-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R7wlyDjh2rEPGahhx5JMWsZkOk++YOGgRWdgG21k2EbbcWMsQZZhXzEyWQKihcev Bin8qidLghPpvXMC63O0Qw== 0001072613-02-000401.txt : 20020414 0001072613-02-000401.hdr.sgml : 20020414 ACCESSION NUMBER: 0001072613-02-000401 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011130 FILED AS OF DATE: 20020228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHATTEM INC CENTRAL INDEX KEY: 0000019520 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 620156300 STATE OF INCORPORATION: TN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-05905 FILM NUMBER: 02562834 BUSINESS ADDRESS: STREET 1: 1715 W 38TH ST CITY: CHATTANOOGA STATE: TN ZIP: 37409 BUSINESS PHONE: 4238214571 MAIL ADDRESS: STREET 1: 1715 W 38TH ST CITY: CHATTANOOGA STATE: TN ZIP: 37409 FORMER COMPANY: FORMER CONFORMED NAME: CHATTEM DRUG & CHEMICAL CO DATE OF NAME CHANGE: 19790111 10-K 1 form10-k_11071.txt FORM 10-K FOR YEAR ENDED NOVEMBER 30, 2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2001 COMMISSION FILE NUMBER 0-5905 CHATTEM, INC. A TENNESSEE CORPORATION IRS EMPLOYER IDENTIFICATION NO. 62-0156300 1715 WEST 38TH STREET CHATTANOOGA, TENNESSEE 37409 TELEPHONE: 423-821-4571 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ---------------- NONE NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, WITHOUT PAR VALUE 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. DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K WILL NOT BE CONTAINED IN THE DEFINITIVE PROXY STATEMENT INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K. AS OF FEBRUARY 22, 2002 THE AGGREGATE MARKET VALUE OF VOTING SHARES HELD BY NON-AFFILIATES WAS $79,675,785. AS OF FEBRUARY 22, 2002 8,945,981 COMMON SHARES WERE OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED NOVEMBER 30, 2001 (THE "2001 ANNUAL REPORT TO SHAREHOLDERS") ARE INCORPORATED BY REFERENCE IN PARTS I, II AND IV OF THIS FORM 10-K. PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED MARCH 11, 2002 (THE "PROXY STATEMENT") ARE INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K. ================================================================================ PART I ITEM 1. BUSINESS GENERAL Chattem, Inc. (the "Company") is a leading marketer and manufacturer of a variety of branded consumer products, principally over-the-counter ("OTC") health care products. The Company's high quality branded products target niche market segments and are among the market leaders in their respective categories. Through creative and cost effective marketing techniques, the Company supports these brands on a national level across all major distribution channels, including food, drug and mass merchandisers. Several of these brands have the number one market share in their categories, including GOLD BOND medicated powders and the Company's topical analgesic brands which together rank number one in that category. The Company conducts a portion of its business through three wholly-owned subsidiaries. One subsidiary owns or licenses substantially all of the trademarks and intangibles associated with the Company's domestic consumer products business and licenses the Company's use thereof. Certain foreign sales operations are conducted through Canadian and United Kingdom subsidiaries. For purposes of this report, the "Company", "we", "our" or "us" refers to Chattem, Inc. and its wholly-owned subsidiaries. Trademarks of the Company appear in this report in all capitalized letters. 2 DEVELOPMENTS DURING FISCAL 2001 - ------------------------------- Fiscal 2001 was highlighted by the retirement of $70,462,000 principal amount of 8.875% Senior Subordinated Notes due 2008 (the "8.875% Notes") and the remaining outstanding principal amount of $29,145,000 of 12.75% Senior Subordinated Notes due 2004 (the "12.75% Notes"), the repurchase of 14,000 shares of the Company's common stock, entering into a $10,000,000 revolving line of credit from a financial institution and the restoration of DEXATRIM sales to near the sales level attained in fiscal 2000 after the discontinuance of DEXATRIM containing phenylpropanoline ("PPA"). On January 17, 2001 the Company completed the consent solicitation and tender offer pursuant to which it retired $70,462,000 principal amount of its 8.875% Notes and $7,397,000 principal amount of its 12.75% Notes. The consideration paid for the consent solicitation and tender offer was $64,937,000, which was provided by the proceeds of the Company's divestiture of the Ban(R) product line in fiscal 2000. An extraordinary gain on the early extinguishment of debt of $7,551,000, net of income taxes, was recognized in the first six months of fiscal 2001. On June 15, 2001 the Company retired all of the remaining outstanding principal balance of $21,748,000 of its 12.75% Notes and accrued interest thereon. In connection with the retirement of the 12.75% Notes the Company recognized a loss on the early extinguishment of debt of $603,000, net of income tax benefit, in the third quarter of fiscal 2001. This loss primarily consisted of the premium paid on the retirement of the notes and the write-off of related unamortized deferred issuance and initial discount costs. During fiscal 2001 the Company repurchased, and returned to unissued, 14,000 shares of its common stock, without par value, for $174,000 in accordance with the Company's previously announced stock buyback program. On June 21, 2001 the Company obtained a $10,000,000 unsecured revolving line of credit from a financial institution. As of February 22, 2002 no portion of this credit facility had been utilized by the Company. The loss of sales of DEXATRIM containing PPA after its voluntary withdrawal from the market in November 2000 was nearly offset in 2001 by sales of DEXATRIM Natural. The Company will continue to seek sales increases through a combination of acquisitions and internal growth while maintaining high operating income levels. As previously high-growth brands mature, sales increases will become even more dependent on acquisitions and the development of successful line extensions. During fiscal 2001 the Company introduced DEXATRIM Natural Ephedrine Free, ICY HOT Patch, BULLFROG Fast Blast and BULLFROG Sensitive Skin as line extensions. Line extensions, product introductions and acquisitions require a significant amount of introductory advertising and promotional support. For a period of time these products do not generate a commensurate amount of sales and/or earnings. As a result, the Company may experience a short-term impact on its profitability due to line extensions. Ban(R) is the registered trademark of Kao Corporation. 3 GROWTH STRATEGY - --------------- The Company seeks to expand its business through: ACQUISITIONS. Brand acquisitions afford the Company the opportunity to leverage its advertising and promotional capabilities and utilize existing distribution channels and, in certain instances, existing manufacturing facilities, to attain incremental sales increases accompanied by higher operating margins. The Company seeks to acquire brands with unrealized potential that have been under-marketed by larger firms or have achieved limited success by entrepreneurs. The Company focuses its acquisition efforts on niche markets in the consumer products sector where it is able to gain a significant market position. As many of the Company's larger competitors rationalize their product lines or businesses, we anticipate an increase in the number and size of attractive brand acquisition opportunities. The most recent examples of the execution of this strategy are the Company's acquisitions of: The brands acquired from Thompson Medical Company, Inc. ("Thompson Medical") in December 1998. With the topical analgesic products acquired in this purchase (SPORTSCREME, ASPERCREME, CAPZASIN and ARTHRITIS HOT), the Company became the leading marketer in the United States of brands in this category. Also acquired in this purchase was DEXATRIM, an appetite suppressant. GOLD BOND in April 1996. GOLD BOND is the leading medicated powder in the United States. Annual sales of GOLD BOND have approximately doubled since the time of the acquisition, while operating margins have increased during the same period. INTERNAL GROWTH. The Company seeks to increase its market share for its existing brands by focusing on increased market penetration and brand awareness and introducing product line extensions. Product line extensions allow the Company to maximize the value of the base brand through an increased market presence and new market entry. Recent examples of product line extensions include: DEXATRIM Natural Ephedrine Free, ICY HOT Patch, BULLFROG Fast Blast and BULLFROG Sensitive Skin. DIVESTITURES. Strategically, the Company continually evaluates its products as part of its growth strategy and, in instances where the Company's objectives are not realized, will dispose of these brands and redeploy the assets to acquire other brands or reduce indebtedness. Recent examples of the execution of this strategy are the Company's divestiture of the Ban product line of antiperspirants and deodorants and Norwich(R) Aspirin in fiscal 2000 and the Cornsilk(R) oil control makeup brand in fiscal 1998. Norwich(R) is the registered trademark of The Monticello Companies, Inc. Cornsilk(R) is the registered trademark of Del Laboratories, Inc. PRODUCTS - -------- The objective of the Company is to offer high quality brand name products in niche market segments in which its products can be among the market leaders in their respective categories. The Company strives to achieve its objective by identifying brands with favorable demographic appeal, quickly modifying products and promotions in response to changing consumer demands and developing creative and cost-effective marketing and advertising programs. The Company manufactures products accounting for approximately 65% of its sales volume at its facility in Chattanooga, Tennessee, with GOLD BOND medicated powders, HERPECIN-L, DEXATRIM, ICY HOT Patch and the SUNSOURCE products being produced by contract manufacturers. 4 The Company's product brands are: GOLD BOND - medicated powders and lotion, antibiotic ointment and anti-itch cream FLEXALL - topical analgesic ICY HOT - topical analgesic ASPERCREME - topical analgesic SPORTSCREME - topical analgesic CAPZASIN - P - topical analgesic CAPZASIN - HP - topical analgesic ARTHRITIS HOT - topical analgesic BENZODENT - topical oral analgesic PAMPRIN - menstrual internal analgesic PREMSYN PMS - premenstrual internal analgesic HERPECIN-L - cold sore and fever blister balm DEXATRIM - appetite suppressant GARLIQUE - garlic extract REJUVEX - menopausal supplement NEW PHASE - menopausal supplement PROPALMEX - prostate health MELATONEX - sleep aid OMNIGEST EZ - digestion aid PHISODERM - facial cleanser and acne medicine MUDD - facial mask and cleanser BULLFROG - sunscreen and sunblock ULTRASWIM - chlorine removing shampoo, conditioner and body wash SUN-IN - spray-in hair lightener 5 The Company markets a diversified portfolio of brand name OTC health care products, many of which are among the market leaders in the United States in their respective categories. The GOLD BOND brand, which is over 100 years old, competes in the adult and baby medicated powder, foot powder, therapeutic lotion, anti-itch cream and antibiotic ointment markets. GOLD BOND is the leading brand in the medicated powder category in the United States. Total retail sales for the brand have grown from less than $28,000,000 when the brand was acquired in fiscal 1996 to over $61,000,000 in fiscal 2001. In 1997 the Company added two line extensions, GOLD BOND Foot Powder and GOLD BOND Medicated Body Lotion. GOLD BOND Antibiotic Ointment was introduced during the first quarter of 1999, while GOLD BOND Sensitive Skin Body Lotion was added to the product line in 2000. In fiscal 2002 the GOLD BOND brand will introduce an aerosol delivery form of its successful foot powder to meet the needs of more than half of consumers who prefer a spray form. The product line is heavily supported by national television and radio advertising throughout most of the year, as well as with consumer promotions. We believe GOLD BOND continues to represent an opportunity for growth both through the existing products and the introduction of line extensions. With the acquisition of the Thompson Medical brands in late 1998, Chattem became the United States market leader in the $220,000,000 topical analgesic market category. The Company's strong market position as well as the advancing age of the United States population and the increasing interest in physical fitness combine to provide solid growth prospects within the topical analgesic category. FLEXALL is an aloe vera based topical analgesic used primarily by chronic pain sufferers to alleviate pain and inflammation in joints and secondarily by sufferers of muscle strain. Introduced in fiscal 1999, FLEXALL QUIK GEL, which provides fast relief without any mess, was accompanied by an advertising campaign featuring NFL Hall of Famer Joe Montana. Uniquely positioned as the brand that goes on "icy to dull the pain and gets hot to relax it away", ICY HOT is available in a cream, balm, patch and stick. This dual action extra strength product appeals to younger users just entering the category as well as older consumers who want to remain active. ICY HOT Patch, concentrated pain relief that lasts for hours and is easy to apply, was successfully introduced in fiscal 2001. Former Thompson Medical brands round out the Company's topical analgesic portfolio. ASPERCREME provides odor free relief of arthritis and other chronic pain while SPORTSCREME is targeted at serious athletes as well as "weekend warriors". CAPZASIN, which contains capsicin, the active ingredient that doctors recommend most, is focused on the arthritis sufferer looking for clinically proven relief. ARTHRITIS HOT provides relief at a value price. The Company supports the topical analgesic brands with extensive national television and radio advertising as well as targeted consumer promotions and is well positioned to achieve solid growth within the topical analgesic category. BENZODENT is a dental analgesic cream in an adhesive base for use as an oral topical analgesic for pain related to dentures. BENZODENT is principally supported by sampling consumers at the time they are fitted with dentures and representation at professional dental conferences. The Company competes in the menstrual analgesic segment with two brands: PAMPRIN, a combination drug targeted towards relief of all menstrual symptoms, and PREMSYN PMS, targeted towards the specific symptoms of premenstrual syndrome. The Company uses a mix of television and print advertising as well as point of entry sampling to gain trial and awareness among the female target audience. 6 HERPECIN-L, Chattem's entry in the lip care category, is uniquely formulated to treat and protect cold sores by moisturizing lips to help prevent cracking and promote healing. Available in a stick and a jar, HERPECIN-L contains a sunblock to help protect lips from the harmful rays of the sun. The Company uses radio advertising to generate trial use during the peak winter and summer cold sore seasons. DEXATRIM, acquired in December 1998, is a leading name in the diet pill category. In 2001 DEXATRIM enjoyed strong growth in the herbal diet aid category with DEXATRIM Natural. DEXATRIM Natural is a drug-free, all natural, dietary supplement with special dual action that curbs appetite and helps burn more fat and calories. DEXATRIM Natural is also available in Green Tea and Caffeine Free versions. DEXATRIM Natural was successfully promoted with high levels of advertising support through the New Year's resolution and spring swimsuit seasons. DEXATRIM is now only available in herbal, dietary supplement formulas after the removal of DEXATRIM products with PPA from the product line in November 2000. In 2002 DEXATRIM RESULTS, a nutrition based weight control product, will be introduced. DEXATRIM RESULTS has a unique formula, which provides more energy sources and more nutrition so that consumers can feel good while they are reaching their dieting goals. DEXATRIM RESULTS will be available in a regular and an ephedrine-free formula. The Company competes in the United States nutritional supplement category with its SUNSOURCE line which includes GARLIQUE, REJUVEX, NEW PHASE, PROPALMEX, MELATONEX, and OMNIGEST EZ. These products are distributed primarily through the drug and mass merchandiser trade channels. GARLIQUE garlic tablets support cardiovascular health and are uniquely positioned in the marketplace as a "one per day" high potency garlic supplement. Most major GARLIQUE competitors require multiple daily dosages. National television advertising is utilized throughout the year to emphasize this key advantage to consumers. REJUVEX and NEW PHASE offer a more complete way for a woman to maintain comfort as she enters a phase of life that, for many, is a time of hormonal imbalance and discomfort. REJUVEX is an estrogen-free dietary supplement that contains magnesium, vitamins and other natural ingredients to replenish nutrients and help maintain healthy bones. NEW PHASE supports hormonal balance with 80 milligrams per tablet of natural phytoestrogens, double the isoflavone content of many leading brands. PROPALMEX supports prostate health and promotes free urinary flow. For men over forty looking for all natural, drug-free options, PROPALMEX offers a healthy choice with a unique formula that contains saw palmetto, lycopene and zinc. MELATONEX is formulated to support a natural sleep cycle by supplementing the body's production of melatonin, a hormone necessary for a good night's sleep. OMNIGEST EZ contains a unique blend of seven plant derived digestive enzymes that work along with the digestive enzymes produced by your own body to help in the digestion of fats, proteins, carbohydrates, cellulose and dairy products. PHISODERM is a line of facial cleansers developed by dermatologists which retains an ethical, troubled skin reputation. The line includes several formulas of liquid cleansers including one for infants. In 2001 the PHISODERM brand sustained its focus on the growing acne portion of the business which includes the 4-Way Daily Acne Cleanser. Consumer support behind the brand is concentrated on the acne business and includes print advertising in teen magazines, targeted television advertising on teen cable programs and extensive sampling. In 2002 the Company will further expand the acne portion of the business with unique 7 line extensions: PHISODERM Clear Confidence Acne Body Wash and PHISODERM Clear Confidence 5 Minute Blemish Masque. The entire PHISODERM line has been repackaged in clear, contemporary-looking packages. MUDD is a line of deep cleaning clay-based products for the face. Target consumers for MUDD are women between the ages of 18 and 49. MUDD Masque is available in four formulas and is a strong market leader in the masque category. In 2001 the masque products were supported by a new television campaign featuring the entire MUDD line and the brand promise of providing the ultimate in facial deep cleaning. BULLFROG is the line of ultimate waterproof sunblocks for outdoor active consumers. In 2001 BULLFROG was the fastest growing SPF 15+ sunblock, posting sales gains of over 6%. In 2001 two new products were added to the line: BULLFROG FastBlast, a watermelon scented spray version for kids of the popular BULLFROG Quik Gel formula, and BULLFROG Sensitive Skin, a dermatologist recommended, fragrance free, high protection lotion. In 2002 BULLFROG is expected to continue to realize solid growth with a comprehensive brand plan which includes an active new product program and targeted consumer advertising, promotions and sampling programs. ULTRASWIM is a line of chlorine removing shampoos, conditioners and soaps. ULTRASWIM has a unique formula that performs chlorine removal better than any comparable hair care or skin care product on the market. The Company supports this brand through targeted print advertising to competitive, recreational and exercise swimmers and through event sponsorship with targeted sampling programs. In 2001 ULTRASWIM was relaunched with a new healthy hair formula and a clear package design. SUN-IN is a hair lightener available in two varieties: spray-on and Super Streaks, a highlighting hair gel. In 2001 SUN-IN built awareness with a continually changing teen target audience through promotional prepacks and an interactive web site. 8 INTERNATIONAL - ------------- Certain of the Company's products are sold in foreign countries. The international business is concentrated in Canada, Europe and Central and South America. Sales in Canada and Europe are conducted by subsidiary companies located and locally staffed in Canada and the United Kingdom, respectively. General export sales are handled by the Company from its offices in Chattanooga. Most of the products sold in international markets are manufactured by the Company at its Chattanooga facilities and are packaged by the subsidiary companies in Canada and the United Kingdom with the assistance, from time to time, of outside contract packagers. The GOLD BOND, PAMPRIN, PHISODERM, ULTRASWIM, SUN-IN, MUDD, ASPERCREME and DEXATRIM brands are sold in Canada. Consumer product sales in the United Kingdom and on the continent of Western Europe are currently limited to toiletry and skin care products. The Company's hair lightener is sold on the continent under the SPRAY BLOND trademark and in the United Kingdom as SUN-IN. MUDD, Cornsilk (through a license agreement) and ULTRASWIM are the other products sold by the Company's United Kingdom subsidiary in Europe. Certain of the Company's OTC health care products are also sold by the United Kingdom operation to customers in the Middle and Far East. The Company's export division services various distributors primarily located in Central and South America and the Caribbean. The Company sells various products into these markets including GOLD BOND, ICY HOT, DEXATRIM and PHISODERM. MANUFACTURING AND QUALITY CONTROL - --------------------------------- The Company manufactures approximately 65% of the sales volume of its products at its Chattanooga plants. GOLD BOND medicated powders, HERPECIN-L, DEXATRIM, ICY HOT Patch and the SUNSOURCE brands are manufactured by third party contract manufacturers. The Company believes it has adequate capacity to meet anticipated demand for its products. New products that are consistent with currently manufactured products can generally be manufactured with the adaptation of existing equipment and facilities, the addition of new equipment at relatively small cost or through readily available contract manufacturers. For additional information about the extent of utilization of the Company's manufacturing facilities, see Item 2, "Properties", of this Form 10-K. The Company's third party manufacturers produce certain products including GOLD BOND medicated powders, HERPECIN-L, DEXATRIM, ICY HOT Patch and the SUNSOURCE brands. In most cases, the manufacturer is not obligated under a contract that fixes the term of its commitment. Manufacturers may experience problems with product quality or timeliness of product delivery. Manufacturers may also discontinue production of brands for us upon little or no advance notice. In each case, we believe that other contract manufacturers could be quickly secured if any of our current contractors cease to perform adequately. However, if this occurs and we cannot find other contract manufacturers, we may be forced to shift production to in-house facilities. This may cause manufacturing delays, which would cause disruption in our ability to fill orders. This could adversely affect our business. To monitor the quality of its products, the Company maintains an internal quality control system supported by an on-site microbiology laboratory. We have quality control inspectors who regularly test our products and processes and shepherd the products through the manufacturing cycle. Outside consultants also are employed from time to time to monitor product manufacturing and the effectiveness of the Company's operations. 9 The Company has not experienced any material adverse effect on its business as a result of shortages of energy, raw materials or packaging materials used in the manufacture of its products. Certain of our products contain specialized ingredients that we obtain from international and domestic third party suppliers. An unexpected interruption or a shortage in supply could adversely affect our business derived from these products. We may not be able to raise prices quickly enough to immediately offset the effects of any increase in the costs of these specialized ingredients or fill customer orders in the event of a supply shortage. At present, we do not foresee any significant problems in obtaining our ingredients requirements at reasonable prices, but an unexpected interruption or a shortage in supply could adversely affect our business in the future. PRODUCT DEVELOPMENT - ------------------- The Company's product development expenditures were $1,664,000, $1,901,000, and $1,839,000 in the fiscal years ended November 30, 2001, 2000 and 1999, respectively. No material customer-sponsored product development activities were undertaken during these periods. The Company expects product development expenditures to increase in fiscal 2002 due to greater emphasis on developing new products and line extension opportunities. The product development effort focuses on developing improved formulations for existing products and on the creation of formulations for product line extensions. The preservation and improvement of the quality of the Company's products are also integral parts of its overall strategy. DISTRIBUTION - ------------ The Company's domestic products are sold primarily through food, drug and mass merchandiser accounts. Internationally, the products are sold by national brokers in Canada and the United Kingdom and by distributors in Western Europe, Central and South America and the Caribbean. Wal-Mart Stores, Inc. accounts for more than 10% of the Company's consolidated net sales. No other customer accounts for more than 10% of consolidated net sales. Boots Plc, a United Kingdom retailer, and Shoppers Drug Mart, a Canadian retailer, account for more than 10% of the international consumer products sales. On January 22, 2002 Kmart Corporation, a customer of the Company representing approximately 5% of consolidated revenues, filed a petition under Chapter 11 of the United States Bankruptcy Code. At the time of the filing, Kmart Corporation owed the Company approximately $1,200,000. The Company is assessing what impact, if any, this bankruptcy filing may have on future operations. This bankruptcy filing did not impact the Company's results of operations and financial position for fiscal 2001. The Company generally maintains sufficient inventories to meet customer orders as received, absent unusual and infrequent situations. At present, the Company has no significant backlog of customer orders and is promptly meeting customer requirements. The Company does not generally experience wide variances in the amount of inventory it maintains. Inventory levels were increased during fiscals 1996-1999 largely as a result of product acquisitions and line extensions in those years. The decline in inventories in 2000 was largely the result of the sale of Ban and write downs for DEXATRIM with PPA and SUNSOURCE inventories. Although not contractually obligated to do so, in certain circumstances the Company allows its customers to return unsold merchandise and, for seasonal products, the Company provides extended payment terms to its customers. 10 MARKETING - --------- The Company allocates a significant portion of its revenues to the advertising and promotion of its products. Expenditures for these purposes were 39.3%, 42.3%, and 39.5%, respectively, as a percentage of net sales during each of the fiscal years ended November 30, 2001, 2000 and 1999. The Company's marketing objective is to develop and execute professionally designed, creative and cost-effective advertising and promotional programs. The manner in which the Company executes promotional programs and purchases advertising time creates more flexibility in terms of adjusting spending levels. The Company believes that balancing advertising, trade promotion and consumer promotion expenditures on a cost-effective basis is essential to its ability to compete successfully. The Company develops for each of its major brands advertising strategies and executions that sell the product by focusing on the particular strengths and market position of the product rather than just entertaining the viewer. The Company achieves cost-effective advertising by minimizing certain expenses, such as production of commercials and payments to advertising agencies. Additionally, working with its outside media agencies, the Company pursues a strategy for buying spot, network and cable television as well us network radio that it believes results in significant efficiencies as compared to traditional media buying methods. New product launches are supported with a substantial level of advertising and promotional spending. We occasionally use celebrity endorsements to increase awareness of our products, such as Joe Montana's endorsement of FLEXALL. Where appropriate, we use radio and print advertising and 10 and 15-second television advertisements. In our advertisements, we sometimes use personal testimonials from individuals attesting to the effectiveness of our products. The Company works directly with retailers to develop promotional calendars and campaigns for each brand that are customized to the particular requirements of the individual retailer. The programs, which include cooperative advertising, temporary price reductions, in-store displays and special events, are designed to obtain or enhance distribution at the retail level and to reach the ultimate consumers of the product. The Company also utilizes consumer promotions such as coupons, samples and trial sizes to increase the trial and consumption of the products. COMPETITION - ----------- The Company competes in the OTC health care market. This market is highly competitive and is characterized by the frequent introduction of new products, including the movement of prescription drugs to the OTC market, often accompanied by major advertising and promotional programs. We compete primarily on the basis of product quality, price, brand loyalty and consumer acceptance. Our competitors include other OTC pharmaceutical companies and large consumer products companies, many of which have considerably greater financial and marketing resources than the Company. In addition, our competitors have often been willing to use aggressive spending on trade promotions and advertising as a strategy for building market share at the expense of their competitors, including us. The private label or generic category has also become increasingly competitive in certain of the Company's product markets. Our products continue to compete for shelf space among retailers which are increasingly consolidating. 11 TRADEMARKS AND PATENTS - ---------------------- Our trademarks are of material importance to our business and are among our most important assets. In fiscal 2001 substantially all of our net sales were from products bearing proprietary brand names, including GOLD BOND, FLEXALL, ICY HOT, ASPERCREME, PAMPRIN, GARLIQUE, PHISODERM, DEXATRIM and BULLFROG. Accordingly, our future success may depend in part upon the goodwill associated with our brand names, particularly GOLD BOND, ICY HOT and DEXATRIM. Our principal brand names are registered in the United States and certain foreign countries. However, we cannot assure you that the steps we take to protect our proprietary rights in our brand names will be adequate to prevent the misappropriation of these registered brand names in the United States or abroad. In addition, the laws of some foreign countries do not protect proprietary rights in brand names to the same extent as do the laws of the United States. Through our subsidiary, Signal Investment & Management Co., we maintain and have applied for patent, trademark and copyright protection in the United States relating to certain of our existing and proposed products and processes. We cannot assure you that we will be able to successfully protect our intellectual property, and the loss of our intellectual property protection could adversely affect our business. Additionally, we license certain intellectual property from third parties, and we cannot assure you that these third parties can successfully maintain their intellectual property rights. The sales of certain of our products rely on our ability to maintain and extend our licensing agreements with third parties, and we cannot assure you that we will be successful in maintaining these licensing agreements. If we lose the right to use these licenses, our business could be adversely affected. The Company also owns patents related to the ICY HOT stick topical analgesics, which expire in 2007. After expiration of the patents, the Company expects that this product will continue to compete in the market primarily on the basis of the goodwill associated with the brand. GOVERNMENT REGULATION - --------------------- The manufacturing, distribution, processing, formulation, packaging, labeling and advertising of the Company's products are subject to regulation by federal agencies, including, but not limited to: o the United States Food and Drug Administration ("FDA"); o the Federal Trade Commission ("FTC"); o the Consumer Product Safety Commission; o the United States Department of Agriculture; o the United States Postal Service; o the United States Environmental Protection Agency ("EPA"); and o the Occupational Safety and Health Administration ("OSHA"). These activities are also regulated by various agencies of the states, localities and foreign countries in which our products are sold. In particular, the FDA regulates the safety, manufacturing, labeling and distribution of dietary supplements, including vitamins, minerals and herbs, food additives, OTC and prescription drugs, medical devices and cosmetics. The regulations that are promulgated by the FDA relating to the manufacturing process are known as current good manufacturing practices, or GMP's. In addition, the FTC has overlapping jurisdiction with the FDA to regulate the promotion and advertising of OTC pharmaceutical, dietary supplement and functional toiletries and skin care products. 12 All of the Company's OTC drug products are regulated pursuant to the FDA's monograph system for OTC drugs. The monographs set out the active ingredients and labeling indications that are permitted for certain broad categories of OTC drug products, such as topical analgesics. Compliance with the monograph provisions means that the product is generally recognized as safe and effective and is not misbranded. Products that comply with monograph standards do not require pre-market approval from the FDA. Future changes in the monographs could result in the Company having to revise product labeling and formulations, which would require the submission of a new drug application or abbreviated new drug application. The Company 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 the Company 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. The Company has been actively monitoring the process and does not believe that either PAMPRIN or PREMSYN PMS will be materially adversely affected by the FDA review. The Company believes that any adverse finding by the FDA would likewise affect the Company's principal competitors in the menstrual product category. The Company is 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. The Company is 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 what action, if any, the FDA may take with respect to acetaminophen. The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was enacted on October 25, 1994. DSHEA amends the Federal Food, Drug and Cosmetic Act by defining dietary supplements, which include vitamins, mineral, nutritional supplements, herbs and botanicals, as a new category of food separate from conventional food. DSHEA provides a regulatory framework to ensure safe, quality dietary supplements and to foster the dissemination of accurate information about such products. Under DSHEA, the FDA is generally prohibited from regulating dietary supplements as food additives or as drugs unless product claims, such as claims that a product may diagnose, mitigate, cure or prevent an illness, disease or malady, permit the FDA to attach drug status to a product. DSHEA provides for specific nutritional labeling requirements for dietary supplements. DSHEA permits substantiated, truthful and non-misleading statements of nutritional support to be made in labeling, such as statements describing general well-being resulting from consumption of a dietary ingredient or the role of a nutrient or dietary ingredient in affecting or maintaining a structure or function of the body. The FDA has adopted a final regulation, effective February 7, 2000, distinguishing between permitted claims and impermissible disease-related claims for dietary supplements. The Company anticipates that the FDA will promulgate GMPs which are specific to dietary supplements and require at least some of the quality control provisions contained in the GMPs for drugs, which are more rigorous than the GMPs for foods. 13 The FDA has finalized some of its regulations to implement DSHEA, including those relating to nutritional labeling requirements and nutritional support claims. The FDA also has under development additional regulations and guidelines to implement DSHEA. Newly adopted and future regulations may require expanded or different labeling for our vitamin and nutritional products. We cannot determine what effect these regulations, when fully implemented, will have on our business in the future. These regulations could require the recall, reformulation or discontinuance of certain products, additional recordkeeping, warnings, notification procedures and expanded documentation of the properties of certain products and scientific substantiation regarding ingredients, product claims and safety. Failure to comply with applicable FDA requirements can result in sanctions being imposed on the Company or the manufacture of our products, including warning letters, product recalls and seizures, injunctions or criminal prosecution. As part of its regulatory authority, the FDA may periodically conduct audits of the physical facilities, machinery, processes and procedures that we and our competitors use to manufacture products. The FDA may perform these audits at any time without advanced notice. As a result of these audits, the FDA may order us to make certain changes in our manufacturing facilities and processes. We may be required to make additional expenditures to comply with these orders or possibly discontinue selling certain products until we comply with these orders. As a result, our business could be adversely affected. In December 1998, the FDA conducted an inspection of one of our manufacturing facilities in Chattanooga, Tennessee. In connection with that inspection, the FDA observed certain processes and procedures that needed to be changed or improved. The Company has responded to the FDA's concerns and believes that it has implemented changes that address and satisfy the FDA's observations. In 2001 the FDA made another inspection of our manufacturing facilities in Chattanooga, Tennessee; no major violations of GMP's were noted at that time. In 1994 the Nonprescription Drug Manufacturers Association (now the Consumer Healthcare Products Association ("CHPA")) initiated a large scale study in conjunction with the Yale University School of Medicine to investigate a possible association, if any, of stroke in women aged 18 to 49 using PPA, the active ingredient in certain of the DEXATRIM products (the "Yale Study"). PPA is also used in other over-the-counter medications which were also part of the study. In May 2000 the results of the Yale Study were filed with the FDA. The investigators concluded that the results of the Yale Study suggest that PPA increases the risk of hemorrhagic stroke. The FDA indicated at that time that no immediate action was required and scheduled an FDA advisory panel to meet in October 2000 to discuss the results of this study. The CHPA questioned the execution of the Yale Study and disagreed with its conclusions. On October 19, 2000 a Nonprescription Drugs Advisory Committee ("NDAC"), commissioned by the FDA to review the safety of PPA, determined that there is an association between PPA and hemorrhagic stroke and recommended that PPA not be considered generally recognized as safe for OTC use as a nasal decongestant or for weight control. In response to a request from the FDA to voluntarily cease marketing DEXATRIM with PPA, the Company announced on November 7, 2000 its decision to immediately cease shipping DEXATRIM with PPA and to accept product returns from any retailers who decide to discontinue marketing DEXATRIM with PPA. To date, the FDA has not issued any final determination concerning PPA or products containing PPA. The Company has been named as a defendant in approximately 115 lawsuits alleging that the plaintiffs were injured as a result of ingestion of products containing PPA, which until November 2000 was the active ingredient in certain of the Company's DEXATRIM products. Most of the lawsuits seek an unspecified amount of compensatory and exemplary damages. None of these suits has been certified as a 14 class action. Approximately 40% of these suits represent cases in which the Company is being defended and indemnified from liability by The DELACO Company, Inc., successor to Thompson Medical from which the Company acquired DEXATRIM in December 1998. Certain countries, states and localities have enacted, or are considering enacting, restrictions on the sale of products that contain PPA, synthetic ephedrine or naturally-occurring sources of ephedrine. These restrictions include the prohibition of OTC sales, required warnings or labeling statements, recordkeeping 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 such countries, states or localities these restrictions could adversely affect the sale of DEXATRIM Natural, which contains naturally-occurring sources of ephedrine. Failure to comply with these restrictions could also lead to regulatory enforcement action, including the seizure of violative products, product recalls, civil or criminal fines or other penalties. The enactment of these restrictions, the perceived safety concerns relating to ephedrine and the possibility of further regulatory action increases the likelihood that claims relating to the existence of naturally-occurring sources of ephedrine in DEXATRIM Natural will be filed against the Company. In late 2000 the FDA requested the National Institutes of Health to commission a review of the safety and efficacy of ephedrine in herbal products used to control weight. This review is assumed to be retrospective in nature and will be based on all adverse events, records and scientific data available to the reviewers. It is expected that the report will be issued in early Fall of 2002. On September 5, 2001 The Public Citizens Health Research Group petitioned the FDA to ban the production and sale of dietary supplements containing ephedrine alkaloids. As of February 22, 2002 the FDA had taken no action in regard to this petition. The Company was notified in October, 2000 that the FDA denied the citizens petition submitted by Thompson Medical, previous owner of SPORTSCREME and ASPERCREME, seeking a determination that 10% trolamine salicylate was clinically proven to be an effective active ingredient in external analgesic OTC drug products, and thus should be included in the FDA's yet-to-be finalized monograph for external analgesics. The Company has met with the FDA and submitted a proposed protocol study to evaluate the efficacy of 10% trolamine salicylate as an active ingredient in OTC external analgesic drug products. Based on comments received from the FDA at the meeting, the Company may revise and resubmit the protocol. After final comments from the FDA, the Company expects that it will take one to two years to produce the clinical data for FDA review. Although unlikely, the FDA could finalize the OTC external analgesic monograph before the protocol and clinical data results are finalized, which would place 10% trolamine salicylate in non-monograph status, thus requiring the submission of a new drug application to market and sell OTC products with 10% trolamine salicylate. The Company is working to develop alternate formulations for SPORTSCREME and ASPERCREME in the event that the FDA does not consider the available clinical data to conclusively demonstrate the efficacy of trolamine salicylate when the OTC external analgesic monograph is finalized. The Company is also reviewing the option of marketing SPORTSCREME and ASPERCREME as homeopathic products. ENVIRONMENTAL - ------------- The Company continuously assesses compliance of its operations with applicable federal, state and local environmental laws and regulations. The Company's policy is to record liabilities for environmental matters when loss amounts are probable and reasonably determinable. The Company's manufacturing sites utilize chemicals and other potentially hazardous materials and generate both hazardous and non-hazardous waste, the transportation, treatment, storage and disposal of which are regulated by various government agencies, and has engaged environmental consultants on a regular basis to assist its compliance efforts. The Company is currently in substantial compliance with all applicable environmental permits and is aware of its responsibilities under applicable environmental laws. Any expenditures necessitated by changes in law and permitting requirements cannot be predicted at this time, although such costs are not expected to be material to the Company's financial position or results of operations. 15 Since the early 1980's, the EPA has been investigating the extent of, and the health effects resulting from, contamination of Chattanooga Creek, which runs through a major manufacturing area of Chattanooga in the vicinity of the Company's manufacturing facilities. The contamination primarily stems from the dumping of coal tar into the creek during World War II when the federal government was leasing and operating a coke and chemical plant adjacent to the creek. However, the EPA has been investigating virtually all businesses that have discharged any wastewater into the creek. A 2 1/2 mile stretch of Chattanooga Creek was placed on the National Priorities List as a Superfund site under the Comprehensive Environmental Response, Compensation and Recovery Act in September of 1995 and remediation of the creek bed commenced in mid-1997. The Company could be named as a potentially responsible party in connection with such site due to the Company's historical discharge of wastewater into the creek. However, considering the nature of the Company's wastewater, as well as the fact that the Company's discharge point is downstream from the old coke and chemical plant that was operated by the government, and the availability of legal defenses and expected cost sharing, the Company does not believe that any liability associated with such site will be material to its financial position or results of operations. PRODUCT LIABILITY AND INSURANCE - ------------------------------- An inherent risk of the Company's business is exposure to product liability claims brought by users of the Company's products or by others. Except as set forth in Item 3, "Legal Proceedings", of this Form 10-K or elsewhere in this Form 10-K, the Company is not aware of any material claims pending or threatened against the Company or its products that if adversely decided would negatively affect us. While the Company will continue to attempt to take what it considers to be appropriate precautions, there can be no assurance that it will avoid significant product liability exposure. The Company maintains product liability insurance, principally through third party insurers, that provides coverage for product liability claims, including those asserted in the lawsuits currently pending and anticipated to be filed against the Company relating to the existence of PPA in DEXATRIM. There can be no assurance that current insurance covering the DEXATRIM with PPA litigation will be sufficient to cover all such claims or that these claims will not have a material adverse effect on the Company's results of operations for some period or on the Company's financial position. The existence of these lawsuits and potential regulatory concerns relating to the existence of ephedrine in DEXATRIM Natural have decreased the availability, increased the cost and limited the coverage afforded of product liability insurance to the Company. At present, the Company has much lower levels of product liability coverage than it did for PPA claims. This coverage expires on May 31, 2002. There can be no assurance that the existing amounts and scope of coverage are sufficient to satisfy future claims, if any, against the Company or that the Company will be able to obtain coverage in the future that is sufficient to satisfy any future claims. EMPLOYEES - --------- The Company employs approximately 373 persons on a full-time basis in the United States and 35 persons at its foreign subsidiaries' offices. The Company's employees are not represented by any organized labor union, and management considers its labor relations to be good. RISK FACTORS - ------------ The Company's business is subject to a number of risks. Some of those risks are described in "Competition," "Governmental Regulation", "Environmental" and "Manufacturing and Quality Control" included in this Form 10-K. In addition to the other information contained in this Form 10-K, the following risk factors should be carefully considered. PRODUCT LIABILITY AND INSURANCE ------------------------------- The Company is constantly at risk that consumers and users of its products will bring lawsuits alleging product liability. Except as disclosed in Item 3, "Legal Proceedings", of this Form 10-K or elsewhere in this Form 10-K, the Company is not aware of any claims pending against it or its products that if adversely decided would materially adversely effect its business. While the Company will continue to attempt to take what it considers to be appropriate precautions, there can be no assurance that these precautions will enable the Company to avoid significant product liability exposure in the future. The Company maintains product 16 liability insurance, principally through third party insurers, that provides coverage for product liability claims, including those asserted in the lawsuits currently pending and anticipated to be filed against the Company relating to the existence of PPA in DEXATRIM. There can be no assurance that current insurance covering the DEXATRIM with PPA litigation will be sufficient to cover all such claims or that these claims will not have a material adverse effect on the Company's results of operations for some period or on the Company's financial position. The existence of these lawsuits and potential regulatory concerns relating to the existence of ephedrine in DEXATRIM Natural have decreased the availability, increased the cost and limited the coverage afforded of product liability insurance to the Company. At present, the Company has much lower levels of product liability coverage than it did for PPA claims. This coverage expires on May 31, 2002. There can be no assurance that the existing amounts and scope of coverage are sufficient to satisfy future claims, if any, against the Company or that the Company will be able to obtain coverage in the future that is sufficient to satisfy future claims. GOVERNMENT REGULATION --------------------- Certain countries, states and localities have enacted, or are considering enacting, restrictions on the sale of products that contain PPA, synthetic ephedrine or naturally-occurring sources of ephedrine. These restrictions include the prohibition of OTC sales, required warnings or labeling statements, recordkeeping 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 such countries, states or localities these restrictions could adversely affect the sale of DEXATRIM Natural, which contains naturally-occurring sources of ephedrine. Failure to comply with these restrictions could also lead to regulatory enforcement action, including the seizure of violative products, product recalls, civil or criminal fines or other penalties. The enactment of these restrictions, the perceived safety concerns relating to ephedrine and the possibility of further regulatory action increases the likelihood that claims relating to the existence of naturally-occurring sources of ephedrine in DEXATRIM Natural will be filed against the Company. In late 2000 the FDA requested the National Institutes of Health to commission a review of the safety and efficacy of ephedrine in herbal products used to control weight. This review is assumed to be retrospective in nature and will be based on all adverse events, records and scientific data available to the reviewers. It is expected that the report will be issued in early Fall of 2002. On September 5, 2001 The Public Citizens Health Research Group petitioned the FDA to ban the production and sale of dietary supplements containing ephedrine alkaloids. As of February 22, 2002 the FDA had taken no action in regard to this petition. RISKS RELATED TO POTENTIAL FUTURE ACQUISITIONS ---------------------------------------------- Future acquisitions by the Company could result in the incurrence of substantial additional indebtedness, which could adversely affect the Company's business, financial condition and results of operations. Acquisitions involve numerous risks, including difficulties in integrating the operations, technologies, services and products of the acquired companies and the diversion of management's attention from other business concerns. If the Company makes any acquisitions, there can be no assurance that those acquisitions will be successful or that its business will not be adversely affected. Much of the Company's future growth depends on its ability to complete additional acquisitions, although the Company has not completed an acquisition since the December 1998 purchase of products from Thompson Medical. There can be no assurance that the Company will be able either to identify qualified acquisition candidates or successfully integrate any of its future acquisitions into its operations. There can be no assurance that the Company will complete any future acquisitions or that acquisitions will contribute favorably to the Company's operations and financial condition. PRODUCT DEVELOPMENT RISKS ------------------------- The Company's future growth is also dependent on new product development. New product initiatives may not be successfully implemented because of difficulty in assimilation, development costs and diversion of management time. The Company evaluates opportunities to develop new products through product line extensions and product modifications in the ordinary course of its business. Product line extensions and product modifications involve numerous risks, including difficulties in the assimilation of the developed 17 products, the expenses incurred in connection with the product development and the diversion of management's attention from other business concerns. There can be no assurance that the Company will successfully develop product line extensions or integrate newly developed products into the Company's business. In addition, there can be no assurance that newly developed products will contribute favorably to the Company's operations and financial condition. RELIANCE ON BRANDS; INTELLECTUAL PROPERTY CONCERNS -------------------------------------------------- If the Company is unable to successfully protect its intellectual property, the Company's business could be adversely affected. The Company's trademarks are of material importance to its business and are among its most important assets. In fiscal year 2001 substantially all of the Company's net sales were from products bearing proprietary brand names, including GOLD BOND, FLEXALL, ICY HOT, ASPERCREME, PAMPRIN, GARLIQUE, PHISODERM and DEXATRIM. Accordingly, the Company's future success may depend in part upon the goodwill associated with its brand names, particularly GOLD BOND, ICY HOT and DEXATRIM. The Company's principal brand names are registered in the United States and certain foreign countries. However, there can be no assurance that the steps the Company takes to protect its proprietary rights in its brand names will be adequate to prevent the misappropriation of these registered brand names in the United States or abroad. In addition, the laws of some foreign countries do not protect proprietary rights in brand names to the same extent as do the laws of the United States. Through its subsidiary, Signal Investment & Management Co., the Company maintains or has applied for patent, trademark and copyright protection in the United States relating to certain of its existing and proposed products and processes. There can be no assurance that the Company will be able to successfully protect its intellectual property or that patents, trademarks or copyrights will be granted with respect to intellectual property that the Company believes is proprietary, and the loss of its intellectual property protection could adversely affect the Company's business. Additionally, the Company licenses certain intellectual property from third parties, and there can be no assurance that these third parties can successfully maintain their intellectual property rights. The sale of certain of the Company's products rely on its ability to maintain and extend its licensing agreements with third parties, and there can be no assurance that we will be successful in maintaining these licensing agreements. If the Company loses the right to use these licenses, its business could be adversely affected. RISK OF LOSS OF MATERIAL CUSTOMERS ---------------------------------- For the year ended November 30, 2001 sales to Wal-Mart Stores, Inc. ("Wal-Mart") accounted for approximately 26% of the Company's total sales. Consistent with industry practice, the Company does not operate under a long-term written supply contract with Wal-Mart or any of its other customers. The Company's business would be adversely affected by the loss of Wal-Mart as a continuing major customer. No other customer accounted for more than 10% of the Company's sales in fiscal 2001. On January 22, 2002 Kmart Corporation, a customer of the Company representing approximately 5% of consolidated revenues, filed a petition under Chapter 11 of the United States Bankruptcy Code. At the time of the filing Kmart Corporation owed the Company approximately $1,200,000. The Company is assessing what impact, if any, this bankruptcy filing may have on future operations. This bankruptcy filing did not impact the Company's results of operations and financial position for fiscal 2001. PUBLIC PERCEPTION ----------------- The Company's dietary supplement and appetite suppressant business could be adversely affected if any of its products or similar products distributed by other companies prove to be harmful to consumers or if scientific studies provide unfavorable findings regarding the safety or effectiveness of its products or any similar products. In 2000 the NDAC report and the FDA request that the Company voluntarily cease marketing DEXATRIM with PPA were widely reported in the media. There can be no assurance that DEXATRIM products which do not contain PPA will not suffer from negative public perception, which could adversely affect the ongoing DEXATRIM business. 18 The Company's dietary supplements products contain vitamins, minerals, herbs and other ingredients that the Company regards as safe when taken as directed by the Company and that various scientific studies have suggested may offer health benefits. While the Company conducts extensive quality control testing on its products, the Company generally does not conduct or sponsor clinical studies relating to the benefits of its products, although the Company did conduct a limited number of clinical studies in 2000. The Company is highly dependent upon consumers' perception of the overall integrity of the dietary supplements business, as well as the safety and quality of products in that industry and similar products distributed by other companies which may not adhere to the same quality standards as the Company. In the past, appetite suppressants, including DEXATRIM, have been the subject of negative press that has affected the public's perception of these products. The Company will market and advertise DEXATRIM that does not contain PPA as safe and effective when taken as directed to offset its past negative perception, but there can be no assurance that DEXATRIM or any of the Company's products will not suffer from negative public perception. DEPENDENCE ON THIRD PARTY MANUFACTURERS --------------------------------------- The Company's business could be adversely affected if its third party manufacturers cease to perform satisfactorily. The Company uses third party manufacturers to make products representing approximately 35% of its sales volume, including GOLD BOND medicated powders, HERPECIN-L, DEXATRIM, ICY HOT Patch and the SUNSOURCE line. In most cases, the manufacturer is not obligated under a contract that fixes the term of its commitment. Manufacturers may experience problems with product quality or timeliness of product delivery. Manufacturers may also discontinue production of products for the Company or increase their manufacturing costs upon little or no advance notice. In any case, the Company believes that it could find other contract manufacturers quickly if any of its current contractors cease to perform adequately. However, if this occurs and the Company cannot find other contract manufacturers, the Company may be forced to shift production to in-house facilities. This may cause manufacturing delays, which would cause disruption in the Company's ability to fill orders. This could adversely affect the Company's business. LEVERAGE -------- As of November 30, 2001, the Company's long-term debt was $204,740,000. The degree to which the Company is leveraged could have important consequences, including, but not limited to, the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be limited or become impaired; (ii) while the Company's indebtedness is currently at fixed interest rates, in the future a portion of the Company's borrowings may be at variable rates of interest, which could result in higher interest expenses in the event of increases in interest rates; and (iii) such indebtedness contains and will contain financial and restrictive covenants, the failure to comply with which may result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. DEPENDENCE ON SENIOR MANAGEMENT ------------------------------- The Company's future performance will depend to a significant degree upon the efforts and abilities of certain members of senior management, in particular those of Zan Guerry, Chairman of the Board and Chief Executive Officer, and A. Alexander Taylor, II, President and Chief Operating Officer. The loss of the services of either Messrs. Guerry or Taylor, each of whom has an employment agreement with the Company, could have an adverse effect on the Company's business. RISKS OF FOREIGN OPERATIONS --------------------------- For the year ended November 30, 2001, 8.3% of the Company's net sales were attributable to its international business. The Company is subject to the risk of doing business internationally, including unexpected changes in, or impositions of, legislative or regulatory requirements, fluctuations in the United States dollar against foreign currencies, which could increase the price of the Company's products in foreign markets or increase the cost of certain raw materials purchased by the Company, delays resulting from 19 difficulty in obtaining export licenses, tariffs and other barriers and restrictions, potentially longer payment cycles, greater difficulty in accounts receivable collection, potentially adverse tax treatment and the burden of complying with a variety of foreign laws. In addition, the Company is subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships, which could affect, among other things, customers' inventory levels and consumer purchasing. Although the Company has not to date experienced any material adverse effect as a result of such factors, there can be no assurance that such factors will not adversely affect the Company in the future. In addition, the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent as the laws of the United States. VOLATILITY OF STOCK PRICE ------------------------- The trading price of the common stock could be subject to significant fluctuations in response to variations in the results of the Company's operations, its leveraged financial position, general trends in the consumer products industry, the relative illiquidity of the Company's common stock and stock market conditions generally. DIVIDEND POLICY --------------- The Company presently intends to retain its earnings, if any, for use in its operations and repayment of outstanding indebtedness and has no current intention of paying dividends to the holders of common stock. ITEM 2. PROPERTIES - ------------------- The Company's headquarter and administrative offices are located at 1715 West 38th Street, Chattanooga, Tennessee. The Company's primary production facilities are in close proximity to the Company's headquarters on land owned by the Company. The Company leases its primary warehouse and distribution centers in Chattanooga, Tennessee for its domestic consumer products. The following table describes in detail the principal properties owned and leased by the Company:
Total Area Total Buildings Square (Acres) (Square Feet) Use Feet ------- ------------- ------------------------ ------ Owned Properties: Chattanooga, Tennessee 10.0 120,700 Manufacturing 80,000 Office & Administration 40,700 Chattanooga, Tennessee 8.3 68,300 Manufacturing & Warehousing 58,100 Office 10,200 Leased Properties: Chattanooga, Tennessee (1) 5.0 135,200 Warehousing 103,800 Chattanooga, Tennessee (2) 0.1 3,800 Warehousing & Manufacturing 35,200 Chattanooga, Tennessee (3) 5.0 50,000 Warehousing 49,300 Office 700 Mississauga, Ontario, Canada (4) 0.3 20,015 Warehousing 15,515 Office & Administration 3,000 Packaging 1,500 Basingstoke, Hampshire, England (5) 0.5 21,900 Warehousing 13,900 Office & Administration 6,500 Packaging 1,500
20 NOTES: (1) Leased on a month-to-month basis for a monthly rental of $26,533. A twelve month termination notice is required. (2) Leased on a month-to-month basis for a monthly rental of $1,575. (3) Leased under a one year lease ending December 31, 2001, with two one year term renewal options, for a monthly rental of $12,500. The first one year renewal option has been exercised. (4) Leased under a lease ending November 30, 2004 at a monthly rental, including property taxes and other incidentals, of approximately $8,461. (5) Leased under leases ending in 2014 and 2015 at a monthly rental, including property taxes and other incidentals, of approximately $15,882. The Company is currently operating its facilities at approximately 70% of total capacity. These facilities are FDA registered and are capable of further utilization through the use of a full-time second shift and the addition of a third shift. ITEM 3. LEGAL PROCEEDINGS - ------------------------- Note 9 of the Notes to Consolidated Financial Statements on page 40 of the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER - -------------------------------------------------------------------------- MATTERS ------- The information found on pages 23 and 37 to 40 of the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. The Company has not paid dividends on its stock during the past two fiscal years. The Company is restricted from paying dividends by the terms of the indenture under which the 8.875% Notes were issued. (See Note 4 of Notes to Consolidated Financial Statements). In fiscal 2001 the Company issued 50,000 shares of restricted common stock to each of Zan Guerry and A. Alexander Taylor II, in accordance with the terms of a restricted stock agreement. The issuance of these shares of common stock was exempt from registration under Section 4(2) of the Securities Act of 1933. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- The information found on page 22 of the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS ------------- The information found on pages 12 to 21 of the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- Not applicable. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The consolidated balance sheets as of November 30, 2001 and 2000 and the consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended November 30, 2001 together with the report of independent public accountants (which includes an explanatory paragraph that describes an accounting change discussed in Note 2 to the financial statements) contained on pages 22 through 56 of the Company's 2001 Annual Report to Stockholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE -------------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- (a) Directors The information found in the Company's 2002 Proxy Statement under the heading "Information about Nominees and Continuing Directors" is hereby incorporated by reference. (b) Executive Officers The following table lists the names of the executive officers and other key employees of the Company as of February 22, 2002, their ages, their positions and offices with the Company and the year in which they were first elected or appointed to these positions:
NAME AGE POSITION WITH REGISTRANT FIRST ELECTED - -------------------------- --- ------------------------ ------------- Zan Guerry 53 Chairman of the Board and 1990 Chief Executive Officer; Director A. Alexander Taylor II 48 President and Chief Operating Officer; 1998 Director Andrea M. Crouch 43 Vice-President - Brand Management 1995 Ron Galante 57 Vice-President - New Business Development 1993 Richard W. Kornhauser 47 Vice-President - Brand Management 2000 Luke J. Lenahan 52 Vice-President - International 2002 Robert S. Marshall 36 Vice-President - Marketing 2000 B. Derrill Pitts 58 Vice-President - Operations 1984 Donald K. Riker, Ph.D. 56 Vice-President - Research and Development 2001 and Chief Scientific Officer Scott J. Sloat 39 Controller 2002 Charles M. Stafford 51 Vice-President - Sales 1994
22 Mr. Guerry has served as Chairman of the Board since June 1990 and as Chief Executive Officer since January 1998. Previously he served as Vice-President and Chief Financial Officer from 1980 until 1983, as Executive Vice-President from 1983 to 1990, as President of Chattem Consumer Products from 1989 to 1994, as Chief Operating Officer from 1989 to 1990 and as President of the Company from 1990 to 1998. Mr. Guerry was first elected as a director of the Company in 1981. Mr. Taylor was elected to his present positions with the Company in January 1998. Previously he was a partner from 1983 to 1998 with the law firm Miller & Martin LLP, general counsel to the Company. Mr. Taylor was first elected as a director of the Company in 1993. Ms. Crouch joined the Company in 1985 as an Assistant Brand Manager. In 1995 she was named to her current position. Previously she worked with Hayes Microcomputer Products and Arthur Andersen LLP. She was denoted an executive officer of the Company in January 1999. Mr. Galante was appointed to his present position with the Company in June 1993. Previously he served as General Manager of Chattem (Canada) Inc. from June 1990 until May 1993 and as Director of Marketing for many of the Company's domestic brands from 1980 until 1993. He was denoted an executive officer of the Company in January 1999. Mr. Kornhauser joined the Company in 2000 as Vice-President - Brand Management. Prior to joining the Company, Mr. Kornhauser served as Vice-President Group Marketing Director with Combe Incorporated from October 1990 until May 2000. Previously he held sales, marketing and advertising positions with American Home Products, Revlon, Ted Bates and Del Laboratories. Mr. Lenahan joined the Company in February 2002 as Vice-President - International. Prior to joining the Company he was Vice-President-Marketing with Johnson & Johnson KK in Tokyo, Japan from 1994 to 2001. Previously he held similar international positions with Combe Incorporated and Procter & Gamble. Mr. Marshall joined the Company in 1994 as a Brand Manager. In 1995 he was promoted to Group Marketing Manager in Toiletries, in 1996 to Vice-President-OTC Marketing and in 2000 to his current position. Previously he worked in brand management at Procter & Gamble. He was denoted an executive officer of the Company in January 1999. Mr. Pitts is a long-term employee and has served in all manufacturing operation disciplines since joining Chattem in 1962. He was promoted to Vice-President in 1984 and was denoted an executive officer of the Company in January 1999. Dr. Riker joined the Company in 2001 as Vice-President-Research and Development and Chief Scientific Officer. Prior to joining the Company, Dr. Riker was employed by Richardson-Vicks/Procter & Gamble from 1982 to 2001 in various research capacities, the last of which was as P&G Fellow, Personal Health Care. Mr. Sloat, a Certified Public Accountant, joined the Company in 2001 as Controller and was denoted an executive officer of the Company in 2002. Previously he had served in corporate accounting and controller positions with several companies. He had also been an Audit Manager with the international public accounting firm of Touche, Ross & Co. (currently Deloitte & Touche LLP.) Mr. Stafford was appointed to his present position in June 1994. Previously he served as Director of Field Sales and Zone Sales Manager. Prior to joining the Company in 1983, Mr. Stafford held sales management positions with Johnson & Johnson and Schering Plough. He was denoted an executive officer of the Company in January 1999. (c) Compliance with Section 16 (a) of the Exchange Act The information found in the Company's 2002 Proxy Statement under the heading "Section 16 (a) Beneficial Reporting Compliance" is hereby incorporated by reference. 23 ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- The information found in the Company's 2002 Proxy Statement under the heading "Executive Compensation and Other Information" is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- The information found in the Company's 2002 Proxy Statement under the heading "Voting Securities and Principal Holders Thereof" is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------- None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORMS 8-K - ------------------------------------------------------------------------ (a) 1. The consolidated financial statements and the related report of independent public accountants required to be filed with this Form 10-K are incorporated by reference from pages 24 to 56 of the Company's 2001 Annual Report to Stockholders. 2. The following documents are filed or incorporated by reference as exhibits to this report: Exhibit Number Description of Exhibit References ------ ---------------------- ---------- 3 Restated Charter of Chattem, Inc., as amended (10) Amended and Restated By-Laws of Chattem, Inc. (1) 4 Rights Agreement dated January 27, 2000 between Chattem, Inc. and SunTrust Bank, Atlanta, N.A. (2) Form of Indenture dated March 24, 1998 between Chattem, Inc. and SouthTrust Bank of Alabama, N.A. relating to the 8.875% Senior Subordinated Notes due 2008 (3) First Amendment and Supplemental Indenture dated January 3, 2001 to Form of Indenture dated March 24, 1998 between Chattem, Inc. and SouthTrust Bank of Alabama, N.A. relating to the 8.875% Senior Subordinated Notes due 2008. (12) 10 Material Contracts - Lease Agreements, as amended, dated February 1, 1996 between Tammy Development Company and Chattem, Inc. for warehouse space at 3100 Williams Street, Chattanooga, Tennessee (4) and (5) Asset Purchase Agreement dated June 6, 1996 between Campbell Laboratories, Inc., seller, and Chattem, Inc. and Signal Investment & Management Co., purchasers, for the HERPECIN-L business (5) Asset Purchase and Sale Agreement dated May 23, 1997 by and among Chattem, Inc., Signal Investment & Management Co., and Sunsource International, Inc. and Mindbody, Inc. (without schedules and exhibits) for the SUNSOURCE business (6) 24 Exhibit Number Description of Exhibit References ------ ---------------------- ---------- 10 First Amended and Restated Master Trademark License Agreement between Signal Investment & Management Co. and Chattem, Inc., effective June 30, 1992 (7) Chattem, Inc. Non-Statutory Stock Option Plan- 1998 (7) Commercial Lease dated April 1, 1998 between Chattem, Inc., lessee, and Kenco Group, Inc., lessor, for warehouse space Located at 4309 Distribution Avenue, (8) Chattanooga, Tennessee. Purchase and Sale Agreement dated November 16, 1998 by and among Thompson Medical Company, Inc., Chattem, Inc. and Signal Investment & Management Co. for certain products (9) Termination Agreement dated November 30, 1999 to SUNSOURCE Asset Purchase and Sale Agreement dated May 23, 1997 (10) Chattem, Inc. Non-Statutory Stock Option Plan - 2000 (10) Asset Sale Agreement dated August 24, 2000 by and among The Andrew Jergens Company, Chattem, Inc. and Signal Investment & Management Co. for the Ban business. (11) Form of Employment Agreements- Zan Guerry A. Alexander Taylor II (12) Form of Amended and Restated Severance Agreements- Zan Guerry A. Alexander Taylor II (12) Form of Amended and Restated Non- Competition and Severance Agreements- Andrea M. Crouch Ron Galante Luke J. Lenahan Richard W. Kornhauser Robert S. Marshall B. Derrill Pitts Don K. Riker Charles M. Stafford (12) 25 Exhibit Number Description of Exhibit References ------ ---------------------- ---------- 10 Form of Restricted Stock Agreements - Zan Guerry A. Alexander Taylor II Loan Agreement dated June 21, 2001 by and among Bank of America, N.A., as Lender, and Chattem, Inc. and Signal Investment and Management Co. as Borrowers, for Revolving Credit Loans not to Exceed $10,000,000 11 Statement Regarding Computation of Per Share Earnings 13 2001 Annual Report to Shareholders of Chattem, Inc. 21 Subsidiaries of the Company 23 Consent of Independent Public Accountants 27 Report of Independent Public Accountants Schedule II - Valuation and Qualifying Accounts 26 References: Previously filed as an exhibit to and incorporated by reference from: (1) Form 8-K dated February 1, 2000. (2) Form 8-A dated February 1, 2000. (3) Form S-4/A Registration Statement (No. 333-53627). (4) Form 10-K for the year ended November 30, 1995. (5) Form 10-K for the year ended November 30, 1996. (6) Form 8-K dated June 26, 1997. (7) Form 10-K for the year ended November 30, 1997. (8) Form 10-K for the year ended November 30, 1998. (9) Form 8-K dated December 21, 1998. (10) Form 10-K for the year ended November 30, 1999. (11) Form 8-K dated September 15, 2000. (12) Form 10-K for the year ended November 30, 2000. (b) No reports on Form 8-K were filed with the Securities and Exchange Commission during the three months ended November 30, 2001. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 22, 2002 CHATTEM, INC. By: /s/ Zan Guerry -------------------------------------- Zan Guerry Title: Chairman and Chief Executive Officer By: /s/Scott J. Sloat --------------------------------------- Scott J. Sloat Title: Controller (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- /s/ Zan Guerry Chairman of the Board 2-22-02 - --------------------------- and Director Zan Guerry (Chief Executive Officer) /s/ A. Alexander Taylor II President and Director 2-22-02 - --------------------------- (Chief Operating Officer) A. Alexander Taylor II /s/ Samuel E. Allen Director 2-22-02 - --------------------------- Samuel E. Allen /s/ Louis H. Barnett Director 2-22-02 - --------------------------- Louis H. Barnett /s/ Robert E. Bosworth Director 2-22-02 - --------------------------- Robert E. Bosworth /s/ Richard E. Cheney Director 2-22-02 - --------------------------- Richard E. Cheney /s/ Scott L. Probasco, Jr. Director 2-22-02 - --------------------------- Scott L. Probasco, Jr. /s/ Philip H. Sanford Director 2-22-02 - --------------------------- Philip H. Sanford 28 CHATTEM, INC. AND SUBSIDIARIES EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 10.1 Form of Restricted Stock Agreement- Zan Guerry A. Alexander Taylor II 10.2 Loan Agreement dated June 21, 2001 by and among Bank of America, N.A., as Lender, and Chattem, Inc. and Signal Investment & Management Co., as Borrowers, for Revolving Credit Loans not to Exceed $10,000,000 11 Statement Regarding Computation of Per Share Earnings 13 2001 Annual Report to Shareholders of Chattem, Inc. 21 Subsidiaries of the Company 23 Consent of Independent Public Accountants 27.1 Report of Independent Public Accountants 27.2 Schedule II - Valuation and Qualifying Accounts 29 EX-10.1 3 exhibit10-1_11071.txt RESTRICTED STOCK AGREEMENT EXHIBIT 10.1 ------------ RESTRICTED STOCK AGREEMENT The Compensation Committee (the "Committee") of the Board of Directors of Chattem, Inc. ("Chattem") has selected Zan Guerry as the recipient ("Recipient") of the following described shares of restricted common stock (the "Restricted Shares") in accordance with the following terms: Administration: The Committee of the Board of Directors of Chattem will administer the grant of Restricted Shares. Shares Subject to Grant: Chattem hereby awards the Recipient Twenty-Five Thousand (25,000) Restricted Shares. Chattem shall instruct its transfer agent to deliver a certificate to the Recipient representing the Restricted Shares as soon as reasonably practicable. The certificate representing the Restricted Shares shall include an appropriate legend concerning the restrictions upon such Restricted Shares. Restrictions: The Restricted Shares shall be owned free of restrictions with respect to Six Thousand Two Hundred Fifty (6,250) of the Restricted Shares on the first anniversary of this Agreement and an additional Six Thousand Two Hundred Fifty (6,250) of such Restricted Shares shall be owned free of restrictions, on a cumulative basis, on each of the three (3) succeeding anniversaries of this Agreement so that four (4) years from the date of this Agreement all Twenty-Five Thousand (25,000) of such Restricted Shares shall be owned free of restrictions. Transferability: The restricted portion of the Restricted Shares are not transferable. Termination of Employment: If prior to lapse of restrictions the Recipient's employment has terminated for any reason other than death, retirement, disability or a Change in Control (as defined in the Recipient's Employment Agreement), then the portion of the Restricted Shares that remain subject to restrictions shall automatically be forfeited to Chattem. Death, Disability or Change in Upon the death or disability of the Control Recipient or a Change in Control, all of the Restricted Shares shall immediately be owned free of restrictions. Taxes: The Recipient currently intends to make a "Section 83(b) election" under the Internal Revenue Code with respect to the Restricted Shares, immediately triggering the payment of ordinary income tax with respect to the fair market value of the Restricted Shares on the date hereof. Chattem shall reimburse the Recipient on a "grossed up" basis for the payment of federal income or any other tax resulting from Recipient's making the Section 83(b) election or receipt of the Restricted Shares. Plan: Chattem intends to amend the terms of its existing Non-Statutory Stock Option Plan - 2000 or create a new plan (the "Plan") governing the award of the Restricted Shares thereunder. However, such an amendment or creation of a Plan shall not be a condition precedent to the issuance of the Restricted Shares, all of which have been validly issued hereby. Section 16: It is intended that the Restricted Shares be granted in compliance with the provisions of Rule 16(b)(3) of the Securities Exchange Act of 1934, as amended. This Restricted Stock Agreement is dated to be effective this 24th day of April, 2001. Chattem, Inc. By:_________________________________ For the Compensation Committee Recipient:__________________________ Zan Guerry EX-10.2 4 exhibit10-2_11071.txt LOAN AGREEMENT EXHIBIT 10.2 ------------ LOAN AGREEMENT This Loan Agreement (the "Agreement") is entered into as of June 21, 2001, by and among BANK OF AMERICA, N.A., a national banking association ("Bank"), CHATTEM, INC., a Tennessee corporation ("Chattem"), and SIGNAL INVESTMENT & MANAGEMENT CO., a Delaware corporation ("Signal"; Chattem and Signal are collectively referred to herein as the "Borrower(s)"). W I T N E S S E T H ------------------- WHEREAS, Borrowers have requested that Bank make revolving credit loans to Borrowers in an aggregate amount from time to time outstanding not to exceed $10,000,000; and WHEREAS, Bank, in reliance upon the representations and inducements of Borrowers, has agreed to make such loans upon the terms and conditions hereinafter set forth; WHEREAS, this Agreement constitutes a replacement of those certain Credit Agreements dated as of March 24, 1998, as amended, by and among Chattem, Signal, NationsBank of Tennessee, N.A., as Agent, and the other lenders party thereto, including any related notes, guarantees, collateral documents, instruments, and agreements executed in connection therewith; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. DEFINITIONS. The following terms shall have the meaning set forth with respect thereto: (a) "ADJUSTED EURODOLLAR RATE": means the Eurodollar Rate plus 2.5%. (b) "ADJUSTED LIBOR FLOATING RATE": means the LIBOR Floating Rate plus 2.5%. (c) "BASE RATE": means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest whole multiple of 1/100 of 1%) equal to the greater of (a) the Federal Funds Rate in effect on such day plus 1/2 of 1% (0.5%) and (b) the Prime Rate in effect on such day. If for any reason the Bank shall have determined (which determination shall be conclusive absent manifest error) that it is unable after due inquiry to ascertain the Federal Funds Rate for any reason, including the inability or failure of the Bank to obtain sufficient quotations in accordance with the terms hereof, the Base Rate shall be determined without regard to clause (a) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Rate, respectively. (d) "BASE RATE LOAN": means any Revolving Credit Loan bearing interest at a rate determined by reference to the Base Rate. (e) "BUSINESS DAY": means a day on which Bank is open for business. (f) "COMMITMENT FEES": as defined in subsection 2(c). (g) "COMMITMENT PERIOD": means the period commencing on the date of this Agreement until, but not including, April 1, 2002. (h) "CREDIT ACCOUNT": as defined in subsection 2(a). (i) "EURODOLLAR LOAN": means any Revolving Credit Loan bearing interest based at a rate determined by reference to the Eurodollar Rate. (j) "EURODOLLAR RATE": means, for the Interest Period for each Eurodollar Loan comprising part of the same borrowing (including conversions, extensions and renewals), a per annum interest rate determined pursuant to the following formula: Eurodollar Rate = London Interbank Offered Rate --------------------------------- 1 - Eurodollar Reserve Percentage (k) "EURODOLLAR RESERVE PERCENTAGE": means for any day, that percentage (expressed as a decimal) which is in effect from time to time under Regulation D of the Board of Governors of the Federal Reserve System (or any successor), as such regulation may be amended from time to time or any successor regulation, as the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency, special or marginal reserves) applicable with respect to Eurocurrency liabilities as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of Eurodollar Loans is determined), whether or not Bank has any Eurocurrency liabilities subject to such reserve requirement at that time. Eurodollar Loans shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to Bank. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. (l) "ERISA": means the Employee Retirement Income Security Act of 1976, as amended, and any successor statute thereto, as interpreted by the rules and regulations thereunder, all as the same may be in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. (m) "EVENT OF DEFAULT": as defined in Section 6. 2 (n) "FEDERAL FUNDS RATE": means for any day the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day and (b) if no such rate is so published on such next preceding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Bank on such day on such transactions as determined by the Bank. (o) "GAAP": means generally accepted accounting principles applied on a consistent basis. (p) "GOVERNMENTAL AUTHORITY": means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. (q) "INTEREST PAYMENT DATE": means (a) as to Base Rate Loans and LIBOR Floating Rate Loans, the first Business Day of each fiscal quarter of the Borrowers beginning September 1, 2001, and on April 1, 2002, and (b) as to Eurodollar Loans, the last day of each applicable Interest Period and on April 1, 2002. (r) "INTEREST PERIOD": means, as to Eurodollar Loans, a period of one, two or three months' duration, as the Borrowers may elect, commencing, in each case, on the date of the borrowing (including continuations and conversions thereof); provided, however, (a) if any Interest Period ends on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day (except that where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day), (b) no Interest Period shall extend beyond April 1, 2002, and (c) where an Interest Period begins on a day for which there is no numerically corresponding day in the calendar month in which the Interest Period is to end, such Interest Period shall end on the last Business Day of such calendar month. (s) "LIBOR FLOATING RATE": means the fluctuating rate of interest equal to the three month London Interbank Offered Rate as published in the "Money Rates" section of THE WALL STREET JOURNAL (or in a successor publication selected by Bank if THE WALL STREET JOURNAL is no longer published) on the immediately preceding Business Day as adjusted from time to time in Bank's sole discretion for then applicable reserve requirements, deposit insurance assessment rates and other regulatory costs. (t) "LIBOR FLOATING RATE LOAN": means any Revolving Credit Loan bearing interest at a rate determined by reference to the LIBOR Floating Rate. (u) "LOAN DOCUMENTS": means this Agreement, the Notes, and all other documents, instruments, guaranties, certificates and agreements heretofore or hereafter executed and/or delivered by either Borrower or any other Person in connection with the Revolving Credit Loans. 3 (v) "LONDON INTERBANK OFFERED RATE" means, with respect to any Eurodollar Loan for the Interest Period applicable thereto, the rate of interest per annum (rounded upwards, if necessary to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. federal funds at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Telerate Page 3750, the applicable rate shall be the arithmetic mean of all such rates. If, for any reason, such rate is not available, the term "London Interbank Offered Rate" shall mean, with respect to any Eurodollar Loan for the Interest Period applicable thereto, the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBOR Page as the London interbank offered rate for deposits in U.S. federal funds at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBOR Page, the applicable rate shall be the arithmetic mean of all such rates. If, for any reason, such rate is not available, the term "London Interbank Offered Rate" shall mean a comparable rate selected by the Bank. (w) "MATERIAL ADVERSE EFFECT": a material adverse effect on (i) the business, operations, property, condition (financial or otherwise) or prospects of either Borrower, (ii) the ability of either Borrower to perform its obligations under this Agreement, the Notes or any of the other Loan Documents, or (iii) the validity or enforceability of this Agreement, any of the Notes, or any of the other Loan Documents or the rights or remedies of the Bank hereunder or thereunder. (x) "MAXIMUM CREDIT AMOUNT": means $10,000,000. (y) "NOTES": as defined in Section 2(a). (z) "OPERATING ACCOUNT": means an account maintained by Borrowers (or either of them) with Bank. (aa) "PLAN" means any employee benefit plan (as defined in Section 3(3) of ERISA) which is covered by ERISA and with respect to which either Borrower or any of its subsidiaries or affiliates is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" within the meaning of Section 3(5) of ERISA. (bb) "PERSON": means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. (cc) "PRIME RATE" means the per annum rate of interest established from time to time by Bank of America, N.A. as its Prime Rate. Any change in the interest rate resulting from a change in the Prime Rate shall become effective as of 12:01 A.M. of the Business Day on which each change in the Prime Rate is announced by Bank of America, N.A.. The Prime Rate is a reference rate used by Bank of America, N.A. in determining interest rates on certain loans 4 and is not intended to be the lowest rate of interest charged on any extension of credit to any debtor. If Bank of America, N.A. ceases to publish a Prime Rate, or if such Prime Rate for any other reason becomes unascertainable, then Bank shall select a comparable rate for purposes of the calculations required under this Loan Agreement and such comparable rate shall be deemed the "Prime Rate" for purposes of this Loan Agreement. (dd) "REPORTABLE EVENT" means a "reportable event" as defined in Section 4043 of ERISA with respect to which the notice requirements to the Pension Benefit Guaranty Corporation have not been waived. (ee) "REVOLVING CREDIT LOANS": as defined in subsection 2(a). (ff) "UNUSED COMMITMENT" means, for any period, the amount by which (i) the then applicable Maximum Credit Amount exceeds (ii) the daily average sum for such period of the outstanding aggregate principal amount of all Revolving Credit Loans. (gg) "ACCOUNTING TERMS": All accounting terms not specifically defined or specified herein shall have the meanings generally attributed to such terms under GAAP, as in effect from time to time, consistently applied. 2. LOANS. (a) REVOLVING CREDIT LOANS. (i) Subject to the terms and conditions hereof, the Bank agrees to make revolving credit loans ("Revolving Credit Loans") to Borrowers from time to time during the Commitment Period in an aggregate principal amount at any one time outstanding not to exceed the Maximum Credit Amount. Notwithstanding anything to the contrary contained in this Agreement, if the aggregate principal amount of the Revolving Credit Loans at any time outstanding exceeds the Maximum Credit Amount, the Borrowers shall immediately pay to the Bank such amounts necessary to reduce the then outstanding principal amount of the Revolving Credit Loans to an amount not exceeding such Maximum Credit Amount. The Revolving Credit Loans made by the Bank shall be evidenced by a Promissory Note dated the date of this Agreement (that Promissory Note together with all renewals, extensions, amendments, replacements or rearrangements thereof being collectively referred to herein as the "Note(s)"). Borrowers may borrow, repay, and re-borrow amounts under the Revolving Credit Loans subject to the terms and limitations contained in this Agreement and the other Loan Documents. (ii) By no later than 11:00 A.M. (A) one (1) Business Day prior to the requested borrowing of Revolving Credit Loans that will be Base Rate Loans or LIBOR Floating Rate Loans or (B) three (3) Business Days prior to the date of the requested borrowing of Revolving Credit Loans that will be Eurodollar Loans, the Borrowers (or either of them) shall submit a written Notice of Borrowing in form acceptable to Bank (or telephone notice promptly confirmed in writing) to the Bank setting forth (a) the amount requested and the date requested, (b) whether such Revolving Credit Loan shall accrue interest at the Base Rate, the Adjusted 5 LIBOR Floating Rate, or the Adjusted Eurodollar Rate, and (c) with respect to Revolving Credit Loans that will be Eurodollar Loans, the Interest Period applicable thereto. Upon compliance with the terms and conditions hereof, Bank shall make the amount of the requested Revolving Credit Loans available to the Borrowers by crediting the Operating Account (or in such other manner as requested by Borrowers and acceptable to Bank in its sole discretion). The failure of Bank to require any written request for an advance of Revolving Credit Loans or to follow any other procedures set forth in this Agreement shall not in any way affect the treatment of any advance into the Operating Account as an advance of Revolving Credit Loans under this Agreement. (iii) Bank shall maintain on its books an account (the "Credit Account") which shall be debited for all Revolving Credit Loans and other amounts chargeable to Borrowers with respect thereto (including interest accruing thereon) and credited for all payments received on the Revolving Credit Loans. Each month the Bank shall render to Borrowers a written statement of the Credit Account which shall be deemed correct and accepted by and binding upon the Borrowers unless the Bank receives a written statement of the Borrowers' specific exceptions thereto within thirty (30) days from the date of mailing of the written statement to Borrowers. The statements of the Credit Account and books of account of the Bank shall constitute prima facie evidence of the balance in the Credit Account. (iv) The agreement of the Bank to make any Revolving Credit Loans is subject to the satisfaction of the following conditions precedent: (1) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties made by the Borrowers in or pursuant to any Loan Document shall be true and correct in all material respects on and as of such date as if made on and as of such date, and by this subsection, the Borrowers represent and warrant that on the date of each advance of the Revolving Credit Loans, unless such representation or warranty refers to another date, such representations and warranties shall be true and correct in all material respects; (2) NO DEFAULT. No Event of Default shall have occurred or shall occur after giving effect to the Revolving Credit Loans requested to be made on such date, and no other event shall have occurred which with notice or lapse of time may constitute an Event of Default; (3) ADDITIONAL DOCUMENTS. The Bank shall have received such additional documents, instruments, legal opinions or items of information reasonably requested by it; and (4) ADDITIONAL MATTERS. All company and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in form and substance to the Bank. 6 (v) Upon at least three (3) Business Days' notice to Bank, the Borrowers shall have the right to permanently terminate or reduce the aggregate unused amount of the Revolving Credit Loans (in other words, reduce the Maximum Credit Amount) at any time or from time to time; provided that (A) each partial reduction shall be in an aggregate amount at least equal to $500,000 and in integral multiples of $100,000 above such amount and (B) no reduction shall be made which would reduce the Maximum Credit Amount to an amount less than the aggregate amount of then outstanding Revolving Credit Loans. Any reduction in (or termination of) the Revolving Credit Loans (including any reduction in the Maximum Credit Amount) shall be permanent and may not be reinstated. (vi) Borrowers shall have the option, on any Business Day, to continue in existence Eurodollar Loans for a subsequent Interest Period, to convert Base Rate Loans and LIBOR Floating Rate Loans into Eurodollar Loans or to convert Eurodollar Loans into Base Rate Loans or LIBOR Floating Rate Loans, or to convert Base Rate Loans to LIBOR Floating Rate Loans or LIBOR Floating Rate Loans to Base Rate Loans provided, however, that (a) each such continuation or conversion must be requested by Borrowers (or either of them) pursuant to a written notice of continuation/conversion in form acceptable to Bank, (b) Eurodollar Loans may only be continued or converted into Base Rate Loans or LIBOR Floating Rate Loans on the last day of the Interest Period applicable thereto, (c) Eurodollar Loans may not be continued nor may Base Rate Loans or LIBOR Floating Rate Loans be converted into Eurodollar Loans during the existence and continuation of an Event of Default under this Agreement, and (d) any request to extend a Eurodollar Loan that fails to comply with the terms hereof or any failure to request an extension of a Eurodollar Loan at the end of an Interest Period shall constitute a request for conversion to a Base Rate Loan on the last day of the applicable Interest Period. Each continuation or conversion must be requested by Borrowers no later than 11:00 A.M. (a) one (1) Business Day prior to the date of the requested conversion of a Eurodollar Loan to a Base Rate Loan or LIBOR Floating Rate Loan, a Base Rate Loan to a LIBOR Floating Rate Loan, or a LIBOR Floating Rate Loan to a Base Rate Loan or (b) three Business Days prior to the date for a requested extension of a Eurodollar Loan or conversion of a Base Rate Loan or LIBOR Floating Rate Loan to a Eurodollar Loan, in each case pursuant to a written notice of continuation/ conversion submitted to Bank which shall set forth (i) whether the Borrowers wish to continue or convert such Revolving Credit Loans and (ii) if the request is to continue a Eurodollar Loan or convert a Base Rate Loan or LIBOR Floating Rate Loan to a Eurodollar Loan, the Interest Period applicable thereto. If for any reason whatsoever there is any outstanding Revolving Credit Loan with respect to which an applicable request is not in place designating an interest rate option available under this Agreement, then that Revolving Credit Loan shall be deemed for all purposes of this Agreement and the other Loan Documents to be a Base Rate Loan until an appropriate designation is effective. Bank may record the date and the amount of each payment or prepayment of principal on a Revolving Credit Loan, each continuation thereof, each conversion of all or a portion thereof to another applicable interest rate, and in the case of Eurodollar Loans the length of the Interest Period with respect thereto, on its books and records and such recordation shall constitute prima facie evidence of the accuracy of the information so recorded in the absence of manifest error. 7 (vii) Each request for a borrowing, conversion or continuation shall be subject to the requirements that (a) each Eurodollar Loan shall be in a minimum amount of $1,000,000 and in $250,000 increments in excess thereof, (b) each Base Rate Loan or LIBOR Floating Rate Loan shall be in a minimum amount of the lesser of $500,000 (and $100,000 increments above that) or the remaining amount available under the Revolving Credit Loans, and (c) no more than three (3) Eurodollar Loans shall, in the aggregate, be outstanding hereunder at any one time unless consented to by Bank in writing. (b) INTEREST RATES AND PAYMENT TERMS. (i) All Base Rate Loans shall accrue interest at the Base Rate, all Eurodollar Loans shall accrue interest at the Adjusted Eurodollar Rate, and all LIBOR Floating Rate Loans shall accrue interest at the Adjusted LIBOR Floating Rate. Upon the occurrence of any Event of Default hereunder, the principal of, and to the extent permitted by law, interest on the Revolving Credit Loans and any other amounts owing hereunder, under any of the Notes, or under any other Loan Document shall bear interest, payable on demand, at a per annum rate equal to the then applicable interest rate plus 2%. In addition to the foregoing remedies, to the extent permitted by applicable law, Borrowers shall pay on demand to Bank a delinquency charge in the amount of five percent (5%) of any payment not received within five days of the date due to defray costs incidental to collecting such late payment (such late payment charges payable notwithstanding any applicable cure period). (ii) Interest on Revolving Credit Loans shall be due and payable in arrears on each Interest Payment Date. If an Interest Payment Date falls on a date which is not a Business Day, such Interest Payment Date shall be deemed to be the next succeeding Business Day (subject to accrual of interest for the period of extension), except in the case of Eurodollar Loans where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day. All outstanding principal, interest and other amounts owing under this Agreement, the Notes or any other Loan Document, if not sooner due and payable in accordance with the terms hereof or thereof, shall be due and payable in full on April 1, 2002. (iii) All payments of principal, interest, and other amounts owing under this Agreement, the Notes and the other Loan Documents must be received not later than 2:00 P.M. on the date when due, at Bank's offices at 633 Chestnut Street, Chattanooga, Tennessee. Payments received after such time shall be deemed to have been received on the next Business Day. (iv) Borrowers shall have the right to prepay Revolving Credit Loans in whole or in part from time to time without premium or penalty; provided, however, that (i) Eurodollar Loans may only be prepaid at the end of the applicable Interest Period on at least three (3) Business Days' prior written notice to Bank (provided that Borrowers may prepay at any other time so long as Borrowers pay to Bank all breakage and redeployment costs incurred in connection with those prepayments); (ii) Base Rate Loans and LIBOR Floating Rate Loans may only be prepaid after written notice to Bank not later than 11:00 A.M. on the Business Day of the applicable prepayment; and (iii) each such partial prepayment shall be in a minimum principal amount of $500,000 and in increments of $100,000 in excess thereof. 8 (c) FEES. In consideration of the commitment to make Revolving Credit Loans, Borrowers agree to pay Bank a fee equal to one-quarter of one percent (0.25%) per annum on the Unused Commitment (the "Commitment Fees"). The accrued Commitment Fees shall commence to accrue on the date of this Agreement and shall be payable quarterly in arrears on the day following the last Business Day of each fiscal quarter of Borrowers (as well as on April 1, 2002, and on any date that the Maximum Credit Amount is reduced) for the immediately preceding fiscal quarter of the Borrowers (or portion thereof) beginning with the first of such dates to occur after the date of this Agreement. (d) COMPUTATIONS OF INTEREST AND FEES. (i) All computations of interest and fees (including, without limitation, Commitment Fees) hereunder shall be made on the basis of the actual number of days elapsed over a year of 360 days provided that calculations with respect to the Prime Rate shall be made on the basis of the actual number of days elapsed in a 365/366 day year. (ii) It is the intent of Borrowers and Bank to conform to and contract in strict compliance with applicable usury laws from time to time in effect. All agreements between Borrowers and Bank are hereby limited by the provisions of this paragraph which shall override and control all such agreements, whether now existing or hereafter arising. If, from any possible construction of any of the Loan Documents, interest would otherwise be payable in excess of the maximum non-usurious amount, any such construction shall be subject to the provisions of this paragraph and such interest rate shall be automatically reduced to the maximum non-usurious amount permitted under applicable law without the necessity of execution of any amendment or new document. (e) CAPITAL ADEQUACY/ILLEGALITY. If, after the date hereof, Bank reasonably determines that the adoption or becoming effective of, or any change in, or any change by any Governmental Authority, central bank or comparable agency in the interpretation or administration of, any applicable law, regulation or requirement requiring capital adequacy, or compliance by Bank with any request or directive regarding capital adequacy of any such Governmental Authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on Bank's capital or assets as a consequence of its commitments or obligations to make Eurodollar Loans hereunder to a level below that which Bank could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration Bank's policies with respect to capital adequacy), upon notice from Bank to Borrowers (which shall include a detailed written explanation of the circumstances requiring the notice and the computation of the additional amounts owed), the Borrowers shall be obligated to pay Bank such additional amount or amounts as will compensate Bank for such reduction or convert Eurodollar Loans to Base Rate Loans or LIBOR Floating Rate Loans. If prior to the first day of any Interest Period the Bank shall have determined that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, Bank shall promptly give notice thereof to Borrowers. If such notice is given (a) 9 any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as Base Rate Loans, (b) any Revolving Credit Loans that were to be converted on the first day of such Interest Period to or continued as Eurodollar Loans shall be converted to or continued as Base Rate Loans, and (c) any outstanding Eurodollar Loans shall be converted, on the first day of such Interest Period, to Base Rate Loans. Notwithstanding any other provision herein, if the adoption of or any change in any requirement of applicable law or in interpretation or application thereof shall make it unlawful for Bank to make or maintain Eurodollar Loans as contemplated by this Agreement, no additional Eurodollar Loans shall be requested by Borrowers and all then outstanding Eurodollar Loans, if any, shall be converted automatically to Base Rate Loans. (f) USE OF PROCEEDS. The proceeds of the Revolving Credit Loans shall be used only for working capital, capital expenditures, acquisitions, and other lawful corporate purposes. 3. GENERAL REPRESENTATIONS AND WARRANTIES. Borrowers hereby jointly and severally represent and warrant to Bank as follows: (a) GOOD STANDING. Chattem is a corporation, duly organized, validly existing and in good standing under the laws of Tennessee and has the power and authority to own its property and to carry on its business in each jurisdiction in which Chattem does business. Chattem is duly qualified to transact business in all states in which the failure to so qualify could have a Material Adverse Effect. Signal is a corporation, duly organized, validly existing and in good standing under the laws of Delaware and has the power and authority to own its property and to carry on its business in each jurisdiction in which Signal does business. Signal is duly authorized to transact business in all states in which the failure to so qualify could have a Material Adverse Effect. (b) AUTHORITY AND COMPLIANCE. Each Borrower has full power and authority to execute and deliver the Loan Documents and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of that Borrower. No consent or approval of any Governmental Authority or other Person is required as a condition to the validity of any Loan Document. Each Borrower is in compliance with all laws, regulations and governmental requirements to which it is subject except any noncompliance which in the aggregate would not have a Material Adverse Effect. (c) BINDING AGREEMENT. This Agreement and the other Loan Documents executed by Borrowers constitute valid and legally binding obligations of Borrowers, enforceable in accordance with their terms subject to bankruptcy and equitable principles. (d) LITIGATION. There is no proceeding involving either Borrower pending or, to the knowledge of either Borrower, threatened before any court or other Governmental Authority which if adversely determined would have a Material Adverse Effect except as disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. 10 (e) NO CONFLICTING AGREEMENTS. There is no charter, bylaw, or other document pertaining to the organization, power or authority of either Borrower and no provision of any existing agreement, mortgage, indenture or contract binding on either Borrower or affecting any of its property, which would conflict with or in any way prevent the execution, delivery or carrying out of the terms of the Loan Documents. (f) TAXES. All taxes and assessments due and payable by either Borrower have been paid or are being contested in good faith by appropriate proceedings and each Borrower has filed all tax returns which it is required to file. (g) FINANCIAL STATEMENTS. The financial statements of Borrowers heretofore delivered to Bank have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved and fairly present Borrowers' financial condition as of the date or dates thereof, and there has been no material adverse change in Borrowers' financial condition or operations since February 28, 2001. To the best of Borrowers' knowledge, all material factual information furnished by either Borrower to Bank in connection with this Agreement and the other Loan Documents is and will be accurate and complete in all material respects on the date as of which such information is delivered to Bank and is not and will not be incomplete by the omission of any material fact necessary to make such information not misleading. Neither Borrower has any material contingent obligations except as disclosed in the financial statements heretofore delivered to Bank. (h) PROPERTIES. Except for property tax liens for taxes not presently due and payable, each Borrower owns and has good title to all of its properties free and clear of all liens, charges, security interests and other encumbrances (except purchase money security interests and statutory liens which secure obligations incurred in the ordinary course of business and which are not yet due and payable), and neither Borrower has executed any security documents or financing statements relating to such properties. All of each Borrower's properties are titled in that Borrower's legal name, and neither Borrower has used, or filed a financing statement under, any other name for at least the last five (5) years. (i) PLACE OF BUSINESS. Chattem's chief executive office is located at 1715 W. 38th Street, Chattanooga, Tennessee 37409, and Signal's chief executive office is located at 1105 N. Market Street, Suite 1300, Wilmington, Delaware 19890. (j) CONTINUATION OF REPRESENTATION AND WARRANTIES. All representations and warranties made under this Agreement and the other Loan Documents shall be deemed to be made at and as of the date hereof and at and as of the date of any future advance of Revolving Credit Loans. 4. AFFIRMATIVE COVENANTS. Until full payment and performance of all obligations of Borrowers under the Loan Documents, and the expiration of any obligation of Bank to make additional Revolving Credit Loans, Borrowers agree as follows: 11 (a) FINANCIAL STATEMENTS AND OTHER INFORMATION. Borrowers shall maintain a system of accounting satisfactory to Bank and in accordance with GAAP applied on a consistent basis throughout the period involved, permit Bank's officers or authorized representatives to visit and inspect Borrowers' books of account and other records at such reasonable times and as often as Bank may desire, and pay the reasonable fees and disbursements of any accountants or other agents of Bank selected by Bank for the foregoing purposes. Unless written notice of another location is given to Bank, Borrowers' books and records will be located at Borrowers' chief executive offices described above. All financial statements called for below shall be prepared in form and content acceptable to Bank and shall be certified by Borrowers' chief financial officer. In addition, Borrowers will: (i) Furnish to Bank as soon as available, but in any event within 120 days after the end of each fiscal year of Borrowers, consolidated annual financial statements of Borrowers (including balance sheet, statements of income and retained earnings and cash flow) accompanied by an audit report including an unqualified opinion on such statements acceptable to Bank by an independent certified public accountant selected by Borrowers and acceptable to Bank and shall be certified by each Borrower's chief financial officer; (ii) Furnish to Bank as soon as available but in any event within 45 days after the end of each fiscal quarter of Borrower, the unaudited quarterly consolidated financial statements of Borrowers certified by each Borrower's chief financial officer; and (iii) furnish to Bank within ten days after filing, copies of all material filings and reports filed by either Borrower with the Securities and Exchange Commission, excluding routine filings and reports in the ordinary course of business. Borrowers shall include with the financial information above a compliance certificate in form and substance required by Bank which shall include a certification that no Event of Default has occurred under the Loan Documents. Borrowers shall furnish Bank such additional financial and other information as Bank may from time to time reasonably request. (b) INSURANCE. Borrowers shall maintain insurance with responsible insurance companies on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, specifically to include fire and extended coverage insurance covering all assets, business interruption insurance, workers compensation insurance and commercial general liability insurance, all to be with such companies and in such amounts as are satisfactory to Bank and providing for at least 30 days prior notice to Bank of any cancellation thereof. Satisfactory evidence of such insurance will be supplied to Bank prior to funding under the Revolving Credit Loans and contemporaneously with each policy renewal. (c) EXISTENCE AND COMPLIANCE. Each Borrower shall maintain its existence, good standing and qualification to do business where required, and shall comply with all laws, regulations and governmental requirements including, without limitation, environmental laws applicable to it or to any of its property, business operations and transactions except for noncompliances which in the aggregate do not have a Material Adverse Effect. 12 (d) ADVERSE CONDITIONS OR EVENTS. Borrowers shall promptly advise Bank in writing of (i) any condition, event or act which comes to their attention that would or with reasonable certainty might have a Material Adverse Effect, (ii) any litigation filed by or against either Borrower where damages could, in the good faith opinion of Borrowers' counsel, exceed $5,000,000, (iii) the existence of any actual or potential contingent liability against either Borrower in excess of $5,000,000, (iv) any event that has occurred that would constitute an Event of Default under any Loan Documents, (v) any uninsured or partially uninsured loss through fire, theft, liability or property damage in excess of an aggregate of $100,000.000, and (vi) any event that has occurred that would constitute a default or event of default under any material indebtedness of either Borrower including, without limitation, an Event of Default hereunder. (e) TAXES AND OTHER OBLIGATIONS. Each Borrower shall pay all of its taxes, assessments and other obligations including, but not limited to, taxes, costs or other expenses arising out of this transaction, as the same become due and payable, except to the extent the same are being contested in good faith by appropriate proceedings in a diligent manner. (f) MAINTENANCE. Each Borrower shall maintain all of its assets in good condition and repair (ordinary wear and tear excepted) and make all necessary replacements thereof, and preserve and maintain all patents, licenses, trademarks, copyrights, privileges, permits, franchises, certificates and the like necessary for the operation of its business. (g) ERISA COMPLIANCE. Borrowers shall pay and cause all subsidiaries to pay contributions adequate to meet at least minimum funding standards under ERISA with respect to each and every Plan; file each annual report required to be filed pursuant to ERISA in connection with each Plan for each year and notify Bank within ten (10) days of the occurrence of any Reportable Event that might constitute grounds for termination of any capital Plan by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States District Court of a trustee to administer any Plan. (h) OPERATIONS. Each Borrower shall maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel. Borrowers shall provide written notice to Bank of any change in the chief executive officer, chief operating officer, or chief financial officer of either Borrower. Borrowers shall conduct their business affairs in a reasonable and prudent manner. (i) FURTHER ASSURANCES. Borrowers shall make, execute and deliver to Bank such Loan Documents, and shall perform such other tasks, as Bank reasonably requests to further carry out the purpose and intent of this Agreement. 5. NEGATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, and the expiration of any obligation of Bank to make additional Revolving Credit Loans, Borrowers agree as follows: 13 (a) CHARACTER OF BUSINESS. Borrowers will not change the general character of their business as intended to be conducted at the date hereof, or engage in any type of business not reasonably related to its business intended to be conducted. Borrowers will not cease operations, liquidate, dissolve, merge, acquire or consolidate with any other entity, change either of their names or transfer or sell any of their assets except in the ordinary course of business. (b) ENCUMBRANCES/NEGATIVE PLEDGE. Borrowers will not, without first obtaining the prior written consent of Bank, create or permit to exist any lien, encumbrance, charge, security interest or negative pledge arrangement on either Borrower's accounts or inventory, whether now owned or hereafter acquired. Without limiting the generality of the foregoing, Borrowers will not permit to exist in favor of any other Person a negative covenant similar to the one contained in the preceding sentence without first obtaining the prior written consent of Bank. 6. DEFAULT. Borrowers shall be in default under this Agreement and under each of the other Loan Documents if any of the following events of default (each an "Event of Default") shall occur: (a) Borrowers shall fail to pay any principal, interest or other sum when due under any Note or any of the other Loan Documents, provided that Borrowers shall have ten (10) days after they receive written notice from the Bank of any such failure to cure such failure; or (b) Any representation or warranty made or deemed made by either Borrower herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with any Loan Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) Either Borrower shall default in the observance or performance of any covenant, term or agreement contained in any of the Loan Documents, provided that Borrowers shall have thirty (30) days after either of them knows of any such default to cure such default if curable; (d) Either Borrower shall (i) default in any payment of principal of or interest on any indebtedness beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such indebtedness was created whether such indebtedness is owing to Bank or another Person (including, but not limited to, any such failure under any senior subordinated or subordinated notes outstanding), or (ii) default in the observance or performance of any other covenant, term or agreement relating to any such indebtedness or contained in any instrument or agreement evidencing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such indebtedness to cause, with the giving of notice if required, such indebtedness to become due prior to its stated maturity; or (e) Either Borrower shall (i) commence any case, proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, 14 insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or there shall be commenced against either Borrower any such case, proceeding or other action which remains undismissed, undischarged or unbonded for a period of 30 days; or (ii) generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (f) One or more judgments or decrees shall be entered against either Borrower involving in the aggregate a liability of Five Million Dollars ($5,000,000) or more and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof unless Borrowers have insurance in place to fully satisfy such judgments or decrees; or (g) Any default or event of default occurs under any of the other Loan Documents (including, without limitation, any default under any Note); or (h) Any change in ownership of 50% or more of the common stock of either Borrower shall occur in a single transaction or series of related transactions; or (i) The occurrence of any materially adverse change in the business, assets, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects of either Borrower, or the existence of any other condition which Bank reasonably determines to constitute a material impairment of either Borrower's ability to perform its obligations under the Loan Documents. 7. REMEDIES UPON DEFAULT. If an Event of Default shall occur, any obligation of Bank to make any Revolving Credit Loan shall terminate, Bank may accelerate the Notes to immediate maturity, all other indebtedness of Borrowers (or either of them) to Bank shall (in Bank's sole discretion) become immediately due and payable, and Bank shall have all rights, powers and remedies available under each of the Loan Documents as well as all rights, powers and remedies available at law or in equity. Bank may, upon the occurrence of an Event of Default, and without notice to Borrowers, apply any property, deposits and other sums credited by or due from Bank to either Borrower or subject to withdrawal from the Bank by either Borrower to Borrowers' obligations under the Notes and the other Loan Documents. 8. NOTICES. All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to the other party at the following address: Borrowers: Chattem, Inc. 1715 W. 38th Street Chattanooga, Tennessee 37409 Attention: Chris S. Keller 15 Signal Investment & Management Co. 1715 W. 38th Street Chattanooga, Tennessee 37409 Attention: Chris S. Keller Bank: Bank of America, N.A. 633 Chestnut Street Chattanooga, Tennessee 37450 Attention: Lawrence M. Richey or to such other address as any party may designate by written notice to the other party. Each such notice, request and demand shall be deemed given or made as follows: (a) If sent by hand delivery, upon delivery; and (b) If sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. Mail, first class postage prepaid. 9. COSTS, EXPENSES AND ATTORNEY'S FEES. Borrowers shall pay to Bank immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees, incurred by Bank in connection with the enforcement of the Loan Documents or collection of any amounts outstanding thereunder. 10. MISCELLANEOUS. Borrower and Bank further covenant and agree as follows, without limiting any requirement of any other Loan Document: (a) CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted to Bank under any Loan Document, or allowed it by law or equity shall be cumulative of each other and may be exercised in addition to any and all other rights of Bank, and no delay in exercising any right shall operate as a waiver thereof, nor shall any single or partial exercise by Bank of any right preclude any other or future exercise thereof or the exercise of any other right. Borrowers expressly waive any presentment, demand, protest or other notice of any kind, including but not limited to notice of intent to accelerate and notice of acceleration. No notice to or demand on Borrowers in any case shall, of itself, entitle Borrower to any other or future notice or demand in similar or other circumstances. (b) APPLICABLE LAW. This Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the laws of Tennessee and applicable United States federal law. (c) AMENDMENT/SUCCESSORS. No modification, consent, amendment or waiver of any provision of any Loan Document, nor consent to any departure by Borrowers therefrom, shall be effective unless the same shall be in writing and signed by an officer of Bank, and then 16 shall be effective only in the specified instance and for the purpose for which given. This Agreement is binding upon Borrowers, their successors and assigns, and inures to the benefit of Bank, its successors and assigns; however, no assignment or other transfer of either Borrower's rights or obligations hereunder shall be made or be effective without Bank's prior written consent, nor shall it relieve either Borrower of any obligations hereunder. This Agreement, the Notes and all of the other Loan Documents may be endorsed, assigned and/or transferred in whole or in part by Bank, and any such holder and/or assignee of the same shall succeed to and be possessed of the rights and powers of the Bank under all of the same to the extent transferred and assigned. Borrowers authorize Bank to disclose to any prospective successor or assignee of Bank any and all financial and other information in Bank's possession concerning the Borrowers. (d) DOCUMENTS. All documents, certificates and other items required under this Agreement to be executed and/or delivered to Bank shall be in form and content satisfactory to Bank. This Agreement and the other Loan Documents constitute the entire agreement between the parties with respect to the subject matter hereof and there are no promises, undertakings, representations or warranties by the Bank relative to the subject matter hereof not expressly set forth or referred to herein or the other Loan Documents. (e) PARTIAL INVALIDITY/SEVERABILITY. The unenforceability or invalidity of any provision of a Loan Document shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of any Loan Document to any Person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other Persons or circumstances. If any provision of a Loan Document would otherwise be unenforceable or invalid as to any Person or circumstance, then without further action by any party that provision as it applies with respect to such Person or circumstance shall be deemed modified to the minimum extent necessary to make that provision fully enforceable and valid. In any action or proceeding involving bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of any Borrower would otherwise be held or determined to be invalid or unenforceable on the account of the amount of its liability under any Loan Document, then notwithstanding any other provision to the contrary, the amount of such Borrower's liability shall, without further action by any party, be automatically limited and reduced to the highest amount which is valid and enforceable as determined in such action or proceeding. Each Borrower hereby fully subordinates all claims that Borrower has against the other Borrower with regard to any amounts paid under this Agreement or any other Loan Document and agrees not to assert such claims or collect any amounts with respect to such claims until all obligations under this Agreement and the other Loan Documents are paid in full and any obligation of Bank to make additional Revolving Credit Loans has expired or been terminated. (f) SURVIVABILITY. All covenants, agreements, representations and warranties made herein or in the other Loan Documents shall survive the making of the Revolving Credit Loans and shall continue in full force and effect so long as any Revolving Credit Loan is outstanding or the obligation of the Bank to make any advances under Revolving Credit Loans shall not have expired. 17 (g) JOINT AND SEVERAL OBLIGATIONS. All obligations of the Borrowers under this Agreement, the Notes, and the other Loan Documents shall be the joint and several obligations of each Borrower, and all references to "Borrower" shall mean each and every Borrower. (h) ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN CHATTANOOGA, TENNESSEE, AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS ARBITRATION PROVISION; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS 18 AGREEMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. (i) Final Agreement. THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [SIGNATURE PAGE ATTACHED] 19 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. BORROWERS: BANK: CHATTEM, INC. BANK OF AMERICA, N.A. By: By: ---------------------------------- -------------------------------- Name: A. Alexander Taylor, II Name: Lawrence M. Richey Title: President Title: Senior Vice President SIGNAL INVESTMENT & MANAGEMENT CO. By: ---------------------------------- Name: A. Alexander Taylor, II Title: President 20 EX-11 5 exhibit11_11071.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 ---------- CHATTEM, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (In thousands, except per share amounts)
2001 2000 1999 ---------- ---------- ---------- NET INCOME (LOSS): Income (loss) before extraordinary gain (loss) and change in accounting principle.................................... $ 8,395 $ (197) $ 22,541 Extraordinary gain (loss)...................... 6,948 (920) (2,385) Change in accounting principle................. -- (542) -- ---------- ---------- ---------- Net income (loss).......................... $ 15,343 $ (1,659) $ 20,156 ========== ========== ========== NUMBER OF COMMON SHARES: Weighted average outstanding................... 8,927 9,411 9,747 Issued upon assumed exercise of outstanding stock options and stock warrants..................................... 95 -- 277 Effect of issuance of restricted common shares....................................... 16 -- -- ---------- ---------- ---------- Weighted average and potential dilutive outstanding.................................. 9,038 9,411 10,024 ========== ========== ========== NET INCOME (LOSS) PER COMMON SHARE: Basic: Income (loss) before extraordinary gain (loss) and change in accounting principle $ .94 $ (.02) $ 2.31 Extraordinary gain (loss).................... .78 (.10) (.24) Change in accounting principle............... -- (.06) -- ---------- ---------- ---------- Total basic................................ $ 1.72 $ (.18) $ 2.07 ========== ========== ========== Diluted: Income (loss) before extraordinary gain (loss) and change in accounting principle $ .93 $ (.02) $ 2.25 Extraordinary gain (loss).................... .77 (.10) (.24) Change in accounting principle............... -- (.06) -- ---------- ---------- ---------- Total diluted.............................. $ 1.70 $ (.18) $ 2.01 ========== ========== ==========
EX-13 6 exhibit13_11071.txt 2001 ANNUAL REPORT EXHIBIT 13 ---------- To the Shareholders Fiscal 2001 Review In our letter to you last year we predicted a strong rebound from a disappointing fiscal 2000. Not only did our results rebound strongly, but they surpassed our own expectations for earnings per share by approximately 50%. Specifically, earnings per share before extraordinary items soared to $.93 from a $.02 per share loss last year. The $.93 per share earnings substantially exceeded the $.60-$.65 earnings per share we estimated at the beginning of the year. In addition, we recorded a $6.9 million, or $.77 per share, gain from early extinguishment of debt. Thus, total net income for the year was $15.3 million and total earnings per share were $1.70. Further, long term debt was reduced by $99.3 million in fiscal 2001, and at the end of the fiscal year net debt (long term debt less cash) was $169.3 million. Net sales for the year were $198.3 million which exceeded our estimate at the beginning of the year by about $15 million. Comparisons of financial results to a year ago are not meaningful due to the sale of Ban(R) in 2000. The strong earnings were led by a number of marketing successes of our brands plus very strict cost controls. Specifically, DEXATRIM Natural was our biggest success as sales more than made up for lost sales due to the discontinuation of DEXATRIM with phenylpropanoline. We had anticipated a significant sales decline for DEXATRIM this year, but sales almost attained fiscal 2000 levels due to aggressive and compelling advertising for DEXATRIM Natural. Another highlight was our topical analgesic portfolio, which increased by about 7%, led by the ICY HOT Patch. For the year, sales of ICY HOT, CAPZASIN and ARTHRITIS HOT increased 34%, 27% and 27%, respectively. After a number of years of disappointing results, SUNSOURCE significantly exceeded the prior year in terms of sales and particularly in profitability. These results were led by sales of GARLIQUE and NEW PHASE plus significant reductions in advertising and promotion spending. After a disappointing 2000, GOLD BOND had a respectable year with sales essentially flat, but improving notably in the second half of the year. Our strongest GOLD BOND products, adult powder, foot powder, cream and lotion, had fairly good performances, which were offset by declines in ointment and baby powder. Finally, BULLFROG had an excellent year with increased sales of over 6% and even a larger increase in profits due to focused spending behind the brand. In terms of disappointments, sales of FLEXALL, PHISODERM and PAMPRIN declined versus the previous year due primarily to intense competition. FISCAL 2002 OUTLOOK* We begin 2002 with momentum and optimism for another successful year. In terms of major marketing initiatives for 2002, we have three important new product launches. The first and largest is DEXATRIM RESULTS, an innovative new diet product which increases fat burning while adding antioxidants and other ingredients to provide energy and nutrition. This launch will be one of our largest ever, backed by $10 million in advertising. Second is the launch of PHISODERM Acne Body Wash and Acne Masque. These two products should add incremental sales to our successful acne facial cleanser. Finally, GOLD BOND Foot Spray should become another successful GOLD BOND line extension. In addition to these new products we have several other major goals for the year. We spent much of the past year working on new products for GOLD BOND and we have a number of strong candidates. We hope to launch at least two new products for GOLD BOND in the next twelve months. We will also focus on research and development with a goal of launching at least one product based on new technology within the next year. Finally, with approximately $35 million in cash and no bank debt, we plan to be aggressively seeking acquisitions. In terms of our financial goals for next year, we are forecasting a 3-5% increase in net sales and a 6-8% increase in EPS. In addition, the Financial Accounting Standards Board has eliminated the amortization of intangibles with indefinite lives, such as trademarks, which will result in an approximate $.38 per share increase in EPS for next year. Thus, we estimate that total EPS should be in the range of $1.35-$1.40, although future performance is impossible to predict with certainty. In closing, it is great to have strong results but it is particularly exciting when the market recognizes our performance. For calendar 2001 Chattem was in the top 25 NASDAQ stocks with a 242% gain in stock price. We are extremely proud of our managers', directors' and employees' achievements during the past year and we look forward to sharing continued successes with you this year. *The statements in this section constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Ban(R) is the registered trademark of Kao Corporation. CHATTEM CONSUMER PRODUCTS DOMESTIC PRODUCT OVERVIEW MEDICATED SKIN CARE PRODUCTS The GOLD BOND brand, which is over 100 years old, competes in the adult and baby medicated powder, foot powder, therapeutic lotion, anti-itch cream and antibiotic ointment markets. GOLD BOND is the leading brand in the medicated powder category in the United States. Total retail sales for the brand have grown from less than $28,000,000 when the brand was acquired in fiscal 1996 to over $61,000,000 in fiscal 2001. In 1997 the Company added two line extensions, GOLD BOND Foot Powder and GOLD BOND Medicated Body Lotion. GOLD BOND Antibiotic Ointment was introduced during the first quarter of 1999, while GOLD BOND Sensitive Skin Body Lotion was added to the product line in 2000. In fiscal 2002 the GOLD BOND brand will introduce an aerosol delivery form of its successful foot powder to meet the needs of more than half of consumers who prefer a spray form. The product line is heavily supported by national television and radio advertising throughout most of the year, as well as with consumer promotions. We believe GOLD BOND continues to represent an opportunity for growth both through the existing products and the introduction of line extensions. TOPICAL ANALGESICS With the acquisition of the Thompson Medical Company, Inc. ("Thompson Medical") brands in late 1998, Chattem became the United States leader in the $220,000,000 topical analgesic market category. The Company's strong market position as well as the advancing age of the United States population and the increasing interest in physical fitness combine to provide solid growth prospects within the topical analgesic category. FLEXALL is an aloe vera based topical analgesic used primarily by chronic pain sufferers to alleviate pain and inflammation in joints and secondarily by sufferers of muscle strain. Introduced in fiscal 1999, FLEXALL QUIK GEL, which provides fast relief without any mess, was accompanied by an advertising campaign featuring NFL Hall of Famer Joe Montana. Uniquely positioned as the brand that goes on "icy to dull the pain and gets hot to relax it away", ICY HOT is available in a cream, balm and stick. This dual action extra strength product appeals to younger users just entering the category as well as older consumers who want to remain active. ICY HOT Patch, concentrated pain relief that lasts for hours and is easy to apply, was successfully introduced in fiscal 2001. Former Thompson Medical brands round out the Company's topical analgesic portfolio. ASPERCREME provides odor free relief of arthritis and other chronic pain while SPORTSCREME is targeted at serious athletes as well as "weekend warriors". CAPZASIN, which contains capsicin, the active ingredient that doctors recommend most, is focused on the arthritis sufferer looking for clinically proven relief. ARTHRITIS HOT provides relief at a value price. The Company supports the topical analgesic brands with extensive national television and radio advertising as well as targeted consumer promotions, and is well positioned to achieve solid growth within the topical analgesic category. BENZODENT is a dental analgesic cream in an adhesive base for use as an oral topical analgesic for pain related to dentures. BENZODENT is principally supported by sampling consumers at the time they are fitted with dentures and representation at professional dental conferences. INTERNAL ANALGESICS The Company competes in the menstrual analgesic segment with two brands: PAMPRIN, a combination drug targeted towards relief of all menstrual symptoms, and PREMSYN PMS, targeted towards the specific symptoms of premenstrual syndrome. The Company uses a mix of television and print advertising as well as point of entry sampling to gain trial and awareness among the female target audience. 1 LIP CARE HERPECIN-L, Chattem's entry in the lip care category, is uniquely formulated to treat and protect cold sores by moisturizing lips to help prevent cracking and promote healing. Available in a stick and a jar, HERPECIN-L contains a sunblock to help protect lips from the harmful rays of the sun. The Company uses radio advertising to generate trial use during the peak winter and summer cold sore seasons. APPETITE SUPPRESSANT DEXATRIM, acquired in December of 1998, is a leading name in the diet pill category. In 2001 DEXATRIM enjoyed strong growth in the herbal diet aid category with DEXATRIM Natural. DEXATRIM Natural is a drug-free, all natural, dietary supplement with special dual action that curbs appetite and helps burn more fat and calories. DEXATRIM Natural is also available in Green Tea and Caffeine Free versions. DEXATRIM Natural was successfully promoted with high levels of advertising support through the New Year's resolution and spring swimsuit seasons. DEXATRIM is now only available in herbal, dietary supplement formulas after the removal of DEXATRIM products with phenalpropanolamine ("PPA") from the product line in November 2000. In 2002 DEXATRIM RESULTS, a nutrition based weight control product, will be introduced. DEXATRIM RESULTS has a unique formula, which provides more energy sources and more nutrition so that consumers can feel good while they are reaching their dieting goals. DEXATRIM RESULTS will be available in a regular and an ephedrine-free formula. DIETARY SUPPLEMENTS The Company competes in the United States nutritional supplement category with its SUNSOURCE line which includes GARLIQUE, REJUVEX, NEW PHASE, PROPALMEX, MELATONEX, and OMNIGEST EZ. These products are distributed primarily through the drug and mass merchandiser trade channels. GARLIQUE garlic tablets support cardiovascular health and are uniquely positioned in the marketplace as a "one per day" high potency garlic supplement. Most major GARLIQUE competitors require multiple daily dosages. National television advertising is utilized throughout the year to emphasize this key advantage to consumers. REJUVEX and NEW PHASE offer a more complete way for a woman to maintain comfort as she enters a phase of life that, for many, is a time of hormonal imbalance and discomfort. REJUVEX is an estrogen-free dietary supplement that contains magnesium, vitamins and other natural ingredients to replenish nutrients and help maintain healthy bones. NEW PHASE supports hormonal balance with 80 milligrams per tablet of natural phytoestrogens, double the isoflavone content of many leading brands. PROPALMEX supports prostate health and promotes free urinary flow. For men over forty looking for all natural, drug-free options, PROPALMEX offers a healthy choice with a unique formula that contains saw palmetto, lycopene and zinc. MELATONEX is formulated to support a natural sleep cycle by supplementing the body's production of melatonin, a hormone necessary for a good night's sleep. OMNIGEST EZ contains a unique blend of seven plant derived digestive enzymes that work along with the digestive enzymes produced by your own body to help in the digestion of fats, proteins, carbohydrates, cellulose and dairy products. All SUNSOURCE products are specially formulated to provide consumers with an all-natural, drug-free way to support their specific health care goals. The Company is committed to bringing to market the highest quality product possible and guarantees the potency of each SUNSOURCE product on the front panel of the package to aid and enhance consumer confidence in selecting SUNSOURCE dietary supplements. 2 FACIAL CLEANSERS AND MASQUES PHISODERM is a line of facial cleansers developed by dermatologists which retains an ethical, troubled skin reputation. The line includes several formulas of liquid cleansers including one for infants. In 2001 the PHISODERM brand sustained its focus on the growing acne portion of the business which includes the 4-Way Daily Acne Cleanser. Consumer support behind the brand is concentrated on the acne business and includes print advertising in teen magazines, targeted television advertising on teen cable programs and extensive sampling. In 2002 the Company will further expand the acne portion of the business with unique line extensions: PHISODERM Clear Confidence Acne Body Wash and PHISODERM Clear Confidence 5 Minute Blemish Masque. The entire PHISODERM line has been repackaged in clear, contemporary-looking packages. MUDD is a line of deep cleaning clay-based products for the face. Target consumers for MUDD are women between the ages of 18 and 49. MUDD Masque is available in four formulas and is a strong market leader in the masque category. In 2001 the masque products were supported by a new television campaign featuring the entire MUDD line and the brand promise of providing the ultimate in facial deep cleaning. SEASONALS BULLFROG is the line of ultimate waterproof sunblocks for outdoor active consumers. In 2001 BULLFROG was the fastest growing SPF 15+ sunblock, posting sales gains of over 6%. In 2001 two new products were added to the line: BULLFROG FastBlast, a watermelon scented spray version for kids of the popular BULLFROG Quik Gel formula, and BULLFROG Sensitive Skin, a dermatologist recommended, fragrance free, high protection lotion. In 2002 BULLFROG is expected to continue to realize solid growth with a comprehensive brand plan which includes an active new product program and targeted consumer advertising, promotions and sampling programs. ULTRASWIM is a line of chlorine removing shampoos, conditioners and soaps. ULTRASWIM has a unique formula that performs chlorine removal better than any comparable hair care or skin care product on the market. The Company supports this brand through targeted print advertising to competitive, recreational and exercise swimmers and through event sponsorship with targeted sampling programs. In 2001 ULTRASWIM was relaunched with a new healthy hair formula and a clear package design. SUN-IN is a hair lightener available in two varieties: spray-on and Super Streaks, a highlighting hair gel. In 2001 SUN-IN built awareness with a continually changing teen target audience through promotional prepacks and an interactive web site. INTERNATIONAL MARKET OVERVIEW - ----------------------------- EUROPE Chattem's European business is conducted through Chattem (U.K.) Limited, a wholly-owned subsidiary located in Basingstoke, Hampshire, England. This unit also services distributors in various other worldwide locations. Manufacturing and packaging of the products are conducted principally in the United Kingdom with a limited number of ingredients purchased from Chattem. Chattem (U.K.) uses a national broker in the United Kingdom while distributors are used to market and sell its products on the Western European continent. Due to the difficulty and expense involved in the registration of OTC health care brands in Europe, the unit markets exclusively the Company's toiletries and skin care products. Chattem's products in Europe include SUN-IN, a range of MUDD face and body products and ULTRASWIM. Cornsilk(R) is sold under a licensing arrangement with another company. SPRAY BLOND Spray-In Hair Lightener is only marketed on the European continent. Certain of the Company's OTC health care products are also sold by Chattem (U.K.) to customers in the Middle and Far East. 3 CANADA Chattem (Canada) Inc. is a wholly-owned subsidiary based in Mississauga, Ontario, Canada which markets and distributes certain of Chattem's consumer products throughout Canada. The manufacturing of the brands is principally done in the Company's facilities in Chattanooga while some packaging takes place in Mississauga. The division utilizes a national broker for its sales efforts. Brands marketed and sold in Canada include GOLD BOND, PAMPRIN, MUDD, SUN-IN, ULTRASWIM, PHISODERM, ASPERCREME and ephedrine free DEXATRIM. UNITED STATES EXPORT The United States Export division services various distributors primarily located in the Caribbean and Central and South America. The Company sells ICY HOT, GOLD BOND, PHISODERM and DEXATRIM into these markets with the primary focus being the development of its OTC health care products. Cornsilk(R) is the registered trademark of Del Laboratories, Inc. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF - --------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS - --------------------------------------------- The following analysis of the financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes thereto included elsewhere in this Annual Report. GENERAL - ------- Fiscal 2001 was highlighted by the retirement of $70,462,000 principal amount of 8.875% Senior Subordinated Notes due 2008 (the "8.875% Notes") and the remaining outstanding principal amount of $29,145,000 of 12.75% Senior Subordinated Notes due 2004 (the "12.75% Notes"), the repurchase of 14,000 shares of the Company's common stock, entering into a $10,000,000 unsecured revolving line of credit from a financial institution and the restoration of DEXATRIM sales to near the sales level attained in fiscal 2000 after the discontinuation of DEXATRIM containing PPA. On January 17, 2001 the Company completed the consent solicitation and tender offer pursuant to which it retired $70,462,000 principal amount of its 8.875% Notes and $7,397,000 principal amount of its 12.75% Notes. The consideration paid for the consent solicitation and tender offer was $64,937,000, which was provided by the proceeds of the Company's divestiture of the Ban product line in fiscal 2000. An extraordinary gain on the early extinguishment of debt of $7,551,000, net of income taxes, was recognized in the first six months of fiscal 2001. On June 15, 2001 the Company retired all of the remaining outstanding principal balance of $21,748,000 of its 12.75% Notes and accrued interest thereon. In connection with the retirement of the 12.75% Notes, the Company recognized a loss on the early extinguishment of debt of $603,000, net of income tax benefit, in the third quarter of fiscal 2001. This loss primarily consisted of the premium paid on the retirement of the notes and the write-off of related unamortized deferred issuance and initial discount costs. During fiscal 2001 the Company repurchased, and returned to unissued, 14,000 shares of its common stock, without par value, for $174,000 in accordance with the Company's previously announced stock buyback program. On June 21, 2001 the Company obtained a $10,000,000 unsecured revolving line of credit from a financial institution. As of November 30, 2001 no portion of this credit facility had been utilized by the Company. The loss of sales of DEXATRIM containing PPA after its voluntary withdrawal from the market in November 2000 was nearly offset in 2001 by sales of DEXATRIM Natural. The Company will continue to seek sales increases through a combination of acquisitions and internal growth while maintaining high operating income levels. As previously high-growth 5 brands mature, sales increases will become even more dependent on acquisitions and the development of successful line extensions. During fiscal 2001 the Company introduced DEXATRIM Natural Ephedrine Free, ICY HOT Patch, BULLFROG Fast Blast and BULLFROG Sensitive Skin as line extensions. Line extensions, product introductions and acquisitions require a significant amount of introductory advertising and promotional support. For a period of time these products do not generate a commensurate amount of sales and/or earnings. As a result, the Company may experience a short-term impact on its profitability due to line extensions. RESULTS OF OPERATIONS - --------------------- The results of operations for fiscal 2001 were significantly affected by the sale of Ban in September 2000, which contributed approximately $61,443,000 and $86,659,000 in sales in fiscal 2000 and 1999, respectively. The following table sets forth, for income (loss) before extraordinary gain (loss) and change in accounting principle and for the periods indicated, certain items from the Company's consolidated statements of income expressed as a percentage of net sales.
Year Ended November 30 -------------------------------------- 2001 2000 1999 -------- -------- -------- NET SALES .................................. 100.0% 100.0% 100.0% -------- -------- -------- COST AND EXPENSES: Cost of sales ........................... 26.5 29.7 25.4 Advertising and promotion ............... 39.3 42.3 39.5 Selling, general and administrative ..... 17.5 12.6 10.9 -------- -------- -------- Total costs and expenses .......... 83.3 84.6 75.8 -------- -------- -------- INCOME FROM OPERATIONS ..................... 16.7 15.4 24.2 -------- -------- -------- OTHER INCOME (EXPENSE): Interest expense ........................ (11.0) (14.1) (12.3) Investment and other income, net ........ 1.1 .6 .2 Loss on product divestitures ............ -- (2.0) -- -------- -------- -------- Total other income (expense) ...... (9.9) (15.5) (12.1) -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES, EXTRORDINARY GAIN (LOSS) AND CHANGE IN ACCOUNTING PRINCIPLE .................. 6.8 (.1) 12.1 PROVISION FOR INCOME TAXES ................. 2.6 -- 4.5 -------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY GAIN (LOSS) AND CHANGE IN ACCOUNTING PRINCIPLE 4.2% (.1)% 7.6% ======== ======== ========
6 FISCAL 2001 COMPARED TO FISCAL 2000 - ----------------------------------- Net sales for the year ended November 30, 2001 decreased $54,399,000, or 21.5%, to $198,300,000 from $252,699,000 for the previous fiscal year. The decrease was largely the result of the sale of Ban in September 2000, partially offset by a net increase in other brands. The decrease consisted of $50,321,000, or 21.7%, decrease in domestic consumer product sales from $232,144,000 in 2000 to $181,823,000 in 2001 and a decrease of $4,078,000, or 19.8%, in international sales to $16,477,000 from $20,555,000. The Company's topical analgesic portfolio produced a sales increase. Sales increases were recognized for ICY HOT, ASPERCREME, CAPZASIN and ATHRITIS HOT in the Company's topical analgesic portfolio while FLEXALL and SPORTSCREME recorded sales decreases. Sales declines were registered for DEXATRIM, PAMPRIN, SUN-IN, PHISODERM and GOLD BOND, although GOLD BOND sales in the fourth quarter of 2001 exceeded those of the same prior year period. Sales variances were largely the result of changes in the volume of unit sales of the particular brand. The increase in sales of the topical analgesic products was attributable to the success of the ICY HOT Patch, introduced in the second quarter of 2001 as well as increased marketing support. International sales from Canadian operations decreased $736,000, or 10.0%, for 2001, and the United Kingdom business decreased $1,379,000, or 14.3%. The decrease in Canadian sales was due primarily to the initial launch of GOLD BOND Medicated Lotion inclusion in 2000 results and the sale of Ban in September 2000. The principal sales decreases were in SUN-IN, Ban and Cornsilk in the United Kingdom. United States export sales decreased $1,963,000, or 55.1%, primarily due to the sale of Ban in the fourth quarter of 2000. Sales variances were principally the result of changes in the volume of unit sales of the respective brand. Cost of sales as a percentage of net sales was 26.5% in 2001 as compared to 29.7% in 2000. The percentage decrease of 3.2% in 2001 was primarily the result of the inventory write downs of $4,119,000 to cost of sales and allowances for returns of $9,600,000 to net sales in 2000. Advertising and promotion expenses were 39.3% of net sales as compared to 42.3% in 2000. The cost of such expenses decreased $28,904,000, or 27.0%, to $77,964,000 from $106,868,000 in 2000. The decrease was primarily the result of the sale of Ban in the fourth quarter of 2000, partially offset by additional spending on other brands. The decrease in the percent of advertising and promotion to net sales in 2001 as compared to 2000 was primarily due to charges to sales in the fourth quarter of 2000 of approximately $9,600,000 for allowances for returns. 7 Selling, general and administrative expenses increased $2,652,000, or 8.3%, to $34,646,000 from $31,994,000 and increased as a percentage of net sales from 12.6% to 17.5%. The dollar increase was due to increased annual bonus, pension and insurance costs partially offset by decreased freight, selling commissions and bad debt expense. The increase in the percent of selling, general and administrative expenses to net sales in 2001 as compared to 2000 was principally the result of the sale of Ban in the fourth quarter of 2000 and the net increase in dollar costs discussed above. The Company anticipates continuing increased insurance costs and reduced amounts and scope of coverage as a result of product liability claims relating to DEXATRIM with PPA and the concern that other claims relating to DEXATRIM could be filed. Interest expense decreased $13,873,000, or 38.8%, to $21,856,000 in 2001 from $35,729,000 in 2000, primarily as a result of payment of all of the outstanding revolver and term loan balances on September 15, 2000 and the retirement of $70,462,000 principal amount of the 8.875% Notes and the remaining outstanding principal balance of $29,145,000 of the 12.75% Notes. Until the Company's indebtedness is reduced substantially, interest expense will continue to represent a significant percentage of the Company's net sales. Investment and other income increased $652,000, or 41.6%, to $2,218,000 from $1,566,000 primarily due to interest income from temporary investments made with the remaining proceeds from the sale of Ban after the debt retirement discussed previously. Income before extraordinary items and cumulative effect of change in accounting principle was $8,395,000 in 2001 as compared to a loss of $197,000 in 2000. The loss in 2000 resulted primarily from reduced sales and the approximately $19,300,000 of charges, including the loss on the sale of Ban and the DEXATRIM with PPA product issues. Cash earnings (net income before extraordinary loss on early extinguishment of debt and change in accounting principle plus non-cash amortization) and EBITDA (earnings before interest, taxes, depreciation and amortization) are key standards used by the Company to measure operating performance, but may not be comparable to similarly titled measures reported by other companies. Cash earnings and EBITDA are used to supplement operating income as an indicator of operating performance and not as alternatives to measures defined and required by generally accepted accounting principles. Cash earnings for fiscal 2001 were $12,294,000, or $1.36 per share, as compared to $5,894,000, or $.63 per share, for fiscal 2000, an increase of 108.6%. EBITDA for fiscal 2001 was $42,261,000 as compared to $51,251,000 for fiscal 2000, a 17.5% decrease due to the Ban sale. The EBITDA margin increased from 20.3% of net sales in 2000 to 21.3% in 2001. 8 FISCAL 2000 COMPARED TO FISCAL 1999 - ----------------------------------- Net sales for the year ended November 30, 2000 decreased $45,443,000, or 15.2%, to $252,699,000 from $298,142,000 for the previous fiscal year. The decrease was largely the result of the sale of Ban and providing for expected returns of DEXATRIM with PPA and certain SUNSOURCE products. The decrease consisted of a $44,488,000, or 16.1%, decrease in domestic consumer products sales from $276,632,000 in 1999 to $232,144,000 in 2000 and a decrease of $955,000, or 4.4%, in international sales to $20,555,000 from $21,510,000. Domestic sales increases in 2000 were recognized for all of the topical analgesic products, most notably ICY HOT and ASPERCREME, HERPECIN-L, MUDD and PHISODERM. Declines in sales were recorded for the SUNSOURCE brands as a result of continuing weakness of the dietary supplements' market, PAMPRIN, PREMSYN PMS, GOLD BOND, DEXATRIM, Ban, SUN-IN and BULLFROG. Sales variances were largely the result of changes in the volume of unit sales of the particular brand. The increase in sales of the topical analgesic products was attributed principally to increased marketing support. MUDD and PHISODERM sales benefited from line extension introductions in 1999 and 2000 (MUDD Self-Heating Skin Cleanser, PHISODERM 4-Way Daily Acne Cleanser and PHISODERM Blemish Patch) and increased marketing support, while HERPECIN-L sales were positively impacted by more effective advertising and promotion campaigns. As previously stated, the Ban product line was sold in the fourth quarter of 2000, therefore markedly affecting its sales for 2000. Prior to the sale, however, Ban sales had declined, principally as a result of the introduction of a new, heavily promoted antiperspirant and deodorant product by a competitor and reduced marketing support. GOLD BOND sales declined primarily due to increased competition from less expensive private label brands and reduced advertising and promotion expenditures. BULLFROG sales were affected principally by the loss of a major customer, while PAMPRIN, PREMSYN PMS and SUN-IN sales were largely influenced by reduced marketing support. As previously discussed, the decline in sales of DEXATRIM reflects the voluntary withdrawal from the marketplace of DEXATRIM containing PPA. Sales of the remaining brands were relatively flat or showed modest declines in 2000. International sales from the Canadian operation increased $645,000, or 9.6%, for 2000, but the United Kingdom business decreased $1,109,000, or 10.3%. The increase in Canadian sales was primarily associated with the launch of GOLD BOND Medicated Lotion while Ban, SUN-IN and MUDD constituted the principal decreases in United Kingdom sales. United States export sales declined $491,000, or 12.1%, for fiscal 2000, with the decrease being largely associated with sales of Ban for reasons previously 9 discussed. Sales variances were principally the result of changes in the volume of unit sales of the particular brand. Cost of sales as a percentage of net sales in 2000 was 29.7% compared to 25.4% in 1999. The percentage increase of 4.3% in 2000 was primarily the result of the inventory write downs of $4,119,000 to cost of sales and allowances for returns of $9,600,000 to net sales. Advertising and promotion expenses were 42.3% of net sales in 2000 compared to 39.5% in 1999, although the cost of such expenses decreased $10,967,000, or 9.3%, to $106,868,000 in 2000 from $117,835,000 in 1999. This decrease in the cost of such expenses was the result of the sale of Ban and reduced spending for generally all of the Company's product lines except MUDD, BULLFROG, PHISODERM and NEW PHASE and OMNIGEST EZ of SUNSOURCE. The increase in the percent of advertising and promotion to net sales in 2000 over 1999 was primarily due to charges to sales in the fourth quarter of 2000 of approximately $9,600,000 for allowance for returns. Selling, general and administrative expenses decreased $500,000, or 1.5%, to $31,994,000 in 2000 from $32,494,000 in 1999 but increased as a percentage of net sales to 12.6% in 2000 from 10.9% in 1999. This dollar decrease was largely associated with increases in direct selling costs, freight and field sales expenses, but was more than offset by decreases in annual bonus and the pension plan curtailment gain. The increase in the percent of selling, general and administrative expenses to net sales in 2000 over 1999 was principally the result of the sale of Ban and charges to sales in the fourth quarter of 2000 of approximately $9,600,000 for allowance for returns. Interest expense decreased $843,000, or 2.3%, to $35,729,000 in 2000 from $36,572,000 in 1999 primarily as a result of payment of all of the outstanding revolver and term bank loan balances on September 15, 2000 and the retirement of $5,400,000 principal amount of the 12.75% Notes, but was offset by a $578,000 charge in the fourth quarter related to the write off of an interest rate swap termination loss because the underlying debt was retired. Investment and other income increased $987,000, or 170.5%, to $1,566,000 in 2000 from $579,000 in 1999. The increase was due primarily to interest income from temporary investments made with the remaining proceeds from the sale of Ban after the retirement of the Company's revolver and term bank loans on September 15, 2000. Loss before extraordinary loss and change in accounting principle was $197,000 in 2000 compared to income before extraordinary loss in 1999 of $22,541,000. The loss in 2000 resulted primarily from reduced sales and the approximately $19,300,000 of previously discussed charges, including the loss on the sale of Ban and the DEXATRIM with PPA product issues. 10 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company has historically financed its operations and acquisitions with a combination of internally generated funds and borrowings. The Company's principal uses of cash are operating expenses, servicing long-term debt, acquisitions, working capital, repurchases of its common shares, capital expenditures and payment of income taxes. Cash provided by operating activities was $23,730,000 and $26,507,000 for 2001 and 2000, respectively. The decrease in cash flows from operations from 2000 to 2001 was primarily the result of a decrease in accounts payable and accrued liabilities offset in part by a decrease in accounts receivable. Investing activities used cash of $1,584,000 and provided cash of $152,796,000 in 2001 and 2000, respectively. The decrease of cash flows from investing activities in 2001 reflected the absence in 2001 of the proceeds from the sale of a major product line such as Ban in 2000. In 2001 capital expenditures totaled $1,854,000 compared to $5,673,000 in 2000. The decrease was due primarily to the substantial completion in 2000 of the extensive renovation of a manufacturing and warehouse facility purchased in fiscal 1998 and the acquisition of major packaging equipment. Capital expenditures are expected to be approximately $3,000,000 in fiscal 2002. Financing activities used cash of $89,179,000 and $78,991,000 in 2001 and 2000, respectively. The use of cash in 2001 consisted primarily of repayment of the outstanding principal balance of $29,145,000 of the 12.75% Notes and $70,462,000 principal amount of the 8.875% Notes. In 2000 cash was used for repayment of all of the outstanding balances of the revolver and term loans and the retirement of $5,400,000 principal amount of the 12.75% Notes. Until June 30, 2003 the Company is obligated to pay an annual royalty on Herpecin-L for the greater of $214,000 or 5% of the brand's annual net sales. 11 The following table presents certain working capital data at November 30, 2001 and 2000 or for the respective years then ended: ITEM 2001 2000 - -------------------------------------- ------------ ------------ Working capital (current assets less current liabilities) .............. $ 53,579,000 $126,029,000 Current ratio (current assets divided by current liabilities) ........... 3.20 3.77 Quick ratio (cash and cash equivalents and receivables divided by current liabilities) ...................... 2.32 3.15 Average accounts receivable turnover . 6.44 5.28 Average inventory turnover ........... 3.58 3.50 Working capital as a percentage of total assets .................... 17.88% 31.34% The decrease in working capital, the current and quick ratios and working capital as a percentage of total assets at November 30, 2001 as compared to November 30, 2000 was primarily due to the reduction in cash and cash equivalents in connection with the payment in 2001 of the remaining outstanding balance of the 12.75% Notes and a portion of the principal balance of the 8.875% Notes. Total debt outstanding at November 30, 2001 was $204,740,000 compared to $304,077,000 at November 30, 2000. The net decrease of $99,337,000 in 2001 reflected the payment of the entire outstanding balance of the 12.75% Notes and a portion of the principal balance of the 8.875% Notes. On June 21, 2001 the Company obtained a $10,000,000 unsecured revolving line of credit from a financial institution. As of February 22, 2002 no portion of this credit facility had been utilized by the Company. As of November 30, 2001 the remaining amount authorized by the Company's board of directors under the stock buyback plan was $6,425,000; however, the Company is limited in its ability to repurchase shares due to restrictions under the terms of the indenture with respect to which its 8.875% Notes were issued. The Company has been named as a defendant in approximately 115 lawsuits alleging that the plaintiffs were injured as a result of ingestion of products containing PPA, which until November 2000 was the active ingredient in certain of the Company's DEXATRIM products. Most of the lawsuits seek an unspecified amount of compensatory and exemplary damages. None of these suits has been certified as a class action. Approximately 40% of these suits represent cases in which the Company is being defended and indemnified from liability by The DELACO Company, Inc., successor to Thompson Medical from which the Company acquired DEXATRIM in December 1998. 12 Excepting the potential material unfavorable resolution beyond the limits of the Company's product liability insurance policies of the above described lawsuits, management of the Company believes that cash generated by operations, its strong cash and cash equivalents balance and its revolving line of credit noted above will be sufficient to fund the Company's current commitments and proposed operations. Also, on December 21, 1998 the Company filed with the Securities and Exchange Commission a shelf registration for $250,000,000 of debt and equity securities, of which $75,000,000 was utilized in the sale of the 8.875% Notes in May 1999. FOREIGN OPERATIONS - ------------------ The Company's primary foreign operations are conducted through its Canadian and United Kingdom subsidiaries. The functional currencies of these subsidiaries are Canadian dollars and British pounds, respectively. Fluctuations in exchange rates can impact operating results, including total revenues and expenses, when translations of the subsidiary financial statements are made in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." For the years ended November 30, 2001 and 2000 these subsidiaries accounted for 7.5% and 6.7% of total revenues, respectively, and 3.5% and 2.0% of total assets, respectively. It has not been the Company's practice to hedge its assets and liabilities in Canada and the United Kingdom or its intercompany transactions due to the inherent risks associated with foreign currency hedging transactions and the timing of payment between the Company and its two foreign subsidiaries. Historically, gains or losses from foreign currency transactions have not had a material impact on the Company's operating results. Losses of $7,000 and $20,000 for the years ended November 30, 2001 and 2000, respectively, resulted from foreign currency transactions. See "Foreign Currency Translation" in Note 2 of Notes to Consolidated Financial Statements. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - ----------------------------------------- In April 1998 the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities"("SOP 98-5"). SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. The initial adoption of SOP 98-5 was recorded as the cumulative effect of a change in accounting principle. This one-time charge, net of income tax benefit, was $542,000, or $.06 per diluted share, in the first quarter of fiscal 2000. In September 2000 the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached a final consensus on EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). EITF 00-10 is effective the fourth quarter of 2001 and addresses the income statement classification of amounts charged to customers for shipping and handling, as well as costs incurred related to shipping and handling. The EITF concluded that amounts billed to a customer in a sales transaction related to shipping and handling should be classified as revenue. The 13 EITF also concluded that if costs incurred related to shipping and handling are significant and not included in cost of sales, an entity should disclose both the amount of such costs and the line item on the income statement that includes them. Costs incurred related to shipping and handling included in revenues were required to be reclassified to cost of sales. The Company currently classifies shipping and handling costs as a selling expense. The amount of shipping and handling costs included in selling expense for 2001, 2000 and 1999 was $5,551,000, $7,644,000 and $6,794,000, respectively. The adoption of this pronouncement in 2001 did not have an impact on the results of operations or the financial position of the Company. In November 2000 the EITF finalized EITF Issue No. 00-14, "Accounting for Certain Sales Incentives" ("EITF 00-14"). EITF 00-14 addresses the recognition, measurement and income statement classification for sales incentives offered to customers. Sales incentives include discounts, coupons, rebates, "buy one get one free" promotions and generally any other offers that entitle a customer to receive a reduction in the price of a product or service by submitting a claim for a refund or rebate. Under EITF 00-14 the reduction in or refund of the selling price of the product or service resulting from any cash sales incentives should be classified as a reduction of revenue. Currently, the Company recognizes all sales incentives as an advertising and promotion expense. Although this pronouncement will not have any impact on the results of operations or financial position of the Company, the presentation prescribed will have an effect of reducing net sales and advertising and promotion expense in comparison to prior years. The Company will adopt EITF 00-14 for all periods presented in the first quarter of fiscal 2002. The impact of adopting would have decreased net sales and advertising and promotion expense in 2001, 2000 and 1999 by $5,543,000, $15,215,000 and $11,441,000, respectively. In June 2001 the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The provisions of SFAS 142 permit the Company to discontinue the amortization of the cost of intangible assets with indefinite lives resulting from acquired brands for accounting purposes and require certain fair value based tests of the carrying value of indefinite lived intangible assets. The Company plans to early adopt the provisions of SFAS 142 effective December 1, 2001. The amount of amortization, net of income tax benefit, was $3,455,000, $5,496,000 and $5,882,000 in 2001, 2000 and 1999, respectively. The Company is currently evaluating the potential impairment of these intangible assets. In July 2001 the EITF finalized EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" ("EITF 00-25"). Under the provisions of EITF 00-25 the Company will be required to reclassify certain marketing and selling expenses as reductions of net sales. The results of operations and the financial position of the Company, therefore, will not be affected. The Company will adopt EITF 00-25 for all periods presented in the first quarter of fiscal 2002. The amount of these marketing and selling expenses were $11,591,000, $19,447,000 and $6,423,000 in 2001, 2000 and 1999, respectively. 14 SUBSEQUENT EVENTS - ----------------- On January 22, 2002 Kmart Corporation, a customer of the Company representing approximately 5% of consolidated revenues, filed a petition under Chapter 11 of the United States Bankruptcy Code. At the time of the filing Kmart Corporation owed the Company approximately $1,200,000. The Company is assessing what impact, if any, this bankruptcy filing may have on future operations. This bankruptcy filing did not impact the Company's results of operations and financial position for fiscal 2001. Subsequent to year end, the Company repurchased, and returned to unissued, 44,000 shares of its common stock, without par value, for $630,000 in accordance with the Company's previously announced stock buyback program. FORWARD LOOKING STATEMENTS - -------------------------- The Company may from time to time make written and oral forward-looking statements. Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases and in reports to shareholders. The Private Securities Litigation Reform Act of 1995 contains a safe harbor for forward-looking statements. The Company relies on this safe harbor in making such disclosures. The forward-looking statements are based on management's current beliefs and assumptions about expectations, estimates, strategies and projections for the Company. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. The risks, uncertainties and assumptions regarding forward-looking statements include, but are not limited to, existing and possible future product liability claims relating to the prior existence of PPA in DEXATRIM; the possible effect of the negative public perception resulting from product liability claims on sales of DEXATRIM products with PPA; the lack of availability, limits of coverage and expense related to product liability insurance; the possibility of other product liability claims, including claims relating to the existence of ephedrine in DEXATRIM Natural; the impact of brand acquisitions and divestitures; the impact of extraordinary gains or losses resulting from product acquisitions or divestitures, financings or debt repayments; product demand and market acceptance risks; product development risks, such as delays or difficulties in developing, producing and marketing new products or line extensions; the impact of competitive products, pricing and advertising; constraints resulting from the financial condition of the Company, including the degree to which the Company is leveraged; debt service requirements and restrictions under indentures; government regulations; risks of loss of material customers; public perception regarding the Company's products; dependence on third party manufacturers; environmental matters; and other risks described in the Company's Securities and Exchange Commission filings. 15 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended November 30, -------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- INCOME STATEMENT DATA: NET SALES .......................................... $ 198,300 $ 252,699 $ 298,142 $ 220,064 $ 143,235 OPERATING COSTS AND EXPENSES ....................... 165,122 213,819 225,941 174,845 117,732 ---------- ---------- ---------- ---------- ---------- INCOME FROM OPERATIONS ............................. 33,178 38,880 72,201 45,219 25,503 OTHER EXPENSE, NET ................................. (19,638) (39,181) (35,993) (16,247) (14,640) ---------- ---------- ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY GAIN (LOSS) AND CHANGE IN ACCOUNTING PRINCIPLE ..... 13,540 (301) 36,208 28,972 10,863 PROVISION FOR (BENEFIT FROM) INCOME TAXES .......... 5,145 (104) 13,667 10,844 3,847 ---------- ---------- ---------- ---------- ---------- INCOME (LOSS) BEFORE EXTRAORDINARY GAIN (LOSS) AND CHANGE IN ACCOUNTING PRINCIPLE .......... $ 8,395 $ (197) $ 22,541 $ 18,128 $ 7,016 ========== ========== ========== ========== ========== PER SHARE DATA: INCOME (LOSS) PER DILUTED SHARE BEFORE EXTRAORDINARY GAIN (LOSS) AND CHANGE IN ACCOUNTING PRINCIPLE ..... $ .93 $ (.02) $ 2.25 $ 1.86 $ .77 ========== ========== ========== ========== ========== BALANCE SHEET DATA: (At End of Year) TOTAL ASSETS ....................................... $ 299,673 $ 402,076 $ 491,624 $ 369,012 $ 178,744 ========== ========== ========== ========== ========== LONG-TERM DEBT, less current maturities .............................. $ 204,740 $ 304,077 $ 358,950 $ 273,913 $ 133,475 ========== ========== ========== ========== ==========
16 MARKET PRICES The Company's common shares trade over-the-counter on the National Market System under the NASDAQ symbol CHTT. A quarterly summary of the high and low market prices per common share as reported by NASDAQ is shown below: 2001 2000 ------------------- ------------------- QUARTER ENDED: High Low High Low ------ ----- ------ ----- February ................ 10.000 4.750 23.438 16.250 May ..................... 10.700 7.688 18.875 11.813 August .................. 13.500 8.500 16.000 9.750 November ................ 16.290 9.520 12.313 4.500 Based upon transfer agent records, the Company's common shares were held by approximately 2,500 shareholders as of February 22, 2002. 17 CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2001 AND 2000 (IN THOUSANDS)
ASSETS 2001 2000 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents .................................................. $ 35,445 $ 102,534 Accounts receivable, less allowance for doubtful accounts of $500 in 2001 and $1,025 in 2000 ...................................... 20,860 40,691 Refundable and deferred income taxes ....................................... 4,646 12,401 Inventories ................................................................ 14,260 15,052 Prepaid expenses and other current assets .................................. 2,667 884 ---------- ---------- Total current assets .................................................... 77,878 171,562 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, NET ........................................... 26,275 27,059 ---------- ---------- OTHER NONCURRENT ASSETS: Patents, trademarks and other purchased product rights, net ................ 185,373 191,980 Debt issuance costs, net ................................................... 7,665 8,829 Other ...................................................................... 2,482 2,646 ---------- ---------- Total other noncurrent assets ........................................... 195,520 203,455 ---------- ---------- TOTAL ASSETS ...................................................... $ 299,673 $ 402,076 ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 18 CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2001 AND 2000 (IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 ---------- ---------- CURRENT LIABILITIES: Accounts payable ................................................... $ 9,010 $ 8,790 Payable to bank .................................................... 151 1,529 Accrued liabilities ................................................ 15,138 35,214 ---------- ---------- Total current liabilities ....................................... 24,299 45,533 ---------- ---------- LONG-TERM DEBT ....................................................... 204,740 304,077 ---------- ---------- DEFERRED INCOME TAXES ................................................ 16,251 12,919 ---------- ---------- OTHER NONCURRENT LIABILITIES ......................................... 1,765 1,894 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 4 and 9) SHAREHOLDERS' EQUITY: Preferred shares, without par value, authorized 1,000, none issued ..................................................... -- -- Common shares, without par value, authorized 50,000, issued 8,973 in 2001 and 8,861 in 2000 ................................. 1,868 1,845 Paid-in surplus .................................................... 65,960 64,443 Accumulated deficit ................................................ (11,120) (26,463) ---------- ---------- 56,708 39,825 Unamortized value of restricted common shares issued ............... (859) -- Cumulative other comprehensive income: Foreign currency translation adjustment ......................... (2,231) (2,172) Minimum pension liability adjustment, net of income taxes ....... (1,000) -- ---------- ---------- Total shareholders' equity ...................................... 52,618 37,653 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 299,673 $ 402,076 ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 19 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999 ---------- ---------- ---------- NET SALES ........................................... $ 198,300 $ 252,699 $ 298,142 ---------- ---------- ---------- COSTS AND EXPENSES: Cost of sales ..................................... 52,512 74,957 75,612 Advertising and promotion ......................... 77,964 106,868 117,835 Selling, general and administrative ............... 34,646 31,994 32,494 ---------- ---------- ---------- Total costs and expenses ....................... 165,122 213,819 225,941 ---------- ---------- ---------- INCOME FROM OPERATIONS .............................. 33,178 38,880 72,201 ---------- ---------- ---------- OTHER INCOME (EXPENSE): Interest expense .................................. (21,856) (35,729) (36,572) Investment and other income, net .................. 2,218 1,566 579 Loss on product divestitures ...................... -- (5,018) -- ---------- ---------- ---------- Total other income (expense) ................... (19,638) (39,181) (35,993) ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY GAIN (LOSS) AND CHANGE IN ACCOUNTING PRINCIPLE .... 13,540 (301) 36,208 PROVISION FOR (BENEFIT FROM) INCOME TAXES ........... 5,145 (104) 13,667 ---------- ---------- ---------- INCOME (LOSS) BEFORE EXTRAORDINARY GAIN (LOSS) AND CHANGE IN ACCOUNTING PRINCIPLE ................ 8,395 (197) 22,541 EXTRAORDINARY GAIN (LOSS) ON EARLY EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES ...................... 6,948 (920) (2,385) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAX BENEFIT ......................... -- (542) -- ---------- ---------- ---------- NET INCOME (LOSS) ................................... $ 15,343 $ (1,659) $ 20,156 ========== ========== ========== NUMBER OF COMMON SHARES: Weighted average outstanding - basic .............. 8,927 9,411 9,747 ========== ========== ========== Weighted average and potential dilutive outstanding 9,038 9,411 10,024 ========== ========== ========== NET INCOME (LOSS) PER COMMON SHARE: Basic: Income (loss) before extraordinary gain (loss) and change in accounting principle ........... $ .94 $ (.02) $ 2.31 Extraordinary gain (loss) ...................... .78 (.10) (.24) Change in accounting principle ................. -- (.06) -- ---------- ---------- ---------- Total basic ................................ $ 1.72 $ (.18) $ 2.07 ========== ========== ========== Diluted: Income (loss) before extraordinary gain (loss) and change in accounting principle ........... $ .93 $ (.02) $ 2.25 Extraordinary gain (loss) ...................... .77 (.10) (.24) Change in accounting principle ................. -- (.06) -- ---------- ---------- ---------- Total diluted .............................. $ 1.70 $ (.18) $ 2.01 ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 20 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Unamortized Value of Minimum Restricted Foreign Pension Common Currency Liability Common Paid-in Accumulated Shares Translation Adjustment, Shares Surplus Deficit Issued Adjustment Net Total -------- -------- -------- -------- -------- -------- -------- Balance, November 30, 1998 ................... $ 1,994 $ 69,068 $(44,960) $ -- $ (1,351) $ -- $ 24,751 Net income ................................. -- -- 20,156 -- -- -- 20,156 Stock options exercised .................... 10 1,775 -- -- -- -- 1,785 Stock warrants exercised ................... 26 860 -- -- -- -- 886 Stock repurchases .......................... (36) (3,876) -- -- -- -- (3,912) Issuance of 128,082 common shares in connection with product acquisitions ..... 27 5,023 -- -- -- -- 5,050 Foreign currency translation adjustment .... -- -- -- -- (15) -- (15) -------- -------- -------- -------- -------- -------- -------- Balance, November 30, 1999 ................... 2,021 72,850 (24,804) -- (1,366) -- 48,701 Net loss ................................... -- -- (1,659) -- -- -- (1,659) Stock options exercised .................... 6 847 -- -- -- -- 853 Stock repurchases .......................... (183) (9,306) -- -- -- -- (9,489) Issuance of 3,312 common shares for non-employee directors' compensation ..... 1 52 -- -- -- -- 53 Foreign currency translation adjustment .... -- -- -- -- (806) -- (806) -------- -------- -------- -------- -------- -------- -------- Balance, November 30, 2000 ................... 1,845 64,443 (26,463) -- (2,172) -- 37,653 Net income ................................. -- -- 15,343 -- -- -- 15,343 Stock options exercised .................... 4 678 -- -- -- -- 682 Stock repurchases .......................... (3) (171) -- -- -- -- (174) Issuance of 6,600 common shares for non-employee directors' compensation ..... 1 38 -- -- -- -- 39 Issuance of 100,000 shares of restricted common stock at a weighted average value of $9.93 per share ....................... 21 972 -- (993) -- -- -- Amortization of value of restricted common shares issued ............................ -- -- -- 134 -- -- 134 Foreign currency translation adjustment .... -- -- -- -- (59) -- (59) Minimum pension liability adjustment, net .. -- -- -- -- -- (1,000) (1,000) -------- -------- -------- -------- -------- -------- -------- Balance, November 30, 2001 ................... $ 1,868 $ 65,960 $(11,120) $ (859) $ (2,231) $ (1,000) $ 52,618 ======== ======== ======== ======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 21 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2001 2000 1999 ---------- ---------- ---------- OPERATING ACTIVITIES: Net income (loss) ............................................... $ 15,343 $ (1,659) $ 20,156 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ................................ 10,241 14,943 15,064 Deferred income tax provision (benefit) ...................... 11,362 (5,734) 4,598 Loss on product divestitures ................................. -- 5,018 -- Extraordinary (gain) loss on early extinguishment of debt, net (6,948) 920 2,385 Cumulative effect of change in accounting principle, net ..... -- 542 -- Dividend receivable from Elcat, Inc. ......................... -- -- (279) Stock option charge .......................................... 525 525 525 Other, net ................................................... (61) 15 -- Changes in operating assets and liabilities, net of acquisitions and divestitures: Accounts receivable .................................... 19,831 14,341 (17,428) Inventories ............................................ 792 7,240 (4,683) Prepaid expenses and other current assets .............. (1,793) (1,538) (159) Accounts payable and accrued liabilities ............... (25,562) (8,106) 6,743 ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES ......... 23,730 26,507 26,922 ---------- ---------- ---------- INVESTING ACTIVITIES: Purchases of property, plant and equipment ...................... (1,854) (5,673) (9,830) Purchases of patents, trademarks and other product rights ....... (277) -- (91,127) Proceeds from product divestitures .............................. 1,179 160,000 -- Proceeds from sale of investments ............................... -- -- 3,381 Proceeds from sales of property, plant and equipment ............ 95 11 272 Increase in other assets ........................................ (727) (1,542) (3,200) ---------- ---------- ---------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,584) 152,796 (100,504) ---------- ---------- ---------- FINANCING ACTIVITIES: Repayment of long-term debt ..................................... (83,746) (95,000) (165,481) Proceeds from long-term debt .................................... -- 29,000 242,281 Payment of consent fees and other costs related to repayment of long-term debt ............................................ (4,000) -- -- Change in payable to bank ....................................... (1,378) (3,376) 3,879 Repurchase of common shares ..................................... (174) (9,489) (3,912) Proceeds from exercise of stock options and warrants ............ 119 237 2,104 Debt issuance costs ............................................. -- (363) (5,101) ---------- ---------- ---------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (89,179) (78,991) 73,770 ---------- ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ........ (56) (86) 44 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS: Increase (decrease) for the year ................................ (67,089) 100,226 232 At beginning of year ............................................ 102,534 2,308 2,076 ---------- ---------- ---------- At end of year .................................................. $ 35,445 $ 102,534 $ 2,308 ========== ========== ========== SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of 125,500 shares of common stock at $39.84 per share to fund portion of Thompson Medical brands' acquisition ...... $ -- $ -- $ 5,000 Issuance of 2,582 shares of common stock at $19.365 per share as part of agreement to settle future contingency payments to the former owners of SUNSOURCE ............................... $ -- $ -- $ 50 Additions to trademarks and other product rights by assumption of certain liabilities ....................................... $ -- $ -- $ 1,525 Issuance of 100,000 shares of restricted common stock at a weighted average value of $9.93 per share .................... $ 993 $ -- $ --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE: ALL MONETARY AMOUNTS ARE EXPRESSED IN THOUSANDS OF DOLLARS UNLESS CONTRARILY EVIDENT. (1) NATURE OF OPERATIONS -------------------- Chattem, Inc. and its wholly-owned subsidiaries (the "Company") market and manufacture branded over-the-counter ("OTC") health care products. The products are sold primarily through mass merchandisers, independent and chain drug stores, drug wholesalers and food stores in the United States and in various markets in approximately 50 countries throughout the world. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ BASIS OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Chattem, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. CASH AND CASH EQUIVALENTS The Company considers all short-term deposits and investments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventory costs include materials, labor and factory overhead. Inventories in the United States are valued at the lower of last-in, first-out ("LIFO") cost or market, while international inventories are valued at the lower of first-in, first-out ("FIFO") cost or market. At November 30, 2001 certain LIFO inventory quantities were lower than their respective prior year levels resulting in liquidations of inventory quantities carried at higher costs prevailing in prior years as compared to current year costs. The effect of this liquidation increased cost of sales by $86. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. The Company capitalized interest of $31 and $255 in 2000 and 1999, respectively. Depreciation is computed using the straight-line method over the estimated useful lives of 10 to 40 years for buildings and improvements and 3 to 12 years for machinery and equipment. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation expense for 2001, 2000 and 1999 was $2,618, $2,504 and $1,936, respectively. 23 PATENTS, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS The costs of acquired patents, trademarks and other purchased product rights are capitalized and amortized over periods ranging from 5 to 40 years. At November 30, 2001 the weighted average life of patents, trademarks and other purchased product rights was 32 years. Total accumulated amortization of these assets at November 30, 2001 and 2000 was $28,090 and $24,964, respectively. Amortization expense for 2001, 2000 and 1999 was $5,783, $9,151 and $9,874, respectively. Royalty expense related to other purchased product rights for 2001, 2000 and 1999 was $180, $23, and $498, respectively. Amortization and royalty expense are included in advertising and promotion expense in the accompanying consolidated statements of income. Effective December 1, 2001 the Company will discontinue amortizing the cost of its trademarks having an indefinite useful life in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") issued by the Financial Accounting Standards Board ("FASB"). See "Recent Accounting Pronouncements" of this footnote. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining useful life of long-lived assets might warrant revision or that the remaining balance may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the future undiscounted net cash flows of the related assets over the remaining lives of the assets in measuring whether long-lived assets are recoverable. In connection with the Company's sale of Norwich Aspirin in fiscal 2001, the Company determined an impairment had occurred in fiscal 2000, resulting in a charge of $810 in that year. DEBT ISSUANCE COSTS The Company has incurred debt issuance costs in connection with its long-term debt. These costs are capitalized and amortized over the term of the related debt. Amortization expense related to debt issuance costs was $1,143, $1,565 and $1,556 in 2001, 2000 and 1999, respectively. Accumulated amortization of these costs was $3,104 and $3,674 at November 30, 2001 and 2000, respectively. PAYABLE TO BANK Payable to bank includes checks outstanding in excess of certain cash balances. REVENUE RECOGNITION Revenue is recognized when the Company's products are shipped to its customers. It is the Company's policy across all classes of customers that all sales are final. As is common in the consumer products industry, product is returned by the customer due to a number of reasons. Examples include product damaged in transit, discontinuance of a particular size or form of product, shipping error, etc. The Company maintains and evaluates an allowance for returns and will record a return upon receipt of the product or deduction by the customer. 24 RESEARCH AND DEVELOPMENT Research and development costs relate primarily to the development of new products and are expensed as incurred. Such expenses were $1,664, $1,901, and $1,839 in 2001, 2000 and 1999, respectively. ADVERTISING EXPENSES The cost of advertising is expensed in the fiscal year in which the related advertising takes place. Production and communication costs are expensed in the period in which the related advertising begins running. Advertising expense for 2001, 2000 and 1999 was $40,516, $46,028, and $54,764, respectively. At November 30, 2001 and 2000, the Company reported $857 and $669, respectively, of advertising paid for in 2001 and 2000 which will run or did run in the next fiscal year. These amounts are included in other noncurrent assets in the accompanying consolidated balance sheets. NET INCOME PER COMMON SHARE For the years ended November 30, 2001, 2000 and 1999 the weighted average and potential dilutive number of common shares outstanding consisted of the following (in thousands): 2001 2000 1999 ------ ------ ------ Weighted average common shares outstanding 8,927 9,411 9,747 Potential dilutive shares from: Stock options ......................... 95 -- 277 Restricted common shares .............. 16 -- -- ------ ------ ------ Weighted average and potential dilutive common shares outstanding (1) .......... 9,038 9,411 10,024 ====== ====== ====== (1) Because their effects are anti-dilutive, excludes shares issuable under stock option plans whose grant price was greater than the average market price of common shares outstanding as follows: 480 shares in 2001 and 135 shares in 1999. Due to the net loss sustained in 2000, the impact of stock options outstanding were antidilutive in that year. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's Canadian and United Kingdom subsidiaries are translated to United States dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated as a separate component of shareholders' equity. Gains and losses which result from foreign currency transactions are included in the accompanying consolidated statements of income. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 25 DERIVATIVE FINANCIAL INSTRUMENTS The Company has entered into interest rate swap agreements from time to time as a means of managing its interest rate exposure and not for trading purposes. These agreements have the effect of converting a portion of the Company's variable rate obligations to fixed rate obligations. Net amounts paid or received are reflected as adjustments to interest expense. The Company was not a party to any interest rate swap agreements at November 30, 2001 and 2000. On December 1, 2001 the Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Transactions", which had no effect on the results of operations and financial position of the Company in fiscal 2001. CONCENTRATIONS OF CREDIT RISK Financial instruments which subject the Company to concentrations of credit risk consist primarily of accounts receivable and short-term cash investments. The Company's exposure to credit risk associated with nonpayment of accounts receivable is affected by conditions or occurrences within the retail industry. As a result, the Company performs ongoing credit evaluations of its customers' financial position but generally requires no collateral from its customers. The Company's largest customer accounted for 26%, 24% and 19% of sales in 2001, 2000 and 1999, respectively. No other customer exceeded 10% of the Company's sales in 2001, 2000 or 1999. Short-term cash investments are placed with high credit-quality financial institutions or in low risk, liquid instruments. No losses have been experienced on such investments. On January 22, 2002 Kmart Corporation, a customer of the Company representing approximately 5% of consolidated revenues, filed a petition under Chapter 11 of the United States Bankruptcy Code. This bankruptcy filing did not impact the Company's results of operations and financial position for fiscal 2001. RECENT ACCOUNTING PRONOUNCEMENTS In April 1998 the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities"("SOP 98-5"). SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. The initial adoption of SOP 98-5 was recorded as the cumulative effect of a change in accounting principle. This one-time charge, net of income tax benefit, was $542, or $.06 per diluted share, in the first quarter of fiscal 2000. In September 2000 the Emerging Issues Task Force ("EITF") of the FASB reached a final consensus on EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). EITF 00-10 is effective the fourth quarter of 2001 and addresses the income statement classification of amounts charged to customers for shipping and handling, as well as costs incurred related to shipping and handling. The EITF concluded that amounts billed to a customer in a sale transaction related to shipping and handling should be classified as revenue. The EITF also concluded that if costs incurred related to shipping and handling are significant and not included in cost of sales, an entity should disclose both the amount of such costs and the line item on the income statement that includes them. Costs incurred related to shipping and handling included in revenues were required to be reclassified to cost of sales. The Company currently classifies shipping and handling costs as a selling expense. The amount of shipping and handling costs included in selling expense for 2001, 2000 and 1999 was $5,551, $7,644 and $6,794, respectively. The adoption of this pronouncement in 2001 did not have an impact on the results of operations or the financial position of the Company. 26 In November 2000 the EITF finalized EITF Issue No. 00-14, "Accounting for Certain Sales Incentives" ("EITF 00-14"). EITF 00-14 addresses the recognition, measurement and income statement classification for sales incentives offered to customers. Sales incentives include discounts, coupons, rebates, "buy one get one free" promotions and generally any other offers that entitle a customer to receive a reduction in the price of a product or service by submitting a claim for a refund or rebate. Under EITF 00-14, the reduction in or refund of the selling price of the product or service resulting from any cash sales incentives should be classified as a reduction of revenue. Currently, the Company recognizes all sales incentives as an advertising and promotion expense. Although this pronouncement will not have any impact on the results of operations or financial position of the Company, the presentation prescribed will have an effect of reducing net sales and advertising and promotion expense in comparison to prior years. The Company will adopt EITF 00-14 for all periods presented in the first quarter of fiscal 2002. The impact of adopting would have decreased net sales and advertising and promotion expense in 2001, 2000 and 1999 by $5,543, $15,215 and $11,441, respectively. In June 2001 the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The provisions of SFAS 142 permit the Company to discontinue the amortization of the cost of intangible assets with indefinite lives resulting from acquired brands for accounting purposes and require certain fair value based tests of the carrying value of indefinite lived intangible assets. The Company plans to early adopt the provisions of SFAS 142 effective December 1, 2001. The amount of amortization, net of income tax benefit, was $3,455, $5,496 and $5,882 in 2001, 2000 and 1999, respectively. The Company is currently evaluating the potential impairment of these intangible assets. In July 2001 the EITF finalized EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" ("EITF 00-25"). Under the provisions of EITF 00-25 the Company will be required to reclassify certain marketing and selling expenses as reductions of net sales. The results of operations and the financial position of the Company, therefore, will not be affected. The Company will adopt EITF 00-25 for all periods presented in the first quarter of fiscal 2002. The amount of these marketing and selling expenses were $11,591, $19,447 and $6,423 in 2001, 2000 and 1999, respectively. STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Effective fiscal 1997, the Company adopted the disclosure option of SFAS No. 123, "Accounting for Stock-Based Compensation". RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current period's presentation. (3) PENSION PLANS ------------- The Company has 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. The Company's contributions are based on computations by independent actuaries. Plan assets at November 30, 2001 and 2000 were invested primarily in United States government and agency securities and corporate debt and equity securities. In October 2000 the Company's 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. This action by the board of directors resulted in a curtailment gain (loss) of $(179) and $1,912 in 2001 and 2000, respectively. 27 Net periodic pension cost for the years ended November 30, 2001, 2000 and 1999 included the following components:
2001 2000 1999 -------- -------- -------- Service cost (benefits earned during the period) $ -- $ 789 $ 834 Interest cost on projected benefit obligation .. 549 794 747 Actual (return) loss on plan assets ............ (1,018) (325) 1,528 Net amortization and deferral .................. 425 (337) (2,558) Curtailment (gain) loss ........................ 179 (1,912) -- -------- -------- -------- Net pension cost (benefit) ..................... $ 135 $ (991) $ 551 ======== ======== ========
The change in the projected benefit obligation resulted from the following components for the years ended November 30, 2001 and 2000: 2001 2000 -------- -------- Projected benefit obligation, beginning of year $ 6,446 $ 10,063 Service cost ................................... -- 789 Interest cost .................................. 549 794 Actuarial loss ................................. 1,987 355 Benefits paid .................................. (1,040) (1,327) Settlements .................................... 253 -- Curtailment of benefits ........................ -- (4,228) -------- -------- Projected benefit obligation, end of year ...... $ 8,195 $ 6,446 ======== ======== The change in plan assets resulted from the following components for the years ended November 30, 2001 and 2000: 2001 2000 -------- -------- Fair value of plan assets, beginning of year $ 6,957 $ 7,659 Actual return on plan assets ................... 1,018 325 Employer contribution .......................... 886 300 Benefits paid .................................. (1,040) (1,327) -------- -------- Fair value of plan assets, end of year ......... $ 7,821 $ 6,957 ======== ======== The following table sets forth the funded status of the Plan as of November 30, 2001 and 2000: 2001 2000 -------- -------- Plan assets at fair market value ............... $ 7,821 $ 6,957 Projected benefit obligation ................... (8,195) (6,446) -------- -------- Plan assets greater (less) than projected benefit obligation ........................... (374) 511 Unrecognized net loss .......................... 1,636 -- Minimum pension liability adjustment ........... (1,636) -- -------- -------- Pension asset (liability) recognized in balance sheets at end of year ................ $ (374) $ 511 ======== ======== The discount rate used in determining the actuarial present value of the projected benefit obligation was 7% and 8% in 2001 and 2000, respectively. The expected long-term rate of return on plan assets was 9% in both 2001 and 2000. 28 The Company has a defined contribution plan covering substantially all employees. Eligible participants can contribute up to 15% of their annual compensation and receive a 25% matching employer contribution up to 6% of their annual compensation. The defined contribution plan expense was $180, $171 and $198 in 2001, 2000 and 1999, respectively. In fiscal 2001 the Company enhanced its savings investment plan to include an additional 3% employer contribution made on behalf of eligible participants. This employer contribution expense was $492 in 2001. (4) LONG-TERM DEBT -------------- Long-term debt consisted of the following at November 30, 2001 and 2000: 2001 2000 --------- --------- 8.875% Senior Subordinated Notes due 2008, plus unamortized premium of $202 for 2001 and $233 for 2000..................................... $ 204,740 $ 275,233 12.75% Senior Subordinated Notes due 2004, net of unamortized discount of $301.............. -- 28,844 --------- --------- Total long-term debt ........................... $ 204,740 $ 304,077 ========= ========= On January 17, 2001 the Company completed the consent solicitation and tender offer pursuant to which it retired $70,462 principal amount of its 8.875% Senior Subordinated Notes due 2008 (the "8.875% Notes") and $7,397 principal amount of its 12.75% Senior Subordinated Notes due 2004 (the "12.75% Notes"). Total consideration paid for the consent solicitation and tender offer was $64,937, which was provided by the proceeds of the Company's divestiture of the Ban product line in fiscal 2000 (Note 11). On June 15, 2001 the Company retired all of the remaining outstanding principal balance of $21,748 of the 12.75% Notes. On March 24, 1998 the Company issued at par value $200,000 of the 8.875% Notes. The proceeds of the note offering were used to fund the Ban purchase (Note 11), repay revolving bank indebtedness and provide additional working capital. On May 7, 1999 the Company issued an additional $75,000 of its 8.875% (priced to yield 8.8125%) Notes under its indenture relating to the issuance of its $200,000 of 8.875% Notes on March 24, 1998. The additional notes were issued under the Company's $250,000 shelf registration statement filed on December 21, 1998 with the Securities and Exchange Commission. The net proceeds from the issuance of the additional notes were used to retire $41,500 of the then outstanding balance of the Company's $115,000 term bank loan and the outstanding balance of $25,500 of its revolving bank loan. The 8.875% Notes mature on April 1, 2008 and interest is payable semi-annually on April 1 and October 1 of each year. The 8.875% Notes are senior subordinated obligations of the Company and are subordinated in right of payment to all existing and future senior debt of the Company. The 8.875% Notes, which were registered under the Securities Act of 1933, are not callable until April 1, 2003, after which they may be redeemed at the option of the Company. Upon the occurrence of certain events constituting a change of control, the holders of the 8.875% Notes may require the Company to repurchase the 8.875% Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest. The 8.875% Notes are guaranteed by Signal Investment & Management Co., a wholly-owned subsidiary of the Company. 29 The 8.875% Notes are issued under an indenture with an indenture trustee, which restricts, among other things, the ability of the Company and its subsidiaries to (i) incur additional indebtedness, (ii) pay dividends, (iii) sell or issue capital stock of a subsidiary, (iv) create encumbrances on the ability of any subsidiary to pay dividends or make other restricted payments, (v) engage in certain transactions with affiliates, (vi) dispose of certain assets, (vii) merge or consolidate with or into, or sell or otherwise transfer all or substantially all their properties and assets as an entirety to another person, or (viii) create additional liens. In 1994 the Company issued $75,000 of the 12.75% Notes with five year warrants to purchase 417,182 shares of common stock (the "Warrants"). The right to exercise the Warrants expired on August 16, 1999. The proceeds of the 12.75% Notes were used to repay amounts outstanding under a prior credit agreement. The remaining principal balance of these notes was retired in 2001. On June 21, 2001 the Company obtained a $10,000 unsecured revolving line of credit from a financial institution. As of November 30, 2001 no portion of this credit facility had been utilized by the Company. During 2001, 2000 and 1999 the Company prepaid previously outstanding long-term debt with funds received from refinancings, the sales of Ban and Cornsilk (Note 11), cash from operations, the redemption of the Elcat Preferred Shares and the issuance of the 8.875% Notes. In connection with the repayment of those borrowings, the Company incurred extraordinary gains (losses), net of income tax, in 2001, 2000 and 1999 of $6,948, $(920) and $(2,385), respectively, or $.77, $(.10) and $(.24) per diluted share, respectively. The gain and these losses related to the write-off of debt issuance and other deferred financing costs and the discounts taken and premiums paid on the retirement of the 8.875% and 12.75% Notes. Future maturities of long-term debt are as follows: 2002 .................................... $ -- 2003 .................................... -- 2004 .................................... -- 2005 .................................... -- 2006 .................................... -- Thereafter .............................. 204,538 ---------- 204,538 Unamortized premium ..................... 202 ---------- $ 204,740 ========== Cash interest payments during 2001, 2000 and 1999 were $23,408, $33,596 and $34,822, respectively, net of $31 and $255 capitalized in 2000 and 1999, respectively. (5) DERIVATIVE FINANCIAL INSTRUMENTS -------------------------------- On July 21, 1997 the Company entered into two interest rate swap agreements with a financial institution in notional amounts of $40,000 and $5,000. The Company entered into these agreements as hedges on its variable rate debt and not for trading purposes. The swaps were scheduled to expire July 22, 2002. In connection with the May 1999 refinancing of its long-term debt, the Company terminated these agreements, which resulted in a $1,155 loss. This loss was deferred by the Company and was being written off as interest expense over the original life of the swaps. In connection with the September 2000 retirement of the underlying variable rate debt, the Company wrote off the unamortized portion of the loss to interest expense. The amounts of this loss charged to interest expense in 2000 and 1999 were $942 and $213, respectively. 30 (6) FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- Unless otherwise indicated elsewhere in the notes to the consolidated financial statements, the carrying value of the Company's financial instruments approximates fair value. At November 30, 2001 the carrying value of the 8.875% Notes exceeded their estimated fair value by approximately $10,429. The fair value was estimated based on quoted market prices for the same or similar issues. (7) INCOME TAXES ------------ The provision for (benefit from) income taxes from income (loss) before extraordinary gain (loss) and change in accounting principle includes the following components for the years ending November 30, 2001, 2000 and 1999: 2001 2000 1999 -------- -------- -------- Current: Federal ...................... $ (5,534) $ 5,053 $ 8,115 State ........................ (683) 577 954 Deferred ........................ 11,362 (5,734) 4,598 -------- -------- -------- $ 5,145 $ (104) $ 13,667 ======== ======== ======== Deferred income tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting and income tax reporting purposes. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities at November 30, 2001 and 2000 are as follows: 2001 2000 -------- -------- Deferred tax assets: Allowances and accruals ....................... $ 235 $ 1,049 Inventory reserve ............................. 365 1,890 Accrued promotional expenses .................. 438 2,783 Allowance for product returns ................. 765 4,382 Accrued postretirement health care benefits ... 612 596 Other ......................................... 1,628 2,016 -------- -------- Gross deferred tax assets .................. 4,043 12,716 -------- -------- Deferred tax liabilities: Depreciation and amortization ................. 16,474 14,512 Prepaid advertising ........................... 315 261 Inventory ..................................... 195 196 Other ......................................... 1,062 388 -------- -------- Gross deferred tax liabilities ............. 18,046 15,357 -------- -------- Net deferred liability ................. $ 14,003 $ 2,641 ======== ======== The decrease in deferred tax assets from 2000 to 2001 relates primarily to the reduction of certain liabilities related to DEXATRIM, SUNSOURCE and Ban products from 2000 to 2001. 31 The difference between the provision for (benefit from) income taxes and the amount computed by multiplying income (loss) before income taxes, extraordinary gain (loss) and change in accounting principle by the United States statutory rate for the years ended November 30, 2001, 2000 and 1999 is summarized as follows: 2001 2000 1999 ------- ------- ------- Expected tax provision (benefit) .... $ 4,739 $ (105) $12,673 Dividend exclusion benefit .......... -- -- (69) State income taxes, net of federal income tax benefit .............. 696 (11) 1,327 Other, net .......................... (290) 12 (264) ------- ------- ------- $ 5,145 $ (104) $13,667 ======= ======= ======= Income taxes paid in 2001, 2000 and 1999 were $1,261, $9,119 and $8,179, respectively. The Company received income tax refunds of $4,747 and $23 during 2001 and 1999, respectively. (8) SHAREHOLDERS' EQUITY -------------------- STOCK OPTIONS The Company's 1993 Non-Statutory Stock Option Plan provides for issuance of up to 350,000 shares of common stock to key employees. In addition, the Company's 1994 Non-Statutory Stock Option Plan and the 1994 Non-Statutory Stock Option Plan for Non-Employee Directors provide for the issuance of up to 350,000 and 80,000 shares, respectively, of common stock. The Company's 1998 Non-Statutory Stock Option Plan provides for issuance of up to 700,000 shares of common stock to key employees, while the 1999 Non-Statutory Stock Option Plan for Non-Employee Directors allows issuance of up to 100,000 shares of common stock. The 2000 Non-Statutory Stock Option Plan provides for the issuance of up to 750,000 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 No. 123 purposes, 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 2001, 2000 and 1999: expected dividend yield of 0%, expected volatility of 65%, 57% and 58%, risk-free interest rates of 4.40%, 6.41% and 4.81% 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 No. 123, the Company's net income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts for the years ended November 30, 2001, 2000 and 1999 as indicated below: 32 2001 2000 1999 -------- -------- -------- Net income (loss): As reported ...................... $ 15,343 $ (1,659) $ 20,156 Pro forma ........................ $ 13,573 $ (2,456) $ 18,980 Net income (loss) per share, basic: As reported....................... $ 1.72 $ (.18) $ 2.07 Pro forma......................... $ 1.52 $ (.26) $ 1.95 Net income (loss) per share, diluted: As reported ...................... $ 1.70 $ (.18) $ 2.01 Pro forma ........................ $ 1.50 $ (.26) $ 1.89 A summary of the activity of stock options during 2001, 2000 and 1999 is presented below (shares in thousands):
2001 2000 1999 ----------------- ----------------- ----------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average Under Exercise Under Exercise Under Exercise Option Price Option Price Option Price ------ ------ ------ ------ ------ ------ Outstanding at beginning of year ............. 768 $12.50 849 $15.92 762 $11.17 Granted ................................... 822 9.96 674 18.45 136 39.38 Exercised ................................. (20) 10.94 (27) 8.65 (46) 7.50 Cancelled ................................. (94) 17.33 (728) 22.14 (3) 14.71 ------ ------ ------ Outstanding at end of year ................... 1,476 $10.85 768 $12.50 849 $15.92 ====== ====== ====== ====== ====== ====== Options exercisable at year-end .............. 508 $11.30 484 $11.50 239 $10.24 ====== ====== ====== ====== ====== ====== Weighted average fair value of options granted $ 7.74 $11.13 $23.25 ====== ====== ======
Compensation expense for stock option grants with exercise prices below the market price at the date of grant is recognized ratably over the vesting period. In 1998 options were granted to purchase 175,000 shares, which were at market price on the date of approval by the board of directors but at prices below the market price on the date of shareholder approval. Compensation expense recorded for this grant was $525 in each of the fiscal years 2001, 2000 and 1999, respectively. 33 A summary of the exercise prices for options outstanding under the Company's stock-based compensation plans at November 30, 2001 is presented below (shares in thousands):
Weighted Average Shares Weighted Average Exercise Price Exercise Under Weighted Average Remaining Shares of Shares Price Range Option Exercise Price Life in Years Exercisable Exercisable - --------------- -------- ---------------- ------------- ----------- ----------- $ 4.63 - $ 7.95 103 $ 5.00 4.40 92 $ 4.91 $ 7.96 - $11.93 893 9.68 8.71 102 8.40 $11.94 - $15.92 463 13.76 6.48 308 13.72 $15.93 - $19.90 6 18.81 8.02 -- -- $19.91 - $27.86 1 26.00 6.35 1 26.00 $27.87 - $39.81 10 36.25 7.38 5 36.25 - --------------- -------- ------------ Total 1,476 $ 10.85 7.69 508 $ 11.30 ======== ================ ============= ============ ===========
PREFERRED SHARES The Company is authorized to issue up to 1,000,000 preferred shares in series and with rights established by the board of directors. At November 30, 2001 and 2000 no shares of any series of preferred stock were issued and outstanding. EMPLOYEE STOCK OWNERSHIP PLAN Effective June 1, 1989 the Company established an Employee Stock Ownership Plan providing for the issuance of up to 360,000 shares of the Company's common stock. At November 30, 2001 no contributions had been made to the plan. STOCK BUYBACK In 1999 the Company's board of directors authorized repurchases of the Company's common stock, not to exceed $10,000 in the aggregate. In April 2000 the Company's board of directors authorized repurchases of up to an additional $10,000 of the Company's common stock. Under these authorizations, 172,500 shares at a cost of $3,912 were reacquired in 1999, 876,500 shares at a cost of $9,489 were repurchased in 2000 and 14,000 shares at a cost of $174 were reacquired in 2001. The repurchased shares were retired and returned to unissued. As of November 30, 2001 $6,425 was available for share repurchases under the board of directors current authorization; however, the Company is limited in its ability to repurchase shares by restrictions under the terms of the indenture with respect to which its 8.875% Notes were issued. SHAREHOLDER RIGHTS PLAN On January 26, 2000 the Company's board of directors adopted a Shareholder Rights Plan. Under the plan, rights were constructively distributed as a dividend at the rate of one right for each share of common stock, without par value, of the Company held by shareholders of record as of the close of business on February 11, 2000. Each right initially will entitle shareholders to buy one one-hundredth of a share of a new Series A Junior Participating Preferred Stock at an exercise price to $90.00 per right, subject to adjustment. The rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's common stock. The rights will expire on February 11, 2010. As of November 30, 2001 no rights had been exercised. 34 RESTRICTED STOCK ISSUANCE In 2001 the Company issued 100,000 restricted shares of its common stock to certain employees. The value of these shares at dates of issuance was an aggregate of $993, which is being amortized using the straight-line method over a four year period. The amount of amortization was $134 in 2001, with the unamortized value of $859 being shown as part of comprehensive income in the shareholders' equity section of the November 30, 2001 consolidated balance sheet. These shares reduced the number of shares available for issuance under the Company's 1998 Non-Statutory Stock Option Plan. (9) COMMITMENTS AND CONTINGENCIES ----------------------------- GENERAL LITIGATION The Company has been named as a defendant in a lawsuit brought by the Center for Environment Health ("CEH") contending that the Company violated the California Safe Drinking Water and Toxic Enforcement Act of 1998 (Proposition 65) by selling to California consumers without a warning topical skin care products containing zinc oxide which in turn contains lead. The lawsuit contends that the purported failure to comply with Proposition 65 requirements also constitutes a violation of the California Business & Professions Code Section 1700 et seq. Violations of either Proposition 65 or Business and Professions Code 1700 et seq. render a defendant liable for civil penalties of up to $2.5 per day per violation. The Company has also been named as a defendant in a lawsuit filed in San Francisco Superior Court on December 29, 1999, JOHNSON et al. v. BRISTOL-MYERS SQUIBB CO., et al., Case No. 308872. This is a putative class action brought by two named plaintiffs on behalf of the general public in California, against the same entities that are defendants in the CEH lawsuit. As with the CEH lawsuit, the Johnson lawsuit alleges that the Company violated Proposition 65 by selling to California consumers without a warning topical skin care products containing zinc oxide which in turn contains lead. The lawsuit does not assert claims directly under Proposition 65, but asserts that the alleged failure to comply with Proposition 65 gives rise to claims under California's Business and Professions Code Section 17200 et seq., 17500 et seq., and the Civil Code Section 1750 et seq. The lawsuit seeks injunctive and equitable relief, restitution, the disgorgement of allegedly wrongfully obtained revenues and damages. The plaintiffs in the two separate actions have filed a consolidated amended complaint that includes a claim based upon the allegation that zinc oxide allegedly also contains cadmium. As of February 22, 2002 a tentative settlement has been reached for these two cases. The Company has been named as a defendant in approximately 115 lawsuits alleging that the plaintiffs were injured as a result of ingestion of products containing phenylpropanoline ("PPA"), which until November 2000 was the active ingredient in certain of the Company's DEXATRIM products. Most of the lawsuits seek an unspecified amount of compensatory and exemplary damages. Approximately 40% of these suits represent cases in which the Company is being defended and indemnified from liability by The DELACO Company, Inc., successor to Thompson Medical Company, Inc. ("Thompson Medical") from which the Company acquired DEXATRIM in December 1998. The Company maintains product liability insurance coverage for claims asserted in the lawsuits, although there can be no assurance that such coverage will be sufficient to satisfy such claims. The Company anticipates that additional lawsuits in which similar allegations are made could be filed. 35 The Company intends to vigorously defend these claims. At this stage of the proceedings, it is not possible to determine the outcome of these matters or the effect of their resolution on the Company's financial position or operating results. Management believes that the Company's defenses will have merit; however, there can be no assurance that the Company will be successful in its defense or that these lawsuits will not have a material adverse effect on the Company's results of operations for some period or on the Company's financial position. Other claims, suits and complaints arise in the ordinary course of the Company's business involving such matters as patents and trademarks, product liability, environmental matters and other alleged injuries or damage. The outcome of such litigation cannot be predicted, but, in the opinion of management, based in part upon the opinion of counsel, all such pending matters are without merit or are of such kind or involve such amounts as would not have a material adverse effect on the consolidated operating results or financial position of the Company if disposed of unfavorably. REGULATORY In 1994 the Nonprescription Drug Manufacturers Association (now the Consumer Healthcare Products Association) ("CHPA") initiated a large-scale study in conjunction with the Yale University School of Medicine to investigate a possible association, if any, of stroke in women aged 18 to 49 using PPA which, until November 2000, was the active ingredient in certain of the DEXATRIM products (the "Yale Study"). PPA is also used in other over-the-counter medications which were also part of the Yale Study. In May 2000, the results of the Yale Study were filed with the Food and Drug Administration ("FDA"). The investigators concluded that the results of the Yale Study suggest that PPA increases the risks of hemorrhagic stroke. The FDA indicated at that time that no immediate action was required and scheduled an FDA advisory panel to meet in October 2000 to discuss the results of the study. The CHPA has questioned the execution of the Yale Study and disagreed with its conclusions. On October 19, 2000 a Nonprescription Drugs Advisory Committee ("NDAC"), commissioned by the FDA to review the safety of PPA, determined that there is an association between PPA and hemorrhagic stroke and recommended that PPA not be considered generally recognized as safe for OTC use as a nasal decongestant or for weight control. In response to a request from the FDA to voluntarily cease marketing DEXATRIM with PPA, the Company announced on November 7, 2000 its decision to immediately cease shipping DEXATRIM with PPA and to accept product returns from any retailers who decide to discontinue marketing DEXATRIM with PPA. To date, the FDA has not issued any final determinations concerning PPA or products containing PPA. Certain countries, states and localities have enacted, or are considering enacting, restrictions on the sale of products that contain synthetic ephedrine or naturally-occurring sources of ephedrine. 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 such countries, states or localities these restrictions could adversely affect the sale of DEXATRIM Natural, which contains naturally occurring sources of ephedrine. Failure to comply with these restrictions could also lead to regulatory enforcement action, including the seizure of violative products, product recalls, civil or criminal fines or other penalties. The enactment of these restrictions, the perceived safety concerns to ephedrine and the possibility of further regulatory action increases the likelihood that claims relating to the existence of naturally-occurring sources of ephedrine in DEXATRIM Natural will be filed against the Company. In late 2000 the FDA requested the National Institutes of 36 Health to commission a review of the safety and efficacy of ephedrine in herbal products used to control weight. This review is assumed to be retrospective in nature and will be based on all adverse events, records and scientific data available to the reviewers. It is expected that the report will be issued in early Fall of 2002. On September 5, 2001 The Public Citizens Health Research Group petitioned the FDA to ban the production and sale of dietary supplements containing ephedrine alkaloids. As of November 30, 2001 the FDA had taken no action with regard to this petition. The Company was notified in October 2000 that the FDA denied a citizen petition submitted by Thompson Medical, the previous owner of SPORTSCREME and ASPERCREME, seeking a determination that 10% trolamine salicylate was clinically proven to be an effective active ingredient in external analgesic OTC drug products, and thus should be included in the FDA's yet-to-be finalized monograph for external analgesics. The Company has met with the FDA and submitted a proposed protocol study to evaluate the efficacy of 10% trolamine salicylate as an active ingredient in OTC external analgesic drug products. Based on comments received from the FDA at the meeting, the Company may revise and resubmit the protocol. After final comments from the FDA, the Company expects that it will take one or two years to produce the clinical data for FDA review. Although unlikely, the FDA could finalize the OTC external analgesic monograph before the protocol and clinical data results are finalized, which would place 10% trolamine salicylate in non-monograph status, thus requiring the submission of a new drug application to market and sell OTC products with 10% trolamine salicylate. The Company is working to develop alternate formulations for SPORTSCREME and ASPERCREME in the event that the FDA does not consider the available clinical data to conclusively demonstrate the efficacy of trolamine salicylate when the OTC external analgesic monograph is finalized. The Company is also reviewing the option of marketing SPORTSCREME and ASPERCREME as homeopathic products. LEASES The minimum rental commitments under all noncancelable operating leases, primarily real estate, in effect at November 30, 2001 are as follows: 2002.................................. $ 298 2003.................................. 296 2004.................................. 197 2005.................................. 187 2006.................................. 187 Thereafter............................ 1,451 ------- $ 2,616 ======= Rental expense was $1,442, $1,802 and $1,791 for 2001, 2000 and 1999, respectively. (10) SUPPLEMENTAL FINANCIAL INFORMATION ---------------------------------- Inventories consisted of the following at November 30, 2001 and 2000: 2001 2000 -------- -------- Raw materials and work in process ............ $ 8,108 $ 6,793 Finished goods ............................... 8,191 10,247 Excess of current cost over LIFO value ....... (2,039) (1,988) -------- -------- Total inventories ......................... $ 14,260 $ 15,052 ======== ======== International inventories included above, valued on a lower of FIFO cost or market at November 30, 2001 and 2000 were $2,279 and $2,670, respectively. 37 Property, plant and equipment consisted of the following at November 30, 2001 and 2000: 2001 2000 -------- -------- Land .............................................. $ 879 $ 879 Buildings and improvements ........................ 5,707 5,326 Machinery and equipment ........................... 44,043 42,603 Construction in progress........................... 286 272 Less - accumulated depreciation ................... (24,640) (22,021) -------- -------- Property, plant and equipment, net .............. $ 26,275 $ 27,059 ======== ======== Accrued liabilities consisted of the following at November 30, 2001 and 2000: 2001 2000 -------- -------- Interest........................................... $ 3,070 $ 5,810 Salaries, wages and commissions ................... 3,462 1,103 Product advertising and promotion.................. 3,654 7,663 Product acquisitions and divestitures.............. 2,205 10,413 Allowances for product returns..................... 255 9,600 Taxes.............................................. 290 (491) Pension............................................ 374 (511) Legal fees......................................... 281 -- Insurance.......................................... 842 754 Other.............................................. 705 873 -------- -------- Total accrued liabilities........................ $ 15,138 $ 35,214 ======== ======== (11) ACQUISITION AND SALE OF BRANDS ------------------------------ On September 15, 2000 the Company completed the sale of its Ban product line to The Andrew Jergens Company, a wholly-owned subsidiary of Kao Corporation. Under the terms of the sales agreement, the Company received $160,000 cash at closing, plus the right to receive up to an additional $6,500 in future payments based upon levels of sales of Ban in 2001 and 2002. The Company recognized a loss of $4,208 on the divestiture. Concurrent with the closing of the sale of Ban the Company used $52,194 of the net proceeds to retire all of the outstanding balances of the revolving line of credit and term loans and accrued interest thereon, with the balance of the net proceeds being retained by the Company. On March 24, 1998 the Company acquired the Ban line of antiperspirant and deodorant products from Bristol-Myers Squibb Company for a purchase price of approximately $165,000 and assumed liabilities of $8,000. The Company acquired the Ban trademarks, formulae, certain patents pertaining to antiperspirant/deodorant technology, technical information, inventory, manufacturing equipment and packaging related assets used in the manufacture of Ban, but not the right to sell Ban in Japan. The purchase price of $173,000 was allocated $8,200 to inventory and $164,800 to trademarks and other product rights which were assigned a useful life of 40 years. On December 21, 1998 the Company acquired the DEXATRIM, SPORTSCREME, ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands (the "Thompson Medical brands") from Thompson Medical Company, Inc. for $95,000. The purchase price consisted of $90,000 cash and 125,500 shares of the Company's common stock. The cash portion of the purchase price was financed by a new senior credit facility. The purchase price of $95,000 was allocated $3,493 to inventory and $91,507 to trademarks and other product rights which were assigned a useful life of 40 years. 38 The following unaudited consolidated pro forma information assumes the acquisition of the Thompson Medical brands and the divestiture of Ban and related long-term borrowings and repayment thereof had occurred on December 1, 1998: PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED) 2000 1999 -------- -------- Net sales ................................ $191,256 $215,945 Income (loss) before extraordinary loss and change in accounting principle ..... (5,610) 9,632 Net income (loss) ........................ (7,072) 7,247 Earnings (loss) per share - basic: Income (loss) before extraordinary loss and change in accounting principle...... (.60) .99 Net income (loss) ........................ (.75) .74 Earnings (loss) per share - diluted: Income (loss) before extraordinary loss and change in accounting principle...... (.60) .96 Net income (loss) ...................... (.75) .72 The pro forma consolidated results of operations include adjustments to give effect to amortization of intangible assets, interest expense on acquisition debt or repayment thereof and certain other adjustments, together with related income tax effects. The pro forma information is for comparative purposes only and does not purport to be indicative of the results that would have occurred had the acquisition, disposition and borrowings occurred at the beginning of the periods presented, or indicative of the results that may occur in the future. On June 26, 1997 the Company purchased certain assets of Sunsource International, Inc. and an affiliated company ("SUNSOURCE") including the exclusive worldwide rights to five leading branded dietary supplement products. The purchase price for the trademarks, inventory and receivables was approximately $32,000, net of certain assumed liabilities. The $32,000 was allocated $1,786 to inventory and receivables and $30,214 to trademarks and other product rights which were assigned a useful life of 40 years. Financing of the SUNSOURCE acquisition was provided by an expansion of the Company's senior bank credit agreement and the issuance of 300,000 shares of Chattem, Inc. common stock to SUNSOURCE. Additional payments were scheduled to be earned by SUNSOURCE over a six year period from the date of closing if sales exceed certain levels as defined in the purchase agreement. In 1998 the Company paid the former owners of SUNSOURCE $2,500 and forgave $5,625 of amounts due the Company, in exchange for a 50% reduction in any future additional payments under the purchase agreement. In 1999 the Company paid the former owners of SUNSOURCE $1,650 and issued 2,582 shares of its common stock in exchange for cancellation of the right to receive any future additional payments under the purchase agreement. The consideration paid in 1998 and 1999 was capitalized as additional purchase price. 39 (12) ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS ------------------------------------------- The Company maintains certain postretirement health care benefits for eligible employees. Employees become eligible for these benefits if they meet certain age and service requirements. The Company pays a portion of the cost of medical benefits for certain retired employees over the age of 65. Effective January 1, 1993, the Company's contribution is a service-based percentage of the full premium. The Company pays these benefits as claims are incurred. Net periodic postretirement health care benefits cost for the years ended November 30, 2001, 2000 and 1999, included the following components: 2001 2000 1999 ------ ------ ------ Service cost (benefits earned during the period). $ 40 $ 32 $ 31 Interest cost on accumulated postretirement benefit obligation ........................... 75 80 76 Amortization of prior service cost............... 15 -- -- Amortization of net gain......................... (44) (22) (10) ------ ------ ------ Net periodic postretirement benefits cost ....... $ 86 $ 90 $ 97 ====== ====== ====== The change in the accumulated benefit obligation resulted from the following components for the years ended November 30, 2001 and 2000: 2001 2000 -------- -------- Accumulated benefit obligation, beginning of year.. $ 1,051 $ 1,023 Service cost....................................... 40 32 Interest cost...................................... 75 80 Actuarial gain..................................... (52) (29) Benefits paid...................................... (39) (55) -------- -------- Accumulated benefit obligation, end of year........ $ 1,075 $ 1,051 ======== ======== The following table sets forth the funded status of the plan at November 30, 2001 and 2000: 2001 2000 -------- -------- Accumulated benefit obligation..................... $ 1,075 $ 1,051 Fair value of plan assets.......................... -- -- -------- -------- Funded status...................................... (1,075) (1,051) Unrecognized prior service cost.................... 129 144 Unrecognized actuarial gain........................ (630) (622) -------- -------- Accrued postretirement benefits cost............... $ (1,576) $ (1,529) ======== ======== For measurement purposes, a 6% annual rate of increase in the per capita cost of covered health care benefits was assumed in 2001 and 2000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7% and 8% at November 30, 2001 and 2000, respectively. Due to premium caps in place which limit the Company's expense, a 1% increase in the assumed health care cost trend rate would not affect the accumulated postretirement benefit obligation as of November 30, 2001, or the aggregate of the service and interest cost components of the net annual postretirement benefit cost for the year ended November 30, 2001. 40 (13) COMPREHENSIVE INCOME (LOSS) --------------------------- Comprehensive income (loss) consisted of the following components for the years ended November 30, 2001, 2000 and 1999, respectively: 2001 2000 1999 -------- -------- -------- Net income (loss) ....................... $ 15,343 $ (1,659) $ 20,156 Other: Foreign currency translation adjustment (59) (806) (15) Minimum pension liability adjustment, net of income taxes of $636 ........ (1,000) -- -- -------- -------- -------- Total .............................. $ 14,284 $ (2,465) $ 20,141 ======== ======== ======== (14) PRODUCT AND GEOGRAPHICAL SEGMENT INFORMATION -------------------------------------------- In 2000 and 1999 the Company operated in two primary segments - (1) OTC health care and (2) toiletries and skin care. Upon the sale of Ban in September 2000, the Company currently operates in only one primary segment - OTC health care. This segment includes medicated skin care products, topical analgesics, internal analgesics, lip care, appetite suppressant, dietary supplement products and other skin care products. Geographical segment information is as follows for the years ended November 30, 2001, 2000 and 1999: 2001 2000 1999 ---------- ---------- ---------- Net Sales: Domestic............................ $ 181,823 $ 232,144 $ 276,632 International (1)................... 16,477 20,555 21,510 ---------- ---------- ---------- Total............................ $ 198,300 $ 252,699 $ 298,142 ========== ========== ========== Long-Lived Assets (2) Domestic............................ $ 211,252 $ 218,739 $ 381,694 International....................... 396 300 353 ---------- ---------- ---------- Total............................ $ 211,648 $ 219,039 $ 382,047 ========== ========== ========== (1) International sales include export sales from United States operations. (2) Consists of book value of property, plant, equipment, trademarks and other product rights. (15) SUBSEQUENT EVENTS ----------------- On January 22, 2002 Kmart Corporation, a customer of the Company representing approximately 5% of consolidated revenues, filed a petition under Chapter 11 of the United States Bankruptcy Code. At the time of the filing Kmart Corporation owed the Company approximately $1,200. The Company is assessing what impact, if any, this bankruptcy filing may have on future operations. This bankruptcy filing did not impact the Company's results of operations and financial position for fiscal 2001. 41 Subsequent to year end, the Company repurchased, and returned to unissued, 44,000 shares of its common stock, without par value, for $630 in accordance with the Company's previously announced stock buyback program. (16) CONSOLIDATING FINANCIAL STATEMENTS ---------------------------------- The condensed consolidating financial statements, for the dates or periods indicated, of Chattem, Inc. ("Chattem"), Signal Investment & Management Co. ("Signal"), the guarantor of the long-term debt of Chattem, and the non-guarantor wholly-owned subsidiary companies of Chattem are presented below. Signal is a wholly-owned subsidiary of Chattem; the guarantee of Signal is full and unconditional and joint and several. 42 CHATTEM, INC. AND SUBSIDIARIES Note 16 CONSOLIDATING BALANCE SHEETS NOVEMBER 30, 2001 ----------------- (Unaudited and in thousands)
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ---------- ---------- ---------- ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents ..................... $ 20,648 $ 10,003 $ 4,794 $ -- $ 35,445 Accounts receivable, less allowance for doubtful accounts of $500 ................... 17,690 -- 3,170 -- 20,860 Refundable and deferred income taxes .......... 4,545 -- 101 -- 4,646 Inventories ................................... 12,409 -- 1,851 -- 14,260 Prepaid expenses and other current assets ..... 2,517 -- 150 -- 2,667 ---------- ---------- ---------- ---------- ---------- Total current assets ........................ 57,809 10,003 10,066 -- 77,878 ---------- ---------- ---------- ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, NET .............. 25,879 -- 396 -- 26,275 ---------- ---------- ---------- ---------- ---------- OTHER NONCURRENT ASSETS: Patents, trademarks and other purchased product rights, net ......................... 3,987 181,386 -- -- 185,373 Debt issuance costs, net ...................... 7,665 -- -- -- 7,665 Investment in subsidiaries .................... 8,280 -- -- (8,280) -- Other ......................................... 2,436 -- 46 -- 2,482 ---------- ---------- ---------- ---------- ---------- Total other noncurrent assets ............... 22,368 181,386 46 (8,280) 195,520 ---------- ---------- ---------- ---------- ---------- TOTAL ASSETS ............................ $ 106,056 $ 191,389 $ 10,508 $ (8,280) $ 299,673 ========== ========== ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .............................. $ 8,523 $ -- $ 487 $ -- $ 9,010 Payable to bank ............................... 151 -- -- -- 151 Accrued liabilities ........................... 13,851 -- 1,287 -- 15,138 ---------- ---------- ---------- ---------- ---------- Total current liabilities ................... 22,525 -- 1,774 -- 24,299 ---------- ---------- ---------- ---------- ---------- LONG-TERM DEBT .................................. 204,740 -- -- -- 204,740 ---------- ---------- ---------- ---------- ---------- DEFERRED INCOME TAXES ........................... 1,401 14,850 -- -- 16,251 ---------- ---------- ---------- ---------- ---------- OTHER NONCURRENT LIABILITIES .................... 1,765 -- -- -- 1,765 ---------- ---------- ---------- ---------- ---------- INTERCOMPANY ACCOUNTS ........................... (178,860) 179,833 (973) -- -- ---------- ---------- ---------- ---------- ---------- SHAREHOLDERS' EQUITY: Preferred shares, without par value, authorized 1,000, none issued ............... -- -- -- -- -- Common shares, without par value, authorized 50,000, issued 8,973 ............. 1,868 2 8,278 8,280 1,868 Paid-in surplus ............................... 65,960 -- -- -- 65,960 Accumulated deficit ........................... (10,994) (3,296) 3,170 -- (11,120) ---------- ---------- ---------- ---------- ---------- Total ....................................... 56,834 (3,294) 11,448 8,280 56,708 Unamortized value of restricted common shares issued ............................... (859) -- -- -- (859) Cumulative other comprehensive income: Foreign currency translation adjustment ..... (490) -- (1,741) -- (2,231) Minimum pension liability adjustment, net ... (1,000) -- -- -- (1,000) ---------- ---------- ---------- ---------- ---------- Total shareholders' equity .................. 54,485 (3,294) 9,707 8,280 52,618 ---------- ---------- ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 106,056 $ 191,389 $ 10,508 $ 8,280 $ 299,673 ========== ========== ========== ========== ==========
43 CHATTEM, INC. AND SUBSIDIARIES Note 16 CONSOLIDATING BALANCE SHEETS NOVEMBER 30, 2000 ----------------- (Unaudited and in thousands)
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ---------- ---------- ---------- ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents ..................... $ 5,515 $ 95,747 $ 1,272 $ -- $ 102,534 Accounts receivable, less allowance for doubtful accounts of $1,025 ................. 35,772 1,154 3,765 -- 40,691 Refundable and deferred income taxes .......... 12,250 -- 151 -- 12,401 Inventories ................................... 12,596 -- 2,456 -- 15,052 Prepaid expenses and other current assets ..... 711 -- 173 -- 884 ---------- ---------- ---------- ---------- ---------- Total current assets ........................ 66,844 96,901 7,817 -- 171,562 ---------- ---------- ---------- ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, NET .............. 26,759 -- 300 -- 27,059 ---------- ---------- ---------- ---------- ---------- OTHER NONCURRENT ASSETS: Patents, trademarks and other purchased product rights, net ......................... 4,198 187,782 -- -- 191,980 Debt issuance costs, net ...................... 8,829 -- -- -- 8,829 Investment in subsidiaries .................... 8,280 -- -- (8,280) -- Other ......................................... 2,646 -- -- -- 2,646 ---------- ---------- ---------- ---------- ---------- Total other noncurrent assets ............... 23,953 187,782 -- (8,280) 203,455 ---------- ---------- ---------- ---------- ---------- TOTAL ASSETS ............................. $ 117,556 $ 284,683 $ 8,117 $ (8,280) $ 402,076 ========== ========== ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .............................. $ 8,426 $ -- $ 364 $ -- $ 8,790 Payable to bank ............................... 1,529 -- -- -- 1,529 Accrued liabilities ........................... 33,898 -- 1,316 -- 35,214 ---------- ---------- ---------- ---------- ---------- Total current liabilities ................... 43,853 -- 1,680 -- 45,533 ---------- ---------- ---------- ---------- ---------- LONG-TERM DEBT .................................. 304,077 -- -- -- 304,077 ---------- ---------- ---------- ---------- ---------- DEFERRED INCOME TAXES ........................... 2,798 10,121 -- -- 12,919 ---------- ---------- ---------- ---------- ---------- OTHER NONCURRENT LIABILITIES .................... 1,894 -- -- -- 1,894 ---------- ---------- ---------- ---------- ---------- INTERCOMPANY ACCOUNTS ........................... (275,101) 277,272 (2,171) -- -- ---------- ---------- ---------- ---------- ---------- SHAREHOLDERS' EQUITY: Preferred shares, without par value, authorized 1,000, none issued ............... -- -- -- -- -- Common shares, without par value, authorized 50,000, issued 8,861 ............. 1,845 2 8,278 8,280 1,845 Paid-in surplus ............................... 64,443 -- -- -- 64,443 Accumulated deficit ........................... (25,771) (2,712) 2,020 -- (26,463) ---------- ---------- ---------- ---------- ---------- Total ....................................... 40,517 (2,710) 10,298 8,280 39,825 Cumulative other comprehensive income - Foreign currency translation adjustment ..... (482) -- (1,690) -- (2,172) ---------- ---------- ---------- ---------- ---------- Total shareholders' equity .................. 40,035 (2,710) 8,608 8,280 37,653 ---------- ---------- ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .. $ 117,556 $ 284,683 $ 8,117 $ 8,280 $ 402,076 ========== ========== ========== ========== ==========
44 CHATTEM, INC. AND SUBSIDIARIES Note 16 CONSOLIDATING STATEMENTS OF INCOME FOR THE YEAR ENDED NOVEMBER 30, 2001 ------------------------------------ (Unaudited and in thousands)
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ---------- ---------- ---------- ---------- ---------- NET SALES ....................................... $ 183,423 $ -- $ 14,877 $ -- $ 198,300 ---------- ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of sales ................................. 47,596 -- 4,916 -- 52,512 Advertising and promotion ..................... 67,231 5,572 5,161 -- 77,964 Selling, general and administrative ........... 31,891 25 2,730 -- 34,646 ---------- ---------- ---------- ---------- ---------- Total costs and expenses .................... 146,718 5,597 12,807 -- 165,122 ---------- ---------- ---------- ---------- ---------- INCOME (LOSS) FROM OPERATIONS ................... 36,705 (5,597) 2,070 -- 33,178 ---------- ---------- ---------- ---------- ---------- OTHER INCOME (EXPENSE): Interest expense .............................. (21,856) -- -- -- (21,856) Investment and other income, net .............. 556 1,606 56 -- 2,218 Royalties ..................................... (8,900) 9,167 (267) -- -- Premium revenue ............................... (79) -- 79 -- -- Corporate allocations ......................... 23 -- (23) -- -- ---------- ---------- ---------- ---------- ---------- Total other income (expense) ............... (30,256) 10,773 (155) -- (19,638) ---------- ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY GAIN 6,449 5,176 1,915 -- 13,540 PROVISION FOR INCOME TAXES ...................... 2,698 1,760 687 -- 5,145 ---------- ---------- ---------- ---------- ---------- INCOME BEFORE EXTRAORDINARY GAIN ................ 3,751 3,416 1,228 -- 8,395 EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES ..................... 6,948 -- -- -- 6,948 ---------- ---------- ---------- ---------- ---------- NET INCOME ...................................... $ 10,699 $ 3,416 $ 1,228 $ -- $ 15,343 ========== ========== ========== ========== ==========
45 CHATTEM, INC. AND SUBSIDIARIES Note 16 CONSOLIDATING STATEMENTS OF INCOME FOR THE YEAR ENDED NOVEMBER 30, 2000 ------------------------------------ (Unaudited and in thousands)
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ---------- ---------- ---------- ---------- ---------- NET SALES ....................................... $ 235,707 $ -- $ 16,992 $ -- $ 252,699 ---------- ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of sales ................................. 69,700 -- 5,257 -- 74,957 Advertising and promotion ..................... 90,975 8,865 7,028 -- 106,868 Selling, general and administrative ........... 29,141 14 2,839 -- 31,994 ---------- ---------- ---------- ---------- ---------- Total costs and expenses .................... 189,816 8,879 15,124 -- 213,819 ---------- ---------- ---------- ---------- ---------- INCOME (LOSS) FROM OPERATIONS ................... 45,891 (8,879) 1,868 -- 38,880 ---------- ---------- ---------- ---------- ---------- OTHER INCOME (EXPENSE): Interest expense .............................. (35,729) -- -- -- (35,729) Investment and other income, net .............. 129 1,352 85 -- 1,566 Loss on product divestitures .................. -- (5,018) -- -- (5,018) Royalties ..................................... (11,754) 12,051 (297) -- -- Corporate allocations ......................... 37 -- (37) -- -- ---------- ---------- ---------- ---------- ---------- Total other income (expense) ................ (47,317) 8,385 (249) -- (39,181) ---------- ---------- ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CHANGE IN ACCOUNTING PRINCIPLE ...... (1,426) (494) 1,619 -- (301) PROVISION FOR (BENEFIT FROM) INCOME TAXES ...... (373) (168) 437 -- (104) ---------- ---------- ---------- ---------- ---------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CHANGE IN ACCOUNTING PRINCIPLE ............... (1,053) (326) 1,182 -- (197) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF INCOME TAX BENEFIT .............. (920) -- -- -- (920) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAX BENEFIT ......... (542) -- -- -- (542) ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS) .............................. $ (2,515) $ (326) $ 1,182 $ -- $ (1,659) ========== ========== ========== ========== ==========
46 CHATTEM, INC. AND SUBSIDIARIES Note 16 CONSOLIDATING STATEMENTS OF INCOME FOR THE YEAR ENDED NOVEMBER 30, 1999 ------------------------------------ (Unaudited and in thousands)
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ---------- ---------- ---------- ---------- ---------- NET SALES ....................................... $ 280,686 $ -- $ 17,456 $ -- $ 298,142 ---------- ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of sales ................................. 69,810 -- 5,802 -- 75,612 Advertising and promotion ..................... 102,079 9,487 6,269 -- 117,835 Selling, general and administrative ........... 29,230 15 3,249 -- 32,494 ---------- ---------- ---------- ---------- ---------- Total costs and expenses .................... 201,119 9,502 15,320 -- 225,941 ---------- ---------- ---------- ---------- ---------- INCOME (LOSS) FROM OPERATIONS ................... 79,567 (9,502) 2,136 -- 72,201 ---------- ---------- ---------- ---------- ---------- OTHER INCOME (EXPENSE): Interest expense .............................. (36,572) -- -- -- (36,572) Investment and other income, net .............. 521 (6) 64 -- 579 Royalties ..................................... (13,448) 13,743 (295) -- -- Premium revenue ............................... (20) -- 20 -- -- Corporate allocations ......................... 33 -- (33) -- -- ---------- ---------- ---------- ---------- ---------- Total other income (expense) ................ (49,486) 13,737 (244) -- (35,993) ---------- ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 30,081 4,235 1,892 -- 36,208 PROVISION FOR INCOME TAXES ...................... 11,437 1,440 790 -- 13,667 ---------- ---------- ---------- ---------- ---------- INCOME BEFORE EXTRAORDINARY LOSS ................ 18,644 2,795 1,102 -- 22,541 EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF INCOME TAX BENEFIT ............... (2,385) -- -- -- (2,385) ---------- ---------- ---------- ---------- ---------- NET INCOME ...................................... $ 16,259 $ 2,795 $ 1,102 $ -- $ 20,156 ========== ========== ========== ========== ==========
47 CHATTEM, INC. AND SUBSIDIARIES Note 16 CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED NOVEMBER 30, 2001 ------------------------------------ (Unaudited and in thousands)
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ---------- ---------- ---------- ---------- ---------- OPERATING ACTIVITIES: Net income .................................... $ 10,699 $ 3,416 $ 1,228 $ -- $ 15,343 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............... 4,523 5,572 146 -- 10,241 Deferred income tax provision ............... 4,827 6,489 46 -- 11,362 Extraordinary gain on early extinguishment of debt, net .............................. (6,948) -- -- -- (6,948) Stock option charge ......................... 525 -- -- -- 525 Other, net .................................. 18 (79) -- -- (61) Changes in operating assets and liabilities: Accounts receivable ....................... 18,115 1,154 562 -- 19,831 Inventories ............................... 210 -- 582 -- 792 Prepaid expenses and other current assets . (1,767) -- (26) -- (1,793) Accounts payable and accrued liabilities .. (25,656) -- 94 -- (25,562) ---------- ---------- ---------- ---------- ---------- Net cash provided by operating activities . 4,546 16,552 2,632 -- 23,730 ---------- ---------- ---------- ---------- ---------- INVESTING ACTIVITIES: Purchases of property, plant and equipment .... (1,615) -- (239) -- (1,854) Additions to trademarks and other product rights -- (277) -- -- (277) Proceeds from product divestiture ............. 1,179 -- -- -- 1,179 Proceeds from sales of property, plant and equipment ................................... 95 -- -- -- 95 Increase in other assets, net ................. (727) -- -- -- (727) ---------- ---------- ---------- ---------- ---------- Net cash used in investing activities ... (1,068) (277) (239) -- (1,584) ---------- ---------- ---------- ---------- ---------- FINANCING ACTIVITIES: Repayment of long- term debt .................. (83,746) -- -- -- (83,746) Payment of consent fees and other costs related to repayment of long-term debt .............. (4,000) -- -- -- (4,000) Change in payable to bank ..................... (1,378) -- -- -- (1,378) Repurchase of common shares ................... (174) -- -- -- (174) Proceeds from exercise of stock options ....... 119 -- -- -- 119 Changes in intercompany accounts .............. 96,871 (98,019) 1,148 -- -- Dividends paid ................................ 4,000 (4,000) -- -- -- ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities ............................. 11,692 (102,019) 1,148 -- (89,179) ---------- ---------- ---------- ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ..................... (37) -- (19) -- (56) ---------- ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS: Increase (decrease) for the year .............. 15,133 (85,744) 3,522 -- (67,089) At beginning of year .......................... 5,515 95,747 1,272 -- 102,534 ---------- ---------- ---------- ---------- ---------- At end of year ................................ $ 20,648 $ 10,003 $ 4,794 $ -- $ 35,445 ========== ========== ========== ========== ==========
48 CHATTEM, INC. AND SUBSIDIARIES Note 16 CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED NOVEMBER 30, 2000 ------------------------------------ (Unaudited and in thousands)
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ---------- ---------- ---------- ---------- ---------- OPERATING ACTIVITIES: Net income (loss) ............................. $ (2,515) $ (326) $ 1,182 $ -- $ (1,659) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ............... 5,978 8,865 100 -- 14,943 Deferred income tax benefit ................. (5,410) (168) (156) -- (5,734) Loss on product divestitures ................ -- 5,018 -- -- 5,018 Extraordinary loss on early extinguishment of debt, net .............................. 920 -- -- -- 920 Cumulative effect of change in accounting principle, net ............................ 542 -- -- -- 542 Stock option charge ......................... 525 -- -- -- 525 Other, net .................................. 9 -- 6 -- 15 Changes in operating assets and liabilities, net of acquisitions and divestitures: Accounts receivable ....................... 15,178 (1,154) 317 -- 14,341 Inventories ............................... 7,618 -- (378) -- 7,240 Prepaid and other current assets .......... (1,873) -- 335 -- (1,538) Accounts payable and accrued liabilities .. (8,318) -- 212 -- (8,106) ---------- ---------- ---------- ---------- ---------- Net cash provided by operating activities 12,654 12,235 1,618 -- 26,507 ---------- ---------- ---------- ---------- ---------- INVESTING ACTIVITIES: Purchases of property, plant and equipment .... (5,582) -- (91) -- (5,673) Proceeds from product divestiture ............. 160,000 -- -- -- 160,000 Proceeds from sales of property, plant and equipment 11 -- -- -- 11 Increase in other assets, net ................. (1,542) -- -- -- (1,542) ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) investing activities ............................ 152,887 -- (91) -- 152,796 ---------- ---------- ---------- ---------- ---------- FINANCING ACTIVITIES: Repayment of long-term debt ................... (95,000) -- -- -- (95,000) Proceeds from long-term debt .................. 29,000 -- -- -- 29,000 Change in payable to bank ..................... (3,376) -- -- -- (3,376) Repurchase of common shares ................... (9,489) -- -- -- (9,489) Proceeds from exercise of stock options ....... 237 -- -- -- 237 Debt issuance costs ........................... (363) -- -- -- (363) Changes in intercompany accounts .............. (85,678) 87,496 (1,818) -- -- Dividends paid ................................ 4,000 (4,000) -- -- -- ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities ............................ (160,669) 83,496 (1,818) -- (78,991) ---------- ---------- ---------- ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ..................... 93 -- (179) -- (86) ---------- ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS: Increase (decrease) for the year .............. 4,965 95,731 (470) -- 100,226 At beginning of year .......................... 550 16 1,742 -- 2,308 ---------- ---------- ---------- ---------- ---------- At end of year ................................ $ 5,515 $ 95,747 $ 1,272 $ -- $ 102,534 ========== ========== ========== ========== ==========
49 CHATTEM, INC. AND SUBSIDIARIES Note 16 CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED NOVEMBER 30, 1999 ------------------------------------ (Unaudited and in thousands)
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ---------- ---------- ---------- ---------- ---------- OPERATING ACTIVITIES: Net income .................................... $ 16,259 $ 2,795 $ 1,102 $ -- $ 20,156 Adjustments to reconcile net income to net cash provided by operating activities: ........... -- Depreciation and amortization ............... 5,429 9,487 148 -- 15,064 Deferred income tax provision ............... 3,158 1,440 -- -- 4,598 Extraordinary loss on early extinguishment of debt, net .............................. 2,385 -- -- -- 2,385 Dividend receivable from Elcat, Inc. ........ (279) -- -- -- (279) Stock option charge ......................... 525 -- -- -- 525 Other, net .................................. (8) 8 -- -- -- Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ....................... (16,598) -- (830) -- (17,428) Inventories ............................... (5,366) -- 683 -- (4,683) Prepaid and other current assets ......... (241) -- 82 -- (159) Accounts payable and accrued liabilities .. 6,355 -- 388 -- 6,743 ---------- ---------- ---------- ---------- ---------- Net cash provided by operating activities 11,619 13,730 1,573 -- 26,922 ---------- ---------- ---------- ---------- ---------- INVESTING ACTIVITIES: Purchases of property, plant and equipment .... (9,789) -- (41) -- (9,830) Purchases of trademarks and other related assets (91,127) -- -- -- (91,127) Proceeds from sales of investments ............ 2,994 387 -- -- 3,381 Proceeds from sales of property, plant and equipment ................................... 272 -- -- -- 272 Increase in other assets ...................... (3,200) -- -- -- (3,200) ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) investing activities ............................ (100,850) 387 (41) -- (100,504) ---------- ---------- ---------- ---------- ---------- FINANCING ACTIVITIES: Repayment of long-term debt ................... (165,481) -- -- -- (165,481) Proceeds from long-term debt .................. 242,281 -- -- -- 242,281 Change in payable to bank .................... 3,879 -- -- -- 3,879 Repurchase of common shares ................... (3,912) -- -- -- (3,912) Proceeds from exercise of stock options and warrants .................................... 2,104 -- -- -- 2,104 Debt issuance costs ........................... (5,101) -- -- -- (5,101) Change in intercompany accounts ............... 12,106 (10,112) (1,994) -- -- Dividends paid ................................ 4,000 (4,000) -- -- -- ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities ............................ 89,876 (14,112) (1,994) -- 73,770 ---------- ---------- ---------- ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ..................... -- -- 44 -- 44 ---------- ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS: Increase (decrease) for the year .............. 645 5 (418) -- 232 At beginning of year .......................... (95) 11 2,160 -- 2,076 ---------- ---------- ---------- ---------- ---------- At end of year ................................ $ 550 $ 16 $ 1,742 $ -- $ 2,308 ========== ========== ========== ========== ==========
50 (17)QUARTERLY INFORMATION (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ---------------------------------------------------------------------------
Quarter Ended ------------------------------------------------------- Total February 28 May 31 August 31 November 30 ---------- -------- -------- --------- ----------- FISCAL 2001: Net sales ................................ $ 198,300 47,420 56,542 49,641 44,697 Gross profit ............................. $ 145,788 34,936 41,136 36,978 32,738 Before extraordinary gain: Income ................................. $ 8,395 586 3,409 2,748 1,652 Income per share, diluted (1) .......... $ .93 .07 .38 .30 .18 Total: Net income ............................. $ 15,343 8,145 3,401 2,145 1,652 Net income per share, diluted (1) ...... $ 1.70 .92 .38 .24 .18 FISCAL 2000: Net sales ................................ $ 252,699 62,371 79,636 73,253 37,439 Gross profit ............................. $ 177,742 45,689 58,181 54,094 19,778 Before extraordinary loss and change in accounting principle: Income (loss) .......................... $ (197) 3,608 6,219 5,151 (15,175) Income (loss) per share, diluted (1) ... $ (.02) .37 .65 .55 (1.66) Total: Net income (loss) ...................... $ (1,659) 3,066 6,109 5,151 (15,985) Net income (loss) per share, diluted (1) $ (.18) .31 .64 .55 (1.75)
(1) THE SUM OF THE QUARTERLY EARNINGS PER SHARE AMOUNTS MAY DIFFER FROM ANNUAL EARNINGS PER SHARE BECAUSE OF THE DIFFERENCES IN THE WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND DILUTIVE POTENTIAL SHARES USED IN THE QUARTERLY AND ANNUAL COMPUTATIONS. 51 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO CHATTEM, INC.: We have audited the accompanying consolidated balance sheets of Chattem, Inc. (a Tennessee corporation) and subsidiaries as of November 30, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended November 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Chattem, Inc. and subsidiaries as of November 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 2001 in conformity with accounting principles generally accepted in the United States. As explained in Note 2 to the consolidated financial statements, effective December 1, 1999, the Company changed its method of accounting for start-up activities and organization costs. ARTHUR ANDERSEN LLP Chattanooga, Tennessee January 23, 2002 52 BOARD OF DIRECTORS ZAN GUERRY Chairman and Chief Executive Officer Chattem, Inc. Chattanooga, Tennessee A. ALEXANDER TAYLOR II President and Chief Operating Officer Chattem, Inc. Chattanooga, Tennessee SAMUEL E. ALLEN Chairman and Chief Executive Officer GLOBALT, Inc. Atlanta, Georgia LOUIS H. BARNETT Business Consultant Fort Worth, Texas ROBERT E. BOSWORTH Vice President - Corporate Finance Livingston Company Chattanooga, Tennessee RICHARD E. CHENEY Former Chairman Emeritus Hill and Knowlton, Inc. New York, New York SCOTT L. PROBASCO, JR. Chairman of the Executive Committee SunTrust Bank, Tennessee, N.A. Chattanooga, Tennessee PHILIP H. SANFORD Chairman and Chief Executive Officer The Krystal Company Chattanooga, Tennessee ADDITIONAL FINANCIAL INFORMATION COPIES OF QUARTERLY PRESS RELEASES AND/OR QUARTERLY REPORTS ON FORM 10-Q AND ANNUAL REPORT ON FORM 10-K, BOTH FORMS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, MAY BE OBTAINED WITHOUT CHARGE BY WRITING TO THE CONTROLLER, CHATTEM, INC., BY CALLING 1-800-366-6077 OR VISIT OUR WEBSITE AT WWW.CHATTEM.COM. - --------------------------------- OFFICERS ZAN GUERRY Chairman and Chief Executive Officer A. ALEXANDER TAYLOR II President and Chief Operating Officer ANDREA M. CROUCH Vice President Brand Management RON GALANTE Vice President New Business Development RICHARD W. KORNHAUSER Vice President Brand Management LUKE J. LENAHAN Vice President International ROBERT S. MARSHALL Vice President Marketing B. DERRILL PITTS Vice President Operations DONALD K. RIKER, PH.D. Vice President Research and Development and Chief Scientific Officer SCOTT J. SLOAT Controller CHARLES M. STAFFORD Vice President Sales HUGH F. SHARBER Secretary ANNUAL MEETING Wednesday, April 17, 2002 1:00 P.M. 1715 West 38th Street Chattanooga, TN 37409 - --------------------------------- CORPORATE OFFICE CHATTEM, INC. 1715 West 38th Street Chattanooga, Tennessee 37409 SUBSIDIARIES AND AFFILIATED COMPANIES CHATTEM (U.K.) LIMITED Guerry House Ringway Centre Edison Road Basingstoke, Hampshire RG21 2YH England CHATTEM (CANADA) INC. 2220 Argentia Road Mississauga, Ontario L5N 2K7 SIGNAL INVESTMENT & MANAGEMENT CO. 1105 North Market Street Suite 1300 Wilmington, Delaware 19890 COMMON STOCK LISTING Over-the-Counter NASDAQ Symbol: CHTT TRANSFER AGENT AND REGISTRAR SUNTRUST BANK, ATLANTA, N.A. P.O. Box 4625 Atlanta, Georgia 30302 EX-21 7 exhibit21_11071.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21 ---------- CHATTEM, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE COMPANY NAME OF SUBSIDIARY STATE OR COUNTRY OF INCORPORATION ------------------ --------------------------------- Chattem (Canada) Inc. Canada Chattem (U.K.) Limited England HBA Insurance Ltd. Bermuda Signal Investment & Management Co. Delaware EX-23 8 exhibit23_11071.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 ---------- CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in Chattem, Inc.'s 2001 annual report and incorporated by reference in the Form 10-K into the Company's previously filed Registration Statements on Form S-8 (Nos. 33-35386, 33-78524, 33-78922 and 33-61267), Form S-3 (Nos. 33-69961, 33-69397, 33-31113, 33-03091 and 33-85348) and Form S-4 (No. 33-53627). ARTHUR ANDERSEN LLP Chattanooga, Tennessee February 26, 2002 EX-99.27.1 9 exhibit27-1_11071.txt REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 27.1 ------------ REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Chattem, Inc. We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in Chattem, Inc. and subsidiaries' annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 23, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Chattanooga, Tennessee January 23, 2002 EX-99.27.2 10 exhibit27-2_11071.txt SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS EXHIBIT 27.2 ------------ CHATTEM, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Balance at Charged to Charged to Beginning Costs and Other Accounts- Accounts Balance at of Period Expenses Describe Written off End of Period --------- -------- -------- ----------- ------------- Year ended November 30, 1999: Reserves deducted from asset accounts: Allowance for doubtful accounts $ 775 $ 208 $ -- $ 83 $ 900 Year ended November 30, 2000: Reserves deducted from asset accounts: Allowance for doubtful accounts $ 900 $ 1,237 $ -- $ 1,112 $ 1,025 Year ended November 30, 2001: Reserves deducted from asset accounts: Allowance for doubtful accounts $ 1,025 $ 533 $ -- $ 1,058 $ 500
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