================================================================================
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, 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 SEPTEMBER 29, 2004, 19,785,408 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 August 31, 2004 and
November 30, 2003 3
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended August 31, 2004 and August 31, 2003 5
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended August 31, 2004 and August 31, 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 39
Item 4. Controls and Procedures 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 40
Item 2. Changes in Securities and Use of Proceeds 40
Item 3. Defaults Upon Senior Securities 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 5. Other Information 40
Item 6. Exhibits and Reports on Form 8-K 41
SIGNATURES 42
2
PART 1. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(In thousands)
AUGUST 31, NOVEMBER 30,
ASSETS 2004 2003
- ------ ---------- ----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 26,755 $ 26,931
Accounts receivable, less allowances of $3,310 at
August 31, 2004 and $3,594 at November 30, 2003 32,241 25,478
Inventories 19,549 17,559
Refundable income taxes 5,273 4,431
Deferred income taxes 1,635 3,441
Prepaid expenses and other current assets 3,369 3,376
---------- ----------
Total current assets 88,822 81,216
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 27,993 28,722
---------- ----------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product rights, net 245,633 245,847
Debt issuance costs, net 5,348 5,504
Other 3,559 2,096
---------- ----------
Total other noncurrent assets 254,540 253,447
---------- ----------
TOTAL ASSETS $ 371,355 $ 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)
AUGUST 31, NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2004 2003
- ------------------------------------ ---------- ----------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ 7,750
Accounts payable and other 10,396 10,924
Accrued liabilities 12,181 15,979
---------- ----------
Total current liabilities 22,577 34,653
---------- ----------
LONG-TERM DEBT, less current maturities 200,000 204,676
---------- ----------
DEFERRED INCOME TAXES 30,975 26,501
---------- ----------
OTHER NONCURRENT LIABILITIES 1,738 1,689
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 18)
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000,
none issued -- --
Common shares, without par value, authorized 50,000,
issued 19,752 at August 31, 2004 and 19,161 at
November 30, 2003 83,425 77,815
Retained earnings 37,543 22,274
---------- ----------
120,968 100,089
Unamortized value of restricted common shares issued (2,668) (2,058)
Cumulative other comprehensive income, net of taxes:
Interest rate cap adjustment (259) --
Foreign currency translation adjustment (336) (525)
Minimum pension liability adjustment (1,640) (1,640)
---------- ----------
Total shareholders' equity 116,065 95,866
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 371,355 $ 363,385
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONDENSED 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,
------------------------ ------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
REVENUES:
Net sales $ 66,096 $ 58,972 $ 196,909 $ 180,366
Royalties 39 210 555 874
--------- --------- --------- ---------
Total revenues 66,135 59,182 197,464 181,240
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 19,135 15,995 56,643 51,399
Advertising and promotion 18,666 17,075 56,278 54,009
Selling, general and administrative 11,525 10,234 32,831 30,445
Litigation settlement 834 -- 4,491 --
--------- --------- --------- ---------
Total costs and expenses 50,160 43,304 150,243 135,853
--------- --------- --------- ---------
INCOME FROM OPERATIONS 15,975 15,878 47,221 45,387
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (3,284) (5,057) (11,678) (15,431)
Investment and other income, net 45 32 205 119
Loss on early extinguishment of debt -- -- (12,958) --
--------- --------- --------- ---------
Total other income (expense) (3,239) (5,025) (24,431) (15,312)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 12,736 10,853 22,790 30,075
PROVISION FOR INCOME TAXES 4,002 4,016 7,521 11,128
--------- --------- --------- ---------
NET INCOME $ 8,734 $ 6,837 $ 15,269 $ 18,947
========= ========= ========= =========
NUMBER OF COMMON SHARES:
Weighted average outstanding-basic 19,498 19,148 19,295 19,178
========= ========= ========= =========
Weighted average and potential dilutive outstanding 20,308 19,905 20,148 19,897
========= ========= ========= =========
NET INCOME PER COMMON SHARE:
Basic $ .45 $ .36 $ .79 $ .99
========= ========= ========= =========
Diluted $ .43 $ .34 $ .76 $ .95
========= ========= ========= =========
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 amounts)
FOR THE NINE MONTHS ENDED
--------------------------
AUGUST 31, AUGUST 31,
2004 2003
---------- ----------
OPERATING ACTIVITIES:
Net income $ 15,269 $ 18,947
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,609 4,565
Deferred income taxes 6,280 6,104
Tax benefit realized from stock option exercises 4,036 1,240
Loss on early extinguishment of debt 12,958 --
Other, net 53 (94)
Changes in operating assets and liabilities:
Accounts receivable (6,763) (2,867)
Inventories (1,990) (1,009)
Refundable income taxes (842) (256)
Prepaid expenses and other current assets 54 (768)
Accounts payable and accrued liabilities (4,326) (1,749)
---------- ----------
Net cash provided by operating activities 29,338 24,113
---------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,763) (3,933)
Purchases of patents, trademarks and other product rights (8) (373)
Increase in other assets, net (594) (285)
---------- ----------
Net cash used in investing activities (2,365) (4,591)
---------- ----------
FINANCING ACTIVITIES:
Repayment of long-term debt (212,288) (10,000)
Proceeds from long-term debt 200,000 --
Proceeds from borrowings under revolving credit facility 25,000 --
Repayments of revolving credit facility (25,000) --
Proceeds from exercise of stock options 5,139 1,533
Repurchase of common shares (5,015) (5,351)
Increase in debt issuance costs (5,729) (25)
Retirement of debt issuance costs (7,861) --
Premium on interest rate cap agreement (1,375) --
---------- ----------
Net cash used in financing activities (27,129) (13,843)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(20) 118
---------- ----------
CASH AND CASH EQUIVALENTS:
(Decrease) increase for the period (176) 5,797
At beginning of period 26,931 15,924
---------- ----------
At end of period $ 26,755 $ 21,721
========== ==========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 70 and 69 shares of restricted common stock at a
value of $19.98 and $14.50 per share for the nine months
ended August 31, 2004 and 2003, respectively $ 1,399 $ 1,000
PAYMENTS FOR:
Interest $ 8,737 $ 9,916
Taxes $ 228 $ 2,680
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 U.S. generally accepted accounting
principles for interim financial information and the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, these condensed
consolidated financial statements do not include all of the information and
footnotes required by U.S. 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. RECLASSIFICATIONS
-----------------
Certain amounts have been reclassified to conform to the current
period's presentation.
4. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 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
application of SFAS 145 resulted in recording a loss on early extinguishment
of debt of $12,958 in the first and second quarters 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. As of August 31, 2004, the application of
SFAS 146 resulted in recording $35 of accrued liabilities related to the
restructuring of the United Kingdom ("U.K.") operations. We expect to record
additional charges related to the restructuring of the U.K. operations in the
fourth quarter of fiscal 2004.
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, our third fiscal
quarter beginning June 1, 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 did not have an impact on our financial
position, results of operations or cash flows.
7
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.
5. 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. Our 2000 Non-Statutory Stock
Option Plan provides for the issuance of up to 1,500 shares of common stock.
Our 2003 Stock Incentive Plan provides for the issuance of up to 1,500 shares
of common stock. Options granted under the plans vest ratably over four years
and are exercisable for a period of up to ten years from the date of grant.
For SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
purposes, as amended by SFAS No. 148, "Accounting for Stock Based
Compensation-Transition and Disclosure", 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 59% and 64%, respectively, risk-free interest rates of 4.12% and 4.47%,
respectively, and expected lives of approximately five and six years,
respectively.
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 income and net income per share would have been adjusted to
the pro forma amounts for the three and nine months ended August 31, 2004 and
2003, respectively, as indicated below:
For the Three Months Ended For the Nine Months Ended
August 31, August 31,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income:
As reported $ 8,734 $ 6,837 $ 15,269 $ 18,947
Fair value method compensation cost, net 1,348 516 3,228 1,552
---------- ---------- ---------- ----------
Pro forma $ 7,386 $ 6,321 $ 12,041 $ 17,395
========== ========== ========== ==========
Net income per share, basic:
As reported $ .45 $ .36 $ .79 $ .99
Pro forma $ .38 $ .33 $ .62 $ .91
Net income per share, diluted:
As reported $ .43 $ .34 $ .76 $ .95
Pro forma $ .36 $ .32 $ .60 $ .87
8
6. EARNINGS PER SHARE
------------------
The following table presents the computation of per share earnings for
the three and nine months ended August 31, 2004 and 2003, respectively:
For the Three Months Ended For the Nine Months Ended
August 31, August 31,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
NET INCOME $ 8,734 $ 6,837 $ 15,269 $ 18,947
========== ========== ========== ==========
NUMBER OF COMMON SHARES:
Weighted average outstanding 19,498 19,148 19,295 19,178
Issued upon assumed exercise of
outstanding stock options 735 647 795 617
Effect of issuance of restricted
common shares 75 110 58 102
---------- ---------- ---------- ----------
Weighted average and potential 20,308 19,905 20,148 19,897
========== ========== ========== ==========
dilutive outstanding (1)
NET INCOME PER COMMON SHARE:
Basic $ .45 $ .36 $ .79 $ .99
========== ========== ========== ==========
Diluted $ .43 $ .34 $ .76 $ .95
========== ========== ========== ==========
(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: 5 and 85 shares for the three months ended
August 31, 2004 and 2003, respectively, and 247 and 87 shares for the
nine months ended August 31, 2004 and 2003, respectively.
7. 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 Accounting Principles Board Opinion No. 28,
"Interim Financial Reporting") and adjusting that accrual to the actual
expenses incurred at the end of the year.
8. SHIPPING AND HANDLING
---------------------
Shipping and handling costs of $2,036 and $1,602 are included in selling
expenses for the three months ended August 31, 2004 and 2003, respectively,
and $5,469 and $4,647 for the nine months ended August 31, 2004 and 2003,
respectively.
9. PATENTS, 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 $244,797 and $244,790 as of August 31, 2004 and November
30, 2003, respectively. After reviewing pertinent information relating to the
revaluation of these intangible assets and performing the impairment test as
prescribed by SFAS 142 as of August 31, 2004, we determined that the
revaluation of these intangible assets was not required. The gross carrying
amount of finite-lived intangible assets subject to amortization at both
August 31, 2004 and November 30, 2003, which consist primarily of non-compete
agreements, was $2,400. The related accumulated amortization of finite-lived
intangible assets at August 31, 2004 and November 30, 2003 was $1,564 and
$1,343, respectively. Amortization of our finite-lived intangible assets
subject to amortization under the provisions of
9
SFAS 142 for the three months ended August 31, 2004 and 2003 was $73 and
$85, respectively, and for the nine months ended August 31, 2004 and 2003
was $222 and $255, 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. INVENTORIES
-----------
Inventories consisted of the following as of August 31, 2004 and
November 30, 2003:
2004 2003
---------- ----------
Raw materials and work in process $ 9,191 $ 9,740
Finished goods 12,046 9,507
Excess of current cost over LIFO values (1,688) (1,688)
---------- ----------
Total inventories $ 19,549 $ 17,559
========== ==========
11. ACCRUED LIABILITIES
-------------------
Accrued liabilities consisted of the following as of August 31, 2004 and
November 30, 2003:
2004 2003
---------- ----------
Interest $ 5,356 $ 3,115
Salaries, wages and commissions 3,669 3,604
Product advertising and promotion 118 5,348
Insurance 520 1,151
Pension 1,054 1,040
Other 1,464 1,721
---------- ----------
Total accrued liabilities $ 12,181 $ 15,979
========== ==========
12. LONG-TERM DEBT
--------------
Long-term debt consisted of the following as of August 31, 2004 and
November 30, 2003:
2004 2003
---------- ----------
Revolving Credit Facility due 2009
at a variable rate of 5.00% as of
August 31, 2004 $ -- $ --
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
8.875% Senior Subordinated Notes, plus
unamortized premium of $138
for 2003 -- 204,676
Floating Rate Senior Notes due 2010
at a variable rate of 4.31% as of
August 31, 2004 75,000 --
7.0% Senior Subordinated Notes due 2014 125,000 --
---------- ----------
Total long-term debt 200,000 212,426
Less: current maturities -- 7,750
---------- ----------
Total long-term debt, net of current
maturities $ 200,000 $ 204,676
========== ==========
On February 26, 2004, we entered into a new Senior Secured Revolving
Credit Facility that matures 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 under the Revolving Credit
Facility. 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 August 31, 2004, no amounts have been borrowed
under the Revolving Credit Facility, and the variable rate was 5.0%.
10
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 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 September 29, 2004, we had no borrowings outstanding
under our Revolving Credit Facility.
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
under the Credit Facility was repaid as part of the refinancing transactions
discussed herein, and the revolving credit line under the Credit Facility 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 indenture
trustee 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 not tendered. The
remaining 8.875% Subordinated Notes not tendered in such offer were called in
accordance with their terms on April 1, 2004 at a redemption price of
102.9583% of their aggregate principal amount. On April 1, 2004, the
remaining amount held in escrow was released for payment and all outstanding
8.875% Subordinated Notes were redeemed.
The completion of our refinancing of the Credit Facility and purchase of
approximately $174,530 of our 8.875% Subordinated Notes that were tendered on
February 26, 2004 resulted in a loss on early extinguishment of debt of
$11,309 and a tax benefit of $3,958 in the first quarter of fiscal 2004. In
the second quarter of fiscal 2004, we recorded a loss on early extinguishment
of debt of $1,649 and a related tax benefit of $577 related to the redemption
of the remaining $30,008 of our 8.875% Subordinated Notes. These related tax
benefits were adjusted to reflect the annual estimated effective tax rate of
33% in the third quarter of fiscal 2004 to $3,732 and $544, respectively.
Also 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 proceeds of which were used to purchase our 8.875% Subordinated
Notes and refinance the Credit Facility as discussed above.
The Floating Rate Notes bear interest at a three-month LIBOR plus 3.00%
per year (4.31% as of August 31, 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
current portion of the premium on the interest rate cap agreement of $47 is
included in prepaid expenses and other current assets, and the long-term
portion of $922 is included in other noncurrent assets. The amortized value
of the premium on the interest rate cap was compared to its fair value as of
August 31, 2004, and a charge of $259, net of tax, was recorded to other
comprehensive income. 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 are unsecured senior obligations of
the guarantors and rank equally with all of the current and future unsecured
senior debt of the guarantors. The guarantees of the Floating Rate Notes
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 liquidated 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 35.0% 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 65.0% 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
11
guarantees of the 7.0% Subordinated Notes are 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
100.000%. At any time prior to March 1, 2007, we may redeem up to 35% of the
aggregate principal amount of the 7.0% Subordinated Notes (including any
additional 7.0% Subordinated Notes) at a redemption price of 107.0% 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 65.0% 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, 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 101.0% of their principal amount
plus accrued and unpaid interest.
The future maturities of long-term debt outstanding as of August 31,
2004 are as follows:
2005 $ --
2006 --
2007 --
2008 --
2009 --
Thereafter 200,000
----------
$ 200,000
==========
13. COMPREHENSIVE INCOME
--------------------
Comprehensive income, net of taxes, consisted of the following
components for the three and nine months ended August 31, 2004 and 2003,
respectively:
For the Three Months For the Nine Months
Ended August 31, Ended August 31,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income $ 8,734 $ 6,837 $ 15,269 $ 18,947
Other - interest rate cap
adjustment (259) -- (259) --
Other - foreign currency
translation adjustment 120 268 189 307
---------- ---------- ---------- ----------
Total $ 8,595 $ 7,105 $ 15,199 $ 19,254
========== ========== ========== ==========
14. 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. During the nine months ended August 31, 2004, we repurchased 190
shares for $5,015. All repurchased shares were retired and returned to
unissued. We are limited in our ability to repurchase shares due to
restrictions under the terms of our Revolving Credit Facility and the
indentures pursuant to which the Floating Rate Notes and 7.0% Subordinated
Notes were issued.
12
15. 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 August 31,
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.
Net periodic pension cost for the three and nine months ended August 31,
2004 and 2003 comprised the following components:
For the Three Months For the Nine Months
Ended August 31, Ended August 31,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Service cost $ -- $ -- $ -- $ --
Interest cost on projected
benefit obligation 155 152 465 456
Actual return on plan assets (178) (157) (534) (471)
Net amortization and deferral 28 (36) 84 (108)
-------- -------- -------- --------
Net pension cost (benefit) $ 5 $ (41) $ 15 $ (123)
======== ======== ======== ========
No employer contributions were made for the nine months ended August 31,
2004 and August 31, 2003, and no employer contributions are required 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 and
nine months ended August 31, 2004 and August 31, 2003, included the following
components:
For the Three Months For the Nine Months
Ended August 31, Ended August 31,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Service cost $ 16 $ 14 $ 48 $ 42
Interest cost on accumulated
postretirement benefit
obligation 20 20 60 60
Amortization of prior service
cost 4 4 12 12
Amortization of net gain (8) (7) (24) (21)
-------- -------- -------- --------
Net periodic postretirement
benefits cost $ 32 $ 31 $ 96 $ 93
======== ======== ======== ========
16. 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 and
nine months ended August 31, 2004 was 31% and 33%, respectively, as compared
to 37% in the three and nine months ended August 31, 2003, respectively. The
lower rates for the three and nine months ended August 31, 2004 reflect the
implementation of a number of foreign and state tax planning initiatives,
which include our determination during the third quarter of fiscal 2004 to
reinvest indefinitely all undistributed earnings of Chattem (Canada), a
wholly-owned subsidiary.
13
Undistributed earnings of Chattem (Canada) amounted to approximately
$496 and $1,441 for the three and nine months ended August 31, 2004,
respectively. These earnings are considered to be reinvested indefinitely
and, accordingly, no provision for U.S. federal and state income taxes has
been provided thereon. Upon distribution of those earnings in the form of
dividends or otherwise, we would be subject to U.S. income taxes (subject to
an adjustment for foreign tax credits).
17. PRODUCT SEGMENT INFORMATION
---------------------------
Net sales of our domestic product categories within our single
healthcare business segment for the three and nine months ended August 31,
2004 and 2003 are as follows:
For the Three Months For the Nine Months
Ended August 31, Ended August 31,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Topical analgesics $ 20,118 $ 14,540 $ 53,964 $ 42,738
Medicated skin care products 17,257 16,926 47,920 44,988
Dietary supplements 7,774 9,664 26,654 30,232
Medicated dandruff shampoos
and conditioner 6,480 6,116 23,107 20,928
Other OTC and toiletry products 8,210 6,490 27,485 23,711
-------- -------- -------- --------
Total $ 59,839 $ 53,736 $179,130 $162,597
======== ======== ======== ========
18. COMMITMENTS AND CONTINGENCIES
-----------------------------
GENERAL LITIGATION
As of September 29, 2004, we were named as a defendant in approximately
345 lawsuits 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.
In an effort to achieve a global settlement of all DEXATRIM PPA product
liability claims, 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 memorialized certain settlement terms concerning lawsuits
relating to our DEXATRIM products containing PPA.
On April 13, 2004, we entered into a class action settlement agreement
with representatives of the plaintiffs' settlement class. The class action
settlement agreement was generally consistent with the terms of and
superceded the Memorandum of Understanding and provided for a national class
action settlement of all DEXATRIM PPA claims. The court granted preliminary
approval of the class action settlement on April 23, 2004.
On August 26, 2004, a fairness hearing to consider final approval of the
settlement was held before Judge Rothstein. At the conclusion of the hearing,
Judge Rothstein stated that the court would prepare and enter an order
certifying the class and granting approval of the settlement. We expect that
the order will be entered in October 2004.
The settlement includes claims against us involving alleged injuries by
DEXATRIM products containing PPA that were alleged to have occurred after
December 21, 1998, the date we acquired the DEXATRIM brand. In accordance
with the terms of the class action settlement agreement, we previously
published notice of the settlement and details as to the manner in which
claims could be submitted. The deadline for submission of claims was July 7,
2004. A total of 391 claims were submitted prior to the claims deadline. Of
these 391 claims, 173 alleged stroke as an injury and 218 alleged other
non-stroke injuries. These claims will be valued pursuant to the agreed upon
settlement matrix that is designed to evaluate and determine the settlement
value of each claim. A total of 16 claimants elected to opt out of the class
settlement and may continue to pursue claims for damages against us in
separate lawsuits.
In accordance with the terms of the class action settlement agreement,
$60,885 has been funded into a settlement trust from our first three layers
of insurance coverage, as described below. In addition, on July 14, 2004, we
entered into a settlement agreement with Sidmak Laboratories, Inc.
("Sidmak"), the manufacturer of DEXATRIM products containing PPA, pursuant to
which Sidmak agreed to contribute $10,000 into the settlement trust within 30
days after final court approval of
14
the settlement. To the extent the amount in the settlement trust is
insufficient to fully fund the settlement, we will be required to make
additional contributions to the settlement trust in the future. We currently
expect to use our cash on hand to fund any required additional contributions
to the settlement trust. If we are required to fund significant other
liabilities related to the PPA litigation beyond the settlement trust, either
pursuant to the terms of the settlement, as a result of the opt out cases or
otherwise, we will have significantly fewer sources of funds with which to
satisfy such liabilities, and we may be unable to do so.
We recorded a $3,463 charge in the second quarter of fiscal 2004 and an
$834 charge in the third quarter of fiscal 2004 relating to settlement and
administrative costs and expenses associated with the PPA litigation.
Although we believe that an additional liability existed as of August 31,
2004 related to the PPA litigation, due to the significant assumptions and
uncertainty involved in estimating the value of cases included in the final
settlement under the settlement matrix, as well as the opt out cases, we are
not able to reasonably estimate if any additional payments by us will be
required in excess of our insurance coverage and third party payments. As a
result, we are not able to reasonably estimate the amount of such liability
as of August 31, 2004 and have made no provision for this liability in the
August 31, 2004 financial statements.
We believe that approximately 206 or approximately 60% of the existing
lawsuits in which we are named as a defendant relating to DEXATRIM containing
PPA involve alleged injuries by DEXATRIM products containing PPA manufactured
and sold prior to our acquisition of DEXATRIM on December 21, 1998. In these
lawsuits, we are being defended on the basis of indemnification obligations
assumed by The DELACO Company ("DELACO"), successor to Thompson Medical
Company, Inc., which owned DEXATRIM prior to December 21, 1998. 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 claims arising from
products manufactured and sold prior to our acquisition of DEXATRIM on
December 21, 1998. However, DELACO is seeking to resolve all DEXATRIM cases
with injury dates prior to December 21, 1998 as part of a liquidating Chapter
11 bankruptcy plan. We understand that DELACO's product liability insurance
carriers and other sources are expected to fund this plan. As part of
DELACO's bankruptcy plan, if finally approved, we expect the bankruptcy court
to release us from liability in DEXATRIM cases with injury dates prior to
December 21, 1998, although there can be no assurances in this regard.
On December 19, 2003, DELACO also entered into a Memorandum of
Understanding with the PSC. If DELACO achieves resolution of the pre-December
21, 1998 cases 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 have filed 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.
Our product liability insurance, as described below, would not apply to
claims arising from products manufactured and sold prior to our acquisition
of DEXATRIM. Although we expect the DELACO bankruptcy plan to resolve these
cases, 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 21, 1998. In the approximately 206 cases that have been filed
against us for products manufactured and sold prior to December 21, 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. Even in these cases,
although there can be no assurances, we do not believe that successor
liability would be imposed against us. 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 21, 1998; we did
not cause DELACO's bankruptcy; and many plaintiffs included in cases filed in
states that in some circumstances impose successor liability are actually
residents of other states.
We have reached an agreement with Kemper Indemnity Insurance Company
("Kemper") to settle its 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 have available for the claims against us
related to the PPA litigation, through our first three layers of insurance
coverage, approximately $60,885 of the $77,000 of product liability coverage
provided by these insurance policies. The $60,885 of available coverage
consists of $37,500 of insurance under the Kemper policy and approximately
$23,385 under policies with two other insurance companies. As indicated
above, this $60,885 of coverage has been funded into a settlement trust in
accordance with the terms of the class action settlement agreement.
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 ensure that we will be successful in retaining such
excess coverage. The Interstate policy is in excess of the product liability
insurance available from Kemper and the two other insurance companies
referred to above. In the event the $60,885 of insurance funds available in
the settlement trust and the $10,000 to be contributed by Sidmak, the
manufacturer of the product, are exhausted under the PPA settlement or
otherwise, coverage under the Interstate policy would not be available until
we have paid $12,615 toward the settlement of PPA claims to reach the $83,500
coverage point for the Interstate policy.
15
We maintain a significantly lower level of insurance coverage for all
other potential claims relating to our products including DEXATRIM products
containing ephedrine. For the current policy period, our 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 $5,019 is currently
funded, and a total of $40,000 of excess coverage through third party
insurers.
We have been named as a defendant in three lawsuits alleging that the
plaintiff was injured as a result of the ingestion of DEXATRIM containing
ephedrine. In addition, three individuals who allege injury caused by
DEXATRIM containing ephedrine filed opt out notices in the PPA class action
settlement. These three individuals have not filed lawsuits against us as of
September 29, 2004. We intend to vigorously defend 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. These plaintiffs have not refiled this
lawsuit as of September 29, 2004.
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 became 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.
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 filed an answer on June 28, 2004 and intend to defend
vigorously 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 assessments from 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
16
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 became effective on April 11, 2004. We discontinued the
manufacturing and shipment of DEXATRIM containing ephedrine in September
2002.
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 demonstrate conclusively 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 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 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 the 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 January 2006. If neither action described above
is successful and the final monograph excludes such products, we would have
to file and receive approval of 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 an 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. In a letter dated January 22, 2004, the FDA wrote the
boards of pharmacy in each state regarding the FDA's concern about products
(both OTC and prescription) that contain acetaminophen. In that letter the
FDA expressed 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
17
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.
19. 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 is 89% owned by Chattem and 11% owned by
Canada. SunDex and Canada are wholly-owned subsidiaries of Chattem. The
guarantees of Signal, SunDex and Canada are full and unconditional and joint
and several. The guarantees of Signal, SunDex and Canada as of August 31,
2004 arose in conjunction with Chattem's issuance of the Revolving Credit
Facility, the Floating Rate Notes and the 7.0% Subordinated Notes (See Note
12). The maximum amount of future payments the guarantors would be required
to make under the guarantees as of August 31, 2004 is $200,000.
18
Note 19
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
August 31, 2004
(Unaudited and in thousands)
GUARANTOR NON-GUARANTOR
SUBSIDIARY SUBSIDIARY
CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- --------- ---------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 15,849 $ 2,523 $ 8,383 $ -- $ 26,755
Accounts receivable, less allowances of $3,310 26,929 9,677 5,312 (9,677) 32,241
Interest receivable -- 619 -- (619) --
Inventories 13,358 3,783 2,408 -- 19,549
Refundable income taxes 5,258 -- 15 -- 5,273
Deferred income taxes 1,635 -- -- -- 1,635
Prepaid expenses and other current assets 3,224 -- 145 -- 3,369
--------- --------- --------- --------- ---------
Total current assets 66,253 16,602 16,263 (10,296) 88,822
--------- --------- --------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET 26,896 775 322 -- 27,993
--------- --------- --------- --------- ---------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased
product rights, net 836 307,087 -- (62,290) 245,633
Debt issuance costs, net 5,348 -- -- -- 5,348
Investment in subsidiaries 261,034 33,000 66,024 (360,058) --
Note receivable -- 33,000 -- (33,000) --
Other 3,159 -- 400 -- 3,559
--------- --------- --------- --------- ---------
Total other noncurrent assets 270,377 373,087 66,424 (455,348) 254,540
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 363,526 $ 390,464 $ 83,009 $(465,644) $ 371,355
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and other $ 8,560 $ -- $ 1,836 $ -- $ 10,396
Accrued liabilities 19,320 1,306 1,851 (10,296) 12,181
--------- --------- --------- --------- ---------
Total current liabilities 27,880 1,306 3,687 (10,296) 22,577
--------- --------- --------- --------- ---------
LONG-TERM DEBT 200,000 -- 33,000 (33,000) 200,000
--------- --------- --------- --------- ---------
DEFERRED INCOME TAXES (786) 31,808 (47) -- 30,975
--------- --------- --------- --------- ---------
OTHER NONCURRENT LIABILITIES 1,738 -- -- -- 1,738
--------- --------- --------- --------- ---------
INTERCOMPANY ACCOUNTS 18,629 (19,627) 998 -- --
--------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued -- -- -- -- --
Common shares, without par value,
authorized 50,000, issued 19,752 83,425 -- -- -- 83,425
Share capital of subsidiaries -- 330,586 38,647 (369,233) --
Retained earnings 37,543 46,391 6,749 (53,140) 37,543
--------- --------- --------- --------- ---------
Total 120,968 376,977 45,396 (422,373) 120,968
--------- --------- --------- --------- ---------
Unamortized value of restricted common
shares issued (2,668) -- -- -- (2,668)
Cumulative other comprehensive income,
net of taxes:
Interest rate cap adjustment (259) -- -- -- (259)
Foreign currency translation adjustment (336) -- (25) 25 (336)
Minimum pension liability adjustment (1,640) -- -- -- (1,640)
--------- --------- --------- --------- ---------
Total shareholders' equity 116,065 376,977 45,371 (422,348) 116,065
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 363,526 $ 390,464 $ 83,009 $(465,644) $ 371,355
========= ========= ========= ========= =========
19
Note 19
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 236,053 -- -- (236,053) --
Other 1,596 -- 500 -- 2,096
--------- --------- --------- --------- ---------
Total other noncurrent assets 244,210 307,080 500 (298,343) 253,447
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 337,162 $ 318,948 $ 13,874 $(306,599) $ 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 (239) 26,788 (48) -- 26,501
--------- --------- --------- --------- ---------
OTHER NONCURRENT LIABILITIES 1,689 -- -- -- 1,689
--------- --------- --------- --------- ---------
INTERCOMPANY ACCOUNTS (3,801) 3,469 332 -- --
--------- --------- --------- --------- ---------
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, net
of taxes:
Foreign currency translation adjustment (525) -- (222) 222 (525)
Minimum pension liability adjustment (1,640) -- -- -- (1,640)
--------- --------- --------- --------- ---------
Total shareholders' equity 95,866 288,063 10,280 (298,343) 95,866
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 337,162 $ 318,948 $ 13,874 $(306,599) $ 363,385
========= ========= ========= ========= =========
20
Note 19
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED AUGUST 31, 2004
(Unaudited and in thousands)
GUARANTOR NON-GUARANTOR
SUBSIDIARY SUBSIDIARY
CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- --------- ---------
TOTAL REVENUES $ 158,569 $ 55,984 $ 13,360 $ (30,449) $ 197,464
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 45,211 7,701 5,401 (1,670) 56,643
Advertising and promotion 44,765 8,089 3,424 -- 56,278
Selling, general and administrative 31,711 339 781 -- 32,831
Litigation settlement 4,491 -- -- -- 4,491
Equity in subsidiary income (24,783) -- -- 24,783 --
--------- --------- --------- --------- ---------
Total costs and expenses 101,395 16,129 9,606 23,113 150,243
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS 57,174 39,855 3,754 (53,562) 47,221
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (11,678) -- (1,856) 1,856 (11,678)
Investment and other income, net 100 1,859 1,352 (3,106) 205
Loss on early extinguishment of debt (12,958) -- -- -- (12,958)
Royalties (24,359) (4,420) -- 28,779 --
Corporate allocations 2,631 (2,545) (86) -- --
--------- --------- --------- --------- ---------
Total other income (expense) (46,264) (5,106) (590) 27,529 (24,431)
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 10,910 34,749 3,164 (26,033) 22,790
--------- --------- --------- --------- ---------
(BENEFIT FROM) PROVISION FOR INCOME TAXES (4,359) 11,467 413 -- 7,521
--------- --------- --------- --------- ---------
NET INCOME $ 15,269 $ 23,282 $ 2,751 $ (26,033) $ 15,269
========= ========= ========= ========= =========
21
Note 19
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED AUGUST 31, 2003
(Unaudited and in thousands)
GUARANTOR NON-GUARANTOR
SUBSIDIARY SUBSIDIARY
CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- --------- ---------
TOTAL REVENUES $ 138,026 $ 53,896 $ 14,225 $ (24,907) $ 181,240
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 39,530 8,113 5,873 (2,117) 51,399
Advertising and promotion 41,218 8,333 4,458 -- 54,009
Selling, general and administrative 28,510 208 1,727 -- 30,445
Equity in subsidiary income (22,792) -- -- 22,792 --
--------- --------- --------- --------- ---------
Total costs and expenses 86,466 16,654 12,058 20,675 135,853
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS 51,560 37,242 2,167 (45,582) 45,387
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (15,431) -- -- -- (15,431)
Investment and other income, net 69 3 47 -- 119
Royalties (20,951) (1,561) (278) 22,790 --
Corporate allocations 2,951 (2,870) (81) -- --
--------- --------- --------- --------- ---------
Total other income (expense) (33,362) (4,428) (312) 22,790 (15,312)
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 18,198 32,814 1,855 (22,792) 30,075
(BENEFIT FROM) PROVISION FOR INCOME TAXES
(749) 11,435 442 -- 11,128
--------- --------- --------- --------- ---------
NET INCOME $ 18,947 $ 21,379 $ 1,413 $ (22,792) $ 18,947
========= ========= ========= ========= =========
22
Note 19
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 31, 2004
(Unaudited and in thousands)
GUARANTOR NON-GUARANTOR
SUBSIDIARY SUBSIDIARY
CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- --------- ---------
OPERATING ACTIVITIES:
Net income $ 15,269 $ 23,282 $ 2,751 $ (26,033) $ 15,269
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,549 -- 60 -- 4,609
Deferred income taxes 1,260 5,020 -- -- 6,280
Tax benefit realized from stock option exercises 4,036 -- -- -- 4,036
Loss on early extinguishment of debt 12,958 -- -- -- 12,958
Other, net 33 -- 20 -- 53
Equity in subsidiary income (26,033) -- -- 26,033 --
Changes in operating assets and liabilities:
Accounts receivable (5,200) (2,588) (1,563) 2,588 (6,763)
Interest receivable -- (619) -- 619 --
Inventories (688) (1,743) 441 -- (1,990)
Refundable income taxes (844) -- 2 -- (842)
Prepaid expenses and other current assets 1,223 -- (2) (1,167) 54
Accounts payable and accrued liabilities (3,341) 678 377 (2,040) (4,326)
--------- --------- --------- --------- ---------
Net cash provided by operating activities 3,222 24,030 2,086 -- 29,338
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,753) -- (10) -- (1,763)
Purchases of patents, trademarks and other
product rights -- (8) -- -- (8)
Increase in note receivable -- (33,000) -- 33,000 --
(Increase) decrease in other assets, net (998) -- 404 -- (594)
--------- --------- --------- --------- ---------
Net cash (used in) provided by investing
activities (2,751) (33,008) 394 33,000 (2,365)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt (212,288) -- -- -- (212,288)
Proceeds from long-term debt 200,000 -- -- -- 200,000
Proceeds from borrowings under revolving credit
facility 25,000 -- -- -- 25,000
Payments of revolving credit facility (25,000) -- -- -- (25,000)
Proceeds from exercise of stock options 5,139 -- -- -- 5,139
Repurchase of common shares (5,015) -- -- -- (5,015)
Increase in debt issuance costs (5,729) -- -- -- (5,729)
Retirement of debt issuance costs (7,861) -- -- -- (7,861)
Premium on interest rate cap agreement (1,375) -- -- -- (1,375)
Intercompany debt proceeds, net -- -- 33,000 (33,000) --
Changes in intercompany accounts 23,805 10,787 (34,592) -- --
Dividends paid -- (1,250) 1,250 -- --
--------- --------- --------- --------- ---------
Net cash (used in) provided by financing
activities (3,324) 9,537 (342) (33,000) (27,129)
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS -- -- (20) -- (20)
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
(Decrease) increase for the period (2,853) 559 2,118 -- (176)
At beginning of period 18,702 1,964 6,265 -- 26,931
--------- --------- --------- --------- ---------
At end of period $ 15,849 $ 2,523 $ 8,383 $ -- $ 26,755
========= ========= ========= ========= =========
23
Note 19
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 31, 2003
(Unaudited and in thousands)
GUARANTOR NON-GUARANTOR
SUBSIDIARY SUBSIDIARY
CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- --------- ---------
OPERATING ACTIVITIES:
Net income $ 18,947 $ 21,379 $ 1,413 $ (22,792) $ 18,947
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,451 -- 114 -- 4,565
Deferred income taxes 713 5,401 (10) -- 6,104
Tax benefit realized from stock option exercises 1,240 -- -- -- 1,240
Other, net (101) -- 7 -- (94)
Equity in subsidiary income (22,792) -- -- 22,792 --
Changes in operating assets and liabilities:
Accounts receivable (3,293) (15,821) 426 15,821 (2,867)
Inventories (1,321) 809 (497) -- (1,009)
Refundable income taxes (256) -- -- -- (256)
Prepaid expenses and other current assets (664) -- (104) -- (768)
Accounts payable and accrued liabilities 12,640 1,235 197 (15,821) (1,749)
--------- --------- --------- --------- ---------
Net cash provided by operating activities 9,564 13,003 1,546 -- 24,113
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,800) -- (133) -- (3,933)
Purchases of patents, trademarks and other
products rights -- (373) -- -- (373)
Increase in other assets, net (250) -- (35) -- (285)
--------- --------- --------- --------- ---------
Net cash used in investing activities (4,050) (373) (168) -- (4,591)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt (10,000) -- -- -- (10,000)
Proceeds from exercise of stock options 1,533 -- -- -- 1,533
Repurchase of common shares (5,351) -- -- -- (5,351)
Deferred debt issuance costs (25) -- -- -- (25)
Changes in intercompany accounts 7,541 (10,277) 2,736 -- --
Dividends paid 3,000 (3,000) -- -- --
--------- --------- --------- --------- ---------
Net cash (used in) provided by financing
activities (3,302) (13,277) 2,736 -- (13,843)
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS -- -- 118 -- 118
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period 2,212 (647) 4,232 -- 5,797
At beginning of period 11,505 1,138 3,281 -- 15,924
--------- --------- --------- --------- ---------
At end of period $ 13,717 $ 491 $ 7,513 $ -- $ 21,721
========= ========= ========= ========= =========
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in our 2003
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. The actual results may differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including, but not limited to, those described in our filings
with the Securities and Exchange Commission.
OVERVIEW
- --------
We are a leading marketer and manufacturer of a broad portfolio of branded
over-the-counter ("OTC") healthcare products, toiletries and dietary supplements
including such categories as topical analgesics, medicated skin care products,
medicated dandruff shampoos and conditioner, dietary supplements, and other OTC
and toiletry products. Our portfolio of products includes well-recognized brands
such as:
o Topical analgesics such as ICY HOT and ASPERCREME;
o Medicated skin care products such as GOLD BOND medicated skin care
powder, cream, lotion, first aid, and foot care produc