-----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, Sfmp/pyKf1gDBAn0NfwoJwj4qdcUqX2DffNsRZ8A7tmsWbF82an5LRjsbfUmxp94 qTbWOwNsIv5JcwWa6PM5AQ== 0001072613-05-000846.txt : 20050401 0001072613-05-000846.hdr.sgml : 20050401 20050401152455 ACCESSION NUMBER: 0001072613-05-000846 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050228 FILED AS OF DATE: 20050401 DATE AS OF CHANGE: 20050401 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: 05725209 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_13368.txt FORM 10-Q (FEBRUARY 28, 2005) ================================================================================ 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 FEBRUARY 28, 2005 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 MARCH 29, 2005, 19,762,791 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 February 28, 2005 and November 30, 2004 .................. 3 Condensed Consolidated Statements of Operations for the Three Months Ended February 28, 2005 and February 29, 2004 ........................................ 5 Condensed Consolidated Statements of Cash Flows for the Three Months Ended February 28, 2005 and February 29, 2004 ........................................ 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 ............................................. 33 Item 4. Controls and Procedures .................................. 33 PART II. OTHER INFORMATION Item 1. Legal Proceedings ........................................ 34 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .......................................... 34 Item 3. Defaults Upon Senior Securities .......................... 34 Item 4. Submission of Matters to a Vote of Security Holders ...... 34 Item 5. Other Information ........................................ 34 Item 6. Exhibits and Reports on Form 8-K ......................... 35 SIGNATURES ................................................................. 36 2 PART 1. FINANCIAL INFORMATION ----------------------------- ITEM 1. FINANCIAL STATEMENTS - ----------------------------- CHATTEM, INC. AND SUBSIDIARIES ------------------------------ CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (In thousands)
FEBRUARY 28, NOVEMBER 30, ASSETS 2005 2004 - ------ ------------ ------------ (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 43,539 $ 40,193 Accounts receivable, less allowances of $2,339 at February 28, 2005 and $1,682 at November 30, 2004 40,810 32,098 Inventories 21,976 21,690 Refundable income taxes 2,530 4,702 Deferred income taxes 4,699 4,308 Prepaid expenses and other current assets 6,552 3,683 ------------ ------------ Total current assets 120,106 106,674 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT, NET 28,354 28,765 ------------ ------------ OTHER NONCURRENT ASSETS: Patents, trademarks and other purchased product rights, net 222,236 225,560 Debt issuance costs, net 4,984 5,174 Other 5,897 5,551 ------------ ------------ Total other noncurrent assets 233,117 236,285 ------------ ------------ TOTAL ASSETS $ 381,577 $ 371,724 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 CHATTEM, INC. AND SUBSIDIARIES ------------------------------ CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (In thousands)
FEBRUARY 28, NOVEMBER 30, LIABILITIES AND SHAREHOLDERS' EQUITY 2005 2004 - ------------------------------------ ------------ ------------ (Unaudited) CURRENT LIABILITIES: Current maturities of long-term debt $ -- $ -- Accounts payable and other 16,303 13,341 Accrued liabilities 22,579 23,763 ------------ ------------ Total current liabilities 38,882 37,104 ------------ ------------ LONG-TERM DEBT, less current maturities 200,000 200,000 ------------ ------------ DEFERRED INCOME TAXES 27,917 25,732 ------------ ------------ OTHER NONCURRENT LIABILITIES 1,804 1,776 ------------ ------------ 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 and outstanding 19,850 at February 28, 2005 and 19,882 at November 30, 2004 84,620 85,949 Retained earnings 32,553 23,888 ------------ ------------ 117,173 109,837 Unamortized value of restricted common shares issued (3,835) (2,386) Cumulative other comprehensive income, net of tax: Interest rate cap adjustment (347) (316) Foreign currency translation adjustment (17) (23) ------------ ------------ Total shareholders' equity 112,974 107,112 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 381,577 $ 371,724 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 CHATTEM, INC. AND SUBSIDIARIES ------------------------------ CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- (Unaudited and in thousands, except per share amounts)
FOR THE THREE MONTHS ENDED --------------------------- FEBRUARY 28, FEBRUARY 29, 2005 2004 ------------ ------------ REVENUES: Net sales $ 71,480 $ 60,927 Royalties 51 310 ------------ ------------ Total revenues 71,531 61,237 ------------ ------------ COSTS AND EXPENSES: Cost of sales 20,260 16,952 Advertising and promotion 20,351 18,532 Selling, general and administrative 11,884 10,635 Litigation settlement 2,755 194 ------------ ------------ Total costs and expenses 55,250 46,313 ------------ ------------ INCOME FROM OPERATIONS 16,281 14,924 ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (3,495) (4,755) Investment and other income, net 147 45 Loss on early extinguishment of debt -- (11,309) ------------ ------------ Total other income (expense) (3,348) (16,019) ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 12,933 (1,095) PROVISION FOR (BENEFIT FROM) INCOME TAXES 4,268 (383) ------------ ------------ NET (LOSS) INCOME $ 8,665 $ (712) ============ ============ NUMBER OF COMMON SHARES: Weighted average outstanding - basic 19,648 19,099 ============ ============ Weighted average and potential dilutive outstanding 20,489 19,881 ============ ============ NET INCOME (LOSS) PER COMMON SHARE: Basic $ .44 $ (.04) ============ ============ Diluted $ .42 $ (.04) ============ ============
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 amount)
FOR THE THREE MONTHS ENDED --------------------------- FEBRUARY 28, FEBRUARY 29, 2005 2004 ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ 8,665 $ (712) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,624 1,537 Deferred income taxes 1,778 1,982 Tax benefit realized from stock option plans 186 1,083 Loss on early extinguishment of debt -- 11,309 Other, net 361 -- Changes in operating assets and liabilities: Accounts receivable (8,712) (9,108) Inventories (286) (9) Refundable income taxes 2,172 (3,752) Prepaid expenses and other current assets 382 2,092 Accounts payable and accrued liabilities 1,778 (101) ------------ ------------ Net cash provided by operating activities 7,948 4,321 ------------ ------------ INVESTING ACTIVITIES: Purchases of property, plant and equipment (456) (491) Purchases of patents, trademarks and other product rights -- (17) Decrease (increase) in other assets, net 524 (490) ------------ ------------ Net cash provided by (used in) investing activities 68 (998) ------------ ------------ FINANCING ACTIVITIES: Repayment of long-term debt -- (182,280) Proceeds from long-term debt -- 200,000 Proceeds from borrowings under revolving credit facility -- 25,000 Repayment of policy loans (1,031) -- Proceeds from exercise of stock options 187 1,453 Repurchase of common shares (3,514) (319) Increase in debt issuance costs -- (5,678) Debt retirement costs -- (6,946) Restricted cash -- (32,227) ------------ ------------ Net cash used in financing activities (4,358) (997) ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (312) 26 ------------ ------------ CASH AND CASH EQUIVALENTS: Increase for the period 3,346 2,352 At beginning of period 40,193 26,931 ------------ ------------ At end of period $ 43,539 $ 29,283 ============ ============ SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of 50 and 70 shares of restricted common stock at a value of $35.37 and $19.98 per share in 2005 and 2004, respectively $ 1,768 $ 1,399 PAYMENTS FOR: Interest $ 1,003 $ 6,378 Taxes $ 85 $ 108
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 consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These 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, 2004. The accompanying unaudited 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 prior year amounts have been reclassified to conform to the current period's presentation. 4. RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- In December 2003, the Financial Accounting Standards board ("FASB") issued Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"), which supercedes Interpretation No. 46, "Consolidation of Variable Interest Entities" issued in January 2003. FIN 46R 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 46R 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 46R applies immediately to a VIE created or acquired after January 31, 2003. For a VIE created before February 1, 2003, FIN 46R 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 46R 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 46R did not have an impact on our financial position, results of operations or cash flows. In November 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs" ("SFAS 151"). SFAS 151 amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing", to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have an impact on our financial position, results of operations or cash flows. In November 2004, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 03-13, "Applying the Conditions in Paragraph 42 of FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" in Determining Whether to Report Discontinued Operations" ("EITF 03-13"). Under the consensus, the approach for assessing whether cash flows of the component have been eliminated from the ongoing operations of the entity focuses on whether continuing cash flows are direct or indirect cash flows. Cash flows of the component would not be eliminated if the continuing cash flows to the entity are considered direct cash flows. The consensus should be applied to a component of an enterprise that is either disposed of or classified as held for sale in fiscal periods beginning after December 15, 2004. The adoption of EITF 03-13 is not expected to have an impact on our financial position, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123R supercedes APB Opinion 7 No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95, "Statement of Cash Flows". SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions and requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Accordingly, the adoption of SFAS 123R's fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of the adoption of SFAS 123R cannot be predicted at this time because it will depend on the levels of share-based payments granted in the future. However, had we adopted SFAS 123R in prior periods the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of proforma net income and earnings per share in Note 5. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were not material to our consolidated financial position or results of operations. This statement is effective for our interim periods beginning after June 15, 2005. In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets" ("SFAS 153"). SFAS 153 amends the guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions" to eliminate certain exceptions to the principle that exchanges of nonmonetary assets be measured based on the fair value of the assets exchanged. SFAS 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. This statement is effective for nonmonetary asset exchanges in fiscal years beginning after June 15, 2005. The adoption of SFAS 153 is not expected to 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. The 2000 Non-Statutory Stock Option Plan provides for the issuance of up to 1,500 shares of common stock. The 2003 Stock Incentive Plan provides for the issuance of up to 1,500 shares of common stock. Options vest ratably over four years and are exercisable for a period of up to ten years from the date of grant. For SFAS No. 123, "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 2005 and 2004: expected dividend yield of 0%, expected volatility of 57% and 53%, respectively, risk-free interest rates of 4.38% and 3.97%, 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 (loss) and net income (loss) per share would have been adjusted to the pro forma amounts for the three months ended February 28, 2005 and February 29, 2004, respectively, as indicated below: 2005 2004 ---------- ---------- Net income (loss): As reported $ 8,665 $ (712) Fair value method compensation cost, net (1,278) (861) ---------- ---------- Pro forma $ 7,387 $ (1,573) ========== ========== Net income (loss) per share, basic: As reported $ .44 $ (.04) Pro forma $ .38 $ (.08) Net income (loss) per share, diluted: As reported $ .42 $ (.04) Pro forma $ .36 $ (.08) 8 6. EARNINGS PER SHARE ------------------ The following table presents the computation of per share earnings for the three months ended February 28, 2005 and February 29, 2004, respectively: 2005 2004 ---------- ---------- NET INCOME (LOSS) $ 8,665 $ (712) ========== ========== NUMBER OF COMMON SHARES: Weighted average outstanding 19,648 19,099 Issued upon assumed exercise of outstanding stock options 762 712 Effect of issuance of restricted common shares 79 70 ---------- ---------- Weighted average and potential dilutive outstanding (1) 20,489 19,881 ========== ========== NET INCOME (LOSS) PER COMMON SHARE: Basic $ .44 $ (.04) ========== ========== Diluted $ .42 $ (.04) ========== ========== (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: 0 and 62 shares for the three months ended February 28, 2005 and February 29, 2004, 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 $1,857 and $1,434 are included in selling expenses for the three months ended February 28, 2005 and February 29, 2004, respectively. 9. PATENT, 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 $221,654 and $224,797 as of February 28, 2005 and November 30, 2004, respectively. The gross carrying amount of intangible assets subject to amortization at February 28, 2005 and November 30, 2004, which consist primarily of non-compete agreements, was $2,139 and $2,400, respectively. The related accumulated amortization of intangible assets at February 28, 2005 and November 30, 2004 was $1,557 and $1,637, respectively. Amortization of our intangible assets subject to amortization under the provisions of SFAS 142 for the three months ended February 28, 2005 and February 29, 2004 was $73 and $77, respectively. Estimated annual amortization expense for these assets for the years ended November 30, 2006, 2007, 2008, 2009 and 2010 is $290, $123, $40, $20 and $0 respectively. 9 On February 28, 2005, we entered into an agreement to sell the trademark and product rights of our SELSUN business in certain countries in Africa and Asia. As a result of the sale, $3,143 of indefinite-lived assets and $108 of intangible assets subject to amortization were retired, which resulted in an insignificant loss. 10. INVENTORIES ----------- Inventories consisted of the following as of February 28, 2005 and November 30, 2004: 2005 2004 ---------- ---------- Raw materials and work in process $ 11,656 $ 10,728 Finished goods 11,753 12,395 Excess of current cost over LIFO values (1,433) (1,433) ---------- ---------- Total inventories $ 21,976 $ 21,690 ========== ========== 11. ACCRUED LIABILITIES ------------------- Accrued liabilities consisted of the following as of February 28, 2005 and November 30, 2004: 2005 2004 ---------- ---------- Interest $ 5,415 $ 3,152 Salaries, wages and commissions 1,490 4,886 Product advertising and promotion 5,568 3,750 Litigation settlement and legal fees 8,568 10,046 Other 1,538 1,929 ---------- ---------- Total accrued liabilities $ 22,579 $ 23,763 ========== ========== 12. LONG-TERM DEBT -------------- Long-term debt consisted of the following as of February 28, 2005 and November 30, 2004: 2005 2004 ---------- ---------- Revolving Credit Facility due 2009 at a variable rate of 6.0% as of February 28, 2005 and November 30, 2004, respectively $ -- $ -- Floating Rate Senior Notes due 2010 at a variable rate of 5.38% and 4.78% as of February 28, 2005 and November 30, 2004, respectively 75,000 75,000 7.0% Senior Subordinated Notes due 2014 125,000 125,000 ---------- ---------- Total long-term debt 200,000 200,000 Less: current maturities -- -- ---------- ---------- Total long-term debt, net of current maturities $ 200,000 $ 200,000 ========== ========== 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 February 28, 2005, no amounts were outstanding under the Revolving Credit Facility, and the variable rate was 6.0%. 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 March 29, 2005, we had no borrowings outstanding under our Revolving Credit Facility. 10 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 in the first quarter of fiscal 2004. Also in the second quarter of fiscal 2004, we recorded a loss on early extinguishment of debt of $1,649 related to the redemption of the remaining $30,008 of our 8.875% Subordinated Notes. Due to our refinancing transactions, in the first quarter of fiscal 2004 tender premiums and related fees of $6,946 were paid and net debt issuance costs of $4,363 were written off and charged to loss on early extinguishment of debt in the Condensed Consolidated Statements of Operations. In addition, new debt issuance costs of $5,678 were capitalized. 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 (5.38% as of February 28, 2005). 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 annual notional principal amounts of $15,000 beginning March 1, 2006 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 $189 is included in prepaid expenses and other current assets, and the long-term portion of $642 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 February 28, 2005, and a charge of $347, net of tax, was recorded to other comprehensive income. The fair value of the interest rate cap agreement is valued by a third party. 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 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 11 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 February 28, 2005 are as follows: 2006 -- 2007 -- 2008 -- 2009 -- 2010 75,000 Thereafter 125,000 ---------- $ 200,000 ========== 13. COMPREHENSIVE INCOME -------------------- Comprehensive income consisted of the following components for the three months ended February 28, 2005 and February 29, 2004, respectively: 2005 2004 ---------- ---------- Net income $ 8,665 $ (712) Other - interest rate cap adjustment (31) -- Other - foreign currency translation adjustment 6 270 ---------- ---------- Total $ 8,640 $ (442) ========== ========== 14. STOCK BUYBACK ------------- In January 2005, our board of directors increased the total authorization to repurchase our common stock under our stock buyback program to $30,000. In the first quarter of fiscal 2005, we repurchased 103 shares for $3,514. All repurchased shares were retired and returned to unissued. We, however, are limited in our ability to repurchase shares due to restrictions under the terms of our Revolving Credit Facility, Floating Rate Notes and 7.0% Subordinated Notes. Subsequent to February 28, 2005, we have repurchased 116 of our shares for $4,221. 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 as of December 31, 2000. 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 February 28, 2005 and November 30, 2004 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 months ended February 28, 2005 and February 29, 2004 comprised the following components: 2005 2004 ---------- ---------- Service cost $ -- $ -- Interest cost on projected benefit obligation 152 155 Actual return on plan assets (212) (178) Net amortization and deferral 5 28 ---------- ---------- Net pension cost (benefit) $ (55) $ 5 ========== ========== No employer contributions were made for the three months ended February 28, 2005 and February 29, 2004, and no employer contributions are expected to be made in fiscal 2005. 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 2005 are approximately $70. Net periodic postretirement health care benefits cost for the three months ended February 28, 2005 and February 29, 2004, included the following components: 2005 2004 ---------- ---------- Service cost $ 18 $ 16 Interest cost on accumulated postretirement benefit obligation 21 20 Amortization of prior service cost 4 4 Amortization of net gain (4) (8) ---------- ---------- Net periodic postretirement benefits cost $ 39 $ 32 ========== ========== 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 months ended February 28, 2005 was 33%, as compared to 35% in the three months ended February 29, 2004. The lower rate for the three months ended February 28, 2005 reflects 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. Undistributed earnings of Chattem Canada amounted to approximately $281 for the three months ended February 28, 2005. These earnings are considered to be reinvested indefinitely and, accordingly, no provision for U.S. federal and state 13 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 months ended February 28, 2005 and February 29, 2004 are as follows: 2005 2004 ---------- ---------- Topical analgesics $ 21,407 $ 15,712 Medicated skin care products 17,624 13,332 Dietary supplements 8,660 8,511 Medicated dandruff shampoos and conditioner 9,800 9,221 Other OTC and toiletry products 8,078 8,830 ---------- ---------- Total $ 65,569 $ 55,606 ========== ========== 18. COMMITMENTS AND CONTINGENCIES ----------------------------- GENERAL LITIGATION We were named as a defendant in a number of 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. The lawsuits filed in federal court were 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 lawsuits were filed in state court in a number of different states. On April 13, 2004, we entered into a class action settlement agreement with representatives of the plaintiffs' settlement class, which provided for a national class action settlement of all DEXATRIM PPA claims, both federal and state. On November 12, 2004, Judge Barbara J. Rothstein of the United States District Court for the Western District of Washington entered a final order and judgment certifying the class and granting approval of the DEXATRIM PPA settlement. After the final judgment was entered, two parties who had objected to the settlement filed appeals challenging and seeking to set aside the final judgment. Both of these appeals have now been dismissed. The DEXATRIM PPA 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. We have settled eight of the opt out claims. In addition, we have learned that two of the remaining opt out claims have injury dates prior to December 21, 1998, for which we will seek indemnification from The DELACO Company ("DELACO"), successor to the Thompson Medical Company, Inc., which owned the brand prior to December 21, 1998. 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 has agreed to contribute $10,000 into the settlement trust. 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. As described below, we have entered into a settlement agreement with Interstate Fire & Casualty Company ("Interstate") with regard to its $25,000 of coverage in excess of the insurance funds available in the settlement trust. We currently expect to use our cash on hand and proceeds of the Interstate policy 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 and outside of our available insurance coverage from Interstate, 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 are also named as a defendant in approximately 206 lawsuits relating to DEXATRIM containing PPA which 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 DELACO. On February 12, 2004, DELACO filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Southern District of New 14 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. Our product liability insurance, as described below, would not apply to claims arising from products manufactured and sold prior to our acquisition of DEXATRIM. If the DELACO bankruptcy plan does not resolve these cases as we expect, 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 have also entered into a settlement agreement with Interstate with regard to Interstate's lawsuit to rescind its $25,000 of excess coverage for product liability claims relating to DEXATRIM products containing PPA. In accordance with the settlement agreement, Interstate will provide coverage of DEXATRIM PPA claims that are covered by its policy after $78,500 has been paid toward covered claims. Once the $78,500 threshold is met, Interstate will pay 100% of the next $4,000 of claims covered by its policy; 75% of the next $8,500 of such claims; and 50% of the last $12,500 of such claims. We are responsible for any claims not covered by the Interstate policy either because the alleged injury did not occur before May 31, 2001, or the claim was first made against us after May 31, 2004. Pursuant to the settlement agreement, we and Interstate have dismissed all claims and counterclaims filed against each other. Prior to the fourth quarter of fiscal 2004, we were unable to reasonably estimate the amount of liability related to the DEXATRIM litigation, due to the significant assumptions and uncertainty involved in estimating the value of cases involved. As a result of the final approval of the DEXATRIM PPA settlement on November 12, 2004 and the term sheet of settlement reached with Interstate on December 13, 2004, as of November 30, 2004 we were able to reasonably estimate the probable loss related to the DEXATRIM litigation. Based on the estimated litigation settlement costs relating to our DEXATRIM products, we have recorded an accrued liability in our Consolidated Balance Sheets as of February 28, 2005 and November 30, 2004 of $8,506 and $9,519, respectively. We currently do not expect to record any additional charges relative to the settlement costs of the PPA litigation, although we will continue to incur costs related to legal expenses. During the first fiscal quarter of 2005, we incurred and recorded $1,070 of legal expenses relating to the PPA settlement. We will record future PPA related legal expenses in the period incurred. 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, we are insured for product liability insurance for all of our other products, including DEXATRIM products containing ephedrine, for $10,000 through our captive insurance subsidiary, of which approximately $3,500 is funded as of March 29, 2005. We also have $40,000 of excess coverage through third party insurers. We were named as a defendant in four lawsuits alleging that the plaintiff was injured as a result of the ingestion of DEXATRIM containing ephedrine. In addition, three individuals who alleged injury caused by DEXATRIM containing ephedrine filed opt out 15 notices in the PPA class action settlement, but did not file lawsuits against us. In the first quarter of fiscal 2005, we reached a settlement with respect to two of the four pending lawsuits and the three opt out claims. Each of these settlements has been or will be funded by insurance coverage provided by our captive insurance subsidiary. After these settlements, there are two lawsuits currently pending against us related to DEXATRIM containing ephedrine. We recorded a litigation settlement charge of $1,685 in the first quarter of fiscal 2005 associated with ephedrine-related claims and legal expenses. 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 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 March 29, 2005. 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 on February 11, 2004. 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. We have been named as a defendant in a putative class action suit filed in the Superior Court of the State of California, County of Los Angeles, on January 13, 2005. The lawsuit seeks injunctive relief, compensatory damages and attorney fees against us under the California Business and Professions code, arising out of alleged deceptive, untrue or misleading advertising and breech of express warranty in connection with the manufacturing, labeling, advertising, promotion and sale of certain DEXATRIM Natural products. The lawsuit seeks certification of a class consisting of all persons who purchased DEXATRIM Natural in California during the four year period prior to the filing of the lawsuit up to the date of any judgment obtained. The plaintiff has stipulated that the amount in controversy with individual claim and each member of the proposed class in the action does not exceed $75. We 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, employment law issues 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. The enactment of further restrictions or prohibitions on sales, the perceived safety concerns related to ephedrine and the possibility of further regulatory action could result in an increase in the number of ephedrine related lawsuits filed including ones in which we are named as a defendant. 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 16 dietary supplements with or without herbs containing caffeine all promote modest amounts of weight loss over the short term and 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 has 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 shortly. 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 lawsuits in addition to those we currently have being filed against us alleging damages related to the use or purchase of DEXATRIM containing ephedrine. 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 conclusively demonstrate 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 recently 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 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 FDA was made on October 15, 2003. Thereafter, in April 2004, we launched the ICY HOT Sleeve, a flexible, non-occlusive fabric patch with menthol levels consistent with the OTC monograph. If additional research is required either as a preliminary to final FDA monograph approval and/or as a requirement of future individual product sale, we may need to invest in a considerable amount of expensive testing and data analysis. Any preliminary cost may be shared with other patch manufacturers. Because the submissions made into the FDA docket have been forwarded from its OTC Division to its Dermatological Division within the Center for Drug Evaluation and Research ("CDER"), we believe that the monograph is unlikely to become final and take effect before mid-2006 and perhaps thereafter. If neither action described above is successful and the final monograph excludes such products, we will have to file an NDA in order to continue to market the ICY HOT Patch, ICY HOT Sleeve or similar delivery systems under our other topical analgesic brands. In such case, we would have to remove the existing products from the market 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. If pyrilamine maleate is not included in the final monograph, we would be required to reformulate the products to continue to provide the consumer with multi-symptom relief benefits. 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. We are also aware of the FDA's concern about the potential toxicity due to concomitant use of OTC and prescription drugs that contain the ingredient acetaminophen, an ingredient also found in PAMPRIN and PREMSYN PMS. 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. 17 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 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 titanium dioxide on the state's list of suspected carcinogens. Titanium 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 titanium 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 February 28, 2005 arose in conjunction with Chattem's Revolving Credit Facility and Chattem's issuance of 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 February 28, 2005 is $200,000. 18 CHATTEM, INC. AND SUBSIDIARIES Note 19 CONDENSED CONSOLIDATING BALANCE SHEETS FEBRUARY 28, 2005 (Unaudited and in thousands)
GUARANTOR NON-GUARANTOR SUBSIDIARY SUBSIDIARY ASSETS CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED - ------ ------------ ------------ ------------ ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 29,026 $ 1,969 $ 12,544 $ -- $ 43,539 Accounts receivable, less allowances of $2,339 34,890 10,379 5,923 (10,382) 40,810 Interest receivable -- 619 -- (619) -- Inventories 17,143 2,391 2,442 -- 21,976 Refundable income taxes 2,530 -- -- -- 2,530 Deferred income taxes 4,699 -- -- -- 4,699 Prepaid expenses and other current assets 5,668 -- 884 -- 6,552 ------------ ------------ ------------ ------------ ------------ Total current assets 93,956 15,358 21,793 (11,001) 120,106 ------------ ------------ ------------ ------------ ------------ PROPERTY, PLANT AND EQUIPMENT, NET 27,319 775 260 -- 28,354 ------------ ------------ ------------ ------------ ------------ OTHER NONCURRENT ASSETS: Patents, trademarks and other purchased product rights, net 582 283,944 -- (62,290) 222,236 Debt issuance costs, net 4,984 -- -- -- 4,984 Investment in subsidiaries 257,166 33,000 70,266 (360,432) -- Note receivable -- 33,000 -- (33,000) -- Other 5,528 -- 369 -- 5,897 ------------ ------------ ------------ ------------ ------------ Total other noncurrent assets 268,260 349,944 70,635 (455,722) 233,117 ------------ ------------ ------------ ------------ ------------ TOTAL ASSETS $ 389,535 $ 366,077 $ 92,688 $ (466,723) $ 381,577 ============ ============ ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Current maturities of long-term debt $ -- $ -- $ -- $ -- $ -- Accounts payable and other 10,299 -- 6,004 -- 16,303 Accrued liabilities 28,463 1,362 3,755 (11,001) 22,579 ------------ ------------ ------------ ------------ ------------ Total current liabilities 38,762 1,362 9,759 (11,001) 38,882 ------------ ------------ ------------ ------------ ------------ LONG-TERM DEBT, less current maturities 200,000 -- 33,000 (33,000) 200,000 ------------ ------------ ------------ ------------ ------------ DEFERRED INCOME TAXES 383 27,534 -- -- 27,917 ------------ ------------ ------------ ------------ ------------ OTHER NONCURRENT LIABILITIES 1,804 -- -- -- 1,804 ------------ ------------ ------------ ------------ ------------ INTERCOMPANY ACCOUNTS 35,607 (36,184) 577 -- -- ------------ ------------ ------------ ------------ ------------ SHAREHOLDERS' EQUITY: Preferred shares, without par value, authorized 1,000, none issued -- -- -- -- -- Common shares, without par value, authorized 50,000, issued and outstanding 19,850 84,620 -- -- -- 84,620 Share capital of subsidiaries -- 329,704 43,209 (372,913) -- Retained earnings 32,553 43,661 5,915 (49,576) 32,553 ------------ ------------ ------------ ------------ ------------ Total 117,173 373,365 49,124 (422,489) 117,173 ------------ ------------ ------------ ------------ ------------ Unamortized value of restricted common shares issued (3,835) -- -- -- (3,835) Cumulative other comprehensive income, net of taxes: Interest rate cap adjustment (347) -- -- -- (347) Foreign currency translation adjustment (12) -- 228 (233) (17) ------------ ------------ ------------ ------------ ------------ Total shareholders' equity 112,979 373,365 49,352 (422,722) 112,974 ------------ ------------ ------------ ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 389,535 $ 366,077 $ 92,688 $ (466,723) $ 381,577 ============ ============ ============ ============ ============
19 CHATTEM, INC. AND SUBSIDIARIES Note 19 CONDENSED CONSOLIDATING BALANCE SHEETS NOVEMBER 30, 2004 (In thousands)
GUARANTOR NON-GUARANTOR SUBSIDIARY SUBSIDIARY ASSETS CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED - ------ ------------ ------------ ------------ ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 28,344 $ 1,967 $ 9,882 $ -- $ 40,193 Accounts receivable, less allowances of $1,682 26,727 8,733 5,376 (8,738) 32,098 Interest receivable -- 619 -- (619) -- Inventories 16,681 3,020 1,989 -- 21,690 Refundable income taxes 4,702 -- -- -- 4,702 Deferred income taxes 4,308 -- -- -- 4,308 Prepaid expenses and other current assets 3,489 -- 194 -- 3,683 ------------ ------------ ------------ ------------ ------------ Total current assets 84,251 14,339 17,441 (9,357) 106,674 ------------ ------------ ------------ ------------ ------------ PROPERTY, PLANT AND EQUIPMENT, NET 27,724 775 266 -- 28,765 ------------ ------------ ------------ ------------ ------------ OTHER NONCURRENT ASSETS: Patents, trademarks and other purchased product rights, net 763 287,087 -- (62,290) 225,560 Debt issuance costs, net 5,174 -- -- -- 5,174 Investment in subsidiaries 249,999 33,000 68,477 (351,476) -- Note receivable -- 33,000 -- (33,000) -- Other 4,681 -- 870 -- 5,551 ------------ ------------ ------------ ------------ ------------ Total other noncurrent assets 260,617 353,087 69,347 (446,766) 236,285 ------------ ------------ ------------ ------------ ------------ TOTAL ASSETS $ 372,592 $ 368,201 $ 87,054 $ (456,123) $ 371,724 ============ ============ ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ -- $ -- $ -- $ -- $ -- Accounts payable and other 11,398 -- 1,943 -- 13,341 Accrued liabilities 27,435 1,107 4,578 (9,357) 23,763 ------------ ------------ ------------ ------------ ------------ Total current liabilities 38,833 1,107 6,521 (9,357) 37,104 ------------ ------------ ------------ ------------ ------------ LONG-TERM DEBT, less current maturities 200,000 -- 33,000 (33,000) 200,000 ------------ ------------ ------------ ------------ ------------ DEFERRED INCOME TAXES (511) 26,243 -- -- 25,732 ------------ ------------ ------------ ------------ ------------ OTHER NONCURRENT LIABILITIES 1,776 -- -- -- 1,776 ------------ ------------ ------------ ------------ ------------ INTERCOMPANY ACCOUNTS 25,382 (25,484) 102 -- -- ------------ ------------ ------------ ------------ ------------ SHAREHOLDERS' EQUITY: Preferred shares, without par value, authorized 1,000, none issued -- -- -- -- -- Common shares, without par value, authorized 50,000, issued and outstanding 19,882 85,949 -- -- -- 85,949 Share capital of subsidiaries -- 329,705 41,100 (370,805) -- Retained earnings 23,888 36,630 6,115 (42,745) 23,888 ------------ ------------ ------------ ------------ ------------ Total 109,837 366,335 47,215 (413,550) 109,837 ------------ ------------ ------------ ------------ ------------ Unamortized value of restricted common shares issued (2,386) -- -- -- (2,386) Cumulative other comprehensive income, net of taxes: Interest rate cap adjustment (316) -- -- -- (316) Foreign currency translation adjustment (23) -- 216 (216) (23) ------------ ------------ ------------ ------------ ------------ Total shareholders' equity 107,112 366,335 47,431 (413,766) 107,112 ------------ ------------ ------------ ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 372,592 $ 368,201 $ 87,054 $ (456,123) $ 371,724 ============ ============ ============ ============ ============
20 CHATTEM, INC. AND SUBSIDIARIES Note 19 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2005 (Unaudited and in thousands)
GUARANTOR NON-GUARANTOR SUBSIDIARY SUBSIDIARY CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ TOTAL REVENUES $ 58,790 $ 19,062 $ 4,873 $ (11,194) $ 71,531 ------------ ------------ ------------ ------------ ------------ COSTS AND EXPENSES: Cost of sales 16,614 2,323 2,139 (816) 20,260 Advertising and promotion 15,459 3,803 1,089 -- 20,351 Selling, general and administrative 11,521 73 290 -- 11,884 Litigation settlement 1,070 -- 1,685 -- 2,755 Equity in subsidiary income (6,831) -- -- 6,831 -- ------------ ------------ ------------ ------------ ------------ Total costs and expenses 37,833 6,199 5,203 6,015 55,250 ------------ ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS 20,957 12,863 (330) (17,209) 16,281 ------------ ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (3,489) -- (623) 617 (3,495) Investment and other income, net 95 623 671 (1,242) 147 Royalties (9,017) (1,362) -- 10,379 -- Corporate allocations 715 (699) (16) -- -- ------------ ------------ ------------ ------------ ------------ Total other income (expense) (11,696) (1,438) 32 9,754 (3,348) ------------ ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 9,261 11,425 (298) (7,455) 12,933 PROVISION FOR (BENEFIT FROM) INCOME TAXES 596 3,770 (98) -- 4,268 ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ 8,665 $ 7,655 $ (200) $ (7,455) $ 8,665 ============ ============ ============ ============ ============
21 CHATTEM, INC. AND SUBSIDIARIES Note 19 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 29, 2004 (Unaudited and in thousands)
GUARANTOR NON-GUARANTOR SUBSIDIARY SUBSIDIARY CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ TOTAL REVENUES $ 49,908 $ 16,549 $ 4,172 $ (9,392) $ 61,237 ------------ ------------ ------------ ------------ ------------ COSTS AND EXPENSES: Cost of sales 13,702 2,249 1,549 (548) 16,952 Advertising and promotion 16,376 1,177 979 -- 18,532 Selling, general and administrative 10,467 46 122 -- 10,635 Litigation settlement 194 -- -- -- 194 Equity in subsidiary income (8,309) -- -- 8,309 -- ------------ ------------ ------------ ------------ ------------ Total costs and expenses 32,430 3,472 2,650 7,761 46,313 ------------ ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 17,478 13,077 1,522 (17,153) 14,924 ------------ ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (4,763) -- (611) 619 (4,755) Investment and other income, net 27 620 17 (619) 45 Loss on early extinguishment of debt (11,309) -- -- -- (11,309) Royalties (7,525) (1,319) -- 8,844 -- Corporate allocations 788 (759) (29) -- -- ------------ ------------ ------------ ------------ ------------ Total other income (expense) (22,782) (1,458) (623) 8,844 (16,019) ------------ ------------ ------------ ------------ ------------ (LOSS) INCOME BEFORE INCOME TAXES (5,304) 11,619 899 (8,309) (1,095) (BENEFIT FROM) PROVISION FOR INCOME TAXES (4,592) 4,067 142 -- (383) ------------ ------------ ------------ ------------ ------------ NET (LOSS) INCOME $ (712) $ 7,552 $ 757 $ (8,309) $ (712) ============ ============ ============ ============ ============
22 CHATTEM, INC. AND SUBSIDIARIES Note 19 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2005 (Unaudited and in thousands)
GUARANTOR NON-GUARANTOR SUBSIDIARY SUBSIDIARY CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ 8,665 $ 7,655 $ (200) $ (7,455) $ 8,665 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,585 -- 39 -- 1,624 Deferred income taxes 487 1,291 -- -- 1,778 Tax benefit realized from stock option plans 186 -- -- -- 186 Other, net 49 -- 312 -- 361 Equity in subsidiary income (7,455) -- -- 7,455 -- Changes in operating assets and liabilities: Accounts receivable (11,307) 1,498 (547) 1,644 (8,712) Inventories (462) 628 (452) -- (286) Refundable income taxes 2,172 -- -- -- 2,172 Prepaid expenses and other current assets 1,072 -- (690) -- 382 Accounts payable and accrued liabilities (70) 255 3,237 (1,644) 1,778 ------------ ------------ ------------ ------------ ------------ Net cash provided by operating activities (5,078) 11,327 1,699 -- 7,948 ------------ ------------ ------------ ------------ ------------ INVESTING ACTIVITIES: Purchases of property, plant and equipment (423) -- (33) -- (456) (Increase) decrease in other assets, net 12 -- 512 -- 524 ------------ ------------ ------------ ------------ ------------ Net cash (used in) provided by investing activities (411) -- 479 -- 68 ------------ ------------ ------------ ------------ ------------ FINANCING ACTIVITIES: Repayment of policy loans (1,031) -- -- -- (1,031) Proceeds from exercise of stock options 187 -- -- -- 187 Repurchase of common shares (3,514) -- -- -- (3,514) Changes in intercompany accounts 10,529 (10,700) 171 -- -- Dividends paid -- (625) 625 -- -- ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 6,171 (11,325) 796 -- (4,358) ------------ ------------ ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS -- -- (312) -- (312) ------------ ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS: Increase for the period 682 2 2,662 -- 3,346 At beginning of period 28,344 1,967 9,882 -- 40,193 ------------ ------------ ------------ ------------ ------------ At end of period $ 29,026 $ 1,969 $ 12,544 $ -- $ 43,539 ============ ============ ============ ============ ============
23 CHATTEM, INC. AND SUBSIDIARIES Note 19 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED FEBRUARY 29, 2004 (Unaudited and in thousands)
GUARANTOR NON-GUARANTOR SUBSIDIARY SUBSIDIARY CHATTEM COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ OPERATING ACTIVITIES: Net (loss) income $ (712) $ 7,552 $ 757 $ (8,309) $ (712) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 1,519 -- 18 -- 1,537 Deferred income taxes 303 1,679 -- -- 1,982 Tax benefit realized from stock option plans 1,083 -- -- -- 1,083 Loss on early extinguishment of debt 11,309 -- -- -- 11,309 Equity in subsidiary income (8,309) -- -- 8,309 -- Changes in operating assets and liabilities: Accounts receivable (8,844) (8,845) (264) 8,845 (9,108) Interest receivable -- (619) -- 619 -- Inventories (74) 22 43 -- (9) Refundable income taxes (3,752) -- -- -- (3,752) Prepaid expenses and other current assets 2,567 -- 25 (500) 2,092 Accounts payable and accrued liabilities 7,368 1,319 176 (8,964) (101) ------------ ------------ ------------ ------------ ------------ Net cash provided by operating activities 2,458 1,108 755 -- 4,321 ------------ ------------ ------------ ------------ ------------ INVESTING ACTIVITIES: Purchases of property, plant and equipment (485) -- (6) -- (491) Purchases of patents, trademarks and other product rights -- (17) -- -- (17) Increase in note receivable -- (33,000) -- 33,000 -- (Increase) decrease in other assets, net (760) -- 270 -- (490) ------------ ------------ ------------ ------------ ------------ Net cash (used in) provided by investing activities (1,245) (33,017) 264 33,000 (998) ------------ ------------ ------------ ------------ ------------ FINANCING ACTIVITIES: Repayment of long-term debt (182,280) -- -- -- (182,280) Proceeds from long-term debt 200,000 -- -- -- 200,000 Proceeds from borrowings under revolving credit facility 25,000 -- -- -- 25,000 Proceeds from exercise of stock options 1,453 -- -- -- 1,453 Repurchase of common shares (319) -- -- -- (319) Increase in debt issuance costs (5,678) -- -- -- (5,678) Debt retirement costs (6,946) -- -- -- (6,946) Restricted cash (32,227) -- -- -- (32,227) Intercompany debt proceeds, net -- -- 33,000 (33,000) -- Changes in intercompany accounts 882 31,915 (32,797) -- -- ------------ ------------ ------------ ------------ ------------ Net cash (used in) provided by financing activities (115) 31,915 203 (33,000) (997) ------------ ------------ ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS -- -- 26 -- 26 ------------ ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS: Increase for the period 1,098 6 1,248 -- 2,352 At beginning of period 18,702 1,964 6,265 -- 26,931 ------------ ------------ ------------ ------------ ------------ At end of period $ 19,800 $ 1,970 $ 7,513 $ -- $ 29,283 ============ ============ ============ ============ ============
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 2004 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 first quarter of fiscal 2005. We sell our products nationally through mass merchandiser, drug and food channels principally utilizing our own sales force. Our net income (loss) margin (net income (loss)/total revenues) was 12.1% and (1.2%) for the first quarter of fiscal 2005 and 2004, respectively. Our net income (excluding debt extinguishment and litigation settlement charges) margin (net income (excluding debt extinguishment and litigation settlement charges)/total revenues) was 14.7% and 11.0% for the first quarter of fiscal 2005 and 2004, respectively. We believe that disclosure of net income (excluding debt extinguishment and litigation settlement charges) margin provides investors with useful information regarding our financial performance and allows for easier comparison with net income margin without the effect of the charges in prior periods. A reconciliation of net income (excluding debt extinguishment and litigation settlement charges) to net income is presented in the following table: FOR THE THREE MONTHS ENDED ------------------------------- FEBRUARY 28, FEBRUARY 29, 2005 2004 ------------ ------------ (dollars in thousands, except per share data) Net income (loss) $ 8,665 $ (712) Add: Loss on early extinguishment of debt -- 11,309 Litigation settlement charges 2,755 194 Benefit from income taxes (909) (4,026) ------------ ------------ Net income (excluding debt extinguishment and litigation settlement charges) $ 10,511 $ 6,765 ============ ============ Net income (excluding debt extinguishment and litigation settlement charges) per common share (diluted) $ .51 $ .34 ============ ============ Net income (excluding debt extinguishment and litigation settlement charges) margin 14.7% 11.0% ============ ============ 25 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 and EBITDA (excluding litigation settlement charges) are 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 and EBITDA (excluding litigation settlement charges) as important indicators of our operational strength and performance, including our ability to pay interest, service debt and fund capital expenditures. EBITDA and EBITDA (excluding litigation settlement charges) 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 FEBRUARY 28, FEBRUARY 29, INCREASE INCREASE 2005 2004 (DECREASE) (DECREASE) ------------ ------------ ------------ ------------ (dollars in thousands) Net income (loss) $ 8,665 $ (712) $ 9,377 1,317.0% Add: Provision for (benefit from) income taxes 4,268 (383) 4,651 1,214.4 Interest expense, net (1) 3,348 16,019 (12,671) (79.1) Depreciation and amortization less amounts included in interest 1,434 1,268 166 13.1 ------------ ------------ ------------ EBITDA $ 17,715 $ 16,192 $ 1,523 9.4 ============ ============ ============ Litigation settlement charges 2,755 194 2,561 1,320.1 ------------ ------------ ------------ EBITDA (excluding litigation settlement charges) $ 20,470 $ 16,386 $ 4,084 24.9 ============ ============ ============ EBITDA margin (EBITDA/total revenues) 24.8% 26.4% ============ ============ EBITDA (excluding litigation settlement charges) margin (EBITDA (excluding litigation settlement charges)/total revenues) 28.6% 26.8% ============ ============
(1) Fiscal 2004 includes a loss on early extinguishment of debt of $11.3 million. DEVELOPMENTS DURING FISCAL 2005 In the first quarter of fiscal 2005, we introduced the following product line extensions: ASPERCREME Odor-Free Therapy Back and Body Patch, GOLD BOND Ultimate Comfort Powder, PHISODERM pH2O, NEW PHASE Extra Strength, DEXATRIM Max and BULLFROG UV Defender. On December 13, 2004, we entered into a term sheet of settlement with Interstate Fire & Casualty Company ("Interstate") with regard to Interstate's lawsuit to rescind its $25.0 million of excess coverage for product liability claims relating to DEXATRIM products containing PPA. On March 18, 2005, we entered into a settlement and coverage-in-place agreement with Interstate consistent with the term sheet of settlement (the "Settlement Agreement"). In accordance with the Settlement Agreement, Interstate will provide coverage of DEXATRIM PPA claims that are covered by its policy after $78.5 million has been paid toward covered claims. Once the $78.5 million threshold is met, Interstate will pay 100% of the next $4.0 million of claims covered by its policy; 75% of the next $8.5 million of such claims; and 50% of the last $12.5 million of such claims. We are responsible for any claims not covered by the Interstate policy either because the alleged injury did not occur before May 31, 2001, or the claim was first made against us after May 31, 2004. In addition, under the Settlement Agreement, we and Interstate will dismiss all claims and counterclaims filed against each other, and we will release all claims against Interstate relating to the excess coverage product liability insurance. In the first quarter of fiscal 2005, we sold our SELSUN business in certain countries in Africa and Asia to The Mentholatum Co., Inc. We maintain our rights to SELSUN in Australia, New Zealand and worldwide (except India). The divested territory was not compatible with our strategic goals for the remainder of our international SELSUN operations and contributed only $1.3 million in net sales in fiscal 2004. 26 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from our Condensed Consolidated Statements of Operations expressed as a percentage of total revenues: FOR THE THREE MONTHS ENDED ------------------------------- FEBRUARY 28, FEBRUARY 29, 2005 2004 ------------ ------------ TOTAL REVENUES 100.0% 100.0% ------------ ------------ COSTS AND EXPENSES: Cost of sales 28.3 27.7 Advertising and promotion 28.5 30.2 Selling, general and administrative 16.6 17.4 Litigation settlement 3.8 0.3 ------------ ------------ Total costs and expenses 77.2 75.6 ------------ ------------ INCOME FROM OPERATIONS 22.8 24.4 ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (4.9) (7.8) Investment and other income, net 0.2 0.1 Loss on early extinguishment of debt -- (18.5) ------------ ------------ Total other income (expense) (4.7) (26.2) ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 18.1 (1.8) PROVISION FOR (BENEFIT FROM) INCOME TAXES 6.0 (0.6) ------------ ------------ NET INCOME (LOSS) 12.1% (1.2%) ============ ============ 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 February 28, 2005 condensed consolidated financial statements: ALLOWANCE FOR DOUBTFUL ACCOUNTS As of February 28, 2005, 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. During the first quarter of fiscal 2005, we performed a detailed assessment of the collectibility of trade accounts receivable and reduced our estimate of allowance for doubtful accounts by approximately $0.3 million, which resulted in a decrease to selling, general and administrative expense in our condensed consolidated financial statements. 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 27 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 (i.e. BULLFROG and SUN IN lines 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 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 $0.2 million. As a result of higher sales volumes in the first quarter of fiscal 2005 and 2004, we increased our estimate of seasonal returns by approximately $0.1 million and $0.2 million, respectively, which resulted in a decrease to net sales in our condensed consolidated financial statements. During the first quarter of fiscal 2005, as a result of our estimate of customer inventory levels and based on historical non-seasonal product returns, we increased our estimate of non-seasonal returns by approximately $0.6 million, which resulted in a decrease to net sales in our condensed consolidated financial statements, as compared to a $0.2 million decrease in our estimate in the first quarter of fiscal 2004. 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. During the first quarter of fiscal 2005 and 2004, primarily as a result of the sales volume impact on variable based programs, we increased our estimate of promotional accruals by approximately $0.5 million and $1.0 million, respectively, which resulted in a decrease 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 our condensed 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 condensed consolidated financial statements based on an estimated annual effective income tax rate. Our tax rate for the three months ended February 28, 2005 was 33%, as compared to 35% in the three months ended February 29, 2004, respectively. The lower rates for the three months ended February 28, 2005 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. Undistributed earnings of Chattem Canada amounted to approximately $281 for the three months ended February 28, 2005. 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). 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, 2004 filed with the Securities and Exchange Commission. 28 COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 To facilitate discussion of our operating results for the three months ended February 28, 2005 and February 29, 2004, we have included the following selected data from our Condensed Consolidated Statements of Operations:
INCREASE (DECREASE) ------------------------ 2005 2004 AMOUNT PERCENTAGE ---------- ---------- ---------- ---------- (dollars in thousands) Domestic net sales $ 65,569 $ 55,606 $ 9,963 17.9% International revenues (including royalties) 5,962 5,631 331 5.9 Total revenues 71,531 61,237 10,294 16.8 Cost of sales 20,260 16,952 3,308 19.5 Advertising and promotion expense 20,351 18,532 1,819 9.8 Selling, general and administrative expense 11,884 10,635 1,249 11.7 Litigation settlement 2,755 194 2,561 1,320.1 Interest expense 3,495 4,755 (1,260) (26.5) Loss on early extinguishment of debt -- (11,309) nm nm Net income (loss) 8,665 (712) 9,377 1,317.0
DOMESTIC NET SALES Domestic net sales for the three months ended February 28, 2005 increased $10.0 million or 17.9% as compared to the comparable period of 2004. A comparison of domestic net sales for the categories of products included in our portfolio of OTC healthcare products is as follows:
INCREASE (DECREASE) ------------------------ 2005 2004 AMOUNT PERCENTAGE ---------- ---------- ---------- ---------- (dollars in thousands) Topical analgesics $ 21,407 $ 15,712 $ 5,695 36.2% Medicated skin care products 17,624 13,332 4,292 32.2 Dietary supplements 8,660 8,511 149 1.8 Medicated dandruff shampoos and conditioner 9,800 9,221 579 6.3 Other OTC and toiletry products 8,078 8,830 (752) (8.5) ---------- ---------- ---------- Total $ 65,569 $ 55,606 $ 9,963 17.9 ========== ========== ==========
Net sales growth in the topical analgesic category was led by 53% and 50% increases in sales of ASPERCREME and ICY HOT, respectively. ASPERCREME'S sales increase was driven by the launch of the Odor-Free Therapy Back and Body Patch. ICY HOT continued to benefit from the ICY HOT Medicated Sleeve and the effective advertising campaign featuring Shaquille O'Neal. Net sales growth in this category also resulted from 13% and 10% increases in SPORTSCREME and CAPZASIN sales, respectively. The overall sales growth in this category was partially offset by a decline in sales of FLEXALL as competition from inside and outside the category increased and media support was curtailed. Net sales growth in the medicated skin care products category resulted from a 42% increase in the GOLD BOND franchise. GOLD BOND sales growth was attributable to 70%, 52%, 23% and 20% increases from the lotion, foot care, powder and cream product lines, respectively. The increase in sales from the GOLD BOND lotion line of products was attributable to the continuing strength of GOLD BOND ULTIMATE Healing Skin Therapy Lotion. The increase in net sales of GOLD BOND foot resulted from increased distribution, GOLD BOND cream benefited from an effective advertising campaign, and GOLD BOND powder sales were driven by the launch of GOLD BOND ULTIMATE Comfort Powder. Net sales growth in the dietary supplements category was led by a 34% increase in sales of NEW PHASE as a result of the introduction of NEW PHASE Extra Strength. The increase in net sales of NEW PHASE was partially offset by a 7% decline in sales of GARLIQUE. Domestic net sales of SELSUN BLUE medicated dandruff shampoo increased due to an effective advertising campaign. The decrease in net sales for the other OTC and toiletry products category was due primarily to sales decreases of PAMPRIN and PREMSYN, which both lost distribution at a major retailer during the second quarter of fiscal 2004. The decrease was partially offset by an increase in net sales of SUN-IN as a result of expanded distribution. 29 Domestic sales variances were principally the result of changes in unit sales volumes with the exception of certain selected products, for which we implemented a unit sales price increase. INTERNATIONAL REVENUES For the first quarter of fiscal 2005, international revenues increased $0.3 million or 5.9% as compared to the first quarter of fiscal 2004 due principally to strengthening sales of SELSUN in certain European and Middle Eastern countries. Sales variances for international operations were principally the result of changes in unit sales volumes. COST OF SALES Cost of sales as a percentage of total revenues was 28.3% for the first quarter of fiscal 2005 as compared to 27.7% for the first quarter of fiscal 2004. Gross margin of 71.7% was attributable to favorable product mix, purchasing and manufacturing efficiencies and ongoing cost savings programs. ADVERTISING AND PROMOTION EXPENSE Advertising and promotion expenses in the first quarter of fiscal 2005 increased $1.8 million or 9.8% as compared to the same quarter of fiscal 2004 and were 28.5% of total revenues for the three months ended February 28, 2005 compared to 30.2% for the comparable period of fiscal 2004. The decrease in advertising and promotion expense as a percentage of revenues of 1.7% represents a more effective use of advertising to generate sales. Increases in advertising and promotion expenditures in the current period were recorded for ICY HOT, ASPERCREME, CAPZASIN, DEXATRIM, SELSUN BLUE, GARLIQUE, NEW PHASE and GOLD BOND powder, lotion and foot care lines. Decreases in advertising and promotion expenditures were recognized for FLEXALL, PHISODERM, PAMPRIN and PREMSYN. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses increased $1.2 million or 11.7% as compared to the same quarter of fiscal 2004. Selling, general and administrative expenses were 16.6% and 17.4% of total revenues for the first quarter of fiscal 2005 and 2004, respectively. An increase in sales was primarily responsible for the increase in selling expense. In addition, freight expenses increased due to an increase in fuel costs. The increase in general and administrative expenses was largely a result of increased compensation and insurance expense. LITIGATION SETTLEMENT CHARGES Litigation settlement charges were $2.8 million in the first quarter of fiscal 2005. This expense was attributable to incurring $1.1 million of legal expenses relating to the DEXATRIM PPA settlement, and $1.7 million associated with DEXATRIM ephedrine-related claims and legal expenses. INTEREST EXPENSE Interest expense decreased $1.3 million or 26.5% in the first quarter of fiscal 2005 as compared to the same quarter of fiscal 2004. 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 quarter of fiscal 2004, we retired $174.5 million principal amount of our 8.875% Subordinated Notes and the remaining outstanding balance of our Credit Facility, which resulted in a loss on early extinguishment of debt of $11.3 million. 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 $7.9 million and $4.3 million was provided by operations for the three months ended February 28, 2005 and February 29, 2004, respectively. The increase in cash flows from operations over the prior period was primarily attributable to an increase in refundable income taxes and accounts payable. In addition, prepaid expenses and other assets decreased as a result of an increase in prepaid advertising in the first quarter of fiscal 2005. 30 Investing activities provided cash of $68,000 and used cash of $1.0 million in the three months ended February 28, 2005 and February 29, 2004, respectively. The usage of cash in the first quarter of fiscal 2004 was primarily due to the increase in cash surrender value related to executive and director insurance policies. Financing activities used cash of $4.4 million and $1.0 million in the three months ended February 28, 2005 and February 29, 2004, respectively. The increase in cash used in the current period was primarily attributable to the $3.5 million repurchase of common stock and the repayment of loans related to executive and director life insurance policies as compared to the prior period reflecting the refinancing transaction. In January 2005, our board of directors increased the total authorization to repurchase our common stock under our stock buyback program to $30.0 million. In the first quarter of fiscal 2005, we repurchased 102,500 shares for $3.5 million. All repurchased shares were retired and returned to unissued. We, however, are limited in our ability to repurchase shares due to restrictions under the terms of our Revolving Credit Facility, Floating Rate Notes and 7.0% Subordinated Notes. Subsequent to February 28, 2005, we have repurchased 115,800 of our shares for $4.2 million. FOREIGN OPERATIONS - ------------------ Historically, our primary foreign operations have been conducted through our Canadian and United Kingdom ("U.K.") subsidiaries. Effective November 1, 2004, we transitioned our European business to Chattem Global Consumer Products Limited, a wholly-owned subsidiary located in Limerick, Ireland. The functional currencies of these subsidiaries are Canadian dollars, British pounds and Euros, respectively. Fluctuations in exchange rates can impact operating results, including total revenues and expenses, when translations of the subsidiary financial statements are made in accordance with SFAS No. 52, "Foreign Currency Translation". For the three months ended February 28, 2005 and February 29, 2004, these subsidiaries accounted for 7% of total revenues, respectively, and 5% and 3% of total assets, respectively. It has not been our practice to hedge our assets and liabilities in Canada, the U.K. and Ireland 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 approximately 70 foreign countries, our international business operations have expanded significantly, which will increase our exposure to fluctuations in foreign exchange rates. During 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, and beginning April 1, 2004, Abbott began billing us in local currencies. Historically, gains or losses from foreign currency transactions have not had a material impact on our operating results. (Losses) gains of $(10,000) and $34,000 for the three months ended February 28, 2005 and February 29, 2004, respectively, resulted from foreign currency transactions and are included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------- In December 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"), which supercedes Interpretation No. 46, "Consolidation of Variable Interest Entities" issued in January 2003. FIN 46R 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 46R 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 46R applies immediately to a VIE created or acquired after January 31, 2003. For a VIE created before February 1, 2003, FIN 46R 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 46R 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 46R did not have an impact on our financial position, results of operations or cash flows. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS 151"). SFAS 151 amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing", to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have an impact on our financial position, results of operations or cash flows. In November 2004, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 03-13, "Applying the Conditions in Paragraph 42 of FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" in Determining Whether to Report Discontinued Operations" ("EITF 03-13"). Under the consensus, the approach for assessing whether cash flows of the component have been eliminated from the ongoing operations of the entity focuses on whether 31 continuing cash flows are direct or indirect cash flows. Cash flows of the component would not be eliminated if the continuing cash flows to the entity are considered direct cash flows. The consensus should be applied to a component of an enterprise that is either disposed of or classified as held for sale in fiscal periods beginning after December 15, 2004. The adoption of EITF 03-13 is not expected to have an impact on our financial position, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123R supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95, "Statement of Cash Flows". SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions and requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Accordingly, the adoption of SFAS 123R's fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of the adoption of SFAS 123R cannot be predicted at this time because it will depend on the levels of share-based payments granted in the future. However, had we adopted SFAS 123R in prior periods the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of proforma net income and earnings per share in Note 5 to our condensed consolidated financial statements. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were not material to our consolidated financial position or results of operations. This statement is effective for our interim periods beginning after June 15, 2005. In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets" ("SFAS 153"). SFAS 153 amends the guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions" to eliminate certain exceptions to the principle that exchanges of nonmonetary assets be measured based on the fair value of the assets exchanged. SFAS 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. This statement is effective for nonmonetary asset exchanges in fiscal years beginning after June 15, 2005. The adoption of SFAS 153 is not expected to 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. 32 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 February 28, 2005, was $75.0 million. The Floating Rate Notes bear interest at a three-month LIBOR plus 3.00% per year (5.38% as of February 28, 2005). 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 February 28, 2005, no amounts were outstanding under the Revolving Credit Facility, and the variable rate on the Revolving Credit Facility was 6.0%. 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 annual notional principal amounts of $15.0 million beginning March 1, 2006 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 February 28, 2005, 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, U.K. and Irish 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 Operations. In addition, Abbott has continued to supply a portion of our international product, and beginning April 1, 2004, Abbott began billing us in local currencies. The potential loss resulting from a hypothetical 10.0% adverse change in the quoted foreign currency exchange rate amounts to approximately $1.3 million as of February 28, 2005. 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 February 28, 2005 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 over financial reporting or in other factors that could significantly affect such controls. 33 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS - ------------------------------------------------------------------- A summary of the common stock repurchase activity for our first quarter of fiscal 2005 is as follows:
TOTAL NUMBER OF MAXIMUM DOLLAR SHARES PURCHASED AS VALUE THAT MAY PART OF PUBLICLY YET BE PURCHASED TOTAL NUMBER OF AVERAGE PRICE ANNOUNCED PLANS UNDER THE PLANS PERIOD SHARES PURCHASED PAID PER SHARE(1) OR PROGRAMS(2) OR PROGRAMS - ----------------------- ---------------- ---------------- ---------------- ---------------- December 1- December 31 500 $32.50 500 $14,950,220 January 1 - January 31 99,800 $34.24 99,800 $28,479,862 February 1 - February 28 2,200 $36.55 2,200 $28,399,452 Total First Quarter 102,500 $34.28 102,500 $28,399,452
(1) Average price paid per share includes broker commissions. (2) Our stock buyback program authorizing the purchase of up to $20.0 million of our common stock was announced in January 2004. In January 2005, our board of directors increased the total authorization to repurchase our common stock under our stock buyback program to $30.0 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. 34 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 Final Settlement Trust Agreement among Chattem, Inc. and AmSouth Bank dated March 16, 2005 10.2 Settlement and Coverage-In-Place Agreement between Interstate Fire & Casualty Company and Chattem, Inc. effective March 18, 2005 10.3 First Amendment to Credit Agreement dated as of December 22, 2004 among Chattem, Inc., its domestic subsidiaries, identified lenders and Bank of America, N.A., as Agent 10.4 Waiver and Second Amendment to Credit Agreement dated as of February 25, 2005 among Chattem, Inc., its domestic subsidiaries, identified lenders and Bank of America, N.A., as Agent 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 first quarter ended February 28, 2005, we filed the following Form 8-K reports with the Securities and Exchange Commission: Form 8-K, filed December 20, 2004, announcing a term sheet of settlement between Chattem, Inc. and Interstate Fire & Casualty Company. Form 8-K, filed January 20, 2005, containing a copy of our press release announcing our financial results for the fourth fiscal quarter of 2004. 35 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: April 1, 2005 /s/ A. Alexander Taylor II ------------- ------------------------------------------ A. Alexander Taylor II President, Chief Operating Officer and Director (Chief Operating Officer) Dated: April 1, 2005 /s/ Richard D. Moss ------------- ------------------------------------------ Richard D. Moss Vice President and Chief Financial Officer (Principal Financial Officer) 36 CHATTEM, INC. AND SUBSIDIARIES ------------------------------ EXHIBIT INDEX ------------- Exhibit Number Description of Exhibit - -------------- ---------------------- 10.1 Final Settlement Trust Agreement among Chattem, Inc. and AmSouth Bank dated March 16, 2005 10.2 Settlement and Coverage-In-Place Agreement between Interstate Fire & Casualty Company and Chattem, Inc. effective March 18, 2005 10.3 First Amendment to Credit Agreement dated as of December 22, 2004 among Chattem, Inc., its domestic subsidiaries, identified lenders and Bank of America, N.A., as Agent 10.4 Waiver and Second Amendment to Credit Agreement dated as of February 25, 2005 among Chattem, Inc., its domestic subsidiaries, identified lenders and Bank of America, N.A., as Agent 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 37 EX-10.1 2 exhibit10-1_13368.txt FINAL SETTLEMENT TRUST AGREEMENT EXHIBIT 10.1 ------------ FINAL SETTLEMENT TRUST AGREEMENT AMONG CHATTEM, INC., AS SETTLOR AND AMSOUTH BANK, AS TRUSTEE DATED MARCH 16, 2005 FINAL SETTLEMENT TRUST AGREEMENT This FINAL SETTLEMENT TRUST AGREEMENT, dated as of the 16th day of March, 2005, (this "TRUST AGREEMENT") is entered into by and between Chattem, Inc., a Tennessee corporation (the "SETTLOR"), and AmSouth Bank, a bank organized and existing under the laws of the State of Alabama, (the "TRUSTEE") to establish the Final Settlement Trust (the "TRUST") to hold, administer and distribute certain assets, as follows: RECITALS WHEREAS, the Settlor has executed and delivered that certain Class Action Settlement Agreement (the "SETTLEMENT AGREEMENT") whereby the Settlor has agreed to provide for certain payments to be made to a final settlement trust in consideration of the compromise, settlement, and release of claims of the class members in that certain class action litigation in Federal District Court captioned In Re Phenylpropanolamine (PPA) Products Liability Litigation (MDL No. 1407) (the "CLASS ACTION LITIGATION"); and WHEREAS, the Settlement Agreement has been approved by the United States District Court for the Western District of Washington (the "COURT") by Order dated November 12, 2004, (the "ORDER") and the Settlor desires to establish this Trust as the final settlement trust as envisioned by the Settlement Agreement and the Trustee is willing to serve as trustee of the trust under the terms hereinafter set forth; and WHEREAS, the parties hereto intend that this Trust will be a "Qualified Settlement Fund" within the meaning of Section 468B of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder. NOW, THEREFORE, it is agreed as follows: ARTICLE 1 - DEFINITIONS SECTION 1.1 GLOSSARY OF TERMS For purposes of this Trust Agreement, the following terms shall have the meanings set forth in this Article 1. Terms used in the singular shall be deemed to include the plural and vice versa. (a) "BENEFICIARIES" shall have the meaning set forth in section 2.2(a). (b) "BENEFIT FUND" shall have the meaning set forth in section 2.6. (c) "CLAIMS" shall have the meaning set forth in section 2.7. (d) "CLAIMS ADMINISTRATOR" shall mean the person(s) or entity(ies) appointed by the Court, and his/her agents, to administer claims under the Settlement Agreement. (e) "CLASS COUNSEL" shall mean those attorneys representing the Class Members, or such other attorneys as shall be approved by the Court as counsel to the Class Members. (f) "CLASS MEMBERS" shall have the meaning set forth in section 2.2(a). (g) "CLASS ACTION LITIGATION" shall have the meaning set forth in the recitals set forth above. (h) "COURT" shall have the meaning set forth in the recitals set forth above. (i) "EXTRAORDINARY DAMAGES FUND" shall have the meaning set forth in section 2.9. (j) "FINAL BENEFIT DETERMINATION" shall have the meaning set forth in section 2.7. (k) "FINAL CHATTEM SETTLEMENT TRUST" shall mean the Trust established hereby pursuant to the terms of the Settlement Agreement and the Trial Court Approval. (l) "INDEMNIFIED PARTIES" shall have the meaning set forth in section 3.5(a). (m) "INITIAL CHATTEM SETTLEMENT TRUST" shall mean the trust established by that certain Initial Settlement Trust Agreement dated April 12, 2004, to hold funds paid by or on behalf of the Settlor and certain other released parties pursuant to the terms of the Settlement Agreement pending the Trial Court Approval and the establishment of the Final Chattem Settlement Trust. (n) "NOTICE FOR WITHDRAWAL FORM" shall have the meaning set forth in section 2.7. (o) "ORDER" shall have the meaning set forth in the recitals set forth above. (p) "SETTLEMENT AGREEMENT" shall have the meaning set forth in the recitals set forth above. (q) "SETTLOR" shall have the meaning set forth in the preamble hereof. (r) "SETTLOR'S COUNSEL" shall mean Miller & Martin PLLC, or any other person or entity selected by Settlor to represent it in connection with the Trust. (s) "SPECIAL MASTER" shall mean the arbitrator appointed by the Court having the authority to make Final Benefit Determinations under the provisions of the Settlement Agreement. (t) "TRIAL COURT APPROVAL" shall mean the granting, by the Order, of the approval of the Settlement Agreement by the Court. (u) "TRUST" shall have the meaning set forth in the preamble hereof. 2 (v) "TRUST AGREEMENT" shall have the meaning set forth in the preamble hereof. (w) "TRUST ASSETS" shall mean any portion of the personal property held by the Trustee under the terms of the Trust, including any assets added to the Trust pursuant to the provisions of this Agreement by conveyance, assignment, or other transfer. (x) "TRUST EARNINGS" shall have the meaning set forth in Section 2.6 hereof. (y) "TRUST ESTATE" shall mean all of the Trust Assets held by the Trustee under this Agreement, including all additions to the Trust made pursuant to the provisions of this Agreement by conveyance, assignment, or other transfer. (z) "TRUSTEE" shall have the meaning set forth in the preamble hereof. ARTICLE 2 - DECLARATION OF TRUST SECTION 2.1 CREATION OF TRUST This Trust is hereby established as the Final Chattem Settlement Trust in accordance with the Settlement Agreement and the Trial Court Approval. As set forth in Sections 2.3 and 2.4 below, this Trust shall replace, and succeed to all assets currently held by, the Initial Chattem Settlement Trust on the terms hereinafter set forth whereupon the Initial Chattem Settlement Trust shall be deemed terminated and of no further force and effect. This Trust shall be irrevocable and upon the termination of the Trust, the Trust Estate shall be distributed in accordance with Section 2.9. SECTION 2.2 BENEFICIARIES (a) The Beneficiaries of the Trust are all Class Members in the Class Action Litigation (the "CLASS MEMBERS") who have been determined to be entitled to receive benefits under the Settlement Agreement ("BENEFICIARIES") pursuant to the Trial Court Approval. Except as otherwise determined by the Court or as expressly set forth herein, no other person shall be deemed a beneficiary of the Trust or be entitled to exercise any right or remedy with respect to the Trust Assets. (b) Nothing in this Agreement is intended to acknowledge the claims of the Class Members in the Class Action Litigation or to confer any rights or benefits on any individual Class Member other than as specifically set forth herein. Neither Settlor nor Trustee shall have any obligation or duty hereunder to any individual Class Member, and no individual Class Member shall have the direct right to exercise rights, claims or remedies against the Settlor or the Trustee except as otherwise set forth under this Trust Agreement or the Settlement Agreement. (c) The Trust Assets, if any, to which a Class Member is entitled shall be determined only in accordance with the Settlement Agreement and the Trial Court Approval. The Trustee shall have no authority under this Trust Agreement or otherwise to make, alter or 3 otherwise influence benefit determinations with respect to, or distribute or to withhold the distribution of, Trust Assets to, Class Members except as specifically set forth herein. SECTION 2.3 PURPOSES OF THE TRUST The sole purposes of the Trust are to receive, hold and invest funds in accordance with, and subject to, the provisions of this Trust Agreement, and to make payments and disburse funds upon the written instructions of the Claims Administrator, and to take all such other actions as contemplated by the Settlement Agreement and the Trial Court Approval. In addition, the Trustee is authorized to pay out of the Trust Estate all costs related to the administration of the Trust or the Settlement Agreement (including the fees of the Claims Administrator and the Special Master) as may be envisioned by the Settlement Agreement. The Trustee hereby consents to the jurisdiction of the Court for all purposes related to the performance under or interpretation of this Trust Agreement. The Trustee shall have no authority or duty to exercise discretion with respect to the performance of obligations under, or the interpretation of, the Settlement Agreement. Any questions of performance or interpretation under the Settlement Agreement shall be determined by the agreement of Settlor and Class Counsel or as otherwise determined by the Court. Except as expressly set forth herein, no creditor of the Settlor shall have any right, lien, claim or other interest in the Trust or the assets that comprise the corpus (whether classified as principal or income) of the Trust. The Settlor shall have no right or authority to alienate, encumber, mortgage or otherwise convey any interest in the corpus of the Trust. In seeking Court approval of the Trust, the Settlor and Class Counsel shall concurrently apply for and secure from the Court an Order of Attachment encompassing all assets that comprise the corpus of the Trust and all after-acquired assets, thereby securing the assets of the Trust and ensuring that such assets shall be used exclusively for the purposes set forth herein. SECTION 2.4 FUNDING Within five (5) days of the establishment of this Trust, the Settlor will cause to be delivered to the Trustee the assets currently held in the Initial Chattem Settlement Trust as envisioned by the Settlement Agreement. The Settlor shall cause the trustee of the Initial Chattem Settlement Trust to provide a final accounting for the Initial Chattem Settlement Trust and furnish such final accounting to the Settlor, Class Counsel and the Court setting forth the principal of the Initial Chattem Settlement Trust and any earnings thereon less fees and expenses which aggregate amount shall be the initial corpus of the Final Chattem Settlement Trust. The Settlor shall also cause other released parties in the Class Action Litigation to contribute additional funds to the Trust at the time of initial funding, including specifically Sidmak Laboratories, Inc. ("Sidmak") who shall contribute $10,000,000.00. The Trustee hereby agrees to accept the assets and to receive, hold, invest, manage, and distribute the assets in accordance with the Trust Agreement. The Trustee shall also receive, hold, administer and distribute hereunder, as part of the Trust Estate: (i) the additional assets delivered to it from time to time by, or at the direction of, the Settlor; (ii) any recoveries with respect to amounts previously expensed by the Trust (such as, without limitation, refunds of taxes or administrative expenses previously paid by the Trust); and (iii) any interest or other earnings on any of the foregoing. 4 SECTION 2.5 HOLDING OF TRUST ASSETS The Trust Assets may be placed by the Trustee in one (1) or more investment and/or cash drawing accounts as the Trustee may deem necessary, prudent, or useful in order to allow for the investment of the Trust Assets as set forth in Section 4.1(b) and to provide for the timely payment of claims of Beneficiaries and expenses of the Trust as set forth in Section 2.7. Trust Assets may be transferred from any investment account to any cash drawing account established by the Trustee from time to time as the Trustee may determine. Notwithstanding the use of one or more accounts, the Trust Assets held in any such account shall be deemed a component of the overall Trust Estate and no such account shall be considered a separate trust or escrow fund. Notwithstanding the foregoing, the Trustee shall establish a separate drawing account for the purpose of holding funds withheld from payments to Beneficiaries to satisfy government liens pursuant to Section 2.7(c) below. SECTION 2.6 ACCOUNTING FOR TRUST ASSETS The Trust Assets shall be classified as two (2) separate funds for purposes of accounting for payments to Beneficiaries hereunder. The initial funding of the Trust from the transfer of assets from the Initial Chattem Settlement Trust and the transfer of additional assets from other released parties in the Class Action Litigation shall comprise the Benefit Fund from which all payments to Beneficiaries and expenses of the Trust during the period of duration of the Trust shall be made. All cumulative interest, dividends, gains or other investment earnings of the Trust (including interest earned in the Initial Settlement Trust on or after November 12, 2004) received during the period of duration of the Trust less any taxes owed on such income or investment fees charged by third parties with respect to such income shall comprise the Trust Earnings which shall be retained by the Trustee and ultimately distributed upon the termination of the Trust for the benefit of the Beneficiaries as set forth in Section 2.9 below. The Benefit Fund and the Trust Earnings shall be bookkeeping accounts only and the Trustee shall not be required to physically segregate or isolate the amounts comprising the two Funds provided, however, that the amounts allocated to the Trust Earnings shall not be used to make payments to Beneficiaries or pay expenses of the Trust during the period of duration of the Trust. In addition, the Trustee shall establish a separate drawing account for the purpose of holding funds withheld from payments to Beneficiaries to satisfy government liens pursuant to Section 2.7(c) below. SECTION 2.7 PAYMENTS FROM THE TRUST ESTATE (a) During the pendency of the Trust, the Trustee shall pay Claims of Beneficiaries as follows. The Trustee shall maintain an office to which Claims may be submitted by the Claims Administrator. The Trustee shall be under no obligation to consider Claims submitted from any person or source other than the Claims Administrator. Claims must be submitted by the Claims Administrator on the "Notice for Withdrawal of Funds From Final Chattem Settlement Trust" form attached as Annex A. The Trustee shall be under no obligation to consider Claims submitted in a manner other than pursuant to the Notice for Withdrawal Form. 5 (b) Upon the receipt of a Notice for Withdrawal Form from the Claims Administrator, the Trustee shall confirm that (1) the Notice for Withdrawal Form has been completed with the name, taxpayer identification number and address of one or more payees and an amount or amounts payable; and (2) the Notice for Withdrawal Form has been executed by a duly authorized officer of the Claims Administrator. If the Notice for Withdrawal Form fails to contain the necessary items (1) and (2), the Trustee shall return the Notice for Withdrawal Form to the Claims Administrator and shall be under no further obligation to act until a completed and executed Notice for Withdrawal Form is resubmitted by the Claims Administrator. (c) Upon confirmation of items (1) and (2) set forth in subsection 2.7(b), the Trustee shall issue a trust account check to the payees listed in the Notice for Withdrawal Form and in the amounts set forth on the Notice for Withdrawal Form, and mail the checks to the Claims Administrator at the address set forth on the Notice for Withdrawal Form within thirty (30) days of the date of receipt of the Notice for Withdrawal Form from the Claims Administrator. If the Notice of Withdrawal Form provides instructions regarding the withholding of amounts necessary to satisfy government liens, the Trustee shall segregate such funds into a separate account for holding funds for the benefit of the lienholder or issue and mail a check for the withheld amount to the designated lienholder in accordance with the instructions set forth in the Notice of Withdrawal Form. Except as specifically set forth herein, the Trustee shall be under no obligation to investigate the circumstances of the Claim, to ascertain the bona fides of the information submitted on the Notice for Withdrawal Form, to confirm the amounts payable or to take other action. The Trustee shall have no discretion to refuse to pay the designated payees upon the submission of a duly-completed Notice for Withdrawal Form. Each payment made pursuant to a Notice for Withdrawal Form shall be debited against the current balance in the Benefit Fund. (d) In addition to the payment of Claims as set forth above, the Trustee shall also be authorized to pay out of the Benefit Fund the monthly statements for services rendered and expenses incurred of (1) the Claims Administrator, (2) the Special Master, and (3) other third-party costs and expenses, as may be forwarded from time to time by the Claims Administrator to the Trustee for payment on the Notice for Withdrawal Form, provided that such statements have been approved and endorsed by Settlor's Counsel as required on the Notice for Withdrawal Form. SECTION 2.8 ADDITIONAL FUNDING OF THE TRUST BY THE SETTLOR The Trustee shall immediately notify the Settlor (with a copy to Class Counsel and the Claims Administrator) by written notice if the balance in the Benefit Fund is reduced to an amount less than $5,000,000.00 due to the payment of Claims, expenses of the Trust, compensation and expenses paid to the Claims Administrator, Special Master and/or Trustee, any indemnification of the Trustee as provided for in Section 3.5, or otherwise authorized and payable hereunder. The Trustee shall specify the amount by which the Benefit Fund has been reduced below $5,000,000.00, and the amount payable under Notice for Withdrawal Forms which have been received by the Trustee but not yet paid 6 and other current expenses payable by the Trustee. Within fifteen (15) days of the receipt of such notice, the Settlor shall contribute, or cause to be contributed, an amount sufficient to make the balance in the Benefit Fund at least $5,000,000.00, after taking into account the payment of all pending Notice for Withdrawal Forms and all other expenses currently payable by the Trustee, if any. SECTION 2.9 FINAL DISTRIBUTION OF THE TRUST ESTATE The Trust shall be terminated upon delivery by the Claims Administrator of written notice to the Trustee that all Claims of Beneficiaries have been satisfied or otherwise provided for and all governmental liens have been satisfied. Upon receipt of written notice of the Claims Administrator that all Claims of Beneficiaries have been satisfied, the Trustee shall, within fifteen (15) days of receipt, make arrangements for the payment of final expenses of the Trust out of the Benefit Fund, including the payment of outstanding invoices from the Claims Administrator and the Special Master, and convey an amount equal to $5,000,000.00 of the Benefit Fund, and the full amount of the Trust Earnings, to a successor trust or escrow account to comprise the Extraordinary Damages Fund for the benefit of the Beneficiaries established by Class Counsel or as otherwise directed by Class Counsel and approved by Settlor's Counsel and the Court. In the event the balance of the Benefit Fund is less than $5,000,000.00 at the time of receipt of the final notice from the Claims Administrator, the Trustee shall notify the Settlor of the deficit and the Settlor shall contribute, or cause to be contributed, an amount necessary to restore the balance of the Benefit Fund to $5,000,000.00 and thereupon the Trustee shall convey the $5,000,000.00 balance of the Benefit Fund and the Trust Earnings to the successor established by Class Counsel. In the event the balance of the Benefit Fund is greater than $5,000,000.00 at the time of receipt of final notice from the Claims Administrator, the Trustee shall convey $5,000,000.00 of the Benefit Fund and the Trust Earnings to the successor and all remaining amounts in the Benefit Fund that are not used to satisfy the obligations of the Trust, including the compensation and expenses of the Trustee, shall be distributed as directed by the Settlor and as approved by the Court. Upon final distribution of all Trust Assets in accordance herewith, the Trust shall terminate. SECTION 2.10 FINAL ACCOUNTING Upon the termination of the Trust, the Trustee shall undertake a final accounting and furnish a final report to the Settlor, Class Counsel and the Court within forty-five (45) days setting forth the initial principal of the Trust Estate, all additions to the principal of the Trust Estate, any earnings of the Trust Estate, disbursements to Beneficiaries and all ordinary and necessary expenses incurred by the Trustee in connection with the management and administration of the Trust Estate, and the final distributions from the Trust. Such Final Accounting shall include an itemized statement of payments made by the Trust to Beneficiaries of the Trust, setting forth the gross amount of each Beneficiary's claim, the amounts deducted and paid or withheld therefrom and the net amount paid to such Beneficiary. 7 ARTICLE 3 - TRUSTEE SECTION 3.1 QUALIFICATION TO SERVE The Trustee hereby accepts the nomination and appointment to serve as trustee and agrees to act in accordance with the terms of this Trust Agreement. The Trustee is, and shall continue to be, a bank organized and doing business under the laws of the United States of America or under the laws of any state thereof, authorized under such laws to exercise corporate trust powers, with a combined capital and surplus of at least $100,000,000. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 3.1, it shall resign immediately in the manner and with the effect hereinafter specified in this Article 3. There shall at all times only be a single trustee of the Trust. The Trustee shall act in accordance with the terms of this Trust Agreement and upon the direction of the Court. The Trustee may not assign its rights or obligations hereunder without the prior written consent of the Settlor, Class Counsel and the Court, provided, however, that the merger or consolidation, or other assumption of assets and liabilities of, the Trustee with or by another bank otherwise qualifying hereunder with such bank being the legal successor to the Trustee shall not be deemed an assignment and shall not require the consent of the Settlor or the Court. SECTION 3.2 TERM OF SERVICE The Trustee shall serve for the duration of the Trust, subject to its resignation or removal as set forth herein. SECTION 3.3 APPOINTMENT OF SUCCESSOR TRUSTEE (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article 3 shall become effective until the acceptance of appointment by the successor Trustee under Section 3.3(c) below. The Trustee may resign at any time by giving written notice thereof to the Settlor, Class Counsel and the Court, and may be removed at any time with the approval of the Court. In addition, if at any time: (i) the Trustee shall fail to comply with the requirements contained in Section 3.1, or (ii) the Trustee shall become incapable of acting or shall be adjudged bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation, or liquidation, then all of the Trustee's powers and authority granted under this Trust shall be immediately suspended pending review by the Court, which shall be sought promptly by the Settlor and Class Counsel. In so doing, the Settlor and Class Counsel may seek all appropriate relief from the Court including, if warranted, removal of the Trustee. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within thirty (30) days after the giving of such notice of resignation, the resigning Trustee may petition the Court for the appointment of a successor Trustee. A successor Trustee must meet the qualifications set forth in Section 3.1 of this Trust Agreement. 8 (b) Upon the acceptance of office by any successor Trustee, all rights, titles, duties, powers, and authority of the predecessor Trustee under this Trust Agreement shall be vested in and undertaken by the successor Trustee without any further act being required. No successor Trustee shall be liable for any act or omission of its predecessor. (c) Every successor Trustee appointed hereunder shall execute, acknowledge, and deliver to the Court and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed, or conveyance, shall become vested with all the rights, powers, trusts, and duties of the retiring Trustee; but, on request of the Court or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all of the rights, powers, and trusts of the retiring Trustee, and shall duly assign, transfer, and deliver to each successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Settlor shall execute any and all instruments reasonably necessary for more fully and certainly vesting in and confirming to each such successor Trustee all such rights, powers, and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article 3, to the extent operative. (d) Upon the resignation or removal of the Trustee, the Trustee shall within forty-five (45) days furnish a final report to the Settlor, Class Counsel and the Court setting forth the initial principal of the Trust Estate, all additions to the principal of the Trust Estate, any earnings of the Trust Estate, disbursements to Beneficiaries and all ordinary and necessary expenses incurred by the Trustee in connection with the management and administration of the Trust Estate during the Trustee's term of service. SECTION 3.4 COMPENSATION AND EXPENSES OF TRUSTEE The Trustee shall be entitled to receive a fee and also shall be reimbursed for any reasonable out-of-pocket expenditures, and ordinary and customary expenses, disbursements, and advancements related to performing its services during the period of the continuation of the Trust as set forth in Annex B. The Parties agree that this compensation represents reasonable compensation for services to be rendered by the Trustee hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust). The fees and expenses of the Trustee shall be paid out of the Trust Estate. SECTION 3.5 INDEMNIFICATION / LIABILITY OF TRUSTEE (a) So long as the Trustee (or former Trustee) and its officers, directors, employees and agents (collectively, the "INDEMNIFIED PARTIES" or individually, an "INDEMNIFIED PARTY") act or have acted in accordance with the terms of this Trust Agreement, the Order and/or upon the direction of the Court, the Indemnified Parties who were or are a party, or are threatened to be made a party, to any threatened, pending, or completed action, suit or proceeding of any kind, whether civil, administrative, or arbitrative, and whether brought (i) against the Trust, or (ii) with respect to a Trustee, by reason of such Trustee 9 being or having been a Trustee of the Trust, shall be indemnified and held harmless by the Settlor and the Trust from and against all costs, damages, judgments, attorneys' fees (whether such attorneys shall be regularly retained or specifically employed), expenses, obligations, and liabilities of every kind and nature which the Indemnified Party or Indemnified Parties may insure, sustain, or be required to pay in connection with or arising out of this Trust Agreement, and to pay to the Indemnified Party or Indemnified Parties on demand the amount of all such costs, damages, judgments, attorneys' fees, expenses, obligations and liabilities. (b) The Trustee shall have no liability or obligation, nor shall any person have a legal or equitable claim, remedy or cause of action for any act or omission by the Trustee with respect to the Trust Estate except for Trustee's failure to comply with the fiduciary standards for trustees as set forth in the laws of the State of Tennessee. The Trustee's sole responsibility shall be for the receipt, administration, investment, and disbursement of the Trust Estate in accordance with the terms of this Trust Agreement. The Trustee shall have no implied duties or obligations and shall not be charged with knowledge or notice of any fact or circumstance not specifically set forth herein. The Trustee may rely upon any instrument, not only as to its due execution, validity and effectiveness, but also as to the truth and accuracy of any information contained therein, which the Trustee shall in good faith believe to be genuine, to have been signed or presented by the person or parties purporting to sign the same and to conform to the provisions of this Trust Agreement. In no event shall the Trustee be liable for incidental, indirect, special, consequential or punitive damages. The Trustee shall not be obligated to take any legal action or commence any proceeding in connection with the Trust Estate, this Trust Agreement or the Settlement Agreement, or to appear in, prosecute or defend any such legal action or proceeding. The Trustee may consult legal counsel selected by it in the event of any dispute or question as to the construction of any of the provisions hereof or of any other agreement or of its duties hereunder, and shall incur no liability and shall be fully indemnified from any liability whatsoever in acting in accordance with the opinion or instruction of such counsel. ARTICLE 4 - POWERS OF THE TRUSTEE SECTION 4.1 POWERS. To carry out the purposes of this Agreement, subject to any limitation in this Agreement, the Trustee is vested with the following powers, in addition to those now or hereafter conferred by law or court order affecting the Trust Estate: (a) To continue to hold any Assets other than cash contributed to the Trust, whether or not of the type or quality, nor constituting a diversification, considered proper for trust investments. (b) To invest and reinvest the principal of the Trust Estate; provided, however, that all investments made by the Trustee shall be in U.S. Government Treasury bills or in other obligations guaranteed by the U.S. Government, with maturities of no more than six (6) months or shares of a money market mutual fund registered under the Investment Company Act of 1940, as amended, the principal of which is invested solely in U.S. 10 Government or agency obligations and repurchase agreements (including such funds advised, managed or sponsored by the Trustee or any of its affiliates), except for such amounts as may be necessary from time to time to be held in a bank checking and/or interest-bearing time deposit account for purposes of paying Claims hereunder. (c) To initiate or defend at the expense of the Trust Estate, any litigation relating to the Trust Estate or property of the Trust Estate, and to compromise, arbitrate, or otherwise adjust claims in favor of or against the Trust Estate and to carry such insurance as the Trustee may deem advisable. The Trustee shall have the authority to initiate, defend and participate in, at the expense of the Trust Estate, all proceedings related to or affecting the Trust, the Trustee or Settlor's obligations under the Settlement Agreement involving the Trust, and the Trustee shall be a party in interest entitled to notice of all such proceedings. (d) To have, respecting securities, all the rights, powers, and privileges of an owner. (e) To employ any custodian, attorney, accountant or other agent reasonably necessary to assist the Trustee in administration of the Trust Estate, and to rely on the advice given by such person. SECTION 4.2 NO SEGREGATION PER BENEFICIARY The Trustee may hold all trust property as a single segregated trust and is under no obligation to separate or segregate or account for trust property for the benefit of individual Beneficiaries. SECTION 4.3 RIGHT TO NON-PERFORM IN CASE OF DISPUTE. In the event of any disagreement between the Settlor and Beneficiaries, or between them and any other person, resulting in adverse claims or demands being made in connection with the assets to be administered hereunder, or in the event that the Trustee, in good faith, be in doubt as to what action it would take hereunder, the Trustee may, at its option, refuse to comply with any claims or demands or it may refuse to take any other action hereunder, so long as such disagreement continues or such doubt exists, and in any such event, the Trustee shall not be or become liable in any way or to any person for its failure or refusal to act, and the Trustee shall be entitled to continue so to refrain from acting until (i) otherwise directed by the Court, or (ii) there exists an agreement between the Settlor and Beneficiaries, and the Trustee shall have been notified thereof in writing signed by or on behalf of all such persons. The rights of the Trustee to non-perform under this paragraph shall be deemed to encompass any express or implied obligation to sue, initiate action or otherwise collect from the Settlor or other parties amounts owed to the Trust pursuant to Section 2.8 or 2.9 above. The rights of the Trustee under this paragraph are in addition to all other rights which it may have by law or otherwise. 11 ARTICLE 5 - ADMINISTRATIVE PROVISIONS SECTION 5.1 BOND. No bond, or other security, shall be required of the Trustee named in this Agreement. SECTION 5.2 SITUS AND VENUE. This Trust Estate has been created and accepted by the Trustee in the State of Tennessee and its validity, construction, and interpretation, and all rights created by this Trust Agreement shall be governed by the laws of the State of Tennessee. Notwithstanding the foregoing, any action to enforce, interpret or adjudicate the rights and responsibilities hereunder shall be in the first instance commenced in the Court. SECTION 5.3 PARTIAL INVALIDITY. Each provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. If any provision of this Agreement or the application of such provision to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected by such invalidity or unenforceability, unless such provision or such application of such provision is essential to this Agreement. SECTION 5.4 HEADINGS. The headings of the various Sections of this Agreement have been inserted only for convenience, and shall not be deemed in any manner to modify or limit any of the provisions of this Agreement, or be used in any manner in the interpretation of this Agreement. SECTION 5.5 INTERPRETATION. Whenever the context so requires, all words used in the singular shall be construed to have been used in the plural (and vice versa), and each gender shall be construed to include the other gender. SECTION 5.6 TAX MATTERS The parties hereto intend that this Trust will be a "Qualified Settlement Fund" within the meaning of Section 468B of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder. The Trustee shall take no action that would cause the Trust to fail to be a Qualified Settlement Fund. In addition to all of the Trustee's other obligations under this Agreement, the Trustee shall handle all federal and state tax matters related to the Trust. The Trustee shall cause a Federal Employer Identification Number for the Trust to be obtained and shall cause the annual income tax returns to be filed on the basis of a December 31 fiscal year end. The Trustee shall take all steps necessary to ensure that any tax obligations imposed upon the Trust are paid. To the extent necessary to satisfy this objective, the Trust is hereby authorized to, among other things, (i) communicate with the Internal Revenue Service and any state agency on behalf of the Trust, (ii) make payment of taxes on behalf of the Trust (which taxes will be paid out of the Trust assets), and (iii) file all applicable tax returns for the Trust. All 12 ordinary and necessary expenses incurred in connection with the preparation of such tax returns shall be paid from the Trust Estate. SECTION 5.7 REPORTS The Trustee shall furnish a report to the Settlor, Class Counsel and the Court on a monthly basis setting forth the principal of the Trust Estate, any earnings of the Trust Estate, disbursements to Beneficiaries and all ordinary and necessary expenses incurred by the Trustee in connection with the management and administration of the Trust Estate. SECTION 5.8 AMENDMENT Any or all of the provisions of this Agreement may be amended at any time and from time to time, in whole or in part, by an instrument in writing executed by the Settlor and approved by the Court. No such amendment shall authorize or permit any part of the Trust Estate to be used for or diverted for purposes other than as envisioned by the Settlement Agreement and no such amendment which affects the rights or duties of the Trustee may be made without the Trustee's written consent. SECTION 5.9 FINAL TERMINATION Notwithstanding any provision in this Agreement to the contrary, neither this Trust nor any other trust established in accordance with this Agreement shall continue beyond the date that is twenty-one years after the death of the survivor of all of the Beneficiaries living on the date of this Agreement. SECTION 5.10 CONFIDENTIALITY The Trustee agrees that any information provided by or regarding a Class Member or otherwise obtained pursuant to this Trust Agreement shall be kept confidential and shall not be disclosed except to appropriate persons to the extent necessary to process Claims or provide benefits hereunder or as otherwise expressly required hereunder or by applicable law. 13 IN WITNESS WHEREOF, the parties hereto have duly executed this Trust Agreement as of the date first set forth above. CHATTEM INC.: - ------------- By:_________________________ Date:________________ Title:______________________ AMSOUTH BANK: - ------------- By:_________________________ Date:________________ Title:______________________ 14 ANNEX A ------- 15 - -------------------------------------------------------------------------------- NOTICE FOR WITHDRAWAL OF FUNDS FROM FINAL CHATTEM SETTLEMENT TRUST IN RE PHENYLPROPANOLAMINE (PPA) PRODUCTS LIABILITY LITIGATION (MDL NO. 1407) - -------------------------------------------------------------------------------- TO: AMSOUTH BANK TRUSTEE, FINAL CHATTEM SETTLEMENT TRUST BY FACSIMILE (XXX) XXX-XXXX ATTENTION: ____________________ - -------------------------------------------------------------------------------- The undersigned representative of the Claims Administrator under that certain Class Action Settlement Agreement dated as of April 13, 2004, provides this Notice for Withdrawal of Funds. The undersigned confirms that the withdrawal request listed below complies with the terms of the Settlement Agreement and that any benefit payment has been approved by the Chattem Claims Coordinator and the Class Counsel Claims Coordinator. The Claims Administrator hereby submits this Notice pursuant to Section 2.7 of the Final Chattem Settlement Trust Agreement. - -------- ------------------------------------- --------------------------------- 1. CHATTEM FINAL SETTLEMENT TRUST WITHDRAWAL NOTICE: Notice # ______ - -------- ------------------------------------- --------------------------------- 2. DATE OF NOTICE: ____________, 2005 - -------- ------------------------------------- --------------------------------- 3. TOTAL AMOUNT TO BE WITHDRAWN FROM THE TRUST UNDER THIS NOTICE: $________ - -------- ------------------------------------- --------------------------------- |_| Benefit Payment (see 5 below) 4. DESCRIPTION OF WITHDRAWAL: |_| Fee or Expense Payment (see 6 below) - -------- ------------------------------------- --------------------------------- Pay: $__________ to: 5A. BENEFIT PAYMENT TO BE ISSUED TO: Payee: ________ TIN: __________ Class Member and/or Designated Address: ______________________ Representative: Pay: $__________ to: MDL No. 1407 Fund for Litigation Payee: ________ TIN: __________ Expenses: Address: ______________________ |_|None Provision for Government |_|Withhold: $_________ Lienholders: |_|Pay: $_________ to: Payee: ________ TIN: __________ Address: ______________________ - -------- ------------------------------------- --------------------------------- _________, CLAIMS ADMINISTRATOR 5B. BENEFIT PAYMENT APPROVAL: BY: ___________________________ ______________________ ,_______ for Claims Administrator DATE: ______________ - -------- ------------------------------------- --------------------------------- 16 - -------- ------------------------------------- --------------------------------- 6A. FEE OR EXPENSE PAYMENT TO BE ISSUED Pay: $__________ to: TO: Payee: ____________ TIN: ______ Address: ______________________ - -------- ------------------------------------- --------------------------------- 6B. FEE OR EXPENSE PAYMENT APPROVAL: _________, CLAIMS ADMINISTRATOR BY: ___________________________ ________________________,______ for Claims Administrator DATE: _____________ ____________, SETTLOR'S COUNSEL BY: ___________________________ ______________________,________ - -------- ------------------------------------- --------------------------------- ALL CHECKS ISSUED HEREUNDER SHALL BE MAILED TO: ___________________________ CLAIMS ADMINISTRATOR, FINAL CHATTEM SETTLEMENT TRUST ___________________________ ___________________________ ATTENTION: ________________ - -------------------------------------------------------------------------------- 17 ANNEX B SCHEDULE OF FEES The Trustee shall be paid a fee for all Trustee, Investment Management and Administrative Services equal to 25 basis points (0.25 of 1.00%) of the market value of the Trust Estate on an annual basis billed monthly in arrears. The fee is based upon the limited Trustee, Investment Management and Administrative Services envisioned by the Trust Agreement and AmSouth Bank reserves the right to adjust the fee upon a change in the scope of the duties required under the Trust Agreement. 18 EX-10.2 3 exhibit10-2_13368.txt SETTLEMENT AND COVERAGE-IN-PLACE AGREEMENT EXHIBIT 10.2 ------------ SETTLEMENT AND COVERAGE-IN-PLACE AGREEMENT ------------------------------------------ This Settlement and Coverage-in-Place Agreement ("Agreement") is entered into by and between Interstate Fire & Casualty Company, and all of its affiliated, related, parent or subsidiary companies, and all of their directors, officers, shareholders, agents, employees, attorneys, assigns and all persons and entities acting by, through or under any of them (hereafter "INTERSTATE"), and Chattem, Inc., and all of its directors, officers, shareholders, agents, employees, attorneys, assigns and all persons and entities acting by, through or under any of them, and any and all persons or entities named as insureds or alleged to be an insured (hereafter "CHATTEM"), as of the date of execution of this Agreement (hereafter "Date of Execution") and under the terms and conditions set forth herein. For the purposes of this Agreement, the term "Party" refers to INTERSTATE or CHATTEM, and the term "Parties" refers to both INTERSTATE and CHATTEM. WHEREAS, Admiral Insurance Company ("Admiral") issued Policy No. A99AG07865 (the "Admiral Policy") to CHATTEM for the policy period December 21, 1999 through May 31, 2001. The Admiral Policy provided limits of $1,000,000 per occurrence, $2,000,000 General Aggregate Other than Products-Completed Operations, and $2,000,000 Products-Completed Operations Aggregate. The Admiral Policy provided claims-made liability insurance coverage, subject to its terms, for claims first made against CHATTEM during the policy period and arising out of injury occurring on or after December 21, 1998 (December 21, 1998 is hereafter referred to as the "Retroactive Date") and on or before May 31, 2001. An extended reporting period endorsement added to the Admiral Policy extended the claims-made reporting period to May 31, 2004; WHEREAS, General Star Indemnity Company ("General Star") issued Umbrella Liability Policy No. IUG-358416B (the "General Star Policy") to CHATTEM with the same policy period and extended claims-made reporting period as the Admiral Policy. The General Star Policy provided limits of $25,000,000 per occurrence and $25,000,000 General Aggregate in excess of the limits of the Admiral Policy; WHEREAS, Kemper Indemnity Insurance Company ("Kemper") issued Policy No. 9YR 001001-01 (the "Kemper Policy") to CHATTEM with the same policy period and extended claims-made reporting period as the Admiral Policy. The Kemper Policy provided limits of $50,000,000 per occurrence, $50,000,000 General Aggregate, and $50,000,000 Products-Completed Operations Aggregate in excess of the limits of the General Star Policy; WHEREAS, INTERSTATE issued Policy No. XUM 1000113-01 (the "POLICY") to CHATTEM for the policy period December 21, 1999 through May 31, 2001. The policy limits of the POLICY were $25,000,000 per occurrence and $25,000,000 general aggregate in excess of the underlying $77,000,000 limits. The POLICY provided claims-made excess liability insurance coverage, subject to its terms, for claims first made against CHATTEM during the policy period and arising out of injury occurring on or after the Retroactive Date and on or before May 31, 2001. An 1 extended reporting period endorsement added to the POLICY extended the claims-made reporting period to May 31, 2004; WHEREAS, numerous claims have been made and suits have been brought against CHATTEM alleging bodily injury arising out of the alleged ingestion of Dexatrim containing phenylpropanalomine ("PPA"), which product was acquired by CHATTEM on December 21, 1998. These suits and claims have been made in a variety of jurisdictions. Many of the suits have been consolidated in Multi-District Litigation in Seattle, Washington, case no. MDL No. 1407, entitled "In Re: Phenylpropanalomine (PPA) Products Liability Litigation" (hereafter "MDL"). Other suits have been pending in various state courts. Any claim or suit alleging bodily injury as a result of the ingestion of Chattem's Dexatrim product is hereinafter referred to as a "PPA Claim". All such claims and suits are hereinafter collectively referred to as the "PPA Claims"; WHEREAS, CHATTEM tendered some or all of the PPA Claims to INTERSTATE, contending that some or all of the PPA Claims are covered under the POLICY; WHEREAS, on or about July 31, 2003, Kemper filed suit against CHATTEM and other insurers in an action entitled Kemper Indemnity Insurance Company v. Chattem, Inc., et al., pending in the United States District Court, Eastern District of Tennessee at Chattanooga, No. 1:03-CV264 (hereinafter "Coverage Action"); WHEREAS, INTERSTATE intervened in the Coverage Action and CHATTEM filed a counterclaim against INTERSTATE; WHEREAS, CHATTEM settled with Kemper, General Star and Admiral concerning their respective obligations under the Kemper Policy, the General Star Policy and the Admiral Policy, respectively. Admiral and General Star had previously paid $1,115,000 and $2,500,000, respectively, toward claims covered by their respective policies (the "Previously Settled Covered Claims"). Admiral agreed to pay an additional $885,000 toward claims covered by the Admiral Policy; General Star agreed to pay an additional $22,500,000 toward claims covered by the General Star Policy; Kemper agreed to pay $37,500,000 toward claims covered by the Kemper Policy (collectively, the "Future Agreed Payments"); WHEREAS, as part of its settlement agreement with Kemper, CHATTEM agreed to accept $37,500,000 in full satisfaction of Kemper's obligations under the Kemper Policy, which amount is $12,500,000 less than the aggregate limits of liability stated in the Kemper Policy. Notwithstanding that agreement between CHATTEM and Kemper, CHATTEM'S Retention shall be defined as sort forth herein; WHEREAS, as of the Date of Execution, CHATTEM and INTERSTATE are the only remaining parties to the Coverage Action; 2 WHEREAS, on or about April 13, 2004 CHATTEM entered into a Class Action Settlement Agreement with Class Counsel on Behalf of Class Representatives in the MDL (hereafter "Class Action Settlement"). On November 12, 2004, the Court in the MDL issued a Memorandum and Order ruling that the Class Action Settlement satisfied the requirements of Federal Rule of Civil Procedure 23 and that the Class Action Settlement is fair, reasonable and adequate. The Court granted the motion for approval of the Class Action Settlement, certified the settlement class, and approved the settlement; WHEREAS, the Class Action Settlement provided that CHATTEM would establish an Initial Chattem Settlement Trust, which would be converted to a Final Chattem Settlement Trust (which terms are defined in the Class Action Settlement). The Future Agreed Payments of Admiral, General Star and Kemper were paid into the Initial Chattem Settlement Trust and will be transferred to the Final Chattem Settlement Trust; WHEREAS, the approved Class Action Settlement provided, among other things, that eligible claimants must file claims in, or opt out of, the settlement class, on or before July 7, 2004. CHATTEM has received approximately 387 class claims and notice of approximately 16 opt-out claims with injury dates after the Retroactive Date, including 173 stroke claims; WHEREAS, the Parties dispute their respective obligations regarding the coverage under the POLICY for the PPA Claims; WHEREAS, CHATTEM and INTERSTATE believe that it is in their mutual best interests to reach an amicable resolution with respect to coverage under the POLICY for the PPA Claims, including the issues raised in the Coverage Litigation, and to create a mechanism to establish INTERSTATE'S and CHATTEM'S obligations with respect to the PPA Claims. NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, CHATTEM and INTERSTATE hereby agree as follows: 1. For the purposes of this Agreement, the term "Covered Claim(s)" shall mean any PPA Claim where the alleged injury occurred on or after the Retroactive Date and on or before May 31, 2001, and where such claim was first made against CHATTEM on or after December 21, 1999 and on or before May 31, 2004. The term "Non-Covered Claim(s)" shall refer to any PPA Claim where the alleged injury occurred before the Retroactive Date or after May 31, 2001, and to any PPA Claim that was first made against CHATTEM before December 21, 1999 or after May 31, 2004. 2. INTERSTATE shall have no obligation to pay any Covered Claim until payment of $78,500,000 has been made by, or on behalf of, CHATTEM in Settlements or Judgments for Covered Claims and Previously Settled Covered Claims (hereafter, "CHATTEM'S Retention"). 3 For purposes of this Agreement, "Settlements or Judgments for Covered Claims" means: a. all payments made by the Final Chattem Settlement Trust other than those payments made for Non-Covered Claims; b. all settlements or judgments paid by or on CHATTEM'S behalf for claims of individuals that opted out of the Class Action Settlement ("Opt-Out Claimants"), other than for Opt-Out Claimants whose claims are Non-Covered Claims; c. subject to the provisions of Paragraph 4, payment to the Extraordinary Injury Fund (also known as the Extraordinary Damages Fund) ("EIF") as described in the Class Action Settlement; and d. all settlements or judgments for PPA Claims for which CHATTEM is obligated to indemnify any entity, other than settlements or judgments for Non-Covered Claims. INTERSTATE is not responsible for the payment of any defense fees or costs as part of an obligation to indemnify any other entity, and no such payment shall constitute Settlements or Judgments for Covered Claims. INTERSTATE and CHATTEM agree that INTERSTATE shall have no obligation to pay any PPA Claim that does not constitute a Covered Claim, as defined herein, and that INTERSTATE shall have no obligation to pay any sum or perform any action on CHATTEM'S behalf until CHATTEM'S Retention has been paid by or on behalf of CHATTEM. 3. In the event that payment for Previously Settled Covered Claims plus Settlements or Judgments for Covered Claims, as defined in Paragraph 2, above, exceeds CHATTEM'S Retention, INTERSTATE'S only obligation to pay further Settlements or Judgments for Covered Claims shall be as follows: a. INTERSTATE will pay the first $4,000,000 in Settlements or Judgments for Covered Claims in excess of CHATTEM'S Retention; b. INTERSTATE will pay 75% of the next $8,500,000 in Settlements or Judgments for Covered Claims in excess of CHATTEM'S Retention and a., above; CHATTEM will pay 25% of such Settlements or Judgments for Covered Claims; c. INTERSTATE and CHATTEM will each pay 50% of the next $12,500,000 in Settlements or Judgments for Covered Claims in excess of CHATTEM'S Retention and a. and b., above. 4 It is expressly understood and agreed by INTERSTATE and CHATTEM that notwithstanding the limits of liability set forth in the POLICY, INTERSTATE'S total aggregate obligation to CHATTEM for all claims of any nature or kind whatsoever under the POLICY is as set forth in this Paragraph 3. 4. With respect to the funding of payments to be made to the EIF, as discussed in subparagraph c. of Paragraph 2 of this Agreement, the Class Action Settlement Agreement provides that "within fifteen (15) days after a Final Benefit Determination is rendered for all Class Members who submitted a Benefit Claim Form, the Trustee of the Final Chattem Settlement Trust shall allocate $5,000,000 from the Benefit Fund to the Extraordinary Damages Fund [EIF]." Accordingly, the EIF will be funded before any determination is made regarding payments to be made by the EIF. To determine the Parties' obligations with respect to the initial and final funding of the EIF, the Parties agree as follows: a. The provisions of Paragraphs 2 and 3 of this Agreement apply, so that if Covered Claims, including payments to the EIF, do not exceed CHATTEM'S Retention, INTERSTATE shall have no obligation to pay any portion of the EIF. b. In the event that Covered Claims, including payments to the EIF, exceed CHATTEM'S Retention, the procedures for determining the amounts initially payable by INTERSTATE and CHATTEM for the initial funding of the EIF, subject to the provisions of Paragraphs 2 and 3 of this Agreement, are set forth below: i. In advance of the payment to the EIF, the Parties will identify the Covered and Non-Covered Claims eligible for payment from the EIF and allocate shares of the $5,000,000 payment to the EIF in the ratio that the number of Covered Claims eligible for payment from the EIF bears to the total number of all claims eligible for payment from the EIF. INTERSTATE shall advance the portion of the EIF payment allocated to Covered Claims unless any portion of Paragraph 3.a. has been paid, in which event INTERSTATE and CHATTEM will advance the portion of the Covered Claims pursuant to the terms of Paragraph 3. ii. When the EIF has been exhausted by payments pursuant to the Class Action Settlement, INTERSTATE'S share of the $5,000,000 payment to the EIF shall be recalculated based on the actual payments made from the EIF with respect to Covered and Non-Covered Claims. The Parties will determine the amounts paid by the EIF for Covered and Non-Covered Claims. If INTERSTATE'S recalculated share is more than the amount it previously paid, and so long as the difference is still within the terms of Paragraph 3, it shall within thirty (30) days of receipt of satisfactory proof of its previous underpayment and demand by CHATTEM pay CHATTEM the difference between INTERSTATE'S previous payment and its recalculated share. If INTERSTATE'S recalculated share is less than the amount it previously paid, CHATTEM shall within thirty (30) days of receipt of satisfactory proof of its previous underpayment and demand by INTERSTATE pay INTERSTATE the difference between INTERSTATE'S previous payment and its recalculated share. 5 c. Pursuant to the Chattem-Sidmak Settlement Agreement, executed by CHATTEM on July 14, 2004, Sidmak Laboratories, Inc. ("Sidmak") may have an obligation to pay up to $1,000,000 to reimburse CHATTEM for its contributions to the EIF (hereafter "SIDMAK'S OBLIGATIONS"). In the event such reimbursement occurs, the payment is to be allocated between Covered Claims and Non-Covered Claims based on the ratio of the dollar value of the Covered Claims described in Paragraph 2.a. of this Agreement to the total dollar value of all claims paid by the Final Chattem Settlement Trust (excluding EIF payments). The amounts received from Sidmak allocated to Covered Claims in this manner will reduce INTERSTATE'S obligation to contribute to the EIF on a dollar-for-dollar basis. d. With respect to SIDMAK'S OBLIGATIONS, in the event that Sidmak does not fulfill its obligations to CHATTEM regarding the EIF, CHATTEM may decide not to pursue Sidmak to enforce SIDMAK'S OBLIGATIONS. However, if CHATTEM determines not to pursue SIDMAK'S OBLIGATIONS, CHATTEM will assign all of its rights to recover such obligations to INTERSTATE. Pursuant to Paragraph 11.f. of this Agreement, CHATTEM will provide information to INTERSTATE regarding Sidmak's compliance with SIDMAK'S OBLIGATIONS. 5. Subject to the provisions of Paragraphs 1, 2, 3, and 4 of this Agreement, the terms, conditions and limitations of the POLICY, including the terms, conditions and limitations of the Kemper Policy and the General Star Policy, where applicable, apply to the obligations of INTERSTATE and CHATTEM with respect to the PPA Claims. Without limiting the scope of this Paragraph, the Parties agree that to the extent CHATTEM is entitled to any indemnity, contribution or other recovery from any third party, excluding only Sidmak, INTERSTATE'S subrogation rights or other rights are to be governed by the POLICY (including the terms of the Kemper Policy, the General Star Policy and the Admiral Policy, if applicable). With respect to Sidmak, INTERSTATE'S subrogation rights do not exist except as stated in subparagraphs 4.c. and 4.d. 6. In consideration of the agreements and promises made herein, and excepting only INTERSTATE'S obligations to perform pursuant to the terms of this Agreement, CHATTEM does hereby covenant not to sue INTERSTATE and forever fully and completely hereby releases and discharges INTERSTATE of and from any and all claims, actions, causes of action, rights, liabilities, obligations and demands of every kind and nature, known and unknown, past, present, and future, for insurance coverage from INTERSTATE under all coverages of the POLICY. The foregoing covenant and release by CHATTEM expressly includes, but is not limited to, any claims that are based upon, arise out of, relate to, or have any connection with PPA or Dexatrim, the PPA Claims, any claims made in the Coverage Action, any other claims for defense, indemnification, damages, breach of contract, fraud, misrepresentation, estoppel, punitive damages, equitable relief, and any claims to recover administrative or legal fees or other costs, or to recover for any alleged acts or omissions on the part of INTERSTATE constituting unfair defense or settlement practices, violations of the Tennessee Consumer Protection Act, unfair or deceptive business practices, insurance or other statutory code 6 violations, bad faith, breach of fiduciary duty, fraud, malice or oppression of any kind or nature whatsoever. 7. CHATTEM agrees that it will execute a further covenant not to sue and a full and complete release and discharge of INTERSTATE in a form identical to the covenant not to sue, release, and discharge set forth in Paragraph 6, above, but deleting the phrase "and excepting only INTERSTATE'S obligations to perform pursuant to the terms of this Agreement": (a) in the event that CHATTEM'S Retention is not exhausted by the payment of Settlements or Judgments for Covered Claims, or (b) upon the discharge of INTERSTATE'S obligations under this Agreement by payment of Settlements or Judgments for Covered Claims exceeding CHATTEM'S Retention in accordance with the terms of this Agreement. 8. For the purposes of determining when an injury occurs with respect to any PPA Claim for which payment is made by the Final Chattem Settlement Trust, the Parties will adopt the findings of the Final Benefit Determination as to the Onset of Symptoms, as referred to in the Dexatrim Case Scoring System & Matrix (hereafter "Matrix") under III. Temporal Relationship of Last Dose of Dexatrim to Onset of Symptoms. For the purposes of determining when an injury occurs with respect to any Opt Out Claimant's stroke claim, the Parties will use the date of the Opt Out Claimant's stroke allegedly caused by Dexatrim. For the purposes of determining when an injury occurs with respect to any Opt Out Claimant's claim other than a stroke claim, the Parties will use the date of the Opt Out Claimant's onset of symptoms following the alleged ingestion of Dexatrim. 9. In the event of the exhaustion of CHATTEM'S Retention, the following procedures will apply: a. Within 7 calendar days of the earlier of (1) the exhaustion of CHATTEM'S Retention, or (2) CHATTEM'S agreement to pay any sum that will result in such exhaustion, CHATTEM shall provide INTERSTATE with evidence of exhaustion, proof of such payment or agreement, including the identification of all Covered Claims paid by or on behalf of CHATTEM, and the amounts of such payments. b. Within 7 calendar days of the notice required by sub-paragraph a. of this Paragraph, CHATTEM shall advise INTERSTATE of all pending settlement negotiations regarding any Covered Claim, including the status of those negotiations, and the scheduling of any arbitration or trial of any Covered Claim. INTERSTATE shall thereafter pay any Settlement or Judgment for a Covered Claim required to be paid by INTERSTATE pursuant to the provisions of this Agreement. Further, if CHATTEM pays (with INTERSTATE'S consent) any Settlement or Judgment for any Covered Claim required to be paid by INTERSTATE pursuant to the provisions of this Agreement in excess of CHATTEM'S Retention, INTERSTATE shall reimburse CHATTEM upon proof of such payment and proof of exhaustion of CHATTEM's Retention within 45 calendar days. 7 c. The notice provisions required of CHATTEM in Sub-Paragraphs 9a. and b., above, shall constitute conditions precedent to the subsequent obligations of INTERSTATE to make payment hereunder. The failure of CHATTEM to comply with said notice provisions shall not constitute a breach of this Agreement; however, INTERSTATE shall have no obligation to make the payments described in Paragraph 9 until 45 days after those conditions precedent have been completed by CHATTEM. 10. INTERSTATE and CHATTEM agree to dismiss with prejudice all claims made by each of them in the Coverage Action and to execute such documents as will result in a complete dismissal with prejudice of the Coverage Action. The dismissals will be filed in a joint instrument within five (5) days after the Date of Execution. Each Party will bear its own fees and costs in connection with the Coverage Action. 11. CHATTEM agrees to cooperate with INTERSTATE in the handling of the PPA Claims by providing INTERSTATE with the information described in this paragraph: For claims that are paid prior to exhaustion of CHATTEM'S Retention, CHATTEM or its attorneys will provide INTERSTATE with interim reports (at 60 day intervals) concerning the matrix and opt-out claims that have been paid, including the name of the claimant, the matrix and opt-out amounts paid, and the EIF entitlement (if known). If or when CHATTEM'S Retention is exhausted, CHATTEM or its attorneys will provide INTERSTATE with information concerning each then-remaining PPA Claim, including the name of the claimant, the date of injury, the date the claim was first reported, the matrix amount to be paid, or the proposed settlement amount of any opt-out claim, and the EIF entitlement (if known). CHATTEM will consult with INTERSTATE concerning any PPA Claim for which the settlement will be paid in excess of CHATTEM'S Retention prior to settlement of that claim. In addition, CHATTEM agrees to comply with any reasonable request by INTERSTATE for information regarding the PPA Claims, including, without limitation, the following information and documentation: a. a complete copy of any file(s) related to any claimant requested by INTERSTATE; b. CHATTEM'S Claims Coordinator's analysis regarding the validity, scoring and value of each PPA Claim; c. information relating to the date each claim was first made against CHATTEM and the date(s) injury occurred with respect to each claimant; d. the status of all payments made by or on CHATTEM'S behalf, including the payments made by the Final Chattem Settlement Trust; 8 e. copies of all case scoring worksheets, extraordinary damage fund benefit claims forms, final benefit determinations, preliminary benefit determinations, and supplemental benefit claims forms; and f. information, including periodic status reports and an interim accounting, relating to the status of Sidmak's compliance with SIDMAK'S OBLIGATIONS. 12. CHATTEM will indemnify and hold INTERSTATE harmless from any judgment against INTERSTATE arising from injury or damage to any person or entity as a result of an act or omission of CHATTEM occurring after April 13, 2004, the date of the Class Action Settlement, and prior to the exhaustion of CHATTEM'S Retention. CHATTEM will also indemnify INTERSTATE for reasonable and necessary defense fees and costs incurred by INTERSTATE in defending any claim or suit arising from injury or damage to any person or entity as a result of an act or omission of CHATTEM occurring after April 13, 2004, the date of the Class Action Settlement, and prior to the exhaustion of CHATTEM'S Retention. Nothing in this paragraph is intended to require CHATTEM to indemnify INTERSTATE for any Settlements or Judgments for Covered Claims in excess of CHATTEM'S Retention. 13. Each Party acknowledges that it may hereafter discover facts different from, or in addition to, those which they now believe to be true with respect to any and all of the claims herein released. Nevertheless, the Parties agree that each of the releases and obligations set forth above shall be and remain effective in all respects, notwithstanding the discovery of any such different or additional facts. 14. Nothing contained in this Agreement shall be construed to be an admission of any kind by either Party. 15. This Agreement is the result of a compromise accord, is the product of arms-length negotiations, and is not intended to be, nor shall it be, construed as an interpretation of the POLICY or as an endorsement to or term of the POLICY. The scope of this Agreement is restricted and limited to the matters addressed herein. Nothing contained herein, however, shall be deemed or construed to prohibit either INTERSTATE or CHATTEM from introducing this Agreement into evidence for the purpose of enforcing the terms of this Agreement. 16. The Parties each represent and warrant that they have not and will not in any manner assign, transfer, convey or sell, or purport to assign, transfer, convey or sell to any entity or person any cause of action, chose in action, or part thereof, arising out of or connected with the matters released in this Agreement. The Parties each further represent and warrant that they will not in any way voluntarily assist any other person or entity in the establishment of any claim, cause of action, action, or right against the other Party to this Agreement arising out of or connected with the matters released in this Agreement. 9 17. This Agreement is an integrated Agreement and contains the entire Agreement regarding the matters herein between the Parties, and no representations, warranties, or promises have been made or relied on by either Party other than as set forth herein. This Agreement prevails over prior communications regarding the matters contained herein between the Parties or their representatives. This Agreement has been reviewed by counsel for each of the Parties, and shall not be construed against either Party, each Party expressly waiving the doctrine of CONTRA PROFERENTUM. 18. This Agreement is intended to confer rights and benefits only on the Parties as described in this Agreement, and is not intended to confer any right or benefit upon any other person or entity. No person or entity other than the Parties shall have any legally enforceable right under this Agreement. All rights of action for any breach of this Agreement are hereby reserved to the Parties. 19. The Parties represent and warrant: a. that each is a corporation duly organized and validly existing in good standing under the laws of one of the States of the United States; b. that they have taken all necessary corporate and legal actions to duly approve the making and performance of this Agreement and that no further corporate or other approval is necessary; c. that the making and performance of this Agreement will not violate any provision of law or of their respective Articles of Incorporation or Bylaws; d. that they have read this Agreement and know the contents hereof, that the terms hereof are contractual and not by way of recital, and that they have signed this Agreement of their own free acts; and e. that in making this Agreement, they have obtained the advice of legal counsel. 20. Each of the terms of this Agreement is binding upon each Party, and their respective predecessors, successors, parents, subsidiaries, affiliated companies, transferees, assigns, representatives, principals, agents, officers, directors, and employees. 10 21. All notices or other communications which either Party desires or is required to give shall be given in writing and shall be deemed to have been given if hand-delivered, sent by telecopier or registered or certified mail deposited in the United States mail, prepaid to the Party at the address noted below or such other address as a Party may designate in writing from time to time: IF TO CHATTEM: - -------------- McCarter & English Four Gateway Center 100 Mulberry Street P.O. Box 652 Newark, NJ 07101-0652 Attention: Andrew Berry, Esq. Facsimile (973) 624-7070 Miller & Martin PLLC Suite 1000 Volunteer Bldg. 832 Georgia Avenue Chattanooga, TN 37402-2289 Attention: C. Crews Townsend, Esq. Facsimile (423) 785-8480 IF TO INTERSTATE - ---------------- McMillan & Shureen, LLP 50 Santa Rose Ave, Fifth Floor Santa Rosa, CA 95404 Attention: D. Douglas Shureen, Esq. Facsimile (707) 576-7955 INTERSTATE FIRE & CASUALTY COMPANY 777 San Marin Drive Novato, CA 94998-3400 Attention: General Counsel 22. This Agreement shall be executed in two (2) duplicate originals, with CHATTEM to retain one (1) original and INTERSTATE to retain one (1) original. 23. This Agreement will be construed pursuant to Tennessee law, without regard to Tennessee conflicts of law principles. IN WITNESS WHEREOF, the Parties have executed this Settlement and Coverage-In-Place Agreement on the dates shown below: 11 CHATTEM, INC. By: ------------------------------- Alec Taylor II President THE STATE OF TENNESSEE COUNTY OF _______________ BEFORE ME, the undersigned authority, on this day personally appeared ALEC TAYLOR, II, known to me to be the person whose name is subscribed to the foregoing instrument, and acknowledged to me that he signed the same for the purposes and consideration therein expressed. GIVEN under my hand and seal of office, this the ______ day of ____________, 2005. ------------------------------ NOTARY PUBLIC IN AND FOR THE STATE OF TENNESSEE My Commission expires: - ------------------------ 12 INTERSTATE FIRE AND CASUALTY COMPANY By: Geoffrey Lamb THE STATE OF CALIFORNIA COUNTY OF _______________ BEFORE ME, the undersigned authority, on this day personally appeared GEOFFREY LAMB, personally known to me/proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the foregoing instrument, and acknowledged to me that he signed the same for the purposes and consideration therein expressed. WITNESS under my hand and official seal, this the ______ day of ____________, 2005. ------------------------------ NOTARY PUBLIC IN AND FOR THE STATE OF CALIFORNIA My Commission expires: - ------------------------ 13 EX-10.3 4 exhibit10-3_13368.txt FIRST AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.3 ------------ FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of December 22, 2004, is by and among CHATTEM, INC., a Tennessee corporation (the "Borrower"), each of the Borrower's Domestic Subsidiaries (individually a "Guarantor" and collectively with the Borrower, the "Credit Parties"), the Persons identified as lenders on the signature pages hereto (the "Lenders") and BANK OF AMERICA, N.A., as agent for the Lenders (in such capacity, the "Agent"). W I T N E S S E T H WHEREAS, the Credit Parties, the Lenders, and the Agent have entered into that certain Credit Agreement dated as of February 26, 2004 (the "Credit Agreement"); WHEREAS, the Borrower has requested that the Lenders amend the Credit Agreement as provided herein; and WHEREAS, the Lenders have agreed to amend the Credit Agreement on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: PART I DEFINITIONS Unless otherwise defined herein or the context otherwise requires, terms used in this Amendment, including its preamble and recitals, have the meanings provided in the Credit Agreement (as amended hereby). PART II AMENDMENTS TO CREDIT AGREEMENT SUBPART 2.1 Section 8.3 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: No Credit Party will, nor will it permit its Subsidiaries to, alter the character of its business from that conducted as of the Closing Date or engage in any business other than the business conducted as of the Closing Date, which with respect to Signal shall be limited to the ownership of trademarks and tradenames for the purpose of licensing (a) any or all of such trademarks and tradenames to the Borrower or any other Credit Party and (b) any or all of such trademarks and tradenames that are not registered in the United States or Canada to any Foreign Subsidiary of the Borrower. SUBPART 2.2 Section 8.5 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: No Credit Party will, nor will it permit any of its Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business or assets whether now owned or hereafter acquired, including, without limitation, inventory, receivables, real property, leasehold interests, equipment and securities other than (a) any inventory or other assets sold, leased or disposed of (or simultaneously replaced with like goods) in the ordinary course of business, (b) obsolete, idle or worn-out assets no longer used or useful in its business, (c) the sale, lease or transfer or other disposal by a Credit Party other than the Borrower of any or all of its assets to the Borrower or to any other Credit Party, (d) the sale, transfer or other disposition of "margin stock" within the meaning of Regulation U, (e) the non-recourse sale of trade accounts receivable to a Person that is not an Affiliate of the Borrower provided that (i) at the time of the sale (and after giving effect thereto) no Default or Event of Default exists, (ii) as a result of such sale, no Material Adverse Effect would occur or be reasonably expected to occur, and (iii) the amount of such receivables subject to such sales do not exceed, in the aggregate, $7,000,000 at any time outstanding, (f) other sales of equipment provided that (i) the sale is for fair market value, (ii) the sale is for cash consideration, (iii) at the time of the sale (and after giving effect thereto) no Default or Event of Default exists, (iv) as a result of such sale, no Material Adverse Effect would occur or be reasonably expected to occur and (v) such sales do not exceed, in the aggregate, $250,000 during any fiscal year, (g) sales of product lines (or the right to produce a consumer product or products) provided that (i) the dispositions permitted under this subparagraph (g) shall not exceed $10,000,000 during any fiscal year and, (ii) the dispositions permitted under this subparagraph (g) during any fiscal year shall be limited to product lines (or the right to produce a consumer product or products) having aggregate sales for the twelve-month period ending on the fiscal quarter ending immediately preceding the sale in an aggregate amount not exceeding ten percent (10%) of EBITDA for such twelve month period and (iii) the Credit Parties shall have delivered to the Agent a Pro Forma Compliance Certificate demonstrating that after giving effect to any such disposition on a Pro Forma Basis, the Credit Parties and their Subsidiaries would have been in compliance with all the financial covenants set forth in Section 7.12, (h) the transfer by the Borrower of the Capital Stock of Chattem (U.K.) Limited to Chattem Global Consumer Products Limited and (i) the sale, lease or transfer or other disposal by a Foreign Subsidiary of the Borrower of any or all of its assets to any other Foreign Subsidiary of the Borrower. SUBPART 2.3 Section 8.8 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: No Credit Party will, nor will it permit its Subsidiaries to, enter into any transaction or series of transactions, whether or not in the ordinary course of business, with any officer, director, shareholder, Subsidiary or Affiliate other than on terms and conditions substantially as favorable as would be obtainable in a comparable arm's-length transaction with a Person other than an officer, director, shareholder, Subsidiary or Affiliate except for (a) transactions set forth on Schedule 8.8 and (b) intercompany transactions that are otherwise permitted by this Credit Agreement. PART III CONDITIONS TO EFFECTIVENESS SUBPART 3.1 Effective Date. This Amendment shall be and become effective as of November 1, 2004, subject to the satisfaction of the following conditions: (a) Execution of Counterparts of Amendment. The Agent shall have received counterparts of this Amendment, which collectively shall have been duly executed on behalf of the Borrower, the Guarantors, the Required Lenders and the Agent. (b) Fees and Expenses. The Borrower shall have paid to the Agent, all reasonable costs and expenses of the Agent in connection with the preparation, execution and delivery of this Amendment, including without limitation the reasonable fees and expenses of the Agent's legal counsel. 2 PART IV MISCELLANEOUS SUBPART 4.1 Representations and Warranties. Each Credit Party hereby represents and warrants to the Agent and the Lenders that (a) no Default or Event of Default exists under the Credit Agreement or any of the other Credit Documents on and as of the date hereof, (b) each Credit Party has the requisite corporate power and authority to execute, deliver and perform this Amendment and (c) the representations and warranties set forth in Section 6 of the Credit Agreement are true and correct in all material respects as of the date hereof (except for those which expressly relate to an earlier date). Each Credit Party acknowledges and confirms that the Borrower's obligations to repay the outstanding principal amount of the Loans is unconditional and not subject to any offsets, defenses or counterclaims. SUBPART 4.2 Acknowledgment. Each Guarantor hereby acknowledges and consents to all of the terms and conditions of this Amendment and agrees that this Amendment does not operate to reduce or discharge the Guarantors' obligations under the Credit Agreement or the other Credit Documents. SUBPART 4.3 Cross-References. References in this Amendment to any Part or Subpart are, unless otherwise specified, to such Part or Subpart of this Amendment. SUBPART 4.4 Instrument Pursuant to Credit Agreement. This Amendment is a Credit Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated therein) be construed, administered and applied in accordance with the terms and provisions of the Credit Agreement. SUBPART 4.5 References in Other Credit Documents. At such time as this Amendment shall become effective pursuant to the terms of Subpart 3.1, all references in the Credit Documents to the "Credit Agreement" shall be deemed to refer to the Credit Agreement as amended by this Amendment. SUBPART 4.6 Counterparts/Telecopy. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. Delivery of executed counterparts of the Amendment by telecopy shall be effective as an original and shall constitute a representation that an original shall be delivered. SUBPART 4.7 Governing Law. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF TENNESSEE. SUBPART 4.8 Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. SUBPART 4.9 General. Except as amended hereby, the Credit Agreement and all other Credit Documents shall continue in full force and effect. [The remainder of this page is intentionally left blank.] 3 IN WITNESS WHEREOF the Borrower, the Guarantors and the Lenders have caused this Amendment to be duly executed on the date first above written. BORROWER: - -------- CHATTEM, INC., a Tennessee corporation By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- GUARANTORS: SIGNAL INVESTMENT & MANAGEMENT CO., - ---------- a Delaware corporation By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- SUNDEX, LLC, a Tennessee limited liability company By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- CHATTEM (CANADA) HOLDINGS, INC., a Delaware corporation By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- 4 AGENT: BANK OF AMERICA, N.A., - ----- in its capacity as Agent By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- LENDERS: BANK OF AMERICA, N.A., - ------- in its capacity as a Lender By: -------------------------------------- Name: John M. Hall Title: Senior Vice President SUNTRUST BANK By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- BRANCH BANKING AND TRUST By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- NATIONAL CITY BANK By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- 5 EX-10.4 5 exhibit10-4_13368.txt SECOND AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.4 ------------ WAIVER AND SECOND AMENDMENT TO CREDIT AGREEMENT THIS WAIVER AND SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") dated as of February 25, 2005 to the Credit Agreement, dated as of February 26, 2004, as amended by a First Amendment to Credit Agreement dated as of December 22, 2004 (collectively the "Credit Agreement") by and among CHATTEM, INC. (the "Borrower"), SIGNAL INVESTMENT & MANAGEMENT CO., SUNDEX, LLC AND CHATTEM (CANADA) HOLDINGS, INC. (individually, a "Guarantor" and collectively, the "Guarantors") the several bank parties to the Credit Agreement (the "Lenders"), and BANK OF AMERICA, N.A., as the Agent (in such capacity, the "Agent") for all the Lenders party to the Credit Agreement. R E C I T A L S: WHEREAS, the Agent, the Lenders, the Borrower and the Guarantors are parties to the Credit Agreement; WHEREAS, the Borrower and the Guarantors have requested certain amendments to the Credit Agreement and a waiver of certain provisions of the Credit Agreement as set forth herein. NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. Unless otherwise defined herein, capitalized terms that are defined in the Credit Agreement are used herein as therein defined. 2. WAIVER. Subject to the complete satisfaction of all of the conditions set forth in Section 4 below and subject to the other terms herein, the Agent and the Lenders for the period beginning on February 26, 2004 and ending on the Effective Date (as defined below) hereby waive any Default or Event of Default which has occurred or which now exists as a result of the failure of Borrower and the Guarantors to be in compliance with Section 8.6, Advances, Investments and Loans of the Credit Agreement because a Subsidiary of the Borrower, HBA Indemnity Company, Ltd., owns securities in the amount of $1,210,000 issued or guaranteed by the United States of America or an agency or instrumentality thereof with maturities of more than twelve months from the date of acquisition. The foregoing waiver is limited to the matters set forth in this Section 2 and no provision of this Section 2 shall be deemed in any way to constitute a waiver of (except as otherwise set forth in this Section 2) (i) any Default or any Event of Default, (ii) any condition precedent, (iii) any other term or provision of the Credit Agreement or the other Credit Documents, or (iv) any right, power or remedy available to Agent or any Lender. The Agent and each Lender reserve all of their rights, powers and remedies under law, the Credit Agreement and all other Credit Documents. 3. AMENDMENTS. Subject to the complete satisfaction of all of the conditions set forth in Section 4 below and subject to the other terms herein: 3.1 Subpart (a) of the definition of "Cash Equivalents" in Subsection 1.1 of the Credit Agreement is amended and restated in its entirety as follows: (a) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than twelve-months from the date of acquisition, provided that solely with respect to HBA Indemnity Company, Ltd ("HBA") such securities of a type described in this subpart (a) owned by HBA may have maturities of not more than twenty-four months from the date of acquisition," 4. CONDITIONS. This Amendment shall become effective upon the date (the "Effective Date") when the Agent shall have received (i) counterparts of this Agreement duly executed and delivered by the Borrower, each Guarantor and each Lender (ii) each other document or instrument required to be delivered hereunder and (iii) the Borrower shall have paid to the Agent, all reasonable costs and expenses of the Agent in connection with the preparation, execution and delivery of this Amendment, including without limitation the reasonable fees and expenses of the Agent's legal counsel. 5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each Credit Party hereby represents and warrants to, and agrees with, the Agent and the Lenders that: 5.1 No Default or Event of Default shall have occurred and be continuing on the Effective Date or after giving effect to the transactions contemplated herein. 5.2 Each of the representations and warranties made by the Credit Parties in or pursuant to the Credit Documents shall be true and correct in all material respects on and as of the Effective Date (after giving effect hereto) as if made on and as of such date, except to the extent such representations and warranties expressly relate to a particular date, in which case such representations and warranties were true and correct in all material respects as of such date. 5.3 Each Credit Party has the requisite corporate power and authority to execute, deliver and perform this Amendment. 5.4 Each of the Credit Parties hereby consents to this Amendment and further hereby reaffirm, ratify and confirm all covenants, representations and warranties made in the Credit Agreement, and all other Credit Documents to which it is a party (after giving effect hereto), all of which continues in full force and effect. Without limitation of the foregoing, each Credit Party hereby grants, and reaffirms the grant, of a security interest by such Obligor in favor of the Agent in the Collateral under the Collateral Documents. 6. REFERENCE TO AGREEMENTS. 6.1 On and after the Effective Date, (a) each reference in the Credit Agreement, respectively, to "this Agreement," "hereunder," "hereof," "herein," or words of like import shall mean and be a reference to the Credit Agreement, as amended hereby, and (b) each -2- reference to the Credit Agreement in all other Credit Documents shall mean and be a reference to the Credit Agreement, as amended hereby. 6.2 Except as otherwise provided herein, all Credit Documents, and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. 6.3 Except as specifically stated herein, the execution, delivery and effectiveness of this Agreement shall not operate as an amendment to any provision of the Credit Agreement, nor a waiver of, or consent to any departure from, any right, power or remedy of Agent or any Lender, nor constitute a waiver of, or consent to any departure from, any provision of the Credit Agreement or any of the other Credit Documents. 6.4 This Agreement shall be deemed a Credit Document for the purposes of the Credit Agreement. 7. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Tennessee. 8. HEADINGS. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 9. COUNTERPARTS. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery by any party of telecopied copies of executed counterparts hereof shall constitute execution and delivery hereof by such party. [SIGNATURE PAGES FOLLOW] -3- IN WITNESS WHEREOF, this Waiver and Second Amendment has been duly executed as of the day and year first above written. BORROWER: CHATTEM, INC. By: _________________________________ Name: _______________________________ Title: ______________________________ GUARANTORS: SIGNAL INVESTMENT & MANAGEMENT CO., a Delaware corporation By: _________________________________ Name: _______________________________ Title: ______________________________ SUNDEX, LLC, a Tennessee limited liability company By: _________________________________ Name: _______________________________ Title: ______________________________ CHATTEM (CANADA) HOLDINGS, INC., a Delaware corporation By: _________________________________ Name: _______________________________ Title: ______________________________ AGENT: BANK OF AMERICA, N.A., in its capacity as Agent By: _________________________________ Name: _______________________________ Title: ______________________________ LENDERS: BANK OF AMERICA, N.A., in its capacity as a Lender, including as Issuing Lender and Swing Line Lender By: _________________________________ Name: _______________________________ Title: ______________________________ NATIONAL CITY BANK, in its capacity as a Lender By: _________________________________ Name: _______________________________ Title: ______________________________ SUNTRUST BANK, in its capacity as a Lender By: _________________________________ Name: _______________________________ Title: ______________________________ BRANCH BANKING AND TRUST, in its capacity as a Lender By: _________________________________ Name: _______________________________ Title: ______________________________ EX-31.1 6 exhibit31-1_13368.txt 302 CERTIFICATION - C.E.O. 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 1, 2005 /s/ Zan Guerry ------------- ------------------------ Zan Guerry, Chairman and Chief Executive Officer EX-31.2 7 exhibit31-2_13368.txt 302 CERTIFICATION - C.F.O. 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 1, 2005 /s/ Richard D. Moss ------------- ------------------------------- Richard D. Moss, Vice President and Chief Financial Officer EX-32 8 exhibit32_13368.txt 906 CERTIFICATION 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 February 28, 2005 (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: April 1, 2005 /s/ Zan Guerry ------------------------------------------ Zan Guerry, Chairman and Chief Executive Officer Dated: April 1, 2005 /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-----