UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý                                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

or

 

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarter Ended September 25, 2004

 

Commission File No. 1–12620

 

PLAYTEX PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

 

 

300 Nyala Farms Road

Westport, Connecticut 06880

(Address of principal executive offices)

 

Telephone number: (203) 341–4000

(Registrant’s telephone number, including area code)

 

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 ý No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

 

Yes ý No o

 

At October 28, 2004, 61,215,856 shares of Playtex Products, Inc. common stock, par value $.01 per share, were outstanding.

 

 

PLAYTEX PRODUCTS, INC.

 

INDEX

 

PART I - FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosure about Market Risk
Item 4.	Controls and Procedures
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings
Item 6.	Exhibits
	Signatures

 

2

 

PLAYTEX PRODUCTS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

		September 25, 2004			December 27, 2003
ASSETS
Current assets:
Cash and cash equivalents		$	84,158		$	27,453
Receivables, less allowance for doubtful accounts		101,061			23,478
Retained interest in receivables		—			64,633
Inventories		56,393			78,413
Deferred income taxes, net		7,296			8,994
Income taxes receivable		2,415			3,826
Assets held for sale		3,582			—
Other current assets		6,227			8,370
Total current assets		261,132			215,167
Net property, plant and equipment		120,354			125,425
Intangible assets, net:
Goodwill		494,307			494,307
Trademarks, patents and other		145,340			138,271
Deferred financing costs, net		17,305			13,109
Other noncurrent assets		8,578			7,019
Total assets		$	1,047,016		$	993,298
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	30,593		$	39,306
Accrued expenses		81,182			53,242
Income taxes payable		1,782			4,169
Current maturities of long-term debt		—			4,500
Total current liabilities		113,557			101,217
Long-term debt		800,000			788,750
Other noncurrent liabilities		19,878			16,404
Deferred income taxes		67,698			59,139
Total liabilities		1,001,133			965,510
Stockholders’ equity:
Common stock, $0.01 par value, authorized 100,000,000 shares, issued and outstanding 61,215,856 shares at September 25, 2004 and December 27, 2003		612			612
Additional paid-in capital		526,233			526,233
Retained earnings (accumulated deficit)		(480,528		)	(498,539		)
Accumulated other comprehensive earnings (loss)		(434		)	(518		)
Total stockholders’ equity		45,883			27,788
Total liabilities and stockholders’ equity		$	1,047,016		$	993,298

 

See accompanying notes to unaudited consolidated financial statements.

 

3

 

PLAYTEX PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

 

		Three Months Ended
		September 25, 2004			September 27, 2003
Net sales		$	148,531		$	146,827
Cost of sales		71,534			72,047
Gross profit		76,997			74,780
Operating expenses:
Selling, general and administrative		56,445			54,937
Amortization of intangibles		241			226
Total operating expenses		56,686			55,163
Operating earnings		20,311			19,617
Interest expense, net of interest income, including related party interest expense of $3,037, net of related party interest income of $3,001 for the three month period ended September 27, 2003		18,072			14,226
Other expenses		—			448
Earnings before income taxes		2,239			4,943
Income taxes		859			1,809
Net earnings		$	1,380		$	3,134
Earnings per share:
Basic and diluted		$	0.02		$	0.05
Weighted average shares outstanding:
Basic		61,216			61,216
Diluted		61,224			61,216

 

See accompanying notes to unaudited consolidated financial statements.

 

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		Nine Months Ended
		September 25, 2004			September 27, 2003
Net sales		$	525,981		$	500,237
Cost of sales		251,481			243,016
Gross profit		274,500			257,221
Operating expenses:
Selling, general and administrative		189,153			183,857
Restructuring		93			—
Amortization of intangibles		692			677
Total operating expenses		189,938			184,534
Operating earnings		84,562			72,687
Interest expense, net of interest income, including related party interest expense of $9,112, net of related party interest income of $9,002 for the nine month period ended September 27, 2003		52,444			41,060
Expenses related to retirement of debt, net		6,432			—
Other expenses		336			1,473
Earnings before income taxes		25,350			30,154
Income taxes		7,339			10,963
Net earnings		$	18,011		$	19,191
Earnings per share:
Basic and diluted		$	0.29		$	0.31
Weighted average shares outstanding:
Basic		61,216			61,216
Diluted		61,222			61,230

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

PLAYTEX PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE EARNINGS

(In thousands)

 

		Common Shares Outstanding		Common Stock			Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Earnings (Loss)			Total
Balance, December 27, 2003		61,216		$	612		$	526,233		$	(498,539	)	$	(518	)	$	27,788
Net earnings		—		—			—			18,011			—			18,011
Foreign currency translation adjustment		—		—			—			—			(201		)	(201		)
Minimum pension liability adjustment, net of tax		—		—			—			—			285			285
Comprehensive earnings																18,095
Balance, September 25, 2004		61,216		$	612		$	526,233		$	(480,528	)	$	(434	)	$	45,883

 

See accompanying notes to unaudited consolidated financial statements.

 

6

 

PLAYTEX PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Nine Months Ended
		September 25, 2004			September 27, 2003
Cash flows from operations:
Net earnings		$	18,011		$	19,191
Adjustments to reconcile net earnings to net cash flows from operations:
Write-off of deferred fees related to retirement of debt		6,882			—
Depreciation		11,117			10,566
Amortization of deferred financing costs		1,855			1,543
Amortization of intangibles		692			677
Deferred income taxes		10,601			5,745
Prepaid pension asset and postretirement benefits		399			1,807
Other, net		246			1,235
Net change in working capital accounts		22,721			17,576
Net cash flows from operations		72,524			58,340
Cash flows used for investing activities:
Purchases of property, plant and equipment		(9,319		)	(13,771		)
Acquisition of intangibles		(1,000		)	—
Net cash flows used for investing activities		(10,319		)	(13,771		)
Cash flows used for financing activities:
Borrowings under revolving credit facilities		115,800			268,450
Repayments under revolving credit facilities		(115,800		)	(268,450		)
Long-term debt borrowings		467,500			—
Long-term debt repayments		(450,750		)	(4,500		)
Repayment of convertible notes		—			(30,000		)
Repurchase of 9 3/8% Notes		(9,550		)	—
Payment of financing costs		(12,850		)	(1,624		)
Net cash flows used for financing activities		(5,650		)	(36,124		)
Effect of exchange rate changes on cash		150			1,341
Increase in cash and cash equivalents		56,705			9,786
Cash and cash equivalents at beginning of period		27,453			31,605
Cash and cash equivalents at end of period		$	84,158		$	41,391
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest		$	44,273		$	31,481
Income taxes, net of refunds		$	(2,286	)	$	1,997

 

See accompanying notes to unaudited consolidated financial statements.

 

7

 

PLAYTEX PRODUCTS, INC.

PART I - FINANCIAL INFORMATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.     Consolidated Financial Statements

 

The interim consolidated financial statements, which are a part of our Quarterly Report on Form 10-Q, are unaudited.  In preparing our financial statements, we make certain adjustments (consisting of normal recurring adjustments) considered necessary in our opinion for a fair presentation of our financial position and results of operations.  As part of a review of the classification of certain expenses, effective in the second quarter of 2004, we are reclassifying cash discount expense as a reduction of revenue.  Previously, this expense was included in selling, general and administrative (“SG&A”).  This reclass amounted to $3.2 million for each of the three month periods ended September 25, 2004 and September 27, 2003.  The reclass was $11.4 million and $10.8 million for the nine months ended September 25, 2004 and September 27, 2003, respectively.  While this discount is a payment incentive, we are now including this with other trade incentives previously reported as a reduction to net sales by employing a broader definition of the Emerging Issues Task Force (“EITF”) No. 01-9, “Accounting for Consideration Given By a Vendor to a Customer (Including a Reseller of the Vendor’s Products).”  The results of operations for the three and nine month periods ended September 25, 2004 are not necessarily indicative of the results that you may expect for the full year.

 

We presume you have access to the audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 27, 2003.  As a result, we have not included footnote and other disclosures that would substantially duplicate the disclosures contained in the Form 10-K.  We file our annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 and Securities Exchange Act of 1934.  You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC  20549.  The SEC also maintains an internet website that contains our filed reports at www.sec.gov.  In addition, we make our filings with the SEC available at the Investor Relations section of our website www.playtexproductsinc.com.  You can call our Investor Relations Department at (203) 341- 4017 or via email at investorrelations@playtex.com to request a copy of any of our reports filed with the SEC.

 

2.     Stock-Based Compensation

 

We account for stock–based compensation in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.”  As permitted by SFAS No. 123 and SFAS No. 148, we follow the intrinsic value approach of Accounting Principles Board Opinion No. 25 (“APB No. 25”), and Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock-Based Compensation, an Interpretation of APB No. 25” issued for determining compensation expense related to the issuance of stock options.  Accordingly, no compensation expense related to our stock options is reflected in our statements of earnings as stock options granted under the stock option plan had an exercise price equal to or greater than the fair market value of the underlying common stock on the date of grant.

 

8

 

The following table illustrates the pro forma effect of stock-based compensation on net earnings and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123 (in thousands, except per
share data):

 

		Three Months Ended						Nine Months Ended
		Sept. 25, 2004			Sept. 27, 2003			Sept. 25, 2004			Sept. 27, 2003
Net earnings:
As reported		$	1,380		$	3,134		$	18,011		$	19,191
Deduct: Total stock-based employee compensation expense determined under the fair value method for stock option awards, net of tax		(486		)	(695		)	(1,515		)	(2,550		)
Pro forma—Basic and diluted		$	894		$	2,439		$	16,496		$	16,641
Earnings per share:
As reported
Basic and diluted		$	0.02		$	0.05		$	0.29		$	0.31
Pro forma
Basic and diluted		$	0.01		$	0.04		$	0.27		$	0.27
Weighted average common shares and common equivalent shares outstanding:
Basic		61,216			61,216			61,216			61,216
Diluted		61,224			61,216			61,222			61,230

 

The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, which uses a number of assumptions to estimate the value of stock option grants.  Assumptions used in the Black-Scholes option-pricing model include: risk-free interest rates, dividend yield if applicable, expected option life and the volatility of the underlying stock price.

 

3.     Impact of Recently Issued Accounting Pronouncements

 

In December 2003, the FASB issued SFAS No. 132 R, “Employer’s Disclosures about Pensions and Other Postretirement Benefits.”  SFAS No. 132 R requires new annual disclosures about the types of plan assets, investment strategy, measurement date, plan obligations, and cash flows as well as the components of the net periodic benefit cost

 

9

 

recognized in interim periods.  The new annual disclosure requirements apply to fiscal years ending after December 15, 2003, except for the disclosure of expected future benefit payments, which must be disclosed for fiscal years ending after June 15, 2004.  Interim period disclosures are generally effective for interim periods beginning after December 15, 2003.  We have included the disclosures required by SFAS No. 132 R for the quarter ended September 25, 2004 (see Note 9).

 

In March 2004, the FASB indicated that they will require stock-based employee compensation to be recorded as a charge to earnings pursuant to an exposure draft they have published for comment.  The FASB announced a decision to delay the effective date for its proposed standard to periods beginning after June 15, 2005.  We will continue to monitor their progress on the issuance of this standard and the impact it may have on our consolidated financial statements.

 

In May 2004, the FASB issued FASB Staff Position (“FSP”) SFAS No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”).”  The Act was signed into law on December 8, 2003 and expanded Medicare to include prescription drugs.  We sponsor retiree medical programs and this legislation includes a federal subsidy for qualifying companies.  FSP SFAS 106-2 requires that the effects of the federal subsidy be considered an actuarial gain and treated like similar gains and losses if it is determined that the prescription drug benefits of the retiree medical program are determined to be actuarially equivalent to those offered under Medicare Part D.  We have adopted FSP SFAS 106-2 during our third quarter ended September 25, 2004 and concluded that we are unable to determine whether the benefits under our plan are actuarially equivalent to Medicare Part D under the Act because the guidance provided thus far is unclear.  We will monitor our plan and assess actuarial equivalence as new information becomes available.

 

4.     Restructuring and Asset Impairment

 

In the fourth quarter of 2003, with the assistance of an outside operations consultant, we launched a comprehensive program of operational improvements to increase effectiveness and profitability.  As part of this program, we incurred $3.9 million in restructuring charges in the fourth quarter of 2003 and another $0.1 million in the first nine months of 2004, primarily for severance costs for employee terminations and costs associated with a voluntary early retirement program.  The total number of positions impacted by the restructuring will be approximately 100, most of which are in manufacturing operations and supporting functions.  At September 25, 2004, approximately 90% of these positions have been eliminated.  During the first nine months of 2004, we paid $1.5 million in severance and related expenses associated with the 2003 restructuring.  In addition, through September 25, 2004, we incurred $3.1 million of other related expenses (primarily consulting) which are included in our SG&A expenses.  We expect the remaining $1.1 million of restructuring liabilities at September 25, 2004 to be paid in cash by the end of the first half of 2005.  At the beginning of the first quarter 2003, our restructuring balance was solely related to our March 2002 decision to close our Watervliet, New York plastic molding facility.  The closure of the plant was complete as of December 27, 2003 and no further restructuring liabilities remain.

 

10

 

The following tables summarize the restructuring activities beginning in fiscal 2003 (in thousands):

 

		Balance at			Charge to			Adjustments									Balance at
		December 28,			Earnings			and Changes			Utilized, Net						December 27,
		2002			2003			to Estimates			Cash			Non-Cash			2003
Asset write-downs		$	349		$	—		$	(349	)	$	—		$	—		$	—
Severance and related expenses		870			2,650			391			(1,433		)	—			2,478
Accelerated pension obligations		80			1,223			(80		)	—			(1,223		)	—
Excess purchase commitments		51			—			(33		)	(18		)	—			—
Other exit costs		814			—			71			(885		)	—			—
Total		$	2,164		$	3,873		$	—		$	(2,336	)	$	(1,223	)	$	2,478
		Balance at			Charge to			Adjustments									Balance at
		December 27,			Earnings			and Changes			Utilized, Net						September 25,
		2003			2004			to Estimates			Cash			Non-Cash			2004
Asset write-downs		$	—		$	—		$	—		$	—		$	—		$	—
Severance and related expenses		2,478			93			—			(1,498		)	—			1,073
Accelerated pension obligations		—			—			—			—			—			—
Excess purchase commitments		—			—			—			—			—			—
Other exit costs		—			—			—			—			—			—
Total		$	2,478		$	93		$	—		$	(1,498	)	$	—		$	1,073

 

5.     Accumulated Other Comprehensive Earnings (Loss)

 

The accumulated balances for each classification of other comprehensive earnings (loss) are as follows (in thousands):

 

						Foreign Currency Translation Adjustment			Minimum Pension Liability Adjustment, net of tax			Accumulated Other Comprehensive Earnings (Loss)
Balance, December 27, 2003						$	297		$	(815	)	$	(518	)
Change in period						(201		)	285			84
Balance, September 25, 2004						$	96		$	(530	)(1)	$	(434	)

 

6.     Balance Sheet Components

 

The components of certain balance sheet accounts are as follows (in thousands):

 

		September 25, 2004			December 27, 2003
Cash and cash equivalents		$	84,158		$	19,502
Cash—lock box (2)		—			7,951
Total		$	84,158		$	27,453
Receivables		$	102,344		$	23,887
Allowance for doubtful accounts		(1,283		)	(409		)
Net		$	101,061		$	23,478

 

(1) Net of tax effect of $0.3 million at September 25, 2004.

(2) Cash held in lock box pending weekly settlement procedure for our then outstanding receivables facility (see Note 8).

 

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		September 25, 2004			December 27, 2003
Inventories:
Raw materials		$	12,625		$	15,076
Work in process		1,871			1,884
Finished goods		41,897			61,453
Total		$	56,393		$	78,413
Net property, plant and equipment:
Land		$	2,376		$	2,376
Buildings		43,561			42,852
Information technology		16,170			16,642
Machinery and equipment		183,175			179,275
		245,282			241,145
Less accumulated depreciation		(124,928		)	(115,720		)
Net		$	120,354		$	125,425
Goodwill		$	667,151		$	667,151
Less accumulated amortization		(172,844		)	(172,844		)
Net		$	494,307		$	494,307
Trademarks		$	150,680		$	151,680
Less accumulated amortization		(19,181		)	(19,442		)
Net		$	131,499		$	132,238
Patents and other(1)		$	20,120		$	11,620
Less accumulated amortization		(6,279		)	(5,587		)
Net		$	13,841		$	6,033
Deferred financing costs		$	21,542		$	17,930
Less accumulated amortization		(4,237		)	(4,821		)
Net		$	17,305		$	13,109
Accrued expenses:
Advertising and sales promotion		$	23,816		$	17,423
Sun Care returns reserve		18,906			5,961
Employee compensation and benefits		15,027			12,284
Interest		13,961			7,645
Other		9,472			9,929
Total		$	81,182		$	53,242

 

(1) The balance at September 25, 2004 includes a $7.5 million obligation under Mr. Gallagher’s retirement agreement, as previously announced, which amount will be amortized to expense commencing upon Mr. Gallagher’s retirement, which was on October 4, 2004, over the five year period of the non-competition and non-solicitation period.

 

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7.              Long-Term Debt

 

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

 

		September 25, 2004				December 27, 2003
Variable rate indebtedness:
Term C Loan		$		—		$	443,250
Fixed rate indebtedness:
8% Senior Secured Notes due 2011		460,000				—
9 3/8% Senior Subordinated Notes due 2011		340,000				350,000
		800,000				793,250
Less current maturities		—				(4,500			)
Total long-term debt		$	800,000			$		788,750

 

2004 Refinancing

 

On February 19, 2004, we completed a refinancing (the “2004 Refinancing Transaction”) of our then outstanding credit facility (“Senior Debt”) and receivables facility (see Note 8).  As part of the 2004 Refinancing Transaction, we entered into:

 

•                  $460.0 million principal amount of 8% Senior Secured Notes due 2011 (the “8% Notes”), and

•                  a five-year $150.0 million variable rate credit facility (the “New Credit Facility”), comprised of:

•                        a $7.5 million Term Loan (the “New Term Loan”), which we subsequently repaid in
the third quarter 2004, and

•                        a $142.5 million Revolving Credit Facility (the “New Revolver”).

 

The net proceeds from the 2004 Refinancing Transaction and the borrowings under the New Credit Facility were used to repay and/or terminate commitments under our Senior Debt and our receivables facility (see Note 8).

 

Also on February 19, 2004, we repurchased on the open market $10.0 million principal of our 9 ³/₈% Senior Subordinated Notes due 2011 (the “9 ³/₈% Notes”), at a discount, which resulted in a net gain, including a $0.2 million write-off of unamortized deferred financing fees associated with the repurchased notes, of $0.3 million.

 

As a result of the 2004 Refinancing Transaction, we incurred approximately $12.9 million in fees and expenses, which have been deferred and are being amortized over the term of the related indebtedness.  Additionally, approximately $6.7 million in unamortized deferred financing fees associated with our Senior Debt were written off in February 2004 and are referred to as “Expenses related to retirement of debt” in the consolidated statement of earnings.

 

Fixed Rate Indebtedness

 

Our fixed rate indebtedness at September 25, 2004 of $800.0 million consisted of $460.0 million of 8% Notes and $340.0 million of 9 ³/₈% Notes.  We pay interest on the 8% Notes semi-annually on March 1 and September 1 of each year.  At any time prior to March 1, 2007, we may redeem up to 35% of the principal amount of the 8% Notes with the proceeds of certain equity offerings and certain asset sales, at a redemption price of 100.000% of the principal amount of notes redeemed plus the Applicable Premium, plus accrued and unpaid interest to the redemption date.  In addition, at any time prior to March 1, 2007, we may also redeem the 8% Notes, in whole but not in part, upon the occurrence of a change of control, at the redemption price of 100.000% of the principal amount of notes redeemed plus the Applicable Premium, plus accrued and unpaid interest to the redemption date.

 

“Applicable Premium” means (i) with respect to an equity offering redemption, 8% of the principal amount of the notes redeemed and (ii) with respect to an asset sale redemption or a change of control redemption, the percentage

 

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(expressed as percentages of principal amount of notes redeemed) set forth below if redeemed during the twelve-month period prior to March 1 of the years indicated below:

 

 

The 8% Notes are secured by a first lien on intellectual property owned by us and the guarantors of the 8% Notes, and by a second lien on substantially all personal property and material owned real property, other than intellectual property, owned by us and the guarantors of the 8% Notes.  We do not have the option to redeem the 8% Notes from March 1, 2007 through March 1, 2008.  At our option, we may redeem the 8% Notes on or after March 1, 2008 at the redemption prices (expressed as percentages of principal amount) listed below plus accrued and unpaid interest to the redemption date:

 

 

We pay interest on the 9 ³/₈% Notes semi-annually on June 1 and December 1 of each year.  We do not have the option to redeem the 9 ³/₈% Notes from June 1, 2004 through May 31, 2006.  At our option, we may redeem the 9 ³/₈% Notes on or after June 1, 2006 at the redemption prices (expressed as percentages of principal amount) listed below plus accrued and unpaid interest to the redemption date:

 

 

Variable Rate Indebtedness

 

At September 25, 2004, there was no outstanding variable rate indebtedness.  Our variable rate indebtedness at December 27, 2003 of $443.3 million was comprised entirely of our Term C Loan.  The rates of interest we pay under the New Credit Facility vary over time depending on short-term interest rates.  We also pay fees on our New Revolver commitments, which vary depending on the average outstanding balance on the New Revolver, which amounts are expensed as incurred.

 

The New Revolver has a term of five years.  The interest rate was the London Inter-Bank Offer Rate (“LIBOR”) plus 400 basis points for the New Term Loan and is LIBOR plus 250 basis points for the New Revolver.

 

The availability under our New Revolver is subject to a borrowing base calculation, which is dependent upon the level of certain assets including eligible receivables, eligible inventory and eligible equipment, as defined in the New Credit Facility.  As of September 25, 2004, our availability under the New Revolver, based on the borrowing base calculation, was $68.8 million, as reduced for the outstanding revolver balance and open letters of credit.  We pay a quarterly commitment fee on the available but unused revolver balance ranging between 0.375% and 0.50% depending on the average outstanding revolver balance.

 

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The rates of interest we have paid in the past, and will continue to pay in the future, on our variable rate debt are, at our option, a function of various alternative short term borrowing rates, such as the Prime Rate or LIBOR.  It should be noted that the 2004 Refinancing Transaction substantially reduced our variable rate indebtedness.  As discussed earlier, we have no outstanding variable rate debt at September 25, 2004.  As a result, our comparable weighted average variable interest rates have decreased significantly and no longer provide a meaningful comparison.  Our weighted average interest rate for all debt (fixed and variable) was 8.57% for the third quarter ended September 25, 2004, up 1.82 percentage points versus the same quarter in 2003.  Our weighted average interest rate for all debt was 8.17% for the nine month period ended September 25, 2004, up 2.00 percentage points versus the same period in 2003.

 

We periodically use financial instruments, such as derivatives, to manage the impact of interest rate changes on our variable rate debt.  At September 25, 2004, we were not a party to any derivative or other type of financial instrument that hedged the impact of interest rate changes on our variable rate debt.

 

Our exposure to changing interest rates has been dramatically reduced as a result of the reduction of our variable rate indebtedness through the 2004 Refinancing Transaction.  A one percentage point change in our variable interest rate would not have a material impact on our consolidated interest expense due to the reduction of our variable rate indebtedness.

 

Our New Credit Facility is secured by a lien on all personal property and other assets owned by us and the guarantors, and contains various restrictions and limitations that may impact us.  These restrictions and limitations relate to:

 

•      limitations on indebtedness,

•      contingent obligations,

•      liens,

•      capital expenditures,

•      mergers and acquisitions,

•      asset sales, dividends and distributions,

•      redemption or repurchase of equity interests,

•      subordinated debt payments and modifications,

•      loans and investments,

•      transactions with affiliates,

•      changes of control,

•      payment of consulting and management fees, and

•      compliance with laws and regulations.

 

On October 27, 2004, we amended our New Credit Facility.  This amendment allows us to repurchase subordinated debt, provided we meet a certain minimum availability target under our Revolver over a forecasted twelve month period.

 

Our New Credit Facility and our 8% Notes also grant rights of inspection, access to management, the submission of certain financial reports, and requires us to make prepayments with the proceeds generated by us resulting from the disposition of assets, the receipt of condemnation settlements and insurance settlements from casualty losses and from the sale of equity securities.

 

The 9 ³/₈% Notes and the 8% Notes also contain certain restrictions and requirements.  Under the terms of each of these agreements, payment of cash dividends on our common stock is restricted.  Certain of our wholly owned subsidiaries are guarantors of the 9 ³/₈% Notes and the 8% Notes.

 

On September 27, 2004, we entered into an agreement to sell certain assets of the Woolite rug and upholstery brand to BISSELL Homecare, Inc. for a purchase price of approximately $62 million in cash.  The transaction is conditional on satisfying regulatory and other customary conditions.  The use of these proceeds may include the repurchase of subordinated debt or reinvestment in our core businesses, including potential acquisitions.  On October 27, 2004, we amended our New Credit Facility to allow us to sell the Woolite assets and use the proceeds from the Woolite sale to repurchase subordinated debt.

 

The only required principal repayments during the next five years is on our New Credit Facility, which requires us to pay all outstanding principal at the February 2009 termination date.  No interim principal repayments are required.

 

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8.     Receivables Facility

 

On February 19, 2004, the receivables facility was terminated as part of the 2004 Refinancing Transaction (see Note 7).  At the time of termination, our wholly owned subsidiary, Playtex A/R LLC, was merged into Playtex Products, Inc.

 

On May 22, 2001, we entered into a receivables purchase agreement (the “Receivables Facility”) through our wholly owned subsidiary, Playtex A/R LLC.  Through the Receivables Facility, we sold on a continuous basis to Playtex A/R LLC substantially all of our domestic customers’ trade invoices that we generated.  Playtex A/R LLC sold to a third-party commercial paper conduit (the “Conduit”) an undivided fractional ownership interest in these trade accounts receivable.  The Conduit issued short-term commercial paper to finance the purchase of the undivided fractional interest in the receivables.  The total funding available to us on a revolving basis under the Receivables Facility was up to $100.0 million, depending primarily on: the amount of receivables generated by us and sold to Playtex A/R LLC, the rate of collection on those receivables, and other characteristics of the receivables pool which affected their eligibility.  Our retained interest in receivables represented our subordinated fractional undivided interest in receivables sold to Playtex A/R LLC and the net unamortized securitization fee incurred by Playtex A/R LLC.

 

We sold receivables at a discount, which we included in other expenses in the consolidated statements of earnings.  This discount, which was $0.3 million for 2004, through the termination date of February 19, 2004 and $1.5 million for the nine month period ended September 27, 2003, reflected the fees required by the Conduit to purchase a fractional undivided interest in the receivables.  The fees were based on the payment characteristics of the receivables, most notably their average life, interest rates in the commercial paper market and historical credit losses.  Also included in other expenses is the impact of the amortization of a securitization fee incurred by Playtex A/R LLC to establish the Receivables Facility.  As a result of the termination of the Receivables Facility in February 2004, we wrote off the unamortized balance of $0.1 million of this securitization fee.

 

The following paragraph summarizes the cash flows between Playtex A/R LLC and us for the nine month periods ended September 25, 2004 and September 27, 2003 (in thousands):

 

Cash Flows from Playtex A/R LLC to Playtex Products, Inc.

 

		Nine Months Ended
		September 25, 2004				September 27, 2003
Proceeds from collections used to purchase additional receivables from Playtex Products, Inc.		$	82,506			$		485,894
Decrease in fractional interest sold		(21,000			)	(20,000			)
Net cash flow to Playtex Products, Inc.		$		61,506		$	465,894

 

We accounted for the sale of accounts receivable to Playtex A/R LLC and related transactions with the Conduit in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”  At the time the receivables were sold, the balances were removed from our balance sheet.  Playtex A/R LLC paid fees on the value of the undivided interest of the receivables sold to the Conduit equal to the 30 day LIBOR rate, which was reset weekly.  We retained the servicing responsibilities under the receivables facility.  The servicing was valued at zero since fees from the servicing were just adequate to compensate us for our servicing responsibilities.  In addition, under the terms of the December 2003 renewal of the Receivables Facility, Playtex A/R LLC paid a 0.75% per annum fee on the utilized portion of the Receivables Facility and a 1.00% per annum liquidity fee on the entire committed amount of the Receivables Facility.  Because of the short-term nature, generally less than 60 days, of our trade accounts receivable sold to Playtex A/R LLC and the historically low credit risk associated with these receivables, the carrying value of our retained interest in receivables approximated the fair value.

 

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9.     Pension and Other Postretirement Benefits

 

The components of the net periodic pension expense for the three and nine month periods ended September 25, 2004 and September 27, 2003 are as follows (in thousands):

 

Net Periodic Pension Expense

 

		Three Months Ended						Nine Months Ended
		September 25, 2004			September 27, 2003			September 25, 2004			September 27, 2003
Service cost—benefits earned during the period		$	303		$	345		$	1,033		$	1,037
Interest cost on projected benefit obligation		764			739			2,342			2,218
Expected return on plan assets		(1,068		)	(928		)	(3,196		)	(2,784		)
Amortization of unrecognized net loss		—			107			84			319
Amortization of transition loss		9			9			26			26
Net periodic pension expense		$	8		$	272		$	289		$	816

 

The components of the net periodic postretirement benefit expense for the three and nine month periods ended September 25, 2004 and September 27, 2003 are as follows (in thousands):

 

Net Periodic Postretirement Benefit Expense

 

		Three Months Ended						Nine Months Ended
		September 25, 2004			September 27, 2003			September 25, 2004			September 27, 2003
Service cost—benefits earned during the period		$	97		$	269		$	455		$	807
Interest cost on accumulated benefit obligation		276			433			808			1,299
Amortization of prior service credit		(584		)	(23		)	(1,751		)	(71		)
Gain due to curtailment		—			(90		)	—			(269		)
Recognized actuarial loss		290			182			896			546
Net periodic postretirement benefit expense		$	79		$	771		$	408		$	2,312

 

10.  Business Segments

 

Previously, we were organized in three divisions.  As a result of our comprehensive program of operational improvements, we have reorganized and consolidated our business structure, effective April 2004.  We are now organized in two divisions, which are categorized as business segments in accordance with accounting principles generally accepted in the United States (“GAAP”), as follows:

 

•      United States (“U.S.”) Division;

•      International Division.

 

Our U.S. Division includes products sold in the United States primarily to mass merchandisers, grocery, drug and specialty classes of trade.  Specialty classes of trade include warehouse clubs, military, convenience stores, specialty stores and telemarketing.  Our products are categorized as follows:

 

The Infant Care product category includes the following brands:

 

•                  Playtex disposable nurser system, cups and reusable hard bottles,

•                  Wet Ones hand and face towelettes,

•                  Diaper Genie diaper disposal system,

•                  Baby Magic infant toiletries,

•                  Mr. Bubble children’s bubble bath, and

•                  Baby Magic baby wipes.

 

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The Feminine Care product category includes a wide range of plastic and cardboard applicator tampons, as well as complementary products, marketed under such brand names as:

 

Tampons

•                  Playtex Gentle Glide,

•                  Playtex Portables,

•                  Playtex Slimfits,

•                  Playtex Beyond, and

•                  Private label.

 

Complementary Products

•                  Playtex Personal Cleansing Cloths for use in feminine hygiene, and

•                  Playtex Heat Therapy patch to alleviate discomfort associated with menstrual pain.

 

Our Sun Care and Household/Personal Grooming products include a number of leading and well-recognized brands, including the following:

 

•                  Banana Boat Sun Care products,

•                  Woolite rug and upholstery cleaning products,

•                  Playtex Gloves,

•                  Ogilvie at-home permanents,

•                  Binaca breath spray and drops,

•                  Tussy deodorant,

•                  Dentax oral care products, and

•                  Tek toothbrushes.

 

Our International Division includes the results from our Canadian and Australian subsidiaries, sales in Puerto Rico and export sales.  The International Division sells substantially the same products as are available to our U.S. customers.

 

Our division results for the three and nine month periods ended September 25, 2004 and September 27, 2003 are as follows (in thousands):

 

		Three Months Ended
		September 25, 2004						September 27, 2003
		Net Sales			Operating Earnings			Net Sales			Operating Earnings
U.S.		$	131,249		$	50,643		$	128,305		$	49,591
International		17,282			7,187			18,522			7,270
Total segment operating earnings		$	148,531		57,830			$	146,827		56,861
Less:
Corporate selling, general and administrative					37,151						36,852
Unallocated charges					127						166
Amortization of intangibles					241						226
Consolidated operating earnings, as reported					$	20,311					$	19,617

 

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