-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LWv5fOYHKwj5fgTrYSdxbB3Jveqaddl5DQu9oxUqdB3IXQ0enJE6mlxXb0KT512N u8C5D2p0MRtaMX25Z0ZDxQ== 0001072613-04-001797.txt : 20041001 0001072613-04-001797.hdr.sgml : 20041001 20041001161152 ACCESSION NUMBER: 0001072613-04-001797 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040831 FILED AS OF DATE: 20041001 DATE AS OF CHANGE: 20041001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHATTEM INC CENTRAL INDEX KEY: 0000019520 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 620156300 STATE OF INCORPORATION: TN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-05905 FILM NUMBER: 041058912 BUSINESS ADDRESS: STREET 1: 1715 W 38TH ST CITY: CHATTANOOGA STATE: TN ZIP: 37409 BUSINESS PHONE: 4238214571 MAIL ADDRESS: STREET 1: 1715 W 38TH ST CITY: CHATTANOOGA STATE: TN ZIP: 37409 FORMER COMPANY: FORMER CONFORMED NAME: CHATTEM DRUG & CHEMICAL CO DATE OF NAME CHANGE: 19790111 10-Q 1 form10-q_12965.txt FORM 10-Q FOR THE PERIOD ENDED AUGUST 31, 2004 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2004 COMMISSION FILE NUMBER 0-5905 CHATTEM, INC. A TENNESSEE CORPORATION I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300 1715 WEST 38TH STREET CHATTANOOGA, TENNESSEE 37409 TELEPHONE: 423-821-4571 REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). AS OF SEPTEMBER 29, 2004, 19,785,408 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT PAR VALUE, WERE OUTSTANDING. ================================================================================ CHATTEM, INC. ------------- INDEX ----- PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of August 31, 2004 and November 30, 2003 3 Condensed Consolidated Statements of Income for the Three and Nine Months Ended August 31, 2004 and August 31, 2003 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended August 31, 2004 and August 31, 2003 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Item 3. Quantitative and Qualitative Disclosures About Market Risks 39 Item 4. Controls and Procedures 39 PART II. OTHER INFORMATION Item 1. Legal Proceedings 40 Item 2. Changes in Securities and Use of Proceeds 40 Item 3. Defaults Upon Senior Securities 40 Item 4. Submission of Matters to a Vote of Security Holders 40 Item 5. Other Information 40 Item 6. Exhibits and Reports on Form 8-K 41 SIGNATURES 42 2 PART 1. FINANCIAL INFORMATION ----------------------------- ITEM 1. FINANCIAL STATEMENTS - ---------------------------- CHATTEM, INC. AND SUBSIDIARIES ------------------------------ CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (In thousands)
AUGUST 31, NOVEMBER 30, ASSETS 2004 2003 - ------ ---------- ---------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 26,755 $ 26,931 Accounts receivable, less allowances of $3,310 at August 31, 2004 and $3,594 at November 30, 2003 32,241 25,478 Inventories 19,549 17,559 Refundable income taxes 5,273 4,431 Deferred income taxes 1,635 3,441 Prepaid expenses and other current assets 3,369 3,376 ---------- ---------- Total current assets 88,822 81,216 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, NET 27,993 28,722 ---------- ---------- OTHER NONCURRENT ASSETS: Patents, trademarks and other purchased product rights, net 245,633 245,847 Debt issuance costs, net 5,348 5,504 Other 3,559 2,096 ---------- ---------- Total other noncurrent assets 254,540 253,447 ---------- ---------- TOTAL ASSETS $ 371,355 $ 363,385 ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 CHATTEM, INC. AND SUBSIDIARIES ------------------------------ CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (In thousands)
AUGUST 31, NOVEMBER 30, LIABILITIES AND SHAREHOLDERS' EQUITY 2004 2003 - ------------------------------------ ---------- ---------- (Unaudited) CURRENT LIABILITIES: Current maturities of long-term debt $ -- $ 7,750 Accounts payable and other 10,396 10,924 Accrued liabilities 12,181 15,979 ---------- ---------- Total current liabilities 22,577 34,653 ---------- ---------- LONG-TERM DEBT, less current maturities 200,000 204,676 ---------- ---------- DEFERRED INCOME TAXES 30,975 26,501 ---------- ---------- OTHER NONCURRENT LIABILITIES 1,738 1,689 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 18) SHAREHOLDERS' EQUITY: Preferred shares, without par value, authorized 1,000, none issued -- -- Common shares, without par value, authorized 50,000, issued 19,752 at August 31, 2004 and 19,161 at November 30, 2003 83,425 77,815 Retained earnings 37,543 22,274 ---------- ---------- 120,968 100,089 Unamortized value of restricted common shares issued (2,668) (2,058) Cumulative other comprehensive income, net of taxes: Interest rate cap adjustment (259) -- Foreign currency translation adjustment (336) (525) Minimum pension liability adjustment (1,640) (1,640) ---------- ---------- Total shareholders' equity 116,065 95,866 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 371,355 $ 363,385 ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 CHATTEM, INC. AND SUBSIDIARIES ------------------------------ CONDENSED CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------- (Unaudited and in thousands, except per share amounts)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED AUGUST 31, ENDED AUGUST 31, ------------------------ ------------------------ 2004 2003 2004 2003 --------- --------- --------- --------- REVENUES: Net sales $ 66,096 $ 58,972 $ 196,909 $ 180,366 Royalties 39 210 555 874 --------- --------- --------- --------- Total revenues 66,135 59,182 197,464 181,240 --------- --------- --------- --------- COSTS AND EXPENSES: Cost of sales 19,135 15,995 56,643 51,399 Advertising and promotion 18,666 17,075 56,278 54,009 Selling, general and administrative 11,525 10,234 32,831 30,445 Litigation settlement 834 -- 4,491 -- --------- --------- --------- --------- Total costs and expenses 50,160 43,304 150,243 135,853 --------- --------- --------- --------- INCOME FROM OPERATIONS 15,975 15,878 47,221 45,387 --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest expense (3,284) (5,057) (11,678) (15,431) Investment and other income, net 45 32 205 119 Loss on early extinguishment of debt -- -- (12,958) -- --------- --------- --------- --------- Total other income (expense) (3,239) (5,025) (24,431) (15,312) --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 12,736 10,853 22,790 30,075 PROVISION FOR INCOME TAXES 4,002 4,016 7,521 11,128 --------- --------- --------- --------- NET INCOME $ 8,734 $ 6,837 $ 15,269 $ 18,947 ========= ========= ========= ========= NUMBER OF COMMON SHARES: Weighted average outstanding-basic 19,498 19,148 19,295 19,178 ========= ========= ========= ========= Weighted average and potential dilutive outstanding 20,308 19,905 20,148 19,897 ========= ========= ========= ========= NET INCOME PER COMMON SHARE: Basic $ .45 $ .36 $ .79 $ .99 ========= ========= ========= ========= Diluted $ .43 $ .34 $ .76 $ .95 ========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 CHATTEM, INC. AND SUBSIDIARIES ------------------------------ CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Unaudited and in thousands, except per share amounts)
FOR THE NINE MONTHS ENDED -------------------------- AUGUST 31, AUGUST 31, 2004 2003 ---------- ---------- OPERATING ACTIVITIES: Net income $ 15,269 $ 18,947 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,609 4,565 Deferred income taxes 6,280 6,104 Tax benefit realized from stock option exercises 4,036 1,240 Loss on early extinguishment of debt 12,958 -- Other, net 53 (94) Changes in operating assets and liabilities: Accounts receivable (6,763) (2,867) Inventories (1,990) (1,009) Refundable income taxes (842) (256) Prepaid expenses and other current assets 54 (768) Accounts payable and accrued liabilities (4,326) (1,749) ---------- ---------- Net cash provided by operating activities 29,338 24,113 ---------- ---------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (1,763) (3,933) Purchases of patents, trademarks and other product rights (8) (373) Increase in other assets, net (594) (285) ---------- ---------- Net cash used in investing activities (2,365) (4,591) ---------- ---------- FINANCING ACTIVITIES: Repayment of long-term debt (212,288) (10,000) Proceeds from long-term debt 200,000 -- Proceeds from borrowings under revolving credit facility 25,000 -- Repayments of revolving credit facility (25,000) -- Proceeds from exercise of stock options 5,139 1,533 Repurchase of common shares (5,015) (5,351) Increase in debt issuance costs (5,729) (25) Retirement of debt issuance costs (7,861) -- Premium on interest rate cap agreement (1,375) -- ---------- ---------- Net cash used in financing activities (27,129) (13,843) ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (20) 118 ---------- ---------- CASH AND CASH EQUIVALENTS: (Decrease) increase for the period (176) 5,797 At beginning of period 26,931 15,924 ---------- ---------- At end of period $ 26,755 $ 21,721 ========== ========== SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of 70 and 69 shares of restricted common stock at a value of $19.98 and $14.50 per share for the nine months ended August 31, 2004 and 2003, respectively $ 1,399 $ 1,000 PAYMENTS FOR: Interest $ 8,737 $ 9,916 Taxes $ 228 $ 2,680
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 CHATTEM, INC. AND SUBSIDIARIES ------------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (UNAUDITED) All monetary and share amounts are expressed in thousands. 1. BASIS OF PRESENTATION --------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended November 30, 2003. The accompanying unaudited condensed consolidated financial statements, in the opinion of management, include all adjustments necessary for a fair presentation. All such adjustments are of a normal recurring nature. 2. CASH AND CASH EQUIVALENTS ------------------------- We consider all short-term deposits and investments with original maturities of three months or less to be cash equivalents. 3. RECLASSIFICATIONS ----------------- Certain amounts have been reclassified to conform to the current period's presentation. 4. RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). We adopted SFAS 145 on December 1, 2002. SFAS 145 requires us to classify gains and losses on extinguishments of debt as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt". We are also required to reclassify any gain or loss on extinguishment of debt previously classified as an extraordinary item in prior periods presented. SFAS 145 also provides accounting standards for certain lease modifications that have economic effects similar to sale-leaseback transactions and various other technical corrections. The application of SFAS 145 resulted in recording a loss on early extinguishment of debt of $12,958 in the first and second quarters of fiscal 2004, which was classified in the condensed consolidated financial statements in accordance with the provisions of SFAS 145. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). We adopted SFAS 146 on January 1, 2003. SFAS 146 supercedes Emerging Issues Task Force ("EITF") Issue No. 94-3. SFAS 146 requires that the liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, not at the date of an entity's commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. As of August 31, 2004, the application of SFAS 146 resulted in recording $35 of accrued liabilities related to the restructuring of the United Kingdom ("U.K.") operations. We expect to record additional charges related to the restructuring of the U.K. operations in the fourth quarter of fiscal 2004. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires a company to consolidate a variable interest entity ("VIE"), as defined, when the company will absorb a majority of the VIE's expected losses, receives a majority of the VIE's expected residual returns or both. FIN 46 also requires consolidation of existing, non-controlled affiliates if the VIE is unable to finance its operations without investor support, or where the other investors do not have exposure to the significant risks and rewards of ownership. FIN 46 applies immediately to a VIE created or acquired after January 31, 2003. For a VIE created before February 1, 2003, FIN 46 applies in the first fiscal year or interim period beginning after March 15, 2004, our third fiscal quarter beginning June 1, 2004. Application of FIN 46 is also required in financial statements that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. The adoption of FIN 46 did not have an impact on our financial position, results of operations or cash flows. 7 In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosure about Pensions and Other Postretirement Benefits" ("SFAS 132"). The revision of SFAS 132 provides for additional disclosures including the description of the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows and components of net periodic benefit cost recognized in interim periods. The revisions of SFAS 132 are effective for financial statements with fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. The adoption of the revised SFAS 132 did not have an impact on our financial position, results of operations or cash flows. 5. STOCK-BASED COMPENSATION ------------------------ Our 1998 Non-Statutory Stock Option Plan provides for the issuance of up to 1,400 shares of common stock to key employees, while the 1999 Non-Statutory Stock Option Plan for Non-Employee Directors allows for the issuance of up to 200 shares of common stock. Our 2000 Non-Statutory Stock Option Plan provides for the issuance of up to 1,500 shares of common stock. Our 2003 Stock Incentive Plan provides for the issuance of up to 1,500 shares of common stock. Options granted under the plans vest ratably over four years and are exercisable for a period of up to ten years from the date of grant. For SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") purposes, as amended by SFAS No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure", the fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 2004 and 2003: expected dividend yield of 0%, expected volatility of 59% and 64%, respectively, risk-free interest rates of 4.12% and 4.47%, respectively, and expected lives of approximately five and six years, respectively. Had compensation expense for stock option grants been determined based on the fair value at the grant dates consistent with the method prescribed by SFAS 123, our net income and net income per share would have been adjusted to the pro forma amounts for the three and nine months ended August 31, 2004 and 2003, respectively, as indicated below:
For the Three Months Ended For the Nine Months Ended August 31, August 31, ------------------------- ------------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Net income: As reported $ 8,734 $ 6,837 $ 15,269 $ 18,947 Fair value method compensation cost, net 1,348 516 3,228 1,552 ---------- ---------- ---------- ---------- Pro forma $ 7,386 $ 6,321 $ 12,041 $ 17,395 ========== ========== ========== ========== Net income per share, basic: As reported $ .45 $ .36 $ .79 $ .99 Pro forma $ .38 $ .33 $ .62 $ .91 Net income per share, diluted: As reported $ .43 $ .34 $ .76 $ .95 Pro forma $ .36 $ .32 $ .60 $ .87
8 6. EARNINGS PER SHARE ------------------ The following table presents the computation of per share earnings for the three and nine months ended August 31, 2004 and 2003, respectively:
For the Three Months Ended For the Nine Months Ended August 31, August 31, ------------------------- ------------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- NET INCOME $ 8,734 $ 6,837 $ 15,269 $ 18,947 ========== ========== ========== ========== NUMBER OF COMMON SHARES: Weighted average outstanding 19,498 19,148 19,295 19,178 Issued upon assumed exercise of outstanding stock options 735 647 795 617 Effect of issuance of restricted common shares 75 110 58 102 ---------- ---------- ---------- ---------- Weighted average and potential 20,308 19,905 20,148 19,897 ========== ========== ========== ========== dilutive outstanding (1) NET INCOME PER COMMON SHARE: Basic $ .45 $ .36 $ .79 $ .99 ========== ========== ========== ========== Diluted $ .43 $ .34 $ .76 $ .95 ========== ========== ========== ==========
(1) Because their effects are anti-dilutive, excludes shares issuable under stock option plans and restricted stock issuance whose grant price was greater than the average market price of common shares outstanding as follows: 5 and 85 shares for the three months ended August 31, 2004 and 2003, respectively, and 247 and 87 shares for the nine months ended August 31, 2004 and 2003, respectively. 7. ADVERTISING EXPENSES -------------------- We incur significant expenditures on television, radio and print advertising to support our nationally branded over-the-counter ("OTC") health care products and toiletries. Customers purchase products from us with the understanding that the brands will be supported by our extensive media advertising. This advertising supports the retailers' sales effort and maintains the important brand franchise with the consuming public. Accordingly, we consider our advertising program to be clearly implicit in our sales arrangements with our customers. Therefore, we believe it is appropriate to allocate a percentage of the necessary supporting advertising expenses to each dollar of sales by charging a percentage of sales on an interim basis based upon anticipated annual sales and advertising expenditures (in accordance with Accounting Principles Board Opinion No. 28, "Interim Financial Reporting") and adjusting that accrual to the actual expenses incurred at the end of the year. 8. SHIPPING AND HANDLING --------------------- Shipping and handling costs of $2,036 and $1,602 are included in selling expenses for the three months ended August 31, 2004 and 2003, respectively, and $5,469 and $4,647 for the nine months ended August 31, 2004 and 2003, respectively. 9. PATENTS, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS ------------------------------------------------------ The carrying value of trademarks, which are not subject to amortization under the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), was $244,797 and $244,790 as of August 31, 2004 and November 30, 2003, respectively. After reviewing pertinent information relating to the revaluation of these intangible assets and performing the impairment test as prescribed by SFAS 142 as of August 31, 2004, we determined that the revaluation of these intangible assets was not required. The gross carrying amount of finite-lived intangible assets subject to amortization at both August 31, 2004 and November 30, 2003, which consist primarily of non-compete agreements, was $2,400. The related accumulated amortization of finite-lived intangible assets at August 31, 2004 and November 30, 2003 was $1,564 and $1,343, respectively. Amortization of our finite-lived intangible assets subject to amortization under the provisions of 9 SFAS 142 for the three months ended August 31, 2004 and 2003 was $73 and $85, respectively, and for the nine months ended August 31, 2004 and 2003 was $222 and $255, respectively. Estimated annual amortization expense for these assets for the years ended November 30, 2005, 2006, 2007, 2008 and 2009 is $290, $290, $123, $40 and $20, respectively. 10. INVENTORIES ----------- Inventories consisted of the following as of August 31, 2004 and November 30, 2003: 2004 2003 ---------- ---------- Raw materials and work in process $ 9,191 $ 9,740 Finished goods 12,046 9,507 Excess of current cost over LIFO values (1,688) (1,688) ---------- ---------- Total inventories $ 19,549 $ 17,559 ========== ========== 11. ACCRUED LIABILITIES ------------------- Accrued liabilities consisted of the following as of August 31, 2004 and November 30, 2003: 2004 2003 ---------- ---------- Interest $ 5,356 $ 3,115 Salaries, wages and commissions 3,669 3,604 Product advertising and promotion 118 5,348 Insurance 520 1,151 Pension 1,054 1,040 Other 1,464 1,721 ---------- ---------- Total accrued liabilities $ 12,181 $ 15,979 ========== ========== 12. LONG-TERM DEBT -------------- Long-term debt consisted of the following as of August 31, 2004 and November 30, 2003: 2004 2003 ---------- ---------- Revolving Credit Facility due 2009 at a variable rate of 5.00% as of August 31, 2004 $ -- $ -- Term loan payable to banks at variable rates of 3.42% and 3.39% as of February 26, 2004 (termination date) and November 30, 2003, respectively -- 7,750 8.875% Senior Subordinated Notes, plus unamortized premium of $138 for 2003 -- 204,676 Floating Rate Senior Notes due 2010 at a variable rate of 4.31% as of August 31, 2004 75,000 -- 7.0% Senior Subordinated Notes due 2014 125,000 -- ---------- ---------- Total long-term debt 200,000 212,426 Less: current maturities -- 7,750 ---------- ---------- Total long-term debt, net of current maturities $ 200,000 $ 204,676 ========== ========== On February 26, 2004, we entered into a new Senior Secured Revolving Credit Facility that matures February 26, 2009 (the "Revolving Credit Facility") with Bank of America, N.A. that provided an initial borrowing capacity of $25,000 and an additional $25,000, subject to successful syndication. On March 9, 2004, we entered into a new commitment agreement with a syndicate of commercial banks led by Bank of America, N.A., as agent, that enables us to borrow up to a total of $50,000 under the Revolving Credit Facility. Borrowings under our Revolving Credit Facility bear interest at LIBOR plus applicable percentages of 1.75% to 2.50% or a base rate (the higher of the federal funds rate plus 0.5% or the prime rate) plus applicable percentages of 0.25% to 1.0%. The applicable percentages are calculated based on our leverage ratio. As of August 31, 2004, no amounts have been borrowed under the Revolving Credit Facility, and the variable rate was 5.0%. 10 Borrowings under our Revolving Credit Facility are secured by substantially all of our assets, except real property, and shares of capital stock of our domestic subsidiaries held by us and by the assets of the guarantors (our domestic subsidiaries). The Revolving Credit Facility contains covenants, representations, warranties and other agreements by us that are customary in credit agreements and security instruments relating to financings of this type. The significant financial covenants include fixed charge coverage ratio, leverage ratio, senior secured leverage ratio, net worth and brand value calculations. On September 29, 2004, we had no borrowings outstanding under our Revolving Credit Facility. On March 28, 2002, we obtained a $60,000 senior secured credit facility from a syndicate of commercial banks led by Bank of America, N.A., as agent (the "Credit Facility"). The Credit Facility included a $15,000 revolving credit line and a $45,000 term loan. The remaining balance of the term loan under the Credit Facility was repaid as part of the refinancing transactions discussed herein, and the revolving credit line under the Credit Facility was terminated on February 26, 2004. On February 10, 2004, we commenced a cash tender offer and consent solicitation for the $204,538 outstanding principal amount of our 8.875% Senior Subordinated Notes due 2008 (the "8.875% Subordinated Notes"). The consent solicitation expired on February 24, 2004, and a total of approximately $174,530, or approximately 85.3% of the 8.875% Subordinated Notes, were tendered and accepted for payment on February 26, 2004. The remaining principal outstanding, call premium, accrued interest and interest to call date amounting to $32,227 was placed in escrow with the indenture trustee to fund the purchase of additional 8.875% Subordinated Notes tendered prior to March 9, 2004, the expiration date of the tender offer, and the redemption of the remaining 8.875% Subordinated Notes not tendered. The remaining 8.875% Subordinated Notes not tendered in such offer were called in accordance with their terms on April 1, 2004 at a redemption price of 102.9583% of their aggregate principal amount. On April 1, 2004, the remaining amount held in escrow was released for payment and all outstanding 8.875% Subordinated Notes were redeemed. The completion of our refinancing of the Credit Facility and purchase of approximately $174,530 of our 8.875% Subordinated Notes that were tendered on February 26, 2004 resulted in a loss on early extinguishment of debt of $11,309 and a tax benefit of $3,958 in the first quarter of fiscal 2004. In the second quarter of fiscal 2004, we recorded a loss on early extinguishment of debt of $1,649 and a related tax benefit of $577 related to the redemption of the remaining $30,008 of our 8.875% Subordinated Notes. These related tax benefits were adjusted to reflect the annual estimated effective tax rate of 33% in the third quarter of fiscal 2004 to $3,732 and $544, respectively. Also on February 26, 2004, we issued and sold $75,000 of Floating Rate Senior Notes due March 1, 2010 (the "Floating Rate Notes") and $125,000 of 7.0% Senior Subordinated Notes due March 1, 2014 (the "7.0% Subordinated Notes"), the proceeds of which were used to purchase our 8.875% Subordinated Notes and refinance the Credit Facility as discussed above. The Floating Rate Notes bear interest at a three-month LIBOR plus 3.00% per year (4.31% as of August 31, 2004). Interest payments are due quarterly in arrears commencing on June 1, 2004. On March 8, 2004, we entered into an interest rate cap agreement effective June 1, 2004 with decreasing notional principal amounts and cap rates ranging from 4.0% to 5.0% over the life of the agreement. We paid a $1,375 premium to enter into the interest rate cap agreement, which will be amortized over the life of the agreement. The current portion of the premium on the interest rate cap agreement of $47 is included in prepaid expenses and other current assets, and the long-term portion of $922 is included in other noncurrent assets. The amortized value of the premium on the interest rate cap was compared to its fair value as of August 31, 2004, and a charge of $259, net of tax, was recorded to other comprehensive income. The interest rate cap agreement terminates on March 1, 2010. Our domestic subsidiaries are guarantors of the Floating Rate Notes. The guarantees of the Floating Rate Notes are unsecured senior obligations of the guarantors and rank equally with all of the current and future unsecured senior debt of the guarantors. The guarantees of the Floating Rate Notes effectively rank junior to any secured debt of the guarantors, including the guarantors' guarantee of our indebtedness under the Revolving Credit Facility. At any time after March 1, 2005, we may redeem any of the Floating Rate Notes upon not less than 30 nor more than 60 days' notice at redemption prices (expressed in percentages of principal amount), plus accrued and unpaid interest, if any, and liquidated damages, if any, to the applicable redemption rate, if redeemed during the twelve-month periods beginning March 1, 2005 at 102.0%, March 1, 2006 at 101.0% and March 1, 2007 and thereafter at 100.0%. At any time prior to March 1, 2005, we may redeem up to 35.0% of the aggregate principal amount of the Floating Rate Notes (including any additional Floating Rate Notes) at a redemption price of 100.0% of the principal amount thereof, plus a premium equal to the interest rate per annum on the Floating Rate Notes applicable on the date on which notice of the redemption is given, together with accrued and unpaid interest and liquidated damages, if any, with the net cash proceeds of one or more qualified equity offerings; provided, that (i) at least 65.0% of the aggregate principal amount of Floating Rate Notes remains outstanding immediately after the occurrence of each redemption (excluding Floating Rate Notes held by us and our subsidiaries); and (ii) the redemption must occur within 90 days of the date of the closing of such qualified equity offering. Interest payments on the 7.0% Subordinated Notes are due semi-annually in arrears on March 1 and September 1, commencing on September 1, 2004. Our domestic subsidiaries are guarantors of the 7.0% Subordinated Notes. The 11 guarantees of the 7.0% Subordinated Notes are unsecured senior subordinated obligations of the guarantors. At any time after March 1, 2009, we may redeem any of the 7.0% Subordinated Notes upon not less than 30 nor more than 60 days' notice at redemption prices (expressed in percentages of principal amount), plus accrued and unpaid interest, if any, and liquidation damages, if any, to the applicable redemption rate, if redeemed during the twelve-month periods beginning March 1, 2009 at 103.500%, March 1, 2010 at 102.333%, March 1, 2011 at 101.167% and March 1, 2012 and thereafter at 100.000%. At any time prior to March 1, 2007, we may redeem up to 35% of the aggregate principal amount of the 7.0% Subordinated Notes (including any additional 7.0% Subordinated Notes) at a redemption price of 107.0% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, thereon to the applicable redemption rate, with the net cash proceeds of one or more qualified equity offerings; provided, that (i) at least 65.0% of the aggregate principal amount of the 7.0% Subordinated Notes remains outstanding immediately after the occurrence of such redemption (excluding 7.0% Subordinated Notes held by us and our subsidiaries); and (ii) the redemption must occur within 90 days of the date of the closing of such qualified equity offering. The indentures governing the Floating Rate Notes and 7.0% Subordinated Notes, among other things, limit our ability and the ability of our restricted subsidiaries to: (i) borrow money or sell preferred stock, (ii) create liens, (iii) pay dividends on or redeem or repurchase stock, (iv) make certain types of investments, (v) sell stock in our restricted subsidiaries, (vi) restrict dividends or other payments from restricted subsidiaries, (vii) enter into transactions with affiliates, (viii) issue guarantees of debt and (ix) sell assets or merge with other companies. In addition, if we experience specific kinds of changes in control, we must offer to purchase the Floating Rate Notes and 7.0% Subordinated Notes at 101.0% of their principal amount plus accrued and unpaid interest. The future maturities of long-term debt outstanding as of August 31, 2004 are as follows: 2005 $ -- 2006 -- 2007 -- 2008 -- 2009 -- Thereafter 200,000 ---------- $ 200,000 ========== 13. COMPREHENSIVE INCOME -------------------- Comprehensive income, net of taxes, consisted of the following components for the three and nine months ended August 31, 2004 and 2003, respectively: For the Three Months For the Nine Months Ended August 31, Ended August 31, ----------------------- ----------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Net income $ 8,734 $ 6,837 $ 15,269 $ 18,947 Other - interest rate cap adjustment (259) -- (259) -- Other - foreign currency translation adjustment 120 268 189 307 ---------- ---------- ---------- ---------- Total $ 8,595 $ 7,105 $ 15,199 $ 19,254 ========== ========== ========== ========== 14. STOCK BUYBACK ------------- In January 2004, our board of directors increased the total authorization to repurchase our common stock under our stock buyback program to $20,000. During the nine months ended August 31, 2004, we repurchased 190 shares for $5,015. All repurchased shares were retired and returned to unissued. We are limited in our ability to repurchase shares due to restrictions under the terms of our Revolving Credit Facility and the indentures pursuant to which the Floating Rate Notes and 7.0% Subordinated Notes were issued. 12 15. RETIREMENT PLANS AND POSTRETIREMENT HEALTH CARE BENEFITS -------------------------------------------------------- RETIREMENT PLANS We have a noncontributory defined benefit pension plan ("the Plan"), which covers substantially all employees. The Plan provides benefits based upon years of service and the employee's compensation. Our contributions are based on computations by independent actuaries. Plan assets at August 31, 2004 and November 30, 2003 were invested primarily in United States government and agency securities and corporate debt and equity securities. In October 2000, our board of directors adopted an amendment to the Plan that freezes benefits of the Plan and prohibits new entrants to the Plan effective December 31, 2000. Net periodic pension cost for the three and nine months ended August 31, 2004 and 2003 comprised the following components: For the Three Months For the Nine Months Ended August 31, Ended August 31, ------------------- ------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Service cost $ -- $ -- $ -- $ -- Interest cost on projected benefit obligation 155 152 465 456 Actual return on plan assets (178) (157) (534) (471) Net amortization and deferral 28 (36) 84 (108) -------- -------- -------- -------- Net pension cost (benefit) $ 5 $ (41) $ 15 $ (123) ======== ======== ======== ======== No employer contributions were made for the nine months ended August 31, 2004 and August 31, 2003, and no employer contributions are required to be made in fiscal 2004. POSTRETIREMENT HEALTH CARE BENEFITS We maintain certain postretirement health care benefits for eligible employees. Employees become eligible for these benefits if they meet certain age and service requirements. We pay a portion of the cost of medical benefits for certain retired employees over the age of 65. Effective January 1, 1993, our contribution is a service-based percentage of the full premium. We pay these benefits as claims are incurred. Employer contributions expected for fiscal 2004 are approximately $70. Net periodic postretirement health care benefits cost for the three and nine months ended August 31, 2004 and August 31, 2003, included the following components: For the Three Months For the Nine Months Ended August 31, Ended August 31, ------------------- ------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Service cost $ 16 $ 14 $ 48 $ 42 Interest cost on accumulated postretirement benefit obligation 20 20 60 60 Amortization of prior service cost 4 4 12 12 Amortization of net gain (8) (7) (24) (21) -------- -------- -------- -------- Net periodic postretirement benefits cost $ 32 $ 31 $ 96 $ 93 ======== ======== ======== ======== 16. INCOME TAXES ------------ We account for income taxes using the asset and liability approach as prescribed by SFAS No. 109, "Accounting for Income Taxes". This approach requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Using the enacted tax rates in effect for the year in which the differences are expected to reverse, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax basis of an asset or liability. We record income tax expense in our consolidated financial statements based on an estimated annual effective income tax rate. Our tax rate for the three and nine months ended August 31, 2004 was 31% and 33%, respectively, as compared to 37% in the three and nine months ended August 31, 2003, respectively. The lower rates for the three and nine months ended August 31, 2004 reflect the implementation of a number of foreign and state tax planning initiatives, which include our determination during the third quarter of fiscal 2004 to reinvest indefinitely all undistributed earnings of Chattem (Canada), a wholly-owned subsidiary. 13 Undistributed earnings of Chattem (Canada) amounted to approximately $496 and $1,441 for the three and nine months ended August 31, 2004, respectively. These earnings are considered to be reinvested indefinitely and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. income taxes (subject to an adjustment for foreign tax credits). 17. PRODUCT SEGMENT INFORMATION --------------------------- Net sales of our domestic product categories within our single healthcare business segment for the three and nine months ended August 31, 2004 and 2003 are as follows: For the Three Months For the Nine Months Ended August 31, Ended August 31, ------------------- ------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Topical analgesics $ 20,118 $ 14,540 $ 53,964 $ 42,738 Medicated skin care products 17,257 16,926 47,920 44,988 Dietary supplements 7,774 9,664 26,654 30,232 Medicated dandruff shampoos and conditioner 6,480 6,116 23,107 20,928 Other OTC and toiletry products 8,210 6,490 27,485 23,711 -------- -------- -------- -------- Total $ 59,839 $ 53,736 $179,130 $162,597 ======== ======== ======== ======== 18. COMMITMENTS AND CONTINGENCIES ----------------------------- GENERAL LITIGATION As of September 29, 2004, we were named as a defendant in approximately 345 lawsuits alleging that the plaintiffs were injured as a result of ingestion of products containing phenylpropanolamine ("PPA"), which was an active ingredient in most of our DEXATRIM products until November 2000. Most of the lawsuits seek an unspecified amount of compensatory and exemplary damages or punitive damages. The lawsuits that are federal cases have now been transferred to the United States District Court for the Western District of Washington before United States District Judge Barbara Jacobs Rothstein (IN RE PHENYLPROPANOLAMINE ("PPA") PRODUCTS LIABILITY LITIGATION, MDL NO. 1407). The remaining cases are state court cases that have been filed in a number of different states. In an effort to achieve a global settlement of all DEXATRIM PPA product liability claims, on December 19, 2003, we entered into a memorandum of understanding with the Plaintiffs' Steering Committee ("PSC") in IN RE PHENYLPROPANOLAMINE ("PPA") PRODUCTS LIABILITY LITIGATION, MDL 1407, pending before the United States District Court for the Western District of Washington (the "Memorandum of Understanding"). The Memorandum of Understanding memorialized certain settlement terms concerning lawsuits relating to our DEXATRIM products containing PPA. On April 13, 2004, we entered into a class action settlement agreement with representatives of the plaintiffs' settlement class. The class action settlement agreement was generally consistent with the terms of and superceded the Memorandum of Understanding and provided for a national class action settlement of all DEXATRIM PPA claims. The court granted preliminary approval of the class action settlement on April 23, 2004. On August 26, 2004, a fairness hearing to consider final approval of the settlement was held before Judge Rothstein. At the conclusion of the hearing, Judge Rothstein stated that the court would prepare and enter an order certifying the class and granting approval of the settlement. We expect that the order will be entered in October 2004. The settlement includes claims against us involving alleged injuries by DEXATRIM products containing PPA that were alleged to have occurred after December 21, 1998, the date we acquired the DEXATRIM brand. In accordance with the terms of the class action settlement agreement, we previously published notice of the settlement and details as to the manner in which claims could be submitted. The deadline for submission of claims was July 7, 2004. A total of 391 claims were submitted prior to the claims deadline. Of these 391 claims, 173 alleged stroke as an injury and 218 alleged other non-stroke injuries. These claims will be valued pursuant to the agreed upon settlement matrix that is designed to evaluate and determine the settlement value of each claim. A total of 16 claimants elected to opt out of the class settlement and may continue to pursue claims for damages against us in separate lawsuits. In accordance with the terms of the class action settlement agreement, $60,885 has been funded into a settlement trust from our first three layers of insurance coverage, as described below. In addition, on July 14, 2004, we entered into a settlement agreement with Sidmak Laboratories, Inc. ("Sidmak"), the manufacturer of DEXATRIM products containing PPA, pursuant to which Sidmak agreed to contribute $10,000 into the settlement trust within 30 days after final court approval of 14 the settlement. To the extent the amount in the settlement trust is insufficient to fully fund the settlement, we will be required to make additional contributions to the settlement trust in the future. We currently expect to use our cash on hand to fund any required additional contributions to the settlement trust. If we are required to fund significant other liabilities related to the PPA litigation beyond the settlement trust, either pursuant to the terms of the settlement, as a result of the opt out cases or otherwise, we will have significantly fewer sources of funds with which to satisfy such liabilities, and we may be unable to do so. We recorded a $3,463 charge in the second quarter of fiscal 2004 and an $834 charge in the third quarter of fiscal 2004 relating to settlement and administrative costs and expenses associated with the PPA litigation. Although we believe that an additional liability existed as of August 31, 2004 related to the PPA litigation, due to the significant assumptions and uncertainty involved in estimating the value of cases included in the final settlement under the settlement matrix, as well as the opt out cases, we are not able to reasonably estimate if any additional payments by us will be required in excess of our insurance coverage and third party payments. As a result, we are not able to reasonably estimate the amount of such liability as of August 31, 2004 and have made no provision for this liability in the August 31, 2004 financial statements. We believe that approximately 206 or approximately 60% of the existing lawsuits in which we are named as a defendant relating to DEXATRIM containing PPA involve alleged injuries by DEXATRIM products containing PPA manufactured and sold prior to our acquisition of DEXATRIM on December 21, 1998. In these lawsuits, we are being defended on the basis of indemnification obligations assumed by The DELACO Company ("DELACO"), successor to Thompson Medical Company, Inc., which owned DEXATRIM prior to December 21, 1998. On February 12, 2004, DELACO filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Southern District of New York. Accordingly, it is uncertain whether DELACO will be able to indemnify us for claims arising from products manufactured and sold prior to our acquisition of DEXATRIM on December 21, 1998. However, DELACO is seeking to resolve all DEXATRIM cases with injury dates prior to December 21, 1998 as part of a liquidating Chapter 11 bankruptcy plan. We understand that DELACO's product liability insurance carriers and other sources are expected to fund this plan. As part of DELACO's bankruptcy plan, if finally approved, we expect the bankruptcy court to release us from liability in DEXATRIM cases with injury dates prior to December 21, 1998, although there can be no assurances in this regard. On December 19, 2003, DELACO also entered into a Memorandum of Understanding with the PSC. If DELACO achieves resolution of the pre-December 21, 1998 cases through its bankruptcy plan, we expect that the administrative process for DELACO's settlement will be similar to the process in our class action. We have filed a claim in DELACO's bankruptcy case in order to preserve our claims for indemnification against DELACO. As part of this Chapter 11 plan, we expect that after resolution of creditors' claims, DELACO will seek to liquidate and distribute all of its assets and will dissolve as a company. Our product liability insurance, as described below, would not apply to claims arising from products manufactured and sold prior to our acquisition of DEXATRIM. Although we expect the DELACO bankruptcy plan to resolve these cases, we will also seek to defend ourselves in these lawsuits on the basis that we did not manufacture and sell products containing PPA prior to December 21, 1998. In the approximately 206 cases that have been filed against us for products manufactured and sold prior to December 21, 1998, approximately half of the plaintiffs are in cases filed in states that we believe do not under current law impose liability upon a successor. The remaining plaintiffs are in cases filed in states that may in some circumstances permit liability against a successor. Even in these cases, although there can be no assurances, we do not believe that successor liability would be imposed against us. The reasons for our belief, among others, are that we did not purchase all of DELACO's assets and DELACO continued to operate its remaining business after December 21, 1998; we did not cause DELACO's bankruptcy; and many plaintiffs included in cases filed in states that in some circumstances impose successor liability are actually residents of other states. We have reached an agreement with Kemper Indemnity Insurance Company ("Kemper") to settle its lawsuit that sought to rescind our policy for $50,000 of excess coverage for product liability claims. After giving effect to the settlement with Kemper, we have available for the claims against us related to the PPA litigation, through our first three layers of insurance coverage, approximately $60,885 of the $77,000 of product liability coverage provided by these insurance policies. The $60,885 of available coverage consists of $37,500 of insurance under the Kemper policy and approximately $23,385 under policies with two other insurance companies. As indicated above, this $60,885 of coverage has been funded into a settlement trust in accordance with the terms of the class action settlement agreement. We continue to aggressively defend an action brought by Interstate Fire & Casualty Company ("Interstate") to rescind its $25,000 of excess coverage for product liability and pursue our available remedies at law against Interstate. We cannot ensure that we will be successful in retaining such excess coverage. The Interstate policy is in excess of the product liability insurance available from Kemper and the two other insurance companies referred to above. In the event the $60,885 of insurance funds available in the settlement trust and the $10,000 to be contributed by Sidmak, the manufacturer of the product, are exhausted under the PPA settlement or otherwise, coverage under the Interstate policy would not be available until we have paid $12,615 toward the settlement of PPA claims to reach the $83,500 coverage point for the Interstate policy. 15 We maintain a significantly lower level of insurance coverage for all other potential claims relating to our products including DEXATRIM products containing ephedrine. For the current policy period, our product liability insurance coverage for all of our other products, including DEXATRIM products containing ephedrine, consists of $10,000 of self-insured coverage through our captive insurance subsidiary, of which approximately $5,019 is currently funded, and a total of $40,000 of excess coverage through third party insurers. We have been named as a defendant in three lawsuits alleging that the plaintiff was injured as a result of the ingestion of DEXATRIM containing ephedrine. In addition, three individuals who allege injury caused by DEXATRIM containing ephedrine filed opt out notices in the PPA class action settlement. These three individuals have not filed lawsuits against us as of September 29, 2004. We intend to vigorously defend these lawsuits. We previously were named in a class action filed in the United States District Court for the Southern District of New York seeking certification of a class consisting of New York residents who have purchased DEXATRIM Results or DEXATRIM Natural since January 2000. The class action lawsuit sought compensatory and punitive damages arising out of allegedly false advertising in connection with the sale of DEXATRIM Results and DEXATRIM Natural products. None of the plaintiffs in this action alleged personal injury as a result of the ingestion of a DEXATRIM product. On March 29, 2004, a stipulation was submitted to the court dismissing the case on jurisdictional grounds. Pursuant to the stipulation, the plaintiffs may re-file the class action in New York state court. These plaintiffs have not refiled this lawsuit as of September 29, 2004. On December 30, 2003, the United States Food and Drug Administration ("FDA") issued a consumer alert on the safety of dietary supplements containing ephedrine alkaloids and on February 6, 2004 published a final rule with respect to these products. The final rule prohibits the sale of dietary supplements containing ephedrine alkaloids because such supplements present an unreasonable risk of illness or injury. The final rule became effective on April 11, 2004. Although we discontinued the manufacturing and shipment of DEXATRIM containing ephedrine in September 2002, the FDA's final rule may result in additional lawsuits being filed against us alleging damages related to the use or purchase of DEXATRIM containing ephedrine. We have been named as a defendant in a putative class action suit filed in the Superior Court of the State of California for the County of Los Angeles. The lawsuit seeks certification of classes consisting of residents of the United States, or residents of the State of California, who have purchased our BULLFROG sun care products during the past four years. The lawsuit seeks injunctive relief and compensatory damages under the California Business and Professions Code against us arising out of alleged deceptive, untrue or misleading advertising, and breach of warranty, in connection with the manufacturing, labeling, advertising, promotion and sale of BULLFROG products. The plaintiff has stipulated that the amount in controversy with respect to plaintiffs' individual claim and each member of the proposed class does not exceed $75. We filed an answer on June 28, 2004 and intend to defend vigorously the lawsuit. Other claims, suits and complaints arise in the ordinary course of our business involving such matters as patents and trademarks, product liability, environmental matters and other alleged injuries or damage. The outcome of such litigation cannot be predicted, but, in the opinion of management, based in part upon assessments from counsel, all such other pending matters are without merit or are of such kind or involve such other amounts as would not have a material adverse effect on our financial position, results of operations or cash flows if disposed of unfavorably. REGULATORY The FDA, the Drug Enforcement Administration and a number of state and local governments have enacted or proposed restrictions or prohibitions on the sale of products that contain ephedrine. Ephedrine can refer to the herbal substance derived from the plant ephedra or the plant heart leaf, which, until September 2002, was used in the manufacturing of some forms of DEXATRIM Natural and DEXATRIM Results, or synthetic ephedrine, an FDA regulated ingredient used in some OTC drug products, which has not been used in our products. These restrictions include the prohibition of OTC sales, required warnings or labeling statements, record keeping and reporting requirements, the prohibition of sales to minors, per transaction limits on the quantity of product that may be purchased and limitations on advertising and promotion. In 1997, the FDA published a proposed rule on the use of dietary supplements containing ephedrine alkaloids. In June 2002, the United States Department of Health and Human Services ("HHS") proposed an expanded scientific evaluation of ephedra which led to the issuance of a report by the RAND-based Southern California Evidence-Based Practice Center (the "RAND Report"). The RAND Report concluded that ephedrine, ephedrine plus caffeine and ephedra-containing dietary supplements with or without herbs containing caffeine all promote modest amounts of weight loss over the short term and 16 use of ephedra or ephedrine plus caffeine is associated with an increased risk of gastrointestinal, psychiatric and autonomic symptoms. The adverse event reports contained a smaller number of more serious adverse events. Given the small number of such events, the RAND Report concluded that further study would be necessary to determine whether consumption of ephedra or ephedrine may be causally related to these serious adverse events. In connection with the RAND Report, HHS sought public comment on whether additional measures are required concerning the sale and distribution of dietary supplements containing ephedrine alkaloids. On December 30, 2003, the FDA issued a consumer alert on the safety of dietary supplements containing ephedrine alkaloids and on February 6, 2004 published a final rule with respect to these products. The final rule prohibits the sale of dietary supplements containing ephedrine alkaloids because such supplements present an unreasonable risk of illness or injury. The final rule became effective on April 11, 2004. We discontinued the manufacturing and shipment of DEXATRIM containing ephedrine in September 2002. We were notified in October 2000 that the FDA denied a citizen petition submitted by Thompson Medical Company, Inc., the previous owner of SPORTSCREME and ASPERCREME. The petition sought a determination that 10% trolamine salicylate, the active ingredient in SPORTSCREME and ASPERCREME, was clinically proven to be an effective active ingredient in external analgesic OTC drug products and should be included in the FDA's yet-to-be finalized monograph for external analgesics. We have met with the FDA and submitted a proposed protocol study to evaluate the efficacy of 10% trolamine salicylate as an active ingredient in OTC external analgesic drug products. We are working to develop alternate formulations for SPORTSCREME and ASPERCREME in the event that the FDA does not consider the available clinical data to demonstrate conclusively the efficacy of trolamine salicylate when the OTC external analgesic monograph is finalized. If 10% trolamine salicylate is not included in the final monograph, we would likely be required to discontinue these products as currently formulated and remove them from the market after expiration of an anticipated grace period. If this occurred, we believe we could still market these products as homeopathic products and could also reformulate them using ingredients included in the FDA monograph. Certain of our topical analgesic products are currently marketed under an FDA tentative final monograph. The FDA has proposed that the final monograph exclude external analgesic products in patch, plaster, or poultice form, unless the FDA receives additional data supporting the safety and efficacy of these products. On October 14, 2003, we submitted to the FDA information regarding the safety of our ICY HOT patches and arguments to support our product's inclusion in the final monograph. We have also participated in an industry effort coordinated by the Consumer Healthcare Products Association ("CHPA") to establish with the FDA a protocol of additional research that will allow the patches to be marketed under the final monograph even if the final monograph does not explicitly allow them. The CHPA submission to the FDA was made on October 15, 2003. This additional research may require a considerable amount of expensive testing and data analysis by expert consultants. Some of this cost may be shared with other patch manufacturers. We believe that the monograph is unlikely to become final and take effect before January 2006. If neither action described above is successful and the final monograph excludes such products, we would have to file and receive approval of a new drug application ("NDA") in order to continue to market the ICY HOT Patch or similar delivery systems under our other topical analgesic brands. In such case, we would have to remove the existing product from the market as of one year from the effective date of the final monograph, pending FDA review and approval of an NDA. The preparation of an NDA would likely take us six to 18 months and would be expensive. It typically takes the FDA at least 12 months to rule on an NDA once it is submitted. We have responded to certain questions with respect to efficacy received from the FDA in connection with clinical studies for pyrilamine maleate, one of the active ingredients used in certain of the PAMPRIN and PREMSYN PMS products. While we addressed all of the FDA questions in detail, the final monograph for menstrual drug products, which has not yet been issued, will determine if the FDA considers pyrilamine maleate safe and effective for menstrual relief products. We have been actively monitoring the process and do not believe that either PAMPRIN or PREMSYN PMS will be materially adversely affected by the FDA review. We believe that any adverse finding by the FDA would likewise affect our principal competitors in the menstrual product category. In a letter dated January 22, 2004, the FDA wrote the boards of pharmacy in each state regarding the FDA's concern about products (both OTC and prescription) that contain acetaminophen. In that letter the FDA expressed concern about the potential toxicity due to concomitant use of OTC and prescription drugs that contain the ingredient acetaminophen, an ingredient also found in PAMPRIN and PREMSYN PMS. We are participating in an industry-wide effort to reassure the FDA that the current recommended dosing regimen is safe and effective and that proper labeling and public education by both OTC and prescription drug companies are the best policies to abate the FDA's concern. There can be no assurance as to what action, if any, the FDA may take with respect to acetaminophen. Our business is also regulated by the California Safe Drinking Water and Toxic Enforcement Act of 1986, known as Proposition 65. Proposition 65 prohibits businesses from exposing consumers to chemicals that the state has determined cause cancer or reproduction toxicity without first giving fair and reasonable warning unless the level of exposure to the carcinogen or reproductive toxicant falls below prescribed levels. From time to time, one or more ingredients in our products could become subject to an inquiry under Proposition 65. If an ingredient is on the state's list as a carcinogen, it is possible 17 that a claim could be brought, in which case we would be required to demonstrate that exposure is below a "no significant risk" level for consumers. Any such claims may cause us to incur significant expense, and we may face monetary penalties or injunctive relief, or both, or be required to reformulate our product to acceptable levels. The State of California under Proposition 65 is also considering the inclusion of titantium dioxide on the state's list of suspected carcinogens. Titantium dioxide has a long history of widespread use as an excipient in prescription and OTC pharmaceuticals, cosmetics, dietary supplements and skin care products and is an active ingredient in our BULLFROG Superblock products. We have participated in an industry-wide submission to the State of California, facilitated through the CHPA, presenting evidence that titantium dioxide presents "no significant risk" to consumers. 19. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS The condensed consolidating financial statements, for the dates or periods indicated, of Chattem, Inc. ("Chattem"), Signal Investment & Management Co. ("Signal"), SunDex, LLC ("SunDex") and Chattem (Canada) Holdings, Inc. ("Canada"), the guarantors of the long-term debt of Chattem, and the non-guarantor direct and indirect wholly-owned subsidiaries of Chattem are presented below. Signal is 89% owned by Chattem and 11% owned by Canada. SunDex and Canada are wholly-owned subsidiaries of Chattem. The guarantees of Signal, SunDex and Canada are full and unconditional and joint and several. The guarantees of Signal, SunDex and Canada as of August 31, 2004 arose in conjunction with Chattem's issuance of the Revolving Credit Facility, the Floating Rate Notes and the 7.0% Subordinated Notes (See Note 12). The maximum amount of future payments the guarantors would be required to make under the guarantees as of August 31, 2004 is $200,000. 18 Note 19 CHATTEM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS August 31, 2004 (Unaudited and in thousands)
GUARANTOR NON-GUARANTOR SUBSIDIARY SUBSIDIARY CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED --------- --------- --------- --------- --------- ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 15,849 $ 2,523 $ 8,383 $ -- $ 26,755 Accounts receivable, less allowances of $3,310 26,929 9,677 5,312 (9,677) 32,241 Interest receivable -- 619 -- (619) -- Inventories 13,358 3,783 2,408 -- 19,549 Refundable income taxes 5,258 -- 15 -- 5,273 Deferred income taxes 1,635 -- -- -- 1,635 Prepaid expenses and other current assets 3,224 -- 145 -- 3,369 --------- --------- --------- --------- --------- Total current assets 66,253 16,602 16,263 (10,296) 88,822 --------- --------- --------- --------- --------- PROPERTY, PLANT AND EQUIPMENT, NET 26,896 775 322 -- 27,993 --------- --------- --------- --------- --------- OTHER NONCURRENT ASSETS: Patents, trademarks and other purchased product rights, net 836 307,087 -- (62,290) 245,633 Debt issuance costs, net 5,348 -- -- -- 5,348 Investment in subsidiaries 261,034 33,000 66,024 (360,058) -- Note receivable -- 33,000 -- (33,000) -- Other 3,159 -- 400 -- 3,559 --------- --------- --------- --------- --------- Total other noncurrent assets 270,377 373,087 66,424 (455,348) 254,540 --------- --------- --------- --------- --------- TOTAL ASSETS $ 363,526 $ 390,464 $ 83,009 $(465,644) $ 371,355 ========= ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable and other $ 8,560 $ -- $ 1,836 $ -- $ 10,396 Accrued liabilities 19,320 1,306 1,851 (10,296) 12,181 --------- --------- --------- --------- --------- Total current liabilities 27,880 1,306 3,687 (10,296) 22,577 --------- --------- --------- --------- --------- LONG-TERM DEBT 200,000 -- 33,000 (33,000) 200,000 --------- --------- --------- --------- --------- DEFERRED INCOME TAXES (786) 31,808 (47) -- 30,975 --------- --------- --------- --------- --------- OTHER NONCURRENT LIABILITIES 1,738 -- -- -- 1,738 --------- --------- --------- --------- --------- INTERCOMPANY ACCOUNTS 18,629 (19,627) 998 -- -- --------- --------- --------- --------- --------- SHAREHOLDERS' EQUITY: Preferred shares, without par value, authorized 1,000, none issued -- -- -- -- -- Common shares, without par value, authorized 50,000, issued 19,752 83,425 -- -- -- 83,425 Share capital of subsidiaries -- 330,586 38,647 (369,233) -- Retained earnings 37,543 46,391 6,749 (53,140) 37,543 --------- --------- --------- --------- --------- Total 120,968 376,977 45,396 (422,373) 120,968 --------- --------- --------- --------- --------- Unamortized value of restricted common shares issued (2,668) -- -- -- (2,668) Cumulative other comprehensive income, net of taxes: Interest rate cap adjustment (259) -- -- -- (259) Foreign currency translation adjustment (336) -- (25) 25 (336) Minimum pension liability adjustment (1,640) -- -- -- (1,640) --------- --------- --------- --------- --------- Total shareholders' equity 116,065 376,977 45,371 (422,348) 116,065 --------- --------- --------- --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 363,526 $ 390,464 $ 83,009 $(465,644) $ 371,355 ========= ========= ========= ========= =========
19 Note 19 CHATTEM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS NOVEMBER 30, 2003 (In thousands)
GUARANTOR NON-GUARANTOR SUBSIDIARY SUBSIDIARY CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED --------- --------- --------- --------- --------- ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 18,702 $ 1,964 $ 6,265 $ -- $ 26,931 Accounts receivable, less allowances of $3,594 21,729 7,089 3,749 (7,089) 25,478 Inventories 12,670 2,040 2,849 -- 17,559 Refundable income taxes 4,414 -- 17 -- 4,431 Deferred income taxes 3,441 -- -- -- 3,441 Prepaid expenses and other current assets 4,401 -- 142 (1,167) 3,376 --------- --------- --------- --------- --------- Total current assets 65,357 11,093 13,022 (8,256) 81,216 --------- --------- --------- --------- --------- PROPERTY, PLANT AND EQUIPMENT, NET 27,595 775 352 -- 28,722 --------- --------- --------- --------- --------- OTHER NONCURRENT ASSETS: Patents, trademarks and other purchased product rights, net 1,057 307,080 -- (62,290) 245,847 Debt issuance costs, net 5,504 -- -- -- 5,504 Investment in subsidiaries 236,053 -- -- (236,053) -- Other 1,596 -- 500 -- 2,096 --------- --------- --------- --------- --------- Total other noncurrent assets 244,210 307,080 500 (298,343) 253,447 --------- --------- --------- --------- --------- TOTAL ASSETS $ 337,162 $ 318,948 $ 13,874 $(306,599) $ 363,385 ========= ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Current maturities of long-term debt $ 7,750 $ -- $ -- $ -- $ 7,750 Accounts payable and other 9,804 -- 1,120 -- 10,924 Accrued liabilities 21,417 628 2,190 (8,256) 15,979 --------- --------- --------- --------- --------- Total current liabilities 38,971 628 3,310 (8,256) 34,653 --------- --------- --------- --------- --------- LONG-TERM DEBT, less current maturities 204,676 -- -- -- 204,676 --------- --------- --------- --------- --------- DEFERRED INCOME TAXES (239) 26,788 (48) -- 26,501 --------- --------- --------- --------- --------- OTHER NONCURRENT LIABILITIES 1,689 -- -- -- 1,689 --------- --------- --------- --------- --------- INTERCOMPANY ACCOUNTS (3,801) 3,469 332 -- -- --------- --------- --------- --------- --------- SHAREHOLDERS' EQUITY: Preferred shares, without par value, authorized 1,000, none issued -- -- -- -- -- Common shares, without par value, authorized 50,000, issued 19,161 77,815 -- -- -- 77,815 Share capital of subsidiaries -- 263,704 6,504 (270,208) -- Retained earnings 22,274 24,359 3,998 (28,357) 22,274 --------- --------- --------- --------- --------- Total 100,089 288,063 10,502 (298,565) 100,089 --------- --------- --------- --------- --------- Unamortized value of restricted common shares issued (2,058) -- -- -- (2,058) Cumulative other comprehensive income, net of taxes: Foreign currency translation adjustment (525) -- (222) 222 (525) Minimum pension liability adjustment (1,640) -- -- -- (1,640) --------- --------- --------- --------- --------- Total shareholders' equity 95,866 288,063 10,280 (298,343) 95,866 --------- --------- --------- --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 337,162 $ 318,948 $ 13,874 $(306,599) $ 363,385 ========= ========= ========= ========= =========
20 Note 19 CHATTEM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED AUGUST 31, 2004 (Unaudited and in thousands)
GUARANTOR NON-GUARANTOR SUBSIDIARY SUBSIDIARY CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED --------- --------- --------- --------- --------- TOTAL REVENUES $ 158,569 $ 55,984 $ 13,360 $ (30,449) $ 197,464 --------- --------- --------- --------- --------- COSTS AND EXPENSES: Cost of sales 45,211 7,701 5,401 (1,670) 56,643 Advertising and promotion 44,765 8,089 3,424 -- 56,278 Selling, general and administrative 31,711 339 781 -- 32,831 Litigation settlement 4,491 -- -- -- 4,491 Equity in subsidiary income (24,783) -- -- 24,783 -- --------- --------- --------- --------- --------- Total costs and expenses 101,395 16,129 9,606 23,113 150,243 --------- --------- --------- --------- --------- INCOME FROM OPERATIONS 57,174 39,855 3,754 (53,562) 47,221 --------- --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest expense (11,678) -- (1,856) 1,856 (11,678) Investment and other income, net 100 1,859 1,352 (3,106) 205 Loss on early extinguishment of debt (12,958) -- -- -- (12,958) Royalties (24,359) (4,420) -- 28,779 -- Corporate allocations 2,631 (2,545) (86) -- -- --------- --------- --------- --------- --------- Total other income (expense) (46,264) (5,106) (590) 27,529 (24,431) --------- --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 10,910 34,749 3,164 (26,033) 22,790 --------- --------- --------- --------- --------- (BENEFIT FROM) PROVISION FOR INCOME TAXES (4,359) 11,467 413 -- 7,521 --------- --------- --------- --------- --------- NET INCOME $ 15,269 $ 23,282 $ 2,751 $ (26,033) $ 15,269 ========= ========= ========= ========= =========
21 Note 19 CHATTEM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED AUGUST 31, 2003 (Unaudited and in thousands)
GUARANTOR NON-GUARANTOR SUBSIDIARY SUBSIDIARY CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED --------- --------- --------- --------- --------- TOTAL REVENUES $ 138,026 $ 53,896 $ 14,225 $ (24,907) $ 181,240 --------- --------- --------- --------- --------- COSTS AND EXPENSES: Cost of sales 39,530 8,113 5,873 (2,117) 51,399 Advertising and promotion 41,218 8,333 4,458 -- 54,009 Selling, general and administrative 28,510 208 1,727 -- 30,445 Equity in subsidiary income (22,792) -- -- 22,792 -- --------- --------- --------- --------- --------- Total costs and expenses 86,466 16,654 12,058 20,675 135,853 --------- --------- --------- --------- --------- INCOME FROM OPERATIONS 51,560 37,242 2,167 (45,582) 45,387 --------- --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest expense (15,431) -- -- -- (15,431) Investment and other income, net 69 3 47 -- 119 Royalties (20,951) (1,561) (278) 22,790 -- Corporate allocations 2,951 (2,870) (81) -- -- --------- --------- --------- --------- --------- Total other income (expense) (33,362) (4,428) (312) 22,790 (15,312) --------- --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 18,198 32,814 1,855 (22,792) 30,075 (BENEFIT FROM) PROVISION FOR INCOME TAXES (749) 11,435 442 -- 11,128 --------- --------- --------- --------- --------- NET INCOME $ 18,947 $ 21,379 $ 1,413 $ (22,792) $ 18,947 ========= ========= ========= ========= =========
22 Note 19 CHATTEM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED AUGUST 31, 2004 (Unaudited and in thousands)
GUARANTOR NON-GUARANTOR SUBSIDIARY SUBSIDIARY CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED --------- --------- --------- --------- --------- OPERATING ACTIVITIES: Net income $ 15,269 $ 23,282 $ 2,751 $ (26,033) $ 15,269 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,549 -- 60 -- 4,609 Deferred income taxes 1,260 5,020 -- -- 6,280 Tax benefit realized from stock option exercises 4,036 -- -- -- 4,036 Loss on early extinguishment of debt 12,958 -- -- -- 12,958 Other, net 33 -- 20 -- 53 Equity in subsidiary income (26,033) -- -- 26,033 -- Changes in operating assets and liabilities: Accounts receivable (5,200) (2,588) (1,563) 2,588 (6,763) Interest receivable -- (619) -- 619 -- Inventories (688) (1,743) 441 -- (1,990) Refundable income taxes (844) -- 2 -- (842) Prepaid expenses and other current assets 1,223 -- (2) (1,167) 54 Accounts payable and accrued liabilities (3,341) 678 377 (2,040) (4,326) --------- --------- --------- --------- --------- Net cash provided by operating activities 3,222 24,030 2,086 -- 29,338 --------- --------- --------- --------- --------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (1,753) -- (10) -- (1,763) Purchases of patents, trademarks and other product rights -- (8) -- -- (8) Increase in note receivable -- (33,000) -- 33,000 -- (Increase) decrease in other assets, net (998) -- 404 -- (594) --------- --------- --------- --------- --------- Net cash (used in) provided by investing activities (2,751) (33,008) 394 33,000 (2,365) --------- --------- --------- --------- --------- FINANCING ACTIVITIES: Repayment of long-term debt (212,288) -- -- -- (212,288) Proceeds from long-term debt 200,000 -- -- -- 200,000 Proceeds from borrowings under revolving credit facility 25,000 -- -- -- 25,000 Payments of revolving credit facility (25,000) -- -- -- (25,000) Proceeds from exercise of stock options 5,139 -- -- -- 5,139 Repurchase of common shares (5,015) -- -- -- (5,015) Increase in debt issuance costs (5,729) -- -- -- (5,729) Retirement of debt issuance costs (7,861) -- -- -- (7,861) Premium on interest rate cap agreement (1,375) -- -- -- (1,375) Intercompany debt proceeds, net -- -- 33,000 (33,000) -- Changes in intercompany accounts 23,805 10,787 (34,592) -- -- Dividends paid -- (1,250) 1,250 -- -- --------- --------- --------- --------- --------- Net cash (used in) provided by financing activities (3,324) 9,537 (342) (33,000) (27,129) --------- --------- --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS -- -- (20) -- (20) --------- --------- --------- --------- --------- CASH AND CASH EQUIVALENTS: (Decrease) increase for the period (2,853) 559 2,118 -- (176) At beginning of period 18,702 1,964 6,265 -- 26,931 --------- --------- --------- --------- --------- At end of period $ 15,849 $ 2,523 $ 8,383 $ -- $ 26,755 ========= ========= ========= ========= =========
23 Note 19 CHATTEM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED AUGUST 31, 2003 (Unaudited and in thousands)
GUARANTOR NON-GUARANTOR SUBSIDIARY SUBSIDIARY CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED --------- --------- --------- --------- --------- OPERATING ACTIVITIES: Net income $ 18,947 $ 21,379 $ 1,413 $ (22,792) $ 18,947 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,451 -- 114 -- 4,565 Deferred income taxes 713 5,401 (10) -- 6,104 Tax benefit realized from stock option exercises 1,240 -- -- -- 1,240 Other, net (101) -- 7 -- (94) Equity in subsidiary income (22,792) -- -- 22,792 -- Changes in operating assets and liabilities: Accounts receivable (3,293) (15,821) 426 15,821 (2,867) Inventories (1,321) 809 (497) -- (1,009) Refundable income taxes (256) -- -- -- (256) Prepaid expenses and other current assets (664) -- (104) -- (768) Accounts payable and accrued liabilities 12,640 1,235 197 (15,821) (1,749) --------- --------- --------- --------- --------- Net cash provided by operating activities 9,564 13,003 1,546 -- 24,113 --------- --------- --------- --------- --------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (3,800) -- (133) -- (3,933) Purchases of patents, trademarks and other products rights -- (373) -- -- (373) Increase in other assets, net (250) -- (35) -- (285) --------- --------- --------- --------- --------- Net cash used in investing activities (4,050) (373) (168) -- (4,591) --------- --------- --------- --------- --------- FINANCING ACTIVITIES: Repayment of long-term debt (10,000) -- -- -- (10,000) Proceeds from exercise of stock options 1,533 -- -- -- 1,533 Repurchase of common shares (5,351) -- -- -- (5,351) Deferred debt issuance costs (25) -- -- -- (25) Changes in intercompany accounts 7,541 (10,277) 2,736 -- -- Dividends paid 3,000 (3,000) -- -- -- --------- --------- --------- --------- --------- Net cash (used in) provided by financing activities (3,302) (13,277) 2,736 -- (13,843) --------- --------- --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS -- -- 118 -- 118 --------- --------- --------- --------- --------- CASH AND CASH EQUIVALENTS: Increase (decrease) for the period 2,212 (647) 4,232 -- 5,797 At beginning of period 11,505 1,138 3,281 -- 15,924 --------- --------- --------- --------- --------- At end of period $ 13,717 $ 491 $ 7,513 $ -- $ 21,721 ========= ========= ========= ========= =========
24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ----------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes thereto included in our 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including, but not limited to, those described in our filings with the Securities and Exchange Commission. OVERVIEW - -------- We are a leading marketer and manufacturer of a broad portfolio of branded over-the-counter ("OTC") healthcare products, toiletries and dietary supplements including such categories as topical analgesics, medicated skin care products, medicated dandruff shampoos and conditioner, dietary supplements, and other OTC and toiletry products. Our portfolio of products includes well-recognized brands such as: o Topical analgesics such as ICY HOT and ASPERCREME; o Medicated skin care products such as GOLD BOND medicated skin care powder, cream, lotion, first aid, and foot care products; and PHISODERM medicated acne treatment products and skin cleansers; o SELSUN BLUE medicated dandruff shampoos and conditioner; o Dietary supplements including DEXATRIM, GARLIQUE and NEW PHASE; and o Other OTC and toiletry products such as PAMPRIN, a menstrual analgesic; HERPECIN-L, a lip care product; BENZODENT, a dental analgesic cream; and toiletries such as BULLFROG, a line of sunblocks; ULTRASWIM, a chlorine-removing shampoo; and SUN-IN, a hair lightener. Our products typically target niche markets that are often outside the core product areas of larger companies where we believe we can achieve and sustain significant market penetration through innovation and strong advertising and promotion support. Many of our products are among the U.S. market leaders in their respective categories. For example, our portfolio of topical analgesic brands and our GOLD BOND medicated body powders have the leading U.S. market share in these categories. We support our brands through extensive and cost-effective advertising and promotion, the expenditures for which represented approximately 29% of our total revenues in the nine months ended August 31, 2004. We sell our products nationally through mass merchandiser, drug and food channels principally utilizing our own sales force. Our strategy to achieve future growth is to generate new sales through strong marketing and promotional programs, new product development, acquisitions of new brands, development of strategic marketing alliances and expansion of our international business. As previously high-growth brands mature, sales increases will become even more dependent on the development of successful line extensions, international expansion and acquisitions. During the first quarter of fiscal 2004, we introduced the DEXATRIM All in One Bar, SELSUN BLUE Conditioner, PAMPRIN All Day, BULLFROG SuperBlock Spray Lotion and PHISODERM CLEAR CONFIDENCE Self Heating Daily Scrub and Herbal Astringent. In the second quarter of fiscal 2004, we introduced the ICY HOT Medicated Sleeve. Line extensions, product introductions and acquisitions require a significant amount of introductory advertising and promotional support. For a period of time, these products do not generate a commensurate amount of sales or earnings. As a result, we may experience a short-term impact on our profitability due to line extensions and acquisitions. In March 2002, we acquired worldwide rights (except in India) to manufacture, sell and market SELSUN BLUE, which is marketed internationally as SELSUN, plus related intellectual property and certain manufacturing equipment from Abbott Laboratories ("Abbott"). Abbott, or manufacturers under contract to Abbott, manufactured SELSUN BLUE for us domestically until June 2003 and internationally until the end of March 2004. We have entered into an amendment to the manufacturing agreement with Abbott under which Abbott will continue to manufacture SELSUN for us for the European, Middle East and several Latin American markets for an additional period ending July 2005 at agreed upon rates, which vary by market. Abbott will also continue to serve as our distributor for SELSUN in certain foreign countries under separate distribution agreements. All of our North American SELSUN BLUE product lines are presently being manufactured at our Chattanooga facilities. During a transition period which ended March 28, 2004, Abbott also marketed, sold and distributed SELSUN products for us in certain foreign countries until we could satisfy various foreign regulatory requirements, new distributors were in place and any applicable marketing permits were transferred. During the transition period, Abbott paid us an initial royalty equal to 28% of international 25 sales of SELSUN in these countries with the royalty reduced to 14% of international sales in certain countries if foreign regulatory requirements were satisfied prior to our assumption of sales and marketing responsibility in such countries. During the transition period, Abbott paid all costs and expenses related to the manufacture, marketing and sales of SELSUN in these countries. As we assumed responsibility for the sales and marketing effort in a country, the royalty arrangement with respect to such country terminated. We then recorded these international sales directly as well as the costs and expenses associated with these sales. Abbott has agreed to extend the transition beyond March 28, 2004 in several countries where we are still awaiting regulatory approval of the transfer. In certain international markets, we sell SELSUN through a distributor and receive a royalty based on a percentage of distributor sales. In January 2004, our board of directors increased the total authorization to repurchase our common stock under our stock buyback program to $20.0 million. For the nine months ended August 31, 2004, we repurchased 190,100 shares for $5.0 million. The remaining availability under the board authorization was $15.0 million as of August 31, 2004. We are limited in our ability to repurchase shares due to restrictions under the terms of our Senior Secured Revolving Credit Facility due February 26, 2009 (the "Revolving Credit Facility") and the indentures pursuant to which the Floating Rate Senior Notes due 2010 (the "Floating Rate Notes") and 7.0 % Senior Subordinated Fixed Rate Notes due 2014 (the "7.0% Subordinated Notes") were issued. Our net income margin (net income/total revenues) was 13.2% and 11.6% for the third quarter of fiscal 2004 and 2003, respectively, and 7.7% and 10.5% for the nine months ended August 31, 2004 and 2003, respectively. Our net income (excluding debt extinguishment and litigation settlement charges) margin (net income (excluding debt extinguishment and litigation settlement charges)/total revenues) was 14.1% and 13.7% for the three and nine months ended August 31, 2004, respectively. We believe that disclosure of net income (excluding debt extinguishment and litigation settlement charges) margin provides investors with useful information regarding the Company's financial performance and allows for easier comparison with net income margin without the effect of these charges in prior periods. A reconciliation of net income (excluding debt extinguishment and litigation settlement charges) to net income for the three and nine months ended August 31, 2004 is presented in the following table: For the Three For the Nine Months Ended Months Ended August 31, 2004 August 31, 2004 --------------- --------------- (dollars in thousands) Net income $ 8,734 $ 15,269 Add: Loss on early extinguishment of debt -- 12,958 Litigation settlement charges 834 4,491 Benefit from income taxes (275) (5,758) --------- --------- Net income (excluding debt extinguishment and litigation settlement charges) $ 9,293 $ 26,960 ========= ========= Net income (excluding debt extinguishment and litigation settlement charges) margin 14.1% 13.7% ========= ========= 26 EBITDA, earnings before interest, taxes, depreciation and amortization, is a key non-GAAP financial measure used by us to measure operating performance but may not be comparable to similarly titled measures reported by other companies. The most directly comparable GAAP financial measure is net income. EBITDA is used by us to supplement net income as an indicator of operating performance and not as an alternative to measures defined and required by U.S. generally accepted accounting principles. We consider EBITDA an important indicator of our operational strength and performance, including our ability to pay interest, service debt and fund capital expenditures. EBITDA should be considered in addition to, but not as a substitute for, operating income, net income and other measures of financial performance reported in accordance with U.S. generally accepted accounting principles. EBITDA is also one measure used in the calculation of certain ratios to determine our compliance with the terms of our Revolving Credit Facility. A reconciliation of EBITDA and EBITDA (excluding litigation settlement charges) to net income is presented in the following table:
For the Three Months Ended ------------------------------------------------- Dollar Percentage August 31, August 31, Increase Increase 2004 2003 (Decrease) (Decrease) ---------- ---------- ---------- ---------- (dollars in thousands) Net income $ 8,734 $ 6,837 $ 1,897 27.7% Add: Provision for income taxes 4,002 4,016 (14) (0.3) Interest expense, net (includes loss on early extinguishment of debt in 2004) 3,239 5,025 (1,786) (35.5) Depreciation and amortization less amounts included in interest 1,341 1,153 188 16.3 ---------- ---------- ---------- EBITDA $ 17,316 $ 17,031 $ 285 1.7 ========== ========== ========== Litigation settlement charges 834 -- 834 nm ---------- ---------- ---------- EBITDA (excluding litigation settlement charges) $ 18,150 $ 17,031 $ 1,119 6.6 ========== ========== ========== EBITDA margin (EBITDA/total revenues) 26.2% 28.8% ========== ========== EBITDA (excluding litigation settlement charges) margin (EBITDA (excluding litigation settlement charges)/total revenues) 27.4% 28.8% ========== ========== For the Nine Months Ended ------------------------------------------------- Dollar Percentage August 31, August 31, Increase Increase 2004 2003 (Decrease) (Decrease) ---------- ---------- ---------- ---------- (dollars in thousands) Net income $ 15,269 $ 18,947 $ (3,678) (19.4%) Add: Provision for income taxes 7,521 11,128 (3,607) (32.4) Interest expense, net (includes loss on early extinguishment of debt in 2004) 24,431 15,312 9,119 59.6 Depreciation and amortization less amounts included in interest 3,958 3,305 653 19.8 ---------- ---------- ---------- EBITDA $ 51,179 $ 48,692 $ 2,487 5.1 ========== ========== ========== Litigation settlement charges 4,491 -- 4,491 nm ---------- ---------- ---------- EBITDA (excluding litigation settlement charges) $ 55,670 $ 48,692 $ 6,978 14.3 ========== ========== ========== EBITDA margin (EBITDA/total revenues) 25.9% 26.9% ========== ========== EBITDA (excluding litigation settlement charges) margin (EBITDA (excluding litigation settlement charges)/total revenues) 28.2% 26.9% ========== ==========
In an effort to achieve a global settlement of all DEXATRIM PPA product liability claims, on December 19, 2003, we entered into a memorandum of understanding with the Plaintiffs' Steering Committee ("PSC") in IN RE PHENYLPROPANOLAMINE ("PPA") PRODUCTS LIABILITY LITIGATION, MDL 1407, pending before the United States District Court for the Western District of 27 Washingtion (the "Memorandum of Understanding"). The Memorandum of Understanding memorialized certain settlement terms concerning lawsuits relating to DEXATRIM products containing PPA. On April 13, 2004, we entered into a class action settlement agreement with representatives of the plaintiffs' settlement class. The class action settlement agreement was generally consistent with the terms of and superceded the Memorandum of Understanding and provided for a national class action settlement of all DEXATRIM PPA claims. The court granted preliminary approval of the class action settlement on April 23, 2004. On August 26, 2004, a fairness hearing to consider final approval of the settlement was held before Judge Rothstein. At the conclusion of the hearing, Judge Rothstein stated that the court would prepare and enter an order certifying the class and granting approval of the settlement. We expect that the order will be entered in October 2004. The settlement includes claims against us involving alleged injuries by DEXATRIM products containing PPA that were alleged to have occurred after December 21, 1998, the date we acquired the DEXATRIM brand. In accordance with the terms of the class action settlement agreement, we previously published notice of the settlement and details as to the manner in which claims could be submitted. The deadline for submission of claims was July 7, 2004. A total of 391 claims were submitted prior to the claims deadline. Of these 391 claims, 173 alleged stroke as an injury and 218 alleged other non-stroke injuries. These claims will be valued pursuant to the case scoring system and settlement matrix agreed upon as part of the class action settlement agreement that is designed to evaluate and determine the settlement value of each claim. A total of 16 claimants elected to opt out of the class settlement and may continue to pursue claims for damages against us in separate lawsuits. In accordance with the terms of the class action settlement agreement, $60.9 million has been funded into a settlement trust from our first three layers of insurance coverage, as described below. In addition, on July 14, 2004, we entered into a settlement agreement with Sidmak Laboratories, Inc. ("Sidmak"), the manufacturer of DEXATRIM products containing PPA, pursuant to which Sidmak agreed to contribute $10.0 million into the settlement trust within 30 days after final court approval of the settlement. To the extent the amount in the settlement trust is insufficient to fully fund the settlement, we will be required to make additional contributions to the settlement trust in the future. We currently expect to use our cash on hand to fund any required additional contributions to the settlement trust. If we are required to fund significant other liabilities related to the PPA litigation beyond the settlement trust, either pursuant to the terms of the settlement, as a result of the opt out cases or otherwise, we will have significantly fewer sources of funds with which to satisfy such liabilities, and we may be unable to do so. Based upon the court's stated intention to approve the class action settlement, the number of claims submitted in the settlement, the number of claims which elected to opt out of the settlement and contributions from insurers and other third parties, we currently expect to record pre-tax charges totaling $10.0-15.0 million, or $7.0-10.0 million net of taxes (approximately $.35-.50 per share), for settlement costs, administrative expenses and costs of defense related to resolving the PPA litigation. We paid or accrued the first portion of this charge, $3.5 million, or $2.3 million after tax ($.11 per share) during the second fiscal quarter ended May 31, 2004, and $0.8 million, or $0.6 million after tax ($.03 per share), during the third fiscal quarter ended August 31, 2004. Although we believe an additional liability existed as of August 31, 2004 related to our PPA litigation, due to the significant assumptions and uncertainty involved in estimating the value of cases included in the final settlement under the settlement matrix, as well as the opt out cases, we are not able to reasonably estimate if any additional payments by us will be required in excess of our insurance coverage and third party payments. As a result, we are not able to reasonably estimate the amount of such liability as of August 31, 2004 and have made no provision for this liability in the August 31, 2004 financial statements. We have reached an agreement with Kemper Indemnity Insurance Company ("Kemper") to settle its lawsuit that sought to rescind our policy for $50.0 million of excess coverage for product liability claims. After giving effect to the settlement with Kemper, we have available for the claims against us related to the PPA litigation, through our first three layers of insurance coverage, approximately $60.9 million of the $77.0 million of product liability coverage provided by these insurance policies. The $60.9 million of available coverage consists of $37.5 million of insurance under the Kemper policy and approximately $23.4 million under policies with two other insurance companies. As indicated above, this $60.9 million of coverage has been funded into a settlement trust in accordance with the terms of the class action settlement agreement. We continue to aggressively defend an action brought by Interstate Fire & Casualty Company ("Interstate") to rescind its $25.0 million of excess coverage for product liability and pursue our available remedies at law against Interstate. We cannot assure you that we will be successful in retaining such excess coverage. The Interstate policy is in excess of the product liability insurance available from Kemper and the two other insurance companies referred to above. In the event the $60.9 million of insurance funds available in the settlement trust and the $10.0 million to be contributed by Sidmak, the manufacturer of the product, are exhausted under the PPA settlement or otherwise, coverage under the Interstate policy would not be available until we have paid $12.6 million toward the settlement of PPA claims to reach the $83.5 million coverage point for the Interstate policy. 28 On December 30, 2003, the United States Food and Drug Administration ("FDA") issued a consumer alert on the safety of dietary supplements containing ephedrine alkaloids and on February 6, 2004 published a final rule with respect to these products. The final rule prohibits the sale of dietary supplements containing ephedrine alkaloids because such supplements present an unreasonable risk of illness or injury. The final rule became effective on April 11, 2004. Although we discontinued the manufacturing and shipment of DEXATRIM containing ephedrine in September 2002, the FDA's final rule may result in additional lawsuits being filed against us alleging damages related to the use or purchase of DEXATRIM containing ephedrine. RESULTS OF OPERATIONS - --------------------- The following table sets forth net income, and for the periods indicated, certain items from our Condensed Consolidated Statements of Income expressed as a percentage of total revenues:
For the Three Months Ended For the Nine Months Ended -------------------------- ------------------------- August 31, August 31, August 31, August 31, 2004 2003 2004 2003 ---------- ---------- ---------- ---------- TOTAL REVENUES 100.0% 100.0% 100.0% 100.0% -------- -------- -------- -------- COSTS AND EXPENSES: Cost of sales 28.9 27.0 28.7 28.4 Advertising and promotion 28.2 28.9 28.5 29.8 Selling, general and administrative 17.4 17.3 16.6 16.8 Litigation settlement 1.3 -- 2.3 -- -------- -------- -------- -------- Total costs and expenses 75.8 73.2 76.1 75.0 -------- -------- -------- -------- INCOME FROM OPERATIONS 24.2 26.8 23.9 25.0 -------- -------- -------- -------- OTHER INCOME (EXPENSE): Interest expense (5.0) (8.5) (5.9) (8.5) Investment and other income, net 0.1 0.1 0.1 0.1 Loss on early extinguishment of debt -- -- (6.6) -- -------- -------- -------- -------- Total other income (expense) (4.9) (8.4) (12.4) (8.4) -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 19.3 18.4 11.5 16.6 PROVISION FOR INCOME TAXES 6.1 6.8 3.8 6.1 -------- -------- -------- -------- NET INCOME (1) 13.2% 11.6% 7.7% 10.5% ======== ======== ======== ========
- -------- (1) For net income (excluding debt extinguishment and litigation settlement charges) margin, see "Overview" in this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations. CRITICAL ACCOUNTING POLICIES - ---------------------------- The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to use estimates. Several different estimates or methods can be used by management that might yield different results. The following are the significant estimates used by management in the preparation of the August 31, 2004 condensed consolidated financial statements: ALLOWANCE FOR DOUBTFUL ACCOUNTS As of August 31, 2004, an estimate was made of the collectibility of the outstanding accounts receivable balances. This estimate requires the utilization of outside credit services, knowledge about the customer and the customer's industry, new developments in the customer's industry and operating results of the customer as well as general economic conditions and historical trends. When all these facts are compiled, a judgment as to the collectibility of the individual account is made. Many factors can impact this estimate, including those noted in this paragraph. The adequacy of the estimated allowance may be impacted by the deterioration in the financial condition of a large customer, weakness in the economic environment resulting in a higher level of customer bankruptcy filings or delinquencies and the competitive environment in which the customer operates. 29 REVENUE RECOGNITION Revenue is recognized when our products are shipped to our customers. It is generally our policy across all classes of customers that all sales are final. As is common in the consumer products industry, customers return products for a variety of reasons including products damaged in transit, discontinuance of a particular size or form of product and shipping errors. As sales are recorded, we accrue an estimated amount for product returns as a reduction of these sales based upon our historical experience and any known specific events that affect the accrual. We charge the allowance account resulting from this accrual with any authorized deduction from remittance by the customer or product returns upon receipt of the product. In accordance with industry practice, we allow our customers to return unsold sun care products (our BULLFROG line of products) at the end of the sun care season. We record the sales at the time the products are shipped and title transfers. At the time of shipment, we also record a reduction in sales and an allowance on our consolidated balance sheet for anticipated returns based upon an estimated return level. The level of returns may fluctuate from our estimates due to several factors including weather conditions, customer inventory levels and competitive conditions. Each percentage point change in our return rate would impact our net sales by approximately $0.1 million. For the three and nine months ended August 31, 2004, we reduced our estimate of returns related to our BULLFROG line of products by approximately $0.6 million and $1.8 million, respectively, which resulted in an increase to net sales in our condensed consolidated financial statements. During the third quarter of fiscal 2004, we also reduced our estimate of non-seasonal returns by approximately $0.3 million, which resulted in an increase to net sales in our condensed consolidated financial statements. We routinely enter into agreements with our customers to participate in promotional programs. These programs generally take the form of coupons, temporary price reductions, scan downs, display activity and participations in advertising vehicles provided uniquely by the customer. The ultimate cost of these programs is often variable based on the number of units actually sold. Estimated unit sales of a product under a promotional program are used to estimate the total cost of the program, which is recorded as a reduction of sales. Actual results can differ from the original estimate. We also consider customer delays in requesting promotional program payments when evaluating the required accrual. Many customers audit programs significantly after the date of performance to determine the actual amount due and make a claim for reimbursement at that time. As a result, changes in the unit sales trends under promotional programs as well as the timing of payments could result in changes in the accrual. For the three and nine months ended August 31, 2004, we reduced our estimate of promotional accruals by approximately $0.6 million and $1.1 million, respectively, which resulted in an increase to net sales in our condensed consolidated financial statements. INCOME TAXES We account for income taxes using the asset and liability approach as prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". This approach requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Using the enacted tax rates in effect for the year in which the differences are expected to reverse, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax basis of an asset or liability. We record income tax expense in our consolidated financial statements based on an estimated annual effective income tax rate. Our tax rate for the three and nine months ended August 31, 2004 was 31% and 33%, respectively, as compared to 37% in the three and nine months ended August 31, 2003, respectively. The lower rates for the three and nine months ended August 31, 2004 reflect the implementation of a number of foreign and state tax planning initiatives, which include our determination during the third quarter of fiscal 2004 to reinvest indefinitely all undistributed earnings of Chattem (Canada), a wholly-owned subsidiary. For a summary of our significant accounting policies, see Note 2 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended November 30, 2003 filed with the Securities and Exchange Commission. 30 COMPARISON OF THREE MONTHS ENDED AUGUST 31, 2004 AND 2003 - --------------------------------------------------------- To facilitate discussion of our operating results for the three months ended August 31, 2004 and 2003, we have included the following selected data from our Condensed Consolidated Statements of Income: Increase (Decrease) ------------------- 2004 2003 Amount Percentage ------- ------- ------- ---------- (dollars in thousands) Domestic net sales $59,839 $53,736 $ 6,103 11.4% International revenues (including royalties) 6,296 5,446 850 15.6 Total revenues 66,135 59,182 6,953 11.7 Cost of sales 19,135 15,995 3,140 19.6 Advertising and promotion expense 18,666 17,075 1,591 9.3 Selling, general and administrative expense 11,525 10,234 1,291 12.6 Litigation settlement charges 834 -- 834 nm Interest expense 3,284 5,057 (1,773) (35.1) Net income 8,734 6,837 1,897 27.7 DOMESTIC NET SALES Domestic net sales for the three months ended August 31, 2004 increased $6.1 million or 11.4% as compared to the corresponding period of 2003. Domestic net sales increased in all product categories except for the dietary supplements category. A comparison of domestic net sales for the categories of products included in our portfolio of OTC healthcare products is as follows: Increase (Decrease) ------------------- 2004 2003 Amount Percentage ------- ------- ------- ---------- (dollars in thousands) Topical analgesics $20,118 $14,540 $ 5,578 38.4% Medicated skin care products 17,257 16,926 331 2.0 Dietary supplements 7,774 9,664 (1,890) (19.6) Medicated dandruff shampoos and conditioner 6,480 6,116 364 6.0 Other OTC and toiletry products 8,210 6,490 1,720 26.5 ------- ------- ------- Total $59,839 $53,736 $ 6,103 11.4 ======= ======= ======= Net sales growth in the topical analgesics category was led by a 70% increase in sales of ICY HOT, which was primarily driven by the continued strength of the ICY HOT Back Patch and the newly introduced ICY HOT Medicated Sleeve. Net sales growth in this category also resulted from 33%, 22% and 8% sales increases in CAPZASIN, ASPERCREME, and SPORTSCREME, respectively. The overall sales growth in this category was partially offset by a decline in sales for the balance of the topical analgesic brands as competition from inside and outside the category increased and media support was reduced. Net sales growth in the medicated skin care products category resulted from a 7% increase in the GOLD BOND franchise. GOLD BOND sales growth was attributable to 60% and 18% increases from the lotion and foot care lines, respectively, and was partially offset by declines in the first aid portion of the business. The increase in sales from the GOLD BOND lotion line of products was attributable to the successful launch of GOLD BOND ULTIMATE Healing Skin Therapy Lotion in the third quarter of fiscal 2003. Sales growth in the medicated skin care products category was also offset by a 17% decrease in PHISODERM sales due to increased competition. Net sales for the dietary supplements category declined primarily due to a 41% decrease in DEXATRIM diet pill sales and a 25% and 20% decline in GARLIQUE and NEW PHASE sales, respectively, from the corresponding year-ago quarter. Sales of DEXATRIM were impacted by the overall decline in the diet pill market resulting in part from negative ephedrine publicity and the emergence of low carbohydrate diet products. The decline in net sales of DEXATRIM diet pills, GARLIQUE and NEW PHASE was partially offset by sales of the DEXATRIM All in One Bar, which was introduced in the first quarter of fiscal 2004. The DEXATRIM All in One Bar sales were lower than expected for the third fiscal quarter of 2004, as the category has proved to be more promotional and seasonal than we expected. If DEXATRIM sales continue to decline, the related intangible asset may be subject to impairment based on the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Domestic net sales of SELSUN BLUE medicated dandruff shampoo increased due to an effective advertising campaign and sales of SELSUN BLUE conditioner, which was launched in the first quarter of fiscal 2004. 31 The increase in net sales for the other OTC and toiletry products category was due primarily to sales increases of PAMPRIN and BULLFROG. The increase in sales of PAMPRIN was primarily attributable to the introduction of PAMPRIN All Day in the first quarter of fiscal 2004. The increase in sales of BULLFROG was primarily attributable to expanded distribution and increased sales of pre-pack displays. Domestic sales variances were principally the result of changes in unit sales volumes with the exception of PAMPRIN, PREMSYN PMS, PHISODERM, FLEXALL, ASPERCREME, CAPZASIN and SPORTSCREME, which experienced a unit sales price increase. INTERNATIONAL REVENUES For the third quarter of fiscal 2004, international revenues increased $0.9 million or 15.6% as compared to the third quarter of fiscal 2003 due principally to increases in SELSUN sales in Canada, Europe and Latin America. International sales variances were principally the result of changes in unit sales volumes. COST OF SALES Cost of sales as a percentage of total revenues was 28.9% for the third quarter of fiscal 2004 as compared to 27.0% for the third quarter of fiscal 2003. Cost of sales in the third quarter of fiscal 2004 increased $3.1 million due primarily to sales of the DEXATRIM All in One Bar, the ICY HOT Back Patch and the ICY HOT Medicated Sleeve, all of which have lower profit margins than most of our other products. ADVERTISING AND PROMOTION EXPENSE Advertising and promotion expenses in the third quarter of fiscal 2004 increased $1.6 million or 9.3% as compared to the same quarter of fiscal 2003 and were 28.2% of total revenues for the three months ended August 31, 2004 compared to 28.9% for the comparable period of fiscal 2003. Support for new product introductions drove an increase in advertising and promotion expenditures in the current period for ICY HOT, PAMPRIN, DEXATRIM All in One Bar, SELSUN BLUE and the GOLD BOND lotion and foot care lines. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses increased $1.3 million or 12.6% as compared to the same quarter of fiscal 2003. Selling, general and administrative expenses were 17.4% and 17.3% of total revenues for the third quarter of fiscal 2004 and 2003, respectively. An increase in sales was primarily responsible for the increase in selling expense. In addition, freight expenses increased due to the increase in fuel costs. The increase in general and administrative expenses was largely a result of increased incentive compensation and new product development expenses as well as expenses related to compliance with the Sarbanes-Oxley Act of 2002. LITIGATION SETTLEMENT CHARGES Litigation settlement charges were $0.8 million in the third quarter of fiscal 2004. This expense was attributable to legal services related to our DEXATRIM with PPA litigation. No corresponding expenses were recorded in the three months ended August 31, 2003. INTEREST EXPENSE Interest expense decreased $1.8 million or 35.1% in the third quarter of fiscal 2004 as compared to the same quarter of fiscal 2003. The decrease was largely the result of lower interest rates and a reduction in outstanding debt as a result of our debt refinancing completed during the first quarter of fiscal 2004. Until our indebtedness is reduced substantially, interest expense will continue to represent a significant percentage of our total revenues. 32 COMPARISON OF NINE MONTHS ENDED AUGUST 31, 2004 AND 2003 - -------------------------------------------------------- To facilitate discussion of our operating results for the nine months ended August 31, 2004 and 2003, we have included the following selected data from our Condensed Consolidated Statements of Income: Increase (Decrease) ------------------- 2004 2003 Amount Percentage -------- -------- -------- ---------- (dollars in thousands) Domestic net sales $179,130 $162,597 $ 16,533 10.2% International revenues (including royalties) 18,334 18,643 (309) (1.7) Total revenues 197,464 181,240 16,224 9.0 Cost of sales 56,643 51,399 5,244 10.2 Advertising and promotion expense 56,278 54,009 2,269 4.2 Selling, general and administrative expense 32,831 30,445 2,386 7.8 Litigation settlement charges 4,491 - 4,491 nm Interest expense 11,678 15,431 (3,753) (24.3) Loss on early extinguishment of debt 12,958 - 12,958 nm Net income 15,269 18,947 (3,678) (19.4) DOMESTIC NET SALES Domestic net sales for the nine months ended August 31, 2004 increased $16.5 million or 10.2% as compared to the corresponding period of 2003. Domestic net sales increased in all product categories except for the dietary supplements category. A comparison of domestic net sales for the categories of products included in our portfolio of OTC healthcare products is as follows: Increase (Decrease) ------------------- 2004 2003 Amount Percentage -------- -------- -------- ---------- (dollars in thousands) Topical analgesics $ 53,964 $ 42,738 $ 11,226 26.3% Medicated skin care products 47,920 44,988 2,932 6.5 Dietary supplements 26,654 30,232 (3,578) (11.8) Medicated dandruff shampoos and conditioner 23,107 20,928 2,179 10.4 Other OTC and toiletry products 27,485 23,711 3,774 15.9 -------- -------- -------- Total $179,130 $162,597 $ 16,533 10.2 ======== ======== ======== Net sales growth in the topical analgesics category was led by a 58% increase in sales of ICY HOT, which was primarily driven by the continued strength of the ICY HOT Back Patch and the newly introduced ICY HOT Medicated Sleeve. Net sales growth in this category also resulted from a 24% and 5% sales increase in CAPZASIN and ASPERCREME, respectively. The overall sales growth in this category was partially offset by a decline in sales for the balance of the topical analgesic brands as competition from inside and outside the category increased and media support was reduced. Net sales growth in the medicated skin care products category resulted from a 14% increase in the GOLD BOND franchise. GOLD BOND sales growth was attributable to 52%, 28% and 23% increases from the lotion, cream and foot care lines, respectively, and was partially offset by declines in the first aid portion of the business. The increase in sales from the GOLD BOND lotion line of products was attributable to the successful launch of GOLD BOND ULTIMATE Healing Skin Therapy Lotion in the third quarter of fiscal 2003. Sales growth in this category was further offset by a 16% decrease in PHISODERM sales due to increased competition. Net sales for the dietary supplements category declined primarily due to a 48% decrease in DEXATRIM diet pill sales and an 8% decline in GARLIQUE sales from the corresponding year-ago period. Sales of DEXATRIM were impacted by the overall decline in the diet pill market resulting in part from negative ephedrine publicity and the emergence of low carbohydrate diet products. The decline in net sales of DEXATRIM diet pills and GARLIQUE was partially offset by sales of the DEXATRIM All in One Bar, which was introduced in the first quarter of fiscal 2004. The DEXATRIM All in One Bar sales were lower than expected for the nine months ended August 31, 2004, as the category has proved to be more promotional and seasonal than we expected. If DEXATRIM sales continue to decline, the related intangible asset may be subject to impairment based on the provisions of SFAS 142. Domestic net sales of SELSUN BLUE medicated dandruff shampoo increased due to an effective advertising campaign and sales of SELSUN BLUE conditioner, which was launched in the first quarter of fiscal 2004. 33 The increase in net sales for the other OTC and toiletry products category was due primarily to sales increases of PAMPRIN and BULLFROG. The increase in sales of PAMPRIN was primarily attributable to the introduction of PAMPRIN All Day in the first quarter of fiscal 2004. The increase in sales of BULLFROG was primarily attributable to expanded distribution and increased sales of pre-pack displays. HERPECIN-L also experienced net sales growth in the nine months ended August 31, 2004 due primarily to effective advertising. Domestic sales variances were principally the result of changes in unit sales volumes with the exception of PAMPRIN, PREMSYN PMS, PHISODERM, FLEXALL, ASPERCREME, CAPZASIN and SPORTSCREME, which experienced a unit sales price increase. INTERNATIONAL REVENUES For the nine months ended August 31, 2004, international revenues decreased $0.3 million or 1.7% as compared to the same period in fiscal 2003 due principally to the termination of certain European distributor relationships and a decrease in GOLD BOND sales in Canada. This decrease was offset by an increase in SELSUN sales in Canada, Europe and Latin America. International sales variances were principally the result of changes in unit sales volumes. COST OF SALES Cost of sales as a percentage of total revenues was 28.7% for the nine months ended August 31, 2004 as compared to 28.4% for the comparable period of fiscal 2003. Cost of sales in the nine months ended August 31, 2004 increased $5.2 million due primarily to sales of the DEXATRIM All in One Bar, the ICY HOT Back Patch and the ICY HOT Medicated Sleeve, which are lower margin products. The increase was partially offset by a fiscal 2003 charge of approximately $0.7 million related to DEXATRIM charges for product returns containing ephedrine. ADVERTISING AND PROMOTION EXPENSE Advertising and promotion expenses in the nine months ended August 31, 2004 increased $2.3 million or 4.2% as compared to the same period in fiscal 2003 and were 28.5% of total revenues for the nine months ended August 31, 2004 compared to 29.8% for the comparable period of fiscal 2003. Support for new product introductions drove an increase in advertising and promotion expenditures in the nine months ended August 31, 2004 for ICY HOT, PAMPRIN, DEXATRIM All in One Bar, SELSUN BLUE and the GOLD BOND cream, lotion and foot care lines. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses increased $2.4 million or 7.8% as compared to the same period of fiscal 2003. Selling, general and administrative expenses were 16.6% and 16.8% of total revenues for the nine months ended August 31, 2004 and 2003, respectively. An increase in sales was primarily responsible for the increase in selling expense. In addition, freight expenses increased due to the increase in fuel costs. The increase in general and administrative expenses was largely a result of increased incentive compensation and new product development expenses as well as expenses related to compliance with the Sarbanes-Oxley Act of 2002. LITIGATION SETTLEMENT CHARGES Litigation settlement charges were $4.5 million for the nine months ended August 31, 2004. This expense was attributable to legal and administrative costs of our DEXATRIM with PPA litigation, costs of public notices related to the PPA settlement and reimbursement of legal and administrative costs in accordance with a settlement with one of our insurance providers. No corresponding expenses were recorded in the nine months ended August 31, 2003. INTEREST EXPENSE Interest expense decreased $3.8 million or 24.3% in the nine months ended August 31, 2004 as compared to the same period in fiscal 2003. The decrease was largely the result of lower interest rates and a reduction in outstanding debt as a result of our debt refinancing completed during the first quarter of fiscal 2004. Until our indebtedness is reduced substantially, interest expense will continue to represent a significant percentage of our total revenues. LOSS ON EARLY EXTINGUISHMENT OF DEBT During the first half of fiscal 2004, we retired $204.5 million principal amount of our 8.875% Subordinated Notes and the remaining outstanding balance of our $60,000 senior secured credit facility from a syndicate of commercial banks led by Bank of America, N.A., as agent, which resulted in a loss on early extinguishment of debt of $13.0 million and a related tax benefit of $4.3 million. 34 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- We have historically financed our operations with a combination of internally generated funds and borrowings. Our principal uses of cash are for operating expenses, servicing long-term debt, acquisitions, working capital, repurchases of our common stock, payment of income taxes and capital expenditures. Cash of $29.3 million and $24.1 million was provided by operations for the nine months ended August 31, 2004 and 2003, respectively. Cash flows from operations were impacted by an increase in the tax benefit realized from stock option exercises as compared to the corresponding period of fiscal 2003 offset by an increase in working capital attributable to an increase in accounts receivable and a decrease in accounts payable and accrued liabilities. The increase in accounts receivable relates primarily to an increase in sales, an increase in international receivables and a decrease in the allowance for returns. The decrease in accounts payable and accrued liabilities relates primarily to a decrease in accrued advertising offset by a lower increase in interest payable as compared to the corresponding period of fiscal 2003. In addition, a loss on early extinguishment of debt of $13.0 million and a tax benefit of $4.3 million was recorded in the first half of fiscal 2004. Investing activities used cash of $2.4 million and $4.6 million in the nine months ended August 31, 2004 and 2003, respectively. The decrease in usage of cash was primarily due to reduced spending on capital expenditures. In fiscal 2003, capital expenditures related primarily to equipment and facility modifications to produce SELSUN BLUE domestically and the construction of the product development building. Capital expenditures are anticipated to increase in the fourth quarter of fiscal 2004. Financing activities used cash of $27.1 million and $13.8 million in the nine months ended August 31, 2004 and 2003, respectively. The increase in cash used in financing activities in the current period was attributable to a net repayment of long-term debt of $12.3 million, an increase in and retirement of debt issuance costs of $13.6 million related to the refinancing transactions, a payment of $1.4 million for a premium on the interest rate cap agreement and $5.0 million used to repurchase shares offset by proceeds from the exercise of stock options of $5.1 million. As of August 31, 2004, our total debt consisted of our Floating Rate Notes of $75.0 million and 7.0% Subordinated Notes of $125.0 million. As of August 31, 2004 and September 29, 2004, we had no borrowings outstanding under our Revolving Credit Facility with available borrowings up to $50.0 million. Borrowings under our Revolving Credit Facility bear interest at LIBOR plus applicable percentages of 1.75% to 2.50% or a base rate (the higher of the federal funds rate plus 0.5% or the prime rate) plus applicable percentages of 0.25% to 1.0% ( 5.00% as of August 31, 2004). The applicable percentages are calculated based on our leverage ratio. The Floating Rate Notes bear interest at a three-month LIBOR plus 3.00% per year (4.31% as of August 31, 2004). On March 8, 2004, we entered into an interest rate cap agreement effective June 1, 2004 with decreasing notional principal amounts and cap rates ranging from 4.0% to 5.0% over the life of the agreement. We paid a $1.4 million premium to enter into the interest rate cap agreement, which will be amortized over the life of the agreement. The current portion of the premium on the interest rate cap agreement of $47,000 is included in prepaid expenses and other current assets, and the long-term portion of $0.9 million is included in other noncurrent assets. The amortized value of the premium on the interest rate cap was compared to its fair value as of August 31, 2004, and a charge of $0.3 million, net of tax, was recorded to other comprehensive income. The interest rate cap agreement terminates on March 1, 2010. In an effort to achieve a global settlement of all DEXATRIM PPA product liability claims, on December 19, 2003, we entered into a Memorandum of Understanding with the PSC, which memorialized certain settlement terms concerning lawsuits relating to DEXATRIM products containing PPA. On April 13, 2004, we entered into a class action settlement agreement with representatives of the plaintiffs' settlement class. The class action settlement agreement was generally consistent with the terms of and superceded the Memorandum of Understanding and provided for a national class action settlement of all DEXATRIM PPA claims. The court granted preliminary approval of the class action settlement on April 23, 2004. On August 26, 2004, a fairness hearing to consider final approval of the settlement was held before Judge Rothstein. At the conclusion of the hearing, Judge Rothstein stated that the court would prepare and enter an order certifying the class and granting approval of the settlement. We expect that the order will be entered in October 2004. The settlement includes claims against us involving alleged injuries by DEXATRIM products containing PPA that were alleged to have occurred after December 21, 1998, the date we acquired the DEXATRIM brand. In accordance with the terms of the class action settlement agreement, we previously published notice of the settlement and details as to the manner in which claims could be submitted. The deadline for submission of claims was July 7, 2004. A total of 391 claims were submitted prior to the claims deadline. Of these 391 claims, 173 alleged stroke as an injury and 218 alleged other non-stroke injuries. These claims will be valued pursuant to the case scoring system and settlement matrix agreed upon as part of the class action 35 settlement agreement that is designed to evaluate and determine the settlement value of each claim. A total of 16 claimants elected to opt out of the class settlement and may continue to pursue claims for damages against us in separate lawsuits. In accordance with the terms of the class action settlement agreement, $60.9 million has been funded into a settlement trust from our first three layers of insurance coverage, as described below. In addition, on July 14, 2004, we entered into a settlement agreement with Sidmak Laboratories, Inc. ("Sidmak"), the manufacturer of DEXATRIM products containing PPA, pursuant to which Sidmak agreed to contribute $10.0 million into the settlement trust within 30 days after final court approval of the settlement. To the extent the amount in the settlement trust is insufficient to fully fund the settlement, we will be required to make additional contributions to the settlement trust in the future. We currently expect to use certain of our cash on hand to fund any required additional contributions to the settlement trust. If we are required to fund significant other liabilities related to the PPA litigation beyond the settlement trust, either pursuant to the terms of the settlement, as a result of the opt out cases or otherwise, we will have significantly fewer sources of funds with which to satisfy such liabilities, and we may be unable to do so. In lawsuits in which we are named as a defendant relating to DEXATRIM containing PPA involving alleged injuries by DEXATRIM containing PPA manufactured and sold prior to our acquisition of DEXATRIM on December 21, 1998, we are being defended on the basis of indemnification obligations assumed by the DELACO Company ("DELACO"), successor to Thompson Medical Company, Inc., which owned Dexatrim prior to December 21, 1998. On February 12, 2004, DELACO filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Southern District of New York. Accordingly, it is uncertain whether DELACO will be able to indemnify us for claims arising from products manufactured and sold prior to our acquisition of DEXATRIM on December 21, 1998. However, DELACO is seeking to resolve all DEXATRIM cases with injury dates prior to December 21, 1998 as part of a liquidating Chapter 11 bankruptcy plan. We understand that DELACO's product liability insurance carriers and other sources are expected to fund this plan. As part of DELACO's bankruptcy plan, if finally approved, we expect the bankruptcy court to release us from liability in DEXATRIM cases with injury dates prior to December 21, 1998, although there can be no assurances in this regard. If DELACO achieves resolution of the pre-December 21, 1998 cases through its bankruptcy plan, we expect that the administrative process for DELACO's settlement will be similar to the process in our class action. We have filed a claim in DELACO's bankruptcy case in order to preserve our claims for indemnification against DELACO. As part of this Chapter 11 plan, we expect that after resolution of creditors' claims, DELACO will seek to liquidate and distribute all of its assets and will dissolve as a company. Based upon the court's stated intention to approve the class action settlement, the number of claims submitted in the settlement, the number of claims which elected to opt out of the settlement and contributions from insurers and other third parties, we currently expect to record pre-tax charges totaling $10.0-15.0 million, or $7.0-10.0 million net of taxes (approximately $.35-.50 per share), for settlement costs, administrative expenses and costs of defense related to resolving the PPA litigation. We paid or accrued the first portion of this charge, $3.5 million, or $2.3 million after tax ($.11 per share) during the second fiscal quarter ended May 31, 2004, and $0.8 million, or $0.6 million after tax ($.03 per share), during the third fiscal quarter ended August 31, 2004. Although we believe an additional liability existed as of August 31, 2004 related to our PPA litigation, due to the significant assumptions and uncertainty involved in estimating the value of cases included in the final settlement under the settlement matrix, as well as the opt out cases, we are not able to reasonably estimate if any additional payments by us will be required in excess of our insurance coverage and third party payments. As a result, we are not able to reasonably estimate the amount of such liability as of August 31, 2004 and have made no provision for this liability in the August 31, 2004 consolidated financial statements. We have reached an agreement with Kemper to settle its lawsuit that sought to rescind our policy for $50.0 million of excess coverage for product liability claims. After giving effect to the settlement with Kemper, we have available for the claims against us related to the PPA litigation, through our first three layers of insurance coverage, approximately $60.9 million of the $77.0 million of product liability coverage provided by these policies. The $60.9 million of available coverage consists of $37.5 million of insurance under the Kemper policy and approximately $23.4 million under policies with two other insurance companies. As indicated above, this $60.9 million of coverage has been funded into a settlement trust in accordance with the terms of the class action settlement agreement We continue to aggressively defend an action brought by Interstate to rescind its $25.0 million of excess coverage for product liability and pursue our available remedies at law against Interstate. We cannot assure you that we will be successful in retaining such excess coverage. The Interstate policy is in excess of the product liability insurance available from Kemper and the two other insurance companies referred to above. In the event the $60.9 million of insurance funds available in the settlement trust and the $10.0 million to be contributed by Sidmak, the manufacturer of the product, are exhausted under the PPA settlement or otherwise, coverage under the Interstate policy would not be available until we have paid $12.6 million toward the settlement of PPA claims to reach the $83.5 million coverage point for the Interstate policy. In January 2004, our board of directors increased the total authorization to repurchase our common stock under our stock buyback program to $20.0 million. For the nine months ended August 31, 2004, we repurchased 190,100 shares for $5.0 million. The remaining availability under the board authorization was $15.0 million as of August 31, 2004. We are limited in 36 our ability to repurchase shares due to restrictions under the terms of our Revolving Credit Facility and the indentures pursuant to which the Floating Rate Notes and 7.0% Subordinated Notes were issued. We believe that cash provided by operating activities, our cash and cash equivalents balance and funds available under our Revolving Credit Facility will be sufficient to fund our capital expenditures, debt service and working capital requirements for the foreseeable future as our business is currently conducted. It is likely that any acquisitions we make in the future will require us to obtain additional financing. FOREIGN OPERATIONS - ------------------ Historically, our primary foreign operations have been conducted through our Canadian and United Kingdom ("U.K.") subsidiaries. The functional currencies of these subsidiaries are Canadian dollars and British pounds, respectively. Fluctuations in exchange rates can impact operating results, including total revenues and expenses, when translations of the subsidiary financial statements are made in accordance with SFAS No. 52, "Foreign Currency Translation". For the nine months ended August 31, 2004 and 2003, these subsidiaries accounted for 7% and 8% of total revenues, respectively, and 3% of total assets for both periods, respectively. It has not been our practice to hedge our assets and liabilities in Canada and the U.K. or our intercompany transactions due to the inherent risks associated with foreign currency hedging transactions and the timing of payments between us and our foreign subsidiaries. Following our acquisition of SELSUN BLUE, which is sold in more than 75 foreign countries, our international business operations have expanded significantly, which will increase our exposure to fluctuations in foreign exchange rates. During the nine months of fiscal 2004, a portion of these foreign sales was reflected as royalties, which have been paid to us in U.S. dollars. In addition, Abbott has continued to supply a portion of our international product where appropriate and bill us in U.S. dollars. Beginning April 1, 2004, we were billed in local currencies. Historically, gains or losses from foreign currency transactions have not had a material impact on our operating results. Gains of $7,000 and $0.2 million for the nine months ended August 31, 2004 and 2003, respectively, resulted from foreign currency transactions and are included in selling, general and administrative expenses in the Condensed Consolidated Statements of Income. RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------- In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). We adopted SFAS 145 on December 1, 2002. SFAS 145 requires us to classify gains and losses on extinguishments of debt as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt". We are also required to reclassify any gain or loss on extinguishment of debt previously classified as an extraordinary item in prior periods presented. SFAS 145 also provides accounting standards for certain lease modifications that have economic effects similar to sale-leaseback transactions and various other technical corrections. The application of SFAS 145 resulted in recording a loss on early extinguishment of debt of $13.0 million in fiscal 2004, which was classified in the condensed consolidated financial statements in accordance with the provisions of SFAS 145. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). We adopted SFAS 146 on January 1, 2003. SFAS 146 supercedes Emerging Issues Task Force ("EITF") Issue No. 94-3. SFAS 146 requires that the liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, not at the date of an entity's commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. As of August 31, 2004, the application of SFAS 146 resulted in recording $35,000 of accrued liabilities related to the restructuring of the U.K operations. We expect to record additional charges related to the restructuring of the U.K. operations in the fourth quarter of fiscal 2004. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires a company to consolidate a variable interest entity ("VIE"), as defined, when the company will absorb a majority of the VIE's expected losses, receives a majority of the VIE's expected residual returns or both. FIN 46 also requires consolidation of existing, non-controlled affiliates if the VIE is unable to finance its operations without investor support, or where the other investors do not have exposure to the significant risks and rewards of ownership. FIN 46 applies immediately to a VIE created or acquired after January 31, 2003. For a VIE created before February 1, 2003, FIN 46 applies in the first fiscal year or interim period beginning after March 15, 2004, our third fiscal quarter beginning June 1, 2004. Application of FIN 46 is also required in financial statements that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. The adoption of FIN 46 did not have an impact on our financial position, results of operations or cash flows. In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosure about Pensions and Other Postretirement Benefits" ("SFAS 132"). The revision of SFAS 132 provides for additional disclosures including the description of the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows and components of net periodic benefit cost recognized in interim periods. The revisions of SFAS 132 are effective for financial statements with fiscal years 37 ending after December 15, 2003 and interim periods beginning after December 15, 2003. The adoption of the revised SFAS 132 did not have an impact on our financial position, results of operations or cash flows. FORWARD LOOKING STATEMENTS - -------------------------- Statements in this Quarterly Report on Form 10-Q which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks, uncertainties and assumptions that could cause actual outcomes and results to differ materially from those expressed or projected. 38 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS - ------------------------------------------------------------------- We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which may adversely affect our results of operations and financial condition. We seek to minimize the risks from these interest rates and foreign currency exchange rate fluctuations through our regular operating and financing activities. Our exposure to interest rate risk currently consists of our Floating Rate Notes and our Revolving Credit Facility. The aggregate balance outstanding under the Floating Rate Notes as of August 31, 2004 was $75.0 million. The Floating Rate Notes bear interest at a three-month LIBOR plus 3.00% per year (4.31% as of August 31, 2004). Loans under our Revolving Credit Facility bear interest at LIBOR plus applicable percentages of 1.75% to 2.50% or a base rate (the higher of the federal funds rate plus 0.5% or the prime rate) plus applicable percentages of 0.25% to 1.0%. The applicable percentages are calculated based on our leverage ratio. As of August 31, 2004, no amounts had been borrowed under the Revolving Credit Facility, and the variable rate on the Revolving Credit Facility was 5.00%. The 7.0% Subordinated Notes are fixed interest rate obligations. On March 8, 2004, we entered into an interest rate cap agreement effective June 1, 2004 with decreasing notional principal amounts and cap rates ranging from 4.0% to 5.0% over the life of the agreement. The amortized value of the premium on the interest rate cap was compared to its fair value as of August 31, 2004, and a charge of $0.3 million, net of tax, was recorded to other comprehensive income. The interest rate cap agreement terminates on March 1, 2010. The impact on our results of operations of a one-point rate change on the balance currently outstanding of our Floating Rate Notes for the next twelve months would be approximately $0.5 million, net of tax. We are subject to risk from changes in the foreign exchange rates relating to our Canadian and U.K. subsidiaries. Assets and liabilities of these subsidiaries are translated to U.S. 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 Condensed Consolidated Statements of Income. During the nine months ended August 31, 2004, pursuant to our manufacturing agreement with Abbott, we were billed in U.S. dollars for purchases of SELSUN for foreign markets. In many cases in the future, we will be billed in the respective foreign currency. The potential loss resulting from a hypothetical 10.0% adverse change in the quoted foreign currency exchange rate amounts to approximately $1.0 million as of August 31, 2004. This market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in financial markets. ITEM 4. CONTROLS AND PROCEDURES - ------------------------------- (a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such terms are defined in Rules 13(a)-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of August 31, 2004 of this Form 10-Q (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic filings under the Exchange Act. (b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls. 39 PART II. OTHER INFORMATION -------------------------- ITEM 1. LEGAL PROCEEDINGS - ------------------------- See Note 18 of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Report. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - ------------------------------------------------- A summary of the common stock repurchase activity for our third quarter of fiscal 2004 is as follows:
Total Number of Maximum Dollar Shares Purchased Value that may Total Number Average as Part of Publicly yet be Purchased of Shares Price Paid Announced Plans or under the Plans Period Purchased Per Share(1) Programs(2) or Programs - ------------------- --------- ------------ ----------- ----------- June 1-June 30 -- $ -- -- $16,765,825 July 1-July 31 61,100 $ 29.14 61,100 $14,985,202 August 1- August 31 -- $ -- -- $14,985,202 Total Third Quarter 61,100 $ 29.14 61,100 $14,985,202
(1) Average price paid per share includes broker commissions. (2) Our stock buyback program authorizing the purchase of up to $10.0 million of our common stock was announced in January 2003. In January 2004, our board of directors increased the total authorization to repurchase our common stock under our stock buyback program to $20.0 million. There is no expiration date specified for our stock buyback program. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - --------------------------------------- None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------- None. ITEM 5. OTHER INFORMATION - ------------------------- None. 40 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ---------------------------------------- (a) Exhibits (numbered in accordance with Item 601 of Regulation S-K): Exhibit Number Description -------------- ----------- 10.1 Settlement Agreement dated July 14, 2004 between Chattem, Inc. and Sidmak Laboratories, Inc. 10.2 DEXATRIM Case Scoring System & Matrix for the Chattem DEXATRIM Class Action Settlement 31.1 Certification required by Rule 13a-14(a) under the Securities Exchange Act of 1934 31.2 Certification required by Rule 13a-14(a) under the Securities Exchange Act of 1934 32 Certification required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 (b) During the third quarter ended August 31, 2004, we filed the following Form 8-K reports with the Securities and Exchange Commission: Form 8-K, filed June 17, 2004, containing a copy of our press release announcing our financial results for the second quarter of fiscal 2004. Form 8-K, filed August 27, 2004, containing a copy of our press release regarding the phenylpropanolamine (PPA) litigation and announcing that the Company expects to exceed prior guidance on financial results for the third quarter of fiscal 2004. 41 CHATTEM, INC. ------------- SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHATTEM, INC. (Registrant) Dated: October 1, 2004 /s/ A. Alexander Taylor II ------------------ -------------------------- A. Alexander Taylor II President, Chief Operating Officer and Director (Chief Operating Officer) Dated: October 1, 2004 /s/ Richard D. Moss ------------------ ---------------------------- Richard D. Moss Vice President and Chief Financial Officer (Principal Financial Officer) 42 CHATTEM, INC. AND SUBSIDIARIES ------------------------------ EXHIBIT INDEX ------------- Exhibit Number Description of Exhibit - -------------- ---------------------- 10.1 Settlement Agreement dated July 14, 2004 between Chattem, Inc. and Sidmak Laboratories 10.2 DEXATRIM Case Scoring System & Matrix for the Chattem DEXATRIM Class Action Settlement 31.1 Certification required by Rule 13a-14(a) under the Securities Exchange Act of 1934 31.2 Certification required by Rule 13a-14(a) under the Securities Exchange Act of 1934 32 Certification required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 43 EX-10.1 2 exhibit10-1_12965.txt SETTLEMENT AGREEMENT DATED JULY 14, 2004 EXHIBIT 10.1 ------------ CHATTEM-SIDMAK SETTLEMENT AGREEMENT WHEREAS, Chattem, Inc. ("Chattem") and Sidmak Laboratories, Inc. ("Sidmak") are both defendants in Phenylpropanolamine ("PPA") litigation involving Dexatrim Products1 in state and federal courts (the "PPA Litigation Cases"), including IN RE PHENYLPROPANOLAMINE (PPA) PRODUCTS LIABILITY LITIGATION, MDL No. 1407; and WHEREAS, Chattem and Sidmak also assert indemnification and contribution claims against each other in connection with the PPA Litigation Cases and otherwise in connection with Dexatrim Products and PPA; and WHEREAS, neither Chattem nor Sidmak admits or acknowledges any liability to the other in this regard, or to any other person or entity in connection with said litigation and/or Dexatrim Products or claims, and expressly denies any such liability; and WHEREAS, Chattem filed a Dexatrim Class Action Settlement Agreement ("DCAS") with the MDL Court on April 13, 2004; and WHEREAS, the Delaco Company ("Delaco") is a codefendant with Sidmak and Chattem in many of the PPA Litigation Cases and has filed a Chapter 11 bankruptcy case no. 04-10899 (the "Bankruptcy Case") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"); and WHEREAS, Sidmak is in the process of negotiating a resolution of the PPA Litigation Cases through the Bankruptcy Case but is willing to also contribute consideration to obtain the releases contained herein and those proposed in the DCAS for itself and its affiliated parties; and - ------------------ 1 All capitalized terms not otherwise defined herein shall have the meanings assigned to them in the DCAS. WHEREAS, for the purpose of resolving the claims against and between Chattem and Sidmak, Sidmak will contribute funding to Chattem's class action settlement in exchange for full protection as a Released Party from Settled Claims under the DCAS, in accordance with the terms and conditions set forth herein. NOW THEREFORE, Chattem and Sidmak agree as follows: 1. In full payment of Sidmak's agreed share of Chattem's class action settlement pursuant to the DCAS, Sidmak will pay ten million dollars ($10,000,000) into the Final Chattem Settlement Trust created pursuant to the DCAS, provided that, upon Trial Court Approval (a) Sidmak and all of its past, present, and future direct and indirect parents, affiliates, insurers, etc., (collectively, the "Sidmak Releasees") are and will remain Released Parties under the DCAS, to the same extent and with the same scope as defined and set forth in Section 1.1(xx)(iii) and (ix) of the DCAS as filed on April 13, 2004, and (b) the Sidmak Releasees are released under the DCAS, to the same extent and with the same scope as set forth in Section 6.2 of the DCAS as filed on April 13, 2004. 2. Sidmak's payment pursuant to paragraph 1 above shall be made 30 days after Trial Court Approval, which Chattem represents will take place in approximately four months from the Trial Court's Preliminary Approval Date. Under no circumstances will the Sidmak Releasees be required to make any further payments in connection with the DCAS or to any Class Members who do not opt out of the DCAS ("Participating Class Members"); all remaining or additional funding and payments under the DCAS will be Chattem's sole responsibility. 3. Chattem has certain termination rights under Section 8.1 of the DCAS. If and when any potential Chattem termination triggering level or event under Section 8.1 of the DCAS is reached, Chattem will confer with Sidmak before deciding whether or not to terminate the DCAS. Sidmak and Chattem agree to make representatives available for a termination rights conference during the period between 30 and 45 days after the Opt Out Deadline. In the event that Sidmak does not make a representative reasonably available for the conference during this period, Sidmak will be deemed to have waived this right. The obligation to confer shall in no way limit Chattem's ability, after such conference, to exercise or waive the termination rights in its sole discretion. 4. As previously agreed among Chattem, Delaco, and Sidmak, Sidmak's contribution to the combined EIF, as EIF is defined in the Dexatrim Case Scoring System and Matrix for the Chattem Dexatrim Class Action Settlement as attached to the MDL Court's Order dated May 21, 2004, and in the Delaco Bankruptcy (as either the EIF or its functional counterpart), shall be equal to the amount (if any) (the "Excess Proceeds") by which proceeds obtained by Sidmak from Admiral Insurance Company exceed the higher of (a) the total amount paid by or on behalf of Sidmak to resolve all known litigations or claims against Sidmak in which plaintiffs or claimants allege liability on the part of Sidmak relating to use of a nasal decongestant containing PPA, and (b) five million dollars ($5,000,000) - - in either case, up to a maximum EIF contribution of two million five hundred thousand dollars ($2,500,000). Chattem acknowledges that the foregoing potential payment by Sidmak to the EIF is the same as (and not in addition to) that to be made by Sidmak pursuant to the settlement agreement entered or to be entered into between Sidmak and Delaco ("Sidmak-Delaco Agreement"), so that in no event shall Sidmak be required under said agreement and this Agreement to pay more than a total of two million five hundred thousand dollars ($2,500,000) to the EIF, regardless of the number of funds constituting the EIF. Chattem represents that it has agreed with the plaintiffs to prepay one million dollars ($1,000,000) of Sidmak's obligation to the EIF. In the event that Chattem does so, forty percent (40%) of Sidmak's obligation (if any) under the formula set forth in the first sentence of this paragraph shall be paid in the form of reimbursement to Chattem for such prepayment. Said Sidmak reimbursement payment shall occur on the later of (a) 30 days after Trial Court Approval and (b) receipt by Sidmak of Excess Proceeds, and shall be returned to Sidmak in the event this Agreement becomes void under paragraph 10 below after said reimbursement payment has been made. The remainder of any EIF payment by Sidmak shall be made in accordance with the Sidmak-Delaco Agreement. 5. With respect to Class Members who exercise their Opt Out Rights or their assignees or subrogees ("Opt Out Claimants"), Chattem and Sidmak will share the cost of any settlement or judgment for compensatory damages in any case in which Sidmak is a named defendant, as well as the costs of litigation (defined as court costs, expert witness fees, and court reporter costs), on the basis of eighty-three percent (83%) Chattem/seventeen percent (17%) Sidmak. Sidmak agrees to reimburse Chattem for its portion of the costs of litigation within 30 days of receipt of a demand from Chattem accompanied by a copy of the invoice and evidence of payment of the invoice. Each party will be responsible for any punitive damages awarded against it. Each party will pay for its own attorneys' fees; provided, however, that in cases not alleging claims for punitive damages, or in cases in which claims for punitive damages against Sidmak have been dismissed pretrial, Sidmak will have the option of retaining its own counsel at its own expense, or being jointly represented by Chattem's counsel at Chattem's sole expense. In the event Sidmak chooses to be jointly represented by Chattem's counsel, Sidmak agrees to waive any potential conflict of interest between the parties over such representation. In the event Sidmak is separately represented, Chattem agrees to be lead counsel on all common issues at Sidmak's option, which can be exercised or withdrawn at any time. Regardless of whether or not there otherwise is joint representation, each party will be responsible for discovery directed to it and to related parties, persons or other entities, including all costs associated therewith. Chattem will not represent Sidmak concerning discovery directed to Sidmak. Chattem agrees not to bring Sidmak into any case in which Sidmak has not been named as a defendant. Sidmak agrees that in any such case, Chattem will have no obligation to seek a release from the Opt Out Claimant for the benefit of the Sidmak Releasees. However, in any such case, Sidmak shall have the option of being brought into the case by Chattem, in which event the eighty-three percent (83%) Chattem/seventeen percent (17%) Sidmak sharing of the costs of settlement or judgment, as well as the costs of litigation, will be applicable as set forth above. 6. In the event that the Bankruptcy Court or another court of competent jurisdiction enters a final order permanently staying or enjoining the further pursuit of the claims of the Opt Out Claimants against Sidmak, relieving Sidmak from any further liability for payment to the Opt Out Claimants whose cases remain pending (except for Sidmak's offer to contribute in Sidmak's sole discretion to a settlement with Delaco or to fund some portion of Delaco's plan of reorganization), or otherwise granting Sidmak relief from the claims of the Opt Out Claimants that is broader than or otherwise more protective of Sidmak than the allocations to Sidmak under paragraph 5 above (any such order being hereinafter referred to as a "Relief Order"), the provisions of paragraph 5 shall be superseded by such Relief Order and Sidmak shall be under no further obligation to pay 17% of the costs of litigation, compensatory damages, and settlements as provided under paragraph 5; however, within 30 days of the entry of such a Relief Order, Sidmak shall pay to Chattem one million dollars ($1,000,000) less any amounts previously paid by Sidmak for costs of litigation, settlement and judgments in accordance with paragraph 5, which net payment shall be returned to Sidmak in the event this Agreement becomes void as set forth in paragraph 10 below, after said payment has been made. Any payments made or due under settlements filed with the trial courts or invoices for costs presented to Sidmak prior to entry of a Relief Order shall remain obligations of Sidmak and shall not be voided or superseded by such Order. Upon entry of a Relief Order, Chattem shall have no further obligation to provide a defense for Sidmak and shall not be liable for any fees or costs incurred by Sidmak in Sidmak's efforts to obtain such Relief Order. Chattem agrees that it will not object to or oppose any motion, application or request for a Relief Order. Sidmak agrees that it will not object to a settlement or plan provision granting Chattem relief similar to that granted Sidmak by the Bankruptcy Court from the claims of Opt Out Claimants. 7. There are no third party beneficiaries of or under this Agreement, except for the Chattem Releasees and Sidmak Releasees other than the signatories. 8. Other than claims arising out of this Agreement, Chattem waives and relinquishes, and releases the Sidmak Releasees from, any and all claims held by, on behalf of, or through Class Members, whether previously asserted or unasserted, that Chattem has or might have against any of the Sidmak Releasees, including but not limited to claims for indemnity and/or contribution (whether based on contract, statute, common law, law, equity or otherwise) regarding the PPA Litigation Cases brought by, on behalf of, or through Class Members. 9. Other than claims arising out of this Agreement, Sidmak waives and relinquishes, and releases Chattem and all of its past, present and future affiliates and insurers (collectively the "Chattem Releasees") from, any and all claims held by, on behalf of, or through Class Members, whether previously asserted or unasserted, that Sidmak has or might have against any of the Chattem Releasees, including but not limited to claims for indemnity and/or contribution (whether based on contract, statute, common law, law, equity or otherwise) regarding the PPA Litigation Cases brought by, on behalf of, or through Class Members. 10. In the event that the DCAS is (i) terminated by Chattem, (ii) not approved or held invalid by the trial court and such trial court action is not timely appealed, or is affirmed if appealed, or (iii) not approved or held invalid by an appellate court, this Agreement, including without limitation the releases in paragraphs 8 and 9 above, shall be void as of that date. In that event, Chattem will, within 10 business days of that date, return or cause the Final Chattem Settlement Trust to return to Sidmak the ten million dollar ($10,000,000) payment made by Sidmak pursuant to paragraphs 1 and 2 above, along with the actual interest accrued thereon, if any. 11. In the event that there is money left over in the Benefit Fund after all claims within the DCAS have been fully funded and released, Chattem will return or cause the Final Chattem Settlement Trust to return to Sidmak its pro rata share of the leftover funds, based on the percentage of Sidmak's contribution relative to the total amount of the Final Chattem Settlement Trust. 12. Except as set forth in paragraphs 1-2 and 4 above, all costs of achieving and administering the DCAS, including without limitation such costs as publication of notice, conducting the fairness hearing and any appeal, and administration of any fund created pursuant to the DCAS, shall be borne entirely by Chattem. 13. The parties agree to cooperate and to comply in good faith with each other's reasonable requests for consultation, participation, [settlement] and information. 14. Neither this Agreement, nor any provision hereof or statement, transaction or proceeding in connection with the negotiation, execution or implementation of this Agreement, is intended to be or shall constitute or be construed as or deemed to be evidence of an admission or concession of any liability, negligence, breach of contract or warranty, or wrongdoing by either Chattem or Sidmak, with respect to any matter, allegations, or claim whatsoever, including, but not limited to, the PPA Litigation Cases and any other past, present, or future cases related to any Dexatrim Product or PPA, and claims by Chattem or Sidmak against the other. No such statement, transaction, or proceeding, and nothing contained in this Agreement, shall be admissible in evidence for any purpose other than enforcement of this Agreement. Chattem and Sidmak deny all liability to any person, party or entity, and the existence of any facts upon which liability could be predicated (whether in contract, tort or otherwise) relating to PPA and/or any Dexatrim Product. 15. This Agreement may be signed in counterparts. Facsimile signatures shall be considered the equivalent of original signatures. 16. This Agreement shall be of no force and effect unless and until this Agreement is executed by all of the Parties hereto. 17. This Agreement will be governed by and construed in accordance with the laws of New York, without regard to conflict of laws principles thereunder. 18. Chattem and Sidmak assume joint responsibility for the form and composition of each and all provisions of this Agreement. Neither Chattem nor Sidmak shall assert that a provision should be construed against its drafter. 19. This Agreement contains the entire agreement between the Parties regarding the subject matter of this Agreement and supersedes any prior or contemporaneous agreement, understanding, or undertaking, written or oral, by and between the Parties regarding such subject matter. This Agreement may not be changed or modified in any manner unless in writing and signed by a duly authorized representative of Chattem and by a duly authorized representative of Sidmak. Counsel for Chattem, Inc. - ------------------------- Miller & Martin PLLC By: /s/ Crews Townsend Date: 7-14-04 Counsel for Sidmak Laboratories, Inc. Duane Morris LLP By: /s/ Mark Lipowicz Date: 7-7-04 EX-10.2 3 exhibit10-2_12965.txt DEXATRIM CASE SCORING SYSTEM EXHIBIT 10.2 ------------ FOR SETTLEMENT ONLY DEXATRIM CASE SCORING SYSTEM & MATRIX FOR THE CHATTEM DEXATRIM CLASS ACTION SETTLEMENT DEXATRIM CASE SCORING SYSTEM & MATRIX FOR THE CHATTEM DEXATRIM CLASS ACTION SETTLEMENT This Dexatrim Case Scoring System and Matrix (the "Chattem Matrix" or the "Matrix") is the system for scoring claims to be submitted pursuant to the Dexatrim Class Action Settlement ("DCAS"). In addition to Plaintiffs, the Matrix applies only to Chattem, Inc. and Sidmak Laboratories, Inc. (the "Dexatrim Defendants"). The Chattem Matrix cannot be used for any purposes in contravention of Federal Rule of Evidence 408. The Chattem Matrix does not reflect, and is not intended to reflect, the litigation positions of either the Dexatrim Defendants or Plaintiffs and is intended solely to facilitate the resolution of the litigation brought by Plaintiffs who allege injuries based on ingestion of Dexatrim appetite-suppressant products that contained phenylpropanolamine ("PPA").(1) I. THE DEXATRIM CASE SCORING SYSTEM & MATRIX A. OVERVIEW OF THE SCORING SYSTEM In order to distinguish between cases and grade them consistently, the attached Matrix is based on a Case Scoring System. This System has seven components: 1. Product Identification; 2. Temporal Relationship; 3. The Liability and Causation Score; 4. The Damages Score; 5. Adjustment for Ischemic Stroke 6. Adjustment for Statute of Limitations; and 7. Adjustment for Other Independent, Potentially Liable Defendants. Product Identification and Temporal Relationship are threshold inquiries. If a case passes the Product Identification and Temporal Relationship threshold inquiries, the resulting scores from each component (Product Identification; Temporal Relationship; Liability and Causation Score; Damages Score) are then added together to arrive at a Total Matrix Score. - -------- 1 Products marketed, distributed and/or manufactured by Thompson Medical Company, Inc. (succeeded by The Delaco Company) that contained phenylpropanolamine include, but are not limited to, the brand names Dexatrim(R), Control(R), Appedrine(R), Prolamine(R), Anorexin(R), Coffee, Tea, and a New Me(R), Grapefruit Plus(R)and Vita Slim(R). All of these products are collectively referred to throughout this document as "Dexatrim". 1 The range of possible Total Matrix Scores are then assigned to a Matrix Level of Severity. The resulting Settlement Amount is then adjusted in the event that other independent, potentially liable defendants are involved in the lawsuit, and adjusted by the remoteness of the filing of Plaintiff's Complaint to Plaintiff's injury. Unless otherwise noted, scoring within each category is not cumulative. Within a scoring category, the point value that results in the greatest addition or greatest deduction is to be applied (e.g., A plaintiff who uses 4 pills per day for 6 months receives a deduction of -3 for Overdose, but not an additional deduction of -1 for Disregard of Labeling). B. THE MATRIX The Matrix has a vertical axis consisting of: (i) injuries other than stroke or cardiac ("Other Injuries")(2), (ii) "Cardiac Injuries"(3) and (iii) seven levels of "Stroke Injuries"(4) - with Level 0 assigned the least and Level VI the highest level of resulting severity. The horizontal axis of the Matrix consists of six (6) age ranges, with the Plaintiff's age at the date of injury as the focal point as follows: 0 - 20 years 21 - 29 years 30 - 39 years 40 - 49 years 50 - 59 years 60 and older A range of values has been ascribed to each injury type and stroke level. The values have then been assigned in equal amounts across the horizontal axis ("Age Increments"). The Matrix is attached as Exhibit A. - ---------- 2 "Other Injuries" are limited to seizures, transient ischemic attacks and hypertensive crisis where medical documentation contemporaneous with the injury establishes the injury and indicates that the Plaintiff consumed Dexatrim within the 96 hours prior to the injury. 3 "Cardiac Injuries" means myocardial infarction/heart attack. 4 "Stroke Injuries" means hemorrhagic stroke and ischemic stroke, but does not mean transient ischemic attacks. 2 II. PRODUCT IDENTIFICATION This component of the Case Scoring System operates as a threshold issue. If a Plaintiff scores "-3" on this issue, that Plaintiff is not eligible for further consideration under the Matrix. If a Plaintiff scores "-2" or higher, the score is incorporated into the Case Scoring System for Stroke Injuries or Cardiac Injuries. Factor Score Positive product identification 0 (E.G., INITIAL INJURY HOSPITALIZATION RECORDS REFER TO BRAND NAME OF PPA PRODUCT SOLD BY THOMPSON MEDICAL OR CHATTEM; BLOOD TOXICOLOGY TEST(5) SPECIFICALLY FOR PPA IS POSITIVE, PACKAGING FROM INGESTED PRODUCT) Testimony of plaintiff OR third party who has personal knowledge -1 Urinalysis Negative for PPA -1 (URINALYSIS TEST PERFORMED FOR EITHER: (I) PHENYLPROPANOLAMINE SPECIFICALLY; OR (II) SYMPATHOMIMETIC AMINES GENERALLY (PROVIDED THAT THE NATURE OR PROTOCOL OF THE TEST FOR SYMPATHOMIMETIC AMINES WOULD REASONABLY BE EXPECTED TO IDENTIFY PHENYLPROPANOLAMINE IF IT WERE PRESENT IN THE URINE); AND THE URINE FOR THE TOXICOLOGY TEST MUST HAVE BEEN DRAWN WITHIN 18 HOURS OF THE ALLEGED INGESTION OF DEXATRIM.) Strong evidence that plaintiff did not use Dexatrim -2 (E.G., INCORRECT DESCRIPTION OF PRODUCT, MEDICAL RECORDS FROM INITIAL HOSPITALIZATION FOR INJURY REFLECT USE OF NON-PRESCRIPTION PRODUCT (EXCEPT OTC PAIN MEDICATION TAKEN IN RESPONSE TO SYMPTOMS RELATING TO STROKE) BUT DO NOT MENTION OTC APPETITE SUPPRESSANTS OR THE BRAND NAME OF PPA PRODUCT SOLD BY THOMPSON MEDICAL OR CHATTEM) No product identification -3 Conclusive evidence that plaintiff did not use Dexatrim -3 (E.G., ALLEGED INGESTION PREDATES MANUFACTURE OF PRODUCT, BLOOD TOXICOLOGY TEST SPECIFICALLY FOR PPA IS NEGATIVE) - ---------- 5 "Blood Toxicology Test" means a toxicology test performed for either: (i) phenylpropanolamine specifically; or (ii) sympathomimetic amines generally (provided that the nature or protocol of the test for sympathomimetic amines would reasonably be expected to identify phenylpropanolamine if it were present in the bloodstream); and the blood for the toxicology test must have been drawn: (a) within 34 hours of the alleged ingestion of sustained-released Dexatrim; or (b) within 24 hours of the alleged ingestion of immediate release Dexatrim. 3 III. TEMPORAL RELATIONSHIP OF LAST DOSE OF DEXATRIM TO ONSET OF SYMPTOMS This component of the Case Scoring System also operates as a threshold issue. If a Plaintiff scores "-3" on this issue, that Plaintiff is not eligible for further consideration under the Matrix and shall receive $200 in Settlement Compensation for Stroke Injuries or Cardiac Injuries, and zero compensation for Other Injuries. If a Plaintiff scores "-2" or higher, the score is incorporated into the Case Scoring System for Stroke Injuries or Cardiac Injuries. Temporal relationship is to be established by showing that the alleged ingestion of Dexatrim occurred within 96 hours of the onset of symptoms (it being understood that such onset of symptoms must be established through medical records that were generated at or about the time of the onset of symptoms).(6) Time between alleged ingestion of Dexatrim and the onset of symptoms Score --------------------------- ----- 0 minutes - 60 minutes(7) -1 >60 minutes - 24 hours 0 >24 hours - 72 hours -1 >73 hours - 96 hours -2 >96 hours -3 - ------------- 6 The terms "onset of symptoms", "injury" and "stroke" are used interchangeably throughout this document, unless the context suggests otherwise. 7 This deduction applies where a plaintiff ingested Dexatrim one hour or less before the injury AND DID NOT ingest Dexatrim at any other time in the 96 hours before the injury. In the event that a plaintiff ingested Dexatrim one hour or less before the injury AND consumed Dexatrim more than one hour, but less than 96 hours, before the injury, the time of the dose that was taken more than one hour, but less than 96 hours, before the injury should be used for scoring this factor. The following examples illustrate how this factor is to be scored: (i) if Plaintiff consumed Dexatrim 35 minutes before the injury and had not consumed any PPA product at any other time in the week preceding the injury, the score for this factor would be -1 (0 - 60 minutes); (ii) if Plaintiff consumed Dexatrim 35 minutes before the injury and also consumed Dexatrim 7 hours before the injury, without taking any PPA in between, the score for this factor would be 0 (61 minutes - 24 hours); (iii) if Plaintiff consumed Dexatrim 35 minutes before the injury and also consumed Dexatrim 36 hours before the injury, with no doses of PPA in between, then the score for this factor would be -1 (24 - 72 hours); (iv) if Plaintiff consumed Dexatrim 35 minutes before the injury and also consumed Dexatrim 98 hours before the injury, with no doses of PPA in between, then the score for this factor would be -1 (0 - 60 minutes). 4 IV. Liability/Causation Score This component of the Case Scoring System operates to assign a separate score for factors that influence the relative strength of the Plaintiff's case. This component is broken down into three sections: General Liability/Causation Factors that apply to all cases, and sections for the specific injuries Hemorrhagic Stroke and Ischemic Stroke. Other Injuries and Cardiac Injuries are to be scored under Sections II, III, VIII, IX, and are exempt from scoring under Sections IV, V, VI, VII, X, and XI. A scoring sheet for Hemorrhagic Stroke is attached at Exhibit E, a scoring sheet for Ischemic Stroke is attached at E Adjustment for Statute of Limitations Exhibit F, a scoring sheet for Other Injuries and Cardiac Injuries is attached at Exhibit G. A. GENERAL LIABILITY/CAUSATION FACTORS Score Exposure to PPA(8) Use of PPA within 24 hours of injury and no use of PPA during preceding 14 days +2 Use of PPA within 48 hours of injury and no use of PPA during preceding 14 days +1 Use of PPA within 0-48 hours and intermittent use of PPA during preceding 14 days, (WITHOUT 3 OR MORE CONSECUTIVE DAYS OF USE THE LATEST OF WHICH OCCURRED WITHIN 96 HOURS OF INJURY) 0 Use of PPA for 3 or more consecutive days prior to injury, the latest of which occurred within 96 hours of injury -1 Date of Injury (Warning) Before June 1, 1994 0 June 1, 1994 - May 10, 2000 -2 After May 10, 2000 0 - ----------- 8 The following examples illustrate how this factor is to be scored: (i) if Plaintiff took PPA on the day of the injury, but had not consumed PPA for 14 days or more prior to that dose, the score for this factor is +2; (ii) if Plaintiff took PPA on the day of the injury, and had consumed PPA every other day for a week prior to that dose, the score for this factor would be 0; (iii) if Plaintiff took PPA for 5 days in a row, stopped taking PPA for 2 days, then resumed taking PPA and the injury occurred on the day that Plaintiff resumed taking Dexatrim, the score for this factor would be -1. 5 Misuse of Product Overdose (3 OR MORE DAILY DOSES(9) OF PPA) -3 Disregard of labeling -1 (USE FOR MORE THAN 3 CONSECUTIVE MONTHS; USE OF MORE THAN ONE PILL WITHIN 24 HOURS; USE BY PERSON UNDER 12; USE BY PERSON BETWEEN 12-18 OR OVER 60 WITHOUT CONSULTATION OF DOCTOR; USE WHILE BEING TREATED FOR DEPRESSION OR EATING DISORDER; USE BY PERSON WITH HEART DISEASE, DIABETES, THYROID DISEASE, PREGNANCY, NURSING A BABY WITHOUT CONSULTATION OF DOCTOR; USE BY SOMEONE WITH NERVOUSNESS, DIZZINESS, SLEEPLESSNESS, PALPITATIONS, HEADACHE; CONCOMITANT USE OF ANY OTHER PPA PRODUCT; OR USE WITHIN 2 WEEKS OF USE OF MAOI.) B. HEMORRHAGIC STROKE FACTORS(10) (Use Score Sheet at Exhibit E) Head trauma within 7 days of onset Severe (Glasgow coma scale 8 or less) -10 Moderate (Glasgow coma scale 9-12) -4 Mild (Glasgow coma scale 13-15) 0 Medically documented but not severity not noted -1 Prior stroke(11) Prior hemorrhagic stroke -3 Prior ischemic stroke -1 Family history of stroke(12) -1 Chronic Hypertension Previously Diagnosed and Uncontrolled -4 Previously Diagnosed and Controlled -1 - ------------ 9 "Daily dose" means the dosage indicated on the labeling of the PPA product(s) ingested. For instance, the daily dose of Maximum Strength Dexatrim is one 75 mg time-released capsule per 24 hours period; cough/cold medicines commonly recommend four 25 mg immediate-release doses per 24 hour period. For purposes of this factor, using the above-described daily doses, four 25 mg doses of a PPA containing cough/cold medicines (1 daily dose) and two 75 mg Dexatrim pills (2 daily doses) within a 24 hour period (3 daily doses total) is an overdose. Conversely, using the above-described daily doses, two 25 mg doses of a PPA containing cough/cold medicine (1/2 daily dose) and two 75 mg Dexatrim pills (2 daily doses) within a 24 hour period (2 1/2 daily doses total) is not an overdose, but, rather, is disregard of labeling. 10 "Hemorrhagic Stroke" means primary hemorrhagic stroke. In other words, an ischemic stroke that results in a hemorrhagic conversion will not be scored under this Section IV.B., but rather will be scored under Section IV.C., the ischemic stroke factors portion of the Dexatrim Scoring System & Matrix. 11 Prior stroke does not include cardiac injuries, seizures, transient ischemic attacks, hypertensive crisis, or any injury other than hemorrhagic or ischemic stroke. 12 Family history of stroke only applies if Plaintiff does not receive deductions for Chronic Hypertension, Aneurysm, AVM, Brain Tumors, Leukemia or Pre-Existing Bleeding Disorders. 6 Previously Unknown -2 (MEDICALLY DIAGNOSED AT TIME OF STROKE WITH PREVIOUSLY UNDIAGNOSED CHRONIC HYPERTENSION) Aneurysm (medically documented, at stroke site(13)) Diameter 24 mm or greater -7 Diameter 10-23 mm -4 Diameter less than 10 mm -1 Diameter not measured -3 Family History -1 AVM Medically Documented at stroke site -6 Medically Documented not at stroke site -3 Family History -1 Brain tumors Medically Documented at stroke site -6 Medically Documented not at stroke site -3 Family History -1 Leukemia, Medically Documented -4 Pre-existing bleeding disorders, Medically Documented -3 (HEMOPHILIA, DISSEMINATED INTRAVASCULAR COAGULATION, SICKLE CELL ANEMIA, ANY DISEASE CAUSING COAGULOPATHY OR AUTOANTICOAGULATION) Use of anticoagulants, within 7 days of injury -1 (USE OF PRESCRIBED ANTICOAGULANTS (E.G. HEPARIN, COUMADIN, WARFARIN; EXCLUDING ASPIRIN)) Age 66 and older -3 55-65 -1 18-54 0 1-17 +3 Cocaine/PCP Use/Unprescribed Amphetamine Within 24 hours of injury -7 Within 24-96 hours of injury -4 - -------------- 13 "Stroke site" means the location in the brain in which the bleed or blockage occurred. 7 Prescribed Amphetamine Within 24 hours of injury -4 Within 24-96 hours of injury -2 Other illicit drug use Within 24 hours of injury -1 Smoking(14) No smoking 0 1-20 cigarettes per day -1 Over 20 cigarettes per day -3 Alcohol consumption(15) 0-5 drinks per day 0 Over 5 drinks per day -3 Exercise & Exertion(16) At or within 6 hours of onset +1 Other 0 C. ISCHEMIC STROKE FACTORS (Use Score Sheet at Exhibit F) Head trauma within 7 days of onset Severe (Glasgow coma scale 8 or less) -6 Moderate (Glasgow coma scale 9-12) -3 Mild (Glasgow coma scale 13-15) 0 Medically documented but not severity not noted -1 Prior Transient Ischemic Attack 0-2 years -4 - -------------- 14 The largest quantity of cigarettes regularly smoked within the period of five years prior to the stroke should be used for scoring purposes. For example, if Plaintiff smoked 1 ppd for three years immediately preceding the stroke, and smoked 1 1/2 ppd for two years before that (4 and 5 years before the stroke), then the score for this factor is -3. By way of further example, if Plaintiff quit smoking within the two years immediately preceding the stroke, and smoked 15 cigarettes per day for two years before that (3 and 4 years before the stroke), then the score for this factor is -1. 15 The largest quantity of alcohol regularly consumed within the period of five years prior to the stroke should be used for scoring purposes. For example, if Plaintiff consumed 3 drinks per day for the three years immediately preceding the stroke, and drank 6 drinks per day for two years before that (4 and 5 years before the stroke), then the score for this factor is -3. 16 Documentary evidence of any such exercise and/or exertion must have been in existence prior to the date that the MOU was signed. 8 3-5 years -3 over 5 years -2 Prior stroke(17) Prior ischemic stroke -3 Prior hemorrhagic stroke -1 Family history of stroke(18) -1 Chronic Hypertension Previously Diagnosed and Uncontrolled -4 Previously Diagnosed and Controlled -1 Previously Unknown -2 (MEDICALLY DIAGNOSED AT TIME OF STROKE WITH PREVIOUSLY UNDIAGNOSED CHRONIC HYPERTENSION) Brain tumors Medically Documented at, or near, stroke site -6 Medically Documented not at stroke site -3 Family History -1 - -------------- 17 Prior stroke does not include cardiac injuries, seizures, transient ischemic attacks, hypertensive crisis, or any injury other than hemorrhagic or ischemic stroke. 18 Family history of stroke only applies if Plaintiff does not receive deductions for Chronic Hypertension, Brain Tumors, Cancer, Coronary Artery Disease, Carotid Artery Disease/Stenosis, Prior Myocardial Infraction, Heart Disease or Defect, Cerebral Venous Thrombosis, Peripheral Artery Disease, Pervious Embolism, Atrial Fibrillation, Cholesterol Problems, or Diabetes. 9 Cancer(19) -4 (SYSTEMIC CANCER, I.E., CANCER WITH DOCUMENTED MESTASTASIZES AND/OR DISTANT LYMPH NODE INFILTRATION OR CANCER IN SITU TREATED WITH CHEMOTHERAPY) Coronary Artery Disease -4 Carotid Artery Disease/Stenosis Severe -4 (STENOSIS > 70%; DIASTOLIC VEL. - >79CM/SEC AND SYSTOLIC VEL.>125CM/SEC) Moderate --- -2 (STENOSIS 50-69%; SYSTOLIC VEL. >124CM/SEC) Mild 0 (STENOSIS <50%) Severity unknown, but disease medically -2 documented Prior myocardial infarction 0-30 days -5 31 days-1 year -3 more than 1 year to 2 years -1 more than 2 years 0 unspecified -1 Heart Disease or Defect -4 (E.G. DILATED CARDIOMYOPATHY, LEFT-SIDED HEART VALVE DISEASE (MODERATE OR GREATER LEFT-SIDED VALVULAR REGURGITATION(20)), Q WAVE INFARCTION, TUMORS, ATRIAL MYXOMA, PATENT FORAMEN OVALE, REPLACED VALVE, ENDOCARDITIS) Cerebral Venous Thrombosis -3 Peripheral Arterial Disease medical records note as severe, symptomatic, or contain reference to claudication -3 mild or moderate or condition not defined -1 - ------------ 19 This deduction does not apply to primary brain tumors, which are addressed in the Matrix as a separate category. 20 Right-sided valvular disease is excluded, unless the medical records show that it actually was the cause of stroke. 10 Previous Embolism Medically Documented organic embolism at any time -3 (EXCLUDING REFERENCE TO A SUSPECTED EMBOLISM IN MEDICAL RECORDS WITHOUT PROOF OF A TEST HAVING BEEN PERFORMED) Embolism caused by trauma within 30 days prior to stroke -2 Embolism caused by trauma more than 30 days prior to stroke 0 Atrial fibrillation (preexisting and medically documented history at initial hospitalization for stroke), concurrent with stroke -1 Major surgery/trauma within 14 days prior to stroke(21) -2 Cholesterol problems -1 (High blood cholesterol (240 mg/dL or higher), high LDL cholesterol (greater than 100 mg/dL), or low HDL cholesterol (less than 40 mg/dL)) Diabetes Type I Onset more than 6 years preceding stroke -4 Onset between 3 and 6 years preceding stroke -2 Onset within 3 years preceding stroke 0 Unknown -2 Diabetes Type II Onset more than 8 years preceding stroke -4 Onset between 4 and 8 years preceding stroke -2 Onset within 4 years preceding stroke 0 Unknown -2 Bleeding/Clotting disorders(22), Medically Documented - -------------- 21 "Major Surgery" means intra-abdominal, knee or hip surgery (specifically excluding arthroscopic surgery) or any surgical procedure that involves general anesthesia or respiratory assistance, or is generally recognized to carry a risk of a thrombotic or embolic event (vaginal childbirth is excluded unless a general anesthesia or respiratory assistance was required). "Major Trauma" means serious bodily injury or shock that is generally recognized to carry a risk of a thrombotic or embolic event. This factor is not to be considered if a Plaintiff receives a score for head trauma or prior embolism caused by trauma. 22 Bleeding/Clotting disorder does not include clotting problems from a surgical procedure or trauma that occurred 14 days prior to stroke. 11 Previously Diagnosed and Uncontrolled -3 Discontinuance of anticoagulants within 90 days(23) -2 Previously Diagnosed and Controlled -1 Unknown -2 Age 66 and older -3 55-65 -1 18-54 0 1-17 +3 Gender Women 0 Men -1 Heroin/Cocaine/PCP Use/Unprescribed Amphetamine Within 24 hours of injury -7 Within 24-96 hours of injury -4 Prescribed Amphetamine Within 24 hours of injury -4 Within 24-96 hours of injury -2 Other illicit drug use Within 24 hours of injury -1 Smoking(24) No smoking 0 1-20 cigarettes per day -1 Over 20 cigarettes per day -3 Concomitant use of oral contraceptives and cigarette smoking in any amount -1 (WITHIN THE 2 YEARS PRIOR TO STROKE) - ------------- 23 Discontinuance must have been upon medical advice. Discontinuance without medical advise is considered "uncontrolled." 24 The largest quantity of cigarettes regularly smoked for the period of five years prior to the stroke should be used for scoring purposes. For example, if Plaintiff smoked 1 ppd for three years immediately preceding the stroke, and smoked 1 1/2 ppd for two years before that (4 and 5 years before the stroke), then the score for this factor is -3. By way of further example, if Plaintiff quit smoking within the two years immediately preceding the stroke, and smoked 15 cigarettes per day for two years before that (3 and 4 years before the stroke), then the score for this factor is -1. 12 Alcohol consumption(25) 0-5 drinks per day 0 Over 5 drinks per day -3 V. Damages Score for Strokes A. OVERVIEW The Damages Score for Strokes is a combination of the first 2 Components for AHA's Stroke Classification System, the Barthel Index which measures Basic Activities of Daily Living ("BADL") and the Lawton/Brody Scale, which measures Instrumental Activities of Daily Living ("IADL"). If Plaintiff has suffered more than one stroke, the damages calculation is made only from the stroke which Plaintiff alleges was preceded by Dexatrim ingestion by 96 hours or less. B. COMPONENTS OF AHA STROKE CLASSIFICATION SYSTEM 1. NUMBER OF DOMAINS IMPAIRED. The domains evaluated are: Motor, Sensory, Vision, Language, Cognition and Affect. See Exhibit C for a description of each domain. The AHA classification is 0 to 3 as follows: - 0 = 0 domains impaired - 1 = 1 domain impaired - 2 = 2 domains impaired, and - 3 = more than 2 domains impaired 2. SEVERITY OF IMPAIRMENT. - See Exhibit C for a description of the three grades: A. No or minimal deficit due to stroke in any domain B. Mild to moderate deficit due to stroke in 1 or more domain C. Severe deficit due to stroke in 1 or more domains - -------------- 25 The largest quantity of alcohol regularly consumed within the period of five years prior to the stroke should be used for scoring purposes. For example, if Plaintiff consumed 3 drinks per day for the three years immediately preceding the stroke, and drank 6 drinks per day for two years before that (4 and 5 years before the stroke), then the score for this factor is -3. 13 C. BASIC ACTIVITIES OF DAILY LIVING. - See Exhibit D for a description of guidelines. Feeding unable 0 needs help cutting, spreading butter, etc., or requires modified diet 5 independent 10 Bathing dependent 0 independent (or in shower) 5 Grooming needs to help with personal care 0 independent face/hair/teeth/shaving (implements provided) 5 Dressing dependent 0 needs help but can do about half unaided 5 independent (including buttons, zips, laces, etc.) 10 Bowels incontinent (or needs to be given enemas) 0 occasional accident 5 continent 10 Bladder incontinent, or catheterized and unable to manage alone 0 occasional accident 5 continent 10 Toilet Use dependent 0 needs some help, but can do something alone 5 independent (on and off, dressing, wiping) 10 Transfers (bed to chair, and back) unable, no sitting balance 0 major help (one or two people, physical), can sit 5 minor help (verbal or physical) 10 independent 15 Mobility (on level surfaces) immobile or < 50 yards 0 14 wheelchair independent, including corners, > 50 yards 5 walks with help of one person (verbal or physical) > 50 yards 10 independent (but may use any aid) > 50 yards 15 Stairs unable 0 needs help (verbal, physical, carrying aid) 5 independent 10 D. INSTRUMENTAL ACTIVITIES OF DAILY LIVING. Ability to Use a Telephone Operates telephone on own initiative 1 Dials a few well known numbers 1 Answers telephone but does not dial 1 Does not use telephone at all 0 Shopping Takes care of all shopping needs independently 1 Shops independently for small purchases 0 Needs to be accompanied on any shopping trip 0 Completely unable to shop 0 Food Preparation Plans, prepares, and serves adequate meals independently 1 Prepares adequate meals if supplied with ingredients 0 Prepares meals but does not maintain adequate diet 0 Needs to have meals prepared and served 0 Housekeeping Maintains house alone or with occasional assistance 1 Performs light daily tasks such as dish washing, bed making 1 Performs light daily tasks but cannot maintain acceptable level of cleanliness 1 Needs help with all home maintenance tasks 1 Does not participate in any housekeeping tasks 0 Laundry Does personal laundry completely 1 Launders small items 1 All laundry must be done by others 0 15 Mode of Transportation Travels independently on public transportation or drives own car 1 Arranges own travel via taxi, but does not otherwise use public transportation 1 Travels on public transport when accompanied by another 1 Travel limited to taxi or vehicle with assistance of another 0 Does not travel at all 0 Responsibility for Own Medication Is responsible for taking medication in correct dosage at correct time 1 Takes responsibility if medication is prepared in advance in separate dosages (may need reminding) 0 Is not capable of dispensing own medication 0 Ability to Handle Finances Manages financial matters independently 1 Manages day-to-day purchases, but needs help with banking major transactions 1 Incapable of making financial decisions or handing money 0 E. SCORING For purposes of scoring, the first two components (Number of Domains Impaired and Severity of Impairment) are evaluated as of the date of discharge from the Plaintiff's initial hospitalization and at six months after the stroke. If six month records are not available, use the records as close to six months as possible that were created more than six months after the stroke, but not more than nine months after the stroke. If no records exist that were created between six months and nine months after the stroke, use records as close to six months after the stroke as possible that were created between three and six months after the stroke. If records between three and six months after the stroke are unavailable, use the next closest records, but the final score will be subject to review by the Administrator. For purposes of scoring, the second two components (Basic Activities of Daily Living and Instrumental Activities of Daily Living) are evaluated as of one year after the stroke. If one year records are not available, use the records as close to one year as possible that were created more than one year after the stroke, but not more than eighteen months after the stroke. If no records exist that were created between one year and eighteen months after the stroke, use records as close to one year after the stroke as possible that were created between six months and one year after the stroke. If records between six months and one year after the stroke are unavailable, use the next closest records, but the final score will be subject to review by the Administrator. 1. Domain/Severity Score 16 Calculate the Domain/Severity Score as follows: o Determine the Number of Domains Impaired and Severity of Impairment as of the day the Plaintiff was released from in-patient care (acute care and in-patient rehabilitation). Using the tables below at Section IV.E.4.(1). and IV.E.4.(2)., assign the appropriate score for each component. o Add the scores together to arrive at the "Discharge Score." o Next, calculate the Number of Domains Impaired and the Severity of Impairment as of 6 months after the stroke. Using the tables below at Section IV.E.4.(1). and IV.E.4.(2)., assign the appropriate score for each component. o Add the scores together to arrive at the "6 Month Score." o Average the Discharge Score and the 6 Month Score to arrive at the "Average Score." o If the Average Score is more than 3 points lower than the Discharge Score, subtract 3 points from the Discharge Score to arrive at the "Domain/Severity Score." o If the Average Score is 3 or less points lower then the Discharge Score, the Average Score is the Domain/Severity Score.(26) 2. BADL/IADL Scores Calculate the BADL Score by determining Plaintiff's level of functioning one year after the stroke and assigning the appropriate point values as indicated in Section IV.C. Add the points for the BADL component and using the table below at Section IV.E.4.(3)., compute the BADL Score. Calculate the IADL Score by determining Plaintiff's level of functioning one year after the stroke and assigning the appropriate point values as indicated in Section IV.D. Add the points for the IADL component and using the table below at Section IV.E.4.(4)., compute the IADL Score. 3. Total Damages Score Calculate the Total Damage Score by adding together the Domain/Severity Score, BADL Score, IADL Score, Inpatient Treatment Score, and Outpatient Rehabilitation Score. - -------------- 26 For instance, if the Discharge Score is 18 and the 6 Month Score is 10, the Average Score would be 14 and the Domain/Severity Score is 15. If, however, the Discharge Score is 18 and the 6 Month Score is 12, the Average Score would be 15 and the Domain/Severity Score would be 15. 17 Number of 4. Component Subpart Points (1) Number of Domains Impaired 0 +2 1 +4 2 +6 3 or more +8 (2) Severity of Impairment A +2 B +6 C +10 (3) BADL Factors 81-100 +2 61-80 +3 41-60 +4 21-40 +5 0-20 +6 (4) IADL Factors 7-8 +2 5-6 +3 3-4 +5 0-2 +6 5. Inpatient Treatment Less than one day 0 1-14 days +1 15-28 days +2 More than 28 days +3 6. Outpatient Rehabilitation for stroke related deficits None 0 1-60 days +1 More than 60 days +2 Using this system, the Damages Score for any one case can range from a low of 8 to a maximum of 35. 18 F. PLAINTIFFS WHO LEAVE MEDICAL TREATMENT AGAINST MEDICAL ADVICE In the event that medical records show that Plaintiff left his or her initial hospitalization against medical advice, Plaintiff's Total Adjusted Settlement Compensation shall be reduced by 10%. If Plaintiff believes that the Total Adjusted Settlement Compensation should be reduced by 5% or less, or should not be reduced, Plaintiff shall have the opportunity to challenge the 10% adjustment and shall have the burden of proof by clear and convincing evidence (that was generated prior to the date of the MOU) that the Total Adjusted Settlement Compensation should be reduced by 5% or less, or not reduced at all. If a Dexatrim Defendant believes that the Total Adjusted Settlement Compensation should be reduced by 15% or more, the Dexatrim Defendant shall have the opportunity to challenge the 10% adjustment and shall have the burden of proof by clear and convincing evidence (that was generated prior to the date of the MOU) that the Total Adjusted Settlement Compensation should be further reduced. In no event shall the Total Adjusted Settlement Compensation be reduced by more than 50%. Adjustments to the Total Adjusted Settlement Compensation shall be within the sole discretion of the Settlement Administrator. The parties shall meet and confer prior to any arbitration proceeding. G. DECEASED PLAINTIFFS Deceased Plaintiffs, whose death was causally related to their stroke, will be scored according to the Scoring Criteria, however, they will be assigned an Damages Score of 35. Ten years will be added to a Deceased Plaintiff's age at injury for purposes of placing that plaintiff on the Matrix. For plaintiffs who were 60 or older at the age of injury, their Settlement Compensation shall be reduced by one Age Increment for the category into which they are placed by virtue of their Total Matrix Score. 19 VI. THE TOTAL MATRIX SCORE The Product Identification, Temporal Relationship, Liability and Causation Factors Scores and the Damages Score are then added together to arrive at a combined Total Matrix Score. A Case Scoring Sheet is attached as Exhibit C. Once a Total Matrix Score is determined, the case is assigned to a particular Matrix Level as follows: Matrix Level Scoring Range Level 0 less than 0 points Level I 0 - 5 points Level II 6 - 10 points Level III 11 - 17 points Level IV 18 - 24 points Level V 25 - 37 points Level VI 38 or more points(27) VII. ADJUSTMENT FOR ISCHEMIC STROKE CASES After calculating the appropriate matrix level for ischemic stroke cases, the Gross Settlement Compensation is to be reduced by 15%. VIII. ADJUSTMENT FOR STATUTE OF LIMITATIONS/REPOSE After calculation of the Settlement Compensation, a reduction of the Settlement Compensation shall be made based on the application of the following principles that relate to statutes of limitations and repose that apply to a particular claim. Attached as Exhibit D is a list of the applicable time frames from the statutes of limitations and statutes of repose for each state. Upon review, the time frames set forth in Exhibit D may only be altered by the Settlement Administrator. A. CASES FILED PRIOR TO THE ANNOUNCEMENT OF THE SETTLEMENT - ------------- 27 To be eligible for Level VI, Plaintiffs must have positive product identification (i.e., a score of 0 on Product Identification). Deceased Plaintiffs are not eligible for Level VI. 20 0% TIMELY CASES: The lawsuit was filed before the applicable statute of limitations had run assuming no discovery rule in the forum state and state of Plaintiff's residence at the time of injury. 66% NO DISCOVERY RULE OR DISCOVERY OF INJURY CASES: Both the forum state and the state of residence at the time of injury do not recognize a discovery rule (or recognizes only a rule of discovery of injury) for statute of limitations purposes. The lawsuit was filed after the statute of limitations had run. 13% NO CONFLICT/FALSE CONFLICT CASES: The forum state and the state of Plaintiff's residence at the time of the injury recognize the same discovery rule for statute of limitations purposes. The lawsuit was filed within the applicable statute of limitations assuming the statute of limitations commenced on November 6, 2000, pursuant to a discovery rule, but after the statute of limitations had run without respect to any discovery rule. 15% CONFLICT CASES: The forum state and the state of Plaintiff's residence at the time of the injury recognize different laws regarding discovery or limitations rules. The lawsuit was filed within the applicable statute of limitations assuming the statute of limitations commenced on November 6, 2000, pursuant to a discovery rule, but after the statute of limitations: (i) had run without respect to any discovery rule; and (ii) had run in either of the forum or residence states. 66% UNTIMELY CASES: The lawsuit was filed after the applicable statute of limitations had run assuming a discovery rule in both the forum state and state of Plaintiff's residence at the time of injury starting on November 6, 2000. $200 In Stroke Injury and Cardiac Injury cases where the forum and residence both have a statute of repose that would bar the lawsuit, or the forum state's statute of repose would bar the lawsuit. $100 In Other Injury cases where the forum and residence both have a statute of repose that would bar the lawsuit, or the forum state's statute of repose would bar the lawsuit. 66% In cases in which a statute of repose in the residence state would bar the lawsuit and the forum state is not FL, NY, or NJ. 25% In cases in which a statute of repose in the residence state would bar the lawsuit and the forum state is FL, NY, or NJ. B. LAWSUITS FILED OR CLAIMS MADE AFTER NOVEMBER 6, 2003 If a claim is made or a lawsuit is filed after November 6, 2003, and after the statute of limitations had run in either the forum state or the state of plaintiff's residence at the time of the injury, the amount of the award shall be not more than $200 for Stroke Injuries and Cardiac Injuries, and not more than $100 for Other Injuries, provided Plaintiff's ingestion of Dexatrim or 21 OTC appetite suppressant is documented in the medical records of the initial hospitalization. If Plaintiff's ingestion of Dexatrim or OTC appetite suppressant is not documented in the medical records of the initial hospitalization, Plaintiff is not eligible for any compensation under this Dexatrim Scoring System and Matrix. For purposes of this sub-section VII.B., all statutes of limitations shall be deemed to have commenced on the later of November 6, 2000, or the date of injury. Attorneys who entered into contingency fee agreements after November 6, 2003, are entitled only to reasonable fees for filling out claim forms and consulting with their clients, up to a cap of 10% of Plaintiff's Total Settlement Compensation, or $10,000, whichever is less. 22 IX. ADJUSTMENT FOR OTHER INDEPENDENT, POTENTIALLY LIABLE DEFENDANTS Several Plaintiffs claim that they took other products at or near the time that they ingested Dexatrim(28). In those cases in which another PPA or ephedrine product is implicated an adjustment to the Plaintiff's Settlement Compensation under this Matrix shall be made as follows:
- ------------------------------------------- ---------------- ----------------- ----------------- 1 other product 2 other products 3 other products - ------------------------------------------- ---------------- ----------------- ----------------- Same day (0-24 hours) co-ingestion -40% -45% -50% - ------------------------------------------- ---------------- ----------------- ----------------- Dexatrim ingestion stopped between -55% -65% -75% 24-96 hours prior to injury, other product(s) consumed between 0-24 hours prior to injury - ------------------------------------------- ---------------- ----------------- ----------------- Other product(s) stopped between 24-96 -15% -25% -35% hours prior to injury, Dexatrim consumed between 0-24 hours prior to injury - ------------------------------------------- ---------------- ----------------- -----------------
- --------------- 28 Legal or factual contentions made by Plaintiffs in Complaints, Fact Sheets, Affirmations, deposition testimony, and other documents will be strictly construed against the Plaintiffs so that this provision applies. In cases where Plaintiff sued a defendant(s) in addition to the Dexatrim Defendants and claimed that the other defendant(s) is jointly responsible for Plaintiffs' injuries due to that defendant's responsibility for a product other than Dexatrim, co-ingestion of that other product(s) will be deemed to have occurred on the same day as Dexatrim if it is unclear when such PPA or other product was ingested in relation to the alleged ingestion of Dexatrim, based on a review of information in that Plaintiff's Complaints, Fact Sheets, Affirmations, deposition testimony, or medical record (and which medical record is generated in the ordinary course of medical treatment contemporaneous with the Plaintiff's injury). If Plaintiff has sued no other defendant, and Plaintiff's Complaints, Fact Sheets, Affirmations, deposition testimony, or medical record (and which medical record is generated in the ordinary course of medical treatment contemporaneous with the Plaintiff's injury) indicate that a product containing PPA (other than Dexatrim) was ingested by Plaintiff within 96 hours before that Plaintiff's injury, but it is unclear when such other PPA product was ingested in relation to the alleged ingestion of Dexatrim, then co-ingestion of that other product will be deemed to have occurred on the same day as Dexatrim. 23 X. APPLICATION OF ADJUSTMENTS Adjustments for Ischemic Stroke, Statutes of Limitations/Repose, and other Independent, Potentially Liable Defendants (Co-Ingestion Adjustment") are to be applied sequentially as follows: Ischemic Adjustment -- Reduce Gross Settlement Compensation by 15% Statute of Limitations/Repose Adjustment -- After Ischemic Stroke Adjustment is applied, reduce net subtotal by the applicable Statute of Limitations/Repose adjustment, but if Ischemic Stroke Adjustment is inapplicable, reduce Gross Settlement Compensation by the applicable Statute of Limitations/Repose Adjustment Co-Ingestion Adjustment -- After Ischemic Stroke Adjustment is applied, and/or after Statute of Limitations/Repose Adjustment is applied, reduce net subtotal by the applicable Co-Ingestion Adjustment; but if neither Ischemic Stroke Adjustment nor Statute of Limitations/Repose Adjustment is applicable, reduce Gross Settlement Compensation by the applicable Co-Ingestion Adjustment. XI. EXTRAORDINARY INJURY FUND A. ELIGIBILITY REQUIREMENTS FOR THE EXTRAORDINARY INJURY FUND An Extraordinary Injury Fund (the "EIF") in the amount of $5 million will be established from which any Plaintiff who meets the eligibility requirements set forth in this Section X (an "Eligible Plaintiff") shall receive an amount equal to his/her Documented Non-Reimbursed/Non-Reimbursable Economic Damages (as defined below), subject to the following adjustments (the "EIF Award"): 1. First, such Eligible Plaintiff's Documented Non-Reimbursed/Non-Reimbursable Economic Damages shall be subject to reduction by the same percentage adjustments set forth in Section IV F. (Plaintiffs Who Leave Medical Treatment Against Medical Advice), Section VI (Adjustment for Other Independent, Potentially Liable Defendants), Section VII (Adjustment for Statute of Limitations/Repose, and Section VIII (Adjustment for Ischemic Stroke Cases) to which such Eligible Plaintiff's Gross Settlement Compensation is subject under this Dexatrim Case Scoring System and Matrix; 2. Second, if the total of all Eligible Plaintiffs' Documented Non-Reimbursed/Non-Reimbursable Economic Damages, after adjustment pursuant to Paragraph 1 above, exceeds $5 million, each Eligible Plaintiff's Documented Non-Reimbursed/Non-Reimbursable Economic Damages (after any applicable adjustment pursuant to 24 Paragraph 1) of the $5 million EIF fund shall be the product of $5 million multiplied by a fraction: (1) the numerator of which shall be the Eligible Plaintiff's Documented Non-Reimbursed/ Non-Reimbursable Economic Damages (after any applicable adjustment pursuant to Paragraph 1); and (2) the denominator of which shall be the total of all Eligible Plaintiffs' Documented Non-Reimbursed/Non-Reimbursable Economic Damages, after any applicable adjustment pursuant to Paragraph 1. In order for a Plaintiff to receive an EIF Award, he or she (a) must fall within Matrix Levels IV, V or VI; and (b) must have documented, Non-Reimbursed/Non-Reimbursable Economic Damages (as defined below) totaling at least $250,000. "Non-Reimbursed/Non-Reimbursable Economic Damages" is comprised of any one or more of the following Documented(29) categories: o Non-reimbursed out-of-pocket past medical expenses; o Non-reimbursable future medical expenses; o Non-reimbursable future living expenses; o Non-reimbursed lost wages; o Non-reimbursable future lost wages; o Non-reimbursable loss of earning capacity (both past and future); and o Other documented non-reimbursed/non-reimbursable economic damages. Any and all determination(s) regarding a Plaintiff's eligibility and EIF Award amounts will be made by the EIF Administrator, as identified by the parties in the applicable Settlement Agreement(s) or other document(s). XII. MISCELLANEOUS PROVISIONS A. ATTORNEY FEES & COSTS Plaintiffs' attorney fees and costs will be paid only from the Total Adjusted Settlement Compensation (including any EIF Award) awarded to individual Plaintiffs. That the Dexatrim Defendants will set aside from the Total Adjusted Settlement Compensation and pay to the MDL - -------------- 29 "Documented" means medical records, billing records, tax returns, social security earnings statements, expert reports (e.g. economists, Life Care planners, neurologists, physiatrists, etc.) or any other documentation or evidence requested by, or otherwise found acceptable by, the EIF Administrator. 25 assessment fund the amount required by CMOs 8 and 16. The Dexatrim Defendants will not contribute to any other separate fund for attorney's fees or costs. B. LIENS Plaintiffs will be responsible for all lien payments. C. DERIVATIVE CLAIMS The treatment of an injured plaintiff ("Primary Claimant") under the settlement shall be cumulative of the derivative claims of any spouse, child or other individuals related to, or who have some other personal relationship with the Primary Claimant. The derivative claims of such related parties shall be deemed released by the treatment afforded the claims of the Primary Claimant under the settlement. XIII. ADMINISTRATION A. ADMINISTRATOR The Parties shall employ a mutually-acceptable Administrator. The Administrator shall, where necessary, create Claims Administration Procedures that provide specific details about how claims are administered. The Claims Administration Procedures promulgated by the Administrator shall comply with the terms set forth in the Matrix and other relevant documents. B. AMENDED OR CHANGED FACTUAL ALLEGATIONS Any amendment or change to factual allegations (other than those required by CMO 15 and 15A) after the date of the MOU shall be subject to a rebuttable presumption that the change should be disregarded for purposes of calculating Plaintiff's Total Adjusted Settlement Compensation under this Dexatrim Scoring System & Matrix. The presumption can be overcome by clear and convincing evidence at the sole discretion of the Administrator. C. FRAUDULENT CLAIMS OR ALLEGATIONS In the event that the Administrator determines that any Plaintiff has submitted fraudulent claims or allegations, the Administrator may reduce the amount of that Plaintiff's Total Adjusted Settlement Compensation by any amount deemed appropriate by the Administrator. In addition to reducing or eliminating a Plaintiff's compensation under the settlement, the Administrator, in his or her discretion, may refer and recommend to the MDL Court or any other appropriate court, monetary or injunctive sanctions against the Plaintiff or Plaintiff's counsel including, but not limited to, forfeiture of attorney fees and costs, or the institution of grievance proceedings. 26 EXHIBIT A INJURY MATRIX
- ---------------- ---------- ---------- ---------- ---------- ---------- ---------- 60 SEVERITY 0 - 20 21 - 29 30 - 39 40 - 49 50 - 59 GREATER - ---------------- ---------- ---------- ---------- ---------- ---------- ---------- OTHER $1,000 $820 $640 $460 $280 $100 INJURY - ---------------- ---------- ---------- ---------- ---------- ---------- ---------- CARDIAC INJURY $2,000 $1,640 $1,280 $920 $560 $200 - ---------------- ---------- ---------- ---------- ---------- ---------- ---------- STROKE LEVEL 0 $2,000 $1,640 $1,280 $920 $560 $200 - ---------------- ---------- ---------- ---------- ---------- ---------- ---------- STROKE LEVEL I $100,000 $95,000 $90,000 $85,000 $80,000 $75,000 - ---------------- ---------- ---------- ---------- ---------- ---------- ---------- STROKE LEVEL II $450,000 $420,000 $390,000 $360,000 $330,000 $300,000 - ---------------- ---------- ---------- ---------- ---------- ---------- ---------- STROKE LEVEL III $850,000 $775,000 $700,000 $625,000 $550,000 $475,000 - ---------------- ---------- ---------- ---------- ---------- ---------- ---------- STROKE LEVEL IV $2,000,000 $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 - ---------------- ---------- ---------- ---------- ---------- ---------- ---------- STROKE LEVEL V $4,000,000 $3,620,000 $3,240,000 $2,860,000 $2,480,000 $2,100,000 - ---------------- ---------- ---------- ---------- ---------- ---------- ---------- STROKE LEVEL VI $5,000,000 $4,800,000 $4,600,000 $4,400,000 $4,200,000 $4,000,000 - ---------------- ---------- ---------- ---------- ---------- ---------- ----------
27 EXHIBIT B COMPONENTS OF THE DOMAINS/SEVERITY SCORE The six domains that are to be considered for scoring purposes are listed and described below. Under each description of the domain is the description of the severity of impairment that is to be considered for each domain. To establish the severity of impairment, documentary evidence (including medical records) from the initial hospitalization and at or about six months after injury, or a sworn statement from Plaintiff's treating physician must show at least one of the components listed under the appropriate deficit level. Plaintiff's most severe injury under each domain should be used for scoring purposes. For example, a Plaintiff who has minor to partial paralysis of face (MILD TO MODERATE DEFICIT UNDER MOTOR DOMAIN) and negligible or no movement of the left arm (SEVERE DEFICIT UNDER MOTOR DOMAIN) should be scored as having a severe deficit. o MOTOR: Motor impairments are the most prevalent of all deficits seen after stroke, usually with involvement of the face, arm, and leg, alone or in various combinations. Motor functions assessed in the AHA.SOC include cranial nerve function (including speech and swallowing), muscle power and tone, reflexes, balance, gait, coordination, and apraxia. Severity of impairment NO OR MINIMAL DEFICIT: normal movement of face and limbs; no drift in arms (arm holds 90 degrees for full 10 seconds); no drift in legs (leg hold at 30 degrees for 5 seconds); normal extension of fingers; no ataxia of limbs. MILD TO MODERATE DEFICIT: minor to partial paralysis of face (asymmetry with smiling and spontaneous speech, or definite weakness, but some movement remains); or arm drift (e.g. arm holds 90 degrees, but drifts down before full 10 seconds); or arm has some effort against gravity, but cannot get to or maintain 90 degrees; or leg drift (e.g. leg holds at 30 degrees but falls by end of 5 seconds); or leg has some effort against gravity but falls to bed before 5 seconds; or some extension of fingers, but full extension in 5 seconds not attainable; or ataxia present in one limb. SEVERE DEFICIT: substantial paralysis of one or both sides of the face (absence of facial movement in the upper and lower face); limbs have negligible or no effort against gravity or negligible or no movement; negligible or no voluntary extension of fingers; or ataxia present in more than one limb. o SENSORY: Sensory deficits range from loss of primary sensations to more complex loss of perception. Patients may describe numbness, tingling, or altered sensitivity. The more complex sensory losses include astereognosis, agrapha, and extinction to double simultaneous stimuli. Severity of impairment NO OR MINIMAL DEFICIT: normal, no sensory loss MILD TO MODERATE DEFICIT: Plaintiff experiences some numbness, tingling or altered sensitivity. With pinprick test, Plaintiff feels pinprick (or other pain/tactile evaluation) is less sharp or is dull on the affected side; or there is a loss of superficial pain but Plaintiff is aware that he/she is being touched. SEVERE DEFICIT: Plaintiff is not aware of being touched in the face, arm or leg. o VISION: Stroke can cause monocular visual loss, partial or complete hemianopia, or cortical blindness. Severity of impairment NO OR MINIMAL DEFICIT: no visual loss MILD TO MODERATE DEFICIT: partial hemianopia (vision loss in up to half the field) SEVERE DEFICIT: substantial, complete or bilateral hemianopia (vision loss in more than half the field) O LANGUAGE: Dysphasia may be exhibited by disturbances in word-finding, comprehension, naming, repetition, fluency, reading, or writing. Severity of impairment NO OR MINIMAL DEFICIT: no impairment MILD TO MODERATE DEFICIT: some obvious loss of fluency or facility of comprehension without significant limitation on ideas expressed or form of expression; or word-finding difficulty, or reduction of speech and/or comprehension makes conversation difficult. Slurs words, and, at worst, can be understood with some difficulty. SEVERE DEFICIT: all verbal communication is through fragmentary expression, great need for inference, questioning and guessing by the listener. Range of information that can be exchanged is limited; listener carries the burden of communication. Slurring of words makes speech unintelligible. o COGNITION: Stroke can cause impairments in memory, attention, orientation, calculation abilities, intelligence and construction. It is important to assess ability to learn and retain new information in the cognitive evaluation. Severity of impairment NO OR MINIMAL DEFICIT: Impairment levels are compatible with all useful functioning. MILD TO MODERATE DEFICIT: Impairment levels are compatible with some, but not all, useful functioning--Plaintiff experienced at least one of the following: 1) impaired ability to understand, remember, or carry out instructions; 2) impaired ability to maintain attention for extended periods of time; 3) impaired ability to sustain an ordinary routine without special supervision; or 4) impaired ability to perform tasks at a consistent pace without an unreasonable number of rest periods); 5) moderate decrease from pre-stroke intelligence; or 6) impaired ability to safely operate a motor vehicle (assuming the loss is not the result of an impairment in a different domain, such as motor skills or vision). SEVERE DEFICIT: Impairment levels preclude or significantly impede useful functioning--Plaintiff experienced at least one of the following: 1) inability to understand, remember, or carry out instructions; 2) inability to maintain attention for extended periods of time; 3) inability to sustain an ordinary routine without special supervision; 4) inability to perform tasks at a consistent pace without an unreasonable number of rest periods; 5) significant decrease from pre-stroke intelligence; or 6) complete loss of the ability to safely operate a motor vehicle (assuming the loss is not the result of an impairment in a different domain, such as motor skills or vision). o AFFECT: Depression is the most common affective disturbance seen after stroke. It tends to be observed more often in the months after stroke than during the acute event. Symptoms may include loss of energy, lack of interests, loss of motivation, listlessness, loss of appetite, insomnia, sexual dysfunction, irritability, lack of inhibition, anxiety, apathy, withdrawal from social activities, or emotional disturbances. Assessment of affect and/or depression is based on the Plaintiff's ability to engage in useful functioning, which includes activities of daily living, social functioning, concentration, and adaptation. Limitation in one's activities of daily living must be related to the affect disorder flowing from the stroke, as opposed to impairment from some other domain. "Social functioning" refers to an individual's capacity to interact appropriately and communicate effectively with other individuals. Concentration is necessary for task completion, which refers to the ability to sustain focused attention long enough the permit a timely completion of tasks commonly found in activities of daily living or work setting. Adaptation refers to one's ability to adapt to stressful circumstances. Severity of Impairment NO OR MINIMAL DEFICIT: Impairment levels are compatible with all useful functioning. MILD TO MODERATE DEFICIT: Impairment levels are compatible with some, but not all, useful functioning--Plaintiff experienced at least one of the following: 1) impaired ability to function in activities of daily living and requires dependency on another person for care; 2) impaired ability to engage in meaningful social contact with others; 3) impaired ability to attend to any conversation or any productive task; or 4) impaired ability to tolerate any change in routines or in environment; or 5) limited ability to resume pre-stroke sexual activity. SEVERE DEFICIT: Impairment levels preclude or significantly impede useful functioning--Plaintiff experienced at least one of the following: 1) inability to function in activities of daily living and requires dependency on another person for care; 2) negligible or no ability to engage in meaningful social contact with others; 3) negligible or no ability to attend to any conversation or any productive task; 4) negligible or no tolerance for any change at all in routines or in environment; or 5) inability to resume pre-stroke sexual activity. EXHIBIT C THE BARTHEL ADL INDEX: GUIDELINES The index should be used as a record of what a patient does, not as a record of what a patient could do. The main aim is to establish degree of independence from any help, physical or verbal, however minor and for whatever reason. The need for supervision renders the patient not independent. A patient's performance should be established using the best available evidence. Asking the patient, friends/relatives and nurses are the usual sources, but direct observation and common sense are also important. However direct testing is not needed. Usually the patient's performance over the preceding 24-48 hours is important, but occasionally longer periods will be relevant. Middle categories imply that the patient supplies over 50 per cent of the effort. Use of aids to be independent is allowed. EXHIBIT D APPLICABLE STATUTES OF LIMITATION AND REPOSE - ------------------------------------- ------------- ------------ STATE SOL SOR - ------------------------------------- ------------- ------------ Alabama 2N N/A - ------------------------------------- ------------- ------------ Alaska 2D N/A - ------------------------------------- ------------- ------------ Arizona 2D N/A - ------------------------------------- ------------- ------------ Arkansas 3D N/A - ------------------------------------- ------------- ------------ California 1D N/A - ------------------------------------- ------------- ------------ Colorado 2D N/A - ------------------------------------- ------------- ------------ Connecticut 3D N/A - ------------------------------------- ------------- ------------ Delaware 2N N/A - ------------------------------------- ------------- ------------ DC 3D N/A - ------------------------------------- ------------- ------------ Florida 4D N/A - ------------------------------------- ------------- ------------ Georgia 2D 10R - ------------------------------------- ------------- ------------ Hawaii 2D N/A - ------------------------------------- ------------- ------------ Idaho 2N N/A - ------------------------------------- ------------- ------------ Illinois 2N 10R - ------------------------------------- ------------- ------------ Indiana 2D 10R - ------------------------------------- ------------- ------------ Iowa 2D 15R - ------------------------------------- ------------- ------------ Kansas 2N N/A - ------------------------------------- ------------- ------------ Kentucky 1D 8R - ------------------------------------- ------------- ------------ Louisiana 1D N/A - ------------------------------------- ------------- ------------ Maine 6N N/A - ------------------------------------- ------------- ------------ Maryland 3D N/A - ------------------------------------- ------------- ------------ Massachusetts 3D N/A - ------------------------------------- ------------- ------------ Michigan 3D N/A - ------------------------------------- ------------- ------------ Minnesota 6D N/A - ------------------------------------- ------------- ------------ Mississippi 3D N/A - ------------------------------------- ------------- ------------ - ---------------------------------------- ------------ ------------- STATE SOL SOR - ---------------------------------------- ------------ ------------- Missouri 5D N/A - ---------------------------------------- ------------ ------------- Montana 3D N/A - ---------------------------------------- ------------ ------------- Nebraska 4N N/A - ---------------------------------------- ------------ ------------- Nevada 2D N/A - ---------------------------------------- ------------ ------------- New Hampshire 3D N/A - ---------------------------------------- ------------ ------------- New Jersey 2D N/A - ---------------------------------------- ------------ ------------- New Mexico 3D N/A - ---------------------------------------- ------------ ------------- New York 3N N/A - ---------------------------------------- ------------ ------------- North Carolina 3N 6R - ---------------------------------------- ------------ ------------- North Dakota 6N N/A - ---------------------------------------- ------------ ------------- Ohio 2D N/A - ---------------------------------------- ------------ ------------- Oklahoma 2D N/A - ---------------------------------------- ------------ ------------- Oregon 2N 8R - ---------------------------------------- ------------ ------------- Pennsylvania 2D N/A - ---------------------------------------- ------------ ------------- Rhode Island 3D N/A - ---------------------------------------- ------------ ------------- South Carolina 3D N/A - ---------------------------------------- ------------ ------------- South Dakota 3N N/A - ---------------------------------------- ------------ ------------- Tennessee 1D 6R - ---------------------------------------- ------------ ------------- Texas 2D N/A - ---------------------------------------- ------------ ------------- Utah 4D N/A - ---------------------------------------- ------------ ------------- Vermont 3D N/A - ---------------------------------------- ------------ ------------- Virginia 2N N/A - ---------------------------------------- ------------ ------------- Washington 3D N/A - ---------------------------------------- ------------ ------------- West Virginia 2D N/A - ---------------------------------------- ------------ ------------- Wisconsin 3D N/A - ---------------------------------------- ------------ ------------- Wyoming 4D N/A - ---------------------------------------- ------------ ------------- * "D" indicates a discovery rule; "N" indicates no discovery rule or discovery of injury; "R" indicates statute of repose. Thus, 3D means the state has a 3 year statute of limitations and a discovery rule that requires discovery of cause or wrongdoing. EXHIBIT E MATRIX SCORING WORKSHEET FOR HEMORRHAGIC STROKE CASES - ---------------------------------------------- -------------------------------- PLAINTIFF NAME: DATE OF INJURY: - -------------- ------------------------------ ------------------ ------------ Rating Score - ---------------------------------------------- ------------------ ------------ Part II - Product Identification Score - ---------------------------------------------- ------------------ ------------ - ---------------------------------------------- ------------------ ------------ Part III - Temporal Relationship Score - ---------------------------------------------- ------------------ ------------ - ---------------------------------------------- ------------------ ------------ Part IV - Liability/Causation Score - ---------------------------------------------- ------------------ ------------ Exposure to PPA - -------------- ------------------------------ ------------------ ------------ Date of Injury - -------------- ------------------------------ ------------------ ------------ Misuse of Product - -------------- ------------------------------ ------------------ ------------ Head trauma - -------------- ------------------------------ ------------------ ------------ Prior stroke - -------------- ------------------------------ ------------------ ------------ Hypertension - -------------- ------------------------------ ------------------ ------------ Aneurysm - -------------- ------------------------------ ------------------ ------------ AVM - -------------- ------------------------------ ------------------ ------------ Brain tumors - -------------- ------------------------------ ------------------ ------------ Leukemia - -------------- ------------------------------ ------------------ ------------ Bleeding disorders - -------------- ------------------------------ ------------------ ------------ Anticoagulants - -------------- ------------------------------ ------------------ ------------ Age - -------------- ------------------------------ ------------------ ------------ Cocaine/Amphetamine/PCP Use - -------------- ------------------------------ ------------------ ------------ Prescribed Amphetamine - -------------- ------------------------------ ------------------ ------------ Other illicit drug use - -------------- ------------------------------ ------------------ ------------ Smoking - -------------- ------------------------------ ------------------ ------------ Alcohol consumption - -------------- ------------------------------ ------------------ ------------ Exercise & Exertion - -------------- ------------------------------ ------------------ ------------ - -------------- ---------------------------------------------------------- ---- PRODUCT ID, TEMPORAL RELATIONSHIP, LIABILITY/CAUSATION SUBTOTAL: - -------------- ---------------------------------------------------------------- CONTINUED - ---------------------------------------------- -------------------------------- PLAINTIFF NAME: DATE OF INJURY: - ---------------------------------------------- ------------------ ------------ Rating Score - ---------------------------------------------- ------------------ ------------ Part V - Damages Score - ---------------------------------------------- -------------------------------- Discharge 6 Month - -------------- ------------------------------ ------------------ ------------ NUMBER OF DOMAINS AFFECTED - -------------- ------------------------------ ------------------ ------------ - -------------- ------------------------------ ------------------ ------------ LEVEL OF SEVERITY - -------------- ------------------------------ ------------------ ------------ Subtotal: - -------------- ------------------------------ -------------------------------- Average Score: - -------------- ------------------------------ -------------------------------- DOMAIN/SEVERITY SCORE: - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- BADL FACTORS - -------------- ------------------------------ -------------------------------- Feeding - -------------- ------------------------------ -------------------------------- Bathing - -------------- ------------------------------ -------------------------------- Grooming - -------------- ------------------------------ -------------------------------- Dressing - -------------- ------------------------------ -------------------------------- Bowels - -------------- ------------------------------ -------------------------------- Bladder - -------------- ------------------------------ -------------------------------- Toilet Use - -------------- ------------------------------ -------------------------------- Transfers - -------------- ------------------------------ -------------------------------- Mobility - -------------- ------------------------------ -------------------------------- Stairs - -------------- ------------------------------ -------------------------------- BADL TOTAL: - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- IADL FACTORS - -------------- ------------------------------ -------------------------------- Telephone - -------------- ------------------------------ -------------------------------- Shopping - -------------- ------------------------------ -------------------------------- Food Preparation - -------------- ------------------------------ -------------------------------- Housekeeping - -------------- ------------------------------ -------------------------------- Laundry - -------------- ------------------------------ -------------------------------- Mode of Transportation - -------------- ------------------------------ -------------------------------- Responsibility for Medication - -------------- ------------------------------ -------------------------------- Ability to Handle Finances - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- IADL TOTAL: - -------------- ---------------------------------------------------------------- - -------------- ---------------------------------------------------------------- INPATIENT TREATMENT - -------------- ---------------------------------------------------------------- - -------------- ---------------------------------------------------------------- OUTPATIENT REHABILITATION - -------------- ---------------------------------------------------------------- - -------------- ---------------------------------------------------------------- DAMAGES SCORE SUBTOTAL: - -------------- ---------------------------------------------------------------- PRODUCT ID, TEMPORAL RELATIONSHIP, LIABILITY/CAUSATION SUBTOTAL: - -------------- ---------------------------------------------------------------- TOTAL MATRIX SCORE: - -------------- ---------------------------------------------------------------- MATRIX LEVEL: - -------------- ---------------------------------------------------------------- AGE ON STROKE DATE: - -------------- ---------------------------------------------------------------- GROSS SETTLEMENT COMPENSATION: - -------------- ---------------------------------------------------------------- CONTINUED - -------------------------------------------------------------------------------- Part VIII - Statute of Limitations/Repose Adjustment (if applicable) - -------------- ---------------------------------------------------------------- - -------------- ---------------------------------------------------------------- Time elapsed from injury to filing: __ years, __ months - -------------- ------------------------------------------- ------------------- Residence Forum - -------------- ------------------------------------------- ------------------- __% deduction from Gross Settlement Compensation - -------------- ---------------------------------------------------------------- ADJUSTMENT FOR STATUTE OF LIMITATIONS/REPOSE: - -------------- ---------------------------------------------------------------- SUBTOTAL: - -------------------------------------------------------------------------------- Part IX - Co-Ingestion Adjustment (if applicable) - -------------------------------------------------------------------------------- Products Ingested Date and Time of Ingestion - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- - -------------- ---------------------------------------------------------------- __% deduction from Statute of Limitation Adjustment Subtotal - -------------- ---------------------------------------------------------------- ADJUSTMENT FOR CO-INGESTION: - -------------- ---------------------------------------------------------------- TOTAL ADJUSTED SETTLEMENT COMPENSATION: - -------------- ---------------------------------------------------------------- EXHIBIT F MATRIX SCORING WORKSHEET FOR ISCHEMIC STROKE CASES - ------------------------------------------------------ ------------------------ PLAINTIFF NAME: DATE OF INJURY: - ------------------------------------------------------ ------------------------ Rating Score - ------------------------------------------------------ --------------- ------- Part II - Product Identification Score - ------------------------------------------------------ --------------- ------- - ------------------------------------------------------ --------------- ------- Part III - Temporal Relationship Score - ------------------------------------------------------ --------------- ------- - ------------------------------------------------------ --------------- ------- Part IV - Liability/Causation Score - ------------------------------------------------------ --------------- ------- Exposure to PPA - -------------- -------------------------------------- --------------- ------- Date of Injury - -------------- -------------------------------------- --------------- ------- Misuse of Product - -------------- -------------------------------------- --------------- ------- Head trauma - -------------- -------------------------------------- --------------- ------- Prior Transient Ischemic Attacks - -------------- -------------------------------------- --------------- ------- Prior Stroke - -------------- -------------------------------------- --------------- ------- Hypertension - -------------- -------------------------------------- --------------- ------- Brain tumors - -------------- -------------------------------------- --------------- ------- Cancer - -------------- -------------------------------------- --------------- ------- Coronary Artery Disease - -------------- -------------------------------------- --------------- ------- Carotid Artery Disease/Stenosis - -------------- -------------------------------------- --------------- ------- Prior Myocardial Infarction - -------------- -------------------------------------- --------------- ------- Heart Disease or Defect - -------------- -------------------------------------- --------------- ------- Cerebral Venous Thrombosis - -------------- -------------------------------------- --------------- ------- Peripheral Arterial Disease - -------------- -------------------------------------- --------------- ------- Previous Embolism - -------------- -------------------------------------- --------------- ------- Atrial Fibrillation - -------------- -------------------------------------- --------------- ------- Major Surgery/Trauma - -------------- -------------------------------------- --------------- ------- Cholesterol Problems - -------------- -------------------------------------- --------------- ------- Diabetes - -------------- -------------------------------------- --------------- ------- Bleeding/Clotting Disorders - -------------- -------------------------------------- --------------- ------- Age - -------------- -------------------------------------- --------------- ------- Gender - -------------- -------------------------------------- --------------- ------- Heroin/Cocaine/PCP Use/Unprescribed Amphetamine - -------------- -------------------------------------- --------------- ------- Prescribed Amphetamine - -------------- -------------------------------------- --------------- ------- Other illicit drug use - -------------- -------------------------------------- --------------- ------- Smoking - -------------- -------------------------------------- --------------- ------- Oral Contraceptive + smoking - -------------- -------------------------------------- --------------- ------- Alcohol consumption - -------------- -------------------------------------- --------------- ------- PRODUCT ID, TEMPORAL RELATIONSHIP, LIABILITY/CAUSATION SUBTOTAL: - -------------------------------------------------------------------------------- CONTINUED - -------------------------------------------------------------------------------- Part V - Damages Score - -------------------------------------------------------------------------------- Discharge 6 Month - -------------- ------------------------------ -------------------------------- NUMBER OF DOMAINS AFFECTED - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- LEVEL OF SEVERITY - -------------- ------------------------------ -------------------------------- SUBTOTAL: - -------------- ------------------------------ -------------------------------- AVERAGE SCORE: - -------------- ---------------------------------------------------------------- DOMAIN/SEVERITY SCORE: - -------------- ---------------------------------------------------------------- - -------------- ------------------------------ -------------------------------- BADL FACTORS - -------------- ------------------------------ -------------------------------- Feeding - -------------- ------------------------------ -------------------------------- Bathing - -------------- ------------------------------ -------------------------------- Grooming - -------------- ------------------------------ -------------------------------- Dressing - -------------- ------------------------------ -------------------------------- Bowels - -------------- ------------------------------ -------------------------------- Bladder - -------------- ------------------------------ -------------------------------- Toilet Use - -------------- ------------------------------ -------------------------------- Transfers - -------------- ------------------------------ -------------------------------- Mobility - -------------- ------------------------------ -------------------------------- Stairs - -------------- ------------------------------ -------------------------------- BADL TOTAL: - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- IADL FACTORS - -------------- ------------------------------ -------------------------------- Telephone - -------------- ------------------------------ -------------------------------- Shopping - -------------- ------------------------------ -------------------------------- Food Preparation - -------------- ------------------------------ -------------------------------- Housekeeping - -------------- ------------------------------ -------------------------------- Laundry - -------------- ------------------------------ -------------------------------- Mode of Transportation - -------------- ------------------------------ -------------------------------- Responsibility for Medication - -------------- ------------------------------ -------------------------------- Ability to Handle Finances - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- IADL TOTAL: - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- INPATIENT TREATMENT - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- OUTPATIENT REHABILITATION - -------------- ------------------------------ -------------------------------- - -------------- ---------------------------------------------------------------- DAMAGES SCORE SUBTOTAL: - -------------- ---------------------------------------------------------------- PRODUCT ID, TEMPORAL RELATIONSHIP, LIABILITY/CAUSATION SUBTOTAL: - -------------- ---------------------------------------------------------------- TOTAL MATRIX SCORE: - -------------- ---------------------------------------------------------------- MATRIX LEVEL: - -------------- ---------------------------------------------------------------- AGE ON STROKE DATE: - -------------- ---------------------------------------------------------------- GROSS SETTLEMENT COMPENSATION: - -------------- ---------------------------------------------------------------- CONTINUED - -------------------------------------------------------------------------------- Part VII - Ischemic Stroke Adjustment - -------------------------------------------------------------------------------- - -------------- ---------------------------------------------------------------- 15% deduction from Gross Settlement Compensation: - -------------- ---------------------------------------------------------------- ADJUSTMENT FOR ISCHEMIC STROKE: - -------------------------------------------------------------------------------- SUBTOTAL: - -------------------------------------------------------------------------------- Part VIII - Statute of Limitations/Repose Adjustment (if applicable) - -------------------------------------------------------------------------------- - -------------- ---------------------------------------------------------------- Time elapsed from injury to filing: __ years, __ months - -------------- ---------------------------------------------------------------- Residence Forum - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- __% deduction from Ischemic Stroke Adjustment Subtotal - -------------- ---------------------------------------------------------------- ADJUSTMENT FOR STATUTE OF LIMITATIONS/REPOSE: - -------------- ---------------------------------------------------------------- SUBTOTAL: - -------------------------------------------------------------------------------- Part IX - Co-Ingestion Adjustment (if applicable) - -------------------------------------------------------------------------------- - -------------- ---------------------------------------------------------------- - -------------- ---------------------------------------------------------------- Products Ingested Date and Time of Ingestion - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- __% deduction from Statute of Limitations Adjustment Subtotal: - -------------- ---------------------------------------------------------------- ADJUSTMENT FOR CO-INGESTION: - -------------- ---------------------------------------------------------------- - -------------- ---------------------------------------------------------------- TOTAL ADJUSTED SETTLEMENT COMPENSATION: - -------------- ---------------------------------------------------------------- EXHIBIT G MATRIX SCORING WORKSHEET FOR OTHER INJURIES AND CARDIAC INJURIES - ---------------------------------------------- -------------------------------- PLAINTIFF NAME: DATE OF INJURY: - ---------------------------------------------- -------------------------------- Rating Score - ---------------------------------------------- ------------------ ------------ Part II - Product Identification Score - ---------------------------------------------- ------------------ ------------ - ---------------------------------------------- ------------------ ------------ Part III - Temporal Relationship Score - ---------------------------------------------- ------------------ ------------ MATRIX LEVEL: - -------------- -------------------------------------------------- ------------ AGE ON STROKE DATE: - -------------- -------------------------------------------------- ------------ GROSS SETTLEMENT COMPENSATION: - ------------------------------------------------------------------ ------------ Part VIII - Statute of Limitations/Repose Adjustment (if applicable) - -------------------------------------------------------------------------------- - -------------- ---------------------------------------------------------------- Time elapsed from injury to filing: __ years, __ months - -------------- ------------------------------ ----------- ------------------- Residence Forum - -------------- ------------------------------ ----------- ------------------- - -------------- ------------------------------------------- ------------------- __% deduction from Gross Settlement Compensation: - -------------- ---------------------------------------------------------------- ADJUSTMENT FOR STATUTE OF LIMITATIONS/REPOSE: - -------------- ---------------------------------------------------------------- SUBTOTAL: - -------------- ---------------------------------------------------------------- Part IX - Co-Ingestion Adjustment (if applicable) - -------------------------------------------------------------------------------- Products Ingested Date and Time of Ingestion - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- - -------------- ------------------------------ -------------------------------- - -------------- ---------------------------------------------------------------- __% deduction from Statute of Limitations Adjustment Subtotal: - -------------- ---------------------------------------------------------------- ADJUSTMENT FOR CO-INGESTION: - -------------- ---------------------------------------------------------------- TOTAL ADJUSTED SETTLEMENT COMPENSATION: - -------------- ---------------------------------------------------------------- EX-31.1 4 exhibit31-1_12965.txt 302 CERTIFICATION OF THE CHAIRMAN OF THE BOARD EXHIBIT 31.1 ------------ CERTIFICATION I, Zan Guerry, Chairman and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Chattem, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusion about the effectiveness of this disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 1, 2004 -------------------------- /s/ Zan Guerry ---------------------------- Zan Guerry, Chairman and Chief Executive Officer EX-31.2 5 exhibit31-2_12965.txt 302 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER EXHIBIT 31.2 ------------ CERTIFICATION I, Richard D. Moss, Vice President and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Chattem, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusion about the effectiveness of this disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 1, 2004 --------------------------- /s/ Richard D. Moss ----------------------------------- Richard D. Moss, Vice President and Chief Financial Officer EX-32 6 exhibit32_12965.txt 906 CERTIFICATIONS OF THE CHAIRMAN AND C.F.O. EXHIBIT 32 ---------- CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Chattem, Inc., a Tennessee corporation (the "Company"), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended August 31, 2004 (the "Form 10-Q") of the Company fully complies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: October 1, 2004 /s/ Zan Guerry ---------------------------------------- Zan Guerry, Chairman and Chief Executive Officer Dated: October 1, 2004 /s/ Richard D. Moss ---------------------------------------- Richard D. Moss Vice President and Chief Financial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q, or as a separate disclosure document. A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO CHATTEM, INC. AND WILL BE RETAINED BY CHATTEM, INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. -----END PRIVACY-ENHANCED MESSAGE-----