SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1995
COMMISSION FILE NUMBER 0-5905
CHATTEM, INC.
A TENNESSEE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
TELEPHONE: 615-821-4571
REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12
MONTHS, AND HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90
DAYS.
AS OF APRIL 3, 1995, 7,292,199 OF THE COMPANY'S COMMON STOCK, WITHOUT PAR
VALUE, WERE OUTSTANDING.
CHATTEM, INC.
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, February 28, 1995 and
November 30, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the Three
Months Ended February 28, 1995 and 1994. . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the Three Months Ended
February 28, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
EXHIBIT 11 - Statement Regarding Computation of Per Share Earnings . . .
EXHIBIT 27 - Financial Data Schedule . . . . . . . . . . . . . . . . . .
EXHIBIT 28 - Sales and Income by Line of Business. . . . . . . . . . . .
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
February 28, November 30,
1995 1994
------------ ------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents.................. $ 1,963 $ 3,034
Accounts receivable - net.................. 18,875 20,288
Refundable and deferred income taxes....... 853 1,015
Inventories................................ 7,443 7,219
Prepaid expenses and other current assets.. 1,541 1,745
------------ ------------
Total current assets..................... 30,675 33,301
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET.......... 11,744 11,279
------------ ------------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other
purchased product rights, net............. 31,884 32,455
Debt issuance costs, net................... 3,665 3,771
Deferred income tax benefit................ 1,831 1,598
Other...................................... 4,287 4,012
------------ ------------
Total other noncurrent assets............ 41,667 41,836
------------ ------------
TOTAL ASSETS........................... $84,086 $86,416
------------ ------------
------------ ------------
See accompanying notes to condensed consolidated financial statements.
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CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In Thousands)
February 28, November 30,
1995 1994
------------ ------------
LIABILITIES AND SHAREHOLDERS' DEFICIT (Unaudited) (Audited)
- -------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt..... $ 2,500 $ 2,500
Accounts payable......................... 4,478 5,559
Payable to bank.......................... - 1,301
Accrued advertising and promotion........ 1,717 1,994
Other accrued liabilities................ 6,079 8,838
------------ ------------
Total current liabilities............ 14,774 20,192
------------ ------------
LONG-TERM DEBT, LESS CURRENT MATURITIES.... 97,911 94,486
------------ ------------
ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS 1,324 1,289
------------ ------------
SHAREHOLDERS' DEFICIT:
Common stock, without par value, at
stated value............................ 1,519 1,519
Paid-in surplus.......................... 51,797 51,797
Accumulated deficit...................... (81,611) (81,352)
------------ ------------
Total.................................. (28,295) (28,036)
Foreign currency translation adjustment.. (1,628) (1,515)
------------ ------------
Total shareholders' deficit.......... (29,923) (29,551)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
DEFICIT............................. $ 84,086 $ 86,416
------------ ------------
------------ ------------
See accompanying notes to condensed consolidated financial statements.
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CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)(Unaudited)
FOR THE THREE MONTHS ENDED
------------------------------
FEBRUARY 28, FEBRUARY 28,
1995 1994
------------ ------------
NET SALES $22,719 $20,820
------------ ------------
COSTS AND EXPENSES:
Cost of sales............................... 8,376 7,782
Advertising and promotion................... 7,420 7,035
Selling, general and administrative......... 4,304 4,677
------------ ------------
Total costs and expenses.................. 20,100 19,494
------------ ------------
Income from operations.................. 2,619 1,326
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense............................ (3,060) (1,773)
Investment income........................... 33 40
Other, net.................................. - -
------------ ------------
Total other income (expense), net......... (3,027) (1,733)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES............. (408) (407)
PROVISION FOR (BENEFIT FOR) INCOME TAXES...... (155) (155)
------------ ------------
NET INCOME (LOSS)............................. $ (253) $ (252)
------------ ------------
------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING................ 7,292 7,292
------------ ------------
------------ ------------
NET INCOME (LOSS) PER COMMON SHARE............ $ (0.03) $ (0.03)
------------ ------------
------------ ------------
See accompanying notes to condensed consolidated financial statements.
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CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) (Unaudited)
FOR THE THREE MONTHS ENDED
-----------------------------
FEBRUARY 28, FEBRUARY 28,
1995 1994
------------ ------------
OPERATING ACTIVITIES:
Net income (loss)........................................ $ (253) $ (252)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... 1,038 858
Gain on sale of interest rate cap...................... (65) -
Changes in operating assets and liabilities:
Decrease in accounts receivable...................... 1,285 745
Decrease (increase) in inventories................... (270) 243
Decrease in prepaid expenses and other current assets 190 125
Increase in refundable and deferred income taxes..... (71) (177)
Decrease in accounts payable......................... (1,062) (2,669)
Decrease in payable to bank.......................... (1,301) (1,058)
Decrease in accrued advertising and promotion........ (78) (103)
Decrease in other accrued liabilities................ (3,660) (935)
------------ ------------
Net cash used in operating activities.............. (4,247) (3,223)
------------ ------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment.............. (905) (720)
Proceeds from notes receivable......................... - 343
Other, net............................................. (246) (110)
------------ ------------
Net cash used in investing activities.............. (1,151) (487)
------------ ------------
FINANCING ACTIVITIES:
Repayment of long-term debt............................ (4,125) (5,250)
Proceeds from long-term debt........................... 7,500 7,000
Proceeds from sale of interest rate cap................ 984 -
Other, net............................................. (15) (88)
------------ ------------
Net cash provided by financing activities.......... 4,344 1,662
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (17) (4)
------------ ------------
CASH AND CASH EQUIVALENTS:
Decrease for the period................................ (1,071) (2,052)
At beginning of period................................. 3,034 4,462
------------ ------------
At end of period....................................... $ 1,963 $ 2,410
------------ ------------
------------ ------------
PAYMENTS FOR:
Interest............................................... $ 5,238 $ 1,668
Taxes.................................................. $ 166 $ 57
See accompanying notes to condensed consolidated financial statements.
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CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The accompanying unaudited
condensed consolidated financial statements, in the opinion of management,
include all adjustments necessary for a fair presentation. All such
adjustments are of a normal recurring nature.
2. The Company incurs significant expenditures on television, radio and print
advertising to suport its nationally branded over-the-counter
pharmaceuticals and functional toiletries and cosmetics. Customers
purchase products from the Company with the understanding that the brands
will be supported by the Company's extensive media advertising. This
advertising supports the retailers' sales effort and maintains the
important brand franchise with the consuming public. Accordingly, the
Company considers its advertising program to be clearly implicit in its
sales arrangements with its customers. Therefore, the Company believes it
is appropriate to allocate a percentage of the necessary supporting
advertising expenses to each dollar of sales by charging a percentage to
sales on an interim basis based upon anticipated annual sales and
advertising expenditures (in accordance with APB Opinion No. 28) and
adjusting that accrual to the actual expenses incurred at the end of the
year. The adoption in fiscal 1995 of the provisions of SOP93-7,
"Advertising Costs", issued by the American Institute of Certified Public
Accountants, did not have a material impact on the Company's financial
position or operating results.
3. The results of operations for the three months ended February 28, 1995 and
1994 are not necessarily indicative of the results to be expected for the
respective full years. Seasonality is a factor in the Company's overall
business, with the first quarter sales and income trailing the other fiscal
quarters.
4. Certain amounts in the prior years' financial information have been
reclassified to conform to the 1995 presentation.
5. As of February 28, 1995, there is a remaining accrual of approximately
$238,000 related to the nonrecurring and unusual charges discussed in
Note 13 of Notes to Consolidated Financial Statements of the Annual
Report on Form 10-K for the year ended November 30, 1994.
6. Inventories consisted of the following at February 28, 1995 and November
30, 1994 (in thousands of dollars):
1995 1994
------- -------
Raw materials. . . . . . . . . . . . $ 5,500 $ 4,480
Finished goods and work in process 4,934 5,640
Excess of current cost over LIFO
values. . . . . . . . . . . . . . . (2,991) (2,901)
------- -------
Total inventories. . . . $ 7,443 $ 7,219
------- -------
------- -------
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
GENERAL
For the three months ended February 28, 1995, the Company experienced a
9.1% increase in sales to $22,719 from $20,820 in the first quarter of fiscal
1994. Operating income during the period likewise increased 97.5% to $2,619
from $1,326 in the first quarter of fiscal 1994. A loss of $253, or $.03 per
share, was recorded during the period compared to a loss of $252, or $.03 per
share, last year.
The increase in sales reflected growth in both the international and
domestic operations of the Consumer Products division and the Chemicals
division. The marked improvement in operating income for the current period is
largely associated with the increase in sales and reductions in selling, general
and administrative expenses, while the net loss remained almost the same as
compared to the corresponding period of the preceding year, principally due to
the refinancing of the Company's long-term debt in the third quarter of 1994 at
higher interest rates and increased outstanding indebtedness related to the
acquisitions of BENZODENT and PHISODERM. 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. Strategically, 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.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Condensed Consolidated Statements of Income expressed as a
percentage of revenues:
Three Months Ended
February 28,
--------------------
1995 1994
---- ----
NET SALES 100.0% 100.0%
--------------------
COSTS AND EXPENSES:
Cost of sales (36.9) (37.4)
Advertising and promotion (32.7) (33.8)
Selling, general and administrative (18.9) (22.4)
--------------------
Total costs and expenses (88.5) (93.6)
--------------------
INCOME FROM OPERATIONS 11.5 6.4
--------------------
OTHER INCOME (EXPENSE):
Interest expense (13.5) (8.5)
Investment income (expense), net .2 0.2
Other, net - -
--------------------
Total other income (expense) (13.3) (8.3)
--------------------
INCOME (LOSS) BEFORE INCOME
TAXES (1.8) (1.9)
PROVISION FOR (BENEFIT FOR)
INCOME TAXES (0.7) (0.7)
--------------------
NET INCOME (LOSS) (1.1) (1.2)
--------------------
--------------------
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1995 AND 1994
Net sales for the three months ended February 28, 1995 increased 9.1% to
$22,719 from $20,820 for the same period last year. Domestic consumer product
sales increased 5.5% to $17,405 from $16,494 for last year's period. Net sales
of international consumer products increased 61.2% from $1,220 in the 1994
period to $1,967 in the current period. Specialty Chemical sales increased 7.8%
to $3,347 from $3,106 in the corresponding 1994 period.
For domestic consumer product sales in the 1995 period, increases over
sales in the corresponding 1994 period were realized for the BULLFROG (25.8%),
ICY HOT (4.0%) and CORN SILK (16.2%) brands, while decreases were recognized for
the NORWICH (23.3%), PAMPRIN (3.0%), FLEX-ALL 454 (25.4%), PREMSYN (29.5%), SUN-
IN (20.7%), ULTRASWIM (32.5%) and MUDD (1.5%) product lines. Sales of BENZODENT
and PHISODERM, products acquired in the second and third quarters of 1994,
respectively, were a combined $2,175 for the three months ended February 28,
1995. The decline in sales of NORWICH, FLEX-ALL 454, PREMSYN, SUN-IN and
ULTRASWIM reflects the maturation of these product lines and the increased
competition in their respective product categories and markets.
-9-
International consumer product sales for the first quarter of 1995
increased $414, or 155.6%, for the Canadian operation and $257, or 50.5%, for
the United Kingdom business. The addition of PHISODERM to the product line in
Canada accounted for practically all of the net increase in sales in that
country, although increases were also realized for the PAMPRIN, MUDD and ACNOMEL
brands. The sale of the ALGEMARIN product line in June 1994 had a negative
effect on Canadian sales in 1995 when compared to the same period of 1994.
Strong sales performances for all major product lines distributed by the United
Kingdom division were realized in the current period. The restructuring of the
international consumer products operations in fiscal years 1993 and 1994
appeared to bring beneficial results to the Company at this time. U.S. export
sales showed a modest increase in the 1995 period.
Specialty chemical sales increases in the 1995 period were realized for all
four major product categories - aluminum hydroxides, specialties, aluminum
derivatives and glycine.
Cost of goods sold as a percentage of net sales improved to 36.9% from
37.4% in the 1994 period. The decline was primarily the result of a shift in
mix of sales of both consumer products divisions to higher gross margin products
in the current period.
Advertising and promotion expenses increased by $385, or 5.5%, in the 1995
period and were 32.7% of net sales compared to 33.8% in the corresponding 1994
period. Increased expenditures were provided in the current period for the MUDD
and CORN SILK brands as well as for the newly acquired BENZODENT and PHISODERM
product lines.
The decrease of $373, or 8.0%, in selling, general and administrative
expenses in the 1995 period was largely associated with reductions in short- and
long-term incentive plan accruals and in outside legal services.
Interest expense increased by $1,287, or 72.6%, in the current period
principally as a result of the refinancing of long-term debt in fiscal 1994 at
higher interest rates and increased outstanding indebtedness related to the
acquisitions of BENZODENT and PHISODERM.
Net loss of $253 in the 1995 period was almost identical to that of the
corresponding 1994 period. The loss mainly resulted from increased sales which
were more than offset by higher interest and advertising and promotion expenses.
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 1995, the Company had working capital of $15,901 compared
to $13,109 at November 30, 1994, an increase of $2,792 in the first three months
of fiscal 1995. This represented 18.9% of total assets at February 28, 1995 and
15.2% of total assets at November 30, 1994.
The Company's current ratio (current assets divided by current liabilities)
was 2.08 at February 28, 1995 compared to 1.65 at November 30, 1994. The
Company's quick ratio (cash equivalents, short-term investments and receivables
divided by current liabilities) was 1.41 at February 28, 1995 compared to 1.16
at November 30, 1994. The increase in these ratios reflected the increase in
working capital discussed above.
-10-
The payment of a special cash dividend of $20.00 per share in June 1993 and
the indebtedness related thereto resulted in a significant increase in the
Company's debt and a substantial shareholders' deficit at the time of the
transaction and at February 28, 1995. Payments of principal and interest on the
indebtedness incurred to finance the special dividend and the refinancing of
such indebtedness have been a significant new use of the Company's funds.
During the three months ended February 28, 1995, the Company increased its
long-term debt by a net amount of $3,375 which was primarily used for working
capital purposes. Increased working capital requirements during the current
period resulted largely from the usual extended credit terms to purchasers of
the Company's seasonal consumer products during that period and the related
normal increase in inventories of these items.
Capital expenditures in the first fiscal quarter of 1995 were $905, an
increase of $185 over the corresponding 1994 period, and are not expected to
exceed $3,500 for the 1995 fiscal year.
The Company believes that cash flows generated by operations, along with
funds available under its bank credit facility and borrowings against
approximately $2,000 of cash value under certain insurance policies should be
sufficient to fund the Company's current commitments and proposed 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 quarters ended February
28, 1995 and 1994, these subsidiaries accounted for 6% and 4% 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 loss of $46 and a gain of $1 for the quarters ended February 28,
1995 and 1994, respectively, resulted from foreign currency transactions.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Statement regarding computation of per share earnings
(Exhibit 11).
(2) Financial data schedule (Exhibit 27).
(3) Sales and income by line of business (Exhibit 28).
(b) No reports on Form 8-K were filed with the Securities and Exchange
Commission during the three months ended February 28, 1995.
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CHATTEM, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHATTEM, INC.
(Registrant)
Dated: April 3, 1995 \s\ Robert E. Bosworth
--------------------- ------------------------------
Robert E. Bosworth,
Executive Vice President
and Chief Financial Officer
(principal financial officer)
10QMAY
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