Physicians Formula Holdings Inc. has a market cap of $41.4 million; its shares were traded at around $3.05 with and P/S ratio of 0.5.
Highlight of Business Operations: Trade spending with retailers decreased by $1.9 million, or 19.3%, for the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The largest driver relates to a decrease in our provision for markdowns of $1.3 million, which occurred due to the benefits of our SKU rationalization at year-end 2009. Our co-operative advertising also decreased by $935,000, driven in large part by the loss of sales to the customer which discontinued our products in 2009. These factors were partially offset by an increase in our provision for retail marketing of $229,000 and an increase in our provision for coupons of $127,000.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $4.2 million, or 32.8%, to $8.6 million for the three months ended March 31, 2010 from $12.8 million for the three months ended March 31, 2009. The decrease was primarily due to a $2.7 million decrease in marketing spending, which reflects a change in the expected timing from the comparable prior period of our marketing investments. Also contributing to the decrease was a $406,000 decrease in corporate administrative costs, a $330,000 decrease in distribution costs, a $333,000 decrease in realized and unrealized foreign currency exchange losses, a $261,000 decrease in bad debt expense and a $75,000 decrease in sales force and sales administrative expenses.
Future Liquidity and Capital Needs. Our net working capital increased $555,000, or 2.3%, to $24.8 million as of March 31, 2010 from $24.3 million as of December 31, 2009. We anticipate that requirements for working capital will increase during the fourth quarter of 2010, when we typically experience higher inventory levels as we produce new products for shipment in the first quarter of the following year. We have budgeted capital expenditures of $5.1 million for 2010 for several key projects, including $3.6 million in investments in retail permanent fixtures, $800,000 in improvements to other manufacturing and distribution equipment, $623,000 in improvements to our information technology infrastructure, $50,000 to upgrade a product assembly line and $17,000 in improvements to our research and development equipment. We expect capital requirements related to fixture infrastructure to total $7.7 million for the period from September 2008 (inception of the project) to December 2010, of which $5.2 million was incurred as of March 31, 2010. We spent $35,000 for capital expenditures and $1.0 million for investments in retail permanent fixtures for the three months ended March 31, 2010. We believe that our cash flows from operations and funds from our financing arrangements entered into during November 2009 will provide adequate funds for our working capital needs and planned capital expenditures for at least the next twelve months. No assurance can be given, however, that this will be the case.
The maximum amount available for borrowing under the new revolving credit facility is equal to the lesser of $25.0 million and a borrowing base formula equal to: (i) 65% or such lesser percentage of eligible accounts receivable as Wells Fargo in its discretion as an asset-based lender may deem appropriate; plus (ii) the least of (1) $14.0 million and (2) the sum of specified percentages (or such lesser percentages as Wells Fargo in its discretion as an asset-based lender may deem appropriate) of each of the following items of eligible inventory (as defined in the New Senior Credit Agreement): (A) eligible inventory consisting of finished goods that are fully packaged, labeled and ready for shipping, not to exceed 65% of such eligible inventory, (B) eligible inventory consisting of semi-finished goods which are ready for packaging and shipping, not to exceed $4.0 million, (C) eligible inventory consisting of raw materials, not to exceed $1.5 million, (D) eligible inventory consisting of blank components, not to exceed $1.0 million and (E) eligible inventory consisting of returned items, not to exceed $0.75 million; plus (iii) the cash balance in a certain Canadian concentration account; less (iv) a working capital reserve of $1.0 million as such amount may be adjusted by Wells Fargo from time to time and a borrowing base reserve that Wells Fargo establishes from time to time in its discretion as a secured asset-based lender; less (v) indebtedness owed to Wells Fargo other than indebtedness outstanding under the new revolving credit facility. Availability under the new revolving credit facility is reduced by outstanding letters of credit.
As of March 31, 2010 and December 31, 2009, there was $8.0 million and $9.9 million outstanding under the new revolving credit facility, respectively, at interest rates of 3.79% and 3.75%, respectively. As of March 31, 2010 and December 31, 2009, there were no outstanding letters of credit and $10.2 and $12.2 million available under the new revolving credit facility, respectively. The new revolving credit facility contains a lock-box feature, whereby remittances made by customers to the lock-box repays the outstanding obligation under the new revolving credit facility. As such, in accordance with ASC 470-10-45, the Company classified the above outstanding amount under the new revolving credit facility as a current liability in the condensed consolidated balance sheets.
New Senior Subordinated Note.On November 6, 2009, pursuant to a Senior Subordinated Note Purchase and Security Agreement between Physicians, the guarantors named therein, and Mill Road (the “Note Agreement” or the new "Senior Subordinated Note"), Physicians issued a new Senior Subordinated Note to Mill Road in an aggregate principal amount equal to $8.0 million. Physicians used $4.3 million of the proceeds to repay in full the principal of $4.2 million and interest of $107,000 outstanding under its Bridge Loan from Mill Road. We used the remaining proceeds for capital expenditures and general corporate purposes. Prior to being amended as described below, the Senior Subordinated Note was scheduled to mature on May 6, 2013 and accrue interest at 19% per annum, with 15% per annum payable in cash monthly in arrears on the first day of each calendar month and 4% payable in kind with quarterly compounding on the first day of each calendar quarter. Interest expense related to the new Senior Subordinated Note totaled approximately $382,000 for the three months ended March 31, 2010 of which $104,000 was included in accrued expenses in the accompanying condensed consolidated balance sheet as of March 31, 2010. Subject to the terms of the new revolving credit facility, the Senior Subordinated Note may be redeemed in whole or in part prior to November 6, 2010 at an amount equal to 105% of the aggregate principal amount of the outstanding Senior Subordinated Note, decreasing to 104% if redeemed on or after November 6, 2010 and prior to November 6, 2011, decreasing to 102% if redeemed on or after November 6, 2011 and prior to November 6, 2012, and decreasing to 101% if redeemed on or after November 6, 2012. In addition, Physicians must make an offer to redeem the Senior Subordinated Notes upon a change of control of Physicians at the then applicable redemption price. We are required to comply with substantially the same covenants under the Note Agreement that it is required to comply with under the New Senior Credit Agreement and events of default under the Note Agreement are substantially the same as the events of default under the New Senior Credit Agreement. The Senior Subordinated Note is guaranteed by us and Physicians subsidiaries and is secured by a first lien on certain intellectual property and a second lien on substantially all of the other assets of ours and our subsidiaries and pledges of the stock of Physicians and its subsidiaries. The value of the collateral subject to these liens is limited to the lesser of 10% of the value of the assets of Physicians Formula Holdings, Inc. and its subsidiaries and 10% of the value of all outstanding common stock of Physicians Formula Holdings, Inc. as of November 6, 2009 (the “10% Cap”). Pursuant to an Intercreditor Agreement entered into between Physicians, Mill Road and Wells Fargo in connection with the New Senior Credit Agreement and Note Agreement, the Senior Subordinated Note is subordinate in right of payment to the prior paying of all obligations under the New Senior Credit Agreement and the liens securing the obligations under the Note Agreement are junior and subordinate to the liens securing the obligations under the New Senior Credit Agreement (except for first liens on certain intellectual property). In addition, the Intercreditor Agreements prohibits certain amendments to the Note Agreement without the consent of Wells Fargo and prohibits certain amendments to the New Senior Credit Agreement without the consent of Mill Road.
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