UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2000
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 OCTOBER 13, 2000, 9,200,446 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT
PAR VALUE, WERE OUTSTANDING.
1
CHATTEM, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of August 31, 2000 and
November 30, 1999....................................................... 3
Consolidated Statements of Income for the Three and Nine
Months Ended August 31, 2000 and 1999................................... 5
Consolidated Statements of Cash Flows for the Nine Months Ended
August 31, 2000 and 1999................................................ 6
Notes to Consolidated Financial Statements................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................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)
AUGUST 31, NOVEMBER 30,
ASSETS 2000 1999
- ------ ----------------- ----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 3,237 $ 2,308
Accounts receivable, less allowance for doubtful accounts
of $850 at August 31, 2000 and $900 at November 30, 1999............. 53,116 55,032
Deferred income taxes.................................................. 6,951 6,951
Inventories............................................................ 23,348 27,818
Prepaid expenses and other current assets.............................. 1,057 929
--------------- ---------------
Total current assets................................................. 87,709 93,038
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT, NET....................................... 29,224 25,752
--------------- ---------------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product rights, net............ 349,559 356,295
Debt issuance costs, net............................................... 10,508 11,469
Other ................................................................. 5,070 5,070
--------------- ---------------
Total other noncurrent assets........................................ 365,137 372,834
--------------- ---------------
TOTAL ASSETS....................................................... $ 482,070 $ 491,624
=============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
3
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
AUGUST 31, NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
- ------------------------------------ ------------ -------------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt.................................... $ 13,500 $ 11,000
Accounts payable........................................................ 11,408 18,573
Payable to bank......................................................... 4,538 4,905
Accrued liabilities..................................................... 33,721 32,147
------------ -------------
Total current liabilities............................................. 63,167 66,625
------------ -------------
LONG-TERM DEBT, less current maturities................................... 345,630 358,950
------------ -------------
DEFERRED INCOME TAXES..................................................... 15,326 15,326
------------ -------------
OTHER NONCURRENT LIABILITIES.............................................. 1,896 2,022
------------ -------------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000, none issued...... -- --
Common shares, without par value, authorized 50,000, issued 9,255 at
August 31, 2000 and 9,707 at November 30, 1999......................... 1,927 2,021
Paid-in surplus......................................................... 66,443 72,850
Accumulated deficit..................................................... (10,478) (24,804)
------------ -------------
57,892 50,067
Cumulative other comprehensive income -
Foreign currency translation adjustment .............................. (1,841) (1,366)
------------ -------------
Total shareholders' equity........................................... 56,051 48,701
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................ $ 482,070 $ 491,624
============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
4
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands, except per share amounts)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
-------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
NET SALES ........................................ $ 73,253 $ 78,661 $ 215,260 $ 224,830
----------- ----------- ----------- ----------
COSTS AND EXPENSES:
Cost of sales .................................. 19,159 21,045 57,296 59,719
Advertising and promotion ...................... 28,108 30,390 82,447 88,443
Selling, general and administrative ............ 8,539 8,401 24,197 23,085
------------ ------------ ----------- ----------
Total costs and expenses ..................... 55,806 59,836 163,940 171,247
------------ ------------ ----------- ----------
INCOME FROM OPERATIONS ........................... 17,447 18,825 51,320 53,583
----------- ----------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest expense ............................... (9,139) (9,313) (27,329) (27,492)
Investment and other income, net ............... 1 101 128 345
------------ ------------ ------------ -----------
Total other income (expense) ................. (9,138) (9,212) (27,201) (27,147)
------------ ------------ ------------ -----------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND
CHANGE IN ACCOUNTING PRINCIPLE ................... 8,309 9,613 24,119 26,436
PROVISION FOR INCOME TAXES ........................ 3,158 3,656 9,141 9,981
------------ ------------ ------------ -----------
INCOME BEFORE EXTRAORDINARY LOSS AND CHANGE IN
ACCOUNTING PRINCIPLE ............................. 5,151 5,957 14,978 16,455
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF
DEBT, NET ........................................ -- (533) (110) (2,117)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET ................................... -- -- (542) --
------------ ------------ ------------ -----------
NET INCOME ........................................ $ 5,151 $ 5,424 $ 14,326 $ 14,338
============ ============ ============ ===========
COMMON SHARES:
Weighted average number outstanding (basic) ..... 9,310 9,774 9,508 9,742
============ ============ ============ ===========
Weighted average and dilutive potential number
outstanding .................................... 9,379 10,039 9,611 10,037
============ ============ ============ ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income before extraordinary loss and change in
accounting principle ........................ $ .55 $ .61 $ 1.58 $ 1.69
Extraordinary loss ............................ -- (.05) (.01) (.22)
Change in accounting principle ................ -- -- (.06) --
------------ ------------ ------------ -----------
Total basic $ .55 $ .56 $ 1.51 $ 1.47
============ ============ ============ ===========
Diluted:
Income before extraordinary loss and change in
accounting principle ......................... $ .55 $ .59 $ 1.56 $ 1.64
Extraordinary loss ............................ -- (.05) (.01) (.21)
Change in accounting principle ................ -- -- (.06) --
------------ ------------ ------------ -----------
Total diluted $ .55 $ .54 $ 1.49 $ 1.43
============ ============ ============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
5
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands, except share and per share amounts)
FOR THE NINE MONTHS ENDED
AUGUST 31,
-----------------------------------
2000 1999
-------------- --------------
OPERATING ACTIVITIES:
Net income........................................................ $ 14,326 $ 14,338
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 11,403 10,988
Dividend receivable from Elcat, Inc........................... -- (210)
Extraordinary loss on early extinguishment of debt, net....... 110 2,117
Cumulative effect of change in accounting principle, net...... 542 --
Other, net.................................................... (11) (19)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable......................................... 1,916 (14,123)
Inventories................................................. 4,470 (601)
Prepaid expenses and other current assets................... 576 (182)
Accounts payable and accrued liabilities.................... (7,478) 10,351
------------ ------------
Net cash provided by operating activities................ 25,854 22,659
------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment.................... (5,293) (5,260)
Additions to trademarks and other product rights.............. (241) (91,051)
Proceeds from sale of investment.............................. -- 387
Increase in other assets, net................................. (673) (1,679)
------------- -------------
Net cash used in investing activities.................... (6,207) (97,603)
------------- -------------
FINANCING ACTIVITIES:
Repayment of long-term debt................................... (39,996) (140,909)
Proceeds from long-term debt.................................. 29,000 223,193
Proceeds from exercise of stock options and warrants.......... 210 1,229
Repurchase of common stock.................................... (7,155) (1,564)
Change in payable to bank..................................... (367) 9,157
Debt issuance costs........................................... (317) (6,494)
Cancellation of interest rate swap agreements................. -- (1,155)
------------- -------------
Net cash provided by (used in) financing activities...... (18,625) 83,457
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS.................................................. (93) (14)
------------- -------------
CASH AND CASH EQUIVALENTS:
Increase for the period....................................... 929 8,499
At beginning of period........................................ 2,308 2,076
------------- -------------
At end of period.............................................. $ 3,237 $ 10,575
============= =============
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........................... $ 542 $ 1,025
CASH PAYMENTS FOR:
Interest...................................................... $ 20,627 $ 21,405
Taxes......................................................... $ 7,580 $ 6,227
The accompanying notes are an integral part of these consolidated
financial statements.
6
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, 1999. The
1999 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.
2. The Company incurs significant expenditures on television, radio and print
advertising to support its nationally branded over-the-counter health care
and toiletries 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. Inventories consisted of the following at August 31, 2000 and November 30,
1999:
2000 1999
------------- ------------
Raw materials and work in process $ 11,859 $ 12,542
Finished goods............................... 13,403 17,190
Excess of current cost over LIFO
values..................................... (1,914) (1,914)
-------------- --------------
Total inventories........................ $ 23,348 $ 27,818
============== ==============
4. Accrued liabilities consisted of the following at August 31, 2000 and
November 30, 1999:
2000 1999
------------- ------------
Income and other taxes ...................... $ 3,322 $ 2,859
Salaries, wages and commissions ............. 581 2,098
Advertising and promotion ................... 11,968 15,880
Interest .................................... 11,451 6,326
Product acquisitions and
divestitures............................... 3,239 2,999
Pension benefits............................. 1,173 781
Royalties.................................... 185 56
Other........................................ 1,802 1,148
-------------- --------------
Total accrued liabilities................ $ 33,721 $ 32,147
============== ==============
7
5. Comprehensive income consisted of the following components for the three
and nine months ended August 31, 2000 and 1999, respectively:
For the Three Months For the Nine Months
Ended August 31, Ended August 31,
-------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- ----------
Net income.................................... $ 5,151 $ 5,424 $ 14,326 $ 14,338
Other - foreign currency
translation adjustment....................... (209) (48) (475) (171)
------------ ------------ ------------ ------------
Total................................ $ 4,942 $ 5,376 $ 13,851 $ 14,167
============ ============ ============ ============
6. Effective December 1, 1999, the Company adopted Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-up Activities" issued by the
American Institute of Certified Public Accountants. SOP 98-5 requires costs
of start-up activities to be expensed as incurred. The initial adoption of
this SOP was recorded as the cumulative effect of a change in an accounting
principle. The one-time charge, net of taxes, was $542, or $.06 per diluted
share.
7. In the second quarter of fiscal 2000 the Company retired $2,400 face amount
of its 12.75% Notes, which resulted in the recognition of an extraordinary
loss of $110, net of income taxes, or $.01 per share, on the early
extinguishment of debt. This loss related to the write off of debt issuance
costs and the premium paid on the retirement of these notes.
8. In fiscal 1999 the Company's board of directors authorized repurchases of
the Company's common stock, not to exceed $10,000 in the aggregate. Under
this authorization and the additional one noted below, 172,500 shares at
a cost of $3,912 were reacquired in 1999 and 476,500 shares at a cost of
$7,155 were repurchased in the first nine months of fiscal 2000. The
repurchased shares were retired and returned to unissued. In April 2000,
the Company's board of directors authorized repurchases of up to an
additional $10,000 of the Company's common stock. As of October 13, 2000,
$8,365 was available for share repurchases under the board of director's
current authorization.
9. On January 26, 2000, the Company's board of directors adopted a new
Shareholder Rights Plan. Under the plan, Rights were constructively
distributed as a dividend at the rate of one Right for each share of common
stock, without par value, of the Company held by shareholders of record at
the close of business on February 11, 2000. Each right initially will
entitle shareholders to buy one one-hundredth of a share of a new Series A
Junior Participating Preferred Stock at an exercise price of $90.00 per
Right, subject to adjustment. The Rights generally will be exercisable only
if a person or group acquires beneficial ownership of 15% or more of the
Company's common stock. The Rights will expire on February 11, 2010.
10. As previously disclosed in "Item 1. Business-Governmental Regulation"
of the Company's Annual Report on Form 10-K for the year ended November
30, 1999 (the "1999 Form 10-K"), in 1994 the Nonprescription Drug
Manufacturers Association (now the Consumer Healthcare Products
Association) ("CHPA") initiated a large scale study in conjunction with
the Yale University School of Medicine to investigate a possible
association, if any, of stroke in women aged 18 to 49 using
phenylpropanolamine ("PPA"), the active ingredient in DEXATRIM, for
weight loss (the "Yale Study"). PPA is also used in other
over-the-counter medications which are also part of the study. In May
2000, the results of the Yale Study were filed with the Food and Drug
Administration ("FDA"). The investigators concluded that the results of
the study suggest that PPA increases the risk of hemorrhagic stroke. The
FDA has indicated that no immediate action is required at this time and
a FDA advisory panel is scheduled to meet on October 19, 2000 to discuss
the results of this study. The CHPA has questioned the execution of the
Yale Study and disagreed with its conclusions.
8
The Company continues to review alternative formulae for DEXATRIM that
would not contain PPA. There continues to be the possibility that DEXATRIM
will have to be reformulated or discontinued due to FDA requirements or
adverse consumer perception. As a result, the DEXATRIM business would
suffer, which would adversely affect the Company's business. The Company
has launched a complementary product, DEXATRIM Natural, an all-natural diet
aid that does not include PPA. Approximately 30% of DEXATRIM's sales are
derived from DEXATRIM Natural.
The Company has recently received correspondence from the FDA that
concludes that certain data submitted by Thompson Medical Company, Inc.,
a previous owner of certain of the Company's over-the-counter topical
analgesic drug products, was inadequate to support the effectiveness as
a topical analgesic of 10% trolamine salicylate, the active ingredient
in SPORTSCREME and ASPERCREME. The correspondence, which is not a formal
ruling, states that the Company has 30 days to indicate whether it
intends to conduct any additional studies. The Company intends to
respond to the FDA during the 30 day period. It is unclear when the FDA
might make a final determination about the regulatory status of OTC
topical analgesics that contain 10% trolamine salicylate or whether the
Company will be given a sufficient transition period to comply with any
new requirements without affecting products currently on the market. If
the FDA determines that the Company must submit a new drug application,
including clinical data, to show that the products with trolamine
salicylate are for their intended use, the Company will be required
to expend significant resources to develop clinical data. Alternatively,
if the Company decides to reformulate the products with a different
active ingredient that the FDA has already determined is safe and
effective, the Company would likely be able to market the products
without submitting additional clinical data or filing a new drug
application, but sales of the products in their current forms could
be adversely affected. The Company cannot predict with certainty the
timing or outcome of any FDA decision, although an FDA decision on the
issue and subsequent action taken by the Company, if necessary, is not
expected to occur until at least fiscal 2001.
The Company has been named as a defendant in a lawsuit brought by the
Center for Environment Health ("CEH") contending that the Company violated
the California Safe Drinking Water and Toxic Enforcement Act of 1998
("Proposition 65") by selling to California consumers without a warning
topical skin care products containing zinc oxide which in turn contains
lead. On December 30, 1999, Chattem was sent a notice of intent to sue
letter from CEH alleging that Chattem had violated Proposition 65 because
zinc oxide allegedly also contains cadmium. The lawsuit contends that the
purported failure to comply with Proposition 65 requirements also
constitutes a violation of the California Business & Profession Code
Section 1700, ET SEQ. Violations of either Proposition 65 or Business &
Profession Code Section 1700, ET SEQ. render a defendant liable for civil
penalties of up to $2.5 per day per violation.
The Company has also been named as a defendant in a lawsuit filed in San
Francisco Superior Court on December 29, 1999, JOHNSON ET AL. V.
BRISTOL-MYERS SQUIBB CO., ET AL., Case No. 308872. This is a putative class
action brought by two named plaintiffs on behalf of the general public in
California, against the same entities that are defendants in the CEH
lawsuit. As with the CEH lawsuit, the Johnson lawsuit alleges that Chattem
violated Proposition 65 by selling to California consumers without a
warning topical skin care product containing zinc oxide which in turn
contains lead. The lawsuit does not assert claims directly under
Proposition 65, but asserts that the alleged failure to comply with
Proposition 65 gives rise to claims under California's Business and
Professions Code Sections 17200 ET. SEQ., and 17500 ET SEQ., and the Civil
Code Section 1750 ET SEQ. The lawsuit seeks injunctive and equitable
relief, restitution, the disgorgement of allegedly wrongfully obtained
revenues and damages.
The Company intends to vigorously defend these claims. It is not possible
at this time to determine the outcome of these matters or the effect of
their resolution on the Company's financial position or operating results.
Management believes that the Company's defenses have merit; however, there
can be no assurance that the Company will be successful in its defense or
that these lawsuits will not have a material adverse effect on the
Company's results of operations for some period or on the Company's
financial position.
11. The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the respective full years.
During recent fiscal years, the Company's first quarter net sales and gross
profit have trailed the other fiscal quarters on average from 25% to 35%
because of slower sales of consumer products and lower levels of
promotional campaigns during this quarter.
12. The Company operates in two primary segments that are based on the
different types of products offered. The OTC health care segment includes
medicated skin care products, topical analgesics, internal analgesics, lip
care, appetite suppressant and dietary supplement products. The toiletries
and skin care segment includes antiperspirants and deodorants, facial
cleaners and masques and seasonal products. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies contained in the 1999 Form 10-K. Certain assets,
including the majority of property, plant and equipment and deferred tax
assets, are not allocated to the identifiable segments.
9
In the table below the following items are included in the indicated
captions:
Variable contribution margin: net sales less variable cost of goods
sold, advertising, promotion, market research, freight out, sales
commissions, royalties, bad debts and inventory obsolescence. The
Company evaluates the performance of its operating segments based on
variable contribution margins.
Depreciation and amortization: amortization of the cost of trademarks
and other product rights with unallocated depreciation and other
amortization expense being shown under the "Not Classified" caption.
Identifiable/total assets: primarily identified unamortized cost of
trademarks and other product rights and total inventory cost with the
remainder of total assets being shown under the "Not Classified"
heading.
Product Classifications
-----------------------------------------------------------
OTC Toiletries
Health and Not
Total Care Skincare Classified
----------- ----------- ------------- -----------
For the three months ended August 31, 2000:
Net sales.................................. $ 73,253 $ 41,050 $ 32,112 $ 91
Variable contribution margin............... 28,830 18,413 10,573 (156)
Depreciation and amortization.............. 3,948 1,296 1,222 1,430
Identifiable assets/total assets (at
August 31, 2000)......................... 482,070 192,408 188,804 100,858
For the three months ended August 31, 1999:
Net sales.................................. $ 78,661 $ 45,338 $ 32,827 $ 496
Variable contribution margin............... 31,106 18,795 11,381 930
Depreciation and amortization.............. 3,844 1,318 1,226 1,300
Identifiable assets/total assets (at
August 31, 1999)......................... 489,346 197,217 192,867 99,262
For the nine months ended August 31, 2000:
Net sales.................................. $ 215,260 $ 126,399 $ 88,506 $ 355
Variable contribution margin............... 84,731 55,868 28,944 (81)
Depreciation and amortization.............. 11,478 3,937 3,658 3,883
Identifiable assets/total assets (at
August 31, 2000)......................... 482,070 192,408 188,804 100,858
For the nine months ended August 31, 1999:
Net sales.................................. $ 224,830 $ 128,410 $ 95,403 $ 1,017
Variable contribution margin............... 88,003 52,190 35,960 (147)
Depreciation and amortization.............. 10,988 3,761 3,700 3,527
Identifiable assets/total assets (at
August 31, 1999)......................... 489,346 197,217 192,867 99,262
10
The reconciliation of variable contribution margin, as shown above, to income
before income taxes, extraordinary loss and change in accounting principle is as
follows for the three and nine months ended August 31, 2000 and 1999,
respectively:
For the Three Months For the Nine Months
Ended August 31, Ended August 31,
------------------------- -----------------------
2000 1999 2000 1999
------ ------ ------ ------
Variable contribution margin.................................... $ 28,830 $ 31,106 $ 84,731 $ 88,003
Less divisional and corporate overhead not allocated to
product groups................................................ 11,383 12,281 33,411 34,420
---------- ---------- ---------- ---------
Income from operations.......................................... 17,447 18,825 51,320 53,583
---------- ---------- ---------- ---------
Other income (expense):
Interest expense.............................................. (9,139) (9,313) (27,329) (27,492)
Investment and other income, net.............................. 1 101 128 345
---------- ---------- ---------- ----------
Total other income (expense)................................. (9,138) (9,212) (27,201) (27,147)
----------- ----------- ----------- -----------
Income before income taxes, extraordinary loss and
change in accounting principle............................... $ 8,309 $ 9,613 $ 24,119 $ 26,436
============ ============ =========== ==========
13. On September 15, 2000 the Company completed the sale of its BAN product
line to The Andrew Jergens Company, a wholly owned subsidiary of Kao
Corporation. Under the terms of the contract, the Company received $160,000
cash at closing, plus the right to receive up to an additional $6,500 in
future payments based upon levels of sales of BAN in 2001 and 2002.
Of the proceeds from the sale, $52,194 was used to retire all of the
outstanding balances of the revolver and the term loans and accrued
interest thereon, with the balance of the net proceeds being retained by
the Company for future product acquisitions or the retirement of senior
subordinated debt. A loss, net of income taxes, of approximately $2,600,
or $.27 per share, is expected to be recognized on the sale.
14. The condensed consolidating financial statements, for the dates or periods
indicated, of Chattem, Inc. ("Chattem"), Signal Investment & 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.
11
Note 14
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
AUGUST 31, 2000
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
------------- -------------- --------------- ------------ ------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents....................... $ 11 $ 11 $ 3,215 $ -- $ 3,237
Accounts receivable, less allowance for
doubtful accounts of $850..................... 48,902 -- 4,214 -- 53,116
Deferred income taxes........................... 6,951 -- -- -- 6,951
Inventories..................................... 21,013 -- 2,335 -- 23,348
Prepaid expenses and other current assets....... 509 -- 548 -- 1,057
------------- ------------- ------------ ---------- -------------
Total current assets.......................... 77,386 11 10,312 -- 87,709
------------- ------------- ------------ ---------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET................ 28,884 -- 340 -- 29,224
------------- ------------- ------------ ---------- -------------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased
product rights, net........................... 5,476 344,083 -- -- 349,559
Debt issuance costs, net........................ 10,508 -- -- -- 10,508
Investment in subsidiaries...................... 9,930 -- -- (9,930) --
Other........................................... 5,070 -- -- -- 5,070
------------- ------------- ------------ ---------- -------------
Total other noncurrent assets................. 30,984 344,083 -- (9,930) 365,137
------------- ------------- ------------ ---------- -------------
TOTAL ASSETS................................ $ 137,254 $ 344,094 $ 10,652 $ (9,930) $ 482,070
============= ============= ============ ========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt............ $ 13,500 $ -- $ -- $ -- $ 13,500
Accounts payable................................ 11,138 -- 270 -- 11,408
Payable to bank................................. 4,538 -- -- -- 4,538
Accrued liabilities............................. 32,925 -- 796 -- 33,721
------------- ------------- ------------ ---------- -------------
Total current liabilities..................... 62,101 -- 1,066 -- 63,167
------------- ------------- ------------ ---------- -------------
LONG-TERM DEBT, less current maturities........... 345,630 -- -- -- 345,630
------------- ------------- ------------ ---------- -------------
DEFERRED INCOME TAXES............................. 2,776 12,550 -- -- 15,326
------------- ------------- ------------ ---------- -------------
OTHER NONCURRENT LIABILITIES...................... 1,896 -- -- -- 1,896
------------- ------------- ------------ ---------- -------------
INTERCOMPANY ACCOUNTS............................. (330,476) 331,238 (762) -- --
------------- ------------- ------------ ---------- -------------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued................. -- -- -- -- --
Common shares, without par value,
authorized 50,000, issued 9,255............... 1,927 2 9,928 9,930 1,927
Paid-in surplus................................. 66,443 -- -- -- 66,443
Accumulated deficit............................. (12,570) 304 1,788 -- (10,478)
------------- ------------- ------------ ---------- -------------
Total......................................... 55,800 306 11,716 9,930 57,892
Cumulative other comprehensive income -
Foreign currency translation adjustment........ (473) -- (1,368) -- (1,841)
------------- ------------- ------------ ---------- -------------
Total shareholders' equity.................... 55,327 306 10,348 9,930 56,051
------------- ------------- ------------ ---------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY...................... $ 137,254 $ 344,094 $ 10,652 $ 9,930 $ 482,070
============= ============= ============ ========== =============
12
Note 14
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
NOVEMBER 30, 1999
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
------------- -------------- --------------- ------------ ------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents....................... $ 550 $ 16 $ 1,742 $ -- $ 2,308
Accounts receivable, less allowance for
doubtful accounts of $900..................... 50,541 -- 4,491 -- 55,032
Deferred income taxes........................... 6,951 -- -- -- 6,951
Inventories..................................... 25,519 -- 2,299 -- 27,818
Prepaid expenses and other current assets....... 739 -- 190 -- 929
------------ ----------- ------------ ---------- ------------
Total current assets.......................... 84,300 16 8,722 -- 93,038
------------ ----------- ------------ ---------- ------------
PROPERTY, PLANT AND EQUIPMENT, NET................ 25,399 -- 353 -- 25,752
------------ ----------- ------------ ---------- ------------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased
product rights, net........................... 5,533 350,762 -- -- 356,295
Debt issuance costs, net........................ 11,469 -- -- -- 11,469
Investment in subsidiaries...................... 9,930 -- -- (9,930) --
Other........................................... 4,709 -- 361 -- 5,070
------------ ----------- ------------ ---------- ------------
Total other noncurrent assets................. 31,641 350,762 361 (9,930) 372,834
------------ ----------- ------------ ---------- ------------
TOTAL ASSETS................................ $ 141,340 $ 350,778 $ 9,436 $ (9,930) $ 491,624
============ =========== ============ ========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt............ $ 11,000 $ -- $ -- $ -- $ 11,000
Accounts payable................................ 18,053 -- 520 -- 18,573
Payable to bank................................. 4,905 -- -- -- 4,905
Accrued liabilities............................. 30,630 -- 1,517 -- 32,147
------------ ----------- ------------ ---------- ------------
Total current liabilities..................... 64,588 -- 2,037 -- 66,625
------------ ----------- ------------ ---------- ------------
LONG-TERM DEBT, less current maturities........... 358,950 -- -- -- 358,950
------------ ----------- ------------ ---------- ------------
DEFERRED INCOME TAXES............................. 2,776 12,550 -- -- 15,326
------------ ----------- ------------ ---------- ------------
OTHER NONCURRENT LIABILITIES...................... 2,022 -- -- -- 2,022
------------ ----------- ------------ ---------- ------------
INTERCOMPANY ACCOUNTS............................. (334,574) 336,612 (2,038) -- --
------------ ----------- ------------ ---------- ------------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued................. -- -- -- -- --
Common shares, without par value,
authorized 50,000, issued 9,707............... 2,021 2 9,928 9,930 2,021
Paid-in surplus................................. 72,850 -- -- -- 72,850
Accumulated deficit............................. (26,819) 1,614 401 -- (24,804)
------------ ----------- ------------ ---------- ------------
Total......................................... 48,052 1,616 10,329 9,930 50,067
Cumulative other comprehensive income -
Foreign currency translation adjustment........ (474) -- (892) -- (1,366)
------------ ----------- ------------ ---------- ------------
Total shareholders' equity.................... 47,578 1,616 9,437 9,930 48,701
------------ ----------- ------------ ---------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY..................... $ 141,340 $ 350,778 $ 9,436 $ 9,930 $ 491,624
============ =========== ============ ========== ============
13
Note 14
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED AUGUST 31, 2000
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
------------- -------------- --------------- ------------ ------------
NET SALES........................................ $ 202,733 $ -- $ 12,527 $ -- $ 215,260
------------- -------------- ------------ ---------- ------------
COSTS AND EXPENSES:
Cost of sales.................................. 53,042 -- 4,254 -- 57,296
Advertising and promotion...................... 70,190 7,288 4,969 -- 82,447
Selling, general and administrative............ 22,060 10 2,127 -- 24,197
------------- -------------- ------------ ---------- ------------
Total costs and expenses..................... 145,292 7,298 11,350 -- 163,940
------------- -------------- ------------ ---------- ------------
INCOME FROM OPERATIONS........................... 57,441 (7,298) 1,177 -- 51,320
------------- -------------- ------------ ---------- ------------
OTHER INCOME (EXPENSE):
Interest expense............................... (27,329) -- -- -- (27,329)
Investment and other income.................... 88 2 38 -- 128
Royalties...................................... (9,654) 9,856 (202) -- --
Corporate allocations.......................... 23 -- (23) -- --
------------- -------------- ------------ ---------- ------------
Total other income (expense)................ (36,872) 9,858 (187) -- (27,201)
------------- -------------- ------------ ---------- ------------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY LOSS
AND CHANGE IN ACCOUNTING PRINCIPLE............. 20,569 2,560 990 -- 24,119
PROVISION FOR INCOME TAXES....................... 8,271 870 -- -- 9,141
------------- -------------- ------------ ---------- ------------
INCOME BEFORE EXTRAORDINARY LOSS AND CHANGE
IN ACCOUNTING PRINCIPLE........................ 12,298 1,690 990 -- 14,978
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET.................... (110) -- -- -- (110)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET...................... (542) -- -- -- (542)
------------- -------------- ------------ ---------- ------------
NET INCOME....................................... $ 11,646 $ 1,690 $ 990 $ -- $ 14,326
============= ============== ============ ========== ============
14
Note 14
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED AUGUST 31, 1999
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
------------- -------------- --------------- ------------ ------------
NET SALES......................................... $ 212,773 $ -- $ 12,057 $ -- $ 224,830
------------- -------------- ------------- ---------- ------------
COSTS AND EXPENSES:
Costs of sales.................................. 55,669 -- 4,050 -- 59,719
Advertising and promotion....................... 77,124 7,063 4,256 -- 88,443
Selling, general and administrative............. 20,708 -- 2,377 -- 23,085
------------- -------------- ------------- ---------- ------------
Total costs and expenses...................... 153,501 7,063 10,683 -- 171,247
------------- -------------- ------------- ---------- ------------
INCOME FROM OPERATIONS............................ 59,272 (7,063) 1,374 -- 53,583
------------- -------------- ------------- ---------- ------------
OTHER INCOME (EXPENSE):
Interest expense................................ (27,492) -- -- -- (27,492)
Investment and other income..................... 304 (5) 46 -- 345
Royalties....................................... (10,233) 10,422 (189) -- --
Corporate allocations........................... 26 -- (26) -- --
------------- -------------- ------------- ---------- ------------
Total other income (expense)................. (37,395) 10,417 (169) -- (27,147)
------------- -------------- ------------- ---------- ------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS.............................. 21,877 3,354 1,205 -- 26,436
PROVISION FOR INCOME TAXES........................ 8,185 1,140 656 -- 9,981
------------- -------------- ------------- ---------- ------------
INCOME BEFORE EXTRAORDINARY LOSS.................. 13,692 2,214 549 -- 16,455
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET.................................... (2,117) -- -- -- (2,117)
------------- -------------- ------------- ---------- ------------
NET INCOME........................................ $ 11,575 $ 2,214 $ 549 $ -- $ 14,338
============= ============== ============ ========== ============
15
Note 14
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 31, 2000
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
------------- -------------- --------------- ------------ ------------
OPERATING ACTIVITIES:
Net income...................................... $ 11,646 $ 1,690 $ 990 $ -- $ 14,326
Adjustments to reconcile net income to --
net cash provided by operating activities:
Depreciation and amortization................. 4,041 7,288 74 -- 11,403
Extraordinary loss on early extinguishment
of debt, net................................. 110 -- -- -- 110
Cumulative effect of change in accounting
principle, net............................... 542 -- -- -- 542
Income tax provision.......................... (870) 870 -- -- --
Other, net.................................... (11) -- -- -- (11)
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable......................... 1,905 -- 11 -- 1,916
Inventories................................. 4,631 -- (161) -- 4,470
Prepaid and other current assets............ 616 -- (40) -- 576
Accounts payable and accrued liabilities.... (7,004) -- (474) -- (7,478)
------------- -------------- ------------- ---------- ------------
Net cash provided by operating
activities.............................. 15,606 9,848 400 -- 25,854
------------- -------------- ------------- ---------- ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment...... (5,204) -- (89) -- (5,293)
Purchase of trademarks and other related
assets........................................ (241) -- -- -- (241)
Increase in other assets, net.................... (673) -- -- -- (673)
------------- -------------- ------------- ---------- ------------
Net cash used in investing
activities.............................. (6,118) -- (89) -- (6,207)
------------- -------------- ------------- ---------- ------------
FINANCING ACTIVITIES:
Payments of long- term debt...................... (39,996) -- -- -- (39,996)
Proceeds from long-term debt..................... 29,000 -- -- -- 29,000
Proceeds from exercise of stock options
and warrants................................... 210 -- -- -- 210
Repurchases of common stock...................... (7,155) -- -- -- (7,155)
Debt issuance costs.............................. (317) -- -- -- (317)
Change in payable to bank........................ (367) -- -- -- (367)
Dividends paid................................... 3,000 (3,000) -- -- --
Changes in intercompany accounts................. 5,612 (6,853) 1,241 -- --
------------- -------------- ------------- ---------- ------------
Net cash provided by (used in)
financing activities..................... (10,013) (9,853) 1,241 -- (18,625)
------------- -------------- ------------- ---------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS............................... (14) -- (79) -- (93)
------------- -------------- ------------- ---------- ------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period............... (539) (5) 1,473 -- 929
At beginning of period........................... 550 16 1,742 -- 2,308
------------- -------------- ------------- ---------- ------------
At end of period................................. $ 11 $ 11 $ 3,215 $ -- $ 3,237
============= ============== ============= ========== ============
16
Note 14
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 31, 1999
(UNAUDITED AND IN THOUSANDS)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
------------- -------------- --------------- ------------ ------------
OPERATING ACTIVITIES:
Net income...................................... $ 11,575 $ 2,214 $ 549 $ -- $ 14,338
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................. 3,824 7,063 101 -- 10,988
Extraordinary loss on early extinguishment
of debt, net............................... 2,117 -- -- -- 2,117
Dividend receivable from Elcat, Inc........... (210) -- -- -- (210)
Income tax provision.......................... (1,140) 1,140 -- -- --
Other, net.................................... (18) 8 -- -- (10)
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable......................... (14,169) -- 46 -- (14,123)
Inventories................................. (968) -- 367 -- (601)
Refundable and deferred income taxes........ (9) -- -- -- (9)
Prepaid and other current assets............ 22 -- (204) -- (182)
Accounts payable and accrued liabilities.... 11,000 (938) 289 -- 10,351
---------- ---------- ---------- ---------- ----------
Net cash provided by operating
activities............................. 12,024 9,487 1,148 -- 22,659
---------- ---------- ---------- ---------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment...... (5,247) -- (13) -- (5,260)
Proceeds from sale of investment................ -- 387 -- -- 387
Purchase of trademarks and other related
assets........................................ (91,051) -- -- -- (91,051)
Increase in other assets, net................... (1,679) -- -- -- (1,679)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
investing activities.................. (97,977) 387 (13) -- (97,603)
---------- ---------- ---------- ---------- ----------
FINANCING ACTIVITIES:
Payments of long-term debt...................... (140,909) -- -- -- (140,909)
Proceeds from long-term debt.................... 223,193 -- -- -- 223,193
Proceeds from exercise of stock options and
warrants...................................... 1,229 -- -- -- 1,229
Repurchases of common stock..................... (1,564) -- -- -- (1,564)
Debt issuance costs............................. (6,494) -- -- -- (6,494)
Cancellation of interest rate swap
agreements.................................... (1,155) -- -- -- (1,155)
Change in payable to bank....................... 9,157 -- -- -- 9,157
Dividends paid.................................. 3,000 (3,000) -- -- --
Changes in intercompany accounts................ 8,320 (6,860) (1,460) -- --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities.................. 94,777 (9,860) (1,460) -- 83,457
---------- ---------- ---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS.............................. (21) -- 7 -- (14)
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period.............. 8,803 14 (318) -- 8,499
At beginning of period.......................... (95) 11 2,160 -- 2,076
---------- ---------- ---------- ---------- ----------
At end of period................................ $ 8,708 $ 25 $ 1,842 $ -- $ 10,575
========== ========== ========== ========== ==========
17
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
For the three months ended August 31, 2000, the Company experienced a $5,408, or
6.9%, decrease in net sales to $73,253 from $78,661 in the third quarter of
fiscal 1999. Operating income during the period declined $1,378, or 7.3%, to
$17,447 from $18,825. Income before extraordinary loss and change in accounting
principle of $5,151, or $.55 per share, was recorded during the period compared
to $5,957, or $.59 per diluted share, during the same period last year.
For the first nine months of fiscal 2000, net sales decreased $9,570, or 4.3%,
to $215,260 from $224,830 for the comparable period last year. Income from
operations declined $2,263, or 4.2%, for the period to $51,320 as compared to
$53,583 for the same period of fiscal 1999. Income before extraordinary loss and
change in accounting principle decreased $1,477, or 9.0%, to $14,978 from
$16,455 in the related fiscal 1999 period.
Cash earnings (net income before extraordinary items plus non-cash amortization)
is one of the key standards used by the Company to measure operating
performance. Cash earnings is used to supplement operating income as an
indicator of operating performance and not as an alternative to measurements
defined and required by generally accepted accounting principles. Cash earnings
for the nine months ended August 31, 2000 were $19,969, or $2.08 per share, as
compared to $21,662, or $2.16 per share, for the comparable 1999 period.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were
$61,144, or 28.4% of net sales, in the first nine months of fiscal 2000 compared
to $63,207, or 28.1% of net sales, in the same 1999 period.
During the third quarter and first nine months of fiscal 2000, the Company
enjoyed strong sales performances from its topical analgesic franchise,
HERPECIN-L, MUDD and PHISODERM brands. These results were offset by continued
sales weakness from the Company's SUNSOURCE line and sales declines of BAN and
GOLD BOND due to increased competition.
In the second quarter of fiscal 2000 the Company recognized an extraordinary
loss of $110, net of income taxes, or $.01 per share, on the early
extinguishment of debt. This loss related to the write-off of debt issuance
costs and premium paid on the retirement of $2,400 face amount of the Company's
12.75% Notes.
The Company recorded a charge of $542, net of income taxes, or $.06 per share,
representing the cumulative effect of a change in an accounting principle in the
first quarter of fiscal 2000. This charge represents costs of start-up
activities required to be expensed upon the initial adoption of SOP 98-5,
"Reporting on the Costs of Start-up Activities".
The Company repurchased 476,500 shares of its common stock in the first nine
months of fiscal 2000 for $7,155. The repurchased shares were retired and
returned to unissued.
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. The
Company introduced DEXATRIM Natural in the first quarter of fiscal 2000 as a
line extension. Line extensions, product introductions and acquisitions require
a significant amount of introductory advertising and promotional support. For a
period of time these products do not generate a commensurate amount of sales or
earnings. As a result, the Company may experience a short-term impact on its
profitability. 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 acquire
other brands, repurchase its common stock or reduce indebtedness.
18
RESULTS OF OPERATIONS
The following table sets forth, for income before extraordinary loss and
change in accounting principle 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 NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
------------------------ -------------------------
2000 1999 2000 1999
---- ---- ---- ----
NET SALES............................................ 100.0% 100.0% 100.0% 100.0%
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of sales...................................... 26.1 26.8 26.6 26.6
Advertising and promotion.......................... 38.4 38.6 38.3 39.3
Selling, general and administrative................ 11.7 10.7 11.3 10.3
------- ------- ------- -------
Total costs and expenses......................... 76.2 76.1 76.2 76.2
------- ------- ------- -------
INCOME FROM OPERATIONS .............................. 23.8 23.9 23.8 23.8
------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense................................... (12.5) (11.8) (12.7) (12.3)
Investment and other income........................ -- .1 .1 .2
------- ------- ------- -------
Total other income (expense).................... (12.5) (11.7) (12.6) (12.1)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES .......................... 11.3 12.2 11.2 11.7
PROVISION FOR INCOME TAXES .......................... 4.3 4.6 4.2 4.4
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY LOSS AND CHANGE
IN ACCOUNTING PRINCIPLE............................ 7.0% 7.6% 7.0% 7.3%
======= ======= ======= =======
19
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 2000 AND 1999
Net sales for the three months ended August 31, 2000 decreased $5,408, or
6.9%, to $73,253 from $78,661 for the same period last year. Domestic
consumer products sales declined $4,655, or 6.4%, to $68,004 from $72,659 for
last years's comparable period. Net sales of international consumer products
decreased $753, or 12.5%, from $6,002 in the 1999 period to $5,249 in the
current period.
For the three months ended August 31, 2000 sales of OTC health care products
decreased $4,288, or 9.5%, to $41,050 from $45,338 in the same period last year,
while sales of toiletries and skin care brands decreased $715, or 2.2%, from
$32,827 in the comparable fiscal 1999 period to $32,112 in the current period.
Other sales decreased $405, or 81.7%, to $91 in the third quarter of fiscal 2000
from $496 in the same period of fiscal 1999.
In the domestic OTC health care product segment in the 2000 period, sales
increases were recognized for most of the topical analgesic products, HERPECIN-L
and DEXATRIM. Declines in sales were recorded for the SUNSOURCE products, as a
result of continuing weakness of the dietary supplements' market, PAMPRIN,
PREMSYN PMS and GOLD BOND. In the current period BULLFROG and PHISODERM of the
domestic toiletries and skin care brands experienced increased sales, while all
of the remaining product lines of this category, including BAN, recorded sales
declines. Sales variances were largely the result of changes in the volume of
unit sales of the particular brands.
The increase in sales of most of topical analgesics products was attributed
principally to increased marketing support, while HERPECIN-L sales were affected
by increased and more effective advertising and promotion programs. DEXATRIM
sales were favorably influenced by the introduction of the Natural line
extension in the first quarter of fiscal 2000. For the skin care products,
except for BULLFROG and PHISODERM, sales decreases were largely due to decreased
advertising. BULLFROG sales increases were primarily the result of generally
favorable summer weather conditions prevailing throughout the southern and
western United States where most of the products' sales occur. PHISODERM sales
have continued to benefit from the introduction of the 4-Way Daily Acne Cleanser
line extension in the first quarter of fiscal 1999.
BAN and GOLD BOND sales declined primarily as a result of reduced marketing
support and increased competition - BAN, from the introduction of a new, heavily
promoted antiperspirant and deodorant product in the first half of fiscal 2000
and GOLD BOND, principally from less expensive competitive private label brands.
PAMPRIN and PREMSYN PMS sales were largely influenced by reduced advertising and
promotion expenditures. Sales of the remaining brands were relatively flat or
showed modest declines in the current period.
International sales for the third quarter of fiscal 2000 increased $4, or .2%,
for the Canadian operation but declined $710, or 20.8%, for the United Kingdom
business. The increase in Canadian sales was primarily associated with GOLD BOND
Medicated Body Lotion of the OTC health care product segment, while the United
Kingdom sales decline, all in the skin care category, reflected increased
competition and the maturity of the limited number of products offered. U.S.
export sales decreased $47, or 6.7%, for the 2000 period as compared to the same
period in fiscal 1999, with the principal decrease being associated with ICY HOT
of the OTC health care product segment. Sales variances were largely the result
of changes in the volume of unit sales of the particular brand.
Cost of goods sold as a percentage of net sales was 26.1% for the current period
compared to 26.8% for the same period last year. The improvement was primarily
the result of a favorable change in product mix to higher gross margin product
lines.
Advertising and promotion expenses decreased $2,282, or 7.5%, and were 38.4% of
net sales compared to 38.6% in the corresponding 1999 period. Increases in the
2000 period were related primarily to the BULLFROG and PHISODERM brands.
Declines were recorded for the GOLD BOND, BAN and SUNSOURCE product lines.
20
The increase of $138, or 1.6%, in selling, general and administrative
expenses in the 2000 period was largely associated with freight on shipments
to customers, sales management, field sales and corporate service
departments' expenses. The selling, general and administrative expenses were
11.7% of net sales in the current period as compared to 10.7% in the same
period of last fiscal year.
Interest expense decreased $174, or 1.9%, in the 2000 period, reflecting
primarily lower interest-bearing debt outstanding.
Investment and other income decreased $100, or 99.0%, largely due to the absence
of dividends from the Company's previous investment in Elcat, Inc., which was
liquidated in November 1999.
Income before extraordinary loss and change in accounting principle in the
current period was $806, or 13.5%, less than that recognized in the same period
of last year. This decline was largely the result of reduced sales.
COMPARISON OF NINE MONTHS ENDED AUGUST 31, 2000 AND 1999
Net sales for the nine months ended August 31, 2000 decreased $9,570, or 4.3%,
to $215,260 from $224,830 for the same period last year. Domestic consumer
products sales declined $10,285, or 4.9%, to $199,713 from $209,998 for last
year's comparable period. Net sales of international consumer products increased
$715, or 4.8%, from $14,832 in the 1999 period to $15,547 in the current period.
For the first nine months of fiscal 2000, sales of the OTC health care products
decreased $2,011, or 1.6%, to $126,399 from $128,410 in the same period last
year, while sales of toiletries and skin care brands decreased $6,897, or 7.2%,
from $95,403 in the comparable fiscal 1999 period to $88,506 in the current
period. Other sales declined $662, or 65.1%, to $355 in the nine months ended
August 31, 2000 from $1,017 in the same period of fiscal 1999.
In the domestic OTC health care product segment in the 2000 period, sales
increases were recognized for all of the topical analgesic products, most
notably FLEXALL and ICY HOT, HERPECIN-L and DEXATRIM. Declines in sales were
recorded for the SUNSOURCE brands, as a result of continuing weakness of the
dietary supplements' market, PAMPRIN, PREMSYN PMS and GOLD BOND. In the current
period sales increases were realized for MUDD and PHISODERM of the domestic
toiletries and skin care product category, while sales decreased for BAN, SUN-IN
and BULLFROG. Sales variances were largely the result of changes in the volume
of unit sales of the particular brand.
The increase in sales of the topical analgesic products was attributed
principally to increased marketing support, and in the case of FLEXALL the
introduction of the QUIK GEL line extension in the third quarter of fiscal 1999.
MUDD and PHISODERM sales benefited from line extension introductions in fiscal
1999 (MUDD Self-Heating Skin Cleanser and PHISODERM 4-Way Daily Acne Cleanser)
and increased marketing support, while HERPECIN-L sales were affected by
increased and more effective advertising and promotion support. The DEXATRIM
sales increase largely represented the introduction of DEXATRIM Natural in the
first quarter of fiscal 2000.
BAN and GOLD BOND sales declined primarily as a result of reduced marketing
support and increased competition--BAN, from the introduction of a new, heavily
promoted antiperspirant and deodorant product in the first half of fiscal 2000
and GOLD BOND, principally from less expensive competitive private label brands.
BULLFROG sales were affected principally by the loss of a major customer, while
PAMPRIN, PREMSYN PMS and SUN-IN sales were largely influenced by reduced
advertising and promotion expenditures. Sales of the remaining brands were
relatively flat or showed modest declines in the current period.
International sales for the first nine months of fiscal 2000 increased $867, or
17.4%, for the Canadian operation but decreased $396, or 5.6%, for the United
Kingdom business. The increase in Canadian sales
21
was primarily associated with the GOLD BOND product line, especially GOLD BOND
Medicated Lotion, of the OTC health care product segment, while SUN-IN and MUDD
of the toiletries and skin care product group constituted the principal
decreases in United Kingdom sales. U.S. export sales increased $244, or 8.8%,
for the current period as compared to the same period last year, with the
increase being largely associated with GOLD BOND and DEXATRIM, both of the OTC
health care product category, and BAN of the toiletries and skin care product
group. Sales variances were principally the result of changes in the volume of
unit sales of the particular brand.
Cost of goods sold as a percentage of net sales was 26.6% for the current period
and for the same period last year.
Advertising and promotion expenses decreased $5,996, or 6.8%, and were 38.3% of
net sales compared to 39.3% in the corresponding 1999 period. Increases in the
current period were associated with SPORTSCREME, ASPERCREME, CAPZASIN, BULLFROG,
PHISODERM and MUDD. Declines were recorded for the GOLD BOND, BAN and SUNSOURCE
product lines.
The increase of $1,112, or 4.8%, in selling, general and administrative expenses
in the current period was largely associated with direct selling expenses,
freight costs on shipments to customers and corporate service departments'
costs. The selling, general and administrative expenses were 11.3% of net sales
in the 2000 period as compared to 10.3% in the same period of last fiscal year.
Investment and other income decreased $217, or 62.9%, in the current period,
primarily due to the absence of dividends from the Company's previous investment
in Elcat Inc., which was liquidated in November 1999.
In the 2000 period the Company recognized an extraordinary loss of $110, net of
income taxes, on the early extinguishment of debt. This loss related to the
write-off of debt issuance costs and premium paid on the retirement of $2,400
face amount of the Company's 12.75% Notes. A similar loss of $2,117, net of
income taxes, was also recorded in the same period of fiscal 1999.
The Company recorded a charge of $542, net of income taxes, representing the
cumulative effect of a change in an accounting principle in the first quarter of
fiscal 2000. This charge represents costs of start-up activities required to be
expensed upon the initial adoption of SOP 98-5, "Reporting on the Costs of
Start-up Activities."
Income before extraordinary loss and change in accounting principle in the
current period was $1,477, or 9.0%, less than that recognized in the same period
of last year. This decline was largely the result of reduced sales.
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, its own stock repurchases,
acquisitions, working capital and capital expenditures.
Cash of $25,854 and $22,659 was provided by operations for the nine months ended
August 31, 2000 and 1999, respectively. The increase in cash flows from
operations over the prior year period was primarily the result of increases in
depreciation and amortization and substantial reductions in accounts receivables
and inventories.
Investing activities used cash of $6,207 and $97,603 in the nine months ended
August 31, 2000 and 1999, respectively. The decrease of $91,396 in the current
period primarily represented the absence of acquisitions comparable to that of
the Thompson Medical brands in the prior year period.
Financing activities used cash of $18,625 in the nine months ended August 31,
2000 compared to $83,457 of cash provided in the comparable prior year period.
The decrease of $102,082 in the current period
22
reflected principally the absence of financing required for acquisitions
comparable to that necessitated by the Thompson Medical brands' purchase in the
same period of last year.
The following table presents working capital data at August 31, 2000 and
November 30, 1999 or for the respective years then ended:
ITEM 2000 1999
----------- --------- ---------
Working capital (current assets less current liabilities).......... $ 24,542 $ 26,413
Current ratio (current assets divided by current liabilities)...... 1.39 1.40
Quick ratio (cash and cash equivalents and accounts
receivable divided by current liabilities)....................... .89 .86
Average accounts receivable turnover............................... 5.56 6.51
Average inventory turnover......................................... 3.11 3.19
Working capital as a percentage of total assets ................... 5.09% 5.37%
The change in the current and quick ratios at May 31, 2000 as compared to
November 30, 1999, was minimal. The lower accounts receivable turnover primarily
reflects at August 31, 2000 the sizable amount of uncollected customer invoices,
pertaining to the sale of the Company's summer seasonal products, which carry a
due date of August 15, 2000. This situation is normal at the end of the third
quarter of each fiscal year.
Total loans outstanding were $359,130 at August 31, 2000 compared to $369,950 at
November 30, 1999, a decrease of $10,820 during the first nine months of fiscal
2000. This decrease was primarily the result of repayments of long-term debt in
the current period. The principal balances outstanding at August 31, 2000 of the
term loan, the revolving credit facility and total senior subordinated notes
were $47,600, $4,500 and $307,145, respectively.
On September 15, 2000 the Company completed the sale of its BAN product line to
The Andrew Jergens Company, a wholly owned subsidiary of Kao Corporation. Under
the terms of the contract, the Company received $160,000 cash at closing, plus
the right to receive up to an additional $6,500 in future payments based upon
levels of sales of BAN in 2001 and 2002. Of the approximately $159,977 of net
proceeds from the sale, $52,194 was used to retire all of the outstanding
balances of the revolver and the term loans and accrued interest thereon, with
the balance of the net proceeds being retained by the Company for future product
acquisitions or the retirement of senior subordinated debt.
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.
The Company intends to utilize its significant debt-free cash flow (cash flow
after capital expenditures and scheduled amortization of principal of debt)
to continue to repurchase the Company's common stock up to the current
$10,000 authorization by the Company's board of directors as well as to
prepay debt. As of October 13, 2000, the remaining amount available to the
Company under its board of director's current repurchase authorization was
$8,365. 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 was utilized in the sale of the 8.875%
Notes in May 1999.
23
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 nine months ended August
31, 2000 and 1999, these subsidiaries accounted for 6% and 5% of total revenues,
respectively, and 2% of total assets for each period. 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 $50 and $83 for the nine months ended August 31, 2000 and
1999, 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, 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; and other
risks described in the Company's Securities and Exchange Commission filings.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10 of Notes to Consolidated Financial Statements included in
Part 1, Item 1 of this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Statement regarding computation of per share earnings
(Exhibit 11).
(2) Financial data schedule (Exhibit 27).
(b) No Form 8-K reports were filed with the Securities and Exchange
Commission during the three months ended August 31, 2000.
25
CHATTEM, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHATTEM, INC.
(Registrant)
Dated: October 16, 2000 \s\ A. Alexander Taylor II
-------------------- --------------------------------
A. Alexander Taylor II
President and Director
(Chief Operating Officer)
\s\ Lisa C. Wilder
--------------------------------
Lisa C. Wilder
Assistant Corporate Controller
(Acting Chief Accounting Officer)
26