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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1999
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.
AS OF JULY 12, 1999, 9,793,733 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT PAR
VALUE, WERE OUTSTANDING.
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CHATTEM, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of May 31, 1999 and
November 30, 1998...................................... 3
Consolidated Statements of Income for the Three and Six
Months Ended May 31, 1999 and 1998..................... 4
Consolidated Statements of Cash Flows for the Six Months
Ended May 31, 1999 and 1998............................ 5
Notes to Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................ 25
Item 4. Submission of Matters to a Vote of Security
Holders................................................. 25
Item 6. Exhibits and Reports on Form 8-K................. 25
SIGNATURES.................................................. 26
EXHIBIT 11--Statement Regarding Computation of Per Share
Earnings
EXHIBIT 27--Financial Data Schedule
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MAY 31,
1999
(AS RESTATED, NOVEMBER 30,
SEE NOTE 15) 1998
------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,869 $ 2,076
Accounts receivable, less allowance for doubtful accounts
of $850 at May 31, 1999 and $775 at November 30, 1998... 58,400 36,581
Refundable and deferred income taxes...................... 3,058 3,049
Inventories............................................... 22,980 19,606
Prepaid expenses and other current assets................. 1,149 784
-------- --------
Total current assets.................................... 90,456 62,096
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 20,256 18,146
-------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc.................................. 3,242 3,102
Patents, trademarks and other purchased product rights,
net..................................................... 360,200 272,226
Debt issuance costs, net.................................. 12,461 10,091
Other..................................................... 4,286 3,351
-------- --------
Total other noncurrent assets........................... 380,189 288,770
-------- --------
TOTAL ASSETS.......................................... $490,901 $369,012
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 9,000 $ 17,444
Accounts payable.......................................... 13,244 12,733
Payable to bank........................................... 128 1,026
Accrued liabilities....................................... 42,674 30,209
-------- --------
Total current liabilities............................... 65,046 61,412
-------- --------
LONG-TERM DEBT, less current maturities..................... 378,547 273,913
-------- --------
DEFERRED INCOME TAXES....................................... 6,826 6,826
-------- --------
OTHER NONCURRENT LIABILITIES................................ 2,150 2,110
-------- --------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000,
none issued............................................. -- --
Common shares, without par value, authorized 50,000,
issued 9,764 at May 31, 1999 and 9,574 at November 30,
1998.................................................... 2,034 1,994
Paid-in surplus........................................... 73,818 69,068
Accumulated deficit....................................... (36,046) (44,960)
-------- --------
39,806 26,102
Cumulative other comprehensive income--
Foreign currency translation adjustment................. (1,474) (1,351)
-------- --------
Total shareholders' equity............................ 38,332 24,751
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $490,901 $369,012
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
------------------------ ------------------------
(AS RESTATED, (AS RESTATED,
SEE NOTE 15) SEE NOTE 15)
1999 1998 1999 1998
------------- -------- ------------- --------
NET SALES......................................... $83,441 $58,545 $146,169 $93,466
------- ------- -------- -------
COSTS AND EXPENSES:
Cost of sales................................... 21,794 15,854 38,674 25,536
Advertising and promotion....................... 33,315 23,202 58,053 38,382
Selling, general and administrative............. 7,984 6,741 14,684 11,900
------- ------- -------- -------
Total costs and expenses.................... 63,093 45,797 111,411 75,818
------- ------- -------- -------
INCOME FROM OPERATIONS............................ 20,348 12,748 34,758 17,648
------- ------- -------- -------
OTHER INCOME (EXPENSE):
Interest expense................................ (9,373) (7,332) (18,179) (11,512)
Investment and other income..................... 113 243 244 435
Gain on product divestiture..................... -- 10,442 -- 10,442
------- ------- -------- -------
Total other income (expense)................ (9,260) 3,353 (17,935) (635)
------- ------- -------- -------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
LOSS............................................ 11,088 16,101 16,823 17,013
PROVISION FOR INCOME TAXES........................ 4,167 6,032 6,325 6,335
------- ------- -------- -------
INCOME BEFORE EXTRAORDINARY LOSS.................. 6,921 10,069 10,498 10,678
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF
DEBT, NET....................................... (1,157) (1,901) (1,584) (1,901)
------- ------- -------- -------
NET INCOME........................................ $ 5,764 $ 8,168 $ 8,914 $ 8,777
======= ======= ======== =======
COMMON SHARES:
Weighted average number outstanding (basic)..... 9,741 9,370 9,726 9,149
======= ======= ======== =======
Weighted average and dilutive potential number
outstanding................................... 10,112 9,829 10,105 9,548
======= ======= ======== =======
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income before extraordinary loss.............. $ .71 $ 1.07 $ 1.08 $ 1.17
Extraordinary loss............................ (.12) (.20) (.16) (.21)
------- ------- -------- -------
Total basic................................. $ .59 $ .87 $ .92 $ .96
======= ======= ======== =======
Diluted:
Income before extraordinary loss.............. $ .69 $ 1.02 $ 1.04 $ 1.12
Extraordinary loss............................ (.12) (.19) (.16) (.20)
------- ------- -------- -------
Total diluted............................... $ .57 $ .83 $ .88 $ .92
======= ======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
FOR THE SIX MONTHS
ENDED MAY 31,
-------------------------
(AS RESTATED,
SEE NOTE 15)
1999 1998
------------- ---------
OPERATING ACTIVITIES:
Net income................................................ $ 8,914 $ 8,777
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 7,144 4,121
Extraordinary loss on early extinguishment of debt,
net.................................................... 1,584 1,901
Gain on sale of trademarks and other product rights..... -- (10,442)
Dividend receivable from Elcat, Inc..................... (140) (328)
Other, net.............................................. 28 111
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable................................... (21,819) (16,434)
Inventories........................................... 119 910
Refundable and deferred income taxes.................. (9) --
Prepaid and other current assets...................... (149) 729
Accounts payable and accrued liabilities.............. 13,464 15,624
--------- ---------
Net cash provided by operating activities........... 9,136 4,969
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (2,473) (7,348)
Proceeds from sale of investment.......................... 387 --
Purchase of trademarks and other related assets........... (91,293) (165,128)
Proceeds from sale of trademarks and other product
rights.................................................. -- 11,750
Other, net................................................ (1,147) (293)
--------- ---------
Net cash used in investing activities............... (94,526) (161,019)
--------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt............................... (126,493) (95,998)
Proceeds from long-term debt.............................. 221,781 262,365
Proceeds from exercise of stock options and warrants...... 675 2,458
Repurchase of common stock................................ (885) --
Debt issuance costs....................................... (4,829) (8,297)
Cancellation of interest rate swap agreements............. (1,155) --
Decrease in payable to bank............................... (898) (865)
--------- ---------
Net cash provided by financing activities........... 88,196 159,663
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (13) (8)
--------- ---------
CASH AND CASH EQUIVALENTS:
Increase for the period................................... 2,793 3,605
At beginning of period.................................... 2,076 4,858
--------- ---------
At end of period.......................................... $ 4,869 $ 8,463
========= =========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 125,500 shares of common stock at $39.84 per
share to fund portion of Thompson Medical brands'
acquisition............................................. $ 5,000 $ --
Additions to trademarks and other product rights by
assumption of certain liabilities....................... $ 500 $ 8,000
PAYMENTS FOR:
Interest.................................................. $ 17,170 $ 8,053
Taxes..................................................... $ 3,981 $ 272
The accompanying notes are an integral part of these consolidated financial
statements.
5
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
1. 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 the Company's
Annual Report to Shareholders for the year ended November 30, 1998. The 1998
Annual Report has previously been filed with the Securities and Exchange
Commission as an exhibit to the Company's Form 10-K. 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. All significant intercompany
transactions and balances have been eliminated.
See note 15 regarding the restatement of financial statements.
2. The Company incurs significant expenditures on television, radio and print
advertising to support its nationally branded over-the-counter health and
skin care products. Customers purchase products from the Company with the
understanding that the brands will be supported by the Company's extensive
media advertising. This advertising supports the retailers' sales effort and
maintains the important brand franchise with the consuming public.
Accordingly, the Company considers its advertising program to be clearly
implicit in its sales arrangements with its customers. Therefore, the
Company believes 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 APB Opinion No. 28) and
adjusting that accrual to the actual expenses incurred at the end of the
year.
3. The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the respective full years.
4. Inventories consisted of the following at May 31, 1999 and November 30,
1998:
MAY 31, NOVEMBER 30,
1999 1998
-------- ------------
Raw materials and work in process...................... $ 9,140 $ 7,903
Finished goods......................................... 16,250 14,113
Excess of current cost over LIFO values................ (2,410) (2,410)
------- -------
Total inventories.................................... $22,980 $19,606
======= =======
6
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
5. Accrued liabilities consisted of the following at May 31, 1999 and
November 30, 1998:
MAY 31,
1999 NOVEMBER 30,
AS RESTATED 1998
----------- ------------
Income and other taxes............................... $ 4,892 $ 3,881
Salaries, wages and commissions...................... 2,298 2,850
Advertising and promotion............................ 21,071 8,896
Interest............................................. 6,880 5,969
Product acquisitions and divestitures................ 3,635 3,290
Royalties............................................ 143 2,889
Other................................................ 3,755 2,434
------- -------
Total accrued liabilities.......................... $42,674 $30,209
======= =======
6. Effective December 1, 1998, the Company adopted Statements of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"; SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related
Information" and SFAS No. 132, "Employers' Disclosure about Pensions and
other Retirement Benefits."
SFAS No. 130 requires the Company to include a financial statement
presentation of comprehensive income and its components. Note 7 of these
Notes to Consolidated Financial Statements presents this information. The
Shareholders' Equity sections of the accompanying Consolidated Balance
Sheets as of May 31, 1999 and November 30, 1998 also present the "Cumulative
other comprehensive income" portion of the respective cumulative
comprehensive income.
SFAS No. 131 requires the Company to expand the financial statement
disclosures for operating segments, products and services and geographic
areas. For fiscal 1999, the Company in accordance with the provisions of
this statement has elected not to provide the disclosures for interim
reporting periods, but will present the required information in its annual
report for fiscal 1999 on a comparative annual basis.
SFAS No. 132 revises the Company's disclosures about pension and other post
retirement benefits plans. These revisions will be reflected in the
Company's annual report for fiscal 1999.
7
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
7. Comprehensive income consisted of the following components for the three and
six months ended May 31, 1999 and 1998, respectively:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
---------------------- ----------------------
AS RESTATED AS RESTATED
1999 1998 1999 1998
----------- -------- ----------- --------
Net income............................. $5,764 $8,168 $8,914 $8,777
Other--foreign currency translation
adjustment........................... (52) 102 (123) 9
------ ------ ------ ------
Total................................ $5,712 $8,270 $8,791 $8,786
====== ====== ====== ======
8. On December 21, 1998, the Company acquired the DEXATRIM, SPORTSCREME,
ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands from Thompson
Medical Company, Inc. (the "Thompson Medical brands") for $95,000. The
purchase price consisted of $90,000 cash and 125,500 shares of the Company's
common stock. The cash portion of the purchase price was financed by a new
senior credit facility. The purchase price of $95,000 was allocated $3,493
to inventory and $91,507 to the trademarks.
9. On December 21, 1998, the Company refinanced its existing credit facilities
with $165,000 in senior secured credit facilities (the "Credit Facilities").
The Credit Facilities were provided by a syndicate of commercial banks, led
by Bank of America as agent. The Credit Facilities include a $50,000
revolving credit facility and a $115,000 term loan. The Credit Facilities
were used to refinance existing senior debt, to finance the acquisition of
the Thompson Medical brands and related fees and expenses and to finance
working capital and other general corporate needs. The $50,000 revolving
credit facility matures on the earlier of (i) December 21, 2003 and
(ii) the date on which the term loan is repaid in full. The $115,000 term
loan matures on December 21, 2003. The Credit Facilities contain covenants,
representations, warranties and other agreements by the Company that are
customary in loan agreements and securities instruments relating to
financing of this type.
The company may elect either the greater of (i) the prime rate or federal
funds rate plus .5% or (ii) a floating rate or Eurodollar interest rate
option applicable to the term and revolving line loans under the Credit
Facilities. The prime rate and Eurodollar interest rate options are based on
a base rate plus a rate margin that fluctuates on the basis of the Company's
senior leverage ratio.
10. On May 7, 1999 the Company issued an additional $75,000 of its 8.875%
(priced to yield 8.8125%) senior subordinated notes under its indenture
relating to the issuance of its $200,000 of 8.875% notes on March 24, 1998.
The additional notes mature on April 1, 2008 and were issued under the
Company's $250,000 shelf registration statement filed on December 21, 1998
with the Securities and Exchange Commission. The net proceeds from the
issuance of the additional notes were used to retire $41,500 of the then
outstanding balance of the Company's $115,000 term bank loan and the
outstanding balance of $25,500 of its revolving bank loan dated
December 21, 1998.
Concurrent with the closing of the $75,000 note issue, the Company amended
its senior credit facility. The amended facility, provided by a syndicate of
banks, consists of a $70,000 term loan and a $50,000 revolving credit
facility. The revolving credit facility and the term loan both mature on
December 21, 2003. The credit facility contains covenants, representations,
warranties and other agreements by the Company that are customary in loan
agreements relating to financing of this type.
8
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
11. In February 1999 a complaint was filed against the Company by Genderm
Corporation ("Genderm") in the U.S. District Court for the District of
Arizona. The complaint alleged, among other things, that the formulations of
CAPZASIN-P, CAPZASIN-HP and ICY HOT Arthritis Therapy Gel infringed U.S.
Patent 4,485,450 owned by Joel Bernstein, M.D. and licensed to Genderm (the
"Patent"). The complaint requested injunctive relief, compensatory and
treble damages, costs and attorneys fees. A hearing on the preliminary
injunction was held on April 13-14, 1999. On May 6, 1999 U.S. District Court
for the District of Arizona held that Genderm had carried its burden of
proving a substantial likelihood of success and ultimately showing that the
Patent was infringed and issued a preliminary injunction prohibiting the
Company from shipping CAPZASIN-P cream, CAPZASIN-HP cream and ICY HOT
Arthritis Therapy Gel. Following the issuance of the preliminary injunction,
Chattem reached a settlement with Genderm pursuant to which Chattem made a
single payment of $750 in exchange for the dismissal of the complaint and a
fully paid license to use the Patent until its expiration. The settlement
cost was recorded as a settlement of a pre-acquisition contingency.
12. During May 1999 the Company retired $6,750 face amount of its 12.75% Senior
Subordinated Notes, due 2004. The remaining principal amount outstanding is
$42,901.
In connection with the repayment of portions of its bank loans and its
12.75% notes, the Company recognized an extraordinary loss on early
extinguishment of debt of $1,584, net of taxes, for the six months ended
May 31, 1999. This loss primarily related to the write-off of debt issuance
costs connected with outstanding long-term debt retired before maturity in
the current period and the premium paid on the retirement of the 12.75%
notes.
13. In March 1999 the Company repurchased for $885, and returned to unissued,
30,000 shares of its common stock, without par value.
14. For purposes of reporting cash flows, the Company considers all short-term
deposits and investments with original maturities of three months or less to
be cash equivalents.
9
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
15. Restatement
In May 1999 the Company terminated its interest rate swap agreements and in
connection therewith recorded a $716 loss, net of tax, as an extraordinary
item. The Company recently determined that the proper accounting for this
transaction was to defer the loss and amortize it as interest expense over
the remaining original life of the swap agreements because the swap was
redesignated as a hedge of continuing debt with similar terms.
As a result of adjustments recorded by the Company to defer and amortize the
loss, the Company has revised its previously reported results of operations
for the three and six months ended May 31, 1999. This Form 10-Q/A reflects
the results of these adjustments. A summary of the effect of the adjustments
for the three and six months ended May 31, 1999 on certain previously
reported amounts is as follows (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, 1999 MAY 31, 1999
------------------------ ------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED
------------- -------- ------------- --------
Interest expense................. $ 9,342 $ 9,373 $18,148 $ 18,179
Total other income (expense)..... (9,229) (9,260) (17,904) (17,935)
Income before income taxes and
extraordinary loss............. 11,119 11,088 16,854 16,823
Provision for income taxes....... 4,179 4,167 6,337 6,325
Income before extraordinary
loss........................... 6,940 6,921 10,517 10,498
Extraordinary loss on early
extinguishment of debt, net.... 1,873 1,157 2,300 1,584
Net income....................... 5,067 5,764 8,217 8,914
Net income (loss) per common
share:
Basic:
Income before extraordinary
loss....................... .71 .71 1.08 1.08
Extraordinary loss........... (.19) (.12) (.24) (.16)
Total basic.................. .52 .59 .84 .92
Diluted:
Income before extraordinary
loss....................... .69 .69 1.04 1.04
Extraordinary loss........... (.19) (.12) (.23) (.16)
Total diluted................ .50 .57 .81 .88
MAY 31, 1999
------------------------
AS PREVIOUSLY
REPORTED RESTATED
------------- --------
Other noncurrent assets............................... $ 3,161 $ 4,286
Accrued liabilities................................... 42,246 42,674
Accumulated deficit................................... (36,743) (36,046)
16. The condensed consolidating financial statements, for the dates or periods
indicated, of Chattem, Inc. ("Chattem"), Signal Investment and Management
Co. ("Signal"), the guarantor of the long-term debt of Chattem, and the
non-guarantor wholly-owned subsidiary companies of Chattem are presented
below. Signal is a wholly-owned subsidiary of Chattem; the guarantee of
Signal is full and unconditional and joint and several.
10
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
MAY 31, 1999
(UNAUDITED AND IN THOUSANDS)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
--------- -------- -------------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 3,248 $ 19 $1,602 $ -- $ 4,869
Accounts receivable, less allowance for
doubtful accounts of $850................... 55,113 -- 3,287 -- 58,400
Refundable and deferred income taxes.......... 3,058 -- -- -- 3,058
Inventories................................... 20,479 -- 2,501 -- 22,980
Prepaid expenses and other current assets..... 312 -- 837 -- 1,149
--------- -------- ------ ------- --------
Total current assets........................ 82,210 19 8,227 -- 90,456
--------- -------- ------ ------- --------
PROPERTY, PLANT AND EQUIPMENT, NET.............. 19,856 -- 400 -- 20,256
--------- -------- ------ ------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc...................... 3,242 -- -- -- 3,242
Patents, trademarks and other purchased
product rights, net......................... 5,752 354,448 -- -- 360,200
Debt issuance costs, net...................... 12,461 -- -- -- 12,461
Investment in subsidiaries.................... 9,930 -- -- (9,930) --
Other......................................... 4,286 -- -- -- 4,286
--------- -------- ------ ------- --------
Total other noncurrent assets............... 35,671 354,448 -- (9,930) 380,189
--------- -------- ------ ------- --------
TOTAL ASSETS.............................. $ 137,737 $354,467 $8,627 $(9,930) $490,901
========= ======== ====== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.......... $ 9,000 $ -- $ -- $ -- $ 9,000
Accounts payable.............................. 12,256 -- 988 -- 13,244
Payable to bank............................... 128 -- -- -- 128
Accrued liabilities........................... 41,718 -- 956 -- 42,674
--------- -------- ------ ------- --------
Total current liabilities................... 63,102 -- 1,944 -- 65,046
--------- -------- ------ ------- --------
LONG-TERM DEBT, less current maturities......... 378,547 -- -- -- 378,547
--------- -------- ------ ------- --------
DEFERRED INCOME TAXES........................... 1,085 5,741 -- -- 6,826
--------- -------- ------ ------- --------
OTHER NONCURRENT LIABILITIES.................... 2,150 -- -- -- 2,150
--------- -------- ------ ------- --------
INTERCOMPANY ACCOUNTS........................... (344,585) 346,485 (1,900) -- --
--------- -------- ------ ------- --------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued............... -- -- -- -- --
Common shares, without par value, authorized
50,000, issued 9,764........................ 2,034 2 9,928 9,930 2,034
Paid-in surplus............................... 73,818 -- -- -- 73,818
Accumulated deficit........................... (37,909) 2,239 (376) -- (36,046)
--------- -------- ------ ------- --------
37,943 2,241 9,552 9,930 39,806
Cumulative other comprehensive income--
Foreign currency translation adjustment..... (505) -- (969) -- (1,474)
--------- -------- ------ ------- --------
Total shareholders' equity................ 37,438 2,241 8,583 9,930 38,332
--------- -------- ------ ------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................ $ 137,737 $354,467 $8,627 $ 9,930 $490,901
========= ======== ====== ======= ========
Note 16.
11
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
NOVEMBER 30, 1998
(UNAUDITED AND IN THOUSANDS)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
-------- -------- -------------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................... $ (95) $ 11 $2,160 $ -- $ 2,076
Accounts receivable, less allowance for
doubtful accounts of $775.................... 32,920 -- 3,661 -- 36,581
Refundable and deferred income taxes........... 3,049 -- -- -- 3,049
Inventories.................................... 16,607 -- 2,999 -- 19,606
Prepaid expenses and other current assets...... 93 415 276 -- 784
-------- -------- ------ ------- --------
Total current assets......................... 52,574 426 9,096 -- 62,096
-------- -------- ------ ------- --------
PROPERTY, PLANT AND EQUIPMENT, NET............... 17,675 -- 471 -- 18,146
-------- -------- ------ ------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc....................... 3,102 -- -- -- 3,102
Patents, trademarks and other purchased product
rights, net.................................. 4,409 267,817 -- -- 272,226
Debt issuance costs, net....................... 10,091 -- -- -- 10,091
Investment in subsidiaries..................... 9,930 -- -- (9,930) --
Other.......................................... 2,979 -- 372 -- 3,351
-------- -------- ------ ------- --------
Total other noncurrent assets................ 30,511 267,817 372 (9,930) 288,770
-------- -------- ------ ------- --------
TOTAL ASSETS............................... $100,760 $268,243 $9,939 $(9,930) $369,012
======== ======== ====== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt........... $ 17,444 $ -- $ -- $ -- $ 17,444
Accounts payable............................... 12,090 -- 643 -- 12,733
Payable to bank................................ 1,026 -- -- -- 1,026
Accrued liabilities............................ 28,963 20 1,226 -- 30,209
-------- -------- ------ ------- --------
Total current liabilities.................... 59,523 20 1,869 -- 61,412
-------- -------- ------ ------- --------
LONG-TERM DEBT, less current maturities.......... 273,913 -- -- -- 273,913
-------- -------- ------ ------- --------
DEFERRED INCOME TAXES............................ 1,085 5,741 -- -- 6,826
-------- -------- ------ ------- --------
OTHER NONCURRENT LIABILITIES..................... 2,110 -- -- -- 2,110
-------- -------- ------ ------- --------
INTERCOMPANY ACCOUNTS............................ (259,582) 259,661 (79) -- --
-------- -------- ------ ------- --------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized
1,000, none issued........................... -- -- -- -- --
Common shares, without par value, authorized
50,000, issued 9,574......................... 1,994 2 9,928 9,930 1,994
Paid-in surplus................................ 69,068 -- -- -- 69,068
Accumulated deficit............................ (46,846) 2,819 (933) -- (44,960)
-------- -------- ------ ------- --------
24,216 2,821 8,995 9,930 26,102
Cumulative other comprehensive income--
Foreign currency translation adjustment...... (505) -- (846) -- (1,351)
-------- -------- ------ ------- --------
Total shareholders' equity................. 23,711 2,821 8,149 9,930 24,751
-------- -------- ------ ------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................. $100,760 $268,243 $9,939 $ 9,930 $369,012
======== ======== ====== ======= ========
Note 16.
12
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED MAY 31, 1999
(UNAUDITED AND IN THOUSANDS)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
-------- -------- -------------- ------------ ------------
NET SALES.......................................... $139,417 $ -- $6,752 $ -- $146,169
-------- ------ ------ ------ --------
COSTS AND EXPENSES:
Cost of sales.................................... 36,343 -- 2,331 -- 38,674
Advertising and promotion........................ 51,182 4,644 2,227 -- 58,053
Selling, general and administrative.............. 13,161 -- 1,523 -- 14,684
-------- ------ ------ ------ --------
Total costs and expenses....................... 100,686 4,644 6,081 -- 111,411
-------- ------ ------ ------ --------
INCOME FROM OPERATIONS............................. 38,731 (4,644) 671 -- 34,758
-------- ------ ------ ------ --------
OTHER INCOME (EXPENSE):
Interest expense................................. (18,179) -- -- -- (18,179)
Investment and other income...................... 210 (7) 41 -- 244
Royalties........................................ (6,688) 6,802 (114) -- --
Premium revenue.................................. (19) -- 19 -- --
Corporate allocations............................ 18 -- (18) -- --
-------- ------ ------ ------ --------
Total other income (expense)................... (24,658) 6,795 (72) -- (17,935)
-------- ------ ------ ------ --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
LOSS............................................. 14,073 2,151 599 -- 16,823
PROVISION FOR INCOME TAXES......................... 5,321 731 273 -- 6,325
-------- ------ ------ ------ --------
INCOME BEFORE EXTRAORDINARY LOSS................... 8,752 1,420 326 -- 10,498
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
NET.............................................. (1,584) -- -- -- (1,584)
-------- ------ ------ ------ --------
NET INCOME......................................... $ 7,168 $1,420 $ 326 $ -- $ 8,914
======== ====== ====== ====== ========
Note 16.
13
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED MAY 31, 1998
(UNAUDITED AND IN THOUSANDS)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR) CONSOLIDATED
-------- -------- -------------- ------------ ------------
NET SALES.......................................... $86,499 $ -- $6,967 $ -- $93,466
------- ------ ------ ------- -------
COSTS AND EXPENSES:
Cost of sales.................................... 23,215 -- 2,321 -- 25,536
Advertising and promotion........................ 33,547 2,176 2,659 -- 38,382
Selling, general and administrative.............. 10,346 13 1,541 -- 11,900
------- ------ ------ ------- -------
Total costs and expenses....................... 67,108 2,189 6,521 -- 75,818
------- ------ ------ ------- -------
INCOME FROM OPERATIONS............................. 19,391 (2,189) 446 -- 17,648
------- ------ ------ ------- -------
OTHER INCOME (EXPENSE):
Interest expense................................. (11,512) -- -- -- (11,512)
Investment and other income...................... 410 1 24 -- 435
Gain on product divestiture...................... -- 10,442 -- -- 10,442
Royalties........................................ (4,137) 4,251 (114) -- --
Premium revenue.................................. (175) -- 175 -- --
Corporate allocations............................ 16 -- (16) -- --
------- ------ ------ ------- -------
Total other income (expense)................... (15,398) 14,694 69 -- (635)
------- ------ ------ ------- -------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
LOSS............................................. 3,993 12,505 515 -- 17,013
PROVISION FOR INCOME TAXES......................... 1,728 4,500 107 -- 6,335
------- ------ ------ ------- -------
INCOME BEFORE EXTRAORDINARY LOSS................... 2,265 8,005 408 -- 10,678
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
NET.............................................. (1,901) -- -- -- (1,901)
------- ------ ------ ------- -------
NET INCOME......................................... $ 364 $8,005 $ 408 $ -- $ 8,777
======= ====== ====== ======= =======
Note 16.
14
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 1999
(UNAUDITED AND IN THOUSANDS)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR) CONSOLIDATED
--------- -------- -------------- ------------ ----------------
OPERATING ACTIVITIES:
Net income................................. $ 7,168 $1,420 $ 326 $ -- $ 8,914
Adjustments to reconcile net income to net
cash provided by operating activities: --
Depreciation and amortization............ 2,432 4,644 68 -- 7,144
Extraordinary loss on early
extinguishment of debt, net............ 1,584 -- -- -- 1,584
Dividend receivable from Elcat, Inc...... (140) -- -- -- (140)
Income tax provision..................... (731) 731 -- -- --
Other net................................ 20 8 -- -- 28
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable.................... (22,161) -- 342 -- (21,819)
Inventories............................ (346) -- 465 -- 119
Refundable and deferred income taxes... (9) -- -- -- (9)
Prepaid and other current assets....... 56 -- (205) -- (149)
Accounts payable and accrued
liabilities.......................... 13,166 -- 298 -- 13,464
--------- ------ ------- --------- ---------
Net cash provided by operating
activities......................... 1,039 6,803 1,294 -- 9,136
--------- ------ ------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and
equipment................................ (2,460) -- (13) -- (2,473)
Purchase of trademarks and other related
assets................................... (91,293) -- -- -- (91,293)
Proceeds from sale of investment........... -- 387 -- -- 387
Other assets............................... (1,147) -- -- -- (1,147)
--------- ------ ------- --------- ---------
Net cash provided by (used in)
investing activities............... (94,900) 387 (13) -- (94,526)
--------- ------ ------- --------- ---------
FINANCING ACTIVITIES:
Payments on long-term debt................. (126,493) -- -- -- (126,493)
Proceeds from long-term debt............... 221,781 -- -- -- 221,781
Proceeds from exercise of stock options and
warrants................................. 675 -- -- -- 675
Debt issuance costs........................ (4,829) -- -- -- (4,829)
Increase in payable to bank................ (898) -- -- -- (898)
Repurchase of common stock................. (885) -- -- -- (885)
Cancellation of interest rate swap
agreements............................... (1,155) -- -- -- (1,155)
Dividends paid............................. 2,000 (2,000) -- -- --
Changes in intercompany accounts........... 7,040 (5,182) (1,858) -- --
--------- ------ ------- --------- ---------
Net cash provided by (used in)
financing activities............... 97,236 (7,182) (1,858) -- 88,196
--------- ------ ------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS........................... (32) -- 19 -- (13)
--------- ------ ------- --------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period......... 3,343 8 (558) -- 2,793
At beginning of period..................... (95) 11 2,160 -- 2,076
--------- ------ ------- --------- ---------
At end of period........................... $ 3,248 $ 19 $ 1,602 $ -- $ 4,869
========= ====== ======= ========= =========
Note 16.
15
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 1998
(UNAUDITED AND IN THOUSANDS)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR) CONSOLIDATED
-------- -------- -------------- ------------ ------------
OPERATING ACTIVITIES:
Net income...................................... $ 364 $ 8,005 $ 408 $ -- $ 8,777
Adjustments to reconcile net income to net cash
provided by operating activities: --
Depreciation and amortization................. 1,875 2,176 70 -- 4,121
Extraordinary loss on early extinguishment of
debt, net................................... 1,901 -- -- -- 1,901
Dividend receivable from Elcat, Inc........... (328) -- -- -- (328)
Gain on product divestiture................... -- (10,442) -- -- (10,442)
Income tax provision.......................... (4,500) 4,500 -- -- --
Other, net.................................... 111 -- -- -- 111
Changes in operating assets and liabilities,
net of acquisitions:
Accounts Receivable......................... (17,114) -- 680 -- (16,434)
Inventories................................. 1,445 -- (535) -- 910
Refundable and deferred income taxes........ -- -- -- -- --
Prepaid and other current assets............ 863 -- (134) -- 729
Accounts payable and accrued liabilities.... 15,475 -- 149 -- 15,624
-------- ------- ------ -------- --------
Net cash provided by operating
activities.............................. 92 4,239 638 -- 4,969
-------- ------- ------ -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment...... (7,331) -- (17) -- (7,348)
Purchase of trademarks and other related
assets........................................ (165,128) -- -- -- (165,128)
Proceeds from product divestiture............... 11,750 -- -- -- 11,750
Other assets.................................... (293) -- -- -- (293)
-------- ------- ------ -------- --------
Net cash (used in) investing activities... (161,002) -- (17) -- (161,019)
-------- ------- ------ -------- --------
FINANCING ACTIVITIES:
Payments on long- term debt..................... (95,998) -- -- -- (95,998)
Proceeds from long-term debt.................... 262,365 -- -- -- 262,365
Proceeds from exercise of stock options and
warrants...................................... 2,458 -- -- -- 2,458
Debt issuance costs............................. (8,297) -- -- -- (8,297)
Payable to bank................................. (865) -- -- -- (865)
Dividends paid.................................. 2,000 (2,000) -- -- --
Changes in intercompany accounts................ 2,954 (2,205) (749) -- --
-------- ------- ------ -------- --------
Net cash provided by (used in) financing
activities.............................. 164,617 (4,205) (749) -- 159,663
-------- ------- ------ -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS..................................... (9) -- 1 -- (8)
-------- ------- ------ -------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period.............. 3,698 34 (127) -- 3,605
At beginning of period.......................... 2,997 55 1,806 -- 4,858
-------- ------- ------ -------- --------
At end of period................................ $ 6,695 $ 89 $1,679 $ -- $ 8,463
======== ======= ====== ======== ========
Note 16.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
GENERAL
On December 21, 1998, the Company acquired the DEXATRIM, SPORTSCREME,
ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands from Thompson
Medical Company, Inc. for $95,000. The purchase price consisted of $90,000 cash
and 125,500 shares of the Company's common stock. The cash portion of the
purchase price was financed by a new senior credit facility. The purchase price
of $95,000 was allocated $3,493 to inventory and $91,507 to the trademarks.
On May 7, 1999 the Company issued an additional $75,000 of its 8.875%
(priced to yield 8.8125%) senior subordinated notes under its indenture relating
to the issuance of its $200,000 of 8.875% notes on March 24, 1998. The
additional notes mature on April 1, 2008 and were issued under the Company's
$250,000 shelf registration statement filed on December 21, 1998 with the
Securities and Exchange Commission. The net proceeds from the issuance of the
additional notes were used to retire $41,500 of the then outstanding balance of
the Company's $115,000 term bank loan and the outstanding balance of $25,500 of
its revolving bank loan dated December 21, 1998.
Concurrent with the closing of the $75,000 note issue, Chattem amended its
senior credit facility. The amended facility, provided by a syndicate of banks,
consists of a $70,000 term loan and a $50,000 revolving credit facility. The
revolving credit facility and the term loan both mature on December 21, 2003.
The credit facility contains covenants, representations, warranties and other
agreements by Chattem that are customary in loan agreements relating to
financing of this type.
For the second quarter of fiscal 1999, net sales increased 42.5% to $83,441
from $58,545 for the corresponding prior year period, while operating income
rose more rapidly than sales, growing 59.6% to $20,348 for 1999 from $12,748 in
1998. Net income before extraordinary loss and product divestiture for the 1999
period was $6,921, or $.69 per share, as compared to $3,595, or $.37 per share,
for the comparable 1998 period, an increase of 92.5%. The increase in earnings
per share was achieved despite the weighted average and dilutive potential
number of shares outstanding increasing 3.0% from 1998 to 1999.
For the first six months of fiscal 1999, net sales were $146,169 compared to
$93,466 for the same period of 1998, a 56.4% increase. Income from operations
for the 1999 period was $34,758 versus $17,648 in the comparable 1998 period, a
97.0% increase. Net income before extraordinary loss for the first six months of
fiscal 1999 was $10,498, or $1.04 per share, compared to $4,204, or $.44 per
share, excluding the gain on the sale of CORNSILK completed in the second fiscal
quarter of 1998, an increase of 149.7%.
The BAN brand, acquired in March 1998, the Thompson Medical brands,
purchased in December 1998, and the continuing strong performance of the GOLD
BOND family of products, including the continuing strength of GOLD BOND
Medicated Body Lotion, were primarily responsible for the revenue growth and the
improvement in the Company's operating results for the three and six months
ended May 31, 1999.
During May 1999 the Company retired $6,750 face amount of its 12.75% Senior
Subordinated Notes, due 2004.
In connection with the repayment of portions of its bank loans and its
12.75% notes, the Company recognized an extraordinary loss on early
extinguishment of debt of $1,584, net of taxes, for the six months ended
May 31, 1999. This loss primarily related to the write-off of debt issuance
costs connected with outstanding long-term debt retired before maturity in the
current period and the premium paid on the retirement of the 12.75% notes.
17
In March 1999 the Company repurchased for $885, and returned to unissued,
30,000 shares of its common stock, without par value.
The Company will continue to seek sales increases through a combination of
acquisitions and internal growth while maintaining high operating income levels.
As previously high-growth brands mature, sales increases will become even more
dependent on acquisitions and the development of successful line extensions of
existing products. During the first six months of fiscal 1999, the Company
introduced the following line extensions/new products: BAN Ultra Dry Roll-On,
BAN Ultra Dry Solid Stick, GOLD BOND Triple Antibiotic Ointment, REPOSE Stress
Relief Formula, BULLFROG MAGICBLOCK, SUN-IN Super Streaks and PHISODERM 4 Way
Daily Acne Cleanser. Also, new packaging for the entire BAN brand was introduced
in the second quarter of fiscal 1999. Strategically, the Company continually
evaluates its products as part of its growth strategy and, in instances where
the Company's objectives are not realized, will dispose of these brands and
redeploy the assets to reduce indebtedness.
RESULTS OF OPERATIONS
The following table sets forth, for income before extraordinary loss and for
the periods indicated, certain items from the Company's Consolidated Statements
of Income expressed as a percentage of net sales:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
----------------------- -----------------------
AS RESTATED AS RESTATED
1999 1998 1999 1998
----------- --------- ----------- ---------
NET SALES........................................ 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales.................................. 26.1 27.1 26.5 27.3
Advertising and promotion...................... 39.9 39.6 39.7 41.1
Selling, general and administrative............ 9.6 11.5 10.0 12.7
------ ------ ------ ------
Total costs and expenses..................... 75.6 78.2 76.2 81.1
------ ------ ------ ------
INCOME FROM OPERATIONS........................... 24.4 21.8 23.8 18.9
------ ------ ------ ------
OTHER INCOME (EXPENSE):
Interest expense............................... (11.2) (12.5) (12.4) (12.3)
Investment and other income.................... .1 .4 .1 .4
Gain on product divestiture.................... -- 17.8 -- 11.2
------ ------ ------ ------
Total other income (expense)................. (11.1) 5.7 (12.3) (.7)
------ ------ ------ ------
INCOME BEFORE INCOME TAXES....................... 13.3 27.5 11.5 18.2
PROVISION FOR INCOME TAXES....................... 5.0 10.3 4.3 6.8
------ ------ ------ ------
NET INCOME BEFORE EXTRAORDINARY LOSS............. 8.3% 17.2% 7.2% 11.4%
====== ====== ====== ======
COMPARISON OF THREE MONTHS ENDED MAY 31, 1999 AND 1998
Net sales for the three months ended May 31, 1999 increased $24,896, or
42.5%, to $83,441 from $58,545 for the same period last year. Domestic consumer
products sales increased $23,850, or 44.2%, to $77,795 from $53,945 for last
year's comparable period. Net sales of international consumer products increased
$1,046, or 22.7%, from $4,600 in the 1998 period to $5,646 in the current
period.
The increase in domestic consumer products sales in the 1999 period was
primarily due to the BAN and Thompson Medical brands acquired in March and
December 1998, respectively, and the continuing strong performance of the GOLD
BOND product line, especially GOLD BOND Medicated Body Lotion. Sales increases
were also registered for the PAMPRIN, SUN-IN, HERPECIN-L and PHISODERM
18
product lines, while decreases were experienced by the SUNSOURCE and BULLFROG
brands. With the exception of the CORNSILK brand, which was sold in May 1998,
sales in the current period of the remaining product lines were essentially flat
or showed modest declines as compared to the corresponding period of 1998. All
sales variances were largely the result of changes in the volume of unit sales
of the particular brands.
The increase in sales of the GOLD BOND product line was led by the
introductions of the Medicated Body Lotion product in the third quarter of
fiscal 1998 and the Triple Antibiotic Ointment in the first quarter of fiscal
1999, although sales increases were also realized for the medicated powders and
cream products. GOLD BOND sales in the current period were also favorably
affected by increased marketing support. PHISODERM sales increases in the
current period were largely the result of the introduction of the 4 Way Daily
Acne Cleanser line extension and increased advertising and promotional
expenditures. Sales increases for the PAMPRIN and SUN-IN brands were largely the
result of increased marketing support, while the increase in sales of HERPECIN-L
was primarily due to more effective advertising. Also, SUN-IN sales in the 1999
period benefited from the introduction of its Super Streaks product in February
of the current year.
The sales decline in the current period for the SUNSOURCE products reflected
the general softening of sales in the dietary supplements' market. The decline
in BULLFROG sales in the current period was largely the result of reduced sales
to two larger customers.
International consumer products sales for the second quarter of fiscal 1999
increased $689, or 55.6%, for the Canadian operation but declined $347, or
11.8%, for the United Kingdom business. The increase in Canadian sales was
primarily associated with the BAN and certain of the Thompson Medical brands,
although sales increases were recorded for all of the remaining brands currently
being sold in Canada. Sales declines were recorded for all of the United Kingdom
brands, except for SUN-IN, largely due to generally weak economic conditions
presently existing in the United Kingdom and Western Europe. U.S. export sales
increased $704, or 165.8%, for the 1999 period as compared to the same period in
fiscal 1998, with practically all of the increase being associated with the BAN
product line. All sales variances were largely the result of changes in the
volume of unit sales of the particular brands.
Cost of goods sold as a percentage of net sales improved to 26.1% from 27.1%
in the 1998 period. The improvement was primarily the result of increased sales
of higher gross margin product lines in the current period.
Advertising and promotion expenses increased $10,113, or 43.6%, and were
39.9% of net sales compared to 39.6% in the corresponding 1998 period. The
majority of the increase in the 1999 period was related to the BAN and Thompson
Medical brands, acquired in March and December 1998, respectively, and to the
GOLD BOND, FLEXALL, SUN-IN and PHISODERM product lines. Declines were recorded
for the HERPECIN-L, SUNSOURCE and CORNSILK brands. The CORNSILK product line was
sold in May 1998.
The increase of $1,243, or 18.4%, in selling, general and administrative
expenses in the 1999 period was largely associated with direct selling expenses,
resulting from increased sales, with research and development costs and with
various expenses of the general service departments of the Company. The selling,
general and administrative expenses were 9.6% of net sales in the current period
as compared to 11.5% in the same period of last fiscal year, reflecting the
increase in sales from newly acquired brands without a corresponding increase in
overhead costs.
Interest expense increased $2,041, or 27.8%, in the 1999 period, reflecting
primarily the additional debt incurred for the BAN and Thompson Medical brands'
acquisitions in March and December 1998, respectively.
An extraordinary loss of $1,157, net of taxes, related to the early
extinguishment of debt was recorded in the 1999 period. The loss primarily
related to the write-off of debt issuance costs connected with
19
outstanding long-term debt retired before maturity in the current period and the
premium paid on the retirement of the 12.75% notes.
Net income of $6,921 before extraordinary loss in the 1999 period was
$3,326, or 92.5%, greater than the comparable 1998 amount of $3,595 after
excluding the gain of $6,474, net of taxes, on the sale of the CORNSILK brand.
This increase was largely the result of increased sales, offset in part by
increased interest expense, advertising and promotion expense and selling,
general and administrative costs.
COMPARISON OF SIX MONTHS ENDED MAY 31, 1999 AND 1998
Net sales for the six months ended May 31, 1999 increased $52,703, or 56.4%,
to $146,169 from $93,466 for the same period last year. Domestic consumer
products sales increased $51,576, or 60.1%, to $137,338 from $85,762 for last
year's comparable period. Net sales of international consumer products increased
$1,127, or 14.6%, from $7,704 in the 1998 period to $8,831 in the current
period.
The increase in domestic consumer products sales in the 1999 period was
primarily due to the BAN and Thompson Medical brands acquired in March and
December 1998, respectively, and the continuing strong performance of the GOLD
BOND family of products, especially GOLD BOND Medicated Body Lotion. Sales
increases were also registered for the PAMPRIN, SUN-IN, HERPECIN-L and PHISODERM
product lines, while decreases were experienced by the SUNSOURCE and BULLFROG
brands. With the exception of the CORNSILK brand, which was sold in May 1998,
sales in the current period of the remaining product lines were essentially flat
or showed modest declines as compared to the corresponding period of 1998. All
sales variances were largely the result of changes in the volume of unit sales
of the particular brands.
The increase in sales of the GOLD BOND product line was led by the
introductions of the Medicated Body Lotion product in the third quarter of
fiscal 1998 and the Triple Antibiotic Ointment in the first quarter of 1999,
although sales increases were also realized for the medicated powders and cream
products. GOLD BOND sales in the current period were also favorably affected by
increased marketing support. PHISODERM sales increases in the current period
were largely the result of the introduction of the 4 Way Daily Acne Cleanser
line extension and increased advertising and promotional expenditures. Sales
increases for the PAMPRIN and SUN-IN brands were largely the result of increased
marketing support, while the increase in sales of HERPECIN-L is primarily due to
more effective advertising. Also, SUN-IN sales in the 1999 period benefited from
the introduction of its Super Streaks product in February of the current year.
The sales decline in the current period for the SUNSOURCE products reflected
the general softening of sales in the dietary supplements' market. The decline
in BULLFROG sales in the current period was largely the result of reduced sales
to two larger customers.
International consumer products sales for the first half of fiscal 1999
increased $924, or 42.9%, for the Canadian operation but declined $1,139, or
23.7%, for the United Kingdom business. The increase in Canadian sales was
primarily associated with the BAN and certain of the Thompson Medical brands,
although sales increases were recorded for all of the remaining brands currently
being sold in Canada. Sales declines were recorded for all of the United Kingdom
brands, except for SUN-IN, largely due to generally weak economic conditions
presently existing in the United Kingdom and Western Europe. U.S. export sales
increased $1,342, or 182.0%, for the 1999 period as compared to the same period
in fiscal 1998, with practically all of the increase being associated with the
BAN product line. All sales variances were largely the result of changes in the
volume of unit sales of the particular brands.
Cost of goods sold as a percentage of net sales improved to 26.5% from 27.3%
in the 1998 period. The improvement was primarily the result of increased sales
of higher gross margin product lines in the current period.
20
Advertising and promotion expenses increased $19,671, or 51.3%, and were
39.7% of net sales compared to 41.1% in the corresponding 1998 period. The
majority of the dollar increase in the 1999 period was related to the BAN and
Thompson Medical brands acquired in March and December 1998, respectively, and
to the GOLD BOND, SUN-IN and PHISODERM. Declines were recorded for the
HERPECIN-L, SUNSOURCE and CORNSILK brands. The CORNSILK product line was sold in
May 1998.
The increase of $2,784, or 23.4%, in selling, general and administrative
expenses in the 1999 period was largely associated with direct selling expenses,
resulting from increased sales, with research and development costs and with
various expenses of the general service departments of the Company. The selling,
general and administrative expenses were 10.0% of net sales in the current
period as compared to 12.7% in the same period of last fiscal year, reflecting
the increase in sales from newly acquired brands without any significant
corresponding increase in overhead costs.
Interest expense increased $6,667, or 57.9%, in the 1999 period, reflecting
primarily the additional debt incurred for the BAN and Thompson Medical brands'
acquisitions in March and December 1998, respectively.
An extraordinary loss of $1,584, net of taxes, related to the early
extinguishment of debt was recorded in the 1999 period. The loss primarily
related to the write-off of debt issuance costs connected with outstanding
long-term debt retired before maturity in the current period and the premium
paid on the retirement of the 12.75% notes.
Net income of $10,498 before extraordinary loss in the 1999 period was
$6,294, or 149.7% greater than the comparable 1998 amount of $4,204 after
excluding the gain of $6,474, net of taxes, on the sale of the CORNSILK brand.
This increase was largely the result of increased sales, offset in part by
increased interest expense, advertising and promotion expense and selling,
general and administrative costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with a combination of
internally generated funds and borrowings. The Company's principal uses of cash
are for operating expenses, long-term debt servicing, acquisitions, working
capital and capital expenditures.
Cash of $9,136 and $4,969 was provided by operations for the six months
ended May 31, 1999, and 1998, respectively. The increase in cash flows from
operations over the prior year period was primarily the result of increases in
net income (after adjusting for the gain on the sale of the CORNSILK product
line in the fiscal 1998 period) and depreciation and amortization.
Investing activities used cash of $94,526 and $161,019 in the six months
ended May 31, 1999 and 1998, respectively. The decrease of $66,493 in the
current period primarily represented the difference in the size of the
acquisitions of BAN in March 1998 and the Thompson Medical brands in
December 1998.
Financing activities provided cash of $88,196 in the six months ended
May 31, 1999 compared to $159,663 for the comparable prior year period. The
decrease of $71,467 in the current period reflected principally the difference
in the financing required for the BAN acquisition in March 1998 and for the
Thompson Medical brands in December 1998.
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The following table presents working capital data at May 31, 1999 and
November 30, 1998 or for the respective periods then ended:
MAY 31,
1999 NOVEMBER 30,
ITEM AS RESTATED 1998
- ---- ----------- ------------
Working capital (current assets less current
liabilities)....................................... $25,410 $684
Current ratio (current assets divided by current
liabilities)....................................... 1.39 1.01
Quick ratio (cash and cash equivalents and accounts
receivable divided by current liabilities)......... .97 .63
Average accounts receivable turnover................. 5.29 6.81
Average inventory turnover........................... 3.40 3.57
Working capital as a percentage of total assets...... 5.18% .19%
The improvement in the current and quick ratios at May 31, 1999 as compared
to November 30, 1998, reflected primarily increases in accounts receivable and
inventories, which were largely associated with the Thompson Medical brands
acquired in December 1998, the seasonal products, e.g., BULLFROG and SUN-IN, and
the reduction of the current maturities of long-term debt.
Total loans outstanding were $387,547 at May 31, 1999 compared to $291,357
at November 30, 1998, an increase of $96,190 during the first half of fiscal
1999. This increase was primarily the result of additional loans required to
purchase the Thompson Medical brands in December 1998. The principal balances
outstanding at May 31, 1999 of the term loan, the revolving credit facility and
total senior subordinated notes were $70,000, $0 and $317,901, respectively.
Management of the Company believes that projected cash flows generated by
operations along with funds available under its credit facilities will be
sufficient to fund the Company's current commitments and proposed operations.
Also, on December 21, 1998, the Company filed a shelf registration statement
with the Securities and Exchange Commission for $250,000 of debt and equity
securities of which $75,000 of notes were issued during the first half of fiscal
1999.
YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the year 2000 date
are a known risk. The Company has developed a plan to ensure its systems are
compliant with the requirements to fulfilling those compliance requirements:
THE COMPANY'S STATE OF READINESS
The Company is in the process of replacing its current information
technology ("IT") systems with a new fully integrated computer system to replace
all hardware and software that the Company uses in its financial, manufacturing
and customer services functions. The new IT system will be year 2000 compliant.
Accordingly, the year 2000 compliance requirements are considered only a portion
of the Company's system replacement effort. This replacement is expected to be
completed on or before December 1, 1999, the beginning of the Company's 2000
fiscal year. Although the Company believes that the new IT system will be year
2000 compliant, the Company uses third party equipment and software that may not
be year 2000 compliant. If any of this software or equipment does not operate
properly in the year 2000 and thereafter, the Company could be forced to make
unanticipated expenditures to cure these problems, which could adversely affect
the Company's business.
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COST TO ADDRESS YEAR 2000 ISSUES
The total cost of the new software and implementation necessary to replace
the Company's current IT system plus address the year 2000 issues is estimated
to be approximately $2,000. Plan costs have been budgeted in the Company's
capital expenditures budget. The projected costs are based on management's best
estimate and actual results could differ as the new system is implemented.
Approximately $1,774 had been expended and capitalized on this system at
May 31, 1999.
RISK OF YEAR 2000 ISSUES
The Company is in the process of execution of its formal year 2000
compliance plan and expects to achieve implementation on or before December 1,
1999.
The Company is requesting from certain of its principal customers and
suppliers written statements regarding their knowledge of and plans for meeting
the year 2000 compliance requirements. All respondents indicate that they have
knowledge of and are in the process of fulfilling these requirements. These
companies have stated that they are at various stages of completion of their
compliance plans, but all have indicated that they expect to be in full year
2000 compliance by or before the end of their 1999 fiscal year.
In the event that the Company or any of its significant customers or
suppliers does not successfully and timely achieve year 2000 compliance, the
Company's business or operations could be adversely affected.
CONTINGENCY PLANS
The Company is currently developing a "Worst Case Contingency Plan", which
will include generally an environment of utilizing "Work Force", "Spreadsheet"
and "Work Around" programming and procedural efforts. This contingency system
will be activated by December 1, 1999, if necessary. The cost of these temporary
measures is estimated between $500 and $1,000.
The Company's current existing systems are fully capable (except for year
2000 date handling) of processing all present and future transactions of the
business. Accordingly, no major efforts have been delayed or avoided which
affect normal business operations as a result of the incomplete implementation
of the year 2000 IT systems. These current systems will become the foundation of
the Company's contingency system.
FOREIGN OPERATIONS
The Company's primary foreign operations are conducted through its Canadian
and U.K. subsidiaries. The functional currencies of these subsidiaries are
Canadian dollars and British pounds, respectively. Fluctuations in exchange
rates can impact operating results, including total revenues and expenses, when
translations of the subsidiary financial statements are made in accordance with
SFAS No. 52, "Foreign Currency Translation." For the six months ended May 31,
1999 and 1998, these subsidiaries accounted for 5% and 7% of total revenues,
respectively, and 2% of total assets for each period, respectively. It has not
been the Company's practice to hedge its assets and liabilities in Canada and
the U.K. or its intercompany transactions due to the inherent risks associated
with foreign currency hedging transactions and the timing of payments between
the Company and its two foreign subsidiaries. Historically, gains or losses from
foreign currency transactions have not had a material impact on the Company's
operating results. Losses of $1 and $45 for the six months ended May 31, 1999
and 1998, respectively, resulted from foreign currency transactions.
FORWARD LOOKING STATEMENTS
The Company may from time to time make written and oral forward looking
statements. Written forward looking statements may appear in documents filed
with the Securities and Exchange Commission,
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in press releases and in reports to shareholders. The Private Securities
Litigation Reform Act of 1995 contains a safe harbor for forward looking
statements. The Company relies on this safe harbor in making such disclosures.
The forward looking statements are based on management's current beliefs and
assumptions about expectations, estimates, strategies and projections for the
Company. These statements are not guarantees of future performance and involve
risks, uncertainties and assumptions that are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward looking statements. The Company undertakes no
obligation to update publicly any forward looking statements whether as a result
of new information, future events or otherwise. The risks, uncertainties and
assumptions regarding forward looking statements include, but are not limited
to, product demand and market acceptance risks; product development risks, such
as delays or difficulties in developing, producing and marketing new products or
line extensions; the impact of competitive products, pricing and advertising;
constraints resulting from financial condition of the Company, including the
degree to which the Company is leveraged, debt service requirements and
restrictions under bank loan agreements and indentures; government regulations;
risks of loss of material customers; public perception regarding the Company's
products; dependence on third party manufacturers; environmental matters;
product liability and insurance; year 2000; and other risks described in the
Company's Securities and Exchange Commission filings.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1999 a complaint was filed against the Company by Genderm
Corporation ("Genderm") in the U.S. District Court for the District of Arizona.
The complaint alleged, among other things, that the formulations of CAPZASIN-P,
CAPZASIN-HP and ICY HOT Arthritis Therapy Gel infringed U.S. Patent 4,485,450
owned by Joel Bernstein, M.D. and licensed to Genderm (the "Patent"). The
complaint requested injunctive relief, compensatory and treble damages, costs
and attorneys fees. A hearing on the preliminary injunction was held on
April 13 - 14, 1999. On May 6, 1999 U.S. District Court for the District of
Arizona held that Genderm had carried its burden of proving a substantial
likelihood of success and ultimately showing that the Patent was infringed and
issued a preliminary injunction prohibiting the Company from shipping CAPZASIN-P
cream, CAPZASIN-HP cream and ICY HOT Arthritis Therapy Gel. Following the
issuance of the preliminary injunction, Chattem reached a settlement with
Genderm pursuant to which Chattem made a single payment of $750 in exchange for
the dismissal of the complaint and a fully paid license to use the Patent until
its expiration. The settlement cost was recorded as a settlement of a
pre-acquisition contingency.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on April 14, 1999 in Chattanooga
Tennessee. At the meeting, the following persons were elected as directors to
serve for a three year term: Samuel E. Allen, Philip H. Sanford and A. Alexander
Taylor II. With respect to Mr. Allen, 7,726,016 were in favor and 742,998
abstain. With respect to Mr. Sanford, 7,725,460 were in favor and 743,553
abstain. With respect to Mr. Taylor, 7,725,685 were in favor and 743,328
abstain. The following directors' terms of office continued after the annual
meeting: Zan Guerry, Louis H. Barnett, Robert E. Bosworth, Richard E. Cheney and
Scott L. Probasco, Jr.
The proposal to increase the number of authorized shares of the Company's
common stock, without par value, to 50,000,000 from 20,000,000 shares was
approved with 7,027,433 votes in favor, 1,436,096 opposed and 5,484 abstaining.
The 1999 Chattem, Inc. Stock Plan for Non-Employee Directors was approved by
the shareholders with 8,105,915 votes in favor, 301,086 opposed, 26,159
abstaining and 35,853 broker non-votes.
The shareholders approved Arthur Andersen LLP as auditors for the next
fiscal year with 8,451,149 votes in favor, 4,095 opposed and 3,769 abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Statement regarding computation of per share earnings, as restated
(Exhibit 11).
(2) Financial data schedule, as restated (Exhibit 27).
(b) No Form 8-K reports were filed with the Securities and Exchange
Commission during the three months ended May 31, 1999.
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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)
/s/ A. ALEXANDER TAYLOR II
------------------------------------------------
A. Alexander Taylor II
Dated: January 11, 2000 PRESIDENT AND DIRECTOR (CHIEF OPERATING OFFICER)
/s/ STEPHEN M. POWELL
------------------------------------------------
Stephen M. Powell
(CHIEF ACCOUNTING OFFICER)
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