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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file Number 333-73160
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ARMKEL, LLC
(Exact name of registrant as specified in its certificate of formation)
Organized in Delaware
469 North Harrison Street
Princeton, New Jersey 08543-5297 13-4181336
(Address of principal executive offices) (Zip Code) I.R.S Employer Identification No.
(609) 683-5900
Registrant's telephone Number, including area code
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of November 7, 2002, all of the 10,000 outstanding membership interests in
Armkel, LLC were held by affiliates.
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PART I - FINANCIAL INFORMATION
ARMKEL, LLC AND SUBSIDIARIES ("SUCCESSOR")
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
CHANGES IN MEMBERS' EQUITY/NET ASSETS TO BE SOLD
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
Successor Predecessor Successor Predecessor
Company Company Company Company
(Dollars in thousands) Sept. 27, Sept. 30, Sept. 27, Sept. 30,
2002 2001(1) 2002 2001(1)
---- ---- ---- ----
Net Sales.............................................. $ 110,290 $ 104,916 $ 322,601 $ 313,101
Cost of goods sold..................................... 48,535 47,619 152,129 139,347
----------- ----------- ----------- -----------
Gross Profit........................................... 61,755 57,297 170,472 173,754
Marketing expenses..................................... 16,739 12,450 41,645 35,713
Selling, general and administrative expenses........... 25,187 21,703 71,441 61,174
----------- ----------- ----------- -----------
Income from Operations................................. 19,829 23,144 57,386 76,867
Interest expense....................................... 9,137 390 27,489 1,031
Interest (income)...................................... (264) (77) (819) (339)
Other (income) expense................................. 429 524 (1,159) 600
----------- ----------- ------------ -----------
Income before taxes.................................... 10,527 22,307 31,875 75,575
Income taxes........................................... 1,211 7,641 6,666 31,813
----------- ----------- ----------- -----------
Net Income............................................. 9,316 14,666 25,209 43,762
Other Comprehensive Income ............................ 2,866 2,211 2,076 (1,323)
----------- ----------- ----------- ------------
Total Comprehensive Income............................. 12,182 16,877 27,285 42,439
Members' Equity at Beginning of Period................. 218,507 -- 203,404 --
----------- -----------
Members' Equity at End of Period....................... $ 230,689 -- $ 230,689 --
=========== ===========
Cash and Other Transfers to Carter-Wallace, Inc........ (19,922) (19,922)
Net Assets to be Sold at Beginning of Period........... 270,056 244,494
----------- -----------
Net Assets to be Sold at End of Period................. $ 267,011 $ 267,011
=========== ===========
- -----------------
(1) The three months and nine months ended September 30, 2001 represent the
predecessor company combined financial information reclassified for conformity
to the 2002 presentation.
See Notes to Condensed Consolidated Financial Statements.
ARMKEL, LLC AND SUBSIDIARIES ("SUCCESSOR")
CONDENSED CONSOLIDATED BALANCE SHEETS
Sept. 27, 2002 Dec. 31, 2001
-------------- -------------
(Dollars in thousands) (Unaudited)
Assets
Current Assets
- --------------
Cash and cash equivalents....................................................... $ 45,563 $ 55,837
Accounts receivable, less allowances of $4,591 and $5,317....................... 118,937 96,672
Inventories..................................................................... 63,250 69,876
Prepaid expenses................................................................ 4,402 3,919
Net assets held for sale........................................................ 20,000 43,039
----------- -----------
Total Current Assets............................................................ 252,152 269,343
Property, Plant and Equipment (Net)............................................. 73,314 76,841
Tradenames and Patents.......................................................... 262,400 265,411
Goodwill........................................................................ 210,739 176,698
Deferred Financing Costs........................................................ 18,745 20,892
Other Assets.................................................................... 3,561 4,608
----------- -----------
Total Assets.................................................................... $ 820,911 $ 813,793
=========== ===========
Liabilities and Members' Equity
Current Liabilities
- -------------------------------
Short-term borrowings........................................................... $ 3,563 $ 2,425
Accounts payable and accrued expenses........................................... 114,261 133,253
Current portion of long-term debt............................................... 8,878 3,246
Taxes payable................................................................... 1,386 3,004
----------- -----------
Total Current Liabilities....................................................... 128,088 141,928
Long-term Debt.................................................................. 433,656 439,750
Deferred and Other Long-term Liabilities........................................ 28,478 28,711
Commitments and Contingencies -- --
Members' Equity................................................................. 230,689 203,404
----------- -----------
Total Liabilities and Members' Equity........................................... $ 820,911 $ 813,793
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
ARMKEL, LLC AND SUBSIDIARIES ("SUCCESSOR")
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Nine Months Ended
Successor Predecessor
Company Company
Sept. 27, Sept. 30,
(Dollars in thousands) 2002 2001(1)
---- ----
Cash Flow From Operating Activities:
Net Income........................................................................ $ 25,209 $ 43,762
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................................ 12,530 8,592
Unrealized gain on foreign exchange transactions............................. (929) --
Change in assets and liabilities:
(Increase) in accounts receivable............................................ (17,310) (17,262)
Decrease in inventories........................................................... 8,585 509
(Decrease) increase in accounts payable and
other accrued expenses.................................................... (23,098) 1,938
Decrease(Increase) in other.................................................. 110 (6,323)
----------- ------------
Net Cash Provided by Operating Activities......................................... 5,097 31,216
----------- -----------
Cash Flow From Investing Activities:
Additions to property, plant and equipment........................................ (6,783) (7,212)
Proceeds from sale of property, plant and equipment............................... -- 1,349
Payment for purchase price adjustments related to the acquisition of the Carter-Wallace
Consumer Business ............................................................. (5,217) --
Payment of costs for the acquisition of the Carter-Wallace, Inc. Business ....... (3,049) --
------------ -----------
Net Cash Used in Investing Activities............................................. (15,049) (5,863)
------------ ------------
Cash Flow From Financing Activities:
Repayment of syndicated bank credit facility...................................... (750) --
Repayment of other debt........................................................... -- (5,447)
Payment of deferred financing costs............................................... (459) --
Proceeds from borrowings ........................................................ -- 1,206
Cash transferred to Carter-Wallace, Inc. ......................................... -- (19,135)
---------- ------------
Net Cash Used in Financing Activities............................................. (1,209) (23,376)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents...................... 887 43
----------- -----------
Net Change in Cash and Cash Equivalents........................................... (10,274) 2,020
Cash and Cash Equivalents at Beginning of Period.................................. 55,837 8,661
----------- -----------
Cash and Cash Equivalents at End of Period........................................ $ 45,563 $ 10,681
=========== ===========
- ----------------
(1) The nine months ended September 30, 2001 represent the predecessor company
combined financial information reclassified for conformity to the 2002
presentation.
See Notes to Condensed Consolidated Financial Statements.
ARMKEL, LLC AND SUBSIDIARIES ("SUCCESSOR")
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statement Presentation
The condensed consolidated balance sheet as of September 27, 2002, the condensed
consolidated statements of income and changes in members' equity/net assets to
be sold for the three months and nine months ended September 27, 2002, and the
consolidated statement of cash flow for the nine months ended September 27, 2002
have been prepared by Armkel, LLC and subsidiaries (the "Company" or the
"Successor") and are unaudited. The period for the three months and nine months
ended September 30, 2001 represents the combined income statement of the
Carter-Wallace Consumer Business - Excluding Antiperspirant/Deodorant Products
in the United States and Canada and Pet Products (the "Predecessor") and is
unaudited. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flow at September 27, 2002 and for all
periods presented have been made.
Fifty-percent (50%) of the membership interests in the Company is owned by each
of Church & Dwight Co., Inc. ("C&D") and certain affiliates of Kelso & Company,
L.P. ("Kelso")
The Company acquired the Predecessor on September 28, 2001 (see Note 6 for
further details on the acquisition). The Predecessor income statement has been
prepared pursuant to the Asset Purchase Agreement and Product Line Purchase
Agreement in accordance with accounting principles generally accepted in the
United States of America as detailed in the Company's December 31, 2001 Form
10-K filing. The principal differences in accounting between the Company and the
Predecessor relate to the income tax status of the entities and amortization of
intangible assets. As the Company is treated as a partnership for U.S. tax
purposes, it is generally not subject to U.S taxes on income. The Predecessor
tax provision was calculated as if it was fully taxable under U.S tax law and as
if it was filing tax returns on a stand-alone basis. Additionally, the Company
adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other
Intangible Assets, the Company does not amortize goodwill and tradenames. The
Predecessor recorded amortization expense for its goodwill and tradenames with
indefinite future lives.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 2001
required Form 10-K filing. Certain items previously reported in specific
captions in the accompanying financial statements have been reclassed to conform
with current period classification. The results of operations for the period
ended September 27, 2002 are not necessarily indicative of the operating results
for the full year.
2. Inventories consist of the following:
Sept. 27, 2002 Dec. 31, 2001
-------------- -------------
(In thousands)
Raw materials and supplies............................................. $ 16,183 $ 14,681
Work in process........................................................ 6,954 13,772
Finished goods......................................................... 40,113 41,423
---------- ---------
$ 63,250 $ 69,876
========== =========
3. Property, Plant and Equipment consist of the following:
Sept. 27, 2002 Dec. 31, 2001 (1)
-------------- -------------
(In thousands)
Land................................................................... $ 7,907 $ 7,435
Buildings and improvements............................................. 17,987 18,029
Machinery and equipment................................................ 38,708 39,396
Office equipment and other assets...................................... 8,784 8,567
Construction in progress............................................... 7,535 5,443
---------- ---------
80,921 78,870
Less accumulated depreciation and amortization......................... 7,607 2,029
---------- ---------
Net Property, Plant and Equipment...................................... $ 73,314 $ 76,841
========== =========
(1) Reclassified for conformity to the 2002 presentation.
ARMKEL, LLC AND SUBSIDIARIES ("SUCCESSOR")
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Recent Accounting Pronouncements
a. Effective January 1, 2002, the Company adopted EITF 01-9, "Accounting
for Consideration given to a Customer or a Reseller of the Vendor's
Products", which codifies and reconciles certain issues from EITF 00-14,
"Accounting for Certain Sales Incentives", and EITF 00-25, "Vendor Income
Statement Characterization of Consideration from a Vendor to a Retailer."
EITF 01-9 addresses the income statement classification for offers bya
vendor directly to end consumers that are exercisable after a single
exchange transaction in the form of coupons, rebate offers, or free
products or services disbursed on the same date as the underlying exchange
transaction. The issue requires the cost of these items to be accounted for
as a reduction of revenues, not included as a marketing expense as the
Company did previously. The issue also outlines required accounting
treatment of certain sales incentives, including slotting or placement
fees, cooperative advertising arrangements, buydowns and other allowances.
The Company previously recorded such costs as marketing expenses. The issue
requires the Company to report the paid consideration expense as a
reduction of sales, rather than marketing expense. The Predecessor's third
quarter and year to date 2001 net sales have been restated for this issue.
The impact was a reduction of net sales and marketing expense for the three
month and nine month periods of approximately $15.3 million and $40.6
million in 2002 and $15.5 million and $37.8 million in 2001, respectively,
and did not have an effect on net income.
b. In January 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" and
the accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions", for the disposal of a business (as previously defined in
that Opinion). This statement also amends ARB No. 51, "Consolidated
Financial Statements"' to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. See Note 10 for
further SFAS 144 details regarding the Company's assets held for sale.
c. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This Statement rescinds FASB Statement No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", and an amendment
of that Statement, FASB Statement No. 64, "Extinguishment of Debt Made to
Satisfy Sinking-Fund Requirements." This Statement also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers."
This Statement amends FASB Statement No. 13, "Accounting for Leases", to
eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. The Company will
adopt the provisions of this Statement upon its effective date and does not
anticipate it to have a material effect on its financial statements.
d. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires
companies to recognize costs associated with exit or disposal commitments
to an exit or disposal plan. Examples of costs covered by the standard
include lease termination costs and certain employee severance costs that
are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. The Company will apply Statement 146
prospectively to exit or disposal activities initiated after December 31,
2002.
5. Goodwill and Intangible Assets
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB Opinion No. 17, "Intangible Assets". Under its
changes, SFAS No. 142 establishes new standards for goodwill acquired in a
business combination and eliminates amortization of goodwill and instead sets
forth methods to periodically evaluate goodwill for impairment. The Company, at
its inception, adopted certain provisions of this statement. The impairment
provisions of the statement were adopted January 1, 2002 and did not have any
impact on the Company's consolidated financial statements.
The following tables discloses the carrying value of all intangible assets:
September 27, 2002 December 31, 2001
------------------ -----------------
Gross Carrying Accum. Gross Carrying Accum.
(In thousands) Amount Amortization Net Amount Amortization Net
------ ------------ --- ------ ------------ ---
Amortized intangible assets:
- ---------------------------
Patents $ 27,500 $ 4,500 $ 23,000 $ 27,500 $ 1,125 $ 26,375
========= ======== ========== ========== ======= =========
Unamortized intangible assets - Carrying value(1)
- -----------------------------
Tradenames $ 239,400 $ -- $ 239,400 $ 239,036 $ -- $ 239,036
========= ======== ========== ========== ======= ==========
- -------------
(1) Change in unamortized tradenames is primarily due to translation adjustments.
Intangible amortization expense amounted to $3.4 million and $2.1 million for
the nine months ended September 27, 2002 and September 30, 2001, respectively.
The estimated intangible amortization for each of the next five years is
approximately $4.5 million. The weighted average amortization period for patents
is 6.4 years.
The changes in the carrying amount of goodwill for the nine months ended
September 27, 2002 is as follows:
(In thousands) Domestic International Total
-------- ------------- -----
Balance December 31, 2001......................................... $145,237 $ 31,461 $ 176,698
Purchase accounting adjustments................................... 28,309 5,424 33,733
Foreign exchange/other............................................ -- 308 308
--------- ---------- ----------
Balance September 27, 2002........................................ $ 173,546 $ 37,193 $ 210,739
========= ========== ==========
The purchase accounting adjustments include the revaluation of the Cranbury, New
Jersey property (see Note 10), settlement of the domestic working capital and
other matters with Medpointe Inc.(the successor to Carter-Wallace, Inc. -- see
Note 8), required severance reserves and additional acquisition costs.
In accordance with SFAS No. 142, the Company completed the annual impairment
test of the valuation of goodwill and intangibles as of April 1, 2002 and based
upon the results, there was no impairment.
6. Acquisitions
On May 7, 2001 the Company and Carter-Wallace entered into a definitive asset
purchase agreement (the "Asset Purchase Agreement") which was consummated on
September 28, 2001. The Company acquired the assets and liabilities that related
primarily to the consumer products business of Carter-Wallace, as well as 100%
of the capital stock of certain foreign subsidiaries of Carter-Wallace (the
"Acquisition"). Under a separate agreement dated May 7, 2001, (the "Product Line
Purchase Agreement") Church & Dwight Co., Inc. agreed to simultaneously purchase
from the Company the assets relating to the antiperspirant/deodorant product
lines in the United States and Canada and the assets relating to the Lambert-Kay
line of pet products, and assumed the liabilities of these businesses. The
Acquisition was accounted for as a purchase under the provisions of SFAS No.
141, "Business Combinations" and has been included in the Company's financial
statements from the date of the acquisition. During this quarter, the purchase
price allocation was modified based on current property appraisal results and
other determinations.
Pro forma results
- -----------------
The following reflects pro forma results for the three and nine months ended
September 30, 2001.
For the three For the nine
months ended months ended
Sept. 30, 2001 Sept. 30, 2001
-------------- --------------
(In millions) Pro forma Pro forma
Net Sales..................................................... $ 104.9 $ 313.1
Income from operations........................................ 13.6 46.4
Net Income.................................................... 12.4 41.8
The pro forma results adjusts for additional interest expense related
principally to the debt incurred to finance the Acquisition and for income taxes
under the Company's LLC status. Adjustments were also made to depreciation and
amortization expense related to the fair value of the assets acquired and the
implementation of SFAS No. 142. "Goodwill and Other Intangible Assets." The 2002
year-to-date results include the effect of the inventory step-up expenses of
$8.1 million and transition expenses of $6.3 million which are not part of the
2001 pro forma adjustments.
7. Related Party Transactions
Arrangements with Church & Dwight
- ---------------------------------
As part of the acquisition, the Company entered into a management services
agreement ("MSA") with C&D whereby C&D has agreed to provide the Company with
corporate management and administrative services primarily for the Company's
domestic operations. These services generally include, but are not limited to,
sales, marketing, facilities operations, finance, accounting, MIS, legal and
regulatory, human resources, R&D, Canadian sales and executive and senior
management oversight of each of the above services.
The term of the management services agreement is five years, with automatic
one-year renewals unless the Company provides six months' notice that it does
not want to renew the agreement.
For the three and nine months ended September 27, 2002, the Company paid C&D
$5.6 and $15.7 million for administrative and management oversight services and
sold $0 and $5.4 million of deodorant/antiperspirant inventory to C&D at its
cost, respectively. The Company charged C&D $0.5 million and $1.6 million of
transition administrative services for the current quarter and nine months,
respectively. The Company had a net payable at September 27, 2002 of
approximately $5 million to C&D that primarily related to administration fees
and invoices paid by C&D on behalf of Armkel.
Arrangements with Kelso
- -----------------------
Kelso has agreed to provide the Company with financial advisory services for
which the Company will pay an annual fee of $1.0 million. The Company has agreed
to indemnify Kelso against certain liabilities and reimburse expenses in
connection with its engagement. For the three and nine months ended September
27, 2002, the Company paid Kelso $0.3 million and $0.8 million, respectively.
8. Contingencies
The Acquisition, and the concurrent sale of the remainder of Carter-Wallace's
business to Medpointe Inc. (the successor to Carter-Wallace), involved a number
of arrangements between the Company and Medpointe relating to assets and
liabilities purchased and assumed by the Company or Medpointe as part of the
transaction. These arrangements have given rise to a number of disputes among
the parties which may lead to the incurrence of costs or liabilities, and the
Company's payment of funds.
As of September 27, 2002, the Company reached a settlement with Medpointe
regarding liability for retiree medical costs. Pursuant to the Asset Purchase
Agreement, the Company had agreed to assume liability for 60% of the future
retiree medical costs incurred with respect to certain specifically identified
employees of the consumer products business that terminated employment with
Carter-Wallace during the period from May 7, 2001, through and including
September 28, 2001, the date the Acquisition was consummated. Medpointe asserted
that all of the specifically identified employees of the consumer products
business were terminated by Carter-Wallace on the date of closing, and that the
Company was therefore liable for 60% of the future retiree medical costs with
respect to all of those former employees. Medpointe estimated the Company's
share of the liability for the specifically identified employees was
approximately $6 million to $10 million (depending upon final actuarial
valuation), based on current plan design, which is subject to change at any time
by such entity. The Company disputed Medpointe's position. Under the terms of
the settlement, the Company paid Medpointe $1.5 million to settle the issue and
adjusted the purchase price allocation accordingly.
As of September 27, 2002, the Company adjusted the purchase price allocation for
a $3.4 million settlement with Medpointe for domestic working capital as of the
date of the acquisition.
The Company has entered into an agreement with Medpointe pursuant to which the
Company has agreed to indemnify it and certain related parties against 60% of
all liabilities relating to any action challenging the validity of the
Acquisition or the merger (other than an antitrust-based action), including 60%
of all Appraisal Damages (defined as the recovery greater than the per share
merger price times the number of shares in the appraisal class) claims made by
former Carter-Wallace shareholders.
On January 17, 2002, certain former shareholders of Carter-Wallace, Inc., namely
Cede & Co., Inc. and GAMCO Investors, Inc., commenced a lawsuit in the form of a
Petition for Appraisal in The Court of Chancery in the State of Delaware against
MedPointe regarding the fairness of the consideration these shareholders
received. The plaintiffs allege that they dissented from, and have perfected
their appraisal rights with respect to, the merger of Carter-Wallace and CPI
Development Corporation, MCC Acquisition Holdings Corporation, MCC Merger Sub
Corporation and MCC Acquisition Sub Corporation, dated September 20, 2001.
Specifically, the plaintiffs claim that the valuation of their shares of
Carter-Wallace stock pursuant to the merger was for less than fair value.
Plaintiffs seek Appraisal Damages, including a determination of the fair value
of the common stock at the time of the merger and an order directing the merged
entity to pay that fair value, as well as fees and expenses.
Although the Company's potential exposure with respect to the Appraisal Damages
claims is effectively capped at $12 million (because of a separate agreement
between Carter-Wallace and certain shareholders of Carter-Wallace), there is no
cap on the Company's indemnification obligation with respect to pre-existing
liabilities of the consumer business acquisition from Carter-Wallace. Due to
uncertainty of the outcome of currently asserted Appraisal Damages claims, no
amount has been reflected in these financial statements. In connection with the
Product Line Purchase Agreement, C&D agreed to indemnify the Company for up to
17.4% of any amounts that the Company may become liable for pursuant to the
Company's indemnification agreement with Carter-Wallace. If the Company is
required to perform under these indemnification obligations, its liability could
be substantial. This could materially and adversely affect the Company's
financial condition and results of operations.
Carter-Wallace has been engaged in litigation with Tambrands Inc. in the Supreme
Court of the State and County of New York arising out of a patent infringement
and misappropriation suit previously filed against both companies in the United
States District Court, Southern District of New York, by New Horizons
Diagnostics Corporation, or "NHDC", et al. The NHDC suit, which was settled and
discontinued in July 1996, asserted claims with respect to certain "gold sol"
technology (used in the First Response and Answer home pregnancy and ovulation
test kits) that Carter-Wallace had acquired from Tambrands pursuant to a written
purchase agreement in March 1990. Carter-Wallace paid an immaterial amount
toward that settlement. The Company assumed this litigation as part of the
Acquisition. In the Supreme Court action, Tambrands sought reimbursement from
Carter-Wallace of an unspecified portion of the amount paid by Tambrands in
settlement of the NHDC suit, and for defense costs. Both Tambrands and
Carter-Wallace moved for summary judgment, and the Supreme Court granted
Carter-Wallace's motion. Tambrands appealed that ruling. On June 13, 2002 the
Supreme Court decision was unanimously affirmed by the Appellate Division, First
Department, resolving all claims in favor of Carter-Wallace. Because Tambrands
has no further appeal rights, the Company considers this matter to be closed.
The Company's distribution of condoms under the Trojan (R) and other trademarks
is regulated by the U.S. Food and Drug Administration (FDA). Certain of the
Company's condoms contain the spermicide nonoxynol-9 (N-9). The World Health
Organization and other interested groups have issued reports suggesting that N-9
should not be used rectally or for multiple daily acts of vaginal intercourse,
given the ingredient's potential to cause irritation. The Company expects the
FDA to issue non-binding draft guidance concerning the labeling of condoms with
N-9, although the timing of such draft guidance is uncertain. The Company
believes that condoms with N-9 provide an acceptable added means of
contraceptive protection and is cooperating with the FDA concerning appropriate
labeling revisions, if any. However, the Company cannot predict the outcome of
the FDA review.
The Company, in the ordinary course of its business, is the subject of, or party
to, various pending or threatened legal actions. The Company believes that any
ultimate liability arising from these actions will not have a material adverse
effect on its financial position or results of operation.
9. Restructuring Reserve
As of the date of the Acquisition, the Company started to implement a plan to
reorganize the operation of the acquired consumer business. The main components
of the plan include rationalizing facilities for which the Company has incurred
lease termination costs, environmental remediation costs and work force
rationalization costs. The plan was finalized on September 27, 2002 and the
Company expects to complete the plan within one year from this date except for
certain long-term contractual obligations related to benefits for certain former
executives of Carter-Wallace, Inc.
The Company has established an accrual for severance to reflect the purchase of
various services from C&D in lieu of obtaining such services through continued
employment of certain personnel at the Predecessor company. The accrued
severance is for identified employees from various areas including executives,
administrative support and corporate functions (finance, human resources, legal,
MIS, R&D, logistics, marketing, sales and purchasing).
The following table summarizes the activity in the Company's restructuring
accruals:
Reserves at Payments and Reserves at
(In thousands) Dec. 31, 2001 Adjustments Sept. 27, 2002
------------- ----------- --------------
Severance and other charges....................................... $ 40,709 $ (29,428) $ 11,281
Environmental remediation costs................................... 250 1,578 1,828
Lease termination costs........................................... 1,753 (1,196) 557
--------- ----------- --------
$ 42,712 $ (29,046) $ 13,666
========= =========== ========
10. Assets Held for Sale
In July 2002 the Company met the criteria to classify its Cranbury, New Jersey
facility as assets held for sale. At December 31, 2001, the net book value of
the Cranbury property and facilities was $43 million based on regional market
prices for such property when used for a similar purpose, as determined by an
independent appraisal at the time of acquisition. During the third quarter of
2002, however, independent real estate consultants advised the Company that the
property would likely have to be sold to land developers who would use it for
purposes other than manufacturing, for which the fair value is significantly
less. Accordingly, the Company has adjusted the purchase price allocation
recorded for the property to the fair value for developmental property ($20
million). Prior year financial information has been reclassified to conform with
the current period classification.
11. Segments and Supplemental Information
Segment Information
- -------------------
The Company has two operating segments: Domestic Consumer Products Division and
International Consumer Products Division.
Measurement of Segment Results and Assets
- -----------------------------------------
The accounting policies of the segments are generally the same as those
described in Note 1.
Supplemental Financial Information of Domestic and International Operations
- ---------------------------------------------------------------------------
The senior subordinated notes registered by the Company are fully and
unconditionally guaranteed by the domestic subsidiaries of the Company on a
joint and several basis. The following information is being presented to comply
with SEC Regulation SX, Item 3-10 and to provide required segment disclosures.
Supplemental information for condensed consolidated balance sheets at September
27, 2002, condensed consolidated income statements and consolidated cash flows
for the period from December 31, 2001 to September 27, 2002 is summarized as
follows (amounts in thousands):
Successor Consolidated Statement of Income For The Three Months Ended September 27, 2002
--------------------------------------------------------------------
Total
Domestic International Eliminations Consolidated
----------- ------------- ------------ ------------
Net sales........................................ $ 58,120 $ 54,884 $ (2,714) $ 110,290
Cost of goods sold............................... 22,275 28,974 (2,714) 48,535
----------- ----------- ------------ -----------
Gross profit..................................... 35,845 25,910 -- 61,755
Operating expenses............................... 20,319 21,607 -- 41,926
----------- ----------- ----------- -----------
Income from operations........................... 15,526 4,303 -- 19,829
Interest expense................................. 8,804 333 -- 9,137
Interest (income)................................ (124) (140) -- (264)
Other (income) expense........................... (920) 1,349 -- 429
------------ ----------- ----------- -----------
Income before taxes.............................. 7,766 2,761 -- 10,527
Income taxes..................................... -- 1,211 -- 1,211
----------- ----------- ----------- -----------
Net Income ................................... $ 7,766 $ 1,550 $ -- $ 9,316
=========== =========== =========== ===========
Predecessor Combined Statement of Income For the Three Months Ended September 30, 2001
--------------------------------------------------------------------
Total
Domestic International Eliminations Consolidated
----------- ------------- ------------ ------------
Net sales........................................ $ 55,816 $ 49,100 $ -- $ 104,916
Cost of goods sold............................... 21,205 26,414 -- 47,619
----------- ----------- ----------- -----------
Gross profit..................................... 34,611 22,686 -- 57,297
Operating expenses............................... 17,584 16,569 -- 34,153
---------- ----------- ----------- -----------
Income from operations........................... 17,027 6,117 -- 23,144
Interest expense................................. -- 390 -- 390
Interest (income)................................ -- (77) -- (77)
Other (income) expense........................... -- 524 -- 524
----------- ----------- ----------- -----------
Income before taxes.............................. 17,027 5,280 -- 22,307
Income taxes..................................... 6,184 1,457 -- 7,641
----------- ----------- ----------- -----------
Net Income.................................. $ 10,843 $ 3,823 $ -- $ 14,666
=========== =========== =========== ===========
Successor Consolidated Statement of Income For The Nine Months Ended September 27, 2002
--------------------------------------------------------------------
Total
Domestic International Eliminations Consolidated
----------- ------------- ------------ ------------
Net sales........................................ $ 170,022 $ 160,251 $ (7,672) $ 322,601
Cost of goods sold............................... 75,941 83,860 (7,672) 152,129
----------- ----------- ------------ -----------
Gross profit..................................... 94,081 76,391 -- 170,472
Operating expenses............................... 57,729 55,357 -- 113,086
----------- ----------- ----------- -----------
Income from operations........................... 36,352 21,034 -- 57,386
Interest expense................................. 26,540 949 -- 27,489
Interest (income)................................ (395) (424) -- (819)
Other (income) expense........................... (7,815) 6,656 -- (1,159)
------------ ----------- ----------- ------------
Income before taxes.............................. 18,022 13,853 -- 31,875
Income taxes..................................... -- 6,666 -- 6,666
----------- ----------- ----------- -----------
Net Income.................................. $ 18,022 $ 7,187 $ -- $ 25,209
=========== =========== =========== ===========
Total
Predecessor Combined Statement of Income For The Nine Months Ended September 30, 2001
--------------------------------------------------------------------
Total
Domestic International Eliminations Consolidated
----------- ------------- ------------ ------------
Net sales........................................ $ 161,304 $ 151,797 $ -- $ 313,101
Cost of goods sold............................... 59,301 80,046 -- 139,347
----------- ----------- ----------- -----------
Gross profit..................................... 102,003 71,751 -- 173,754
Operating expenses............................... 45,417 51,470 -- 96,887
---------- ----------- ----------- -----------
Income from operations........................... 56,586 20,281 -- 76,867
Interest expense................................. -- 1,031 -- 1,031
Interest (income)................................ (98) (241) -- (339)
Other (income) expense........................... (932) 1,532 -- 600
------------ ----------- ----------- -----------
Income before taxes.............................. 57,616 17,959 -- 75,575
Income taxes..................................... 24,976 6,837 -- 31,813
----------- ----------- ----------- -----------
Net Income.................................. $ 32,640 $ 11,122 $ -- $ 43,762
=========== =========== =========== ===========
Successor Consolidated Balance Sheets September 27, 2002
-------------------------------------------------------------------
Total
Domestic International Eliminations Consolidated
----------- ------------- ------------ ------------
Cash and cash equivalents........................ $ 24,575 $ 20,988 $ -- $ 45,563
Accounts receivable, less allowances............. 33,306 85,631 -- 118,937
Inventories...................................... 23,169 40,081 -- 63,250
Prepaid expenses................................. 234 4,168 -- 4,402
Net assets held for sale ....................... 20,000 -- -- 20,000
----------- ----------- ----------- -----------
Total current assets........................ 101,284 150,868 -- 252,152
Property, plant and equipment (net).............. 43,142 30,172 -- 73,314
Notes receivable................................. 55,987 -- (55,987) --
Investment in subsidiaries....................... 63,557 -- (63,557) --
Tradenames and patents........................... 224,200 38,200 -- 262,400
Goodwill......................................... 173,546 37,193 -- 210,739
Deferred financing costs......................... 18,745 -- -- 18,745
Other assets..................................... 2,424 1,137 -- 3,561
----------- ----------- ----------- -----------
Total assets................................ $ 682,885 $ 257,570 $ (119,544) $ 820,911
=========== =========== ============ ===========
Short-term borrowings............................ $ -- $ 3,563 $ -- $ 3,563
Accounts payable and accrued expenses............ 43,339 70,112 810 114,261
Current portion of long-term debt................ 5,525 3,353 -- 8,878
Taxes payable.................................... -- 1,386 -- 1,386
----------- ----------- ----------- -----------
Total current liabilities................... 48,864 78,414 810 128,088
Long-term debt................................... 403,480 30,176 -- 433,656
Notes payable.................................... -- 68,410 (68,410) --
Deferred and other long-term liabilities......... 7,691 20,787 -- 28,478
---------- ----------- ----------- -----------
Total liabilities........................... 460,035 197,787 (67,600) 590,222
Net members' equity and subsidiary capital....... 222,850 59,783 (51,944) 230,689
----------- ----------- ----------- -----------
Total Liabilities and Members' Equity....... $ 682,885 $ 257,570 $ (119,544) $ 820,911
=========== =========== =========== ===========
December 31, 2001
-------------------------------------------------------------------
Total
Domestic International Eliminations Consolidated
----------- ------------- ------------ ------------
Cash and cash equivalents........................ $ 40,444 $ 15,393 $ -- $ 55,837
Accounts receivable, less allowances............. 31,958 68,936 (4,222) 96,672
Inventories...................................... 36,137 33,739 -- 69,876
Prepaid expenses................................. 648 3,271 -- 3,919
Net assets held for sale......................... 43,039 -- -- 43,039
----------- ---------- ---------- -----------
Total current assets........................ 152,226 121,339 (4,222) 269,343
Property, plant and equipment (net).............. 45,751 31,090 -- 76,841
Investment in subsidiaries....................... 52,061 -- (52,061) --
Notes receivable................................. 65,540 -- (65,540) --
Tradenames and patents........................... 227,575 37,836 -- 265,411
Goodwill......................................... 145,237 31,461 -- 176,698
Deferred financing costs......................... 20,892 -- -- 20,892
Other assets..................................... -- 4,608 -- 4,608
----------- ---------- ---------- -----------
Total assets................................ $ 709,282 $ 226,334 $ (121,823) $ 813,793
========== ========== ========== ===========
Short-term borrowings............................ $ -- $ 2,425 $ -- $ 2,425
Accounts payable and accrued expenses............ 87,752 49,723 (4,222) 133,253
Current portion of long-term debt................ 2,413 833 -- 3,246
Taxes payable.................................... -- 3,004 -- 3,004
----------- ----------- ----------- -----------
Total current liabilities................... 90,165 55,985 (4,222) 141,928
Long-term debt................................... 407,235 32,515 -- 439,750
Notes payable.................................... -- 65,540 (65,540) --
Deferred and other long-term liabilities......... 6,011 22,700 -- 28,711
---------- ----------- ---------- -----------
Total liabilities........................... 503,411 176,740 (69,762) 610,389
Net members' equity and subsidiary capital....... 205,871 49,594 (52,061) 203,404
----------- ----------- ---------- -----------
Total Liabilities and Members' Equity ...... $ 709,282 $ 226,334 $(121,823) $ 813,793
=========== =========== =========== ===========
Successor Consolidated Statement of Cash Flow For The Nine Months Ended September 27, 2002
--------------------------------------------
Total
Domestic International Consolidated
-------- ------------- ------------
Cash Flow From Operating Activities:
Net Income........................................................ $ 18,022 $ 7,187 $ 25,209
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................... 9,580 2,950 12,530
Unrealized (gain) loss on foreign exchange transactions (3,522) 2,593 (929)
Change in assets and liabilities:
(Increase) in accounts receivable............................ (4,677) (12,633) (17,310)
Decrease (Increase) in inventories .......................... 13,184 (4,599) 8,585
(Decrease) Increase in accounts payable and
other accrued expenses (33,128) 10,030 (23,098)
(Decrease) Increase in other................................ (622) 732 110
----------- ---------- ----------
Net Cash (Used in) Provided by Operating Activities............... (1,163) 6,260 5,097
----------- ---------- ----------
Cash Flow From Investing Activities:
Additions to property, plant & equipment..................... (5,231) (1,552) (6,783)
Adjustments to purchase price allocation .................... (5,217) -- (5,217)
Payment of acquisition-related costs......................... (3,049) -- (3,049)
----------- --------- ----------
Net Cash Used in Investing Activities............................. (13,497) (1,552) (15,049)
----------- --------- ----------
Cash Flow from Financing Activities:
Repayment of syndicated bank credit facility ................ (750) -- (750)
Payment of deferred financing costs.......................... (459) -- (459)
----------- --------- ----------
Net Cash Used in Financing Activities............................. (1,209) -- (1,209)
----------- --------- ----------
Effect of exchange rate changes on cash and cash equivalents...... -- 887 887
----------- --------- ----------
NET CHANGE IN CASH & CASH EQUIVALENTS............................. (15,869) 5,595 (10,274)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD.................... 40,444 15,393 55,837
----------- --------- ----------
CASH & CASH EQUIVALENTS AT END OF PERIOD.......................... $ 24,575 $ 20,988 $ 45,563
=========== =========== ===========
The following table sets forth the Company's principal product lines and related
data for the three and nine months period ended Sept. 27, 2002 and September 30,
2001.
Three Months Ended Nine Months Ended
------------------ ------------------
Successor Predecessor Successor Predecessor
Company Company Company Company
Net Sales (In thousands) Sept. 27, 2002 Sept. 30, 2001 Sept. 27, 2002 Sept. 30, 2001
-------------- -------------- -------------- --------------
Products
Family Planning(1).......................... $ 49,339 $ 50,975 $ 141,090 $ 141,559
Depilatories and waxes; face and skincare... 22,603 18,640 68,491 63,202
Oral care................................... 8,649 7,654 24,775 22,826
OTC Products................................ 11,205 10,803 34,932 33,758
Other consumer products..................... 18,494 16,844 53,313 51,756
---------- --------- ---------- ----------
Total net sales............................. $ 110,290 $ 104,916 $ 322,601 $ 313,101
========== ========= ========== ==========
- ----------------
(1) Family Planning includes condom product sales and pregnancy and ovulation
kits.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Armkel, LLC and subsidiaries (the "Company" or the "Successor") is an equally
owned joint venture formed by Church & Dwight Co., Inc. ("C&D") and affiliates
of Kelso & Company, L.P. ("Kelso"). On September 28, 2001, the Company acquired
certain of the domestic consumer product assets of Carter-Wallace, primarily
Trojan(R) condoms, Nair(R) depilatories, and First Response(R) and Answer(R)
pregnancy test kits, and the international subsidiaries of Carter-Wallace. The
remainder of Carter-Wallace, comprised of its healthcare and pharmaceuticals
businesses, was merged with Medpointe, Inc. ("Medpointe") after the completion
of the Acquisition. Simultaneously with the consummation of the acquisition, the
Company sold the remainder of the consumer products businesses, Arrid
antiperspirant in the U.S and Canada and the Lambert-Kay line of pet care
products, to C&D (the "Disposed Businesses").
Prior to the Acquisition, Carter-Wallace reported its historical financial
results for the combined business, including the business the Company acquired,
the Disposed Businesses and the healthcare and pharmaceuticals businesses on a
consolidated basis. In connection with the Acquisition, the Carter-Wallace
consumer business predecessor financial statements were prepared to reflect the
operating performance of the Company's business for the years ended March 31,
2000 and 2001 and for the period from April 1, 2001 to September 28, 2001. The
Company's historical financial statements were not compiled separately at any
prior time, as the Company was not a stand-alone subsidiary, with the exception
of the international division. As a result, certain cost allocation assumptions
were made.
The following section discusses comparisons to the three-month and nine-month
period ended September 27, 2002 compared to the same period in the prior year
for the predecessor company.
Three Months Ended Nine Months Ended
------------------ ------------------
Successor Predecessor Successor Predecessor
Company Company Company Company
Sept. 27, Sept. 30, Sept. 27, Sept. 30
(In millions) 2002 2001(1) 2002 2001(1)
---- ---- ---- ----
Net sales(1)......................................... $ 110.3 $ 104.9 $ 322.6 $ 313.1
Cost of goods sold(2)................................ 48.5 47.6 152.1 139.4
--------- --------- --------- --------
Gross Profit......................................... 61.8 57.3 170.5 173.7
Marketing expenses.................................. 16.7 12.5 41.6 35.7
Selling, General & Administrative expenses(2)........ 25.2 21.7 71.4 61.2
Interest Expense & Other Income...................... 9.4 .8 25.6 1.2
--------- --------- --------- --------
Income before taxes.................................. $ 10.5 $ 22.3 $ 31.9 $ 75.6
========= ========= ========= ======== =
(1) Net Sales for the predecessor financial statements has been adjusted to
conform with EITF 01-9.
(2) Distribution expense reclassified from operating expense to cost of goods
sold for predecessor financial statements in order to conform to the
Company's presentation.
The results of operations for the period from January 1, 2002 to September 27,
2002 are affected by certain expenses related to accounting and other
acquisition related integration expenses. These items are outlined below and
addressed in further detail in the discussion below:
Three Months Ended Nine Months Ended
Sept. 27, 2002 Sept. 27, 2002
-------------- --------------
(In millions)
Inventory Step-up Expenses.................................. $ 0 $ 8.1
Transition Expenses......................................... $ 2.1 $ 6.3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Net Sales
- ---------
Net sales for the quarter increased $5.4 million, or 5.1%, to $110.3 million
from $104.9 million in the same period last year. Domestic Net Sales decreased
$0.4 million, or 0.7%, to $55.4 million from $55.8 million. International Net
Sales increased $5.8 million, or 11.8%, to $54.9 million from $49.1 million. The
increase in International Net Sales is principally due to higher sales in
France, Mexico and the United Kingdom as well as a favorable foreign exchange
translation of $2.7 million.
Net sales for the nine months ended September 27, 2002 increased $9.5 million,
or 3.0%, to $322.6 million from $313.1 million in the same period last year.
Domestic Net Sales increased $1.1 million, or 0.6%, to $162.4 million from
$161.3 million. This increase in Domestic Net Sales (net of intercompany
eliminations) is primarily due to the continued growth in the domestic condoms
and depilatories businesses. International Net Sales increased $8.5 million, or
5.6%, to $160.3 million from $151.8 million primarily due to increases for
Nair(R) depilatories, Trojan(R) condoms and Sterimar(R) nasal decongestant in
Mexico, higher sales in France and the United Kingdom, as well as a favorable
foreign exchange translation of $1.9 million.
Effective January 1, 2002, the Company adopted EITF 01-9 "Accounting for
Consideration given to a Customer or a Reseller of the Vendor's Products", which
codifies and reconciles certain issues from EITF 00-14 and EITF 00-25. EITF 01-9
addresses the income statement classification for offers by a vendor directly to
end consumers that are exercisable after a single exchange transaction in the
form of coupons, rebate offers, or free products or services disbursed on the
same date as the underlying exchange transaction. The issue requires the cost of
these items to be accounted for as a reduction of revenues, not included as a
marketing expense as the Company did previously. The EITF also outlines required
accounting treatment of certain sales incentives, including slotting or
placement fees, cooperative advertising arrangements, buydowns and other
allowances. The Company previously recorded such costs as marketing expenses.
The issue requires the Company to report the paid consideration expense as a
reduction of sales, rather than marketing expense. The Predecessor's second
quarter and year to date 2001 net sales have been restated for this issue. The
impact was a reduction of net sales and marketing expense for the three month
and nine month periods of approximately $15.3 million and $40.6 million in 2002
and $15.5 million and $37.8 million in 2001, respectively, and did not have an
effect on net income.
Cost of Goods Sold
- ------------------
Cost of goods sold for the quarter increased $0.9 million, or 1.9%, to $48.5
million from $47.6 million in the same period last year. As a percentage of net
sales, cost of goods sold for the quarter decreased to 44.0% from 45.4% in 2001.
The decrease in cost of goods sold is primarily due to lower cost of goods for
domestic condom sales and lower cost of goods for Nair resulting from the
transfer of production moved from the Cranbury facility to the Lakewood
facility.
Cost of goods sold for the nine months ended September 27, 2002 increased $12.7
million, or 9.2%, to $152.1 million from $139.4 million in the same period last
year. As a percentage of net sales, cost of goods sold year to date grew to
47.2% from 44.5% in 2001. This increase in cost of goods sold is due to the
remaining $8.1 million of additional expense relating to inventory step-up
adjustments incurred at the Acquisition and due to the excess cost to carry the
Cranbury plant of $1.6 million. Excluding these adjustments, cost of goods sold,
as a percentage of net sales, would have been reduced to 44.1% of net sales.
Operating Costs excluding Interest Expense and Other Income
- -----------------------------------------------------------
Total operating expenses for the quarter, excluding interest expense and other
income, increased $7.7 million, or 22.5%, to $41.9 million from $34.2 million in
the same period last year. Total operating expenses for the nine months ended
September 27, 2002, excluding interest expense and other income, increased $16.1
million, or 16.6%, to $113.0 million from $96.9 million in the nine months ended
September 27, 2001. The operating expense increases are addressed below.
Marketing expenses for the quarter increased by $4.2 million, or 33.6%, to $16.7
million from $12.5 million in the same period last year. The increase in
spending in the quarter is primarily related to higher advertising spending in
the United Kingdom and Mexico. Marketing expenses in the nine months ended
September 27, 2002 increased by $5.9 million, or 16.5%, to $41.6 million from
$35.7 million in the nine months ended September 30, 2001. The year-to-date
marketing increase is related to higher media spending behind domestic and
international products.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Selling, general and administrative expenses for the quarter increased $3.5
million, or 16.1%, to $25.2 million from $21.7 million in the same period last
year. Selling, general and administrative expenses in the nine months ended
September 27, 2002 increased $10.2 million, or 16.7% to $71.4 million from $61.2
million in the same period last year. This year to date increase is primarily
related to estimated transitional costs of $4.7 million for former
Carter-Wallace employees employed during the integration process, $5.0 million
in fees to Church & Dwight and Kelso, and a net increase of $1.3 million in
amortization for acquired patents, compared to the prior year amortization of
patents and goodwill.
Interest Expense and Other Income and Expenses
- ----------------------------------------------
Interest expense for the quarter was $9.1 million compared to $0.4 million for
the same period last year. Interest expense for the nine months ended September
27, 2002 was $27.5 million compared to $1.0 million for the same period last
year. The interest expense in 2002 is related to the $225 million in outstanding
bonds and $220 million in term loans incurred at the time of the Acquisition.
Interest income for the quarter of $0.3 million increased $0.2 million compared
to the same period last year. Interest income for the nine months ended
September 27, 2002 of $0.8 million increased $0.5 million compared to the same
period last year.
Other expenses (net) for the quarter of $0.4 million decreased $0.1 million
compared to the same period last year. Other income (net) for the nine months
ended September 27, 2002 of $1.2 million increased $1.8 million compared to the
same period last year. This gain is primarily related to the accounting
remeasurement on intercompany loans entered into at Acquisition with certain of
its subsidiaries.
Liquidity and capital resources
- -------------------------------
The Company considers cash and cash equivalents, and available amounts under its
revolving credit facility, as the principal measurement of its liquidity. At
September 27, 2002, cash, including cash equivalents, totaled $45.6 million as
compared to $55.8 million at December 31, 2001. At September 27, 2002, the
Company had an unused revolving credit facility of $85 million.
The Company had outstanding long-term debt of $433.7 million, and the
aforementioned cash and cash equivalents less short term and related party debt
of $28.1 million, for a net debt position of $405.6 million at September 27,
2002. Based on the definition in its loan agreements, the Company's EBITDA is
estimated to be $25 million for the three months ending September 27, 2002 and
$82 million for the nine months ended September 27, 2002.
Financial covenants in the Company's loan agreements include a leverage ratio
and an interest coverage ratio, both of which the Company continues to satisfy.
The Company believes cash on hand, along with the $85 million revolving credit
facility, is sufficient to operate its businesses, to make expected capital
expenditures, to make severance payments, and to meet foreseeable liquidity
requirements.
Cash flow generated in operating activities for the nine months ended September
27, 2002 was $5.1 million. Year to date the significant uses of cash were $26.8
million in severance payments and $6.3 million in transition expenses. Cash flow
used in investing activities for the nine months ended September 27, 2002 was
$15.1 million which is related to capital expenditures and acquisition related
costs.
The Company has incurred and will incur severance and other change in control
related liabilities to certain employees. In the nine-month period ending
September 27, 2002 the Company paid $26.8 million in severance payments. The
Company currently anticipates that the total severance payments will equal
approximately $48.2 million and the Company has paid out $36.9 million since the
start of the acquisition. The Company anticipates the remaining $11.3 million in
severance and related costs to be principally paid out in 2002 and 2003,
although the restructuring plan was completed this quarter.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Cautionary Note on Forward-Looking Statements
- ---------------------------------------------
This report contains forward-looking statements relating, among others, to
financial objectives, liquidity needs, severance costs, contingencies and other
matters. These statements represent the intentions, expectations and beliefs of
the Company, and are subject to risks, uncertainties and other factors, many of
which are outside the Company's control. These factors, which include the
ability of Church & Dwight to successfully complete the integration of the
Company's operations, and assumptions as to market growth and consumer demand
(including but not limited to general economic and marketplace conditions and
events, competitors' actions and the Company's costs), and the outcome of
contingencies, including litigation, environmental remediation and the
divestiture of assets, could cause actual results to differ materially from such
forward-looking statements. For a description of additional cautionary
statements, see the Company's 2001 Form 10-K for the year ended December 31,
2001 and in the Company's subsequent SEC filings, as well as Carter-Wallace's
historical SEC reports.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, we have concluded that the Company's disclosure controls
and procedures are effective in recording, processing, summarizing and reporting
within the time periods specified in the SEC's rules and forms material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic SEC filings.
Since Mr. Davies' and Ms. Usifer's most recent review of the Company's internal
controls systems, there have been no significant changes in internal controls or
in other factors that could significantly affect these controls.
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
(99.1) Statement regarding the Certification of the CEO of
Armkel, LLC Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to 906 of the Sarbanes-Oxley Act of 2002
(99.2) Statement regarding the Certification of the CFO of
Armkel, LLC Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to 906 of the Sarbanes-Oxley Act of 2002
b. No reports on Form 8-K were filed for the three months ended
September 27, 2002.
EXHIBIT 99.1
The Certification of the Chief Executive Officer of Armkel, LLC Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 is not being filed with the Quarterly Report but has been submitted
to the Securities and Exchange Commission under separate cover.
EXHIBIT 99.2
The Certification of the Chief Financial Officer of Armkel, LLC Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 is not being filed with the Quarterly Report but has been submitted
to the Securities and Exchange Commission under separate cover.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARMKEL, LLC.
---------------------------------------
(REGISTRANT)
DATE: November 8, 2002 /s/ Maureen K. Usifer
------------------------- ---------------------------------------
MAUREEN K. USIFER
CHIEF FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
DATE: November 8, 2002 /s/ Zvi Eiref
------------------------- ---------------------------------------
ZVI EIREF
DIRECTOR
CERTIFICATION
I, Robert A. Davies, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Armkel, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of any material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (of persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls: and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls: and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
----------------
/s/ Robert A. Davies, III
------------------------------------------------
Robert A. Davies, III
Chief Executive Officer
CERTIFICATION
I, Maureen K. Usifer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Armkel, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of any material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (of persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls: and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls: and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
----------------
/s/ Maureen K. Usifer
------------------------------------------------
Maureen K. Usifer
Chief Financial Officer