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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 I.R.S Employer
executive offices) (Zip Identification No.
Code)
(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. [_]
As of March 28, 2002, all of the 10,000 outstanding membership interests in
Armkel, LLC were held by affiliates.
Documents Incorporated by Reference: None
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TABLE OF CONTENTS
Item Page
---- ----
PART I
ITEM 1. BUSINESS..................................................... 1
ITEM 2. PROPERTIES................................................... 8
ITEM 3. LEGAL PROCEEDINGS............................................ 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 10
ITEM 6. SELECTED FINANCIAL DATA...................................... 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................... 77
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 77
ITEM 11. EXECUTIVE COMPENSATION....................................... 78
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 80
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 81
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K................................................... 88
PART I
ITEM 1. BUSINESS.
General
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.
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 69 companies requiring total capital at closing
of approximately $17 billion.
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 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, 2001,
approximately 45% of the Company's net sales were generated in the United
States and the majority of the remainder were generated in Europe 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.
Description of Business Segments
The Company conducts its business through its domestic consumer products
division and its international consumer products division.
Domestic Consumer Products. The following table sets forth the principal
products of the Company's domestic consumer products division and related data.
Market
Categories Key Brand Names Position
------------------------ ----------------------------------- --------
Condoms Trojan, Naturalamb, Class Act 1
Depilatories and waxes Nair 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 --
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.
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. The Company began shipping Nair for Men to its
customers in July 2001.
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 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, Italy, Canada, Mexico, Australia and Spain, and it has
operations in each of these countries. In addition, the Company exports some of
its products from the United Kingdom to European countries such as Germany,
Belgium, Holland, Poland, Switzerland, Ireland and
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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 25% 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 30% 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.
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, Manix Canada, France, Mexico
Home pregnancy and ovulation First Response, Answer, Australia, Canada, Italy, Mexico, U.K.
test kits Confidelle, Discover, Gravix
Depilatories and waxes Nair, Taky Australia, Canada, France, Mexico,
Middle East, Spain, U.K.
Face and skin care Barbara Gould, Lineance, France, Spain, U.K.
Eudermin, Anne French,
Bi-Solution
Oral care Pearl Drops, Email Diamant, Australia, Canada, France, Germany,
Perlweiss, Nacar Blanco, Orasiv, Italy, Mexico, U.K.
Ultrafresh
OTC products Sterimar, Gravol, Dencorub, Rub Australia, Canada, France, Italy,
A-535, Cerox, Atasol, Ovol, Mexico
Diovol
Antiperspirants Arrid Australia, U.K.
Baby care Poupina, Curash Australia, France
Professional diagnostics -- France, Italy
Other consumer products Femfresh, Cossack Australia, Canada, Italy, 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
3
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; denture fixatives
marketed under the Orasiv brand name; 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 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; and Cerox adhesive tapes and bandages, which are sold in
Italy.
Antiperspirants. The Company's principal antiperspirant brand is Arrid,
which it manufactures and sells in the United Kingdom.
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 and Italy. These comprise
enzyme immuno-assay tests and radioactive immuno-assay tests, which are sold by
the Company's sales force in both countries 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. For example, the
Company distributes certain AstaMedica OTC products in Italy, Bausch & Lomb
lens solution in the United Kingdom and Australia and Chattem toiletries in
Italy and Australia.
Distribution
Under a management services agreement with Church & Dwight (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.
4
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 Italy and 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.
New Product Development
Pursuant to the management services agreement, the Company manages the
majority of its own research and development ("R&D") activities, which the
Company will relocate from Cranbury, New Jersey to C&D's New Jersey
headquarters. 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, Canada and Italy. The Company's expenditures
on R&D were approximately $5.3 million for the nine months ended December 31,
2001, $7.9 million in the fiscal year ended March 31, 2001 and $8.8 million in
the fiscal year ended March 31, 2000.
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.
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.
The Acquisition
On September 28, 2001 the Company acquired the consumer products business
of Carter-Wallace for approximately $739.0 million, which consisted of cash
consideration of approximately $715.4 million, the repayment of approximately
$19.9 million of indebtedness and the assumption of approximately $3.7 million
of indebtedness. The remainder of Carter-Wallace, which was primarily comprised
of its healthcare and pharmaceuticals business, was sold to an unrelated third
party in a merger transaction simultaneous with the Acquisition.
5
Upon consummation of the Acquisition, C&D purchased from the Company the
assets relating to the Arrid Extra Dry, Arrid XX and Lady's Choice
antiperspirant and deodorant product lines (in the United States and Canada),
and the assets relating to the Lambert-Kay line of pet products, which are
referred to collectively as the Disposed Businesses, for approximately $128.5
million and assumed certain related liabilities.
The purchase price for the Disposed Businesses was determined by the Company
and C&D in advance of the execution of the Asset Purchase Agreement between the
Company and Carter-Wallace. When the Company was formed by C&D and Kelso to
acquire the consumer products business of Carter-Wallace (or CW Consumer
Business), it was the intention of the members that the assets comprising the
Disposed Businesses would be acquired by C&D directly from Carter-Wallace and
that the remainder of the consumer products business would be acquired by the
Company. C&D and Kelso did not want the Company to acquire the Disposed
Businesses directly, and never intended for Disposed Businesses to be operated
by the Company for any period of time. In conducting its sale process, however,
Carter-Wallace was unwilling to agree to a transaction structured in such a
manner, and insisted that the entire consumer products business be acquired by
a single purchaser. As a result, the Company and C&D agreed to a structure
whereby the entire consumer products business (including the Disposed
Businesses) would be acquired by the Company, and the Disposed Businesses would
immediately be resold to C&D. In submitting a proposed purchase price to
Carter-Wallace in the auction for the consumer products business, C&D
formulated a price for the Disposed Businesses and the Company formulated a
price for the remainder of the consumer products business. These amounts, added
together, were submitted as the Company's bid for the entire consumer products
business in the auction.
Trademarks, Patents and Licenses
The Company markets its products under a number of trademarks and trade
names. The Company has registered these trademarks, or has applications
pending, in the United States and in certain of the countries in which the
Company sells these product lines. The Company considers the protection of its
trademarks to be important to its business.
The Company owns or has licenses for a number of patents and patent
applications covering certain of its products. 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.
Competition
For information regarding competition, see Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
Employees and Labor Relations
The Company's worldwide work force consisted of approximately 2,100
employees as of December 31, 2001, of whom approximately 1,200 were located
outside the United States and approximately 900 worked in its domestic
facilities.
The hourly employees at the Company's Cranbury, New Jersey and Dayton, New
Jersey facilities are represented by Paper, Allied-Industrial Chemical and
Energy Workers union. On December 31, 2001, their collective bargaining
agreements covered approximately 320 workers. These agreements expire on April
30, 2004. Internationally, the Company employs union representatives in France,
Italy, 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.
In order to increase efficiencies and performance, the Company will relocate
its manufacturing operations at certain of its facilities, including relocation
of the facilities producing its Nair product line, from Cranbury, New
6
Jersey to C&D's Lakewood, New Jersey facilities. See "Item 13. Certain
Relationships and Related Transactions" and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
capital resources following the Acquisition."
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 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 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 $0.3 million. 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.
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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 28, 2002:
Location Products Manufactured Area (Sq. Feet)
-------- --------------------- ---------------
Owned:
Manufacturing Facilities and Offices:
Cranbury, New Jersey................. personal care products 734,000
Colonial Heights, Virginia........... condoms 220,000
Montreal, Canada..................... personal care products 157,000
Folkestone, England.................. personal care products 78,000
Milan, Italy......................... personal care products 60,000
Mexico City, Mexico.................. pharmaceutical products 37,600
New Plymouth, New Zealand............ condom processing 31,000
Warehouse and Offices
Toronto, Canada...................... -- 52,000
Leased:
Manufacturing Facilities and Offices:
Barcelona, Spain..................... personal care products 58,400
Milan, Italy......................... diagnostics and personal care products 49,100
Folkestone, England.................. personal care products 21,500
Norwood, Pennsylvania................ condom processing 10,000
Warehouses and Offices:
Dayton, New Jersey**................. -- 179,000
Folkestone, England.................. -- 65,000
Momence, Illinois**.................. -- 43,000
Revel, France........................ -- 35,500
Mexico City, Mexico.................. -- 27,500
Sparks, Nevada+...................... -- 25,000
Sydney, Australia.................... -- 24,900
Plainsboro, New Jersey*.............. -- 23,300
Atlanta, Georgia..................... -- 23,071
Levallois, France*................... -- 22,500
Dallas, Texas+....................... -- 11,000
Pittsburgh, Pennsylvania*............ -- 940
- --------
* Offices only
+ Warehouses only
** The Company has given notice of termination of the leases at both the
Dayton, New Jersey and Momence, Illinois locations, effective mid-2002. The
Company will occupy space at C&D contracted or leased warehouses.
ITEM 3. LEGAL PROCEEDINGS.
Litigation. Carter-Wallace has been engaged in litigation with Tambrands
Inc. in the Supreme Court of the State and County of New York arising out of a
patent infringement and misappropriation suit previously filed against both
companies in the United States District Court, Southern District of New York,
by New Horizons Diagnostics Corporation, or "NHDC", et al. The NHDC suit, which
was settled and discontinued in July 1996, asserted claims with respect to
certain "gold sol" technology (used in the First Response and Answer home
pregnancy and ovulation test kits) that Carter-Wallace had acquired from
Tambrands pursuant to a written
8
purchase agreement in March 1990. Carter-Wallace paid an immaterial amount
toward that settlement. In the pending Supreme Court action, Tambrands seeks
reimbursement from Carter-Wallace of an unspecified portion of the amount paid
by Tambrands in settlement of the NHDC suit, and for defense costs. Both
Tambrands and Carter-Wallace moved for summary judgment, and the Supreme Court
granted Carter-Wallace's motion. Tambrands has appealed that ruling. The
Company has assumed this litigation as part of the Acquisition. The Company
believes it has good defenses, under the terms of the 1990 purchase agreement,
to Tambrands' claim.
Upon consummation of the Acquisition, the Company assumed liability under
other legal actions arising out of Carter-Wallace's operation of the consumer
products business arising before the Acquisition. The Company does not believe
such actions are material.
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, who are purported holders of record of approximately 3.1
million shares of MedPointe, have petitioned for an appraisal of the fair value
of their shares in accordance with Section 262 of the Delaware General
Corporation Law.
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 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 that no liability should accrue to the Company as a result of
the proceedings. The Company filed its response to the petition for appraisal
on February 13, 2002.
The Asset Purchase Agreement provides for an adjustment to the purchase
price paid by the Company based on the Company's net working capital as of the
closing date. On January 9, 2002, the Company received from MedPointe a notice
of disagreement with respect to the Company's calculation of its net working
capital for purposes of the agreement. The Company believes that it is due
approximately $3.5 million from MedPointe pursuant to the Asset Purchase
Agreement; MedPointe, however, claims that the Company owes it $7.6 million.
The Company believes MedPointe's position is without merit.
Pursuant to the Asset Purchase Agreement, the Company has agreed to assume
the liability for 60% of the future retiree medical costs with respect to
certain identified employees of the consumer products division purchased by the
Company. MedPointe has asserted that the Company is also responsible for the
costs certain employees which were terminated by Carter-Wallace on the closing
date, which MedPointe has estimated to be between $6 and $10 million; the
Company disagrees with MedPointe's position and does not believe it has any
liability for the employees in question.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
At March 28, 2002, 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
2001, the Company did not declare any dividends.
On August 27, 2001, the Company issued the membership interests to C&D and
Kelso in exchange for their capital contributions of $111,750,000 and
$116,750,000, respectively which amounts were used in connection with the
Acquisition. Apart from the foregoing, no unregistered sales or issuances of
the equity securities have taken place.
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
Successor Predecessor
--------------------- ----------------------------------------------
Period from Period from March 31,
August 28, 2001 to April 1, 2001 to ---------------------------
December 31, 2001 (1) September 28, 2001 2001 2000 1999 1998
--------------------- ------------------ ------ ------ ------ ------
(Dollars in millions)
Operating Results
Net sales........................ $ 95.4 $245.6 $435.5 $412.9 $360.6 $340.9
Income (loss) from operations.... (4.8) 56.9 88.4 69.9 55.0 52.5
Net income (loss)................ (15.6) 33.4 49.9 40.5 31.3 28.9
Total assets..................... 812.6 379.3 371.2 369.5 353.9 324.4
Total debt....................... 445.4 23.1 24.3 26.8 33.4 22.6
- --------
(1) The period from August 28, 2001 to September 28, 2001 is inclusive of only
net interest expense of $1.6 million.
UNAUDITED QUARTERLY FINANCIAL INFORMATION
Calendar Year Calendar Year
2000 2001
------------------------- ------------------------------------
Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter(2)
-------- -------- ------- -------- -------- -------- ----------
(in thousands)
Net sales......... $123,276 $108,678 $98,303 $105,281 $125,231 $120,367 $ 95,417
Gross profit(1)... 73,830 65,568 57,873 63,814 76,453 72,748 38,625
Income (loss) from
Operations(1)... 28,323 20,225 17,922 21,957 31,766 23,144 (4,783)
Net income (loss). 17,384 11,808 10,410 10,324 18,772 14,666 (15,648)
- --------
(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.
10
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, 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 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.
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.
The following two sections discuss comparisons to the three-month period
ended December 31, 2001 and the combined (predecessor and successor) nine-month
period ended December 31, 2001 compared to the same periods in the prior year.
Three Month Comparison
Period from August 28, 2001 to December 31, 2001 Compared with Three Months
Ended December 31, 2000.(1)
Period from
August 28, Three
2001 Months
(inception) to Ended
December 31, December 31,
2001(1) 2000
-------------- ------------
Net sales........................................................ $ 95.4 $98.3
Cost of goods sold(2)............................................ 56.8 40.4
------ -----
Gross profit(2).................................................. 38.6 57.9
Total operating expenses excluding Interest & other Income(2).... 43.4 40.0
Interest Expense & Other Income.................................. 11.5 0.8
------ -----
Revenues in excess of expenses before provision/benefit for taxes $(16.3) $17.1
====== =====
- --------
(1) 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. This amount is included in
the financial figures.
(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.
11
The results of operations for the period from September 29, 2001 to December
31, 2001 are affected by a number of acquisition related expenses. These items
are outlined below and addressed in further detail in the discussion below:
(in millions)
-------------
Inventory Step-up Expenses................................. $15.1
Transition Expenses........................................ $ 2.6
Estimated Gross Margin Loss on Prior Period Product Sell-in $ 2.8
The prior period inventory sell-in resulted in a build-up in trade
inventories in the two-month period prior to the acquisition due in part to the
efforts of the previous sales organization, which operated under a performance
based compensation plan. This build-up is estimated to have increased sales by
approximately $4.0 million and revenues in excess of expenses by an estimated
$2.8 million in the two months prior to the Acquisition thereby shifting sales
and profit from the fourth calendar quarter of 2001 to the third quarter of
2001 which was included in the results of the predecessor company.
Net Sales
Net sales decreased $2.9 million, or 2.9%, to $95.4 million in the period
ended December 31, 2001 from $98.3 million in the three months ended December
31, 2000. This decrease is primarily due to a domestic sales increase of $4.0
million that occurred in the three months prior to the Acquisition. This sales
increase created high trade inventories as of the start of the Acquisition and
have depressed post Acquisition sales as the correction of trade inventories
occurs. Net sales were up 10.8% or $11.7 million from July 1, 2001 through Sept
28, 2001 compared to prior year.
Net sales of domestic products, excluding intercompany sales, decreased $2.3
million, or 5.1%, to $42.7 million in the period ended December 31, 2001 from
$45.0 million in the three months ended December 31, 2000. This decrease in net
sales was discussed above.
Net sales of international products decreased $0.6 million, or 1.1%, to
$52.8 million in the period ended December 31, 2001 from $53.4 million in the
three months ended December 31, 2000.
Cost of Goods Sold
Cost of goods sold increased $16.4 million, or 40.5%, to $56.8 million in
the period ended December 31, 2001 from $40.4 million in the three months ended
December 31, 2000. As a percentage of net sales, cost of goods sold grew to
59.5% from 41.1% in 2000. This increase in cost of goods sold is primarily due
to the $15.1 million of additional expense relating to inventory step-up
adjustments incurred at the Acquisition. At the time of the Acquisition the
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 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 will all be 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 43.7% of net sales.
Cost of goods sold for domestic products, excluding intercompany sales,
increased $11.1 million, or 75.5%, to $25.8 million in the period ended
December 31, 2001 from $14.7 million in the three months ended December 31,
2000. As a percentage of net sales, domestic cost of goods sold increased to
60.5% from 32.8% 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 be reduced
to 34.2% of net sales. The remaining increase in cost of goods as a percentage
of net sales is principally due to changes in product mix.
Cost of goods sold for international products increased $5.3 million, or
20.6%, to $31.0 million in the period ended December 31, 2001 from $25.7
million in the three months ended December 31, 2000. As a percentage of net
sales, international cost of goods sold increased to 58.8% from 48.2% primarily
due to $3.9 million in inventory step-up adjustments. Excluding these
adjustments, cost of goods sold, as a percentage of net sales
12
would be reduced to 51.4% for the period ending December 31, 2001. The
remaining difference as a percentage of net sales versus the prior year is
principally due to product mix.
Operating Costs excluding Interest Expense and Other Income
Total operating expenses excluding interest expense and other income
increased $3.4 million, or 8.5%, to $43.4 million in the period ended December
31, 2001 from $40.0 million in the three months ended December 31, 2000.
Advertising, consumer and trade promotion expense decreased by $1.4 million,
or 6.8%, to $19.4 million in the period ended December 31, 2001 from $20.8
million in 2000.
Selling, general and administrative expenses increased $4.9 million, or
25.4%, to $24.1 million in the period ended December 31, 2001 from $19.2
million in 2000. This increase is related to estimated transitional costs of
$1.8 million for former Carter-Wallace employees employed during the
integration process, $1.0 million in fees to Church & Dwight and Kelso, and
$1.1 million in amortization for acquired patents.
Interest Expense and Other Income
Interest expense was $11.7 million in the period from August 28, 2001 to
December 31, 2001 compared to $0.3 million for the three months ending December
31, 2000. This interest expense is related to the $225 million in outstanding
bonds and $220 million in term loans incurred at the time of the Acquisition
and includes interest expense on financing from August 28, 2001 to December 31,
2001.
Interest income of $0.8 million for the period from August 28, 2001 to
December 31, 2001 increased $0.7 million compared to the three months ended
December 31, 2000, due to excess proceeds from financing activities invested
primarily in money market funds.
Other expense of $0.6 million for the period from August 28, 2001 to
December 31, 2001 primarily relates to unrealized losses on foreign exchange
transactions.
Nine Month Comparison
Nine Months Ended December 31, 2001 Compared with Nine Months Ended December
31, 2000(1)
Nine-Month Period
Ended December 31,
------------------
2001(1) 2000(1)
------- -------
Net sales...................................................... $341.0 $330.4
Cost of goods sold(2).......................................... 153.2 133.0
------ ------
Gross profit(2)................................................ 187.8 197.4
Total operating expenses excluding Interest and Other Income(2) 137.7 130.8
Interest Expense & Other Income................................ 11.8 1.2
------ ------
Revenues in excess of expenses before provision for taxes...... $ 38.3 $ 65.4
====== ======
- --------
(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. 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) Distribution expense reclassified from operating expense to cost of goods
sold for predecessor financial statements in order to conform to the
Company's presentation.
13
Net Sales
Net sales increased $10.6 million, or 3.2%, to $341.0 million in the period
ended December 31, 2001 from $330.4 million in the nine months ended December
31, 2000. This increase is discussed below.
Net sales of domestic products, excluding intercompany sales, increased
$11.2 million, or 7.1%, to $169.0 million in the period ended December 31, 2001
from $157.8 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 decreased $0.6 million, or 0.3%, to
$172.0 million in the period ended December 31, 2001 from $172.6 million in the
nine months ended December 31, 2000. This decrease was due to lower foreign
exchange rates predominantly offset by volume increases on Trojan and Nair,
selective price increases on several products and higher sales of OTC
pharmaceuticals in Mexico.
Cost of Goods Sold
Cost of goods sold increased $20.2 million, or 15.2%, to $153.2 million in
the period ended December 31, 2001 from $133.0 million in the nine months ended
December 31, 2000. As a percentage of net sales, cost of goods sold grew to
44.9% from 40.3% 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 will all be
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
40.5%.
Cost of goods sold for domestic products, excluding intercompany sales,
increased $14.9 million, or 28.5%, to $67.1 million in the period ended
December 31, 2001 from $52.2 million in the nine months ended December 31,
2000. As a percentage of net sales, domestic cost of goods sold increased to
39.7% from 33.1% 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
33.1% down slightly from the prior period. The reduction, after adjustments, is
due to selective price increases for Trojan and Nair and the impact of higher
unit sales on fixed overhead expenses.
Cost of goods sold for international products increased $5.3 million, or
6.6%, to $86.1 million in the period ended December 31, 2001 from $80.8 million
in the nine months ended December 31, 2000. As a percentage of net sales,
international cost of goods sold increased to 50.1% from 46.8% primarily due to
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 47.8% for
the period ending December 31, 2001. The remaining difference as a percentage
of net sales is principally due to product mix.
Operating Costs excluding Interest Expense and Other Income
Total operating expenses excluding interest expense and other income
increased $6.9 million, or 5.3%, to $137.7 million in the period ended December
31, 2001 from $130.8 million in the nine months ended December 31, 2000.
Advertising, consumer and trade promotion expense decreased slightly by $0.2
million, or 0.3%, to $70.9 million in the period ended December 31, 2001 from
$71.1 million in 2000.
Selling, general and administrative expenses increased $7.1 million, or
11.9%, to $66.8 million in the period ended December 31, 2001 from $59.7
million in 2000. This increase is related to estimated transitional costs of
$1.8 million, related to general and administrative for former Carter-Wallace
employees employed during the integration process, $1.0 million in fees to C&D
and Kelso, and $1.1 million in amortization for acquired patents.
14
Interest Expense and Other Income
Interest expense and other income was $11.8 million in the period ended
December 31, 2001 compared to $1.2 million for the nine months ending December
31, 2000. 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.
Year Ended March 31, 2001 Compared with Year Ended March 31, 2000
Years Ended
March 31,
-------------
2001 2000
------ ------
Net sales................................................ $435.5 $412.9
Cost of goods sold....................................... 159.5 160.3
------ ------
Gross profit............................................. 276.0 252.6
Total operating expenses................................. 189.7 186.5
------ ------
Revenues in excess of expenses before provision for taxes $ 86.3 $ 66.1
====== ======
Net Sales
Net sales increased $22.6 million, or 5.5%, to $435.5 million in the year
ended March 31, 2001 from $412.9 million in the year ended March 31, 2000. This
improvement was due to increased unit volume, and to a lesser extent, higher
selling prices.
Net sales of domestic products increased $24.9 million, or 13.6%, to $207.4
million in the year ended March 31, 2001 from $182.5 million in the year ended
March 31, 2000. The increase in sales reflects higher sales of Trojan condoms
and Nair depilatories due to new product introductions, coupled with selective
price increases in the Company's Trojan brand products. In addition, 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 test kits.
Net sales of international products decreased $2.2 million, or 1.0%, to
$228.2 million in the year ended March 31, 2001 from $230.4 million in the year
ended March 31, 2000. The decrease was primarily due to lower foreign exchange
rates, which was partly offset by increased sales of depilatories, skin care
products and condoms due to new line extensions. Lower foreign exchange rates
had the effect of decreasing sales in the current year period by approximately
$21.6 million.
Cost of Goods Sold
Cost of goods sold decreased $0.8 million, or 0.5%, to $159.5 million in the
year ended March 31, 2001 from $160.3 million in the year ended March 31, 2000.
As a percentage of net sales, cost of goods sold fell to 36.6% from 38.8% in
2000. This decrease in cost of goods sold as a percentage of net sales, is
primarily the result of selective price increases in July 2000 in the Company's
Trojan brand products and cost control and reduction measures.
Cost of goods sold for domestic products increased $3.2 million, or 5.5%, to
$61.3 million in the year ended March 31, 2001 from $58.1 million in the year
ended March 31, 2000. As a percentage of net sales, domestic cost of goods sold
fell to 29.6% from 31.8% in 2000. This decrease in cost of goods sold as a
percentage of net sales reflects selective price increases for the Company's
Trojan brand products and the impact of higher unit sales on fixed overhead
expenses.
Cost of goods sold for international products decreased $4.0 million, or
3.9%, to $98.2 million in the year ended March 31, 2001 from $102.2 million in
the year ended March 31, 2000. As a percentage of net sales, international cost
of goods sold fell to 43.0% from 44.4% in the year ended March 31, 2000,
reflecting a favorable product mix and manufacturing cost savings in the
Company's skin care line.
15
Operating Expenses
Total operating expenses increased $3.2 million, or 1.7%, to $189.7 million
in the year ended March 31, 2001 from $186.5 million in the year ended March
31, 2000.
Advertising and promotion, marketing and other selling and distribution
expense for the consumer operations in 2001 increased by $5.7 million, or 3.8%,
to $157.1 million in the year ended March 31, 2001 from $151.3 million in 2000,
as a result of increased advertising and promotional support domestically,
primarily for the Company's First Response home pregnancy test kits and Nair
depilatories.
General and administrative expenses were $22.7 million in 2001, unchanged
from the prior year.
R&D expenses in 2001 decreased by $0.9 million, or 10.5%, from the prior
year.
Interest Expense and Other Expense
Interest expense was $1.3 million in the year ended March 31, 2001, a
decrease of $0.2 million, or 14.7%, from $1.5 million in the year ended March
31, 2000. The fluctuation in interest expense is related to changes in levels
of borrowing at the Company's international subsidiaries. Interest income from
operations increased by $0.1 million, or 26.1%, to $0.5 million in the year
ended March 31, 2001 from $0.4 million in the year ended March 31, 2000.
Other expenses--net from operations decreased $1.2 million in the year ended
March 31, 2001, or 47.2%, to $1.4 million from $2.6 million in 2000. This was
primarily attributed to a gain on the sale of a facility in Mexico in 2000.
Liquidity and capital resources following the Acquisition
Cash flows provided by operating activities was $20.9 million for the period
from August 28, 2001 to December 31, 2001 which includes $10.1 million in
severance payments partially offset by lower working capital.
Cash flows used in investing activities was $586.7 million for the period
from August 28 to December 31, 2001. The net cash flows used in investing
activities includes the purchase of the Carter-Wallace assets for the consumer
businesses net of the proceeds from the sale of the Arrid and Lambert-Kay
assets to C&D.
Net cash provided from financing activities was $621.9 million for the
period from August 28, 2001 (inception) to December 31, 2001, which includes
$443.5 million in long-term debt and $228.5 million in contributions from the
members, less the cost of financing and proceeds to members.
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
71/2-year term loans, all of which were drawn at closing and an $85.0 million
revolving credit facility, which remained fully undrawn at December 31, 2001.
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
$445.0 million of total debt outstanding as of December 31, 2001, excluding
various short term borrowings of foreign subsidiaries. The weighted average
interest rate on the credit facility borrowings at December 31, 2001, excluding
deferred financing costs and commitment fees, was approximately 5.6% including
hedges.
Interest payments on the notes and on borrowings under the senior credit
facilities will significantly increase the Company's liquidity requirements.
Borrowings under the term loans and the revolving credit facility will 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 EBITDA to total debt. 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, and predecessor results for the first nine months of calendar
2001, was approximately $101 million for the twelve month period ending
December 31, 2001. The leverage ratio as defined in the loan agreement was 3.87
versus the agreement's maximum 5.50, and the interest coverage ratio was 2.96
versus the agreement's minimum of 2.00.
16
Distributions of a portion of revenues in excess of expenses may be made to
fund tax distributions to Kelso and C&D.
The Company has incurred and will incur severance and other change in
control related liabilities to certain employees. In the three-month period
ending December 31, 2001 it paid $10.1 million in severance payments. The
Company currently anticipates that the total severance payments will equal
approximately $51 million. It anticipates the remaining $41 million in
severance to be principally paid out in 2002.
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 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 addition, the senior credit
facilities will require the Company to maintain certain financial ratios.
Indebtedness under the senior credit facilities will be secured by
substantially all of the Company's assets including the real and personal
property, inventory, accounts receivable, intellectual property and other
intangibles.
The Company expects that the total capital expenditures will be
approximately $20 million in 2002 and approximately $11 million in 2003. 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
-----------------------------------------
2003 to 2006 to After
Total 2002 2005 2007 2007
-------- ------- ------- ------- --------
(Thousands of dollars)
Principal payments on borrowings:
Long-term debt
Syndicated Financing Loans................... $219,474 $ 3,246 $37,750 $62,978 $115,500
Notes Payable 91/2%.......................... 225,000 -- -- -- 225,000
Various Short-Term Borrowings at Foreign
Subsidiaries............................... 2,425 2,425 -- -- --
Other commitments:
Operating Leases Obligations..................... $ 13,045 $ 5,085 $ 7,126 $ 834 $ --
Capital Lease Obligations........................ 725 190 462 73 --
Management Services Agreements................... 71,500 14,300 42,900 14,300 --
Manufacturing Distribution Agreement............. 4,000 800 2,400 800 --
-------- ------- ------- ------- --------
Total............................................... $536,169 $26,046 $90,638 $78,985 $340,500
======== ======= ======= ======= ========
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, 2001, will provide sufficient funds to operate
its business, to make expected capital expenditures of approximately $20
million in 2002 and approximately $11 million in 2003 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
17
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.
Related Party Transactions
The Company believes that substantial synergies can be achieved 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 will
retain its core marketing, research & development, and financial planning
capabilities, and will continue to manufacture condoms, but will purchase
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. As a first step, the Company and C&D merged the two
sales organizations during the fourth quarter of 2001. The companies have begun
transferring production of antiperspirants and depilatories 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 will take six to nine months and should be completed in third
quarter 2002. The companies have begun integrating the planning and purchasing,
accounting and management information systems, and other service functions
which is expected to be completed in the third quarter of 2002. Upon completion
of the integration discussed above, the Company intends to sell the Cranbury
plant.
During 2001, the Company was charged $2.1 million for administrative
services, and manufactured deodorant antiperspirant inventory of $8.3 million
for C&D at the Company's cost, and charged C&D $1.4 million for transition
administrative services. The Company has an open net accounts payable to C&D at
December 31, 2001 of approximately $12.0 million that primarily related to cash
collected by the Company on behalf of C&D for open accounts receivable,
partially offset by amounts owed by C&D for inventory.
The Company paid advisory fees of $0.7 million to C&D and $0.3 million to
Kelso.
Significant Accounting Policies
The Company's significant accounting policies are more fully described in
Note 1 to its consolidated financial statements. Certain of its 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.
Impairment of Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. In such situations, long-lived assets are
18
considered impaired when estimated future cash flows (undiscounted and
without interest charges) resulting from the use of the asset and its
eventual disposition are less than the asset's carrying amount. While the
Company believes that its estimates of future cash flows are reasonable,
different assumptions regarding such cash flows could materially affect its
evaluations.
Recent Accounting Pronouncements
The EITF issued EITF 00-14, "Accounting for Certain Sales Incentives". This
issue addresses the income statement classification for offers by a vendor
directly to end consumers that are exercisable after a single exchange
transaction in the form of coupons, rebate offers, or free products or services
disbursed on the same date as the underlying exchange transaction. The issue
requires the cost of these items to be accounted for as a reduction of
revenues, rather than as a marketing expense. This reclassification is expected
to reduce sales by 1% annually. The EITF was effective January 1, 2002 and
there is no net income impact.
The EITF also issued EITF No. 00-25, "Vendor Income Statement
Characterization of Consideration from a Vendor to a Retailer". This issue
outlines required accounting treatment of certain sales incentives, including
slotting or placement fees, cooperative advertising arrangements, buy-downs and
other allowances. The Company currently records such costs as marketing
expenses. EITF 00-25 will require the Company to report the paid consideration
expense as a reduction of sales, rather than marketing expense. The Company is
required to implement EITF 00-25 for the quarter beginning January 1, 2002. The
Company estimates this reclassification to reduce sales by approximately 3% to
4%, but in any case, implementation will not have an effect on net income.
At its inception, the Company adopted Statement of Financial Accounting
Standards ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." Under this statement, all derivatives, whether designated as
hedging instruments or not, are required to be recorded on the balance sheet at
fair value. Furthermore, changes in fair value of derivative instruments not
designated as hedging instruments are recognized in earnings in the current
period.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" which
establishes new standards for accounting and reporting requirements for
business combinations and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited. The Company adopted this statement
at its inception.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB Opinion No. 17, "Intangible Assets". Under its
changes, SFAS No. 142 establishes new standards for goodwill acquired in a
business combination and eliminates amortization of goodwill and instead sets
forth methods to periodically evaluate goodwill for impairment. The Company, at
its inception, adopted certain provisions of this statement. The Company has
separately allocated goodwill to its domestic and international reporting units.
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 is currently
assessing but has not yet determined the impact of SFAS No. 143 on its
financial position and results of operations. 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
19
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 is in the process of evaluating the impact of the SFAS No. 144. The
adoption of this Statement is not expected to have a material impact on the
Company's consolidated financial statements. The effective date for the Company
is January 1, 2002.
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 68%
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.
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 major domestic
producers are the Company, Pfizer, Unipath and Abbott Labs. Unilever sold its
Unipath business to Inverness Medical Innovations' in December 2001 for $149
million. Inverness currently markets pregnancy kits under the Early brand and
will now be marketing the acquired Clearblue brand as well.
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 will be introducing 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.
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
20
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 markets, 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, and a range of smaller brands in Italy.
Cautionary Note on Forward-Looking Statements
This report contains forward-looking statements relating, among others, to
financial objectives, sales growth and cost improvement programs. These
statements, including the statements above represent the intentions, plans,
expectations and beliefs of the Company, and are subject to risks,
uncertainties and other factors, many of which are outside the Company's
control. These factors include the ability of the Company to successfully
integrate the operations of the consumer products business of Carter-Wallace
into the Company's joint venture in conjunction with service arrangements with
Church & Dwight, and assumptions as to market growth and consumer demand
(including the effect of recent political and economic events on consumer
purchases), and the outcome of contingencies, including litigation,
environmental remediation and the divestiture of assets, could cause actual
results to differ materially from such forward-looking statements. With regard
to new product introductions, there is particular uncertainty related to trade,
competitive and consumer reactions. For a description of additional cautionary
statements see Carter-Wallace's historical SEC reports.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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. If the Company uses these instruments, they would only
be used for risk management purposes and would not be used for speculation or
for trading.
Interest Rate Risk
The Company entered into interest rate swap agreements to reduce the impact
of changes in interest rates on its floating rate long-term debt. The swap
agreements are contracts to exchange floating rate for fixed interest payments
periodically over the life of the agreements without the exchange of the
underlying notional amounts. At December 31, 2001, the Company entered into
agreements for a notional amount of $50 million swapping debt with a one month
LIBOR rate for a fixed interest rate that averages 6.7%.
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.
21
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, 2001, would have
affected earnings by approximately $.9 million.
Foreign Currency Risk
A portion of the Company's revenues and earnings are exposed to changes in
foreign exchange rates. Where practical, it 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 accounting remeasurement gains and losses on these loans.
The Company's foreign exchange rate risk related to the predecessor
financial statements was not material. However, in connection with intercompany
loans the potential loss in cash flows and earnings based upon a hypothetical
10% change in foreign currency rates over a one-year period due to immediate
change in rates at December 31, 2001, would have affected earnings by
approximately $0.4 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(a) 1. Financial Statements
ARMKEL, LLC
Audited Financial Statements
Independent Auditors' Report........................................................................... 23
Consolidated Statements of Income and Changes in Members' Equity for the period from August 28, 2001
(inception) to December 31, 2001..................................................................... 24
Consolidated Balance Sheet as of December 31, 2001..................................................... 25
Consolidated Statement of Cash Flow for the period from August 28, 2001 (inception) to
December 31, 2001.................................................................................... 26
Notes to Consolidated Financial Statements............................................................. 27
CARTER-WALLACE, INC.--CONSUMER BUSINESS EXCLUDING ANTIPERSPIRANT/
DEODORANT PRODUCTS IN THE UNITED STATES AND CANADA AND PET PRODUCTS
Audited Combined Financial Statements
Independent Auditors' Report........................................................................... 50
Combined Statements of Net Assets to be Sold as of March 31, 2001...................................... 51
Combined Statements of Revenues and Expenses for the Period from April 1, 2001 to September 28, 2001
and for Years Ended March 31, 2001 and 2000.......................................................... 53
Combined Statements of Changes in Net Assets and Comprehensive Earnings for the period from April 1,
2001 to September 28, 2001 and for Years Ended March 31, 2001 and 2000............................... 54
Combined Statements of Cash Flows for the Period from April 1, 2001 to September 28, 2001 and for Years
Ended March 31, 2001 and 2000........................................................................ 55
Notes to Combined Statements........................................................................... 56
(a) 2. Financial Statements Schedule
Included in Part IV of this report:
Schedule II--Valuation and Qualifying Accounts..... S-1
22
INDEPENDENT AUDITORS' REPORT
To the Members of Armkel, LLC
Princeton, New Jersey
We have audited the accompanying consolidated balance sheet of Armkel, LLC
(the "Company") and subsidiaries as of December 31, 2001, and the related
consolidated statement of income and changes in members' equity, and cash flow
for the period from August 28, 2001 (inception) to December 31, 2001. Our audit
also included the financial statement schedule listed in the Index at Item 14
as of December 31, 2001 and for the period from August 28, 2001 (inception) to
December 31, 2001. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Armkel, LLC and subsidiaries
as of December 31, 2001, and the results of their operations and their cash
flows for the period from August 28, 2001 (inception) to December 31, 2001, in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule as of
December 31, 2001 and for the period from August 28, 2001 (inception) to
December 31, 2001, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 11, 2002
23
ARMKEL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND CHANGES IN MEMBERS' EQUITY
Period from
August 28, 2001
(Inception) to
December 31,
2001
----------------------
Statement of Income: (Dollars in thousands)
Net Sales......................................... $ 95,417
Cost of goods sold................................ 56,792
--------
Gross Profit...................................... 38,625
Advertising, consumer and trade promotion expenses 19,352
Selling, general and administrative expenses...... 24,056
--------
Loss from Operations.............................. (4,783)
Interest expense.................................. (11,716)
Interest income................................... 816
Other expense..................................... (637)
--------
Loss before taxes................................. (16,320)
Income tax benefit................................ 672
--------
Net Loss.......................................... $(15,648)
========
Statement of Changes in Members' Equity:
Initial Members' Contribution..................... $228,500
Distributions to Members.......................... (8,000)
Net Loss.......................................... (15,648)
Other Comprehensive Loss
Foreign translation loss....................... (1,246)
Fair market value of interest rate swaps....... (202)
--------
Total Comprehensive Loss.......................... (17,096)
--------
Balance, End of Year.............................. $203,404
========
See Notes to Consolidated Financial Statements.
24
ARMKEL, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
2001
------------
(Dollars in thousands)
Assets
Current Assets
Cash and cash equivalents........................ $ 55,837
Accounts receivable, less allowances of $5,317... 95,472
Inventories...................................... 69,876
Prepaid expenses................................. 3,919
--------
Total Current Assets............................. 225,104
Property, Plant and Equipment (Net).............. 119,880
Tradenames and Patents........................... 265,411
Goodwill......................................... 176,698
Deferred Financing Costs......................... 20,892
Other Assets..................................... 4,608
--------
Total Assets..................................... $812,593
========
Liabilities and Members' Equity
Current Liabilities
Short-term borrowings............................ $ 2,425
Accounts payable and accrued expenses............ 132,053
Current portion of long-term debt................ 3,246
Taxes payable.................................... 3,004
--------
Total Current Liabilities........................ 140,728
Long-term Debt................................... 439,750
Deferred Income Taxes............................ 11,391
Deferred and Other Long-term Liabilities......... 17,320
Commitments and Contingencies
Members' Equity
Net contributed capital.......................... 220,500
Retained deficit................................. (15,648)
Accumulated other comprehensive loss............. (1,448)
--------
Total Members' Equity............................ 203,404
--------
Total Liabilities and Members' Equity............ $812,593
========
See Notes to Consolidated Financial Statements.
25
ARMKEL, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
Period from
August 28, 2001
(Inception) to
December 31, 2001
----------------------
(Dollars in thousands)
Cash Flow From Operating Activities
Net Loss....................................................................... $ (15,648)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization............................................... 4,179
Unrealized loss on foreign exchange transactions............................ 539
Change in assets and liabilities:
Decrease in accounts receivable............................................. 7,420
Decrease in inventories..................................................... 12,308
Decrease in prepaid expenses................................................ 1,276
Increase in accounts payable................................................ 7,772
Increase in other liabilities............................................... 3,017
---------
Net Cash Provided by Operating Activities...................................... 20,863
Cash Flow From Investing Activities
Additions to property, plant and equipment..................................... (1,954)
Acquisition of Carter-Wallace Consumer Business, including anti-perspirant
and pet care products business, net of cash acquired.......................... (713,293)
Proceeds from sale of anti-perspirant and pet care products business........... 128,500
---------
Net Cash Used in Investing Activities.......................................... (586,747)
Cash Flow From Financing Activities
Proceeds from issuance of senior subordinated notes............................ 223,477
Proceeds from syndicated bank credit facility.................................. 220,000
Repayment of syndicated bank credit facility................................... (375)
Repayment of acquired long-term debt........................................... (19,971)
Payment of deferred financing costs............................................ (21,754)
Proceeds from Members.......................................................... 228,500
Distributions to Members....................................................... (8,000)
---------
Net Cash Provided by Financing Activities...................................... 621,877
Effect of exchange rate changes on cash and cash equivalents................... (156)
Net Change in Cash and Cash Equivalents........................................ 55,837
Cash and Cash Equivalents at Beginning of Period............................... --
---------
Cash and Cash Equivalents at End of Period..................................... $ 55,837
=========
Cash paid during the period for:
Interest.................................................................... $ 2,395
Income taxes................................................................ $ 3,986
Acquisition in which liabilities were assumed are as follows:
Fair value of assets acquired............................................... 771,899
Cash paid for acquisition................................................... (586,920)
---------
Liabilities assumed...................................................... $ 184,979
=========
See Notes to Consolidated Financial Statements.
26
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from August 28, 2001, to December 31, 2001
1. description of business
Armkel, LLC (the "Company"), a Delaware limited liability company, was
formed as an equally owned joint venture between Church and Dwight Co., Inc.
("C&D") and affiliates and Kelso and Company, L.P ("Kelso"). The Company's
joint venture agreement governs its operations. The Company was formed to
acquire (the "Acquisition") certain operations of the consumer products
business of Carter-Wallace, Inc. ("CWCPD"). The remainder of Carter-Wallace,
which was primarily comprised of Carter-Wallace's healthcare and
pharmaceuticals business, was merged with an unrelated third party, which
became the successor company to Carter-Wallace (the "Successor"). On August 28,
2001, the Company was capitalized when Armkel Finance Company (a wholly owned
subsidiary of the Company) issued $225 million of 9.5% senior subordinated
notes, for net proceeds of $223.5 million. The Company is a leading marketer
and manufacturer of well-recognized branded personal care consumer products,
including condoms, depilatories and waxes and home pregnancy and ovulation test
kits.
2. basis of presentation
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany transactions and
profits have been eliminated in consolidation. Accounts of operating units
outside of North America are included for periods one month prior to the period
presented.
Revenue Recognition Policy
Revenues from product sales are recognized upon shipment to customers as
title has passed and are shown net of sales adjustments for discounts, rebates
to customers, returns and other adjustments, which are provided in the same
period that the related sales are recorded.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 is applicable to
public companies and provides guidance on applying accounting principles
generally accepted in the United States to revenue recognition issues in
financial statements. Management believes the Company's revenue recognition
criteria are consistent with the guidance provided by SAB No. 101 as their
revenues meet all the revenue recognition criteria in SAB No. 101.
Use of Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ materially from those estimates.
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. The
Company uses historical trend experience and coupon redemption provider input
in arriving at coupon reserve requirements, and the Company uses 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 the Company believes that its 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 from what
will actually transpire in the future.
27
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
Impairment of Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. In such situations, long-lived assets are considered impaired when
estimated future cash flows (undiscounted and without interest charges)
resulting from the use of the asset and its eventual disposition are less than
the asset's carrying amount. While the Company believes that its estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows could materially affect its evaluations.
Foreign Currency Translation
Financial statements of foreign subsidiaries are translated into U.S.
dollars in accordance with SFAS No. 52. Translation gains and losses are
recorded in Other Comprehensive Income. Gains and losses on foreign currency
transactions are recorded in the Consolidated Statement of Income and were not
material.
Derivatives
Derivatives designated as hedges are either (1) a hedge of the fair value of
a recognized asset or liability ("fair value" hedge), or (2) a hedge of the
variability of cash flows to be received or paid related to a recognized asset
or liability ("cash flow" hedge).
Changes in the fair value of derivatives that are designated and qualify as
fair value hedges, along with the gain or loss on the hedged asset or liability
that is attributable to the hedged risk, are recorded in current period
earnings.
Changes in the fair value of derivatives that are designated and qualify as
cash flow hedges are recorded in Other comprehensive loss until earnings are
affected by the variability of cash flows of the hedged asset or liability.
Other Comprehensive Income
Other comprehensive income consists of gains and losses from interest rate
swaps and foreign currency translation.
Cash Equivalents
Cash equivalents consist of highly liquid short-term investments, which
mature within three months of purchase.
Inventories
Inventories are valued at the lower of cost or market on the first-in,
first-out ("FIFO") method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is provided by the straight-line method over the
estimated useful lives of the respective assets which ranges from 3-20 years.
28
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
Goodwill, Tradenames and Patents
The Company adopted certain provisions of Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" upon the consummation
of the acquisition of Carter-Wallace Consumer Products Division. Accordingly,
goodwill is not being amortized. Tradenames are not being amortized as they
have an indefinite useful life. Patents are being amortized between 5-8 years.
Effective January 1, 2002, the Company will evaluate goodwill and intangible
assets with indefinite useful lives annually or more frequently if certain
indicators arise. For intangible assets other than goodwill the Company will
compare the carrying value of the asset to the undiscounted future cash flows.
Where the undiscounted future cash flows are not sufficient to recover the
carrying value of the intangible assets, the assets will be adjusted to fair
values. The Company has allocated goodwill to the domestic and international
segments. The Company will perform a valuation of these reporting units at
least annually. If the residual goodwill is less than the carrying value of the
goodwill the Company will adjust goodwill accordingly. The Company will
evaluate the useful lives of intangible assets with both finite and indefinite
lives. If it is determined that an indefinite intangible asset's useful life is
no longer indefinite, the intangible asset will be amortized over its estimated
remaining useful life. If an intangible asset with a finite life is determined
to have an indefinite life, the Company will cease amortizing that intangible
asset. For 2001 policy see impairment of long-lived assets policy.
Shipping and Handling Costs
The Company does not bill shipping and handling costs to its customers.
Shipping and handling costs are included within operating expenses.
Selected Operating Expenses
Research & development costs in the amount of $1.9 million for the period
ended December 31, 2001 were charged to operations as incurred.
Income Taxes
As the Company is treated as a partnership for U.S. tax purposes, it is
generally not subject to U.S. taxes on income. Accordingly, no provision has
been made for income taxes on Domestic income. The foreign subsidiaries of the
Company recognize deferred income taxes under the asset and liability method;
accordingly, deferred income taxes are provided to reflect the future
consequences of differences between the tax bases of assets and liabilities and
their reported amounts in the financial statements. Also, distributions may be
made to the members in order to fund their tax liability.
Recent Accounting Pronouncements
The EITF issued EITF 00-14, "Accounting for Certain Sales Incentives". This
issue addresses the income statement classification for offers by a vendor
directly to end consumers that are exercisable after a single exchange
transaction in the form of coupons, rebate offers, or free products or services
disbursed on the same date as the underlying exchange transaction. The issue
requires the cost of these items to be accounted for as a reduction of
revenues, rather than as a marketing expense. This reclassification is expected
to reduce sales by 1% annually. The EITF was effective January 1, 2002 and
there is no net income impact.
29
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
The EITF also issued EITF No. 00-25, "Vendor Income Statement
Characterization of Consideration from a Vendor to a Retailer". This issue
outlines required accounting treatment of certain sales incentives, including
slotting or placement fees, cooperative advertising arrangements, buy-downs and
other allowances. The Company currently records such costs as marketing
expenses. EITF 00-25 will require the Company to report the paid consideration
expense as a reduction of sales, rather than marketing expense. The Company is
required to implement EITF 00-25 for the quarter beginning January 1, 2002. The
Company estimates this reclassification to reduce sales by approximately 3% to
4%, but in any case, implementation will not have an effect on net income.
At its inception, The Company adopted Statement of Financial Accounting
Standards ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." Under this statement, all derivatives, whether designated as
hedging instruments or not, are required to be recorded on the balance sheet at
fair value. Furthermore, changes in fair value of derivative instruments not
designated as hedging instruments are recognized in earnings in the current
period.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" which
establishes new standards for accounting and reporting requirements for
business combinations and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited. The Company adopted this statement
at its inception.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB Opinion No. 17, "Intangible Assets". Under its
changes, SFAS No. 142 establishes new standards for goodwill acquired in a
business combination and eliminates amortization of goodwill and instead sets
forth methods to periodically evaluate goodwill for impairment. The Company, at
its inception, adopted certain provisions of this statement. The Company has
separately allocated goodwill to its domestic and international reporting units.
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 is currently
assessing but has not yet determined the impact of SFAS No. 143 on its
financial position and results of operations. 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 is in the process of
evaluating the impact of the SFAS No. 144. The adoption of this Statement is
not expected to have a material impact on the Company's consolidated financial
statements. The effective date for the Company is January 1, 2002.
30
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
3. fair value of financial instruments and risk management
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 2001. SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments," defines the fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
2001
-----------------
Carrying Fair
Amount Value
-------- --------
(In thousands)
Short-term borrowings.......... $ 2,425 $ 2,425
Syndicated bank credit facility 219,474 219,474
Senior subordinated notes...... 223,522 236,250
Interest rate swaps............ 202 202
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments reflected in the Consolidated Balance
Sheets:
Short-term Borrowings
The amounts of unsecured lines of credit equal fair value because of their
short maturities and variable interest rates.
Syndicated Bank Credit Facility
The fair value of these securities approximates their carrying values based
upon the variable interest rates that they carry.
Senior Subordinated Notes
The fair value is determined based on quoted market prices at or near
December 31, 2001.
Interest Rate Swaps
The fair values are the estimated amounts that the Company would receive or
pay to terminate the agreements at the balance sheet date, taking into account
current interest rates.
Foreign Currency
The Company is subject to exposure from fluctuations in foreign currency
exchange rates, primarily U.S. Dollar/British Pound, U.S. Dollar/Canadian
Dollar, U.S. Dollar/Mexican Peso and U.S. Dollar/Euro. The Company did not have
any forward exchange contracts outstanding at December 31, 2001.
In connection with the Acquisition, the Company entered into intercompany
loans with certain of its subsidiaries. The Company is exposed to accounting
remeasurement gains and losses.
Interest Rate Risk
The Company entered into a syndicated bank credit facility and also issued
senior subordinated notes to finance the Acquisition. The syndicated bank
credit facility consists of variable rate $220 million 6 and 71/2-year term
loans, all of which were drawn at closing and an $85 million variable rate
revolving credit facility, which
31
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
remained fully undrawn at December 31, 2001. The Company issued $225 million of
9.5% senior debt notes due in 8 years with the interest paid semi-annually. The
weighted average interest rate on the credit facility borrowings at December
31, 2001 was approximately 5.6%. The Company entered into interest rate swap
agreements to reduce the impact of the credit facility's variable interest
rate. The swap agreements are contracts to exchange floating rate for fixed
interest rate payments periodically over the life of the agreements without the
exchange of the underlying notional amounts. During the period ended December
31, 2001, the Company entered into agreements for a notional amount of $50
million, swapping debt with a one-month LIBOR rate for a fixed rate that
averages 6.7%.
4. inventories
Inventories are summarized as follows at December 31:
2001
--------------
(in thousands)
Raw materials and supplies....................... $20,772
Work in process.................................. 13,772
Finished goods................................... 35,332
-------
$69,876
=======
5. property, plant and equipment
Property, plant and equipment consist of the following at December 31:
2001
--------------
(in thousands)
Land............................................. $ 23,922
Buildings and improvements....................... 43,508
Machinery and equipment.......................... 39,917
Office equipment and other assets................ 8,567
Construction in progress......................... 6,156
--------
122,070
Less accumulated depreciation.................... 2,190
--------
Net property, plant and equipment................ $119,880
========
Depreciation of property, plant and equipment amounted to $2,190,000 for the
period ended December 31, 2001.
6. acquisitions
On May 7, 2001 the Company and Carter-Wallace entered into a definitive
Asset Purchase Agreement which was consummated on September 28, 2001. The
Company acquired the assets and liabilities that related primarily to the
consumer products business of Carter-Wallace, as well as 100% of the capital
stock of certain foreign subsidiaries of Carter-Wallace. The purchase price for
the acquired business was approximately $739 million, which consisted of cash
consideration of approximately $715.4 million, the repayment of approximately
$19.9 million of indebtedness and the assumption of approximately $3.7 million
of indebtedness, plus transaction fees and expenses of approximately $10.4
million.
32
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
Under a separate agreement dated May 7, 2001, C&D agreed to simultaneously
purchase from the Company, for $128.5 million, the assets relating to the
antiperspirant/deodorant product lines in the United States and Canada and the
assets relating to the Lambert-Kay line of pet products, and assumed the
liabilities of these businesses.
The Acquisition is accounted for as a purchase under the provisions of SFAS
No. 141, "Business Combinations" and has been included in the Company's
financial statements from the date of the acquisition.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed (excluding the assets relating to the
anti-perspirant and pet care products businesses):
(in thousands)
Current assets............... $ 205,505
Property, plant and equipment 120,397
Tradenames and patents....... 266,900
Goodwill..................... 176,698
Other long-term assets....... 2,399
---------
Total assets acquired........ 771,899
Total liabilities............ (184,979)
---------
Net assets acquired....... $ 586,920
=========
$239.4 million was assigned to tradenames and $27.5 million was assigned to
patents. Tradenames are not being amortized as it has been determined that they
have an indefinite life. Patents are being amortized between 5-8 years. An
appraisal is currently in process and the purchase price allocation will be
modified based on its results.
$145.2 million and $31.5 million of goodwill were assigned to the domestic
segment and international segment, respectively. Domestic goodwill will be
deductible for tax purposes by the members. International goodwill is not
deductible for tax purposes.
Pro forma results--unaudited
The following reflects pro forma results for the nine months ended December
31, 2001 and the twelve months ended March 31, 2001.
For the nine
months ended For the twelve
December 31, months ended
2001 March 31, 2001
------------ --------------
Pro forma Pro forma
Net Sales............. $341.0 $435.5
Income from operations 51.7 88.2
Net Income............ 20.9 39.5
The pro forma results adjusts for additional interest expense related
principally to the debt incurred to finance the Acquisition and for income
taxes under the Company's LLC status. Adjustments were also made to
depreciation and amortization expense related to the fair value of the assets
acquired and the implementation of SFAS No. 142, "Goodwill and Other Intangible
Assets."
33
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
7. joint venture agreement
The Company is a Delaware limited liability company. The Company was formed
as a joint venture among C&D, which owns 50%, and an entity wholly owned by
Kelso Investment Associates VI, L.P. and KEP VI, LLC, which are referred to as
the Kelso funds, which owns 50%, for the purpose of acquiring the consumer
products business of Carter-Wallace. The Company's joint venture agreement
governs the Company's operations. The material provisions of this agreement are
described below.
Governance. The joint venture agreement contains provisions regarding the
Company's governance, including the following:
. Board of Directors. The Company's board of directors consists of three
directors appointed by C&D and three directors appointed by the Kelso
funds. Any committee established by the Company's board of directors must
have an equal number of directors appointed by the Kelso funds and by
C&D. Any action by the Company's board of directors requires the
affirmative vote of members holding a majority of membership interests
present at a meeting at which such matter is voted upon, except that in
certain matters, approval of at least one C&D director and at least one
Kelso director is also required. The presence of an equal number of Kelso
directors and C&D directors constitutes a quorum.
. Officers and Management. The Company's officers may be removed by its
board of directors (requiring, in the case of its chief executive
officer, the approval of at least one Kelso director and one C&D
director) or the Company's chief executive officer (in the case of its
other officers). In addition, if certain financial targets are not
satisfied, Kelso has the right to remove the Company's chief executive
officer. Vacancies in the Company's officer positions will be filled by
its board of directors (which, in the case of the Company's chief
executive officer and chief financial officer positions, require the
approval of a Kelso director and a C&D director) or the Company's chief
executive officer.
A number of significant managerial functions are performed for the Company
by C&D. For additional information see Note 12.
Transfers of Interests; Preferential Purchase or Sale Rights. Except as
described below, the Company's members may not transfer their interests in the
Company or admit additional members (other than in transactions with certain of
their respective affiliates), without the prior written consent of all of the
other members.
. Call Option. The Kelso funds have granted C&D an option to purchase the
Kelso funds' membership interests in the Company. The option is
exercisable at any time after the third anniversary and before the fifth
anniversary of the closing of the Acquisition. The purchase price for the
Kelso funds' interests in the Company is equal to 50% of the Company's
fair market value at the time the option exercise notice is given, as
determined pursuant to a valuation method set forth in the joint venture
agreement. The purchase price is subject to certain floors and caps which
are indexed to the Kelso funds' rate of return on their investment in the
Company.
. Right of First Offer and Drag Along Rights. The joint venture agreement
provides for a mechanism whereby the Company's members may dispose of
their interests and, in certain circumstances, force a sale of the entire
entity. At any time after the fifth anniversary of the closing of the
Acquisition, in the case of a request by the Kelso funds, and after the
seventh anniversary of the closing of the Acquisition, in the case of a
request by C&D, the Kelso funds or C&D may request that the other party
purchase all (but not less than all) of the requesting party's ownership
interests in the Company at a price specified in the request. If the
other party declines the request, the requesting party may sell all of
its interests and all
34
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
of the other member's interest in the Company to a third party, with the
proceeds of such sale to be distributed to the members in accordance with
the terms of the joint venture agreement. Under certain circumstances, if
the proceeds of a proposed third party sale are insufficient to provide
the Kelso funds with a return of their initial investment (less $5.0
million), C&D may elect to purchase the Kelso funds' interests at a price
equal to the amount of the Kelso funds' initial investment (less $5.0
million), or pay the Kelso funds the amount of such shortfall, as
described below. Under certain circumstances in which Kelso requests that
C&D purchase its ownership interests, and C&D declines, then following a
bona fide sales process, Kelso may require C&D to purchase the Kelso
funds' ownership interests for a price equal to Kelso's Adjusted Capital
Contribution Balance, less the Excess Contribution Balance (as such terms
are defined in the joint venture agreement). This amount would not be
payable until after the seventh anniversary of the Acquisition.
. Change of Control Put Option. The joint venture agreement also provides
that, upon the occurrence of a change of control of C&D (as defined in
the joint venture agreement), the Kelso funds may require C&D to purchase
all of the Kelso funds' ownership interests in the Company at a price
equal to (i) the fair market value of the Company at the time the option
exercise notice is given, minus $5.0 million, multiplied by 50%, plus
(ii) $5.0 million.
The foregoing purchase and sale rights will be subject to various
adjustments and limitations not described above, including the agreement by C&D
that, in the case of a forced sale to a third party, after the seventh
anniversary of the Acquisition it will make up any shortfall to the Kelso funds
relative to the Kelso funds' aggregate initial capital contribution, less $5.0
million.
Covenants of C&D. Under the joint venture agreement, C&D have agreed that:
. without the prior consent of the Kelso funds, C&D will not incur any
indebtedness unless C&D's ratio of consolidated debt to adjusted EBITDA
(as defined in C&D's senior credit facility) for the prior four fiscal
quarters is less than 4.5:1.0, or unless C&D has provided the Kelso funds
with a letter of credit or other reasonably satisfactory credit support
in an amount equal to the Kelso funds' initial capital contributions,
less $5.0 million;
. it will not create or cause or permit to exist any restriction on its
ability to operate the Company or on the Company's ability to engage in
any line of business; and
. if presented with an opportunity to operate or invest in any entity
engaged in the business of manufacturing, marketing or selling of
condoms, depilatory products or diagnostic tests, or, with respect to
non-U.S. operations, cosmetics, over-the-counter drugs or toning and
exfoliating products, it will first offer such opportunity to the Company.
Covenant of Kelso. Under the joint venture agreement, the Kelso funds have
agreed that, if presented with an opportunity to operate or invest in any
entity engaged in the business of manufacturing, marketing or selling condoms,
depilatory products or diagnostic tests, it will first offer such opportunity
to the Company.
Termination of the Joint Venture Agreement. The joint venture agreement
will terminate upon the occurrence of any of the following:
. the vote of all members in favor of termination;
. an initial public offering of the Company's equity interests;
. the payment of the proceeds of any sale of the Company to a third party,
or upon the final liquidating distribution made in connection with a
dissolution of the Company; or
. the payment in full by either member of the purchase price for all the
membership interests of the other member.
35
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
Dissolution of the Company. The Company will be dissolved and its assets
liquidated upon the occurrence of any of the following:
. the vote of all members in favor of dissolution;
. the sale, exchange or disposition of substantially all of the Company's
assets;
. an insolvency event with respect to any member, if other members holding
at least 50.0% of the interests vote in favor of dissolution;
. it becoming unlawful for a member to conduct its business substantially
in the manner contemplated by the joint venture agreement; or
. a judicially ordered dissolution.
8. accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following at December
31:
2001
----
Accounts payable........................................... $ 34,154
Accrued severance.......................................... 40,709
Accrued advertising, marketing, brokerage & sales promotion 12,638
Accrued payroll liabilities................................ 10,849
Payable due to Church & Dwight............................. 11,937
Accrued acquisition costs.................................. 4,225
Accrued interest payable................................... 8,092
VAT liability.............................................. 1,601
Accrued audit and professional fees........................ 951
Other accrued expenses..................................... 6,897
--------
Total accounts payable and other accrued expenses.......... $132,053
========
9. short-term borrowings and long-term debt
The Company entered into a syndicated bank credit facility and also issued
senior subordinated notes primarily to finance the Acquisition.
Syndicated Bank Credit Facility
The bank credit facility, consisting of several tranches, has a total of
$220 million in variable rate six and seven and one half year term loans, all
of which were used to finance the Acquisition and a six year $85 million
variable rate revolving credit facility, which remained fully undrawn at
December 31, 2001. The revolving credit facility is available for working
capital, general corporate purposes, severance payments and acquisitions.
The tranche A-1 facility, a $50 million term loan with a predetermined
repayment schedule, matures in September of 2007. The interest rate is variable
with the Company having the option to select one of several variable rates
including LIBOR plus a percentage to be determined based on the Company's
financial performance but no greater than 3%, an alternate base rate plus a
percentage to be determined based on the Company's financial performance but no
greater than 2% or the greater of prime rate, a certificate of deposit rate
plus 1% or Federal Funds effective rate plus 1/2 of 1%. For the period ended
December 31, 2001 the Company selected a rate based on LIBOR.
The tranche A-2 facility, a $31.5 million Canadian dollar term loan (US$20
million at acquisition), with a predetermined repayment schedule, matures in
September of 2007. The interest rate is variable with the Company having the
option to select among two variable rates, Canadian BA rate plus a percentage
to be determined based on the
36
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
Company's financial performance but no greater than 3% or a rate equal to the
greater of the Bank of Canada's prime rate plus a percentage to be determined
based on the Company's financial performance but no greater than 2%. During the
period ended December 31, 2001 the Company selected varying rates.
The tranche B facility, a $150 million term loan with a predetermined
repayment schedule, matures in March of 2009. The interest rate is variable
with the Company having the option to select one of two variable rates, LIBOR
plus 3% or an alternate base rate plus 2%. For the period ended December 31,
2001 the Company selected a rate based on LIBOR.
The $85 million revolving credit facility has a variable interest rate with
the Company having the option to select one of several rates including LIBOR
plus a percentage to be determined based on the Company's financial performance
but no greater than 3%, an alternate base rate plus a percentage to be
determined based on the Company's financial performance but no greater than 2%
or the greater of prime rate, a certificate of deposit rate plus 1% or Federal
Funds effective rate plus 1/2 of 1%. The Company will pay an unused commitment
fee of .5% based on the daily average unused portion of the revolving credit
facility, subject to certain reductions based on the Company's financial
performance.
The weighted average interest rate on the overall credit facility, during
the period of September 28, 2001 to December 31, 2001, excluding the undrawn
revolving facility, was 5.9% exclusive of deferred financing costs and
commitment fees, including hedges.
The credit facility contains various non financial and financial covenants
including the maintenance of certain ratios of leverage and interest coverage
as well as limitations on capital expenditures, liens, sale of assets,
acquisitions, voluntary prepayment of debt, transactions with affiliates and
loans and investments. Violation of covenants could result in an event of
default and trigger early termination of the credit facility, if not remedied
within a certain period of time.
In addition to the predetermined repayment schedule, the term loans will be
mandatorily reduced in amounts equal to 50% of excess cash flow, as defined,
100% of net cash proceeds of asset sales and dispositions of property, 100% of
net cash proceeds of any issuances of debt obligations and 50% of net cash
proceeds of issuances of equity.
The borrowings under the credit facility are secured by substantially all of
the domestic assets of the Company, 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.
Senior Subordinated Notes
The Company issued $225 million of 9.5% senior subordinated notes due in
2009 ("Notes") with interest paid semi-annually. The Notes were issued at a
discount and the Company received proceeds of $223.5 million, all of which were
used to finance the Acquisition. The Notes are subordinate to all amounts
outstanding under the credit facility. The effective yield on the Notes is
approximately 9.62%. The terms of the Notes provide for an optional prepayment
of principal at a premium. The original issue discount is being amortized using
the effective interest method. The Notes are guaranteed by all of the Company's
domestic subsidiaries. The Notes contain various financial and non-financial
covenants similar to the credit facility.
37
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
Long-term debt and current portion of long-term debt consist of the
following:
2001
--------------
(in thousands)
Syndicated Financing Loan Due September 30, 2007........................ $ 50,000
Syndicated Financing Loan Due September 30, 2007........................ 19,849
Syndicated Financing Loan Due March 30, 2009............................ 149,625
Senior Subordinated Note (91/2%) Due August 28, 2009....................
Interest Paid semi-annually 2/15 and 8/15............................ 225,000
Various short term borrowings at foreign subsidiaries................... 2,425
--------
Total Debt........................................................... 446,899
Less: discount on Senior Subordinated Note........................... 1,478
Less: current maturities (including short term borrowings of $2,425). 5,671
--------
Net long-term debt................................................... $439,750
========
The principal payments required to be made are as follows:
(in thousands)
2002.......... $ 5,671
2003.......... 9,375
2004.......... 12,875
2005.......... 15,500
2006.......... 20,750
2007.......... 42,228
2008.......... 78,750
2009.......... 261,750
--------
Total Debt. $446,899
========
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, 2001, 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 6.7%. The fair value of these swaps were recorded as a
liability in the amount of $.2 million at December 31, 2001. These instruments
are designated as cash flow hedges as of December 31, 2001 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.
10. income taxes
Federal income taxes on the income of the Company are payable directly by
the members pursuant to the Internal Revenue Code. Accordingly, no provision
for federal or state income tax has been included in the Company's financial
statements. The difference between the federal tax and book basis of Company's
domestic assets and liabilities is a net taxable temporary difference of $4.0
million at December 31, 2001 (consisting of tax-deductible temporary
differences of $13.3 million and taxable temporary differences of $17.3
million). Earnings of the foreign operations are taxable under local country
statutes.
38
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
The components of loss before taxes are as follows:
Period from
August 28 to
December 31,
2001
--------------
(in thousands)
Domestic $(14,426)
Foreign. (1,894)
--------
Total... $(16,320)
========
The following table summarizes the provision for U.S. federal, state and
foreign income taxes:
Period from
August 28 to
December 31, 2001
-----------------
(in thousands)
Current:
U.S. federal.......... $ --
State................. --
Foreign............... 912
-------
$ 912
-------
Deferred:
U.S. federal.......... $ --
State................. --
Foreign............... (1,584)
-------
$(1,584)
-------
Total provision (benefit) $ (672)
=======
Deferred tax liabilities/(assets) of the foreign subsidiaries consist of the
following at December 31:
2001
--------------
(in thousands)
Deferred tax assets:
Post retirement benefits...................................... $(1,209)
Other......................................................... (53)
-------
Total deferred tax assets..................................... (1,262)
-------
Deferred tax liabilities:
Inventory related............................................. 1,272
Depreciation and amortization................................. 1,801
Fair market value adjustment to intangible assets............. 5,294
Fair market value adjustment to property, plant and equipment. 2,807
Other......................................................... 217
-------
Total deferred tax liabilities................................ 11,391
-------
Net deferred tax liability....................................... $10,129
=======
39
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
The difference between tax expense and the "expected" tax which would result
from the use of the federal statutory rate is as follows:
Period from
August 28 to
December 31, 2001
-----------------
(in thousands)
Income taxes computed at statutory U.S. federal income tax rate $(5,712)
Partnership status for U.S. Federal income tax purposes........ 5,049
Non-deductible amortization.................................... 263
Foreign tax adjustments........................................ (503)
Other.......................................................... 231
-------
Income taxes as recorded (benefits)............................ $ (672)
=======
11. pension and nonpension postretirement benefits
The Company has defined benefit pension plans covering certain hourly
employees. Pension benefits to retired employees are based upon their length of
service and a percentage of qualifying compensation during the final years of
employment. The Company's funding policy is consistent with federal funding
requirements. Retirement plan obligations consist of the Retirement Plan for
Bargaining Employees of Carter-Wallace, and certain obligations of foreign
subsidiaries.
Obligations for retirement-related plans exist in each of the Company's
foreign subsidiaries. Both Canada and the United Kingdom have defined benefit
pension plans. The plans are accounted for in accordance with SFAS No. 87,
"Accounting for Pensions." The United Kingdom pension plan has an unfunded
pension obligation of $4 million at the end of this reporting period. Pension
plans also exist in other foreign subsidiaries which, in totality, are not
material to these combined statements.
Postretirement benefit obligations related to the Company's employees in
Canada are included in the accompanying combined statements in accordance with
SFAS No. 106, "Employers' Obligations for Postretirement Benefits Other Than
Pensions."
40
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
The following table provides information on the status of the plans at
December 31:
Nonpension
Postretirement
Pension Plans Benefit Plans
------------- --------------
2001 2001
------------- --------------
(in thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of period............. $ 68,029 $ 1,367
Service cost.......................................... 506 10
Interest cost......................................... 1,113 23
Other................................................. 156 0
Actuarial (gain) loss................................. 346 57
Benefits paid......................................... (1,007) (20)
Effect of exchange rate changes....................... (497) (11)
-------- -------
Benefit obligation at end of period...................... $ 68,646 $ 1,426
======== =======
Change in Plan Assets:
Fair value of plan assets at beginning of period...... $ 58,706 $ --
Actual return on plan assets (net of expenses)........ 1,711 --
Employer contributions................................ 291 20
Participants' contributions........................... 156 --
Benefits paid......................................... (1,007) (20)
Effect of exchange rate changes....................... (430) --
-------- -------
Fair value of plan assets at end of period............... $ 59,427 $ --
======== =======
Reconciliation of the Funded Status:
Funded status......................................... $ (9,219) $(1,426)
-------- -------
Net amount recognized at end of period................ $ (9,219) $(1,426)
======== =======
Amounts recognized in the statement of financial position
consist of:
Prepaid benefit cost.................................. $ 3,199 $ --
Accrued benefit liability............................. (12,418) (1,426)
-------- -------
Net amount recognized at end of period................... $ (9,219) $(1,426)
======== =======
Weighted-average assumptions as of December 31:
Discount rate............................................ 6.66% 6.50%
Rate of compensation increase............................ 4.25% --
Expected return on plan assets........................... 7.92% --
41
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
Net Pension and Net Postretirement Benefit Costs consisted of the following
components:
Postretirement
Pension Costs Costs
------------- --------------
2001 2001
------------- --------------
(in thousands)
Components of Net Periodic Benefit Cost:
Service cost............................ $ 506 $ 10
Interest cost........................... 1,113 23
Expected return on plan assets.......... (443) --
Other................................... (30) (37)
Net deferrals........................... (688) --
Recognized actuarial loss............... 53 --
------ ----
Net periodic benefit cost (income)...... $ 511 $ (4)
====== ====
The pension plan assets primarily consist of equity mutual funds, fixed
income funds and a guaranteed investment contract fund.
2001
--------------
(in thousands)
Effect of 1% increase in health-care cost trend rates on:
Postretirement benefit obligation..................... $ 127
Total of service cost and interest cost component..... 4
Effect of 1% decrease in health-care cost trend rates on:
Postretirement benefit obligation..................... (114)
Total of service cost and interest cost component..... (3)
The Company also maintains a defined contribution profit-sharing plan for
domestic salaried and certain hourly employees. Contributions to the
profit-sharing plan charged to earnings were approximately $598,000 for the
period from September 29, 2001 to December 31, 2001.
The Company also has an employee savings plan. The Company matches 50% of
each employee's contribution up to a maximum of 6% of the employee's earnings.
The Company's matching contributions to the savings plan were approximately
$87,000 for the period from September 29, 2001 to December 31, 2001.
12. related party transactions
Arrangements with Church & Dwight
In connection with the consummation of the Acquisition, the Company entered
into a management services agreement ("MSA") with C&D whereby C&D has agreed to
provide the Company with corporate management and administrative services
primarily for the Company's domestic operations. These services generally
include, but are not limited to, sales, marketing, facilities operations,
finance, accounting, MIS, legal and regulatory, human resources, R&D, Canadian
sales and executive and senior management oversight of each of the above
services.
The services charges under the MSA will commence on an agreeable starting
date for each of the services at which time the applicable fee structure set
forth in the agreement will commence. The parties agreed to commence the sales
and legal and regulatory services on September 28, 2001. As of December 31,
2001, the
42
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
parties had not yet agreed to commence the other services but have agreed to an
alternative method to compensate C&D for services provided to the Company. The
Company was charged $2.1 million for such services for the period from
September 29, 2001 to December 31, 2001. Beginning in 2002 the Company will
compensate C&D for services provided under the management services agreement
based upon a schedule of costs. Under the MSA, the Company will initially pay
annual fees of $1.7 million for domestic sales services; $1.6 million for
Canadian sales services; $1.0 million for advertising and creative services;
$1.7 million for operations functions; $2.2 million for accounting services;
$1.6 million for management information services; $1.0 million for human
resources functions; and $3.5 million for legal services, including regulatory
affairs services; and the Company reimburses C&D for actual costs incurred for
marketing, finance and R&D functions. In addition, the Company pays a quarterly
fee equal to five percent of its EBITDA (as EBITDA is calculated pursuant to
the management services agreement) for the previous quarter, which fee will be
adjusted annually, for executive and senior management oversight services.
However, the Company and C&D have agreed to re-evaluate the fee structure under
the management services agreement, including the underlying methods used to
determine the allocations thereof, from time to time, and in any event at least
annually and following any increase in the Company's fiscal year net sales by
10% or more over the prior fiscal year's net sales, to confirm that the fee
structure produces a result consistent with the fair allocation of costs and
benefits incurred by the parties. If the Company and C&D are unable to agree
upon adjustments to the fee structure, the fixed fees paid under the management
services agreement will be adjusted based on the increase and/or decrease in
the consumer price index for that year. In addition, the Company and C&D may
agree to add new services under the agreement that are not presently
contemplated. The Company will reimburse C&D for the actual and necessary costs
required to commence provision of the services to be provided under the
management services agreement, including costs and expenses for transition
employees and relocation and recruiting costs and expenses.
The term of the management services agreement is five years, with automatic
one-year renewals unless the Company provides six months' notice that it does
not want to renew the agreement.
Upon consummation of the Acquisition, the Company paid C&D a transaction fee
of $3.5 million for services provided in connection with the Acquisition.
At December 31, 2001 the Company had a net payable of approximately $12.0
million primarily related to accounts receivables collected on behalf of C&D,
partially offset by amounts due to the Company from C&D for inventory.
Arrangements with Kelso
Kelso has agreed to provide the Company with financial advisory services for
which the Company will pay 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 period ended December 31, 2001, the
Company paid Kelso $250,000. In addition, upon consummation of the Acquisition,
the Company paid Kelso a fee of $4.5 million for investment banking services
provided in connection with the Acquisition.
43
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
13. commitments and contingencies
Commitments
a. Rent expense amounted to $1.7 million for the period of September 29,
2001 to December 31, 2001. The Company is obligated for minimum annual rentals
under non-cancelable long-term operating leases as follows:
(in thousands)
2002.................................. $ 5,085
2003.................................. 3,755
2004.................................. 1,991
2005.................................. 1,380
2006.................................. 452
2007 and thereafter................... 382
-------
Total future minimum lease commitments $13,045
=======
Contingencies
The Acquisition, and the concurrent sale of the remainder of
Carter-Wallace's business to a third party, involved a number of arrangements
between the Company and the Successor relating to assets and liabilities
purchased and assumed as part of the transaction. These arrangements have given
rise to a number of disputes among the parties which may lead to the incurrence
of costs or liabilities, and the Company's payment of funds.
There exists a dispute related to retiree medical costs. Pursuant to the
Asset Purchase Agreement, the Company has agreed to assume the liability for
60% of the future retiree medical costs incurred with respect to certain
specifically identified employees of the consumer products business that
terminated employment with Carter-Wallace during the period from May 7, 2001,
through and including September 28, 2001, the date the Acquisition was
consummated.
The Successor has asserted that all of the specifically identified employees
of the consumer products business were terminated by Carter-Wallace on the date
of closing, and that the Company is therefore liable for 60% of the future
retiree medical costs with respect to all of those former employees. The
Successor estimates the Company's share of the liability for the specifically
identified employees to be approximately $6 million to $10 million (depending
upon final actuarial valuation), based on current plan design, which is subject
to change at any time by such entity. The Company disagrees with the
Successor's position and does not believe that it has any liability for those
employees who chose not to retire but to instead work for the Company or C&D,
it cannot be certain that the dispute will be resolved in the Company's favor.
Due to the uncertainty regarding the resolution of this dispute, any potential
liability for this amount has not been reflected in these financial statements.
Pursuant the Asset Purchase Agreement, the purchase price shall be adjusted
with respect to closing domestic net working capital. The Company and the
Successor are currently negotiating this adjustment. Due to the uncertainty of
the outcome no amount has been reflected in these financial statements.
The Company has entered into an agreement with the Successor pursuant to
which the Company has agreed to indemnify it and certain related parties
against 60% of all liabilities relating to any action challenging the validity
of the Acquisition or the merger (other than antitrust-based action), including
60% of all Appraisal Damages (defined as the recovery greater than the per
share merger price times the number of shares in the appraisal class) claims
made by former Carter-Wallace shareholders.
44
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
While the Company's potential exposure with respect to the Appraisal Damages
claims is effectively capped at $12 million (because of a separate agreement
between Carter-Wallace and certain shareholders of Carter-Wallace), there is no
cap on the Company's indemnification obligation arising out of other
transaction related liabilities of Carter-Wallace related to Appraisal Damages.
Due to uncertainty of the outcome no amount has been reflected in these
financial statements. In connection with the sale of the Disposed Businesses to
C&D, C&D agreed to indemnify the Company for up to 17.4% of any amounts that
the Company may become liable for pursuant to the Company's indemnification
agreement with Carter-Wallace. If the Company is required to perform under
these indemnification obligations, its liability could be substantial. This
could materially and adversely affect the Company's financial condition and
results of operations.
Carter-Wallace has been engaged in litigation with Tambrands Inc. in the
Supreme Court of the State and County of New York arising out of a patent
infringement and misappropriation suit previously filed against both companies
in the United States District Court, Southern District of New York, by New
Horizons Diagnostics Corporation, or "NHDC", et al. The NHDC suit, which was
settled and discontinued in July 1996, asserted claims with respect to certain
"gold sol" technology (used in the First Response and Answer home pregnancy and
ovulation test kits) that Carter-Wallace had acquired from Tambrands pursuant
to a written purchase agreement in March 1990. Carter-Wallace paid an
immaterial amount toward that settlement. In the pending Supreme Court action,
Tambrands seeks reimbursement from Carter-Wallace of an unspecified portion of
the amount paid by Tambrands in settlement of the NHDC suit, and for defense
costs. Both Tambrands and Carter-Wallace moved for summary judgment, and the
Supreme Court granted Carter-Wallace's motion. Tambrands has appealed that
ruling. The Company has assumed this litigation as part of the Acquisition. The
Company believes it has good defenses, under the terms of the 1990 purchase
agreement, to Tambrands' claim.
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.
14. restructuring reserve
As of the date of the Acquisition, the Company started to implement a plan
to reorganize the operation of the acquired consumer business. The main
components of the plan included rationalizing facilities for which the Company
incurred lease termination costs of $1.8 million and rationalizing the
Company's work force.
The accrual for severance is consistent with the Company's plan to have C&D
provide various services instead of the current infrastructure of the
predecessor company. The accrued severance is for identified employees from
various areas including executives, administrative support and corporate
functions (finance, human resources, legal, MIS, R&D, logistics, marketing,
sales and purchasing). There may be other employees identified for involuntary
termination to complete the plan and, if so, an additional amount of severance
will be accrued and goodwill will increase. Actions required by the plan of
termination began immediately after consummation of the transaction and the
period of time to complete the plan will not extend past 12 months after the
Acquisition date.
The following table summarizes the activity in the Company's restructuring
accruals:
At Reserve at
Acquisition Payments December 31, 2001
----------- -------- -----------------
Severance.............. $50,821 $(10,112) $40,709
------- -------- -------
Lease Termination Costs 1,753 -- 1,753
------- -------- -------
$52,574 (10,112) 42,462
======= ======== =======
45
15. segments and supplemental information
Segment Information
The Company has two operating segments: Domestic Consumer Products Division
and International Consumer Products Division.
Measurement of Segment Results and Assets
The accounting policies of the segments are generally the same as those
described in the summary of significant accounting policies.
Supplemental Financial Information of Domestic and International Operations
The senior subordinated notes registered by the Company are fully and
unconditionally guaranteed by the domestic subsidiaries of the Company and are
joint and several. The following information is being presented to comply with
SEC Regulation SX, Item 3-10 and to provide required segment disclosures.
46
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
Supplemental information for condensed consolidated statements of income,
consolidated balance sheets and consolidated cash flows for the period from
August 28, 2001 (inception) to December 31, 2001 is summarized as follows
(amounts in thousands):
Statement of Income
Total
Domestic International Eliminations Consolidated
-------- ------------- ------------ ------------
Net sales............................... $ 45,320 $ 52,750 $ (2,653) $ 95,417
Cost of goods sold...................... 28,453 30,992 (2,653) 56,792
-------- -------- --------- --------
Gross profit............................ 16,867 21,758 -- 38,625
Operating expenses...................... 20,965 22,443 -- 43,408
-------- -------- --------- --------
Loss from operations.................... (4,098) (685) -- (4,783)
Interest expense........................ (11,181) (1,253) 718 (11,716)
Interest income......................... 1,393 141 (718) 816
Other income (expense).................. (540) (97) -- (637)
-------- -------- --------- --------
Loss before taxes....................... (14,426) (1,894) -- (16,320)
Income tax benefit...................... -- 672 -- 672
-------- -------- --------- --------
Net Loss............................. $(14,426) $ (1,222) $ -- $(15,648)
======== ======== ========= ========
Consolidated Balance Sheet
Total
Domestic International Eliminations Consolidated
-------- ------------- ------------ ------------
Cash and cash equivalents............... $ 40,444 $ 15,393 $ -- $ 55,837
Accounts receivable, less allowance..... 30,758 68,936 (4,222) 95,472
Inventories............................. 36,137 33,739 -- 69,876
Prepaid expenses........................ 648 3,271 -- 3,919
-------- -------- --------- --------
Total current assets................. 107,987 121,339 (4,222) 225,104
Property, plant and equivalent, net..... 88,790 31,090 -- 119,880
Investment in subsidiaries.............. 52,061 -- (52,061) --
Notes receivable........................ 65,540 -- (65,540) --
Tradenames and patents.................. 227,575 37,836 -- 265,411
Goodwill................................ 145,237 31,461 -- 176,698
Deferred financing costs................ 20,892 -- -- 20,892
Other assets............................ -- 4,608 -- 4,608
-------- -------- --------- --------
Total assets......................... $708,082 $226,334 $(121,823) $812,593
======== ======== ========= ========
Short-term borrowings................... $ -- $ 2,425 -- $ 2,425
Accounts payable and accrued expenses... 86,552 49,723 (4,222) 132,053
Current portion of long-term debt....... 2,413 833 -- 3,246
Taxes payable........................... -- 3,004 -- 3,004
-------- -------- --------- --------
Total current liabilities............ 88,965 55,985 (4,222) 140,728
Long-term debt.......................... 407,235 32,515 -- 439,750
Deferred income taxes................... -- 11,391 -- 11,391
Notes payable........................... -- 65,540 (65,540) --
Deferred and other long-term liabilities 6,011 11,309 -- 17,320
-------- -------- --------- --------
Total liabilities.................... 502,211 176,740 (69,762) 609,189
Net contributed capital................. 220,500 52,061 (52,061) 220,500
Retained deficit........................ (14,426) (1,222) -- (15,648)
Other comprehensive income.............. (203) (1,245) -- (1,448)
-------- -------- --------- --------
Total liabilities and Capital........ $708,082 $226,334 $(121,823) $812,593
======== ======== ========= ========
47
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
Statement of Cash Flows
Total
Domestic International Consolidated
--------- ------------- ------------
(In thousands)
CASH FLOW FROM OPERATING ACTIVITIES
NET LOSS............................................................ $ (14,426) $ (1,222) $ (15,648)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization.................................... 3,255 924 4,179
Unrealized (gain) loss on foreign exchange transactions.......... 967 (428) 539
Change in assets and liabilities:
Decrease in accounts receivable.................................. 2,330 5,090 7,420
Decrease in inventories.......................................... 8,877 3,431 12,308
(Increase) Decrease in prepaid expenses.......................... (990) 2,266 1,276
Increase (Decrease) in accounts payable.......................... 10,025 (2,253) 7,772
Increase (Decrease) in other liabilities......................... 6,830 (3,813) 3,017
--------- --------- ---------
Net Cash Provided by Operating Activities........................... 16,868 3,995 20,863
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Additions to property, plant and equipment.......................... (1,190) (764) (1,954)
Acquisition of Carter-Wallace Consumer Business, including anti-
perspirant and pet care products business, net of cash acquired... (593,548) (119,745) (713,293)
Proceeds from sale of anti-perspirant and pet care products business 128,500 -- 128,500
--------- --------- ---------
Net Cash Used in Investing Activities............................... (466,238) (120,509) (586,747)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of senior subordinated notes................. 223,477 -- 223,477
Proceeds from syndicated bank credit facility....................... 186,500 33,500 220,000
Repayment of syndicated bank credit facility........................ (375) -- (375)
Repayment of acquired long-term debt................................ -- (19,971) (19,971)
Payment of deferred financing costs................................. (21,754) -- (21,754)
Proceeds from Members............................................... 228,500 -- 228,500
Distributions to Members............................................ (8,000) -- (8,000)
Intercompany acquisition financing.................................. (118,534) 118,534 --
--------- --------- ---------
Net Cash Provided by Financing Activities........................... 489,814 132,063 621,877
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents........ -- (156) (156)
NET CHANGE IN CASH & CASH EQUIVALENTS............................... 40,444 15,393 55,837
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD...................... -- -- --
--------- --------- ---------
CASH & CASH EQUIVALENTS AT END OF PERIOD............................ $ 40,444 $ 15,393 $ 55,837
========= ========= =========
48
ARMKEL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period from August 28, 2001, to December 31, 2001
The following table sets forth our principal product lines and related data
for the period ended December 31, 2001.
Net Sales
Product
Family Planning(1)....................... $42,692
Depilatories and waxes; face and skincare 14,093
Oral care................................ 6,441
OTC Products............................. 14,383
Other consumer products.................. 17,808
-------
Total net sales....................... $95,417
=======
--------
(1) Family Planning includes condom product sales and pregnancy and
ovulation kits.
Geographic Information
Approximately 45% of net sales for the period from August 28, 2001 to
December 31, 2001 were to customers in the United States, and approximately 15%
of long-lived assets at December 31, 2001 were located in the U.S.
Customers
A group of 4 customers accounted for approximately 19% of consolidated net
sales for the period from September 29, 2001 to December 31, 2001.
49
Independent Auditors' Report
The Board of Directors
Carter-Wallace, Inc.:
We have audited the accompanying combined statement of net assets to be sold
of Carter-Wallace, Inc. Consumer Business--Excluding Antiperspirant/Deodorant
Products in the United States and Canada and Pet Products as of March 31, 2001,
and the related combined statements of revenues and expenses, changes in net
assets and comprehensive earnings, and cash flows for the period from April 1,
2001 to September 28, 2001 and for the years ended March 31, 2001 and 2000.
These combined statements are the responsibility of the Consumer Business
management. Our responsibility is to express an opinion on these combined
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in and to the extent of note 1, the accompanying combined
statements were prepared to present the net assets to be sold of
Carter-Wallace, Inc. Consumer Business--Excluding Antiperspirant/Deodorant
Products in the United States and Canada and Pet Products as of March 31, 2001,
and the related combined statements of revenues and expenses, changes in net
assets and comprehensive earnings, and cash flows for the period from April 1,
2001 to September 28, 2001 and for the years ended March 31, 2001 and 2000,
pursuant to the Asset Purchase Agreement between Carter-Wallace, Inc. and
Armkel, LLC and the Product Line Purchase Agreement between Armkel, LLC and
Church & Dwight Co., Inc.
In our opinion, the accompanying combined statements referred to above
present fairly, in all material respects, the net assets to be sold of
Carter-Wallace, Inc. Consumer Business--Excluding Antiperspirant/Deodorant
Products in the United States and Canada and Pet Products as of March 31, 2001,
and its revenues and expenses and its cash flows for the period from April 1,
2001 to September 28, 2001 and for the years ended March 31, 2001 and 2000,
pursuant to the Asset Purchase Agreement between Carter-Wallace, Inc. and
Armkel, LLC and the Product Line Purchase Agreement between Armkel, LLC and
Church & Dwight Co. referred to in note 1, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
New York, New York
December 11, 2001
50
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
COMBINED STATEMENT OF NET ASSETS TO BE SOLD
(in thousands)
March 31,
2001
---------
Assets
Current assets:
Cash and cash equivalents........................................................................ $ 12,836
Accounts receivable--trade, less allowances of $4,089 at March 31, 2001.......................... 84,806
Other receivables................................................................................ 3,883
Inventories:.....................................................................................
Finished goods............................................................................... 37,809
Work in process.............................................................................. 8,634
Raw materials and supplies................................................................... 14,046
--------
60,489
Deferred taxes................................................................................... 6,281
Prepaid expenses and other current assets........................................................ 6,031
--------
Total current assets...................................................................... 174,326
--------
Property, plant, and equipment at cost:
Land............................................................................................. 2,521
Buildings and improvements....................................................................... 105,666
Machinery, equipment, and fixtures............................................................... 117,513
Leasehold improvements........................................................................... 4,721
--------
230,421
Accumulated depreciation and amortization........................................................ 117,497
--------
112,924
--------
Intangible assets:
Excess of purchase price of businesses acquired over the net assets at date of acquisition, less
amortization................................................................................... 53,769
Patents, trademarks, contracts, and formulae, less amortization.................................. 26,560
--------
80,329
--------
Other assets........................................................................................ 3,624
--------
Total assets.............................................................................. $371,203
========
51
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
COMBINED STATEMENT OF NET ASSETS TO BE SOLD
(in thousands)
March 31,
2001
---------
Liabilities and Net Assets to Be Sold
Current liabilities:
Accounts payable.................................... $ 41,180
Accrued expenses.................................... 32,877
Notes payable....................................... 6,358
Taxes on income..................................... 4,621
--------
Total current liabilities....................... 85,036
--------
Long-term liabilities:
Long-term debt...................................... 17,921
Accrued postretirement benefit obligation in Canada. 2,560
Other long-term liabilities......................... 6,693
Deferred tax liability.............................. 3,231
--------
Total long-term liabilities..................... 30,405
--------
Total liabilities............................... 115,441
Net assets to be sold.................................. 255,762
--------
Total liabilities and net assets to be sold..... $371,203
========
See accompanying notes to combined statements.
52
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
COMBINED STATEMENTS OF REVENUES AND EXPENSES
(in thousands)
Period
from April 1,
2001 to Year ended Year ended
September 28, March 31, March 31,
2001 2001 2000
------------- ---------- ----------
Net sales.................................................... $245,598 $435,538 $412,929
Cost of goods sold........................................... 88,513 159,515 160,308
-------- -------- --------
Gross profit.............................................. 157,085 276,023 252,621
-------- -------- --------
Operating expenses:
Advertising and promotion................................. 51,580 92,312 84,881
Marketing and other selling............................... 26,265 49,813 51,713
Distribution expense...................................... 7,884 14,938 14,724
Research and development.................................. 3,441 7,866 8,785
General and administrative................................ 13,005 22,667 22,656
Interest expense.......................................... 647 1,277 1,497
Interest income........................................... (175) (497) (394)
Other (income) expense, net............................... (180) 1,392 2,639
-------- -------- --------
102,467 189,768 186,501
-------- -------- --------
Revenues in excess of expenses before provision for taxes
on income............................................... 54,618 86,255 66,120
Provision for taxes on income................................ 21,180 36,329 25,669
-------- -------- --------
Revenues in excess of expenses............................ $ 33,438 $ 49,926 $ 40,451
======== ======== ========
See accompanying notes to combined statements.
53
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
AND COMPREHENSIVE EARNINGS
(in thousands)
Period
From April 1,
2001 to Year ended Year ended
September 28, March 31, March 31,
2001 2001 2000
------------- ---------- ----------
Amount at beginning of period.............................. $255,762 $259,497 $238,397
Revenues in excess of expenses............................. 33,438 49,926 40,451
Foreign currency translation adjustments................... 222 (8,223) (3,695)
-------- -------- --------
Comprehensive earnings..................................... 33,660 41,703 36,756
Cash and other transfers to Carter-Wallace, Inc............ (21,763) (45,438) (15,656)
-------- -------- --------
Amount at end of period.................................... $267,659 $255,762 $259,497
======== ======== ========
See accompanying notes to combined statements.
54
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Period from Year ended Year ended
April 1, 2001 to March 31, March 31,
September 28, 2001 2001 2000
------------------ ---------- ----------
Cash flows from operating activities:
Revenues in excess of expenses........................................ $ 33,438 $ 49,926 $ 40,451
Adjustments to reconcile revenues in excess of expenses to cash
flows from operations:
Depreciation and amortization...................................... 4,620 8,615 7,684
Amortization of excess of purchase price of businesses acquired
over the net assets at date of acquisition, patents, trademarks,
contracts, and formulae.......................................... 1,375 2,930 3,500
Other changes in assets and liabilities:
Decrease (increase) in accounts receivable and other
receivables.................................................. (15,282) (10,524) (13,868)
(Increase) decrease in inventories............................. 5,747 (1,575) (11,537)
Increase in prepaid expenses................................... (2,096) (697) (1,569)
(Decrease) increase in accounts payable and accrued
expenses..................................................... (3,622) 11,941 5,304
Increase in deferred taxes..................................... (2,437) (894) (4,303)
Other changes.................................................. 1,394 (1,312) (1,505)
-------- -------- --------
Cash flows provided by operating activities................. 23,137 58,410 24,157
-------- -------- --------
Cash flows used in investing activities:
Additions to property, plant, and equipment--net of
acquisitions..................................................... (4,941) (11,370) (15,216)
Decrease in short-term investments................................. -- -- 313
Proceeds from sale of property, plant, and equipment............... 79 1,443 1,025
-------- -------- --------
Cash flows used in investing activities..................... (4,862) (9,927) (13,878)
-------- -------- --------
Cash flows used in financing activities:
Payments of debt................................................... (2,451) (3,596) (5,008)
Cash transferred to Carter-Wallace, Inc............................ (19,135) (41,697) (11,802)
Increase in borrowings............................................. 1,206 2,173 2,781
-------- -------- --------
Cash flows used in financing activities..................... (20,380) (43,120) (14,029)
-------- -------- --------
Effect of foreign exchange rate changes on cash and
cash equivalents.................................................... (50) (553) (522)
======== ======== ========
Increase (decrease) in cash and cash equivalents............ (2,155) 4,810 (4,272)
-------- -------- --------
See accompanying notes to combined statements.
55
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS
March 31, 2001
(1) Description of Business and Basis of Presentation
On May 7, 2001, Carter-Wallace, Inc. ("the Company") entered into definitive
agreements for the sale of the Company in a two-step transaction which was
consummated on September 28, 2001. In accordance with an Asset Purchase
Agreement, the Company first sold the net assets and business of the Company's
Consumer Business, as defined in the Asset Purchase Agreement, to Armkel, LLC
("Armkel") for $739 million, less certain debt outstanding. Armkel is jointly
owned by two private investment funds formed by Kelso & Company L.P. and by
Church & Dwight Co., Inc. Such funds were paid directly to the Company.
Pursuant to an Agreement and Plan of Merger, immediately following the sale of
the Consumer Business, a buying group ("the Buying Group") purchased the
Company's outstanding common stock and Class B common stock for $20.44 per
share subject to certain closing adjustments. The aggregate consideration from
both parts of the transaction was $1.121 billion, less approximately $155
million of corporate taxes to be paid on the sale of the Consumer Business.
Under a separate product Line Purchase Agreement effective May 7, 2001, as
amended, Church & Dwight Co., Inc. acquired the antiperspirant/deodorant
products business in the United States and Canada and the pet products business
from Armkel. Excluded from this transaction are the antiperspirants/deodorants
products business in the United Kingdom and Australia.
Products sold domestically by this component of the Consumer Business
primarily include condoms, at-home pregnancy and ovulation test kits, hair
removal products, and tooth-whitening products. These products are promoted
directly to the consumer by television and other advertising media and are sold
to wholesalers and various retailers. Many of the products sold by foreign
subsidiaries are the same products which are sold domestically, as well as
certain other products which are sold exclusively in international markets.
Products are sold throughout the world by various subsidiaries and distributors.
The accompanying combined statements pertain to the Consumer Business of the
Company--Excluding Antiperspirant/Deodorant Products in the United States and
Canada and Pet Products (as defined in the aforementioned definitive
agreements) and have been prepared pursuant to the Asset Purchase Agreement and
Product Line Purchase Agreement in accordance with accounting principles
generally accepted in the United States of America. The statements reflect the
normal business operations of the Consumer Business--Excluding
Antiperspirant/Deodorant Products in the United States and Canada and Pet
Products through September 28, 2001, the date of closing of the transaction
noted above. Accordingly, no transactions which arise directly related to the
sale or purchase of the Consumer Business have been reflected in the
accompanying combined statements. Also excluded from these statements is
certain debt financing that was incurred by the Buying Group to help finance
its purchase price.
All significant intercompany transactions have been eliminated. This
component of the Consumer Business has no separate legal status and operated as
an integral part of the Company's Consumer Business which operated as an
integral part of the Company's overall operations. These combined statements
have been prepared from the historical accounting records of the Company prior
to the Armkel acquisition and do not reflect a new basis of accounting
resulting from the acquisition by Armkel or other direct costs related to the
acquisition.
The accompanying combined statements of revenues and expenses are not
necessarily indicative of the costs and expenses that would have been incurred
had the component been operated as a stand-alone entity.
56
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
Certain indirect operating expenses for selling and general and
administrative costs of the Consumer Business were allocated to the
Carter-Wallace, Inc. Consumer Business--Excluding Antiperspirant/Deodorant
Products in the United States and Canada and Pet Products based on a percentage
of net sales. Such allocated selling and other general and administrative costs
for the period from April 1, 2001 to September 28, 2001, included in the
accompanying combined statements amounted to approximately $10,400,000, and for
the years ended March 31, 2001 and 2000 amounted to $19,700,000 and
$19,300,000, respectively. Corporate income and expenses of the Company
included in this component of the Consumer Business include those items
specifically identifiable to this component and allocation, primarily based on
usage estimates, of certain other corporate expenses, including accounting,
human resources, and corporate systems. Corporate expenses allocated to this
component of the Consumer Business are costs which benefit and are required for
its operations. Certain general corporate expenses of the Company have not been
allocated to this component of the Consumer Business because they did not
provide a direct or material benefit to this business. In addition, if the
Consumer Business had not been a part of the Company during the period
presented, such corporate expenses would not have significantly changed as a
result of not having to operate this business. In the opinion of management,
these methods of allocating these costs are reasonable; however, such costs do
not necessarily equal the costs that this component of the Consumer Business
would have incurred on a stand-alone basis. Therefore, the financial
information included herein may not necessarily reflect assets and liabilities,
revenues and expenses, and cash flows of this component of the Consumer
Business on a stand-alone basis in the future.
This component of the Consumer Business includes only the cash of the
foreign subsidiaries, except for Canada where the amount of cash is limited to
U.S. $1,000,000.
Certain expenses, such as postretirement benefit costs which are included in
the combined statements of revenues and expenses for this component of the
Consumer Business, relate to assets and/or liabilities which have not been
included in the accompanying combined statements of net assets to be sold of
this component of the Consumer Business. Such assets and/or liabilities will be
retained by Carter-Wallace, Inc. in accordance with the terms of the definitive
sales agreements. In accordance with such agreements, Armkel will assume the
liability for 60% of the retiree medical obligations incurred with respect to
certain specifically identified Consumer Business employees who terminate
employment during the period from May 7, 2001 through and including the sale
closing date. The Buying Group that acquired the outstanding shares of the
Company has asserted that all of the specifically identified Consumer Business
employees were terminated by the Company on the sale closing date and that
Armkel is therefore liable for 60% of the future retiree medical costs with
respect to all of those former employees. Armkel disagrees with the Buying
Group's position and does not believe it has any liability for those employees.
The Buying Group estimates Armkel's share of the liability for the specifically
identified Consumer Business employees to be approximately $6,000,000 to
$10,000,000 (depending upon a final actuarial valuation). This amount is not
reflected in the accompanying statement of net assets to be sold as of March
31, 2001. To the extent Armkel may have liability related to this matter, some
portion of that would be borne by Church & Dwight Co., Inc.
(2) Summary of Significant Accounting Policies
(a) Basis of Combination
The accompanying combined statements have been prepared pursuant to the
Asset Purchase Agreement and Product Line Purchase Agreement in accordance with
accounting principles generally accepted in the United States of America. All
significant intercompany transactions have been eliminated. The combined
statements include the accounts related to the Consumer Business--Excluding
Antiperspirant/Deodorant Products in the
57
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
United States and Canada and Pet products, as defined in the Asset Purchase
Agreement and Product Line Purchase Agreement, all of which have been stated on
a going-concern basis and do not necessarily reflect liquidity values (see note
1).
(b) Revenue Recognition Policy
Revenues from product sales are recognized upon shipment to customers as
title has passed and are shown net of sales adjustments for discounts, rebates
to customers, returns and other adjustments, which are provided in the same
period that the related sales are recorded.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 is applicable to
public companies and provides guidance on applying accounting principles
generally accepted in the United States to revenue recognition issues in
financial statements. Management believes the Company's revenue recognition
criteria are consistent with the guidance provided by SAB No. 101 as their
revenues meet all the revenue recognition criteria in SAB No. 101.
(c) Use of Estimates
The preparation of statements in conformity with generally accepted
accounting principles requires management to make estimates and use assumptions
that affect certain reported amounts and disclosures. Actual amounts may differ.
(d) Cash Equivalents
Cash equivalents consist of short-term securities with maturities of three
months or less when purchased. The carrying value of cash equivalents
approximates fair value at March 31, 2001.
(e) Inventories
Inventories are valued at the lower of cost or market on the first-in,
first-out ("FIFO") method, except for certain domestic inventories which are
stated at cost on the last-in, first-out ("LIFO") method.
(f) Property, Plant, and Equipment
Depreciation is provided over the estimated useful lives of the assets,
principally using the straight-line method. Machinery, equipment, and fixtures
are depreciated over a period ranging from 5 to 20 years. Buildings and
improvements are depreciated over a period ranging from 20 to 40 years.
Leasehold improvements are amortized on a straight-line basis over the life of
the related asset or the life of the lease, whichever is shorter. Expenditures
for renewal and betterments are capitalized. Upon sale or retirement of assets,
the appropriate asset and related accumulated depreciation accounts are
adjusted and the resultant gain or loss is reflected in earnings. Maintenance
and repairs are charged to expense as incurred.
(g) Intangible Assets
The excess of purchase price of businesses acquired over the net assets at
date of acquisition is assessed to the product or group of products which
constitute the business acquired and amortized over no longer than 40 years for
amounts relating to acquisitions subsequent to October 31, 1970. The cost of
patents, formulae, and
58
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
contracts is amortized on a straight-line basis over their legal or contractual
lives. The cost of trademarks is being amortized over no longer than 40 years
for amounts relating to acquisitions subsequent to October 31, 1970. Amounts
related to intangible assets acquired prior to October 31, 1970 are not
material.
The policy of the Consumer Bussiness in assessing the recoverability of
intangible assets is to compare the carrying value of the intangible asset with
the undiscounted cash flow generated by products related to the intangible
asset. In addition, the Consumer Business continually evaluates whether adverse
developments indicate that an intangible asset may be impaired.
(h) Income Taxes
The income and expenses for the Consumer Business--Excluding
Antiperspirant/Deodorant Products in the UnitedStates and Canada and Pet
Products are included in the tax returns of the Company. The provision for
taxes on income is computed as if this component of the Consumer Business was
filing income tax returns on a stand-alone basis.
(i) Advertising and Marketing Costs
Advertising, promotion, and other marketing costs are charged to earnings in
the period in which they are incurred.
(j) Shipping and Handling Costs
The Company does not bill shipping and handling costs to its customers.
Shipping and handling costs are included within operating expense under the
caption Distribution Expense.
(k) Accrued Expenses
Accruals related to certain employee costs such as management bonuses and
vacation pay are calculated based upon the proportioned number of employees
designated as part of this component of the Consumer Business.
(l) Foreign Currency Translation
The assets and liabilities of foreign subsidiaries are translated at the
year-end rate of exchange, and income statement items are translated at the
average rates prevailing during the year. The effects of foreign exchange gains
and losses arising from these translations of assets and liabilities are
included as a component of comprehensive earnings.
(m) Accounting for Derivatives
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that
companies recognize all derivatives as either assets or liabilities on the
balance sheet and measure these instruments at fair value. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." This
statement deferred the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities," which made
minor amendments of SFAS No. 133. The Company has adopted SFAS No. 133, as
59
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
amended, effective April 1, 2001. The Company's derivatives are all qualified
hedges. The derivatives are comprised of interest rate swaps and foreign
exchange forward contracts. The valuation of these derivatives at September 28,
2001 resulted in a net liability of approximately $60,000. The adoption of this
accounting requirement did not have a material effect on the accompanying
combined statements.
(n) New Accounting Pronouncements
Emerging Issues Task Force Issue No. 00-14, "Accounting for Certain Sales
Incentives" ("EITF Issue No. 00-14"), outlines required accounting treatment
for certain sales incentives, including manufacturer's coupons. EITF Issue No.
00-14 requires companies to record coupon expense as a reduction of sales,
rather than marketing expense. The Consumer Business currently records coupon
expense as a component of marketing expense.
The Consumer Business is required to implement EITF Issue No. 00-14 for the
quarter beginning January 1, 2002. It will require the Consumer Business to
report coupon expense as a reduction of net sales. Coupon expense in this
component of the Consumer Business approximates $3,000,000 per year based on
historical amounts, spread relatively evenly throughout the year.
Issue No. 00-25, "Vendor Income Statement Characterization of Consideration
from a Vendor to a Retailer" ("EITF Issue No. 00-25"), outlines required
accounting treatment of certain sales incentives, including slotting or
placement fees, cooperative advertising arrangements, buydowns, and other
allowances. The Consumer Business currently records such costs as marketing
expenses. EITF Issue No. 00-25 will require the Consumer Business to report the
paid consideration expense as a reduction of sales, rather than marketing
expense. The Consumer Business is required to implement EITF Issue No. 00-25
for the quarter beginning January 1, 2002. The Consumer Business has not yet
determined the effect of implementing the guidelines of EITF Issue No. 00-25,
but, in any case, implementation will not have an effect on net earnings.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." This
statement addresses the financial accounting and reporting for business
combinations and supersedes Accounting Principles Board Opinion ("APB") No. 16,
"Business Combinations," and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." SFAS No. 141 requires "Accounting for
Preacquisition Contingencies of purchased Enterprises." SFAS No 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and establishes criteria to separately recognize
intangible assets apart from goodwill. In July 2001, the FASB issued SFAS No.
142, "Goodwill and Other Intangible Assets." This statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB No. 17, 'Intangible Assets." This statement requires, among
other things, that goodwill and intangible assets that have indefinite useful
lives should not be amortized, but rather should be tested at least annually
for impairment, using the guidance for measuring impairment set forth in the
statement and is effective April 1, 2002. At September 28, 2001, unamortized
goodwill amounted to approximately $52,500,000 and amortization expense related
to this goodwill for the period from April 1, 2001 to September 28, 2001
amounted to approximately $1,560,000.
(3) Property, Plant, and Equipment
Included in property, plant, and equipment are all operating assets related
directly to the Consumer Business--Excluding Antiperspirant/Deodorant Products
in the United States and Canada and Pet Products. These include manufacturing
and other facilities in: Cranbury, New Jersey; Colonial Heights, Virginia;
Montreal,
60
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
Canada; Toronto, Canada; Folkestone, England; Milan, Italy; Mexico City,
Mexico; and New Plymouth, New Zealand. Specifically excluded from this
component of the Consumer Business property, plant, and equipment and the
accompanying combined statements is certain vacant land adjacent to the
Consumer Business facility in Cranbury, New Jersey and machinery, equipment,
and other fixed assets related to antiperspirant/deodorant products in the
United States and Canada and pet products. The vacant land will be retained by
the Company.
(4) Inventories
Inventories computed on the LIFO method comprised 8% of inventories included
in current assets at March 31, 2001. If these inventories had been valued on
the FIFO inventory method (which approximates current or replacement costs),
total inventories would have been approximately $3,000,000 higher than reported
at March 31, 2001.
(5) Taxes on Income
The provision (benefit) for taxes on income was as follows:
Year ended March 31
------------------------
Period from
April 1, 2001 to
September 28, 2001 2001 2000
------------------ ----------- -----------
Current:
Domestic...... $18,006,000 $26,366,000 $18,725,000
Foreign....... 4,553,000 10,117,000 7,285,000
----------- ----------- -----------
22,559,000 36,483,000 26,010,000
----------- ----------- -----------
Deferred:
Domestic...... (906,000) (249,000) (8,000)
Foreign....... (473,000) 95,000 (333,000)
----------- ----------- -----------
(1,379,000) (154,000) (341,000)
----------- ----------- -----------
Total..... $21,180,000 $36,329,000 $25,669,000
=========== =========== ===========
61
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
Deferred income taxes are provided for temporary differences between the
financial statement and tax bases of the assets and liabilities of this
component of the Consumer Business. The temporary differences gave rise to the
following deferred tax assets and liabilities at March 31, 2001 follows:
Postretirement benefit plans.. $ 1,048,000
Employee benefit plans........ 6,430,000
Accrued liabilities........... 4,938,000
Asset valuation accounts...... 1,979,000
All other..................... 3,672,000
------------
Total deferred tax assets..... 18,067,000
------------
Depreciation.................. (10,428,000)
All other..................... (4,589,000)
------------
Total deferred tax liabilities (15,017,000)
------------
Net deferred tax assets....... $ 3,050,000
============
Realization of the deferred tax assets of this component of the Consumer
Business is dependent on generating sufficient taxable income in future years.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax assets will be realized. However, the deferred
tax assets could be reduced if estimates of future taxable income are lowered.
Deferred taxes have not been provided on undistributed earnings of foreign
subsidiaries. It has been management's practice and intent to reinvest such
earnings in the operations of these subsidiaries.
The effective tax rate of the provision for taxes on income as compared with
the U.S. Federal statutory income tax rate was as follows:
Year ended March 31,
Period from April 1, 2001 ---------------------------------------
to September 28, 2001 2001 1999
------------------------ ------------------ ------------------
% to % to % to
pretax pretax pretax
Tax amount income Tax amount income Tax amount income
----------- ------ ----------- ------ ----------- ------
Computed tax expense.................. $19,117,000 35.0% $30,189,000 35.0% $23,142,000 35.0%
Foreign income taxed at a different
effective rate...................... 275,000 0.5% 3,065,000 3.6% 392,000 0.6%
State income taxes, net of federal tax
benefit............................. 1,643,000 3.0% 3,729,000 4.3% 1,907,000 2.9%
Amortization of intangibles........... 138,000 0.3% 268,000 0.3% 268,000 0.4%
Other................................. 7,000 -- (922,000) (1.1)% (40,000) (0.1)%
----------- ---- ----------- ---- ----------- ----
Provision for taxes on income......... $21,180,000 38.8% $36,329,000 42.1% $25,669,000 38.8%
=========== ==== =========== ==== =========== ====
The results of this component of the Consumer Business are included in the
income tax returns of Carter-Wallace, Inc. and subsidiaries. The provision for
taxes on income is computed as if this component of the Consumer Business was
filing income tax returns on a stand-alone basis.
62
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
The U.S. Internal Revenue Service completed its examination of
Carter-Wallace, Inc. and subsidiaries' tax returns through fiscal year 1995,
resulting in no material impact on the Company or this component of the
Consumer Business. The statute of limitations for the examination of
Carter-Wallace, Inc. and subsidiaries' U.S. Federal income tax return has
expired for fiscal years 1996 and 1997.
(6) Notes Payable And Long-Term Debt
Notes Payable
Notes payable consisting of borrowings from banks under available lines of
credit were $2,740,000 and the current portion of long-term debt was $2,188,000
at March 31, 2001. In addition, other short-term notes payable in international
operations amounted to $1,430,000 at March 31, 2001. Interest rates on
short-term borrowings range from 3.0% to 7.0%. The Consumer Business has
available various bank credit lines amounting to $15,400,000, all of which
relate to international operations. The availability of the lines of credit is
subject to review by the banks involved. Commitment fees are immaterial.
Long-Term Debt
Long-term debt is summarized below:
March 31, 2001
--------------
Unsecured Euro term loan, 4.10%, payable in installments beginning June 1, 2002
through March 1, 2004....................................................................... $ 8,493,000
Unsecured French franc term loan, 4.10%, payable in installments through
February 25, 2006........................................................................... 3,135,000
Unsecured French franc loan, 5.10%, payable February 24, 2003................................. 2,814,000
Unsecured Italian lira term loan, adjustable rate, payable in installments through
December 31, 2004........................................................................... 2,358,000
Unsecured French franc loan, adjustable rate, payable in installments through April 1, 2006... 1,809,000
Unsecured French franc loan, adjustable rate, payable in installments through
September 18, 2003.......................................................................... 492,000
Secured Italian lira term loans, adjustable rate, payable in installments through July 1, 2001 490,000
Unsecured French franc loan, 4.50%, payable in installments through August 5, 2001............ 193,000
Other long-term debt.......................................................................... 325,000
-----------
20,109,000
Less current portion of long-term debt included in notes payable.............................. (2,188,000)
-----------
Total...................................................................................... $17,921,000
===========
Maturities of long-term debt outstanding at March 31, 2001 for each of the
fiscal years 2003 through 2006 are $7,658,000, $6,148,000, $2,678,000, and
$998,000, respectively.
International debt of $19,800,000 at March 31, 2001 is guaranteed by the
Company. This debt may be called by the lender as Carter-Wallace, Inc. ceased
to be the majority stockholder of the borrowing subsidiary, as a result of the
acquisition by Armkel.
63
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
With respect to the Italian lira loan payable through December 31, 2004,
interest on this loan is the Euro Interbank Offered Rate plus a nominal
increment.
With respect to the French franc loan payable February 24, 2003, interest is
adjustable based on the Euro Interbank Offered Rate plus a nominal increment,
adjusted quarterly, and is converted to a fixed rate at the inception of the
loan.
With respect to the French franc loan payable through April 1, 2006,
interest on this loan is the Euro Interbank Offered Rate plus a nominal
increment.
The Italian lira loans due July 1, 2001 are secured by irrevocable letters
of credit. Commitment fees are immaterial. Interest on these loans is the Euro
Interbank Offered Rate plus a nominal increment, adjusted quarterly.
With respect to the French franc loan payable through September 18, 2003,
interest on this loan is the Euro Interbank Offered Rate plus a nominal
increment.
The fair value of long-term debt, including current maturities, was
$20,109,000 at March 31, 2001.
(7) Retirement Plans and Other Postretirement Benefits
Retirement plan obligations included in the Consumer Business--Excluding
Antiperspirant/Deodorant Products in the United States and Canada and Pet
Products, consist of the Retirement Plan for Bargaining Employees of
Carter-Wallace, Inc., and certain obligations of foreign subsidiaries.
Obligations for the Executive Pension Benefits Plan and the Employees
Retirement Plan of Carter-Wallace, Inc. have been excluded from the
accompanying combined statements, as these are obligations of the Company.
Pension expense for domestic salaried employees has not been included in the
accompanying combined statements because such expense was immaterial in each of
the periods presented.
Postretirement benefit obligations for domestic employees have been excluded
from this component of the Consumer Business as these are obligations of the
Company. However, expense related to postretirement benefits for domestic
employees of the Consumer Business--Excluding Antiperspirant/Deodorant Products
in the United States and Canada and Pet Products is included in the
accompanying combined statements of revenues and expenses. Expense related to
the postretirement benefit obligations for domestic employees of the Consumer
Business--Excluding Antiperspirant/Deodorant Products in the United States and
Canada and Pet Products amounted to $550,000 for the period from April 1, 2001
to September 28, 2001, $1,044,000 and $999,000 for the fiscal years ended March
31, 2001 and 2000, respectively.
Postretirement benefit obligations related to the Consumer Business
employees in Canada are included in the accompanying combined statements in
accordance with SFAS No. 106, "Employers' Obligations for Postretirement
Benefits Other Than Pensions."
Obligations for retirement-related plans exist in each of the foreign
subsidiaries. Both Canada and the United Kingdom have defined benefit pension
plans. The plans in Canada are accounted for in accordance with SFAS No. 87,
"Accounting for Pensions." Pension plans also exist in other foreign
subsidiaries which, in totality, are not material to these combined statements.
64
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
The components of the pension and postretirement benefit expense reflected
in the accompanying combined statements for the period from April 1, 2001 to
September 28, 2001 and for the years ended March 31, 2001 and 2000 were as
follows:
Retirement plans Other postretirement benefits
--------------------------------- ----------------------------------
Period from Period from
April 1, April 1,
2001 to Year ended March 31, 2001 to Year ended March 31,
September 28, ------------------- September 28, -------------------
2001 2001 2000 2001 2001 2000
------------- ------- ------- ------------- ------ -----
Service cost....................... $ 648 $ 1,208 $ 1,291 $ 21 $ 42 $ 41
Interest cost...................... 1,841 3,600 3,507 45 90 102
Expected return on assets.......... (2,228) (4,676) (4,315) -- -- --
Amortization of prior service cost. (71) 91 95 -- -- (147)
Amortization of transition cost.... 38 77 (288) (76) (156) --
Amortization of actuarial gain..... 50 (264) (107) -- -- --
------- ------- ------- ---- ------ -----
Benefit cost (income).............. 278 36 183 (10) (24) (4)
Cost for domestic Consumer Business
employees charged from
Carter-Wallace, Inc.............. -- -- -- 550 1,044 999
------- ------- ------- ---- ------ -----
Total benefit cost.......... $ 278 $ 36 $ 183 $540 $1,020 $ 995
======= ======= ======= ==== ====== =====
The components of the changes in the benefit obligation for the year ended
March 31, 2001 was as follows:
Retirement Other post-
plans retirement benefits
---------- -------------------
(Amounts in thousands)
Benefit obligation at beginning of year $47,615 $1,392
Service cost........................... 1,208 42
Interest cost.......................... 3,600 90
Plan participants' contributions....... 391 --
Actuarial (gain) loss.................. 3,167 (14)
Effect of exchange rate changes........ (1,455) (143)
Benefits paid.......................... (3,411) (69)
------- ------
Benefit obligation at end of year...... $51,115 $1,298
======= ======
65
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
The components of the changes in plan assets for the year ended March 31,
2001 was as follows:
Other post-
Retirement retirement
plans benefits
---------- -----------
(Amounts in thousands)
Fair value of plan assets at beginning of year $58,460 $ --
Actual return on plan assets.................. (1,982) --
Employer contributions........................ 171 69
Plan participants' contributions.............. 391 --
Effect of exchange rate changes............... (1,801) --
Benefits paid................................. (3,411) (69)
------- ----
Fair value of plan assets at end of year...... $51,828 $ --
======= ====
The following is a reconciliation of the funded status of the plans to the
accompanying combined statements of net assets to be sold at March 31, 2001:
Other post-
Retirement retirement
plans benefits
---------- -----------
(Amounts in thousands)
Funded status.................. $ 713 $(1,298)
Unrecognized actuarial gain.... (2,121) (1,262)
Unrecognized prior service cost 96 --
Unrecognized transition amounts 191 --
------- -------
Accrued benefit cost........... $(1,121) $(2,560)
======= =======
Amounts recognized in the accompanying combined statements of net assets to
be sold at March 31, 2001 was as follows:
Other post-
Retirement Retirement
plans benefits
---------- -----------
(Amounts in thousands)
Other assets......... $ 3,307 $ --
Accrued expenses..... (779) --
Long-term liabilities (3,649) (2,560)
------- -------
Net amount recognized $(1,121) $(2,560)
======= =======
The principal assumptions used in determining 2001 and 2000 actuarial values
were:
Discount rate................................... 8%
Rate of increase in compensation levels......... 4%-6%
Expected long-term rate of return on plan assets 7%-10%
======
Expense for the employee savings plan under which the Consumer Business
matches the contributions of participating employees up to a designated level
was approximately $175,000 for the period from April 1, 2001 to September 28,
2001 and approximately $350,000 in each of the years ended March 31, 2001 and
2000.
66
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
The assumed health care cost trend rate used to measure the accumulated
postretirement benefit obligation for those over age 65 is 8% for 2001 trending
to 5% over a three-year period. For those under age 65, the trend rate is 6.3%
for 2001 trending to 5% over a three-year period. A 1% increase or decrease in
the assumed respective annual medical cost trend rate would change the
accumulated postretirement benefit obligation by approximately $100,000, and
the service and interest components of net postretirement benefit expense would
be immaterially affected.
(8) Long-Term Incentive Plans
Obligations for deferred stock awards and stock option grants made under the
1996 Long-Term Incentive Plan for Corporate Officers of the Company have been
excluded from the accompanying combined statements of net assets to be sold of
this component of the Consumer Business, as these are obligations of the
Company. As of March 31, 2001, the outstanding stock awards for the four
Consumer Business executives totaled 105,000 shares and the outstanding stock
options totaled 567,000. Outstanding awards of deferred stock become fully
vested and outstanding options become immediately exercisable upon the
occurrence of a change in control of the Company. Expense for stock award
amortization has been included in the accompanying combined statements of
revenues and expenses. This stock award amortization expense amounted to
$116,000 for the period from April 1, 2001 to September 28, 2001 and $232,000
and $334,000 for the fiscal years ended March 31, 2001 and 2000, respectively.
The Consumer Business has chosen to continue to account for options granted
under the plan using the intrinsic value method. Accordingly, no compensation
expense has been recognized for these options. Had the fair value method of
accounting, as defined in SFAS No. 123, "Accounting for Stock-Based
Compensation," been applied to these stock options, revenue in excess of
expenses of the Consumer Business would have been reduced on a pro forma basis
by approximately $350,000 in the period from April 1, 2001 to September 28,
2001 and approximately $490,000 and $578,000 in the fiscal years ended March
31, 2001 and 2000, respectively. For purposes of fair market value disclosures,
the fair market value of an option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2001 2000
------ ------
Risk-Free Interest Rate 6.3% 6.3%
Expected Life.......... 8 yrs. 8 yrs.
Volatility............. 31.7% 31.7%
Dividend Yield......... 1.2% 1.2%
====== ======
(9) Rental Expense and Lease Commitments
Rental expense for operating leases with a term greater than one year for
2001 and 2000 was as follows (amounts in thousands):
Real Equipment and
Rental expense property other
-------------- -------- -------------
Period from April 1, 2001 to September 28, 2001 $ 975 $3,994
Year ended March 31, 2001...................... 1,691 7,244
Year ended March 31, 2000...................... 1,541 6,916
====== ======
67
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
Minimum rental commitments under noncancelable leases in effect at March 31,
2001 were as follows (amounts in thousands):
Real Equipment and Capital lease
Minimum rental commitments property other obligations
-------------------------- -------- ------------- -------------
2002............................................. $1,533 $896 $ 275
2003............................................. 1,469 564 216
2004............................................. 601 249 203
2005............................................. 363 69 190
2006............................................. 94 15 127
2007 and thereafter.............................. 7 -- --
====== ==== ------
1,011
Less interest and executory cost................. (163)
------
Present value of minimum lease payments (of which
$213 is included in accrued expenses).......... $ 848
======
(10) Litigation
The Consumer Business is engaged in litigation with Tambrands Inc.
("Tambrands") in the Supreme Court of the State and County of New York
("Supreme Court"), arising out of a patent infringement and misappropriation
suit previously filed against both companies in the United States District
Court, Southern District of New York, by New Horizons Diagnostics Corporation
("NHDC"), et al. The NHDC suit, which was settled and discontinued in July
1996, asserted claims with respect to certain "gold sol" technology (used in
First Response and Answer home pregnancy and ovulation predictor test kits)
that the Consumer Business had acquired from Tambrands pursuant to a written
purchase agreement in March 1990. The Consumer Business paid an immaterial
amount toward that settlement. In the pending Supreme Court action, Tambrands
seeks reimbursement from the Consumer Business of an unspecified portion of the
amount paid by Tambrands in settlement of the NHDC suit, and for defense costs.
Cross-motions for summary judgment have been filed. The Consumer Business
believes it has good defenses, under the terms of the purchase agreement, to
Tambrands' claim.
The Consumer Business is subject to other legal actions arising out of its
operations. The Consumer Business believes, based on the opinion of counsel,
that it has good defenses to such actions and should prevail.
(11) Employment Agreements and Termination and Change in Control Arrangements
The Company has entered into agreements with four executives of the Consumer
Business as well as seven foreign subsidiary general managers, whose services
are being made available to the Consumer Business. These obligations will be
assumed by Armkel as part of the acquisition of the Consumer Business. These
agreements generally provide for payments equal to salary and bonus multiples,
and in the case of the four executives, certain pension enhancements if the
executives' employment is terminated as specified in the agreements after a
change in control of the Company.
As a result of the acquisition by Armkel, which represents a change in
control, as defined in the agreements, all of the obligations under the
agreements have been assumed by Armkel and totaled approximately $15,000,000.
These obligations are not reflected in the accompanying statements.
68
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
(12) Supplemental Financial Information
The following is presented in support of the accompanying combined
statements of net assets to be sold:
March 31, 2001
--------------
(Amounts in
thousands)
Accrued expenses:
Salaries and wages........... $ 9,985
Advertising and promotion.... 11,925
Retirement and related plans. 1,947
Other........................ 9,020
-------
$32,877
=======
March 31, 2001
--------------
(Amounts in
thousands)
Other long-term liabilities:
Retirement plans......... $3,649
Other.................... 3,044
------
$6,693
======
Interest paid was $647,000 for the period from April 1, 2001 to September
28, 2001 and was $1,278,000 and $1,497,000 in 2001 and 2000, respectively.
(13) Certain Operational and Revenue Information
Net current assets and net sales of this component of the Consumer Business
foreign subsidiaries and branches operating outside of the United States and
the Consumer Business' equity in net assets and revenues in excess of expenses
of such operations of this component were (note 14 has additional information
on international operations):
March 31,
-------------------------
Period from
April 1, 2001 to
September 28, 2001 2001 2000
------------------ ------------ ------------
Net current assets........... $ 56,230,000
Equity in net assets......... 101,734,000
Net sales.................... $119,255,000 228,162,000 $230,395,000
Revenue in excess of expenses 6,996,000 10,492,000 12,026,000
============ ============ ============
69
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
The adjustment from foreign currency translation is included as a reduction
of the net assets to be sold. The cumulative balances are included as a
component of stockholders' equity of Carter-Wallace, Inc. The adjustments are
comprised of the following:
March 31, 2001
--------------
Opening balance.... $31,258,000
Current year change 8,223,000
-----------
Ending balance..... $39,481,000
===========
The following table sets forth our principal product lines and related data.
Domestic Division
Net sales (in millions)
--------------------------------
Period from
April 1, 2001 to
September 28, 2001 2001 2000
------------------ ------ ------
Product
Condoms............................... $ 72.1 $121.6 $111.7
Depilatories and waxes................ 24.9 35.9 30.0
Home pregnancy and ovulation test kits 25.1 40.8 31.1
Other consumer products............... 4.2 9.0 9.7
------ ------ ------
Total domestic net sales........... $126.3 $207.3 $182.5
====== ====== ======
International Division
Net sales (in millions)
--------------------------------
Period from
April 1, 2001 to
September 28, 2001 2001 2000
------------------ ------ ------
Product
Condoms; home pregnancy and ovulation test kits $ 12.0 $ 23.5 $ 20.7
Depilatories and waxes; face and skin care..... 27.4 53.1 50.4
Oral care...................................... 14.6 29.8 32.2
OTC products*.................................. 23.0 46.4 34.0
Other consumer products*....................... 42.3 75.4 93.1
------ ------ ------
Total international net sales............... $119.3 $228.2 $230.4
====== ====== ======
- --------
* Includes net sales of approximately $16 million for the period from April 1,
2001 to September 28, 2001 and $32 million for the years ended March 31, 2001
and 2000 relating to products distributed by the Carter-Wallace consumer
business for third parties.
For the period April 1, 2001 to September 28, 2001, our largest domestic
customer represented approximately 19% of our consolidated domestic net sales
and, for the same period, our top ten largest domestic customers in the
aggregate represented approximately 60% of our consolidated domestic net sales.
For the fiscal
70
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
years ended March 31, 2001 and 2000, our largest domestic customer represented
approximately 19% and 16%, respectively, of our consolidated domestic net sales
and, for the same periods, our top ten largest domestic customers in the
aggregate represented approximately 60% and 58% of our consolidated domestic
net sales.
(14) Supplemental Financial Information of Domestic and International
Operations
The international subsidiaries and domestic business, owned by the Company,
will be owned by Armkel, LLC, the successor company, after the consummation of
the transaction and the classification between the domestic business and
international subsidiaries is expected to remain the same as a result of the
acquisition. The subordinated notes expected to be registered by Armkel, LLC,
the successor company, are expected to be fully and unconditionally guaranteed
by the new Armkel domestic subsidiaries and are expected to be joint and
several. The classification of domestic vs. international is not expected to
change after the acquisition by Armkel. The following information is being
presented to comply with SEC Regulation SX, Item 3-10.
Supplemental information for combined condensed revenues in excess of
expenses, net assets to be sold, and cash flows data as of March 31, 2001, and
for the period from April 1, 2001 to September 28, 2001 and for the years ended
March 31, 2001 and 2000 is summarized as follows (amounts in thousands):
Period from April 1, 2001
to September 28, 2001
----------------------------------
Total
Domestic International(1) Combined
-------- ---------------- --------
Net sales.................................................... $126,343 $119,255 $245,598
Cost of goods sold........................................... 38,153 50,360 88,513
-------- -------- --------
Gross profit.............................................. 88,190 68,895 157,085
Operating Expenses........................................... 44,648 57,819 102,467
-------- -------- --------
Revenues in excess of expenses before provision for taxes
on income............................................... 43,542 11,076 54,618
Provision for taxes on income................................ 17,100 4,080 21,180
-------- -------- --------
Revenues in excess of expenses............................ $ 26,442 $ 6,996 $ 33,438
======== ======== ========
Year ended March 31, 2001
----------------------------------
Total
Domestic International(1) Combined
-------- ---------------- --------
Net sales.................................................... $207,376 $228,162 $435,538
Cost of goods sold........................................... 61,316 98,199 159,515
-------- -------- --------
Gross profit.............................................. 146,060 129,963 276,023
Operating Expenses........................................... 79,716 110,052 189,768
-------- -------- --------
Revenues in excess of expenses before provision for taxes
on income............................................... 66,344 19,911 86,255
Provision for taxes on income................................ 26,910 9,419 36,329
-------- -------- --------
Revenues in excess of expenses............................ $ 39,434 $ 10,492 $ 49,926
======== ======== ========
71
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
Year ended March 31, 2000
----------------------------------
Total
Domestic International(1) Combined
-------- ---------------- --------
Net sales....................................................... $182,534 $230,395 $412,929
Cost of goods sold.............................................. 58,095 102,213 160,308
-------- -------- --------
Gross profit................................................. 124,439 128,182 252,621
Operating Expenses.............................................. 76,346 110,155 186,501
-------- -------- --------
Revenues in excess of expenses before provision for taxes on
income..................................................... 48,093 18,027 66,120
Provision for taxes on income................................... 19,668 6,001 25,669
-------- -------- --------
Revenues in excess of expenses............................... $ 28,425 $ 12,026 $ 40,451
======== ======== ========
- --------
(1) International includes primarily the Company's operations in France, the
United Kingdom and Canada, together with certain smaller locations
throughout the world. No particular country has a material component of the
international operations.
72
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
As of March 31, 2001
-------------------------------
Total
Domestic International Combined
-------- ------------- --------
Cash and cash equivalents................................................. $ 99 $ 12,737 $ 12,836
Accounts receivable--trade, less allowance................................ 20,462 64,344 84,806
Other receivables......................................................... 487 3,396 3,883
Inventories............................................................... 25,521 34,968 60,489
Deferred taxes............................................................ 6,281 -- 6,281
Prepaid expenses and other current assets................................. 2,109 3,922 6,031
-------- -------- --------
Total current assets............................................... 54,959 119,367 174,326
-------- -------- --------
Property, plant and equipment, net........................................ 91,785 21,139 112,924
======== ======== ========
Intangible assets:
Excess of purchase price of businesses acquired over the net assets at
date of acquisition, less amortization............................... 28,662 25,107 53,769
Patents, trademarks, contracts, and formulae, less amortization........ 8,921 17,639 26,560
-------- -------- --------
Total intangible assets............................................ 37,583 42,746 80,329
Other assets.............................................................. -- 3,624 3,624
-------- -------- --------
Total assets....................................................... $184,327 $186,876 $371,203
======== ======== ========
Accounts payable.......................................................... $ 5,600 $ 35,580 $ 41,180
Accrued expenses.......................................................... 16,299 16,578 32,877
Notes payable............................................................. -- 6,358 6,358
Taxes on income........................................................... -- 4,621 4,621
-------- -------- --------
Total current liabilities.......................................... 21,899 63,137 85,036
Long-term liabilities..................................................... 5,104 25,301 30,405
Total liabilities.................................................. 27,003 88,438 115,441
Net assets to be sold..................................................... 157,324 98,438 255,762
-------- -------- --------
Total liabilities and net assets to be sold........................ $184,327 $186,876 $371,203
======== ======== ========
73
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS
Period from April 1, 2001 to
September 28, 2001
--------------------------------
Total
Domestic International Combined
-------- ------------- --------
Cash flows from operating activities:
Revenues in excess of expenses............................................ $ 26,442 $ 6,996 $ 33,438
Adjustments to reconcile revenues in excess of expenses to cash flows from
operations:
Depreciation and amortization.......................................... 2,943 1,677 4,620
Amortization........................................................... 409 966 1,375
Other changes in assets and liabilities:
Increase in accounts receivable........................................ (10,239) (5,043) (15,282)
Increase in inventories................................................ 3,571 2,176 5,474
Increase (decrease) in prepaid expenses................................ 347 (2,443) (2,096)
(Decrease) increase in accounts payable and accrued expenses........... (4,002) 380 (3,622)
(Increase) decrease in deferred taxes.................................. (2,272) (165) (2,437)
Other changes.......................................................... 1,041 353 1,394)
-------- ------- --------
Changes in assets and liabilities......................................... (11,554) (4,742) (16,296)
-------- ------- --------
Cash flows provided by operations......................................... 18,240 4,897 23,137
-------- ------- --------
Cash flows from investing activities:
Additions to property, plant and equipment--net of acquisitions........ (2,402) (2,539) (4,941)
Proceeds from sale of property, plant and equipment.................... 54 25 79
-------- ------- --------
Cash flows used in investing activities................................... (2,348) (2,514) (4,862)
-------- ------- --------
Cash flows from financing activities:
Payments of debt....................................................... $ -- $(2,451) $ (2,451)
Cash transferred to CWI................................................ (15,991) (3,144) (19,135)
Increase in borrowings................................................. -- 1,206 1,206
-------- ------- --------
Cash flows provided by (used in) financing activities..................... (15,991) (4,389)
-------- ------- --------
Foreign exchange effect on cash & cash equivalents........................ -- (50) (50)
-------- ------- --------
Decrease in cash and cash equivalents..................................... $ (99) $(2,056) $ (2,155)
======== ======= ========
74
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
Year ended March 31, 2001
--------------------------------
Total
Domestic International Combined
-------- ------------- --------
Cash flows from operating activities:
Revenues in excess of expenses..................................... $ 39,434 $10,492 $ 49,926
Adjustments to reconcile revenues in excess of expenses
to cash flows from operations:
Depreciation and amortization...................................... 5,439 3,176 8,615
Amortization....................................................... 1,071 1,859 2,930
Other changes in assets & liabilities:
Increase in accounts receivable................................. (1,455) (9.069) (10,524)
Increase in inventories......................................... (73) (1,502) (1,575)
Increase in prepaid expenses.................................... (271) (426) (697)
Increase (decrease) in accounts payable & accrued expenses...... (984) 12,925 11,941
Decrease in deferred taxes...................................... (1,579) 685 (894)
Other changes................................................... 224 (1,536) (1,312)
-------- ------- --------
Changes in assets & liabilities................................. (4,138) 1,077 (3,061)
-------- ------- --------
Cash flows provided by operations.................................. 41,806 16,604 58,410
-------- ------- --------
Cash flows from investing activities:
Additions to property, plant and equipment--net of acquisitions. (6,995) (4,375) (11,370)
Proceeds from sale of property, plant and equipment............. 1,086 357 1,443
-------- ------- --------
Cash flows used in investing activities............................ (5,909) (4,018) (9,927)
-------- ------- --------
Cash flows from financing activities:
Payments of debt................................................ -- (3,596) (3,596)
Cash transferred to CWI......................................... (35,798) (5,899) (41,697)
Increase in borrowings.......................................... -- 2,173 2,173
-------- ------- --------
Cash flows provided by (used in) financing activities.............. (35,798) (7,322) (43,120)
-------- ------- --------
Foreign exchange effect on cash & cash equivalents................. -- (553) (553)
-------- ------- --------
Increase in cash & cash equivalents................................ $ 99 $ 4,711 $ 4,810
======== ======= ========
75
CARTER-WALLACE, INC.
CONSUMER BUSINESS--
EXCLUDING ANTIPERSPIRANT/DEODORANT PRODUCTS
IN THE UNITED STATES AND CANADA AND PET PRODUCTS
NOTES TO COMBINED STATEMENTS--(Continued)
Year ended March 31, 2000
--------------------------------
Total
Domestic International Combined
-------- ------------- --------
Cash flows from operating activities:
Revenues in excess of expenses............................................ $ 28,425 $ 12,026 $ 40,451
Adjustments to reconcile revenues in excess of expenses to cash flows from
operations:
Depreciation and amortization............................................. 4,625 3,059 7,684
Amortization.............................................................. 1,187 2,313 3,500
Other changes in assets & liabilities:
Increase in accounts receivable........................................ (2,472) (11,396) (13,868)
Increase in inventories................................................ (6,343) (5,194) (11,537)
Increase in prepaid expenses........................................... (474) (1,095) (1,569)
Increase in accounts payable & accrued expenses........................ 574 4,730 5,304
Decrease in deferred taxes............................................. (4,027) (276) (4,303)
Other changes.......................................................... 408 (1,913) (1,505)
-------- -------- --------
Changes in assets & liabilities........................................ (12,334) (15,144) (27,478)
-------- -------- --------
Cash flows provided by operations......................................... 21,903 2,254 24,157
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment--net of acquisitions........ (6,886) (8,330) (15,216)
Cash paid for acquisitions............................................. -- -- --
Decrease in short-term investments..................................... -- 313 313
Proceeds from sale of property, plant and equipment.................... 353 672 1,025
-------- -------- --------
Cash flows used in investing activities................................... (6,533) (7,345) (13,878)
-------- -------- --------
Cash flows from financing activities:
Payments of debt....................................................... -- (5,008) (5,008)
Cash transferred (to) from CHI......................................... (15,407) 3,605 (11,802)
Increase in borrowings................................................. -- 2,781 2,781
-------- -------- --------
Cash flows provided by (used in) financing activities..................... (15,407) 1,378 (14,029)
-------- -------- --------
Foreign exchange effect on cash & cash equivalents........................ -- (522) (522)
-------- -------- --------
Decrease in cash & cash equivalents....................................... $ (37) $ (4,235) $ (4,272)
======== ======== ========
76
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the Company's
directors, executive officers and key employees as of March 28, 2002.
Name Age Position
---- --- --------
Robert A. Davies, III 66 Chief Executive Officer, Director
Brad Casper.......... 42 President, Domestic Operations
(effective March 18, 2002)
James Rogula......... 68 Director and former President, Domestic Operations
Adrian Huns.......... 53 President, International Operations
Maureen K. Usifer.... 42 Chief Financial Officer
Thomas Gehrmann...... 58 Chief Financial Officer, International Operations
Philip E. Berney..... 38 Director
Zvi Eiref............ 63 Director
Michael B. Goldberg.. 54 Director
Michael B. Lazar..... 32 Director
T. Rosie Albright.... 54 Advisor to the Board of Directors
Robert A. Davies, III has been chief executive officer of the Company, on an
interim basis, since the closing of the Acquisition. Mr. Davies has served as
chairman of the board and chief executive officer of C&D since February 2001.
He served as president of C&D from February 1995 until he was elected chairman.
From January 1995 to September 1995, Mr. Davies was president of the Arm &
Hammer Division at C&D. Before joining C&D in 1995, he served as president and
chief executive officer and a member of the board of directors of California
Home Brands, Inc. Mr. Davies is also director of Footstar, Inc. and The
Newgrange School.
Brad Casper became president, domestic operations of the Company on March
18, 2002. Mr. Casper also serves as president, personal care division of C&D.
Mr. Casper held various positions with Procter & Gamble where he most recently
served as vice president, global fabric care. He served in the global fabric
care role for three years prior to which he was general manager, Hong Kong and
China hair care. Mr. Casper began his career with General Electric.
James Rogula was the Company's president, domestic operations from the
closing of the Acquisition until March 18, 2002. Mr. Rogula serves as
president, personal care division of C&D until March 18, 2002. Since January
1995, Mr. Rogula has held several positions with The Scotts Company. He
continued to serve as group executive vice president for The Scotts Company's
North American Business Groups until the closing date of the Acquisition. Mr.
Rogula was also president of American Candy Company from 1990 to 1994, and
served as vice president and general manager of the Arm & Hammer division at
C&D from 1982 to 1989. Prior to 1982, Mr. Rogula held several different
positions with various consumer products companies, including serving as vice
president new products at Carter-Wallace from 1967 to 1972.
Adrian Huns has been the Company's president, international operations since
the closing of the Acquisition. Mr. Huns has served as president, international
division for the Carter-Wallace consumer business since May 1996. Prior to this
time he was managing director of the Carter-Wallace consumer business'
subsidiary operation in the United Kingdom for 6 years. Mr. Huns worked in
Belgium for the Medgenix Group between 1988 and 1989 and served as director of
marketing for the international branded health care operations of the Boots
Company in England between 1978 and 1988.
Maureen K. Usifer has been the Company's chief financial officer since the
closing of the Acquisition. Ms. Usifer was with C&D from 1988 until she joined
us. From May 2000 through October 2001, Ms. Usifer was Division Controller of
C&D's Armus joint venture, which encompassed $500 million in laundry sales.
From 1996 through 2000, Ms. Usifer was a Senior Finance Manager of C&D,
handling all of the Arm & Hammer's personal care businesses.
77
Thomas Gehrmann has been the Company's chief financial officer,
international operations since the closing of the Acquisition. Mr. Gehrmann has
served as divisional vice president for international finance in the
Carter-Wallace consumer business since 1983. Previously Mr. Gehrmann held other
finance positions within Carter-Wallace's domestic operations and prior to that
was at Johnson & Johnson in various finance roles between 1969 and 1978.
Philip E. Berney has been a managing director of Kelso since January 1999
and has served as one of the Company's directors since the closing of the
Acquisition. Prior to January 1999, Mr. Berney was a senior managing director
and head of high yield finance at Bear Stearns & Co. Mr. Berney is a director
of CDT Holdings, plc and Key Components, Inc.
Zvi Eiref has served as one of the Company's directors since the closing of
the Acquisition. Mr. Eiref has been vice president and chief financial officer
of C&D since November 1995. Mr. Eiref also served as chief financial officer of
C&D from 1979 to 1988. From 1988 to 1995, Mr. Eiref was employed by Chanel,
Inc. as senior vice president, finance.
Michael B. Goldberg has served as one of the Company's directors since the
closing of the Acquisition. Mr. Goldberg has been a managing director of Kelso
since October 1991. Mr. Goldberg served as a managing director and jointly
managed the merger and acquisitions department at The First Boston Corporation
from 1989 to May 1991. Mr. Goldberg was a partner at the law firm of Skadden,
Arps, Slate, Meagher & Flom from 1980 to 1989. Mr. Goldberg is a director of
Consolidated Vision Group, Inc., Endo Pharmaceuticals, Inc., HCI Direct Inc.
and Unilab Corporation. Mr. Goldberg is also a director of the Phoenix House
Foundation and the Woodrow Wilson Council.
Michael B. Lazar has served as one of the Company's directors since the
closing of the Acquisition. Mr. Lazar has been a vice president of Kelso since
January 1999 after having joined Kelso in October 1993. Prior to October 1993,
Mr. Lazar served as an associate in the Acquisition Finance Group at Chemical
Securities, Inc.
T. Rosie Albright, formerly the president of the domestic consumer division
of the Carter-Wallace consumer business, became an advisor to the Company's
board of directors upon closing of the Acquisition. Ms. Albright served as
corporate vice president, consumer products of Carter-Wallace and president,
Carter Products Division of Carter-Wallace from December 1995 until the closing
date of the Acquisition. Prior to 1995, Ms. Albright was general manager and
executive vice president, beauty care with Revlon, Inc.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning annual compensation
earned, paid or accrued by the Company during the period following the
inception of the Company, from September 28, 2001 to December 31, 2001, to, or
for, the Chief Executive Officer, and each of the next four highest paid
executive officers of the Company who served as executive officers during the
fiscal period ended December 31, 2001 and whose total salary and bonus for the
period exceeded $100,000.
SUMMARY COMPENSATION TABLE
Quarterly Compensation
Other Quarterly
Compensation All Other
Name and Principal Position Year Salary ($) Bonus ($) ($) Compensation(3)(4)(5)(6)
- --------------------------- ---- ---------- --------- --------------- ------------------------
Robert A. Davies, III 2001 126,083(1) 150,375(1) -- 20,163
Chief Executive Officer
James Rogula, 2001 81,250(2) 47,400(2) -- 52,887
President
Zvi Eiref, 2001 65,000(1) 68,750(1) -- 10,624
Vice President and Chief
Financial Officer
Adrian Huns, 2001 97,890 73,400 -- 11,887
President, International
Operations
78
- --------
(1) Mr. Davies and Mr. Eiref render services to C&D and the Company. We
estimate that approximately 25% of this compensation represents
compensation for services rendered to the Company.
(2) Mr. Rogula renders services to the Company and C&D. We estimate that
approximately 48% of Mr. Rogula's annual compensation was for services
rendered to the Company and approximately 52% was for services rendered to
C&D.
(3) Includes C&D contributions, vested and unvested, under C&D's Investment
Savings Plan and the Profit Sharing Plan. Total contributions on behalf of
named individuals were as follows: R.A. Davies, III $14,490; J. Rogula
$8,684; Z. Eiref $7,678; A. Huns $11,562.
(4) Includes compensation deferred pursuant to a deferred compensation
agreement with C&D, providing certain plan contributions above Internal
Revenue Code limits. Such amounts are not deferred at the request of the
individual or C&D. Total compensation deferred on behalf of named
individuals was as follows for 2001: R.A. Davies, III $2,475; J. Rogula
$720; Z. Eiref $675.
(5) Includes premiums paid for life insurance plans. Total premiums paid on
behalf of named individuals were as follows for 2001: R.A. Davies, III
$3,198; J. Rogula $195; Z. Eiref $2,271; A. Huns $325.
(6) Includes $43,288 for reimbursement of relocation expenses.
Option/SAR Grants in Last Fiscal Year
The Company did not sponsor any equity-based incentive plans for the last
completed fiscal year.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The Company did not sponsor any equity-based incentive plans for the last
completed fiscal year.
Employment Agreements, Termination Provisions and Change in Control Arrangements
In connection with the Acquisition, the Company entered into a letter
agreement with Mr. Huns. The letter agreement contemplates a negotiation of a
new employment agreement with Mr. Huns and requires the Company to assume all
obligations of Carter-Wallace under a prior change in control agreement between
Mr. Huns and Carter-Wallace until such new agreement is finalized. Under the
change in control agreement, if Mr. Huns' employment is terminated by the
Company for any reason other than for cause or is terminated by Mr. Huns as a
result of a diminution in position, authority, duties or responsibilities or in
certain other circumstances, the Company is obligated to pay Mr. Huns a lump
sum payment equal to two times the annual salary and bonus and an increased
benefit under Executive Pension Benefits Plan based on final salary and bonus
and credit for three additional years of service and treating such benefit as
fully vested. In addition, the Company is required to continue the benefits for
a two-year period following termination of employment or such longer period as
an applicable plan or program provides. As a result of the Acquisition, a
change in control has already occurred under the prior change in control
agreement and Mr. Huns will be entitled to approximately $2.5 million (which
amount excludes an additional payment equal to any applicable excise tax under
the Internal Revenue Code and income taxes associated with such additional
payment), if Mr. Huns' employment is terminated by the Company for any reason
other than for cause or is terminated by Mr. Huns as a result of a diminution
in position, authority, duties or responsibilities or in certain other
circumstances.
79
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 28, 2002, certain information
concerning the beneficial ownership of (a) each director, (b) each nominee for
director, (c) each executive officer, (d) each holder of more than 5% of the
Company's membership interests, and (e) all directors and executive officers as
a group (based on 10,000 membership interests outstanding on such date). Each
of the persons named below has sole voting power and sole investment power with
respect to the membership interests set forth opposite his or her name, except
as otherwise stated.
Number of Percent of
Membership Membership
Name of Beneficial Owner Interests Interests
------------------------ ---------- ----------
Kelso Investment Associates VI, L.P. and KEP VI, LLC(1)(2)............... 5,000 50.0%
Frank T. Nickell(1)(3)................................................... 5,000(3) 50.0%(3)
Thomas R. Wall, IV(1)(3)................................................. 5,000(3) 50.0%(3)
George E. Matelich(1)(3)................................................. 5,000(3) 50.0%(3)
Michael B. Goldberg(1)(3)(4)............................................. 5,000(3) 50.0%(3)
David I. Wahrhaftig(1)(3)................................................ 5,000(3) 50.0%(3)
Frank K. Bynum, Jr.(1)(3)................................................ 5,000(3) 50.0%(3)
Philip E. Berney(1)(3)(4)................................................ 5,000(3) 50.0%(3)
Michael B. Lazar(1)(4)(5)................................................ 0 0.0%
Church & Dwight Co., Inc.(6)............................................. 5,000 50.0%
Robert A. Davies, III(4)(7).............................................. 0 0
Brad Casper(7)........................................................... 0 0
James Rogula(4)(7)....................................................... 0 0
Zvi Eiref(4)(7).......................................................... 0 0
Adrian Huns.............................................................. 0 0
Maureen K. Usifer(7)..................................................... 0 0
Thomas Gehrmann.......................................................... 0 0
T. Rosie Albright........................................................ 0 0
All directors and executive officers of Armkel as a group (11 persons)(8) 5,000(3) 50%(3)
- --------
(1) The business address for these persons is c/o Kelso & Company, 320 Park
Avenue, 24th Floor, New York, New York 10022.
(2) Represents the combined ownership of Kelso Investment Associates VI, L.P.
and KEP VI, LLC. Kelso Investment Associates VI, L.P. and KEP VI, LLC could
be deemed to beneficially own each of the other's membership interests, but
disclaim such beneficial ownership.
(3) Messrs. Nickell, Wall, Matelich, Goldberg, Wahrhaftig, Bynum and Berney may
be deemed to share beneficial ownership of membership interests owned of
record by Kelso Investment Associates VI, L.P. and KEP VI, LLC, by virtue
of their status as managing members of KEP VI, LLC and the general partner
of Kelso Investment Associates VI, L.P. Messrs. Nickell, Wall, Matelich,
Goldberg, Wahrhaftig, Bynum and Berney share investment and voting power
with respect to the membership interests owned by Kelso Investment
Associates VI, L.P. and KEP VI, LLC but disclaim beneficial ownership of
such membership interests.
(4) Members of the Company's board of directors.
(5) Mr. Lazar is not reporting any beneficial ownership, but could be deemed to
share beneficial ownership of membership interests owned of record by Kelso
Investment Associates VI, L.P. and KEP VI, LLC, by virtue of his status as
a non-managing member of KEP VI, LLC and the general partner of Kelso
Investment Associates VI, L.P. Mr. Lazar may be deemed to share investment
and voting power with Messrs. Nickell, Wall, Matelich, Goldberg,
Wahrhaftig, Bynum and Berney with respect to the membership interests owned
by Kelso Investment Associates VI, L.P. and KEP VI, LLC but disclaims
beneficial ownership of such membership interests.
(6) The business address for Church & Dwight Co., Inc. is 469 North Harrison
Street, Princeton, New Jersey 08543.
(7) The business address for these persons is c/o Church & Dwight Co., Inc.,
469 North Harrison Street, Princeton, New Jersey 08543.
(8) Includes membership interests the beneficial ownership of which Messrs.
Berney and Goldberg may be deemed to share, as described in notes 3 and 5
above.
80
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Arrangements with Church & Dwight
In connection with the consummation of the Acquisition, the Company entered
into a series of agreements with C&D. C&D beneficially owns 50% of the
Company's membership interests. C&D has the right to and has appointed three of
the Company's six directors. The agreements are described below:
Management Services Agreement. Upon consummation of the Acquisition, the
Company entered into a management services agreement with C&D pursuant to which
C&D has agreed to provide the Company with corporate management and
administrative services primarily for its domestic operations. These services
generally include, but are not limited to, sales, marketing, facilities
operations, finance, accounting, MIS, legal and regulatory, human resources,
R&D, Canadian sales and executive and senior management oversight of each of
the above services, each as more fully described below. C&D has begun to
provide the Company with some of these services and will provide it with others
as described below. The Company employs its own finance managers and brand
managers at C&D's Princeton, New Jersey corporate headquarters and
manufacturing personnel located at the Colonial Heights facility. In addition,
the Company employs its own R&D employees, who will be located at C&D's
Princeton, New Jersey, corporate headquarters and who will operate under the
supervision of C&D personnel.
C&D has agreed that the services they provide will be in the scope and
nature substantially the same as such services were provided within the
Carter-Wallace consumer business prior to the Acquisition, and that C&D
personnel will provide substantially the same level of service and use
substantially the same degree of care as consistent with the highest level of
services, determined on an aggregate basis, provided by C&D to its own
products, divisions or subsidiaries. In addition, C&D has agreed that it will
not favor its own products, divisions or subsidiaries over those services
provided to the Company under the management services agreement (as viewed on
an aggregate basis), that it will make available all resources and personnel
reasonably necessary to perform the services in a manner consistent with the
standards described above and that all employees it designates to provide the
services to the Company will have the appropriate skill sets to perform such
services and that these employees will not, without the Company's prior
approval, have material conflicts of interest or responsibilities that
materially conflict with the services to be provided under the management
services agreement.
Under the management services agreement, C&D currently provides the Company
with domestic selling services comparable to those provided at the
Carter-Wallace consumer business historically, including direct selling
activities to retail customers, supervision of broker organizations and
operations for non-direct sales and related administrative functions such as
pricing announcements, promotional bulletins, brand pricing and promotion
execution. During the year 2002, C&D will begin to provide general sales
support for the Company's Canadian operations, similar to those C&D provides
for the Company's domestic operations. The marketing services that C&D provides
to the Company include creative services, packaging and graphic development,
marketing research and related consumer testing services, website maintenance,
consumer relations and specialized consumer promotion programs. C&D may, from
time to time, contract with an outside advertising agency for certain creative
services, including execution and production of television, radio and print
commercials. The Company employs its own brand managers who coordinate
marketing activities with the designated C&D employees.
In 2002, C&D has begun providing the Company with domestic facilities and
operational services that include customer service functions, production
planning, transportation analysis, inventory control, engineering, purchasing,
environmental and safety analysis, general plant supervision and manufacturing
management and oversight. In addition, C&D will provide distribution services
for all of the Company's domestic products, as described under "Manufacturing
and Distribution Agreement."
81
In the first half of 2002, C&D began providing the Company with finance
services and accounting services. The finance services that C&D will provide
under the management services agreement consist of promotional payment services
comparable to those provided at the Carter-Wallace consumer business
historically. The Company employs its own personnel to perform budgeting,
forecasting, financial analysis, bill payment and financial closing activities.
All domestic accounting activities will be performed by C&D, including accounts
payable functions, credit and collections functions, cash applications to
accounts receivables, treasury, risk management, general expense analysis,
projections and external reporting functions. Consolidation and reporting
activities performed by C&D for the Company will include the international
business. Plant costs and inventory accounting functions are performed by the
Company's own personnel.
In the first half of 2002, C&D began providing the Company with management
information services that include order processing, production of sales
reports, deployment and sourcing of inventory and other inventory control
functions, transportation planning, billing, promotion and pricing functions,
maintenance of accounts payable and accounts receivable, sales forecasting,
network maintenance and support, including desktop support, and data and voice
communications and support of plant MIS functions.
C&D also currently provides a full range of legal and regulatory services to
the Company, including regulatory compliance and advertising claims support,
litigation services, tax services, including planning and compliance,
intellectual property management, employment matters, securities laws
compliance and transactional legal services. In addition, international legal
services will be provided on an as needed basis.
C&D also currently provides the Company with general human resources
corporate support for domestic and international operations. These services
include employee relations support in all locations, organization development
and executive training, implementation of short and long term incentive plans,
recruiting, surveys of headcount, wages and work practices, general employer,
operations and labor relations support and corporate benefits administration.
The Company performs its own human resources functions at each of its plants
and facilities.
The Company also performs its own R&D activities, including brand
maintenance and support, existing product development and new product
development. C&D provides supplementary R&D services related to package design
and engineering, process development and engineering, corporate quality control
and assurance functions consisting of system design and quality control
auditing systems, technology development, manufacturing oversight and clinical
research in connection with regulatory compliance, at the direction of the
Company's R&D employees.
Under the management services agreement (the "MSA"), C&D provides the
Company with executive and senior management supervisory services, including
oversight of all of the above services by designated management personnel,
planning and oversight of the implementation of services under the agreement
and development of the Company's general business strategy. These executive and
senior management activities are to be performed at the direction of the
Company's board of directors and under the supervision of its executive
officers.
The service charges under the MSA will commence on an agreeable starting
date for each of the services at which time the applicable fee structure set
forth in the agreement will commence. The parties agreed to commence the sales
and legal and regulatory services on September 28, 2001. As of December 31,
2001, the parties had not yet agreed to commence the other services but have
agreed to an alternative method to compensate C&D for services provided to the
Company. The Company was charged $2.1 million for such services for the period
from September 29, 2001 to December 31, 2001. Beginning in 2002 the Company
will compensate C&D for services provided under the management services
agreement based upon a schedule of costs. Under the MSA, the Company will
initially pay annual fees of $1.7 million for domestic sales services; $1.6
million for Canadian sales services; $1.0 million for advertising and creative
services; $1.7 million for operations functions; $2.2 million for accounting
services; $1.6 million for management information services;
82
$1.0 million for human resources functions; and $3.5 million for legal
services, including regulatory affairs services; and the Company reimburses C&D
for actual costs incurred for marketing, finance and R&D functions. In
addition, the Company pays a quarterly fee equal to five percent of its EBITDA
(as EBITDA is calculated pursuant to the management services agreement) for the
previous quarter, which fee will be adjusted annually, for executive and senior
management oversight services. However, the Company and C&D have agreed
to re-evaluate the fee structure under the management services agreement,
including the underlying methods used to determine the allocations thereof,
from time to time, and in any event at least annually and following any
increase in the Company's fiscal year net sales by 10% or more over the prior
fiscal year's net sales, to confirm that the fee structure produces a result
consistent with the fair allocation of costs and benefits incurred by the
parties. If the Company and C&D are unable to agree upon adjustments to the fee
structure, the fixed fees paid under the management services agreement will be
adjusted based on the increase and/or decrease in the consumer price index for
that year. In addition, the Company and C&D may agree to add new services under
the agreement that are not presently contemplated. The Company will reimburse
C&D for the actual and necessary costs required to commence provision of the
services to be provided under the management services agreement, including
costs and expenses for transition employees and relocation and recruiting costs
and expenses.
The term of the management services agreement is five years, with automatic
one-year renewals unless the Company provides six months' notice that it does
not want to renew the agreement. The Company may, acting at the direction of
Kelso, terminate the management services agreement upon a change of control of
C&D, upon a bankruptcy of either C&D or the Company, or upon the sale of C&D's
or Kelso's ownership interests in the Company to a third party. See "The Joint
Venture Agreement--Transfers of Interests; Preferential Purchase or Sale
Rights" for a description of the circumstances under which C&D may transfer its
interests in the Company.
In addition, the management services agreement contains provisions that
permit the Company to terminate the agreement with respect to any particular
service or services provided by C&D, if:
. such service or services have been significantly deficient for a period
of at least 180 days, compared to how such service or services could have
been provided by an independent third party who performed similar
services for a business of the size and type of the Company, and such
deficiency was within C&D's control;
. the Company's chief executive officer recommends to its board of
directors to terminate such service or services; and
. the Company has provided written notice to C&D detailing such deficiency
and has given C&D an opportunity to cure such deficiency for a period of
at least 90 days.
Manufacturing and Distribution Agreement. Pursuant to the manufacturing and
distribution agreement, C&D will manufacture products associated with the Nair
product line for the Company using the Company's equipment, which the Company
anticipates will be relocated to a C&D facility during 2002. The products will
be manufactured in an amount reflecting the Company's best estimates of its
production requirements. The Company will pay C&D an annual fee of $500,000 for
manufacturing overheads, which includes quality control, maintenance and
maintenance supplies, utilities, general plant supervision, property taxes and
insurance, and an annual fee of $300,000 for facilities operations, which
includes customer service functions, production planning, inventory control,
engineering, purchasing, environmental and safety analysis and implementation
and manufacturing management. In addition, the Company will reimburse C&D for
their direct manufacturing labor costs. Under the manufacturing and
distribution agreement, C&D also will provide distribution services for all of
the Company's products, and the Company will reimburse C&D for the actual costs
of storage, handling, freight, raw and packaging materials, plus certain costs
of warehousing, labor and overhead and returned goods processing based on time
records, space utilization or a similar basis. Under certain circumstances, C&D
has agreed to provide the Company manufacturing and distribution services with
respect to any new products the Company may develop at a cost structure to be
agreed by C&D and the Company.
83
C&D has agreed that the services they provide to the Company under the
manufacturing and distribution agreement will be in the scope and nature
substantially the same as such services were provided within the Carter-Wallace
consumer business prior to the Acquisition, and that C&D personnel will provide
substantially the same level of service and use substantially the same degree
of care as consistent with the highest level of services, determined on an
aggregate basis, provided by C&D to its own products, divisions or
subsidiaries. In addition, C&D has agreed that it will not favor its own
products, divisions or subsidiaries over those services provided to the Company
under the manufacturing and distribution agreement (as viewed on an aggregate
basis), and that all employees it designates to provide the manufacturing and
distribution services to the Company will have the appropriate skill sets to
perform such services and that these employees will not, without the Company's
prior approval, have material conflicts of interest or responsibilities that
materially conflict with the services to be provided under the manufacturing
and distribution agreement. The agreement contains customary indemnification
provisions.
The term of the manufacturing and distribution agreement is five years, with
one-year automatic renewals unless either party provides six months' written
notice that it does not wish to renew the agreement. In addition, the
manufacturing and distribution agreement contains provisions for the
re-evaluation of fee structures, the addition of new services and termination
of the agreement with respect to any particular service or services provided by
C&D on similar terms as those described above for the management services
agreement.
Arrid Manufacturing Agreement. In connection with the Company's sale of the
Disposed Businesses to C&D, the Company entered into the Arrid manufacturing
agreement with C&D, pursuant to which the Company manufactures certain products
associated with the Arrid Extra Dry, Arrid XX and Lady's Choice product lines
for C&D at its Cranbury, New Jersey facility, using equipment owned by C&D. The
products are manufactured by the Company in an amount reflecting C&D's best
estimates of its production requirements, and the Company manufactures these
products for C&D at the Company's cost. The Arrid manufacturing agreement
expires on September 28, 2002, although it may be terminated earlier if C&D
relocates the related manufacturing equipment out of the Cranbury plant before
the end of the term. The Arrid manufacturing agreement contains customary
indemnification provisions.
The Joint Venture Agreement
The Company is a Delaware limited liability company. The Company was formed
as a joint venture among C&D, which owns 50%, and an entity wholly owned by
Kelso Investment Associates VI, L.P. and KEP VI, LLC, which the are referred to
as the Kelso funds, which owns 50%, for the purpose of acquiring the consumer
products business of Carter-Wallace. The Company's joint venture agreement
governs the Company's operations. The material provisions of this agreement are
described below.
Governance. The joint venture agreement contains provisions regarding the
Company's governance, including the following:
. Board of Directors. The Company's board of directors consists of three
directors appointed by C&D and three directors appointed by the Kelso
funds. Any committee established by the Company's board of directors must
have an equal number of directors appointed by the Kelso funds and by
C&D. Any action by the Company's board of directors requires the
affirmative vote of members holding a majority of membership interests
present at a meeting at which such matter is voted upon, except that in
certain matters, approval of at least one C&D director and at least one
Kelso director is also required. The presence of an equal number of Kelso
directors and C&D directors constitutes a quorum.
. Officers and Management. The Company's officers may be removed by its
board of directors (requiring, in the case of its chief executive
officer, the approval of at least one Kelso director and one C&D
director) or the Company's chief executive officer (in the case of its
other officers). In addition, if certain financial targets are not
satisfied, Kelso has the right to remove the Company's chief executive
officer. Vacancies in the Company's officer positions will be filled by
its board of directors (which, in the case of the Company's chief
executive officer and chief financial officer positions, require the
approval of a Kelso director and a C&D director) or the Company's chief
executive officer.
84
A number of significant managerial functions are performed for the Company
by C&D. For additional information about the Company's management, see Item 10.
Directors and Executive Officers of the Registrant.
Transfers of Interests; Preferential Purchase or Sale Rights. Except as
described below, the Company's members may not transfer their interests in the
Company or admit additional members (other than in transactions with certain of
their respective affiliates), without the prior written consent of all of the
other members.
. Call Option. The Kelso funds have granted C&D an option to purchase the
Kelso funds' membership interests in the Company. The option is
exercisable at any time after the third anniversary and before the fifth
anniversary of the closing of the Acquisition. The purchase price for the
Kelso funds' interests in the Company is equal to 50% of the Company's
fair market value at the time the option exercise notice is given, as
determined pursuant to a valuation method set forth in the joint venture
agreement. The purchase price is subject to certain floors and caps which
are indexed to the Kelso funds' rate of return on their investment in the
Company.
. Right of First Offer and Drag Along Rights. The joint venture agreement
provides for a mechanism whereby the Company's members may dispose of
their interests and, in certain circumstances, force a sale of the entire
entity. At any time after the fifth anniversary of the closing of the
Acquisition, in the case of a request by the Kelso funds, and after the
seventh anniversary of the closing of the Acquisition, in the case of a
request by C&D, the Kelso funds or C&D may request that the other party
purchase all (but not less than all) of the requesting party's ownership
interests in the Company at a price specified in the request. If the
other party declines the request, the requesting party may sell all of
its interests and all of the other member's interest in the Company to a
third party, with the proceeds of such sale to be distributed to the
members in accordance with the terms of the joint venture agreement.
Under certain circumstances, if the proceeds of a proposed third party
sale are insufficient to provide the Kelso funds with a return of their
initial investment (less $5.0 million), C&D may elect to purchase the
Kelso funds' interests at a price equal to the amount of the Kelso funds'
initial investment (less $5.0 million), or pay the Kelso funds the amount
of such shortfall, as described below.
. Change of Control Put Option. The joint venture agreement also provides
that, upon the occurrence of a change of control of C&D (as defined in
the joint venture agreement), the Kelso funds may require C&D to purchase
all of the Kelso funds' ownership interests in the Company at a price
equal to (i) the fair market value of the Company at the time the option
exercise notice is given, minus $5.0 million, multiplied by 50%, plus
(ii) $5.0 million.
The foregoing purchase and sale rights will be subject to various
adjustments and limitations not described above, including the agreement by C&D
that, in the case of a forced sale to a third party, after the seventh
anniversary of the Acquisition it will make up any shortfall to the Kelso funds
relative to the Kelso funds' aggregate initial capital contribution, less $5.0
million.
Covenants of C&D. Under the joint venture agreement, C&D have agreed that:
. without the prior consent of the Kelso funds, C&D will not incur any
indebtedness unless C&D's ratio of consolidated debt to adjusted EBITDA
(as defined in C&D's senior credit facility) for the prior four fiscal
quarters is less than 4.5:1.0, or unless C&D has provided the Kelso funds
with a letter of credit or other reasonably satisfactory credit support
in an amount equal to the Kelso funds' initial capital contributions,
less $5.0 million;
. it will not create or cause or permit to exist any restriction on its
ability to operate the Company or on the Company's ability to engage in
any line of business; and
. if presented with an opportunity to operate or invest in any entity
engaged in the business of manufacturing, marketing or selling of
condoms, depilatory products or diagnostic tests, or, with respect
85
to non-U.S. operations, cosmetics, over-the-counter drugs or toning and
exfoliating products, it will first offer such opportunity to the Company.
Covenant of Kelso. Under the joint venture agreement, the Kelso funds have
agreed that, if presented with an opportunity to operate or invest in any
entity engaged in the business of manufacturing, marketing or selling condoms,
depilatory products or diagnostic tests, it will first offer such opportunity
to the Company.
Termination of the Joint Venture Agreement. The joint venture agreement
will terminate upon the occurrence of any of the following:
. the vote of all members in favor of termination;
. an initial public offering of the Company's equity interests;
. the payment of the proceeds of any sale of the Company to a third party,
or upon the final liquidating distribution made in connection with a
dissolution of the Company; or
. the payment in full by either member of the purchase price for all the
membership interests of the other member.
Dissolution of the Company. The Company will be dissolved and its assets
liquidated upon the occurrence of any of the following:
. the vote of all members in favor of dissolution;
. the sale, exchange or disposition of substantially all of the Company's
assets;
. an insolvency event with respect to any member, if other members holding
at least 50.0% of the interests vote in favor of dissolution;
. it becoming unlawful for a member to conduct its business substantially
in the manner contemplated by the joint venture agreement; or
. a judicially ordered dissolution.
Ongoing Arrangements with Carter-Wallace
General. As a condition to, and as part of, the Acquisition, the Company
entered into a number of agreements to provide certain services to, and receive
certain services from, Carter-Wallace. These services relate to certain aspects
of the businesses to be operated by the Company and Carter-Wallace following
the Acquisition. The material arrangements are described below:
Cranbury Facilities Sharing Agreement and Lease. Under the Cranbury
facilities sharing agreement and lease, the Company has leased to
Carter-Wallace for two years a portion of the manufacturing plant in Cranbury
(purchased by the Company as part of the Acquisition) at a specified monthly
rent. The agreement contains provisions whereby Carter-Wallace may elect to
extend the term of the lease for up to an additional 18 months. The rental
payments payable under the agreement escalate from approximately $125,000 per
month during the initial year to up to $500,000 per month during the optional
extension periods. In addition, the Company has granted to Carter-Wallace an
option to purchase this property following the expiration of the lease at the
greater of $20.0 million or the fair market value of the property on the date
the option is exercised.
Transition Services Agreement. Pursuant to the transition services
agreement, the Company provides office administration, distribution and human
resources services to Carter-Wallace at the Company's Cranbury and Dayton
facilities. Services will be provided at the Cranbury facility for the duration
of the Cranbury facilities sharing agreement and lease, and will be provided at
Dayton for the duration of the Company's lease of that facility, which is
scheduled to expire in mid 2002. Carter-Wallace will pay scheduled fees for
these services, which in the aggregate equal approximately $200,000 per month,
although it has the option to terminate some or all of the services provided to
it upon advance written notice. In addition, for the same time periods, the
Company has agreed to make available to Carter-Wallace certain of its unionized
production employees and quality-control employees to perform pharmaceutical
production services for Carter-Wallace's pharmaceutical
86
operations at Cranbury and Dayton under the supervision of Carter-Wallace
personnel. Carter-Wallace has assumed all costs and legal obligations
associated with the relevant employees. In addition, for a period of one year
from the date of the Acquisition, Carter-Wallace will provide information
technology services to the Company in exchange for a monthly fee of $85,000.
The Company has also agreed to purchase systems support services from
Carter-Wallace, including assistance with transferring records from
Carter-Wallace's systems, for $200,000 per month for the length of the Cranbury
lease, although the Company may terminate such services upon written notice to
Carter-Wallace.
The Indemnification Agreements. Upon consummation of the Acquisition,
certain stockholders of Carter-Wallace entered into an indemnification
agreement, pursuant to which they are be required to indemnify the merger buyer
and certain related parties from damages suffered by such parties in relation
to the exercise of appraisal rights with respect to the merger under the
Delaware General Corporation Law. The Company has entered into an agreement
pursuant to which it has agreed to indemnify Carter-Wallace and certain related
parties from liabilities of Carter-Wallace relating to any action challenging
the validity of the merger or the Acquisition (other than on antitrust grounds)
and 60% of all liabilities of Carter-Wallace relating to the exercise of
appraisal rights with respect to the merger under the Delaware General
Corporation Law. The agreement to which the Company is a party provides for
indemnification after taking into account any amounts received under the
indemnification agreement between Carter-Wallace and certain of its
stockholders described above. The Company believes that the combined effect of
these agreements is that our potential indemnification obligations with respect
to appraisal rights claims are effectively limited to approximately $12.0
million, although there is no cap on the Company's indemnification obligation
arising out of other transaction-related liabilities of Carter-Wallace.
However, in connection with the Company's sale of the Disposed Businesses to
C&D, C&D agreed to indemnify the Company for up to 17.38% of amounts that the
Company may become liable for pursuant to the indemnification agreement with
Carter-Wallace. See "The Acquisition; Product Line Resale to C&D and Related
Matters" for a discussion of the sale to C&D.
The Company has also agreed to indemnify Carter-Wallace and certain related
parties against liabilities assumed by us pursuant to the Asset Purchase
Agreement. Carter-Wallace has agreed to indemnify the Company and certain
related parties against any liabilities not assumed by the Company in the Asset
Purchase Agreement.
Other Agreements Related to the Acquisition. The Company has entered into a
number of other agreements in connection with the Acquisition. Pursuant to an
insurance claims agreement, any insurance proceeds received by the Company with
respect to any assets or liabilities excluded from the assets purchased or
liabilities assumed by the Company will be paid to Carter-Wallace, and any
insurance proceeds received by Carter-Wallace with respect to any purchased
assets or assumed liabilities will be paid to the Company. Pursuant to a
consumer products transitional trademark license agreement, Carter-Wallace has
granted to the Company a fully paid, worldwide non-exclusive license for a
period of up to one year to use the "Carter-Wallace" name and related logos
used on any and all consumer and personal care products manufactured or
distributed by the consumer products business purchased by the Company.
Pursuant to the company patent license agreement, the Company has agreed to
license for the life of each patent, on a royalty-free and exclusive basis,
specified patents and related know-how to Carter-Wallace for use in
Carter-Wallace's healthcare and pharmaceuticals business.
Other Agreements
Kelso Financial Advisory Services Agreement. Kelso has agreed to provide
the Company with financial advisory services for which the Company will pay 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.
In addition, upon consummation of the Acquisition, the Company paid Kelso a fee
of $4.5 million for investment banking services provided in connection with the
Acquisition.
Church & Dwight Fee Agreement. Upon consummation of the Acquisition, the
Company paid C&D a transaction fee of $3.5 million for services provided in
connection with the Acquisition.
87
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
See Item 8. FINANCIAL STATEMENTS AND OTHER DATA
(a) 2. Financial Statements Schedule
Included in Part IV of this report:
See Item 8. FINANCIAL STATEMENTS AND OTHER DATA
(a) 3. Exhibits
Exhibit
Numbers Description
- ------- -----------
3.1 Certificate of Formation of Armkel, LLC dated March 9, 2001 (Incorporated by Reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-4, dated November 9, 2001)
3.2 Limited Liability Company Agreement of Armkel, LLC, dated as of March 9, 2001 (Incorporated by
Reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4, dated
November 9, 2001)
3.3 Amended and Restated Limited Liability Company Agreement of Armkel, LLC, dated as of
August 27, 2001 (Incorporated by Reference to Exhibit 3.3 to the Company's Registration Statement
on Form S-4, dated November 9, 2001)
3.4 Amendment No. 1 to the Amended and Restated Limited Liability Company Agreement of Armkel,
LLC, dated as of September 24, 2001 (Incorporated by Reference to Exhibit 3.4 to the Company's
Registration Statement on Form S-4, dated November 9, 2001)
3.5 Amendment No. 2 to the Amended and Restated Limited Liability Company Agreement of Armkel,
LLC dated as of September 24, 2001*
4.1 Indenture, dated as of August 28, 2001, by and among Armkel, LLC, Armkel Finance, Inc. and
The Bank of New York, as Trustee (Incorporated by Reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4, dated November 9, 2001)
4.2 Registration Rights Agreement dated as of August 28, 2001 by and among Armkel, LLC,
Armkel Finance, Inc., J.P. Morgan Securities Inc. and Deutsche Banc. Alex Brown Inc. (Incorporated
by Reference to Exhibit 4.2 to the Company's Registration Statement on Form S-4, dated
November 9, 2001)
10.1 Management Services Agreement dated as of September 28, 2001 by and between Church & Dwight
Co., Inc. and Armkel, LLC (Incorporated by Reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-4, dated November 9, 2001)
10.2 Manufacturing and Distribution Agreement dated as of September 28, 2001 by and between
Church & Dwight Co., Inc. and Armkel, LLC (Incorporated by Reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-4, dated November 9, 2001)
10.3 Arrid Manufacturing Agreement dated as of September 28, 2001 by and between Church & Dwight
Co., Inc. and Armkel, LLC (Incorporated by Reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-4, dated November 9, 2001)
10.4 Consumer Products Transitional Trademark License Agreement dated as of September 28, 2001 by
and between Carter-Wallace, Inc. and Armkel, LLC (Incorporated by Reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-4, dated November 9, 2001)
88
Exhibit
Numbers Description
- ------- -----------
10.5 Cranbury Facilities Sharing Agreement and Lease between Carter-Wallace, Inc. and Armkel, LLC
(Incorporated by Reference to Exhibit 10.5 to the Company's Registration Statement on Form S-4,
dated November 9, 2001)
10.6 Indemnification Agreement dated as of September 28, 2001 by and between Carter-Wallace, Inc. and
Armkel, LLC (Incorporated by Reference to Exhibit 10.6 to the Company's Registration Statement on
Form S-4, dated November 9, 2001)
10.7 Insurance Claims Agreement dated as of September 28, 2001 by and between Carter-Wallace, Inc. and
Armkel, LLC (Incorporated by Reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-4, dated November 9, 2001)
10.8 Patent License Agreement dated as of September 28, 2001 by and between Carter-Wallace, Inc. and
Armkel, LLC (Incorporated by Reference to Exhibit 10.8 to the Company's Registration Statement on
Form S-4, dated November 9, 2001)
10.9 Transition Services Agreement dated as of September 28, 2001 by and between Carter-Wallace, Inc.
and Armkel, LLC (Incorporated by Reference to Exhibit 10.9 to the Company's Registration Statement
on Form S-4, dated November 9, 2001)
10.10 Credit Agreement dated as of September 28, 2001 among Armkel, LLC, Armkel Holding
(Netherlands) B.V., Armkel (Canada), Corp., the Lenders Party thereto, and the Chase Manhattan
Bank, as Administrative Agent, J.P. Morgan Securities Inc. and Deutsche Banc. Alex Brown Inc., as
Arrangers and Bookrunners and Fleet National Bank, National City Bank and PNC Bank, N.A., as
Documentation Agents (Incorporated by Reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-4, dated November 9, 2001)
10.11 The Carter-Wallace, Inc. Change in Control Severance Plan, as amended and restated, effective
May 7, 2001 (Incorporated by Reference to Exhibit 10.11 to the Company's Registration Statement on
Form S-4, dated November 9, 2001)
10.12 Church & Dwight Severance Policy, effective March 28, 2001 (Incorporated by Reference to
Exhibit 10.12 to the Company's Registration Statement on Form S-4, dated November 9, 2001)
10.13 Employment Letter, dated as of September 28, 1998, between Adrian Huns and Carter-Wallace, Inc.
(Incorporated by Reference to Exhibit 10.13 to the Company's Registration Statement on
Form S-4, dated November 9, 2001)
21 Subsidiaries of the Registrant*
- --------
* filed herewith
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year ended
December 31, 2001.
89
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Allowance for Doubtful Accounts
- -------------------------------
Balance at beginning of period 8/28/01 (inception).................................... $ --
Reserves acquired as part of acquisition of Carter-Wallace Consumer Business excluding
anti-perspirants & pet care Products................................................ 5,031
Additions
Charged to expenses & costs........................................................ 783
Deductions:
Amounts Written off:............................................................... (497)
------
Balance at end of period 12/31/01..................................................... $5,317
======
S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 29, 2002.
ARMKEL, LLC
By: /S/ ROBERT A. DAVIES, III
-----------------------------
Robert A. Davies, III
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/ ROBERT A. DAVIES, III Chief Executive Officer, Director March 26, 2002
- ------------------------------- (Principal Executive Officer)
Robert A. Davies, III
/S/ MAUREEN K. USIFER Chief Financial Officer, (Principal March 26, 2002
- ------------------------------- Financial Officer and Principal
Maureen K. Usifer Accounting Officer)
/S/ JAMES ROGULA Director March 26, 2002
- -------------------------------
James Rogula
/S/ PHILIP E. BERNEY Director March 26, 2002
- -------------------------------
Philip E Berney
/S/ ZVI EIREF Director March 26, 2002
- -------------------------------
Zvi Eiref
/S/ MICHAEL B. GOLDBERG Director March 26, 2002
- -------------------------------
Michael B. Goldberg
/S/ MICHAEL B. LAZAR Director March 26, 2002
- -------------------------------
Michael B. Lazar