**U. S. SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **QUARTERLY REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------|--------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30,2005**

 

**PRESTIGEBRANDS HOLDINGS, INC.**

 
| **Delaware**                 | ** ** | **20-1297589**                           | ** ** | **001-32433**                |
|------------------------------|------------|------------------------------------------|------------|------------------------------|
| **(State of Incorporation)** | ** ** | **(I.R.S. Employer Identification No.)** | ** ** | **(Commission File Number)** |

 

**PRESTIGEBRANDS INTERNATIONAL, LLC**

 
| **Delaware**                 | ** ** | **20-0941337**                           | ** ** | **333-11715218-18**          |
|------------------------------|------------|------------------------------------------|------------|------------------------------|
| **(State of Incorporation)** | ** ** | **(I.R.S. Employer Identification No.)** | ** ** | **(Commission File Number)** |

(Exactname 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) |

 

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This Quarterly Report on Form 10-Q is acombined quarterly report being filed separately by Prestige Brands Holdings, Inc.and Prestige Brands International LLC, both registrants.  Prestige Brands International, LLC, anindirect wholly owned subsidiary of Prestige Brands Holdings, Inc. is the indirectparent company of Prestige Brands, Inc., the issuer of our 91⁄4% seniorsubordinated notes due 2012, and the parent guarantor of such notes.  As the indirect holding company of PrestigeBrands International, LLC, Prestige Brands Holdings, Inc. does not conductongoing business operations.  As aresult, the financial information for Prestige Brands Holdings, Inc. andPrestige Brands International, LLC is identical for the purposes of thediscussion of operating results in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.” Unless otherwise indicated, we have presented information throughoutthis Form 10-Q for Prestige Brands Holdings, Inc. and itsconsolidated subsidiaries, including Prestige Brands International, LLC.  The information contained herein relating toeach individual registrant is filed by such registrant on its own behalf.  Neither registrant makes any representationas to information relating to the other registrant.  Prestige Brands International, LLC meets theconditions set forth in general instructions (H)(1)(a) and (b) of Form 10-Qand is therefore filing this Form 10-Q with the reduced disclosure format.

 

Indicate by check markwhether the Registrants (1) have filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrants wererequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý  No  o

 

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

 

As of August 5,2005, Prestige Brands Holdings, Inc. had 50,053,423 shares of common stockoutstanding.  As of such date, PrestigeInternational Holdings, LLC, a wholly owned subsidiary of Prestige BrandsHoldings, Inc., owned 100% of the uncertificated ownership interests ofPrestige Brands International, LLC.

 

 

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**Prestige Brands Holdings, Inc.**

**Form 10-Q**

**Index**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                     |   |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
|              |                                                                                                                                          |   |
| Item 1.           | Consolidated  Financial Statements                                                                                                            |   |
|              | **Prestige Brands  Holdings, Inc.**                                                                                                      |   |
|              | Consolidated Balance Sheets  – June 30, 2005 and March 31, 2005 (unaudited)                                                    |   |
|              | Consolidated  Statements of Operations – three months ended June 30, 2005 and 2004  (unaudited)                                     |   |
|              | Consolidated  Statement of Changes in Shareholders’ Equity and Comprehensive Income - three  months ended June 30, 2005 (unaudited) |   |
|              | Consolidated  Statements of Cash Flows - three months ended June 30, 2005 and 2004  (unaudited)                                          |   |
|              | Notes to Unaudited  Consolidated Financial Statements                                                                                         |   |
|              |                                                                                                                                          |   |
|              | **Prestige Brands  International, LLC**                                                                                                       |   |
|              | Consolidated Balance Sheets  – June 30, 2005 (unaudited) and March 31, 2005                                                    |   |
|              | Consolidated Statements  of Operations – three months ended June 30, 2005 and 2004 (unaudited)                                      |   |
|              | Consolidated  Statement of Changes in Members’ Equity and Comprehensive Income - three  months ended June 30, 2005 (unaudited)      |   |
|              | Consolidated  Statements of Cash Flows - three months ended September 30, 2005 and  2004 (unaudited)                                     |   |
|              | Notes to  Unaudited Consolidated Financial Statements                                                                                         |   |
|              |                                                                                                                                          |   |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                                                    |   |
|              |                                                                                                                                          |   |
| Item 3.           | Quantitative and Qualitative  Disclosure About Market Risk                                                                                    |   |
|              |                                                                                                                                          |   |
| Item 4.           | Controls and Procedures                                                                                                                       |   |
|              |                                                                                                                                          |   |
| **PART II.** | **OTHER INFORMATION**                                                                                                                         |   |
|              |                                                                                                                                          |   |
| Item 1.           | Legal Proceedings                                                                                                                             |   |
|              |                                                                                                                                          |   |
| Item 2.           | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                                  |   |
|              |                                                                                                                                          |   |
| Item 3.           | Defaults Upon Senior Securities                                                                                                               |   |
|              |                                                                                                                                          |   |
| Item 4.           | Submission of Matters to a Vote of  Security Holders                                                                                          |   |
|              |                                                                                                                                          |   |
| Item 5.           | Other Information                                                                                                                             |   |
|              |                                                                                                                                          |   |
| Item  6.          | Exhibits                                                                                                                                      |   |
|              |                                                                                                                                          |   |
|              | Signatures                                                                                                                                    |   |

 

1

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**Prestige Brands Holdings, Inc.**

**Consolidated BalanceSheets**

***(Unaudited*)**

 
| **(Dollars in thousands, except share data**                                                                                              | ** ** | ** ** | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|-------------------------|------------|
| **Assets**                                                                                                                                                         | ** ** | ** ** | ** ** | ** **             | ** ** |
| Current  assets                                                                                                                                                    |       |       |       |                   |       |
| Cash                                                                                                                                                               |       | $          | 13,945     |                   | $          | 5,334                   |       |
| Accounts  receivable                                                                                                                                               |       | 32,489     |       | 43,893                 |       |
| Inventories                                                                                                                                                        |       | 27,946     |       | 21,580                 |       |
| Deferred  income tax assets                                                                                                                                        |       | 6,965      |       | 5,699                  |       |
| Prepaid  expenses and other current assets                                                                                                                         |       | 4,039      |       | 3,152                  |       |
| Total  current assets                                                                                                                                              |       | 85,384     |       | 79,658                 |       |
|                                                                                                                                                               |       |       |       |                   |       |
| Property  and equipment                                                                                                                                            |       | 2,043      |       | 2,324                  |       |
| Goodwill                                                                                                                                                           |       | 294,544    |       | 294,544                |       |
| Intangible  assets                                                                                                                                                 |       | 606,465    |       | 608,613                |       |
| Other  long-term assets                                                                                                                                            |       | 14,344     |       | 15,996                 |       |
|                                                                                                                                                               |       |       |       |                   |       |
| Total  Assets                                                                                                                                                      |       | $          | 1,002,780  |                   | $          | 1,001,135               |       |
|                                                                                                                                                               |       |       |       |                   |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                      |       |       |       |                   |       |
| Current  liabilities                                                                                                                                               |       |       |       |                   |       |
| Accounts  payable                                                                                                                                                  |       | $          | 18,626     |                   | $          | 21,705                  |       |
| Accrued  liabilities                                                                                                                                               |       | 10,705     |       | 13,472                 |       |
| Current  portion of long-term debt                                                                                                                                 |       | 3,730      |       | 3,730                  |       |
| Total  current liabilities                                                                                                                                         |       | 33,061     |       | 38,907                 |       |
|                                                                                                                                                               |       |       |       |                   |       |
| Long-term  debt                                                                                                                                                    |       | 490,698    |       | 491,630                |       |
| Deferred  income tax liabilities                                                                                                                                   |       | 89,916     |       | 84,752                 |       |
|                                                                                                                                                               |       |       |       |                   |       |
| Total  liabilities                                                                                                                                                 |       | 613,675    |       | 615,289                |       |
|                                                                                                                                                               |       |       |       |                   |       |
| **Commitments and Contingencies – Note 7**                                                                                                                    |       |       |       |                   |       |
|                                                                                                                                                               |       |       |       |                   |       |
| **Shareholders’ Equity**                                                                                                                                      |       |       |       |                   |       |
| Preferred  stock - $0.01 par value Authorized - 5,000,000 shares Issued and outstanding  – None                                                               |       | —     |       | —                 |       |
| Common  stock - $.01 par value Authorized – 250,000,000 shares Issued and outstanding  – 50,000,000 shares at June 30, 2005 and March 31, 2005 |       | 500        |       | 500                    |       |
| Additional  paid-in capital                                                                                                                                        |       | 378,188    |       | 378,251                |       |
| Treasury  stock – 2,353 shares at cost                                                                                                                        |       | (4         | )          | (4                     | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                     |       | (365       | )          | 320                    |       |
| Retained  earnings                                                                                                                                                 |       | 10,786     |       | 6,779                  |       |
| Total  shareholders’ equity                                                                                                                                   |       | 389,105    |       | 385,846                |       |
|                                                                                                                                                               |       |       |       |                   |       |
| Total  Liabilities and Shareholders’ Equity                                                                                                                   |       | $          | 1,002,780  |                   | $          | 1,001,135               |       |

 

*Seeaccompanying notes.*

 

2

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**Prestige Brands Holdings, Inc.**

**ConsolidatedStatements of Operations**

***(Unaudited)***

 
| ** **                                                                           | ** ** | **Three Months Ended June 30** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| **(Dollars in thousands, except share data)**               | ** ** | ** **                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                                                                         |       |                                |       |   |   |
| Net  sales                                                                           |       | $                                   | 63,530     |   | $ | 67,682 |   |
| Other  revenues                                                                      |       | 25                                  |       | 75 |   |
| Total  revenues                                                                      |       | 63,555                              |       | 67,757 |   |
|                                                                                 |       |                                |       |   |   |
| **Costs of Sales**                                                                   |       |                                |       |   |   |
| Costs  of sales                                                                      |       | 28,339                              |       | 36,123 |   |
| Gross  profit                                                                        |       | 35,216                              |       | 31,634 |   |
|                                                                                 |       |                                |       |   |   |
| **Operating Expenses**                                                               |       |                                |       |   |   |
| Advertising  and promotion                                                           |       | 10,714                              |       | 13,771 |   |
| General  and administrative                                                          |       | 4,911                               |       | 4,921 |   |
| Depreciation                                                                         |       | 483                                 |       | 486 |   |
| Amortization  of intangible assets                                                   |       | 2,148                               |       | 1,803 |   |
| Total  operating expenses                                                            |       | 18,256                              |       | 20,981 |   |
|                                                                                 |       |                                |       |   |   |
| Operating  income                                                                    |       | 16,960                              |       | 10,653 |   |
|                                                                                 |       |                                |       |   |   |
| **Other income (expense)**                                                           |       |                                |       |   |   |
| Interest  income                                                                     |       | 81                                  |       | 28 |   |
| Interest  expense                                                                    |       | (8,591                              | )          | (11,077 | ) |
| Loss  on extinguishment of debt                                                      |       | —                              |       | (7,567 | ) |
| Total  other income (expense)                                                        |       | (8,510                              | )          | (18,616 | ) |
|                                                                                 |       |                                |       |   |   |
| Income  before income taxes                                                          |       | 8,450                               |       | (7,963 | ) |
|                                                                                 |       |                                |       |   |   |
| Provision  (benefit) for income taxes                                                |       | 4,443                               |       | (2,826 | ) |
| Net  income (loss)                                                                   |       | 4,007                               |       | (5,137 | ) |
|                                                                                 |       |                                |       |   |   |
| Cumulative  preferred dividends on Senior Preferred and Class B Preferred units |       | —                              |       | (3,619 | ) |
|                                                                                 |       |                                |       |   |   |
| Net  income (loss) available to members and common shareholders                      |       | $                                   | 4,007      |   | $ | (8,756 | ) |
|                                                                                 |       |                                |       |   |   |
| Basic  and diluted earnings (loss) per share                                         |       | $                                   | 0.08       |   | $ | (0.33 | ) |
|                                                                                 |       |                                |       |   |   |
| Basic  and diluted weighted average shares outstanding                               |       | 49,997,647                          |       | 26,515,916 |   |
|                                                                                      |            |                                     |            |  |  |  |  |  |  |

 

*See accompanying notes.*

 

3

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**Prestige Brands Holdings, Inc.**

**Consolidated Statement of Changesin Stockholders’ Equityand Comprehensive Income**

**Three Months Ended June 30, 2005**

***(Unaudited)***

 
| ** **                                                               | ** ** | ** **        | ** ** | ** **     | ** ** | ** **  | ** ** | ** **          | ** ** | ** **        | ** ** | **Accumulated**    | ** ** | ** **   | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|-------------|------------|---------------------|------------|-------------------|------------|--------------------|------------|--------------|------------|------------|------------|
| ** **                                                               | ** ** | **Common  Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **          | ** ** | **Other**         | ** ** | ** **         | ** ** | ** **   | ** ** |
| **(Dollars in thousands,**                                     | ** ** | ** **        | ** ** | **Par**        | ** ** | **Paid-in** | ** ** | **Treasury  Stock** | ** ** | **Comprehensive** | ** ** | **Retained**       | ** ** | ** **   | ** ** |
| **except share data)**                                         | ** ** | **Shares**        | ** ** | **Value**      | ** ** | **Capital** | ** ** | **Shares**          | ** ** | **Amount**        | ** ** | **Income  (Loss)** | ** ** | **Earnings** | ** ** | **Totals** | ** ** |
| Balances  - March 31, 2005                                          |       | 50,000,000        |       | $              | 500        |        | $          | 378,251             |       | 2,353             |       | $                  | (4         | )            | $          | 320        |       | $ | 6,779 |   | $ | 385,846 |   |
|                                                                     |       |              |       |           |       |        |       |                |       |              |       |               |       |         |       |       |       |
| Additional  costs associated with initial public offering                |       |              |       |           |       | (63         | )          |                |       |              |       |               |       |         |       | (63        | )          |
|                                                                     |       |              |       |           |       |        |       |                |       |              |       |               |       |         |       |       |       |
| Components  of comprehensive income                                      |       |              |       |           |       |        |       |                |       |              |       |               |       |         |       |       |       |
| Net  income                                                              |       |              |       |           |       |        |       |                |       |              |       |               |       | 4,007        |       | 4,007      |       |
|                                                                     |       |              |       |           |       |        |       |                |       |              |       |               |       |         |       |       |       |
| Unrealized  loss on interest rate cap, net of income tax benefit of $440 |       |              |       |           |       |        |       |                |       |              |       | (685               | )          |         |       | (685       | )          |
| Total  comprehensive income                                              |       |              |       |           |       |        |       |                |       |              |       |               |       |         |       | 3,322      |       |
|                                                                     |       |              |       |           |       |        |       |                |       |              |       |               |       |         |       |       |       |
| Balances  - June 30, 2005                                           |       | 50,000,000        |       | $              | 500        |        | $          | 378,188             |       | 2,353             |       | $                  | (4         | )            | $          | (365       | )          | $ | 10,786 |   | $ | 389,105 |   |

 

*Seeaccompanying notes.*

 

4

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**Prestige Brands Holdings, Inc.**

**Consolidated Statements of CashFlows**

***(Unaudited)***

 
| ** **                                                                                | ** ** | **Three Months Ended June 30** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| **(Dollars in thousands, except share data)**                    | ** ** | ** **                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Operating Activities**                                                                  |       |                                |       |   |   |
| Net  income (loss)                                                                        |       | $                                   | 4,007      |   | $ | (5,137 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                                |       |   |   |
| Depreciation  and amortization                                                            |       | 2,635                               |       | 2,289 |   |
| Deferred  income taxes                                                                    |       | 4,338                               |       | 2,913 |   |
| Amortization  of deferred financing costs                                                 |       | 527                                 |       | 781 |   |
| Loss  on extinguishment of debt                                                           |       | —                              |       | 7,567 |   |
| Changes  in operating assets and liabilities, net of effects of purchases of  businesses  |       |                                |       |   |   |
| Accounts  receivable                                                                      |       | 11,404                              |       | (5,861 | ) |
| Inventories                                                                               |       | (6,366                              | )          | 5,200 |   |
| Prepaid  expenses and other assets                                                        |       | (887                                | )          | (5,573 | ) |
| Accounts  payable                                                                         |       | (3,079                              | )          | 401 |   |
| Account  payable – related parties                                                   |       | —                              |       | 934 |   |
| Accrued  expenses                                                                         |       | (2,767                              | )          | 5,195 |   |
| Net  cash provided by operating activities                                                |       | 9,812                               |       | 8,709 |   |
|                                                                                      |       |                                |       |   |   |
| **Investing Activities**                                                                  |       |                                |       |   |   |
| Purchase  of equipment                                                                    |       | (206                                | )          | (109 | ) |
| Purchase  of business, net of cash acquired                                               |       | —                              |       | (373,250 | ) |
| Net  cash used for investing activities                                                   |       | (206                                | )          | (373,359 | ) |
|                                                                                      |       |                                |       |   |   |
| **Financing Activities**                                                                  |       |                                |       |   |   |
| Proceeds  from the issuance of notes                                                      |       | —                              |       | 668,512 |   |
| Payment  of deferred financing costs                                                      |       | —                              |       | (22,651 | ) |
| Repayment  of notes                                                                       |       | (932                                | )          | (330,786 | ) |
| Proceeds  from the issuance of preferred and common units                                 |       | —                              |       | 58,487 |   |
| Additional  costs associated with initial public offering                                 |       | (63                                 | )          | — |   |
| Net  cash provided by (used for) financing activities                                     |       | (995                                | )          | 373,562 |   |
|                                                                                      |       |                                |       |   |   |
| Increase  in cash                                                                         |       | 8,611                               |       | 8,912 |   |
| Cash  - beginning of period                                                               |       | 5,334                               |       | 3,393 |   |
|                                                                                      |       |                                |       |   |   |
| Cash  - end of period                                                                     |       | $                                   | 13,945     |   | $ | 12,305 |   |
|                                                                                      |       |                                |       |   |   |
| **Supplemental Cash Flow Information**                                                    |       |                                |       |   |   |
| Fair  value of assets acquired, net of cash acquired                                      |       | $                                   | —     |   | $ | 596,955 |   |
| Fair  value of liabilities assumed                                                        |       | —                              |       | (223,613 | ) |
| Purchase  price funded with non-cash contributions                                        |       | —                              |       | (92 | ) |
| Cash  paid to purchase business                                                           |       | $                                   | —     |   | $ | 373,250 |   |
|                                                                                      |       |                                |       |   |   |
| Interest  paid                                                                            |       | $                                   | 8,051      |   | $ | 10,295 |   |
| Income  taxes paid                                                                        |       | $                                   | 422        |   | $ | 280 |   |
|                                                                                           |            |                                     |            |  |  |  |  |  |  |

 

***Seeaccompanying notes.***

 

5

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**PrestigeBrands Holdings, Inc.**

**Notes to ConsolidatedFinancial Statements**

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

 

**1.**              Businessand Basis of Presentation

** **

***Nature of Business***

 

Prestige Brands Holdings, Inc. (“theCompany”) and its subsidiaries are engaged in the marketing, sales anddistribution of over-the-counter drug, personal care and household cleaningbrands to mass merchandisers, drug stores, supermarkets and club storesprimarily in the United States.  In February 2005,the Company completed an initial public offering.

 

***Basis of Presentation***

 

Theunaudited consolidated financial statements presented herein have been preparedin accordance with generally accepted accounting principles for interimfinancial reporting and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, the financialstatements include all adjustments, consisting only of normal recurringadjustments that are considered necessary for a fair presentation of theCompany’s financial position, results of operations and cash flows for theinterim periods.  Operating results forthe three month period ended June 30, 2005 are not necessarily indicativeof results that may be expected for the year ending March 31, 2006.  This financial information should be read inconjunction with the Company’s audited financial statements and notes thereto includedin the Company’s Annual Report on Form 10-K/A for the year ended March 31,2005.

 

***Use of Estimates***

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements, as well as thereported amounts of revenues and expenses during the reporting period.  Although these estimates are based on theCompany’s knowledge of current events and actions that the Company mayundertake in the future, actual results could differ from those estimates.

 

***Cashand Cash Equivalents***

*** ***

The Company considers all short-term depositsand investments with original maturities of three months or less to be cashequivalents.  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.

 

***Accounts Receivable***

 

The Company extends non-interest bearing tradecredit to its customers in the ordinary course of business. To minimize creditrisk, ongoing evaluations of customers’ financial condition are performed;however, collateral is not required.  TheCompany maintains an allowance for doubtful accounts based on its historicalcollections experience, as well as its evaluation of current and expectedconditions and trends affecting its customers.

 

***Sales Returns***

 

The Company must make estimates of potentialfuture product returns related to current period sales. In order to do this,the Company analyzes historical returns, current economic trends, changes incustomer demand and acceptance of the Company’s products when evaluating theadequacy of the Company’s allowance for returns in any accounting period.  If actual returns are greater than those estimatedby management, the Company’s financial statements in future periods may beadversely affected.

 

6

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***Inventories***

 

Inventories are stated at the lower of cost or fairvalue where cost is determined by using the first-in, first-out method.  The Company provides an allowance for slowmoving and obsolete inventory.

 

***Property and Equipment***

 

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

 
| ** **              | ** ** | **Years** | ** ** |
|-------------------------|------------|-----------|------------|
| Machinery               |       | 5         |       |
| Computer  equipment     |       | 3         |       |
| Furniture  and fixtures |       | 7         |       |

 

Expenditures for maintenance and repairs arecharged to expense as incurred.  When anasset is 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.

 

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

 

***Goodwill***

 

The excess of the purchase price over the fairmarket value of assets acquired and liabilities assumed in acquisition transactionsis classified as goodwill.  In accordancewith Financial Accounting Standards Board (“FASB”) Statement of FinancialAccounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets,” the Company does not amortize goodwill, but performs impairment testsof the carrying value at least annually.

 

***Intangible Assets***

 

Intangible assets are stated at the lesser ofcost or fair value less accumulated amortization.  For intangible assets with finite lives,amortization is computed on the straight-line method over estimated usefullives ranging from five to 30 years.

 

Indefinite lived intangible assets are testedfor impairment at least annually, while intangible assets with finite lives arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of such assets may not be recoverable.  An impairment loss is recognized if thecarrying amount of the asset exceeds its fair value.

 

***Deferred Financing Costs***

 

The Company has incurred debt issuance costs inconnection with its long-term debt.  Thesecosts are capitalized as deferred financing costs and amortized using theeffective interest method over the term of the related debt.

 

***Revenue Recognition***

 

Revenues are recognized when the followingrevenue recognition criteria are met: (1) persuasive evidence of an arrangementexists; (2) there is a fixed or determinable price; (3) the producthas been shipped and the customer takes ownership and assumes risk of loss; and(4) collectibility of the resulting receivable is reasonably assured.  These criteria are satisfied upon shipment ofproduct, and revenues are recognized accordingly.  Provision is made for estimated customerdiscounts and returns at the time of sale based on the Company’s historicalexperience.

 

The Company frequently participates in thepromotional programs of its customers, as is customary in this industry.  The ultimate cost of these promotionalprograms varies based on the actual number of units sold during a finite periodof time.  These programs may includecoupons, scan downs, temporary price

 

7

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reductions or other price guaranteevehicles.  The Company estimates the costof such promotional programs at their inception based on historical experienceand current market conditions and reduces sales by such estimates.  At the completion of the promotional program,the estimated amounts are adjusted to actual results.

 

***Costs of Sales***

 

Costs of sales include product costs,warehousing costs, inbound and outbound shipping costs, and handling andstorage costs.  Shipping, warehousing andhandling costs were $5.5 million and $5.3 million for the periods endedJune 30, 2005 and 2004, respectively.

 

***Advertising and Promotion Costs***

 

Advertising and promotion costs are expensed asincurred.  Slotting fees associated withproducts are recognized as a reduction of sales.  Under slotting arrangements, the retailersallow the Company’s products to be placed on the stores’ shelves in exchangefor such fees.  Direct reimbursements ofadvertising costs are reflected as a reduction of advertising costs in theperiod earned.

 

***Stock-based Compensation***

 

The Company accounts for employee stock-basedcompensation in accordance with the provisions of Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) andcomplies with the disclosure provisions of FASB Statement No. 123, “Accountingfor Stock-Based Compensation” (“Statement No. 123”) and FASB Statement No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure, an amendmentof FASB Statement No. 123.”  UnderAPB 25, compensation expense is based on the difference, if any, on the date ofgrant, between the fair value of the Company’s common stock and the exerciseprice of the equity instrument.

 

***Income Taxes***

 

Income taxes are recorded in accordance with theprovisions of FASB Statement No. 109, “Accounting for Income Taxes” (“StatementNo. 109”).  Pursuant to Statement No. 109,deferred tax assets and liabilities are determined based on the differencesbetween the financial reporting and tax bases of assets and liabilities usingthe enacted tax rates and laws that will be in effect when the differences areexpected to reverse.  A valuationallowance is established when necessary to reduce deferred tax assets to theamounts expected to be realized.

 

***Derivative Instruments***

 

FASB Statement No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“Statement No. 133”),requires companies to recognize derivative instruments as either assets orliabilities in the balance sheet at fair value.  The accounting for changes in the fair valueof a derivative instrument depends on whether it has been designated andqualifies as part of a hedging relationship and further, on the type of hedgingrelationship.  For those derivativeinstruments that are designated and qualify as hedging instruments, a companymust designate the hedging instrument, based upon the exposure being hedged, asa fair value hedge, a cash flow hedge or a hedge of a net investment in aninternational operation.

 

The Company has designated its derivativefinancial instruments as cash flow hedges because they hedge exposure tovariability in expected future cash flows that is attributable to interest raterisk.  For these hedges, the effectiveportion of the gain or loss on the derivative instrument is reported as acomponent of other comprehensive income (loss) and reclassified into earningsin the same line item associated with the forecasted transaction in the sameperiod or periods during which the hedged transaction affects earnings. Anyineffective portion of the gain or loss on the derivative instruments isrecorded in results of operations immediately.

 

***Earnings Per Share***

 

Basicand diluted earnings per share are calculated based on income (loss) availableto common shareholders and the weighted-average number of shares outstandingduring the reported period.  For theperiod ended June 30, 2004, the weighted average number of common shares outstandingincludes the

 

8

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Company’scommon units as if the common units had been converted to common stock usingthe February 2005 initial public offering conversion ratio of one commonunit to 0.4543 shares of common stock. The Company had no potentially dilutive securities outstanding duringthe periods ended June 30, 2005 or June 30, 2004.

 

***Recently Issued Accounting Standards***

 

In March 2005, the FASB issued FASBInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations” (“FIN 47”) which clarifies guidance provided by Statement No. 143,“Accounting for Asset Retirement Obligations.”  FIN 47 is effective for the Company no laterthan March 31, 2006.  The adoptionof FIN 47 is not expected to have a significant impact on the Company’sfinancial position, results of operations or cash flows.

 

In April 2005, the Securities and ExchangeCommission approved an amendment to Rule 4-01 of Regulation S-X thatdelays the effective date of Statement No. 123 (Revised 2004), “Shared-BasedPayments” (“Statement No. 123R”), which requires companies to expense thevalue of employee and director stock options and similar awards.  The Company is currently reviewing itsoptions for implementation of Statement No. 123(R).  The results of operations for the periodended June 30, 2005 would not have been affected had the Company appliedthe fair value recognition provisions of Statement 123(R) during this period.

 

In May 2005, the FASB issued Statement ofFinancial Accounting Standards No. 154, “Accounting Changes and ErrorCorrections” (“Statement No. 154”) which replaces Accounting PrinciplesBoard Opinion No. 20, “Accounting Changes” (“APB Opinion No. 20”) andFASB Statement No. 3, “Reporting Accounting Changes in Interim FinancialStatements.”  Statement No. 154requires that voluntary changes in accounting principle be appliedretrospectively to the balances of assets and liabilities as of the beginningof the earliest period for which retrospective application is practicable andthat a corresponding adjustments be made to the opening balance of retainedearnings.  APB Opinion No. 20 hadrequired that most voluntary changes in accounting principle be recognized byincluding in net income the cumulative effect of changing to the newprinciple.  Statement No. 154 iseffective for all accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005.

 

**2.**              AccountsReceivable

 

The components of accounts receivable consist ofthe following:

 
| ** **                                                         | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
|                                                               |       |                   |       |                    |       |
| Accounts  receivable                                               |       | $                      | 32,654     |                    | $          | 45,329 |   |
| Other  receivables                                                 |       | 1,251                  |       | 835                     |       |
|                                                               |       | 33,905                 |       | 46,164                  |       |
| Less  allowances for discounts, returns and uncollectible accounts |       | (1,416                 | )          | (2,271                  | )          |
|                                                               |       |                   |       |                    |       |
|                                                               |       | $                      | 32,489     |                    | $          | 43,893 |   |

 

9

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**3.**              Inventories

 

Inventories consist of the following:

 
| ** **                   | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|------------------------------|------------|------------------------|------------|-------------------------|------------|
|                         |       |                   |       |                    |       |
| Packaging  and raw materials |       | $                      | 5,192      |                    | $          | 3,587 |   |
| Finished  goods              |       | 22,754                 |       | 17,993                  |       |
|                         |       |                   |       |                    |       |
|                         |       | $                      | 27,946     |                    | $          | 21,580 |   |

 

Inventories are shown net of allowances forobsolete and slow moving inventory of $1.4 million at June 30, 2005 and March 31,2005, respectively.

 

**4.**              Propertyand Equipment

 

Propertyand equipment consist of the following:

 
| ** **                | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|---------------------------|------------|------------------------|------------|-------------------------|------------|
|                      |       |                   |       |                    |       |
| Machinery                 |       | $                      | 2,828      |                    | $          | 2,828 |   |
| Computer  equipment       |       | 784                    |       | 771                     |       |
| Furniture  and fixtures   |       | 542                    |       | 515                     |       |
| Leasehold  improvements   |       | 339                    |       | 173                     |       |
|                      |       | 4,493                  |       | 4,287                   |       |
|                      |       |                   |       |                    |       |
| Accumulated  depreciation |       | (2,450                 | )          | (1,963                  | )          |
|                      |       |                   |       |                    |       |
|                      |       | $                      | 2,043      |                    | $          | 2,324 |   |

 

**5.**              IntangibleAssets

 

Intangibleassets consist of the following:

 
| ** **                     | ** ** | **June 30, 2005** | ** ** |
|--------------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **Gross**              | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **                     | ** ** | **Amount**             | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                           |       |                   |       |   |   |   |   |
| Indefinite  lived trademarks   |       | $                      | 522,346    |   | $ | — |   | $ | 522,346 |   |
|                           |       |                   |       |   |   |   |   |
| Amortizable  intangible assets |       |                   |       |   |   |   |   |
| Trademarks                     |       | 94,900                 |       | (10,915 | ) | 83,985 |   |
| Non-compete  agreement         |       | 158                    |       | (24 | ) | 134 |   |
|                           |       | 95,058                 |       | (10,939 | ) | 84,119 |   |
|                           |       |                   |       |   |   |   |   |
|                           |       | $                      | 617,404    |   | $ | (10,939 | ) | $ | 606,465 |   |

 

10

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| ** **                     | ** ** | **March 31, 2005** | ** ** |
|--------------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **Gross**               | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **                     | ** ** | **Amount**              | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                           |       |                    |       |   |   |   |   |
| Indefinite  lived trademarks   |       | $                       | 522,346    |   | $ | — |   | $ | 522,346 |   |
|                           |       |                    |       |   |   |   |   |
| Amortizable  intangible assets |       |                    |       |   |   |   |   |
| Trademarks                     |       | 94,900                  |       | (8,775 | ) | 86,125 |   |
| Non-compete  agreement         |       | 158                     |       | (16 | ) | 142 |   |
|                           |       | 95,058                  |       | (8,791 | ) | 86,267 |   |
|                           |       |                    |       |   |   |   |   |
|                           |       | $                       | 617,404    |   | $ | (8,791 | ) | $ | 608,613 |   |
|                                |            |                         |            |  |  |  |  |  |  |  |  |  |

 

AtJune 30, 2005, intangible assets are expected to be amortized over aperiod of five to 30 years as follows:

 
| **Twelve Months Ending June 30** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|
| 2006                                                 |       | $          | 8,592      |       |
| 2007                                                 |       | 8,592      |       |
| 2008                                                 |       | 8,592      |       |
| 2009                                                 |       | 8,592      |       |
| 2010                                                 |       | 8,592      |       |
| Thereafter                                           |       | 41,159     |       |
|                                                 |       |       |       |
|                                                 |       | $          | 84,119     |       |

 

11

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**6.****             ****Long-Term Debt**

 

Long-termdebt consists of the following:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                   |       |                    |       |
| Senior revolving credit  facility (“Revolving Credit Facility”), which expires on April 6, 2009,  is available for maximum borrowings of up to $60.0 million. The Revolving  Credit Facility bears interest at the Company’s option at either the prime  rate plus a variable margin or LIBOR plus a variable margin. The variable  margin ranges from 0.75% to 2.50% and at June 30, 2005, the interest  rate on the Revolving Credit Facility was 7.0% per annum. The Company is also  required to pay a variable commitment fee on the unused portion of the  Revolving Credit Facility. At June 30, 2005, the commitment fee was  0.50% of the unused line. The Revolving Credit Facility is collateralized by  substantially all of the Company’s assets.                                                                        |       | $                      | —     |                    | $          | — |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                   |       |                    |       |
| Senior secured term  loan facility, (“Tranche B Term Loan Facility”) bears interest at the  Company’s option at either the prime rate or LIBOR plus a variable margin of  2.25%. At June 30, 2005, the applicable interest rate on the Tranche B  Term Loan Facility was 5.38%. Principal payments of $933 and interest are  payable quarterly. In February 2005, the Tranche B Term Loan Facility  was amended to increase the amount available thereunder by $200.0 million,  all of which is available at June 30, 2005. Current amounts outstanding  under the Tranche B Term Loan Facility mature on April 6, 2011, while  amounts borrowed pursuant to the amendment will mature on October 6,  2011. The Tranche B Term Loan Facility is collateralized by substantially all  of the Company’s assets.               |       | 368,428                |       | 369,360                 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                   |       |                    |       |
| Senior Subordinated  Notes (“Senior Notes”) that bear interest at 9.25% which is payable on  April 15th and October 15th of each year. The  Senior Notes mature on April 15, 2012; however, the Company may redeem  some or all of the Senior Notes on or prior to April 15, 2008 at a  redemption price equal to 100% plus a make-whole premium, and on or after  April 15, 2008 at redemption prices set forth in the indenture governing  the Senior Notes. The Senior Notes are unconditionally guaranteed by Prestige  Brands International, LLC (“Prestige International”), a wholly owned  subsidiary, and Prestige International’s wholly owned subsidiaries (other  than the issuer). There are no significant restrictions on the ability of any  of the guarantors to obtain funds from their subsidiaries. |       | 126,000                |       | 126,000                 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                   |       |                    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 494,428                |       | 495,360                 |       |
| Current  portion of long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | (3,730                 | )          | (3,730                  | )          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                   |       |                    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | $                      | 490,698    |                    | $          | 491,630 |   |

 

12

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TheRevolving Credit Facility and the Tranche B Term Loan Facility (together the “SeniorCredit Facility”) contain various financial covenants, including provisionsthat require the Company to maintain certain leverage ratios, interest coverageratios and fixed charge coverage ratios. Additionally, the Senior Credit Facility contains provisions thatrestrict the Company from undertaking specified corporate actions, such asasset dispositions, acquisitions, dividend payments, changes of control,incurrence of indebtedness, creation of liens and transactions withaffiliates.  The Company was incompliance with its financial and restrictive covenants under the Senior CreditFacility at June 30, 2005.

 

Futureprincipal payments required in accordance with the terms of the Senior CreditFacility and the Senior Notes are as follows:

 
| **Twelve Months Ending June 30** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|
| 2006                                                 |       | $          | 3,730      |       |
| 2007                                                 |       | 3,730      |       |
| 2008                                                 |       | 3,730      |       |
| 2009                                                 |       | 3,730      |       |
| 2010                                                 |       | 3,730      |       |
| Thereafter                                           |       | 475,778    |       |
|                                                 |       |       |       |
|                                                 |       | $          | 494,428    |       |

 

The Company entered into a 5% interest rate cap agreementwith a financial institution to mitigate the impact of changing interest rates. The agreement provides for a notionalamount of $20.0 million and terminates in June 2006.  The Company also entered into interest ratecap agreements with another financial institution that become effective August 30,2005, with a total notional amount of $180.0 million and cap rates ranging from3.25% to 3.75%.  The agreements terminateon May 30, 2006, 2007 and 2008 as to $50.0 million, $80.0 million and $50.0million, respectively.  The Company isaccounting for the interest rate cap agreements as cash flow hedges.  The fair value of the interest rate capagreements was $1.7 million at June 30, 2005.

 

**7.****             ****Commitments and Contingencies**

 

InJuly 2002, the Company entered into a ten year manufacturing and supplyagreement with an unrelated company.  Pursuantto this agreement, the Company agreed to purchase certain minimum quantities ofproduct over the initial three years of the agreement or to pay liquidateddamages of up to $360.  The Company hadrecorded a liability of $308 at June 30, 2005 and March 31, 2005, whichrepresents its estimate of the probable liquidated damages.  Such estimate is based on historical andexpected purchases during the initial three years of the agreement.

 

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. Theodosakispublished “The Arthritis Cure” and “Maximizing the Arthritis Cure” regardingthe use of dietary supplements to treat arthritis patients.  Dr. Theodosakis alleged that his bookshave a distinctive trade dress, or cover layout, design, color and typeface,and those products that the defendants sold under the ARTHx trademarksinfringed the books’ trade dress and constituted unfair competition and falsedesignation 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 the ARTHx trademarks,goodwill and inventory to a third party, Contract Pharmacal Corporation, in March 2003. On January 12, 2005, the courtgranted the Company’s motion for summary judgment and dismissed all

 

13

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claimsagainst Pecos and Medtech.  The plaintiffhas filed an appeal in the U.S. Court of Appeals which is pending.

 

OnJanuary 3, 2005, the Company was served with process by its former leadcounsel in the Theodosakis litigation seeking $679 plus interest.  The case was filed in the Supreme Court of NewYork and is styled as Dickstein Shapiro et al v. Medtech Products, Inc.  In February 2005, the plaintiffs filed anamended complaint naming the Pecos Pharmaceutical Company as defendant.  The Company has answered and filed a counterclaimagainst Dickstein and also filed a third party complaint against the LexingtonInsurance Company.  The Company believesthat if there is any obligation to the Dickstein firm relating to this matter,it is an obligation of Lexington and not the Company.

 

OnMay 9, 2005, the Company was served with a complaint in a class action lawsuitfiled in Essex County, Massachusetts, styled as Dawn Thompson v. Wyeth, Inc.relating to the Company’s Little Remedies pediatric cough products.  The Company is one of several corporatedefendants, all of whom market over-the-counter cough syrup products forpediatric use.  The complaint allegesthat the ingredient dextromethorphan is no more effective than a placebo.  There is no allegation of physical injurycaused by the product or the ingredient.  In June 2005, the Company was served in asecond class action complaint involving dextromethorphan.  The second case, styled Tina Yescavage v.Wyeth was filed in Lee County Florida and similarly involves multiple corporatedefendants.  The Company believes thatboth of the dextromethorphan cases are without merit and is actively pursuingappropriate defenses.  The use ofdextromethorphan in pediatric products is fully consistent with and supportedby Food and Drug Administration 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.

 

**8.**              EquityIncentive Plan

** **

In connection with the Company’s IPO, the Boardof Directors adopted the 2005 Long-Term Equity Incentive Plan (“the Plan”).  The Plan provides for grants of stock options,restricted stock, restricted stock units, deferred stock units and otherequity-based awards.  Directors, officersand other employees of the Company and its subsidiaries, as well as othersperforming services for the Company, are eligible for grants under the Plan.  At June 30, 2005, there were 5,000,000shares available for issuance under the Plan; however, no grants have been madeunder the Plan.

 

**9.**              RelatedParty Transactions

 

The Company had entered in an agreement with anaffiliate of GTCR Golder Rauner II, LLC (“GTCR”), a private equity firm and aninvestor in the Company, whereby the GTCR affiliate was to provide

 

14

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management and advisory services to the Companyfor an aggregate annual compensation of $4.0 million.  The agreement was terminated in February 2005.  During the period ended June 30, 2004,the Company paid the affiliate of GTCR a management fee of $934.

 

**10.****      ****Income Taxes**

 

Income taxes are recorded in the Company’squarterly financial statements based on the Company’s estimated annualeffective income tax rate.  The effectiverates used in the calculation of income taxes were 52.6% and 35.5% for theperiods ended June 30, 2005 and 2004, respectively.  The increase in the effective tax rate for2005 resulted primarily from a one time charge of approximately $1.2 milliondue to the increase in the Company’s graduated federal income tax rate from 34%to 35% and its related impact on the Company’s deferred tax liabilities.

 

**11.**       Concentrationsof Risk

 

The Company’s sales are concentrated in theareas of over-the-counter pharmaceutical products, personal care products andhousehold cleaning products.  The Companysells its products to mass merchandisers, food and drug accounts, and dollarand club stores.  During the period endedJune 30, 2005, approximately 60.8% of the Company’s total sales werederived from its four major brands while during the period ended June 30,2004, approximately 64.4% of the Company’s total sales were derived from thesefour brands.  During the periods ended June 30,2005 and 2004, approximately 22.8% and 23.3%, respectively, of the Company’snet sales were made to one customer.  At June 30,2005, approximately 20% of accounts receivable were owed by one customer.

 

The Company manages product distribution in thecontinental United States through a main distribution center in St. Louis,Missouri.  A serious disruption, such asa flood 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 Company could incur significantly highercosts and experience longer lead times associated with the distribution of itsproducts to its customers during the time that it takes the Company to reopenor replace its distribution center.  As aresult, any such disruption could have a material adverse effect on the Company’ssales and profitability.

 

**12.**       BusinessSegments

** **

Segment information has been prepared inaccordance with FASB Statement No. 131, “Disclosures about Segments of anEnterprise and Related Information.”  TheCompany’s operating segments are based on its product lines and consist of (i) Over-the-CounterDrugs, (ii) Personal Care and (iii) Household Cleaning.  Accordingly, within each reportable segmentare operations that have similar economic characteristics, including the natureof their products, production process, type of customer and method ofdistribution.

 

There were no inter-segment sales or transfersduring the periods ended June 30, 2005 and 2004.  The Company evaluates the performance of itsproduct lines and allocates resources to them based primarily on contributionmargin.  The table below summarizesinformation about reportable segments.

 

15

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| ** **                  | ** ** | **Period Ended June 30, 2005** | ** ** |
|-----------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **Over-the-  Counter**              | ** ** | **Personal** | ** ** | **Household** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Drug**                            | ** ** | **Care** | ** ** | **Cleaning** | ** ** | **Consolidated** | ** ** |
|                        |       |                                |       |   |   |   |   |   |   |
| Net  sales                  |       | $                                   | 32,866     |   | $ | 7,484 |   | $ | 23,180 |   | $ | 63,530 |   |
| Other  revenues             |       | —                              |       | — |   | 25 |   | 25 |   |
|                        |       |                                |       |   |   |   |   |   |   |
| Total  revenues             |       | 32,866                              |       | 7,484 |   | 23,205 |   | 63,555 |   |
| Cost  of sales              |       | 11,165                              |       | 3,884 |   | 13,290 |   | 28,339 |   |
|                        |       |                                |       |   |   |   |   |   |   |
| Gross  profit               |       | 21,701                              |       | 3,600 |   | 9,915 |   | 35,216 |   |
| Advertising  and promotion  |       | 7,402                               |       | 1,103 |   | 2,209 |   | 10,714 |   |
|                        |       |                                |       |   |   |   |   |   |   |
| Contribution  margin        |       | $                                   | 14,299     |   | $ | 2,497 |   | $ | 7,706 |   | 24,502 |   |
| Other  operating expenses   |       |                                |       |   |   |   |   | 7,542 |   |
|                        |       |                                |       |   |   |   |   |   |   |
| Operating  income           |       |                                |       |   |   |   |   | 16,960 |   |
| Other  income (expense)     |       |                                |       |   |   |   |   | (8,510 | ) |
| Provision  for income taxes |       |                                |       |   |   |   |   | (4,443 | ) |
|                        |       |                                |       |   |   |   |   |   |   |
| Net  income                 |       |                                |       |   |   |   |   | $ | 4,007 |   |

 
| ** **                 | ** ** | **Period Ended June 30, 2004** | ** ** |
|----------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **Over-the-**                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Counter**                         | ** ** | **Personal** | ** ** | **Household** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Drug**                            | ** ** | **Care** | ** ** | **Cleaning** | ** ** | **Consolidated** | ** ** |
|                       |       |                                |       |   |   |   |   |   |   |
| Net  sales                 |       | $                                   | 34,599     |   | $ | 8,438 |   | $ | 24,645 |   | $ | 67,682 |   |
| Other  revenues            |       |                                |       |   |   | 75 |   | 75 |   |
|                       |       |                                |       |   |   |   |   |   |   |
| Total  revenues            |       | 34,599                              |       | 8,438 |   | 24,720 |   | 67,757 |   |
| Cost  of sales             |       | 14,722                              |       | 4,445 |   | 16,956 |   | 36,123 |   |
|                       |       |                                |       |   |   |   |   |   |   |
| Gross  profit              |       | 19,877                              |       | 3,993 |   | 7,764 |   | 31,634 |   |
| Advertising  and promotion |       | 7,989                               |       | 2,621 |   | 3,161 |   | 13,771 |   |
|                       |       |                                |       |   |   |   |   |   |   |
| Contribution  margin       |       | $                                   | 11,888     |   | $ | 1,372 |   | $ | 4,603 |   | 17,863 |   |
| Other  operating expenses  |       |                                |       |   |   |   |   | 7,210 |   |
|                       |       |                                |       |   |   |   |   |   |   |
| Operating  income          |       |                                |       |   |   |   |   | 10,653 |   |
| Other  income (expense)    |       |                                |       |   |   |   |   | (18,616 | ) |
| Benefit  for income taxes  |       |                                |       |   |   |   |   | 2,826 |   |
|                       |       |                                |       |   |   |   |   |   |   |
| Net  loss                  |       |                                |       |   |   |   |   | $ | (5,137 | ) |

 

Duringthe periods ended June 30, 2005 and 2004, 97.9% and 97.4%, respectively, ofsales were made to customers in the United States and Canada.  No individual geographical area accounted formore than 10% of net sales in any of the periods presented.  At June 30, 2005 and 2004, all of theCompany’s long-term assets were located in the United States of America andhave not been allocated between segments.

 

16

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**13.**       SubsequentEvents

 

On July 22, 2005, the Company entered intoa material definitive asset sale and purchase agreement with Reckitt BenckiserInc. for the acquisition of the Chore Boy line of household cleaning productsfor an aggregate consideration of $22.3 million.

 

Pursuant to the provisions of the Company’s 2005Long-Term Equity Incentive Plan, on July 29, 2005, each of the Company’sfour independent members of the Board of Directors received an award of6,222 shares of common stock in connection with Company’s directors’compensation arrangements.  Of such amount,1,778 shares represent a one-time grant of unrestricted shares while theremaining 4,444 shares represent restricted shares that vest over a two yearperiod.

 

On August 3, 2005, a complaint in a class action lawsuit, CharterTownship of Clinton Police and Fire Retirement System v. Prestige BrandsHoldings, Inc. et al, was filed in United States District Court for theSouthern District of New York, on behalf of all persons who purchased theCompany’s securities pursuant to and/or traceable to the Company’s initialpublic offering (the “IPO”) on or about February 9, 2005 throughJuly 28, 2005.  The complaint alsonames as defendants Merrill Lynch, Pierce, Fenner & SmithIncorporated, Goldman, Sachs & Co and J.P. Morgan Securities Inc., thelead or co-lead underwriters of the IPO. The complaint charges the Company, certain of its officers anddirectors, and other insiders with violations of the Securities Act of1933.  The Company plans to defend thismatter vigorously.

 

The Company has been made aware of the possibility of additionalsimilar class action lawsuits.  If thesepotential lawsuits are filed, the Company plans to defend these mattersvigorously.

 

On August 4, 2005, Frank Palantoni joined theCompany as President and Chief Operating Officer.  In connection therewith, the Board ofDirectors granted Mr. Palantoni 30,888 shares of restricted common stockand options to purchase an additional 61,776 shares of common stock at apurchase price of $12.95 per share.  Theoptions vest over a period of five years while the restricted shares will vestcontingent upon the attainment of certain performance-based benchmarks.

 

17

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**PrestigeBrands International, LLC**

**Consolidated BalanceSheets**

***(Unaudited*)**

 
| **(Dollars in thousands, except share data)** | ** ** | ** ** | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|-------------------------|------------|
| **Assets**                                                             | ** ** | ** ** | ** ** | ** **             | ** ** |
| Current  assets                                                        |       |       |       |                   |       |
| Cash                                                                   |       | $          | 13,945     |                   | $          | 5,334                   |       |
| Accounts  receivable                                                   |       | 32,489     |       | 43,893                 |       |
| Inventories                                                            |       | 27,946     |       | 21,580                 |       |
| Deferred  income tax assets                                            |       | 6,965      |       | 5,699                  |       |
| Prepaid  expenses and other current assets                             |       | 4,039      |       | 3,152                  |       |
| Total  current assets                                                  |       | 85,384     |       | 79,658                 |       |
|                                                                   |       |       |       |                   |       |
| Property  and equipment                                                |       | 2,043      |       | 2,324                  |       |
| Goodwill                                                               |       | 294,544    |       | 294,544                |       |
| Intangible  assets                                                     |       | 606,465    |       | 608,613                |       |
| Other  long-term assets                                                |       | 14,344     |       | 15,996                 |       |
|                                                                   |       |       |       |                   |       |
| Total  Assets                                                          |       | $          | 1,002,780  |                   | $          | 1,001,135               |       |
|                                                                   |       |       |       |                   |       |
| **Liabilities and Members’ Equity**                               |       |       |       |                   |       |
| Current  liabilities                                                   |       |       |       |                   |       |
| Accounts  payable                                                      |       | $          | 18,626     |                   | $          | 21,705                  |       |
| Accrued  liabilities                                                   |       | 10,705     |       | 13,472                 |       |
| Current  portion of long-term debt                                     |       | 3,730      |       | 3,730                  |       |
| Total  current liabilities                                             |       | 33,061     |       | 38,907                 |       |
|                                                                   |       |       |       |                   |       |
| Long-term  debt                                                        |       | 490,698    |       | 491,630                |       |
| Deferred  income tax liabilities                                       |       | 89,916     |       | 84,752                 |       |
|                                                                   |       |       |       |                   |       |
| Total  liabilities                                                     |       | 613,675    |       | 615,289                |       |
|                                                                   |       |       |       |                   |       |
| **Commitments and Contingencies – Note 7**                        |       |       |       |                   |       |
|                                                                   |       |       |       |                   |       |
| **Members’ Equity**                                               |       |       |       |                   |       |
| Contributed  capital – Prestige Holdings                          |       | 370,214    |       | 370,277                |       |
| Accumulated  other comprehensive income (loss)                         |       | (365       | )          | 320                    |       |
| Retained  earnings                                                     |       | 19,256     |       | 15,249                 |       |
| Total  members’ equity                                            |       | 389,105    |       | 385,846                |       |
|                                                                   |       |       |       |                   |       |
| Total  liabilities and members’ equity                            |       | $          | 1,002,780  |                   | $          | 1,001,135               |       |

 

*Seeaccompanying notes.*

 

18

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**Prestige Brands****International, LLC**

**ConsolidatedStatements of Operations**

***(Unaudited)***

 
| ** **                                                            | ** ** | **Three Months Ended June 30** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------|------------|
| **(Dollars in thousands, except share data** | ** ** | ** **                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                                                          |       |                                |       |   |   |
| Net  sales                                                            |       | $                                   | 63,530     |   | $ | 67,682 |   |
| Other  revenues                                                       |       | 25                                  |       | 75 |   |
| Total  revenues                                                       |       | 63,555                              |       | 67,757 |   |
|                                                                  |       |                                |       |   |   |
| **Costs of Sales**                                                    |       |                                |       |   |   |
| Costs  of sales                                                       |       | 28,339                              |       | 36,123 |   |
| Gross  profit                                                         |       | 35,216                              |       | 31,634 |   |
|                                                                  |       |                                |       |   |   |
| **Operating Expenses**                                                |       |                                |       |   |   |
| Advertising  and promotion                                            |       | 10,714                              |       | 13,771 |   |
| General  and administrative                                           |       | 4,911                               |       | 4,921 |   |
| Depreciation                                                          |       | 483                                 |       | 486 |   |
| Amortization  of intangible assets                                    |       | 2,148                               |       | 1,803 |   |
| Total  operating expenses                                             |       | 18,256                              |       | 20,981 |   |
|                                                                  |       |                                |       |   |   |
| Operating  income                                                     |       | 16,960                              |       | 10,653 |   |
|                                                                  |       |                                |       |   |   |
| **Other income (expense)**                                            |       |                                |       |   |   |
| Interest  income                                                      |       | 81                                  |       | 28 |   |
| Interest  expense                                                     |       | (8,591                              | )          | (11,077 | ) |
| Loss  on extinguishment of debt                                       |       | —                              |       | (7,567 | ) |
| Total  other income (expense)                                         |       | (8,510                              | )          | (18,616 | ) |
|                                                                  |       |                                |       |   |   |
| Income  before income taxes                                           |       | 8,450                               |       | (7,963 | ) |
|                                                                  |       |                                |       |   |   |
| Provision  (benefit) for income taxes                                 |       | 4,443                               |       | (2,826 | ) |
|                                                                  |       |                                |       |   |   |
| Net  income (loss)                                                    |       | $                                   | 4,007      |   | $ | (5,137 | ) |
|                                                                       |            |                                     |            |  |  |  |  |  |  |

 

*See accompanying notes.*

 

19

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**Prestige Brands****International, LLC**

**Consolidated Statement of Changesin Members’ Equityand Comprehensive Income**

**Three Months Ended June 30, 2005**

***(Unaudited)***

 
| **(Dollars in thousands, expect share data*)***              | ** ** | ** ** | **Contributed  Capital  Prestige  Holdings** | ** ** | **Accumulated  Other****Comprehensive****Income (loss)** | ** ** | **Retained  Earnings** | ** ** | **Totals** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|------------------------|------------|------------|------------|
| Balances  - March 31, 2005                                                       |       | $          | 370,277                                      |       | $                                                        | 320        |                   | $          | 15,249     |       | $ | 385,846 |   |
|                                                                                  |       |       |                                         |       |                                                     |       |                   |       |       |
| Additional  costs associated with capital contributions from Prestige Brands Holdings |       | (63        | )                                            |       |                                                     |       |                   | (63        | )          |
|                                                                                  |       |       |                                         |       |                                                     |       |                   |       |       |
| Components  of comprehensive income                                                   |       |       |                                         |       |                                                     |       |                   |       |       |
| Net  income for the period                                                            |       |       |                                         |       |                                                     | 4,007      |                   | 4,007      |       |
| Unrealized  loss on interest rate cap, net of income tax benefit of $440              |       |       |                                         | (685       | )                                                        |       |                   | (685       | )          |
|                                                                                  |       |       |                                         |       |                                                     |       |                   |       |       |
|                                                                                  |       |       |                                         |       |                                                     |       |                   | 3,322      |       |
|                                                                                  |       |       |                                         |       |                                                     |       |                   |       |       |
| Balances  - June 30, 2005                                                        |       | $          | 370,214                                      |       | $                                                        | (365       | )                      | $          | 19,256     |       | $ | 389,105 |   |

 

*Seeaccompanying notes.*

 

20

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**Prestige Brands****International, LLC**

**Consolidated Statements of CashFlows**

***(Unaudited)***

 
| ** **                                                                                | ** ** | **Three Months Ended June 30** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| **(Dollars in thousands, except share data)**                    | ** ** | ** **                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Operating Activities**                                                                  |       |                                |       |   |   |
| Net  income (loss)                                                                        |       | $                                   | 4,007      |   | $ | (5,137 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                                |       |   |   |
| Depreciation  and amortization                                                            |       | 2,635                               |       | 2,289 |   |
| Deferred  income taxes                                                                    |       | 4,338                               |       | 2,913 |   |
| Amortization  of deferred financing costs                                                 |       | 527                                 |       | 781 |   |
| Loss  on extinguishment of debt                                                           |       | —                              |       | 7,567 |   |
| Changes  in operating assets and liabilities, net of effects of purchases of  businesses  |       |                                |       |   |   |
| Accounts  receivable                                                                      |       | 11,404                              |       | (5,861 | ) |
| Inventories                                                                               |       | (6,366                              | )          | 5,200 |   |
| Prepaid  expenses and other assets                                                        |       | (887                                | )          | (5,573 | ) |
| Accounts  payable                                                                         |       | (3,079                              | )          | 401 |   |
| Account  payable – related parties                                                   |       | —                              |       | 934 |   |
| Accrued  expenses                                                                         |       | (2,767                              | )          | 5,195 |   |
| Net  cash provided by operating activities                                                |       | 9,812                               |       | 8,709 |   |
|                                                                                      |       |                                |       |   |   |
| **Investing Activities**                                                                  |       |                                |       |   |   |
| Purchase  of equipment                                                                    |       | (206                                | )          | (109 | ) |
| Purchase  of business, net of cash acquired                                               |       | —                              |       | (373,250 | ) |
| Net  cash used for investing activities                                                   |       | (206                                | )          | (373,359 | ) |
|                                                                                      |       |                                |       |   |   |
| **Financing Activities**                                                                  |       |                                |       |   |   |
| Net  proceeds from the issuance of notes                                                  |       | —                              |       | 668,512 |   |
| Payment  of deferred financing costs                                                      |       | —                              |       | (22,651 | ) |
| Repayment  of notes                                                                       |       | (932                                | )          | (330,786 | ) |
| Proceeds  from capital contributions                                                      |       | —                              |       | 58,487 |   |
| Additional  costs associated with initial public offering                                 |       | (63                                 | )          | — |   |
| Net  cash provided by (used for) financing activities                                     |       | (995                                | )          | 373,562 |   |
|                                                                                      |       |                                |       |   |   |
| Increase  in cash                                                                         |       | 8,611                               |       | 8,912 |   |
| Cash  – beginning of period                                                          |       | 5,334                               |       | 3,393 |   |
|                                                                                      |       |                                |       |   |   |
| Cash  – end of period                                                                |       | $                                   | 13,945     |   | $ | 12,305 |   |
|                                                                                      |       |                                |       |   |   |
| **Supplemental Cash Flow Information**                                                    |       |                                |       |   |   |
| Fair  value of assets acquired, net of cash acquired                                      |       | $                                   | —     |   | $ | 596,955 |   |
| Fair  value of liabilities assumed                                                        |       | —                              |       | (223,613 | ) |
| Purchase  price funded with non-cash contributions                                        |       | —                              |       | (92 | ) |
| Cash  paid to purchase business                                                           |       | $                                   | —     |   | $ | 373,250 |   |
|                                                                                      |       |                                |       |   |   |
| Interest  paid                                                                            |       | $                                   | 8,051      |   | $ | 10,295 |   |
| Income  taxes paid                                                                        |       | $                                   | 422        |   | $ | 280 |   |
|                                                                                           |            |                                     |            |  |  |  |  |  |  |

 

*See accompanying notes.*

 

21

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** **

**Prestige Brands International, LLC**

**Notes to ConsolidatedFinancial Statements**

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

 

**1.**              Businessand Basis of Presentation

 

***Nature of Business***

 

*Prestige Brands International,LLC, (“Prestige International”) is an indirect wholly owned subsidiary ofPrestige Brands Holdings, Inc. (“the Company”) and the indirect parentcompany of Prestige Brands, Inc., the issuer of the 9.25% seniorsubordinated notes due 2012 (“Senior Notes”) and the borrower under the seniorcredit facility consisting of a Revolving Credit Facility, Tranche B Term LoanFacility and a Tranche C Term Loan Facility (together the “Senior CreditFacility”).  Prestige International isalso the parent guarantor of the obligations. The Company and its subsidiaries are engaged in the marketing, sales anddistribution of over-the-counter drug, personal care and household cleaningbrands to mass merchandisers, drug stores, supermarkets and club storesprimarily in the United States.*

* *

***Basis of Presentation***

 

Theunaudited consolidated financial statements presented herein have been preparedin accordance with generally accepted accounting principles for interimfinancial reporting and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, the financial statements include all adjustments, consisting onlyof normal recurring adjustments that are considered necessary for a fairpresentation of the Company’s financial position, results of operations andcash flows for the interim periods. Operating results for the three month period ended June 30, 2005are not necessarily indicative of results that may be expected for the yearending March 31, 2006.  Thisfinancial information should be read in conjunction with the Company’s auditedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K/A for the year ended March 31, 2005.

 

***Use of Estimates***

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements, as well as thereported amounts of revenues and expenses during the reporting period.  Although these estimates are based on theCompany’s knowledge of current events and actions that the Company mayundertake in the future, actual results could differ from those estimates.

 

***Cashand Cash Equivalents***

 

The Company considers all short-term depositsand investments with original maturities of three months or less to be cashequivalents.  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 risk beyondthe normal risk associated with commercial banking relationships.

 

***Accounts Receivable***

 

The Company extends non-interest bearing tradecredit to its customers in the ordinary course of business. To minimize creditrisk, ongoing evaluations of customers’ financial condition are performed;however, collateral is not required.  TheCompany maintains an allowance for doubtful accounts based on its historicalcollections experience, as well as its evaluation of current and expectedconditions and trends affecting its customers.

 

22

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***Sales Returns***

 

The Company must make estimates of potentialfuture product returns related to current period sales. In order to do this,the Company analyzes historical returns, current economic trends, changes incustomer demand and acceptance of the Company’s products when evaluating theadequacy of the Company’s allowance for returns in any accounting period.  If actual returns are greater than thoseestimated by management, the Company’s financial statements in future periodsmay be adversely affected.

 

***Inventories***

*** ***

Inventories are stated at the lower of cost orfair value where cost is determined by using the first-in, first-outmethod.  The Company provides anallowance for slow moving and obsolete inventory.

 

***Property and Equipment***

*** ***

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

 
| ** **             | ** ** | **Years** | ** ** |
|------------------------|------------|-----------|------------|
| Machinery              |       | 5         |       |
| Computer equipment     |       | 3         |       |
| Furniture and fixtures |       | 7         |       |

 

Expenditures for maintenance and repairs arecharged to expense as incurred.  When anasset is 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.

 

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

 

***Goodwill***

 

The excess of the purchase price over the fairmarket value of assets acquired and liabilities assumed in acquisitiontransactions is classified as goodwill. In accordance with Statement No. 142, “Goodwill and OtherIntangible Assets,” the Company does not amortize goodwill, but performsimpairment tests of the carrying value at least annually.

 

***Intangible Assets***

 

Intangible assets are stated at the lesser ofcost or fair value less accumulated amortization.  For intangible assets with finite lives,amortization is computed on the straight-line method over estimated usefullives ranging from five to 30 years.

 

Indefinite lived intangible assets are testedfor impairment at least annually, while intangible assets with finite lives arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of such assets may not be recoverable.  An impairment loss is recognized if thecarrying amount of the asset exceeds its fair value.

 

***Deferred Financing Costs***

 

The Company has incurred debt issuance costs inconnection with its long-term debt. These costs are capitalized as deferred financing costs and amortizedusing the effective interest method over the term of the related debt.

 

***Revenue Recognition***

 

Revenues are recognized when the followingrevenue recognition criteria are met: (1) persuasive evidence of anarrangement exists; (2) there is a fixed or determinable price;(3) the product has been shipped and the customer takes ownership andassumes risk of loss; and (4) collectibility of the resulting receivableis reasonably assured.  These criteriaare satisfied upon shipment of product, and revenues are recognized

 

23

----

 

accordingly. Provision is made for estimated customer discounts and returns at thetime of sale based on the Company’s historical experience.

 

The Company frequently participates in thepromotional programs of its customers, as is customary in this industry.  The ultimate cost of these promotionalprograms varies based on the actual number of units sold during a finite periodof time.  These programs may includecoupons, scan downs, temporary price reductions or other price guaranteevehicles.  The Company estimates the costof such promotional programs at their inception based on historical experienceand current market conditions and reduces sales by such estimates.  At the completion of the promotional program,the estimated amounts are adjusted to actual results.

 

***Costs of Sales***

 

Costs of sales include product costs,warehousing costs, inbound and outbound shipping costs, and handling andstorage costs.  Shipping, warehousing andhandling costs were $5.5 million and $5.3 million for the periodsended June 30, 2005 and 2004, respectively.

 

***Advertising and Promotion Costs***

 

Advertising and promotion costs are expensed asincurred.  Slotting fees associated withproducts are recognized as a reduction of sales.  Under slotting arrangements, the retailersallow the Company’s products to be placed on the stores’ shelves in exchangefor such fees.  Direct reimbursements ofadvertising costs are reflected as a reduction of advertising costs in the periodearned.

 

***Stock-based Compensation***

 

The Company accounts for employee stock-basedcompensation in accordance with the provisions of APB 25 and complies with thedisclosure provisions of Statement No. 123 and StatementNo. 148.  Under APB 25, compensationexpense is based on the difference, if any, on the date of grant, between thefair value of the Company’s common stock and the exercise price of the equityinstrument.

 

***Income Taxes***

 

Income taxes are recorded in accordance with theprovisions of Statement No. 109. Pursuant to Statement No. 109, deferred tax assets and liabilitiesare determined 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 valuation allowance is established whennecessary to reduce deferred tax assets to the amounts expected to be realized.

 

***Derivative Instruments***

 

Statement No. 133 requires companies torecognize derivative instruments as either assets or liabilities in the balancesheet 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 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.

 

The Company has designated its derivativefinancial instruments as cash flow hedges because they hedge exposure tovariability in expected future cash flows that is attributable to interest raterisk.  For these hedges, the effectiveportion of the gain or loss on the derivative instrument is reported as acomponent of other comprehensive income (loss) and reclassified into earningsin the same line item associated with the forecasted transaction in the sameperiod or periods during which the hedged transaction affects earnings. Anyineffective portion of the gain or loss on the derivative instruments isrecorded in results of operations immediately.

 

24

----

 

***Recently Issued Accounting Standards***

 

In March 2005, the FASB issued FIN 47 whichclarifies guidance provided by Statement No. 143, “Accounting for AssetRetirement Obligations.”  FIN 47 iseffective for the Company no later than March 31, 2006.  The adoption of FIN 47 is not expected tohave a significant impact on the Company’s financial position, results ofoperations or cash flows.

 

In April 2005, the Securities and ExchangeCommission approved an amendment to Rule 4-01 of Regulation S-X thatdelays the effective date of Statement No. 123(R) which requires companiesto expense the value of employee and director stock options and similarawards.  The Company is currentlyreviewing its options for implementation of Statement No. 123(R).  The results of operations for the periodended June 30, 2005 would not have been affected had the Company appliedthe fair value recognition provisions of Statement 123(R) during this period.

 

In May 2005, the FASB issued StatementNo. 154 which replaces APB Opinion No. 20 and FASB StatementNo. 3, “Reporting Accounting Changes in Interim Financial Statements.”  Statement No. 154 requires thatvoluntary changes in accounting principle be applied retrospectively to thebalances of assets and liabilities as of the beginning of the earliest periodfor which retrospective application is practicable and that a correspondingadjustments be made to the opening balance of retained earnings.  APB Opinion No. 20 had required thatmost voluntary changes in accounting principle be recognized by including innet income the cumulative effect of changing to the new principle.  Statement No. 154 is effective for allaccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005.

 

**2.**              AccountsReceivable

 

The components of accounts receivable consist ofthe following:

 
| ** **                                                         | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
|                                                               |       |                   |       |                    |       |
| Accounts receivable                                                |       | $                      | 32,654     |                    | $          | 45,329 |   |
| Other receivables                                                  |       | 1,251                  |       | 835                     |       |
|                                                               |       | 33,905                 |       | 46,164                  |       |
| Less allowances for discounts, returns and  uncollectible accounts |       | (1,416                 | )          | (2,271                  | )          |
|                                                               |       |                   |       |                    |       |
|                                                               |       | $                      | 32,489     |                    | $          | 43,893 |   |

 

**3.**              Inventories

 

Inventories consist of the following:

 
| ** **                  | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|-----------------------------|------------|------------------------|------------|-------------------------|------------|
|                        |       |                   |       |                    |       |
| Packaging and raw materials |       | $                      | 5,192      |                    | $          | 3,587 |   |
| Finished goods              |       | 22,754                 |       | 17,993                  |       |
|                        |       |                   |       |                    |       |
|                        |       | $                      | 27,946     |                    | $          | 21,580 |   |

 

Inventories are shown net of allowances forobsolete and slow moving inventory of $1.4 million at June 30, 2005 andMarch 31, 2005, respectively.

 

25

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**4.**              Propertyand Equipment

 

Propertyand equipment consist of the following:

 
| ** **               | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|--------------------------|------------|------------------------|------------|-------------------------|------------|
|                     |       |                   |       |                    |       |
| Machinery                |       | $                      | 2,828      |                    | $          | 2,828 |   |
| Computer equipment       |       | 784                    |       | 771                     |       |
| Furniture and fixtures   |       | 542                    |       | 515                     |       |
| Leasehold improvements   |       | 339                    |       | 173                     |       |
|                     |       | 4,493                  |       | 4,287                   |       |
|                     |       |                   |       |                    |       |
| Accumulated depreciation |       | (2,450                 | )          | (1,963                  | )          |
|                     |       |                   |       |                    |       |
|                     |       | $                      | 2,043      |                    | $          | 2,324 |   |

 

**5.**              IntangibleAssets

 

Intangibleassets consist of the following:

 
| ** **                    | ** ** | **June 30, 2005** | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **Gross**              | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **                    | ** ** | **Amount**             | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                          |       |                   |       |   |   |   |   |
| Indefinite lived trademarks   |       | $                      | 522,346    |   | $ | — |   | $ | 522,346 |   |
|                          |       |                   |       |   |   |   |   |
| Amortizable intangible assets |       |                   |       |   |   |   |   |
| Trademarks                    |       | 94,900                 |       | (10,915 | ) | 83,985 |   |
| Non-compete agreement         |       | 158                    |       | (24 | ) | 134 |   |
|                          |       | 95,058                 |       | (10,939 | ) | 84,119 |   |
|                          |       |                   |       |   |   |   |   |
|                          |       | $                      | 617,404    |   | $ | (10,939 | ) | $ | 606,465 |   |
|                               |            |                        |            |  |  |  |  |  |  |  |  |

 
| ** **                    | ** ** | **March 31, 2005** | ** ** |
|-------------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **Gross**               | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **                    | ** ** | **Amount**              | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                          |       |                    |       |   |   |   |   |
| Indefinite lived trademarks   |       | $                       | 522,346    |   | $ | — |   | $ | 522,346 |   |
|                          |       |                    |       |   |   |   |   |
| Amortizable intangible assets |       |                    |       |   |   |   |   |
| Trademarks                    |       | 94,900                  |       | (8,775 | ) | 86,125 |   |
| Non-compete agreement         |       | 158                     |       | (16 | ) | 142 |   |
|                          |       | 95,058                  |       | (8,791 | ) | 86,267 |   |
|                          |       |                    |       |   |   |   |   |
|                          |       | $                       | 617,404    |   | $ | (8,791 | ) | $ | 608,613 |   |
|                               |            |                         |            |  |  |  |  |  |  |  |  |

 

26

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AtJune 30, 2005, intangible assets are expected to be amortized over aperiod of five to 30 years as follows:

 
| **Twelve Months Ending June 30** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|
| 2006                                                 |       |       |       |       | $          | 8,592      |   |
| 2007                                                 |       | 8,592      |       |
| 2008                                                 |       | 8,592      |       |
| 2009                                                 |       | 8,592      |       |
| 2010                                                 |       | 8,592      |       |
| Thereafter                                           |       | 41,159     |       |
|                                                 |       |       |       |
|                                                 |       | $          | 84,119     |       |

 

27

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**6.****             ****Long-Term Debt**

 

Long-termdebt consists of the following:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                   |       |                    |       |
| Senior revolving credit facility (“Revolving Credit Facility”), which  expires on April 6, 2009, is available for maximum borrowings of up to  $60.0 million. The Revolving Credit Facility bears interest at the Company’s  option at either the prime rate plus a variable margin or LIBOR plus a  variable margin. The variable margin ranges from 0.75% to 2.50% and at  June 30, 2005, the interest rate on the Revolving Credit Facility was  7.0% per annum. The Company is also required to pay a variable commitment fee  on the unused portion of the Revolving Credit Facility. At June 30,  2005, the commitment fee was 0.50% of the unused line. The Revolving Credit  Facility is collateralized by substantially all of the Company’s assets.                                                          |       | $                      | —     |                    | $          | — |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                   |       |                    |       |
| Senior secured term loan facility, (“Tranche B Term Loan Facility”)  bears interest at the Company’s option at either the prime rate or LIBOR plus  a variable margin of 2.25%. At June 30, 2005, the applicable interest  rate on the Tranche B Term Loan Facility was 5.38%. Principal payments of  $933 and interest are payable quarterly. In February 2005, the Tranche B  Term Loan Facility was amended to increase the amount available thereunder by  $200.0 million, all of which is available at June 30, 2005. Current  amounts outstanding under the Tranche B Term Loan Facility mature on  April 6, 2011, while amounts borrowed pursuant to the amendment will  mature on October 6, 2011. The Tranche B Term Loan Facility is  collateralized by substantially all of the Company’s assets. |       | 368,428                |       | 369,360                 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                   |       |                    |       |
| Senior Subordinated Notes (Senior Notes) that bear interest at 9.25%  which is payable on April 15th and October 15th  of each year. The Senior Notes mature on April 15, 2012; however, the  Company may redeem some or all of the Senior Notes on or prior to  April 15, 2008 at a redemption price equal to 100% plus a make-whole  premium, and on or after April 15, 2008 at redemption prices set forth  in the indenture governing the Senior Notes. The Senior Notes are unconditionally  guaranteed by Prestige International and Prestige International’s wholly  owned subsidiaries (other than the issuer). There are no significant  restrictions on the ability of any of the guarantors to obtain funds from  their subsidiaries.                                                                            |       | 126,000                |       | 126,000                 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                   |       |                    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 494,428                |       | 495,360                 |       |
| Current portion of long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | (3,730)                |       | (3,730)                 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                   |       |                    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | $                      | 490,698    |                    | $          | 491,630 |   |

 

28

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TheRevolving Credit Facility and the Tranche B Term Loan Facility (together the“Senior Credit Facility”) contain various financial covenants, includingprovisions that require the Company to maintain certain leverage ratios,interest coverage ratios and fixed charge coverage ratios.  Additionally, the Senior Credit Facilitycontains provisions that restrict the Company from undertaking specifiedcorporate actions, such as asset dispositions, acquisitions, dividend payments,changes of control, incurrence of indebtedness, creation of liens andtransactions with affiliates.  The Companywas in compliance with its financial and restrictive covenants under the SeniorCredit Facility at June 30, 2005.

 

Futureprincipal payments required in accordance with the terms of the Senior CreditFacility and the Senior Notes are as follows:

 
| **Twelve Months Ending June 30** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|
| 2006                                                 |       | $          | 3,730      |       |
| 2007                                                 |       | 3,730      |       |
| 2008                                                 |       | 3,730      |       |
| 2009                                                 |       | 3,730      |       |
| 2010                                                 |       | 3,730      |       |
| Thereafter                                           |       | 475,778    |       |
|                                                 |       |       |       |
|                                                 |       | $          | 494,428    |       |

 

The Company entered into a 5% interest rate capagreement with a financial institution to mitigate the impact of changinginterest rates.  The agreement provides anotional amount of $20.0 million and terminates in June 2006.  The Company also entered into interest ratecap agreements with another financial institution that become effectiveAugust 30, 2005, with a total notional amount of $180.0 million and caprates ranging from 3.25% to 3.75%.  Theagreements terminate on May 30, 2006, 2007 and 2008 as to $50.0 million,$80.0 million and $50.0 million, respectively. The Company is accounting for the interest rate cap agreements as cashflow hedges.  The fair value of theinterest rate cap agreements was $1.7 million at June 30, 2005.

 

**7.****             ****Commitments and Contingencies**

 

InJuly 2002, the Company entered into a ten year manufacturing and supplyagreement with an unrelated company. Pursuant to this agreement, the Company agreed to purchase certainminimum quantities of product over the initial three years of the agreement orto pay liquidated damages of up to $360. The Company had recorded a liability of $308 at June 30, 2005 andMarch 31, 2005 which represents its estimate of the probable liquidateddamages.  Such estimate is based onhistorical and expected purchases during the initial three years of the agreement.

 

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 “Maximizing theArthritis Cure” regarding the use of dietary supplements to treat arthritispatients.  Dr. Theodosakis allegedthat his books have a distinctive trade dress, or cover layout, design, colorand 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 alleged that the defendants made false endorsements of theproducts by referencing his books on the product packaging and that the use ofhis name, books and trade dress invaded his right to publicity.  The Company sold the ARTHx trademarks,goodwill and inventory to a third party, Contract Pharmacal Corporation, inMarch 2003.  On January 12,2005, the court granted the Company’s motion for summary judgment and dismissedall

 

29

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claimsagainst Pecos and Medtech.  The plaintiffhas filed an appeal in the U.S. Court of Appeals which is pending.

 

OnJanuary 3, 2005, the Company was served with process by its former leadcounsel in the Theodosakis litigation seeking $679 plus interest.  The case was filed in the Supreme Court ofNew York and is styled as Dickstein Shapiro et al v. MedtechProducts, Inc.  InFebruary 2005, the plaintiffs filed an amended complaint naming the PecosPharmaceutical Company as defendant.  TheCompany has answered and filed a counterclaim against Dickstein and also fileda third party complaint against the 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 actionlawsuit filed in Essex County, Massachusetts, styled as Dawn Thompson v.Wyeth, Inc. relating to the Company’s Little Remedies pediatric coughproducts.  The Company is one of severalcorporate defendants, all of whom market over-the-counter cough syrup productsfor pediatric use.  The complaint allegesthat the ingredient dextromethorphan is no more effective than a placebo.  There is no allegation of physical injurycaused by the product or the ingredient. In June 2005, the Company was served in a second class actioncomplaint involving dextromethorphan. The second case, styled Tina Yescavage v. Wyeth was filed in Lee CountyFlorida and similarly involves multiple corporate defendants.  The Company believes that both of thedextromethorphan cases are without merit and is actively pursuing appropriatedefenses.  The use of dextromethorphan inpediatric products is fully consistent with and supported by Food and DrugAdministration 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.

 

**8.**              EquityIncentive Plan

 

In connection with the Company’s IPO, the Boardof Directors adopted the 2005 Long-Term Equity Incentive Plan (“thePlan”).  The Plan provides for grants ofstock options, restricted stock, restricted stock units, deferred stock unitsand other equity-based awards. Directors, officers and other employees of the Company and itssubsidiaries, as well as others performing services for the Company, areeligible for grants under the Plan.  AtJune 30, 2005, there were 5,000,000 shares available for issuance underthe Plan; however, no grants have been made under the Plan.

 

**9.**              RelatedParty Transactions

 

The Company had entered in an agreement with anaffiliate of GTCR Golder Rauner II, LLC (“GTCR”), a private equity firm and aninvestor in the Company, whereby the GTCR affiliate was to provide

 

30

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management and advisory services to the Companyfor an aggregate annual compensation of $4.0 million.  The agreement was terminated inFebruary 2005.  During the periodended June 30, 2004, the Company paid the affiliate of GTCR a managementfee of $934.

 

**10.****      ****IncomeTaxes**

 

Income taxes are recorded in the Company’squarterly financial statements based on the Company’s estimated annualeffective income tax rate.  The effectiverates used in the calculation of income taxes were 52.6% and 35.5% for theperiods ended June 30, 2005 and 2004, respectively.  The increase in the effective tax rate for2005 resulted primarily from a one time charge of approximately $1.2 milliondue to the increase in the Company’s graduated federal income tax rate from 34%to 35% and its related impact on the Company’s deferred tax liabilities.

 

**11.**       Concentrationsof Risk

 

The Company’s sales are concentrated in theareas of over-the-counter pharmaceutical products, personal care products andhousehold cleaning products.  The Companysells its products to mass merchandisers, food and drug accounts, and dollarand club stores.  During the period endedJune 30, 2005, approximately 60.8% of the Company’s total sales werederived from its four major brands while during the period ended June 30,2004, approximately 64.4% of the Company’s total sales were derived from thesefour brands.  During the periods endedJune 30, 2005 and 2004, approximately 22.8% and 23.3%, respectively, ofthe Company’s net sales were made to one customer.  At June 30, 2005, approximately 20% ofaccounts receivable were owed by one customer.

 

The Company manages product distribution in thecontinental United States through a main distribution center in St. Louis,Missouri.  A serious disruption, such asa flood 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 Company could incur significantly highercosts and experience longer lead times associated with the distribution of itsproducts to its customers during the time that it takes the Company to reopenor replace its distribution center.  As aresult, any such disruption could have a material adverse effect on the Company’ssales and profitability.

 

**12.**       BusinessSegments

 

Segment information has been prepared inaccordance with FASB Statement No. 131, “Disclosures about Segments of anEnterprise and Related Information.”  TheCompany’s operating segments are based on its product lines and consist of(i) Over-the-Counter Drugs, (ii) Personal Care and(iii) Household Cleaning. Accordingly, within each reportable segment are operations that havesimilar economic characteristics, including the nature of their products, productionprocess, type of customer and method of distribution.

 

There were no inter-segment sales or transfersduring the periods ended June 30, 2005 and 2004.  The Company evaluates the performance of itsproduct lines and allocates resources to them based primarily on contributionmargin.  The table below summarizesinformation about reportable segments.

 

31

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| ** **                 | ** ** | **Period Ended June 30, 2005** | ** ** |
|----------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **Over-the-  Counter**              | ** ** | **Personal** | ** ** | **Household** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Drug**                            | ** ** | **Care** | ** ** | **Cleaning** | ** ** | **Consolidated** | ** ** |
|                       |       |                                |       |   |   |   |   |   |   |
| Net sales                  |       | $                                   | 32,866     |   | $ | 7,484 |   | $ | 23,180 |   | $ | 63,530 |   |
| Other revenues             |       | —                              |       | — |   | 25 |   | 25 |   |
|                       |       |                                |       |   |   |   |   |   |   |
| Total revenues             |       | 32,866                              |       | 7,484 |   | 23,205 |   | 63,555 |   |
| Cost of sales              |       | 11,165                              |       | 3,884 |   | 13,290 |   | 28,339 |   |
|                       |       |                                |       |   |   |   |   |   |   |
| Gross profit               |       | 21,701                              |       | 3,600 |   | 9,915 |   | 35,216 |   |
| Advertising and promotion  |       | 7,402                               |       | 1,103 |   | 2,209 |   | 10,714 |   |
|                       |       |                                |       |   |   |   |   |   |   |
| Contribution margin        |       | $                                   | 14,299     |   | $ | 2,497 |   | $ | 7,706 |   | 24,502 |   |
| Other operating expenses   |       |                                |       |   |   |   |   | 7,542 |   |
|                       |       |                                |       |   |   |   |   |   |   |
| Operating income           |       |                                |       |   |   |   |   | 16,960 |   |
| Other income (expense)     |       |                                |       |   |   |   |   | (8,510 | ) |
| Provision for income taxes |       |                                |       |   |   |   |   | (4,443 | ) |
|                       |       |                                |       |   |   |   |   |   |   |
| Net income                 |       |                                |       |   |   |   |   | $ | 4,007 |   |

 
| ** **                | ** ** | **Period Ended June 30, 2004** | ** ** |
|---------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **Over-the-  Counter**              | ** ** | **Personal** | ** ** | **Household** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **Drug**                            | ** ** | **Care** | ** ** | **Cleaning** | ** ** | **Consolidated** | ** ** |
|                      |       |                                |       |   |   |   |   |   |   |
| Net sales                 |       | $                                   | 34,599     |   | $ | 8,438 |   | $ | 24,645 |   | $ | 67,682 |   |
| Other revenues            |       |                                |       |   |   | 75 |   | 75 |   |
|                      |       |                                |       |   |   |   |   |   |   |
| Total revenues            |       | 34,599                              |       | 8,438 |   | 24,720 |   | 67,757 |   |
| Cost of sales             |       | 14,722                              |       | 4,445 |   | 16,956 |   | 36,123 |   |
|                      |       |                                |       |   |   |   |   |   |   |
| Gross profit              |       | 19,877                              |       | 3,993 |   | 7,764 |   | 31,634 |   |
| Advertising and promotion |       | 7,989                               |       | 2,621 |   | 3,161 |   | 13,771 |   |
|                      |       |                                |       |   |   |   |   |   |   |
| Contribution margin       |       | $                                   | 11,888     |   | $ | 1,372 |   | $ | 4,603 |   | 17,863 |   |
| Other operating expenses  |       |                                |       |   |   |   |   | 7,210 |   |
|                      |       |                                |       |   |   |   |   |   |   |
| Operating income          |       |                                |       |   |   |   |   | 10,653 |   |
| Other income (expense)    |       |                                |       |   |   |   |   | (18,616 | ) |
| Benefit for income taxes  |       |                                |       |   |   |   |   | 2,826 |   |
|                      |       |                                |       |   |   |   |   |   |   |
| Net loss                  |       |                                |       |   |   |   |   | $ | (5,137 | ) |

 

Duringthe periods ended June 30, 2005 and 2004, 97.9% and 97.4%, respectively,of sales were made to customers in the United States and Canada.  No individual geographical area accounted formore than 10% of net sales in any of the periods presented.  At June 30, 2005 and 2004, all of theCompany’s long-term assets were located in the United States of America andhave not been allocated between segments.

 

32

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**13.**       SubsequentEvents

 

On July 22, 2005, the Company entered intoa material definitive asset sale and purchase agreement with Reckitt BenckiserInc. for the acquisition of the Chore Boy line of household cleaning productsfor an aggregate consideration of $22.3 million.

 

Pursuant to the provisions ofthe Company’s 2005 Long-Term Equity Incentive Plan, on July 29, 2005, eachof the Company’s four independent members of the Board of Directors received anaward of 6,222 shares of common stock in connection with Company’sdirectors’ compensation arrangements.  Ofsuch amount, 1,778 shares represent a one-time grant of unrestrictedshares while the remaining 4,444 shares represent restricted shares that vestover a two year period.

 

On August 3, 2005, acomplaint in a class action lawsuit, Charter Township of Clinton Police andFire Retirement System v. Prestige Brands Holdings, Inc. et al, was filed inUnited States District Court for the Southern District of New York, on behalfof all persons who purchased the Company’s securities pursuant to and/ortraceable to the Company’s IPO or about February 9, 2005 throughJuly 28, 2005.  The complaint alsonames as defendants Merrill Lynch, Pierce, Fenner & SmithIncorporated, Goldman, Sachs & Co and J.P. Morgan Securities Inc., thelead or co-lead underwriters of the IPO. The complaint charges the Company, certain of its officers anddirectors, and other insiders with violations of the Securities Act of1933.  The Company plans to defend thismatter vigorously.

 

The Company has been made awareof the possibility of additional similar class action lawsuits.  If these potential lawsuits are filed, theCompany plans to defend these matters vigorously.

 

On August 4, 2005, FrankPalantoni joined the Company as President and Chief Operating Officer.  In connection therewith, the Board ofDirectors granted Mr. Palantoni 30,888 shares of restricted common stockand options to purchase an additional 61,776 shares of common stock at apurchase price of $12.95 per share.  Theoptions vest over a period of five years while the restricted shares will vestcontingent upon the attainment of certain performance-based benchmarks.

 

33

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**ITEM2.**      MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

*The Company, as the indirectholding company of Prestige International, does not conduct ongoing businessoperations.  As a result, the financialinformation for Prestige Brands Holdings, Inc. and Prestige BrandsInternational, LLC is identical for the purposes of the discussion of operatingresults in Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.  Prestige BrandsInternational, LLC, is an indirect wholly owned subsidiary of Prestige BrandsHoldings, Inc. and the parent company of Prestige Brands, Inc., theissuer of our 9.25% senior subordinated notes due 2012 (“Senior Notes”) and theborrower under the senior credit facility, consisting of a Revolving CreditFacility, Tranche B Term Loan Facility and a Tranche C Term Loan Facility(together the “Senior Credit Facility”). Prestige International is also the parent guarantor of the obligations.*

* *

This document should be read in conjunction withthe Management’s Discussion and Analysis section of Amendment No. 1to our Annual Report on Form 10-K/A for the fiscal year endedMarch 31, 2005.

 

**General**

 

We sell well-recognized, brand name over-the-counterdrug, household cleaning and personal care products. We operate in nichesegments of these categories where we can use the strength of our brands, ourestablished retail distribution network, a low-cost operating model and ourexperienced management team as a competitive advantage to grow our presence inthese categories and, as a result, grow our sales and profits.

 

We have grown our brand portfolio by acquiringstrong and well-recognized brands from larger consumer products andpharmaceutical companies, as well as other brands from smaller privatecompanies.  While the brands we havepurchased from larger consumer products and pharmaceutical companies have longhistories of support and brand development, we believe that at the time weacquired them they were considered “non-core” by their previous owners and didnot benefit from the focus of senior level management or strong marketingsupport.  We believe that the brands wehave purchased from smaller private companies have been constrained by thelimited resources of their prior owners. After acquiring a brand, we seek to increase its sales, market share anddistribution in both existing and new channels. We pursue this growth through increased spending on advertising andpromotion, new marketing strategies, improved packaging and formulations andinnovative new products.

 

In February 2005, we raised $448.0 millionthrough an initial public offering of 28,000,000 shares of common stock.  The net proceeds of the offering were $416.8million after deducting $28.0 million of underwriters’ discounts andcommissions and $3.2 million of offering expenses.  The net proceeds of $416.8 million plus $3.0million from our revolving credit facility and $8.8 million of cash on handwent to repay $100.0 million of our existing senior indebtedness (plus arepayment premium of $3.0 million and accrued interest of $0.5 million asof February 15, 2005), to redeem $84.0 million in aggregate principalamount of our existing 9.25% senior subordinated notes (plus a redemptionpremium of $7.8 million and accrued interest of $3.3 million as ofMarch 18, 2005), to repurchase an aggregate of 4,397,950 shares of ourcommon stock held by the GTCR funds and the TCW/Crescent funds for $30.2million, and to contribute $199.8 million to Prestige International Holdings,LLC, which was used to redeem all of its outstanding senior preferred units andclass 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 the underwriters exercising their over-allotmentoptions.

 

34

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**QuarterlyPeriod Ended June 30, 2005 compared to the Quarterly Period EndedJune 30, 2004**

 

**Net Sales**

 

Net sales for the period ended June 30,2005 were $63.6 million compared to $67.8 million for the comparable period ofthe prior year.  This represented adecrease of $4.2 million or 6.2% from the prior period.  All three operating segments experiencedsales declines during the period.  TheOver-the-Counter Drug segment had net sales of $32.9 million for the periodended June 30, 2005, a decrease of $1.7 million, or 5.0% below net salesof $34.6 million for the period ended June 30, 2004.  The Household Cleaning segment had net salesof $23.2 million for the period ended June 30, 2005, a decrease of $1.5million, or 6.1% below net sales of $24.7 million for the period endedJune 30, 2004.  The Personal Caresegment had net sales of $7.5 million for the period ended June 30, 2005,a decrease of $0.9 million, or 11.3% below net sales of $8.4 million for theperiod ended June 30, 2004.

 

***Over-the-Counter Drug Segment***

 

Net sales in the Over-the-Counter Drug segmentwere $32.9 million for the period ended June 30, 2005 versus $34.6 millionfor the comparable period of the prior year. This represented a decrease of $1.7 million or 5.0% from the priorperiod.  The sales decrease was theresult of declines in Compound W and New Skin partially offset by LittleRemedies, which is not included in the June 30, 2004 results, and gains onChloraseptic.  The decline in Compound Wis primarily a result of softness in the retail wart remover category andincreased competition.  The decline inNew Skin is a result of the sudden drop in sales in the retail liquid bandagecategory. The Little Remedies brand was acquired in the Vetco acquisition inOctober 2004.  The Chlorasepticgains are a result of continued strong retail consumer consumption during theperiod.

 

***Personal Care Segment***

 

Net sales of the Personal Care segment were $7.5million for the period ended June 30, 2005 versus $8.4 million for thecomparable period of the prior year. This represented a decrease of $0.9 million or 11.3% from the priorperiod.  The sales decrease is primarilyattributable to the Denorex brand’s continued decline in consumer consumption.

 

***Household Cleaning Segment***

 

Net sales of the Household Cleaning segment were$23.2 million for the period ended June 30, 2005 versus $24.7 million forthe comparable period of the prior year.  This represented a decrease of $1.5 million or6.1% from the prior period.  The salesdecrease was the result of declines in both household brands — Comet and Spicand Span.  The decrease in Comet sales islargely attributable to the discontinuance of the Clean & Flush toiletbowl product during 2004.  The on-goingComet product line — powder, sprays and cream — experienced modest increases insales during the period.  The Spic andSpan brand decreases are due to the timing of dollar store orders and sales ofobsolete product during the same period last year.

 

**Gross Profit**

 

Gross profit for the period ended June 30,2005 was $35.2 million compared to $31.6 million for the comparable period ofthe prior year.  This represented anincrease of $3.6 million or 11.3% from the prior period.  The period ended June 30, 2004 includedinventory step-up costs associated with the acquisitions of the businesses ofapproximately $5.2 million.  Excludingcosts associated with the inventory step-up in the period ended June 30,2004, gross profit decreased by $1.7 million or 4.5% for the period endedJune 30, 2005.  The decrease ingross profit is primarily a result of the sales shortfall.  Gross profit as a percent of sales was 55.4%for the period ended June 30, 2005 versus 54.4% for the comparable periodof the prior year.  The increase in grossprofit percentage is primarily a result of improvements in the over-the-counterdrug and household cleaning segments partially offset by declines in thepersonal care segment.

 

***Over-the-Counter Drug Segment***

 

Gross profit of the Over-the-Counter segment was$21.7 million for the period ended June 30, 2005 versus $19.9 million forthe comparable period of the prior year. This represented an increase of $1.8

 

35

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million or 9.2% from the prior period.  Excluding $2.6 million of cost associatedwith the inventory step-up in the period ended June 30, 2004, gross profitdecreased by $0.8 million or 3.4% for the period ended June 30, 2005.  Gross profit as a percent of sales was 66.0%for the period ended June 30, 2005 versus 64.9% for the comparable periodof the prior year.  The decrease in grossprofit is a result of the sales shortfall partially offset by improved grossprofit as a percent of sales, excluding cost of inventory step-up, due tofavorable sales mix.  Compound WFreeze-off has a lower gross profit percentage than the average product in theOver-the-Counter Drug segment and a smaller proportion of the sales in theperiod ended June 30, 2005 than in the comparable period of the prioryear.

 

***Personal Care Segment***

 

Gross profit of the personal care segment was$3.6 million for the period ended June 30, 2005 versus $4.0 million forthe comparable period of the prior year. This represented a decrease of $0.4 million or 9.8% from the priorperiod.  Excluding $0.2 million of costsassociated with the inventory step-up in the period ended June 30, 2004,gross profit decreased by $0.6 million or 15.3% for the period endedJune 30, 2005. The gross profit decrease is primarily due to the salesshortfall.  Gross profit as a percent ofsales was 48.1% for the period ended June 30, 2005 versus 50.3% for thecomparable period of the prior year.  Thedecrease in gross profit percentage is primarily a result of the higher costvalue size for Denorex which was introduced last fall.

 

***Household Cleaning Segment***

 

Gross profit of the Household Cleaning segmentwas $9.9 million for the period ended June 30, 2005 versus $7.8 millionfor the comparable period of the prior year. This represented an increase of $2.1 million or 27.7% from the priorperiod.  Excluding $2.4 million of costsassociated with the inventory step-up in the period ended June 30, 2004,gross profit decreased by $0.3 million or 2.5% for the period endedJune 30, 2005.  The decrease ingross profit is a result of the sales shortfall, partially offset by improvedgross profit as a percent of sales due to discontinuance of the lower marginClean & Flush toilet bowl product and sales of obsolete Spic and Spaninventory.  Gross profit as a percent ofsales was 42.7% for the period ended June 30, 2005 versus 41.1% for thecomparable period of the prior year as a result the sale of fewer lower margin itemsas described above.

 

**Contribution Margin**

 

Contribution margin was $24.5 million for theperiod ended June 30, 2005 versus $17.9 million for the comparable periodof the prior year.  This represented anincrease of $6.6 million or 37.2% from the prior period.  Excluding costs associated with the inventorystep-up mentioned above, contribution margin increased by $1.4 million or 6.0%for the period ended June 30, 2005 versus the comparable period of theprior year.  The contribution marginincrease is primarily attributable to a $3.1 million reduction in advertisingand promotion spending in the period ended June 30, 2005 versus the sameperiod in the prior year, offset by the decrease in gross profits discussedabove.

 

***Over-the-Counter Drug Segment***

 

Contribution margin of the Over-the-Counter drugsegment was $14.3 million for the period ended June 30, 2005 versus $11.9million for the comparable period of the prior year.  Excluding costs associated with the inventorystep-up mentioned above, contribution margin decreased by $0.2 million or 1.2%for the period ended June 30, 2005 versus the comparable period of theprior year. The contribution margin decrease is a result of the gross profitdecline partially offset by $0.6 million reduction in advertising and promotionspending in the period ended June 30, 2005 versus the same period of theprior year.  The reduction in advertisingand promotion spending was due to a Chloraseptic media test program aimed atthe allergy season in the period ended June 30, 2004 which was notrepeated in the period ended June 30, 2005.

 

***Personal Care Segment***

 

Contribution margin of the personal care segmentwas $2.5 million for the period ended June 30, 2005 versus $1.4 millionfor the comparable period of the prior year. This represented an increase of $1.1 million or 82.0% from the priorperiod.  The contribution margin increaseis a result of the $1.5 million

 

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reduction in advertising and promotion spendingin the period ended June 30, 2005, offset by the gross profit decline of$0.4 million.  The reduction inadvertising and promotion was primarily a result of a shift in Cutexadvertising from television to print media. The Cutex print media advertising campaign is planned throughout thecurrent fiscal year as opposed to television media which was concentrated inthe first two fiscal quarters of last year.

 

***Household Cleaning Segment***

 

Contribution margin of the Household Cleaningsegment was $7.7 million for the period ended June 30, 2005 versus $4.6million for the comparable period of the prior year.  This represented an increase of $3.1 millionor 67.4% from the prior period. Excluding costs associated with the inventory step-up mentioned above,contribution margin increased by $0.7 million or 9.9% for the period endedJune 30, 2005 versus the comparable period of the prior year.  The contribution margin increase is a resultof a $0.9 million reduction in advertising and promotion in the period endJune 30, 2005 from the comparable period of the prior year, offset by thegross profit decrease of $0.3 million. The decline in spending is driven by the elimination of advertising andpromotional spend behind the discontinued Comet Clean and Flush product.

 

**General and Administrative**

 

General and administrative expenses were flat at$4.9 million for the period ended June 30, 2005 versus the comparableperiod of the prior year.  Synergiesachieved with the integration of the Medtech, Bonita Bay and Spic and Spanacquisitions were partially offset by an increase in costs associated withbeing a public company, including, Sarbanes-Oxley reporting compliance,regulatory filings and legal fees.  Theperiod ended June 30, 2005 includes additional expenses associated withadding the Little Remedies brand in the Vetco acquisition that was completed inOctober 2004.

 

**Depreciation and Amortization**

 

Depreciation and amortization expense was $2.6million for the period ended June 30, 2005 versus $2.3 million for thecomparable period of the prior year.  Theincrease was due to amortization of intangible assets related to the Vetcoacquisition.

 

**Interest Expense, net**

 

Net interest expense was $8.5 million for theperiod ended June 30, 2005 versus $11.0 million for the comparable periodof the prior year.  This represented adecrease of $2.5 million or 23.0% from the prior period.  The decrease in interest expense is due tothe reduction of indebtedness outstanding.

 

**Loss on Extinguishment of Debt**

 

Loss on extinguishment of debt was $0 for theperiod ended June 30, 2005 versus $7.6 million for the comparable periodof the prior year.  The $7.6 million forthe period ended June 30, 2004 related to the write-off of deferredfinancing costs and debt discounts associated with the borrowings retired inconnection with the Bonita Bay acquisition.

 

**Income Taxes**

 

The income tax provision for the period endedJune 30, 2005 was $4.4 million, with an effective rate of 52.6%, comparedto a benefit of $2.8 million, with an effective rate of 35.5% for period endedJune 30, 2004.  The increase ineffective tax rate is primarily the result of a one time charge of $1.2 milliondue to an increase in the Company’s graduated federal income tax rate from 34%to 35% and its related impact on deferred tax liabilities.

 

**Liquidity and CapitalResources**

 

We have historically financed our operationswith a combination of internally generated funds and borrowings.  In February 2005, we completed aninitial public offering that provided the Company with net proceeds of $416.8 millionwhich were used to repay $184.0 million of indebtedness, to repurchase commonstock held by the GTCR funds and the TCW/Crescent funds, and to redeem all ofthe outstanding senior preferred units and class B preferred units held byprevious investors.  Our principal

 

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uses of cash are for operating expenses, debtservice, acquisitions, working capital, and capital expenditures.

 

Net cash provided by operating activities was$9.8 million for period ended June 30, 2005 compared to $8.7 million forcomparable period of the prior year. The $1.1 million increase was primarilydue to net income of $4.0 million, adjusted for non-cash items of $7.5 millionin 2005, compared to net loss of $5.1 million, adjusted for non-cash items of$13.6 million for the period ended June 30, 2004, offset by workingcapital changes.  Working capitalincreased by $1.7 million for period ended June 30, 2005, primarily due toan increase in inventory of $6.4 million as a result of the net sales shortfallduring the period and a decrease in accounts payable and accrued expenses of$5.8 million, offset by a reduction in accounts receivable of $11.0 million.

 

Net cash used in investing activities was $0.2million for period ended June 30, 2005 compared to net cash used of $373.4million for the comparable period of the prior year.  The net cash used in investing activities forthe June 30, 2005 period was primarily a result of leasehold improvementson the Company’s Irvington, New York offices. The net cash used in investing activities for the period endedJune 30, 2004 was for the acquisition of Bonita Bay on April 6, 2004.

 

Net cash used in financing activities was $1.0million for the period ended June 30, 2005 compared to $373.6 million forthe period ended June 30, 2004.  Netcash used in financing activities for June 30, 2005 was primarily due tomandatory scheduled payments on the senior secured term loan facility.  In the period ended June 30, 2004, tofinance the acquisitions of Bonita Bay, the Company borrowed $668.5 million andissued preferred units and common units of $58.5 million.  The increase in debt was partially offset bythe payment of deferred financing costs of $22.6 million, repayment of the debtincurred in February 2004 at the time of the Medtech/Denorex acquisition,the pay down of the revolving credit facility and scheduled payments on currentdebt which all totaled $330.8 million.

 

***Capital Resources***

 

On February 15, 2005, the Company completedan initial public offering of common stock which resulted in net proceeds of$416.8 million.  The proceeds were usedto repay the $100.0 million outstanding under the Tranche C Term Loan Facility(plus a repayment premium of $3.0 million and accrued interest of $0.5 millionas of February 15, 2005), and to redeem $84.0 million in aggregateprincipal amount of our existing 9.25% Senior Notes (plus a redemption premiumof $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 Term Loan Facility by $200.0 million and allows for anincrease in our Revolving Credit Facility up to $60.0 million.

 

As of June 30, 2005, we had an aggregate of$494.4 million of outstanding indebtedness, which consisted of (i) anaggregate of $368.4 million of borrowings under the Tranche B Term LoanFacility, and (ii) $126.0 million of 9.25% Senior Notes due 2012.  We had $60.0 million of borrowing capacityunder the Revolving Credit Facility available at such time.

 

All loans under the Senior Credit Facility bearinterest at floating rates, which can be either (i) based on the primerate, or (ii) LIBOR rate, plus an applicable margin.  As of June 30, 2005, an aggregate of$368.4 million was outstanding under the term loans at a weighted averageinterest rate of 5.3%.

 

On June 30, 2004, we paid $52 for a 5%interest rate cap agreement with a notional amount of $20 million.  The interest rate cap terminates inJune 2006.  On March 7, 2005,we paid $2.3 million for interest rate cap agreements that become effectiveAugust 30, 2005, with a total notional amount of $180 million and LIBORcap rates ranging from 3.25% to 3.75%. The interest rate cap agreements terminate on May 30, 2006, 2007and 2008 as to $50.0 million, $80.0 million and $50.0 million,respectively.  The fair value of theinterest rate cap agreements was $1.7 million at June 30, 2005.

 

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The Tranche B Term Loan Facility matures inApril 2011.  We must make quarterlyamortization payments on the term loan facility equal to 0.25% of the initialprincipal amount of the term loan.  TheRevolving Credit Facility matures and the commitments relating to the RevolvingCredit Facility terminate in April 2009. The obligations under the Senior Credit Facility are guaranteed on asenior basis by Prestige International and all of its domestic subsidiaries,other than the issuer (Prestige Brands, Inc.), and are secured bysubstantially all of our assets.

 

The Senior Credit Facility contains variousfinancial covenants, including financial covenants that require us to maintaincertain leverage ratios, interest coverage ratios and fixed charge coverageratios, as well as covenants restricting us from undertaking specifiedcorporate actions, including asset dispositions, acquisitions, payment ofdividends and other specified payments, changes of control, incurrence ofindebtedness, creation of liens, making loans and investments and transactionswith affiliates.  Our Senior Notesrequire that adjusted EBITDA (as defined in the indenture governing such notes)be used as the basis for calculating our leverage and interest coverageratios.  We were in compliance with ourfinancial and restrictive covenants under the credit facility at June 30,2005.

 

Our principal sources of funds are anticipatedto be cash flows from operating activities and available borrowings under theRevolving Credit Facility.  We believethat these funds will provide us with sufficient liquidity and capitalresources for us to meet our current and future financial obligations, as wellas to provide funds for working capital, capital expenditures and other needsfor at least the next 12 months.  Weregularly review acquisition opportunities and other potential strategictransactions, which may require additional debt or equity financing.

 

**Commitments**

 

As of June 30, 2005, we had ongoingcommitments under various contractual and commercial obligations as follows:

 
| **Contractual Obligations** | ** ** | **Total**         | ** ** | **Less than   1 Year** | ** ** | **1 to 3  Years** | ** ** | **4 to 5  Years** | ** ** | **After 5  Years** | ** ** |
|----------------------------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|-------------------|------------|--------------------|------------|
| ** **                       | ** ** | **(in millions)** | ** ** |
| Long-term  debt                  |       | $                 | 494.4      |                   | $          | 3.7               |       | $                 | 7.5        |               | $          | 7.5 |   | $ | 475.7 |   |
|                             |       |              |       |                   |       |              |       |              |       |               |       |
| Interest on long-term debt (1)   |       | 210.8             |       | 31.7                   |       | 62.4              |       | 62.0              |       | 54.7               |       |
|                             |       |              |       |                   |       |              |       |              |       |               |       |
| Operating leases                 |       | 1.6               |       | 0.5                    |       | 0.8               |       | 0.3               |       | —             |       |
|                             |       |              |       |                   |       |              |       |              |       |               |       |
| Total Contractual Obligations    |       | $                 | 706.8      |                   | $          | 35.9              |       | $                 | 70.7       |               | $          | 69.8 |   | $ | 530.4 |   |

 

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(1)          Representsthe estimated interest obligations on the outstanding balance of the Tranche BTerm Loan Facility and the outstanding balance of the Senior Notes, together,assuming scheduled principal payments (based on the terms of the loanagreements) were made and assuming a weighted average interest rate of6.4%.  Estimated interest obligationswould be different under different assumptions regarding interest rates ortiming of principal payments.  Ifinterest rates on borrowings with variable rates increased by 1%, interestexpense would increase approximately $3.7 million, in the first year.

 

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**Critical Accounting Policies and Estimates**

 

The significant accounting policies aredescribed in the notes of the unaudited financial statements included elsewherein this document.  While all significantaccounting policies are important to our consolidated financial statements,some of these policies may be viewed as being critical.  Such policies are those that are both mostimportant to the portrayal of our financial condition and require our mostdifficult, subjective and complex estimates and assumptions that affect thereported amounts of assets, liabilities, revenues, expenses and the relateddisclosure of contingent assets and liabilities.  These estimates are based upon our historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances.  Actual resultsmay differ materially from these estimates under different assumptions orconditions.  The most critical accountingpolicies are as follows:

 

***Allowance fordoubtful accounts and the allowance for obsolete and damaged inventory***

 

In the ordinary course of business, we grantnon-interest bearing trade credit to our customers on normal credit terms.  To reduce our credit risk, we perform ongoingcredit evaluations of our customers’ financial condition.  In addition, we maintain an allowance fordoubtful accounts receivable based upon our historical collection experienceand expected collectibility of our accounts receivable.  If uncollectible account balances exceed ourestimates, our financial statements would be adversely affected.

 

We write down our inventory for estimatedobsolescence or damage equal to the difference between the cost of inventoryand the estimated market value based upon assumptions about future demand andmarket conditions.  If actual marketconditions are less favorable than those projected by management, additionalinventory write-downs may be required.

 

***Valuation oflong-lived and intangible assets and goodwill***

 

Pursuant to FASB Statement No. 141,“Business Combinations” (“Statement No. 141”) and Statement No. 142,“Goodwill and Other Intangible Assets” (“Statement No. 142”) goodwill andindefinite-lived intangible assets are no longer amortized, but must be testedfor impairment at least annually. Intangible assets with finite lives are amortized over their respectiveestimated useful lives.  We are requiredto make judgments regarding the value assigned to acquired intangible assetsand their respective useful lives.  Ourdetermination of the values and lives was based on our analysis of therequirements of Statements No. 141 and No. 142, as well as anindependent evaluation of such assets. We have determined that a significant portion of our trademarks haveindefinite lives.  If we determine thatany of these assets has a finite life, we would amortize the value of thatasset over the remainder of such finite life. Intangible assets with finite lives and other long-lived assets mustalso be evaluated for impairment when management believes that the carryingvalue of the asset will not be recovered. Adverse changes in market conditions or poor operating results couldresult in a future impairment charge. There were no impairments of goodwill, indefinite-lived intangibleassets or other long-lived assets during the period ended June 30,2005.  Goodwill and other long-termassets amounted to $901.0 million at June 30, 2005.

 

***RevenueRecognition***

 

We comply with the provisions Securities andExchange Commission of Staff Accounting Bulletin 104 “Revenue Recognition,”which states that revenue should be recognized when the following revenuerecognition criteria are met: (1) persuasive evidence of an arrangementexists; (2) the product has been shipped and the customer takes ownershipand assumes the risk of loss; (3) the selling price is fixed ordeterminable; and (4) collection of the resulting receivable is reasonablyassured.  These criteria are satisfiedupon shipment of product and revenues are recognized accordingly.

 

We must make estimates of potential futureproduct returns related to current period sales.  In order to do this, we analyze historicalreturns, current economic trends and changes in customer demand and acceptanceof our products when evaluating the adequacy of our allowance for returns inany accounting period.  If actual returnsare greater than those estimated by management, our financial statements infuture periods would be adversely affected.

 

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The Company’s frequently participates in thepromotional programs of its customers, as is customary in this industry.  The ultimate cost of these promotionalprograms varies based on the actual number of units sold during a finite periodof time.  These programs may includecoupons, scan downs, temporary price reductions or other price guaranteevehicles.  The Company estimates the costof such promotional programs at their inception based on historical experienceand current market conditions and reduces sales by such estimates.  At the completion of the promotional program,the estimated amounts are adjusted to actual results.

 

**Recent Accounting Pronouncements**

 

In March 2005, the FASB issued FIN 47 whichclarifies guidance provided by Statement No. 143, “Accounting for AssetRetirement Obligations.”  FIN 47 iseffective for the Company no later than March 31, 2006.  The adoption of FIN 47 is not expected tohave a significant impact on our financial position, results of operations orcash flows.

 

In April 2005, the Securities and ExchangeCommission approved an amendment to Rule 4-01 of Regulation S-X thatdelays the effective date of Statement No. 123(R), which requires companies toexpense the value of employee and director stock options and similarawards.  The Company is currentlyreviewing its options for implementation of Statement No. 123(R).  The results of operations for the periodended June 30, 2005 would not have been affected had the Company appliedthe fair value recognition provisions of Statement 123 during this period.

 

In May 2005, the FASB issued StatementNo. 154 which replaces APB Opinion No. 20 and FASB StatementNo. 3, “Reporting Accounting Changes in Interim Financial Statements.”  Statement No. 154 requires that voluntarychanges in accounting principle be applied retrospectively to the balances ofassets and liabilities as of the beginning of the earliest period for whichretrospective application is practicable and that a corresponding adjustment bemade to the opening balance of retained earnings.  APB Opinion No. 20 had required that mostvoluntary changes in accounting principle be recognized by including in netincome the cumulative effect of changing to the new principle.  Statement No. 154 is effective for all accountingchanges and corrections of errors made in fiscal years beginning afterDecember 15, 2005.

 

**Off-Balance Sheet Arrangements**

 

We do not have any off-balance sheetarrangements or financing activities with special-purpose entities.

 

**Inflation**

 

Inflationary factors such as increases in thecosts of raw materials, packaging materials, purchased product and overhead mayadversely affect our operating results. Although we do not believe that inflation has had a material impact onour financial position or results of operations for the periods referred toabove, a high rate of inflation in the future may have an adverse effect on usand our operating results.

 

**Seasonality**

 

The first quarter of our fiscal year typicallyhas the lowest level of revenue due to the seasonal nature of certain of ourbrands relative to the summer and winter months.  In addition, the first quarter is the leastprofitable quarter due the increased advertising and promotional spending tosupport those brands with a summer season, such as, Compound W, Cutex and NewSkin.  The Company’s advertising andpromotional campaign in the third quarter influence sales in the fourth quarterwinter months.  Additionally, the fourthquarter has the lowest level of advertising and promotional spending as apercent of revenue.

 

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**CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING STATEMENTS**

 

This quarterly report of Form 10-Q containsforward looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995 (the “Act”), including information withinManagement’s Discussion and Analysis of Financial Condition and Results ofOperations.  The following cautionarystatements are being made pursuant to the provisions of the Act and with theintention to obtaining the benefits of the “safe harbor” provisions of theAct.  Although we believe that ourexpectations are based on reasonable assumptions, actual results may differmaterially from those in the forward looking statement.

 

These forward-looking statements may or may notcontain the words “believe,” “anticipate,” “expect,” “estimate,” “project,”“will be,” “will continue,” “will likely result,” or other similar words andphrases. Forward-looking statements and our plans and expectations are subjectto a number of risks and uncertainties that could cause actual results todiffer materially from those anticipated, including, but not limited to thefollowing:

 

•       generaleconomic conditions affecting our products and their respective markets,

 

•       thehigh level of competition in our industry and markets,

 

•       ourdependence on a limited number of customers for a large portion of our sales,

 

•       disruptionsin our distribution center,

 

•       acquisitionsor other strategic transactions diverting managerial resources, or incurrenceof additional liabilities or integration problems associated with suchtransactions,

 

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

 

•       increasesin supplier prices,

 

•       changesin our senior management team,

 

•       ourability to protect our intellectual property rights,

 

•       ourdependency on the reputation of our brand names,

 

•       shortagesof supply of sourced goods or interruptions in the manufacturing of ourproducts,

 

•       ourlevel of debt, and ability to service our debt,

 

•       ourability to obtain additional financing, and

 

•       therestrictions imposed by our senior credit facility and the indenture on ouroperations.

 

Forward-looking statements speak only as of thedate of this quarterly report on Form 10-Q.  Except as required under federal securitieslaws and the rules and regulations of the Securities and ExchangeCommission, we do not have any intention to update any forward-looking statementsto reflect events or circumstances arising after the date of thisForm 10-Q, whether as a result of new information, future events orotherwise.  As a result of these risksand uncertainties, readers are cautioned not to place undue reliance onforward-looking statements included in this Form 10-Q or that may be madeelsewhere from time to time by, or on behalf of, us.  All forward-looking statements attributableto us are expressly qualified by these cautionary statements.

 

**ITEM3.**     QUANTITATIVEAND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

We are exposed to changes in interest ratesbecause our senior credit facility is variable rate debt.  Interest rate changes, therefore, generallydo not affect the market value of such debt, but do impact the amount of ourinterest payments and, therefore, our future earnings and cash flows, assumingother factors are held constant.  AtJune 30, 2005, we had variable rate debt of approximately $368.0 millionrelated to our Tranche B Term Loan. There were no borrowings outstanding at June 30, 2005 related toour Revolving

 

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Credit Facility. Holding other variables constant, including levels of indebtedness, aone percentage point increase in interest rates on our variable debt would havean adverse impact on pre-tax earnings and cash flows for the next year ofapproximately $3.7 million.

 

However, on June 30, 2004, we paid $52 fora 5% interest rate cap agreement with a notional amount of $20.0 million thatterminates in June 2006. Additionally, on March 7, 2005 we paid $2.3 million for interestrate cap agreements that become effective August 30, 2005, with a totalnotional amount of $180.0 million and LIBOR cap rates ranging from 3.25% to3.75%.  These interest rate capagreements terminate on May 30, 2006, 2007 and 2008 as to $50.0 million,$80.0 million and $50.0 million, respectively. Given the protection afforded by the interest rate cap agreements, theimpact on pre-tax earnings and cash flows during the next year of a onepercentage point increase in interest rates would be limited to $2.1 million.  The fair value of the interest rate capagreements was $1.7 million at June 30, 2005.

 

**ITEM4.**                    CONTROLS ANDPROCEDURES

 

**Evaluation ofDisclosure Controls and Procedures**

 

Under the supervision and with the participationof our management, including our Chief Executive Officer and our ChiefFinancial Officer, we conducted an evaluation of our disclosure controls andprocedures, as such term is defined under Rule 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 as of the end of theperiod covered by this report.  Based onthis evaluation, our Chief Executive Officer and our Chief Financial Officerhave concluded that the Company and Prestige International maintained effectivedisclosure controls and procedures as of the end of the period covered by thisreport.

 

**Changes in InternalControls**

 

During the quarterly period ended June 30,2005, there were no changes in the Company’s or Prestige International’sinternal controls over financial reporting that have materially affected, orare reasonably likely to materially affect, the Company’s or PrestigeInternational’s internal control over financial reporting.

 

**PART II**.                        OTHERINFORMATION

 

**ITEM 1.****                            ****LEGAL PROCEE****DINGS**

 

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 “Maximizing theArthritis Cure” regarding the use of dietary supplements to treat arthritispatients.  Dr. Theodosakis allegedthat his books have a distinctive trade dress, or cover layout, design, colorand 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 alleged that the defendants made false endorsements of theproducts by referencing his books on the product packaging and that the use ofhis name, books and trade dress invaded his right to publicity.  The Company sold the ARTHx trademarks,goodwill and inventory to a third party, Contract Pharmacal Corporation, inMarch 2003.  On January 12,2005, the court granted the Company’s motion for summary judgment and dismissedall claims against Pecos and Medtech. The plaintiff has filed an appeal in the U.S. Court of Appeals which ispending.

 

OnJanuary 3, 2005, the Company was served with process by its former leadcounsel in the Theodosakis litigation seeking $679 plus interest.  The case was filed in the Supreme Court ofNew York and is styled as Dickstein Shapiro et al v. MedtechProducts, Inc.  InFebruary 2005, the plaintiffs filed an amended complaint naming the PecosPharmaceutical Company as defendant.  TheCompany has answered and

 

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fileda counterclaim against Dickstein and also filed a third party complaint againstthe Lexington Insurance Company.  TheCompany believes that if there is any obligation to the Dickstein firm relatingto this matter, it is an obligation of Lexington and not the Company.

 

OnMay 9, 2005, the Company was served with a complaint in a class actionlawsuit filed in Essex County, Massachusetts, styled as Dawn Thompson v.Wyeth, Inc. relating to the Company’s Little Remedies pediatric coughproducts.  The Company is one of severalcorporate defendants, all of whom market over-the-counter cough syrup productsfor pediatric use.  The complaint allegesthat the ingredient dextromethorphan is no more effective than a placebo.  There is no allegation of physical injurycaused by the product or the ingredient. In June 2005, the Company was served in a second class actioncomplaint involving dextromethorphan. The second case, styled Tina Yescavage v. Wyeth was filed in Lee CountyFlorida and similarly involves multiple corporate defendants.  The Company believes that both of thedextromethorphan cases are without merit and is actively pursuing appropriatedefenses.  The use of dextromethorphan inpediatric products is fully consistent with and supported by Food and DrugAdministration regulations.

 

On August 3, 2005, a complaint in aclass action lawsuit, Charter Township of Clinton Police and Fire RetirementSystem v. Prestige Brands Holdings, Inc. et al, was filed in United StatesDistrict Court for the Southern District of New York, on behalf of all personswho purchased the Company’s securities pursuant to and/or traceable to theCompany’s IPO on or about February 9, 2005 through July 28,2005.  The complaint also names asdefendants Merrill Lynch, Pierce, Fenner & Smith Incorporated,Goldman, Sachs & Co and J.P. Morgan Securities Inc., the lead orco-lead underwriters of the IPO.  Thecomplaint charges the Company, certain of its officers and directors, and otherinsiders with violations of the Securities Act of 1933.  The Company plans to defend this mattervigorously.

 

The Company has been made aware of the possibility ofadditional similar class action lawsuits. If these potential lawsuits are filed, the Company plans to defend thesematters vigorously.

 

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.

 

**ITEM 2.****                            ****UNREGISTERED SALES OF****EQUITY SECURITIES AND USE OF PROCEEDS**

 

None

 

**ITEM 3.****                            ****DEFAULTS UPON SENIO****R SECURITIES**

 

None

 

**ITEM 4.****                            ****SUBMISSION OF MATTE****RS TO A VOTE OF SECURITY HOLDERS**

 

The Company’s 2005 Annual Meeting ofStockholders was held on July 29, 2005. The following nominees were elected to the Company’s Board of Directorsto serve until the 2006 Annual Meeting of Stockholders and until theirrespective successors have been elected and qualified, or until their earlierdeath, resignation or retirement:

 

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| ** **        | ** ** | **For**    | ** ** | **Withheld** | ** ** | **Broker  Non-Votes** | ** ** |
|-------------------|------------|------------|------------|--------------|------------|-----------------------|------------|
|              |       |       |       |         |       |                  |       |
| Peter C. Mann     |       | 43,854,444 |       | 2,907,753    |       | —                |       |
| L. Dick Buell     |       | 36,568,359 |       | 10,193,838   |       | —                |       |
| Gary E. Costley   |       | 36,568,519 |       | 10,193,678   |       | —                |       |
| David A. Donnini  |       | 42,296,352 |       | 4,465,845    |       | —                |       |
| Ronald Gordon     |       | 45,782,108 |       | 980,089      |       | —                |       |
| Vincent J. Hemmer |       | 36,467,294 |       | 10,294,903   |       | —                |       |
| Patrick Lonergan  |       | 45,840,039 |       | 922,158      |       | —                |       |

 

The votes for the ratification of theappointment of PricewaterhouseCoopers LLP as the Company’s independentregistered public accounting firm for the audit of the Company’s financialstatement s for the fiscal year ending March 31, 2006 were as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Broker  Non-Votes** | ** ** |
|------------|------------|-------------|------------|--------------|------------|-----------------------|------------|
|       |       |        |       |         |       |                  |       |
| 29,967,938 |       | 16,786,058  |       | 8,201        |       | —                |       |

 

**ITEM 5.****                            ****OTHERINFORMATION**

 

None

 

**ITEM 6.**** ****EXHIBIT****S**

 
| 2.1    |   | Asset Sale and Purchase Agreement, dated July 22, 2005, by and  among Reckitt Benckiser Inc., Reckitt Benckiser (Canada) Inc., Prestige  Brands Holdings, Inc. and the Spic and Span Company, incorporated by  reference to the Form 8-K of Prestige Brands, Inc. filed on  July 28, 2005. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.1   |   | Form of Restricted Stock Agreement                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.2   |   | Executive Employment Agreement, dated August 4, 2005, by and among  Prestige Brands Holdings, Inc., Prestige Brands, Inc. and Frank P. Palantoni,  incorporated by reference to Form 8-K of Prestige Brands Holdings, Inc. filed  on August 9, 2005.                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 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), executed 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), executed 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.                                      |

 

45

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**SIGNATUR****ES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrants have duly caused this report to be signedon their behalf by the undersigned thereunto duly authorized.

 
| ** ** | **Prestige Brand Holdings, Inc.** | ** ** |
|------------|----------------------------------------|------------|
|       | Registrant                             |
|       |                                   |       |
| Date:      | August 9, 2005                    |       | **/s/ PETER J. ANDERSON** |   |
|       | Peter J. Anderson                      |
|       | Chief Financial Officer                |
|       |                                   |       |
|       |                                   |       |
| ** ** | **Prestige Brands International, LLC** | ** ** |
|       |                                   | Registrant |
|       |                                   |       |
| Date:      | August 9, 2005                    |       | **/s/ PETER J. ANDERSON** |   |
|       | Peter J. Anderson                      |
|       | Chief Financial Officer                |

 

46

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