UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1996
COMMISSION FILE NUMBER 0-5905
CHATTEM, INC.
A TENNESSEE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
TELEPHONE: 423-821-4571
REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
AS OF JULY 8, 1996, 8,547,991 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT PAR
VALUE, WERE OUTSTANDING.
1
CHATTEM, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of May 31, 1996 and
November 30, 1995 .............................................
Condensed Consolidated Statements of Income for the
Three and Six Months Ended May 31, 1996 and 1995 ..............
Consolidated Statements of Cash Flows for the Six Months Ended
May 31, 1996 and 1995 .........................................
Notes to Condensed Consolidated Financial Statements ............
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .........................
SIGNATURES ..........................................................
EXHIBIT 11 - Statement Regarding Computation of Per Share Earnings...
EXHIBIT 27 - Financial Data Schedule ................................
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MAY 31, NOVEMBER 30,
ASSETS 1996 1995
- ------ ---------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 8,582 $ 3,636
Accounts receivable, net ......................... 24,216 16,248
Refundable and deferred income taxes ............. 1,400 1,400
Inventories ...................................... 12,278 8,678
Prepaid expenses and other current assets ........ 1,096 1,112
--------- --------
Total current assets ........................... 47,572 31,074
--------- --------
PROPERTY, PLANT AND EQUIPMENT, NET ................. 9,347 9,330
--------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc. ........................ 5,656 5,328
Patents, trademarks and other purchased
product rights, net.............................. 67,894 31,007
Debt issuance costs, net ......................... 3,832 3,073
Deferred income taxes ............................ 98 98
Other ............................................ 2,509 3,500
--------- --------
Total other noncurrent assets .................. 79,989 43,006
--------- --------
TOTAL ASSETS ................................. $ 136,908 $ 83,410
--------- --------
--------- --------
See accompanying notes to condensed consolidated financial statements.
3
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' DEFICIT MAY 31, NOVEMBER 30,
1996 1995
---------- -----------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt ............... $ 2,675 $ 1,600
Accounts payable ................................... 2,994 5,462
Payable to bank .................................... 2,014 1,184
Accrued liabilities ................................ 12,231 12,574
-------- -------
Total current liabilities ........................ 19,914 20,820
-------- -------
LONG-TERM DEBT, less current maturities .............. 124,257 78,089
-------- -------
OTHER NONCURRENT LIABILITIES ......................... 2,338 1,922
-------- -------
SHAREHOLDERS' DEFICIT:
Common shares, without par value, at stated value .. 1,780 1,519
Paid-in surplus .................................... 58,321 52,099
Accumulated deficit ................................ (67,945) (69,386)
-------- -------
(7,844) (15,768)
Foreign currency translation adjustment ............ (1,757) (1,653)
-------- -------
Total shareholders' deficit .................... (9,601) (17,421)
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
DEFICIT ....................................$136,908 $83,410
-------- -------
-------- -------
See accompanying notes to condensed consolidated financial statements.
4
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands, except per share amounts)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
-------------------- ------------------
1996 1995 1996 1995
------ ------ ------ ------
NET SALES .............................. $ 30,430 $ 27,114 $ 49,127 $ 46,486
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales ........................ 9,329 8,557 15,078 14,785
Advertising and promotion ............ 11,365 9,853 18,366 17,268
Selling, general and administrative .. 4,836 4,729 9,060 8,597
-------- -------- -------- --------
Total costs and expenses ............... 25,530 23,139 42,504 40,650
-------- -------- -------- --------
INCOME FROM OPERATIONS ................. 4,900 3,975 6,623 5,836
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense ..................... (3,014) (2,964) (5,631) (5,847)
Investment income .................... 268 52 923 84
Gain on product divestitures ......... 877 -- 877 --
Other, net ........................... (8) 7 (10) 8
-------- -------- -------- --------
Total other income (expense) ....... (1,877) (2,905) (3,841) (5,755)
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ................... 3,023 1,070 2,782 81
PROVISION FOR INCOME TAXES ............. 1,013 400 809 22
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS....... 2,010 670 1,973 59
-------- -------- -------- --------
DISCONTINUED OPERATIONS:
Income from operations, less provision
for income taxes of $196 and $417,
respectively .......................... -- 314 -- 675
Gain on disposal, less provision
for income taxes of $6,046 ......... -- 9,863 -- 9,863
-------- -------- -------- --------
Total discontinued operations ..... -- 10,177 -- 10,538
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY LOSS ....... 2,010 10,847 1,973 10,597
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET .......... (532) (367) (532) (367)
-------- -------- -------- --------
NET INCOME ............................. $ 1,478 $10,480 $ 1,441 $ 10,230
-------- -------- -------- --------
-------- -------- -------- --------
WEIGHTED AVERAGE NUMBER OF COMMON
EQUIVALENT SHARES OUTSTANDING ......... 7,794 7,292 7,547 7,292
-------- -------- -------- --------
NET INCOME PER COMMON SHARE:
Continuing operations ................ $ 0.26 $ 0.09 $ 0.26 $ 0.01
Discontinued operations .............. -- 1.40 -- 1.44
Extraordinary loss ................... (0.07) (0.05) (0.07) (0.05)
-------- -------- -------- --------
Net income per common share ........ $ 0.19 $ 1.44 $ 0.19 $ 1.40
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes to condensed consolidated financial statements.
5
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
FOR THE SIX MONTHS ENDED
May 31,
----------------------------------
1996 1995
---------- ----------
OPERATING ACTIVITIES:
Net income .............................. $ 1,441 $ 10,230
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization.......... 2,109 2,029
Gain on sale of speciality chemicals
business ............................ -- (9,863)
Extraordinary loss on early
extinguishment of debt .............. 532 367
Gain on sale of trademarks and other
product rights ...................... (877) --
Dividend receivable from Elcat, Inc.... (328) --
Other, net ............................ (382) 347
Changes in operating assets and
liabilities:
Increase in accounts receivable ..... (8,213) (3,010)
Increase in inventories ............. (3,600) (554)
Increase in refundable and deferred
income taxes ....................... -- (95)
Decrease in accounts payable and
accrued liabilities ................ (2,285) (1,775)
Increase (decrease) in payable to
bank ............................... 830 (1,301)
--------- --------
Net cash used in operating
activities ....................... (10,773) (3,625)
--------- --------
INVESTING ACTIVITIES:
Purchase of property, plant and
equipment ............................ (710) (1,912)
Proceeds from sale of speciality
chemicals business, net .............. -- 18,747
Proceeds from notes receivable ........ 245 250
Purchase of trademarks and other
product rights ....................... (37,000) --
Proceeds from sale of trademarks and
other product rights.................. 1,000 --
Other, net ............................ -- 98
--------- --------
Net cash provided by (used in)
investing activities ............ (36,465) 17,183
--------- --------
FINANCING ACTIVITIES:
Repayment of long-term debt ........... (25,600) (29,425)
Proceeds from long-term debt .......... 72,750 15,000
Proceeds from issuance of common stock. 5,500 --
Proceeds from borrowings against
insurance policies ................... 1,412 --
Proceeds from sale of interest rate
cap .................................. -- 984
Debt issuance costs ................... (1,847) --
Other, net ............................ -- (159)
--------- --------
Net cash provided by (used in)
financing activities ............. 52,215 (13,600)
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS ................ (31) 4
--------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period .... 4,946 (38)
At beginning of period ................ 3,636 3,034
--------- --------
At end of period ...................... $ 8,582 $ 2,996
--------- --------
--------- --------
PAYMENTS FOR:
Interest .............................. $ 5,525 $ 5,996
Taxes ................................. $ 950 $ 173
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY
Issuance of 155,792 shares of common
stock to Fund the GOLD BOND
acquisition........................... $ 1,000
See accompanying notes to condensed consolidated financial statements.
6
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The accompanying unaudited
condensed consolidated financial statements, in the opinion of management,
include all adjustments necessary for a fair presentation. All such
adjustments are of a normal recurring nature.
2. The Company incurs significant expenditures on television, radio and print
advertising to support its nationally branded over-the-counter
pharmaceuticals and functional toiletries and cosmetics. Customers
purchase products from the Company with the understanding that the brands
will be supported by the Company's extensive media advertising. This
advertising supports the retailers' sales effort and maintains the
important brand franchise with the consuming public. Accordingly, the
Company considers its advertising program to be clearly implicit in its
sales arrangements with its customers. Therefore, the Company believes it
is appropriate to allocate a percentage of the necessary supporting
advertising expenses to each dollar of sales by charging a percentage to
sales on an interim basis based upon anticipated annual sales and
advertising expenditures (in accordance with APB Opinion No. 28) and
adjusting that accrual to the actual expenses incurred at the end of the
year.
3. The results of operations for the six months ended May 31, 1996 and 1995
are not necessarily indicative of the results to be expected for the
respective full years. Seasonality is a factor in the Company's overall
business, with the first quarter sales and income trailing the other fiscal
quarters.
4. Certain amounts in the prior years' financial information have been
reclassified to conform to the 1996 presentation.
5. Inventories consisted of the following:
May 31, November 30,
1996 1995
--------- ------------
Raw materials ......................... $ 6,884 $ 5,396
Finished goods and work in process .... 7,820 5,694
Excess of current cost over LIFO
values ............................... (2,426) (2,412)
-------- --------
Total inventories ............$ 12,278 $ 8,678
-------- --------
-------- --------
7
6. Accrued liabilities consisted of the following:
May 31, November 30,
1996 1995
--------- ------------
Income and other taxes ................ $ 248 $ 1,214
Salaries, wages and commissions ....... 571 1,317
Advertising and promotion ............. 4,067 1,560
Interest .............................. 3,952 3,942
Estimated specialty chemicals
divestiture costs .................... 8 1,231
Other ................................. 3,385 3,310
------- -------
Total accrued liabilities ....... $12,231 $12,574
------- -------
------- -------
7. On April 29, 1996, the Company and Signal Investment & Management Co.
("Signal"), a wholly-owned subsidiary of Chattem, purchased the worldwide
rights for the GOLD BOND line of medicated powders and anti-itch cream.
GOLD BOND is the leading brand in the medicated powder market and has a
growing presence in the anti-itch cream market. The purchase price for
the trademarks and inventory was $40,000. Additionally, the Company assumed
certain liabilities of approximately $500. The Company financed the GOLD
BOND acquisition and repaid all existing bank indebtedness by entering into
a new $61,500 credit agreement, issuing 1,100,000 new shares of Chattem
stock at $5.00 per share to a group of investors, including certain
officers, directors and affiliates and issued to the seller, $1,000 of
Chattem stock valued at the average closing price of the stock ten days
prior to closing.
8. On June 6, 1996, the Company and Signal purchased the rights for the
HERPECIN-L line of medicated lip balm. HERPECIN-L is a cold sore and fever
blister treatment that also contains a sunscreen. The purchase price for
the trademark, receivables and inventory was $5,560 plus a royalty
payment equal to the greater of $214 or 5% of net sales. Receivables and
inventory were acquired by the Company. The royalty payment is payable
annually for each of the seven twelve-month periods beginning July 1, 1996
and ending June 30, 2003. The purchase was financed by the Company with a
$5,000 addition to its existing bank credit agreement with the remaining
$560 being funded by the Company.
8
9. Long-Term debt consisted of the following as of May 31, 1996:
Revolving lines of credit payable to banks at variable rates
(8.19% as of May 31, 1996) $ 24,000
Term loans payable to banks at variable rates (8.48% weighted
average as of May 31, 1996) 37,500
12.75% Series B Subordinated Notes, due 2004, net of
unamortized discount of $1,568 as of May 31, 1996 65,432
--------
Total long-term debt 126,932
Less: current maturities 2,675
--------
Total long-term debt, net of current maturities $124,257
--------
--------
The Company entered into a new credit agreement with a syndicate of banks
on April 29, 1996. The purpose of the new credit agreement was to finance
the GOLD BOND purchase and repay all existing bank debt. The credit
agreement is divided into an aggregate of $24,000 revolving lines of credit
for working capital purposes, a five year $20,000 Term A loan facility and
a seven and one-half year $17,500 Term B loan facility.
The combined Term A and B loans are payable in quarterly installments as
follows:
August 31, 1996 to May 31, 1997 $ 669
August 31, 1997 to May 31, 1998 919
August 31, 1998 to May 31, 1999 1,044
August 31, 1999 to May 31, 2001 1,294
August 31, 2001 to October 29, 2003 1,663
The revolving lines of credit are available to the Company up to a
maximum $24,000 with a maturity date of April 20, 2001. Cash is advanced
on the revolving lines of credit based on the Company's cash, receivables
and inventory.
The Company may elect either a prime interest rate or Eurodollar interest
rate option applicable to the term and revolving line loans under the credit
agreement. The prime 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 for the Term
A and revolving line loans under the credit agreement is 2.0% for the
prime interest rate option and 3.0% for the Eurodollar rate option. The
maximum floating rate margin for the Term B loan under the credit agreement
is 2.25% for the prime interest rate option and 3.25% for the Eurodollar
rate option.
The credit agreement is secured by substantially all of the Company's cash,
accounts receivables, inventory, real property and brand trademarks and
associated intellectual property held by the Company.
9
During April, 1996, the Company prepaid previously outstanding long-term
debt, with funds received from the new credit agreement. In connection with
the prepayment of those borrowings, the Company incurred an extraordinary
loss of $532 (net of income taxes), or $0.07 per share. The loss primarily
related to the write-off of debt issuance and other deferred costs.
On April 29, 1996, the Company recognized the remaining unamortized gain of
$65 on an interest rate cap associated with the repaid bank debt.
Future maturities of long-term as follows:
May 31, 1997 $ 2,675
May 31, 1998 3,675
May 31, 1999 4,175
May 31, 2000 5,175
May 31, 2001 29,175
Later years 83,625
----------
128,500
Less: unamortized discount (1,568)
----------
$ 126,932
----------
----------
The May 31, 2001 maturities include the $24,000 revolving lines of credit.
On June 6, 1996, the Company amended the new credit agreement and increased
the outstanding balance of the Term B loan by $5,000 to fund a portion
the HERPECIN-L purchase. The total outstanding balance of the Term B loan as
of June 6, was $22,500 increasing the total bank debt outstanding under
the new credit agreement to $66,500. The interest rate and $12.5 quarterly
principal amortization of the additional $5,000 are identical to the
original outstanding Term B portion.
On May 31, 1996, the Company entered into two interest rate cap
agreements in notional principal amounts of $15,000 each. The Company
entered into these agreements as hedges on its variable rate debt and
not for trading purposes. The term of each agreement is for a three year
period ending June 4, 1999. The interest rate on each cap for the prime
interest rate option was 5.50% and 6.27% for the LIBOR rate option plus
the appropriate floating rate margin. The differences to be paid or received
on the caps will be included as interest expense as payments are made or
received.
10. During April, 1996, the Company sold the trademarks and inventory of two of
its minor consumer products brands, SOLTICE and BLIS-TO-SOL. The purchase
price of $1,200 consisted of $1,000 cash received at closing and a $200
promissory note requiring payments of $100 per year for the next two years.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
GENERAL
On April 29, 1996, the Company purchased the worldwide rights for the GOLD BOND
line of medicated powders and anti-itch cream. GOLD BOND is the leading brand
in the medicated powder market and has a growing presence in the anti-itch cream
market. Concurrently with the closing of the GOLD BOND acquisition, the Company
entered into a $61,500 bank credit agreement, issued 1,100 new shares of
Chattem stock at $5.00 per share to a group of investors, including certain
officers, directors and affiliates and issued to the seller, $1,000 of
Chattem stock valued at the average closing price of the stock ten days prior
to the closing. The proceeds of the financing and stock issuance were used to
fund the GOLD BOND acquisition and repay all existing bank indebtedness of
the Company.
As a result of the sale of the Company's specialty chemicals division in May,
1995, 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. The results of operations and the gain on disposal of
the specialty chemicals division have been separately classified as
discontinued operations in the consolidated statements of income for the
three and six months ended May 31, 1995.
For the second quarter, net sales increased 12.2% to $30,430 from $27,114, while
operating income rose more rapidly than sales, growing 23.3% to $4,900 in 1996
from $3,975 in 1995. Income and earnings per share from continuing operations
increased almost three fold to $2,010 or $0.26 per share, from $670, or $0.09
per share in 1995. This increase in income and earnings per share was impacted
by the rapid growth in operating income and the recognition of a $877 gain on
the sale of SOLTICE and BLIS-TO-SOL. The acquisition of GOLD BOND during April,
1996, also had a positive impact on earnings for the quarter.
An extraordinary loss of $532, or $0.07 per share, net of tax, resulting from
the early extinguishment of debt was recognized during the quarter ended May 31,
1996. During April, 1996, the Company prepaid previously outstanding long-term
debt with funds received from a new bank credit agreement entered into to fund
the GOLD BOND acquisition. The loss primarily related to the write-off of debt
issuance and other deferred costs.
Earnings per share from continuing operations increased $0.17 per share for the
quarter and $0.25 for the six months ended May 31, 1996. The increase in
earnings per share from continuing operations was primarily due to increased
income from operations, the gain on the sale of the two brands discussed
above and a gain on the sale of a non-cash producing security. The per share
amounts for the quarter and six months ended May 31, 1996 reflect the
increase in the total number of shares outstanding due to the issuance of
additional shares during the period and the increase in the price of the
Company's stock.
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. On
May 1, the Company began shipping PHISODERM Antibacterial Skin Cleanser. The
launch of this line extension of PHISODERM will be supported by heavy
advertising
11
and promotional expenditures. Also on May 1, in an effort to expand the
PHISODERM facial cleanser business, the Company began shipping an unfragranced
product for sensitive skin.
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 the brands and redeploy the assets
to products or businesses with greater growth potential or to reduce
indebtedness.
RESULTS OF OPERATIONS
The following table sets forth, for continuing operations and for the
periods indicated, certain items from the Company's Condensed Consolidated
Statements of Income expressed as a percentage of net sales:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
-------------------- ------------------
1996 1995 1996 1995
------ ------ ------ ------
NET SALES ................................ 100.0% 100.0% 100.0% 100.0%
------ ------ ------- -------
COSTS AND EXPENSES:
Cost of sales .......................... 30.7 31.6 30.7 31.8
Advertising and promotion .............. 37.3 36.3 37.4 37.1
Selling, general and administrative .... 15.9 17.4 18.4 18.5
------ ------ ------- -------
Total costs and expenses ............. 83.9 85.3 86.5 87.4
------ ------ ------- -------
INCOME FROM OPERATIONS ................... 16.1 14.7 13.5 12.6
------ ------ ------- -------
OTHER INCOME (EXPENSE):
Interest expense ....................... (9.9) (10.9) (11.5) (12.6)
Investment income ...................... 0.9 0.2 1.9 0.2
Gain on product divestiture ............ 2.9 - 1.8 -
Other, net ............................. - - - -
------ ------ ------- -------
Total other income (expense) ........ (6.1) (10.7) (7.8) (12.4)
------ ------ ------- -------
INCOME BEFORE INCOME TAXES ............... 10.0 4.0 5.7 0.2
PROVISION FOR INCOME TAXES ............... 3.3 1.5 1.6 0.1
------ ------ ------- -------
NET INCOME FROM CONTINUING OPERATIONS .... 6.7% 2.5% 4.1% 0.1%
------ ------ ------- -------
------ ------ ------- -------
12
COMPARISON OF THREE MONTHS ENDED MAY 31, 1996 AND 1995 FOR CONTINUING OPERATIONS
Net sales for the three months ended May 31, 1996 increased $3,316 or 12.2% to
$30,430 from $27,114 for the same period last year. The increase in net sales
was attributable to a $2,716, or 11.3%, increase in domestic consumer products
sales to $26,742 from $24,026 last year and an increase of $600, or 19.4%, in
international consumer products sales to $3,688 from $3,088.
For domestic consumer products in the fiscal 1996 period, increases over
sales in the corresponding fiscal 1995 period were realized for the BULLFROG
(61.0%), MUDD (128.3%), BENZODENT (35.3%) and ULTRASWIM (18.1%) brands, while
decreases were recognized for the PAMPRIN (8.0%), PREMSYN (10.5%),
FLEX-ALL-454 (8.8%%), CORN SILK (16.0%), NORWICH (18.7%) and PHISODERM
(16.7%) brands. The remaining brands were basically flat versus a year ago.
The BULLFROG and MUDD brands continued their strong sales growth from fiscal
1995. The strong BULLFROG sales are primarily from increased distribution.
The increased sales of MUDD are due to the success of the new packaging and
new products which were introduced during 1995. GOLD BOND and PHISODERM
Antibacterial Skin Cleanser also contributed to the increase in net sales by
$2,609 over the prior year period. GOLD BOND was acquired on April 29, 1996
and PHISODERM Antibacterial began shipping May 1, 1996. The decline in sales
of the brands listed above reflects the maturation of these product lines,
increased competition in their respective product categories and markets. All
sales variances were principally due to volume changes.
International consumer product sales for the 1996 period increased $7 or .7%,
for the Canadian operation and $482 or 24.4% for the United Kingdom business.
U.S. export sales increased $111 or 103.6% over the prior year period. Sales
increases for SUN-IN and MUDD brands were realized in the current period by
the United Kingdom division, while sales declines were recognized for the
ULTRASWIM product line. All sales variances were principally due to volume
changes.
Cost of goods sold as a percentage of net sales decreased to 30.7% for the
quarter from 31.6% for the prior year period. The slight decrease was largely
the result of the addition of GOLD BOND for a portion of the quarter and the
shift in product mix of sales of domestic consumer products to higher margin
products.
Advertising and promotion expenses increased by $1,512 or 15.4% in the 1996
period and were 37.3% of net sales compared to 36.3% in the corresponding
1995 period. Increased expenditures were provided in the current period for
BULLFROG, MUDD and PHISODERM brands as well as for the most recently acquired
GOLD BOND product line.
Selling, general and administrative costs increased $107, or 2.3% to $4,836
but decreased as a percentage of net sales to 15.9% compared to 17.4% for the
prior year period.
Interest expense increased $50 or 1.7% principally as a result of the
increased outstanding long-term debt which was used to fund the GOLD BOND
acquisition and to pay off all previously outstanding bank debt. Investment
income increased in the 1996 period primarily due to the partial period
accrual of the dividend on the cumulative, convertible preferred stock of
Elcat, Inc., which was received as a part of the proceeds from the sale in
fiscal 1995 of the specialty chemicals division. A gain on the sale of
SOLTICE and BLIS-TO-SOL of $877 was recognized during the 1996 period.
13
Income from continuing operations increased by $1,340 or 200.0%, in the 1996
period. The increase resulted primarily from increased sales, increased
investment income and the gain on the product divestitures.
COMPARISON OF SIX MONTHS ENDED MAY 31, 1996 AND 1995 FOR CONTINUING OPERATIONS
Net sales for the six months ended May 31, 1996 increased $2,641 or 5.7% to
$49,127 from $46,486 for the same period last year. The increase in net sales
was attributable to a $1,849, or 4.5%, increase in domestic consumer products
sales to $43,280 from $41,431 last year and an increase of $792, or 15.7%, in
international consumer products sales to $5,847 from $5,055.
For domestic consumer products in the fiscal 1996 period, increases over
sales in the corresponding fiscal 1995 period were realized for the BULLFROG
(36.5%), ICY HOT (8.1%), ULTRASWIM (8.9%) and MUDD (75.6%) brands, while
decreases were recognized for the NORWICH (12.4%), PREMSYN (8.3%),
FLEX-ALL-454 (11.0%), and CORN SILK (21.1%) product lines. The remaining
brands were basically flat versus a year ago. GOLD BOND and PHISODERM
Antibacterial Skin Cleanser contributed to the increase in net sales by
$2,609 over the prior year period. GOLD BOND was acquired on April 29, 1996
and PHISODERM Antibacterial began shipping May 1, 1996. The decline in sales
of the brands listed above reflects the maturation of these product lines,
increased competition in their respective product categories and markets.
All sales variances were principally due to volume changes.
International consumer product sales for the 1996 period decreased $130 or
7.7%, for the Canadian operation and increased $1,101 or 40.1% for the United
Kingdom business. U.S. export sales decreased $179 or 28.5% over the prior
year period. Increases over the sales in the corresponding fiscal 1995 period
were recognized for SUN-IN and MUDD, while decreases were recognized for
FLEX-ALL-454, CORNSILK and PHISODERM for the Canadian business. Sales
increases for SUN-IN and MUDD brands were realized in the current period by
the United Kingdom division. U.S. export sales declined from the prior year
period.
Cost of goods sold as a percentage of net sales decreased to 30.7% from 31.8%,
in the 1995 period. The decrease was the result of a shift in product mix of
sales of domestic consumer products to higher margin products and the addition
of GOLD BOND.
Advertising and promotion expenses increased $1,098, or 6.4% in the 1996 period
and were 37.4% of net sales compared to 37.1% in the corresponding 1995 period.
Increased expenditures were provided in the current period for the BULLFROG,
MUDD and PHISODERM brands as well as for the most recently acquired GOLD BOND
product line.
14
Selling, general and administrative increased $463 or 5.4% in the 1996
period, but were reduced to 18.4% of net sales compared to 18.5% in the
corresponding 1995 period. The increase was primarily due to increased
research and development costs and selling expenses associated with the
Company's new product line extensions.
Interest expense decreased $216, or 3.7% in the current period as a result of
the application of the net proceeds from the sale of the specialty chemicals
division in May 1995. Investment income increased in the 1996 period
primarily due to the partial period accrual of the dividend on the
cumulative, convertible preferred stock of Elcat, Inc., which was received as
a part of the proceeds from the sale in fiscal 1995 of the specialty
chemicals division. A gain of $452 was recognized from the sale of a
non-cash producing security. A gain on the sale of SOLTICE and BLIS-TO-SOL
of $877 was recognized.
Income from continuing operations increased by $1,914 in the 1996 period.
The increase resulted from increased sales, increased investment income and the
gain on the product divestitures.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with a combination of
internally generated funds and borrowings. The Company's principal uses of
cash are for operating expenses, working capital, capital expenditures and
long-term debt servicing.
Cash used in operations was $10,773 for the six months ended May 31, 1996.
The primary uses of cash for operations were accounts receivable,
inventories, accounts payable and accrued liabilities. The increase in
receivables is due to sales of product with seasonal dating and the
acquisition of GOLD BOND. The increase in inventory is due to a buildup of
the Company's new line extensions which were launched May 1, 1996 and the
acquisition of GOLD BOND. The decrease in accounts payable and accrued
liabilities is due primarily to the timing of payments between the end of the
fiscal year and May 31, 1996.
Cash used in investing activities was $36,465 in the six months ended May 31,
1996. The primary use was for the acquisition of GOLD BOND.
Financing activities provided cash of $52,215 in the six months ended May 31,
1996. The Company financed the acquisition of GOLD BOND and repaid all
outstanding indebtedness with the proceeds of a new $61,500 bank credit
agreement and the issuance of 1,100,000 new shares of Chattem common stock
to a group of investors, including certain officers, directors and affiliates
at $5.00 per share and issued to the seller, $1,000 of Chattem stock valued
at the average closing price of the stock ten days prior to the closing. The
Company also borrowed $1,412 against the cash surrender value of certain life
insurance policies.
The following table presents working capital data at May 31, 1996 and
November 30, 1995 or for the respective years then ended:
Item 1996 1995
---- --------- ---------
Working capital (current assets less current liabilities........ $27,658 $10,254
Current ratio (current assets dividend by current liabilities).. 2.39 1.49
Quick ratio (cash and cash equivalents and accounts
receivable dividend by current liabilities).................... 1.65 .96
Average accounts receivable turnover............................ 4.49 5.86
Average inventory turnover...................................... 3.16 3.99
Working capital as a percentage of total assets................. 20.20% 12.29%
15
The improvement in the current and quick ratios at May 31, 1996 as compared
to November 30, 1995 reflects primarily the impact of the GOLD BOND
acquisition which was funded with long-term borrowings and the receivables on
seasonal products.
Total loans outstanding were $126,932 at May 31, 1996 compared to $79,689 at
November 30, 1995, an increase of $47,243 during the six months ended May 31,
1996. The availability of credit is determined based on the Company's cash,
accounts receivable and inventories. The Company had approximately $7,000
invested in highly liquid, short-term investments at May 31, 1996 which was
available for general operating purposes as needed and has no further
availability under its credit facility.
The Company had not begun receiving payments on customer accounts for the
sales of GOLD BOND for the period from April 29, 1996 to May 31, 1996. The
dated receivables related to seasonal sales of BULLFROG, SUN-IN and ULTRASWIM
are due August 31, 1996 and are approximately $8,000 to $9,000.
Management of the Company believes that cash flows generated by operations,
along with funds available under its bank credit facility will be sufficient
to fund the Company's current commitments and proposed operations.
FOREIGN OPERATIONS
The Company's primary foreign operations are conducted through its Canadian
and U.K. subsidiaries. The functional currencies of these subsidiaries are
Canadian dollars and British pounds, respectively. Fluctuations in exchange
rates can impact operating results, including total revenues and expenses,
when translations of the subsidiary financial statements are made in
accordance with SFAS No. 52 "Foreign Currency Translation." For the six
months ended May 31, 1996 and 1995, these subsidiaries accounted for 11% and
9% of total revenues, respectively, and 5% and 8% of total assets. It has not
been the Company's practice to hedge its assets and liabilities in the U.K.
and Canada or its intercompany transactions due to the inherent risks
associated with foreign currency hedging transactions and the timing of
payment between the Company and its two foreign subsidiaries. Historically,
gains or losses from foreign currency transactions have not had a material
impact on the Company's operating results. A loss of $23 and a gain of $7 for
the six months ended May 31, 1996 and 1995, respectively, resulted from
foreign currency transactions.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Statement regarding computation of per share earnings
(Exhibit 11).
(2) Financial data schedule (Exhibit 27).
(b) The Company filed a Form 8-K dated May 2, 1996 with the Securities
and Exchange Commission. The Form 8-K disclosed the acquisition of
GOLD BOND by the Company.
17
CHATTEM, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHATTEM, INC.
(Registrant)
Dated: July 15, 1996 \s\ Robert E. Bosworth
---------------------------- ----------------------------------
Robert E. Bosworth,
Executive Vice President
and Chief Financial Officer
(principal financial officer)
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