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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 333-73160
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ARMKEL, LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF FORMATION)
ORGANIZED IN DELAWARE
469 NORTH HARRISON STREET
PRINCETON, NEW JERSEY 08543-5297 13-4181336
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) I.R.S EMPLOYER
IDENTIFICATION NO.
(609) 683-5900
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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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 and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes | | No |X|
As of March 27, 2003, all of the 10,000 outstanding membership interests in
Armkel, LLC were held by affiliates.
Documents Incorporated by Reference: None
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CAUTIONARY NOTE ON FORWARD LOOKING INFORMATION
This Annual Report contains forward-looking statements relating to, among
other things, short- and long-term financial objectives, sales growth, cash flow
and cost improvement programs. These statements represent the intentions, plans,
expectations and beliefs of the Company, and are subject to risk, uncertainties
and other factors, many of which are outside the Company's control and could
cause actual results to differ materially from such forward-looking statements.
The uncertainties include assumptions as to market growth and consumer demand
(including the effect of political and economic events on consumer demand), raw
material and energy prices and the financial condition of major customers. With
regard to the new product introductions referred to in this report, there is
particular uncertainty relating to trade, competitive and consumer reactions.
Other factors, which could materially affect the results, include the outcome of
contingencies, including litigation, pending regulatory proceedings,
environmental remediation and the acquisition or divestiture of assets.
The Company undertakes no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any further
disclosures we make on related subjects in our filings with the U.S. Securities
and Exchange Commission. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.
TABLE OF CONTENTS [TO BE UPDATED]
ITEM PAGE
PART I
ITEM 1. BUSINESS ......................................................... 1
ITEM 2. PROPERTIES ....................................................... 9
ITEM 3. LEGAL PROCEEDINGS ................................................ 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ............................................ 11
ITEM 6. SELECTED FINANCIAL DATA .......................................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...................................... 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....... 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................... 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ....................................... 69
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............... 69
ITEM 11. EXECUTIVE COMPENSATION ........................................... 70
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS ..................... 74
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................... 75
ITEM 14. CONTROLS AND PROCEDURES .......................................... 80
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K ....................................................... 80
PART I
ITEM 1. BUSINESS.
GENERAL; RECENT DEVELOPMENTS
Armkel, LLC (the "Company") is an equally owned joint venture formed by
Church & Dwight Co., Inc. ("C&D") and affiliates of Kelso & Company, L.P.
("Kelso"). On September 28, 2001, the Company acquired certain of the domestic
consumer product assets of Carter-Wallace, primarily Trojan condoms, Nair
depilatories, and First Response and Answer test kits, and the international
subsidiaries of Carter-Wallace (the "Acquisition"). The remainder of
Carter-Wallace, comprised of its healthcare and pharmaceuticals businesses, was
merged with an unrelated third party after the completion of the Acquisition.
Simultaneously with the consummation of the Acquisition, the Company sold the
remainder of the consumer products businesses, Arrid antiperspirant in the U.S
and Canada and the Lambert-Kay line of pet care products, to C&D. The Company
retained the Arrid antiperspirant business outside the U.S. and Canada.
C&D markets a broad range of products under its well-recognized Arm &
Hammer brand name, including personal care products such as antiperspirants,
dentifrices and oral care gum and other products, such as baking soda, carpet
deodorizer, air freshener and laundry detergent. C&D distributes its products
through a broad distribution platform that includes mass merchandisers, food
stores, drug stores, convenience stores and other channels. C&D's senior
management team has extensive experience in the branded consumer products
industry with average experience of more than 20 years. C&D was founded in 1846
and its common stock is publicly traded under the symbol "CHD" and has been
publicly traded for over thirty years. Kelso & Company, or Kelso, is a private
investment firm founded in 1971 that specializes in acquisition transactions.
Since 1980, Kelso has acquired 71 companies requiring total capital at closing
of approximately $18 billion.
During 2002, the Company continued the integration of its consumer
products business with the operations of C&D. The integration began in the
fourth quarter of 2001 with the consolidation of sales organizations, continued
through the integration of manufacturing and distribution and was materially
completed with the shut down of the former Carter-Wallace production facility in
Cranbury, New Jersey in the third quarter of 2002.
In February 2003, the Company sold its Italian subsidiary, S.p.A. Italiana
Laboratori Bouty, including its two subsidiaries, to a group comprised of local
management and private equity investors for a price of $22.6 million. The net
proceeds from the sale were used to prepay a portion of the Company's syndicated
financing loans. The Company will retain ownership of certain Italian pregnancy
kit and oral care product lines with annual sales of approximately $3 million.
The remainder of the Italian subsidiary's business disposed of in the sale
included a high percentage of distributor sales as well as hospital diagnostic
and other products not related to the Company's core business.
The Company is a leading marketer and manufacturer of well-recognized
branded personal care consumer products. The Company's Trojan brand occupies the
number one position in the domestic condom market. The Company's Nair brand
occupies the number one position in the domestic depilatories and waxes market.
The Company is either the number one or two provider of condoms,
depilatories and waxes and home pregnancy and ovulation test kits to consumers
in the United States. The Company's home pregnancy and ovulation test kits are
marketed under the First Response and Answer brand names. Similarly, the Company
enjoys leading market positions in certain of its international markets. In
Canada, for example, the Company's Trojan brand is the market leader. In
addition, the Company's depilatory and wax products, marketed under the Nair and
Taky brand names, have either a number one or number two market position in many
of its key international markets. The Company believes its leading market
positions and its well-recognized brand names are significant competitive
advantages, as they typically enable it to maintain superior shelf space
allocations within its retail customers' facilities.
The Company markets its products through a well-established, diversified
marketing platform that serves mass merchandisers, food stores, drug stores,
convenience stores and other channels. For the period ended December 31, 2002,
approximately 55% of the Company's net sales were generated in the United States
and the majority of the remainder were generated in Europe, Mexico and Canada.
The Company's products include condoms (latex, natural skin and polyurethane
contraceptives), depilatories and waxes (lotion, cream and wax hair removal
treatments), home pregnancy and ovulation test kits, over-the-counter (OTC)
products (topical analgesics, antinauseants, nasal decongestants and vitamin
supplements), oral care products (cosmetic tooth polishes and denture adhesives)
skin care products (moisturizers, anti-cellulite cream and skin cleansers), and
other products.
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DESCRIPTION OF BUSINESS SEGMENTS
The Company conducts its business through its domestic consumer products
division and its international consumer products division.
Neither of these segments is seasonal with the exception of the
depilatories and waxes product group which performs better in the spring and
summer months. Information concerning the net sales, operating income and
identifiable assets of each of the segments is set forth in Note 19 to the
consolidated financial statements included in Item 8 of this form 10-K.
DOMESTIC CONSUMER PRODUCTS. The following table sets forth the principal
products of the Company's domestic consumer products division and related data.
CATEGORY
CATEGORIE KEY BRAND NAMES POSITION*
--------- --------------- ---------
Condoms Trojan, Naturalamb, Class Act 1
Depilatories and waxes Nair, Lineance 1
Home pregnancy test kits First Response, Answer 2
Home ovulation test kits First Response, Answer 2
Other Consumer products Pearl Drops, Carter's Little Pills,
H-R Lubricating Jelly, Rigident --
* All brand rankings are based on IRI FDTKS, excluding Wal-Mart, for
the 52 weeks ending December 22, 2002.
Condoms. The Company offers a wide variety of products under its
well-recognized brand names, including: Trojan, its leading consumer brand;
Naturalamb, a natural product offered at higher prices; and Class Act, a
discount brand offered at lower prices.
The Company is dedicated to building its Trojan brand through advertising,
trade promotions and new product development.
The Company is currently the leading advertiser in the U.S. condom
category based on dollars spent. The Company has increased its promotional
programs and has regularly developed new and innovative product line extensions.
To this end, in 2002 the Company launched Trojan Her Pleasure Condoms and plans
on launching additional products in 2003.
Depilatories and Waxes. The Company's Nair depilatories and waxes products
have a leading market share. The Company believes that, as a result of its
dedicated advertising and promotional programs, distinct packaging and several
successful line extensions, Nair is positioned as the leader in lotion and cream
depilatories. The Company is also a leader in product innovation in the
depilatories and waxes categories. The Company's success with female hair
removal products has prompted it to broaden its product line and introduce hair
removal products for men. In 2003, new waxes, depilatory creams and cloth strips
will be launched to further strengthen Nair depilatories and waxes leadership
position.
In February 2003, the Company began shipping Lineance European Body
Essentials, a line of upscale hair removal and skin care treatments.
Home Pregnancy and Ovulation Test Kits. First Response and Answer brand
home pregnancy test kits represent the number two market position in each
category.
The First Response home pregnancy test kit is a premium priced, branded
product. In a sector with intensive advertising and promotion-based competition,
First Response is well-positioned as a trusted, well-recognized brand name with
high brand awareness. The Company's Answer brand home pregnancy test kit is a
value-priced product that competes with other valued-priced brands including
private label products, but generally at a slightly higher price point.
The First Response 1-Step Ovulation Kit is a premium priced, branded
product. The Company has introduced technology that enables the user to monitor
the test while in progress. First Response appeals to customers that favor
premium brand products.
Other Consumer Products. The Company's other domestic consumer products
operate in mature markets. The Company's brands include Pearl Drops
tooth-whitening products, Carter's Little Pills, a stimulant laxative, Rigident
denture adhesive and H-R Lubricating Jelly.
INTERNATIONAL CONSUMER PRODUCTS. The Company markets a diverse portfolio
of consumer products in a broad range of international markets. The Company's
international consumer products primarily include condoms, home pregnancy and
ovulation test kits, antiperspirants, skin care products, oral hygiene products
and other consumer products, as well as OTC pharmaceuticals and professional
diagnostic tests. The Company's primary international markets are France, the
United Kingdom, Canada, Mexico, Australia and Spain, and it has operations in
each of these countries. In addition, the Company exports some of
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its products from the United Kingdom to European countries such as Germany,
Belgium, Holland, Poland, Switzerland, Ireland and Greece, as well as to the
Middle East. The Company's operations in each of its primary international
markets operate as independent, stand alone companies, with separate management,
marketing efforts and product sourcing.
The Company believes that approximately 33% of its international net sales
are attributable to brands which hold the number one or two position in their
respective local markets. None of the countries in which the Company operates
accounts for more than 31% of its total international net sales, and no brand
accounts for more than 12% of its total international net sales. Certain of the
Company's international product lines are similar to its domestic product lines.
For example, the Company markets depilatories and waxes, home pregnancy and
ovulation test kits and oral care products in most of its international markets,
as well as condoms in Canada and Mexico.
In 2002 the Company's Canadian subsidiary, Carter-Horner Corp., and C&D's
Canadian subsidiary, Church & Dwight Ltd./Ltee. began to provide certain
services and employees to each other for the purposes of efficiently allocating
management, administrative, operations and sales functions among the entities.
The following table sets forth the principal product categories of the
Company's international consumer products division.
CATEGORIES KEY BRAND NAMES COUNTRIES SERVED
---------- --------------- ----------------
Condoms Trojan, Canada, Mexico
Home pregnancy and ovulation First Response, Answer, Confidelle, Australia, Canada, Italy, Mexico, U.K.
test kits Discover, Gravix
Depilatories and waxes Nair, Taky Australia, Canada, France, Mexico,
Middle East, Spain, U.K.
Face and skin care Barbara Gould, Lineance, Eudermin, France, Spain, U.K.
Anne French, Bi-Solution
Oral care Pearl Drops, Email Diamant, Perlweiss, Australia, Canada, France, Germany,
Nacar Blanco,, Ultrafresh Italy, Mexico, U.K.
OTC products Sterimar, Gravol, Dencorub, Rub A-535, Australia, Canada, France, Mexico
Atasol, Ovol, Diovol
Antiperspirants Arrid Australia, U.K.
Baby care Poupina, Curash Australia, France
Professional diagnostics -- France
Other consumer products Femfresh, Cossack Australia, Canada, Mexico, U.K., France,
Spain
Condoms. The Company markets condoms primarily in Canada and Mexico under
the Trojan brand name. In Canada, the Company's Trojan brand has a leading
market share. The Company markets its condoms through distribution channels
similar to those of its domestic condom business. These channels include
pharmacies, drug stores and mass merchandisers.
Home Pregnancy and Ovulation Test Kits. The Company's international home
pregnancy and ovulation test kits consist of the First Response, Answer,
Confidelle, Discover and Gravix brands. The Company sells these products in the
United Kingdom, Canada, Italy, Mexico and Australia. Additionally, the Company
licenses a third party to market its test kits in Germany.
Depilatories and Waxes. The Company's international depilatories are sold
under the Nair brand name and are sold in Canada, Mexico, the United Kingdom,
France, Australia and Spain (marketed under the Taky brand name), as well as
distributed in the Middle East and other parts of Europe.
Face and Skin Care. The Company's face and skin care products are marketed
under the Barbara Gould, Lineance, Anne French and Eudermin brand names. Barbara
Gould is a leading range of facial and beauty skin care products that serves the
French mass market. Anne French offers a traditional range of facial cleansing
products that are marketed in England and Ireland. Lineance is an established
leader in the mass market slimming, anti-cellulite category in France. Eudermin
is a leading hand cream marketed in Spain.
Oral Care. The Company's principal international oral care products are
sold in Australia, Canada, France, Germany, Italy, Mexico and the United Kingdom
and include: cosmetic whitening tooth polishes marketed under the Pearl Drops,
Perlweiss, Nacar Blanco and Email Diamant brand names; and mouthwash and breath
freshening products marketed under the Ultrafresh brand name. Pearl Drops, the
Company's leading oral care brand, is positioned as a cosmetic whitening tooth
polish and sells at a premium price over regular toothpaste.
OTC Products. The Company's principal OTC products are: Sterimar sea water
nasal decongestant and cleansing spray, which is sold primarily in France and
Mexico; Gravol anti-nauseant, Atasol acetaminophen analgesic, Ovol antiflatulent
and
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Diovol antacid, all of which are sold primarily in Canada; topical analgesics
sold under Rub A-535 brand name in Canada and Dencorub brand name in Australia.
Antiperspirants. The Company's principal antiperspirant brand is Arrid,
which it manufactures and sells primarily in the United Kingdom. Arrid is
manufactured and sold in United States and Canada by C&D..
Baby Care. The Company's main baby care brands are Curash, a line of
diaper rash powder, cream and wipes products sold in Australia and Poupina, a
line of skin care and toiletry products sold in France.
Professional Diagnostics. The Company sells professional diagnostic tests
for the detection of infectious diseases in France. These comprise enzyme
immuno-assay tests, which are sold by the Company's sales force to hospitals,
clinics and government laboratories.
Other Consumer Products. The Company's other international brands include
the Femfresh line of feminine hygiene products sold in the United Kingdom,
France and Australia and the Cossack line of men's grooming products sold in the
United Kingdom. In addition, the Company has distribution agreements with third
parties to sell their products through its sales force.
DISTRIBUTION
Under a management services agreement with C&D (described elsewhere in
this document), the Company sells its domestic consumer products through C&D's
direct sales force. The Company also uses the independent broker currently
utilized by C&D to supplement the direct sales force. C&D's sales force makes
presentations for the Company's products at the headquarters or home offices of
the Company's customers, where applicable, as well as to individual retail
outlets.
The international division sells its products through classes of trade
substantially similar to the domestic division in each of the countries in which
the Company operates, with some exceptions. For example, in many European
countries, the pharmacy channel (high end drug stores), which is not significant
to the Company's business in the United States, is important to the distribution
of certain consumer products. The Company believes its international consumer
products are adequately represented by class of trade in each of the countries
in which it competes.
The Company, through C&D, uses a combination of third-party distribution
centers and a leased facility to ship its products in the United States. These
distribution centers are located strategically to maximize the Company's ability
to service its customers.
The Company's international distribution network is based on subsidiary
capacities and cost considerations. In Canada, Mexico, Spain and Australia,
finished goods are warehoused internally and shipped directly to customers
through independent freight carriers. In the United Kingdom, all product
distribution is subcontracted to a professional distribution company. In France,
distribution of consumer products to mass markets is handled internally while
distribution of OTC products to pharmacies and professional diagnostics to
laboratories is handled by outside agencies.
In 2002, the Company took over distribution of the Arm & Hammer toothpaste
product line in the United Kingdom and began distribution in Mexico for C&D.
COMPETITION
For information regarding competition, see Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
RAW MATERIALS
The Company's major raw materials are chemicals, plastics, latex and
packaging materials.
These materials are generally available from several sources and the
Company has had no significant supply problems to date. The Company generally
has two or more approved suppliers for production materials. Although there are
multiple providers of its raw materials, in certain instances the Company
chooses to sole source certain raw materials in order to gain favorable pricing.
TRADEMARKS, PATENTS AND LICENSES
The Company markets its products under a number of trademarks and trade
names. The Company has registered these trademarks (identified throughout this
annual report in italicized letters), or has applications pending, in the United
States and in certain of the countries in which the Company sells these product
lines. United States trademark registrations are for a term of 10 years,
renewable every 10 years so long as the trademarks are used in the regular
course of trade. The Company considers the
4
protection of its trademarks to be important to its business. The Company
maintains a portfolio of trademarks representing substantial goodwill in the
businesses using the trademarks.
The Company owns or has licenses for a number of United States and foreign
patents and patent applications covering certain of its products, and has an
ongoing program of obtaining additional patents to protect new product
developments. The Company believes that certain of these patents may provide
competitive insulation and advantage. The Company does not believe that the
expiration of or any other change in any of these patents or patent applications
will materially affect its business.
CUSTOMERS AND ORDER BACKLOG
A group of five customers accounted for approximately 27% of consolidated
net sales in 2002, including a single customer Walmart who accounted for 12%.
This group accounted for 27% of domestic net sales in 2001.
Although not included in the top five customers noted above, Kmart
Corporation historically has represented approximately 2% of the Company's
consolidated net sales. Kmart's bankruptcy, followed by its announcement to
close an additional 329 stores in the first half of 2003, could cause an
insignificant reduction in sales to Kmart of approximately 0.3% of the Company's
consolidated net sales. It is not clear whether, and to what extent, these lost
sales may be made to other retailers.
The time between receipt of orders and shipment is generally short, and as
a result, backlog is not significant.
NEW PRODUCT DEVELOPMENT
The Company conducts the majority of its research and development ("R&D")
activities at its facility in Cranbury, New Jersey. C&D will provide
supplementary R&D services on an as needed basis. Internationally, the Company
operates small satellite R&D facilities in the United Kingdom, France, Spain and
Canada. The Company's expenditures on R&D were approximately $8.4 million in the
year ended December 31, 2002, $7.2 million for the twelve months ended December
31, 2001 and $7.5 million in the fiscal year ended March 31, 2001.
The primary focus of the Company's new product development group is to
design and develop new and improved products that address consumer needs. In
addition, this group provides technology support to both in-house and contract
manufacturing and safety and regulatory support to all of the Company's
businesses. The Company devotes significant resources and attention to product
innovation and consumer research to develop differentiated products with new and
distinctive features, which provide increased convenience and value to its
consumers. The Company's new product development broadens its product line by
creating new product line extensions and new formulations that appeal to various
consumer needs.
QUALITY CONTROL
The Company places a high degree of importance on quality and product
testing through its quality control department, with quality control employees
in each of its manufacturing locations. Through its quality control efforts, the
Company maintains rigorous standards over all of its products. In addition, the
Company also tests the ingredients and packaging that comprise its product
offerings. Several of the Company's products are registered with the FDA
including condoms, home pregnancy and ovulation test kits, depilatories, oral
care products and OTC product offerings. As a result, the Company is required to
meet exacting standards of quality. An example of the Company's commitment to
quality control is the 100% product testing policy with respect to its condoms.
Each condom is quality tested by trained and qualified employees before it is
released for sale. As a result, the Company has never had to recall any of its
condoms as a result of design or production flaws.
GOVERNMENTAL REGULATION
Some of the Company's products are subject to regulation under the FDA and
the Fair Packaging and Labeling Act. The Company is also subject to regulation
by the FTC in connection with the content of its labeling, advertising,
promotion, trade practices and other matters. The Company is subject to
regulation by the FDA in connection with its manufacture, labeling and sale of
its condoms, home pregnancy and ovulation test kits, depilatories and OTC
products. The Company's relationships with certain unionized employees may be
overseen by the National Labor Relations Board.
In addition, the Company's international operations, including the
production of OTC drug products, are subject to regulation in each of the
foreign jurisdictions in which the Company manufactures or markets goods.
ENVIRONMENTAL MATTERS
The Company's operations involve the use, storage and disposal of chemicals
and other hazardous materials and wastes. The Company is subject to applicable
federal, state, local and foreign health, safety and environmental laws relating
to the protection of the environment, including those governing discharges of
pollutants to air and water, the generation, management and disposal of
hazardous materials and wastes and the cleanup of contaminated sites. Some of
the Company's operations, particularly its
5
manufacturing sites, require environmental permits and controls to prevent and
reduce air and water pollution, and these permits are subject to modification,
renewal and revocation by issuing authorities.
The Company believes that its operations are currently in material
compliance with all environmental laws, regulations and permits. While the
Company does not believe that ongoing environmental operating and capital
expenditures will be material, the Company could incur significant additional
operating and capital expenditures in order to comply with current or future
environmental laws, such as the installation of pollution control equipment at
its manufacturing sites. For example, the Company may be required to make
significant upgrades to its on-site wastewater treatment plant at its Colonial
Heights, Virginia facility.
In addition, some environmental laws, such as the U.S. Superfund law,
similar state statutes and common laws, can impose liability for the entire
cleanup of a contaminated site or for third-party claims for property damage and
personal injury, regardless of whether the current owner or operator owned or
operated the site at the time of the release of contaminants or the legality of
the original disposal activity. With certain limited exceptions, the Company
also has agreed to assume any environmental-related liabilities that may arise
from the pre-Acquisition operation of the consumer products business and assets
transferred as part of the Carter-Wallace acquisition. Many of the Company's
sites have a history of industrial operations and contaminants from current and
historical operations have been detected at some of its sites. For example,
contamination has been discovered at the Company's Cranbury, New Jersey site.
Based on the Company's preliminary assessments, the cost of remediating such
contamination is expected to be approximately $1.8 million, which is recorded in
the Company's reorganization reserves. While the Company is not aware of any
other material cleanup obligations or related third-party claims, the detection
of additional contaminants or the imposition of additional cleanup obligations
at its sites or any other properties could result in significant costs.
GEOGRAPHIC AREAS
Approximately 55% of net sales of the Company in 2002 and 2001 were to
customers in the United States and approximately 82% of long-lived assets of the
Company in 2002 and 2001 were located in the United States.
EMPLOYEES AND LABOR RELATIONS
The Company's worldwide work force consisted of approximately 1700
employees as of December 31, 2002, of whom approximately 1000 were located
outside the United States and approximately 700 worked in its domestic
facilities. This includes approximately 150 employees at the Company's Italian
subsidiaries that were sold in February 2003.
The hourly employees at the Company's Cranbury, New Jersey facility are
represented by Paper, Allied-Industrial Chemical and Energy Workers union. As of
December 31, 2002 the Company had shut down the Dayton facility and had
substantially shut down the Cranbury facility leaving only a few hourly
employees to maintain the facility until its disposition. This agreement expires
on April 30, 2004. Internationally, the Company employs union representatives in
France, Spain and Mexico. The Company believes that its labor relations are
satisfactory and no material labor cost increases are anticipated prior to April
30, 2004.
CLASSES OF SIMILAR PRODUCTS
Information concerning similar products marketed by the Company during the
period from January 1, 2001 to December 31, 2002 is set forth in Note 19 to the
consolidated financial statements included in Item 8 herein.
CERTAIN RISKS AND UNCERTAINTIES RELATED TO THE COMPANY'S BUSINESS
The Company's future results and financial condition are dependent upon its
ability to develop, manufacture and market consumer products successfully.
Inherent in this process are a number of factors that the Company must
successfully manage to achieve favorable future operating results and financial
condition. In addition to the other information contained in this Annual Report
on Form 10-K, the following risks and uncertainties could affect the Company's
future operating results and financial condition:
- - THE COMPANY HAS RECENTLY DEVELOPED AND COMMENCED SALES OF A NUMBER OF NEW
PRODUCTS WHICH, IF THEY DO NOT GAIN WIDESPREAD CUSTOMER ACCEPTANCE OR IF
THEY CANNIBALIZE SALES OF EXISTING PRODUCTS, COULD HARM THE COMPANY'S
EFFORTS TO IMPROVE ITS FINANCIAL PERFORMANCE.
The Company has introduced a number of new consumer products. The
development and introduction of new products involves substantial research,
development and marketing expenditures, which the Company may be unable to
recoup if the new products do not gain widespread market acceptance. In
addition, if the new products merely cannibalize sales of existing products, the
Company's financial performance could be harmed.
6
In addition new products carry a greater risk of supply chain interruption
if product sales are significantly greater or less than expectations. Although
the Company has taken steps to ensure that demand planning is done properly
interruptions in supply may occur and could affect the Company's financial
condition and operating results.
- - THE COMPANY MAY DISCONTINUE PRODUCTS OR PRODUCT LINES, WHICH COULD RESULT
IN RETURNS, ASSET WRITE-OFFS AND SHUT DOWN COSTS.
In the past, the Company has discontinued certain products and product
lines, which resulted in returns from customers, asset write-offs, and shut down
costs. The Company may suffer similar adverse consequences in the future to the
extent it discontinues products that do not meet expectations or no longer
satisfy consumer demand. Product returns, write-offs or shut down costs would
reduce cash flow and earnings. Product efficacy or safety concerns could result
in product recalls or declining sales which would reduce cash flow and earnings.
- - THE COMPANY FACES INTENSE COMPETITION IN A MATURE INDUSTRY THAT MAY REQUIRE
IT TO INCREASE EXPENDITURES AND ACCEPT LOWER PROFIT MARGINS TO PRESERVE OR
MAINTAIN ITS MARKET SHARE. UNLESS THE MARKETS IN WHICH THE COMPANY COMPETES
GROW SUBSTANTIALLY, A LOSS OF MARKET SHARE WILL RESULT IN REDUCED SALES
LEVELS AND DECLINING OPERATING RESULTS.
The Company operates in competitive consumer product markets in which
performance, quality and innovation are critical to success. It holds leading
market positions and possesses well recognized and respected brand names. The
Company competes on the basis of name recognition, advertising, quality of
products, product differentiation, promotion and price. It is either the number
one or two provider of condoms, depilatories and waxes, and home pregnancy and
ovulation test kits in the United States. Internationally, the Company markets a
diverse portfolio of consumer products in a broad range of markets, several of
which are similar to its domestic business, such as condoms, depilatories and
waxes, home pregnancy and ovulation test kits and oral care products. In
addition, the Company competes in a variety of other international categories
including antiperspirants, skin care products and other consumer products, as
well as OTC pharmaceuticals and professional diagnostic kits.
The Company's unit sales growth will depend on increasing usage by
consumers, product innovation and capturing market share from competitors. The
Company may not be able to succeed in implementing its strategies to increase
revenues. To protect the Company's existing market share or to capture increased
market share, the Company may need to increase expenditures for promotions and
advertising and introduce and establish new products. Increased expenditures may
not prove successful in maintaining or enhancing the Company's market share and
could result in lower sales and profits.
The Company competes with SSL International and Ansell in the condom
business, Pfizer, Inverness, Medical Innovations and Abbott Labs in the
pregnancy test kits business, Del Labs, Aussie Nads and Reckitt Benckiser in the
depilatories and wax business and L'Oreal, Beiersdorf and Unilever in the skin
care business. Many of the Company's competitors are substantially larger
companies with greater financial resources than the Company. They have the
capacity to outspend the Company in an attempt to take market share from the
Company.
- - PROVIDING PRICE CONCESSIONS OR TRADE TERMS THAT ARE ACCEPTABLE TO THE
COMPANY'S TRADE CUSTOMERS, OR THE FAILURE TO DO SO, COULD ADVERSELY AFFECT
THE COMPANY'S SALES AND PROFITABILITY. IN ADDITION, REDUCTIONS IN INVENTORY
BY THE COMPANY'S TRADE CUSTOMERS, INCLUDING AS A RESULT OF CONSOLIDATIONS
IN THE RETAIL INDUSTRY, OR A SHIFT IN THE IMPORTANCE OF CERTAIN CHANNELS OF
TRADE COULD ADVERSELY AFFECT ITS SALES.
From time to time, the Company may need to reduce the prices for some of
its products to respond to competitive and customer pressures and to maintain
market share. Any reduction in prices to respond to these pressures would harm
profit margins. In addition, if the Company's sales volumes fail to grow
sufficiently to offset any reduction in margins, its results of operations would
suffer.
Because of the competitive environment facing retailers, many of the
Company's trade customers, particularly its high-volume retail store customers,
have increasingly sought to obtain pricing concessions or better trade terms.
These concessions or terms could reduce the Company's margins. Further, if the
Company is unable to maintain price or trade terms that are acceptable to its
trade customers, they could reduce product purchases from the Company and
increase product purchases from the Company's competitors, which would harm the
Company's sales and profitability. In addition, from time to time the Company's
retail customers have reduced inventory levels in managing their working capital
requirements. Any reduction in inventory levels by the Company's retail
customers would harm its operating results. In particular, continued
consolidation within the retail industry could potentially reduce inventory
levels maintained by the Company's retail customers, which could adversely
impact its results of operations. The Company's performance is also dependent
upon the general health of the economy and of the retail environment in
particular and could be significantly harmed by changes affecting retailing and
by the financial difficulties of retailers, including the ongoing bankruptcy
proceedings involving Kmart.
7
- - PRICE INCREASES IN CERTAIN RAW MATERIALS OR ENERGY COSTS COULD ERODE OUR
PROFIT MARGINS, WHICH COULD HARM OUR OPERATING RESULTS.
Increases in the prices of certain raw materials or increases in energy
costs could significantly impact our profit margins. If price increases were to
occur we may not be able to increase the prices of our products to offset these
increases. This could harm the Company's financial condition and results of
operations.
- - LOSS OF ANY OF THE COMPANY'S PRINCIPAL CUSTOMERS COULD SIGNIFICANTLY
DECREASE ITS SALES AND PROFITABILITY.
A group of five customers accounted for approximately 27% of consolidated
net sales in 2002, including a single customer Walmart who accounted for 12%.
This group accounted for 27% of domestic net sales in 2001.
Although not included in the top five customers noted above, Kmart
Corporation historically has represented approximately 2% of the Company's
consolidated net sales. Kmart's bankruptcy, followed by its announcement to
close an additional 329 stores in the first half of 2003, could cause an
insignificant reduction in sales to Kmart of approximately 0.3% of the Company's
consolidated net sales. It is not clear whether, and to what extent, these lost
sales may be made to other retailers.
- - THE COMPANY'S CONDOM PRODUCT LINE COULD SUFFER IF THE SPERMICIDE N-9 IS
PROVED OR PERCEIVED TO BE HARMFUL.
The Company's distribution of condoms under the Trojan and other trademarks
is regulated by the U.S. Food and Drug Administration (FDA). Certain of Armkel's
condoms and similar condoms sold by Armkel's major competitors, contain the
spermicide nonoxynol-9 (N-9). The World Health Organization and other interested
groups have issued reports suggesting that N-9 should not be used rectally or
for multiple daily acts of vaginal intercourse, given the ingredient's potential
to cause irritation to human membranes. The Company expects the FDA to issue
non-binding draft guidance concerning the labeling of condoms with N-9, although
the timing of such draft guidance is uncertain. The Company believes that
condoms with N-9 provide an acceptable added means of contraceptive protection
and is cooperating with the FDA concerning the appropriate labeling revisions,
if any. However, the Company cannot predict the outcome of the FDA review. If
the FDA or state governments promulgate rules which prohibit or restrict the use
of N-9 in condoms (such as new labeling requirements), the financial condition
and operating results of the Company could suffer.
Related to this issue, on February 28, 2003 a purported class action suit,
Lissette Velez v. Church & Dwight Co., Inc., et als including Armkel, LLC., was
filed against the Company and Armkel, and two other condom manufacturers, in the
Superior Court of New Jersey. The lawsuit alleges that condoms lubricated with
N-9 are being marketed in a misleading manner because the makers of such condoms
claim they aid in the prevention of sexually transmitted diseases whereas,
according to the plaintiffs, public health organizations have found that N-9
usage can under some circumstances increase the risk of transmission of disease.
Condoms with N-9 have been marketed for many years as a cleared medical device
under applicable FDA regulations, however, the Company cannot predict the
outcome of this litigation.
- - CURRENT AND FUTURE PRODUCT LIABILITY CLAIMS COULD HARM THE COMPANY'S
PREGNANCY DIAGNOSTIC PRODUCTS BUSINESS.
In 2002, a purported class action suit, Sandra J. Wagner v. Church & Dwight
Co., Inc., et al, was filed against the Company and C&D in the Superior Court of
New Jersey. The lawsuit alleged that the Company's ovulation test kits ("OTK")
are being marketed in a misleading manner because they do not advise women with
certain ovarian conditions that test results may be inaccurate. The plaintiffs
seek monetary damages as well as injunctive relief against the OTK's - marketing
materials. The products in question have been cleared for marketing as medical
devices under applicable FDA regulations. If the Company is not successful in
defending against a claim, the Company could be liable for substantial damages
or may be prevented from offering some of the Company's products. These events
could harm the Company's financial condition and results of operations.
8
ITEM 2. PROPERTIES.
The Company's headquarters are located in C&D's global headquarters at 469
North Harrison Street, Princeton, New Jersey. The following are the Company's
principal facilities as of March 21, 2003:
LOCATION PRODUCTS MANUFACTURED AREA (SQ. FEET)
-------- --------------------- ---------------
OWNED:
Manufacturing Facilities and Offices:
Cranbury, New Jersey(1).................................. None 734,000
Colonial Heights, Virginia............................... Condoms 220,000
Montreal, Canada......................................... Personal care products 157,000
Folkestone, England...................................... Personal care products 78,000
Mexico City, Mexico...................................... Pharmaceutical products 37,600
New Plymouth, New Zealand................................ Condom processing 31,000
Warehouse and Offices
Toronto, Canada.......................................... -- 52,000
Toronto, Canada (2)...................................... -- 83,000
LEASED:
Manufacturing Facilities and Offices:
Barcelona, Spain(3)...................................... Personal care products 58,400
Folkestone, England...................................... Personal care products 21,500
Norwood, Pennsylvania.................................... Condom processing 10,000
Warehouses and Offices:
Folkestone, England...................................... -- 65,000
Revel, France............................................ -- 35,500
Mexico City, Mexico...................................... -- 27,500
Sydney, Australia........................................ -- 24,900
Atlanta, Georgia......................................... -- 23,071
Levallois, France*....................................... -- 22,500
- ----------
1. The Cranbury production facility was closed during 2002 and is currently
for sale. The Company continues to operate a 36,000 square feet research
facility located on the site.
2. Shared facility with C&D. The Company occupies approximately 35% of the
available space.
3. The Company intends to relocate its manufacturing facility to a leased
facility also in Barcelona, Spain. The new facility is approximately 83,000
square feet. The lease for the present facility may be terminated at any
time with six months prior notice to the landlord.
* Offices only
The leased facilities in Dayton, New Jersey, Momence, Illinois and Sparks,
Nevada were closed during 2002 and the leases were terminated.
9
ITEM 3. LEGAL PROCEEDINGS.
LITIGATION.
On January 17, 2002, a petition for appraisal, Cede & Co., Inc. and GAMCO
Investors, Inc. v. MedPointe Healthcare Inc., Civil Action No. 19354, was filed
in the Court of Chancery of the State of Delaware demanding a determination of
the fair value of shares of MedPointe. The action was brought by purported
former shareholders of Carter-Wallace in connection with the merger on September
28, 2001 of MCC Acquisition Sub Corporation with and into Carter-Wallace. The
merged entity subsequently changed its name to MedPointe. The petitioners seek
an appraisal of the fair value of their shares in accordance with Section 262 of
the Delaware General Corporation Law. The matter was heard on March 10 and 11,
2003, at which time the petitioners purportedly held approximately 2.3 million
shares of MedPointe. No decision has yet been rendered by the court.
MedPointe and certain former Carter-Wallace shareholders are party to an
indemnification agreement pursuant to which such shareholders will be required
to indemnify MedPointe from a portion of the damages, if any, suffered by
MedPointe in relation to the exercise of appraisal rights by other former
Carter-Wallace shareholders in the merger. Pursuant to the agreement, the
shareholders have agreed to indemnify MedPointe for 40% of any Appraisal Damages
(defined as the recovery greater than the per share merger price times the
number of shares in the appraisal class) suffered by Medpointe in relation to
the merger; provided that if the total amount of Appraisal Damages exceeds $33.3
million, then the indemnifying stockholders will indemnify MedPointe for 100% of
any damages suffered in excess of that amount. The Company, in turn, is party to
an agreement with MedPointe pursuant to which it has agreed to indemnify
MedPointe and certain related parties against 60% of any Appraisal Damages for
which MedPointe remains liable. The maximum liability to the Company pursuant to
the indemnification agreement and prior to any indemnification from C&D, as
described in the following sentence is $12 million. C&D is party to an agreement
with the Company pursuant to which it has agreed to indemnify the Company for
17.4% of any Appraisal Damages, or up to a maximum of $2.1 million for which the
Company becomes liable.
The Company, MedPointe and the indemnifying shareholders believe that the
consideration offered in the merger was fair to the former Carter-Wallace
shareholders and have vigorously defended the petitioner's claim. However, the
Company cannot predict the outcome of the proceedings.
On August 26, 2002, the Company filed suit against Pfizer in the District
Court of New Jersey to redress infringement of two (2) of the Company's patents
directed to pregnancy diagnostic devices. The suit claims that Pfizer's "ept"
product infringes these patents. The Company is seeking a reasonable royalty and
associated damages as compensation for Pfizer's infringement. The Court has
ordered a Settlement Conference for April 11, 2003, and has set dates throughout
2003 for various stages of discovery.
In 2002, a purported class action suit, Sandra J. Wagner v. Church & Dwight
Co., Inc., et al, was filed against the Company and C&D in the Superior Court of
New Jersey. The lawsuit alleged that the Company's ovulation test kits ("OTK")
are being marketed in a misleading manner because they do not advise women with
certain ovarian conditions that test results may be inaccurate. The plaintiffs
seek monetary damages as well as injunctive relief against the OTK's - marketing
materials. The products in question have been cleared for marketing as medical
devices under applicable FDA regulations. The Company is vigorously defending
the action but cannot predict the outcome of the proceedings.
On February 28, 2003 a purported class action suit, Lissette Velez v.
Church & Dwight Co., Inc., et als including Armkel, LLC, was filed against the
Company and C&D, and two other condom manufacturers, in the Superior Court of
New Jersey. The lawsuit alleges that condoms lubricated with the spermicide
non-oxydol 9 (N-9) are being marketed in a misleading manner because the makers
of such condoms claim they aid in the prevention of sexually transmitted
diseases whereas, according to the plaintiffs, public health organizations have
found that N-9 usage can under some circumstances increase the risk of
transmission of disease. The plaintiffs claim economic loss from the purchase of
the Company's Trojan-brand condoms with N-9 but no personal injury and seek
injunctive relief. Condoms with N-9 have been marketed for many years as a
cleared medical device under applicable FDA regulations. Separately, FDA has
begun a notice and comment rulemaking, which will permit the Company as well as
other interested parties the opportunity to consider and review the labeling of
N-9 lubricated condoms. The Company is vigorously defending the lawsuit but
cannot predict its outcome.
The Company, in the ordinary course of its business, is the subject of, or
party to, various pending or threatened legal actions. The Company believes that
any ultimate liability arising from these actions will not have a material
adverse effect on its financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
At March , 2003, the Company had 10,000 membership interests outstanding
and held by C&D (5,000 interests) and Kelso (5,000 interests). There is no
established trading market for the membership interests of the Company. During
2002, the Company did not declare any dividends.
The Company believes that the foregoing issuances of equity securities to
C&D and Kelso did not involve a public offering or sale of securities and were
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act") pursuant to the exemption from registration
afforded by Section 4(2 )of the Securities Act. No underwriters, brokers or
finders were involved in these transactions.
ITEM 6. SELECTED FINANCIAL DATA.
ARMKEL, LLC AND SUBSIDIARIES
FIVE-YEAR FINANCIAL REVIEW (2)
(in millions)
SUCCESSOR PREDECESSOR
----------------------------------------- -----------------------------------------------------
YEAR ENDED
PERIOD FROM PERIOD FROM MARCH 31,
YEAR ENDED AUGUST 28, 2001 TO APRIL 1, 2001 TO ----------------------------
DECEMBER 31, 2002 DECEMBER 31, 2001 (1) SEPTEMBER 28, 2001 2001 2000 1999
----------------- --------------------- ------------------ ---- ---- ----
OPERATING RESULTS
Net sales........................ $383.8 $ 77.6 $ 197.7 $ 344.5 $ 320.2 $ 278.0
Income (loss) before taxes
from continuing operations.... 35.4 (15.4) 53.8 84.3 64.0 52.3
Net income (loss)................ 31.2 (15.6) 33.4 49.9 40.5 31.3
Total assets..................... 808.5 811.7 379.3 371.2 369.5 353.9
Total debt....................... 440.2 443.4 23.1 24.3 26.8 33.4
- ----------
(1) The period from August 28, 2001 to September 28, 2001 is inclusive of only
net interest expense of $1.6 million.
(2) All periods have been adjusted for the effect of discontinued operations.
UNAUDITED QUARTERLY FINANCIAL INFORMATION(3)
(in millions)
CALENDAR YEAR 2001 CALENDAR YEAR 2002
------------------ ------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER(4) QUARTER(4) QUARTER(4) QUARTER(2) QUARTER QUARTER QUARTER QUARTER
---------- --------- ---------- --------- ------- ------- ------- -------
Net sales............................ $ 84.4 $ 102.6 $ 96.1 $ 77.6 $ 87.4 $ 104.4 $ 101.0 $ 91.0
Gross profit(1)...................... 47.6 61.6 54.3 27.1 42.1 58.9 58.5 51.3
Income (loss) before taxes from
continuing operations(1)........... 20.1 32.0 21.8 (15.4) 1.1 17.6 9.9 6.8
Net income (loss).................... 10.3 18.8 14.6 (15.6) 0.3 15.6 9.3 6.0
- ----------
(1) Distribution expense reclassified from operating expense to cost of goods
sold for predecessor financial statements in order to conform to the
Company's presentation.
(2) Fourth quarter 2001 represents the period from August 28, 2001 (inception)
to December 31, 2001. Operations for this period commenced on September 29,
2001. The period from August 28, 2001 (inception) to September 28, 2001
only included net interest expense of approximately $1.6 million relating
to the issuance of senior subordinated notes on August 28, 2001.
(3) All periods have been adjusted for the effect of discontinued operations.
(4) Represents combined statement of revenue in excess of expenses for
the predecessor company.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Armkel, LLC (the Company) is an equally owned joint venture formed by
Church & Dwight Co., Inc. (C&D) and affiliates of Kelso & Company, L.P. (Kelso).
On September 28, 2001, the Company acquired certain of the domestic consumer
product assets of Carter-Wallace (the "Acquisition"), primarily Trojan condoms,
Nair depilatories, and First Response and Answer test kits, and the
international subsidiaries of Carter-Wallace. Initial financing was obtained on
August 28, 2001, however operations did not commence until the Acquisition was
consummated on September 28, 2001. The remainder of Carter-Wallace, comprised of
its healthcare and pharmaceuticals businesses, was merged with MedPointe, Inc.
("MedPointe") after the completion of the Acquisition. Simultaneously with the
consummation of the Acquisition, the Company sold the remainder of the consumer
products businesses, Arrid antiperspirant in the U.S and Canada and the
Lambert-Kay line of pet care products, to C&D - (the "Disposed Businesses").
Prior to the Acquisition, Carter-Wallace reported its historical financial
results for the combined business, including the business the Company acquired,
the Disposed Businesses and the healthcare and pharmaceuticals business on a
consolidated basis. In connection with the Acquisition, the Carter-Wallace
consumer business predecessor financial statements were prepared to reflect the
operating performance of the Company's business for the years ended March 31,
2000 and 2001 and for the period from April 1, 2001 to September 28, 2001. The
Company's historical financial statements were not compiled separately at any
prior time, as the Company was not a stand-alone subsidiary, with the exception
of the international division. As a result, certain cost allocation assumptions
were made. See Note 1 to the predecessor combined financial statements as shown
in Item 8 of this report.
In December 2002, the Company entered into an agreement to sell its Italian
subsidiary to a group, comprising local management and private equity investors.
The sale closed in February 2003 for a price of approximately $22.6 million
including the repayment of $11.8 million of intercompany debt. The Company will
retain ownership of certain Italian pregnancy kit and oral care product lines
with sales of approximately $3 million. The remainder of the Italian
subsidiary's business includes a high percentage of distributor sales as well as
hospital diagnostic and other products not related to the Company's core
business. The financial statements have been reclassified to reflect the Italian
business as a discontinued operation in 2002 and prior financial statements.
The following section discusses comparisons to the year period ended
December 31, 2002 compared to the combined (predecessor and successor) twelve
month period ended December 31, 2001. All amounts have been adjusted for the
effect of discontinued operations.
2002 COMPARED TO 2001
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH TWELVE MONTHS ENDED DECEMBER 31, 2001
2002 2001(1)(2)(3)
---- ----
(in millions)
Net sales(1)............................................................ $383.8 $360.7
Cost of goods sold(2)................................................... 173.0 170.1
------ ------
Gross profit(1) (2)..................................................... 210.8 190.6
Marketing expenses(1)................................................... 53.1 44.6
Selling, general and administrative expenses(2)(4) 87.6 75.5
Interest Expense & Other Income......................................... 34.7 12.0
------ ------
Income before taxes from continuing operations.......................... $ 35.4 $ 58.5
====== ======
- ----------
(1) Net Sales and marketing expenses for the predecessor financial statements
have been adjusted to conform with EITF 01-9.
(2) Distribution expense reclassified from operating expense to cost of goods
sold for predecessor financial statements in order to conform to the
Company's presentation.
(3) For 2001, represents combined statement of revenue in excess of expenses,
before provision for taxes for the predecessor company from January 1, 2001
to September 28, 2001 and for the Company from August 28, 2001 (inception)
to December 31, 2001, restated for discontinued operations.
(4) In 2002, selling, general and administrative expenses include management
service agreements with C&D for the full year, principally in the Domestic
segment. In 2001, these expenses include the management service costs which
were in effect in the fourth quarter. Refer to the agreements with C&D in
Item 13, Certain Relationships and Related Transactions, Arrangements with
C&D.
12
The results of operations for both periods are affected by certain expenses
related to accounting and other acquisition related integration expenses. These
items are outlined below and addressed in further detail in the discussion
below:
2002 2001
---- ----
(in millions)
Inventory Step-up Expenses.................................. $ 8.1 $15.1
Transition Expenses......................................... $ 9.0 $ 2.6
Net Sales
Net sales increased $23.1 million, or 6.4%, to $383.8 million for the year
ended December 31, 2002 from $360.7 million in the previous year. This increase
is discussed by business segment below.
Net sales of domestic products, excluding intercompany sales, increased
$10.1 million, or 5.0%, to $209.2 million for the year ended December 31, 2002
from $199.1 million in the twelve months ended December 31, 2001. This increase
in net sales is behind solid year on year category growth for Trojan, pregnancy
kits and Nair and brand growth related to product line extensions for Trojan and
Nair.
Net sales of international products increased $13.0 million, or 8.1%, to
$174.6 million for the year ended December 31, 2002 from $161.6 million in the
twelve months ended December 31, 2001. The increase was principally due to
volume increases in England, France and Mexico. Favorable foreign exchange
accounted for $2.6 million of the increase.
In November 2001, the Financial Accounting Standards Board ("FASB")
Emerging Issues Task Force ("EITF") reached a consensus on Issue 01-9 (formerly
EITF issues 00-14 and 00-25), "Accounting for Consideration Given to a Customer
or Reseller of the Vendor's Products." This EITF addressed the recognition,
measurement and income statement classification of consideration from a vendor
to a customer in connection with the customer's purchase or promotion of the
vendor's products. The EITF requires the cost of such items as coupons, slotting
allowances, cooperative advertising arrangements, buydowns, and other allowances
to be accounted for as a reduction of revenues, not included as a marketing
expense as the Company did previously. The prior period net sales have been
reclassified to conform with this pronouncement. The impact was a reduction of
net sales of approximately $52.9 million in 2002 and $45.4 million for the
twelve months ended December 31, 2001. This consensus did not have an effect on
net income. In accordance with the consensus reached, the Company adopted the
required accounting beginning January 1, 2002.
Cost of Goods Sold
Cost of goods sold increased $2.9 million, or 1.7%, to $173.0 million for
the year ended December 31, 2002 from $170.1 million in the twelve months ended
December 31, 2001. As a percentage of net sales, cost of goods sold reduced to
45.1% from 47.2% in 2001. This decrease in cost of goods sold is primarily
related to a decline year to year in expenses related to inventory step-up
adjustments incurred at the Acquisition of $8.1 million expensed in 2002 and
$15.1 million expensed in 2001. At the time of the Acquisition, the inventory
book value was $57.8 million. As part of the allocation of the purchase price,
the inventory value was increased by $23.2 million to $81.0 million. The
majority of this inventory step-up, $15.1 million, was reflected in the fourth
quarter results of operations of 2001, including $11.2 million for domestic
operations and $3.9 million for international operations. The remaining $8.1
million inventory step-up adjustment was all reflected in the first quarter of
2002 operating results. Excluding these adjustments, cost of goods sold, as a
percentage of net sales, would be reduced to 43.0% in 2002 and 42.9% in 2001.
Cost of goods sold for domestic products, excluding intercompany sales,
increased $0.1 million, or 0.1%, to $85.2 million for the year ended December
31, 2002 from $85.1 million in the twelve months ended December 31, 2001. As a
percentage of net sales, domestic cost of goods sold decreased to 40.7% from
42.7% in 2001. This decrease in cost of goods sold is primarily due to the
inventory step-up adjustments of $7.9 million in 2002 and $11.2 million in 2001.
Excluding these adjustments, cost of goods sold, as a percentage of net sales,
would be reduced to 37.0% in 2002 and 37.1% in 2001.
Cost of goods sold for international products increased $2.8 million, or
3.3%, to $87.8 million for the year ended December 31, 2002 from $85.0 million
in the twelve months ended December 31, 2001. As a percentage of net sales,
international cost of goods sold decreased to 50.3% from 52.6% principally due
to inventory step-up adjustments. Excluding these adjustments, cost of goods
sold, as a percentage of net sales would be reduced to 50.1% for the period
ending December 31, 2002 and 50.2% for the twelve months ending December 31,
2001.
Operating Costs excluding Interest Expense and Other Income
Total operating expenses, excluding interest expense and other income,
increased $20.6 million, or 17.2%, to $140.7 million in the period ended
December 31, 2002 from $120.1 million in the twelve months ended December 31,
2001.
13
Marketing expenses increased by $8.5 million, or 19.0%, to $53.1 million
for the year ended December 31, 2002 from $44.6 million for the twelve months
ended December 31, 2001. The majority of the increase, $6.3 million, was in the
International segment behind products such as Nair, Trojan, Barbara Gould and
Arm & Hammer toothpaste primarily in the U.K., Mexico and France. The remaining
$2.2 million was in the Domestic segment primarily for higher advertising
spending behind First Response.
Selling, general and administrative expenses increased $12.1 million, or
16.0%, to $87.6 million for the year ended December 31, 2002 from $75.5 million
for the twelve months ended December 31, 2001. The Domestic segment had $13.7
million in additional spending while the International segment was lower by $1.4
million. This domestic increase is related to estimated transitional costs of
$7.4 million in 2002 compared to $1.8 million in 2001 for former Carter-Wallace
employees employed during the integration process, a net increase of $1.5
million in amortization for acquired patents, compared to prior year
amortization of patents and predecessor goodwill, and the remainder of the
increase was for additional legal fees as well as fees paid to Church & Dwight
and Kelso. The International segment was lower due to synergies in Canada as a
result of the Church & Dwight and Armkel Canadian operations being combined.
Interest Expense and Other Income
Interest expense was $36.6 million for the year ended December 31, 2002
compared to $12.3 million for the twelve months ended December 31, 2001. This
increase in interest expense is related to the $225.0 million in senior
subordinated notes and $220.0 million in a syndicated bank credit facility
incurred at the time of the Acquisition. Interest expense for 2002 represents a
full year of financing while 2001 represents interest expense on financing from
August 28, 2001 to December 31, 2001 and a small amount of predecessor interest
expense.
Interest income was $1.0 million for 2002 and $1.3 million for 2001. The
year 2001 includes $0.4 million of interest income earned on the proceeds from
the senior subordinated notes prior to Acquisition.
Other income/expense was $0.9 million of income in 2002 and $1.0 of expense
in 2001. The increase in income is primarily related to foreign exchange
accounting remeasurement on intercompany loans entered into at acquisition with
certain of its subsidiaries.
NINE MONTH COMPARISON
THE FOLLOWING SECTION REFERS TO NINE MONTHS OF FINANCIAL DATA FROM APRIL TO
DECEMBER. FOR 2000, THE COMPANY DID NOT HAVE PREDECESSOR DOMESTIC CONSUMER
PRODUCTS BUSINESS AND INTERNATIONAL SUBSIDIARY DATA FOR THE THREE MONTHS ENDED
MARCH 31, 2000 IN ORDER TO COMPARE A TWELVE MONTH CALENDAR YEAR.
NINE MONTHS ENDED DECEMBER 31, 2001 COMPARED WITH NINE MONTHS ENDED DECEMBER 31,
2000(1)
2001(1) 2000(1)
---- ----
(in millions)
Net sales(2).......................................................... $276.3 $260.6
Cost of goods sold(3)................................................. 133.3 111.4
------ ------
Gross profit(2) (3)................................................... 143.0 149.2
Marketing expenses(2)................................................. 34.0 30.1
Selling, general and administrative expenses(3) 59.4 54.3
Interest Expense & Other Income....................................... 11.2 0.5
------ ------
Income before taxes from continuing operations........................ $ 38.4 $ 64.3
====== ======
- ----------
(1) For 2001, represents combined statement of revenue in excess of expenses,
before provision for taxes for the predecessor company from April 1, 2001
to September 28, 2001 and for the Company from August 28, 2001 (inception)
to December 31, 2001, restated for discontinued operations. The period from
August 28, 2001 to September 28, 2001 only included net interest expense of
approximately $1.6 million relating to the issuance of senior subordinated
notes on August 28, 2001. The nine months ended December 31, 2000
represents the predecessor company.
(2) Net Sales and marketing expenses for the predecessor financial statements
have been adjusted to conform with EITF 01-9.
(3) Distribution expense reclassified from operating expense to cost of goods
sold for predecessor financial statements in order to conform to the
Company's presentation.
Net Sales
14
Net sales increased $15.7 million, or 6.0%, to $276.3 million in the period
ended December 31, 2001 from $260.6 million in the nine months ended December
31, 2000. This increase is discussed below.
Net sales of domestic products, excluding intercompany sales, increased
$12.5 million, or 8.8%, to $153.7 million in the period ended December 31, 2001
from $141.2 million in the nine months ended December 31, 2000. The increase in
net sales reflects higher net sales of Trojan condoms and Nair depilatories due
to new product introductions, coupled with selective price increases in Trojan
and Nair brand products. In addition, net sales of First Response home pregnancy
and ovulation test kits were higher based on expanded distribution, as well as
an improved product claim for one of the Company's home pregnancy tests kits.
Net sales of international products increased $3.2 million, or 2.7%, to
$122.6 million in the period ended December 31, 2001 from $119.4 million in the
nine months ended December 31, 2000. This increase was due to volume increases
on Trojan and Nair, selective price increases on several products and higher
sales of OTC pharmaceuticals in Mexico, offset by lower foreign exchange rates.
Cost of Goods Sold
Cost of goods sold increased $21.9 million, or 19.6%, to $133.3 million in
the period ended December 31, 2001 from $111.4 million in the nine months ended
December 31, 2000. As a percentage of net sales, cost of goods sold grew to
48.2% from 42.8% in 2000. This increase in cost of goods sold is primarily due
to $15.1 million of additional expense relating to inventory step-up incurred at
acquisition. At the time of the Acquisition inventory book value was $57.8
million. As part of purchase accounting, the inventory value was increased by
$23.2 million to $81.0 million. The majority of this step-up, $15.1 million, was
reflected in the fourth quarter results of operations of 2001, including $11.2
million for domestic operations and $3.9 million for international operations.
The remaining $8.1 million inventory step-up adjustment was reflected in the
first quarter of 2002 operating results. Excluding these adjustments, cost of
goods sold as a percentage of net sales would have been 42.8% in 2001.
Cost of goods sold for domestic products, excluding intercompany sales,
increased $16.3 million, or 31.0%, to $68.9 million in the period ended December
31, 2001 from $52.6 million in the nine months ended December 31, 2000. As a
percentage of net sales, domestic cost of goods sold increased to 44.8% from
37.3% in 2000. This increase in cost of goods sold is primarily due to the
inventory step-up adjustment of $11.2 million. Excluding these adjustments, cost
of goods sold as a percentage of net sales would have been 37.5% in 2001.
Cost of goods sold for international products increased $5.6 million, or
9.4%, to $64.4 million in the period ended December 31, 2001 from $58.8 million
in the nine months ended December 31, 2000. As a percentage of net sales,
international cost of goods sold increased to 52.5% from 49.3% in 2000. This
increase is primarily due to the inventory step-up adjustments of $3.9 million.
Excluding these adjustments, cost of goods sold, as a percentage of net sales
would be reduced to 49.3% in 2001.
Operating Costs excluding Interest Expense and Other Income
Total operating expenses excluding interest expense and other income
increased $9.0 million, or 10.6%, to $93.4 million in the period ended December
31, 2001 from $84.4 million in the nine months ended December 31, 2000.
Marketing expenses increased by $3.9 million, or 12.9%, to $34.0 million in
the period ended December 31, 2001 from $30.1 million in 2000.
Selling, general and administrative expenses increased $5.1 million, or
9.4%, to $59.4 million in the period ended December 31, 2001 from $54.3 million
in 2000. This increase is related to estimated transitional costs of $1.8
million, related to general and administrative costs for former Carter-Wallace
employees employed during the integration process, $1.0 million in fees to C&D
and Kelso, $1.1 million in amortization for acquired patents, with the remainder
due to higher legal costs.
Interest Expense and Other Income
Interest expense and other income was $11.2 million in the period ended
December 31, 2001 compared to $0.5 million for the nine months ending December
31, 2000. This increase in net interest expense and other income is related to
the $225.0 million in senior subordinated notes and $220.0 million in a
syndicated bank credit facility incurred at the time of the Acquisition.
Interest income was $1.1 million for 2001 and $0.3 million for 2000. The
period ended December 31, 2001 includes $0.4 million of interest income earned
on the proceeds from the senior subordinated notes prior to acquisition.
15
Other expense was $0.3 million in 2001 and $0.1 in 2000. The increase in
income is primarily related to foreign exchange accounting remeasurement on
intercompany loans entered into at acquisition with certain of its subsidiaries.
Liquidity and capital resources following the Acquisition
Cash flows provided by operating activities was $18.4 million for the year
ended December 31, 2002. This includes $31.8 million in severance payments and
$9.0 million in transition expenses offset by higher operating earnings before
non-cash charges for depreciation and amortization. Also, there is a reduction
in working capital which included a $1.1 million reduction in inventory, after
the $8.1 million step-up adjustment, and a decrease in accounts receivable due
to approximately $6.0 million received from MedPointe, Inc., for lockbox cash
receipts owed to the Company at December 31, 2001.
Cash flows used in investing activities was $17.3 million for the year
ended December 31, 2002. The net cash flows used in investing activities
includes additions to property, plant and equipment of $8.4 million, a $5.2
million settlement with MedPointe, Inc. regarding the Company's liability for
retiree medical costs, domestic working capital assessed as of the date of the
Acquisition and executive retirement plan costs, and $3.7 million of other costs
related to the Acquisition.
Cash flows used in financing activities was $3.2 million for the year ended
December 31, 2002, for the mandatory payment of debt from the syndicated bank
credit facility.
The Company entered into a syndicated bank credit facility and also issued
a senior subordinated notes to finance its investment in the Acquisition. The
long-term $305 million credit facility consists of $220.0 million in 6 and 7
1/2-year term loans, of which $ 216.5 million was outstanding at December 31,
2002 and an $85.0 million revolving credit facility, which remained fully
undrawn at December 31, 2002. On August 28, 2001 the Company issued $225 million
of 9.5% senior subordinated notes due in 8 years with the interest paid
semi-annually. The Company had outstanding long-term debt of $411.6 million, and
cash less short-term debt of $26.2 million, for a net debt position of $385.4
million at year-end. This excludes discontinued operations. The weighted average
interest rate on the credit facility borrowings at December 31, 2002, excluding
deferred financing costs and commitment fees, was approximately 5.0% including
hedges.
Interest payments on the notes and on borrowings under the senior credit
facilities significantly increase the Company's liquidity requirements.
Borrowings under the term loans and the revolving credit facility bear interest
at variable rates plus any applicable margin. The interest rates on the term
loans are dependent on the attainment of certain covenants depending on the
ratio of total debt to EBITDA. Financial covenants include a leverage ratio and
an interest coverage ratio, which if not met, could result in an event of
default and trigger the early termination of the credit facility, if not
remedied within a certain period of time. EBITDA, as defined by the Company's
loan agreement, which includes an add-back of certain acquisition related costs,
was approximately $99.3 million for the twelve month period ending December 31,
2002. The leverage ratio as defined in the term loan agreement was 3.88 versus
the agreement's maximum 5.50, and the interest coverage ratio was 3.10 versus
the agreement's minimum of 2.00. The reconciliation of income from continuing
operations to the Company's key liquidity measure, adjusted EBITDA per the term
loan agreement, is as follows (in millions):
Income from continuing operations $ 70.2
Other income (principally royalty income) 0.1
Depreciation & Amortization(1) 11.9
------
EBITDA from continuing operations 82.2
Inventory Step-up Adjustment 8.1
Transition Expenses 9.0
------
Adjusted EBITDA $ 99.3
======
(1) Amortization is reduced by $3.6 million for deferred financing costs that
are recognized as interest expense.
Distributions of a portion of net income may be made to fund tax
distributions to Kelso and C&D. No such distributions were made in 2002.
The Company incurred severance and other change in control related
liabilities to certain employees. Since acquisition the Company paid $42.0
million in severance payments, including $31.8 million paid for the year ended
December 31, 2002. The Company estimates that the total severance payments will
be approximately $48.0 million. The Company anticipates the remaining $6.0
million in severance and related costs to be principally paid out in 2003 with a
small balance being carried into future years for medical and life insurance
payments for three prior Carter-Wallace executives.
The term loans will be subject to mandatory prepayments, subject to certain
limited exceptions, in an amount equal to (1) 50% of excess cash flow of the
Company and its subsidiaries, (2) 100% of the net cash proceeds of asset sales
and dispositions of
16
property of the Company and its subsidiaries, (3) 100% of the net cash proceeds
of any issuance of debt obligations of the Company and its subsidiaries and (4)
50% of the net cash proceeds of issuances of equity of the Company and it
subsidiaries.
The syndicated bank credit facility and the senior subordinated notes
impose certain restrictions on the Company, including restrictions on its
ability to incur indebtedness, pay dividends, make investments, grant liens,
sell assets and engage in certain other activities. In 2002 the Company obtained
a waiver to the syndicated bank credit facility in order to proceed with the
sale of the Italian operations. The proceeds from the sale of the Italian
operations were received in February 2003 and were used to prepay the term loans
under the covenant requirements. In addition, the senior credit facilities
requires the Company to maintain certain financial ratios. The borrowings under
the credit facility are secured by substantially all of the domestic assets of
the Company, in a pledge of stock of the Company's operating subsidiaries and a
pledge of not more than 65% of the voting capital stock of the Company's foreign
subsidiaries.
The Company expects that the total capital expenditures will be
approximately $16 million in 2003 and approximately $10 million in 2004. Of such
amounts, the Company currently estimates that a minimum range of $3 million to
$5 million of ongoing maintenance capital expenditures are required each year.
PAYMENTS DUE BY PERIOD
----------------------
2004 TO 2007 TO AFTER
TOTAL 2003 2006 2008 2008
-------- ------- -------- -------- -------
(THOUSANDS OF DOLLARS)
PRINCIPAL PAYMENTS ON BORROWINGS:
Long-term debt
Syndicated Financing Loans(1)................. $216,468 $ 28,501 $ 35,127 $116,139 $ 36,701
Notes Payable 9 1/2%.......................... 225,000 -- -- -- 225,000
Various Short-Term Borrowings at
Foreign Subsidiaries....................... 55 55 -- -- --
OTHER COMMITMENTS:
Operating Leases Obligations....................... 17,379 3,580 9,128 2,676 1,995
Capital Lease Obligations.......................... 191 52 139 -- --
Guarantee(2)....................................... 1,828 1,828 -- -- --
Management Services Agreements..................... 58,344 14,586 43,758 -- --
Manufacturing Distribution Agreement............... 3,264 816 2,448 -- --
-------- -------- -------- -------- -------
Total................................................... $522,529 $ 49,418 $ 90,600 $ 118,815 $263,696
======== ======== ======== ========= ========
(1) In the first quarter of 2003 net proceeds from the sale of the Italian
operations of $21.6 million are required to pay down the syndicated credit
facility, along with the $6.9 million of predetermined payments.
(2) Guarantee represents the Company's performance based obligation with the
New Jersey Department of Environmental Protection for estimated
environmental remediation costs at its Cranbury, New Jersey facility.
The Company expects that funds provided from operations and available
borrowings of $85 million under its six-year revolving credit facility, none of
which was drawn at December 31, 2002, will provide sufficient funds to operate
its business, to make expected capital expenditures of approximately $16 million
in 2003 and approximately $10 million in 2004 and to meet foreseeable liquidity
requirements, including debt service on the notes and the senior credit
facilities, as noted above. There can be no assurance, however, that the
Company's business will generate sufficient cash flows or that future borrowings
will be available in an amount sufficient to enable it to service its debt or to
fund its other liquidity needs. If the Company is unable to pay its obligations,
it will be required to pursue one or more alternative strategies, such as
selling assets, refinancing or restructuring indebtedness or raising additional
capital. However, the Company cannot give assurance that any alternative
strategies will be feasible or prove adequate. However, management believes that
operating cash flow, coupled with the Company's access to credit markets, will
be sufficient to meet the anticipated cash requirements for the coming year.
OTHER ITEMS
Related Party Transactions
The Company has achieved substantial synergies by combining certain of its
operations with those of C&D particularly in the areas of sales, manufacturing
and distribution, and most service functions. The Company retained its core
marketing, research & development, and financial planning capabilities, and
continues to manufacture condoms, but purchases virtually all the support
services it requires for its U.S. domestic business from C&D under a management
services agreement, which has a term of five years with possible renewal. The
Company and C&D merged the two sales organizations during the fourth quarter of
2001 and merged the companies Canadian operations in 2002. The companies
transferred production of antiperspirants and depilatories
17
from the former Carter-Wallace plant at Cranbury, NJ, to C&D's plant at
Lakewood, NJ, which is a more efficient producer of antiperspirants and other
personal care products. This process was completed by the third quarter 2002.
The companies integrated the planning and purchasing, accounting and management
information systems, and other service functions during 2002.
During 2002, the Company was invoiced $22.5 million for administrative,
manufacturing and management oversight services provided by C&D and $1.4 million
of toothpaste products purchased from C&D. The Company sold $7.1 million of
deodorant anti-perspirant inventory to the Company's at its cost. The Company
also invoiced C&D $1.7 million for transition administrative services. The
Company has an open net accounts payable to C&D at December 31, 2002 of
approximately $4.8 million that primarily related to administrative services
partially offset by amounts owed by C&D for inventory from international
subsidiaries.
Kelso has agreed to provide the Company with financial advisory services
for which the Company pays an annual fee of $1.0 million. The Company has agreed
to indemnify Kelso against certain liabilities and reimburse expenses in
connection with its engagement. For the year ended December 31, 2002, the
Company paid Kelso $1.0 million for 2002 financial advisory fees plus prepaid
the 2003 financial advisory service fee of $1.0 million at a discounted value.
Significant Accounting Policies
The Company's significant accounting policies are more fully described in
Note 1 to its consolidated financial statements. Certain of the Company's
accounting policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an inherent degree of
uncertainty. These judgments are based on the Company's historical experience,
its observance of trends in the industry, information provided by its customers
and information available from other outside sources, as appropriate. The
Company's significant accounting policies include:
Promotional and Sales Returns Reserves
The reserves for consumer and trade promotion liabilities, and sales
returns are established based on our best estimate of the amounts necessary to
settle future and existing claims on products sold as of the balance sheet date.
We use historical trend experience and coupon redemption provider input in
arriving at coupon reserve requirements, and we use forecasted appropriations,
customer and sales organization inputs, and historical trend analysis in
arriving at the reserves required for other promotional reserves and sales
returns. While we believe that our promotional and sales returns reserves are
adequate and that the judgment applied is appropriate, such amounts estimated to
be due and payable could differ materially form what will actually transpire in
the future. If the Company's estimates for other promotional reserves and sales
returns were to differ by 10%, the impact to promotional spending and sales
return accruals would be approximately $1.2 million.
Impairment of Goodwill, Tradenames and Other Intangible Assets and Property,
Plant and Equipment
Carrying values of goodwill, tradenames, patents and other intangible
assets are reviewed periodically for possible impairment in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets". The Company's impairment review
is based on a discounted cash flow approach that requires significant judgment
with respect to future volume, revenue and expense growth rates, and the
selection of an appropriate discount rate. With respect to goodwill, impairment
occurs when the carrying value of the reporting unit exceeds the discounted
present value of cash flows for that reporting unit. For trademarks and other
intangible assets, an impairment charge is recorded for the difference between
the carrying value and the net present value of estimated cash flows, which
represents the estimated fair value of the asset. The Company uses its judgment
in assessing whether assets may have become impaired between annual valuations.
Indicators such as unexpected adverse, economic factors, unanticipated
technological change or competitive activities, acts by governments and courts,
may signal that an asset has become impaired. In accordance with SFAS No. 142,
the Company completed the annual impairment test of the valuation of goodwill
and intangibles as of April 1, 2002 and, based upon the results, there was no
impairment.
Property, plant and equipment and other long-lived assets are reviewed
periodically for possible impairment in accordance with SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets". The Company's impairment
review is based on an undiscounted cash flow analysis at the lowest level for
which identifiable cash flows exist. The analysis requires management judgment
with respect to changes in technology, the continued success of product lines,
and future volume, revenue and expense growth rates. The Company conducts annual
reviews for idle and underutilized equipment, and reviews business plans for
possible impairment implications. Impairment occurs when the carrying value of
the asset exceeds the future undiscounted cash flows. When an impairment is
indicated, the estimated future cash flows are then discounted to determine the
estimated fair value of the asset and an impairment charge is recorded for the
difference between the carrying value and the net present value of estimated
future cash flows.
The estimates and assumptions used are consistent with the business plans
and estimates that the Company uses to manage its business operations. The use
of different assumptions would increase or decrease the estimated value of
future cash flows and would have increased or decreased any impairment charge
taken. Future outcomes may also differ. If the Company's products
18
fail to achieve estimated volume and pricing targets, market conditions
unfavorably change or other significant estimates are not realized, then the
Company's revenue and cost forecasts may not be achieved, and the Company may be
required to recognize additional impairment charges.
Inventory Reserves
When appropriate, the Company provided allowances to adjust the carrying
value of its inventory to the lower of cost or market (net realizable value),
including any costs to sell or dispose. The Company identifies any slow moving,
obsolete or excess inventory to determine whether a valuation allowance is
indicated. The determination of whether inventory items are slow moving obsolete
or in excess of needs requires estimates and assumptions about the future demand
for the Company's products, technological changes, and new product
introductions. The estimates as to the future demand used in the valuation of
inventory are dependent on the ongoing success of its products. In addition, the
Company's allowance for obsolescence may be impacted by the rationalization of
the number of stock keeping units. To minimize this risk, the Company evaluated
its inventory levels and expected usage on a periodic basis and records
adjustments as required. Reserves for inventory obsolescence were $0.7 million
at December 31, 2002, and $1.9 million at December 31, 2001. The decline is
primarily related to a revaluation of a reserve established for a specific
product that is no longer at risk to be discontinued.
Valuation of Pension and Postretirement Benefit Costs
The Company's pension and postretirement benefit costs are developed from
actuarial valuations. Inherent in these valuations are key assumptions provided
by the Company to our actuaries, including the discount rate and expected
long-term rate of return on plan assets. Material changes in the Company's
pension and postretirement benefit costs may occur in the future due to changes
in these assumptions.
The discount rate is subject to change each year, consistent with changes
in applicable high-quality, long-term corporate bond indices. Based on the
expected duration of the benefit payments for our pension plans and
postretirement plans we refer to applicable indices such as the Moody's AA
Corporate Bond Index to select a rate at which we believe the pension benefits
could be effectively settled. Based on applicable published rates as of December
31, 2002, the Company used a discount rate ranging from 5.7% to 6.75% for its
various, worldwide plans, compared to the discount rate range in 2001 of 5.5% to
7.25%.
The expected long-term rate of return on pension plan assets is selected by
taking into account a historical long-term average, the expected duration of the
projected benefit obligation for the plans, the asset mix of the plans, and
known economic and market conditions at the time of valuation. Based on these
factors, the Company's expected long-term rate of return as of December 31, 2002
for its various plan is 5.5% to 8.5%, compared to a range of 5.5% to 8.5% as of
December 31, 2001.
On December 31, 2002 the accumulated benefit obligation related to our
pension plans exceeded the fair value of the pension plan assets (such excess is
referred to as an un-funded accumulated benefit obligation) in two of our plans.
This difference is attributed to (1) an increase in the accumulated benefit
obligation that resulted from the decrease in the interest rate used to discount
the projected benefit obligation to its present settlement amount and (2) a
decline in the market value of the plan assets at December 31, 2002. As a
result, in accordance with SFAS No. 87, the Company recognized an additional
minimum pension liability of $5.2 million included in benefit obligations, and
recorded a charge, net of tax, to accumulated other comprehensive loss of $4.8
million which decreased stockholders' equity. The charge to stockholders' equity
for the excess of additional pension liability represents a net loss not yet
recognized as pension expense.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company has assessed SFAS
No. 143 and does not anticipate it to have a material impact on the Company's
financial statements. The effective date for the Company is January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a business (as previously defined in that
Opinion). This statement also amends ARB No. 51, "Consolidated Financial
Statements", to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The Company implemented this standard
in 2002 and according to this standard, the Company accounted for its Cranbury
facility, anticipated to be sold as assets held for sale, and its Italian
operations (sold in February 2003) as discontinued operations.
19
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements." This Statement also rescinds FASB Statement No. 44, "Accounting
for Intangible Assets of Motor Carriers." This Statement amends FASB Statement
No. 13, "Accounting for Leases", to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The Company
will adopt the provisions of this Statement upon its effective date and does not
anticipate it to have a material effect on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize certain costs associated with exit or disposal activities when they
are incurred rather than at the date of commitment of a commitment to an exit or
disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. Statement 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company does not
anticipate that this interpretation will have a material effect on its financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair market value of the obligations it assumes under
that guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of the
Interpretation apply on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure provisions are effective for financial
statements of interim or annual periods ending after December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities (an interpretation of ARB No.51)". This
Interpretation addresses consolidation by business enterprises of certain
variable interest entities, commonly referred to as special purpose entities
(SPEs). The Company does not anticipate that this interpretation will have a
material effect on its financial statements.
Competitive Environment
The Company operates in competitive consumer product markets in which
performance, quality and innovation are critical to success. It holds leading
market positions and possesses well recognized and respected brand names. The
Company competes on the basis of name recognition, advertising, quality of
products, product differentiation, promotion and price. It is either the number
one or two provider of condoms, depilatories and waxes, and home pregnancy and
ovulation test kits in the United States. Internationally, the Company markets a
diverse portfolio of consumer products in a broad range of markets, several of
which are similar to its domestic business, such as condoms, depilatories and
waxes, home pregnancy and ovulation test kits and oral care products. In
addition, the Company competes in a variety of other international categories
including antiperspirants, skin care products and other consumer products, as
well as OTC pharmaceuticals and professional diagnostic kits.
The markets for the Company's products are extremely competitive and are
characterized by the frequent introduction of new products, often accompanied by
advertising and promotional programs. The Company believes that the market for
these consumer products will continue to be highly competitive and the level of
competition may intensify in the future. The Company's competitors consist of a
large number of domestic and foreign companies, a number of which have
significantly greater financial resources than it does.
The domestic condom market is highly concentrated with a limited number of
competitors. The market is divided between premium brands and price brands, with
companies competing on the basis of quality, innovation and price. The major
domestic producers are the Company, with its Trojan, Naturalamb and Class Act
brands, SSL International with its Durex and Avanti brands, and Ansell with its
Lifestyles brand. The Company is the market leader with an approximate 69%
share. The Company is currently the leading advertiser in the U.S. condom
category based on dollars spent. The Company also increased its promotional
programs and has regularly developed new and innovative product line extensions
including the very successful introduction of Her Pleasure in 2002. In 2003 the
company will launch several additional innovative products.
The domestic market for home pregnancy test kits is divided between premium
and value brands. The home pregnancy test kit industry is highly competitive and
unit sales have been shifting toward value brands. The dynamics of the category
will be changing with the launch of digital pregnancy kits in 2003. The major
domestic producers are the Company, Pfizer, Inverness and Abbott Labs.
20
The domestic depilatories and waxes market is highly concentrated with a
limited number of competitors. Products compete based on their functionality,
innovation and price. The major domestic manufacturers are the Company with its
Nair brand, Del Labs with its Sally Hansen brand and Aussie Nads with its Nads
wax product. In March 2002 Reckitt Benckiser introduced Veet into the domestic
depilatory market. Veet is currently successful in the international marketplace
with a predominant emphasis on wax products. The Company believes that, as a
result of its dedicated advertising and promotional programs, distinct packaging
and several successful line extensions, Nair is positioned to continue to be a
leader in lotion and cream depilatories. The company has announced a 1st quarter
2003 launch of an upscale depilatory line called Lineance of which the consumer
acceptance in pre-market testing was excellent.
Internationally, the Company's products compete in similar, competitive
categories. Some of the Company's U.S. branded products are also marketed in
other countries, holding leading or number two market share positions. Examples
include: Trojan in Canada and Mexico, and Nair, in Canada, Mexico, France,
Australia, the U.K., and Spain, where the Company's depilatory products are
marketed under the Taky brand name. The Company also has a position in the
cosmetic whitening dentifrice segment with its Pearl Drops brand in the U.K.,
Australia, Italy, and Germany, (under the Perl Weiss brand), as well as in
France, (where the Company's products are marketed as Email Diamant).
The Company markets home pregnancy test kits in many countries, under such
brand names as First Response, Discover, Confidelle, and Answer. This category
has been negatively effected in international markets by the introduction of
many lower-priced and private label products, as it has in the U.S., but the
Company has seen some growth for its business recently as it has rolled out the
"use 3 days before a missed period" claim first used domestically.
In the skin care category the Company markets such brands as Lineance and
Barbara Gould in France, the former for anti-cellulite and general body care and
the latter for facial care. In Spain, the Company markets Eurdermin hand care
cream, in the mass market class of trade, where it has a number two position.
Recently this line has been expanded to include body and foot care products.
In various countries the Company also markets OTC pharmaceutical products.
These include Gravol and Ovol, the leading anti-nauseant and anti-gas brands in
Canada, the Pangavit range of vitamin supplements in Mexico, Sterimar, a
sea-water nasal hygiene product sold primarily in France, but also in about
fifty other countries, including most recently Mexico.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
Concentration of Risk
The Company is exposed to market risks, which include changes in interest
rates as well as changes in foreign currency exchange rates as measured against
the U.S. dollar. It does not currently have an established foreign exchange risk
management policy, although it may implement such a policy in the future. The
Company may, in the normal course of business, use derivative financial
instruments, including foreign currency forward contracts, to manage its foreign
exchange risk. The Company uses these instruments only for risk management
purposes and does not use them for speculation or for trading.
A group of five customers accounted for approximately 27% of consolidated
net sales in 2002, including a single customer Walmart who accounted for 12%.
This group accounted for 27% of domestic net sales in 2001.
Although not included in the top five customers noted above, Kmart
Corporation historically has represented approximately 2% of our consolidated
net sales. Kmart's bankruptcy, followed by its announcement to close an
additional 329 stores in the first half of 2003, could cause an insignificant
reduction in the Company's sales to Kmart of approximately 0.3% of the
Company's consolidated net sales. It is not clear whether, and to what extent,
these lost sales may be made to other retailers.
Interest Rate Risk
The Company entered into interest rate swap agreements, which are
considered derivatives, to reduce the impact of changes in interest rates on its
floating rate credit facility. The swap agreements are contracts to exchange
floating interest payments for fixed interest payments periodically over the
life of the agreements without the exchange of the underlying notional amounts.
As of December 31, 2002, the Company had swap agreements in the notional amount
of $50 million, swapping debt with a one month LIBOR rate for a fixed interest
rate that averages 6.6%. The fair value of these swaps were recorded as a
liability in the amount of $1.2 million at December 31, 2002. These instruments
are designated as cash flow hedges as of December 31, 2002 and the changes in
fair value have been recorded in other comprehensive income ("OCI") as there
was no ineffectiveness. The amount expected to be classified from OCI to
earnings over the next three months is not significant.
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The Company measures its interest rate risk, as outlined below, utilizing a
sensitivity analysis. The analysis measures the potential loss in fair values,
cash flows, and earnings based on a hypothetical 10% change in interest rates
and currency exchange rates. The Company uses year-end market rates on its
financial instruments to perform the sensitivity analysis.
The Company's interest rate risk related to the predecessor financial
statements was not material. However, the potential loss in cash flows and
earnings based on a hypothetical 10% change in interest rates over a one-year
period due to an immediate change in rates at December 31, 2002, would have
affected earnings by approximately $0.7 million.
Foreign Currency Risk
A portion of the Company's revenues and earnings are exposed to changes in
foreign currency exchange rates. Where practical, the Company seeks to relate
expected local currency revenues with local currency costs and local currency
assets with local currency liabilities. In connection with the Acquisition, the
Company entered into intercompany loans with certain of its subsidiaries. The
Company is exposed to foreign exchange accounting remeasurement gains and losses
from these intercompany loans. The Company has entered into several foreign
exchange contracts to hedge the net accounting remeasurement exposure on the
intercompany loans. At December 31, 2002, the Company has 15.0M EUROS hedge with
an average rate of 98.42, which is approximately 43.0% of the total EURO debt
position. The Company has 30.0M Mexican Pesos hedge with a rate of 10