CONTENTS
Financial Highlights .................................................. 1
President's Letter .................................................... 2
Product and Market Summary ............................................ 5
Management's Discussion and Analysis .................................. 9
Selected Financial Data ............................................... 15
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 .............................. 33
CHATTEM, INC.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993
EARNINGS PER SHARE FROM
CONTINUING OPERATIONS $ 0.32 $ 0.29 $ (0.17)
COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 7,292 7,292 6,341
DIVIDENDS PER SHARE $ -- $ -- $ 20.20
NET SALES
($ Millions)
95 100.6
94 94.4
93 89.9
92 90.2
91 84.1
INCOME FROM OPERATIONS
Before Nonrecurring and Unusual Charges
($ Millions)
95 14.8
94 13.1
93 7.3
92 8.2
91 5.2
I am pleased to report that 1995 was another very successful year highlighted
by record operating income before nonrecurring and unusual charges of $14.8
million and the strategic divestiture of Chattem Chemicals. The following is
a list of significant accomplishments during the year:
- - Operating income before nonrecurring and unusual charges rose 13% to $14.8
million, representing 14.7% of sales.
- - International operating income surged to $1.3 million from $120 thousand a
year ago. This was led by strong performances in Canada and the United
Kingdom.
- - BULLFROG sales increased 29% led by BULLFROG for Kids, the new BULLFROG
Quick Gel, a revolutionary sunblock, and regained sales to a major
customer.
- - MUDD was successfully relaunched with two new products, Sea Mask and Aloe
Mask, in bold, exciting new packaging. At year end, MUDD consumer sales
were increasing 25% due to this relaunch.
- - Net debt, funded debt less cash and cash equivalents and investments, was
reduced by $23 million due to the Chattem Chemical divestiture and
increased profits.
- - The operating income increase was achieved through increased sales, a
slight increase in gross margin percentage and reduced administrative
costs. The sales increase was supported by a 12% rise in advertising
and promotion expenses exemplifying our continuing commitment to our
brands.
- - Finally, we profitably divested Chattem Chemicals to Elcat, Inc., resulting
in an after-tax gain of $9.3 million or $1.28 per share. In addition to
reducing the Company's debt, this action completely focuses our efforts on
the consumer products business.
In terms of disappointments, the main issue was significant new competition
in several of our larger markets. First, the topical analgesic market had
unprecedented activity with the launch of two major new products,
Zostrix-Registered Trademark- and CAPSAZIN-P-TM-, which at year end had
garnered about 15% market share. In addition, Ben-Gay-Registered Trademark-
relaunched its product line backed by strong advertising and promotion
support. Due to this higher level of competition, FLEX-ALL sales declined
19%. I will address our response in my 1996 outlook section.
Although not at the unprecedented level of competition encountered in the
topical analgesics, the face cleanser and cosmetic markets also had
significant new competition. In the cleanser category, Neutrogena-Registered
Trademark-, Clean & Clear-Registered Trademark-, and OIL of OLAY-Registered
Trademark- had strong new products and support levels. This made our
PHISODERM relaunch more difficult.
2
In cosmetics, the major new product focus was on the "age defying" products
from Revlon-Registered Trademark- and Maybelline-Registered Trademark-. CORN
SILK factory sales were stable but at year end we saw some decline in
consumer sales as these new products gained share and the oil control
category declined.
1996 OUTLOOK
1996 will simply be Chattem's most aggressive year in our history in terms of
new product activity. The biggest event is our May 1 launch of PHISODERM
Antibacterial Skin Cleanser. This product has been our most tested product
ever and we feel very good about its chances for success.
The PHISODERM heritage of hospital and doctor usage is ideal for an
antibacterial hand soap. Also, the category size of approximately $180
million is the correct size for our corporate strategy of being a leader in
small to medium markets of $50 million-$200 million.
We will support this exciting launch with strong advertising and promotional
support. We should be the leading advertiser in the category during 1996.
This new launch will come at an expense of approximately $.20 per share which
we think is an appropriate investment to support this important new product.
3
A second major new product will be PHISODERM Sensitive which will continue
our relaunch program for PHISODERM Face Cleansers. This new product will
appeal to consumers with sensitive skin, which represents over 40% of all
women. Also, PHISODERM Sensitive will be unfragranced, an important
attribute for many face cleanser users.
A third major new product is FLEX-ALL Ultra Plus. FLEX-ALL has been a
Menthol only product in terms of active ingredients. Ultra Plus will add two
more ingredients, Methyl Salicylate and Camphor, and will be positioned as
three ingredient strength for fast and long lasting pain relief. In testing,
many consumers prefer the Menthol only relief but also many prefer the
strength of the three ingredient product. We think the combination of
FLEX-ALL and FLEX-ALL Ultra Plus will meet all consumer's pain relief needs.
In addition to these three major launches, we have several other new products
for our other brands. CORN SILK Liquid has been reformulated to provide more
natural, lighter coverage. ULTRASWIM will introduce a shower gel to address
dry itchy skin caused by chlorine damage. Also, we will be continuing our
support behind the new MUDD products which began shipping in the last half of
1995.
4
Our primary focus for the year will be to support these important product
launches. However, we will continue our emphasis on cost-reduction efforts
which have yielded savings of several million dollars over the past two
years. We believe we can achieve further efficiencies in terms of material
costs, commercial production and media buying.
From a cultural and people standpoint, I am extremely proud of the effort our
employees put forth to achieve the 1995 results in spite of the competition
we faced. Also, I can tell you I have never seen the enthusiasm as high
within the Company as it is for 1996. I hope and believe this enthusiasm and
effort will enable Chattem to have another successful year.
5
PRODUCT AND MARKET SUMMARY
MISSION AND OBJECTIVE
The mission of the Company 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 compete in small to
medium size over-the-counter (OTC) pharmaceuticals or functional toiletries
and cosmetics markets, with an ideal retail market size of $50 million to
$200 million, in which its products can be among the market leaders. These
products are advertised through national media and are distributed through
the food, drug and mass merchandiser classes of trade. The objective of the
Company is to create or maintain a leadership position in each of its markets
and to thereby provide superior earnings while also building the value of
each brand.
DOMESTIC PRODUCT OVERVIEW
OTC PHARMACEUTICALS - TOPICAL ANALGESICS
The Company competes in the topical external analgesic category, a $190
million market, with its FLEX-ALL 454, ICY HOT and SOLTICE brands. BENZODENT
competes in the denture irritation segment, a $37 million segment, within the
overall topical oral analgesic category.
FLEX-ALL 454, the second largest brand in its category, is an aloe vera-based
topical analgesic used by the trainers of all 102 professional football,
baseball, basketball and hockey teams, and is the official locker room
product of the National Football League. The brand's current product line
includes Original and Maximum Strength FLEX-ALL 454, which contain menthol as
the active ingredient. The new Ultra Plus product, which begins distribution
in mid 1996, contains three active ingredients; menthol, methyl salicylate
and camphor.
6
ICY HOT, the fifth largest brand in its category, completed 1995 with its
third straight year of double digit sales growth. It is the only brand in
the category with three product forms; a cream, a balm and a chill stick.
Its unique positioning as the product offering "Icy and Hot Therapy for Pain"
and high brand awareness among consumers continues to provide growth
opportunities.
BENZODENT, a topical oral analgesic, is the only brand positioned to be
applied directly to dentures to relieve denture pain. For additional pain
relief, the product contains the maximum amount of benzocaine allowable in
the category. 1995 represented the first year in the brand's history in which
it received a full year of targeted advertising and promotional support.
Additionally, the Company manufactures and markets two smaller proprietary
drug brands, SOLTICE, a topical external analgesic, and BLIS-TO-SOL, an
antifungal foot care product. Limited regional support will continue to be
done on an opportunistic basis.
OTC PHARMACEUTICALS - INTERNAL ANALGESICS
The Company competes in the menstrual pain relief category, a $63 million
market, with its PAMPRIN and PREMSYN PMS brands. NORWICH Aspirin competes in
the general analgesic category.
PAMPRIN, the number two brand in the menstrual analgesics category, is a
combination drug specifically designed for relief of menstrual symptoms.
Multi-Symptom PAMPRIN effectively relieves multiple menstrual discomforts
with three active ingredients. Maximum Pain Relief PAMPRIN provides superior
relief from cramps by being the only non-ibuprofen, non-aspirin cramp relief
product. Maximum Strength PREMSYN PMS, the third largest brand in the
category, effectively relieves both the physical and emotional symptoms of
PMS.
7
NORWICH, a high-quality, reasonably-priced aspirin franchise, complements the
other OTC pharmaceuticals of the division. The brand is principally focused
both in sales and marketing support in the northeast and west coast. The
brand continues to decline about 10% per year principally due to the
continued expansion of private label aspirin and reduced advertising and
promotion support in lieu of other strategic brand priorities.
COSMETICS
The Company competes in the oil control face make-up segment, a $99 million
market, within the overall cosmetics category with its CORNSILK brand.
CORNSILK, the number three brand in the oil control make-up segment, is the
original make-up especially formulated to be oil free as well as able to
absorb excess facial oils. The product is available in translucent no-color
and shades of the original powder Classic line, and also in shades of the new
powder Natural Matte line. The line also includes shaded liquids.
TOILETRIES - SKIN CLEANSERS AND MASKS
The Company competes in the face cleanser category, a $335 million market,
with its PHISODERM brand. MUDD, a line of clay-based facial mask products,
is the Company's entry into the facial masks and scrubs category, a $42
million market.
8
PHISODERM, a specialty face cleanser, is a product that through its pH
balanced formula provides the consumer with superior cleansing without the
harsh, drying effect of soaps. The brand offers adult products available in
different skin types, normal to oily or dry, as well as a product designed
for use on babies. Following the acquisition of PHISODERM in mid 1994, the
brand was completely restaged in 1995 with new packaging and products while
being supported with meaningful advertising and promotion levels for the
first time in four years. To complement the restaged line, an unfragranced
PHISODERM Sensitive will be launched in 1996 appealing to consumers with
sensitive skin. Capitalizing on the heritage of hospital and doctor usage,
PHISODERM Antibacterial Skin Cleanser will also be launched in 1996.
After two years of minimal support and declining sales, the Company
relaunched MUDD in mid 1995 with new packaging and two line extensions, Sea
Mask and Aloe Mask. The relaunch has been and will be supported by
television and promotional support and as a result is the fastest growing
brand in the mask and scrub category.
TOILETRIES - SEASONALS
The Company competes in the suncare category with products that have a sun
protection factor(SPF) of greater than 15, a $221 million market, with its
BULLFROG sunblock line. SUN-IN competes in the spray on hair lightener
category, a $9 million market, while ULTRASWIM shampoo and conditioner are
essentially the only products in the small chlorine removal market.
For the second straight year BULLFROG AMPHIBIOUS FORMULA SUNBLOCK continues
to be one of the fastest growing brands in its category. The product is a
unique waterproof gel sunblock that provides all-day sun protection, in or
out of the water, with just one application. The line includes body gels and
lotions and a stick product, for adults and children, with SPF's ranging from
18 to 36.
9
The other seasonal products, SUN-IN hair lighteners and ULTRASWIM chlorine
removal shampoo and conditioner, continue to be the market leaders in these
small niche categories. ULTRASWIM has a patented formula and is endorsed by
Janet Evans, four time Olympic gold medalist, in its marketing efforts.
INTERNATIONAL MARKET OVERVIEW
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 manufacturing of the brands is principally done in the
Company's facilities in Chattanooga while some packaging takes place in
Mississauga. The division utilizes a national broker for its sales efforts.
Brands marketed in Canada include PAMPRIN, FLEX-ALL, CORNSILK, 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; as well as AQUA CARE and ROSE MILK.
10
EUROPE
Chattem's European business is conducted through Chattem (U.K.) Limited, a
wholly-owned subsidiary located in Basingstoke, Hampshire, England. This
unit also services distributors in Australia and the Middle East.
Manufacturing and packaging of the products is performed principally in the
U.K. with a limited number of ingredients purchased from Chattem. In the
U.K., the division employs its own sales force 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 unit markets exclusively the Company's
toiletry products. Chattem's products in Europe include SUN-IN, a range of
MUDD Face and Body products, ULTRASWIM, BRONZ SILK and CORNSILK. SPRAY BLOND
Spray-In Hair Lightener is only marketed on the continent.
U.S. EXPORT
The U.S. Export division services various distributors primarily located in
the Caribbean, Mexico and Peru. The Company sells various products into
these markets with the primary focus being the development of its OTC
pharmaceuticals, principally ICY HOT and PAMPRIN. The Company continues to
look for established distributors in Central and South America capitalizing
on the success and heritage of ICY HOT in these regions.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
On May 26, 1995, the Company completed the sale of its specialty chemicals
division to privately-held Elcat, Inc. ("Elcat"). The Company received
$25,000,000 from the sale of the specialty chemicals division consisting of
$20,000,000 in cash and $5,000,000 of 13.125% cumulative, convertible
preferred stock of Elcat. The net cash proceeds were used to repay long-term
debt of approximately $12,000,000. The Company recognized a gain of
$9,334,000 (net of tax) from the sale and an extraordinary charge (after tax)
of $367,000 relating to the early extinguishment of the debt.
The results of operations and the gain on disposal of the specialty chemicals
division have been separately classified as discontinued operations in the
accompanying Consolidated Statements of Income.
As a result of the sale of the specialty chemicals division, unless otherwise
indicated, the following discussion and analysis of financial condition and
results of operations relate only to the continuing operations of the
Company, which are the domestic and international consumer products
businesses.
12
The Company experienced an increase in net sales, operating income, income
from continuing operations and net income for the year ended November 30,
1995. Net sales increased 6.6% to $100,598,000 from $94,370,000 in 1994.
Operating income before nonrecurring and unusual charges increased 12.8% to
$14,770,000 from $13,099,000 in 1994. Income from continuing operations
increased 10.2% to $2,325,000 from $2,110,000 in 1994, while net income,
which includes the net income from discontinued operations, the net gain on
disposal of the specialty chemicals division and the extraordinary charge
relating to the early extinguishment of debt, increased to $11,966,000 from
$2,054,000 in fiscal year 1994.
In fiscal year 1995 as compared to fiscal year 1994, earnings per share from
continuing operations increased $.03, or 10.3%, to $.32 while total earnings
per share increased $1.35 to $1.64. Total earnings per share for the year
ended November 30, 1995 include the net income from discontinued operations,
the net gain on disposition of the specialty chemicals division and the net
loss on early extinguishment of debt. The reduction in interest expense as a
result of the retirement of long-term debt discussed previously is estimated
to be approximately $1,400,000 on an annual basis. Until the Company's
indebtedness is reduced significantly, net income will likely continue to be
adversely impacted by interest expense.
13
The Company also will recognize annually approximately $656,000 in dividends
on the cumulative, convertible preferred stock of Elcat, which was received
as a part of the proceeds from the sale of the specialty chemicals division.
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 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 business 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 growth potential
or to reduce indebtedness.
14
RESULTS OF OPERATIONS
The following table sets forth for continuing operations certain items from
the Company's Consolidated Statements of Income, for the periods indicated,
expressed as a percentage of net sales:
YEAR ENDED NOVEMBER 30,
------------------------------
1995 1994 1993
-------- -------- --------
Net Sales ................................................ 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of sales ........................................ 29.6 30.2 29.7
Advertising and promotion ............................ 37.0 35.3 40.4
Selling, general and administrative .................. 18.7 20.6 21.8
Nonrecurring and unusual charges ..................... 0.3 0.6 6.1
------ ------ ------
Total costs and expenses .......................... 85.6 86.7 98.0
------ ------ ------
Income From Operations .................................. 14.4 13.3 2.0
Other Income (Expense), Net ............................. (10.8) (9.8) (3.9)
------ ------ ------
Income (Loss) Before Income Taxes ....................... 3.6 3.5 (1.9)
Provision For (Benefit From) Income Taxes ............... 1.3 1.3 (0.7)
------ ------ ------
Income (loss) From Continuing Operations ................ 2.3% 2.2% (1.2)%
====== ====== ======
FISCAL 1995 COMPARED TO FISCAL 1994 FOR CONTINUING OPERATIONS
Net sales for the year ended November 30, 1995 increased $6,228,000, or 6.6%,
to $100,598,000 as compared to $94,370,000 for the previous fiscal year. The
increase in net sales was attributable to a $4,607,000, or 5.6%, increase in
domestic consumer products sales to $87,250,000 from $82,643,000 in fiscal
1994 and an increase of $1,621,000, or 13.8%, in international consumer
products sales to $13,348,000 from $11,727,000.
15
For domestic consumer products, net sales increases in 1995 over 1994 were
realized for the BULLFROG (28.8%), ICY HOT (8.6%), SUN-IN and MUDD brands,
while decreases were recorded for the major product lines of FLEX-ALL 454
(19.4%), PREMSYN PMS, ULTRASWIM, PAMPRIN and NORWICH Aspirin. Sales of
BENZODENT and PHISODERM, products acquired in May and June 1994,
respectively, increased a combined $7,159,000 over their respective 1994
short periods. All sales variances were largely the result of changes in
volume.
The increase in sales of the BULLFROG and SUN-IN brands was led by new
products, good summer weather, increased advertising and promotion
expenditures and, in the case of BULLFROG, the addition of a previously lost
major customer. The MUDD brand introduced new packaging and two new products
in 1995 and both MUDD and the ICY HOT brand received increased marketing
support.
The decline in sales of FLEX-ALL 454 reflects increased competition in the
topical analgesic product category and decreased advertising and promotion
expenditures. Sales declines for the other products listed above are
primarily the result of the maturation of these brands along with reduced
marketing support in most cases.
16
International consumer products sales for fiscal year 1995 increased
$756,000, or 24.0%, for the Canadian operation and $631,000, or 8.5%, 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 realized for the PAMPRIN, MUDD and SUN-IN
brands. Decreases in sales of CORN SILK and FLEX-ALL 454 were recorded also.
Sales increases for the SUN-IN and CORN SILK brands were recognized in 1995
for the United Kingdom business, while sales declines were registered for the
BRONZ SILK, MUDD and ULTRASWIM product lines. U.S. export sales increased
$234,000, or 21.0%, in fiscal 1995. All sales variances were principally due
to volume changes.
Cost of goods sold as a percentage of net sales decreased to 29.6% in 1995
from 30.2% in the 1994 fiscal year. This improvement in 1995 was essentially
the result of a shift in the mix of sales of domestic consumer products to
higher gross margin brands, a full year of in-house production for PHISODERM,
and reduced inventory obsolescence charges.
Advertising and promotion expenses increased by $3,906,000, or 11.7%, in 1995
and was 37.0% of net sales compared to 35.3% in the 1994 fiscal year. This
increase was principally due to full year advertising and promotion support
for the BENZODENT and PHISODERM product lines.
17
The decrease of $609,000, or 3.1%, in selling, general and administrative
expenses in 1995 was largely associated with increases in direct selling
costs, freight and field sales expenses, as a result of increased sales, with
large decreases in administrative and corporate personnel and bonuses more
than offsetting the increase in selling expenses.
The Company recognized a nonrecurring and unusual charge of $302,000 in 1995
and $559,000 in 1994 related to the repricing of the Company's stock options
in connection with the payment of the Special Dividend in 1993.
Interest expense increased $1,716,000, or 18.3%, in the 1995 fiscal year as a
result of the refinancing of long-term debt in 1994 at higher interest rates
and increased outstanding indebtedness related to the acquisition of
BENZODENT and PHISODERM in that year. Total long-term notes payable
decreased by $17,297,000 in 1995, largely due to the application of the net
proceeds from the sale of the specialty chemicals division to repay
indebtedness. This debt reduction favorably impacted interest expense for
approximately half the 1995 fiscal year. Until the Company's indebtedness is
reduced substantially, interest expense will continue to represent a
significant percentage of the Company's net sales.
18
In 1995 a gain of $729,000 on the sale of an interest rate cap was recognized
but deferred. This amount is to be amortized over the remaining life of the
original cap agreement. The portion allocated to fiscal 1995 was $454,000,
which was credited to interest expense.
The increase of $341,000 in investment income in 1995 primarily reflects the
pro-rata accrual of the previously discussed dividend to be received on the
cumulative, convertible preferred stock of Elcat.
During 1994, the Company realized a loss of $512,000 from the sale of the
distribution rights to ALGEMARIN in Canada.
Other income and expense for 1995 includes a loss of $380,000 related to the
disposition of certain assets. During 1994, the Company realized a gain of
$484,000 on the sale of an interest rate swap.
Income taxes decreased to 35.6% of income from continuing operations before
income taxes from 35.9% in 1994.
Income from continuing operations increased by $215,000, or 10.2%, in the
1995 fiscal year. The increase mainly resulted from increased sales and
lower selling, general and administrative expenses.
19
FISCAL 1994 COMPARED TO FISCAL 1993 FOR CONTINUING OPERATIONS
Net sales rose 5.0% to $94,370,000 from $89,861,000 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 a 11.6% decrease in international consumer product sales to $11,727,000
from $13,269,000 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 for the first time
by 21.0% from 1993 sales levels, while NORWICH Aspirin 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. All sales
variances were largely the result of changes in volume except for the CORN
SILK and SUN-IN brands.
20
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.
As a result of a poor Christmas season, above normal returns of ALGEMARIN in
the spring of 1994 had a negative impact on overall 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. All sales variances were primarily due to change in volume.
Cost of goods as a percentage of net sales increased to 30.2% from 29.7% in
1993. The increase was primarily the result of a shift in mix of sales to
lower gross margin brands, e.g., ICY HOT, CORN SILK and PHISODERM. Reflected
also in this increase was the write-off of approximately $425,000 of
inventory related to the unsuccessful launch of Nighttime PAMPRIN.
Advertising and promotion expense decreased $2,926,000, or 8.1%, to
$33,336,000 in 1994 from $36,262,000 in the previous year. The decrease was
primarily the result of $2,988,000 in reduced advertising spending for
FLEX-ALL 454 and NORWICH Aspirin. 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 Aspirin in 1993. The division also spent $1,310,000 in
advertising and promotion expenditures on the two acquired brands, PHISODERM
and BENZODENT.
21
Selling, general and administrative expenses decreased by $165,000 to
$19,440,000 from $19,605,000 in 1993 and declined as a percentage of the
Company's net sales to 20.6% from 21.8% in 1993. This slight improvement
compared to 1993 was realized even with the incremental expense of incentive
bonuses to management and for 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 $9,360,000 from $3,879,000 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.
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 realized a loss of $512,000 from the sale of the
distribution rights to ALGEMARIN in Canada. During 1993, the Company
realized a gain of $867,000 from the sale of the BLACK-DRAUGHT and NULLO
brands.
22
Other income and expense for 1994 includes 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 from 36.7% in 1993. See Note 7 of Notes to Consolidated
Financial Statements.
Based on increased sales, planned reductions in advertising and promotion and
the reduction in nonrecurring and unusual charges, but offset in part by an
increase in interest expense, income from continuing operations increased to
$2,110,000 in 1994 from a loss of $1,100,000 in 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and acquisitions with a
combination of internally generated funds and borrowings. The Company's
principal uses of cash are operating expenses, working capital, capital
expenditures and to service long-term debt.
Cash provided by operating activities was $713,000 and $16,405,000 for 1995
and 1994, respectively. The decrease in cash flows from operations from 1994
to 1995 was primarily the result of changes in accounts receivable,
inventories and accounts payable and accrued liabilities.
Investing activities provided cash of $16,762,000 in 1995 and used cash of
$23,753,000 in 1994. The 1995 amount includes the proceeds from the sale of
the Company's specialty chemicals division. The acquisitions of PHISODERM
and BENZODENT are reflected in 1994. In 1995, capital expenditures totaled
$2,836,000 compared to $2,764,000 in 1994. Expenditures of this nature are
expected to be approximately $2,500,000 in fiscal 1996.
Financing activities used cash of $16,873,000 and provided cash of $5,831,000
in 1994. The use of cash in 1995 is primarily due to the net repayment of
$17,297,000 long-term debt with the proceeds from the sale of the Company's
specialty chemicals division and excess cash generated from operations. During
1994, the Company repaid a portion of its long-term debt with the proceeds
from the issuance of Senior Subordinated notes.
23
The following table presents certain working capital data at November 30,
1995 and 1994 or for the respective years then ended:
ITEM 1995 1994*
- ------------------------------------ ----------- -----------
Working capital (current assets less $10,254,000 $ 9,901,000
current liabilities)
Current ratio (current assets divided 1.49 1.51
by current liabilities)
Quick ratio (cash equivalents, short- .96 1.09
term investments and receivables
divided by current liabilities)
Average accounts receivable turnover 5.86 5.34
Average inventory turnover 3.99 3.47
Working capital as a percentage of
total assets 12.29% 12.31%
*After removing the net assets of the specialty chemicals division, which was
sold in 1995.
The decrease in the current and quick ratios at November 30, 1995 as compared
to November 30, 1994 was primarily due to a combination of a decrease in
accounts receivable and increases in inventories, accounts payable and
accrued liabilities related to the divestiture of the specialty chemicals
division.
24
Total debt outstanding was $79,689,000 at November 30, 1995 compared to
$96,986,000 at November 30, 1994. Under the terms of the current bank
facility, $17,000,000 was available at November 30, 1995 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. A separate $12,500,000 revolving line of credit for acquisition
purposes was available and unused at year-end. The Company also has
additional borrowing capacity of approximately $1,600,000 against life
insurance policies owned by the Company, all of which was available at
November 30, 1995.
In connection with the sale of the specialty chemicals division, management
of the Company believes that it has recorded adequate amounts to cover costs
related to environmental remediation of the property sold and other costs
associated with the separation of the consumer products and specialty
chemicals businesses. These estimated costs have been charged to the gain on
the disposal of that division.
Management of the Company believes that cash flows generated by operations,
along with funds available under its bank credit facility and from borrowing
against approximately $1,600,000 of cash value under certain insurance
policies, will be sufficient to fund the Company's current commitments and
proposed operations.
25
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, 1995 and 1994, these subsidiaries accounted for 13% and
12% of total revenues, respectively, and 9% and 10% 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. Gains of $129,000 and
$82,000 for the years ended November 30, 1995 and 1994, respectively,
resulted from foreign currency transactions. See "Foreign Currency
Translation" in Note 2 of Notes to the Consolidated Financial Statements.
26
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
INCOME STATEMENT DATA
NET SALES .......................................... $100,598 $ 94,370 $ 89,861 $ 90,221 $ 84,085
OPERATING COSTS AND EXPENSES ....................... 86,130 81,830 88,111 82,045 78,899
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS ............................... 14,468 12,540 1,750 8,176 5,186
OTHER INCOME (EXPENSE), NET .......................... (10,858) (9,248) (3,489) (1,328) (2,198)
-------- -------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ...................................... 3,610 3,292 (1,739) 6,848 2,988
PROVISION FOR (BENEFIT FROM) INCOME TAXES ............ 1,285 1,182 (639) 2,329 957
-------- -------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS ............. $ 2,325 $ 2,110 $ (1,100) $ 4,519 $ 2,031
======== ======== ======== ======== ========
PER COMMON SHARE DATA
INCOME (LOSS) FROM CONTINUING OPERATIONS ............. $ .32 $ .29 $ (.17) $ .90 $ .50
DIVIDENDS ............................................ $ -- $ -- $ 20.20 $ .30 $ .22
BALANCE SHEET DATA
(At End of Period)
TOTAL ASSETS ......................................... $ 83,410 $ 85,442 $ 69,534 $ 97,571 $ 64,122
LONG-TERM DEBT, less current maturities .............. $ 78,089 $ 94,486 $ 83,000 $ 22,784 $ 29,278
27
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:
1995 1994
----------------- -----------------
QUARTER ENDED: HIGH LOW HIGH LOW
-------- ------- -------- -------
February ............................ 6 3/16 4 9/16 8 5/8 6 3/4
May ................................. 6 1/4 4 3/4 7 3/4 5 3/4
August .............................. 5 3/4 4 3/4 6 1/2 5
November ............................ 5 1/4 4 1/4 7 3/8 5 1/8
Based upon transfer agent records, the Company's common shares were held by
approximately 2,500 shareholders as of February 21, 1996.
28
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1995 AND 1994
(IN THOUSANDS)
ASSETS 1995 1994
---- ----
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 3,636 $ 3,034
Accounts receivable, less allowance for doubtful accounts
of $286 in 1995 and $850 in 1994 ................................... 16,248 18,069
Refundable and deferred income taxes ................................. 1,400 1,015
Inventories .......................................................... 8,678 6,247
Prepaid expenses and other current assets ............................ 1,112 929
Net current assets of discontinued operations ........................ - 2,402
------- -------
Total current assets ............................................... 31,074 31,696
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET ..................................... 9,330 8,491
------- -------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc. ............................................ 5,328 -
Patents, trademarks and other purchased product rights, net .......... 31,007 32,455
Debt issuance costs, net ............................................. 3,073 3,771
Deferred income taxes ................................................ 98 1,598
Other ................................................................ 3,500 4,818
Net noncurrent assets of discontinued operations ..................... - 2,613
------- -------
Total other noncurrent assets ..................................... 43,006 45,255
------- -------
TOTAL ASSETS ................................................... $83,410 $85,442
======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
29
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1995 AND 1994
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' DEFICIT 1995 1994
---- ----
CURRENT LIABILITIES:
Current maturities of long-term debt ............................... $ 1,600 $ 2,500
Accounts payable ................................................... 5,462 4,942
Payable to bank .................................................... 1,184 1,301
Accrued liabilities ................................................ 12,574 10,650
------- -------
Total current liabilities ........................................ 20,820 19,393
------- -------
LONG-TERM DEBT, less current maturities .............................. 78,089 94,486
------- -------
OTHER NONCURRENT LIABILITIES ......................................... 1,922 1,114
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 6, 10 and 12)
SHAREHOLDERS' DEFICIT:
Preferred shares, without par value, authorized
1,000, none issued ............................................... - -
Common shares, without par value, authorized 20,000, issued
7,292 in 1995 and 1994 ........................................... 1,519 1,519
Paid-in surplus .................................................... 52,099 51,797
Accumulated deficit ................................................ (69,386) (81,352)
------- -------
(15,768) (28,036)
Foreign currency translation adjustment ............................ (1,653) (1,515)
------- -------
Total shareholders' deficit ...................................... (17,421) (29,551)
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT ..................... $83,410 $85,442
======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
30
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993
---- ---- ----
NET SALES $100,598 $94,370 $89,861
-------- ------- -------
COSTS AND EXPENSES:
Cost of sales ..................................................... 29,755 28,495 26,717
Advertising and promotion ......................................... 37,242 33,336 36,262
Selling, general and administrative ............................... 18,831 19,440 19,605
Nonrecurring and unusual charges (Note 14) ........................ 302 559 5,527
-------- ------- -------
Total costs and expenses ........................................ 86,130 81,830 88,111
-------- ------- -------
INCOME FROM OPERATIONS .............................................. 14,468 12,540 1,750
-------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense .................................................. (11,076) (9,360) (3,879)
Investment income (loss) .......................................... 527 186 (522)
Gain (loss) on product divestitures ............................... - (512) 867
Other income (expense), net ....................................... (309) 438 45
-------- ------- -------
Total other income (expense) .................................... (10,858) (9,248) (3,489)
-------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ........ 3,610 3,292 (1,739)
PROVISION FOR (BENEFIT FROM) INCOME TAXES ........................... 1,285 1,182 (639)
-------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS ............................ 2,325 2,110 (1,100)
-------- ------- -------
DISCONTINUED OPERATIONS:
Income from operations, less provision for income taxes
of $417, $840 and $1,382, respectively .......................... 674 1,500 2,379
Gain on disposal, less provision for income taxes of $5,696 ....... 9,334 - -
-------- ------- -------
Income from discontinued operations ............................... 10,008 1,500 2,379
-------- ------- -------
INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES ................................................ 12,333 3,610 1,279
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES (Note 6) ............................................. (367) (1,556) (480)
CUMULATIVE EFFECT OF ACCOUNTING CHANGES, NET OF INCOME
TAXES (Note 3) .................................................... - -- 569
-------- ------- -------
NET INCOME .......................................................... $ 11,966 $ 2,054 $ 1,368
======== ======= =======
NET INCOME (LOSS) PER COMMON SHARE:
From continuing operations ........................................ $ .32 $ .29 $ (.17)
Discontinued operations ........................................... 1.37 .21 .38
Extraordinary loss ................................................ (.05) (.21) (.08)
Cumulative effect of accounting changes ........................... - - .09
-------- ------- -------
Net income per common share ..................................... $ 1.64 $ .29 $ .22
======== ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING ................................................ 7,292 7,292 6,341
======== ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
31
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED NOVEMBER 30, 1995, 1994 AND 1993
(IN THOUSANDS)
NET UNREALIZED FOREIGN
RETAINED LOSS ON CURRENCY
COMMON PAID-IN EARNINGS LONG-TERM TRANSLATION
SHARES SURPLUS (DEFICIT) INVESTMENTS ADJUSTMENT TOTAL
-------- --------- ---------- ------------ ----------- ---------
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)
Net income ........................................... -- -- 11,966 -- -- 11,966
Stock options granted ................................ -- 302 -- -- -- 302
Foreign currency translation adjustment .............. -- -- -- -- (138) (138)
------ ------- -------- ----- ------- --------
Balance, November 30, 1995 ............................ $1,519 $52,099 $(69,386) $ -- $(1,653) $(17,421)
====== ======= ======== ===== ======= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1995, 1994 AND 1993
(IN THOUSANDS)
1995 1994 1993
-------- -------- --------
OPERATING ACTIVITIES:
Net income ........................................................ $ 11,966 $ 2,054 $ 1,368
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................... 4,072 4,036 3,387
Cumulative effect of accounting changes, net .................... -- -- (569)
Deferred income tax provision ................................... 645 303 393
Gain on sale of specialty chemicals division .................... (9,334) -- --
Loss (gain) on product divestitures ............................. -- 512 (867)
Repriced stock option expense ................................... 302 559 956
Loss (gain) on sales of assets .................................. (454) 6 (757)
Extraordinary loss on extinguishment of debt, net ............... 367 1,556 480
Dividend receivable from Elcat, Inc. ............................ (328) -- --
Other, net ...................................................... 771 983 (343)
Changes in operating assets and liabilities:
Accounts receivable ........................................... 1,973 (1,704) 1,682
Refundable and deferred income taxes .......................... 106 828 (941)
Inventories ................................................... (2,488) 3,832 495
Prepaid expenses and other current assets ..................... (166) 133 317
Accounts payable and accrued liabilities ...................... (6,602) 3,064 1,852
Payable to bank ............................................... (117) 243 230
-------- ------- -------
Net cash provided by operating activities ....................... 713 16,405 8,550
-------- ------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ........................ (2,836) (2,764) (2,297)
Proceeds from sale of specialty chemicals division, net ........... 19,397 -- --
Net decrease in long-term investments ............................. -- -- 5,062
Proceeds from short-term investments .............................. -- -- 23,212
Proceeds from notes and sales of assets ........................... 227 549 619
Purchases of patents, trademarks and other product rights ......... -- (20,272) (1,750)
Increase in other assets .......................................... (26) (1,266) (790)
-------- ------- -------
Net cash provided by (used in) investing activities ............. 16,762 (23,753) 24,056
-------- ------- -------
FINANCING ACTIVITIES:
Repayment of long-term debt ....................................... (48,704) (112,831) (42,900)
Proceeds from long-term debt ...................................... 31,100 48,706 104,116
Proceeds from sale of interest rate cap ........................... 984 -- --
Proceeds from issuance of senior subordinated notes ............... -- 73,012 --
Proceeds from issuance of common stock, net ....................... -- -- 12,405
Common stock dividends paid ....................................... -- -- (109,570)
Proceeds from issuance of stock warrants .......................... -- 955 --
Exercise of stock options ......................................... -- -- 1,156
Tax benefit from exercise of stock options ........................ -- -- 1,253
Debt issuance costs ............................................... (253) (4,011) (2,630)
Other, net ........................................................ -- -- (712)
-------- ------- -------
Net cash provided by (used in) financing activities ............. (16,873) 5,831 (36,882)
-------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ........ -- 89 30
-------- ------- -------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year .................................. 602 (1,428) (4,246)
At beginning of year .............................................. 3,034 4,462 8,708
-------- ------- -------
At end of year .................................................... $ 3,636 $ 3,034 $ 4,462
======== ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
33
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. 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.
(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 in
consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
short-term deposits and investments with original maturities of three
months or less to be cash equivalents.
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.
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 3 to 12 years for machinery and equipment.
Expenditures for maintenance and repairs are charged to expense as
incurred.
34
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,
1995 and 1994 was $7,291 and $5,824, respectively. Amortization expense
for 1995, 1994 and 1993 was $1,467, $1,309 and $1,179, respectively.
Royalty expense related to other purchased product rights for 1995,
1994 and 1993 was $1,030, $1,703, and $1,974, respectively.
Amortization and royalty expense are included in advertising and
promotion expense in the accompanying consolidated statements of income.
DEBT ISSUANCE COSTS
The Company has incurred debt issuance costs in connection with its
long-term debt (Note 6). These costs are capitalized and amortized over
the term of the debt. Amortization expense related to debt issuance
costs was $471, $439, and $214 in 1995, 1994 and 1993, respectively.
Accumulated amortization of these costs was $711 and $240 at November
30, 1995 and 1994, respectively.
PAYABLE TO BANK
Payable to bank includes checks outstanding in excess of certain cash
balances.
REVENUE RECOGNITION
Revenue is recognized when the Company's products are shipped to its
customers.
RESEARCH AND DEVELOPMENT
Research and development costs relate primarily to the development of
new products and are expensed as incurred. Such expenses were $1,140,
$893, and $930, in 1995, 1994 and 1993, respectively.
ADVERTISING EXPENSES
The cost of advertising is expensed in the fiscal year in which the
related advertising takes place. At November 30, 1995 and 1994, the
Company reported $709 and $806, respectively, of advertising as prepaid
assets included in other noncurrent assets in the accompanying
consolidated balance sheets. The adoption of the AICPA's Statement of
Position 93-7, "Reporting on Advertising Costs", did not have a
significant effect on the Company's consolidated financial position.
35
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 8).
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 consolidated statements of income.
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.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121 on accounting for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to assets to be held and
used. SFAS No. 121 also establishes accounting standards for long-lived
assets and certain identifiable intangibles to be disposed of. The
Company is required to adopt the provisions of SFAS No. 121 no later
than December 1, 1996, although earlier implementation is permitted.
SFAS No. 121 is required to be applied prospectively for assets to be
held and used. The initial application of SFAS No. 121 to assets held
for disposition is required to be reported as the cumulative effect of
a change in accounting principle. The adoption of SFAS No. 121 is not
expected to have a significant impact on the consolidated financial
position or results of operations of the Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1995 presentation.
36
(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. 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
13). 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.
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.
(4) INVESTMENT IN ELCAT, INC.
--------------------------------------------------------------------------
Investment in Elcat, Inc. (Elcat) consists of 40,000 shares of 13.125%
cumulative, convertible preferred stock of Elcat (the Preferred Shares)
which was received as part of the consideration from the sale of the
Company's specialty chemicals division (Note 15). The Preferred Shares
are nonvoting and are convertible, in whole or in part, at any time on
or after April 1, 1998, into a 21% common stock ownership of Elcat. At
the option of Elcat, the Preferred Shares may be redeemed, in whole or
in part, on or after April 1, 1998, at par value ($125 per share) plus
any accrued and unpaid dividends. If all of the then outstanding
Preferred Shares are not converted or redeemed on or before April 1,
2005, Elcat is obligated to redeem all of the then outstanding
Preferred Shares at par value plus any accrued and unpaid dividends.
The dividends on the Preferred Shares accumulate annually but are
non-payable until the shares are called or redeemed. After three years,
however, if the shares are still outstanding, a cash dividend of $200
will be received by the Company in fiscal year 1999, increasing ratably
to the full $656 in fiscal year 2002.
This investment is classified as held-to-maturity and is accounted for
using the cost method of accounting.
(5) 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. Plan assets at November 30, 1995 and 1994 were invested
primarily in United States government and agency securities, corporate
debt securities and common stocks.
37
Pension cost for the years ended November 30, 1995, 1994 and 1993
included the following components:
1995 1994 1993
------ ------ ------
Service cost (benefits earned during the
period) ....................................... $ 544 $ 581 $ 456
Interest cost on projected benefit obligation ... 745 743 618
Actual loss (return) on plan assets ............. (828) 220 (815)
Net amortization and deferral ................... 98 (1,223) (206)
------ ------ ------
Net pension cost ................................ $ 559 $ 321 $ 53
====== ====== ======
The following table sets forth the funded status of the Plan as of
November 30, 1995 and 1994:
1995 1994
------ ------
Actuarial present value of benefit obligations:
Vested benefit obligation ............................... $ 6,560 $ 5,585
Nonvested benefit obligation ............................ 686 912
------- -------
Accumulated benefit obligation ........................ $ 7,246 $ 6,497
======= =======
Plan assets at fair market value .......................... $ 6,166 $ 8,137
Projected benefit obligation .............................. (9,885) (9,119)
------- -------
Plan assets less than projected benefit obligation ........ (3,719) (982)
Unrecognized net loss ..................................... 3,344 2,265
Unrecognized prior service cost ........................... (163) (211)
Unrecognized initial asset ................................ (781) (1,171)
------- -------
Pension liability recognized in balance sheets at end
of year ................................................. $(1,319) $ (99)
======= =======
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected
benefit obligation were 7.5% and 6.0%, respectively, in 1995, and 8.5%
and 6.0%, respectively, in 1994. The expected long-term rate of return
on plan assets was 9.5%.
As a result of the sale of the Company's specialty chemical division, a
charge of $662 was recognized for pension curtailment and settlement
expense. This expense is included in the gain on the sale of
discontinued operations for fiscal 1995. (Note 15)
The Company has a defined contribution plan covering substantially all
employees. Eligible participants can contribute up to 10% of their
annual compensation and receive a 25% matching employer contribution
up to 6% of their annual compensation. The defined contribution plan
expense was $141 for 1995, $141 for 1994 and $162 for 1993.
38
(6) LONG-TERM DEBT
--------------------------------------------------------------------------
Long-term debt consisted of the following at November 30, 1995 and 1994:
1995 1994
------ ------
Revolving line of credit payable to banks at
variable rates (8.49% weighted average at
November 30, 1995) ........................... $ 5,500 $ 4,500
Term loan payable to banks at variable rates
8.375% at November 30, 1995) ................. 8,850 19,375
12.75% Series B Senior Subordinated Notes,
due 2004, net of unamortized discount of
$1,581 for 1995 and $1,889 for 1994 .......... 65,339 73,111
------- -------
Total long-term debt ........................... 79,689 96,986
Less: current maturities ....................... 1,600 2,500
------- -------
Total long-term debt, net of current
maturities ................................... $78,089 $94,486
======= =======
The Company entered into a new credit agreement with a syndicate of
banks (the New Credit Agreement) on June 17, 1994 and as amended on May
10, 1995 providing for maximum borrowings of up to $55,000. The New
Credit Agreement is divided into a $22,500 revolving line of credit 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 remaining quarterly installments as
follows: from February 28, 1996 through November 30, 1996, in quarterly
installments of $400, from February 28, 1997 through November 30, 1997,
in quarterly installments of $500, from February 28, 1998 through
November 30, 1998, in quarterly installments of $600, from February 28,
1999 through May 31, 1999, in quarterly installments of $1,000 and a
final payment of $850 on August 31, 1999. The revolving line of credit
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 the renewal date of June 16th of each year 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 maximum floating rate margin under the
New Credit Agreement is 1.75% for the floating rate option and 3.0% for
the Eurodollar rate option.
39
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 8), 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).
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. 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.
40
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 fiscal year
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 8) and related fees and
expenses, the Company entered into a credit agreement in June 1993 with
a syndicate of banks (The Old Credit Agreement). 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 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 was deferred and is being amortized over the
remaining life of the original cap agreement as a reduction of
interest expense.
During May 1995, the Company prepaid previously outstanding long-term
debt, with funds received from the sale of the specialty chemicals
division. In connection with prepayment of those borrowings, the
Company incurred an extraordinary loss of $367 (net of income taxes),
or $.05 per share. The loss primarily related to the write-off of
debt issuance and other deferred costs.
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 $.08 per share. The loss primarily related to
the write-off of debt issuance and other deferred costs.
41
Future maturities of long-term debt are as follows:
1996 ......................................... $ 1,600
1997 ......................................... 2,000
1998 ......................................... 2,400
1999 ......................................... 2,850
2000 ......................................... 5,500
Thereafter ................................... 66,920
-------
81,270
Less: unamortized discount ................... (1,581)
-------
$79,689
=======
Cash interest payments during 1995, 1994 and 1993 were $10,811, $7,114,
and $2,612, respectively.
42
(7) INCOME TAXES
--------------------------------------------------------------------------
The provision for (benefit from) income taxes from continuing
operations includes the following components:
1995 1994 1993
------ ------ ------
Current:
Federal ....................... $ 470 $ 697 $ (884)
State ......................... 170 182 (148)
Deferred ........................ 645 303 393
------ ------ ------
$1,285 $1,182 $ (639)
====== ====== ======
Deferred income tax assets and liabilities for 1995 and 1994 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, 1995 and 1994 are as follows:
1995 1994
------ ------
Deferred tax assets:
Operating loss carryforwards .............. $ 675 $1,175
Reserves and accruals ..................... 1,156 1,713
Deferred promotional expenses ............. 545 701
Accrued postretirement health care
benefits ................................ 511 490
Repriced stock option expense ............. 690 576
Accruals for discontinued operations ...... 472 -
Gain on sale of interest rate cap ......... 108 -
Nonrecurring and unusual charges .......... - 126
Other ..................................... 273 225
------ ------
Gross deferred tax assets ............... 4,430 5,006
------ ------
Deferred tax liabilities:
Excess tax depreciation and
amortization ............................ 2,359 2,133
Prepaid advertising ....................... 183 216
Inventory ................................. 190 -
Other ..................................... 207 157
------ ------
Gross deferred tax liabilities .......... 2,939 2,506
------ ------
Net deferred tax asset .................. $1,491 $2,500
====== ======
The Company did not record a valuation allowance against the net
deferred income tax asset at November 30, 1995 or 1994 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 consolidated balance sheets are income tax refunds
receivable of $7 and $113 at November 30, 1995 and 1994, respectively.
43
The difference between the provision for (benefit from) income taxes
and the amount computed by multiplying income from continuing
operations before income taxes by the U.S. statutory rate is
summarized as follows:
1995 1994 1993
------ ------ ------
Expected tax provision (benefit) ...... $1,227 $1,119 $ (591)
Dividend exclusion benefit ............ (78) - (35)
State income taxes, net of federal
income tax benefit .................. 112 225 (28)
Other, net ............................ 24 (162) 15
------ ------ ------
$1,285 $1,182 $ (639)
====== ====== ======
Income taxes paid in 1995, 1994 and 1993 were $5,026, $727 and $1,170,
respectively. The Company received income tax refunds of $163 and $790
during 1995 and 1994, respectively.
(8) 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. 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.
STOCK OPTIONS
The Company had 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.
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.
44
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.
During 1995, the Company cancelled 20,500 and 27,000 options previously
granted under the 1993 Plan and 1994 Plan, respectively. In addition,
the Company granted 16,250 options from the 1993 Plan and 2,000 options
from the 1994 Plans. The per share exercise price for the options
granted under these plans ranged from $4.75 to $5.25. 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, 1992 173,436 $5.67 - $7.750
Exercised ........................ (173,436) 5.67 - 7.750
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
Cancelled ........................ (47,500) 6.25 - 8.125
Granted .......................... 18,250 4.75 - 5.250
--------
Outstanding at November 30, 1995 645,500 4.75 - 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 $302, $559 and $956 in 1995, 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 14).
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 1995 or 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, 1995 and 1994, no shares of any series of preferred stock
were issued and outstanding.
45
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, 1995, no contributions had
been made to the plan.
COMMON STOCK WARRANTS
As described in Note 6, 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.
(9) GEOGRAPHICAL SEGMENT INFORMATION
--------------------------------------------------------------------------
The Company operates exclusively in the consumer products industry.
Geographic data for 1995, 1994 and 1993 is included in the schedule of
geographical information on page 35, which is an integral part of these
financial statements.
(10) 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.
46
(11) SUPPLEMENTAL FINANCIAL INFORMATION
--------------------------------------------------------------------------
A - Inventories consisted of the following at November 30, 1995 and
1994:
1995 1994
------ ------
Raw materials .................................. $ 5,396 $ 3,451
Finished goods and work in process ............. 5,694 5,070
Excess of current cost over LIFO value ......... (2,412) (2,274)
------- -------
Total inventories ............................ $ 8,678 $ 6,247
======= =======
International inventories included above, valued on a lower of FIFO
cost or market basis at November 30, 1995 and 1994, were $1,720 and
$1,780, respectively.
B - Property, plant and equipment consisted of the following at
November 30, 1995 and 1994:
1995 1994
------ ------
Land ........................................... $ 150 $ 150
Buildings and improvements ..................... 2,957 2,900
Machinery and equipment ........................ 21,354 19,308
Less -- accumulated depreciation ............... (15,131) (13,867)
------- -------
Property, plant and equipment, net ........... $ 9,330 $ 8,491
======= =======
C - Accrued liabilities consisted of the following at November 30, 1995
and 1994:
1995 1994
------ ------
Accrued interest expense ....................... $ 3,942 $ 4,341
Salaries, wages and commissions ................ 1,317 1,377
Promotion expense .............................. 1,560 1,994
Accrued estimated specialty chemicals
divestiture costs ............................ 1,231 -
Other .......................................... 4,524 2,938
------- -------
Total accrued liabilities .................... $12,574 $10,650
======= =======
(12) 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.
47
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 $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 above has
been exceeded, the Company will pay Sterling an additional $1,000 per
year.
(13) 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 consolidated 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, 1995 and 1994, included the following components:
1995 1994 1993
------ ------ ------
Service cost (benefits earned during
the period) .............................. $ 30 $ 35 $ 35
Interest cost on accumulated postretirement
benefits obligation ...................... 102 94 84
----- ----- -----
Net periodic postretirement benefits
cost ..................................... $ 132 $ 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 sheets at November 30, 1995 and 1994:
1995 1994
------ ------
Accumulated postretirement benefits
obligation:
Retirees ................................... $ 883 $ 803
Fully eligible active plan participants .... 292 197
Other active participants .................. 170 114
------ ------
Accrued postretirement health care
benefits ................................... $1,345 $1,114
====== ======
48
For measurement purposes, a 6% annual rate of increase in the per
capita cost of covered health care benefits was assumed in 1995 and
1994. The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% and 8.5% at
November 30, 1995 and 1994, 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, 1995
by approximately 4.8%, and the aggregate of the service and interest
cost components of the net annual postretirement benefit cost by
approximately 3.6% for November 30, 1995.
(14) 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 8). (C) Accrued
severance of approximately $1,237 for executives leaving the Company
was recorded during the fourth quarter of fiscal 1993.
The Company recorded nonrecurring and unusual charges of $302 for 1995
and $559 for 1994 related to the stock options which were repriced in
1993 (Note 8). There is no remaining accrual as of November 30, 1995
related to the nonrecurring and unusual charges.
49
(15) DISCONTINUED OPERATIONS
--------------------------------------------------------------------------
On May 26, 1995, the Company completed the sale of its specialty
chemicals division to privately-held Elcat. The Company received $25,000
from the sale of the specialty chemicals division consisting of $20,000
in cash and $5,000 of 13.125% cumulative, convertible preferred stock of
Elcat. The net cash proceeds were used to repay long-term debt of
approximately $12,000. The Company recognized a gain of $9,334, (after
tax) from the sale and extraordinary charge (after tax) of $367 relating
to the early extinguishment of the debt.
The results of operations and the gain on disposal of the specialty
chemicals division have been separately classified as discontinued
operations in the accompanying consolidated statements of income. Net
sales of the specialty chemicals division were $6,739 through May 26,
1995, $13,586 for 1994 and $15,544 for 1993. Interest expense of $351,
$752 and $350 for 1995, 1994 and 1993, respectively, has been
allocated to discontinued operations based upon the ratio of net
assets discontinued to the total net assets of the consolidated entity.
50
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, 1995 and 1994
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, 1995. 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, 1995 and 1994 and the results of their
operations and their cash flows for each of the three years in the period
ended November 30, 1995 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.
Chattanooga, Tennessee
January 25, 1996
51
QUARTERLY INFORMATION
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
-------------------------------------------------------
TOTAL FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30
----- ----------- ------ --------- -----------
FISCAL 1995:
Continuing operations:
Net sales ...................... $ 100,598 19,372 27,114 28,990 25,122
Gross profit ................... $ 70,843 13,144 18,557 20,628 18,514
Income (loss)(1) ............... $ 2,325 (611) 670 1,673 593
Income (loss) per share (1) .... $ .32 (.08) .09 .23 .08
Total:
Net income (loss)............... $ 11,966 (250)(3) 10,480(3) 1,673 63(3)
Net income (loss) per
share (2) .................... $ 1.64 (.03)(3) 1.44(3) .23 .01(3)
FISCAL 1994:
Continuing operations:
Net Sales ...................... $ 94,370 17,714 23,642 25,954 27,060
Gross profit ................... $ 65,875 11,920 16,878 18,574 18,503
Income (loss) (1) .............. $ 2,110 (638) 1,198 1,212 338
Income (loss) per share (1) .... $ .29 (.09) .16 .17 .05
Total:
Net income (loss) .............. $ 2,054 (252)(4) 1,553(4) (105)(4) 858(4)
Net income (loss) per
share(2) ..................... $ .29 (.03)(4) .21(4) (.01)(4) .12(4)
(1) BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT.
(2) 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.
(3) INCLUDES INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX, OF
$361 OR $.05 PER SHARE, $10,177 OR $1.40 PER SHARE AND $(530) OR
$(.07) PER SHARE FOR THE QUARTERS ENDED FEBRUARY 28, MAY 31 AND
NOVEMBER 30, RESPECTIVELY.
(4) INCLUDES INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX, OF $385
OR $.05 PER SHARE, $355 OR $.05 PER SHARE, $239 OR $.03 PER SHARE
AND $521 OR $.07 PER SHARE FOR THE QUARTERS ENDED FEBRUARY 28,
MAY 31, AUGUST 31 AND NOVEMBER 30, RESPECTIVELY.
52
GEOGRAPHICAL SEGMENT INFORMATION
(IN THOUSANDS)
YEAR ENDED NOVEMBER 30,
---------------------------
1995 1994 1993
---- ---- ----
NET SALES:
Domestic ................................ $ 87,250 $ 82,643 $ 76,592
International ........................... 13,348 11,727 13,269
-------- -------- --------
Consolidated ............................ $100,598 $ 94,370 $ 89,861
======== ======== ========
OPERATING INCOME:
Domestic ................................ $ 16,719 $ 16,981 $ 10,127
International ........................... 1,292 120 381
-------- -------- --------
Total ................................. 18,011 17,101 10,508
Other unallocated expenses, net (1) ..... (14,401) (13,809) (12,247)
-------- -------- --------
Income (loss) from continuing
operations before income taxes ...... $ 3,610 $ 3,292 $ (1,739)
======== ======== ========
IDENTIFIABLE ASSETS:
Domestic ................................ $ 66,911 $ 69,361 $ 47,792
International ........................... 7,535 8,032 12,768
-------- -------- --------
Total ................................. 74,446 77,393 60,560
Investment in Elcat, Inc. ............... 5,000 - -
Discontinued operations ................. - 5,015 4,512
Corporate ............................... 3,964 3,034 4,462
-------- -------- --------
Consolidated .......................... $ 83,410 $ 85,442 $ 69,534
======== ======== ========
(1) PRINCIPALLY INTEREST EXPENSE, CORPORATE OVERHEAD NOT ALLOCATED AND
NONRECURRING AND UNUSUAL CHARGES.
53
BOARD OF DIRECTORS OFFICERS CHATTEM, INC.
ZAN GUERRY ZAN GUERRY Chattanooga, Tennessee 37409
Chairman and President Chairman and President Corporate Office
Chattem, Inc.
Chattanooga, Tennessee ROBERT E. BOSWORTH SUBSIDIARIES AND AFFILIATED COMPANIES
Executive Vice President
SAMUEL E. ALLEN and Chief Financial Officer CHATTEM (U.K.) LIMITED
Chairman Guerry House
GLOBALT, Inc. HUGH F. SHARBER Ringway Centre
Atlanta, Georgia Secretary Edison Road
Basingstoke, Hampshire RG21 2YH
LOUIS H. BARNETT ADDITIONAL FINANCIAL England
Business Consultant INFORMATION
Fort Worth, Texas COMMENCING WITH THE 1996 CHATTEM (CANADA) INC.
FISCAL YEAR, THE COMPANY 2220 Argentia Road
ROBERT E. BOSWORTH WILL DISCONTINUE ISSUING Mississauga, Ontario L5N 2K7
Executive Vice President PRINTED QUARTERLY REPORTS
and Chief Financial Officer TO STOCKHOLDERS. IN PLACE HBA INSURANCE LTD.
Chattem, Inc. OF THESE REPORTS, THE P. O. Box HM 2062
Chattanooga, Tennessee COMPANY WILL FORWARD TO Hamilton 5, Bermuda
REQUESTING SHAREHOLDERS
ROBERT M. BOYD, JR. COPIES OF QUARTERLY PRESS SIGNAL INVESTMENT &
Business Consultant RELEASES AND/OR QUARTERLY MANAGEMENT CO.
Hilton Head, South Carolina REPORTS ON FORM 10-Q FILED 1100 North Market Street
WITH THE SECURITIES AND Suite 780, Wilmington Trust Center
RICHARD E. CHENEY EXCHANGE COMMISSION. Wilmington, Delaware 19801-1239
Former Chairman Emeritus BOTH THE QUARTERLY
Hill and Knowlton, Inc. INFORMATION AND THE COMMON STOCK LISTING
New York, New York COMPANY'S ANNUAL REPORT Over-the-Counter
ON FORM 10-K FILED WITH THE NASDAQ Symbol: CHTT
SCOTT L. PROBASCO, JR. COMMISSION MAY BE OBTAINED
Chairman of the Executive WITHOUT CHARGE BY WRITING TO TRANSFER AGENT AND
Committee THE DIRECTOR OF FINANCE, REGISTRAR
SunTrust Bank, Tennessee, N.A. CHATTEM, INC. OR BY CALLING SunTrust Bank, Atlanta, N.A.
Chattanooga, Tennesee 1-800-366-6077, EXT. 769 P. O. Box 4625
Atlanta, GA 30302
A. ALEXANDER TAYLOR II
Partner
Miller & Martin
Chattanooga, Tennessee