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PROSPECTUS
[LOGO]
417,182 SHARES OF COMMON STOCK
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This Prospectus relates to 417,182 shares of Common Stock of Chattem, Inc.,
a Tennessee corporation (the "Company"), issuable upon exercise of outstanding
warrants (the "Warrants") previously issued by the Company in a private
placement of 75,000 Units (the "Units") consisting of $75,000,000 principal
amount of the Company's 12.75% Series A Senior Subordinated Notes due 2004 (the
"Old Notes") and the Warrants to Kidder, Peabody & Co. Incorporated (the
"Initial Purchaser") on June 17, 1994. The Company, on September 19, 1994,
completed an exchange offer (the "Exchange Offer"), in which $75,000,000
principal amount of its 12.75% Series B Senior Subordinated Notes due 2004 (the
"Notes"), which have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement on Form S-2
filed August 4, 1994, were issued in exchange for the outstanding Old Notes. The
Common Stock issuable pursuant to the Warrants is being offered hereunder in
order to satisfy the obligations of the Company under the Warrant Registration
Rights Agreement dated as of June 17, 1994 entered into with the Initial
Purchaser. All expenses of the registration of the Common Stock will be borne by
the Company.
Each Warrant entitles the holder thereof to purchase from the Company
5.56242 shares of Common Stock at an exercise price of $7.15 per share. The
exercise price and the number of shares of Common Stock for which a Warrant may
be exercised are subject to adjustment under certain circumstances. The Warrants
entitle the holders thereof to purchase in the aggregate approximately 5% of the
outstanding Common Stock on a fully diluted basis as of the date of the issuance
of the Warrants.
The Company's Common Stock is included on the National Market System of the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
under the symbol "CHTT."
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SEE "RISK FACTORS" FOR A DESCRIPTION OF CERTAIN RISKS TO BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 21, 1995
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CHATTEM
OUR FAMILY OF CONSUMER BRANDS
[PHOTOGRAPH OF THE COMPANY'S PRIMARY CONSUMER PRODUCTS PACKAGED FOR RETAIL SALE]
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act, for the registration of the Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
certain items of which are contained in exhibits and schedules to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement, including
the exhibits thereto, filed as a part thereof. Statements made in this
Prospectus concerning the contents of any document referred to herein are not
necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Reports, proxy statements and other information filed by the Company
with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington D.C. 20549-1004, and at the following Regional
Offices of the Commission: Chicago Regional Office, Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60621; and New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material may also be obtained at prescribed rates from the Public
Reference Section of the Commission at its principal office at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549-1004. The Company's common stock
is listed on the National Association of Securities Dealers Inc.'s Automated
Quotation System National Market System under the symbol "CHTT."
Pursuant to the Warrant Registration Rights Agreement, so long as any of the
Warrants are outstanding, whether or not the Company is subject to the reporting
requirements of Section 13(a) or 15(d) of the Exchange Act, the Company is
obligated to submit for filing with the Commission the annual reports, quarterly
reports and other documents that the Company would have been required to file
with the Commission pursuant to Section 13(a) or 15(d) if the Company were
subject to such reporting requirements.
In addition, so long as any of the Warrants remain outstanding and during
any period in which the Company is not subject to Section 13 or 15(d) of the
Exchange Act, the Company has agreed to make available to any prospective
purchaser of the Warrants or beneficial owner of the Warrants in connection with
any sale thereof the information required by Rule 144A(d)(4) under the
Securities Act. The Company has agreed to keep this Registration Statement
effective for a period of not less than five years and, in certain instances, to
amend and/or supplement the Prospectus, as necessary to permit resales.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended November 30,
1993, its Quarterly Reports on Form 10-Q for the quarters ended February 28,
1994, May 31, 1994 and August 31, 1994, its Current Reports on Form 8-K dated
May 12, 1994 and June 23, 1994 and its final prospectus included in Amendment
No. 1 to Registration Statement on Form S-2 (File No. 33-80770) dated August 4,
1994, which have been filed by the Company with the Commission, are incorporated
by reference herein. All documents filed by the Company pursuant to Section
13(a), 13(c) or 15(d) of the Exchange Act after the date of the Prospectus and
prior to termination of this offering shall be deemed to be incorporated by
reference herein and to be a part of this Prospectus from the date of filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that such statement is
inconsistent with a statement contained herein. Any statement as so modified or
superseded shall not be deemed to constitute a part of this Prospectus, except
as so modified or superseded.
The Company will provide, without charge, upon written or oral request, to
each person to whom a copy of this Prospectus is delivered, a copy of any
documents incorporated by reference herein (other than exhibits to such
document, unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates). Requests for such copies
should be directed to the Company's principal executive offices at 1715 West
38th Street, Chattanooga, Tennessee 37409, Attention: Robert E. Bosworth;
telephone number (615) 821-4571.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. REFERENCES IN THIS
PROSPECTUS TO THE "COMPANY" SHALL MEAN CHATTEM, INC. AND ITS CONSOLIDATED
SUBSIDIARIES, UNLESS THE CONTEXT OTHERWISE REQUIRES.
THE COMPANY
The Company is a diversified manufacturer and marketer of consumer products
and specialty chemicals. Through its consumer products division, the Company
manufactures and markets branded over-the-counter ("OTC") pharmaceuticals, such
as FLEX- ALL 454-Registered Trademark-, ICY HOT-Registered Trademark-,
PAMPRIN-Registered Trademark-, PREMSYN PMS-Registered Trademark- and
NORWICH-Registered Trademark- aspirin, and functional toiletries and cosmetics,
including CORN SILK-Registered Trademark-, BULLFROG-Registered Trademark-,
ULTRASWIM-Registered Trademark-, SUN-IN-Registered Trademark- and
MUDD-Registered Trademark-. The Company's specialty chemicals division develops,
manufactures and sells value-added specialty chemicals, such as aluminum
hydroxides, aluminum derivatives and glycine, to selected industries, including
the pharmaceutical and printing ink industries.
The objective of the Company's consumer products division is to offer high
quality brand name products in niche market segments in which the Company's
products can be among the market leaders. The Company strives to achieve its
objective by identifying brands with favorable demographic appeal, being
flexible in modifying products and promotions in response to changing consumer
demands and developing creative and cost-effective marketing and advertising
programs. The Company manufactures substantially all of its consumer products.
The Company anticipates that its consumer products division will continue to
expand through a combination of brand acquisitions and internal growth. Between
1986 and 1991, the Company acquired five brands, two of which are FLEX-ALL 454
and ICY HOT, which place the Company as the market leader in the topical
analgesic market. Other brands acquired during this period include NORWICH,
BULLFROG and ULTRASWIM. The Company's acquisition strategy is to identify brands
that are embryonic or have unrealized potential, which can complement existing
brands, and which can be among the leaders in attractive niche market segments.
Since 1991, the Company has relied on internal growth with programs designed to
capitalize on the value of existing brands and product line extensions such as
Maximum Strength FLEX-ALL 454-Registered Trademark- introduced in 1993.
The objective of the Company's specialty chemicals division is to develop,
manufacture and sell value-added specialty chemicals to selected industry
segments in which the Company is or can be among the market leaders and a high
value provider. Products supplied by the Company's specialty chemicals division
are generally essential elements of a customer's manufacturing process but
represent only a relatively small portion of the customer's overall cost in the
process. The Company believes its specialty chemicals division can capitalize on
its technical strength and strong customer relationships to expand through the
development of new products and the application of existing products to new
uses.
RECENT DEVELOPMENTS
On June 11, 1993, the Company paid a special cash dividend ("Special
Dividend") of $20.00 per share to holders of its common stock. In connection
with the payment of the Special Dividend, the Company borrowed approximately
$97.0 million under a $100.0 million senior secured bank agreement consisting of
a $75 million term loan facility divided into a $63 million facility with a
6.1875% interest rate at November 30, 1993 and a $12 million facility with a
6.9735% interest rate at November 30, 1993 and a $25 million revolving credit
facility with a 6.035% weighted average interest rate at November 30, 1993 ("Old
Credit Agreement"), which was repaid in full with the net proceeds from the
issuance of the Units together with a portion of the proceeds from a new $55.0
million revolving credit facility ("New Credit Agreement"). The financing of the
Special Dividend resulted in a substantial increase in the Company's total
indebtedness. See "Recent Developments".
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On May 12, 1994, the Company acquired Benzodent-Registered Trademark-, a
topical oral analgesic, from The Procter & Gamble Company. The Benzodent
business acquired consisted principally of trademarks and finished product
inventories. Benzodent, a denture analgesic cream in an adhesive base, expands
the Company's current specialty analgesic presence by complementing FLEX-ALL 454
and ICY HOT in the topical analgesics market and PAMPRIN and PREMSYN PMS in the
menstrual analgesics category. The Company financed the purchase of Benzodent
with borrowings under its Old Credit Agreement.
On June 17, 1994, the Company acquired a license to the
pHisoDerm-Registered Trademark- trademark in the United States, Canada and
Puerto Rico (the "Territory"), together with certain other pHisoDerm related
assets from Sterling Winthrop Inc. ("Sterling"). pHisoDerm is a unique line of
specialty skin cleansers with annual sales in the Territory in excess of $10.0
million. Sterling retained certain hospital and other institutional pHisoDerm
sales in the Territory, the related pHisohex product line and all pHiso
businesses outside the Territory. The purchase price for the license of the
pHisoDerm in the Territory and the other assets was $16.0 million. If net sales
of pHisoDerm products in the United States only exceed (i) $10.0 million for the
12-month period beginning July 1, 1994 and ending June 30, 1995 or (ii) $11.0
million for either of the 12-month periods beginning July 1, 1995 and July 1,
1996, respectively, and ending June 30, 1996 and June 30, 1997, respectively,
then within 45 days after the end of the applicable 12-month period with respect
to which the applicable net sales threshold specified in (i) or (ii) above has
been exceeded, the Company will pay Sterling $1.0 million for such year.
Despite the high level of consumer awareness and broad distribution of
Benzodent and pHisoDerm, sales of each product have declined over the past three
years. The Company believes that this decline with respect to pHisoDerm sales is
primarily attributable to the decision by Sterling to cease all advertising for
pHisoDerm since 1991. In 1993, Benzodent and pHisoDerm had strong operating
margins and market positions despite the relative lack of advertising and
promotion expenditures by their owners. The Company intends to increase spending
on advertising and promotion in an effort to increase each brand's sales and
market share.
Also on June 17, 1994, the Company sold the Units consisting of $75.0
million aggregate principal amount of the Old Notes, issued at an original issue
discount of 98.623% of principal amount, with the Warrants to purchase 417,182
shares of Company common stock at $7.15 per share to the Initial Purchaser and
entered into the New Credit Agreement. The last reported sales price on the day
prior to the issuance of the Warrants was $6.50 per share. The New Credit
Agreement includes a $20.0 million term loan with a 8.000% interest rate at
November 30, 1994, a $22.5 million working capital facility with a 8.300%
weighted average interest rate at November 30, 1994 and a $12.5 million facility
for future acquisitions, with respect to which no funds were borrowed at
November 30, 1994. The proceeds of the financings were used to fund the
pHisoDerm acquisition and repay all existing indebtedness under the Old Credit
Agreement, and will be used for working capital and to make additional
acquisitions.
On September 19, 1994, the Company completed the Exchange Offer in which the
Notes, which were registered under the Securities Act, were issued in exchange
for the Old Notes.
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THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ Up to 417,182 shares of the Company's Common Stock, all
of which are being offered by the Company pursuant to
the exercise of the Warrants at an exercise price of
$7.15 per share.
Registration Rights Agreement..... Pursuant to a purchase agreement dated June 10, 1994, by
and between the Company and its subsidiaries and the
Initial Purchaser (the "Purchase Agreement"), the
Company and the Initial Purchaser entered into a Warrant
Registration Rights Agreement dated as of June 17, 1994
(the "Registration Rights Agreement"), which grants the
holders of the Warrants certain registration rights. The
offer made hereby is intended to satisfy such registra-
tion rights.
Common Stock Outstanding After the
Offering (1)..................... 7,709,381 shares.
Use of Proceeds................... Proceeds to the Company from the exercise of the
Warrants will be used for general corporate purposes.
NASDAQ Symbol..................... CHTT.
<FN>
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(1) Assumes the exercise of all of the Warrants and that outstanding options
granted to employees are not exercised.
</TABLE>
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RECENT DEVELOPMENTS
On June 11, 1993, the Company paid the Special Dividend of $20.00 per share
to holders of its Common Stock. In connection with its determination to declare
the Special Dividend, the Company retained Houlihan, Lokey, Howard & Zukin, Inc.
("HLHZ") to conduct a valuation of the Company's assets and liabilities and to
furnish an opinion to the Board in connection therewith. Under the Tennessee
Business Corporation Act ("TBCA"), it is unlawful to make a distribution
(including the cash distribution reflected by the Special Dividend) if, after
giving effect to the transaction, (i) the corporation would not be able to pay
its debts as they become due in the usual course of business, or (ii) the
corporation's total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the corporation were to be dissolved at
the time of the distribution, to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are superior to those
receiving the distribution. Based in part upon the valuation and opinion of HLHZ
and in accordance with Section 48-16-401 of the TBCA, the Board determined prior
to the declaration of the Special Dividend that (i) the fair saleable value of
the Company's total assets would exceed the Company's stated liabilities
including the amount, if any, that would be needed to satisfy the preferential
rights of shareholders, (ii) the Company should be able to pay its debts as they
become due in the usual course of business and (iii) the Company does not have
unreasonable small capital to carry on its business as management has indicated
it is now conducted and as it was proposed to be conducted following
consummation of the Special Dividend transaction. Payment of the Special
Dividend was contingent upon confirmation by HLHZ of such opinion on the date
the Special Dividend was paid.
In order to pay the Special Dividend and related fees and expenses, the
Company borrowed approximately $97.0 million pursuant to the Old Credit
Agreement with First Union National Bank of North Carolina ("First Union Bank")
and a syndicate of banks. In addition to the loan proceeds, the Company sold
1,866,667 shares of its Common Stock to First Union Capital Partners, Inc., an
affiliate of First Union Bank, for $7.50 per share, for an aggregate price of
$14.0 million before offering expenses. The Company also used $4.75 million from
the sale of certain investments and $1.0 million from available cash for the
Special Dividend. The purpose of the Special Dividend was to provide
shareholders with a substantial immediate return on their investment in the
Common Stock, to enable shareholders to retain a significant ownership interest
in the Company, to continue to share in its future growth prospects and to
utilize leverage to achieve an earnings per share growth rate that is greater
than if the Special Dividend transaction had not been effected.
The payment of the Special Dividend effected a leveraged recapitalization of
the Company that significantly increased indebtedness of the Company and created
a shareholders' deficit. On the basis of management's forecast of operations at
the time of the Special Dividend, which assumed that operating results would be
unaffected by the Special Dividend except for increased interest expense, the
earnings per share growth rate calculated from the first full year after the
Special Dividend transaction would be greater than if the Special Dividend
transaction had not occurred because the repayment of indebtedness reduces
interest expense (and thus increases net income) over time. Management continues
to expect that the growth rate will be higher than if the Special Dividend
transaction had not occurred, although the rate of increase may be less than
forecasted at the time of the Special Dividend as a result of the refinancing of
indebtedness in June 1994 with the proceeds from the issuance of the Notes and
the New Credit Agreement, which requires smaller principal payments and has
higher interest rates than under the Old Credit Agreement.
The funding of the Special Dividend resulted in a substantial negative
balance in the Company's shareholders' equity and significantly increased the
use of leverage in the Company's capital structure. The increase in debt has had
several important consequences for the Company's financial position and results
of operations, including a significant increase in interest expense and
principal repayment obligations, which have required substantial amounts of
cash. The amount and terms of the Company's debt and the resulting shareholders'
deficit have limited the ability of the Company to effect additional debt
financing. Since the Special Dividend transaction, the Company has refinanced
its debt obligations with the proceeds from the issuance of the Notes, which has
fixed the interest rate payable on a significant portion of the Company's
indebtedness and reduced expenses related to amortization of debt, and the New
Credit Agreement, which
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includes a $22.5 million working capital facility and a $12.5 million facility
for future acquisitions. Moreover, the Company has completed two acquisitions
that are anticipated to contribute toward future interest and debt repayments.
During fiscal 1993, several factors adversely affected the Company's net
sales and profits. First, factory shipments significantly trailed retail sales
as measured by A.C. Nielsen reflecting inventory reductions at the trade level.
Second, the Company's specialty chemicals division lost the Warner-Lambert
Company ("Warner-Lambert") as a customer in July as a result of the
reformulation of its Rolaids-Registered Trademark- product line. On an
annualized basis, Warner-Lambert had accounted for approximately $4.0 million of
the division's sales of DASC and recovered alcohol byproducts. Finally,
unfavorable foreign currency exchange rate fluctuations adversely impacted sales
and profits of the Company's international consumer products division.
For the year ended November 30, 1993, the Company also recognized $5.5
million of pretax nonrecurring charges, a $480,000 (net of tax) extraordinary
loss and a $569,000 net benefit from the cumulative effect of changes in
accounting principles. The nonrecurring charges principally reflected the
restructuring of the Company's international operations, a noncash expense
related to the repricing of stock options undertaken as a component of the
Special Dividend transaction and, to a lesser extent, a reduction in corporate
staffing. The extraordinary loss related to the early extinguishment of debt was
recognized in the first quarter of fiscal 1993. Finally, an expense of $731,000
(net of tax) and a benefit of $1.3 million were recorded pertaining to the
adoption in 1993 of Statements of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS
106") and No. 109, "Accounting for Income Taxes" ("SFAS 109"), respectively.
On May 12, 1994, the Company acquired Benzodent-Registered Trademark-, a
topical oral analgesic, from The Procter & Gamble Company. The Benzodent
business acquired consisted principally of trademarks and finished product
inventories. Benzodent, a denture analgesic cream in an adhesive base, expands
the Company's current specialty analgesic presence by complementing FLEX-ALL 454
and ICY HOT in the topical analgesics market and PAMPRIN and PREMSYN PMS in the
menstrual analgesics category. The Company financed the purchase of Benzodent
with borrowings under its Old Credit Agreement.
On June 17, 1994, the Company acquired a license to the
pHisoDerm-Registered Trademark- trademark in the United States, Canada and
Puerto Rico (the "Territory"), together with certain other pHisoDerm related
assets from Sterling. pHisoDerm is a unique line of specialty skin cleansers
with annual sales in the Territory in excess of $10.0 million. Sterling will
retain certain hospital and other institutional pHisoDerm sales in the
Territory, the related pHisohex product line and all pHiso businesses outside
the Territory. The purchase price for the license of pHisoDerm in the Territory
and the other assets was $16.0 million. If net sales of pHisoDerm products in
the United States only exceed (i) $10.0 million for the 12-month period
beginning July 1, 1994 and ending June 30, 1995 or (ii) $11.0 million for either
of the 12-month periods beginning July 1, 1995 and July 1, 1996, respectively,
and ending June 30, 1996 and June 30, 1997, respectively, then within 45 days
after the end of the applicable 12-month period with respect to which the
applicable net sales threshold specified in (i) or (ii) above has been exceeded,
the Company will pay Sterling $1.0 million for such year.
Despite the high level of consumer awareness and broad distribution of
Benzodent and pHisoDerm, sales of each product have declined over the past three
years. The Company believes that this decline as it relates to pHisoDerm is
primarily attributable to the decision by Sterling to cease all advertising with
respect to pHisoDerm since 1991. In 1993, Benzodent and pHisoDerm had strong
operating margins and market positions despite the relative lack of advertising
and promotion expenditures by their owners. The Company intends to increase
spending on advertising and promotion in an effort to increase each brand's
sales and market share.
Also on June 17, 1994, the Company sold Units consisting of $75.0 million
aggregate principal amount of the Old Notes with the Warrants to purchase
417,182 shares of common stock at $7.15 per share to the Initial Purchaser and
entered into the New Credit Agreement. The New Credit Agreement includes a $20.0
million term loan, a $22.5 million working capital facility and a $12.5 million
facility for future
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acquisitions. The proceeds of the financings were used to fund the pHisoDerm
acquisition and repay all existing indebtedness under the Old Credit Agreement,
and will be used for working capital and to make additional acquisitions.
The refinancing of the Old Credit Agreement with the issuance of the Notes
and the Warrants and the proceeds from the New Credit Agreement has resulted in
a reduction in annual debt service obligations and exposure to variable interest
rates, although indebtedness under the New Credit Agreement will continue to be
at variable rates, since the Notes provide for payments of interest only until
maturity and bear interest at a fixed rate. Prior to maturity of the Notes on
June 15, 2004, the Company will have to either refinance its obligations with
respect to the Notes, sell assets or raise equity capital to repay the principal
amount of the Notes, since the company does not currently expect to generate
sufficient cash flow from operations to make the principal payment due at
maturity on the Notes. Moreover, the Warrants obligate the Company to issue the
underlying shares of common stock upon payment of the exercise price of $7.15
per share during the five year term regardless of the then prevailing market
price of the Common Stock.
On September 19, 1994, the Company completed the Exchange Offer in which the
Notes, which were registered under the Securities Act, were issued in exchange
for the Old Notes.
The Company's operations continue to be impacted by the Special Dividend
transaction. The consequences to the Company have been significantly increased
interest expense and debt repayment obligations, and thus greater vulnerability
to adverse business conditions. These factors have adversely affected the
Company's net income and, to a lesser extent, operating income. Until the
Company's indebtedness is reduced significantly, the Company's net income will
likely continue to be adversely affected as a result of the Special Dividend
transaction.
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RISK FACTORS
THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER INFORMATION INCLUDED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SHOULD BE CAREFULLY CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
LEVERAGE AND DEBT SERVICE
As of August 31, 1994, the Company's long-term debt was $103.1 million
(including $2.5 million in current maturities) and the Company's shareholders'
deficit was $31.2 million. The Company may incur additional indebtedness in the
future, subject to certain limitations imposed by law and contained in the
instruments governing its indebtedness. The Company will continue to be highly
leveraged, although its annual debt service obligations and its exposure to
variable interest rates was reduced as a result of the issuance of the Units.
The degree to which the Company is leveraged could have important
consequences to holders of the Warrants and Common Stock, 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) certain of the Company's borrowings are and will continue to 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.
The Notes will mature on June 15, 2004. The Company believes that it will
generate sufficient cash flow from operations to be able to make the scheduled
interest and principal payments under the New Credit Agreement and interest
payments under the Notes, although the Company does not currently expect to
generate sufficient cash flow from operations to make the principal payment due
at maturity on the Notes. Accordingly, the Company will have to either refinance
its obligations with respect to the Notes prior to maturity, sell assets or
raise equity capital to repay the principal amount of the Notes. The Company's
ability to make its principal payment under the Notes, sell assets or raise
equity capital depends on its financial and operating performance, which, in
turn, is subject to prevailing economic conditions and to financial, business
and other factors, some of which are beyond its control. The Company's cash flow
from its operations and borrowings have been sufficient to meet its historical
obligations under substantially less indebtedness than has existed following the
payment of the Special Dividend. There can be no assurance that the Company's
cash flow from operations will continue to be sufficient or that future
borrowing facilities or other sources of funds will be available for the payment
or refinancing of the Notes or the Company's other indebtedness.
RESTRICTIVE COVENANTS
The New Credit Agreement and the Indenture with respect to the Notes contain
various operating covenants including, among others, restrictions on the ability
of the Company to incur additional indebtedness, to create liens or other
encumbrances, to make certain payments and investments, and to sell or otherwise
dispose of assets and merge or consolidate with another entity. The New Credit
Agreement and the Indenture also require the Company to meet certain financial
ratios and tests, including a minimum net worth test, a minimum fixed charge
coverage ratio and a maximum leverage ratio. Any failure of the Company to
comply with the covenants contained in the New Credit Agreement or the Indenture
could result in an event of default under either the New Credit Agreement or the
Indenture which could permit acceleration of the obligations thereunder and
acceleration of debt under other instruments that may contain cross-acceleration
or cross-default provisions. Other indebtedness of the Company could contain
financial and other covenants more restrictive than those applicable to the
Notes.
SHAREHOLDERS' DEFICIT
Primarily as a result of the payment of the Special Dividend, shareholders'
equity of the Company changed from approximately $58.6 million at November 30,
1992 to a deficit of approximately $31.2 million at August 31, 1994.
STATE LAW LIMITATIONS ON DISTRIBUTIONS
Under the Tennessee Business Corporation Act, it is unlawful to make a
distribution if, after giving effect to the transaction, (i) the corporation
would not be able to pay its debts as they become due in the
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usual course of business, or (ii) the corporation's total assets would be less
than the sum of its total liabilities plus the amount that would be needed, if
the corporation were to be dissolved at the time of the distribution, to satisfy
the preferential rights upon dissolution of shareholders whose preferential
rights are superior to those receiving the distribution. Distributions include
any direct or indirect transfer of money or other property or incurrence of
indebtedness by a corporation to or for the benefit of its shareholders in
respect of any of its shares and may be in the form of a dividend, a purchase,
redemption or other acquisition of shares, a distribution of indebtedness or
otherwise. The Company presently intends to retain earnings to finance future
growth, service indebtedness and for general corporate purposes and does not
presently intend to pay dividends on its capital stock. The Indenture and the
New Credit Agreement restrict the payment of distributions.
COMPETITION
The OTC pharmaceutical and functional toiletry products markets in which the
Company competes are highly competitive. The markets are 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. The Company competes primarily on the basis of product quality, price,
brand loyalty and consumer acceptance. The Company's competitors include other
OTC pharmaceutical companies and large consumer products companies, many of
which have considerably greater financial and marketing resources than the
Company. The products offered by these companies are often supported by much
larger advertising and promotional expenditures and are generally backed by
larger sales forces. In addition, the Company's competitors have often been
willing to use aggressive spending on trade promotions as a strategy for
building market share at the expense of their competitors, including the
Company. The private label products have also become increasingly more
competitive in certain of the Company's product categories. Another factor
affecting the OTC pharmaceutical and toiletry products business is the
consolidation of retailers and increasingly more competitive negotiations for
access to shelf space.
In the specialty chemicals division, the Company competes on the basis of
product quality, technical service and price. In the principal markets currently
served by the specialty chemicals division, there are a limited number of firms
with which the Company competes.
GOVERNMENT REGULATION
The Company's products are generally subject to governmental regulations,
primarily those of the Federal Food and Drug Administration (the "FDA"). Certain
of the Company's consumer products are regulated by the FDA as OTC drugs, with
the rest of the products being regulated as "cosmetics." All such products must
comply with FDA regulations governing the safety of the products themselves and
the ingredients used in their manufacture. FDA regulations for all
pharmaceuticals products also include requirements for product labeling and for
adherence to "current good manufacturing practices."
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. Future changes in the monographs could result in the
Company having to revise product labeling and formulations.
The Company has supplied data to the FDA in connection with the OTC review
process with respect to pyrilamine maleate, one of the three active ingredients
used in the PAMPRIN and PREMSYN PMS products, to support the classification of
pyrilamine maleate as a generally recognized safe and effective ingredient for
menstrual relief products. Based on study results and marketing experience, the
Company believes that further clinical testing of pyrilamine maleate may be
required. Although the exact requirements of the final monographs cannot be
predicted, it is possible that pyrilamine maleate will no longer be permitted to
be indicated for relief from the "negative effects cluster," including tension
and irritability. The Company has been actively monitoring the process and does
not believe that its OTC drug brands 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.
With regard to all of the Company's products, the FDA may revise applicable
regulations or provide new interpretations of existing regulations which could
necessitate product labeling changes, reformulation
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or other changes in the Company's products or the conduct of its business. While
it is impossible to predict the impact of future FDA actions, to date the
Company has not been adversely affected as a result of compliance with FDA or
state regulations.
In addition to the FDA regulations discussed above, the Company is subject
to numerous other statutory and regulatory restrictions, including regulations
relating to product packaging. As a result of an agreement with the Consumer
Product Safety Commission, the Company will change the packaging of certain of
its PAMPRIN products to child resistant packaging, even though there has been no
consumer safety claims filed related to the current package. This change will
take approximately one year to complete and will require new packaging equipment
at a cost of approximately $500,000. The Company does not expect that the
repackaging will materially adversely affect PAMPRIN's sales or the market share
of that product generally.
The Company is continually engaged in assessing compliance of its operations
with applicable federal, state and local health, safety and environmental laws
and regulations, including those pertaining to underground storage tanks, clean
air rules and the likely designation of a site in the vicinity of the Company's
manufacturing facility as a National Priorities List Superfund site.
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 others. The Company has not
had any material claims in the past ten years and is not aware of any material
claims pending against the Company or its products. 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, through HBA Insurance Limited, its captive insurance
company subsidiary, maintains product liability insurance that it believes to be
adequate; however, there can be no assurance that it will be able to retain its
existing coverage or that such coverage will be cost-justified or sufficient to
satisfy future claims, if any.
SEASONALITY
During recent fiscal years, the Company's first quarter net sales and income
have trailed the other fiscal quarters on average from 25% to 35% because of
slower sales of international consumer products and the relative absence of
promotional campaigns during this quarter.
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
Robert E. Bosworth, Executive Vice President and Chief Financial Officer. The
Company has recently restructured certain of its management responsibilities. As
a result of this restructuring, the Company will become even more reliant on the
services of Messrs. Guerry and Bosworth. The loss of the services of either of
Messrs. Guerry or Bosworth could have an adverse effect on the Company.
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 and stock market conditions generally.
DIVIDEND POLICY
The Company 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.
USE OF PROCEEDS
In the event that all of the currently outstanding Warrants are exercised,
of which there can be no assurance, the Company will receive net proceeds of
approximately $2.9 million. The net proceeds from exercise of the Warrants
received by the Company will be considered uncommitted funds that may be used by
the Company for general corporate purposes.
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PLAN OF DISTRIBUTION
The shares of Common Stock received pursuant to the exercise of Warrants may
be sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the Common
Stock or a combination of such methods of resale, at market prices prevailing at
the time of resale, at prices related to such prevailing market prices or at
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers of
any such Common Stock. Any person that resells Common Stock that were received
by it for its own account pursuant to the exercise of Warrants and any person
that participates in a distribution of Common Stock may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Common Stock and any commissions or concessions received by any
such person may be deemed to be underwriting compensation under the Securities
Act. The Company has no arrangement or understanding with any broker or dealer
to distribute the Common Stock received upon the exercise of Warrants.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Common Stock may not simultaneously engage in
market making activities with respect to the Common Stock for a period of two
business days prior to the commencement of such distribution. In addition and
without limiting the foregoing, each such person will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including, without limitation, rules 10b-6 and 10b-7, which may limit the timing
and purchases and sales of the Common Stock by such persons. All of the
foregoing may affect the marketability of the Common Stock.
At the time a particular offer of Common Stock is made, a Prospectus
Supplement, if required, will be distributed which will set forth the aggregate
amount of Common Stock being offered and the terms of the offering, including
the name or names of any underwriters, dealers or agents, any discounts,
commissions and other terms constituting compensation from the selling holders
of the Common Stock and any discounts, commissions or concessions allowed,
reallowed or paid to dealers.
Pursuant to the Registration Rights Agreement, the Company will pay
substantially all of the expenses incident to the registration, offering and
sale of the Common Stock pursuant hereto, other than commissions, discounts and
allowances to underwriters, dealers or agents, which expenses are estimated to
be $20,000. The Registration Rights Agreement provides for indemnification of
persons engaged in the sale of the Common Stock and the Company to the extent
permitted by law for losses, claims, damages, liabilities and expenses arising
under certain circumstances and out of the registration of the Common Stock.
DESCRIPTION OF CAPITAL STOCK
The authorized Common Stock of the Company consists of 20,000,000 shares of
Common Stock, without par value, of which 7,292,199 shares are issued and
outstanding as of July 29, 1994 and 1,000,000 shares of preferred stock, none of
which are issued and outstanding. On that date there were approximately 638
record holders and an estimated 2,500 beneficial holders of shares of Common
Stock.
COMMON STOCK
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, if any. The holders of Common Stock are entitled to share
ratably in any distribution to shareholders upon liquidation of the Company. The
holders of Common Stock have no preemptive, conversion, registration or other
subscription or conversion rights, and the Common Stock is not subject to
further calls or assessments by the Company. The Common Stock currently
outstanding is, and the Common Stock to be issued by the Company upon exercise
of the Warrants will be, when issued, validly issued, fully paid and
non-assessable.
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Holders of Common Stock are entitled to one vote per share on all matters to
be voted on by the shareholders and do not have cumulative voting rights in the
election of directors. This means that the holders of a majority of the
outstanding shares of Common Stock voting in an election of directors can elect
all of the directors then standing for election, if they choose to do so.
PREFERRED STOCK
The Board of Directors has authority to divide the preferred stock into
series and to fix the rate of dividend, whether shares may be redeemed,
liquidation preferences, sinking fund provisions, terms and conditions of
conversion, voting rights, cumulative rights and any other designations
pertaining to such shares not forbidden by law. Except as otherwise provided by
law or by action of the Board of Directors, the entire voting power is vested
exclusively in the Common Stock. Dividends on any outstanding shares of
preferred stock must be declared and paid before any dividends on Common Stock.
The issuance of the preferred stock could adversely affect the voting power of
holders of Common Stock and could have the effect of delaying, deferring or
preventing a change in control of the Company.
CERTAIN CHARTER PROVISIONS
The Company's Charter contains the following provisions which may have the
effect of delaying or preventing a change of control of the Company: (i) the
Charter provides that the Company's directors are divided into three classes,
that only one class of directors is elected at each annual meeting and that each
director is elected for a term of three years; (ii) the Charter provides that
directors may be removed only for cause prior to the expiration of their terms;
and (iii) the Charter requires that, in addition to any other vote ordinarily
required by law, the affirmative vote of holders of not less than 75% of the
outstanding shares of Common Stock shall be necessary to approve certain sales
of Company assets, acquisitions, mergers, changes of control and other Business
Combinations (as defined in the Company's Charter) unless the proposed Business
Combination shall have been approved by a majority of the Continuing Directors
(as defined in the Company's Charter) or certain measures designed to ensure
that fair value is received by all shareholders are complied with. The
provisions enumerated above may have the effect of deterring unsolicited
acquisition proposals or delaying changes in control or management of the
Company.
VALIDITY OF SECURITIES
The validity of the securities offered hereby will be passed upon for the
Company by Miller & Martin, Chattanooga, Tennessee. A. Alexander Taylor, II, a
Director of the Company, is a partner in the law firm of Miller & Martin.
EXPERTS
The consolidated financial statements and schedules incorporated by
reference in this Prospectus and elsewhere in the Registration Statement to the
extent and for the periods indicated in their reports have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included or incorporated herein in
reliance upon the authority of said firm as experts in giving said reports.
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NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
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TABLE OF CONTENTS
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PAGE
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<S> <C>
Available Information.......................... iii
Incorporation of Certain Information by
Reference..................................... iii
Prospectus Summary............................. 1
Recent Developments............................ 4
Risk Factors................................... 7
Use of Proceeds................................ 9
Plan of Distribution........................... 10
Description of Capital Stock................... 10
Validity of Securities......................... 11
Experts........................................ 11
</TABLE>
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417,182 SHARES
[LOGO]
COMMON STOCK
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PROSPECTUS
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February 21, 1995
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