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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 AUGUST 31, 2002
COMMISSION FILE NUMBER 0-5905
CHATTEM, INC.
A TENNESSEE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
TELEPHONE: 423-821-4571
REGISTRANT 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, AND HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
AS OF OCTOBER 14, 2002, 9,516,620 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT
PAR VALUE, WERE OUTSTANDING.
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CHATTEM, INC.
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INDEX
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PAGE
NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of August 31, 2002 and
November 30, 2001 .................................................. 3
Consolidated Statements of Income for the Three and Nine
Months Ended August 31, 2002 and 2001 .............................. 5
Consolidated Statements of Cash Flows for the Nine Months Ended
August 31, 2002 and 2001 ........................................... 6
Notes to Consolidated Financial Statements ........................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 23
Item 4. Controls and Procedures........................................ 34
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................... 35
Item 3. Legal Proceedings.............................................. 35
Item 6. Exhibits and Reports on Form 8-K .............................. 35
SIGNATURES ............................................................... 36
2
PART 1. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
AUGUST 31, NOVEMBER 30,
ASSETS 2002 2001
- ------ -------- --------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 34,625 $ 35,445
Accounts receivable, less allowance for doubtful accounts
of $838 at August 31, 2002 and $500 at
November 30, 2001 ............................................. 29,150 20,860
Refundable and deferred income taxes ........................... 8,654 4,646
Inventories .................................................... 14,504 14,260
Prepaid expenses and other current assets ...................... 3,021 2,667
-------- --------
Total current assets ......................................... 89,954 77,878
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET ............................... 26,626 26,275
-------- --------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product rights, net .... 245,868 185,373
Debt issuance costs, net ....................................... 7,881 7,665
Other .......................................................... 2,123 2,482
-------- --------
Total other noncurrent assets ................................ 255,872 195,520
-------- --------
TOTAL ASSETS ............................................... $372,452 $299,673
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
3
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
AUGUST 31, NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001
- ------------------------------------ --------- ---------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt ............................. $ 7,000 $ --
Accounts payable ................................................. 12,903 9,010
Payable to bank .................................................. 213 151
Accrued liabilities .............................................. 32,282 15,138
--------- ---------
Total current liabilities ...................................... 52,398 24,299
--------- ---------
LONG-TERM DEBT, less current maturities ............................ 234,716 204,740
--------- ---------
DEFERRED INCOME TAXES .............................................. 16,952 16,251
--------- ---------
OTHER NONCURRENT LIABILITIES ....................................... 1,622 1,765
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000,
none issued .................................................... -- --
Common shares, without par value, authorized 50,000,
issued 9,453 at August 31, 2002 and 8,973 at
November 30, 2001 .............................................. 1,968 1,868
Paid-in surplus .................................................. 73,795 65,960
Accumulated deficit .............................................. (5,573) (11,120)
--------- ---------
70,190 56,708
Unamortized value of restricted common shares issued ............. (672) (859)
Cumulative other comprehensive income:
Foreign currency translation adjustment ........................ (1,754) (2,231)
Minimum pension liability adjustment, net of income taxes ...... (1,000) (1,000)
--------- ---------
Total shareholders' equity .................................... 66,764 52,618
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ................................................... $ 372,452 $ 299,673
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
4
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited and in thousands, except per share amounts)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
--------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES:
Net sales (Note 2) ......................................... $ 63,457 $ 45,208 $ 169,617 $ 139,975
Royalties (Note 14) ........................................ 947 -- 1,873 --
--------- --------- --------- ---------
Total revenues ........................................... 64,404 45,208 171,490 139,975
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales .............................................. 17,526 12,663 48,673 40,553
Advertising and promotion (Note 2) ......................... 21,307 14,337 55,276 48,442
Selling, general and administrative (Note 2) ............... 9,926 9,106 29,002 24,991
--------- --------- --------- ---------
Total costs and expenses ................................. 48,759 36,106 132,951 113,986
--------- --------- --------- ---------
INCOME FROM OPERATIONS ....................................... 15,645 9,102 38,539 25,989
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense ........................................... (5,374) (4,959) (15,518) (17,024)
Investment and other income, net ........................... 79 289 243 1,910
--------- --------- --------- ---------
Total other income (expense) ............................. (5,295) (4,670) (15,275) (15,114)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY GAIN (LOSS) AND CHANGE
IN ACCOUNTING PRINCIPLE .................................... 10,350 4,432 23,264 10,875
PROVISION FOR INCOME TAXES ................................... 3,933 1,684 8,840 4,132
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY GAIN (LOSS)
AND CHANGE IN ACCOUNTING PRINCIPLE ......................... 6,417 2,748 14,424 6,743
EXTRAORDINARY GAIN (LOSS) ON EARLY
EXTINGUISHMENT OF DEBT, NET OF INCOME
TAXES ...................................................... -- (603) -- 6,948
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF INCOME TAX
BENEFIT (Note 3) ........................................... -- -- (8,877) --
--------- --------- --------- ---------
NET INCOME ................................................... $ 6,417 $ 2,145 $ 5 ,547 $ 13,691
========= ========= ========= =========
NUMBER OF COMMON SHARES:
Weighted average outstanding-basic ......................... 9,470 8,876 9,229 8,871
========= ========= ========= =========
Weighted average and potential dilutive outstanding ........ 9,935 9,031 9,623 8,917
========= ========= ========= =========
NET INCOME PER COMMON SHARE:
Basic:
Income before extraordinary gain (loss) and change in
accounting principle ................................... $ .68 $ .31 $ 1.56 $ .76
Extraordinary gain (loss) ................................ -- (.07) -- .78
Change in accounting principle ........................... -- -- (.96) --
--------- --------- --------- ---------
Total basic ............................................ $ .68 $ .24 $ .60 $ 1.54
========= ========= ========= =========
Diluted:
Income before extraordinary gain (loss) and change in
accounting principle ................................... $ .65 $ .30 $ 1.50 $ .76
Extraordinary gain (loss) ................................ -- (.06) -- .78
Change in accounting principle ........................... -- -- (.92) --
--------- --------- --------- ---------
Total diluted .......................................... $ .65 $ .24 $ .58 $ 1.54
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
5
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited and in thousands, except share and per share amounts)
FOR THE NINE MONTHS ENDED
AUGUST 31,
---------------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Net income ............................................................. $ 5,547 $ 13,691
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ...................................... 3,969 7,627
Increase in deferred income taxes .................................. 4,333 --
Gain on product divestiture ........................................ -- (79)
Extraordinary gain on early extinguishment of debt, net ............ -- (6,948)
Cumulative effect of change in accounting principle, net ........... 8,877 --
Stock option charge ................................................ 175 394
Other, net ......................................................... (75) (59)
Changes in operating assets and liabilities, net of product
acquisition:
Accounts receivable .............................................. (8,290) 16,215
Refundable income taxes .......................................... 1,031 600
Inventories ...................................................... (244) 2,077
Prepaid expenses and other current assets ........................ (354) (2,309)
Accounts payable and accrued liabilities ......................... 21,037 (16,331)
--------- ---------
Net cash provided by operating activities ..................... 36,006 14,878
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ............................. (2,622) (1,512)
Additions to trademarks and other product rights ....................... (74,996) (277)
Proceeds from product divestiture ...................................... -- 1,179
Decrease in other assets, net .......................................... 254 374
--------- ---------
Net cash used in investing activities ......................... (77,364) (236)
--------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt ............................................ (8,000) (84,453)
Payment of consent fees and other costs related to repayment of
long-term debt ....................................................... -- (3,293)
Proceeds from long-term debt ........................................... 45,000 --
Proceeds from exercise of stock options ................................ 6,146 95
Repurchase of common shares ............................................ (1,650) --
Change in payable to bank .............................................. 62 (1,529)
Debt issuance costs .................................................... (1,133) --
--------- ---------
Net cash provided by (used in) financing activities ............ 40,425 (89,180)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS ....................................................... 113 (31)
--------- ---------
CASH AND CASH EQUIVALENTS:
Decrease for the period ................................................ (820) (74,569)
At beginning of period ................................................. 35,445 102,534
--------- ---------
At end of period ....................................................... $ 34,625 $ 27,965
========= =========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 100,000 shares of restricted common stock at an average
value of $9.93 each ................................................. $ -- $ 993
PAYMENTS FOR:
Interest ............................................................... $ 9,862 $ 14,331
Taxes .................................................................. $ 536 $ 266
The accompanying notes are an integral part of these consolidated financial statements.
6
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. These consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes thereto included in the Company's
Annual Report on Form 10-K for the year ended November 30, 2001. The
accompanying unaudited consolidated financial statements, in the opinion
of management, include all adjustments necessary for a fair presentation.
All such adjustments are of a normal and recurring nature.
2. The Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board ("FASB") finalized EITF Issue No. 00-14, "Accounting for
Certain Sales Incentives" ("EITF 00-14") and EITF Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products" ("EITF 00-25") in November 2000 and July 2001,
respectively. (See "Recently Issued Accounting Pronouncements" on page 33
of this Form 10-Q report for a discussion of the provisions of these two
statements). The Company adopted the requirements of these two
pronouncements effective December 1, 2001. The following table presents
the effect of the requirements of these two pronouncements on the
components, as indicated, of the consolidated statements of income for the
three and nine months ended August 31, 2002 and 2001, respectively:
Advertising Selling,
and General and
Net Promotion Administrative
Sales Expense Expense
-------- -------- --------
For the Three Months Ended
August 31, 2002:
Previous reporting basis ..... $ 66,277 $ 23,884 $ 10,169
Impact of adopting EITF's
00-14 and 00-25 ........... 2,820 2,577 243
-------- -------- --------
Current reporting basis ...... $ 63,457 $ 21,307 $ 9,926
======== ======== ========
For the Three Months Ended
August 31, 2001:
Previous reporting basis ..... $ 49,641 $ 18,528 $ 9,348
Impact of adopting EITF's
00-14 and 00-25 ............ 4,433 4,191 242
-------- -------- --------
Current reporting basis ...... $ 45,208 $ 14,337 $ 9,106
======== ======== ========
For the Nine Months Ended
August 31, 2002:
Previous reporting basis ..... $180,630 $ 65,625 $ 29,666
Impact of adopting EITF's
00-14 and 00-25 ............ 11,013 10,349 664
-------- -------- --------
Current reporting basis ...... $169,617 $ 55,276 $ 29,002
======== ======== ========
7
For the Nine Months Ended
August 31, 2001:
Previous reporting basis...... $153,603 $ 61,391 $ 25,670
Impact of adopting EITF's
00-14 and 00-25............. 13,628 12,949 679
-------- -------- --------
Current reporting basis....... $139,975 $ 48,442 $ 24,991
======== ======== ========
Appropriate adjustments have likewise been made in the consolidating
statements of income for the nine months ended August 31, 2002 and 2001,
respectively. (See Note 17 of Notes to Consolidated Financial Statements).
The Company's income before extraordinary gain (loss) and change in
accounting principle and net income for the three and nine months ended
August 31, 2002 and 2001, respectively, and its financial position at
August 31, 2002 and 2001, respectively, were not affected by the adoption
of the provisions of these two pronouncements.
3. In June 2001 the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The
provisions of SFAS 142, which were adopted by the Company on December 1,
2001, require the Company to discontinue the amortization of the cost of
intangible assets with indefinite lives and also requires certain fair
value based tests of the carrying value of indefinite lived intangible
assets. Income before extraordinary gain (loss) and net income for the
three and nine months ended August 31, 2001, respectively, adjusted to
exclude amortization expense recognized in those periods which was related
to intangible assets that are no longer being amortized, are as follows:
For the Three Months Ended For the Nine Months Ended
August 31, 2001 August 31, 2001
-------------------------- --------------------------
Income Before Income Before
Extraordinary Extraordinary
Gain(Loss) Net Income Gain(Loss) Net Income
------- ------- ------- -------
As reported ....................... $ 2,748 $ 2,145 $ 6,743 $13,691
Amortization, net of
tax ............................. 864 864 2,591 2,591
------- ------- ------- -------
Adjusted .......................... $ 3,612 $ 3,009 $ 9,334 $16,282
======= ======= ======= =======
Per common share, as adjusted:
Basic ........................... $ .41 $ .34 $ 1.05 $ 1.84
======= ======= ======= =======
Diluted ......................... $ .40 $ .33 $ 1.05 $ 1.83
======= ======= ======= =======
Also in connection with the adoption of SFAS 142, the Company obtained
independent appraisals to determine the fair values of these intangible
assets at December 1, 2001 and compared their fair values with their
carrying values to determine the write-down of $8,877, net of income tax
benefit of $5,440, or $.92 per diluted share. The write-down was primarily
related to the Company's SUNSOURCE product line, which experienced a
decline in sales volume as compared to sales levels at its initial
purchase in 1997. This adjustment is shown as a cumulative effect of
change in accounting principle in the consolidated statement of income for
the nine months ended August 31, 2002.
4. The Company incurs significant expenditures on television, radio and print
advertising to support its nationally branded over-the-counter ("OTC")
health care products. Customers purchase products from the Company with
the understanding that the brands will be supported by the Company's
extensive media advertising. This advertising supports the retailers'
sales effort and maintains the important brand franchise with the
consuming public. Accordingly, the Company considers its advertising
program to be clearly
8
implicit in its sales arrangements with its customers. Therefore, the
Company believes it is appropriate to allocate a percentage of the
necessary supporting advertising expenses to each dollar of sales by
charging a percentage of sales on an interim basis based upon anticipated
annual sales and advertising expenditures (in accordance with Accounting
Principles Board Opinion No. 28) and adjusting that accrual to the actual
expenses incurred at the end of the year.
5. Inventories consisted of the following at August 31, 2002 and November 30,
2001:
2002 2001
-------- --------
Raw materials and work in process .... $ 7,081 $ 8,108
Finished goods ....................... 9,462 8,191
Excess of current cost over LIFO
values ............................. (2,039) (2,039)
-------- --------
Total inventories ................ $ 14,504 $ 14,260
======== ========
6. Accrued liabilities consisted of the following at August 31, 2002 and
November 30, 2001:
2002 2001
------- -------
Income and other taxes ................... $ 5,505 $ 290
Interest ................................. 7,756 3,070
Salaries, wages and commissions .......... 2,959 3,462
Product advertising and promotion ........ 12,540 3,654
Product acquisitions and divestitures .... 737 2,205
Other .................................... 2,785 2,457
------- -------
Total accrued liabilities ............ $32,282 $15,138
======= =======
7. Comprehensive income consisted of the following components for the three
and nine months ended August 31, 2002 and 2001, respectively:
For the Three Months For the Nine Months
Ended August 31, Ended August 31,
------------------------ ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income ................... $ 6,417 $ 2,145 $ 5,547 $ 13,691
Other - foreign currency
translation adjustment .... 426 (20) 477 (61)
-------- -------- -------- --------
Total ..................... $ 6,843 $ 2,125 $ 6,024 $ 13,630
======== ======== ======== ========
8. In fiscal 1999 and 2000 the Company's board of directors authorized
repurchases of the Company's common stock not to exceed an aggregate total
of $20,000. Under these authorizations, 1,142,200 shares at a cost of
$15,224 have been reacquired through August 31, 2002, leaving $4,776
available for future repurchases. The Company, however, is limited in its
ability to repurchase shares due to restrictions under the terms of the
indenture with respect to which its senior subordinated notes were issued
and under the terms of the Credit Facility. (See Note 15 of Notes to
Consolidated Financial Statements for a description of this facility). The
repurchased shares were retired and returned to unissued. In the first
nine months of fiscal 2002, 79,200 shares were repurchased at a cost of
$1,650.
9. On January 17, 2001 the Company completed a consent solicitation and
tender offer pursuant to which it retired $70,462 principal amount of its
8.875% senior subordinated notes due 2008 and $7,397 principal amount of
its 12.75% senior subordinated notes due 2004. The consideration paid for
the consent solicitation and tender offer was $64,937, which was provided
by the proceeds of the Ban(R) sale. An extraordinary gain on the early
extinguishment of debt of $7,551, net of income taxes, was recognized in
the first six months of fiscal 2001. On June 15, 2001 the Company retired
all of the remaining outstanding principal balance of $21,748 of the
12.75% notes, at which time an extraordinary loss on the early
9
extinguishment of debt of $603, net of income tax benefit, was recorded in
connection with this retirement. This loss primarily consisted of the
premium paid on the retirement of the notes and the write-off of related
unamortized deferred issuance and initial discount costs.
10. On January 22, 2002 Kmart Corporation ("Kmart"), a customer of the Company
representing approximately 5% of fiscal 2001 consolidated revenues, filed
a petition under Chapter 11 of the United States Bankruptcy Code. At the
time of the filing Kmart owed the Company approximately $1,200. This
bankruptcy filing did not impact the Company's results of operations and
financial position for fiscal 2001. In the first quarter of fiscal 2002
the Company established a reserve of $1,000 to cover its estimated bad
debt related to Kmart. In the second quarter of fiscal 2002 the Company
sold its receivable from Kmart to a financial institution for $367. The
Company continues to sell to Kmart at decreased volume levels and as of
August 31, 2002 the Company's receivables from Kmart were approximately
$1,056.
11. COMMITMENTS AND CONTINGENCIES
-----------------------------
GENERAL LITIGATION
The Company was named as a defendant in a lawsuit brought by the Center
for Environment Health ("CEH") contending that the Company violated the
California Safe Drinking Water and Toxic Enforcement Act of 1998
(Proposition 65) by selling to California consumers without a warning
topical skin care products containing zinc oxide which in turn contains
lead. The lawsuit contended that the purported failure to comply with
Proposition 65 requirements also constituted a violation of the California
Business & Professions Code Section 1700 et seq. Violations of either
Proposition 65 or Business and Professions Code 1700 et seq. render a
defendant liable for civil penalties of up to $2.5 per day per violation.
The Company was also named as a defendant in a lawsuit filed in San
Francisco Superior Court on December 29, 1999, JOHNSON et al. v.
BRISTOL-MYERS SQUIBB CO., et al., Case No. 308872. This was a putative
class action brought by two named plaintiffs on behalf of the general
public in California, against the same entities that are defendants in the
CEH lawsuit. As with the CEH lawsuit, the Johnson lawsuit alleged that the
Company violated Proposition 65 by selling to California consumers without
a warning topical skin care products containing zinc oxide which in turn
contains lead. The lawsuit did not assert claims directly under
Proposition 65, but asserted that the alleged failure to comply with
Proposition 65 gave rise to claims under California's Business and
Professions Code Section 17200 et seq., 17500 et seq., and the Civil Code
Section 1750 et seq. The lawsuit sought injunctive and equitable relief,
restitution, the disgorgement of allegedly wrongfully obtained revenues
and damages.
The plaintiffs in the two separate actions filed a consolidated amended
complaint that included a claim based upon the allegation that zinc oxide
allegedly also contains cadmium. During the third quarter of fiscal 2002 a
settlement was finalized among the parties for these two cases pending
final court approval. Final court approval of the settlement is expected
during the Company's fourth quarter of fiscal 2002. In the settlement, the
Company paid a settlement amount that was within the expected range that
had been previously accrued by the Company. The settlement amount was not
material to the Company's results of operations.
The Company has been named as a defendant in approximately 160 lawsuits
involving claims by approximately 765 plaintiffs alleging that the
plaintiffs were injured as a result of ingestion of products containing
phenylpropanolamine ("PPA"), which was an active ingredient in most of the
Company's DEXATRIM products until November 2000. The Company anticipates
that additional lawsuits will be filed in which similar or other
allegations related to the Company's DEXATRIM products containing PPA.
Most of the lawsuits seek an unspecified amount of compensatory and
exemplary damages or punitive damages. At this stage of the proceedings,
it is not possible for the Company to determine the outcome of these
matters or the effect of their resolution on the Company's financial
position or operating results. The earliest scheduled trial date in these
cases is set for January 2003, and it is anticipated that other cases will
be set for trial beginning later in 2003.
10
There can be no assurance that Company will be successful in the defense
of these lawsuits or that these lawsuits will not have a material adverse
effect on the Company's results of operations or its financial position.
Approximately half of the existing suits represent cases involving alleged
injuries by products manufactured and sold prior to the Company's
acquisition of DEXATRIM in December 1998. The Company is being defended
and is indemnified from liability by The DELACO Company, Inc., successor
to Thompson Medical Company, Inc., ("Thompson Medical") which owned
DEXATRIM prior to December 1998. The Company understands that The DELACO
Company, Inc. maintains product liability insurance coverage for products
manufactured and sold prior to December 1998 with annual limits of
coverage and has an excess liability policy, but otherwise has only
nominal assets. Accordingly, it is unlikely that The DELACO Company, Inc.
will be able to indemnify the Company beyond its insurance coverage. In
addition, there can be no assurance that the insurance maintained by The
DELACO Company, Inc. will be sufficient to cover claims related to
products manufactured or sold prior to the Company's acquisition of
DEXATRIM or that ultimately the Company will not be held liable for these
claims. Although the Company maintains product liability insurance
coverage for claims asserted in the balance of the lawsuits, such coverage
may be insufficient to satisfy these claims. Moreover, the Company's
product liability insurance coverage would not apply to claims arising
from products manufactured and sold prior to the Company's acquisition of
DEXATRIM. If the Company is forced to assume PPA-related liabilities
arising prior to the Company's acquisition of DEXATRIM or if PPA-related
lawsuits resulted in liabilities greater than amounts available under or
exceed the scope of the Company's insurance coverage, the Company may not
have sufficient resources to satisfy these obligations.
Other claims, suits and complaints arise in the ordinary course of the
Company's business involving such matters as patents and trademarks,
product liability, environmental matters and other alleged injuries or
damage. The outcome of such litigation cannot be predicted, but, in the
opinion of management, based in part upon the opinion of counsel, all such
pending matters are without merit or are of such kind or involve such
amounts as would not have a material adverse effect on the consolidated
operating results or financial position of the Company if disposed of
unfavorably.
REGULATORY
In 1994 the Nonprescription Drug Manufacturers Association (now the
Consumer Healthcare Products Association) ("CHPA") initiated a large-scale
study in conjunction with the Yale University School of Medicine to
investigate a possible association, if any, of stroke in women aged 18 to
49 using PPA which, until November 2000, was the active ingredient in
certain of the DEXATRIM products (the "Yale Study"). PPA is also used in
other OTC medications, which were also part of the Yale Study. In May
2000, the results of the Yale Study were filed with the Food and Drug
Administration ("FDA"). The investigators concluded that the results of
the Yale Study suggest that PPA increases the risks of hemorrhagic stroke.
The FDA indicated at that time that no immediate action was required and
scheduled a FDA advisory panel to meet in October 2000 to discuss the
results of the study.
In October 2000, a Nonprescription Drugs Advisory Committee ("NDAC"),
commissioned by the FDA to review the safety of PPA, determined that there
is an association between PPA and hemorrhagic stroke and recommended that
PPA not be considered generally recognized as safe for OTC use as a nasal
decongestant or for weight control. In response to a request from the FDA
to cease voluntarily marketing DEXATRIM with PPA, the Company announced on
November 7, 2000 its decision to cease immediately shipping DEXATRIM with
PPA and to accept product returns from any retailers who decide to
discontinue marketing DEXATRIM with PPA.
The Food and Drug Administration, the Drug Enforcement Administration and
a number of state and local governments have enacted or proposed
restrictions or prohibitions on the sale of products that
11
contain ephedrine. Ephedrine can refer to the herbal substance derived
from the plant ephedra or the plant heart leaf, which has been used in
some forms of DEXATRIM, or synthetic ephedrine, a FDA regulated ingredient
used in some OTC drug products, which is not used in our products. These
restrictions include the prohibition of OTC sales, required warnings or
labeling statements, record keeping and reporting requirements, the
prohibition of sales to minors, per transaction limits on the quantity of
product that may be purchased and limitations on advertising and
promotion. These restrictions could adversely affect the sale of DEXATRIM
Natural and DEXATRIM Results, which have had SKU's containing naturally
occurring sources of ephedrine. Failure to comply with these restrictions
could also lead to regulatory enforcement action, including the seizure of
violative products, product recalls, civil or criminal fines or other
penalties. The enactment of these restrictions or prohibitions on sales,
the perceived safety concerns related to ephedrine and the possibility of
further regulatory action, increases the likelihood that claims relating
to the existence of naturally-occurring sources of ephedrine in DEXATRIM
Natural and DEXATRIM Results will be filed against the Company. Although
the Company is not currently defending any lawsuits alleging product
liability claims relating to the existence of naturally-occurring sources
of ephedrine in DEXATRIM, we understand that lawsuits have been filed
against other manufacturers of appetite supppresssants containing
ephedrine. In late 2000 the FDA requested the National Institutes of
Health to commission a review of the safety and efficacy of ephedrine in
herbal products used to control weight. This review will be based on all
adverse events, records and scientific data available to the reviewers. It
is expected that the report will be issued in early Fall of 2002. In
September 2001 The Public Citizen Health Research Group petitioned the FDA
to ban the production and sale of dietary supplements containing ephedrine
alkaloids. As of August 31, 2002 the FDA's parent entity, the Department
of Health and Human Services, has decided to defer making a decision on
the petition until it has further scientific information on the safety of
ephedrine alkaloids. If the FDA concludes that ephedrine should not be
used in dietary supplements, the Company will be required to reformulate
the product. The Company has developed alternative formulations for
DEXATRIM Natural and DEXATRIM Results to exclude ephedrine and since the
end of the third quarter of fiscal 2002 has discontinued the sale of
DEXATRIM products containing ephedrine.
The Company was notified in October 2000 that the FDA denied a citizen
petition submitted by Thompson Medical, the previous owner of SPORTSCREME
and ASPERCREME, seeking a determination that 10% trolamine salicylate was
clinically proven to be an effective active ingredient in external
analgesic OTC drug products, and thus should be included in the FDA's
yet-to-be finalized monograph for external analgesics. The Company has met
with the FDA and submitted a proposed protocol study to evaluate the
efficacy of 10% trolamine salicylate as an active ingredient in OTC
external analgesic drug products. Based on comments received from the FDA
at the meeting, the Company may revise and resubmit the protocol. After
final comments from the FDA, the Company expects that it will take one or
two years to produce the clinical data for FDA review. The FDA could
finalize the OTC external analgesic monograph before the protocol and
clinical data results are finalized, which would place 10% trolamine
salicylate in non-monograph status, thus requiring the submission of a new
drug application to market and sell OTC products with 10% trolamine
salicylate. This submission would likely require the Company to provide
clinical data, which would be expensive. The Company is working to develop
alternate formulations for SPORTSCREME and ASPERCREME in the event that
the FDA does not consider the available clinical data to conclusively
demonstrate the efficacy of trolamine salicylate when the OTC external
analgesic monograph is finalized. If 10% trolamine salicylate is not
included in the final monograph, the Company would likely be required to
discontinue these products and remove them from the market after
expiration of an anticipated grace period or review the option of
marketing these products as homeopathic products.
12. Certain prior year amounts have been reclassified to conform to the
current period's presentation.
13. The Company considers all short-term deposits and investments with
original maturities of three months or less to be cash equivalents.
12
14. On March 28, 2002 the Company completed the acquisition of SELSUN BLUE, a
leading medicated dandruff shampoo, from Abbott Laboratories ("Abbott")
for $75,000, plus inventories of $1,380 and assumed liabilities of $1,173.
This acquisition includes worldwide rights (except India) to manufacture,
sell and market SELSUN BLUE plus related intellectual property and certain
manufacturing equipment. The purchase price of $77,553 was allocated
$1,518 to inventory, $1,000 to property, plant and equipment, $73,785 to
the trademark which was assigned an indefinite life and $1,250 to other
purchased product rights which were assigned useful lives of 5 years. This
is a preliminary allocation which will be revised upon completion of
appraisals of the assets. Abbott will continue to manufacture the product
for the Company until June 2003 domestically, or such earlier date as the
Company moves production to its Chattanooga, Tennessee facilities, and
until March 2004 internationally, or such earlier date as the Company
enters into its own agreements with contract manufacturers. The Company
will generally pay Abbott a fee of ten percent over standard manufacturing
costs until the Company assumes manufacturing or enters into third party
agreements, except as discussed below. The Company will also rely on
Abbott to market, sell and distribute SELSUN BLUE products in most foreign
countries until the Company satisfies various foreign regulatory
requirements, new distributors are in place and any applicable marketing
permits are transferred. During the marketing transition period, Abbott
will initially pay the Company a royalty equal to 28% of international
sales of SELSUN BLUE in these countries with the royalty reduced to 14% of
international sales in certain countries if foreign regulatory
requirements are satisfied prior to the Company's assumption of sales and
marketing responsibility in such countries. Abbott will pay all costs and
expenses related to the manufacture, marketing and sales of SELSUN BLUE in
these countries. As the Company assumes responsibility for the sales and
marketing effort in a country, the royalty arrangement with respect to
such country will terminate and the Company will record these
international sales directly, as well as the costs and expenses associated
with these sales. The following table summarizes the Company's estimate of
how the results for SELSUN BLUE international for the three and nine
months ended August 31, 2002 would have been presented had the transition
period been finalized on the date of acquisition:
ESTIMATED SELECTED SELSUN BLUE INTERNATIONAL DATA (Unaudited)
For the Three For the Nine
Months ended Months ended
August 31, August 31,
2002 2002
------ ------
NET SALES ................................ $4,450 $7,701
------ ------
COSTS AND EXPENSES:
Cost of sales .......................... 1,724 2,983
Advertising and promotion .............. 658 1,139
Selling, general and administrative .... 1,121 1,706
------ ------
Total costs and expenses ............. 3,503 5,828
------ ------
INCOME FROM OPERATIONS ................... $ 947 $1,873
====== ======
13
The following unaudited consolidated pro forma information assumes the
acquisition of SELSUN BLUE had occurred at the beginning of the periods
presented:
PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)
For the Three Months For the Nine Months
Ended August 31, Ended August 31,
--------------- ------------------------------
2001 2002 2001
----------- ----------- -----------
Total revenue .................... $ 54,819 $ 182,221 $ 169,293
Income before extraordinary
gain (loss) and change in
accounting principle ........... 3,906 14,740 10,636
Net income ....................... 3,303 5,863 17,584
Earnings per share - basic:
Income before extraordinary
gain (loss) and change in
accounting principle .......... .44 1.60 1.20
Net income ..................... .37 .64 1.98
Earnings per share - diluted:
Income before extraordinary
gain (loss) and change in
accounting principle .......... .43 1.53 1.19
Net income ..................... .37 .61 1.97
The pro forma consolidated results of operations include adjustments to
give effect to interest expense on debt to finance the acquisition,
depreciation expense on adjusted property, plant and equipment values,
amortization of certain intangible assets, increased manufacturing costs
of 10% over standard historical costs and decrease in interest income on
cash used in the acquisition, together with related income tax effects.
The pro forma information is for comparative purposes only and does not
purport to be indicative of the results that would have occurred had the
acquisition and borrowings occurred at the beginning of the periods
presented, or indicative of the results that may occur in the future.
15. On March 28, 2002 the Company obtained a $60,000 senior secured credit
facility from a syndicate of commercial banks led by Bank of America,
N.A., as agent (the "Credit Facility"). The Credit Facility includes a
$15,000 revolving credit line and a $45,000 term loan. The Credit Facility
together with the Company's available cash was used to finance the
acquisition of SELSUN BLUE and was used to provide working capital and for
general corporate purposes. The $45,000 term loan, which requires
principal payments to be made quarterly, and any outstanding loans under
the revolving credit line mature on March 28, 2007. The Credit Facility is
secured by the stock of the Company's domestic subsidiaries and all
present and future assets of the Company, excluding real property. The
Credit Facility contains covenants, representations, warranties and other
agreements by the Company that are customary in credit agreements and
security instruments relating to financings of this type.
16. On June 17, 2002 the Company announced that it was commencing a public
offering of 1,800,000 shares of its common stock through an underwriting
group led by Banc of America Securities LLC. On June 28, 2002 the Company
announced the postponment of the public offering, due to adverse market
conditions. On September 12, 2002 the Company announced that it was
considering the recommencement of the public offering. On September 24,
2002, however, the Company announced that it had postponed indefinitely
any plans for the recommencement of the public offering, again due to
unfavorable market conditions. Selling, general and administrative
expenses for the third quarter of 2002 include $500 of expenses related to
the indefinitely postponed public offering.
14
17. The condensed consolidating financial statements, for the dates or periods
indicated, of Chattem, Inc. ("Chattem"), Signal Investment & Management
Co. ("Signal") and SunDex, Inc. ("SunDex"), the guarantors of the
long-term debt of Chattem, and the non-guarantor wholly-owned subsidiary
companies of Chattem are presented below. Signal and SunDex are
wholly-owned subsidiaries of Chattem; the guarantee of Signal and SunDex
is full and unconditional and joint and several.
15
Note 17
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING BALANCE SHEETS
----------------------------
AUGUST 31, 2002
---------------
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL SUNDEX COMPANIES DR. (CR.) CONSOLIDATED
--------- --------- --------- --------- --------- ---------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 27,572 $ 458 $ 2,231 $ 4,364 $ -- $ 34,625
Accounts receivable, less allowance for
doubtful accounts of $838 ................... 24,162 -- -- 4,988 -- 29,150
Refundable and deferred income taxes .......... 8,553 -- -- 101 -- 8,654
Inventories ................................... 9,392 -- 2,368 2,744 -- 14,504
Prepaid expenses and other current assets ..... 2,828 -- -- 193 -- 3,021
--------- --------- --------- --------- --------- ---------
Total current assets ........................ 72,507 458 4,599 12,390 -- 89,954
--------- --------- --------- --------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT,
NET ......................................... 25,504 -- 775 347 -- 26,626
--------- --------- --------- --------- --------- ---------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased
product rights, net ......................... 1,483 182,095 62,290 -- -- 245,868
Debt issuance costs, net ...................... 7,881 -- -- -- -- 7,881
Investment in subsidiaries .................... 71,725 -- -- -- (71,725) --
Other ......................................... 2,106 -- -- 17 -- 2,123
--------- --------- --------- --------- --------- ---------
Total other noncurrent assets ............... 83,195 182,095 62,290 17 (71,725) 255,872
--------- --------- --------- --------- --------- ---------
TOTAL ASSETS .............................. $ 181,206 $ 182,553 $ 67,664 $ 12,754 $ (71,725) $ 372,452
========= ========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
- -----------------------------
EQUITY
------
CURRENT LIABILITIES:
Current maturities of long-term debt .......... $ 7,000 $ -- $ -- $ -- $ -- $ 7,000
Accounts payable .............................. 12,116 -- -- 787 -- 12,903
Payable to bank ............................... 213 -- -- -- -- 213
Accrued liabilities ........................... 31,668 -- -- 614 -- 32,282
--------- --------- --------- --------- --------- ---------
Total current liabilities ................... 50,997 -- -- 1,401 -- 52,398
--------- --------- --------- --------- --------- ---------
LONG-TERM DEBT, less current maturities ......... 234,716 -- -- -- -- 234,716
--------- --------- --------- --------- --------- ---------
DEFERRED INCOME TAXES ........................... 7,542 9,410 -- -- -- 16,952
--------- --------- --------- --------- --------- ---------
OTHER NONCURRENT LIABILITIES .................... 1,622 -- -- -- -- 1,622
--------- --------- --------- --------- --------- ---------
INTERCOMPANY ACCOUNTS ........................... (185,642) 182,865 2,654 123 -- --
--------- --------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued ............... -- -- -- -- -- --
Common shares, without par value,
authorized 50,000, issued 9,453 ............. 1,968 2 63,065 8,658 71,725 1,968
Paid-in surplus ............................... 73,795 -- -- -- -- 73,795
Retained earnings (deficit) ................... (1,621) (9,724) 1,945 3,827 -- (5,573)
--------- --------- --------- --------- --------- ---------
Total ....................................... 74,142 (9,722) 65,010 12,485 71,725 70,190
Unamortized value of restricted common
shares issued ............................... (672) -- -- -- -- (672)
Cumulative other comprehensive income:
Foreign currency translation adjustment ...... (499) -- -- (1,255) -- (1,754)
Minimum pension liability adjustment, net .... (1,000) -- -- -- -- (1,000)
--------- --------- --------- --------- --------- ---------
Total shareholders' equity (deficit) ........ 71,971 (9,722) 65,010 11,230 71,725 66,764
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .................. $ 181,206 $ 182,553 $ 67,664 $ 12,754 $ 71,725 $ 372,452
========= ========= ========= ========= ========= =========
16
Note 17
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING BALANCE SHEETS
----------------------------
NOVEMBER 30, 2001
-----------------
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
--------- --------- --------- --------- ---------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 20,648 $ 10,003 $ 4,794 $ -- $ 35,445
Accounts receivable, less allowance for
doubtful accounts of $500 ................... 17,690 -- 3,170 -- 20,860
Refundable and deferred income taxes .......... 4,545 -- 101 -- 4,646
Inventories ................................... 12,409 -- 1,851 -- 14,260
Prepaid expenses and other current assets ..... 2,517 -- 150 -- 2,667
--------- --------- --------- --------- ---------
Total current assets ........................ 57,809 10,003 10,066 -- 77,878
--------- --------- --------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT,
NET ........................................... 25,879 -- 396 -- 26,275
--------- --------- --------- --------- ---------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased
product rights, net ......................... 3,987 181,386 -- -- 185,373
Debt issuance costs, net ...................... 7,665 -- -- -- 7,665
Investment in subsidiaries .................... 8,280 -- -- (8,280) --
Other ......................................... 2,436 -- 46 -- 2,482
--------- --------- --------- --------- ---------
Total other noncurrent assets ............... 22,368 181,386 46 (8,280) 195,520
--------- --------- --------- --------- ---------
TOTAL ASSETS .............................. $ 106,056 $ 191,389 $ 10,508 $ (8,280) $ 299,673
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
- -----------------------------
EQUITY
------
CURRENT LIABILITIES:
Accounts payable .............................. $ 8,523 $ -- $ 487 $ -- $ 9,010
Payable to bank ............................... 151 -- -- -- 151
Accrued liabilities ........................... 13,851 -- 1,287 -- 15,138
--------- --------- --------- --------- ---------
Total current liabilities ................... 22,525 -- 1,774 -- 24,299
--------- --------- --------- --------- ---------
LONG-TERM DEBT .................................. 204,740 -- -- -- 204,740
--------- --------- --------- --------- ---------
DEFERRED INCOME TAXES ........................... 1,401 14,850 -- -- 16,251
--------- --------- --------- --------- ---------
OTHER NONCURRENT LIABILITIES .................... 1,765 -- -- -- 1,765
--------- --------- --------- --------- ---------
INTERCOMPANY ACCOUNTS ........................... (178,860) 179,833 (973) -- --
--------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued ............... -- -- -- -- --
Common shares, without par value,
authorized 50,000, issued 8,973 ............. 1,868 2 8,278 8,280 1,868
Paid-in surplus ............................... 65,960 -- -- -- 65,960
Retained earnings (deficit) ................... (10,994) (3,296) 3,170 -- (11,120)
--------- --------- --------- --------- ---------
Total ....................................... 56,834 (3,294) 11,448 8,280 56,708
Unamortized value of restricted common
shares issued ............................... (859) -- -- -- (859)
Cumulative other comprehensive income:
Foreign currency translation adjustment ...... (490) -- (1,741) -- (2,231)
Minimum pension liability adjustment, net .... (1,000) -- -- -- (1,000)
--------- --------- --------- --------- ---------
Total shareholders' equity (deficit) ........ 54,485 (3,294) 9,707 8,280 52,618
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .................. $ 106,056 $ 191,389 $ 10,508 $ 8,280 $ 299,673
========= ========= ========= ========= =========
17
Note 17
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING STATEMENTS OF INCOME
----------------------------------
FOR THE NINE MONTHS ENDED AUGUST 31, 2002
-----------------------------------------
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL SUNDEX COMPANIES DR. (CR.) CONSOLIDATED
--------- --------- --------- --------- --------- ---------
TOTAL REVENUES ........................... $ 141,966 $ -- $ 17,502 $ 12,022 $ -- $ 171,490
--------- --------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales .......................... 38,893 -- 5,193 4,587 -- 48,673
Advertising and promotion .............. 45,900 -- 6,296 3,080 -- 55,276
Selling, general and administrative .... 27,051 8 119 1,824 -- 29,002
--------- --------- --------- --------- --------- ---------
Total costs and expenses ............. 111,844 8 11,608 9,491 -- 132,951
--------- --------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS ............ 30,122 (8) 5,894 2,531 -- 38,539
--------- --------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense ....................... (15,518) -- -- -- -- (15,518)
Investment and other income, net ....... 143 66 -- 34 -- 243
Royalties .............................. (6,984) 8,198 (973) (241) -- --
Insurance premiums ..................... (500) -- -- 500 -- --
Corporate allocations .................. 1,862 -- (1,784) (78) -- --
--------- --------- --------- --------- --------- ---------
Total other income (expense) ........ (20,997) 8,264 (2,757) 215 -- (15,275)
--------- --------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
CHANGE IN ACCOUNTING PRINCIPLE .......... 9,125 8,256 3,137 2,746 -- 23,264
PROVISION FOR INCOME TAXES ............... 4,416 2,807 1,192 425 -- 8,840
--------- --------- --------- --------- --------- ---------
INCOME BEFORE CHANGE IN
ACCOUNTING PRINCIPLE ................... 4,709 5,449 1,945 2,321 -- 14,424
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF
INCOME TAX BENEFIT ..................... -- (8,877) -- -- -- (8,877)
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) ........................ $ 4, 709 $ (3,428) $ 1,945 $ 2,321 $ -- $ 5,547
========= ========= ========= ========= ========= =========
18
Note 17
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING STATEMENTS OF INCOME
----------------------------------
FOR THE NINE MONTHS ENDED AUGUST 31, 2001
-----------------------------------------
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
--------- --------- --------- --------- ---------
NET SALES ................................ $ 130,485 $ -- $ 9,490 $ -- $ 139,975
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales .......................... 36,849 -- 3,704 -- 40,553
Advertising and promotion .............. 41,688 4,179 2,575 -- 48,442
Selling, general and administrative .... 23,427 15 1,549 -- 24,991
--------- --------- --------- --------- ---------
Total costs and expenses ............. 101,964 4,194 7,828 -- 113,986
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS ........... 28,521 (4,194) 1,662 -- 25,989
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense ....................... (17,024) -- -- -- (17,024)
Investment and other income, net ....... 337 1,537 36 -- 1,910
Royalties .............................. (6,895) 7,083 (188) -- --
Insurance premiums ..................... (40) -- 40 -- --
Corporate allocations .................. 23 -- (23) -- --
--------- --------- --------- --------- ---------
Total other income (expense) ........ (23,599) 8,620 (135) -- (15,114)
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY GAIN ..................... 4,922 4,426 1,527 -- 10,875
PROVISION FOR INCOME TAXES ............... 2,292 1,505 335 -- 4,132
--------- --------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY
GAIN ................................... 2,630 2,921 1,192 -- 6,743
EXTRAORDINARY GAIN ON EARLY
EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES ........................... 6,948 -- -- -- 6,948
--------- --------- --------- --------- ---------
NET INCOME ............................... $ 9,578 $ 2,921 $ 1,192 $ -- $ 13,691
========= ========= ========= ========= =========
19
Note 17
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING STATEMENTS OF CASH FLOWS
--------------------------------------
FOR THE NINE MONTHS ENDED AUGUST 31, 2002
-----------------------------------------
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL SUNDEX COMPANIES DR. (CR.) CONSOLIDATED
-------- -------- -------- -------- ------ --------
OPERATING ACTIVITIES:
Net income (loss) ..................................... $ 4,709 $ (3,428) $ 1,945 $ 2,321 $ -- $ 5,547
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ....................... 3,873 -- -- 96 -- 3,969
Deferred income tax provision ....................... 9,773 (5,440) -- -- -- 4,333
Provision for income taxes .......................... (3,999) 2,807 1,192 -- -- --
Cumulative effect of change in accounting
principle, net .................................... -- 8,877 -- -- -- 8,877
Stock option charge ................................. 175 -- -- -- -- 175
Other, net .......................................... (75) -- -- -- -- (75)
Changes in operating assets and liabilities, net
of product acquisition:
Accounts receivable ............................... (6,720) -- -- (1,570) -- (8,290)
Refundable income taxes ........................... 1,031 -- -- -- -- 1,031
Inventories ....................................... 2,862 -- (2,368) (738) -- (244)
Prepaid expenses and other current assets ......... (326) -- -- (28) -- (354)
Accounts payable and accrued liabilities .......... 21,451 -- -- (414) -- 21,037
-------- -------- -------- -------- ------ --------
Net cash provided by (used in) operating
activities .................................... 32,754 2,816 769 (333) -- 36,006
-------- -------- -------- -------- ------ --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ............ (2,600) -- -- (22) -- (2,622)
Purchase of trademarks and other product rights ....... (1,211) (73,785) -- -- -- (74,996)
Decrease in other assets, net ......................... 225 -- -- 29 -- 254
-------- -------- -------- -------- ------ --------
Net cash provided by (used in)
investing activities ......................... (3,586) (73,785) -- 7 -- (77,364)
-------- -------- -------- -------- ------ --------
FINANCING ACTIVITIES:
Repayment of long-term debt ........................... (8,000) -- -- -- -- (8,000)
Proceeds from long-term debt .......................... 45,000 -- -- -- -- 45,000
Proceeds from exercise of stock options ............... 6,146 -- -- -- -- 6,146
Repurchase of common shares ........................... (1,650) -- -- -- -- (1,650)
Change in payable to bank ............................. 62 -- -- -- -- 62
Debt issuance costs ................................... (1,133) -- -- -- -- (1,133)
Changes in intercompany accounts ...................... (65,680) 64,424 1,462 (206) -- --
Dividends paid ........................................ 3,000 (3,000) -- -- -- --
-------- -------- -------- -------- ------ --------
Net cash provided by (used in) financing
activities ................................... (22,255) 61,424 1,462 (206) -- 40,425
-------- -------- -------- -------- ------ --------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS ............................. 11 -- -- 102 -- 113
-------- -------- -------- -------- ------ --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period .................... 6,924 (9,545) 2,231 (430) -- (820)
At beginning of period ................................ 20,648 10,003 -- 4,794 -- 35,445
-------- -------- -------- -------- ------ --------
At end of period ...................................... $ 27,572 $ 458 $ 2,231 $ 4,364 $ -- $ 34,625
======== ======== ======== ======== ====== ========
20
Note 17
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING STATEMENTS OF CASH FLOWS
--------------------------------------
FOR THE NINE MONTHS ENDED AUGUST 31, 2001
-----------------------------------------
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
--------- --------- --------- --------- ---------
OPERATING ACTIVITIES:
Net income ............................................ $ 9,578 $ 2,921 $ 1,192 $ -- $ 13,691
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................... 3,398 4,179 50 -- 7,627
Gain on product divestiture ......................... -- (79) -- -- (79)
Provision for income taxes .......................... (1,505) 1,505 -- -- --
Extraordinary gain on early extinguishment of
debt, net ......................................... (6,948) -- -- -- (6,948)
Stock option charge ................................. 394 -- -- -- 394
Other, net .......................................... (59) -- -- -- (59)
Changes in operating assets and liabilities, net
of product divestitures:
Accounts receivable ............................... 14,703 1,154 358 -- 16,215
Refundable income taxes ........................... 600 -- -- -- 600
Inventories ....................................... 1,760 -- 317 -- 2,077
Prepaid expenses and other current assets ......... (2,261) -- (48) -- (2,309)
Accounts payable and accrued liabilities .......... (15,986) -- (345) -- (16,331)
--------- --------- --------- --------- ---------
Net cash provided by operating activities ....... 3,674 9,680 1,524 -- 14,878
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ............ (1,496) -- (16) -- (1,512)
Additions to trademarks and other product rights ...... -- (277) -- -- (277)
Proceeds from product divestiture ..................... 1,179 -- -- -- 1,179
Decrease in other assets, net ......................... 374 -- -- -- 374
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities .......................... 57 (277) (16) -- (236)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Repayment of long- term debt .......................... (84,453) -- -- -- (84,453)
Payment of consent fees related to repayment of
long-term debt ...................................... (3,293) -- -- -- (3,293)
Proceeds from exercise of stock options ............... 95 -- -- -- 95
Change in payable to bank ............................. (1,529) -- -- -- (1,529)
Changes in intercompany accounts ...................... 92,351 (93,077) 726 -- --
Dividends paid ........................................ 3,000 (3,000) -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities ................................... 6,171 (96,077) 726 -- (89,180)
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS ............................. (32) -- 1 -- (31)
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period .................... 9,870 (86,674) 2,235 -- (74,569)
At beginning of period ................................ 5,515 95,747 1,272 -- 102,534
--------- --------- --------- --------- ---------
At end of period ...................................... $ 15,385 $ 9,073 $ 3,507 $ -- $ 27,965
========= ========= ========= ========= =========
21
18. The following table presents the computation of earnings per share of the
Company for the three and nine months ended August 31, 2002 and 2001,
respectively:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
-------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
NET INCOME:
Income before extraordinary gain (loss) and
change in accounting principle .................. $ 6,417 $ 2,748 $ 14,424 $ 6,743
Extraordinary gain (loss) ......................... -- (603) -- 6,948
Change in accounting principle .................... -- -- (8,877) --
-------- -------- -------- --------
Net income ................................. $ 6,417 $ 2,145 $ 5,547 $ 13,691
======== ======== ======== ========
NUMBER OF COMMON SHARES:
Weighted average outstanding ...................... 9,470 8,876 9,229 8,871
Issued upon assumed exercise of outstanding
stock options ................................... 417 142 350 40
Effect of issuance of restricted common stock ..... 48 13 44 6
-------- -------- -------- --------
Weighted average and potential dilutive
outstanding ............................... 9,935 9,031 9,623 8,917
======== ======== ======== ========
NET INCOME PER COMMON SHARE:
Basic:
Income before extraordinary gain (loss) and
change in accounting principle ............... $ .68 $ .31 $ 1.56 $ .76
Extraordinary gain (loss) ...................... -- (.07) -- .78
Change in accounting principle ................. -- -- (.96) --
-------- -------- -------- --------
Total basic ................................ $ .68 $ .24 $ .60 $ 1.54
======== ======== ======== ========
Diluted:
Income before extraordinary gain (loss) and
change in accounting principle ............... $ .65 $ .30 $ 1.50 $ .76
Extraordinary gain (loss) ...................... -- (.06) -- .78
Change in accounting principle ................. -- -- (.92) --
-------- -------- -------- --------
Total diluted .............................. $ .65 $ .24 $ .58 $ 1.54
======== ======== ======== ========
19. In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). SFAS 145, which will be adopted by the Company
effective December 1, 2002, will require the Company to classify gains and
losses on extinguishments of debt as income or loss from continuing
operations rather than as extraordinary items as previously required under
FASB Statement No. 4. The Company will also be required to reclassify any
gain or loss on extinguishment of debt previously classified as an
extraordinary item in prior periods presented. The results of operations
and financial position of the Company, therefore, will not be affected.
Ban(R) is a registered trademark of Kao Corporation.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
General
- -------
We are a leading marketer and manufacturer of a broad portfolio of branded
over-the-counter healthcare products, toiletries and dietary supplements,
including such categories as topical analgesics, skin care products, appetite
suppressants and medicated dandruff shampoos. Our portfolio of products includes
well-recognized brands, such as ICY HOT, ASPERCREME and FLEXALL topical
analgesics; GOLD BOND medicated skin care powder, cream, lotion and spray
products; PHISODERM medicated acne treatment products and skin cleansers;
DEXATRIM appetite suppressants; and SELSUN BLUE medicated dandruff shampoos. Our
products target niche markets that are often outside the core product areas of
large companies where we believe we can achieve and sustain significant market
penetration through strong advertising and promotion support. Many of our
products are among the U.S. market leaders in their respective categories. For
example, our portfolio of topical analgesic brands and our GOLD BOND medicated
body powders have the leading U.S. market share in these categories.
We have grown by actively acquiring new brands and expanding our existing
brands. Our strategy to achieve future growth is to acquire new brands, generate
profitable internal growth and expand our international business.
On March 28, 2002, we acquired the SELSUN BLUE line of medicated dandruff
shampoos from Abbott Laboratories for $75.0 million in cash, plus $1.4 million
for inventories and assumed liabilities of $1.2 million, which we financed with
a $45.0 million term loan under our senior credit facility and $31.4 million of
cash. We acquired the worldwide rights (except in India) to manufacture, sell
and market SELSUN BLUE plus related intellectual property and manufacturing
equipment. In 2001, SELSUN BLUE recorded $40.7 million in sales and product
contribution of $13.5 million.
Abbott Laboratories, or manufacturers under contract to Abbott Laboratories,
will initially manufacture SELSUN BLUE for us domestically until June 2003, or
such earlier date as we move production to our Chattanooga, Tennessee
facilities, which we expect to do by the second quarter of 2003. Abbott
Laboratories, or manufacturers under contract to Abbott Laboratories, will
manufacture SELSUN BLUE for us internationally until March 2004 or such earlier
date as we enter our own agreements with foreign contract manufacturers. We will
generally pay Abbott Laboratories 10% over standard manufacturing costs until we
assume manufacturing or enter into our own third party agreements, except as
discussed below. We will also rely on Abbott Laboratories to market, sell and
distribute SELSUN BLUE products for us in most foreign countries until we
satisfy various foreign regulatory requirements, new distributors are in place
and any applicable marketing permits are transferred. During the transition
period, Abbott Laboratories will initially pay us a royalty equal to 28% of
international net sales in these countries with the royalty reduced to 14% of
international sales in certain countries if foreign regulatory requirements are
satisfied prior to the assumption of sales and marketing responsibility in such
countries. Abbott Laboratories will pay all costs and expenses related to the
manufacture, marketing and sales of SELSUN BLUE in these foreign countries. As
we take over responsibility for the sales and marketing effort in a country, the
royalty arrangement with respect to such country will terminate and we will
record these international sales directly, as well as the costs and expenses
associated with these sales. We expect to complete the transition for most key
markets by the end of 2002 and for all other relevant foreign countries by March
2004. Total revenues for the three and nine months ended August 31, 2001
reflected our net sales, and total revenues for the three and nine months ended
August 31, 2002 reflected both our net sales and royalty income from
international sales of SELSUN BLUE.
In fiscal 2001 our international sales were $13.9 million, or 7.7% of net sales.
In 2001 SELSUN BLUE was sold in approximately 90 countries, with aggregate
international sales of $20.1 million, or approximately 50% of its total net
sales. Our plan is to expand SELSUN BLUE's international presence both in
existing and new markets. We also intend to leverage SELSUN BLUE's
international marketing and distribution network to launch other brands in
countries where they are not currently being sold.
23
Other key brand acquisitions include our acquisition of DEXATRIM, a line of
appetite suppressants, ASPERCREME, CAPZASIN, SPORTSCREME and ARTHRITIS HOT,
topical analgesics, in December 1998, and GOLD BOND, the leading medicated body
powder in the United States, in 1996.
Product line extensions are a key element of our effort to generate profitable
internal growth. In fiscal 1999 we introduced MUDD Self-Heating Skin Cleanser.
In fiscal 2000 we introduced PHISODERM 4-Way Daily Acne Cleanser and PHISODERM
Blemish Patch. During fiscal 2001 we introduced DEXATRIM Natural Ephedrine Free,
ICY HOT Patch, BULLFROG Fast Blast and BULLFROG Sensitive Skin as line
extensions. During the first quarter of fiscal 2002 we introduced DEXATRIM
Results, GOLD BOND Foot Spray, PHISODERM Acne Body Wash and PHISODERM Acne
Facial Masque, and we recently began shipping PHISODERM Clear Swab.
Line extensions, product introductions and acquisitions require a significant
amount of introductory advertising and promotional support. For a period of time
these products do not generate a commensurate amount of sales or earnings. As a
result, we may experience a short-term impact on our profitability.
We continually evaluate the profit potential of and markets for our brands and,
in instances where our objectives are not realized, will dispose of these
underperforming brands and redeploy the assets. For example, in September 2000
we sold the Ban product line of antiperspirants and deodorants for $160.0
million plus inventories and the assumption of certain liabilities, in response
to major shifts in the competitive environment in this product category and the
resulting prospect of declining sales. We used $52.2 million of the net proceeds
from the sale of Ban to repay all of the outstanding indebtedness under our
prior senior credit facility. In fiscal 2001 we sold Norwich aspirin for $1.1
million. In fiscal 1998 we sold the Cornsilk oil control makeup brand for $10.7
million, plus inventories and the assumption of certain liabilities. We recorded
a loss on product divestitures in fiscal 2000 of $4.2 million related to the
sale of Ban and $0.8 million in connection with the sale of Norwich aspirin.
In November 2000 we voluntarily withdrew our DEXATRIM products containing
phenylpropanolamine, or PPA, from the market. As a result of the withdrawal, we
recorded $8.4 million of charges, including a reserve of $5.6 million for
estimated product returns and a write-down of $2.8 million for inventories. In
fiscal 2000, sales of DEXATRIM containing PPA constituted approximately $18.0
million of the total DEXATRIM brand sales of $29.0 million. Despite the absence
of sales of DEXATRIM containing PPA in fiscal 2001, total DEXATRIM sales in
fiscal 2001 were $27.6 million, as a result of the growth of DEXATRIM Natural
sales from $10.9 million in fiscal 2000 to $27.5 million in fiscal 2001.
We currently offer two versions of DEXATRIM: DEXATRIM Natural and DEXATRIM
Results. Given the perceived safety concerns and the regulatory uncertainties
relating to ephedrine, we have developed alternative formulations for DEXATRIM
Natural and DEXATRIM Results to exclude ephedrine. We discontinued marketing of
DEXATRIM products containing ephedrine as of the end of September 2002, without
any material charges and/or reserves against sales.
On January 12, 2002 Kmart Corporation, a customer of ours representing
approximately 5% of our fiscal 2001 consolidated net sales, filed a petition
under Chapter 11 of the United States Bankruptcy Code. At the time of filing
Kmart Corporation owed us approximately $1.2 million. In the first quarter of
2002 we increased our allowance for doubtful accounts by $1.0 million for this
potential loss. This bankruptcy filing did not impact the results of operations
and financial position for fiscal 2001. In the second quarter of 2002 we sold
the outstanding amounts of accounts receivable related to Kmart Corporation to
Bank of America, N.A. for $0.4 million. We continue to sell to Kmart Corporation
at decreased volume levels and as of August 31, 2002 our receivables from Kmart
Corporation were approximately $1.1 million.
The Emerging Issues Task Force, or EITF, of the Financial Accounting Standards
Board, or FASB, finalized EITF Issue No. 00-14, "Accounting for Certain Sales
Incentives" and EITF Issue No. 00-25, "Vendor Income Statement Characterization
of Consideration Paid to a Reseller of the Vendor's Products" in November 2000
and July 2001, respectively. EITF Issue No. 00-14 requires us to classify the
reduction in or refund of the selling price of a product resulting from any cash
sales incentives as a reduction of revenue. We adopted EITF Issue No. 00-14
beginning in the first quarter of fiscal 2002. In prior periods, we recognized
all sales incentives as an advertising and promotion expense. This pronouncement
has the effect of reducing net sales
24
and advertising and promotion expense in comparison to prior years. Under the
provisions of EITF Issue No. 00-25, we are required to reclassify certain
marketing and selling expenses, previously classified under advertising and
promotion expenses and selling expenses, respectively, as reductions of net
sales. We adopted EITF Issue No. 00-25 beginning in the first quarter of fiscal
2002. Income statement information for the three and nine months ended August
31, 2001 has been restated to reflect the effect these pronouncements would have
had if adopted for those periods. The amounts of these advertising, promotion
and selling expenses for the three and nine months ended August 31, 2001 were
$2.8 million and $11.0 million, respectively.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth, for income before extraordinary gain (loss) and
change in accounting principle and for the periods indicated, certain items from
our consolidated statements of income expressed as a percentage of total
revenues (consisting of net sales plus, for periods in fiscal 2002, royalties
from international sales of SELSUN BLUE):
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
---------------------- ----------------------
2002(1) 2001(1) 2002(1) 2001(1)
----- ----- ----- -----
TOTAL REVENUES ........................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
COSTS AND EXPENSES:
Cost of sales .......................... 27.2 28.0 28.4 29.0
Advertising and promotion .............. 33.1 31.7 32.2 34.6
Selling, general and administrative .... 15.4 20.1 16.9 17.8
----- ----- ----- -----
Total costs and expenses ............. 75.7 79.8 77.5 81.4
----- ----- ----- -----
INCOME FROM OPERATIONS ................... 24.3 20.2 22.5 18.6
----- ----- ----- -----
OTHER INCOME (EXPENSE):
Interest expense ....................... (8.3) (11.0) (9.1) (12.2)
Investment and other income, net ....... .1 .6 .2 1.4
----- ----- ----- -----
Total other income (expense) ........ (8.2) (10.4) (8.9) (10.8)
----- ----- ----- -----
INCOME BEFORE INCOME TAXES ............... 16.1 9.8 13.6 7.8
PROVISION FOR INCOME TAXES ............... 6.1 3.7 5.2 3.0
----- ----- ----- -----
INCOME BEFORE EXTRAORDINARY
GAIN (LOSS) AND CHANGE IN
ACCOUNTING PRINCIPLE ................... 10.0% 6.1% 8.4% 4.8%
===== ===== ===== =====
(1) Amounts for the three and nine months ended August 31, 2002 reflect the
effect of the adoption of EITF Issue Nos. 00-14 and 00-25 and amounts for
the three and nine months ended August 31, 2001 have been restated to
reflect the effects these pronouncements would have had if adopted during
those periods.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The selection and application of accounting principles and methods impact our
financial results. Our most critical accounting policies are described below.
IMPAIRMENT TESTING OF INTANGIBLE ASSETS
- ---------------------------------------
In June 2001, the FASB issued Statement of Financial Accounting Standards, or
SFAS, No. 142,"Goodwill and Other Intangible Assets". The provisions of SFAS No.
142, which were adopted by us on December 1, 2001, require us to discontinue the
amortization of the cost of intangible assets with indefinite lives and to
perform certain fair value based tests of the carrying value of indefinite lived
intangible assets. SFAS No.142
25
requires this testing to be performed at least annually. These impairment tests
are impacted by judgments as to future cash flows and brand performance. For a
further discussion of SFAS No.142, see Note 3 of Notes to Consolidated Financial
Statements.
PRODUCT RETURN RESERVES
- -----------------------
Revenue is recognized when our products are shipped to our customers. It is our
policy across all classes of customers that all sales are final. As is common in
the consumer products industry, customers occasionally return products for a
variety of reasons. Examples include product damaged in transit, discontinuance
of a particular size or form of product and shipping errors. We record an
estimate of products to be returned by customers as a reserve against sales. We
generally base this reserve on our historical return experience and sales
volume. Significant judgment is required when estimating the reserves for
product returns.
For a summary of our significant accounting policies, see Note 2 of Notes to
Consolidated Financial Statements filed as an exhibit to our Form 10-K report
for the year ended November 30, 2001.
26
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 2002 AND 2001
- ---------------------------------------------------------
Our total revenues, comprised of net sales and royalty income from the
international sales of SELSUN BLUE, in the third quarter of fiscal 2002
increased $19.2 million, or 42.5%, to $64.4 million from $45.2 million in the
third quarter of fiscal 2001. Domestic sales increased $15.8 million, or 37.9%,
to $57.4 million from $41.6 million. International sales, including royalties
received from the SELSUN BLUE international sales, increased $3.4 million, or
95.1%, to $7.0 million, from $3.6 million in the third quarter of fiscal 2001.
For purposes of this comparison, the prior year amounts have been restated to
reflect the impact of EITF Issue Nos. 00-14 and 00-25.
For our domestic products, third quarter fiscal 2002 sales increases were
recognized for the topical analgesic product group, which includes ICY HOT,
ASPERCREME, FLEXALL, SPORTSCREME, CAPZASIN and ARTHRITIS HOT. The PHISODERM,
DEXATRIM, GOLD BOND, BULLFROG, SUN-IN, ULTRASWIM AND HERPECIN-L brands also
recognized sales increases. SUNSOURCE recognized a sales increase led by
GARLIQUE. Sales declines were recorded for the PAMPRIN and PREMSYN PMS brands.
Sales of our other products remained largely unchanged relative to the year-ago
period.
The increased sales for our topical analgesic product group were led by sales
increases of 34.7% for ICY HOT, 32.0% for ARTHRITIS HOT a