United States
Securities and Exchange Commission
Washington, D.C. 20549
----------------------------------------------------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 8, 2002
ENCORE MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
000-26538 65-0572565
(Commission File Number) (IRS Employer Identification No.)
9800 Metric Blvd., Austin, Texas 78758
(Address of principal executive offices) (Zip Code)
(512) 832-9500
Registrant's telephone number, including area code
Not Applicable
(Former name or former address, if changed since last report)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On February 8, 2002, Encore Medical Corporation, a Delaware corporation
(the "Company"), acquired 56,269 shares of Class A Common Stock and 2,296,307
shares of Class B Common Stock of Chattanooga Group, Inc., a Delaware
corporation ("Chattanooga"), such shares constituting all of the issued and
outstanding shares of capital stock of Chattanooga (the "Acquisition"), pursuant
to a Stock Purchase Agreement dated as of November 28, 2001, as amended by
letter agreement dated December 26, 2001 (the "Stock Purchase Agreement"), by
and between the Company, as purchaser, and Richard T. Niner and Robert W.
Cruickshank, as trustees of and on behalf of the Robert McNeil, Jr. 1983 Trust,
Chatt Investment L.P., a Delaware limited partnership, Paul D. Chapman, Scott A.
Klosterman, David C. Linville, Charles M. Thomas and certain other shareholders
of Chattanooga (collectively, the "Sellers"). The Stock Purchase Agreement is
set forth in Exhibit 2.1 to this Form 8-K and is incorporated herein in its
entirety by reference in response to this Item. The descriptions of the terms
and provisions of the Stock Purchase Agreement and all other documents described
herein are summaries only, and are qualified in their entirety by reference to
such document
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS
(a) Pro forma financial information. The following unaudited pro forma
-------------------------------
financial information required pursuant to Article 11 of Regulation S-X
previously omitted from the Company's 8-K filed on February 25, 2002 is filed
with this amendment:
INDEX TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Balance Sheet 4
Unaudited Pro Forma Condensed Combined Statement of Operations 5
Notes to Condensed Combined Pro Forma Financial Statements 6
(b) Financial statements of business acquired - Chattanooga Group, Inc.
-----------------------------------------
financial statements (i) for the years ended June 30, 2001, 2000 and
1999 and Report of Independent Accountants thereon and (ii) for the six
months ended December 31, 2001 and 2000 are attached as Exhibit 99.1
INDEX TO FINANCIAL STATEMENTS OF CHATTANOOGA GROUP, INC.
Report of Independent Public Accountants 9
Consolidated Balance Sheets at June 30, 2001 and 2000 10
Consolidated Statements of Operations for the Years Ended June 30, 2001, 2000 and 1999 11
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2001, 2000 and 1999 11
Consolidated Statements of Cash Flows for the Years Ended June 30, 2001, 2000 and 1999 12
Notes to Consolidated Financial Statements 13
Unaudited Condensed Consolidated Balance Sheet at December 31, 2001 21
Unaudited Condensed Consolidated Statements of Operations for the Six Months Ended December 31,
2001 and 2000 22
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31,
2001 and 2000 22
Notes to Unaudited Condensed Financial Statements 23
(c) Exhibits
The following exhibits are filed as part of this report:
2.1 Stock Purchase Agreement dated as of November 28, 2001 by and among
Encore Medical Corporation, Richard T. Niner and Robert Cruickshank as
Trustees of and on behalf of the
- 2 -
Robert McNeil, Jr. 1983 Trust, Chatt Investment L.P., Paul D. Chapman,
Scott A. Klosterman, David C. Linville, Charles M. Thomas and certain other
shareholders thereto is incorporated by reference to Exhibit (c)(1) to the
Registrant's Form 8-K filed with the Commission on February 25, 2002.
99.1 Financial Statements of Chattanooga Group, 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 hereunto duly authorized.
Date: April 17, 2002 ENCORE MEDICAL CORPORATION
By /s/ Harry L. Zimmerman
--------------------------------------
Harry L. Zimmerman
Executive Vice President - General Counsel
FINANCIAL STATEMENTS
UNAUDITED PRO FORMA FINANCIAL DATA
The following presents summary unaudited combined pro forma financial data of
Encore Medical Corporation (the "Company"), and Chattanooga Group, Inc.
("Chattanooga"). The combined pro forma statement of operations was prepared as
if the acquisition of Chattanooga by the Company (the "Acquisition"), occurred
on January 1, 2001.
The historical data of the Company for the fiscal year ended December 31, 2001
have been derived from the Company's audited consolidated financial statements.
The historical data of Chattanooga for the fiscal year ended December 31, 2001
have been derived from Chattanooga's audited consolidated financial statements
for the years ended June 30, 2001, as well as Chattanooga's unaudited
consolidated financial statements for the six-month period ended December 31,
2001. The unaudited combined pro forma balance sheet and statement of operations
are based on assumptions and includes adjustments as explained in the notes
thereto.
The summary unaudited combined pro forma financial data does not necessarily
reflect the results of operations of the Company and Chattanooga that actually
would have resulted had the Acquisition been consummated as of the date referred
to above. Accordingly, such data should not be viewed as fully representative of
the past performance of the Company or Chattanooga or indicative of future
results.
The summary unaudited combined pro forma financial data should be read together
with the Financial Statements and Notes of the Company and Chattanooga included
elsewhere and herein.
- 3 -
ENCORE MEDICAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
December 31, 2001
(In Thousands, Except Share Data)
Encore
Medical Chattanooga
Corporation Group, Inc. Adjustments Total
----------- ----------- ---------------------------- --------
ASSETS
Cash and cash equivalents $ 5,401 $ 556 ($3,198)(a),(d),(e),(f),(g) $ 2,759
Accounts receivable, net 5,828 7,587 - 13,415
Inventories, net 22,911 7,984 - 30,895
Deferred tax assets 2,461 301 - 2,762
Prepaid expense and other current assets 1,327 874 201 (a),(e),(f) 2,402
-------- -------- -------- --------
Total Current Assets 37,928 17,302 (2,997) 52,233
Property, plant and equipment, net 7,233 4,621 - 11,854
Intangible assets, net 6,044 349 22,639 (c) 29,032
Other noncurrent assets 457 54 1,300 (i) 1,811
-------- -------- -------- --------
$ 51,662 $ 22,326 $ 20,942 $ 94,930
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,737 $ 2,278 $ 0 $ 5,015
Accrued liabilities 3,355 3,515 - 6,870
Current portion of long-term debt 9,975 1,515 (8,087) (d),(g) 3,403
-------- -------- -------- --------
Total Current Liabilities 16,067 7,308 (8,087) 15,288
Capital lease payable 127 34 - 161
Notes payable 2,724 4,369 31,166 (d),(e),(f),(h) 38,259
Other long term liabilities 567 329 (178) (d) 718
-------- -------- -------- --------
Total Liabilities 19,485 12,040 22,901 54,426
Series A Preferred Stock 12,840 - - 12,840
Common stock 11 618 (618) (b) 11
Additional paid-in capital 22,052 5,943 2,384 (a),(b),(h),(i) 30,379
Deferred compensation (56) - - (56)
Notes receivable for sale of common stock (1,187) - - (1,187)
Retained earnings 560 5,431 (5,431) (b) 560
Other comprehensive income (loss) - (178) 178 (b) -
Less treasury stock (2,043) (1,528) 1,528 (b) (2,043)
-------- -------- -------- --------
Total Stockholders' Equity 32,177 10,286 (1,959) 40,504
-------- -------- -------- --------
Total Liabilities and Stockholders' Equity $ 51,662 $ 22,326 $ 20,942 $ 94,930
======== ======== ======== ========
-4-
ENCORE MEDICAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2001
(In Thousands)
Encore
Medical Chattanooga
Corporation Group, Inc. Adjustments Total
----------- -------------- -------------- --------------
Sales $42,721 $49,382 $ 0 $92,103
Cost of sales 17,852 29,811 - 47,663
----------- -------------- -------------- --------------
Gross margin 24,869 19,571 - 44,440
Operating expenses:
Research and development 1,732 1,371 - 3,103
Selling, general & administrative 19,865 11,365 - 31,230
Other charges 1,623 - - 1,623
----------- -------------- -------------- --------------
Total Operating Expenses 23,220 12,736 - 35,956
----------- -------------- -------------- --------------
Operating Income 1,649 6,835 8,484
Interest income 186 - - 186
Interest expense (1,299) (671) (5,266) (k) - (o) (7,236)
Other, net 229 (744) (463) (j) (978)
----------- -------------- -------------- --------------
Income before taxes 765 5,420 (5,729) 456
Provision for income taxes 217 963 (1,011) (p) 169
----------- -------------- -------------- --------------
Net income 548 4,457 (4,718) 287
Beneficial conversion feature (3,706) - - (3,706)
-
----------- -------------- -------------- --------------
Net income (loss) available to
common stockholders ($3,158) $ 4,457 ($4,718) ($3,419)
=========== ============== ============== ==============
Earnings (Loss) Per Share:
Basic ($0.34) ($0.36)
Diluted ($0.34) ($0.36)
Shares used:
Basic 9,355 9,355
Diluted 9,355 9,355
- 5 -
NOTES TO CONDENSED COMBINED PRO FORMA FINANCIAL STATEMENT
(In thousands, except per share data)
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed combined balance sheet of Encore
Medical Corporation ("EMC" or the "Company") as of December 31, 2001 reflects
the acquisition of Chattanooga Group, Inc. and Subsidiaries ("Chattanooga") as
if it has occurred on that date.
The accompanying unaudited pro forma condensed combined statement of operations
for the year ended December 31, 2001 reflects the acquisition of Chattanooga as
if it had occurred on January 1, 2001.
The unaudited pro forma financial information gives effect to the acquisition
using the purchase method of accounting. The pro forma adjustments are described
in the accompanying notes to the unaudited pro forma financial information and
are based upon preliminary available information and upon certain assumptions
made by management. Accordingly, the pro forma adjustments reflected in the
unaudited pro forma financial information are preliminary and subject to
revision. Such revision could be material.
On February 8, 2002, EMC acquired all of the issued and outstanding shares of
capital stock of Chattanooga pursuant to a Stock Purchase Agreement for a cash
purchase price of $31,500. This price is subject to adjustment, if any, based on
the change in the net worth of Chattanooga between October 1, 2001 and February
8, 2002. In order to finance this acquisition, EMC entered into a Credit
Agreement (the "Credit Agreement") with Bank of America, N.A. for maximum
borrowings up to $30,000, subject to limitations based upon the Company's
Borrowing Base, as defined, and a Note and Equity Purchase Agreement (the "Note
Agreement") with CapitalSource Finance LLC ("CSF") for $24,000.
Pursuant to the terms of the Note Agreement, the Company issued a warrant to
CapitalSource Holdings LLC ("CSH"), pursuant to which CSH has the right to
acquire for a period of five years up to an aggregate of 2,198,614 shares of the
Company's Common Stock (the "Warrants"). Further, under the terms of the Note
Agreement, if the Company fails to generate certain amounts of earnings before
interest, taxes, deprecation and amortization, the Company would have the right,
commencing on March 31, 2003 and ending on August 15, 2003, to prepay without
penalty up to $6,000 of the aggregate principal under the Note Agreement. If the
Company exercises this right, then a pro-rata portion of the Warrants (the
"Conveyed Warrants") will be conveyed by CSH to the Galen Entities. In the event
the Company has the right to prepay but does not choose to exercise this right,
then the Galen Entities will purchase the amount of Notes that the Company has
the right to prepay. In the event the Galen Entities purchase any Notes from
CSF, then upon such purchase, (a) those Notes will automatically convert into
additional shares of Series A Preferred Stock and (b) a pro-rata portion of the
Warrants will also be conveyed by CSH to the Galen Entities.
The Galen Entities and CSF have entered into an agreement (the "CSF/Galen
Agreement") to evidence certain of the foregoing obligations. As an inducement
for the Galen Entities to enter into the CSF/Galen Agreement, the Company
granted the Galen Entities options dated as of February 8, 2002 (the "Galen
Options") to acquire up to the number of shares of Common Stock which have a
value equal to $6,000,000, at an exercise price equal to the greater of $3.50
per share or one-half of the trailing ten-day average closing price of the
Common Stock on the date of exercise. If the Galen Entities choose to exercise
the Galen Options, then any Conveyed Warrants will automatically be terminated.
Conversely, if the Galen Entities choose to exercise any Conveyed Warrants, then
the Galen Options will automatically be terminated. The Galen Options will
otherwise automatically terminate on the earlier of (i) the 30th day following
the date the Galen Entities are no longer obligated to purchase any Notes under
the CSF/Galen Agreement, (ii) the date the Galen Entities acquire any senior
subordinated notes or (iii) August 15, 2003.
The total purchase price paid for Chattanooga approximating $32,924, including
cash payments of $31,500, and issuance costs of approximately $1,424, was
preliminary allocated as follows based upon the fair value of the assets
acquired and liabilities assumed (dollars in thousands):
- 6 -
Current assets $ 17,302
Tangible and other noncurrent assets 5,023
Liabilities assumed (12,040)
Intangible assets 13,641
Goodwill 8,998
----------
$ 32,924
==========
The tangible assets are being depreciated over their useful lives of three to
twenty-five years. The acquired intangible assets consist of the following, and
are being amortized over their estimated economic life, where applicable:
Asset class Fair value Wtd. Avg. Useful life
--------------------------------------- ---------------------
Patents $ 1,699 11 years
Trademarks/ Trade names 6,426 Indefinite
Distributor network 5,277 20 years
Goodwill 9,237 Indefinite
------------
$22,639
============
2. PRO FORMA ADJUSTMENTS
The pro forma adjustments to the unaudited pro forma condensed combined
financial statements as of and for the year ended December 31, 2001 are as
follows:
Pro Forma Balance Sheet
- -----------------------
(a) Adjustment to record the original purchase price of $31,500 and
approximately $1,424 of acquisition costs, comprised of cash payments of
approximately $221, reversal of prepaid acquisition costs of approximately
$772, and the issuance of approximately $431 of Company common stock.
(b) Adjustment to eliminate the Chattanooga equity accounts in purchase
accounting.
(c) Adjustment to record goodwill and other intangible assets of approximately
$22,639.
(d) Adjustment to record pay down of Chattanooga debt totaling $5,979 including
$1,515 of current portion of long-term debt, $4,286 of notes payable and
$178 of other long-term liabilities. Actual payoff of Chattanooga debt on
February 8, 2002 was approximately $5,000.
(e) Adjustment of $18,048 to record proceeds from Bank of America financing and
debt issuance costs of $300.
(f) Adjustment of $24,000 to record proceeds from CSF financing, and debt
issuance costs of $673.
(g) Adjustment of $6,572 to record the pay down of EMC's existing line of credit
with proceeds from the Bank of America Credit Agreement.
(h) Adjustment to record the issuance of the Warrants at an estimated fair value
of $6,596.
(i) Adjustment to record the issuance of the Galen Options at an estimated fair
value of $1,300.
Pro Forma Statement of Operations
- ---------------------------------
(j) Adjustment of $463 to record one year of amortization of acquired intangible
assets.
(k) Adjustment of $1,319 to record one year of amortization of the Warrants.
- 7 -
(l) Adjustment of $260 to record one year of amortization of Galen Options.
(m) Adjustment of $4,625 to record one year of interest expense on the
outstanding Bank of America and CSF debt.
(n) Adjustment of $478 to record reduction of interest expense for pay down of
Chattanooga debt.
(o) Adjustment of $460 to record reduction of interest expense for pay down of
EMC line of credit.
(p) Adjustment to reflect a combined effective tax rate of approximately 37%.
- 8 -
Chattanooga Group, Inc. and Subsidiaries
Consolidated Financial Statements as of
June 30, 2001, 2000 and 1999
Together With Auditors' Report
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Chattanooga Group, Inc.:
We have audited the accompanying consolidated balance sheets of CHATTANOOGA
GROUP, INC. (a Delaware corporation) and subsidiaries as of June 30, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
2001. These financial statements are the responsibility of Chattanooga's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chattanooga Group, Inc. and
subsidiaries as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001 in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
September 12, 2001
(Except for matters discussed
in Note 15, as to which the
date is February 8, 2002)
- 9 -
CHATTANOOGA GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
(In Thousands, Except Share Data)
ASSETS 2001 2000
- ------------------------------------------------------------------------ -------- -------
CURRENT ASSETS:
Cash $ 402 $ 564
Accounts receivable, less allowance for doubtful accounts of
$432 and $567 in 2001 and 2000, respectively 6,285 5,791
Inventories 7,594 7,163
Prepaid expenses and other 493 463
Deferred income taxes 51 145
-------- -------
Total current assets 14,825 14,126
-------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land and land improvements 1,010 1,010
Buildings 4,399 4,399
Machinery and equipment 4,966 5,453
Furniture and fixtures 2,385 1,942
-------- -------
12,760 12,804
Less accumulated depreciation and amortization (7,807) (7,291)
-------- -------
4,953 5,513
-------- -------
OTHER ASSETS:
Intangibles, net of accumulated amortization of $1,094 and $1,010 in
2001 and 2000, respectively 368 277
Other 65 11
-------- -------
433 288
-------- -------
Total assets $ 20,211 $19,927
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
- ------------------------------------------------------------------------ -------- -------
CURRENT LIABILITIES:
Current maturities of long-term obligations
$ 485 $ 524
Current maturities of capital lease obligations 65 117
Bank overdraft 90 321
Advances under line of credit 0 2,111
Trade accounts payable 3,011 2,586
Other accrued liabilities 3,814 2,960
-------- -------
Total current liabilities 7,465 8,619
-------- -------
LONG-TERM OBLIGATIONS, less current maturities 4,946 5,413
-------- -------
CAPITAL LEASE OBLIGATIONS, less current maturities 69 134
-------- -------
DEFERRED INCOME TAXES 51 145
-------- -------
COMMITMENTS AND CONTINGENCIES (Notes 14 and 15)
STOCKHOLDERS' EQUITY:
Common stock of $.25 par value:
Class A voting stock, 100,000 authorized; 75,395 issued and
outstanding 19 19
Class B nonvoting stock, 3,900,000 authorized; 2,396,701 issued
and outstanding 599 599
Contributed capital 5,943 5,943
Retained earnings (deficit) 2,767 (942)
Treasury stock, at cost (19,126 shares of Class A in 2001 and
364,234 and 840 shares of Class B in 2001 and 2000,
respectively) (1,528) (3)
Cumulative other comprehensive income (loss) (120) 0
-------- -------
Total stockholders' equity 7,680 5,616
-------- -------
Total liabilities and stockholders' equity $ 20,211 $19,927
======== =======
The accompanying notes are an integral part of these consolidated statements.
- 10 -
CHATTANOOGA GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(In Thousands)
2001 2000 1999
-------- -------- --------
NET SALES $ 46,411 $ 39,798 $ 36,890
COST OF SALES 29,374 27,279 25,693
-------- -------- --------
Gross profit 17,037 12,519 11,197
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 12,163 10,808 10,665
-------- -------- --------
INCOME FROM OPERATIONS 4,874 1,711 532
-------- -------- --------
OTHER EXPENSE:
Interest expense, net 793 938 939
Other, net 206 114 71
-------- -------- --------
Income (loss) before income tax expense 3,875 659 (478)
INCOME TAX EXPENSE 166 155 78
-------- -------- --------
NET INCOME (LOSS) $ 3,709 $ 504 $ (556)
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
CHATTANOOGA GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(In Thousands, Except Share Data)
Cumulative
Class A Class B Other
Voting Nonvoting Retained Comprehensive
Common Common Contributed Earnings Treasury Income
Stock Stock Capital (Deficit) Stock (Loss) Total
------- --------- ----------- --------- -------- ------------- -------
BALANCE, June 30, 1998 $ 19 $ 499 $ 5,043 $ (890) $ (3) $ (5) $ 4,663
Net loss 0 0 0 (556) 0 0 (556)
Currency translation adjustment 0 0 0 0 0 5 5
------- ------- -------- ------- ------- -------- -------
BALANCE, June 30, 1999 19 499 5,043 (1,446) (3) 0 4,112
Net income 0 0 0 504 0 0 504
Issuance of 400,000 common shares 0 100 900 0 0 0 1,000
------- ------- -------- ------- ------- -------- -------
BALANCE, June 30, 2000 19 599 5,943 (942) (3) 0 5,616
Net income 0 0 0 3,709 0 0 3,709
Currency translation adjustment 0 0 0 0 0 (3) (3)
Purchase of 382,520 treasury shares 0 0 0 0 (1,525) 0 (1,525)
Change in fair value of interest rate swap 0 0 0 0 0 (117) (117)
------- ------- -------- ------- ------- -------- -------
BALANCE, June 30, 2001 $ 19 $ 599 $ 5,943 $ 2,767 $(1,528) $ (120) $ 7,680
======= ======= ======== ======= ======= ======== =======
The accompanying notes are an integral part of these consolidated statements.
-11-
CHATTANOOGA GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(IN THOUSANDS)
2001 2000 1999
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,709 $ 504 $ (556)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,296 1,360 1,453
Foreign exchange (gain) loss 15 0 (4)
Loss on sale of equipment 0 0 44
Changes in operating assets and liabilities:
Accounts receivables, net (494) (487) (250)
Inventories (231) 1,062 30
Prepaid expenses and other (30) (319) 283
Trade accounts payable 425 (199) 322
Other accrued liabilities 737 503 (194)
Other, net (54) 25 0
---------- ---------- ---------
Net cash provided by operating activities 5,373 2,449 1,128
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (627) (528) (1,305)
Proceeds from sale of property, plant and equipment 0 26 21
Cash paid for acquisition (400) 0 0
---------- ---------- ---------
Net cash used in investing activities (1,027) (502) (1,284)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term obligations (641) (3,782) (1,136)
Net repayments (advances) under line of credit (2,111) (2,934) 292
Borrowings under long-term obligations 18 4,229 650
Proceeds from issuance of common stock 0 1,000 0
Purchase of treasury stock (1,525) 0 0
Debt issuance costs 0 (186) 0
Increase (decrease) in bank overdraft (231) 66 (11)
---------- ---------- ---------
Net cash used in financing activities (4,490) (1,607) (205)
---------- ---------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (18) 0 9
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH (162) 340 (352)
CASH, beginning of year 564 224 576
---------- ---------- ---------
CASH, end of year $ 402 $ 564 $ 224
========== ========== =========
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT
NONCASH INVESTING AND FINANCING ACTIVITIES:
New equipment under capital lease financing $ 0 $ 175 $ 0
========== ========== =========
The accompanying notes are an integral part of
these consolidated statements.
- 12 -
CHATTANOOGA GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Chattanooga Group,
Inc. and its wholly-owned subsidiaries (collectively referred to as
"Chattanooga") including Chattanooga Europe b.v.b.a., Chattanooga Pacific Pty.
Ltd. and Chattanooga International, Inc., an Interest Charge Domestic
International Sales Corporation as defined by Internal Revenue Code Section 995.
All significant intercompany balances and transactions have been eliminated.
In fiscal year 2000, the Board of Directors approved a restructuring plan,
whereby Chattanooga dissolved Chattanooga International, Inc. The restructuring
was complete as of June 30, 2001.
In fiscal year 1999, the Board of Directors approved a restructuring plan,
whereby Chattanooga would close its Chattanooga Pacific Pty. Ltd. operations.
Chattanooga recorded a one-time charge of $438 in 1999 related to the
restructuring, which is included in selling, general and administrative expenses
in the consolidated statement of operations. The restructuring was complete as
of June 30, 2001.
Nature of Operations
Chattanooga manufactures and sells physical therapy, chiropractic and home care
products to many fields of physical medicine including physical therapy and
chiropractic clinics, hospitals, athletic training facilities and home
healthcare providers. Chattanooga sells mainly through dealers, and services a
world-wide market that includes virtually all major countries in the world.
A substantial part of Chattanooga's net revenues are derived from sales of
products to health service professionals and organizations reimbursed by
commercial insurers, health maintenance organizations and other third-party
payors, including reimbursement pursuant to the Medicare and Medicaid programs.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Foreign Currency Translation
Assets and liabilities of Chattanooga Europe b.v.b.a. and Chattanooga Pacific
are translated to United States dollars at year-end exchange rates. Income and
expense items are translated at average rates of exchange prevailing during the
year. Translation adjustments are accumulated as a separate component of
stockholders' equity. Gains and losses which result from foreign currency
transactions are included in the accompanying consolidated statements of
operations.
Bank Overdraft
Bank overdraft includes checks outstanding in excess of certain cash balances.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method. Inventory costs are comprised of material, direct labor and
manufacturing overhead.
- 13 -
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. When retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in income. Depreciation for
financial reporting purposes is provided for using the straight-line method over
lives ranging from three to twenty-five years. For fiscal 2001, 2000 and 1999,
Chattanooga recognized approximately $1,212, $1,306 and $1,353, respectively, in
depreciation expense.
Amortization of Intangibles
The costs of patents, trademarks and manufacturing and distribution rights are
amortized on a straight-line basis over the estimated useful lives of the
assets. At June 30, 2001, the estimated useful lives range from three to nine
years. Chattanooga continually evaluates whether events and circumstances have
occurred that may warrant revision of the remaining useful lives of intangibles
or that would indicate the remaining balances may not be recoverable. For fiscal
2001, 2000 and 1999, Chattanooga recognized approximately $84, $54 and $100,
respectively, in amortization expense.
Derivative Financial Instruments
Effective July 1, 2000, Chattanooga adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). The impact of adopting SFAS 133 was not material.
Stock-Based Compensation
Chattanooga accounts for its stock-based compensation plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
No. 25). Chattanooga has adopted the disclosure option of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123).
Advertising Expenses
Chattanooga expenses production costs of advertising as incurred. Advertising
expense for fiscal 2001, 2000 and 1999 was $419, $540 and $411, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Such costs were
approximately $668, $540 and $1,070 in 2001, 2000 and 1999, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
period's presentation.
Revenue Recognition
Revenue is recognized when Chattanooga's products are shipped to its customers.
Shipping and Handling Costs
Chattanooga classifies shipping and handling costs billed to the customers as
revenues and costs related to shipping and handling as cost of sales.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires all business combinations
- 14 -
initiated after June 30, 2001, to be accounted for using the purchase method.
SFAS No. 142 eliminates the amortization of goodwill over its estimated useful
life and requires an assessment of impairment by applying a fair-value-based
test on at least an annual basis. The provisions of SFAS No. 142 are effective
for fiscal years beginning after December 15, 2001. Chattanooga has elected to
early adopt SFAS No. 142, resulting in an effective date and transition of July
1, 2001. Management does not believe SFAS No. 142 will have a material impact on
its financial position or results of operations.
2. INVENTORIES
Inventories as of June 30, 2001 and 2000 are as follows:
2001 2000
------ ------
Raw materials $3,282 $3,587
Work-in-progress 1,182 1,676
Finished goods 3,130 1,900
------ ------
$7,594 $7,163
====== ======
3. DEBT AND OTHER LONG-TERM OBLIGATIONS
Long-term obligations as of June 30, 2001 and 2000 are as follows:
2001 2000
------ ------
Term note payable in monthly installm of $7 plus accrued interest
beginnin Septembe 1999, $ 353 and balance due August 1 2004, at
the bank's base rate plus .50%, (7.25% at June 30, 2001), $ 268 $ 353
Termnote payable in monthly principal installments of $31 plus accrued
interest beginning September 1999, and balance due August 1, 2004,
at the bank's base rate plus .50% (7.25% at June 30, 2001) 3,047 3,420
Term note payable in monthly principal installments of $2 plus accrued
interest beginning June 2000, and balance due May 1, 2003, at the
bank's base rate plus .50% (7.25% at June 30, 2001) 48 73
Subordinated notes to related party, principal and accrued interest due
July 1, 2005, at a fixed rate of 8.50% 1,950 1,950
Other 118 141
------- -------
5,431 5,937
Less current maturities (485) (524)
------- -------
$ 4,946 $ 5,413
======= =======
During fiscal 1998, Chattanooga entered into a capital lease obligation for
certain computer equipment. In connection with the acquisition of additional
computer equipment, Chattanooga extended a portion of this lease during fiscal
2000. At June 30, 2001, Chattanooga has $673 included in property, plant and
equipment relating to this lease with current year depreciation expense of $99
and accumulated depreciation of $348. The capital lease obligation was $134 and
$251 at June 30, 2001 and 2000, respectively, with current maturities of $65 in
fiscal 2002.
Chattanooga maintains a revolving line of credit, which bears interest at .25%
above the bank's base rate (7.00% at June 30, 2001) and expires December 31,
2002. The revolving line of credit permits borrowings of the lesser of $6,000,
or the borrowing base, as defined in the agreement, subject to a $40 letter of
credit. No amounts were outstanding under the revolving line of credit at June
30, 2001.
The future maturities of long-term obligations, including the capital lease
obligation outstanding as of June 30, 2001, are as follows:
- 15 -
- - 15 -
Long-Term Capital Lease
Obligations Obligation
----------- -------------
2002 $ 485 $65
2003 481 69
2004 455 0
2005 1,942 0
2006 1,950 0
Thereafter 118 0
The loan agreements for the line of credit and term notes contain certain
restrictive covenants including, among other restrictions, required maintenance
of minimum levels of tangible net worth and limitations on the payment of
dividends or repurchase of common stock. The bank also requires Chattanooga to
maintain a restricted cash balance of $250, which is included in cash on the
consolidated balance sheet as of June 30, 2001.
Substantially all assets of Chattanooga are pledged as collateral on the above
revolving line of credit and term notes.
In October 1996, Chattanooga entered into a term loan with the majority
shareholder. Maximum borrowings under the term loan are $1,500. The term loan is
due on July 1, 2005, subject to the terms of a subordination agreement with
Chattanooga's senior lender. Interest is payable quarterly at a fixed rate of
8.5%. Borrowings outstanding were $1,300 at June 30, 2001 and 2000. Interest
expense for the years ended June 30, 2001, 2000 and 1999 was $111, $117 and
$111, respectively. Accrued interest at June 30, 2001 and 2000 is $492 and $380,
respectively, and is included in other accrued liabilities on the consolidated
balance sheet.
In December 1998, Chattanooga entered into a term loan with the majority
shareholder. The term loan is due on July 1, 2005, subject to the terms of a
subordination agreement with Chattanooga's senior lender. Interest is payable
quarterly at a fixed rate of 8.5%. Borrowings outstanding were $650 at June 30,
2001 and 2000. Interest expense for the years ended June 30, 2001, 2000 and 1999
was $55, $55 and $28, respectively. Accrued interest at June 30, 2001 and 2000
is $138 and $83, respectively, and is included in other accrued liabilities on
the consolidated balance sheet.
Subsequent to June 30, 2001, Chattanooga paid all cumulative accrued interest
due on the notes to the majority shareholder.
Total interest paid during the years ended June 30, 2001, 2000 and 1999 was
$663, $796 and $888, respectively.
4. INCOME TAXES
The principal temporary differences which give rise to deferred tax assets and
liabilities at June 30, 2001 and 2000 result from differences in financial and
income tax reporting for allowance for doubtful accounts, property, plant and
equipment, deferred revenue and certain accruals. The total of all deferred tax
assets and deferred tax liabilities recognized at June 30, 2001 and 2000 consist
of the following:
2001 2000
------ ------
Deferred tax assets $1,467 $2,980
Less: Valuation allowance (991) (2,373)
------ ------
476 607
Deferred tax liabilities (476) (607)
------ ------
Net deferred tax asset $ 0 $ 0
====== ======
The difference between the income tax expense at the statutory income tax rate
and the effective tax rate for the years ended June 30, 2001, 2000 and 1999 is
due principally to the utilization of net operating losses to reduce income tax
expense. A valuation allowance was recorded in 2001 and 2000 due to management's
belief that it is
- 16 -
more likely than not that all deferred tax assets will not be realized. During
2001, Chattanooga fully utilized its net operating loss carryforwards of
approximately $3,936. Due to the 100% valuation allowance, the total provision
for 2001, 2000 and 1999 represents the current provision.
Total income taxes paid for the years ended June 30, 2001, 2000 and 1999 were
approximately $68, $113 and $55, respectively.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Unless otherwise indicated elsewhere in the notes to the consolidated financial
statements, the carrying value of Chattanooga's financial instruments
approximates fair value.
6. ACQUISITIONS
Effective May 11, 2001, Chattanooga purchased certain assets for an aggregate
purchase price of $400. The acquisition was accounted for under the purchase
method of accounting. The excess of the purchase price over the estimated fair
value of the assets acquired of approximately $175 was allocated to goodwill.
7. WARRANTS WITH REDEMPTION FEATURE
In connection with a guarantee from the majority shareholder to advance
Chattanooga funds needed in the event of settlement of the suit with a minority
shareholder (see Note 14) and a subordination agreement in the event of
advancement of funds, Chattanooga issued 25,000 stock purchase warrants
("Warrants"). The Warrants were issued on July 30, 1999 at an initial value of
$2.50 per Warrant. Each Warrant represents the right to purchase one share of
Chattanooga's Class B nonvoting common stock at an exercise price of $4.00,
until the expiration date of July 30, 2009. The fair value of the Warrants was
not material. As of June 30, 2001, no Warrants had been exercised.
8. COMMON STOCK AND STOCK OPTIONS
Chattanooga issued restricted Class B nonvoting common stock that is subject to
various restrictions including restrictions on the sale, transfer, pledge or
encumbrance of the stock. Employees become 100% vested in the restricted Class B
nonvoting common stock after five years, at which time the shares awarded are
transferred to the employees. There were 27,520 shares of restricted Class B
nonvoting common stock outstanding at June 30, 2001 and 2000, all of which are
fully vested.
Chattanooga established the Chattanooga Group Stock Option Plan (the "Plan")
which provides, among other things, for the granting of stock options and
restricted common stock to certain employees. The total number of shares that
may be issued as restricted shares or as shares subject to option under the Plan
shall not exceed 113,760 shares of Chattanooga's Class B nonvoting common stock.
In January 2000, the Plan was terminated and all options authorized but not
granted and all outstanding options were cancelled upon approval of the
participants in the Plan.
Options granted had terms ranging from seven to ten years. Employees vested in
options granted prior to 1993 at the rate of 50% after five years, 75% after six
years and 100% after seven years. Employees vested in options granted after 1993
ratably over a three-to-five year period.
Effective July 25, 2000, Chattanooga adopted the Chattanooga Group, Inc. 2000
Stock Option Plan (the "2000 Plan") which provides, among other things, for the
granting of stock options and restricted common stock to certain employees. The
total number of shares that may be issued as restricted shares or as shares
subject to option under the 2000 Plan is not to exceed 300,000 shares of
Chattanooga's Class B nonvoting common stock.
Stock options granted under the plan are granted at the fair market value at the
time of grant, vest immediately or ratably over a three or five year period, and
expire 10 years from the grant date.
Chattanooga accounts for its stock-based compensation plan under APB No. 25,
under which no compensation expense has been recognized as all employee stock
options have been granted with an exercise price equal to or
- 17 -
above the fair value of Chattanooga's common stock on the date of grant.
Chattanooga adopted SFAS No. 123 for disclosure purposes only. For SFAS No. 123,
the fair value of each employee option grant has been estimated as of the date
of grant using the Minimum Value option pricing model and the following weighted
average assumptions: risk-free interest rate of 5.67%, and 5.34% for 2001 and
1999, respectively, expected life of 10 years, and dividend rate of 0%. Had
compensation cost been determined in accordance with SFAS No. 123, utilizing the
assumptions detailed above, Chattanooga's pro forma net income (loss) would have
been $3,663, $497 and $(570) for the years ended June 30, 2001, 2000 and 1999,
respectively.
A summary of Chattanooga's stock option activity during the years ended June 30,
2001, 2000 and 1999 is as follows:
2001 2000 1999
------------------------ ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
--------- -------- --------- --------- --------- --------
Outstanding at beginning of year 0 $0.00 66,500 $6.67 72,400 $6.58
Granted at fair value 240,000 2.50 0 0.00 0 0.00
Canceled or expired (2,000) 2.50 (66,500) 6.67 (5,900) 5.64
--------- -------- --------- -------- --------- --------
Outstanding at end of year 238,000 $2.50 0 $0.00 66,500 $6.67
--------- -------- --------- -------- --------- --------
Exercisable at end of year 0 0 66,500 $6.67
--------- --------- --------- --------
Weighted average fair value of
options granted $1.06 $0.00 $0.00
-------- -------- --------
9. EMPLOYEE BENEFIT PLAN
Chattanooga maintains a 401(k) profit sharing plan (the "401(k) Plan") covering
substantially all employees upon completion of six months of service, as
defined. The 401(k) Plan allows for employees to contribute a portion of their
compensation subject to certain limitations. Chattanooga may make discretionary
contributions to the 401(k) Plan. Total discretionary contributions during 2001,
2000 and 1999 were $191, $184 and $169, respectively.
10. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swap agreements are used to manage well-defined interest rate
risks. Under an interest rate swap agreement, Chattanooga has agreed with
another party to exchange, at specified intervals, the difference between fixed
rate and variable rate interest amounts calculated by reference to an
agreed-upon notional amount. Under this agreement, Chattanooga receives interest
payments at rates equal to USD Prime, and pays interest at the fixed rate shown
below:
Notional Fixed Rate Variable Rate
Amount Component Component Effective Date Expiration Date
--------------- ------------- ---------------- ----------------- -----------------
$3,047 9.44% 6.97% March 20, 2001 August 1, 2004
Chattanooga is exposed to credit loss in the event of non-performance by the
counterparty to its interest rate swap agreement. Chattanooga anticipates,
however, that the counterparty will be able to fully satisfy their obligations
under the contract. Chattanooga does not obtain collateral or other security to
support financial instruments subject to credit risk, but monitors the
credit-standing of the counterparty.
The fair value of the interest rate swap agreement is defined as the amount
Chattanooga would receive or pay to relinquish itself from further obligations
under the agreements. At June 30, 2001, Chattanooga estimates the amount it
would pay to terminate the agreement approximates $117, which has been recorded
as a liability in the accompanying consolidated balance sheet as of June 30,
2001.
- 18 -
As of June 30, 2001, management believes Chattanooga has met the hedge
effectiveness requirements of SFAS No. 133. Accordingly, the fair value of the
interest rate swap and changes in fair value has been recorded as a reduction of
cumulative other comprehensive income (loss) in the consolidated balance sheet
as of June 30, 2001.
11. LEASES
The following is a schedule of future annual minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of June 30, 2001:
2002 $157
2003 102
2004 52
2005 12
2006 3
Total rental expense under all leases for the years ended June 30, 2001, 2000
and 1999 was $184, $222 and $215, respectively.
12. MANUFACTURING AND DISTRIBUTION RIGHTS
Chattanooga has various exclusive manufacturing and distribution agreements,
which include earned royalty and minimum royalty arrangements. Total royalty
expense during 2001, 2000 and 1999 was $140, $148 and $116, respectively.
13. COMPREHENSIVE INCOME
Comprehensive income (loss) consisted of the following components for the years
ended June 30, 2001, 2000 and 1999, respectively:
2001 2000 1999
--------- -------- --------
Net income (loss) $3,709 $504 $(556)
Currency translation adjustment (3) 0 5
Change in fair value of interest rate swap (117) 0 0
-------- ------- -------
Total $3,589 $504 $(551)
======== ======= =======
14. COMMITMENTS AND CONTINGENCIES
Chattanooga was a party to a Stock Purchase Agreement, pursuant to which a
minority shareholder acquired from Chattanooga and other shareholders
approximately 25% of the common stock of Chattanooga. The Stock Purchase
Agreement provided the minority shareholder with a right to "put" the stock to
Chattanooga at a price that was based upon the "fair market value" of
Chattanooga as of September 12, 1996. The minority shareholder exercised its put
option. However, Chattanooga and the minority shareholder were unable to reach
an agreement on the fair market value of Chattanooga for the purpose of
determining the purchase price of the shares subject to the put rights.
In accordance with the Stock Purchase Agreement, Chattanooga and the minority
shareholder jointly retained the services of an arbitrator to determine the fair
market value of Chattanooga. Chattanooga and the minority shareholder each
submitted a valuation of Chattanooga as of September 12, 1996, and the
arbitrator, after making an independent determination of value, selected the
valuation submitted by Chattanooga as the value closest to their determination.
This value then became the value for determining the purchase price of the
shares subject to the put rights. The minority shareholder failed to convey the
shares to Chattanooga and Chattanooga instituted a lawsuit on May 16, 1997 to
obtain a declaratory judgment requiring the minority shareholder to comply with
the terms of the Stock Purchase Agreement and for breach of contract.
- 19 -
On July 2, 1997, the minority shareholder filed an answer and counterclaim
against Chattanooga, Chattanooga's principal shareholder, and a member of the
Board of Directors, alleging causes of action by breach of contract, civil
conspiracy and tortuous interference with contract. The minority shareholder
requested declaratory judgment vacating the arbitration, and requested an award
of damages in an amount not less than $15,000.
On February 1, 2001, Chattanooga reached a settlement which required a payment
of $1,700 to the minority shareholder in return for the sale, assignment and
transfer of 19,126 and 363,394 of Class A voting and Class B nonvoting shares,
respectively. Chattanooga funded the settlement through borrowings under their
revolving line of credit of $1,525, with the remaining $175 paid by
Chattanooga's insurer.
Chattanooga is currently under review by the United States Department of
Commerce ("Department") for Compliance with Export Administration Regulations of
the Export Administration Act and Office of Foreign Asset Controls Regulations.
In May 2001, the Department initiated inquiries and has concluded that certain
limited violations occurred. Management asserts it was not aware of the
violations when they occurred and has done everything in its power to avoid
future violations.
Chattanooga is in the process of seeking a global administrative settlement of
the matter. While the exact amount of the settlement is not known, management
believes the settlement and related legal fees will be less than $300. This
amount has been recognized as an operating expense in the current year and that
amount, less legal fees paid, is included in other accrued liabilities in the
consolidated balance sheet as of June 30, 2001. The total payout could
ultimately be higher than Chattanooga's estimate (see Note 15).
Chattanooga is party to certain other legal proceedings incidental to its
business. The ultimate disposition of these matters is not presently
determinable but will not, in the opinion of management, have a material adverse
effect on the financial statements.
Purchase Commitments
The following is a schedule of long-term purchase commitments for production
components that have remaining noncancelable purchase commitments in excess of
one year as of June 30, 2001:
2002 $5,059
2003 1,195
15. SUBSEQUENT EVENTS
Subsequent to September 12, 2001, management increased the provision for the
settlement and related legal fees for the investigation by the Department
discussed in Note 14 to $600. This change in accounting estimate will be
reflected as expense in subsequent financial statements.
On February 8, 2002, all of the issued and outstanding shares of Chattanooga
were acquired by Encore Medical Corporation for a cash price of $31,500, which
is subject to adjustment based on the change in net worth of Chattanooga between
October 1, 2001 and February 8, 2002, and the repayment of certain Chattanooga
debt approximating $5,000.
- 20 -
CHATTANOOGA GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED
BALANCE SHEET
December 31, 2001
(In Thousands, Except Share Data)
ASSETS
Cash and cash equivalents $ 556
Accounts receivable, net 7,587
Inventories, net 7,984
Deferred tax assets 301
Prepaid expense and other current assets 874
-----------
Total Current Assets 17,302
Property, plant and equipment, net 4,621
Intangible assets, net 349
Other noncurrent assets 54
-----------
Total Assets $ 22,326
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,278
Accrued liabilities 3,515
Current portion of long-term debt 1,515
-----------
Total Current Liabilities 7,308
Capital lease payable 34
Notes payable 4,369
Other long term liabilities 329
-----------
Total Liabilities 12,040
Total Stockholders' Equity 10,286
-----------
Total Liabilities and Stockholders' Equity $ 22,326
===========
- 21 -
CHATTANOOGA GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2001 and 2000
(In Thousands)
2001 2000
------------------------------
Sales $26,070 $23,100
Cost of sales 15,233 14,789
------------------------------
Gross margin 10,837 8,311
Operating expenses:
Research and Development 682 693
Selling, General & Administrative 5,786 5,211
------------------------------
Total operating expenses 6,468 5,904
------------------------------
Operating income 4,369 2,407
Other expense, net 815 398
------------------------------
Income before taxes 3,554 2,009
Provision for income taxes 891 94
------------------------------
Net income $ 2,663 $ 1,915
==============================
CHATTANOOGA GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2001 and 2000
(In Thousands)
2001 2000
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,663 $ 1,915
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 576 659
Changes in operating assets and liabilities:
Accounts receivable (1,381) (1,409)
Inventories (390) (96)
Deferred tax assets (250) -
Prepaid expense and other current assets (291) (6)
Accounts payable and accrued liabilities (1,001) 607
--------------------------
Net cash provided (used in) by operating activities (74) 1,670
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (225) (233)
--------------------------
Net cash used in investing activities (225) (233)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings / (repayments) on line of credit 965 (1,019)
Payments under long term obligations (512) (327)
--------------------------
Net cash provided by (used in) financing activities 453 (1,346)
Net increase in cash and cash equivalents 154 91
Cash and cash equivalents at beginning of year 402 564
--------------------------
Cash and cash equivalents at end of year $ 556 $ 655
==========================
- 22 -
CHATTANOOGA GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
(In Thousands)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Chattanooga Group, Inc. and its wholly owned subsidiaries
(individually and collectively referred to as "Chattanooga"). All significant
intercompany balances and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six months ended December 31, 2001 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 2002. For further information, refer to the audited financial
statements and notes thereto for Chattanooga included elsewhere herein.
2. EARNINGS PER SHARE
Chattanooga does not report earnings per share as it is a privately held
concern.
3. INVENTORIES
Inventories at December 31, 2001 are as follows (in thousands):
December 31, 2001
--------------------
Raw materials $3,834
Work in process 1,707
Finished goods 3,210
Less-inventory reserves (768)
--------------------
Total $7,984
====================
4. COMPREHENSIVE INCOME
The components of comprehensive income for the six months ended December 31,
2001 and 2000 are as follows (in thousands):
2001 2000
---------------------------------
Net income $ 2,663 $ 1,915
Change in fair value of interest rate swap (58) -
---------------------------------
Total $ 2,605 $ 1,915
=================================
5. COMMITMENTS AND CONTINGENCIES
Chattanooga is currently under review by the United States Department of
Commerce ("Department") for Compliance with Export Administration Regulations of
the Export Administration Act and Office of Foreign Asset Controls Regulations.
In May 2001, the Department initiated inquiries and has concluded that certain
limited violations occurred. Management asserts it was not aware of the
violations when they occurred and has done everything in its power to avoid
future violations.
- 23 -
Chattanooga is in the process of seeking a global administrative settlement of
the matter. While the exact amount of the settlement is not known, management
believes the settlement and related legal fees will be less than $600. Of this
amount, $300 has been recognized as an operating expense in the period ended
December 31, 2001. As of December, 31, 2001, Chattanooga has approximately $275
included in other accrued liabilities in the consolidated balance sheet related
to this contingency, which represents the total estimated settlement of $600
less legal fees paid to date. The total payout could ultimately be higher than
Chattanooga's estimate.
Chattanooga is party to certain other legal proceedings incidental to its
business. The ultimate disposition of these matters is not presently
determinable but will not, in the opinion of management, have a material adverse
effect on the financial position and results of operations.
6. SUBSEQUENT EVENTS
On February 8, 2002, Encore Medical Corporation ("EMC") acquired all of the
issued and outstanding shares of capital stock of Chattanooga pursuant to a
Stock Purchase Agreement for a cash purchase price of $31,500. This price is
subject to adjustment, if any, based on the change in the net worth of
Chattanooga between October 1, 2001 and February 8, 2002.
Subsequent to December 31, 2001, Chattanooga repaid approximately $965 of the
outstanding notes payable. Additionally, in connection with this acquisition,
EMC paid off the outstanding balances of the majority of Chattanooga's remaining
debt approximating $5,000 as of February 8, 2002.
- 24 -