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1.      Business and Basis of Presentation

Nature of Business

Prestige Brands Holdings, Inc. (referred to herein as the “Company” which reference shall, unless the context requires otherwise, be deemed to refer to Prestige Brands Holdings, Inc. and all of its direct or indirect wholly-owned subsidiaries on a consolidated basis) is engaged in the marketing, sales and distribution of over-the-counter healthcare, personal care and household cleaning brands to mass merchandisers, drug stores, supermarkets, club and dollar stores primarily in the United States, Canada and certain other international markets.  Prestige Brands Holdings, Inc. is a holding company with no assets or operations and is also the parent guarantor of the senior credit facility and the senior notes more fully described in Note 10 to the consolidated financial statements.

Basis of Presentation

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.  All significant intercompany transactions and balances have been eliminated in consolidation.  The Company’s fiscal year ends on March 31st of each year.  References in these consolidated financial statements or notes to a year (e.g., “2010”) mean the Company’s fiscal year ended on March 31st of that year.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.  Although these estimates are based on the Company’s knowledge of current events and actions that the Company may undertake in the future, actual results could differ from those estimates.  As discussed below, the Company’s most significant estimates include those made in connection with the valuation of intangible assets, sales returns and allowances, trade promotional allowances and inventory obsolescence.

 

Cash and Cash Equivalents

The Company considers all short-term deposits and investments with original maturities of three months or less to be cash equivalents.  Substantially all of the Company’s cash is held by a large regional bank with headquarters in California.  The Company does not believe that, as a result of this concentration, it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.

Accounts Receivable

The Company extends non-interest-bearing trade credit to its customers in the ordinary course of business.  The Company maintains an allowance for doubtful accounts receivable based upon historical collection experience and expected collectability of the accounts receivable.  In an effort to reduce credit risk, the Company (i) has established credit limits for all of its customer relationships, (ii) performs ongoing credit evaluations of customers’ financial condition, (iii) monitors the payment history and aging of customers’ receivables, and (iv) monitors open orders against an individual customer’s outstanding receivable balance.

Inventories

Inventories are stated at the lower of cost or fair value, where cost is determined by using the first-in, first-out method.  The Company provides an allowance for slow moving and obsolete inventory, whereby it reduces inventories for the diminution of value, resulting from product obsolescence, damage or other issues affecting marketability, equal to the difference between the cost of the inventory and its estimated market value.  Factors utilized in the determination of estimated market value include (i) current sales data and historical return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new product introductions, (v) product expiration dates, and (vi) component and packaging obsolescence.

 

F-7

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Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method based on the following estimated useful lives:

 

		Years
Machinery		5
Computer equipment		3
Furniture and fixtures		7

Leasehold improvements are amortized over the lesser of the term of the lease or 5 years.

Expenditures for maintenance and repairs are charged to expense as incurred.  When an asset is sold or otherwise disposed of, the cost and associated accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized in the consolidated statement of operations.

 

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  An impairment loss is recognized if the carrying amount of the asset exceeds its fair value.

Goodwill

The excess of the purchase price over the fair market value of assets acquired and liabilities assumed in purchase business combinations is classified as goodwill.  The Company does not amortize goodwill, but performs impairment tests of the carrying value at least annually in the fourth fiscal quarter of each year.  The Company tests goodwill for impairment at the reporting unit “brand” level which is one level below the operating segment level.

Intangible Assets

Intangible assets, which are composed primarily of trademarks, are stated at cost less accumulated amortization.  For intangible assets with finite lives, amortization is computed on the straight-line method over estimated useful lives ranging from 3 to 30 years.

Indefinite-lived intangible assets are tested for impairment at least annually in the fourth fiscal quarter; however, at each reporting period an evaluation is made to determine whether events and circumstances continue to support an indefinite useful life.  Intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts exceed their fair values and may not be recoverable.  An impairment loss is recognized if the carrying amount of the asset exceeds its fair value.

Deferred Financing Costs

The Company has incurred debt origination costs in connection with the issuance of long-term debt.  These costs are capitalized as deferred financing costs and amortized using the straight-line method, which approximates the effective interest method, over the term of the related debt.

Revenue Recognition

Revenues are recognized when the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the selling price is fixed or determinable; (iii) the product has been shipped and the customer takes ownership and assumes the risk of loss; and (iv) collection of the resulting receivable is reasonably assured.  The Company has determined that these criteria are met and the transfer of the risk of loss generally occurs when product is received by the customer and, accordingly, recognizes revenue at that time.  Provision is made for estimated discounts related to customer payment terms and estimated product returns at the time of sale based on the Company’s historical experience.

As is customary in the consumer products industry, the Company participates in the promotional programs of its customers to enhance the sale of its products.  The cost of these promotional programs varies based on the actual number of units sold during a finite period of time.  These promotional programs consist of direct-to-consumer incentives such as coupons and temporary price reductions, as well as incentives to the Company’s customers, such as slotting fees and cooperative advertising.  Estimates of the costs of these promotional programs are based on (i) historical sales experience, (ii) the current offering, (iii) forecasted data, (iv) current market conditions, and (v) communication with customer purchasing/marketing personnel.  At the completion of the promotional program, the estimated amounts are adjusted to actual results.

 

F-8

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Due to the nature of the consumer products industry, the Company is required to estimate future product returns.  Accordingly, the Company records an estimate of product returns concurrent with recording sales which is made after analyzing (i) historical return rates, (ii) current economic trends, (iii) changes in customer demand, (iv) product acceptance, (v) seasonality of the Company’s product offerings, and (vi) the impact of changes in product formulation, packaging and advertising.

Cost of Sales

Cost of sales includes product costs, warehousing costs, inbound and outbound shipping costs, and handling and storage costs.  Shipping, warehousing and handling costs were $21.4 million for 2010, $22.5 million for 2009 and $23.2 for 2008.

Advertising and Promotion Costs

Advertising and promotion costs are expensed as incurred.  Slotting fees associated with products are recognized as a reduction of sales.  Under slotting arrangements, the retailers allow the Company’s products to be placed on the stores’ shelves in exchange for such fees.  

Stock-based Compensation

The Company recognizes stock-based compensation by measuring the cost of services to be rendered based on the grant-date fair value of the equity award.  Compensation expense is to be recognized over the period an employee is required to provide service in exchange for the award, generally referred to as the requisite service period.

Income Taxes

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.

The Taxes Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  As a result, the Company has applied a more-likely-than-not recognition threshold for all tax uncertainties.  The guidance only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the various taxing authorities.

The Company is subject to taxation in the United States and various state and foreign jurisdictions.  

The Company classifies penalties and interest related to unrecognized tax benefits as income tax expense in the Statements of Operations.

Derivative Instruments

Companies are required to recognize derivative instruments as either assets or liabilities in the consolidated Balance Sheets at fair value.  The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship.  For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation.

The Company has designated its derivative financial instruments as cash flow hedges because they hedge exposure to variability in expected future cash flows that are attributable to interest rate risk.  For these hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same line item (principally interest expense) associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings.  Any ineffective portion of the gain or loss on the derivative instruments is recorded in results of operations immediately.  Cash flows from these instruments are classified as operating activities.

Earnings Per Share

Basic earnings per share is calculated based on income available to common stockholders and the weighted-average number of shares outstanding during the reporting period.  Diluted earnings per share is calculated based on income available to common stockholders and the weighted-average number of common and potential common shares outstanding during the reporting period.  Potential common shares, composed of the incremental common shares issuable upon the exercise of stock options, stock appreciation rights and unvested restricted shares, are included in the earnings per share calculation to the extent that they are dilutive.

 

 

F-9

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Reclassifications

Certain prior period financial statement amounts have been reclassified to conform to the current period presentation.

Recently Issued Accounting Standards

In April 2010, the FASB issued authoritative guidance to provide clarification regarding the classification requirements of a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade. The guidance states that such an award should not be considered to contain a market, performance, or service condition and should not be classified as a liability if it otherwise qualifies as an equity classification. This guidance is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In May 2009, the FASB issued guidance regarding subsequent events, which was subsequently updated in February 2010. This guidance established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  In particular, this guidance set forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance was effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009, and was therefore adopted by the Company for the second quarter 2009 reporting.  The adoption did not have a significant impact on the subsequent events that the Company reports, either through recognition or disclosure, in the consolidated financial statements.  In February 2010, the FASB amended its guidance on subsequent events to remove the requirement to disclose the date through which an entity has evaluated subsequent events, alleviating conflicts with current SEC guidance.  This amendment was effective immediately and the Company therefore removed the disclosure in this Annual Report.

In January 2010, the FASB issued authoritative guidance requiring new disclosures and clarifying some existing disclosure requirements about fair value measurement.  Under the new guidance, a reporting entity should (a) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, and (b) present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs.  This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The new guidance requires only enhanced disclosures and the Company does not expect this guidance to have a material impact on its consolidated financial statements.

In August 2009, the FASB issued authoritative guidance to provide clarification on measuring liabilities at fair value when a quoted price in an active market is not available.  In these circumstances, a valuation technique should be applied that uses either the quote of the liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique consistent with existing fair value measurement guidance, such as an income approach or a market approach.  The new guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  This guidance became effective beginning with the third quarter of the Company’s 2010 fiscal year; however, the adoption of the new guidance did not have a material impact on the Company’s financial position, results from operations or cash flows.

In June 2009, the FASB issued authoritative guidance to eliminate the exception to consolidate a qualifying special-purpose entity, change the approach to determining the primary beneficiary of a variable interest entity and require companies to more frequently re-assess whether they must consolidate variable interest entities.  Under the new guidance, the primary beneficiary of a variable interest entity is identified qualitatively as the enterprise that has both (a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.  This guidance becomes effective for the Company’s fiscal 2011 year-end and interim reporting periods.  The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In June 2009, the FASB established the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles.  The new guidance explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants.  The new guidance became effective for our financial statements issued for the three and six month periods ending on September 30, 2009.

 

 

F-10

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The Derivatives and Hedging Topic of the FASB ASC was amended to require a company with derivative instruments to disclose information to enable users of the financial statements to understand (i) how and why the company uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  Accordingly, the Derivatives and Hedging Topic now requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.  The amendments to the Derivatives and Hedging Topic were effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The implementation of the Derivatives and Hedging guidance required enhanced disclosures of derivative instruments and the Company’s hedging activities and did not have any impact on the Company’s financial position, results from operations or cash flows.

Management has reviewed and continues to monitor the actions of the various financial and regulatory reporting agencies and is currently not aware of any other pronouncement that could have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

2. Discontinued Operations and Sale of Certain of Assets

In October 2009, the Company sold certain assets related to the shampoo brands previously included in its Personal Care products segment to an unrelated third party.  In accordance with the Discontinued Operations Topic of the ASC, the Company reclassified the related assets as held for sale in the consolidated balance sheets as of March 31, 2009 and reclassified the related operating results as discontinued in the consolidated financial statements and related notes for all periods presented.  The Company recognized a gain of $253,000 on a pre-tax basis and $157,000 net of tax effects on the sale in the quarter ended December 31, 2009.

The following table presents the assets related to the discontinued operations as of March 31, 2009 (in thousands):

Inventory		$	1,038
Intangible assets			8,472
Total assets held for sale		$	9,510

 

The following table summarizes the results of discontinued operations (in thousands):

		Year Ended March 31,
		2010				2009				2008
Components of Income
Revenues		$	5,053			$	9,568			$	11,496
Income before income taxes			1,121				1,896				2,994

 

The total sale price for the assets was $9 million, with $8 million received upon closing, and the remaining $1 million to be received on the first anniversary of the closing.

3.      Acquisition of Businesses

Acquisition of Wartner USA B.V.

On September 21, 2006, the Company completed the acquisition of the ownership interests of Wartner USA B.V., the owner of the Wartner brand of over-the-counter wart treatment products.  The Company expects that the Wartner brand, which is the #3 brand in the United States over-the-counter wart treatment category, along with the acquired technology, will continue to enhance the Company’s leadership in the category.  Additionally, the Company believes that the brand will continue to benefit from a targeted advertising and marketing program, as well as the Company’s business model of outsourcing manufacturing and the elimination of redundant operations.  The results from operations of the Wartner brand have been included within the Company’s consolidated financial statements as a component of the Over-the-Counter Healthcare segment commencing September 21, 2006.

 

F-11

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The purchase price of the ownership interests was approximately $31.2 million, including fees and expenses of the acquisition of $216,000 and the assumption of approximately $5.0 million of contingent payments, with an originally estimated fair value of $3.8 million, owed to the former owner of Wartner through 2011.  The Company funded the cash acquisition price from operating cash flows.  During 2009, the Company paid the former owner $4.0 million in full satisfaction of all obligations due to such former owner.

The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition.

(In thousands)
Inventory		$	769
Intangible assets			29,600
Goodwill			11,746
Accrued liabilities			(3,854	)
Deferred tax liabilities			(7,000	)
		$	31,261

The amount allocated to intangible assets of $29.6 million includes $17.8 million related to the Wartner brand trademark which the Company estimates to have a useful life of 20 years, as well as $11.8 million related to a patent estimated to have a useful life of 14 years.  Goodwill resulting from this transaction was $11.7 million, inclusive of a deferred income tax liability recorded for the difference between the assigned values of assets acquired and liabilities assumed, and their respective taxes bases.  It is estimated that of such amount, approximately $4.7 million will be deductible for income tax purposes.

 

4.      Accounts Receivable

Accounts receivable consist of the following (in thousands):

		March 31,
		2010				2009
Trade accounts receivable		$	35,527			$	37,521
Other receivables			1,588				1,081
			37,115				38,602
Less allowances for discounts, returns and uncollectible accounts			(6,494	)			(2,577	)
		$	30,621			$	36,025

 

5.      Inventories

Inventories consist of the following (in thousands):

		March 31,
		2010				2009
Packaging and raw materials		$	2,037			$	1,955
Finished goods			27,125				23,984
		$	29,162			$	25,939

Inventories are shown net of allowances for obsolete and slow moving inventory of $2.0 million and $1.4 million at March 31, 2010 and 2009, respectively.

 

F-12

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6.      Property and Equipment

Property and equipment consist of the following (in thousands):

		March 31,
		2010				2009
Machinery		$	1,620			$	1,556
Computer equipment			1,570				1,021
Furniture and fixtures			239				239
Leasehold improvements			418				357
			3,847				3,173
Accumulated depreciation			(2,451	)			(1,806	)
		$	1,396			$	1,367

The Company recorded depreciation expense of $645,000, $548,000, $507,000 for 2010, 2009 and 2008, respectively.

7.      Goodwill

 

A reconciliation of the activity affecting goodwill by operating segment is as follows (in thousands):

		Over-the- Counter				Household				Personal
		Healthcare				Cleaning				Care				Consolidated
Balance – March 31, 2008
Goodwill		$	235,789			$	72,549			$	4,643			$	312,981
Accumulated purchase price adjustments			(2,174	)			—				—				(2,174	)
Accumulated impairment losses			—				—				(1,892	)			(1,892	)
			233,615				72,549				2,751				308,915
2009 purchase price adjustments			(3,988	)			—				—				(3,988	)
2009 impairments			(125,527	)			(65,160	)			—				(190,687	)
Balance – March 31, 2009
Goodwill			235,789				72,549				4,643				312,981
Accumulated purchase price adjustments			(6,162	)			—				—				(6,162	)
Accumulated impairment losses			(125,527	)			(65,160	)			(1,892	)			(192,579	)
			104,100				7,389				2,751				114,240
2010 impairments			—				—				(2,751	)			(2,751	)
Balance – March 31, 2010
Goodwill		$	235,789				72,549				4,643				312,981
Accumulated purchase price adjustments			(6,162	)			—				—				(6,162	)
Accumulated impairment losses			(125,527	)			(65,160	)			(4,643	)			(195,330	)
			104,100				7,389				—				111,489

At March 31, 2010, in conjunction with the annual test for goodwill impairment, the Company recorded an impairment charge of $2.8 million to adjust the carrying amounts of goodwill related to one reporting unit within the Personal Care segment to its fair value, as determined by use of a discounted cash flow methodology.  The impairment was a result of distribution losses and increased competition from private label store brands.

At March 31, 2009, in conjunction with the annual test for goodwill impairment, the Company recorded an impairment charge aggregating $190.7 million to adjust the carrying amounts of goodwill related to several reporting units within the Over-the-Counter Healthcare and Household Cleaning segments to their fair values as determined by use of a discounted cash flow methodology.  These charges were a consequence of the challenging economic environment experienced in 2009, the dislocation of the debt and equity markets, and contracting consumer demand for the Company’s product offerings.

The discounted cash flow methodology is a widely-accepted valuation technique utilized by market participants in the transaction evaluation process and has been applied consistently.  However, we did consider the Company’s market capitalization at March 31, 2010 and 2009, as compared to the aggregate fair values of our reporting units to assess the reasonableness of our estimates pursuant to the discounted cash flow methodology.    Although the impairment charges represent management’s best estimate, the estimates and assumptions made in assessing the fair value of the Company’s reporting units and the valuation of the underlying assets and liabilities are inherently subject to significant uncertainties.  Consequently, changing rates of interest and inflation, declining sales or margins, increases in competition, changing consumer preferences, technical advances or reductions in advertising and promotion may require additional impairments in the future.

 

F-13

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8.      Intangible Assets

 

A reconciliation of the activity affecting intangible assets is as follows (in thousands):

 

		Year Ended March 31, 2010
		Indefinite Lived				Finite Lived				Non Compete
		Trademarks				Trademarks				Agreement				Totals
Carrying Amounts
Balance – March 31, 2009		$	500,176			$	106,159			$	158			$	606,493
Reclassifications			(45,605	)			45,605				—				—
Additions
Deletions			—				(500)				—				(500	)
Impairments			—				—				—				—
Balance – March 31, 2010		$	454,571			$	151,264			$	158			$	605,993
Accumulated Amortization
Balance – March 31, 2009		$	—			$	37,214			$	142			$	37,356
Additions			—				9,725				16				9,741
Deletions			—				(333)				—				(333	)
Balance – March 31, 2010		$	—			$	46,606			$	158			$	46,764
Intangibles, net – March 31, 2010		$	454,571			$	104,658			$	—			$	559,229

 

		Year Ended March 31, 2009
		Indefinite Lived				Finite Lived				Non Compete
		Trademarks				Trademarks				Agreement				Totals
Carrying Amounts
Balance – March 31, 2008		$	544,963			$	119,470			$	196			$	664,629
Additions			—				500				—				500
Deletions			—				—				(38)				(38)
Impairments			(44,787)				(13,811)				—				(58,598	)
Balance – March 31, 2009		$	500,176			$	106,159			$	158			$	606,493
Accumulated Amortization
Balance – March 31, 2008		$	—			$	28,377			$	141			$	28,518
Additions							8,837				39				8,876
Deletions			—				—				(38)				(38)
Balance – March 31, 2009		$	—			$	37,214			$	142			$	37,356
Intangibles, net – March 31, 2009		$	500,176			$	68,945			$	16			$	569,137

In a manner similar to goodwill, the Company completed a test for impairment of its intangible assets during the fourth quarter of 2010.  Accordingly, the Company recorded no impairment charge as facts and circumstances indicated that the fair values of the intangible assets for such segments exceeded their carrying values.

In a manner similar to goodwill, the Company completed a test for impairment of its intangible assets during the fourth quarter of 2009.  Accordingly, the Company recorded an impairment charge aggregating $58.6 million to the Over-the-Counter Healthcare and Household Cleaning segments as facts and circumstances indicated that the carrying values of the intangible assets for such segments exceeded their fair values and may not be recoverable.

 

F-14

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The economic events experienced during the fiscal year ended March 31, 2009, as well as the Company’s plans and projections for its brands indicated that several of such brands can no longer support indefinite useful lives.  Each of these brands incurred an impairment charge during the three month period ended March 31, 2009 and has been adversely affected by increased competition and the macroeconomic environment in the United States.  Consequently, at April 1, 2009, management reclassified $45.6 million of previously indefinite-lived intangibles to intangibles with definite lives.  Management estimates the remaining useful lives of these intangibles to be 20 years.

The fair values and the annual amortization charges of the reclassified intangibles are as follows (in thousands):

Intangible		Fair Value as of March 31, 2009				Annual Amortization
Household Trademarks		$	34,888			$	1,745
OTC Healthcare Trademark			10,717				536
		$	45,605			$	2,281

 

At March 31, 2010, intangible assets are expected to be amortized over a period of 3 to 30 years as follows (in thousands):

Year Ending March 31,
2011		$	9,558
2012			9,160
2013			8,612
2014			7,797
2015			6,147
Thereafter			63,386
		$	104,660

 

9.      Other Accrued Liabilities

Other accrued liabilities consist of the following (in thousands):

		March 31,
		2010				2009
Accrued marketing costs		$	3,823			$	3,519
Accrued payroll			5,233				750
Accrued commissions			285				312
Accrued income taxes			372				679
Accrued professional fees			1,089				1,906
Interest swap obligation			—				2,152
Severance			929				—
Other			2				89
		$	11,733			$	9,407

 

During the second quarter of fiscal 2010, the Company completed a staff reduction program to eliminate approximately 10% of its workforce.  The accrued severance balance as of March 31, 2010 is related to this reduction in workforce and consists primarily of the remaining payments of salaries, bonuses and other benefits for separated employees.

The Company has reclassified the interest rate swap liability of $2.2 million as of March 31, 2009 from accounts payable to accrued liabilities. The Company’s interest rate swap liability of $2.2 million as of March 31, 2009 terminated before March 26, 2010.

 

F-15

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10.    Long-Term Debt

 

Long-term debt consists of the following (in thousands):

		March 31,
		2010				2009
Senior secured term loan facility (“2010 Senior Term Loan”) that bears interest at the Company’s option at either the prime rate plus a margin of 2.25% or LIBOR plus 3.25% with a LIBOR floor of 1.5%.  At March 31, 2010, the average interest rate on the 2010 Senior Term Loan was 4.75%.  Principal payments of $375,000 plus accrued interest are payable quarterly, with the remaining principal due on the 2010 Senior Term Loan maturity date.  The 2010 Senior Term Loan matures on March 24, 2016 and is collateralized by substantially all of the Company’s assets.		$	150,000			$	—
Senior secured term loan facility (“Tranche B Term Loan Facility”) that bore interest at the Company’s option at either the prime rate plus a margin of 1.25% or LIBOR plus a margin of 2.25%.  The Tranche B Term Loan Facility was repaid in full during 2010.			—				252,337
Senior unsecured notes (“2010 Senior Notes”) that bear interest at 8.25% which are payable on April 1st and October 1st of each year.  The 2010 Senior Notes mature on April 1, 2018; however the Company may redeem some or all of the 2010 Senior Notes at redemption prices set forth in the indenture governing the 2010 Senior Notes.  The 2010 Senior Notes are unconditionally guaranteed by Prestige Brands Holdings, Inc., and its domestic wholly-owned subsidiaries other than Prestige Brands, Inc., the issuer.  Each of these guarantees is joint and several.  There are no significant restrictions on the ability of any of the guarantors to obtain funds from their subsidiaries.			150,000				—
Senior subordinated notes (“Senior Subordinated Notes”) that bore interest of 9.25% which was payable on April 15th and October 15th of each year.  The balance outstanding on the Senior Subordinated Notes as of March 31, 2010 was repaid in full subsequent to year-end, on April 15th, 2010.  The Senior Subordinated Notes were unconditionally guaranteed by Prestige Brands Holdings, Inc., and its domestic wholly-owned subsidiaries other than Prestige Brands, Inc., the issuer.			28,087				126,000
			328,087				378,337
Current portion of long-term debt			(29,587	)			(3,550	)
			298,500				374,787
Less: unamortized discount on the 2010 Senior Notes			(3,943)				—
Long-term debt, net of unamortized discount		$	294,557			$	374,787

On March 24, 2010, Prestige Brands, Inc. issued the 2010 Senior Notes for $150 million, with an interest rate of 8.25% and a maturity date of April 1, 2018; and entered into a senior secured term loan facility for $150 million, with an interest rate at LIBOR plus 3.25% with a LIBOR floor of 1.5% and a maturity date of March 24, 2016; and entered into a non-amortizing senior secured revolving credit facility (“2010 Revolving Credit Facility”) in an aggregate principal amount of up to $30.0 million.  The Company’s 2010 Revolving Credit Facility was available for maximum borrowings of $30.0 million at March 31, 2010.

The $150 million 2010 Senior Term Loan was entered into with a discount to lenders of $1.8 million and net proceeds to the Company of $148.2 million, yielding a 5.0% effective interest rate.  The 2010 Senior Notes were issued at an aggregate face value of $150 million with a discount to bondholders of $2.2 million and net proceeds to the Company of $147.8 million, yielding a 8.5% effective interest rate.

In connection with entering into the 2010 Senior Term Loan, the 2010 Revolving Credit Facility and the 2010 Senior Notes, the Company incurred $7.3 million in issuance costs, of which $6.6 million was capitalized as deferred financing costs and $0.7 million expensed.  The deferred financing costs are being amortized over the terms of the related loan and notes.

In March and April 2010, the Company retired its Tranche B Term Loan facility with an original maturity date of April 11, 2016 and Senior Subordinated Notes that bore interest at 9.25% with a maturity date of April 15, 2012.  The Company recognized a $2.7 million loss on the extinguishment of debt.

 

F-16

---

 

The 2010 Senior Notes are senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis.  The 2010 Senior Notes are effectively junior in right of payment to all existing and future secured obligations of the Company, equal in right of payment with all existing and future senior unsecured indebtedness of the Company, and senior in right of payment to all future subordinated debt of the Company.

 

At any time prior to April 1, 2014, the Company may redeem the 2010 Senior Notes in whole or in part at a redemption price equal to 100% of the principal amount of the notes redeemed, plus a “make-whole premium” calculated as set forth in the Indenture, together with accrued and unpaid interest, if any, to the date of redemption.  The Company may redeem the 2010 Senior Notes in whole or in part at any time on or after the 12-month period beginning April 1, 2014 at a redemption price of 104.125% of the principal amount thereof, at a redemption price of 102.063% of the principal amount thereof if the redemption occurs during the 12-month period beginning on April 1, 2015, and at a redemption price of 100% of the principal amount thereof on and after April 1, 2016, in each case, plus accrued and unpaid interest, if any, to the redemption date.  In addition, on or prior to April 1, 2013, with the net cash proceeds from certain equity offerings, the Company may redeem up to 35% in aggregate principal amount of the 2010 Senior Notes at a redemption price of 108.250% of the principal amount of the 2010 Senior Notes to be redeemed, plus accrued and unpaid interest to the redemption date.

The 2010 Senior Term Loan contains various financial covenants, including provisions that require the Company to maintain certain leverage and interest coverage ratios and not to exceed annual capital expenditures of $3.0 million.  The 2010 Senior Term Loan and the 2010 Senior Notes also contain provisions that restrict the Company from undertaking specified corporate actions, such as asset dispositions, acquisitions, dividend payments, repurchase of common shares outstanding, changes of control, incurrence of indebtedness, creation of liens, making of loans and transactions with affiliates.  Additionally, the 2010 Senior Term Loan and the 2010 Senior Notes contain cross-default provisions whereby a default pursuant to the terms and conditions of certain indebtedness will cause a default on the remaining indebtedness under the 2010 Senior Term Loan, the 2010 Senior Notes and the Senior Subordinated Notes.  At March 31, 2010, the Company was in compliance with the applicable financial covenants under its long-term indebtedness.

Future principal payments required in accordance with the terms of the 2010 Senior Term Loan, the 2010 Senior Notes and the Senior Subordinated Notes are as follows (in thousands):

Year Ending March 31
2011		$	29,587
2012			1,500
2013			1,500
2014			1,500
2015			1,500
Thereafter			292,500
		$	328,087

 

F-17

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11.	Fair Value Measurements

As deemed appropriate, the Company uses derivative financial instruments to mitigate the impact of changing interest rates associated with its long-term debt obligations.  At March 31, 2010, the Company had no open financial derivative financial obligations. While the Company has not entered into derivative financial instruments for trading purposes, all of the Company’s derivatives were over-the-counter instruments with liquid markets.  The notional, or contractual, amount of the Company’s derivative financial instruments were used to measure the amount of interest to be paid or received and did not represent an actual liability.  The Company accounted for the interest rate cap and swap agreements as cash flow hedges.

In March 2005, the Company purchased interest rate cap agreements with a total notional amount of $180.0 million, the terms of which were as follows:

Notional Amount			Interest Rate Cap Percentage			Expiration Date
(In millions)
$	50.0			3.25	%	May 31, 2006
	80.0			3.50		May 30, 2007
	50.0			3.75		May 30, 2008

The Company entered into an interest rate swap agreement, effective March 26, 2008, in the notional amount of $175.0 million, decreasing to $125.0 million at March 26, 2009 to replace and supplement the interest rate cap agreement that expired on May 30, 2008.  The Company agreed to pay a fixed rate of 2.88% while receiving a variable rate based on LIBOR.  The agreement terminated on March 26, 2010, and was neither renewed nor replaced.

The Fair Value Measurements and Disclosures Topic of the FASB ASC requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market assuming an orderly transaction between market participants.  The Fair Value Measurements and Disclosures Topic established market (observable inputs) as the preferred source of fair value to be followed by the Company’s assumptions of fair value based on hypothetical transactions (unobservable inputs) in the absence of observable market inputs.

Based upon the above, the following fair value hierarchy was created:

                   

	Level 1 –	Quoted market prices for identical instruments in active markets,
	Level 2 –	Quoted prices for similar instruments in active markets, as well as quoted prices for identical or similar instruments in markets that are not considered active, and
	Level 3 –	Unobservable inputs developed by the Company using estimates and assumptions reflective of those that would be utilized by a market participant.

  

Quantitative disclosures about the fair value of the Company’s derivative hedging instruments are as follows:

Fair Value Measurements at March 31, 2010

(In thousands) Description

March 31, 2010

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Interest Rate Swap Liability

$

—

$

—

$

—

$

—

 

F-18

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						Fair Value Measurements at March 31, 2009
(In thousands) Description		March 31, 2009				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Interest Rate Swap Liability		$	2,152			$	—			$	2,152			$	—

						Fair Value Measurements at March 31, 2008
(In thousands) Description		March 31, 2008				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Interest Rate Swap Liability		$	1,527			$	—			$	1,527			$	—

A summary of the fair value of the Company’s derivatives instruments, their impact on the consolidated statements of operations and comprehensive income and the amounts reclassified from other comprehensive income is as follows (in thousands):

For the Year Ended March 31, 2010

March 31, 2010

Income Statement Account

Amount Income

Amount Gains

Cash Flow Hedging Instruments

Balance Sheet Location

Notional Amount

Fair Value Asset/ (Liability)

Gains/ Losses Charged

(Expense) Recognized In Income

(Losses) Recognized In OCI

Interest Rate Swap

Other Accrued Liabilities

$

—

$

—

Interest Expense

$

(2,866

)

$

2,152

											For the Year Ended March 31, 2009
		March 31, 2009									Income Statement Account		Amount Income				Amount Gains
Cash Flow Hedging Instruments		Balance Sheet Location		Notional Amount				Fair Value Asset/ (Liability)			Gains/ Losses Charged		(Expense) Recognized In Income				(Losses) Recognized In OCI
Interest Rate Swap		Other Accrued Liabilities		$	125			$	(2,152	)	Interest Expense		$	(502	)		$	(625	)

											For the Year Ended March 31, 2008
		March 31, 2008									Income Statement Account		Amount Income				Amount Gains
Cash Flow Hedging Instruments		Balance Sheet Location		Notional Amount				Fair Value Asset/ (Liability)			Gains/ Losses Charged		(Expense) Recognized In Income				(Losses) Recognized In OCI
Interest Rate Swap		Other Accrued Liabilities		$	175			$	(1,527	)	Interest Expense		$	—			$	(1,527	)

 

F-19

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The Company recorded a charge to interest expense of $2.9 million during 2010 in connection with this interest rate swap agreement.  At March 31, 2010, the Company did not participate in an interest rate swap agreement.

At March 31, 2009, the fair value of the interest rate swap was $2.2 million.  Such amount was included in current liabilities.  The determination of fair value is based on closing prices for similar instruments traded in liquid over-the-counter markets.  The changes in the fair value of this interest rate swap were recorded in Accumulated Other Comprehensive Income in the balance sheet due to its designation as a cash flow hedge.

For certain of our financial instruments, including cash, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their respective fair values due to the relatively short maturity of these amounts.

At March 31, 2010, the carrying value of the 2010 Senior Term Loan was $150.0 million.  The terms of the 2010 Senior Term Loan provide that the interest rate is adjusted, at the Company’s option, on either a monthly or quarterly basis, to the prime rate plus a margin of 2.25% or LIBOR, with a floor of 1.5%, plus a margin of 3.25%. At March 31, 2010, the market value of the Company’s 2010 Senior Term Loan was approximately $150.8 million.  

At March 31, 2010, the carrying value of the Company’s 8.25% 2010 Senior Notes was $150.0 million. The market value of these notes was approximately $152.3 million at March 31, 2010.   The market values have been determined from market transactions in the Company’s debt securities.  Also at March 31, 2010, the Company maintained a residual balance of $28.1 million relating to the Senior Subordinated Notes that remained outstanding at fiscal year end. The $28.1 million balance was redeemed in full on April 15, 2010 at par value.

12.	Stockholders’ Equity

      

The Company is authorized to issue 250.0 million shares of common stock, $0.01 par value per share, and 5.0 million shares of preferred stock, $0.01 par value per share.  The Board of Directors may direct the issuance of the undesignated preferred stock in one or more series and determine preferences, privileges and restrictions thereof.

Each share of common stock has the right to one vote on all matters submitted to a vote of stockholders.  The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to prior rights of holders of all classes of stock outstanding having priority rights as to dividends.  No dividends have been declared or paid on the Company’s common stock through March 31, 2010.

During 2009 and 2008, the Company repurchased 65,000 and 4,000 shares, respectively, of restricted common stock from former employees pursuant to the provisions of the various employee stock purchase agreements.  The 2009 purchases were at an average price of $0.24 per share while the 2008 purchases were at an average purchase price of $1.70 per share.   All of such shares have been recorded as treasury stock. There were no share repurchases during 2010.

 

F-20

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13.	Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

		Year Ended March 31,
		2010				2009				2008
Numerator
Income (loss) from continuing operations		$	31,262			$	(187,953	)		$	32,046
Income from discontinued operations and gain on sale of discontinued operations			853				1,177				1,873
Net income (loss)		$	32,115			$	(186,776	)		$	33,919
Denominator
Denominator for basic earnings per share- weighted average shares			50,013				49,935				49,751
Dilutive effect of unvested restricted common stock (including restricted stock units), options and stock appreciation rights issued to employees and directors			72				—				288
Denominator for diluted earnings per share			50,085				49,935				50,039
Earnings per Common Share:
Basic earnings (loss) per share from continuing operations		$	0.63			$	(3.76	)		$	0.64
Basic earnings per share from discontinued operations and gain on sale of discontinued operations			0.01				0.02				0.04
Basic net earnings (loss) per share		$	0.64			$	(3.74	)		$	0.68
Diluted earnings (loss) per share from continuing operations		$	0.62			$	(3.76	)		$	0.64
Diluted earnings per share from discontinued operations and gain on sale of discontinued operations			0.02				0.02				0.04
Diluted net earnings (loss) per share		$	0.64			$	(3.74	)		$	0.68

At March 31, 2010, 204,892 shares of restricted stock granted to employees and restricted stock units granted to Board members, subject only to time vesting, were unvested and excluded from the calculation of basic earnings per share; however, such shares were included in the calculation of diluted earnings per share.  Additionally, 82,202 shares of restricted stock granted to employees have been excluded from the calculation of both basic and diluted earnings per share because vesting of such shares is subject to contingencies that were not met as of March 31, 2010.  Lastly, at March 31, 2010, there were options to purchase 1,330,337 shares of common stock outstanding that were not included in the computation of diluted earnings per share because their exercise price was greater than the average market price of the common stock, and therefore, their inclusion would be antidilutive.

At March 31, 2009, 183,000 shares of restricted stock granted to employees have been excluded from the calculation of both basic and diluted earnings per share since vesting of such shares is subject to contingencies.  Additionally, at March 31, 2009, there were options to purchase 663,000 shares of common stock outstanding that were not included in the computation of diluted earnings per share because their exercise price was greater than the average market price of the common stock, and therefore, their inclusion would be antidilutive.

At March 31, 2008, 314,000 restricted shares issued to employees, subject only to time-vesting, were unvested and excluded from the calculation of basic earnings per share; however, such shares were included in the calculation of diluted earnings per share.  Additionally, at March 31, 2008, 324,000 shares of restricted stock granted to management and employees, as well as 16,000 stock appreciation rights have been excluded from the calculation of both basic and diluted earnings per share since vesting of such shares is subject to contingencies.  Lastly, at March 31, 2008, there were options to purchase 254,000 shares of common stock outstanding that were not included in the computation of diluted earnings per share because their exercise price was greater than the average market price of the common stock, and therefore, their inclusion would be antidilutive.

 

F-21

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14.	Share-Based Compensation

In connection with the Company’s initial public offering, the Board of Directors adopted the 2005 Long-Term Equity Incentive Plan (“the Plan”) which provides for the grant, to a maximum of 5.0 million shares, of restricted stock, stock options, restricted stock units, deferred stock units and other equity-based awards.  Directors, officers and other employees of the Company and its subsidiaries, as well as others performing services for the Company, are eligible for grants under the Plan.  

During 2010, net compensation costs charged against income and the related income tax benefit recognized were $2.1 million and $790,000, respectively.  During the year management determined that performance goals associated with the grants of stock to management and employees in May 2008 were met and recorded stock compensation costs accordingly.  No prior compensation costs were required to be reversed.

During 2009, net compensation costs charged against income and the related income tax benefit recognized were $2.4 million and $924,000, respectively.  During the year management determined that the Company would not meet the performance goals associated with the grants of stock to management and employees in May 2007 and 2008.  Therefore, management reversed previously recorded stock compensation costs of $705,000 and $193,000 related to the May 2007 and May 2008 grants, respectively.

During 2008, net compensation costs charged against income, and the related tax benefits recognized were $1.1 million and $433,000, respectively.  During the year management determined that the Company would not meet the performance goals associated with the grants of restricted stock to management and employees in October 2005, July 2006 and May 2007.  Therefore, management reversed previously recorded stock-based compensation costs of $538,000, $394,000 and $166,000 related to the October 2005, July 2006 and May 2007 grants, respectively.

Restricted Shares

Restricted shares granted to employees under the Plan generally vest in 3 to 5 years, contingent on attainment of Company performance goals, including revenue and earnings before income taxes, depreciation and amortization targets, or the attainment of certain time vesting thresholds.  The restricted share awards provide for accelerated vesting if there is a change of control, as defined in the plan or document pursuant to which the awards were made.  The fair value of nonvested restricted shares is determined as the closing price of the Company’s common stock on the day preceding the grant date.  The weighted-average grant-date fair values during 2010, 2009 and 2008 were $7.09, $10.85 and $12.52, respectively.

A summary of the Company’s restricted shares granted under the Plan is presented below:

  

Nonvested Shares		Shares (in thousands)				Weighted-Average Grant-Date Fair Value
Nonvested at March 31, 2007			294.4			$	11.05
Granted			292.0				12.52
Vested			(24.8	)			10.09
Forfeited			(76.9	)			12.35
Nonvested at March 31, 2008			484.7				11.78
Granted			303.5				10.85
Vested			(29.9	)			10.88
Forfeited			(415.9	)			11.55
Nonvested at March 31, 2009			342.4				11.31
Granted			171.6				7.09
Vested			(47.8	)			10.97
Forfeited			(179.1	)			11.28
Nonvested at March 31, 2010			287.1			$	8.86

Options

The Plan provides that the exercise price of the option granted shall be no less than the fair market value of the Company’s common stock on the date the option is granted.  Options granted have a term of no greater than 10 years from the date of grant and vest in accordance with a schedule determined at the time the option is granted, generally 3 to 5 years.  The option awards provide for accelerated vesting if there is a change in control.

 

F-22

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The fair value of each option award is estimated on the date of grant using the Black-Scholes Option Pricing Model (“Black-Scholes Model”) that uses the assumptions noted in the following table.  Expected volatilities are based on the historical volatility of the Company’s common stock and other factors, including the historical volatilities of comparable companies.  The Company uses appropriate historical data, as well as current data, to estimate option exercise and employee termination behaviors.  Employees that are expected to exhibit similar exercise or termination behaviors are grouped together for the purposes of valuation.  The expected terms of the options granted are derived from management’s estimates and consideration of information derived from the public filings of companies similar to the Company and represent the period of time that options granted are expected to be outstanding.  The risk-free rate represents the yield on U.S. Treasury bonds with a maturity equal to the expected term of the granted option.  The weighted-average grant-date fair value of the options granted during 2010, 2009 and 2008 were $3.64, $5.04 and $5.30, respectively.  

		Year Ended March 31,
		2010				2009
Expected volatility			45.6	%			43.3	%
Expected dividends			—				—
Expected term in years			7.0				6.0
Risk-free rate			2.8	%			3.2	%

A summary of option activity under the Plan is as follows:

Options		Shares (in thousands)				Weighted-Average Exercise Price				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value (in thousands)
Outstanding at March 31, 2007			—			$	—				—			$	—
Granted			255.1				12.86				10.0				—
Exercised			—				—				—				—
Forfeited or expired			(1.6	)			12.86				9.2				—
Outstanding at March 31, 2008			253.5				12.86				9.2				—
Granted			413.2				10.91				10.0				—
Exercised			—				—				—				—
Forfeited or expired			(4.1	)			11.83				9.2				—
Outstanding at March 31, 2009			662.6				11.65				8.8				—
Granted			1,125.0				7.16				9.4				2,070.0
Exercised			—				—				—				—
Forfeited or expired			(203.4	)			11.34				7.9				—
Outstanding at March 31, 2010			1,584.2				8.50				8.9				2,070.0
Exercisable at March 31, 2010			297.9			$	11.96				7.6			$	2,070.0

Since the Company’s closing stock price of $9.00 at March 31, 2010 exceeded the exercise price for the options granted in 2010, the aggregate intrinsic value of outstanding options was $2.1 million.  Since the exercise price of the options exceeded the Company’s closing stock price of $5.18 at March 31, 2009 and $8.18 at March 31, 2008, the aggregate intrinsic value of outstanding options was $0 at March 31, 2009 and 2008.

Stock Appreciation Rights (“SARS”)

During 2007, the Board of Directors granted SARS to a group of selected executives; however, there were no SARS granted during 2008, 2009 or 2010.  The terms of the SARS provide that on the vesting date, the executive will receive the excess of the market price of the stock award over the market price of the stock award on the date of issuance.  The Board of Directors, in its sole discretion, may settle the Company’s obligation to the executive in shares of the Company’s common stock, cash, other securities of the Company or any combination thereof.

 

F-23

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The Plan provides that the issuance price of a SAR shall be no less than the market price of the Company’s common stock on the date the SAR is granted.  SARS may be granted with a term of no greater than 10 years from the date of grant and will vest in accordance with a schedule determined at the time the SAR is granted, generally 3 to 5 years.  The weighted-average grant date fair value of the SARS granted during 2007 was $3.68.  The fair value of each SAR award was estimated on the date of grant using the Black-Scholes Model using the assumptions noted in the following table.

		Year Ended March 31, 2007
Expected volatility			50.00	%
Expected dividend			—
Expected term in years			2.75
Risk-free rate			5.00	%

The SARs expired on March 31, 2009; and no compensation was paid because the grant-date market price of the Company’s common stock exceeded the market value of the Company’s common stock on the measurement date.

A summary of SARS activity under the Plan is as follows:

SARS		Shares (in thousands)				Grant Date Stock Price				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value (in thousands)
Outstanding at March 31, 2007			16.1				9.97				2.0				30,300
Granted			—				—				—				—
Forfeited or expired			—				—				—				—
Outstanding at March 31, 2008			16.1				9.97				1.0				—
Granted			—				—				—				—
Forfeited or expired			(16.1	)			(9.97	)			—				—
Outstanding at March 31, 2009			—			$	—				—			$	—
Exercisable at March 31, 2009			—			$	—				—			$	—

At March 31, 2010, there were $4.5 million of unrecognized compensation costs related to nonvested share-based compensation arrangements under the Plan based on management’s estimate of the shares that will ultimately vest.  The Company expects to recognize such costs over a weighted average period of 1.5 years.  However, certain of the restricted shares vest upon the attainment of Company performance goals and if such goals are not met, no compensation costs would ultimately be recognized and any previously recognized compensation cost would be reversed.  The total fair value of shares vested during 2010, 2009 and 2008, was $525,000, $325,000, and $277,000, respectively.  There were no options exercised during 2010, 2009 or 2008; hence there were no tax benefits realized during these periods.  At March 31, 2010, there were 3.0 million shares available for issuance under the Plan.

 

F-24

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15.	Income Taxes

The provision (benefit) for income taxes consists of the following (in thousands):

		Year Ended March 31,
		2010				2009				2008
Current
Federal		$	9,628			$	9,284			$	8,599
State			1,313				1,266				1,208
Foreign			415				218				386
Deferred
Federal			9,113				(17,606	)			8,851
State			1,901				(2,348	)			1,245
		$	22,370			$	(9,186	)		$	20,289

The principal components of the Company’s deferred tax balances are as follows (in thousands):

		March 31,
		2010				2009
Deferred Tax Assets
Allowance for doubtful accounts and sales returns		$	2,670			$	1,152
Inventory capitalization			644				574
Inventory reserves			806				553
Net operating loss carryforwards			663				747
Property and equipment			20				8
State income taxes			4,964				4,125
Accrued liabilities			502				315
Interest rate derivative instruments			—				818
Other			1,938				1,511
Deferred Tax Liabilities
Intangible assets			(117,999)				(103,764	)
		$	(105,792)			$	(93,961	)

At March 31, 2010, Medtech Products Inc., a wholly-owned subsidiary of the Company, had a net operating loss carryforward of approximately $1.9 million which may be used to offset future taxable income of the consolidated group and begins to expire in 2020.  The net operating loss carryforward is subject to an annual limitation as to usage under Internal Revenue Code Section 382 of approximately $240,000.

 

F-25

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A reconciliation of the effective tax rate compared to the statutory U.S. Federal tax rate is as follows:

		Year Ended March 31,
(In thousands)		2010								2009								2008
						%								%								%
Income tax provision at statutory rate		$	19,069				35.0			$	(68,586	)			(35.0	)		$	18,973				35.0
Foreign tax provision			(36)				(0.1)				83				—				16				—
State income taxes, net of federal income tax benefit			1,662				3.1				(5,467	)			(2.8	)			1,284				2.4
Increase (decrease) in net deferred tax liability resulting from an increase (decrease) in the effective state tax rate			597				1.1				—				—				—				—
Goodwill			1,039				1.9				64,770				33.1				—				—
Other			39				0.1				14				—				16				—
Provision for income taxes		$	22,370				41.1			$	(9,186	)			(4.7	)		$	20,289				37.4

Uncertain tax liability activity is as follows:

		2010				2009
(In thousands)
Balance – beginning of year		$	225			$	—
Additions based on tax positions related to the current year			90				225
Balance – end of year		$	315			$	225

The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense.  For 2010, 2009, and 2008, the Company did not incur any interest or penalties related to income taxes.  The Company does not anticipate any significant events or circumstances that would cause a change to these uncertainties during the ensuing year.  The Company is subject to taxation in the United States and various state and foreign jurisdictions and is generally open to examination from the year ended March 31, 2007 forward.

16.	Commitments and Contingencies

DenTek Oral Care, Inc. Litigation

In April 2007, the Company filed a lawsuit in the U.S. District Court in the Southern District of New York against DenTek Oral Care, Inc. (“DenTek”) alleging (i) infringement of intellectual property associated with The Doctor’s NightGuard dental protector which is used for the protection of teeth from nighttime teeth grinding; and (ii) the violation of unfair competition and consumer protection laws.  On October 4, 2007, the Company filed a Second Amended Complaint in which it named Kelly M. Kaplan (“Kaplan”), Raymond Duane (“Duane”) and C.D.S. Associates, Inc. (“CDS”) as additional defendants in this action and added other claims to the previously filed complaint.  Kaplan and Duane were formerly employed by the Company and CDS is a corporation controlled by Duane.  In the Second Amended Complaint, the Company has asserted claims for patent, trademark and copyright infringement, unfair competition, unjust enrichment, violation of New York’s Consumer Protection Act, breach of contract, tortious interference with contractual and business relations, civil conspiracy and trade secret misappropriation.  

In October 2008, DenTek, Kaplan, Duane and CDS filed Answers to the Second Amended Complaint.  In their Answers, each of DenTek, Duane and CDS has asserted counterclaims against the Company.  DenTek’s counterclaims allege false advertising, violation of New York consumer protection statutes and unfair competition relating to The Doctor’s NightGuard Classic dental protector.  Duane’s counterclaim is a contractual indemnity claim seeking to recover attorneys’ fees pursuant to the release between Duane and Dental Concepts LLC (“Dental Concepts”), a predecessor-in-interest to Medtech Products Inc. (“Medtech”), plaintiff in the DenTek litigation and a wholly-owned subsidiary of Prestige Brands Holdings, Inc.  CDS’s counterclaim alleges a breach of the consulting agreement between CDS and Dental Concepts.

 

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On March 24, 2009, Duane submitted a petition for a Chapter 7 bankruptcy with the United States Bankruptcy Court for the District of Nevada.  The New York Court retains jurisdiction over Duane for injunctive relief arising out of the New York action while the Nevada Court retains exclusive jurisdiction over the dischargeability of Medtech’s damage claims against Duane and other issues affecting the bankruptcy.

On March 25, 2010, Medtech settled all of the claims and counterclaims involving DenTek in the law suit on terms mutually agreeable to Medtech and DenTek.  No payment by Medtech or the Company is required as part of the settlement.

The Company’s management believes that the counterclaims asserted by Duane and CDS are legally deficient and that it has meritorious defenses to the counterclaims.  The Company intends to vigorously defend against the counterclaims, which, if adversely determined against the Company, would not, in the opinion of management, have a material adverse effect on the Company.

San Francisco Technology Inc. Litigation

On April 5, 2010, Medtech was served with a Complaint filed by San Francisco Technology Inc. (“SFT”) in the U.S. District Court for the Northern District of California, San Jose Division.  In the Complaint, SFT asserted a qui tam action against Medtech alleging false patent markings with the intent to deceive the public regarding Medtech’s two Dermoplast® products.  Medtech has filed a Motion to Dismiss or Stay and a Motion to Sever and Transfer Venue to the Southern District of New York and is awaiting decisions on the pending Motions.  Medtech intends to vigorously defend against the Complaint.

In addition to the matters described above, the Company is involved from time to time in other routine legal matters and other claims incidental to its business.  The Company reviews outstanding claims and proceedings internally and with external counsel as necessary to assess probability and amount of potential loss.  These assessments are re-evaluated at each reporting period and as new information becomes available to determine whether a reserve should be established or if any existing reserve should be adjusted.  The actual cost of resolving a claim or proceeding ultimately may be substantially different than the amount of the recorded reserve.  In addition, because it is not permissible under GAAP to establish a litigation reserve until the loss is both probable and estimable, in some cases there may be insufficient time to establish a reserve prior to the actual incurrence of the loss (upon verdict and judgment at trial, for example, or in the case of a quickly negotiated settlement).  The Company believes the resolution of routine matters and other incidental claims, taking into account reserves and insurance, will not have a material adverse effect on its business, financial condition or results from operations.

Lease Commitments

The Company has operating leases for office facilities and equipment in New York and Wyoming, which expire at various dates through 2014.

The following summarizes future minimum lease payments for the Company’s operating leases (in thousands):

 

		Facilities				Equipment				Total
Year Ending March 31,
2011		$	559			$	74			$	633
2012			577				40				617
2013			596				17				613
2014			50				—				50
		$	1,782			$	131			$	1,913

Rent expense for 2010, 2009 and 2008 was $753,000, $612,000 and $597,000, respectively.

 

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Purchase Commitments

The Company has entered into a 10 year supply agreement for the exclusive manufacture of a portion of one of its household cleaning products.  Although the Company is committed under the supply agreement to pay the minimum amounts set forth in the table below, the total commitment is less than 10 percent of the estimated purchases that are expected to be made during the course of the supply agreement.

(In thousands)
Year Ending March 31,
2011		$	10,703
2012			6,724
2013			1,166
2014			1,136
2015			1,105
Thereafter			4,673
		$	25,507

17.	Concentrations of Risk

The Company’s sales are concentrated in the areas of over-the-counter healthcare, household cleaning and personal care products.  The Company sells its products to mass merchandisers, food and drug accounts, and dollar and club stores.  During 2010, 2009 and 2008, approximately 62.3%, 60.8% and 60.3%, respectively, of the Company’s total sales were derived from its four major brands.  During 2010, 2009 and 2008, approximately 24.6%, 25.9% and 23.1%, respectively, of the Company’s sales were made to one customer.  At March 31, 2010, approximately 22.3% of accounts receivable were owed by the same customer.

At March 31, 2010, we had relationships with over 40 third-party manufacturers.  Of those, we had long-term contracts with 20 manufacturers that produced items that accounted for approximately 68.7% of our gross sales for 2010 compared to 18 manufacturers with long-term contracts that produced approximately 64.0% of gross sales in 2009.  The fact that we do not have long-term contracts with certain manufacturers means that they could cease manufacturing these products at any time and for any reason, or initiate arbitrary and costly price increases which could have a material adverse effect on our business, financial condition and results from operations.

 

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18.	Business Segments

Segment information has been prepared in accordance with Segment Topic of the FASB ASC. The Company’s operating and reportable segments consist of (i) Over-the-Counter Healthcare, (ii) Household Cleaning and (iii) Personal Care.

There were no inter-segment sales or transfers during any of the periods presented.  The Company evaluates the performance of its operating segments and allocates resources to them based primarily on contribution margin.  

The table below summarizes information about the Company’s operating and reportable segments.

		Year Ended March 31, 2010
		Over-the- Counter				Household				Personal
		Healthcare				Cleaning				Care				Consolidated
(In thousands)
Net sales		$	177,313			$	108,797			$	10,812			$	296,922
Other revenues			3,150				1,899				52				5,101
Total revenues			180,463				110,696				10,864				302,023
Cost of sales			66,049				72,118				6,420				144,587
Gross profit			114,414				38,578				4,444				157,436
Advertising and promotion			24,220				6,659				357				31,236
Contribution margin		$	90,194			$	31,919			$	4,087				126,200
Other operating expenses															44,747
Impairment of goodwill															2,751
Operating income															78,702
Other expenses															25,591
Provision for income taxes															21,849
Income from continuing operations															31,262
Income from discontinued operations, net of income tax															696
Gain on sale of discontinued operations, net of income tax															157
Net income														$	32,115

		Year Ended March 31, 2009
		Over-the- Counter				Household				Personal
		Healthcare				Cleaning				Care				Consolidated
(In thousands)
Net sales		$	176,878			$	113,923			$	10,136			$	300,937
Other revenues			97				2,092				21				2,210
Total revenues			176,975				116,015				10,157				303,147
Cost of sales			63,459				74,457				6,280				144,196
Gross profit			113,516				41,558				3,877				158,951
Advertising and promotion			29,695				7,625				457				37,777
Contribution margin		$	83,821			$	33,933			$	3,420				121,174
Other operating expenses															41,311
Impairment of goodwill and intangibles															249,285
Operating loss															(169,422)
Other expenses															28,436
Income tax benefit															(9,905)
Loss from continuing operations															(187,953)
Income from discontinued operations, net of tax															1,177
Net loss														$	(186,776)

 

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		Year Ended March 31, 2008
		Over-the- Counter				Household				Personal
		Healthcare				Cleaning				Care				Consolidated
(In thousands)
Net sales		$	183,641			$	119,224			$	10,260			$	313,125
Other revenues			51				1,903				28				1,982
Total revenues			183,692				121,127				10,288				315,107
Cost of sales			69,344				75,459				7,008				151,811
Gross profit			114,348				45,668				3,280				163,296
Advertising and promotion			26,188				7,483				572				34,243
Contribution margin		$	88,160			$	38,185			$	2,708				129,053
Other operating expenses															40,633
Operating income															88,420
Other expenses															37,206
Provision for income taxes															19,168
Income from continuing operations															32,046
Income from discontinued operations, net of income tax															1,873
Net income														$	33,919

During 2010, 2009 and 2008, approximately 95.8%, 96.4% and 95.9% of the Company’s sales were made to customers in the United States and Canada, respectively.  Other than the United States, no individual geographical area accounted for more than 10% of net sales in any of the periods presented.  At March 31, 2010, substantially all of the Company’s long-term assets were located in the United States of America and have been allocated to the operating segments as follows:

		Over-the- Counter				Household				Personal
(In thousands)		Healthcare				Cleaning				Care				Consolidated
Goodwill		$	104,100			$	7,389			$	—			$	111,489
Intangible assets
Indefinite lived			334,750				119,821				—				454,571
Finite lived			65,961				33,143				5,554				104,658
			400,711				152,964				5,554				559,229
		$	504,811			$	160,353			$	5,554			$	670,718

 

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19.  Unaudited Quarterly Financial Information

Unaudited quarterly financial information for 2010 and 2009 is as follows:

Year Ended March 31, 2010

		Quarterly Period Ended
(In thousands, except for per share data)		June 30, 2009				September 30, 2009				December 31, 2009				March 31, 2010
Total revenues		$	71,012			$	84,181			$	75,448			$	71,382
Cost of sales			33,181				39,847				35,641				35,918
Gross profit			37,831				44,334				39,807				35,464
Operating expenses
Advertising and promotion			8,765				9,782				6,099				6,590
General and administrative			8,195				10,481				7,411				8,108
Depreciation and amortization			2,345				2,841				2,596				2,770
Impairment of goodwill			—				—				—				2,751
			19,305				23,104				16,106				20,219
Operating income			18,526				21,230				23,701				15,245
Net interest expense			5,653				5,642				5,558				6,082
Loss on extinguishment of debt			—				—				—				2,656
Income from continuing operations before income taxes			12,873				15,588				18,143				6,507
Provision for income taxes			4,879				5,908				7,807				3,255
Income from continuing operations			7,994				9,680				10,336				3,252
Discontinued Operations
Income from discontinued operations, net of income tax			331				243				87				35
Gain on sale of discontinued operations, net of income tax			—				—				157				—
Net income		$	8,325			$	9,923			$	10,580			$	3,287
Basic earnings per share:
Income from continuing operations		$	0.16			$	0.19			$	0.21			$	0.07
Net income		$	0.17			$	0.20			$	0.21			$	0.07
Diluted earnings per share:
Income from continuing operations		$	0.16			$	0.19			$	0.21			$	0.06
Net income		$	0.17			$	0.20			$	0.21			$	0.07
Weighted average shares outstanding:
Basic			49,982				50,012				50,030				50,030
Diluted			50,095				50,055				50,074				50,105

 

F-31

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Year Ended March 31, 2009

		Quarterly Period Ended
(In thousands, except for per share data)		June 30, 2008				September 30, 2008				December 31, 2008				March 31, 2009
Total revenues		$	70,997			$	85,540			$	77,966			$	68,644
Cost of sales			32,907				40,402				36,480				34,407
Gross profit			38,090				45,138				41,486				34,237
Operating expenses
Advertising and promotion			7,236				13,543				11,349				5,649
General and administrative			7,973				9,363				8,311				6,241
Depreciation and amortization			2,308				2,308				2,311				2,496
Impairment of goodwill and intangible assets			—				—				—				249,285
			17,517				25,214				21,971				263,671
Operating income (loss)			20,573				19,924				19,515				(229,434)
Net interest expense			8,683				6,779				7,051				5,923
Income (loss) from continuing operations before income taxes			11,890				13,145				12,464				(235,357)
Provision (benefit) for income taxes			4,506				4,982				4,724				(24,117)
Income (loss) from continuing operations			7,384				8,163				7,740				(211,240)
Discontinued Operations
Income from discontinued operations, net of income tax			397				359				278				143
Net income (loss)			7,781				8,522				8,018				(211,097)
Basic earnings (loss) per share:
Income (loss) from continuing operations		$	0.15			$	0.16			$	0.15			$	(4.23)
Net income (loss)		$	0.16			$	0.17			$	0.16			$	(4.22)
Diluted earnings (loss) per share:
Income (loss) from continuing operations		$	0.15			$	0.16			$	0.15			$	(4.23)
Net income (loss)		$	0.16			$	0.17			$	0.16			$	(4.22)
Weighted average shares outstanding:
Basic			49,880				49,924				49,960				49,976
Diluted			50,035				50,037				50,040				49,976

 

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20. Condensed Consolidating Financial Statements