10-Q 1 f10q20032.txt 2ND QUARTER 2003 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 27, 2003 Commission file Number 333-73160 ------------------ ARMKEL, LLC (Exact name of registrant as specified in its certificate of formation) Delaware 13-4181336 (State or other jurisdiction (I.R.S Employer Identification No.) of incorporation or organization) 469 North Harrison Street, Princeton, N.J. 08543-5297 (Address of principal executive office) (Zip Code) Registrant's telephone Number, including area code: (609) 683-5900 ------------------ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act Yes |_| No |X| As of August 8, 2003, all of the 10,000 outstanding membership interests in Armkel, LLC were held by affiliates. ================================================================================ TABLE OF CONTENTS PART I ITEM PAGE 1. Financial Statements 3 2. Management's Discussion and Analysis 17 3. Quantitative and Qualitative Disclosure About Market Risk 20 4. Controls and Procedures 20 PART II 6. Exhibits and Reports on Form 8-K 22 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS ARMKEL, LLC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND CHANGES IN MEMBERS' EQUITY (Unaudited)

See Notes to Condensed Consolidated Financial Statements. ARMKEL, LLC AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

See Notes to Condensed Consolidated Financial Statements. ARMKEL, LLC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

See Notes to Condensed Consolidated Financial Statements. ARMKEL, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Financial Statement Presentation The condensed consolidated balance sheet as of June 27, 2003, the condensed consolidated statements of income and changes in members' equity for the three and six months ended June 27, 2003 and June 28, 2002, and the condensed consolidated statement of cash flows for the six months ended June 27, 2003 and June 28, 2002 have been prepared by Armkel, LLC and subsidiaries (the "Company") and are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flow at June 27, 2003 and for all periods presented have been made. Fifty-percent (50%) of the membership interests in the Company is owned by each of Church & Dwight Co., Inc. ("C&D") and certain affiliates of Kelso & Company, L.P. ("Kelso"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2002 required Form 10-K filing. Certain items previously reported in specific captions in the accompanying financial statements have been reclassed to conform with current period classification. The financial statement effect of the recently divested Italian operations is recognized as discontinued operations in all periods. The results of operations for the period ended June 27, 2003 are not necessarily indicative of the operating results for the full year. 2. Inventories consist of the following:

3. Property, Plant and Equipment consist of the following:

4. Goodwill and Intangible Assets The following tables disclose the carrying value of all intangible assets:

ARMKEL, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Intangible amortization expense amounted to $2.25 million for the six months ended June 27, 2003 and June 28, 2002. The estimated intangible amortization is approximately $4.5 million per year over the remaining amortization period. The weighted average amortization period for patents is 6.4 years. The changes in the carrying amount of goodwill for the six months ended June 27, 2003 is as follows:

5. Related Party Transactions Arrangements with Church & Dwight --------------------------------- C&D charged the Company $7.6 million and $14.0 million for primarily administrative and management oversight services for the three and six months ended June 27, 2003. C&D charged the Company $5.4 million and $10.1 million for primarily administrative and management services for the three and six months ended June 28, 2002. The Company sold $0.7 and $1.4 million of deodorant/antiperspirant inventory to C&D at its cost during the three and six months ended June 27, 2003., compared with $0.0 and $5.4 million of deodorant/antiperspirant during the three and six months ended June 28, 2002. The Company purchased $0.5 million and $1.3 million of Arm & Hammer products to be sold in international markets during the three and six months ended June 27, 2003., compared with $0.0 million and $0.1 million during the three and six months ended June 28, 2002. During the three and six months ended June 28, 2002, the Company charged C&D $0.1 and $1.1 million of transition administrative services. The Company had a net payable to C&D at June 27, 2003 and December 31, 2002 of approximately $4.9 million and $4.8 million, respectively, that primarily related to administration fees and invoices paid by C&D on behalf of Armkel, offset by amounts owed for inventory. Arrangements with Kelso ----------------------- Kelso provides the Company with financial advisory services for which the Company pays an annual fee of $1.0 million. The Company indemnifies Kelso against certain liabilities and reimburses expenses in connection with its engagement. The Company prepaid Kelso's 2003 annual fee at the end of December 2002. For the three and six months ended June 27, 2002, the Company paid Kelso $0.3 and $0.5 million. 6. Contingencies On January 17, 2002, a petition for appraisal, Cede & Co., Inc. and GAMCO Investors, Inc. v. Medpointe Healthcare Inc., Civil Action No. 19354, was filed in the Court of Chancery of the State of Delaware demanding a determination of the fair value of shares of Medpointe. The action was brought by purported former shareholders of Carter-Wallace in connection with the merger on September 28, 2001 of MCC Acquisition Sub Corporation with and into Carter-Wallace. The merged entity subsequently changed its name to Medpointe. The petitioners seek an appraisal of the fair value of their shares in accordance with Section 262 of the Delaware General Corporation Law. The matter was heard on March 10 and 11, 2003, at which time the petitioners purportedly held approximately 2.3 million shares of Medpointe. No decision has yet been rendered by the court. Medpointe and certain former Carter-Wallace shareholders are party to an indemnification agreement pursuant to which such shareholders will be required to indemnify Medpointe from a portion of the damages, if any, suffered by Medpointe in relation to the exercise of appraisal rights by other former Carter-Wallace shareholders in the merger. Pursuant to the agreement, the shareholders have agreed to indemnify Medpointe for 40% of any Appraisal Damages (defined as the recovery greater than the per share merger price times the number of shares in the appraisal class) suffered by Medpointe in relation to the merger; provided that if the total amount of Appraisal Damages exceeds $33.3 million, then the indemnifying stockholders will indemnify Medpointe for 100% of any damages suffered in excess of that amount. The Company, in turn, is party to an agreement with Medpointe pursuant to which it has agreed to indemnify Medpointe and certain related parties against 60% of any Appraisal Damages for which Medpointe remains liable. The maximum liability to the Company pursuant to the indemnification agreement and prior to any indemnification from C&D, as described in the following sentence is $12 million. C&D is party to an agreement ARMKEL, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) with the Company pursuant to which it has agreed to indemnify the Company for 17.4% of any Appraisal Damages, or up to a maximum of $2.1 million for which the Company becomes liable. The Company, Medpointe and the indemnifying shareholders believe that the consideration offered in the merger was fair to the former Carter-Wallace shareholders and have vigorously defended the petitioner's claim. However, the Company cannot predict the outcome of the proceedings. On March 27, 2003, GAMCO Investors, Inc. filed another complaint in the New York Supreme Court seeking damages from MedPointe Healthcare Inc., the former directors of Carter-Wallace, and one of the former shareholders of Carter-Wallace. The complaint alleges breaches of fiduciary duty in connection with certain employment agreements with former Carter-Wallace executives, the sale of Carter Wallace's consumer products business to the Company (some of the products acquired by the Company were subsequently sold by the Company to C&D) and the merger of MCC Acquisition Sub Corporation with and into Carter-Wallace. The complaint seeks monetary damages and equitable relief, including among other things, invalidation of the transactions. The defendants have moved to dismiss the complaint. The Company has not been named as a defendant in this action and believes it has no liability. On August 26, 2002, the Company filed suit against Pfizer in the District Court of New Jersey to redress infringement of two (2) of the Company's patents directed to pregnancy diagnostic devices. The suit claimed that Pfizer's "ept" product infringes these patents. On June 23, 2003 the Company agreed to a settlement with Pfizer resulting in a gain, after attorney's fees and costs, of $12.7 million. As part of the settlement the Company granted Pfizer a fully paid-up non-exclusive worldwide license to practice and use the Company's pregnancy test kit patents until July 1, 2004. In 2002, a purported class action suit, Sandra J. Wagner v. Church & Dwight Co., Inc., et al, was filed against the Company and C&D in the Superior Court of New Jersey. The lawsuit alleged that the Company's ovulation test kits ("OTK") are being marketed in a misleading manner because they do not advise women with certain ovarian conditions that test results may be inaccurate. The plaintiffs seek monetary damages as well as injunctive relief against the OTK's marketing materials. The products in question have been cleared for marketing as medical devices under applicable FDA regulations. The Company is vigorously defending the action but cannot predict the outcome of the proceedings. If the Company is not successful in defending against a claim, the Company could be liable for substantial damages or may be prevented from offering some of the Company's products. These events could harm the Company's financial condition and results of operations. The Company's distribution of condoms under the Trojan and other trademarks is regulated by the U.S. Food and Drug Administration (FDA). Certain of Armkel's condoms and similar condoms sold by Armkel's major competitors, contain the spermicide nonoxynol-9 (N-9). The World Health Organization and other interested groups have issued reports suggesting that N-9 should not be used rectally or for multiple daily acts of vaginal intercourse, given the ingredient's potential to cause irritation to human membranes. The Company expects the FDA to issue non-binding draft guidance concerning the labeling of condoms with N-9, although the timing of such draft guidance is uncertain. The Company believes that condoms with N-9 provide an acceptable added means of contraceptive protection and is cooperating with the FDA concerning the appropriate labeling revisions, if any. However, the Company cannot predict the outcome of the FDA review. While awaiting further FDA guidance, the Company has implemented interim labeling revisions that caution against rectal use and more-than-once-a-day vaginal use of N-9-containing condoms, and has launched a public information campaign to communicate these messages to the affected communities. If the FDA or state governments promulgate rules which prohibit or restrict the use of N-9 in condoms (such as new labeling requirements), the financial condition and operating results of the Company could suffer. In February 2003, two members of the California Assembly introduced a non-binding resolution calling on FDA to ban condoms containing N-9. The proposed resolution has not yet been scheduled for committee discussion. The Company has provided the Assemblymen and the Assembly Speaker with information explaining why a ban would be inappropriate and outlining the interim labeling revisions and public information efforts the Company has implemented. If the resolution is passed, while not legally binding, it could impair public perception of the product with resultant impairment of operating results of the Company. ARMKEL, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Relating to this issue, on February 28, 2003 a class action suit, Lisette Velez v. Church & Dwight Co., Inc., et als including Armkel, LLC, was filed against the Company and C&D, and two other condom manufacturers, in the Superior Court of New Jersey. The lawsuit alleged that condoms lubricated with N-9 are being marketed in a misleading manner because the makers of such condoms claim they aid in the prevention of sexually transmitted diseases whereas, according to the plaintiffs, public health organizations have found that N-9 usage can under some circumstances increase the risk of transmission of disease. In June 2003, the plaintiffs voluntarily dismissed the suit after defendants filed a motion to dismiss on the ground that their compliance with comprehensive federal medical device regulations precluded recovery. The Company, in the ordinary course of its business, is the subject of, or party to, various pending or threatened legal actions. The Company believes that any ultimate liability arising from these actions will not have a material adverse effect on its financial position or results of operation. 7. Reorganization Reserve As of September 28, 2001, the date of the acquisition of the Carter-Wallace Consumer Business (the "Predecessor"), the Company started to implement a plan to reorganize the operation of the acquired consumer business. The main components of the plan included rationalizing facilities for which the Company had incurred lease termination costs, environmental remediation costs and work force rationalization costs. The plan was finalized in 2002 and the Company expects to complete the plan in 2003 except for certain long-term contractual obligations related to benefits for certain former executives of Carter-Wallace, Inc. and certain environmental remediation activities. The Company established an accrual for severance to reflect the purchase of various services from C&D in lieu of obtaining such services through continued employment of certain personnel by the Company. The accrued severance is for identified employees from various areas including executives, administrative support and corporate functions (finance, human resources, legal, MIS, R&D, logistics, marketing, sales and purchasing). The following table summarizes the activity in the Company's reorganization accruals:

8. Assets Held for Sale In the third quarter of 2002, the Company made a commitment to sell its land and buildings, excluding the research and development building, at its Cranbury, New Jersey location and, as such, has classified these assets as held for sale. In the second quarter of 2003, a $3.1 million reduction to fair market value was recorded based on a recent proposal for sale of the property. This property, with a current fair market value of $11.5 million, will likely be sold to land developers who would use it for purposes other than manufacturing. 9. Discontinued Operations At the end of December 2002, the Company signed a definitive agreement to sell its Italian operations. On February 20, 2003, the sale was completed with proceeds of $22.6 million. The Company recorded an after-tax gain on the sale of these operations of approximately $1.9 million. As part of this transaction, the Company recorded a $0.5 million guarantee reserve which was the estimated fair value of the contractual indemnification obligation of the Company to the buyer of the Italian operations. In June 2003, the Company signed an agreement which effectively reduced the selling price by requiring the payment of 0.1 million euros by the Company to the buyer in the third quarter of 2003 in return for a release from any indemnification obligations that might arise with respect to certain tax matters under the definitive sales agreement. Upon payment of the 0.1 million euros the guarantee reserve will be reduced accordingly. Exposure under such indemnification obligation is capped at 1.5 million Euros. ARMKEL, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the three and six months ended June 27, 2003, net sales from the Italian operations was $10.0 and $10.0 million as compared to $11.4 and $20.5 million for the same period in 2002 and income from discontinued operations was $0.3 and $0.0 million (net of taxes of $0.0 and $0.3 million) in 2003 as compared to $0.9 and $1.5 million (net of taxes of $0.7 and $1.1million) for the same period in 2002. The proceeds were used to pay down the term loan debt and costs associated with the divestiture. The financial statements of the comparable periods of a year ago in this report have been reclassified for discontinued operations. 10. Patent Infringement On August 26, 2002, the Company filed suit against Pfizer in the District Court of New Jersey to redress infringement of two (2) of the Company's patents directed to pregnancy diagnostic devices. The suit claimed that Pfizer's "ept" product infringes these patents. On June 23, 2003 the Company agreed to a settlement with Pfizer resulting in a gain, after attorney's fees and costs, of $12.7 million. As part of the settlement the Company granted Pfizer a fully paid-up non-exclusive worldwide license to practice and use the Company's pregnancy test kit patents until July 1, 2004. The patent infringement settlement required Pfizer to pay the Company $18.0 million within 45 days. The payment was received on August 7, 2003. The Company has incurred approximately $5.3 million in legal and related settlement expenses. There are no future substantive performance requirements with respect to recognizing the gain on the $18.0 million as of June 2003. 11. Recent Accounting Pronouncements In April 2003, the FASB issued SFAS No. 149,"Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions. The Company will adopt the provisions of the statement on its effective date and does not anticipate a material impact to its consolidated financial statements. On May 15, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which aims to eliminate diversity in practice by requiring that the "freestanding" financial instruments be reported as liabilities by their issuers. The provisions of SFAS 150, which also include a number of new disclosure requirements, are effective for instruments entered into or modified after May 31, 2003 and for pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The Company adopted the provisions of the statement on its effective date and does not anticipate a material impact to its consolidated financial statements. 12. Segments and Supplemental Information Segment Information ------------------- The Company has two operating segments: Domestic Consumer Products Division and International Consumer Products Division. Measurement of Segment Results and Assets ----------------------------------------- The accounting policies of the segments are generally the same as those noted in Note 1. Supplemental Financial Information of Domestic and International Operations --------------------------------------------------------------------------- The senior subordinated notes registered by the Company are fully and unconditionally guaranteed by the domestic subsidiaries of the Company on a joint and several basis. The following information is being presented to comply with SEC Regulation SX, Item 3-10 and to provide required segment disclosures. Supplemental information for condensed consolidated balance sheets at June 27, 2003, condensed consolidated income statements for the three and six months ended June 27, 2003 and June 28, 2002, and consolidated cash flows for the six month periods ended June 27, 2003 and June 28, 2002 is summarized as follows (amounts in thousands): ARMKEL, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Statements of Income

ARMKEL LLC 10-Q