<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1998
REGISTRATION STATEMENT NO. 333-53627
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
CHATTEM, INC.
SIGNAL INVESTMENT & MANAGEMENT CO.
(Exact Name of Registrants as Specified in Their Charter)
<TABLE>
<S> <C> <C>
TENNESSEE 2834 62-0156300
DELAWARE 62-1290284
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
(TELEPHONE: 423-821-4571)
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
A. ALEXANDER TAYLOR II
PRESIDENT AND CHIEF OPERATING OFFICER
CHATTEM, INC.
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
(TELEPHONE: 423-821-4571)
COPY TO:
HUGH F. SHARBER, ESQ.
MILLER & MARTIN LLP
SUITE 1000 VOLUNTEER BUILDING
832 GEORGIA AVENUE
CHATTANOOGA, TENNESSEE 37402
(TELEPHONE: 423-756-6600)
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER NOTE PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
8 7/8% Series B Senior Subordinated Notes due
2008........................................... $200,000,000 100% $200,000,000 $60,606.06
Subsidiary Guarantees of 8 7/8% Series B Senior
Subordinated Notes Due 2008(2)................. -- -- -- --
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate
registration fee is payable with respect to the subsidiary guarantees.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 4, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
[LOGO]
OFFER TO EXCHANGE ITS 8 7/8% SERIES B SENIOR
SUBORDINATED NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 FOR ANY AND ALL OUTSTANDING
8 7/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN TIME, ON JULY 23, 1998,
UNLESS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION (THE "EXPIRATION DATE").
Chattem, Inc., a Tennessee corporation (the "Company"), hereby offers (the
"Exchange Offer"), upon the terms and subject to the conditions set forth in
this Prospectus (the "Prospectus") and the accompanying Letter of Transmittal
(the "Letter of Transmittal"), to exchange up to $200.0 million in aggregate
principal amount of its 8 7/8% Series B Senior Subordinated Notes due 2008 (the
"Exchange Notes") for equal principal amounts of its outstanding 8 7/8% Series A
Senior Subordinated Notes due 2008 (the "Series A Notes"). The Exchange Notes
are identical (including principal amount, interest rate, maturity and
redemption rights) to the Series A Notes for which they may be exchanged
pursuant to this offer, except that (i) the offering and sale of the Exchange
Notes will have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), and (ii) holders of Exchange Notes will not be entitled
to certain rights of holders of Series A Notes under a Registration Rights
Agreement (as defined herein) of the Company. The Series A Notes have been, and
the Exchange Notes will be, issued under an Indenture dated as of March 24, 1998
(the "Indenture") by and among the Company, Signal Investment & Management Co.,
a Delaware corporation and wholly-owned subsidiary of the Company, as guarantor
(the "Guarantor"), and SouthTrust Bank, National Association, as trustee (the
"Trustee"). The Company will not receive any proceeds from this Exchange Offer;
however, pursuant to the Registration Rights Agreement, the Company will bear
certain offering expenses. See "The Exchange Offer- Series A Notes Registration
Rights." The Series A Notes together with the Exchange Notes are referred to
herein as the "Notes."
The Exchange Notes will bear interest at the same rate and on the same terms
as the Series A Notes. Consequently, interest on the Exchange Notes will be
payable semi-annually on April 1 and October 1 of each year, commencing on
October 1, 1998. The Exchange Notes will mature on April 1, 2008, and may be
redeemed at the option of the Company, in whole or in part, on or after April 1,
2003, at the redemption prices set forth herein, plus accrued and unpaid
interest thereon and Liquidated Damages (as defined), if any, to the applicable
redemption date. Upon a Change of Control (as defined herein), the Company will
be required to make an offer to purchase all outstanding Exchange Notes at 101%
of the aggregate principal amount thereof, plus accrued and unpaid interest
thereon and Liquidated Damages, if any, to the date of repurchase. See
"Description of Exchange Notes--Optional Redemption" and "Repurchase at the
Option of Holders--Change of Control."
The Exchange Notes will be general unsecured obligations of the Company,
will be subordinated in right of payment to all existing and future Senior
Indebtedness (as defined) of the Company, including the Secured Credit Facility
(as defined) and will rank PARI PASSU in right of payment with $58.4 million in
aggregate principal amount of 12.75% Series B Subordinated Notes due 2004 (the
"Existing Notes") of the Company and any future senior subordinated indebtedness
of the Company. The Company's payment of principal, premium, if any, interest
and Liquidated Damages, if any, on the Exchange Notes will be guaranteed (the
"Subsidiary Guarantees"), jointly and severally, on a senior subordinated basis
by each Restricted Subsidiary (as defined) of the Company that guarantees any
other indebtedness of the Company or any other guarantor of the Notes (the
"Subsidiary Guarantors"). Upon issuance of the Exchange Notes, the only
Subsidiary Guarantor will be Signal Investment & Management Co. The Subsidiary
Guarantees will be subordinated in right of payment to all existing and future
Senior Indebtedness of the Subsidiary Guarantors, including all obligations of
the Subsidiary Guarantors under the Secured Credit Facility, will rank PARI
PASSU in right of payment with any senior subordinated indebtedness of the
Subsidiary Guarantors, and will rank senior in right of payment to all existing
and future subordinated indebtedness of the Subsidiary Guarantors. At February
28, 1998, on a pro forma basis after giving effect to the Acquisition (as
defined), the aggregate principal amount of Senior Indebtedness of the Company
would have been approximately $62.4 million (all of which would have been
Indebtedness secured by substantially all of the assets of the Company and its
domestic subsidiaries pursuant to the Secured Credit Facility). The Exchange
Notes will be structurally subordinated to all indebtedness and other
liabilities and commitments (including trade payables and capital lease
obligations) of the Company's foreign subsidiaries which will not guarantee the
Exchange Notes. As of February 28, 1998, the liabilities (including trade
payables and lease obligations) of the Company's foreign subsidiaries were $4.1
million.
The Company will accept for exchange any and all Series A Notes validly
tendered by eligible holders and not withdrawn prior to 5:00 p.m. Eastern time
on July 23, 1998, unless extended by the Company in its sole discretion (the
"Expiration Date"). Tenders of Series A Notes may be withdrawn at any time prior
to the Expiration Date. The Exchange Offer is subject to certain customary
conditions. The Series A Notes may be tendered only in integral multiples of
$1,000. See "The Exchange Offer."
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY INVESTORS WITH RESPECT TO THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
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 , 1998
<PAGE>
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
provides that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of the Exchange Notes received in exchange for Series A Notes where
such Series A Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, beginning on the date of this Prospectus and ending on the close of
business no more than one year after the date of this Prospectus, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "The Exchange Offer--Terms of the Exchange Offer" and "Plan of
Distribution."
The Series A Notes are not listed on any securities exchange and are not
traded on the National Association of Securities Dealers Automated Quotation
System, Inc. ("NASDAQ"). The Series A Notes are traded through the National
Association of Securities Dealers, Inc.'s ("NASD") PORTAL trading system, and it
is expected that the Exchange Notes will be eligible for trading through the
PORTAL system. The Company does not intend to list the Exchange Notes on any
national securities exchange or to seek admission thereof to trading on NASDAQ.
NationsBanc Montgomery Securities LLC has advised the Company that it has
made a market in the Series A Notes, and that it may make a market in the Series
A Notes and in the Exchange Notes; however, it is not obligated to do so and any
market-making activity may be discontinued at any time. As a result, there is no
assurance that an active public market will develop or continue for the Exchange
Notes, or that the market, if any, that develops for the Exchange Notes will be
similar to the limited market that currently exists for the Series A Notes. To
the extent that a market for the Exchange Notes does develop, the market value
of the Exchange Notes will depend on market conditions (such as yields on
alternative investments), general economic conditions, the Company's financial
condition and certain other factors. Such conditions might cause the Notes, to
the extent that they are traded, to trade at a significant discount from face
value. See "Risk Factors--Lack of Public Market."
Except as specifically requested by a holder on the Letter of Transmittal,
the Exchange Notes will be issued in the form of Global Notes (as defined
herein). Beneficial interests in the Global Note representing the Exchange Note
will be shown on, and transfers thereof will be effected through, records
maintained by The Depository Trust Company and its participants.
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection with
this Exchange Offer. See "The Exchange Offer."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF SERIES A NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
No person is authorized in connection with the Exchange Offer to give any
information or to make any representation not contained in this Prospectus or
the accompanying Letter of Transmittal, and, if given or made, such information
or representation must not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus or the accompanying Letter of
Transmittal, nor any exchange made hereunder shall under any circumstances
create any implication that the information contained herein is correct as of
any date subsequent to the date hereof.
Dealers effecting transactions in the Exchange Notes, whether or not
participating in the Exchange Offer, may be required to deliver a prospectus in
connection therewith. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
1
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-4 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, as permitted by
the rules and regulations of the Commission. For further information with
respect to the Company, the Series A Notes and the Exchange Notes, reference is
hereby made to the Registration Statement, including the exhibits and schedules
filed or incorporated as a part thereof. Statements contained herein concerning
the provisions of any document are not necessarily complete and in each instance
reference is made to the copy of the document filed as an exhibit or schedule to
the Registration Statement. Each such statement is qualified in its entirety by
reference to the copy of the applicable documents filed with the Commission. In
addition, the Company and the Guarantor are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Registration Statement, including the exhibits and schedules thereto,
and the periodic reports and other information filed in connection therewith,
may be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Seven World Trade Center, Suite
1300, New York, New York 10048 and Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Such reports, proxy and information statements and other information
may be found at the Commission's site address, http:// www.sec.gov. Copies of
such material also can be obtained from the Company upon request by writing to
Chattem, Inc., 1715 West 38th Street, Chattanooga, Tennessee 37409, Attention:
President and Chief Operating Officer.
In addition, the Company has agreed that, whether or not it is required to
do so by the rules and regulations of the Commission, for so long as any of the
Series A Notes or Exchange Notes remain outstanding, it will furnish (excluding
exhibits and schedules) to the holders of the Series A Notes and Exchange Notes
and file with the Commission (unless the Commission will not accept such a
filing) as specified in the Commission's rules and regulations: (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual combined financial statements only, a report thereon by the Company's
independent certified public accountants and (ii) all reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports. In addition, for so long as any of the Series A
Notes or Exchange Notes remain outstanding, the Company has agreed to make
available to any prospective purchaser of the Series A Notes or Exchange Notes
or beneficial owner of the Series A Notes or Exchange Notes in connection with
any sale thereof the information required by Rule 144A(d)(4) under the
Securities Act.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and 21E of the Exchange Act. Such
forward-looking statements are subject to known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. Important
factors ("Cautionary Statements") that could cause the actual results,
performance or achievements of the Company to differ materially from the
Company's expectations are disclosed in this Prospectus, including, without
limitation, those statements made in conjunction with the forward-looking
statements included under "Risk Factors" and otherwise herein. All written or
oral forward-looking statements attributable to the Company are expressly
qualified in their entirety by the Cautionary Statements.
------------------------
TRADEMARKS OF THE COMPANY INCLUDED IN THIS PROSPECTUS APPEAR IN ALL
CAPITALIZED LETTERS. ALL OTHER TRADEMARKS APPEARING IN THIS PROSPECTUS ARE THE
PROPERTY OF THEIR RESPECTIVE OWNERS.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING
THE FINANCIAL STATEMENTS AND RELATED NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. AS USED HEREIN, REFERENCES TO "CHATTEM" OR THE "COMPANY" ARE TO
CHATTEM, INC. REFERENCES TO "FISCAL YEAR" ARE TO THE COMPANY'S FISCAL YEAR WHICH
ENDS ON NOVEMBER 30 OF EACH YEAR. ON MARCH 24, 1998, THE COMPANY ACQUIRED THE
BAN LINE OF ANTI-PERSPIRANT/DEODORANT PRODUCTS ("BAN") FROM BRISTOL-MYERS SQUIBB
COMPANY ("BMS") (THE "ACQUISITION"). BAN'S FISCAL YEAR ENDS ON DECEMBER 31 OF
EACH YEAR. AS USED HEREIN, THE PRO FORMA FINANCIAL DATA INCLUDES THE ADJUSTMENTS
DESCRIBED IN "UNAUDITED PRO FORMA FINANCIAL DATA."
THE COMPANY
Chattem is a leading manufacturer and marketer of high quality, branded
consumer products primarily in attractive niche markets throughout the United
States and Canada. On March 24, 1998, the Company acquired BAN from BMS for a
purchase price of $165.0 million plus the assumption of up to $5.0 million in
liabilities. BAN has been one of the most recognized brands in the
anti-perspirant/ deodorant ("AP/Deo") market since its introduction in 1955 and
holds a dominant position in the roll-on market segment. On a pro forma basis,
the Company would have generated revenues and EBITDA (as defined herein) for the
twelve months ended February 28, 1998 of $240.8 million and $62.1 million,
respectively.
The Company's products are among the leaders in their respective markets
allowing the Company to establish brand loyalty among consumers, extend product
life cycles and maintain attractive margins. The Company competes in three
distinct market segments: OVER-THE-COUNTER PHARMACEUTICAL PRODUCTS, including
medicated powders (GOLD BOND), topical analgesics (FLEXALL, ICY HOT, BENZODENT)
and internal analgesics (PAMPRIN, NORWICH, PREMSYN PMS); FUNCTIONAL TOILETRIES
AND COSMETICS, including facial cleanser (PHISODERM), sunblock (BULLFROG),
shampoo (ULTRASWIM) and hair lightener (SUN-IN); and DIETARY SUPPLEMENTS
marketed under the SUNSOURCE name, including garlic extracts (GARLIQUE), a sleep
aid (MELATONEX), a product providing resistance against infections (ECHINEX), a
menopausal supplement (REJUVEX) and a newly launched St. John's Wort and
Siberian ginseng product for emotional balance and physical well being
(HARMONEX).
The Company has grown rapidly by (i) aggressive product line extensions that
capitalize on consumer awareness of the existing brand names and (ii) selective
acquisitions of new brands that can benefit from the Company's established
infrastructure and brand management expertise. Since 1992, the Company has
introduced in excess of 35 product line extensions, which accounted for a
significant amount of total sales in fiscal 1997. Chattem has traditionally
acquired either (i) established brands that have been undermanaged by larger
consumer products companies and therefore have unrealized potential or (ii)
brands of entrepreneurial companies which have achieved regional success that
would benefit from national exposure. In both cases, the Company has been
successful at increasing the acquired brand's sales and product contribution by
utilizing the Company's marketing, sales, product development and manufacturing
expertise and established distribution network.
As a result of product line extensions and strategic acquisitions, excluding
the Acquisition, the Company has achieved a compound annual growth rate ("CAGR")
in sales and EBITDA of 12.4% and 31.5%, respectively, over the last four fiscal
years.
BAN OVERVIEW
BAN is one of the most highly recognized brands in the AP/Deo market, with a
40 year history of innovation and quality. In the AP/Deo market, which is
segmented by end-user and application type, BAN is positioned as a highly
effective AP/Deo in the unisex segment, where it ranks in the top three. In
addition, BAN is the dominant brand in the high margin roll-on segment. BAN's
product portfolio is
3
<PAGE>
focused on five core products: BAN Roll-On, BAN Clear Roll-On, BAN White Solid,
BAN Clear Solid and BAN Clear Soft Solid. These products compete in all major
AP/Deo market segments except aerosol.
The addition of the BAN product line to Chattem further diversifies the
Company's revenue base and enhances its market presence. The Company believes
there are significant opportunities to increase BAN's revenues and related
contribution by augmenting the brand's current level of advertising and
promotional spending. In addition, Chattem intends to refocus the product's
marketing strategy to target specific segments within BAN's broad and
established customer base. The Company also would have realized approximately
$9.0 million in cost savings on a 1997 pro forma basis based on the terms of a
manufacturing agreement entered into between the Company and BMS, pursuant to
which BMS will manufacture BAN for Chattem.
COMPETITIVE STRENGTHS
The acquisition of BAN improves the Company's market position and increases
its overall growth prospects. The Company will continue to utilize the following
competitive strengths to enhance its position in the marketplace:
COST EFFECTIVE ADVERTISING AND PROMOTIONAL SUPPORT. The Company has a
proven ability to efficiently utilize its marketing, promotional and advertising
expertise to increase the profitability of its portfolio of well-recognized
brands. The Company traditionally invests 35% to 40% of its revenues in
advertising and trade and consumer promotions. The Company believes that it has
a significant competitive advantage compared to certain of its larger
competitors due to its ability to (i) manage advertising, trade promotion and
consumer promotion expenditures on a cost effective basis and (ii) quickly adapt
its marketing strategies to changing consumer preferences.
STRONG HISTORICAL CASH FLOW. The Company's diverse product offerings,
strong brand names and leading market positions have provided a stable base of
cash flow. As a result of these factors, the Company's four year historical
average EBITDA margin has been 18.5%. On a pro forma basis, the Company's EBITDA
margin for the twelve months ended February 28, 1998, would have improved to
25.8%. The Company's products compete in diverse markets which reduces the
Company's dependency on any one product or market segment. Further, a majority
of the Company's products are targeted to consumers over the age of 45, a
segment of the population which is expected to grow at a significantly faster
rate than the overall population.
EXPERIENCED MANAGEMENT TEAM. The Company's senior management team averages
over 15 years of experience with the Company. The Company's senior management is
actively involved in the management of the Company's brands, thereby allowing
the Company to quickly make and execute decisions regarding changes in brand
strategy. Additionally, the senior management team has lead the successful
completion and integration of five acquisitions over the past four years.
EFFECTIVE BRAND MANAGEMENT. The Company believes that it is able to (i)
effectively manage and develop brands that compete in certain niche segments of
larger overall markets and (ii) identify brands with significant intrinsic value
that may have been undermarketed or underdeveloped by prior owners. The Company
believes that for many larger consumer products companies certain brands do not
generate the sales or profitability that allow for efficient and cost effective
brand management. Conversely, the Company believes that firms that are smaller
than Chattem generally do not achieve the advertising and marketing scale
necessary to compete consistently or on a national basis. As a result, the
Company has been able to utilize brand recognition within its products'
respective markets to maintain favorable relationships with retailers, achieve
consumer loyalty and extend product life cycles.
EFFICIENT OPERATIONS. The Company has built strong marketing, sales,
product development, manufacturing, distribution and staff functions to support
its strategic emphasis on growth within the consumer products industry. Because
of its operating efficiency the Company is able to support substantial
additional
4
<PAGE>
product offerings and volume with relatively low increases in non-manufacturing
employees and fixed expenses. For example, the Company has increased sales by
approximately $53.4 million over the last four years, while its selling, general
and administrative expense as a percentage of sales has declined from 21.8% to
15.6% over the same time period.
ESTABLISHED DISTRIBUTION NETWORK. Chattem has an established distribution
network comprised of thousands of drug, food and mass merchandiser retailers
which continues to be developed and serviced through its internal sales force.
The Company has a proven ability to leverage this distribution network to
increase the market penetration of product line extensions and acquired brands.
For example, BULLFROG (acquired in 1986) and FLEXALL (acquired in 1989),
regional brands at the time of acquisition, were expanded into national brands
with combined sales in excess of $20.0 million in fiscal 1997.
GROWTH STRATEGY
By capitalizing on its competitive strengths, the Company intends to (i)
expand the market share of existing products, (ii) maximize the value of
existing brands through product line extensions and (iii) acquire established
brands with unrealized potential or successful regional brands that would
benefit from national exposure.
STRATEGY FOR BAN
The Company believes that it can increase both revenue and profitability of
BAN based upon the following strategies:
REALIZE MANUFACTURING COST SAVINGS. BAN has historically been manufactured
in a facility that has operated well below its manufacturing capacity. As a
result, BAN absorbed significant fixed overhead. Chattem has entered into a
manufacturing agreement with BMS, pursuant to which BMS will manufacture BAN at
a pro forma cost savings of approximately $9.0 million over the amount reflected
for the manufacture of BAN in the BAN financial statements for 1997.
LEVERAGE CHATTEM'S EXPERIENCED SALES FORCE. BAN, with 45 SKU's, represented
a small portion of the total SKU's of the Personal Care unit of BMS's Consumer
Products group. In contrast, BAN represents Chattem's largest product line and
therefore will be a major focus of the Company's 55 person in-house sales force.
Furthermore, Chattem's executive management team is actively involved in the
management of all the Company's brands and will be directly involved in
realizing the full potential of BAN.
ENHANCE AND REFOCUS MARKETING STRATEGY. Beginning in 1994, BAN began
receiving less media spending than in previous years. Chattem believes that it
can apply its expertise in advertising and promotion to BAN and generate strong
gains in market share with limited incremental spending above the amount spent
in 1997. To achieve this, the Company plans to (i) significantly increase
advertising support to a level that is consistent with BAN's market share and
(ii) develop a consistent marketing platform that targets certain demographic
segments where the Company believes there is a current lack of focus by the
industry.
INTRODUCE NEW AND OR IMPROVED FORMS OF BAN. Management believes that sales
gains in the AP/Deo market are driven in part by new product introductions and
product line extensions. BAN is recognized for its leadership in developing new
products. In fact, three of BAN's five existing products were leaders in
creating new segments of the AP/Deo market. Management believes there are
numerous enhancements that can be made to the BAN product line to improve
existing forms and introduce innovative line extensions.
5
<PAGE>
THE ACQUISITION
On March 24, 1998, the Company acquired the BAN line of AP/Deo products from
BMS for a purchase price of $165.0 million (subject to an inventory adjustment),
plus the assumption of up to $5.0 million of liabilities. The Company acquired
the BAN trademarks, formulae, certain patents pertaining to AP/Deo products
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. Chattem has entered into a manufacturing agreement with BMS,
pursuant to which BMS will manufacture BAN at a pro forma cost savings of
approximately $9.0 million over the amount reflected for the manufacture of BAN
in the BAN financial statements for 1997.
In connection with the Acquisition, the Company (i) amended and restated the
Credit Agreements, dated as of June 26, 1997, as amended, by and among the
Company, NationsBank of Tennessee, N.A., as agent and the other lenders party
thereto (the "Secured Credit Facility"), to permit the issuance of the Series A
Notes (the "Secured Credit Facility Amendment") and (ii) obtained the requisite
consents pursuant to a consent solicitation (the "Consent Solicitation") under
the indenture governing its 12.75% Senior Subordinated Notes due 2004 (the
"Existing Notes") to permit the Company to permit its Subsidiaries which
guarantee the Existing Notes to guarantee other indebtedness of the Company,
including the Notes. Currently, the only subsidiary of the Company that
guarantees the Existing Notes is Signal Investment & Management Co. ("Signal").
As of February 28, 1998 there were $67.0 million in aggregate principal amount
of Existing Notes outstanding. The Acquisition, the Secured Credit Facility
Amendment and the Consent Solicitation are sometimes hereinafter referred to as
the "Transaction".
The purchase price for the Acquisition, together with associated transaction
fees and expenses, were funded through the net proceeds from the sale of the
Series A Notes. See "The Acquisition."
RECENT DEVELOPMENTS
On May 12, 1998, the Company sold its CORN SILK oil control makeup brand to
Del Laboratories, Inc. for $10.75 million plus inventories and the assumption of
certain liabilities. The Company used the proceeds from the sale to reduce
Senior Indebtedness.
On April 27, 1998, the Company repurchased $8.6 million in principal amount
of its Existing Notes. As a result, there were as of May 26, 1998 $58.4 million
in aggregate principal amount of the Existing Notes Outstanding.
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Securities Offered........... $200.0 million in aggregate principal amount of 8 7/8%
Series B Senior Subordinated Notes due April 1, 2008.
The Exchange Offer........... $1,000 principal amount of the Exchange Notes in exchange
for each $1,000 principal amount of Series A Notes. As of
the date hereof, all of the aggregate principal amount of
Series A Notes are outstanding. The Company will issue the
Exchange Notes to eligible holders on or promptly after the
Expiration Date of the Exchange Offer.
Based on interpretations by the staff of the Commission set
forth in no-action letters issued to unrelated third
parties, the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for Series A
Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than (i) a broker-
dealer who purchases Notes directly from the Company to
resell
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
pursuant to Rule 144A or any other available exemption under
the Securities Act or (ii) a person that is an affiliate of
the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration
and prospectus delivery provisions of the Securities Act;
provided that the holder is acquiring the Exchange Notes in
the ordinary course of its business and is not
participating, and had no arrangement or understanding with
any person to participate, in the distribution of the
Exchange Notes. (See the No-Action Letters.) Holders of
Series A Notes who tender their Series A Notes in the
Exchange Offer with the intention of participating in a
distribution of the Exchange Notes will not be able to rely
on the No-Action Letters or similar no-action letters. Each
broker-dealer that receives Exchange Notes for its own
account in exchange for Series A Notes, where such Series A
Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes.
Holders of Series A Notes will not have dissenters' rights
or appraisal rights in connection with the Exchange Offer.
See "The Exchange Offer--Appraisal Rights."
Expiration Date.............. The Exchange Offer will expire at 5:00 p.m., Eastern time,
on July 23, 1998, unless the Exchange Offer is extended by
the Company in its sole discretion, in which case the term
"Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended. See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain customary
conditions, which may be waived, to the extent permitted by
law, by the Company. See "The Exchange Offer--Conditions."
Procedures for Tendering
Exchange Notes............. Each eligible holder of Series A Notes wishing to accept the
Exchange Offer must complete, sign and date the accompanying
Letter of Transmittal, or a facsimile thereof, in accordance
with the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Series A Notes and any other
required documentation to the Exchange Agent (as defined
herein) at the address set forth in the Letter of Transmit-
tal. By executing the Letter of Transmittal, each holder
will represent to the Company that, among other things, (i)
the Exchange Notes to be acquired by such holder of Series A
Notes in connection with the Exchange Offer are being
acquired by such holder in the ordinary course of its
business, (ii) such holder has no arrangement or under-
standing with any person to participate in a distribution of
the Exchange Notes, (iii) that if such holder is a
broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of
distributing Exchange Notes, such holder will comply with
the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person
and cannot rely on the
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
position of the staff of the Commission set forth in the
No-Action Letters (see "The Exchange Offer--Resale of the
Exchange Notes"), (iv) such holder understands that a
secondary resale transaction described in clause (iii) above
and any resales of Exchange Notes obtained by such holder
directly from the Company should be covered by an effective
registration statement containing the selling security
holder information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the Commission and (v) such
holder is not an "affiliate" as defined in Rule 405 under
the Securities Act, of the Company. If the holder is a
broker-dealer that will receive Exchange Notes for its own
account in exchange for Series A Notes that were acquired as
a result of market-making activities or other trading
activities, such holder will be required to acknowledge in
the Letter of Transmittal that such holder will deliver a
prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a
prospectus, such holder will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities
Act. See "The Exchange Offer--Procedures for Tendering."
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Series A Notes are registered in
the name of a broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender such Series A
Notes in the Exchange Offer should contact such registered
holder promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such beneficial
owner wishes to tender on such owner's own behalf, such
owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Series A Notes,
either make appropriate arrangements to register ownership
of the Series A Notes in such owner's name or obtain a
properly completed bond power from the registered holder.
The transfer of registered ownership may take considerable
time and may not be able to be completed prior to the
Expiration Date. See "The Exchange Offer--Procedures for
Tendering."
Guaranteed Delivery
Procedures................. Holders of Series A Notes who wish to tender their Series A
Notes and whose Series A Notes are not immediately available
or who cannot deliver the Letter of Transmittal or any other
documents required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for book-entry
transfer) prior to the Expiration Date must tender their
Series A Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer - Guaranteed
Delivery Procedures."
Withdrawal Rights............ Tenders may be withdrawn at any time prior to 5:00 p.m.,
Eastern time, on the Expiration Date pursuant to the
procedures described under "The Exchange Offer -Withdrawal
of Tenders."
Acceptance of the Series A
Notes and Delivery of the
Exchange Notes............. Subject to the satisfaction or waiver of the conditions to
the Exchange Offer, the Company will accept for exchange any
and all Series A
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Notes that are properly tendered in the Exchange Offer, and
not withdrawn, prior to 5:00 p.m., Eastern time, on the
Expiration Date. The Exchange Notes issued pursuant to the
Exchange Offer will be delivered on the earliest practicable
date following the Expiration Date. See "The Exchange Offer
Terms of the Exchange Offer."
Certain Federal Income Tax
Consequences............... For a discussion of certain federal income tax
considerations relating to the exchange of the Series A
Notes for Exchange Notes, see "Certain Federal Income Tax
Considerations."
Registration Rights
Agreement.................. The Series A Notes were sold by the Company on March 24,
1998, to the Initial Purchaser pursuant to a purchase
agreement dated March 20, 1998 (the "Purchase Agreement") by
and among the Company, the Guarantor and the Initial
Purchaser, in an offering consisting in the aggregate of
$200 million of the Series A Notes. Pursuant to the Purchase
Agreement, the Company, the Guarantor and the Initial
Purchaser entered into the Registration Rights Agreement,
which grants the holders of the Series A Notes certain
exchange and registration rights. This Exchange Offer is
intended to satisfy such rights, which generally will
terminate upon the consummation of the Exchange Offer. The
holders of the Exchange Notes will not be entitled to any
exchange or registration rights with respect to the Exchange
Notes. See "The Exchange Offer--Series A Notes Registration
Rights."
Effect on Holders of the
Series A Notes............. As a result of the making of this Exchange Offer, the
Company will have fulfilled certain of its obligations under
the Registration Rights Agreement, and holders of Series A
Notes who do not tender their Series A Notes generally will
not have any further registration rights under the
Registration Rights Agreement or otherwise. Such holders
will continue to hold the untendered Series A Notes and will
be entitled to all the rights and subject to all the
limitations, including, without limitation, transfer
restrictions, applicable thereto under the Indenture, except
to the extent such rights or limitations, by their terms,
terminate or cease to have further effectiveness as a result
of the Exchange Offer. Accordingly, if any Series A Notes
are tendered and accepted in the Exchange Offer, the trading
market, if any, for the untendered Series A Notes could be
adversely affected.
Exchange Agent............... SouthTrust Bank, National Association is serving as exchange
agent (the "Exchange Agent") in connection with the Exchange
Offer.
</TABLE>
9
<PAGE>
SUMMARY OF TERMS OF EXCHANGE NOTES
The form and terms of the Exchange Notes are identical to the form and terms
of the Series A Notes which they replace except that (i) the Exchange Offer will
have been registered under the Securities Act and, therefore, the Exchange Notes
will not bear legends restricting the transfer thereof and (ii) the holders of
Exchange Notes generally will not be entitled to further registration rights
under the Registration Rights Agreement, which rights generally will have been
satisfied when the Exchange Offer is consummated. The Exchange Notes will
evidence the same indebtedness as the Series A Notes which they replace and will
be issued under, and be entitled to the benefits of, the Indenture. See
"Description of Exchange Notes."
<TABLE>
<S> <C>
Maturity Date................ April 1, 2008
Interest Payment Dates....... April 1 and October 1, commencing October 1, 1998
Optional Redemption.......... On or after April 1, 2003, the Company may redeem the Notes,
in whole or in part, at the redemption prices set forth
herein, plus accrued and unpaid interest thereon and
Liquidated Damages, if any, to the date of redemption.
Notwithstanding the foregoing, at any time on or before
April 1, 2001, the Company may redeem up to 35% of the
original aggregate principal amount of the Notes with the
net proceeds of one or more Public Offerings (as defined) of
common stock of the Company at the redemption prices set
forth herein, plus accrued and unpaid interest thereon, if
any, to the redemption date; provided, that at least $100.0
million in aggregate principal amount of Notes remain
outstanding immediately after the occurrence of such
redemption; and, provided, further, that such redemption
shall occur within 60 days of the date of the closing of
such Public Offering. See "Description of Exchange
Notes--Optional Redemption."
Mandatory Redemption......... None.
Subordination................ The Notes are general unsecured obligations of the Company
and rank subordinate in right of payment to all existing and
future Senior Indebtedness (as defined), including
indebtedness under the Secured Credit Facility, will rank
PARI PASSU in right of payment with $58.4 million in
aggregate principal amount of the Existing Notes and will
rank senior or PARI PASSU in right of payment with all other
existing and future subordinated indebtedness of the
Company. The Subsidiary Guarantees will be general unsecured
obligations of the Subsidiary Guarantors, will rank
subordinate in right of payment to all existing and future
Senior Indebtedness of the Subsidiary Guarantors, including
their guarantees under the Secured Credit Facility, PARI
PASSU with the guarantees of the Existing Notes and will
rank senior or PARI PASSU in right of payment with all other
existing and future subordinated indebtedness of the
Subsidiary Guarantors. As of February 28, 1998, on a pro
forma basis after giving effect to the issuance of the
Series A Notes and the application of the net proceeds
therefrom, the Notes would have been subordinated to $62.4
million of Senior Indebtedness. See "Risk
Factors--Subordination." The Notes are structurally
subordinated to all indebtedness and other liabilities and
commitments (including trade payables and capital lease
obligations) of the Company's foreign subsidiaries. Any
right of
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
the Company to receive assets of any of its foreign
subsidiaries upon the latter's liquidation or reorganization
(and the consequent right of the Holders of the Notes to
participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors,
except to the extent that the Company is itself recognized
as a creditor of such Subsidiary, in which the claims of the
Company would still be subordinate to any security in the
assets of such Subsidiary and any indebtedness of any such
Subsidiary senior to that held by the Company. As of
February 28, 1998, the liabilities (including trade
payables) of the Company's foreign subsidiaries were $4.1
million. See "Risk Factors--Foreign Operating Subsidiaries;
Structural Subordination."
Subsidiary Guarantees........ The Notes are unconditionally guaranteed by each Restricted
Subsidiary (as defined) of the Company that guarantees any
other indebtedness of the Company or any other guarantor of
the Notes (each a "Subsidiary Guarantor" and, collectively,
the "Subsidiary Guarantors"). Upon issuance of the Exchange
Notes, the only Subsidiary Guarantor will be Signal. See the
Financial Statements of Signal included herewith.
Change of Control............ Upon a Change of Control (as defined herein), the Company
will be required to make an offer to repurchase all
outstanding Notes at 101% of the principal amount thereof
plus accrued and unpaid interest thereon and Liquidated
Damages, if any, to the date of repurchase. See "Description
of Exchange Notes--Repurchase at the Option of
Holders--Change of Control."
Covenants.................... The Indenture restricts, among other things, the ability of
the Company and its subsidiaries to incur additional
indebtedness and issue preferred stock, incur liens, pay
dividends or make certain other restricted payments, apply
net proceeds from certain asset sales, enter into certain
transactions with affiliates, merge or consolidate with any
other person, sell stock of Restricted Subsidiaries, and
assign, transfer, lease, convey or otherwise dispose of
substantially all of the assets of the Company. See
"Description of Exchange Notes--Certain Covenants."
Use of Proceeds.............. The Company will not receive proceeds from the Exchange
Offer. The net proceeds from the sale of the Series A Notes
were used to finance the Acquisition, pay associated fees
and expenses, repay revolving credit indebtedness under the
Secured Credit Facility and for general corporate purposes.
See "Use of Proceeds."
</TABLE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Exchange Notes.
11
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited summary pro forma combined financial information of
the Company gives effect to the consummation of the Transaction and the offering
of Series A Notes as if they occurred on March 1, 1997. The information included
in this table should be read in conjunction with the audited historical
consolidated financial statements of Chattem and the audited historical
financial statements of BAN and the respective notes thereto, "Unaudited Pro
Forma Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus. The
summary pro forma combined financial information does not purport to represent
what the Company's financial position or results of operations actually would
have been if the Transaction and the offering of Series A Notes had been
completed as of the date or for the periods presented, or to project the
Company's financial position or results of operations at any future date or for
any future period.
<TABLE>
<CAPTION>
THREE THREE TWELVE
YEAR MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
NOVEMBER FEBRUARY FEBRUARY FEBRUARY
30, 28, 28, 28,
1997 1997 1998 1998
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net sales............................................................................ $239,387 $52,939 $54,365 $240,813
Gross margin(1)...................................................................... 176,354 38,316 39,907 177,945
Income from operations............................................................... 55,423 11,526 7,520 51,417
OTHER FINANCIAL DATA:
EBITDA(2)............................................................................ $65,842 $14,002 $10,220 $ 62,060
Cash interest expense(3)............................................................. 31,916 7,989 8,371 32,298
Depreciation and amortization........................................................ 10,419 2,476 2,700 10,643
Capital expenditures................................................................. 2,858 203 566 3,221
EBITDA/cash interest expense......................................................................................... 1.9x
Total long-term debt/EBITDA.......................................................................................... 5.1x
MARGIN DATA:
Gross margin......................................................................... 73.7% 72.4% 73.4% 73.9%
Advertising and promotion............................................................ 36.4 38.5 47.0 40.4
Selling, general and administrative.................................................. 12.1 12.1 12.6 12.2
EBITDA(3)............................................................................ 27.5 26.4 18.8 25.8
<CAPTION>
AT
FEBRUARY
28, 1998
---------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................................................................... $ 30,694
Total assets......................................................................................................... 366,430
Long-term debt(4).................................................................................................... 319,034
Shareholders' equity................................................................................................. 4,967
</TABLE>
- ------------------------
(1) Pro forma gross profit reflects the effect of certain manufacturing cost
savings anticipated to be realized by the Company upon consummation of the
Transaction. The Company has entered into a manufacturing agreement with BMS
pursuant to which BMS will manufacture BAN at a pro forma savings of
approximately $9.0 million over the amount reflected for the manufacture of
BAN in the BAN financial statements for 1997.
(2) EBITDA represents income from operations, plus depreciation and
amortization. The Company believes that EBITDA provides useful information
regarding the Company's ability to service its debt. However, EBITDA does
not represent cash flow from operations as defined by generally accepted
12
<PAGE>
accounting principles and should not be considered as a substitute for net
income as an indicator of the Company's operating performance or cash flow
as a measure of liquidity.
(3) Represents interest expense excluding the amortization of deferred financing
costs and the amortization of the original issue discount on the Existing
Notes.
(4) Long-term debt is net of current maturities under the Secured Credit
Facility.
13
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The information in this table should be read in conjunction with "Selected
Historical Consolidated Financial Data", "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and the notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30 THREE MONTHS ENDED
----------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FEBRUARY 28, FEBRUARY 28,
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ------------- -------------
<CAPTION>
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.............. $ 89,861 $ 94,370 $ 100,598 $ 118,903 $ 143,235 $ 27,946 $ 34,921
Cost of sales.......... 26,717 28,495 29,755 35,120 39,253 8,394 9,682
--------- --------- --------- --------- --------- ------------- -------------
Gross margin........... 63,144 65,875 70,843 83,783 103,982 19,552 25,239
Advertising and
promotion............ 36,262 33,336 37,242 45,512 56,176 11,267 15,180
Selling, general and
administrative....... 25,132(1) 19,999 19,133 21,582 22,303 4,657 5,159
--------- --------- --------- --------- --------- ------------- -------------
Income from
operations........... 1,750 12,540 14,468 16,689 25,503 3,628 4,900
Interest expense....... (3,879) (9,360) (11,076) (13,394) (15,934) (3,798) (4,180)
Investment and other
income............... 390 112 218 2,325(2) 1,679(3) 319 192
--------- --------- --------- --------- --------- ------------- -------------
Income (loss) from
continuing operations
before income
taxes................ (1,739) 3,292 3,610 5,620 11,248 149 912
Provision for (benefit
from) income taxes... (639) 1,182 1,285 1,816 3,993 13 303
--------- --------- --------- --------- --------- ------------- -------------
Income (loss) from
continuing
operations........... $ (1,100) $ 2,110 $ 2,325 $ 3,804 $ 7,255 $ 136 $ 609
--------- --------- --------- --------- --------- ------------- -------------
--------- --------- --------- --------- --------- ------------- -------------
OTHER FINANCIAL DATA:
EBITDA (4)............. $ 10,450 $ 16,038 $ 17,874 $ 20,834 $ 31,208 $ 4,926 $ 6,422
Interest expense....... 3,879 9,360 11,076 13,394 15,934 3,798 4,180
Depreciation and
amortization......... 3,173 3,498 3,406 4,145 5,705 1,298 1,522
Capital expenditures... 2,297 2,764 2,836 1,785 2,758 203 566
MARGIN DATA:
Gross margin........... 70.3% 69.8% 70.4% 70.5% 72.6% 70.0% 72.3%
Advertising and
promotion............ 40.4 35.3 37.0 38.3 39.2 40.3 43.5
Sales, general and
administrative....... 28.0 21.2 19.0 18.2 15.6 16.7 14.8
EBITDA................. 11.6 17.0 17.8 17.5 21.8 17.6 18.4
</TABLE>
<TABLE>
<CAPTION>
AS OF FEBRUARY 28, 1998
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(5)
--------- --------------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................................................... $ 19,871 $ 30,694
Total assets.......................................................................... 178,751 366,430
Long-term debt........................................................................ 136,034 319,034
Shareholders' equity.................................................................. 4,967 4,967
</TABLE>
- ------------------------
(1) Includes nonrecurring and unusual charges of $5.5 million recorded during
the fourth quarter of 1993.
(2) Reflects a gain on the sale of SOLTICE and BLIS-TO-SOL, gain on sale of
certain investments and a full year of dividend income from the Company's
investment in Elcat, Inc.
(3) Includes dividend income from the Company's investment in Elcat, Inc.
(4) EBITDA represents income from operations, plus depreciation and
amortization. The Company believes that EBITDA provides useful information
regarding the Company's ability to service its debt. However, EBITDA does
not represent cash flow from operations as defined by generally accepted
accounting principles and should not be considered as a substitute for net
income as an indicator of the Company's operating performance or cash flow
as a measure of liquidity. EBITDA for fiscal year 1993, as shown above,
excludes the impact of nonrecurring and unusual charges of $5.5 million.
(5) Adjusted to reflect the issuance of the Series A Notes and the application
of the net proceeds therefrom as described under "Use of Proceeds" and the
completion of the Transaction.
14
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS THE
FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING THE NOTES OFFERED HEREBY. THIS PROSPECTUS,
INCLUDING INFORMATION INCORPORATED BY REFERENCE HEREIN, CONTAINS CERTAIN
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), WHICH REPRESENT THE COMPANY'S
EXPECTATIONS OR BELIEFS, INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONCERNING
INDUSTRY PERFORMANCE, THE COMPANY'S OPERATIONS, PERFORMANCE, FINANCIAL
CONDITION, GROWTH AND ACQUISITION STRATEGIES, MARGINS AND GROWTH IN SALES OF THE
COMPANY'S PRODUCTS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED IN THIS
PROSPECTUS THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND
ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT
FACTORS, INCLUDING THOSE DESCRIBED IN THIS "RISK FACTORS" SECTION.
LEVERAGE
The Company is, and will continue to be, highly leveraged. On February 28,
1998, after giving pro forma effect to the offering of Series A Notes and the
application of the net proceeds therefrom, the Company would have had total
indebtedness of approximately $329.4 million (of which $200.0 million would have
consisted of the Series A Notes, $67.0 million would have consisted of Existing
Notes, and $62.4 million would have consisted of Senior Indebtedness outstanding
under the Secured Credit Facility) and shareholders' equity of approximately
$5.0 million. The Company and its subsidiaries will be permitted to incur
additional indebtedness in the future. See "Capitalization" and "Selected
Combined Financial and Operating Data" and "Descriptions of Notes."
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Notes), or to fund planned capital expenditures and
research and development expense will depend on its future performance, which,
to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond its control. Based
upon the current level of operations and anticipated revenue growth, management
believes that cash flow from operations and available cash, together with
available borrowings under the Secured Credit Facility, will be adequate to meet
the Company's future liquidity needs for at least the next several years. The
Company may, however, need to refinance all or a portion of the principal of the
Notes on or prior to maturity. There can be no assurance that the Company's
business will generate sufficient cash flow from operations, that anticipated
revenue growth will be realized or that future borrowings will be available
under the Secured Credit Facility in an amount sufficient to enable the Company
to service its indebtedness, including the Notes, or to fund its other liquidity
needs. In addition, there can be no assurance that the Company will be able to
effect any such refinancing on commercially reasonable terms or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The degree to which the Company will be leveraged could have important
consequences to holders of the Notes, including, but not limited to: (i) making
it more difficult for the Company to satisfy its obligations with respect to the
Notes, (ii) increasing the Company's vulnerability to general adverse economic
and industry conditions, (iii) limiting the Company's ability to obtain
additional financing to fund future working capital, capital expenditures,
research and development and other general corporate requirements, (iv)
requiring the dedication of a substantial portion of the Company's cash flow
from operations to the payment of principal of, and interest on, its
indebtedness, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures, research and development or other general
corporate purposes, (v) limiting the Company's flexibility in planning for, or
reacting to, changes in its business and the industry, and (vi) placing the
Company at a competitive disadvantage vis-a-vis less leveraged competitors. In
addition, the Indenture and the Secured Credit Facility contain financial and
other restrictive covenants that limit the ability of the Company to, among
other things, borrow
15
<PAGE>
additional funds. Failure by the Company to comply with such covenants could
result in an event of default which, if not cured or waived, could have a
material adverse effect on the Company. In addition, the degree to which the
Company is leveraged could prevent it from repurchasing all of the Notes
tendered to it upon the occurrence of a Change of Control. See "Description of
Notes--Repurchase at Option of Holder--Change of Control" and "Description of
Other Indebtedness--Secured Credit Facility."
SUBORDINATION
The Notes and the Subsidiary Guarantees are subordinated in right of payment
to all current and future Senior Indebtedness of the Company and the Subsidiary
Guarantors. Upon any distribution to creditors of the Company in a liquidation
or dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, the
holders of Senior Indebtedness will be entitled to be paid in full in cash
before any payment may be made with respect to the Notes. In addition, the
subordination provisions of the Indenture provide that payments with respect to
the Notes will be blocked in the event of a payment default on Senior
Indebtedness and may be blocked for up to 179 days each year in the event of
certain non-payment defaults on Senior Indebtedness. In the event of a
bankruptcy, liquidation or reorganization of the Company, holders of the Notes
will participate ratably with all holders of subordinated indebtedness of the
Company that is deemed to be of the same class as the Notes, and potentially
with all other general creditors of the Company, based upon the respective
amounts owed to each holder or creditor, in the remaining assets of the Company.
In any of the foregoing events, there can be no assurance that there would be
sufficient assets to pay amounts due on the Notes. As a result, holders of Notes
may receive less, ratably, than the holders of Senior Indebtedness.
As of February 28, 1998, on a pro forma adjusted basis after giving effect
to the offering of Series A Notes and the application of the net proceeds
therefrom, the aggregate amount of Senior Indebtedness of the Company and its
subsidiaries would have been approximately $62.4 million, and approximately
$30.0 million would have been available for additional borrowing under the
Secured Credit Facility. The Indenture permits the incurrence of substantial
additional indebtedness, including Senior Indebtedness, by the Company and its
subsidiaries in the future.
FOREIGN OPERATING SUBSIDIARIES; STRUCTURAL SUBORDINATION
Certain operations of the Company are conducted through its foreign
subsidiaries, which have not guaranteed the Notes. Except to the extent that the
Company itself may be a creditor with recognized claims against its foreign
subsidiaries, the claims of creditors of (and any holders of equity interests
in) the foreign subsidiaries will have priority with respect to the assets and
cash flows of the foreign subsidiaries over claims of creditors of the Company.
As of February 28, 1998, the Company's foreign subsidiaries had total
liabilities (including trade credit) of $4.1 million. See "Management's
Discussion of Financial Condition and Results of Operations--Foreign
Operations."
RESTRICTIVE DEBT COVENANTS
The Secured Credit Facility, the indenture governing the Existing Notes (the
"Existing Notes Indenture") and the Indenture contain restrictive covenants
which limit the discretion of management of the Company with respect to various
business matters. These covenants will place certain restrictions on, among
other things, the ability of the Company and its subsidiaries to incur
indebtedness, to create liens or other encumbrances, to pay dividends or make
other restricted payments, to make investments, loans and guarantees and to sell
or otherwise dispose of a substantial portion of assets to, or merge or
consolidate with, another entity. In addition, the Secured Credit Facility and
the Existing Notes indenture contain other and more restrictive covenants and
prohibit the Company from prepaying the Notes, except in certain circumstances.
The Secured Credit Facility also requires the Company to maintain specified
financial ratios and satisfy certain financial tests. The Company's ability to
meet such financial ratios and tests may be affected by events beyond its
control. There can be no assurance that the Company will meet
16
<PAGE>
such tests. A breach of these covenants could result in an event of default
under the Secured Credit Facility. If such an event of default occurs, the
lenders under the Secured Credit Facility could elect to declare all amounts
borrowed under the Secured Credit Facility, together with accrued and unpaid
interest, to be immediately due and payable and to terminate all commitments
under the Secured Credit Facility. If the Company were unable to repay all
amounts declared due and payable, the lenders could proceed against the
collateral granted to them to satisfy the indebtedness and other obligations due
and payable. If indebtedness under the Secured Credit Facility were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay in full such indebtedness and the other indebtedness of the
Company, including the Notes and the Existing Notes. See "Description of the
Notes--Certain Covenants" and "Description of Other Indebtedness."
COMPETITION
The over-the-counter ("OTC") pharmaceutical, functional toiletries and
cosmetics and dietary supplements markets in which the Company competes are
highly competitive, and the Company expects competitive pressures to continue in
the future. 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. Competitors of certain of the Company's products include OTC
pharmaceutical companies, dietary supplement manufacturers 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 or generic category is
also a competitive factor in certain of the Company's product markets. Another
factor affecting the OTC pharmaceutical, functional toiletries and cosmetics and
dietary supplements business is the consolidation of retailers and increasingly
more competitive negotiations for access to shelf space.
GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the United States Food and Drug Administration
("FDA"), the Federal Trade Commission ("FTC"), the Consumer Product Safety
Commission, the United States Department of Agriculture, the United States
Environmental Protection Agency and the Occupational Safety and Health
Administration. These activities are also regulated by various agencies of the
states, localities and foreign countries in which the Company's products are
sold. In particular, the FDA regulates the safety, manufacturing, labeling and
distribution of OTC pharmaceuticals, functional toiletries and cosmetics and
dietary supplements. The regulations that are promulgated by the FDA relating to
the manufacturing process are known as current Good Manufacturing Practices
("GMPs"), and are different for drug and food products. In addition, the FTC has
overlapping jurisdiction with the FDA to regulate the promotion and advertising
of OTC pharmaceuticals, functional toiletries and cosmetics, dietary supplements
and foods.
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
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 PAMPRIN and PREMSYN PMS. While the Company addressed all of
the FDA questions in detail, the
17
<PAGE>
final monograph for menstrual drug products will determine if the FDA considers
pyrilamine maleate 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 competitor in the menstrual product category.
As a result of an order issued by the Consumer Products Safety Commission,
there are new packaging requirements for products containing lidocaine. The
Company has until September 1998 to develop child resistant packaging for its
GOLD BOND Cream products that are sold in tubes or change the product
formulation.
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, minerals,
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, trigger drug status. See "Business--Government
Regulation."
RELIANCE ON BRANDS; INTELLECTUAL PROPERTY CONCERNS
In fiscal year 1997, substantially all of the Company's net sales were from
sales of products bearing proprietary brand names, including GOLD BOND, FLEXALL,
ICY HOT, PAMPRIN, PREMSYN PMS, PHISODERM, SUN-IN and GARLIQUE. In addition, on a
pro forma basis, giving effect to the Acquisition, BAN products would have
represented approximately 40% of the Company's fiscal 1997 net sales.
Accordingly, the Company's future success may depend in part upon the goodwill
associated with the Company's brand names, particularly BAN and GOLD BOND.
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
taken by the Company to protect its proprietary rights in such brand names will
be adequate to prevent the misappropriation thereof 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.
The Company, through its subsidiary, Signal, maintains and has applied for
patent, trademark and copyright protection in the United States relating to
certain of its existing and proposed products and processes. There is no
assurance that the Company can successfully protect its intellectual property
and the loss of its intellectual property protection could have a material
adverse effect. Additionally, the Company licenses certain intellectual property
from third parties, and there is no assurance that such third parties will be
successful in maintaining their intellectual property rights. The sale of
certain of the Company's products rely on the ability of the Company to maintain
and extend its licensing agreements with third parties, and there is no
assurance that the Company will be successful in maintaining these licensing
agreements. The loss of the use of such licenses could have a material adverse
effect on the Company.
RISK OF LOSS OF MATERIAL CUSTOMER
For the year ended November 30, 1997, sales to Wal-Mart Stores, Inc.
("Wal-Mart") accounted for approximately 16% of the Company's total sales. On a
pro forma basis, sales to Wal-Mart would have represented an increased
percentage of total net sales for 1997. For the three months ended February 28,
1998, sales to Wal-Mart accounted for approximately 16% 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 could be materially adversely affected by the loss of
18
<PAGE>
Wal-Mart as a continuing major customer. No other customer accounted for more
than 10% of the Company's sales in fiscal 1997 or in the three month period
ended February 28, 1998.
RISKS RELATED TO PENDING AND POTENTIAL FUTURE ACQUISITIONS
Although management believes that the Acquisition of BAN was in the best
interest of the Company, it involved a substantial expenditure and risk on the
part of the Company. There can be no assurance that the Acquisition of BAN and
the assimilation of that business into the Company will be successful or will
yield the expected benefits to the Company or will not materially adversely
affect the Company's business, financial condition or results of operations. BAN
net sales during the period beginning January 1, 1998 through March 23, 1998
were approximately $5.5 million lower than for the same period of the prior
year. The Company believes that this decline is due to higher than usual net
sales levels in December 1997 which led to a reduction in customer requirements
for the beginning of 1998.
In addition, the Company may pursue other acquisitions from time to time,
although the Company has no present understandings, commitments or agreements
with respect to any such acquisitions except as described above. Future
acquisitions by the Company could result in the incurrence of substantial
additional indebtedness, which could materially adversely affect the Company's
business, financial condition and results of operations. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies, services and products of the acquired companies and the diversion
of management's attention from other business concerns. There can be no
assurance that future brand acquisitions, if any, will be successfully
integrated into the Company's operations. In addition, 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. In the
event that any such acquisition were to occur, there can be no assurance that
the Company's business, financial condition and results of operations would not
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General."
PUBLIC PERCEPTION
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. 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 its products and similar products
distributed by other companies which may not adhere to the same quality
standards as the Company. The Company could be materially adversely affected if
any of the Company's products or any similar products distributed by other
companies should prove or be asserted to be harmful to consumers or if
scientific studies provide unfavorable findings regarding the effectiveness of
the Company's products. See "Business--Dietary Supplements."
PRODUCT DEVELOPMENT RISKS
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 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 newly developed products, will be successfully integrated into
the Company's operations. In addition, there can be no assurance that newly
developed products will contribute favorably to the Company's operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
19
<PAGE>
AVAILABILITY OF RAW MATERIALS
Certain of the Company's dietary supplements contain ingredients that are
harvested by and obtained from third-party suppliers, some of which are
harvested internationally. An unexpected interruption of supply, such as a
harvest failure, could cause the Company's results of operations derived from
such products to be adversely affected. The Company may not be able to raise
prices quickly enough to immediately offset the effects of such increased raw
material costs.
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. Such claims to date
have not been material and the Company is not aware of any claims pending
against the Company or its products that if adversely decided would have a
material adverse effect on the Company. 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 Ltd., 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, or that the resulting publicity will not have a material adverse
effect. See "Business--Product Liability and Insurance."
ENVIRONMENTAL MATTERS
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 and
clean air rules. A site in the vicinity of the Company's manufacturing facility
has been designated as a National Priorities List Superfund site. The Company
could be named as a potentially responsible party due to the Company's
historical discharge of wastewater into the creek that flows through the site.
The Company's manufacturing site utilizes chemicals and other potentially
hazardous materials and generates both hazardous and non-hazardous waste, the
transportation, treatment and storage and disposal of which are regulated by
various governmental agencies. See "Business-- Environmental Matters."
DEPENDENCE ON SENIOR EXECUTIVE MANAGEMENT
The Company's future performance will depend to a significant degree upon
the efforts and abilities of certain members of senior executive 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, neither of whom has an
employment agreement with the Company, could have an adverse effect on the
Company. See "Management."
RISKS OF FOREIGN OPERATIONS
For the twelve months ended February 28, 1998, on a pro forma basis 6.6% of
the Company's revenues 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 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 generally 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
20
<PAGE>
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.
FRAUDULENT CONVEYANCE RISKS
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or avoid the obligation
of, or liens securing, the Notes or any Subsidiary Guarantee in favor of other
existing or future creditors of the Company or a Subsidiary Guarantor.
Under applicable provisions of Federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the Company
or any Subsidiary Guarantor, at the time it incurred the indebtedness evidenced
by the Notes or a Subsidiary Guarantee, (i)(a) was or is insolvent or rendered
insolvent by reason of such occurrence or (b) was or is engaged in a business or
transaction for which the assets remaining with the Company or such Subsidiary
Guarantor constituted unreasonably small capital or (c) intended or intends to
incur, or believed or believes that it would incur, debts beyond its ability to
pay such debts as they mature, and (ii) the Company or such Subsidiary Guarantor
received or receives less than reasonably equivalent value or fair consideration
for the incurrence of such indebtedness, then the Notes and the Subsidiary
Guarantees, as the case may be, and any pledge or other security interest
securing such indebtedness, could be voided, or claims in respect of the Notes,
the Subsidiary Guarantees or the other security interest securing such
indebtedness, could be voided, or claims in respect of the Notes or the
Subsidiary Guarantees could be subordinated to all other debts of the Company or
such Subsidiary Guarantor, as the case may be. In addition, the payment of
interest and principal by the Company pursuant to the Notes or the payment of
amounts by a Subsidiary Guarantor pursuant to a Subsidiary Guarantee could be
voided and required to be returned to the person making such payment, or to a
fund for the benefit of the creditors of the Company or such Subsidiary
Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Subsidiary Guarantor would be
considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the fair saleable value of all of its assets at a
fair valuation or if the present fair saleable value of its assets were less
than the amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become absolute and
mature or (ii) it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, the Company and the Subsidiary Guarantor believe that the
indebtedness being incurred in connection with the Notes and the Subsidiary
Guarantees is being incurred for proper purposes and in good faith and that,
after giving effect thereto, the Company, and the Subsidiary Guarantor are
solvent and will continue to be solvent after issuing the Notes or its
Subsidiary Guarantee, as the case may be, will have sufficient capital for
carrying on its business after such issuance and will be able to pay its debts
as they mature. There can be no assurance, however, as to what standard a court
would apply in making such determinations or that the Court would agree with the
Company's conclusions in this regard. The Company did not obtain a solvency
opinion in connection with the offering of Series A Notes.
PURCHASE OF NOTES UPON CHANGE OF CONTROL
Upon a Change of Control, the Company will be required to offer to purchase
all outstanding Notes at 101% of the principal amount thereof plus accrued and
unpaid interest and Liquidated Damages, if any, to the date of purchase. The
source of funds for any such purchase would be the Company's available cash or
cash generated from other sources. However, there can be no assurance that
sufficient funds would be available at the time of any Change of Control to make
any required purchases of Notes tendered or that
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<PAGE>
restrictions in the Secured Credit Facility or the Existing Notes would permit
the Company to make such required purchases. See "Description of the
Notes--Repurchase at the Option of Holders."
ABSENCE OF PUBLIC MARKET
The Exchange Notes are a new issue of securities for which there is
currently no trading market. The Series A Notes are currently eligible for
trading in the PORTAL market, and it is expected that the Exchange Notes will be
eligible for trading through the PORTAL market. The Company has been advised by
the Initial Purchaser that it intends to make a market in the Exchange Notes, as
permitted by applicable laws and regulations. However, it is not obligated to do
so and any market making activities with respect to the Notes may be
discontinued at any time without notice. In addition, such market-making
activities may be limited during the Exchange Offer and the pendency of any
Shelf Registration Statement (as defined herein). Therefore, there can be no
assurance that an active trading market for the Exchange Notes will develop, or,
if such a market develops, as to the liquidity of such market. If a market were
to exist, the Exchange Notes could trade at prices that may be lower than the
initial offering price of the Series A Notes depending on many factors,
including prevailing interest rates and the market for similar securities,
general economic conditions and the financial condition and performance of, and
prospects for, the Company. The Company does not intend to apply for listing or
quotation of the Exchange Notes on any securities exchange or automated
quotation system. See "Plan of Distribution".
FAILURE TO EXCHANGE SERIES A NOTES
Exchange Notes will be issued in exchange for Series A Notes only after
timely receipt by the Exchange Agent of such Series A Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Series A Notes desiring to tender such
Series A Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under any
duty to give notification of defects or irregularities with respect to tenders
of Series A Notes for exchange. Series A Notes that are not tendered or are
tendered but not accepted will, following consummation of the Exchange Offer,
continue to be subject to the existing restrictions upon transfer thereof. In
addition, any holder of Series A Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes will be
required to comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each broker-dealer
that receives Exchange Notes for its own account in exchange for Series A Notes,
where such Series A Notes were acquired by such broker-dealer as a result of
market-making activities or any other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. To the extent that Series A Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Series A Notes could be adversely affected due to the limited amount, or
"float," of the Series A Notes that is expected to remain outstanding following
the Exchange Offer. Generally, a lower "float" of a security could result in
less demand to purchase such security and could, therefore, result in lower
prices for such security. For the same reason, to the extent that a large amount
of Series A Notes is not tendered or is tendered and not accepted in the
Exchange Offer, the trading market for the Exchange Notes could be adversely
affected. See "Plan of Distribution" and "The Exchange Offer."
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<PAGE>
THE ACQUISITION
On March 24, 1998, the Company acquired the BAN line of AP/Deo products from
BMS for a purchase price of $165.0 million (subject to an inventory adjustment),
plus the assumption of up to $5.0 million of indebtedness. The Company acquired
the BAN trademarks, formulae, certain patents pertaining to AP/Deo products
technology, technical information, inventory, certain manufacturing equipment
and packaging related assets used in the manufacture of BAN but not the right to
sell BAN in Japan. Chattem has entered into a manufacturing agreement with BMS,
pursuant to which BMS will manufacture BAN at a pro forma cost savings of
approximately $9.0 million over the amount reflected for the manufacture of BAN
in the BAN financial statements for 1997.
In connection with the Acquisition, the Company (i) amended and restated its
Secured Credit Facility to permit the issuance of the Series A Notes and (ii)
obtained the requisite consents pursuant to the Consent Solicitation under the
Existing Notes. Currently, the only subsidiary of the Company that guarantees
the Existing Notes is Signal. As of February 28, 1998 there were $67.0 million
in aggregate principal amount of Existing Notes outstanding.
The purchase price for the Acquisition, together with associated fees and
expenses, were funded through the net proceeds from the sale of the Series A
Notes.
RECENT DEVELOPMENTS
On May 12, 1998, the Company sold its CORN SILK oil control makeup brand to
Del Laboratories, Inc. for $10.75 million plus inventories and the assumption of
certain liabilities. The Company used the proceeds from the sale to reduce
Senior Indebtedness.
On April 27, 1998, the Company repurchased $8.6 million in principal amount
of its Existing Notes. As a result, there were as of May 26, 1998 $58.4 million
in aggregate principal amount of the Existing Notes outstanding.
USE OF PROCEEDS
The Company will not receive proceeds from the Exchange Offer. The net
proceeds from the sale of Series A Notes were used to finance the Acquisition,
pay asociated fees and expenses, repay revolving credit indebtedness under the
Secured Credit Facility and for general corporate purposes.
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<PAGE>
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company as of February 28, 1998, on an actual basis, (ii) the pro forma
adjustments to give effect to the offering of Series A Notes and the
consummation of the Transaction and (iii) the consolidated capitalization of the
Company after giving effect to the offering of the Series A Notes and the
Transaction. This table should be read in conjunction with "Use of Proceeds" and
"Selected Consolidated Financial Data" included elsewhere in this Prospectus.
For a description of the Secured Credit Facility and the Existing Notes, see
"Description of Other Indebtedness."
<TABLE>
<CAPTION>
FEBRUARY 28, 1998
--------------------------------
PRO
ACTUAL ADJUSTMENTS FORMA
-------- ----------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Current maturities of long-term debt (1).......................................................... $ 9,089 $ -- $ 9,089
-------- ----------- --------
Long term debt:
Secured Credit Facility......................................................................... 70,276 (17,000) 53,276
Existing Notes, net of unamortized discount(2).................................................. 65,758 -- 65,758
Series A Notes.................................................................................. -- 200,000 200,000
-------- ----------- --------
Total long term debt........................................................................ 136,034 183,000 319,034
-------- ----------- --------
Shareholders' equity.............................................................................. 4,967 -- 4,967
-------- ----------- --------
Total capitalization.............................................................................. $150,090 $ 183,000 $333,090
-------- ----------- --------
-------- ----------- --------
</TABLE>
- ------------------------
(1) Consists of borrowings under the Secured Credit Facility.
(2) On April 27, 1998, the Company repurchased $8.6 million in principal amount
of its Existing Notes.
24
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Balance Sheet was prepared as
if the Transaction and offering of Series A Notes had occurred on February 28,
1998. The following Unaudited Pro Forma Consolidated Statements of Income for
the year ended November 30, 1997 and the three month periods ended February 28,
1998 and 1997 give effect to the Transaction and offering of Series A Notes as
if they had occurred on December 1, 1996. The Unaudited Pro Forma Consolidated
Statements of Income do not purport to represent what the Company's results of
operations actually would have been if the Transaction and offering of Series A
Notes had occurred as of such date or what such results will be for any future
periods.
The Unaudited Pro Forma Consolidated Balance Sheet reflects the preliminary
allocation of the purchase price for the Acquisition to the Company's tangible
and intangible assets and liabilities. The final allocation of such purchase
price, and the resulting depreciation and amortization expense in the
accompanying Unaudited Pro Forma Consolidated Statements of Income, will differ
from the preliminary estimates due to the final allocation being based on: (a)
actual closing date amounts of assets and liabilities, and (b) final appraised
values of property, plant and equipment and other assets.
The Unaudited Pro Forma Financial Data are based on the historical financial
statements of the Company and the assumptions and adjustments described in the
accompanying notes. The Company believes that such assumptions are reasonable.
The Unaudited Pro Forma Financial Data should be read in conjunction with the
Consolidated Financial Statements of the Company and those of BAN and the
respective accompanying notes thereto appearing elsewhere in this Prospectus.
25
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA ADJUSTMENTS
CHATTEM BAN ------------------------
AS OF AS OF ACQUISITION
FEBRUARY 28, DECEMBER 31, OFFERING OF BAN
1998 1997 ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 1,398 $ 189,600(a) $(182,350)(b) $ 8,648
Accounts receivable................. 30,596 30,596
Inventories......................... 16,737 $ 8,252 24,989
Other current assets................ 2,624 2,624
------------ ------------ -----------
Total current assets.............. 51,355 8,252 66,857
------------ ------------ -----------
Property, plant and equipment, net.... 11,045 8,934 19,979
------------ ------------ -----------
Other non-current assets:
Investment in Elcat, Inc............ 6,804 6,804
Patents, trademarks and other
purchased product rights, net..... 104,223 152,843(c) 257,066
Other non-current assets............ 5,324 10,400(d) 15,724
------------ ------------ -----------
Total non-current assets.......... 116,351 279,594
------------ ------------ -----------
Total assets.................... $ 178,751 $ 17,186 $ 366,430
------------ ------------ -----------
------------ ------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
debt.............................. $ 9,089 $ 9,089
Accounts payable and other accrued
liabilities....................... 9,328 9,328
13,067 $ 4,679 17,746
------------ ------------ -----------
Total current liabilities......... 31,484 4,679 36,163
------------ ------------ -----------
Long-term debt........................ 136,034 200,000(a) 319,034
(17,000)(b)
Other non-current liabilities......... 6,266 6,266
Shareholders' equity:
Net assets acquired................. -- 12,507 (12,507)(e) --
Common stock........................ 1,955 1,955
Paid-in surplus..................... 64,046 64,046
Accumulated deficit................. (59,620) (59,620)
Foreign currency translation........ (1,414) (1,414)
------------ ------------ -----------
Total shareholders' equity........ 4,967 12,507 4,967
------------ ------------ -----------
Total liabilities and
shareholders' equity............ $ 178,751 $ 17,186 $ 366,430
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
The Pro Forma Consolidated Balance Sheet reflects the Transaction and the
offering of Series A Notes as if they had occurred as of February 28, 1998
(actual amounts may differ from amounts estimated below).
(a) Reflects the issuance of the Notes and the Secured Credit Facility
Amendment:
<TABLE>
<S> <C>
Issuance of the Notes............................................................. $ 200,000
Issuance-related fees and expenses................................................ (10,400)
---------
$ 189,600
---------
---------
</TABLE>
(b) Represents the following cash payments related to the Acquisition:
<TABLE>
<S> <C>
Purchase price................................................................... $(165,000)
Acquisition expenses............................................................. (350)
Repayment of revolving credit indebtedness....................................... (17,000)
---------
$(182,350)
---------
---------
</TABLE>
(c) The Acquisition will be accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations". The
purchase price is being allocated first to the tangible and identifiable
intangible assets and liabilities of BAN based upon preliminary estimates of
their fair market values, with the remainder allocated to "Patents, trademarks,
and other purchased products rights" as follows:
<TABLE>
<S> <C>
Purchase price.................................................................... $ 165,000
Acquisition expenses.............................................................. 350
Book value of net assets acquired................................................. (12,507)
---------
Increase in intangible assets..................................................... $ 152,843
---------
---------
</TABLE>
(d) Reflects the deferred financing costs related to the Offering and
Secured Credit Facility Amendment.
(e) Reflects the elimination of the BAN net asset balance.
27
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF INCOME
FOR THE YEAR ENDED NOVEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
CHATTEM FOR BAN
THE YEAR FOR THE YEAR PRO FORMA ADJUSTMENTS
ENDED ENDED ---------------------------
NOVEMBER 30, DECEMBER 31, ACQUISITION OFFERING
1997 1997 ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales......................................... $143,235 $ 96,152 $ 239,387
Cost of sales..................................... 39,253 32,780 $ (9,000)(a) 63,033
Advertising and promotion......................... 56,176 32,037 3,821(b) 92,034
Selling, general and administrative............... 22,303 6,594 28,897
------------ ------------
Income from operations............................ 25,503 55,423
Interest expense.................................. 15,934 $ 16,658(c) 33,708
1,116(d)
Other income, net................................. (1,679) (1,679)
------------ ------------
Income from continuing operations before income
taxes........................................... 11,248 23,394
Provision for income taxes........................ 3,993 8,907(e) 1,864(e) (6,399)(e) 8,365
------------ ------------
Income from continuing operations................. $ 7,255 $ 15,029
------------ ------------
------------ ------------
Other Financial Data:
EBITDA.......................................... $ 31,208 $ 65,842
EBITDA Margin................................... 21.8% 27.5%
</TABLE>
28
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
BAN
HISTORICAL FOR THE
CHATTEM FOR PERIOD FROM
THE THREE DECEMBER 31, PRO FORMA ADJUSTMENTS
MONTHS ENDED 1997 TO ---------------------------
FEBRUARY 28, MARCH 23, ACQUISITION OFFERING
1998 1998 ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ 34,921 $ 19,444 $ 54,365
Cost of sales..................................... 9,682 7,026 $ (2,250)(a) 14,458
Advertising and promotion......................... 15,180 9,438 955(b) 25,573
Selling, general and administrative............... 5,159 1,655 6,814
------------ ------------ ------------
Income from operations............................ 4,900 7,520
Interest expense.................................. 4,180 $ 4,081(c) 8,540
279(d)
Other income, net................................. (192) (192)
------------ ------------
Income (loss) from continuing operations before
income taxes.................................... 912 (828)
Provision for (benefit from) income taxes......... 303 477(e) 466(e) (1,570)(e) (324)
------------ ------------
Income (loss) from continuing operations.......... $ 609 $ (504)
------------ ------------
------------ ------------
Other Financial Data:
EBITDA.......................................... $ 6,422 $ 10,220
EBITDA Margin................................... 18.4% 18.8%
</TABLE>
29
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
CHATTEM FOR BAN FOR THE
THE THREE THREE MONTHS
MONTHS ENDED ENDED
FEBRUARY 28, MARCH 31, ACQUISITION OFFERING
1997 1997 ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ 27,946 $ 24,993 $ 52,939
Cost of sales..................................... 8,394 8,479 $ (2,250)(a) 14,623
Advertising and promotion......................... 11,267 8,177 955(b) 20,399
Selling, general and administrative............... 4,657 1,734 6,391
------------ ------------ ------------
Income from operations............................ 3,628 11,526
Interest expense.................................. 3,798 $ 4,081(c) 8,158
279(d)
Other income, net................................. (319) (319)
------------ ------------
Income from continuing operations before income
taxes........................................... 149 3,687
Provision for income taxes........................ 13 2,377(e) 466(e) (1,570)(e) 1,286
------------ ------------
Income from continuing operations................. $ 136 $ 2,401
------------ ------------
------------ ------------
Other Financial Data:
EBITDA.......................................... $ 4,926 $ 14,002
EBITDA Margin................................... 17.6% 26.4%
</TABLE>
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
(a) Reflects management's estimate of the cost savings that will be generated
following consummation of the acquisition of BAN. Chattem has entered into a
manufacturing agreement with BMS, pursuant to which BMS will manufacture BAN
at a pro forma cost savings of approximately $9,000 and $2,250 over the
amounts reflected for the manufacture of BAN in the BAN financial statements
for fiscal 1997 and the first quarters of 1998 and 1997, respectively.
(b) Represents additional amortization of trademarks.
(c) Reflects the increase in cash interest expense resulting from the incurrence
of indebtedness under the Notes offset by the interest savings resulting
from the repayment of the revolving credit indebtedness. A change of 1/4% in
the interest rate on the Notes and the Secured Credit Facility would have an
impact on pro forma interest expense of $649 for the twelve months ended
February 28, 1998.
(d) To record the increase in interest expense related to the amortization of
deferred financing costs.
(e) Represents income tax expense (benefit) at an effective tax rate of 36.0%.
31
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified in its
entirety by the consolidated financial statements and other information
contained elsewhere in this Prospectus. The financial data as of November 30,
1993, 1994, 1995, 1996, and 1997, and for the years then ended have been derived
from the audited financial statements of the Company contained elsewhere in this
Prospectus. The financial data as of and for the three months ended February 28,
1997 and 1998, have been derived from the unaudited financial statements of the
Company and, in the opinion of the Company's management, include all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation. Interim results are not necessarily indicative of financial
results of the Company for the full fiscal year. The following financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30 THREE MONTHS ENDED
----------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FEBRUARY FEBRUARY
1993 1994 1995 1996 1997 28, 1997 28, 1998
--------- --------- --------- --------- --------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.......................... $ 89,861 $ 94,370 $ 100,598 $ 118,903 $ 143,235 $ 27,946 $ 34,921
Cost of sales...................... 26,717 28,495 29,755 35,120 39,253 8,394 9,682
--------- --------- --------- --------- --------- ----------- -----------
Gross margin....................... 63,144 65,875 70,843 83,783 103,982 19,552 25,239
Advertising and promotion.......... 36,262 33,336 37,242 45,512 56,176 18,267 15,180
Selling, general and
administrative................... 25,132(1) 19,999 19,133 21,582 22,303 4,657 5,159
--------- --------- --------- --------- --------- ----------- -----------
Income from operations............. 1,750 12,540 14,468 16,689 25,503 3,628 4,900
Interest expense................... (3,879) (9,360) (11,076) (13,394) (15,934) (3,798) (4,180)
Investment and other income
(expense)........................ 390 112 218 2,325(2) 1,679 319 192
--------- --------- --------- --------- --------- ----------- -----------
Income (loss) from continuing
operations before income taxes... (1,739) 3,292 3,610 5,620 11,248 149 912
Provision for (benefit from) income
taxes............................ (639) 1,182 1,285 1,816 3,993 13 303
--------- --------- --------- --------- --------- ----------- -----------
Income (loss) from continuing
operations....................... $ (1,100) $ 2,110 $ 2,325 $ 3,804 $ 7,255 $ 136 $ 609
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Ratio of earnings to fixed
charges(3)....................... 0.6 (5) 1.3x 1.3x 1.4x 1.7x 1.0x 1.2x
OTHER FINANCIAL DATA:
EBITDA(4).......................... $ 10,450 $ 16,038 $ 17,874 $ 20,834 $ 31,208 $ 4,926 $ 6,422
Interest expense................... 3,879 9,360 11,076 13,394 15,934 3,798 4,180
Depreciation and amortization...... 3,173 3,498 3,406 4,145 5,705 1,298 1,522
Capital expenditures............... 2,297 2,764 2,836 1,785 2,758 203 566
MARGIN DATA:
Gross margin....................... 70.3% 69.8% 70.4% 70.5% 72.6% 70.0% 72.3%
Advertising and promotion.......... 40.4 35.3 37.0 38.3 39.2 40.3 43.5
Selling, general and
administrative................... 28.0 21.2 19.0 18.2 15.6 16.7 14.8
EBITDA............................. 11.6 17.0 17.8 17.5 21.8 17.6 18.4
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital.................... 16,516 9,901 10,254 19,793 15,520 24,296 19,871
Total assets....................... 69,534 85,442 83,410 152,183 178,744 149,200 178,751
Long-term debt..................... 83,000 94,486 78,089 127,438 133,475 126,553 136,034
Shareholders' equity (deficit)..... (33,473) (29,551) (17,421) (7,180) 4,370 (7,076) 4,967
</TABLE>
- ------------------------
(1) Includes nonrecurring and unusual charges of $5.5 million recorded during
the fourth quarter of 1993.
(2) Reflects a gain on the sale of SOLTICE and BLIS-TO-SOL, gain on sale of
certain investments and a full year of dividend income from the Company's
investment in Elcat, Inc.
(3) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest expense
and amortization of deferred financing cost and 33.0% of the rent expense
from operating leases which the Company believes is a reasonable
approximation of the interest factor included in the rent. The pro forma
ratio of earnings to fixed charges for the twelve months ended February 28,
1998 is 1.5x.
(4) EBITDA represents income from operations, plus depreciation and
amortization. The Company believes that EBITDA provides useful information
regarding the Company's ability to service its debt. However, EBITDA does
not represent cash flow from operations as defined by generally accepted
accounting principles and should not be considered as a substitute for net
income as an indicator of the Company's operating performance or cash flow
as a measure of liquidity. EBITDA for fiscal year 1993, as shown above,
excludes the impact of nonrecurring and unusual charges of $5.5 million.
(5) In fiscal year 1993, the Company's earnings would have been insufficient to
cover its fixed charges by $1,739,000.
32
<PAGE>
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 Consolidated Financial Statements
(including the Notes thereto) included elsewhere in this Prospectus.
GENERAL
On March 24, 1998, the Company announced the completion of the previously
reported acquisition of the BAN line of anti-perspirant/deodorant products from
Bristol-Myers Squibb Company for a purchase price of $165 million (subject to an
inventory adjustment), plus the assumption of up to $5 million of liabilities.
The Company acquired the BAN world-wide trademarks, formulae, certain patents
pertaining to the anti-perspirant/deodorant products 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.
Concurrently with the closing of the Acquisition, the Company issued $200
million of 8 7/8% Series A Senior Subordinated Notes due 2008 and amended and
restated the Secured Credit Facility. The proceeds from the offering of Series A
Notes were used to fund the Acquisition of BAN, pay related acquisition and
financing fees and expenses and repay certain bank indebtedness.
For the three months ended February 28, 1998, the Company experienced a $7.0
million or 25.0% increase in sales to $34.9 million from $27.9 million for the
first quarter of fiscal 1997. Operating income during the period likewise
increased $1.3 million or 35.1%, to $4.9 million from $3.6 million. Net income
of $609,000 or $.06 per share, was recorded during the period compared to net
income of $136,000 or $.02 per share, during the same period last year.
Seasonality is a factor in the Company's overall business with the first quarter
sales and income traditionally trailing the other fiscal quarters.
The SUNSOURCE product line, acquired in the third quarter of fiscal 1997,
was largely responsible for the improvement in the Company's operating results
for the three months ended February 28, 1998.
The Company will continue to seek increases in sales through a combination
of acquisitions and internal growth while maintaining high operating income. As
previously high growth brands mature, sales increases will become even more
dependent on acquisitions and the development of successful line extensions.
During the first quarter of fiscal 1998, the Company introduced the following
line extensions/ new products: BENZODENT cream; HERPECIN-L cold sore lip balm in
a jar; BULLFROG SPF45 for babies and SPF45 Superblock; CORNSILK (Weightless
label) light liquid makeup in six shades; CORNSILK green concealer stick; and
HARMONEX. Strategically, the Company continually evaluates its products and
businesses as part of its sales growth strategy and, in instances where the
Company's objectives are not realized, will dispose of these brands or
businesses and redeploy the assets to products or businesses with greater growth
potential or to reduce indebtedness.
Unless otherwise indicated, the following discussion relates only to the
continuing operations of the Company, which are the domestic and international
consumer products business. The results of operations and the gain on disposal
of the speciality chemical division in 1995 have been separately classified as
discontinued operations in the accompanying consolidated statements of income.
33
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for continuing operations certain items from
the Company's consolidated statements of income, for the periods indicated,
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER 30, FEBRUARY 28,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
Net sales............................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------- ---------
Cost and expenses:
Cost of sales...................................................... 29.6 29.5 27.4 30.0 27.7
Advertising and promotion.......................................... 37.0 38.3 39.2 40.3 43.5
Selling, general and administrative................................ 19.0 18.2 15.6 16.7 14.8
--------- --------- --------- --------- ---------
Total costs and expenses......................................... 85.6 86.0 82.2 87.0 86.0
--------- --------- --------- --------- ---------
Income from operations............................................... 14.4 14.0 17.8 13.0 14.0
Other expenses, net.................................................. (10.8) (9.3) (9.9) (12.5) (11.4)
--------- --------- --------- --------- ---------
Income before income taxes........................................... 3.6 4.7 7.9 .5 2.6
Provisions for income taxes.......................................... 1.3 1.5 2.8 -- .9
--------- --------- --------- --------- ---------
Income from continuing operations.................................... 2.3% 3.2% 5.1% 0.5% 1.7%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
Net sales for the three months ended February 28, 1998 increased $7.0
million or 25.0%, to $34.9 million from $27.9 million for the same period last
year. Domestic consumer products sales increased to $6.2 million, or 24.2% to
$31.8 from $25.6 million $25.6 million for last year's comparative period. Net
sales of international consumer products increased $771,000, or 33.1% from $2.3
million in the 1997 period to $3.1 million in the current period.
The increase in domestic consumer products sales in the 1998 period was
primarily due to the SUNSOURCE brands, which were acquired in the third quarter
of 1997. Sales increases were also registered for the PAMPRIN, BENZODENT and
BULLFROG product lines, while decreases were experienced by the HERPECIN-L,
NORWICH Asprin, FLEXALL, CORNSILK and GOLD BOND baby powders. All sales
variances were principally due to sales volume changes.
The increase in sales of PAMPRIN and BENZODENT reflects the effect of
extensions of these two product lines initiated in fiscal 1997 and the first
quarter of fiscal 1998. The substantial increase in BULLFROG sales represents
the introduction of two new SPF45 products in the current quarter, the addition
of several new or former customers for the 1998 season and increased advertising
and promotion support. The sales decline for CORNSILK reflects the
reintroduction of that entire line in new packaging in the first quarter of
fiscal 1997, resulting in abnormally high sales in the first quarter of fiscal
1997. The reduced GOLD BOND sales were almost entirely associated with the
CORNSTARCH PLUS Medicated Baby Powder product which was introduced in the first
quarter of fiscal 1997. The decline in sales of the remaining brands listed
above reflects the maturation of these products, increased competition in their
respective product categories and, in most instances, reduced marketing support.
International consumer product sales for the first quarter of fiscal 1998
increased $66,000 or 7.8% for the Canadian operation and $607,000 or 47.8% for
the United Kingdom business. The increase in Canadian sales was largely
associated with the GOLD BOND product line, although sales increases were
recorded for the PAMPRIN, FLEXALL, SUN-IN and ULTRASWIM brands. Sales increases
were experienced for all of the United Kingdom brands. U.S. export sales
increased $98,000 or 45.6% for the
34
<PAGE>
1998 quarter as compared to the same period in fiscal 1997, with practically all
of the increase being associated with the ICY HOT product line. All sales
variances were primarily due to sales volume changes.
Cost of goods sold as a percentage of net sales improved to 27.7% from 30.0%
in the 1997 period. The decline was primarily the result of increased sales of
higher gross margin product lines in the current period and the SUNSOURCE brands
acquired in mid 1997.
Advertising and promotion expenses increased $3.9 million or 34.7%, in the
1998 period and were 43.5% of net sales compared to 40.3% in the corresponding
1997 period. The majority of the increase in the 1998 period was related to the
SUNSOURCE product line, although significant increases were recorded for the
BULLFROG and GOLD BOND brands. Substantial declines were realized for the
FLEXALL, MUDD, CORNSILK and PHISODERM product lines.
The increase of $502,000 or 10.8% in selling, general and administrative
expenses in the 1998 period was largely associated with increased direct selling
expenses resulting from increased sales. The selling, general and administrative
expenses were 14.8% of net sales in the current period as compared to 16.7% in
the same period of last fiscal year.
Interest expense increased $382,000 or 10.1% in the 1998 period, reflecting
primarily the additional debt incurred for the SUNSOURCE products acquisition in
mid 1997.
Investment and other income decreased by $127,000 in the 1998 period largely
due to a decline in interest income and gains on sales of property items.
The increase of $473,000 in net income in 1998 was largely the result of
increased sales offset in part by increased interest charges, advertising and
promotion expenses and selling, general and administrative expenditures.
FISCAL 1997 COMPARISON TO FISCAL 1996 FOR CONTINUING OPERATIONS
For the year ended November 30, 1997, net sales increased $24.3 million, or
20.5%, to $143.2 million from $118.9 million for the previous fiscal year. This
increase consisted of a $23.6 million, or 22.6%, increase in domestic consumer
products sales from $104.4 million in 1996 to $128.0 million in 1997 and an
increase of $752,000, or 5.2%, in international sales to $15.2 million from
$14.5 million.
For domestic consumer products, sales of the GOLD BOND, HERPECIN-L, ICY HOT
and the SUNSOURCE products accounted for the majority of the sales increase in
1997, although sales increases were also realized for the SUN-IN and MUDD
brands. Sales declines were recognized for FLEXALL, NORWICH Aspirin, CORNSILK,
BULLFROG and PHISODERM. The remaining domestic brands were basically flat or had
modest declines over the prior fiscal year. All sales variances were largely the
result of changes in volume.
The increase in sales of the SUN-IN brand was largely the result of
increased marketing support, while the MUDD sales increase was primarily due to
the addition of the 5 Minute Mask to the line in 1997 and the continuing effect
of new packaging in late 1995. The sales increase of the ICY HOT brand reflect
the line extension launched in early 1997 and a 68% increase in advertising and
promotion expenditures to support the brand in 1997 over 1996.
Sales declines for the remainder of the domestic products are primarily due
to increased competition in their respective product categories, the maturation
of these brands and in most cases reduced marketing support. The decline in
sales of the BULLFROG brand reflect the loss of a major customer and the cool,
wet spring experienced in 1997.
In fiscal 1997, sales for the international consumer products' segment
increased $847,000, or 21.0%, for the Canadian operation but declined $252,000,
or 2.6%, for the United Kingdom business. The GOLD BOND product line accounted
for practically all of the net sales increase in Canada, although increases
35
<PAGE>
were also realized for the remainder of the product lines marketed in that
country, except for ULTRA-
SWIM and CORNSILK. Sales declines were recognized for all of the product lines
marketed by the United Kingdom operation, except for MUDD. These sales decreases
were largely due to a change in the United Kingdom from a dealer distribution
system to one operated by the Company's U.K. subsidiary in that country. U.S.
export sales increased $157,000, or 17.5%, in 1997 over 1996, with essentially
all of the increase being associated with the ICY HOT brand. All sales variances
were principally due to volume changes.
Cost of goods sold as a percentage of net sales in 1997 decreased to 27.4%
from 29.5% in 1996. The decrease was largely the result of a shift in product
mix of sales of domestic consumer products to higher margin products and the
addition of GOLD BOND and SUNSOURCE.
Advertising and promotion expenses increased $10.7 million, or 23.4%, to
$56.2 million in 1997 from $45.5 million in 1996 and were 39.2% of net sales
compared to 38.3% in 1996. This increase was principally associated with the
GOLD BOND and HERPECIN-L brands, which were acquired in 1996; the SUNSOURCE
product line, acquired in mid-1997; and ICY HOT. Increases in 1997 were also
recorded for the PAMPRIN, PREMSYN PMS, and SUN-IN brands.
Selling, general and administrative expenses increased $721,000, or 3.3%, to
$22.3 million in 1997 from $21.6 million in 1996, but decreased as a percentage
of net sales to 15.6% in 1997 as compared to 18.2% in 1996. This increase was
largely associated with increases in direct selling costs, freight and field
sales expenses, as a result of increased sales, offset in part by reductions in
financial and legal services expenses.
Interest expense increased $2.5 million, or 19.0%, to $15.9 million in 1997
from $13.4 million in 1996 primarily as a result of increased indebtedness
associated with the GOLD BOND and HERPECIN-L product acquisitions in 1996 and
the SUNSOURCE brands purchase in mid-1997. Interest expense is expected to
increase in 1998 due to the full year impact of the higher debt levels
associated with product acquisitions. 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 229,000, or 15.8%, to $1.7 million in
1997 from $1.5 million in 1996.
Provisions for income taxes were 35.5% of before tax income in 1997 as
compared to 32.3% in 1996. See Note 8 of Notes to Consolidated Financial
Statements.
Income from continuing operations increased $3.5 million, or 90.7%, to $7.3
million in 1997 from $3.8 million in 1996. This increase resulted primarily from
increased sales and product sales with more favorable gross margins in 1997.
FISCAL 1996 COMPARED TO FISCAL 1995 FOR CONTINUING OPERATIONS
For the year ended November 30, 1996, net sales increased $18.3 million or
18.2%, to $118.9 million from $100.6 million for the previous fiscal year. This
increase consisted of a $17.2 million, or 19.7%, increase in domestic consumer
product sales from $87.3 million in 1995 to $104.4 million in 1996 and an
increase of $1.1 million, or 8.3%, in international sales to $14.5 million from
$13.3 million.
For domestic consumer products, sales of the GOLD BOND and HERPECIN-L
product lines, both of which were acquired in 1996, and PHISODERM Antibacterial
Hand Cleanser accounted for essentially all of the sales increase in 1996,
although sales increases were also realized for the BULLFROG, ICY HOT and MUDD
product lines. Sales declines were recognized for CORNSILK, NORWICH Aspirin and
PHISODERM facial. The remaining domestic brands were basically flat or had
modest declines over the prior fiscal year. All sales variances were largely the
result of changes in volume rather than changes in prices.
36
<PAGE>
The increase in sales of BULLFROG and MUDD brands in 1996 was largely the
result of new product introductions and/or new packaging in late 1995 and
increased marketing support. Sales growth for the ICY HOT product line was
primarily due to increased advertising and promotional expenditures.
Sales declines for the remainder of the domestic products are essentially
the result of increased competition in their respective product categories, the
maturation of these brands and reduced marketing support in most cases.
In fiscal 1996, sales for the international consumer products' segment
increased $121,000, or 3.1% for the Canadian operation and $1.4 million, or
17.9%, for the United Kingdom business. The addition of the GOLD BOND product
line in Canada accounted for more than the total of the net sales increase in
that country, although increases were also realized for the SUN-IN, ULTRASWIM
and MUDD product lines. Declines in sales of the other brands in Canada largely
offset the increases enumerated above. Sales increases for all of the product
lines sold by the United Kingdom operation were realized with the exception of
the CORNSILK brand. U.S. export sales decreased $456,000, or 33.8%, in 1996
largely resulting from unfavorable general economic conditions in Peru and
Mexico. All sales variances were principally due to volume changes.
Cost of goods sold as percentage of net sales in 1996 was essentially
unchanged at 29.5% versus 29.6% for 1995. Cost of goods sold was affected by the
partial year positive impact of GOLD BOND which was offset by increased
inventory obsolescence charges.
Advertising and promotion expenses increased $8.3 million or 22.2%, to $45.5
million in 1996 from $37.2 million in 1995 and were 38.3% of net sales compared
to 37.0% in 1995. This increase was principally associated with the GOLD BOND
and HERPECIN-L brands, which were acquired in 1996, and with the introduction of
PHISODERM Antibacterial Hand Cleanser in that year. Increases in 1996 were also
recorded for the BULLFROG, FLEXALL, ICY HOT, SUN-IN and MUDD product lines.
Selling, general and administrative expenses increased $2.4 million, or
12.8%, to $21.6 million in 1996 from $19.1 million in 1995 but decreased as a
percentage of net sales to 18.2% for 1996 as compared to 19.0% in 1995. This
increase was largely associated with increases in direct selling costs, freight
and field sales expense, as a result of increased sales.
Interest expense increased $2.3 million or 20.9%, to $13.4 million in 1996
from $11.1 million in 1995 largely as a result of increased indebtedness
associated with the acquisition of the GOLD BOND and HERPECIN-L product lines in
April and June, 1996, respectively. Until the Company's indebtedness is reduced
substantially, interest expense will continue to represent a significant
percentage of the Company's net sales.
Investment income increased $893,000 to $1.4 million in 1996 from $527,000
in 1995. This increase consisted of $113,000 of interest income, resulting from
the temporary investment of excess funds; $328,000 of dividends on the
cumulative, convertible preferred stock of Elcat, Inc. received as part of the
proceeds from the sale of the specialty chemical division in 1995; and a gain of
$452,000 on the sale of an investment.
In 1996, a gain of $875,000 from the sale of the two minor product lines,
SOLTICE and BLIS-TO-SOL, was realized.
Provisions for income taxes were 32.3% of before tax income in 1996 as
compared to 35.6% in 1995. See Note 8 of Notes to Consolidated Financial
Statements.
Income from continuing operations increased $1.5 million, or 63.6%, to $3.8
million in 1996 from $2.3 million in 1995. This increase resulted primarily from
increased sales in 1996 which more than offset increased interest expense.
37
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with a combination of
internally generated funds and borrowings. The Company's principal uses of cash
are for operating expenses, acquisitions, working capital, capital expenditures
and long-term debt servicing.
Cash of $8.1 million and $2.8 million was used in operations for the three
months ended February 28, 1998 and 1997, respectively. The decrease in cash flow
from operations over the prior year period was primarily the result of changes
in accounts receivable, inventories, accounts payable and accrued liabilities.
The changes were due in part to the SUNSOURCE acquisition in mid 1997.
Investing activities used cash of $662,000 and $350,000 in the three months
ended February 28, 1998 and 1997, respectively. The increase of $312,000 in the
current period was largely a result of increased property, plant and equipment
additions. Investing activities used cash of $32.7 million and $47.7 million in
1997 and 1996, respectively. The usage of cash in 1997 reflects the expenditures
required for the purchase of the SUNSOURCE brands, while the 1996 amount
represents the cost of the GOLD BOND and HERPECIN-L product lines acquired in
that year. In 1997, capital expenditures totaled $2.8 million compared to $1.8
million in 1996. Expenditures of this nature are expected to be approximately
$3.0 million in fiscal 1998.
Financing activities provided cash of $5.4 million in the three months ended
February 28, 1998 compared to $735,000 for the comparable prior year period. The
increase of $4.6 million in the current period reflects additional bank
borrowings required for working capital purposes. Financing activities provided
cash of $11.4 million in 1997 and $57.1 million in 1996. The Company financed
the acquisition of the SUNSOURCE brands and repaid all outstanding bank
indebtedness with the proceeds of a new $95.0 million bank credit agreement and
the issuance of 300,000 new shares of the Company's common stock at a value of
$13.50 a share to the sellers of SUNSOURCE. In 1996, the Company financed the
acquisition of GOLD BOND and repaid all outstanding bank indebtedness with the
proceeds of a new bank facility.
In connection with certain of its acquisitions, the Company has agreed to
make certain deferred payments. The Company is obligated to make additional
payments, not to exceed $15.8 million in the aggregate, over a six year period
from the June 1997 closing if sales of the SUNSOURCE business exceeds certain
levels as defined in the purchase agreement. In addition, for new dietary
supplement products introduced in the first three years following the
acquisition of the SUNSOURCE business, the Company is obligated to pay a royalty
on net sales of such new product for a period of seven years. The Company is
obligated to pay a royalty on net sales of HERPECIN-L for each 12 month period
ending June 30, 2003. The Company is also obligated to make an additional
payment if new sales of PHISODERM products in the U.S. exceed certain levels for
each 12-month period ending June 30, 1997.
The following table presents certain working capital data at February 28,
1998 and November 30, 1997 or for the respective periods then ended:
<TABLE>
<CAPTION>
FEBRUARY 28,
ITEM 1998 NOVEMBER 30, 1997
- -------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Working capital (current assets less current
liabilities).......................................... $ 19,871,000 $ 15,520,000
Current ratio (current assets divided by current
liabilities).......................................... 1.63 1.45
Quick ratio (cash and cash equivalents, and receivables
divided by current liabilities)....................... 1.0 2.96
Average accounts receivable turnover.................... 5.62 5.92
Average inventory turnover.............................. 2.85 3.17
Working capital as a percentage of total assets......... 11.12% 8.68%
</TABLE>
38
<PAGE>
The improvement in the current and quick ratio at February 28, 1998 as
compared to November 30, 1997, reflect primarily increases in accounts
receivable and inventories, which were largely associated with the seasonal
products, e.g., BULLFROG and SUN-IN, and the reduction of accounts payable.
Total loans outstanding were $145.1 million at February 28, 1998 compared to
$142.4 million at November 30, 1997, an increase of $2.7 million during the
first quarter of 1998. The revolving line of credit is available to the Company
up to $30 million or such lesser amount as is determined to be available under
the terms of the Company's bank credit agreement. The availability of credit
under the revolver is determined based on the Company's accounts receivable and
inventories. As of February 28, 1998, the Company had $17.0 million outstanding
on its $30 million working capital line of credit.
On March 24, 1998, the Company completed the previously reported Acquisition
of the BAN line of anti-perspirant/deodorant products. Concurrently with the
closing of the Acquisition, the Company issued $200 million of 8 7/8% Series A
Senior Subordinated Notes due 2008 and amended and restated the Secured Credit
Facility. The proceeds from the offering of Series A Notes were used to fund the
Acquisition of BAN, pay related acquisition and financing fees and expenses and
repay the outstanding balance of the working capital line of credit which was
$19.0 million as of March 24, 1998.
On May 12, 1998, the Company sold its CORNSILK oil control make up brand to
Del Laboratories, Inc. Proceeds from the sale of CORNSILK were used to reduce
Senior Indebtedness. On April 27, 1998, the Company repurchased $8.6 million in
principal amount of its Existing Notes. As a result, there were as of May 26,
1998 $58.4 million in aggregate principal amount of the Existing Notes
outstanding.
Management of the Company believes that projected cash flows generated by
operations along with funds available under its credit facilities will be
sufficient to fund the Company's current commitment and proposed operations.
PRO FORMA LIQUIDITY
The Company incurred substantial indebtedness in connection with the
Transaction. As of February 28, 1998, on a pro forma basis after giving effect
to the consummation of the offering of Series A Notes and the Transaction, the
Company would have had total indebtedness of $329.4 million and shareholders'
equity of $5.0 million. Following the Transaction, the Company intends to use
cash flow from operations and borrowings under the Secured Credit Facility to
meet its working capital requirements, operating expenses, debt service
obligations and capital expenditure requirements. The Secured Credit Facility
provides for term loans in an aggregate principal amount of $63.7 million and
revolving credit borrowings of up to $30.0 million (subject to borrowing base
limitations). The revolving credit borrowings and $27.5 million of the term
loans matures on June 26, 2002, and the remaining term loan matures on June 14,
2004. Loans under the Secured Credit Facility are guaranteed by each domestic
subsidiary of the Company and are secured by substantially all of the assets of
the Company and its domestic subsidiaries (including 65% of the capital stock of
foreign subsidiaries). Signal is the only guarantor under the Secured Credit
Facility. See "Description of Other Indebtedness--Secured Credit Facility."
Based upon current and anticipated levels of operations, the Company
believes that its cash flow from operations, together with amounts available
under the Secured Credit Facility, will be adequate to meet its anticipated
requirements for working capital, capital expenditures and interest payments.
However, the Company's business is subject to prevailing economic conditions and
to financial, business and other factors, many of which are beyond its control.
Consequently, there can be no assurance that the Company's business will
continue to generate sufficient cash flows in the future to enable the Company
to service its debt, and the Company may be required to refinance all or a
portion of its indebtedness or to obtain additional financing. These increased
borrowings may result in higher interest payments. There can be no assurance
that any such refinancing would be possible or that any such additional
financing could be obtained. See "Risk Factors--Leverage."
39
<PAGE>
YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the year 2000 date
are a known risk. The Company has developed a plan to ensure its systems are
compliant with the requirements to process transactions in the year 2000. The
majority of the Company's internal information systems will be replaced with
fully compliant new systems. The total cost of the software and implementation
is estimated to be $1.5 million to $2.0 million, which will be capitalized as
incurred. The majority of actual cash payments will be made in 1998 with the
remainder to be paid in early 1999. This new system implementation is expected
to be completed during 1999.
The Company does not currently have any information concerning the year 2000
compliance status of its suppliers and customers. In the event that any of the
Company's significant suppliers or customers does not successfully and timely
achieve year 2000 compliance, the Company's business or operations could be
adversely affected.
FOREIGN OPERATIONS
The Company's primary foreign operations are conducted through its Canadian
and U.K. 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
SFAS No. 52, "Foreign Currency Translation." For the three months ended February
28, 1998 and 1997, these subsidiaries accounted for 8% and 8% of total revenues,
respectively, and 4% and 5% of total assets, respectively. It has not been the
Company's practice to hedge its assets and liabilities in Canada and the U.K. or
its intercompany transactions due to the inherent risks associated with foreign
currency hedging transactions and the timing of payments 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 $49,000 to $10,000 for the three months ended February 28,
1998 and 1997, respectively, resulted from foreign currency transactions.
SEASONALITY
During recent fiscal years, the Company's first quarter net sales and gross
profit have trailed the other fiscal quarters on average from 25.0% to 35.0%
because of slower sales of international consumer products and the relative
absence of promotional campaigns during this quarter.
40
<PAGE>
BUSINESS
Chattem is a leading manufacturer and marketer of high quality, branded
consumer products primarily in attractive niche markets throughout the United
States and Canada. On March 24, 1998, the Company acquired BAN for $165.0
million plus the assumption of up to $5.0 million in liabilities. BAN has been
one of the most recognized brands in the AP/Deo market since its introduction in
1955 and holds a dominant position in the roll-on market segment. On a pro forma
basis, the Company would have generated revenues and EBITDA for the twelve
months ended February 28, 1998 of $240.8 million and $62.1 million,
respectively.
The Company's products are among the leaders in their respective markets
allowing the Company to establish brand loyalty among consumers, extend product
life cycles and maintain attractive margins. The Company competes in three
distinct market segments: OVER-THE-COUNTER PHARMACEUTICAL PRODUCTS, including
medicated powders (GOLD BOND), topical analgesics (FLEXALL, ICY HOT, BENZODENT)
and internal analgesics (PAMPRIN, NORWICH, PREMSYN PMS); FUNCTIONAL TOILETRIES
AND COSMETICS, including facial cleanser (PHISODERM), sunblock (BULLFROG),
shampoo (ULTRASWIM) and hair lightener (SUN-IN); and DIETARY SUPPLEMENTS
marketed under the SUNSOURCE name, including garlic extracts (GARLIQUE), a sleep
aid (MELATONEX), a product providing resistance against infections (ECHINEX), a
menopausal supplement (REJUVEX) and a newly launched St. John's Wort and
Siberian ginseng product for emotional balance and physical well being
(HARMONEX).
The Company has grown rapidly by (i) aggressive product line extensions that
capitalize on consumer awareness of the existing brand names and (ii) selective
acquisitions of new brands that can benefit from the Company's established
infrastructure and brand management expertise. Since 1992, the Company has
introduced in excess of 35 product line extensions, which accounted for a
significant amount of total sales in fiscal 1997. Chattem has traditionally
acquired either (i) established brands that have been undermanaged by larger
consumer products companies and therefore have unrealized potential or (ii)
brands of entrepreneurial companies which have achieved regional success that
would benefit from national exposure. In both cases, the Company has been
successful at increasing the acquired brand's sales and product contribution by
utilizing the Company's marketing, sales, product development and manufacturing
expertise and established distribution network.
As a result of product line extensions and strategic acquisitions, excluding
the Acquisition, the Company has achieved a CAGR in sales and EBITDA of 12.4%
and 31.5%, respectively, over the last four fiscal years.
BAN OVERVIEW
BAN is one of the most highly recognized brands in the AP/Deo market, with a
forty year history of innovation and quality. In the AP/Deo market, which is
segmented by end-user and application type, BAN is positioned as a highly
effective AP/Deo in the unisex segment, where BAN ranks in the top three. In
addition, BAN is the dominant brand in the high margin roll-on segment. BAN's
product portfolio is focused on five core products: BAN Roll-On, BAN Clear
Roll-On, BAN White Solid, BAN Clear Solid and BAN Clear Soft Solid. These
products compete in all major AP/Deo market segments except aerosol.
The addition of the BAN product line to Chattem further diversifies the
Company's revenue base and enhances its market presence. The Company believes
there are significant opportunities to increase BAN's revenues and related
contribution by augmenting the brand's current level of advertising and
promotional spending. In addition, Chattem intends to refocus the product's
marketing strategy to target specific segments within BAN's broad and
established customer base. The Company also would have realized approximately
$9.0 million in cost savings on a pro forma 1997 basis based on the terms of a
manufacturing agreement entered into between the Company and BMS, pursuant to
which BMS will manufacture BAN for Chattem.
41
<PAGE>
COMPETITIVE STRENGTHS
The acquisition of BAN improves the Company's market position and increases
its overall growth prospects. The Company will continue to utilize the following
competitive strengths to enhance its position in the marketplace:
COST EFFECTIVE ADVERTISING AND PROMOTIONAL SUPPORT. The Company has a
proven ability to efficiently utilize its marketing, promotional and advertising
expertise to increase the profitability of its portfolio of well-recognized
brands. The Company traditionally invests 35% to 40% of its revenues in
advertising and trade and consumer promotions. The Company believes that it has
a significant competitive advantage compared to several of its larger
competitors due to its ability to (i) manage advertising, trade promotion and
consumer promotion expenditures on a cost effective basis and (ii) quickly adapt
its marketing strategies to changing consumer preferences.
STRONG HISTORICAL CASH FLOW. The Company's diverse product offerings,
strong brand names and leading market positions have provided a stable base of
cash flow. As a result of these factors, the Company's four year historical
average EBITDA margin has been 18.5%. On a pro forma basis, the Company's EBITDA
margin for the twelve months ended February 28, 1998 would have improved to
25.8%. The Company's products compete in diverse markets which reduces the
Company's dependency on any one product or market segment. Further, a majority
of the Company's products are targeted to consumers over the age of 45, a
segment of the population which is expected to grow at a significantly faster
rate than the overall population.
EXPERIENCED MANAGEMENT TEAM. The Company's senior management team averages
over 15 years of experience with the Company. The Company's senior management is
actively involved in the management of the Company's brands, thereby allowing
the Company to quickly make and execute decisions regarding changes in brand
strategy. Additionally, the senior management team has lead the successful
completion and integration of five acquisitions over the past four years.
EFFECTIVE BRAND MANAGEMENT. The Company believes that it is able to (i)
effectively manage and develop brands that compete in certain niche segments of
larger overall markets and (ii) identify brands with significant intrinsic value
that may have been undermarketed or underdeveloped by prior owners. The Company
believes that for many larger consumer products companies, certain brands do not
generate the sales or profitability that allow for efficient and cost effective
brand management. Conversely, the Company believes that firms that are smaller
than Chattem generally do not achieve the advertising and marketing scale
necessary to compete consistently or on a national basis. As a result, the
Company has been able to utilize brand recognition within its products'
respective markets to maintain favorable relationships with retailers, achieve
consumer loyalty and extend product life cycles.
EFFICIENT OPERATIONS. The Company has built strong marketing, sales,
product development, manufacturing, distribution and staff functions to support
its strategic emphasis on growth within the consumer products industry. Because
of its operating efficiency the Company is able to support substantial
additional product offerings and volume with relatively low increases in
non-manufacturing employees and fixed expenses. For example, the Company has
increased sales by approximately $53.4 million over the last four years, while
its selling, general and administrative expenses as a percentage of sales has
declined from 21.8% to 15.6% over the same time period.
ESTABLISHED DISTRIBUTION NETWORK. Chattem has an established distribution
network comprised of thousands of drug, food and mass merchandiser retailers
which continues to be developed and serviced through its internal sales force.
The Company has a proven ability to leverage this distribution network to
increase the market penetration of product line extensions and acquired brands.
For example, BULLFROG (acquired in 1986) and FLEXALL (acquired in 1989),
regional brands at the time of acquisition, were expanded into national brands
with combined sales in excess of $20.0 million in fiscal 1997.
42
<PAGE>
GROWTH STRATEGY
By capitalizing on its competitive strengths, the Company intends to (i)
expand the market share of existing products, (ii) maximize the value of
existing brands through product line extensions and (iii) acquire established
brands with unrealized potential or successful regional brands that would
benefit from national exposure.
STRATEGY FOR BAN
The Company believes that it can increase both revenue and profitability of
BAN based upon the following strategies:
REALIZE MANUFACTURING COST SAVINGS. BAN has historically been manufactured
in a facility that has operated well below its manufacturing capacity. As a
result, BAN absorbed significant fixed overhead. Chattem has entered into a
manufacturing agreement with BMS pursuant to which BMS will manufacture BAN at a
pro forma cost savings of approximately $9.0 million over the amount reflected
for the manufacture of BAN in the BAN financial statements for 1997.
LEVERAGE CHATTEM'S EXPERIENCED SALES FORCE. BAN, with 45 SKU's, represented
a small portion of the total SKU's of the Personal Care unit of BMS's Consumer
Products group. In contrast, BAN represents Chattem's largest product line and
therefore will be a major focus of the Company's 55 person in-house sales force.
Furthermore, Chattem's executive management team is actively involved in the
management of all the Company's brands and will be directly involved in
realizing the full potential of BAN.
ENHANCE AND REFOCUS MARKETING STRATEGY. Beginning in 1994, BAN began
receiving less media spending than in previous years. Chattem believes that it
can apply its expertise in advertising and promotion to BAN and generate strong
gains in market share with limited incremental spending above the amount spent
in 1997. To achieve this, the Company plans to (i) significantly increase
advertising support to a level that is consistent with BAN's market share and
(ii) develop a consistent marketing platform that targets certain demographic
segments where the Company believes there is a current lack of focus by the
industry.
INTRODUCE NEW AND OR IMPROVED FORMS OF BAN. Management believes that sales
gains in the AP/Deo market are driven in part by new product introductions and
product line extensions. BAN is recognized for its leadership in developing new
products. In fact, three of BAN's five existing products were leaders in
creating new segments of the AP/Deo market. Management believes there are
numerous enhancements that can be made to the BAN product line to improve
existing forms and introduce innovative line extensions.
43
<PAGE>
PRODUCTS
The objective of the Company is to offer high quality branded products in
attractive niche market segments in which the Company's products are among the
market leaders in their respective categories.
The Company's products are:
OTC PHARMACEUTICALS
BAN--anti-perspirant/deodorant products
GOLD BOND--medicated powders and anti-itch cream
FLEXALL--topical analgesic
ICY HOT--topical analgesic
PAMPRIN--menstrual internal analgesic
PREMSYN PMS--premenstrual internal analgesic
NORWICH Aspirin--internal analgesic
BENZODENT--topical oral analgesic
HERPECIN-L--cold sore and fever blister product
FUNCTIONAL TOILETRIES AND COSMETICS
BULLFROG--sunblock
ULTRASWIM--chlorine removing shampoo
SUN-IN--spray-on hair lightener
MUDD--facial mask and cleanser
PHISODERM--facial and hand cleanser
DIETARY SUPPLEMENTS
GARLIQUE--garlic extract
MELATONEX--sleep aid
ECHINEX--infections resistance enhancer
PROPALMEX--prostate health product
REJUVEX--menopausal supplement
HARMONEX--emotional and physical well-being
The following table sets forth the Company's net sales attributable to
domestic and international OTC pharmaceuticals, functional toiletries and
cosmetics, dietary supplement and homeopathic products, other products and total
consumer products (including CORN SILK and excluding BAN) for the three months
ended February 28, 1998 and for the years ended November 30, 1995, 1996 and 1997
(dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------
THREE MONTHS ENDED
FEBRUARY 28, 1998 1997 1996 1995
------------------------ ------------------------ ------------------------ ---------
PRODUCT CLASS SALES PERCENTAGE SALES PERCENTAGE SALES PERCENTAGE SALES
- -------------------------------- --------- ------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic:
OTC pharmaceuticals........... $ 15,052 43.1% $ 83,121 58.0% $ 67,214 56.5% $ 48,700
Functional toiletries and
cosmetics................... 9,433 27.0 33,887 23.7 36,232 30.5 37,519
Dietary supplements and
homeopathics................ 7,222 20.7 9,102 6.4 -- -- --
International:
OTC pharmaceuticals........... 766 2.2 3,053 2.1 2,255 1.9 2,463
Functional toiletries and
cosmetics................... 2,337 6.7 12,154 8.5 12,204 10.3 10,885
Other products:................. 111 .3 1,918 1.3 998 .8 1,031
--------- ----- --------- ----- --------- ----- ---------
Total consumer products......... $ 34,921 100.0% $ 143,235 100.0% $ 118,903 100.0% $ 100,598
--------- ----- --------- ----- --------- ----- ---------
--------- ----- --------- ----- --------- ----- ---------
<CAPTION>
PRODUCT CLASS PERCENTAGE
- -------------------------------- -------------
<S> <C>
Domestic:
OTC pharmaceuticals........... 48.4%
Functional toiletries and
cosmetics................... 37.3
Dietary supplements and
homeopathics................ --
International:
OTC pharmaceuticals........... 2.5
Functional toiletries and
cosmetics................... 10.8
Other products:................. 1.0
-----
Total consumer products......... 100.0%
-----
-----
</TABLE>
44
<PAGE>
OTC PHARMACEUTICALS
The Company markets a diversified portfolio of brand name OTC pharmaceutical
products, many of which are among the market leaders in the U.S. in their
respective categories.
The GOLD BOND brand, which is approximately 100 years old, competes in the
adult, foot and baby medicated powder and anti-itch cream markets. GOLD BOND is
the leading brand in the medicated powder market and has a rapidly growing
presence in the anti-itch cream market. The product line is heavily supported by
national television and radio advertising, as well as with consumer promotions.
The Company believes GOLD BOND represents a major growth opportunity. In
February 1997, the Company added two product line extensions with the
introduction of GOLD BOND Medicated Foot Powder and GOLD BOND Corn Starch Plus
Medicated Baby Powder.
FLEXALL is an aloe-vera based topical analgesic used primarily by people
with arthritic symptoms to alleviate pain and irritation in joints and
secondarily by persons suffering from muscle strain. The Company believes that
the advancing age of the U.S. population and the emphasis on fitness and
physical activity will increase the overall market size of the topical analgesic
market. The Company supports the brand with a marketing program that utilizes
extensive television and print media advertising. In fiscal 1996 FLEXALL Ultra
Plus, containing menthol, methyl salicylate and camphor as active ingredients,
was added to the line.
ICY HOT provides the Company with a second entry into the topical analgesic
market segment. ICY HOT is an extra strength dual action product. The Company
supports this brand with national advertising and strong promotional programs.
In February 1997, the Company began shipping ICY HOT Arthritis Therapy Gel. This
new product contains capsaicin, the active ingredient most recommended by
doctors, in an aloe based gel. The Company believes that this line extension
provides significant opportunity for growth.
In the menstrual analgesic segment, the Company markets PAMPRIN, a
combination drug specifically designed for relief of menstrual symptoms, and
PREMSYN PMS, a product formulated to relieve mild to moderate symptoms of
premenstrual syndrome. PAMPRIN was developed internally by the Company over 30
years ago, while PREMSYN PMS was introduced by the Company in 1983.
HERPECIN-L is a balm stick in the lip care category which treats and
protects cold sores in three ways. The unique formula moisturizes lips to help
prevent cracking, reduce soreness and promote healing. Also, HERPECIN-L contains
an SPF 15 sunblock to help protect lips from the harmful rays of the sun. The
Company supports the brand with television and radio advertising as well as
consumer promotions designed to generate trial during the peak winter and summer
cold sore seasons.
NORWICH is a pharmaceutical-quality, aspirin-based analgesic which
complements the Company's other OTC pharmaceuticals by offering consumers
another choice in the analgesic market segment and by permitting shared product
promotions. The Company positions the brand as a reasonably priced alternative
between private label generic aspirin and high-priced, heavily advertised
brands.
BENZODENT is a dental analgesic cream in an adhesive base for use as an
oral, topical analgesic for pain related to dentures. The Company acquired
BENZODENT in 1994 and seeks to increase the market share of this brand through a
sampling provided to dental professionals.
FUNCTIONAL TOILETRIES AND COSMETICS
The Company also markets a portfolio of brand name functional toiletries and
cosmetics, many of which are among the market leaders in the U.S. in their
respective categories.
In the sunscreen and sunblock category, BULLFROG provides long-lasting
water-durable protection from the sun. Positioned as a line of highly
efficacious sunblock products in a unique, highly concentrated formula, the
Company believes that the BULLFROG brand should continue to benefit from this
overall
45
<PAGE>
market growth as well as increasing brand awareness, broader product offerings
and increased consumer advertising, promotion and sampling programs.
ULTRASWIM is a line of chlorine-removing shampoo, conditioner and soap.
ULTRASWIM has a patented formula that the Company believes makes it superior to
formulations of other products in removing chlorine. ULTRASWIM has also
benefited as it has moved beyond the competitive swim segment to include
exercise and recreational swimmers. The Company supports this brand by selected
television advertising complemented by print advertising.
SUN-IN is a leading product line in the spray-on hair lightener market. The
target customers within this market segment are light-haired women between the
ages of 12 and 24. The Company supports SUN-IN's position as a market leader
through recent improvements in the formula and package, seasonal advertising to
teens and young adults and consumer promotions in retail stores.
MUDD is a line of clay-based products which provide deep cleansing of the
face for healthier, cleaner skin. Target customers for MUDD are women between
the ages of 18 and 49. In 1997, the Company introduced a revolutionary new
masque extension, MUDD 5 Minute Mask. The new product provides all of the
cleansing benefits of a clay-based masque product but in one-third of the time.
PHISODERM is a line of facial cleansers consisting of several formulae of
liquid cleansers, including one for infants, and a bar soap. Acquired in 1994,
PHISODERM is the Company's second entry into the facial cleanser category. In
fiscal 1995, the Company improved the formula, updated the packaging and
provided television advertising and promotional support. In fiscal 1996,
PHISODERM Antibacterial Hand Cleanser was introduced in the domestic and certain
international markets.
DIETARY SUPPLEMENTS
A majority of the Company's SUNSOURCE line of products compete in the herbal
dietary supplementals market. The herbal dietary supplements industry in the
U.S. is estimated to be between $2.0 billion and $2.5 billion. The U.S. market
for these products is considered underdeveloped by worldwide standards, as the
European market is estimated at $6.0 billion. The mass market outlets (drug,
food and mass merchandisers) accounted for only 10% of the total domestic
marketplace in 1996, and increased in retail sales by 37% from approximately
$161.0 million in 1995 to approximately $221.0 million in 1996. Dietary
supplements are profitable for mass market retailers, which are expanding their
presence in this market to take advantage of a growth opportunity.
ECHINEX is used to improve the body's natural resistance to infection. The
product was launched by SUNSOURCE in November 1996. There is little branded
competition or advertising in this category. Echinacea is the best selling herb
in U.S. health food stores.
GARLIQUE helps to lower cholesterol and blood pressure and is the second
leading branded garlic product. GARLIQUE contains a full month's supply in each
package making it more economical and convenient than any other leading garlic
supplement.
REJUVEX is a dietary supplement formulated especially for the relief of
symptoms associated with menopause. There is little competition or advertising
in this category.
MELATONEX contains melatonin, a substance already produced by the body that
regulates the body's natural sleep/wake cycle. There is substantial competition
in this category from OTC products and non-branded melatonin products.
PROPALMEX helps to support prostate health and promote free urinary flow.
The product was launched in July 1996 and has little branded competition. There
is little competitive advertising in this category.
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HARMONEX, a new product launched in May 1998, contains a unique combination
of St. John's Wort for emotional well-being and Siberian ginseng for physical
well-being. HARMONEX enters the fast growing St. John's Wort category, now
selling at an annualized rate of approximately $100.0 million in sales. In
addition to significant consumer advertising levels planned for its promotion,
HARMONEX will also be supported by a powerful public relations campaign.
In connection with the acquisition of the SUNSOURCE products, the Company
also acquired a line of homeopathic products including cold and allergy
remedies.
BAN
GENERAL. BAN is one of the most recognized brand names in the AP/Deo market
in the United States and has consistently maintained a strong market position
since its introduction in 1955. BAN is positioned as a highly effective AP/Deo
that appeals to both female and male consumers. BAN's high recognition and
positive attributes have enabled it to cultivate a loyal consumer base.
BAN's product portfolio covers all of the significant AP/Deo forms available
in the market, with the exception of aerosols, and represents a competitive and
diverse product offering. Three of BAN's five core products were leaders in
creating new segments in the AP/Deo market. The overall AP/Deo market is
segmented by application type (roll-on, solid, aerosol) and by end-user (male,
female, unisex). BAN currently enjoys a dominant share of the high margin $179.0
million roll-on segment. In the $494.0 million unisex segment, BAN ranks third
with a 21.0% share. BAN is ranked sixth, with a 6.5% share, in the overall
$1.593 billion U.S. AP/Deo market.
BAN is distributed primarily in the United States through drug, food and
mass merchandiser channels. BAN has established the number three position in
drug stores in the United States, a channel which represents 22.0% of domestic
AP/Deo sales. Internationally, BAN is currently marketed in Thailand, Canada,
Latin America and certain other Asian countries.
ANTI-PERSPIRANT AND DEODORANT MARKET. AP/Deo's have become an important
element of personal hygiene throughout the United States, ranking as the seventh
largest segment of household consumer purchases of health and beauty care items
(based on units sold). With total unit sales of 706.4 million, or 5.8% of the
total health and beauty care market, households regularly purchase more
anti-perspirants/ deodorants than pain remedies, skin care or shaving products.
Brands within the AP/Deo category are segmented into five types: Solids,
Roll-Ons, Clear Solids, Gels and Aerosols. The AP/Deo market in the United
States has grown consistently from 1992 to 1997 at a compound annual growth rate
of 3.5%.
PRODUCTS. For over forty years, the BAN brand has made a significant
contribution to category expansion by introducing innovative, high growth new
products. These introductions were designed to meet consumers' preferences for
highly effective protection with less residue and greater ease of application.
BAN's most recent new product introduction, BAN Clear Soft Solid, launched in
late 1996, effectively provided these product attributes by integrating clear
technology into a gel form delivered via a unique "contoured dome" applicator.
BAN's product portfolio is focused on five core products, BAN Roll-On, BAN
Clear Roll-On, BAN White Solid, BAN Clear Solid and BAN Clear Soft Solid, which
are available in a variety of sizes and fragrances. BAN's products are as
follows:
BAN ROLL-ON. BAN's flagship product was developed in the roll-on form in
1955 and is labeled "America's #1 Roll-On." The water based formula is
designed to apply with little friction and will not stain skin or clothes.
BAN Roll-On is available in three sizes and seven fragrances.
BAN CLEAR ROLL-ON. Introduced in 1995, BAN Clear Roll-On is the first
and only clear roll-on that provides application without the "white
residue." This product has allowed BAN to solidify its leading
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<PAGE>
market position in the roll-on segment with market share increasing from
26.0% in 1994 to 34.4% in 1997.
BAN WHITE SOLID. This product competes in the largest AP/Deo category
segment and is the BAN's second largest contributor to total sales. BAN
White Solid is offered in one size and seven fragrances.
BAN CLEAR SOLID. Introduced in 1991, this product was the first clear
solid in the AP/Deo category which addressed the "white residue" problem.
BAN Clear Solid is available in one size and four fragrances.
BAN CLEAR SOFT SOLID. This product is the latest addition to the BAN
portfolio and is marketed with a unique package, a clear, non-alcohol
formula and a patented contoured-dome applicator that enables the product to
be applied comfortably.
ADVERTISING AND PROMOTION
The Company allocates a significant portion of its revenue to the
advertising and promotion of its products. As a percentage of net sales,
advertising and promotion for these purposes were 43.5%, 40.3%, 39.2%, 38.3% and
37.0%, during the three month periods ended February 28, 1998 and 1997, and each
of the fiscal years ended November 30, 1997, 1996 and 1995, respectively.
The Company's marketing objective is to develop and execute 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 managing advertising, trade promotions and consumer promotions expenditures
on a cost effective basis is an essential element in its ability to compete
successfully.
The Company develops for each of its major brands advertising strategies and
executions that focus on the particular attributes and market positions of the
products. The Company achieves cost-effective advertising by minimizing certain
expenses, such as production of commercials and payments to advertising
agencies.
The Company works directly with retailers to develop for each brand
promotional calendars and campaigns 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.
MANUFACTURING AND QUALITY CONTROL
The Company manufactures most of its OTC pharmaceuticals and functional
toiletries and cosmetics products at its manufacturing facility in Chattanooga,
Tennessee. GOLD BOND, NORWICH Aspirin and the dietary supplements are
manufactured by contract manufacturers. Currently, the Company 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, with the addition of
new equipment at relatively small cost or through readily available contract
manufacturers. For products that require different manufacturing processes, the
Company determines whether to manufacture such products based on its evaluation
of the economic benefit versus contract manufacturing with a third party.
Chattem has entered into a manufacturing agreement with BMS, pursuant to which
BMS has agreed to manufacture BAN for the Company for a period of three years.
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To monitor the quality of its products, the Company maintains an internal
quality control system supported by an on-site microbiology laboratory. Outside
consultants also are employed from time to time to monitor product development
and the effectiveness of the Company's operations.
The Company has not experienced any material adverse effect on its business
as a result of shortages of energy or other raw materials used in the
manufacture of its products. At present, the Company does not foresee any
significant problems in obtaining its requirements at reasonable prices, but no
assurances can be given that raw material or energy shortages will not adversely
affect its operations in the future.
PRODUCT DEVELOPMENT
The Company's product development expenditures were $275,000, $248,000, $1.2
million, $1.1 million and $1.1 million, during the three month periods ended
February 28, 1998 and 1997, and each of the fiscal years ended November 30,
1997, 1996 and 1995, respectively. No material customer-sponsored product
development activities were undertaken during these periods. The Company expects
to maintain the same general level of expenditures in fiscal 1998.
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 thousands of
food, drug and mass merchandise accounts. Internationally, the products are sold
by a national broker in Canada and the Company's own sales force in the United
Kingdom and by exclusive distributors in Western Europe and Central and South
America to mass distribution channels.
Wal-Mart accounted for more than 16% of the Company's consolidated net sales
in fiscal 1997 and more than 16% of the Company's consolidated net sales in the
three month period ended February 28, 1998. On a pro forma basis, sales to
Wal-Mart would have represented an increased percentage of total net sales for
1997. No other customer accounts for more than 10% of consolidated net sales.
Boots Plc, a U.K. retailer, and Shoppers Drug Mart, a Canadian retailer, each
accounted for more than 10% of the international consumer products segment's
sales in fiscal 1997 and in the three month period ended February 28, 1998.
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 1997 and
1996 largely as a result of product acquisitions and line extensions in both
years. In certain circumstances, the Company allows its customers to return
unsold merchandise and, for seasonal products, provides extended payment terms
to its customers.
INTERNATIONAL
The Company's products are also sold in foreign countries. This
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. 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
and United Kingdom facilities and are packaged by subsidiary companies in small
facilities in Canada and the United Kingdom with the assistance, from time to
time, of outside contract packagers.
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Many of the Company's major domestic products are currently sold in Canada,
including the GOLD BOND, FLEXALL, PAMPRIN, SUN-IN, MUDD, ULTRASWIM and PHISODERM
brands.
Consumer product sales in the United Kingdom and on the continent of Western
Europe are currently limited to toiletry and cosmetic products. The Company's
hair lightener product is sold on the continent under the SPRAY BLOND trademark
and in the United Kingdom as SUN-IN. MUDD and ULTRASWIM are the other primary
consumer products sold by the Company's international division in Europe.
The Company's export division services various distributors primarily
located in the Caribbean, Mexico and Peru. The Company sells various products
into these markets with the primary focus being the development of its OTC
pharmaceuticals, principally ICY HOT, PAMPRIN, PHISODERM and GOLD BOND. The
Company continues to look for established distributors for its products in
Central and South America.
BAN products are sold internationally in Thailand, Canada, Latin America and
certain other Asian countries other than Japan.
TRADEMARKS AND PATENTS
The Company's trademarks are of material importance to its business and are
among its most important assets. However, except in the case of the FLEX ALL
454, PHISODERM, ICY HOT, GOLD BOND, SUNSOURCE and BAN trademarks, its business
as a whole is not materially dependent upon ownership of any one trademark. The
Company, either directly or through a wholly-owned subsidiary, owns or licenses
all of the trademarks associated with its business. All of the Company's brands
have recognized trademarks associated with them, and the Company's significant
domestic trademarks have been registered on the principal register of the United
States Patent and Trademark Office. Federally registered trademarks have a
perpetual life as long as they are timely renewed and used properly as
trademarks, subject to the right of third parties to seek cancellation of the
marks.
The Company also owns patents related to the ULTRASWIM shampoo, which expire
in 1998, and ICY HOT stick topical analgesic, which expire in 2007. After
expiration of the patents, the Company expects that these products will continue
to compete in the market primarily on the basis of the goodwill associated with
the brands.
COMPETITION
The OTC pharmaceutical, functional toiletry and dietary supplements 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 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 or generic category has
also become more competitive in certain of the Company's product markets.
Another factor affecting the OTC pharmaceutical, toiletry and dietary supplement
products business is the consolidation of retailers and increasingly more
competitive negotiations for access to shelf space.
BAN's principal competitive products include Secret, Sure, Old Spice (The
Proctor & Gamble Company); Right Guard, Soft & Dri, Dry Idea (Gillette Company);
Degree, Suave, Brut (Unilever NV);
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Speed Stick, Lady Speed Stick (Colgate-Palmolive Company); Arrid (Carter-Wallace
Inc.); Mitchum, Lady Mitchum and Almay (Revlon Inc.); and Arm and Hammer (Church
& Dwight Company Inc.).
GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the FDA, the FTC, the Consumer Product Safety
Commission, the United States Department of Agriculture, the United States
Postal Service, the United States Environmental Protection Agency and the
Occupational Safety and Health Administration. These activities are also
regulated by various agencies of the states, localities and foreign countries in
which the Company's 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 an cosmetics. The regulations that are promulgated by the FDA relating to
the manufacturing process are known as GMPs, and are different for drug and food
products. In addition, the FTC has overlapping jurisdiction with the FDA to
regulate the promotion and advertising of OTC pharmaceuticals, functional
toiletries and cosmetics, dietary supplements and foods.
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
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. While the Company
addressed all of the FDA questions in detail, the final monograph for menstrual
drug products 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 competitor in the menstrual product category.
As a result of an order issued by the Consumer Products Safety Commission,
there are new packaging requirements for products containing lidocaine. The
Company has until September 1998 to develop child resistant packaging for its
GOLD BOND Cream products that are sold in tubes or change the product
formulation.
DSHEA was enacted on October 25, 1994. DSHEA amends the Federal Food, Drug
and Cosmetic Act by defining dietary supplements, which include vitamins,
minerals, 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, trigger drug status.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements effective January 1, 1997, although final regulations have not been
published and the FDA has indicated that implementation will be delayed. 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 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.
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The FDA has proposed but not finalized regulations to implement DSHEA,
including those relating to nutritional labeling requirements. The Company
cannot determine what effect such regulations, when promulgated, will have on
its business in the future. Such regulations are likely to require expanded or
different labeling for the Company's vitamin and nutritional dietary supplement
products and could, among other things, 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,
safety or efficacy. Failure to comply with applicable FDA requirements can
result in sanctions being imposed on the Company or the manufacture of its
products, including warning letters, product recalls and seizures, injunctions
or criminal prosecution.
ENVIRONMENTAL MATTERS
The Company is continuously engaged in assessing 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 site utilizes chemicals and other potentially hazardous
materials and generates both hazardous and non-hazardous waste, the
transportation, treatment, storage and disposal of which are regulated by
various governmental agencies. The Company is a member of the Chattanooga
Manufacturers Association, a trade association which promotes industry awareness
of developments in environmental matters and has engaged environmental
consultants on a regular basis to assist its compliance efforts. The Company is
currently in 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.
Since the early 1980's, the U.S. Environmental Protection Agency ("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 1995. 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. The Company has
not had any material claims in the past and is not aware of any material claims
pending or threatened 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 maintains product liability insurance,
principally through a captive insurance subsidiary, that it believes to be
adequate; however, there can be no assurance that it will be able to maintain
its existing coverage or that such coverage will be cost justified or sufficient
to satisfy future claims, if any, or that the resulting publicity will not have
a material adverse effect.
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EMPLOYEES
The Company employs approximately 303 persons on a full-time basis in the
U.S. and 37 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.
PROPERTIES
The Company's headquarters and administrative offices are located at 1715
West 38th Street, Chattanooga, Tennessee. The Company's primary production
facilities are adjacent to the Company's headquarters on land owned by the
Company. The Company leases the primary warehouse and distribution center,
located at 3100 Williams Street, Chattanooga, Tennessee, for its domestic
consumer products. The following table describes in detail the principal
properties owned and leased by the Company:
<TABLE>
<CAPTION>
TOTAL
BUILDINGS FACILITY
TOTAL AREA (SQUARE -----------------------------------------------
(ACRES) FEET) USE SQUARE FEET
--------------- ------------ ---------------------------------- -----------
<S> <C> <C> <C> <C>
Owned Properties:
Chattanooga, Tennessee............. 10 111,200 Manufacturing Office & 71,800
Administration 39,400
Leased Properties:
Chattanooga, Tennessee............. 4.0 100,000 Warehousing 103,800
Chattanooga, Tennessee............. 0.1 3,800
Chattanooga, Tennessee............. 1.0 35,200 Warehousing & Manufacturing 35,200
Mississauga, Ontario, Canada....... 0.3 15,000 Warehousing 10,500
Office & Administration 3,000
Packaging 1,500
Basingstoke, Hampshire England..... 0.3 21,900 Warehousing 13,900
Office & Administration 6,500
Packaging 1,500
</TABLE>
The Company is currently operating its facilities at approximately 70% of
total capacity. All of these facilities are FDA registered and are capable of
further utilization through the use of full-time second and third shifts.
LEGAL PROCEEDINGS
Claims, suits and complaints arise in the ordinary course of the Company's
business involving such matters as patents and trademarks, product liability and
other alleged injuries or damage. The outcome of such litigation cannot be
predicted, but, in the opinion of management, no such pending matters would have
a material adverse effect on the consolidated operating results or financial
position of the Company if disposed of unfavorably.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table lists the names of all executive officers and directors
of the Company, their ages and their positions and offices with the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Zan Guerry........................................... 49 Chairman of the Board and Chief Executive Officer;
Director
A. Alexander Taylor, II.............................. 45 President and Chief Operating Officer; Director
Robert E. Bosworth................................... 50 Director
Samuel E. Allen...................................... 61 Director
Louis H. Barnett..................................... 79 Director
Richard E. Cheney.................................... 76 Director
Scott L. Probasco, Jr................................ 69 Director
</TABLE>
ZAN GUERRY has served as Chairman of the Board of the Company since June
1990 and Chief Executive Officer of the Company since January 1998. Previously,
Mr. Guerry served as President of the Company from 1990 to 1998, as Executive
Vice President of the Company from 1983 to 1990, as President of Chattem
Consumer Products from 1984 to 1989 and as Chief Operating Officer from 1989 to
1990. Mr. Guerry is also a director of SunTrust Bank, Chattanooga, N.A. Mr.
Guerry was first elected as a director of the Company in 1981.
A. ALEXANDER TAYLOR, II has served as President and Chief Operating Officer
of the Company since January 1998. Previously he was a partner with the law firm
of Miller & Martin LLP, general counsel to the Company, from 1983 to 1998. Mr.
Taylor is also a director of U.S. Xpress Enterprises, Inc., a transportation
company located in Chattanooga, Tennessee and The Krystal Company, a
quick-service restaurant company located in Chattanooga, Tennessee. Mr. Taylor
was first elected as a director of the Company in 1993.
ROBERT E. BOSWORTH served as Executive Vice President of the Company from
June 1990 to January 1998 and Chief Financial Officer of the Company from April
1985 to January 1998. Mr. Bosworth was first elected as a director of the
Company in 1986.
LOUIS H. BARNETT, a director since 1970, is a consultant to the Company and
others regarding plastics and chemicals and oil investments and operations. Mr.
Barnett is also a director of Overton Bank and Trust and A/F Protein, Inc.
RICHARD E. CHENEY, a director since 1984, is former Chairman Emeritus,
director and member of the executive committee, Hill and Knowlton, Inc. Mr.
Cheney is also a director of HolloPak Technologies, Inc. and Rowe Furniture
Corporation.
SCOTT L. PROBASCO, JR., a director since 1966, is Chairman of the Executive
Committees of SunTrust Bank, N.A., Chattanooga, since March 1989, and SunTrust
Banks of Tennessee, Inc., since January 1990. Mr. Probasco is also a director of
SunTrust Banks, Inc., Coca-Cola Enterprises Inc. and Provident Life and Accident
Insurance Company.
SAMUEL E. ALLEN, a director since 1993, is Chairman of Globalt, Inc.
EXECUTIVE COMPENSATION
The following table sets forth information for the past three fiscal years
concerning compensation paid or accrued by the Company to or on behalf of the
Company's chief executive officer and the other most
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highly compensated executive officer, the only executive officers of the Company
during the fiscal year ended November 30, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
FISCAL ---------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS AWARDED (1) COMPENSATION (2)
- ------------------------------------- ----------- ---------- ---------- ----------------------- -----------------
<S> <C> <C> <C> <C> <C>
Zan Guerry(3)........................ 1997 $ 285,750 $ 202,500 0 $ 2,895
Chairman of the Board and Chief 1996 253,000 133,650 40,000 2,854
Executive Officer 1995 236,000 108,324 0 2,760
Robert E. Bosworth(4)................ 1997 $ 211,667 $ 125,000 0 $ 3,099
Executive Vice President and Chief 1996 192,500 81,400 25,000 3,032
Financial Officer 1995 181,760 119,819(5) 0 2,663
</TABLE>
- ------------------------
(1) Represents non-qualified stock options granted on January 31, 1996 under the
Company's 1994 Stock Option Plan at an exercise price of $4.875 per share.
(2) Represents premiums paid by the Company under life insurance policies with
respect to which the named executive is entitled to a death benefit of up to
$450,000 as follows for the 1997 fiscal year: Mr. Guerry $520; Mr. Bosworth
$724. Also represents the Company's contributions with respect to the
Company's Savings and Investment Plan for the named executive as follows for
the 1997 fiscal year: Mr. Guerry $2,375; Mr. Bosworth $2,375.
(3) Mr. Guerry was appointed Chief Executive Officer of the Company on January
13, 1998.
(4) Mr. Bosworth resigned from his position as Executive Vice President and
Chief Financial Officer on January 13, 1998.
(5) Includes one-time incentive bonus of $50,000 for the 1995 fiscal year.
AGREEMENTS WITH EXECUTIVE OFFICERS
The Company has entered into severance agreements with the officers named in
the Summary Compensation Table. These severance agreements are operative only
upon the occurrence of a change in control of the Company and are intended to
encourage key executives to remain in the Company's employ by providing them
with greater security and imposing various restrictions on competitive
employment should an officer leave the Company's employment. Absent a change in
control of the Company, the severance agreements do not require the Company to
retain any executive or to pay him any specified level of compensation.
If the severance agreements become operative, and if the employment with the
Company of one of these officers is terminated or the officer is constructively
discharged within two years of the occurrence of a change in control of the
Company, the officer will be entitled to receive a termination payment equal to
three times his average annualized includible compensation from the Company
during the five most recently completed fiscal years and the continuation of
certain Company-provided benefits. Includible compensation for purposes of
calculating the severance benefit generally includes all compensation paid to
the officer by the Company and will be calculated in accordance with the
applicable provisions of the Internal Revenue Code.
A change of control of the Company will be deemed to occur if (i) there is a
change of one-third or more of the directors of the Company within any 12-month
period; (ii) there is a change of one-half or more of the directors of the
Company within any 24-month period; or (iii) any person acquires ownership or
the right to vote 35% or more of the Company's outstanding voting shares.
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VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Set forth below is information, as of February 27, 1998, with respect to
beneficial ownership by (a) each person who is known to the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, (b) each
director and nominee, (c) the chief executive officer and the other most highly
compensated executive officer for the previous fiscal year, and (d) all
directors and executive officers of the Company as a group. As of February 27,
1998 there were issued and outstanding 9,127,970 shares of Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT
NAME OF BENEFICIAL OWNER (1) OF CLASS (2)
- ---------------------------------------------------------------- ---------------------- -------------
<S> <C> <C>
Palisade Capital Management, L.L.C.............................. 1,313,200(3) 14.4%
Suite 695
One Bridge Plaza
Fort Lee, NJ 07024
Zan Guerry...................................................... 1,250,639(4)(5 (7) 13.5
1715 W. 38th St.
Chattanooga, TN 37409
Robert E. Bosworth.............................................. 988,648(7)(8 (9) 10.7
1715 W. 38th St.
Chattanooga, TN 37409
Hamico, Inc..................................................... 891,865(10) 9.8
1715 W. 38th Street
Chattanooga, TN 37409
Piedmont Capital Management Corporation......................... 794,700(11) 8.7
One James Center
Suite 1500
Richmond, VA 23219
Barrow, Hanley, Mewhinney & Strauss, Inc........................ 636,800(12) 7.0
One McKinney Plaza
15th Floor, 3232 McKinney Avenue
Dallas, TX 75204
Putnam Investments, Inc......................................... 591,700(13) 6.5
One Post Office Square
Boston, MA 02109
Louis H. Barnett................................................ 122,219(14) 1.3
Richard E. Cheney............................................... 15,460 *
Scott L. Probasco, Jr........................................... 91,176(15) 1.0
Samuel E. Allen................................................. 14,250 *
A. Alexander Taylor, II......................................... 9,175 *
Directors and Executive Officers as a Group
(7 persons)................................................... 1,599,702 17.1
</TABLE>
- ------------------------
* Less than 1.0%.
(1) Except as otherwise indicated, refers to either shared or sole voting and
investment power. Includes the following numbers of shares subject to
purchase pursuant to options that are exercisable within 60 days of February
27, 1998 under the Company's Non-Statutory Stock Option Plan--1993 (the
"1993 Stock Option Plan"), the Company's Non-Statutory Stock Option
Plan--1994 (the "1994 Stock Option Plan") or the Company's Non-Statutory
Stock Option Plan for Non-Employee Directors (the "Director Plan"): Mr.
Guerry--124,600 shares, Mr. Bosworth--71,250 shares, Mr. Probasco--7,000
shares, Messrs. Allen and Taylor--6,750 shares each, Messrs. Barnett and
Cheney--6,500 shares each,
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<PAGE>
and all directors and executive officers as a group--229,350 shares. Also
includes the following numbers of shares subject to purchase pursuant to the
exercise of warrants issued in June, 1994 in connection with the Company's
Existing Notes due 2004: Mr. Guerry--1,464 shares, Mr. Barnett-- 1,581
shares, and all directors and executive officers as a group--3,045 shares.
(2) For the purpose of computing the percentage of outstanding shares owned by
each beneficial owner, the shares issuable pursuant to presently exercisable
stock options or warrants held by such beneficial owner are deemed to be
outstanding. Such shares are not deemed to be outstanding for the purpose of
computing the percentage owned by any other person.
(3) This information is based solely upon a Schedule 13G filed by Palisade
Capital Management, L.L.C. on or about January 14, 1998.
(4) Includes 37,081 shares held by a trust for the benefit of Mr. Guerry's
sister, of which he serves as a co-trustee. Mr. Guerry disclaims beneficial
ownership of the shares held by this trust.
(5) Includes 6,000 shares held in trust for Mr. Guerry pursuant to the terms of
the Company's Savings and Investment Plan.
(6) Includes 2,685 shares which Mr. Guerry holds as custodian for his children.
Mr. Guerry disclaims beneficial ownership of these custodial shares.
(7) Includes 878,100 shares and 13,765 shares subject to purchase pursuant to
the exercise of warrants owned by Hamico, Inc., a charitable foundation for
which Messrs. Guerry and Bosworth serve as directors and executive officers.
Messrs. Guerry and Bosworth disclaim beneficial ownership of all such
shares.
(8) Includes 23,433 shares held in trust for Mr. Bosworth pursuant to the terms
of the Company's Savings and Investment Plan.
(9) Includes 600 shares which Mr. Bosworth holds as custodian for his daughter.
Mr. Bosworth disclaims beneficial ownership of these custodial shares.
(10) Includes 13,765 shares subject to purchase pursuant to the exercise of
warrants issued June, 1994 in connection with the Company's 12.75% senior
subordinated notes due 2004.
(11) Includes shares held by various officers and affiliates of Piedmont Capital
Management Corporation for which shares Piedmont Capital Management
Corporation disclaims beneficial ownership.
(12) This information is based solely upon a Schedule 13G filed by Barrow,
Hanley, Mewhinney & Strauss, Inc. on or about February 13, 1997.
(13) Consists solely of shares held by certain wholly-owned subsidiaries of
Putnam Investments, Inc., which are registered investment advisors, for the
benefit of clients of such investment advisors and for which shares Putnam
Investments, Inc. disclaims beneficial ownership. This information is based
solely upon a Schedule 13G filed by Putnam Investments, Inc. on or about
January 27, 1997.
(14) Includes 103,778 shares which are held in trust for the benefit of various
family members. Mr. Barnett disclaims beneficial ownership of these shares.
(15) Includes 1,500 shares which are held in trust for the benefit of Mr.
Probasco's spouse. Mr. Probasco disclaims beneficial ownership of these
shares.
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<PAGE>
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the Exchange Offer is to fulfill certain obligations of
the Company with respect to the Registration Rights Agreement.
The Series A Notes were originally issued and sold on March 24, 1998 (the
"Issue Date") to the Initial Purchaser pursuant to the Purchase Agreement. Such
sales were not registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) of the Securities Act and Rule 144A of the
Securities Act. In connection with the sale of the Series A Notes, the Company
and the Initial Purchaser of the Series A Notes entered into the Registration
Rights Agreement dated March 24, 1998, pursuant to which the Company agreed to
(i) cause to be filed with the Commission no later than 60 days after March 24,
1998, a Registration Statement under the Securities Act relating to the Exchange
Notes and the Exchange Offer (the "Exchange Offer Registration Statement," which
is this Registration Statement), (ii) use its best efforts to cause such
Registration Statement to become effective at the earliest possible time, but in
no event later than 150 days after March 24, 1998, (iii) in connection with the
foregoing, file (A) all pre-effective amendments to such Registration Statement
as may be necessary in order to cause such Registration Statement to become
effective, (B) if applicable, a post effective amendment to such Registration
Statement pursuant to Rule 430A under the Securities Act and (C) cause all
necessary filings in connection with the registration and qualification of the
Exchange Notes to be made under the Blue Sky laws of such jurisdictions as are
necessary to permit the Exchange Offer to be consummated, and (iv) upon the
effectiveness of such Registration Statement, commence the Exchange Offer. The
Company shall cause the Exchange Offer Registration Statement to be effective
continuously and shall keep the Exchange Offer open for a period of not less
than the minimum period required under applicable federal and state securities
laws to consummate the Exchange Offer; provided, however, that in no event shall
such period be less than 30 business days. The Company has agreed to cause the
Exchange Offer to comply with all applicable federal and state securities laws.
No securities other than the Exchange Notes are to be included in the Exchange
Offer Registration Statement. The Company has agreed to use its best efforts to
cause the Exchange Offer to be consummated on the earliest practicable date
after the Exchange Offer Registration Statement has become effective, but in no
event later than 30 business days thereafter. The Company has agreed to use its
best efforts to keep the Exchange Offer Registration Statement continuously
effective, supplemented and amended as required by the provisions of the
Registration Rights Agreement to the extent necessary to ensure that it is
available for resales of Exchange Notes acquired by broker-dealers for their own
accounts as a result of market making activities or other trading activities,
and to ensure that it conforms with the requirements of the Registration Rights
Agreement, the Securities Act and the policies, rules and regulations of the
Commission as announced from time to time, for a period of one year from the
date on which the Exchange Offer Registration Statement is declared effective.
The Company shall provide sufficient copies of the latest version of this
Prospectus to broker-dealers promptly upon request at any time during such
one-year period in order to facilitate such resales.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in the No-Action Letters, the Company believes
that a holder (other than (i) a broker-dealer who purchases Notes directly from
the Company to resell pursuant to Rule 144A or any other available exemption
under the Securities Act or (ii) any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) who exchanges
Series A Notes for Exchange Notes in the ordinary course of business and who is
not participating, does not intend to participate, and has no arrangement with
any person to participate, in a distribution of the Exchange Notes, will be
allowed to resell Exchange Notes to the public without further registration
under the Securities Act and without delivering to the purchasers of the
Exchange Notes a prospectus that satisfies the requirements of Section 10 of the
Securities Act. See the No-Action Letters. However, if any holder acquires
Exchange Notes in the
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<PAGE>
Exchange Offer for the purpose of distributing or participating in the
distribution of the Exchange Notes or is a broker-dealer, such holder cannot
rely on the position of the staff of the Commission enumerated in the No-Action
Letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Each broker-dealer
that receives Exchange Notes for its own account in exchange for Series A Notes,
where such Series A Notes were acquired by such broker-dealer as a result of
market making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Series A
Notes where such Series A Notes were acquired by such broker-dealer as a result
of market-making or other trading activities. Pursuant to the Registration
Rights Agreement, the Company has agreed to make this Prospectus, as it may be
amended or supplemented from time to time, available to broker-dealers for use
in connection with any resale for a period of up to one year after the date of
this Prospectus. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Series A
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000 principal amount of outstanding Series A Notes surrendered pursuant
to the Exchange Offer. Series A Notes may be tendered only in integral multiples
of $1,000.
The form and terms of the Exchange Notes are identical to the form and terms
of the Series A Notes except that (i) the Exchange Offer will be registered
under the Securities Act and, therefore, the Exchange Notes will not bear
legends restricting the transfer thereof and (ii) holders of the Exchange Notes
will not be entitled to any of the rights of holders of Series A Notes under the
Registration Rights Agreement, which rights will generally terminate upon the
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Series A Notes (which they replace) and will be issued
under, and be entitled to the benefits of, the Indenture, which also authorized
the issuance of the Series A Notes, such that both series of Notes will be
treated as a single class of debt securities under the Indenture.
As of the date of this Prospectus, $200 million in aggregate principal
amount of the Series A Notes are outstanding. Only a registered holder of the
Series A Notes (or such holder's legal representative or attorney-in-fact) as
reflected on the records of the Trustee under the Indenture may participate in
the Exchange Offer. There will be no fixed record date for determining
registered holders of the Series A Notes entitled to participate in the Exchange
Offer. The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable requirements
of the Securities Act, the Exchange Act and the rules and regulations of the
Commission thereunder.
The Company shall be deemed to have accepted validly tendered Series A Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Series A Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Series A Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Series A
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "Fees and Expenses."
59
<PAGE>
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Exchange Offer will expire on the Expiration Date. The term "Expiration
Date" shall mean 5:00 p.m., New York City time on July 23, 1998, unless the
Company, in its sole discretion, extends the Exchange Offer, in which case the
term "Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended. In order to extend the Exchange Offer, the Company will (i)
notify the Exchange Agent of any extension by oral or written notice, (ii) mail
to the registered holders an announcement thereof and (iii) issue a press
release or other public announcement which shall include disclosure of the
approximate number of Series A Notes deposited to date, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Without limiting the manner in which the Company may choose to
make a public announcement of any delay, extension, amendment or termination of
the Exchange Offer, the Company shall have no obligation to publish, advertise,
or otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Series A Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such delay,
extension or termination to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 8 7/8% per annum.
Interest on the Exchange Notes will be payable semi-annually in arrears on each
April 1 and October 1, commencing October 1, 1998. Holders of Exchange Notes
will receive interest on October 1, 1998 from the date of initial issuance of
the Exchange Notes, plus an amount equal to the accrued interest on the Series A
Notes from the date of initial delivery to the date of exchange thereof for
Exchange Notes. Holders of Series A Notes that are accepted for exchange will be
deemed to have waived the right to receive any interest accrued on the Series A
Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Series A Notes may tender such Series A Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Series A Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile to
the Exchange Agent at the address set forth below under "--Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Series A Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Series A Notes, if such procedure is
available, into the Exchange Agent's account at the Depositary pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the holder must comply with
the guaranteed delivery procedures described below.
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<PAGE>
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF SERIES A NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR SERIES A NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Series A Notes whose Series A Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Series A Notes, either make appropriate
arrangements to register ownership of the Series A Notes in such owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed by
an Eligible Institution (as defined below) unless the Series A Notes tendered
pursuant thereto are tendered (i) by a registered holder who has not completed
the box titled "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be made by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Series A Notes listed therein, such Series A Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Series A
Notes.
If the Letter of Transmittal or any Series A Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Series A Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Series A Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Series A Notes not properly tendered or any Series A Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
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<PAGE>
irregularities or conditions of tender as to particular Series A Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Series A Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Series A Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Series A Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived.
While the Company has no present plan to acquire any Series A Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Series A Notes that are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or make
offers for any Series A Notes that remain outstanding subsequent to the
Expiration Date or, as set forth below under "--Conditions," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Series A
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each holder of Series A Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such holder of
Series A Notes in connection with the Exchange Offer are being acquired by such
holder in the ordinary course of business of such holder, (ii) such holder has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such holder acknowledges and agrees
that any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on the
position of the staff of the Commission set forth in certain no-action letters,
(iv) such holder understands that a secondary resale transaction described in
clause (iii) above and any resales of Exchange Notes obtained by such holder in
exchange for Series A Notes acquired by such holder directly from the Company
should be covered by an effective registration statement containing the selling
security holder information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and (v) such holder is not an "affiliate," as
defined in Rule 405 under the Securities Act, of the Company. If the holder is a
broker-dealer that will receive Exchange Notes for such holder's own account in
exchange for Series A Notes that were acquired as a result of market-making
activities or other trading activities, such holder will be required to
acknowledge in the Letter of Transmittal that such holder will deliver a
prospectus in connection with any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, such holder will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
RETURN OF SERIES A NOTES
If any tendered Series A Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Series A Notes are
withdrawn or are submitted for a greater principal amount than the holder
desires to exchange, such unaccepted, withdrawn or non-exchanged Series A Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Series A Notes tendered by book-entry transfer into the Exchange Agent's
account at the Depositary pursuant to the book-entry transfer procedures
described below, such Series A Notes will be credited to an account maintained
with the Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Series A Notes at the Depositary for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make book-
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<PAGE>
entry delivery of Series A Notes by causing the Depositary to transfer such
Series A Notes into the Exchange Agent's account at the Depositary in accordance
with the Depositary's procedures for transfer. However, although delivery of
Series A Notes may be effected through book-entry transfer at the Depositary,
the Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under
"--Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Series A Notes and (i) whose Series A Notes
are not immediately available or (ii) who cannot deliver their Series A Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder, the certificate number(s) of such Series A Notes and the principal
amount of Series A Notes tendered, stating that the tender is being made thereby
and guaranteeing that, within five New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or a facsimile thereof),
together with the certificate(s) representing the Series A Notes in proper form
for transfer or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof), as
well as the certificate(s) representing all tendered Series A Notes in proper
form for transfer and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within five New York Stock Exchange trading
days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Series A Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Series A Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Series A Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Series A Notes to be withdrawn (the "Depositor"), (ii) identify the Series A
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Series A Notes) and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Series A Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company in its sole discretion, whose
determination shall be final and binding on all parties. Any Series A Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Series A Notes so withdrawn are validly retendered. Properly withdrawn
Series A Notes may be retendered by following one of the procedures described
above under "The Exchange Offer--Procedures for Tendering" at any time prior to
the Expiration Date.
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CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Series A Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Series A Notes, if the Exchange Offer violates applicable
law, rules or regulations or an applicable interpretation of the staff of the
Commission.
If the Company determines in its sole discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Series A
Notes and return all tendered Series A Notes to the tendering holders, (ii)
extend the Exchange Offer and retain all Series A Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders to
withdraw such Series A Notes (see "Withdrawal of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Series A Notes that have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders of the Series A Notes, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
SERIES A NOTES REGISTRATION RIGHTS
If (i) the Company is not required to file an Exchange Offer Registration
Statement or to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy (after the procedures set forth
in the Registration Rights Agreement have been complied with) or (ii) if any
holder of Transfer Restricted Securities (as defined in the Registration Rights
Agreement) shall notify the Company within 20 business days after the Exchange
Offer shall have been consummated (A) that such holder is prohibited by
applicable law or Commission policy from participating in the Exchange Offer, or
(B) that such holder may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and that the
Prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales by such holder, or (C) that such
holder is a broker-dealer and holds Series A Notes acquired directly from the
Company or one of its affiliates, then the Company shall (x) cause to be filed a
Shelf Registration Statement on or prior to the Shelf Filing Deadline, which
Shelf Registration Statement shall provide for resales of all Transfer
Restricted Securities the holders of which shall have provided certain
information required pursuant to the Registration Rights Agreement; and (y) use
its best efforts to cause such Shelf Registration Statement to be declared
effective by the Commission on or before the 150th day after the obligation to
file the Shelf Registration Statement arises. The Company shall use its best
efforts to keep such Shelf Registration Statement continuously effective,
supplemented and amended as required by certain provisions of the Registration
Rights Agreement to the extent necessary to ensure that it is available for
resales of Notes by the holders of Transfer Restricted Securities entitled to
the benefit of the Shelf Registration, and to ensure that it conforms with the
requirements of the Registration Rights Agreement, the Securities Act and the
policies, rules and regulations of the Commission as announced from time to
time, for a period of at least two years following the date on which such Shelf
Registration Statement first becomes effective under the Act, or such shorter
period as will terminate when all Transfer Restricted Securities covered by such
Registration Statement have been sold pursuant thereto.
The Registration Rights Agreement provides that a registration default will
occur if (i) any of the registration statements required by the Registration
Rights Agreement are not filed with the Commission on or prior to the date
specified for such filing in the Registration Rights Agreement, (ii) any of such
Registration Statements have not been declared effective by the Commission on or
prior to the date specified for such effectiveness in the Registration Rights
Agreement (the "Effectiveness Target Date"), (iii) the Exchange Offer has not
been consummated within 30 business days after the Effectiveness Target Date
with respect to the Exchange Offer Registration Statement or (iv) any
registration statement required by the Registration Rights Agreement is filed
and declared effective but shall thereafter cease to be
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effective or fail to be usable in connection with resales of Transfer Restricted
Securities during the time period specified by the Registration Rights Agreement
without being succeeded immediately by a post-effective amendment to such
Registration Statement that cures such failure and that is itself immediately
declared effective (each such event referred to in clauses (i) through (iv), a
"Registration Default").
The Registration Rights Agreement provides that in the event of a
Registration Default, the Company is required to pay as liquidated damages
("Liquidated Damages") to each holder of Transfer Restricted Securities (as
defined in the Registration Rights Agreement), with respect to the first 90-day
period immediately following the occurrence of such Registration Default, in an
amount equal to $.05 per week per $1,000 principal amount of Transfer Restricted
Securities held by such holder for each week or portion thereof that the
Registration Default continues. The amount of the liquidated damages shall
increase by an additional $.05 per week per $1,000 in principal amount of
Transfer Restricted Securities with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $.50 per week per $1,000 principal amount of Transfer
Restricted Securities. All accrued Liquidated Damages shall be paid to record
holders by the Company by wire transfer of immediately available funds or by
federal funds check on each damages payment date, as provided in the Indenture.
Following the cure of all Registration Defaults relating to any particular
Transfer Restricted Securities, the accrual of Liquidated Damages with respect
to such Transfer Restricted Securities will cease. All obligations of the
Company set forth in this paragraph that are outstanding with respect to any
Transfer Restricted Security at the time such security ceases to be a Transfer
Restricted Security shall survive until such time as all such obligations with
respect to such security shall have been satisfied in full. The filing and
effectiveness of the Registration Statement of which this Prospectus is a part
and the consummation of the Exchange Offer will eliminate all rights of the
holders of Series A Notes eligible to participate in the Exchange Offer to
receive damages that would have been payable if such actions had not occurred.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Series A Notes eligible to participate in the Exchange
Offer will terminate upon consummation of the Exchange Offer except with respect
to the Company's continuing obligations (i) to indemnify such holders (including
any broker-dealers) and certain parties related to such holders against certain
liabilities (including liabilities under the Securities Act), (ii) to provide,
upon the request of any holder of a transfer-restricted Senior Note, the
information required by Rule 144A(d)(4) under the Securities Act in order to
permit resales of such Series A Notes pursuant to Rule 144A, (iii) to use its
best efforts to keep the Registration Statement effective to the extent
necessary to ensure that it is available for resales of transfer-restricted
Series A Notes by broker-dealers for a period of up to one year from the date of
this Prospectus, (iv) to provide copies of the latest version of the Prospectus
to broker-dealers upon their request for a period of up to one year from the
date of this Prospectus and (v) to pay Liquidated Damages pursuant to the
Registration Rights Agreement accruing prior to the effectiveness of the
Exchange Offer Registration Statement.
EXCHANGE AGENT
SouthTrust Bank, National Association has been appointed as Exchange Agent
of the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Overnight Courier or by Hand or by Registered or Certified Mail:
SouthTrust Bank, National Association
100 Office Park Drive
Birmingham, Alabama 35223
Attention: Corporate Trust Services
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In addition, questions and requests may be directed to the Exchange Agent by
telephone at (205) 254-5105, or by facsimile at (205) 254-4180.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$150,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Series A Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Series A Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Series A
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
The Series A Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Series A
Notes may be resold only (i) to a person whom the seller reasonably believes is
a qualified institutional buyer as defined in Rule 144A of the Securities Act in
a transaction meeting the requirements of Rule 144A of the Securities Act, (ii)
in a transaction meeting the requirements of Rule 144 under the Securities Act,
(iii) outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, (iv) in accordance with
another exemption from the registration requirements of the Securities Act (and
based upon an opinion of counsel if the Company so requests), (v) to the Company
or (vi) pursuant to an effective registration statement and, in each case, in
accordance with any applicable securities laws of any state of the United States
or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
APPRAISAL RIGHTS
HOLDERS OF NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN
CONNECTION WITH THE EXCHANGE OFFER.
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DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued pursuant to an Indenture (the "Indenture")
among the Company, the Guarantor and SouthTrust Bank, National Association, as
trustee (the "Trustee"). The terms of the Exchange Notes are identical in all
respects to the terms of the Series A Notes for which they may be exchanged
pursuant to this Exchange Offer, except that (i) the Exchange Offer will have
been registered under the Securities Act, and therefore, the Exchange Notes will
not bear legends restricting the transfer thereof and (ii) the holders of the
Exchange Notes will generally not be entitled to registration rights under the
Registration Rights Agreement. The Exchange Notes will evidence the same debt as
the Series A Notes. The terms of the Exchange Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The Exchange Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the Trust Indenture Act for a statement thereof. The following summary of
the material provisions of the Indenture does not purport to be complete and is
qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. A copy of the Indenture is
available as set forth below under "--Additional Information." The definitions
of certain terms used in the following summary are set forth below under
"--Certain Definitions." For purposes of this summary, the term "Company" refers
only to Chattem, Inc. and not to any of its Subsidiaries.
The Exchange Notes will be general unsecured obligations of the Company,
will be subordinated in right of payment to all existing and future Senior
Indebtedness of the Company, including Senior Indebtedness under the Senior
Credit Facility, and will rank PARI PASSU or senior in right of payment with all
existing and future subordinated indebtedness of the Company. As of February 28,
1998, on a pro forma basis after giving effect to the Transaction (including the
offering of Series A Notes), the aggregate principal amount of Senior
Indebtedness (excluding trade payables and other accrued liabilities) of the
Company would have been approximately $62.4 million, all of which would have
been Indebtedness secured by substantially all of the assets of the Company and
the Guarantor pursuant to the Senior Credit Facility. The terms of the Indenture
limit, subject to compliance with a Fixed Charge Coverage Ratio test, the
ability of the Company and its subsidiaries to incur additional Indebtedness.
Presently, all of the Company's Subsidiaries are Restricted Subsidiaries.
However, under certain circumstances, the Company will be able to designate
current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants set forth
in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $200.0 million and
will mature on April 1, 2008. The Indenture provides for the issuance of up to
$75.0 million aggregate principal amount of additional Notes having identical
terms and conditions to the Exchange Notes (the "Additional Notes"), subject to
compliance with the covenants contained in the Indenture. Any Additional Notes
will be part of the same issue as the Exchange Notes and will vote on all
matters with the Exchange Notes. For purposes of this "Description of Exchange
Notes," references to the Exchange Notes do not include Additional Notes.
Interest on the Notes will accrue at the rate of 8 7/8% per annum and will be
payable semi-annually in arrears on April 1 and October 1, commencing on October
1, 1998, to Holders of record on the immediately preceding March 15 and
September 15. Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium, if any, and interest and
Liquidated Damages on the Notes will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or, at
the option of the Company, payment of interest and Liquidated Damages may be
made by check mailed to the Holders
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of the Notes at their respective addresses set forth in the register of Holders
of Notes; provided that all payments of principal, premium, interest and
Liquidated Damages with respect to Notes the Holders of which have given wire
transfer instructions to the Company will be required to be made by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof. Until otherwise designated by the Company, the Company's office or
agency in New York will be the office of the Trustee maintained for such
purpose. The Notes will be issued in denominations of $1,000 and integral
multiples thereof.
SUBORDINATION
The payment of principal of, premium, if any, interest and Liquidated
Damages, if any, on the Notes will be subordinated in right of payment, as set
forth in the Indenture, to the prior payment in full of all Senior Indebtedness,
whether outstanding on the date of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full of all Obligations due in respect of such Senior
Indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Indebtedness) before the Holders
of Notes will be entitled to receive any payment with respect to the Notes, and
until all Obligations with respect to Senior Indebtedness are paid in full, any
distribution to which the Holders of Notes would be entitled shall be made to
the holders of Senior Indebtedness (except that Holders of Notes may receive and
retain Permitted Junior Securities and payments made from the trust described
under the caption "--Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in Permitted Junior Securities or from the trust described under the
caption "--Legal Defeasance and Covenant Defeasance") if (i) a default in the
payment of the principal of, premium, if any, or interest on Designated Senior
Indebtedness occurs and is continuing beyond any applicable period of grace or
(ii) any other default occurs and is continuing with respect to Designated
Senior Indebtedness that permits holders of the Designated Senior Indebtedness
as to which such default relates to accelerate its maturity and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from the Company
or the holders of any Designated Senior Indebtedness. Payments on the Notes may
and shall be resumed (a) in the case of a payment default, upon the date on
which such default is cured or waived and (b) in case of a nonpayment default,
the earlier of the date on which such nonpayment default is cured or waived or
179 days after the date on which the applicable Payment Blockage Notice is
received, unless the maturity of any Designated Senior Indebtedness has been
accelerated. No new period of payment blockage may be commenced unless and until
(i) 360 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice and (ii) all scheduled payments of principal, premium,
if any, interest and Liquidated Damages, if any, on the Notes that have come due
have been paid in full in cash. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the Trustee
shall be, or be made, the basis for a subsequent Payment Blockage Notice.
The Indenture requires that the Company promptly notify holders of Senior
Indebtedness if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Indebtedness. On a pro forma
basis, after giving effect to the Transaction (including the offering of Series
A Notes) and the application of the proceeds therefrom, the principal amount of
Senior Indebtedness outstanding at February 28, 1998, would have been
approximately $62.4 million. The Indenture limits, subject to certain financial
tests, the amount of additional Indebtedness, including Senior Indebtedness,
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that the Company and its Subsidiaries can incur. See " --Certain Covenants --
Incurrence of Indebtedness and Issuance of Preferred Stock."
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are fully and
unconditionally, jointly and severally guaranteed on a senior subordinated basis
(the "Subsidiary Guarantees") by the Guarantors. The Subsidiary Guarantees are
subordinated in right of payment to all existing and future Senior Indebtedness
of the Guarantors, including all obligations of the Guarantors under the Senior
Credit Facility and rank PARI PASSU or senior in right of payment with any
subordinated indebtedness of the Guarantors. The obligation of each Guarantor
under its Subsidiary Guarantee limited so as not to constitute a fraudulent
conveyance under applicable law. See "Risk Factors--Fraudulent Conveyance
Risks."
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes and the Indenture and (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
PROVIDED that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "Repurchase at
Option of Holders--Asset Sales."
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to April 1, 2003.
Thereafter, the Notes will be subject to redemption at any time at the option of
the Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest and Liquidated Damages thereon
to the applicable redemption date, if redeemed during the twelve-month period
beginning on April 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2003.............................................................................. 104.4375%
2004.............................................................................. 102.9583%
2005.............................................................................. 101.4791%
2006 and thereafter............................................................... 100.0000%
</TABLE>
Notwithstanding the foregoing, at any time on or before April 1, 2001, the
Company may redeem up to 35% of the aggregate principal amount of Notes
originally issued under the Indenture at a redemption price of 108.875% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the redemption date, with the net cash proceeds to
the Company of one or more Public Offerings; PROVIDED that at least $100.0
million in the aggregate principal amount of Notes originally issued remain
outstanding immediately after the occurrence of such redemption (excluding Notes
held by the Company or any of its Subsidiaries); and PROVIDED, further, that
such redemption shall occur within 60 days of the date of the closing of such
Public Offering.
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SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; PROVIDED
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. Notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase (the
"Change of Control Payment"). Within 20 days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; PROVIDED that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture will provide
that, prior to complying with the provisions of this covenant, but in any event
within 90 days following a Change of Control, the Company will either repay all
outstanding Senior Indebtedness or obtain the requisite consents, if any, under
all agreements governing outstanding Senior Indebtedness to permit the
repurchase of Notes required by this covenant. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
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The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Senior Credit Facility provides that certain change of control events
with respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Indebtedness to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from repurchasing Notes, the Company could seek the consent of its lenders to
the repurchase of Notes or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or repay
such borrowings, the Company will remain prohibited from repurchasing Notes. In
such case, the Company's failure to repurchase tendered Notes would constitute
an Event of Default under the Indenture which would, in turn, constitute a
default under the Senior Credit Facility. In such circumstances, the
subordination provisions in the Indenture would likely restrict payments to
Holders of Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
(or the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash or
Qualified Proceeds, PROVIDED, that the aggregate fair market value of Qualified
Proceeds which may be received in consideration for Asset Sales pursuant to this
clause (ii) shall not exceed $5.0 million since the Issue Date; PROVIDED,
FURTHER that the amount of (x) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet), of the Company or any
Restricted Subsidiary (other than contingent liabilities and liabilities that
are by their terms subordinated to the Notes or any guarantee thereof) that are
assumed by the transferee of any such assets pursuant to a customary novation
agreement that releases the Company or such Restricted Subsidiary from further
liability and (y) any securities, notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted by the
Company or such Restricted Subsidiary into cash (to the extent of the cash
received), shall be deemed to be cash for purposes of this provision.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to permanently repay
(and reduce the commitments under) Senior
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Indebtedness of the Company or a Guarantor or (b) to the acquisition of a
Permitted Business, or a majority of the Voting Stock of, a Permitted Business,
the making of a capital expenditure or the acquisition of other long-term assets
that are used or useful in a Permitted Business. Pending the final application
of any such Net Proceeds, the Company may temporarily reduce revolving credit
borrowings or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $5.0 million, the Company will be required to make an offer to
all Holders of Notes and all holders of other Indebtedness containing provisions
similar to those set forth in the Indenture with respect to offers to purchase
or redeem with the proceeds of sales of assets (an "Asset Sale Offer") to
purchase the maximum principal amount of Notes and such other Indebtedness that
may be purchased out of the Excess Proceeds, at an offer price in cash in an
amount equal to 100% of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase, in
accordance with the procedures set forth in the Indenture and such other
Indebtedness. To the extent that any Excess Proceeds remain after consummation
of an Asset Sale Offer, the Company may use such Excess Proceeds for any purpose
not otherwise prohibited by the Indenture. If the aggregate principal amount of
Notes and such other Indebtedness tendered into such Asset Sale Offer
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes and such other Indebtedness to be purchased on a
pro rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation involving
the Company or any of its Restricted Subsidiaries) or to the direct or indirect
holders of the Company's or any of its Restricted Subsidiaries' Equity Interests
in their capacity as such (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or dividends or
other distributions payable to the Company or a Restricted Subsidiary of the
Company); (ii) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company or any direct or
indirect parent of the Company or other Affiliate of the Company (other than any
such Equity Interests owned by the Company or any Wholly Owned Restricted
Subsidiary of the Company); (iii) make any payment on or with respect to, or
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is PARI PASSU with or subordinated to the Notes (other than
Notes), except a payment of interest or principal at Stated Maturity; or (iv)
make any Restricted Investment (all such payments and other actions set forth in
clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock"; and
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(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii) and (iv) of the next succeeding paragraph),
is less than the sum, without duplication, of (i) 50% of the Consolidated
Net Income of the Company for the period (taken as one accounting period)
from the beginning of the first fiscal quarter commencing after the date of
the Indenture to the end of the Company's most recently ended fiscal quarter
for which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net
cash proceeds received by the Company since the date of the Indenture as a
contribution to its common equity capital or from the issue or sale of
Equity Interests of the Company (other than Disqualified Stock) or from the
issue or sale of Disqualified Stock or debt securities of the Company that
have been converted into such Equity Interests (other than Equity Interests
(or Disqualified Stock or convertible debt securities) sold to a Subsidiary
of the Company), plus (iii) to the extent that any Restricted Investment
that was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition, if
any) and (B) the initial amount of such Restricted Investment plus (iv) $7.5
million.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any PARI PASSU or subordinated Indebtedness or Equity Interests
of the Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary of the
Company) of, other Equity Interests of the Company (other than any Disqualified
Stock); PROVIDED that the amount of any such net cash proceeds that are utilized
for any such redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (c) (ii) of the preceding paragraph; (iii) the
defeasance, redemption, repurchase or other acquisition of PARI PASSU or
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a
Restricted Subsidiary of the Company to the holders of its common Equity
Interests on a pro rata basis; and (v) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company or
any Restricted Subsidiary of the Company held by any member of the Company's (or
any of its Restricted Subsidiaries') management pursuant to any management
equity subscription agreement or stock option agreement; PROVIDED that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $500,000 in any twelve-month period and no
Default or Event of Default shall have occurred and be continuing immediately
after such transaction.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the Board
of Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or
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appraisal issued by an accounting, appraisal or investment banking firm of
national standing if such fair
market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "Restricted
Payments" were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred stock;
PROVIDED, HOWEVER, that the Company may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock and the Guarantors may incur
Indebtedness (including Guarantees) or issue preferred stock if the Fixed Charge
Coverage Ratio for the Company's most recently ended four full fiscal quarters
for which internal financial statements are available immediately preceding the
date on which such additional Indebtedness is incurred or such Disqualified
Stock or preferred stock is issued would have been at least 2.0 to 1.0,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock or preferred stock had been issued, as the case may be, at
the beginning of such four-quarter period.
The foregoing provisions will not apply to the incurrence of any of the
following items of Indebtedness (collectively, "Permitted Debt"):
(i) the incurrence by the Company of Indebtedness (including letters of
credit, with letters of credit being deemed to have a principal amount equal to
the maximum potential liability of the Company and its Restricted Subsidiaries
thereunder) under the Senior Credit Facility; PROVIDED that the aggregate
principal amount of all Indebtedness (including letters of credit) outstanding
under the Senior Credit Facility after giving effect to such incurrence does not
exceed an amount equal to $92.5 million less the aggregate amount of all Net
Proceeds of Asset Sales applied to permanently repay any such Indebtedness
pursuant to the covenant described above under the caption "Repurchase at the
Option of Holders--Asset Sales."
(ii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the Notes
(other than any Additional Notes) and the Exchange Notes (other than any
Additional Notes) and the incurrence by the Guarantors of Indebtedness
represented by the Subsidiary Guarantees;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Company or such
Subsidiary, in an aggregate principal amount not to exceed $10.0 million at any
time outstanding;
(v) the incurrence by the Company or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which
are used to refund, refinance or replace Indebtedness (other than intercompany
Indebtedness) that is either the Existing Indebtedness or was permitted by the
Indenture to be incurred under the first paragraph hereof or clauses (iii), (iv)
or (v) of this paragraph;
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(vi) the incurrence by the Company or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Wholly
Owned Restricted Subsidiaries; PROVIDED, HOWEVER, that (i) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly subordinated to the
prior payment in full in cash of all Obligations with respect to the Notes and
(ii)(A) any subsequent issuance or transfer of Equity Interests that results in
any such Indebtedness being held by a Person other than the Company or a
Restricted Subsidiary thereof and (B) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Wholly Owned
Restricted Subsidiary thereof shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as
the case may be, that was not permitted by this clause (vi);
(vii) the incurrence by the Company or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of this Indenture to be outstanding;
(viii) the guarantee by the Company or any of the Guarantors of Indebtedness
of the Company or a Restricted Subsidiary of the Company that is permitted to be
incurred by another provision of this covenant;
(ix) the incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness (in addition to Indebtedness or Guarantees permitted by any other
clause of this paragraph) in an aggregate principal amount (or accreted value,
as applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness incurred
pursuant to this clause (ix), not to exceed $15.0 million;
(x) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, PROVIDED, HOWEVER, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to
constitute an incurrence of Indebtedness by a Restricted Subsidiary of the
Company that was not permitted by this clause (x); and
(xi) the incurrence of Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, incurred
in connection with the disposition of any business, assets or Subsidiary of the
Company (other than Guarantees of Indebtedness incurred by any Person acquiring
all or any portion of such business, assets or Subsidiary for the purpose of
financing such acquisition), provided that none of the foregoing results in
Indebtedness required to be reflected as Indebtedness on the balance sheet of
the Company or any such Subsidiary in accordance with GAAP and the maximum
aggregate liability in respect of all such Indebtedness shall at no time exceed
100% of the gross proceeds actually received by the Company and its Subsidiaries
in connection with such disposition.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (xi) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Company shall, in
its sole discretion, classify such item of Indebtedness in any manner that
complies with this covenant. Accrual of interest, accretion or amortization of
original issue discount, the payment of interest on any Indebtedness in the form
of additional Indebtedness with the same terms, and the payment of dividends on
Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an
issuance of Disqualified Stock for purposes of this covenant; PROVIDED, in each
such case, that the amount thereof is included in Fixed Charges of the Company
as accrued.
LIENS
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien securing Indebtedness or trade
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payables on any asset now owned or hereafter acquired, or any income or profits
therefrom or assign or convey any right to receive income therefrom, except
Permitted Liens, unless all payments due under the Indenture and the Notes are
secured on an equal and ratable basis with the Indebtedness so secured until
such time as such is no longer secured by a Lien; provided that if such
Indebtedness is by its terms expressly subordinated to the Notes or any
Subsidiary Guarantee, the Lien securing such Indebtedness shall be subordinate
and junior to the Lien securing the Notes and the Subsidiary Guarantees with the
same relative priority as such subordinate or junior Indebtedness shall have
with respect to the Notes and the Subsidiary Guarantees.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries. However, the
foregoing restrictions will not apply to encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness as in effect on the date of the
Indenture, (b) the Indenture and the Notes, (c) applicable law, (d) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Restricted Subsidiaries as in effect at the time of such
acquisition (except to the extent such Indebtedness was incurred in connection
with or in contemplation of such acquisition), which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so acquired,
PROVIDED that, in the case of Indebtedness, such Indebtedness was permitted by
the terms of the Indenture to be incurred, (e) customary non-assignment
provisions in leases entered into in the ordinary course of business and
consistent with past practices, (f) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, (g) any
agreement for the sale of a Restricted Subsidiary that restricts distributions
by that Restricted Subsidiary pending its sale, (h) Permitted Refinancing
Indebtedness, PROVIDED that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive, taken
as a whole, than those contained in the agreements governing the Indebtedness
being refinanced, (i) Liens securing Indebtedness otherwise permitted to be
incurred pursuant to the provisions of the covenant described above under the
caption "--Liens" that limits the right of the debtor to dispose of the assets
securing such Indebtedness, (j) provisions with respect to the disposition or
distribution of assets or property in joint venture agreements and other similar
agreements entered into in the ordinary course of business, (k) restrictions on
cash or other deposits or net worth imposed by customers under contracts entered
into in the ordinary course of business, and (l) the Senior Credit Facility,
PROVIDED that such restrictions are no more restrictive than those contained in
the Senior Credit Facility as in effect on the Issue Date.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the
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Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Registration Rights Agreement, the Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no Default
or Event of Default exists; and (iv) except in the case of a merger of the
Company with or into a Wholly Owned Restricted Subsidiary of the Company, the
Company or the entity or Person formed by or surviving any such consolidation or
merger (if other than the Company), or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made (A) will have
Consolidated Net Worth immediately after the transaction equal to or greater
than the Consolidated Net Worth of the Company immediately preceding the
transaction and (B) will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing. Notwithstanding the foregoing, the following items shall not be deemed
to be Affiliate Transactions: (i) any issuance of securities, or other payments,
awards or grants in cash, securities or otherwise pursuant to, or the funding
of, employment arrangements, stock options and stock ownership plans approved by
the Board of Directors or the payment of fees and indemnities of directors of
the Company and its Subsidiaries, in each case, in the ordinary course of
business and consistent with the past practice of the Company or such
Subsidiary, (ii) loans or advances to employees in the ordinary course of
business and consistent with past practice, (iii) transactions between or among
the Company and/or its Restricted Subsidiaries, (iv) payment of reasonable
directors fees to Persons who are not otherwise Affiliates of the Company, and
(v) Restricted Payments (other than Restricted Investments) that are permitted
by the provisions of the Indenture described above under the caption
"--Restricted Payments."
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LIMITATION ON ISSUANCES AND SALES OF EQUITY INTERESTS IN RESTRICTED
SUBSIDIARIES
The Indenture provides that the Company (i) will not, and will not permit
any Restricted Subsidiary of the Company to, transfer, convey, sell, lease or
otherwise dispose of any Equity Interests in any Restricted Subsidiary of the
Company to any Person (other than the Company or a Restricted Subsidiary of the
Company), unless (a) such transfer, conveyance, sale, lease or other disposition
is of all the Equity Interests in such Restricted Subsidiary and (b) the cash
Net Proceeds from such transfer, conveyance, sale, lease or other disposition
are applied in accordance with the covenant described above under the caption
"--Asset Sales," and (ii) will not permit any Restricted Subsidiary of the
Company to issue any of its Equity Interests (other than, if necessary, shares
of its Capital Stock constituting directors' qualifying shares) to any Person
other than to the Company or a Restricted Subsidiary of the Company.
NO SENIOR SUBORDINATED DEBT
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Indebtedness and senior
in any respect in right of payment to the Notes and (ii) no Guarantor will
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness of such Guarantor that is subordinate or junior in right of payment
to any Indebtedness of such Guarantor and senior in any respect in right of
payment to the Subsidiary Guarantee of such Guarantor.
PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
is paid to all Holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that describes
the financial condition and results of operations of the Company and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of operation of
the Unrestricted Subsidiaries of the Company) and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such reports, in
each case within the time periods specified in the Commission's rules and
regulations. In addition, following the consummation of the exchange offer
contemplated by the Registration Rights Agreement, whether or not required by
the rules and regulations of the Commission, the Company will file a copy of all
such information and reports with the Commission for public availability within
the time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company and the Guarantors have agreed that, for so long as any Notes remain
outstanding, they will furnish to the Holders and to
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securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture provides that (i) the Company will not permit any of its
Restricted Subsidiaries that is not a Subsidiary Guarantor to Guarantee or
secure through the granting of Liens the payment of any Indebtedness of the
Company or any Subsidiary Guarantor and (ii) the Company will not and will not
permit any of its Restricted Subsidiaries to pledge any intercompany notes
representing obligations of any of its Restricted Subsidiaries, to secure the
payment of any Indebtedness of the Company or any Subsidiary Guarantor, in each
case unless such Subsidiary, the Company and the Trustee execute and deliver a
supplemental indenture evidencing such Subsidiary's Subsidiary Guarantee
(providing for the unconditional guarantee by such Restricted Subsidiary, on a
senior subordinated basis, of the Notes).
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company or
any of its Restricted Subsidiaries to comply with the provisions described under
the captions "--Change of Control," "--Asset Sales," "--Restricted Payments" or
"--Incurrence of Indebtedness and Issuance of Preferred Stock", (iv) failure by
the Company or any of its Restricted Subsidiaries for 60 days after notice to
comply with any of its other agreements in the Indenture or the Notes; (v)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Restricted Subsidiaries (or the payment of
which is guaranteed by the Company or any of its Restricted Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the date
of the Indenture, which default (a) is caused by a failure to pay principal of
or premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $7.5 million or more; (vi) failure by the Company or
any of its Restricted Subsidiaries to pay final judgments aggregating in excess
of $7.5 million, which judgments are not paid, discharged or stayed for a period
of 60 days; (vii) except as permitted by the Indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor, or any
Person acting on behalf of any Guarantor, shall deny or disaffirm its
obligations under its Subsidiary Guarantee; and (viii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Restricted
Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Significant Restricted Subsidiary
or any group of Restricted Subsidiaries that, taken together, would constitute a
Significant Restricted Subsidiary, all outstanding Notes will become due and
payable without further action or notice. Holders of the Notes may not enforce
the Indenture or the Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the Notes notice of any
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continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to April
1, 2003 by reason of any willful action (or inaction) taken (or not taken) by or
on behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to April 1, 2003 then the premium specified in the
Indenture shall also become immediately due and payable to the extent permitted
by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages,
if any, on the outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must
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specify whether the Notes are being defeased to maturity or to a particular
redemption date; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of the outstanding Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or insofar
as Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Indenture) to which the Company or any of its Subsidiaries is a party
or by which the Company or any of its Subsidiaries is bound; (vi) the Company
must have delivered to the Trustee an opinion of counsel to the effect that
after the 91st day following the deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally; (vii) the Company must deliver to
the Trustee an Officers' Certificate stating that the deposit was not made by
the Company with the intent of preferring the Holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes).
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Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"--Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders"), (viii) release any Guarantor
from any of its obligations under its Subsidiary Guarantee or the Indenture,
except in accordance with the terms of the Indenture or (ix) make any change in
the foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination) will
require the consent of the Holders of at least 75% in aggregate principal amount
of the Notes then outstanding if such amendment would adversely affect the
rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company, the Guarantors and the Trustee may amend or supplement the
Indenture or the Notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's or any Guarantor's
obligations to Holders of Notes in the case of a merger or consolidation or sale
of all or substantially all of the Company's assets, to provide for the issuance
of Additional Notes in accordance with the provisions set forth in the Indenture
on the Issue Date, to make any change that would provide any additional rights
or benefits to the Holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder, or to comply with requirements of
the Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Chattem, Inc., 1715
West 38th Street, Chattanooga, Tennessee 37409, Attention: Chief Operating
Officer.
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BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Exchange Notes will initially
be issued in the form of one Global Note (the "Global Note"). The Global Note
will be deposited on the date of the consummation of the Exchange Offer (the
"Closing Date") with, or on behalf of, The Depository Trust Company (the
"Depositary") and registered in the name of Cede & Co., as nominee of the
Depositary (such nominee being referred to herein as the "Global Note Holder").
Exchange Notes that are issued as described below under "-Certificated
Securities" will be issued in the form of registered definitive certificates
(the "Certificated Securities"). Upon the transfer of Certificated Securities,
such Certificated Securities may, unless the Global Note has previously been
exchanged for Certificated Securities, be exchanged for an interest in the
Global Note representing the principal amount of Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchaser), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Initial Purchaser with portions of
the principal amount of the Global Note and (ii) ownership of the Exchange Notes
evidenced by the Global Note will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Exchange Notes evidenced by the
Global Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
Payments in respect of the principal of and premium, if any, interest and
Liquidated Damages, if any, on any Notes registered in the name of the Global
Note Holder on the applicable record date will be payable by the Trustee to or
at the direction of the Global Note Holder in its capacity as the registered
holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee may treat the persons in whose names Notes, including the Global
Note, are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of Notes. The Company believes, however, that it is currently the policy of the
Depositary to immediately credit the accounts of the relevant Participants with
such payments, in amounts proportionate to their respective holdings of
beneficial interests in the relevant security as shown on the records of the
Depositary. Payments by the
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Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
Certificated Securities Subject to certain conditions, any person having a
beneficial interest in the Global Note may, upon request to the Trustee,
exchange such beneficial interest for Notes in the form of Certificated
Securities. Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of, and cause the same to be delivered to,
such person or persons (or the nominee of any thereof). All such certificated
Notes would be subject to the legend requirements described herein under "Notice
to Investors." In addition, if (i) the Company notifies the Trustee in writing
that the Depositary is no longer willing or able to act as a depositary and the
Company has not located a qualified successor within 90 days after delivery of
notice from the Depositary of such resignation or (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
Notes in the form of Certificated Securities under the Indenture, then, upon
surrender by the Global Note Holder of its Global Note, Notes in such form will
be issued to each person that the Global Note Holder and the Depositary identify
as being the beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to Notes in
certificated form, the Company will make all payments of principal, premium, if
any, interest and Liquidated Damages, if any, by wire transfer of immediately
available funds to the accounts specified by the Holders thereof or, if no such
account is specified, by mailing a check to each such Holder's registered
address. The Notes represented by the Global Notes are expected to be eligible
to trade in the PORTAL market and to trade in the Depositary's Same-Day Funds
Settlement System, and any permitted secondary market trading activity in such
Notes will, therefore, be required by the Depositary to be settled in
immediately available funds. The Company expects that secondary trading in any
certificated Notes will also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person,
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whether through the ownership of voting securities, by agreement or otherwise;
PROVIDED that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole will be governed by the provisions of the Indenture described
above under the caption "--Change of Control" and/or the provisions described
above under the caption "--Merger, Consolidation or Sale of Assets" and not by
the provisions of the Asset Sale covenant), and (ii) the issue by any Restricted
Subsidiaries of the Company of any Equity Interests of such Restricted
Subsidiary and the sale by the Company or any of its Restricted Subsidiaries of
Equity Interest of any of the Company's Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $1.0 million or (b)
for net proceeds in excess of $1.0 million. Notwithstanding the foregoing, the
following items shall not be deemed to be Asset Sales: (i) a transfer of assets
by the Company to a Wholly Owned Restricted Subsidiary or by a Wholly Owned
Restricted Subsidiary to the Company or to another Wholly Owned Restricted
Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary,
(iii) a Restricted Payment that is permitted by the covenant described above
under the caption "--Restricted Payments", (iv) the issuance by the Company of
shares of its Capital Stock, (v) the sale or other disposition of cash or Cash
Equivalents, (vi) the sale or disposition of damaged, worn out or other obsolete
personal property in the ordinary course of business, (vii) the surrender or
waiver of contract rights or the settlement, release or surrender of contract,
tort or other claims of any kind, (viii) the granting of Liens not prohibited by
the Indenture or (ix) the execution and performance of contracts to provide
manufacturing and other services, including in connection with Asset Sales.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any lender party to the New
Credit Facility or with any domestic commercial bank having capital and surplus
in excess of $500 million and a Thompson Bank Watch Rating of "B" or better,
(iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having the highest rating obtainable
from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in
each case maturing within six months after the date of acquisition and (vi)
money market funds the assets of which constitute Cash Equivalents of the kinds
described in clauses (i)--(v) of this definition.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of
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related transactions, of all or substantially all of the assets of the Company
and its Restricted Subsidiaries taken as a whole to any "person" (as such term
is used in Section 13(d)(3) of the Exchange Act); (ii) the adoption of a plan
relating to the liquidation or dissolution of the Company; (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above)
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Exchange Act, except that a person shall be deemed to have
"beneficial ownership" of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only upon
the occurrence of a subsequent condition), directly or indirectly, of more than
50% of the Voting Stock of the Company (measured by voting power rather than
number of shares); (iv) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing Directors or; (iv) the
Company consolidates with, or merges with or into, any Person, or any Person
consolidates with, or merges with or into, the Company, in any such event
pursuant to a transaction in which any of the outstanding Voting Stock of the
Company is converted into or exchanged for cash, securities or other property,
other than any such transaction where the Voting Stock of the Company
outstanding immediately prior to such transaction is converted into or exchanged
for Voting Stock (other than Disqualified Stock) of the surviving or transferee
Person constituting a majority of the outstanding shares of such Voting Stock of
such surviving or transferee Person (immediately after giving effect to such
issuance).
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such Consolidated
Net Income, plus (iii) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations but excluding amortization
of debt issuance costs), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash expenses (excluding any such non-cash expense to the extent that
it represents an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of such
Person and its Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, minus (v) non-cash items increasing such
Consolidated Net Income for such period, in each case, on a consolidated basis
and determined in accordance with GAAP. Notwithstanding the foregoing, the
provision for taxes on the income or profits of, and the depreciation and
amortization and other non-cash expenses of, a Restricted Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person and only if a corresponding amount would
be permitted at the date of determination to be dividended to the Company by
such Restricted Subsidiary without prior governmental approval (that has not
been obtained), and without direct or indirect restriction pursuant to the terms
of its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Restricted
Subsidiary or its stockholders.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
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Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof that is a Guarantor, (ii) the Net Income of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders, (iii) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded and (v) the Net Income (but not loss) of
any Unrestricted Subsidiary shall be excluded, whether or not distributed to the
Company or one of its Subsidiaries.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED SENIOR INDEBTEDNESS" means (i) so long as the Senior Credit
Facility is outstanding, Obligations under the Senior Credit Facility and (ii)
thereafter, any other Senior Indebtedness permitted under the Indenture the
aggregate principal amount of which is $25.0 million or more and that has been
designated by the Company as "Designated Senior Indebtedness."
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require the Company to repurchase such Capital Stock upon the occurrence of a
Change of Control or an Asset Sale shall not constitute Disqualified Stock if
the terms of such Capital Stock provide that the Company may not repurchase or
redeem any such Capital Stock pursuant to such provisions unless such repurchase
or redemption complies with the covenant described above under the caption
"--Certain Covenants-- Restricted Payments."
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"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Senior Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"FIXED CHARGES" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations but excluding the amortization of debt issuance costs) and (ii) the
consolidated interest of such Person and its Restricted Subsidiaries that was
capitalized during such period, and (iii) any interest expense on Indebtedness
of another Person that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries and (iv) the product of (a) all dividend payments,
whether or not in cash, on any series of preferred stock of such Person or any
of its Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of the Company (other than Disqualified
Stock) or to the Company or a Restricted Subsidiary of the Company, times (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the referent
Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in the
definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, and (iii) the Fixed Charges attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges will not be obligations of the
referent Person or any of its Restricted Subsidiaries following the Calculation
Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements
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by such other entity as have been approved by a significant segment of the
accounting profession, which are in effect from time to time.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"GUARANTORS" means (i) each domestic Subsidiary of the Company on the Issue
Date and (ii) any other subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the Indenture, and their respective successors
and assigns.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all Indebtedness of others secured
by a Lien on any asset of such Person (whether or not such Indebtedness is
assumed by such Person) and, to the extent not otherwise included, the Guarantee
by such Person of any indebtedness of any other Person. The amount of any
Indebtedness outstanding as of any date shall be (i) the accreted value thereof,
in the case of any Indebtedness issued with original issue discount, and (ii)
the principal amount thereof, together with any interest thereon that is more
than 30 days past due, in the case of any other Indebtedness.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Subsidiary of the Company sells or otherwise disposes of
any Equity Interests of any direct or indirect Subsidiary of the Company such
that, after giving effect to any such sale or disposition, such Person is no
longer a Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "--Restricted Payments."
"ISSUE DATE" means the closing date for the sale and original issuance of
the Notes under the Indenture.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
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"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or loss,
together with any related provision for taxes on such gain or loss, realized in
connection with (a) any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback transactions) or (b) the disposition of any
securities by such Person or any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries and (ii) any extraordinary or nonrecurring gain or loss, together
with any related provision for taxes on such extraordinary or nonrecurring gain
or loss.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than debt under the Senior Credit Facility) secured by a Lien on the
asset or assets that were the subject of such Asset Sale and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness, including with respect to
Indebtedness under the Senior Credit Facility, interest accruing after the
filing of a petition initiating any proceeding pursuant to any bankruptcy law
whether or not the claim for such interest is allowed as a claim after such
filing in any proceeding under such bankruptcy law.
"PERMITTED BUSINESS" means the business conducted by the Company and its
Restricted Subsidiaries on the Issue Date and businesses reasonably related
thereto.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company; (b) any Investment in Cash
Equivalents; (c) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person, if as a result of such Investment (i) such Person
becomes a Wholly Owned Restricted Subsidiary of the Company or (ii) such Person
is merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly Owned Restricted Subsidiary of the Company; (d) any Investment made as a
result of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales"; (e) any
acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of the Company; (f) the conversion of preferred
stock of Elcat, Inc. owned by the Company on the Issue Date into common stock of
Elcat, Inc. in accordance with the terms of such preferred stock; and (g) other
Investments in any Person having an aggregate fair market value (measured on the
date each such Investment was made and without giving effect to subsequent
changes in value),
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when taken together with all other Investments made pursuant to this clause (f)
that are at the time outstanding, not to exceed $12.5 million.
"PERMITTED JUNIOR SECURITIES" means Equity Interests in the Company or debt
securities that are subordinated to all Senior Indebtedness (and any debt
securities issued in exchange for Senior Indebtedness) to substantially the same
extent as, or to a greater extent than, the Notes are subordinated to Senior
Indebtedness pursuant to the Indenture.
"PERMITTED LIENS" means (i) Liens on assets of the Company or any of the
Guarantors securing Senior Indebtedness under the Senior Credit Facility that
were permitted by the terms of the Indenture to be incurred; (ii) Liens in favor
of the Company; (iii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Company or any Subsidiary of the
Company;PROVIDEDthat such Liens were in existence prior to the contemplation of
such merger or consolidation and do not extend to any assets other than those of
the Person merged into or consolidated with the Company; (iv) Liens on property
existing at the time of acquisition thereof by the Company or any Subsidiary of
the Company, PROVIDED that such Liens were in existence prior to the
contemplation of such acquisition; (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (v)
Liens to secure Indebtedness (including Capital Lease Obligations) permitted by
clause (iv) of the second paragraph of the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock" covering only the assets acquired
with such Indebtedness; (vi) Liens existing on the date of the Indenture; (vii)
Liens for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded, PROVIDED that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (viii) Liens incurred in the ordinary course of business of
the Company or any Subsidiary of the Company with respect to obligations that do
not exceed $5.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of advances
or credit (other than trade credit in the ordinary course of business) and (b)
do not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company or
such Subsidiary; (ix) Liens on any insurance policies arising out of borrowings
against the cash surrender value of such insurance policies held by the Company,
PROVIDED that such Liens do not exceed the amount of Indebtedness and are
secured only by the cash surrender value of such insurance policies; (x) Liens
on assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of
Unrestricted Subsidiaries; (xi) Liens on assets of the Company securing Senior
Indebtedness of the Company that was permitted to be incurred by the terms of
the Indenture and Liens on assets of a Guarantor securing Senior Indebtedness of
such Guarantor that was permitted to be incurred by the terms of the Indenture;
and (xii) other than a deferred payment obligation of a purchase price for the
purchase of assets or a business or by means of a royalty or otherwise based on
sales of an acquired asset or business.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that: (i) the principal amount
(or accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of premium and reasonable
expenses incurred in connection therewith); (ii) such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on
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terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"PUBLIC OFFERING" means an underwritten public offering of common stock
(other than Disqualified Stock) of the Company, pursuant to an effective
registration statement filed with the Commission in accordance with the
Securities Act.
"QUALIFIED PROCEEDS" means any of the following or any combination of the
following: (i) long-term assets that are used or useful in a Permitted Business,
(ii) the Capital Stock of any Person engaged primarily in a Permitted Business
if, in connection with the receipt by the Company or any Restricted Subsidiary
of the Company of such Capital Stock, (a) such Person becomes a Wholly-Owned
Subsidiary and a Guarantor or (b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or any Wholly-Owned Subsidiary of
the Company that is a Guarantor.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"SENIOR CREDIT FACILITY" means those certain Credit Agreements, dated as of
June 26, 1997, as amended, by and among the Company, 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, and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time.
"SENIOR INDEBTEDNESS" means (i) all Obligations of the Company or any of its
Subsidiaries outstanding under the Senior Credit Facility and all Hedging
Obligations with respect thereto, (ii) any other Indebtedness permitted to be
incurred by the Company or any of its Subsidiaries under the terms of the
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Notes or any Guarantor's Subsidiary Guarantee of the Notes and
(iii) all Obligations with respect to the foregoing. Notwithstanding anything to
the contrary in the foregoing, Senior Indebtedness will not include (w) any
liability for federal, state, local or other taxes owed or owing by the Company
or any of its Subsidiaries, (x) any Indebtedness of the Company or any of its
Subsidiaries to any Subsidiary or other Affiliate, (y) any trade payables or (z)
any Indebtedness that is incurred in violation of the Indenture. Senior
Indebtedness will not include the Existing Notes.
"SIGNIFICANT RESTRICTED SUBSIDIARY" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the date of
the Indenture.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner
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or the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (a) has no Indebtedness other than
Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (c) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing with the Trustee a certified copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
"Certain Covenants--Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption "Incurrence of Indebtedness and
Issuance of Preferred Stock," the Company shall be in default of such covenant).
The Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted under
the covenant described under the caption "Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," calculated on a pro forma basis
as if such designation had occurred at the beginning of the four-quarter
reference period and (ii) no Default or Event of Default would be in existence
following such designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
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DESCRIPTION OF OTHER INDEBTEDNESS
SECURED CREDIT FACILITY
GENERAL. Concurrently with the consummation of the Transaction, the Company
entered into the Secured Credit Facility Amendment consisting of (i) an amended
and restated credit agreement (the "New Credit Agreement") with NationsBank of
Tennessee, N.A. (the "Agent"), as agent and a syndicate of lenders, providing
for borrowings in an aggregate principal amount of up to $30.0 million (the
"Secured Revolving Credit Facility") and (ii) an amended and restated credit
agreement (the "Supplemental Credit Agreement") with the Agent and a syndicate
of lenders providing for a Tranche A term loan (the "Amended Term Loan A") in
the principal amount of $27.5 million and a Tranche B term loan (the "Amended
Term Loan B") in the principal amount of $34.8 million (the "Secured Term Loan
Facility") (the New Credit Agreement and Supplemental Credit Agreement may be
referred to collectively herein as the "Credit Agreements"). The Secured Credit
Facility Amendment is guaranteed by each of the Company's existing and hereafter
acquired domestic subsidiaries. This information relating to the Secured Credit
Facility Amendment is qualified in its entirety by reference to the complete
text of the documents entered into in connection therewith. The following is a
description of the general terms of the Secured Credit Facility Amendment.
SECURITY. Indebtedness under the Secured Credit Facility Amendment is
secured by (i) substantially all of the assets of the Company and its domestic
subsidiaries, (ii) 100% of the outstanding capital stock of the Company's
domestic subsidiaries and (iii) 65% of the outstanding capital stock of any
foreign subsidiary of the Company other than HBA Insurance Ltd.
INTEREST. The Company may elect either the greater of the prime rate or
federal funds plus 1/2%, or a Eurodollar interest rate option applicable to the
term and revolving credit loans under the Secured Credit Facility Amendment. The
greater of the prime rate or federal funds plus 1/2%, and Eurodollar interest
rate options are based on a base rate plus a rate margin that fluctuates on the
basis of the Company's leverage ratio. The maximum rate margin for the Amended
Term Loan A and the Secured Revolving Credit Facility is 2.0% for the prime rate
option and 3.0% for the Eurodollar rate option. The maximum rate margin for the
Amended Term Loan B is 2.5% for the prime rate option and 3.5% for the
Eurodollar rate option.
BORROWING BASE. Pursuant to the terms of the Secured Revolving Credit
Facility, advances under the Secured Revolving Credit Facility are limited to a
borrowing base comprised of specified percentages of eligible accounts
receivable and eligible inventory.
MATURITY. Loans made pursuant to the Secured Revolving Credit Facility may
be borrowed, repaid and reborrowed from time to time until June 26, 2002,
subject to the satisfaction of certain conditions on the date of any such
borrowing. Loans under Amended Term Loan A are due June 26, 2002, and loans
under Amended Term Loan B are due June 14, 2004.
COVENANTS. The Secured Credit Facility Amendment contains a number of
financial, affirmative and negative covenants that regulate the operation of the
Company and its subsidiaries. Financial covenants require the Company to
maintain: (i) a minimum consolidated net worth, (ii) a minimum fixed charge
coverage ratio (iii) a minimum interest coverage ratio, (iv) a maximum leverage
ratio and (v) a maximum senior leverage ratio of senior debt to EBITDA. Negative
covenants will restrict, among other things, the incurrence of debt, the
existence of liens, transactions with affiliates, loans, advances and
investments, payment of dividends and other distributions to shareholders,
dispositions of assets, mergers, consolidations and dissolutions, contingent
liabilities and changes in business.
EVENTS OF DEFAULT; REMEDIES. The Credit Agreements contain customary events
of default, including (i) the non-payment of principal, interest or other
amounts, (ii) violation of covenants, (iii) inaccuracy of representations and
warranties, (iv) cross-defaults to certain other indebtedness in material
agreements (including the Notes), (iv) certain events of bankruptcy and
insolvency, (v) ERISA, (vi) actual or asserted
94
<PAGE>
invalidity of any loan documents or security interests, (vii) changes in control
in ownership of the Company, and (viii) bankruptcy. If any such event of default
occurs, the Agent will be entitled, on behalf of the lenders, to take all
actions permitted to be taken by a secured creditor under the Uniform Commercial
Code, enforce all rights created under the Credit Agreements and to accelerate
the amounts due under the Secured Credit Facility Amendment and may require all
such amounts outstanding thereunder to be immediately paid in full.
EXISTING NOTES
In 1994, the Company issued 75,000 units consisting of (i) $75.0 million in
aggregate principal amount of Existing Notes and (ii) five year warrants to
purchase 417,182 shares of common stock (the "Warrants").
The Existing Notes mature on June 15, 2004, and interest is payable
semi-annually on June 15 and December 15. The Existing Notes may be redeemed at
the option of the Company, in whole or in part, at 101.594% of the principal
amount thereof (plus accrued interest thereon) from June 15, 2001 through June
14, 2002 and at par (plus accrued interest thereon) thereafter. Upon the
occurrence of certain events constituting a change of control triggering event,
the holders of the Existing Notes may require the Company to repurchase the
Existing Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest. The Existing Notes are guaranteed by
Signal, a wholly-owned subsidiary of the Company.
The Existing 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.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material federal income tax
consequences expected to result to holders whose Series A Notes are exchanged
for Exchange Notes in the Exchange Offer. This discussion is based upon current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury regulations, judicial authority and administrative rulings
and practice. There can be no assurance that the Internal Revenue Service (the
"Service") will not take a contrary view, and no ruling from the Service has
been or will be sought with respect to the Exchange Offer. Legislative, judicial
or administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including, but not limited to,
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) may be subject to special rules not discussed
below. EACH HOLDER OF SERIES A NOTES SHOULD CONSULT ITS OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING SERIES A NOTES FOR EXCHANGE NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS.
The exchange of Exchange Notes for Series A Notes pursuant to the Exchange
Offer should not be treated as an "exchange" for federal income tax purposes
because the Exchange Notes should not be considered to differ materially in kind
or extent from the Series A Notes. Rather, the Exchange Notes received by a
Holder should be treated as a continuation of the Series A Notes in the hands of
such Holder. As a result, there should be no federal income tax consequences to
Holders exchanging Series A Notes for Exchange Notes pursuant to the Exchange
Offer. If, however, the exchange of Series A Notes for
95
<PAGE>
Exchange Notes were treated as an "exchange" for federal income tax purposes,
such exchange should constitute a recapitalization for federal income tax
purposes. Holders exchanging Series A Notes for Exchange Notes pursuant to such
recapitalization should not recognize any gain or loss upon the exchange.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with the resales of Exchange Notes received in exchange for Series A
Notes where such Series A Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that for a period
of up to one year after the date of this Prospectus, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer that
requests such document in the Letter of Transmittal for use in connection with
any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer 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 Exchange Notes 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 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
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Series A Notes (including any broker-dealers), and
certain parties related to such holders, against certain liabilities, including
liabilities under the Securities Act. The Company has agreed to reimburse the
Initial Purchaser and holders of Transfer Restricted Securities being tendered
in the Exchange Offer and or resold pursuant to this Plan of Distribution or
registered pursuant to a Shelf Registration Statement, as applicable, for
reasonable attorneys' fees.
Each holder of the Series A Notes who wishes to exchange its Series A Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company as set forth in "The Exchange Offer Terms of the
Exchange Offer."
The Initial Purchaser and certain of its affiliates have engaged in and may
in the future engage in investment banking and commercial banking transactions
with the Company in the ordinary course of business. The Initial Purchaser also
was the arranger and syndication agent under the Secured Credit Facility.
NationsBank of Tennessee, N.A., an affiliate of the Initial Purchaser, was a
lender and administrative agent under the Secured Credit Facility, in respect of
which it receives customary fees.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of
96
<PAGE>
which information is given herein. The Exchange Offer is not being made to (nor
will tenders be accepted from or on behalf of) holders of Series A Notes in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, the
Company may at its discretion, take such action as it may deem necessary to make
the Exchange Offer in any such jurisdiction and extend the Exchange Offer to
holders of Series A Notes in such jurisdiction. In any jurisdiction the
securities laws or blue sky laws of which require the Exchange Offer to be made
by a licensed broker or dealer, the Exchange Offer is being made on behalf of
the Company by one or more registered brokers or dealers which are licensed
under the laws of such jurisdiction.
LEGAL MATTERS
Certain legal matters in connection with the Exchange Offer will be passed
upon for the Company by Miller & Martin LLP, Chattanooga, Tennessee.
EXPERTS
The Consolidated Financial Statements of the Company included in this
registration statement to the extent and for the periods indicated in their
reports have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing in giving said reports.
The financial statements of BAN as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as expert in
auditing and accounting.
97
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
As of November 30, 1996 and 1997, and February 28, 1998 (unaudited), and for the years ended November 30,
1995, 1996, and 1997, and for the three months ended February 28, 1997 and 1998 (unaudited):
Chattem, Inc. and Subsidiaries
Report of Independent Public Accountants................................................................. F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Income........................................................................ F-4
Consolidated Statements of Shareholders' Equity (Deficit)................................................ F-5
Consolidated Statements of Cash Flows.................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
Signal Investment & Management Co.
Report of Independent Public Accountants................................................................. F-23
Balance Sheets........................................................................................... F-24
Statements of Income..................................................................................... F-25
Statements of Shareholders' Equity....................................................................... F-26
Statements of Cash Flows................................................................................. F-27
Notes to Financial Statements............................................................................ F-28
As of December 31, 1996 and 1997, and for the years ended December 31, 1995, 1996, and 1997:
U.S. Ban
Report of Independent Public Accountants................................................................. F-31
Statement of U.S. Assets and Liabilities................................................................. F-32
Statement of U.S. Net Sales and Product Contribution..................................................... F-33
Notes to the Statement of U.S. Assets and Liabilities and the Statement of U.S. Net Sales and Product
Contribution........................................................................................... F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Chattem, Inc.:
We have audited the accompanying consolidated balance sheets of Chattem,
Inc. (a Tennessee corporation) and subsidiaries as of November 30, 1996 and 1997
and the related consolidated statements of income, shareholders' equity
(deficit) and cash flows for each of the three years in the period ended
November 30, 1997. 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 generally accepted auditing
standards. 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
January 19, 1998 (EXCEPT WITH
RESPECT TO THE RESTATEMENT OF NET INCOME PER COMMON SHARE AS DISCUSSED IN NOTE 2
AND THE MATTER DISCUSSED IN NOTE 15 AS TO WHICH THE DATE IS MARCH 24, 1998)
F-2
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY
------------------ 28,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents............. $ 9,254 $ 4,858 $ 1,398
Accounts receivable, less allowance
for doubtful accounts of $450 in
1996, $500 in 1997 and $500 in
1998................................ 20,276 28,078 30,596
Refundable and deferred income
taxes............................... 5,405 1,876 1,876
Inventories........................... 10,295 14,493 16,737
Prepaid expenses and other current
assets.............................. 912 667 748
-------- -------- --------
Total current assets.............. 46,142 49,972 51,355
-------- -------- --------
PROPERTY, PLANT AND EQUIPMENT, NET...... 9,774 10,988 11,045
-------- -------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc.............. 5,984 6,640 6,804
Patents, trademarks and other
purchased product rights, net....... 76,024 104,972 104,223
Debt issuance costs, net.............. 3,819 3,118 3,166
Other................................. 10,440 3,054 2,158
-------- -------- --------
Total other noncurrent assets..... 96,267 117,784 116,351
-------- -------- --------
TOTAL ASSETS.................... $152,183 $178,744 $178,751
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term
debt................................ $ 3,906 $ 8,919 $ 9,089
Accounts payable...................... 6,602 9,319 3,960
Payable to bank....................... 1,710 2,618 5,368
Accrued liabilities................... 14,131 13,596 13,067
-------- -------- --------
Total current liabilities......... 26,349 34,452 31,484
-------- -------- --------
LONG-TERM DEBT, less current
maturities............................ 127,438 133,475 136,034
-------- -------- --------
DEFERRED INCOME TAXES................... 2,917 3,290 3,290
-------- -------- --------
OTHER NONCURRENT LIABILITIES............ 2,659 3,157 2,976
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Notes 5,
10 and 12)
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred shares, without par value,
authorized 1,000, none issued....... -- -- --
Common shares, without par value,
authorized 20,000, issued 8,592 in
1996, 9,082 in 1997 and 9,128 in
1998................................ 1,843 1,945 1,955
Paid-in surplus....................... 58,561 63,975 64,046
Accumulated deficit................... (66,114) (60,229) (59,620 )
-------- -------- --------
(5,710) 5,691 6,381
Minimum pension liability
adjustment.......................... (112) -- --
Foreign currency translation
adjustment.......................... (1,358) (1,321) (1,414 )
-------- -------- --------
Total shareholders' equity
(deficit)....................... (7,180) 4,370 4,967
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIT)..................... $152,183 $178,744 $178,751
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
YEAR ENDED NOVEMBER 30, FEBRUARY 28,
---------------------------- ------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
NET SALES.......................... $100,598 $118,903 $143,235 $ 27,946 $ 34,921
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales.................... 29,755 35,120 39,253 8,394 9,682
Advertising and promotion........ 37,242 45,512 56,176 11,267 15,180
Selling, general and
administrative................. 19,133 21,582 22,303 4,657 5,159
-------- -------- -------- -------- --------
Total costs and expenses..... 86,130 102,214 117,732 24,318 30,021
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS............. 14,468 16,689 25,503 3,628 4,900
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense................. (11,076) (13,394) (15,934) (3,798) (4,180)
Investment and other income,
net............................ 218 1,450 1,679 319 192
Gain on product divestitures..... -- 875 -- -- --
-------- -------- -------- -------- --------
Total other income
(expense).................. (10,858) (11,069) (14,255) (3,479) (3,988)
-------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.............. 3,610 5,620 11,248 149 912
PROVISION FOR INCOME TAXES......... 1,285 1,816 3,993 13 303
-------- -------- -------- -------- --------
INCOME FROM CONTINUING
OPERATIONS....................... 2,325 3,804 7,255 136 609
-------- -------- -------- -------- --------
DISCONTINUED OPERATIONS:
Income from operations, less
provision for income taxes of
$417........................... 674 -- -- -- --
Gain on disposal, less provision
for income taxes of $5,696..... 9,334 -- -- -- --
-------- -------- -------- -------- --------
Income from discontinued
operations..................... 10,008 -- -- -- --
-------- -------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY LOSS... 12,333 3,804 7,255 136 609
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES (Note 5)............ (367) (532) (1,370) -- --
-------- -------- -------- -------- --------
NET INCOME......................... $ 11,966 $ 3,272 $ 5,885 $ 136 $ 609
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
COMMON SHARES:
Weighted average shares
outstanding.................... 7,292 8,052 8,793 8,603 9,087
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average and dilutive
potential shares outstanding... 7,292 8,143 9,123 8,807 9,491
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
NET INCOME PER COMMON SHARE:
BASIC:
Continuing operations.......... $ .32 $ .47 $ .83 $ .02 $ .07
Discontinued operations........ 1.37 -- -- -- --
Extraordinary loss............. (.05) (.06) (.16) -- --
-------- -------- -------- -------- --------
Total........................ $ 1.64 $ .41 $ .67 $ .02 $ .07
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
DILUTED:
Continuing operations.......... $ .32 $ .47 $ .80 $ .02 $ .06
Discontinued operations........ 1.37 -- -- -- --
Extraordinary loss............. (.05) (.07) (.15) -- --
-------- -------- -------- -------- --------
Total........................ $ 1.64 $ .40 $ .65 $ .02 $ .06
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MINIMUM FOREIGN
PENSION CURRENCY
COMMON PAID-IN ACCUMULATED LIABILITY TRANSLATION
SHARES SURPLUS DEFICIT ADJUSTMENT ADJUSTMENT TOTAL
----------- --------- ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1994................... $ 1,519 $ 51,797 $ (81,352) -- $ (1,515) $ (29,551)
Net income................................. -- -- 11,966 -- -- 11,966
Stock options granted...................... -- 302 -- -- -- 302
Foreign currency translation adjustment.... -- -- -- -- (138) (138)
----------- --------- ------------ ----- ----------- ----------
Balance, November 30, 1995................... 1,519 52,099 (69,386) -- (1,653) (17,421)
Net income................................. -- -- 3,272 -- -- 3,272
Stock options exercised.................... 63 223 -- -- -- 286
Issuance of common shares.................. 261 6,239 -- -- -- 6,500
Foreign currency translation adjustment.... -- -- -- -- 295 295
Minimum pension liability adjustment....... -- -- -- (112) -- (112)
----------- --------- ------------ ----- ----------- ----------
Balance, November 30, 1996................... 1,843 58,561 (66,114) (112) (1,358) (7,180)
Net income................................. -- -- 5,885 -- -- 5,885
Stock options exercised.................... 25 962 -- -- -- 987
Stock warrants exercised................... 15 464 -- -- -- 479
Issuance of common shares.................. 62 3,988 -- -- -- 4,050
Foreign currency translation adjustment.... -- -- -- -- 37 37
Minimum pension liability adjustment....... -- -- -- 112 -- 112
----------- --------- ------------ ----- ----------- ----------
Balance, November 30, 1997................... 1,945 63,975 (60,229) -- (1,321) 4,370
Net income................................. -- -- 609 -- -- 609
Stock options exercised.................... 8 48 -- -- -- 56
Stock warrants exercised................... 2 23 -- -- -- 25
Foreign currency translation adjustment.... -- -- -- -- (93) (93)
----------- --------- ------------ ----- ----------- ----------
Balance, February 28, 1998 (Unaudited)....... $ 1,955 $ 64,046 $ (59,620) $ -- $ (1,414) $ 4,967
----------- --------- ------------ ----- ----------- ----------
----------- --------- ------------ ----- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
YEAR ENDED NOVEMBER 30, ENDED FEBRUARY 28,
---------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
---------- ---------- ---------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income......................................................... $ 11,966 $ 3,272 $ 5,885 $ 136 $ 609
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 4,072 4,829 6,381 1,467 1,691
Deferred income tax provision.................................... 645 1,797 1,120 -- --
Gain on sale of specialty chemicals division..................... (9,334) -- -- -- --
Gain on product divestitures..................................... -- (875) -- -- --
Gain on sale of investment....................................... -- (452) -- -- --
Proceeds from sale of investment................................. -- 452 -- -- --
Gain on termination of interest rate cap......................... (454) (281) -- -- --
Extraordinary loss on early extinguishment of debt, net.......... 367 532 1,370 -- --
Dividend receivable from Elcat, Inc.............................. (328) (656) (656) (164) (164)
Other, net....................................................... 2,251 (379) (106) 282 (285)
Changes in operating assets and liabilities:
Accounts receivable............................................ 1,973 (3,063) (5,140) (2,603) (2,518)
Refundable income taxes........................................ 106 (2,519) 3,425 2,386 --
Inventories.................................................... (2,488) 745 (2,401) (1,429) (2,244)
Prepaid expenses and other current assets...................... (166) (359) 252 1,285 659
Accounts payable and accrued liabilities....................... (7,780) (185) (14) (4,177) (5,877)
---------- ---------- ---------- --------- ---------
Net cash provided by operating activities........................ 830 2,858 10,116 (2,817) (8,129)
---------- ---------- ---------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment......................... (2,836) (1,785) (2,758) (203) (566)
Proceeds from sale of specialty chemicals division, net............ 19,397 -- -- -- --
Proceeds from product divestitures................................. -- 1,000 -- -- --
Proceeds from notes and sales of assets............................ 227 253 75 -- --
Purchases of patents, trademarks and other product rights.......... -- (43,048) (29,293) -- (96)
Increase in other assets........................................... (26) (4,128) (746) (147) --
---------- ---------- ---------- --------- ---------
Net cash provided by (used in) investing activities.............. 16,762 (47,708) (32,722) (350) (662)
---------- ---------- ---------- --------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt........................................ (48,704) (15,032) (76,636) (1,363) (3,318)
Proceeds from long-term debt....................................... 31,100 67,944 87,500 -- 6,000
Change in payable to bank.......................................... (117) 526 908 2,125 2,750
Proceeds from sale of interest rate cap............................ 984 -- -- -- --
Proceeds from issuance of common stock, net........................ -- 5,500 -- -- --
Exercise of stock options and warrants............................. -- 286 1,274 -- 88
Debt issuance costs................................................ (253) (2,099) (1,612) -- --
Other, net......................................................... -- -- -- (27) (169)
---------- ---------- ---------- --------- ---------
Net cash provided by (used in) financing activities.............. (16,990) 57,125 11,434 735 5,351
---------- ---------- ---------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS......... -- 129 (10) (115) (20)
---------- ---------- ---------- --------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year................................... 602 12,404 (11,182) (2,547) (3,460)
At beginning of year............................................... 3,034 3,636 16,040 16,040 4,858
---------- ---------- ---------- --------- ---------
At end of year..................................................... $ 3,636 $ 16,040 $ 4,858 $ 13,493 $ 1,398
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
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) manufacture
and market branded consumer products consisting primarily of over-the-counter
pharmaceuticals, cosmetics, toiletries, dietary supplements and homeopathics.
The consumer products are sold primarily through independent and chain drug
stores, drug wholesalers, mass merchandisers and food stores in the United
States and in various markets in approximately 50 countries throughout the
world.
Geographic data for 1995, 1996 and 1997 is included in the schedule of
geographical information on page 37, which is an integral part of these
financial statements.
(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
For purposes of reporting cash flows, the Company considers all short-term
deposits and investments with original maturities of three months or less to be
cash equivalents, including cash and cash equivalents available exclusively for
the repayment of long-term debt (Note 5).
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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is provided
using both straight-line and accelerated methods 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 1995, 1996 and 1997 was $1,319, $1,352 and
$1,502, respectively.
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. Total
accumulated amortization of these assets at November 30, 1996 and 1997 was
$8,369 and $11,246, respectively. Amortization expense for 1995, 1996 and 1997
was $1,467, $2,086 and $2,877, respectively. Royalty expense related to other
purchased product rights for 1995, 1996 and 1997 was $1,030, $1,140 and $522,
respectively. Amortization and royalty expense are included in advertising and
promotion expense in the accompanying consolidated statements of income.
F-7
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
debt. Amortization expense related to debt issuance costs was $471, $498 and
$490 in 1995, 1996 and 1997, respectively. Accumulated amortization of these
costs was $817 and $1,004 at November 30, 1996 and 1997, 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.
RESEARCH AND DEVELOPMENT
Research and development costs relate primarily to the development of new
products and are expensed as incurred. Such expenses were $1,140, $1,117 and
$1,207 in 1995, 1996 and 1997, respectively.
ADVERTISING EXPENSES
The cost of advertising is expensed when the related advertising first takes
place. Advertising expense for 1995, 1996 and 1997 was $18,015, $22,789 and
$29,923, respectively. At November 30, 1996 and 1997, the Company reported
$1,293 and $1,066, respectively, of advertising paid for in 1996 and 1997 which
will run or did in 1997 and 1998 as other noncurrent assets in the accompanying
consolidated balance sheets.
NET INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 changes the criteria for reporting earnings
per share (EPS) by replacing primary EPS with basic EPS and fully diluted EPS
with diluted EPS. The Company adopted SFAS No. 128 on December 1, 1997 for the
three months ended February 28, 1998. All prior periods' EPS data have been
restated. The impact of adopting SFAS No. 128 did not have a material impact on
EPS for any period presented.
For the years ended November 30, 1995, 1996, and 1997, the weighted average
and dilutive potential common shares outstanding consisted of the following:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding............................................... 7,292 8,052 8,793
Dilutive potential shares
Stock options.......................................................................... -- 55 207
Warrants............................................................................... -- 37 123
--------- --------- ---------
Weighted average and dilutive potential common shares outstanding........................ 7,292 8,143 9,123
--------- --------- ---------
</TABLE>
Options and warrants to purchase common shares were outstanding at November
30, 1995 but were not included as dilutive potential common shares because the
options' and warrants' exercise prices were greater than the average market
price of the common shares.
F-8
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's Canadian and U.K. 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 (deficit). Gains and losses which result from foreign
currency transactions are included in the accompanying consolidated statements
of income.
INCOME TAXES
The Company uses the asset and liability approach to accounting for deferred
income taxes based on currently enacted tax rates and estimated differences in
financial reporting and income tax bases of assets and liabilities.
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.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has entered into interest rate swap agreements 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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of accounts receivable, short-term cash investments and
the investment in Elcat, Inc. (Note 3). 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 16% of sales in 1996 and 1997. No other customer exceeded 10% of
the Company's sales in 1995, 1996 or 1997. 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
F-9
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENT IN ELCAT, INC.
Investment in Elcat, Inc. (Elcat) consists of 40,000 shares of 13.125%
cumulative, convertible preferred stock of Elcat (the Elcat Preferred Shares)
which was received as part of the consideration from the sale of the Company's
specialty chemicals division in 1995 (Note 14). The Elcat Preferred Shares are
nonvoting and are convertible, in whole or in part, at any time on or after
April 1, 1998, into a 21% common stock ownership of Elcat. At the option of
Elcat, the Elcat Preferred Shares may be redeemed, in whole or in part, on or
after April 1, 1998, at par value ($125 per share) plus any accrued and unpaid
dividends. If all of the then outstanding Elcat Preferred Shares are not
converted or redeemed on or before April 1, 2005, Elcat is obligated to redeem
all of the then outstanding Elcat Preferred Shares at par value plus any accrued
and unpaid dividends.
The dividends, which amount to $656 annually, on the Elcat Preferred Shares
accumulate quarterly but are non-payable until the shares are called or
redeemed. After three years, however, if the shares are still outstanding, a
cash dividend of $200 will be received by the Company in fiscal year 1999,
increasing ratably to the full $656 in fiscal year 2002.
This investment is classified as held-to-maturity and is accounted for using
the cost method of accounting. As Elcat stock is not publicly traded in the open
market and a market price is not readily available, it is not practicable to
estimate the fair value of the investment in Elcat at November 30, 1997. In the
opinion of management, however, the fair value of this investment is in excess
of its carrying value as of November 30, 1997.
(4) 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,
1996 and 1997 were invested primarily in United States government and agency
securities, corporate debt securities and equity securities.
Pension cost for the years ended November 30, 1995, 1996 and 1997 included
the following components:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Service cost (benefits earned during the
period)......................................... $ 544 $ 610 $ 545
Interest cost on projected benefit obligation..... 745 775 741
Actual return on plan assets...................... (828) (637) (845)
Net amortization and deferral..................... 98 107 365
----- ----- -----
Net pension cost.................................. $ 559 $ 855 $ 806
----- ----- -----
----- ----- -----
</TABLE>
In addition to net pension cost, a net lump-sum settlement loss of $598 was
recorded in 1996 related to lump-sum distributions to certain employees. This
expense is included in selling, general and administrative expenses in the
accompanying consolidated statements of income. In 1995, as a result of the sale
of the Company's specialty chemicals division, a charge of $662 was recognized
for pension curtailment and settlement expense and is included in the gain on
the sale of discontinued operations for 1995 (Note 14).
F-10
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) PENSION PLANS (CONTINUED)
The following table sets forth the funded status of the Plan as of November
30, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation....................... $ 7,152 $ 7,108
Nonvested benefit obligation.................... 129 57
-------------- -------
Accumulated benefit obligation................ $ 7,281 $ 7,165
-------------- -------
-------------- -------
Plan assets at fair market value.................. $ 5,069 $ 6,471
Projected benefit obligation...................... (9,340) (11,072)
-------------- -------
Plan assets less than projected benefit
obligation...................................... (4,271) (4,601)
Unrecognized net loss............................. 2,898 4,186
Unrecognized prior service cost................... (147) (131)
Unrecognized initial asset........................ (511) (369)
Minimum pension liability adjustment.............. (181) --
-------------- -------
Pension liability recognized in balance sheets at
end of year..................................... $ (2,212) $ (915)
-------------- -------
-------------- -------
</TABLE>
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
7.5% and 5.0%, respectively, in both 1996 and 1997. The expected long-term rate
of return on plan assets was 9.0%.
In accordance with the provisions of SFAS No. 87, "Employers' Accounting for
Pensions," the Company recorded an additional liability at November 30, 1996
representing the excess of the accumulated benefit obligation over the fair
value of plan assets and accrued pension liability for its pension plan. At
November 30, 1997, the unrecognized prior service cost exceeded the minimum
liability, and the minimum pension liability was eliminated.
The Company has a defined contribution plan covering substantially all
employees. Eligible participants can contribute up to 10% of their annual
compensation and receive a 25% matching employer contribution up to 6% of their
annual compensation. The defined contribution plan expense was $141 for 1995,
$120 for 1996 and $155 for 1997.
F-11
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LONG-TERM DEBT
Long-term debt consisted of the following at November 30, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Revolving line of credit payable to banks at
variable rates (8.44% at November 30, 1997)..... $ -- $ 13,000
Term loans payable to banks at variable rates
(8.71% weighted average at November 30, 1997)... -- 63,683
Revolving line of credit payable to banks at
variable rates, repaid in 1997.................. 24,000 --
Term loans payable to banks at variable rates,
repaid in 1997.................................. 41,819 --
12.75% Senior Subordinated Notes, due 2004, net of
unamortized discount of $1,475 for 1996 and
$1,289 for 1997................................. 65,525 65,711
-------------- --------------
Total long-term debt.............................. 131,344 142,394
Less: current maturities.......................... 3,906 8,919
-------------- --------------
Total long-term debt, net of current maturities... $ 127,438 $ 133,475
-------------- --------------
-------------- --------------
</TABLE>
The Company entered into a new credit agreement with a syndicate of banks
(the New Credit Agreement) on June 26, 1997. The purpose of the New Credit
Agreement was to finance the acquisition of SUNSOURCE (Note 12), and to repay
all existing bank debt. The New Credit Agreement is divided into a $30,000
revolving line of credit for working capital purposes, a five year $30,000 Term
A loan and a six and three-quarter year $35,000 Term B loan facility.
The combined Term A and B loans are payable in remaining quarterly
installments as follows:
<TABLE>
<S> <C>
December 31, 1997 to September 30, 1998........... $ 1,318
December 31, 1998 to September 30, 1999........... $ 1,488
December 31, 1999 to June 30, 2001................ $ 1,738
September 30, 2001................................ $ 2,650
December 31, 2001 to March 31, 2002............... $ 4,900
June 30, 2002..................................... $ 5,000
September 30, 2002 to December 31, 2003........... $ 3,250
February 14, 2004................................. $ 3,350
</TABLE>
The Company may elect either a prime rate or Eurodollar interest rate option
applicable to the term and revolving line loans under the New Credit Agreement.
The prime rate and Eurodollar interest rate options are based on a base rate
plus a rate margin that fluctuates on the basis of the Company's leverage ratio.
The maximum rate margin for the Term A and revolving line loans is 2.0% for the
prime rate option and 3.0% for the Eurodollar rate option. The maximum rate
margin for the Term B loan is 2.5% for the prime rate option and 3.5% for the
Eurodollar rate option.
The New Credit Agreement is secured by substantially all of the Company's
assets. The more restrictive financial covenants require the maintenance of
minimum amounts of consolidated tangible net worth, fixed charge coverage,
interest coverage and leverage ratios. The provisions of the New Credit
Agreement also include restrictions on capital expenditures and the payment of
dividends. The New Credit Agreement is guaranteed by one of the Company's
subsidiaries, Signal Investment & Management Co.
F-12
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LONG-TERM DEBT (CONTINUED)
The revolving line of credit is available to the Company up to $30,000 or
such lesser amount as is determined to be available under the terms of the New
Credit Agreement, and is due and payable on June 26, 2002. The availability of
credit under the revolver is determined based on the Company's accounts
receivable and inventories.
The Company entered into a credit agreement with a syndicate of banks (the
Credit Agreement) on April 29, 1996 and as amended on June 6, 1996. The purpose
of the Credit Agreement was to finance the acquisitions of GOLD BOND and
HERPECIN-L (Note 12), and to repay all existing bank debt. The Credit Agreement
was divided into a $24,000 revolving line of credit for working capital
purposes, a five year $20,000 Term A loan facility, and a seven and one-half
year $22,500 Term B loan facility. These loans were repaid in 1997 with part of
the proceeds from the New Credit Agreement.
The amount of cash and cash equivalents on deposit up to the calculated
availability was included in other noncurrent assets in the accompanying
consolidated balance sheet at November 30, 1996 and was available exclusively
for the repayment of long-term bank debt. The amount of cash and cash
equivalents on deposit in excess of the calculated availability is included as a
current asset in the accompanying consolidated balance sheet at November 30,
1996 and was available for general operating purposes. All of the above cash and
cash equivalents were invested in highly liquid short-term investments.
In 1994, the Company issued $75,000 of 12.75% Senior Subordinated Notes due
2004 (the Notes) with five year warrants to purchase 417,182 shares of common
stock (the Warrants). The Notes consisted of 75,000 units, each consisting of
$1,000 principal amount of the Notes and a warrant to purchase shares of the
Company's common stock (Note 9). The price of the Notes was $73,967, or 98.6% of
the original principal amount of the Notes, resulting in a discount of $1,033.
The value assigned to the Warrants was $955 (Note 9), resulting in a total
original issue discount of $1,988. The proceeds of the Notes were used to repay
a prior credit agreement.
The Notes mature on June 15, 2004, and interest is payable semi-annually on
June 15 and December 15 of each year. The 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 Notes, which were registered
under the Securities Act of 1933, may not be redeemed until June 15, 2001, 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 Notes may
require the Company to repurchase the Notes at a purchase price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest. The Notes are
guaranteed by Signal Investment & Management Co., a wholly-owned subsidiary of
the Company.
The 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.
During 1995, 1996 and 1997 the Company prepaid previously outstanding
long-term debt, with funds received from refinancing in 1996 and 1997 and the
sale of the specialty chemicals division in 1995. In connection with the
prepayment of those borrowings, the Company incurred extraordinary losses, net
of income taxes, in 1995, 1996 and 1997 of $367, $532 and $1,370, respectively,
or $.05, $.07 and $.15 per
F-13
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LONG-TERM DEBT (CONTINUED)
share, respectively. The losses related to the write-off of debt issuance and
other deferred costs. The 1997 amount includes costs associated with the
termination of two interest rate swap agreements.
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998.............................................. $ 8,919
1999.............................................. 5,950
2000.............................................. 6,950
2001.............................................. 7,863
2002.............................................. 31,050
Thereafter........................................ 82,951
--------------
143,683
Less: unamortized discount........................ (1,289)
--------------
$ 142,394
--------------
--------------
</TABLE>
The 2002 maturities include the amount outstanding under the revolving line
of credit which was $13,000 as of November 30, 1997.
The Company is also required to pay $3,649 during 1998. This amount was
determined based upon the excess cash flow calculation, as defined in the New
Credit Agreement, and is included in the 1998 maturities.
Cash interest payments during 1995, 1996 and 1997 were $10,811, $12,710 and
$15,259, respectively.
(6) DERIVATIVE FINANCIAL INSTRUMENTS
On July 21, 1997, the Company entered into two interest rate swap agreements
with NationsBank, N.A. 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 term of the $40,000 swap is for a five year period ending
July 22, 2002. The Company will receive interest payments on the notional amount
at a rate equal to the one month London Interbank Offered Rate (LIBOR) (5.59% as
of November 30, 1997) and will pay interest on the same notional amount at a
fixed interest rate of 6.38%. The term of the $5,000 swap is for a five year
period ending July 22, 2002. The agreement may be terminated by NationsBank,
N.A. at each quarterly date. The Company will receive interest payments on the
notional amount at a rate equal to the three month LIBOR (5.64% as of November
30, 1997) and will pay interest on the same notional amount at a fixed interest
rate of 5.62%.
The Company is exposed to credit losses in the event of nonperformance by
the counterparty to its interest rate swap agreements but has no off-balance
sheet credit risk of accounting loss. The Company anticipates, however, that the
counterparty will be able to fully satisfy its obligations under the agreements.
At November 30, 1996, the Company had two interest rate swap agreements
outstanding with financial institutions, each in a notional amount of $15,000.
Both of these interest rate swaps were terminated in 1997 in connection with the
refinancing of long-term debt. (Note 5). The resulting extraordinary loss, net
of tax, is included in the 1997 consolidated statement of income as part of the
extraordinary loss on the early extinguishment of debt.
During June 1993, the Company entered into an interest rate cap agreement in
a notional principal amount of $30,000. On January 12, 1995, the interest rate
cap was terminated resulting in a gain of approximately $729 to the Company. The
gain was deferred and was amortized over the remaining life of the original cap
agreement as a reduction of interest expense. In 1996, the remaining deferred
gain of $281 was recognized.
F-14
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," and
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments" require the disclosure of the fair value of all
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, 1997, the estimated fair values of the revolving line of
credit and the term loans payable to banks approximate the carrying amounts of
such debt because the interest rates change with market interest rates.
The estimated fair value of the Notes at November 30, 1997 exceeded their
carrying value by approximately $9,600. The fair value was estimated based on
quoted market prices for the same or similar issues.
The fair values of the interest rate swap agreements are the estimated
amounts that the Company would receive or pay to terminate the agreements at the
reporting date, taking into account current interest rates and the current
credit worthiness of the counterparties. At November 30, 1997, the Company
estimates it would have paid $603 to terminate the agreements.
(8) INCOME TAXES
The provision for income taxes from continuing operations includes the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal........................................................ $ 470 $ (203) $ 2,639
State.......................................................... 170 222 234
Deferred......................................................... 645 1,797 1,120
--------- --------- ---------
$ 1,285 $ 1,816 $ 3,993
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income tax assets and liabilities for 1996 and 1997 reflect the
impact of temporary differences between the amounts of assets and liabilities
for financial reporting and income tax reporting
F-15
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES (CONTINUED)
purposes. Temporary differences and carryforwards which give rise to deferred
tax assets and liabilities at November 30, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals.................................................. $ 1,790 $ 2,005
Accrued promotional expenses........................................... 770 720
Accrued postretirement health care benefits............................ 535 559
Repriced stock option expense.......................................... 690 251
Accruals for discontinued operations................................... 237 --
Other.................................................................. 260 310
--------- ---------
Gross deferred tax assets............................................ 4,282 3,845
--------- ---------
Deferred tax liabilities:
Excess tax depreciation and amortization............................... 3,317 4,486
Prepaid advertising.................................................... 309 318
Inventory.............................................................. 190 190
Other.................................................................. 772 277
--------- ---------
Gross deferred tax liabilities....................................... 4,588 5,271
--------- ---------
Net deferred liability............................................... $ (306) $ (1,426)
--------- ---------
--------- ---------
</TABLE>
The difference between the provision for income taxes and the amount
computed by multiplying income from continuing operations before income taxes by
the U.S. statutory rate is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Expected tax provision........................................... $ 1,227 $ 1,911 $ 3,837
Dividend exclusion benefit....................................... (78) (140) (178)
State income taxes, net of federal income tax benefit............ 112 147 154
Other, net....................................................... 24 (102) 180
--------- --------- ---------
$ 1,285 $ 1,816 $ 3,993
--------- --------- ---------
--------- --------- ---------
</TABLE>
Included in "refundable and deferred income taxes" in current assets in the
accompanying consolidated balance sheets are income tax refunds receivable of
$2,794 and $12 at November 30, 1996 and 1997, respectively.
Income taxes paid in 1995, 1996 and 1997 were $5,026, $2,459 and $2,162,
respectively. The Company received income tax refunds of $163, $215 and $2,719
during 1995, 1996 and 1997, respectively.
F-16
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SHAREHOLDERS' EQUITY (DEFICIT)
STOCK ISSUANCE
On June 26, 1997, the Company issued to the sellers of the SUNSOURCE product
line 300,000 shares of its common stock at a value of $13.50 per share to fund a
portion of the purchase price for the brands.
In April 1996, the Company issued 1,100,000 shares of common stock to a
group of investors, including certain officers, directors and affiliates, in
order to partially fund the acquisition of GOLD BOND (Note 12). In addition, the
Company issued to the seller of GOLD BOND 155,792 shares of the Company's common
stock at $6.42 per share.
STOCK OPTIONS
Although the Company adopted SFAS No. 123, Accounting For Stock-Based
Compensation, during 1997, it elected to continue to account for compensation
expense under its stock option plans under APB No. 25. Accordingly, no
compensation cost has been recognized for stock option grants since the options
have exercise prices equal to the market value of the common stock at the date
of grant.
The Company's 1993 Non-Statutory Stock Option Plan (1993 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 (1994 Plans) provide for the
issuance of up to 350,000 and 80,000 shares, respectively, 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 1996 and 1997:
expected dividend yield of 0%, expected volatility of 49%, risk-free interest
rates of 6.48% and 5.39%, and expected lives of 6 years.
Had compensation cost for 1996 and 1997 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 and net income per share would have
been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Net income:
As reported.............................................................. $ 3,272 $ 5,885
Pro forma................................................................ $ 2,877 $ 5,683
Net income per share:
As reported.............................................................. $ 0.40 $ 0.65
Pro forma................................................................ $ 0.35 $ 0.62
</TABLE>
The pro forma effect on net income in this disclosure is not representative
of the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to 1996.
F-17
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
A summary of the activity of stock options during 1995, 1996, and 1997 is
presented below (shares in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.... 675 $ 7.69 646 $ 7.60 613 $ 6.39
Granted........................... 18 4.79 318 5.07 91 9.01
Exercised......................... -- -- (44) 6.93 (120) 6.65]
Cancelled......................... (47) 7.83 (307) 7.48 -- --
--- ----- --- ----- --- -----
Outstanding at end of year.......... 646 $ 7.60 613 $ 6.39 584 $ 6.75
--- ----- --- ----- --- -----
--- ----- --- ----- --- -----
Options exercisable at year-end..... 305 $ 7.72 221 $ 7.73 262 $ 7.43
--- ----- --- ----- --- -----
--- ----- --- ----- --- -----
Weighted average fair value of
options granted................... N/A $ 2.62 $ 5.24
----- ----- -----
----- ----- -----
</TABLE>
A summary of the exercise prices for options outstanding under the Company's
stock-based compensation plans at November 30, 1997 is presented below (shares
in thousands):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE
AVERAGE EXERCISE PRICE OF
SHARES UNDER EXERCISE WEIGHTED AVERAGE SHARES SHARES
EXERCISE PRICE RANGE OPTION PRICE REMAINING LIFE EXERCISABLE EXERCISABLE
- --------------------- ----------------- ----------- ------------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
$4.63 - $5.25........ 249 $ 4.87 8.2 29 $ 4.85
$7.50 - $9.50........ 330 7.99 6.5 233 7.76
$18.00............. 5 18.00 9.8 -- N/A
--
--- ----------- --- -----
Total.............. 584 $ 6.75 7.2 262 $ 7.43
--
--
--- ----------- --- -----
--- ----------- --- -----
</TABLE>
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,
1996 and 1997, 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, 1997, no contributions had been made to the plan.
COMMON STOCK WARRANTS
As described in Note 5, the Company issued the Warrants at an assigned value
of $955. The Warrants are exercisable for five years. In the aggregate, 75,000
warrants were issued which, when exercised, would entitle the holders thereof to
acquire an aggregate of 417,182 shares of the Company's common stock. The
F-18
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
number of shares of common stock and the price per share at which a warrant is
exercisable are subject to adjustment upon the occurrence of certain events. A
warrant does not entitle the holder to receive any cash dividends paid on common
stock or to exercise any other rights as a shareholder of the Company.
During 1996, as a result of the issuance of 1,100,000 shares of common stock
(Note 9), the number of shares of common stock and the price per share at which
a warrant is exercisable were adjusted from 5.56242 shares and $7.15,
respectively, to 5.85733 shares and $6.79, respectively.
During 1997, 12,030 warrants were exercised to acquire 70,464 shares. At
November 30, 1997, 62,970 warrants were outstanding which, when exercised, would
entitle the holders thereof to acquire an aggregate of 368,836 shares of the
Company's common stock.
(10) CONTINGENCIES
Claims, suits and complaints arise in the ordinary course of the Company's
business involving such matters as patents and trademarks, product liability 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.
(11) SUPPLEMENTAL FINANCIAL INFORMATION
A--Inventories consisted of the following at November 30, 1996 and 1997:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Raw materials and work in process....................................... $ 5,365 $ 9,107
Finished goods.......................................................... 7,484 7,850
Excess of current cost over LIFO value.................................. (2,554) (2,464)
--------- ---------
Total inventories..................................................... $ 10,295 $ 14,493
--------- ---------
--------- ---------
</TABLE>
International inventories included above, valued on a lower of FIFO cost or
market at November 30, 1996 and 1997, were $2,039 and $2,546, respectively.
B--Property, plant and equipment consisted of the following at November 30,
1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Land.................................................................. $ 208 $ 138
Buildings and improvements............................................ 3,014 3,150
Machinery and equipment............................................... 21,973 23,416
Construction in progress.............................................. 1,046 2,221
Less--accumulated depreciation........................................ (16,467) (17,937)
---------- ----------
Property, plant and equipment, net.................................. $ 9,774 $ 10,988
---------- ----------
---------- ----------
</TABLE>
F-19
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)
C--Accrued liabilities consisted of the following at November 30, 1996 and
1997:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Accrued interest expense................................................ $ 3,996 $ 4,119
Salaries, wages and commissions......................................... 1,287 1,696
Promotion expense....................................................... 2,827 2,840
Product acquisitions.................................................... 614 1,489
Accrued pension benefits................................................ 2,076 435
Other................................................................... 3,331 3,619
--------- ---------
Total accrued liabilities............................................. $ 14,131 $ 14,198
--------- ---------
--------- ---------
</TABLE>
(12) ACQUISITION AND SALE OF BRANDS
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. Additional payments
may 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, but such
additional payments are not to exceed $15,750 in the aggregate. Financing of the
SUNSOURCE acquisition was provided by an expansion of the Company's senior bank
credit agreement (Note 5) and the issuance of 300,000 shares of Chattem, Inc.
common stock to SUNSOURCE (Note 9).
On April 29, 1996, the Company purchased the worldwide rights for the GOLD
BOND line of medicated powders and anti-itch cream for approximately $40,000.
The assets acquired consisted of the trademarks ($38,000) and inventory.
Additionally, the Company assumed certain liabilities of approximately $500. The
Company financed the GOLD BOND acquisition with bank borrowings (Note 5) and
issuance of common stock (Note 9).
On June 6, 1996, the Company purchased the rights for the HERPECIN-L line of
medicated lip balm for $5,607 plus a royalty payment equal to the greater of
$214 or 5% of net sales. The royalty payment is payable annually for each of the
seven twelve-month periods beginning July 1, 1996 and ending June 30, 2003. The
assets acquired consisted primarily of the trademark ($5,159), receivables and
inventory. Additionally, the Company assumed certain liabilities of
approximately $500. The purchase was financed by the Company with additional
bank borrowings of $5,000 with the remaining $607 being funded by the Company
(Note 5).
During April 1996, the Company sold the trademarks and inventory of two of
its minor consumer products brands, SOLTICE and BLIS-TO-SOL, for $1,200
consisting of $1,000 cash received at closing and a $200 promissory note
requiring payments of $100 per year for the next two years contingent upon the
brands meeting specific future sales levels.
On June 17, 1994, the Company acquired a license to the PHISODERM trademark
in the United States, Canada and Puerto Rico ("the Territory"), together with
certain other assets from Sterling Winthrop Inc. (Sterling). If net sales of
PHISODERM products in the United States exceed $11,000 for either of the
12-month periods beginning July 1, 1995 and July 1, 1996 and ending June 30,
1996 and June 30, 1997, then the Company will pay Sterling an additional $1,000
per year. Net sales of
F-20
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) ACQUISITION AND SALE OF BRANDS (CONTINUED)
PHISODERM products exceeded $11,000 for each of the 12-month periods ended June
30, 1997 and 1996. As a result, an additional $2,000 was recorded to patents,
trademarks and other purchased product rights as of November 30, 1997.
(13) 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, 1995, 1996 and 1997, included the following components:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Service cost (benefits earned during the period)...................... $ 30 $ 36 $ 29
Interest cost on accumulated postretirement benefits obligation....... 102 101 115
Amortization of net loss.............................................. -- -- 2
--------- --------- ---------
Net periodic postretirement benefits cost............................. $ 132 $ 137 $ 146
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the funded status of the plan, reconciled to
the accrued postretirement health care benefits recognized in the Company's
balance sheets at November 30, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Accumulated postretirement benefits obligation:
Retirees................................................................. $ 912 $ 715
Fully eligible active plan participants.................................. 275 502
Other active participants................................................ 260 377
Unrecognized net loss...................................................... -- (160)
--------- ---------
Accrued postretirement health care benefits................................ $ 1,447 $ 1,434
--------- ---------
--------- ---------
</TABLE>
For measurement purposes, a 6.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed in 1996 and 1997. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at November 30, 1996 and 1997. A 1%
increase in the assumed health care cost trend rate would not affect the
accumulated postretirement benefit obligation as of November 30, 1997 or the
aggregate of the service and interest cost components of the net annual
postretirement benefit cost for the year ended November 30, 1997.
(14) DISCONTINUED OPERATIONS
On May 26, 1995, the Company completed the sale of its specialty chemicals
division to privately-held Elcat. The Company received $25,000 from the sale of
the specialty chemicals division consisting of $20,000 in cash and $5,000 of
13.125% cumulative, convertible preferred stock of Elcat. The net cash proceeds
were used to repay long-term debt of approximately $12,000. The Company
recognized a gain of
F-21
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) DISCONTINUED OPERATIONS (CONTINUED)
$9,334 (after tax) from the sale and extraordinary charge (after tax) of $367
relating to the early extinguishment of the debt.
The results of operations and the gain on disposal of the specialty
chemicals division have been separately classified as discontinued operations in
the accompanying consolidated statements of income. Net sales of the specialty
chemicals division were $6,739 through May 26, 1995. Interest expense of $351
for 1995 was allocated to discontinued operations based upon the ratio of net
assets discontinued to the total net assets of the consolidated entity.
(15) SUBSEQUENT EVENT
On March 24, 1998, the Company acquired the BAN anti-perspirant and
deodorant brand from Bristol-Myers Squibb Company. Pursuant to the terms of the
acquisition agreement, the Company purchased all the assets, including
inventories, patents and trademarks of BAN (excluding the rights in Japan), for
$165,000 in cash, plus assumed liabilities. The purchase price was funded by the
issuance of $200,000 8 7/8% senior subordinated notes due 2008.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder and Board of Directors of
Signal Investment & Management Co.:
We have audited the accompanying balance sheets of Signal Investment &
Management Co. (a Delaware corporation and wholly owned subsidiary of Chattem,
Inc.) as of November 30, 1996 and 1997 and the related statements of income,
shareholder's equity (deficit) and cash flows for each of the three years in the
period ended November 30, 1997. 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 generally accepted auditing
standards. 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 Signal Investment &
Management Co. as of November 30, 1996 and 1997 and the results of its
operations and its cash flows for each of the three years in the period ended
November 30, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
January 19, 1998 (EXCEPT WITH
RESPECT TO THE MATTER DISCUSSED IN
NOTE 6 AS TO WHICH THE DATE IS
MARCH 24, 1998)
F-23
<PAGE>
SIGNAL INVESTMENT & MANAGEMENT CO.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
---------------------- ------------
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 2,911 $ 55 $ 42
Royalties receivable from Chattem, Inc.................................... 1,287 1,588 1,558
---------- ---------- ------------
Total current assets.................................................. 4,198 1,643 1,600
TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS, net.......................... 74,086 101,426 100,656
---------- ---------- ------------
TOTAL ASSETS.......................................................... $ 78,284 $ 103,069 $ 102,256
---------- ---------- ------------
---------- ---------- ------------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
PAYABLE TO CHATTEM, INC..................................................... $ 75,713 $ 102,573 $ 102,253
---------- ---------- ------------
DEFERRED INCOME TAXES....................................................... 1,556 2,628 2,628
---------- ---------- ------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 4)
SHAREHOLDER'S EQUITY (DEFICIT):
Common shares, without par value, 500 shares authorized, 250 shares issued
and outstanding......................................................... 2 2 2
Retained earnings (deficit)............................................... 1,013 (2,134) (2,627)
---------- ---------- ------------
Total shareholder's equity (deficit).................................. 1,015 (2,132) (2,625)
---------- ---------- ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT).................. $ 78,284 $ 103,069 $ 102,256
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
SIGNAL INVESTMENT & MANAGEMENT CO.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED FOR THE THREE MONTHS
NOVEMBER 30, ENDED FEBRUARY 28,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Royalties from Chattem, Inc.............................. $ 4,200 $ 5,044 $ 6,181 $ 1,263 $ 1,559
Investment income:
Interest............................................... 23 33 31 19 --
Interest from Chattem, Inc. note receivable............ 181 136 -- -- --
Gain on sale of investment............................... 0 323 -- -- --
Gain on product divestitures............................. 0 875 -- -- --
--------- --------- --------- --------- ---------
Total revenues....................................... 4,404 6,411 6,212 1,282 1,559
--------- --------- --------- --------- ---------
EXPENSES:
Amortization of trademarks and other purchased product
rights................................................. 1,162 1,779 2,627 571 770
Other.................................................... 11 18 27 1 2
--------- --------- --------- --------- ---------
Total expenses....................................... 1,173 1,797 2,654 572 772
--------- --------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES................... 3,231 4,614 3,558 710 787
PROVISION FOR INCOME TAXES................................. 1,091 1,575 1,205 240 280
--------- --------- --------- --------- ---------
NET INCOME................................................. $ 2,140 $ 3,039 $ 2,353 $ 470 $ 507
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................. 250 250 250 250 250
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NET INCOME PER COMMON SHARE:
Basic.................................................... $ 8,560 $ 12,156 $ 9,412 $ 1,880 $ 2,028
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted.................................................. $ 8,560 $ 12,156 $ 9,412 $ 1,880 $ 2,028
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
SIGNAL INVESTMENT & MANAGEMENT CO.
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON SHARES (DEFICIT)
------------- -----------
<S> <C> <C>
BALANCE, November 30, 1994................................................................... $ 2 $ 5,687
Net income................................................................................. -- 2,140
Dividends ($16,000 per share).............................................................. -- (4,000)
--- -----------
BALANCE, November 30, 1995................................................................... 2 3,827
Net income................................................................................. -- 3,039
Dividends ($23,412 per share).............................................................. -- (5,853)
--- -----------
BALANCE, November 30, 1996................................................................... 2 1,013
Net income................................................................................. -- 2,353
Dividends ($22,000 per share).............................................................. -- (5,500)
--- -----------
BALANCE, November 30, 1997................................................................... 2 (2,134)
Net income................................................................................... -- 507
Dividends ($4,000 per share)................................................................. -- (1,000)
--- -----------
Balance, February 28, 1998 (unaudited)....................................................... $ 2 $ (2,627)
--- -----------
--- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
SIGNAL INVESTMENT & MANAGEMENT CO.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED FEBRUARY
YEAR ENDED NOVEMBER 30, 28,
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.......................... $ 2,140 $ 3,039 $ 2,353 $ 470 $ 507
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization...................... 1,162 1,779 2,627 571 770
Deferred income tax provision..... 366 682 1,072 240 280
Gain on sale of investment........ -- (323) -- -- --
Gain on product divestitures...... -- (875) -- -- --
Changes in operating assets and
liabilities:
(Increase) decrease in royalties
receivable from Chattem,
Inc........................... 51 (266) (301) 24 30
(Increase) decrease in interest
receivable from Chattem,
Inc........................... (84) 121 -- -- --
------- ------- ------- ------- -------
Net cash provided by operating
activities.................. 3,635 4,157 5,751 1,305 1,587
------- ------- ------- ------- -------
INVESTING ACTIVITIES:
Payment of note receivable from
Chattem, Inc...................... -- 2500 -- -- --
Proceeds from sale of investment.... -- 323 -- -- --
------- ------- ------- ------- -------
Net cash provided by investing
activities.................. -- 2,823 -- -- --
------- ------- ------- ------- -------
FINANCING ACTIVITIES:
Increase (decrease) in payable to
Chattem, Inc...................... 740 933 (3,107) (2,750) (600)
Dividends paid to Chattem, Inc...... (4,000) (5,853) (5,500) (1,250) (1,000)
------- ------- ------- ------- -------
Net cash used in financing
activities.................. (3,260) (4,920) (8,607) (4,000) (1,600)
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year.... 375 2,060 (2,856) (2,695) (13)
At beginning of year................ 476 851 2,911 2,911 55
------- ------- ------- ------- -------
At end of year...................... $ 851 $ 2,911 $ 55 $ 216 $ 42
------- ------- ------- ------- -------
------- ------- ------- ------- -------
SUPPLEMENTAL SCHEDULE OF NON-CASH
TRANSACTIONS:
Decrease in payable to Chattem, Inc.
in connection with the sale of
trademarks and other product
rights............................ $ -- $ 875 $ -- $ -- $ --
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Increase in payable to Chattem, Inc.
in connection with purchases of
trademarks and other product
rights............................ $ -- $45,810 $29,967 $ -- $ --
------- ------- ------- ------- -------
------- ------- ------- ------- -------
DIVIDENDS PER SHARE................... $ 16 $ 23 $ 22 $ 5 $ 4
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
SIGNAL INVESTMENT & MANAGEMENT CO.
NOTES TO FINANCIAL STATEMENTS
(ALL MONETARY AMOUNTS ARE EXPRESSED IN
THOUSANDS OF DOLLARS UNLESS CONTRARILY EVIDENT)
1. GENERAL
Signal Investment & Management Co. ("Signal" or the "Company") is a
wholly-owned subsidiary of Chattem, Inc. ("Chattem"). Signal was formed by
Chattem for the sole purpose of holding certain of Chattem's trademarks and
other purchased product rights and certain investments. The Company owns or
licenses substantially all of the trademarks and intangibles associated with
Chattem's domestic consumer products business and licenses Chattem's use
thereof. Signal has no active operations.
Signal is a guarantor of Chattem's $75,000 of 12.75% Senior Subordinated
Notes (the "Notes") due 2004, which guaranty and notes were registered under the
Securities Act of 1933 on a Form S-2 Registration Statement effective August 4,
1994.
Signal is also guarantor of Chattem's current bank credit facility which
consists of term loans and a working capital revolving loan maturing at various
dates from December 31, 1997 to February 14, 2004. The outstanding balances as
of November 30, 1997 were $63,683 for the term loans and $13,000 for the working
capital revolving loan.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS
The costs of acquired trademarks and other purchased product rights are
capitalized and amortized over periods ranging from 20 to 40 years. Total
accumulated amortization of these assets at November 30, 1996 and 1997 was
$5,060 and $7,687, respectively. Amortization expense for 1995, 1996 and 1997
was $1,162, $1,779 and $2,627, respectively.
INCOME TAXES
The Company uses the asset and liability approach to accounting for deferred
income taxes based on currently enacted tax rates and differences in financial
reporting and income tax bases of assets and liabilities. The Company is
included in the consolidated tax returns filed by Chattem, Inc.
INVESTMENTS
In March 1996, the Company sold for $323, an investment which had been
written down to a carrying value of zero in 1993 due to uncertainty concerning
future realization.
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.
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.
F-28
<PAGE>
SIGNAL INVESTMENT & MANAGEMENT CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL MONETARY AMOUNTS ARE EXPRESSED IN
THOUSANDS OF DOLLARS UNLESS CONTRARILY EVIDENT)
3. INCOME TAXES
The provision for income taxes includes the following components for the
years ended November 30:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current........................................... $ 725 $ 893 $ 133
Deferred.......................................... 366 682 1,072
------ ------ ------
$ 1,091 $ 1,575 $ 1,205
------ ------ ------
------ ------ ------
</TABLE>
The temporary difference which gives rise to the deferred tax liability at
November 30, 1997 and 1996 consists primarily of the differences between
carrying values of trademarks and other purchased product rights for income tax
and financial statement reporting purposes.
The difference between the provision for income taxes and the amount
computed by multiplying income before income taxes by the U.S. statutory rate is
summarized as follows for the years ended November 30:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Expected tax provision............................ $ 1,098 $ 1,584 $ 1,210
Nontaxable interest income........................ (7) (9) (5)
------ ------ ------
$ 1,091 $ 1,575 $ 1,205
------ ------ ------
------ ------ ------
</TABLE>
4. ACQUISITION AND SALE OF TRADEMARKS
On June 26, 1997, the Company purchased the rights for the SUNSOURCE line of
dietary supplements and homeopathic medicines, and subsequently licensed the use
of the trademark to Chattem. The purchase price of the trademark was $26,650
which was financed with borrowings from Chattem. Additional payments may 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, but such additional
payments are not to exceed $15,750 in the aggregate.
On April 29, 1996, the Company purchased the worldwide rights for the GOLD
BOND line of medicated powders and anti-itch cream, and subsequently licensed
the use of the trademark to Chattem. The purchase price for the trademark was
$38,000 which was financed with borrowings from Chattem.
On June 6, 1996, the Company purchased the rights for the HERPECIN-L line of
medicated lip balm, and subsequently licensed the use of the trademark to
Chattem. The purchase price for the trademark was $5,159 plus a royalty payment
equal to the greater of $214 or 5% of net sales. The royalty payment is payable
annually for each of the seven twelve-month periods beginning July 1, 1996 and
ending June 30, 2003. The purchase of the HERPECIN-L trademark was financed with
borrowings from Chattem.
During April 1996, the Company sold the trademarks of two minor consumer
products brands, SOLTICE and BLIS-TO-SOL. The sales price of $1,200 consisted of
$1,000 of cash received at closing and a $200 promissory note requiring payments
of $100 per year for the next two years contingent upon the brands meeting
specific future sales levels.
F-29
<PAGE>
SIGNAL INVESTMENT & MANAGEMENT CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL MONETARY AMOUNTS ARE EXPRESSED IN
THOUSANDS OF DOLLARS UNLESS CONTRARILY EVIDENT)
5. RELATED PARTY TRANSACTIONS
In exchange for the licensed use of the Company's trademarks, the Company
receives royalties from Chattem of 5% of net sales of certain defined domestic
consumer products.
Note receivable from Chattem, Inc. results from borrowings by Chattem. The
note bears interest at 7 1/4% which is payable quarterly. The note and all
accrued interest were repaid by Chattem in fiscal 1996.
Payable to Chattem, Inc. represents net advances received from Chattem used
to fund the acquisitions of trademarks as discussed in Note 4. Such advances are
noninterest bearing and are not expected to be paid prior to November 30, 1998.
Certain general and administrative expenses of the Company are occasionally
paid by Chattem on behalf of the Company. Such amounts are not significant.
A summary analysis of the activity between the Company and Chattem, Inc. for
the two years ended November 30, 1997 is as follows:
<TABLE>
<S> <C>
Balance--November 30, 1995........................ $ 29,844
Gain on sale of trademarks................ (875)
Additions................................. 46,744
--------------
Balance--November 30, 1996........................ 75,713
Repayments................................ (3,250)
Additions................................. 30,110
--------------
Balance--November 30, 1997........................ $ 102,573
--------------
--------------
</TABLE>
The weighted average balance due Chattem, Inc. during the year ended
November 30, 1997, was $86,424.
6. SUBSEQUENT EVENT
On March 24, 1998, the Company and Chattem acquired the BAN anti-perspirant
and deodorant brand from Bristol-Myers Squibb Company. Pursuant to the terms of
the acquisition agreement, the Company and Chattem purchased all the assets,
including patents and trademarks of BAN (excluding the rights in Japan), for
$165,000 in cash, plus assumed liabilities. The purchase price was funded by the
issuance of $200,000 8 7/8% senior subordinated notes of Chattem due 2008.
F-30
<PAGE>
March 3, 1998
To the Board of Directors and Stockholders
of Bristol-Myers Squibb Company:
We have audited the accompanying statement of United States (U.S.) assets
and liabilities as of December 31, 1996 and 1997, and the statement of U.S. net
sales and product contribution for the years ended December 31, 1995, 1996 and
1997, of the Ban deodorant and antiperspirant product lines (the Product) of
Bristol-Myers Products (the Business), a division of Bristol-Myers Squibb
Company. These financial statements are the responsibility of the Business's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of U.S. assets and liabilities
and the statement of U.S. net sales and product contribution are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in these statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of these
statements. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying financial statements reflect the U.S. assets and
liabilities and the U.S. net sales and product contribution attributable to the
Product as described in Note 2 and are not intended to be a complete
presentation of the Product's assets, liabilities, revenues or expenses.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the U.S. assets and liabilities of the Product as
described in Note 2 as of December 31, 1996 and 1997 and the U.S. net sales and
product contribution of the Product as described in Note 2 for the years ended
December 31, 1995, 1996 and 1997, in conformity with generally accepted
accounting principles.
[LOGO]
F-31
<PAGE>
U.S. BAN
STATEMENT OF U.S. ASSETS AND LIABILITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Inventories, net:
Raw materials...................................................................... $ 1,233 $ 1,089
Packaging.......................................................................... 1,161 860
Work in process.................................................................... 342 19
Finished goods..................................................................... 7,497 6,284
------------ ------------
Total inventories, net........................................................... 10,233 8,252
------------ ------------
Property, plant and equipment, net:
Machinery and equipment............................................................ 21,799 21,897
Less: Accumulated depreciation..................................................... 10,946 12,963
------------ ------------
Total property, plant and equipment, net......................................... 10,853 8,934
------------ ------------
Total assets..................................................................... $ 21,086 $ 17,186
LIABILITIES
Accrued expenses
Advertising........................................................................ $ 722 $ --
Consumer promotion................................................................. 1,127 1,003
Trade promotion.................................................................... 2,140 3,676
------------ ------------
Total accrued expenses........................................................... $ 3,989 $ 4,679
------------ ------------
Assets less liabilities.......................................................... $ 17,097 $ 12,507
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
U.S. BAN
STATEMENT OF U.S. NET SALES AND PRODUCT CONTRIBUTION
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................................. $ 94,705 $ 97,547 $ 96,152
Cost of goods sold.................................................... 30,630 32,340 32,780
------------ ------------ ------------
Gross margin........................................................ 64,075 65,207 63,372
Distribution.......................................................... 6,169 7,131 6,594
Promotion............................................................. 18,908 21,952 25,018
Advertising and other marketing....................................... 10,691 9,251 7,019
------------ ------------ ------------
Product contribution................................................ $ 28,307 $ 26,873 $ 24,741
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
U.S. BAN
NOTES TO THE STATEMENT OF U.S. ASSETS AND LIABILITIES AND THE
STATEMENT OF U.S. NET SALES AND PRODUCT CONTRIBUTION
(IN THOUSANDS)
1. DESCRIPTION OF BUSINESS
The Business manufactures and markets topical deodorants and
antiperspirants. The products are sold through distributors and directly to end
users primarily in the retail markets in the United States (U.S.), Thailand,
Canada, Latin America and certain other Asian countries.
2. BASIS OF PRESENTATION
The accompanying financial statements present only the U.S. assets and
liabilities and the U.S. net sales and product contribution of the Product.
These financial statements include all adjustments necessary for a fair
presentation of the assets and liabilities at December 31, 1997 and 1996 and of
U.S. net sales and product contribution for the years ended December 31, 1997,
1996 and 1995. These financial statements have been prepared in accordance with
Bristol-Myers Squibb Company accounting principles which are in accordance with
generally accepted accounting principles.
These financial statements set forth only the U.S. net sales and operational
expenses attributable to the Product and do not purport to represent all the
costs and expenses associated with a stand alone, separate company. Accordingly,
not included in operating expenses are the expenses associated with product
management, legal, cash management/treasury functions, and various tax services
provided by BMS.
The statement of U.S. net sales and product contribution includes amounts
attributable to the manufacture, sale, promotion and advertisement of the
Product. Net sales include allowances for sales returns and cash discounts.
Product contribution represents net sales less cost of goods sold, distribution,
promotion, advertising and other marketing expenses attributable to the Product.
Included in product contribution is an allocation of certain expenses
attributable to the Product. These expenses have been allocated to the Product
by the Business based upon various factors which management believes are
reasonable.
Net sales by the Business to one customer comprised approximately 24%, 24%
and 23% of total net sales for the years ended December 31, 1997, 1996 and 1995,
respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates.
INVENTORIES, NET
Inventories, net of reserves for obsolescence, are valued at average costs,
not in excess of market.
PROPERTY, PLANT AND EQUIPMENT, NET
Expenditures for additions, renewals and betterments are capitalized at
cost. Depreciation is generally computed by the straight-line method based on
the estimated useful lives of the related assets ranging from 5 to 20 years.
F-34
<PAGE>
U.S. BAN
NOTES TO THE STATEMENT OF U.S. ASSETS AND LIABILITIES AND THE
STATEMENT OF U.S. NET SALES AND PRODUCT CONTRIBUTION (CONTINUED)
(IN THOUSANDS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The machinery and equipment is primarily located in Morrisville, North
Carolina, and at a third party manufacturer in Quebec, Canada.
4. COMMITMENTS AND CONTINGENCIES
Various lawsuits, claims and proceedings of a nature considered normal to
the Business are pending through BMS. Management believes that these lawsuits,
claims and proceedings are without merit or will not have a material adverse
effect on the Business's operating results, liquidity or financial position.
F-35
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR 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 WOULD BE UNLAWFUL. 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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Special Cautionary Notice Regarding Forward-Looking Statements............ 2
Prospectus Summary........................................................ 3
Summary Pro Forma Combined Financial Information.......................... 12
Summary Historical Consolidated Financial Information..................... 14
Risk Factors.............................................................. 15
The Acquisition........................................................... 23
Recent Developments....................................................... 23
Use of Proceeds........................................................... 23
Capitalization............................................................ 24
Unaudited Pro Forma Financial Data........................................ 25
Selected Historical Consolidated Financial Data........................... 32
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 33
Business.................................................................. 41
Management................................................................ 54
Voting Securities and Principal Holders Thereof........................... 56
The Exchange Offer........................................................ 58
Description of Exchange Notes............................................. 67
Description of Other Indebtedness......................................... 94
Certain Federal Income Tax Considerations................................. 95
Plan of Distribution...................................................... 96
Legal Matters............................................................. 97
Experts................................................................... 97
Index to Financial Statements............................................. F-1
</TABLE>
$200,000,000
[LOGO]
OFFER TO EXCHANGE UP TO $200,000,000 OF ITS 8 7/8% SERIES B SENIOR SUBORDINATED
NOTES DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, FOR AN EQUAL AGGREGATE PRINCIPAL AMOUNT OF ITS 8 7/8% SERIES A SENIOR
SUBORDINATED NOTES DUE 2008
---------------------
PROSPECTUS
---------------------
June 4, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14(1) of the Company's Amended and Restated Charter provides that no
director of the Company shall be liable to the corporation or its shareholders
for monetary damages for breach of fiduciary duty as a director, except for
liability: (1) for any breach of the director's duty of loyalty to the
corporation or its shareholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, or (iii) for
distributions in violation of Section 48-18-304 of the Tennessee Code Annotated.
Section 14(2) of the Company's Amended and Restated Charter further provides
that each person who was or is made a party or is threatened to be made to or is
otherwise involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, and whether formal or informal (a
"proceeding"), by reason of the fact that he or she is or was a director,
officer or employee of the corporation or is or was serving at the request of
the Company as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans (hereinafter "indemnitee") whether the
basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity as a director,
officer, employee or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
Company to the fullest extent authorized by the Tennessee Business Corporation
Act, as the same exists or may hereafter be amended (but in the case of any such
amendment, only to the extent that such amendment permits the Company to provide
broader indemnification rights than such law permitted the Company to provide
prior to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an indemnitee
who has ceased to be a director, officer, or employee and shall inure to the
benefit of the indemnitee's heirs, executors and administrators; provided,
however, that, except with respect to proceedings to enforce a right to
indemnification under Section 14(3) of the Company's Amended and Restated
Charter, the Company shall indemnify any such indemnitee in connection with a
proceeding (or part thereof) initiated by such indemnitee only if such
proceeding (or part thereof) was authorized by the Board of Directors of the
Company. This right to indemnification includes the right to be paid by the
Company the expenses incurred in defending any such proceeding in advance of its
final disposition ("advancement expenses") provided, however, that, if the
Tennessee Business Corporation Act so requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a director, officer or
employee shall be made only upon (i) delivery of written affirmation of the
indemnitee's good faith belief that any applicable standard of conduct required
by the Tennessee Business Corporation Act has been met, and (ii) delivery of an
undertaking, by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal that such indemnitee is not entitled
to be indemnified for such expenses under this paragraph or otherwise (an
"undertaking").
Under Section 14(3) of the Company's Amended and Restated Charter, if a
claim is not paid in full by the Company within sixty days after a written claim
has been received by the Company, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be twenty
days, the indemnitee may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim. If the indemnitee is
successful in whole or in part in any such suit or in any suit brought by the
Company to recover an advancement of expenses pursuant to the terms of the
undertaking, the indemnitee shall be entitled to also be paid the expense of
prosecuting or defending such a suit. In (i) any suit brought by the indemnitee
to enforce a right to indemnification hereunder (but not in a suit brought by
the indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and (ii) any suit by
II-1
<PAGE>
the corporation to recover an advancement of expenses pursuant to the terms of
the undertaking the corporation shall be entitled to such expenses upon a final
adjudication that, the indemnitee has not met the applicable standard of conduct
set forth in the Tennessee Business Corporation Act, as amended. Neither the
failure of the Company (including its board of directors, independent legal
counsel, or its shareholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Tennessee Business Corporation Act, nor an actual
determination by the corporation (including its Board of Directors, independent
legal counsel or its shareholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has failed to meet the applicable standard of conduct or be a defense to such
suit. In any suit brought by the indemnitee to enforce a right hereunder, or by
the Company to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to
indemnification or advancement expenses shall be on the Company.
Section 14(2) further provides that the rights to indemnification and to the
advancement of expenses conferred therein shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute, the
corporation's Amended and Restated Charter or Amended and Restated By-laws,
agreement, vote of shareholders or disinterested directors or otherwise.
Article II, Section 5 of the Company's By-Laws provides that any person made
or threatened to be made a party to a suit or proceeding by reason of the fact
that he or his intestate was, is, or shall be a director or officer or Audit
Committee member of the Company or at the request of the Company a director or
officer or Audit Committee member of another corporation controlled by the
Company, shall be indemnified by the Company to the maximum extend and upon the
conditions provided by the laws of the State of Tennessee, including Tennessee
Code Annotated, Sections 48-1-407 through 48-1-411.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See Index to Exhibits.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
II-2
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chattanooga, State of Tennessee, on June 4, 1998.
CHATTEM, INC.
BY: /S/ A. ALEXANDER TAYLOR, II
-----------------------------------------
A. Alexander Taylor, II
PRESIDENT AND CHIEF OPERATING OFFICER
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board of
/s/ ZAN GUERRY* Directors and Chief
- ------------------------------ Executive Officer June 4, 1998
Zan Guerry (principal executive
officer)
/s/ A. ALEXANDER TAYLOR, II President and Chief
- ------------------------------ Operating Officer, and June 4, 1998
A. Alexander Taylor, II Director
/s/ STEPHEN M. POWELL* Controller (principal
- ------------------------------ financial officer) June 4, 1998
Stephen M. Powell
/s/ ROBERT E. BOSWORTH* Director
- ------------------------------ June 4, 1998
Robert E. Bosworth
/s/ LOUIS H. BARNETT* Director
- ------------------------------ June 4, 1998
Louis H. Barnett
/s/ RICHARD E. CHENEY* Director
- ------------------------------ June 4, 1998
Richard E. Cheney
/s/ SCOTT L. PROBASCO, JR.* Director
- ------------------------------ June 4, 1998
Scott L. Probasco, Jr.
/s/ SAMUEL E. ALLEN* Director
- ------------------------------ June 4, 1998
Samuel E. Allen
<TABLE>
<S> <C> <C>
*By: /s/ A.
ALEXANDER
TAYLOR, II
------------
A. Alexander
Taylor, II
Attorney-in-fact
</TABLE>
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chattanooga, State of Tennessee, on June 4, 1998.
SIGNAL INVESTMENT & MANAGEMENT CO.
BY: /S/ A. ALEXANDER TAYLOR, II
-----------------------------------------
A. Alexander Taylor, II
PRESIDENT
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ A. ALEXANDER TAYLOR, II President and Director
- ------------------------------ (principal executive June 4, 1998
A. Alexander Taylor, II officer)
/s/ STEPHEN M. POWELL* Vice President, Treasurer
- ------------------------------ and Director (principal June 4, 1998
Stephen M. Powell financial officer)
/s/ ERIK L. SAVILLE* Assistant Vice President
- ------------------------------ and Director June 4, 1998
Erik L. Saville
/s/ HUGH F. SHARBER Secretary and Director
- ------------------------------ June 4, 1998
Hugh F. Sharber
<TABLE>
<S> <C> <C>
*By: /s/ A.
ALEXANDER
TAYLOR, II
------------
A. Alexander
Taylor, II
Attorney-in-fact
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER REFERENCES
- ----------- ---------------
<C> <S> <C>
1.1* Purchase Agreement dated March 20, 1998 by and among that Chattem, Inc., Signal Investment &
Management Co. and NationsBanc Montgomery Securities LLC ...................................
2.1 Asset Purchase Agreement dated February 22, 1998 by and among Bristol-Meyers Squibb Company,
Signal Investment & Management Co. and Chattem, Inc. ....................................... (1)
3.1 Amended and Restated Charter of Chattem, Inc. .............................................. (2)
3.2 Amended and Restated Bylaws of Chattem, Inc. ............................................... (3)
4.1* Indenture dated March 24, 1998, by and among Chattem, Inc., Signal Investment & Management
Co. and SouthTrust Bank, National Association...............................................
4.2 Form of Exchange Note (included in Exhibit 4.1).............................................
4.3* Registration Rights Agreement dated March 24, 1998 by and among Chattem, Inc., Signal
Investment & Management Co. and NationsBanc Montgomery Securities, LLC......................
5.1 Opinion and Consent of Miller & Martin LLP regarding validity of the Exchange Notes.........
10.1* Amended and Restated Credit Agreement (New Credit Agreement) dated as of March 24, 1998
among Chattem, Inc., Signal Investment & Management Co. and NationsBank of Tennessee, N.A.,
as agent....................................................................................
10.2* Amended and Restated Credit Agreement (Supplemental Credit Agreement) dated as of March 24,
1998 by and among Chattem, Inc., Signal Investment & Management Co. and NationsBank of
Tennessee, N.A., as agent ..................................................................
10.3 Form of Indenture dated August 3, 1994 between Chattem, Inc. and SouthTrust Bank of Alabama,
N.A. relating to the 12.75% Series B Senior Subordinated Notes due 2004..................... (4)
10.4 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. ........... (5)
10.5 First Amended and Restated Master Trademark License Agreement between Signal Investment &
Management Co. and Chattem, Inc., effective June 30, 1992................................... (6)
21.1* Subsidiaries of the Company.................................................................
23.1 Consent of Arthur Andersen LLP..............................................................
23.2* Consent of Price Waterhouse LLP.............................................................
23.3 Consent of Miller & Martin LLP (included in Exhibit 5.1)....................................
24.1 Power of Attorney (included on signature page)..............................................
25.1 Statement of Eligibility of Trustee.........................................................
27.1** Financial Data Schedule.....................................................................
99.1* Form of Letter of Transmittal...............................................................
99.2* Form of Notice of Guaranteed Delivery.......................................................
99.3* Instructions to Registered Holders and DTC Participants.....................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER REFERENCES
- ----------- ---------------
<C> <S> <C>
99.4 Form of Exchange Agent Agreement............................................................
</TABLE>
- ------------------------
* Filed as an exhibit to Registration Statement on Form S-4 dated May 26,
1998.
** Submitted only with the electronic filing of this document with the
Commission pursuant to Regulation S-T.
Previously filed as an exhibit to and incorporated by reference from:
(1) Form 8-K dated April 8, 1998.
(2) Form 10-K for the year ended November 30, 1992.
(3) Form 10-K for the year ended November 30, 1995.
(4) Form S-2 Registration Statement (No. 33-80770).
(5) Form 8-K dated June 26, 1997.
(6) Form 10-K for the year ended November 30, 1997.
<PAGE>
June 4, 1998
Chattem, Inc.
1715 West 38th Street
Chattanooga, Tennessee 37409
Signal Investment & Management Co.
1105 North Market Street, Suite 1300
Wilmington, Delaware 19890
Re: Chattem, Inc. and Signal Investment & Management Co.
Registration Statement on Form S-4
$200,000,000 8-7/8% Series B Senior Subordinated
Notes due 2008
Gentlemen:
We are acting as counsel to Chattem, Inc., a Tennessee
corporation (the "Company"), and Signal Investment & Management Co., a Delaware
corporation (the "Guarantor"), in connection with the registration under the
Securities Act of 1933, as amended, of $200,000,000 aggregate principal amount
of 8-7/8% Series B Senior Subordinated Notes due 2008 (the "Exchange Notes"),
pursuant to a Registration Statement on Form S-4 (the "Registration Statement").
The Exchange Notes will be issued pursuant to the terms of an Indenture, dated
March 24, 1998, between the Company and SouthTrust Bank, National Association,
as trustee (the "Indenture"), in exchange for the identical principal amount of
any and all of the Company's outstanding 8-7/8% Series A Senior Subordinated
Notes due 2008 (the "Series A Notes," which with the Exchange Notes are
sometimes referred to collectively as the "Notes"). In connection with the
foregoing, we have examined the Company's Charter and the Guarantor's
Certificate of Incorporation, the Company's and the Guarantor's Bylaws, the
corporate
<PAGE>
August 3, 1994
Page 2
proceedings taken by both the Company and the Guarantor to authorize the
offering, sale and issuance of the Notes, the Indenture (including the form of
the Exchange Notes), and the Registration Statement. We also have examined and
relied upon such other records, documents and other instruments in our judgment
are necessary or appropriate in order to express the opinions hereinafter set
forth.
Based upon the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the
state of Tennessee.
2. The Guarantor is a corporation duly organized,
validly existing and in good standing under the laws
of the state of Delaware.
3. The Exchange Notes have been duly authorized and,
when issued and exchanged for the Series A Notes in
accordance with the terms of the Exchange Offer
described in the Prospectus included in the
Registration Statement, will be validly issued and
binding obligations of the Company.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and further consent to the reference to us under
the caption "Legal Matters" in the Prospectus included in the Registration
Statement.
Very truly yours,
MILLER & MARTIN LLP
HFS/bbj
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of
this registration statement.
/s/ Arthur Andersen LLP
June 4, 1998
Chattanooga, Tennessee
<PAGE>
Exhibit 25.1
OMB APPROVAL
------------------------
OMB Number 3235-0110
Expires: March 31, 1994
Estimated average burden
hours per response....15
------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
Securities Act of 1933 File No: _________________
(If application to determine eligibility of trustee for delayed offering
pursuant to section 305(b)(2))
GENERAL INSTRUCTIONS
A. Rule as to the Use of Form T-1.
Form T-1 shall be used for statements of eligibility of corporations
designated to act as trustees under trust indentures to be qualified pursuant
to Sections 305 or 307 of the Trust Indenture Act of 1939. Form T-1 also
shall be used for statements of eligibility of foreign trustees under trust
indentures to be qualified pursuant to Sections 305 or 307, where a prior
order has been issued pursuant to Section 310(a)(1) or 304(d), or the
Commission has promulgated a rule under such sections permitting the trustee
to act as a sole trustee under the indenture to be qualified, Finally, Form
T-1 shall be used for applications to determine the eligibility of a trustee
pursuant to Section 305(b)(2) of the Act.
B. Obligations Deemed to be in Default.
Item 13 requires disclosure of defaults of the obligor on securities
issued under indentures under which the applicant is trustee.
If the obligor is not in default, the applicant is required to provide
responses to Items 1, 2, and 16 of Form T-1. In addition, Item 15 would be
applicable to foreign trustees. If the obligor is in default, the applicant
must respond to all of the items in the Form T-1.
An Obligor shall be deemed to be in default upon the occurrence of acts or
conditions as defined in the indenture, but exclusive of any period of grace
or requirement of notice.
C. Application of General Rules and Regulations.
The General Rules and Regulations under the Trust Indenture Act of 1939
are applicable to statements of eligibility on this form. Attention is
particularly directed to Rules 0-1 and 0-2 as to the meaning of terms used in
the rules and regulations. Attention is also directed to Rule 5a-3 regarding
the filing of statements of eligibility and qualification and to Rule 7a-16
regarding the inclusion of items, the differentiation between items and
answers, and the omissions of instructions.
D. Scope of Items and Instructions.
The items and instructions require information only as to the trustee,
unless the context clearly shows otherwise.
E. Calculation of Percentages of Securities.
The percentages of securities required by this form are to be calculated
in accordance with the provisions of Rule 10b-1.
F. Items Relating to Underwriters.
Wherever any item of the form requires information with respect to an
underwriter for the obligor, the information is to be given as to very person
who, within one year prior to the date of filing the statement of eligibility
and qualification, acted as an underwriter of any security of the obligor
outstanding on the date of filing the statement and as to every proposed
principal underwriter of the securities proposed to be offered. The term
"principal underwriter" means an underwriter in privity of contract with the
issuer of the securities as to which he is an underwriter.
<PAGE>
G. Coordination with Delayed Offering Registration Statement
When the Form T-1 is used for applications to determine the eligibility of
a trustee pursuant to Section 305(b)(2), the following provisions shall apply:
1. The file number under the Securities Act of 1933 for the delayed offering
registration statements to which the application applies shall be placed in
the upper right hand corner of the cover page of the Form T-1.
2. The description of the indenture securities included under "Title of
Securities" should specify whether the application relates to a single
tranche or to all of the securities registered pursuant to the delayed
offering registration statement.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE
PURSUANT TO SECTION 305(b)(2) / /
SouthTrust Bank, National Association
- -------------------------------------------------------------------------------
(Exact name of trustee as specified in its charter)
N/A 63-0022787
- -------------------------------------------------------------------------------
(Jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization if not a U.S. national bank)
100 Office Park Dr., Birmingham, Alabama 35223
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
N/A
- -------------------------------------------------------------------------------
(Name, address and telephone number of agent for service)
Chattem, Inc.
- -------------------------------------------------------------------------------
(Exact name of obligor as specified in its charter)
Tennessee 62-0156300
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1715 West 38th Street, Chattanooga, Tn. 37409
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
8 7/8% Senior Subordinated Notes Due 2008
- -------------------------------------------------------------------------------
(Title of the indenture securities)
Item 1. General Information.
Furnish the following information as to the trustee --
(a) Name and address of each examining or supervising authority to which
it is subject. SEE ATTACHED EXHIBIT "A"
(b) Whether it is authorized to exercise corporate trust powers. YES
Item 2. Affiliations with the obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation. NONE
Instructions.
1. The term "affiliate" is defined in Rule 0-2 of the General Rules and
Regulations under the Act. Attention is also directed to Rule 7a-26.
2. Include the name of each such affiliate and the names of all intermediary
affiliates, if any. Include the respective percentage of voting securities or
other bases of control giving rise to the affiliation.
Item 3. Voting securities of the trustee.
Furnish the following information as to each class of voting securities of
the trustee:
As of ________________________ (Insert date within 31 days).
2
<PAGE>
- --------------------------------------------------------------------------------
Col. A. Col. B.
Title of Class Amount Outstanding
- --------------------------------------------------------------------------------
Instruction. The term "voting security" is defined in Section 303(16) of the
Act.
Item 4. Trusteeships under other indentures.
If the trustee is a trustee under another indenture under which any other
securities, or certificates of interest or participation in any other
securities, of the obligor are outstanding, furnish the following information:
(a) Title of the securities outstanding under each such other indenture.
Chattem, Inc. 12.75% Class B Senior Subordinated Notes due 2004
(b) A brief statement of the facts relied upon as a basis for the claim
that no conflicting interest within the meaning of Section 310(b)(1)
of the Act arises as a result of the trusteeship under any such other
indenture, including a statement as to how the indenture securities
will rank as compared with the securities issued under such other
indenture.
Item 5. Interlocking directorates and similar relationships with the obligor
or underwriters. n/a
If the trustee or any of the directors or executive officers of the
trustee is a director, officer, partner, employee, appointee, or
representative of the obligor or of any underwriter for the obligor, identify
each such person having any such connection and state the nature of each such
connection.
Instructions.
1. Notwithstanding General Instruction F, the term "underwriter" as used in
this item does not refer to any person who is not currently engaged in the
business of underwriting.
2. The terms "employee," "appointee," and "representative," as used in this
item, do not include connections in the capacity of transfer agent,
registrar, custodian, paying agent, fiscal agent, escrow agent, or
depositary, or in any other similar capacity or connections in the
capacity of trustee, whether under an indenture or otherwise.
Item 6. Voting securities of the trustee owned by the obligor or its
officials. n/a
Furnish the following information as to the voting securities of the
trustee owned beneficially by the obligor and each director, partner, and
executive officer of the obligor:
As of ____________________ (Insert date within 31 days).
Instructions.
1. Names of persons who do not own beneficially any of the securities
specified may be omitted.
2. No information need be given in any case where the amount of voting
securities of the trustee, owned beneficially by the obligor and its
directors, partners, and executive officers, taken as a group, does not
exceed 1 percent of the outstanding voting securities of the trustee.
- --------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D
Percentage of Voting
Amount Owned Securities Represented by
Name of Owner Title of Class Beneficially Amount Given in Col. C
- --------------------------------------------------------------------------------
Item 7. Voting securities of the trustee owned by underwriters or their
officials. n/a
Furnish the following information as to the voting securities of the
trustee owned beneficially by each underwriter for the obligor and each
director, partner, and executive officer of each such underwriter:
As of ____________________ (Insert date within 31 days).
Instructions.
1. Instruction 1 to Item 6 shall be applicable to this item.
2. The name of each director, partner, or executive officer required to be
given in Column A shall be set forth under the name of the underwriter of
which he is a director, partner, or executive officer.
3. No information need be given in any case where the amount of voting
securities of the trustee owned beneficially by an underwriter and its
directors, partners, and executive officers, taken as a group, does not
exceed 1 percent of the outstanding voting securities of the trustee.
- --------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D
Percentage of Voting
Amount Owned Securities Represented by
Name of Owner Title of Class Beneficially Amount Given in Col. C
- --------------------------------------------------------------------------------
3
<PAGE>
Item 8. Securities of the obligor owned or held by the trustee. n/a
Furnish the following information as to securities of the obligor owned
beneficially or held as collateral security for obligations in default by the
trustee:
As of ____________________ (Insert date within 31 days).
Instructions.
1. As used in this item, the term "securities" includes only such securities
as are generally known as corporate securities, but shall not include any
note or other evidence of indebtedness issued to evidence an obligation to
repay monies lent to a person by one or more banks, trust companies, or
banking firms, or any certificate of interest or participation in any such
note or evidence of indebtedness.
2. For the purposes of this item the trustee shall not be deemed the owner or
holder of (a) any security which it holds as collateral security (as trustee
or otherwise) for an obligation which is not in default, or (b) any security
which it holds as collateral security under the indenture to be qualified,
irrespective of any default thereunder, or (c) any security which it holds as
agent for collection, or as custodian, escrow agent or depositary, or in any
similar representative capacity.
3. No information need be furnished under this item as to holdings by the
trustee of securities already issued under the indenture to be qualified or
securities issued under any other indenture under which the trustee is also
trustee.
4. No information need be given with respect to any class of securities where
the amount of securities of the class which the trustee owns beneficially or
holds as collateral security for obligations in default does not exceed 1
percent of the outstanding securities of the class.
<TABLE>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Col. A Col. B Col. C Col. D
Amount Owned Percentage of Class
Whether the Securities Beneficially or Held as Represented by
are Voting or Collateral Security for Amount Given
Title of Class Nonvoting Securities Obligations in Default in Col. C
- ---------------------------------------------------------------------------------------------------
</TABLE>
Item 9. Securities of underwriters owned or held by the trustee. n/a
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of an underwriter for the obligor,
furnish the following information as to each class of securities of such
underwriter any of which are so owned or held by the trustee:
As of ____________________ (Insert date within 31 days).
<TABLE>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Col. A Col. B Col. C Col. D
Amount Owned
Beneficially or Held as
Collateral Security for Percentage of Class
Title of Issuer Obligations in Default Represented by Amount
and Title of Class Amount Outstanding by Trustee Given in Col. C
- ---------------------------------------------------------------------------------------------------
</TABLE>
Instruction. Instructions 1,2 and 4 to Item 8 shall be applicable to this
item.
Item 10. Ownership or holdings by the trustee of voting securities of certain
affiliates or security holders of the obligor. n/a
If the trustee owns beneficially or holds as collateral security for
obligations in default voting securities of a person who, to the knowledge of
the trustee (1) owns 10 percent or more of the voting securities of the
obligor or (2) is an affiliate, other than a subsidiary, of the obligor,
furnish the following information as to the voting securities of such person:
As of ____________________ (Insert date within 31 days).
<TABLE>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Col. A Col. B Col. C Col. D
Amount Owned
Beneficially or Held as
Collateral Security for Percentage of Class
Title of Issuer Obligations in Default Represented by Amount
and Title of Class Amount Outstanding by Trustee Given in Col. C
- ---------------------------------------------------------------------------------------------------
</TABLE>
Instruction. Instructions 1,2 and 4 to Item 8 shall be applicable to this
item.
4
<PAGE>
Item 11. Ownership or holdings by the trustee of any securities of a person
owning 50 percent or more of the voting securities of the obligor. n/a
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of a person who, to the knowledge of
the trustee, owns 50 percent or more of the voting securities of the obligor,
furnish the following information as to each class of securities of such
person any of which are so owned or held by the trustee:
As of ____________________ (Insert date within 31 days).
<TABLE>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Col. A Col. B Col. C Col. D
Amount Owned
Beneficially or Held as
Collateral Security for Percentage of Class
Title of Issuer Obligations in Default Represented by Amount
and Title of Class Amount Outstanding by Trustee Given in Col. C
- ---------------------------------------------------------------------------------------------------
</TABLE>
Instruction. Instructions 1,2 and 4 to Item 8 shall be applicable to this
item.
Item 12. Indebtedness of the Obligor to the Trustee. n/a
Except as noted in the instructions, if the obligor is indebted to the
trustee, furnish the following information:
As of ____________________ (Insert date within 31 days).
- --------------------------------------------------------------------------------
Col. A Col. B Col. C
Nature of Indebtedness Amount Outstanding Date Due
- --------------------------------------------------------------------------------
Instructions.
1. No information need be provided as to: (a) the ownership of securities
issued under any indenture, or any security or securities having a maturity
of more than one year at the time of acquisition by the indenture trustee;
(b) disbursements made in the ordinary course of business in the capacity
of trustee of an indenture, transfer agent, registrar, custodian, paying
agent, fiscal agent or depositary, or other similar capacity; (c)
indebtedness created as a result of services rendered or premises rented; or
indebtedness created as a result of goods or securities sold in a cash
transaction; (d) the ownership of stock or of other securities of a
corporation organized under Section 25(a) of the Federal Reserve Act, as
amended, which is directly or indirectly a creditor of an obligor upon the
indenture securities; or (e) the ownership of any drafts, bills of exchange,
acceptances, or obligations which fall within the classification of
self-liquidating paper.
2. Information should be given as to the general type of indebtedness, such
as lines of credit, commercial paper, long-term notes, mortgages, etc.
Item 13. Defaults by the Obligor. none
(a) State whether there is or has been a default with respect to the
securities under this indenture. Explain the nature of any such default
(b) If the trustee is a trustee under another indenture under which any
other securities, or certificates of interest or participation in any
other securities, of the obligor are outstanding, or is trustee for
more than one outstanding series of securities under the indenture,
state whether there has been a default under any such indenture or
series, identify the indenture or series affected, and explain the
nature of any such default.
Item 14. Affiliations with the Underwriters. none
If any underwriter is an affiliate of the trustee, describe each such
affiliation.
Instructions.
1. The term "affiliate" as defined in Rule 0-2 of the General Rules and
Regulations under the Act. Attention is directed to Rule 7a-26.
2. Include the name of each such affiliate and the names of all intermediate
affiliates, if any. Indicate the respective percentage of voting securities
or other bases of control giving rise to the affiliation.
Item 15. Foreign Trustee. none
Identify the order or rule pursuant to which the foreign trustee is
authorized to act as sole trustee under indentures qualified or to be
qualified under the Act.
Item 16. List of exhibits.
List below all exhibits filed as a part of this statement of eligibility.
5
<PAGE>
Instructions. Subject to Rule 7a-29 permitting incorporation of exhibits by
reference, the following exhibits are to be filed as a part of the statement
of eligibility of the trustee. Such exhibits shall be appropriately lettered
or numbered for convenient reference. Exhibits incorporated by reference may
be referred to by the designation given in the previous filing. Where
exhibits are incorporated by reference, the reference shall be made in the
list of exhibits called for under Item 16. If the certificate of authority to
commence business (Exhibit 2) and/or the certificate to exercise corporate
trust powers (Exhibit 3) is contained in another exhibit, a statement to that
effect shall be made, identifying the exhibit in which such certificates are
included. If an applicable exhibit is not in English, a translation in
English shall also be filed. In response to Exhibit 7, foreign trustees shall
provide financial information sufficient to provide the information required
by Section 310(a)(2) of the Act.
1. A copy of the articles of association of the trustee as now in effect.
2. A copy of the certificate of authority of the trustee to commence
business, if not contained in the articles of association.
3. A copy of the authorization of the trustee to exercise corporate trust
powers, if such authorization is not contained in the documents specified in
paragraph (1) or (2) above.
4. A copy of the existing bylaws of the trustee, or instruments corresponding
thereto.
5. A copy of each indenture referred to in Item 4, if the obligor is in
default.
6. The consents of United States institutional trustees required by Section
321(b) of the Act.
7. A copy of the latest report of condition of the trustee published pursuant
to law or the requirements of its supervising or examining authority.
8. A copy of any order pursuant to which the foreign trustee is authorized to
act as sole trustee under indentures qualified or to be qualified under the
Act.
9. Foreign trustees are required to furnish a consent to service of process
(see Rule 10a-4 under the Act).
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the trustee,
SouthTrust Bank, National Association, a NATIONAL Association state [form of
organization] organized and existing under the laws of Alabama, has duly
caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Birmingham, and
State [or other jurisdiction] of Alabama, on the 20th day of May, 1998.
SouthTrust Bank,
National Association
----------------------------------------
(Trustee)
By: /s/ John Hiott
----------------------------------------
(Name and Title)
John Hiott
Group Vice President and Manager-
Corporate Trust
Instruction. The name of each person signing the statement of eligibility
shall be typed or printed beneath the signature.
6
<PAGE>
Exhibit "A"
GENERAL INFORMATION
Item 1.
Furnish the following information as to the trustee--
Name and address of each examining or supervising authority to which it is
subject.
Comptroller of the Currency
Southeastern District Office
Atlanta, Georgia
Federal Reserve Bank of Atlanta
Atlanta, Georgia
Federal Deposit Insurance Corporation
Washington, D.C.
<PAGE>
Exhibit "B"
Item 4. Trusteeships under other indentures.
(b) No conflicting interest within the meaning of Section 301(b)(i) of the Act
arises as a result of the Trustee's trusteeship under another indenture
under which notes of the obligor (the "Existing Notes") are outstanding,
because the Existing Notes under such indenture are not in default. The
indenture securities will rank pari passu with the Existing Notes.
<PAGE>
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act
of 1939 in connection with the proposed issue of 8.875% Senior Subordinated
Notes Due 2008 by Chattem, Inc., we hereby consent that reports of
examination by Federal, State, Territorial, or District authorities may be
furnished by such authorities to the Securities and Exchange Commission upon
request therefor.
SouthTrust Bank, National Association
By: /s/ John Hiott
-------------------------------------
Group Vice President and Manager--
Corporate Trust Department
Dated: May 22, 1998
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, SouthTrust Bank,
National Association, has duly caused this statement of eligibility to be
signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of Birmingham and the State of Alabama, on the 22nd day of May, 1998.
SouthTrust Bank, National Association
By: /s/ John Hiott
-------------------------------------
John Hiott
Group Vice President and Manager
Dated: May 22, 1998
<PAGE>
Comptroller of the Currency
Administrator of National Banks
Washington, D.C. 20219
CERTIFICATE
I, Eugene A. Ludwig, Comptroller of the Currency, do hereby certify that:
1. The Comptroller of the Currency, pursuant to Revised Statutes 324, et
seq., as amended, 12 U.S.C. 1, et seq., as amended, has possession, custody
and control of all records pertaining to the chartering, regulation and
supervision of all National Banking Associations.
2. "SouthTrust Bank of Alabama, National Association", Birmingham, Alabama,
(Charter No. 14569), is a National Banking Association formed under the laws
of the United States and is authorized thereunder to transact the business of
banking on the date of this Certificate.
IN TESTIMONY WHEREOF, I have hereunto
subscribed my name and caused my seal
of office to be affixed to these presents
at the Treasury Department, in the City
of Washington and District of Columbia,
this 29th day of March, 1996.
/s/ Eugene A. Ludwig
-----------------------------------------
Comptroller of the Currency
<PAGE>
Comptroller of the Currency
Administrator of National Banks
Southeastern District
Marquis One Tower, Suite 600
245 Peachtree Center Ave., N.E.
Atlanta Georgia 30303
June 2, 1997
Anitta Pross
Senior Administrative Officer
SouthTrust Corporation
P.O. Box 2554
Birmingham, Alabama 35290
Re: 97-SE-02-0019 SouthTrust Bank, National Association
Birmingham, Alabama
Dear Ms. Pross:
This letter is the official certification of the Comptroller of the Currency
(OCC) to merge SouthTrust Bank of South Mississippi, Biloxi, Mississippi,
SouthTrust Bank of North Carolina, Charlotte, North Carolina, SouthTrust Bank
of Northwest Florida, Marianna, Florida, SouthTrust Bank of Russell County,
Phenix City, Alabama, SouthTrust Bank of Florida, National Association, St.
Petersburg, Florida, SouthTrust Bank of Georgia, National Association,
Atlanta, Georgia, SouthTrust Bank of Columbus, National Association,
Columbus, Georgia, SouthTrust Bank of Tennessee, National Association,
Nashville, Tennessee, and SouthTrust Bank of South Carolina, National
Association, Charleston, South Carolina, into SouthTrust Bank of Alabama,
National Association, Birmingham, Alabama, effective as of June 2, 1997. The
resulting bank title is SouthTrust Bank, National Association, charter number
14569, with its head office to be located in Birmingham, Alabama.
This is also the official OCC authorization given to SouthTrust Bank,
National Association to operate the target institution's former head offices
and their branches as branches. Enclosed is a listing of the newly authorized
branches and their assigned OCC branch numbers.
Very truly yours,
/s/ John O. Stein
- -----------------
John O. Stein
Corporate Manager
Enclosure
<PAGE>
RESOLUTIONS TO BE ADOPTED BY THE
BOARD OF DIRECTORS OF
SOUTHTRUST BANK OF ALABAMA, NATIONAL ASSOCIATION
RESOLVED by the Board of Directors of SouthTrust Bank of Alabama, National
Association, a national banking association ("ST-Bank"), that ST-Bank enter
into an agreement and plan of merger (the "Merger Agreement"), among
ST-Bank and the other named direct and indirect banking subsidiaries of
SouthTrust Corporation, a Delaware corporation, set forth and listed on
Exhibit A hereto (the "Subsidiary Banks"), providing for the merger (the
"Merger") of the Subsidiary Banks with and into ST-Bank, on substantially
the terms and conditions set forth in the Merger Agreement;
RESOLVED FURTHER, that the appropriate officers of ST-Bank be, and they
hereby are, authorized and empowered to approve the form and terms of the
Merger Agreement which shall provide for the Merger on substantially the
terms and conditions set forth in the Merger Agreement, with such additional
terms and conditions as the officers of ST-Bank may approve, the approval of
the form and terms of the merger Agreement to be conclusively evidenced by
its execution and delivery thereof;
RESOLVED FURTHER, that the appropriate officers of ST-Bank be, and they
hereby are, authorized and directed to execute, attest the execution of,
affix the seal of ST-Bank to, and deliver the Merger Agreement in the name of
and on behalf of ST-Bank;
RESOLVED FURTHER, that the Board of Directors of ST-Bank hereby recommends
to the sole shareholder of ST-Bank the approval of the Merger Agreement and
hereby directs that the appropriate officers of ST-Bank cause the Merger
Agreement to be submitted to its sole shareholder for its approval;
RESOLVED FURTHER, that the appropriate officers of ST-Bank be, and they
hereby are, authorized and directed to file all necessary applications, and
other documents with the appropriate regulatory agencies in order to obtain
regulatory approval of the Merger;
RESOLVED FURTHER, that the Board of Directors does hereby find, determine
and declare that it is advisable that in connection with the Merger that the
Articles of Association of ST-Bank be, upon the effectiveness of the Merger,
amended and restated in their entirety as set forth in Exhibit B to the
Merger Agreement;
1
<PAGE>
RESOLVED FURTHER, that the Board of Directors of ST-Bank does hereby
recommend the adoption of the foregoing amended and restated Articles of
Association to the sole shareholder of ST-Bank;
RESOLVED FURTHER, that the Board of Directors does hereby find, determine
and declare that it is advisable that in connection with the Merger, the
bylaws of ST-Bank be, upon the effectiveness of the Merger, amended and
restated in their entirety as set forth in Exhibit C to the Merger Agreement;
RESOLVED FURTHER, that the Board of Directors of ST-Bank does hereby
recommend the adoption of the foregoing amended and restated Bylaws to the
sole shareholder of ST-Bank;
RESOLVED FURTHER, that all acts and deeds performed by the officers of
ST-Bank or counsel to ST-Bank prior to or on the date of these resolutions
that are within the authority confirmed hereby are hereby ratified,
confirmed, approved, and adopted as the authorized acts and deeds of ST-Bank;
and
RESOLVED FURTHER, that the appropriate officers of ST-Bank be, and they
hereby are, authorized and directed to do any and all other or further
things, and to execute any and all other or further documents and agreements,
all on behalf of ST-Bank, as they, in their sole discretion may deem
necessary or desirable to effectuate the purposes of the foregoing
resolutions.
2
<PAGE>
STATE OF ALABAMA
STATE BANKING DEPARTMENT
101 SOUTH UNION STREET
MONTGOMERY, ALABAMA 36130-0901
Telephone (205) 242-3452
Fax (205) 240-3014
March 4, 1994
CERTIFICATION OF FIDUCIARY POWERS
TO WHOM IT MAY CONCERN:
I hereby certify, as Acting Superintendent of Banks of the State of Alabama,
that SouthTrust Bank of Alabama, National Association is authorized by the
laws of the State of Alabama, which is the state of its domicile, to act as a
fiduciary in this state.
Witness my hand this the 4th day of March 1994.
/s/ Kenneth R. McCartha
------------------------
Kenneth R. McCartha
Acting Superintendent of Banks
<PAGE>
SOUTHTRUST BANK, NATIONAL ASSOCIATION
BIRMINGHAM, ALABAMA
BY-LAWS AND ARTICLES OF ASSOCIATION
AS AMENDED AND RESTATED
JUNE 2, 1997
(as further amended on July 15, 1997)
I hereby certify this is a true and correct copy of the By-Laws of SouthTrust
Bank of Alabama, National Association so of this twentieth day of May, 1998.
/s/ Sandra B. Goddard
---------------------------------------
Sandra B. Goddard
Senior Vice President/Cashier
<PAGE>
ARTICLE ONE
Shareholders
Section 1.
The annual meeting of shareholders of the Association shall be held in the
City of Birmingham, State of Alabama, at the Association's principal offices
on the third Tuesday of January of each year at such time as may be fixed by
the Board of Directors of the Association, and if a legal holiday, then on
the next following banking day, or at such other date, time and place as may
be fixed by the Board of Directors and stated in the notice of the meeting.
At the annual meeting of shareholders, the shareholders shall elect a Board
of Directors of the Association and transact such other business as properly
may be brought before such meeting. Written notice of the annual meeting of
shareholders, stating the date, place and time thereof, shall be mailed,
postage prepaid, at least ten days and not more than sixty days prior to the
date thereof, to each shareholder entitled to vote in respect of the matters
to be considered at such annual meeting of shareholders.
Section 2.
The Board of Directors of the Association, or any shareholder owning, in
the aggregate, not less than 10 percent of the outstanding capital stock of
the Association entitled to vote in respect of any matter to be considered at
any special meeting of shareholders, may call a special meeting of
shareholders at any time. Unless otherwise provided by law, written notice of
any special meeting of shareholders, stating the date, place, time and
purposes thereof, shall be mailed, postage prepaid, at least ten days and not
more than sixty days prior to the date thereof, to each shareholder entitled
to vote at such special meeting of shareholders.
Section 3.
The holders of the outstanding common stock of the Association shall be
entitled to one vote for each share held by them with respect to all matters
coming before any meeting of shareholders as to which a vote or consent of
the shareholders is required, including the election of directors. Except as
otherwise provided by law or by the Amended and Restated Articles of
Association, a majority of the outstanding capital stock of the Association
entitled to vote thereat shall constitute a quorum in all meetings of the
shareholders, and a majority of the votes cast shall decide every issue or
question presented to any meeting of the shareholders, except that the Board
of Directors of the Association may increase the vote of the shareholders
required with respect to any such matter or question.
1
<PAGE>
Section 4.
At any meeting of shareholders, a shareholder entitled to vote thereat may
be represented by proxy duly appointed by such shareholder in writing. Any
person or group of persons, including directors or attorneys for the
Association, may be designated to act as proxy for any such shareholders, but
officers or employees of the Association may not be designated to act as
proxy.
Section 5.
The Board of Directors of the Association may fix a record date for
determining shareholders of the Association entitled to notice of and to vote
at any meeting of the shareholders of the Association, which date shall be a
date not in excess of sixty days prior to the date of such meeting.
Section 6.
If a meeting of shareholders is adjourned to a different date, time or
place, notice need not be given of the new date, time or place, provided that
the new date, time or place is announced at the meeting before adjournment,
unless an additional item of business is to be considered at such adjourned
meeting or unless the Association becomes aware of an intervening event
materially affecting any matter to be voted on at such adjourned meeting. If
a new record date for the adjourned meeting is fixed, notice of the adjourned
meeting, stating the date, time, place and purposes thereof, shall be given
to each shareholder of record entitled to vote at such adjourned meeting.
ARTICLE TWO
Directors and Other Positions
Section 1.
(a) The business and the affairs of the Association shall be managed and
administered by the Board of Directors of the Association, which shall
consist of not less than five nor more than twenty-five persons, the exact
number of which, within such limits, to be established from time to time by
the Board of Directors or by the holders of the majority of the outstanding
capital stock of the Association entitled to vote in respect of the election
of directors of the Association.
(b) Nominations of persons for election to the Board of Directors of the
Association may be made by the Board of Directors or by any holder of any
outstanding capital stock of the
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Association entitled to vote in respect of the election of directors of the
Association. Nominations, other than those made by or on behalf of the Board
of Directors of the Association, shall be made in writing and shall be
delivered or mailed to the Chairman of the Board or the President of the
Association and to the Comptroller of the Currency, Washington, D.C., not
less than fourteen days nor more than fifty days prior to any meeting of
shareholders called for the election of directors, provided, however, that if
less than twenty-one days' notice of the meeting is given to the
shareholders, such nomination shall be mailed or delivered to the Chairman of
the Board or the President of the Association and to the Comptroller of the
Currency not later than the close of business on the seventh day following
the day on which the notice of meeting was mailed. Such notification shall
contain the following information to the extent known to the notifying
shareholder: (a) the name and address of each proposed nominee; (b) the
principal occupation of each proposed nominee; (c) the total number of shares
of capital stock of the bank that will be voted for each proposed nominee;
(d) the name and residence address of the notifying shareholder; and (e) the
number of shares of capital stock of the Bank owned by the notifying
shareholder. Nominations not made in accordance herewith may, in the
discretion of the chairman of the meeting, be disregarded by the chairman of
the meeting, and if so disregarded by the chairman of the meeting, the
inspectors of election, or the persons performing a similar duty, may
disregard all votes cast for such nominees.
(c) Directors need not be elected by written ballot, unless the chairman
of the meeting otherwise determines.
(d) Directors elected at any meeting of shareholders shall serve for the
ensuing year and until their successors are elected and shall qualify,
subject to other provisions hereof and subject to the ability of the holders
of a majority of the outstanding capital stock entitled to vote in respect
of the election of directors to remove a director, with or without cause, at
any time. No director shall act as a director until he shall have taken the
oath of office required by law.
Section 2.
All vacancies on the Board of Directors occurring in the intervals between
meetings of the shareholders may be filled by the Board of Directors.
Section 3.
The Board of Directors shall meet immediately upon the adjournment of the
meeting of shareholders at which such directors have been elected, or at such
other time as the Board of Directors may determine, and following such
initial meeting, the Board of Directors shall hold regular meetings on the
third Tuesday of each October, January, April, and July of each year at 10:00
a.m. at the principal offices of the Association, unless said Tuesday is a
legal holiday, in which case, the meeting shall be held on the next following
banking day at the same place and hour.
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Section 4.
Special meetings of the Board of Directors may be called by the Chairman
of the Board, the President or any three members of the Board of Directors.
Each member of the Board of Directors shall be given a reasonable advance
notice of any special meeting of the Board of Directors, stating the date,
time and place of such special meeting, which notice may be given in writing
or in person or by telegram, telephone or other reasonable means.
Section 5.
Each director of the Association who is not an officer or employee of the
Association shall be entitled to an attendance fee for each meeting of the
Board of Directors and a quarterly retainer fee, the amount of such fees to
be established from time to time by the Human Resources Committee of the
Board of Directors.
Section 6.
A majority of the entire Board of Directors is required to constitute a
quorum of the Board of Directors authorized to transact business at any
meeting of the Board of Directors. Except as otherwise provided by law, the
Amended and Restated Articles of Association or the Amended and Restated
By-laws, an act of the majority of the directors present at a meeting of the
Board of Directors, at which a quorum is present, shall be the act of the
Board of Directors. In the absence of a quorum, no business shall be
transacted except that the members of the Board of Directors present may
adjourn such meeting from time to time until a quorum is secured.
Section 7.
If a majority of the directors present at any meeting of the Board of
Directors so determines, any action of the Board of Directors may be
conducted by written ballot.
Section 8.
At the initial meeting of the Board of Directors after each annual meeting
of shareholders, the Board of Directors shall elect the committees and
officers contemplated by these Amended and Restated By-laws.
Section 9.
(a) Any director of the Association or any member of any Area Board who
has reached his or her 68th birthday or who has retired from his or her
principal business position or occupation will not be eligible for
re-election as director or as a member of a Area Board; provided, however,
that the foregoing provision relating to retirement from such person's
principal business
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position or occupation shall not apply to any director who has served as
Chairman of the Board of the Association.
Section 10.
A director of the Association is eligible for election as a director
emeritus if such person is ineligible for re-election as a director of the
Association under Section 9 above or if such person has served as a director
of the association for at least five years and voluntarily declines to stand
for re-election as a director. Immediately following each annual meeting of
shareholders, or from time to time as the Board of Directors may determine,
the Board of Directors, in its discretion, may elect one or more eligible
persons to serve as a director emeritus for the ensuing year or until his or
her successor is elected and shall qualify. Notwithstanding the foregoing,
the Board of Directors of the Association may remove, with or without cause,
a director emeritus from office at any time. If requested by the Board of
Directors, a director emeritus may attend meetings of the Board of Directors,
but shall not have voting power or power of final decision on any matter
concerning the business or affairs of the Association, and his or her
presence at any meeting of the Board of Directors shall not be counted in the
determination of a quorum. A director emeritus shall not have the same
responsibilities and liabilities imposed by law and banking regulation upon
members of the Board of Directors. A director emeritus shall receive such
fees as the Board of Directors may from time to time determine. A director
emeritus shall not be required to own qualifying shares of Common Stock of
SouthTrust Corporation.
Section 11.
Immediately following each annual meeting of shareholders, or from time to
time as the Board of Directors may determine, the Board of Directors of the
Association may elect persons to serve as advisory or honorary members of the
Board of Directors, and in this regard, may establish, in its discretion and
by appropriate resolution, separate advisory or honorary boards in each city
or other geographical area in which the Association transacts business (each
advisory or honorary board being hereinafter referred to as the "Area
Board"). Members of each Area Board shall be elected to serve for the
ensuing year and until their successors are elected and shall qualify.
Notwithstanding the foregoing, the Board of Directors of the Association may
remove, with or without cause, any member of any Area Board at any time. The
members of the Area Boards shall assist the Board of Directors and the
officers of the Association in business development, with particular emphasis
being placed upon business development in the city or other geographical area
with respect to which such members have been designated, and shall have such
other duties and functions as the Board of Directors, by appropriate
resolution, shall determine; provided, however, that the members of the Area
Boards shall not have power of final decision on any matter concerning the
business or affairs of the Association. If requested by the Board of
Directors, the members of the Area Boards shall attend meetings of the Board
of Directors of the Association, but shall not have voting power, and the
presence of any Area Board member at any meeting of the Board of Directors
shall not be counted in the determination of a quorum. Members of the Area
Boards shall not be deemed to have the responsibilities and liabilities
imposed upon directors of the Association
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by law and banking regulations. Members of the Area Boards may receive such
fees as the Human Resources Committee of the Board of Directors may from time
to time determine. The members of each Area Board shall not be required to
own qualifying shares of Common Stock of SouthTrust Corporation.
The provisions of the Amended and Restated Articles of Association and the
Amended and Restated By-laws of the Association governing the conduct of
meetings of the Board of Directors, including, without limitation, the time
and place of any such meeting, the power to convene or call a meeting, the
giving of notice of any meeting, and the quorum and voting requirements
thereof, shall apply to each Area Board, and meetings and other business of
each Area Board shall be convened and conducted in accordance with such
provisions.
The Chief Executive Officer of the city or other geographical area for
which any Area Board is established shall serve as an ex officio member of
any such Area Board. In addition, subject to the other notice provisions
contained herein, the Chief Executive Officer of the city or other
geographical area for which any Area Board is established shall be entitled
to convene or call meetings of any such Area Board and shall be entitled to
attend and vote in respect of all matters coming before meetings of any such
Area Board.
ARTICLE THREE
Officers
Section 1.
The officers of the Association shall be a Chairman of the Board of
Directors, who shall serve as Chief Executive Officer, and a President, who
shall serve as Chief Administrative Officer, both of whom shall be directors;
one or more Vice Presidents, one or more of whom may be designated as
Executive Vice Presidents, one or more of whom may be designated as Senior
Vice Presidents; and one or more of whom may be designated as Group Vice
Presidents; one or more Assistant Vice Presidents; a Cashier; a Secretary; a
Comptroller; one or more Executive Vice Presidents and Trust Officers, Senior
Vice Presidents and Trust Officers, Vice Presidents and Trust Officers and
Assistant Vice Presidents and Assistant Trust Officers; and such other
officers as may, from time to time, be appointed, or elected, by the Board of
Directors to perform such duties as may be designated by the Board of
Directors of the Association. The same person may be elected to more than one
of such offices, provided that no person may be President and Cashier at the
same time. If the office of the Chairman of the Board of Directors becomes
vacant, the powers and duties herein vested in and imposed upon the holder of
that office shall be vested in and discharged by the President, and the
number of persons constituting the Executive Committee of the Board of
Directors shall be correspondingly decreased while any such vacancy continues.
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Section 2.
The Chairman of the Board or, in his absence, the President shall preside
at all meetings of the Board of Directors and, in case of absence or
inability to act of the Chairman of the Board and of the President, the Board
of Directors shall appoint one of their members to preside during such
absence or inability.
The Chairman of the Board, or in his absence, the President shall preside
at all meetings of the Executive Committee of the Board of Directors, and, in
case of absence or inability to act of the Chairman of the Board and the
President, the Executive Committee shall elect one of its members to preside
during such absence or inability.
The Chairman of the Board shall exercise general supervision of the
business and affairs of the Association, and, without limiting the foregoing,
shall act as the Chief Executive Officer of the Association. In the absence
of the Chairman of the Board, the powers and duties hereby vested in and
imposed upon such person shall be exercised by the President. In the absence
of both the Chairman of the Board and the President, those powers and duties
shall be exercised by such officer of the Association as may have been
designated for that purpose by the Chairman of the Board or the President, as
the case may be. If none has been so designated by either thereof, the Board
of Directors shall designate an officer of the Association to act in such
capacity.
Section 3.
The President shall have general executive and administrative powers with
respect to the business and affairs of the Association and shall have and may
exercise any and all other powers and duties pertaining by law, regulation or
practice to the office of President. The President also shall have and may
exercise such further powers and duties as may from time to time be assigned
or conferred upon him by the Board of Directors of the Association.
Section 4.
The Vice Presidents of the Association shall perform such duties and
possess such powers as may be directed and delegated by the Board of
Directors; the Executive Vice President(s) shall rank in priority over all
other Vice Presidents; and the Senior Vice President(s) and Group Vice
President(s) shall rank below any Executive Vice President but shall rank in
priority and in presiding over all other Vice Presidents.
Section 5.
The Secretary shall attend all meetings of the Board of Directors and
record all the proceedings of the meetings of the Board of Directors in a
book to be kept for that purpose, which will be housed in the office of the
Secretary. The Secretary shall give, or cause to be given, notice of all
meetings of the Board of Directors, and shall perform such other duties as
may be prescribed
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by the Board of Directors. The Secretary shall have the custody of the
corporate seal of the Association and he or she, or in the Secretary's
absence, the Cashier or an Assistant Secretary, or any other officer of the
Association designated by the Board of Directors, shall have authority to
affix the same to any instrument requiring it. When so affixed, it may be
attested by his or her signature or by the signature of the Cashier. The
Board of Directors may give general authority to any other officer to affix
the seal of the Association and to attest the affixing by his signature.
Section 6.
The Cashier shall have the custody of such property and assets of the
Association as may be entrusted to him or her by the Board of Directors. In
the absence, removal or other disability of the Cashier, the Chairman of the
Board or the President shall designate an officer for that purpose who shall
perform his or her duties until action by the Board of Directors or Executive
Committee.
Section 7.
The Chairman of the Board, the President, any Executive Vice President,
any Senior Vice President, any Group Vice President or any Vice President
shall have the power and authority to execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Association, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and the execution thereof shall be expressly delegated by
the Board of Directors to some other officer or agent of the Association.
Section 8.
The Executive Vice President and Trust Officer, each Senior Vice President
and Trust Officer and any other officer designated by the Board of Directors
are hereby authorized to make, execute and acknowledge all bonds,
certificates, deeds, mortgages, notes, releases, leases, agreements,
contracts, bills of sale, assignments, transfers, powers of attorney or
substitution, proxies to vote stock, or any other instrument in writing that
may be necessary in the purchase, sale, mortgage, lease, assignment,
transfer, management or handling, in any way, of any property of any
description held or controlled by the Association in its corporate or in any
fiduciary capacity; and shall have such other duties and powers as shall be
designated by the Board of Directors. The Executive Vice President and Trust
Officer shall exercise general supervision and management over the affairs of
the Trust and Financial Services Division of the Association. The officers
named above shall exercise the authority granted above in compliance with
various policies and procedures as may be approved by the Board of Directors
or the Trust Policy Committee from time to time.
Section 9.
The other officers of the Association shall perform such duties as may be
prescribed by the Board of Directors, the Chairman of the Board or the
President.
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Section 10.
Any office described in Sections 1 through 6 of Article Three of the
Amended and Restated By-laws may, by appropriate resolution adopted by the
Board of Directors of the Association, be established in respect of any city
or other geographical area in which the Association transacts business and
the Board of Directors of the Association may elect persons to fill any such
office created thereby in Section 1 through 6 of Article Three hereof. In
such event, the duties and responsibilities assigned to each officer of the
Association also shall constitute the duties and responsibilities of the
person serving in a comparable office with respect to any such city or other
geographical area, and such persons shall be deemed officers of the
Association, except that, in the latter case, such duties and
responsibilities shall be limited to the operations of the Association in the
city or other geographical area with respect to which such person has been so
designated, and provided that there shall be only one Cashier of the
Association. Any person designated by the Board of Directors to serve as an
officer with respect to any city or other geographical area shall be given
such title as the Board of Directors may determine; provided, however, that
such titles shall distinguish such persons from those persons holding
comparable positions with the Association.
Section 11.
The officers of this Association shall receive such compensation as may be
fixed by the Board of Directors or, if the Board of Directors directs, and
following advice or consultation with such persons as the Board of Directors
deems appropriate, the Human Resources Committee.
Section 12.
The Chairman of the Board may suspend any officer of the Association
except the President until the next regular or called meeting of the Board of
Directors, and any officer of this Association may be removed by a majority
of the Board of Directors at any regular or called meeting of the Board of
Directors.
Section 13.
Bonds shall be required of the officers, tellers, and other employees in
such amounts as may be designated by the Board of Directors.
Section 14.
The officers shall hold office from the time of their respective elections
until the first meeting of the Board of Directors following the next annual
meeting of the shareholders or until their successors shall be elected and
qualify; provided, however, that the Board of Directors may remove, with or
without cause, any officer of the Association at any time.
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ARTICLE FOUR
Conveyances, Transfers and Contracts
Section 1.
The Chairman of the Board or the President is authorized, in his
discretion, to do and perform any and all corporate and official acts in
carrying on the business of the Association, either of its own or when acting
in any fiduciary capacity whatsoever. Each is hereby empowered, in his
discretion, to appoint all necessary agents or attorneys. The Chairman of the
Board, the President, any Executive Vice President, any Senior Vice
President, any Group Vice President or any Vice President is also authorized
to make, execute and acknowledge all deeds, mortgages, releases, leases,
agreements, contracts, bills of sale, assignments, transfers, powers of
attorney or of substitution, proxies to vote stock, or any other instrument
in writing that may be necessary in the purchase, sale, mortgage, lease,
assignment, transfer, management, or handling in any way of any property of
any description, held or controlled by the Association, either in its own
right or in any fiduciary capacity, and the Secretary or Cashier is
authorized to attest and affix the corporate seal to any and all instruments
in writing requiring such attestation or which are executed under seal. The
enumeration of particular powers in this By-law shall not restrict, or be
taken to restrict, in any way the general powers and authority herein given
to said officer.
Section 2.
The Chairman of the Board, the President, any Executive Vice President,
Senior Vice President, Group Vice President, Vice President or Assistant Vice
President, including those persons serving in such capacities who also carry
the designation of Trust Officer, the Comptroller, the Cashier, or any
employee so designated by the Chairman of the Board or the President, is
authorized and empowered to receive and give receipts for money due and
payable to the Association from any source whatever and to sign and endorse
checks, drafts and warrants in its name or on its behalf.
Section 3.
The Chairman of the Board, the President, any Executive Vice President,
Senior Vice President, Group Vice President or Vice President, including
those persons serving in such capacities who also carry the designation of
Trust Officer, shall have full power and authority to sign and execute any
and all trustees' certificates executed by the Association or any certificate
of any character pertaining to any activity or condition in the Trust and
Financial Services Division of the Association and also shall have full power
and authority to sign any acceptance of any trust shall have been granted by
such directors, officers or committees as shall then be authorized by the
Trust
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Policy Committee to grant such approval and (ii) that the giving of such
approval shall be made a matter of written record.
ARTICLE FIVE
Committees
Section 1.
EXECUTIVE COMMITTEE. The Board of Directors shall, at its initial meeting
after its election in each year, elect from among their number a committee of
three or more who, with the Chairman of the Board and the President of the
Association, acting as ex officio members, shall constitute the Executive
Committee of the Board of Directors. Each member of the Executive Committee
shall serve for the ensuing year and until his or her successor is elected
and shall qualify; provided, however, that any member of the Executive
Committee may be removed, with or without cause, at any time by the Board of
Directors. All vacancies in said Committee shall be filled by the Board of
Directors.
The Chairman of the Board of Directors and the President of the
Association shall be ex-officio members of the Committee and shall have the
power to vote with respect to all matters coming before the Executive
Committee. The Executive Committee shall meet at such times as it may decide.
It shall keep a separate book of minutes of its proceedings and actions, and
make reports to the Board of Directors, from time to time, of its actions.
All the powers of the Board of Directors when the Board is not in session
may be exercised by the Executive Committee, except that the Executive
Committee shall not declare dividends or distribute assets of the
Association. Unless otherwise provided by resolutions duly adopted by the
Board of Directors, a majority of the Executive Committee shall constitute a
quorum for the transaction of business.
The Executive Committee shall review all loans when the total liability of
the borrower exceeds an established amount, which amount is to be determined
and set by the Board of Directors from time to time.
All persons appointed or elected to office by the Executive Committee
shall hold their respective offices only until the next annual meeting of
the Board of Directors.
Each member of the Executive Committee, except salaried officers of the
Association, shall be entitled to an attendance fee for each meeting of the
Committee, the amount of such fee to be established by the Board of Directors.
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Section 2.
AUDIT AND EXAMINATION COMMITTEE. The Board of Directors shall, at its
initial meeting after its election in each year, elect from among its number
a committee of three or more who constitute the Audit and Examination
Committee of the Board of Directors. No member of the Audit and Examination
Committee shall be an officer or employee of the Association or shall be a
member of the Trust Policy Committee. Each member of the Audit and
Examination Committee shall serve until his or her successor is elected and
shall qualify; provided, however, that any member of the Audit and
Examination Committee may be removed, with or without cause, at any time by
the Board of Directors of the Association.
The Audit and Examination Committee shall make suitable examinations every
six months of the affairs of the Association. The result of such examination
shall be reported in writing to the Board of Directors at the next regular
meeting thereafter, stating whether the Association is in a sound and solvent
condition, whether adequate internal audit controls and procedures are being
maintained, and recommending to the Board such changes in the manner of doing
business, etc. as shall be deemed advisable. The Audit and Examination
Committee, upon its own recommendation and with the approval of the Board of
Directors, may employ a qualified firm of Certified Public Accountants to
make an examination and audit of the Association. If such a procedure is
followed, the one annual examination and audit of such firm of accountants and
the presentation of its report to the Board of Directors will be deemed
sufficient to comply with the requirements of this section of these Amended
and Restated By-laws.
At least once during each calendar year and as often as required by
regulations, the Audit and Examination Committee shall make suitable audits
of the Trust and Financial Services Division or cause suitable audits to be
made by auditors responsible only to the Board of Directors and, at such
time, shall ascertain whether the Trust and Financial Services Division has
been administered in accordance with law, appropriate regulations and sound
fiduciary principles. In lieu of such periodic audits, the Board of Directors
may elect to adopt an adequate continuous audit system. A report of the audits
and examinations, together with the action taken thereon, shall be noted in
the minutes of the Board of Directors.
Each member of the Audit and Examination Committee, except salaried
officers, shall be entitled to an attendance fee for each meeting of the
Committee, the amount of such fee to be established by the Human Resources
Committee of the Board of Directors.
Section 3.
TRUST POLICY COMMITTEE. The Board of Directors shall, at its initial
meeting after its election in each year, elect from among its number a
committee of four or more directors, who are not officers or employees of the
Association, who shall constitute the Trust Policy Committee. Each member of
the Trust Policy Committee shall serve for the ensuing year and until his or
her successor is elected and shall qualify; provided, however, that any member
of the Trust
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Policy Committee may be removed, with or without cause, at any time by the
Board of Directors of the Association.
The Trust Policy Committee shall be responsible for the formulation of
policy with respect to all fiduciary functions exercised by the Trust and
Financial Services Division and shall take all such action as, in its
judgment, may be necessary to insure the proper functioning of the Trust and
Financial Services Division in matters pertaining to trust administration,
investments, operations and new business development. The Trust Policy
Committee shall from time to time receive information reflecting the
implementation of its decisions and shall have authority to establish
standing or ad hoc committees for the purpose of carrying out policies
formulated by it. The Trust Policy Committee shall review the affairs of the
Trust and Financial Services Division on an annual basis and, if appropriate,
make recommendations with respect thereto. The Trust Policy Committee may
authorize any one or more of its members, or officers assigned to the Trust
and Financial Services Division, to grant prior approval of the acceptance of
any or all appointments of the Association in a fiduciary capacity and to
cause the granting of each such prior approval to be made a matter of written
record. The Trust Policy Committee shall have such other and further duties
as may from time to time be assigned to it by the Board of Directors.
All investments of trust funds shall be made, retained or disposed of in
accordance with policies, procedures or practices established or approved by
the Trust Policy Committee, or with the express approval of the Trust Policy
Committee, and the Trust Policy Committee shall keep minutes of all of its
meetings showing the disposition of all matters considered and passed upon by
it. At least once during each period of twelve months, the Trust Policy
Committee shall review, or cause to be reviewed, all the assets held in or
for each fiduciary account for which the Trust and Financial Services
Division is charged with investment responsibility in order to determine the
safety and current value of such accounts and the feasibility of retaining or
disposing of them.
The Trust Policy Committee shall fix the time for its regular meetings (to
be held at least quarterly), provide for the call of special meetings and may
adopt rules of procedure. Unless otherwise provided by a resolution duly
adopted by the Board of Directors, the majority of the Trust Policy Committee
shall constitute a quorum for the transaction of business. Each member of the
Trust Policy Committee shall be entitled to an attendance fee for each
meeting of the Trust Policy Committee, the amount of such fee to be
established by the Board of Directors.
Section 4.
HUMAN RESOURCES COMMITTEE. The Board of Directors shall, at its initial
meeting after its election in each year, elect from among its number a
committee of three or more members who shall constitute the Human Resources
Committee. Each member of the Human Resources Committee shall serve for the
ensuing year and until his or her successor is elected and shall qualify;
provided, however, that any member of the Human Resources Committee may be
removed, with or without cause, at any time by the Board of Directors of the
Association. The Human Resources Committee shall monitor, on behalf of the
Board of Directors, management's
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performance in providing the management and manpower requirements for the
proper functioning and progress of the Association and shall counsel with
management; the Human Resources Committee shall review plans for management
succession, management training and management development programs; the
Human Resources Committee shall review (and, if directed by the Board of
Directors, establish) salary and wage administration procedures, including
current ranges and surveys; approve any major deviation from established
salary and wage levels; review compliance with applicable regulations;
approve (and, if directed by the Board of Directors, establish) compensation
of the principal executive officers, considering the recommendation of the
Chairman of the Board, and in the case of the Chief Executive Officer's
salary, considering the recommendation of the Chairman or President of
SouthTrust Corporation; establish directors' fees; review and recommend
proposed new Board members; review employee relation plans and activities;
and establish a budget for contributions and review management's
recommendations for individual contributions.
Each member of the Human Resources Committee shall be entitled to an
attendance fee for each meeting of the Human Services Committee, the amount
of such fee to be established by the Board of Directors.
Section 5.
The Board of Directors also may appoint, from time to time, such other
committees, including temporary committees, for such purposes and with such
powers as the Board of Directors may determine, and may establish such
attendance fees for the members of such other committees as the Board of
Directors may determine.
Section 6.
The persons constituting the entire membership of any committee provided
for or created pursuant to the Amended and Restated By-laws may be increased
by the Board of Directors whenever it sees fit. In the case of any such
increase in the membership of any such committee, the Board of Directors may
fix the term of service on any committee of any person elected to fill a
vacancy created by any such increase.
ARTICLE SIX
Loans
Section 1.
Loans may be made by or upon the authority of the Executive Committee or
its designee as specified in the Loan Policy and Administration Manual.
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Section 2.
The Board of Directors shall from time to time establish regulations or
standards respecting the review and authority subject to which real estate
loans may be made by the Association in any fiduciary capacity. Authority to
make real estate loans n a fiduciary capacity may be delegated by the Board
of Directors to the Trust Policy Committee; such loans may be made by an
officer or a committee of officers who may be authorized and directed by the
Trust Policy Committee, as the case may be, to perform those duties. In any
such case, instructions relating to the powers, duties, authority and
procedure for approving such loans, the maximum and minimum amount of same,
the terms and conditions of same, and the names of officers authorized to
approve such loans and appraise or approve the appraisal of the real estate
concerned, shall be set forth in detail in the minutes of the Trust Policy
Committee.
Section 3.
On payment of the sums loaned for which collateral security has been
taken, either by mortgage of real or personal property or by other pledge of
collateral, whether said loans have been made from funds of the Association
or from funds held in a fiduciary capacity, the Executive Committee shall
from time to time designate bank officers that shall have the full power and
authority to release or cancel the same on the margin of the record, if
recorded, or in any other manner as the law in such cases may require or
permit.
ARTICLE SEVEN
Borrowings
Section 1.
With the approval of the Board of Directors or Executive Committee, the
Chairman of the Board, the President, any Executive Vice President, Senior
Vice President, Group Vice President, or Vice President, including those
persons serving in such capacities who also carry the designation of Trust
Officer, shall have the authority to borrow money, including the authority to
pledge and hypothecate any securities or any stocks or bonds, notes, or any
property, real or personal, of the Association as collateral for such loan,
and to endorse or guarantee in its name any notes or obligations payable or
belonging to the Association and to execute and acknowledge, any document or
instrument required for such purpose or purposes.
Section 2.
All time or interest bearing certificates of deposit may be signed by
the Chairman of the Board, the President, any Executive Vice President,
Senior Vice President, Group Vice President, Vice President or any Assistant
Vice President, the Cashier or any employee or employees of the
15
<PAGE>
Association designated by name or by job title or description from time to
time by the Chairman of the Board or the President. The provisions of this
Section 2 are supplemental to any other provision of these Amended and
Restated By-laws.
ARTICLE EIGHT
Savings Deposits
Section 1.
Savings deposits shall be subject to such rules and regulations as may
be adopted from time to time by the Board of Directors of this Association.
ARTICLE NINE
Corporate Seal
Section 1.
The Corporate Seal of the Association shall be circular in shape and
around the outer circle shall have the words: SOUTHTRUST
BANK NATIONAL ASSOCIATION and on the inner circle may, but need not include
the words: BIRMINGHAM, ALABAMA.
ARTICLE TEN
Dividends and Distributions
Section 1.
The Board of Directors may, at any regular or special meeting, declare
such dividends, or make such distributions, as in its judgment are proper,
out of the earnings and funds of the Association legally available therefor.
16
<PAGE>
ARTICLE ELEVEN
Stock Certificates
Section 1.
Certificates evidencing shares of capital stock of this Association
shall be signed by the Chairman of the Board, the President or any Vice
President or Assistant Vice President and the Cashier, or the Secretary and
shall have the seal of the Association affixed thereto. Stock certificates
shall conform to law in all respects.
Section 2.
Transfers of shares of capital stock of the Association can only be made
in writing upon the production of a certificate or certificates evidencing
such shares of capital stock with a transfer and assignment endorsed thereon
by the person, or persons, in whose name the certificates were issued, the
personal representatives thereof, or duly authorized attorneys-in-fact. The
former certificate, or certificates, shall be surrendered and canceled before
the new certificate or certificates are issued or delivered.
Section 3.
The stock transfer books may be closed for such purposes and such time
as may be specified in resolutions duly adopted by the Board of Directors.
Section 4.
In case of loss or destruction of any certificate evidencing shares of
capital stock of the Association, the holder or owner thereof shall give
notice thereof to the Cashier or Secretary of the Association, and if such
holder or owner shall desire the issue of a new certificate in the place of
the one lost or destroyed, he or she shall make affidavit of such loss or
destruction and deliver the same to the Cashier or the Secretary of the
Association and accompany the same with a bond, with security satisfactory to
the Association, to indemnify and save harmless the Association against any
loss, damage or expense in case the certificate so lost or destroyed should
thereafter be presented to the Association. The proof of loss, and the
condition and security of the said bond, shall be approved by the Executive
Committee or Board of Directors before the issue of any new certificate.
17
<PAGE>
ARTICLE TWELVE
Amendment and Repeal of the Amended and Restated By-laws
Section 1.
The amended and Restated By-laws may be altered, amended or repealed by
the Board of Directors or the shareholders of the Association.
ARTICLE THIRTEEN
Emergency Preparedness Program
Section 1.
In the event of the destruction of properties, personnel and records of
the Association, to the extent that continued operation of the Association is
not reasonably possible, provisions in various resolutions hereafter adopted
by the Board of Directors with reference to emergency operations shall become
effective and continue to be in effect until conditions warrant the
reestablishment of operations.
HISTORY OF AMENDED AND RESTATED BYLAWS
Amended and Restated By-laws Adopted June 2, 1997
Article Two, Section 3 amended on July 15, 1997.
18
<PAGE>
<TABLE>
LIABILITIES
<S> <C> <C> <C> <C>
13. Deposits:
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E,
part I)................................................................................ RCON 2200 20,485,533
(1) Noninterest-bearing(1)................................... RCON 6631 2,426,214
(2) Interest-bearing......................................... RCON 6636 18,060,319
b. In foreign offices, Edge and Agreement subsidiaries, and IBPs (from Schedule RC-E,
part II)............................................................................... RCFN 2200 601,503
(1) Noninterest-bearing...................................... RCFN 6631 0
(2) Interest-bearing......................................... RCFN 6636 601,503
14. Federal funds purchased and securities sold under agreements to repurchase................ RCFD 2900 3,265,473
15. a. Demand notes issued to the U.S. Treasury............................................... RCON 2840 58,407
b. Trading liabilities (from Schedule RC-D)............................................... RCFD 3548 0
16. Other borrowed money (includes mortgage indebtedness and obligations under
capitalized leases):
a. With a remaining maturity of one year or less.......................................... RCFD 2332 1,955,551
b. With a remaining maturity of more than one year through three years.................... RCFD A547 600,000
c. With a remaining maturity of more than three years..................................... RCFD A548 2,191,284
17. Not applicable
18. Bank's liability on acceptances executed and outstanding.................................. RCFD 2920 6,988
19. Subordinated notes and debentures(2)...................................................... RCFD 3200 675,000
20. Other liabilities (from Schedule RC-G).................................................... RCFD 2930 460,298
21. Total liabilities (sum of items 13 through 20)............................................ RCFD 2948 30,302,036
22. Not applicable
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus............................................. RCFD 3838 0
24. common stock.............................................................................. RCFD 3230 9,006
25. Surplus (exclude all surplus related to preferred stock).................................. RCFD 3839 1,162,276
26. a. Undivided profits and capital reserves................................................. RCFD 3632 1,170,498
b. Net unrealized holding gains (losses) on available-for-sale securities................. RCFD 9434 7,575
27. Cumulative foreign currency translation adjustments....................................... RCFD 3284 0
28. Total equity capital (sum of items 23 through 27)......................................... RCFD 3210 2,349,355
29. Total liabilities and equity capital (sum of items 21 and 28)............................. RCFD 3300 32,650,392
</TABLE>
I, Tobin N. Vinson, Vice President and
Financial Reporting Manager of
SouthTrust Bank, National Association,
do hereby declare that this Report of
Condition is true and correct to the
best of my knowledge and belief.
/s/ Tobin N. Vinson
------------------------------------
Tobin N. Vinson
May 20, 1998
------------------------------------
Date
<PAGE>
Comptroller of the Currency
Administrator of National Banks
REPORT OF CONDITION
Consolidating domestic and foreign subsidiaries of the
SouthTrust Bank, National Association of Birmingham in the state of Alabama,
at the close of business on March 31, 1998, published in response to call
made by Comptroller of the currency, under title 12, United States Code,
Section 161. Charter Number 14569 Comptroller of the Currency Southeastern
District.
Statement of Resources and Liabilities
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C> <C> <C>
1. Cash and balances due from depository institutions (from Schedule RC-A):
a. Noninterest-bearing balances and currency and coin(2).........................................0081 $14,209
b. Interest-bearing balances(2)..................................................................0073 125
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A)....................................1754 2,769,773
b. Available-for-sale securities (from Schedule RC-B, column D)..................................1773 3,272,172
3. Federal funds sold and securities purchased under agreements to resell...........................1350 28,700
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income (from Schedule RC-C)..........RCFD 2122 24,110,914
b. LESS: Allowance for loan and lease losses..............................RCFD 3223 335,995
c. LESS: Allocated transfer risk reserve..................................RCFD 3128 0
d. Loans and leases, net of unearned income,
allowance, and reserve (item 4.a minus 4.b and 4.c)...........................................2125 23,774,919
5. Trading assets (from Schedule RC-D)..............................................................3545 0
6. Premises and fixed assets (including capitalized leases).........................................2145 630,498
7. Other real estate owned (from Schedule RC-H).....................................................2150 42,220
8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M).........2130 0
9. Customers' liability to this bank on acceptances outstanding.....................................2155 6,986
10. Intangible assets (from Schedule RC-M)...........................................................2143 326,628
11. Other assets (from Schedule RC-P)................................................................2160 989,167
12. Total assets (sum of items 1 through 11).........................................................2170 32,650,391
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHATTEM,
INC'S AUDITED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> NOV-30-1997 NOV-30-1996 NOV-30-1995
<PERIOD-START> DEC-01-1996 DEC-01-1995 DEC-01-1995
<PERIOD-END> NOV-30-1997 NOV-30-1996 NOV-30-1995
<CASH> 509 2,404 3,636
<SECURITIES> 4,349 6,850 0
<RECEIVABLES> 28,578 20,726 16,534
<ALLOWANCES> 500 450 286
<INVENTORY> 14,493 10,295 8,678
<CURRENT-ASSETS> 49,972 46,124 31,074
<PP&E> 28,925 26,241 24,461
<DEPRECIATION> 17,937 16,467 15,131
<TOTAL-ASSETS> 178,744 152,183 83,410
<CURRENT-LIABILITIES> 35,054 26,349 20,820
<BONDS> 142,394 131,344 79,689
0 0 0
0 0 0
<COMMON> 2,262 1,843 1,579
<OTHER-SE> 2,108 (7,823) (8,940)
<TOTAL-LIABILITY-AND-EQUITY> 178,744 152,183 3,410
<SALES> 143,235 118,903 100,598
<TOTAL-REVENUES> 143,235 118,983 100,598
<CGS> 39,253 35,120 89,755
<TOTAL-COSTS> 117,732 102,214 86,130
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 15,934 13,394 11,075
<INCOME-PRETAX> 11,248 5,620 3,610
<INCOME-TAX> 3,998 1,816 1,285
<INCOME-CONTINUING> 7,255 3,804 2,325
<DISCONTINUED> 0 0 10,008
<EXTRAORDINARY> (1,370) (532) (367)
<CHANGES> 0 0 0
<NET-INCOME> 5,885 3,272 11,996
<EPS-PRIMARY> .65 .40 1.64
<EPS-DILUTED> .65 .40 1.64
</TABLE>
<PAGE>
June ___, 1998
SouthTrust Bank, National Association
100 Office Park Drive
Birmingham, Alabama 35223
Attention: Corporate Trust Services
Ladies and Gentlemen:
Chattem, Inc., a Tennessee corporation (the "Company"), is
offering to issue, upon the terms and subject to the conditions set forth in the
Prospectus to be dated on or about ___________, 1998 (the "Prospectus"), and the
related Letter of Transmittal (which together constitute the "Exchange Offer"),
$200 million principal amount of its 8 7/8% Series B Senior Subordinated Notes
due 2008 (the "Exchange Notes"), which have been registered under the Securities
Act of 1933, as amended, in exchange for an equal principal amount of its 8 7/8
Series A Senior Subordinated Notes due 2008 (the "Series A Notes"). The Exchange
Notes will be issued only in integral multiples of $1,000 to each tendering
holder of Series A Notes whose Series A Notes are accepted in the Exchange
Offer.
You are hereby appointed and authorized to act as agent (the
"Exchange Agent") to effectuate the exchange of the Series A Notes for the
Exchange Notes, on the terms and subject to the conditions of this agreement
(the "Agreement"). In that connection, the following documents have been
delivered to you:
(i) the Prospectus;
(ii) the Letter of Transmittal to be used by the
registered holders of the Series A Notes; and
(iii) Notice of Guaranteed Delivery, to be used by any
registered holder of the Series A Notes
when the Series A Notes are not immediately available
or time will not permit a Letter of Transmittal and
the accompanying documents to
<PAGE>
SouthTrust Bank, National Association
June ___, 1998
Page 2
reach you prior to the expiration of the
Exchange Offer.
The Exchange Offer shall expire at the time and on the date
specified in the Prospectus (the "Initial Expiration Date") or at any subsequent
time and date to which the Company may extend the Offer. The later of the
Initial Expiration Date and the latest time and date to which the Exchange Offer
is so extended is referred to as the "Expiration Date."
You are hereby requested, and you hereby agree, to act,
including any actions which may be by or through your agent, as follows:
1. You are to accept, subject to any withdrawal rights, Series
A Notes that are accompanied by the Letter of Transmittal (or facsimile
thereof), properly completed and duly executed in accordance with the
instructions thereon and any requisite collateral documents and all other
instruments and communications submitted to you in connection with the Exchange
Offer and to hold the same upon the terms and conditions set forth in this
Agreement.
2. You are to examine the Letters of Transmittal, the Series A
Notes, and the other documents delivered or mailed to you by or for the holders
of the Series A Notes as soon as practicable after receipt to ascertain whether
(i) the Letters of Transmittal are properly completed and duly executed in
accordance with the instructions set forth therein, (ii) the Series A Notes have
otherwise been properly tendered and (iii) if applicable, the other documents
are properly completed and duly executed. You need not pass on the legal
sufficiency of any signature or verify any signature guarantee.
3. In the event any Letter of Transmittal or other document
has been improperly executed or completed or any of the Series A Notes are not
in proper form or have been improperly tendered, or if some other irregularity
in connection with the delivery of Series A Notes by a registered holder thereof
exists, you shall promptly report such information to the Company and you are
authorized, upon consultation with the Company and its counsel, to endeavor to
take such action as may be necessary to cause such irregularity to be corrected.
You are authorized, upon
<PAGE>
SouthTrust Bank, National Association
June ___, 1998
Page 3
consultation with the Company or one of its representatives, to request from any
person tendering Series A Notes such additional documents or undertakings as you
may deem appropriate. All questions as to the form of all documents and the
validity, form, eligibility (including time of receipt), acceptance and
withdrawal of tendered Series A Notes will be determined by the Company, in its
sole discretion, whose determinations will be final and binding. The Company
reserves the absolute right to reject any or all tenders that are not in proper
form or the acceptance of any particular Series A Notes that would, in the
opinion of the Company's counsel, be unlawful. The Company, also reserves the
absolute right to waive any of the conditions of the Exchange Offer or any
defect or irregularity in the tender of any Series A Notes, and the Company's
interpretation of the terms and conditions of the Exchange Offer (including the
Letter of Transmittal and the instructions set forth therein) will be final and
binding. No tender of Series A Notes will be deemed to have been properly made
until all defects and irregularities have been cured or waived.
4. Tenders of Series A Notes shall be made only as set forth
in the Prospectus and the Letter of Transmittal, and Series A Notes shall be
considered properly tendered to you only when:
(a) a properly completed and duly executed Letter of
Transmittal (or facsimile thereof), with any required signature guarantee and
any other required documents, are received by you at your address set forth in
the Prospectus or in the Letter of Transmittal and Series A Notes are received
by you at such address; or a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company, with an
appropriate guarantee of signature and delivery from an Eligible Guarantor
Institution within the meaning of Rule 17Ad-15 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), is received by you at or prior to the
Expiration Date. For purposes of this Agreement, an "Eligible Guarantor
Institution" within the meaning of Rule 17Ad-15 under the Exchange Act shall
mean a member of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., or a savings institution, commercial
bank or trust company having an office or correspondent in the United States and
which is a member of a recognized signature guarantee program (i.e., Securities
Transfer Agents Medallion Program, Stock Exchanges Medallion Program or New
<PAGE>
SouthTrust Bank, National Association
June ___, 1998
Page 4
York Stock Exchange Medallion Signature Program). The Notice of Guaranteed
Delivery may be delivered to you by hand or transmitted by telegram, facsimile
transmission or letter;
(b) Series A Notes (in respect of which there has been
delivered to you prior to the Expiration Date a properly completed and duly
executed Notice of Guaranteed Delivery) in proper form for transfer together
with a properly completed and duly executed Letter of Transmittal (or facsimile
thereof), and any other required documents, are received by you within five (5)
trading days of The New York Stock Exchange after the date of execution of such
Notice of Guaranteed Delivery; and
(c) the adequacy of the items relating to Series A Notes,
and the Letters of Transmittal therefor and any Notice of Guaranteed Delivery
has been favorably passed upon as above provided.
Notwithstanding the provisions of the preceding paragraph,
Series A Notes that the Company shall approve as having been properly tendered
shall be considered to be properly tendered.
5. (a) A tendering holder of Series A Notes may withdraw
tendered Series A Notes in accordance with the procedures set forth in the
Prospectus at any time on or prior to 5:00 p.m. New York City time on the
Expiration Date, in which event, except as may be otherwise specified in the
holder's notice of withdrawal, all items in your possession that shall have been
received from such holder with respect to those Series A Notes shall be promptly
returned to or upon the order of the holder and the Series A Notes covered by
those items shall no longer be considered to be properly tendered.
(b) A withdrawal of tender of Series A Notes may not be
rescinded and any Series A Notes withdrawn will thereafter be deemed not validly
tendered for purposes of the Exchange Offer, provided, however, that withdrawn
Series A Notes may be retendered by again following one of the procedures
described in the Prospectus at any time on or prior to the Expiration Date.
<PAGE>
SouthTrust Bank, National Association
June ___, 1998
Page 5
(c) All questions as to the validity (including time of
receipt) of notices of withdrawal will be determined by the Company, whose
determination will be final and binding.
6. You are to record and hold all tenders received by you and
promptly notify by telephone Mr. Stephen M. Powell of the Company (423/832-2037
ext. 340), on a weekly basis, or as may be requested by the Company, as to the
total number of Series A Notes tendered during such week or other period and the
cumulative numbers with respect to the Series A Notes received and not withdrawn
through the time of such call. Each weekly report should be divided into the
number of Series A Notes represented by (i) certificates and (ii) Notices of
Guaranteed Delivery actually received by you through the time of the report. The
foregoing information should also be sent to the Company in a weekly written
report. Each report should also indicate the number of Series A Notes tendered
in good form. In addition, you will also provide, and cooperate in making
available to the Company, such other information as it may reasonably request,
of access to those persons on your staff who are responsible for receiving
tenders of Series A Notes in order to ensure that immediately prior to the
Expiration Date, the Company shall have received information in sufficient
detail to enable it to decide whether to extend the Exchange Offer.
7. Each letter of Transmittal, Series A Note, Notice of
Guaranteed Delivery and any other documents received by you in connection with
the Exchange Offer shall be stamped by you to show the date and time of receipt
and if defective, the date and time the last defect was waived by the Company or
cured. Each Letter of Transmittal and Series A Note that is accepted by the
Company shall be retained in your possession until the Expiration Date. As
promptly as practicable thereafter, you will deliver by registered mail with
proper insurance those items, together with all properly tendered and canceled
Series A Notes, to Chattem, Inc., Attention: Mr. Stephen M. Powell, Controller.
8. You are to satisfy requests of brokers, dealers, commercial
banks, trust companies and other persons for copies of the documents and other
materials specified in items (i) through (iii) of the introduction to this
Agreement. You are not authorized to offer any concessions or to pay any
commissions to
<PAGE>
SouthTrust Bank, National Association
June ___, 1998
Page 6
any brokers, banks or other persons or to engage or to utilize any persons to
solicit tenders or consents.
9. You are to follow up and to act upon any amendments,
modifications or supplements to these instructions, and upon any further
information in connection with the terms of the Exchange Offer, any of which may
be given to you by the Company, including instructions with respect to any
extension or modification of the Exchange Offer and the cancellation of the
Exchange Offer.
10. No exchange shall be made as to any Series A Notes held in
certificated form until you physically receive a certificate or certificates
representing such Series A Notes, a properly completed and duly executed Letter
of Transmittal (or facsimile thereof) and any other required documents.
11. For performing your services hereunder, you shall be
entitled to receive from the Company a fee in accordance with Exhibit A attached
hereto. You shall also be reimbursed by the Company for all reasonable expenses,
including reasonable counsel fees, if any, you may incur in connection with the
performance of your duties hereunder.
12. As Exchange Agent hereunder, you:
(a) shall not have duties or obligations other than those
specifically set forth herein or as may subsequently be agreed to by you and the
Company in writing;
(b) shall not be obligated to take any legal action
hereunder that might in your reasonable judgement involve any expense or
liability unless you have been furnished with reasonable indemnification;
(c) may rely on and shall be protected in acting upon any
certificate, instrument, opinion, notice, letter, facsimile transmission, telex,
telegram or other document or any security delivered to you and believed by you
to be genuine and to have been signed by the proper party or parties;
(d) may rely on and shall be protected in acting upon the
terms and conditions of (i) this Agreement, (ii) the
<PAGE>
SouthTrust Bank, National Association
June ___, 1998
Page 7
documents relating to the Exchange Offer, (iii) any instructions given to you
orally or in writing by the Company by the following officer of the Company with
respect to any matter relating to your activities as Exchange Agent covered by
this Agreement: Mr. Stephen M. Powell, Controller; and (iv) as to any matter not
covered by any of the foregoing, your usual and customary practice when acting
as an exchange agent; and
(e) may consult with counsel satisfactory to you
(including counsel to the Company), and the opinion of such counsel shall be
full and complete authorization and protection with respect to any action
taken, suffered, or omitted by you hereunder in good faith and in accordance
with the opinion of such counsel.
13. You undertake the duties and obligations imposed herein
upon the following additional terms and conditions:
(a) you shall perform your duties and obligations
hereunder with due care; and
(b) you shall not be under any responsibility in
respect of the validity or sufficiency of any Letter of Transmittal,
certificate for Series A Notes or Notice of Guaranteed Delivery.
14. You are not authorized to make any recommendation on
behalf of the Company as to whether a holder of Series A Notes of the Company
should or should not tender his securities.
15. All Exchange Notes shall be forwarded by you to the
persons at the addresses so indicated in the Letter of Transmittal by (i)
first-class mail under a blanket surety bond protecting you and the Company from
loss or liability arising out of the nonreceipt or non-delivery of such
certificate, or (ii) registered mail, insured separately for the replacement
value of such certificates.
16. The Company covenants and agrees to reimburse, indemnify
and hold you harmless against any costs, expenses (including reasonable expenses
of your legal counsel), losses or damages which, without gross negligence or
willful misconduct on your part or arising out of or attributable thereto, may
be paid,
<PAGE>
SouthTrust Bank, National Association
June ___, 1998
Page 8
incurred or suffered by you or to which you may become subject by reason of or
as a result of the administration of your duties hereunder or by reason of or as
a result of your compliance with the instructions set forth herein or with any
written or oral instructions delivered to you pursuant hereto, or liability
resulting from your actions as Exchange Agent pursuant hereto, including any
claims against you by any holder tendering Series A Notes for exchange. The
Company shall be entitled to participate at its own expense in the defense, and
if the Company so elects at any time after receipt of such notice, the Company
shall assume the defense of any suit brought to enforce any such claim. In the
event that the Company assumes the defense of any such suit, the Company shall
not be liable for the fees and expenses of any additional counsel thereafter
retained by you, unless in your judgement, which must be reasonable, it is
advisable for you to be represented by separate counsel. In no case shall the
Company be liable under this indemnity with respect to any claim or action
against you, unless the Company shall be notified by you, by letter or by cable
or telex confirmed by letter, of the written assertion of a claim against you or
of any action commenced against you, promptly after you shall have received any
such written assertion of a claim or shall have been served with a summons or
other first legal process giving information as to the nature and basis of an
action, but failure so to notify the Company shall not relieve the Company from
any liability which it may have otherwise than on account of this indemnity.
17. You hereby acknowledge receipt of each of the documents
listed in items (i) through (iii) of the introduction to this Agreement and
further acknowledge that you have examined the same. Any inconsistency between
this Agreement on the one hand and the Prospectus and Letter of Transmittal, as
they may from time to time be amended, on the other, shall be resolved in favor
of the latter, except with respect to the duties, liabilities and
indemnification of you as Exchange Agent.
18. In the event that any of the terms of the Exchange Offer
are amended, the Company shall give you prompt written notice thereof describing
such amendment. The parties shall amend this Agreement to the extent necessary
to reflect any material changes to the terms hereof caused by any amendment of
the Exchange Offer.
<PAGE>
SouthTrust Bank, National Association
June ___, 1998
Page 9
19. You may resign at any time on thirty (30) days prior
written notice thereof delivered to the Company. Promptly after receipt of your
written notice, the Company shall take such action as may be necessary to
appoint a successor Exchange Agent. If within thirty (30) days of such written
notice no successor Exchange Agent has been appointed, you or any party to this
Agreement may petition any court having jurisdiction for the appointment of a
successor Exchange Agent. Your resignation shall not be effective until a
successor Exchange Agent has been appointed. Upon the effectiveness of your
resignation, you shall turn over to the successor all property held by you as
Exchange Agent hereunder upon presentation to you of evidence appointing such
successor and its acceptance thereof.
20. Upon the later of (a) the completion of your duties
pursuant to this Agreement, or (b) September 30, 1998 (as such date may be
extended by written agreement between you and the Company) your designation
as Exchange Agent and your obligations hereunder will terminate provided that
your rights under Paragraphs 11, 12 and 16 above and your liabilities under
this Agreement for acts or omissions theretofore occurring shall survive the
termination of your appointment. Notwithstanding the foregoing, it is
understood that if, during the period of thirty (30) days following the
termination of your obligations hereunder pursuant to this paragraph 20, you
receive any Letters of Transmittal (or functional equivalent thereof), you
shall return the same together with all enclosures to the party from whom
such documents were received and shall be reimbursed by the Company for your
fees and expenses in connection therewith. In addition, notwithstanding the
termination of this Agreement, you shall preserve, and shall provide the
Company access to, all records pertaining to the Exchange Offer and shall
permit them to make reproductions of same, at their expense during normal
business hours, for a period of five (5) years following the termination of
this Agreement.
21. This Agreement is effective as of June ___, 1998, and
is binding upon and inures to the benefit of the parties' respective
successors or agents. This Agreement shall be governed by and construed in
accordance with the laws of the State of Tennessee. It is the intention of
the parties to this Agreement that the situs of the trust created by this
Agreement be, and it be administered, in the state in which is located the
principal office
<PAGE>
SouthTrust Bank, National Association
June ___, 1998
Page 10
of the Exchange Agent from time to time acting under this Agreement.
22. These instructions may be reasonably modified or
supplemented by the Company or by any officer thereof authorized to give notice,
approval or waiver on its behalf.
<PAGE>
SouthTrust Bank, National Association
June ___, 1998
Page 11
If the foregoing is acceptable to you, please acknowledge
receipt of this letter and confirm the arrangements herein provided by signing
and returning the enclosed copy.
Very truly yours,
CHATTEM, INC.
By:
----------------------------------
Name: A. Alexander Taylor, II
Title: President and Chief Operating
Officer
ACCEPTED AS OF
, 1998
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SOUTHTRUST BANK, NATIONAL ASSOCIATION,
as Exchange Agent
By:
---------------------------
Name:
-------------------------
Title:
------------------------
Enclosures
<PAGE>
EXHIBIT A