CONTENTS
FINANCIAL HIGHLIGHTS...................................................... 1
PRESIDENT'S LETTER........................................................ 2
CHATTEM CONSUMER PRODUCTS................................................. 4
CHATTEM CHEMICALS......................................................... 6
CHATTEM INTERNATIONAL..................................................... 7
MANAGEMENT'S DISCUSSION AND ANALYSIS...................................... 9
SALES AND INCOME BY LINE OF BUSINESS...................................... 13
SELECTED FINANCIAL DATA................................................... 14
CONSOLIDATED BALANCE SHEETS............................................... 16
CONSOLIDATED STATEMENTS OF INCOME......................................... 18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)................. 19
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................... 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................................. 32
CHATTEM, INC.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1994 1993 1992
EARNINGS PER SHARE
BEFORE EXTRAORDINARY LOSS
AND ACCOUNTING CHANGES $ 0.50 $ 0.20 $ 1.60
COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 7,292 6,341 5,033
DIVIDENDS PER SHARE $ -- $ 20.20 $ 0.30
NET SALES
Consolidated ($ Millions)
94 108.0
93 105.4
92 108.2
91 100.7
90 84.4
INCOME FROM OPERATIONS(1)
Before Nonrecurring and Unusual Charges ($ Millions)
94 16.2
93 11.4
92 13.7
91 9.6
90 8.0
<FN>
(1)AS A RESULT OF SIGNIFICANT NONRECURRING AND UNUSUAL CHARGES IN FISCALS 1993
AND 1994 AND THE INTEREST EXPENSE ASSOCIATED WITH FINANCING THE $20 SPECIAL
DIVIDEND TO SHAREHOLDERS, OPERATING INCOME BEFORE NONRECURRING AND UNUSUAL
CHARGES IS BELIEVED TO BE THE MOST MEANINGFUL MEASURE FOR COMPARING CHATTEM'S
FINANCIAL RESULTS.
I am pleased to report to you that 1994 was a very good year led by a 42%
increase in operating income before nonrecurring and unusual charges to an all
time record of $16.2 million. Also, we made two important acquisitions,
PHISODERM and BENZODENT, which should provide excellent growth opportunities for
several years.
It was a particularly critical year as we bounced back from a disappointing 1993
in which operating income had declined 17%. I am optimistic that we are back on
track to achieve solid future growth as we did with our 30% annual earnings
growth from 1990 through 1992, although probably not at quite that pace. Also,
it was meaningful that the excellent results for 1994 were done "the old
fashioned way, we earned it." Without any single development leading the surge,
we increased profit by cutting costs, improving manufacturing operations,
reducing inventories and using advertising and promotion expenditures more
efficiently.
To cite some key numbers, total sales of $108 million increased 2% over 1993.
Increased sales of about $7 million from the two newly acquired brands offset a
decline of $2 million in Chattem Chemicals during the first full year without
the ROLAIDS-Registered Trademark- business and a $2 million decrease in Chattem
International's sales due to refocusing our efforts overseas.
We believe that operating income before nonrecurring and unusual charges is the
most meaningful measure for a comparison of earnings at Chattem given the impact
on interest expense of the Special Dividend transaction in June 1993 and of the
$75 million senior subordinated notes issue in mid-1994. Operating income
before nonrecurring and unusual charges of $16.2 million increased 42% compared
with $11.4 million. This $16.2 million figure and the underlying 15% operating
margin both represent all time
records for Chattem. Earnings per share before extraordinary loss and
accounting changes were $.50 compared with last year's $.20.
The significant increase in operating income came from two key areas: the two
newly acquired brands and improved margins on domestic consumer products due to
expense control in all areas with a particular focus on our advertising and
promotion dollars.
In the consumer products area, the highlights were strong results from ICY HOT,
PAMPRIN, PREMSYN PMS, PHISODERM and BENZODENT. MUDD and NORWICH had poor years
due to increased competition while BULLFROG lost a major retail customer which
impacted what could have been a reasonable year. FLEX-ALL 454, which has
enjoyed strong sales growth in recent years, and CORN SILK both were relatively
stable.
Chattem Chemicals, which operated for its first full year without the
ROLAIDS-Registered Trademark- business, performed solidly with slight increases
in sales and operating income, after adjusting for the ROLAIDS-Registered
Trademark- loss. Chattem Chemicals also maintained its historically strong
operating margin.
Chattem International's sales and profits declined in 1994, but as a result of
steps initiated in 1993, along with the acquisition of PHISODERM, the unit is
poised for significant profit improvements. Sales and profits declined
principally due to the sale of ALGEMARIN in Canada, the continued commitment to
the development of FLEX-ALL 454 in Canada in the face of increased competition
and reduced sales due to downsizing efforts begun in 1993 on the Western
European continent as well as within the U. S. export businesses.
Although our managers feel good about 1994, they are enthusiastic about 1995 and
committed to another strong performance. I cannot ever recall having more
significant programs in progress as we have at the outset of this year.
Clearly, the relaunch of PHISODERM is critical with new formulas, redesigned
packaging and record levels of advertising. Additionally, we will be testing
important line extensions for PHISODERM for launching in 1996. Another key
program will be the first ever advertising campaign for BENZODENT as we attempt
to grow the underdeveloped market for products that relieve denture pain.
The new programs for our existing products are too numerous to cover, but I will
mention a few highlights. A major relaunch of MUDD is planned with two line
extensions - Sea Mask and Aloe Mask. We will have an exciting new addition to
the BULLFROG line of products with BULLFROG Quick Gel, a unique, non-greasy
formula that is waterproof and dries quickly with no residue. SUN-IN will
introduce SUN-IN for Men this summer, capitalizing on research indicating a
strong interest in blonding by male teens and young adults. ULTRASWIM should
benefit from exciting new packaging. CORN SILK will perhaps have the most
changes with improved packaging, the introduction of shaded natural matte
powders and a new liquid formula.
As we begin the year, we are also excited about advertising campaigns just
created for ICY HOT, FLEX-ALL 454, PREMSYN PMS, PAMPRIN, ULTRASWIM, SUN-IN and
MUDD. Finally, we will be testing line extension concepts for FLEX-ALL 454 and
ICY HOT. In summary, we are going to have a very proactive and eventful year
enhancing and marketing our brands.
Our proven strategy for growth has been through acquiring products and then
developing marketing programs and advertising support to grow the brands. We
will continue our
acquisition efforts in 1995, and the recent wave of mergers should afford a
number of opportunities over the next several years as companies rationalize
their product portfolios. We will also continue to evaluate our existing
businesses and products, and in instances where our objectives are not realized,
will dispose of these businesses or brands and redeploy the assets to products
or businesses with greater growth potential, or to pay down indebtedness.
In conclusion, we are excited about this important upcoming year, and I look
forward to reporting to you during the year about the progress of many of our
new programs.
CHATTEM CONSUMER PRODUCTS
MISSION
Chattem Consumer Products' mission is the satisfaction of consumer needs in
personal and health care areas through the marketing of brand name products
which are of excellent quality and proven efficacy. These products are
advertised through national media and are distributed through the food, drug and
mass merchandiser classes of trade. The objective is to create or maintain a
leadership position in each of Chattem's domestic markets and to thereby provide
superior earnings while also building the value of each brand.
FISCAL 1994 SUMMARY
The highlight of the year was the consummation and assimilation of two newly
acquired brands into the division's portfolio. Chattem acquired the trademark
and inventory of BENZODENT, a topical oral analgesic, from Procter & Gamble in
May 1994 and acquired a perpetual license for use of the PHISODERM trademark in
North America from Sterling Winthrop Inc. in June 1994.
Sales for the division were up 7.9% to $82,643,000 from $76,592,000 in 1993
principally due to the PHISODERM and BENZODENT business, as the remaining
product lines were essentially flat. The two acquired products exceeded sales
expectations both at the trade and retail levels even with minimal amounts spent
during 1994 on consumer advertising. Positive news included the continued
expansion of ICY HOT, a retail share increase by PAMPRIN and significant sales
growth by PREMSYN
PMS, MUDD, NORWICH and ULTRASWIM registered sales decreases due to competition
and short-term reductions in support levels while BULLFROG lost a major
customer. Sales of FLEX-ALL 454, CORN SILK and SUN-IN were consistent with
1993. The sales of FLEX-ALL 454 in 1994 reflected the maturing of a brand that
has added significant growth to the division's sales in prior years.
Operating income rose 68% to $16,981,000 from $10,127,000 in 1993. This
increase was due to incremental income generated from the two acquired brands
and, recognizing the maturation of FLEX-ALL and the marginal benefits of a
national advertising campaign for NORWICH in 1993, a reduction in advertising
and promotion expenditures for these two brands. ICY HOT, PAMPRIN and CORN SILK
had increases in advertising and promotion levels for 1994 as compared to 1993.
Additionally, the division continues to improve margins and also limit overhead
through aggressive cost containment measures.
BRAND OVERVIEW AND FISCAL 1995 OUTLOOK
OTC PHARMACEUTICALS
ICY HOT, a topical analgesic and the fastest growing brand in the category,
completed its second straight year of double digit sales growth. Its unique
positioning as the product offering "extra strength dual action relief" together
with compelling consumer promotions and expanded national advertising should
continue to enable ICY HOT to gain market share.
FLEX-ALL 454, an aloe vera-based topical analgesic used by the trainers of all
102 professional football, baseball, basketball and hockey teams, is the
official locker room product of the National Football League. Sales were down
slightly for the first time in this important brand's history principally due to
competitive pressures from both private label and nationally branded products.
In an effort to resume growth in 1995, the brand will seek to capitalize on new
advertising which will continue to feature former football superstar Joe Namath
and the ongoing support of professional trainers in addition to new targeted
consumer programs.
BENZODENT, a topical oral analgesic, is the only brand applied directly to
dentures to relieve denture pain. After the acquisition in May 1994, product
manufacturing was successfully transitioned to Chattem in September. After a
period of extensive research, the first integrated marketing plan ever for the
brand was developed. This plan includes advertising on a national basis as well
as a very focused effort to gain additional support from medical professionals.
PAMPRIN, the number two brand in the menstrual analgesics category, is a
combination drug specifically designed for relief of menstrual symptoms.
Following a year of trade inventory adjustments, PAMPRIN's factory sales were up
almost 9%, which approximated retail sales movement. The growth was experienced
by both the Multi-Symptom and Maximum Pain Relief products due to effective
consumer advertising and promotional support, although anticipated competitive
pressure from general analgesics
could make this performance difficult to repeat. Nighttime PAMPRIN has not met
the original expectations since its launch in late 1993 and will not be a factor
in 1995.
PREMSYN PMS, the division's other menstrual product, was a particularly positive
surprise with a sales increase in spite of a decrease in media support. After a
year of reduced spending, the brand will be advertised at much higher levels in
1995.
NORWICH, a high-quality, reasonably-priced aspirin franchise, complements the
other OTC pharmaceuticals of the division. The brand continues to decline in
excess of 10% per year principally due to the continued expansion of private
label aspirin, heavy returns after the disappointing launch of NORWICH Enteric-
Coated Aspirin and reduced support in lieu of other portfolio priorities.
Additionally, the division manufactures and markets two smaller proprietary
drugs, SOLTICE, an external analgesic, and BLIS-TO-SOL, an antifungal product.
Limited regional support will continue on an opportunistic basis.
COSMETICS
CORN SILK, the face make-up especially formulated to be oil free and able to
absorb excess facial oils, had a good year with sales growing both at factory
and retail during a year when the oil-control face make-up category and all of
CORN SILK's major competitors were down in retail sales. The successful
introduction of CORN SILK's new Natural Matte Loose and Pressed Powders in the
summer of 1994, the initial repackaging of loose and pressed compacts and liquid
bottles to a contemporary squared
design and an expanded support program contributed to a very good year. Chattem
should capitalize in 1995 on the full year effects of the product and packaging
efforts begun in the second half of 1994. In addition, plans are in place to
expand the new Natural Matte line into shades and to introduce new Bronzing
powders and new shades for the liquid line. CORN SILK will once again increase
its programs to support all of these new items. CORN SILK's goal of being the
market's number one specialty face make-up continues to be a focus of the
Company.
TOILETRIES
PHISODERM, a specialty face cleanser, has surpassed initial expectations as
consumer sales are growing following three years of decline and, more
importantly, after only one month of consumer advertising. The key program for
Chattem in 1995 is the relaunch of PHISODERM with improved formulas, new
packaging and record levels of advertising. Additionally, testing of important
line extensions for late 1995 or early 1996 will be a priority. Also, the
integration of the manufacturing into Chattem's facilities in early 1995 affords
significant cost savings to support the brand.
After two years of minimal support and declining sales, Chattem will relaunch
MUDD, a line of clay-based facial mask products, with new packaging and two line
extensions - Sea Mask and Aloe Mask. New creative and promotional support will
complement the product changes in order to stabilize the brand and, together
with PHISODERM, to strengthen the Company's presence in the specialty face
cleanser category.
BULLFROG AMPHIBIOUS FORMULA SUNBLOCK had disappointing factory sales in 1994.
Consolidation among the large warehouse clubs resulted in a loss of distribution
equal to almost $700,000. On the positive side, the reformulation and
repackaging of the BULLFROG for Kids product and the return of BULLFROG to
television during the summer season resulted in retail sales being up 16% for
the year. This retail performance and the addition of BULLFROG Quick Gel, a
unique waterproof, non-greasy formula that dries quickly with no residue,
provides optimism for 1995.
The other seasonal products, SUN-IN Hair Lighteners and ULTRASWIM Chlorine
Removal Shampoo and Conditioner, had combined sales which were down slightly
versus 1993. While both products still remain the market share leaders of their
respective categories, competitive pressures combined with a reduction in
marketing support due to other portfolio priorities limited upside potential.
In 1995 both brands will be repackaged and returned to regional TV support, and
Chattem will introduce SUN-IN for Men in response to research indicating a
strong interest in blonding by male teens and young adults.
CHATTEM CHEMICALS
MISSION
Chattem Chemicals is committed to the development, manufacture and sale of high
value-added specialty chemicals for which Chattem is or can be a market leader
and low-cost producer. The division offers high-quality specialty products at
competitive prices, responds promptly and professionally to customer needs and
provides technical assistance as required. Growth will occur through the
application of current and new technologies to existing as well as emerging
markets. It is Chattem's further commitment to consistently act in an
environmentally responsible manner.
FISCAL 1994 SUMMARY
Both sales and profits for Chattem Chemicals in 1994 were below those recorded
in 1993 due primarily to the previously reported reformulation of
ROLAIDS-Registered Trademark- which occurred in mid-1993. Net sales declined
12.6% from $15,544,000 in 1993 to $13,586,000. Operating income was down from
$4,111,000 to $3,093,000 in 1994. Sales from continuing operations, after
adjusting for the loss of the ROLAIDS-Registered Trademark- volume, increased
modestly from $12,915,000 in the prior year to $13,586,000 in 1994.
Efforts throughout fiscal 1994 were focused on further strengthening all
division profit centers as new opportunities have been identified and work has
begun to supplement the strong contribution from core businesses. Future growth
will be driven by the division's expertise as a producer of unique specialty
chemicals. As in the past, new products and applications are most often jointly
developed by technical teams representing both
Chattem and end users working closely together to solve a particular problem or
fill a specific need. These product development relationships continue to be
the building blocks for future division growth.
PRODUCT OVERVIEW AND FISCAL 1995 OUTLOOK
ALUMINUM HYDROXIDES
Aluminum hydroxide compounds are used in the manufacture of many antacids and
also in the formulation of water treatment chemicals, industrial catalysts and
other industrial specialty compounds. In the antacid sector, the division
anticipates sales increases through new product introductions and a broader
customer base. Chattem Chemicals is a major bulk supplier to the expanding
private label antacid market. Demand for active ingredients used in water
treatment compounds and other industrial applications is increasing and should
continue to grow in the years ahead.
ALUMINUM DERIVATIVES
Aluminum derivatives act as reactive intermediates and are primarily utilized as
viscosity builders and cross linkers in printing inks and other industrial
coatings. These materials also serve as a unique source of reactive aluminum
metal. With an expanding number of possible uses for Chattem's specialty
compounds, the aluminum derivative segment continues to provide growth
opportunities for the division. Although specialty additives for the printing
ink industry form the core product market, new technologies for industrial
lubricants, high-purity reactive aluminum compounds, plastics additives and
catalyst bases offer a number of exciting opportunities for products now in
development.
GLYCINE
Glycine is an amino acid used in the formulation of certain intravenous
solutions and other pharmaceutical applications and as a buffer in highly
effective antiperspirant compounds. It also serves as a taste modifier in
foods, including certain seafood and pet food products. As the glycine market
has historically been volatile, Chattem Chemicals capitalizes on periodic
opportunities which arise from fluctuating market conditions and continues in
its role as a leading U.S. producer.
Beginning in 1992, but escalating significantly in 1993 and 1994, imports of
glycine into the U.S. from China have increased. These lower-priced imports
forced reduced selling prices for U.S.-produced material and ultimately led to
an industry-sponsored petition for relief to the U. S. Department of Commerce.
Its final report made in November concluded that these Chinese imports were sold
far below fair value, and the International Trade Commission will render its
final determination this year.
NEW PRODUCT DEVELOPMENT
Future growth of the division is largely dependent on the successful
introduction of new products. Major commercial development emphasis for 1995
and beyond is focused on the expansion of Chattem Chemicals' product and
technology base into markets and industries not currently being served.
Research efforts are concentrated on developing products which utilize the
Company's technical expertise to solve specific problems identified by the
customer. Specialty products for new resin systems, for coatings applications
and for the catalyst, plastics and printing markets should significantly
contribute to the division's growth in the years ahead.
CHATTEM INTERNATIONAL
MISSION
Chattem International directs the international business development of Chattem
Consumer Products. The division's goal is to leverage the value of Chattem's
consumer brands and thereby expand the Company's revenues and profits.
FISCAL 1994 SUMMARY
The highlight of the year was the continued reorganization of the international
businesses to improve the profitability of the division. This was accomplished
through the sale of ALGEMARIN, an unprofitable line of bath products in Canada,
and through the reduction of division overhead and the restructuring of European
operations. Also, the addition of PHISODERM in Canada will more than offset the
revenue loss from the disposition of ALGEMARIN while adding substantially more
profits. The reduced sales caused operating income to decline somewhat to
$120,000 from $381,000 in 1993. Chattem International's net sales in fiscal
1994 decreased 12% to $11,727,000 from $13,269,000 in fiscal 1993, primarily due
to the rationalization of operations.
Advertising and promotion expenses were maintained at 1993 levels while fixed
expenses in all units continue to be managed aggressively with total fixed costs
down almost $500,000. Another positive note in 1994 was the aggressive
management of working capital which allowed approximately $3,000,000 in
intercompany accounts to be repaid and used to reduce overall bank debt.
CANADA
The divestiture of ALGEMARIN and the acquisition of PHISODERM in June 1994 were
of major significance to the unit's long-term profitability. As in the U.S.,
sales of PHISODERM exceeded initial expectations with no consumer advertising
support. CORN SILK had an exceptional year of sales growth during its first
year ever of television support. The brand benefited from its strength in the
U.S. and also capitalized on a strong sales and marketing effort to gain
distribution in Wal-Mart. In spite of a tough competitive environment, FLEX-ALL
454 sales remained consistent with continued support on national television.
ULTRASWIM, ACNOMEL and SUN-IN had stable years while PAMPRIN declined due to
competitive pressures.
EUROPE
While overall sales in the United Kingdom were up marginally, the core brands
had another good year. SUN-IN Hair Lightener and CORN SILK experienced double
digit sales growth while the MUDD Mask brands were flat and ULTRASWIM Shampoo
was down slightly. The BRONZ SILK products that were launched in 1993 fell
short of expectations after the large initial sell-in. Sales on the Western
European continent were down significantly principally due to the restructuring
that took place in 1993. The division's distributor in Spain was terminated and
efforts in Germany reduced, but sales to the remaining eight distributor markets
were essentially flat.
U.S. EXPORTS
Sales were down following the restructuring of the division in 1993. Sales of
ICY HOT to Mexico, Peru and Singapore were even with the launch in 1993, and
sales of existing product lines in the Caribbean were flat. Chattem continues
to explore other profitable distributor arrangements in the growing markets of
Central and South America.
1995 OUTLOOK AND MARKET OVERVIEW
The primary goal for the division in 1995 and in the future will be to
contribute significantly more profits while continuing to build worldwide brand
equities. This earnings growth should come from several areas. The
stabilization and subsequent growth of PHISODERM, while being advertised for the
first time in several years in Canada, will be a key for 1995 and the years
following. As FLEX-ALL 454 matures in Canada, a slow down in investment
spending will result in improved earnings. Capitalizing on the successful
launch of ICY HOT in Central and South America, established and profitable
distribution networks can be aggressively pursued. All distributors and brands
in each market on the Western European continent will continue to be evaluated
relative to its capability to provide long-term profits. Also, fixed expenses
in all markets will be managed aggressively to afford more support for the
brands and also higher profits.
CANADA
Chattem (Canada) Inc. is a wholly-owned subsidiary based in Mississauga,
Ontario, which markets and distributes Chattem's consumer products throughout
the country. The
brands are principally manufactured in Chattanooga with some packaging completed
in Mississauga. A national broker handles sales efforts. Brands marketed in
Canada include PAMPRIN, FLEX-ALL 454, CORN SILK, MUDD, SUN-IN, ULTRASWIM and
PHISODERM. In addition, Chattem owns the marketing and distribution rights for
SHY, a line of feminine hygiene and douche products; ACNOMEL, a medicated acne
mask; and also AQUA CARE and ROSE MILK, two smaller brands for skin care.
EUROPE
Chattem's European business is conducted through Chattem (U.K.) Limited, a
wholly-owned subsidiary located in Basingstoke, Hampshire. This unit also
services distributors in Australia and the Middle East. Manufacturing and
packaging of the products are performed in the Company's Chattanooga facilities
as well as in the U.K. The division employs its own sales force in the U.K.
while exclusive distributors are used to market and sell its products on the
Western European continent. Due to the difficulty and expense involved in the
registration of OTC pharmaceuticals in Europe, the focus is exclusively on the
Company's toiletry brands. Chattem's products in Europe include SUN-IN, a range
of MUDD Face and Body products, ULTRASWIM, BRONZ SILK and CORN SILK. SPRAY
BLOND Spray-In Hair Lightener is only marketed on the Continent.
U.S. EXPORTS
The division services various distributors located in the Caribbean, Mexico,
Peru and two markets within the Pacific Rim, Singapore and the Philippines.
Various products are sold into these markets but with the primary focus on OTC
pharmaceuticals, principally
ICY HOT and PAMPRIN. The Company continues to look for established distributors
in Central and South America to capitalize on the success and heritage of ICY
HOT in these regions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company experienced an increase in net sales, operating income and net
income for the fiscal year ended November 30, 1994. Net sales increased 2.4% to
$107,956,000 from $105,405,000 in 1993. Operating income before nonrecurring
and unusual charges increased 42.2% to $16,191,000 from $11,388,000 in 1993.
Net income increased 50.1% to $2,054,000 from $1,368,000 in 1993.
The Company's results of operations and liquidity in 1994 were affected by the
acquisition of two new brands, BENZODENT and PHISODERM, and the refinancing of
indebtedness with the proceeds of the senior subordinated notes and new bank
credit facilities in June 1994. The Company's new financing arrangement has
fixed the interest rate payable on a significant portion of the Company's
indebtedness and provided a $12.5 million bank credit facility available for
acquisitions. The new financing at higher interest rates, along with higher
outstanding borrowings, resulted in an increase of interest expense of
$5,883,000 to $10,112,000 in 1994 from $4,229,000 in 1993. Until the Company's
indebtedness is reduced significantly, net income will likely continue to be
adversely impacted by interest expense.
The Company will continue to seek increases in sales through a combination of
acquisitions and internal growth while maintaining high operating income. As
previously high growth brands such as FLEX-ALL 454 mature, sales increases will
become even more dependent on acquisitions and the development of successful
line extensions. The Company continually evaluates its products and businesses
as part of its sales growth strategy and, in instances where the Company's
objectives are not realized, will dispose of these brands or businesses and
redeploy the assets to products or businesses with greater upside potential
or to pay down indebtedness.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's Consolidated Statements of Income, expressed as a percentage of
revenues:
YEAR ENDED NOVEMBER 30,
---------------------------
1994 1993 1992
------- ------- -------
Net sales 100.0% 100.0% 100.0%
Cost of sales 34.4 34.6 34.2
Gross profit 65.6 65.4 65.8
Costs and expenses:
Advertising and promotion 30.9 34.4 32.0
Selling, general and administrative 19.7 20.2 21.1
Nonrecurring and unusual charges 0.5 5.2 --
Total costs and expenses 51.1 59.8 53.1
Operating income 14.5 5.6 12.7
Other income (expense), net (9.3) (3.7) (1.4)
Income before income taxes, extraordinary loss
and cumulative effect of accounting changes 5.2 1.9 11.3
Provision for income taxes 1.9 0.7 3.8
Income before extraordinary loss and
cumulative effect of accounting changes 3.3 1.2 7.5
Extraordinary loss on early extinguishment
of debt, net (1.4) (0.4) --
Cumulative effect of accounting changes, net -- 0.5 --
Net income 1.9% 1.3% 7.5%
----- ----- -----
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales rose 2.4% to $107,956,000 from $105,405,000 in 1993. This was led by
a 7.9% increase in domestic consumer product sales to $82,643,000 from
$76,592,000 in 1993. The domestic consumer products sales growth was offset by
an 11.6% decrease in international consumer product sales to $11,727,000 from
$13,269,000 in 1993 and a 12.6% decrease in specialty chemical sales to
$13,586,000 from $15,544,000 in 1993.
The growth in domestic consumer products sales resulted primarily from
$6,257,000 of partial year sales from the two newly acquired products, PHISODERM
and BENZODENT. The remaining brands were basically flat with sales in 1994
declining $206,000. Absent the new products, sales of the division's OTC
pharmaceuticals increased 1.8% in 1994 led by strong sales of PAMPRIN, PREMSYN
PMS and ICY
HOT. Sales of FLEX-ALL 454 decreased by 2.1% from 1993 sales levels for the
first time while NORWICH sales declined 22.8% from 1993 due to continued inroads
by private label products and general analgesics. Although revenues from CORN
SILK and SUN-IN increased in 1994, the division's overall sales of cosmetic and
toiletry brands declined 4.3%. The loss of a major retail customer due to
account consolidation in 1994 resulted in a 15.4% sales drop for BULLFROG versus
1993. ULTRASWIM and MUDD also registered sales decreases of 9.3% and 19.5%,
respectively.
The decline in sales of the international division reflected the efforts
initiated in 1993 to reorganize the division to a more profitable unit. In
Canada, ALGEMARIN, an unprofitable line of bath products, was sold in June. Due
to heavy returns in the spring following the Christmas season, this event had a
negative impact on sales. During the fourth quarter of 1993, certain
distributor arrangements were terminated on the Western European continent and
within the U.S. export unit, and marketing efforts to others were significantly
reduced leading to decreased sales in 1994. The acquisition of PHISODERM in
Canada added $796,000 in partial year sales.
Reduced sales in the specialty chemicals division in 1994 were primarily the
result of the loss of Warner-Lambert as a customer in July 1993 due to the
reformulation of its ROLAIDS-Registered Trademark- product line. On an
annualized basis, Warner-Lambert had accounted for about $4,000,000 of the
division's sales of DASC and recovered alcohol by-products and was the most
significant contributor to the division's margins. Partial year sales in 1993
related to the Warner-Lambert business were $2,629,000. Sales from continuing
operations, after adjusting for the loss of the ROLAIDS-Registered Trademark-
volume, increased modestly by 5.2%, from $12,915,000 in 1993 to $13,586,000
with all product groups contributing to the increase.
Cost of goods as a percentage of net sales improved to 34.4% from 34.6% in 1993.
The decline was primarily the result of a shift in mix of sales between the
divisions with sales of the higher margin domestic consumer products
representing about 76.6% of consolidated sales in 1994 compared to 72.7% in
1993. This overall improvement
included the write-off of approximately $425,000 of inventory related to the
unsuccessful launch of Nighttime PAMPRIN.
Advertising and promotion expense, almost all of which is attributable to the
consumer products division, dropped by $2,927,000, or 8.1%, to $33,346,000 in
1994 from $36,273,000 in the previous year. The decrease was primarily the
result of $2,988,000 in reduced advertising spending for FLEX-ALL 454 and
NORWICH. The reduction in advertising spending for these two brands reflected
management's recognition of the maturation of FLEX-ALL 454 and the marginal
benefits of the national advertising campaign for NORWICH in 1993. The division
also spent $1,310,000 in advertising and promotion expenditures on the two
acquired brands, PHISODERM and BENZODENT.
Selling, general and administrative expenses decreased by $34,000 to $21,244,000
from $21,278,000 in 1993 and declined as a percentage of the Company's net sales
to 19.7% from 20.2% in 1993. This slight improvement compared to 1993 was
realized even with the incremental expense of incentive bonuses to management
and of additional compensation to sales personnel and independent sales agents
as a result of increased sales for the year.
In 1994, the Company recognized a nonrecurring and unusual charge of $559,000
related to the repricing of the Company's stock options in connection with the
payment of the Special Dividend in June 1993. The total charge related to the
noncash, remeasured compensation was $1,987,000 and is being amortized over the
vesting period of the options. The amount recorded in 1993 as part of the
nonrecurring and unusual charge was $956,000.
Interest expense increased to $10,112,000 from $4,229,000 in 1993 as a result of
higher outstanding indebtedness related to the payment of the Special Dividend
in June 1993, the consummation of the two acquisitions and higher interest rates
related to the senior subordinated notes issue in June of 1994. Until the
Company's indebtedness is reduced substantially, interest expense will continue
to represent a significant percentage of the Company's net sales.
Net investment income increased substantially to $186,000 from a loss of
$522,000 in 1993. The loss incurred in 1993 related to liquidation of the
investment portfolio with the proceeds being used to reduce bank debt and
partially fund the payment of the Special Dividend. During 1994, the Company
also realized a loss of $513,000 from the sale of the distribution rights to
ALGEMARIN in Canada and a gain of $484,000 on the sale of an interest rate swap.
Income taxes decreased to 35.9% of income from continuing operations before
income taxes, extraordinary loss and cumulative effect of accounting changes
from 36.7% in 1993. See Note 6 of Notes to Consolidated Financial Statements.
In conjunction with the refinancing of existing debt with the proceeds from the
issuance of the senior subordinated notes and the new bank facility in 1994,
the Company incurred an extraordinary loss of $1,556,000 (net of taxes) related
to the early extinguishment of debt. This compares to an extraordinary loss of
$480,000 (net of taxes) recognized in 1993 in connection with an earlier
extinguishment of debt.
Based on increased sales, planned reductions in advertising and promotion and
the reduction in nonrecurring and unusual charges, but offset by increases in
interest expense and extraordinary charges, net income rose 50.1% to $2,054,000
in 1994 from $1,368,000 in 1993.
FISCAL 1993 COMPARED TO FISCAL 1992
Net sales decreased 2.5% in 1993 to $105,405,000 from $108,151,000 in 1992. The
decline was a result of a 13.3% decrease in specialty chemical sales to
$15,544,000 from $17,930,000 in 1992 and a 7.7% decrease in international
consumer product sales to $13,269,000 from $14,376,000 in 1992, partially offset
by a 1.0% increase in domestic consumer product sales to $76,592,000 from
$75,845,000 in 1992.
The increase in domestic consumer product sales resulted from the growth of CORN
SILK, FLEX-ALL 454, BULLFROG and ICY HOT. The Company also introduced
Maximum Strength FLEX-ALL 454 in August 1993 and Nighttime PAMPRIN in September
1993 as line extensions, although initial sales levels were lower than the
Company had anticipated. Contributing significantly to the inability of the
division to expand sales volume were inventory reductions at the trade level.
These reductions were reflected in the fact that factory sales during the second
half of 1993 trailed retail sales as measured by A.C. Nielsen for several
brands, including FLEX-ALL 454, PAMPRIN, ICY HOT, PREMSYN PMS and NORWICH.
The decline in sales of the international division reflected unfavorable
translational variances in foreign currency exchange rates which reduced sales
in U.S. dollars by about $2 million in comparison with 1992. Sales increases in
the U.K. and from export sales to Central and South America during 1993 were
more than offset by declining sales in Spain and Germany together with the
reduced sales volume of ALGEMARIN in Canada.
The drop in sales in the specialty chemicals division was primarily the result
of the loss of Warner-Lambert as a customer in July 1993 due to the
reformulation of its ROLAIDS-Registered Trademark- product line. On an
annualized basis, Warner-Lambert had accounted for about $4 million of the
division's sales of DASC and recovered alcohol by-products and was the most
significant contributor to the division's gross margin. Also contributing to
the shortfall was the loss of certain very low margin, opportunistic sales of
glycine and a write-off of approximately $400,000 of inventory related to new
product development.
Cost of goods sold as a percentage of net sales increased to 34.6% in 1993 from
34.2% in 1992. The increase in fiscal 1993 reflected a reduction in gross
margin percentages of the specialty chemicals division resulting from a shift in
sales and product mix.
Advertising and promotion expense, almost all of which is attributable to the
consumer products division, increased 4.9% to $36,273,000 in 1993 from
$34,589,000 in 1992. This increase reflected major expenditures associated with
the marketing of PAMPRIN, ICY HOT and BULLFROG, as efforts were focused on
expanding these brands, and the introduction of two product line extensions,
Maximum Strength FLEX-ALL 454 and
Nighttime PAMPRIN. The Company increased advertising and promotion expenses in
1993 during a period in which sales failed to attain projected levels in order
to expand the market positions of its products and to support the launch of the
line extensions.
Selling, general and administrative expenses decreased to $21,278,000 in 1993
from $22,893,000 in 1992 and also improved as a percentage of the Company's net
sales to 20.2% from 21.1% in 1992. The majority of the decline in these
expenses reflected the fact that no bonuses were paid to management on the basis
of operating performance in 1993.
Interest expense increased by 68.8% in 1993 to $4,229,000 from $2,505,000 in
1992. The increase was attributable to the higher outstanding indebtedness
under the Company's credit facility relating to the financing of the Special
Dividend transaction.
An investment loss of $522,000 in 1993 reflected a decline of $1,263,000 from
income of $741,000 in 1992. The decrease was primarily due to losses on the
liquidation of the investment portfolio, which was sold in conjunction with the
repayment of bank debt and the payment of the Special Dividend.
The net other income in 1993 was primarily the result of a gain from the sale of
BLACK DRAUGHT and NULLO, two minor consumer product brands.
Income taxes increased in 1993 to 36.7% of income from continuing operations
before income taxes, extraordinary loss and cumulative effect of accounting
changes from 34.0% in 1992. See Note 6 of Notes to Consolidated Financial
Statements.
In 1993, the Company recognized $5,527,000 of pretax nonrecurring and unusual
charges reflecting the restructuring of the Company's international division, a
noncash expense related to the repricing of stock options undertaken as a result
of the Special Dividend transaction and, to a lesser extent, a reduction in
corporate staffing. The most significant charges were related to the
restructuring of the Company's distribution
operations in Spain, the write-down of certain assets to net realizable value
associated with the proposed sale of the ALGEMARIN product line, termination and
employee severance costs in both the domestic and international consumer
products operations and a write-off of certain assets related to the Company's
German operations. While the full benefit will not be realized until 1994, the
corporate and international restructuring should save approximately $1 million
on an annualized basis. See Note 13 of Notes to Consolidated Financial
Statements.
The Company also incurred an extraordinary loss of $480,000 (net of taxes)
related to the early extinguishment of debt and a net benefit of $569,000
resulting from the adoption of SFAS No. 106 and SFAS No. 109.
Based on lower operating income, increased interest expense, the nonrecurring
and unusual charges and the extraordinary loss, net income fell to $1,368,000 in
1993 from $8,072,000 in 1992.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at November 30, 1994 was $13,109,000 compared to $18,630,000 a
year earlier and the current ratio (current assets divided by current
liabilities) declined to 1.65 at November 30, 1994 from 1.96 for the prior year-
ended. Working capital represents 15.2% of total assets at November 30, 1994,
compared to 26.5% of total assets at November 30, 1993. The decrease in working
capital was due principally to two factors. The Company began a program which
reduced inventories by $3,892,000, while maintaining high quality service levels
to customers. Also as a result of the issuance of the senior subordinated notes
and its semi-annual interest payments due in December and June, accrued
liabilities were up $2,668,000. With the new bank credit facility, current
maturities of long-term bank debt decreased by $2,500,000, partially offsetting
the decreases to working capital mentioned above.
In 1994, capital expenditures totaled $2,764,000 compared to $2,297,000 in 1993.
Three major projects were not yet completed at year-end with approximately
$1,350,000 remaining to be spent in the first half of 1995. These projects
include capital required to bring the manufacturing of PHISODERM into the
Company's current facilities, to
support a new product opportunity in the chemicals division and to support
packaging changes for the PAMPRIN and PREMSYN PMS product lines. Capital
expenditures for 1995 are not anticipated to exceed $3,500,000.
Total debt outstanding was $96,986,000 at November 30, 1994 compared to
$88,000,000 the prior year. Under the terms of the current bank facility,
$15,422,000 was available at November 30, 1994 under a working capital line of
credit for general operating purposes. The availability of credit is determined
based on the Company's accounts receivable and inventories. Also, a separate
$12,500,000 revolving line of credit was available at year end for acquisition
purposes. The Company also has additional borrowing capacity of up to
$2,000,000 against life insurance policies owned by the Company, all of which
was available at November 30, 1994.
During the fourth quarter of 1993, the Company recorded nonrecurring and unusual
charges of $5,527,000. These charges included an accrual of $1,842,000 at
November 30, 1993, which covered severance payments for executives leaving the
Company, fees related to the termination of distributors and other international
restructuring charges. The accrual balance at November 30, 1994 of $331,000 is
adequate to cover any remaining liabilities.
Management believes that cash flow from operations together with funds available
under its credit facility and borrowings available under insurance policies
should be sufficient to fund the Company's current commitments and proposed
operations.
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 years ended November 30,
1994 and 1993, these subsidiaries accounted for 11%
and 13% of total revenues, respectively, and 9% and 18% of total assets,
respectively. It has not been the Company's practice to hedge its assets and
liabilities in the U.K. and Canada or its intercompany transactions due to the
inherent risks associated with foreign currency hedging transactions and the
timing of payment 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. A gain of $82,000 and a
loss of $257,000 for the years ended November 30, 1994 and 1993, respectively,
resulted rom foreign currency transactions. See "Foreign Currency Translation"
in Note 2 of Notes to the Consolidated Financial Statements.
SALES AND INCOME BY LINE OF BUSINESS
(IN THOUSANDS)
1994 1993 1992
---- ---- ----
CONSUMER PRODUCTS:
Net sales
Domestic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82,643 $ 76,592 $ 75,845
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,727 13,269 14,376
--------- --------- ---------
$ 94,370 $ 89,861 $ 90,221
--------- --------- ---------
Operating income
Domestic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,981 $ 10,127 $ 12,140
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 381 174
--------- --------- ---------
$ 17,101 $ 10,508 $ 12,314
--------- --------- ---------
Identifiable assets
Domestic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,423 $ 45,024 $ 41,249
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,032 12,768 12,669
--------- --------- ---------
$ 73,455 $ 57,792 $ 53,918
--------- --------- ---------
Capital expenditures
Domestic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,772 $ 1,402 $ 1,966
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 55 47
--------- --------- ---------
$ 1,845 $ 1,457 $ 2,013
--------- --------- ---------
Depreciation and amortization
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,335 $ 2,300 $ 2,330
International. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 544 209
--------- --------- ---------
$ 3,408 $ 2,844 $ 2,539
--------- --------- ---------
SPECIALTY CHEMICALS:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,586 $ 15,544 $ 17,930
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,093 4,111 5,555
Identifiable assets . . . . . . . . . . . . . . . . . . . . . . . . . 9,649 8,119 8,329
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . 919 840 1,102
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 628 543 518
CONSOLIDATED:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 107,956 $ 105,405 $ 108,151
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . 20,194 14,619 17,869
Other unallocated expenses, net(1). . . . . . . . . . . . . . . . . . (14,562) (12,597) (5,637)
Income before income taxes. . . . . . . . . . . . . . . . . . . . . . 5,632 2,022 12,232
Identifiable assets . . . . . . . . . . . . . . . . . . . . . . . . . 83,104 65,911 62,247
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . 2,764 2,297 3,115
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 4,036 3,387 3,057
SALES BETWEEN INDUSTRY SEGMENTS ARE NOT MATERIAL
<FN>
(1) Principally interest expense, corporate overhead not allocated to the
divisions and nonrecurring and unusual charges.
13
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended November 30,
------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
INCOME STATEMENT DATA
NET SALES. . . . . . . . . . . . . . . . . . $107,956 $105,405 $108,151 $100,655 $ 84,364
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . 37,175 36,466 36,938 37,324 32,052
Operating expenses. . . . . . . . . . . . . 54,590 57,551 57,482 53,699 44,310
Nonrecurring and unusual charges. . . . . . 559 5,527 -- -- --
-------- -------- -------- -------- --------
Total . . . . . . . . . . . . . . . . . . 92,324 99,544 94,420 91,023 76,362
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS . . . . . . . . . . . 15,632 5,861 13,731 9,632 8,002
OTHER EXPENSE, NET . . . . . . . . . . . . . 10,000 3,839 1,499 2,527 2,599
-------- -------- -------- -------- --------
INCOME BEFORE INCOME
TAXES, EXTRAORDINARY
LOSS AND CUMULATIVE
EFFECT OF ACCOUNTING
CHANGES. . . . . . . . . . . . . . . . . . 5,632 2,022 12,232 7,105 5,403
PROVISION FOR INCOME
TAXES . . . . . . . . . . . . . . . . . . 2,022 743 4,160 2,276 2,1000
-------- -------- -------- -------- --------
INCOME BEFORE EXTRA-
ORDINARY LOSS AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES . . . . . . . . . . . . 3,610 1,279 8,072 4,829 3,303
EXTRAORDINARY LOSS ON
EARLY EXTINGUISHMENT OF
DEBT, NET. . . . . . . . . . . . . . . . . (1,556) (480) -- -- --
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES, NET. . . . . . . . . . -- 569 -- -- --
-------- -------- -------- -------- --------
NET INCOME . . . . . . . . . . . . . . . . . $ 2,054 $ 1,368 $ 8,072 $ 4,829 $ 3,303
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
PER COMMON SHARE DATA
INCOME BEFORE EXTRA-
ORDINARY LOSS AND
ACCOUNTING CHANGES . . . . . . . . . . . . $ .50 $ .20 $ 1.60 $ 1.20 $ .87
NET INCOME . . . . . . . . . . . . . . . . . .29 .22 1.60 1.20 . 87
DIVIDENDS. . . . . . . . . . . . . . . . . . -- 20.20 .300 .217 .187
BALANCE SHEET DATA
(At End Of Period)
CURRENT ASSETS . . . . . . . . . . . . . . . $ 33,30 $ 38,137 $ 66,970 $ 33,712 $ 25,324
CURRENT LIABILITIES. . . . . . . . . . . . . 20,192 19,507 16,579 16,914 20,378
TOTAL ASSETS . . . . . . . . . . . . . . . . 86,416 70,194 98,451 65,201 52,994
LONG-TERM DEBT, less current
maturities . . . . . . . . . . . . . . . . 94,486 83,000 22,784 29,278 19,282
SHAREHOLDERS' EQUITY
(DEFICIT). . . . . . . . . . . . . . . . . (29,551) (33,473) 58,607 18,692 13,187
14
MARKET PRICES
The Company's common shares trade over-the-counter on the National Market
System under the NASDAQ symbol CHTT. A quarterly summary of the high and low
market prices per common share as reported by NASDAQ is shown below:
--------------------------------------------
1994 1993
--------------------------------------------
High Low High Low
--------------------------------------------
QUARTER ENDED:
February................ 8 5/8 6 3/4 30 24 3/4
May..................... 7 3/4 5 3/4 31 1/2 25
August.................. 6 1/2 5 32 9 1/4
November................ 7 3/8 5 1/8 11 7
The sharp decline in market price in the August 1993 quarter is related to the
$20 per share Special Dividend paid on June 11, 1993. Based upon transfer agent
records, the Company's common shares were held by approximately 2,500
shareholders as of February 22, 1995.
QUARTERLY DATA (unaudited)
(In thousands of dollars, except per share amounts)
___________ ___________ __________ ____________
NET
NET GROSS INCOME EARNINGS
FISCAL 1994 SALES PROFIT (LOSS) PER SHARE(1)
_______________________________________________________
QUARTER ENDED:
February . . . . . . . . . . . . . . . . . . $ 20,820 $ 13,038 $ (252) $ (.03)
May. . . . . . . . . . . . . . . . . . . . . 26,906 18,018 1,553 . 21
August . . . . . . . . . . . . . . . . . . . 29,328 19,689 (105) (.01)
November . . . . . . . . . . . . . . . . . . 30,902 20,036 858 .12
-------- -------- --------
Total. . . . . . . . . . . . . . . . . . . $107,956 $ 70,781 $ 2,054 .29
-------- -------- --------
-------- -------- --------
FISCAL 1993(2)
QUARTER ENDED:
February . . . . . . . . . . . . . . . . . . $ 21,182 $ 13,541 $ 1,496 $ .28
May. . . . . . . . . . . . . . . . . . . . . 29,054 19,206 3,087 .57
August . . . . . . . . . . . . . . . . . . . 26,597 18,326 1,269 .17
November . . . . . . . . . . . . . . . . . . 28,572 17,866 (4,484) (.61)
-------- -------- --------
Total. . . . . . . . . . . . . . . . . . . $105,405 $ 68,939 $ 1,368 .22
-------- -------- --------
-------- -------- --------
<FN>
(1)The sum of the quarterly earnings per share amounts may differ from
annual earnings per share because of the differences in the weighted average
number of common shares and common share equivalents used (where dilutive) in
the quarterly and annual computations.
(2)Effective December 1, 1992, the Company adopted SFAS No 106 and SFAS No
109 (Note 3). Previously reported quarterly data for fiscal 1993 has been
restated to reflect the adoption of these new accounting standards.
15
DIVIDENDS
Dividend payments by quarter for common shares are presented below:
_____________ ______________
1994(1) 1993
_____________ ______________
First Quarter..................... $ -- $ .10
Second Quarter.................... -- .10
Third Quarter..................... -- 20.00
Fourth Quarter.................... -- -- (1)
------ -----------
$ -- $ 20.20
------ -----------
------ -----------
<FN>
(1) The quarterly dividend was suspended after payment of the Special Dividend
of $20 per share in 1993.
16
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1994 AND 1993
(IN THOUSANDS)
ASSETS 1994 1993
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 3,034 $ 4,462
Accounts receivable, less allowance for doubtful accounts
of $850 in 1994 and $350 in 1993 . . . . . . . . . . . . . 20,288 18,959
Refundable and deferred income taxes. . . . . . . . . . . . 1,015 1,746
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 7,219 11,111
Prepaid expenses and other current assets . . . . . . . . . 1,745 1,859
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . 33,301 38,137
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET . . . . . . . . . . . . . 11,279 10,083
--------- ---------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased
product rights, net. . . . . . . . . . . . . . . . . . . . 32,455 13,628
Debt issuance costs, net . . . . . . . . . . . . . . . . . 3,771 2,453
Deferred income taxes . . . . . . . . . . . . . . . . . . . 1,598 1,852
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,012 4,041
--------- ---------
Total other noncurrent assets . . . . . . . . . . . . . . 41,836 21,974
--------- ---------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $ 86,416 $ 70,194
--------- ---------
--------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
17
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1994 AND 1993
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' DEFICIT 1994 1993
CURRENT LIABILITIES:
Current maturities of long-term debt. . . . . . . . . . . . . . $ 2,500 $ 5,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 5,559 5,285
Payable to bank . . . . . . . . . . . . . . . . . . . . . . . . 1,301 1,058
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 10,832 8,164
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . 20,192 19,507
--------- ---------
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . 94,486 83,000
--------- ---------
ACCRUED POSTRETIREMENT HEALTH CARE
BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,289 1,160
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 5, 9 and 11)
SHAREHOLDERS' DEFICIT:
Preferred shares, without par value, authorized
1,000, none issued . . . . . . . . . . . . . . . . . . . . . . -- --
Common shares, without par value, authorized 20,000, issued
7,292 in 1994 and 1993 . . . . . . . . . . . . . . . . . . . . 1,519 1,519
Paid-in surplus . . . . . . . . . . . . . . . . . . . . . . . . 51,797 50,283
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (81,352) (83,406)
--------- ---------
(28,036) (31,604)
Foreign currency translation adjustment. . . . . . . . . . . . . (1,515) (1,869)
--------- ---------
Total shareholders' deficit . . . . . . . . . . . . . . . . . . (29,551) (33,473)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT . . . . . . . . . $ 86,416 $ 70,194
--------- ---------
--------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
18
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 1994, 1993 AND 1992
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1994 1993 1992
NET SALES. . . . . . . . . . . . . . . . . . . . . . . . . . $107,956 $105,405 $108,151
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 37,175 36,466 36,938
Advertising and promotion . . . . . . . . . . . . . . . . . 33,346 36,273 34,589
Selling, general and administrative . . . . . . . . . . . . 21,244 21,278 22,893
Nonrecurring and unusual charges (Note 13). . . . . . . . . 559 5,527 --
-------- -------- --------
Total costs and expenses . . . . . . . . . . . . . . . . . 92,324 99,544 94,420
-------- -------- --------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . 15,632 5,861 13,731
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . . . . . . . . . . . . (10,112) (4,229) (2,505)
Investment income (loss). . . . . . . . . . . . . . . . . . 186 (522) 741
Other income (expense), net . . . . . . . . . . . . . . . . (74) 912 265
-------- -------- --------
Total other income (expense) . . . . . . . . . . . . . . . (10,000) (3,839) (1,499)
-------- -------- --------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES. . . . . . . . . . . . . . . . 5,632 2,022 12,232
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . 2,022 743 4,160
-------- -------- --------
INCOME BEFORE EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGES . . . . . . . . . . . . . . . . . . . . . . . . . . 3,610 1,279 8,072
EXTRAORDINARY LOSS ON EARLY EXTINGUISH-
MENT OF DEBT, NET (Note 5). . . . . . . . . . . . . . . . . (1,556) (480) --
CUMULATIVE EFFECT OF ACCOUNTING
CHANGES, NET (Note 3) . . . . . . . . . . . . . . . . . . . -- 569 --
-------- -------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,054 $ 1,368 $ 8,072
-------- -------- --------
-------- -------- --------
NET INCOME PER COMMON SHARE:
Before extraordinary loss and cumulative effect of
accounting changes . . . . . . . . . . . . . . . . . . . . $ .50 $ .20 $ 1.60
Extraordinary loss. . . . . . . . . . . . . . . . . . . . . (.21) (.07) --
Cumulative effect of accounting changes . . . . . . . . . . -- .09 --
-------- -------- --------
Net income per common share. . . . . . . . . . . . . . . . $ .29 $ .22 $ 1.60
-------- -------- --------
-------- -------- --------
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING . . . . . . . . . . . . . . . . . . . . . . . . 7,292 6,341 5,033
-------- -------- --------
-------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED NOVEMBER 30, 1994, 1993 AND 1992
(IN THOUSANDS)
(NOTE 7)
Net Unrealized Foreign
Retained Loss on Currency
Common Paid-in Earnings Long-Term Translation
Shares Surplus (Deficit) Investments Adjustment Total
------- -------- --------- ----------- ----------- -------
Balance, November 30, 1991 . . . . . . . . . $ 789 $ 1,692 $ 18,171 $ (1,849) $ (111) $18,692
Net income. . . . . . . . . . . . . . . . . -- -- 8,072 -- -- 8,072
Dividends . . . . . . . . . . . . . . . . . -- -- (1,447) -- -- (1,447)
Issuance of common shares . . . . . . . . . 228 27,876 -- -- -- 28,104
Exercise of stock options . . . . . . . . . 77 2,344 -- -- -- 2,421
Tax benefit from exercise of stock
options. . . . . . . . . . . . . . . . . . -- 3,026 -- -- -- 3,026
Decrease in net unrealized loss on
long-term investments. . . . . . . . . . . -- -- -- 1,052 -- 1,052
Foreign currency translation adjustment . . -- -- -- -- (1,313) (1,313)
------- -------- --------- ----------- ----------- -------
Balance, November 30, 1992 . . . . . . . . . 1,094 34,938 24,796 (797) (1,424) 58,607
Net income. . . . . . . . . . . . . . . . . -- -- 1,368 -- -- 1,368
Dividends . . . . . . . . . . . . . . . . . -- -- (109,570) -- -- (109,570)
Issuance of common shares . . . . . . . . . 389 12,016 -- -- -- 12,405
Stock options granted . . . . . . . . . . . -- 956 -- -- -- 956
Exercise of stock options . . . . . . . . . 36 1,120 -- -- -- 1,156
Tax benefit from exercise of stock
options. . . . . . . . . . . . . . . . . . -- 1,253 -- -- -- 1,253
Decrease in net unrealized loss on
long-term investments. . . . . . . . . . . -- -- -- 797 -- 797
Foreign currency translation adjustment . . -- -- -- -- (445) (445)
------- -------- --------- ----------- ----------- -------
Balance, November 30, 1993 . . . . . . . . . 1,519 50,283 (83,406) -- (1,869) (33,473)
Net income. . . . . . . . . . . . . . . . . -- -- 2,054 -- -- 2,054
Issuance of warrants. . . . . . . . . . . . -- 955 -- -- -- 955
Stock options granted . . . . . . . . . . . -- 559 -- -- -- 559
Foreign currency translation adjustment . . -- -- -- -- 354 354
------- -------- --------- ----------- ----------- -------
Balance, November 30, 1994 . . . . . . . . . $ 1,519 $ 51,797 $ (81,352) $ -- $ (1,515) $ (29,551)
------- -------- --------- ----------- ----------- -------
------- -------- --------- ----------- ----------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1994, 1993 AND 1992
(IN THOUSANDS)
1994 1993 1992
---------------------------------------
OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 2,054 $ 1,368 $ 8,072
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 4,036 3,387 3,057
Cumulative effect of accounting changes, net . . . . . . . -- (569) --
Deferred income tax provision. . . . . . . . . . . . . . . 303 393 164
Repriced stock option expense. . . . . . . . . . . . . . . 559 956 --
Loss (gain) on sales of assets . . . . . . . . . . . . . . 518 (757) (40)
Extraordinary loss on extinguishment of debt, net. . . . . 1,556 480 --
Other, net . . . . . . . . . . . . . . . . . . . . . . . . 983 (343) (253)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . (1,704) 1,682 (1,333)
Refundable and deferred income taxes. . . . . . . . . . . 828 (941) (62)
Inventories . . . . . . . . . . . . . . . . . . . . . . . 3,832 495 (3,377)
Prepaid expenses and other current assets . . . . . . . . 133 317 (437)
Accounts payable and accrued liabilities. . . . . . . . . 3,064 1,852 (1,808)
Payable to bank . . . . . . . . . . . . . . . . . . . . . 243 230 659
-------- -------- --------
Net cash provided by operating activities. . . . . . . . 16,405 8,550 4,642
-------- -------- --------
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment. . . . . . . . . (2,764) (2,297) (3,115)
Net decrease in long-term investments . . . . . . . . . . . -- 5,062 2,982
Proceeds from (purchases of) short-term investments . . . . -- 23,212 (23,212)
Proceeds from notes and sales of assets . . . . . . . . . . 549 619 419
Purchases of patents, trademarks and other product rights . (20,272) (1,750) (159)
Increase in other assets. . . . . . . . . . . . . . . . . . (1,266) (790) (1,836)
-------- -------- --------
Net cash provided by (used in) investing activities . . . (23,753) 24,056 (24,921)
-------- -------- --------
-------- -------- --------
FINANCING ACTIVITIES:
Repayment of long-term debt . . . . . . . . . . . . . . . . (112,831) (42,900) (32,279)
Proceeds from long-term debt. . . . . . . . . . . . . . . . 48,706 104,116 26,535
Proceeds from issuance of senior subordinated notes . . . . 73,012 -- --
Proceeds from issuance of common stock, net . . . . . . . . -- 12,405 28,104
Common stock dividends paid . . . . . . . . . . . . . . . . -- (109,570) (1,447)
Proceeds from issuance of stock warrants. . . . . . . . . . 955 -- --
Exercise of stock options . . . . . . . . . . . . . . . . . -- 1,156 2,421
Tax benefit from exercise of stock options. . . . . . . . . -- 1,253 3,026
Debt issuance costs . . . . . . . . . . . . . . . . . . . . (4,011) (2,630) --
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . -- (712) --
-------- -------- --------
Net cash provided by (used in) financing activities . . . 5,831 (36,882) 26,360
-------- -------- --------
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . 89 30 200
-------- -------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year. . . . . . . . . . . . . . (1,428) (4,246) 6,281
At beginning of year. . . . . . . . . . . . . . . . . . . . 4,462 8,708 2,427
-------- -------- --------
At end of year. . . . . . . . . . . . . . . . . . . . . . . $ 3,034 $ 4,462 $ 8,708
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these consolidated
financial statements
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE: ALL MONETARY AMOUNTS ARE EXPRESSED IN THOUSANDS OF DOLLARS UNLESS
CONTRARILY EVIDENT.
(1) GENERAL
--------------------------------------------------------------------------
Chattem, Inc. and its wholly owned subsidiaries (the Company) are
primarily engaged in manufacturing and marketing branded consumer products
and specialty chemicals. The consumer products are sold nationwide and in
many international markets, primarily through independent and chain drug
stores, drug wholesalers, mass merchandisers and food stores. Specialty
chemicals are sold primarily to other manufacturing companies.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Chattem, Inc. and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
INVENTORIES
Inventory costs include materials, labor and factory overhead.
Inventories in the United States are valued at the lower of last-in, first-
out (LIFO) cost or market, while international inventories are valued at
the lower of first-in, first-out (FIFO) cost or market.
REVENUE RECOGNITION
Revenue is recognized when the Company's products are shipped to its
customers.
INCOME TAXES
As discussed in Note 3, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
effective December 1, 1992. SFAS No. 109 requires an asset and liability
approach to accounting for deferred income taxes based on currently
enacted tax rates and differences in financial reporting and income tax
bases of assets and liabilities. In prior years, the Company accounted for
income taxes using the deferral method in accordance with Accounting
Principles Board Opinion No. 11 (Note 6).
PATENTS, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS
The costs of acquired patents, trademarks and other purchased product
rights are capitalized and amortized over periods ranging from 5 to 40
years. Total accumulated amortization of these assets at November 30, 1994
and 1993 was $5,824 and $5,382, respectively. Amortization expense for
1994, 1993 and 1992 was $1,309, $1,179 and $1,233, respectively. Royalty
expense related to other purchased product rights for
22
1994, 1993 and 1992 was $1,703, $1,974 and $2,365, respectively.
Amortization and royalty expense are included in advertising and promotion
expense in the accompanying statements of income.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
provided using both straight-line and accelerated methods over the
estimated useful lives of 10 to 40 years for buildings and improvements and
5 to 12 years for machinery and equipment. Expenditures for maintenance
and repairs are charged to expense as incurred.
RESEARCH AND DEVELOPMENT
Research and development costs relate primarily to the development of
new products and are expensed as incurred. Such expenses were $1,255,
$1,292 and $1,232 in 1994, 1993 and 1992, respectively.
ADVERTISING EXPENSES
The cost of advertising is expensed in the fiscal year in which the
related advertising takes place. In December 1993, the Accounting
Standards Division of the American Institute of Certified Public
Accountants issued Statement of Position No. 93-7, "Reporting on
Advertising Costs" (SOP 93-7). SOP 93-7 is effective for fiscal years
beginning after June 15, 1994 and provides guidance on the recognition of
advertising expenses. Adoption of SOP 93-7 in fiscal 1995 will not have a
material impact on the Company's financial position or operating results.
NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of
common shares outstanding after consideration of common share equivalents
having a dilutive effect (Note 7).
INVESTMENTS
Short-term investments are stated at cost plus accrued interest, which
approximates market value. Realized gains and losses are computed on a
specific identification basis. The Company's short-term investment
portfolio was liquidated in 1993.
PAYABLE TO BANK
Payable to bank includes checks outstanding in excess of certain cash
balances.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
1994 financial statement presentation.
23
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash and cash
equivalents include time deposits and money market accounts with original
maturities of three months or less.
DEBT ISSUANCE COSTS
The Company has incurred debt issuance costs in connection with its
long-term debt (Note 5). These costs are capitalized and amortized over
the term of the debt. Amortization expense related to debt issuance costs
was $439, $214 and $122 in 1994, 1993 and 1992, respectively. Accumulated
amortization of these costs was $240 and $177 at November 30, 1994 and
1993, respectively. During 1994, the Company refinanced its long-term
debt and incurred debt issuance costs of $4,011. As a result of the
refinancing, the Company incurred an extraordinary loss of $1,556 (net of
income taxes) related to the write-off of previously capitalized debt
issuance costs.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's Canadian and U.K.
subsidiaries are translated into United States currency in accordance with
SFAS No. 52, "Foreign Currency Translation." Assets and liabilities are
translated to United States dollars at year-end exchange rates. Income and
expense items are translated at average rates of exchange prevailing
during the year. Translation adjustments are accumulated as a separate
component of shareholders' deficit. Gains and losses which result from
foreign currency transactions are included in the accompanying statements
of income.
(3) ACCOUNTING CHANGES
--------------------------------------------------------------------------
Effective December 1, 1992, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and SFAS No. 109, "Accounting for Income Taxes," using the cumulative
catch-up method. Prior year financial statements have not been restated.
SFAS No. 106 requires that the expected cost of providing postretirement
health care benefits be charged to expense during the years in which the
employees render service (Note 12). The cost of these benefits was
historically recognized as expense when paid. The adoption of SFAS No. 106
resulted in a net charge to income of $731 ($1,160 before income taxes), or
$.12 per share, for the cumulative effect of this change in accounting
principle. The adoption of SFAS No. 106 did not have a significant effect
on 1993 income before the cumulative effect of accounting changes.
SFAS No. 109 requires a change from the deferral method to the asset
and liability method of accounting for income taxes. Adoption of SFAS No.
109 resulted in a net credit to income of $1,300, or $.21 per share, for
the cumulative effect of this change in accounting principle. The adoption
of SFAS No. 109 did not have a significant effect on 1993 income before the
cumulative effect of accounting changes.
24
(4) PENSION PLAN
The Company has a noncontributory defined benefit pension plan (the
Plan) which covers substantially all employees. The Plan provides benefits
based upon years of service and the employee's compensation. The Company's
contributions are based on computations by independent actuaries. Due to
the overfunded status of the Plan prior to 1994, no contributions have been
made since 1986. Plan assets at November 30, 1994 and 1993 were
invested primarily in United States government and agency securities,
corporate debt securities and common stocks.
Pension cost (credit) for the years ended November 30, 1994, 1993 and
1992 included the following components:
------- ------- -------
1994 1993 1992
------- ------- -------
Service cost (benefits earned during the
period). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 581 $ 456 $ 389
Interest cost on projected benefit obligation. . . . . . . . . . 743 618 511
Actual loss (return) on plan assets. . . . . . . . . . . . . . . 220 (815) (1,439)
Net amortization and deferral. . . . . . . . . . . . . . . . . . (1,223) (206) 484
------- ------- -------
Net pension cost (credit). . . . . . . . . . . . . . . . . . . . $ 321 $ 53 $ (55)
------- ------- -------
------- ------- -------
25
The following table sets forth the funded status of the Plan as of November 30,
1994 and 1993:
-------- ---------
1994 1993
-------- ---------
Actuarial present value of benefit obligations:
Vested benefit obligation . . . . . . . . . . . . . . . . . . . $ 5,585 $ 5,578
Nonvested benefit obligation. . . . . . . . . . . . . . . . . . 912 786
-------- ---------
Accumulated benefit obligation . . . . . . . . . . . . . . . . $ 6,497 $ 6,364
-------- ---------
-------- ---------
Plan assets at fair market value. . . . . . . . . . . . . . . . $ 8,137 $ 9,450
Projected benefit obligation. . . . . . . . . . . . . . . . . . (9,119) (9,383)
-------- ---------
Plan assets in excess (deficiency) of projected
benefit obligation . . . . . . . . . . . . . . . . . . . . . . (982) 67
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . 2,265 1,486
Unrecognized prior service cost . . . . . . . . . . . . . . . . (211) 21
Unrecognized initial asset. . . . . . . . . . . . . . . . . . . (1,171) (1,351)
-------- ---------
Pension asset (liability) recognized in balance
sheets at end of year. . . . . . . . . . . . . . . . . . . . . $ (99) $ 223
-------- ---------
-------- ---------
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 8.5% and 6.0%, respectively, in 1994, and 7.75% and 5.0%,
respectively, in 1993 The expected long-term rate of return on plan assets was
9.5%.
(5) LONG-TERM DEBT
--------------------------------------------------------------------------
Long-term debt consisted of the following at November 30, 1994 and 1993:
-------- -------
1994 1993
-------- -------
Revolving line of credit payable to banks at variable
rates (9.33% weighted average at November 30,
1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,500 $ --
Note payable to banks at variable rates (8.625% at
November 30, 1994). . . . . . . . . . . . . . . . . . . . . . . 19,375 --
12.75% Series B Senior Subordinated Notes, due
2004, net of unamortized discount of $1,889 . . . . . . . . . . 73,111 --
Revolving line of credit payable to bank at variable
rates, paid during 1994 . . . . . . . . . . . . . . . . . . . . -- 16,000
Note payable to banks at variable rates, paid during
1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 60,000
Note payable to banks at variable rates, paid during
1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 12,000
-------- -------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . 96,986 88,000
Less -- current maturities . . . . . . . . . . . . . . . . . . . (2,500) (5,000)
-------- -------
Total long-term debt, net of current maturities. . . . . . . . . $ 94,486 $83,000
-------- -------
-------- -------
26
The Company entered into a new credit agreement with a syndicate of
banks (the New Credit Agreement) on June 17, 1994 providing for maximum
borrowings of up to $55,000. The New Credit Agreement is divided into a
$22,500 facility for working capital purposes, a $12,500 facility for
product/brand acquisitions and a six year $20,000 term loan facility.
The term loan is payable in 24 quarterly installments commencing
November 30, 1994, as follows: from November 30, 1994 through August 31,
1996, in quarterly installments of $625; from November 30, 1996 through
August 31, 1997, in quarterly installments of $750; and from November 30,
1997 through May 31, 2000, in quarterly installments of $1,000. The
working capital facility is available to the Company up to $22,500 or such
lesser amount as is determined to be available under the terms of the New
Credit Agreement and is due and payable on June 17, 2000, if the commitment
is not earlier terminated under the terms of the New Credit Agreement. The
acquisition facility provides for loans on a revolving credit basis which
shall be repaid at the option of the Company either in a single installment
on June 16, 1995, or in 12 equal, consecutive quarterly installments
payable on the last day of each fiscal quarter, commencing at the end of
the first fiscal quarter following the date such acquisition loan is made
and continuing thereafter until the third anniversary of such acquisition
loan, on which date the final installment shall be payable.
The Company may elect either a floating rate or Eurodollar interest
rate option applicable to loans under the New Credit Agreement. The
floating rate and Eurodollar interest rate options are based on a base rate
plus a floating rate margin that fluctuates on the basis of the Company's
leverage ratio. The initial floating rate margin under the New Credit
Agreement is 1.75% for the floating rate option and 3.0% for the Eurodollar
rate option.
The New Credit Agreement is secured by substantially all of the
Company's accounts receivables, inventory and currently owned brand
trademarks and associated intellectual property held by the Company. The
New Credit Agreement contains (i) cross-collateralization and cross-default
provisions, (ii) a negative pledge on the brand trademarks not pledged,
(iii) restrictions on prepayment of the Notes without the lender's consent
and (iv) a pledge of the outstanding shares of various subsidiaries. The
more restrictive financial covenants require the maintenance of minimum
amounts of consolidated tangible net worth, cash flow coverage, fixed
charges coverage and leverage ratios.
Also on June 17, 1994, the Company issued $75,000 of 12.75% Series A
Senior Subordinated Notes due 2004 (the Series A Notes) with five year
warrants to purchase 417,182 shares of common stock at a price of $7.15 per
share (the Warrants) to an investment banking firm (the Initial Purchaser).
The Series A Notes consisted of 75,000 units, each consisting of $1,000
principal amount of the Series A Notes and a warrant to purchase 5.56242
shares of the Company's common stock at a price of $7.15 per share. The
price to the Initial Purchaser of the Series A Notes was $73,967, or 98.6%
of the original principal amount of the Series A Notes, resulting in a
discount of $1,033. The value assigned to the Warrants was $955 (Note 7),
resulting in a total original issue discount of $1,988. The proceeds of
the Series A Notes were used to repay the Old Credit Agreement (as defined
below).
27
On September 19, 1994, the Company completed an exchange offer of
12.75% Series B Senior Subordinated Notes (the Notes) due 2004, which were
registered under the Securities Act of 1933, for all of the outstanding
Series A Notes. The form and terms of the Series A Notes and the Notes are
the same, except that the Notes are registered under the Securities Act of
1933 and the holders of the Notes are not entitled to the rights of the
holders of Series A Notes following the completion of the exchange offer.
The Notes mature on June 15, 2004, and interest is payable semi-
annually on June 15 and December 15 of each year, commencing December 15,
1994. On December 15, 1994, the Company made an interest payment of $4,728
on the Notes. The Notes are senior subordinated obligations of the
Company, and are subordinated in right of payment to all existing and
future senior debt of the Company. The Notes may not be redeemed until June
15, 2001, after which they may be redeemed at the option of the Company.
Upon the occurrence of certain events constituting a change of control, the
holders of the Notes may require the Company to repurchase the Notes at a
purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest. The Notes are guaranteed by one of the Company's
subsidiaries, Signal Investment & Management Co. (Note 14).
The Notes are issued under an indenture with an indenture trustee,
which restricts, among other things, the ability of the Company and its
subsidiaries to (i) incur additional indebtedness, with the exception of
indebtedness incurred under the New Credit Agreement up to an aggregate of
$50,000 outstanding at any time, (ii) pay dividends and make other
distributions, (iii) sell or issue capital stock of a subsidiary, (iv)
create encumbrances on the ability of any subsidiary to pay dividends or
make other restricted payments, (v) engage in certain transactions with
affiliates, (vi) dispose of certain assets, (vii) merge or consolidate with
or into, or sell or otherwise transfer all or substantially all their
properties and assets as an entirety to, another person, (viii) incur
indebtedness that would rank senior in right of payment to the Notes and be
subordinated to any other indebtedness of the Company or (ix) create
additional liens. The Company is allowed to incur additional indebtedness
over and above the $50,000 allowable under the New Credit Agreement if
after the incurrence of the additional indebtedness, the Company's fixed
charge coverage ratio for the four full fiscal quarters preceding the date
such additional indebtedness is incurred, is at least 1.75:1 for the fiscal
years 1994 and 1995, and 2.00:1 thereafter, is determined on a pro forma
basis as if the additional indebtedness had been incurred and applied at
the beginning of such four-quarter period.
In order to pay the Special Dividend (Note 7) and related fees and
expenses, the Company entered into a credit agreement in June 1993 with a
syndicate of banks (the Old Credit Agreement). The Old Credit Agreement
included a $75,000 term loan and a $25,000 revolving line of credit.
During June 1994, the Old Credit Agreement was repaid with funds from the
New Credit Agreement and the Notes. In connection with the prepayment of
those borrowings, the Company incurred an extraordinary loss of $1,556 (net
of income taxes) related to the write-off of debt issuance and other
deferred costs.
During June 1993, the Company entered into separate interest rate swap
and cap agreements in notional principal amounts of $30,000 each. The
Company entered into both of these agreements as hedges on its variable
rate debt and not for trading purposes. The term of each agreement was for
a three-year period ending May 31, 1996. The interest rate on the swap was
fixed at 4.95% LIBOR, and the rate on the cap was 5% LIBOR. The
28
differences paid or received on the swap and cap have been included as
interest expense as payments have been made or received. In connection
with the New Credit Agreement and the issuance of the Notes, the swap was
terminated in June 1994, resulting in a gain of approximately $484 which is
included in other income in the accompanying statements of income. On
January 12, 1995, the interest rate cap was terminated resulting in a gain
of approximately $729 to the Company. The gain will be deferred and
amortized over the remaining life of the original cap agreement as a
reduction of interest expense.
During April 1993, the Company prepaid previously outstanding long-
term debt with available cash funds. In connection with the prepayment of
those borrowings, the Company incurred an extraordinary loss of $480 (net
of income taxes), or $.07 per share. The loss primarily related to the
write-off of debt issuance and other deferred costs.
Future maturities of long-term debt are as follows:
1995 ............................ $ 2,500
1996 ............................ 2,625
1997 ............................ 3,250
1998 ............................ 4,000
1999 ............................ 4,000
Thereafter ...................... 82,500
--------
98,875
Less -- unamortized discount ................ (1,889)
--------
$96,986
--------
--------
Cash interest payments during 1994, 1993 and 1992 were $7,114, $2,612
and $2,425, respectively.
29
(6) INCOME TAXES
--------------------------------------------------------------------------
The provision for income taxes includes the following components:
--------- ------- ---------
1994 1993 1992
--------- ------- ---------
Current:
Federal . . . . . . . . . . . $ 1,363 $ 300 $ 3,856
State . . . . . . . . . . . . 356 50 140
Deferred . . . . . . . . . . . 303 393 164
--------- ------- ---------
$ 2,022 $ 743 $ 4,160
--------- ------- ---------
--------- ------- ---------
Deferred income tax assets and liabilities for 1994 and 1993 reflect
the impact of temporary differences between the amounts of assets and
liabilities for financial reporting and income tax reporting purposes. Temporary
differences and carryforwards which give rise to deferred tax assets and
liabilities at November 30, 1994 and 1993 are as follows:
-------- --------
1994 1993
-------- --------
Deferred tax assets:
Operating loss carryforwards. . . . . . . . . $ 1,175 $ 1,002
Reserves and accruals . . . . . . . . . . . . 1,713 547
Deferred promotional expenses . . . . . . . . 701 720
Accrued postretirement health care
benefits . . . . . . . . . . . . . . . . . . 490 429
Repriced stock option expense . . . . . . . . 576 364
Nonrecurring and unusual charges. . . . . . . 126 1,643
Other . . . . . . . . . . . . . . . . . . . . 25 193
-------- --------
Gross deferred tax assets. . . . . . . . . . 5,006 4,898
-------- --------
Deferred tax liabilities:
Excess tax depreciation and
amortization . . . . . . . . . . . . . . . . 2,133 1,840
Prepaid advertising . . . . . . . . . . . . . 216 257
-------- --------
Other . . . . . . . . . . . . . . . . . . . . 157 144
Gross deferred tax liabilities . . . . . . . 2,506 2,241
-------- --------
Net deferred tax asset . . . . . . . . . . . $ 2,500 $ 2,657
-------- --------
-------- --------
The Company did not record a valuation allowance against the net
deferred income tax asset at November 30, 1994 or 1993 because it is more likely
than not, in management's opinion, that the income tax asset will be realized
in future years.
Included in "refundable and deferred income taxes" in current assets
in the accompanying balance sheets are income tax refunds receivable of $113 and
$941 at November 30, 1994 and 1993, respectively.
30
The provision for deferred income taxes in 1992 resulted from income
and expense items which are recognized for financial reporting purposes in
periods other than those in which they are recognized for income tax purposes
and consisted primarily of excess tax depreciation and amortization, accrued
expenses and reserves, and deferred taxes which were reinstated.
The difference between the provision for income taxes and the amount
computed by multiplying income before income taxes by the U.S. statutory rate is
summarized as follows:
-------- ------- --------
1994 1993 1992
-------- ------- --------
Expected tax provision . . . . . . . . . . $ 1,915 $ 687 $ 4,159
Nontaxable interest. . . . . . . . . . . . (6) (23) (135)
State income taxes, net of federal
income tax benefit . . . . . . . . . . . . 269 76 393
Contributed inventory. . . . . . . . . . . (66) (47) (53)
Other net. . . . . . . . . . . . . . . . . (90) 50 (204)
-------- ------- --------
$ 2,022 $ 743 $ 4,160
-------- ------- --------
-------- ------- --------
Income taxes paid in 1994, 1993 and 1992 were $727, $1,170 and $1,117,
respectively. The Company received income tax refunds of $790 during 1994
(7) SHAREHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------
SPECIAL DIVIDEND AND 1993 STOCK ISSUANCE
On May 14, 1993, the board of directors declared a special cash
dividend (the Special Dividend) of $20 per common share to holders of
record on June 4, 1993. The Special Dividend was paid on June 11, 1993 and
approximated $108,511. In order to pay the Special Dividend and related
fees and expenses, the Company entered into a $75,000 term loan agreement
and a $25,000 revolving credit facility with a group of banks (Note 5). In
addition, the Company sold 1,866,667 common shares at $7.50 per share to an
affiliate of one of the Company's lending banks. The net proceeds to the
Company, after offering expenses, were $12,405. These shares did not
qualify for the Special Dividend.
1992 STOCK ISSUANCE
In March 1992, the Company issued 1,092,500 common shares through a
public offering, resulting in net proceeds of $28,104.
STOCK OPTIONS
The Company has stock option plans adopted in 1983 and 1988 which
provided for issuance of options during a five-year period to purchase up
to 600,000 and 375,000 common shares, respectively. There are no more
options available for grant under the 1983 and 1988 plans. All options
granted under the 1983 and 1988 plans had been exercised as of November 30,
1993.
31
During 1993, the shareholders approved the 1993 Non-Statutory Stock
Option Plan (1993 Plan). The 1993 Plan provides for issuance of up to
350,000 shares of common stock to key employees. The Company granted
options to purchase 349,000 shares during 1993 at prices ranging from $6.25
to $8.125 per share, as repriced as a result of the Special Dividend.
During 1994, the Company granted options to purchase 1,000 shares at $7.00
per share under the 1993 Plan. Options are exercisable for a period of up
to ten years from date of grant.
During 1994, the shareholders approved the Company's 1994 Non-
Statutory Stock Option Plan which provides for the issuance to key
employees of up to 350,000 shares of common stock in accordance with the
plan, of which 294,750 shares were granted in 1994. In addition, during
1994, the shareholders approved the 1994 Non-Statutory Stock Option Plan
for Non-Employee Directors, which provides for the issuance of up to 80,000
shares of common stock. The Company granted 30,000 options under this plan
during 1994. The per share exercise price for the options granted under
these 1994 plans ranged from $6.25 to $10.375. These options are
exercisable for a period of up to ten years from date of grant.
A summary of stock option activity is as follows:
Shares Price Range
-------------------------------
Outstanding at November 30, 1991 546,081 $5.67 -$7.75
Exercised (372,645) 5.67 - 7.75
--------
Outstanding at November 30, 1992 173,436 5.67 - 7.75
Exercised (173,436) 5.67 - 7.75
Granted 349,000 7.50 - 8.125
--------
Outstanding at November 30, 1993 349,000 7.50 - 8.125
Granted 325,750 6.25 - 10.375
--------
Outstanding at November 30, 1994 674,750 6.25 - 10.375
--------
--------
As a result of the Special Dividend paid in 1993, the Company reduced
the exercise price on stock options granted under the 1993 Plan and the two
1994 plans. There were 634,250 options granted under these plans which had
original exercise prices ranging from $26.25 to $28.125 per share. After
the Special Dividend, the board of directors approved new exercise prices
in the range of $6.25 to $8.125 per share. As a result of the new
measurement date, the repricing of these options resulted in unusual
noncash charges of $559 and $956 in 1994 and 1993, respectively, and
corresponding increases in paid-in surplus. These expense amounts are
included in "nonrecurring and unusual charges" in the accompanying
statements of income (Note 13).
During 1993, the Company recognized certain tax benefits related to
the exercise of stock options in the amount of $1,253. Such benefit was
recorded as an increase in paid-in surplus. No stock options were
exercised in 1994.
PREFERRED SHARES
The Company is authorized to issue up to 1,000,000 preferred shares in
series and with rights established by the board of directors. At November
30, 1994 and 1993, no shares of any series of preferred stock were issued
and outstanding.
32
EMPLOYEE STOCK OWNERSHIP PLAN
Effective June 1, 1989, the Company established an Employee Stock
Ownership Plan providing for the issuance of up to 360,000 shares of the
Company's common stock. At November 30, 1994, no contributions had been
made to the plan.
COMMON STOCK WARRANTS
As described in Note 5, the Company issued the Warrants at an assigned
value of $955. The Warrants are exercisable for five years. In the
aggregate there are 75,000 warrants, which when exercised would entitle the
holders thereof to acquire an aggregate of 417,182 shares of the Company's
common stock at a price of $7.15 per share. The number of shares of common
stock and the price per share at which a warrant is exercisable are subject
to adjustment upon the occurrence of certain events. A warrant does not
entitle the holder to receive any cash dividends paid on common stock or to
exercise any other rights as a shareholder of the Company.
33
(8) SEGMENT INFORMATION
--------------------------------------------------------------------------
Industry segment data for 1994, 1993 and 1992 is included in the
schedule of sales and income by line of business on page 13, which is an
integral part of these financial statements.
(9) CONTINGENCIES
---------------------------------------------------------------------------
Claims, suits and complaints arise in the ordinary course of the
Company's business involving such matters as patents and trademarks,
product liability and other alleged injuries or damage. The outcome of
such litigation cannot be predicted, but, in the opinion of management,
based in part upon the opinion of counsel, all such pending matters are
without merit or are of such kind or involve such amounts as would not have
a material adverse effect on the consolidated operating results or
financial position of the Company if disposed of unfavorably.
(10) SUPPLEMENTAL FINANCIAL INFORMATION
--------------------------------------------------------------------------
A - Inventories consisted of the following at November 30, 1994 and
1993:
--------- ---------
1994 1993
--------- ---------
Raw materials . . . . . . . . . . . . . . . . $ 4,480 $ 6,514
Finished goods and work in process. . . . . . 5,640 7,452
Excess of current cost over LIFO value. . . . (2,901) (2,855)
--------- ---------
Total inventories . . . . . . . . . . . . . $ 7,219 $11,111
--------- ---------
--------- ---------
International inventories included above, valued on a lower of FIFO
cost or market basis at November 30, 1994 and 1993, were $1,780 and $2,299,
respectively
B - Accrued liabilities consisted of the following at November 30, 1994
and 1993:
--------- ---------
1994 1993
--------- ---------
Accrued interest expense. . . . . . . . . . . $ 4,341 $ 1,343
Salaries, wages and commissions . . . . . . . 1,519 1,999
Promotion expense . . . . . . . . . . . . . . 1,994 1,896
Other . . . . . . . . . . . . . . . . . . . . 2,978 2,926
--------- ---------
Total accrued liabilities . . . . . . . . . $10,832 $ 8,164
--------- ---------
--------- ---------
C - Property, plant and equipment consisted of the following at
November 30, 1994 and 1993:
--------- ---------
1994 1993
--------- ---------
Land. . . . . . . . . . . . . . . . . . . . . $ 235 $ 222
Buildings and improvements. . . . . . . . . . 3,812 3,712
Machinery and equipment . . . . . . . . . . . 23,366 21,462
Less -- accumulated depreciation. . . . . . . (16,134) (15,313)
--------- ---------
Property, plant and equipment, net. . . . . $ 11,279 $ 10,083
--------- ---------
--------- ---------
34
(11) ACQUISITION OF BRANDS
--------------------------------------------------------------------------
On May 12, 1994, the Company acquired BENZODENT, a topical oral
analgesic, for approximately $3,500 from The Procter & Gamble Company. The
assets acquired consisted primarily of the trademark ($3,246) and finished
product inventories. The Company financed the purchase of BENZODENT with
bank borrowings.
On June 17, 1994, the Company acquired a license to the PHISODERM
trademark in the United States, Canada and Puerto Rico (the Territory),
together with certain other assets from Sterling Winthrop Inc. (Sterling).
The purchase price for the license of PHISODERM in the Territory and
certain other assets approximated $17,276. The assets acquired consisted
primarily of the trademark ($16,826) and inventories. If net sales of
PHISODERM products in the United States exceed (i) $10,000 for the 12-month
period beginning July 1, 1994 and ending June 30, 1995 or (ii) $11,000 for
either of the 12-month periods beginning July 1, 1995 and July 1, 1996 and
ending June 30, 1996 and June 30, 1997 then within 45 days after the end of
the applicable 12-month period with respect to which the applicable net
sales threshold specified in (i) or (ii) above has been exceeded, the
Company will pay Sterling an additional $1,000 per year.
(12) ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS
--------------------------------------------------------------------------
As discussed in Note 3, the Company adopted SFAS No. 106 as of
December 1,1992 and the cumulative effect of this change is reported in the
accompanying statement of income for fiscal 1993. The Company maintains
certain postretirement health care benefits for eligible employees.
Employees become eligible for these benefits if they meet certain age and
service requirements. The Company pays a portion of the cost of medical
benefits for certain retired employees over the age of 65. Effective
January 1, 1993, the Company's contribution is a service-based percentage
of the full premium. The Company pays these benefits as claims are
incurred.
Net periodic postretirement health care benefits cost for the years
ended November 30, 1994 and 1993, included the following components:
------ ------
1994 1993
------ ------
Service cost (benefits earned during the period) $ 35 $ 35
Interest cost on accumulated postretirement
benefits obligation 94 84
------ ------
Net periodic postretirement benefits cost $ 129 $ 119
------ ------
------ ------
The following table sets forth the funded status of the plan,
reconciled to the accrued postretirement health care benefits recognized in
the Company's balance sheet at November 30, 1994 and 1993:
------ ------
1994 1993
------ ------
Accumulated postretirement benefits obligation:
Retirees $ 803 $ 621
Fully eligible active plan participants 306 296
Other active participants 180 243
------ ------
Accrued postretirement health care benefits $1,289 $1,160
------ ------
------ ------
35
For measurement purposes, a 6% and 5% annual rate of increase in the
per capita cost of covered health care benefits was assumed in 1994 and
1993, respectively. The weighted-average discount rate used in determining
the accumulated postretirement benefit obligation was 8.5% and 7.75% at
November 30, 1994 and 1993, respectively. The effect of a 1% increase in
the assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation as of November 30, 1994 and 1993 by
approximately 5.1% and 5.3%, respectively, and the aggregate of the service
and interest cost components of the net annual postretirement benefit cost
by approximately 3.9% for each of the years then ended.
(13) NONRECURRING AND UNUSUAL CHARGES
-------------------------------------------------------------------------
During the fourth quarter of 1993, the Company recorded nonrecurring
and unusual charges of $5,527. The nonrecurring and unusual charges
consisted of the following: (A) International Restructuring Charges - (1)
Write-down of a product trademark to net realizable value in the amount of
$742. Based on management's best estimate of the net realizable value of
the brand, a write-down of the trademark was recorded in the fourth quarter
of 1993. During fiscal 1994, the Company sold the brand and recorded an
additional loss of $512. (2) Write-down of accounts receivable in the
amount of $1,775. During the fourth quarter of fiscal 1993, the Company
terminated its distribution operations in Spain. As a result, the
Company's U.K. subsidiary wrote off uncollectible accounts receivable from
its Spanish distributor in the amount of $728. In addition, restructuring
of the Company's German distribution operations in connection with a change
in distribution methods resulted in a reserve for uncollectible accounts
receivable in the amount of $1,047. (3) Write-down of inventories in the
amount of $212 related to Spanish and discontinued brand inventories to
their net realizable values [see (1) and (2) above]. (4) Accrued severance
payments and lease and distributor termination fees in the amount of $375
consisted of severance for terminated international employees, accrual of
fees for termination of the Spanish distributor and European distributor
and lease termination fees. (5) Other accrued international restructuring
charges of approximately $230 primarily related to the shutdown of the
Spanish operations and scaling back of the Canadian operations. (B)
Noncash compensation expense related to repricing of stock options in the
amount of $956 was recorded (Note 7). (C) Accrued severance of
approximately $1,237 for executives leaving the Company was recorded during
the fourth quarter of fiscal 1993.
During 1994, the Company recorded nonrecurring and unusual charges of $559
related to the stock options which were repriced in 1993 (Note 7). As of
November 30, 1994, there is a remaining accrual of approximately $331 related to
the nonrecurring and unusual charges.
36
(14) SUBSIDIARY GUARANTOR OF THE NOTES
--------------------------------------------------------------------------
As discussed in Note 5, the Company filed a registration statement
with the Securities and Exchange Commission (SEC) to register the Notes
under the Securities Act of 1933. In accordance with the SEC rules, the
following consolidating condensed financial data illustrates the
composition of the Company's subsidiary, Signal Investment & Management Co.
(Signal), which guarantees the Notes, and the nonguarantor subsidiaries:
Parent
and its Guarantor Nonguarantor Consolidated
Divisions(1) Subsidiary(2) Subsidiaries(3) Eliminations(4) Total
Year Ended November 30, 1994:
Net sales . . . . . . . . . . . . . . . . . . $ 96,229 $ 3,950 $ 12,077 $ (4,300) $107,956
Income from operations. . . . . . . . . . . . 16,492 3,011 429 (4,300) 15,632
Income before income taxes,
extraordinary loss and
accounting changes . . . . . . . . . . . . . 6,422 3,175 483 (4,448) 5,632
Net income. . . . . . . . . . . . . . . . . . 3,918 2,101 483 (4,448) 2,054
Cash flows from operating
activities . . . . . . . . . . . . . . . . . 15,279 2,632 (1,506) -- 16,405
Cash flows from investing
activities . . . . . . . . . . . . . . . . . (743) (22,809) (201) -- (23,753)
Cash flows from financing
activities . . . . . . . . . . . . . . . . . (13,017) 18,848 -- -- 5,831
Net increase (decrease)in
cash and cash equivalents. . . . . . . . . . 1,117 (1,329) (1,216) -- (1,428)
Year Ended November 30, 1993:
Net Sales . . . . . . . . . . . . . . . . . . $ 92,136 $ 3,501 $ 13,619 $ (3,851) $105,405
Income from operations. . . . . . . . . . . . 6,616 2,417 679 (3,851) 5,861
Income before income taxes,
extraordinary loss and
accounting changes . . . . . . . . . . . . . 2,362 2,774 737 (3,851) 2,022
Net income. . . . . . . . . . . . . . . . . . 2,574 1,908 737 (3,851) 1,368
Cash flows from operating
activities . . . . . . . . . . . . . . . . . 4,970 2,513 1,067 -- 8,550
Cash flows from investing
activities . . . . . . . . . . . . . . . . . (2,033) 26,144 (55) -- 24,056
Cash flows from financing
activities . . . . . . . . . . . . . . . . . (8,262) (27,020) (1,600) -- (36,882)
Net increase (decrease) in
cash and cash equivalents. . . . . . . . . . (5,325) 1,637 (558) -- (4,246)
Year Ended November 30, 1992:
Net Sales . . . . . . . . . . . . . . . . . . $ 93,775 $ 1,880 $ 14,726 $ (2,230) $108,151
Income from operations. . . . . . . . . . . . 13,936 1,552 473 (2,230) 13,731
Income before income taxes,
extraordinary loss and
accounting changes . . . . . . . . . . . . . 11,496 2,398 568 (2,230) 12,232
Net income. . . . . . . . . . . . . . . . . . 7,916 1,818 568 (2,230) 8,072
Cash flows from operating
activities . . . . . . . . . . . . . . . . . 2,767 1,370 505 -- 4,642
Cash flows from investing
activities . . . . . . . . . . . . . . . . . (4,702) (20,171) (48) -- (24,921)
37
Parent
and its Guarantor Nonguarantor Consolidated
Divisions(1) Subsidiary(2) Subsidiaries(3) Eliminations(4) Total
Cash flows from financing
activities . . . . . . . . . . . . . . . . 7,392 18,968 -- -- 26,360
Net increase in cash and
cash equivalents . . . . . . . . . . . . . 5,456 167 658 -- 6,281
At November 30, 1994:
Current assets. . . . . . . . . . . . . . . $ 24,170 $ 1,548 $ 13,838 $ (6,255) $ 33,301
Noncurrent assets . . . . . . . . . . . . . 21,616 33,753 10,092 (12,346) 53,115
Current liabilities . . . . . . . . . . . . 18,471 -- 4,396 (2,675) 20,192
Noncurrent liabilities. . . . . . . . . . . 59,951 29,311 11,773 (5,260) 95,775
Shareholders' equity (deficit) . . . . . . (32,636) 5,990 7,761 (10,666) (29,551)
At November 30, 1993:
Current assets. . . . . . . . . . . . . . . $ 23,482 $ 2,469 $ 18,115 $ (5,929) $ 38,137
Noncurrent assets . . . . . . . . . . . . . 18,864 11,883 11,119 (9,809) 32,057
Current liabilities . . . . . . . . . . . . 18,170 -- 3,918 (2,581) 19,507
Noncurrent liabilities. . . . . . . . . . . 63,493 8,463 15,544 (3,340) 84,160
Shareholders' equity (deficit) . . . . . . (39,317) 5,889 9,772 (9,817) (33,473)
<FN>
(1) Investments in the subsidiaries are accounted for by the parent on
the cost basis for supplemental combining presentation purposes. Earnings
of subsidiaries are therefore not reflected in the parent's investment
account or earnings. Under the equity method of accounting, earnings of
subsidiaries would be reflected in the parent's investment account and
earnings.
(2) Signal was founded by the Company for the sole purpose of holding
certain of the Company's patents and trademarks and investments Signal has
no active operations
(3) The financial information of the nonguarantor subsidiaries
includes the Company's two wholly-owned foreign subsidiaries, Chattem
(Canada) Inc and Chattem (UK) Limited and the Company's wholly-owned
captive insurance subsidiary, HBA Insurance Limited.
(4) The principal elimination entries eliminate investments in
subsidiaries and intercompany amounts.
38
Report of Independent
Public Accountants
To the Shareholders and Board of Directors of
Chattem, Inc.:
We have audited the accompanying consolidated balance sheets of Chattem, Inc.
(a Tennessee corporation) and subsidiaries as of November 30, 1994 and 1993 and
the related consolidated statements of income, shareholders' equity (deficit)
and cash flows for each of the three years in the period ended November 30,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chattem, Inc. and subsidiaries
as of November 30, 1994 and 1993 and the results of their operations and their
cash flows for each of the three years in the period ended November 30, 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in 1993 the
Company changed its methods of accounting for income taxes and for
postretirement health care benefits.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
January 20, 1995
39
BOARD OF DIRECTORS OFFICERS CHATTEM, INC.
1715 West 38th Street
ZAN GUERRY ZAN GUERRY Corporate Office
Chairman and President Chairman and President Chattem Consumer Products
Chattem, Inc. Chattem Chemicals
Chattanooga, Tennessee ROBERT E. BOSWORTH
Executive Vice President
SAMUEL E. ALLEN and Chief Financial Officer SUBSIDIARIES AND
Chairman AFFILIATED COMPANIES
GLOBALT, Inc. HUGH F. SHARBER
Atlanta, Georgia Secretary CHATTEM (U.K.) LIMITED
Guerry House
LOUIS H. BARNETT Ringway Centre
Business Consultant Edison Road
Fort Worth, Texas Basingstoke, Hampshire RG21 2Y
England
ROBERT E. BOSWORTH
Executive Vice President CHATTEM (CANADA) INC.
and Chief Financial Officer 2220 Argentia Road
Chattem, Inc. Mississauga, Ontario L5N 2K7
Chattanooga, Tennessee
HBA INSURANCE LIMITED
ROBERT M. BOYD, JR. P. O. Box HM 2062
Business Consultant Hamilton 5, Bermuda
Chattanooga, Tennessee
SIGNAL INVESTMENT &
FRANCIS L. CAPERS MANAGEMENT CO.
Business Consultant 1100 North Market Street
Riverside, Connecticut Suite 780, Wilmington Trust Center
Wilmington, Delaware 19801-1239
RICHARD E. CHENEY
Former Chairman Emeritus
Hill and Knowlton, Inc. COMMON STOCK LISTING
New York, New York Over-the-Counter
NASDAQ Symbol: CHTT
SCOTT L. PROBASCO, JR.
Chairman of the Executive
Committee TRANSFER AGENT AND REGISTRAR
American National Bank TRUST COMPANY BANK
and Trust Company P. O. Box 4625
Chattanooga, Tennessee Atlanta, GA 30302
A. ALEXANDER TAYLOR II FORM 10-K AVAILABLE
Partner The Company's annual report on
Miller and Martin Form 10-K filed with the Securities
Chattanooga, Tennessee and Exchange Commission may be
obtained without charge by writing
to the Chief Financial Officer,
Chattem, Inc.