liability claims may
result in negative publicity that may adversely affect our sales and operating
results. Also, if one of our products is found to be defective we may be
required to recall it. This may result in substantial costs and negative
publicity which may adversely affect our sales and operating results. Although
we maintain, and require our suppliers and third-party manufacturers to
maintain, product liability insurance coverage, potential product liability
claims may exceed the amount of insurance coverage or potential product
liability claims may be excluded under the terms of the policy, which could
have
a material adverse effect on our business, financial condition and results
from
operations. In addition, in the future we may not be able to obtain adequate
insurance coverage or we may be required to pay higher premiums and accept
higher deductibles in order to secure adequate insurance coverage.
If
we are unable to protect our intellectual property rights our ability to compete
effectively in the market for our products could be negatively
impacted.
The
market for our products depends to a significant extent upon the goodwill
associated with our trademarks, trade names and patents. Our trademarks and
trade names convey that the products we sell are “brand name” products. We
believe consumers ascribe value to our brands, some of which are over 100 years
old. We own the material trademark, trade names and patents used in connection
with the packaging, marketing and sale of our products. This ownership is what
prevents our competitors or new entrants to the market from using our valuable
brand names and technologies. Therefore, trademark, trade name and patent
protection is critical to our business. Although most of our material
intellectual property is registered in the United States and in applicable
foreign countries, we may not be successful in asserting protection. If we
were
to lose the exclusive right to use one or more of our intellectual property
rights, the loss of such exclusive right could have a material adverse effect
on
our business, financial condition and results from operations.
Other
parties may infringe on our intellectual property rights and may thereby dilute
the value of our brands in the marketplace. Brand dilution or the introduction
of competitive brands could cause confusion in the marketplace and adversely
affect the value that our consumers associate with our brands, and thereby
negatively impact our sales. Any such infringement of our intellectual property
rights would also likely result in a commitment of our time and resources,
financial or otherwise, to protect these rights through litigation or other
means. In addition, third parties may assert claims against our intellectual
property rights and we may not be able to successfully resolve those claims
causing us to lose our ability to use our intellectual property that is the
subject of those claims. Such loss could have a material adverse effect on
our
business, financial condition and results from operations. Furthermore, from
time-to-time, we may be involved in litigation in which we are enforcing or
defending our intellectual property rights which could require us to incur
substantial fees and expenses and have a material adverse effect on our
business, financial condition and results from operations.
Virtually
all of our assets consist of goodwill and
intangibles.
As
our
financial statements indicate, virtually all of our assets consist of goodwill
and intangibles, principally the trademarks, trade names and patents that we
have acquired. In the event that the value of those assets became impaired
or
our business is materially adversely affected in any way, we would not have
tangible assets that could be sold to repay our liabilities. As a result, our
creditors and investors may not be able to recoup the amount of the indebtedness
that they have extended to us or the amount they have invested in
us.
-20-
We
depend on third parties for intellectual property relating to some of the
products we sell, and our inability to maintain or enter into future license
agreements may result in our failure to meet customer demand, which would
adversely affect our operating results.
We
have
licenses or manufacturing agreements with third parties that own intellectual
property (e.g., formulae, copyrights, trademarks, trade dress, patents and
other
technology) used in the manufacture and sale of certain of our products. In
the
event that any such license or manufacturing agreement is terminated as a result
of our breach, we may lose the right to use or have reduced rights to use the
intellectual property covered by such license or agreement and may have to
develop or obtain rights to use other intellectual property. Similarly, our
rights could be reduced if the applicable licensor or third-party manufacturer
fails to maintain the licensed intellectual property because, in such event,
our
competitors could obtain the right to use the intellectual property without
restriction. If this were to occur, we might not be able to develop or obtain
replacement intellectual property in a timely manner. Additionally, any modified
products may not be well-received by customers. The consequences of losing
the
right to use or having reduced rights to such intellectual property could
negatively impact our sales due to our failure to meet consumer demand for
the
affected products or require us to incur costs for development of new or
different intellectual property, either of which could have a material adverse
effect on our business, financial condition and results from operations. In
addition, development of replacement products may be time-consuming and
ultimately may not be feasible.
We
depend on our key personnel and the loss of the services provided by any of
our
executive officers or other key employees could harm our business and results
of
operations.
Our
success depends to a significant degree upon the continued contributions of
our
senior management, many of whom would be difficult to replace. These employees
may voluntarily terminate their employment with us at any time. We may not
be
able to successfully retain existing personnel or identify, hire and integrate
new personnel. While we believe we have developed depth and experience among
our
key personnel, our business may be adversely affected if one or more of these
key individuals were to leave. We do not maintain any key-man or similar
insurance policies covering any of our senior management or key
personnel.
Our
substantial indebtedness could adversely affect our financial health and the
significant amount of cash we need to service our debt will not be available
to
reinvest in our business.
We
have a
significant amount of indebtedness. At March 31, 2007, our total indebtedness,
including current maturities, is approximately $463.3 million. Additionally,
we
have the ability to borrow up to $200.0 million pursuant to our senior credit
facility and an additional $60.0 million pursuant to our revolving credit
facility.
Our
substantial indebtedness could:
| · |
Increase
our vulnerability to general adverse economic and industry
conditions,
|
| · |
Require
us to dedicate a substantial portion of our cash flow from operations
to
repay our indebtedness, thereby reducing the availability of our
cash flow
to fund working capital, capital expenditures, acquisitions and
investments and other general corporate
purposes,
|
| · |
Limit
our flexibility in planning for, or reacting to, changes in our business
and the markets in which we
operate,
|
| · |
Place
us at a competitive disadvantage compared to our competitors that
have
less debt, and
|
| · |
Limit,
among other things, our ability to borrow additional funds on favorable
terms or at all.
|
The
terms
of the indenture governing the 9¼% senior subordinated notes and the senior
credit facility allow us to issue and incur additional debt upon satisfaction
of
conditions set forth in the respective agreements. If new debt is added to
current debt levels, the related risks described above could
increase.
-21-
Our
operating flexibility is limited in significant respects by the restrictive
covenants in our senior credit facility and the indenture governing our senior
subordinated notes.
Our
senior credit facility and the indenture governing our senior subordinated
notes
impose restrictions that could increase our vulnerability to adverse economic
and industry conditions by limiting our flexibility in planning for, and
reacting to, changes in our business and industry. Specifically, these
restrictions limit our ability to, among other things:
| · |
Borrow
money or issue guarantees,
|
| · |
Pay
dividends, repurchase stock from or make other restricted payments
to
stockholders,
|
| · |
Make
investments,
|
| · |
Use
assets as security in other
transactions,
|
| · |
Sell
assets or merge with or into other
companies,
|
| · |
Enter
into transactions with affiliates,
|
| · |
Sell
stock in our subsidiaries, and
|
| · |
Direct
our subsidiaries to pay dividends or make other payments to our
company.
|
Our
ability to engage in these types of transactions is generally limited by the
terms of the senior credit facility and the indenture governing the senior
subordinated notes, even if we believe that a specific transaction would
positively contribute to our future growth, operating results or profitability.
However, if we are able to enter into these types of transactions under the
terms of the senior credit facility and the indenture, or if we obtain a waiver
with respect to any specific transaction, that transaction may cause our
indebtedness to increase, may not result in the benefits we anticipate or may
cause us to incur greater costs or suffer greater disruptions in our business
than we anticipate, and could therefore, have a material adverse effect on
our
business, financial condition and results from operations.
In
addition, the senior credit facility requires us to maintain certain leverage,
interest and fixed charge coverage ratios. Although we believe we are on track
to meet and/or maintain the financial ratios contained in our credit agreement,
our ability to do so may be affected by events outside our control. Covenants
in
our senior credit facility also require us to use 100% of the proceeds we
receive from debt issuances to repay outstanding borrowings under our senior
credit facility. Any failure by us to comply with the terms and conditions
of
the credit agreement and the indenture governing the senior subordinated notes
could have a material adverse effect on our business, financial condition and
results from operations.
The
senior credit facility and the indenture governing the senior subordinated
notes
contain cross-default provisions that may result in the acceleration of all
of
our indebtedness.
The
senior credit facility and the indenture governing the senior subordinated
notes
contain provisions that allow the respective creditors to declare all
outstanding borrowings under one agreement to be immediately due and payable
as
a result of a default under the other agreement. Consequently, under the senior
credit facility, failure to make a payment required by the indenture governing
the senior subordinated notes, among other things, may lead to an event of
default under the senior credit facility. Similarly, an event of default or
failure to make a required payment at maturity under the senior credit facility,
among other things, may lead to an event of default under the indenture
governing the senior subordinated notes. If the debt under the senior credit
facility and indenture governing the senior subordinated notes were to both
be
accelerated, the aggregate amount immediately due and payable as of March 31,
2007 would have been approximately $463.3 million. We presently do not have
sufficient liquidity to repay these borrowings in the event they were to be
accelerated, and we may not have sufficient liquidity in the future to do so.
Additionally, we may not be able to borrow money from other lenders to enable
us
to refinance the indebtedness. At March 31, 2007, the book value of our current
assets was $83.8 million. Although the book value of our total assets was
$1,063.4 million, approximately $968.1 million was in the form of intangible
assets, including goodwill of $310.9 million, a significant portion of which
are
illiquid and may not be available to satisfy our creditors in the event our
debt
is accelerated.
-22-
Any
failure to comply with the restrictions of the senior credit facility, the
indenture governing the senior subordinated notes or any other subsequent
financing agreements may result in an event of default. Such default may allow
the creditors to accelerate the related debt, as well as any other debt to
which
the cross-acceleration or cross-default provisions apply. In addition, the
lenders may be able to terminate any commitments they had made to supply us
with
additional funding. As a result, any default by us under our credit agreement,
indenture governing the senior subordinated notes or any other financing
agreement, could have a material adverse effect on our business, financial
condition and results from operations.
Our
business is subject to the risk of litigation by employees, consumers,
suppliers, stockholders or others through private actions, class actions,
administrative proceedings, regulatory actions or other litigation. The outcome
of litigation, particularly class action lawsuits and regulatory actions, is
difficult to assess or quantify. Plaintiffs in these types of lawsuits may
seek
recovery of very large or indeterminate amounts, and the magnitude of the
potential loss relating to such lawsuits may remain unknown for substantial
periods of time. The cost to defend current and future litigation may be
significant. There may also be adverse publicity associated with litigation
that
could decrease customer acceptance of our products, regardless of whether the
allegations are valid or whether we are ultimately found liable. As a result,
litigation may adversely affect our business, financial condition and results
of
operations.
The
trading price of our common stock may be volatile.
The
trading price of our common stock could be subject to significant fluctuations
in response to several factors, some of which are beyond our control, including
(i) general stock market volatility, (ii) variations in our quarterly operating
results, (iii) our leveraged financial position, (iv) potential sales of
additional shares of our common stock, (v) general trends in the consumer
products industry, (vi) changes by securities analysts in their estimates or
investment ratings, (vii) the relative illiquidity of our common stock and
(viii) news regarding litigation in which we are or become
involved.
Our
principal stockholders have the ability to significantly influence our business,
which may be disadvantageous to other stockholders and adversely affect the
trading price of our common stock.
Entities
affiliated with GTCR collectively own approximately 29.9% of our outstanding
common stock. As a result, these stockholders, acting together, will have the
ability to exert substantial influence over all matters requiring approval
by
our stockholders, including the election and removal of directors and any
proposed merger, consolidation or sale of all or substantially all of our assets
and other corporate transactions. Under our amended and restated certificate
of
incorporation, the GTCR entities and non-employee directors will not have any
duty to refrain from engaging directly or indirectly in the same or similar
business activities or lines of business that we do. In the event that any
GTCR
entity or non-employee director, as the case may be, acquires knowledge of
a
potential transaction or matter which may be a corporate opportunity for itself
and us, the GTCR entity or non-employee director, as the case may be, will
not
have any duty to communicate or offer such corporate opportunity to us and
may
pursue such corporate opportunity for itself or direct such corporate
opportunity to another person. This concentration of stock ownership also may
make it difficult for stockholders to replace management. In addition, this
significant concentration of stock ownership may adversely affect the trading
price for our common stock because investors often perceive disadvantages in
owning stock in companies with stockholders who
own
significant blocks of stock. This concentration of control could be
disadvantageous to other stockholders with interests different from those of
our
officers, directors and principal stockholders and the trading price of shares
of our common stock could be adversely affected.
Substantial
sales of our common stock by either our controlling stockholder or management
or
the perception that these sales could occur could cause the price of our common
stock to decline.
Sales
of
substantial amounts of our common stock in the public market by GTCR or
management, or the perception that these sales could occur, could adversely
affect the price of our common stock and could impair our ability to raise
capital through the sale of additional equity securities. Pursuant to an
agreement with GTCR, we filed a Registration Statement on Form S-3 (“Form S-3”)
with the
-23-
SEC
in
December 2006. While the Form S-3 has yet to be declared effective by the SEC,
once effective, our controlling stockholder will have the ability to sell common
stock, up to the maximum number of common shares registered, into the public
marketplace. Such a sale could adversely affect the price of our common
stock.
We
have no current intention of paying dividends to holders of our common
stock.
We
presently intend to retain our earnings, if any, for use in our operations,
to
facilitate strategic acquisitions, or to repay our outstanding indebtedness
and
have no current intention of paying dividends to holders of our common stock.
In
addition, our debt instruments limit our ability to declare and pay cash
dividends on our common stock. As a result, your only opportunity to achieve
a
return on your investment in our common stock will be if the market price of
our
common stock appreciates and you sell your shares at a profit.
Our
annual and quarterly results from operations may fluctuate significantly and
could fall below the expectations of securities analysts and investors due
to a
number of factors, some of which are beyond our control, resulting in a decline
in the price of our securities.
Our
annual and quarterly results from operations may fluctuate significantly because
of several factors, including:
| · |
Increases
and decreases in average quarterly revenues and
profitability,
|
| · |
The
rate at which we make acquisitions or develop new products and
successfully market them,
|
| · |
Our
inability to increase the sales of our existing products and expand
their
distribution,
|
| · |
Changes
in consumer preferences and competitive conditions, including the
effects
of competitors’ operational, promotional or expansion
activities,
|
| · |
Seasonality
of our products,
|
| · |
Fluctuations
in commodity prices, product costs, utilities and energy costs, prevailing
wage rates, insurance costs and other
costs,
|
| · |
Our
ability to recruit, train and retain qualified employees, and the
costs
associated with those activities,
|
| · |
Changes
in advertising and promotional activities and expansion to new
markets,
|
| · |
Negative
publicity relating to us and the products we
sell,
|
| · |
Unanticipated
increases in infrastructure costs,
|
| · |
Impairment
of goodwill or long-lived assets,
|
| · |
Changes
in interest rates, and
|
| · |
Changes
in accounting, tax, regulatory or other rules applicable to our
business.
|
Our
quarterly operating results and revenues may fluctuate as a result of any of
these or other factors. Accordingly, results for any one quarter are not
necessarily indicative of results to be expected for any other quarter or for
any year, and revenues for any particular future period may decrease. In the
future, operating results may fall below the expectations of securities analysts
and investors. In that event, the price of our securities could
decrease.
We
can be affected adversely and unexpectedly by the implementation of new, or
changes in the interpretation of existing, accounting principles generally
accepted in the United States of America (“GAAP”).
Our
financial reporting complies with GAAP, and GAAP is subject to change over
time.
If new rules or interpretations of existing rules require us to change our
financial reporting, our financial condition and results from operations could
be adversely affected.
-24-
Identification
of material weakness in internal controls over financial reporting may adversely
affect our financial results.
We
are
subject to the ongoing internal control provisions of Section 404 of the
Sarbanes-Oxley Act of 2002. Those provisions provide for the identification
and
reporting of material weaknesses in our system of internal controls over
financial reporting. If such a material weakness is identified, it could
indicate a lack of controls adequate to generate accurate financial statements.
We routinely assess our internal controls over financial reporting, but we
cannot assure you that we will be able to timely remediate any material
weaknesses that may be identified in future periods, or maintain all of the
controls necessary for continued compliance. Likewise, we cannot assure you
that
we will be able to retain sufficient skilled finance and accounting personnel,
especially in light of the increased demand for such personnel among
publicly-traded companies.
Provisions
in our amended and restated certificate of incorporation and Delaware law may
discourage potential acquirers of our company, which could adversely affect
the
value of our securities.
Our
amended and restated certificate of incorporation provides that our board of
directors is authorized to issue from time to time, without further stockholder
approval, up to 5.0 million shares of preferred stock in one or more series
of
preferred stock issuances. Our board of directors may establish the number
of
shares to be included in each series of preferred stock and determine, as
applicable, the voting and other powers, designations, preferences, rights,
qualifications, limitations and restrictions for such series of preferred stock.
The shares of preferred stock could have preferences over our common stock
with
respect to dividends and liquidation rights. We may issue additional preferred
stock in ways which may delay, defer or prevent a change in control of the
Company without further action by our stockholders. The shares of preferred
stock may be issued with voting rights that may adversely affect the voting
power of the holders of our common stock by increasing the number of outstanding
shares having voting rights, and by the creation of class or series voting
rights.
Our
amended
and restated certificate of incorporation contains
additional provisions that may have the effect of making it more difficult
for a
third party to acquire or attempt to acquire control of our company. In
addition, we are subject to certain provisions of Delaware law that limit,
in
some cases, our ability to engage in certain business combinations with
significant stockholders.
These
provisions, either alone, or in combination with each other, give our current
directors and executive officers the ability to significantly influence the
outcome of a proposed acquisition of the Company. These provisions would apply
even if an acquisition or other significant corporate transaction was considered
beneficial by some of our stockholders. If a change in control or change in
management is delayed or prevented by these provisions, the market price of
our
securities could decline.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Our
corporate headquarters are located in Irvington, New York, a suburb of New
York
City. Primary functions undertaken at the Irvington facility include senior
management, marketing, sales, operations, quality control and regulatory
affairs, finance and legal. We lease our Irvington facility which expires on
April 30, 2009. We also have an administrative center in Jackson, Wyoming.
Primary functions undertaken at the Jackson facility include back office
functions, such as invoicing, credit and collection, general ledger and customer
service. We lease the Jackson facility which expires on December 31, 2007.
We conduct business regarding all of our business segments at each of the
Irvington, New York and Jackson, Wyoming facilities.
-25-
ITEM
3. LEGAL
PROCEEDINGS
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 (the “Consolidated
Action”). The first of the six consolidated cases was filed on August 3, 2005.
Plaintiffs purport to represent a class of stockholders of the Company who
purchased shares between February 9, 2005 through November 15, 2005. Plaintiffs
also name as defendants the underwriters in the Company’s initial public
offering and a private equity fund that was a selling stockholder in the
offering. The District Court has appointed a Lead Plaintiff. On December 23,
2005, the Lead Plaintiff filed a Consolidated Class Action Complaint, which
asserted claims under Sections 11, 12(a)(2) and 15 of the Securities Act of
1933
and Sections 10(b), 20(a) and 20A of the Securities Exchange Act of 1934. The
Lead Plaintiff generally alleged that the Company issued a series of materially
false and misleading statements in connection with its initial public offering
and thereafter in regard to the following areas: the accounting issues described
in the Company’s press release issued on or about November 15, 2005; and the
alleged failure 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 Company
filed a motion to dismiss the Consolidated Class Action Complaint in February
2006. On July 10, 2006, the Court dismissed all claims against the Company
and
the individual defendants arising under the Securities Exchange Act of 1934.
The
parties have commenced the discovery process which is ongoing. On June 1, 2007,
a hearing before the Court was held regarding Plaintiffs’ pending motion for
class certification in the Consolidated Action on which no decision has been
rendered at this time. The Company’s management believes the remaining claims
are legally deficient and subject to meritorious defenses. The Company intends
to vigorously pursue its defenses; however, the Company cannot reasonably
estimate the potential range of loss, if any.
On
May
23, 2006, Similasan Corporation filed a lawsuit against the Company in the
United States District Court for the District of Colorado in which Similasan
alleged false designation of origin, trademark and trade dress infringement,
and
deceptive trade practices by the Company related to Murine
for
Allergy Eye Relief, Murine
for
Tired Eye Relief and Murine
for
Earache Relief, as applicable. Similasan has requested injunctive relief, an
accounting of profits and damages and litigation costs and attorneys’ fees. In
response, the Company filed an answer to the complaint with a potentially
dispositive motion. In addition to the lawsuit filed by Similasan in the U.S.
District Court for the District of Colorado, the Company also received a cease
and desist letter from Swiss legal counsel to Similasan and its parent company,
Similasan AG, a Swiss company. In the cease and desist letter, Similasan and
Similasan AG have alleged a breach of the Secrecy Agreement executed by the
Company and demanded that the Company cease and desist from (i) using
confidential information covered by the Secrecy Agreement; and (ii)
manufacturing, distributing, marketing or selling certain of its homeopathic
products. The complaint in the Colorado action has been amended to include
allegations relating to the breach of confidentiality and the Company has filed
an answer and responsive motions. On February 22, 2007, prior to the Court’s
issuance of a decision regarding the pending motions, the Company agreed to
a
settlement of the litigation with Similasan and Similasan AG and executed a
settlement agreement. The terms of the settlement agreement involved a dismissal
of the litigation with prejudice and no monetary damages to the
Company.
On
September 28, 2006, OraSure Technologies, Inc. moved in the Supreme Court of
the
State of New York for a preliminary injunction prohibiting the Company from
selling cryogenic wart removal products under the Wartner brand, which
the Company acquired on September 21, 2006. OraSure Technologies is a supplier
to the Company for the Company’s Compound
W Freeze Off
business. The distribution agreement between the parties provides for mediation
of contract disputes, followed by arbitration, if necessary. The contract in
question is of five years duration ending in December 2007. On October 30,
2006,
the Court denied OraSure Technologies’ motion for a preliminary injunction.
Subsequently, in a decision and order dated December 20, 2006, the Court denied
a motion by OraSure Technologies for a rehearing regarding a preliminary
injunction. An appeal was filed by OraSure in the Appellate Division of the
Supreme Court of the State of New York on January 29, 2007, and the Company
filed a brief with the Court on February 28, 2007. On May 17, 2007, the
Appellate Division reversed the decision of the Supreme Court of the State
of
New York and issued a preliminary injunction prohibiting the marketing and
selling of the Wartner brand by the Company until the underlying
arbitration with OraSure was concluded. On May 21, 2007, the Company requested
that the Appellate Division issue a stay of the preliminary injunction, consider
reargument of the Appellate Division’s decision and grant a leave to appeal to
the Court of Appeals of the State of New York. In response to the Company’s
request for a stay of the preliminary injunction,
-26-
the
Appellate Division issued a stay of the preliminary injunction pending the
Appellate Division’s consideration of the Company’s motion to reargue and
request for leave to appeal to the Court of Appeals. The parties are currently
awaiting the decision of the Appellate Division regarding the motions made
by
the Company. The Company believes the preliminary injunction was granted based
upon factual and legal error and is inconsistent with the terms of the
distribution agreement with OraSure and applicable law. The Company is also
seeking resolution of the matter through arbitration as required pursuant to
the
distribution agreement. A hearing before the arbitration panel is scheduled
to
be held in August 2007.
The
Company is also involved from time to time in other routine legal matters and
other claims incidental to its business. The Company reviews outstanding claims
and proceedings internally and with external counsel as necessary to assess
probability and amount of potential loss. These assessments are re-evaluated
at
each reporting period and as new information becomes available to determine
whether a reserve should be established or if any existing reserve should be
adjusted. The actual cost of resolving a claim or proceeding ultimately may
be
substantially different than the amount of the recorded reserve. In addition,
because it is not permissible under generally accepted accounting principles
to
establish a litigation reserve until the loss is both probable and estimable,
in
some cases there may be insufficient time to establish a reserve prior to the
actual incurrence of the loss (upon verdict and judgment at trial, for example,
or in the case of a quickly negotiated settlement). The Company believes the
resolution of routine matters and other incidental claims, taking into account
reserves and insurance, will not have a material adverse effect on its business,
financial condition or results from operations.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-27-
|
ITEM 5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Market
Information
Prestige
Brands Holdings, Inc.’s common stock is listed on The New York Stock
Exchange under the symbol “PBH.” Our initial public offering occurred on
February 9, 2005, and the first day of trading was February 10, 2005.
The high and low prices of the Company’s common stock as reported by The New
York Stock Exchange for the Company’s two most recent fiscal years on a
quarterly basis were as follows:
|
Year
Ended March 31, 2007
|
High
|
Low
|
|||||
|
Quarter
Ended:
|
|||||||
|
June
30, 2006
|
$
|
12.90
|
$
|
8.25
|
|||
|
September
30, 2006
|
11.55
|
8.50
|
|||||
|
December
31, 2006
|
13.87
|
10.77
|
|||||
|
March
31, 2007
|
13.53
|
10.80
|
|||||
|
Year
Ended March 31, 2006
|
|||||||
|
Quarter
Ended:
|
|||||||
|
June
30, 2005
|
$
|
19.67
|
$
|
15.80
|
|||
|
September
30, 2005
|
21.15
|
10.50
|
|||||
|
December
31, 2005
|
12.50
|
9.39
|
|||||
|
March
31, 2006
|
13.13
|
10.22
|
|||||
Unregistered
Sales of Equity Securities and Use of Proceeds
There
were no equity securities sold by the Company during the period
covered by this Annual Report on Form 10-K that were not registered
under the Securities Act of 1933, as amended.
There
were no purchases of shares of the Company’s common stock made during the
fourth quarter of 2007, by or on behalf of the Company or any
“affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Exchange
Act.
Holders
As
of
June 1, 2007, there were 57 holders of record of our common stock. The number
of
record holders does not include beneficial owners whose shares are held in
the
names of banks, brokers, nominees or other fiduciaries.
Dividend
Policy
We
have
not in the past paid, and do not expect for the foreseeable future, to pay
dividends on our common stock. Instead, we anticipate that all of our earnings
in the foreseeable future will be used in our operations, to facilitate
strategic acquisitions, or to pay down our outstanding indebtedness. Any future
determination to pay dividends will be at the discretion of our board of
directors and will depend upon, among other factors, our results from
operations, financial condition, capital requirements and contractual
restrictions, including restrictions under our senior credit facility and the
indenture governing our 91/4%
senior
subordinated notes, and any other considerations our board of directors deems
relevant.
-28-
PERFORMANCE
GRAPH
The
following graph compares our cumulative total stockholder return since February
9, 2005, the date of our initial public offering, the Peer Group Index, the
Russell 2000 Index (in which the Company is included) and the S&P
Supercomposite 1500 Household and Personal Products Index. The graph assumes
that the value of the investment in the Company’s common stock and each index
was $100.00 on February 9, 2005. The graph was also prepared based on the
assumption that all dividends paid, if any, were reinvested. The
Company has added the Peer Group Index to the performance graph since the
Company has recently established a peer group in connection with its review
and
implementation of executive compensation packages for 2008. Based on the
Company's use of the peer group for benchmarking purposes, the Company believes
the peer group should be included in the performance graph.
|
February
9,
|
March
31
|
||||||||||||
|
2005
(1)
|
2005
|
2006
|
2007
|
||||||||||
|
Prestige
Brands Holdings
|
$
|
100.00
|
$
|
110.31
|
$
|
76.06
|
$
|
74.06
|
|||||
|
The
Peer Group Index (2)
|
100.00
|
97.33
|
117.96
|
131.29
|
|||||||||
|
The
Russell 2000 Index
|
100.00
|
98.57
|
122.61
|
127.78
|
|||||||||
|
The
S&P Supercomposite Index
|
100.00
|
101.32
|
106.25
|
122.91
|
|||||||||
(1) The
Company’s initial public offering priced at $16.00 per share on February 9,
2005. Shares of the Company’s common stock closed at $17.75 per share on
February 10, 2005, the first day the shares of the Company’s common stock were
traded on the NYSE.
(2) The
Peer
Group Index is a self-constructed peer group consisting of companies in the
consumer products industry with comparable revenues and market capitalization,
from which the Company has been excluded. Such Peer Group Index was constructed
in connection with the Company’s benchmark analysis of executive compensation
and is comprised of the following companies: (i) Adams
Respiratory Therapeutics Inc,
(ii)
Alpharma Inc., (iii) Bradley Pharmaceuticals, Inc. (iv) Chattem Inc., (v)
Elizabeth Arden, Inc., (vi) Hain Celestial Group, Inc., (vii) Helen of Troy
Limited, (viii) Inter Parfums, Inc., (ix) Lifetime Brands, Inc., (x) Maidenform
Brands, Inc., (xi) Playtex Products, Inc., and (xii) WD-40
Company.
-29-
ITEM
6. SELECTED
FINANCIAL DATA
Prestige
Brands Holdings, Inc. and Predecessor
Summary
historical financial data for the period from April 1, 2002 to
February 5, 2004 is referred to as the “predecessor” information. On
February 6, 2004, an indirect subsidiary of Prestige Brands
Holdings, Inc. acquired Medtech Holdings, Inc. and The Denorex
Company, which at the time were both under common control and management, in
a
transaction recognized using the purchase method of accounting. The summary
financial data after such dates, referred to as “successor” information,
includes the financial statement impact of recording fair value adjustments
arising from such acquisitions. In addition, the summary financial data includes
the effects of The Spic & Span Company, Bonita Bay Holdings, Inc.,
Vetco Inc. and Dental Concepts LLC and Wartner USA B.V. acquisitions, as well
as
the acquisition of the Chore
Boy
trademark, from their respective acquisition dates.
-30-
|
(In
Thousands, except per share data)
|
Year
Ended March 31
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Income
Statement Data
|
||||||||||
|
Total
revenues
|
$
|
318,634
|
$
|
296,668
|
$
|
289,069
|
||||
|
Cost
of sales (1)
|
153,147
|
139,430
|
139,009
|
|||||||
|
Gross
profit
|
165,487
|
157,238
|
150,060
|
|||||||
|
Advertising
and promotion expenses
|
32,005
|
32,082
|
29,697
|
|||||||
|
Depreciation
and amortization
|
10,384
|
10,777
|
9,800
|
|||||||
|
General
and administrative
|
28,416
|
21,158
|
20,198
|
|||||||
|
Impairment
of intangible assets and
goodwill
|
--
|
9,317
|
--
|
|||||||
|
Interest
expense, net
|
39,506
|
36,346
|
44,726
|
|||||||
|
Other
expense (2)
|
--
|
--
|
26,863
|
|||||||
|
Income
before income taxes
|
55,176
|
47,558
|
18,776
|
|||||||
|
Provision
for income taxes
|
19,098
|
21,281
|
8,556
|
|||||||
|
Net
income
|
36,078
|
26,277
|
10,220
|
|||||||
|
Cumulative
preferred dividends on
Senior
Preferred
and Class B Preferred
units
|
--
|
--
|
(25,395
|
)
|
||||||
|
Net
income (loss) available to common stockholders
|
$
|
36,078
|
$
|
26,277
|
$
|
(15,175
|
)
|
|||
|
Net
income (loss) per common share:
|
||||||||||
|
Basic
|
$
|
0.73
|
$
|
0.54
|
$
|
(0.55
|
)
|
|||
|
Diluted
|
$
|
0.72
|
$
|
0.53
|
$
|
(0.55
|
)
|
|||
|
Weighted
average shares outstanding:
|
||||||||||
|
Basic
|
49,460
|
48,908
|
27,546
|
|||||||
|
Diluted
|
50,020
|
50,008
|
27,546
|
|||||||
|
|
Year
Ended March 31
|
|||||||||
|
Other
Financial Data
|
2007
|
|
|
2006
|
|
|
2005
|
|
||
|
Capital
expenditures
|
$
|
540
|
$
|
519
|
$
|
365
|
||||
|
Cash
provided by (used in):
|
||||||||||
|
Operating
activities
|
71,899
|
53,861
|
51,042
|
|||||||
|
Investing
activities
|
(31,051
|
)
|
(54,163
|
)
|
(425,844
|
)
|
||||
|
Financing
activities
|
(35,290
|
)
|
3,168
|
376,743
|
||||||
|
March
31
|
||||||||||
|
Balance
Sheet Data
|
2007
|
|
|
2006
|
|
|
2005
|
|||
|
Cash
and cash equivalents
|
$
|
13,758
|
$
|
8,200
|
$
|
5,334
|
||||
|
Total
assets
|
1,063,416
|
1,038,645
|
996,600
|
|||||||
|
Total
long-term debt, including current
maturities
|
463,350
|
498,630
|
495,360
|
|||||||
|
Stockholders’
equity
|
445,334
|
409,407
|
382,047
|
|||||||
-31-
|
(In
Thousands, except per share data)
|
February
6, 2004 to March 31,
|
April
1, 2003 to February 5,
|
Year
Ended
March
31
|
|||||||
|
2004
|
2004
|
2003
|
||||||||
|
Income
Statement Data
|
(Successor)
|
(Predecessor)
|
||||||||
|
Total
revenues
|
$
|
16,876
|
$
|
68,402
|
$
|
71,734
|
||||
|
Cost
of sales (1)
|
9,351
|
26,855
|
27,017
|
|||||||
|
Gross
profit
|
7,525
|
41,547
|
44,717
|
|||||||
|
Advertising
and promotion expenses
|
1,267
|
10,061
|
11,116
|
|||||||
|
Depreciation
and amortization
|
931
|
4,498
|
5,274
|
|||||||
|
General
and administrative
|
1,649
|
12,068
|
12,075
|
|||||||
|
Interest
expense, net
|
1,725
|
8,157
|
9,747
|
|||||||
|
Other
expense
|
--
|
1,404
|
685
|
|||||||
|
Income
before income taxes
|
1,953
|
5,359
|
5,820
|
|||||||
|
Provision
for income taxes
|
724
|
2,214
|
3,287
|
|||||||
|
Income
from continuing operations
|
1,229
|
3,145
|
2,533
|
|||||||
|
Loss
from discontinued operations
|
--
|
--
|
(5,644
|
)
|
||||||
|
Cumulative
effect of change in
accounting
principle
|
--
|
--
|
(11,785
|
)
|
||||||
|
Net
income (loss)
|
1,229
|
$
|
3,145
|
$
|
(14,896
|
)
|
||||
|
Cumulative
preferred dividends on
Senior
Preferred
and Class B
Preferred
units
|
(1,390
|
)
|
||||||||
|
Net
loss available to members and
common
stockholders
|
$
|
(161
|
)
|
|||||||
|
Basic
and diluted net loss
per
share
|
$
|
(0.01
|
)
|
|||||||
|
Basic
and diluted weighted average
shares
outstanding
|
24,472
|
|||||||||
|
February
6, 2004 to
March
31,
|
|
|
April
1, 2003 to February 5,
|
|
|
Year
Ended March 31
|
|
|||
|
Other
Financial Data:
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
Capital
expenditures
|
$
|
42
|
$
|
66
|
$
|
421
|
||||
|
Cash
provided by (used in):
|
||||||||||
|
Operating
activities
|
(1,706
|
)
|
7,843
|
12,519
|
||||||
|
Investing
activities
|
(166,874
|
)
|
(576
|
)
|
(2,165
|
)
|
||||
|
Financing
activities
|
171,973
|
(8,629
|
)
|
(14,708
|
)
|
|||||
|
Balance
Sheet Data:
|
March
31, 2004
|
|
|
February
5, 2004
|
|
|
March
31, 2003
|
|||
|
Cash
and cash equivalents
|
$
|
3,393
|
$
|
2,868
|
$
|
3,530
|
||||
|
Total
assets
|
325,358
|
145,130
|
142,056
|
|||||||
|
Total
long-term debt, including
current
maturities
|
148,694
|
71,469
|
81,866
|
|||||||
|
Members’/Stockholders’
equity
|
125,948
|
50,122
|
43,858
|
|||||||
|
(1)
|
For
the period from February 6, 2004 to March 31, 2004 and for 2005,
2006 and
2007, cost of sales includes $1.8 million, $5.3 million, $248,000
and
$276,000, respectively, of charges related to the step-up of
inventory.
|
| (2) |
For
2005, other expense includes a loss on debt extinguishment of $26.9
million.
|
-32-
|
ITEM 7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
|
The
following discussion of our financial condition and results of operations should
be read together with the “Selected Financial Data” and the consolidated
financial statements and the related notes included elsewhere in this Annual
Report on Form 10-K. This discussion and analysis may contain forward-looking
statements that involve certain risks, assumptions and uncertainties. Future
results could differ materially from the discussion that follows for many
reasons, including the factors described in Item 1A., “Risk Factors” in this
Annual Report on Form 10-K, as well as those described in future reports filed
with the SEC.
General
We
are
engaged in the marketing, sales and distribution of brand name over-the-counter
healthcare, household cleaning and personal care products to mass merchandisers,
drug stores, supermarkets and club stores primarily in the United States and
Canada. 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
(“IPO”) of 28.0 million shares of common stock. The net proceeds of the offering
were $416.8 million after deducting $28.0 million of underwriters’ fees 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), to redeem $84.0 million in aggregate principal amount
of our existing 91/4%
senior
subordinated notes (plus a redemption premium of $7.8 million and accrued
interest of $3.3 million), to repurchase an aggregate of 4.7 million 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 our subsidiary, 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 4.2 million shares by the selling
stockholders as a result of underwriters exercising their over-allotment
options.
In
October 2005, we completed the acquisition of the “Chore Boy” brand of cleaning
pads and sponges. The purchase price of this acquisition was $22.6 million,
including direct costs of $400,000. We purchased the Chore Boy brand
with funds generated from operations.
In
November 2005, we completed the acquisition of Dental Concepts LLC, a marketer
of therapeutic oral care products sold under “The Doctor’s” brand. The adjusted
purchase price of the ownership interests was approximately $30.2 million,
including fees and expenses of the acquisition of $1.3 million. We financed
the
acquisition price through the utilization of our Revolving Credit Facility
in
the amount of $30.0 million and cash on hand.
In
September 2006, we completed the acquisition of Wartner USA B.V., a privately
held Netherlands limited liability company, which owned the intellectual
property associated with the “Wartner”
brand of
over-the-counter wart treatment products. The purchase price of this acquisition
was $31.2 million, inclusive of direct
-33-
costs
of
the acquisition of $216,000. We purchased the Wartner brand with funds
generated from operations and the assumption of approximately $5.0 million
of
contingent payments to the former owner of the Wartner
brand.
Impact
of Purchase Accounting
The
acquisitions of Medtech, Spic and Span, Bonita Bay, Vetco, Dental Concepts
and
Wartner USA have been accounted for using the purchase method of accounting
pursuant to Statement of Financial Accounting Standards No. 141, “Business
Combinations” (“Statement No. 141”). As a result, these acquisitions will affect
our future results of operations in significant respects. The aggregate
acquisition consideration has been allocated to the tangible and intangible
assets acquired and liabilities assumed by us based upon their respective fair
values as of the acquisition date. A significant portion of the acquisition
consideration was allocated to amortizable intangible assets which results
in
amortization expense in the periods following the acquisitions. In addition,
our
borrowing to finance these acquisitions has resulted, and will continue to
result in significant interest costs until such time that the debt obligations
are repaid. For additional information, see “Liquidity and Capital Resources”
contained in this Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Critical
Accounting Policies and Estimates
The
Company’s significant accounting policies are described in the notes to the
audited financial statements included elsewhere in this Annual Report on Form
10-K.
While
all significant accounting policies are important to our consolidated financial
statements, certain 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 results from operations and require our most difficult,
subjective and complex estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, expenses or 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 conditions. The most critical accounting policies
are
as follows:
Revenue
Recognition
We
comply
with the provisions of SEC Staff Accounting Bulletin No. 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. We have
determined that the transfer of risk of loss generally occurs when product
is
received by the customer, and, accordingly recognize revenue at that time.
Provision
is made for estimated discounts related to customer payment terms and estimated
product returns at the time of sale based on our historical
experience.
As
is
customary in the consumer products industry, we participate in the promotional
programs of our customers to enhance the sale of our products. The
cost
of these promotional programs is recorded in accordance with Emerging Issues
Task Force 01-09, “Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of
the
Vendor’s Products)”
as
either advertising and promotional expenses or as a reduction of sales. Such
costs vary from period-to-period based on the actual number of units sold during
a finite period of time. We estimate the cost of such promotional programs
at
their inception based on historical experience and current market conditions
and
reduce sales by such estimates. These
promotional programs consist of direct to consumer incentives such as coupons
and temporary price reductions, as well as incentives to our customers, such
as
slotting fees and cooperative advertising. We do not provide incentives to
customers for the acquisition of product in excess of normal inventory
quantities since such incentives increase the potential for future returns,
as
well as reduce sales in the subsequent fiscal periods.
Estimates
of costs of promotional programs are based on (i) historical sales experience,
(ii) the current offering, (iii) forecasted data, (iv) current market
conditions, and (v) communication with customer purchasing/marketing personnel.
At the completion of the promotional program, the estimated amounts are adjusted
to actual results. While our promotional expense for the year ended March 31,
2007 was $16.5 million, we participated in 5,900 promotional campaigns,
resulting in an average cost of $2,800 per campaign. Of such amount, only 582
payments were in excess of $5,000. We believe that the estimation methodologies
employed, combined with the nature of the promotional campaigns, makes the
likelihood remote that our obligation would be misstated by a
-34-
material
amount. However, for illustrative purposes, had we underestimated the
promotional program rate by 10% for the year ended March 31, 2007, our sales
and
operating income would have been adversely affected by approximately $1.6
million. Net income would have been adversely affected by approximately $1.0
million.
We
also
periodically run coupon programs in Sunday newspaper inserts or as on-package
instant redeemable coupons. We utilize a national clearing house to process
coupons redeemed by customers. At the time a coupon is distributed, a provision
is made based upon historical redemption rates for that particular product,
information provided as a result of the clearing house’s experience with coupons
of similar dollar value, the length of time the coupon is valid, and the
seasonality of the coupon drop, among other factors. During the year ended
March
31, 2007, we had 17 coupon events. The amount recorded against revenues and
accrued for these events during the year was $2.7 million, of which $2.3 million
was redeemed during the year.
Allowances
for Product Returns
Due
to
the nature of the consumer products industry, we are required to estimate future
product returns. Accordingly, we record an estimate of product returns
concurrent with the recording of sales. Such estimates are made after analyzing
(i) historical return rates, (ii) current economic trends, (iii) changes in
customer demand, (iv) product acceptance, (v) seasonality of our product
offerings, and (vi) the impact of changes in product formulation, packaging
and
advertising.
We
construct our returns analysis by looking at the previous year’s return history
for each brand. Subsequently, each month, we estimate our current return rate
based upon an average of the previous six months’ return rate and review that
calculated rate for reasonableness giving consideration to the other factors
described above. Our historical return rate has been relatively stable; for
example, for the years ended March 31, 2007, 2006 and 2005, returns represented
3.7%, 3.5%, and 3.6%, respectively, of gross sales. At March 31, 2007 and 2006,
the
allowance for sales returns was $1.8 million and $1.9 million,
respectively.
While
we
utilize the methodology described above to estimate product returns, actual
results may differ materially from our estimates, causing our future financial
results to be adversely affected. Among the factors that could cause a material
change in the estimated return rate would be significant unexpected returns
with
respect to a product or products that comprise a significant portion of our
revenues. Based upon the methodology described above and our actual returns’
experience, management believes the likelihood of such an event is remote.
As
noted, over the last three years, our actual product return rate has stayed
within a range of 3.7% to 3.5% of gross sales. An increase of 0.1% in our
estimated return rate as a percentage of gross sales would have adversely
affected our reported sales and operating income for the year ended March 31,
2007 by approximately $371,000. Net income would have been adversely affected
by
approximately $228,000.
Allowances
for Obsolete and Damaged Inventory
We
value
our inventory at the lower of cost or market value. Accordingly, we reduce
our
inventories for the diminution of value resulting from product obsolescence,
damage or other issues affecting marketability equal to the difference between
the cost of the inventory and its estimated market value. Factors utilized
in
the determination of estimated market value include (i) current sales data
and
historical return rates, (ii) estimates of future demand, (iii) competitive
pricing pressures, (iv) new product introductions, (v) product expiration dates,
and (vi) component and packaging obsolescence.
Many
of
our products are subject to expiration dating. As a general rule our customers
will not accept goods with expiration dating of less than 12 months from the
date of delivery. To monitor this risk, management utilizes a detailed
compilation of inventory with expiration dating between zero and 15 months
and
reserves for 100% of the cost of any item with expiration dating of 12 months
or
less. At March 31, 2007 and 2006, the allowance for obsolete and slow moving
inventory represented 5.8% and 2.9%, respectively, of total inventory. The
year-over-year increase resulted primarily from obsolescence
reserves related to products in the cough and cold category facing expiration
dating. Inventory
obsolescence costs charged to operations for the years ended March 31, 2007,
2006, and 2005 were 1.0%, 0.2%, and 0.3% of net sales, respectively. A 1.0%
increase in our allowance for obsolescence at March 31, 2007 would have
adversely affected our reported operating income and net income for the year
ended March 31, 2007 by approximately $320,000 and $196,000,
respectively.
-35-
Allowance
for Doubtful Accounts
In
the
ordinary course of business, we grant non-interest bearing trade credit to
our
customers on normal credit terms. We maintain an allowance for doubtful accounts
receivable which is based upon our historical collection experience and expected
collectibility of the accounts receivable. In an effort to reduce our credit
risk, we (i) establish credit limits for all of our customer relationships,
(ii)
perform ongoing credit evaluations of our customers’ financial condition, (iii)
monitor the payment history and aging of our customers’ receivables, and (iv)
monitor open orders against an individual customer’s outstanding receivable
balance.
We
establish specific reserves for those accounts which file for bankruptcy, have
no payment activity for 180 days or have reported major negative changes to
their financial condition. The allowance for bad debts at March 31, 2007 and
2006 amounted to 0.1% and 0.3%, respectively, of accounts receivable. Bad debt
expense (recoveries) for 2007, 2006 and 2005 were $(100,000), $(53,000) and
$31,700, respectively, each representing 0.0% of net sales in each of the
years.
While
management believes that it is diligent in its evaluation of the adequacy of
the
allowance for doubtful accounts, an unexpected event, such as the bankruptcy
filing of a major customer, could have an adverse effect on our future financial
results. A 0.1% increase in our bad debt expense as a percentage of sales in
2007 would have resulted in a decrease in reported operating income of
approximately $317,000, and a decrease in our reported net income of
approximately $195,000.
Valuation
of Intangible Assets and Goodwill
Goodwill
and intangible assets amounted to $968.1 million and $935.1 million at March
31,
2007 and 2006, respectively. At March
31,
2007,
goodwill and intangible assets were apportioned among our three operating
segments as follows:
|
Over-the-
Counter
Healthcare
|
Household
Cleaning
|
Personal
Care
|
Consolidated
|
||||||||||
|
Goodwill
|
$
|
235,647
|
$
|
72,549
|
$
|
2,751
|
$
|
310,947
|
|||||
|
Intangible
assets
|
|||||||||||||
|
Indefinite
lived
|
374,070
|
170,893
|
--
|
544,963
|
|||||||||
|
Finite
lived
|
94,776
|
21
|
17,397
|
112,194
|
|||||||||
|
468,846
|
170,914
|
17,397
|
657,157
|
||||||||||
|
$
|
704,493
|
$
|
243,463
|
$
|
20,148
|
$
|
968,104
|
||||||
Our
Clear
Eyes,
New-Skin,
Chloraseptic,
Compound W
and
Wartner
brands
comprise the majority of the value of the intangible assets within the
Over-The-Counter Healthcare segment. Denorex,
Cutex and
Prell comprised
substantially all of the intangible asset value within the Personal Care
segment. The Comet,
Spic and Span and
Chore
Boy brands
comprise substantially all of the intangible asset value within the Household
Cleaning segment.
Goodwill
and intangible assets comprise substantially all of our assets. Goodwill
represents the excess of the purchase price over the fair value of assets
acquired and liabilities assumed in a purchase business combination. Intangible
assets generally represent our trademarks, brand names and patents. When we
acquire a brand, we are required to make judgments regarding the value assigned
to the associated intangible assets, as well as their respective useful lives.
Management considers many factors, both prior to and after, the acquisition
of
an intangible asset in determining the value, as well as the useful life,
assigned to each intangible asset that the Company acquires or continues to
own
and promote. The most significant factors are:
| · |
Brand
History
|
A
brand
that has been in existence for a long period of time (e.g.,
25,
50 or
100 years) generally warrants a higher valuation and longer life (sometimes
indefinite) than a brand that has been in
-36-
existence
for a very short period of time. A brand that has been in existence for an
extended period of time generally has been the subject of considerable
investment by its previous owner(s) to support product innovation and
advertising and promotion.
| · |
Market
Position
|
Consumer
products that rank number one or two in their respective market generally have
greater name recognition and are known as quality product offerings, which
warrant a higher valuation and longer life than products that lag in the
marketplace.
| · |
Recent
and Projected Sales Growth
|
Recent
sales results present a snapshot as to how the brand has performed in the most
recent time periods and represent another factor in the determination of brand
value. In addition, projected sales growth provides information about the
strength and potential longevity of the brand. A brand that has both strong
current and projected sales generally warrants a higher valuation and a longer
life than a brand that has weak or declining sales. Similarly, consideration
is
given to the potential investment, in the form of advertising and promotion,
which is required to reinvigorate a brand that has fallen from
favor.
| · |
History
of and Potential for Product
Extensions
|
Consideration
also is given to the product innovation that has occurred during the brand’s
history and the potential for continued product innovation that will determine
the brand’s future. Brands that can be continually enhanced by new product
offerings generally warrant a higher valuation and longer life than a brand
that
has always “followed the leader”.
After
consideration of the factors described above, as well as current economic
conditions and changing consumer behavior, management prepares a determination
of the intangible’s value and useful life based on its analysis of the
requirements of Statements No. 141 and No. 142. Under 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 and must also
be tested for impairment.
On
an
annual basis, or more frequently if conditions indicate that the carrying value
of the asset may not be recovered, management performs a review of both the
values and useful lives assigned to goodwill and intangible assets and tests
for
impairment.
Finite-Lived
Intangible Assets
As
mentioned above, management performs a review annually, or more frequently
if
necessary, to ascertain the impact of events and circumstances on the estimated
useful lives and carrying values of our trademarks and trade names. In
connection with this analysis, management:
| · |
Reviews
period-to-period sales and profitability by
brand,
|
| · |
Analyzes
industry trends and projects brand growth
rates,
|
| · |
Prepares
annual sales forecasts,
|
| · |
Evaluates
advertising effectiveness,
|
| · |
Analyzes
gross margins,
|
| · |
Reviews
contractual benefits or
limitations,
|
| · |
Monitors
competitors’ advertising spend and product
innovation,
|
| · |
Prepares
projections to measure brand viability over the estimated useful
life of
the intangible asset, and
|
| · |
Considers
the regulatory environment, as well as industry
litigation.
|
Should
analysis of any of the aforementioned factors warrant a change in the estimated
useful life of the intangible asset, management will reduce the estimated useful
life and amortize the carrying value prospectively over the shorter remaining
useful life. Management’s projections are utilized to assimilate all of the
facts, circumstances and expectations related to the trademark or trade name
and
estimate the cash flows over its useful life. In the event that the long-term
projections indicate that the carrying value is in excess of the undiscounted
cash flows expected to result from the use of the intangible assets, management
is required to record an
-37-
impairment
charge. Once that analysis is completed, a discount rate is applied to the
cash
flows to estimate fair value. The impairment charge is measured as the excess
of
the carrying amount of the intangible asset over fair value as calculated using
the discounted cash flow analysis. Future events, such as competition,
technological advances and reductions in advertising support for our trademarks
and trade names could cause subsequent evaluations to utilize different
assumptions.
Indefinite-Lived
Intangible Assets
In
a
manner similar to finite-lived intangible assets, on an annual basis, or more
frequently if necessary, management analyzes current events and circumstances
to
determine whether the indefinite life classification for a trademark or trade
name continues to be valid. Should circumstance warrant a finite life, the
carrying value of the intangible asset would then be amortized prospectively
over the estimated remaining useful life.
In
connection with this analysis, management also tests the indefinite-lived
intangible assets for impairment by comparing the carrying value of the
intangible asset to its estimated fair value. Since quoted market prices are
seldom available for trademarks and trade names such as ours, we utilize present
value techniques to estimate fair value. Accordingly, management’s projections
are utilized to assimilate all of the facts, circumstances and expectations
related to the trademark or trade name and estimate the cash flows over its
useful life. In performing this analysis, management considers the same types
of
information as listed above in regards to finite-lived intangible assets. Once
that analysis is completed, a discount rate is applied to the cash flows to
estimate fair value. Future events, such as competition, technological advances
and reductions in advertising support for our trademarks and trade names could
cause subsequent evaluations to utilize different assumptions.
Goodwill
As
part
of its annual test for impairment of goodwill, management estimates the
discounted cash flows of each reporting unit, which is at the brand level,
and
one level below the operating segment level, to estimate their respective fair
values. In performing this analysis, management considers the same types of
information as listed above in regards to finite-lived intangible assets. In
the
event that the carrying amount of the reporting unit exceeds the fair value,
management would then be required to allocate the estimated fair value of the
assets and liabilities of the reporting unit as if the unit was acquired in
a
business combination, thereby revaluing the carrying amount of goodwill. In
a
manner similar to indefinite-lived assets, future events, such as competition,
technological advances and reductions in advertising support for our trademarks
and trade names could cause subsequent evaluations to utilize different
assumptions.
In
estimating the value of trademarks and trade names, as well as goodwill, at
March 31, 2007, management applied a discount rate of 9.5%, the Company’s then
current weighted-average cost of funds, to the estimated cash flows; however
that rate, as well as future cash flows may be influenced by such factors,
including (i) changes in interest rates, (ii) rates of inflation, or (iii)
sales
or contribution margin reductions. In the event that the carrying value exceeded
the estimated fair value of either intangible assets or goodwill, we would
be
required to recognize an impairment charge. Additionally, continued decline
of
the fair value ascribed to an intangible asset or a reporting unit caused by
external factors may require future impairment charges.
During
the three month period ended March 31, 2006, we recorded non-cash charges
related to the impairment of intangible assets and goodwill of the Personal
Care
segment of $7.4 million and $1.9 million, respectively, because the carrying
amounts of these “branded” assets exceeded their fair market values primarily as
a result of declining sales caused by product competition. Should the related
fair values of goodwill and intangible assets continue to be adversely affected
as a result of declining sales or margins caused by competition, technological
advances or reductions in advertising and promotional expenses, the Company
may
be required to record additional impairment charges. We were not required to
record any asset impairment charges during the year ended March 31,
2007.
Stock-Based
Compensation
During
2006, we 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
Plan. Statement
No. 123(R) requires us 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
-38-
over
the
period which an employee is required to provide service in exchange for the
award, generally referred to as the requisite service period. Information
utilized in the determination of fair value includes the following:
| · |
Type
of instrument (i.e.: restricted shares vs. an option, warrant or
performance shares),
|
| · |
Strike
price of the instrument,
|
| · |
Market
price of the Company’s common stock on the date of
grant,
|
| · |
Discount
rates,
|
| · |
Duration
of the instrument, and
|
| · |
Volatility
of the Company’s common stock in the public
market.
|
Additionally,
management must estimate the expected attrition rate of the recipients to enable
it to estimate the amount of non-cash compensation expense to be recorded in
our
financial statements. While management uses diligent analysis to estimate the
respective variables, a change in assumptions or market conditions, as well
as
changes in the anticipated attrition rates, could have a significant impact
on
the future amounts recorded as non-cash compensation expense. The Company
recorded non-cash compensation expense of $655,000 and $383,000 during
2007
and
2006, respectively.
Assuming no changes in assumptions and no awards authorized by the Compensation
Committee of the Board of Directors during 2008, we will record non-cash
compensation expense of approximately $800,000. There were no stock-based
compensation charges incurred during 2005.
Loss
Contingencies
Loss
contingencies are recorded as liabilities when it is probable that a liability
has been incurred and the amount of such loss is reasonable estimable.
Contingent losses are often resolved over longer periods of time and involve
many factors including:
| · |
Rules
and regulations promulgated by regulatory
agencies,
|
| · |
Sufficiency
of the evidence in support of our
position,
|
| · |
Anticipated
costs to support our position, and
|
| · |
Likelihood
of a positive outcome.
|
Recent
Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including
an amendment of FASB Statement No. 115” (“Statement
No.
159”). Statement
No. 159
permits companies to choose to measure certain financial instruments and certain
other items at fair value. Unrealized gains and losses on items for which the
fair value option has been elected will be recognized in earnings at each
subsequent reporting date. Statement
No. 159
is effective for
interim financial statements issued during the fiscal year beginning after
November 15, 2007. The Company
is evaluating the impact that the adoption of Statement
No. 159
will have on its consolidated financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 was issued in an
effort to eliminate the diversity in practice surrounding how companies quantify
financial statement misstatements. SAB No. 108 requires that errors be
quantified using both a balance sheet and income statement approach and
evaluated as to materiality giving consideration to all relevant quantitative
and qualitative factors. The adoption of SAB No. 108 did not have a material
impact on our consolidated financial statements.
In
September 2006, the FASB issued SFAS
No.
157, “Fair Value Measurements” (“Statement No. 157”) to address inconsistencies
in the definition and determination of fair value pursuant to generally accepted
accounting principles (“GAAP”). Statement No. 157 provides a single definition
of fair value, establishes a framework for measuring fair value in GAAP and
expands disclosures about fair value measurements in an effort to increase
comparability related to the recognition of market-based assets and liabilities
and their impact on earnings. Statement No. 157 is effective for interim
financial statements issued during the fiscal year beginning after November
15,
2007.
-39-
In
June
2006, the FASB issued
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement 109” (“FIN No.
48”),
which clarifies the accounting for uncertainty in income taxes recognized in
a
company’s financial statements in accordance with FASB Statement 109. FIN
No.
48 and
prescribes a recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN No.
48 is
effective for the Company’s interim financial statements issued after April 1,
2007, and is not expected to have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.
Management
has reviewed and continues to monitor the actions of the various financial
and
regulatory reporting agencies and is currently not aware of any other
pronouncement that could have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
Fiscal 2007 compared to Fiscal 2006
Revenues
|
2007
Revenues
|
%
|
2006
Revenues
|
%
|
Increase
(Decrease)
|
%
|
||||||||||||||
|
OTC
Healthcare
|
$
|
174,704
|
54.8
|
$
|
160,942
|
54.3
|
$
|
13,762
|
8.6
|
||||||||||
|
Household
Cleaning
|
119,036
|
37.4
|
107,801
|
36.3
|
11,235
|
10.4
|
|||||||||||||
|
Personal
Care
|
24,894
|
7.8
|
27,925
|
9.4
|
(3,031
|
)
|
(10.9)
|
|
|||||||||||
|
|
|||||||||||||||||||
|
$
|
318,634
|
100.0
|
$
|
296,668
|
100.0
|
$
|
21,966
|
7.4
|
|||||||||||
The
7.4%
increase in revenues for 2007 versus 2006 was primarily a result of the
acquisitions of the Wartner brand, acquired in September of 2006, and
the Chore
Boy
and
The
Doctor’s
brands
acquired in October and November 2005, respectively. Excluding the impact of
the
acquisitions, revenues were up 0.6%. Revenue increases in Over-the-Counter
Healthcare and Household Cleaning segments were partially offset by a decrease
in the Personal Care segment.
Over-the-Counter
Healthcare Segment
Revenues
for the Over-the-Counter Healthcare segment increased $13.8 million, or 8.6%
for
2007 versus 2006. The increase was primarily attributable to the acquisition
of
the Wartner
and
The
Doctor’s
brands.
Excluding the impact of these acquisitions, revenues increased 1.2%. Revenue
increases for Clear
Eyes,
Little
Remedies,
Murine
and
Dermoplast
were
partially offset by revenue declines on Compound
W, Chloraseptic and New Skin.
The
Clear
Eyes
revenue
growth was a result of continued strong consumer consumption trends, the launch
of Clear
Eyes
Triple
Action and Maximum Redness Relief, and increased shipments to international
customers. The Little
Remedies
revenue
increase was a result of improved consumer consumption. Dermoplast’s
revenue
increase was due to increased shipments to institutional customers and the
launch of Dermoplast
Poison
Ivy. The Murine
revenue
increase was primarily the result of improved consumer consumption of the ear
product. The revenue decrease for Compound
W
was
primarily a result of weaker consumer consumption primarily in the cryogenic
segment of the wart remover category. Chloraseptic’s
revenue
decrease was primarily due to lower consumer consumption as a result of a weak
cough and cold flu season. New
Skin’s revenue
decrease was the result of softness in the liquid bandage category.
Household
Cleaning Segment
Revenues
for the Household Cleaning segment increased $11.2 million, or 10.4%, for 2007
versus 2006. Excluding the acquisition of Chore
Boy,
revenues for this segment increased 2.8% for the period. Comet
revenue
increased during the period due to strong consumer consumption, expanded
distribution and royalty revenues earned from licensing agreements in Eastern
Europe and for institutional sales in North America. Revenues for the
Spic
and Span
brand
decreased during the period as a result of lower sales to the dollar store
channel.
-40-
Personal
Care Segment
Revenues
of the Personal Care segment declined $3.0 million, or 10.9%, for 2007 versus
2006. The revenue decrease was the result of continued declines in consumer
consumption trends for the Cutex,
Denorex
and
Prell
brands
and was in accordance with management’s expectations.
Gross
Profit
|
2007
Gross
Profit
|
%
|
2006
Gross
Profit
|
%
|
Increase
(Decrease)
|
%
|
||||||||||||||
|
OTC
Healthcare
|
109,103
|
62.5
|
$
|
102,451
|
63.7
|
$
|
6,652
|
6.5
|
|||||||||||
|
Household
Cleaning
|
46,034
|
38.7
|
42,713
|
39.6
|
3,321
|
7.8
|
|||||||||||||
|
Personal
Care
|
10,350
|
41.6
|
12,074
|
43.2
|
(1,724
|
)
|
(14.3)
|
|
|||||||||||
|
$
|
165,487
|
51.9
|
$
|
157,238
|
53.0
|
$
|
8,249
|
5.2
|
|||||||||||
Gross
profit for 2007 increased $8.2 million, or 5.2%, versus 2006. As a percent
of
total revenue, gross profit decreased from 53.0% for 2006 to 51.9% during 2007.
The decrease in gross profit percentage was a result of inventory obsolescence,
higher product costs and increased shipments to non-North American distributors
which have a lower margin than our domestic markets, partially offset by lower
distribution expense. Shipments to markets outside of North America represented
4.6% of total revenues in 2007 versus 3.4% for 2006.
Over-the-Counter
Healthcare Segment
Gross
profit for 2007 increased $6.6 million, or 6.5%, versus 2006. As a percent
of
OTC revenue, gross profit decreased from 63.7% for 2006 to 62.5% during 2007.
The decrease in gross profit percentage was primarily a result of obsolescence
reserves of $2.6 million related to products in the cough and cold category
facing expiration dating.
Household
Cleaning Segment
Gross
profit for 2007 increased $3.3 million, or 7.8%, versus 2006. As a percent
of
household cleaning revenue, gross profit decreased from 39.6% for 2006 to 38.7%
during 2007. The decrease in gross profit percentage is primarily a result
of
increased product costs partially offset by royalties earned, with no associated
costs, from our international and institutional licensing arrangements with
Procter & Gamble.
Personal
Care Segment
Gross
profit for 2007 decreased $1.7 million, or 14.3%, versus 2006. As a percent
of
personal care revenue, gross profit decreased from 43.2% for 2006 to 41.6%
during 2007. The decrease in gross profit percentage is a result of increased
promotional pricing allowances and product costs.
Contribution
Margin
|
2007
Contribution
Margin
|
%
|
2006
Contribution
Margin
|
%
|
Increase
(Decrease)
|
%
|
||||||||||||||
|
OTC
Healthcare
|
$
|
84,902
|
48.6
|
$
|
80,027
|
49.7
|
$
|
4,875
|
6.1
|
||||||||||
|
Household
Cleaning
|
39,355
|
33.1
|
36,218
|
33.6
|
3,137
|
8.7
|
|||||||||||||
|
Personal
Care
|
9,225
|
37.1
|
8,911
|
31.9
|
314
|
3.5
|
|||||||||||||
|
|
|
|
|||||||||||||||||
|
$
|
133,482
|
41.9
|
$
|
125,156
|
42.2
|
$
|
8,326
|
6.7
|
|||||||||||
Contribution
margin, defined as gross profit less advertising and promotional expenses,
increased $8.3 million, or 6.7% for 2007 versus 2006. The contribution margin
increase was a result of the increase in sales and gross profit as previously
discussed, and a $77,000, or 0.2% reduction in advertising and promotional
spending. The reduction in advertising and promotional spending is primarily
a
result of a $2.0 million reduction in the Personal Care segment mostly offset
by
an increase of $1.7 million in the Over-the-Counter Healthcare segment and
$200,000 in the Household Cleaning segment.
-41-
Over-the-Counter
Healthcare Segment
Contribution
margin in the Over-the-Counter Healthcare segment increased by $4.9 million,
or
6.1%, for 2007 versus 2006. The contribution margin increase was a result of
the
increase in sales and gross profit as previously discussed, partially offset
by
a $1.7 million, or an 8.0%, increase in advertising and promotional spending.
The increase in advertising and promotional spending was primarily a result
of
increased media behind The
Doctor’s Nightguard,
Little
Remedies
print
media and Chloraseptic
promotional spending, partially offset by a reduction in Clear
Eyes
and
New
Skin
media.
Household
Cleaning Segment
Contribution
margin in the Household Cleaning segment increased by $3.1 million, or 8.7%,
for
2007 versus 2006. The contribution margin increase was a result of the sales
and
gross profit increase previously discussed, slightly offset with a $184,000,
or
a 2.8% increase in advertising and promotional spending. The increase is a
result of a modest reduction of Comet
media
and promotional spending offset by increased spending resulting from the
Chore
Boy
acquisition.
Personal
Care Segment
Contribution
margin in the personal care segment was up $314,000, or 3.5% for 2007 versus
2006. The contribution margin increase was primarily the result of a $2.0
million, or 64.4%, reduction in advertising and promotion spending versus 2006,
partially offset by the gross profit decline as previously discussed. The
reduction in advertising and promotion was due to the Company’s strategic
decision to redeploy advertising and promotional funds in support of its growth
brands in the other segments.
General
and Administrative
General
and administrative expenses were $28.4 million for 2007 versus $21.1 million
for
2006. The increase was primarily related to additional staff added during the
second half of 2006 and employee incentive plan compensation that was not earned
in 2006, as well as severance compensation related to the departure of a member
of management in 2007, increased stock-based compensation costs in 2007 and
increased legal and professional fees in 2007.
Depreciation
and Amortization
Depreciation
and amortization expense was $10.4 million for 2007 versus $10.8 million for
2006. An increase in amortization related to intangible assets purchased in
the
Wartner and Dental Concepts acquisitions was partially offset by a reduction
of
the carrying value of certain trademarks in our Personal Care segment. During
the three month period ended March 31, 2006, the Company recognized an asset
impairment charge of approximately $7.4 million related to this segment.
Depreciation expense decreased by $1.0 million for 2007 versus 2006 due to
the
absence of depreciation charges for manufacturing equipment that was fully
depreciated as of January 31, 2006.
Impairment
of Intangible Assets and Goodwill
We
performed our impairment analyses of intangible assets and goodwill and
determined, in accordance with FASB Statements No. 142 and 144, that no
impairment existed in 2007. During the three month period ended March 31, 2006,
we recorded non-cash charges related to the impairment of certain intangible
assets and goodwill of the Personal Care segment of $7.4 million and $1.9
million, respectively. The impairment charges related to the intangible assets
and goodwill were the result of their carrying amounts exceeding their fair
market values as a result of declining sales.
Interest
Expense
Net
interest expense was $39.5 million for 2007 versus $36.3 million for the
comparable period of 2006. This represented an increase of $3.2 million, or
8.7%, from 2006. The increase in interest expense was due to the increase in
interest rates associated with our variable rate indebtedness. The average
cost
of funds increased from 6.3% for 2006 to 7.4% for 2007.
Income
Taxes
The
income tax provision for 2007 was $19.1 million, with an effective rate of
34.6%, compared to $21.3 million, with an effective rate of 44.7% for 2006.
During 2006, the Company increased the effective tax rate to 39.1% and adjusted
the deferred tax liabilities as a result of the completion of a state nexus
study. Fiscal 2007 includes a
-42-
$2.2
million tax benefit resulting from a reduction in the deferred income tax rate
to 38.4% from 39.1% as a result of the implementation of initiatives to obtain
operational, as well as tax, efficiencies.
Fiscal
2006 compared to Fiscal 2005
Revenues
|
2006
Revenues
|
%
|
2005
Revenues
|
%
|
Increase
(Decrease)
|
%
|
||||||||||||||
|
|
|||||||||||||||||||
|
OTC
Healthcare
|
$
|
160,942
|
54.3
|
$
|
159,010
|
55.0
|
$
|
1,932
|
1.2
|
||||||||||
|
Household
Cleaning
|
107,801
|
36.3
|
97,897
|
33.9
|
9,904
|
10.1
|
|||||||||||||
|
Personal
Care
|
27,925
|
9.4
|
32,162
|
11.1
|
(4,237
|
)
|
(13.2)
|
|
|||||||||||
|
|
|
|
|||||||||||||||||
|
$
|
296,668
|
100.0
|
$
|
289,069
|
100.0
|
$
|
7,599
|
2.6
|
|||||||||||
Revenues
increased by $7.6 million, or 2.6%, to $296.7 million for 2006 from $289.1
million for 2005. The increase was driven by the acquisitions of Vetco, Inc.
and
Dental Concepts LLC in October 2004 and November 2005, respectively, as well
as
the Chore
Boy
brand in
October 2005. The Over-the-Counter Healthcare segment had revenues of $160.9
million for 2006, an increase of $1.9 million over revenues of $159.0 million
for 2005. The Household Cleaning segment had revenues of $107.8 million for
2006, a $9.9 million increase over revenues of $97.9 million for 2005. The
Personal Care segment had revenues of $27.9 million for 2006, a $4.2 million
decrease from revenues of $32.2 million for 2005.
Over-the-Counter
Healthcare Segment
Revenues
of the Over-the-Counter Healthcare segment increased by $1.9 million, or 1.2%,
for 2006 as a result of sales related to The
Doctor’s
brand,
which was acquired as part of the Dental Concepts acquisition in November 2005,
a full year of revenue from the Little
Remedies
brand,
which was acquired as part of the Vetco acquisition in October 2004, as well
as
the launch of the Clear
Eyes
for Dry
Eyes product line at the end of 2005. Partially offsetting the increases related
to the acquisitions and Clear
Eyes
were
declines in Chloraseptic,
Compound
W,
New-Skin
and
Murine.
The
decline in Chloraseptic
was
generally confined to the quarter ended December 31, 2005, and resulted from
a
formulation issue related to stability of several batches of the relief strips
product line. Declines for Compound
W
and
New-Skin
were
related to softness in the retail wart remover and liquid bandage categories,
respectively. The decline for Murine
was a
result of decreased consumer consumption and lost distribution.
Household
Cleaning Segment
Revenues
of the Household Cleaning segment increased $9.9 million, or 10.1%, for 2006
as
a result of the Chore
Boy
acquisition, as well as sales growth in 2006 from both the Comet
and
Spic
and Span
brands.
The
Comet
revenue
increase was driven by strong retail consumption of powder and sprays and
expanded distribution of Comet
Cream.
The
Spic
and Span
revenue
increase was driven by increased distribution within the mass market channel
of
distribution.
Personal
Care Segment
Revenues
of the Personal Care segment declined $4.2 million, or 13.2%, for 2006 as a
result of the continued decline in consumer consumption of the Denorex
brand,
attributable to increased competition in the dandruff shampoo category, as
well
as lower sales of Cutex
due to
increasing market share of private label brands, as well as a general softness
in the nail polish remover category as more women choose to have their nails
manicured at salons.
-43-
Gross
Profit
|
2006
Gross
Profit
|
%
|
2005
Gross
Profit
|
%
|
Increase
(Decrease)
|
%
|
||||||||||||||
|
OTC
Healthcare
|
$
|
102,451
|
63.7
|
$
|
98,440
|
61.9
|
$
|
4,011
|
4.1
|
||||||||||
|
Household
Cleaning
|
42,713
|
39.6
|
35,858
|
36.6
|
6,855
|
19.1
|
|||||||||||||
|
Personal
Care
|
12,074
|
43.2
|
15,762
|
49.0
|
(3,688
|
)
|
(23.4)
|
|
|||||||||||
|
|
|||||||||||||||||||
|
$
|
157,238
|
53.0
|
$
|
150,060
|
51.9
|
$
|
7,178
|
4.8
|
|||||||||||
Gross
profit increased by $7.2 million, or 4.8%, to $157.2 million for 2006 from
$150.1 million for 2005. As a percentage of revenues, gross profit increased
to
53.0% for 2006 from 51.9% in 2005. Excluding the inventory step-up costs of
$200,000 in 2006 and $5.3 million in 2005, gross profit would have decreased
to
53.1% for 2006 from 53.8% for 2005. The decrease in gross profit resulted
primarily from a shift in the sales mix toward the Household Cleaning segment
which has a lower gross profit relative to the Over-the-Counter
Healthcare and Personal Care segments.
Over-the-Counter
Healthcare Segment
Gross
profit for the Over-the-Counter Healthcare segment increased by $4.0 million,
or
4.1%, for 2006. As a percentage of revenues, gross profit increased to 63.7%
for
2006 from 61.9% in 2005. Excluding the inventory step-up costs of $200,000
in
2006 and $2.7 million in 2005, gross profit would have increased to 63.8% for
2006 from 63.6% for 2005. The increase was primarily a result of a favorable
product mix, partially offset by higher transportation, packaging and commodity
costs.
Household
Cleaning Segment
Gross
profit for the Household Cleaning segment increased by $6.9 million, or 19.1%,
for 2006. As a percentage of revenues, gross profit increased to 39.6% for
2006
from 36.6% in 2005. Excluding charges related to the inventory step-up of $2.4
million for 2005, gross profit as a percentage of revenues would have been
39.6%
for 2006 compared to 39.1% for 2005. An increase in transportation costs in
2006
was offset by a favorable product mix.
Personal
Care Segment
Gross
profit for the Personal Care segment declined by $3.7 million, or 23.4%, for
2006. As a percentage of gross revenues, gross profit decreased to 43.2% for
2006 from 49.0% in 2005. The decrease in gross profit was due to the sales
decline, as well as higher product and transportation costs. The increased
product costs were the result of higher packaging and raw material costs and
the
introduction of a “value” size for Denorex
in the
third quarter of 2005.
Contribution
Margin
|
2006
Contribution
Margin
|
%
|
2005
Contribution
Margin
|
%
|
Increase
(Decrease)
|
%
|
||||||||||||||
|
OTC
Healthcare
|
$
|
80,027
|
|
49.7
|
$
|
79,897
|
50.2
|
$
|
130
|
0.2
|
|||||||||
|
Household
Cleaning
|
36,218
|
|
33.6
|
30,202
|
30.9
|
6,016
|
19.9
|
||||||||||||
|
Personal
Care
|
8,911
|
31.9
|
10,264
|
31.9
|
(1,353
|
)
|
(13.2)
|
|
|||||||||||
|
$
|
125,156
|
42.2
|
$
|
120,363
|
41.6
|
$
|
4,793
|
4.0
|
|||||||||||
Contribution
margin increased by $4.8 million, or 4.0%, to $125.2 million for 2006 from
$120.4 million for 2005. The increase in contribution margin was due to the
increased gross profit discussed above and a reduction of advertising and
promotion spending in the Personal Care segment, partially offset by increased
advertising and promotion spending on the core brands in the Over-the-Counter
Healthcare segment and increases associated with the acquisitions of the
Little
Remedies,
Chore
Boy
and
The
Doctor’s
brands.
-44-
Over-the-Counter
Healthcare Segment
Contribution
margin for the Over-the-Counter Healthcare segment increased by $130,000, or
0.2%, for 2006 as a result of the increased gross profit discussed above, offset
by increased spending behind Chloraseptic,
Clear
Eyes,
Little
Remedies
and
Compound
W,
as well
as by spending behind The
Doctor’s
brand.
Household
Cleaning Segment
Contribution
margin for the Household Cleaning segment increased by $6.0 million, or 19.9%,
for 2006 as a result of the increased gross profit discussed above, partially
offset by an increase in advertising and promotion expenses. The increase in
advertising and promotion expenses was a result of increased Comet
media
spending and advertising and promotion expenditures in support of the
Chore
Boy
brand.
Personal
Care Segment
Contribution
margin for the Personal Care segment decreased by $1.4 million, or 13.2%, for
2006 as a result of the decrease in gross margin discussed above, partially
offset by a reduction of $2.3 million of advertising and promotion expenses.
The
reduction in advertising and promotion expenses resulted primarily from the
reduction of media support behind the Denorex
brand.
General
and Administrative Expenses
General
and administrative expenses increased by $960,000, or 4.8%, to $21.2 million
for
2006 from $20.2 million for 2005. The increase was due to accounting and legal
costs associated with the Company’s restatement of financial results, initial
year testing in connection with compliance with the provisions of Section 404
of
the Sarbanes-Oxley Act, increased staffing and stock-based compensation expense
resulting from the application of FASB Statement No. 123(R). These increases
were partially offset by a significant reduction in employee incentive
compensation as a result of the Company’s financial performance in 2006 not
meeting internal objectives.
Depreciation
and Amortization Expense
Depreciation
and amortization expense increased by $1.0 million, or 10.2%, to $10.8 million
for 2006 from $9.8 million for 2005. The increase was primarily due to
amortization of intangible assets acquired with the Vetco and Dental Concepts
acquisitions.
Impairment
of Intangible Assets and Goodwill
During
the fourth quarter of 2006, we recorded non-cash charges related to the
impairment of certain intangible assets and goodwill of the Personal Care
segment of $7.4 million and $1.9 million, respectively. We performed our
impairment analyses of intangible assets and goodwill and determined, in
accordance with FASB Statements No. 142 and 144, that the carrying amounts
of
these “branded” assets exceeded their fair market values as a result of
declining sales.
Net
Interest Expense
Net
interest expense was $36.3 million in 2006 compared to $44.7 million in 2005.
The decrease in interest expense of $8.4 million, or 18.7%, was due to the
reduction of indebtedness outstanding, partially offset by higher interest
rates
on the remaining indebtedness. In February 2005, the Company significantly
reduced debt with the proceeds from its IPO.
Loss
on Extinguishment of Debt
For
2006
the loss on extinguishment of debt was $0, compared to $26.9 million for 2005.
The $26.9 million loss on extinguishment of debt consisted of $19.3 million
of
charges related to the $184.0 million of debt retired in connection with our
IPO
and $7.6 million related to the write-off of deferred financing costs associated
with the borrowings retired in connection with the Medtech
acquisition.
Income
Taxes
The
provision for income taxes in 2006 was $21.3 million, with an effective rate
of
44.7%, compared to a provision of $8.6 million for 2005, with an effective
rate
of 45.6%. The provision for income taxes in 2006 includes a $2.0 million charge,
recorded during the quarter ended March 31, 2006, resulting from an increase
in
the state tax rate associated with the Company’s deferred tax liability. The
increase resulted from the completion of a state tax nexus study during the
quarter. The provision for income taxes in 2005 includes a $1.2 million
-45-
charge,
recorded during the quarter ended March 31, 2005, resulting from an increase
in
the Company’s graduated federal income tax rate from 34% to 35% related to its
deferred income tax liability.
Liquidity
and Capital Resources
Liquidity
We
have
financed and expect to continue to finance 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
the
$100.0 million outstanding under the Tranche C Facility of our Senior Credit
Facility, to redeem $84.0 million in aggregate principal amount of our existing
9.25% Senior Notes, 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 in Prestige International Holdings, LLC, the
predecessor-in-interest to Prestige Brands Holdings, Inc. Effective
upon the completion of the IPO, we entered into an amendment to the credit
agreement that, among other things, allows us to increase the indebtedness
we
can incur under our Tranche B Term Loan Facility to $200.0 million and allows
for an increase in our Revolving Credit Facility up to $60.0 million.
Our
principal uses of cash are for operating expenses, debt service, acquisitions,
working capital and capital expenditures.
|
Year
Ended March 31
|
||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||
|
Net
cash provided by (used in):
|
|
|
|
|||||||
|
Operating
activities
|
$
|
71,899
|
$
|
53,861
|
$
|
51,042
|
||||
|
Investing
activities
|
(31,051
|
)
|
(54,163
|
)
|
(425,844
|
)
|
||||
|
Financing
activities
|
(35,290
|
)
|
3,168
|
376,743
|
||||||
Fiscal
2007 compared to fiscal 2006
Operating
Activities
Net
cash
provided by operating activities was $71.9 million for 2007 compared to $53.9
million 2006. The $18.0 million increase in net cash provided by operating
activities was primarily the result of the following:
| · |
An
increase of net income of $9.8 million from $26.3 million for 2006
to
$36.1 million for 2007,
|
| · |
An
improvement of $22.3 million in the components of operating assets
and
liabilities as a result of net operating assets and liabilities decreasing
by $11.8 million in 2007 compared to an increase of $10.5 million
in
2006, offset by
|
|
|
| · | A decrease in non-cash expenses of $14.1 million from $38.1 million for 2006 to $24.0 million for 2007. |
Investing
Activities
Net
cash
used for investing activities was $31.1 million for 2007 compared to $54.2
million for 2006. The net cash used for investing activities for 2007 was
primarily the result of the acquisition of Wartner USA B.V., while during 2006,
cash was used primarily for the acquisitions of the Chore
Boy
brand of
cleaning pads and sponges and The
Doctor’s
brand of
therapeutic oral care products.
Financing
Activities
Net
cash
used for financing activities was $35.3 million for 2007 compared to net cash
provided by financing activities of $3.2 million for 2006. During
2007, the Company repaid $31.6 million of indebtedness in excess of normal
maturities with cash generated from operations. This reduced our outstanding
indebtedness to $463.3 million from $498.6 million at March 31, 2006. In
November 2005, the Company incurred $30.0 million of indebtedness to fund the
acquisition of Dental Concepts LLC. Of such amount, $23.0 million was repaid
during 2006.
The
Company’s cash flow from operations exceeded net income due to the substantial
non-cash
charges related to depreciation and amortization of intangibles, increases
in
deferred income tax liabilities resulting from differences in the amortization
of intangible assets and goodwill for income tax and financial reporting
purposes, the
-46-
amortization
of certain deferred financing costs and stock-based compensation.
Fiscal 2006 compared to fiscal 2005
Operating
Activities
Net
cash
provided by operating activities was $53.9 million for 2006 compared to $51.0
million for 2005. The $2.9 million increase was primarily due to:
| · |
An
increase in net income of $16.1 million from $10.2 million for 2005
to
$26.3 million for 2006,
|
| · |
A
deterioration of $3.4 million in the components of operating assets
and
liabilities as a result of net operating assets and liabilities increasing
by $10.5 million in 2006 compared to an increase of $7.1 million
in 2005,
and
|
| · |
A
decrease in non-cash expenses of $9.8 million from $47.9 million
for 2005
to $38.1 million for 2006.
|
Investing
Activities
Net
cash
used in investing activities was $54.2 million for 2006 compared to net cash
used of $425.8 million for 2005. The net cash used in investing activities
for
2006 was primarily for the acquisitions of the Chore
Boy
brand
and Dental Concepts in October and November 2005, respectively. The net cash
used in investing activities for 2005 was primarily for the acquisitions of
Bonita Bay and Vetco in April and October 2004, respectively.
Financing
Activities
Net
cash
provided by financing activities was $3.2 million for 2006 compared to $376.7
million for 2005. Net cash provided by financing activities for 2006 was due
primarily to $30.0 million of borrowings on the Company’s revolving credit
facility to finance the purchase of Dental Concepts, offset by repayments of
$23.0 million, and $3.7 million of mandatory principal payments on the term
loan. Net cash provided by financing activities for 2005 was primarily a
function of the following events: (i) to finance the acquisitions of Bonita
Bay
and Vetco, the Company borrowed $698.5 million and issued preferred units and
common units of $58.7 million, (ii) the repayment of the debt incurred in
February 2004 at the time of the Medtech/Denorex acquisition and the repayment
of the revolving credit facility and scheduled payments on current debt which
all totaled $345.5 million, (iii) the February 2005 IPO raised $416.8 million,
and (iv) the repayment of $184.0 million of debt, the repurchase $199.8 million
of senior preferred units and class B preferred units, and the repurchase of
4.4
million shares of common stock for $30.2 million, all from the net proceeds
of
the IPO.
Capital
Resources
On
February 15, 2005, our initial public offering of common stock resulted in
net
proceeds of $416.8 million. The proceeds were used to repay the $100.0 million
outstanding under the Tranche C facility of our senior credit facility and
to
redeem $84.0 million in aggregate principal amount of our existing 91/4%
senior
subordinated notes which were issued in connection with our acquisitions of
Bonita Bay and Vetco in 2004.
As
of
March
31,
2007,
we had an aggregate of $463.4 million of outstanding indebtedness, which
consisted of the following:
| · |
$337.4
million of borrowings under the Tranche B Term Loan Facility,
and
|
| · |
$126.0
million of 9.25% Senior Subordinated Notes due
2012.
|
We
had
$60.0 million of borrowing capacity available under the Revolving Credit
Facility at such time, as well as $200.0 million available under the Tranche
B
Term Loan Facility.
All
loans
under the Senior Credit Facility bear interest at floating rates, based on
either the prime rate, or at our option, the LIBOR rate, plus an applicable
margin. As of March 31, 2007, an aggregate of $337.4 million was outstanding
under the Senior Credit Facility at a weighted average interest rate of
7.63%.
-47-
In
June
2004, we purchased a 5% interest rate cap agreement with a notional amount
of
$20.0 million which expired in June 2006. In March 2005, we purchased interest
rate cap agreements that became effective August 30, 2005, with a total notional
amount of $180.0 million and LIBOR cap rates ranging from 3.25% to 3.75%. On
May
31, 2006, an interest rate cap agreement with a notional amount of $50.0 million
and a 3.25% cap rate expired. Additionally,
an interest rate cap agreement with a notional amount of $80.0 million and
a
3.50% cap rate expired on May 30, 2007. The remaining agreement, with a notional
amount of $50.0 million and a cap rate of 3.75%, terminates on May 30, 2008.
The
fair
value of the interest rate cap agreements was $1.2 million at March 31,
2007.
The
Tranche B Term Loan Facility matures in October 2011. We must make quarterly
principal payments on the Tranche B Term Loan Facility equal to $887,500,
representing 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.
Effective
as of December 19, 2006: (i) a Second Supplemental Indenture (“Second
Supplemental Indenture”) and (ii) a Guaranty Supplement (“Indenture Guaranty
Supplement”) were entered into with the trustee for the holders of the Senior
Subordinated Notes. The Second Supplemental Indenture supplements and amends
the
indenture, dated as of April 6, 2004, as supplemented on October 6, 2004
(“Indenture”). Pursuant to the terms of the Second Supplemental Indenture and
the Indenture Guaranty Supplement, the Company agreed to guaranty all of the
obligations of Prestige Brands, Inc., an indirect wholly-owned subsidiary of
the
Company (“PBI”), set forth in the Indenture governing the PBI’s Senior
Subordinated Notes. The Second Supplemental Indenture also amended the covenant
requiring Prestige Brands International, LLC (“Prestige Brands International”),
an indirect wholly-owned subsidiary of the Company, to file periodic reports
with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act
of
1934, as amended (“Exchange Act”). So long as the Company or any other guarantor
is required to file periodic reports under Section 13 or 15(d) of the Exchange
Act that are substantially the same as the periodic reports that Prestige Brands
International would otherwise be required to file with the SEC pursuant to
the
Indenture, Prestige Brands International is not required to file such
reports.
Also
effective as of December 19, 2006, a Joinder Agreement (“Joinder Agreement”) and
a Guaranty Supplement (“Credit Agreement Guaranty Supplement”) were entered into
with the administrative agent for the lenders under the Senior Credit Facility.
Pursuant to the terms of the Joinder Agreement and the Credit Agreement Guaranty
Supplement, the Company agreed to become a party to the Pledge and Security
Agreement (“Security Agreement”) and the Guaranty (“Credit Agreement Guaranty”),
each dated as of April 6, 2004, by PBI and certain of its affiliates in favor
of
the lenders. The Security Agreement and the Credit Agreement Guaranty secure
the
performance by PBI of its obligations under the Credit Agreement, dated as
of
April 6, 2004, as amended (“Credit Agreement”), by granting security interests
to PBI's lenders in collateral owned by the Company and certain of its
subsidiaries and providing guaranties of such obligations by certain of PBI’s
affiliates.
The
Revolving Credit Facility and the Tranche B Term Loan Facility contain various
financial covenants, including provisions that require us to maintain certain
leverage ratios, interest coverage ratios and fixed charge coverage ratios.
The
Revolving Credit Facility and the Tranche B Term Loan Facility, as well as
the
Senior Subordinated Notes, contain provisions that accelerate our indebtedness
on certain changes in control and restrict us from undertaking specified
corporate actions, including, asset dispositions, acquisitions, payment of
dividends and other specified payments, repurchasing the Company’s equity
securities in the public markets, incurrence of indebtedness, creation of liens,
making loans and investments and transactions with affiliates. Specifically,
we
must:
| · |
Have
a leverage ratio of less than 5.0 to 1.0 for the quarter ended March
31,
2007, decreasing over time to 3.75 to 1.0 for the quarter ending
September
30, 2010, and remaining level
thereafter,
|
| · |
Have
an interest coverage ratio of greater than 2.75 to 1.0 for the quarter
ended March 31, 2007, increasing over time to 3.25 to 1.0 for the
quarter
ending March 31, 2010, and
|
| · |
Have
a fixed charge coverage ratio of greater than 1.5 to 1.0 for the
quarter
ended March 31, 2007, and for each quarter thereafter until the quarter
ending March 31, 2011.
|
-48-
At
March
31, 2007, we were in compliance with the applicable financial and restrictive
covenants under the Senior Credit Facility and the Indenture governing the
Senior Subordinated Notes.
Our
principal sources of funds are anticipated to be cash flows from operating
activities and available borrowings under the Revolving Credit Facility and
Tranche B Term Loan 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. As part of our
growth strategy, we regularly review acquisition opportunities and other
potential strategic transactions, which may require additional debt or equity
financing. If additional financing is required, there are no assurances that
it
will be available, or if available, that it can be obtained on terms favorable
to us or on a basis that is not dilutive to our stockholders.
Commitments
As
of
March 31, 2007, we had ongoing commitments under various contractual and
commercial obligations as follows:
|
Payments
Due by Period
|
||||||||||||||||
|
(In
Millions)
|
Less than
|
1 to 3
|
4 to 5
|
After 5
|
||||||||||||
|
Contractual
Obligations
|
Total
|
1 Year
|
Years
|
Years
|
Years
|
|||||||||||
|
Long-term
debt
|
$
|
463.4
|
$
|
3.6
|
$
|
7.1
|
$
|
326.7
|
$
|
126.0
|
||||||
|
Interest
on long-term debt (1)
|
160.0
|
37.5
|
74.0
|
48.5
|
--
|
|||||||||||
|
Operating
leases
|
1.5
|
0.7
|
0.8
|
--
|
--
|
|||||||||||
|
Total
contractual cash
obligations
|
$
|
624.9
|
$
|
41.8
|
$
|
81.9
|
$
|
375.2
|
$
|
126.0
|
||||||
| (1) |
Represents
the estimated interest obligations on the outstanding balances of
the
Revolving Credit Facility, Tranche B Term Loan Facility and Senior
Subordinated Notes, together, assuming scheduled principal payments
(based
on the terms of the loan agreements) were made and assuming a weighted
average interest rate of 8.07%. 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 $3.4
million, in the first year. However, given the protection afforded
by the
interest rate cap agreements, the impact of a one percentage point
increase would be limited to $2.7
million.
|
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 condition or results from operations for the periods referred to
above, a high rate of inflation in the future could have a material adverse
effect on our business, financial condition or results from operations. The
recent increase in crude oil prices has had an adverse impact on transportation
costs, as well as, certain petroleum based raw materials and packaging material.
Although the Company takes efforts to minimize the impact of inflationary
factors, including raising prices to our customers, a high rate of pricing
volatility associated with crude oil supplies may continue to have an adverse
effect on our operating results.
-49-
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains “forward looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLR
Act”), including, without limitation, 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 PSLR
Act
and with the intention of obtaining the benefits of the “safe harbor” provisions
of the PSLR Act. Although we believe that our expectations are based on
reasonable assumptions, actual results may differ materially from those in
the
forward-looking statements.
Forward-looking
statements speak only as of the date of this Annual Report on Form 10-K.
Except as required under federal securities laws and the rules and regulations
of the SEC, we do not have any intention to update any forward-looking
statements to reflect events or circumstances arising after the date of this
Annual Report on Form 10-K, 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 Annual Report on Form 10-K 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.
These
forward-looking statements generally can be identified by the use of words
or
phrases such as “believe,” “anticipate,” “expect,” “estimate,” “project,” “will
be,” “will continue,” “will likely result,” or other similar words and phrases.
Forward-looking statements 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, and our business in general is subject to
such risks. For more information, see “Risk Factors” contained in Item 1A of
this Annual Report on Form 10-K. In addition, our expectations or beliefs
concerning future events involve risks and uncertainties, including, without
limitation:
| · |
General
economic conditions affecting our products and their respective
markets,
|
| · |
The
high level of competition in our industry and
markets,
|
| · |
Our
dependence on a limited number of customers for a large portion of
our
sales,
|
| · |
Disruptions
in our distribution center,
|
| · |
Acquisitions
or other strategic transactions diverting managerial resources, or
incurrence of additional liabilities or integration problems associated
with such transactions,
|
| · |
Changing
consumer trends or pricing pressures which may cause us to lower
our
prices,
|
| · |
Increases
in supplier prices,
|
| · |
Increases
in transportation and fuel charges,
|
| · |
Changes
in our senior management team,
|
| · |
Our
ability to protect our intellectual property
rights,
|
| · |
Our
dependency on the reputation of our brand
names,
|
| · |
Shortages
of supply of sourced goods or interruptions in the manufacturing
of our
products,
|
| · |
Our
level of debt, and ability to service our
debt,
|
| · |
Any
adverse judgments rendered in any pending litigation or
arbitration,
|
| · |
Our
ability to obtain additional financing,
and
|
| · |
The
restrictions imposed by our senior credit facility and the indenture
on
our operations.
|
-50-
|
ITEM 7A.
|
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 March 31, 2007, we had variable rate debt of approximately
$337.4 million related to our Tranche B term loan.
In
an
effort to protect the Company from the adverse impact that rising interest
rates
would have on our variable rate debt, we have entered into various interest
rate
cap agreements to hedge this exposure. In June 2004, we purchased a 5% interest
rate cap agreement with a notional amount of $20.0 million which terminated
in
June 2006. In March 2005, we purchased interest rate cap agreements that became
effective August 30, 2005, with a total notional amount of $180.0 million and
LIBOR cap rates ranging from 3.25% to 3.75%. On May 31, 2006, an interest rate
cap agreement with a notional amount of $50.0 million and a 3.25% cap rate
expired. Additionally,
an interest rate cap agreement with a notional amount of $80.0 million and
a
3.50% cap rate expired on May 30, 2007. The remaining agreement, with a notional
amount of $50.0 million and a cap rate of 3.75%, terminates on May 30,
2008.
Holding
other variables constant, including levels of indebtedness, a one percentage
point increase in interest rates on our variable rate debt would have an adverse
impact on pre-tax earnings and cash flows for fiscal 2008 of approximately
$3.4
million. However, given the protection afforded by the interest rate cap
agreements, the impact of a one percentage point increase would be limited
to
$2.7 million. The
fair
value of the interest rate cap agreements was $1.2 million at March 31,
2007.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements and supplementary data required by this Item are described
in Part IV, Item 15 of this Annual Report on Form 10-K and are presented
beginning on page F-1.
|
ITEM
9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
Disclosure
Controls and Procedures
The
Company’s management, with the participation of its Chief Executive Officer and
the Chief Financial Officer, evaluated the effectiveness of the Company’s
disclosure controls and procedures, as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934 (“Exchange Act”) as of March 31, 2007. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that, as of March 31, 2007, the Company’s disclosure controls and
procedures were effective to ensure that information required to be disclosed
by
the Company in the reports the Company files or submits 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 the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
-51-
Management’s
Annual Report on Internal Control over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) of the Exchange
Act). Internal control over financial reporting is a process designed by, or
under the supervision of the Chief Executive Officer and Chief Financial Officer
and effected by the Board of Directors, Management and other personnel, to
provide reasonable assurance regarding reliability of financial reporting and
the preparation of financial statements for external purposes in accordance
with
generally accepted accounting principles.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Therefore, even those systems determined to
be
effective can provide only reasonable, not absolute, assurance that the control
objectives will be met. Also, projections of any evaluation of effectiveness
to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate over time.
Management,
with the participation of the Chief Executive Officer and Chief Financial
Officer, has assessed the effectiveness of the Company’s internal control over
financial reporting as of March 31, 2007. In making its assessment, management
has used the criteria established by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal
Control - Integrated Framework
(the
“COSO Criteria”).
Based
on
our assessment utilizing the COSO Criteria, management has concluded that the
Company’s internal control over financial reporting was effective as of March
31, 2007.
Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting, as of March 31, 2007, has been audited by PricewaterhouseCoopers
LLP
(“PWC”), the Company’s independent registered public accounting firm, who also
audited the Company’s consolidated financial statements, as stated in their
report included in Part IV, Item 15, of this Annual Report on Form 10-K. PWC
has
issued an attestation report on management’s assessment of the Company’s
internal controls over financial reporting, a copy of which is included in
PWC’s
report contained in Part IV, Item 15, of this Annual Report on Form
10-K.
Changes
in Internal Control over Financial Reporting
There
have been no changes during the quarter ended March 31, 2007 in the Company’s
internal control over financial reporting that have materially affected, or
are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM
9B. OTHER
INFORMATION
None.
-52-
Part
III
Information
required to be disclosed by this Item will be contained in the
Company’s 2007 Proxy Statement, which is incorporated herein by
reference.
Information
required to be disclosed by this Item will be contained in the
Company’s 2007 Proxy Statement, which is incorporated herein by
reference.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Information
required to be disclosed by this Item will be contained in the Company’s 2007
Proxy Statement, which is incorporated herein by reference.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR
INDEPENDENCE
|
Information
required to be disclosed by this Item will be contained in the
Company’s 2007 Proxy Statement, which is incorporated herein by
reference.
Information
required to be disclosed by this Item will be contained in the
Company’s 2007 Proxy Statement, which is incorporated herein by
reference.
-53-
Part
IV
(a)
(1) Financial
Statements
The
financial statements and financial statement schedules listed below are set
forth at pages F-1 through F-37 of this Annual Report on Form 10-K, which
are
incorporated herein to this Item as if copied verbatim.
|
Prestige
Brands Holdings, Inc.
|
|
Report
of Independent Registered Public Accounting Firm,
PricewaterhouseCoopers
LLP
|
|
Consolidated
Statements of Operations for each of the three years in
the
period ended
March 31, 2007
|
|
Consolidated
Balance Sheets at March 31, 2007 and 2006
|
|
Consolidated
Statements of Members’ and Stockholders’ Equity and
Comprehensive
Income for each of the three years in the period ended March 31,
2007
|
|
Consolidated
Statements of Cash Flows for each of the three years
in
the period ended
March 31, 2007
|
|
Notes
to Consolidated Financial Statements
|
|
Schedule
II—Valuation and Qualifying Accounts
|
|
|
(a)
(2) Financial
Statement Schedules
Schedule
II - Valuation and Qualifying Accounts listed in (a) (1) above
is incorporated herein by reference as if copied verbatim. Schedules other
than those listed in the preceding sentence have been omitted as they are either
not required, not applicable, or the information has otherwise been shown in
the
consolidated financial statements or notes thereto.
(b) Exhibits
See
Exhibit Index immediately following the F pages to this Annual Report on
Form 10-K.
-54-
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PRESTIGE
BRANDS HOLDINGS, INC.
By: /s/
PETER
J.
ANDERSON
Name: Peter
J.
Anderson
Title:
Chief
Financial Officer
Date:
June
14,
2007
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
|
Signature
|
|
Title
|
Date
|
|
|
/s/
MARK
PETTIE
|
|
Chairman
of the Board
and
Chief Executive Officer
|
June
14, 2007
|
|
|
Mark
Pettie
|
|
(Principal
Executive Officer)
|
||
|
/s/
PETER
J. ANDERSON
|
|
Chief
Financial Officer
|
June
14, 2007
|
|
|
Peter
J. Anderson
|
|
(Principal
Financial Officer and
|
||
|
Principal
Accounting Officer)
|
||||
|
/s/
L. DICK BUELL
|
|
Director
|
June
14, 2007
|
|
|
L.
Dick Buell
|
|
|
||
|
/s/
JOHN E. BYOM
|
Director
|
June
14, 2007
|
||
|
John
E. Byom
|
||||
|
/s/
GARY E. COSTLEY
|
|
Director
|
June
14, 2007
|
|
|
Gary
E. Costley
|
|
|
||
|
/s/
DAVID A. DONNINI
|
|
Director
|
June
14, 2007
|
|
|
David
A. Donnini
|
|
|
||
|
/s/
RONALD B. GORDON
|
|
Director
|
June
14, 2007
|
|
|
Ronald
B. Gordon
|
|
|
||
|
/s/
VINCENT J. HEMMER
|
|
Director
|
June
14, 2007
|
|
|
Vincent
J. Hemmer
|
|
|
||
|
/s/
PATRICK M. LONERGAN
|
|
Director
|
June
14, 2007
|
|
|
Patrick
M. Lonergan
|
|
|
||
|
/s/
PETER C. MANN
|
Director
|
June
14, 2007
|
||
|
Peter
C. Mann
|
||||
|
/s/
RAYMOND P. SILCOCK
|
Director
|
June
14, 2007
|
||
|
Raymond
P. Silcock
|
-55-
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Prestige
Brands Holdings, Inc.
Audited
Financial Statements
March
31, 2007
|
Report
of Independent Registered Public Accounting Firm, PricewaterhouseCoopers
LLP
|
F-1
|
|
|
Consolidated
Statements of Operations for each of the three years in
the
period ended March 31, 2007
|
F-3
|
|
|
Consolidated
Balance Sheets at March 31, 2007 and 2006
|
F-4
|
|
|
Consolidated
Statements of Members’ and Stockholders’ Equity and Comprehensive
Income
for each of the
three years in the period ended March 31, 2007
|
F-5
|
|
|
Consolidated
Statements of Cash Flows for each of the three year
in
the period
ended March 31, 2007
|
F-9
|
|
|
Notes
to Consolidated Financial Statements
|
F-11
|
|
|
Schedule
II—Valuation and Qualifying Accounts
|
F-37
|
|
-56-
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders
Prestige
Brands Holdings, Inc.
We
have
completed integrated audits of Prestige Brands Holdings, Inc.’s 2007 and 2006
consolidated financial statements and of its internal control over financial
reporting as of March 31, 2007 and an audit of its 2005 consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated
financial statements and financial statement schedule
In
our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of members’ and stockholders’ equity and
comprehensive income and of cash flows present fairly, in all material respects,
the financial position of Prestige Brands Holdings, Inc. and its subsidiaries
at
March 31, 2007 and 2006, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 2007 in
conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed under Item 15(a)(2) presents
fairly, in all material respects, the information set forth therein when read
in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We
conducted our audits of these statements in accordance with the standards of
the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in Management’s Annual Report on
Internal Control over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
March 31, 2007 based on criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations (“COSO”) of the Treadway
Commission, is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of March 31, 2007, based
on criteria established in Internal
Control - Integrated Framework
issued
by COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness
of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding
of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
F
-
1
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Salt
Lake
City, Utah
June
14,
2007
F
-
2
Prestige
Brands Holdings, Inc.
Consolidated
Statements of Operations
|
Year
Ended March 31
|
||||||||||
|
(In
thousands, except per share data)
|
2007
|
2006
|
2005
|
|||||||
|
Revenues
|
||||||||||
|
Net
sales
|
$
|
316,847
|
$
|
296,239
|
$
|
288,918
|
||||
|
Other
revenues
|
1,787
|
429
|
151
|
|||||||
|
Total
revenues
|
318,634
|
296,668
|
289,069
|
|||||||
|
Cost
of Sales
|
||||||||||
|
Cost
of sales
|
153,147
|
139,430
|
139,009
|
|||||||
|
Gross
profit
|
165,487
|
157,238
|
150,060
|
|||||||
|
Operating
Expenses
|
||||||||||
|
Advertising
and promotion
|
32,005
|
32,082
|
29,697
|
|||||||
|
General
and administrative
|
28,416
|
21,158
|
20,198
|
|||||||
|
Depreciation
|
744
|
1,736
|
1,899
|
|||||||
|
Amortization
of intangible assets
|
9,640
|
9,041
|
7,901
|
|||||||
|
Impairment
of goodwill
|
--
|
1,892
|
--
|
|||||||
|
Impairment
of intangible asset
|
--
|
7,425
|
--
|
|||||||
|
Total
operating expenses
|
70,805
|
73,334
|
59,695
|
|||||||
|
Operating
income
|
94,682
|
83,904
|
90,365
|
|||||||
|
Other
income (expense)
|
||||||||||
|
Interest
income
|
972
|
568
|
371
|
|||||||
|
Interest
expense
|
(40,478
|
)
|
(36,914
|
)
|
(45,097
|
)
|
||||
|
Loss
on disposal of equipment
|
--
|
--
|
(9
|
)
|
||||||
|
Loss
on extinguishment of debt
|
--
|
--
|
(26,854
|
)
|
||||||
|
Total
other income (expense)
|
(39,506
|
)
|
(36,346
|
)
|
(71,589
|
)
|
||||
|
Income
before income taxes
|
55,176
|
47,558
|
18,776
|
|||||||
|
Provision
for income taxes
|
(19,098
|
)
|
(21,281
|
)
|
(8,556
|
)
|
||||
|
Net
income
|
36,078
|
26,277
|
10,220
|
|||||||
|
Cumulative
preferred dividends on Senior
Preferred
and Class
B Preferred Units
|
--
|
--
|
(25,395
|
)
|
||||||
|
Net
income (loss) available to members and
common
stockholders
|
$
|
36,078
|
$
|
26,277
|
$
|
(15,175
|
)
|
|||
|
Basic
earnings (loss) per share
|
$
|
0.73
|
$
|
0.54
|
$
|
(0.55
|
)
|
|||
|
Diluted
earnings (loss) per share
|
$
|
0.72
|
$
|
0.53
|
$
|
(0.55
|
)
|
|||
|
Weighted
average shares outstanding:
Basic
|
49,460
|
48,908
|
27,546
|
|||||||
|
Diluted
|
50,020
|
50,008
|
27,546
|
|||||||
See
accompanying notes.
F
-
3
Prestige
Brands Holdings, Inc.
Consolidated
Balance Sheets
(In
thousands)
|
Assets
|
March
31, 2007
|
March
31, 2006
|
|||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
13,758
|
$
|
8,200
|
|||
|
Accounts
receivable
|
35,167
|
40,042
|
|||||
|
Inventories
|
30,173
|
33,841
|
|||||
|
Deferred
income tax assets
|
2,735
|
3,227
|
|||||
|
Prepaid
expenses and other current assets
|
1,935
|
701
|
|||||
|
Total
current assets
|
83,768
|
86,011
|
|||||
|
Property
and equipment
|
1,449
|
1,653
|
|||||
|
Goodwill
|
310,947
|
297,935
|
|||||
|
Intangible
assets
|
657,157
|
637,197
|
|||||
|
Other
long-term assets
|
10,095
|
15,849
|
|||||
|
Total
Assets
|
$
|
1,063,416
|
$
|
1,038,645
|
|||
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable
|
$
|
19,303
|
$
|
18,065
|
|||
|
Accrued
interest payable
|
7,552
|
7,563
|
|||||
|
Income
taxes payable
|
--
|
1,795
|
|||||
|
Other
accrued liabilities
|
10,505
|
4,582
|
|||||
|
Current
portion of long-term debt
|
3,550
|
3,730
|
|||||
|
Total
current liabilities
|
40,910
|
35,735
|
|||||
|
Long-term
debt
|
459,800
|
494,900
|
|||||
|
Other
long-term liabilities
|
2,801
|
--
|
|||||
|
Deferred
income tax liabilities
|
114,571
|
98,603
|
|||||
|
Total
Liabilities
|
618,082
|
629,238
|
|||||
|
Commitments
and Contingencies - Note 15
|
|||||||
|
Stockholders’
Equity
|
|||||||
|
Preferred
stock - $0.01 par value
|
|||||||
|
Authorized
- 5,000 shares
|
|||||||
|
Issued
and outstanding - None
|
--
|
--
|
|||||
|
Common
stock - $0.01 par value
|
|||||||
|
Authorized
- 250,000 shares
|
|||||||
|
Issued
- 50,060 shares and 50,056 shares at March 31,
2007
and 2006,
respectively
|
501
|
501
|
|||||
|
Additional
paid-in capital
|
379,225
|
378,570
|
|||||
|
Treasury
stock, at cost - 55 shares and 18 shares at
March 31,
2007 and 2006, respectively
|
(40
|
)
|
(30
|
)
|
|||
|
Accumulated
other comprehensive income
|
313
|
1,109
|
|||||
|
Retained
earnings
|
65,335
|
29,257
|
|||||
|
Total
stockholders’ equity
|
445,334
|
409,407
|
|||||
|
Total
Liabilities and Stockholders’ Equity
|
$
|
1,063,416
|
$
|
1,038,645
|
|||
See
accompanying notes.
F
-
4
Prestige
Brands Holdings, Inc.
Consolidated
Statement of Changes in Members’
and
Stockholders’ Equity and Comprehensive Income
|
Senior
Preferred
Units
|
Class
B
Preferred
Units
|
Common
Units
|
Common
Stock
|
||||||||||||||||||||||
|
(In
thousands)
|
Units
|
Amount
|
Units
|
Amount
|
Units
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||
|
Balances
at March 31, 2004
|
23
|
$
|
17,768
|
107
|
$
|
96,807
|
57,902
|
$
|
5,273
|
--
|
$
|
--
|
|||||||||||||
|
Issuance
of Preferred and Common
Units
for
cash
|
--
|
--
|
58
|
58,385
|
1,839
|
148
|
--
|
--
|
|||||||||||||||||
|
Issuance
of Preferred and Common
Units
in
conjunction with the Bonita
Bay
Acquisition
|
--
|
--
|
--
|
91
|
19
|
1
|
--
|
--
|
|||||||||||||||||
|
Repurchase/cancellation
of Preferred and
Common
Units in
conjunction with the
Bonita
Bay
Acquisition
|
--
|
--
|
(2
|
)
|
--
|
(1,987
|
)
|
(46
|
)
|
--
|
--
|
||||||||||||||
|
Issuance
of restricted Common Units to
management
for
cash
|
--
|
--
|
--
|
--
|
337
|
235
|
--
|
--
|
|||||||||||||||||
|
Exchange
of Common Units for
Common
Stock
|
--
|
--
|
--
|
--
|
(58,110
|
)
|
(5,611
|
)
|
26,666
|
267
|
|||||||||||||||
|
Issuance
of Common Stock in Initial
Public
Offering,
net
|
--
|
--
|
--
|
--
|
--
|
--
|
28,000
|
280
|
|||||||||||||||||
|
Redemption
of Preferred Units
|
(23
|
)
|
(17,768
|
)
|
(163
|
)
|
(155,283
|
)
|
--
|
--
|
--
|
--
|
|||||||||||||
|
Retirement
of Common Stock
|
--
|
--
|
--
|
--
|
--
|
--
|
(4,666
|
)
|
(47
|
)
|
|||||||||||||||
|
Purchase
of Treasury Stock
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||
|
Components
of comprehensive income
|
|||||||||||||||||||||||||
|
Net
income
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||
|
Unrealized
gain on interest rate caps,
net
of income tax
expense of $200
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||
|
Total
comprehensive income
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||
|
Balances
at March 31, 2005
|
--
|
$
|
-
|
--
|
$
|
--
|
--
|
$
|
--
|
50,000
|
$
|
500
|
|||||||||||||
See
accompanying notes.
F
-
5
|
Prestige
Brands Holdings, Inc.
Consolidated
Statement of Changes in Members’
and
Stockholders’ Equity and Comprehensive Income
(Continued)
|
|||||||||||||||||||
|
Additional
Paid-in
|
Treasury
Stock
|
Accumulated
Other
Comprehensive
Income
|
Retained
Earnings
(Accumulated
|
||||||||||||||||
|
Capital
|
Shares |
Amount
|
(Loss)
|
Deficit)
|
Total
|
||||||||||||||
|
(In
thousands)
|
|||||||||||||||||||
|
Balances
at March 31, 2004
|
$
|
4,871
|
--
|
$
|
--
|
$
|
--
|
$
|
1,229
|
$
|
125,948
|
||||||||
|
Issuance
of Preferred and Common
Units
for
cash
|
--
|
--
|
--
|
--
|
--
|
58,533
|
|||||||||||||
|
Issuance
of Preferred and Common Units
in
conjunction with
the Bonita
Bay
Acquisition
|
--
|
--
|
--
|
--
|
--
|
92
|
|||||||||||||
|
Repurchase/cancellation
of Preferred and
Common
Units in
conjunction with the
Bonita
Bay
Acquisition
|
--
|
--
|
--
|
--
|
--
|
(46
|
)
|
||||||||||||
|
Issuance
of restricted Common Units to
management
for
cash
|
--
|
--
|
--
|
--
|
--
|
235
|
|||||||||||||
|
Exchange
of Common Units for
Common
Stock
|
5,344
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||
|
Issuance
of Common Stock in Initial
Public
Offering,
net
|
416,552
|
--
|
--
|
--
|
--
|
416,832
|
|||||||||||||
|
Redemption
of Preferred Units
|
(18,315
|
)
|
--
|
--
|
--
|
(8,469
|
)
|
(199,835
|
)
|
||||||||||
|
Retirement
of Common Stock
|
(30,201
|
)
|
--
|
--
|
--
|
--
|
(30,248
|
)
|
|||||||||||
|
Purchase
of Treasury Stock
|
--
|
2
|
(4
|
)
|
--
|
--
|
(4
|
)
|
|||||||||||
|
Components
of comprehensive income
|
|||||||||||||||||||
|
Net
income
|
--
|
--
|
--
|
--
|
10,220
|
10,220
|
|||||||||||||
|
Unrealized
gain on interest rate caps,
net
of income tax expense of $200
|
--
|
--
|
--
|
320
|
--
|
320
|
|||||||||||||
|
Total
comprehensive income
|
--
|
--
|
--
|
--
|
--
|
10,540
|
|||||||||||||
|
Balances
at March 31, 2005
|
$
|
378,251
|
2
|
$
|
(4
|
)
|
$
|
320
|
$
|
2,980
|
$
|
382,047
|
|||||||
F
-
6
Prestige
Brands Holdings, Inc.
Consolidated
Statement of Changes in Members’
and
Stockholders’ Equity and Comprehensive Income
(Continued)
|
Common
Stock
Par
Shares Value
|
Additional
Paid-in
Capital
|
Treasury
Stock
Shares Amount
|
Accumulated
Other
Comprehensive
Income
|
Retained
Earnings
|
Totals
|
||||||||||||||||||||
|
(In
thousands)
|
|||||||||||||||||||||||||
|
Balances
at March 31, 2005
|
50,000
|
$
|
500
|
$
|
378,251
|
2
|
$
|
(4
|
)
|
$
|
320
|
$
|
2,980
|
$
|
382,047
|
||||||||||
|
Additional
costs associated with initial public offering
|
--
|
--
|
(63
|
)
|
--
|
--
|
--
|
--
|
(63
|
)
|
|||||||||||||||
|
Stock-based
compensation
|
56
|
1
|
382
|
--
|
--
|
--
|
--
|
383
|
|||||||||||||||||
|
Purchase
of common stock for treasury
|
--
|
--
|
--
|
16
|
(26
|
)
|
--
|
--
|
(26
|
)
|
|||||||||||||||
|
Components
of comprehensive income
|
|||||||||||||||||||||||||
|
Net
income
|
--
|
--
|
--
|
--
|
--
|
--
|
26,277
|
26,277
|
|||||||||||||||||
|
Amortization
of interest rate caps reclassified into earnings, net of income tax
expense of $192
|
--
|
--
|
--
|
--
|
--
|
298
|
--
|
298
|
|||||||||||||||||
|
Unrealized
gain on interest rate caps, net of income tax expense of
$208
|
--
|
--
|
--
|
--
|
--
|
491
|
--
|
491
|
|||||||||||||||||
|
Total
comprehensive income
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
27,066
|
|||||||||||||||||
|
Balances
at March 31, 2006
|
50,056
|
$
|
501
|
$
|
378,570
|
18
|
$
|
(30
|
)
|
$
|
1,109
|
$
|
29,257
|
$
|
409,407
|
||||||||||
See
accompanying notes.
F
-
7
Prestige
Brands Holdings, Inc.
Consolidated
Statement of Changes in Members’
and
Stockholders’ Equity and Comprehensive Income
(Continued)
|
Common
Stock
Par
Shares
Value
|
Additional
Paid-in
Capital
|
Treasury
Stock
Shares
Amount
|
Accumulated
Other
Comprehensive
Income
|
Retained
Earnings
|
Totals
|
||||||||||||||||||||
|
(In
thousands)
|
|||||||||||||||||||||||||
|
Balances
at March 31, 2006
|
50,056
|
$
|
501
|
$
|
378,570
|
18
|
$
|
(30
|
)
|
$
|
1,109
|
$
|
29,257
|
$
|
409,407
|
||||||||||
|
Stock-based
compensation
|
4
|
655
|
655
|
||||||||||||||||||||||
|
Purchase
of common stock for treasury
|
37
|
(10
|
)
|
(10
|
)
|
||||||||||||||||||||
|
Components
of comprehensive income
|
|||||||||||||||||||||||||
|
Net
income
|
36,078
|
36,078
|
|||||||||||||||||||||||
|
Amortization of interest rate caps
reclassified into earnings, net of
income tax expense of $429
|
678
|
678
|
|||||||||||||||||||||||
|
Unrealized loss on interest rate caps, net
of income tax benefit of $931
|
(1,474
|
)
|
(1,474
|
)
|
|||||||||||||||||||||
|
Total
comprehensive income
|
35,282
|
||||||||||||||||||||||||
|
Balances
at March 31, 2007
|
50,060
|
$
|
501
|
$
|
379,225
|
55
|
$
|
(40
|
)
|
$
|
313
|
$
|
65,335
|
$
|
445,334
|
||||||||||
See
accompanying notes.
F
-
8
Prestige
Brands Holdings, Inc.
Consolidated
Statements of Cash Flows
|
Year
Ended March 31
|
||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||
|
Operating
Activities
|
||||||||||
|
Net
income
|
$
|
36,078
|
$
|
26,277
|
$
|
10,220
|
||||
|
Adjustments
to reconcile net income to net cash provided
by operating activities:
|
||||||||||
|
Depreciation
and amortization
|
10,384
|
10,777
|
9,800
|
|||||||
|
Amortization
of financing costs
|
3,257
|
2,649
|
2,943
|
|||||||
|
Impairment
of goodwill and intangible assets
|
--
|
9,317
|
--
|
|||||||
|
Deferred
income taxes
|
9,662
|
14,976
|
8,344
|
|||||||
|
Stock-based
compensation
|
655
|
383
|
--
|
|||||||
|
Loss
on extinguishment of debt
|
--
|
--
|
26,854
|
|||||||
|
Other
|
--
|
--
|
9
|
|||||||
|
Changes
in operating assets and liabilities, net of effects
of purchases of businesses
|
||||||||||
|
Accounts
receivable
|
4,875
|
(1,350
|
)
|
(7,227
|
)
|
|||||
|
Inventories
|
4,292
|
(7,156
|
)
|
2,922
|
||||||
|
Prepaid
expenses and other assets
|
(1,235
|
)
|
2,623
|
(1,490
|
)
|
|||||
|
Accounts
payable
|
(186
|
)
|
(6,037
|
)
|
5,059
|
|||||
|
Income
taxes payable
|
(1,795
|
)
|
1,795
|
--
|
||||||
|
Other
accrued liabilities
|
5,912
|
(393
|
)
|
(6,392
|
)
|
|||||
|
Net
cash provided by operating activities
|
71,899
|
53,861
|
51,042
|
|||||||
|
Investing
Activities
|
||||||||||
|
Purchases
of equipment
|
(540
|
)
|
(519
|
)
|
(365
|
)
|
||||
|
Purchases
of intangible assets
|
--
|
(22,655
|
)
|
--
|
||||||
|
Change
in other assets due to purchase price adjustments
|
750
|
--
|
--
|
|||||||
|
Purchases
of businesses, net
|
(31,261
|
)
|
(30,989
|
)
|
(425,479
|
)
|
||||
|
Net
cash used for investing activities
|
(31,051
|
)
|
(54,163
|
)
|
(425,844
|
)
|
||||
|
Financing
Activities
|
||||||||||
|
Proceeds
from the issuance of notes
|
--
|
30,000
|
698,512
|
|||||||
|
Payment
of deferred financing costs
|
--
|
(13
|
)
|
(24,539
|
)
|
|||||
|
Repayment
of notes
|
(35,280
|
)
|
(26,730
|
)
|
(529,538
|
)
|
||||
|
Prepayment
penalty
|
--
|
--
|
(10,875
|
)
|
||||||
|
Payments
on interest rate caps
|
--
|
--
|
(2,283
|
)
|
||||||
|
Proceeds
from the issuance of equity, net
|
--
|
(63
|
)
|
475,554
|
||||||
|
Redemption
of equity interests
|
(10
|
)
|
(26
|
)
|
(230,088
|
)
|
||||
|
Net
cash provided by (used for) financing activities
|
(35,290
|
)
|
3,168
|
376,743
|
||||||
|
Increase
in cash
|
5,558
|
2,866
|
1,941
|
|||||||
|
Cash
- beginning of period
|
8,200
|
5,334
|
3,393
|
|||||||
|
Cash
- end of period
|
$
|
13,758
|
$
|
8,200
|
$
|
5,334
|
||||
See
accompanying notes.
F
-
9
Prestige
Brands Holdings, Inc.
Consolidated
Statements of Cash Flows
(Continued)
|
Year
Ended March 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Supplemental
Cash Flow Information
|
||||||||||
|
Purchases
of Businesses
|
||||||||||
|
Fair
value of assets acquired, net of cash acquired
|
$
|
42,115
|
$
|
34,706
|
$
|
655,542
|
||||
|
Fair
value of liabilities assumed
|
(10,854
|
)
|
(3,717
|
)
|
(229,971
|
)
|
||||
|
Purchase
price funded with non-cash contributions
|
--
|
--
|
(92
|
)
|
||||||
|
Cash
paid to purchase businesses
|
$
|
31,261
|
$
|
30,989
|
$
|
425,479
|
||||
|
Interest
paid
|
$
|
37,234
|
$
|
33,760
|
$
|
42,155
|
||||
|
Income
taxes paid
|
$
|
11,751
|
$
|
2,852
|
$
|
2,689
|
||||
See
accompanying notes.
F
-
10
Prestige
Brands Holdings, Inc.
Notes
to Consolidated Financial Statements
|
1.
|
Business
and Basis
of Presentation
|
Nature
of Business
Prestige
Brands Holdings, Inc. (referred to herein as the “Company” which reference
shall, unless the context requires otherwise, be deemed to refer to Prestige
Brands Holdings, Inc. and all of its direct or indirect wholly-owned
subsidiaries on a consolidated basis) is engaged in the marketing, sales and
distribution of over-the-counter healthcare, personal care and household
cleaning brands to mass merchandisers, drug stores, supermarkets and club stores
primarily in the United States and Canada. Prestige Brands Holdings, Inc. is
a
holding company with no assets or operations and is also the parent guarantor
of
the senior revolving credit facility, senior secured term loan facility and
the
senior subordinated notes more fully described in Note 9 to the consolidated
financial statements.
On
April
6, 2004, Prestige International Holdings, LLC, an entity controlled by
affiliates of GTCR Golder Rauner II, LLC (“Prestige LLC”), through an indirect
wholly-owned subsidiary, acquired all of the outstanding capital stock of Bonita
Bay Holdings, Inc. (“Bonita Bay”). On October 6, 2004, Prestige LLC, through an
indirect wholly-owned subsidiary, acquired all of the outstanding capital stock
of Vetco, Inc. (“Vetco”). On February 9, 2005, the Company became the direct
parent company of Prestige LLC, under the terms of an exchange agreement among
the Company, Prestige LLC and each holder of common units of Prestige LLC,
whereby the holders of common units of Prestige LLC exchanged all of their
common units for an aggregate of 26.7 million shares of common stock of the
Company. On February 9, 2005, the Company completed an initial public offering.
On November 8, 2005, the Company, through a wholly-owned subsidiary, acquired
the ownership interests of Dental Concepts LLC (“Dental Concepts”). In addition,
on September 21, 2006, the Company, through a wholly-owned subsidiary, acquired
the ownership interests of Wartner USA B.V. (“Wartner”).
Basis
of Presentation
The
Bonita Bay, Vetco, Dental Concepts and Wartner acquisitions were accounted
for
as purchase transactions. The results of operations and cash flows of Bonita
Bay, Vetco, Dental Concepts and Wartner have been reflected in the Company’s
consolidated statements of operations and cash flows beginning from their
respective acquisition dates. The formation of the Company and exchange of
common units for common shares was accounted for as a reorganization of entities
under common control. As a result, there was no adjustment to the carrying
value
of the assets and liabilities. All significant intercompany transactions and
balances have been eliminated.
The
Company’s fiscal year ends on March 31st
of each
year. References in these financial statements or notes to a year (e.g., “2007”)
means the Company’s fiscal year ended on March 31st of that year.
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. As discussed
below, the Company’s most significant estimates include those made in connection
with the valuation of intangible assets, sales returns and allowances, trade
promotional allowances and inventory obsolescence.
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.
F
-
11
Accounts
Receivable
The
Company extends non-interest bearing trade credit to its customers in the
ordinary course of business. The Company maintains an allowance for doubtful
accounts receivable based upon historical collection experience and expected
collectibility of the accounts receivable. In
an
effort to reduce credit risk, the Company (i) has established credit limits
for
all of its customer relationships, (ii) performs ongoing credit evaluations
of
customers’ financial condition, (iii) monitors the payment history and aging of
customers’ receivables, and (iv) monitors open orders against an individual
customer’s outstanding receivable balance.
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, whereby it reduces
inventories for the diminution of value, resulting from product obsolescence,
damage or other issues affecting marketability, equal to the difference between
the cost of the inventory and its estimated market value. Factors utilized
in
the determination of estimated market value include (i) current sales data
and
historical return rates, (ii) estimates of future demand, (iii) competitive
pricing pressures, (iv) new product introductions, (v) product expiration dates,
and (vi) component and packaging obsolescence.
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
|
|
Leasehold
improvements
|
5
|
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 purchase business combinations 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. The Company tests
goodwill for impairment at the “brand” level which is one level below the
operating segment level.
Intangible
Assets
Intangible
assets, which are composed primarily of trademarks, are stated at cost 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
straight-line method, which approximates the effective interest method, over
the
term of the related debt.
F
-
12
Revenue
Recognition
Revenues
are recognized in accordance with Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin 104, “Revenue Recognition,” when the following
criteria are met: (1) persuasive evidence of an arrangement exists; (2) the
product has been shipped and the customer takes ownership and assumes 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
transfer of risk of loss generally occurs when product is received by the
customer and, accordingly, recognizes revenue at that time. Provision is made
for estimated discounts related to customer payment terms and estimated product
returns at the time of sale based on the Company’s historical
experience.
As
is
customary in the consumer products industry, the
Company participates
in the
promotional programs of its customers to enhance the sale of its products.
The
cost
of these promotional programs varies based on the actual number of units sold
during a finite period of time.
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.
These
promotional programs consist of direct to consumer incentives such as
coupons
and temporary price reductions, as well as incentives to the Company’s
customers, such as slotting fees and cooperative advertising. Estimates of
the
costs of these promotional programs are based on (i) historical sales
experience, (ii) the current offering, (iii) forecasted data, (iv) current
market conditions, and (v) communication with customer purchasing/marketing
personnel. At
the
completion of the promotional program, the estimated amounts are adjusted to
actual results.
Due
to
the nature of the consumer products industry, the Company is required to
estimate future product returns. Accordingly, the Company records an estimate
of
product returns concurrent with recording sales which is made after analyzing
(i) historical return rates, (ii) current economic trends, (iii) changes in
customer demand, (iv) product acceptance, (v) seasonality of the Company’s
product offerings, and (vi) the impact of changes in product formulation,
packaging and advertising.
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 $24.3 million, $24.5 million and $22.7 million for 2007, 2006 and 2005,
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
2006, the Company adopted FASB, Statement No. 123(R), “Share-Based Payment”
(“Statement No. 123(R)”) with the grants of restricted stock and options to
purchase common stock to employees and directors in accordance with the
provisions of the Company’s 2005 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
an
employee is required to provide service in exchange for the award, generally
referred to as the requisite service period. The Company recorded stock-based
compensation charges of $655,000 and $383,000 during 2007 and 2006,
respectively.
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.
F
-
13
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 a foreign 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.
Earnings
Per Share
Basic
earnings per share is calculated based on income available to common
stockholders and the weighted-average number of shares outstanding during the
reporting period. Diluted earnings per share is calculated based on income
available to common stockholders and the weighted-average number of common
and
potential common shares outstanding during the reporting period. Potential
common shares, composed of the incremental common shares issuable upon the
exercise of stock options, stock appreciation rights and unvested restricted
shares, are included in the earnings per share calculation to the extent that
they are dilutive.
Fair
Value of Financial Instruments
The
carrying value of cash, accounts receivable and accounts payable at both March
31, 2007 and 2006 approximates fair value due to the short-term nature of these
instruments. The carrying value of long-term debt at both March 31, 2007 and
2006 approximates fair value based on interest rates for instruments with
similar terms and maturities.
Recently
Issued Accounting Standards
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including
an amendment of FASB Statement No. 115” (“Statement
No.
159”). Statement
No. 159
permits companies to choose to measure certain financial instruments and certain
other items at fair value. Unrealized gains and losses on items for which the
fair value option has been elected will be recognized in earnings at each
subsequent reporting date. Statement
No. 159
is effective for
the
Company’s interim financial statements issued after April 1, 2008. The
Company
is evaluating the impact that the adoption of Statement
No. 159
will have on its consolidated financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 was issued in an
effort to eliminate the diversity in practice surrounding how companies quantify
financial statement misstatements. SAB No. 108 requires that errors be
quantified using both a balance sheet and income statement approach and
evaluated as to materiality giving consideration to all relevant quantitative
and qualitative factors. The adoption of SAB No. 108 did not have a material
impact on the Company’s consolidated financial statements.
In
September 2006, the FASB issued SFAS
No.
157, “Fair Value Measurements” (“Statement No. 157”) to address inconsistencies
in the definition and determination of fair value pursuant to generally accepted
accounting principles (“GAAP”). Statement No. 157 provides a single definition
of fair value, establishes a framework for measuring fair value in GAAP and
expands disclosures about fair value measurements in an effort to increase
comparability related to the recognition of market-based assets and liabilities
and their impact on earnings. Statement No. 157 is effective for the Company’s
interim financial statements issued after April 1, 2008. The Company is
evaluating the impact that the adoption of Statement No. 157 will have on its
consolidated financial statements.
F
-
14
In
June
2006, the FASB issued
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement 109” (“FIN No.
48”),
which clarifies the accounting for uncertainty in income taxes recognized in
a
company’s financial statements in accordance with FASB Statement 109. FIN
No.
48
prescribes a recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN No.
48 is
effective for the Company’s interim financial statements issued after April 1,
2007, and is not expected to have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.
Management
has reviewed and continues to monitor the actions of the various financial
and
regulatory reporting agencies and is currently not aware of any other
pronouncement that could have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
|
2.
|
Acquisition
of
Businesses
|
Acquisition
of Bonita Bay
On
April
6, 2004, the Company acquired all of the outstanding capital stock of Bonita
Bay
for a purchase price of approximately $561.3 million (including working capital
adjustments totaling $1.1 million). The Bonita Bay acquisition, including fees
and expenses related to the financing of $22.7 million, and funds used to repay
$154.4 million of outstanding debt obligations, was financed through the
following sources:
|
(In
thousands)
Revolving
Credit Facility
|
$
|
3,512
|
||
|
Tranche
B Term Loan Facility
|
355,000
|
|||
|
Tranche
C Term Loan Facility
|
100,000
|
|||
|
9.25%
Senior Subordinated Notes
|
210,000
|
|||
|
Issuance
of Preferred and Common units
|
58,579
|
|||
|
Total
sources of funds
|
$
|
727,091
|
The
total
purchase price of the Bonita Bay acquisition (which included cash of $379.2
million paid to the selling stockholders, Prestige LLC Class B Preferred Units
valued at an aggregate of $91,000 and Prestige LLC Common Units valued at an
aggregate of $1,000, assumed debt and accrued interest which was retired of
$176.9 million and acquisition costs of $3.6 million) was allocated to the
acquired assets and liabilities as set forth in the following
table:
|
(In
thousands)
Cash
|
$
|
4,304
|
||
|
Accounts
receivable
|
13,186
|
|||
|
Inventories
|
16,185
|
|||
|
Prepaid
expenses and other current assets
|
1,391
|
|||
|
Property
and equipment
|
2,982
|
|||
|
Goodwill
|
217,234
|
|||
|
Intangible
assets
|
352,460
|
|||
|
Accounts
payable and accrued liabilities
|
(21,189
|
)
|
||
|
Long-term
debt
|
(172,898
|
)
|
||
|
Deferred
income taxes
|
(34,429
|
)
|
||
|
$
|
379,226
|
As
a
result of the Bonita Bay acquisition, the Company recorded indefinite lived
trademarks of $340.7 million and $11.8 million of trademarks with an estimated
weighted average useful life of seven years. Additionally, the Company recorded
goodwill of $217.2 million that is not deductible for income tax
purposes.
F
-
15
Acquisition
of Vetco, Inc.
On
October 6, 2004, the Company acquired all the outstanding stock of Vetco, Inc.
for a purchase price of approximately $50.6 million. To finance the acquisition,
the Company used cash on hand of approximately $20.6 million and borrowed an
additional $12.0 million on its Revolving Credit Facility and $18.0 million
on
its Tranche B Term Loan Facility. The
results from operations of Vetco, Inc. have been included within the Company’s
consolidated financial statements as a component of the over-the-counter
healthcare segment commencing October 6, 2004.
The
total
purchase price of the Vetco acquisition was allocated to the acquired assets
and
liabilities as set forth in the following table:
|
(In
thousands)
Accounts
receivable
|
$
|
2,136
|
||
|
Inventories
|
910
|
|||
|
Prepaid
expenses and other current assets
|
37
|
|||
|
Property
and equipment
|
5
|
|||
|
Goodwill
|
21,858
|
|||
|
Intangible
assets
|
27,158
|
|||
|
Accounts
payable and accrued liabilities
|
(1,455
|
)
|
||
|
$
|
50,649
|
As
a
result of the Vetco acquisition, the Company recorded $27.0 million of
trademarks with an estimated useful life of 20 years and $158,000 related to
a
5-year non-compete agreement with the former owner of Vetco. Additionally,
the
Company recorded goodwill of $21.9
million that will be fully deductible for income tax purposes.
Acquisition
of Dental Concepts, LLC
On
November 8, 2005, the Company acquired all of the ownership interests of Dental
Concepts, a marketer of therapeutic oral care products sold under “The
Doctor’s”
brand.
The
Doctor’s
product
line has been fully integrated in the Company’s operations and has benefited
from its business model of outsourced manufacturing. Additionally, the Company
has increased product sales as a result of a targeted marketing and advertising
program. The results from operations of Dental Concepts have been included
within the Company’s consolidated financial statements as a component of the
over-the-counter healthcare segment commencing November 8, 2005.
The
purchase price of the ownership interests was approximately $30.2 million (net
of cash acquired of $280,000), including fees and expenses of the acquisition
of
$1.3 million. The Company financed the acquisition price through the utilization
of its senior revolving credit facility in the amount of $30.0 million and
cash
on hand.
The
following table summarizes the estimated fair values of the assets acquired
and
the liabilities assumed at the date of acquisition, which includes a purchase
price adjustment of $750,000 that was recorded in 2007.
|
(In
thousands)
|
||||
|
Accounts
receivable
|
$
|
2,774
|
||
|
Inventories
|
1,707
|
|||
|
Prepaid
expenses and other current assets
|
172
|
|||
|
Property
and equipment
|
546
|
|||
|
Goodwill
|
6,362
|
|||
|
Intangible
assets
|
22,395
|
|||
|
Accounts
payable and accrued liabilities
|
(3,717
|
)
|
||
|
$
|
30,239
|
|||
As
a
result of the Dental Concepts acquisition, the Company recorded a trademark
valued at $22.4 million with an estimated useful life of 20 years. Goodwill
resulting from this transaction was $6.4 million and it is estimated that such
amount will be fully deductible for income tax purposes.
F
-
16
Acquisition
of Wartner USA BV
On
September 21, 2006, the Company completed the acquisition of the ownership
interests of Wartner USA B.V., the owner of the Wartner brand of
over-the-counter wart treatment products. The Company expects that the
Wartner brand, which is the #3 brand in the United States
over-the-counter wart treatment category, will enhance the Company’s leadership
in the category. Additionally, the Company believes that the brand will benefit
from a targeted advertising and marketing program, as well as the Company’s
business model of outsourcing manufacturing and the elimination of redundant
operations. The results from operations of the Wartner brand have been
included within the Company’s consolidated financial statements as a component
of the over-the-counter healthcare segment commencing September 21,
2006.
The
purchase price of the ownership interests was approximately $31.2 million,
including fees and expenses of the acquisition of $216,000 and the assumption
of
approximately $5.0 million of contingent payments, with an estimated fair value
of $3.8 million, owed to the former owner of Wartner through 2011. The Company
funded the cash acquisition price from operating cash flows.
The
following table summarizes the estimated fair values of the assets acquired
and
the liabilities assumed at the date of acquisition; however, the final purchase
price will not be determined until all preliminary valuations have been
finalized. Consequently, the allocation of the purchase price is subject to
refinement.
|
(In
thousands)
|
||||
|
Inventory
|
$
|
769
|
||
|
Intangible
assets
|
29,600
|
|||
|
Goodwill
|
11,746
|
|||
|
Accrued
liabilities
|
(3,854
|
)
|
||
|
Deferred
tax liabilities
|
(7,000
|
)
|
||
|
$
|
31,261
|
|||
The
amount allocated to intangible assets of $29.6 million includes $17.8 million
related to the Wartner brand trademark which the Company estimates to
have a useful life of 20 years, as well as $11.8 million related to a patent
estimated to have a useful life of 14 years. Goodwill resulting from this
transaction was $11.7 million, inclusive of a deferred income tax liability
recorded for the difference between the assigned values of assets acquired
and
liabilities assumed, and their respective taxes bases. As discussed above,
this
recorded amount is subject to change as additional information becomes
available; however, it is estimated that of such amount, approximately $4.7
million will be deductible for income tax purposes.
The
following table sets forth the unaudited results of the Company’s operations on
a pro forma basis as if the acquisition of Wartner had been completed on April
1, 2005, and the acquisition of Dental Concepts, which was acquired in November
2005, had been completed on April 1, 2004. It also includes the pro forma
results from operations of Vetco, Inc., which was acquired in October 2004,
as
if the acquisition of Vetco, Inc. had been completed on April 1, 2004. The
pro
forma financial information is not necessarily indicative of the operating
results that the combined entities would have achieved, nor is it necessarily
indicative of the operating results that may be expected in the
future.
F
-
17
|
Year
Ended March 31
|
||||||||||
|
(In
thousands, except per share data)
|
2007
|
2006
|
2005
|
|||||||
|
(Unaudited
Pro forma)
|
||||||||||
|
Revenues
|
$
|
326,103
|
$
|
315,276
|
$
|
308,062
|
||||
|
Income
before provision for income taxes
|
$
|
55,340
|
$
|
47,368
|
$
|
20,730
|
||||
|
Net
income
|
$
|
36,178
|
$
|
26,161
|
$
|
11,418
|
||||
|
Cumulative
preferred dividends on Senior
Preferred
and Class
B Preferred Units
|
--
|
--
|
(25,395
|
)
|
||||||
|
Net
income (loss) available to members and
common
stockholders
|
$
|
36,178
|
$
|
26,161
|
$
|
(13,977
|
)
|
|||
|
Basic
earnings per share
|
$
|
0.73
|
$
|
0.53
|
$
|
(0.51
|
)
|
|||
|
Diluted
earnings per share
|
$
|
0.72
|
$
|
0.52
|
$
|
(0.51
|
)
|
|||
|
Weighted
average shares outstanding:
Basic
|
49,460
|
48,908
|
27,546
|
|||||||
|
Diluted
|
50,020
|
50,008
|
27,546
|
|||||||
|
Accounts
Receivable
|
Accounts
receivable consist of the following (in thousands):
|
March
31
|
|||||||
|
2007
|
2006
|
||||||
|
Accounts
receivable
|
$
|
35,274
|
$
|
40,140
|
|||
|
Other
receivables
|
1,681
|
1,870
|
|||||
|
36,955
|
42,010
|
||||||
|
Less
allowances for discounts, returns and
uncollectible
accounts
|
(1,788
|
)
|
(1,968
|
)
|
|||
|
$
|
35,167
|
$
|
40,042
|
||||
|
Inventories
|
Inventories
consist of the following (in thousands):
|
March
31
|
|||||||
|
2007
|
2006
|
||||||
|
Packaging
and raw materials
|
$
|
2,842
|
$
|
3,278
|
|||
|
Finished
goods
|
27,331
|
30,563
|
|||||
|
$
|
30,173
|
$
|
33,841
|
||||
Inventories
are shown net of allowances for obsolete and slow moving inventory of $1.8
million and $1.0 million at March 31, 2007 and 2006, respectively.
F
-
18
Property
and equipment consist of the following (in thousands):
|
March
31
|
|||||||
|
2007
|
2006
|
||||||
|
Machinery
|
$
|
1,480
|
$
|
3,722
|
|||
|
Computer
equipment
|
566
|
987
|
|||||
|
Furniture
and fixtures
|
247
|
303
|
|||||
|
Leasehold
improvements
|
372
|
340
|
|||||
|
2,665
|
5,352
|
||||||
|
Accumulated
depreciation
|
(1,216
|
)
|
(3,699
|
)
|
|||
|
$
|
1,449
|
$
|
1,653
|
||||
6. Goodwill
A
reconciliation of the activity affecting goodwill by operating segment is as
follows (in thousands):
|
Over-the-Counter
|
Household
|
Personal
|
|||||||||||
|
Healthcare
|
Cleaning
|
Care
|
Consolidated
|
||||||||||
|
Balance
- March 31, 2005
|
$
|
217,539
|
72,549
|
$
|
4,643
|
$
|
294,731
|
||||||
|
Additions
|
5,096
|
--
|
--
|
5,096
|
|||||||||
|
Impairments
|
--
|
--
|
(1,892
|
)
|
(1,892
|
)
|
|||||||
|
Balance
- March 31, 2006
|
222,635
|
72,549
|
2,751
|
297,935
|
|||||||||
|
Additions
|
13,012
|
--
|
--
|
13,012
|
|||||||||
|
Balance
- March 31, 2007
|
$
|
235,647
|
$
|
72,549
|
$
|
2,751
|
$
|
310,947
|
|||||
During
the year ended March 31, 2006 and in conjunction with the annual test for
goodwill impairment, the Company recorded a $1.9 million charge to adjust the
carrying amount of goodwill related to one of the reporting units in the
personal care segment to its fair value as determined by use of discounted
cash
flow methodologies.
7. Intangible
Assets
On
October 28, 2005, the Company acquired the “Chore
Boy”
brand
of cleaning pads and sponges for $22.7 million, including direct costs of
$405,000. The acquired trademark was assigned an indefinite life.
During
2006, management determined that declining sales in the Company’s personal care
segment might be indicative of an impairment of the Company’s intangible assets.
Accordingly, in connection with its annual impairment tests of goodwill and
indefinite-lived intangibles in accordance with Statement No. 142, management
also performed an impairment analysis for all of the Company’s finite-lived
intangible assets in accordance with Statement No. 144. As a result of this
analysis, the Company recorded a $7.4 million charge to adjust the carrying
amount of certain trademarks related to the personal care segment to their
fair
values as determined by use of discounted cash flow methodologies. As discussed
in Note 6, the Company also recorded a related impairment charge to
goodwill.
F
-
19
A
reconciliation of the activity affecting intangible assets is as follows (in
thousands):
|
Year
Ended March 31, 2007
|
|||||||||||||
|
Indefinite
Lived
|
Finite
Lived
|
Non
Compete
|
|||||||||||
|
Trademarks
|
Trademarks
|
Agreement
|
Totals
|
||||||||||
|
Carrying
Amounts
|
|||||||||||||
|
Balance
- March 31, 2006
|
$
|
544,963
|
$
|
109,870
|
$
|
196
|
$
|
655,029
|
|||||
|
Additions
|
--
|
29,600
|
--
|
29,600
|
|||||||||
|
Balance
- March 31, 2007
|
$
|
544,963
|
$
|
139,470
|
$
|
196
|
$
|
684,629
|
|||||
|
Accumulated
Amortization
|
|||||||||||||
|
Balance
- March 31, 2006
|
$
|
--
|
$
|
17,779
|
$
|
53
|
$
|
17,832
|
|||||
|
Additions
|
--
|
9,596
|
44
|
9,640
|
|||||||||
|
Balance
- March 31, 2007
|
$
|
--
|
$
|
27,375
|
$
|
97
|
$
|
27,472
|
|||||
|
Year
Ended March 31, 2006
|
|||||||||||||
|
Indefinite
Lived
|
Finite
Lived
|
Non
Compete
|
|||||||||||
|
Trademarks
|
Trademarks
|
Agreement
|
Totals
|
||||||||||
|
Carrying
Amounts
|
|||||||||||||
|
Balance
- March 31, 2005
|
$
|
522,346
|
$
|
94,900
|
$
|
158
|
$
|
617,404
|
|||||
|
Additions
|
22,617
|
22,395
|
38
|
45,050
|
|||||||||
|
Impairments
|
--
|
(7,425
|
)
|
--
|
(7,425
|
)
|
|||||||
|
Balance
- March 31, 2006
|
$
|
544,963
|
$
|
109,870
|
$
|
196
|
$
|
655,029
|
|||||
|
Accumulated
Amortization
|
|||||||||||||
|
Balance
- March 31, 2005
|
$
|
--
|
$
|
8,775
|
$
|
16
|
$
|
8,791
|
|||||
|
Additions
|
--
|
9,004
|
37
|
9,041
|
|||||||||
|
Balance
- March 31, 2006
|
$
|
--
|
$
|
17,779
|
$
|
53
|
$
|
17,832
|
|||||
At
March
31, 2007, intangible assets are expected to be amortized over a period of five
to 30 years as follows (in thousands):
|
Year
Ending March 31
|
||||
|
2008
|
$
|
10,507
|
||
|
2009
|
10,502
|
|||
|
2010
|
9,086
|
|||
|
2011
|
9,071
|
|||
|
2012
|
9,071
|
|||
|
Thereafter
|
63,957
|
|||
|
$
|
112,194
|
|||
F
-
20
8. Other
Accrued Liabilities
Other
accrued liabilities consist of the following (in thousands):
|
|
March
31
|
|
||||||||
|
|
2007
|
2006
|
||||||||
|
|
||||||||||
|
Accrued
marketing costs
|
$
|
5,687
|
$
|
2,513
|
||||||
|
Accrued
payroll
|
3,721
|
813
|
||||||||
|
Accrued
commissions
|
335
|
248
|
||||||||
|
Other
|
762
|
1,008
|
||||||||
|
|
$
|
10,505
|
$
|
4,582
|
||||||
F
-
21
9. Long-Term
Debt
Long-term
debt consists of the following (in thousands):
|
March
31
|
|||||||
|
2007
|
2006
|
||||||
|
Senior
revolving credit facility (“Revolving Credit Facility”), which expires on
April 6, 2009 and 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 margins range from 0.75% to 2.50% and
at
March 31, 2007, the interest rate on the Revolving Credit Facility
was
9.5% per annum. The Company is also required to pay a variable commitment
fee on the unused portion of the Revolving Credit Facility. At March
31,
2007, the commitment fee was 0.50% of the unused line. The Revolving
Credit Facility is collateralized by substantially all of the Company’s
assets.
|
$
|
--
|
$
|
7,000
|
|||
|
Senior
secured term loan facility (“Tranche B Term Loan Facility”) that bears
interest at the Company’s option at either the prime rate plus a margin of
1.25% or LIBOR plus a margin of 2.25%. At March
31, 2007,
the applicable interest rate on the Tranche B Term Loan Facility
was
7.63%. Principal payments of $887,500 plus accrued interest are payable
quarterly. In February 2005, the Tranche B Term Loan Facility was
amended
to increase the additional amount available thereunder by $50.0 million
to
$200.0 million, all of which is available at March
31, 2007.
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.
|
337,350
|
365,630
|
|||||
|
Senior
Subordinated Notes that bear interest at 9.25% which is payable on
April
15th
and October 15th
of
each year. The Senior Subordinated Notes mature on April 15, 2012;
however, the Company may redeem some or all of the Senior Subordinated
Notes on or prior to April 15, 2008 at a redemption price equal to
100%,
plus a make-whole premium, and after April 15, 2008 at redemption
prices
set forth in the indenture governing the Senior Subordinated Notes.
The
Senior Subordinated Notes are unconditionally guaranteed by Prestige
Brands Holdings, Inc., and its domestic wholly-owned subsidiaries
other
than Prestige Brands, Inc., 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
|
|||||
|
463,350
|
498,630
|
||||||
|
Current
portion of long-term debt
|
(3,550
|
)
|
(3,730
|
)
|
|||
|
$
|
459,800
|
$
|
494,900
|
||||
Effective
as of December 19, 2006: (i) a Second Supplemental Indenture (“Second
Supplemental Indenture”), and (ii) a Guaranty Supplement (“Indenture Guaranty
Supplement”) were entered into with the trustee for the holders of the Senior
Subordinated Notes. The Second Supplemental Indenture supplements and amends
the
indenture,
F
-
22
dated
as
of April 6, 2004, as supplemented on October 6, 2004 (“Indenture”). Pursuant to
the terms of the Second Supplemental Indenture and the Indenture Guaranty
Supplement, the Company agreed to guaranty all of the obligations of Prestige
Brands, Inc., an indirect wholly-owned subsidiary of the Company (“PBI”), set
forth in the Indenture governing PBI’s Senior Subordinated Notes. The Second
Supplemental Indenture also amended the covenant requiring Prestige Brands
International, LLC (“Prestige Brands International”), an indirect wholly-owned
subsidiary of the Company, to file periodic reports with the SEC pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended
(“Exchange Act”). So long as the Company or any other guarantor is required to
file periodic reports under Section 13 or 15(d) of the Exchange Act that are
substantially the same as the periodic reports that Prestige Brands
International would otherwise be required to file with the SEC pursuant to
the
Indenture, Prestige Brands International is not required to file such
reports.
Also
effective as of December 19, 2006, a Joinder Agreement (“Joinder Agreement”) and
a Guaranty Supplement (“Credit Agreement Guaranty Supplement”) were entered into
with the administrative agent for the lenders under the Senior Credit Facility.
Pursuant to the terms of the Joinder Agreement and the Credit Agreement Guaranty
Supplement, the Company agreed to become a party to the Pledge and Security
Agreement (“Security Agreement”) and the Guaranty (“Credit Agreement Guaranty”),
each dated as of April 6, 2004, by PBI and certain of its affiliates in favor
of
the lenders. The Security Agreement and the Credit Agreement Guaranty secure
the
performance by PBI of its obligations under the Credit Agreement, dated as
of
April 6, 2004, as amended (“Credit Agreement”), by granting security interests
to PBI's lenders in collateral owned by the Company and certain of its
subsidiaries and providing guaranties of such obligations by certain of PBI’s
affiliates.
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. The Senior Credit
Facility and the Senior Subordinated Notes also contain provisions that restrict
the Company from undertaking specified corporate actions, such as asset
dispositions, acquisitions, dividend payments, repurchase of common shares
outstanding, changes of control, incurrence of indebtedness, creation of liens,
making of loans and transactions with affiliates. Additionally, the Senior
Credit Facility and the Senior Subordinated Notes contain cross-default
provisions whereby a default pursuant to the terms and conditions of either
indebtedness will cause a default on the remaining indebtedness. At March 31,
2007, the Company was in compliance with its applicable financial and other
covenants under the Senior Credit Facility and the Indenture.
Future
principal payments required in accordance with the terms of the Senior Credit
Facility and the Senior Subordinated Notes are as follows (in
thousands):
|
Year
Ending March 31
|
||||
|
2008
|
$
|
3,550
|
||
|
2009
|
3,550
|
|||
|
2010
|
3,550
|
|||
|
2011
|
3,550
|
|||
|
2012
|
323,150
|
|||
|
Thereafter
|
126,000
|
|||
|
$
|
463,350
|
|||
In
an
effort to mitigate the impact of changing interest rates, the Company entered
into interest rate cap agreements with various financial institutions. In June
2004, the Company purchased a 5% interest rate cap with a notional amount of
$20.0 million which expired in June 2006. In March 2005, the Company purchased
interest rate cap agreements with a total notional amount of $180.0 million
and
cap rates ranging from 3.25% to 3.75%. On May 31, 2006, an interest rate cap
agreement with a notional amount of $50.0 million and a 3.25% cap rate expired.
Additionally, an interest rate cap agreement with a notional amount of $80.0
million and a 3.50% cap rate expired on May 30, 2007. The remaining agreement,
with a notional amount of $50.0 million and a cap rate of 3.75%, terminates
on
May 30, 2008. The Company is accounting for the interest rate cap agreements
as
cash flow hedges. The fair value of the interest rate cap agreements, which
is
included in other long-term assets, was $1.2 million and $3.3 million at
March
31,
2007 and 2006, respectively.
F
-
23
10. Stockholders’
Equity
The
Company is authorized to issue 250.0 million shares of common stock, $0.01
par
value per share, and 5.0 million shares of preferred stock, $0.01 par value
per
share. The Board of Directors may direct the issuance of the undesignated
preferred stock in one or more series and determine preferences, privileges
and
restrictions thereof.
Each
share of common stock has the right to one vote on all matters submitted to
a
vote of stockholders. The holders of common stock are also entitled to receive
dividends whenever funds are legally available and when declared by the Board
of
Directors, subject to prior rights of holders of all classes of stock
outstanding having priority rights as to dividends. No dividends have been
declared or paid on the Company’s common stock through March 31,
2007.
Prior
to
the Company’s initial public offering in February 2005, Prestige International
Holdings, LLC (“Prestige LLC”), then the top tier entity, had four classes of
units: Senior Preferred Units, Class A Preferred Units, Class B Preferred Units
and Common Units. A “unit” is an equity interest of a unitholder in the profits,
losses and distributions of the Company.
On
February 6, 2004, certain senior executive officers purchased an aggregate
of
5.3 million common units of Prestige LLC at $.10 per unit. These units were
purchased on the same day and at the same price that GTCR and TCW/Crescent
Partners, the Company’s unrelated equity investors (the “Sponsors”), purchased
50.0 million common units. On March 17, 2004, other executive officers purchased
an aggregate of 405,000 common units at a price of $.10 per unit and on April
6,
2004, two additional employees purchased an aggregate of 50,000 common units
at
a price of $.10 per unit. Each of the above-referenced purchase transactions
by
management were conducted at fair market value based upon the price paid by
the
Sponsors and the fact that such purchases were made at the same price and at
the
same time or shortly thereafter. Certain
of these shares are subject to vesting requirements over a period of 5 years.
No
compensation cost was recorded in connection with the issuance of these units
as
these units were purchased by management at fair value. As of March 31, 2007,
there were approximately 295,000 shares of unvested restricted stock related
to
these purchases.
On
April
6, 2004, the Company acquired all of the outstanding capital stock of Bonita
Bay
for a purchase price of approximately $564.9 million, inclusive of acquisition
costs of $3.6 million. The total purchase price consideration for the Bonita
Bay
included cash of $379.2 million paid to the selling stockholders, the issuance
of Prestige LLC Class B Preferred Units valued at an aggregate of $91,000 and
Prestige LLC Common Units valued at an aggregate of $1,000, as well as the
assumption of debt and accrued interest of $176.9 million.
On
November 1, 2004, certain non-executive employees purchased an aggregate of
337,000 common units of Prestige LLC, for $0.70 per unit, which was equal to
fair market value, and which vest over a period of 5 years. This determination
was based on a contemporaneous valuation that utilized traditional
methodologies, including market multiples, comparable transactions and
discounted cash flow. Prestige LLC relied on this fair market value analysis
in
setting the $0.70 per unit price for the purchases. Prestige LLC awarded a
total
cash bonus of $235,000 to allow employees to purchase such units. In connection
therewith, Prestige LLC recorded a bonus expense of $235,000. In this regard,
all employee purchases were conducted at fair market value based upon the
contemporaneous valuation. As
of
March 31, 2007, there were approximately 37,000 shares of unvested restricted
stock related to these employee purchases.
On
February 9, 2005, the Company became the direct parent company of Prestige
LLC,
under the terms of an exchange agreement among the Company, Prestige LLC and
each holder of common units of Prestige LLC. Pursuant to the exchange agreement,
the holders of common units of Prestige LLC exchanged all their common units
for
an aggregate of 26.7 million shares of common stock of the Company.
On
February 9, 2005, the Company completed its initial public offering, pursuant
to
which it sold 28.0 million shares of its common stock and selling stockholders
sold 4.2 million shares of common stock at a price of $16.00 per share. The
offering resulted in proceeds to the Company of approximately $416.8 million,
net of $3.1 million of issuance costs. In connection with the offering, the
Company retired 4.7 million shares of its common stock
F
-
24
for
an
aggregate cost of $30.2 million. Upon completion of the initial public offering,
there were 50.0 million shares of the Company’s common stock issued and
outstanding.
On
February 15, 2005, a portion of the net proceeds from the initial public
offering were used to redeem all of Prestige LLC’s outstanding Senior Preferred
Units and Class B Preferred Units for $199.8 million, which included cumulative
and liquidating dividends of $26.8 million. The cumulative dividends were based
on an 8% per year rate of return.
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 accordance with
Company’s directors’ compensation arrangements. The common stock had a fair
value of $11.25 per share, the closing price of the Company’s common stock on
July 28, 2005. 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, the Company named a new President and Chief Operating Officer. In
connection therewith, the Board of Directors granted this individual 30,888
shares of restricted common stock with a fair market value of $12.95 per share,
the closing price of the common stock on August 4, 2005, and options to purchase
an additional 61,776 shares of common stock at an exercise price of $12.95
per
share. During 2007, compensation costs of $142,000 were reversed upon the
departure of this member of management.
On
October 1, 2005, the Company’s Board of Directors authorized the grant of
156,000 shares of restricted common 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. The issuance of such shares is contingent upon the Company’s
attainment of certain revenue and earnings per share targets. Additionally,
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
August
15, 2006, each of two new independent members to the Company’s Board of
Directors received an award of 2,119 unrestricted shares of common stock in
accordance with Company’s directors’ compensation arrangements. The common stock
had a fair value of $9.44 per share, the closing price of the Company’s common
stock on August 14, 2006.
During
2007 and 2006, the Company repurchased 6,000 and 16,000 shares, respectively,
of
restricted common stock from former employees pursuant to the provisions of
the
various employee stock purchase agreements at an average purchase price of
$1.70
per share. Additionally, during 2007, the Company recovered 30,888 shares of
restricted stock upon the departure of a former member of management. All of
such shares have been recorded as treasury stock.
F
-
25
11. Earnings
Per Share
The
following table sets forth the computation of basic and diluted earnings per
share (in thousands):
|
Year
Ended March 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Numerator
|
||||||||||
|
Net
income
|
$
|
36,078
|
$
|
26,277
|
$
|
10,220
|
||||
|
Cumulative
preferred dividends on Senior
Preferred
and Class
B Preferred Units
|
--
|
--
|
(25,395
|
)
|
||||||
|
Net
income (loss) available to members
and
common
stockholders
|
$
|
36,078
|
$
|
26,277
|
$
|
(15,175
|
)
|
|||
|
Denominator
|
||||||||||
|
Denominator
for basic earnings per share
|
49,460
|
48,908
|
27,546
|
|||||||
|
Dilutive
effect of unvested restricted
common
stock and
stock appreciation
rights
issued to
employees and directors
|
560
|
1,100
|
--
|
|||||||
|
Denominator
for diluted earnings per share
|
50,020
|
50,008
|
27,546
|
|||||||
|
Earnings
per Common Share:
|
||||||||||
|
Basic
|
$
|
0.73
|
$
|
0.54
|
$
|
(0.55
|
)
|
|||
|
Diluted
|
$
|
0.72
|
$
|
0.53
|
$
|
(0.55
|
)
|
|||
Outstanding
employee stock options to purchase an aggregate of 61,800 shares of common
stock
at March 31, 2006 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, their inclusion would be antidilutive. There
were no such stock options outstanding at March 31, 2007. At March 31, 2007,
373,000 restricted shares, issued to management and employees are unvested;
however, such shares are included in the calculation of diluted earnings per
share. Additionally, at March 31, 2007, 254,000 shares of restricted stock
granted to management and employees, as well as 16,000 stock appreciation rights
have been excluded from the calculation of both basic and diluted earnings
per
share since vesting of such shares is subject to contingencies. At March 31,
2006, 734,000 restricted shares issued to management and employees were
unvested; however, such shares were included in the calculation of diluted
earnings per share. Additionally, at March 31, 2006, 180,000 shares of
restricted stock granted to management and employees have been excluded from
the
calculation of both basic and diluted earnings per share since vesting of such
shares is subject to contingencies.
12. Related
Party Transactions
Effective
February 6, 2004, the Company entered into 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. The
total
fee paid to the GTCR affiliate during 2005 was $3.4 million.
|
13.
|
Share-Based
Compensation
|
In
connection with the Company’s initial public offering, the Board of Directors
adopted the 2005 Long-Term Equity Incentive Plan (“Plan”) which provides for the
grant, to a maximum of 5.0 million shares, of stock options,
F
-
26
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. The Company believes that such awards better align the interests of its
employees with those of its stockholders.
During
2006, the Company adopted 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 Plan. Compensation costs charged
against income, and the related tax benefits recognized were $655,000 and
$253,000, respectively, for 2007 and $383,000 and $150,000, respectively, for
2006.
Restricted
Shares
Restricted
shares granted under the plan generally vest in 3 to 5 years, contingent on
attainment of Company performance goals, including both revenue and earnings
per
share growth targets. Certain restricted share awards provide for accelerated
vesting if there is a change of control. The fair value of nonvested restricted
shares is determined as the closing price of the Company’s common stock on the
day preceding the grant date. The weighted-average grant-date fair values during
2007 and 2006 were $9.83 and $12.29, respectively.
A
summary
of the Company’s restricted shares granted under the Plan is presented
below:
|
Nonvested
Shares
|
Shares
(000)
|
Weighted-
Average
Grant-Date
Fair
Value
|
|||||
|
Granted
|
211.6
|
$
|
12.29
|
||||
|
Vested
|
(7.1)
|
|
11.25
|
||||
|
Forfeited
|
(6.5)
|
|
12.32
|
||||
|
Nonvested
at March 31, 2006
|
198.0
|
12.32
|
|||||
|
|
|||||||
|
Granted
|
156.5
|
9.83
|
|||||
|
Vested
|
(13.1)
|
|
10.67
|
||||
|
Forfeited
|
(47.0)
|
|
12.47
|
||||
|
Nonvested
at March 31, 2007
|
294.4
|
$
|
11.05
|
||||
Options
The
Plan
provides that the exercise price of the option granted shall be no less than
the
fair market value of the Company’s common stock on the date the option is
granted. Options granted have a term of no greater than 10 years from the date
of grant and vest in accordance with a schedule determined at the time the
option is granted, generally 3 to 5 years. Certain option awards provide for
accelerated vesting if there is a change in control.
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes Option Pricing Model (“Black-Scholes Model”) that uses the
assumptions noted in the following table. Expected volatilities are based on
the
historical volatility of the Company’s common stock and other factors, including
the historical volatilities of comparable companies. The Company uses
appropriate historical data, as well as current data, to estimate option
exercise and employee termination behaviors. Employees that are expected to
exhibit similar exercise or termination behaviors are grouped together for
the
purposes of valuation. The expected terms of the options granted are derived
from management’s estimates and information derived from the public filings of
companies similar to the Company and represent the period of time that options
granted are expected to be outstanding. The risk-free rate represents the yield
on U.S. Treasury bonds with a maturity equal to the expected term of the granted
option. The weighted-average grant-date fair value of the options granted during
the year
F
-
27
ended
March 31, 2006 was $5.02. There were no options granted during the year ended
March 31, 2007.
|
Year
Ended March 31
|
|||||||
|
2007
|
2006
|
||||||
|
Expected
volatility
|
--
|
31.0%
|
|
||||
|
Expected
dividends
|
--
|
--
|
|||||
|
Expected
term in years
|
--
|
6.0
|
|||||
|
Risk-free
rate
|
--
|
4.2%
|
|
||||
A
summary
of option activity under the Plan is as follows:
|
Options
|
Shares
(000)
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
(000)
|
|||||||||
|
Granted
|
61.8
|
$
|
12.95
|
5.0
|
$
|
--
|
|||||||
|
Exercised
|
--
|
--
|
--
|
--
|
|||||||||
|
Forfeited
or expired
|
--
|
--
|
--
|
--
|
|||||||||
|
Outstanding
at March 31, 2006
|
61.8
|
12.95
|
4.3
|
--
|
|||||||||
|
|
|
||||||||||||
|
Granted
|
--
|
--
|
--
|
--
|
|||||||||
|
Exercised
|
--
|
--
|
--
|
--
|
|||||||||
|
Forfeited
or expired
|
(61.8)
|
|
12.95
|
4.3
|
--
|
||||||||
|
Outstanding
at March 31, 2007
|
--
|
$
|
--
|
--
|
$
|
--
|
|||||||
|
|
|
||||||||||||
|
Exercisable
at March 31, 2007
|
--
|
$
|
--
|
--
|
$
|
--
|
|||||||
Since
the
exercise price of the option exceeded the Company’s closing stock price of
$12.17 at March 31, 2006, the aggregate intrinsic value of outstanding options
was $0 at March 31, 2006.
Stock
Appreciation Rights (“SARS”)
During
2007, the Board of Directors granted SARS to a group of selected executives.
The
terms of the SARS provide that on the vesting date, the executive will receive
the excess of the market price of the stock award over the market price of
the
stock award on the date of issuance. The Board of Directors, in its sole
discretion, may settle the Company’s obligation to the executive in shares of
the Company’s common stock, cash, other securities of the Company or any
combination thereof.
The
Plan
provides that the issuance price of a SAR shall be no less than the market
price
of the Company’s common stock on the date the SAR is granted. SARS may be
granted with a term of no greater than 10 years from the date of grant and
will
vest in accordance with a schedule determined at the time the SAR is granted,
generally 3 to 5 years. The weighted-average grant date fair value of the SARS
granted during 2007 was $3.68. The fair value of each SAR award was estimated
on
the date of grant using the Black-Scholes Model using the assumptions noted
in
the following table.
|
Year
Ended
March
31, 2007
|
||
|
Expected
volatility
|
50.0%
|
|
|
Expected
dividends
|
--
|
|
|
Expected
term in years
|
2.75
|
|
|
Risk-free
rate
|
5.0%
|
F
-
28
A
summary
of SARS activity under the Plan is as follows:
|
SARS
|
Shares
(000)
|
Grant
Date
Stock
Price
|
Weighted-
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
(000)
|
|||||||||
|
Granted
|
16.1
|
$
|
9.97
|
2.0
|
$
|
--
|
|||||||
|
Forfeited
or expired
|
--
|
--
|
-- |
--
|
|||||||||
|
Outstanding
at March 31, 2007
|
16.1
|
$
|
9.97
|
2.0
|
$
|
30,300
|
|||||||
|
Exercisable
at March 31, 2007
|
--
|
$
|
--
|
--
|
$
|
--
|
|||||||
Since
the
closing market price of the Company’s common stock on March 31, 2007 of $11.85
exceeded the market price of the Company’s stock on the grant date, the
aggregate intrinsic value of outstanding SARS was $30,300 at March 31,
2007.
At
March
31, 2007 and 2006, there were $1.4 million and $1.2 million, respectively,
of
unrecognized compensation costs related to nonvested share-based compensation
arrangements under the Plan based on management’s estimate of the shares that
will ultimately vest. The Company expects to recognize such costs over the
next
2.5 years. However, the restricted shares vest upon the attainment of Company
performance goals and if such goals are not met, no compensation costs would
ultimately be recognized and any previously recognized compensation cost would
be reversed. The total fair value of shares vested during 2007 and 2006 was
$104,000 and $80,000, respectively. There were no options exercised during
2007
or 2006; hence there were no tax benefits realized during these periods. At
March 31, 2007, there were 4.7 million shares available for issuance under
the
Plan.
14. Income
Taxes
The
provision (benefit) for income taxes consists of the following (in
thousands):
|
Year
Ended March 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Current
|
||||||||||
|
Federal
|
$
|
7,547
|
$
|
5,043
|
$
|
(544
|
)
|
|||
|
State
|
1,739
|
1,056
|
654
|
|||||||
|
Foreign
|
150
|
206
|
102
|
|||||||
|
Deferred
|
||||||||||
|
Federal
|
10,391
|
10,621
|
7,495
|
|||||||
|
State
|
(729
|
)
|
4,355
|
849
|
||||||
|
$
|
19,098
|
$
|
21,281
|
$
|
8,556
|
|||||
F
-
29
The
principal components of the Company’s deferred tax balances are as follows (in
thousands):
|
March
31
|
|||||||
|
2007
|
2006
|
||||||
|
Deferred
Tax Assets
|
|||||||
|
Allowance
for doubtful accounts and sales returns
|
$
|
982
|
$
|
1,975
|
|||
|
Inventory
capitalization
|
420
|
524
|
|||||
|
Inventory
reserves
|
731
|
420
|
|||||
|
Net
operating loss carryforwards
|
1,052
|
2,402
|
|||||
|
Property
and equipment
|
95
|
325
|
|||||
|
State
income taxes
|
4,545
|
5,319
|
|||||
|
Accrued
liabilities
|
286
|
233
|
|||||
|
Other
|
347
|
168
|
|||||
|
Deferred
Tax Liabilities
|
|||||||
|
Intangible
assets
|
(120,096
|
)
|
(106,342
|
)
|
|||
|
Interest
rate caps
|
(198
|
)
|
(400
|
)
|
|||
|
$
|
(111,836
|
)
|
$
|
(95,376
|
)
|
||
At
March
31, 2007, Medtech Products, Inc., a wholly-owned subsidiary of the Company,
had
a net operating loss carryforward of approximately $2.6 million which may be
used to offset future taxable income of the consolidated group and which begins
to expire in 2020. The net operating loss carryforward is subject to an annual
limitation as to usage under Internal Revenue Code Section 382 of approximately
$240,000.
A
reconciliation of the effective tax rate compared to the statutory U.S. Federal
tax rate is as follows (in
thousands):
|
Year
Ended March 31
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
%
|
%
|
%
|
|||||||||||||||||
|
Income
tax provision at
statutory
rate
|
$
|
19,312
|
35.0
|
$
|
16,645
|
35.0
|
$
|
6,384
|
34.0
|
||||||||||
|
Foreign
tax provision
|
(69
|
)
|
(0.1
|
)
|
59
|
0.1
|
102
|
0.5
|
|||||||||||
|
State
income taxes, net of
federal
income tax
benefit
|
2,029
|
3.7
|
2,096
|
4.4
|
901
|
4.8
|
|||||||||||||
|
Increase
in net deferred tax
liability
resulting
from an
increase
in federal
tax rate
to
35%
|
--
|
--
|
--
|
--
|
1,147
|
6.2
|
|||||||||||||
|
Increase
(decrease) in net
deferred
tax
liability
resulting
from an
increase
(decrease)
in the
effective
state
tax
rate
|
(2,200
|
)
|
(4.0
|
)
|
2,019
|
4.2
|
--
|
--
|
|||||||||||
|
Goodwill
|
--
|
--
|
461
|
1.0
|
--
|
--
|
|||||||||||||
|
Other
|
26
|
0.0
|
1
|
0.0
|
22
|
0.1
|
|||||||||||||
|
Provision
for income taxes
|
$
|
19,098
|
34.6
|
$
|
21,281
|
44.7
|
$
|
8,556
|
45.6
|
||||||||||
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 (the “Consolidated
Action”). The first of the six consolidated cases was filed on August 3, 2005.
Plaintiffs purport to represent a class of stockholders of the Company who
purchased shares between February 9, 2005 through November 15,
F
-
30
2005.
Plaintiffs also name as defendants the underwriters in the Company’s initial
public offering and a private equity fund that was a selling stockholder in
the
offering. The District Court has appointed a Lead Plaintiff. On December 23,
2005, the Lead Plaintiff filed a Consolidated Class Action Complaint, which
asserted claims under Sections 11, 12(a)(2) and 15 of the Securities Act of
1933
and Sections 10(b), 20(a) and 20A of the Securities Exchange Act of 1934. The
Lead Plaintiff generally alleged that the Company issued a series of materially
false and misleading statements in connection with its initial public offering
and thereafter in regard to the following areas: the accounting issues described
in the Company’s press release issued on or about November 15, 2005; and the
alleged failure 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 Company
filed a motion to dismiss the Consolidated Class Action Complaint in February
2006. On July 10, 2006, the Court dismissed all claims against the Company
and
the individual defendants arising under the Securities Exchange Act of 1934.
The
parties have commenced the discovery process which is ongoing. On June 1, 2007,
a hearing before the Court was held regarding Plaintiffs’ pending motion for
class certification in the Consolidated Action on which no decision has been
rendered at this time. The Company’s management believes the remaining claims
are legally deficient and subject to meritorious defenses. The Company intends
to vigorously pursue its defenses; however, the Company cannot reasonably
estimate the potential range of loss, if any.
On
May
23, 2006, Similasan Corporation filed a lawsuit against the Company in the
United States District Court for the District of Colorado in which Similasan
alleged false designation of origin, trademark and trade dress infringement,
and
deceptive trade practices by the Company related to Murine
for
Allergy Eye Relief, Murine
for
Tired Eye Relief and Murine
for
Earache Relief, as applicable. Similasan has requested injunctive relief, an
accounting of profits and damages and litigation costs and attorneys’ fees. In
response, the Company filed an answer to the complaint with a potentially
dispositive motion. In addition to the lawsuit filed by Similasan in the U.S.
District Court for the District of Colorado, the Company also received a cease
and desist letter from Swiss legal counsel to Similasan and its parent company,
Similasan AG, a Swiss company. In the cease and desist letter, Similasan and
Similasan AG have alleged a breach of the Secrecy Agreement executed by the
Company and demanded that the Company cease and desist from (i) using
confidential information covered by the Secrecy Agreement; and (ii)
manufacturing, distributing, marketing or selling certain of its homeopathic
products. The complaint in the Colorado action has been amended to include
allegations relating to the breach of confidentiality and the Company has filed
an answer and responsive motions. On February 22, 2007, prior to the Court’s
issuance of a decision regarding the pending motions, the Company agreed to
a
settlement of the litigation with Similasan and Similasan AG and executed a
settlement agreement. The terms of the settlement agreement involved a dismissal
of the litigation with prejudice and no monetary damages to the
Company.
On
September 28, 2006, OraSure Technologies, Inc. moved in the Supreme Court of
the
State of New York for a preliminary injunction prohibiting the Company from
selling cryogenic wart removal products under the Wartner brand, which
the Company acquired on September 21, 2006. OraSure Technologies is a supplier
to the Company for the Company’s
Compound W Freeze Off business.
The distribution agreement between the parties provides for mediation of
contract disputes, followed by arbitration, if necessary. The contract in
question is of five years duration ending in December 2007. On October 30,
2006,
the Court denied OraSure Technologies’ motion for a preliminary injunction.
Subsequently, in a decision and order dated December 20, 2006, the Court denied
a motion by OraSure Technologies for a rehearing regarding a preliminary
injunction. An appeal was filed by OraSure in the Appellate Division of the
Supreme Court of the State of New York on January 29, 2007, and the Company
filed a brief with the Court on February 28, 2007. On May 17, 2007, the
Appellate Division reversed the decision of the Supreme Court of the State
of
New York and issued a preliminary injunction prohibiting the marketing and
selling of the Wartner brand by the Company until the underlying
arbitration with OraSure was concluded. On May 21, 2007, the Company requested
that the Appellate Division issue a stay of the preliminary injunction, consider
reargument of the Appellate Division’s decision and grant a leave to appeal to
the Court of Appeals of the State of New York. In response to the Company’s
request for a stay of the preliminary injunction, the Appellate Division issued
a stay of the preliminary injunction pending the Appellate Division’s
consideration of the Company’s motion to reargue and request for leave to appeal
to the Court of Appeals. The parties are currently awaiting the decision of
the
Appellate Division regarding the motions made by the Company. The Company
believes the preliminary injunction was granted based upon factual and legal
error and is inconsistent with the terms of the distribution agreement with
OraSure and applicable law. The Company is also seeking resolution of the matter
through arbitration as required pursuant to the distribution agreement. A
hearing before
F
-
31
the
arbitration panel is scheduled to be held in August 2007.
The
Company is also involved from time to time in other routine legal matters and
other claims incidental to its business. The Company reviews outstanding claims
and proceedings internally and with external counsel as necessary to assess
probability and amount of potential loss. These assessments are re-evaluated
at
each reporting period and as new information becomes available to determine
whether a reserve should be established or if any existing reserve should be
adjusted. The actual cost of resolving a claim or proceeding ultimately may
be
substantially different than the amount of the recorded reserve. In addition,
because it is not permissible under generally accepted accounting principles
to
establish a litigation reserve until the loss is both probable and estimable,
in
some cases there may be insufficient time to establish a reserve prior to the
actual incurrence of the loss (upon verdict and judgment at trial, for example,
or in the case of a quickly negotiated settlement). The Company believes the
resolution of routine matters and other incidental claims, taking into account
reserves and insurance, will not have a material adverse effect on its business,
financial condition or results from operations.
Lease
Commitments
The
Company has operating leases for office facilities and equipment in New York,
New Jersey and Wyoming, which expire at various dates through 2011.
The
following summarizes future minimum lease payments for the Company’s operating
leases (in thousands):
|
Facilities
|
Equipment
|
Total
|
||||||||
|
Year
Ending March 31,
|
||||||||||
|
2008
|
$
|
612
|
$
|
120
|
$
|
732
|
||||
|
2009
|
501
|
113
|
614
|
|||||||
|
2010
|
75
|
85
|
160
|
|||||||
|
2011
|
--
|
25
|
25
|
|||||||
|
$
|
1,188
|
$
|
343
|
$
|
1,531
|
|||||
Rent
expense for 2007, 2006 and 2005 was $565,000, $584,000 and $512,000
respectively.
The
Company’s sales are concentrated in the areas of over-the-counter healthcare,
personal care and household cleaning products. The Company sells its products
to
mass merchandisers, food and drug accounts, and dollar and club stores. During
2007, 2006 and 2005, approximately 57%, 61%, and 64%, respectively, of the
Company’s total sales were derived from its four major brands. During 2007, 2006
and 2005, approximately 24%, 21%, and 24%, respectively, of the Company’s net
sales were made to one customer. At March 31, 2007, approximately 22% of
accounts receivable were owed by the same 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
inventories 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 affect on the
Company’s sales and profitability.
The
Company has relationships with over 40 third-party manufacturers. Of those,
the
top 10 manufacturers produced items that accounted for approximately 78% of
the
Company’s gross sales for 2007. The Company does not have long-term contracts
with 3 of these manufacturers and certain manufacturers of various smaller
brands, which collectively, represented approximately 35% of the Company’s gross
sales for 2007. The lack of manufacturing agreements for these products exposes
the Company to the risk that a manufacturer could stop producing the Company’s
products at any time, for any reason or fail to provide the Company with the
level of products the Company needs to meet its customers’ demands. Without
adequate supplies of merchandise to sell
F
-
32
to
the
Company’s customers, sales would decrease materially and the Company’s business
would suffer.
17. 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 and reportable segments consist of (i) Over-the-Counter
Healthcare, (ii) Household Cleaning and (iii) Personal Care.
There
were no inter-segment sales or transfers during any of the periods presented.
The Company evaluates the performance of its operating segments and allocates
resources to them based primarily on contribution margin. The table below
summarizes information about the Company’s operating and reportable segments (in
thousands).
|
Year
Ended March 31, 2007
|
|||||||||||||
|
Over-the-Counter
|
Household
|
Personal
|
|||||||||||
|
Healthcare
|
Cleaning
|
Care
|
Consolidated
|
||||||||||
|
Net
sales
|
$
|
174,704
|
$
|
117,249
|
$
|
24,894
|
$
|
316,847
|
|||||
|
Other
revenues
|
--
|
1,787
|
--
|
1,787
|
|||||||||
|
Total
revenues
|
174,704
|
119,036
|
24,894
|
318,634
|
|||||||||
|
Cost
of sales
|
65,601
|
73,002
|
14,544
|
153,147
|
|||||||||
|
Gross
profit
|
109,103
|
46,034
|
10,350
|
165,487
|
|||||||||
|
Advertising
and promotion
|
24,201
|
6,679
|
1,125
|
32,005
|
|||||||||
|
Contribution
margin
|
$
|
84,902
|
$
|
39,355
|
$
|
9,225
|
133,482
|
||||||
|
Other
operating expenses
|
38,800
|
||||||||||||
|
Operating
income
|
94,682
|
||||||||||||
|
Other
(income) expense
|
39,506
|
||||||||||||
|
Provision
for income taxes
|
19,098
|
||||||||||||
|
Net
income
|
$
|
36,078
|
|||||||||||
F
-
33
|
Year
Ended March 31, 2006
|
|||||||||||||
|
Over-the-Counter
|
Household
|
Personal
|
|||||||||||
|
Healthcare
|
Cleaning
|
Care
|
Consolidated
|
||||||||||
|
Net
sales
|
$
|
160,942
|
$
|
107,372
|
$
|
27,925
|
$
|
296,239
|
|||||
|
Other
revenues
|
--
|
429
|
--
|
429
|
|||||||||
|
Total
revenues
|
160,942
|
107,801
|
27,925
|
296,668
|
|||||||||
|
Cost
of sales
|
58,491
|
65,088
|
15,851
|
139,430
|
|||||||||
|
Gross
profit
|
102,451
|
42,713
|
12,074
|
157,238
|
|||||||||
|
Advertising
and promotion
|
22,424
|
6,495
|
3,163
|
32,082
|
|||||||||
|
Contribution
margin
|
$
|
80,027
|
$
|
36,218
|
$
|
8,911
|
125,156
|
||||||
|
Other
operating expenses
|
41,252
|
||||||||||||
|
Operating
income
|
83,904
|
||||||||||||
|
Other
(income) expense
|
36,346
|
||||||||||||
|
Provision
for income taxes
|
21,281
|
||||||||||||
|
Net
income
|
$
|
26,277
|
|||||||||||
|
Year
Ended March 31, 2005
|
|||||||||||||
|
Over-the-Counter
|
Household
|
Personal
|
|||||||||||
|
Healthcare
|
Cleaning
|
Care
|
Consolidated
|
||||||||||
|
Net
sales
|
$
|
159,010
|
$
|
97,746
|
$
|
32,162
|
$
|
288,918
|
|||||
|
Other
revenues
|
--
|
151
|
--
|
151
|
|||||||||
|
Total
revenues
|
159,010
|
97,897
|
32,162
|
289,069
|
|||||||||
|
Cost
of sales
|
60,570
|
62,039
|
16,400
|
139,009
|
|||||||||
|
Gross
profit
|
98,440
|
35,858
|
15,762
|
150,060
|
|||||||||
|
Advertising
and promotion
|
18,543
|
5,656
|
5,498
|
29,697
|
|||||||||
|
Contribution
margin
|
$
|
79,897
|
$
|
30,202
|
$
|
10,264
|
120,363
|
||||||
|
Other
operating expenses
|
29,998
|
||||||||||||
|
Operating
income
|
90,365
|
||||||||||||
|
Other
(income) expense
|
71,589
|
||||||||||||
|
Provision
for income taxes
|
8,556
|
||||||||||||
|
Net
income
|
$
|
10,220
|
|||||||||||
During
2007, approximately 95% of the Company’s sales were made to customers in the
United States and Canada, while during each of 2006 and 2005, approximately
97%
of the Company’s sales were made to customers in the United States and Canada.
Other than the United States, no individual geographical area accounted for
more
than 10% of net sales in any of the periods presented. At March 31, 2007,
substantially all of the Company’s long-term assets were located in the United
States of America and have been allocated to the
F
-
34
operating
segments as follows:
|
Over-the-Counter
|
Household
|
Personal
|
|||||||||||
|
Healthcare
|
Cleaning
|
Care
|
Consolidated
|
||||||||||
|
Goodwill
|
$
|
235,647
|
$
|
72,549
|
$
|
2,751
|
$
|
310,947
|
|||||
|
Intangible
assets
|
|||||||||||||
|
Indefinite
lived
|
374,070
|
170,893
|
--
|
544,963
|
|||||||||
|
Finite
lived
|
94,776
|
21
|
17,397
|
112,194
|
|||||||||
|
468,846
|
170,914
|
17,397
|
657,157
|
||||||||||
|
$
|
704,493
|
$
|
243,463
|
$
|
20,148
|
$
|
968,104
|
||||||
18. Unaudited
Quarterly Financial Information
Unaudited
quarterly financial information for 2007 and 2006 is as follows:
Year
Ended March 31, 2007
|
Quarterly
Period Ended
|
|||||||||||||
|
(In
thousands, except for
per
share data)
|
June
30,
2006
|
September
30,
2006
|
December
31,
2006
|
March
31,
2007
|
|||||||||
|
Total
revenues
|
$
|
75,923
|
$
|
84,551
|
$
|
80,124
|
$
|
78,036
|
|||||
|
Cost
of sales
|
36,325
|
41,259
|
36,766
|
38,797
|
|||||||||
|
Gross
profit
|
39,598
|
43,292
|
43,358
|
39,239
|
|||||||||
|
Operating
expenses
|
|||||||||||||
|
Advertising
and promotion
|
7,402
|
9,455
|
8,952
|
6,196
|
|||||||||
|
Depreciation
and amortization
|
2,413
|
2,412
|
2,804
|
2,755
|
|||||||||
|
General
and administrative
|
6,434
|
7,259
|
7,068
|
7,655
|
|||||||||
|
16,249
|
19,126
|
18,824
|
16,606
|
||||||||||
|
Operating
income
|
23,349
|
24,166
|
24,534
|
22,633
|
|||||||||
|
Net
interest expense
|
(9,792
|
)
|
(9,743
|
)
|
(10,156
|
)
|
(9,815
|
)
|
|||||
|
Income
before income taxes
|
13,557
|
14,423
|
14,378
|
12,818
|
|||||||||
|
Provision
for income taxes
|
(5,301
|
)
|
(5,639
|
)
|
(3,735
|
)
|
(4,423
|
)
|
|||||
|
Net
income
|
$
|
8,256
|
$
|
8,784
|
$
|
10,643
|
$
|
8,395
|
|||||
|
Net
income per share:
|
|||||||||||||
|
Basic
|
$
|
0.17
|
$
|
0.18
|
$
|
0.21
|
$
|
0.17
|
|||||
|
Diluted
|
$
|
0.17
|
$
|
0.18
|
$
|
0.21
|
$
|
0.17
|
|||||
|
Weighted
average shares outstanding:
|
|||||||||||||
|
Basic
|
49,372
|
49,451
|
49,535
|
49,607
|
|||||||||
|
Diluted
|
50,005
|
49,994
|
50,024
|
50,027
|
|||||||||
F
-
35
Year
Ended March 31, 2006
|
Quarterly
Period Ended
|
|||||||||||||
|
(In
thousands, except for
per
share data)
|
June
30,
2005
|
September
30,
2005
|
December
31,
2005
|
March
31,
2006
|
|||||||||
|
Total
revenues
|
$
|
63,453
|
$
|
73,345
|
$
|
79,856
|
$
|
80,014
|
|||||
|
Cost
of sales
|
28,949
|
35,549
|
38,726
|
36,206
|
|||||||||
|
Gross
profit
|
34,504
|
37,796
|
41,130
|
43,808
|
|||||||||
|
Operating
expenses
|
|||||||||||||
|
Advertising
and promotion
|
8,705
|
10,217
|
7,385
|
5,775
|
|||||||||
|
Depreciation
and amortization
|
2,631
|
2,635
|
2,834
|
2,694
|
|||||||||
|
General
and administrative
|
4,911
|
4,117
|
6,159
|
5,954
|
|||||||||
|
Other
expenses (1)
|
--
|
--
|
--
|
9,317
|
|||||||||
|
16,247
|
16,969
|
16,378
|
23,740
|
||||||||||
|
Operating
income
|
18,257
|
20,827
|
24,752
|
20,068
|
|||||||||
|
Net
interest expense
|
(8,510
|
)
|
(8,671
|
)
|
(9,526
|
)
|
(9,639
|
)
|
|||||
|
Income
before income taxes
|
9,747
|
12,156
|
15,226
|
10,429
|
|||||||||
|
Provision
for income taxes
|
(3,818
|
)
|
(4,782
|
)
|
(5,881
|
)
|
(6,800
|
)
|
|||||
|
Net
income
|
$
|
5,929
|
$
|
7,374
|
$
|
9,345
|
$
|
3,629
|
|||||
|
Net
income per share:
|
|||||||||||||
|
Basic
|
$
|
0.12
|
$
|
0.15
|
$
|
0.19
|
$
|
0.07
|
|||||
|
Diluted
|
$
|
0.12
|
$
|
0.15
|
$
|
0.19
|
$
|
0.07
|
|||||
|
Weighted
average shares outstanding:
|
|||||||||||||
|
Basic
|
48,722
|
48,791
|
48,929
|
49,077
|
|||||||||
|
Diluted
|
49,998
|
49,949
|
50,010
|
50,008
|
|||||||||
|
(1)
|
Consists
of a $7.4 million charge for the impairment of intangible assets
and a
$1.9 million charge for the impairment of
goodwill.
|
F
-
36
SCHEDULE
II
VALUATION
AND QUALIFYING ACCOUNTS
|
(In
Thousands)
|
Balance
at
Beginning
of
Year
|
Amounts
Charged
to
Expense
|
Deductions
|
Other
|
Balance
at
End
of
Year
|
||||||||||||||
|
Year
Ended March 31, 2007
|
|||||||||||||||||||
|
Reserves
for sales
returns
and
allowance
|
$
|
1,868
|
$
|
12,611
|
$
|
(12,726
|
)
|
$
|
--
|
$
|
1,753
|
||||||||
|
Reserves
for trade
promotions
|
1,671
|
2,974
|
(2,484
|
)
|
--
|
2,161
|
|||||||||||||
|
Reserves
for consumer
coupon
redemptions
|
283
|
2,674
|
(2,556
|
)
|
--
|
401
|
|||||||||||||
|
Allowance
for doubtful
accounts
|
100
|
100
|
(165
|
)
|
--
|
35
|
|||||||||||||
|
Allowance
for
inventory
obsolescence
|
1,019
|
3,096
|
(2,397
|
)
|
136
|
(1
|
)
|
1,854
|
|||||||||||
|
Year
Ended March 31, 2006
|
|||||||||||||||||||
|
Reserves
for sales
returns
and
allowance
|
$
|
1,652
|
$
|
13,040
|
$
|
(13,056
|
)
|
$
|
232
|
(2
|
)
|
$
|
1,868
|
||||||
|
Reserves
for trade
promotions
|
1,493
|
2,522
|
(2,481
|
)
|
137
|
(2
|
)
|
1,671
|
|||||||||||
|
Reserves
for consumer
coupon
redemptions
|
290
|
2,680
|
(2,687
|
)
|
--
|
283
|
|||||||||||||
|
Allowance
for doubtful
accounts
|
250
|
1
|
(92
|
)
|
(59
|
)
|
(2
|
)
|
100
|
||||||||||
|
Allowance
for inventory
obsolescence
|
1,450
|
76
|
(526
|
)
|
19
|
(2
|
)
|
1,019
|
|||||||||||
|
Pecos
returns reserve
|
242
|
--
|
(242
|
)
|
--
|
--
|
|||||||||||||
|
Year
Ended March 31, 2005
|
|||||||||||||||||||
|
Reserves
for sales
returns
and
allowance
|
$
|
687
|
$
|
10,245
|
$
|
(9,280
|
)
|
$
|
--
|
$
|
1,652
|
||||||||
|
Reserves
for trade
promotions
|
1,163
|
10,120
|
(11,660
|
)
|
1,870
|
(3
|
)
|
1,493
|
|||||||||||
|
Reserves
for consumer
coupon
redemptions
|
266
|
2,265
|
(2,891
|
)
|
650
|
(3
|
)
|
290
|
|||||||||||
|
Allowance
for doubtful
accounts
|
60
|
32
|
(33
|
)
|
191
|
(3
|
)
|
250
|
|||||||||||
|
Allowance
for inventory
obsolescence
|
124
|
769
|
(266
|
)
|
823
|
(3
|
)
|
1,450
|
|||||||||||
|
Pecos
returns reserve
|
1,186
|
--
|
(944
|
)
|
--
|
242
|
|||||||||||||
(1) As
a
result of the acquisition of Dental Concepts LLC, the Company recorded an
allowance for inventory obsolescence in purchase accounting.
(2) As
a
result of the acquisition of Dental Concepts LLC, the Company recorded allowance
for sales returns, promotional allowances and bad debts in purchase
accounting.
(3) As
a
result of the acquisition of Bonita Bay Holdings, Inc. and Vetco, Inc., the
Company recorded allowances for doubtful accounts and inventory obsolescence
in
purchase accounting.
F
- 37
EXHIBIT
INDEX
EXHIBIT
NO. DESCRIPTION
|
2.1
|
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 (filed as Exhibit 2.1 to
Prestige Brands Holdings, Inc.’s Form 8-K filed on July 28,
2005).+
|
|
|
2.2
|
Unit
Purchase Agreement, dated as of November 9, 2005, by and between
Prestige
Brands Holdings, Inc., and each of Dental Concepts LLC, Richard
Gaccione,
Combined Consultants DBPT Gordon Wade, Douglas A.P. Hamilton, Islandia
L.P., George O’Neill, Abby O’Neill, Michael Porter, Marc Cole and Michael
Lesser (filed as Exhibit 10.1 to Prestige Brands Holdings, Inc.’s Form
10-Q filed on February 14, 2006).+
|
|
|
2.3
|
Stock
Sale and Purchase Agreement, dated as of September 21, 2006, by
Lil’ Drug
Store Products, Inc., Wartner USA B.V., Lil’ Drug Store Products, Inc.’s
shareholders set forth on the signature thereto, and Medtech Products
Inc.
(filed as Exhibit 2.1 to Prestige Brands Holdings, Inc.’s Form 10-Q filed
on November 9, 2006).+
|
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of Prestige Brands
Holdings, Inc. (filed
as Exhibit 3.1 to Prestige Brands Holdings, Inc.’s Form S-1/A filed on
February 8, 2005).+
|
|
3.2
|
|
Amended
and Restated Bylaws of Prestige Brands Holdings, Inc., as amended
(filed
as Exhibit 3.1 to Prestige Brands Holdings, Inc.’s Form 10-Q filed on
August 9, 2006).+
|
|
4.1
|
|
Form of
stock certificate for common stock (filed
as Exhibit 4.1 to Prestige Brands Holdings, Inc.’s Form S-1/A filed on
January 26, 2005).+
|
|
4.2
|
|
Indenture,
dated April 6, 2004, among Prestige Brands, Inc., each Guarantor
thereto and U.S. Bank National Association, as Trustee (filed
as Exhibit 4.1 to Prestige Brands, Inc.’s Form S-4 filed on July 6,
2004).+
|
|
4.3
|
Form
of 9¼% Senior Subordinated Note due 2012 (contained in Exhibit 4.2 to
this
Annual Report on Form 10-K).+
|
|
|
4.4
|
Supplemental
Indenture, dated as of October 6, 2004, among Vetco, Inc., Prestige
Brands, Inc. and U.S. Bank, National Association (filed as Exhibit
4.1 to
Prestige Brands Holdings, Inc.’s Form 10-Q filed on February 9,
2007).+
|
|
|
4.5
|
Second
Supplemental Indenture, dated as of December 19, 2006, by and among
Prestige Brands, Inc., U.S. Bank, National Association, Prestige
Brands
Holdings, Inc., Dental Concepts LLC and Prestige International
Holdings,
LLC (filed as Exhibit 4.2 to Prestige Brands Holdings, Inc.’s Form 10-Q
filed on February 9, 2007).+
|
|
|
10.1
|
|
Credit
Agreement, dated April 6, 2004, among Prestige Brands, Inc.,
Prestige Brands International, LLC, the Lenders thereto, the Issuers
thereto, Citicorp North America, Inc., as Administrative Agent and as
Tranche C Agent, Bank of America, N.A., as Syndication Agent, and
Merrill Lynch Capital, a division of Merrill Lynch Business Financial
Services Inc., as Documentation Agent (filed
as Exhibit 10.1 to Prestige Brands Holdings, Inc.’s Form S-1 filed on July
28, 2004).+
|
|
10.2
|
|
Form of
Amendment No. 1 to the Credit Agreement, dated as of April 6,
2004, among Prestige Brands, Inc., Prestige Brands International,
LLC, the Lenders thereto, the Issuers thereto, Citicorp North
America, Inc., as administrative agent, Bank of America, N.A., as
syndication agent, and Merrill Lynch Capital, a division of Merrill
Lynch
Business Financial Services, Inc., as documentation agent
(filed
as Exhibit 10.1.1 to Prestige Brands Holdings, Inc.’s Form S-1/A filed on
February 8, 2005).+
|
|
10.3
|
|
Pledge
and Security Agreement, dated April 6, 2004, by Prestige
Brands, Inc. and each of the Grantors party thereto, in favor of
Citicorp North America, Inc. as Administrative Agent and
Tranche C Agent (filed
as Exhibit 10.2 to Prestige Brands Holdings, Inc.’s Form S-1 filed on July
28, 2004).+
|
|
10.4
|
Joinder
Agreement, dated as of December 19, 2006, by Prestige Brands Holdings,
Inc., Prestige International Holdings, LLC and Dental Concepts
LLC in
favor of Citicorp North America, Inc., as Administrative Agent,
to the
Pledge and Security Agreement, dated as of April 6, 2004, by Prestige
Brands, Inc. and its subsidiaries and affiliates listed on the
signature
pages thereof in favor of Citicorp North America, Inc., as Administrative
Agent (filed as Exhibit 10.1 to Prestige Brands Holdings, Inc.’s Form 10-Q
filed on February 9, 2007).+
|
|
|
10.5
|
Guaranty,
dated as of April 6, 2004, by Prestige Brands International, LLC
and each
of the other entities listed on the signature pages thereof in
favor of
Citicorp North America, Inc., as Administrative Agent (filed as
Exhibit
10.2 to Prestige Brands Holdings, Inc.’s Form 10-Q filed on February 9,
2007).+
|
|
|
10.6
|
Guaranty
Supplement, dated as of December 19, 2006, by Prestige Brands Holdings,
Inc., Prestige International Holdings, LLC and Dental Concepts
LLC in
favor of Citicorp North America, Inc., as Administrative Agent,
to the
Guaranty, dated as of April 6, 2004, among Prestige Brands International,
LLC and certain subsidiaries and affiliates of Prestige Brands,
Inc.
listed on the signature pages thereof in favor of Citicorp North
America,
Inc., as Administrative Agent (filed as Exhibit 10.3 to Prestige
Brands
Holdings, Inc.’s Form 10-Q filed on February 9, 2007).+
|
|
|
10.7
|
Securityholders
Agreement, dated February 6, 2004, among Medtech/Denorex, LLC, GTCR
Fund VIII, L.P., GTCR Fund VIII/B, L.P., GTCR Co-Invest II,
L.P., GTCR Capital Partners, L.P., the TCW/Crescent Purchasers
and the
TCW/Crescent Lenders thereto, each Executive thereto and each of
the Other
Securityholders thereto (filed as Exhibit 10.11 to Prestige Brands
Holdings, Inc.’s Form S-1 filed on July 28, 2004).+
|
|
|
10.8
|
First
Amendment and Acknowledgement to Securityholders Agreement, dated
April 6, 2004, to the Securityholders Agreement, dated
February 6, 2004, among Medtech/Denorex, LLC, GTCR Fund VIII,
L.P., GTCR Fund VIII/B, L.P., GTCR Co-Invest II, L.P., GTCR
Capital Partners, L.P., the TCW/Crescent Purchasers and the TCW/Crescent
Lenders thereto, each Executive thereto and each of the Other
Securityholders thereto (filed as Exhibit 10.12 to Prestige Brands
Holdings, Inc.’s Form S-1 filed on July 28, 2004).+
|
|
|
10.9
|
Registration
Rights Agreement, dated February 6, 2004, among Medtech/Denorex, LLC,
GTCR Fund VIII, L.P., GTCR Fund VIII/B, L.P., GTCR
Co-Invest II, L.P., GTCR Capital Partners, L.P., the TCW/Crescent
Purchasers and the TCW/Crescent Lenders thereto, each Executive
thereto
and each of the Other Securityholders thereto (filed
as Exhibit 10.13 to Prestige Brands Holdings, Inc.’s Form S-1 filed on
July 28, 2004).+
|
|
|
10.10
|
First
Amendment and Acknowledgement to Registration Rights Agreement,
dated
April 6, 2004, to the Registration Rights Agreement, dated
February 6, 2004, among Medtech/Denorex, LLC, GTCR Fund VIII,
L.P., GTCR Fund VIII/B, L.P., GTCR Co-Invest II, L.P., GTCR
Capital Partners, L.P., the TCW/Crescent Purchasers and the TCW/Crescent
Lenders thereto, each Executive thereto and each of the Other
Securityholders thereto (filed
as Exhibit 10.14 to Prestige Brands Holdings, Inc.’s Form S-1 filed on
July 28, 2004).+
|
|
|
10.11
|
Omnibus
Consent and Amendment to Securityholders Agreement, Registration
Rights
Agreement, Senior Management Agreements and Unit Purchase Agreement,
dated
as of July 6, 2004 (filed as Exhibit 10.29.1 to Prestige Brands
Holdings, Inc.’s Form S-1/A filed on November 12,
2004).+
|
|
|
10.12
|
Form of
Exchange Agreement by and among Prestige Brands Holdings, Inc.,
Prestige International Holdings, LLC and the common unit holders
listed on the signature pages thereto (filed
as Exhibit 10.39 to Prestige Brands Holdings, Inc.’s Form S-1/A filed on
January 26, 2005).+
|
|
|
10.13
|
Employment
Agreement, dated as of January 19, 2007, by and between Prestige
Brands
Holdings, Inc. and Mark Pettie (filed as Exhibit 10.5 to Prestige
Brands
Holdings, Inc.’s Form 10-Q filed on February 9,
2007).+@
|
|
|
10.14
|
Senior
Management Agreement, dated as of March 21, 2006, between Prestige
Brands
Holdings, Inc., Prestige Brands, Inc. and Peter C. Mann (filed
as Exhibit
99.1 to Prestige Brands Holdings, Inc.’s Form 8-K filed on March 23,
2006).+@
|
|
|
10.15
|
Form of
Amended and Restated Senior Management Agreement, dated as of January
28,
2005, by and among Prestige International Holdings, LLC, Prestige
Brands Holdings, Inc., Prestige Brands, Inc., and Peter J.
Anderson (filed
as Exhibit 10.29.7 to Prestige Brands Holdings, Inc.’s Form S-1/A filed on
January 26, 2005).+@
|
|
10.16
|
Executive
Employment Agreement, dated as of January 17, 2006, between Prestige
Brands Holdings, Inc. and Charles N. Jolly (filed as Exhibit 10.35
to
Prestige Brands Holdings, Inc.’s Form 10-K filed on June 14,
2006).+@
|
|
|
10.17
|
Letter
Agreement between Prestige Brands Holdings, Inc. and James E.
Kelly*@
|
|
|
10.18
|
Executive
Employment Agreement, dated as of August 21, 2006, between Prestige
Brands
Holdings, Inc. and Jean A. Boyko (filed
as Exhibit 10.1 to Prestige Brands Holdings, Inc.’s Form 10-Q filed on
November 9, 2006).+@
|
|
|
10.19
|
Form of
Amended and Restated Senior Management Agreement, dated as of January
28,
2005, by and among Prestige International Holdings, LLC, Prestige
Brands Holdings, Inc., Prestige Brands, Inc., and Gerard F.
Butler (filed as Exhibit 10.29.8 to Prestige Brands Holdings, Inc.’s Form
S-1/A filed on January 26, 2005).+@
|
|
|
10.20
|
Letter
Agreement, dated December 22, 2006, among Prestige Brands Holdings,
Inc.,
Prestige Brands, Inc. and Gerard F. Butler (filed as Exhibit 10.4
to
Prestige Brands Holdings, Inc.’s Form 10-Q filed on February 9,
2007).+#
|
|
|
10.21
|
Form of
Amended and Restated Senior Management Agreement, dated as of January
28,
2005, by and among Prestige International Holdings, LLC, Prestige
Brands Holdings, Inc., Prestige Brands, Inc., and Michael A.
Fink (filed
as Exhibit 10.29.9 to Prestige Brands Holdings, Inc.’s Form S-1/A filed on
January 26, 2005).+@
|
|
|
10.22
|
Letter
Agreement, dated April 13, 2007, by and among Prestige Brands Holdings,
Inc., Prestige Brands, Inc. and Michael A. Fink.*#
|
|
|
10.23
|
Form of
Amended and Restated Senior Management Agreement, dated as of January
28,
2005, by and among Prestige International Holdings, LLC, Prestige
Brands
Holdings, Inc., Prestige Brands, Inc., and Charles Shrank
(filed
as Exhibit 10.29.10 to Prestige Brands Holdings, Inc.’s Form S-1/A filed
on January 26, 2005).+@
|
|
|
10.24
|
Form of
Amended and Restated Senior Management Agreement, dated as of January
28,
2005, by and among Prestige International Holdings, LLC, Prestige
Brands
Holdings, Inc., Prestige Brands, Inc., and Eric M. Millar
(filed
as Exhibit 10.29.11 to Prestige Brands Holdings, Inc.’s Form S-1/A filed
on January 26, 2005).+@
|
|
|
10.25
|
Prestige
Brands Holdings, Inc. 2005 Long-Term Equity Incentive Plan
(filed
as Exhibit 10.38 to Prestige Brands Holdings, Inc.’s Form S-1/A filed on
January 26, 2005).+#
|
|
|
10.26
|
Form
of Restricted Stock Grant Agreement (filed
as Exhibit 10.1 to Prestige Brands Holdings, Inc.’s Form 10-Q filed on
August 9, 2005).+#
|
|
|
10.27
|
Form
of Performance Share Grant Agreement (filed
as Exhibit 10.3 to Prestige Brands Holdings, Inc.’s Form 10-Q filed on
November 9, 2006).+#
|
|
|
10.28
|
Form
of Nonqualified Stock Option Agreement *#
|
|
|
10.29
|
Contract
Manufacturing Agreement, dated February 1, 2001, among The
Procter & Gamble Manufacturing Company, P&G International
Operations SA, Prestige Brands International, Inc. and Prestige
Brands International (Canada) Corp. (filed
as Exhibit 10.31 to Prestige Brands, Inc.’s Form S-4/A filed on August 4,
2004).+**
|
|
|
10.30
|
Patent
and Technology License Agreement, dated October 2, 2001, between The
Procter & Gamble Company and Prestige Brands
International, Inc. (filed
as Exhibit 10.29 to Prestige Brands, Inc.’s Form S-4/A filed on August 19,
2004).+**
|
|
|
10.31
|
Amendment
No. 4 and Restatement of Contract Manufacturing Agreement, dated
May 1, 2002, by and between The Procter & Gamble Company and
Prestige Brands International, Inc. (filed
as Exhibit 10.33 to Prestige Brands, Inc.’s Form S-4/A filed on August 4,
2004).+**
|
|
|
10.32
|
Manufacturing
Agreement, dated December 30, 2002, by and between Prestige Brands
International, Inc. and Abbott Laboratories (filed
as Exhibit 10.32 to Prestige Brands, Inc.’s Form S-4/A filed on August 4,
2004).+**
|
|
|
10.33
|
Distribution
Agreement, dated April 24, 2003, by and between Medtech
Holdings, Inc. and OraSure Technologies, Inc. (filed
as Exhibit 10.27 to Prestige Brands, Inc.’s Form S-4/A filed on August 4,
2004).+**
|
|
|
10.34
|
Amendment
No. 1 to Distribution Agreement, dated as of February 10, 2006,
between
OraSure Technologies, Inc., Medtech Holdings, Inc. and Medtech
Products
Inc. (filed as Exhibit 10.2 to Prestige Brands Holdings, Inc.’s Form 8-K
filed on September 29, 2006).+
|
|
|
10.35
|
Amendment
No. 1 dated April 30, 2003 to the Patent and Technology License
Agreement, dated October 2, 2001, between The Procter &
Gamble Company and Prestige Brands International, Inc. (filed
as Exhibit 10.30 to Prestige Brands, Inc.’s Form S-4/A filed on August 19,
2004).+
|
|
|
10.36
|
Storage
and Handling Agreement dated April 13, 2005 by and between
Warehousing Specialists, Inc. and Prestige Brands, Inc. (filed
as Exhibit 10.1 to Prestige Brands Holdings, Inc.’s Form 8-K filed on
April 15, 2005).+
|
|
|
10.37
|
Transportation
Management Agreement dated April 13, 2005 by and between Prestige
Brands, Inc. and Nationwide Logistics, Inc. (filed
as Exhibit 10.2 to Prestige Brands Holdings, Inc.’s Form 8-K filed on
April 15, 2005).+
|
|
|
10.38
|
Trademark
License and Option to Purchase Agreement, dated September 8, 2005,
by and
among The Procter & Gamble Company and Prestige Brands Holdings, Inc.
(filed as Exhibit 10.1 to Prestige Brands Holdings, Inc.’s Form 8-K filed
on September 12, 2005).+
|
|
|
10.39
|
Exclusive
Supply Agreement, dated as of September 18, 2006, among Medtech
Products
Inc., Pharmacare Limited, Prestige Brands Holdings, Inc. and Aspen
Pharmacare Holdings Limited (filed
as Exhibit 10.2 to Prestige Brands Holdings, Inc.’s Form 10-Q filed on
November 9, 2006).+
|
|
|
21.1
|
Subsidiaries
of the Registrant.*
|
|
|
23.1
|
Consent
of PricewaterhouseCoopers LLP.*
|
|
|
31.1
|
Certification
of Principal Executive Officer of Prestige Brands Holdings, Inc.
pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
|
|
|
31.2
|
Certification
of Principal Financial Officer of Prestige Brands Holdings, Inc.
pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
|
|
|
32.1
|
Certification
of Principal Executive Officer of Prestige Brands Holdings, Inc.
pursuant
to Rule 13a-14(b) of the Securities Exchange Act of 1934 and Section
1350
of Chapter 63 of Title 18 of the United States Code, as adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
|
32.2
|
Certification
of Principal Financial Officer of Prestige Brands Holdings, Inc.
pursuant
to Rule 13a-14(b) of the Securities Exchange Act of 1934 and Section
1350
of Chapter 63 of Title 18 of the United States Code, as adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
| * | Filed herewith. |
|
**
|
Certain
confidential portions have been omitted pursuant to a confidential
treatment request separately filed with the Securities and Exchange
Commission.
|
| + | Incorporated herein by reference. |
| @ | Represents a management contract. |
| # | Represents a compensatory plan. |