<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus Dated January 22, 1999)
$75,000,000
8 7/8% Senior Subordinated Notes due 2008
----------------
The Issuer:
. We are a leading marketer and manufacturer of a variety of branded
consumer products, including over-the-counter healthcare products and
toiletries and skin care products.
The Offering:
. We intend to use approximately $45.0 million of the net proceeds from
this Offering to permanently repay amounts under our senior secured
credit facility. The remaining amount, which is approximately $27.7
million, will be used for general corporate purposes and the refinancing
of outstanding indebtedness. Pending such uses we will use the proceeds
to reduce our revolving credit borrowings.
. The Notes offered hereby have terms that are identical to those of our
$200.0 million of outstanding 8 7/8% Senior Subordinated Notes due 2008,
which were issued in March 1998, and all notes issued will be deemed the
same class of notes under the indenture.
The Notes:
. Maturity: The Notes will mature on April 1, 2008.
. Interest Payments: The Notes will pay interest semi-annually in cash in
arrears on April 1 and October 1, commencing on October 1, 1999.
. Redemption: The Notes will be redeemable on or after April 1, 2003. In
addition, up to 35% of the Notes ever issued will be redeemable prior to
April 1, 2001, with the proceeds of one or more public offerings of
common stock.
. Guarantees: If we cannot make payments on the Notes when due, our
guarantor subsidiaries must make them instead. Not all of our
subsidiaries will be guarantors.
. Ranking: The Notes will be our general unsecured obligations. The Notes
will rank subordinate in right of payment to all of our existing and
future senior indebtedness and will rank senior or pari passu in right
of payment with all of our other existing and future subordinated
indebtedness. On March 31, 1999, after giving effect to this Offering,
the Notes would have been subordinated to approximately $70.0 million of
senior indebtedness and these Notes, together with the $200.0 million of
outstanding notes of the same class, would rank pari passu with $49.7
million of indebtedness.
This investment involves risks. See "Risk Factors" beginning on page S-8.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Discount to Proceeds to
Investors Underwriters Chattem
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note................................... 100.375% 2.760% 97.615%
Total...................................... $75,281,250 $2,070,000 $73,211,250
- --------------------------------------------------------------------------------
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus Supplement or the Prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
The Notes are expected to be delivered to the underwriters on or about May 7
, 1999.
NationsBanc Montgomery Securities LLC Lehman Brothers
The date of this Prospectus Supplement is April 29, 1999.
<PAGE>
Table of Contents
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Supplement Summary............................................ S-1
Risk Factors............................................................. S-8
Use of Proceeds.......................................................... S-18
Capitalization........................................................... S-18
Unaudited Pro Forma Financial Data....................................... S-19
Selected Historical Consolidated Financial Data.......................... S-26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-27
The Company.............................................................. S-37
Description of Notes..................................................... S-48
Description of Other Indebtedness........................................ S-80
Certain United States Federal Tax Considerations......................... S-82
Underwriting............................................................. S-86
Legal Matters............................................................ S-87
Experts.................................................................. S-87
Prospectus
Information Available to You............................................. 2
Incorporation of Certain Documents By Reference.......................... 2
The Company.............................................................. 3
Ratio of Earnings to Fixed Charges....................................... 4
Use of Proceeds.......................................................... 4
Plan of Distribution..................................................... 4
Description of Stock..................................................... 5
Description of Debt Securities........................................... 5
Description of Warrants.................................................. 8
Certain Provisions in the Charter........................................ 9
Experts.................................................................. 10
Legal Matters............................................................ 10
</TABLE>
i
<PAGE>
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Prospectus Supplement includes or incorporates by reference "forward
looking statements" within the meaning of Section 27A of the Securities Act
and Section 21E of the Exchange Act including, in particular, the statements
about our plans, strategies and prospects under the headings "Prospectus
Supplement Summary," "Unaudited Pro Forma Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"The Company." Although we believe that our plans, intentions and expectations
reflected in or suggested by such forward looking statements are reasonable,
we can give no assurance that such plans, intentions or expectations will be
achieved. Important factors that could cause actual results to differ
materially from the forward looking statements we make in this Prospectus
Supplement are set forth below under the caption "Risk Factors" and elsewhere
in this Prospectus Supplement.
All forward looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by those cautionary
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions,
the forward-looking events discussed in this document might not occur.
ii
<PAGE>
PROSPECTUS SUPPLEMENT 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 Supplement or incorporated herein by reference. References to
"fiscal year" are to our fiscal year which ends on November 30 of each year. On
December 21, 1998, we acquired certain product lines from Thompson Medical
Company, Inc. ("Thompson") (the "Thompson Acquisition"). Thompson's fiscal year
also ends on November 30 of each year. As used herein, the pro forma financial
data includes the adjustments described in "Unaudited Pro Forma Consolidated
Financial Statements." Brand names that are italicized refer to Chattem, Inc.
trademarks.
THE COMPANY
We are a leading marketer and manufacturer of a variety of branded consumer
products, including over-the-counter ("OTC") healthcare products and toiletries
and skin care products. Our high quality branded products target niche market
segments with favorable demographic appeal and are among the market leaders in
their respective categories. By quickly adapting to changing consumer
preferences and utilizing creative and cost-effective marketing techniques, we
support our brands on a national level across all major distribution channels,
including food, drug and mass merchandisers.
Our portfolio of branded products includes:
. OTC healthcare products
. the Gold Bond line of medicated powder, cream and lotion products;
. topical analgesics, such as Flexall, Icy Hot, Aspercreme and
Sportscreme;
. the appetite suppressant, Dexatrim;
. menstrual internal analgesics, including Pamprin; and
. dietary supplements under the Sunsource label, including Garlique,
Harmonex and Rejuvex.
. Toiletries and skin care products
. Antiperspirants and deodorants under the Ban brand name; and
. Functional toiletries and skin care products, including pHisoderm
skin cleansers and Bullfrog sunblock.
Several of our brands have the number one market share in their categories,
including Gold Bond (medicated powders), Ban (roll-on
antiperspirant/deodorant), Dexatrim (diet pills) and Garlique (garlic
extracts). Additionally, our portfolio of six brands leads the topical
analgesics market and, together, our Pamprin and Premsyn PMS brands, are the
leading menstrual internal analgesics in the United States.
Competitive Strengths
We will build upon the following competitive strengths to enhance our brands'
positions in the marketplace:
. Effective Brand Management. We acquire and develop brands that compete
in niche segments of larger markets where we can create significant
brand equity. We enhance the value of our brands through aggressive and
effective advertising, promotions and product line extensions. Through
such efforts, we have been able to develop brand recognition within our
product markets to achieve consumer loyalty, extend product life cycles
and maintain favorable relationships with retailers.
S-1
<PAGE>
. Cost-Effective Advertising and Promotional Strategy. We improve the
profitability of our brand portfolio through our marketing, promotion
and advertising expertise. We traditionally invest approximately 40% of
our sales in advertising and promotions. We believe we maintain a
significant competitive advantage over many of our competitors by:
. purchasing advertising time at reduced rates;
. minimizing certain related expenditures, such as the production of
commercials and payments to advertising agencies;
. managing trade and consumer promotion spending on a cost-effective
basis; and
. quickly adapting our marketing strategies to changing consumer
preferences.
. Cost-Effective Operating Structure. By carefully managing our fixed
costs we have developed an efficient and cost-effective operating
structure in marketing, sales, product development, manufacturing,
distribution and administrative support. As a result, we are able to
handle additional sales volume from new and acquired products with
comparatively smaller increases in our fixed expenses. By leveraging our
operating structure we have increased sales by approximately $170.8
million from fiscal 1996 to fiscal 1998 on a pro forma basis, while
reducing our selling, general and administrative expenses from 18.2% to
10.8% of sales during the same period. By carefully managing purchasing
and manufacturing expenses, we enjoyed an average gross profit margin of
over 70% in fiscal 1998.
. Established National Sales and Distribution Network. We have an
established national sales and distribution network that is balanced
among all major food, drug and mass merchandiser retailers. We utilize
this distribution network effectively to increase the market penetration
of our acquired brands and our product line extensions, while
maintaining our selling expense at less than 3% of sales in fiscal 1998.
. Successful Integration of Acquisitions. We identify, acquire and
integrate brands that are either embryonic in their development or
undermanaged and that we can manufacture and market with relatively
small increases in operating expenses. Since 1994 we have successfully
completed seven acquisitions, resulting in the purchase of 15 brands. We
have been disciplined in the prices we have paid for acquired brands and
have acquired only brands that are immediately accretive to our
earnings. Since fiscal 1996 we have spent approximately $345.7 million
on acquisitions and have increased earnings before interest, taxes,
depreciation and amortization ("EBITDA") from $20.8 million for fiscal
1996 to $81.0 million for the twelve months ended February 28, 1999 on a
pro forma basis.
Growth Strategy
We have grown rapidly by actively acquiring new brands and expanding our
existing brands. This strategy has been largely responsible for our compound
annual growth of 56% in sales and 90% in EBITDA from fiscal 1996 to fiscal 1998
on a pro forma basis. Our future growth will depend on our ability to continue
to successfully make acquisitions and generate internal growth, as described
below.
. Acquisitions. We seek to acquire brands with unrealized potential that
have been under-marketed by larger firms or have achieved success in
limited geographic regions. We focus our acquisition efforts on niche
markets in the consumer products sector where we are able to gain a
significant market position by applying our competitive strengths. For
example, we have increased sales in the Gold Bond brand from less than
$28 million in annual sales at the time of purchase in 1996 to over $35
million in fiscal 1998. Additionally, with the Thompson Acquisition, we
became the leading seller of topical analgesics in the United States and
acquired Dexatrim, the number one selling diet pill. As many of our
competitors rationalize their product lines or businesses, we anticipate
additional brand acquisition opportunities.
S-2
<PAGE>
. Internal Growth. Our internal growth strategy for our existing brands
focuses on increasing market penetration and brand awareness and
introducing product line extensions. For example, we have grown the Icy
Hot brand from approximately $5 million in annual sales at the time we
acquired the brand in 1991 to over $13 million in fiscal 1998. Since
1994, we have introduced 25 line extensions of 12 of our existing
brands. In 1999 we have introduced or plan to introduce 10 product line
extensions including for the Gold Bond, Ban and Sunsource lines, among
others.
Recent Developments
On December 21, 1998, we acquired a line of appetite suppressants and
external analgesics sold under the Dexatrim, Aspercreme, Sportscreme, Capzasin-
P, Capzasin-HP and Arthritis Hot trademarks (the "Thompson Products") from
Thompson. With the Thompson Acquisition, Chattem became the leading
manufacturer and marketer of topical analgesics in the United States and in
Dexatrim purchased the number one selling diet pill in the United States. In
fiscal 1998, the Thompson Products would have produced approximately $55
million in sales and provided EBITDA of approximately $17.8 million on a pro
forma basis. Additionally, we believe we can realize certain operating
improvements from advertising efficiencies, the elimination of the use of
brokers, rationalization of market research and related expenses and certain
procurement savings. We paid a total consideration of $95.0 million for the
Thompson Products, consisting of $90.0 million in cash and $5.0 million of
Chattem common stock. The cash portion was financed with borrowings available
under our senior secured credit facility.
S-3
<PAGE>
The Offering
The summary below describes the principal terms of the Notes. Certain of the
terms and conditions described below are subject to important limitations and
exceptions. The "Description of Notes" section of this Prospectus Supplement
contains a more detailed description of the terms of the Notes.
<TABLE>
<C> <S>
Issuer.................... Chattem, Inc.
Securities Offered........ $75.0 million in aggregate principal amount of 8
7/8% Senior Subordinated Notes due 2008. The Notes
offered hereby have terms that are identical to
those of our $200.0 million of outstanding 8 7/8%
Senior Subordinated Notes due 2008, which were
issued in March 1998, and all notes issued will be
deemed the same class of notes under the
indenture.
Maturity Date............. April 1, 2008.
Interest.................. Semi-annually in cash in arrears on April 1 and
October 1, commencing on October 1, 1999.
Ranking................... The Notes will be our general unsecured
obligations.
The Notes will rank subordinate to all of our
existing and future senior indebtedness.
The Notes will rank senior or pari passu with all
of our other existing and future subordinated
indebtedness.
The Notes will be guaranteed by certain of our
existing and future domestic subsidiaries. The
Notes will effectively rank behind all liabilities
of our non-guarantor subsidiaries.
Assuming we had completed this Offering and
applied the net proceeds therefrom in the manner
contemplated hereby, on February 28, 1999, the
Notes would have been effectively subordinated to
approximately $59.8 million of senior indebtedness
(all of which would have been indebtedness secured
by substantially all of our assets and the assets
of certain of our domestic subsidiaries pursuant
to our senior secured credit facility). In
addition, the Notes, together with $200.0 million
of our outstanding notes of the same class, will
rank pari passu with $49.7 million in aggregate
principal amount of indebtedness. See "Description
of Other Indebtedness."
Optional Redemption....... On or after April 1, 2003, we may redeem some or
all of the Notes at any time at the redemption
prices described in the "Description of Notes"
section under the heading "Optional Redemption."
Prior to April 1, 2001, we may redeem up to 35% of
the Notes ever issued with the proceeds of one or
more public offerings of our common stock at the
price listed in the "Description of Notes" section
under the heading "Optional Redemption."
Change of Control......... If we experience certain types of change of
control, we must offer to repurchase the Notes at
the prices listed in the section "Description of
Notes."
</TABLE>
S-4
<PAGE>
<TABLE>
<C> <S>
Basic Covenants of Indenture.. We will issue the Notes under an indenture with
SouthTrust Bank, National Association, as
trustee. The indenture will, among other
things, restrict our and our subsidiaries'
ability to:
.borrow money;
.pay dividends on stock or repurchase stock;
.make investments;
.limit our subsidiaries' ability to make
dividend and other payments to us;
.sell equity interest in certain types of
subsidiaries;
.engage in transactions with our affiliates;
.use assets as security in other transactions;
and
.sell certain assets or merge with or into
other companies.
See "Description of Notes--Certain Covenants."
Use of Proceeds............... We intend to use approximately $45.0 million of
the net proceeds from this Offering to
permanently repay amounts under our senior
secured credit facility. The remaining amount,
which is approximately $27.7 million, will be
used for general corporate purposes and the
refinancing of outstanding indebtedness.
Pending such uses we will use the proceeds to
reduce our revolving credit borrowings.
</TABLE>
You should refer to the section entitled "Risk Factors" for an explanation of
certain risks of investing in the Notes.
S-5
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited summary pro forma consolidated financial information
gives effect to the consummation of the acquisition of the Thompson Products,
the sale of CornSilk and this Offering as if they occurred on December 1, 1997
and the acquisition of Ban as if it had occurred on December 31, 1997. The
information included in this table should be read in conjunction with the
audited historical consolidated financial statements of Chattem, the audited
historical financial statements of Ban, the audited historical financial
statements of the Thompson Products 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 Supplement. The summary pro forma consolidated financial information
does not purport to represent what our financial position or results of
operations actually would have been if this Offering and the acquisitions of
Ban and the Thompson Products had been completed as of the date or for the
periods presented, or to project our financial position or results of
operations at any future date or for any future period.
<TABLE>
<CAPTION>
Twelve Months
Year Ended Three Months Ended
November 30, Ended February 28,
1998 February 28, 1999
<S> ------------ <C> <C> -------------
1998 1999
-------- -------
<CAPTION>
(Dollars in thousands)
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales................... $289,709 $66,101 $66,856 $290,464
Gross margin................ 213,740 48,979 49,170 213,931
Advertising and promotion... 119,586 30,201 24,985 114,370
Selling, general and
administrative............. 31,248 7,476 6,892 30,664
Income from operations...... 62,906 11,302 17,293 68,897
Other Financial Data:
EBITDA(1)................... 75,548 15,169 20,581 80,960
Cash interest expense(2).... 38,701 9,793 9,505 38,413
Depreciation and
amortization............... 12,642 3,867 3,288 12,063
Capital expenditures........ 9,050 566 864 9,348
Margins:
Gross margin............... 73.8% 74.1% 73.5% 73.7%
Advertising and promotion.. 41.3% 45.7% 37.4% 39.4%
Selling, general and
administrative............ 10.8% 11.3% 10.3% 10.6%
EBITDA(1).................. 26.1% 22.9% 30.8% 27.9%
Ratios:
EBITDA/cash interest expense............................ 2.1x
Long-term debt/EBITDA(3)................................ 4.6x
</TABLE>
<TABLE>
<CAPTION>
As of February 28, 1999
-------------------------
Actual As Adjusted
------------ ------------
<S> <C> <C>
Balance Sheet Data:
Working capital................................... $ 11,952 $ 16,660
Total assets...................................... 480,618 481,810
Long-term debt(3)................................. 367,379 374,949(4)
Shareholders' equity.............................. 33,170 31,792
</TABLE>
- -------
(1) EBITDA represents income from operations, plus depreciation and
amortization. We believe that EBITDA provides useful information regarding
our ability to service our debt. However, EBITDA does not represent cash
flow from operations as defined by generally accepted accounting principles
and should not be considered a substitute for net income as an indicator of
our operating performance or cash flow as a measure of liquidity.
(2) Represents interest expense excluding the amortization of deferred
financing costs and the amortization of the original issue discount on the
existing notes.
(3) Long-term debt is net of current maturities under our senior secured credit
facility.
(4) The amount shown reflects a premium of approximately $0.3 million
associated with the issuance of the Notes.
S-6
<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 and the notes thereto appearing elsewhere in this
Prospectus Supplement or incorporated herein by reference. Historical results
of operations are significantly impacted by the acquisition of Ban in March
1998 and the Thompson Products in December 1998.
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
November 30, February 28,
---------------------------- ------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(Dollars in thousands) (unaudited)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales................... $118,903 $143,235 $220,064 $ 34,921 $ 62,728
Cost of sales............... 35,120 39,253 60,889 9,682 16,880
-------- -------- -------- -------- --------
Gross margin................ 83,783 103,982 159,175 25,239 45,848
Advertising and promotion... 45,512 56,176 86,592 15,180 24,738
Selling, general and
administrative............. 21,582 22,303 27,364 5,159 6,700
-------- -------- -------- -------- --------
Income from operations...... 16,689 25,503 45,219 4,900 14,410
Interest expense............ (13,394) (15,934) (26,676) (4,180) (8,806)
Investment and other income,
net (1).................... 2,325 1,679 10,429 192 131
-------- -------- -------- -------- --------
Income before income taxes.. 5,620 11,248 28,972 912 5,735
Provision for income taxes.. 1,816 3,993 10,844 303 2,158
-------- -------- -------- -------- --------
Income from continuing
operations................. $ 3,804 $ 7,255 $ 18,128 $ 609 $ 3,577
======== ======== ======== ======== ========
Margin Data:
Gross margin................ 70.5% 72.6% 72.3% 72.3% 73.1%
Advertising and promotion... 38.3 39.2 39.3 43.5 39.4
Selling, general and
administrative............. 18.2 15.6 12.4 14.8 10.7
Income from operations...... 14.0 17.8 20.5 14.0 23.0
Other Financial Data:
EBITDA (2).................. $ 20,834 $ 31,208 $ 53,889 $ 6,422 $ 17,505
Interest expense............ 13,394 15,934 26,676 4,180 8,806
Depreciation and
amortization............... 4,145 5,705 8,670 1,522 3,095
Capital expenditures........ 1,785 2,758 9,050 566 864
Balance Sheet Data:
Working capital............. $ 19,793 $ 15,520 $ 684 $ 19,871 $ 11,952
Total assets................ 152,183 178,744 369,012 178,751 480,618
Long-term debt(3)........... 127,438 133,475 273,913 136,034 367,379
Shareholders' equity
(deficit).................. (7,180) 4,370 24,751 4,967 33,170
</TABLE>
- --------
(1) For 1996, amount reflects a gain on the sale of Soltice and Blis-to-Sol, a
gain on the sale of certain investments and a full year of dividend income
from our investment in Elcat, Inc. For 1998, amount reflects a gain on the
sale of CornSilk.
(2) EBITDA represents income from operations, plus depreciation and
amortization. We believe that EBITDA provides useful information regarding
our ability to service our 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 our operating performance or cash flow a measure of liquidity.
(3) Long-term debt is net of current maturities under our senior secured credit
facility.
S-7
<PAGE>
RISK FACTORS
You should consider carefully the specific factors set forth below, as well
as the other information set forth in this Prospectus Supplement or
incorporated by reference in the accompanying Prospectus, before making an
investment in the Notes.
Substantial Leverage--Our substantial indebtedness could adversely affect the
financial health of the Company and prevent us from fulfilling our obligations
under these Notes.
We have now, and after this Offering will continue to have, a significant
amount of indebtedness. The following chart shows certain important credit
statistics and is presented assuming we had completed this Offering as of the
dates or at the beginning of the periods specified below and applied the
proceeds as intended:
<TABLE>
<CAPTION>
At February 28, 1999
-----------------------
(Dollars in thousands)
<S> <C>
Total indebtedness...................................... $383,949
Shareholders' equity.................................... 31,792
Debt to equity ratio.................................... 12.1x
<CAPTION>
For the Twelve Months
Ended February 28, 1999
-----------------------
<S> <C>
Ratio of earnings to fixed charges...................... 1.7x
</TABLE>
Our substantial indebtedness could have important consequences to you. For
example, it could:
. make it more difficult for us to satisfy our obligations with respect to
the notes;
. increase our vulnerability to general adverse economic and industry
conditions;
. limit our ability to fund future working capital needs, capital
expenditures, research and development costs and other general corporate
requirements;
. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital needs, capital
expenditures and acquisitions, research and development efforts and
other general corporate purposes;
. limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
. place us at a competitive disadvantage compared to our competitors that
are less leveraged; and
. limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional
funds; and, failing to comply with those covenants could result in an
event of default which, if not cured or waived, could have a material
adverse effect on us.
Available Additional Borrowings and Asset Encumbrances--Despite current
indebtedness levels, we and our subsidiaries may still be able to incur
substantially more debt. In addition, we and our subsidiaries may be able to
secure such additional debt with our assets and the assets of our
subsidiaries. This could further exacerbate the risks associated with our
substantial leverage.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the indenture do not fully prohibit
us or our subsidiaries from doing so. If new debt is added to our and our
subsidiaries' current debt levels, the related risks that we and they now face
could intensify. See "Description of Other Indebtedness."
Subordination--Your right to receive cash payments on the Notes is junior to
our senior secured credit facility and possibly all of our future borrowings,
and the subsidiary guarantees of the Notes are junior to all of our subsidiary
guarantors' existing indebtedness and possibly to all of their future
borrowings.
The Notes and the subsidiary guarantees will be subordinated in right of
payment to all of our and our subsidiary guarantors' existing and future
senior indebtedness. Upon any distribution to our creditors in a liquidation
or dissolution of Chattem or in a bankruptcy, reorganization, insolvency,
receivership or similar
S-8
<PAGE>
proceeding relating to Chattem 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 will provide that payments with respect to the
Notes will be blocked in the event of a payment default on our senior
indebtedness and may be blocked for up to 179 days each year in the event of
certain non-payment defaults on our senior indebtedness. In the event of a
bankruptcy, liquidation or reorganization of Chattem, holders of the Notes
will participate in our remaining assets ratably with all holders of our
subordinated indebtedness that is deemed to be of the same class as the Notes,
and potentially with all our other general creditors, based upon the
respective amounts owed to each holder or creditor. 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 our senior indebtedness.
As of February 28, 1999, on a pro forma adjusted basis after giving effect
to this Offering and the application of the net proceeds therefrom, the
aggregate amount of senior indebtedness of Chattem and its subsidiaries would
have been approximately $59.8 million. The indenture will permit us and our
subsidiaries to incur substantial additional indebtedness in the future,
including senior indebtedness. On a pro forma basis after giving effect to
this Offering and assuming the amendment of the senior secured credit
facility, we will have $50.0 million available under our revolving credit
facility.
Restrictive Debt Covenants--We are subject to substantial restrictions and
covenants under the indenture and our senior secured credit facility.
The indenture and our senior secured credit facility contain numerous
restrictive covenants, including, but not limited to, covenants that restrict
our ability to incur indebtedness, pay dividends, create liens, sell assets
and engage in certain mergers and acquisitions. In addition, our senior
secured credit facility also requires us to maintain certain financial ratios.
Our ability to comply with the covenants and other terms of the senior secured
credit facility and the indenture, to satisfy our other respective debt
obligations (including, without limitation, borrowings and other obligations
under the senior secured credit facility) and to make cash payments with
respect to the Notes will depend on our future operating performance. In the
event that we fail to comply with the various covenants contained in the
senior secured credit facility or the Indenture, as applicable, we would be in
default thereunder, and in any such case, the maturity of substantially all of
our long-term indebtedness could be accelerated.
A default under the indenture would also constitute an event of default
under the senior secured credit facility. In addition, the lenders under our
senior secured credit facility could elect to declare all amounts borrowed
thereunder, together with accrued interest, to be due and payable. If we were
unable to repay such borrowings, such lenders could proceed against our
assets, which secure our borrowings under the senior secured credit facility.
If the indebtedness under the senior secured credit facility were to be
accelerated, there can be no assurance that our assets would be sufficient to
repay such indebtedness and the Notes in full. The senior secured credit
facility prohibits the repayment, purchase, redemption, defeasance or other
payment of any of the principal of the Notes at any time prior to their stated
maturity other than as described herein. See "Description of Other
Indebtedness" and "Description of Notes."
Ability to Service Debt--To service our indebtedness, we will require a
significant amount of cash. Our ability to generate cash depends on many
factors beyond our control.
Our ability to make payments on and to refinance our indebtedness, including
these Notes, and to fund planned capital expenditures and research and
development efforts will depend on our ability to generate cash in the future.
This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
Based on our current level of operations and anticipated cost savings and
operating improvements, we believe our cash flow from operations, available
cash and anticipated available borrowings under our senior secured credit
facility will be adequate to meet our future liquidity needs for at least the
next few years.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations, that currently anticipated cost savings and
operating improvements will be realized on schedule or that future
S-9
<PAGE>
borrowings will be available to us under our senior secured credit facility in
an amount sufficient to enable us to pay our indebtedness, including these
Notes, or to fund our other liquidity needs. We may need to refinance all or a
portion of our indebtedness, including these Notes, on or before maturity. We
cannot assure you that we will be able to refinance any of our indebtedness,
including our senior secured credit facility and these Notes, on commercially
reasonable terms or at all.
Not all Subsidiaries are Guarantors--Your right to receive payments on these
Notes could be adversely affected if any of our non-guarantor subsidiaries
declare bankruptcy, liquidate or reorganize.
Our foreign subsidiaries will not guarantee the Notes. In the event of a
bankruptcy, liquidation or reorganization of any of the non-guarantor
subsidiaries, holders of their indebtedness and their trade creditors
generally will be entitled to payment of their claims from the assets of such
subsidiaries before any assets are made available for distribution to us.
Assuming we had completed this Offering on February 28, 1999, these Notes
would have been effectively junior to $0.8 million of indebtedness and other
liabilities (including trade payables) of the non-guarantor subsidiaries. The
non-guarantor subsidiaries generated 6.99% and 4.76% of our consolidated
revenues and accounted for 4.03% and 0.19% of our consolidated EBITDA in
fiscal 1998 and for the three months ended February 28, 1999, respectively,
and held 1.49% of our consolidated assets as of February 28, 1999.
Dilution of Interest--As a result of this offering of the Notes, the
individual voting rights of each holder of Notes will be diluted.
There will be $275.0 million aggregate principal amount of senior
subordinated notes outstanding immediately following the consummation of this
Offering, and all notes ever issued under the Indenture will be deemed to be a
single class of notes outstanding under the indenture. In such case, any
actions requiring the consent of each holder or the holders of a majority in
outstanding principal amount of notes under the indenture will therefore
require the consent of each holder of notes or the holders of a majority in
aggregate principal amount of all outstanding notes, as applicable, and the
individual voting interest of each holder will accordingly be diluted.
Risks Related to Acquisitions--We recently acquired Ban and the Thompson
Products and these acquisitions involved a substantial expenditure and risk on
the part of the Company.
We cannot assure you that the Ban acquisition, the Thompson Acquisition or
the integration of those businesses into the Company will be successful or
will yield the expected benefits to us or will not adversely affect our
business.
In addition, although we do not have any present understandings, commitments
or agreements to make any acquisitions, we may pursue other acquisitions. Any
of our future acquisitions could result in substantial additional
indebtedness, which could adversely affect our business. Acquisitions involve
numerous risks, including difficulties in integrating the operations,
technologies, services and products of the acquired companies and the
diversion of management's attention from other business concerns. If we make
any acquisitions, we cannot assure you that our business will not be adversely
affected.
Much of our future growth may depend on our ability to complete additional
acquisitions. We cannot assure you that we will be able either to identify
qualified acquisition candidates or successfully to integrate any of our
future acquisitions into our operations. In addition, we cannot assure you
that we will complete any future acquisitions or that acquisitions will
contribute favorably to our financial condition. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations--General."
Competition--We compete in the highly competitive OTC pharmaceutical,
antiperspirant and deodorant, dietary supplement and functional toiletry and
skin care products markets.
These markets are highly competitive and are characterized by the frequent
introduction of new products, including the movement of prescription drugs to
the OTC pharmaceutical market, often accompanied by major
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advertising and promotional programs. We compete primarily on the basis of
product quality, price, brand loyalty and consumer acceptance. Our competitors
include other OTC pharmaceutical companies and large consumer products
companies, many of which have considerably greater financial and marketing
resources than us. In addition, our competitors often have been willing to use
aggressive spending on trade promotions and advertising as a strategy for
building market share at the expense of their competitors, including us. The
private label or generic category has also become increasingly more
competitive in certain of our product markets. Our products continue to
compete for shelf space among retailers who are increasingly consolidating.
See "The Company--Competition."
Government Regulation--The manufacturing, processing, formulation, packaging,
labeling and advertising of our products are subject to regulation by 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 Postal Service;
. the United States Environmental Protection Agency ("EPA"); and
. the Occupational Safety and Health Administration ("OSHA").
These activities are also regulated by various agencies of the states,
localities and foreign countries in which we sell our products. In particular,
the FDA regulates the safety, manufacturing, labeling and distribution of OTC
pharmaceuticals, antiperspirants and deodorants, dietary supplements and
functional toiletries and skin care products. The FDA regulations relating to
the manufacturing process are known as current Good Manufacturing Practices
("GMPs"). In addition, the FTC has overlapping jurisdiction with the FDA to
regulate the promotion and advertising of OTC pharmaceuticals, antiperspirants
and deodorants, dietary supplements and functional toiletry and skin care
products.
All of our OTC drug products are regulated by 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 require us to revise
our product labeling and formulations. In 1995 we responded to certain
questions we received from the FDA with respect to efficacy in connection with
clinical studies for pyrilamine maleate, one of the active ingredients used in
Pamprin and Premsyn PMS. While we addressed all of the FDA questions in
detail, the final monograph for internal premenstrual analgesic drug products
will determine if the FDA considers pyrilamine maleate effective for menstrual
relief products. We actively monitor the process, and while we do not believe
that either Pamprin or Premsyn PMS will be adversely affected by the FDA
review, it is not possible to predict the FDA's regulatory position. We
believe that any adverse finding by the FDA will affect our principal
competitor in the OTC premenstrual internal analgesic product category in the
same way it affects us.
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 these products. Under DSHEA, the FDA is generally
prohibited from regulating the active ingredients in dietary supplements as
food additives or drugs unless a marketer makes product claims, such as claims
that a product may heal, mitigate, cure or prevent an illness, disease or
malady, that require the FDA to attach drug status to a product.
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DSHEA provides for specific nutritional labeling requirements for dietary
supplements, and the FDA's final regulations required that all dietary
supplements be labeled in compliance with the regulations no later than March
23, 1999. We believe we are in material compliance with these regulations.
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. We anticipate that the FDA will finalize
GMPs that 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.
The FDA has finalized some of its regulations to implement DSHEA, including
those relating to nutritional labeling requirements. The FDA also has under
development additional regulations to implement DSHEA. Final labeling
regulations require expanded or different labeling for our vitamin and
nutritional products. It cannot be determined what effect these regulations,
when fully implemented, will have on our business in the future. These
regulations could require the recall, reformulation or discontinuance of
certain products, additional record keeping, 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 the
imposition of sanctions on the Company or the manufacture of our products,
including warning letters, product recalls and seizures, injunctions or
criminal prosecution.
We received a warning letter, dated April 20, 1999, from the FDA regarding
our marketing and distribution of our Echinex and Propalmex products.
According to the FDA, our promotional material (labeling) for Echinex and
Propalmex make impermissable therapuetic claims that only may be made
consistent with FDA approved labeling for approved drugs. As such, Echinex and
Propalmex are, according to the FDA, misbranded to the extent they make such
therapuetic claims. The FDA has requested that we correct our promotional
materials within 15 working days of the date of the letter. We expect to fully
comply with the FDA's requests within the required time limits.
As part of its regulatory authority, the FDA may periodically conduct audits
of the physical facilities, machinery, processes and procedures that we and
our competitors use to manufacture products. The FDA may perform these audits
at any time without advanced notice. As a result of these audits, the FDA may
order us to make certain changes in our manufacturing facilities and
processes. It may be necessary to make additional expenditures to comply with
these orders or possibly stop selling certain products until we comply with
these orders. As a result, our business could be adversely affected. In
December 1998, the FDA conducted an audit of our manufacturing facility in
Chattanooga, Tennessee. In connection with that audit, the FDA issued a report
citing certain processes and procedures it requires us to change or improve.
We have responded to the FDA's report and are in the process of complying with
its requirements. See "The Company--Governmental Regulation."
Yale Study--The Dexatrim business could be adversely affected by the results
of a large scale study initiated in 1994 by the Nonprescription Drug
Manufacturers Association in conjunction with the Yale University School of
Medicine to investigate the increased risk, if any, of stroke in obese women
using phenylpropanolamine ("PPA"), the active ingredient in Dexatrim, for
weight loss.
The Yale Study was designed in collaboration with the FDA. The results of
the Yale Study are expected to be issued in mid-1999. If the Yale Study
results indicate an increased likelihood of stroke among obese women using PPA
for weight loss, we could be forced to reformulate Dexatrim or discontinue
manufacturing and selling it in its current form. As a result, the Dexatrim
business would suffer, which would adversely affect our business.
Computer System--We are implementing a new computer system. Delays in the
expected completion date and system failures could adversely affect our
business.
We are replacing all of our existing computer systems, including hardware
and software, with a single new computer system that integrates all of our
financial, manufacturing, inventory and customer control functions. We expect
to complete the replacement of our computer system by mid-1999. The
replacement of our computer
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system may be delayed beyond the expected completion date, and we may
experience technical or operational problems with the new computer system.
Because the back-up system for this new computer system is limited, if the
primary system fails, our business could be adversely affected.
Product Development Risks--New product initiatives may not be successfully
implemented because of difficulty in assimilation, development costs and
diversion of management time.
We evaluate opportunities to develop new products through product line
extensions and product modifications in the ordinary course of our business.
Product line extensions and product modifications involve numerous risks,
including the difficulties in assimilating the developed products, the
expenses incurred in developing the products and the diversion of management's
attention from other business concerns. We cannot assure you that we can
successfully develop product line extensions or integrate newly developed
products into our business. In addition, we cannot assure you that newly
developed products will contribute favorably to our business. See "The
Company--Product Development."
Risk of Loss of Material Customers--Our business could be adversely affected
if we lost Wal-Mart Stores, Inc. ("Wal-Mart") as a major customer.
Consistent with industry practice, we do not operate under a long-term
written supply contract with Wal-Mart or any of our other customers. On a pro
forma basis, our 1998 sales to Wal-Mart accounted for approximately 17% of our
total sales. As such, our business would be adversely affected if we lost Wal-
Mart as a continuing major customer. See "The Company--Customers."
Public Perception--Our dietary supplement and appetite suppressant business
could be adversely affected if any of our products or any similar products
distributed by other companies prove to be harmful to consumers or if
scientific studies provide unfavorable findings regarding the safety or
effectiveness of our products or any similar products.
Our dietary supplements products contain vitamins, minerals, herbs and other
ingredients that we regard as safe when taken as directed and that various
scientific studies have suggested may offer health benefits. While we conduct
extensive quality control testing on our products, we generally do not conduct
or sponsor clinical studies relating to the benefits of our products. We are
highly dependent upon consumers' perception of the overall integrity of the
dietary supplements business, as well as the safety and quality of products in
that industry, and similar products distributed by other companies that may
not adhere to the same quality standards we do. See "The Company--Dietary
Supplements."
In the past, appetite suppressants, including Dexatrim, have been the
subject of negative press that has affected the public's perception of these
products. We will market and advertise Dexatrim as safe and effective to
offset its past negative perception, but we cannot assure you that Dexatrim,
or any of our other products, will not suffer from negative public perception.
See "The Company--Appetite Suppressants."
Dependence on Third Party Manufacturers--Our business could be adversely
affected if our third party manufacturers cease to perform adequately.
We use third party manufacturers to make products representing approximately
one-half of our sales volume, including Gold Bond powders, the Sunsource line
and Dexatrim. Additionally, we have entered into a manufacturing agreement
with Bristol-Myers Squibb Company ("BMS"), where BMS will manufacture Ban for
us until March 2001. In most other cases, the manufacturer is not obligated
under a contract that fixes the term of its commitment. Manufacturers may
experience problems with product quality or timeliness of product delivery.
Manufacturers may also discontinue production of products for us or increase
their manufacturing costs upon little or no advance notice. In any case, we
believe that we could find other contract manufacturers quickly if any of our
current contractors cease to perform adequately. However, if this occurs and
we cannot find other contract manufacturers, we may be forced to shift
production to in-house facilities. This may cause manufacturing delays, which
would cause disruption in our ability to fill orders. This could adversely
affect our business. See "The Company--Manufacturing and Quality Control."
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Reliance on Brands; Intellectual Property Concerns--If we are unable to
successfully protect our intellectual property, our business could be
adversely affected.
Our trademarks are of material importance to our business and are among our
most important assets. In fiscal year 1998, substantially all of our net sales
were from products bearing proprietary brand names, including Ban, Gold Bond,
Flexall, Icy Hot, Pamprin, Garlique, pHisoderm and Bullfrog. In addition, Ban
represented approximately 25.8%, the topical analgesics (as a group)
represented approximately 17.7%, Gold Bond represented approximately 12.1% and
Dexatrim represented approximately 10.6% of our pro forma fiscal 1998 net
sales. Accordingly, our future success may depend in part upon the goodwill
associated with our brand names, particularly Ban, Gold Bond and Dexatrim.
Our principal brand names are registered in the United States and certain
foreign countries. However, we cannot assure you that the steps we take to
protect our proprietary rights in our brand names will be adequate to prevent
the misappropriation of these registered brand names in the United States or
abroad. In addition, the laws of some foreign countries do not protect
proprietary rights in brand names to the same extent as do the laws of the
United States.
Through our subsidiary, Signal Investment & Management Co., we maintain and
have applied for patent, trademark and copyright protection in the United
States relating to certain of our existing and proposed products and
processes. We cannot assure you that we will be able to successfully protect
our intellectual property, and the loss of our intellectual property
protection could adversely affect our business. Additionally, we license
certain intellectual property from third parties, and we cannot assure you
that these third parties can successfully maintain their intellectual property
rights. The sale of certain of our products rely on our ability to maintain
and extend our licensing agreements with third parties, and we cannot assure
you that we will be successful in maintaining these licensing agreements. If
we lose the right to use these licenses, our business could be adversely
affected. See "The Company--Trademarks and Patents."
Availability of Raw Materials--Our business depends on the availability of
certain raw materials, the unavailability of which could have an adverse
effect on our business.
Certain of our products contain specialized ingredients that we obtain from
a single or limited number of international and domestic third party
suppliers. Additionally, we currently source one of our material ingredients
for Dexatrim, PPA, through a single supplier. An unexpected interruption or a
shortage in supply could adversely affect our business derived from these
products. We may not be able to raise prices quickly enough to immediately
offset the effects of any increase in the costs of these specialized
ingredients or fill customer orders in the event of a supply shortage. At
present, we do not foresee any significant problems in obtaining our
ingredients requirements at reasonable prices, but an unexpected interruption
or a shortage in supply could adversely affect our business in the future. See
"The Company--Manufacturing and Quality Control."
Environmental Matters--We may be liable for penalties under environmental
laws.
Our operations are subject to 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 near our manufacturing
facility has been designated as a National Priorities List Superfund site. We
could be named as a potentially responsible party due to our historical
discharge of wastewater into the creek that flows through the site. Our
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 these waste products are
regulated by various governmental agencies. See "The Company--Environmental
Matters."
In December 1998, we were named in a lawsuit with 37 other companies as
potentially responsible parties for the disposal of waste materials found at a
site in Birmingham, Alabama. Although the facts surrounding this case are
unclear, the lawsuit alleges that a company we used periodically during 1986
and 1987 to treat, store
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and dispose of waste materials from our manufacturing processes improperly
disposed of these waste materials. We cannot currently assess our potential
liability resulting from this lawsuit, but if we are found liable our business
could be adversely affected. See "The Company--Environmental Matters."
Product Liability and Insurance--We are constantly at risk that consumers and
users of our products will sue us for product liability.
We are not aware of any claims pending against us or our products that if
adversely decided would adversely affect our business. While we will continue
to attempt to take what we consider to be appropriate precautions, we cannot
assure you that these precautions will enable us to avoid significant product
liability exposure in the future. We maintain product liability insurance
through third party providers. We believe our insurance coverage is adequate;
however, we cannot assure you that we will be able to retain our existing
coverage or that this coverage will be cost-justified or sufficient to satisfy
any future claims. See "The Company--Product Liability and Insurance."
Dependence on Senior Management--We are dependant on certain senior managers,
the loss of whom could have a material adverse effect on our business.
Our future performance depends significantly upon the efforts and abilities
of certain members of senior management, in particular those of Zan Guerry,
Chairman of the Board and Chief Executive Officer, and A. Alexander Taylor II,
President and Chief Operating Officer. The loss of the services of either
Messrs. Guerry or Taylor, neither of whom has an employment agreement with the
Company, could adversely affect our business.
Impact of the Year 2000 Problem--The Year 2000 problem could have an adverse
effect on us.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field and cannot distinguish
21st Century dates from 20th Century dates. These date code fields will need
to distinguish 21st Century dates from 20th Century dates. This could result
in system failures or miscalculations causing interruptions in operations,
including a temporary inability to process transactions, send invoices or
engage in normal business activities. As a result, many companies' software
and computer systems may need to be upgraded or replaced in order to comply
with "Year 2000" requirements.
We have established a Year 2000 strategic plan which identifies initiatives
necessary to minimize failures of our electronic systems to process date-
sensitive information in the Year 2000 and thereafter. In connection with our
Year 2000 strategic plan, we will implement a new, fully integrated computer
system to replace all hardware and software we currently use in our financial,
manufacturing, inventory and customer control functions. We expect to complete
the replacement of our computer system by mid-1999.
Although we believe that our new computer system will be Year 2000
compliant, we may use third party equipment and software that may not be Year
2000 compliant. If any of this software or equipment does not operate properly
in the Year 2000 and thereafter, we could be forced to make unanticipated
expenditures to cure these problems, which could adversely affect our
business.
A failure of our computer system to be Year 2000 compliant could result in:
. a decrease in sales of our products;
. an increase in the allocation of our capital resources and employees'
time to address Year 2000 problems without additional sales normally
expected to result from the expenditure of these resources; and
. an increase in litigation costs relating to losses suffered by our
customers due to our Year 2000 problems.
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We have incurred and capitalized approximately $1.2 million to date in the
implementation of our new integrated computer system. We estimate the total
cost to replace our computer system to be in the range of $1.5 million to $2.0
million. Plan costs have been budgeted in our capital expenditures budget. Our
projected costs are based on management's best estimates and actual costs
could differ as the new system is implemented.
A critical step in our strategic plan is the coordination of Year 2000
readiness with third parties. We are communicating with our significant
suppliers and customers to determine the extent to which the Company and its
interface systems are vulnerable if any customer, supplier or third party
fails to resolve its Year 2000 issues. We have requested and received from a
majority of our principle customers and suppliers written statements regarding
their plans for meeting their Year 2000 compliance requirements. All of these
customers and suppliers indicate that they have knowledge of and are in the
process of resolving their Year 2000 issues. These companies are at various
stages of completion of their compliance plans, but all expect to be in full
compliance by or before the end of their 1999 fiscal years.
We believe that necessary modifications and replacements of our computer
systems will be completed in a timely fashion. If for any reason, our critical
service providers, suppliers or customers are unable to resolve their Year
2000 issues in a timely manner, our business could be adversely affected.
Specifically, the lack of Year 2000 readiness by raw material/packaging
suppliers could adversely impact the availability and expected cost of raw
materials and, therefore, production. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Year 2000."
Financing Change of Control Offer--We may not have the ability to raise the
funds necessary to finance the change of control offer required by the
indenture.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding Notes. However, it
is possible that we will not have sufficient funds at the time of the change
of control to make the required repurchase of Notes or that restrictions in
our senior secured credit facility will not allow such repurchases. In
addition, certain important corporate events, such as leveraged
recapitalizations, which would increase the level of our indebtedness, would
not constitute a "Change of Control" under the indenture. See "Description of
Notes--Repurchase at the Option of Holders."
Fraudulent Conveyance Matters--Federal and state statutes allow courts, under
specific circumstances, to void guarantees and require Noteholders to return
payments received from guarantors.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a guarantee could be voided, or claims in respect of
a guarantee could be subordinated to all other debts of that guarantor if,
among other things, the guarantor, at the time it incurred the indebtedness
evidenced by its guarantee:
. received less than reasonably equivalent value or fair consideration for
the incurrence of such guarantee; and
. was insolvent or rendered insolvent by reason of such incurrence; or
. was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
. intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor.
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The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine
whether a fraudulent transfer has occurred. Generally, however, a guarantor
would be considered insolvent if:
. the sum of its debts, including contingent liabilities, were greater
than the fair saleable value of all of its assets; or
. the present fair saleable value of its assets was 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
. it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, we believe that the guarantor, after giving effect to its
guarantee of these Notes, will not be insolvent, will not have unreasonably
small capital for the business in which it is engaged and will not have
incurred debts beyond its ability to pay such debts as they mature. There can
be no assurance, however, as to what standard a court would apply in making
such determinations or whether a court would agree with our conclusions in
this regard.
No Prior Market for Notes--If an active trading market does not develop for
these notes you may not be able to resell them.
Prior to this Offering, there was no public market for these Notes. We have
been informed by the underwriters that they intend to make a market in these
Notes after this Offering is completed. However, the underwriters may cease
their market-making at any time. In addition, the liquidity of the trading
market in these Notes, and the market price quoted for these Notes, may be
adversely affected by changes in the overall market for high yield securities,
changes in our financial performance or prospects or changes in the prospects
for companies in our industry generally. As a result, you cannot be sure that
an active trading market will develop for these Notes. If no active trading
market develops, you may not be able to resell your Notes at their fair market
value or at all.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes are estimated to
be approximately $72.7 million. Of such amount $45.0 million will be used to
permanently repay amounts under our senior secured credit facility. The
remaining amount, which is approximately $27.7 million, will be used for
general corporate purposes and the refinancing of outstanding indebtedness.
Pending such uses we will use the proceeds to reduce our revolving credit
borrowings. Upon closing of this Offering and assuming the amendment of our
senior secured credit facility, we will have $50 million available under our
revolving credit facility. Our revolving credit facility matures on the
earlier of (i) December 21, 2003, and (ii) the date on which the term loan is
repaid in full. Our term loan has a final maturity on December 21, 2003. The
weighted average interest rate under our senior secured credit facility on
February 28, 1999 was 7.63%. We obtained our senior secured credit facility in
December 1998 for the purpose of acquiring the Thompson Products, refinancing
existing debt and for general corporate purposes.
CAPITALIZATION
The following table sets forth the consolidated capitalization as of
February 28, 1999 on an actual basis and on a pro forma basis adjusted to give
effect to this Offering. This table should be read in conjunction with "Use of
Proceeds" and "Selected Consolidated Financial Data" included elsewhere in
this Prospectus Supplement. For a description of our existing senior secured
credit facility and our other indebtedness, see "Description of Other
Indebtedness."
<TABLE>
<CAPTION>
February 28, 1999
---------------------------------
Actual Adjustments Pro Forma
-------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Current maturities of long-term debt(1)....... $ 14,000 $ (5,000) $ 9,000
-------- -------- --------
Long-term debt:
Senior secured credit facility............... 118,500 (67,711) 50,789
12 3/4% Senior Subordinated Notes due 2004,
net of unamortized discounts................ 48,879 -- 48,879
8 7/8% Senior Subordinated Notes due 2008,
net of unamortized premium.................. 200,000 75,281 (2) 275,281
-------- -------- --------
Total long-term debt........................ 367,379 7,570 374,949
-------- -------- --------
Shareholders' equity(3)....................... 33,170 (1,378) 31,792
-------- -------- --------
Total capitalization.......................... $414,549 $ 1,192 $415,741
======== ======== ========
</TABLE>
- --------
(1) Consists of borrowings under our senior secured credit facility. On March
31, 1999, we made a scheduled principal payment of $3.5 million and had
net borrowings under our revolving credit facility of approximately $10.0
million which borrowings were used to fund the semi-annual interest
payment on the 8 7/8% notes and working capital needs. Upon consummation
of this Offering, it is anticipated that our senior secured credit
facility will be amended as described in "Description of Other
Indebtedness," and that there will be $50.0 million available to be
borrowed under our revolving credit facility. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity."
(2) The amount shown reflects a premium of approximately $0.3 million
associated with the issuance of the Notes.
(3) As of February 28, 1999 there were 20,000,000 common shares authorized and
approximately 9,763,000 issued. In April 1999 the Company amended its
amended and restated charter to increase the authorized common shares to
50,000,000.
S-18
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Balance Sheet gives effect to
this Offering and the repayment of a portion of existing senior debt with the
net proceeds received from this Offering as if they had occurred on February
28, 1999. The following Unaudited Pro Forma Consolidated Statements of Income
for the year ended November 30, 1998 and the three months ended February 28,
1999 and 1998 give effect to this Offering, the repayment of a portion of
existing senior debt, the acquisition of the Thompson Products and the
disposition of CornSilk (collectively the "Transactions") as if they had
occurred on December 1, 1997, and the acquisition of Ban as if it had occurred
on December 31, 1997.
The Unaudited Pro Forma Financial Data are presented for informational
purposes only and are not necessarily indicative of the financial position and
results of operations that would have been achieved had the Transactions been
completed as of the dates indicated and are not necessarily indicative of our
future financial position or results of operations.
The Unaudited Pro Forma Financial Data are based on our historical financial
statements and the assumptions and adjustments described in the accompanying
notes. We believe that such assumptions are reasonable. The Unaudited Pro
Forma Financial Data should be read in conjunction with our Consolidated
Financial Statements, those of Ban and the Thompson Products, and the
respective accompanying notes thereto appearing elsewhere in this Prospectus
Supplement or incorporated herein by reference.
S-19
<PAGE>
Unaudited Pro Forma Consolidated Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
Historical
Chattem as of Pro Forma
February 28, Offering Pro
1999 Adjustments Forma
------------- ----------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 3,120 $(1,101)(a) $ 2,019
Accounts receivable.................... 52,633 52,633
Inventories............................ 23,341 23,341
Other current assets................... 3,974 402 (b) 4,783
407 (a)
-------- --------
Total current assets................. 83,068 82,776
-------- --------
Property, plant, and equipment, net..... 18,463 18,463
-------- --------
Investment in Elcat, Inc................ 3,172 3,172
Patents, trademarks, and other purchased
product rights, net.................... 361,798 361,798
Other noncurrent assets................. 14,117 2,570 (c) 15,601
(1,086)(b)
-------- --------
Total noncurrent assets.............. 379,087 380,571
-------- --------
Total assets......................... $480,618 $481,810
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of debt............. $ 14,000 (5,000)(d) $ 9,000
Accounts payable and other accrued
liabilities........................... 57,116 57,116
-------- --------
Total current liabilities............ 71,116 66,116
-------- --------
Long-term debt.......................... 367,379 75,281 (c) 374,949
-------- --------
5,000 (d)
(72,711)(e)
Other noncurrent liabilities............ 8,953 8,953
-------- --------
Shareholders' equity:
Common stock........................... 2,033 2,033
Paid-in surplus........................ 74,369 74,369
Accumulated deficit.................... (41,810) (694)(a) (43,188)
(684)(b)
Foreign currency translation........... (1,422) (1,422)
-------- --------
Total shareholders' equity........... 33,170 31,792
-------- --------
Total liabilities and shareholders'
equity.............................. $480,618 $481,810
======== ========
</TABLE>
S-20
<PAGE>
Notes to Unaudited Pro Forma Consolidated Balance Sheet
(In thousands)
The Pro Forma Consolidated Balance Sheet reflects the Offering as if it had
occurred on February 28, 1999 (actual amounts may differ from amounts
estimated below).
(a) Represents the estimated payment required to be made by the Company to
terminate its interest rate swap agreements, net of tax benefit.
(b) Reflects the write-off of deferred financing costs resulting from the
expected repayment of senior debt, net of tax benefit.
(c) Reflects the issuance of the Notes and the amendment of the senior secured
credit facility:
<TABLE>
<S> <C>
Issuance of the Notes............................................... $75,000
Original issue premium.............................................. 281
Issuance-related fees and expenses.................................. (2,570)
-------
$72,711
=======
</TABLE>
(d) Reflects the reclassification of maturities under the amendment of the
senior secured credit facility.
(e) Represents the expected repayment of existing senior debt with the net
proceeds from this Offering.
S-21
<PAGE>
Unaudited Pro Forma Consolidated Statement of Income
For the Year Ended November 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Historical Historical Historical
Historical Ban for the Thompson CornSilk for
Chattem for Period from Products for the Period from Pro Forma
the Year December 31, the Year December 1, Acquisition
Ended 1997 to Ended 1997 to and Pro Forma
November 30, March 23, November 30, May 12, Disposition Offering
1998 1998 1998 1998 Adjustments Adjustments Pro Forma (g)
------------ ------------ ------------ --------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $220,064 $19,444 $54,735 $(4,534) $289,709
Cost of sales........... 60,889 7,026 12,071 (1,767) $(2,250)(a) 75,969
-------- ------- ------- ------- --------
Gross margin........... 159,175 12,418 42,664 (2,767) 213,740
Advertising and
promotion.............. 86,592 9,438 22,051 (2,189) 3,694 (b) 119,586
Selling, general, and
administrative......... 27,364 1,655 2,768 (539) 31,248
-------- ------- ------- ------- --------
Income from operations.. 45,219 1,325 17,845 (39) 62,906
Interest expense........ 26,676 11,520 (c) $2,106 (f) 40,302
Gain on product
divestiture............ (9,548) 9,548 (d) --
Other income, net....... (881) (881)
-------- ------- ------- ------- --------
Income before income
taxes and extraordinary
loss................... 28,972 1,325 17,845 (39) 23,485
Provision for income
taxes.................. 10,844 490(e) 6,603(e) (14)(e) (8,329)(e) (779)(e) 8,815
-------- ------- ------- ------- --------
Income before
extraordinary loss..... $ 18,128 $ 835 $11,242 $ (25) $ 14,670
======== ======= ======= ======= ========
Other Financial Data:
EBITDA................. $ 53,889 $ 75,548
EBITDA margin.......... 24.5% 26.1%
</TABLE>
S-22
<PAGE>
Unaudited Pro Forma Consolidated Statement of Income
For the Three Months Ended February 28, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Historical Historical Thompson
Chattem for the Products for the Pro Forma
Three Months Period from Acquisition Pro Forma
Ended December 1, 1998 to and Disposition Offering
February 28, 1999 December 21, 1998 Adjustments Adjustments Pro Forma (g)
----------------- ------------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net sales............... $62,728 $4,128 $66,856
Cost of sales........... 16,880 806 17,686
------- ------ -------
Gross margin........... 45,848 3,322 49,170
Advertising and
promotion.............. 24,738 55 192 (b) 24,985
Selling, general, and
administrative......... 6,700 192 6,892
------- ------ -------
Income from operations.. 14,410 3,075 17,293
Interest expense........ 8,806 667 (c) 477 (f) 9,950
Other income, net....... (131) (131)
------- ------ -------
Income before income
taxes and extraordinary
loss................... 5,735 3,075 7,474
Provision for income
taxes.................. 2,158 1,138 (e) (318)(e) (176)(e) 2,802
------- ------ -------
Income before
extraordinary loss..... $ 3,577 $1,937 $ 4,672
======= ====== =======
Other Financial Data:
EBITDA................. $17,505 $20,581
EBITDA margin.......... 27.9% 30.8%
</TABLE>
S-23
<PAGE>
Unaudited Pro Forma Consolidated Statement of Income
For the Three Months Ended February 28, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Historical Historical
Historical BAN for the Thompson Historical
Chattem for Period from Products for Cornsilk for Pro Forma
the Three December 31, the Three the Three Acquisition
Months Ended 1997 to Months Ended Months Ended and Pro Forma
February 28, March 23, February 28, February 28, Disposition Offering
1998 1998 1998 1998 Adjustments Adjustments Pro Forma (g)
------------ ------------ ------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $34,921 $19,444 $13,872 $(2,136) $66,101
Cost of sales........... 9,682 7,026 3,262 (598) $(2,250)(a) 17,122
------- ------- ------- ------- -------
Gross margin........... 25,239 12,418 10,610 (1,538) 48,979
Advertising and
promotion.............. 15,180 9,438 4,856 (890) 1,617 (b) 30,201
Selling, general, and
administrative......... 5,159 1,655 697 (35) 7,476
------- ------- ------- ------- -------
Income from operations.. 4,900 1,325 5,057 (613) 11,302
Interest expense........ 4,180 5,348 (c) $ 564 (f) 10,092
Other income, net....... (192) (192)
------- ------- ------- ------- -------
Income before income
taxes and extraordinary
loss................... 912 1,325 5,057 (613) 1,402
Provision for income
taxes.................. 303 490 (e) 1,871 (e) (227)(e) (1,745)(e) (209)(e) 483
------- ------- ------- ------- -------
Income before
extraordinary loss..... $ 609 $ 835 $ 3,186 $ (386) $ 919
======= ======= ======= ======= =======
Other Financial Data:
EBITDA................. $ 6,422 $15,169
EBITDA margin.......... 18.4% 22.9%
</TABLE>
S-24
<PAGE>
Notes to Unaudited Pro Forma Consolidated Statements of Income
(In thousands)
(a) Reflects management's estimate of the cost savings that would have been
generated during the period from December 31, 1997 to March 23, 1998. In
connection with the acquisition of Ban, Chattem entered into a
manufacturing agreement with BMS, pursuant to which BMS will manufacture
Ban at a pro forma cost savings of approximately $2,250 over the amount
reflected for the manufacture of Ban in the historical Ban financial
statements for the period from December 31, 1997 to March 23, 1998.
(b) Represents additional amortization of trademarks for BAN and the Thompson
Products as follows:
<TABLE>
<CAPTION>
Three months Three months
Year ended ended ended
November 30, February 28, February 28,
1998 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Ban................................... $1,387 $-- $1,040
Thompson Products..................... 2,307 192 577
------ ---- ------
$3,694 $192 $1,617
====== ==== ======
</TABLE>
(c) Represents the net increase in interest expense as follows:
<TABLE>
<CAPTION>
Three months Three months
Year ended ended ended
November 30, February 28, February 28,
1998 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Interest expense on the 8.875% Senior
Subordinated Notes due 2008......... $ 5,916 $-- $4,437
Interest expense under the existing
senior debt......................... 5,678 627 1,046
Interest savings resulting from the
repayment of indebtedness with the
proceeds from the sale of CornSilk.. (465) -- (253)
Amortization of deferred financing
costs............................... 391 40 118
------- ---- ------
$11,520 $667 $5,348
======= ==== ======
</TABLE>
(d) Reflects the elimination of the gain on the sale of CornSilk for the year
ended November 30, 1998.
(e) Represents income tax expense (benefit) at an effective tax rate of 37%.
(f) Reflects the net increase in cash interest expense as follows:
<TABLE>
<CAPTION>
Three months Three months
Year ended ended ended
November 30, February 28, February 28,
1998 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Interest expense resulting from the
incurrence of
indebtedness under the Notes........ $ 6,656 $ 1,664 $ 1,664
Interest savings resulting from:
Expected repayment of a portion of
existing senior debt............... (4,000) (1,000) (1,000)
Termination of the interest rate
swap agreements.................... (302) (125) (38)
Amendment of credit facility to
reduce interest rate margin by
.50%............................... (300) (75) (75)
Amortization of deferred financing
costs............................... 52 13 13
------- ------- -------
$ 2,106 $ 477 $ 564
======= ======= =======
</TABLE>
A change of 1/8% in the interest rate under the amended senior secured
credit facility would have an impact on pro forma interest expense of $88
for the twelve months ended February 28, 1999.
(g) During the period subsequent to this Offering, the Company expects to
incur an extraordinary loss associated with (1) the write-off of deferred
financing costs related to the portion of the existing senior debt to be
repaid with the net proceeds from this Offering and (2) the termination of
interest rate swap agreements. Such amounts are not reflected in the
accompanying pro forma consolidated statements of income.
S-25
<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 Supplement. The financial data as of
November 30, 1996, 1997, and 1998, and for the years then ended have been
derived from the audited financial statements of the Company contained
elsewhere in this Prospectus Supplement. The financial information as of
November 30, 1994 and 1995 has been derived from our audited financial
statements. The financial data as of and for the three months ended February
28, 1998 and 1999, have been derived from our unaudited financial statements
and, in the opinion of our management, include all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation. Interim results are not necessarily indicative of our financial
results 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 Supplement or
incorporated by reference herein.
<TABLE>
<CAPTION>
Three Months
Ended
Fiscal Year Ended November 30, February 28,
------------------------------------------------ ------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales............... $ 94,370 $100,598 $118,903 $143,235 $220,064 $ 34,921 $ 62,728
Cost of sales........... 28,495 29,755 35,120 39,253 60,889 9,682 16,880
-------- -------- -------- -------- -------- -------- --------
Gross margin............ 65,875 70,843 83,783 103,982 159,175 25,239 45,848
Advertising and
promotion.............. 33,336 37,242 45,512 56,176 86,592 15,180 24,738
Selling, general and
administrative......... 19,999 19,133 21,582 22,303 27,364 5,159 6,700
-------- -------- -------- -------- -------- -------- --------
Income from operations.. 12,540 14,468 16,689 25,503 45,219 4,900 14,410
Interest expense........ (9,360) (11,076) (13,394) (15,934) (26,676) (4,180) (8,806)
Investment and other
income, net (1)........ 112 218 2,325 1,679 10,429 192 131
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 3,292 3,610 5,620 11,248 28,972 912 5,735
Provision for income
taxes.................. 1,182 1,285 1,816 3,993 10,844 303 2,158
-------- -------- -------- -------- -------- -------- --------
Income from continuing
operations............. $ 2,110 $ 2,325 $ 3,804 $ 7,255 $ 18,128 $ 609 $ 3,577
======== ======== ======== ======== ======== ======== ========
Ratio of earnings to
fixed charges(2)....... 1.3x 1.3x 1.4x 1.7x 2.1x 1.2x 1.6x
Margin Data:
Gross margin............ 69.8% 70.4% 70.5% 72.6% 72.3% 72.3% 73.1%
Advertising and
promotion.............. 35.3 37.0 38.3 39.2 39.3 43.5 39.4
Selling, general and
administrative......... 21.2 19.0 18.2 15.6 12.4 14.8 10.7
Income from operations.. 13.3 14.4 14.0 17.8 20.5 14.0 23.0
Balance Sheet Data:
Working capital......... $ 9,901 $ 10,254 $ 19,793 $ 15,520 $ 684 $ 19,871 $ 11,952
Total assets............ 85,442 83,410 152,183 178,744 369,012 178,751 480,618
Long-term debt (3)...... 94,486 78,089 127,438 133,475 273,913 136,034 367,379
Shareholders' equity
(deficit).............. (29,551) (17,421) (7,180) 4,370 24,751 4,967 33,170
</TABLE>
- --------
(1) For 1996, amount reflects a gain on the sale of Soltice and Blis-to-Sol, a
gain on the sale of certain investments and a full year of dividend income
from our investment in Elcat, Inc. For 1998, amount reflects a gain on the
sale of CornSilk.
(2) For purposes of comparing this ratio, earnings consist of income before
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 that we believe 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, 1999 is 1.7x.
(3) Long-term debt is net of current maturities under our senior secured
credit facility.
S-26
<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 audited consolidated financial
statements and related notes thereto included elsewhere in this Prospectus
Supplement.
General
A significant portion of the Company's growth in recent periods has been
through the consummation of brand acquisitions. As the Company's brands
mature, sales increases become increasingly dependent upon acquisitions as
well as product line extensions. As a result, the Company believes that its
future operating results may not be directly comparable to its historical
operating results.
The following table sets forth the Company's net sales attributable to
domestic and international OTC healthcare products, toiletries and skin care
products, other products and total consumer products during the past three
fiscal years and for the first fiscal quarter of 1998 and 1999:
<TABLE>
<CAPTION>
Three Months
Year Ended November 30, Ended February 28,
---------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic:
OTC Healthcare......... $ 67,214 56.5% $ 92,223 64.4% $114,060 51.8% $22,274 63.8% $35,631 56.8%
Toiletries and Skin
Care.................. 36,232 30.5 33,887 23.7 84,850 38.6 9,433 27.0 23,635 37.7
International:
OTC Healthcare......... 2,255 1.9 3,053 2.1 5,863 2.7 804 2.3 642 1.0
Toiletries and Skin
Care.................. 12,204 10.3 12,154 8.5 14,390 6.5 2,249 6.4 2,572 4.1
Other Products.......... 998 0.8 1,918 1.3 901 0.4 161 0.5 248 0.4
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total Products......... $118,903 100.0% $143,235 100.0% $220,064 100.0% $34,921 100.0% $62,728 100.0%
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
</TABLE>
Fiscal 1998 was highlighted by the purchase of Ban, the issuance of
$200,000,000 of senior subordinated notes and the sale of CornSilk. Shortly
after the end of fiscal 1998, the Company acquired certain products from
Thompson Medical Company, Inc. ("Thompson") and completed the related
refinancing of senior debt.
On March 24, 1998, the Company acquired the Ban line of antiperspirant and
deodorant products from Bristol-Myers Squibb Company for a purchase price,
including assumed liabilities, of approximately $170,000,000. The Company
acquired the Ban trademarks, formulae, certain patents pertaining to
antiperspirant/deodorant technology, technical information, inventory,
manufacturing equipment and packaging related assets used in the manufacture
of Ban, but not the right to sell Ban in Japan.
Also on March 24, 1998, the Company issued at par value $200,000,000 of
8.875% Senior Subordinated Notes due 2008 (the "Notes") and entered into an
amended and restated senior secured bank credit agreement. The proceeds of the
Notes offering were used to fund the Ban purchase and related fees and
expenses, repay revolving bank indebtedness and provide additional working
capital.
On May 12, 1998, the Company sold the CornSilk oil control makeup brand to
Del Laboratories, Inc. for $10,750,000 plus inventories and the assumption of
certain liabilities. The Company sold, at a gain of $9,548,000, CornSilk
trademarks, formulae, technical information, inventory and other related
assets, but will continue to operate the CornSilk business in the United
Kingdom pursuant to a license agreement. The Company used the net proceeds
from the sale to reduce bank indebtedness.
During the year ended November 30, 1998, the Company prepaid previously
outstanding long-term bank debt and a portion of its 12.75% Senior
Subordinated Notes. In connection with the prepayment of those
S-27
<PAGE>
borrowings, the Company recorded an extraordinary loss of $2,859,000 (net of
income taxes), or $.29 per share. The loss primarily related to the write-off
of debt issuance costs.
The results of operations for fiscal year 1998 reflect a full year of
operations of the Sunsource product line, which was acquired in mid-1997,
approximately eight months' operations of the Ban brand, which was purchased
in March 1998 and approximately five and one half months of the CornSilk
brand, which was sold in May 1998.
During the year ended November 30, 1998, new additions to the Gold Bond
(Medicated Lotion), Bullfrog (for Babies and Superblock SPF45), Herpecin-L
(jar lip balm) and Sunsource (Harmonex) product lines were introduced.
On December 21, 1998, the Company acquired the Dexatrim, Sportscreme,
Aspercreme, Capzasin-P, Capzasin-HP, and Arthritis Hot brands from Thompson
for $95,000,000. The purchase price consisted of $90,000,000 cash and 125,500
shares of the Company's common stock. The cash portion of the purchase price
was financed by a new senior credit facility consisting of a $115,000,000 term
loan and a $50,000,000 working capital revolving line of credit, of which
$17,500,000 was outstanding at February 28, 1999. The proceeds of the new
senior credit facility were used to fund the Thompson Acquisition and related
fees and expenses and refinance existing bank indebtedness.
The Company will continue to seek increases in sales and earnings through a
combination of acquisitions and internal growth. As previously high growth
brands mature, sales increases will become even more dependent on acquisitions
and the development of successful line extensions. During fiscal 1999, the
Company introduced or will introduce the following line extensions/new
products: Gold Bond Triple Antibiotic Ointment, Ban Ultra Dry Roll-On, Ban
Sheer Dry Stick, Dexatrim Gel Caps, Flexall Quick Gel, Repose Stress Relief
Formula, Bullfrog Magicblock, pHisoderm 4 Way Daily Acne Cleanser, Mudd Sauna
Masque and Sun-In Super Streaks. Strategically, the Company continually
evaluates its products as part of its sales growth strategy and, in instances
where the Company's objectives are not realized, may dispose of these brands
and redeploy the assets to reduce indebtedness.
Results of Operations
The following table sets forth for the periods indicated certain items from
the Company's Consolidated Statements of Income expressed as a percentage of
net sales:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
November 30, February 28,
------------------- --------------------
1996 1997 1998 1998 1999
----- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- --------- ---------
Costs and Expenses:
Costs of sales..................... 29.5 27.4 27.7 27.7 26.9
Advertising and promotion.......... 38.3 39.2 39.3 43.5 39.4
Selling, general and
administrative.................... 18.2 15.6 12.4 14.8 10.7
----- ----- ----- --------- ---------
Total costs and expenses.......... 86.0 82.2 79.4 86.0 77.0
----- ----- ----- --------- ---------
Income from operations.............. 14.0 17.8 20.6 14.0 23.0
----- ----- ----- --------- ---------
Other Income (Expenses):
Interest expense................... (11.2) (11.1) (12.1) (11.9) (14.0)
Investment and other income, net... 1.9 1.2 0.4 0.5 0.2
----- ----- ----- --------- ---------
Total other income (expense)...... (9.3) (9.9) (7.4) (11.4) (13.8)
----- ----- ----- --------- ---------
Income before income taxes.......... 4.7 7.9 13.2 2.6 9.2
Provision for income taxes.......... 1.5 2.8 4.9 2.6 3.5
----- ----- ----- --------- ---------
Income before extraordinary loss.... 3.2% 5.1% 8.3% 1.7% 5.7%
===== ===== ===== ========= =========
</TABLE>
S-28
<PAGE>
Comparison of Three Months Ended February 28, 1999 and 1998
Net sales for the three months ended February 28, 1999 increased $27,807,000
or 79.6%, to $62,728,000 from $34,921,000 for the same period last year.
Domestic sales increased $27,726,000 or 87.1%, to $59,544,000 from $31,818,000
for last year's comparable period. Net sales of international products
increased $81,000, or 2.6%, from $3,103,000 in the fiscal 1998 period to
$3,184,000 in the current period.
The increase in domestic sales in the 1999 fiscal period was primarily due
to Ban and the Thompson Products acquired in March and December 1998,
respectively. Sales increases were also registered for the Gold Bond and
pHisoderm product lines, while decreases were experienced by the Bullfrog and
Sunsource brands. With the exception of the CornSilk brand, which was sold in
May 1998, sales in the first quarter of fiscal 1999 of the remaining product
lines were essentially flat or showed modest declines as compared to the
corresponding period of fiscal 1998. All sales variances were largely the
result of changes in the volume of unit sales of the particular brands.
The increase in Gold Bond sales was primarily due to the introductions of
the Medicated Lotion product in the third quarter of fiscal 1998 and the
Triple Antibiotic Ointment in the first quarter of fiscal 1999, although major
sales increases were realized for medicated powders and cream products. Gold
Bond sales in the first quarter of fiscal 1999 were favorably affected by
increased marketing support. pHisoderm sales increases in the first quarter of
fiscal 1999 were largely the result of the introduction of the 4 Way Daily
Acne Cleanser line extension and increased advertising and promotional
expenditures.
The sales decline in the first quarter of fiscal 1999 for the Sunsource
products, reflected the absence of a major distribution effort for those
products, unlike the same period in fiscal 1998 in which Harmonex was
launched, and the general softening of the dietary supplements' market. The
decline in Bullfrog sales in the first quarter of fiscal 1999 was largely a
result of sales occurring in the second fiscal quarter of fiscal 1999 as
compared to the first quarter of fiscal 1998.
International sales for the first quarter of fiscal 1999 increased $235,000,
or 25.7%, for the Canadian operation but declined $792,000 or 42.2%, for the
United Kingdom business. The increase in Canadian sales was almost entirely
associated with Ban, although sales increases were recorded for Flexall and
the Thompson Products, the latter of which were acquired in December 1998.
Sales declines were recorded for all of the United Kingdom brands largely due
to generally weak economic conditions presently existing in the United Kingdom
and Western Europe. U.S. export sales increased $638,000, or 203.8%, for the
fiscal 1999 period as compared to the same period in fiscal 1998, with
practically all of the increase being associated with Ban product line. All
sales variances were largely the result of changes in the volume of unit sales
of the particular brands.
Cost of goods sold as a percentage of net sales improved to 26.9% in the
first quarter of fiscal 1999 from 27.7% in the same 1998 period. The decline
was primarily the result of increased sales of higher gross margin product
lines in the first quarter of fiscal 1999.
Advertising and promotion expenses increased $9,558,000, or 63.0%, and were
39.4% of net sales in the first quarter of fiscal 1999 compared to 43.5% in
the corresponding fiscal 1998 period. The majority of the increase in the
fiscal 1999 period was related to Ban and Thompson Products acquired in March
and December 1998, respectively, and to the Gold Bond and pHisoderm brands.
Declines were recorded for the Flexall, Herpecin-L and CornSilk brands. The
CornSilk product line was sold in May 1998.
The increase of $1,541,000 or 29.9% in selling, general and administrative
expenses in the first quarter of fiscal 1999 was largely associated with
increased direct selling expenses, resulting from increased sales, and with
various expenses of the general service departments of the Company. The
selling, general and administrative expenses were 10.7% of net sales in the
first quarter of fiscal 1999 as compared to 14.8% in the same period of the
1998 fiscal year.
Interest expense increased $4,626,000, or 110.7% in the first quarter of
fiscal 1999, reflecting primarily the additional debt incurred for the Ban and
Thompson Products acquisitions in March and December 1998, respectively.
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<PAGE>
Investment and other income decreased by $61,000, or 31.8%, in the first
quarter of fiscal 1999, largely due to a decrease in dividends from a reduced
investment in Elcat, Inc.
An extraordinary loss of $427,000, net of income tax benefit, related to the
early extinguishment of debt was recorded in the first quarter of fiscal 1999.
The loss primarily related to the write-off of debt issuance costs connected
with outstanding long-term bank debt retired before maturity in the current
period.
The increase of $2,968,000, or 487.4%, in net income before extraordinary
loss in the first quarter of fiscal 1999 was largely the result of increased
sales, offset in part by increased interest expense, advertising and promotion
expenses and selling, general and administrative costs.
Fiscal 1998 Compared to Fiscal 1997
Net sales for the year ended November 30, 1998 increased $76,829,000, or
53.6%, to $220,064,000 from $143,235,000 for the previous fiscal year. The
increase consisted of a $71,787,000, or 56.1%, increase in domestic sales from
$128,024,000 in 1997 to $199,811,000 in 1998 and an increase of $5,042,000, or
33.1%, in international sales to $20,253,000 from $15,211,000.
For domestic products, sales of the Ban, Sunsource and Gold Bond products
accounted for the majority of the sales increase in fiscal 1998. Sales
increases were also realized for the Pamprin, Sun-In and Bullfrog brands.
Sales declines were recognized for Flexall, Icy Hot, Norwich Aspirin, Mudd 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 the volume of unit sales of the particular brands.
The increase in sales of the Gold Bond brand was due primarily to the
introduction of the lotion line extension in fiscal 1998 and also to growth of
the existing business. The sales increases for the Pamprin and Bullfrog
product lines were principally the result of increased marketing expenditures.
Also for the Bullfrog brand, the introduction of two new products and a new
major customer had a favorable impact on that product line's 1998 sales. The
Ban brand was acquired in March 1998 and the Sunsource product line was
purchased in June 1997.
The sales declines for the Flexall, Icy Hot, Mudd and pHisoderm brands were
principally the result of decreased advertising and promotional support.
CornSilk was sold in May 1998. The modest sales declines experienced by
certain of the other domestic products were essentially due to increased
competition in their respective categories, the maturation of these brands
and, in certain cases, reduced marketing expenditures.
In fiscal 1998, sales for the international segment increased $447,000, or
9.2%, for the Canadian operation and $1,808,000, or 19.5%, for the United
Kingdom business. The Ban product line accounted for the majority of the net
sales increase in Canada, while increases were also realized for the Pamprin,
Sun-In and Gold Bond brands. Sales increases were realized for all of the
product lines marketed by the United Kingdom operation. U.S. export sales
increased $2,787,000, or 264.8%, to $3,839,000 in 1998 to $1,052,000 in 1997,
with essentially all of the increase being associated with the Ban brand. All
sales variances were largely the result of changes in the volume of unit sales
of the particular brands.
Cost of goods sold as a percentage of net sales in fiscal 1998 was
essentially unchanged at 27.7% versus 27.4% for fiscal 1997. Cost of sales was
affected by the full year favorable impact of the Sunsource line which was
slightly more than offset by the unfavorable impact of the Ban acquisition.
Advertising and promotion expenses increased $30,416,000, or 54.1%, to
$86,592,000 in fiscal 1998 from $56,176,000 in fiscal 1997 and were 39.3% of
net sales compared to 39.2% in fiscal 1997. This increase was principally
associated with advertising and promotional expenses incurred in connection
with the Ban product line, acquired in March 1998, a full year of the
Sunsource brands and the introduction of Gold Bond Lotion. Increases in
advertising and promotion in 1998 were also recorded for the Pamprin and
Bullfrog brands.
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<PAGE>
Selling, general and administrative expenses increased $5,061,000, or 22.7%,
to $27,364,000 in fiscal 1998 from $22,303,000 in fiscal 1997, but decreased
as a percentage of net sales to 12.4% in fiscal 1998 as compared to 15.6% in
fiscal 1997. This dollar increase was largely associated with increases in
direct selling costs, freight, bad debts and field sales expenses as a result
of increased sales from acquired brands and associated increases in
administrative, financial and legal services.
Interest expense increased $10,742,000, or 67.4%, to $26,676,000 in fiscal
1998 from $15,934,000 in fiscal 1997 primarily as a result of increased
indebtedness associated with the Ban acquisition in March 1998 and the
Sunsource brand purchase in mid-1997. Interest expense is expected to increase
in fiscal 1999 due to the full year impact of the higher debt levels
associated with the Ban and Thompson Products 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 decreased $798,000, or 47.5%, to $881,000 in
fiscal 1998 from $1,679,000 in fiscal 1997. The decrease was due primarily to
the Company's sale of a portion of its investment in Elcat, Inc.
A gain of $9,548,000 on the sale of the CornSilk brand was recognized in
fiscal 1998.
The provision for income taxes was 37.4% of income before income taxes in
fiscal 1998 as compared to 35.5% in fiscal 1997. See Note 8 of Notes to
Consolidated Financial Statements.
Income before extraordinary loss increased $10,873,000, or 149.9%, to
$18,128,000 in fiscal 1998 from $7,255,000 in fiscal 1997. This increase
resulted primarily from increased sales and the gain on the sale of the
Cornsilk brand.
Fiscal 1997 Compared to Fiscal 1996
For the year ended November 30, 1997, net sales increased $24,332,000, or
20.5%, to $143,235,000 from $118,903,000 for the previous fiscal year. This
increase consisted of a $23,580,000, or 22.6%, increase in domestic sales from
$104,444,000 in fiscal 1996 to $128,024,000 in 1997 and an increase of
$752,000, or 5.2%, in international sales to $15,211,000 from $14,459,000.
For domestic products, sales of the Gold Bond, Herpecin-L, Icy Hot and the
Sunsource products accounted for the majority of the sales increase in fiscal
1997. 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 of unit sales of the particular brands.
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 fiscal 1997 and the
continuing effect of new packaging in late fiscal 1995. The sales increase of
the Icy Hot brand reflected the line extension launched in early fiscal 1997
and a 68.0% increase in advertising and promotion expenditures in fiscal 1997
over fiscal 1996.
Sales declines for the remainder of the domestic products were 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 reflected the loss of a major customer
and the cool, wet spring experienced in fiscal 1997.
In fiscal 1997, sales for the international 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 were also realized
for the remainder of the product lines marketed in that country, except for
Ultraswim 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
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<PAGE>
largely due to a change in the United Kingdom from a dealer distribution
system to one operated by the Company's United Kingdom subsidiary in that
country. U.S. export sales increased $157,000, or 17.5%, in fiscal 1997 over
fiscal 1996, with essentially all of the increase being associated with the
Icy Hot brand. All sales variances were largely the result of changes in
volume of unit sales of the particular brands.
Cost of goods sold as a percentage of net sales in fiscal 1997 decreased to
27.4% from 29.5% in fiscal 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 $10,664,000, or 23.4%, to
$56,176,000 in fiscal 1997 from $45,512,000 in fiscal 1996 and were 39.2% of
net sales compared to 38.3% in fiscal 1996. This increase was principally
associated with the Gold Bond and Herpecin-L brands, which were acquired in
fiscal 1996; the Sunsource product line, acquired in mid-1997; and Icy Hot.
Increases in fiscal 1997 were also recorded for the Pamprin, Premsyn PMS,
Ultraswim and Sun-In brands.
Selling, general and administrative expenses increased $721,000, or 3.3%, to
$22,303,000 in fiscal 1997 from $21,582,000 in fiscal 1996, but decreased as a
percentage of net sales to 15.6% in fiscal 1997 as compared to 18.2% in fiscal
1996. This increase was largely associated with increases in direct selling
costs, freight and field sales expenses, resulting from increased sales,
offset in part by reductions in financial and legal services expenses.
Interest expense increased $2,540,000, or 19.0%, to $15,934,000 in fiscal
1997 from $13,394,000 in fiscal 1996 primarily as a result of increased
indebtedness associated with the Gold Bond and Herpecin-L product acquisitions
in fiscal 1996 and the Sunsource brands' purchase in mid-1997.
Investment and other income increased $229,000, or 15.8%, to $1,679,000 in
fiscal 1997 from $1,450,000 in fiscal 1996.
The provision for income taxes was 35.5% of income before income taxes in
fiscal 1997 as compared to 32.3% in fiscal 1996. See Note 8 of Notes to
Consolidated Financial Statements.
Income before extraordinary loss increased $3,451,000, or 90.7%, to
$7,255,000 in 1997 from $3,804,000 in fiscal 1996. This increase resulted
primarily from increased sales and a more favorable product sales mix with
regard to gross margins in 1997.
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 operating expenses, long-term debt servicing, acquisitions, working
capital and capital expenditures.
Cash provided by operating activities was $20,790,000 and $10,116,000 for
fiscal 1998 and fiscal 1997, respectively. The increase in cash flows from
operations from fiscal 1997 to fiscal 1998 was primarily the result of
increases in net income, depreciation and amortization, accounts receivable,
accounts payable and accrued liabilities. The operating activities were
favorably impacted by the acquisition of the Sunsource product line in fiscal
1997 and Ban in fiscal 1998. Cash of $4,495,000 and $8,129,000 was used in
operations for the three months ended February 28, 1999 and 1998,
respectively. The increase in cash flows from operations over the fiscal 1998
period was primarily the result of increases in net income, depreciation and
amortization and accrued liabilities. The increases were due in part to the
Ban and Thompson Products acquisitions in March and December 1998,
respectively.
Investing activities used cash of $161,595,000 and $32,722,000 in fiscal
1998 and fiscal 1997, respectively. The use of cash in fiscal 1998 reflected
the expenditures required for the purchase of Ban, while the fiscal 1997
amount represented the purchase of the Sunsource product line. In fiscal 1998,
capital expenditures totaled
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<PAGE>
$9,050,000 compared to $2,758,000 in fiscal 1997. The increase was due
primarily to the machinery and equipment purchased as a part of the Ban
acquisition and the purchase of a 68,300 square foot manufacturing and
warehouse facility in Chattanooga, Tennessee. Investing activities used cash
of $87,015,000 and $662,000 in the three months ended February 28, 1999 and
1998, respectively. The increase of $86,353,000 in the first quarter of fiscal
1999 was largely the result of the acquisition of the Thompson Products'
trademarks and related assets in December 1998 and additions to property,
plant and equipment. Capital expenditures are expected to be approximately
$7,000,000 in fiscal 1999.
Financing activities provided cash of $138,090,000 in fiscal 1998 and
$11,434,000 in fiscal 1997. In fiscal 1998, the Company financed the
acquisition of Ban and repaid all revolving bank indebtedness with the
proceeds from its issuance of $200,000,000 of 8.875% Senior Subordinated Notes
due 2008. In fiscal 1997, the Company financed the Sunsource acquisition with
the proceeds of a $95,000,000 credit agreement and the issuance of 300,000
shares of the Company's common stock at a value of $13.50 per share to the
sellers of Sunsource. In December 1998, the Company financed the acquisition
of the Thompson Products with the proceeds of a $165,000,000 bank credit
agreement and 125,500 shares of common stock valued at approximately $39.85
per share. Financing activities provided cash of $92,564,000 in the three
months ended February 28, 1999 compared to $5,351,000 for the comparable prior
year period. The increase of $87,213,000 in the first quarter of fiscal 1999
reflected additional bank borrowing required for the purchase of the Thompson
Products in December 1998.
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 $7,900,000 in the aggregate, over a six year period
from June 1997 if sales of the Sunsource business exceed certain levels as
defined in the purchase agreement. In addition, for two new dietary
supplements products introduced in the first three years following the
acquisition of the Sunsource business, the Company is obligated to pay a 3.5%
royalty on net sales of such new products for a period of seven years. The
Company is obligated to pay a royalty on Herpecin-L equal to the greater of
$214,000, or 5% of net sales, for each twelve month period ending June 30,
2003.
The following table presents working capital data at November 30, 1997 and
1998 and at February 28, 1998 and 1999 or for the respective periods then
ended:
<TABLE>
<CAPTION>
November 30, February 28,
------------- ----------------
ITEM 1997 1998 1998 1999
---- ------- ---- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Working capital (current assets less current
liabilities)................................ $15,520 $684 $19,871 $11,952
Current ratio (current assets divided by
current liabilities)........................ 1.5x 1.0x 1.6x 1.2x
Quick ratio (cash and cash equivalents and
receivables divided
by current liabilities)..................... 1.0x .63x 1.0x 0.8x
Average accounts receivable turnover......... 5.9x 6.8x 5.6x 6.0x
Average inventory turnover................... 3.2x 3.6x 2.9x 3.4x
Working capital as a percentage of total
assets...................................... 8.7% 0.2% 11.1% 2.5%
</TABLE>
The improvement in the current and quick ratio at February 28, 1999 as
compared to November 30, 1998, reflected primarily increases in accounts
receivable and inventories, which were largely associated with the acquisition
of the Thompson Products in December 1998, the seasonal products, e.g.,
Bullfrog and Sun-In, and the reduction of accounts payable.
Total debt outstanding was $381,379,000 at February 28, 1999 compared to
$291,357,000 at November 30, 1998, an increase of $90,022,000 during the first
quarter of fiscal 1999. This increase represented essentially the additional
loans required to purchase the Thompson Products in December 1998.
Pro Forma Liquidity
It is anticipated that simultaneously upon the closing of the sale of the
notes, the Company will amend its senior secured credit facility to provide
for a $70,000,000 term loan and a $50,000,000 working capital revolving
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<PAGE>
loan, of which $70,000,000 will be outstanding on the closing date. See
"Description of Other Indebtedness." Because the Company has not obtained a
commitment from its lenders to amend the senior secured credit facility, there
can be no assurances that such facility will be amended. If not amended, the
Company's existing $165.0 million senior secured credit facility will remain
in place. The Company intends to continue to reduce its debt costs by
opportunistically repurchasing certain of its outstanding higher interest rate
debt securities, including in open market purchases.
We believe that cash generated from operations and amounts available under
our revolving credit facility will be adequate to meet our anticipated debt
service requirements, capital expenditures and working capital needs for the
foreseeable future. There can be no assurance, however, that our business will
generate sufficient cash flow from operations or that future borrowings will
be available under the senior secured credit facility or otherwise to enable
us to service our indebtedness, including the senior secured credit facility
and the notes, to retire or redeem the notes when required or to make
anticipated capital expenditures. Our future operating performance and our
ability to service or refinance the notes and to service, extend or refinance
the senior secured credit facility will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond our control. See "Risk Factors."
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 following is a status report of the Company's efforts to date for
fulfilling those compliance requirements:
The Company's State of Readiness
The Company is in the process of replacing its current information
technology (IT) systems with a new fully integrated computer system to replace
all hardware and software that the Company uses in its financial,
manufacturing and customer services functions. The new IT system will be year
2000 compliant. Accordingly, the year 2000 compliance requirements are
considered only a portion of the Company's systems replacement effort. This
replacement is expected to be completed on or before December 1, 1999, the
beginning of the Company's 2000 fiscal year. Although the Company believes
that the new IT system will be year 2000 compliant, the Company uses third
party equipment and software that may not be year 2000 compliant. If any of
this software or equipment does not operate properly in the year 2000 and
thereafter, the Company could be forced to make unanticipated expenditures to
cure these problems, which could adversely affect the Company's business.
Cost to Address Year 2000 Issues
The total cost of the new software and implementation necessary to replace
the Company's current IT system plus address the year 2000 issues is estimated
to be from $1,500,000 to $2,000,000. Plan costs have been budgeted in the
Company's capital expenditures budget. The projected costs are based on
management's best estimates and actual results could differ as the new system
is implemented. Approximately $1,150,000 had been expended and capitalized on
this system at February 28, 1999.
Risks of Year 2000 Issues
The Company is in the process of execution of its formal year 2000
compliance plan and expects to achieve implementation on or before December 1,
1999.
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<PAGE>
The Company is requesting from certain of its principal customers and
suppliers written statements regarding their knowledge of and plans for
meeting the year 2000 compliance requirements. All respondents indicate that
they have knowledge of and are in the process of fulfilling these
requirements. These companies have stated that they are at various stages of
completion of their compliance plans, but all have indicated that they expect
to be in full year 2000 compliance by or before the end of their 1999 fiscal
year.
In the event that the Company or any of its significant customers or
suppliers does not successfully and timely achieve year 2000 compliance, the
Company's business or operations could be adversely affected.
Contingency Plans
The Company is currently developing a "Worst Case Contingency Plan", which
will include the ability to utilize "Work Force", "Spreadsheet" and "Work
Around" programming and procedural efforts. This contingency system will be
activated by December 1, 1999. The cost of these temporary measures is
estimated between $500,000 and $1,000,000.
The Company's current systems are fully capable (except for year 2000 date
handling) of processing all present and future transactions of the business.
Accordingly, no major efforts have been delayed or avoided which affect normal
business operations as a result of the incomplete implementation of the year
2000 IT systems. These current systems will become the foundation of the
Company's contingency system.
Foreign Operations
The Company's primary foreign operations are conducted through its Canadian
and United Kingdom subsidiaries. The functional currencies of these
subsidiaries are Canadian dollars and British pounds, respectively.
Fluctuations in exchange rates can impact operating results, including total
revenues and expenses, when translations of the subsidiary financial
statements are made in accordance with SFAS No. 52, "Foreign Currency
Translation." For the years ended November 30, 1998 and 1997, these
subsidiaries accounted for 7.5% and 9.9% of total revenues, respectively, and
2.4% and 4.5% of total assets, respectively. It has not been the Company's
practice to hedge its assets and liabilities in Canada and the United Kingdom
or its intercompany transactions due to the inherent risks associated with
foreign currency hedging transactions and the timing of payment between the
Company and its two foreign subsidiaries. Historically, gains or losses from
foreign currency transactions have not had a material impact on the Company's
operating results. Losses of $74,000 and $68,000 for the years ended November
30, 1998 and 1997, respectively, resulted from foreign currency transactions.
See "Foreign Currency Translation" in Note 2 of Notes to Consolidated
Financial Statements.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The statement was adopted by the Company on
December 1, 1998. Under provisions of this statement, the Company has included
a financial statement presentation of comprehensive income and its components
to conform to these new requirements. As a consequence of this change, certain
reclassifications were necessary for previously reported amounts to achieve
the required presentation of comprehensive income. Implementation of this
disclosure standard has not and will not affect the Company's financial
position or results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." The
statement was adopted by the Company for fiscal 1999. Under provisions of this
statement, the Company is required to modify or expand the financial statement
disclosures for operating segments, products and services, and geographic
areas. Implementation of this disclosure standard will not affect the
Company's financial position or results of operations.
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<PAGE>
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Post Retirement
Benefits." The statement amends SFAS Nos. 87, 88 and 106. SFAS No. 132 revises
employers' disclosures about pension and other post retirement benefit plans.
The Company has adopted SFAS No. 132 for fiscal 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.13
established accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No.133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No.133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement SFAS No.133 as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No.133 cannot be applied retroactively. SFAS No.133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired or substantively
modified after December 31, 1997 (and, at the Company's election, before
January 1, 1998).
The Company has not yet quantified the impacts of adopting SFAS No. 133 on
its financial statements and has not determined the timing of or method of its
adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.
Seasonality
During recent fiscal years, the Company's first quarter's net sales and
gross profit have trailed the other fiscal quarters because of slower sales of
domestic seasonal and international consumer products and the relative absence
of promotional campaigns during this quarter. As a result of the Ban and the
Thompson Products acquisitions, seasonality should not be as pronounced as in
years past; however, because of seasonal products, net sales and gross profit
during the first fiscal quarter will continue to trail the other fiscal
quarters.
Forward Looking Statements
The Company may from time to time make written and oral forward looking
statements. Written forward looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases and in reports
to shareholders. The Private Securities Litigation Reform Act of 1995 contains
a safe harbor for forward looking statements. The Company relies on this safe
harbor in making such disclosures. The forward looking statements are based on
management's current beliefs and assumptions about expectations, estimates,
strategies and projections for the Company. These statements are not
guarantees of future performance and involve risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward looking statements. The Company undertakes no obligation to update
publicly any forward looking statements whether as a result of new
information, future events or otherwise. The risks, uncertainties and
assumptions regarding forward looking statements include, but are not limited
to, risks related to acquisitions; product demand and market acceptance risks;
product development risks, such as delays or difficulties in developing,
producing and marketing new products or line extensions; the impact of
competitive products, pricing and advertising; constraints resulting from
financial condition of the Company, including the degree to which the Company
is leveraged, debt service requirements and restrictions under bank loan
agreements and indentures; government regulation; risks of loss of material
customers; public perception regarding our products; dependence on third party
manufacturers; reliance on brands and intellectual property concerns;
availability of raw materials; environmental matters; product liability and
insurance; year 2000; and other risks described in the Company's Securities
and Exchange Commission filings.
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<PAGE>
THE COMPANY
We are a leading marketer and manufacturer of a variety of branded consumer
products, including over-the-counter ("OTC") healthcare products and
toiletries and skin care products. Our high quality branded products target
niche market segments with favorable demographic appeal and are among the
market leaders in their respective categories. By quickly adapting to changing
consumer preferences and utilizing creative and cost-effective marketing
techniques, we support our brands on a national level across all major
distribution channels, including food, drug and mass merchandisers.
Our portfolio of branded products includes:
. OTC healthcare products
. the Gold Bond line of medicated powder, cream and lotion products;
. topical analgesics, such as Flexall, Icy Hot, Aspercreme and
Sportscreme;
. the appetite suppressant, Dexatrim;
. menstrual internal analgesics, including Pamprin; and
. dietary supplements under the Sunsource label, including Garlique,
Harmonex and Rejuvex.
. Toiletries and skin care products
. Antiperspirants and deodorants under the Ban brand name; and
. Functional toiletries and skin care products, including pHisoderm
skin cleansers and Bullfrog sunblock.
Several of our brands have the number one market share in their categories,
including Gold Bond (medicated powders), Ban (roll-on
antiperspirant/deodorant), Dexatrim (diet pills) and Garlique (garlic
extracts). Additionally, our portfolio of six brands leads the topical
analgesics market and, together, our Pamprin and Premsyn PMS brands, are the
leading menstrual internal analgesics in the United States.
Competitive Strengths
We will build upon the following competitive strengths to enhance our
brands' positions in the marketplace:
. Effective Brand Management. We acquire and develop brands that compete
in niche segments of larger markets where we can create significant
brand equity. We enhance the value of our brands through aggressive and
effective advertising, promotions and product line extensions. Through
such efforts, we have been able to develop brand recognition within our
product markets to achieve consumer loyalty, extend product life cycles
and maintain favorable relationships with retailers.
. Cost-Effective Advertising and Promotional Strategy. We improve the
profitability of our brand portfolio through our marketing, promotion
and advertising expertise. We traditionally invest approximately 40% of
our sales in advertising and promotions. We believe we maintain a
significant competitive advantage over many of our competitors by:
. purchasing advertising time at reduced rates;
. minimizing certain related expenditures, such as the production of
commercials and payments to advertising agencies;
. managing trade and consumer promotion spending on a cost-effective
basis; and
. quickly adapting our marketing strategies to changing consumer
preferences.
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. Cost-Effective Operating Structure. By carefully managing our fixed
costs we have developed an efficient and cost-effective operating
structure in marketing, sales, product development, manufacturing,
distribution and administrative support. As a result, we are able to
handle additional sales volume from new and acquired products with
comparatively smaller increases in our fixed expenses. By leveraging
our operating structure we have increased sales by approximately $170.8
million from fiscal 1996 to fiscal 1998 on a pro forma basis, while
reducing our selling, general and administrative expenses from 18.2% to
10.8% of sales during the same period. By carefully managing purchasing
and manufacturing expenses, we enjoyed an average gross profit margin
of over 70% in fiscal 1998.
. Established National Sales and Distribution Network. We have an
established national sales and distribution network that is balanced
among all major food, drug and mass merchandiser retailers. We utilize
this distribution network effectively to increase the market
penetration of our acquired brands and our product line extensions,
while maintaining our selling expense at less than 3% of sales in
fiscal 1998.
. Successful Integration of Acquisitions. We identify, acquire and
integrate brands that are either embryonic in their development or
undermanaged and that we can manufacture and market with relatively
small increases in operating expenses. Since 1994 we have successfully
completed seven acquisitions, resulting in the purchase of 15 brands.
We have been disciplined in the prices we have paid for acquired brands
and have acquired only brands that are immediately accretive to our
earnings. Since fiscal 1996 we have spent approximately $345.7 million
on acquisitions and have increased earnings before interest, taxes,
depreciation and amortization ("EBITDA") from $20.8 million for fiscal
1996 to $81.0 million for the twelve months ended February 28, 1999 on
a pro forma basis.
Growth Strategy
We have grown rapidly by actively acquiring new brands and expanding our
existing brands. This strategy has been largely responsible for our compound
annual growth of 56% in sales and 90% in EBITDA from fiscal 1996 to fiscal
1998 on a pro forma basis. Our future growth will depend on our ability to
continue to successfully make acquisitions and generate internal growth, as
described below.
. Acquisitions. We seek to acquire brands with unrealized potential that
have been under-marketed by larger firms or have achieved success in
limited geographic regions. We focus our acquisition efforts on niche
markets in the consumer products sector where we are able to gain a
significant market position by applying our competitive strengths. For
example, we have increased sales in the Gold Bond brand from less than
$28 million in annual sales at the time of purchase in 1996 to over $35
million in fiscal 1998. Additionally, with the Thompson Acquisition, we
became the leading seller of topical analgesics in the United States
and acquired Dexatrim, the number one selling diet pill. As many of our
competitors rationalize their product lines or businesses, we
anticipate additional brand acquisition opportunities.
. Internal Growth. Our internal growth strategy for our existing brands
focuses on increasing market penetration and brand awareness and
introducing product line extensions. For example, we have grown the Icy
Hot brand from approximately $5 million in annual sales at the time we
acquired the brand in 1991 to over $13 million in fiscal 1998. Since
1994, we have introduced 25 line extensions of 12 of our existing
brands. In 1999 we have introduced or plan to introduce 10 product line
extensions including for the Gold Bond, Ban and Sunsource lines, among
others.
Recent Developments
On December 21, 1998, we acquired a line of appetite suppressants and
external analgesics sold under the Dexatrim, Aspercreme, Sportscreme,
Capzasin-P, Capzasin-HP and Arthritis Hot trademarks (the "Thompson Products")
from Thompson. With the Thompson Acquisition, Chattem became the leading
manufacturer and
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marketer of topical analgesics in the United States and in Dexatrim purchased
the number one selling diet pill in the United States. In fiscal 1998, the
Thompson Products would have produced approximately $55 million in sales and
provided EBITDA of approximately $17.8 million on a pro forma basis.
Additionally, we believe we can realize certain operating improvements from
advertising efficiencies, the elimination of the use of brokers,
rationalization of market research and related expenses and certain
procurement savings. We paid a total consideration of $95.0 million for the
Thompson Products, consisting of $90.0 million in cash and $5.0 million of
Chattem common stock. The cash portion was financed with borrowings available
under our senior secured credit facility.
Products
We offer high quality branded products in attractive niche market segments
in which our products are among the market leaders in their respective
categories. Our product categories include OTC healthcare products and
toiletries and skin care products.
OTC Healthcare Products
We market a diversified portfolio of brand name OTC healthcare products,
many of which are among the market leaders in the United States in their
respective categories. Our OTC healthcare product portfolio consists of the
following brands:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Brand Description
- -------------------------------------------------------------------------------
<C> <S>
Gold Bond Medicated powder, lotion and anti-itch cream for
adults and babies
Topical Analgesics
Flexall Aloe-vera based reliever of arthritis pain and
muscular irritation in joints
Icy Hot Extra strength dual action muscular and arthritis pain
reliever
Aspercreme Greaseless, odor-free analgesic rub designed to
relieve minor arthritis pain, muscle pain and strains
Sportscreme Slightly scented external muscular pain reliever,
offered in both lotion and cream form
Capzasin-P Deep penetrating, odor-free analgesic rub for
arthritis pain, offered in both lotion and cream form
Capzasin-HP Deep penetrating, odor-free analgesic rub for
arthritis pain, offered in both lotion and cream form
Arthritis Hot Low-priced external analgesic to relieve arthritis
pain
Appetite Suppressants
Dexatrim The number one selling diet pill in the United States
Internal Analgesics and
Other
Pamprin/Premsyn PMS Together, the number one selling brands for relief of
menstrual symptoms in the United States
Herpecin-L Lip balm to treat and prevent cold sores
Norwich Pharmaceutical-quality, aspirin-based product
Benzodent Dental cream for relief from pain related to dentures
Garlique Promotes lower cholesterol and blood pressure
Harmonex Promotes emotional and physical well-being with St.
John's Wort and Siberian ginseng
Rejuvex Helps relieve symptoms associated with menopause
Helps regulate the body's sleep/wake cycle with
Melatonex melatonin
Supports prostate health and promotes free urinary
Propalmex flow
Helps improve the body's natural resistance to
Echinex infection with echinacea
Repose Helps relieve symptoms related to stress
</TABLE>
- -------------------------------------------------------------------------------
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Gold Bond
The Gold Bond brand competes in the adult, foot and baby medicated powder,
lotion 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. Total retail sales for the brand have grown from less than $28
million when we acquired the brand in fiscal 1996 to over $35 million in
fiscal 1998, a 25% increase over the period.
We believe that Gold Bond represents a major growth opportunity. We heavily
support the Gold Bond product line with national television and radio
advertising, as well as with consumer promotions. In 1997, we added two
product line extensions with the introduction of Gold Bond Medicated Foot
Powder and Gold Bond Corn Starch Plus Medicated Baby Powder. In 1998, we
introduced Gold Bond Medicated Lotion. We have recently launched Gold Bond
Antibiotic Ointment and believe Gold Bond can be further extended into
additional products.
Topical Analgesics
We are currently the market leader in topical analgesics, with a product
portfolio that appeals to a variety of demographic and need profiles.
According to the A. C. Nielsen report, as of March 13, 1999, our six analgesic
brands held a combined 37% market share, compared to a 20% market share for
our closest competitor's product. With the Flexall, Icy Hot, Aspercreme,
Sportscreme, Capzasin-P, Capzasin-HP and Arthritis Hot brands, we have
products targeted for different types of pain relief and consumer profiles.
Because arthritis sufferers represent the largest users of topical analgesics,
we believe that the advancing age of the U.S. population offers a significant
growth opportunity for our topical analgesics. We also believe that sales of
our topical analgesics will benefit from the emphasis on fitness and physical
activity among the U.S. population. We will continue to take advantage of
these trends by supporting these brands with targeted advertising campaigns,
including a new campaign for the Flexall brand featuring Joe Montana. In 1999,
we will add a product line extension with the introduction of Flexall QuikGel,
which we expect to add incremental revenues to the Flexall brand.
Appetite Suppressants
Dexatrim competes in the OTC diet pill category of the approximately $150
million U.S. appetite suppressant market. Dexatrim is the number one selling
diet pill in this category. According to Information Resources, Inc., as of
October 4, 1998, Dexatrim enjoyed a 59% share of the $67 million PPA-based
diet pill market. Based on a survey conducted by Drug Topics in 1996, Dexatrim
was the number one pharmacist-recommended diet pill in 1996. We believe that
this category represents a growth opportunity, and are emphasizing the
category through high levels of marketing and advertising support in 1999.
Internal Analgesics and Other
We also manufacture and market menstrual internal analgesics and a variety
of other smaller products that, because they are profitable products and
require minimal advertising and promotion expenditures, provide excellent
variable contribution. Among these products, Pamprin and Premsyn PMS combined
outsell any other OTC menstrual internal analgesic on the market today (based
on units sold) in the United States. Combined sales for these two brands have
grown over 12% from fiscal 1997 to fiscal 1998.
Dietary Supplements
We entered the herbal dietary supplements market with our 1997 purchase of
Sunsource. The herbal dietary supplement industry in the United States,
estimated to be between $2.0 billion and $2.5 billion, is considered
underdeveloped compared to the $6.0 billion European market. Dietary
supplements are profitable for mass market retailers, which are expanding
their presence in this market to take advantage of this growth opportunity.
Several of our dietary supplement products are the leaders in their
categories, including Garlique, Rejuvex and Propalmex. In February 1998, we
launched Harmonex, which contains a unique combination of St. John's Wort for
emotional well-being and Siberian ginseng for physical well-being. In Spring
of 1999, we introduced
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Repose, a stress relief dietary supplement containing kava and a blend of
vitamins and minerals. According to A.C. Nielsen, nationwide kava sales for
the 52-week period ending October 1998 were approximately $16 million. Based
on a survey conducted in Fall 1998, we see Repose as a growth opportunity and
are supporting its introduction with an extensive advertising and marketing
campaign. Although sales of dietary supplements represented only approximately
10.3% of our pro forma fiscal 1998 sales, these product lines offer
significantly higher gross margins than some of our other products.
Toiletries and Skin Care Products
Antiperspirants and Deodorants
In March 1998, we purchased the Ban brand from BMS. Ban is one of the most
recognized brand names in the antiperspirant and deodorant market in the
United States, is the number one selling product in the roll-on category and
has consistently maintained a strong market position since its introduction in
1955. Ban is positioned as a highly effective antiperspirant and deodorant
that appeals to both female and male consumers. Ban's high brand recognition
has enabled it to cultivate a loyal consumer base.
Antiperspirants and deodorants 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 approximately 706 million, or 5.8% of
the total health and beauty care market, households regularly purchase more
anti-perspirants and deodorants than pain remedies, skin care or shaving
products. The antiperspirant and deodorant market in the United States has
grown consistently from 1992 to 1997 at a compound annual growth rate of 3.5%.
In Spring of 1999, we introduced new, contemporary packaging for the Ban
line of products to improve the shelf presence of the brand. We also
introduced two new products, Ban Ultra Dry Roll-On and Ban Ultra Dry Clear
Solid Stick. We are supporting these new products with an aggressive
advertising and marketing campaign which began in March 1999 and will continue
through fiscal 1999. We will also participate in promotional programs, which
we believe will attract consumers and gain greater shelf space with
participating retailers.
Functional Toiletries and Skin Care
We manufacture and market a portfolio of brand name functional toiletries
and skin care products, many of which are among the market leaders in the
United States in their respective categories.
<TABLE>
- ------------------------------------------------------------
<CAPTION>
Brand Description
- ------------------------------------------------------------
<C> <S>
Bullfrog Long lasting water-durable sunscreen
pHisoderm Line of facial and hand cleaners
Sun-In Spray-on hair lightener
Mudd Clay-based facial deep cleaner
Ultraswim Chlorine-removing shampoo, conditioner and soap
</TABLE>
- -------------------------------------------------------------------------------
In the sunscreen and sunblock category, Bullfrog provides long lasting,
water-durable protection from the sun. We believe that the Bullfrog brand
should continue to benefit from the overall market growth of its product
category as well as increasing brand awareness, broader product offerings and
increased consumer advertising, promotion and sampling programs. Bullfrog
offers additional product line extension opportunities which we expect to
develop.
We have two powerful skin care brands, pHisoderm and Mudd. pHisoderm is a
line of facial cleansers consisting of several formulae of liquid cleansers,
including one for infants, and a bar soap. Mudd is a line of
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clay-based products that provides deep cleansing of the face for healthier,
cleaner skin. We introduced new product line extensions for both pHisoderm (4
Way Daily Acne Cleanser) and Mudd (Sauna Masque) in Spring of 1999.
We also have two brands that are specialized hair care products. Sun-In is a
leading product line in the spray-on hair lightener market. Our Ultraswim
brand is a line of chlorine-removing shampoo, conditioner and soap. Like some
of our OTC products, Sun-In and Ultraswim are profitable products that require
minimal advertising support, and therefore provide favorable variable
contribution.
International
Certain of our products are sold in foreign countries. Our international
business is concentrated in Canada, Europe and Central and South America.
Sales in Canada and Europe are conducted by subsidiary companies located and
locally staffed in Canada and the United Kingdom, respectively. General export
sales are handled by the Company from its offices in Chattanooga. We
manufacture most of the products we sell in international markets at our
Chattanooga and United Kingdom facilities. These products 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.
The Ban, Gold Bond, Flexall, Pamprin, Bullfrog, pHisoderm, Ultraswim, Sun-In
and Mudd brands are sold in Canada. Sales in the United Kingdom and other
western European countries are currently limited to toiletry and cosmetic
products. Our hair lightener is sold in Europe under the Spray Blond trademark
and in the United Kingdom as Sun-In. Mudd and Ultraswim are the other products
sold by our United Kingdom subsidiary in Europe.
Our export division services various distributors primarily located in
Central and South America and the Caribbean. We sell various products into
these markets including Ban, Gold Bond, Icy Hot and pHisoderm.
Manufacturing and Quality Control
We manufacture products representing approximately one-half of our sales
volume. The rest of our products are manufactured for us by third party
manufacturers. We manufacture most of our OTC pharmaceuticals and functional
toiletries and skin care products at our manufacturing facility in
Chattanooga, Tennessee. We recently purchased a manufacturing facility within
one mile of our main manufacturing facility in Chattanooga, Tennessee. With
the addition of this new facility, we will have an additional 68,300 square
feet of manufacturing capacity. Currently, between our facilities and those of
our third party manufacturers, we have adequate capacity to meet the
anticipated demand for our products. New products that are consistent with
currently manufactured products generally can be manufactured by adapting
existing equipment and facilities, by adding new equipment at a relatively low
cost or through readily available third party manufacturers.
Our third party manufacturers manufacture certain products, including Gold
Bond powders, the Sunsource line and Dexatrim. Additionally, we have entered
into a manufacturing agreement with BMS, where BMS will manufacture Ban for us
until March 2001. In other cases, the manufacturer is not obligated under a
contract that fixes the term of its commitment. Manufacturers may experience
problems with product quality or timeliness of product delivery. Manufacturers
may also discontinue production of products for us upon little or no advance
notice. In any case, we believe that we could find other contract
manufacturers quickly if any of our current contractors cease to perform
adequately. However, if this occurs and we cannot find other contract
manufacturers, we may be forced to shift production to in-house facilities.
This may cause manufacturing delays, which would cause disruption in our
ability to fill orders. This could adversely affect our business.
To monitor the quality of our products, we maintain an internal quality
control system supported by an on-site microbiology laboratory. We have 12
quality control inspectors who regularly test our products and
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processes, and shepherd the products through the manufacturing cycle. Outside
consultants also are employed from time to time to monitor product development
and the effectiveness of our operations.
Certain of our products contain specialized ingredients that we obtain from
international and domestic third party suppliers. Additionally, we currently
source one of our material ingredients for Dexatrim, PPA, through a single
supplier. An unexpected interruption or a shortage in supply could adversely
affect our business derived from these products. We may not be able to raise
prices quickly enough to immediately offset the effects of any increase in the
costs of these specialized ingredients or fill customer orders in the event of
a supply shortage. At present, we do not foresee any significant problems in
obtaining our ingredients requirements at reasonable prices, but an unexpected
interruption or a shortage in supply could adversely affect our business in
the future.
Product Development
Our product development expenditures were $1.4 million, $1.2 million, and
$1.1 million during each of the fiscal years ended November 30, 1998, 1997,
and 1996, respectively, and we expect to maintain the same general level of
expenditures in fiscal 1999. The product development effort focuses on
developing improved formulations for existing products and the creation of
formulations for product line extensions. In 1998, we launched 5 new products,
most of which were line extensions of existing brands. Some of the most
successful of those line extensions include Gold Bond Medicated Lotion and
Harmonex. In 1999, we introduced or plan to introduce 10 product launches,
including Gold Bond Triple Antibiotic Ointment, Ban Ultra Dry Roll-On, Ban
Sheer Dry Stick, Repose, Dexatrim Gel Caps, Flexall Quick Gel, Bullfrog
Magicblock, pHisoderm 4 Way Daily Acne Cleanser, Mudd Sauna Masque and Sun-In
Super Streaks.
Marketing and Sales
Advertising and Promotion
We allocate a significant portion of our sales to advertising and promoting
our products. As a percentage of net sales, our advertising and promotional
spending was 39.3%, 39.2% and 38.3%, during the years ended November 1998,
1997, and 1996, respectively.
Our marketing objective is to develop and execute professionally designed,
creative and cost-effective advertising and promotional programs. For each
major brand, we develop advertising strategies that sell the product by
focusing on the particular strengths and market positions of the products,
rather than just entertaining the viewer. We support our new product launches
with a substantial level of advertising and promotional spending. We often use
celebrity endorsements to increase awareness of our products, such as Larry
King's endorsement of Garlique and Harmonex. We recently reached an agreement
with Joe Montana for an advertising campaign in support of Flexall, which
began in December 1998. Where appropriate, we use radio advertising and 15-
second television advertisements. In our advertisements, we have successfully
used personal testimonials from individuals attesting to the effectiveness of
our products.
We believe our ability to manage the cost of advertising, trade promotions
and consumer promotions is an essential element of our competitive strategy.
We do this through specialized purchasing of advertising time that allows us
to minimize the cost. We are able to achieve significant media efficiencies by
utilizing the spot television market rather than more traditional network
buying. By buying advertising time on the spot market, permitting schedule
flexibility and holding individual stations accountable for weekly delivery,
we are able to deliver national media plans at a fraction of the cost per
thousand of traditional network media plans. We also achieve cost-effective
advertising by minimizing other expenses, such as production of commercials
and payments to advertising agencies. We believe that our use of spot media
and other production efficiencies allow us to achieve reported media spending
that is significantly above our actual spending.
We work directly with retailers to develop promotional calendars and
campaigns for each brand, customizing the promotion to the particular
requirements of the individual retailer. These programs, which
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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. We also
utilize consumer promotions such as coupons, samples and trial sizes to
increase the trial and consumption of the products.
Customers
Our customers consist of all major drug, food and mass merchandiser
retailers. On a pro forma basis, our 1998 sales to Wal-Mart accounted for
approximately 16% of our total sales. Consistent with industry practice, we do
not operate under a long-term written supply contract with Wal-Mart or any of
our other customers. Our business would be adversely affected if we lose Wal-
Mart as a continuing major customer. No other customer represented more than
10% of our 1998 net sales on a pro forma basis.
Sales
We have an established national sales and distribution network that is
balanced among all major food, drug and mass merchandiser retailers. We
utilize this network effectively to increase the market penetration of our
acquired brands and our product line extensions while keeping our selling
expenses to less than 3% of sales in fiscal 1998. We have an internal sales
force of over 60 people which serves our largest accounts on an individual
basis and our smaller accounts on a regional basis. For the more fragmented
food channel and for the smaller individual stores, we rely on an extensive
network of regional brokers. In excess of 80% of our orders are received
electronically through our electronic data interchange ("EDI") system and
customer satisfaction with our order fulfillment is consistently very high.
Our sales department performs significant analysis, helping both our
salespeople and our customers to understand sales patterns and create
appropriate promotions and merchandising aids for our products. We have a
specialized sales training program, and have experienced extremely low rates
of turnover among senior salespeople.
Internationally, our products are sold by a national broker in Canada, by
our own sales force in the United Kingdom and by distributors in Western
Europe and Central and South America.
Distribution
Our products are currently shipped from two leased warehouses located in
Chattanooga, Tennessee. We also use warehouse space in a distribution center
in Ontario, California. We use outside carriers to transport our products.
We generally maintain sufficient inventories to meet customer orders as
received absent unusual and infrequent situations. At present, we have no
significant backlog of customer orders, and we generally meet customer
requirements promptly. We do not generally experience wide variances in the
amount of inventory we maintain. In 1997 and 1998, we experienced depleted
inventory levels for certain product lines largely as a result of product
acquisitions and line extensions. In certain circumstances, we allow our
customers to return unsold merchandise and, for seasonal products, we provide
extended payment terms to our customers.
Seasonality
During recent fiscal years, our first quarter net sales and gross profit
have trailed the other fiscal quarters because of slower sales of domestic
seasonal and international consumer products, and the relative absence of
promotional campaigns during this quarter. As a result of our acquisition of
Ban and the Thompson Products, seasonality should not be as pronounced as in
years past; however, because of seasonal products, net sales and profit during
the first quarter will continue to trail the other fiscal quarters.
Competition
We compete in the OTC pharmaceutical, antiperspirant and deodorant, dietary
supplement and functional toiletry and skin care products markets. These
markets are highly competitive and are characterized by the
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frequent introduction of new products, including the movement of prescription
drugs to the OTC market, often accompanied by major advertising and
promotional programs. We compete primarily on the basis of product quality,
price, brand loyalty and consumer acceptance. Our competitors include other
OTC pharmaceutical companies and large consumer products companies, many of
which have considerably greater financial and marketing resources than us. In
addition, our competitors have often been willing to use aggressive spending
on trade promotions and advertising as a strategy for building market share at
the expense of their competitors, including us. The private label or generic
category has also become increasingly more competitive in certain of our
product markets. Our products continue to compete for shelf space among
retailers who are increasingly consolidating.
Trademarks and Patents
Our trademarks are of material importance to our business and are among our
most important assets. In particular, the Ban, Gold Bond, Dexatrim, Flexall,
Icy Hot, Sunsource and pHisoderm trademarks are of material importance to our
success. We either directly or through a wholly-owned subsidiary, own or
license all of the trademarks associated with its business. All of our brands
have recognized trademarks associated with them, and our 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 trademarks.
We also own patents relating to the Icy Hot stick topical analgesic, which
expire in 2007, and a portfolio of approximately 50 patents relating to the
Ban brand, which expire during the period 1999 through 2018. After expiration
of the patents, we expect that these products will continue to compete in the
market primarily on the basis of the goodwill associated with the brands.
Government Regulation
The manufacturing, processing, formulation, packaging, labeling and
advertising of our 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 EPA and OSHA. These activities are also regulated by various agencies of
the states, localities and foreign countries in which our products are sold.
In particular, the FDA regulates the safety, manufacturing, labeling and
distribution of dietary supplements, including vitamins, minerals and herbs,
food additives, OTC and prescription drugs and cosmetics. The regulations that
are promulgated by the FDA relating to the manufacturing process are known as
GMPs. In addition, the FTC has overlapping jurisdiction with the FDA to
regulate the promotion and advertising of OTC pharmaceutical, antiperspirant
and deodorant, dietary supplement and functional toiletry and skin care
products.
All of our 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 our having to revise product labeling and formulations. In 1995 the Company
responded to certain questions it received from the FDA with respect to
efficacy in connection with clinical studies for pyrilamine maleate, one of
the active ingredients used in certain of the Pamprin and Premsyn PMS. While
we 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. We have been actively
monitoring the process, and while we do not believe that either Pamprin or
Premsyn PMS will be adversely affected by the FDA review, it is not possible
to predict the FDA's regulatory position. We believe that any adverse finding
by the FDA would likewise affect our principal competitor in the menstrual
product category.
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
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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 the active ingredients in
dietary supplements as food additives or drugs unless a marketer makes product
claims, such as claims that a product may heal, mitigate, cure or prevent an
illness, disease or malady, that require the FDA to attach drug status to a
product.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements, and the FDA's final regulations required that all dietary
supplements be labeled in compliance with the regulations no later than March
23, 1999. We believe we are in material compliance with these regulations.
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. We anticipate that the FDA will finalize
GMPs that 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.
The FDA has finalized some of its regulations to implement DSHEA, including
those relating to nutritional labeling requirements. The FDA also has under
development additional regulations to implement DSHEA. Final labeling
regulations require expanded or different labeling for our vitamin and
nutritional products. It cannot be determined what effect such regulations,
when fully implemented, will have on our business in the future. These
regulations could, among other things, require the recall, reformulation or
discontinuance of certain products, additional record keeping, 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 the imposition of sanctions on the Company or the manufacture of
our products, including warning letters, product recalls and seizures,
injunctions or criminal prosecution.
We received a warning letter, dated April 20, 1999, from the FDA regarding
our marketing and distribution of our Echinex and Propalmex products.
According to the FDA, our promotional material (labeling) for Echinex and
Propalmex make impermissable therapeutic claims that only may be made
consistent with FDA approved labeling for approved drugs. As such, Echinex and
Propalmex are, according to the FDA, misbranded to the extent they make such
therapuetic claims. The FDA has requested that we correct our promotional
materials within 15 working days of the date of the letter. We expect to fully
comply with the FDA's requests within the required time limits.
As part of its regulatory authority, the FDA may periodically conduct audits
of the physical facilities, machinery, processes and procedures that we and
our competitors use to manufacture products. The FDA may perform these audits
at any time without advanced notice. As a result of these audits, the FDA may
order us to make certain changes in our manufacturing facilities and
processes. It may be necessary to make additional expenditures to comply with
these orders or possibly stop selling certain products until we comply with
these orders. As a result, our business could suffer. In December 1998, the
FDA conducted an audit of our manufacturing facility in Chattanooga,
Tennessee. In connection with that audit, the FDA issued a report citing
certain processes and procedures it requires us to change or improve. We have
responded to the FDA's report and are in the process of complying with its
requirements.
Environmental Matters
We continuously assess compliance of our operations with applicable federal,
state and local environmental laws and regulations. Our policy is to record
liabilities for environmental matters when loss amounts are probable and
reasonably determinable. Our 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. We are a member of the Chattanooga
Manufacturing Association, a trade association that promotes industry
awareness of developments in environmental matters, and
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has engaged environmental consultants on a regular basis to assist its
compliance efforts. We are 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 our financial position or results of
operations.
Since the early 1980's, the EPA has been investigating the extent of, and
the health effects resulting from, contamination of Chattanooga Creek, which
runs through a major manufacturing area of Chattanooga in the vicinity of the
Company's manufacturing facilities. The contamination primarily stems from the
dumping of coal tar into the creek during World War II when the federal
government was leasing and operating a coke and chemical plant adjacent to the
creek. However, the EPA has been investigating virtually all businesses that
have discharged any wastewater into the creek. A 2- 1/2 mile stretch of
Chattanooga Creek was placed on the National Priorities List as a Superfund
site under the Comprehensive Environmental Response, Compensation and Recovery
Act in September 1995. We could be named as a potentially responsible party in
connection with such site due to our historical discharge of wastewater into
the creek. However, considering the nature of our wastewater, as well as the
fact that our 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, we do not believe that any liability
associated with such site will be material to its financial position or
results of operations.
In December 1998, we were named in a lawsuit with 37 other companies as
potentially responsible parties for the disposal of waste materials found at a
site in Birmingham, Alabama. Although the facts surrounding this case are
unclear, the lawsuit alleges that a company we used periodically during 1986
and 1987 to treat, store and dispose of waste materials from our manufacturing
processes improperly disposed of these waste materials. We cannot currently
assess our potential liability resulting from this lawsuit, but if we are
found liable, our business could be adversely affected. See "Risk Factors--
Environmental Matters."
Product Liability and Insurance
We are constantly at risk that consumers and users of our products will sue
us for product liability. We are not aware of any claims pending against us or
our products that if adversely decided would negatively affect us. While we
will continue to attempt to take what we consider to be appropriate
precautions, we cannot assure you that these precautions will enable us to
avoid significant product liability exposure in the future. We maintain
product liability insurance through third party providers. We believe our
insurance coverage is adequate; however, we cannot assure you that we will be
able to retain our existing coverage or that this coverage will be cost-
justified or sufficient to satisfy any future claims.
Employees
We currently employ 368 persons on a full-time basis in the United States
and 37 persons at its foreign subsidiaries' offices. Our employees are not
represented by any organized labor union, and management considers its labor
relations to be good.
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DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description under
the subheading "--Certain Definitions." In this description, the word
"Company" refers only to Chattem, Inc. and not to any of its Subsidiaries.
The Company will issue the Notes under the indenture dated March 24, 1998
(the "Indenture") among itself, the Guarantor and SouthTrust Bank, National
Association, as trustee (the "Trustee"). The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
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 description is a summary of the material provisions of the
Indenture. It does not restate the Indenture in its entirety. We urge you to
read the Indenture because it, and not this description, defines your rights
as holders of these Notes. Copies of the Indenture are available as set forth
below under the subheading "--Additional Information."
Brief Description of the Notes and the Subsidiary Guarantees
The Notes
The Notes:
. are general unsecured obligations of the Company;
. are subordinated in right of payment to all existing and future Senior
Indebtedness of the Company, including Senior Indebtedness under the
senior secured credit facility;
. are senior or pari passu in right of payment with all other existing and
future subordinated indebtedness of the Company; and
. are unconditionally guaranteed by the Guarantors.
As of February 28, 1999, on a pro forma basis after giving effect to the
Offering, the aggregate principal amount of Senior Indebtedness (excluding
trade payables and other accrued liabilities) of the Company would have been
approximately $60.1 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 secured credit facility. The terms of the Indenture will limit
the ability of the Company and its subsidiaries to incur additional
Indebtedness.
The Subsidiary Guarantees
The Subsidiary Guarantees of the Notes:
. are general unsecured obligations of the Guarantors;
. 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 secured credit facility; and
. are pari passu or senior in right of payment with any subordinated
Indebtedness of the Guarantors.
As of the date of the Indenture, all of our subsidiaries will be "Restricted
Subsidiaries." However, under the circumstances described below under the
subheading "Certain Covenants--Designation of Restricted and Unrestricted
Subsidiaries," we will be permitted to designate certain of our
subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will
not be subject to many of the restrictive covenants in the Indenture.
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Principal, Maturity and Interest
The Indenture provides for the issuance of up to $275.0 million in aggregate
principal amount of Notes, of which $200.0 million of Series A/B Senior
Subordinated Notes have already been issued. The Company will issue the
remaining $75.0 million in aggregate principal amount of Notes in the
Offering. The Company will issue Notes in denominations of $1,000 and integral
multiples of $1,000. The Notes will mature on April 1, 2008.
Interest on these 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, 1999. The Company will make each interest payment to the Holders of
record of these Notes on the immediately preceding March 15 and September 15.
Interest on these 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.
Methods of Receiving Payments on the Notes
If a Holder has given wire transfer instructions to the Company, the Company
will make all principal, premium, if any, and interest payments on those Notes
in accordance with those instructions. All other payments on the Notes will be
made at the office or agency of the Paying Agent or Registrar within the City
and State of New York, unless the Company elects to make interest payments by
check mailed to the Holders of the Notes at their respective addresses set
forth in the register of Holders of Notes.
Paying Agent and Registrar for the Notes
The Trustee will initially act as Paying Agent and Registrar. The Company
may change the Paying Agent or Registrar without prior notice to the Holders
of the Notes, and the Company or any of its Subsidiaries may act as Paying
Agent or Registrar.
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.
Subordination
The payment of principal of, premium, if any, and interest 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.
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 (except that Holders
of Notes may receive and retain Permitted Junior Securities and payments made
from the trust described under "Legal Defeasance and Covenant Defeasance"), in
the event of any distribution to creditors of the Company:
(1) in a liquidation or dissolution of the Company;
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(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshalling of the Company's assets and liabilities.
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
"Legal Defeasance and Covenant Defeasance") if:
(1) a payment default on Designated Senior Indebtedness occurs and is
continuing beyond any applicable grace period; or
(2) any other default occurs and is continuing on Designated Senior
Indebtedness that permits holders of such Designated Senior
Indebtedness 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:
(1) in the case of a payment default, upon the date on which such default
is cured or waived; and
(2) 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 Payment Blockage Notice may be delivered unless and until:
(1) 360 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice; and
(2) all scheduled payments of principal, premium, if any, and interest 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 Company must 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 these Notes may recover less ratably
than creditors of the Company who are holders of Senior Indebtedness. See
"Risk Factors--Subordination." On a pro forma basis, after giving effect to
the Transaction (including the Offering) and the application of the proceeds
therefrom, the principal amount of Senior Indebtedness outstanding at February
28, 1999 would have been approximately $59.8 million. The Indenture will
limit, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Indebtedness, 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 will be fully and
unconditionally, jointly and severally guaranteed on a senior subordinated
basis (the "Subsidiary Guarantees") by the Guarantors. The Subsidiary
Guarantees will be 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 will 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 will be limited so
as not to constitute a fraudulent conveyance under applicable law. See "Risk
Factors--Fraudulent Conveyance Risks."
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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.
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 will not be 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 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 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.
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.
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<PAGE>
Mandatory Redemption
The Company is not required to make mandatory redemption payments with
respect to the Notes.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, 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 of Notes repurchased plus
accrued and unpaid interest 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 from holders 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.
Prior to complying with the provisions of this "Change of Control" 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.
The Change of Control provisions described above that require the Company to
make a Change of Control Offer following a Change of Control 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.
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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 Company will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless:
(1) 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
(2) 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
(2) shall not exceed $5.0 million since the Issue Date.
For purposes of this provision, each of the following shall be deemed to be
cash:
(a) 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
(b) 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).
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option:
(1) to permanently repay (and reduce the commitments under) Senior
Indebtedness of the Company or a Guarantor or
(2) to acquire a Permitted Business, or a majority of the Voting Stock of a
Permitted Business,
(3) to make a capital expenditure; or
(4) to acquire 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.
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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
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 Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(1) 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);
(2) 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);
(3) 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
(4) make any Restricted Investment (all such payments and other actions set
forth in clauses (1) through (4) above being collectively referred to as
"Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof;
(2) 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
(3) 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
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<PAGE>
permitted by clauses (2), (3) and (4) of the next succeeding paragraph), is
less than the sum, without duplication, of
(a) 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
(b) 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
(c) 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
(d) $7.5 million.
The foregoing provisions will not prohibit:
(1) 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;
(2) 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
(3)(b) of the preceding paragraph;
(3) 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;
(4) 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
(5) 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
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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
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
this "Restricted Payments" covenant 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 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 first paragraph of this covenant will not prohibit the incurrence of any
of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) 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 secured credit facility;
provided that the aggregate principal amount of all Indebtedness
(including letters of credit) outstanding under the senior secured 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."
(2) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by the Company of Indebtedness represented by the Notes and
the Exchange Notes and the incurrence by the Guarantors of Indebtedness
represented by the Subsidiary Guarantees;
(4) 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;
(5) 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 (3), (4) or (5) of this paragraph;
(6) 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
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(a) 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
(b) (i) 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 (ii) 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 (6);
(7) 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 the Indenture to be outstanding;
(8) 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;
(9) 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 (9), not to
exceed $15.0 million;
(10) 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 (10); and
(11) 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 (1) through (11) 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 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 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
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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 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:
(1) (a) pay dividends or make any other distributions to the Company or any of
its Restricted Subsidiaries (i) on its Capital Stock or (ii) 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;
(2) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(3) 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:
(1) Existing Indebtedness as in effect on the date of the Indenture;
(2) the Indenture and the Notes;
(3) applicable law;
(4) 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;
(5) customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (3)
above on the property so acquired;
(7) any agreement for the sale of a Restricted Subsidiary that restricts
distributions by that Restricted Subsidiary pending its sale;
(8) 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;
(9) 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;
(10) 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;
(11) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business; and
(12) 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.
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Merger, Consolidation, or Sale of Assets
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:
(1) 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;
(2) the entity or Person formed by or surviving any such consolidation or
merger (if other than the 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 Notes
and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event of Default exists;
and
(4) 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 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:
(1) 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
(2) 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 (1) above and that such Affiliate Transaction has
been approved by a majority of the disinterested members of the Board
of Directors;
(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.
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Notwithstanding the foregoing, the following items shall not be deemed to be
Affiliate Transactions:
(1) 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;
(2) loans or advances to employees in the ordinary course of business and
consistent with past practice;
(3) transactions between or among the Company and/or its Restricted
Subsidiaries;
(4) payment of reasonable directors fees to Persons who are not otherwise
Affiliates of the Company; and
(5) Restricted Payments (other than Restricted Investments) that are permitted
by the provisions of the Indenture described above under the caption "--
Restricted Payments."
Limitation on Issuances and Sales of Equity Interests in Restricted
Subsidiaries
The Company 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
(1) such transfer, conveyance, sale, lease or other disposition is of all the
Equity Interests in such Restricted Subsidiary; and
(2) 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."
In addition, the Company 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 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. 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
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
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:
(1) 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
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"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
(2) 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.
Additional Subsidiary Guarantees
The Company will not permit (i) 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) 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
Each of the following constitutes an Event of Default:
(1) default for 30 days in the payment when due of interest on the Notes
(whether or not prohibited by the subordination provisions of the
Indenture);
(2) 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);
(3) 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";
(4) 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;
(5) 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;
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(6) 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;
(7) 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
(8) 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 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. Upon becoming aware of any Default or
Event of Default, the Company is required 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.
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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:
(1) the rights of Holders of outstanding Notes to receive payments in respect
of the principal of, premium, if any, and interest on such Notes when such
payments are due from the trust referred to below;
(2) the Company's obligations with respect to the Notes concerning mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency
for payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith; and
(4) 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:
(1) 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 on the outstanding Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must
specify whether the Notes are being defeased to maturity or to a
particular redemption date;
(2) 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;
(3) 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;
(4) no Default or Event of Default shall have occurred and be continuing
either (a) 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 (b) 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;
(5) 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;
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(6) 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;
(7) 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
(8) 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.
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).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder):
(1) reduce the principal amount of Notes whose Holders must consent to an
amendment, supplement or waiver;
(2) 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");
(3) reduce the rate of or change the time for payment of interest on any Note;
(4) 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);
(5) make any Note payable in money other than that stated in the Notes;
(6) 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;
(7) 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");
(8) 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
(9) make any change in the foregoing amendment and waiver provisions.
In addition, any amendment to the provisions of Article 10 of the Indenture
(which relates 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:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(3) 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;
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(4) 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
(5) 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
If the Trustee becomes a creditor of the Company, the Indenture limits it
right 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 Supplement may obtain a copy of the
Indenture without charge by writing to Chattem, Inc., 1715 West 38th Street,
Chattanooga, Tennessee 37409, Attention: Chief Operating Officer.
Book-Entry, Delivery and Form
Except as set forth below, each Note will be issued in registered, global
form (each, a "Global Note") in minimum denominations of $1,000 and integral
multiples of $1,000 in excess thereof. Notes will be issued at the closing of
the Offering (the "Closing") only against payment in immediately available
funds. The Global Notes will be deposited upon issuance with the Trustee as
custodian for The Depository Trust Company ("DTC"), in New York, New York, and
registered in the name of DTC or its nominee, in each case, for credit to an
account of a direct or indirect participant in DTC as described below.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
Notes in certificated form, except in the limited circumstances described
below. See "--Exchange of Book-Entry Notes for Certificated Notes." Except in
the limited circumstances described below, owners of beneficial interests in
the Global Notes will not be entitled to receive physical delivery of
Certificated Notes (as defined below).
Transfers of beneficial interests in the Global Notes will be subject to the
applicable rules and procedures of DTC and its direct or indirect
participants, which may change from time to time.
Initially, the Trustee will act as Paying Agent and Registrar. The Notes may
be presented for registration of transfer and exchange at the offices of the
Registrar.
Depository Procedures
The following description of the operations and procedures of DTC are
provided solely as a matter of convenience. These operations and procedures
are solely within the control of the respective settlement systems
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and are subject to changes by them from time to time. The Company takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Underwriters), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
Pursuant to procedures established by DTC:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Underwriters with portions of the principal
amount of the Global Notes; and
(2) ownership of such interests in the Global Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other owners
of beneficial interest in the Global Notes).
All interests in a Global Note may be subject to the procedures and
requirements of DTC. 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 beneficial interests in a Global Note to
such persons will be limited to that extent. Because DTC can act only on
behalf of Participants, which in turn act on behalf of Indirect Participants
and certain banks, the ability of a person having beneficial interests in a
Global Note to pledge such interests to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing
such interests.
Except as described below, owners of interest in the Global Notes will not
have Notes registered in their names, will not receive physical de livery of
Notes in certificated form and will not be considered the registered owners or
"Holders" thereof under the Indenture for any purpose.
Payments in respect of the principal of, and premium, if any, and interest
on a Global Note registered in the name of DTC or its nominee will be payable
to DTC in its capacity as the registered Holder under the Indenture. Under the
terms of the Indenture, the Company and the Trustee will treat the persons in
whose names the Notes, including the Global Notes, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Consequently, neither the Company, the Trustee nor
any agent of the Company or the Trustee has or will have any responsibility or
liability for:
(1) any aspect of DTC's records or any Participant's or Indirect Participant's
records relating to or payments made on account of beneficial ownership
interest in the Global Notes, or for maintaining, supervising or reviewing
any of DTC's records or any Participant's or Indirect Participant's
records relating to the beneficial ownership interests in the Global
Notes; or
(2) any other matter relating to the actions and practices of DTC or any of
its Participants or Indirect Participants. DTC has advised the Company
that its current practice, upon receipt of any payment in respect of
securities such as the Notes (including principal and interest), is to
credit the accounts of the relevant Participants with the payment on the
payment date, in amounts proportionate to their respective holdings in the
principal amount of beneficial interest in the relevant security as shown
on the records of DTC unless DTC has reason to believe it will not receive
payment on such payment date.
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Payments by the Participants and the Indirect Participants to the beneficial
owners of Notes will be governed by standing instructions and customary
practices and will be the responsibility of the Participants or the Indirect
Participants and will not be the responsibility of DTC, the Trustee or the
Company. Neither the Company nor the Trustee will be liable for any delay by
DTC or any of its Participants in identifying the beneficial owners of the
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for all purposes.
Interest in the Global Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will, therefore, settle in immediately available funds, subject in
all cases to the rules and procedures of DTC and its Participants. See "--Same
Day Settlement and Payment."
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Notes only at the direction of one or more Participants
to whose account DTC has credited the interests in the Global Notes and only
in respect of such portion of the aggregate principal amount of the Notes as
to which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Notes, DTC reserves the
right to exchange the Global Notes for legended Notes in certificated form,
and to distribute such Notes to its Participants.
Exchange of Book-Entry Notes for Certificated Notes
A Global Note is exchangeable for definitive Notes in registered
certificated form ("Certificated Notes") if:
(1) DTC:
(a) notifies the Company that it is unwilling or unable to continue as
depositary for the Global Notes and the Company thereupon fails to
appoint a successor depositary; or
(b) has ceased to be a clearing agency registered under the Exchange Act;
(2) the Company, at its option, notifies the Trustee in writing that it elects
to cause the issuance of the Certificated Notes; or
(3) there shall have occurred and be continuing a Default or Event of Default
with respect to the Notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon request but only upon prior written notice given to
the Trustee by or on behalf of DTC in accordance with the Indenture. In all
cases, Certificated Notes delivered in exchange for any Global Note or
beneficial interests therein will be registered in the names, and issued in
any approved denominations, requested by or on behalf of the depositary (in
accordance with its customary procedures).
Exchange of Certificated Notes for Book-Entry Notes
Notes issued in certificated form may not be exchanged for beneficial
interests in any Global Note unless the transferor first delivers to the
Trustee a written certificate (in the form provided in the Indenture) to the
effect that such transfer will comply with the appropriate transfer
restrictions applicable to such Notes. See "Notice to Investors."
Same Day Settlement and Payment
Payments in respect of the Notes represented by the Global Notes (including
principal, premium, if any, and interest) must 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, and interest by wire transfer of
immediately available funds to the accounts specified
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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 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:
(1) 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
(2) 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, 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:
(1) 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
(2) 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 (1) or (2), 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:
(1) 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;
(2) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary to
the Company or to another Wholly Owned Restricted Subsidiary;
(3) a Restricted Payment that is permitted by the covenant described above
under the caption "--Restricted Payments";
(4) the issuance by the Company of shares of its Capital Stock;
(5) the sale or other disposition of cash or Cash Equivalents;
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(6) the sale or disposition of damaged, worn out or other obsolete personal
property in the ordinary course of business;
(7) the surrender or waiver of contract rights or the settlement, release or
surrender of contract, tort or other claims of any kind;
(8) the granting of Liens not prohibited by the Indenture; or
(9) 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:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company, partnership or
membership interests (whether general or limited); and
(4) 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:
(1) United States dollars;
(2) 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;
(3) 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;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) 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
(6) money market funds the assets of which constitute Cash Equivalents of the
kinds described in clauses (1)-(5) of this definition.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition (other than by
way of merger or consolidation), in one or a series of 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);
(2) the adoption of a plan relating to the liquidation or dissolution of the
Company;
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(3) 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);
(4) the first day on which a majority of the members of the Board of Directors
of the Company are not Continuing Directors; or
(5) 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:
(1) 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
(2) 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
(3) 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
(4) 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
(5) 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.
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"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:
(1) the Net Income (but not loss) of any Person that is not a 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;
(2) 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;
(3) 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;
(4) the cumulative effect of a change in accounting principles shall be
excluded; and
(5) 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:
(1) the consolidated equity of the common stockholders of such Person and its
consolidated Subsidiaries as of such date; plus
(2) 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
(a) 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;
(b) all investments as of such date in unconsolidated Subsidiaries and in
Persons that are not Subsidiaries (except, in each case, Permitted
Investments); and
(c) 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:
(1) was a member of such Board of Directors on the date of the Indenture; or
(2) 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.
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"Designated Senior Indebtedness" means:
(1) so long as the senior credit facility is outstanding, Obligations under
the senior credit facility; and
(2) 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."
"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:
(1) 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
(2) the consolidated interest of such Person and its Restricted Subsidiaries
that was capitalized during such period; and
(3) 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
(4) 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
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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 calculating the Fixed Charge Coverage Ratio:
(1) 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 (3)
of the proviso set forth in the definition of Consolidated Net Income; and
(2) 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
(3) 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 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:
(1) each domestic Subsidiary of the Company on the Issue Date; and
(2) 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:
(1) interest rate swap agreements, interest rate cap agreements and interest
rate collar agreements; and
(2) 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:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof);
(3) banker's acceptances;
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(4) representing Capital Lease Obligations;
(5) 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. In addition, the term "Indebtedness"
includes 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:
(1) the accreted value thereof, in the case of any Indebtedness issued with
original issue discount; and
(2) 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).
"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:
(1) 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
(2) 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
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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:
(1) 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
(2) 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 (upo n 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
(3) 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:
(1) any Investment in the Company or in a Wholly Owned Restricted Subsidiary
of the Company
(2) any Investment in Cash Equivalents;
(3) any Investment by the Company or any Restricted Subsidiary of the Company
in a Person, if as a result of such Investment:
(a) such Person becomes a Wholly Owned Restricted Subsidiary of the
Company; 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 a Wholly Owned Restricted Subsidiary of
the Company;
(4) 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";
(5) any acquisition of assets solely in exchange for the issuance of Equity
Interests (other than Disqualified Stock) of the Company;
(6) 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
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(7) 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), when taken together with all other
Investments made pursuant to this clause (7) that are at the time
outstanding, not to exceed $12.5 million.
"Permitted Junior Securities" means:
(1) Equity Interests in the Company; or
(2) 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:
(1) 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;
(2) Liens in favor of the Company;
(3) 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;
provided that 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;
(4) 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;
(5) 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;
(6) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (4) of the second paragraph of the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock" covering only
the assets acquired with such Indebtedness;
(7) Liens existing on the date of the Indenture;
(8) 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;
(9) 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;
(10) 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;
(11) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse
Debt of Unrestricted Subsidiaries;
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(12) 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
(13) 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:
(1) 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);
(2) 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;
(3) 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 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
(4) 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:
(1) long-term assets that are used or useful in a Permitted Business;
(2) 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,
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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:
(1) all Obligations of the Company or any of its Subsidiaries outstanding
under the senior credit facility and all Hedging Obligations with respect
thereto;
(2) 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
(3) all Obligations with respect to the foregoing. Notwithstanding anything to
the contrary in the foregoing, Senior Indebtedness will not include:
(a) any liability for federal, state, local or other taxes owed or owing by
the Company or any of its Subsidiaries;
(b) any Indebtedness of the Company or any of its Subsidiaries to any
Subsidiary or other Affiliate;
(c) any trade payables; or
(d) 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:
(1) 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
(2) any partnership (a) the sole general partner 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 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:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) 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;
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(3) is a Person with respect to which neither the Company nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results; and
(4) 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 (1) 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 (2) 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:
(1) 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
(2) 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
Senior Secured Credit Facility
General
On December 21, 1998, the Company entered into the senior secured credit
facility consisting of (i) an amended and restated credit agreement providing
for revolving credit borrowings in an aggregate principal amount of up to
$50.0 million and (ii) an amended and restated credit agreement providing for
borrowings under a term loan in an aggregate principal amount of $115.0
million. The senior secured credit facility is guaranteed by each of the
Company's existing and hereafter acquired domestic subsidiaries. It is
anticipated that concurrently with the consummation of this offering the
Company will amend and restate its senior secured credit facility. The amended
senior secured credit facility will provide for revolving borrowings of up to
$50.0 million and term borrowings in an aggregate principal amount of $70.0
million. Since there is no commitment by the banks to provide the amended
senior secured credit facility, there can be no assurance that the Company
will be able to consummate the amended senior secured credit facility.
This information relating to the senior secured credit facility is qualified
in its entirety by reference to the complete text of such documents. The
following is a description of the general terms of the senior secured credit
facility, and in instances in which the senior secured credit facility will be
changed by the proposed amendment, the changes to be effected by the amendment
are described below.
Security
Indebtedness under the senior secured credit facility 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 of federal funds
plus 1/2%, or a Eurodollar interest rate option applicable to the term and
revolving credit loans under the senior secured credit facility. 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 loans under
the senior secured credit facility is 2.0% for the prime rate option and 3.0%
for the Eurodollar rate option. Under the amended senior secured credit
facility, the applicable interest rate margins will be reduced by .50%.
Borrowing Base
Pursuant to the terms of the senior secured credit facility, advances under
the revolving credit facility are limited to a borrowing base comprised of
specified percentages of eligible accounts receivable and eligible inventory.
Under the amended senior secured credit facility the borrowing base
availability requirement will be eliminated.
Maturity
Revolving loans made pursuant to the senior secured credit facility may be
borrowed, repaid and reborrowed from time to time until December 21, 2003,
subject to the satisfaction of certain conditions on the date of any such
borrowing. The term loans under the senior secured credit facility will mature
on December 21, 2003. The maturity of the loans will not be changed under the
amended senior secured credit facility.
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Covenants
The senior secured credit facility 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
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.
The amended senior secured credit facility (i) eliminates the $10 million
per annum limitation on permitted acquisitions subject to pro forma compliance
with covenants, (ii) permits the Company to repurchase the Existing Notes
subject to pro forma compliance with covenants, (iii) permits the Company to
repurchase up to $10 million of its common stock annually subject to pro forma
compliance with covenants, and (iv) eliminates the interest coverage ratio
financial covenant.
Events of Default; Remedies
The senior secured facility contains 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 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 lenders will be entitled to take all
actions permitted to be taken by a secured creditor under the Uniform
Commercial Code, enforce all rights created under the senior secured credit
facility and to accelerate the amounts due under the senior secured credit
facility 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 12 3/4% Senior Subordinated Notes due 2004 (the
"1994 Notes") and (ii) five year warrants to purchase 417,182 shares of common
stock (the "Warrants").
The 1994 Notes mature on June 15, 2004, and interest is payable semi-
annually on June 15 and December 15. The 1994 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 1994 Notes may require the Company to repurchase the
1994 Notes at a purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest. The 1994 Notes are guaranteed by Signal, a
wholly-owned subsidiary of the Company.
The 1994 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.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a discussion of certain material United States Federal
income tax consequences of the acquisition, ownership and disposition of the
Notes. Unless otherwise stated, this discussion is limited to the tax
consequences to those persons who are original owners of the Notes and who
hold such Notes as capital assets ("Holders"). The discussion does not purport
to address specific tax consequences that may be relevant to particular
persons (including, for example, financial institutions, broker-dealers,
insurance companies, tax-exempt organizations, and persons in special
situations, such as those who hold Notes as part of a straddle, hedge,
conversion transaction, or other integrated investment). In addition, this
discussion does not address United States Federal alternative minimum tax
consequences or any aspect of state, local or foreign taxation. This
discussion is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Department regulations promulgated thereunder (the
"Treasury Regulations"), and administrative and judicial interpretations
thereof, all of which are subject to change, possibly with retroactive effect.
The Company will treat the Notes as indebtedness for Federal income tax
purposes, and the following discussion assumes that such treatment is correct.
The following discussion assumes that the Notes will not be issued with
original issue discount exceeding a de minimis amount.
For purposes of this discussion, a "U.S. Holder" is a Holder of a Note who
is a United States citizen or resident, a corporation or partnership created
or organized in or under the laws of the United States or any state, an estate
the income of which is subject to United States Federal income taxation
regardless of its source, or a trust if a United States court exercises
primary supervision over its administration and one or more United States
persons have the authority to control all of its substantial decisions. A
"Non-U.S. Holder" is a Holder of a Note who is not a U.S. Holder.
PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO CONSULT THEIR TAX ADVISORS
CONCERNING THE UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO
THEM OF ACQUIRING, OWNING AND DISPOSING OF THE NOTES, AS WELL AS THE
APPLICATION OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
Tax Consequences to U.S. Holders
Taxation of Interest
Interest paid on the notes will be includible in the income of a U.S. Holder
in accordance with the U.S. Holder's regular method of tax accounting. A U.S.
Holder may be entitled to treat interest income on the Notes as "investment
income" for purposes of computing certain limitations concerning the
deductibility of investment interest expense.
In the event of a Change of Control, a Holder of a Note will have the right
to require the Company to purchase such Note at a price equal to 101% of the
principal amount thereof. The Treasury Regulations provide that the right of a
Holder of a Note to require redemption of such Note upon the occurrence of a
Change of Control will not affect the yield or maturity date of the Note if,
based on all the facts and circumstances as of the issue date, it is
significantly more likely than not that a Change of Control giving rise to the
redemption right will not occur. The Company believes that the redemption
provisions of the Notes will not affect the computation of the yield to
maturity of the Notes and intends to report in a manner consistent with this
belief.
The Company may redeem the Notes at any time on or after April 1, 2003, and
in certain circumstances, may redeem a portion of the Notes at any time prior
to April 1, 2001. Under the Treasury Regulations, the Company is deemed to
exercise any option to redeem if the exercise of such option would lower the
yield of the debt instrument. The Company believes that it will not be treated
as having exercised an option to redeem under these rules and intends to
report in a manner consistent with this belief.
S-82
<PAGE>
Sale, Exchange or Retirement of the Notes
Upon the sale, exchange or retirement of the notes, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized
upon the sale, exchange or retirement (less a portion allocable to any accrued
and unpaid interest, which will be taxable as ordinary income) and the U.S.
Holder's adjusted tax basis in the notes. A U.S. Holder's adjusted tax basis
in the Notes generally will be the U.S. Holder's cost therefor, less any
principal payments received by such Holder.
Gain or loss recognized by a U.S. Holder on the sale, exchange or retirement
of the Notes will be capital gain or loss. The gain or loss will be long-term
capital gain or loss if the Notes have been held by the U.S. Holder for more
than twelve months. Long-term capital gain is subject to a maximum federal tax
rate of 20%. The deductibility of capital losses by U.S. Holders is subject to
limitation.
Tax Consequences to Non-U.S. Holders
Taxation of Interest
A Non-U.S. Holder generally will not be subject to United States Federal
income or withholding tax on interest paid on the Notes so long as such
interest is not effectively connected with the Non-U.S. Holder's conduct of a
trade or business within the United States, and the Non-U.S. Holder (i) does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company, (ii) is not a "controlled
foreign corporation" with respect to which the Company is a "related person"
within the meaning of the Code, and (iii) satisfies the requirements of
Sections 871(h) or 881(c) of the Code, as set forth below under "Owner
Statement Requirement." If the foregoing conditions (i)--(iii) are not
satisfied, then interest paid on the Notes will be subject to United States
withholding tax at a rate of 30%, unless such rate is reduced or eliminated
pursuant to an applicable tax treaty.
Amortizable Bond Premium
If a U.S. holder purchases a Note for an amount in excess of the principal
amount, the holder will be considered to have purchased the Note at a
"premium." A U.S. holder generally may elect to amortize the premium over the
remaining term of the Note on a constant yield method. However, if the Note is
purchased at a time when the Note may be optionally redeemed for an amount
that is in excess of its principal amount, special rules would apply that
could result in a smaller premium eligible for amortization during the call
period and a deferral of the amortization of the remaining bond premium until
later in the term of the Note. The amount amortized in any year will be
treated as a reduction of the U.S. holder's interest income from the Note.
Bond premium on a Note held by a U.S. holder that does not make such an
election will decrease the gain or increase the loss otherwise recognized on
disposition of the Note. The election to amortize premium on a constant yield
method, once made, applies to all debt obligations held or subsequently
acquired by electing U.S. holder on or after the first day of the first
taxable year to which the election applies and may not be revoked within the
consent of the Internal Revenue Service.
Sale, Exchange or Retirement of the Notes
Any capital gain a Non-U.S. Holder recognizes on the sale, exchange,
retirement or other taxable disposition of a note will be exempt from United
States Federal income and withholding tax, provided that (i) the gain is not
effectively connected with the Non-U.S. Holder's conduct of a trade or
business within the United States, and (ii) in the case of a Non-U.S. Holder
that is an individual, the Non-U.S. Holder is not present in the United States
for 183 days or more during the taxable year.
Effectively Connected Income
If the interest, gain or other income a Non-U.S. Holder recognizes on a note
is effectively connected with the Non-U.S. Holder's conduct of a trade or
business within the United States, the Non-U.S. Holder (although
S-83
<PAGE>
exempt from the withholding tax previously discussed if an appropriate
statement is furnished) generally will be subject to United States Federal
income tax on the interest, gain or other income at regular Federal income tax
rates. In addition, if the Non-U.S. Holder is a corporation, it may be subject
to a branch profits tax equal to 30% of its "effectively connected earnings
and profits," as adjusted for certain items, unless it qualifies for a lower
rate under an applicable tax treaty.
Federal Estate Taxes
A Note held by an individual who at the time of death is not a citizen or
resident of the United States will not be subject to United States Federal
estate tax as a result of such individual's death, provided that the
individual does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote
and that the interest accrued on such Notes was not effectively connected with
the Non-U.S. Holder's conduct of a trade or business within the United States.
Owner Statement Requirement
In order to avoid withholding of United States Federal income tax, sections
871(h) and 881(c) of the Code require that either the beneficial owner of a
Note or a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business (a "Financial Institution") and holds a Note on behalf of
such owner files a statement with the Company or its agent to the effect that
the beneficial owner is not a United States person. Under current regulations,
this requirement will be satisfied if the Company or its agent receives (i) a
statement (an "Owner Statement") from the beneficial owner of a Note in which
such owner certifies, under penalties of perjury, that such owner is not a
United States person and provides such owner's name and address, or (ii) a
statement from the Financial Institution holding the note on behalf of the
beneficial owner in which the Financial Institution certifies, under penalties
of perjury, that it has received the Owner Statement together with a copy of
the Owner Statement. The beneficial owner must inform the Company or its agent
(or, in the case of a statement described in clause (ii) of the immediately
preceding sentence, the Financial Institution) within 30 days of any change in
information on the Owner Statement. The Internal Revenue Service has amended
the transition period relating to recently issued Treasury Regulations
governing backup withholding and information reporting requirements.
Withholding certificates or statements that are valid on December 31, 1999,
may be treated as valid until the earlier of their expiration or December 31,
2000. Certificates or statements received under the currently effective rules
will fail to be effective after December 31, 2000.
Information Reporting and Backup Withholding
The Company will, where required, report to the Holders of Notes and the
Internal Revenue Service the amount of any interest paid on the Notes in each
calendar year and the amounts of tax withheld, if any, with respect to such
payments. A noncorporate U.S. Holder may be subject to information reporting
and backup withholding at a rate of 31% with respect to payments of principal
and interest made on a Note, or on proceeds of the disposition of a Note
before maturity, unless such U.S. Holder provides a correct taxpayer
identification number or proof of an applicable exemption, and otherwise
complies with applicable requirements of the information reporting and backup
withholding rules.
In the case of payments of interest to Non-U.S. Holders, current Treasury
Regulations provide that the 31% backup withholding tax and certain
information reporting requirements will not apply to such payments with
respect to which either the requisite certification, as described above, has
been received or an exemption has otherwise been established, provided that
neither the Company nor its payment agent has actual knowledge that the Holder
is a United States person or that the conditions of any other exemption are
not in fact satisfied. Under current Treasury Regulations, these information
reporting and backup withholding requirements will apply, however, to the
gross proceeds paid to a Non-U.S. Holder on the disposition of the Notes by or
through a United States office of a United States or foreign broker, unless
the Non-U.S. Holder otherwise establishes an exemption. Information reporting,
but not backup withholding requirements, will also apply to payment of the
proceeds of a disposition of the Notes by or through a foreign office of a
United States broker or foreign brokers with certain
S-84
<PAGE>
types of relationships to the United States, unless such broker has
documentary evidence in its file that the Holder of the notes is not a United
States person and such broker has no actual knowledge to the contrary, or the
Holder establishes an exemption. Neither information reporting nor backup
withholding generally will apply to payment of the proceeds of a disposition
of the notes by or through a foreign office of a foreign broker not subject to
the preceding sentence.
The Treasury Department has released new Treasury Regulations governing the
backup withholding and information reporting requirements. The new regulations
would not generally alter the treatment of a Non-U.S. Holder who furnishes an
Owner Statement to the payor. The new regulations may change certain
procedures applicable to the foreign office of a United States broker or
foreign brokers with certain types of relationships to the United States. The
new regulations are generally effective for payments made after December 31,
1999. Non-U.S. Holders should consult their own tax advisors with respect to
the impact, if any, of the new final regulations.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Holder's
United States Federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
S-85
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement"), dated the date hereof, we have agreed to sell
to the underwriters named below, and the underwriters have agreed to purchase
from us, all of the Notes to be sold in this Offering. We have listed the
total dollar amount of each of the Notes that each of the Underwriters will
purchase from us in the chart below.
<TABLE>
<CAPTION>
Principal
Amount of
Underwriters Notes
------------ -----------
<S> <C>
NationsBanc Montgomery Securities LLC........................ $52,500,000
Lehman Brothers Inc. ........................................ $22,500,000
-----------
Total...................................................... $75,000,000
</TABLE>
The Underwriting Agreement provides that the obligations of the underwriters
to purchase the notes are subject to the satisfaction of certain conditions,
including the approval of certain legal matters by their counsel. Under the
terms and conditions of the Underwriting Agreement, if the underwriters take
any of the Notes, then the underwriters are obligated to take and pay for all
of the Notes.
The underwriters will pay us the offering price less the underwriting
discount specified on the cover of the final Prospectus Supplement. We
estimate that we will incur approximately $2.6 million of expenses in
connection with the offering of the Notes.
The underwriters have advised us that they will offer the Notes directly to
the public at the offering price indicated on the cover. After the initial
offering of the Notes, the underwriters may change the public offering price
and other selling terms.
We have also agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make in respect of any
such liabilities.
The underwriters have advised us that they presently intend to make a market
in the Notes as permitted by applicable laws and regulations. The underwriters
are not obligated to make a market in the Notes, however, and they may
discontinue this market making at any time in their sole discretion.
Accordingly, we cannot assure you that there will be adequate liquidity or
adequate trading markets for the Notes.
In connection with the offering of the Notes, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the underwriters may overallot in connection with the
offering of the Notes, creating a syndicate short position. In addition, the
underwriters may bid for, and purchase, Notes in the open market to cover
syndicate short positions or to stabilize the price of the Notes. Any of these
activities may stabilize or maintain the market price of the Notes above
independent market levels. The underwriters are not required to engage in any
of these activities, and may end any of them at any time.
The underwriters have, directly and indirectly, provided investment and
commercial banking or financial advisory services to Chattem and its
affiliates, for which they have received customary fees and commissions, and
expect to provide these services to Chattem and its affiliates in the future,
for which they expect to receive customary fees and commissions. Affiliates of
NationsBanc Montgomery Securities LLC ("NMS") are lenders and agents under the
senior secured credit facility and will continue to act as such under the
amended credit agreement.
Under the Conduct Rules of the National Association of Securities Dealers,
Inc. (the "NASD"), if more than 10% of the net proceeds of a public offering
of debt securities, not including underwriting compensation, are intended to
be paid to members of the NASD of affiliated or associated persons that are
participating in the
S-86
<PAGE>
distribution of the offering, under Rule 2720 the yield at which the debt
securities are distributed to the public can be no lower than that recommended
by a "qualified independent underwriter" meeting certain standards of the NASD
(a "QIU"). NationsBank, N.A., an affiliate of NMS is expected to receive in
the aggregate more than 10% of the net proceeds from this Offering as a result
of the repayment by the Company of outstanding indebtedness under the senior
secured credit facility. Accordingly, in compliance with Rule 2710(c)(8),
Lehman Brothers Inc. ("Lehman") has assumed the responsibilities of acting as
QIU and will recommend a yield for the Notes in compliance with the
requirements of Rule 2720. In connection with this Offering, Lehman is
performing due diligence investigations and is participating in the
preparation of this Prospectus Supplement.
LEGAL MATTERS
The validity of the notes offered hereby will be passed upon for the Company
by Miller & Martin LLP, Chattanooga, Tennessee. Certain legal matters in
connection with the offering will be passed upon for the Underwriters by
Latham & Watkins, New York, New York.
EXPERTS
The financial statements included in this Prospectus Supplement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their report with respect thereto 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 Supplement, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent public accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Thompson Medical Company, Inc. (U.S. Acquired
Brands) as of November 30, 1998 and for each of the three years in the period
ended November 30, 1998 included in this Prospectus Supplement, have been
audited by Arthur Andersen LLP, independent certified public accountants, as
indicated in their report with respect thereto and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
S-87
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
As of November 30, 1997 and 1998, and February 28, 1999 (unaudited), and
for the years ended November 30, 1996, 1997, and 1998, and for the three
months ended February 28, 1998 and 1999 (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 Shareholder's 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
As of November 30, 1997 and 1998, and for the years ended November 30,
1996, 1997, and 1998:
Thompson Medical Company, Inc. (U.S. Acquired Brands)
Report of Independent Certified Public Accountant F-36
Statements of Assets Acquired and Liabilities Assumed F-37
Statements of Net Sales and Product Contribution F-38
Notes to Financial Statements F-39
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
To Chattem, Inc.:
We have audited the accompanying consolidated balance sheets of Chattem, Inc.
(a Tennessee corporation) and subsidiaries as of November 30, 1998 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended November 30, 1998 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
January 22, 1999 (except with
respect to the matter discussed in
the second paragraph of Note 10 as
to which the date is February 19, 1999)
F-2
<PAGE>
Chattem, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
ASSETS
<TABLE>
<CAPTION>
November 30, February 28,
------------------ ------------
1997 1998 1999
-------- -------- ------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................... $ 4,858 $ 2,076 $ 3,120
Accounts receivable, less allowance for
doubtful accounts of
$500 in 1997, $775 in 1998, and $825 in
1999........................................ 28,078 36,581 52,633
Deferred income taxes........................ 1,864 3,049 3,049
Inventories.................................. 14,493 19,606 23,341
Prepaid expenses and other current assets.... 679 784 925
-------- -------- --------
Total current assets........................ 49,972 62,096 83,068
-------- -------- --------
PROPERTY, PLANT AND EQUIPMENT, NET............ 10,988 18,146 18,463
-------- -------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc. ................... 6,640 3,102 3,172
Patents, trademarks and other purchased
product rights, net......................... 104,972 272,226 361,798
Debt issuance costs, net..................... 3,118 10,091 11,402
Other........................................ 3,054 3,351 2,715
-------- -------- --------
Total other noncurrent assets............... 117,784 288,770 379,087
-------- -------- --------
TOTAL ASSETS............................... $178,744 $369,012 $480,618
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt......... $ 8,919 $ 17,444 $ 14,000
Accounts payable............................. 9,319 12,733 11,453
Payable to bank.............................. 2,618 1,026 5,531
Accrued liabilities.......................... 13,596 30,209 40,132
-------- -------- --------
Total current liabilities................... 34,452 61,412 71,116
-------- -------- --------
LONG-TERM DEBT, less current maturities....... 133,475 273,913 367,379
-------- -------- --------
DEFERRED INCOME TAXES......................... 3,290 6,826 6,826
-------- -------- --------
OTHER NONCURRENT LIABILITIES.................. 3,157 2,110 2,127
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Notes 5, 10 and
12)
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued............... -- -- --
Common shares, without par value, authorized
20,000, issued
9,082 in 1997, 9,574 in 1998 and 9,763 in
1999........................................ 1,945 1,994 2,033
Paid-in surplus.............................. 63,975 69,068 74,369
Accumulated deficit.......................... (60,229) (44,960) (41,810)
-------- -------- --------
5,691 26,102 34,592
Foreign currency translation adjustment...... (1,321) (1,351) (1,422)
-------- -------- --------
Total shareholders' equity.................. 4,370 24,751 33,170
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY..................................... $178,744 $369,012 $480,618
======== ======== ========
</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
Year Ended November 30, Ended February 28,
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
---------------------------- ----------------------
<CAPTION>
(Unaudited)
<S> <C> <C> <C> <C> <C>
NET SALES................ $118,903 $143,235 $220,064 $ 34,921 $ 62,728
-------- -------- -------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales........... 35,120 39,253 60,889 9,682 16,880
Advertising and
promotion.............. 45,512 56,176 86,592 15,180 24,738
Selling, general and
administrative......... 21,582 22,303 27,364 5,159 6,700
-------- -------- -------- ---------- ----------
Total costs and
expenses.............. 102,214 117,732 174,845 30,021 48,318
-------- -------- -------- ---------- ----------
INCOME FROM OPERATIONS... 16,689 25,503 45,219 4,900 14,410
-------- -------- -------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense........ (13,394) (15,934) (26,676) (4,180) (8,806)
Investment and other
income, net............ 1,450 1,679 881 192 131
Gain on product
divestitures........... 875 -- 9,548 -- --
-------- -------- -------- ---------- ----------
Total other income
(expense)............. (11,069) (14,255) (16,247) (3,988) (8,675)
-------- -------- -------- ---------- ----------
INCOME BEFORE INCOME
TAXES AND
EXTRAORDINARY LOSS...... 5,620 11,248 28,972 912 5,735
PROVISION FOR INCOME
TAXES................... 1,816 3,993 10,844 303 2,158
-------- -------- -------- ---------- ----------
INCOME BEFORE
EXTRAORDINARY LOSS...... 3,804 7,255 18,128 609 3,577
EXTRAORDINARY LOSS ON
EARLY EXTINGUISHMENT OF
DEBT, NET OF INCOME
TAXES (Note 5).......... (532) (1,370) (2,859) -- (427)
-------- -------- -------- ---------- ----------
NET INCOME............... $ 3,272 $ 5,885 $ 15,269 $ 609 $ 3,150
======== ======== ======== ========== ==========
COMMON SHARES:
Weighted average number
outstanding (basic).... 8,052 8,793 9,374 9,087 9,712
======== ======== ======== ========== ==========
Weighted average and
dilutive potential
number
outstanding............ 8,143 9,123 9,735 9,491 10,118
======== ======== ======== ========== ==========
NET INCOME (LOSS) PER
COMMON SHARE:
Basic:
Income before
extraordinary loss.... $ .47 $ .83 $ 1.93 $ .07 $ .37
Extraordinary loss..... (.06) (.16) (.30) -- (.04)
-------- -------- -------- ---------- ----------
Total basic........... $ .41 $ .67 $ 1.63 $ .07 $ .33
======== ======== ======== ========== ==========
Diluted:
Income before
extraordinary loss.... $ .47 $ .80 $ 1.86 $ .06 $ .35
Extraordinary loss..... (.07) (.15) (.29) -- (.04)
-------- -------- -------- ---------- ----------
Total diluted......... $ .40 $ .65 $ 1.57 $ .06 $ .31
======== ======== ======== ========== ==========
</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,
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............. -- -- 15,269 -- -- 15,269
Stock options
exercised............. 28 3,699 -- -- -- 3,727
Stock warrants
exercised............. 21 1,394 -- -- -- 1,415
Foreign currency
translation
adjustment............ -- -- -- -- (30) (30)
----- ------- -------- ----- ------- -------
Balance, November 30,
1998................... 1,994 69,068 (44,960) -- (1,351) 24,751
Net income............. -- -- 3,150 -- -- 3,150
Stock options
exercised............. 5 159 -- -- -- 164
Issuance of common
shares................ 26 4,974 -- -- -- 5,000
Stock warrants
exercised............. 8 168 -- -- -- 176
Foreign currency
translation
adjustment............ -- -- -- -- (71) (71)
----- ------- -------- ----- ------- -------
Balance, February 28,
1999 (unaudited)....... 2,033 $74,369 $(41,810) $ -- $(1,422) $33,170
===== ======= ======== ===== ======= =======
</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,
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
----------------------------- ---------------------
<CAPTION>
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.............. $ 3,272 $ 5,885 $ 15,269 $ 609 $ 3,150
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization.......... 4,829 6,381 9,827 1,691 3,488
Deferred income tax
provision............. 1,797 1,120 2,351 -- --
Gain on product
divestitures.......... (875) -- (9,548) -- --
Gain on sale of trading
securities............ (452) -- -- -- --
Gain on termination of
interest rate cap..... (281) -- -- -- --
Extraordinary loss on
early extinguishment
of debt, net.......... 532 1,370 2,859 -- 427
Dividend receivable
from Elcat, Inc....... (656) (656) (462) (164) (70)
Other, net............. (379) (106) (28) (285) 8
Changes in operating
assets and
liabilities:
Accounts receivable... (3,063) (5,140) (12,054) (2,518) (16,052)
Inventories........... 745 (2,401) 1,836 (2,244) (3,735)
Prepaid expenses and
other current
assets............... (2,878) 3,034 (102) 659 (12)
Accounts payable and
accrued liabilities.. (185) 629 10,842 (5,877) 8,301
-------- -------- --------- --------- ----------
Net cash provided by
operating activities.. 2,406 10,116 20,790 (8,129) (4,495)
-------- -------- --------- --------- ----------
INVESTING ACTIVITIES:
Purchases of property,
plant and equipment.... (1,785) (2,758) (9,050) (566) (864)
Proceeds from sale of
investments............ 452 -- 4,000 -- 387
Proceeds from product
divestitures........... 1,000 -- 11,965 -- --
Proceeds from notes and
sales of assets........ 253 75 1,085 -- --
Purchases of patents,
trademarks and other
product rights......... (43,048) (29,293) (168,402) (96) (86,324)
Increase in other
assets................. (4,128) (746) (1,193) -- (214)
-------- -------- --------- --------- ----------
Net cash used in
investing activities.. (47,256) (32,722) (161,595) (662) (87,015)
-------- -------- --------- --------- ----------
FINANCING ACTIVITIES:
Repayment of long-term
debt................... (15,032) (76,636) (145,028) (3,318) (48,515)
Proceeds from long-term
debt................... 67,944 87,500 291,365 6,000 138,500
Change in payable to
bank................... 526 908 (1,592) 2,750 4,505
Proceeds from issuance
of common stock, net... 5,500 -- -- -- --
Exercise of stock
options and warrants... 286 1,274 3,316 88 429
Debt issuance costs..... (2,099) (1,612) (9,971) (169) (2,355)
-------- -------- --------- --------- ----------
Net cash provided by
financing activities.. 57,125 11,434 138,090 5,351 92,564
-------- -------- --------- --------- ----------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND CASH
EQUIVALENTS............. 129 (10) (67) (20) (10)
-------- -------- --------- --------- ----------
CASH AND CASH
EQUIVALENTS:
Increase (decrease) for
the year............... 12,404 (11,182) (2,782) (3,460) 1,044
At beginning of year.... 3,636 16,040 4,858 4,858 2,076
-------- -------- --------- --------- ----------
At end of year.......... $ 16,040 $ 4,858 $ 2,076 $ 1,398 $ 3,120
======== ======== ========= ========= ==========
</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, antiperspirants and deodorants, toiletries and skin care, and
dietary supplements. The consumer products are sold primarily through mass
merchandisers, independent and chain drug stores, drug wholesalers, and food
stores in the United States and in various markets in approximately 50
countries throughout the world.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Chattem, Inc. and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS
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.
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 computed
using the straight-line method over the estimated useful lives of 10 to 40
years for buildings and improvements and 3 to 12 years for machinery and
equipment. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation expense for 1996, 1997 and 1998 was $1,352, $1,502 and
$1,597, 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, 1997 and 1998 was
$11,246 and $17,382, respectively. Amortization expense for 1996, 1997 and
1998 was $2,086, $2,877 and $6,180, respectively. Royalty expense related to
other purchased product rights for 1996, 1997 and 1998 was $1,140, $522 and
$523, respectively. Amortization and royalty expense are included in
advertising and promotion expense in the accompanying consolidated statements
of income.
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 $498, $490 and
$986 in 1996, 1997 and 1998, respectively. Accumulated amortization of these
costs was $1,004 and $1,814 at November 30, 1997 and 1998, respectively.
F-7
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
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, 1997 and 1998 was
$11,246 and $17,382, respectively. Amortization expense for 1996, 1997 and
1998 was $2,086, $2,877 and $6,180, respectively. Royalty expense related to
other purchased product rights for 1996, 1997 and 1998 was $1,140, $522 and
$523, respectively. Amortization and royalty expense are included in
advertising and promotion expense in the accompanying consolidated statements
of income.
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 $498, $490 and
$986 in 1996, 1997 and 1998, respectively. Accumulated amortization of these
costs was $1,004 and $1,814 at November 30, 1997 and 1998, 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 $1,117, $1,207 and
$1,369 in 1996, 1997 and 1998, respectively.
ADVERTISING EXPENSES
The cost of advertising is expensed in the fiscal year in which the related
advertising takes place. Advertising expense for 1996, 1997 and 1998 was
$22,789, $29,923 and $44,386, respectively. At November 30, 1997 and 1998, the
Company reported $1,066 and $646, respectively, of advertising paid for in
1997 and 1998 which will run or did run in the next fiscal year. These amounts
are included in other noncurrent assets in the accompanying consolidated
balance sheets.
NET INCOME PER COMMON SHARE
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. 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, 1996, 1997 and 1998, the weighted average
and dilutive potential common shares outstanding consisted of the following:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Weighted average common shares
outstanding.................................................. 8,052 8,793 9,374
Dilutive potential shares:
Stock options................................................ 54 207 332
Warrants..................................................... 37 123 29
----- ----- -----
Weighted average and dilutive potential common
shares outstanding........................................... 8,143 9,123 9,735
===== ===== =====
</TABLE>
F-8
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's Canadian and United Kingdom
subsidiaries are translated to United States dollars at year-end exchange
rates. Income and expense items are translated at average rates of exchange
prevailing during the year. Translation adjustments are accumulated as a
separate component of shareholders' equity. Gains and losses which result from
foreign currency transactions are included in the accompanying consolidated
statements of income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
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%, 16% and 17% of sales in 1996, 1997 and 1998, respectively.
No other customer exceeded 10% of the Company's sales in 1996, 1997 or 1998.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The statement must be adopted by the Company
on December 1, 1998. Under provisions of this statement, the Company will be
required to include a financial statement presentation of comprehensive income
and its components to conform to these new requirements. As a consequence of
this change, certain reclassifications will be necessary for previously
reported amounts to achieve the required presentation of comprehensive income.
Implementation of this disclosure standard will not affect the Company's
financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." The
statement must be adopted by the Company for fiscal 1999. Under provisions of
this statement, the Company will be required to modify or expand the financial
statement disclosures for operating segments, products and services and
geographic areas. Implementation of this disclosure standard will not affect
the Company's financial position or results of operations.
F-9
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits". The statement amends SFAS Nos. 87, 88 and 106. SFAS No. 132 revises
employer's disclosures about pension and other post retirement benefit plans.
The Company is required to adopt SFAS No. 132 for fiscal 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.133
established accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allow a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. A company may also implement SFAS No.133 as of the beginning of
any fiscal quarter after issuance (that is, fiscal quarters beginning June 16,
1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No.
133 must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired or
substantively modified after December 31, 1997 (and, at the Company's
election, before January 1, 1999). The Company has not yet quantified the
impact of adopting SFAS No. 133 on its financial statements and has not
determined the timing of or method of its adoption of SFAS No. 133. However,
SFAS No. 133 could increase volatility in earnings and other comprehensive
income.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
period's presentation.
(3) INVESTMENT IN ELCAT, INC.
As part of the consideration for the sale of the Company's specialty
chemicals division in 1995, the Company received 40,000 shares of 13.125%
cumulative, convertible preferred stock of Elcat, Inc. (the Elcat Preferred
Shares) having a total par value of $5,000.
In 1998, Elcat, Inc. (Elcat) redeemed 22,960 of these shares for $4,000
($2,870 par value and $1,130 accumulated dividends). The remaining 17,040
Elcat Preferred Shares are nonvoting and convertible, in whole or in part,
into a 8.95% ownership interest in Elcat. At the option of Elcat, the Elcat
Preferred Shares may be redeemed, in whole or in part, at par value ($125 per
share) plus any accrued and unpaid dividends. If all of the 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.
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, 1998. In
the opinion of management, however, the fair value of this investment is in
excess of its carrying value as of November 30, 1998.
(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, 1997 and 1998 were invested primarily in United States
government and agency securities and corporate debt and equity securities.
F-10
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Pension cost for the years ended November 30, 1996, 1997 and 1998 included
the following components:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -------
<S> <C> <C> <C>
Service cost (benefits earned during the period)..... $ 610 $ 545 $ 661
Interest cost on projected benefit obligation........ 775 741 739
Actual return on plan assets......................... (637) (845) (3,226)
Net amortization and deferral........................ 107 365 2,677
----- ----- -------
Net pension cost..................................... $ 855 $ 806 $ 851
===== ===== =======
</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.
The following table sets forth the funded status of the Plan as of November
30, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation............................. $ 7,108 $ 7,462
Nonvested benefit obligation.......................... 57 103
-------- --------
Accumulated benefit obligation....................... $ 7,165 $ 7,565
======== ========
Plan assets at fair market value....................... $ 6,471 $ 9,879
Projected benefit obligation........................... (11,072) (11,275)
-------- --------
Plan assets less than projected benefit obligation .... (4,601) (1,396)
Unrecognized net loss.................................. 4,186 1,043
Unrecognized prior service cost........................ (131) (115)
Unrecognized initial asset............................. (369) (227)
-------- --------
Pension liability recognized in balance sheets at end
of year............................................... $ (915) $ (695)
======== ========
</TABLE>
The discount rates used in determining the actuarial present value of the
projected benefit obligation were 7.5% and 6.75% in 1997 and 1998,
respectively. The rates of increase in future compensation levels used were
5.0% and 4.0% in 1997 and 1998, respectively. The expected long-term rate of
return on plan assets was 9.0% in 1997 and 1998.
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 $120,
$155 and $148 in 1996, 1997 and 1998, respectively.
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, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Revolving line of credit payable to banks at variable
rates (8.23% at November 30, 1998)...................... $ 13,000 $ 2,000
Term loans payable to banks at variable rates (8.34%
weighted average at November 30, 1998).................. 63,683 40,514
8.875% Senior Subordinated Notes, due 2008............... -- 200,000
12.75% Senior Subordinated Notes, due 2004, net of
unamortized discount of $808 for 1998 and $1,289 for
1997.................................................... 65,711 48,843
-------- --------
Total long-term debt..................................... 142,394 291,357
Less: current maturities................................. 8,919 17,444
-------- --------
Total long-term debt, net of current maturities.......... $133,475 $273,913
======== ========
</TABLE>
On March 24, 1998, the Company issued at par value $200,000 of 8.875% Senior
Subordinated Notes due 2008 (the 8.875% Notes). The proceeds of the note
offering were used to fund the BAN purchase and related fees and expenses,
repay revolving bank indebtedness and provide additional working capital.
The 8.875% Notes mature on April 1, 2008 and interest is payable semi-
annually on April 1 and October 1 of each year. The 8.875% Notes are senior
subordinated obligations of the Company and are subordinated in right of
payment to all existing and future senior debt of the Company. The 8.875%
Notes, which were registered under the Securities Act of 1933, are not
callable until April 1, 2003, after which they may be redeemed at the option
of the Company. Upon the occurrence of certain events constituting a change of
control, the holders of the 8.875% Notes may require the Company to repurchase
the 8.875% Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest. The 8.875% Notes are guaranteed by
Signal Investment & Management Co., a wholly-owned subsidiary of the Company.
The 8.875% Notes are issued under an indenture with an indenture trustee,
which restricts, among other things, the ability of the Company and its
subsidiaries to (i) incur additional indebtedness, (ii) pay dividends, (iii)
sell or issue capital stock of a subsidiary, (iv) create encumbrances on the
ability of any subsidiary to pay dividends or make other restricted payments,
(v) engage in certain transactions with affiliates, (vi) dispose of certain
assets, (vii) merge or consolidate with or into, or sell or otherwise transfer
all or substantially all their properties and assets as an entirety to another
person, or (viii) create additional liens.
In conjunction with the acquisition of BAN, the Company entered into a
credit agreement with a syndicate of banks, also on March 24, 1998 (the New
Credit Agreement). This credit agreement was divided into a $30,000 revolving
line of credit for working capital purposes, a $27,540 Term A loan, maturing
on June 26, 2002, and a $34,825 Term B loan, maturing on June 14, 2003.
The combined Term A and B loans are payable in remaining quarterly
installments as follows:
<TABLE>
<S> <C>
December 31, 1998 to September 30, 1999.............................. $1,488
December 31, 1999 to March 31, 2001.................................. $1,738
June 30, 2001........................................................ $ 777
September 30, 2001................................................... $1,000
December 31, 2001 to March 31, 2003.................................. $3,250
June 30, 2003........................................................ $2,861
</TABLE>
F-12
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
The Company may elect either the greater of (i) the prime rate or federal
funds rate plus .5% or (ii) a floating 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 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.
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.
In 1994, the Company issued $75,000 of 12.75% Senior Subordinated Notes due
2004 (the 12.75% Notes) with five year warrants to purchase 417,182 shares of
common stock (the Warrants). The 12.75% Notes consisted of 75,000 units, each
consisting of $1,000 principal amount of the 12.75% Notes and a warrant to
purchase shares of the Company's common stock (Note 9). The price of the
12.75% Notes was $73,967, or 98.6% of the original principal amount of the
12.75% 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 12.75% Notes were used to repay amounts
outstanding under a prior credit agreement.
The 12.75% Notes mature on June 15, 2004, and interest is payable semi-
annually on June 15 and December 15 of each year. The 12.75% 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 12.75%
Notes, which were registered under the Securities Act of 1933, are not
callable 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 12.75% Notes may require the Company to repurchase
the 12.75% Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest. The 12.75% Notes are guaranteed by
Signal Investment & Management Co., a wholly-owned subsidiary of the Company.
The 12.75% Notes are issued under an indenture with an indenture trustee.
The indenture places on the Company restrictions similar to those required
under the terms of the indenture associated with the 8.875% Notes.
During 1998, 1997 and 1996, the Company prepaid previously outstanding long-
term debt, with funds received from refinancings, the sale of CORNSILK (Note
12) and the redemption of the Elcat Preferred Shares. During 1998, the Company
also repurchased $17,349 of the 12.75% Notes. In connection with the
repurchase of those borrowings, the Company incurred extraordinary losses, net
of income taxes, in 1998, 1997 and 1996 of $2,859, $1,370 and $532,
respectively, or $.29, $.15 and $.07 per share, respectively. These 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.
F-13
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1999.......................................................... $ 17,444
2000.......................................................... 6,950
2001.......................................................... 5,252
2002.......................................................... 15,000
2003.......................................................... 9,361
Thereafter.................................................... 238,157
--------
292,165
Less: unamortized discount.................................... (808)
--------
$291,357
========
</TABLE>
The 2002 maturities include the amount outstanding under the revolving line
of credit which was $2,000 as of November 30, 1998.
Cash interest payments during 1996, 1997 and 1998 were $12,710, $15,259 and
$23,669, 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) (5.62% as of November 30, 1998) 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 (5.28% as of November 30, 1998) 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.
(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, 1998, 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.
F-14
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
The estimated fair values of the 12.75% and 8.875% notes at November 30,
1998 exceeded their carrying values by approximately $6,400 and $6,082,
respectively. 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, 1998, the Company
estimates it would have paid $1,888 to terminate the agreements.
(8) INCOME TAXES
The provision for income taxes from income before extraordinary loss
includes the following components for the years ending November 30, 1996, 1997
and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Current:
Federal.............................................. $ (203) $2,639 $ 8,034
State................................................ 222 234 459
Deferred............................................. 1,797 1,120 2,351
------ ------ -------
$1,816 $3,993 $10,844
====== ====== =======
</TABLE>
Deferred income tax assets and liabilities for 1997 and 1998 reflect the
impact of temporary differences between the amounts of assets and liabilities
for financial reporting and income tax reporting purposes. Temporary
differences and carryforwards which give rise to deferred tax assets and
liabilities at November 30, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Allowances and accruals................................. $ 2,005 $ 2,303
Accrued promotional expenses............................ 720 1,316
Accrued postretirement health care
benefits............................................... 559 558
Repriced stock option expense........................... 251 --
Other................................................... 310 643
------- -------
Gross deferred tax assets.............................. 3,845 4,820
------- -------
Deferred tax liabilities:
Depreciation and amortization........................... 4,486 7,829
Prepaid advertising..................................... 318 252
Inventory............................................... 190 196
Other................................................... 277 320
------- -------
Gross deferred tax liabilities......................... 5,271 8,597
------- -------
Net deferred liability................................. $(1,426) $(3,777)
======= =======
</TABLE>
F-15
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
The difference between the provision for income taxes and the amount
computed by multiplying income before income taxes and extraordinary loss by
the U.S. statutory rate for the years ended November 30, 1996, 1997 and 1998
is summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Expected tax provision............................ $1,911 $3,837 $10,140
Dividend exclusion benefit........................ (140) (178) (85)
State income taxes, net of federal Income tax
benefit.......................................... 147 154 298
Other, net........................................ (102) 180 491
------ ------ -------
$1,816 $3,993 $10,844
====== ====== =======
</TABLE>
Income taxes paid in 1996, 1997 and 1998 were $2,459, $2,162 and $1,980,
respectively. The Company received income tax refunds of $215, $2,719 and $350
during 1996, 1997 and 1998, respectively.
(9) SHAREHOLDERS' EQUITY
STOCK OPTIONS
The Company adopted SFAS No. 123, "Accounting For Stock-Based Compensation,"
during 1997, and 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 having exercise prices equal to or
greater than the market value of the common stock at the date of grant.
Compensation expense for stock option grants with exercise prices below the
market price at the date of grant is recognized ratably over the vesting
period. Compensation expense recorded for stock option grants was $350 in
1998.
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. The Company's 1998 Non-Statutory Stock Option Plan (1998 Plan) provides
for issuance of up to 700,000 shares of common stock to key employees. 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 1997 and 1998:
expected dividend yield of 0%, expected volatility of 49% and 51%, risk-free
interest rates of 6.48% and 5.42%, and expected lives of 6 years.
Had compensation expense for 1997 and 1998 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 for the years ended
November 30, 1997 and 1998 as indicated below:
<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Net income:
As reported................................................. $5,885 $15,269
Pro forma................................................... $5,683 $14,599
Net income per share, basic:
As reported................................................. $ 0.67 $ 1.63
Pro forma................................................... $ 0.65 $ 1.56
Net income per share, diluted:
As reported................................................. $ 0.65 $ 1.57
Pro forma................................................... $ 0.62 $ 1.50
</TABLE>
F-16
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
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.
A summary of the activity of stock options during 1996, 1997, and 1998 is
presented below (shares in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
--------------- --------------- ---------------
Weighted Weighted Weighted
Shares Average Shares Average Shres Average
Under Exercise Under Exercise Under Execise
Option Price Option Price Option Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year......................... 646 $7.60 613 $6.39 584 $ 6.75
Granted...................... 318 5.07 91 9.01 470 13.89
Exercised.................... (44) 6.93 (120) 6.65 (292) 6.70
Canceled..................... (307) 7.48 -- -- -- --
---- ----- ---- ----- ---- ------
Outstanding at end of year.... 613 $6.39 584 $6.75 762 $11.17
==== ===== ==== ===== ==== ======
Options exercisable at year-
end.......................... 221 $7.73 262 $7.43 96 $ 7.48
==== ===== ==== ===== ==== ======
Weighted average fair value of
options...................... $2.62 $5.24 $ 7.69
===== ===== ======
</TABLE>
A summary of the exercise prices for options outstanding under the Company's
stock-based compensation plans at November 30, 1998, is presented below
(shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Weighted Weighted Exercise
Shares Average Average Price of
Exercise Under Exercise Remaining Shares Shares
Price Range Option Price Life Exercisable Exercisable
--------------- ------ -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 4.63 - $ 5.25 145 $ 4.87 7.15 24 $ 4.86
$ 7.50 - $ 9.50 143 8.37 6.67 71 8.19
$13.50 - $18.00 469 13.78 9.16 1 18.00
$25.63 - $26.31 5 25.90 9.55 -- N/A
--- ------ ---- --- ------
Total 762 $11.17 8.31 96 $ 7.48
=== ====== ==== === ======
</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,
1998 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, 1998, no contributions had been made to the
plan.
F-17
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
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
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 1998, 35,568 warrants were exercised to acquire 208,337 shares.
During 1997, 12,030 warrants were exercised to acquire 70,464 shares. At
November 30, 1998, 23,626 warrants were outstanding which, when exercised,
would entitle the holders thereof to acquire an aggregate of 138,386 shares of
the Company's common stock.
(10) CONTINGENCIES
GENERAL LITIGATION
Claims, suits and complaints arise in the ordinary course of the Company's
business involving such matters as patents and trademarks, product liability,
environmental matters and other alleged injuries or damage.
In February 1999, a complaint was filed by Genderm Corporation ("Genderm")
in the U.S. District Court alleging, among other things, that the formulations
of CAPZASIN-P, CAPZASIN-HP and ICY HOT Arthritis Therapy Gel infringe upon a
patent licensed to Genderm. The complaint requests injunctive relief,
compensatory and treble damages, costs and attorneys' fees. A hearing on the
injunctive relief is currently scheduled for April 1999.
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 (with the exception of the Genderm litigation as to which litigation
management is not yet in a position to form an opinion), are without merit or
are of such kind or involve such amounts as would not have a material adverse
effect on the consolidated operating results or financial position of the
Company if disposed of unfavorably.
REGULATORY
The manufacturing, processing, formulation, packaging, labeling and
advertising of the Company's products are subject to regulation by federal
agencies, including the United States Food and Drug Administration (FDA). As
part of its regulatory authority, the FDA may periodically conduct audits of
the physical facilities, machinery, processes and procedures which the Company
uses to manufacture products. In December 1998, the FDA conducted an audit of
the Company's manufacturing facility in Chattanooga, Tennessee. The FDA issued
a report citing certain processes and procedures it requires the Company to
change or improve. The Company has responded to the FDA's report and is in the
process of complying with its requirements.
YEAR 2000 (unaudited)
The Company is currently in the process of replacing most of its current
information technology (IT) systems which are approximately 20 years old;
consequently, the new IT system will be year 2000 compliant. As a result, the
year 2000 compliance requirements are considered only a portion of the
Company's systems replacement effort. This replacement is expected to be
completed by December 1, 1999 at a total cost of $1,500 to $2,000. Such costs
are being capitalized as incurred.
F-18
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
The Company is also reviewing the possible impact of the year 2000 problem
on its customers and suppliers and has requested and received from a majority
of its principal customers and suppliers written statements regarding their
knowledge of and plans for meeting the year 2000 compliance requirements.
The Company's business could be adversely affected should the Company or
other entities with whom the Company does business be unsuccessful in
completing critical modifications in a timely manner.
(11) SUPPLEMENTAL FINANCIAL INFORMATION
Inventories consisted of the following at November 30, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Raw materials and work in process.......................... $ 9,107 $ 7,903
Finished goods............................................. 7,850 14,113
Excess of current cost over LIFO value..................... (2,464) (2,410)
------- -------
Total inventories......................................... $14,493 $19,606
======= =======
</TABLE>
International inventories included above, valued on a lower of FIFO cost or
market at November 30, 1997 and 1998, were $2,546 and $3,004, respectively.
Property, plant and equipment consisted of the following at November 30,
1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Land....................................................... $ 138 $ 140
Buildings and improvements................................. 3,150 3,434
Machinery and equipment.................................... 23,416 29,678
Construction in progress................................... 2,221 2,900
Less -- accumulated depreciation........................... (17,937) (18,006)
------- -------
Property, plant and equipment, net........................ $10,988 $18,146
======= =======
</TABLE>
Accrued liabilities consisted of the following at November 30, 1997 and
1998:
<TABLE>
<S> <C> <C>
Accrued interest expense.................................... $ 4,119 $ 5,969
Salaries, wages and commissions............................. 1,696 2,850
Promotion expense........................................... 2,840 8,896
Product acquisitions........................................ 1,489 3,290
Accrued pension benefits.................................... 435 700
Accrued royalties........................................... 1,670 2,889
Other....................................................... 1,347 5,615
------- -------
Total accrued liabilities.................................. $13,596 $30,209
======= =======
</TABLE>
(12) ACQUISITION AND SALE OF BRANDS
On March 24, 1998, the Company acquired the BAN line of antiperspirant and
deodorant products from Bristol-Myers Squibb Company for a purchase price of
approximately $165,000, plus assumed liabilities. The Company acquired the BAN
trademarks, formulae, certain patents pertaining to antiperspirant/deodorant
technology, technical information, inventory, manufacturing equipment and
packaging related assets used in the manufacture of BAN, but not the right to
sell BAN in Japan.
F-19
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
The following unaudited consolidated pro forma information assumes the
acquisition of BAN and related long-term borrowings had occurred on December
1, 1997 and 1998, respectively:
Pro Forma Consolidated Results of Operations (Unaudited) (1)
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Net sales................................................. $239,387 $239,508
Income before extraordinary loss (2)...................... 15,029 15,780
Net income................................................ 13,659 12,921
Earnings per share (basic):
Income before extraordinary loss......................... 1.71 1.68
Net income............................................... 1.55 1.38
Earnings per share (diluted):
Income before extraordinary loss......................... 1.65 1.62
Net income............................................... 1.50 1.33
</TABLE>
- --------
(1) The pro forma consolidated results of operations include adjustments to
give effect to amortization of intangible assets, interest expense on
acquisition debt and certain other adjustments, together with related
income tax effects. The pro forma information is not necessarily
indicative of the combined results that would have occurred had the
acquisition and borrowings occurred at the beginning of the periods
presented, nor is it indicative of the results that may occur in the
future.
(2) Includes gain on the sale of CORNSILK.
On May 12, 1998, the Company sold the CORNSILK oil control makeup brand to
Del Laboratories, Inc. for $10,750, plus inventories and the assumption of
certain liabilities. The Company sold, at a gain of $9,548, CORNSILK
trademarks, formulae, technical information, inventory and other related
assets but will continue to operate the CORNSILK business in the United
Kingdom pursuant to a license agreement. The Company used the net proceeds
from the sale to reduce bank indebtedness.
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. 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. 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. In 1998, the Company paid the former
owners of SUNSOURCE $2,500 and forgave $5,625 of amounts due the Company, in
exchange for a 50% reduction in any future additional payments under the
purchase agreement. Under the amended agreement, future additional payments
may not exceed $7,875 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 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).
F-20
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
(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, 1996, 1997 and 1998, included the following components:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
---- ---- ----
Service cost (benefits earned during the period).......... $ 36 $ 29 $ 19
Interest cost on accumulated postretirement
benefits obligation...................................... 101 115 82
Amortization of net loss (gain)........................... -- 2 (18)
---- ---- ----
Net periodic postretirement benefits cost................. $137 $146 $ 83
==== ==== ====
</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, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
--- ------ ------
<S> <C> <C> <C>
Accumulated postretirement benefits obligation:
Retirees............................................ $ 715 $ 722
Fully eligible active plan participants............. 502 246
Other active participants........................... 377 252
Unrecognized net gain (loss)......................... (160) 210
--- ------ ------
Accrued postretirement health care benefits.......... $1,434 $1,430
=== ====== ======
</TABLE>
For measurement purposes, a 6.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed in 1997 and 1998. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at November 30, 1997 and 1998. A 1%
increase in the assumed health care cost trend rate would not affect the
accumulated postretirement benefit obligation as of November 30, 1998 or the
aggregate of the service and interest cost components of the net annual
postretirement benefit cost for the year ended November 30, 1998.
F-21
<PAGE>
Chattem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
(14) GEOGRAPHICAL SEGMENT INFORMATION
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
NET SALES:
Domestic....................................... $104,444 $128,024 $199,811
International.................................. 14,459 15,211 20,253
-------- -------- --------
Consolidated................................. $118,903 $143,235 $220,064
======== ======== ========
OPERATING INCOME:
Domestic....................................... $ 18,929 $ 27,393 $ 47,482
International.................................. 1,613 1,710 2,902
-------- -------- --------
Total........................................ 20,542 29,103 50,384
Other unallocated expenses, net (1)............ (14,922) (17,855) (21,412)
-------- -------- --------
Income before income taxes and extraordinary
loss........................................ $ 5,620 $ 11,248 $ 28,972
======== ======== ========
IDENTIFIABLE ASSETS:
Domestic....................................... $135,238 $164,175 $357,568
International.................................. 10,961 7,929 8,342
-------- -------- --------
Total........................................ 146,199 172,104 365,910
Investment in Elcat, Inc. ..................... 5,984 6,640 3,102
-------- -------- --------
Consolidated................................. $152,183 $178,744 $369,012
======== ======== ========
</TABLE>
- --------
(/1/) Principally interest expense and corporate overhead not allocated.
(15) SUBSEQUENT EVENT
On December 21, 1998, the Company acquired the DEXATRIM, SPORTSCREME,
ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands from Thompson
Medical Company, Inc. (Thompson) for $95,000. The purchase price consisted of
$90,000 cash and 125,500 shares of the Company's common stock. The cash
portion of the purchase price was financed by a new senior credit facility.
The new $165,000 senior credit facility consists of a $115,000 term loan and a
$50,000 working capital revolving line of credit of which $21,500 was
initially drawn. The proceeds of the new credit facility were used to fund the
Thompson acquisition and related fees and expenses and refinance existing bank
indebtedness.
On December 21, 1998, the Company filed a shelf registration statement with
the Securities and Exchange Commission for $250,000 of debt and equity
securities.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1998 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, 1998. 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, 1998 and 1997 and the results of its
operations and its cash flows for each of the three years in the period ended
November 30, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
January 22, 1999
F-23
<PAGE>
SIGNAL INVESTMENT & MANAGEMENT CO.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
November 30, February 28,
------------------ ------------
1997 1998 1999
-------- -------- ------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 55 $ 11 $ 16
Available-for-sale security--at market value
............................................. -- 415 --
Royalties receivable from Chattem, Inc........ 1,588 2,669 2,952
-------- -------- --------
Total current assets......................... 1,643 3,095 2,968
Trademarks and other purchased product rights,
net........................................... 101,426 267,817 356,867
-------- -------- --------
TOTAL ASSETS................................ $103,069 $270,912 $359,835
======== ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Liabilities:
<S> <C> <C> <C>
Payable to Chattem, Inc....................... $102,573 $262,330 $351,792
Deferred income taxes ........................ 2,628 5,741 5,741
-------- -------- --------
Total liabilities ........................... 105,201 268,071 357,533
-------- -------- --------
Shareholder's equity (deficit):
Common shares, without par value, 500 shares
authorized,
250 shares issued and outstanding ........... 2 2 2
Retained earnings (deficit)................... (2,134) 2,819 2,300
Unrealized gain on investment................. -- 20 --
-------- -------- --------
Total shareholder's equity (deficit)......... (2,132) 2,841 2,302
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY
(DEFICIT).................................. $103,069 $270,912 $359,835
======== ======== ========
</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>
For the Three
Year Ended November Months Ended
30, February 28,
---------------------- -------------
1996 1997 1998 1998 1999
------- ------ ------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES AND GAINS:
Royalties from Chattem, Inc. $ 5,044 $6,181 $ 9,891 $1,559 $2,961
Investment income:
Interest .............................. 33 31 3 -- 1
Interest from Chattem, Inc. note
receivable ........................... 136 -- -- -- --
Gain on sale of investment............... 323 -- -- -- --
Gain on sale of trademarks and other
product rights.......................... 875 -- 9,548 -- --
------- ------ ------- ------ ------
Total revenues and gains.............. 6,411 6,212 19,442 1,559 2,962
------- ------ ------- ------ ------
EXPENSES:
Amortization of trademarks and other
purchased product rights................ 1,779 2,627 5,859 770 2,225
Other.................................... 18 27 18 2 8
------- ------ ------- ------ ------
Total expenses ....................... 1,797 2,654 5,877 772 2,233
------- ------ ------- ------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES.. 4,614 3,558 13,565 787 729
PROVISION FOR INCOME TAXES................ 1,575 1,205 4,612 280 248
------- ------ ------- ------ ------
NET INCOME ............................... $ 3,039 $2,353 $ 8,953 507 481
======= ====== ======= ====== ======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING.............................. 250 250 250 250 250
======= ====== ======= ====== ======
NET INCOME PER COMMON SHARE............... $12,156 $9,412 $35,812 $2,028 $1,924
======= ====== ======= ====== ======
</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 Unrealized
Common Earnings Gain on
Shares (Deficit) Investment Total
------ --------- ---------- -------
<S> <C> <C> <C> <C>
BALANCE, November 30, 1996 $ 2 $ 1,013 $-- $ 1,015
Net income .............................. -- 2,353 -- 2,353
Dividends................................ -- (5,500) -- (5,500)
--- ------- ---- -------
BALANCE, November 30, 1997 2 (2,134) -- (2,132)
Net income............................... -- 8,953 -- 8,953
Dividends................................ -- (4,000) -- (4,000)
Unrealized gain on investment ........... -- -- 20 20
--- ------- ---- -------
BALANCE, November 30, 1998 2 2,819 20 2,841
Net income............................... -- 481 -- 481
Dividends................................ -- (1,000) -- (1,000)
Sale of investment....................... -- -- (20) (20)
--- ------- ---- -------
BALANCE, February 28, 1999 (unaudited) $ 2 $ 2,300 $-- $ 2,302
=== ======= ==== =======
</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
Year Ended November 30, February 28,
-------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,039 $ 2,353 $ 8,953 507 481
Adjustments to reconcile net
income to net cash
Provided by operating
activities:
Amortization.................. 1,779 2,627 5,859 770 2,225
Income tax provision ......... 1,575 1,205 4,612 280 248
(Gain)/Loss on sale of
investment................... (323) -- -- -- 8
Gain on sale of trademarks and
other product rights......... (875) -- (9,548) -- --
Other......................... 35 10 -- -- --
Changes in operating assets
and liabilities:
Increase in royalties
receivable from Chattem,
Inc......................... (266) (301) (1,081) -- (283)
Decrease in interest
receivable from Chattem,
Inc......................... 121 -- -- 30 --
------- ------- -------- ------- -------
Net cash provided by
operating activities ..... 5,085 5,894 8,795 1,587 2,679
------- ------- -------- ------- -------
INVESTING ACTIVITIES:
Payment of note receivable from
Chattem, Inc.................. 2,500 -- -- -- --
Proceeds from sale of
investment.................... 323 -- -- -- 386
Purchase of investment......... -- -- (395) -- --
------- ------- -------- ------- -------
Net cash provided by (used
in) investing
activities................ 2,823 -- (395) -- 386
------- ------- -------- ------- -------
FINANCING ACTIVITIES:
Receipts from (payments to)
Chattem, Inc.................. 5 (3,250) (4,444) (600) (2,060)
Dividends paid to Chattem,
Inc........................... (5,853) (5,500) (4,000) (1,000) (1,000)
------- ------- -------- ------- -------
Net cash used in financing
activities................ (5,848) (8,750) (8,444) (1,600) (3,060)
------- ------- -------- ------- -------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the
year.......................... 2,060 (2,856) (44) (13) 5
At beginning of year........... 851 2,911 55 55 11
------- ------- -------- ------- -------
At end of year................. $ 2,911 $ 55 $ 11 $ 42 $ 16
======= ======= ======== ======= =======
SUPPLEMENTAL SCHEDULE OF NON-
CASH TRANSACTIONS :
Increase (decrease) in payable
to Chattem, Inc. in connection
with--
Gain on sale of trademarks and
other product rights......... $ (875) $ -- $ (9,548) $ -- $ --
Purchase of trademarks and
other product rights......... 45,810 29,967 172,250 -- 91,275
Provision for income taxes.... 893 133 1,499 280 24
Payment of certain items on
behalf of the Company........ 35 10 -- -- --
DIVIDENDS PER SHARE ............ $ 23 $ 22 $ 16 $ 4 $ 4
</TABLE>
The accompanying notes are an integral part of these financial 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") and is included in Chattem's
consolidated financial statements and tax returns. Signal was formed 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 other active operations.
Signal is a guarantor of Chattem's $75,000 of 12.75% Series B Senior
Subordinated Notes due 2004 and $200,000 of 8.875% Series B Senior
Subordinated Notes due 2008, which guarantees and notes were registered under
the Securities Act of 1933. During 1995 and 1998 Chattem repurchased
approximately $25,000 of the 12.75% Notes.
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, 1998 to June 14, 2004. The outstanding
balances as of November 30, 1998 were $40,514 for the term loans and $2,000
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, 1997 and 1998 was
$7,687 and $13,545, respectively. Amortization expense for 1996, 1997 and 1998
was $1,779, $2,627 and $5,859, respectively.
Investments
In fiscal 1998, the Company purchased $395 of available-for-sale equity
securities, which were sold in December 1998.
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>
(3) INCOME TAXES
The provision for income taxes includes the following components for the
years ended November 30:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Current.............................................. $ 893 $ 133 $1,499
Deferred............................................. 682 1,072 3,113
------ ------ ------
$1,575 $1,205 $4,612
====== ====== ======
</TABLE>
The temporary difference which gives rise to the deferred tax liability at
November 30, 1996, 1997 and 1998, respectively, 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>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Expected tax provision............................ $1,584 $1,210 $4,612
Nontaxable interest income........................ (9) (5) --
------ ------ ------
$1,575 $1,205 $4,612
====== ====== ======
</TABLE>
(4) ACQUISITION AND SALE OF TRADEMARKS
On March 24, 1998, Chattem and the Company acquired the BAN line of
antiperspirant and deodorant products from Bristol-Myers Squibb Company for a
purchase price of approximately $165,000, plus assumed liabilities. The
Company acquired the BAN trademarks, formulae, certain patents pertaining to
antiperspirant/deodorant technology and technical information. Chattem
purchased the inventory, manufacturing equipment and packaging related assets
used in the manufacture of BAN, but not the right to sell BAN in Japan.
On May 12, 1998, Chattem and the Company sold the CORNSILK oil control
makeup brand for $10,750, plus inventories and the assumption of certain
liabilities. The Company sold the CORNSILK trademarks, formulae and technical
information for which a gain of $9,548 was recognized. Chattem sold the
inventory and other related assets but will continue to operate the CORNSILK
business in the United Kingdom pursuant to a license agreement. Chattem used
the net proceeds from the sale to reduce bank indebtedness.
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. In 1998
Chattem paid the former owners of SUNSOURCE $2,500 and forgave $5,625 of
amounts due Chattem, in exchange for a 50% reduction in any future additional
payments under the purchase agreement. This total of $8,125 was added to the
cost of the SUNSOURCE trademark and will be amortized over its remaining life.
Under the amended agreement, future additional payments may not exceed $7,875
in the aggregate.
(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.
Payable to Chattem 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,
1999.
Certain general and administrative expenses of the Company are occasionally
paid by Chattem on behalf of the Company. Such amounts are not significant.
F-29
<PAGE>
A summary analysis of the activity between the Company and Chattem for the
two years ended November 30, 1998 is as follows:
<TABLE>
<C> <S> <C>
Balance-- November 30, 1996...................................... $ 75,713
Repayments............................................. (3,250)
Income tax provision................................... 133
Expenses paid by Chattem............................... 10
Purchase of trademarks and other product rights........ 29,967
--------
Balance-- November 30, 1997...................................... 102,573
Repayments............................................. (4,444)
Income tax provision................................... 1,499
Purchase of trademarks and other product rights........ 172,250
Gain or sale of trademarks and other product rights.... (9,548)
--------
Balance-- November 30, 1998...................................... $262,330
========
</TABLE>
The weighted average balance due Chattem during the year ended November 30,
1998 was $197,055.
(6) YEAR 2000
The Company is a wholly-owned subsidiary of Chattem which provides the
Company with the use of all of its information technology (IT) systems.
Chattem is currently in the process of replacing most of its current
information technology systems which are approximately 20 years old;
consequently, the new IT system will be year 2000 compliant. As a result, the
year 2000 compliance requirements are considered only a portion of the
Chattem's systems replacement effort. This replacement is expected to be
completed on or before December 1, 1999 at a total cost of $1,500 to $2,000.
Such costs are being capitalized as incurred.
Chattem is also reviewing the possible impact of the year 2000 problem on
its customers and suppliers and has requested and received from a majority of
its principal customers and suppliers written statements regarding their
knowledge of and plans for meeting the year 2000 compliance requirements.
Chattem's business could be adversely affected should Chattem or other
entities with whom Chattem does business be unsuccessful in completing
critical modifications in a timely manner.
(7) SUBSEQUENT EVENT
On December 21, 1998 the Company and Chattem acquired the DEXATRIM,
SPORTSCREME, ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands from
Thompson Medical Company, Inc. ("Thompson") for $95,000. The purchase price
consisted of $90,000 cash and 125,500 shares of Chattem's common stock. The
cash portion of the purchase price was financed with a new senior credit
facility. The Company is the guarantor of the new $165,000 credit facility,
which consists of a $115,000 term loan and a $50,000 working capital revolving
loan of which $21,500 was initially outstanding. The proceeds of the new
credit facility were used to fund the Thompson acquisition and related fees
and expenses and refinance existing bank indebtedness for which the Company
was guarantor.
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, 1997 and 1996, and the statement of U.S.
net sales and product contribution for the years ended December 31, 1997, 1996
and 1995, 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, 1997 and 1996 and the U.S. net sales
and product contribution of the Product as described in Note 2 for the years
ended December 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
PriceWaterhouse LLP
F-31
<PAGE>
U.S. BAN
STATEMENT OF U.S. ASSETS AND LIABILITIES
(in thousands)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Assets
Inventories, net:
Raw materials.............................. $ 1,089 $ 1,233
Packaging.................................. 860 1,161
Work in process............................ 19 342
Finished goods............................. 6,284 7,497
------- --------
Total inventories, net................. 8,252 10,233
------- --------
Property, plant and equipment, net:
Machinery and equipment.................. 21,897 21,799
Less: Accumulated depreciation........... 12,963 10,946
------- --------
Total property, plant and equipment,
net................................... 8,934 10,853
------- --------
Total assets........................... $17,186 $ 21,086
Liabilities
Accrued expenses
Advertising.............................. $ -- $ 722
Consumer promotion....................... 1,003 1,127
Trade promotion.......................... 3,676 2,140
------- --------
Total accrued expenses................. $ 4,679 $ 3,989
------- --------
Assets less liabilities................ $12,507 $ 17,097
======= ========
</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,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................... $96,152 $97,547 $97,705
Cost of goods sold...................... 32,780 32,340 30,630
------- ------- -------
Gross margin.......................... 63,372 65,207 64,075
Distribution............................ 6,594 7,131 6,169
Promotion............................... 25,018 21,952 18,908
Advertising and other marketing ........ 7,019 9,251 10,691
------- ------- -------
Product contribution.................. $24,741 $26,873 $28,307
======= ======= =======
</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.
The machinery and equipment is primarily located in Morrisville, North
Carolina, and at a third party manufacturer in Quebec, Canada.
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)
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>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Thompson Medical Company, Inc.
We have audited the accompanying statements of assets acquired and
liabilities assumed as of November 30, 1998 and 1997, of the Dexatrim,
Aspercreme, Sportscreme, Arthritis Hot, and Capzasin U.S. Produce lines (the
U.S. Acquired Brands) of Thompson Medical Company, Inc. (the Business) and the
related statements of net sales and product contribution for the years ended
November 30, 1998, 1997 and 1996. These financial statements are the
responsibility of the Business' 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 required 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 principals used and significant
estimates made by management, as well as evaluating the overall presentation
of the financial statements. We believe that our audits provide a reasonable
basis for our opinion.
The accompanying financial statements reflect the assets acquired and
liabilities assumed and the net sales and product contribution attributable to
the U.S. Acquired Brands and are not intended to be a complete presentation of
the U.S. Acquired Brands' assets, liabilities, revenues or expenses.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets acquired and liabilities assumed of the
U.S. Acquired Brands as of November 30, 1998 and 1997 and the net sales and
product contribution of the U.S. Acquired Brands for the years ended November
30, 1998, 1997 and 1996, in conformity with generally accepted accounting
principals.
Arthur Andersen LLP
West Palm Beach, Florida,
January 20, 1999
F-36
<PAGE>
THOMPSON MEDICAL COMPANY, INC.
U.S. ACQUIRED BRANDS
STATEMENTS OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
AS OF NOVEMBER 30, 1998 AND 1997
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
ASSETS
------
INVENTORIES................................................... $ 3,435 $ 2,740
MACHINERY..................................................... 685 685
Less: accumulated depreciation.............................. (668) (612)
------- -------
Total machinery........................................... 17 73
------- -------
Total assets.............................................. $ 3,452 $ 2,813
------- -------
LIABILITIES
-----------
ACCRUED EXPENSES:
Consumer promotion.......................................... $ 34 $ 130
Sales returns............................................... 461 651
------- -------
Total accrued expenses.................................... 495 781
------- -------
Assets less liabilities................................... $ 2,957 $ 2,032
------- -------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-37
<PAGE>
THOMPSON MEDICAL COMPANY, INC.
U.S. ACQUIRED BRANDS
STATEMENTS OF NET SALES AND PRODUCT CONTRIBUTION
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES........................................... $ 54,735 $ 55,752 $ 54,661
COSTS OF GOODS SOLD................................. 12,071 12,130 11,657
-------- -------- --------
Gross margin...................................... 42,664 43,622 43,004
Advertising......................................... 16,530 20,152 13,225
Promotion........................................... 5,521 4,719 5,277
Allocated warehouse and distribution................ 1,804 1,582 1,394
Allocated variable selling.......................... 964 922 976
-------- -------- --------
Product contribution.............................. $ 17,845 $ 16,247 $ 22,132
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-38
<PAGE>
THOMPSON MEDICAL COMPANY, INC.
U.S. ACQUIRED BRANDS
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
1. DESCRIPTION OF BUSINESS
The Business manufactures and markets over-the-counter appetite suppressants
and external analgesic products. The products are sold through wholesalers and
directly to retailers throughout the United States.
On December 21, 1998, the Company sold the U.S. Acquired Brands, certain
other minor brands and the related worldwide rights to Chattem, Inc.
("Chattem"). Under the terms of this agreement, Chattem acquired the brand
inventories, and specified fixed assets, assumed certain liabilities for
returns and coupons, subject to specified limitations, and assumed all
commitments for advertising and promotion of the brands following the closing
date. The purchase price was $95 million, subject to adjustment based on the
final value of the inventories.
2. BASIS OF PRESENTATION
The accompanying financial statements present only the assets acquired and
liabilities assumed and the net sales and product contribution of the U.S.
Acquired Brands. These financial statements include all adjustments necessary
for a fair presentation of the U.S. assets acquired and liabilities assumed at
November 30, 1998 and 1997 and of U.S. net sales and product contribution for
the years ended November 30, 1998, 1997 and 1996. These financial statements
have been prepared in accordance with Thompson Medical Company, Inc.
accounting principles which are in accordance with generally accepted
accounting principles.
These financial statements set forth only the net sales and operational
expenses attributable to the U.S. Acquired Brands 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, sales administration, marketing, legal and
other administrative functions.
The statements of net sales and product contribution includes amounts
attributable to the manufacture, sale, promotion and advertisement of the U.S.
Acquired Brands. Net sales include allowances for sales returns and cash
discounts. Product contribution represents net sales less cost of goods sold,
distribution, promotion, advertising and variable selling expenses
attributable to the U.S. Acquired Brands. Included in product contribution is
an allocation of certain expenses attributable to the U.S. Acquired Brands.
These expenses have been allocated to the U.S. Acquired Brands by the Business
based upon various factors which management believes are reasonable.
Net sales by the Business to one customer comprised approximately 19%, 19%
and 17% of total net sales for the years ended November 30, 1998, 1997 and
1996, respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The presentation of financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates.
F-39
<PAGE>
THOMPSON MEDICAL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
November 30, 1998 and 1997
Inventories, net
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Component parts.......................................... $ 1,516 $ 1,164
Finished goods........................................... 1,919 1,576
------- -------
$ 3,435 $ 2,740
======= =======
</TABLE>
Machinery
Expenditures for additions, renewals and betterments are capitalized at
cost. Depreciation is generally computed by accelerated methods based on the
estimated useful lives of the related assets. Machinery has been depreciated
over 5 years.
The machinery and equipment is located at a third party manufacturer.
4. COMMITMENTS AND CONTINGENCIES
The Business has entered into promotional, advertising, supply and certain
other commitments that are considered normal to the Business.
F-40
<PAGE>
Chattem, Inc.
By this Prospectus, we offer up to $250,000,000 of -
DEBT SECURITIES, PREFERRED STOCK,
COMMON STOCK AND WARRANTS
We may offer the securities in one or more separate classes or series, in
amounts, at prices and on terms to be determined by market conditions at the
time of sale and to be set forth in a supplement or supplements to this
Prospectus. Any securities may be offered with other securities or separately.
Debt securities or preferred stock may be exchangeable for or convertible into
shares of common stock. Debt securities may be guaranteed by our subsidiary,
Signal Investment & Management Co. The aggregate offering price of the
securities will not exceed $250,000,000.
We will provide the specific terms of these securities in supplements to
this Prospectus. You should read this Prospectus and supplements carefully
before you invest. More information on the Company may be obtained from the
sources described herein (see "Information Available to You").
The securities may be sold on a negotiated or competitive bid basis to or
through underwriters or dealers designated from time to time or to other
purchasers directly or through agents designated from time to time (see "Plan
of Distribution").
Our common stock is listed on the Nasdaq Stock Market (National Market)
under the symbol "CHTT."
This Prospectus may not be used to consummate a sale of securities unless
accompanied by the applicable Prospectus Supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is January 22, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Information Available to You................................................ 2
Incorporation of Certain Documents by Reference............................. 2
The Company................................................................. 3
Ratio of Earnings to Fixed Charges.......................................... 4
Use of Proceeds............................................................. 4
Plan of Distribution........................................................ 4
Description of Stock........................................................ 5
Description of Debt Securities.............................................. 5
Description of Warrants..................................................... 8
Certain Provisions in the Charter........................................... 9
Experts..................................................................... 9
Legal Matters............................................................... 10
Indemnification of Directors and Officers................................... 11
</TABLE>
INFORMATION AVAILABLE TO YOU
We are subject to the informational reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and therefore file,
reports, proxy statements and other information with the Securities and
Exchange Commission (the "SEC"). You may read and copy any document we file at
the SEC's public reference facilities at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the SEC's regional offices
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New
York 10048. You can obtain copies of these materials from the Public Reference
Section of the SEC at Judiciary Plaza, 450 Fifth Street, Washington, D.C.
20549 at prescribed rates. Our SEC filings are also available to the public
from the SEC's web site at http://www.sec.gov.
We have filed with the SEC a Registration Statement on Form S-3 (herein
together with all amendments, supplements and exhibits thereto called the
"Registration Statement") with respect to the securities covered by this
Prospectus. This Prospectus does not contain all of the information set forth
in the Registration Statement, as permitted by the rules and regulations of
the SEC. For further information with respect to Chattem and the securities
offered hereby, we refer you to the Registration Statement. Statements
contained herein concerning the provisions of certain documents filed with, or
incorporated by reference in, the Registration Statement as exhibits are not
necessarily complete and each such statement is qualified in its entirety by
reference to the applicable document filed with the SEC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this Prospectus, and later information filed with the
SEC will update and supersede this information. We incorporate by reference
the documents listed below and any further filings made with the SEC under
Section 13(a), 13(c), 14, or 15(d) of the Exchange Act until our offering is
completed.
(1) Chattem's Annual Report on Form 10-K for the year ended November 30,
1997, filed March 2, 1998;
(2) Chattem's Quarterly Reports on Form 10-Q filed April 14, 1998, July 14,
1998 and October 15, 1998;
(3) Chattem's Current Reports on Form 8-K filed February 25, 1998, March 10,
1998, April 8, 1998, May 28, 1998 (as amended by Form 8-K/A filed May 29,
1998) and November 18, 1998; and
2
<PAGE>
(4) The description of Chattem's common stock as set forth in Chattem's
Amended and Restated Charter filed as an exhibit to Chattem's Annual Report on
Form 10-K for the transition period ended November 30, 1992.
We also incorporate by reference the documents listed below and any further
filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act until our offering is completed.
(1) Signal Investment & Management Co. ("Signal") Annual Report on Form 10-K
for the year ended November 30, 1997, filed on March 2, 1998; and
(2) Signal's Quarterly Reports on Form 10-Q filed April 4, 1998, July 14,
1998 and October 15, 1998.
You may request a copy of these filings, at no cost, by writing or
telephoning us at: Chattem, Inc., 1715 West 38th Street, Chattanooga,
Tennessee 37409, Attention: A. Alexander Taylor, II (Telephone: (423) 821-
4571). You should rely only on the information incorporated by reference or
provided in this Prospectus or any supplement. We have not authorized anyone
else to provide you with different information. This Prospectus is an offer to
sell or to buy only the securities referred to herein, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this Prospectus is current only as of the date
hereof.
THE COMPANY
Chattem, Inc. ("We," "Chattem" or the "Company") is a diversified
manufacturer and marketer of over-the-counter health and skin care products,
dietary supplements and diet aids. We manufacture and market:
. branded over-the-counter ("OTC") pharmaceuticals, such as GOLD BOND,
FLEX ALL, ICY HOT, ASPERCREME, CAPZASIN, SPORTSCREME, ARTHRITIS HOT,
BENZODENT, HERPECIN-L, PAMPRIN, PREMSYN PMS and NORWICH aspirin;
. functional toiletries, including PHISODERM, BULLFROG, ULTRASWIM, SUN-IN
and MUDD;
. dietary supplements, including GARLIQUE, MELATONEX, ECHINEX, PROPALMEX,
REJUVEX and HARMONEX;
. the BAN line of antiperspirants and deodorants; and
. DEXATRIM appetite suppressants.
Our objective is to offer high quality brand name products in niche market
segments in which our products can be among the market leaders. We strive to
achieve this objective by identifying brands with favorable demographic
appeal, being flexible in modifying products and promotions in response to
changing consumer demands and developing creative and cost-effective marketing
and advertising programs. We manufacture approximately half of our consumer
products.
We anticipate that the Company will continue to expand through a combination
of brand acquisitions and internal growth. Since 1986, we have acquired
approximately 20 brands, including the acquisition of DEXATRIM, ASPERCREME,
CAPZASIN, SPORTSCREME and ARTHRITIS HOT, on December 21, 1998. We also
acquired other brands during this period including BAN, GARLIQUE, MELATONEX,
ECHINEX, PROPALMEX, REJUVEX, GOLD BOND, FLEX-ALL, ICY HOT, PHISODERM,
BENZODENT, NORWICH, BULLFROG and ULTRASWIM. Our acquisition strategy is to
identify brands that are embryonic or have unrealized potential, which can
complement existing brands, and which can be among the leaders in attractive
niche market segments. We also seek internal growth with programs designed to
capitalize on the value of our existing brands and product line extensions,
such as ICY HOT Arthritis Therapy Gel and GOLD BOND Medicated Foot Powder
introduced in 1997 and GOLD BOND Medicated Lotion in 1998.
The Company's principal executive offices are located at 1715 West 38th
Street, Chattanooga, Tennessee 37409, and its telephone number is (423) 821-
4571. Signal is a wholly-owned subsidiary of Chattem. Its principal executive
offices are located at 1105 North Market, Suite 1300, Wilmington, Delaware
19890, and its telephone number is (302) 656-3950.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's ratio of earnings to fixed
charges for the periods indicated:
<TABLE>
<CAPTION>
Nine Months
Ended
August 31, Years Ended November 30,
----------- ---------------------------
1998 1997 1997 1996 1995 1994
----- ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges..... 2.2:1 1.8:1 1.7:1 1.4:1 1.3:1 1.3:1
</TABLE>
For purposes of calculating this ratio, "earnings" consist of the Company's
consolidated income from continuing operations before income taxes,
extraordinary items and fixed charges. "Fixed charges" consist of interest
expense, amortization of deferred financing costs and the portion of rental
expense representative of the interest factor.
USE OF PROCEEDS
Except as otherwise set forth in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the debt securities,
preferred stock, common stock and warrants registered hereunder (the
"Securities") for general corporate purposes, including, among other things,
the acquisition of new brands and the repayment of existing indebtedness.
PLAN OF DISTRIBUTION
We may sell the Securities (i) through agents; (ii) through underwriters;
(iii) through dealers; (iv) directly to purchasers (through a specific bidding
or auction process or otherwise); or (v) through a combination of any such
methods of sale. We (directly or through agents) may sell, and the
underwriters may resell, the Securities in one or more transactions at a fixed
price or prices, which may be changed, or at market prices prevailing at the
time of sale, at prices relating to such prevailing market prices or at
negotiated prices.
Agents designated by the Company from time to time may solicit offers to
purchase the Securities. Agents involved in the offer or sale of the
Securities will be named, and any commissions payable by the Company to such
agent will be set forth, in the Prospectus Supplement. Unless otherwise
indicated in the Prospectus Supplement, an agent will act on a best efforts
basis for the period of its appointment. An agent may be deemed to be an
underwriter, as that term is defined in the Securities Act, of the Securities
so offered and sold.
If an underwriter or underwriters are utilized in the sale of Securities,
the Company will execute an underwriting agreement with such underwriter or
underwriters at the time an agreement for such sale is reached. The names of
the specific managing underwriter or underwriters, as well as any other
underwriters, and the terms of the transactions, including compensation of the
underwriters and dealers, which may be in the form of discounts, concessions
or commissions, if any, will be set forth in the Prospectus Supplement, which
will be used by the underwriters to make resales of the Securities.
If a dealer is utilized in the sale of the Securities, the Company or an
underwriter will sell such Securities to the dealer, as principal. The dealer
may then resell such Securities to the public at varying prices to be
determined by such dealer at the time of resale. The name of the dealer and
the terms of the transactions will be set forth in the Prospectus Supplement
relating thereto.
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Offers to purchase the Securities may be solicited directly by the Company
and sales thereof may be made by the Company directly to institutional
investors or others. The terms of any such sales, including the terms of any
bidding or auction process, if utilized, will be described in the Prospectus
Supplement relating thereto.
We will indemnify agents, underwriters and dealers against certain
liabilities, including liabilities under the Securities Act. The terms and
conditions of such indemnification or contribution will be described in the
applicable Prospectus Supplement. Agents, underwriters and dealers may engage
in transactions with or perform services for us in the ordinary course of
business.
DESCRIPTION OF STOCK
The summary of the terms of the stock of the Company set forth below does
not purport to be complete and is subject to and qualified in its entirety by
reference to the charter and bylaws of the Company and applicable law. See
"Information Available to You."
General
The Company has authorized 20,000,000 shares of common stock, without par
value (the "Common Stock"), and 1,000,000 shares of preferred stock, without
par value (the "Preferred Stock"). As of December 18, 1998, 9,585,772 shares
of Common Stock were issued and outstanding and no shares of Preferred Stock
were issued and outstanding.
Preferred Stock
The Board of Directors of the Company has the authority, without further
action by the Company's shareholders, to determine the principal rights,
preferences and privileges of the unissued Preferred Stock.
Common Stock
Subject to the preferential rights of any series of Preferred Stock that may
be outstanding, all shares of Common Stock participate equally in any
dividends declared by the Board of Directors and in the net assets of the
Company on liquidation. Holders of shares of Common Stock are entitled to one
vote for each share held of record and have no conversion, exchange,
preemptive or cumulative voting rights. All outstanding shares of Common Stock
are fully paid and nonassessable.
The transfer agent and registrar for the Common Stock is the SunTrust Bank,
Atlanta, Georgia.
DESCRIPTION OF DEBT SECURITIES
The following sets forth certain general terms and provisions of each
indenture under which the debt securities are to be issued (as amended or
supplemented from time to time, each an "Indenture"). The particular terms of
the debt securities being registered hereunder (the "Debt Securities") will be
set forth in a Prospectus Supplement relating to such Debt Securities. The
Debt Securities are to be issued under one or more Indentures, to be entered
into between the Company and a trustee chosen by the Company and qualified to
act under the Trust Indenture Act of 1939, as amended (the "TIA") (together
with any other trustee(s) chosen by the Company and appointed in a
supplemental indenture with respect to a particular series, the "Trustee").
The form of Indenture will be filed by the Company from time to time by means
of an exhibit to Form 8-K and will be available for inspection at the
corporate trust office of the Trustee, or as described above under
"Information Available to You." The Indentures are subject to, and governed
by, the TIA. The Company will execute an Indenture if and when the Company
issues any Debt Securities. The statements made hereunder relating to the
Indentures and the Debt Securities to be issued thereunder are summaries of
certain provisions thereof and do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all provisions of
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<PAGE>
the Indentures (including those terms made a part of the Indenture by
reference to the TIA) and such Debt Securities. Capitalized terms used but not
defined herein shall have the respective meanings set forth in the Indentures.
References below to an "Indenture" are deemed to constitute a reference to the
applicable Indenture under which a particular series of Debt Securities is
issued.
General
The Debt Securities will be unsecured obligations of the Company. The Debt
Securities may be issued in one or more series. Specific terms of each series
of Debt Securities will be contained in authorizing resolutions or a
supplemental indenture relating to that series. There will be Prospectus
Supplements relating to particular series of Debt Securities. Each Prospectus
Supplement will describe, as to the Debt Securities to which it relates: (i)
the title of the Debt Securities; (ii) any limit upon the aggregate principal
amount of a series of Debt Securities which may be issued; (iii) the date or
dates on which principal of the Debt Securities will be payable and the amount
of principal which will be payable; (iv) the rate or rates (which may be fixed
or variable) at which the Debt Securities will bear interest, if any, as well
as the dates from which interest will accrue, the dates on which interest will
be payable and the record date for the interest payable on any payment date;
(v) the currency or currencies in which principal, premium, if any, and
interest, if any, will be paid; (vi) the place or places where principal,
premium, if any, and interest, if any, on the Debt Securities will be payable
and where Debt Securities which are in registered form can be presented for
registration of transfer or exchange and the identification of any depositary
or depositaries for any global Debt Securities; (vii) any provisions regarding
the right of the Company to redeem or purchase Debt Securities or of holders
to require the Company to redeem Debt Securities; (viii) the right, if any, of
holders of the Debt Securities to convert them into stock or other securities
of the Company, including any provisions intended to prevent dilution of the
conversion rights or otherwise; (ix) any provisions by which the Company will
be required or permitted to make payments to a sinking fund which will be used
to redeem Debt Securities or a purchase fund which will be used to purchase
Debt Securities; (x) the percentage of the principal amount at which Debt
Securities will be issued and, if other than the full principal amount
thereof, the percentage of the principal amount of the Debt Securities which
is payable if maturity of the Debt Securities is accelerated because of a
default; (xi) the terms, if any, upon which Debt Securities may be
subordinated to other indebtedness of the Company; (xii) any additions to,
modifications of or deletions from the terms of the Debt Securities with
respect to Events of Default or covenants or other provisions set forth in the
Indenture; and (xiii) any other material terms of the Debt Securities, which
may be different from the terms set forth in this Prospectus.
Events of Default and Remedies
An Event of Default with respect to any series of Debt Securities will be
defined in the Indenture as being default in payment of the principal of or
premium, if any, on any of the Debt Securities of such series; default for 30
days in payment of any installment of interest on any Debt Security of such
series; default by the Company for 60 days after notice in the observance or
performance of any other covenants in the Indenture relating to such series;
and certain events involving bankruptcy, insolvency or reorganization of the
Company. The Indenture will provide that the Trustee may withhold notice to
the holders of any series of Debt Securities of any default (except a default
in payment of principal, premium, if any, or interest, if any, with respect to
such series of Debt Securities) if the Trustee considers it in the interest of
the holders of such series of Debt Securities to do so.
The Indenture will provide that if any Event of Default has occurred and is
continuing with respect to any series of Debt Securities, the Trustee or the
holders of not less than a certain specified percentage in principal amount of
such series of Debt Securities then outstanding may declare the principal of
all the Debt Securities of such series to be due and payable immediately.
However, the holders of a majority in principal amount of the Debt Securities
of such series then outstanding by written notice to the Trustee and the
Company may waive any Default or Event of Default (other than any continuing
Default or Event of Default in payment of principal or interest) with respect
to such series of Debt Securities. Holders of a majority in principal amount
of the then outstanding Debt Securities of any series may rescind an
acceleration with respect to such series and its
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<PAGE>
consequences (except an acceleration due to nonpayment of principal or
interest on such series) if the rescission would not conflict with any
judgment or decree and if all existing Events of Default with respect to such
series have been cured or waived.
The holders of a majority in principal amount of the Debt Securities of any
series then outstanding will have the right to direct the time, method and
place of conducting any proceedings for any remedy available to the Trustee
with respect to such series, subject to certain limitations specified in the
Indenture.
Defeasance of Indenture
The Indenture will permit the Company to terminate all of its obligations
under the Indenture as they relate to any particular series of Debt
Securities, other than the obligation to pay interest, if any, on and the
principal of the Debt Securities of such series and certain other obligations,
at any time by (i) depositing in trust with the Trustee, under an irrevocable
trust agreement, money or U.S. government obligations in an amount sufficient
to pay principal of and interest, if any, on the Debt Securities of such
series to their maturity, and (ii) complying with certain other conditions,
including delivery to the Trustee of an opinion of counsel or a ruling
received from the Internal Revenue Service to the effect that holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of such right and will be subject to federal income tax
on the same amount and in the same manner and at the same times as would have
been the case otherwise.
In addition, the Indenture will permit the Company to terminate all of its
obligations under the Indenture as they relate to any particular series of
Debt Securities (including the obligations to pay interest, if any, on and the
principal of the Debt Securities of such series and certain other obligations)
at any time by (i) depositing in trust with the Trustee, under an irrevocable
trust agreement, money or U.S. government obligations in an amount sufficient
to pay principal of and interest, if any, on the Debt Securities of such
series to their maturity, and (ii) complying with certain other conditions,
including delivery to the Trustee of an opinion of counsel or a ruling
received from the Internal Revenue Service to the effect that holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of such right and will be subject to federal income tax
on the same amount and in the same manner and at the same times as would have
been the case otherwise, which opinion of counsel is based upon a change in
the applicable federal tax law since the date of the Indenture.
Transfer and Exchange
A holder will be able to transfer or exchange Debt Securities only in
accordance with the provisions of the Indenture. The registrar may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents, and to pay any taxes and fees required by law or permitted by the
Indenture.
Amendment, Supplement and Waiver
Subject to certain exceptions, the Indenture or the Debt Securities may be
amended or supplemented with the consent (which may include consents obtained
in connection with a tender offer or exchange offer for Debt Securities) of
the holders of at least a majority in principal amount of the Debt Securities
of such series then outstanding, and any existing Default under, or compliance
with any provision of the Indenture relating to a particular series of Debt
Securities may be waived (other than any continuing Default or Event of
Default in the payment of interest on or the principal of such Debt
Securities) with the consent (which may include consents obtained in
connection with a tender offer or exchange offer for Debt Securities) of the
holders of a majority in principal amount of the Debt Securities of such
series then outstanding. Without the consent of any holder, the Company and
the Trustee may amend or supplement the Indenture or the Debt Securities to
cure any ambiguity, defect or inconsistency; to provide for uncertificated
Debt Securities in addition to or in place of certificated Debt Securities; to
make any change that does not adversely affect the legal rights of any holder;
or to create a series and establish its terms.
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<PAGE>
Without the consent of each holder affected, the Company and the Trustee may
not (i) reduce the amount of Debt Securities of such series whose holders must
consent to an amendment, supplement or waiver; (ii) reduce the rate of or
change the time for payment of interest; (iii) reduce the principal of or
change the fixed maturity of any Debt Security or alter the provisions with
respect to redemptions or mandatory offers to repurchase Debt Securities
pursuant to certain covenants set forth in the Indenture; (iv) make any Debt
Security payable in money other than that stated in the Debt Security; (v)
modify the ranking or priority of the Debt Securities; or (vi) waive a
continuing default in the payment of principal of or interest on the Debt
Securities.
The right of any holder to participate in any consent required or sought
pursuant to any provision of the Indenture (and the obligation of the Company
to obtain any such consent otherwise required from such holder) may be subject
to the requirement that such holder shall have been the holder of record of
any Debt Securities with respect to which such consent is required or sought
as of a date identified by the Trustee in a notice furnished to holders in
accordance with the terms of the Indenture.
Concerning the Trustee
The Indenture will provide that in case an Event of Default occurs and is
not cured, the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent person in similar circumstances in the conduct
of its own affairs. The Trustee may refuse to perform any duty or exercise any
right or power under the Indenture, unless it receives indemnity satisfactory
to it against any loss, liability or expense.
DESCRIPTION OF WARRANTS
The Company may issue warrants to purchase Debt Securities (the "Debt
Warrants"), Preferred Stock (the "Preferred Stock Warrants"), Common Stock
(the "Common Stock Warrants") or other securities issued by the Company or
another issuer (the "Other Warrants," collectively with the Debt Warrants, the
Preferred Stock Warrants and the Common Stock Warrants, the "Warrants").
Warrants may be issued independently or together with any Securities and may
be attached to or separate from such Securities. The Warrants are to be issued
under warrant agreements (each a "Warrant Agreement") to be entered into
between the Company and a bank or trust company, as warrant agent (the
"Warrant Agent"), all as shall be set forth in the Prospectus Supplement
relating to the Warrants being offered pursuant thereto.
Debt Warrants
The applicable Prospectus Supplement will describe the terms of Debt
Warrants offered thereby, the Warrant Agreement relating to such Debt Warrants
and the debt warrant certificates representing such Debt Warrants, including
the following: (i) the title of such Debt Warrants; (ii) the aggregate number
of such Debt Warrants; (iii) the price or prices at which such Debt Warrants
will be issued; (iv) the designation, aggregate principal amount and terms of
the Debt Securities purchasable upon exercise of such Debt Warrants, and the
procedures and conditions relating to the exercise of such Debt Warrants; (v)
the date, if any, on and after which such Debt Warrants and the related Debt
Securities will be separately transferable; (vi) the principal amount of Debt
Securities purchasable upon exercise of each Debt Warrant, and the price at
which such principal amount of Debt Securities may be purchased upon such
exercise; (vii) the date on which the right to exercise such Debt Warrants
shall commence, and the date on which such right shall expire; (viii) the
maximum or minimum number of such Debt Warrants which may be exercised at any
time; (ix) a discussion of material federal income tax considerations, if any;
and (x) any other terms of such Debt Warrants and terms, procedures and
limitations relating to the exercise of such Debt Warrants.
Debt Warrant certificates will be exchangeable for new Debt Warrant
certificates of different denominations, and Debt Warrants may be exercised at
the corporate trust office of the Warrant Agent or any other office indicated
in the Prospectus Supplement. Prior to the exercise of their Debt Warrants,
holders of Debt Warrants will not have any of the rights of holders of the
securities purchasable upon such exercise and will not be entitled
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to payments of principal of (or premium, if any) or interest, if any, on the
securities purchasable upon such exercise.
Preferred Stock Warrants, Common Stock Warrants and Other Warrants
The applicable Prospectus Supplement will describe the following terms of
Preferred Stock Warrants, Common Stock Warrants, and Other Warrants in respect
of which this Prospectus is being delivered: (i) the title of such Warrants;
(ii) the securities for which such Warrants are exercisable; (iii) the price
or prices at which such Warrants will be issued; (iv) if applicable, the
number of such Warrants issued with each share of Preferred Stock, Common
Stock or other securities of the Company or another issuer; (v) any provisions
for adjustment of the number or amount of shares of Preferred Stock, Common
Stock or other securities of the Company or another issuer receivable upon
exercise of such Warrants or the exercise price of such Warrants; (vi) if
applicable, the date on and after which such Warrants and the related
Preferred Stock, Common Stock or other securities of the Company or another
issuer will be separately transferable; (vii) if applicable, a discussion of
material federal income tax considerations; (viii) any other terms of such
Warrants, including terms, procedures and limitations relating to the exchange
and exercise of such Warrants; (ix) the date on which the right to exercise
such Warrants shall commence, and the date on which such right shall expire;
and (x) the maximum or minimum number of such Warrants which may be exercised
at any time.
Exercise of Warrants
Each Warrant will entitle the holder of Warrants to purchase for cash such
principal amount of Debt Securities, shares of Preferred Stock or Common
Stock, or amounts of other securities at such exercise price as shall in each
case be set forth in, or be determinable as set forth in, the Prospectus
Supplement relating to the Warrants offered thereby. Warrants may be exercised
at any time up to the close of business on the expiration date set forth in
the Prospectus Supplement relating to the Warrants offered thereby. After the
close of business on the expiration date, unexercised Warrants will become
void.
Warrants may be exercised as set forth in the Prospectus Supplement relating
to the Warrants offered thereby. Upon receipt of payment and the warrant
certificate properly completed and duly executed at the corporate trust office
of the Warrant Agent or any other office indicated in the Prospectus
Supplement, the Company will, as soon as practicable, forward the Debt
Securities, shares of Preferred Stock or Common Stock or other securities
purchasable upon such exercise. If less than all of the Warrants represented
by such warrant certificate are exercised, a new warrant certificate will be
issued for the remaining Warrants.
CERTAIN PROVISIONS IN THE CHARTER
The Company's Charter contains the following provisions which may have the
effect of delaying or preventing a change of control of the Company: (i) the
Charter provides that the Company's directors are divided into three classes,
that only one class of directors is elected at each annual meeting and that
each director is elected for a term of three years; (ii) the Charter provides
that directors may be removed only for cause prior to the expiration of their
terms; and (iii) the Charter requires that, in addition to any other vote
ordinarily required by law, the affirmative vote of holders of not less than
75% of the outstanding shares of Common Stock shall be necessary to approve
certain sales of Company assets, acquisitions, mergers, changes of control and
other Business Combinations (as defined in the Company's Charter) unless the
proposed Business Combination shall have been approved by a majority of the
Continuing Directors (as defined in the Company's Charter) or certain measures
designed to ensure the fair value is received by all shareholders are complied
with. The provisions enumerated above may have the effect of deterring
unsolicited acquisition proposals or delaying changes in control or management
of the Company.
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EXPERTS
The consolidated financial statements of Chattem, Inc. and the financial
statements of Signal Investment & Management Co., incorporated by reference 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 incorporated by
reference in this registration statement have been so included in reliance on
the report of PricewaterhouseCoopers LLP, independent public accountants,
given on the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the Securities will be passed upon for us by Miller & Martin
LLP. If certain legal matters in connection with offerings made by this
Prospectus are passed on by counsel for the underwriters of an offering of
those Securities, that counsel will be named in the Prospectus Supplement
relating to that offering.
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CHATTEM
[LOGO]
$75,000,000
8 7/8% Senior Subordinated Notes due 2008
----------------------------------
PROSPECTUS SUPPLEMENT
(To Prospectus Dated January 22, 1999)
----------------------------------
NationsBanc Montgomery Securities LLC
Lehman Brothers
April 29, 1999
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