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, 1997
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, 1997, 8,917,344 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, 1997 and November 30, 1996.................... 3
Condensed Consolidated Statements of Income for the Three and Six Months Ended May 31, 1997 and
1996............................................................................................. 5
Consolidated Statements of Cash Flows for the Six Months Ended May 31, 1997 and 1996.............. 6
Notes to Condensed Consolidated Financial Statements.............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................ 16
SIGNATURES............................................................................................ 17
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 1997 1996
- ----------------------------------------------------------------------------------- ----------- ---------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 13,449 $ 9,254
Accounts receivable, net......................................................... 26,950 20,276
Refundable and deferred income taxes............................................. 3,019 5,405
Inventories...................................................................... 10,340 10,295
Prepaid expenses and other current assets........................................ 510 912
----------- ---------------
Total current assets........................................................... 54,268 46,142
----------- ---------------
PROPERTY, PLANT AND EQUIPMENT, NET................................................. 9,696 9,774
----------- ---------------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc. ....................................................... 6,312 5,984
Patents, trademarks and other purchased product rights, net...................... 75,944 76,024
Debt issuance costs, net......................................................... 3,936 3,819
Other............................................................................ 2,491 10,440
----------- ---------------
Total other noncurrent assets.................................................. 88,683 96,267
----------- ---------------
TOTAL ASSETS................................................................. $ 152,647 $ 152,183
----------- ---------------
----------- ---------------
See accompanying notes to condensed consolidated financial statements.
3
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MAY 31, NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' DEFICIT 1997 1996
- ----------------------------------------------------------------------------------- ----------- ---------------
(UNAUDITED)
CURRENT LIABILITIES:
Current maturities of long-term debt............................................. $ 3,725 $ 3,906
Accounts payable................................................................. 3,654 6,602
Payable to bank.................................................................. 2,289 1,710
Accrued liabilities.............................................................. 15,456 14,131
----------- ---------------
Total current liabilities...................................................... 25,124 26,349
----------- ---------------
LONG-TERM DEBT, less current maturities............................................ 125,668 127,438
----------- ---------------
DEFERRED INCOME TAXES.............................................................. 2,917 2,917
----------- ---------------
OTHER NONCURRENT LIABILITIES....................................................... 2,936 2,659
----------- ---------------
SHAREHOLDERS' DEFICIT:
Preferred shares, without par value, authorized 1,000, none issued............... -- --
Common shares, without par value, authorized 20,000, issued 8,614 at May 31, 1997
and 8,592 at November 30, 1996................................................. 1,867 1,843
Paid-in surplus.................................................................. 58,620 58,561
Accumulated deficit.............................................................. (62,921) (66,114)
----------- ---------------
(2,434) (5,710)
Minimum pension liability adjustment............................................. (112) (112)
Foreign currency translation adjustment.......................................... (1,452) (1,358)
----------- ---------------
Total shareholders' deficit.................................................... (3,998) (7,180)
----------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT.................................. $ 152,647 $ 152,183
----------- ---------------
----------- ---------------
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,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
NET SALES....................................................... $ 39,178 $ 30,430 $ 67,124 $ 49,127
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales................................................. 10,888 9,329 19,282 15,078
Advertising and promotion..................................... 14,602 11,365 25,869 18,366
Selling, general and administrative........................... 5,767 4,836 10,424 9,060
--------- --------- --------- ---------
Total costs and expenses.................................... 31,257 25,530 55,575 42,504
--------- --------- --------- ---------
INCOME FROM OPERATIONS.......................................... 7,921 4,900 11,549 6,623
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense.............................................. (3,835) (3,014) (7,633) (5,631)
Investment and other income................................... 694 260 1,013 913
Gain on product divestitures.................................. -- 877 -- 877
--------- --------- --------- ---------
Total other income (expense)................................ (3,141) (1,877) (6,620) (3,841)
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES........... 4,780 3,023 4,929 2,782
PROVISION FOR INCOME TAXES...................................... 1,723 1,013 1,736 809
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY LOSS .... 3,057 2,010 3,193 1,973
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET......... -- (532) -- (532)
--------- --------- --------- ---------
NET INCOME...................................................... $ 3,057 $ 1,478 $ 3,193 $ 1,441
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING................................................... 8,852 7,794 8,830 7,547
--------- --------- --------- ---------
--------- --------- --------- ---------
NET INCOME PER COMMON SHARE:
Continuing operations......................................... $ 0.35 $ 0.26 $ 0.36 $ 0.26
Extraordinary loss............................................ -- (0.07) -- (0.07)
--------- --------- --------- ---------
Net income per common share................................. $ 0.35 $ 0.19 $ 0.36 $ 0.19
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements.
5
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
FOR THE SIX MONTHS
ENDED
MAY 31,
-----------------------
1997 1996
--------- ------------
OPERATING ACTIVITIES:
Net income.......................................................................... $ 3,193 $ 1,441
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization..................................................... 2,979 2,109
Extraordinary loss on early extinguishment of debt................................ -- 532
Gain on sale of trademarks and other product rights............................... -- (877)
Dividend receivable from Elcat, Inc............................................... (328) (328)
Other, net........................................................................ 266 414
Changes in operating assets and liabilities:
Increase in accounts receivable................................................. (6,774) (8,213)
Increase in inventories......................................................... (45) (3,600)
Decrease in refundable and deferred income taxes................................ 2,386 --
Decrease in prepaid and other current assets.................................... 1,384 16
Decrease in accounts payable and accrued liabilities............................ (1,623) (2,285)
--------- ------------
Net cash provided by (used in) operating activities........................... 1,438 (10,791)
--------- ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment........................................ (619) (710)
Proceeds from notes receivable.................................................... 100 245
Purchase of trademarks and other product rights................................... (1,000) (37,000)
Proceeds from sale of trademarks and other product rights......................... -- 1,000
Other, net........................................................................ (651) (812)
--------- ------------
Net cash used in investing activities......................................... (2,170) (37,277)
--------- ------------
FINANCING ACTIVITIES:
Repayment of long-term debt....................................................... (2,044) (25,600)
Proceeds from long-term debt...................................................... -- 72,750
Proceeds from issuance of common stock............................................ 83 5,500
Proceeds from borrowings against insurance policies............................... -- 1,412
Debt issuance costs............................................................... (383) (1,847)
Increase in payable to bank....................................................... 579 830
--------- ------------
Net cash provided by (used in) financing activities........................... (1,765) 53,045
--------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS.......................... (94) (31)
--------- ------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period................................................ (2,591) 4,946
At beginning of period............................................................ 16,040 3,636
--------- ------------
At end of period.................................................................. $ 13,449 $ 8,582
--------- ------------
PAYMENTS FOR:
Interest.......................................................................... $ 7,274 $ 5,525
Taxes............................................................................. $ 153 $ 950
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY:
Issuance of 154,887 shares of common stock at $6.46 per share to partially fund the
GOLD BOND acquisition............................................................. -- $ 1,000,000
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. These consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes thereto included in the Company's
Annual Report to Shareholders for the year ended November 30, 1996. The 1996
Annual Report has previously been filed with the Securities and Exchange
Commission as an exhibit to the Company's Form 10-K. The accompanying
unaudited 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 results of operations for the periods presented 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 traditionally trailing the other fiscal quarters.
3. 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.
4. Certain amounts in the prior years' financial information have been
reclassified to conform to the current period presentation.
5. For purposes of reporting cash flows, the Company considers all short-term
deposits and investments with original maturities of three months or less to
be cash equivalents, including cash and cash equivalents available
exclusively for the repayment of long-term debt.
7
6. Inventories consisted of the following at May 31, 1997 and November 30,
1996:
MAY 31, NOVEMBER 30,
1997 1996
--------- ------------
Raw materials....................................................... $ 5,415 $ 5,365
Finished goods and work in process.................................. 7,479 7,484
Excess of current cost over LIFO values............................. (2,554) (2,554)
--------- ------------
Total inventories................................................. $ 10,340 $ 10,295
--------- ------------
--------- ------------
7. Accrued liabilities consisted of the following at May 31, 1997 and November
30, 1996:
MAY 31, NOVEMBER 30,
1997 1996
--------- ------------
Income and other taxes.............................................. $ 1,849 $ --
Salaries, wages and commissions..................................... 683 1,287
Advertising and promotion........................................... 3,771 2,827
Interest............................................................ 3,928 3,996
Accrued pension benefits............................................ 2,076 2,076
Other............................................................... 3,149 3,945
--------- ------------
Total accrued liabilities......................................... $ 15,456 $ 14,131
--------- ------------
--------- ------------
8
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 May 23, 1997, the Company announced the signing of an agreement to
purchase certain assets of Sunsource International, Inc. and an affiliated
company (collectively, "Sunsource") consisting primarily of the exclusive
worldwide rights to five leading branded dietary supplement products. The
products being acquired are GARLIQUE, REJUVEX, MELATONEX, ECHINEX and
PROPALMEX. The purchase price of the assets was approximately $32,000,
including inventories and accounts receivable. Financing was provided by an
expansion of the Company's senior bank credit agreement and the issuance of
300,000 shares of the common stock of the Company to the seller. Additional
payments, based on the attainment of certain sales levels of the products
acquired, may be made to Sunsource in the six years following the purchase,
but such payments are not to exceed $15,750 in the aggregate. The purchase of
the assets was completed on June 26, 1997.
The GOLD BOND and HERPECIN-L product lines, which were acquired in the
second and third quarters of fiscal 1996, respectively, were largely responsible
for the improvement in the Company's operating results for the three and six
months ended May 31, 1997.
For the second quarter of the 1997 fiscal year, net sales increased 28.7%,
to $39,178 from $30,430 for the corresponding prior year period, while operating
income rose more rapidly than sales, growing 61.7% to $7,921 for 1997, from
$4,900 in 1996. Income from continuing operations increased $1,047, or 52.1%, to
$3,057, or $0.35 per share, from $2,010, or $0.26 per share in 1996. This
increase for the second quarter in income and earnings per share was impacted by
the rapid growth in operating income and a complete quarter of sales of the GOLD
BOND and HERPECIN-L product lines.
Earnings per share from continuing operations increased $0.09 per share, or
34.6%, for the quarter and $0.10, or 38.5%, for the six months ended May 31,
1997. The increase in earnings per share from continuing operations was
primarily due to increased income from operations, less an increase in interest
expense. The per share amounts for the quarter and six months ended May 31, 1997
reflect the increase in the total number of shares outstanding due to the
issuance of additional shares of the Company's common stock during the second
quarter of 1996 in conjunction with the GOLD BOND acquisition and the increase
in the price of the Company's common 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. During the six months ended May 31, 1997, new
additions to the ICY HOT (Arthritis Therapy Gel), GOLD BOND (Medicated Foot
Powder and CORNSTARCH PLUS Medicated Baby Powder), MUDD (5 Minute Mask) and
PAMPRIN and PREMSYN PMS (Gel Caps) product lines as well as a newly
repackaged CORNSILK line were introduced.
9
Strategically, the Company continually evaluates its products and businesses
as part of its 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,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
NET SALES.................................................................... 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales.............................................................. 27.8 30.7 28.7 30.7
Advertising and promotion.................................................. 37.3 37.3 38.6 37.4
Selling, general and administrative........................................ 14.7 15.9 15.5 18.4
--------- --------- --------- ---------
Total costs and expenses................................................. 79.8 83.9 82.8 86.5
--------- --------- --------- ---------
INCOME FROM OPERATIONS....................................................... 20.2 16.1 17.2 13.5
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense........................................................... (9.8) (9.9) (11.4) (11.5)
Investment and other income................................................ 1.8 .9 1.6 1.9
Gain on product divestitures............................................... -- 2.9 -- 1.8
--------- --------- --------- ---------
Total other income (expense)............................................. (8.0) (6.1) (9.8) (7.8)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES................................................... 12.2 10.0 7.4 5.7
PROVISION FOR INCOME TAXES................................................... 4.4 3.3 2.6 1.6
--------- --------- --------- ---------
NET INCOME FROM CONTINUING OPERATIONS........................................ 7.8% 6.7% 4.8% 4.1%
--------- --------- --------- ---------
10
COMPARISON OF THREE MONTHS ENDED MAY 31, 1997 AND 1996 FOR CONTINUING OPERATIONS
Net sales for the three months ended May 31, 1997 increased $8,748, or
28.7%, to $39,178 from $30,430 for the same period of 1996. This increase in net
sales was attributable to an $8,096, or 30.3% increase in domestic consumer
products sales to $34,837 from $26,741 last year and an increase of $652, or
17.7%, in international consumer products sales to $4,341 from $3,689.
For domestic consumer products in the 1997 period, increases over sales
in the corresponding 1996 period were realized for FLEX-ALL, ICY HOT,
PREMSYN, MUDD, GOLD BOND and HERPECIN-L. Decreases in sales from the
corresponding 1996 period were realized for BULLFROG, SUN-IN, ULTRASWIM,
NORWICH Aspirin and CORNSILK. Sales of the summer seasonal products
(BULLFROG, SUN-IN and ULTRASWIM) were affected by the cool and wet Spring
experienced in most sections of the country in 1997. BULLFROG sales were also
impacted by the loss of a large customer. The decline in CORNSILK sales for
the second quarter of the 1997 period reflects the effect of the reintroduction
of that entire line in completely new packaging in the first quarter of the
current fiscal year in which sales were unusually high. The ICY HOT sales
increase reflects the introduction in February 1997 of Arthritis Therapy Gel
to the product line. The over-all increase in sales is largely attributable
to the GOLD BOND and HERPECIN-L brands which were acquired in April and June
of 1996, respectively. All other product lines were basically flat compared
to the 1996 period. All sales variances were principally due to volume
changes.
International consumer product sales for the second quarter of the 1997
period increased $313, or 31.0%, for the Canadian operation and $126, or
5.1%, for the United Kingdom business. U.S. export sales increased $213, or
96.8%, over the prior year period. Sales from the introduction of the
BULLFROG brand in the 1997 period along with a full three months' sales of
the GOLD BOND line, introduced in June 1996, accounted for practically all of
the Canadian sales increase in the three months ended May 31, 1997. Sales
increases for the SUN-IN and MUDD brands were realized in the current period
by the United Kingdom division, while sales declines were recognized for the
ULTRASWIM and CORNSILK product lines. U.S. export sales' increases in the
1997 period were entirely associated with the ICY HOT and GOLD BOND brands.
All sales variances were largely the result of changes in volume.
Cost of sales as a percentage of net sales decreased to 27.8% for the 1997
quarter from 30.7% for the same prior year period. This decline was essentially
due to a shift in product mix of sales of domestic consumer products to higher
margin brands.
Advertising and promotion expenses increased $3,237, or 28.5%, in the 1997
period and were 37.3% of net sales for both the 1997 and 1996 quarters. This
increase in the 1997 period was primarily associated with the GOLD BOND,
HERPECIN-L and ICY HOT brands.
Selling, general and administrative expenses increased $931, or 19.2%, in
the 1997 period but declined as a percentage of net sales to 14.7% compared to
15.9% for the prior year period. The increase was primarily due to increases in
direct selling expenses, as a result of increased sales.
Interest expense increased $821, or 27.2%, in the 1997 period, reflecting
primarily the additional debt incurred for the GOLD BOND and HERPECIN-L product
acquisitions in fiscal 1996. A gain of $877 on the sale of SOLTICE and
BLIS-TO-SOL product lines was recognized in the 1996 period.
11
Income from continuing operations increased by $1,047, or 52.1%, in the 1997
period. The net increase resulted primarily from increased sales and an improved
cost of sales percentage of net sales, offset in part by increased interest
expense and income taxes.
COMPARISON OF SIX MONTHS ENDED MAY 31, 1997 AND 1996 FOR CONTINUING OPERATIONS
Net sales for the six months ended May 31, 1997 increased $17,997, or 36.6%,
to $67,124 from $49,127 for the same period last year. The increase in net sales
was associated with a $17,172, or 39.7%, increase in domestic consumer product
sales to $60,451 from $43,279 last year and an increase of $825, or 14.1%, in
international consumer products sales to $6,673 from $5,848.
For domestic consumer products in the 1997 period, increases over sales in
the corresponding 1996 period were realized for FLEX-ALL, ICY HOT, PREMSYN,
SUN-IN, MUDD, CORNSILK, BENZODENT, PHISODERM Anti-bacterial Hand Cleanser, GOLD
BOND and HERPECIN-L. Decreases in sales from the corresponding 1996 period were
realized for BULLFROG, NORWICH Aspirin, ULTRASWIM and PHISODERM. Sales of
BULLFROG and ULTRASWIM were affected by the cool and wet Spring experienced in
most sections of the country in 1997. BULLFROG sales were also impacted by the
loss of a large customer. ICY HOT Arthritis Therapy Gel, introduced in February
1997, and the reintroduction of the CORNSILK line in completely new packaging in
the first quarter of that year had a very favorable impact on sales of those
respective brands for the 1997 period. All other product lines were basically
flat compared to the 1996 period. All sales variances were principally due to
volume changes.
International consumer product sales for the 1997 period increased $616, or
39.6%, for the Canadian operation, and $11, or .3%, for the United Kingdom
business. U.S. export sales increased $198, or 44.0%, over the prior year
period. Sales from the introduction of the BULLFROG brand in the 1997 period
along with a full six months' sales of the GOLD BOND product line, introduced in
June 1996, accounted for practically all of the Canadian sales increase in the
six months ended May 31, 1997. U.S. export sales' increases in the 1997 period
were entirely associated with the ICY HOT and GOLD BOND product lines. All sales
variances were largely the result of volume changes.
Cost of sales as a percentage of net sales decreased to 28.7% for the 1997
period from 30.7% for the prior year's first six months. This decline was
essentially due to a shift in product mix of sales of domestic consumer products
to higher margin brands.
Advertising and promotion expenses increased $7,053, or 40.8%, in the 1997
period and were 38.6% of net sales compared to 37.4% in the corresponding 1996
period. This increase in the 1997 period was primarily associated with the GOLD
BOND, HERPECIN-L and ICY HOT brands.
12
Selling, general and administrative expenses increased $1,364, or 15.1%, in
the 1997 period but were reduced to 15.5% of net sales compared to 18.4% in the
corresponding 1996 period. The increase was primarily due to increases in direct
selling expenses, as a result of increased sales.
Interest expense increased $2,002, or 35.6%, in the 1997 period, reflecting
primarily the additional debt incurred for the GOLD BOND and HERPECIN-L product
acquisitions in fiscal 1996. A gain of $877 on the sale of the SOLTICE and
BLIS-TO-SOL brands was recognized in the 1996 period.
Income from continuing operations increased by $1,220, or 61.8%, in the
current period. The net increase resulted primarily from increased sales and an
improved cost of sales percentage of net sales, offset in part by increased
interest expense and income taxes.
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, acquisitions, working capital, capital expenditures
and long-term debt servicing.
Cash of $1,438 was provided by operations for the six months ended May 31,
1997 while cash of $10,791 was used in operations of the prior year period. The
increase in cash flows provided by operations was primarily a result of changes
in net income, accounts receivable, inventories, refundable and deferred income
taxes, prepaid and other current assets, accounts payable and accrued
liabilities. The changes were due in part to the acquisitions of GOLD BOND and
HERPECIN-L.
Investing activities used cash of $2,170 in the six months ended May 31,
1997 compared to $37,277 for the comparable prior year period. The decrease
in cash used primarily resulted from the acquisition of GOLD BOND during the
second quarter of the fiscal 1996 period.
Financing activities used cash of $1,765 in the six months ended May 31,
1997 while cash of $53,045 was provided by financing activities in the prior
year period. In the fiscal 1996 period, the Company financed the acquisition of
GOLD BOND and repaid all outstanding bank indebtedness with the proceeds of a
new bank credit agreement and the issuance of 1,100,000 new shares of the
Company's common stock.
As previously discussed, the Company has expanded its senior bank credit
agreement to fund the acquisition of Sunsource. The transaction was completed on
June 26, 1997.
13
The following table presents working capital data at May 31, 1997 and
November 30, 1996 or for the respective years then ended:
MAY 31, NOVEMBER 30,
ITEM 1997 1996
- -------------------------------------------------------------------- --------- ------------
Working capital (current assets less current liabilities)........... $ 29,144 $ 19,793
Current ratio (current assets divided by current liabilities)....... 2.16 1.75
Quick ratio (cash and cash equivalents and accounts receivable
divided by current liabilities)................................... 1.61 1.12
Average accounts receivable turnover................................ 5.35 6.51
Average inventory turnover.......................................... 3.48 3.70
Working capital as a percentage of total assets..................... 19.09% 13.01%
The improvement in the current and quick ratios at May 31, 1997 as compared
to November 30, 1996 reflected primarily the increase in cash and cash
equivalents, increase in accounts receivable and decrease in accounts payable.
The decline in the average accounts receivable turnover as of May 31,
1997 as compared to November 30, 1996 is primarily due to the increase in the
average receivable balance. This increase is due to the acquisition of GOLD
BOND and the dated receivables which are included in the May receivable
balances but not in the November receivable balances.
Total loans outstanding were $129,393 as of May 31, 1997 compared to
$131,344 as of November 30, 1996, a decrease of $1,951. The revolving line of
credit is available to the Company up to $24,000 or such lesser amount as is
determined to be available under the terms of the Company's bank credit
agreement. The availability of credit under the revolvers is determined based on
the Company's cash, accounts receivable and inventories. The amount of cash and
cash equivalents on deposit in excess of the calculated availability is included
as a current asset in the accompanying consolidated balance sheet as of May 31,
1997 and is available for general operating purposes. The amount of cash and
cash equivalents on deposit up to the calculated availability is included in
other non-current assets in the accompanying consolidated balance sheet as of
May 31, 1997 and is available exclusively for the repayment of long-term bank
debt. As of May 31, 1997, the Company had total cash and cash equivalents of
$13,449. The Company had $8,550 invested in highly liquid short-term investments
as of May 31, 1997 and has no further availability under its credit facility.
The dated receivables related to the seasonal sales of BULLFROG, SUN-IN and
ULTRASWIM are due August 15, 1997 and are approximately $5,000 to $6,000 as of
May 31, 1997.
Management of the Company believes that cash flows generated by operations,
along with funds available under its short-term highly liquid investments, will
be sufficient to fund the Company's current commitments and proposed operations.
14
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,
1997 and 1996, these subsidiaries accounted for 9% and 11% of total revenues,
respectively, and 5% of total assets for both periods. 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. Losses of $49 and of $23 for the six months ended May 31, 1997 and
1996, respectively, resulted from foreign currency transactions.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contain forward looking statements that are based on management's
current beliefs and assumptions about expectations, estimates, strategies and
projections for the Company. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual outcomes and results may differ materially from
what is expressed or forecasted in such forward looking statements. The Company
undertakes no obligation to update publicly any forward looking statements
whether as a result of new information, future events or otherwise. The risks,
uncertainties and assumptions regarding forward looking statements include, but
are not limited to, product demand and market acceptance risks; product
development risks, such as delays or difficulties in developing, producing and
marketing new products or line extensions; the impact of competitive products,
pricing and advertising; constraints resulting from financial condition of the
Company, including the degree to which the Company is leveraged, debt service
requirements and restrictions under bank loan agreements and the indenture; and
other risks described in the Company's Securities and Exchange Commission
filings.
15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Statement regarding computation of per share earnings (Exhibit 11).
(2) Financial data schedule (Exhibit 27).
(b) No reports on Form 8-K were filed with the Securities and Exchange
Commission during the three months ended May 31, 1997.
16
CHATTEM, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHATTEM, INC.
(Registrant)
Dated: July 15, 1997 /s/ ROBERT E. BOSWORTH
------------------------------------------
Robert E. Bosworth,
Executive Vice President
and Chief Financial Officer
(principal financial officer)
17
CHATTEM, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHATTEM, INC.
(Registrant)
Dated: July 15, 1997
------------------------------------------
Robert E. Bosworth,
Executive Vice President
and Chief Financial Officer
(principal financial officer)
18