Credit Agreement
On October 29, 2009, the Company entered into a Credit Agreement, which provided the Company with borrowings of (1) up to $10 million under a Revolving Facility including outstanding Letters of Credit and (2) a Term Loan in the aggregate maximum principal amount of $55 million. At October 31, 2010, the Company has outstanding letters of credit of $55,458. Amounts outstanding under the Credit Agreement are secured by all assets of the Company.
In accordance with the Credit Agreement, the minimum prime rate shall not be less than the h
igher of (1) the Prime Rate (2) the Federal Funds rate plus one-half percent (0.5%) or (3) LIBOR plus one percent (1%). In that case the minimum LIBOR rate shall not be less than three percent (3%).
Revolving Facility
The interest on outstanding revolving credit under the Revolving Facility is payable (1) on the last day of each quarter in arrears in cash at an annual rate equal to the prime rate plus five and one-quarter percent (5.25%) or (2) on the last day of the applicable interest period with respect to LIBOR loans at the
LIBOR rate plus six and one quarter percent (6.25%). The Company also pays a fee quarterly on a proportion of the unused Revolving Facility of one-half percent (0.5%) per year. At October 31, 2010 there was no outstanding
balance under the Revolving Facility.
All revolving credit advances outstand
ing under the Revolving Facility and all other obligations under the Revolving Facility shall be due and payable in full on the maturity date of December 31, 2014.
Term Loan
The interest on the outstanding Term Loan is payable (1) on the last day of each quarter in arrears in cash at an annual rate equal to the prime rate plus eight and one half percent (8.5%) or (2) on the last day of the applicable interest period with respect to LIBOR loans at the LIBOR rate plus nine and one half percent (9.5%). At O
ctober 31, 2010, the interest rate under the Term Loan was 12.5%.
Payment on the outstanding principal balance under the Term Loan is due on each of the quarterly payment dates as follows: $250,000 on each of the last day of the quarter commencing January 1, 2010, $412,500 on each of the last day of the quarter commencing April 1, 2010 to September 30, 2010, $687,500 on each of the last day of the quarter commencing October 1, 2010 to March 31, 2012, $1,031,250 on each of the last day of the quarter commencing April 1, 2012 to March 31, 2013, $1,375,000 on each of the last day of the quarter commencing April 1, 2013 to September 30, 2014 and the remaining balance of $37,425,000 is payable on December 31, 2014.
The following is a summary of the aggregate annual maturities of the Company's Term Loan, during the twelve month period ending October 31 of each year indicated:
| | | |
2011 <
/td> | 2,750,000 | |
2012 | 3,437,500 | |
2013 | 4,812,500 | |
2014 | 5,500,000 | |
2015 | 37,425,000 | |
| $ | 53,925,000 | |
Affirmative and Financial Covenants
In accordance with the Credit Agreement, the Company is required to comply with quarterly financial covenants including minimum total leverage ratio, minimum EBITDA, fixed charge ratio, and limitations on capital expenditures. At October 31, 2010, the Company was in compliance with the applicable financial covenants under its credit agreement.
10. Capital Stock
Series A Preferred Stock
Series A Preferred Stock is nonvoting and is entitled to receive dividends on ea
ch share equal to the product of the purchase price for each share multiplied by 10% per annum. All dividends with respect to Series A Preferred Stock shall (i) be payable in cash or additional shares of Series A Preferred stock, at the discretion of the Board of Directors, (ii) accrue on a daily basis, (iii) be cumulative, whether or not earned or declared, (iv) be compounded quarterly from the date of issuance of such share and (v) be payable when declared by the Board of Directors. In addition, the preferred stock is redeemable on a pro rata basis at the option of a majority of the Board of Directors for the original purchase price per share plus all accrued and unpaid dividends, whether or not declared (the “Liquidation Value”). Upon the sale, merger or other change of control of the Company, each holder of a Series A Preferred Stock is entitled to receive an amount equal to the Liquidation Value, before any payments can be made in respect of the Common Stock. At October 31, 2010, aggregate a
rrearages in cumulative Series A Preferred Stock dividends amounted to $5.7 million.
Equity Incentive Plan
Effective on October 29, 2009, the Company's Board of Directors (the “Board”) adopted an Equity Incentive Plan (the “Plan”) to provide the Company's employees, certain consultants and advisors who perform services for the Company and nonemployee members of the Board with an opportunity to receive grants of options to purchase shares of the Company's common stock and grants of restricted shares of the Company's common stock.
The Plan is administered by the
Board or a committee appointed by the Board. The Board may grant incentive stock options, nonqualified stock options, or restricted shares. Incentive stock options may be granted only to employees of the Company and nonqualified stock options may be granted to employees, nonemployee directors and advisors. At October 31, 2010, no stock options have been granted under the Plan. The term of any option shall not exceed ten years from the date of grant. However, an incentive stock option that is granted to an employee who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, may not have a term that exceeds five years from the date of grant.
Restricted Shares
Pursuant to the Plan, 1,200,000 shares were reserved to be issued and at October 31, 2010, 437,948 shares are available to be issued.
As of October 31, 2010, there is 700,845 common shares of unvested restricted stock granted to employees, subject to service and performance criteria. Half of the restricted shares vest based on Company performance and half vest quarterly based on service over a one or five year period. The shares vest immediately if there is a change in control or initial public offering.The fair value of nonvested restricted shares is the Company's best estimate of the value of its common stock on the day of the grant date. The weighted-average grant-date fair values during the twelve months ended October 31, 2010 was $2.71.
The following represents restricted stock activity during the period from November 1, 2009 through October 31, 2010:
<
td width="63%"> | | | | |
Nonvested Shares | Shares ( in thousands) | | | Weighted-Average Grant-Date Fair Value |
Nonvested at November 1, 2009 | 540.8 | | | $0.10 | |
Granted | 221.3 | | | 2.71 | |
Vested | (61.2 | ) | | 0.10 | |
Nonvested at October 31, 2010 | 700.8 | | | $2.71 |
|
At October 31, 2010, there was no unrecognized compensation costs related to nonvested share-based compensation arrangements under the Plan based on management's estimate of the shares that will ultimately vest. All shares vested on November 1, 2010 due to the change in control of the Company as discussed in Note 16.
11. Related Party Transa
ctions
Management Agreement
Pursuant to the management agreement dated October 29, 2009, the Company pays Charlesbank a monitoring fee. Fees paid for the twelve months ended October 31, 2010 were $316,291 which are included in operating, general and administrative expenses in the accompanying consolidated statement of operations.
Sales and Logistical Administrative Services
The Company has contracted with two companies to provide the sales and certain logistical administrative functions. Both of those companies are controlled by an investor in the Company. The contract with each of
the two companies can be terminated by either party with six months notice. The total fees incurred for the twelve months ended October 31, 2010 were $3,985,896 and are included in operating, general and administrative expenses, of which $714,769 payable to these companies is included in accrued liabilities at October 31, 2010.
12. Employee Benefit Plan
Profit Sharing
The Company offers a defined contribution 401(k) profit sharing plan to all of its management and office employees. Employees become eligible when they join the Company. Employee contributions are based on their annual salary with a contribution rate ranging up to 15%. Employer contributions can range from 4% to 8% of an employee's annual salary with the excess above 4% determined by management on a discretionary basis. The Company made employer contributions of $152,331 to the plan for the twelve months ended October 31, 2010.
13. Income Taxes
The following is a summary of the components of the income tax benefit:
| | | |
| Twelve months ended October 31, 2010 |
Current: | |
Federal | $ | 2,717,562 | |
State | 789,386 | |
Total current provision | 3,506,948 | |
| |
Deferred:<
/div> | |
Federal | 2,399,353 | |
State | 391,595 | |
Total deferred provision | 2,790,948 | |
Income tax expense | $ | 6,297,896 | |
Reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
| | |
| October 31, 2010 |
| |
Statutory federal income tax rate | 35.00 | % |
State income taxes, net of federal tax | 5.90 | % |
Meals & entertainment | 0.02 | % |
Transaction costs | 0.40 | % |
Stock compensation | 1.58 | % |
Benefit of graduated federal tax rates | (0.89 | )% |
Effective inc
ome tax rate | 42.01 | % |
| |
The tax effects of the temporary differences which give rise to the deferred tax assets and liabilities are as follows:
| | | |
| October 31, 2010 |
Current deferred tax assets: | |
Reserves and accruals | $ | 475,608 | |
Inventory capitalization | 261,905 | |
Total current deferred tax assets | <
div style="text-align:right;font-size:10pt;">737,513 | |
| |
Noncurrent deferred tax assets: | |
Deferred rent | 15,694 | |
Total noncurrent deferred tax assets | 15,694 | |
| |
Noncurrent deferred tax liabilities: | |
Depreciation | (1,509 | ) |
Intangibles | (1,448,429 | ) |
Total deferred tax liabilities | (1,449,938 | ) |
Net deferred tax liability | (696,731 | ) |
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) ASC 740-10 “Accounting for Uncertainty in Income Taxes”, which provides a financial statement recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Under FASB ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based solely on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that is more likely than not to be sustained upon ultimate settlement. The Company has no reserves for uncertain tax positions as of October 31, 2010.
14. Employment Agreements
The employment agreements with the Company's chief executive officer and with certain of its management employees include, among other terms, various noncompetition provisions and severance payments comprised of salary and benefits continuation. The aggregate of such future potential severance cash payments under the terms of those agreements is $2.6 million.
15. Commitments and Contingencies
Operating Leases
The Company occupies office space pursuant to a non-cancelable lease agreement which it entered into on October 30, 2009. The lease expires in 2015.
The minimum rental commitment under the operating lease is as follows for each year ending October 31:
| | | |
2011 | $ | 196,474 | |
2012 | 214,960 | |
2013 | 210,218 | |
2014 | 221,832 | |
2015 | 147,888 | |
Total | $ | 991,372 | |
Rent expense for the twelve months ended October 31, 2010 was $157,646.
PediaCare® Trade Dress Infringement Claim
On December 16, 2010, the Company received written correspondence from a competitor in which the competitor alleged trade dress infringement by the new packaging for the PediaCare® Plus product line of the competitor's trade dress for its competitive products. The Company is exploring the resolution of the alleged trade dress infringement on terms mutually satisfactory to the Company and the competitor.
In addition to the matter described above, the Company is involved from time to time in other routine legal matters and other claims incidental to its business. The Company reviews outstanding claims and proceedings internally and with external counsel as necessary to assess probability and amoun
t of potential loss. These assessments are re-evaluated at each reporting period and as new information becomes available to determine whether a reserve should be established or if any existing reserve should be adjusted. The actual cost of resolving a claim or proceeding ultimately may be substantially different than the amount of the recorded reserve. In addition, because it is not permissible under GAAP to establish a litigation reserve until the loss is both probable and estimable, in some cases there may be insufficient time to establish a reserve prior to the actual incurrence of the loss (upon verdict and judgment at trial, for example, or in the case of a quickly negotiated settlement). The Company believes the resolution of routine matters and other incidental claims, taking into account reserves and insurance, will not have a material adverse effect on its business, financial condition or results from operations.
16. Subsequent Events
The Company has evaluated, for potential recognition and disclosure, events t
hat occurred after the balance sheet date of October 31, 2010 through January 18, 2011, the date the financial statements were available to be issued.
On November 1, 2010, the Company sold 100% of its capital stock to Prestige Brands Holdings, Inc., for $190 million in cash, plus a pending working capital closing adjustment of $13.4 million.
WebFilings | EDGAR view
Exhibit 99.2
Prestige Brands Holdings, Inc.
Pro Forma Financial Information Introduction
(unaudited)
The accompanying unaudited pro forma consolidated balance sheet as of September 30, 2010 has been prepared to reflect the acquisition of Blacksmith Brands Holdings, Inc. ("Blacksmith"), by Prestige Brands Holdings, Inc., giving effect to the transaction as if it had occurred on September 30, 2010. The balance sheet includes unaudited results of Prestige Brands Holdings, Inc. at September 30, 2010 and the audited results of Blacksmith Brands Holdings, Inc. at October 31, 2010.
The accompanying unaudited pro forma condensed consolidated statements of operations for the twelve months ended March 31, 2010 and the six months ended September 30, 2010 are prepared giving effect to the transaction as if it occurred on April 1, 2009. For Prestige Brands Holdings, Inc., the
condensed statements of operations include twelve month audited results at March 31, 2010 and six month unaudited results at September 30, 2010. For Blacksmith Brands Holdings, Inc., the condensed statements of operation include twelve month audited and six month unaudited results at October 31, 2010.
It is management's opinion that these pro forma financial statements represent the fair presentation, in all material respects, of the transaction described above applied on a basis consistent with Prestige Brand Holdings, Inc.'s accounting policies. No adjustments have been made to reflect potential cost savings that may occur subsequent to completion of the transaction.
The unaudited pro forma financial statements are not intended to reflect the results of the operations or the financial position of Prestige Brands Holdings, Inc., which would have actually resulted had the proposed transaction been effected on the dates indicated. Further, the unaudited pro forma financial information is not necessarily indicative of the results of operations that may be obtained in the future.
Prestige Brands Holdings, Inc.
Pro Forma Balance Sheet
September 30, 2010
(unaudited)
(dollars in thousands)
| | | | | | | | | | | | | | |
| Prestige Brands Holdings, Inc. | | Blacksmith Brands Holdings, Inc. | | Pro Forma Adjustments | | Pro Forma |
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 55,032 | | | $ | 2,507 | | | $3,530 | | (a) | 61,069 | |
Accounts receivable-trade, net of allowances | 32,256 | | | 17,473 | | <
td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;">
| | 49,729 |
|
Accounts receivable-other | — | | | 1,198 | | | | <
font style="font-family:inherit;font-size:10pt;"> | 1,198 | |
Inventories | 24,997 | | | 16,201 | | | 7,000 | | (b) | 48,198 | |
Prepaid expenses | 3,203 | | | 44 | | | | |
3,247 | |
Deferred income taxes | 6,663 | | | 738 | | | | | 7,401 | |
Current assets of discontinued operations | 14 | | | | | | | 14 | |
Total current assets<
/div> | 122,165 | | | 38,161 | | | 10,530 | | | 170,856 | |
| | | | | | |
|
Property and equipment, net | 1,207 | | | 226 | | | | | 1,433 | |
Goodwill | 111,489 |
| | 4,913 | | | 3,687 | | (c) | 120,089 | |
Intangible assets | 549,855 | | | 83,820 | | | 83,580 | | (c) | 717,255 | |
Other long term assets | 6,456 | | | 482 | | | | | 6,938 | |
Total assets | $ | 791,172 | | | $ | 127,602 | | | $97,797 | | | $ | 1,016,571 | |
| | | | | | | |
Liabilities and stockholders' equity | | | | | | | |
Current liabilities: | | | | | | | |
Current portion of long-term debt | 1,500 | | | $ | 2,750 | | | (2,750 | ) | (a) | 1,500 | |
Accounts payable | 13,980 | | | 6,966 | | | | | 20,946 | |
Accrued expenses | 16,340 | | | 4,004 | | | | &nb
sp; | 20,344 | |
Income taxes payable | — | | | 2,994 | | | | | 2,994 | |
Total current liabilities | 31,820 | | | 16,714 | | | (2,750 | ) | | 45,784 | |
| | | | | | | |
Long-term debt, net of unamortized discount | 290,342 | | | 49,502 | | | 160,498 | | (a) | 500,342 | |
| | | &nbs
p; | | | | |
Deferred income tax liability | 117,630 | | | 1,434 | | | | | 119,064 | |
| | | | | | | |
Total liabilities | 439,792 | | | 67,650 | | | 157,748 | | | 665,190 | |
| | | | | | | |
Stockholders' equity: | | | | | | | |
Preferred Stock<
/font> | — | | | 54 | | | (54 | ) | (d) | — | |
Common Stock | 502 | | | 61 | | | (61 | ) | (d) | 502 | |
Additional paid-in capital | 385,771 | | | 54,337 | | | (54,336 | ) | (d) | 385,772 | |
Treasury stock | (114 | ) | | — | | | | | (114 | ) |
Retained earnings | (34,779 | ) | | 5,500 | | | (5,500 | ) | (d) | (34,779 | ) |
Total stockholders' equity | 351,380 | | | 59,952 | | | (59,951 | ) | | 351,381 | |
Total liabilities and stockholders' equity | $ | 791,172 | | | $ | 127,602 | | | $97,797 | | | $ | 1,016,571 | |
The accompanying notes are an integral part of these financial statements.
Prestige Brands Holdings, Inc.
Pro Forma Statement of Operations
For the Six Months ended September 30, 2010
(unaudited)
(dollars in thousands)
| | | | | | | | | | | |
| Prestige Brands Holdings, Inc. | | Blacksmith Brands Holdings, Inc. | | Pro Forma Adjustments | | Pro Forma |
| | | | | | | |
Net sales | $149,538 | | | $51,480 | | | $0<
/font> | | | $201,018 |
Cost of goods sold | 68,977 | | | 22,778 | | | — | | | 91,755 | |
Gross profit | 80,561 | | | 28,702 | | | — | | | 109,263 | |
| | | | | | | |
Operating, general and administrative expenses | 31,240 | | | 13,285 | | | — | | | 44,525 | |
Income from operations before depreciation and amortization | 49,321 | | | 15,417 | | | — | | | 64,738 | |
| | | | | | | |
Depreciation | 319 | | | 113 | | | — | | | 432 | |
Amortization | 4,504 | | | — | | | 269 | | (e) | 4,773 | |
Income from operations | 44,
498 | | | 15,304 | |
| (269 | ) | | 59,533 | |
| | | | | | | |
Interest expense, net | 10,835 | | | 3,679 | | | 3,500 | | (f) | 18,014 | |
Other expense | 290 | | | — | | | — | | | 290 | |
Income before income taxes | 33,373 | | | 11,625 | | | (3,769 | ) | <
div style="overflow:hidden;font-size:10pt;"> | 41,229 | |
| | | | | | | |
Income tax expense ( benefit ) | 12,745 | | | 4,831 | | | (1,440 | ) | (g) | 16,136 | |
Net income | $20,628 | | $6,794 | | (2,329 | ) | | $25,093 |
The accompanying notes are an integral part of these financial statements.
Prestige Brands Holdings, Inc.
Pro Forma Statement of Operations
For the Twelve Months ended March 31, 2010
(unaudited)
(dollars in thousands)
| | | | | | | | | | | |
| Prestige Brands Holdings, Inc. | | Blacksmith Brands Holdings, Inc. | | Pro Fo
rma Adjustments | | Pro Forma |
| | | | | | | |
Net sales | $292,601 | | | $85,144 | | | $0 | | $377,745 |
Cost of goods sold | 139,157 | | | 43,042 | | | — | | | 182,199 | |
Gross profit | 153,444 | | | 42,102 | | | — | | | 195,546 | |
| | | | | | | |
Operating, general and administrative expenses | 65,1
18 | | | 19,466 | | | — | | | 84,584 | |
Income from operations before depreciation and amortization | 88,326 | | | 22,636 | | | — | | | 110,962 | |
| | | | | | | |
Depreciation | 645 | | | 275 | | | — | | | 920 | |
Amortization | 9,356 | | | — | | | 538 | | (e) | 9,894 | |
Income from operations | 78,325 |
; | | 22,361 | | | (538 | ) | | 100,148 | |
| | | | | | | |
Interest expense, net | 22,935 | | | 7,371 | | | 6,604 | | (f) | 36,910 | |
Other expense | 905
| | | — | | | — | | | 905 | |
Income before income taxes | 54,485 | | | 14,990 | | | (7,142 | ) | | 62,333 | |
| | | | | | | |
Income tax expense ( benefit ) | 22,370 | | | 6,298 | | | (2,728 | ) | (g) | 25,940<
/font> | |
Net income | $32,115 | | $8,692 | | (4,414 | ) | | $36,393 |
The accompanying notes are an integral part of these financial statements.
<
a name="s991276BABB9524AB1A0995A9D4D32852">
Prestige Brands Holdings, Inc.
Notes To Pro Forma Combined Financial Statements
(unaudited)
|
BASIS OF PRO FORMA PRESENTATION |
On November 1, 2010, Prestige Brands Holdings, Inc. ("Prestige" or the "Company"), acquired all of the issued and outstanding equity securities of Blacksmith Brands Holdings, Inc. ("Blacksmith") from all of Blacksmith's stockholders pursuant to a Stock Purchase Agreement (the "Acquisition"). The total purchase consideration for the Acquisition was $190 million plus a working capital adjustment of $13.4 million (subject to a post-closing reconciliation process), all of which was paid in cash on the closing date of the Acquisition, November 1, 2010 (the &
ldquo;Closing Date”).
The Company, its wholly-owned subsidiary Prestige Brands, Inc. (the “Issuer” or the "Borrower"), and certain subsidiaries of the Company completed an offering of $100 million in aggregate principal amount of Senior Notes due 2018 (the “New Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The New Notes, which priced on October 22, 2010, yielded proceeds to the Company of approximately $100.3 million plus accrued interest at a rate of 8.25% per annum from October 1, 2010. Interest on the New Notes will be payable semi-annually commencing April 1, 201
1. The New Notes will mature on April 1, 2018. Delivery of, and payment for, the New Notes was made on November 1, 2010. The New Notes have the same terms and will be part of the same series as the Issuer's existing 8.25% Senior Notes due 2018 issued in March 2010 (the “Existing Notes”). The New Notes are fully and unconditionally guaranteed by the Company and its domestic subsidiaries. Also, on November 1, 2010, the Borrower, the Company and certain subsidiaries of the Company entered into an increase joinder (the “Increase Joinder”) to the existing Credit Agreement dated as of March 24, 2010, among the Borrower, the Company, Bank of America, N.A., as administrative agent, Deutsche Bank Securities Inc., as syndication agent, and a syndicate of financial institutions and institutional lenders (the “Senior Secured Credit Facilities”). Pursuant to the terms of the Increase Joinder, Bank of America, N.A. and Deutsche Bank Trust Company Americas agreed to extend addition
al term loans and revolving credit commitments to the Borrower under the Senior Secured Credit Facilities. The net proceeds of the New Notes and Increase Joinder were used to pay purchase price consideration in connection with the Acquisition and for general corporate and working capital purposes.
The unaudited pro forma statement of operations for the six and twelve months ended September 30, 2010 are based o
n the historical financial statements of Prestige and Blacksmith and give effect to the Acquisition and related financings as if they had occurred on April 1, 2009.
Pro forma adjustments were made to reflect:
| |
· | Prestige's acquisition of Blacksmith, and |
| |
· | The yield and resulting interest of the New Notes and the Increase Joinder. |
The accounting for the Acquisition, including the purchase price allocation, is dependent upon certain valuations and other studies that have yet to be finalized. A final determination of these fair values may change the allocation of the purchase price, which could affect the fair values assigned to the assets and liabilities, which could result in a material change to the unaudited pro forma combined statement of operations including potential changes in fair value assigned to intangible assets and estimated useful lives, which could result
in a significant change to the related amortization expenses.
The unaudited pro forma adjustments are based upon available information and certain assumptions that are factually supportable and that the Company believes are reasonable under the circumstances. The unaudited pro forma combined statement of operations is presented for information purposes only and does not purport to represent what our actual consolidated results of operations would have been had the Acquisition and related financings actually occurred on the date indicated, nor are they necessarily indicative of future consolidated results of operations.
PRELIMINARY PURCHASE PRICE
The following table summarizes the preliminary purchase price for the Acquisition (in millions):
| | | |
Costs of Acquisition | | | |
Cash paid upon closing | | $203.4 | |
Total costs of acquisition | | $203.4 | |
|
PRELIMINARY PURCHASE PRICE ALLOCATION |
The Company is in the process of assessing the fair value of assets acquired and the liabilities assumed. The preliminary allocation of the purchase price is based on the best information available to management at the time that these unaudited pro forma combined financial statements were filed and is provisional pending, among other things, the finalization of the valuation of selected items. During the measurement period (which is not to exceed one year from the Closing Date), Prestige is required to recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the Closing Date that, if known, would have resulted in the recognition of those assets or liabilities as of that date. Prestige may adjust the preliminary purchase price allocation after obtaining additional information regarding, among other things, asset valuations, liabilities assumed and revisions of previous estimates. The following table summarizes the preliminary allocation of the Acquisition purchase price based on the estimated fair value of the acquired assets and assumed liabilities (in millions):
| | | | |
Inventory | | $23.2 | | |
Net Working Capital, excluding Inventory | | 8.0 | | |
Fixed Assets | | 0.2 | | |
Other Assets (Liabilities) | | (1.0 | ) | |
Net assets acquired | | $30.4 | | |
| | | | |
Excess of costs of acquisition over net assets acquired | | $173.0 | | |
Under purchase accounting rules, Prestige revalued the acqu
ired finished goods inventory to fair value, which is defined as the estimated selling price less the sum of (a) costs of disposal and (b) a reasonable profit allowance for Prestige's selling effort. Prestige revalued the acquired property and equipment using the cost approach which is based on the amount required to replace similar assets.
Certain trade names of Blacksmith's brands have been recorded as indefinite-lived and definite-lived intangible assets. The definite-lived intangible asset is expected to have estimated useful lives of fifteen years. The definite-lived intangible asset is being amortized on a straight-line basis as this is the most reliable representation of how the economic benefits of the asset is
realized. Amortization expense of the trade name is classified as general and administrative expense.
Goodwill represents the purchase price in excess of the amounts assigned to acquired tangible or intangible assets and assumed liabilities. Amounts allocated to goodwill are tax deductible in all relevant
jurisdictions. The goodwill is attributable to the synergies expected to arise as a result of the acquisition.
The final allocation of the purchase price will be determined at a later date and is dependent on a number of factors, including the final valuation of our tangible and identifiable intangible assets acquired and liabilities assumed on the Closing Date of the Acquisition. Adjustments resulting from the final allocation of purchase price may be material.
PRO FORMA ADJUSTMENTS
The pro forma combined provision for income taxes does not necessarily reflect the amounts that would have resulted had Prestige and Blacksmith filed consolidated returns for the periods presented.
ADJUSTMENTS TO UNADUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
|
(a) New Notes, Increase Joinder and Excess Cash - To record the additional debt (New Notes and Increase Joinder) of $210.0 million used to finance the acquisition, payment of Blacksmith's old debt of $52.3 million and to record the remaining cash not used in the purchase transaction of $3.5 million. |
|
(b) Inventory Fair Value - To record the acquired inventory to the estimated fair value of $23.2 million from the original Blacksmith book value of inventory. The six and twelve month pro forma financial statements do not reflect any potential increase in cost of goods sold due to this mark up of inventory to estimated fair value. |
|
(c) Goodwill and Intangible Assets - To record the acquired goodwill and intangible assets to the estimated fair value of $8.6 million and $167.4 million, respectively. |
|
(d) Purchased Equity - To record the elimination of equity on the Blacksmith balance sheet in accordance with purchase accounting rules. |
|
(e) Amortization - To record amortization expense of the acquired intangible assets, whose useful lives is fifteen years. Amortization of trademarks is charged to general and administrative expenses. The following table summarizes expected amortization expense related to the newly acquired indefinite-lived intangible asset (in millions). |
| | | | | |
| Estimated Useful Life | | Six Month Amortization Expense | Twelve Month Amortization Expense | |
Trademarks | 15 | | $0.3 | $0.5 | |
|
(f) Interest from New Notes and Increased Joinder - In connection with the Blacksmith acquisition, adjustments are recorded to reflect interest expense of approximately $3.5 million and $6.7 million related to the New Notes and Increase Joinder, including amortization of deferred financing fees and discounts, for the six and twelve months periods presented, respectively. |
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(g) Tax effect of pro forma
adjustments - To record the tax impact of the pro forma adjustments at the company's tax rate of 38.2% |
