** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K/A**

 

**AmendmentNo. 1**

 

**Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934**

 

**For the fiscal year ended March 31,2005**

 

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| **PRESTIGE BRANDS HOLDINGS, INC.**                              |
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| ** **                                                      | ** ** | ** ** | ** ** | ** ** |
| **Delaware**                                                    | ** ** | **20-1297589** | ** ** | **001-32433** |
| **(State of Incorporation)**                                    | ** ** | **(I.R.S. Employer Identification No.)** | ** ** | **(Commission File Number)** |
| ** **                                                      | ** ** | ** ** | ** ** | ** ** |
| **PRESTIGE BRANDS INTERNATIONAL, LLC**                          |
| ** **                                                      | ** ** | ** ** | ** ** | ** ** |
| **Delaware**                                                    | ** ** | **20-0941337** | ** ** | **333-11715218-18** |
| **(State of Incorporation)**                                    | ** ** | **(I.R.S. Employer Identification No.)** | ** ** | **(Commission File Number)** |
| **(Exact name of Registrants as specified in their  charters)** |

 
| **90 North Broadway  Irvington, New York 10533** | ** ** | **(914) 524-6810**                                         |
|--------------------------------------------------|------------|------------------------------------------------------------|
| (Address of Principal  Executive Offices)        |       | (Registrants’ telephone  number, including area code) |

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 
| **Title of each class:**                                                     | ** ** | **Name on each exchange on which  registered:** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------|
| Common Stock, Prestige Brands Holdings, Inc.,  par value $.01 per share |       | New York Stock Exchange                         |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

**None**

 

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PrestigeBrands International, LLC meets the conditions set forth in generalinstructions (I) (1) (a) and (b) of Form 10-K and istherefore filing this Form 10-K/A with the reduced disclosure format.

 

Indicateby check mark whether the Registrants (1) have filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934, during the preceding 12 months (or for such shorter period that the Registrantswere required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of Registrants’ knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K/A or anyamendment to this Form 10-K/A.  x

 

Indicateby check mark whether the Registrants are accelerated filers (as defined inExchange Act Rule 12b-2). Yes o  No x

 

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates as of September 30, 2004 is not applicable as no publicmarket existed on that date for the voting and non-voting common equity of theRegistrants.

 

Asof June 10, 2005, Prestige Brands Holdings, Inc. had 49,997,647shares of common stock outstanding.  Asof such date, Prestige International Holdings, LLC, a wholly owned subsidiaryof Prestige Brands Holdings, Inc., owned 100% of the uncertificatedownership interests of Prestige Brands International, LLC.

 

Informationrequired by Items 10, 11, 12, 13 and 14 of Part III of this AnnualReport on Form 10-K/A incorporates by reference information (to the extentspecific sections are referred to herein) from Prestige Brands Holding, Inc.’sProxy Statement for its annual meeting to be held on July 29, 2005.

 

 

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**TABLEOF CONTENTS**

 
| **Part I**   |                                                                                                                    |   |
|-------------------|-------------------------------------------------------------------------------------------------------------------------|--------|
|              |                                                                                                                    |   |
| Item  1.          | Business                                                                                                                | 2      |
| Item  2.          | Properties                                                                                                              | 21     |
| Item  3.          | Legal  Proceedings                                                                                                      | 21     |
| Item  4.          | Submission  of Matters to a Vote of Security Holders                                                                    | 22     |
|              |                                                                                                                    |   |
| **Part II**  |                                                                                                                    |   |
|              |                                                                                                                    |   |
| Item  5.          | Market for the Registrants’  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities | 23     |
| Item  6.          | Selected  Financial Data                                                                                                | 24     |
| Item 7.           | Management’s Discussion and Analysis of  Financial Condition and Results Of Operations                             | 25     |
| Item 7A.          | Quantitative and Qualitative Disclosures About  Market Risk                                                             | 40     |
| Item 8.           | Financial Statements and Supplementary Data                                                                             | 40     |
| Item 9.           | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                                   | 40     |
| Item 9A.          | Controls and Procedures                                                                                                 | 40     |
| Item 9B.          | Other Information                                                                                                       | 41     |
|              |                                                                                                                    |   |
| **Part III** |                                                                                                                    |   |
|              |                                                                                                                    |   |
| Item 10.          | Directors and Executive Officers of the  Registrant                                                                     | 41     |
| Item 11.          | Executive Compensation                                                                                                  | 41     |
| Item 12.          | Security Ownership of Certain Beneficial Owners  and Management and Related Stockholder Matters                         | 41     |
| Item 13.          | Certain Relationships and Related Transactions                                                                          | 41     |
| Item 14.          | Principal Accountant Fees and Services                                                                                  | 41     |
|              |                                                                                                                    |   |
| **Part IV**  |                                                                                                                    |   |
|              |                                                                                                                    |   |
| Item 15.          | Exhibits and Financial Statement Schedules                                                                              | 42     |
|              | Signatures                                                                                                              | 48     |

 

PrestigeBrands Holdings, Inc. is filing this Amendment No. 1 on Form 10-K/Afor the fiscal year ended March 31, 2005 to include the financialstatements and other information called for by Form 10-K relating to PrestigeBrands International, LLC, an indirect wholly owned subsidiary of PrestigeBrands Holdings, Inc.  PrestigeBrands International, LLC is the parent company of Prestige Brands, Inc.,the issuer of our 91⁄4% senior subordinated notes due 2012, and the parentguarantor of such notes.  As the indirectholding company of Prestige Brands International, LLC, Prestige Brands Holdings, Inc.does not conduct ongoing business operations.  As a result, the financial information forPrestige Brands Holdings, Inc. and Prestige Brands International, LLC is identicalfor the purposes of the discussion of operating results in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”.  Unless otherwise indicated, we have presentedinformation throughout this Form 10-K/A for Prestige Brands Holdings, Inc.and its consolidated subsidiaries, including Prestige Brands International,LLC.  Additionally, we have included theaudited consolidated financial statements of both Prestige Brands Holdings, Inc.and Prestige Brands International, LLC, which can be found in Item 8 of this Form 10-K/A.

 

**Trademarksand Trade Names**

** **

Trademarksand trade names used in this Form 10-K/A are the property of theirrespective owners. We have utilized the ® and Ô symbols thefirst time each brand appears in this Form 10-K/A.

 

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**Part I.**

** **

*In this Form 10-K/A, unless the contextrequires otherwise, the terms “we,” “us,” “our,” the “Company” and “PrestigeHoldings” refer to Prestige Brands Holdings, Inc., a Delaware corporation,with our consolidated subsidiaries and any predecessor entities unless thecontext requires otherwise. The term “Prestige International” refers toPrestige Brands International, LLC and its subsidiaries, unless the contextrequires otherwise.  In addition, in thisForm 10-K/A, our fiscal years ended March 31, 2003, March 31,2004 and March 31, 2005 are referred to as fiscal 2003, fiscal 2004 andfiscal 2005, respectively.*

* *

**ITEM1**.                             BUSINESS

 

**Overview**

 

Wesell well-recognized, brand name over-the-counter drug, household cleaning andpersonal care products. We operate in niche segments of these categories wherewe can use the strength of our brands, our established retail distributionnetwork, a low-cost operating model and our experienced management team as acompetitive advantage to grow our presence in these categories and, as aresult, grow our sales and profits. Our ten major brands, set forth in thetable below, have strong levels of consumer awareness and retail distributionacross all major channels. These brands accounted for approximately 90.5% ofour net sales for fiscal 2005.

 
| **Major Brands**      | ** ** | **Market  Position(1)** | ** ** | **Market Segment**       | ** ** | **Market  Share(1)** | ** ** | **ACV(1)** | ** ** |
|----------------------------|------------|-------------------------|------------|-------------------------------|------------|----------------------|------------|------------|------------|
| ** **                 | ** ** | ** **              | ** ** | ** **                    | ** ** | **(%)**              | ** ** | **(%)**    | ** ** |
| **Over-the-Counter Drug:** | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **           | ** ** | ** ** | ** ** |
| *Chloraseptic*             |       | #1                      |       | Liquid Sore Throat Relief     |       | 49.4                 | %          | 96         | %          |
| *Clear eyes*               |       | #2                      |       | Redness Relief                |       | 16.7                 |       | 92         |       |
| *Compound W*               |       | #2                      |       | Wart Removal                  |       | 33.7                 |       | 88         |       |
| *Murine*                   |       | #3                      |       | Personal Ear Care             |       | 16.0                 |       | 63         |       |
| *Little Remedies(2)*       |       | N/A                     |       |                          |       | N/A                  |       | N/A        |       |
| *New-Skin*                 |       | #1                      |       | Liquid Bandages               |       | 37.7                 |       | 89         |       |
| **Household Cleaning:**    | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **           | ** ** | ** ** | ** ** |
| *Comet*                    |       | #2                      |       | Abrasive Tub and Tile Cleaner |       | 29.9                 |       | 95         |       |
| *Spic and Span*            |       | #6                      |       | All Purpose Cleaner           |       | 2.6                  |       | 63         |       |
| **Personal Care:**         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **           | ** ** | ** ** | ** ** |
| *Cutex*                    |       | #1                      |       | Nail Polish Remover           |       | 29.0                 |       | 91         |       |
| *Denorex*                  |       | #4                      |       | Medicated Shampoo             |       | 10.0                 |       | 74         |       |

 

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(1)    Source:Information Resources, Inc. “Market share” or “market position” is basedon sales in the United States, as calculated by Information Resources for the52 weeks ended March 20, 2005. “ACV” refers to the All CommodityVolume Food Drug Mass Index, as calculated by Information Resources for the52 weeks ended March 20, 2005. ACV measures the weighted sales volumeof stores that sell a particular product out of all the stores that sellproducts in that market segment generally. For example, if a product is sold by50% of the stores that sell products in that market segment, but those storesaccount for 85% of the sales volume in that market segment, that product wouldhave an ACV of 85%. We believe that ACV is a measure of a product’s importanceto major retailers. We believe that a high ACV evidences a product’sattractiveness to consumers, as major retailers will try and carry productswhich are demanded by its customers. Lower ACV measures would indicate that aproduct is not as available to consumers because major national and regionalretailers do not carry products for which consumer demand may not be as high.For these reasons, we believe that ACV is an important measure to investors inbrand name consumer product companies like Prestige.

 

(2)    Market share and ACV information formarket segments in which *Little Remedies*productscompete is not available from Information Resources or any other independentthird party researcher that we have been able to identify.

 

Ourproducts are sold through multiple channels, including mass merchandisers anddrug, grocery, dollar and club stores. This balanced channel mix allows us toeffectively launch new products across all

 

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distributionchannels and reduces our exposure to any single customer. We focus our internalresources on marketing, sales, customer service and product development. Whilewe perform the production planning and oversee the quality control aspects ofthe manufacturing, warehousing and distribution of our products, we outsourcethe operating elements of these functions to well-established, lower-cost,third party providers. This operating model allows us to focus our resources onmarketing and product development, which we believe enables us to achieveattractive margins while minimizing capital expenditures and working capitalinvestment.

 

Wehave grown our brand portfolio by acquiring strong and well-recognized brandsfrom larger consumer products and pharmaceutical companies, as well as otherbrands from smaller private companies. While the brands we have purchased fromlarger consumer products and pharmaceutical companies have long histories ofsupport and brand development, we believe that at the time we acquired themthey were considered “non-core” by their previous owners and did not benefitfrom the focus of senior level management or strong marketing support. Webelieve that the brands we have purchased from smaller private companies havebeen constrained by the limited resources of their prior owners. Afteracquiring a brand, we seek to increase its sales, market share and distributionin both existing and new channels. We pursue this growth through increasedspending on advertising and promotion, new marketing strategies, improvedpackaging and formulations and innovative new products.

 

**CompetitiveStrengths**

** **

*DiversifiedPortfolio of Recognized and Established Brands. *We own and market well-recognized brands with long historiesin the marketplace. On average, each of our ten major brands was establishedover 60 years ago and is widely recognized by consumers. Our diverseportfolio of products provides us with multiple sources of growth and minimizesour reliance on any one single category. We provide significant marketingsupport to our brands in order to grow our sales and our long-termprofitability. The industry categories in which we sell our products, however,are highly competitive. These markets include numerous national manufacturers,distributors, marketers and retailers, many of which have greater resourcesthan we do and may be able to spend more aggressively on advertising andmarketing, which may have an adverse effect on our competitive position.

 

*StrongCompetitor in Attractive, Niche Categories. *We strategically choose to compete in niche productcategories that address recurring consumer needs and that we believe areconsidered non-core to larger consumer and pharmaceutical companies. We believewe are well positioned in these categories due to the long history and consumerawareness of our brands, our strong market positions and our low-cost operatingmodel. However, a significant increase in the number of product introductionsby our competitors in these niche markets could have an adverse effect on oursales and operating results.

 

*ProvenAbility to Develop and Introduce New Products. *We focus our marketing and product development efforts onidentifying underserved consumer needs and then designing products thatdirectly address those needs. Recent product introductions that addressed anidentified consumer need include: *Compound W*Freeze OffÔ, acryogenic wart removal product which allows consumers to use a wart freezingtreatment similar to that used by doctors; *Chloraseptic*Relief StripsÔ, whichcombine popular dissolvable strips with *Chloraseptic*’ssore throat relief medicine; *New-Skin*Scar TherapyÔ; a clear,odorless, non-irritating silicone gel that is applied to scars to make themless visible; *Cutex* TwisterÔ, a portableand spill-proof nail polish remover; and *Cleareyes***TM***for Dry Eyes,*a moisture enriched formulathat stays in your eyes for long-lasting relief. Although line extensions andnew product introductions are important to the overall growth of a brand, ourefforts in this regard sometimes have the effect of reducing sales of existingproducts within that brand. In addition, some of our product introductions maynot be successful, such as *Comet*Clean and FlushÔ, which weintroduced in August 2003 and discontinued in November 2004.

 

*EfficientOperating Model.  *We focus our internal resources onmarketing, sales, customer service and product development. While we directlymanage the production planning and quality control aspects of themanufacturing, warehousing and distribution of our products, we outsource theoperating elements of these functions to well-established, lower-cost, third-partyproviders. This approach allows us to benefit from third-party economies ofscale and maintain a highly variable cost structure, with low overhead,

 

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limitedworking capital investment and minimal capital expenditures. For fiscal 2005,our gross margin was approximately 53%, while our general and administrativeexpenses and our capital expenditures represented less than 7% and 1% of netsales, respectively. Our operating model, however, requires us to depend onthird-party providers for manufacturing and logistics services. In the eventthat our third-party providers are unable or unwilling to supply or ship ourproducts, our inventory levels, sales, gross margins and, ultimately, ourresults of operations could be adversely affected.

 

*ExperiencedSenior Management Team with Proven Ability to Acquire, Integrate and GrowBrands. *We have anexperienced senior management team averaging over 30 years of consumerproducts experience in marketing, sales, customer service and productdevelopment. Since joining our company, this senior management team hasincreased our sales and integrated several brands into our portfolio. Unlikemany large consumer products companies, which we believe often entrust theirsmaller brands to rotating junior employees, our experienced managers arededicated to specific brands and remain with those brands as they grow andevolve. Prior to managing our company, Peter Mann, our chief executive officer,Peter Anderson, our chief financial officer, and several other members of ourmanagement team held senior positions at a publicly traded consumer productscompany.

 

**GrowthStrategy**

** **

Ourgrowth strategy is to focus on our marketing, sales, customer service andproduct development efforts in order to continue to enhance our brands anddrive growth. We plan to execute this strategy through:

 

•       ***Investing in Advertising and Promotion.***   We will continue to invest in advertisingand promotion to drive the growth of our brands. Our marketing strategy isfocused primarily on consumer-oriented programs that include media advertising,targeted couponing programs and in-store advertising. While the absolute levelof marketing expenditure differs by brand and category, we typically haveincreased the amount of investment in our brands after acquiring them. Forexample, after the acquisition of *Clear eyes*in 2002, we introduced new packaging and increased advertising and promotion,which resulted in growth in domestic annual brand sales of approximately 22%during fiscal 2005. Given the competition in our industry, however, there is arisk that our marketing efforts may not result in increased sales andprofitability.

 

•       ***Growingour Categories and Market Share with Innovative New Products.***   Ourstrategy is to grow the number of categories in which we participate, the sizeof those categories and our share within those categories through ongoing productinnovation. For example, we launched an artificial tears product called *Clear eyes for Dry Eyes*, which we expect to increase the *Clear eyes*brand’s**market sharein the eye care category. While there is a risk that new product introductionsmay at times be offset to varying degrees by reduced sales of existingproducts, our goal is to grow the overall sales of our brands.

 

•       ***IncreasingDistribution Across Multiple Channels.***   Ourbroad distribution base ensures that our products are well positioned acrossall available channels and that we are able to participate in changing consumerretail trends. Recently, we have expanded our sales in dollar stores,introducing customized packaging and sizes of our products for this highergrowth channel. For example, *Comet* and *Spic* and *Span* have grownapproximately 6% and 87%, respectively, in this channel during fiscal 2005.There is a risk that we may not be able to maintain or enhance ourrelationships across distribution channels, which could adversely impact oursales and profitability.

 

•       ***Growing Our International Business.***   We intend to increase our focus ongrowing our international business. International sales outside of NorthAmerica represent approximately 2% of our net sales for fiscal 2005. Managementbelieves that international sales can become a significant percentage of ourbusiness. *Clear eyes*, *Murine* and *Chloraseptic* are currently sold internationally, and anumber of our other brands have previously been sold internationally.Management intends to expand the number of our brands sold through our existinginternational distribution network and is actively negotiating with additionaldistribution partners for further expansion into other international

 

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markets. There is a riskthat increasing our focus on international growth may divert attention andresources from implementing our domestic business strategy.

 

•       ***Pursuing Strategic Acquisitions.***   We have an active corporate developmentprogram and intend to continue to pursue strategic add-on acquisitions thatenhance our product portfolio. We seek to acquire highly complementary,recognized brands in attractive categories and channels. For example, werecently purchased the *Little Remedies*brand, which competes in the pediatric over-the-counter drug category, where wepreviously had a limited presence. Our management team has a long track recordof successfully identifying, acquiring and integrating new brands. We believewe have a strong pipeline of attractive acquisition candidates, and that ourstrong cash flow will enhance our ability to successfully pursue theseacquisitions. We believe our business model will allow us to integrate thesefuture acquisitions in an efficient manner, while also providing opportunitiesto realize significant cost savings. There is a risk, however, that ouroperating results could be adversely affected in the event we do not realizeall of the anticipated operating synergies and cost savings from any futureacquisitions. In addition, provisions in our senior credit facility and theindenture governing our senior notes may limit our ability to engage instrategic acquisitions.

 

**MarketPosition**

** **

Approximately71% of our net sales from the fiscal 2005 are from brands with a number one ornumber two market position, which include *Chloraseptic*,*Clear eyes*, *Comet*, *Compound W*,*Cutex* and *New-Skin***.**

 

See“Market, Ranking and Other Data” on page 21 of this document forinformation regarding market share and ACV calculations.

 

**OurHistory**

** **

Originallyformed in 1996, as a joint venture of Medtech Labs and The Shansby Group, toacquire over-the-counter drug brands from American Home Products, our Companyhas been led by chief executive officer, Peter Mann, and chief financialofficer, Peter Anderson, since 2001. Since that time, our Company’s portfolioof brand name products has expanded from over-the-counter drugs to includehousehold cleaning and personal care products. We have added brands to ourportfolio principally by acquiring strong and well-recognized brands fromlarger consumer products and pharmaceutical companies. In February 2004,GTCR Golder Rauner II, LLC, a private equity firm, acquired our businessfrom the original founders, as well as the Spic and Span business, with PeterMann and Peter Anderson continuing to lead the management team. In this Form 10-K/A,we refer to this acquisition as the “Medtech acquisition.”

 

InApril 2004, we acquired Bonita Bay Holdings, Inc. Bonita Bay was theparent holding company of Prestige Brands International, Inc. andconducted its business under the “Prestige” name. After we completed thisacquisition, we began to conduct our business under the “Prestige” name. Inthis Form 10-K/A, we refer to the acquisition of Bonita Bay as the “BonitaBay acquisition.” The Bonita Bay portfolio included the following major brands:*Chloraseptic, Comet, Clear eyes*and *Murine*. Since the Bonita Bayacquisition, we have successfully integrated its operations and realizedapproximately $12 million of annual cost savings, exceeding our initialestimates.

 

InOctober 2004, we acquired the rights to the *Little Remedies* brands through our purchase of Vetco, Inc.Vetco is engaged in the development, distribution and marketing of pediatricover-the-counter healthcare products, primarily marketed under the *Little Remedies* brand name. Vetco’sproducts include *Little Noses®*nasal products, *Little Tummy’s®*digestive health products, *Little Colds®*cough/cold remedies and *Little Remedies NewParents Survival Kits*. The *LittleRemedies* products deliver relief of common childhood ailments withoutunnecessary additives such as saccharin, alcohol, artificial flavors, coloringdyes or harmful preservatives. In this Form 10-K/A, we refer to theacquisition of Vetco as the “Vetco acquisition.”

 

InFebruary 2005, we raised $448.0 million through an initial public offeringof 28,000,000 shares of common stock. The net proceeds of the offering were$416.8 million after deducting $28.0 million of

 

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underwriters’discounts and commissions and $3.2 million of offering expenses. The netproceeds of $416.8 million plus $3.0 million from our revolving creditfacility and $8.8 million of cash on hand went to repay $100.0 million of ourexisting senior indebtedness (plus a repayment premium of $3.0 million andaccrued interest of $0.5 million as of February 15, 2005), to redeem$84.0 million in aggregate principal amount of our existing 91¤4% seniorsubordinated notes (plus a redemption premium of $7.8 million and accruedinterest of $3.3 million as of March 18, 2005), to repurchase anaggregate of 4,397,950 shares of our common stock held by the investmentfunds affiliated with GTCR Golder Rauner, LLC (“GTCR”) and TCW/CrescentMezzanine, LLC (“TWC/Crescent”) for $30.2 million, and to contribute $199.8million to Prestige International Holdings, LLC, which was used to redeemall of its outstanding senior preferred units and class B preferred units.We did not receive any of the proceeds from the sale of 4,200,000 shares by theselling stockholders as a result of underwriters’ exercising over-allotmentoption.

 

**Products**

 

Weconduct our operations through three principal business segments:over-the-counter drug, household cleaning and personal care.

 

***Over-the-CounterDrug Category***

 

Ourportfolio of over-the-counter drugs consists of *Clear eyes, Murine, Chloraseptic,**Compound W*,the *Little Remedies* line ofpediatric over-the-counter healthcare products, and first aid products such as *New-Skin* and *Dermoplast.* Our other brands in this category include *Percogesic®*, and *Momentum®, Freezone®, Mosco®,* and *Outgro®, Sleep-Eze®, Compoz®* and *Heet®.* For fiscal 2005, the over-the-counterdrug category accounted for 55.1% of our net sales.

 

***Clear eyes and Murine.  ***Bonita Baypurchased the *Clear eyes* and *Murine* brands from Abbott Laboratories in December 2002.Since its introduction in 1968, the *Cleareyes* brand has been marketed as an effective eye care product thathelps take redness away and helps moisturize the eye. *Clear eyes* has an ACV of 92%. The *Murine* brand is over 100 years old. *Murine* products consist of bothlubricating and soothing eye drops and ear wax removal aids. *Clear eyes, Murine Tears*****and*****Murine****EarCare* are leading brands in the over-the-counter personal eyeand ear care categories. The 0.5 oz. size of *Clear eyes* redness relief eye drops is the number oneselling product in the eye redness relief category and *Clear eyes*is the number two brand in thatcategory with 16.7% market share. The ear drop category is composed of productsthat loosen earwax, treat trapped water (swimmer’s ear) and treat ear aches. *Murine* is the number three ear care brandwith 16.0% market share.

 

***Chloraseptic.  ***Bonita Bayacquired *Chloraseptic* in March 2000from Procter & Gamble. *Chloraseptic*was originally developed by a dentist in 1957 to relieve sore throats and mouthpain. *Chloraseptic’s* 6 oz.cherry liquid sore throat spray is the number one selling product in the sorethroat liquids/sprays segment. The *Chloraseptic*brand has an ACV of 96% and is number one in sore throat liquids/sprays with a49.4% market share.

 

Historically,*Chloraseptic* products werelimited to sore throat lozenges and traditional sore throat sprays that werestored and used at home. Since its acquisition, the *Chloraseptic* product line has been expanded to includeportable sprays, gargle, mouth pain sprays and relief strips, which wereintroduced in July 2003 and combine popular dissolvable strips with *Chloraseptic*’s professionally recommendedmedicine. These product introductions enable us to market *Chloraseptic* products as a system,encourage consumers to buy multiple types of *Chloraseptic*products, and increase volume for the entire product line.

 

***Compound W.  ***We acquired *Compound W* from American Home Products in1996. The *Compound W* brand has along heritage; its wart removal products having been introduced almost50 years ago. *Compound W*products are specially designed to provide relief of common and plantar wartsand are sold in multiple forms of treatment depending on the consumer’s need,including Fast-Acting Liquid, Fast-Acting Gel, One Step Pads for Kids, One StepPads for Adults and Freeze Off. We believe that *Compound W* is one of the most trusted names in wart removal.

 

*Compound W*is thenumber two wart removal brand in the United States with a 33.7% market shareand an ACV of 88%. Since *Compound W*’sacquisition, we have successfully expanded the wart remover

 

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categoryand enhanced the value associated with the *CompoundW* brand by introducing several new products. On July 1, 2003,we introduced a cryogenic wart removal product, *Compound W* Freeze Off, which allows consumers to use a wartfreezing treatment similar to that used by doctors. *Compound W* Freeze Off has achieved high trade acceptance. Wehave also extended the *Compound W*brand by introducing Fast Acting Liquid, One Step Pads for Kids and WaterproofOne Step Pads.

 

***Little Noses.  ****Little Noses* was first introduced to the market in1992 and is marketed as a product for the relief of childhood nasal discomfort,containing no alcohol, saccharin, artificial flavors or coloring dyes. The *Little Noses* product line consists ofsaline nasal spray/drops, decongestant nose drops, a nasal aspirator for theremoval of mucous from nasal passages and moisturizing nasal gel.

 

***Little Colds.  ****Little Colds* was first introduced to the market in2001 and is marketed as a product for the relief of childhood cold symptoms,containing no alcohol, saccharin, artificial flavors or coloring dyes. The *Little Colds* product line includes sixdifferent products consisting of a multi-symptom cold relief formula,dissolvable sore throat relief strips, sore throat relief *Saf-T-Pops®*, cough relief formula,decongestant formula and a combined decongestant plus cough relief formula.

 

***Little Tummy’s.  ****Little Tummy’s* was first introduced to the market in1994 and is marketed as a product for the relief of childhood stomachdiscomfort, containing no alcohol, saccharin, artificial flavors or coloringdyes. The *Little Tummy’s* productline consists of gas relief drops, laxative drops and a nausea relief aid.

 

***New-Skin.  ***The brandhas a long heritage, with the core product believed by management to be over100 years old. *New-Skin*products consist of liquid bandages for small cuts and scrapes that aredesigned to replace traditional bandages in an effective and easy to use form.Each *New-Skin* product works bydrying and creating a thin, clear, protective covering when applied to theskin. *New-Skin* competes in theliquid bandage segment of the first aid bandage category. Within this segment, *New-Skin* has a 37.7% market share and an89% ACV.

 

***Dermoplast.  ***We acquired *Dermoplast* from American Home Products in1996. *Dermoplast* is an aerosolspray anesthetic for minor topical pain that was traditionally a “hospital-only”brand dispensed to mothers after giving birth. The primary use in hospitals isfor post episiotomy pain, post-partum hemorrhoid pain, and for the relief offemale genital itching. *Dermoplast*enjoys broad distribution across the drug and mass merchandise channels, withan ACV of 63%.

 

Since*Dermoplast*’*s*acquisition, we have introduced retail versions of the product, a move that haseffectively doubled the size of the business. In addition to the traditionalhospital uses mentioned above, *Dermoplast*offers sanitary, convenient first aid relief for pain and itching from minorskin irritations, sunburn, insect bites, minor cuts, scrapes and burns. Theproducts are currently offered in two formulas: regular strength andantibacterial strength.

 

***HouseholdCleaning Category***

*** ***

Ourportfolio of household cleaning brands includes the *Comet* and *Spic and Span*brands. For fiscal 2005, the household cleaning category accounted for 33.8% ofour net sales.

 

***Comet.  ***Bonita Bayacquired *Comet* from Procter &Gamble in October 2001. *Comet*was originally introduced in 1956 and is one of the most widely recognizedhousehold cleaning brands, with an ACV of 95%. *Comet*products include different varieties of cleaning powders, sprays and cream,some of which are abrasive and some of which are non-abrasive. *Comet* competes in the abrasive andnon-abrasive tub and tile cleaner sub-category of the household cleaningcategory that includes abrasive powders and non-abrasive liquids, sprays,creams and gels. The top three brands in this market are Henkel’s *Soft Scrub®*, *Comet*and Colgate Palmolive’s *Ajax®*. *Comet* is the number two brand in this sub-categorywith 29.9% market share behind Henkel’s Soft Scrub, which has 45.3% marketshare. The non-abrasive tub and tile cleaner segment is more fragmented andcompetitive than the abrasive segment and *Comet*has been attempting to build momentum in its efforts to increase itsmarket share in the non-abrasive tub and tile cleaner segment through focusedadvertising and promotions, including free-standing insert coupons, hang collarcoupons and television advertising.

 

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Since*Comet**’s*acquisition from Bonita Bay, we have expanded the brand’s distribution,increased advertising and promotion and implemented focused marketinginitiatives. *Comet* has introducednew products to extend the brand into new categories and increase usage. Someof the significant recent product launches include the *Comet**Orange Brite BathroomSpray* and *Comet**Soft Cleanser* cream products. These and other new productsare aimed at extending *Comet**’s* brand value by promoting *Comet*as a comprehensive cleaning system of powders, sprays and cream.

 

***Spic and Span.  ****Spic and Span* was introduced to the market in 1925 andis marketed as the complete home cleaner with three product lines consisting ofdilutables, hard surface sprays for counter tops and glass, and soft powder,all of which can be used for multi-room and multi-surface cleaning. Since itsacquisition from Procter & Gamble in January 2001, the productline has grown from eight to 28 separate items and we have increasedadvertising and promotional efforts supporting the products.

 

***PersonalCare Category***

*** ***

Ourportfolio of personal care brands includes the brands of *Denorex*dandruff shampoo, *Cutex*nail products and *Prell*shampoo. Our other brands in thiscategory include *EZO®*denturecushion, *Oxipor VHC®* skin-carelotion, *Cloverine®*skin salve, *Zincon®* shampoo and *Kerodex®* barrier cream. For fiscal 2005,the personal care category accounted for 11.1% of our net sales.

 

***Denorex.  ****Denorex* was acquired from American Home Productsin February 2002. The *Denorex*brand was originally launched in 1971 to compete in the then new “therapeutic”segment of the dandruff shampoo category. The *Denorex*brand has strong consumer awareness as an effective solution to scalp problems,as illustrated by its ACV of 74%. The current lineup of *Denorex* products includes Daily, formoderate dandruff sufferers, Extra Strength and Extra Strength withConditioner, and Therapeutic Strength and Therapeutic Strength with Conditionerfor those with more serious dandruff conditions.

 

*Denorex*competes inthe therapeutic segment of the dandruff shampoo category. Within thetherapeutic shampoo segment *Denorex*has a 10.0% market share competing with McNeil-PPC’s Nizoral®, Chattem’s SelsunBlue® and Neutrogena’s *T-Gel®*.

 

***Cutex.  ****Cutex* is an old and, we believe, trustedbrand, synonymous with its core products’ key function: nail polish removal. *Cutex,* with an ACV rating of 91%, has fourproduct lines: Quick and Gentle Liquid Nail Polish Remover, *Cutex Essential Care®* Advanced Liquid, *Essential Care®* Advanced Nail PolishRemover Pads and *Essential Care®*Twister Nail Polish Remover.

 

*Cutex*is thenumber one brand in the nail polish remover category and has a leading 29.0%market share. The main competition comes from private label brands, whichcollectively have a 50.2% market share.

 

***Prell.  ***Bonita Bayacquired *Prell* from Procter &Gamble in November 1999. *Prell*,**whichcompetes in the shampoo segment, was launched in 1947 and is a highlyrecognized shampoo brand.

 

Theshampoo category is fragmented and populated by hundreds of brands. The fragmentednature of the shampoo segment places a premium on distribution and brandrecognition and positioning. We believe *Prell*has a loyal base of consumers seeking shampoo at the mid-price point segment.

 

**Marketingand Sales**

** **

Ourmarketing approach is based upon the acquisition and rebuilding of establishedconsumer brands that possess what we believe to be significant brand value andunrealized potential. Our marketing objective is to increase sales and marketshare by developing and executing professionally designed, creative andcost-effective advertising and promotional programs. Once we acquire a brand,we implement a brand building strategy that uses the brand’s existing consumerawareness to maximize sales of current products and grows the brand throughproduct innovation. This brand building process involves the evaluation andenhancement of the existing brand name, the development and introduction ofinnovative new products and the professional execution of support programs. Allnew product concepts are thoroughly researched before launch. To ensureconsistent growth, the brands are supported by an integrated trade, consumerand advertising effort, although advertising is used selectively. Recognizing

 

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thatfinancial resources are limited, we allocate our resources to focus on thosebrands that show the greatest opportunities for growth and financial success.Brand priorities vary from year to year and generally revolve around theintroduction of new items.

 

**Customers**

** **

Oursenior management team and dedicated sales force maintain long-standingrelationships with our top 50 customers, which accounted for approximately 83%of our combined gross sales for fiscal 2005. Our sales management team consistsof ten people, who focus on our key customer relationships. We also contractwith third party sales management organizations that interface directly withour remaining customers and report directly to members of our sales managementteam.

 

Weenjoy broad distribution across each of the major retail channels, includingmass merchandisers, drug, food, dollar and club stores. The following tablesets forth the percentage of gross sales to our top 50 customers across ourfive major distribution channels for the fiscal years 2003, 2004 and 2005:

 
| ** **                            | ** ** | **Percentage of  Gross Sales to  Top 50 Customers****(1)** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **Channel of Distribution** | ** ** | **2003**                                                                       | ** ** | **2004** | ** ** | **2005** | ** ** |
| Mass                                  |       | 36.2                                                                           | %          |   | 37.8 | % |   | 39.1 | % |   |
| Food                                  |       | 28.8                                                                           |       |   | 26.1 |   |   | 23.0 |   |   |
| Drug                                  |       | 23.1                                                                           |       |   | 23.4 |   |   | 23.9 |   |   |
| Dollar                                |       | 5.9                                                                            |       |   | 7.2 |   |   | 9.4 |   |   |
| Club                                  |       | 5.6                                                                            |       |   | 4.6 |   |   | 2.8 |   |   |
| Other                                 |       | 0.4                                                                            |       |   | 0.9 |   |   | 1.8 |   |   |

 

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(1)             Includesestimates for some of our wholesale customers that service more than onedistribution channel.

 

Dueto the diversity of our product line, we believe that each of these channels isimportant to our business and we continue to seek opportunities for growth ineach channel. We have recently expanded our sales in dollar stores byintroducing customized packaging and sizes of our brand name products for thesechannels.

 

Ourprincipal customer relationships include Wal-Mart, Walgreens, CVS, Target andDollar General. For fiscal 2005, our top five and ten customers accounted forapproximately 43% and 55% of our gross sales, respectively. No single customerother than Wal-Mart accounted for more than 10% of our gross sales in the mostrecent fiscal year and none of our other top five customers accounted for lessthan 3.0% of our gross sales for the most recent fiscal year. Our top fifteencustomers each purchase products from virtually all of our major product lines.

 

Ourstrong customer relationships provide us with a number of important benefitsincluding minimizing slotting fees and shortening payment time after invoicing.In addition, these relationships help us by facilitating new product introductionsand ensuring prominent shelf space. We believe that management’s emphasis onstrong customer relationships, speed and flexibility, leading sales technologycapabilities, including electronic data interchange, e-mail, the Internet,integrated retail coverage, consistent marketing support programs and ongoingproduct innovation will continue to maximize our competitiveness in theincreasingly complex retail environment.

 

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Thefollowing table sets forth a list of our primary distribution channels and ourprincipal customers for each channel:

 
| Channel of  Distribution | ** ** | **Customers**             |
|--------------------------|------------|---------------------------|
| Mass                     |       | Kmart                     |
|                     |       | Meijer                    |
|                     |       | Target                    |
|                     |       | Wal-Mart                  |
| Drug                     |       | CVS                       |
|                     |       | Rite  Aid                 |
|                     |       | Walgreens                 |
| Food                     |       | Ahold                     |
|                     |       | Albertsons                |
|                     |       | Kroger                    |
|                     |       | Publix                    |
|                     |       | Safeway                   |
|                     |       | Supervalu                 |
| Dollar                   |       | Dollar  General           |
|                     |       | Family  Dollar            |
|                     |       | Dollar  Tree              |
| Club                     |       | Costco                    |
|                     |       | Sam’s  Club          |
|                     |       | BJ’s  Wholesale Club |

 

**Outsourcingand Manufacturing**

 

Inorder to maximize our competitiveness and efficiently allocate our resources,third party manufacturers fulfill all of our manufacturing needs. We have foundthat contract manufacturing maximizes our flexibility and responsiveness toindustry and consumer trends while minimizing the need for capitalexpenditures. We select contract manufacturers based on what we believe to bethe best overall value, and we take into account factors such as depth ofservices, the management team, manufacturing flexibility, regulatory complianceand competitive pricing. We also conduct thorough reviews of each potentialmanufacturer’s facilities, quality standards, capacity and financial stability.We generally only purchase finished products from our manufacturers, and noneof those products require unique raw materials.

 

Ourprimary contract manufacturers provide comprehensive services, from productdevelopment through the manufacturing of finished goods, and are responsiblefor such matters as production planning, product research and development,procurement, production and quality testing. The manufacturer is responsiblefor all capital expenditures and works with us to develop improved packagingand promotional offers. In most instances, we provide our contractmanufacturers with guidance in the form of product development, performancecriteria, regulatory guidance, sourcing of packaging materials and monthlymaster production schedules. This management approach results in minimalcapital expenditures and maximizes our cash flow, which is reinvested tosupport our marketing initiatives and to repay outstanding indebtedness.

 

Wehave relationships with over 25 third-party manufacturers. As of March 31,2005, we sold 94 types of products. We do not have long-term contractswith the manufacturers of 59 of those types of products. These 59 types of productsaccounted for approximately 29% of our gross sales for fiscal 2005. Not havingmanufacturing agreements for these products exposes us to the risk that themanufacturer could stop producing our products at any time, for any reason orfail to provide us with the level of products we need to meet our customers’demands.

 

Ourlargest suppliers of manufactured goods for fiscal 2005 included VijonLaboratories, Abbott Laboratories, Kolmar Canada, Procter & Gamble,OraSure Technologies, Humco Holdings and Alticor. We enter into manufacturingagreements for a majority of our products by sales volume, each of which

 

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vary based on thethird-party manufacturer and the products being supplied. These agreementsexplicitly outline the manufacturer’s obligations and product specificationswith respect to the brand or brands being produced. The manufacturingagreements are typically one to seven years in duration and prices under theseagreements generally are established annually and subject to quarterlyadjustments for changes to raw material and packaging costs. Labor costincreases are generally limited to increases in the consumer price index. Allof our other products are manufactured on a purchase order basis. Orders aregenerally based on batch sizes and result in no long-term obligations orcommitments.

 

**Warehousingand Distribution**

** **

Wereceive orders from retailers and/or brokers primarily by electronic datainterchange, or EDI, which automatically enters each order into our systems andthen routes the order to our distribution center. The distribution center will,in turn, send a confirmation that the order was received, fill the order andship the order to the customer, while sending a shipment confirmation to us.Upon receipt of the confirmation, we send an invoice to the customer.

 

Wemanage product distribution in the mainland United States through one facilitylocated in St. Louis, leased and operated by Ozburn-Hessey Logistics.Ozburn-Hessey handles all finished goods storage and all customer shipments, aswell as the counting and disposition of customer returns. Our agreement withOzburn-Hessey was to expire in May 2007; however, on April 12, 2005,the Company exercised the termination option in the agreement by givingOzburn-Hessey 120 days advance written notice. In April 2005, the Companyentered into a material definitive Storage and Handling Agreement withWarehousing Specialist, Inc. (“WHI”) and a Transportation ManagementAgreement with Nationwide Logistics, Inc. (“NLI”). Both WHI and NLI aresubsidiaries of The Arthur Wells Group. We believe that the new agreements withWHI and NLI will improve customer service and increase efficiency in ourwarehousing and distribution operations.

 

TheStorage and Handling Agreement provides that, for a term of thirty-six monthscommencing on the first shipment of our product to WHI’s warehouse, WHI shallprovide warehouse services, including without limitation, storage, handling andshipping services to us with respect to our full line of products. TheTransportation Management Agreement provides that, for a term of thirty-sixmonths, NLI shall provide complete management services, claims administration,proof of delivery procurement, report generation and automation and tariffcompliance services to us with respect to our full line of products.

 

IfOzburn-Hessey, WHI or NLI abruptly stopped providing logistics services to us,our business operations could suffer a temporary disruption while a new servicesprovider was engaged. We believe this process could be completed quickly andany temporary disruption resulting therefrom would have an insignificant effecton our operating results and financial condition.

 

**Competition**

** **

Thebusiness of selling brand name consumer products in the over-the-counter drug,household cleaning and personal care categories is highly competitive. Thesemarkets include numerous manufacturers, distributors, marketers and retailersthat actively compete for consumers’ business both in the United States andabroad.

 

Ourprincipal competitors vary by industry category. Competitors in the over-thecounter drug category include Pfizer, maker of *Visine*®,which competes with our *Clear eyes*brand; McNeill-PPC, maker of *Tylenol*®Sore Throat, which competes with our *Chloraseptic*brand; Schering-Plough, maker of *Dr. Scholl’s*®,which competes with our *Compound W*brand; Johnson & Johnson, maker of *BAND-AID*®Brand Liquid Bandage, which competes with our *New-Skin*brand; and GlaxoSmithKline, maker of *Debrox*®,which competes with our *Murine*brand. Competitors in the household cleaning category include Henkel, maker of *Soft Scrub*, and Clorox, maker of *Tilex*®, each of which competes with our *Comet* brand, and Clorox’s *Pine Sol*®, which competes with our *Spic and Span* brand. Competitors in thepersonal care category include Johnson & Johnson, maker of *T-Gel* shampoo, which competes with our *Denorex* brand, and Del Laboratories, makerof *Sally Hansen*®, which competeswith our *Cutex* brand. Many ofthese competitors are larger and have substantially greater resources than wedo, and may therefore have the

 

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abilityto spend more aggressively on advertising and marketing and to respond moreeffectively to changing business and economic conditions than us. If this wereto occur, our sales, operating results and profitability would be adverselyaffected.

 

Wecompete on the basis of numerous factors, including brand recognition, productquality, performance, price and product availability at retail stores.Advertising, promotion, merchandising and packaging, the timing of new productintroductions and line extensions also have a significant impact on customers’buying decisions and, as a result, on our sales. The structure and quality ofthe sales force, as well as consumption of our products affects in-storeposition, wall display space and inventory levels in retail outlets. If we areunable to maintain or improve the inventory levels and in-store positioning ofour products in retail stores, our sales and operating results will beadversely affected. Our markets also are highly sensitive to the introductionof new products, which may rapidly capture a significant share of the market.An increase in the amount of product introductions by our competitors couldhave a material adverse effect on our sales and operating results.

 

**Regulation**

 

***Product Regulations.  ***Theformulation, manufacturing, packaging, labeling, distribution, importation,sale and storage of our products are subject to extensive regulation by variousfederal agencies, including the Food and Drug Administration, or FDA, theFederal Trade Commission, or FTC, the Consumer Product Safety Commission, orCPSC, the Environmental Protection Agency, or EPA, and by various agencies ofthe states, localities and foreign countries in which our products aremanufactured, distributed and sold. Regulatory issues are handled internally bymanagement and an experienced FDA consultant. Our operations team works closelywith our third-party providers on quality matters and makes frequent sitevisits. When and if the FDA chooses to audit a particular facility that ismanufacturing one of our products, we are notified immediately and updated onthe progress of the audit as it proceeds. To prepare manufacturers for audits,we perform “mock” FDA inspections at least biannually. Our management intendsto continue this procedure across all of our brands. This continual evaluationprocess ensures that our manufacturing processes and products are of thehighest quality and in compliance with all regulatory needs. If we or ourmanufacturers fail to comply with these regulations, we could become subject tosignificant claims or penalties, which could materially and adversely affectour business. In addition, the adoption of new regulations or changes in theinterpretations of existing regulations may result in significant additionalcompliance costs or discontinuation of product sales and may adversely affectthe marketing of our products, which could result in a significant loss ofsales revenues.

 

Allof our over-the-counter drug products are regulated pursuant to the FDA’s monographsystem. The monographs, both tentative and final, set out the activeingredients and labeling indications that are permitted for certain broadcategories of over-the-counter drug products. Where the FDA has finalized aparticular monograph, it has concluded that a properly labeled productformulation is generally recognized as safe and effective and not misbranded. Atentative final monograph indicates that the FDA has not made a finaldetermination about products in a category to establish safety and efficacy fora product and its uses. However, unless there is a serious safety or efficacyissue, the FDA will typically exercise enforcement discretion and permitcompanies to sell products conforming to a tentative final monograph until thefinal monograph is published. Products that comply with either final ortentative final monograph standards do not require pre-market approval from theFDA.

 

Inaccordance with the FDC Act and FDA regulations, the manufacturing processes ofour third party manufacturers must also comply with the FDA’s current GoodManufacturing Processes (“cGMPs”). The FDA inspects our facilities and those ofour third party manufacturers periodically to determine if we and our thirdparty manufacturers are complying with cGMPs.

 

***Other Regulations.  ***We are alsosubject to a variety of other regulations in various foreign markets, includingregulations pertaining to import/export regulations and antitrust issues. Tothe extent we decide to commence or expand operations in additional countries,we may be required to obtain an approval, license or certification from thecountry’s ministry of health or comparable agency. We must also comply

 

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withproduct labeling and packaging regulations that may vary from country tocountry. Government regulations in both our domestic and international marketscan delay or prevent the introduction, or require the reformulation orwithdrawal, of some of our products. Our failure to comply with theseregulations can result in a product being removed from sale in a particularmarket, either temporarily or permanently. In addition, we are subject to FTCand state regulations, as well as foreign regulations, relating to our productclaims and advertising. If we fail to comply with these regulations, we couldbe subject to enforcement actions and the imposition of penalties.

 

**IntellectualProperty**

 

Weown a number of trademark registrations and applications in the United States,Canada and other foreign countries. The following are some of the mostimportant trademarks registered in the United States: *Chloraseptic, Clear eyes, Cinch®, Cloverine, Comet,Compound W, Compoz, Cutex, Denorex, Dermoplast, Essential Care, Freezone,Heet, Kerodex, Momentum, Mosco, Murine, New-Skin, Outgro, Oxipor VHC,Percogesic, Prell, Simple Pad®, Simplegel®, Sleep-Eze, Spic and Span, VacuumGrip®* and *Zincon.* Inaddition, we have an exclusive royalty bearing license to use the *EZO*trademark in the United States for theten year term ending on December 31, 2012, at which time we shallhave the right to purchase the trademark for $1,000. While we own the U.S.trademark registration for *Kerodex*,we have an obligation to pay royalties to Unilever/Scientific with respect tothe manufacture and sale of barrier creams sold in the United States under the *Kerodex* trademark. This royalty obligationwill continue so long as we make, use or sell these products in the UnitedStates.

 

Ourtrademarks and tradenames are how we convey that the products we sell are “brandname” products. Our ownership of these trademarks and tradenames enables us toprevent others from using them and allows us to compete based on the valueassociated with them. Enforcing our proprietary rights in these trademark andtradenames, however, is expensive. If we are not able to effectively enforceour rights, others may be able to dilute our trademarks and tradenames and hurtthe value that our customers associate with our brands, which could adverselyaffect our sales and operating results.

 

Aspart of Bonita Bay’s acquisition of the *Cleareyes*and *Murine*productlines from Abbott Laboratories in 2002, specified country closings werescheduled to take place after 2003 in order for the parties to obtain thenecessary regulatory approvals in those countries. While a number of thoseclosings have occurred and the trademark registrations and applications in suchcountries have been assigned to us, we and Abbott are still in the process ofexecuting separate agreements to effect assignments of trademark registrationsand applications for the *Clear eyes*and*Murine*trademarks in somecountries that represent smaller markets for us.

 

BonitaBay acquired other intellectual property rights from Procter & Gambleand Abbott Laboratories when it acquired the trademarks related to the *Comet*, *Chloraseptic*,*Clear eyes*, *Murine* and *Prell* product lines; however, we did not in each case obtaintitle to all of the intellectual property used to manufacture and sell thoseproducts. Therefore, we are dependent upon Procter & Gamble, AbbottLaboratories and other third parties for intellectual property used in themanufacture and sale of some of our products. For example, we rely on thirdparties for intellectual property relating to *Comet*products, *Chloraseptic*strips,*Prell*shampoo, *Spic and Span*dilutables, *Cinch* spray and *Spic and Span*soft powder. We have licenses for suchintellectual property or manufacturing agreements with the owners of suchintellectual property. However, if we are unable to maintain these arrangements,we would have to establish new arrangements with different licensors ormanufacturers. If this were to occur, we could experience disruptions in ourbusiness, our ability to meet customer demand could be constrained, and oursales and operating results could be adversely affected.

 

Wehave granted MF Distributions, Inc. an exclusive license (with anoption to purchase) to sell *Spic and Span*and*Cinch* products in Canada for a royalty.In 2003, we assigned our Italian trademark applications and registrations for *Spic and Span*and *Cinch* to Conter, S.p.A., and entered intoa concurrent use agreement with Conter with respect to such marks.

 

Wehave granted Procter & Gamble the right to use the *Comet* and *Chlorinol®*trademarks in the commercial/institutional/industrial segment in the UnitedStates and Canada until 2010 and in all of its

 

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segmentsin specified Eastern European countries until 2006. In addition, we havegranted to Procter & Gamble the right to use the *Spic and Span*trademark in connection withcleaning products for use primarily outside the home and in a business orinstitution until 2009.

 

**InformationTechnology**

 

Weuse ACCPAC as our business management system. The system handles our accountsreceivable, accounts payable, inventory control, purchase order, order entryand general ledger transactions. Because this system gives us the ability tomanage several different companies at the same time, we anticipate that anyintegration required as the result of future acquisitions will be completedwithout disruption to our daily operations.

 

ForEDI transactions, we use Gentran, a software from Sterling Commerce which isone of the most widely used packages for EDI in the United States. The abovesystems, along with our highly experienced staff located in Jackson, Wyoming,gives us the capability to add brands or entire companies to the portfolio in aseamless fashion.

 

**Employees**

 

Weemployed 75 individuals as of March 31, 2005. None of our employeesare party to collective bargaining agreements. Management believes that itsrelations with its employees are good.

 

**BacklogOrders**

 

TheCompany had no backlog orders as of March 31, 2005.

 

**RISKFACTORS**

 

**Thehigh level of competition in our industry could adversely affect our sales,operating results and profitability.**

 

Thebusiness of selling brand name consumer products in the over-the-counter drug,household cleaning and personal care categories is highly competitive. Thesemarkets include numerous manufacturers, distributors, marketers and retailersthat actively compete for consumers’ business both in the United States andabroad.

 

Ourprincipal competitors vary by industry category. Competitors in the over-thecounter drug category include Pfizer, maker of *Visine*,which competes with our *Clear eyes*brand; McNeill-PPC, maker of *Tylenol*Sore Throat, which competes with our *Chloraseptic*brand; Schering-Plough, maker of *Dr. Scholl’s*,which competes with our *Compound W*brand; Johnson & Johnson, maker of *BAND-AID*Brand Liquid Bandage, which competes with our *New-Skin*brand; and GlaxoSmithKline, maker of *Debrox*,which competes with our *Murine*brand. Competitors in the household cleaning category include Henkel, maker of *Soft Scrub*, and Clorox, maker of *Tilex*, each of which competes with our *Comet* brand, and Clorox’s *Pine Sol*, which competes with our *Spic and Span* brand. Competitors in thepersonal care category include Johnson & Johnson, maker of *T-Gel* shampoo, which competes with our *Denorex* brand, and Del Laboratories, makerof *Sally Hansen*, which competeswith our *Cutex* brand. Many ofthese competitors are larger and have substantially greater resources than wedo, and may therefore have the ability to spend more aggressively onadvertising and marketing and to respond more effectively to changing businessand economic conditions than us. If this were to occur, our sales, operatingresults and profitability would be adversely affected.

 

Someof our product lines that account for a large percentage of our sales have asmall market share relative to our competitors. For example, while *Clear eyes* has a number two market shareposition of 16.7%, its top competitor, *Visine*,has a market share of 41.7%. In contrast, some of our brands with number twomarket positions have a similar market share relative to our competitors. Forexample, *Compound W* has a numbertwo market position of 33.7% and its top competitor, *Dr. Scholl’s* Clear Away®, has a market position of40.0%. Also, while *Cutex* is thenumber one brand name nail polish remover with a market share of 29.0%,non-branded, private label nail polish removers account, in the

 

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aggregate,for 50.2% of the market. Finally, while our *New-Skin*liquid bandage product has a number one market position of 37.7%, the size ofthe liquid bandage market is relatively small, particularly when compared tothe much larger bandage category. See “Market, Ranking and Other Data” section onpage 22 of this document for information regarding market sharecalculations.

 

Wecompete on the basis of numerous factors, including brand recognition, productquality, performance, price and product availability at retail stores.Advertising, promotion, merchandising and packaging, the timing of new productintroductions and line extensions also have a significant impact on consumerbuying decisions and, as a result, on our sales. The structure and quality ofthe sales force, as well as consumption of our products affects in-storeposition, wall display space and inventory levels in retail stores. If we areunable to maintain or improve the inventory levels and in-store positioning ofour products in retail stores, our sales and operating results will beadversely affected. Our markets also are highly sensitive to the introductionof new products, which may rapidly capture a significant share of the market.An increase in the amount of product introductions by our competitors couldhave a material adverse effect on our sales and operating results.

 

Inaddition, competitors may attempt to gain market share by offering products atprices at or below those typically offered by us. Competitive pricing mayrequire us to reduce prices and may result in lost sales or a reduction of ourprofit margins. Future price or product changes by our competitors may have amaterial adverse effect on us or we may be unable to react with price orproduct changes of our own to maintain our current market position.

 

**Wedepend on a limited number of customers for a large portion of our gross salesand the loss of one or more of these customers could reduce our gross sales andtherefore, could have a material adverse effect on our business, financialcondition and results of operations.**

** **

Forfiscal 2005, our top five and ten customers accounted for approximately 43% and55% of our gross sales, respectively. Wal-Mart, which itself accounted forapproximately 25% of our gross sales, is our only customer that accounted for10% or more of our gross sales for fiscal 2005. We expect that for the yearending March 31, 2006 and future periods, our top five and ten customers,including Wal-Mart, will, in the aggregate, continue to account for a largeportion of our gross sales. The loss of one or more of our top customers, anysignificant decrease in sales to these customers, or any significant decreasein our retail display space in any of these customers’ stores, could reduce ourgross sales, and therefore, could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

Inaddition, our business is based primarily upon individual sales orders. Wetypically do not enter into long-term contracts with our customers.Accordingly, our customers could cease buying products from us at any time andfor any reason. The fact that we do not have long-term contracts with ourcustomers means that we have no recourse in the event a customer no longerwants to purchase products from us. If a significant number of our customerselect not to purchase products from us, our business, prospects, financialcondition and results of operations could be adversely affected.

 

**Wedepend on third party manufacturers to produce the products we sell. If we areunable to maintain these manufacturing relationships or fail to enter into additionalor different arrangements, we may be unable to meet customer demand and oursales and profitability may suffer as a result.**

** **

Allof our products are produced by third party manufacturers. Without adequatesupplies of merchandise to sell to our customers, sales would decreasematerially and our business would suffer. In the event that our third partymanufacturers are unable or unwilling to ship products to us in a timely manneror continue to manufacture products for us, we would have to rely on othercurrent manufacturing sources or identify and qualify new manufacturers. Wemight not be able to identify or qualify such manufacturers for existing or newproducts in a timely manner and such manufacturers might not allocatesufficient capacity to us in order to meet our requirements. In addition,identifying alternative manufacturers without adequate lead times cancompromise required product validation and stability work, which may involveadditional manufacturing expense, delay in production or product disadvantagein the marketplace. The consequences of not securing adequate and timelysupplies of merchandise would negatively impact inventory levels, sales andgross margin rates, and ultimately our results of operations.

 

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Inaddition, even if our current manufacturers continue to manufacture ourproducts, they may not maintain adequate controls with respect to productspecifications and quality and may not continue to produce products that areconsistent with our standards or applicable regulatory requirements. If we areforced to rely on products of inferior quality, then our brand recognition andcustomer satisfaction would likely suffer, which would likely lead to reducedsales. These manufacturers may also increase the cost of the products wepurchase from them. If our manufacturers increase our costs, our margins wouldbe adversely affected if we cannot pass along these increased costs to ourcustomers.

 

Asof March 31, 2005, we sold 94 types of products. We do not have long-termcontracts with the manufacturers of 59 of those types of products. These 59 typesof products accounted for approximately 29% of our gross sales for fiscal 2005.The fact that we do not have long-term contracts with these manufacturers meansthat they could cease manufacturing these products at any time and for anyreason.

 

**Disruptionin our main distribution center may prevent us from meeting customer demand andour sales and profitability may suffer as a result.**

** **

Wemanage our product distribution in the continental United States through a maindistribution center in St. Louis, Missouri. A serious disruption, such as aflood or fire, to our main distribution center could damage our inventory andcould materially impair our ability to distribute our products to customers ina timely manner or at a reasonable cost. We could incur significantly highercosts and experience longer lead times associated with distributing ourproducts to our customers during the time that it takes for us to reopen orreplace our distribution center. As a result, any such serious disruption couldhave a material adverse effect on our sales and profitability.

 

**Effortsto acquire other companies, brands or product lines may divert our managerialresources away from our business operations, and if we complete an acquisition,we may incur or assume additional liabilities or experience integrationproblems.**

** **

Part ofour growth has been driven by acquiring other companies. At any given time, wemay be engaged in discussions with respect to possible material acquisitions orother business combinations that are intended to enhance our product portfolio,enable us to realize cost savings and further diversify our category, customerand channel focus. Our ability to successfully grow through acquisitionsdepends on our ability to identify, negotiate, complete and integrate suitableacquisitions and to obtain any necessary financing. These efforts could divertthe attention of our management and key personnel from our business operations.If we complete acquisitions, we may also experience:

 

•       difficultiesin integrating any acquired companies, personnel and products into our existingbusiness;

 

•       delays inrealizing the benefits of the acquired company or products;

 

•       higher costsof integration than we anticipated;

 

•       difficultiesin retaining key employees of the acquired business who are necessary to managethe business;

 

•       difficultiesin maintaining uniform standards, controls, procedures and policies throughoutour acquired companies; or

 

•       adversecustomer reaction to the business combination.

 

Inaddition, an acquisition could materially impair our operating results bycausing us to incur debt or requiring us to amortize acquisition expenses andacquired assets.

 

**Regulatorymatters governing our industry could have a significant negative effect on oursales and operating costs.**

 

Inboth our U.S. and foreign markets, we are affected by extensive laws,governmental regulations, administrative determinations, court decisions andsimilar constraints. Such laws, regulations and other

 

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constraintsexist at the federal, state or local levels in the United States and atanalogous levels of government in foreign jurisdictions.

 

Theformulation, manufacturing, packaging, labeling, distribution, importation,sale and storage of our products are subject to extensive regulation by variousfederal agencies, including the FDA, the FTC, the CPSC, the EPA, and by variousagencies of the states, localities and foreign countries in which our productsare manufactured, distributed and sold. If we or our third party manufacturersfail to comply with those regulations, we could become subject to significantpenalties or claims, which could materially adversely affect our operatingresults or our ability to conduct our business. In addition, the adoption ofnew regulations or changes in the interpretations of existing regulations mayresult in significant compliance costs or discontinuation of product sales andmay adversely affect the marketing of our products, resulting in a significantloss of sales revenues.

 

Inaccordance with the Federal Food, Drug and Cosmetic Act, or FDC Act, and FDAregulations, the manufacturing processes of our third party manufacturers mustalso comply with the FDA’s cGMPs. The FDA inspects our facilities and those ofour third party manufacturers periodically to determine if we and our thirdparty manufacturers are complying with cGMPs. A history of past compliance isnot a guarantee that future cGMPs will not mandate other compliance steps andassociated expense.

 

Ifwe or our third party manufacturers fail to comply with federal, state orforeign regulations, we could be required to:

 

•       suspendmanufacturing operations;

 

•       changeproduct formulations;

 

•       suspend thesale of products with non-complying specifications;

 

•       initiateproduct recalls; or

 

•       changeproduct labeling, packaging or advertising or take other corrective action.

 

Anyof these actions could materially and adversely affect our financial results.

 

Inaddition, our failure to comply with FTC or state regulations, or withregulations in foreign markets that cover our product claims and advertising,including direct claims and advertising by us, may result in enforcementactions and imposition of penalties or otherwise materially and adverselyaffect the distribution and sale of our products.

 

**Productliability claims could adversely affect our sales and operating results.**

** **

Wemay be required to pay for losses or injuries purportedly caused by ourproducts. We have been and may again be subjected to various product liabilityclaims. Claims could be based on allegations that, among other things, ourproducts contain contaminants, include inadequate instructions regarding theiruse or inadequate warnings concerning side effects and interactions with othersubstances. For example, *Denorex*products contain coal tar which the State of California has determined causescancer and our packaging contains a warning to this effect. In addition, anyproduct liability claims may result in negative publicity that may adverselyaffect our sales and operating results. Also, if one of our products is foundto be defective we may be required to recall it, which may result insubstantial expense and adverse publicity and adversely affect our sales andoperating results. Although we maintain, and require our material suppliers andthird party manufacturers to maintain, product liability insurance coverage,potential product liability claims may exceed the amount of insurance coverageor potential product liability claims may be excluded under the terms of thepolicy, which could hurt our financial condition. In addition, we may also berequired to pay higher premiums and accept higher deductibles in order tosecure adequate insurance coverage in the future.

 

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**Ifwe are unable to protect our intellectual property rights our ability tocompete effectively in the market for our products could be negativelyimpacted.**

 

Themarket for our products depends to a significant extent upon the goodwillassociated with our trademarks and tradenames. The trademarks and tradenames onour products are how we convey that the products we sell are “brand name”products, and we believe consumers ascribe value to our brands. We own thematerial trademark and tradename rights used in connection with the packaging,marketing and sale of our products. This ownership is what prevents ourcompetitors or new entrants to the market from using our valuable brand names.Therefore, trademark and tradename protection is critical to our business.Although most of our material trademarks are registered in the United Statesand in applicable foreign countries, we may not be successful in assertingtrademark or tradename protection. If we were to lose the exclusive right touse our brand names, our sales and operating results would be materially andadversely affected. We could also incur substantial costs to defend legalactions relating to the use of our intellectual property, which could have amaterial adverse effect on our business, results of operations or financialcondition.

 

Otherparties may infringe on our intellectual property rights and may thereby dilutethe value of our brands in the marketplace. If our brands become diluted, or ifour competitors are able to introduce brands that cause confusion with ourbrands in the marketplace, it could adversely affect the value that ourconsumers associate with our brands, and thereby negatively impact our sales.Any such infringement of our intellectual property rights would also likelyresult in a commitment of our time and resources to protect these rightsthrough litigation or otherwise. In addition, third parties may assert claimsagainst our intellectual property rights and we may not be able to successfullyresolve these claims. In that event, we may lose our ability to use the brandnames that were the subject of these claims, which could have a materialadverse impact on our sales and operating results.

 

**Wedepend on third parties for intellectual property relating to some of theproducts we sell, and our inability to maintain or enter into additional orfuture license agreements may result in our failure to meet customer demand,which would adversely affect our operating results.**

** **

Wehave licenses or manufacturing agreements with third parties that ownintellectual property (e.g., formulae, copyrights, trade dress, patents andother technology) used in the manufacture and sale of some of our products. Inthe event that any such license or manufacturing agreement is terminated as aresult of our breach (e.g., by our failure to pay royalties or breach ofconfidentiality), we may lose the right to use or have reduced rights to usethe intellectual property covered by such agreement and may have to develop orobtain rights to use other intellectual property. Similarly, our rights couldbe reduced if the applicable licensor or contract manufacturer fails to maintainthe licensed patents or trade secrets because in such event our competitorscould obtain the right to use the intellectual property without restriction. Ifthis were to occur, we might not be able to develop or obtain replacementintellectual property in a timely manner and the products modified as a resultof this development may not be well-received by customers. The consequences oflosing the right to use or having reduced rights to such intellectual propertycould negatively impact our results of operations through failure to meetconsumer demand for the affected products, the cost of developing or obtainingdifferent intellectual property and possible reduction in sales of the affectedproducts. In addition, development of replacement products may be time-consuming,expensive and ultimately may not be feasible.

 

**Wedepend on our key personnel and the loss of the services provided by any of ourexecutive officers or other key employees could harm our business and resultsof operations.**

** **

Oursuccess depends to a significant degree upon the continued contributions of oursenior management, many of whom would be difficult to replace. These employeesmay voluntarily terminate their employment with us at any time. We may not beable to successfully retain existing personnel or identify, hire and integratenew personnel. While we believe we have developed depth and experience amongour key personnel, our business may be adversely affected if one or more ofthese key individuals left. We do not maintain any key-man or similar insurancepolicies covering any of our senior management or key personnel.

 

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**Oursubstantial indebtedness could adversely affect our financial health and thesignificant amount of cash we must generate to service our debt will not beavailable to reinvest in our business.**

** **

Wehave a significant amount of indebtedness. As of March 31, 2005, our totalindebtedness, including current maturities, is approximately $495.4 million,and we are able to borrow an additional $60.0 million under our amendedrevolving credit facility.

 

Oursubstantial indebtedness could:

 

•       increase ourvulnerability to general adverse economic and industry conditions;

 

•       require usto dedicate a substantial portion of our cash flow from operations to paymentson our indebtedness, thereby reducing the availability of our cash flow to fundworking capital, capital expenditures, acquisitions and investments and othergeneral corporate purposes;

 

•       limit ourflexibility in planning for, or reacting to, changes in our business and themarkets in which we operate;

 

•       place us ata competitive disadvantage compared to our competitors that have less debt; and

 

•       limit, amongother things, our ability to borrow additional funds.

 

Theterms of the indenture governing the 91⁄4% senior subordinated notes and thesenior credit facility allow us to issue and incur additional debt uponsatisfaction of conditions set forth in the respective agreements. If new debtis added to current debt levels, the related risks described above couldintensify.

 

**Ouroperating flexibility is limited in significant respects by the restrictivecovenants in the senior credit facility and the indenture governing the notes.**

** **

Thesenior credit facility and the indenture governing the notes imposerestrictions on us that could increase our vulnerability to adverse economicand industry conditions by limiting our flexibility in planning for, andreacting to, changes in our business and industry. Specifically, theserestrictions limit our ability to:

 

•       borrow moneyor issue guarantees;

 

•       paydividends, purchase stock or make other restricted payments to shareholders;

 

•       makeinvestments;

 

•       use assetsas security in other transactions;

 

•       sell assetsor merge with or into other companies;

 

•       enter intotransactions with affiliates;

 

•       sell stockin our subsidiaries; and

 

•       create orpermit restrictions on the ability of our subsidiaries to pay dividends or makeother payments to our company.

 

Ourability to engage in these types of transactions is generally limited by theterms of the senior credit facility and the indenture governing the notes, evenif we believe that a specific transaction would positively contribute to ourfuture growth, operating results or profitability. However, if we are able toenter into these types of transactions under the terms of the senior creditfacility and the indenture, or if we obtain a waiver with respect to anyspecific transaction, that transaction may cause our indebtedness to increase,may not result in the benefits we anticipate or may cause us to incur greatercosts or suffer greater disruptions in our business than we anticipate, andcould therefore negatively impact our business and operating results.

 

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Inaddition, the senior credit facility requires us to meet specified financialratios. For example, we must:

 

•       have aleverage ratio of less than 5.50 to 1.0 for the quarter ended June 30,2005, and decreasing over time to 3.75 to 1.0 for the quarter ending September 30,2010, and remaining level thereafter. Our leverage ratio was less than 5.50 to1.0 for the quarter ended March 31, 2005;

 

•       have aninterest coverage ratio of greater than 2.50 to 1.0 for the quarter ended June 30,2005, and increasing to 3.25 to 1.0 for the quarter ending March 31, 2011.Our interest coverage ratio was greater than 2.50 to 1.0 for the quarter ended March 31,2005; and

 

•       have a fixedcharge coverage ratio of greater than 1.5 to 1.0 for the quarter ended June 30,2005, and for each quarter thereafter until the quarter ending March 31,2011. Our fixed charge coverage ratio was greater than 1.5 to 1.0 for thequarter ended March 31, 2005.

 

Althoughwe believe we are on track to meet and/or maintain these financial ratios, ourability to do so may be affected by events outside our control. Covenants inour senior credit facility also require us to use 100% of the proceeds wereceive from debt issuances to repay outstanding borrowings under our seniorcredit facility.

 

**Thesenior credit facility and the indenture governing the notes contain cross-defaultprovisions that may result in the acceleration of all our indebtedness.**

 

Thesenior credit facility and the indenture governing the notes contain provisionsthat allow the respective creditors to declare all outstanding borrowings underone agreement to be immediately due and payable as a result of a default underthe other agreement. The result is that upon our default under one debtagreement, all indebtedness may become immediately due and payable under thesenior credit facility and the indenture. Under the senior credit facility,failure to make a payment required by the indenture, among other things, maylead to an event of default under the credit agreement. Similarly, an event ofdefault or failure to make a required payment at maturity under the seniorcredit facility, among other things, may lead to an event of default under theindenture. If the debt under the senior credit facility and indenture were toboth be accelerated, the aggregate amount immediately due and payable as of March 31,2005 would have been approximately $495.4 million. We presently do nothave sufficient liquidity to repay these borrowings if they were to beaccelerated, and we may not have sufficient liquidity in the future.Additionally, we may not be able to borrow money from other lenders to enableus to refinance the indebtedness. As of March 31, 2005, the book value ofour current assets was $79.7 million. Although the book value of our totalassets was $1,001.1 million, approximately $903.2 million was in theform of intangible assets, a significant portion of which are illiquid and maynot be available to satisfy our creditors in the event our debt is accelerated.

 

Anyfailure to comply with the restrictions of the senior credit facility, theindenture related to the notes or any other subsequent financing agreements mayresult in an event of default. Such default may allow the creditors toaccelerate the related debt, as well as any other debt to which the cross-accelerationor cross-default provisions apply. In addition, the lenders may be able toterminate any commitments they had made to supply us with further funds.

 

**MARKET,RANKING AND OTHER DATA**

 

Thedata included in this Form 10-K/A regarding market share and ranking,including our position and the position of our competitors within these marketsare based on data generated by the independent market research firm InformationResources, Inc., which we refer to as “Information Resources.” InformationResources reports retail sales in the food, drug and mass merchandise markets.Information Resources data for the mass merchandise market, however, does notinclude Wal-Mart, which ceased providing sales data to Information Resources in2001. Although Wal-Mart represents a significant portion of the massmerchandise market for us, as well as our competitors, we believe that Wal-Mart’sexclusion from Information Resources data does not significantly change ourmarket share or ranking relative to our competitors.

 

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Unlessotherwise indicated, all references in this Form 10-K/A to:

 

•       “marketshare” or “market position” are based on sales in the United States, as calculatedby Information Resources for the 52 weeks ended March 20, 2005.

 

•       “ACV” referto the All Commodity Volume Food Drug Mass Index, as calculated by InformationResources for the 52 weeks ended March 20, 2005. ACV measures theweighted sales volume of stores that sell a particular product out of all thestores that sell products in that market segment generally. For example, if aproduct is sold by 50% of the stores that sell products in that market segment,but those stores account for 85% of the sales volume in that market segment,that product would have an ACV of 85%. We believe that ACV is a measure of aproduct’s importance to major retailers. We believe that a high ACV evidences aproduct’s attractiveness to consumers, as major retailers will try and carryproducts which are demanded by its customers. Lower ACV measures would indicatethat a product is not as available to consumers because major national andregional retailers do not carry products for which consumer demand may not beas high. For these reasons, we believe that ACV is an important measure toinvestors in brand name consumer product companies like Prestige.

 

**ITEM2**.                             PROPERTIES

 

Ourcorporate headquarters are located in Irvington, New York, a suburb of New YorkCity. Primary functions undertaken at the Irvington facility include seniormanagement, marketing, sales, operations and finance. The lease on theIrvington facility expires on April 30, 2009. We also have a secondaryadministrative center in Jackson, Wyoming. Primary functions undertaken at theJackson facility include back office functions such as invoicing, credit andcollection, general ledger and customer service. The lease on the Jacksonfacility expires on December 31, 2005.

 

**ITEM3**.                             LEGALPROCEEDINGS

 

InJune 2003, Dr. Jason Theodosakis filed a lawsuit, Theodosakis v.Walgreens, et al., in Federal District Court in Arizona, alleging that two ofour subsidiaries, Medtech Products and Pecos Pharmaceutical, as well as otherunrelated parties, infringed the trade dress of two of his published books.Specifically, Dr. Theodosakis published “The Arthritis Cure” and “Maximizingthe Arthritis Cure” regarding the use of dietary supplements to treat arthritispatients. Dr. Theodosakis alleged that his books have a distinctive tradedress, or cover layout, design, color and typeface, and those products that thedefendants sold under the ARTHx trademarks infringed the books’ trade dress andconstituted unfair competition and false designation of origin. Additionally, Dr. Theodosakisalleged that the defendants made false endorsements of the products byreferencing his books on the product packaging and that the use of his name,books and trade dress invaded his right to publicity. We sold the ARTHxtrademarks, goodwill and inventory to a third party, Contract PharmacalCorporation, in March 2003. On January 12, 2005, the court grantedthe Company’s motion for summary judgment and dismissed all claims againstPecos and Medtech. The plaintiff has filed an appeal in the U.S. Court ofAppeals which is pending.

 

OnJanuary 3, 2005 the Company was served with process by our former leadcounsel in the Theodosakis litigation seeking $679,000 plus interest. The casewas filed in the Supreme Court of New York and is styled as Dickstein Shapiroet al v. Medtech Products, Inc. In February 2005, the plaintiffsfiled an amended complaint naming the Pecos Pharmaceutical Company. The Companyhas answered and counterclaimed against Dickstein and also filed a third partycomplaint against the Lexington Insurance Company, our product liabilityinsurer. The Company believes that if there is any obligation to the Dicksteinfirm relating to this matter, it is an obligation of Lexington and not theCompany.

 

OnMay 9, 2005 the Company was served with a complaint in a class actionfiled in Essex County, Massachusetts, styled as Dawn Thompson v. Wyeth, Inc.et al, relating to the Company’s *Little Remedies*pediatric cough products. The Company is one of several corporate defendants,all of whom market over-the-counter cough syrup products for pediatric use. Thecomplaint alleges that the ingredient dextromethorphan is no more effectivethan a placebo. There is no allegation of physical injury caused by

 

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theproduct or the ingredient. The Company is still evaluating its position in thislitigation; however, the use of dextromethorphan in pediatric products is fullyconsistent with and supported by FDA regulations.

 

Weare also involved from time to time in routine legal matters and other claimsincidental to our business. When it appears probable in management’s judgmentthat we will incur monetary damages or other costs in connection with suchclaims and proceedings, and such costs can be reasonably estimated, liabilitiesare recorded in the financial statements and charges are recorded againstearnings. We believe the resolution of such routine matters and otherincidental claims, taking into account reserves and insurance, will not have amaterial adverse effect on our financial condition or results of operation.

 

**ITEM4**.                             SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

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**Part II.**

** **

**ITEM5**.                             MARKET FORTHE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASEOF EQUITY SECURITIES

 

**MarketInformation**

 

PrestigeBrands Holdings, Inc.’s common stock is listed on the New York StockExchange under the symbol “PBH.” Our initial public offering occurred on February 9,2005, and the first day of trading was February 10, 2005. The high and lowclosing price during the fourth quarter ended March 31, 2005, as reportedby the New York Stock Exchange, was $18.65 and $17.26, respectively.

 

PrestigeInternational Holdings, LLC, a wholly owned subsidiary of Prestige BrandsHoldings, Inc., owns 100% of the uncertificated ownership interests ofPrestige International.  There were noequity securities sold by Prestige International during the period covered bythis report.  There is no establishedpublic trading market for the equity interests of Prestige International.

 

**Holders**

** **

Asof June 1, 2005, there were approximately 58 holders of record of ourcommon stock. The number of record holders does not include beneficial ownerswhose shares are held in the names of banks, brokers, nominees or otherfiduciaries.

 

**DividendPolicy**

** **

Wehave not in the past paid, and do not expect for the foreseeable future, to paydividends on our common stock. Instead, we anticipate that all of our earningsin the foreseeable future will be used in the operation and growth of ourbusiness. Any future determination to pay dividends will be at the discretionof our board of directors and will depend upon, among other factors, ourresults of operations, financial condition, capital requirements andcontractual restrictions, including restrictions under our senior creditfacility and the indenture governing our 91/4% seniorsubordinated notes, and any other considerations our board of directors deemsrelevant.

 

**Reorganizationas a Corporation/Repurchases**

** **

TheCompany is the direct parent company of Prestige InternationalHoldings, LLC, a Delaware limited liability company, which was our formertop-tier holding company. In this discussion, we refer to the Company as “Prestige Holdings”and Prestige International Holdings, LLC as “Prestige LLC.”Prestige Holdings became the direct parent of Prestige LLC pursuantto a reorganization that took place prior to the completion of the common stockoffering. The reorganization did not affect our operations, which we continueto conduct through our operating subsidiaries.

 

Thereorganization was effected under the terms of an exchange agreement amongPrestige Holdings, Prestige LLC and each holder of common units ofPrestige LLC. Pursuant to the agreement, the holders of common units ofPrestige LLC exchanged all of their common units for an aggregate of26,666,667 shares of common stock of Prestige Holdings. In addition,pursuant to the reorganization, members of our management team and other employeescontributed an aggregate of 268,717 shares of common stock toPrestige Holdings for no consideration at the completion of the offering.After completion of the initial public offering, Prestige Holdingscontributed a portion of the net offering proceeds to Prestige LLC, whichused such proceeds to redeem all of its senior preferred units and class Bpreferred units, thus causing Prestige LLC to become a wholly ownedsubsidiary of Prestige Holdings.

 

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**ITEM6**.                             SELECTEDFINANCIAL DATA

 

*PrestigeBrands Holdings, Inc and Predecessor*

 

Summaryhistorical financial data for the fiscal years ended March 31, 2001, 2002and 2003, and for the period from April 1, 2003 to February 5, 2004is referred to as the “predecessor” information. On February 6, 2004, anindirect subsidiary of Prestige Brands Holdings, Inc. acquired MedtechHoldings, Inc. and The Denorex Company, which at the time were both undercommon control and management, in a transaction accounted for using the purchasemethod. The summary financial data after such dates, referred to as “successor”information, includes the financial statement impact of recording fair valueadjustments arising from such acquisitions. In addition, the summary financialdata includes the impact of the Spic & Span, Bonita Bay and Vetcoacquisitions from their respective acquisition dates.

 
| ** **                                                                           | ** ** | **Fiscal Year Ended March 31,** | ** ** | **April 1, 2003  to February 5,** | ** ** | **February 6,  2004  to March 31,** | ** ** | **Fiscal Year  Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2001**                                            | ** ** | **2002**                                              | ** ** | **2003**                                           | ** ** | **2004**                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                           | ** ** | **(predecessor basis)**                        | ** ** | **(successor basis)**                            | ** ** |
| ** **                                                                           | ** ** | **(dollars in thousands, except  per share data)**  | ** ** |
| **Income Statement Data:**                                                           | ** ** | ** **                                          | ** ** | ** **                                            | ** ** | ** **                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                                                                       |       | $                                                   | 8,655      |                                                  | $          | 46,201                                             |       | $                                           | 76,439     |   | $ | 69,059 |   | $ | 18,861 |   | $ | 303,318 |   |
| Cost of sales(1)                                                                     |       | 3,075                                               |       | 18,699                                                |       | 27,475                                             |       | 26,254                                      |       | 10,023 |   | 141,348 |   |
| Gross profit                                                                         |       | 5,580                                               |       | 27,502                                                |       | 48,964                                             |       | 42,805                                      |       | 8,838 |   | 161,970 |   |
| Advertising and promotion expenses                                                   |       | 149                                                 |       | 5,230                                                 |       | 14,274                                             |       | 12,601                                      |       | 1,689 |   | 38,402 |   |
| Depreciation and amortization expense                                                |       | 305                                                 |       | 3,992                                                 |       | 5,274                                              |       | 4,498                                       |       | 931 |   | 9,800 |   |
| General and administrative expenses                                                  |       | 560                                                 |       | 8,576                                                 |       | 12,075                                             |       | 12,068                                      |       | 1,649 |   | 20,198 |   |
| Interest expense, net                                                                |       | 2,051                                               |       | 8,766                                                 |       | 9,747                                              |       | 8,157                                       |       | 1,725 |   | 44,726 |   |
| Other expense(2)                                                                     |       | 124                                                 |       | —                                                |       | 685                                                |       | 1,404                                       |       | — |   | 26,863 |   |
| Income from continuing operations before taxes                                       |       | 2,391                                               |       | 938                                                   |       | 6,909                                              |       | 4,077                                       |       | 2,844 |   | 21,981 |   |
| Provision/(benefit) for income taxes                                                 |       | (77                                                 | )          | 311                                                   |       | 3,902                                              |       | 1,684                                       |       | 1,054 |   | 8,522 |   |
| Income from continuing operations                                                    |       | 2,468                                               |       | 627                                                   |       | 3,007                                              |       | 2,393                                       |       | 1,790 |   | 13,459 |   |
| Income/(loss) from discontinued operations                                           |       | 60                                                  |       | (67                                                   | )          | (5,644                                             | )          | —                                      |       | — |   | — |   |
| Cumulative effect of change in accounting principle                                  |       | —                                              |       | —                                                |       | (11,785                                            | )          | —                                      |       | — |   | — |   |
| Net income/(loss)                                                                    |       | $                                                   | 2,528      |                                                  | $          | 560                                                |       | $                                           | (14,422    | ) | $ | 2,393 |   | $ | 1,790 |   | $ | 13,459 |   |
| Cumulative preferred dividends on Senior Preferred  and Class B Preferred units |       |                                                |       |                                                  |       |                                               |       |                                        |       | (1,390 | ) | (25,395 | ) |
| Net income (loss) available to common shareholders                                   |       |                                                |       |                                                  |       |                                               |       |                                        |       | $ | 400 |   | $ | (11,936 | ) |
| Net income (loss) per common share                                                   |       |                                                |       |                                                  |       |                                               |       |                                        |       | $ | 0.02 |   | $ | (0.41 | ) |
| Basic and diluted weighted average shares  outstanding                               |       |                                                |       |                                                  |       |                                               |       |                                        |       | 26,571,155 |   | 29,389,329 |   |
| **Other Financial Data:**                                                            |       |                                                |       |                                                  |       |                                               |       |                                        |       |   |   |   |   |
| Capital expenditures                                                                 |       | $                                                   | 123        |                                                  | $          | 95                                                 |       | $                                           | 421        |   | $ | 66 |   | $ | 42 |   | $ | 365 |   |
| Cash provided by (used in):                                                          |       |                                                |       |                                                  |       |                                               |       |                                        |       |   |   |   |   |
| Operating activities                                                                 |       | 1,978                                               |       | 3,940                                                 |       | 12,519                                             |       | 7,843                                       |       | (1,706 | ) | 51,042 |   |
| Investing activities                                                                 |       | (37,542                                             | )          | (4,412                                                | )          | (2,165                                             | )          | (576                                        | )          | (166,874 | ) | 425,844 |   |
| Financing activities                                                                 |       | 36,491                                              |       | 5,526                                                 |       | (14,708                                            | )          | (8,629                                      | )          | 171,973 |   | 376,743 |   |
| **Balance Sheet Data (at period end):**                                              |       |                                                |       |                                                  |       |                                               |       |                                        |       |   |   |   |   |
| Cash and cash equivalents                                                            |       | $                                                   | 2,830      |                                                  | $          | 7,884                                              |       | $                                           | 3,530      |   |   |   | $ | 3,393 |   | $ | 5,334 |   |
| Total assets                                                                         |       | 151,292                                             |       | 174,783                                               |       | 143,910                                            |       |                                        |       | 326,622 |   | 1,001,135 |   |
| Total long term debt, including current maturities                                   |       | 80,918                                              |       | 93,530                                                |       | 81,021                                             |       |                                        |       | 148,694 |   | 495,360 |   |
| Members’/shareholders’ equity                                              |       | 46,030                                              |       | 59,201                                                |       | 44,797                                             |       |                                        |       | 126,509 |   | 385,846 |   |

 

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(1)             Forthe period from February 6, 2004 to March 31, 2004 and the twelvemonths ended March 31, 2005, cost of sales includes $1,805 and $5,335,respectively, of charges related to the step-up of inventory.

 

(2)             Forfiscal 2005, other expense includes a loss on debt extinguishment of $26,854.

 

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**ITEM 7****.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionof our financial condition and results of operations should be read togetherwith the “Selected Financial Data,” and the consolidated financial statementsand the related notes included elsewhere in this Form 10-K/A. Futureresults could differ materially from the discussion below for many reasons,including the factors described in “Risk Factors” in this Form 10-K/A.Tables and other data in this section may not total due to rounding.

 

**General**

 

***Overview****. *We sellwell-recognized, brand name over-the-counter drug, household cleaning andpersonal care products. We operate in niche segments of these categories wherewe can use the strength of our brands, our established retail distributionnetwork, a low-cost operating model and our experienced management team as acompetitive advantage to grow our presence in these categories and, as aresult, grow our sales and profits.

 

We have grown our brandportfolio by acquiring strong and well-recognized brands from larger consumerproducts and pharmaceutical companies, as well as other brands from smallerprivate companies. While the brands we have purchased from larger consumerproducts and pharmaceutical companies have long histories of support and branddevelopment, we believe that at the time we acquired them they were considered “non-core”by their previous owners and did not benefit from the focus of senior levelmanagement or strong marketing support. We believe that the brands we havepurchased from smaller private companies have been constrained by the limitedresources of their prior owners. After acquiring a brand, we seek to increaseits sales, market share and distribution in both existing and new channels. Wepursue this growth through increased spending on advertising and promotion, newmarketing strategies, improved packaging and formulations and innovative newproducts.

 

In February 2005, weraised $448.0 million through an initial public offering of 28,000,000 sharesof common stock. The net proceeds of the offering were $416.8 million afterdeducting $28.0 million of underwriters’ discounts and commissions and $3.2million of offering expenses. The net proceeds of $416.8 million plus $3.0 millionfrom our revolving credit facility and $8.8 million of cash on hand went torepay $100.0 million of our existing senior indebtedness (plus a repaymentpremium of $3.0 million and accrued interest of $0.5 million as of February 15,2005), to redeem $84.0 million in aggregate principal amount of ourexisting 91/4% senior subordinatednotes (plus a redemption premium of $7.8 million and accrued interest of$3.3 million as of March 18, 2005), to repurchase an aggregate of4,397,950 shares of our common stock held by the GTCR funds and theTCW/Crescent funds for $30.2 million, and to contribute $199.8 million toPrestige International Holdings, LLC, which was used to redeem all of itsoutstanding senior preferred units and class B preferred units. We did notreceive any of the proceeds from the sale of 4,200,000 shares by the sellingstockholders as a result of underwriters exercising their over-allotmentoptions.

 

***Purchase Accounting Effects. ***The acquisitions of Medtech, Spic and Span, BonitaBay and Vetco have been accounted for using the purchase method of accountingunder Statement of Financial Accounting Standards (“SFAS”) No. 141, “BusinessCombinations.” As a result, these acquisitions will affect our future resultsof operations in significant respects. The aggregate acquisition considerationhas been allocated to the tangible and intangible assets acquired andliabilities assumed by us based upon their respective fair values as of theacquisition date. In addition, due to the effects of the increased borrowingsto finance the acquisitions, our interest expense will increase significantlyin the periods following the acquisitions. For more information, see “Liquidityand Capital Resources.”

 

**CriticalAccounting Policies and Estimates**

 

The significantaccounting policies are described in the notes of each of the audited financialstatements included elsewhere in this document. All companies presented hereinutilize the same critical accounting policies, except as otherwise stated.While all significant accounting policies are important to our consolidatedfinancial statements, some of these policies may be viewed as being critical.Such policies

 

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are those that are both most important to the portrayalof our financial condition and require our most difficult, subjective andcomplex estimates and assumptions that affect the reported amounts of assets,liabilities, revenues, expenses and the related disclosure of contingent assetsand liabilities. These estimates are based upon our historical experience andon various other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ materially from these estimates underdifferent assumptions or conditions. The most critical accounting policies areas follows:

 

***Reserve for returns, allowance for doubtful accounts and theallowance for obsolete and damaged inventory. ***We must make estimates of potential future productreturns related to current period sales. In order to do this, we analyzehistorical returns, current economic trends and changes in customer demand andacceptance of our products when evaluating the adequacy of our reserve forreturns in any accounting period. If actual future returns are greater than estimatedby management, our financial statements in future periods would be adverselyaffected.

 

In the ordinary course ofbusiness, we grant non-interest bearing trade credit to our customers on normalcredit terms. To reduce our credit risk, we perform ongoing credit evaluationsof our customers’ financial condition. In addition, we maintain an allowancefor doubtful accounts receivable based upon our historical collectionexperience and expected collectibility of our accounts receivable. Ifuncollectible account balances exceed our estimates, our financial statementswould be adversely affected.

 

We write down ourinventory for estimated obsolescence or damage equal to the difference betweenthe cost of inventory and the estimated market value based upon assumptionsabout future demand and market conditions. If actual market conditions are lessfavorable than those projected by management, additional inventory write-downsmay be required.

 

***Valuation of long-lived and intangible assets and goodwill. ***Under SFAS No. 142,“Goodwill and Other Intangible Assets,” goodwill and indefinite-livedintangible assets are no longer amortized, but must be tested for impairment atleast annually. Intangible assets with definite lives are amortized over theirrespective estimated useful lives. We are required to make judgments regardingthe value assigned to acquired intangible assets and their respective usefullives. Our determination of the values and lives was based on our analysis ofthe requirements of SFAS No. 141 and No. 142, as well as anindependent evaluation of such assets. We have determined that a significantportion of our trademarks have indefinite lives. If we determine that any ofthese assets has a finite life, we would amortize the value of that asset overthe remainder of such finite life. Intangible assets with finite lives andother long-lived assets must also be evaluated for impairment when managementbelieves that the carrying value of the asset will not be recovered. Futureadverse changes in market conditions or poor operating results could result inan impairment charge in the future. There were no impairments of goodwill,indefinite-lived intangible assets or other long-lived assets during the yearended March 31, 2005. Goodwill and other long-term assets, amounted to$919.1 million at March 31, 2005.

 

***Revenue Recognition. ***Forsales transactions, we comply with the provisions Securities and ExchangeCommission of Staff Accounting Bulletin 104 “Revenue Recognition,” whichstates that revenue should be recognized when the following revenue recognitioncriteria are met: (1) persuasive evidence of an arrangement exists; (2) theproduct has been shipped and the customer takes ownership and assumes the riskof loss; (3) the selling price is fixed or determinable; and (4) collectionof the resulting receivable is reasonably assured. These criteria are satisfiedupon shipment of product and revenues are recognized accordingly.

 

***Equity Issuances. ***OnFebruary 6, 2004, in connection with the Medtech acquisition, certainsenior executive officers purchased an aggregate of 5,282,269 common units ofPrestige International Holdings, LLC (the predecessor company) at $0.10per unit. These units were purchased on the same day and at the same price thatGTCR and TCW/Crescent, our unrelated equity investors (the “Sponsors”),purchased 50,000,000 common units. The value of the common units purchased inconnection with the Medtech acquisition was determined by subtracting from theacquisition purchase price, the total debt outstanding immediately followingthe acquisition and the liquidation value of outstanding preferred units issuedin the acquisition. On March 17, 2004, other executive officers purchasedan aggregate of 405,103 common units at a price of $0.10 per unit. TheSponsors did not purchase any common units at this time.

 

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On April 6, 2004, two employees purchased anaggregate of 50,435 common units at a price of $.10 per unit. The Sponsorsdid not purchase any common units at this time. We believe that each of theabove-referenced purchase transactions by management were conducted at fairmarket value based upon the price paid by the Sponsors in the original February 2004acquisition and the fact that such purchases were made at the same price and atthe same time or shortly thereafter.

 

On November 1, 2004,certain non-executive employees purchased an aggregate of 337,000 common unitsfor $0.70 per unit, which we believe was equal to fair market value. Webased this determination on a contemporaneous valuation. The valuation utilizedtraditional methodologies, including market multiples, comparable transactionsand discounted cash flow. We relied on this fair market value analysis insetting the $0.70 per unit price for the purchases. We awarded a totalcash bonus of $235,900 to allow our employees to purchase such units. Inconnection therewith, we recorded a bonus expense of $235,900. In this regard,we believe that all employee purchases were conducted at fair market valuebased upon a contemporaneous valuation.

 

**RecentAccounting Pronouncements**

 

In November 2004,the Financial Accounting Standards Board issued SFAS No. 151 “InventoryCosts—an amendment of ARB No. 43, Chapter 4.” This statement amendsthe guidance in Accounting Research Bulletin No. 43, Chapter 4, toclarify the accounting for abnormal amounts of idle facility expense, freight,handling costs and wasted material. This statement requires that those items berecognized as current period charges and that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. SFAS No. 151 is effective for fiscal yearsbeginning after June 15, 2005. We do not expect the adoption of thisstandard to have a significant impact on our financial position, results ofoperations or cash flows.

 

In November 2004,the EITF reached a consensus on Issue No. 03-13, “Applying the Conditionsin Paragraph 42 of FASB Statement No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets” in Determining Whether to Report DiscontinuedOperations” (“EITF 03-13”). Under the consensus, the approach for assessingwhether cash flows of the component have been eliminated from the ongoingoperations of the entity focuses on whether continuing cash flows are direct orindirect cash flows. Cash flows of the component would not be eliminated if thecontinuing cash flows to the entity are considered direct cash flows. Theconsensus should be applied to a component of an enterprise that is eitherdisposed of or classified as held for sale in fiscal periods beginning after December 15,2004. The adoption of EITF 03-13 is not expected to have a significant impacton our financial position, results of operations or cash flows.

 

In December 2004,the FASB issued SFAS No. 123R, “Share-Based Payments” (“Statement No. 123R”).Statement No. 123R requires the Company to recognize compensation expensefor equity instruments awarded to employees. Statement No. 123R iseffective for the Company as of the beginning of the first annual period thatbegins after June 15, 2005. The adoption of this standard is not expectedto have a significant impact on our financial position, results of operationsor cash flows.

 

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets” (“StatementNo. 153”). Statement No. 153 amends the guidance in APB Opinion No. 29,“Accounting for Nonmonetary Transactions” to eliminate certain exceptions tothe principle that exchanges of nonmonetary assets be measured based on thefair value of the assets exchanged. Statement No. 153 eliminates theexception of nonmonetary exchanges of similar productive assets and replaces itwith a general exception for exchanges of nonmonetary assets that do not havecommercial substance. This statement is effective for nonmonetary assetexchanges in fiscal years beginning after June 15, 2005. The adoption ofStatement No. 153 is not expected to have a significant impact on ourfinancial position, results of operations or cash flows.

 

In March 2005, theFASB issued FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations” (“FIN 47”) which clarifies guidance provided by SFAS No. 143,“Accounting for Asset Retirement Obligations.” FIN 47 is effective for theCompany no later than March 31, 2006.  The

 

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adoption of FIN 47 is not expected to have asignificant impact on our financial position, results of operations or cashflows.

 

**Results of Operations of PrestigeBrands Holdings, Inc. and Combined Medtech Holdings, Inc. and TheDenorex Company (the “predecessor”)**

 

The following table setsforth the net sales, gross profit and contribution margin (i.e., grossprofit less advertising and promotion, or A&P) by segment:

 
| ** **                | ** ** | **Fiscal year ended** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **March 31, 2005**    | ** ** | **March 31, 2004** | ** ** | **March 31, 2004** | ** ** |
| ** **                | ** ** | **(successor basis)**      | ** ** | **(combined basis(1))** | ** ** | **(pro forma basis(2))** | ** ** |
| ** **                | ** ** | **(Unaudited)**                 | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| Net Sales                 |       |                            |       |   |   |   |   |
| Over-the-counter drug     |       | $                               | 167,246    |   | $ | 55,587 |   | $ | 141,504 |   |
| Personal care             |       | 33,665                          |       | 29,870 |   | 36,945 |   |
| Household cleaning        |       | 102,407                         |       | 2,076 |   | 100,591 |   |
| Other                     |       | —                          |       | 387 |   | 387 |   |
| Total net sales           |       | $                               | 303,318    |   | $ | 87,920 |   | $ | 279,427 |   |
|                      |       |                            |       |   |   |   |   |
| Gross Profit              |       |                            |       |   |   |   |   |
| Over-the-counter drug     |       | $                               | 105,564    |   | $ | 34,922 |   | $ | 92,274 |   |
| Personal care             |       | 17,196                          |       | 15,465 |   | 18,744 |   |
| Household cleaning        |       | 39,210                          |       | 869 |   | 40,214 |   |
| Other                     |       | —                          |       | 387 |   | 387 |   |
| Total gross profit        |       | $                               | 161,970    |   | $ | 51,643 |   | $ | 151,619 |   |
|                      |       |                            |       |   |   |   |   |
| Contribution Margin       |       |                            |       |   |   |   |   |
| Over-the-counter drug     |       | $                               | 82,371     |   | $ | 27,585 |   | $ | 69,742 |   |
| Personal care             |       | 10,302                          |       | 8,728 |   | 10,261 |   |
| Household cleaning        |       | 30,895                          |       | 653 |   | 25,456 |   |
| Other                     |       | —                          |       | 387 |   | 387 |   |
| Total contribution margin |       | $                               | 123,568    |   | $ | 37,353 |   | $ | 105,846 |   |

 

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(1)             Includescombined results for the period from April 1, 2003 through February 5,2004 (predecessor basis) and the period from February 6, 2004 through March 31,2004 (successor basis).

 

(2)             Use of the term “proforma” in this table and throughout the following discussion reflects theresults of our operations as if the Spic and Span acquisition and the BonitaBay acquisition had both been completed on April 1, 2003, without givingeffect to the Vetco acquisition, which is not considered material to the proforma results.

 

**Fiscal2005 compared to Fiscal 2004**

 

The information presentedabove for the analysis of net sales, gross profit and contribution margin forfiscal 2005 compared to fiscal 2004 was derived by comparing the financialstatements for fiscal 2005 of Prestige Holdings to (1) the sum of thehistorical financial statements of the predecessor company for the period from April 1,2003 to February 5, 2004 and (2) the results of Prestige Holdings forthe period from February 6, 2004 through March 31, 2004*.*

 

**NetSales. **Net salesincreased by $215.4 million, or 245.0% from $87.9 million for fiscal 2004 to$303.3 million for fiscal 2005. The sales increase was driven by theacquisitions of Spic and Span, Bonita Bay, and Vetco in March 2004, April 2004and October 2004, respectively. The Over-the-Counter Drug segment had netsales of $167.2 million for fiscal 2005, an increase of $111.6 million, or200.7% over net sales of $55.6 million for fiscal 2004. The Household CleaningSegment, which was acquired as part of the Spic and Span and Bonita Bayacquisitions, had sales of $102.4 million for fiscal 2005, a $100.3 millionincrease over net sales of $2.1 million for fiscal 2004. The Personal Caresegment had net sales of $33.7 million for fiscal 2005, a $3.8 million, or12.7%, increase over net sales of $29.9 million for fiscal 2004.

 

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On a pro forma basis, netsales increased by $23.9 million or 8.6% from $279.4 million for fiscal 2004 to$303.3 million for fiscal 2005.

 

*Over-the-CounterDrug Segment*.  On a proforma basis, the increase in overall net sales was driven by theOver-the-Counter Drug segment which had net sales of $167.2 million for fiscal2005, compared to pro forma net sales of $141.5 million in fiscal 2004. Thestrong sales performance compared to fiscal 2004 was led by *Compound W*, which benefited from verystrong *Freeze Off* sales, *Clear eyes*, and *Chloraseptic*. *Chloraseptic*had a very strong fourth quarter due to the “late” flu season in fiscal 2005compared to an “early” flu season in fiscal 2004. The *Little**Remedies*brand, acquired in the Vetco acquisition in October 2004, contributed $8.9million to sales in fiscal 2005.

 

*PersonalCare Segment*.  On a proforma basis, the Personal Care segment showed a sales decline of $3.2 million,or 8.8%, from $36.9 million for fiscal 2004 to $33.7 million for fiscal 2005.The sales decrease was driven by declines for the *Cutex* and *Denorex*brands. The *Denorex* sales declinereflected a loss in market share during fiscal 2005. The *Cutex* sales decline was reflective of adecline for the entire nail polish remover category for fiscal 2005 versusfiscal 2004.

 

*HouseholdCleaning Segment*.  On apro forma basis, the Household Cleaning segment showed a sales increase of $1.8million, or 1.8%, from pro forma net sales of $100.6 million for fiscal 2004 to$102.4 million for fiscal 2005. Both the *Comet*and *Spic and Span* brands showedsales increases over the prior year. The *Comet*sales increase was driven by increases for the *Powder*line and for the *Comet*creamproduct, as we increased distribution of that item. Partially offsetting thoseincreases were declines for the discontinued *Cleanand Flush* disposable toilet bowl brush system. The *Spic and Span* sales increase was driven byincreased distribution, particularly in the Dollar Store channel.

 

**GrossProfit**.  Gross profitincreased by $110.3 million, or 213.6%, from $51.6 million for fiscal 2004 to$162.0 million for fiscal 2005. The increase was due to the sales increasediscussed above. As a percentage of sales, gross profit declined from 58.7%fiscal 2004 to 53.4% for fiscal 2005. The decrease in gross margin as apercentage of net sales was primarily due to the acquisition of the *Spic and Span* and *Comet* brands in the Household Productssegment at the end of fiscal 2004 and the beginning of fiscal 2005,respectively. Gross margins for the *Spic andSpan* and *Comet* brandsare lower than gross margins for the Over-the-Counter Drug and Personal Caresegments.

 

On a pro forma basis,gross profit increased by $10.4 million, or 6.8%, from $151.6 million forfiscal 2004 to $162.0 million for fiscal 2005. The increase in gross margin wasdue to the sales increase. Gross profit as a percentage of sales was 53.4% forfiscal 2005, which was below the gross profit percentage of 54.3% for fiscal2004. The decline was almost entirely due to the effect of the inventorystep-up resulting from the acquisition of the business by GTCR. Excluding theinventory step-up costs of $5.3 million in fiscal 2005 and $3.0 million infiscal 2004 would have resulted in gross profit percentages of 55.1% for fiscal2005 and 55.3 % for fiscal 2004.

 

*Over-the-CounterDrug Segment*.  On a proforma basis, the Over-the-Counter Drug segment’s gross profit increased by$13.3 million, or 14.4%, from $92.3 million for fiscal 2004 to $105.6 millionfor fiscal 2005. The increase in gross profit was due to the sales increase. Asa percentage of sales, gross profit for fiscal 2005 declined to 63.1% from65.2% for fiscal 2004. The decline in gross profit as a percentage of sales wasprimarily due to sales mix, as *Compound WFreeze Off*, with a gross margin percentage less favorable than theaverage of the Over-the-Counter Drug segment, accounted for a larger portion ofsegment sales in fiscal 2005.

 

*PersonalCare Segment*.  On a proforma basis, gross profit for the Personal Care segment declined by $1.5million, or 8.3%, from $18.7 million for fiscal 2004 to $17.2 million forfiscal 2005. The decrease in gross profit was due to the sales decline. Grossprofit as a percentage of sales improved from 50.7% for fiscal 2004 to 51.1%for fiscal 2005. The improvement in gross profit as a percentage of sales wasdue to sales mix.

 

*HouseholdCleaning Segment*.  On apro forma basis, the Household cleaning segment’s gross profit declined by $1.0million, or 2.5%, from $40.2 million for fiscal 2004 to $39.2 million forfiscal 2005. Excluding charges related to the inventory step-ups of $2.4million for fiscal 2005 and $1.8 million for fiscal

 

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2004, gross profit would have been $41.6 million, or40.6%, for fiscal 2005 compared to $42.0 million, or 41.8%, for fiscal 2004.The slight decline in gross profit as a percentage of sales was due toincreased shipments to lower gross margin Dollar Stores and close out sales of *Comet Clean and Flush*.

 

**ContributionMargin**.  Contributionmargin increased by $86.2 million, or 230.8%, from $37.4 million for fiscal2004 to $123.6 million for fiscal 2005. The increase in contribution margin wasdue to the increased gross profit discussed above, partially offset byincreased advertising and selling expenses associated with the acquisitions ofthe Spic and Span, Bonita Bay and Vetco brands.

 

On a pro forma basis,contribution margin increased by $17.7 million, or 16.7%, from $105.8 millionfor fiscal 2004 to $123.6 million for fiscal 2005. The increase in contributionmargin was due to the increased gross profit combined with a decrease inadvertising and selling expenses. The decrease in advertising and sellingexpenses from fiscal 2004 to fiscal 2005 was primarily due to synergy savingsrelated to advertising agency fees, media buying service fees and sales brokercommissions. In addition, approximately $2.5 million of advertising and sellingexpenses related to the *Comet Clean andFlush* disposable toilet bowl brush in fiscal 2004 were not repeatedin fiscal 2005.

 

*Over-the-CounterDrug Segment*.  Proforma contribution margin for the Over-the-Counter Drug segment increased by$12.6 million, or 18.1%, from $69.7 million for fiscal 2004 to $82.4 millionfor fiscal 2005. The increase in pro forma contribution margin was driven bythe sales increase.

 

*PersonalCare Segment*.  Proforma contribution margin for the Personal Care segment was flat at $10.3million for fiscal 2005 and fiscal 2004. A reduction in advertising and sellingexpenses, primarily driven by the synergies discussed above, offset thereduction in gross margin.

 

*HouseholdCleaning Segment. *Proforma contribution margin for the Household Cleaning segment increased by $5.4million, or 21.4%, from $25.5 million for fiscal 2004 to $30.9 million forfiscal 2005. The increase was driven by the reduction in advertising andselling expenses resulting from the synergies discussed above and theelimination of support behind the discontinued *CometClean and Flush* product.

 

**Generaland Administrative Expenses**. General and Administrative expenses increased by $6.5 million, or 47.2%,from $13.7 million for fiscal 2004 to $20.2 million for fiscal 2005. Theincrease was due to the additional expenses associated with adding the brandsacquired in the Spic and Span, Bonita Bay and Vetco acquisitions to theportfolio.

 

On a pro forma basis,general and administrative expenses decreased by $6.9 million, or 25.5%, from$27.1 million for fiscal 2004 to $20.2 million for fiscal 2005. The decreasefrom fiscal 2004 resulted from the synergies achieved as a result of thecombination of the Medtech, Spic and Span and Bonita Bay companies in fiscal2005, and the non-recurrence of a one time bonus paid to management in fiscal2004 related to the Medtech Acquisition.

 

**Depreciationand Amortization Expense. **Depreciationand amortization expense increased by $4.4 million, or 80.5%, from $5.4 millionfor fiscal 2004 to $9.8 million for fiscal 2005. The increase was primarily dueto amortization of intangible assets related to acquisitions and an increase indepreciation related to the Bonita Bay Acquisition.

 

**InterestExpense, net**.  Netinterest expense increased by $34.8 million, or 351.5%, from $9.9 million forfiscal 2004 to $44.7 million for fiscal 2005. The increase in interest expensewas primarily due to the increased levels of indebtedness outstanding after theacquisitions.

 

**Loss onExtinguishment of Debt. **Forfiscal 2005 the loss on extinguishment of debt was $26.9 million, compared to$0 for fiscal 2004. The $26.9 million loss on extinguishment of debt consistedof $19.3 million of charges related to the $184.0 million of debt retired inconnection with our Initial Public Offering and $7.6 million related to thewrite-off of deferred financing costs and discount on debt associated with theborrowings retired in connection with the Medtech Acquisition.

 

**IncomeTaxes**.  The income taxprovision for fiscal 2005 was $8.5 million, with an effective rate of 38.8%,compared to a provision of $2.7 million for fiscal 2004, with an effective rateof 39.6%. The difference between the U.S. federal statutory rate of 34% and theeffective rates was primarily due to state income taxes.

 

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**AdjustedEarnings Before Interest Depreciation and Amortization (“Adjusted EBITDA”).**  AdjustedEBITDA is defined as income before taxes, interest expense, depreciation,amortization and certain other non-recurring items. Adjusted EBITDA ispresented because it is our understanding that certain members of the financialcommunity use this as another measure of the company’s financial results andoperating performance. Adjusted EBITDA should not be considered as analternative to, or more meaningful than, amounts determined in accordance withgenerally accepted accounting principles. Adjusted EBITDA is not calculatedidentically by all companies, and therefore, the presentation herein may not becomparable to similarly titled measures of other companies. The following tablereconciles net income to Adjusted EBITDA:

 
| ** **                                                                         | ** ** | **Fiscal year ended**      | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **Reconciliation of Net Income to Adjusted EBITDA:** | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(successor basis)**           | ** ** | **(combined basis(1))** | ** ** |
| ** **                                                                         | ** ** | **(dollars in thousands)** | ** ** |
| Net income                                                                         |       | $                                    | 13,459     |   | $ | 4,183 |   |
| Interest expense, net                                                              |       | 44,726                               |       | 9,882 |   |
| Provision for income taxes                                                         |       | 8,522                                |       | 2,738 |   |
| Depreciation and amortization                                                      |       | 9,800                                |       | 5,429 |   |
| Loss on extinguishment of debt                                                     |       | 26,854                               |       | — |   |
| Charges due to inventory step-up                                                   |       | 5,335                                |       | 1,805 |   |
| Other non-recurring items                                                          |       | 636                                  |       | — |   |
| Adjusted EBITDA                                                                    |       | $                                    | 109,332    |   | $ | 24,037 |   |

 

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1)                 Includescombined results for the period from April 1, 2003 through February 5,2004 (predecessor basis) and the period from February 6, 2004 through March 31,2004 (successor basis).

 

The following table setsforth the net sales, gross profit and contribution margin (i.e., gross profitless advertising and promotion, or A&P) by segment:

 
| ** **            | ** ** | ** **                           | ** ** | ** **                          | ** ** | **Prestige Holdings**     | ** ** |
|-----------------------|------------|--------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|
| ** **            | ** ** | **Predecessor**                      | ** ** | **Period from**                | ** ** | **Total for**             | ** ** |
| ** **            | ** ** | **Fiscal Year Ended**      | ** ** | **Period from**                | ** ** | **February 6, 2004** | ** ** | **Twelve Months** | ** ** |
| ** **            | ** ** | **March 31,**                   | ** ** | **April 1, 2003 to** | ** ** | **to March 31,**     | ** ** | **ended** | ** ** |
| ** **            | ** ** | **2003**                             | ** ** | **February 5, 2004**      | ** ** | **2004**                       | ** ** | **March 31, 2004** | ** ** |
| ** **            | ** ** | **(dollars in thousands)** | ** ** | **(unaudited)**                     | ** ** |
| Net Sales:            |       |                                 |       |                                |       |                           |       |   |   |
| Over-the-Counter Drug |       | $                                    | 43,260     |                                | $          | 43,577                         |       | $ | 12,010 |   | $ | 55,587 |   |
| Personal Care         |       | 32,788                               |       | 25,149                              |       | 4,721                          |       | 29,870 |   |
| Household Cleaning    |       | —                               |       | —                              |       | 2,076                          |       | 2,076 |   |
| Other(1)              |       | 391                                  |       | 333                                 |       | 54                             |       | 387 |   |
| Total                 |       | $                                    | 76,439     |                                | $          | 69,059                         |       | $ | 18,861 |   | $ | 87,920 |   |
|                  |       |                                 |       |                                |       |                           |       |   |   |
| Gross profit:         |       |                                 |       |                                |       |                           |       |   |   |
| Over-the-Counter Drug |       | $                                    | 30,640     |                                | $          | 28,892                         |       | $ | 6,029 |   | $ | 34,921 |   |
| Personal Care         |       | 17,933                               |       | 13,580                              |       | 1,885                          |       | 15,465 |   |
| Household Cleaning    |       | —                               |       | —                              |       | 870                            |       | 870 |   |
| Other                 |       | 391                                  |       | 333                                 |       | 54                             |       | 387 |   |
| Total                 |       | $                                    | 48,964     |                                | $          | 42,805                         |       | $ | 8,838 |   | $ | 51,643 |   |
|                  |       |                                 |       |                                |       |                           |       |   |   |
| Contribution margin:  |       |                                 |       |                                |       |                           |       |   |   |
| Over-the-Counter Drug |       | $                                    | 23,220     |                                | $          | 22,425                         |       | $ | 5,160 |   | $ | 27,585 |   |
| Personal Care         |       | 11,079                               |       | 7,446                               |       | 1,282                          |       | 8,728 |   |
| Household Cleaning    |       | —                               |       | —                              |       | 653                            |       | 653 |   |
| Other                 |       | 391                                  |       | 333                                 |       | 54                             |       | 387 |   |
| Total                 |       | $                                    | 34,690     |                                | $          | 30,204                         |       | $ | 7,149 |   | $ | 37,353 |   |

 

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(1)             Representsrevenues related to the provision of administrative, technology and supportservices to Spic and Span prior to our acquisition of Spic and Span.

 

***Fiscal 2004 compared to fiscal 2003***

 

The information presentedabove for net sales, gross profit and contribution margin for the fiscal 2004compared to fiscal 2003 was derived from comparing (1) the historicalfinancial statements of the predecessor company for fiscal 2003 to (2) thesum of the historical financial statements of the predecessor company for theperiod from April 1, 2003 to February 5, 2004 plus the results ofPrestige Holdings for the period from February 6, 2004 through March 31,2004.

 

***Net Sales. ***Netsales increased by $11.5 million, or 15.0%, from $76.4 million forfiscal 2003 to $87.9 million for fiscal 2004. The increase in net salesincluded a $12.3 million increase in the Over-the-Counter Drug segment,and the $2.1 million impact of *Spic andSpan* (Household Cleaning segment) from the acquisition date of March 5,2004, partially offset by a $2.9 million decrease in the Personal Caresegment.

 

*Over-the-CounterDrug Segment. *Netsales increased by $12.3 million, or 28.5%, from $43.3 million forfiscal 2003 to $55.6 million for fiscal 2004. The increase in net saleswas primarily due to new products introduced during fiscal 2004. New products,led by *Compound W Freeze Off*,contributed $10.6 million of the increase. The remainder of the increasewas driven by increased domestic sales of: (i) *Compound W* of $0.7 million, or 5.2%, from$13.4 million for fiscal 2003 to $14.1 million for fiscal 2004 due toincreasing market share; and (ii) *New-Skin*of $0.8 million, or 9.2%, from $8.7 million for fiscal 2003 to$9.5 million for fiscal 2004 driven by high levels of advertising byJohnson & Johnson in support of their liquid bandage product. Theseincreases were partially offset by a decrease in *Dermoplast* sales of $0.6 million, or 6.9%, from $8.7 millionfor fiscal 2003 to $8.1 million for fiscal 2004. The decrease was due tolower demand in the beginning of fiscal 2004 following a very strong March 2003due to wholesale accounts purchasing heavily in advance of a price increase.

 

*PersonalCare Segment. *Netsales decreased by $2.9 million, or 8.9%, from $32.8 million forfiscal 2003 to $29.9 million for fiscal 2004. The decrease was primarilydue to *Denorex*, which experienceda sales decline of $2.7 million, or 17.4%, from $15.5 million forfiscal 2003 to $12.8 million for fiscal 2004. The sales decline resultedfrom a decrease in market share.

 

***Gross Profit. ***Grossprofit increased by $2.6 million, or 5.5%, from $49.0 million forfiscal 2003 to $51.6 million for fiscal 2004. The increase in gross profitincluded a $4.3 million increase in the Over-the-Counter Drug segment anda $0.9 million increase due to the impact of *Spic and Span* within the new Household Cleaning segmenteffective March 5, 2004, partially offset by a $2.5 million decreasein the Personal Care segment. Included in the cost of goods sold for the periodfrom February 6, 2004 through March 31, 2004 was a $1.8 millioncharge related to the step-up of inventory at the time of the acquisition ofthe business by GTCR.

 

*Over-the-CounterDrug Segment. *Grossprofit increased by $4.3 million, or 14.0%, from $30.6 million forfiscal 2003 to $34.9 million for fiscal 2004. The increase in gross profitwas due to the sales increase partially offset by the increased cost of goodsrelated to the inventory step-up at the time of the acquisition of the businessby GTCR. Excluding the inventory step-up expenses of $1.2 million, grossprofit as a percent of net sales declined from 70.8% for fiscal 2003 to 64.8%for fiscal 2004. The percentage decline was due to the very strong sales of *Compound W**Freeze Off*, which has a higher cost of goods as a percent ofsales than the other products in the segment.

 

*PersonalCare Segment. *Grossprofit decreased by $2.5 million, or 13.8%, from $17.9 million forfiscal 2003 to $15.5 million for fiscal 2004. Excluding theacquisition-related expenses of $0.6 million, gross profit as a percent ofsales decreased slightly, from 54.6% for fiscal 2003 to 53.8% for fiscal 2004.The decline was due to product mix as the *Denorex*line, which experienced a sales decline of $2.7 million as previouslydiscussed, has a higher gross profit margin than the rest of the products inthe Personal Care segment.

 

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***Contribution Margin. ***Contributionmargin increased by $2.7 million, or 7.7%, from $34.7 million forfiscal 2003 to $37.4 million for fiscal 2004. The net increase incontribution margin included a $4.4 million increase in theOver-the-Counter Drug segment and $0.7 million of contribution marginrelated to *Spic and Span*(Household Cleaning segment), partially offset by a $2.4 million decreasein the Personal Care segment.

 

*Over-the-CounterDrug Segment. *Contributionmargin increased by $4.4 million, or 18.8%, from $23.2 million forfiscal 2003 to $27.6 million for fiscal 2004. The increase in contributionmargin was due to the gross profit increase discussed above.

 

*PersonalCare Segment. *Contributionmargin decreased by $2.4 million, or 21.2%, from $11.1 million forfiscal 2003 to $8.7 million for fiscal 2004. The decrease in contributionmargin was due to the gross profit decrease discussed above.

 

***General and Administrative Expenses. ***General andadministrative expenses were $12.1 million (15.9% of net sales) for fiscal2003, compared to 11.0 million (excluding the bonus of $2.6 million paid inconnection with Medtech Acquisition) for fiscal 2004. The overall decrease ingross general and administrative dollars and as a percentage of net sales wasprimarily due to both the Company’s ability to add *Spic and Span* with virtually no incremental overhead and theimpact of increased sales on a relatively fixed base of general andadministrative costs.

 

***Depreciation and Amortization Expense. ***Depreciation andamortization expense was $5.3 million (6.9% of net sales) for fiscal 2003,$4.5 million (6.5% of net sales) for the period from April 1 2003through February 5, 2004 and $0.9 million (5.0% of net sales) for theperiod from February 6, 2004 through March 31, 2004. The increase ingross dollars was primarily due to the amortization of intangible assetsrelated to the Medtech/Denorex and Spic and Span acquisitions.

 

***Interest Expense, net. ***Interest expense, net was $9.7 million forfiscal 2003, $8.2 million for the period from April 1, 2003 through February 5,2004 and $1.7 million for the period from February 6, 2004 through March 31,2004. The overall increase in interest expense, net, during fiscal 2004 wasprimarily due to the increase in net indebtedness resulting from the Medtech/Denorexand Spic and Span acquisitions.

 

***Other Expense. ***Otherexpense was $0.7 million for fiscal 2003. The other expense in fiscal 2003was comprised of a loss on extinguishment of debt.

 

***Income Taxes. ***Thetax provision for fiscal year 2003 was $3.9 million with an effective taxrate of 56.5%. The difference between the U.S. federal statutory rate of 34%and the effective rate relates primarily to changes in the valuation allowance,the federal benefit of deductible state taxes, a change in the effective statetax rate and the amortization of intangible assets. The tax provision for theperiod from April 1, 2003 through February 5, 2004 was$1.7 million, with an effective rate of 41.3%. The difference between theU.S. federal statutory rate of 34% and the effective rate was primarily relatedto changes in the valuation allowance, state income taxes (net of federalincome tax benefit) and the amortization of intangible assets. The taxprovision for the period from February 6, 2004 through March 31, 2004was $1.1 million, with an effective rate of 37.1%. The difference betweenthe U.S. federal statutory rate of 34% and the effective rate was primarilyrelated to state income taxes, net of federal income tax benefit.

 

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**Resultsof Operations for Bonita Bay Holdings, Inc.**

 

The following table setsforth for the last two completed fiscal years prior to acquisition the netsales, gross profit and contribution margin (i.e., gross profit less A&P)by segment:

 
| ** **                 | ** ** | **Fiscal Year Ended  December 31,** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|
| ** **                 | ** ** | **2002**                                           | ** ** | **2003** | ** ** |
| Net sales:                 | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Over-the-Counter Drug |       | $                                                  | 26,812     |   | $ | 83,251 |   |
| Personal Care              |       | 8,384                                              |       | 6,646 |   |
| Household Cleaning         |       | 75,370                                             |       | 77,173 |   |
| Total                      |       | $                                                  | 110,566    |   | $ | 167,070 |   |
|                       |       |                                               |       |   |   |
| Gross profit:              |       |                                               |       |   |   |
| Over-the-Counter Drug |       | $                                                  | 17,172     |   | $ | 51,219 |   |
| Personal Care              |       | 2,735                                              |       | 2,605 |   |
| Household Cleaning         |       | 32,211                                             |       | 30,582 |   |
| Total                      |       | $                                                  | 52,118     |   | $ | 84,406 |   |
|                       |       |                                               |       |   |   |
| Contribution margin:       |       |                                               |       |   |   |
| Over-the-Counter Drug |       | $                                                  | 12,261     |   | $ | 39,193 |   |
| Personal Care              |       | 902                                                |       | 1,363 |   |
| Household Cleaning         |       | 28,822                                             |       | 24,325 |   |
| Total                      |       | $                                                  | 41,985     |   | $ | 64,881 |   |

 

***Year ended December 31, 2003 compared to year ended December 31,2002***

 

***Net Sales. ***Netsales increased by $56.5 million, or 51.1%, from $110.6 million forthe year ended December 31, 2002 to $167.1 million for the year endedDecember 31, 2003. The increase in net sales included a $56.5 millionincrease in the Over-the-Counter Drug segment, a $1.8 million decrease inthe Personal Care segment and a $1.8 million increase in the HouseholdCleaning segment.

 

*Over-the-CounterDrug Segment. *Netsales increased by $56.5 million, or 210.5%, from $26.8 million forthe year ended December 31, 2002 to $83.3 million for the year ended December 31,2003. The increase in net sales was primarily due to the acquisition of *Clear eyes* and *Murine*, which was effective December 30, 2002 andcontributed $47.8 million of net sales to the year ended December 31,2003. New product introductions, which increased market share, and a strongcold and flu season attributed to an increase in *Chloraseptic* net sales of $8.7 million, or 32.6% from2002 to 2003. The introduction of *ReliefStrips* and the *Pocket Pump*contributed $3.7 million and $1.2 million to net sales, respectively.

 

*PersonalCare Segment. *Netsales declined by $1.8 million, or 20.7% from $8.4 million for theyear ended December 31, 2002 to $6.6 million for the year ended December 31,2003. The decline in net sales was primarily the result of the 2002discontinuation of the *Prell Spa*product line.

 

*HouseholdCleaning Segment. *Netsales increased by $1.8 million, or 2.4%, from $75.4 million for theyear ended December 31, 2002 to $77.2 million for the year ended December 31,2003. The increase in net sales was primarily the result of the introduction of*Comet Clean and Flush* in October 2003representing $2.8 million of net sales for the year ended December 31,2003. Bonita Bay also introduced the *CometOrange BriteTM Bathroom Spray* and *Orange Oxygenated Soft Powder* in 2003,which generated $0.7 million of net sales in the year ended December 31,2003. The increases related to new products were partially offset by a declinein overall industry net sales for Comet’s core segment.

 

***Gross Profit. ***Grossprofit increased by $32.3 million, or 62.0%, from $52.1 million forthe year ended December 31, 2002 to $84.4 million for the year ended December 31,2003. The net increase in gross profit included a $34.0 million increasein the Over-the-Counter Drug segment, a $0.1 million decrease in thePersonal Care segment and a $1.6 million decrease in the HouseholdCleaning segment.

 

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*Over-the-CounterDrug Segment. *Grossprofit increased by $34.0 million, or 198.3%, from $17.2 million forthe year ended December 31, 2002 to $51.2 million for the year ended December 31,2003. The increase in gross profit was due, in part, to inclusion of a fullfiscal year of *Clear eyes* and *Murine* sales in 2003. New productintroductions contributed $2.4 million to 2003 gross profit, with *Relief Strips* and *Pocket Pump* contributing $1.9 millionand $0.5 million, respectively. Increased gross profit of *Chloraseptic* contributed$3.2 million. Overall gross margin declined from 64.0% for the year ended December 31,2002 to 61.5% for 2003. This decline was due to lower margins on *Chloraseptic* as a result of higher thannormal product liquidations, which generated lower margins, as well as highercosts associated with the new *Chloraseptic*products.

 

*PersonalCare Segment. *Grossprofit decreased by $0.1 million, or 4.8%, from $2.7 million for theyear ended December 31, 2002 to $2.6 million for the year ended December 31,2003. The decline in gross profit was due to a decline in sales. Gross marginincreased from 32.6% to 39.2% for the year ended December 31, 2003.

 

*HouseholdCleaning Segment. *Grossprofit decreased by $1.6 million, or 5.1%, from $32.2 million for theyear ended December 31, 2002 to $30.6 million for the year ended December 31,2003. The gross profit attributable to *Comet**Clean and Flush* was$1.1 million in 2003, which was more than offset by lower gross profitmargins on other products. Gross profit as a percent of net sales decreasedfrom 42.7% for the year ended December 31, 2002 to 39.6% for the yearended December 31, 2003 as a result of changes in product mix and higherdiscounts.

 

***Contribution Margin. ***Contributionmargin increased by $22.9 million, or 54.5%, from $42.0 million forthe year ended December 31, 2002 to $64.9 million for the year ended December 31,2003. The net increase in contribution margin included a $26.9 millionincrease in the Over-the-Counter Drug segment, a $0.5 million increase inthe Personal Care segment and a $4.5 million decrease in the HouseholdCleaning segment.

 

*Over-the-CounterDrug Segment. *Contributionmargin increased by $26.9 million, or 219.6%, from $12.3 million forthe year ended December 31, 2002 to $39.2 million for the year ended December 31,2003. A&P expenses increased $7.1 million, or 144.9%, from$4.9 million to $12.0 million, which was attributable to$6.3 million for *Clear eyes*and *Murine* as well as$0.8 million for *Chloraseptic*.Overall contribution margin as a percentage of net sales increased from 45.7%to 47.1% for the year ended December 31, 2002 versus 2003. This increasewas the result of adding the *Clear eyes*and *Murine* product lines.

 

*PersonalCare Segment. *Contributionmargin increased by $0.5 million, or 51.1%, from $0.9 million for theyear ended December 31, 2002 to $1.4 million for the year ended December 31,2003. A&P expenses declined $0.6 million, or 32.2%, from$1.8 million to $1.2 million during the period, due to an overallreduction in *Prell* brandspending.

 

*HouseholdCleaning Segment. *Contributionmargin decreased by $4.5 million, or 15.6%, from $28.8 million forthe year ended December 31, 2002 to $24.3 million for the year ended December 31,2003. The decrease in contribution margin was primarily due to an increase inA&P expenses of $2.9 million, or 84.6%, from $3.4 million to$6.3 million. *Comet Clean and Flush*product development and marketing costs totaling $1.2 million as well as amid-year advertising campaign for *Comet**Spray* contributed to the higherA&P expenses. Overall contribution margin as a percentage of net salesdeclined from 38.2% to 31.5% for these reasons.

 

***General and Administrative Expenses. ***General andadministrative expenses increased by $4.1 million, or 75.2%, from$5.6 million for the year ended December 31, 2002 to$9.7 million for the year ended December 31, 2003. This increase wasprimarily the result of the *Clear eyes*and *Murine* acquisition.

 

***Depreciation and Amortization Expenses. ***Depreciation andamortization expenses increased by $1.0 million, or 134.3%, from$0.7 million for the year ended December 31, 2002 to$1.7 million for the year ended December 31, 2003. The increase indepreciation and amortization was primarily the result of the *Clear eyes* and *Murine* acquisition.

 

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***Interest Expense, net. ***Interest expense, net increased by$9.3 million, or 116.1%, from $8.0 million for the year ended December 31,2002 to $17.3 million for the year ended December 31, 2003. Theincrease in interest expense was a function of the outstanding debt, whichincreased as a result of the *Clear eyes*and *Murine* acquisition.

 

***Income Taxes. ***Thetax provision for the year ended December 31, 2003 was $13.8 million,with an effective tax rate of 38.3%. The tax provision for the year ended December 31,2002 was $11.1 million, with an effective tax rate of 40.1%. In bothyears, the difference between the U.S. federal statutory rate of 34% and theeffective rate was primarily related to state income taxes, net of the federalbenefit.

 

**Liquidityand Capital Resources**

 

We have historicallyfinanced our operations with a combination of internally generated funds andborrowings. Our principal uses of cash are for operating expenses, servicinglong-term debt, acquisitions, working capital, payment of income taxes andcapital expenditures.

 
| ** **                  | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                  | ** ** | **(Successor Basis)**      | ** ** | **(Combined Basis(1))** | ** ** | **(Predecessor Basis)** | ** ** |
| Cash provided by (used in): |       |                            |       |   |   |   |   |
| Operating activities        |       | $                               | 51,042     |   | $ | 6,137 |   | $ | 12,519 |   |
| Investing activities        |       | (425,844                        | )          | (167,450 | ) | (2,165 | ) |
| Financing activities        |       | 376,743                         |       | 163,344 |   | (14,708 | ) |
|                             |            |                                 |            |  |  |  |  |  |  |  |

 

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(1)             Includescombined results for the period from April 1, 2003 through February 5,2004 (predecessor basis) and the period from February 6, 2004 through March 31,2004 (successor basis).

 

***Operating Activities***

 

***Fiscal 2005 compared to fiscal 2004***.  Net cash provided by operating activities was$51.0 million for fiscal 2005 compared to $6.1 million for fiscal 2004. The$45.0 million increase was primarily due to net income of $13.5 million,adjusted for non-cash items of $52.8 million for fiscal 2005, compared to netincome of $4.2 million, adjusted for non-cash items of $9.8 million for fiscal2004. Working capital increased by $15.2 million for fiscal 2005, primarily dueto an increase in accounts receivable of $12.4 million, due to the net sales increaseduring the period, and a decrease in accrued expenses of $11.2 million, offsetby a reduction in inventories of $5.3 million*.*

 

***Fiscal 2004 compared to fiscal 2003. ***Net cash provided byoperating activities was $6.1 million in fiscal 2004 compared to$12.5 million for fiscal 2003. The $6.4 million decrease was primarily theresult of net income of $4.2 million, adjusted for non-cash items of$9.8 million and an increase in working capital of $7.8 million in fiscal2004 compared to a net loss of $14.4 million, adjusted for non-cash items of$21.7 million and a decrease of working capital of $5.2 million for fiscal2003. The increase in working capital for fiscal 2004 was primarily related toa decrease in accrued expenses of $5.9 million.

 

***Investing Activities***

 

***Fiscal 2005 compared to fiscal 2004***.  Net cash used in investing activities was$425.8 million for fiscal 2005 compared to net cash used of $167.5 million forfiscal 2004. The net cash used in investing activities for fiscal 2005 wasprimarily for the acquisitions of Bonita Bay on April 6, 2004 and Vetco onOctober 6, 2004. The net cash used in investing activities for fiscal 2004was primarily for the acquisitions of Medtech/Denorex on February 6, 2004and Spic and Span on March 6, 2004.

 

***Fiscal 2004 compared to fiscal 2003. ***Net cash used ininvesting activities was $167.5 million in fiscal 2004 compared to net cashused of $2.2 million for fiscal 2003. The increase of $165.3 millionduring fiscal 2004 was primarily related to the acquisitions of Medtech/Denorexand Spic and Span.

 

***Financing Activities***

 

***Fiscal 2005 compared to fiscal 2004***.  Net cash provided by financing activities was$376.7 million for fiscal 2005 compared to $163.3 million for fiscal 2004. Netcash provided by financing activities for fiscal 2005 was primarily due to twoevents. In 2004, to finance the acquisitions of Bonita Bay and Vetco, the

 

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Company borrowed $698.5 million and issued preferredunits and common units of $58.7 million. The increase in debt was partiallyoffset by repayment of the debt incurred in February 2004 at the time ofthe Medtech/Denorex acquisition, the pay down of the revolving credit facilityand scheduled payments on current debt which all totaled $345.5 million. On February 15,2005 the Initial Public Offering raised $416.8 million. Proceeds were used torepay $184.0 million of debt, repurchase $199.8 million of senior preferredunits and class B preferred units, and to repurchase 4,397,950 shares of commonstock for $30.2 million.

 

***Fiscal 2004 compared to fiscal 2003. ***Net cash provided byfinancing activities for the fiscal 2004 was $163.4 million compared to netcash (used in) financing activities of ($14.7) million in fiscal 2003. Theincrease in cash provided by financing activities in fiscal 2004 was primarilya result of capital contributions of $100.4 million and a net increase inindebtedness of $74.6 million related to the acquisition of Medtech/Denorex andSpic and Span. Cash flows used in financing activities during fiscal 2003 wereattributed to scheduled pay down of the Medtech’s senior bank facilities.

 

***Capital Resources***

 

In connection with theBonita Bay acquisition, our subsidiary, Prestige Brands, Inc., enteredinto a senior credit facility and issued senior subordinated notes. We usedborrowings under the senior credit facility and proceeds from the issuance ofthe senior subordinated notes, as well as proceeds from the issuance ofadditional equity securities, to fund the acquisition purchase price, refinanceexisting indebtedness and provide funds for working capital and generalcorporate purposes. Prestige Brands, Inc. borrowed approximately $458.5million under the senior credit facility in connection with the Bonita Bayacquisition and $30.0 million in connection with the Vetco acquisition.

 

In connection with theBonita Bay acquisition, Prestige Brands, Inc. also issued$210.0 million of 91/4% senior subordinated notesdue 2012. The notes are guaranteed by Prestige Brands International, LLC,our intermediate holding company, and all of its domestic subsidiaries, otherthan the issuer (Prestige Brands, Inc.), on a senior subordinated basis.The indenture governing the notes contains covenants restricting specifiedcorporate actions, including, incurrence of indebtedness, payment of dividendsand other specified payments, making loans and investments, creating liens,asset dispositions, acquisitions, changes of control and transactions withaffiliates.

 

On February 15,2005, our initial public offering of common stock resulted in net proceeds of$416.8 million. The proceeds were used to repay the $100.0 million outstandingunder the tranche C facility of our senior credit facility (plus a repaymentpremium of $3.0 million and accrued interest of $0.5 million as of February 15,2005), and to redeem $84.0 million in aggregate principal amount of ourexisting 91/4% senior subordinated notes (plus aredemption premium of $7.8 million and accrued interest of$3.3 million as of March 18, 2005). Effective upon the completion ofthe initial public offering, we entered into an amendment to the creditagreement that, among other things, allows us to increase the indebtednessunder our tranche B facility by $200.0 million and allows for an increase inour revolving credit facility up to $60 million.

 

As of March 31,2005, we had an aggregate of $495.4 million of outstanding indebtedness,which consisted of the following:

 

•       an aggregate of$369.4 million of borrowings under the term loan facility, and

 

•       $126.0 million of 91/4%senior subordinated notes due 2012.

 

We had $60.0 million ofborrowing capacity under the revolving credit facility at such time.

 

All loans under thesenior credit facility bear interest at floating rates, which can be either abase rate, based on the prime rate, or, at our option, a LIBOR rate, plus anapplicable margin. As of March 31, 2005, an aggregate of $369.4 millionwas outstanding under the term loans at a weighted average interest rate of6.4%.

 

On June 30, 2004, wepaid $52 for a 5% interest rate cap agreement with a notional amount of $20.0million. The interest rate cap terminates in June 2006. On March 7,2005, we paid $2.3 million for interest rate cap agreements that becomeeffective August 30, 2005, with a total notional amount of $180.0 million

 

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and LIBOR cap rates ranging from 3.25% to 3.75%. Theinterest rate cap agreements terminate on May 30, 2006, 2007 and 2008 asto $50 million, $80 million and $50 million, respectively. The fair value ofthe interest rate cap agreements was $2.8 million at March 31, 2005.

 

The term loan facilitymatures in April 2011. We must make quarterly amortization payments on theterm loan facility equal to 0.25% of the initial principal amount of the termloan. The revolving credit facility matures and the commitments relating to therevolving credit facility terminate in April 2009. The obligations underthe senior credit facility are guaranteed on a senior basis by Prestige BrandsInternational, LLC, our intermediate holding company, and all of itsdomestic subsidiaries, other than the issuer (Prestige Brands, Inc.) andare secured by substantially all of our assets.

 

The senior creditfacility contains various financial covenants, including financial covenantsthat require us to maintain certain leverage ratios, interest coverage ratiosand fixed charge coverage ratios, as well as covenants restricting us fromundertaking specified corporate actions, including, asset dispositions,acquisitions, payment of dividends and other specified payments, changes ofcontrol, incurrence of indebtedness, creation of liens, making loans andinvestments and transactions with affiliates. Our senior credit facilityagreement, dated April 6, 2004, requires that adjusted EBITDA be used asthe basis for calculating our leverage and interest coverage ratios. We were incompliance with our financial and restrictive covenants under the creditfacility at March 31, 2005.

 

Our principal sources offunds are anticipated to be cash flows from operating activities and availableborrowings under the revolving credit facility. We believe that these fundswill provide us with sufficient liquidity and capital resources for us to meetour current and future financial obligations, as well as to provide funds forworking capital, capital expenditures and other needs for at least the next12 months. We regularly review acquisition opportunities and otherpotential strategic transactions, which may require additional debt or equityfinancing.

 

**Commitments**

 

As of March 31,2005, we had ongoing commitments under various contractual and commercialobligations as follows:

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | ** **                                | ** ** | **Less than** | ** ** | **1 to 3** | ** ** | **4 to 5** | ** ** | **After 5** | ** ** |
| **Contractual Obligations**   | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| ** **                         | ** ** | **(in millions)**                    | ** ** |
| Long-term debt                     |       | $                                         | 495.4      |   | $ | 3.7 |   | $ | 7.5 |   | $ | 7.5 |   | $ | 476.7 |   |
| Interest on long-term debt(1)      |       | 218.7                                     |       | 31.7 |   | 62.4 |   | 62.0 |   | 62.6 |   |
| Operating leases                   |       | 1.6                                       |       | 0.5 |   | 0.7 |   | 0.4 |   | — |   |
| Total contractual cash obligations |       | $                                         | 715.7      |   | $ | 35.9 |   | $ | 70.6 |   | $ | 69.9 |   | $ | 539.3 |   |

 

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(1)             Representsthe estimated interest obligations on the outstanding balance of the Tranche Bterm loan and the outstanding balance of the senior subordinated notes,together, assuming scheduled principal payments (based on the terms of the loanagreements) were made and assuming a weighted average interest rate of 6.4%.Estimated interest obligations would be different under different assumptionsregarding interest rates or timing of principal payments. If interest rates onborrowings with variable rates increased by 1%, interest expense would increaseapproximately $3.7 million, in the first year.

 

**Off-BalanceSheet Arrangements**

 

We do not have anyoff-balance sheet arrangements or financing activities with special-purposeentities.

 

**Inflation**

 

Inflationary factors suchas increases in the costs of raw materials, packaging materials, purchasedproduct and overhead may adversely affect our operating results. Although we donot believe that inflation

 

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has had a material impact on our financial position orresults of operations for the periods referred to above, a high rate ofinflation in the future may have an adverse effect on us and our operatingresults.

 

**Seasonality**

 

The first quarter of ourfiscal year typically has the lowest level of revenue due to the seasonalnature of certain of our brands relative to the summer and winter months. Inaddition, the first quarter is the least profitable quarter due the increasedadvertising and promotional spending to support those brands with a summerseason, such as, *Compound W*, *Cutex* and *NewSkin*. The company’s advertising and promotional campaign in thethird quarter influence sales in the fourth quarter winter months.Additionally, the fourth quarter has the lowest level of advertising andpromotional spending as a percent of revenue.

 

**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

This document and thedocuments incorporated by reference in this statement may contain “forward-lookingstatements” that reflect, when made, our expectations or beliefs concerningfuture events that involve risks and uncertainties, including:

 

•       general economic conditionsaffecting our products and their respective markets,

 

•       the high level ofcompetition in our industry and markets,

 

•       our dependence on a limitednumber of customers for a large portion of our sales,

 

•       disruptions in ourdistribution center,

 

•       acquisitions or otherstrategic transactions diverting managerial resources, or incurrence ofadditional liabilities or integration problems associated with suchtransactions,

 

•       changing consumer trends,pricing pressures which may cause us to lower our prices,

 

•       increases in supplierprices,

 

•       changes in our seniormanagement team,

 

•       our ability to protect ourintellectual property rights,

 

•       our dependency on thereputation of our brand names,

 

•       shortages of supply ofsourced goods or interruptions in the manufacturing of our products,

 

•       our level of debt, and abilityto service our debt

 

•       our ability to obtainadditional financing, and

 

•       the restrictions imposed byour senior credit facility and the indenture on our operations.

 

All statements other thanstatements of historical facts included in this Form 10-K/A, including,without limitation, the statements under “Business,” “Risk Factors,” “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” andelsewhere are forward-looking statements. Although we believe that the expectationsreflected in such forward-looking statements are reasonable, such expectationsmay prove not to have been correct.

 

Forward-lookingstatements speak only as of the date of this Form 10-K/A. Except asrequired under federal securities laws and the rules and regulations ofthe Securities and Exchange Commission, we do not have any intention to updateany forward-looking statements to reflect events or circumstances arising afterthe date of this Form 10-K/A, whether as a result of new information, futureevents or otherwise. As a result of these risks and uncertainties, readers arecautioned not to place undue reliance on forward-looking statements included inthis Form 10-K/A or that may be made elsewhere from time to time by, or onbehalf of, us. All forward-looking statements attributable to us are expresslyqualified by these cautionary statements.

 

39

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This Form 10-K/Acontains forward looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995 (the “Act”), including informationwithin Management’s Discussion and Analysis of Financial Condition and Resultsof Operations. The following cautionary statements are being made pursuant tothe provisions of the Act and with the intention to obtaining the benefits ofthe “safe harbor” provisions of the Act. Although we believe that ourexpectations are based on reasonable assumptions, actual results may differmaterially from those in the forward looking statement.

 

These forward-lookingstatements may or may not contain the words “believe,” “anticipate,” “expect,” “estimate,”“project,” “will be,” “will continue,” “will likely result,” or other similarwords and phrases. Forward-looking statements and our plans and expectations aresubject to a number of risks and uncertainties that could cause actual resultsto differ materially from those anticipated, and our business in general issubject to risks that could affect the value of the notes. For moreinformation, see “Risk Factors.”

 
| **ITEM  7A****.** | ** ** | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** |
|-------------------|------------|-----------------------------------------------------------------|

 

 

We are exposed to changesin interest rates because our senior credit facility is variable rate debt.Interest rate changes, therefore, generally do not affect the market value ofsuch debt, but do impact the amount of our interest payments and, therefore,our future earnings and cash flows, assuming other factors are held constant.At March 31, 2005, we had variable rate debt of approximately$369.4 million related to our Tranche B term loan and zero balanceoutstanding on our Revolving Credit Facility. Holding other variables constant,including levels of indebtedness, a one percentage point increase in interestrates on our variable debt would have an adverse impact on pre-tax earnings andcash flows for the next year of approximately $3.7 million.

 

On June 30, 2004, wepaid $52 for a 5% interest rate cap agreement with a notional amount of $20.0million. The interest rate cap terminates in June 2006. On March 7,2005 we paid $2.3 million for interest rate cap agreements that becomeeffective August 30, 2005, with a total notional amount of $180.0 millionand LIBOR cap rates ranging from 3.25% to 3.75%. The interest rate capagreements terminate on May 30, 2006, 2007 and 2008 as to $50 million, $80million and $50 million, respectively. The fair value of the interest rate capagreements was $2,803 at March 31, 2005.

 
| **ITEM  8****.** | ** ** | **FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA** |
|------------------|------------|--------------------------------------------------|

 

The financial statementsand supplementary data required by this item are included in Part IV, Item15 of this Form 10-K/A and are presented beginning on page F-1.

 
| **ITEM  9****.** | ** ** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|------------------|------------|-------------------------------------------------------------------------------------------|

 

None.

 
| **ITEM  9A****.** | **CONTROLS  AND PROCEDURES** |
|-------------------|------------------------------|

 

**Evaluationof Disclosure Controls and Procedures**

 

Under the supervision andwith the participation of our management, including our principal executiveofficer and our principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures, as such term is defined under Rule 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934. Based on thisevaluation, our principal executive officer and our principal financial officerconcluded that the Company and Prestige International maintained effectivedisclosure controls and procedures as of the end of the period covered by thisreport.

 

**Changesin Internal Controls**

 

During the year ended March 31,2005, there was no change in the Company’s or Prestige International’s internalcontrol over financial reporting that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

40

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| **ITEM  9B****.** | **OTHER  INFORMATION** |
|-------------------|------------------------|

 

 

None.

 

**Part III****.**

 
| **ITEM  10****.** | **DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT** |
|-------------------|---------------------------------------------------------|

 

 

Information called for bythis Item relating to the directors and executive officers is contained inPrestige Brands Holdings, Inc.’s Proxy Statement for the 2005 AnnualMeeting of Stockholders, which is incorporated herein by reference.

 
| **ITEM  11****.** | **EXECUTIVE  COMPENSATION** |
|-------------------|-----------------------------|

 

Information called for bythis Item relating to executive compensation is contained in Prestige BrandsHoldings, Inc.’s Proxy Statement for the 2005 Annual Meeting ofStockholders, which is incorporated herein by reference.

 
| **ITEM  12****.** | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS** |
|-------------------|------------------------------------------------------------------------------------------------------|

 

Information called for bythis Item relating to security ownership of certain beneficial owners and managementis contained in Prestige Brands Holdings, Inc.’s Proxy Statement for the2005 Annual Meeting of Stockholders, and is incorporated herein by reference.

 
| **ITEM  13****.** | **CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS** |
|-------------------|-----------------------------------------------------|

 

Information called for bythis Item relating to certain relationships and related transactions iscontained in Prestige Brands Holdings, Inc.’s Proxy Statement for the 2005Annual Meeting of Stockholders, which is incorporated herein by reference.

 
| **ITEM  14****.** | **PRINCIPAL  ACCOUNTANT FEES AND SERVICES** |
|-------------------|---------------------------------------------|

 

Information called for bythis Item relating to principal accountant fees and services is contained inPrestige Brands Holdings, Inc.’s Proxy Statement for the 2005 Annual Meeting ofStockholders, which is incorporated herein by reference.

 

41

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** **

**Part IV.**

 
| **ITEM 15**. | **EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES** |
|--------------|-------------------------------------------------|

 

**(a)****            ****1.   Financial Statements**

 
| **Prestige  Brands Holdings, Inc.**                                                                                                                                                                                                                                                                                               |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Reports of  independent registered public accounting firm (PricewaterhouseCoopers LLP)                                                                                                                                                                                                                                                 |
| Statements of  operations (for year ended March 31, 2005, the period from February 6,  2004 to March 31, 2004 (successor basis) and the period from April 1,  2003 to February 5, 2004 and the year ended March 31, 2003  (predecessor basis))                                                           |
| Balance sheets  (as of March 31, 2005 and 2004 (successor basis))                                                                                                                                                                                                                                                                 |
| Statements of  cash flows (for year ended March 31, 2005, the period from February 6,  2004 to March 31, 2004 (successor basis) and the period from April 1,  2003 to February 5, 2004 and the year ended March 31, 2003 (predecessor  basis))                                                           |
| Statements of  members’ and shareholders’ equity and comprehensive income (for year ended March 31,  2005, the period from February 6, 2004 to March 31, 2004 (successor  basis) and the period from April 1, 2003 to February 5, 2004 and the  year ended March 31, 2003 (predecessor basis)) |
| Notes to  consolidated financial statements                                                                                                                                                                                                                                                                                            |
| Schedule II—Valuation  and Qualifying Accounts                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                   |
| **Prestige  Brands International, LLC**                                                                                                                                                                                                                                                                                                |
| Reports of  independent registered public accounting firm (PricewaterhouseCoopers LLP)                                                                                                                                                                                                                                                 |
| Statements of  operations (for year ended March 31, 2005, the period from February 6,  2004 to March 31, 2004 (successor basis) and the period from April 1,  2003 to February 5, 2004 and the year ended March 31, 2003  (predecessor basis))                                                           |
| Balance sheets  (as of March 31, 2005 and 2004 (successor basis))                                                                                                                                                                                                                                                                 |
| Statements of  cash flows (for year ended March 31, 2005, the period from February 6,  2004 to March 31, 2004 (successor basis) and the period from April 1,  2003 to February 5, 2004 and the year ended March 31, 2003  (predecessor basis))                                                           |
| Statements of  members’ equity and comprehensive income (for year ended March 31, 2005,  the period from February 6, 2004 to March 31, 2004 (successor  basis) and the period from April 1, 2003 to February 5, 2004 and  the year ended March 31, 2003 (predecessor basis))                        |
| Notes to  consolidated financial statements                                                                                                                                                                                                                                                                                            |
| Schedule II—Valuation  and Qualifying Accounts                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                   |
| **Bonita  Bay Holdings, Inc.**                                                                                                                                                                                                                                                                                                    |
| Report of  independent registered certified public accountants (Ernst &  Young LLP)                                                                                                                                                                                                                                      |
| Consolidated  balance sheets (at December 31, 2003 and 2002)                                                                                                                                                                                                                                                                      |
| Consolidated  statements of income (for the years ended December 31, 2003, 2002 and  2001)                                                                                                                                                                                                                                        |
| Consolidated  statements of stockholders’ equity (for the years ended December 31,  2003, 2002 and 2001)                                                                                                                                                                                                                     |
| Consolidated  statements of cash flows (for the years ended December 31, 2003, 2002  and 2001)                                                                                                                                                                                                                                    |
| Notes to  consolidated financial statements                                                                                                                                                                                                                                                                                            |

 

**2.****                ****Financial Statement Schedules**

 

Schedule IIValuation and Qualifying Accounts listed in (a)(1) above is includedherein. Schedules other than those listed in the preceding sentence have beenomitted as they are either not required, not applicable, or the information hasotherwise been shown in the consolidated financial statements or notes thereto.

 

42

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**3.****          ****Exhibits**

 

Theexhibits listed below are filed as part of, or incorporated by reference into,this Form 10-K/A.

 

**EXHIBIT INDEX**

 
| 3.1  |   | Amended and Restated Certificate of Incorporation of  Prestige Brands Holdings, Inc.* |
|------|--------|--------------------------------------------------------------------------------------------|
| 3.2  |   | Amended and Restated Bylaws of Prestige Brands  Holdings, Inc.*                       |
| 3.3  |   | Certificate of Incorporation of Prestige Brands, Inc.**                               |
| 3.4  |   | Bylaws of Prestige Brands, Inc.**                                                     |
| 3.5  |   | Certificate of Formation of Prestige Brands  International, LLC.**                    |
| 3.6  |   | Limited Liability Company Agreement of Prestige  Brands International, LLC.**         |
| 3.7  |   | Certificate of Incorporation of Prestige Household  Holdings, Inc.**                  |
| 3.8  |   | Bylaws of Prestige Household Holdings, Inc.**                                         |
| 3.9  |   | Certificate of Incorporation of Prestige Household  Brands, Inc.**                    |
| 3.10 |   | Bylaws of Prestige Household Brands, Inc.**                                           |
| 3.11 |   | Certificate of Incorporation of The Comet Products  Corporation.**                         |
| 3.12 |   | Bylaws of The Comet Products Corporation.**                                                |
| 3.13 |   | Certificate of Incorporation of The Spic and Span  Company.**                              |
| 3.14 |   | Bylaws of The Spic and Span Company.**                                                     |
| 3.15 |   | Certificate of Incorporation of Prestige Products  Holdings, Inc.**                   |
| 3.16 |   | Bylaws of Prestige Products Holdings, Inc.**                                          |
| 3.17 |   | Certificate of Formation of Prestige Acquisition  Holdings, LLC.**                    |
| 3.18 |   | Limited Liability Company Agreement of Prestige  Acquisition Holdings, LLC.*8         |
| 3.19 |   | Articles of Incorporation of Bonita Bay Holdings, Inc.**                              |
| 3.20 |   | Bylaws of Bonita Bay Holdings, Inc.**                                                 |
| 3.21 |   | Articles of Incorporation of Prestige Brands  Holdings, Inc.**                        |
| 3.22 |   | Bylaws of Prestige Brands Holdings, Inc.**                                            |
| 3.23 |   | Articles of Incorporation of Prestige Brands  International, Inc.**                   |
| 3.24 |   | Bylaws of Prestige Brands International, Inc.**                                       |
| 3.25 |   | Certificate of Incorporation of Prestige Brands  Financial Corporation.**                  |
| 3.26 |   | Bylaws of Prestige Brands Financial Corporation.**                                         |
| 3.27 |   | Certificate of Incorporation of Medtech Holdings, Inc.**                              |
| 3.28 |   | Bylaws of Medtech Holdings, Inc. (f/k/a Pecos  Acquisition Company).**                |
| 3.29 |   | Certificate of Incorporation of Medtech  Products Inc.**                              |
| 3.30 |   | Bylaws of Medtech Products Inc.**                                                     |
| 3.31 |   | Articles of Incorporation of Pecos Pharmaceutical, Inc.**                             |
| 3.32 |   | Bylaws of Pecos Pharmaceutical, Inc. (f/k/a  Stuart Millheiser Incorporated).**       |
| 3.33 |   | Certificate of Incorporation of The Cutex Company.**                                       |
| 3.34 |   | Bylaws of The Cutex Company.**                                                             |
| 3.35 |   | Certificate of Incorporation of Prestige Personal  Care Holdings, Inc.**              |
| 3.36 |   | Bylaws of Prestige Personal Care Holdings, Inc.**                                     |
| 3.37 |   | Certificate of Incorporation of Prestige Personal  Care, Inc.**                       |
| 3.38 |   | Bylaws of Prestige Personal Care, Inc.**                                              |
| 3.39 |   | Certificate of Incorporation of The Denorex  Company.**                                    |
| 3.40 |   | Bylaws of The Denorex Company.**                                                           |
| 3.41 |   | Certificate of Incorporation of Vetco, Inc.**                                         |

 

43

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| 3.42   |   | Bylaws of Vetco, Inc. (f/k/a Vetco  Pharmaceuticals, Inc.).**                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1    |   | Form of stock certificate for common stock.*                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.2    |   | Indenture, dated April 6, 2004, among Prestige  Brands, Inc., each Guarantor thereto and U.S. Bank National Association,  as Trustee.*                                                                                                                                                                                                                                                                                                                   |
| 10.1   |   | Credit Agreement, dated April 6, 2004, among  Prestige Brands, Inc., Prestige Brands International, LLC, the Lenders  thereto, the Issuers thereto, Citicorp North America, Inc. as  Administrative Agent and as Tranche C Agent, Bank of America, N.A. as  Syndication Agent and Merrill Lynch Capital, a division of Merrill Lynch  Business Financial Services Inc., as Documentation Agent.*                                          |
| 10.1.1 |   | Form of Amendment No. 1 to the Credit  Agreement, dated as of April 6, 2004, among Prestige Brands, Inc.,  Prestige Brands International, LLC, the Lenders thereto, the Issuers thereto,  Citicorp North America, Inc., as administrative agent, Bank of America,  N.A., as syndication agent, and Merrill Lynch Capital, a division of Merrill  Lynch Business Financial Services, Inc., as documentation agent.*                   |
| 10.2   |   | Pledge and Security Agreement, dated April 6,  2004, by Prestige Brands, Inc. and each of the Grantors party thereto,  in favor of Citicorp North America, Inc. as Administrative Agent and  Tranche C Agent.*                                                                                                                                                                                                                                 |
| 10.3   |   | Intercreditor Agreement, dated April 6, 2004,  between Citicorp North America, Inc. as Administrative Agent and as  Tranche C Agent, Prestige Brands, Inc., Prestige Brands  International, LLC and each of the Subsidiary Guarantors thereto.*                                                                                                                                                                                                |
| 10.4   |   | Indenture, dated April 6, 2004, among Prestige  Brands, Inc., each Guarantor thereto and U.S. Bank National Association,  as Trustee.*                                                                                                                                                                                                                                                                                                                   |
| 10.5   |   | Purchase Agreement, dated April 6, 2004, among  Prestige Brands, Inc., each Guarantor thereto and Citicorp North America, Inc.  as Representative of the Initial Purchasers.*                                                                                                                                                                                                                                                                       |
| 10.6   |   | Registration Rights Agreement, dated April 6,  2004, among Prestige Brands, Inc., each Guarantor thereto, Citigroup  Global Markets Inc., Banc of America Securities LLC and Merrill Lynch,  Pierce, Fenner & Smith Incorporated.*                                                                                                                                                                                                         |
| 10.7   |   | Third Amended and Restated Limited Liability Company  Agreement of Prestige International Holdings, LLC, dated April 6, 2004.*                                                                                                                                                                                                                                                                                                                                |
| 10.8   |   | Unit Purchase Agreement, dated February 6,  2004, by and among Medtech/Denorex, LLC, GTCR Fund VIII, L.P., GTCR  Fund VIII/B, L.P., GTCR Co-Invest II, L.P. and the TCW/Crescent  Purchasers thereto.*                                                                                                                                                                                                                                         |
| 10.9   |   | First Amendment, Acknowledgment and Supplement to  Unit Purchase Agreement, dated April 6, 2004, to the Unit Purchase  Agreement, dated February 6, 2004, by and among Medtech/Denorex, LLC,  GTCR Fund VIII, L.P., GTCR Fund VIII/B, L.P., GTCR  Co-Invest II, L.P. and the TCW/Crescent Purchasers thereto.*                                                                                                                            |
| 10.10  |   | Second Amendment, Acknowledgement and Supplement to  Unit Purchase Agreement, dated April 6, 2004, to the Unit Purchase  Agreement, dated February 6, 2004, by and among Medtech/Denorex, LLC,  GTCR Fund VIII, L.P., GTCR Fund VIII/B, L.P., GTCR  Co-Invest II, L.P. and the TCW/Crescent Purchasers thereto as amended by  the First Amendment, Acknowledgement and Supplement to Unit Purchase Agreement,  dated April 6, 2004.* |
| 10.11  |   | Securityholders Agreement, dated February 6,  2004, among Medtech/Denorex, LLC, GTCR Fund VIII, L.P., GTCR  Fund VIII/B, L.P., GTCR Co-Invest II, L.P., GTCR Capital Partners,  L.P., the TCW/Crescent Purchasers and the TCW/Crescent Lenders thereto, each  Executive thereto and each of the Other Securityholders thereto.*                                                                                                                |
| 10.12  |   | First Amendment and Acknowledgement to  Securityholders Agreement, dated April 6, 2004, to the Securityholders  Agreement, dated February 6, 2004, among Medtech/Denorex, LLC, GTCR  Fund VIII, L.P., GTCR Fund VIII/B, L.P., GTCR Co-Invest II,  L.P., GTCR Capital Partners, L.P., the TCW/Crescent Purchasers and the  TCW/Crescent Lenders thereto, each Executive thereto and each of the Other  Securityholders thereto.*           |

 

44

----

 
| 10.13 |   | Registration Rights Agreement, dated February 6,  2004, among Medtech/Denorex, LLC, GTCR Fund VIII, L.P., GTCR  Fund VIII/B, L.P., GTCR Co-Invest II, L.P., GTCR Capital Partners,  L.P., the TCW/Crescent Purchasers and the TCW/Crescent Lenders thereto, each  Executive thereto and each of the Other Securityholders thereto.*                                                                                                          |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.14 |   | First Amendment and Acknowledgement to Registration  Rights Agreement, dated April 6, 2004, to the Registration Rights Agreement,  dated February 6, 2004, among Medtech/Denorex, LLC, GTCR Fund VIII,  L.P., GTCR Fund VIII/B, L.P., GTCR Co-Invest II, L.P., GTCR Capital  Partners, L.P., the TCW/Crescent Purchasers and the TCW/Crescent Lenders  thereto, each Executive thereto and each of the Other Securityholders  thereto.* |
| 10.15 |   | Senior Preferred Investor Rights Agreement, dated March 5,  2004, among Medtech/Denorex, LLC, GTCR Fund VIII, L.P., TSG3 L.P.,  J. Gary Shansby, Charles H. Esserman, Michael L. Mauze,  James L. O’Hara and each Subsequent Securityholder thereto.*                                                                                                                                                                         |
| 10.16 |   | Amended and Restated Professional Services  Agreement, dated April 6, 2004, by and between GTCR Golder  Rauner II, L.L.C. and Prestige Brands, Inc.*                                                                                                                                                                                                                                                                                              |
| 10.17 |   | Amended and Restated Management Company Services  Agreement, dated April 6, 2004, among Prestige Brands, Inc.,  Prestige Brands International, Inc., Medtech Products, Inc., The  Spic and Span Company, The Comet Products Corporation and The Denorex  Company.*                                                                                                                                                                           |
| 10.18 |   | Senior Management Agreement, dated February 6,  2004, by and among Medtech/Denorex, LLC, Medtech/Denorex Management, Inc.  and Peter C. Mann.*                                                                                                                                                                                                                                                                                                    |
| 10.19 |   | First Amendment and Acknowledgement to Senior  Management Agreement, dated March 5, 2004, to the Senior Management  Agreement, dated February 6, 2004, by and among Medtech/Denorex, LLC,  Medtech/Denorex Management, Inc. and Peter C. Mann.*                                                                                                                                                                                              |
| 10.20 |   | Second Amendment and Acknowledgement to Senior  Management Agreement, dated April 6, 2004, to the Senior Management  Agreement, dated February 6, 2004, by and among Medtech/Denorex, LLC,  Medtech/Denorex Management, Inc. and Peter C. Mann and amended by  the First Amendment and Acknowledgement to Senior Management Agreement, dated  March 5, 2004.*                                                                           |
| 10.21 |   | Senior Management Agreement, dated February 6,  2004, by and among Medtech/Denorex, LLC, Medtech/Denorex Management, Inc.  and Peter J. Anderson.*                                                                                                                                                                                                                                                                                                |
| 10.22 |   | First Amendment and Acknowledgement to Senior  Management Agreement, dated March 5, 2004, to the Senior Management  Agreement, dated February 6, 2004, by and among Medtech/Denorex, LLC,  Medtech/Denorex Management, Inc. and Peter J. Anderson.*                                                                                                                                                                                          |
| 10.23 |   | Second Amendment and Acknowledgement to Senior  Management Agreement, dated April 6, 2004, to the Senior Management  Agreement, dated February 6, 2004, by and among Medtech/Denorex, LLC,  Medtech/Denorex Management, Inc. and Peter J. Anderson and amended  by the First Amendment and Acknowledgement to Senior Management Agreement,  dated March 5, 2004.*                                                                       |
| 10.24 |   | Senior Management Agreement, dated February 6,  2004, by and among Medtech/Denorex, LLC, Medtech/Denorex Management, Inc.  and Gerard F. Butler.*                                                                                                                                                                                                                                                                                                 |
| 10.25 |   | First Amendment and Acknowledgement to Senior  Management Agreement, dated March 5, 2004, to the Senior Management  Agreement, dated February 6, 2004, by and among Medtech/Denorex, LLC,  Medtech/Denorex Management, Inc. and Gerard F. Butler.*                                                                                                                                                                                           |
| 10.26 |   | Second Amendment and Acknowledgement to Senior  Management Agreement, dated April 6, 2004, to the Senior Management  Agreement, dated February 6, 2004, by and among Medtech/Denorex, LLC,  Medtech/Denorex Management, Inc. and Gerard F. Butler and amended  by the First Amendment and Acknowledgement to Senior Management Agreement,  dated March 5, 2004.*                                                                        |
| 10.27 |   | Senior Management Agreement, dated February 6,  2004, by and among Medtech/Denorex, LLC, Medtech/Denorex Management, Inc.  and Michael A. Fink.*                                                                                                                                                                                                                                                                                                  |
| 10.28 |   | First Amendment and Acknowledgement to Senior  Management Agreement, dated March 5, 2004, to the Senior Management  Agreement, dated February 6, 2004, by and among Medtech/Denorex, LLC,  Medtech/Denorex Management, Inc. and Michael A. Fink.*                                                                                                                                                                                            |

 

45

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| 10.29    |   | Second Amendment and Acknowledgement to Senior  Management Agreement, dated April 6, 2004, to the Senior Management  Agreement, dated February 6, 2004, by and among Medtech/Denorex, LLC,  Medtech/Denorex Management, Inc. and Michael A. Fink and amended by  the First Amendment and Acknowledgement to Senior Management Agreement, dated  March 5, 2004.* |
|----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.29.1  |   | Senior Management Agreement, dated March 17,  2004, by and among Medtech/Denorex, LLC, Medtech/Denorex Management, Inc.  and Charles Schrank.*                                                                                                                                                                                                                                 |
| 10.29.2  |   | First Amendment and Acknowledgement to Senior  Management Agreement, dated April 6, 2004, to the Senior Management  Agreement, dated March 17, 2004, by and among Medtech/Denorex, LLC,  Medtech/Denorex Management, Inc. and Charles Schrank.*                                                                                                                           |
| 10.29.3  |   | Senior Management Agreement, dated March 17,  2004, by and among Medtech/Denorex, LLC, Medtech/Denorex Management, Inc.  and Eric M. Millar.*                                                                                                                                                                                                                                  |
| 10.29.4  |   | First Amendment and Acknowledgement to Senior  Management Agreement, dated April 6, 2004, to the Senior Management  Agreement, dated March 17, 2004, by and among Medtech/Denorex, LLC,  Medtech/Denorex Management, Inc. and Eric M. Millar.*                                                                                                                            |
| 10.29.5  |   | Omnibus Consent and Amendment to Securityholders  Agreement, Registration Rights Agreement, Senior Management Agreements and  Unit Purchase Agreement, dated as of July 6, 2004.*                                                                                                                                                                                                   |
| 10.29.6  |   | Form of Amended and Restated Senior Management  Agreement by and among Prestige International Holdings, LLC, Prestige  Brands Holdings, Inc. and Peter C. Mann.*                                                                                                                                                                                                     |
| 10.29.7  |   | Form of Amended and Restated Senior Management  Agreement by and among Prestige International Holdings, LLC, Prestige  Brands Holdings, Inc. and Peter J. Anderson.*                                                                                                                                                                                                 |
| 10.29.8  |   | Form of Amended and Restated Senior Management  Agreement by and among Prestige International Holdings, LLC, Prestige  Brands Holdings, Inc. and Gerald F. Butler.*                                                                                                                                                                                                  |
| 10.29.9  |   | Form of Amended and Restated Senior Management  Agreement by and among Prestige International Holdings, LLC, Prestige  Brands Holdings, Inc. and Michael A. Fink.*                                                                                                                                                                                                   |
| 10.29.10 |   | Form of Amended and Restated Senior Management  Agreement by and among Prestige International Holdings, LLC, Prestige Brands  Holdings, Inc. and Charles Shrank.*                                                                                                                                                                                                              |
| 10.29.11 |   | Form of Amended and Restated Senior Management  Agreement by and among Prestige International Holdings, LLC, Prestige Brands  Holdings, Inc. and Eric M. Millar.*                                                                                                                                                                                                              |
| 10.30    |   | Distribution Agreement, dated April 24, 2003,  by and between Medtech Holdings, Inc. and OraSure Technologies, Inc.***                                                                                                                                                                                                                                                    |
| 10.31    |   | License Agreement, dated June 2, 2003, between  Zengen, Inc. and Prestige Brands International, Inc.***                                                                                                                                                                                                                                                                   |
| 10.32    |   | Patent and Technology License Agreement, dated October 2,  2001, between The Procter & Gamble Company and Prestige Brands  International, Inc.***                                                                                                                                                                                                                     |
| 10.33    |   | Amendment, dated April 30, 2003, to the Patent  and Technology License Agreement, dated October 2, 2001, between The  Procter & Gamble Company and Prestige Brands International, Inc.***                                                                                                                                                                        |
| 10.34    |   | Contract Manufacturing Agreement, dated February 1,  2001, among The Procter & Gamble Manufacturing Company, P&G  International Operations SA, Prestige Brands International, Inc. and  Prestige Brands International (Canada) Corp.***                                                                                                                           |
| 10.35    |   | Manufacturing Agreement, dated December 30,  2002, by and between Prestige Brands International, Inc. and Abbott  Laboratories.***                                                                                                                                                                                                                                             |
| 10.36    |   | Amendment No. 4 and Restatement of Contract  Manufacturing Agreement, dated May 1, 2002, by and between The Procter &  Gamble Company and Prestige Brands International, Inc.***                                                                                                                                                                                 |
| 10.37    |   | Letter Agreement, dated April 15, 2004, between  Prestige Brands, Inc. and Carrafiello Diehl & Associates, Inc.***                                                                                                                                                                                                                                               |
| 10.38    |   | Prestige Brands Holdings, Inc. 2005 Long-Term  Equity Incentive Plan.*                                                                                                                                                                                                                                                                                                              |
| 10.39    |   | Form of Exchange Agreement by and among  Prestige Brands Holdings, Inc., Prestige                                                                                                                                                                                                                                                                                              |

 

46

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|   |   | International Holdings, LLC and the common  unitholders listed on the signature pages thereto.*                                                                                                                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.40  |   | Storage and Handling Agreement dated April 13,  2005 by and between Prestige Brands Inc. and Warehousing Specialists, Inc.****                                                                                                                                                             |
| 10.41  |   | Transportation Management Agreement dated April 13,  2005 by and between Prestige Brands Inc. and Nationwide Logistics, Inc.****                                                                                                                                                           |
| 21.1   |   | Subsidiaries of the Registrant.*                                                                                                                                                                                                                                                                     |
| 23.1   |   | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                          |
| 23.2   |   | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                          |
| 31.1   |   | Rule 13a-14(a)/ 15d-14(a) Certification,  executed by Peter C. Mann, Chairman, President and Chief Executive Officer of  Prestige Brands Holdings, Inc.                                                                                                                               |
| 31.2   |   | Rule 13a-14(a)/ 15d-14(a) Certification,  executed by Peter J. Anderson, Chief Financial Officer of Prestige Brands  Holdings, Inc.                                                                                                                                                   |
| 31.3   |   | Rule 13a-14(a)/ 15d-14(a) Certification,  executed by Peter C. Mann, Manager, President and Chief Executive Officer of  Prestige Brands International, LLC.                                                                                                                                |
| 31.4   |   | Rule 13a-14(a)/ 15d-14(a) Certification,  executed by Peter J. Anderson, Chief Financial Officer of Prestige Brands  International, LLC.                                                                                                                                                   |
| 32.1   |   | Certification required by Rule 13a-14(b) or  Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of  the United States Code 302 (18 U.S.C. 1350), excecuted by Peter C. Mann,  Chairman, President and Chief Executive Officer of Prestige Brands Holdings, Inc. |
| 32.2   |   | Certification required by Rule 13a-14(b) or  Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of  the United States Code 302 (18 U.S.C. 1350) executed by Peter J. Anderson,  Chief Financial Officer of Prestige Brands Holdings, Inc.                       |
| 32.3   |   | Certification required by Rule 13a-14(b) or  Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of  the United States Code 302 (18 U.S.C. 1350), excecuted by Peter C. Mann,  Manager, President and Chief Executive Officer of Prestige Brands  International, LLC. |
| 32.4   |   | Certification required by Rule 13a-14(b) or  Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of  the United States Code 302 (18 U.S.C. 1350) executed by Peter J. Anderson,  Chief Financial Officer of Prestige Brands International, LLC.                       |
| 99.1   |   | Code of Conduct and Code of Ethics for Senior  Financial Employees. +                                                                                                                                                                                                                                |

 

----

*                                 Incorporatedby reference to the Registration Statement on Form S-1 of Prestige BrandsHoldings, Inc. (RegistrationNo. 333-117700)

 

**                          Incorporatedby reference to the Registration Statement on Form S-4 of Prestige Brands, Inc.(Registration No. 333-117152).

 

***                   Incorporatedby reference to the Registration Statement on Form S-4 of Prestige Brands, Inc.(Registration No. 333-117152).  Certainconfidential portions have been omitted pursuant to a confidential treatmentrequest separately filed with the Securities and Exchange Commission.

 

****            Incorporatedby reference to the current report on Form 8-K of Prestige Brands Holdings, Inc.filed on April 15, 2005.

 

+                                 Previouslyfiled.

 

47

----

 

**SIGNATURES**

** **

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the undersigned registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized, in the Cityof Irvington, State of New York, on June 24, 2005.

 
|   | PRESTIGE BRANDS HOLDINGS, INC. |
|--------|-------------------------------------|
|   |                                |   |
|   |                                |   |
|   | By:                                 | /s/ PETER J. ANDERSON |   |
|   | Name:                               | Peter J. Anderson |
|   | Title:                              | *Chief Financial Officer* |
|        |                                     |  |  |  |  |

 

48

----

 

**SIGNATURES**

** **

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the undersigned registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized, in the Cityof Irvington, State of New York, on June 24, 2005.

 
|   | PRESTIGE BRANDS INTERNATIONAL, LLC |
|--------|------------------------------------|
|   |                               |
|   |                               |
|   | By:                                | /s/ PETER J. ANDERSON |   |
|   | Name:                              | Peter J. Anderson |
|   | Title:                             | *Chief Financial Officer* |
|        |                                    |  |  |  |

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the registrant in thecapacities indicated, on June 24, 2005.

 
| **Signature**         | ** ** | **Title**                                                 |
|-----------------------|------------|-----------------------------------------------------------|
|                  |       |                                                      |
| /s/ PETER C. MANN     |       | Manager, President,  Chief Executive Officer and Director |
| Peter C. Mann         |       | (Principal Executive  Officer)                            |
|                  |       |                                                      |
| /s/ PETER J. ANDERSON |       | Chief Financial  Officer, Secretary and Treasurer         |
| Peter J. Anderson     |       | (Principal Financial  and Accounting Officer)             |
|                  |       |                                                      |
| /s/ DAVID A. DONNINI  |       | Manager                                                   |
| David A. Donnini      |       |                                                      |
|                  |       |                                                      |
| /s/ VINCENT J. HEMMER |       | Manager                                                   |
| Vincent J. Hemmer     |       |                                                      |

 

49

----

 

 

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

 
| **Prestige Brands  Holdings, Inc.**                                                                                                                                                                                                                                                                                               | F-2    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Reports of independent  registered public accounting firm (PricewaterhouseCoopers LLP)                                                                                                                                                                                                                                                 | F-3    |
| Statements of  operations (for year ended March 31, 2005, the period from  February 6, 2004 to March 31, 2004 (successor basis) and the period  from April 1, 2003 to February 5, 2004 and the year ended  March 31, 2003 (predecessor basis))                                                           | F-5    |
| Balance sheets (as of  March 31, 2005 and 2004 (successor basis))                                                                                                                                                                                                                                                                 | F-6    |
| Statements of  cash flows (for year ended March 31, 2005, the period from  February 6, 2004 to March 31, 2004 (successor basis) and the period  from April 1, 2003 to February 5, 2004 and the year ended  March 31, 2003 (predecessor basis))                                                           | F-7    |
| Statements of members’ and  shareholders’ equity and comprehensive income (for year ended March 31,  2005, the period from February 6, 2004 to March 31, 2004 (successor  basis) and the period from April 1, 2003 to February 5, 2004 and  the year ended March 31, 2003 (predecessor basis)) | F-9    |
| Notes to consolidated  financial statements                                                                                                                                                                                                                                                                                            | F-12   |
| Schedule II—Valuation and  Qualifying Accounts                                                                                                                                                                                                                                                                               | F-32   |
|                                                                                                                                                                                                                                                                                                                                   |   |
| **Prestige Brands  International, LLC**                                                                                                                                                                                                                                                                                                | F-33   |
| Reports  of independent registered public accounting firm (PricewaterhouseCoopers LLP)                                                                                                                                                                                                                                                 | F-34   |
| Statements of  operations (for year ended March 31, 2005, the period from  February 6, 2004 to March 31, 2004 (successor basis) and the period  from April 1, 2003 to February 5, 2004 and the year ended  March 31, 2003 (predecessor basis))                                                           | F-36   |
| Balance sheets (as of  March 31, 2005 and 2004 (successor basis))                                                                                                                                                                                                                                                                 | F-37   |
| Statements of  cash flows (for year ended March 31, 2005, the period from  February 6, 2004 to March 31, 2004 (successor basis) and the period  from April 1, 2003 to February 5, 2004 and the year ended  March 31, 2003 (predecessor basis))                                                           | F-38   |
| Statements of  members’ equity and comprehensive income (for year ended March 31, 2005,  the period from February 6, 2004 to March 31, 2004 (successor  basis) and the period from April 1, 2003 to February 5, 2004 and  the year ended March 31, 2003 (predecessor basis))                        | F-40   |
| Notes to  consolidated financial statements                                                                                                                                                                                                                                                                                            | F-42   |
| Schedule II—Valuation and Qualifying  Accounts                                                                                                                                                                                                                                                                               | F-62   |
|                                                                                                                                                                                                                                                                                                                                   |   |
| **Bonita Bay  Holdings, Inc.**                                                                                                                                                                                                                                                                                                    | F-63   |
| Report  of independent registered certified public accountants (Ernst &  Young LLP)                                                                                                                                                                                                                                      | F-64   |
| Consolidated balance sheets  (at December 31, 2003 and 2002)                                                                                                                                                                                                                                                                      | F-65   |
| Consolidated  statements of income (for the years ended December 31, 2003, 2002 and  2001)                                                                                                                                                                                                                                        | F-66   |
| Consolidated  statements of stockholders’ equity (for the years ended December 31,  2003, 2002 and 2001)                                                                                                                                                                                                                     | F-67   |
| Consolidated  statements of cash flows (for the years ended December 31, 2003, 2002  and 2001)                                                                                                                                                                                                                                    | F-68   |
| Notes to  consolidated financial statements                                                                                                                                                                                                                                                                                            | F-69   |

 

F-1

----

 

**PrestigeBrands Holdings, Inc.**

** **

**Financial StatementsMarch 31, 2005**

 

F-2

----

 

**Report of Independent**RegisteredPublic Accounting Firm

** **

Tothe Board of Directors and Stockholders ofPrestige Brands Holdings, Inc.

 

Inour opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of operations, of members’ and shareholders’ equity andcomprehensive income and of cash flows present fairly, in all materialrespects, the financial position of Prestige Brands Holdings, Inc. and itssubsidiaries at March 31, 2005 and 2004, and the results of theiroperations and their cash flows for the year ended March 31, 2005 and forthe period from February 6, 2004 to March 31, 2004 (successor basis)in conformity with accounting principles generally accepted in the UnitedStates of America. In addition, in our opinion, the financial statement schedule listedin the index appearing on page F-1 presents fairly, in all materialrespects, the information set forth therein when read in conjunction with therelated financial statements. These financial statements and financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits. We conducted our auditsof these statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 
| /s/  PRICEWATERHOUSECOOPERS LLP |   |
|---------------------------------|--------|
|                            |
| Salt Lake City,  Utah           |
| June 3,  2005              |

 

F-3

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

Tothe Board of Directors and Shareholders ofMedtech Holdings, Inc. and The Denorex Company

 

Inour opinion, the accompanying combined statements of operations, ofshareholders’ equity and of cash flows present fairly, in all materialrespects, the combined result of operations and cash flows of Medtech Holdings, Inc.and The Denorex Company (the “Company”) for the period from April 1, 2003to February 5, 2004 and the year ended March 31, 2003 (predecessorbasis) in conformity with accounting principles generally accepted in theUnited States of America. In addition, in our opinion, the financial statement schedule listedin the index appearing on page F-1 presents fairly, in all materialrespects, the information set forth therein when read in conjunction with therelated financial statements. These financial statements and financialstatement schedule are the responsibility of the Company’s management; ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits. We conducted our auditsof these statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), which require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 
| /s/  PRICEWATERHOUSECOOPERS LLP |   |
|---------------------------------|--------|
|                            |
| Salt Lake City,  Utah           |
| July 2,  2004              |

 

F-4

----

** **

**PRESTIGEBRANDS HOLDINGS, INC.CONSOLIDATED STATEMENTS OFOPERATIONS(in thousands, except share and per share data)**

 
| ** **                                                                                       | ** ** | **Year Ended  March 31, 2005** | ** ** | **February 6, 2004  to March 31, 2004** | ** ** | **April 1, 2003  to February 5, 2004** | ** ** | **Year Ended  March 31, 2003** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                       | ** ** | **(successor basis)**                    | ** ** | **(predecessor basis)**                                     | ** ** |
| **Revenues:**                                                                                    |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Net sales                                                                                        |       | $                                             | 303,167    |                                                             | $          | 18,807                                                          |       | $                                             | 68,726     |   | $ | 76,048 |   |
| Other revenues                                                                                   |       | 151                                           |       | —                                                           |       | —                                                          |       | —                                        |       |
| Other revenues—related  parties                                                             |       | —                                        |       | 54                                                               |       | 333                                                             |       | 391                                           |       |
| Total revenues                                                                                   |       | 303,318                                       |       | 18,861                                                           |       | 69,059                                                          |       | 76,439                                        |       |
| **Cost of  Sales:**                                                                              |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Cost of sales                                                                                    |       | 141,348                                       |       | 10,023                                                           |       | 26,254                                                          |       | 27,475                                        |       |
| Gross profit                                                                                     |       | 161,970                                       |       | 8,838                                                            |       | 42,805                                                          |       | 48,964                                        |       |
| **Operating  Expenses:**                                                                         |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Advertising and  promotion                                                                       |       | 38,402                                        |       | 1,689                                                            |       | 12,601                                                          |       | 14,274                                        |       |
| General and  administrative                                                                      |       | 20,198                                        |       | 1,649                                                            |       | 12,068                                                          |       | 12,075                                        |       |
| Depreciation                                                                                     |       | 1,899                                         |       | 41                                                               |       | 247                                                             |       | 301                                           |       |
| Amortization of  intangible assets                                                               |       | 7,901                                         |       | 890                                                              |       | 4,251                                                           |       | 4,973                                         |       |
| Loss on  forgiveness of related party receivable                                                 |       | —                                        |       | —                                                           |       | 1,404                                                           |       | —                                        |       |
| Total operating  expenses                                                                        |       | 68,400                                        |       | 4,269                                                            |       | 30,571                                                          |       | 31,623                                        |       |
| Operating income                                                                                 |       | 93,570                                        |       | 4,569                                                            |       | 12,234                                                          |       | 17,341                                        |       |
| **Other  Income (Expenses)**                                                                     |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Interest income                                                                                  |       | 371                                           |       | 10                                                               |       | 38                                                              |       | 59                                            |       |
| Interest expense                                                                                 |       | (45,097                                       | )          | (1,735                                                           | )          | (8,195                                                          | )          | (9,806                                        | )          |
| Loss on disposal  of property and equipment                                                      |       | (9                                            | )          | —                                                           |       | —                                                          |       | —                                        |       |
| Loss on  extinguishment of debt                                                                  |       | (26,854                                       | )          | —                                                           |       | —                                                          |       | (685                                          | )          |
| Total other  income (expense)                                                                    |       | (71,589                                       | )          | (1,725                                                           | )          | (8,157                                                          | )          | (10,432                                       | )          |
| Income from  continuing operations before income taxes                                           |       | 21,981                                        |       | 2,844                                                            |       | 4,077                                                           |       | 6,909                                         |       |
| **Provision  for Income Taxes**                                                                  |       | (8,522                                        | )          | (1,054                                                           | )          | (1,684                                                          | )          | (3,902                                        | )          |
| Income from  continuing operations                                                               |       | 13,459                                        |       | 1,790                                                            |       | 2,393                                                           |       | 3,007                                         |       |
| **Discontinued  Operations**                                                                     |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Loss from  operations of discontinued Pecos reporting unit, net of income tax benefit of  $1,848 |       | —                                        |       | —                                                           |       | —                                                          |       | (3,385                                        | )          |
| Loss on disposal  of Pecos reporting unit, net of income tax benefit of $1,233              |       | —                                        |       | —                                                           |       | —                                                          |       | (2,259                                        | )          |
| Income (loss)  before cumulative effect of change in accounting principle                        |       | 13,459                                        |       | 1,790                                                            |       | 2,393                                                           |       | (2,637                                        | )          |
| Cumulative  effect of change in accounting principle,  net of income tax benefit of  $6,467 |       | —                                        |       | —                                                           |       | —                                                          |       | (11,785                                       | )          |
| Net income  (loss)                                                                               |       | 13,459                                        |       | 1,790                                                            |       | $                                                               | 2,393      |                                          | $          | (14,422 | ) |
| Cumulative  preferred dividends on Senior Preferred and Class B Preferred units        |       | (25,395                                       | )          | (1,390                                                           | )          |                                                            |       |                                          |       |
| Net income  (loss) available to members and common shareholders                                  |       | $                                             | (11,936    | )                                                                | $          | 400                                                             |       |                                          |       |   |   |
| Net income  (loss) per common share                                                              |       | $                                             | (0.41      | )                                                                | $          | 0.02                                                            |       |                                          |       |   |   |
| Basic and  diluted weighted average shares outstanding                                           |       | 29,389,329                                    |       | 26,571,155                                                       |       |                                                            |       |                                          |       |

 

The accompanying notesare an integral part of these financial statements.

 

F-5

----

 

**PRESTIGEBRANDS HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share and unit data)**

** **
| ** **                                                                                                                                            | ** ** | **March 31,**         | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                            | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                                                                                                                            | ** ** | **(successor basis)** | ** ** |
| **ASSETS**                                                                                                                                            |       |                       |       |   |   |
| Current assets:                                                                                                                                       |       |                       |       |   |   |
| Cash                                                                                                                                                  |       | $                          | 5,334      |   | $ | 3,393 |   |
| Accounts  receivable                                                                                                                                  |       | 43,893                     |       | 15,732 |   |
| Inventories                                                                                                                                           |       | 21,580                     |       | 9,748 |   |
| Deferred income  tax asset                                                                                                                            |       | 5,699                      |       | 1,647 |   |
| Prepaid expenses  and other current assets                                                                                                            |       | 3,152                      |       | 234 |   |
| Total current  assets                                                                                                                                 |       | 79,658                     |       | 30,754 |   |
| Property and  equipment                                                                                                                               |       | 2,324                      |       | 880 |   |
| Goodwill                                                                                                                                              |       | 294,544                    |       | 55,594 |   |
| Other long-term  assets                                                                                                                               |       | 624,609                    |       | 239,394 |   |
| Total assets                                                                                                                                          |       | $                          | 1,001,135  |   | $ | 326,622 |   |
|                                                                                                                                                  |       |                       |       |   |   |
| **LIABILITIES  AND MEMBERS’ AND SHAREHOLDERS’ EQUITY**                                                                                      |       |                       |       |   |   |
| Current  liabilities:                                                                                                                                 |       |                       |       |   |   |
| Accounts payable                                                                                                                                      |       | $                          | 21,705     |   | $ | 5,281 |   |
| Accrued expenses                                                                                                                                      |       | 13,472                     |       | 7,264 |   |
| Current portion  of long-term debt                                                                                                                    |       | 3,730                      |       | 2,000 |   |
| Total current  liabilities                                                                                                                            |       | 38,907                     |       | 14,545 |   |
| Long-term debt                                                                                                                                        |       | 491,630                    |       | 146,694 |   |
| Deferred income  tax liability                                                                                                                        |       | 84,752                     |       | 38,874 |   |
| Total  liabilities                                                                                                                                    |       | 615,289                    |       | 200,113 |   |
| Commitments and  contingencies (Note 11)                                                                                                              |       |                       |       |   |   |
| Members’ and  Shareholders’ equity:                                                                                                         |       |                       |       |   |   |
| Senior Preferred  Units, -0- and 22,500 units issued and outstanding at March 31, 2005,  and 2004, respectively                                  |       | —                     |       | 17,768 |   |
| Class B  Preferred Units, -0- and 106,656 units issued and outstanding at  March 31, 2005, and 2004, respectively                           |       | —                     |       | 96,807 |   |
| Common Units, -0-  and 57,901,655 units issued and outstanding at March 31, 2005 and 2004,  respectively                                         |       | —                     |       | 5,273 |   |
| Preferred stock—par  value $0.01 per share, 5,000,000 shares authorized, no shares issued or  outstanding                                        |       | —                     |       | — |   |
| Common stock—par  value $0.01 per share, 250,000,000 shares authorized and 49,997,647  shares issued and outstanding at March 31, 2005 |       | 500                        |       | — |   |
| Treasury stock—2,353  shares at cost                                                                                                             |       | (4                         | )          | — |   |
| Additional paid  in capital                                                                                                                           |       | 378,251                    |       | 4,871 |   |
| Accumulated  other comprehensive income                                                                                                               |       | 320                        |       | — |   |
| Retained  earnings                                                                                                                                    |       | 6,779                      |       | 1,790 |   |
| Total members’  and shareholders’ equity                                                                                                    |       | 385,846                    |       | 126,509 |   |
| Total  liabilities and members’ and shareholders’ equity                                                                                    |       | $                          | 1,001,135  |   | $ | 326,622 |   |

 

The accompanying notesare an integral part of these financial statements.

 

F-6

----

 

**PRESTIGE BRANDS HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**

 
| ** **                                                                                           | ** ** | **Year Ended  March 31, 2005** | ** ** | **February 6, 2004  to March 31, 2004** | ** ** | **April 1, 2003  to February 5, 2004** | ** ** | **Year Ended  March 31, 2003** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                           | ** ** | **(successor basis)**                    | ** ** | **(predecessor basis)**                                     | ** ** |
| **Operating  Activities**                                                                            |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Net income  (loss)                                                                                   |       | $                                             | 13,459     |                                                             | $          | 1,790                                                           |       | $                                             | 2,393      |   | $ | (14,422 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Cumulative  effect of change in accounting principle, net of income tax benefit of $6,467            |       | —                                        |       | —                                                           |       | —                                                          |       | 11,785                                        |       |
| Loss on  extinguishment of debt                                                                      |       | 26,854                                        |       | —                                                           |       | —                                                          |       | 685                                           |       |
| Depreciation                                                                                         |       | 1,899                                         |       | 41                                                               |       | 247                                                             |       | 301                                           |       |
| Loss on disposal  of property and equipment                                                          |       | 9                                             |       | —                                                           |       | —                                                          |       | 91                                            |       |
| Amortization of  intangible assets                                                                   |       | 7,901                                         |       | 890                                                              |       | 4,251                                                           |       | 4,973                                         |       |
| Amortization of  deferred financing costs and debt discount                                          |       | 2,943                                         |       | 134                                                              |       | 1,271                                                           |       | 1,912                                         |       |
| Amortization of  deferred compensation                                                               |       | —                                        |       | —                                                           |       | 67                                                              |       | 79                                            |       |
| Increase in  long-term debt due to accrued interest                                                  |       | —                                        |       | —                                                           |       | 376                                                             |       | 251                                           |       |
| Deferred income  taxes                                                                               |       | 7,197                                         |       | 696                                                              |       | 1,718                                                           |       | 1,622                                         |       |
| Other                                                                                                |       | —                                        |       | 71                                                               |       | —                                                          |       | —                                        |       |
| Changes in  operating assets and liabilities, net of effects of purchase of businesses:              |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Accounts  receivable                                                                                 |       | (12,839                                       | )          | (3,314                                                           | )          | 2,674                                                           |       | (2,698                                        | )          |
| Accounts  receivable—related parties                                                            |       | —                                        |       | 53                                                               |       | 326                                                             |       | (364                                          | )          |
| Inventories                                                                                          |       | 5,263                                         |       | 1,119                                                            |       | (2,313                                                          | )          | 3,931                                         |       |
| Prepaid expenses  and other current assets                                                           |       | (1,490                                        | )          | (52                                                              | )          | 259                                                             |       | 2,216                                         |       |
| Accounts payable                                                                                     |       | 5,059                                         |       | 1,106                                                            |       | (262                                                            | )          | (638                                          | )          |
| Accounts payable—related  parties                                                               |       | —                                        |       | (532                                                             | )          | (1,111                                                          | )          | 464                                           |       |
| Accrued expenses                                                                                     |       | (5,213                                        | )          | (4,028                                                           | )          | (1,859                                                          | )          | 2,551                                         |       |
| Income taxes  payable                                                                                |       | —                                        |       | 320                                                              |       | (194                                                            | )          | (220                                          | )          |
| Net cash  provided by (used in) operating activities                                                 |       | 51,042                                        |       | (1,706                                                           | )          | 7,843                                                           |       | 12,519                                        |       |
| **Investing  Activities**                                                                            |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Purchase of  property and equipment                                                                  |       | (365                                          | )          | (42                                                              | )          | (66                                                             | )          | (421                                          | )          |
| Change in  restricted cash                                                                           |       | —                                        |       | 700                                                              |       | —                                                          |       | (700                                          | )          |
| Purchase of  intangibles                                                                             |       | —                                        |       | —                                                           |       | (510                                                            | )          | (256                                          | )          |
| Purchase of  businesses, net of cash acquired                                                        |       | (425,479                                      | )          | (167,532                                                         | )          | —                                                          |       | (788                                          | )          |
| Net cash used in  investing activities                                                               |       | (425,844                                      | )          | (166,874                                                         | )          | (576                                                            | )          | (2,165                                        | )          |
| **Financing  Activities**                                                                            |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Proceeds from  borrowings                                                                            |       | 698,512                                       |       | 154,786                                                          |       | 13,539                                                          |       | 4,220                                         |       |
| Repayment of  borrowings                                                                             |       | (529,538                                      | )          | (80,146                                                          | )          | (24,682                                                         | )          | (18,862                                       | )          |
| Payment of  deferred financing costs                                                                 |       | (24,539                                       | )          | (2,841                                                           | )          | (115                                                            | )          | (76                                           | )          |
| Payment on  interest rate swap liability                                                             |       | —                                        |       | (197                                                             | )          | —                                                          |       | —                                        |       |
| Prepayment  penalty                                                                                  |       | (10,875                                       | )          | —                                                           |       | —                                                          |       | —                                        |       |
| Premium on  interest rate cap                                                                        |       | (2,283                                        | )          | —                                                           |       | —                                                          |       | —                                        |       |
| Proceeds from  issuance of Denorex Class A shares                                               |       | —                                        |       | —                                                           |       | —                                                          |       | 12                                            |       |
| Purchase of  treasury stock                                                                          |       | (4                                            | )          | —                                                           |       | —                                                          |       | (4                                            | )          |
| Proceeds from  issuance of treasury stock                                                            |       | —                                        |       | —                                                           |       | —                                                          |       | 2                                             |       |
| Proceeds from  capital contributions                                                                 |       | —                                        |       | —                                                           |       | 2,629                                                           |       | —                                        |       |
| Issuance of  common stock in initial public offering, net                                            |       | 416,832                                       |       | —                                                           |       | —                                                          |       | —                                        |       |
| Redemption of  preferred units                                                                       |       | (199,836                                      | )          | —                                                           |       | —                                                          |       | —                                        |       |
| Redemption of  common units                                                                          |       | (30,248                                       | )          | —                                                           |       | —                                                          |       | —                                        |       |
| Proceeds from  issuance of preferred and common units, net                                           |       | 58,722                                        |       | 100,371                                                          |       | —                                                          |       | —                                        |       |
| Net cash  provided by (used in) financing activities                                                 |       | 376,743                                       |       | 171,973                                                          |       | (8,629                                                          | )          | (14,708                                       | )          |
| Increase  (decrease) in cash                                                                         |       | 1,941                                         |       | 3,393                                                            |       | (1,362                                                          | )          | (4,354                                        | )          |
| Cash at  beginning of period                                                                         |       | 3,393                                         |       | —                                                           |       | 3,530                                                           |       | 7,884                                         |       |
| Cash at end of  period                                                                               |       | $                                             | 5,334      |                                                             | $          | 3,393                                                           |       | $                                             | 2,168      |   | $ | 3,530 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

F-7

----

 
| ** **                                                                   | ** ** | **Year Ended  March 31, 2005** | ** ** | **February 6, 2004  to March 31, 2004** | ** ** | **April 1, 2003  to February 5, 2004** | ** ** | **Year Ended  March 31, 2003** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **(successor basis)**                    | ** ** | **(predecessor basis)**                                     | ** ** |
| **Supplemental  cash flow information**                                      |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Interest paid                                                                |       | $                                             | 42,155     |                                                             | $          | 2,357                                                           |       | $                                             | 5,491      |   | $ | 8,553 |   |
| Income taxes  paid (refunded)                                                |       | $                                             | 2,689      |                                                             | $          | (31                                                             | )          | $                                             | 159        |   | $ | 174 |   |
| **Supplemental  disclosure of non-cash investing and financing activities:** |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Fair value of  assets acquired, net of cash acquired                         |       | $                                             | 655,542    |                                                             | $          | 317,498                                                         |       | $                                             | —     |   | $ | — |   |
| Fair value of  liabilities assumed                                           |       | (229,971                                      | )          | (130,489                                                         | )          | —                                                          |       | —                                        |       |
| Purchase price  funded with non-cash capital contribution                    |       | (92                                           | )          | (19,477                                                          | )          | —                                                          |       | —                                        |       |
| Cash paid to  purchase businesses                                            |       | $                                             | 425,479    |                                                             | $          | 167,532                                                         |       | $                                             | —     |   | $ | — |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

F-8

----

 

**PRESTIGE BRANDS HOLDINGS, INC.**

**STATEMENT OF MEMBERS****’ AND SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

**(in thousands, except share andunit data)**

 
| ** **                                                                      | ** ** | **Senior**    | ** ** | ** ** | ** ** | **Class B** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Medtech**           | ** ** | **Denorex**           | ** ** |
|---------------------------------------------------------------------------------|------------|---------------|------------|------------|------------|------------------|------------|------------|------------|------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                      | ** ** | **preferred** | ** ** | ** ** | ** ** | **preferred**    | ** ** | ** ** | ** ** | **Common** | ** ** | ** ** | ** ** | **common stock** | ** ** | **common stock** | ** ** |
| ** **                                                                      | ** ** | **units**     | ** ** | **Amount** | ** ** | **units**        | ** ** | **Amount** | ** ** | **units**  | ** ** | **Amount** | ** ** | **Shares**            | ** ** | **Amount**            | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| **Predecessor Basis**                                                      |       |          |       |       |       |             |       |       |       |       |       |       |       |                  |       |                  |       |   |   |   |   |   |   |
| Balance at  March 31, 2002                                                 |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | 7,144,937             |       | $                     | 71         |   | 112,242 |   | $ | 1 |   |
| Issuance of  Denorex Class A shares                                        |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | 12,471 |   | — |   |
| Purchase of  treasury stock                                                     |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | — |   | — |   |
| Issuance of  shares from treasury                                               |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | — |   | — |   |
| Amortization of  deferred compensation                                          |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | — |   | — |   |
| Components of  Comprehensive loss                                               |       |          |       |       |       |             |       |       |       |       |       |       |       |                  |       |                  |       |   |   |   |   |
| Net loss                                                                        |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | — |   | — |   |
| Unrealized loss  on interest rate swap net of income tax benefit of $38    |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | — |   | — |   |
| Total  comprehensive loss                                                       |       |          |       |       |       |             |       |       |       |       |       |       |       |                  |       |                  |       |   |   |   |   |
| Balance at  March 31, 2003                                                 |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | 7,144,937             |       | 71                    |       | 124,713 |   | 1 |   |
| Amortization of  deferred compensation                                          |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | — |   | — |   |
| Contribution of  capital                                                        |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | — |   | — |   |
| Components of  Comprehensive income                                             |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | — |   | — |   |
| Net income                                                                      |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | — |   | — |   |
| Unrealized gain  on interest rate swap net of income tax expense of $148   |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | — |   | — |   |
| Total  comprehensive income                                                     |       |          |       |       |       |             |       |       |       |       |       |       |       |                  |       |                  |       |   |   |   |   |
| Balance at  February 5, 2004                                               |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | 7,144,937             |       | 71                    |       | 124,713 |   | 1 |   |
|                                                                            |       |          |       |       |       |             |       |       |       |       |       |       |       |                  |       |                  |       |   |   |   |   |
| **Successor  Basis**                                                            |       |          |       |       |       |             |       |       |       |       |       |       |       |                  |       |                  |       |   |   |   |   |
| Issuance of  Preferred and Common Units                                         |       | —        |       | —     |       | 100,221          |       | 95,622     |       | 50,000,000 |       | 4,749      |       | —                |       | —                |       | — |   | — |   |
| Issuance of  Preferred and Common Units in conjunction with Medtech Acquisition |       | —        |       | —     |       | 1,185            |       | 1,185      |       | 5,282,269  |       | 524        |       | —                |       | —                |       | — |   | — |   |
| Adjustments  related to Medtech Acquisition                                     |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | (7,144,937            | )          | (71                   | )          | (124,713 | ) | (1 | ) |
| Issuance of  Preferred Units in conjunction with Spic and Span Acquisition      |       | 22,500        |       | 17,768     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | — |   | — |   |
| Issuance of  warrants in connection with Medtech Acquisition Debt               |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | — |   | — |   |
| Issuance of  Preferred and Common Units upon exercise of warrants               |       | —        |       | —     |       | 5,250            |       | —     |       | 2,619,386  |       | —     |       | —                |       | —                |       | — |   | — |   |
| Net income and  comprehensive income                                            |       | —        |       | —     |       | —           |       | —     |       | —     |       | —     |       | —                |       | —                |       | — |   | — |   |
| Balance at  March 31, 2004                                                 |       | 22,500        |       | $          | 17,768     |             | 106,656    |       | $          | 96,807     |       | 57,901,655 |       | $                     | 5,273      |                  | —     |   | $ | — |   | — |   | $ | — |   |
|                                                                                 |            |               |            |            |            |                  |            |            |            |            |            |            |            |                       |            |                       |            |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part ofthese financial statements.

 

F-9

----

** **
| ** **                                                                      | ** ** | **Additional  paid-in  capital** | ** ** | **Deferred  compensation** | ** ** | **Medtech  treasury  stock** | ** ** | **Accumulated  other  comprehensive  Income (loss)** | ** ** | **Retained  earnings  (accumulated  deficit)** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| **Predecessor Basis**                                                      |       |                             |       |                       |       |                         |       |                                                      |       |                                           |       |      |       |   |   |   |   |   |
| Balance at  March 31, 2002                                                 |       | $                                | 56,780     |                       | $          | (219                         | )          | —                                                    |       | $                                              | (478       | )         | $          | 3,046 |   | $ | 59,201 |   |
| Issuance of  Denorex Class A shares                                        |       | 12                               |       | —                     |       | —                       |       | —                                                    |       | —                                         |       | 12        |       |
| Purchase of  treasury stock                                                     |       | —                           |       | —                     |       | (4                           | )          | —                                                    |       | —                                         |       | (4        | )          |
| Issuance of  shares from treasury                                               |       | —                           |       | —                     |       | 2                            |       | —                                                    |       | —                                         |       | 2         |       |
| Amortization of  deferred compensation                                          |       | —                           |       | 79                         |       | —                       |       | —                                                    |       | —                                         |       | 79        |       |
| Components of  Comprehensive loss                                               |       |                             |       |                       |       |                         |       |                                                      |       |                                           |       |      |       |
| Net loss                                                                        |       | —                           |       | —                     |       | —                       |       | —                                                    |       | (14,422                                        | )          | (14,422   | )          |
| Unrealized loss  on interest rate swap net of income tax benefit of $38         |       | —                           |       | —                     |       | —                       |       | (71                                                       | )          | —                                         |       | (71       | )          |
| Total  comprehensive loss                                                       |       |                             |       |                       |       |                         |       |                                                      |       |                                           |       | (14,493   | )          |
| Balance at  March 31, 2003                                                 |       | 56,792                           |       | (140                       | )          | (2                           | )          | (549                                                      | )          | (11,376                                        | )          | 44,797    |       |
| Amortization of  deferred compensation                                          |       | —                           |       | 67                         |       | —                       |       | —                                                    |       | —                                         |       | 67        |       |
| Contribution of  capital                                                        |       | 2,629                            |       | —                     |       | —                       |       | —                                                    |       | —                                         |       | 2,629     |       |
| Components of  Comprehensive income                                             |       | —                           |       | —                     |       | —                       |       | —                                                    |       | —                                         |       | —    |       |
| Net income                                                                      |       | —                           |       | —                     |       | —                       |       | —                                                    |       | 2,393                                          |       | 2,393     |       |
| Unrealized gain  on interest rate swap net of income tax expense of $148        |       | —                           |       | —                     |       | —                       |       | 423                                                       |       | —                                         |       | 423       |       |
| Total  comprehensive income                                                     |       |                             |       |                       |       |                         |       |                                                      |       |                                           |       | 2,816     |       |
| Balance at  February 5, 2004                                               |       | 59,421                           |       | (73                        | )          | (2                           | )          | (126                                                      | )          | (8,983                                         | )          | 50,309    |       |
| ** **                                                                      |       |                             |       |                       |       |                         |       |                                                      |       |                                           |       |      |       |
| **Successor  Basis**                                                            |       |                             |       |                       |       |                         |       |                                                      |       |                                           |       |      |       |
| Issuance of Preferred  and Common Units                                         |       | —                           |       | —                     |       | —                       |       | —                                                    |       | —                                         |       | 100,371   |       |
| Issuance of  Preferred and Common Units in conjunction with Medtech Acquisition |       | —                           |       | —                     |       | —                       |       | —                                                    |       | —                                         |       | 1,709     |       |
| Adjustments  related to Medtech Acquisition                                     |       | (59,421                          | )          | 73                         |       | 2                            |       | 126                                                       |       | 8,983                                          |       | (50,309   | )          |
| Issuance of  Preferred Units in conjunction with Spic and Span Acquisition      |       | —                           |       | —                     |       | —                       |       | —                                                    |       | —                                         |       | 17,768    |       |
| Issuance of  warrants in connection with Medtech Acquisition Debt               |       | 4,871                            |       | —                     |       | —                       |       | —                                                    |       | —                                         |       | 4,871     |       |
| Issuance of  Preferred and Common Units upon exercise of warrants               |       | —                           |       | —                     |       | —                       |       | —                                                    |       | —                                         |       | —    |       |
| Net income and  comprehensive income                                            |       | —                           |       | —                     |       | —                       |       | —                                                    |       | 1,790                                          |       | 1,790     |       |
| Balance at  March 31, 2004                                                 |       | $                                | 4,871      |                       | $          | —                       |       | $                                                         | —     |                                           | $          | —    |       | $ | 1,790 |   | $ | 126,509 |   |
|                                                                                 |            |                                  |            |                            |            |                              |            |                                                           |            |                                                |            |           |            |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part ofthese financial statements.

** **

**F-10**

----

** **
| ** **                                                                                        | ** ** | **Senior  Preferred Units** | ** ** | **Class B  Preferred Units** | ** ** | **Common Units** | ** ** | **Common Stock** | ** ** | **Treasury** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Retained** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|-----------------------|------------|-----------------------|------------|--------------|------------|-------------------------|------------|---------------------------------------|------------|--------------|------------|------------|------------|
| ** **                                                                                        | ** ** | **Units**                        | ** ** | **Amount**                             | ** ** | **Units**             | ** ** | **Amount**            | ** ** | **Units**    | ** ** | **Amount**              | ** ** | **Shares**                            | ** ** | **Amount**   | ** ** | **Stock**  | ** ** | **Capital** | ** ** | **Income (loss)** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| **Successor  Basis**                                                                              |       |                             |       |                                   |       |                  |       |                  |       |         |       |                    |       |                                  |       |         |       |       |       |   |   |   |   |   |   |   |   |
| Balance at  March 31, 2004                                                                   |       | 22,500                           |       | $                                      | 17,768     |                  | 106,656    |                  | $          | 96,807       |       | 57,901,655              |       | $                                     | 5,273      |         | —     |       | $          | — |   | $ | — |   | $ | 4,871 |   | $ | — |   | $ | 1,790 |   | $ | 126,509 |   |
| Issuance of  Preferred and Common Units for cash                                                  |       |                             |       |                                   |       | 58,385                |       | 58,385                |       | 1,838,591    |       | 148                     |       | —                                |       | —       |       | —     |       | — |   | — |   | — |   | 58,533 |   |
| Issuance of  Preferred and Common Units in conjunction with Bonita Bay Acquisition                |       |                             |       |                                   |       | 94                    |       | 91                    |       | 18,842       |       | 1                       |       | —                                |       | —       |       | —     |       | — |   | — |   | — |   | 92 |   |
| Repurchase/cancellation  of Preferred and Common Units in conjunction with Bonita Bay Acquisition |       |                             |       |                                   |       | (2,271                | )          | —                |       | (1,986,302   | )          | (46                     | )          | —                                |       | —       |       | —     |       | — |   | — |   | — |   | (46 | ) |
| Issuance of  restricted Common Units to management for cash                                  |       |                             |       |                                   |       | —                |       | —                |       | 337,000      |       | 235                     |       | —                                |       | —       |       | —     |       | — |   | — |   | — |   | 235 |   |
| Exchange of  Common Units for common stock                                                        |       |                             |       |                                   |       | —                |       | —                |       | (58,109,786  | )          | (5,611                  | )          | 26,666,667                            |       | 267          |       | —     |       | 5,344 |   | — |   | — |   | — |   |
| Issuance of  Common Stock in initial public offering, net                                         |       |                             |       |                                   |       | —                |       | —                |       | —       |       | —                  |       | 28,000,000                            |       | 280          |       | —     |       | 416,552 |   | — |   | — |   | 416,832 |   |
| Redemption of  Preferred Units                                                                    |       | (22,500                          | )          | (17,768                                | )          | (162,864              | )          | (155,283              | )          | —       |       | —                  |       | —                                |       | —       |       | —     |       | (18,315 | ) | — |   | (8,470 | ) | (199,836 | ) |
| Retirement of  common stock                                                                       |       | —                           |       | —                                 |       | —                |       | —                |       | —       |       | —                  |       | (4,666,667                            | )          | (47          | )          | —     |       | (30,201 | ) | — |   | — |   | (30,248 | ) |
| Purchase of  treasury stock                                                                       |       | —                           |       | —                                 |       | —                |       | —                |       | —       |       | —                  |       | —                                |       | —       |       | (4         | )          | — |   | — |   | — |   | (4 | ) |
| Components of  comprehensive income:                                                              |       |                             |       |                                   |       |                  |       |                  |       |         |       |                    |       |                                  |       |         |       |       |       |   |   |   |   |   |   |   |   |
| Net income                                                                                        |       | —                           |       | —                                 |       | —                |       | —                |       | —       |       | —                  |       | —                                |       | —       |       | —     |       | — |   | — |   | 13,459 |   | 13,459 |   |
| Unrealized gain  on interest rate caps net of income tax expense of $200                          |       | —                           |       | —                                 |       | —                |       | —                |       | —       |       | —                  |       | —                                |       | —       |       | —     |       | — |   | 320 |   | — |   | 320 |   |
| Total  comprehensive income                                                                       |       |                             |       |                                   |       |                  |       |                  |       |         |       |                    |       |                                  |       |         |       |       |       |   |   |   |   |   |   | 13,779 |   |
| Balance at  March 31, 2005                                                                   |       | —                           |       | $                                      | —     |                  | —     |                  | $          | —       |       | —                  |       | $                                     | —     |         | 50,000,000 |       | $          | 500 |   | $ | (4 | ) | $ | 378,251 |   | $ | 320 |   | $ | 6,779 |   | $ | 385,846 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

F-11

----

 

**PRESTIGEBRANDS HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS(in thousands, except share and unit data)**

** **

**1.   Businessand Basis of Presentation**

** **

***Natureof business***

*** ***

OnFebruary 6, 2004, Prestige International Holdings, LLC (“Prestige LLC”),through two indirect wholly-owned subsidiaries, acquired all of the outstandingcapital stock of Medtech Holdings, Inc. (“Medtech”) and The DenorexCompany (“Denorex”) (collectively the “Predecessor Company”) (the “MedtechAcquisition”). On March 5, 2004, Prestige LLC, through an indirect wholly-ownedsubsidiary, acquired all of the outstanding capital stock of The Spic and SpanCompany (“Spic and Span”) (the “Spic and Span Acquisition”). On April 6,2004, Prestige LLC, through an indirect wholly-owned subsidiary, acquired allof the outstanding capital stock of Bonita Bay Holdings, Inc. (“Bonita Bay”)(the “Bonita Bay Acquisition”). On October 6, 2004, Prestige LLC acquiredall the outstanding capital stock of Vetco, Inc. (“Vetco”) (the “VetcoAcquisition”). On February 9, 2005, Prestige Brands Holdings, Inc. (“PrestigeHoldings,” or together with Prestige LLC, “the Company”), a Delawarecorporation, became the direct parent company of Prestige LLC, under theterms of an exchange agreement among Prestige Holdings, Prestige LLCand each holder of common units of Prestige LLC. Prestige LLC wascontrolled by affiliates of GTCR Golder Rauner II, LLC. Pursuant to theagreement, the holders of common units of Prestige LLC exchanged all oftheir common units for an aggregate of 26,666,667 shares of common stock ofPrestige Holdings. In February 2005, the Company completed an initialpublic offering (Note 14).

 

TheCompany is engaged in the marketing, sales and distribution of over-the-counterdrug, personal care and household cleaning brands to mass merchandisers, drugstores, supermarkets and club stores primarily in the United States.

 

***Basisof presentation***

*** ***

TheMedtech Acquisition was accounted for as a purchase transaction. As a result,the combined Medtech and Denorex assets and liabilities were adjusted to fairvalue as of February 6, 2004, in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 141, “Business Combinations”. Forfinancial reporting purposes, Medtech and Denorex, which were under commoncontrol and management, are considered the predecessor entities. Accordingly,the results of operations and cash flows for the year ended March 31, 2003and the period from April 1, 2003 to February 5, 2004, represent thecombined historical financial statements of Medtech and its subsidiaries andDenorex (“predecessor basis”). The balance sheets of the Company at March 31,2005 and 2004, and the results of operations and cash flows for the year ended March 31,2005 and for the period from February 6, 2004 to March 31, 2004,reflect those purchase accounting adjustments resulting from the MedtechAcquisition (“successor basis”). The Spic and Span, Bonita Bay and VetcoAcquisitions were also accounted for as purchase transactions. The results ofoperations and cash flows for Spic and Span, Bonita Bay and Vetco have beenreflected in the Company’s consolidated statements of operations and cash flowsbeginning from their respective acquisition dates. The formation of PrestigeHoldings and exchange of common units for common shares was accounted for as areorganization of entities under common control. As a result, there was noadjustment to the carrying value of the assets and liabilities. All significantintercompany transactions and balances have been eliminated.

 

***Useof estimates***

*** ***

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements, as well as the reported amounts of revenues andexpenses during the reporting

 

F-12

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period.Although these estimates are based on the Company’s knowledge of current eventsand actions the Company may undertake in the future, actual results coulddiffer from those estimates.

 

***Cash***

*** ***

Substantiallyall of the Company’s cash is held by one bank located in Wyoming.  The Company does not believe that, as aresult of this concentration, it is subject to any unusual financial riskbeyond the normal risk associated with commercial banking relationships.

 

***Accountsreceivable***

*** ***

TheCompany extends non-interest bearing trade credit to its customers in theordinary course of business. To minimize credit risk, ongoing evaluations ofcustomers’ financial condition are performed; however, collateral is notrequired. The Company maintains an allowance for doubtful accounts based on itshistorical collections experience, as well as its evaluation of current andexpected conditions and trends affecting its customers.

 

***Salesreturns***

*** ***

TheCompany must make estimates of potential future product returns related tocurrent period sales. In order to do this, the Company analyzes historicalreturns, current economic trends and changes in customer demand and acceptanceof the Company’s products when evaluating the adequacy of the Company’s reservefor returns in any accounting period. If actual future returns are greater thanestimated by management, the Company’s financial statements in future periodswould be adversely affected.

 

***Inventories***

*** ***

Inventoriesare stated at the lower of cost or market, cost being determined using thefirst-in, first-out method. The Company provides a reserve for slow moving andobsolete inventory.

 

***Propertyand equipment***

*** ***

Propertyand equipment are stated at cost and are depreciated using the straight-linemethod based on the following estimated useful lives:

 
| Machinery               |   | 5 years |   |
|-------------------------|--------|--------------|--------|
| Computer  equipment     |   | 3 years |   |
| Furniture and  fixtures |   | 7 years |   |

 

Expendituresfor maintenance and repairs are charged to expense as incurred. When an assetis sold or otherwise disposed of, the cost and associated accumulateddepreciation are removed from the accounts and the resulting gain or loss isrecognized in the consolidated statement of operations.

 

Propertyand equipment are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of such assets may not berecoverable. An impairment loss is recognized if the carrying amount of theasset exceeds its fair value.

 

***Goodwill***

*** ***

Theexcess of the purchase price over the fair market value of assets acquired andliabilities assumed in acquisition transactions is classified as goodwill.Effective April 1, 2002, the Predecessor Company ceased amortization ofgoodwill as described in Note 7. In accordance with SFAS No. 142, “Goodwilland Other Intangible Assets,” the Company does not amortize goodwill, butperforms impairment tests of the carrying value at least annually.

 

F-13

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***Otherlong-term assets***

*** ***

Otherlong-term assets are stated at the lessor of cost or fair value lessaccumulated amortization. For amortizable intangible assets, amortization iscomputed on the straight-line method as follows:

 
| Trademarks |   | 15-30 years |   | (predecessor basis) |   |
|------------|--------|-------------|--------|---------------------|--------|
| Trademarks |   | 5-30 years  |   | (successor basis)   |   |

 

TheCompany and Predecessor Company have incurred debt issuance costs in connectionwith their long-term debt. These costs are capitalized as deferred financingcosts and amortized using the effective interest method over the term of therelated debt.

 

Indefinitelived intangible assets are tested for impairment at least annually, while amortizableintangible assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of such assets may not berecoverable. An impairment loss is recognized if the carrying amount of theasset exceeds its fair value.

 

***Revenuerecognition***

*** ***

Revenuesare recognized when the following revenue recognition criteria are met: (1) persuasiveevidence of an arrangement exists; (2) there is a fixed or determinableprice; (3) delivery has occurred; and (4) collectibility isreasonably assured. These criteria are satisfied, and revenue is recognized,upon shipment of product. Provision is made for estimated customer discountsand returns at the time of sale.

 

***Costof sales***

*** ***

Costof goods sold include product costs, warehousing costs, inbound and outboundshipping costs, handling and storage costs.

 

***Advertisingand promotion costs***

*** ***

Advertisingand promotion costs are expensed as incurred. Slotting fees associated withproducts are recognized as a reduction of sales. Under slotting arrangements,the retailers allow the Company’s products to be placed on the stores’ shelvesin exchange for slotting fees. Direct reimbursements of advertising costs arereflected as a reduction of advertising costs in the period earned.

 

***Stock-basedcompensation***

*** ***

TheCompany accounts for employee stock-based compensation in accordance with theprovisions of Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”) and complies with the disclosureprovisions of No. 123, “Accounting for Stock-Based Compensation” (“StatementNo. 123”) and Statement No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure, an amendment of FASB Statement No. 123.”Under APB 25, compensation expense is based on the difference, if any, on thedate of grant, between the fair value of the Company’s common stock and theexercise price of the equity instrument.

 

***Incometaxes***

*** ***

TheCompany and Predecessor Company account for income taxes in accordance with theprovisions of Statement No. 109, “Accounting for Income Taxes” (“StatementNo. 109”). Under SFAS 109, deferred tax assets and liabilities aredetermined based on the differences between the financial reporting and taxbases of assets and liabilities using the enacted tax rates and laws that willbe in effect when the differences are expected to reverse. A valuationallowance is established when necessary to reduce deferred tax assets to theamounts expected to be realized.

 

F-14

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***Derivativeinstruments***

*** ***

StatementNo. 133, “Accounting for Derivative Instruments and Hedging Activities” (“StatementNo. 133”), requires companies to recognize all of their derivativeinstruments as either assets or liabilities in the balance sheet at fair value.The accounting for changes in the fair value of a derivative instrument dependson whether it has been designated and qualifies as part of a hedgingrelationship and further, on the type of hedging relationship. For thosederivative instruments that are designated and qualify as hedging instruments,a company must designate the hedging instrument, based upon the exposure beinghedged, as a fair value hedge, a cash flow hedge or a hedge of a net investmentin an international operation.

 

TheCompany and Predecessor Company have designated their derivative financialinstruments as cash flow hedges (i.e., hedging the exposure to variability inexpected future cash flows that is attributable to interest rate risk). Forthese hedges, the effective portion of the gain or loss on the derivativeinstrument is reported as a component of other comprehensive income (loss) andreclassified into earnings in the same line item associated with the forecastedtransaction in the same period or periods during which the hedged transactionaffects earnings. Any ineffective portion of the gain or loss on the derivativeinstruments is recorded in results of operations immediately.

 

***Recentlyissued accounting standards***

*** ***

InNovember 2004, the FASB issued SFAS No. 151 “Inventory Costs—anamendment of ARB No. 43, Chapter 4.” Statement No. 151 amends the guidance in Accounting ResearchBulletin No. 43, Chapter 4, to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs and wasted material.Statement No. 151 requires that those items be recognized as currentperiod charges and that allocation of fixed production overheads to the costsof conversion be based on the normal capacity of the production facilities.Statement No. 151 is effective for fiscal years beginning after June 15,2005. The Company does not expect the adoption of this standard to have asignificant impact on its financial position, results of operations or cashflows.

 

InNovember 2004, the EITF reached a consensus on Issue No. 03-13, “Applyingthe Conditions in Paragraph 42 of FASB Statement No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets” in Determining Whether toReport Discontinued Operations” (“EITF 03-13”). Under the consensus, the approachfor assessing whether cash flows of the component have been eliminated from theongoing operations of the entity focuses on whether continuing cash flows aredirect or indirect cash flows. Cash flows of the component would not beeliminated if the continuing cash flows to the entity are considered directcash flows. The consensus should be applied to a component of an enterprisethat is either disposed of or classified as held for sale in fiscal periodsbeginning after December 15, 2004. The adoption of EITF 03-13 is notexpected to have a significant impact on the Company’s financial position,results of operations or cash flows.

 

InDecember 2004, the FASB issued SFAS No. 123R “Share-Based Payments (“StatementNo. 123R”)”  Statement 123R requiresthe Company to recognize compensation expense for equity instruments awarded toemployees. Statement 123R is effective for the Company as of the beginningof the first interim period that begins after June 15, 2005. The Companydoes not expect the adoption of this standard to have a significant impact onits financial statements.

 

InDecember 2004, the FASB issued SFAS No.153, “Exchanges of NonmonetaryAssets”. Statement No. 153 amends the guidance in APB Opinion No. 29,“Accounting for Nonmonetary Transactions” to eliminate certain exceptions tothe principle that exchanges of nonmonetary assets be measured based on thefair value of the assets exchanged. Statement No. 153 eliminates theexception of nonmonetary exchanges of similar productive assets and replaces itwith a general exception for exchanges of nonmonetary assets that do not havecommercial substance. This statement is effective for nonmonetary assetexchanges in fiscal years beginning after June 15, 2005. The adoption ofSFAS 153 is not expected to have a significant impact on the Company’sfinancial position, results of operations or cash flows.

 

InMarch 2005, the FASB issued FASB Interpretation No. 47, “Accountingfor Conditional Asset Retirement Obligations” (“FIN 47”) which clarifiesguidance provided by SFAS No. 143, “Accounting for

 

F-15

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AssetRetirement Obligations.” FIN 47 is effective for the Company no later than March 31,2006. The adoption of FIN 47 is not expected to have a significant impact onthe Company’s financial position, results of operations or cash flows.

 

**2.   Acquisitionof Businesses**

** **

OnFebruary 6, 2004, the Company acquired all of the outstanding capitalstock of Medtech and Denorex for a purchase price of approximately $244,270(including fees and expenses of $2,371).

 

OnMarch 5, 2004, the Company acquired all of the outstanding capital stockof Spic and Span for a purchase price of approximately $30,268.

 

TheMedtech Acquisition, including fees and expenses related to the new financingof $7,692, and the Spic and Span Acquisition were financed through thefollowing sources:

 
| ** **                              | ** ** | **Medtech** | ** ** | **Spic and Span** | ** ** |
|-----------------------------------------|------------|-------------|------------|-----------------------------|------------|
| Medtech  revolving credit facility      |       | $           | 195        |                        | $          | 11,650 |   |
| Medtech term  loan facility             |       | 100,000     |       | —                      |       |
| Medtech  subordinated notes             |       | 42,941      |       | —                      |       |
| Issuance of  Preferred and Common Units |       | 106,951     |       | 17,768                      |       |
| Total sources of  funds                 |       | $           | 250,087    |                        | $          | 29,418 |   |

 

Thetotal purchase prices of the Medtech Acquisition (which included cash of$166,146 paid to the selling shareholders, 1,185 Prestige LLC Class BPreferred Units valued at an aggregate of $1,185, and Prestige LLC Common Unitsvalued at an aggregate of $524, assumed debt and accrued interest which wasretired of $74,044 and acquisition costs of $2,371) and the Spic and SpanAcquisition (which included cash of $4,873 paid to the selling shareholders,22,500 Prestige LLC Senior Preferred Units issued to the selling shareholdersvalued at $17,768, and assumed debt and accrued interest which was retired of$7,627) were allocated to the acquired assets and liabilities as set forth inthe following table:

 
| ** **                                 | ** ** | **Medtech** | ** ** | **Spic and Span** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|-------------|------------|-----------------------------|------------|-----------|------------|
| Cash                                       |       | $           | 2,168      |                        | $          | 1,063     |       | $ | 3,231 |   |
| Restricted cash                            |       | 700         |       | —                      |       | 700       |       |
| Accounts  receivable                       |       | 10,622      |       | 1,849                       |       | 12,471    |       |
| Inventories                                |       | 9,959       |       | 908                         |       | 10,867    |       |
| Prepaid expenses  and other current assets |       | 151         |       | 31                          |       | 182       |       |
| Property and  equipment                    |       | 434         |       | 445                         |       | 879       |       |
| Goodwill                                   |       | 55,452      |       | —                      |       | 55,452    |       |
| Intangible  assets                         |       | 209,330     |       | 28,171                      |       | 237,501   |       |
| Deferred income  taxes                     |       | —      |       | 141                         |       | 141       |       |
| Accounts payable                           |       | (6,672      | )          | (1,644                      | )          | (8,316    | )          |
| Accrued  liabilities                       |       | (6,077      | )          | (1,341                      | )          | (7,418    | )          |
| Long-term debt                             |       | (71,868     | )          | (6,981                      | )          | (78,849   | )          |
| Deferred income  taxes                     |       | (36,601     | )          | —                      |       | (36,601   | )          |
|                                       |       | $           | 167,598    |                        | $          | 22,642    |       | $ | 190,240 |   |

 

Thevalue of the Prestige LLC Class B Preferred Units and the Prestige LLCCommon Units issued to the selling shareholders was determined based on thecash consideration received from GTCR and other investors concurrently with theacquisitions. The value of the Prestige LLC Senior Preferred Units issued to theselling shareholders in the Spic and Span Acquisition was determined based onthe estimated cash flows that will accrue to the owners of the Senior PreferredUnits, the timing of receipt and a market-based required rate of return for theSenior Preferred Units. A “unit” is an equity interest of a unitholder in theprofits, losses and distributions of a limited liability company, or “LLC.”

 

F-16

----

 

Asa result of the Medtech Acquisition, the Company recorded indefinite livedtrademarks of $153,190 and $56,140 of trademarks with an estimated weightedaverage useful life of 11 years. As a result of the Spic and SpanAcquisition, the Company recorded indefinite lived trademarks of $28,171.

 

OnApril 6, 2004, the Company acquired all of the outstanding capital stockof Bonita Bay for a purchase price of approximately $561,266 (including workingcapital adjustments totaling $1,091). In accordance with Statement No. 141,the Company was determined to be the accounting acquirer.

 

TheBonita Bay Acquisition, including fees and expenses related to the newfinancing of $22,651 and funds used to pay off $154,422 of debt and accruedinterest incurred to finance the Medtech Acquisition, was financed through thefollowing sources:

 
| Revolving Credit  Facility              |   | $       | 3,512   |   |
|-----------------------------------------|--------|---------|---------|--------|
| Tranche B Term  Loan Facility           |   | 355,000 |    |
| Tranche C Term  Loan Facility           |   | 100,000 |    |
| 9.25% Senior  Subordinated Notes        |   | 210,000 |    |
| Issuance of  Preferred and Common units |   | 58,579  |    |
| Total sources of  funds                 |   | $       | 727,091 |   |

 

Thetotal purchase price of the Bonita Bay Acquisition (which included cash of$379,226 paid to the selling shareholders, 94 Prestige LLC Class BPreferred Units valued at an aggregate of $91 and 18,842 Prestige LLC CommonUnits valued at an aggregate of $1, assumed debt and accrued interest which wasretired of $176,918 and acquisition costs of $3,579) was allocated to theacquired assets and liabilities as set forth in the following table:

 
| Cash                                       |   | $        | 4,304   |   |
|--------------------------------------------|--------|----------|---------|--------|
| Accounts  receivable                       |   | 13,186   |    |
| Inventories                                |   | 16,185   |    |
| Prepaid expenses  and other current assets |   | 1,391    |    |
| Property and  equipment                    |   | 2,982    |    |
| Goodwill                                   |   | 217,234  |    |
| Intangible  assets                         |   | 352,460  |    |
| Accounts payable  and accrued liabilities  |   | (21,189  | )       |
| Long-term debt                             |   | (172,898 | )       |
| Deferred income  taxes                     |   | (34,429  | )       |
|                                       |   | $        | 379,226 |   |

 

Asa result of the Bonita Bay Acquisition, the Company recorded indefinite livedtrademarks of $340,700 and $11,760 of trademarks with an estimated weightedaverage useful life of seven years.

 

OnOctober 6, 2004, the Company acquired all the outstanding stock of Vetco, Inc.for a purchase price of approximately $50,649. To finance the acquisition, theCompany used cash on hand of approximately $20,649 and borrowed an additional$12,000 on its Revolving Credit Facility and $18,000 on its Tranche B TermLoan Facility.

 

Thetotal purchase price of the Vetco Acquisition was allocated to the acquiredassets and liabilities as set forth in the following table:

 
| Accounts  receivable                       |   | $      | 2,136  |   |
|--------------------------------------------|--------|--------|--------|--------|
| Inventories                                |   | 910    |   |
| Prepaid expenses  and other current assets |   | 37     |   |
| Property and  equipment                    |   | 5      |   |
| Goodwill                                   |   | 21,858 |   |
| Intangible  assets                         |   | 27,158 |   |
| Accounts payable  and accrued liabilities  |   | (1,455 | )      |
|                                       |   | $      | 50,649 |   |

 

F-17

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Asa result of the Vetco Acquisition, the Company recorded $27,000 of trademarkswith an estimated useful life of 20 years and $158 related to a 5-year non-competeagreement with the former owner of Vetco.

 

Thefollowing table reflects the unaudited results of the Company’s operations on apro forma basis as if the Medtech, Spic and Span, Bonita Bay and VetcoAcquisitions had been completed on April 1, 2003. The pro forma financialinformation is not necessarily indicative of the operating results that wouldhave occurred had the acquisitions been consummated as of April 1, 2003,nor is it necessarily indicative of future operating results.

 

F-18

----

 
| ** **                  | ** ** | **Pro Forma  Twelve months ended  March 31, 2005** | ** ** | **Pro Forma  Twelve months ended  March 31, 2004** | ** ** |
|-----------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **(unaudited)**                                                             | ** ** | **(unaudited)**                                                             | ** ** |
| Net sales                   |       | $                                                                           | 309,534    |                                                                        | $          | 293,627 |   |
| Income before  income taxes |       | $                                                                           | 32,482     |                                                                        | $          | 37,120 |   |
| Net income                  |       | $                                                                           | 19,886     |                                                                        | $          | 22,322 |   |

 

**3.   DiscontinuedOperations**

** **

EffectiveMarch 28, 2003, the Predecessor Company sold substantially all of theassets of Pecos Pharmaceutical, Inc. (“Pecos”), one of the PredecessorCompany’s three reporting units, to Contract Pharmacal Corporation (the “Purchaser”).The sale included all inventory and intangible assets related to the Pecosproducts. The sales price consisted of up to $1,000 of cash, all of which wassubject to an earn-out provision based on the achievement of certaincontribution margins from future sales by the Purchaser. During the year ended March 31,2005, the Company received $445 from the Purchaser in full satisfaction of theearn-out provision. The Company recorded this consideration as an acquiredreceivable in purchase accounting.

 

Inconnection with the sale, the Predecessor Company agreed to indemnify thePurchaser for up to $3,000 of potential sales returns, less the cost ofinventory transferred to the Purchaser as part of this transaction.Accordingly, the Predecessor Company recorded a liability of $2,272 related tothis indemnification. In addition, the Predecessor Company recorded a loss onthe sale of inventory totaling $1,220. These amounts have been included in theloss on disposal of the Pecos reporting unit for the year ended March 31,2003.

 

Inaccordance with the sale agreement, the Predecessor Company was required todeposit $700 of cash into a legally restricted escrow account. This cash wasreturned to the Company in March 2004 as the Company and PredecessorCompany had fully complied with the terms of the sale agreement.

 

Theresults of operations of the Pecos reporting unit for the year ended March 31,2003 have been classified as a loss from operations of the discontinued Pecosreporting unit. Revenues of the discontinued Pecos reporting unit were $4,587for the year ended March 31, 2003 (predecessor basis). The pre-tax lossesof the discontinued Pecos reporting unit were $5,233 for the year ended March 31,2003 (predecessor basis).

 

**4.   AccountsReceivable**

** **

Thecomponents of accounts receivable consist of the following:

 
| ** **                                            | ** ** | **March 31,**         | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | **(successor basis)** | ** ** |
| Accounts  receivable                                  |       | $                          | 45,329     |   | $ | 16,244 |   |
| Other  receivables                                    |       | 835                        |       | 341 |   |
| Less allowances  for discounts, returns and bad debts |       | (2,271                     | )          | (853 | ) |
|                                                  |       | $                          | 43,893     |   | $ | 15,732 |   |

 

**5.   Inventories**

** **

Inventoriesconsist of the following:

 
| ** **                   | ** ** | **March 31,**         | ** ** |
|------------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(successor basis)** | ** ** |
| Packaging and  raw materials |       | $                          | 3,587      |   | $ | 1,562 |   |
| Finished goods               |       | 17,993                     |       | 8,186 |   |
|                         |       | $                          | 21,580     |   | $ | 9,748 |   |

 

F-19

----

 

Inventoriesare shown net of reserves for obsolete and slow moving inventory of $1,450 and$124 at March 31, 2005 and 2004, respectively.

 

**6.   Propertyand Equipment**

** **

Propertyand equipment consist of the following:

 
| ** **                     | ** ** | **March 31,**         | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(Successor Basis)** | ** ** |
| Machinery                      |       | $                          | 2,828      |   | $ | — |   |
| Computer  equipment            |       | 771                        |       | 341 |   |
| Furniture and  fixtures        |       | 515                        |       | 555 |   |
| Leasehold  improvements        |       | 173                        |       | 19 |   |
|                           |       | 4,287                      |       | 915 |   |
| Less accumulated  depreciation |       | (1,963                     | )          | (35 | ) |
|                           |       | $                          | 2,324      |   | $ | 880 |   |

 

Depreciationof property and equipment totaled $1,899 for the year ended March 31,2005, $41 for the period from February 6, 2004 to March 31, 2004(successor basis) and $247 and $301 for the period from April 1, 2003 to February 5,2004, and the year ended March 31, 2003 (predecessor basis), respectively.

 

**7.   Goodwill**

** **

EffectiveApril 1, 2002, the Predecessor Company adopted Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).SFAS 142 requires that companies perform periodic evaluations of potentialimpairment of goodwill. Impairment tests were performed as of March 31,2005 and 2004, and no impairment charges were required. The changes in thecarrying amount of goodwill for the years ended March 31, 2003, 2004 and2005 were as follows:

 
| Balance as of  March 31, 2003                                   |   | $       | —  |   |
|----------------------------------------------------------------------|--------|---------|---------|--------|
| Goodwill  acquired in the Medtech Acquisition                        |   | 55,594  |    |
| Balance as of  March 31, 2004                                   |   | 55,594  |    |
| Goodwill  acquired in the Bonita Bay Acquisition                     |   | 217,234 |    |
| Goodwill  acquired in the Vetco Acquisition                          |   | 21,858  |    |
| Purchase  accounting adjustments related to fiscal 2004 acquisitions |   | (142    | )       |
| Balance as of  March 31, 2005                                   |   | $       | 294,544 |   |

 

Thefollowing table reflects what the Predecessor Company’s net loss would havebeen for the years ended March 31, 2003 before the change in accountingprinciple related to goodwill:

 
| ** **                                                                                                                                   | ** ** | **Year ended  March 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **(predecessor basis)**              | ** ** |
| Net loss                                                                                                                                     |       | $                                         | (14,422    | ) |
| Add back the  cumulative effect of change in accounting principle, net of income tax  benefit of $6,467, related to the adoption of SFAS 142 |       | 11,785                                    |       |
| Adjusted net  loss                                                                                                                           |       | $                                         | (2,637     | ) |

 

F-20

----

 

**8.   OtherLong-term Assets**

** **

Otherlong-term assets consist of the following at March 31, 2005:

 
| ** **                        | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
|-----------------------------------|------------|----------------------|------------|-------------------------------|------------|---------------------------|------------|
| ** **                        | ** ** | ** **           | ** ** | **(successor basis)**    | ** ** | ** **                | ** ** |
| Intangible  assets:               |       |                 |       |                          |       |                      |       |
| Indefinite lived  trademarks      |       | $                    | 522,346    |                          | $          | —                    |       | $ | 522,346 |   |
| Amortizable  intangible assets:   |       |                 |       |                          |       |                      |       |
| Trademarks                        |       | 94,900               |       | (8,775                        | )          | 86,125                    |       |
| Non-compete  agreement            |       | 158                  |       | (16                           | )          | 142                       |       |
|                              |       | 617,404              |       | (8,791                        | )          | 608,613                   |       |
| Deferred  financing costs, net    |       | 13,193               |       | —                        |       | 13,193                    |       |
| Fair value of  interest rate caps |       | 2,803                |       | —                        |       | 2,803                     |       |
| Total                             |       | $                    | 633,400    |                          | $          | (8,791                    | )          | $ | 624,609 |   |

 

Otherlong-term assets consist of the following at March 31, 2004:

 
| ** **                      | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-------------------------------|------------|---------------------------|------------|
| ** **                      | ** ** | ** **                  | ** ** | **(successor basis)**    | ** ** | ** **                | ** ** |
| Intangible  assets:             |       |                        |       |                          |       |                      |       |
| Indefinite lived  trademarks    |       | $                           | 181,361    |                          | $          | —                    |       | $ | 181,361 |   |
| Amortizable  intangible assets: |       |                        |       |                          |       |                      |       |
| Trademarks                      |       | 56,140                      |       | (890                          | )          | 55,250                    |       |
|                            |       | 237,501                     |       | (890                          | )          | 236,611                   |       |
| Deferred financing costs, net   |       | 2,783                       |       | —                        |       | 2,783                     |       |
| Total                           |       | $                           | 240,284    |                          | $          | (890                      | )          | $ | 239,394 |   |

 

AtMarch 31, 2005 and 2004, the Company’s intangible assets had tax bases of$394,580 and $100,863, respectively.

 

Amortizationof intangible assets totaled $7,901 for the year ended March 31, 2005 and$890 for the period from February 6, 2004 to March 31, 2004(successor basis) and $4,251 and $4,973 for the period from April 1, 2003to February 5, 2004 and the year ended March 31, 2003 (predecessorbasis), respectively.

 

Asof March 31, 2005, the Company’s future amortization of intangible assetsis expected to be as follows:

 
| **Year ending March 31,** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|------------|
| 2006                                     |       | $          | 8,592      |       |
| 2007                                     |       | 8,592      |       |
| 2008                                     |       | 8,592      |       |
| 2009                                     |       | 8,592      |       |
| 2010                                     |       | 7,168      |       |
| Thereafter                               |       | 44,731     |       |
| Total                                    |       | $          | 86,267     |       |

 

Inconnection with the Medtech Acquisition, the Company assumed certaincontractual obligations, including royalty agreements for certain of thelicensed products. Royalty costs were approximately $1,087 for the year ended March 31,2005, $73 for the period from February 6, 2004 to March 31, 2004(successor basis), $450 for the period from April 1, 2003 to February 5,2004, and $1,208 the year ended March 31, 2003 (predecessor basis).

 

F-21

----

 

**9.   AccruedExpenses**

** **

Accruedliabilities consist of:

 
| ** **                 | ** ** | **March 31,**         | ** ** |
|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **(successor basis)** | ** ** |
| Accrued  marketing costs   |       | $                          | 2,693      |   | $ | 1,631 |   |
| Reserve for  Pecos returns |       | 242                        |       | 1,186 |   |
| Accrued payroll            |       | 2,004                      |       | 1,345 |   |
| Accrued  commissions       |       | 308                        |       | 353 |   |
| Interest payable           |       | 7,060                      |       | 1,241 |   |
| Income taxes  payable      |       | 615                        |       | 138 |   |
| Other                      |       | 550                        |       | 1,370 |   |
|                       |       | $                          | 13,472     |   | $ | 7,264 |   |

 

**10.   Long-TermDebt**

** **

Long-termdebt consists of the following:

 
| ** **                         | ** ** | **March 31,**         | ** ** |
|------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                         | ** ** | **(successor basis)** | ** ** |
| Tranche B Term  Loan Facility      |       | $                          | 369,360    |   | $ | — |   |
| Senior  Subordinated Notes         |       | 126,000                    |       | — |   |
| Medtech  Revolving Credit Facility |       | —                     |       | 10,548 |   |
| Medtech Term  Loan Facility        |       | —                     |       | 100,000 |   |
| Medtech  Subordinated Notes        |       | —                     |       | 38,146 |   |
|                               |       | 495,360                    |       | 148,694 |   |
| Less: current  portion             |       | (3,730                     | )          | (2,000 | ) |
| Long-term debt                     |       | $                          | 491,630    |   | $ | 146,694 |   |

 

OnApril 6, 2004, the Company, through a wholly owned subsidiary, enteredinto a new senior secured credit facility (the “Senior Credit Facility”),consisting of a $50,000 non-amortizing senior secured revolving credit facility(“Revolving Credit Facility”), a $355,000 senior secured term loan facility, (“TrancheB Term Loan Facility”) and a $100,000 second lien term loan facility (“TrancheC Term Loan Facility”). On April 6, 2004, the Company, through a whollyowned subsidiary, also issued $210,000 of 9.25% senior subordinated notes (“SeniorSubordinated Notes”).

 

OnFebruary 15, 2005, the Company’s initial public offering of common stockresulted in proceeds of $416.8 million. The proceeds were used to repay $100.0million outstanding under the Tranche C facility of the Company’s senior creditfacility (plus a repayment premium of $3.0 million and accrued interest of$0.5 million as of February 15, 2005), and to redeem $84.0 millionin aggregate principal amount of our existing 91¤4% seniorsubordinated notes (plus a redemption premium of $7.8 million and accruedinterest of $3.3 million as of March 18, 2005). Effective upon thecompletion of the initial public offering, the Company entered into anamendment to the credit agreement that, among other things, allows the Companyto increase the indebtedness under its Tranche B facility by $200.0 million andallows for an increase in its revolving credit facility up to $60 million.

 

TheSenior Credit Facility is collateralized by substantially all of the Company’sassets. The Tranche B Term Loan Facility bears interest at the Company’s optionof either prime (5.75% at March 31, 2005) or LIBOR (3.13% at March 31,2005) plus a variable margin and mature on April 6, 2011 and October 6,2011, respectively. At March 31, 2005, the applicable interest rate on theTranche B facility was 5.38%. Principal and interest payments on Tranche Bare due quarterly.

 

TheRevolving Credit Facility is available until April 6, 2009. At March 31,2005, the Company was eligible to borrow $60 million on the RevolvingCredit Facility. The Revolving Credit Facility bears interest

 

F-22

----

 

atthe Company’s option of either prime plus a variable margin or LIBOR plus avariable margin. The variable margin ranges from 0.75% to 2.50%. At March 31,2005, the applicable interest rate on the Revolving Credit Facility was 7.3%.The Company is also required to pay a variable commitment fee on the unusedportion of the Revolving Credit Facility. At March 31, 2005, theapplicable rate was 0.50%.

 

TheSenior Subordinated Notes (“Notes”) mature on April 15, 2012 and bearinterest at 9.25%. Interest is payable on April 15 and October 15,each year, beginning on October 15, 2004. The total principal amount isdue on April 15, 2012. The Company may redeem some or all of the Notes onor prior to April 15, 2008 at a redemption price equal to 100% plus amake-whole premium and on or after April 15, 2008 at redemption prices setforth in the Note agreement. The Notes are fully and unconditionally guaranteedby Prestige Brands International, LLC, which has no independent assets oroperations, and its other wholly owned subsidiaries (except the issuer(Prestige Brands, Inc.), which is a wholly owned finance subsidiary of theCompany). Each of these guarantees is joint and several. There are nosignificant restrictions on the ability of any of the guarantors to obtainfunds from their subsidiaries.

 

Thesenior credit facility contains various financial covenants, includingfinancial covenants that require us to maintain certain leverage ratios,interest coverage ratios and fixed charge coverage ratios, as well as covenantsrestricting the Company from undertaking specified corporate actions,including, asset dispositions, acquisitions, payment of dividends and otherspecified payments, changes of control, incurrence of indebtedness, creation ofliens, making loans and investments and transactions with affiliates. TheCompany’s credit agreement, dated April 6, 2004, requires that adjustedEBITDA is to be used as the basis for calculating the Company’s leverage andinterest coverage ratios. The Company was in compliance with its financial andrestrictive covenants under the credit facility at March 31, 2005.

 

***TheMedtech and Spic and Span Acquisitions***

*** ***

Inorder to finance the Medtech and Spic and Span Acquisitions, repay certainexisting indebtedness, and pay related fees and expenses, the Company enteredinto the financing agreements set forth in the following paragraphs.

 

OnFebruary 6, 2004, the Company entered into a senior secured creditfacility (the “Medtech Senior Credit Facility”), consisting of a$20 million non-amortizing senior secured revolving credit facility and a$100.0 million senior secured term loan facility. On February 6,2004, the Company also issued $42.9 million of 12.0% subordinated notes (“MedtechSubordinated Notes”). The outstanding borrowings on the Medtech Senior CreditFacility were repaid on April 6, 2004 using proceeds from the Bonita BayAcquisition financing discussed above.

 

TheMedtech Subordinated Notes (“Notes”) were scheduled to mature on February 6,2014. In conjunction with the Notes, the Company issued warrants to purchase5,250 Class B Preferred Units and 2,619,386 Common Units. The warrantswere exercised immediately upon issuance. The relative fair value of thesewarrants was recorded as a discount on debt of $4,871 and was being amortizedover the life of the related debt. The outstanding Notes were repaid on April 6,2004 using proceeds from the Bonita Bay Acquisition financing discussed above.In conjunction with the repayment of the Notes, the unamortized discount of$4,795 was written-off and recorded as loss on extinguishment of debt.

 

***PredecessorCompany***

*** ***

OnMarch 1, 2001, the Predecessor Company entered into a credit agreementwith a bank to provide $55,000 in debt (“Term Commitments A and B”) and a$10,000 revolving line of credit (“Revolving Line”, or together with TermCommitments A and B, the “Senior Debt”). Simultaneously, the PredecessorCompany issued $21,500 of subordinated notes payable (the “Senior SubordinatedNotes”). The outstanding borrowings were repaid on February 6, 2004 usingproceeds from the Medtech Acquisition financing discussed above.

 

TheSenior Subordinated Notes were scheduled to mature on August 31, 2008, andoriginally bore interest at 15%. On September 11, 2002, the note agreementwas amended to require interest at 17%. The Predecessor Company accounted forthis modification as an extinguishment and reissuance of debt in accordancewith EITF 96-19, “Debtors Accounting for a Modification or Exchange of DebtInstruments.”

 

F-23

----

 

Accordingly,the Predecessor Company recorded a loss on extinguishment of debt totaling $685for the year ended March 31, 2003. In conjunction with the purchase of theSenior Subordinated Notes, the Predecessor Company issued 1,048,798 warrants topurchase Class A-1 Common Stock. The warrants were exercisable immediatelyat an exercise price of $0.01 per share and were to expire on March 1,2013. The Predecessor Company initially recorded a discount of $442 on theSenior Subordinated Notes. The unamortized discount was expensed during theyear ended March 31, 2003. The outstanding borrowings were repaid on February 6,2004 using proceeds from the Medtech Acquisition financing discussed above.

 

Estimatedfuture principal payments associated with long-term debt at March 31, 2005are as follows:

 
| **Year ending March 31,** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|------------|
| 2006                                     |       | $          | 3,730      |       |
| 2007                                     |       | 3,730      |       |
| 2008                                     |       | 3,730      |       |
| 2009                                     |       | 3,730      |       |
| 2010                                     |       | 3,730      |       |
| Thereafter                               |       | 476,710    |       |
|                                     |       | $          | 495,360    |       |

 

***Interestrate protection agreement***

*** ***

OnJune 30, 2004, the Company paid $52 for a 5% interest rate cap agreementwith a notional amount of $20.0 million. The interest rate cap terminates in June 2006.On March 7, 2005, the Company paid $2.3 million for interest rate capagreements that become effective August 30, 2005, with a total notionalamount of $180.0 million and cap rates ranging from 3.25% to 3.75%. Theinterest rate cap agreements terminate on May 30, 2006, 2007 and 2008 asto $50 million, $80 million and $50 million, respectively. The Company isaccounting for the interest rate cap agreements as cash flow hedges. The fairvalue of the interest rate cap agreements was $2,803 as of March 31, 2005.

 

**11.   Commitmentsand Contingencies**

** **

TheCompany has operating leases for office facilities in New York and Wyoming,which expire on April 9, 2009 and December 31, 2005, respectively.

 

Thefollowing summarizes future minimum lease payments:

 
| ** **                          | ** ** | **Operating** | ** ** |
|-------------------------------------|------------|---------------|------------|
| **Year ending March 31,** | ** ** | ** **    | **Leases** | ** ** |
| 2006                                |       | 471           |       |
| 2007                                |       | 371           |       |
| 2008                                |       | 371           |       |
| 2009                                |       | 371           |       |
| 2010                                |       | 32            |       |
|                                |       | $             | 1,614      |   |
|                                     |            |               |            |  |  |

 

Rentexpense for the fiscal year ending March 31, 2005 was $512 (successorbasis). Rent expense totaled $62 for the period from February 6, 2004 to March 31,2004 (successor basis), $357 for the period from April 1, 2003 to February 5,2004 and $418 the year ended March 31, 2003 (predecessor basis), net ofrent income from subleases totaling $23 for the period from February 6,2004 to March 31, 2004 (successor basis) $96 for the period from April 1,2003 to February 5, 2004 and $104 the year ended March 31, 2003(predecessor basis).

 

OnJuly 29, 2002, the Predecessor Company entered into a 10 yearmanufacturing and supply agreement with an unrelated company. Pursuant to thisagreement, the Company agreed to purchase certain minimum quantities of productover the initial three years of the agreement or to pay liquidated damages ofup to $360. The Company had recorded a liability of $308 at March 31, 2005and 2004 which

 

F-24

----

 

representsits estimate of the probable liquidated damages. Such estimate is based onhistorical and expected purchases during the initial three years of theagreement.

 

InJune 2003, Dr. Jason Theodosakis filed a lawsuit, Theodosakis v.Walgreens, et al., in Federal District Court in Arizona, alleging that two ofthe Company’s subsidiaries, Medtech Products and Pecos Pharmaceutical, as wellas other unrelated parties, infringed the trade dress of two of his publishedbooks. Specifically, Dr. Theodosakis published “The Arthritis Cure” and “Maximizingthe Arthritis Cure” regarding the use of dietary supplements to treat arthritispatients. Dr. Theodosakis alleged that his books have a distinctive tradedress, or cover layout, design, color and typeface, and those products that thedefendants sold under the ARTHx trademarks infringed the books’ trade dress andconstituted unfair competition and false designation of origin. Additionally, Dr. Theodosakisalleged that the defendants made false endorsements of the products byreferencing his books on the product packaging and that the use of his name,books and trade dress invaded his right to publicity. The Company sold theARTHx trademarks, goodwill and inventory to a third party, Contract PharmacalCorporation, in March 2003. On January 12, 2005, the court granted theCompany’s motion for summary judgment and dismissed all claims against Pecosand Medtech. The plaintiff has filed an appeal in the U.S. Court of Appealswhich is pending.

 

OnJanuary 3, 2005 the Company was served with process by our former leadcounsel in the Theodosakis litigation seeking $679,000 plus interest. The casewas filed the Supreme Court of New York and is styled as Dickstein Shapiro etal v. Medtech Products, Inc. In February plaintiffs filed an amendedcomplaint naming the Pecos Pharmaceutical Company. The Company has answered andcounterclaimed against Dickstein and also filed a third party complaint againstthe Lexington Insurance Company. The Company believes that if there is anyobligation to the Dickstein firm relating to this matter, it is an obligationof Lexington and not the Company.

 

OnMay 9, 2005 the Company was served with a complaint in a class actionfiled in Essex County, Massachusetts, styled as Dawn Thompson v. Wyeth, Inc.relating to the Company’s Little Remedies® pediatric cough products. TheCompany is one of several corporate defendants, all of whom market OTC coughsyrup products for pediatric use. The complaint alleges that the ingredientdextromethorphan is no more effective than placebo. There is no allegation of physicalinjury caused by the product or the ingredient. The Company is still evaluatingits position in this litigation, however, the use of dextromethorphan inpediatric products is fully consistent with and supported by FDA regulations.

 

TheCompany is also involved from time to time in routine legal matters and otherclaims incidental to its business. When it appears probable in management’sjudgment that the Company will incur monetary damages or other costs inconnection with such claims and proceedings, and such costs can be reasonablyestimated, liabilities are recorded in the financial statements and charges arerecorded against earnings. The Company believes the resolution of such routinematters and other incidental claims, taking into account reserves andinsurance, will not have a material adverse effect on its financial conditionor results of operation.

 

F-25

----

 

**12.   IncomeTaxes**

** **

Theprovision (benefit) for income taxes consists of the following:

 
| ** **                                                                               | ** ** | **Year Ended  March 31,  2005** | ** ** | **February 6, 2004  to March 31,  2004** | ** ** | **April 1, 2003  to February 5,  2004** | ** ** | **Year Ended  March 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                               | ** ** | **(successor basis)**                | ** ** | **(predecessor basis)**                                 | ** ** |
| Current:                                                                                 |       |                                      |       |                                                         |       |                                                        |       |                                      |       |
| Federal                                                                                  |       | $                                         | 545        |                                                         | $          | 307                                                         |       | $                                         | (30        | ) | $ | 2,151 |   |
| State                                                                                    |       | 678                                       |       | 51                                                           |       | (4                                                          | )          | 129                                       |       |
| Foreign                                                                                  |       | 102                                       |       | —                                                       |       | —                                                      |       | —                                    |       |
| Deferred:                                                                                |       |                                      |       |                                                         |       |                                                        |       |                                      |       |
| Federal                                                                                  |       | 6,348                                     |       | 662                                                          |       | 1,620                                                       |       | 1,530                                     |       |
| State                                                                                    |       | 849                                       |       | 34                                                           |       | 98                                                          |       | 92                                        |       |
| Provision for  income taxes from continuing operations                                   |       | 8,522                                     |       | 1,054                                                        |       | 1,684                                                       |       | 3,902                                     |       |
| Benefit for  income taxes from loss from operations of discontinued Pecos reporting unit |       | —                                    |       | —                                                       |       | —                                                      |       | (1,848                                    | )          |
| Benefit for  income taxes from loss on disposal of Pecos reporting unit                  |       | —                                    |       | —                                                       |       | —                                                      |       | (1,233                                    | )          |
| Benefit for  income taxes from cumulative effect of changes in accounting principle      |       | —                                    |       | —                                                       |       | —                                                      |       | (6,467                                    | )          |
|                                                                                     |       | $                                         | 8,522      |                                                         | $          | 1,054                                                       |       | $                                         | 1,684      |   | $ | (5,646 | ) |

 

Theprincipal components of the Company’s deferred tax balances are as follows:

 
| ** **                                         | ** ** | **March 31,**         | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **(successor basis)** | ** ** |
| **Deferred  tax assets:**                          |       |                       |       |   |   |
| Allowance for  doubtful accounts and sales returns |       | $                          | 992        |   | $ | 622 |   |
| Inventory  capitalization                          |       | 359                        |       | 83 |   |
| Inventory  reserve                                 |       | 567                        |       | 45 |   |
| Inventory  step-up                                 |       | —                     |       | (122 | ) |
| Net operating  loss carryforwards                  |       | 7,990                      |       | 8,306 |   |
| Property and  equipment                            |       | 50                         |       | — |   |
| State income  taxes                                |       | 2,978                      |       | 747 |   |
| Other                                              |       | 430                        |       | 270 |   |
| Reserve for  coupons                               |       | 114                        |       | — |   |
| Vacation accrual                                   |       | 93                         |       | — |   |
| AMT tax credit  carryforwards                      |       | 278                        |       | — |   |
| **Deferred  tax liabilities:**                     |       |                       |       |   |   |
| Intangible  assets                                 |       | (92,704                    | )          | (47,145 | ) |
| Interest rate  caps                                |       | (200                       | )          | — |   |
| Property and  equipment                            |       | —                     |       | (33 | ) |
| Other                                              |       | —                     |       | — |   |
|                                               |       | $                          | (79,053    | ) | $ | (37,227 | ) |

 

AtMarch 31, 2005, Prestige Brands, Medtech, Spic and Span, and Denorex hadnet operating loss carryforwards of approximately $9,790, $5,956, $901 and$4,932, respectively, which may be used to offset future taxable income of theconsolidated group and which begin to expire in 2020. $8,677 of thesecarryforwards are subject to annual limitations as to usage of approximately$1,865 under Internal Revenue Code Section 382.

 

F-26

----

 

Areconciliation of the effective tax rate for continuing operations compared tothe statutory U.S. Federal tax rate (34%) is as follows:

 
| ** **                                              | ** ** | **Year Ended  March 31,  2005** | ** ** | **February 6  to March 31,  2004** | ** ** | **April 1, 2003  to February 5,  2004** | ** ** | **Year Ended  March 31,  2003** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **(successor basis)**                | ** ** | **(predecessor basis)**                      | ** ** |
| Income  tax provision at statutory rate                 |       | $                                         | 7,525      |                                              | $          | 967                                                         |       | $                                         | 1,386      |   | $ | 2,349 |   |
| Foreign  income tax provision                           |       | 102                                       |       | —                                            |       | —                                                      |       | —                                    |       |
| State  income taxes (net of federal income tax benefit) |       | 873                                       |       | 50                                                |       | 71                                                          |       | 139                                       |       |
| Change  in effective state tax rate                     |       | —                                    |       | —                                            |       | —                                                      |       | 190                                       |       |
| Amortization  of intangible assets                      |       | —                                    |       | —                                            |       | 94                                                          |       | 193                                       |       |
| Valuation  allowance                                    |       | —                                    |       | —                                            |       | 321                                                         |       | 992                                       |       |
| Other                                                   |       | 22                                        |       | 37                                                |       | (188                                                        | )          | 39                                        |       |
| Provision  for income taxes from continuing operations  |       | $                                         | 8,522      |                                              | $          | 1,054                                                       |       | $                                         | 1,684      |   | $ | 3,902 |   |

 

**13.   Members’ andShareholders’ Equity**

** **

**Prestige Holdings**

** **

Prestige Holdings isauthorized to issue 250,000,000 shares of common stock, $0.01 par value pershare, and 5,000,000 shares of preferred stock, $0.01 par value per share. TheBoard of Directors may direct the issuance of the undesignated preferred stockin one or more series and determine preferences, privileges and restrictionsthereof.

 

Each share of commonstock has the right to one vote on all matters submitted to a vote ofstockholders. The holders of common stock are also entitled to receivedividends whenever funds are legally available and when declared by the Boardof Directors, subject to prior rights of holders of all classes of stockoutstanding having priority rights as to dividends. No dividends have beendeclared or paid on the Company’s common stock through March 31, 2005.

 

**Prestige LLC**

** **

Prior to the initialpublic offering, the Company had four classes of units: Senior Preferred Units,Class A Preferred Units, Class B Preferred Units and Common Units. A “unit”is an equity interest of a unitholder in the profits, losses and distributionsof the Company.

 

On February 9,2005, Prestige Brands Holdings, Inc., a Delaware corporation, became thedirect parent company of Prestige LLC, under the terms of an exchange agreementamong Prestige Holdings, Prestige LLC and each holder of common units ofPrestige LLC. Pursuant to the agreement, the holders of common units ofPrestige LLC exchanged all their common units for an aggregate of 26,666,667 sharesof common stock of Prestige Holdings.

 

On February 15,2005, Prestige LLC, used a portion of the net proceeds from the initial publicoffering to redeem all the outstanding Senior Preferred Units and Class BPreferred Units for $199,836, which included cumulative and liquidatingdividends of $26,785. The cumulative dividends were based on an 8% per yearrate of return.

 

**14.   EquityIssuances**

** **

On February 6,2004, in connection with the Medtech Acquisition, certain senior executiveofficers purchased an aggregate of 5,282,269 common units of Prestige LLC at$.10 per unit. These units were purchased on the same day and at the same pricethat GTCR and-TCW/Crescent Partners, the Company’s unrelated equity investors(the “Sponsors”), purchased 50,000,000 common units. The value of the commonunits purchased in connection with the Medtech acquisition was determined bysubtracting from the acquisition purchase price, the total debt outstandingimmediately following the acquisition and the liquidation value of outstandingpreferred units issued in the acquisition. On March 17, 2004, otherexecutive officers purchased an aggregate of 405,103 common units at a price of$.10 per unit. The

 

F-27

----

 

Sponsors did not purchaseany common units at this time. On April 6, 2004, two employees purchasedan aggregate of 50,435 common units at a price of $.10 per unit. The Sponsorsdid not purchase any common units at this time. Each of the above-referencedpurchase transactions by management were conducted at fair market value basedupon the price paid by the Sponsors in the Medtech Acquisition and the factthat the such purchases were made at the same price and at the same time orshortly thereafter.

 

On November 1,2004, certain non-executive employees purchased an aggregate of 337,000 commonunits for $0.70 per unit, which was equal to fair market value. Thisdetermination was based on a contemporaneous valuation that utilizedtraditional methodologies, including market multiples, comparable transactionand discounted cash flow. The Company relied on this fair market value analysisin setting the $0.70 per unit price for the purchases. The Company awarded atotal cash bonus of $235 to allow employees to purchase such units. In connectiontherewith, the Company recorded a bonus expense of $235. In this regard, allemployee purchases were conducted at fair market value based upon thecontemporaneous valuation.

 

In February 2005,the Company completed its initial public offering, pursuant to which it sold28,000,000 shares of its common stock and selling shareholders sold 4,200,000shares of common stock at a price of $16.00 per share. The offering resulted inproceeds to the Company of approximately $416,832, net of $3,168 of issuancecosts. In connection with the offering, the Company retired 4,666,667 shares ofits common stock for an aggregate cost of $30,248. Upon completion of theinitial public offering, there were 50,000,000 shares of the Company’s commonstock issued and outstanding.

 

**15.   EquityIncentive Plan**

** **

In connection with theCompany’s initial public offering, the Company’s board of directors adopted the2005 Long-Term Equity Incentive Plan (“the Plan”). The Plan provides for grantsof stock options, restricted stock, restricted stock units, deferred stockunits and other equity-based awards. Directors, officers and other employees ofthe Company and its subsidiaries, as well as others performing services for theCompany, are eligible for grants under the Plan. As of March 31, 2005,there were 5,000,000 shares available for issuance under the Plan. No grantshave been made under the Plan as of March 31, 2005.

 

**16.   Earnings PerShare**

** **

Basic and dilutedearnings per share are calculated based on income (loss) available to commonshareholders and the weighted-average number of shares outstanding during thereported period. For the period from February 6, 2004 to the initialpublic offering, the weighted average number of common shares outstandingincludes common units of Prestige LLC as if the common units had been convertedto common stock using the initial public offering conversion ratio of onecommon unit to 0.4589 shares of common stock. The Company had no potentially dilutive securities outstanding duringthe year ending March 31, 2005 or the period from February 6, 2004through March 31, 2004.

 
| ** **                                                                                | ** ** | **Fiscal Year  Ended  March 31,  2005** | ** ** | **February 6,  2004 to  March 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| Net  income as reported                                                                   |       | $                                                 | 13,459     |                                                | $          | 1,790 |   |
| Cumulative  preferred dividends on Senior Preferred and Class B Preferred units |       | (25,395                                           | )          | (1,390                                              | )          |
| Net  income (loss) available to common shareholders                                       |       | $                                                 | (11,936    | )                                                   | $          | 400 |   |
| Basic  and diluted weighted average shares outstanding                                    |       | 29,389,329                                        |       | 26,571,155                                          |       |
| Basic  and diluted net income (loss) per common share                                     |       | $                                                 | (0.41      | )                                                   | $          | 0.02 |   |

 

**17.   Related PartyTransactions**

** **

In connection with theacquisitions, the Company entered into an agreement with an affiliate of GTCRto provide management and advisory services. Under the terms of the agreement,the Company was required to pay $4.0 million per year for these services. In February 2005,the management and advisory services agreement between the Company and anaffiliate of GTCR was terminated. The total fee

 

F-28

----

 

paid to GTCR during theyear ended March 31, 2005 was $3.4 million. During 2004, in conjunctionwith the Medtech and Denorex Acquisitions, the Company paid an affiliate ofGTCR a fee of $5,026.

 

In January 2004,the Company forgave a $1,404 receivable from Spic and Span.

 

The Predecessor Companyentered into agreements with its majority shareholder to provide advisory andmanagement services. For the period from April 1, 2003 to February 5,2004 and the year ended March 31, 2003, the Predecessor Company incurred$1,293 and $1,600, respectively, for these services. In addition, thePredecessor Company reimbursed this shareholder for travel expenses totaling$390 and $170 for the period from April 1, 2003 to February 5, 2004and the year ended March 31, respectively. This shareholder was also paid$560 during the year ended March 31, 2003 for management and advisoryservices relating to the acquisition of the Denorex assets on February 7,2002.

 

During the year ended March 31,2002, the Predecessor Company entered into an agreement with an affiliatedcompany under common management to provide certain administrative, technologyand support services to the affiliate in exchange for $57 per month. Thisagreement was amended in April 2002 to reduce this fee to $33 per month.The Predecessor Company recognized $333 and $391 for these services during theperiod from April 1, 2003 to February 5, 2004 and the year ended March 31,2003, respectively. The agreement was terminated in March 2004.

 

**18.   Fair Value ofFinancial Instruments**

** **

The carrying value ofcash, accounts receivable and accounts payable at March 31, 2005 and 2004approximates fair value because of the short-term nature of these instruments.The carrying value of long-term debt at March 31, 2005 and 2004approximates fair value based on interest rates for instruments with similarterms and maturities.

 

**19.   Concentrationsof Risk**

** **

The Company’s sales areconcentrated in the areas of over-the-counter pharmaceutical products, personalcare products and household cleaning products. The Company sells its productsto mass merchandisers, food and drug accounts, and dollar and club stores.During the year ended March 31, 2005, the periods from February 6,2004 to March 31, 2004, April 1, 2003 to February 5, 2004 andthe year ended March 31, 2003, approximately 64%, 66%, 74% and 70% theCompany’s total sales were derived from 4 of its brands. During the year ended March 31,2005, the periods from February 6, 2004 to March 31, 2004, April 1,2003 to February 5, 2004 and the year ended March 31, 2003,approximately 24%, 33%, 30% and 24% the Company’s net sales were made to onecustomer. At March 31, 2005, approximately 21% of accounts receivable wereowed by one customer.

 

The Company managesproduct distribution in the continental United States through a maindistribution center in St. Louis, Missouri. A serious disruption, such as aflood or fire, to the main distribution center could damage the Company’sinventory and could materially impair the Company’s ability to distribute itsproducts to customers in a timely manner or at a reasonable cost. The Companycould incur significantly higher costs and experience longer lead timesassociated with distributing its products to its customers during the time thatit takes the Company to reopen or replace its distribution center. As a result,any such disruption could have a material adverse effect on the Company’s salesand profitability.

 

As of March 31,2005, the Company sold 94 types of products. The Company does not havelong-term contracts with the manufacturers of 59 of those types of products.These 59 types of products accounted for approximately 29% of the Company’sgross sales for the year ended March 31, 2005. The fact that the Companydoes not have long-term contracts with these manufacturers means that theycould cease manufacturing these products at any time and for any reason.Without adequate supplies of merchandise to sell to the Company’s customers,sales would decrease materially and the Company’s business would suffer.

 

**20.   BusinessSegments**

** **

Segment information hasbeen prepared in accordance with SFAS No. 131, “Disclosures about Segmentsof an Enterprise and Related Information.” Operating segments are based on the Company’s

 

F-29

----

 

product lines. Withineach reportable segment are operating segments which have similar economiccharacteristics, including the nature of the products, production process, typeof customer and method of distribution.

 

There were no inter-segmentsales or transfers during the year ended March 31, 2005, the period from February 6,2004 through March 31, 2004, the period from April 1, 2003 through February 5,2004 or the year ended March 31, 2003. The Company evaluates theperformance of its product lines and allocates resources to them basedprimarily on contribution margin. The table below summarizes information aboutreportable segments.

 
| **Year ended  March 31, 2005  (successor basis)** | ** ** | **Over-the-Counter  Drug** | ** ** | **Personal  Care** | ** ** | **Household  Cleaning** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|-------------------------|------------|-----------|------------|------------------|------------|
| Net  sales                                                       |       | $                          | 167,246    |               | $          | 33,665                  |       | $         | 102,256    |             | $          | — |   | $ | 303,167 |   |
| Other  revenues                                                  |       | —                     |       | —             |       | 151                     |       | —    |       | 151              |       |
| Total  revenues                                                  |       | 167,246                    |       | 33,665             |       | 102,407                 |       | —    |       | 303,318          |       |
| Cost  of sales                                                   |       | 61,682                     |       | 16,469             |       | 63,197                  |       | —    |       | 141,348          |       |
| Gross  profit                                                    |       | 105,564                    |       | 17,196             |       | 39,210                  |       | —    |       | 161,970          |       |
| Advertising  and promotion                                       |       | 23,193                     |       | 6,894              |       | 8,315                   |       | —    |       | 38,402           |       |
| Contribution  margin                                             |       | 82,371                     |       | 10,302             |       | 30,895                  |       | —    |       | 123,568          |       |
| Other  operating expenses                                        |       |                       |       |               |       |                    |       |      |       | 29,998           |       |
| Operating  income                                                |       |                       |       |               |       |                    |       |      |       | 93,570           |       |
| Other  income (expense)                                          |       |                       |       |               |       |                    |       |      |       | (71,589          | )          |
| Provision  from income taxes                                     |       |                       |       |               |       |                    |       |      |       | (8,522           | )          |
| Net  income                                                      |       |                       |       |               |       |                    |       |      |       | $                | 13,459     |   |
|                                                                  |            |                            |            |                    |            |                         |            |           |            |                  |            |  |  |  |  |  |

 
| **Period from February 6, 2004 to March 31, 2004  (successor basis)** | ** ** | **Over-the-Counter  Drug** | ** ** | **Personal  Care** | ** ** | **Household  Cleaning** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|-------------------------|------------|-----------|------------|------------------|------------|
| Net  sales                                                                                                         |       | $                          | 12,010     |               | $          | 4,721                   |       | $         | 2,076      |             | $          | — |   | $ | 18,807 |   |
| Other  revenues—related party                                                                                 |       | —                     |       | —             |       | —                  |       | 54        |       | 54               |       |
| Total  revenues                                                                                                    |       | 12,010                     |       | 4,721              |       | 2,076                   |       | 54        |       | 18,861           |       |
| Cost  of sales                                                                                                     |       | 5,981                      |       | 2,836              |       | 1,206                   |       | —    |       | 10,023           |       |
| Gross  profit                                                                                                      |       | 6,029                      |       | 1,885              |       | 870                     |       | 54        |       | 8,838            |       |
| Advertising  and promotion                                                                                         |       | 869                        |       | 603                |       | 217                     |       | —    |       | 1,689            |       |
| Contribution  margin                                                                                               |       | 5,160                      |       | 1,282              |       | 653                     |       | 54        |       | 7,149            |       |
| Other  operating expenses                                                                                          |       |                       |       |               |       |                    |       |      |       | 2,580            |       |
| Operating  income                                                                                                  |       |                       |       |               |       |                    |       |      |       | 4,569            |       |
| Other  income (expense)                                                                                            |       |                       |       |               |       |                    |       |      |       | (1,725           | )          |
| Provision  for income taxes                                                                                        |       |                       |       |               |       |                    |       |      |       | (1,054           | )          |
| Net  income                                                                                                        |       |                       |       |               |       |                    |       |      |       | $                | 1,790      |   |
|                                                                                                                    |            |                            |            |                    |            |                         |            |           |            |                  |            |  |  |  |  |  |

 
| **Period from April 1, 2003 to February 5, 2004  (predecessor basis)** | ** ** | **Over-the-Counter  Drug** | ** ** | **Personal Care** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------|------------|-----------|------------|------------------|------------|
| Net  sales                                                                                                          |       | $                          | 43,577     |                   | $          | 25,149    |       | $                | —     |   | $ | 68,726 |   |
| Other  revenues—related party                                                                                  |       | —                     |       | —                 |       | 333       |       | 333              |       |
| Total  revenues                                                                                                     |       | 43,577                     |       | 25,149                 |       | 333       |       | 69,059           |       |
| Cost  of sales                                                                                                      |       | 14,685                     |       | 11,569                 |       | —    |       | 26,254           |       |
| Gross  profit                                                                                                       |       | 28,892                     |       | 13,580                 |       | 333       |       | 42,805           |       |
| Advertising  and promotion                                                                                          |       | 6,467                      |       | 6,134                  |       | —    |       | 12,601           |       |
| Contribution  margin                                                                                                |       | 22,425                     |       | 7,446                  |       | 333       |       | 30,204           |       |
| Other  operating expenses                                                                                           |       |                       |       |                   |       |      |       | 17,970           |       |
| Operating  income                                                                                                   |       |                       |       |                   |       |      |       | 12,234           |       |
| Other  income (expense)                                                                                             |       |                       |       |                   |       |      |       | (8,157           | )          |
| Provision  for income taxes                                                                                         |       |                       |       |                   |       |      |       | (1,684           | )          |
| Discontinued  operations                                                                                            |       |                       |       |                   |       |      |       | —           |       |
| Change  in accounting principle Net income                                                                          |       |                       |       |                   |       |      |       | $2,393           |       |
|                                                                                                                     |            |                            |            |                        |            |           |            |                  |            |  |  |  |  |

 

F-30

----

 
| **Year ended March 31, 2003  (predecessor basis)** | ** ** | **Over-the-Counter  Drug** | ** ** | **Personal Care** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------|------------|------------------------|------------|-----------|------------|------------------|------------|
| Net  sales                                                                  |       | $                          | 43,260     |                   | $          | 32,788    |       | $                | —     |   | $ | 76,048 |   |
| Other  revenues—related party                                          |       | —                     |       | —                 |       | 391       |       | 391              |       |
| Total  revenues                                                             |       | 43,260                     |       | 32,788                 |       | 391       |       | 76,439           |       |
| Cost  of sales                                                              |       | 12,620                     |       | 14,855                 |       | —    |       | 27,475           |       |
| Gross  profit                                                               |       | 30,640                     |       | 17,933                 |       | 391       |       | 48,964           |       |
| Advertising  and promotion                                                  |       | 7,420                      |       | 6,854                  |       | —    |       | 14,274           |       |
| Contribution  margin                                                        |       | 23,220                     |       | 11,079                 |       | 391       |       | 34,690           |       |
| Other  operating expenses                                                   |       |                       |       |                   |       |      |       | 17,349           |       |
| Operating  income                                                           |       |                       |       |                   |       |      |       | 17,341           |       |
| Other  income (expense)                                                     |       |                       |       |                   |       |      |       | (10,432          | )          |
| Provision  for income taxes                                                 |       |                       |       |                   |       |      |       | (3,902           | )          |
| Discontinued  operations                                                    |       |                       |       |                   |       |      |       | (5,644           | )          |
| Cumulative  effect of change in accounting principle                        |       |                       |       |                   |       |      |       | (11,785          | )          |
| Net  (loss)                                                                 |       |                       |       |                   |       |      |       | $                | (14,422    | ) |
|                                                                             |            |                            |            |                        |            |           |            |                  |            |  |  |  |  |

 

During the year ended March 31,2005, 98% of sales were made to customers in the United States and Canada.During the period from February 6, 2004 through March 31, 2004, theperiod from April 1, 2003 through February 5, 2004, and the yearended March 31, 2003, virtually all sales were made to customers in theUnited States of America and Canada. No individual geographical area accountedfor more than 10% of net sales in any of the periods presented. At March 31,2005 and 2004, all of the Company’s long-term assets were located in the UnitedStates of America and have not been allocated between segments.

 

**21.   SubsequentEvents**

** **

On April 13, 2005,the Company entered into a material definitive storage and handling agreementand transportation management agreement. As a result, in August 2005, theCompany will change its third-party service provider and move its storage anddistribution center to a different facility.

 

**22.   UnauditedQuarterly Financial Information (in thousands, except for per share data)**

 
| ** **                                                                                      | ** ** | **Quarter Ended** | ** ** | **Period from  January 1,  2004** | ** ** | **Period  from Feb. 6,  2004  through** | ** ** | **Quarter Ended**     | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                      | ** ** | **June 30,**      | ** ** | **Sept. 30,**                          | ** ** | **Dec. 31,**                                 | ** ** | **through**                | ** ** | **Mar. 31,** | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** | **Mar. 31,** | ** ** |
| ** **                                                                                      | ** ** | **2003**               | ** ** | **2003**                                    | ** ** | **2003**                                          | ** ** | **Feb. 5, 2004** | ** ** | **2004** | ** ** | **2004** | ** ** | **2004** | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Income  Statement Data:**                                                                     |       |                   |       |                                        |       |                                              |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                                                                  |       | $                      | 19,377     |                                        | $          | 23,781                                            |       | $                          | 19,219     |   | $ | 6,682 |   | $ | 18,861 |   | $ | 67,757 |   | $ | 81,346 |   | $ | 75,854 |   | $ | 78,361 |   |
| Cost of sales                                                                                   |       | 7,047                  |       | 9,040                                       |       | 7,485                                             |       | 2,682                      |       | 10,023 |   | 36,123 |   | 37,843 |   | 33,923 |   | 33,459 |   |
| Gross profit                                                                                    |       | 12,330                 |       | 14,741                                      |       | 11,734                                            |       | 4,000                      |       | 8,838 |   | 31,634 |   | 43,503 |   | 41,931 |   | 44,902 |   |
| Advertising and  promotion expenses                                                             |       | 4,208                  |       | 5,046                                       |       | 2,736                                             |       | 611                        |       | 1,689 |   | 13,771 |   | 10,304 |   | 7,265 |   | 7,062 |   |
| Depreciation and  amortization expenses                                                         |       | 1,312                  |       | 1,318                                       |       | 1,319                                             |       | 549                        |       | 931 |   | 2,289 |   | 2,254 |   | 2,605 |   | 2,652 |   |
| General and  administrative expenses                                                            |       | 2,441                  |       | 2,493                                       |       | 2,879                                             |       | 4,255                      |       | 1,649 |   | 4,921 |   | 4,502 |   | 5,690 |   | 5,085 |   |
| Interest expense,  net                                                                          |       | 2,171                  |       | 2,217                                       |       | 2,148                                             |       | 1,621                      |       | 1,725 |   | 11,049 |   | 10,834 |   | 11,994 |   | 10,849 |   |
| Other expense                                                                                   |       | —                 |       | —                                      |       | —                                            |       | 1,404                      |       | — |   | 7,567 |   | — |   | — |   | 19,296 |   |
| Income from  continuing operations before taxes                                                 |       | 2,198                  |       | 3,667                                       |       | 2,652                                             |       | (4,440                     | )          | 2,844 |   | (7,963 | ) | 15,609 |   | 14,377 |   | (42 | ) |
| Provision/(benefit)  for income taxes                                                           |       | 771                    |       | 1,541                                       |       | 1,052                                             |       | (1,680                     | )          | 1,054 |   | (2,826 | ) | 5,936 |   | 5,230 |   | 182 |   |
| Net income/(loss)                                                                               |       | $                      | 1,427      |                                        | $          | 2,126                                             |       | $                          | 1,600      |   | $ | (2,760 | ) | 1,790 |   | (5,137 | ) | 9,673 |   | 9,147 |   | (224 | ) |
| Cumulative  preferred dividends on Senior Preferred and Class B Preferred  units |       |                   |       |                                        |       |                                              |       |                       |       | (1,390 | ) | (3,619 | ) | (3,827 | ) | (3,895 | ) | (14,053 | ) |
| Net income (loss)  available to common shareholders                                             |       |                   |       |                                        |       |                                              |       |                       |       | $ | 400 |   | $ | (8,756 | ) | $ | 5,846 |   | $ | 5,252 |   | $ | (14,277 | ) |
| Net income (loss)  per common share                                                             |       |                   |       |                                        |       |                                              |       |                       |       | $ | 0.02 |   | $ | (0.33 | ) | $ | 0.22 |   | $ | 0.20 |   | $ | (0.37 | ) |
| Basic and diluted  weighted average shares outstanding                                          |       |                   |       |                                        |       |                                              |       |                       |       | 26,571,155 |   | 26,515,916 |   | 26,512,017 |   | 26,612,876 |   | 38,074,074 |   |

 

F-31

----

 

**SCHEDULE II**VALUATION AND QUALIFYING ACCOUNTS(dollars in thousands)

** **
| ** **                                                | ** ** | **Balance at  Beginning of  Year** | ** ** | **Charged to  Expense** | ** ** | **Deductions** | ** ** | **Other** | ** ** | **Balance at  End of  Year** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------|------------|----------------|------------|-----------|------------|----------------------------------------|------------|
| **Predecessor  Basis**                                    |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Year ended  March 31, 2003                           |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Deferred tax  valuation allowance                         |       | $                                            | 427        |                         | $          | 992            |       | $         | —     |                                   | $          | — |   | $ | 1,419 |   |
| Reserves for  sales returns                               |       | 262                                          |       | 4,305                        |       | 4,218          |       | —    |       | 349                                    |       |
| Allowance for  doubtful accounts                          |       | 57                                           |       | 126                          |       | 94             |       | —    |       | 89                                     |       |
| Allowance for  inventory obsolescence                     |       | 184                                          |       | 87                           |       | 193            |       | —    |       | 78                                     |       |
| Pecos returns  reserve                                    |       | 888                                          |       | 7,556                        |       | 4,340          |       | —    |       | 4,104                                  |       |
|                                                      |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Period from  April 1, 2003 to February 5, 2004  |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Deferred tax  valuation allowance                         |       | 1,419                                        |       | 325                          |       | —         |       | —    |       | 1,744                                  |       |
| Reserves for  sales returns                               |       | 348                                          |       | 3,254                        |       | 3,025          |       | —    |       | 577                                    |       |
| Allowance for  doubtful accounts                          |       | 89                                           |       | 166                          |       | 114            |       | —    |       | 141                                    |       |
| Allowance for  inventory obsolescence                     |       | 78                                           |       | 350                          |       | 340            |       | —    |       | 88                                     |       |
| Pecos returns  reserve                                    |       | 4,104                                        |       | —                       |       | 2,755          |       | —    |       | 1,349                                  |       |
|                                                      |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| **Successor  Basis**                                      |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Period from  February 6, 2004 to March 31, 2004 |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Deferred tax  valuation allowance                         |       | 1,744                                        |       | —                       |       | —         |       | (1,744    | )(1)       | —                                 |       |
| Reserves for  sales returns                               |       | 684                                          |       | 389                          |       | 568            |       | 288       | (2)        | 793                                    |       |
| Allowance for  doubtful accounts                          |       | 141                                          |       | 46                           |       | 140            |       | 13        | (2)        | 60                                     |       |
| Allowance for  inventory obsolescence                     |       | 88                                           |       | 70                           |       | 60             |       | 26        | (2)        | 124                                    |       |
| Pecos returns  reserve                                    |       | 1,349                                        |       | —                       |       | 163            |       | —    |       | 1,186                                  |       |
|                                                      |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Year ended  March 31, 2005                           |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Reserves for  sales returns                               |       | 793                                          |       | 10,508                       |       | 8,708          |       | —    |       | 2,593                                  |       |
| Allowance for  doubtful accounts                          |       | 60                                           |       | 32                           |       | 33             |       | 191       | (3)        | 250                                    |       |
| Allowance for  inventory obsolescence                     |       | 124                                          |       | 769                          |       | 266            |       | 823       | (3)        | 1,450                                  |       |
| Pecos returns  reserve                                    |       | 1,186                                        |       | —                       |       | 944            |       | —    |       | 242                                    |       |
|                                                           |            |                                              |            |                              |            |                |            |           |            |                                        |            |  |  |  |  |  |

 

----

(1)    As a result of the business combination ofMedtech and Denorex, the Company determined that it would probably be able toutilize the deferred tax assets for which a valuation allowance had previouslybeen established. Accordingly, the Company did not record a valuation allowancein purchase accounting.

 

(2)    As a result of the acquisition of Spic andSpan, the Company recorded reserves for sales returns and allowances fordoubtful accounts and inventory obsolescense in purchase accounting.

 

(3)    As a result of the acquisition of Bonita Bayand Vetco, the Company recorded allowances for doubtful accounts and inventoryobsolescence in purchase accounting.

 

F-32

----

 

**Prestige**

** **

**BrandsInternational, LLC**

** **

**FinancialStatementsMarch 31, 2005**

** **

**F-33**

----

** **

**Report of Independent Registered PublicAccounting Firm**

** **

Tothe Board of Directors and Members ofPrestige Brands International, LLC

 

In our opinion, theaccompanying consolidated balance sheets and the related consolidatedstatements of operations, of members’ equity and comprehensive income and ofcash flows present fairly, in all material respects, the financial position ofPrestige Brands International, LLC and its subsidiaries at March 31,2005 and 2004, and the results of their operations and their cash flows for theyear ended March 31, 2005 and for the period from February 6, 2004 toMarch 31, 2004 (successor basis) in conformity with accounting principlesgenerally accepted in the United States of America. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements and financial statement schedule basedon our audits. We conducted our audits of these statements in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 
| /s/ PRICEWATERHOUSECOOPERS LLP |   |
|--------------------------------|--------|
|                           |
| Salt Lake City, Utah           |
| June 3, 2005              |

 

F-34

----

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

Tothe Board of Directors and Shareholders ofMedtech Holdings, Inc. and The Denorex Company

 

In our opinion, theaccompanying combined statements of operations, of shareholders’ equity and ofcash flows present fairly, in all material respects, the combined result ofoperations and cash flows of Medtech Holdings, Inc. and The DenorexCompany (the “Company”) for the period from April 1, 2003 to February 5,2004 and the year ended March 31, 2003 (predecessor basis) in conformitywith accounting principles generally accepted in the United States of America.In addition, in our opinion, the financial statement schedule listed inthe index appearing on page F-1 presents fairly, in all material respects,the information set forth therein when read in conjunction with the relatedfinancial statements. These financial statements and financial statement schedule arethe responsibility of the Company’s management; our responsibility is toexpress an opinion on these financial statements and financial statement schedule basedon our audits. We conducted our audits of these statements in accordance withthe standards of the Public Company Accounting Oversight Board (United States),which require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 
| /s/  PRICEWATERHOUSECOOPERS LLP |   |
|---------------------------------|--------|
|                            |
| Salt Lake City, Utah            |
| July 2, 2004               |

 

F-35

----

** **

**PRESTIGEBRANDS INTERNATIONAL, LLCCONSOLIDATED STATEMENTS OFOPERATIONS(in thousands, except share and per share data)**

 
| ** **                                                                                       | ** ** | **Year Ended  March 31, 2005** | ** ** | **February 6, 2004   to March 31, 2004** | ** ** | **April 1, 2003  to February 5, 2004** | ** ** | **Year Ended  March 31, 2003** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                       | ** ** | **(successor basis)**                    | ** ** | **(predecessor basis)**                                      | ** ** |
| **Revenues:**                                                                                    |       |                                          |       |                                                              |       |                                                            |       |                                          |       |
| Net sales                                                                                        |       | $                                             | 303,167    |                                                              | $          | 18,807                                                          |       | $                                             | 68,726     |   | $ | 76,048 |   |
| Other revenues                                                                                   |       | 151                                           |       | —                                                            |       | —                                                          |       | —                                        |       |
| Other revenues—related  parties                                                             |       | —                                        |       | 54                                                                |       | 333                                                             |       | 391                                           |       |
| Total revenues                                                                                   |       | 303,318                                       |       | 18,861                                                            |       | 69,059                                                          |       | 76,439                                        |       |
| **Cost of  Sales:**                                                                              |       |                                          |       |                                                              |       |                                                            |       |                                          |       |
| Cost of sales                                                                                    |       | 141,348                                       |       | 10,023                                                            |       | 26,254                                                          |       | 27,475                                        |       |
| Gross profit                                                                                     |       | 161,970                                       |       | 8,838                                                             |       | 42,805                                                          |       | 48,964                                        |       |
| **Operating  Expenses:**                                                                         |       |                                          |       |                                                              |       |                                                            |       |                                          |       |
| Advertising and  promotion                                                                       |       | 38,402                                        |       | 1,689                                                             |       | 12,601                                                          |       | 14,274                                        |       |
| General and  administrative                                                                      |       | 20,198                                        |       | 1,649                                                             |       | 12,068                                                          |       | 12,075                                        |       |
| Depreciation                                                                                     |       | 1,899                                         |       | 41                                                                |       | 247                                                             |       | 301                                           |       |
| Amortization of  intangible assets                                                               |       | 7,901                                         |       | 890                                                               |       | 4,251                                                           |       | 4,973                                         |       |
| Loss on  forgiveness of related party receivable                                                 |       | —                                        |       | —                                                            |       | 1,404                                                           |       | —                                        |       |
| Total operating  expenses                                                                        |       | 68,400                                        |       | 4,269                                                             |       | 30,571                                                          |       | 31,623                                        |       |
| Operating income                                                                                 |       | 93,570                                        |       | 4,569                                                             |       | 12,234                                                          |       | 17,341                                        |       |
| **Other  Income (Expenses)**                                                                     |       |                                          |       |                                                              |       |                                                            |       |                                          |       |
| Interest income                                                                                  |       | 371                                           |       | 10                                                                |       | 38                                                              |       | 59                                            |       |
| Interest expense                                                                                 |       | (45,097                                       | )          | (1,735                                                            | )          | (8,195                                                          | )          | (9,806                                        | )          |
| Loss on disposal  of property and equipment                                                      |       | (9                                            | )          | —                                                            |       | —                                                          |       | —                                        |       |
| Loss on  extinguishment of debt                                                                  |       | (26,854                                       | )          | —                                                            |       | —                                                          |       | (685                                          | )          |
| Total other  income (expense)                                                                    |       | (71,589                                       | )          | (1,725                                                            | )          | (8,157                                                          | )          | (10,432                                       | )          |
| Income from  continuing operations before income taxes                                           |       | 21,981                                        |       | 2,844                                                             |       | 4,077                                                           |       | 6,909                                         |       |
| **Provision  for Income Taxes**                                                                  |       | (8,522                                        | )          | (1,054                                                            | )          | (1,684                                                          | )          | (3,902                                        | )          |
| Income from  continuing operations                                                               |       | 13,459                                        |       | 1,790                                                             |       | 2,393                                                           |       | 3,007                                         |       |
| **Discontinued  Operations**                                                                     |       |                                          |       |                                                              |       |                                                            |       |                                          |       |
| Loss from  operations of discontinued Pecos reporting unit, net of income tax benefit of  $1,848 |       | —                                        |       | —                                                            |       | —                                                          |       | (3,385                                        | )          |
| Loss on disposal  of Pecos reporting unit, net of income tax benefit of $1,233              |       | —                                        |       | —                                                            |       | —                                                          |       | (2,259                                        | )          |
| Income (loss)  before cumulative effect of change in accounting principle                        |       | 13,459                                        |       | 1,790                                                             |       | 2,393                                                           |       | (2,637                                        | )          |
| Cumulative  effect of change in accounting principle,  net of income tax benefit of  $6,467 |       | —                                        |       | —                                                            |       | —                                                          |       | (11,785                                       | )          |
| Net income  (loss)                                                                               |       | $                                             | 13,459     |                                                              | $          | 1,790                                                           |       | $                                             | 2,393      |   | $ | (14,422 | ) |

 

Theaccompanying notes are an integral part of these financial statements.

 

F-36

----

 

**PRESTIGEBRANDS INTERNATIONAL, LLCCONSOLIDATED BALANCE SHEETS(in thousands, except share and unit data)**

** **
| ** **                                  | ** ** | **March 31,**         | ** ** |
|---------------------------------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **(successor basis)** | ** ** |
| **ASSETS**                                  |       |                       |       |   |   |
| Current assets:                             |       |                       |       |   |   |
| Cash                                        |       | $                          | 5,334      |   | $ | 3,393 |   |
| Accounts  receivable                        |       | 43,893                     |       | 15,732 |   |
| Inventories                                 |       | 21,580                     |       | 9,748 |   |
| Deferred income  tax asset                  |       | 5,699                      |       | 1,647 |   |
| Prepaid expenses  and other current assets  |       | 3,152                      |       | 234 |   |
| Total current  assets                       |       | 79,658                     |       | 30,754 |   |
| Property and  equipment                     |       | 2,324                      |       | 880 |   |
| Goodwill                                    |       | 294,544                    |       | 55,594 |   |
| Other long-term  assets                     |       | 624,609                    |       | 239,394 |   |
| Total assets                                |       | $                          | 1,001,135  |   | $ | 326,622 |   |
|                                        |       |                       |       |   |   |
| **LIABILITIES  AND MEMBERS’ EQUITY**   |       |                       |       |   |   |
| Current  liabilities:                       |       |                       |       |   |   |
| Accounts payable                            |       | $                          | 21,705     |   | $ | 5,281 |   |
| Accrued expenses                            |       | 13,472                     |       | 7,264 |   |
| Current portion  of long-term debt          |       | 3,730                      |       | 2,000 |   |
| Total current  liabilities                  |       | 38,907                     |       | 14,545 |   |
| Long-term debt                              |       | 491,630                    |       | 146,694 |   |
| Deferred income  tax liability              |       | 84,752                     |       | 38,874 |   |
| Total  liabilities                          |       | 615,289                    |       | 200,113 |   |
| Commitments and  contingencies (Note 11)    |       |                       |       |   |   |
| Members’ equity:                       |       |                       |       |   |   |
| Prestige  contributed capital               |       | 370,277                    |       | 124,719 |   |
| Accumulated  other comprehensive income     |       | 320                        |       | — |   |
| Retained  earnings                          |       | 15,249                     |       | 1,790 |   |
| Total members’  equity                 |       | 385,846                    |       | 126,509 |   |
| Total  liabilities and members’ equity |       | $                          | 1,001,135  |   | $ | 326,622 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

F-37

----

 

**PRESTIGEBRANDS HOLDINGS, INC.CONSOLIDATED STATEMENTS OFCASH FLOWS(in thousands)**

 
| ** **                                                                                           | ** ** | **Year Ended  March 31, 2005** | ** ** | **February 6, 2004  to March 31, 2004** | ** ** | **April 1, 2003  to February 5, 2004** | ** ** | **Year Ended  March 31, 2003** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                           | ** ** | **(successor basis)**                    | ** ** | **(predecessor basis)**                                     | ** ** |
| **Operating  Activities**                                                                            |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Net income  (loss)                                                                                   |       | $                                             | 13,459     |                                                             | $          | 1,790                                                           |       | $                                             | 2,393      |   | $ | (14,422 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Cumulative  effect of change in accounting principle, net of income tax benefit of $6,467            |       | —                                        |       | —                                                           |       | —                                                          |       | 11,785                                        |       |
| Loss on extinguishment  of debt                                                                      |       | 26,854                                        |       | —                                                           |       | —                                                          |       | 685                                           |       |
| Depreciation                                                                                         |       | 1,899                                         |       | 41                                                               |       | 247                                                             |       | 301                                           |       |
| Loss on disposal  of property and equipment                                                          |       | 9                                             |       | —                                                           |       | —                                                          |       | 91                                            |       |
| Amortization of  intangible assets                                                                   |       | 7,901                                         |       | 890                                                              |       | 4,251                                                           |       | 4,973                                         |       |
| Amortization of  deferred financing costs and debt discount                                          |       | 2,943                                         |       | 134                                                              |       | 1,271                                                           |       | 1,912                                         |       |
| Amortization of  deferred compensation                                                               |       | —                                        |       | —                                                           |       | 67                                                              |       | 79                                            |       |
| Increase in  long-term debt due to accrued interest                                                  |       | —                                        |       | —                                                           |       | 376                                                             |       | 251                                           |       |
| Deferred income  taxes                                                                               |       | 7,197                                         |       | 696                                                              |       | 1,718                                                           |       | 1,622                                         |       |
| Other                                                                                                |       | —                                        |       | 71                                                               |       | —                                                          |       | —                                        |       |
| Changes in  operating assets and liabilities, net of effects of purchase of businesses:              |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Accounts  receivable                                                                                 |       | (12,839                                       | )          | (3,314                                                           | )          | 2,674                                                           |       | (2,698                                        | )          |
| Accounts  receivable—related parties                                                            |       | —                                        |       | 53                                                               |       | 326                                                             |       | (364                                          | )          |
| Inventories                                                                                          |       | 5,263                                         |       | 1,119                                                            |       | (2,313                                                          | )          | 3,931                                         |       |
| Prepaid expenses  and other current assets                                                           |       | (1,490                                        | )          | (52                                                              | )          | 259                                                             |       | 2,216                                         |       |
| Accounts payable                                                                                     |       | 5,059                                         |       | 1,106                                                            |       | (262                                                            | )          | (638                                          | )          |
| Accounts payable—related  parties                                                               |       | —                                        |       | (532                                                             | )          | (1,111                                                          | )          | 464                                           |       |
| Accrued expenses                                                                                     |       | (5,213                                        | )          | (4,028                                                           | )          | (1,859                                                          | )          | 2,551                                         |       |
| Income taxes  payable                                                                                |       | —                                        |       | 320                                                              |       | (194                                                            | )          | (220                                          | )          |
| Net cash  provided by (used in) operating activities                                                 |       | 51,042                                        |       | (1,706                                                           | )          | 7,843                                                           |       | 12,519                                        |       |
| **Investing  Activities**                                                                            |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Purchase of  property and equipment                                                                  |       | (365                                          | )          | (42                                                              | )          | (66                                                             | )          | (421                                          | )          |
| Change in  restricted cash                                                                           |       | —                                        |       | 700                                                              |       | —                                                          |       | (700                                          | )          |
| Purchase of  intangibles                                                                             |       | —                                        |       | —                                                           |       | (510                                                            | )          | (256                                          | )          |
| Purchase of  businesses, net of cash acquired                                                        |       | (425,479                                      | )          | (167,532                                                         | )          | —                                                          |       | (788                                          | )          |
| Net cash used in  investing activities                                                               |       | (425,844                                      | )          | (166,874                                                         | )          | (576                                                            | )          | (2,165                                        | )          |
| **Financing  Activities**                                                                            |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Proceeds from  borrowings                                                                            |       | 698,512                                       |       | 154,786                                                          |       | 13,539                                                          |       | 4,220                                         |       |
| Repayment of  borrowings                                                                             |       | (529,538                                      | )          | (80,146                                                          | )          | (24,682                                                         | )          | (18,862                                       | )          |
| Payment of  deferred financing costs                                                                 |       | (24,539                                       | )          | (2,841                                                           | )          | (115                                                            | )          | (76                                           | )          |
| Payment on  interest rate swap liability                                                             |       | —                                        |       | (197                                                             | )          | —                                                          |       | —                                        |       |
| Prepayment  penalty                                                                                  |       | (10,875                                       | )          | —                                                           |       | —                                                          |       | —                                        |       |
| Premium on  interest rate cap                                                                        |       | (2,283                                        | )          | —                                                           |       | —                                                          |       | —                                        |       |
| Proceeds from  issuance of Denorex Class A shares                                               |       | —                                        |       | —                                                           |       | —                                                          |       | 12                                            |       |
| Purchase of  treasury stock                                                                          |       | —                                        |       | —                                                           |       | —                                                          |       | (4                                            | )          |
| Proceeds from  issuance of treasury stock                                                            |       | —                                        |       | —                                                           |       | —                                                          |       | 2                                             |       |
| Proceeds from  capital contributions                                                                 |       | —                                        |       | —                                                           |       | 2,629                                                           |       | —                                        |       |
| Contribution of  capital from parent                                                                 |       | 245,466                                       |       | 100,371                                                          |       | —                                                          |       | —                                        |       |
| Net cash  provided by (used in) financing activities                                                 |       | 376,743                                       |       | 171,973                                                          |       | (8,629                                                          | )          | (14,708                                       | )          |
| Increase  (decrease) in cash                                                                         |       | 1,941                                         |       | 3,393                                                            |       | (1,362                                                          | )          | (4,354                                        | )          |
| Cash at  beginning of period                                                                         |       | 3,393                                         |       | —                                                           |       | 3,530                                                           |       | 7,884                                         |       |
| Cash at end of  period                                                                               |       | $                                             | 5,334      |                                                             | $          | 3,393                                                           |       | $                                             | 2,168      |   | $ | 3,530 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

F-38

----

 
| ** **                                                                   | ** ** | **Year Ended  March 31, 2005** | ** ** | **February 6, 2004  to March 31, 2004** | ** ** | **April 1, 2003  to February 5, 2004** | ** ** | **Year Ended  March 31, 2003** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **(successor basis)**                    | ** ** | **(predecessor basis)**                                     | ** ** |
| **Supplemental  cash flow information**                                      |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Interest paid                                                                |       | $                                             | 42,155     |                                                             | $          | 2,357                                                           |       | $                                             | 5,491      |   | $ | 8,553 |   |
| Income taxes  paid (refunded)                                                |       | $                                             | 2,689      |                                                             | $          | (31                                                             | )          | $                                             | 159        |   | $ | 174 |   |
| **Supplemental  disclosure of non-cash investing and financing activities:** |       |                                          |       |                                                             |       |                                                            |       |                                          |       |
| Fair value of  assets acquired, net of cash acquired                         |       | $                                             | 655,542    |                                                             | $          | 317,498                                                         |       | $                                             | —     |   | $ | — |   |
| Fair value of  liabilities assumed                                           |       | (229,971                                      | )          | (130,489                                                         | )          | —                                                          |       | —                                        |       |
| Purchase price  funded with non-cash capital contribution                    |       | (92                                           | )          | (19,477                                                          | )          | —                                                          |       | —                                        |       |
| Cash paid to  purchase businesses                                            |       | $                                             | 425,479    |                                                             | $          | 167,532                                                         |       | $                                             | —     |   | $ | — |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

F-39

----

 

**PRESTIGE BRANDS INTERNATIONAL,LLC**

**CONSOLIDATED STATEMENTS OFMEMBERS****’ EQUITY AND COMPREHENSIVEINCOME**

**(in thousands, except per shareand unit data)**

 
| ** **                                                                              | ** ** | ** **      | ** ** | ** **            | ** ** | ** **            | ** ** | ** **     | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** | ** **       | ** ** | **Accumulated**        | ** ** | **Retained** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------|------------|-----------------------|------------|-----------------------|------------|----------------|------------|--------------|------------|--------------|------------|-------------------|------------|------------------|------------|------------------------|------------|--------------|------------|------------|------------|
| ** **                                                                              | ** ** | **Prestige**    | ** ** | **Medtech**           | ** ** | **Denorex**           | ** ** | **Additional** | ** ** | ** **   | ** ** | **Medtech**  | ** ** | **other**         | ** ** | **earnings**     | ** ** | ** **             | ** ** |
| ** **                                                                              | ** ** | **Contributed** | ** ** | **common stock** | ** ** | **common stock** | ** ** | **paid-in**    | ** ** | **Deferred** | ** ** | **treasury** | ** ** | **comprehensive** | ** ** | **(accumulated** | ** ** | ** **             | ** ** |
| ** **                                                                              | ** ** | **Capital**     | ** ** | **Shares**            | ** ** | **Amount**            | ** ** | **Shares**     | ** ** | **Amount**   | ** ** | **capital**  | ** ** | **compensation**  | ** ** | **Stock**        | ** ** | **Income (loss)** | ** ** | **deficit)** | ** ** | **Total**  | ** ** |
| **Predecessor Basis**                                                              |       |            |       |                  |       |                  |       |           |       |         |       |         |       |              |       |             |       |                   |       |         |       |       |       |
| Balance at  March 31, 2002                                                         |       | —          |       | 7,144,937             |       | $                     | 71         |           | 112,242    |         | $          | 1            |       | $                 | 56,780     |             | $          | (219                   | )          | —       |       | $          | (478       | ) | $ | 3,046 |   | $ | 59,201 |   |
| Issuance of  Denorex Class A shares                                                |       | —          |       | —                |       | —                |       | 12,471         |       | —       |       | 12           |       | —            |       | —           |       | —                 |       | —       |       | 12         |       |
| Purchase of  treasury stock                                                             |       | —          |       | —                |       | —                |       | —         |       | —       |       | —       |       | —            |       | (4               | )          | —                 |       | —       |       | (4         | )          |
| Issuance of  shares from treasury                                                       |       | —          |       | —                |       | —                |       | —         |       | —       |       | —       |       | —            |       | 2                |       | —                 |       | —       |       | 2          |       |
| Amortization of  deferred compensation                                                  |       | —          |       | —                |       | —                |       | —         |       | —       |       | —       |       | 79                |       | —           |       | —                 |       | —       |       | 79         |       |
| Components of  Comprehensive loss                                                       |       |            |       |                  |       |                  |       |           |       |         |       |         |       |              |       |             |       |                   |       |         |       |       |       |
| Net loss                                                                                |       | —          |       | —                |       | —                |       | —         |       | —       |       | —       |       | —            |       | —           |       | —                 |       | (14,422      | )          | (14,422    | )          |
| Unrealized loss  on interest rate swap net of income tax benefit of $38            |       | —          |       | —                |       | —                |       | —         |       | —       |       | —       |       | —            |       | —           |       | (71                    | )          | —       |       | (71        | )          |
| Total  comprehensive loss                                                               |       |            |       |                  |       |                  |       |           |       |         |       |         |       |              |       |             |       |                   |       |         |       | (14,493    | )          |
| Balance at  March 31, 2003                                                         |       | —          |       | 7,144,937             |       | 71                    |       | 124,713        |       | 1            |       | 56,792       |       | (140              | )          | (2               | )          | (549                   | )          | (11,376      | )          | 44,797     |       |
| Amortization of  deferred compensation                                                  |       | —          |       | —                |       | —                |       | —         |       | —       |       | —       |       | 67                |       | —           |       | —                 |       | —       |       | 67         |       |
| Contribution of  capital                                                                |       | —          |       | —                |       | —                |       | —         |       | —       |       | 2,629        |       | —            |       | —           |       | —                 |       | —       |       | 2,629      |       |
| Components of  Comprehensive income                                                     |       | —          |       | —                |       | —                |       | —         |       | —       |       | —       |       | —            |       | —           |       | —                 |       | —       |       | —     |       |
| Net income                                                                              |       | —          |       | —                |       | —                |       | —         |       | —       |       | —       |       | —            |       | —           |       | —                 |       | 2,393        |       | 2,393      |       |
| Unrealized gain  on interest rate swap net of income tax expense of $148           |       | —          |       | —                |       | —                |       | —         |       | —       |       | —       |       | —            |       | —           |       | 423                    |       | —       |       | 423        |       |
| Total  comprehensive income                                                             |       |            |       |                  |       |                  |       |           |       |         |       |         |       |              |       |             |       |                   |       |         |       | 2,816      |       |
| Balance at  February 5, 2004                                                       |       | —          |       | 7,144,937             |       | 71                    |       | 124,713        |       | 1            |       | 59,421       |       | (73               | )          | (2               | )          | (126                   | )          | (8,983       | )          | 50,309     |       |
|                                                                                    |       |            |       |                  |       |                  |       |           |       |         |       |         |       |              |       |             |       |                   |       |         |       |       |       |
| **Successor  Basis**                                                                    |       |            |       |                  |       |                  |       |           |       |         |       |         |       |              |       |             |       |                   |       |         |       |       |       |
| Cash contribution  of capital related to the Medtech Acquisition, net of offering costs |       | 100,371         |       | —                |       | —                |       | —         |       | —       |       | —       |       | —            |       | —           |       | —                 |       | —       |       | 100,371    |       |
| Issuance of  Prestige LLC units in conjunction with Medtech Acquisition                 |       | 1,709           |       | —                |       | —                |       | —         |       | —       |       | —       |       | —            |       | —           |       | —                 |       | —       |       | 1,709      |       |
| Adjustments  related to Medtech Acquisition                                             |       | —          |       | (7,144,937            | )          | (71                   | )          | (124,713       | )          | (1           | )          | (59,421      | )          | 73                |       | 2                |       | 126                    |       | 8,983        |       | (50,309    | )          |
| Issuance of  Prestige LLC units in conjunction with Spic and Span Acquisition           |       | 17,768          |       | —                |       | —                |       | —         |       | —       |       | —       |       | —            |       | —           |       | —                 |       | —       |       | 17,768     |       |
| Issuance of  Prestige LLC warrants in conjunction with Medtech Acquisition              |       | 4,871           |       | —                |       | —                |       | —         |       | —       |       | —       |       | —            |       | —           |       | —                 |       | —       |       | 4,871      |       |
| Net income and  comprehensive income                                                    |       | —          |       | —                |       | —                |       | —         |       | —       |       | —       |       | —            |       | —           |       | —                 |       | 1,790        |       | 1,790      |       |
| Balance at  March 31, 2004                                                         |       | $               | 124,719    |                  | —     |                  | $          | —         |       | —       |       | $            | —     |              | $          | —           |       | $                      | —     |         | $          | —     |       | $ | — |   | $ | 1,790 |   | $ | 126,509 |   |
|                                                                                         |            |                 |            |                       |            |                       |            |                |            |              |            |              |            |                   |            |                  |            |                        |            |              |            |            |            |  |  |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these financial statements.

** **

**F-40**

----

 

**PRESTIGE BRANDS INTERNATIONAL,LLC**

**CONSOLIDATED STATEMENTS OFMEMBERS’ EQUITY AND COMPREHENSIVE INCOME**

**(in thousands, except per shareand unit data)**

**(continued)**

 
| ** **                                                               | ** ** | **Prestige  Contributed  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income (loss)** | ** ** | **Retained  Earnings** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|-----------|------------|
| **Successor  Basis**                                                     |       |                               |       |                                                      |       |                   |       |      |       |
| Balance at  March 31, 2004                                          |       | $                                  | 124,719    |                                                      | $          | —                 |       | $         | 1,790      |   | $ | 126,509 |   |
| Contribution of  capital from parent                                     |       | 245,558                            |       | —                                                    |       | —                 |       | 245,558   |       |
| Components of  comprehensive income:                                     |       |                               |       |                                                      |       |                   |       |      |       |
| Net income                                                               |       | —                             |       | —                                                    |       | 13,459                 |       | 13,459    |       |
| Unrealized gain  on interest rate caps net of income tax expense of $200 |       | —                             |       | 320                                                       |       | —                 |       | 320       |       |
| Total comprehensive  income                                              |       |                               |       |                                                      |       |                   |       | 13,779    |       |
| Balance at  March 31, 2005                                          |       | $                                  | 370,277    |                                                      | $          | 320                    |       | $         | 15,249     |   | $ | 385,846 |   |

 

The accompanying notes are an integralpart of these financial statements.

 

F-41

----

 

**PRESTIGEBRANDS INTERNATIONAL, LLCNOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(in thousands, except share and unit data)**

** **

**1.   Business andBasis of Presentation**

** **

***Natureof business***

*** ***

On February 6,2004, Prestige Brands International, LLC (“the Company”), a wholly-ownedsubsidiary of Prestige International Holdings, LLC (“Prestige LLC”), throughtwo indirect wholly-owned subsidiaries, acquired all of the outstanding capitalstock of Medtech Holdings, Inc. (“Medtech”) and The Denorex Company (“Denorex”)(collectively the “Predecessor Company”) (the “Medtech Acquisition”). On March 5,2004, the Company, through an indirect wholly-owned subsidiary, acquired all ofthe outstanding capital stock of The Spic and Span Company (“Spic and Span”)(the “Spic and Span Acquisition”). On April 6, 2004, the Company, throughan indirect wholly-owned subsidiary, acquired all of the outstanding capitalstock of Bonita Bay Holdings, Inc. (“Bonita Bay”) (the “Bonita BayAcquisition”). On October 6, 2004, the Company acquired all theoutstanding capital stock of Vetco, Inc. (“Vetco”) (the “Vetco Acquisition”).On February 9, 2005, Prestige Brands Holdings, Inc. (“PrestigeHoldings”), a Delaware corporation, became the direct parent company ofPrestige LLC, under the terms of an exchange agreement amongPrestige Holdings, Prestige LLC and each holder of common units ofPrestige LLC. Prestige LLC was controlled by affiliates of GTCR GolderRauner II, LLC. Pursuant to the agreement, the holders of common units ofPrestige LLC exchanged all of their common units for an aggregate of26,666,667 shares of common stock of Prestige Holdings which completed aninitial public offering of equity securities in February 2005.

 

The Company is engagedin the marketing, sales and distribution of over-the-counter drug, personalcare and household cleaning brands to mass merchandisers, drug stores,supermarkets and club stores primarily in the United States.

 

***Basisof presentation***

*** ***

The Medtech Acquisitionwas accounted for as a purchase transaction. As a result, the combined Medtechand Denorex assets and liabilities were adjusted to fair value as of February 6,2004, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,“Business Combinations”. For financial reporting purposes, Medtech and Denorex,which were under common control and management, are considered the predecessorentities. Accordingly, the results of operations and cash flows for the yearended March 31, 2003 and the period from April 1, 2003 to February 5,2004, represent the combined historical financial statements of Medtech and itssubsidiaries and Denorex (“predecessor basis”). The balance sheets of theCompany at March 31, 2005 and 2004, and the results of operations and cashflows for the year ended March 31, 2005 and for the period from February 6,2004 to March 31, 2004, reflect those purchase accounting adjustmentsresulting from the Medtech Acquisition (“successor basis”). The Spic and Span,Bonita Bay and Vetco Acquisitions were also accounted for as purchasetransactions. The results of operations and cash flows for Spic and Span,Bonita Bay and Vetco have been reflected in the Company’s consolidatedstatements of operations and cash flows beginning from their respectiveacquisition dates. The formation of Prestige Holdings and exchange of commonunits for common shares was accounted for as a reorganization of entities undercommon control. As a result, there was no adjustment to the carrying value ofthe assets and liabilities. All significant intercompany transactions andbalances have been eliminated.

 

***Useof estimates***

*** ***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements, as well as the reported amounts of revenues and expenses during thereporting

 

F-42

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period. Although theseestimates are based on the Company’s knowledge of current events and actionsthe Company may undertake in the future, actual results could differ from thoseestimates.

 

***Cash***

*** ***

Substantially all of theCompany’s cash is held by one bank located in Wyoming.  The Company does not believe that, as aresult of this concentration, it is subject to any unusual financial riskbeyond the normal risk associated with commercial banking relationships.

 

***Accountsreceivable***

*** ***

The Company extendsnon-interest bearing trade credit to its customers in the ordinary course ofbusiness. To minimize credit risk, ongoing evaluations of customers’ financialcondition are performed; however, collateral is not required. The Companymaintains an allowance for doubtful accounts based on its historicalcollections experience, as well as its evaluation of current and expectedconditions and trends affecting its customers.

 

***Salesreturns***

*** ***

The Company must makeestimates of potential future product returns related to current period sales.In order to do this, the Company analyzes historical returns, current economictrends and changes in customer demand and acceptance of the Company’s productswhen evaluating the adequacy of the Company’s reserve for returns in anyaccounting period. If actual future returns are greater than estimated bymanagement, the Company’s financial statements in future periods would beadversely affected.

 

***Inventories***

*** ***

Inventories are statedat the lower of cost or market, cost being determined using the first-in,first-out method. The Company provides a reserve for slow moving and obsolete inventory.

 

***Propertyand equipment***

*** ***

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

 
| Machinery               |   | 5 years |   |
|-------------------------|--------|--------------|--------|
| Computer  equipment     |   | 3 years |   |
| Furniture and  fixtures |   | 7 years |   |

 

Expenditures formaintenance and repairs are charged to expense as incurred. When an asset issold or otherwise disposed of, the cost and associated accumulated depreciationare removed from the accounts and the resulting gain or loss is recognized inthe consolidated statement of operations.

 

Property and equipmentare reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of such assets may not be recoverable. Animpairment loss is recognized if the carrying amount of the asset exceeds itsfair value.

 

***Goodwill***

*** ***

The excess of thepurchase price over the fair market value of assets acquired and liabilitiesassumed in acquisition transactions is classified as goodwill. Effective April 1,2002, the Predecessor Company ceased amortization of goodwill as described inNote 7. In accordance with SFAS No. 142, “Goodwill and OtherIntangible Assets,” the Company does not amortize goodwill, but performsimpairment tests of the carrying value at least annually.

 

F-43

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***Otherlong-term assets***

*** ***

Other long-term assetsare stated at the lessor of cost or fair value less accumulated amortization.For amortizable intangible assets, amortization is computed on the straight-linemethod as follows:

 
| Trademarks |   | 15-30 years |   | (predecessor basis) |   |
|------------|--------|-------------|--------|---------------------|--------|
| Trademarks |   | 5-30 years  |   | (successor basis)   |   |

 

The Company andPredecessor Company have incurred debt issuance costs in connection with theirlong-term debt. These costs are capitalized as deferred financing costs andamortized using the effective interest method over the term of the relateddebt.

 

Indefinite livedintangible assets are tested for impairment at least annually, whileamortizable intangible assets are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of such assets maynot be recoverable. An impairment loss is recognized if the carrying amount ofthe asset exceeds its fair value.

 

***Revenuerecognition***

*** ***

Revenues are recognizedwhen the following revenue recognition criteria are met: (1) persuasiveevidence of an arrangement exists; (2) there is a fixed or determinableprice; (3) delivery has occurred; and (4) collectibility isreasonably assured. These criteria are satisfied, and revenue is recognized,upon shipment of product. Provision is made for estimated customer discountsand returns at the time of sale.

 

***Costof sales***

*** ***

Cost of goods soldinclude product costs, warehousing costs, inbound and outbound shipping costs,handling and storage costs.

 

***Advertisingand promotion costs***

*** ***

Advertising andpromotion costs are expensed as incurred. Slotting fees associated withproducts are recognized as a reduction of sales. Under slotting arrangements,the retailers allow the Company’s products to be placed on the stores’ shelvesin exchange for slotting fees. Direct reimbursements of advertising costs arereflected as a reduction of advertising costs in the period earned.

 

***Stock-basedcompensation***

*** ***

The Company accounts foremployee stock-based compensation in accordance with the provisions ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB 25”) and complies with the disclosure provisions of No. 123,“Accounting for Stock-Based Compensation” (“Statement No. 123”) andStatement No. 148, “Accounting for Stock-Based Compensation—Transition andDisclosure, an amendment of FASB Statement No. 123.” Under APB 25,compensation expense is based on the difference, if any, on the date of grant,between the fair value of the Company’s common stock and the exercise price ofthe equity instrument.

 

***Incometaxes***

*** ***

The Company andPredecessor Company account for income taxes in accordance with the provisionsof Statement No. 109, “Accounting for Income Taxes” (“Statement No. 109”).Under SFAS 109, deferred tax assets and liabilities are determined basedon the differences between the financial reporting and tax bases of assets andliabilities using the enacted tax rates and laws that will be in effect whenthe differences are expected to reverse. A valuation allowance is establishedwhen necessary to reduce deferred tax assets to the amounts expected to berealized.

 

F-44

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***Derivativeinstruments***

*** ***

Statement No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“Statement No. 133”),requires companies to recognize all of their derivative instruments as eitherassets or liabilities in the balance sheet at fair value. The accounting forchanges in the fair value of a derivative instrument depends on whether it hasbeen designated and qualifies as part of a hedging relationship and further, onthe type of hedging relationship. For those derivative instruments that aredesignated and qualify as hedging instruments, a company must designate thehedging instrument, based upon the exposure being hedged, as a fair valuehedge, a cash flow hedge or a hedge of a net investment in an internationaloperation.

 

The Company andPredecessor Company have designated their derivative financial instruments ascash flow hedges (i.e., hedging the exposure to variability in expected futurecash flows that is attributable to interest rate risk). For these hedges, theeffective portion of the gain or loss on the derivative instrument is reportedas a component of other comprehensive income (loss) and reclassified intoearnings in the same line item associated with the forecasted transaction inthe same period or periods during which the hedged transaction affectsearnings. Any ineffective portion of the gain or loss on the derivativeinstruments is recorded in results of operations immediately.

 

***Recentlyissued accounting standards***

*** ***

In November 2004,the FASB issued SFAS No. 151 “Inventory Costs—an amendment of ARB No. 43,Chapter 4.”  Statement No. 151amends the guidance in Accounting Research Bulletin No. 43,Chapter 4, to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs and wasted material. Statement No. 151requires that those items be recognized as current period charges and thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. Statement No. 151 iseffective for fiscal years beginning after June 15, 2005. The Company doesnot expect the adoption of this standard to have a significant impact on itsfinancial position, results of operations or cash flows.

 

In November 2004,the EITF reached a consensus on Issue No. 03-13, “Applying the Conditionsin Paragraph 42 of FASB Statement No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets” in Determining Whether to Report DiscontinuedOperations” (“EITF 03-13”). Under the consensus, the approach for assessingwhether cash flows of the component have been eliminated from the ongoingoperations of the entity focuses on whether continuing cash flows are direct orindirect cash flows. Cash flows of the component would not be eliminated if thecontinuing cash flows to the entity are considered direct cash flows. Theconsensus should be applied to a component of an enterprise that is eitherdisposed of or classified as held for sale in fiscal periods beginning after December 15,2004. The adoption of EITF 03-13 is not expected to have a significant impacton the Company’s financial position, results of operations or cash flows.

 

In December 2004,the FASB issued SFAS No. 123R “Share-Based Payments (“Statement No. 123R”)”  Statement 123R requires the Company torecognize compensation expense for equity instruments awarded to employees.Statement 123R is effective for the Company as of the beginning of thefirst interim period that begins after June 15, 2005. The Company does notexpect the adoption of this standard to have a significant impact on its financialstatements.

 

In December 2004,the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets”. Statement No. 153amends the guidance in APB Opinion No. 29, “Accounting for NonmonetaryTransactions” to eliminate certain exceptions to the principle that exchangesof nonmonetary assets be measured based on the fair value of the assetsexchanged. Statement No. 153 eliminates the exception of nonmonetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of nonmonetary assets that do not have commercial substance. Thisstatement is effective for nonmonetary asset exchanges in fiscal yearsbeginning after June 15, 2005. The adoption of SFAS 153 is not expected tohave a significant impact on the Company’s financial position, results ofoperations or cash flows.

 

In March 2005, theFASB issued FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations” (“FIN 47”) which clarifies guidance provided by SFAS No. 143,“Accounting for

 

F-45

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Asset RetirementObligations.” FIN 47 is effective for the Company no later than March 31,2006. The adoption of FIN 47 is not expected to have a significant impact onthe Company’s financial position, results of operations or cash flows.

 

**2.   Acquisition ofBusinesses**

** **

On February 6,2004, the Company acquired all of the outstanding capital stock of Medtech andDenorex for a purchase price of approximately $244,270 (including fees andexpenses of $2,371).

 

On March 5, 2004,the Company acquired all of the outstanding capital stock of Spic and Span fora purchase price of approximately $30,268.

 

The Medtech Acquisition,including fees and expenses related to the new financing of $7,692, and theSpic and Span Acquisition were financed through the following sources:

 
| ** **                              | ** ** | **Medtech** | ** ** | **Spic and Span** | ** ** |
|-----------------------------------------|------------|-------------|------------|-----------------------------|------------|
| Medtech  revolving credit facility      |       | $           | 195        |                        | $          | 11,650 |   |
| Medtech term  loan facility             |       | 100,000     |       | —                      |       |
| Medtech  subordinated notes             |       | 42,941      |       | —                      |       |
| Issuance of  Preferred and Common Units |       | 106,951     |       | 17,768                      |       |
| Total sources of  funds                 |       | $           | 250,087    |                        | $          | 29,418 |   |

 

The total purchaseprices of the Medtech Acquisition (which included cash of $166,146 paid to theselling shareholders, 1,185 Prestige LLC Class B Preferred Units valued atan aggregate of $1,185, and Prestige LLC Common Units valued at an aggregate of$524, assumed debt and accrued interest which was retired of $74,044 andacquisition costs of $2,371) and the Spic and Span Acquisition (which includedcash of $4,873 paid to the selling shareholders, 22,500 Prestige LLC SeniorPreferred Units issued to the selling shareholders valued at $17,768, andassumed debt and accrued interest which was retired of $7,627) were allocatedto the acquired assets and liabilities as set forth in the following table:

 
| ** **                                 | ** ** | **Medtech** | ** ** | **Spic and Span** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|-------------|------------|-----------------------------|------------|-----------|------------|
| Cash                                       |       | $           | 2,168      |                        | $          | 1,063     |       | $ | 3,231 |   |
| Restricted cash                            |       | 700         |       | —                      |       | 700       |       |
| Accounts  receivable                       |       | 10,622      |       | 1,849                       |       | 12,471    |       |
| Inventories                                |       | 9,959       |       | 908                         |       | 10,867    |       |
| Prepaid expenses  and other current assets |       | 151         |       | 31                          |       | 182       |       |
| Property and  equipment                    |       | 434         |       | 445                         |       | 879       |       |
| Goodwill                                   |       | 55,452      |       | —                      |       | 55,452    |       |
| Intangible  assets                         |       | 209,330     |       | 28,171                      |       | 237,501   |       |
| Deferred income  taxes                     |       | —      |       | 141                         |       | 141       |       |
| Accounts payable                           |       | (6,672      | )          | (1,644                      | )          | (8,316    | )          |
| Accrued  liabilities                       |       | (6,077      | )          | (1,341                      | )          | (7,418    | )          |
| Long-term debt                             |       | (71,868     | )          | (6,981                      | )          | (78,849   | )          |
| Deferred income  taxes                     |       | (36,601     | )          | —                      |       | (36,601   | )          |
|                                       |       | $           | 167,598    |                        | $          | 22,642    |       | $ | 190,240 |   |

 

The value of thePrestige LLC Class B Preferred Units and the Prestige LLC Common Unitsissued to the selling shareholders was determined based on the cashconsideration received from GTCR and other investors concurrently with theacquisitions. The value of the Prestige LLC Senior Preferred Units issued tothe selling shareholders in the Spic and Span Acquisition was determined basedon the estimated cash flows that will accrue to the owners of the SeniorPreferred Units, the timing of receipt and a market-based required rate ofreturn for the Senior Preferred Units. A “unit” is an equity interest of aunitholder in the profits, losses and distributions of a limited liabilitycompany, or “LLC.”

 

F-46

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As a result of theMedtech Acquisition, the Company recorded indefinite lived trademarks of$153,190 and $56,140 of trademarks with an estimated weighted average usefullife of 11 years. As a result of the Spic and Span Acquisition, theCompany recorded indefinite lived trademarks of $28,171.

 

On April 6, 2004,the Company acquired all of the outstanding capital stock of Bonita Bay for apurchase price of approximately $561,266 (including working capital adjustmentstotaling $1,091). In accordance with Statement No. 141, the Company wasdetermined to be the accounting acquirer.

 

The Bonita BayAcquisition, including fees and expenses related to the new financing of$22,651 and funds used to pay off $154,422 of debt and accrued interestincurred to finance the Medtech Acquisition, was financed through the followingsources:

 
| Revolving Credit  Facility              |   | $       | 3,512   |   |
|-----------------------------------------|--------|---------|---------|--------|
| Tranche B Term  Loan Facility           |   | 355,000 |    |
| Tranche C Term  Loan Facility           |   | 100,000 |    |
| 9.25% Senior  Subordinated Notes        |   | 210,000 |    |
| Issuance of  Preferred and Common units |   | 58,579  |    |
| Total sources of  funds                 |   | $       | 727,091 |   |

 

The total purchase priceof the Bonita Bay Acquisition (which included cash of $379,226 paid to theselling shareholders, 94 Prestige LLC Class B Preferred Units valued at anaggregate of $91 and 18,842 Prestige LLC Common Units valued at an aggregate of$1, assumed debt and accrued interest which was retired of $176,918 andacquisition costs of $3,579) was allocated to the acquired assets andliabilities as set forth in the following table:

 
| Cash                                       |   | $        | 4,304   |   |
|--------------------------------------------|--------|----------|---------|--------|
| Accounts  receivable                       |   | 13,186   |    |
| Inventories                                |   | 16,185   |    |
| Prepaid expenses  and other current assets |   | 1,391    |    |
| Property and  equipment                    |   | 2,982    |    |
| Goodwill                                   |   | 217,234  |    |
| Intangible  assets                         |   | 352,460  |    |
| Accounts payable  and accrued liabilities  |   | (21,189  | )       |
| Long-term debt                             |   | (172,898 | )       |
| Deferred income  taxes                     |   | (34,429  | )       |
|                                       |   | $        | 379,226 |   |

 

As a result of theBonita Bay Acquisition, the Company recorded indefinite lived trademarks of$340,700 and $11,760 of trademarks with an estimated weighted average usefullife of seven years.

 

On October 6, 2004,the Company acquired all the outstanding stock of Vetco, Inc. for apurchase price of approximately $50,649. To finance the acquisition, theCompany used cash on hand of approximately $20,649 and borrowed an additional$12,000 on its Revolving Credit Facility and $18,000 on its Tranche B TermLoan Facility.

 

The total purchase priceof the Vetco Acquisition was allocated to the acquired assets and liabilitiesas set forth in the following table:

 
| Accounts  receivable                       |   | $      | 2,136  |   |
|--------------------------------------------|--------|--------|--------|--------|
| Inventories                                |   | 910    |   |
| Prepaid expenses  and other current assets |   | 37     |   |
| Property and  equipment                    |   | 5      |   |
| Goodwill                                   |   | 21,858 |   |
| Intangible  assets                         |   | 27,158 |   |
| Accounts payable  and accrued liabilities  |   | (1,455 | )      |
|                                       |   | $      | 50,649 |   |

 

F-47

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As a result of the VetcoAcquisition, the Company recorded $27,000 of trademarks with an estimateduseful life of 20 years and $158 related to a 5-year non-compete agreement withthe former owner of Vetco.

 

The following tablereflects the unaudited results of the Company’s operations on a pro forma basisas if the Medtech, Spic and Span, Bonita Bay and Vetco Acquisitions had beencompleted on April 1, 2003. The pro forma financial information is notnecessarily indicative of the operating results that would have occurred hadthe acquisitions been consummated as of April 1, 2003, nor is it necessarilyindicative of future operating results.

 

F-48

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| ** **                  | ** ** | **Pro Forma**                | ** ** | **Pro Forma**                | ** ** |
|-----------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                  | ** ** | **Twelve months ended** | ** ** | **Twelve months ended** | ** ** |
| ** **                  | ** ** | **March 31, 2005**      | ** ** | **March 31, 2004**      | ** ** |
| ** **                  | ** ** | **(unaudited)**                   | ** ** | **(unaudited)**                   | ** ** |
| Net sales                   |       | $                                 | 309,534    |                              | $          | 293,627 |   |
| Income before  income taxes |       | $                                 | 32,482     |                              | $          | 37,120 |   |
| Net income                  |       | $                                 | 19,886     |                              | $          | 22,322 |   |

 

**3.   DiscontinuedOperations**

** **

Effective March 28,2003, the Predecessor Company sold substantially all of the assets of PecosPharmaceutical, Inc. (“Pecos”), one of the Predecessor Company’s threereporting units, to Contract Pharmacal Corporation (the “Purchaser”). The saleincluded all inventory and intangible assets related to the Pecos products. Thesales price consisted of up to $1,000 of cash, all of which was subject to anearn-out provision based on the achievement of certain contribution marginsfrom future sales by the Purchaser. During the year ended March 31, 2005,the Company received $445 from the Purchaser in full satisfaction of theearn-out provision. The Company recorded this consideration as an acquiredreceivable in purchase accounting.

 

In connection with thesale, the Predecessor Company agreed to indemnify the Purchaser for up to$3,000 of potential sales returns, less the cost of inventory transferred tothe Purchaser as part of this transaction. Accordingly, the Predecessor Companyrecorded a liability of $2,272 related to this indemnification. In addition,the Predecessor Company recorded a loss on the sale of inventory totaling$1,220. These amounts have been included in the loss on disposal of the Pecosreporting unit for the year ended March 31, 2003.

 

In accordance with thesale agreement, the Predecessor Company was required to deposit $700 of cashinto a legally restricted escrow account. This cash was returned to the Companyin March 2004 as the Company and Predecessor Company had fully compliedwith the terms of the sale agreement.

 

The results ofoperations of the Pecos reporting unit for the year ended March 31, 2003have been classified as a loss from operations of the discontinued Pecosreporting unit. Revenues of the discontinued Pecos reporting unit were $4,587for the year ended March 31, 2003 (predecessor basis). The pre-tax lossesof the discontinued Pecos reporting unit were $5,233 for the year ended March 31,2003 (predecessor basis).

 

**4.   AccountsReceivable**

** **

The components ofaccounts receivable consist of the following:

 
| ** **                                            | ** ** | **March 31,**         | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | **(successor basis)** | ** ** |
| Accounts  receivable                                  |       | $                          | 45,329     |   | $ | 16,244 |   |
| Other  receivables                                    |       | 835                        |       | 341 |   |
| Less allowances  for discounts, returns and bad debts |       | (2,271                     | )          | (853 | ) |
|                                                  |       | $                          | 43,893     |   | $ | 15,732 |   |

 

**5.   Inventories**

** **

Inventories consist ofthe following:

 
| ** **                   | ** ** | **March 31,**         | ** ** |
|------------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(successor basis)** | ** ** |
| Packaging and  raw materials |       | $                          | 3,587      |   | $ | 1,562 |   |
| Finished goods               |       | 17,993                     |       | 8,186 |   |
|                         |       | $                          | 21,580     |   | $ | 9,748 |   |

 

F-49

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Inventories are shownnet of reserves for obsolete and slow moving inventory of $1,450 and $124 at March 31,2005 and 2004, respectively.

 

**6.   Property andEquipment**

** **

Property and equipmentconsist of the following:

 
| ** **                     | ** ** | **March 31,**         | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(Successor Basis)** | ** ** |
| Machinery                      |       | $                          | 2,828      |   | $ | — |   |
| Computer  equipment            |       | 771                        |       | 341 |   |
| Furniture and  fixtures        |       | 515                        |       | 555 |   |
| Leasehold  improvements        |       | 173                        |       | 19 |   |
|                           |       | 4,287                      |       | 915 |   |
| Less accumulated  depreciation |       | (1,963                     | )          | (35 | ) |
|                           |       | $                          | 2,324      |   | $ | 880 |   |

 

Depreciation of propertyand equipment totaled $1,899 for the year ended March 31, 2005, $41 forthe period from February 6, 2004 to March 31, 2004 (successor basis)and $247 and $301 for the period from April 1, 2003 to February 5,2004, and the year ended March 31, 2003 (predecessor basis), respectively.

 

**7.   Goodwill**

** **

Effective April 1,2002, the Predecessor Company adopted Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).SFAS 142 requires that companies perform periodic evaluations of potentialimpairment of goodwill. Impairment tests were performed as of March 31,2005 and 2004, and no impairment charges were required. The changes in thecarrying amount of goodwill for the years ended March 31, 2003, 2004 and2005 were as follows:

 
| Balance as of  March 31, 2003                                   |   | $       | —  |   |
|----------------------------------------------------------------------|--------|---------|---------|--------|
| Goodwill  acquired in the Medtech Acquisition                        |   | 55,594  |    |
| Balance as of  March 31, 2004                                   |   | 55,594  |    |
| Goodwill  acquired in the Bonita Bay Acquisition                     |   | 217,234 |    |
| Goodwill  acquired in the Vetco Acquisition                          |   | 21,858  |    |
| Purchase  accounting adjustments related to fiscal 2004 acquisitions |   | (142    | )       |
| Balance as of  March 31, 2005                                   |   | $       | 294,544 |   |

 

The following tablereflects what the Predecessor Company’s net loss would have been for the yearended March 31, 2003 before the change in accounting principle related togoodwill:

 
| ** **                                                                                                                                   | ** ** | **Year ended  March 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **(predecessor basis)**              | ** ** |
| Net loss                                                                                                                                     |       | $                                         | (14,422    | ) |
| Add back the  cumulative effect of change in accounting principle, net of income tax  benefit of $6,467, related to the adoption of SFAS 142 |       | 11,785                                    |       |
| Adjusted net  loss                                                                                                                           |       | $                                         | (2,637     | ) |

 

F-50

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**8.   Other Long-termAssets**

** **

Other long-term assetsconsist of the following at March 31, 2005:

 
| ** **                        | ** ** | **Carrying  Amount**       | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
|-----------------------------------|------------|----------------------------|------------|-------------------------------|------------|---------------------------|------------|
| ** **                        | ** ** | **(successor basis)** | ** ** |
| Intangible  assets:               |       |                       |       |                          |       |                      |       |
| Indefinite lived  trademarks      |       | $                          | 522,346    |                          | $          | —                    |       | $ | 522,346 |   |
| Amortizable  intangible assets:   |       |                       |       |                          |       |                      |       |
| Trademarks                        |       | 94,900                     |       | (8,775                        | )          | 86,125                    |       |
| Non-compete  agreement            |       | 158                        |       | (16                           | )          | 142                       |       |
|                              |       | 617,404                    |       | (8,791                        | )          | 608,613                   |       |
| Deferred  financing costs, net    |       | 13,193                     |       | —                        |       | 13,193                    |       |
| Fair value of  interest rate caps |       | 2,803                      |       | —                        |       | 2,803                     |       |
| Total                             |       | $                          | 633,400    |                          | $          | (8,791                    | )          | $ | 624,609 |   |

 

Other long-term assetsconsist of the following at March 31, 2004:

 
| ** **                      | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-------------------------------|------------|---------------------------|------------|
| ** **                      | ** ** | **(successor basis)**  | ** ** |
| Intangible  assets:             |       |                        |       |                          |       |                      |       |
| Indefinite lived  trademarks    |       | $                           | 181,361    |                          | $          | —                    |       | $ | 181,361 |   |
| Amortizable  intangible assets: |       |                        |       |                          |       |                      |       |
| Trademarks                      |       | 56,140                      |       | (890                          | )          | 55,250                    |       |
|                            |       | 237,501                     |       | (890                          | )          | 236,611                   |       |
| Deferred financing costs, net   |       | 2,783                       |       | —                        |       | 2,783                     |       |
| Total                           |       | $                           | 240,284    |                          | $          | (890                      | )          | $ | 239,394 |   |

 

At March 31, 2005and 2004, the Company’s intangible assets had tax bases of $394,580 and$100,863, respectively.

 

Amortization ofintangible assets totaled $7,901 for the year ended March 31, 2005 and$890 for the period from February 6, 2004 to March 31, 2004(successor basis) and $4,251 and $4,973 for the period from April 1, 2003to February 5, 2004 and the year ended March 31, 2003 (predecessorbasis), respectively.

 

As of March 31,2005, the Company’s future amortization of intangible assets is expected to beas follows:

 
| **Year ending March 31,** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|------------|
| 2006                                     |       | $          | 8,592      |       |
| 2007                                     |       | 8,592      |       |
| 2008                                     |       | 8,592      |       |
| 2009                                     |       | 8,592      |       |
| 2010                                     |       | 7,168      |       |
| Thereafter                               |       | 44,731     |       |
| Total                                    |       | $          | 86,267     |       |

 

In connection with theMedtech Acquisition, the Company assumed certain contractual obligations,including royalty agreements for certain of the licensed products. Royaltycosts were approximately $1,087 for the year ended March 31, 2005, $73 forthe period from February 6, 2004 to March 31, 2004 (successor basis),$450 for the period from April 1, 2003 to February 5, 2004, and$1,208 the year ended March 31, 2003 (predecessor basis).

 

F-51

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**9.   AccruedExpenses**

** **

Accrued liabilitiesconsist of:

 
| ** **                 | ** ** | **March 31,**         | ** ** |
|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **(successor basis)** | ** ** |
| Accrued  marketing costs   |       | $                          | 2,693      |   | $ | 1,631 |   |
| Reserve for  Pecos returns |       | 242                        |       | 1,186 |   |
| Accrued payroll            |       | 2,004                      |       | 1,345 |   |
| Accrued  commissions       |       | 308                        |       | 353 |   |
| Interest payable           |       | 7,060                      |       | 1,241 |   |
| Income taxes  payable      |       | 615                        |       | 138 |   |
| Other                      |       | 550                        |       | 1,370 |   |
|                       |       | $                          | 13,472     |   | $ | 7,264 |   |

 

**10.   Long-Term Debt**

** **

Long-term debt consistsof the following:

 
| ** **                         | ** ** | **March 31,**         | ** ** |
|------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                         | ** ** | **(successor basis)** | ** ** |
| Tranche B Term  Loan Facility      |       | $                          | 369,360    |   | $ | — |   |
| Senior  Subordinated Notes         |       | 126,000                    |       | — |   |
| Medtech  Revolving Credit Facility |       | —                     |       | 10,548 |   |
| Medtech Term  Loan Facility        |       | —                     |       | 100,000 |   |
| Medtech  Subordinated Notes        |       | —                     |       | 38,146 |   |
|                               |       | 495,360                    |       | 148,694 |   |
| Less: current  portion             |       | (3,730                     | )          | (2,000 | ) |
| Long-term debt                     |       | $                          | 491,630    |   | $ | 146,694 |   |

 

On April 6, 2004,the Company, through a wholly owned subsidiary, entered into a new seniorsecured credit facility (the “Senior Credit Facility”), consisting of a $50,000non-amortizing senior secured revolving credit facility (“Revolving CreditFacility”), a $355,000 senior secured term loan facility, (“Tranche B Term LoanFacility”) and a $100,000 second lien term loan facility (“Tranche C Term LoanFacility”). On April 6, 2004, the Company, through a wholly ownedsubsidiary, also issued $210,000 of 9.25% senior subordinated notes (“SeniorSubordinated Notes”).

 

On February 15,2005, Prestige Holdings’ initial public offering of common stock resulted in acapital contribution to the Company of $186.7 million. The proceeds were usedto repay $100.0 million outstanding under the tranche C facility of the Company’ssenior credit facility (plus a repayment premium of $3.0 million andaccrued interest of $0.5 million as of February 15, 2005), and toredeem $84.0 million in aggregate principal amount of our existing 91¤4% seniorsubordinated notes (plus a redemption premium of $7.8 million and accruedinterest of $3.3 million as of March 18, 2005). Effective upon thecompletion of the Prestige Holdings initial public offering, the Companyentered into an amendment to the credit agreement that, among other things,allows the Company to increase the indebtedness under its Tranche B facility by$200.0 million and allows for an increase in its revolving credit facility upto $60 million.

 

The Senior CreditFacility is collateralized by substantially all of the Company’s assets. TheTranche B Term Loan Facility bears interest at the Company’s option of eitherprime (5.75% at March 31, 2005) or LIBOR (3.13% at March 31, 2005)plus a variable margin and mature on April 6, 2011 and October 6,2011, respectively. At March 31, 2005, the applicable interest rate on theTranche B facility was 5.38%. Principal and interest payments on Tranche Bare due quarterly.

 

The Revolving CreditFacility is available until April 6, 2009. At March 31, 2005, theCompany was eligible to borrow $60 million on the Revolving CreditFacility. The Revolving Credit Facility bears interest

 

F-52

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at the Company’s optionof either prime plus a variable margin or LIBOR plus a variable margin. Thevariable margin ranges from 0.75% to 2.50%. At March 31, 2005, theapplicable interest rate on the Revolving Credit Facility was 7.3%. The Companyis also required to pay a variable commitment fee on the unused portion of theRevolving Credit Facility. At March 31, 2005, the applicable rate was0.50%.

 

The Senior SubordinatedNotes (“Notes”) mature on April 15, 2012 and bear interest at 9.25%.Interest is payable on April 15 and October 15, each year, beginningon October 15, 2004. The total principal amount is due on April 15,2012. The Company may redeem some or all of the Notes on or prior to April 15,2008 at a redemption price equal to 100% plus a make-whole premium and on orafter April 15, 2008 at redemption prices set forth in the Note agreement.The Notes are fully and unconditionally guaranteed by the Company and its otherwholly owned subsidiaries (except the issuer (Prestige Brands, Inc.),which is a wholly owned finance subsidiary of the Company). Each of theseguarantees is joint and several. There are no significant restrictions on theability of any of the guarantors to obtain funds from their subsidiaries.

 

The senior credit facilitycontains various financial covenants, including financial covenants thatrequire us to maintain certain leverage ratios, interest coverage ratios andfixed charge coverage ratios, as well as covenants restricting the Company fromundertaking specified corporate actions, including, asset dispositions,acquisitions, payment of dividends and other specified payments, changes ofcontrol, incurrence of indebtedness, creation of liens, making loans andinvestments and transactions with affiliates. The Company’s credit agreement,dated April 6, 2004, requires that adjusted EBITDA is to be used as thebasis for calculating the Company’s leverage and interest coverage ratios. TheCompany was in compliance with its financial and restrictive covenants underthe credit facility at March 31, 2005.

 

***TheMedtech and Spic and Span Acquisitions***

*** ***

In order to finance theMedtech and Spic and Span Acquisitions, repay certain existing indebtedness,and pay related fees and expenses, the Company entered into the financing agreementsset forth in the following paragraphs.

 

On February 6,2004, the Company entered into a senior secured credit facility (the “MedtechSenior Credit Facility”), consisting of a $20 million non-amortizingsenior secured revolving credit facility and a $100.0 million seniorsecured term loan facility. On February 6, 2004, the Company also issued$42.9 million of 12.0% subordinated notes (“Medtech Subordinated Notes”).The outstanding borrowings on the Medtech Senior Credit Facility were repaid onApril 6, 2004 using proceeds from the Bonita Bay Acquisition financingdiscussed above.

 

The Medtech SubordinatedNotes (“Notes”) were scheduled to mature on February 6, 2014. Inconjunction with the Notes, the Company issued warrants to purchase 5,250 Class BPreferred Units and 2,619,386 Common Units. The warrants were exercisedimmediately upon issuance. The relative fair value of these warrants wasrecorded as a discount on debt of $4,871 and was being amortized over the lifeof the related debt. The outstanding Notes were repaid on April 6, 2004using proceeds from the Bonita Bay Acquisition financing discussed above. Inconjunction with the repayment of the Notes, the unamortized discount of $4,795was written-off and recorded as loss on extinguishment of debt.

 

***PredecessorCompany***

*** ***

On March 1, 2001,the Predecessor Company entered into a credit agreement with a bank to provide$55,000 in debt (“Term Commitments A and B”) and a $10,000 revolving line ofcredit (“Revolving Line”, or together with Term Commitments A and B, the “SeniorDebt”). Simultaneously, the Predecessor Company issued $21,500 of subordinatednotes payable (the “Senior Subordinated Notes”). The outstanding borrowingswere repaid on February 6, 2004 using proceeds from the Medtech Acquisitionfinancing discussed above.

 

The Senior SubordinatedNotes were scheduled to mature on August 31, 2008, and originally boreinterest at 15%. On September 11, 2002, the note agreement was amended torequire interest at 17%. The Predecessor Company accounted for thismodification as an extinguishment and reissuance of debt in accordance withEITF 96-19, “Debtors Accounting for a Modification or Exchange of DebtInstruments.”

 

F-53

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Accordingly, thePredecessor Company recorded a loss on extinguishment of debt totaling $685 forthe year ended March 31, 2003. In conjunction with the purchase of theSenior Subordinated Notes, the Predecessor Company issued 1,048,798 warrants topurchase Class A-1 Common Stock. The warrants were exercisable immediatelyat an exercise price of $0.01 per share and were to expire on March 1,2013. The Predecessor Company initially recorded a discount of $442 on theSenior Subordinated Notes. The unamortized discount was expensed during theyear ended March 31, 2003. The outstanding borrowings were repaid on February 6,2004 using proceeds from the Medtech Acquisition financing discussed above.

 

Estimated futureprincipal payments associated with long-term debt at March 31, 2005 are asfollows:

 
| **Year ending March 31,** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|------------|
| 2006                                     |       | $          | 3,730      |       |
| 2007                                     |       | 3,730      |       |
| 2008                                     |       | 3,730      |       |
| 2009                                     |       | 3,730      |       |
| 2010                                     |       | 3,730      |       |
| Thereafter                               |       | 476,710    |       |
|                                     |       | $          | 495,360    |       |

 

***Interestrate protection agreement***

*** ***

On June 30, 2004,the Company paid $52 for a 5% interest rate cap agreement with a notionalamount of $20.0 million. The interest rate cap terminates in June 2006. OnMarch 7, 2005, the Company paid $2.3 million for interest rate capagreements that become effective August 30, 2005, with a total notionalamount of $180.0 million and cap rates ranging from 3.25% to 3.75%. Theinterest rate cap agreements terminate on May 30, 2006, 2007 and 2008 asto $50 million, $80 million and $50 million, respectively. The Company is accountingfor the interest rate cap agreements as cash flow hedges. The fair value of theinterest rate cap agreements was $2,803 as of March 31, 2005.

 

**11.   Commitmentsand Contingencies**

** **

The Company hasoperating leases for office facilities in New York and Wyoming, which expire onApril 9, 2009 and December 31, 2005, respectively.

 

The following summarizesfuture minimum lease payments:

 
| **Year ending March 31,** | ** ** | ** ** | **Operating  Leases** | ** ** |
|-------------------------------------|------------|------------|-----------------------|------------|
| 2006                                |       | 471        |                  |
| 2007                                |       | 371        |                  |
| 2008                                |       | 371        |                  |
| 2009                                |       | 371        |                  |
| 2010                                |       | 32         |                  |
|                                |       | $          | 1,614                 |       |
|                                     |            |            |                       |            |  |

 

Rent expense for thefiscal year ending March 31, 2005 was $512 (successor basis). Rent expensetotaled $62 for the period from February 6, 2004 to March 31, 2004(successor basis), $357 for the period from April 1, 2003 to February 5,2004 and $418 the year ended March 31, 2003 (predecessor basis), net ofrent income from subleases totaling $23 for the period from February 6,2004 to March 31, 2004 (successor basis) $96 for the period from April 1,2003 to February 5, 2004 and $104 the year ended March 31, 2003(predecessor basis).

 

On July 29, 2002,the Predecessor Company entered into a 10 year manufacturing and supplyagreement with an unrelated company. Pursuant to this agreement, the Companyagreed to purchase certain minimum quantities of product over the initial threeyears of the agreement or to pay liquidated damages of up to $360. The Companyhad recorded a liability of $308 at March 31, 2005 and 2004 which

 

F-54

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represents its estimateof the probable liquidated damages. Such estimate is based on historical andexpected purchases during the initial three years of the agreement.

 

In June 2003, Dr. JasonTheodosakis filed a lawsuit, Theodosakis v. Walgreens, et al., in FederalDistrict Court in Arizona, alleging that two of the Company’s subsidiaries,Medtech Products and Pecos Pharmaceutical, as well as other unrelated parties,infringed the trade dress of two of his published books. Specifically, Dr. Theodosakispublished “The Arthritis Cure” and “Maximizing the Arthritis Cure” regardingthe use of dietary supplements to treat arthritis patients. Dr. Theodosakisalleged that his books have a distinctive trade dress, or cover layout, design,color and typeface, and those products that the defendants sold under the ARTHxtrademarks infringed the books’ trade dress and constituted unfair competitionand false designation of origin. Additionally, Dr. Theodosakis allegedthat the defendants made false endorsements of the products by referencing hisbooks on the product packaging and that the use of his name, books and tradedress invaded his right to publicity. The Company sold the ARTHx trademarks,goodwill and inventory to a third party, Contract Pharmacal Corporation, in March 2003.On January 12, 2005, the court granted the Company’s motion for summaryjudgment and dismissed all claims against Pecos and Medtech. The plaintiff hasfiled an appeal in the U.S. Court of Appeals which is pending.

 

On January 3, 2005the Company was served with process by our former lead counsel in theTheodosakis litigation seeking $679,000 plus interest. The case was filed theSupreme Court of New York and is styled as Dickstein Shapiro et al v. MedtechProducts, Inc. In February plaintiffs filed an amended complaintnaming the Pecos Pharmaceutical Company. The Company has answered andcounterclaimed against Dickstein and also filed a third party complaint againstthe Lexington Insurance Company. The Company believes that if there is anyobligation to the Dickstein firm relating to this matter, it is an obligationof Lexington and not the Company.

 

On May 9, 2005 theCompany was served with a complaint in a class action filed in Essex County,Massachusetts, styled as Dawn Thompson v. Wyeth, Inc. relating to theCompany’s Little Remedies® pediatric cough products. The Company is one ofseveral corporate defendants, all of whom market OTC cough syrup products forpediatric use. The complaint alleges that the ingredient dextromethorphan is nomore effective than placebo. There is no allegation of physical injury causedby the product or the ingredient. The Company is still evaluating its positionin this litigation, however, the use of dextromethorphan in pediatric productsis fully consistent with and supported by FDA regulations.

 

The Company is alsoinvolved from time to time in routine legal matters and other claims incidentalto its business. When it appears probable in management’s judgment that theCompany will incur monetary damages or other costs in connection with such claimsand proceedings, and such costs can be reasonably estimated, liabilities arerecorded in the financial statements and charges are recorded against earnings.The Company believes the resolution of such routine matters and otherincidental claims, taking into account reserves and insurance, will not have amaterial adverse effect on its financial condition or results of operation.

 

F-55

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**12.   IncomeTaxes**

 

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

 
| ** **                                                                               | ** ** | **Year Ended  March 31,  2005** | ** ** | **February 6, 2004  to March 31,  2004** | ** ** | **April 1, 2003  to February 5,  2004** | ** ** | **Year Ended  March 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                               | ** ** | **(successor basis)**                | ** ** | **(predecessor basis)**                                 | ** ** |
| Current:                                                                                 |       |                                      |       |                                                         |       |                                                        |       |                                      |       |
| Federal                                                                                  |       | $                                         | 545        |                                                         | $          | 307                                                         |       | $                                         | (30        | ) | $ | 2,151 |   |
| State                                                                                    |       | 678                                       |       | 51                                                           |       | (4                                                          | )          | 129                                       |       |
| Foreign                                                                                  |       | 102                                       |       | —                                                       |       | —                                                      |       | —                                    |       |
| Deferred:                                                                                |       |                                      |       |                                                         |       |                                                        |       |                                      |       |
| Federal                                                                                  |       | 6,348                                     |       | 662                                                          |       | 1,620                                                       |       | 1,530                                     |       |
| State                                                                                    |       | 849                                       |       | 34                                                           |       | 98                                                          |       | 92                                        |       |
| Provision for  income taxes from continuing operations                                   |       | 8,522                                     |       | 1,054                                                        |       | 1,684                                                       |       | 3,902                                     |       |
| Benefit for  income taxes from loss from operations of discontinued Pecos reporting unit |       | —                                    |       | —                                                       |       | —                                                      |       | (1,848                                    | )          |
| Benefit for  income taxes from loss on disposal of Pecos reporting unit                  |       | —                                    |       | —                                                       |       | —                                                      |       | (1,233                                    | )          |
| Benefit for  income taxes from cumulative effect of changes in accounting principle      |       | —                                    |       | —                                                       |       | —                                                      |       | (6,467                                    | )          |
|                                                                                     |       | $                                         | 8,522      |                                                         | $          | 1,054                                                       |       | $                                         | 1,684      |   | $ | (5,646 | ) |

 

The principal componentsof the Company’s deferred tax balances are as follows:

 
| ** **                                         | ** ** | **March 31,**         | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **(successor basis)** | ** ** |
| **Deferred  tax assets:**                          |       |                       |       |   |   |
| Allowance for  doubtful accounts and sales returns |       | $                          | 992        |   | $ | 622 |   |
| Inventory  capitalization                          |       | 359                        |       | 83 |   |
| Inventory  reserve                                 |       | 567                        |       | 45 |   |
| Inventory  step-up                                 |       | —                     |       | (122 | ) |
| Net operating  loss carryforwards                  |       | 7,990                      |       | 8,306 |   |
| Property and  equipment                            |       | 50                         |       | — |   |
| State income  taxes                                |       | 2,978                      |       | 747 |   |
| Other                                              |       | 430                        |       | 270 |   |
| Reserve for  coupons                               |       | 114                        |       | — |   |
| Vacation accrual                                   |       | 93                         |       | — |   |
| AMT tax credit  carryforwards                      |       | 278                        |       | — |   |
| **Deferred  tax liabilities:**                     |       |                       |       |   |   |
| Intangible assets                                  |       | (92,704                    | )          | (47,145 | ) |
| Interest rate  caps                                |       | (200                       | )          | — |   |
| Property and  equipment                            |       | —                     |       | (33 | ) |
| Other                                              |       | —                     |       | — |   |
|                                               |       | $                          | (79,053    | ) | $ | (37,227 | ) |

 

At March 31, 2005,Prestige Brands, Medtech, Spic and Span, and Denorex had net operating losscarryforwards of approximately $9,790, $5,956, $901 and $4,932, respectively,which may be used to offset future taxable income of the consolidated group andwhich begin to expire in 2020. $8,677 of these carryforwards are subject toannual limitations as to usage of approximately $1,865 under Internal RevenueCode Section 382.

 

F-56

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A reconciliation of theeffective tax rate for continuing operations compared to the statutory U.S.Federal tax rate (34%) is as follows:

 
| ** **                                              | ** ** | **Year Ended  March 31,  2005** | ** ** | **February 6  to March 31,  2004** | ** ** | **April 1, 2003  to February 5,  2004** | ** ** | **Year Ended  March 31,  2003** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **(successor basis)**                | ** ** | **(predecessor basis)**                      | ** ** |
| Income tax  provision at statutory rate                 |       | $                                         | 7,525      |                                              | $          | 967                                                         |       | $                                         | 1,386      |   | $ | 2,349 |   |
| Foreign income  tax provision                           |       | 102                                       |       | —                                            |       | —                                                      |       | —                                    |       |
| State income  taxes (net of federal income tax benefit) |       | 873                                       |       | 50                                                |       | 71                                                          |       | 139                                       |       |
| Change in  effective state tax rate                     |       | —                                    |       | —                                            |       | —                                                      |       | 190                                       |       |
| Amortization of  intangible assets                      |       | —                                    |       | —                                            |       | 94                                                          |       | 193                                       |       |
| Valuation  allowance                                    |       | —                                    |       | —                                            |       | 321                                                         |       | 992                                       |       |
| Other                                                   |       | 22                                        |       | 37                                                |       | (188                                                        | )          | 39                                        |       |
| Provision for  income taxes from continuing operations  |       | $                                         | 8,522      |                                              | $          | 1,054                                                       |       | $                                         | 1,684      |   | $ | 3,902 |   |

 

**13.   Members’Equity**

 

All of the Company’smembership units are owned by Prestige LLC. A “unit” is an equity interest of amember in the profits, losses and distributions of the Company.

 

**14.   EquityIssuances**

** **

On February 6,2004, in connection with the Medtech Acquisition, certain senior executiveofficers purchased an aggregate of 5,282,269 common units of Prestige LLC at$.10 per unit. These units were purchased on the same day and at the same pricethat GTCR and-TCW/Crescent Partners, the Company’s unrelated equity investors(the “Sponsors”), purchased 50,000,000 common units. The value of the commonunits purchased in connection with the Medtech acquisition was determined bysubtracting from the acquisition purchase price, the total debt outstandingimmediately following the acquisition and the liquidation value of outstandingpreferred units issued in the acquisition. On March 17, 2004, otherexecutive officers purchased an aggregate of 405,103 common units at a price of$.10 per unit. The Sponsors did not purchase any common units at this time. OnApril 6, 2004, two employees purchased an aggregate of 50,435 common unitsat a price of $.10 per unit. The Sponsors did not purchase any common units atthis time. Each of the above-referenced purchase transactions by managementwere conducted at fair market value based upon the price paid by the Sponsorsin the Medtech Acquisition and the fact that the such purchases were made atthe same price and at the same time or shortly thereafter.

 

On November 1,2004, certain non-executive employees purchased an aggregate of 337,000 commonunits for $0.70 per unit, which was equal to fair market value. Thisdetermination was based on a contemporaneous valuation that utilizedtraditional methodologies, including market multiples, comparable transactionand discounted cash flow. The Company relied on this fair market value analysisin setting the $0.70 per unit price for the purchases. The Company awarded atotal cash bonus of $235 to allow employees to purchase such units. Inconnection therewith, the Company recorded a bonus expense of $235. In thisregard, all employee purchases were conducted at fair market value based uponthe contemporaneous valuation.

 

In February 2005, PrestigeHoldings completed its initial public offering of equity securities, pursuantto which it sold 28,000,000 shares of its common stock and selling shareholderssold 4,200,000 shares of common stock at a price of $16.00 per share. Theoffering resulted in a capital contribution to the Company of approximately $186.7million.

 

**15.   EquityIncentive Plan**

** **

In connection with PrestigeHoldings’ initial public offering, Prestige Holdings’ board of directorsadopted the 2005 Long-Term Equity Incentive Plan (“the Plan”). The Planprovides for grants of stock options, restricted stock, restricted stock units,deferred stock units and other equity-based awards.

 

F-57

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Directors, officers andother employees of the Company and its subsidiaries, as well as othersperforming services for the Company, are eligible for grants under the Plan. Asof March 31, 2005, there were 5,000,000 Prestige Holdings common sharesavailable for issuance under the Plan. No grants have been made under the Planas of March 31, 2005.

 

**16.   RelatedParty Transactions**

** **

In connection with theacquisitions, the Company entered into an agreement with an affiliate of GTCRto provide management and advisory services. Under the terms of the agreement,the Company was required to pay $4.0 million per year for these services. InFebruary 2005, the management and advisory services agreement between theCompany and an affiliate of GTCR was terminated. The total fee paid to GTCRduring the year ended March 31, 2005 was $3.4 million. During 2004, inconjunction with the Medtech and Denorex Acquisitions, the Company paid anaffiliate of GTCR a fee of $5,026.

 

In January 2004,the Company forgave a $1,404 receivable from Spic and Span.

 

The Predecessor Companyentered into agreements with its majority shareholder to provide advisory andmanagement services. For the period from April 1, 2003 to February 5,2004 and the year ended March 31, 2003, the Predecessor Company incurred$1,293 and $1,600, respectively, for these services. In addition, thePredecessor Company reimbursed this shareholder for travel expenses totaling$390 and $170 for the period from April 1, 2003 to February 5, 2004and the year ended March 31, respectively. This shareholder was also paid$560 during the year ended March 31, 2003 for management and advisoryservices relating to the acquisition of the Denorex assets on February 7,2002.

 

During the year endedMarch 31, 2002, the Predecessor Company entered into an agreement with anaffiliated company under common management to provide certain administrative,technology and support services to the affiliate in exchange for $57 per month.This agreement was amended in April 2002 to reduce this fee to $33 permonth. The Predecessor Company recognized $333 and $391 for these servicesduring the period from April 1, 2003 to February 5, 2004 and the yearended March 31, 2003, respectively. The agreement was terminated in March2004.

 

**17.   FairValue of Financial Instruments**

** **

The carrying value ofcash, accounts receivable and accounts payable at March 31, 2005 and 2004approximates fair value because of the short-term nature of these instruments.The carrying value of long-term debt at March 31, 2005 and 2004approximates fair value based on interest rates for instruments with similarterms and maturities.

 

**18.   Concentrationsof Risk**

** **

The Company’s sales areconcentrated in the areas of over-the-counter pharmaceutical products, personalcare products and household cleaning products. The Company sells its productsto mass merchandisers, food and drug accounts, and dollar and club stores.During the year ended March 31, 2005, the periods from February 6,2004 to March 31, 2004, April 1, 2003 to February 5, 2004 andthe year ended March 31, 2003, approximately 64%, 66%, 74% and 70% theCompany’s total sales were derived from 4 of its brands. During the year endedMarch 31, 2005, the periods from February 6, 2004 to March 31,2004, April 1, 2003 to February 5, 2004 and the year endedMarch 31, 2003, approximately 24%, 33%, 30% and 24% the Company’s netsales were made to one customer. At March 31, 2005, approximately 21% ofaccounts receivable were owed by one customer.

 

The Company managesproduct distribution in the continental United States through a maindistribution center in St. Louis, Missouri. A serious disruption, such as aflood or fire, to the main distribution center could damage the Company’sinventory and could materially impair the Company’s ability to distribute itsproducts to customers in a timely manner or at a reasonable cost. The Companycould incur significantly higher costs and experience longer lead timesassociated with distributing its products to its customers during the time thatit takes the Company to reopen or replace its distribution center. As a result,any such disruption could have a material adverse effect on the Company’s salesand profitability.

 

F-58

----

 

As of March 31,2005, the Company sold 94 types of products. The Company does not havelong-term contracts with the manufacturers of 59 of those types of products.These 59 types of products accounted for approximately 29% of the Company’sgross sales for the year ended March 31, 2005. The fact that the Companydoes not have long-term contracts with these manufacturers means that theycould cease manufacturing these products at any time and for any reason.Without adequate supplies of merchandise to sell to the Company’s customers,sales would decrease materially and the Company’s business would suffer.

 

**19.   BusinessSegments**

** **

Segment information hasbeen prepared in accordance with SFAS No. 131, “Disclosures about Segmentsof an Enterprise and Related Information.” Operating segments are based on the Company’sproduct lines. Within each reportable segment are operating segments which havesimilar economic characteristics, including the nature of the products,production process, type of customer and method of distribution.

 

There were no inter-segmentsales or transfers during the year ended March 31, 2005, the period fromFebruary 6, 2004 through March 31, 2004, the period fromApril 1, 2003 through February 5, 2004 or the year endedMarch 31, 2003. The Company evaluates the performance of its product linesand allocates resources to them based primarily on contribution margin. Thetable below summarizes information about reportable segments.

 
| **Year ended  March 31, 2005  (successor basis)** | ** ** | **Over-the-Counter  Drug** | ** ** | **Personal  Care** | ** ** | **Household  Cleaning** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|-------------------------|------------|-----------|------------|------------------|------------|
| Net sales                                                        |       | $                          | 167,246    |               | $          | 33,665                  |       | $         | 102,256    |             | $          | — |   | $ | 303,167 |   |
| Other revenues                                                   |       | —                     |       | —             |       | 151                     |       | —    |       | 151              |       |
| Total revenues                                                   |       | 167,246                    |       | 33,665             |       | 102,407                 |       | —    |       | 303,318          |       |
| Cost of sales                                                    |       | 61,682                     |       | 16,469             |       | 63,197                  |       | —    |       | 141,348          |       |
| Gross profit                                                     |       | 105,564                    |       | 17,196             |       | 39,210                  |       | —    |       | 161,970          |       |
| Advertising and  promotion                                       |       | 23,193                     |       | 6,894              |       | 8,315                   |       | —    |       | 38,402           |       |
| Contribution  margin                                             |       | 82,371                     |       | 10,302             |       | 30,895                  |       | —    |       | 123,568          |       |
| Other operating  expenses                                        |       |                       |       |               |       |                    |       |      |       | 29,998           |       |
| Operating income                                                 |       |                       |       |               |       |                    |       |      |       | 93,570           |       |
| Other income  (expense)                                          |       |                       |       |               |       |                    |       |      |       | (71,589          | )          |
| Provision from  income taxes                                     |       |                       |       |               |       |                    |       |      |       | (8,522           | )          |
| Net income                                                       |       |                       |       |               |       |                    |       |      |       | $                | 13,459     |   |
|                                                                  |            |                            |            |                    |            |                         |            |           |            |                  |            |  |  |  |  |  |

 
| **Period from February 6, 2004 to March 31, 2004  (successor basis)** | ** ** | **Over-the-Counter  Drug** | ** ** | **Personal  Care** | ** ** | **Household  Cleaning** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|-------------------------|------------|-----------|------------|------------------|------------|
| Net sales                                                                                                          |       | $                          | 12,010     |               | $          | 4,721                   |       | $         | 2,076      |             | $          | — |   | $ | 18,807 |   |
| Other revenues—related  party                                                                                 |       | —                     |       | —             |       | —                  |       | 54        |       | 54               |       |
| Total revenues                                                                                                     |       | 12,010                     |       | 4,721              |       | 2,076                   |       | 54        |       | 18,861           |       |
| Cost of sales                                                                                                      |       | 5,981                      |       | 2,836              |       | 1,206                   |       | —    |       | 10,023           |       |
| Gross profit                                                                                                       |       | 6,029                      |       | 1,885              |       | 870                     |       | 54        |       | 8,838            |       |
| Advertising and  promotion                                                                                         |       | 869                        |       | 603                |       | 217                     |       | —    |       | 1,689            |       |
| Contribution  margin                                                                                               |       | 5,160                      |       | 1,282              |       | 653                     |       | 54        |       | 7,149            |       |
| Other operating  expenses                                                                                          |       |                       |       |               |       |                    |       |      |       | 2,580            |       |
| Operating income                                                                                                   |       |                       |       |               |       |                    |       |      |       | 4,569            |       |
| Other income  (expense)                                                                                            |       |                       |       |               |       |                    |       |      |       | (1,725           | )          |
| Provision for  income taxes                                                                                        |       |                       |       |               |       |                    |       |      |       | (1,054           | )          |
| Net income                                                                                                         |       |                       |       |               |       |                    |       |      |       | $                | 1,790      |   |
|                                                                                                                    |            |                            |            |                    |            |                         |            |           |            |                  |            |  |  |  |  |  |

 

F-59

----

 
| **Period from April 1, 2003 to February 5, 2004  (predecessor basis)** | ** ** | **Over-the-Counter  Drug** | ** ** | **Personal Care** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------|------------|-----------|------------|------------------|------------|
| Net sales                                                                                                           |       | $                          | 43,577     |                   | $          | 25,149    |       | $                | —     |   | $ | 68,726 |   |
| Other revenues—related  party                                                                                  |       | —                     |       | —                 |       | 333       |       | 333              |       |
| Total revenues                                                                                                      |       | 43,577                     |       | 25,149                 |       | 333       |       | 69,059           |       |
| Cost of sales                                                                                                       |       | 14,685                     |       | 11,569                 |       | —    |       | 26,254           |       |
| Gross profit                                                                                                        |       | 28,892                     |       | 13,580                 |       | 333       |       | 42,805           |       |
| Advertising and  promotion                                                                                          |       | 6,467                      |       | 6,134                  |       | —    |       | 12,601           |       |
| Contribution  margin                                                                                                |       | 22,425                     |       | 7,446                  |       | 333       |       | 30,204           |       |
| Other operating  expenses                                                                                           |       |                       |       |                   |       |      |       | 17,970           |       |
| Operating income                                                                                                    |       |                       |       |                   |       |      |       | 12,234           |       |
| Other income  (expense)                                                                                             |       |                       |       |                   |       |      |       | (8,157           | )          |
| Provision for  income taxes                                                                                         |       |                       |       |                   |       |      |       | (1,684           | )          |
| Net income                                                                                                          |       |                       |       |                   |       |      |       | $                | 2,393      |   |
|                                                                                                                     |            |                            |            |                        |            |           |            |                  |            |  |  |  |  |

 
| **Year ended March 31, 2003  (predecessor basis)** | ** ** | **Over-the-Counter  Drug** | ** ** | **Personal Care** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------|------------|------------------------|------------|-----------|------------|------------------|------------|
| Net sales                                                                   |       | $                          | 43,260     |                   | $          | 32,788    |       | $                | —     |   | $ | 76,048 |   |
| Other revenues—related  party                                          |       | —                     |       | —                 |       | 391       |       | 391              |       |
| Total revenues                                                              |       | 43,260                     |       | 32,788                 |       | 391       |       | 76,439           |       |
| Cost of sales                                                               |       | 12,620                     |       | 14,855                 |       | —    |       | 27,475           |       |
| Gross profit                                                                |       | 30,640                     |       | 17,933                 |       | 391       |       | 48,964           |       |
| Advertising and  promotion                                                  |       | 7,420                      |       | 6,854                  |       | —    |       | 14,274           |       |
| Contribution  margin                                                        |       | 23,220                     |       | 11,079                 |       | 391       |       | 34,690           |       |
| Other operating  expenses                                                   |       |                       |       |                   |       |      |       | 17,349           |       |
| Operating income                                                            |       |                       |       |                   |       |      |       | 17,341           |       |
| Other income  (expense)                                                     |       |                       |       |                   |       |      |       | (10,432          | )          |
| Provision for  income taxes                                                 |       |                       |       |                   |       |      |       | (3,902           | )          |
| Discontinued  operations                                                    |       |                       |       |                   |       |      |       | (5,644           | )          |
| Cumulative  effect of change in accounting principle                        |       |                       |       |                   |       |      |       | (11,785          | )          |
| Net (loss)                                                                  |       |                       |       |                   |       |      |       | $                | (14,422    | ) |
|                                                                             |            |                            |            |                        |            |           |            |                  |            |  |  |  |  |

 

Duringthe year ended March 31, 2005, 98% of sales were made to customers in theUnited States and Canada. During the period from February 6, 2004 throughMarch 31, 2004, the period from April 1, 2003 throughFebruary 5, 2004, and the year ended March 31, 2003, virtually allsales were made to customers in the United States of America and Canada. No individualgeographical area accounted for more than 10% of net sales in any of theperiods presented. At March 31, 2005 and 2004, all of the Company’slong-term assets were located in the United States of America and have not beenallocated between segments.

 

F-60

----

 

**20.   SubsequentEvents**

** **

**On April 13, 2005, the Company entered into a materialdefinitive storage and handling agreement and transportation managementagreement. As a result, in August 2005, the Company will change its third-partyservice provider and move its storage and distribution center to a differentfacility.**

 

**21.   UnauditedQuarterly Financial Information (in thousands, except for per share data)**

 
| ** **                                      | ** ** | ** **              | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                          | ** ** | **Period**              | ** ** | ** **              | ** ** | ** **               | ** ** | ** **              | ** ** | ** **              | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------|------------|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | ** **              | ** ** | ** **               | ** ** | ** **              | ** ** | **Period from**                | ** ** | **from Feb.6,**    | ** ** | ** **              | ** ** | ** **               | ** ** | ** **              | ** ** | ** **              | ** ** |
| ** **                                      | ** ** | ** **              | ** ** | ** **               | ** ** | ** **              | ** ** | **January 1,**                 | ** ** | **2004**                | ** ** | ** **              | ** ** | ** **               | ** ** | ** **              | ** ** | ** **              | ** ** |
| ** **                                      | ** ** | **Quarter Ended**  | ** ** | **2004**                 | ** ** | **Through**             | ** ** | **Quarter Ended**              | ** ** |
| ** **                                      | ** ** | **June 30,  2003** | ** ** | **Sept. 30,  2003** | ** ** | **Dec. 31,  2003** | ** ** | **through  Feb. 5, 2004** | ** ** | **Mar. 31,  2004** | ** ** | **June 30,  2004** | ** ** | **Sept. 30,  2004** | ** ** | **Dec. 31,  2004** | ** ** | **Mar. 31,  2005** | ** ** |
| **Income  Statement Data:**                     |       |                    |       |                     |       |                    |       |                                |       |                    |       |                    |       |                     |       |                    |       |                    |       |
| Total revenues                                  |       | $                       | 19,377     |                     | $          | 23,781                  |       | $                                   | 19,219     |                    | $          | 6,682                   |       | $                        | 18,861     |                    | $          | 67,757                  |       | $ | 81,346 |   | $ | 75,854 |   | $ | 78,361 |   |
| Cost of sales                                   |       | 7,047                   |       | 9,040                    |       | 7,485                   |       | 2,682                               |       | 10,023                  |       | 36,123                  |       | 37,843                   |       | 33,923                  |       | 33,459                  |       |
| Gross profit                                    |       | 12,330                  |       | 14,741                   |       | 11,734                  |       | 4,000                               |       | 8,838                   |       | 31,634                  |       | 43,503                   |       | 41,931                  |       | 44,902                  |       |
| Advertising and  promotion expenses             |       | 4,208                   |       | 5,046                    |       | 2,736                   |       | 611                                 |       | 1,689                   |       | 13,771                  |       | 10,304                   |       | 7,265                   |       | 7,062                   |       |
| Depreciation and  amortization expenses         |       | 1,312                   |       | 1,318                    |       | 1,319                   |       | 549                                 |       | 931                     |       | 2,289                   |       | 2,254                    |       | 2,605                   |       | 2,652                   |       |
| General and  administrative expenses            |       | 2,441                   |       | 2,493                    |       | 2,879                   |       | 4,255                               |       | 1,649                   |       | 4,921                   |       | 4,502                    |       | 5,690                   |       | 5,085                   |       |
| Interest  expense, net                          |       | 2,171                   |       | 2,217                    |       | 2,148                   |       | 1,621                               |       | 1,725                   |       | 11,049                  |       | 10,834                   |       | 11,994                  |       | 10,849                  |       |
| Other expense                                   |       | —                  |       | —                   |       | —                  |       | 1,404                               |       | —                  |       | 7,567                   |       | —                   |       | —                  |       | 19,296                  |       |
| Income from  continuing operations before taxes |       | 2,198                   |       | 3,667                    |       | 2,652                   |       | (4,440                              | )          | 2,844                   |       | (7,963                  | )          | 15,609                   |       | 14,377                  |       | (42                     | )          |
| Provision/(benefit)  for income taxes           |       | 771                     |       | 1,541                    |       | 1,052                   |       | (1,680                              | )          | 1,054                   |       | (2,826                  | )          | 5,936                    |       | 5,230                   |       | 182                     |       |
| Net income/(loss)                               |       | $                       | 1,427      |                     | $          | 2,126                   |       | $                                   | 1,600      |                    | $          | (2,760                  | )          | $                        | 1,790      |                    | $          | (5,137                  | )          | $ | 9,673 |   | $ | 9,147 |   | $ | (224 | ) |

 

F-61

----

 

**SCHEDULE II**VALUATION AND QUALIFYING ACCOUNTS(dollars in thousands)

 
| ** **                                                | ** ** | **Balance at  Beginning of  Year** | ** ** | **Charged to  Expense** | ** ** | **Deductions** | ** ** | **Other** | ** ** | **Balance at  End of  Year** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------|------------|----------------|------------|-----------|------------|----------------------------------------|------------|
| **Predecessor  Basis**                                    |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Year ended  March 31, 2003                           |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Deferred tax  valuation allowance                         |       | $                                            | 427        |                         | $          | 992            |       | $         | —     |                                   | $          | — |   | $ | 1,419 |   |
| Reserves for  sales returns                               |       | 262                                          |       | 4,305                        |       | 4,218          |       | —    |       | 349                                    |       |
| Allowance for  doubtful accounts                          |       | 57                                           |       | 126                          |       | 94             |       | —    |       | 89                                     |       |
| Allowance for  inventory obsolescence                     |       | 184                                          |       | 87                           |       | 193            |       | —    |       | 78                                     |       |
| Pecos returns  reserve                                    |       | 888                                          |       | 7,556                        |       | 4,340          |       | —    |       | 4,104                                  |       |
|                                                      |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Period from  April 1, 2003 to February 5, 2004  |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Deferred tax  valuation allowance                         |       | 1,419                                        |       | 325                          |       | —         |       | —    |       | 1,744                                  |       |
| Reserves for  sales returns                               |       | 348                                          |       | 3,254                        |       | 3,025          |       | —    |       | 577                                    |       |
| Allowance for  doubtful accounts                          |       | 89                                           |       | 166                          |       | 114            |       | —    |       | 141                                    |       |
| Allowance for  inventory obsolescence                     |       | 78                                           |       | 350                          |       | 340            |       | —    |       | 88                                     |       |
| Pecos returns  reserve                                    |       | 4,104                                        |       | —                       |       | 2,755          |       | —    |       | 1,349                                  |       |
|                                                      |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| **Successor  Basis**                                      |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Period from  February 6, 2004 to March 31, 2004 |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Deferred tax  valuation allowance                         |       | 1,744                                        |       | —                       |       | —         |       | (1,744    | )(1)       | —                                 |       |
| Reserves for  sales returns                               |       | 684                                          |       | 389                          |       | 568            |       | 288       | (2)        | 793                                    |       |
| Allowance for  doubtful accounts                          |       | 141                                          |       | 46                           |       | 140            |       | 13        | (2)   | 60                                     |       |
| Allowance for  inventory obsolescence                     |       | 88                                           |       | 70                           |       | 60             |       | 26        | (2)   | 124                                    |       |
| Pecos returns  reserve                                    |       | 1,349                                        |       | —                       |       | 163            |       | —    |       | 1,186                                  |       |
|                                                      |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Year ended  March 31, 2005                           |       |                                         |       |                         |       |           |       |      |       |                                   |       |
| Reserves for  sales returns                               |       | 793                                          |       | 10,508                       |       | 8,708          |       | —    |       | 2,593                                  |       |
| Allowance for  doubtful accounts                          |       | 60                                           |       | 32                           |       | 33             |       | 191       | (3)   | 250                                    |       |
| Allowance for  inventory obsolescence                     |       | 124                                          |       | 769                          |       | 266            |       | 823       | (3)   | 1,450                                  |       |
| Pecos returns  reserve                                    |       | 1,186                                        |       | —                       |       | 944            |       | —    |       | 242                                    |       |
|                                                           |            |                                              |            |                              |            |                |            |           |            |                                        |            |  |  |  |  |  |

 

----

(1)    As a result of the business combination ofMedtech and Denorex, the Company determined that it would probably be able toutilize the deferred tax assets for which a valuation allowance had previouslybeen established. Accordingly, the Company did not record a valuation allowancein purchase accounting.

 

(2)    As a result of the acquisition of Spic andSpan, the Company recorded reserves for sales returns and allowances fordoubtful accounts and inventory obsolescense in purchase accounting.

 

(3)    As a result of the acquisition of Bonita Bayand Vetco, the Company recorded allowances for doubtful accounts and inventoryobsolescence in purchase accounting.

 

F-62

----

 

**Bonita BayHoldings, Inc.**

** **

**Consolidated FinancialStatements**

** **

**Years endedDecember 31, 2003, 2002 and 2001with Report of Independent Certified Public Accountants**

** **

**F-63**

----

** **

**REPORTOF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTANTS**

** **

TheBoard of Directors and StockholdersBonita Bay Holdings, Inc.

 

We have audited theaccompanying consolidated balance sheets of Bonita Bay Holdings, Inc. asof December 31, 2003 and 2002, and the related consolidated statements ofincome, stockholders’ equity and cash flows for each of the three years in theperiod ended December 31, 2003. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Bonita Bay Holdings, Inc.as of December 31, 2003 and December 31, 2002, and the results of itsoperations and its cash flows for each of the three years in the period endedDecember 31, 2003, in conformity with U.S. generally accepted accountingprinciples.

 

As discussed inNote 2 to the consolidated financial statements, effective January 1,2002, the company changed its method of accounting for goodwill and otherintangible assets.

 
| /s/ ERNST &  YOUNG LLP |   |
|---------------------------------|--------|
|                            |
| Tampa, Florida                  |
| February 20,  2004         |

 

F-64

----

 

**BONITABAY HOLDINGS, INC.CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2003 AND 2002**

** **
| ** **                                                                                                                                | ** ** | **2003**    | ** **  | **2002**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **ASSETS**                                                                                                                                |       |        |        |        |       |
| Current assets:                                                                                                                           |       |        |        |        |       |
| Cash and cash equivalents                                                                                                                 |       | $           | 7,153,906   |        | $          | 7,463,528 |   |
| Accounts  receivable, net of allowance for doubtful accounts and discounts of $365,891  and $1,226,501, respectively                      |       | 23,119,991  |        | 15,595,726  |       |
| Inventories                                                                                                                               |       | 10,625,913  |        | 12,441,162  |       |
| Prepaid expenses                                                                                                                          |       | 1,017,608   |        | 2,274,036   |       |
| Deferred income  taxes                                                                                                                    |       | —      |        | 340,902     |       |
| Total current  assets                                                                                                                     |       | 41,917,418  |        | 38,115,354  |       |
| Property and  equipment, net                                                                                                              |       | 3,272,853   |        | 4,504,950   |       |
| Other noncurrent  assets:                                                                                                                 |       |        |        |        |       |
| Trademarks and  other purchased product rights, net                                                                                       |       | 310,190,618 |        | 310,784,569 |       |
| Debt issuance  costs, net                                                                                                                 |       | 7,884,590   |        | 9,410,802   |       |
| Other                                                                                                                                     |       | 224,360     |        | 11,252      |       |
| Total other  noncurrent assets                                                                                                            |       | 318,299,568 |        | 320,206,623 |       |
| Total assets                                                                                                                              |       | $           | 363,489,839 |        | $          | 362,826,927 |   |
|                                                                                                                                      |       |        |        |        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                            |       |        |        |        |       |
| Current liabilities:                                                                                                                      |       |        |        |        |       |
| Accounts payable                                                                                                                          |       | $           | 10,726,036  |        | $          | 9,848,417 |   |
| Accrued expenses                                                                                                                          |       | 5,680,223   |        | 3,542,773   |       |
| Deferred income  taxes                                                                                                                    |       | 117,471     |        | —      |       |
| Income taxes  payable                                                                                                                     |       | 1,353,207   |        | 1,363,495   |       |
| Current  maturities of long-term debt                                                                                                     |       | 25,260,000  |        | 20,910,000  |       |
| Total current  liabilities                                                                                                                |       | 43,136,937  |        | 35,664,685  |       |
| Deferred income  taxes                                                                                                                    |       | 15,451,791  |        | 6,968,263   |       |
| Other long-term  liabilities                                                                                                              |       | 590,664     |        | 1,238,360   |       |
| Long-term debt,  net of current maturities                                                                                                |       | 153,817,551 |        | 177,780,431 |       |
| Common stock  warrants                                                                                                                    |       | 2,355,330   |        | 2,684,569   |       |
| Stockholders’  equity:                                                                                                               |       |        |        |        |       |
| Class A,  voting common stock, no par value; 125,000,000 shares authorized, 52,746,509  and 59,014,709 shares issued and outstanding |       | 57,643,125  |        | 70,598,392  |       |
| Class B,  nonvoting common stock, no par value; 50,000,000 shares authorized;  34,340,506 shares issued and outstanding              |       | 47,330,446  |        | 47,330,446  |       |
| Receivable from  sale of stock                                                                                                            |       | (1,186,333  | )           | (1,122,684  | )          |
| Retained  earnings                                                                                                                        |       | 44,503,941  |        | 22,231,550  |       |
| Accumulated  other comprehensive loss                                                                                                     |       | (153,613    | )           | (547,085    | )          |
| Total  stockholders’ equity                                                                                                          |       | 148,137,566 |        | 138,490,619 |       |
| Total  liabilities and stockholders’ equity                                                                                          |       | $           | 363,489,839 |        | $          | 362,826,927 |   |

 

See accompanying notes.

 

F-65

----

 

**BONITABAY HOLDINGS, INC.CONSOLIDATED STATEMENTS OFINCOMEFOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**

** **
| ** **                         | ** ** | **2003**    | ** **  | **2002**    | ** ** | **2001**    | ** ** |
|------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
| Sales                              |       | $           | 183,920,595 |        | $          | 122,353,757 |       | $ | 61,367,894 |   |
| Returns,  discounts and allowances |       | (16,850,740 | )           | (11,787,626 | )          | (6,399,577  | )          |
| Net sales                          |       | 167,069,855 |        | 110,566,131 |       | 54,968,317  |       |
| Cost of sales                      |       | 82,663,523  |        | 58,447,880  |       | 26,488,911  |       |
| Gross profit                       |       | 84,406,332  |        | 52,118,251  |       | 28,479,406  |       |
| Operating  expenses:               |       |        |        |        |       |        |       |
| Advertising and  promotion         |       | 19,525,302  |        | 10,132,868  |       | 7,425,355   |       |
| Depreciation and  amortization     |       | 1,744,253   |        | 744,439     |       | 4,155,245   |       |
| General and  administrative        |       | 9,733,510   |        | 5,555,994   |       | 4,138,169   |       |
| Total operating  expenses          |       | 31,003,065  |        | 16,433,301  |       | 15,718,769  |       |
| Income from  operations            |       | 53,403,267  |        | 35,684,950  |       | 12,760,637  |       |
| Loss on  extinguishment of debt    |       | —      |        | —      |       | (1,604,300  | )          |
| Interest expense                   |       | (17,482,602 | )           | (8,111,635  | )          | (6,212,878  | )          |
| Interest income                    |       | 175,220     |        | 103,238     |       | 13,432      |       |
| Income before  income taxes        |       | 36,095,885  |        | 27,676,553  |       | 4,956,891   |       |
| Provision for  income taxes        |       | 13,823,494  |        | 11,106,800  |       | 1,874,126   |       |
| Net income                         |       | $           | 22,272,391  |        | $          | 16,569,753  |       | $ | 3,082,765 |   |

 

See accompanying notes.

 

F-66

----

 

**BONITABAY HOLDINGS, INC.CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITYFOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**

 
| ** **                                                                                                    | ** ** | ** **            | ** ** | ** **       | ** ** | ** **     | ** ** | ** **         | ** ** | ** **   | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|----------------|------------|--------------------|------------|--------------|------------|-------------------|------------|-------------------|------------|------------|------------|-----------------|------------|-------------|------------|
| ** **                                                                                                    | ** ** | **Common stock** | ** ** | ** **       | ** ** | **Receivable** | ** ** | ** **         | ** ** | ** **   | ** ** | **other**         | ** ** | ** **        | ** ** |
| ** **                                                                                                    | ** ** | **Class A**      | ** ** | **Class B** | ** ** | **Treasury**   | ** ** | **from sale** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                                    | ** ** | **Shares**            | ** ** | **Value**        | ** ** | **Shares**     | ** ** | **Value**          | ** ** | **stock**    | ** ** | **of stock** | ** ** | **earnings**      | ** ** | **income** | ** ** | **loss**        | ** ** | **Total**   | ** ** |
| Balance,  December 31, 2000                                                                              |       | 45,830,780            |       | $                | 45,830,780 |           | 1,791,220  |               | $          | 1,791,220    |       | $                 | —     |              | $          | —     |       | $               | 2,579,032  |        |       |   | $ | — |   | $ | 50,201,032 |   |
| Repurchase of  Class A common stock                                                                      |       | (10,000,000           | )          | —           |       | —         |       | —             |       | (14,000,000  | )          | —            |       | —            |       |       |       | —          |       | (14,000,000 | )          |
| Issuance of  Class A common stock, net of stock issuance costs                                           |       | 15,673,929            |       | 9,148,070        |       | —         |       | —             |       | 14,000,000   |       | (1,059,035        | )          | —            |       |       |       | —          |       | 22,089,035  |       |
| Issuance of  Class B common stock, net of stock issuance costs                                           |       | —                |       | —           |       | 32,549,286     |       | 44,501,930         |       | —       |       | —            |       | —            |       |       |       | —          |       | 44,501,930  |       |
| Exercise of stock  options                                                                                    |       | 10,000                |       | 10,000           |       | —         |       | —             |       | —       |       | —            |       | —            |       |       |       | —          |       | 10,000      |       |
| Issuance of  common stock warrants                                                                            |       | —                |       | 1,042,704        |       | —         |       | 1,037,296          |       | —       |       | —            |       | —            |       |       |       | —          |       | 2,080,000   |       |
| Net income                                                                                                    |       | —                |       | —           |       | —         |       | —             |       | —       |       | —            |       | 3,082,765         |       | $          | 3,082,765  |            | —     |        | 3,082,765  |   |
|                                                                                                          |       |                  |       |             |       |           |       |               |       |         |       |              |       |              |       | $          | 3,082,765  |            |       |        |       |   |
| Balance,  December 31, 2001                                                                              |       | 51,514,709            |       | 56,031,554       |       | 34,340,506     |       | 47,330,446         |       | —       |       | (1,059,035        | )          | 5,661,797         |       |       |       | —          |       | 107,964,762 |       |
| Issuance of  Class A common stock, net of stock issuance costs                                           |       | 7,500,000             |       | 14,575,238       |       | —         |       | —             |       | —       |       | —            |       | —            |       |       |       | —          |       | 14,575,238  |       |
| Exercise of stock  options                                                                                    |       | 14,000                |       | 14,000           |       | —         |       | —             |       | —       |       | —            |       | —            |       |       |       | —          |       | 14,000      |       |
| Repurchase and  retirement of Class A common stock                                                       |       | (14,000               | )          | (22,400          | )          | —         |       | —             |       | —       |       | —            |       | —            |       |       |       | —          |       | (22,400     | )          |
| Interest on  receivable from sale of stock                                                                    |       | —                |       | —           |       | —         |       | —             |       | —       |       | (63,649           | )          | —            |       |       |       | —          |       | (63,649     | )          |
| Net income                                                                                                    |       | —                |       | —           |       | —         |       | —             |       | —       |       | —            |       | 16,569,753        |       | $          | 16,569,753 |            | —     |        | 16,569,753 |   |
| Other  comprehensive income:                                                                                  |       |                  |       |             |       |           |       |               |       |         |       |              |       |              |       |       |       |            |       |        |       |
| Change in fair  value of interest rate swap and collar agreements, net of income  taxes of $360,873 |       | —                |       | —           |       | —         |       | —             |       | —       |       | —            |       | —            |       | (547,085   | )          | (547,085        | )          | (547,085    | )          |
|                                                                                                          |       |                  |       |             |       |           |       |               |       |         |       |              |       |              |       | $          | 16,022,668 |            |       |        |       |   |
| Balance,  December 31, 2002                                                                              |       | 59,014,709            |       | 70,598,392       |       | 34,340,506     |       | 47,330,446         |       | —       |       | (1,122,684        | )          | 22,231,550        |       |       |       | (547,085        | )          | 138,490,619 |       |
| Issuance of  Class A common stock, net of stock issuance costs                                           |       | 166,300               |       | 332,600          |       | —         |       | —             |       | —       |       | —            |       | —            |       |       |       | —          |       | 332,600     |       |
| Exercise of stock  options                                                                                    |       | 28,167                |       | 32,467           |       | —         |       | —             |       | —       |       | —            |       | —            |       |       |       | —          |       | 32,467      |       |
| Repurchase and  retirement of Class A common stock                                                       |       | (6,462,667            | )          | (13,320,334      | )          | —         |       | —             |       | —       |       | —            |       | —            |       |       |       | —          |       | (13,320,334 | )          |
| Interest on  receivable from sale of stock                                                                    |       | —                |       | —           |       | —         |       | —             |       | —       |       | (63,649           | )          | —            |       |       |       | —          |       | (63,649     | )          |
| Net income                                                                                                    |       | —                |       | —           |       | —         |       | —             |       | —       |       | —            |       | 22,272,391        |       | $          | 22,272,391 |            | —     |        | 22,272,391 |   |
| Other  comprehensive income:                                                                                  |       |                  |       |             |       |           |       |               |       |         |       |              |       |              |       |       |       |            |       |        |       |
| Change in fair  value of interest rate swap and collar agreements, net of income  taxes of $254,224 |       | —                |       | —           |       | —         |       | —             |       | —       |       | —            |       | —            |       | 393,472    |       | 393,472         |       | 393,472     |       |
|                                                                                                          |       |                  |       |             |       |           |       |               |       |         |       |              |       |              |       | $          | 22,665,863 |            |       |        |       |   |
| Balance,  December 31, 2003                                                                              |       | 52,746,509            |       | $                | 57,643,125 |           | 34,340,506 |               | $          | 47,330,446   |       | $                 | —     |              | $          | (1,186,333 | )          | $               | 44,503,941 |        |       |   | $ | (153,613 | ) | $ | 148,137,566 |   |

 

Seeaccompanying notes.

 

F-67

----

 

**BONITABAY HOLDINGS, INC.CONSOLIDATED STATEMENTS OFCASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**

** **
| ** **                                                                           | ** ** | **2003**    | ** ** | **2002**     | ** ** | **2001**     | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------|------------|--------------|------------|--------------|------------|
| Operating  activities                                                                |       |        |       |         |       |         |       |
| Net income                                                                           |       | $           | 22,272,391 |         | $          | 16,569,753   |       | $ | 3,082,765 |   |
| *Adjustments  to reconcile net income to net cash provided by operating activities:* |       |        |       |         |       |         |       |
| Loss on  extinguishment of debt                                                      |       | —      |       | —       |       | 1,604,300    |       |
| Accretion of  debt discount to interest expense                                      |       | 483,916     |       | —       |       | 475,700      |       |
| Depreciation and  amortization                                                       |       | 1,744,253   |       | 744,439      |       | 4,155,245    |       |
| Deferred taxes                                                                       |       | 8,687,680   |       | 5,411,113    |       | 1,386,714    |       |
| Interest earned  on receivable from sale of stock                                    |       | (63,649     | )          | (63,649      | )          | —       |       |
| Reallocation of  purchase price                                                      |       | 743,956     |       | —       |       | —       |       |
| Paid in kind  interest                                                               |       | 503,964     |       | —       |       | —       |       |
| Changes in  assets and liabilities:                                                  |       |        |       |         |       |         |       |
| Accounts  receivable                                                                 |       | (7,524,265  | )          | (5,488,194   | )          | (1,514,875   | )          |
| Income taxes  receivable                                                             |       | —      |       | —       |       | (27,000      | )          |
| Inventories                                                                          |       | 1,815,249   |       | (3,604,299   | )          | (2,130,237   | )          |
| Prepaid expenses                                                                     |       | 1,256,428   |       | (1,155,804   | )          | (710,036     | )          |
| Debt issuance  costs                                                                 |       | 2,039,300   |       | 1,003,209    |       | 1,504,738    |       |
| Accounts payable                                                                     |       | 877,619     |       | 6,595,828    |       | 1,283,214    |       |
| Accrued expenses                                                                     |       | 2,137,450   |       | 606,502      |       | 1,684,825    |       |
| Income taxes  payable                                                                |       | (10,288     | )          | 1,390,495    |       | (892,308     | )          |
| Net cash  provided by operating activities                                           |       | 34,964,004  |       | 22,009,393   |       | 9,903,045    |       |
|                                                                                 |       |        |       |         |       |         |       |
| Investing  activities                                                                |       |        |       |         |       |         |       |
| Purchases of  fixed assets                                                           |       | (369,654    | )          | (241,916     | )          | (120,452     | )          |
| Acquisition of  Clear eyes/Murine brands                                             |       | (295,367    | )          | (110,700,129 | )          | —       |       |
| Acquisition of  Comet brand                                                          |       | (4,638      | )          | —       |       | (144,805,862 | )          |
| Disposals of  fixed assets                                                           |       | 7,496       |       | —       |       | —       |       |
| Changes in other  noncurrent assets                                                  |       | (213,108    | )          | —       |       | —       |       |
| Net cash used in  investing activities                                               |       | (875,271    | )          | (110,942,045 | )          | (144,926,314 | )          |
|                                                                                 |       |        |       |         |       |         |       |
| Financing  activities                                                                |       |        |       |         |       |         |       |
| Issuance of  common stock, net of stock issuance costs                               |       | 332,600     |       | 14,575,238   |       | 52,590,965   |       |
| Exercise of  stock options                                                           |       | 32,467      |       | 14,000       |       | 10,000       |       |
| Repurchase and  retirement of common stock                                           |       | (13,320,334 | )          | (22,400      | )          | —       |       |
| Reallocation/issuance  of common stock warrants                                      |       | (329,239    | )          | 2,684,569    |       | 2,080,000    |       |
| Payments under  line of credit agreement                                             |       | —      |       | (1,000,000   | )          | —       |       |
| Payments under  long-term debt                                                       |       | (35,600,761 | )          | (23,475,000  | )          | (51,705,000  | )          |
| Proceeds from  debt                                                                  |       | 15,000,000  |       | 108,740,431  |       | 136,500,000  |       |
| Debt issuance  costs                                                                 |       | (513,088    | )          | (5,929,626   | )          | (5,255,780   | )          |
| Net cash (used  in) provided by financing activities                                 |       | (34,398,355 | )          | 95,587,212   |       | 134,220,185  |       |
| Net (decrease)  increase in cash                                                     |       | (309,622    | )          | 6,654,560    |       | (803,084     | )          |
| Cash at  beginning of year                                                           |       | 7,463,528   |       | 808,968      |       | 1,612,052    |       |
| Cash at end of  year                                                                 |       | $           | 7,153,906  |         | $          | 7,463,528    |       | $ | 808,968 |   |
| ** **                                                                           |       |        |       |         |       |         |       |
| **Supplemental  disclosures of cash flow information**                               |       |        |       |         |       |         |       |
| Cash paid for  interest                                                              |       | $           | 15,751,257 |         | $          | 7,508,000    |       | $ | 3,635,301 |   |
| Cash paid for  income taxes                                                          |       | $           | 5,167,219  |         | $          | 4,294,769    |       | $ | 1,392,412 |   |

 

F-68

----

 

**BONITABAY HOLDINGS, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTSDECEMBER 31, 2003**

** **

**1.   Organizationand Operations**

** **

Bonita BayHoldings, Inc. and its wholly-owned subsidiaries (the Company) market andmanufacture branded over-the-counter consumer products. The Company’s productsare sold through mass merchandisers, independent and chain drug stores, drugwholesalers and food stores in the United States and in various marketsthroughout the world. The Company acquired all of the assets related to thePrell, Chloraseptic and Comet brands from The Procter & Gamble Company(“P&G”) effective November 1, 1999, March 30, 2000 andOctober 2, 2001, respectively. Additionally, the Company acquired all ofthe assets related to the Clear eyes/Murine brands from Abbott Laboratories (“Abbott”)on December 30, 2002 (see Note 3). The results of operations of theacquired products have been included in the accompanying consolidatedstatements of income from the dates of acquisition.

 

**2.   Summaryof Significant Accounting Policies**

** **

***Principlesof consolidation***

*** ***

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries. All significant intercompany transactions andbalances are eliminated in consolidation.

 

***Useof estimates***

*** ***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

***Revenuerecognition***

*** ***

The Company recognizesrevenue from product sales upon the shipment to the customer. The Company hasrecorded revenue generated under the Comet and the Clear eyes/Murine domestictransitional service agreements (see Note 3) on a gross basis in accordancewith the provisions of Emerging Issues Task Force 99-19, *Reporting Revenue Gross as a Principal versus Net asan Agent*, as the Company was the primary obligor under theseagreements, bears the credit and economic risk and has discretion in the choiceof supplier. In addition, sales of Chloraseptic to certain customers stillserviced by P&G are recorded on a gross basis, as the Company is theprimary obligor under these agreements, bears the credit and economic risk andhas discretion in the choice of supplier.

 

Revenue has beenrecorded on a net basis for international sales of Clear eyes/Murine under themarketing transition period and prior to the satisfaction of regulatoryrequirements (see Note 3) for the years ended December 31, 2003 and2002, in accordance with the provisions of Emerging Issues Task Force 99-19,*Reporting Revenue Gross as a Principalversus Net as an Agent*, as the Company was not the primary obligorunder this arrangement and did not bear any credit or economic risk in the salestransactions.

 

It is the Company’spolicy across all classes of customers that all sales are final. As is commonin the consumer products industry, products are returned by the customer due toa number of reasons.

 

Examples includeproducts damaged in transit, discontinuance of a particular size or form ofproduct, shipping error, etc. The Company maintains and evaluates an allowancefor damages since all other types

 

F-69

----

 

of returns are notsignificant. Actual returns are charged against the allowance upon the receiptof the product or deduction from remittance by the customer.

 

***Cashand cash equivalents***

*** ***

The Company considersall short-term deposits and investments with original maturities of three monthsor less to be cash equivalents.

 

***Accountsreceivable***

*** ***

Accounts receivable arerecorded at the amount the Company expects to collect on customer tradereceivables. The Company establishes a general allowance of approximately 1% ofgross trade receivables in conjunction with a specific allowance forreceivables with known collection problems due to circumstances such asliquidity or bankruptcy. Collection problems are identified using an aging ofreceivables analysis based on invoice due dates. Items that are deemeduncollectible are written off against the allowance for doubtful accounts. TheCompany does not charge interest on past due receivables.

 

***Inventories***

*** ***

Inventories, comprisedof finished goods, are priced at the lower of cost (purchased cost for finishedgoods purchased from outsourced manufacturers) or market. The Company’s methodfor determining inventory cost approximates the first-in, first-out method. Inaddition, the Company recognizes shipping and handling expenses as a componentof cost of sales.

 

***Propertyand equipment***

*** ***

Property and equipmentare stated at cost less accumulated depreciation. Depreciation is providedusing the straight-line method over the estimated useful lives of depreciableassets. Leasehold improvements are capitalized and amortized over the lesser ofthe life of the lease or the estimated useful life of the asset.

 

Expenditures for repairsand maintenance are charged to expense when incurred. Expenditures for renewalsand betterments, which extend the useful lives of existing equipment, arecapitalized and depreciated. Upon retirement or disposition of property andequipment, the cost and related accumulated depreciation are removed from theaccounts, and any resulting gain or loss is recognized in the consolidated statementof income.

 

***Trademarksand other purchased product rights***

*** ***

The cost of aChloraseptic noncompete agreement was capitalized and amortized over its usefullife, estimated at 3 years. In June 2001, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standards(SFAS) 142, *Goodwill and OtherIntangible Assets* (SFAS No. 142). Prior to the adoption of SFASNo. 142, trademarks were amortized over 20 years. All intangibleassets subject to amortization have been fully amortized as ofDecember 31, 2003.

 

The provisions of SFASNo. 142, which were adopted by the Company on January 1, 2002,required the Company to discontinue the amortization of the cost of intangibleassets with indefinite lives and to perform certain fair value-based tests ofthe carrying value of indefinite-lived intangible assets. Accordingly, theCompany discontinued the amortization of the cost of these intangible assets.The discontinuation of this amortization favorably affected net income infiscal 2002 by $6,687,155, net of income tax benefit. In addition, goodwill andother indefinite-lived intangible assets are now tested for impairment on anannual basis. The Company obtained independent appraisals to determine the fairvalue of the intangible assets at December 31, 2002 and compared theirfair values with the carrying values, noting that no impairment had occurred.

 

Prior to the adoption ofSFAS No. 142, the Company evaluated whether events and circumstances hadoccurred that indicated the remaining useful life of intangible assets mightwarrant revision or that the remaining balance may not be recoverable. Whenfactors indicated that intangible assets should have been

 

F-70

----

 

evaluated for possibleimpairment, the Company used an estimate of the future undiscounted net cashflows of the related assets over the remaining lives of the assets in measuringwhether long-lived assets were recoverable. Subsequent to the adoption of SFASNo. 142, the Company performed annual impairment tests and determined noreevaluation was warranted using fair values as determined by product brandcontribution margin.

 

The changes in thecarrying amount of the Clear eyes/Murine Brand’s trademark are as follows for2003 and 2002:

 
| ** **                                         | ** ** | **2003** | ** **  | **2002**    | ** ** |
|----------------------------------------------------|------------|----------|-------------|-------------|------------|
| Balance as of  January 1                      |       | $        | 102,795,660 |        | $          | — |   |
| Additional Clear  eyes/Murine Brands closing costs |       | 295,367  |        | 102,795,660 |       |
| Clear  eyes/Murine international closings          |       | (743,956 | )           | —      |       |
| Balance as of  December 31                    |       | $        | 102,347,071 |        | $          | 102,795,660 |   |

 

While the full purchaseprice for the Clear eyes/Murine worldwide business was paid at theDecember 30, 2002 closing, transfer of the international assets could notoccur until the appropriate infrastructure and regulatory filings werecompleted. Inventory purchased in connection with these international closingsrequired adjustment to the original purchase price allocation based on theinventory net realizable value less costs of disposal and a reasonable profitthereon. Since there was no additional purchase price to allocate to theinventory, an allocation reducing trademarks resulted for the internationalclosings occurring in 2003. The adjustment to the trademark was $743,956.

 

***Debtissuance costs***

*** ***

The Company has incurreddebt issuance costs in connection with its long-term debt. These costs arecapitalized and amortized using a method that approximates the effectiveinterest method over the term of the related debt. The yearly amortization ofdebt issuance cost is recorded as interest expense in the consolidatedstatements of income. Amortization expense related to debt issuance costs was$2,039,300, $1,003,209 and $1,504,738 for the years ended December 31,2003, 2002 and 2001, respectively, and accumulated amortization was $3,433,598and $1,394,297 as of December 31, 2003 and 2002, respectively.

 

Estimated futureamortization expense for debt issuance costs is as follows:

 
| **Year ending December 31:** | ** ** | ** ** | **Amount** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|
| 2004                                        |       | $          | 2,072,097  |       |
| 2005                                        |       | 1,949,136  |       |
| 2006                                        |       | 1,665,258  |       |
| 2007                                        |       | 1,167,386  |       |
| 2008                                        |       | 1,019,479  |       |
| Thereafter                                  |       | 11,234     |       |
|                                        |       | $          | 7,884,590  |       |

 

***Advertisingexpenses***

*** ***

The cost of advertisingis expensed in the fiscal year in which the related advertising takes place.Production and communication costs are expensed in the period in which therelated advertising begins running. Advertising expense for 2003, 2002 and 2001was $11,216,236, $4,732,800 and $4,610,613, respectively.

 

***Foreigncurrency translation***

*** ***

The assets andliabilities of the Company’s international subsidiaries are translated at ratesof exchange in effect on the reporting date. Income and expense items aretranslated at average exchange rates in effect for the year. The resultingtranslation adjustment was not material to the Company’s consolidated balancesheets or income statements.

 

F-71

----

 

***Stockoption plan***

*** ***

At December 31,2003, the company has one stock-based employee compensation plan, which isdescribed more fully in Note 11. The Company accounts for this plan underthe intrinsic value method, as defined under Accounting Principles BoardOpinion No. 25, *Accounting for StockIssued to Employees* (APB 25), and related Interpretations. Nostock-based employee compensation cost is reflected in net income, as alloptions granted under the plan had an exercise price equal to the fair value ofthe underlying common stock on the date of grant. The following tableillustrates the effect on net income if the Company had applied the fair valuerecognition provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation* (SFAS No. 123), as amended by SFASNo. 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure* (SFAS No. 148), to stock-basedemployee compensation for the year ended December 31:

 
| ** **                                                                                                                                 | ** ** | **2003** | ** ** | **2002** | ** ** | **2001**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net income, as  reported                                                                                                                   |       | $        | 22,272,391 |     | $          | 16,569,753 |       | $ | 3,082,765 |   |
| Less total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (312,838 | )          | (351,779 | )          | (314,482   | )          |
| Pro forma net  income                                                                                                                      |       | $        | 21,959,553 |     | $          | 16,217,974 |       | $ | 2,768,283 |   |

 

***Derivativefinancial instruments***

*** ***

SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities* (SFAS No. 133), requires companies to recognize allof its derivative instruments as either assets or liabilities in the balancesheet at fair value. The accounting for changes in the fair value of aderivative instrument depends on whether it has been designated and qualifiesas part of a hedging relationship and further, on the type of hedgingrelationship. For those derivative instruments that are designated and qualifyas hedging instruments, a company must designate the hedging instrument, basedupon the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedgeof a net investment in an international operation.

 

The Company hasdesignated its derivative financial instruments as cash flow hedges (i.e.,hedging the exposure to variability in expected future cash flows that isattributable to a particular risk). For these hedges, the effective portion ofthe gain or loss on the derivative instrument is reported as a component ofother comprehensive income and reclassified into earnings in the same line itemassociated with the forecasted transaction in the same period or periods duringwhich the hedged transaction affects earnings. Any ineffective portion of thegains or losses on the derivative instruments is recorded in results ofoperations immediately.

 

***Fairvalues of financial instruments***

*** ***

The carrying values ofthe Company’s cash, accounts receivable and accounts payable approximate theirfair values due to the short-term nature of these financial instruments. Thecarrying value of long-term debt approximates its fair value due to thevariable rates associated with this financial instrument. For the interest rateswap and collar agreements, the carrying amount was determined using fair valueestimates from third parties.

 

***Concentrationsof credit risk***

*** ***

Financial instrumentswhich potentially subject the Company to concentrations of credit risk consistprimarily of accounts receivable and cash and cash equivalents. The Company’sexposure to credit risk associated with nonpayment of accounts receivable isaffected by conditions or occurrences within the retail industry. As a result,the Company performs ongoing credit evaluations of its customers’ financialposition but generally requires no collateral from its customers. The Company’slargest customer accounted for 25.2%, 19.4%, and 20.2% of sales in 2003, 2002and 2001, respectively. No other customer exceeded 10% of the Company’s salesin the respective years. Short-term cash investments are placed with

 

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high credit-qualityfinancial institutions or in low-risk, liquid instruments. No losses have beenexperienced on such investments.

 

***Incometaxes***

*** ***

The Company uses theliability method of accounting for income taxes. Under this method, deferredincome tax assets and liabilities are determined based on differences betweenthe financial reporting and the tax bases of assets and liabilities measuredusing the enacted tax rates and laws that are expected to be in effect when thedifferences are expected to reverse.

 

***Impactof recently issued pronouncements***

*** ***

In July 2001, theEmerging Issues Task Force (“EITF”) finalized EITF Issue No. 00-25, *Vendor Income Statement Characterization ofConsideration Paid to a Reseller of the Vendor’s Products*(EITF 00-25). Under the provisions of EITF 00-25, the Company isrequired to classify certain marketing and selling expenses as reductions ofnet sales. The results of operations and the financial position of the Company,therefore, are not affected. The Company adopted the provisions ofEITF 00-25 during the year ended December 31, 2001. EITF Issue Nos. 00-14,*Accounting for Certain Sales Incentives*(EITF 00-14) and EITF 00-25 have been codified in EITF IssueNo. 01-09, *Accounting for ConsiderationGiven by a Vendor to a Customer*.

 

On December 31,2002, the FASB issued SFAS No. 148. SFAS No. 148 amends SFASNo. 123 to provide alternative methods of transition to the fair valuemethod of accounting for stock-based employee compensation. In addition, SFASNo. 148 amends the disclosure provisions of SFAS No. 123 to requiredisclosure in the summary of significant accounting policies of the effects ofan entity’s accounting policy with respect to stock-based employee compensationon reported net income and earnings per share in annual and interim financialstatements. SFAS No. 148 does not amend SFAS No. 123 to require companiesto account for their employee stock-based awards using the fair value method.However, the disclosure provisions are required for all companies with stock-basedemployee compensation, regardless of whether they utilize the fair value methodof accounting described in SFAS No. 123 or the intrinsic value methoddescribed in APB 25. The Company adopted the disclosure provisions of SFASNo. 148 during the year ended December 31, 2002.

 

In April 2002, theFASB issued SFAS No. 145, *Rescission ofFASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections* (SFAS No. 145). TheCompany adopted SFAS No. 145 on December 31, 2002. SFAS No. 145requires the Company to include gains and losses on extinguishment of debt asincome or loss from continuing operations rather than as extraordinary items aspreviously required under SFAS No. 4, *ReportingGains and Losses from Extinguishment of Debt*. The Company is alsorequired to reclassify any gain or loss on extinguishment of debt previouslyclassified as an extraordinary item in prior periods presented. SFASNo. 145 also provides accounting standards for certain lease modificationsthat have economic effects similar to sale-leaseback transactions and variousother technical corrections.

 

In April 2003, theFASB issued SFAS No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities* (SFASNo. 149). SFAS No. 149 amends and clarifies accounting for derivativeinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities under SFAS No. 133. SFAS No. 149is generally effective for derivative instruments embedded in certaincontracts, entered into or modified after June 30, 2003 and for hedgingrelationships designated after June 30, 2003. The adoption of SFASNo. 149 did not have an impact on the Company’s financial position,results of operations or cash flows.

 

In May 2003, theFASB issued SFAS No. 150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity* (SFAS No. 150). The statement modifies the accountingfor certain financial instruments that, under previous guidance, issuers couldaccount for as equity. The new statement requires that those instruments beclassified as liabilities in a company’s statement of financial position. Thisstatement is effective for the year-end period beginning afterDecember 31, 2003. The

 

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adoption of SFAS No. 150did not have an impact on the Company’s financial position, results ofoperations or cash flows other than classification of warrants in theaccompanying balance sheet.

 

**3.   Acquisitionof Brands**

** **

***Cleareyes/Murine brands***

*** ***

On December 30,2002, the Company completed the acquisition of the Clear eyes/Murine eye andear-care product lines from Abbott for approximately $110,700,000, includingacquisition costs of approximately $1,097,000. As a result, the accompanyingconsolidated statements of income includes the results of operations of theClear eyes/Murine brands since the date of acquisition. This acquisitionincluded the worldwide rights to manufacture, sell and market the Cleareyes/Murine products plus related intellectual property and certainmanufacturing equipment. The purchase price of $110,700,000 was allocated$3,816,000 to inventory, $4,088,000 to property and equipment and $102,796,000to the Clear eyes/Murine Brands trademark, which was assigned an indefinitelife. This was a preliminary allocation which is adjusted as additionalinternational country regulatory requirements are met (See Note 2) andinternational assets are transferred.

 

Under a domestictransitional services agreement, Abbott continued to receive and processcustomer orders, ship products to customers, and collect and process accountsreceivable through March 31, 2003. Revenue has been recorded on a grossbasis under the domestic transitional services agreement for the year ended December 31,2003 and 2002. Abbott continued to manufacture the product for the Companyunder a manufacturing agreement that extends through December 31, 2005.

 

The Company will alsocontinue to rely on Abbott to market, sell and distribute the Clear eyes/Murine products in the remaining international countries until the Companysatisfies various international regulatory requirements, new distributors arein place and any applicable marketing permits are transferred. During themarketing transition period, Abbott paid the Company a net royalty equal to 38%of international sales of Clear eyes/Murine products in these countries throughDecember 31, 2003, with the net royalty to be reduced to 19% ofinternational sales from January 1, 2004 through December 30, 2004.Revenue has been recorded on a net basis for international sales of the Cleareyes/Murine brands during the marketing transition period for the year ended December 31,2003 and 2002. Abbott will pay all costs and expenses related to themanufacture, marketing and sales of the Clear eyes/Murine products in thesecountries. As the regulatory requirements are met and the Company assumesresponsibility for the sales and marketing effort in a country, the royaltyarrangement with respect to such country will terminate and the Company willrecord these international sales directly on a gross basis, as well as thecosts and expenses associated with these sales. During the year ended December 31,2003, the Company satisfied regulatory requirements in seven additionalcountries.

 

***CometBrand***

*** ***

Effective October 2,2001, the Company completed the acquisition of the Comet brand from P&G forapproximately $144,800,000, including acquisition costs of $2,800,000. Thisacquisition included the worldwide rights (except in certain Eastern Europeancountries and Russia) to manufacture, sell and market Comet products plusrelated intellectual property. The entire purchase price was allocated totrademark, which was assigned an indefinite useful life. Under a transitionalservices agreement, P&G continued to receive and process customer orders,ship products to customers, and collect and process accounts receivable throughApril 30, 2002. Revenue has been recorded on a gross basis under the transitionalservices agreement for the years ended December 31, 2002 and 2001. Since April 30,2002, P&G has continued to manufacture Comet products under a standardcontract manufacturing agreement.

 

F-74

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**4.   Propertyand Equipment**

** **

Property and equipmentare summarized as follows at December 31:

 
| ** **                       | ** ** | **Useful Life  in Years** | ** ** | **2003**   | ** ** | **2002**  | ** ** |
|----------------------------------|------------|-------------------------------------|------------|------------|------------|-----------|------------|
| Computer  equipment and software |       | 3                                   |       | $          | 645,549    |      | $          | 500,557 |   |
| Furniture and  fixtures          |       | 5                                   |       | 147,428    |       | 131,898   |       |
| Office equipment                 |       | 5                                   |       | 55,112     |       | 48,862    |       |
| Leasehold  improvements          |       | 7                                   |       | 102,105    |       | 88,255    |       |
| Plates, dies and  molds          |       | 7                                   |       | 312,705    |       | 133,191   |       |
| Manufacturing  equipment         |       | 7                                   |       | 4,088,470  |       | 4,088,470 |       |
|                             |       |                                |       | 5,351,369  |       | 4,991,233 |       |
| Less accumulated  depreciation   |       |                                |       | (2,078,516 | )          | (486,283  | )          |
|                             |       |                                |       | $          | 3,272,853  |      | $          | 4,504,950 |   |

 

Depreciation expense was$1,594,253, $211,106 and $152,103 for the years ended December 31, 2003,2002 and 2001, respectively.

 

**5.   Trademarksand Other Purchased Product Rights**

** **

Trademarks and otherpurchased product rights consisted of the following at December 31:

 
| ** **                         | ** ** | **Useful Life  in Years** | ** ** | **2003**    | ** **  | **2002**    | ** ** |
|------------------------------------|------------|-------------------------------------|------------|-------------|-------------|-------------|------------|
| Prell trademark                    |       | Indefinite                          |       | $           | 10,693,394  |        | $          | 10,693,394 |   |
| Chloraseptic  trademark            |       | Indefinite                          |       | 58,654,300  |        | 58,654,300  |       |
| Chloraseptic  noncompete agreement |       | 3                                   |       | 1,600,000   |        | 1,600,000   |       |
| Comet trademark                    |       | Indefinite                          |       | 144,810,500 |        | 144,805,862 |       |
| Clear  eyes/Murine trademarks      |       | Indefinite                          |       | 102,347,071 |        | 102,795,660 |       |
|                               |       |                                |       | 318,105,265 |        | 318,549,216 |       |
| Less accumulated  amortization     |       |                                |       | (7,914,647  | )           | (7,764,647  | )          |
|                               |       |                                |       | $           | 310,190,618 |        | $          | 310,784,569 |   |

 

F-75

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Amortization expenserelated to the Chloraseptic noncompete agreement was $150,000 and $533,333 forthe years ended December 31, 2003 and 2002. Amortization expense relatedto the Prell, Chloraseptic, and Comet trademarks and the Chlorasepticnoncompete was $4,003,142 for the year ended December 31, 2001.

 

**6.   RevolvingLine of Credit**

 

The Company has a$15,000,000 revolving line of credit with a bank collateralized by virtuallyall of the assets of the Company. On December 30, 2002, the line of creditwas amended and restated to extend the maturity date to December 30, 2007.Advances under the line of credit bear interest payable monthly at LIBOR plusan applicable rate (5.75% at December 31, 2002). As of December 31,2003 and 2002, there were no outstanding balances under the line of credit.

 

**7.   Long-TermDebt**

 

Long-term debt is asfollows at December 31, 2003 and 2002:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **2003**    | ** **  | **2002**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| Tranche A term  note payable to a bank group, payable in quarterly installments of principal  and interest through December 30, 2007. Interest is payable at LIBOR plus  an applicable margin through December 30, 2007. At December 31,  2003 and December 31, 2002 the rate was approximately 5.19% and  5.75%, respectively. The note is collateralized by substantially all of  the Company’s assets.                                                                                       |       | $           | 86,866,172  |        | $          | 110,000,000 |   |
| Tranche B term  note payable to a bank group, payable in quarterly installments of principal  and interest through December 30, 2008. Interest is payable at LIBOR  plus an applicable margin through December 30, 2008. At  December 31, 2003 and December 31, 2002, the rate was  approximately 5.69% and 6.75%, respectively. The note is collateralized  by substantially all of the Company’s assets.                                                                                      |       | 68,683,828  |        | 63,000,000  |       |
| Senior  subordinated notes payable with a fixed interest rate of 15% (of which 2% is  Paid in Kind interest accrued in the notes payable balance). Interest is  payable quarterly, with principal and any remaining interest due in full on  December 31, 2009. The notes are recorded at the face amount of  $24,895,000 and $28,375,000 less unamortized discount in the amount of  $1,871,414, and $2,684,569, for the years ended December 31, 2003 and  December 31, 2002, respectively. Refer to Note 9. |       | 23,527,551  |        | 25,690,431  |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | 179,077,551 |        | 198,690,431 |       |
| Less current  portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | (25,260,000 | )           | (20,910,000 | )          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | $           | 153,817,551 |        | $          | 177,780,431 |   |

 

The Tranche A and Bnotes payable and the line of credit agreement contains restrictive covenants,which, among other things, require maintenance of various financial ratios. Asof December 31, 2003, the Company was in compliance with all restrictivecovenants.

 

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Maturities of theCompany’s long-term debt as of December 31, 2003, are as follows:

 
| **Year ending December 31:** | ** ** | ** ** | **Amount**  | ** ** |
|---------------------------------------------|------------|------------|-------------|------------|
| 2004                                        |       | $          | 25,260,000  |       |
| 2005                                        |       | 27,460,000 |        |
| 2006                                        |       | 29,660,000 |        |
| 2007                                        |       | 26,590,064 |        |
| 2008                                        |       | 46,579,936 |        |
| Thereafter                                  |       | 23,527,551 |        |
|                                        |       | $          | 179,077,551 |       |

 

**8.   DerivativeFinancial Instruments**

** **

Effective July 27,2001, the Company entered into an interest rate swap agreement with a bankcovering $16,500,000 of the balance under the Tranche A note payable. Theinterest rate swap agreement requires the Company to pay a fixed rate of 4.8%in exchange for variable rate payments based on the U.S. three-month LIBOR. Theinterest rate swap agreement expires on July 31, 2004. During the yearended December 31, 2001, the swap was ineffective and $330,402 wasrecorded as interest expense in the accompanying statement of income. Duringthe year ended December 31, 2002, the Company redesignated the interestrate swap agreement as a cash flow hedge. Therefore, the change in fair valueof this hedge is no longer recorded through earnings but through othercomprehensive income in the accompanying consolidated statements ofstockholders equity.

 

Effective March 29,2002, the Company entered into a zero-cost collar agreement with a bankcovering $41,237,500 of the combined balance under the Tranche A and B notepayable agreements, in order to minimize its exposure to fluctuations caused byvolatility in interest rates. The interest rate collar agreement requires theCompany to pay a variable rate based on the U.S. three-month LIBOR with a floorof 2.83% and a cap of 6.00%. The interest rate collar agreement expires on July 31,2004.

 

Effective March 14,2003, the Company entered into two zero-cost collar agreements with twodifferent banks covering $44,230,000 of the combined balance under the TrancheA and B note payable agreements, in order to minimize its exposure tofluctuations caused by volatility in interest rates. The interest rate collaragreements require the Company to pay a variable rate based on the US threemonth LIBOR with a floor of 1.33% on $17,692,000 and 1.35% on $26,538,000 and acap of 6.00%. The interest rate collar agreements expire on March 31,2006.

 

The fair value of allthese hedges is $590,654 and $1,238,360 at December 31, 2003 and 2002,respectively, and is included in other long-term liabilities on theaccompanying consolidated balance sheet. Because the hedges qualify aseffective for financial reporting purposes, the change in fair value of thehedges of $393,472 and $547,085, net of income taxes of $254,224, and $360,873at December 31, 2003 and 2002, respectively, is recorded as a reduction ofother comprehensive income in the accompanying consolidated statements ofstockholders’ equity.

 

**9.   Warrants**

** **

In connection with theissuance of the senior subordinated notes payable on December 30, 2002,the Company issued warrants to the holders of the subordinated notes for1,489,999 shares of the Company’s Class A common stock. The warrants havean exercise price of $0.01 and expire on December 30, 2012. On December 30,2002, the amount allocated to the warrants of $2,684,569 was recorded as adiscount to the senior subordinated notes payable and a credit to common stockwarrants. On February 25, 2003, in connection with a partial repayment ofthe senior subordinated notes, the number of warrants was reduced to 1,307,261,resulting in the value of the warrants being reduced to $2,355,330. Thesewarrants contain certain “put” rights that allow the holder to require theCompany to purchase all or any portion of the warrants or shares of Class Acommon stock issued upon exercise of the warrants at a price equal to thehigher of adjusted earnings before interest, taxes, depreciation andamortization expense per share or the fair market value per share of commonstock on such date less the cost to exercise the warrants. The “put” repurchaseperiod commences June 30, 2009 and terminates on December 30, 2012.The “put” repurchase period may be accelerated upon the occurrence, not priorto December 30, 2003, of giving notice by the

 

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Company of an optionalprepayment of the senior subordinated notes payable. In accordance with thedebt agreement, all prepayments must be done on a pro-rata basis to all noteholders. The Company has certain “call” rights during the period from December 30,2009 to December 30, 2012 to repurchase all of the warrants or shares of Class Acommon stock issued upon exercise of the warrants from the holders of suchwarrants for the repurchase price defined above. The Company accretes the valueof the warrants up to the highest “put” repurchase price through June 30,2009.

 

In connection with theissuance of bridge loans on October 2, 2001, the Company issued warrantsto the loanholders for 900,000 shares of the Company’s Class A or Class Bcommon stock. The warrants were assigned a value of $1,662,000 as of the dateof issuance, which was recorded as an increase in common stock in theconsolidated balance sheet as of December 31, 2001. The Bridge Loancontained provisions to issue additional warrants if certain repayment dateswere not met. Under these provisions, the Company issued additional warrants topurchase 328,000 shares of Class A or Class B common stock. Thewarrants were assigned a value of $418,000 as of the date of issuance, whichwas recorded as interest expense in the accompanying consolidated statement ofincome for the year ended December 31, 2001. The warrants had an exerciseprice of $0.01 and were to expire on October 2, 2008. The total valueassigned to the warrants was $2,080,000, of which $1,662,000 was charged todebt discount and $418,000 was charged to interest expense. The Bridge Loan wasrepaid on December 17, 2001, and accordingly, the difference between thenet carrying amount of the debt (including the unamortized debt discount), andthe cost of extinguishment was recorded as a loss on extinguishment of debt of$1,604,300 in the accompanying consolidated income statement for the year endedDecember 31, 2001. The warrants remain outstanding after extinguishment ofthe debt.

 

**10.   Stockholders’Equity**

** **

During November andDecember 2001, the Company repurchased 10,000,000 shares of Class Acommon stock from a stockholder that were issued in connection with the Cometacquisition. These shares were repurchased at the original issuance price of$1.40 per share for a total purchase price of $14,000,000. The Companysubsequently resold 8,937,500 of shares to new stockholders for total proceedsof $14,000,000.

 

**11.   IncomeTaxes**

** **

The provision for incometaxes for the years ended December 31, 2003, 2002 and 2001, respectively,was composed of the following:

 
| ** **      | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** |
|-----------------|------------|------------|------------|------------|------------|------------|------------|
| Current:        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal         |       | $          | 4,407,875  |       | $          | 4,447,314  |       | $ | 416,172 |   |
| State           |       | 605,550    |       | 1,248,373  |       | 71,240     |       |
| Foreign         |       | 122,389    |       | —     |       | —     |       |
|            |       | 5,135,814  |       | 5,695,687  |       | 487,412    |       |
| Deferred:       |       |       |       |       |       |       |       |
| Federal         |       | 7,240,443  |       | 4,225,175  |       | 1,183,852  |       |
| State           |       | 1,447,237  |       | 1,185,938  |       | 202,862    |       |
|            |       | 8,687,680  |       | 5,411,113  |       | 1,386,714  |       |
| Total provision |       | $          | 13,823,494 |       | $          | 11,106,800 |       | $ | 1,874,126 |   |

 

F-78

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The income tax provisiondiffers from the amount of tax determined by applying the Federal statutoryrate as follows:

 
| ** **                                               | ** ** | **2003**  | ** ** | **2002**  | ** ** | **2001**   | ** ** |
|----------------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Income tax  provision at statutory rate:                 |       | $         | 12,644,965 |      | $          | 9,686,794  |       | $ | 1,685,343 |   |
| Increase  (decrease) in income tax due to:               |       |      |       |      |       |       |       |
| Meals &  entertainment                          |       | 10,036    |       | 6,605     |       | 7,994      |       |
| Officer life  insurance                                  |       | 5,170     |       | —    |       | —     |       |
| State income  taxes net                                  |       | 1,282,910 |       | 1,315,533 |       | 180,789    |       |
| Adjustment to  deferred tax liability due to rate change |       | (83,366   | )          | 97,868    |       | —     |       |
| Earned income  exclusion                                 |       | (36,221   | )          | —    |       | —     |       |
|                                                     |       | $         | 13,823,494 |      | $          | 11,106,800 |       | $ | 1,874,126 |   |

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamount of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. Significant components of the Company’snet deferred tax liability on the consolidated balance sheets at December 31,2003 and 2002 are:

 
| ** **                          | ** ** | **2003**    | ** ** | **2002**   | ** ** |
|-------------------------------------|------------|-------------|------------|------------|------------|
| Deferred tax  assets:               |       |        |       |       |       |
| Accounting fees                     |       | $           | 33,296     |       | $          | 15,972 |   |
| Allowance for  doubtful accounts    |       | 143,612     |       | 487,534    |       |
| Accrued legal  fees                 |       | 51,025      |       | 37,517     |       |
| Accrued other                       |       | 7,959       |       | —     |       |
| Cash flow  hedge/interest rate swap |       | 231,835     |       | 492,248    |       |
| Total deferred  tax assets          |       | $           | 467,727    |       | $          | 1,033,271 |   |
|                                |       |        |       |       |       |
| Deferred tax  liabilities:          |       |        |       |       |       |
| Prepaid expenses                    |       | $           | (353,363   | )          | $          | (200,121 | ) |
| Fixed assets                        |       | (221,417    | )          | (30,885    | )          |
| Intangible  assets                  |       | (15,462,209 | )          | (7,429,626 | )          |
| Total deferred  tax liabilities     |       | (16,036,989 | )          | (7,660,632 | )          |
| Net deferred tax  liability         |       | $           | 15,569,262 |       | $          | 6,627,361 |   |

 

**12.   StockOption Plan**

** **

Effective December 3,1999, the Company adopted the Stock Option Plan (the “Plan”), under which5 million shares of Class A common stock are authorized and reservedfor use in the Plan. The Plan allows the issuance of nonqualified or incentivestock options at an exercise price determined by the Company’s Board ofDirectors. Options covering one-half of the authorized number of shares aresubject to Pool A Agreements, and options covering the remaining half aresubject to Pool B Agreements. Options granted under Pool A Agreements becomeexercisable over three years and expire ten years from the date of grant.Options granted under Pool B Agreements become exercisable on the eighthanniversary of the date of grant and expire ten years from the date of grant.Accelerated vesting may occur under Pool B Agreements due to a change incontrol and based on attainment of certain return on investment levels duringthe year in which the change of control takes place.

 

F-79

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Stock option activityfor the years ended December 31, 2003, 2002 and 2001 was as follows:

 
| ** **                                      | ** ** | **2003**   | ** ** | **2002**                                   | ** ** | **2001**   | ** ** |
|-------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                      | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding,  beginning of year            |       | 3,890,500  |       | $                                          | 1.12       |       | 3,184,500  |   | $ | 1.00 |   | 2,625,000 |   | $ | 1.00 |   |
| Granted                                         |       | 848,000    |       | 2.00                                       |       | 750,000    |       | 1.60 |   | 829,500 |   | 1.00 |   |
| Exercised                                       |       | (28,167    | )          | 1.60                                       |       | (14,000    | )          | 1.00 |   | (10,000 | ) | 1.00 |   |
| Canceled or  expired                            |       | (91,833    | )          | 1.54                                       |       | (30,000    | )          | 1.00 |   | (260,000 | ) | 1.00 |   |
| Outstanding, end  of year                       |       | 4,618,500  |       | $                                          | 1.26       |       | 3,890,500  |   | $ | 1.12 |   | 3,184,500 |   | $ | 1.00 |   |
| Options vested  at year-end                     |       | 3,113,333  |       | $                                          | 1.05       |       | 1,805,604  |   | $ | 1.01 |   | 802,833 |   | $ | 1.00 |   |
| Weighted Average  fair value of options granted |       |       |       | $                                          | .30        |       |       |   | $ | .51 |   |   |   | $ | .34 |   |

 

A summary of exerciseprices for options outstanding under the Company’s stock-based compensationplan at December 31, 2003 is presented below:

 
| **Exercise Price  Range** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Life   (years)** | ** ** | **Shares  Exercisable** | ** ** | **Weighted  Average   Exercise Price  of Shares  Exercisable** | ** ** |
|--------------------------------|------------|------------|------------|--------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------------------------------|------------|
| $1.00                          |       | 3,068,500  |       | $                                          | 1.00       |                                                                  | 6.17       |                    | 2,789,333  |                                                                     | $          | 1.00 |   |
| $1.40—$1.60               |       | 722,000    |       | $                                          | 1.53       |                                                                  | 7.94       |                    | 324,000    |                                                                     | $          | 1.50 |   |
| $ 2.00                    |       | 828,000    |       | $                                          | 2.00       |                                                                  | 8.76       |                    | —     |                                                                     | —     |   |
|                           |       | 4,618,500  |       |                                       |       |                                                                  |       | 3,113,333               |       |                                                                     |       |

 

The Company accounts forits stock-based compensation plan under APB 25, under which nocompensation expense has been recognized. In October 1995, the FASB issuedSFAS No.123, as amended by SFAS No. 148, which allows companies tocontinue following the accounting guidance of APB 25, but requiresdisclosure of net income and earnings per share for the effects on compensationexpense had the accounting guidance of SFAS No. 123 been adopted.

 

The Company has electedSFAS No. 123 for disclosure purposes. Under SFAS No. 123, the fairvalue of each option granted has been estimated as of the grant date using theMinimum Value method, with the following weighted-average assumptions forgrants during the year ended December 31, 2003, 2002 and 2001: weightedaverage risk-free interest rates of 2.01%, 4.80%, and 5.24%; expected life ofeight years; and no expected dividends.

 

**13.   EmployeeStock Purchase Plan**

** **

Effective April 1,2003, the Company established an Employee Stock Purchase Plan (the “ESPP Plan”)providing for the issuance of up to 1,000,000 shares of the Company’s commonstock. All employees are eligible to participate in the ESPP Plan and can electto purchase shares of common stock at fair market value. All shares must bepurchased with cash and each participant must sign a subscription agreement.The provisions of the ESPP Plan includes transfer restrictions, bring-alongrights and repurchase rights. Approximately 166,000 shares were purchased in2003 under the ESPP Plan.

 

**14.   Commitmentsand Contingencies**

** **

***Litigation***

*** ***

The Company is involvedin various legal actions arising in the normal course of business. While it isnot possible to determine with certainty the outcome of these matters, in theopinion of management, the eventual resolution of these claims and actionsoutstanding will not have a material adverse effect on the Company’s financialposition or operating results.

 

F-80

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***Leasingactivities***

*** ***

The Company leases realestate under operating leases. Certain real estate leases require the Companyto pay maintenance, insurance, taxes and certain other expenses in addition tothe stated rentals. Future minimum lease payments for noncancelable operatingleases in effect at December 31, 2003, are as follows:

 
| **Year ending December 31:** | ** ** | ** ** | **Amount** | ** ** |
|-----------------------------------|------------|------------|------------|------------|
| 2004                              |       | $          | 259,624    |       |
| 2005                              |       | 219,850    |       |
| 2006                              |       | 150,245    |       |
| 2007                              |       | 37,561     |       |
|                              |       | $          | 667,280    |       |

 

The base rent of theCompany’s office facility in Bonita Springs, Florida, will be increased by theconsumer price index each year during its seven-year lease term expiring March 31,2007.

 

Total rent expense underall operating leases for the year ended December 31, 2003, 2002 and 2001was approximately $296,108, $167,316 and $167,632 respectively.

 

***Purchaseoption***

*** ***

On December 22,2002, the Company entered into a purchase option agreement with an investor ofthe Company. Under the terms of the agreement, the Company had the option torepurchase 6,437,500 shares of Class A common stock of the Company owned bythat investor. The purchase price as defined in the agreement was based on a20% internal rate of return on the investor’s original purchase of the sharesfor $10,500,000. In consideration of the purchase option agreement, the Companypaid the investor a deposit of $1,750,000 on December 23, 2002. Thisamount was classified within prepaid expenses on the December 31, 2002accompanying consolidated balance sheet. On February 13, 2003, the Companyrepurchased these shares at a total purchase price of $13,270,000.

 

**15.   RetirementPlan**

** **

The Company has aretirement plan under Section 401(k) of the Internal Revenue Code(the “Retirement Plan”). The Retirement Plan allows all full-time employees todefer a portion of their compensation on a pre-tax basis through contributionsto the Retirement Plan. The Company matches these contributions up to 5% of theemployee’s compensation. The Company’s matching contribution for the yearsended December 31, 2003, 2002 and 2001 was $119,465, $105,281 and $29,528,respectively.

 

**16.   Related-PartyTransactions**

** **

As of December 31,2003, the Company had a receivable of $1,000,000 plus accrued interest of$186,333 due from a certain stockholder related to the stockholder’s purchaseof the Company’s Class A common stock. Approximately $230,000 of thereceivable balance accrues interest at 6.08% and is payable in full on November 1,2004, or upon the termination of employment with the Company. The remaining$770,000 of the receivable balance accrues interest at 6.45% and is due andpayable on March 30, 2004, or upon termination of employment with theCompany. The amount was treated as a reduction of stockholders’ equity in theaccompanying consolidated statements of stockholders’ equity.

 

As part of the Company’sAmended and Restated Shareholders’ Agreement, certain investors are entitled toan annual management fee for advisory services rendered. Management feestotaled $640,000, $475,000, and $0 for the years ended December 31, 2003,2002, and 2001, respectively. As of December 31, 2003 and 2002 managementfees payable of $0 and $100,000, respectively, are included in accrued expenseson the accompanying consolidated balance sheets.

 

F-81

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**17.   SubsequentEvents**

** **

On January 1, 2004,the Company entered into Employment and Non-Competition Agreements with thePresident and CFO for a period of one year. The agreements provide for certaincompensation and benefits as well as severance payments in the event oftermination.

 

The company entered intoan Agreement of Merger dated February 10, 2004 pursuant to which theholders of capital stock of the Company (including option and warrant holders)will receive cash consideration in an amount equal to $555 million (asadjusted based on the working capital of the Company at the closing of themerger), less all of the Company’s outstanding indebtedness at the closing andall transaction expenses (including investment banking, legal and accountingfees) incurred in connection with the merger, plus excess cash and proceedsfrom the exercise of employee stock options. As a result of the transaction,the Company will become a wholly-owned subsidiary of Prestige AcquisitionHoldings, LLC. The closing of the merger is expected to occur in late March orearly April of 2004.

 

F-82

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