Irinquiries@prestigebrands.com
Prestige Consumer Healthcare Inc.
660 White Plains Road – Ste 250
Tarrytown, NY 10591
Telephone: 914-524-6819
[BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PC LETTERHEAD]
|
COMMERCE
CENTER
SUITE
1000
211
COMMERCE STREET
NASHVILLE,
TENNESSEE 37201
PHONE:
615.726.5600
FAX:
615.726.0464
MAILING
ADDRESS:
P.O.
BOX 190613
NASHVILLE,
TENNESSEE 37219
WWW.BAKERDONELSON.COM
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Gary
M.
Brown
Direct
Dial: (615) 726-5763
Direct
Fax: (615) 744-5763
E-Mail
Address: gbrown@bakerdonelson.com
April
21,
2006
Mr.
Jim
B. Rosenberg
Senior
Assistant Chief Accountant
United
States Securities and Exchange Commission
100
F
Street, N.E.
Washington,
D.C. 20549-3628
Re: Prestige
Brands Holdings, Inc.
Form
10-K/A for Fiscal Year Ended March 31, 2005
Filed
on
January 12, 2006
File
No.
001-32433
Prestige
Brands International LLC
Form
10-K/A for Fiscal Year Ended March 31, 2005
Filed
on
January 12, 2006
File
No.
333-11752818-18
Dear
Mr.
Rosenberg:
As
counsel for Prestige Brands Holdings, Inc (“Holdings”) and Prestige Brands
International LLC (“International”) (Holdings and International collectively
referred to herein as the "Company"), I acknowledge receipt of the letter
dated
March 31, 2006 (the "Comment Letter"). After receipt of the Comment Letter,
the
Company also was contacted by Mr. Frank Wyman of your office with a question
regarding the failure of International to file a separate Annual Report
on Form
10-K for the fiscal year ended March 31, 2005 (the “Supplemental Comment”). On
Friday, April 14, I spoke to Mr. Wyman with questions about the Comment
Letter
and indicated that the Company had prepared a draft of the formal response
to
the Comment Letter and the Supplemental Comment and planned to submit
it this
week after the Company has an opportunity to review the response with
its audit
committee and independent registered public accounting firm. I confirmed
those
intentions in a letter to the Commission on Friday filed electronically
via
EDGAR.
The
following are the Company’s responses to the Comment Letter and the Supplemental
Comment. For convenience, we have repeated each of the Staff’s comment in its
entirety followed immediately by the Company’s response.
Form
10-K/A for Fiscal Year Ended March 31, 2005 filed on January 12,
2006
General
Comment
#1:
Because
Amendment No. 2 to the Annual Report on Form 10-K/A for the fiscal year
ended
March 31, 2005 is a combined report being filed separately by Prestige
Brands
Holdings, Inc. and Prestige Brands International, LLC the following comments
apply to the Annual Report filed by each registrant.
Response
to Comment #1:
The
Company acknowledges that the comments in the Comment Letter apply to
both
Holdings and International.
Item
7. Managements Discussion and Analysis of Financial Condition and Results
of
Operations
Critical
Accounting Policies and Estimates, page 22
Comment
#2:
This
disclosure should provide investors with a fuller understanding of the
uncertainties in applying critical accounting policies and the likelihood
that
materially different amounts would be reported under different conditions
or
using different assumptions. It should include quantification for the
related
variability in operating results that you expect to be reasonably likely
to
occur. For all critical accounting policies and estimates, except for
revenue
recognition that is discussed in the next comment, please provide us
information
in disclosure-type format regarding the uncertainties in applying these
accounting policies, the historical accuracy of these accounting estimates,
a
quantification of their sensitivity to changes in key assumptions and
the
expected likelihood of material changes in the future.
Response
to Comment #2:
The
Company responds by offering the following revised disclosure, which
it plans to
include in future filings with the Commission starting with the Company’s Annual
Report on Form 10-K for the year-ended March 31, 2006, with regard to
critical
accounting policies other than with respect to revenue recognition, which
is
discussed in Response to Comment #3 below.
Critical
Accounting Policies and Estimates
The
significant accounting policies are described in the notes of each of
the
audited financial statements included elsewhere in this document. All
companies
included within our consolidated group utilize the same critical accounting
policies. While all significant accounting policies are important to
our
consolidated financial statements, certain of these require judgment
and are
based on estimates and assumptions that determine the reported amounts
of
assets, liabilities, revenues, expenses and the related disclosure of
contingent
assets and liabilities. These estimates are based upon our historical
experience
and on various other assumptions that we believe to be reasonable under
the
circumstances. Such estimates would vary using different assumptions
or
conditions. Actual results will differ from the estimates and may, in
some
cases, differ materially from these estimates. The most critical accounting
policies are as follows:
Allowances
for product returns
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, and (v) seasonality of our
product
offerings, and (vi)the impact of changes in product formulation, packaging
and
advertising.
The
Company constructs its returns budget by looking at the previous year’s return
history for each brand. Subsequently, each month, the Company estimates
its
current return rate based upon an average of the previous six month return
rate
and reviews that calculated rate for reasonableness giving consideration
to the
other factors described above. Our historical return rate has been relatively
stable; for example, at March 31, 2005, 2004 and 2003, returns represented
3.6%,
3.6%, and 3.4% respectively, of gross sales.
While
we
utilize the methodology described above to estimate product returns,
actual
results may differ materially from our estimates, causing our future
financial
statements to be adversely affected. Among the factors that could cause
a
material change in the estimated return rate would be a significant unexpected
return with respect to a product or products that comprise a significant
portion
of our revenues. Based upon the methodology described above and the actual
returns experience, management believes the likelihood of such an event
is
remote. As noted, over the last three years, the Company’s actual product return
rate has stayed within a range of 0.2% of gross sales. A change of 0.1%
in our
estimated return rate would have adversely affected our reported sales
and
operating income for fiscal 2005 by approximately $340,000. Net income
would
have been affected by approximately $207,000.
Allowances
for obsolete and damaged inventory
The
Company values its inventory at the lower of cost or market value. Accordingly,
we reduce our inventories for the diminution of value resulting from
product
obsolescence, damage, or other issues affecting marketability equal to
the
difference between the cost of the inventory and its estimated market
value.
Factors utilized in the determination of estimated market value include
(i)
current sales data and historical return rates, (ii) estimates of future
demand,
(iii) competitive pricing pressures, (iv) new product introductions,
(v) product
expiration dates, and (vi) component and packaging obsolescence.
Many
of
the Company’s products are subject to expiration dating. Every month a report is
circulated detailing inventory with expiration dating between 0 and 15
months.
Because as a general rule retailers will not accept goods with expiration
dating
of less than 12 months dating, the company reserves for 100% of the cost
of any
item with expiration dating of 12 months or less.
At
March
31, 2005 and 2004, the allowance for obsolete and slow moving inventory
represented 5.6% and 1.2%, respectively, of total inventory. Inventory
obsolescence costs charged to operations for the fiscal years ended March
31,
2005, 2004 and 2003 were 0.3%, 0.6%, and 0.3% of net sales,
respectively.
A
change
of 0.1% in our obsolescence charges would have adversely affected our
reported
operating income for fiscal year 2005 by approximately $303,000 and our
net
income for that year by approximately $185,000.
Allowance
for doubtful accounts
In
the
ordinary course of business, the Company grants non-interest bearing
trade
credit to its customers on normal credit terms. We maintain an allowance
for
doubtful accounts receivable based upon our historical collection experience
and
expected collectibility of the accounts receivable. In an effort to reduce
our
credit risk, we (i) establish credit limits for all of our customer
relationships, (ii) perform ongoing credit evaluations of our customers’
financial condition, (iii) monitor the payment history and aging of our
customers’ receivables, and (iv) monitor open orders against an individual
customer’s outstanding receivable.
The
company establishes specific reserves for those accounts which file for
bankruptcy, have no payment activity for 180 days or have reported major
negative changes to their financial condition.
The
allowance for bad debts at March 31, 2005 and 2004 amounted to 0.4% and
0.7%,
respectively of accounts receivable. Bad debt expense for the fiscal
years ended
March 31, 2005, 2004 and 2003 was 0.0%, 0.1%, and 0.4% of net sales,
respectively.
While
management is diligent in its evaluation of the adequacy of the allowance
for
doubtful accounts, an unexpected event, such as the bankruptcy filing
of a major
customer, could have an adverse effect on our future financial
statements.
A
0.1%
increase in our bad debt expense would have resulted in a decrease in
our fiscal
year 2005 reported operating income of approximately $303,000 and a decrease
in
our 2005 reported net income of approximately $185,000.
Valuation
of long-lived and intangible assets and
goodwill.
We
are
required to make judgments regarding the value assigned to acquired intangible
assets and their respective useful lives when we acquire them. Our determination
of the values and lives was based on our analysis of the requirements
of
SFAS No. 141 and No. 142, as well as an independent valuation of
such assets.
Under
SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and
indefinite-lived intangible assets are no longer amortized, but must
be tested
for impairment at least annually. Intangible assets with definite lives
are
amortized over their respective estimated useful lives. Intangible assets
with
finite lives and other long-lived assets must also be evaluated for impairment
when management believes that the carrying value of the asset may not
be
recovered.
Management
estimates the undiscounted and discounted cash flows (fair values) of
goodwill
and intangible assets based on an analysis of (i) period-to-period sales
and
profitability by brands, (ii) industry trends, (iii) annual budget and
projected
sales and gross margins by brands, inflation rate, brand growth rate
and
advertising spend rates. There were no impairments of goodwill, indefinite-lived
intangible assets or other long-lived assets during the years ended
March 31, 2005 and 2004. Goodwill and other long-term assets amounted to
$919.1 million and $295.2 million at March 31, 2005 and 2004,
respectively.
Comment
#3:
We
believe that your disclosure related to estimates of items that reduce
gross
revenue such as product returns, chargebacks, customer rebates and other
discounts and allowances could be improved. Please provide us the following
information in a disclosure-type format:
| a. |
The
nature and amount of each accrual at the balance sheet date
and the effect
that could result from using other reasonably likely assumptions
than what
you used to arrive at each accrual such as a range of reasonably
likely
amounts or other type of sensitivity
analysis.
|
| b. |
The
factors that you consider in estimating each accrual such as
historical
return of products, levels of inventory in the distribution
channel,
estimated remaining shelf life, price changes from competitors
and
introductions of new products.
|
| c. |
To
the extent that information you consider in b) is quantifiable,
disclose
both quantitative and qualitative information and discuss to
what extent
information is from external sources, e.g. end-customer demand,
third-party market research data comparing wholesaler inventory
levels to
end-customer demand. For example, in discussing your estimate
of product
that may be returned, explain preferably by product and in
tabular format,
the total amount of product in sales dollars that could potentially
be
returned as of the balance sheet
date.
|
| d. |
If
applicable, any shipments made as a result of incentives and/or
in excess
of your customer's ordinary course of business inventory level.
Discuss
your revenue recognition policy for such
shipments.
|
| e. |
A
roll forward of the accrual for each estimate for each period
presented
showing the following:
|
| · |
Beginning
balance,
|
| · |
Current
provision related to sales made in current
period,
|
| · |
Current
provision related to sales made in prior
periods,
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| · |
Actual
returns or credits in current period related to sales made
in current
period,
|
| · |
Actual
returns or credits in current period related to sales made
in prior
periods, and
|
| · |
Ending
balance.
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| f. |
In
your discussion of results of operations for the period to
period revenue
comparisons, the amount of and reason for fluctuations for
each type of
reduction of gross revenue, e.g. product returns, chargebacks,
customer
rebates and other discounts and allowances, including the effect
that
changes in your estimates of these items had on your revenues
and
operations.
|
Response
to Comment #3:
Because
of the nature of the Company’s business and products, it is virtually impossible
to link product returns to actual product shipments made in a particular
accounting period. As discussed in Response to Comment #2 above, the
methodology
utilized by the Company has produced an accurate and relatively stable
estimate
of these amounts. Additionally, the Company has not discussed these variations
in its Management Discussion and Analysis because there have not been
material
changes to the amounts recorded period-to-period.
In
response to Staff question “d” above, please be advised that the Company does
not make and has not made shipments as a result of incentives and/or
in excess
of its customers' ordinary course of business inventory levels. In addition,
the
Company does not extend rebates or volume discounts to its
customers.
In
response to Comment #3, the Company offers the following revised disclosure,
which it plans to include in future filings with the Commission.
Revenue
Recognition.
We
comply
with the provisions of Securities and Exchange Commission Staff Accounting
Bulletin 104 “Revenue Recognition,” which states that revenue should be
recognized when the following revenue recognition criteria are met: (1)
persuasive evidence of an arrangement exists; (2) the product has been
shipped
and the customer takes ownership and assumes the risk of loss; (3) the
selling
price is fixed or determinable; and (4) collection of the resulting receivable
is reasonably assured. The Company has determined that the risk of loss
generally occurs when product is received by the customer, and, accordingly
recognizes revenue at that time.
As
is
customary in the consumer products industry, we participate in the promotional
programs of our customers to enhance the sale of our products. The cost
of these
promotional programs is generally recorded as a reduction of sales and
is
ultimately based on the 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 our
customers,
such as slotting and display fees, and cooperative advertising. The Company
does
not provide incentives to customers for the acquisition of product in
excess of
normal inventory quantities. Such incentives would increase the potential
rate
for future returns, as well as reduce sales in the subsequent fiscal
period.
Estimates
of costs of promotional programs (based on the number of units sold)
are based
on (i) historical sales experience, (ii) the current offering, (iii)
forecasted
data and (iv) current market conditions, and communications with customer
purchasing/marketing personnel. At the completion of the promotional
program,
the estimated amounts are adjusted to actual results. While our promotional
expense for the fiscal year ended March 31, 2005 was $10,120,000 we participated
in 5,922 promotional campaigns, resulting in an average cost of $1,708
per
campaign. Of such amount, only 290 payments were in excess of $5,000.
Management
believes that the estimation methodologies employed, combined with the
nature of
the promotional campaigns, makes the likelihood remote that its obligation
would
be misstated by a material amount. However, for illustrative purposes,
a one
percentage point change in the estimated redemption rates at March 31,
2005
would adversely affect our fiscal year 2005 sales and operating income
by
approximately $101,000, respectively. Net income would be adversely affected
by
approximately $61,000.
The
Company also periodically runs couponing programs in Sunday newspaper
inserts or
as on package instant redeemable coupons. The Company utilizes a national
clearing house to process coupons redeemed by customers. At the time
a coupon is
distributed, a provision is made based upon historical redemption rates
for that
particular product and information provided by the clearing house’s experience
with coupons of similar dollar value, the length of time the coupon is
valid,
and the seasonality of the coupon drop, among other factors. During the
fiscal
year ended March 31, 2005, the Company had 27 coupon events. The amount
expensed
and accrued for these events during the fiscal year was $2.3 million,
of which
$2.0 million was redeemed during the fiscal year.
Additionally,
the Company is required to estimate the impact of future product returns
on the
current statement of financial condition and results from operations.
The
Company’s methodology with respect to product returns and its effects on sales
are described above under Allowances
for product returns.
In
response to the Staff’s comment “e”, the Company notes that the Company’s Annual
Report on Form 10-K for the year ended March 31, 2005 includes a rollforward
of
reserves for sales returns, allowance for doubtful accounts, and allowance
for
inventory obsolescence on Schedule II - Valuation and Qualifying Accounts.
The
following table provides supplemental information on the Company’s co-operative
promotional and coupon reserves. The Company plans to add this information
as
separate line items on Schedule II - Valuation and Qualifying Accounts
in future
filings. The Company advises the Staff that it does not track the activity
of or
maintain separate reserves for chargebacks, rebates, or other discounts
and
allowances because the Company does not offer discounts of that nature
to its
customers.
SCHEDULE
II
VALUATION
AND QUALIFYING ACCOUNTS
(dollars
in thousands)
|
|
Balance at
Beginning of
Year
|
Charged
to
Expense
|
|
|
Deductions
|
|
|
Other
|
|
|
Balance at
End of
Year
|
||||||||||
|
Predecessor
Basis
|
|
||||||||||||||||||||
|
Year
ended March 31, 2003
|
|
||||||||||||||||||||
|
Reserves
for trade promotion
|
$
|
2,145
|
$
|
3,127
|
$
|
3,044
|
$
|
—
|
$ |
2,228
|
|||||||||||
|
Reserve
for consumer coupon redemptions
|
113
|
546
|
597
|
—
|
62
|
||||||||||||||||
|
|
|
||||||||||||||||||||
|
Period
from April 1, 2003 to February 5, 2004
|
|
||||||||||||||||||||
|
Reserves
for trade promotion
|
2,228
|
3,241
|
3,526
|
—
|
1,943
|
||||||||||||||||
|
Reserve
for consumer coupon redemptions
|
62
|
473
|
525
|
—
|
10
|
||||||||||||||||
|
|
|
||||||||||||||||||||
|
Successor
Basis
|
|
||||||||||||||||||||
|
Period
from February 6, 2004 to March 31, 2004
|
|
||||||||||||||||||||
|
Reserves
for trade promotion
|
1,943
|
213
|
1,542
|
549
|
(1)
|
|
1,163
|
||||||||||||||
|
Reserve
for consumer coupon redemptions
|
10
|
60
|
0
|
196
|
(1)
|
|
266
|
||||||||||||||
|
|
|
||||||||||||||||||||
|
Year
ended March 31, 2005
|
|
||||||||||||||||||||
|
Reserves
for trade promotion
|
1,163
|
10,120
|
10,193
|
403
|
(2)
|
|
1,493
|
||||||||||||||
|
Reserve
for consumer coupon redemptions
|
266
|
2,265
|
2,241
|
—
|
290
|
||||||||||||||||
|
|
|||||||||||||||||||||
(1)
As a result of the acquisition of Spic and Span, the Company recorded reserves
for trade promotion expense in purchase accounting.
(2)
As a result of the acquisition of Bonita Bay, the Company recorded reserves
for
trade promotional expense in purchase accounting.
Comment
#4:
Your
revenue recognition and inventory management appear to depend on data
provided
by third parties. We believe that greater uncertainty related to these
accounting activities may exist due to the extent of your dependence
on data
generated by third parties. Please provide the following information
in a
disclosure-type format:
| · |
The
nature of data used in accounting for these activities and your
process
for ensuring its accuracy and
completeness.
|
| · |
Describe
the nature and frequency of disputes with third parties and the
magnitude
of related amounts.
|
| · |
Discuss
the impact of these factors on the related critical accounting
estimates.
|
| · |
Link
this discussion to your revenue restatements and planned corrective
actions.
|
Response
to Comment #4:
The
Company supplementally advises the Staff that the Company receives orders
from
retailers and/or brokers primarily by electronic data interchange, or
EDI, which
automatically enters each order into its EDP systems located in the Company’s
Jackson Hole, Wyoming support center. Upon receipt, each order is reviewed
electronically for compliance with appropriate credit limits, sufficient
quantities on-hand, and routed to the Company’s distribution center in St.
Louis, Missouri. The distribution center, in turn, sends an electronic
confirmation that the order was received, fills the order and ships the
product
to the customer. Upon shipment, the distribution center delivers an electronic
confirmation to the Company’s support center, after which an invoice is sent to
the customer. The following day, the appropriate documents supporting
the
delivery are forwarded to the support center where they are reviewed.
Shipping
errors are investigated by the Company’s support center personnel directly with
customers as the need arises.
To
maintain data integrity, distribution center personnel perform daily
inventory
“cycle counts” that are forwarded to the Company’s support center where they are
reconciled against the Company’s perpetual inventory. Any discrepancies are
investigated by the Company with distribution center personnel. In addition,
the
Company reconciles its full perpetual inventory with records maintained
by the
third party distribution center on a monthly basis, investigating significant
discrepancies.
The
Company has not had any disputes with its third party distribution center,
nor
did its relationship with the distribution center have any impact on
the
Company’s decision to restate previously issued financial statements. This
relationship does not have any impact on any critical accounting
estimate.
Results
of Operations of Prestige Brands Holdings, Inc. and Combined Medtech
Holdings,
Inc. and The Denorex Company ("the predecessor")
Fiscal
2005 Compared to Fiscal 2004, page 25
Adjusted
Earnings Before Interest Depreciation and Amortization ("Adjusted EBITDA"),
page
27
Comment
#5:
You
disclose that Adjusted EBITDA is presented because it is your understanding
that
certain members of the financial community use this as another measure
of a
company's financial results and operating performance. We believe that
disclosure of non-GAAP measures, such Adjusted EBITDA, that eliminate
recurring
items are not permissible unless management reasonably believes the financial
impact of items will disappear or become immaterial within a near-term
finite
period. Since the items excluded from Adjusted EBITDA are significant
components
of your business, the financial impact of these items will not disappear
or
become immaterial in the future. While Item 10(e) of Regulation S-K does
not
expressly prohibit the removal of recurring items, Answer 8 of "Frequently
Asked
Questions Regarding the Use of Non-GAAP Financial Measures" indicates
that
registrants must meet the burden of demonstrating the usefulness of any
measure
that excludes recurring items, especially if that measure is used to
evaluate
performance. The Answer to Question 8 of the Non-GAAP FAQ, further states
it is
permissible, and may be necessary, to identify, discuss, and analyze
material
items, whether they are recurring or non-recurring in MD&A and it may be
necessary to discuss the nature of such items and their significance
to an
investor in evaluating the company's results of operations. We believe
that
material items such as depreciation, amortization, interest expense,
and income
taxes should be discussed in MD&A but should not be eliminated or adjusted
in connection with a non-GAAP measure. Please confirm your intention
to delete
Adjusted EBITDA as a supplementary non-GAAP operating performance measure
in
future filings or tell us how your disclosure complies with Item 10 of
Regulation S-K.
Response
to Comment #5:
The
Company has grown significantly over the past several years through the
combined
efforts of management and several private investment firms. The growth
strategy
was driven by the availability of additional capital, debt financing
and the
need to acquire additional consumer brands, the most significant of which
was
the acquisition of Bonita Bay Holdings, Inc. in April 2004. Due to the
nature of
the Company’s genesis, management believed providing this information in its
public filings was appropriate and useful to understanding the Company’s
financial statements.
We
nevertheless hereby confirm, on behalf of the Company, that it intends
to
discontinue disclosure of Adjusted EBITDA as a supplementary non-GAAP
operating
performance measure in future filings with the Commission. The company,
however,
does reserve the right, pursuant to and in conformity with Regulation
G, to
publicly disclose such a non-GAAP measure as an aid to investors.
Item
9A. Controls and Procedures, page 36
Comment
#6:
In
Amendment No. 2, you restated prior year financial statements to correct
various
accounting errors related to revenue recognition. We note your statement
that
you are changing "controls and accounting policies surrounding the review,
analysis and recording of shipments and shipping terms with customers,
including
the selection and monitoring of appropriate assumptions and guidelines
to be
applied during the review and analysis of all customer terms." Please
explain
more specifically in a disclosure-type format the processing difficulties
related to this review, analysis and recording of shipments and shipping
terms
that led to these accounting errors. Describe the estimates and related
assumptions required in this revenue recognition process. Describe the
change
that you expect to make to your revenue recognition accounting policies.
Link
this discussion to your response to comment three.
Response
to Comment #6:
The
Company supplementally advises the Staff that prior to September 30,
2006,
consistent with its stated, published pricing and shipping terms and
conditions
to its customers (“FOB-shipping point”) as well as with what management believed
to be the industry standard, the Company recorded revenues at the time
of
shipment. As a part of its efforts to meet the requirements of Section
404 of
the Sarbanes-Oxley Act of 2002, however, further analysis of the Company’s terms
of shipment revealed that the Company had executed various agreements
and was
subject to various purchase order conditions with many of its customers
that
made it often unclear when, from a legal standpoint, risk of loss passed
to
these customers. Additionally, while generally not required to do so,
the
Company, for customer relations purposes, often would replace damaged
or missing
product as an accommodation to its customers. In these circumstances,
the
Company would seek recourse against the common carrier or the insurance
company
for compensation of such losses. As a result, management determined that
the
Company’s practices created “'synthetic' FOB Destination” shipping
terms.
The
FOB
Destination shipping policy that emerged as a result of the Company’s
examination of its policies and procedures did not conform with how the
Company
was previously recording revenue and, accordingly, the Company determined
that
it had not fully complied with the provision of SAB 104 that requires
that the
product must be delivered and the customer has taken ownership and assumed
the
risk of loss for the sale to be complete. Accordingly, the Company adopted
a
more conservative FOB Destination revenue recognition policy and adjusted
its
operating and accounting policies to efficiently and effectively capture
the
information necessary to conform to such revenue recognition policy.
The
Company has implemented procedures to track product shipments and estimate
the
average shipping duration (approximately 4 days) and accordingly, has
adjusted
its cut-off date for recognition of revenues. Management evaluates these
estimates on at least an annual basis and at such time that changes to
its
warehousing and logistics arrangements warrant such a review.
Consolidated
Financial Statements
Prestige
Brands Holdings, Inc.
Prestige
Brands International LLC
Business
and Basis of Presentation
Inventories
Comment
#7:
You
disclose on pages 8 and 9 that third parties fulfill all of your manufacturing
needs and that Warehousing Specialist, Inc. and Nationwide Logistics,
Inc.
perform your warehousing and distribution activities. Please describe
to us in a
disclosure-type format the following information regarding your inventory
accounting policy:
| · |
The
contractual terms governing transfer of title and risk of loss
from the
third party manufacturing firm to our warehouse firm and your
basis for
recording receipt of inventory; and
|
| · |
The
contractual terms governing your product returns to third party
manufacturers.
|
Response
to Comment #7:
The
Company supplementally advises the staff that inventories are stated
at the
lower of cost or market, cost being determined using the first-in, first-out
method. Inventory purchases consist of componentry for further assembly,
finished goods or packaging materials. The Company’s customary terms with its
product suppliers are generally “FOB Shipping Point,” which require the Company
to take ownership and assume the risk of loss when the product is picked
up by
the common carrier at the vendor’s warehouse. It is at that point that the
Company records the inventory and the related obligation to the
vendor.
Because
the Company assumes the risk of loss at the shipping point, claims for
damaged
or missing product are filed against the common carrier or the Company’s
insurance carrier. Claims against our suppliers/vendors are limited to
situations where the product does not conform to the pre-defined production
specifications.
The
Company provides a reserve for slow moving and obsolete inventory. See
Allowances
for obsolete and damaged inventory
above.
Supplemental
Comment:
The
Company has interpreted the Supplemental Comment as being to the effect
of:
“Please explain why International failed to file a separate Annual Report
on
Form 10-K for the year ended March 31, 2005. In the absence of a satisfactory
explanation, please file the form in question.”
Response
to Supplemental Comment:
Although
both Holdings and International are required to file reports under Section
13 of
the Exchange Act, Holdings, the parent and holding company of International,
conducts no ongoing business operations of its own. As a result, the
financial
information for Holdings and International is identical, particularly
for the
purposes of Management’s Discussion and Analysis of Financial Condition and
Results of Operations. Accordingly, Holdings and International have filed
combined reports as they believed they were allowed to do by the applicable
rules.
Please
note that Holdings filed its Annual Report on Form 10-K for the fiscal
year
ended March 31, 2005 on June 15, 2005. On June 28, 2005 an amendment
to that
report was filed adding information about International pursuant to Instruction
I to Form 10-K as well as the legend required by Instruction I that:
“Prestige
Brands International, LLC meets the conditions set forth in general instructions
(I) (1) (a) and (b) of Form 10-K and is therefore filing this Form10-K/A
with
the reduced disclosure format.”
The
Company was advised at the time of the filing of these reports in 2005
both by
counsel and by its independent registered accounting firm that the reporting
by
International using the abbreviated disclosure format prescribed by Instruction
I to Form 10-K was appropriate. Upon review, that appears still to be
the
case.
On
behalf
of the Company, the Company acknowledges that (i) it is responsible for
the
adequacy and accuracy of the disclosure in the filings; (ii) staff comments
or
changes to disclosure in response to staff comments in the filings reviewed
by
the staff do not foreclose the Commission from taking any action with
respect to
the filing; and (iii) the Company may not assert staff comments as a
defense in
any proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
Please
feel free to contact me with respect to this response to the Comment
Letter and
the Supplemental Comment.
Very
truly yours,
BAKER,
DONELSON, BEARMAN,
CALDWELL
& BERKOWITZ, P.C.
/S/
Gary
M. Brown
Gary
M.
Brown
cc:
Charles Jolly, Esq.