================================================================================
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 FEBRUARY 29, 2004
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.
THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE
ACT).
AS OF APRIL 1, 2004, 19,522,598 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT
PAR VALUE, WERE OUTSTANDING.
================================================================================
CHATTEM, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of February 29, 2004 and
November 30, 2003 3
Condensed Consolidated Statements of Operations for the Three
Months Ended February 29, 2004 and February 28, 2003 5
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended February 29, 2004 and February 28, 2003 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures About Market Risks 35
Item 4. Controls and Procedures 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 2. Changes in Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 5. Other Information 37
Item 6. Exhibits and Reports on Form 8-K 37
SIGNATURES 38
2
PART 1. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(In thousands)
FEBRUARY 29, NOVEMBER 30,
ASSETS 2004 2003
- ------ ------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 29,283 $ 26,931
Restricted cash (Note 3) 32,227 --
Accounts receivable, less allowances of $3,765 at
February 29, 2004 and $3,594 at November 30, 2003 34,586 25,478
Inventories 17,568 17,559
Refundable income taxes 8,183 4,431
Deferred income taxes 2,551 3,441
Prepaid expenses and other current assets 1,284 3,376
------------ ------------
Total current assets 125,682 81,216
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 28,389 28,722
------------ ------------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product rights, net 245,787 245,847
Debt issuance costs, net 6,432 5,504
Other 2,751 2,096
------------ ------------
Total other noncurrent assets 254,970 253,447
------------ ------------
TOTAL ASSETS $ 409,041 $ 363,385
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(In thousands)
FEBRUARY 29, NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2004 2003
- ------------------------------------ ------------ ------------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ 7,750
Called debt (Notes 3 and 13) 30,028 --
Accounts payable and other 11,746 10,924
Accrued liabilities 15,056 15,979
------------ ------------
Total current liabilities 56,830 34,653
------------ ------------
LONG-TERM DEBT, less current maturities and called debt 225,000 204,676
------------ ------------
DEFERRED INCOME TAXES 27,888 26,796
------------ ------------
OTHER NONCURRENT LIABILITIES 1,710 1,689
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 19)
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000,
none issued -- --
Common shares, without par value, authorized 50,000,
issued 19,458 at February 29, 2004 and 19,161 at
November 30, 2003 81,474 77,815
Retained earnings 21,562 22,274
------------ ------------
103,036 100,089
Unamortized value of restricted common shares issued (3,233) (2,058)
Cumulative other comprehensive income:
Foreign currency translation adjustment (550) (820)
Minimum pension liability adjustment, net of income taxes (1,640) (1,640)
------------ ------------
Total shareholders' equity 97,613 95,571
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 409,041 $ 363,385
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited and in thousands, except per share amounts)
FOR THE THREE MONTHS ENDED
---------------------------------
FEBRUARY 29, FEBRUARY 28,
2004 2003
------------ ------------
REVENUES:
Net sales $ 60,927 $ 58,125
Royalties 310 300
------------ ------------
Total revenues 61,237 58,425
------------ ------------
COSTS AND EXPENSES:
Cost of sales 16,952 17,691
Advertising and promotion 18,532 18,405
Selling, general and administrative 10,829 9,814
------------ ------------
Total costs and expenses 46,313 45,910
------------ ------------
INCOME FROM OPERATIONS 14,924 12,515
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (4,755) (5,147)
Investment and other income, net 45 34
Loss on early extinguishment of debt (11,309) --
------------ ------------
Total other income (expense) (16,019) (5,113)
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (1,095) 7,402
(BENEFIT FROM) PROVISION FOR INCOME TAXES (383) 2,813
------------ ------------
NET (LOSS) INCOME $ (712) $ 4,589
============ ============
NUMBER OF COMMON SHARES:
Weighted average outstanding - basic 19,099 19,165
============ ============
Weighted average and potential dilutive outstanding 19,881 19,949
============ ============
NET (LOSS) INCOME PER COMMON SHARE:
Basic $ (.04) $ .24
============ ============
Diluted $ (.04) $ .23
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited and in thousands, except per share amount)
FOR THE THREE MONTHS ENDED
---------------------------------
FEBRUARY 29, FEBRUARY 28,
2004 2003
------------ ------------
OPERATING ACTIVITIES:
Net (loss) income $ (712) $ 4,589
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization 1,537 1,499
Deferred income taxes 1,982 952
Tax benefit realized from stock option plans 1,083 143
Loss on early extinguishment of debt 11,309 --
Other, net -- (129)
Changes in operating assets and liabilities:
Accounts receivable (9,108) (6,770)
Inventories (9) (1,116)
Refundable income taxes (3,752) (1,134)
Prepaid expenses and other current assets 2,092 253
Accounts payable and accrued liabilities (101) 10,045
------------ ------------
Net cash provided by operating activities 4,321 8,332
------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (491) (1,464)
Purchases of patents, trademarks and other product rights (17) --
(Increase) decrease in other assets, net (490) 955
------------ ------------
Net cash used in investing activities (998) (509)
------------ ------------
FINANCING ACTIVITIES:
Repayment of long-term debt (182,280) (1,750)
Proceeds from long-term debt 200,000 --
Proceeds from borrowings under revolving credit facility 25,000 --
Proceeds from exercise of stock options 1,453 160
Repurchase of common shares (319) (1,579)
Increase in debt issuance costs (5,678) --
Retirement of debt issuance costs (6,946) --
Restricted cash (32,227) --
------------ ------------
Net cash used in financing activities (997) (3,169)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
26 148
------------ ------------
CASH AND CASH EQUIVALENTS:
Increase for the period 2,352 4,802
At beginning of period 26,931 15,924
------------ ------------
At end of period $ 29,283 $ 20,726
============ ============
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 70 shares of restricted common stock at a value of $19.98
per share $ 1,399 $ --
PAYMENTS FOR:
Interest $ 6,378 $ 383
Taxes $ 108 $ 6
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
All monetary and share amounts are expressed in thousands.
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited condensed 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 condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in our
Annual Report on Form 10-K for the year ended November 30, 2003. The
accompanying unaudited condensed consolidated financial statements, in the
opinion of management, include all adjustments necessary for a fair
presentation. All such adjustments are of a normal recurring nature.
2. CASH AND CASH EQUIVALENTS
-------------------------
We consider all short-term deposits and investments with original
maturities of three months or less to be cash equivalents.
3. RESTRICTED CASH
---------------
On February 10, 2004, we commenced a cash tender offer and consent
solicitation for the $204,538 outstanding principal amount of our 8.875%
Subordinated Notes (defined in Note 13). The consent solicitation expired
on February 24, 2004, and a total of approximately $174,530, or
approximately 85.3% of the 8.875% Subordinated Notes, were tendered and
accepted for payment on February 26, 2004. The remaining principal
outstanding, call premium, accrued interest and interest to call date
amounting to $32,227 was placed in escrow with the trustee of the indenture
to fund the purchase of additional 8.875% Subordinated Notes tendered prior
to March 9, 2004, the expiration date of the tender offer, and the
redemption of the remaining 8.875% Subordinated Notes that were not
tendered in such offer in accordance with their terms on April 1, 2004 at a
redemption price of 102.9583% of their aggregate principal amount (See Note
13). As of February 29, 2004, restricted cash is comprised of the
following:
Called principal $ 30,008
Accrued interest 1,072
Call premium 888
Interest to call date 259
------------
Total restricted cash $ 32,227
============
4. RECLASSIFICATIONS
-----------------
Certain prior year amounts have been reclassified to conform to the
current period's presentation.
5. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS 143"). We adopted SFAS 143 on
December 1, 2002. SFAS 143 establishes accounting standards for the
recognition and measurement of an asset retirement obligation and its
associated asset retirement cost. It also provides accounting guidance for
legal obligations associated with the retirement of tangible long-lived
assets. The adoption of SFAS 143 did not have an impact on our financial
position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145"). We adopted SFAS 145 on December 1,
2002. SFAS 145 requires us 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 SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of
7
Debt". We are also required to reclassify any gain or loss on
extinguishment of debt previously classified as an extraordinary item in
prior periods presented. SFAS 145 also provides accounting standards for
certain lease modifications that have economic effects similar to
sale-leaseback transactions and various other technical corrections. The
adoption of SFAS 145 did not have an impact on our financial position,
results of operations or cash flows, except for the loss on early
extinguishment of debt of $11,309 in the first quarter of fiscal 2004,
which was classified in the condensed consolidated financial statements in
accordance with the provisions of SFAS 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). We adopted SFAS
146 on January 1, 2003. SFAS 146 supercedes Emerging Issues Task Force
("EITF") Issue No. 94-3. SFAS 146 requires that the liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred, not at the date of an entity's commitment to an exit
or disposal plan. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The adoption of SFAS
146 did not have an impact on our financial position, results of operations
or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 supercedes
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness
of Others," and provides guidance on the recognition and disclosures to be
made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees. The initial recognition and
measurement provisions of FIN 45 are effective for guarantees issued or
modified after December 31, 2002 and are to be applied prospectively. The
disclosure requirements are effective for financial statements for interim
or annual periods ending after December 15, 2002. We had no instruments or
guarantees that required additional or enhanced disclosure under FIN 45 at
February 29, 2004, except as disclosed in Note 20, and no guarantees issued
or modified after December 31, 2002 that required recognition and
measurement in accordance with the provisions of FIN 45. The adoption of
FIN 45 did not have an impact on our financial position, results of
operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
to provide alternative methods of transition for a voluntary change to the
fair-value-based method of accounting for stock-based employee
compensation. SFAS 148 also amends Accounting Principles Board Opinion No.
28, "Interim Financial Reporting" ("APB 28"), to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on
reported net income and earnings per share in annual and interim financial
statements. The transition guidance and annual disclosure provisions of
SFAS 148 are effective for fiscal years ending December 31, 2002. We
implemented the interim disclosure provision in our first quarter of fiscal
2003. The adoption of SFAS 148 did not have an impact on our financial
position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). FIN 46 requires a company to
consolidate a variable interest entity ("VIE"), as defined, when the
company will absorb a majority of the VIE's expected losses, receives a
majority of the VIE's expected residual returns or both. FIN 46 also
requires consolidation of existing, non-controlled affiliates if the VIE is
unable to finance its operations without investor support, or where the
other investors do not have exposure to the significant risks and rewards
of ownership. FIN 46 applies immediately to a VIE created or acquired after
January 31, 2003. For a VIE created before February 1, 2003, FIN 46 applies
in the first fiscal year or interim period beginning after March 15, 2004.
Application of FIN 46 is also required in financial statements that have
interests in structures that are commonly referred to as special-purpose
entities for periods ending after December 15, 2003. The adoption of FIN 46
will not have an impact on our financial position, results of operations or
cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS
149 amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS 149 is generally effective for derivative
instruments, including derivative instruments embedded in certain
contracts, entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did
not have an impact on our financial position, results of operations or cash
flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). The statement modifies the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
equity. The new statement requires that those instruments be classified as
liabilities in a company's statement of financial position. This statement
is effective for our interim periods beginning after June 15, 2003. The
adoption of SFAS 150 did not have an impact on our financial position,
results of operations or cash flows.
8
In July 2003, the EITF reached a consensus on Issue No. 03-11,
"Reporting Gains and Losses on Derivative Instruments and Hedging
Activities, and Not Held for Trading Purposes" ("EITF 03-11"). EITF 03-11
addresses when gains and losses on derivative contracts not held for
trading purposes should be reported on a net basis. The adoption of EITF
03-11 did not have an impact on our financial position, results of
operations or cash flows.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosure about Pensions and Other Postretirement Benefits"
("SFAS 132"). The revision of SFAS 132 provides for additional disclosures
including the description of the types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows, and components of net
periodic benefit cost recognized in interim periods. The revisions of SFAS
132 are effective for financial statements with fiscal years ending after
December 15, 2003 and interim periods beginning after December 15, 2003.
The adoption of the revised SFAS 132 did not have an impact on our
financial position, results of operations or cash flows.
6. STOCK-BASED COMPENSATION
------------------------
Our 1998 Non-Statutory Stock Option Plan provides for the issuance of
up to 1,400 shares of common stock to key employees, while the 1999
Non-Statutory Stock Option Plan for Non-Employee Directors allows for the
issuance of up to 200 shares of common stock. The 2000 Non-Statutory Stock
Option Plan provides for the issuance of up to 1,500 shares of common
stock. The 2003 Stock Incentive Plan provides for the issuance of up to
1,500 shares of common stock. Options vest ratably over four years and are
exercisable for a period of up to ten years from the date of grant.
For SFAS 123 purposes, as amended by SFAS 148, the fair value of each
option grant has been estimated as of the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 2004 and 2003: expected dividend yield of 0%,
expected volatility of 53% and 64%, respectively, risk-free interest rates
of 3.97% and 3.69%, respectively, and expected lives of six years.
Had compensation expense for stock option grants been determined based
on the fair value at the grant dates consistent with the method prescribed
by SFAS 123, our net (loss) income and net (loss) income per share would
have been adjusted to the pro forma amounts for the three months ended
February 29, 2004 and February 28, 2003, respectively, as indicated below:
2004 2003
-------- --------
Net (loss) income:
As reported $ (712) $ 4,589
Fair value method compensation cost, net 861 525
-------- --------
Pro forma $ (1,573) $ 4,064
======== ========
Net (loss) income per share, basic:
As reported $ (.04) $ .24
Pro forma $ (.08) $ .21
Net (loss) income per share, diluted:
As reported $ (.04) $ .23
Pro forma $ (.08) $ .20
9
7. EARNINGS PER SHARE
------------------
The following table presents the computation of per share earnings for
the three months ended February 29, 2004 and February 28, 2003,
respectively:
2004 2003
---------- ----------
NET (LOSS) INCOME $ (712) $ 4,589
========== ==========
NUMBER OF COMMON SHARES:
Weighted average outstanding 19,099 19,165
Issued upon assumed exercise of
outstanding stock options 712 688
Effect of issuance of restricted common
shares 70 96
---------- ----------
Weighted average and potential
dilutive outstanding (1) 19,881 19,949
========== ==========
NET (LOSS) INCOME PER COMMON SHARE:
Basic $ (.04) $ .24
========== ==========
Diluted $ (.04) $ .23
========== ==========
(1) Because their effects are anti-dilutive, excludes shares issuable
under stock option plans and restricted stock issuance whose grant
price was greater than the average market price of common shares
outstanding as follows: 62 shares in 2004 and 80 shares in 2003.
8. ADVERTISING EXPENSES
--------------------
We incur significant expenditures on television, radio and print
advertising to support our nationally branded over-the-counter ("OTC")
health care products and toiletries. Customers purchase products from us
with the understanding that the brands will be supported by our extensive
media advertising. This advertising supports the retailers' sales effort
and maintains the important brand franchise with the consuming public.
Accordingly, we consider our advertising program to be clearly implicit in
our sales arrangements with our customers. Therefore, we believe 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 APB 28) and adjusting that
accrual to the actual expenses incurred at the end of the year.
9. SHIPPING AND HANDLING
---------------------
Shipping and handling costs of $1,434 and $1,458 are included in
selling expenses for the three months ended February 29, 2004 and February
28, 2003, respectively.
10. PATENT, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS
-----------------------------------------------------
The carrying value of trademarks, which are not subject to
amortization under the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), was $244,807 and $244,790 as of February
29, 2004 and November 30, 2003, respectively. The gross carrying amount of
intangible assets subject to amortization at both February 29, 2004 and
November 30, 2003, which consist primarily of non-compete agreements, was
$2,400. The related accumulated amortization of intangible assets at
February 29, 2004 and November 30, 2003 was $1,420 and $1,343,
respectively. Amortization of our intangible assets subject to amortization
under the provisions of SFAS 142 for the three months ended February 29,
2004 and February 28, 2003 was $77 and $85, respectively. Estimated annual
amortization expense for these assets for the years ended November 30,
2005, 2006, 2007, 2008 and 2009 is $290, $290, $123, $40 and $20,
respectively.
10
11. INVENTORIES
-----------
Inventories consisted of the following as of February 29, 2004 and
November 30, 2003:
2004 2003
---------- ----------
Raw materials and work in process $ 8,038 $ 9,740
Finished goods 11,218 9,507
Excess of current cost over LIFO values (1,688) (1,688)
---------- ----------
Total inventories $ 17,568 $ 17,559
========== ==========
12. ACCRUED LIABILITIES
-------------------
Accrued liabilities consisted of the following as of February 29, 2004
and November 30, 2003:
2004 2003
---------- ----------
Interest $ 1,217 $ 3,115
Salaries, wages and commissions 1,526 3,604
Product advertising and promotion 8,855 5,348
Product acquisitions and divestitures 205 205
Property and other taxes 149 354
Consulting fees 280 301
Insurance 683 1,151
Pension 998 1,040
Other 1,143 861
---------- ----------
Total accrued liabilities $ 15,056 $ 15,979
========== ==========
13. LONG-TERM DEBT
--------------
Long-term debt consisted of the following as of February 29, 2004 and
November 30, 2003:
2004 2003
---------- ----------
Revolving Credit Facility due 2009 at a
variable rate of 4.75% as of
February 29, 2004 $ 25,000 $ --
Term loan payable to banks at variable
rates of 3.42% and 3.39% as of
February 26, 2004 (termination date)
and November 30, 2003, respectively -- 7,750
Called - 8.875% Senior Subordinated
Notes, due 2008, plus unamortized
premium of $20 for 2004 and $138
for 2003 30,028 204,676
Floating Rate Senior Notes due 2010
at a variable rate of 4.12% as of
February 29, 2004 75,000 --
7.0% Senior Subordinated Notes due 2014 125,000 --
---------- ----------
Total long-term debt 255,028 212,426
Less: current maturities and called
debt 30,028 7,750
---------- ----------
Total long-term debt, net of current
maturities and called debt $ 225,000 $ 204,676
========== ==========
On February 26, 2004, we entered into a new Senior Secured Revolving
Credit Facility due February 26, 2009 (the "Revolving Credit Facility")
with Bank of America, N.A. that provided an initial borrowing capacity of
$25,000 and an additional $25,000, subject to successful syndication. On
March 9, 2004, we entered into a new commitment agreement with a syndicate
of commercial banks led by Bank of America, N.A., as agent, that enables us
to borrow up to a total of $50,000. Borrowings under our Revolving Credit
Facility bear interest at LIBOR plus applicable percentages of 1.75% to
2.50% or a base rate (the higher of the federal funds rate plus 0.5% or the
prime rate) plus applicable percentages of 0.25% to 1.0%. The applicable
percentages are calculated based on our leverage ratio. As of February 29,
2004, $25,000 had been borrowed under the Revolving Credit Facility and the
variable rate was 4.75%. Borrowings under our Revolving Credit Facility are
secured by substantially all of our assets, except real property, and
shares of capital stock of our domestic
11
subsidiaries held by us and by the assets of the guarantors (our domestic
subsidiaries). The Revolving Credit Facility contains covenants,
representations, warranties and other agreements by us that are customary
in credit agreements and security instruments relating to financings of
this type. The significant financial covenants include fixed charge
coverage ratio, leverage ratio, senior secured leverage ratio, net worth
and brand value calculations. On March 9, 2004, we repaid $15,000 of our
outstanding borrowings under our Revolving Credit Facility. As of April 1,
2004, the Revolving Credit Facility had an outstanding balance of $10,000.
On March 28, 2002, we 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 included a $15,000
revolving credit line and a $45,000 term loan. The remaining balance of the
term loan was repaid as part of the refinancing transactions discussed
herein, and the revolving credit line was terminated on February 26, 2004.
On February 10, 2004, we commenced a cash tender offer and consent
solicitation for the $204,538 outstanding principal amount of our 8.875%
Senior Subordinated Notes due 2008 (the "8.875% Subordinated Notes"). The
consent solicitation expired on February 24, 2004, and a total of
approximately $174,530, or approximately 85.3% of the 8.875% Subordinated
Notes, were tendered and accepted for payment on February 26, 2004. The
remaining principal outstanding, call premium, accrued interest and
interest to call date amounting to $32,227 was placed in escrow with the
trustee of the indenture to fund the purchase of additional 8.875%
Subordinated Notes tendered prior to March 9, 2004, the expiration date of
the tender offer, and the redemption of the remaining 8.875% Subordinated
Notes that were not tendered in such offer in accordance with their terms
on April 1, 2004 at a redemption price of 102.9583% of their aggregate
principal amount. The cash placed in escrow used to pay these obligations
is included in restricted cash in the Condensed Consolidated Balance Sheet
(See Note 3).
On February 26, 2004, we completed our refinancing of the Credit
Facility and purchased approximately $174,530 of our 8.875% Subordinated
Notes that were tendered, which resulted in a loss on early extinguishment
of debt of $11,309 and a tax benefit of $3,958. In the second quarter of
fiscal 2004, we anticipate recording an additional loss on early
extinguishment of debt of approximately $1,600 and a related tax benefit of
$500 related to the redemption of the remaining $30,008 of our called
8.875% Subordinated Notes.
On February 26, 2004, we issued and sold $75,000 of Floating Rate
Senior Notes due March 1, 2010 (the "Floating Rate Notes") and $125,000 of
7.0% Senior Subordinated Notes due March 1, 2014 (the "7.0% Subordinated
Notes").
The Floating Rate Notes bear interest at a three-month LIBOR plus
3.00% per year (4.12% as of February 29, 2004). Interest payments are due
quarterly in arrears commencing on June 1, 2004. On March 8, 2004, we
entered into an interest rate cap agreement effective June 1, 2004 with
decreasing notional principal amounts and cap rates ranging from 4.0% to
5.0% over the life of the agreement. We paid a $1,375 premium to enter into
the interest rate cap agreement, which will be amortized over the life of
the agreement. The interest rate cap agreement terminates on March 1, 2010.
Our domestic subsidiaries are guarantors of the Floating Rate Notes. The
guarantees of the Floating Rate Notes will be unsecured senior obligations
of the guarantors and will rank equally with all of the current and future
unsecured senior debt of the guarantors. The guarantees of the Floating
Rate Notes will effectively rank junior to any secured debt of the
guarantors, including the guarantors' guarantee of our indebtedness under
the Revolving Credit Facility. At any time after March 1, 2005, we may
redeem any of the Floating Rate Notes upon not less than 30 nor more than
60 days' notice at redemption prices (expressed in percentages of principal
amount), plus accrued and unpaid interest, if any, and liquidation damages,
if any, to the applicable redemption rate, if redeemed during the
twelve-month periods beginning March 1, 2005 at 102.0%, March 1, 2006 at
101.0% and March 1, 2007 and thereafter at 100.0%. At any time prior to
March 1, 2005, we may redeem up to 35% of the aggregate principal amount of
the Floating Rate Notes (including any additional Floating Rate Notes) at a
redemption price of 100.0% of the principal amount thereof, plus a premium
equal to the interest rate per annum on the Floating Rate Notes applicable
on the date on which notice of the redemption is given, together with
accrued and unpaid interest and liquidated damages, if any, with the net
cash proceeds of one or more qualified equity offerings; provided, that (i)
at least 65% of the aggregate principal amount of Floating Rate Notes
remains outstanding immediately after the occurrence of each redemption
(excluding Floating Rate Notes held by us and our subsidiaries); and (ii)
the redemption must occur within 90 days of the date of the closing of such
qualified equity offering.
Interest payments on the 7.0% Subordinated Notes are due semi-annually
in arrears on March 1 and September 1, commencing on September 1, 2004. Our
domestic subsidiaries are guarantors of the 7.0% Subordinated Notes. The
guarantees of the 7.0% Subordinated Notes will be unsecured senior
subordinated obligations of the guarantors. At any time after March 1,
2009, we may redeem any of the 7.0% Subordinated Notes upon not less than
30 nor more than 60 days' notice at redemption prices (expressed in
percentages of principal amount), plus accrued and unpaid interest, if any,
and liquidation damages, if any, to the applicable redemption rate, if
redeemed during the twelve-month periods beginning March 1, 2009 at
103.500%, March 1, 2010 at 102.333%, March 1, 2011 at 101.167% and March 1,
2012 and thereafter at 100%. At any time prior to March 1, 2007, we may
redeem up to 35% of the aggregate principal amount of the 7.0%
12
Subordinated Notes (including any additional 7.0% Subordinated Notes) at a
redemption price of 107% of the principal amount thereof, plus accrued and
unpaid interest and liquidated damages, if any, thereon to the applicable
redemption rate, with the net cash proceeds of one or more qualified equity
offerings; provided, that (i) at least 65% of the aggregate principal
amount of the 7.0% Subordinated Notes remains outstanding immediately after
the occurrence of such redemption (excluding 7.0% Subordinated Notes held
by us and our subsidiaries); and (ii) the redemption must occur within 90
days of the date of the closing of such qualified equity offering.
The indentures governing the Floating Rate Notes and 7.0% Subordinated
Notes will, among other things, limit our ability and the ability of our
restricted subsidiaries to: (i) borrow money or sell preferred stock, (ii)
create liens, (iii) pay dividends on or redeem or repurchase stock, (iv)
make certain types of investments, (v) sell stock in our restricted
subsidiaries, (vi) restrict dividends or other payments from restricted
subsidiaries, (vii) enter into transactions with affiliates, (viii) issue
guarantees of debt and (ix) sell assets or merge with other companies. In
addition, if we experience specific kinds of changes in control, we must
offer to purchase the Floating Rate Notes and 7.0% Subordinated Notes at
101% of their principal amount plus accrued and unpaid interest.
Excluding the $30,028 of called debt, the future maturities of
long-term debt outstanding as of February 29, 2004 are as follows:
2005 $ --
2006 --
2007 --
2008 --
2009 25,000
Thereafter 200,000
----------
$ 225,000
==========
14. COMPREHENSIVE INCOME
--------------------
Comprehensive income consisted of the following components for the
three months ended February 29, 2004 and February 28, 2003, respectively:
2004 2003
---------- ----------
Net (loss) income $ (712) $ 4,589
Other - foreign currency
translation adjustment 270 364
---------- ----------
Total $ (442) $ 4,953
========== ==========
15. STOCK BUYBACK
-------------
In January 2004, our board of directors increased the total
authorization to repurchase our common stock under our stock buyback
program to $20,000. In the first quarter of fiscal 2004, we repurchased 16
shares for $319. All repurchased shares were retired and returned to
unissued. We, however, are limited in our ability to repurchase shares due
to restrictions under the terms of our Revolving Credit Facility, Floating
Rate Notes and 7.0% Subordinated Notes.
16. RETIREMENT PLANS AND POSTRETIREMENT HEALTH CARE BENEFITS
--------------------------------------------------------
RETIREMENT PLANS
We have a noncontributory defined benefit pension plan ("the Plan"),
which covers substantially all employees. The Plan provides benefits based
upon years of service and the employee's compensation. Our contributions
are based on computations by independent actuaries. Plan assets at February
29, 2004 and November 30, 2003 were invested primarily in United States
government and agency securities and corporate debt and equity securities.
In October 2000, our board of directors adopted an amendment to the Plan
that freezes benefits of the Plan and prohibits new entrants to the Plan
effective December 31, 2000.
13
Net periodic pension cost for the three months ended February 29, 2004
and February 28, 2003 comprised the following components:
2004 2003
---------- ----------
Service cost $ -- $ --
Interest cost on projected benefit
obligation 155 152
Actual return on plan assets (178) (157)
Net amortization and deferral 28 (36)
---------- ----------
Net pension cost (benefit) $ 5 $ (41)
========== ==========
No employer contributions were made for the three months ended
February 29, 2004 and February 28, 2003, and no employer contributions are
expected to be made in fiscal 2004.
POSTRETIREMENT HEALTH CARE BENEFITS
We maintain certain postretirement health care benefits for eligible
employees. Employees become eligible for these benefits if they meet
certain age and service requirements. We pay a portion of the cost of
medical benefits for certain retired employees over the age of 65.
Effective January 1, 1993, our contribution is a service-based percentage
of the full premium. We pay these benefits as claims are incurred. Employer
contributions expected for fiscal 2004 are approximately $70.
Net periodic postretirement health care benefits cost for the three
months ended February 29, 2004 and February 28, 2003, included the
following components:
2004 2003
---------- ----------
Service cost $ 16 $ 14
Interest cost on accumulated
postretirement benefit obligation 20 20
Amortization of prior service cost 4 4
Amortization of net gain (8) (7)
---------- ----------
Net periodic postretirement benefits
cost $ 32 $ 31
========== ==========
17. INCOME TAXES
------------
We account for income taxes using the asset and liability approach as
prescribed by SFAS No. 109, "Accounting for Income Taxes". This approach
requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Using the enacted tax
rates in effect for the year in which the differences are expected to
reverse, deferred tax assets and liabilities are determined based on the
differences between the financial reporting and the tax basis of an asset
or liability. We record income tax expense in our consolidated financial
statements based on an estimated annual effective income tax rate. Our tax
rate for the three months ended February 29, 2004 was 35% as compared to
38% in the corresponding quarter of fiscal 2003, which reflects the
implementation of a number of foreign and state tax saving initiatives.
18. PRODUCT SEGMENT INFORMATION
---------------------------
Net sales of our domestic product categories within our single
healthcare business segment for the three months ended February 29, 2004
and February 28, 2003 are as follows:
2004 2003
---------- ----------
Topical analgesics $ 15,712 $ 13,572
Medicated skin care products 13,332 13,150
Dietary supplements 8,511 9,605
Medicated dandruff shampoos and
conditioner 9,221 8,171
Other OTC and toiletry products 8,830 8,182
---------- ----------
Total $ 55,606 $ 52,680
========== ==========
19. COMMITMENTS AND CONTINGENCIES
-----------------------------
GENERAL LITIGATION
As of April 1, 2004, we were named as a defendant in approximately 349
lawsuits involving claims by approximately 688 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 our
DEXATRIM products until November 2000. Most of the lawsuits seek an
unspecified amount of compensatory and exemplary damages or punitive
damages. The lawsuits that are federal cases have now been transferred to
the United States District Court for the Western District of Washington
before United States District Judge Barbara Jacobs Rothstein (In Re
Phenylpropanolamine ("PPA") Products Liability Litigation, MDL No. 1407).
The remaining cases are state court cases that have been filed in a number
of different states.
We believe that approximately 214 or approximately 60% of the existing
lawsuits in which we are named as a defendant represent cases involving
alleged injuries by products manufactured and sold prior to our acquisition
of DEXATRIM in December 1998. We are being defended in these lawsuits and
are indemnified from liability by The DELACO Company, Inc. ("DELACO"),
successor to Thompson Medical Company, Inc., which owned DEXATRIM prior to
December 1998. We understand that DELACO 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. We further understand that DELACO's
insurance carriers are disputing their responsibility for such coverage.
Moreover, on February 12, 2004, DELACO filed a Chapter 11 bankruptcy
petition in the United States Bankruptcy Court for the Southern District of
New York. Accordingly, it is uncertain whether DELACO will be able to
indemnify us for such claims and even if it
14
is able to do so, it is unlikely that DELACO will be able to indemnify us
beyond its insurance coverage. In addition, we cannot assure you that the
insurance maintained by DELACO will be sufficient to cover claims related
to products manufactured or sold prior to our acquisition of DEXATRIM or
that ultimately we will not be held liable for these claims. Our product
liability insurance, as described below, would not apply to claims arising
from products manufactured and sold prior to our acquisition of DEXATRIM.
In addition to indemnification from DELACO, we will also seek to defend
ourselves in these lawsuits on the basis that we did not manufacture and
sell products containing PPA prior to December 1998.
In the approximately 214 cases that have been filed against us for
products manufactured and sold prior to December 1998, approximately half
of the plaintiffs are in cases filed in states that we believe do not under
current law impose liability upon a successor. The remaining plaintiffs are
in cases filed in states that may in some circumstances permit liability
against a successor. However, although there can be no assurances, we do
not believe that successor liability would be imposed against us in these
cases. The reasons for our belief, among others, are that we did not
purchase all of DELACO's assets and DELACO continued to operate its
remaining business after December 1998; we did not cause DELACO's
bankruptcy; many plaintiffs included in cases filed in states that in some
circumstances impose successor liability are actually residents of other
states; and we believe that a remedy will be available to plaintiffs who
file claims in the DELACO bankruptcy.
As of April 1, 2004, in the approximately 135 lawsuits we are
defending, approximately 163 plaintiffs specifically allege ingestion of
DEXATRIM. The remaining plaintiffs either do not specifically allege
ingestion of DEXATRIM or have sued many manufacturers or seller of products
containing PPA without identifying the products they ingested.
On December 19, 2003, we entered into a memorandum of understanding
with the Plaintiffs' Steering Committee ("PSC") in In re
Phenylpropanolamine ("PPA") Products Liability Litigation, MDL 1407,
pending before the United States District Court for the Western District of
Washington (the "Memorandum of Understanding"). The Memorandum of
Understanding memorializes certain settlement terms concerning lawsuits
relating to DEXATRIM products containing PPA. We are currently negotiating
with the PSC on the terms of a settlement agreement that will supercede the
Memorandum of Understanding. The Memorandum of Understanding contemplates
that we will commence a national class action settlement of all Dexatrim
PPA claims. We will then seek final approval of the settlement terms at a
fairness hearing. Claims would be settled pursuant to an agreed upon
settlement matrix that is designed to evaluate and place settlement values
on cases. If the class settlement is approved, it is expected that a
judgment will be entered, and we will pay the finally determined amount of
the settlement into a trust fund. We will then publish notice of the final
settlement and details on how plaintiffs can submit claims and the
deadlines for making such claims. Claims would be settled in the class
action pursuant to an agreed upon settlement matrix that is designed to
evaluate and place settlement values on cases. If we are able to complete a
final settlement agreement and successfully obtain approval from the court
in each of the foregoing steps, which we presently believe we will be able
to do, it is expected that final approval of the class settlement and
funding of the settlement trust fund will occur during the second half of
2004.
On December 19, 2003, DELACO also entered into the Memorandum of
Understanding with the PSC. We understand that DELACO intends to implement
its contemplated settlement with the PSC through a liquidating Chapter 11
bankruptcy plan. If DELACO pursues the settlement through its bankruptcy
plan, we expect that the administrative process for DELACO's settlement
will be similar to the process in our class action. We will be required to
file a claim in DELACO's bankruptcy case in order to preserve our claims
for indemnification against DELACO. As part of this Chapter 11 plan, we
expect that after resolution of creditors' claims, DELACO will seek to
liquidate and distribute all of its assets and will dissolve as a company.
Based upon the Memorandum of Understanding and the settlement matrix,
Judge Rothstein has entered a stay of discovery in all federal court
DEXATRIM PPA cases to allow the PSC and us to negotiate a final settlement
agreement and for us to then file our class action settlement. We will seek
a similar stay in the state court cases. Approximately 70% of our cases are
included in the MDL. We expect many of our cases pending in state courts
will join in the settlement discussed above. Judge Rothstein ordered that
the DEXATRIM case scoring system and settlement matrix remain confidential
until a final settlement agreement is entered.
Since the terms of the preliminary settlement in the PPA litigation
are not final or binding, we cannot assure you that we will be able to
reach a final settlement or that if a final settlement is reached, the
terms will be approved by the court. If the settlement is approved, we
believe that the settlement will include a substantial majority of the
claims by users of DEXATRIM products containing PPA, but that some claims
may elect to "opt out" of any class settlement and will continue to pursue
claims for damages against us in separate lawsuits. We cannot estimate at
this time how many claims will opt out or whether such claims will result
in significant additional liability for us. To the extent the number of opt
outs are deemed excessive relative to the total number of claims, as
determined by the final settlement agreement, we reserve the right to
terminate the settlement.
15
Although we believe a liability existed as of February 29, 2004
related to our PPA litigation, since the terms of the settlement are
preliminary, we are not able to reasonably estimate the amount of such
liability at February 29, 2004 and have made no provision for this
liability in our condensed consolidated financial statements. In addition,
we currently expect to use most of our product liability insurance coverage
available for the PPA litigation and certain of our cash on hand to make
the initial funding of the settlement trust. To the extent the amount in
the settlement trust is ultimately insufficient to fully fund the
settlement, we may be required to make additional contributions to the
trust fund in the future. If we are required to fund significant other
liabilities beyond the initial settlement amount, either pursuant to the
terms of the settlement as a result of litigation or otherwise, we will
have significantly fewer sources of funds with which to satisfy such
liabilities, and we may be unable to do so. Moreover, if the settlement is
not approved, we may not have sufficient funds to satisfy all claims
against us.
We have reached an agreement with Kemper Indemnity Insurance Company
("Kemper") to settle Kemper's lawsuit that sought to rescind our policy for
$50,000 of excess coverage for product liability claims. After giving
effect to the settlement with Kemper, we will have available for the claims
against us related to the PPA litigation through our first three layers of
insurance coverage approximately $60,000 of the $77,000 of product
liability coverage provided by these policies. The $60,000 of available
coverage consists of $37,500 of insurance under the Kemper policy and
approximately $22,500 under policies with two other insurance companies.
Coverage under these policies is available to us for injuries related to
DEXATRIM containing PPA occurring after our acquisition of DEXATRIM in
December 1998 and prior to May 31, 2001, if the claims are made before May
31, 2004. Injuries occurring before December 1998 or after May 31, 2001, or
claims made after May 31, 2004 would not be covered by these insurance
policies. We currently have a number of claims relating to injuries
occurring prior to December 1998 for which we will seek indemnification
from DELACO and one claim in which there are multiple PPA manufacturers as
defendants that relate to injuries occurring after May 31, 2001. We believe
we have meritorious defenses to these claims and are aggressively defending
them. Our insurance policies are subject to certain other limitations that
are generally customary for policies of this type.
We continue to aggressively defend an action brought by Interstate
Fire & Casualty Company ("Interstate") to rescind its $25,000 of excess
coverage for product liability and pursue our available remedies at law
against Interstate. We cannot assure that we will be successful in
retaining such excess coverage. The Interstate policy is in excess of the
product liability insurance described above. In the event the $60,000 of
insurance funds are exhausted under the PPA settlement or otherwise,
coverage under the Interstate policy would not be available until we have
paid the $17,000 difference up to $77,000. We currently expect to use most
of our product liability insurance coverage available for the PPA
litigation to make the initial funding of the proposed PPA settlement
trust.
We maintain a significantly lower level of insurance coverage for all
other potential claims relating to our products including DEXATRIM products
containing ephedrine. Our existing product liability insurance coverage for
all of our other products, including DEXATRIM products containing
ephedrine, consists of $10,000 of self-insured coverage through our captive
insurance subsidiary, of which approximately $3,600 is currently funded,
and a total of $30,000 of excess coverage through third party insurers.
We have been named as defendant in two lawsuits alleging that the
plaintiffs were injured as a result of the ingestion of DEXATRIM containing
ephedrine. We have been named in an additional lawsuit alleging that the
plaintiff was injured as a result of the ingestion of DEXATRIM Natural, but
the allegations do not indicate whether the DEXATRIM Natural contained
ephedrine. We intend to vigorously defend all of these lawsuits.
We previously were named in a class action filed in the United States
District Court for the Southern District of New York seeking certification
of a class consisting of New York residents who have purchased DEXATRIM
Results or DEXATRIM Natural since January 2000. The class action lawsuit
sought compensatory and punitive damages arising out of allegedly false
advertising in connection with the sale of DEXATRIM Results and DEXATRIM
Natural products. None of the plaintiffs in this action alleged personal
injury as a result of the ingestion of a DEXATRIM product. On March 29,
2004, a stipulation was submitted to the court dismissing the case on
jurisdictional grounds. Pursuant to the stipulation, the plaintiffs may
re-file the class action in New York state court.
On December 30, 2003, the United States Food and Drug Administration
("FDA") issued a consumer alert on the safety of dietary supplements
containing ephedrine alkaloids and on February 6, 2004 published a final
rule with respect to these products. The final rule prohibits the sale of
dietary supplements containing ephedrine alkaloids because such supplements
present an unreasonable risk of illness or injury. The final rule becomes
effective on April 11, 2004. Although we discontinued the manufacturing and
shipment of DEXATRIM containing ephedrine in September 2002, the FDA's
final rule may result in additional lawsuits being filed against us
alleging damages related to the use or purchase of DEXATRIM containing
ephedrine.
16
We have been named as a defendant in a putative class action suit
filed in the Superior Court of the State of California for the County of
Los Angeles. The lawsuit seeks certification of classes consisting of
residents of the United States, or residents of the State of California,
who have purchased our BULLFROG sun care products during the past four
years. The lawsuit seeks injunctive relief and compensatory damages under
the California Business and Professions Code against us arising out of
alleged deceptive, untrue or misleading advertising, and breach of
warranty, in connection with the manufacturing, labeling, advertising,
promotion and sale of BULLFROG products. The plaintiff has stipulated that
the amount in controversy with respect to plaintiffs' individual claim and
each member of the proposed class does not exceed $75. We are investigating
this matter and intend to vigorously defend the lawsuit.
Other claims, suits and complaints arise in the ordinary course of our
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 other
pending matters are without merit or are of such kind or involve such other
amounts as would not have a material adverse effect on our financial
position, results of operations or cash flows if disposed of unfavorably.
REGULATORY
The FDA, 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 contain ephedrine. Ephedrine can refer to the
herbal substance derived from the plant ephedra or the plant heart leaf,
which, until September 2002, was used in the manufacturing of some forms of
DEXATRIM Natural and DEXATRIM Results, or synthetic ephedrine, an FDA
regulated ingredient used in some OTC drug products, which has not been
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.
In 1997, the FDA published a proposed rule on the use of dietary
supplements containing ephedrine alkaloids. In June 2002, the United States
Department of Health and Human Services ("HHS") proposed an expanded
scientific evaluation of ephedra which led to the issuance of a report by
the RAND-based Southern California Evidence-Based Practice Center (the
"RAND Report"). The RAND Report concluded that ephedrine, ephedrine plus
caffeine and ephedra-containing dietary supplements with or without herbs
containing caffeine all promote modest amounts of weight loss over the
short term and use of ephedra or ephedrine plus caffeine is associated with
an increased risk of gastrointestinal, psychiatric and autonomic symptoms.
The adverse event reports contained a smaller number of more serious
adverse events. Given the small number of such events, the RAND Report
concluded that further study would be necessary to determine whether
consumption of ephedra or ephedrine may be causally related to these
serious adverse events. In connection with the RAND Report, HHS sought
public comment on whether additional measures are required concerning the
sale and distribution of dietary supplements containing ephedrine
alkaloids.
On December 30, 2003, the FDA issued a consumer alert on the safety of
dietary supplements containing ephedrine alkaloids and on February 6, 2004
published a final rule with respect to these products. The final rule
prohibits the sale of dietary supplements containing ephedrine alkaloids
because such supplements present an unreasonable risk of illness or injury.
The final rule becomes effective on April 11, 2004. Although we
discontinued the manufacturing and shipment of DEXATRIM containing
ephedrine in September 2002, the FDA's final rule may result in additional
lawsuits being filed against us alleging damages related to the use or
purchase of DEXATRIM containing ephedrine.
Negative publicity relating to the possible harmful effects of
ephedrine and the possibility of further regulatory action to restrict or
prohibit the sale of products containing ephedrine resulted in a return of
products from retailers in fiscal 2003 for which we initially provided a
$750 allowance. At this time, we believe we have received returns
representing substantially all DEXATRIM with ephedrine. In the fourth
quarter of fiscal 2003, the unused portion of the returns allowance for
DEXATRIM containing ephedrine of $235 was recorded as a reduction of cost
of sales.
We were notified in October 2000 that the FDA denied a citizen
petition submitted by Thompson Medical Company, Inc., the previous owner of
SPORTSCREME and ASPERCREME. The petition sought a determination that 10%
trolamine salicylate, the active ingredient in SPORTSCREME and ASPERCREME,
was clinically proven to be an effective active ingredient in external
analgesic OTC drug products and should be included in the FDA's yet-to-be
finalized monograph for external analgesics. We have 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. We are 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, we would
likely be required to discontinue these products as currently formulated
and remove them from the market after expiration of an anticipated grace
period. If this occurred, we believe we
17
could still market these products as homeopathic products and could also
reformulate them using ingredients included in the FDA monograph.
Certain of our topical analgesic products are currently marketed under
an FDA tentative final monograph. The FDA has recently proposed that the
final monograph exclude external analgesic products in patch, plaster, or
poultice form, unless the FDA receives additional data supporting the
safety and efficacy of these products. On October 14, 2003, we submitted to
the FDA information regarding the safety of our ICY HOT patches and
arguments to support our product's inclusion in the final monograph. We
have also participated in an industry effort coordinated by the Consumer
Healthcare Products Association ("CHPA") to establish with the FDA a
protocol of additional research that will allow the patches to be marketed
under the final monograph even if the final monograph does not explicitly
allow them. The CHPA submission to FDA was made on October 15, 2003. This
additional research may require a considerable amount of expensive testing
and data analysis by expert consultants. Some of this cost may be shared
with other patch manufacturers. We believe that the monograph is unlikely
to become final and take effect before November 2005. If neither action
described above is successful and the final monograph excludes such
products, we will have to file a new drug application ("NDA") in order to
continue to market the ICY HOT Patch or similar delivery systems under our
other topical analgesic brands. In such case, we would have to remove the
existing product from the market as of one year from the effective date of
the final monograph, pending FDA review and approval of an NDA. The
preparation of an NDA would likely take us six to 18 months and would be
expensive. It typically takes the FDA at least 12 months to rule on the NDA
once it is submitted.
We have responded to certain questions with respect to efficacy
received from the FDA in connection with clinical studies for pyrilamine
maleate, one of the active ingredients used in certain of the PAMPRIN and
PREMSYN PMS products. While we addressed all of the FDA questions in
detail, the final monograph for menstrual drug products, which has not yet
been issued, will determine if the FDA considers pyrilamine maleate safe
and effective for menstrual relief products. We have been actively
monitoring the process and do not believe that either PAMPRIN or PREMSYN
PMS will be materially adversely affected by the FDA review. We believe
that any adverse finding by the FDA would likewise affect our principal
competitors in the menstrual product category. We are also aware of the
FDA's concern about the potential toxicity due to concomitant use of OTC
and prescription drugs that contain the ingredient acetaminophen, an
ingredient also found in PAMPRIN and PREMSYN PMS. We are participating in
an industry-wide effort to reassure the FDA that the current recommended
dosing regimen is safe and effective and that proper labeling and public
education by both OTC and prescription drug companies are the best policies
to abate the FDA's concern. There can be no assurance as to what action, if
any, the FDA may take with respect to acetaminophen.
Our business is also regulated by the California Safe Drinking Water
and Toxic Enforcement Act of 1986, known as Proposition 65. Proposition 65
prohibits businesses from exposing consumers to chemicals that the state
has determined cause cancer or reproduction toxicity without first giving
fair and reasonable warning unless the level of exposure to the carcinogen
or reproductive toxicant falls below prescribed levels. From time to time,
one or more ingredients in our products could become subject to an inquiry
under Proposition 65. If an ingredient is on the state's list as a
carcinogen, it is possible that a claim could be brought, in which case we
would be required to demonstrate that exposure is below a "no significant
risk" level for consumers. Any such claims may cause us to incur
significant expense, and we may face monetary penalties or injunctive
relief, or both, or be required to reformulate our product to acceptable
levels. The State of California under Proposition 65 is also considering
the inclusion of titantium dioxide on the state's list of suspected
carcinogens. Titantium dioxide has a long history of widespread use as an
excipient in prescription and OTC pharmaceuticals, cosmetics, dietary
supplements and skin care products and is an active ingredient in our
BULLFROG Superblock products. We have participated in an industry-wide
submission to the State of California, facilitated through the CHPA,
presenting evidence that titantium dioxide presents "no significant risk"
to consumers.
20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
--------------------------------------------
The condensed consolidating financial statements, for the dates or
periods indicated, of Chattem, Inc. ("Chattem"), Signal Investment &
Management Co. ("Signal"), SunDex, LLC ("SunDex") and Chattem (Canada)
Holdings, Inc. ("Canada"), the guarantors of the long-term debt of Chattem,
and the non-guarantor direct and indirect wholly-owned subsidiaries of
Chattem are presented below. Signal, SunDex and Canada are wholly-owned
subsidiaries of Chattem; the guarantee of Signal, SunDex and Canada is full
and unconditional and joint and several. The guarantee of Signal, SunDex
and Canada as of February 29, 2004 arose in conjunction with Chattem's
issuance of the 8.875% Subordinated Notes, the Revolving Credit Facility,
the Floating Rate Notes and the 7.0% Subordinated Notes (See Note 13). The
guarantees' terms match the terms of the 8.875% Subordinated Notes, the
Revolving Credit Facility, the Floating Rate Notes and the 7.0%
Subordinated Notes. The maximum amount of future payments the guarantors
would be required to make under the guarantees as of February 29, 2004 is
$255,028.
18
Note 20
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
FEBRUARY 29, 2004
(In thousands)
GUARANTOR NON-GUARANTOR
SUBSIDIARY SUBSIDIARY
CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ---------- ----------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 19,800 $ 1,970 $ 7,513 $ -- $ 29,283
Restricted cash 32,227 -- -- -- 32,227
Accounts receivable, less allowances of $3,765 30,573 15,934 4,013 (15,934) 34,586
Interest receivable -- 619 -- (619) --
Inventories 12,744 2,018 2,806 -- 17,568
Refundable income taxes 8,166 -- 17 -- 8,183
Deferred income taxes 2,551 -- -- -- 2,551
Prepaid expenses and other current assets 1,834 -- 117 (667) 1,284
---------- ---------- ---------- ---------- ----------
Total current assets 107,895 20,541 14,466 (17,220) 125,682
---------- ---------- ---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 27,257 775 357 -- 28,389
---------- ---------- ---------- ---------- ----------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product
rights, net 981 307,096 -- (62,290) 245,787
Debt issuance costs, net 6,432 -- -- -- 6,432
Investment in subsidiaries 244,509 33,000 66,024 (343,533) --
Note receivable -- 33,000 -- (33,000) --
Other 2,251 -- 500 -- 2,751
---------- ---------- ---------- ---------- ----------
Total other noncurrent assets 254,173 373,096 66,524 (438,823) 254,970
---------- ---------- ---------- ---------- ----------
TOTAL ASSETS $ 389,325 $ 394,412 $ 81,347 $ (456,043) $ 409,041
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Called debt $ 30,028 $ -- $ -- $ -- $ 30,028
Accounts payable and other 10,804 -- 942 -- 11,746
Accrued liabilities 27,785 1,947 2,544 (17,220) 15,056
---------- ---------- ---------- ---------- ----------
Total current liabilities 68,617 1,947 3,486 (17,220) 56,830
---------- ---------- ---------- ---------- ----------
LONG-TERM DEBT, less current maturities and
called debt 225,000 -- 33,000 (33,000) 225,000
---------- ---------- ---------- ---------- ----------
DEFERRED INCOME TAXES (531) 28,467 (48) -- 27,888
---------- ---------- ---------- ---------- ----------
OTHER NONCURRENT LIABILITIES 1,710 -- -- -- 1,710
---------- ---------- ---------- ---------- ----------
INTERCOMPANY ACCOUNTS (3,084) 1,504 1,580 -- --
---------- ---------- ---------- ---------- ----------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized
1,000, none issued -- -- -- -- --
Common shares, without par value, authorized
50,000, issued 19,458 81,474 -- -- -- 81,474
Share capital of subsidiaries -- 330,586 38,647 (369,233) --
Retained earnings 21,562 31,908 4,759 (36,667) 21,562
---------- ---------- ---------- ---------- ----------
Total 103,036 362,494 43,406 (405,900) 103,036
---------- ---------- ---------- ---------- ----------
Unamortized value of restricted common shares
issued (3,233) -- -- -- (3,233)
Cumulative other comprehensive income:
Foreign currency translation adjustment (550) -- (77) 77 (550)
Minimum pension liability adjustment, net of
income taxes (1,640) -- -- -- (1,640)
---------- ---------- ---------- ---------- ----------
Total shareholders' equity 97,613 362,494 43,329 (405,823) 97,613
---------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 389,325 $ 394,412 $ 81,347 $ (456,043) $ 409,041
========== ========== ========== ========== ==========
19
Note 20
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
NOVEMBER 30, 2003
(In thousands)
GUARANTOR NON-GUARANTOR
SUBSIDIARY SUBSIDIARY
CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ---------- ----------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 18,702 $ 1,964 $ 6,265 $ -- $ 26,931
Accounts receivable, less allowances of $3,594 21,729 7,089 3,749 (7,089) 25,478
Inventories 12,670 2,040 2,849 -- 17,559
Refundable income taxes 4,414 -- 17 -- 4,431
Deferred income taxes 3,441 -- -- -- 3,441
Prepaid expenses and other current assets 4,401 -- 142 (1,167) 3,376
---------- ---------- ---------- ---------- ----------
Total current assets 65,357 11,093 13,022 (8,256) 81,216
---------- ---------- ---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 27,595 775 352 -- 28,722
---------- ---------- ---------- ---------- ----------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product
rights, net 1,057 307,080 -- (62,290) 245,847
Debt issuance costs, net 5,504 -- -- -- 5,504
Investment in subsidiaries 235,928 -- -- (235,928) --
Other 1,596 -- 500 -- 2,096
---------- ---------- ---------- ---------- ----------
Total other noncurrent assets 244,085 307,080 500 (298,218) 253,447
---------- ---------- ---------- ---------- ----------
TOTAL ASSETS $ 337,037 $ 318,948 $ 13,874 $ (306,474) $ 363,385
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 7,750 $ -- $ -- $ -- $ 7,750
Accounts payable and other 9,804 -- 1,120 -- 10,924
Accrued liabilities 21,417 628 2,190 (8,256) 15,979
---------- ---------- ---------- ---------- ----------
Total current liabilities 38,971 628 3,310 (8,256) 34,653
---------- ---------- ---------- ---------- ----------
LONG-TERM DEBT, less current maturities 204,676 -- -- -- 204,676
---------- ---------- ---------- ---------- ----------
DEFERRED INCOME TAXES 56 26,788 (48) -- 26,796
---------- ---------- ---------- ---------- ----------
OTHER NONCURRENT LIABILITIES 1,689 -- -- -- 1,689
---------- ---------- ---------- ---------- ----------
INTERCOMPANY ACCOUNTS (3,926) 3,469 457 -- --
---------- ---------- ---------- ---------- ----------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized
1,000, none issued -- -- -- -- --
Common shares, without par value, authorized
50,000, issued 19,161 77,815 -- -- -- 77,815
Share capital of subsidiaries -- 263,704 6,504 (270,208) --
Retained earnings 22,274 24,359 3,998 (28,357) 22,274
---------- ---------- ---------- ---------- ----------
Total 100,089 288,063 10,502 (298,565) 100,089
---------- ---------- ---------- ---------- ----------
Unamortized value of restricted common shares
issued (2,058) -- -- -- (2,058)
Cumulative other comprehensive income:
Foreign currency translation adjustment (820) -- (347) 347 (820)
Minimum pension liability adjustment, net of
income taxes (1,640) -- -- -- (1,640)
---------- ---------- ---------- ---------- ----------
Total shareholders' equity 95,571 288,063 10,155 (298,218) 95,571
---------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 337,037 $ 318,948 $ 13,874 $ (306,474) $ 363,385
========== ========== ========== ========== ==========
20
Note 20
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FEBRUARY 29, 2004
(Unaudited and in thousands)
GUARANTOR NON-GUARANTOR
SUBSIDIARY SUBSIDIARY
CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ---------- ----------
TOTAL REVENUES $ 49,908 $ 16,549 $ 4,172 $ (9,392) $ 61,237
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 13,702 2,249 1,549 (548) 16,952
Advertising and promotion 16,376 1,177 979 -- 18,532
Selling, general and administrative 10,661 46 122 -- 10,829
Equity in subsidiary income (8,309) -- -- 8,309 --
---------- ---------- ---------- ---------- ----------
Total costs and expenses 32,430 3,472 2,650 7,761 46,313
---------- ---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 17,478 13,077 1,522 (17,153) 14,924
---------- ---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (4,763) -- (611) 619 (4,755)
Investment and other income, net 27 620 17 (619) 45
Loss on early extinguishment of debt (11,309) -- -- -- (11,309)
Royalties (7,525) (1,319) -- 8,844 --
Corporate allocations 788 (759) (29) -- --
---------- ---------- ---------- ---------- ----------
Total other income (expense) (22,782) (1,458) (623) 8,844 (16,019)
---------- ---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES (5,304) 11,619 899 (8,309) (1,095)
(BENEFIT FROM) PROVISION FOR INCOME TAXES (4,592) 4,067 142 -- (383)
---------- ---------- ---------- ---------- ----------
NET (LOSS) INCOME $ (712) $ 7,552 $ 757 $ (8,309) $ (712)
========== ========== ========== ========== ==========
21
Note 20
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FEBRUARY 28, 2003
(Unaudited and in thousands)
GUARANTOR NON-GUARANTOR
SUBSIDIARY SUBSIDIARY
CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ---------- ----------
TOTAL REVENUES $ 44,884 $ 12,758 $ 4,617 $ (3,834) $ 58,425
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 14,032 2,701 1,940 (982) 17,691
Advertising and promotion 13,740 3,280 1,385 -- 18,405
Selling, general and administrative 9,227 58 529 -- 9,814
Equity in subsidiary income (3,947) -- -- 3,947 --
---------- ---------- ---------- ---------- ----------
Total costs and expenses 33,052 6,039 3,854 2,965 45,910
---------- ---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 11,832 6,719 763 (6,799) 12,515
---------- ---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (5,147) -- -- -- (5,147)
Investment and other income, net 25 1 8 -- 34
Royalties (2,262) (500) (90) 2,852 --
Corporate allocations 915 (887) (28) -- --
---------- ---------- ---------- ---------- ----------
Total other income (expense) (6,469) (1,386) (110) 2,852 (5,113)
---------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 5,363 5,333 653 (3,947) 7,402
PROVISION FOR INCOME TAXES 774 1,900 139 -- 2,813
---------- ---------- ---------- ---------- ----------
NET INCOME $ 4,589 $ 3,433 $ 514 $ (3,947) $ 4,589
========== ========== ========== ========== ==========
22
Note 20
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED FEBRUARY 29, 2004
(Unaudited and in thousands)
GUARANTOR NON-GUARANTOR
SUBSIDIARY SUBSIDIARY
CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ---------- ----------
OPERATING ACTIVITIES:
Net (loss) income $ (712) $ 7,552 $ 757 $ (8,309) $ (712)
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 1,519 -- 18 -- 1,537
Deferred income taxes 303 1,679 -- -- 1,982
Tax benefit realized from stock option plans 1,083 -- -- -- 1,083
Loss on early extinguishment of debt 11,309 -- -- -- 11,309
Equity in subsidiary income (8,309) -- -- 8,309 --
Changes in operating assets and liabilities:
Accounts receivable (8,844) (8,845) (264) 8,845 (9,108)
Interest receivable -- (619) -- 619 --
Inventories (74) 22 43 -- (9)
Refundable income taxes (3,752) -- -- -- (3,752)
Prepaid expenses and other current assets 2,567 -- 25 (500) 2,092
Accounts payable and accrued liabilities 7,368 1,319 176 (8,964) (101)
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities 2,458 1,108 755 -- 4,321
---------- ---------- ---------- ---------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (485) -- (6) -- (491)
Purchases of patents, trademarks and other product
rights -- (17) -- -- (17)
Increase in note receivable -- (33,000) -- 33,000 --
(Increase) decrease in other assets, net (760) -- 270 -- (490)
---------- ---------- ---------- ---------- ----------
Net cash (used in) provided by investing
activities (1,245) (33,017) 264 33,000 (998)
---------- ---------- ---------- ---------- ----------
FINANCING ACTIVITIES:
Repayment of long-term debt (182,280) -- -- -- (182,280)
Proceeds from long-term debt 200,000 -- -- -- 200,000
Proceeds from borrowings under revolving credit
facility 25,000 -- -- -- 25,000
Proceeds from exercise of stock options 1,453 -- -- -- 1,453
Repurchase of common shares (319) -- -- -- (319)
Increase in debt issuance costs (5,678) -- -- -- (5,678)
Retirement of debt issuance costs (6,946) -- -- -- (6,946)
Restricted cash (32,227) -- -- -- (32,227)
Intercompany debt proceeds, net -- -- 33,000 (33,000) --
Changes in intercompany accounts 882 31,915 (32,797) -- --
---------- ---------- ---------- ---------- ----------
Net cash (used in) provided by financing
activities (115) 31,915 203 (33,000) (997)
---------- ---------- ---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS
-- -- 26 -- 26
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS:
Increase for the period 1,098 6 1,248 -- 2,352
At beginning of period 18,702 1,964 6,265 -- 26,931
---------- ---------- ---------- ---------- ----------
At end of period $ 19,800 $ 1,970 $ 7,513 $ -- $ 29,283
========== ========== ========== ========== ==========
23
Note 20
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 2003
(Unaudited and in thousands)
GUARANTOR NON-GUARANTOR
SUBSIDIARY SUBSIDIARY
CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ---------- ----------
OPERATING ACTIVITIES:
Net income $ 4,589 $ 3,433 $ 514 $ (3,947) $ 4,589
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,465 -- 34 -- 1,499
Deferred income taxes 2,832 (1,880) -- -- 952
Tax benefit realized from stock option plans 143 -- -- -- 143
Other, net (134) -- 5 -- (129)
Equity in subsidiary income (3,947) -- -- 3,947 --
Changes in operating assets and liabilities:
Accounts receivable (6,665) -- (105) -- (6,770)
Inventories (1,016) 130 (230) -- (1,116)
Refundable income taxes (1,134) -- -- -- (1,134)
Prepaid expenses and other current assets 239 -- 14 -- 253
Accounts payable and accrued liabilities 10,842 -- (797) -- 10,045