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 AUGUST 31, 1999
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 OCTOBER 13, 1999, 9,821,681 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT
PAR VALUE, WERE OUTSTANDING.
CHATTEM, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of August 31, 1999 and
November 30, 1998......................................................................... 3
Consolidated Statements of Income for the Three and Nine
Months Ended August 31, 1999 and 1998..................................................... 5
Consolidated Statements of Cash Flows for the Nine Months Ended
August 31, 1999 and 1998.................................................................. 6
Notes to Consolidated Financial Statements.................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................... 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................... 28
SIGNATURES...................................................................................... 29
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
CONSOLIDATED BALANCE SHEETS
(In thousands)
AUGUST 31, NOVEMBER 30,
ASSETS 1999 1998
- ------ -------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 10,575 $ 2,076
Accounts receivable, less allowance for doubtful
accounts of $850 at August 31, 1999 and $775 at
November 30, 1998 ....................................... 50,704 36,581
Refundable and deferred income taxes ...................... 3,058 3,049
Inventories ............................................... 23,700 19,606
Prepaid expenses and other current assets ................. 1,042 784
-------- --------
Total current assets .................................... 89,079 62,096
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET .......................... 22,092 18,146
-------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc. ................................. 3,312 3,102
Patents, trademarks and other purchased product
rights, net ............................................. 358,449 272,226
Debt issuance costs, net .................................. 12,001 10,091
Other 3,379 3,351
-------- --------
Total other noncurrent assets 377,141 288,770
-------- --------
TOTAL ASSETS .......................................... $488,312 $369,012
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated
financial statements.
4
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
AUGUST 31, NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ------------------------------------ --------- ---------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt ............................ $ 10,000 $ 17,444
Accounts payable ................................................ 7,091 12,733
Payable to bank ................................................. 10,183 1,026
Accrued liabilities ............................................. 45,663 30,209
--------- ---------
Total current liabilities ..................................... 72,937 61,412
--------- ---------
LONG-TERM DEBT, less current maturities ........................... 363,641 273,913
--------- ---------
DEFERRED INCOME TAXES ............................................. 6,826 6,826
--------- ---------
OTHER NONCURRENT LIABILITIES ...................................... 1,966 2,110
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000,
none issued ................................................... -- --
Common shares, without par value, authorized 50,000,
issued 9,821 at August 31, 1999
and 9,574 at November 30, 1998 ................................ 2,045 1,994
Paid-in surplus ................................................. 73,682 69,068
Accumulated deficit ............................................. (31,263) (44,960)
--------- ---------
44,464 26,102
Cumulative other comprehensive income -
Foreign currency translation adjustment ....................... (1,522) (1,351)
--------- ---------
Total shareholders' equity ................................... 42,942 24,751
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................ $ 488,312 $ 369,012
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated
financial statements.
5
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands, except per share amounts)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
NET SALES ...................................... $ 78,661 $ 67,600 $ 224,830 $ 161,066
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales ................................ 21,045 19,381 59,719 44,917
Advertising and promotion .................... 30,390 26,088 88,443 64,470
Selling, general and administrative .......... 8,401 7,366 23,085 19,266
--------- --------- --------- ---------
Total costs and expenses ................... 59,836 52,835 171,247 128,653
--------- --------- --------- ---------
INCOME FROM OPERATIONS ......................... 18,825 14,765 53,583 32,413
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense ............................. (9,222) (7,720) (27,370) (19,232)
Investment and other income .................. 101 97 345 571
Gain (loss) on product divestiture ........... -- (75) -- 10,328
--------- --------- --------- ---------
Total other income (expense) ............... (9,121) (7,698) (27,025) (8,333)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS ............................ 9,704 7,067 26,558 24,080
PROVISION FOR INCOME TAXES ..................... 3,691 2,676 10,028 9,011
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS ............... 6,013 4,391 16,530 15,069
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET .................. (533) (958) (2,833) (2,859)
--------- --------- --------- ---------
NET INCOME ..................................... $ 5,480 $ 3,433 $ 13,697 $ 12,210
--------- --------- --------- ---------
--------- --------- --------- ---------
COMMON SHARES:
Weighted average number outstanding (basic) .. 9,774 9,483 9,742 9,165
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average and dilutive potential number
outstanding ................................ 10,039 9,846 10,037 9,507
--------- --------- --------- ---------
--------- --------- --------- ---------
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income before extraordinary loss ........... $ .61 $ .46 $ 1.70 $ 1.64
Extraordinary loss ......................... (.05) (.10) (.29) (.31)
--------- --------- --------- ---------
Total basic .............................. $ .56 $ .36 $ 1.41 $ 1.33
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted:
Income before extraordinary loss ........... $ .60 $ .45 $ 1.65 $ 1.58
Extraordinary loss ......................... (.05) (.10) (.29) (.30)
--------- --------- --------- ---------
Total diluted ............................ $ .55 $ .35 $ 1.36 $ 1.28
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated
financial statements.
6
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
FOR THE NINE MONTHS ENDED
AUGUST 31,
1999 1998
--------- ---------
OPERATING ACTIVITIES:
Net income .......................................................... $ 13,697 $ 12,210
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ................................... 10,866 6,881
Extraordinary loss on early extinguishment of debt, net ......... 2,833 2,859
Gain on sale of trademarks and other product rights ............. -- (10,328)
Dividend receivable from Elcat, Inc. ............................ (210) (392)
Other, net ...................................................... (10) (32)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ........................................... (14,123) (12,696)
Inventories ................................................... (601) 2,130
Refundable and deferred income taxes .......................... (9) --
Prepaid and other current assets .............................. (182) 675
Accounts payable and accrued liabilities ...................... 10,398 9,089
--------- ---------
Net cash provided by operating activities .................. 22,659 10,396
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ...................... (5,260) (4,157)
Proceeds from sale of investment ................................ 387 --
Purchase of trademarks and other related assets ................. (91,051) (173,084)
Proceeds from sale of trademarks and other product rights ....... -- 11,750
Increase in other assets ........................................ (1,679) (977)
--------- ---------
Net cash used in investing activities ...................... (97,603) (166,468)
--------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt ..................................... (140,909) (107,065)
Proceeds from long-term debt .................................... 223,193 262,365
Proceeds from exercise of stock options and warrants ............ 1,229 3,208
Repurchase of common stock ...................................... (1,564) --
Debt issuance costs ............................................. (6,494) (7,873)
Cancellation of interest rate swap agreements ................... (1,155) --
Increase in payable to bank ..................................... 9,157 2,137
--------- ---------
Net cash provided by financing activities .................. 83,457 152,772
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS .......................................................... (14) (26)
--------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period .............................. 8,499 (3,326)
At beginning of period .......................................... 2,076 4,858
--------- ---------
At end of period ................................................ $ 10,575 $ 1,532
--------- ---------
--------- ---------
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of 125,500 shares of common stock at $39.84 per
share to fund portion of Thompson Medical brands' acquisition .... $ 5,000 $ --
Additions to trademarks and other product rights by
assumption of certain liabilities ................................ $ 1,025 $ 8,000
PAYMENTS FOR:
Interest ........................................................ $ 21,405 $ 12,849
Taxes ........................................................... $ 6,227 $ 448
The accompanying notes are an integral part of these consolidated
financial statements.
7
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
1. The accompanying unaudited 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, 1998. The 1998
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 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. All significant intercompany
transactions and balances have been eliminated.
2. The Company incurs significant expenditures on television, radio and print
advertising to support its nationally branded over-the-counter health and
skin care products. 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 of 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 periods presented are not necessarily
indicative of the results to be expected for the respective full years.
4. Inventories consisted of the following at August 31, 1999 and November 30,
1998:
August 31, November 30,
1999 1998
---------- ------------
Raw materials and work in process .............. $ 9,636 $ 7,903
Finished goods ................................. 16,474 14,113
Excess of current cost over LIFO
values ....................................... (2,410) (2,410)
-------- --------
Total inventories .......................... $ 23,700 $ 19,606
-------- --------
-------- --------
7
5. Accrued liabilities consisted of the following at August 31, 1999 and
November 30, 1998:
August 31, November 30,
1999 1998
--------- --------
Income and other taxes ................... $ 5,353 $ 3,881
Salaries, wages and commissions .......... 2,618 2,850
Advertising and promotion ................ 18,201 8,896
Interest ................................. 11,453 5,969
Product acquisitions and divestitures .... 3,681 3,290
Royalties ................................ 2,255 2,889
Other .................................... 2,102 2,434
--------- --------
Total accrued liabilities .............. $ 45,663 $ 30,209
--------- --------
--------- --------
6. Effective December 1, 1998, the Company adopted Statements of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"; SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related
Information" and SFAS No. 132, "Employers' Disclosure about Pensions and
other Retirement Benefits."
SFAS No. 130 requires the Company to include a financial statement
presentation of comprehensive income and its components. Note 7 of these
Notes to Consolidated Financial Statements presents this information. The
Shareholders' Equity sections of the accompanying Consolidated Balance
Sheets as of August 31, 1999 and November 30, 1998 also present the
"Cumulative other comprehensive income" portion of the respective cumulative
comprehensive income.
SFAS No. 131 requires the Company to expand the financial statement
disclosures for operating segments, products and services and geographic
areas. For fiscal 1999, the Company, in accordance with the provisions of
this statement, has elected not to provide the disclosures for interim
reporting periods, but will present the required information in its annual
report for fiscal 1999 on a comparative annual basis.
SFAS No. 132 revises the Company's disclosures about pension and other post
retirement benefits plans. These revisions will be reflected in the
Company's annual report for fiscal 1999.
7. Comprehensive income consisted of the following components for the three and
nine months ended August 31, 1999 and 1998, respectively:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
1999 1998 1999 1998
-------- -------- -------- --------
Net income ........................ $ 5,480 $ 3,433 $ 13,697 $ 12,210
Other - foreign currency
translation adjustment ........... (48) (133) (171) (124)
-------- -------- -------- --------
Total comprehensive income ..... $ 5,432 $ 3,300 $ 13,526 $ 12,086
-------- -------- -------- --------
-------- -------- -------- --------
8. On December 21, 1998, the Company acquired the DEXATRIM, SPORTSCREME,
ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands from Thompson
Medical Company, Inc. (the "Thompson Medical brands") for $95,000. The
purchase price consisted of $90,000 cash and 125,500 shares of the Company's
common stock. The cash portion of the purchase price was financed by a new
senior credit facility. The purchase price of $95,000 was allocated $3,493
to inventory and $91,507 to the brands' trademarks.
8
9. On December 21, 1998, the Company refinanced its existing credit facilities
with $165,000 in senior secured credit facilities (the "Credit Facilities").
The Credit Facilities were provided by a syndicate of commercial banks. The
Credit Facilities included a $50,000 revolving credit facility and a
$115,000 term loan. The Credit Facilities were used to refinance existing
senior debt, to finance the acquisition of the Thompson Medical brands and
related fees and expenses and to finance working capital and other general
corporate needs. The $50,000 revolving credit facility matures on the
earlier of (i) December 21, 2003 and (ii) the date on which the term loan is
repaid in full. The $115,000 term loan matures on December 21, 2003. The
Credit Facilities contain covenants, representations, warranties and other
agreements by the Company that are customary in loan agreements and security
instruments relating to financing of this type.
The Company may elect either (i) the greater of the prime rate or federal
funds rate plus .5% or (ii) a floating rate or Eurodollar interest rate
option applicable to the term and revolving line loans under the Credit
Facilities. The prime rate and Eurodollar interest rate options are based on
a base rate plus a rate margin that fluctuates on the basis of the Company's
senior leverage ratio.
10. On May 7, 1999 the Company issued an additional $75,000 of its 8.875%
(priced to yield 8.8125%) senior subordinated notes under its indenture
relating to the issuance of its $200,000 of 8.875% notes on March 24, 1998.
The additional notes mature on April 1, 2008 and were issued under the
Company's $250,000 shelf registration statement filed on December 21, 1998
with the Securities and Exchange Commission. The net proceeds from the
issuance of the additional notes were used to retire $41,500 of the then
outstanding balance of the Company's $115,000 bank term loan and the
outstanding balance of $25,500 of its bank revolving loan under the Credit
Facilities.
Concurrent with the closing of the $75,000 note issue, the Company amended
the Credit Facilities. The amended Credit Facilities, provided by a
syndicate of banks, consists of a $70,000 term loan and a $50,000 revolving
credit facility. The revolving credit facility and the term loan both mature
on December 21, 2003. The amended Credit Facilities contain covenants,
representations, warranties and other agreements by the Company that are
customary in loan agreements relating to financing of this type. At August
31, 1999 the outstanding balances of the term loan and the revolving credit
facility were $61,000 and $0, respectively. The entire $50,000 of the
revolving credit facility was available for use by the Company at August 31,
1999.
11. In February 1999 a complaint was filed against the Company by Genderm
Corporation ("Genderm") in the U.S. District Court for the District of
Arizona. The complaint alleged, among other things, that the formulations of
CAPZASIN-P, CAPZASIN-HP and ICY HOT Arthritis Therapy Gel infringed U.S.
Patent 4,485,450 owned by Joel Bernstein, M.D. and licensed to Genderm (the
"Patent"). The complaint requested injunctive relief, compensatory and
treble damages, costs and attorney fees. A hearing on the preliminary
injunction was held on April 13-14, 1999. On May 6, 1999 U.S. District Court
for the District of Arizona held that Genderm had carried its burden of
proving a substantial likelihood of success and ultimately showing that the
Patent was infringed and issued a preliminary injunction prohibiting the
Company from shipping CAPZASIN-P cream, CAPZASIN-HP cream and ICY HOT
Arthritis Therapy Gel. Following the issuance of the preliminary injunction,
the Company reached a settlement with Genderm pursuant to which the Company
made a single payment of $750 in exchange for the dismissal of the complaint
and a fully paid license to use the Patent until its expiration. The
settlement cost was recorded as a settlement of a pre-acquisition
contingency.
12. During the nine months ended August 31, 1999 the Company retired $11,750
face amount of its 12.75% Senior Subordinated Notes, due 2004. The remaining
principal amount outstanding is $37,901. During the three months ended
August 31, 1999 the Company prepaid $7,000 of its bank term loan.
In connection with the repayment of portions of its bank loans and its
12.75% notes, the Company recognized an extraordinary loss on early
extinguishment of debt of $2,833, net of taxes, for the nine months ended
August 31, 1999. This loss primarily related to the write-off of debt
issuance costs connected with outstanding long-term debt retired before
maturity in the current period, the premium paid on the retirement of the
12.75% notes and the cost of the termination of interest rate swaps.
9
13. During the nine months ended August 31, 1999 the Company repurchased for
$1,564, and returned to unissued, 55,000 shares of its common stock,
without par value.
14. 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
15. Certain prior periods' amounts have been reclassified to conform to the
current periods' presentation.
16. The condensed consolidating financial statements, for the dates or periods
indicated, of Chattem, Inc. ("Chattem"), Signal Investment & Management Co.
("Signal"), the guarantor of the long-term debt of Chattem, and the
non-guarantor wholly-owned subsidiary companies of Chattem are presented
below. Signal is a wholly-owned subsidiary of Chattem; the guarantee of
Signal is full and unconditional and joint and several.
10
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
AUGUST 31, 1999
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
--------- --------- ------------- ------------ ------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents ............... $ 8,708 $ 25 $ 1,842 $ -- $ 10,575
Accounts receivable, less allowance for
doubtful accounts of $850 ............. 47,173 -- 3,531 -- 50,704
Refundable and deferred income taxes .... 3,058 -- -- -- 3,058
Inventories ............................. 21,131 -- 2,569 -- 23,700
Prepaid expenses and other current assets 725 -- 317 -- 1,042
--------- --------- -------- ------- --------
Total current assets .................. 80,795 25 8,259 -- 89,079
--------- --------- -------- ------- --------
PROPERTY, PLANT AND EQUIPMENT,
NET .................................... 21,724 -- 368 -- 22,092
--------- --------- -------- ------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc. ............... 3,312 -- -- -- 3,312
Patents, trademarks and other purchased
product rights, net ................... 5,755 352,694 -- -- 358,449
Debt issuance costs, net ................ 12,001 -- -- -- 12,001
Investment in subsidiaries .............. 9,930 -- -- (9,930) --
Other ................................... 2,868 -- 511 -- 3,379
--------- --------- -------- ------- --------
Total other noncurrent assets ......... 33,866 352,694 511 (9,930) 377,141
--------- --------- -------- ------- --------
TOTAL ASSETS ........................ $ 136,385 $ 352,719 $ 9,138 $(9,930) $488,312
--------- --------- -------- ------- --------
--------- --------- -------- ------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt .... $ 10,000 $ -- $ -- $ -- $ 10,000
Accounts payable ........................ 6,440 -- 651 -- 7,091
Payable to bank ......................... 10,183 -- -- -- 10,183
Accrued liabilities ..................... 44,408 -- 1,255 -- 45,663
--------- --------- -------- ------- --------
Total current liabilities ............. 71,031 -- 1,906 -- 72,937
--------- --------- -------- ------- --------
LONG-TERM DEBT, less current maturities ... 363,641 -- -- -- 363,641
--------- --------- -------- ------- --------
DEFERRED INCOME TAXES ..................... 1,085 5,741 -- -- 6,826
--------- --------- -------- ------- --------
OTHER NONCURRENT LIABILITIES .............. 1,966 -- -- -- 1,966
--------- --------- -------- ------- --------
INTERCOMPANY ACCOUNTS ..................... (343,416) 344,943 (1,527) -- --
--------- --------- -------- ------- --------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued ......... -- -- -- -- --
Common shares, without par value,
authorized 50,000, issued 9,821 ....... 2,045 2 9,928 9,930 2,045
Paid-in surplus ......................... 73,682 -- -- -- 73,682
Accumulated deficit ..................... (33,144) 2,033 (152) -- (31,263)
--------- --------- -------- ------- --------
42,583 2,035 9,776 9,930 44,464
Cumulative other comprehensive income -
Foreign currency translation adjustment (505) -- (1,017) -- (1,522)
--------- --------- -------- ------- --------
Total shareholders' equity .......... 42,078 2,035 8,759 9,930 42,942
--------- --------- -------- ------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .............. $ 136,385 $ 352,719 $ 9,138 $ 9,930 $488,312
--------- --------- -------- ------- --------
--------- --------- -------- ------- --------
Note 16.
11
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
NOVEMBER 30, 1998
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
--------- --------- ------------- ------------ ------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents ............... $ (95) $ 11 $ 2,160 $ -- $ 2,076
Accounts receivable, less allowance for
doubtful accounts of $775 ............. 32,920 -- 3,661 -- 36,581
Refundable and deferred income taxes .... 3,049 -- -- -- 3,049
Inventories ............................. 16,607 -- 2,999 -- 19,606
Prepaid expenses and other current assets 93 415 276 -- 784
--------- --------- -------- ------- --------
Total current assets .................. 52,574 426 9,096 -- 62,096
--------- --------- -------- ------- --------
PROPERTY, PLANT AND EQUIPMENT,
NET .................................... 17,675 -- 471 -- 18,146
--------- --------- -------- ------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc. ............... 3,102 -- -- -- 3,102
Patents, trademarks and other purchased
product rights, net ................... 4,409 267,817 -- -- 272,226
Debt issuance costs, net ................ 10,091 -- -- -- 10,091
Investment in subsidiaries .............. 9,930 -- -- (9,930) --
Other ................................... 2,979 -- 372 -- 3,351
--------- --------- -------- ------- --------
Total other noncurrent assets ......... 30,511 267,817 372 (9,930) 288,770
--------- --------- -------- ------- --------
TOTAL ASSETS ........................ $ 100,760 $ 268,243 $ 9,939 $(9,930) $369,012
--------- --------- -------- ------- --------
--------- --------- -------- ------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt .... $ 17,444 $ -- $ -- $ -- $ 17,444
Accounts payable ........................ 12,090 -- 643 -- 12,733
Payable to bank ......................... 1,026 -- -- -- 1,026
Accrued liabilities ..................... 28,963 20 1,226 -- 30,209
--------- --------- -------- ------- --------
Total current liabilities ............. 59,523 20 1,869 -- 61,412
--------- --------- -------- ------- --------
LONG-TERM DEBT, less current maturities ... 273,913 -- -- -- 273,913
--------- --------- -------- ------- --------
DEFERRED INCOME TAXES ..................... 1,085 5,741 -- -- 6,826
--------- --------- -------- ------- --------
OTHER NONCURRENT LIABILITIES .............. 2,110 -- -- -- 2,110
--------- --------- -------- ------- --------
INTERCOMPANY ACCOUNTS ..................... (259,582) 259,661 (79) -- --
--------- --------- -------- ------- --------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued ......... -- -- -- -- --
Common shares, without par value,
authorized 50,000, issued 9,574 ....... 1,994 2 9,928 9,930 1,994
Paid-in surplus ......................... 69,068 -- -- -- 69,068
Accumulated deficit ..................... (46,846) 2,819 (933) -- (44,960)
--------- --------- -------- ------- --------
24,216 2,821 8,995 9,930 26,102
Cumulative other comprehensive income -
Foreign currency translation adjustment (505) -- (846) -- (1,351)
--------- --------- -------- ------- --------
Total shareholders' equity .......... 23,711 2,821 8,149 9,930 24,751
--------- --------- -------- ------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .............. $ 100,760 $ 268,241 $ 9,939 $ 9,930 $369,012
--------- --------- -------- ------- --------
--------- --------- -------- ------- --------
Note 16.
12
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED AUGUST 31, 1999
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
--------- --------- -------------- ------------ ------------
NET SALES ........................... $ 212,773 $ -- $ 12,057 $ -- $ 224,830
--------- --------- -------- ------- ---------
COSTS AND EXPENSES:
Costs of sales .................... 55,669 -- 4,050 -- 59,719
Advertising and promotion ......... 77,124 7,063 4,256 -- 88,443
Selling, general and administrative 20,708 -- 2,377 -- 23,085
--------- --------- -------- ------- ---------
Total costs and expenses ........ 153,501 7,063 10,683 -- 171,247
--------- --------- -------- ------- ---------
INCOME FROM OPERATIONS .............. 59,272 (7,063) 1,374 -- 53,583
--------- --------- -------- ------- ---------
OTHER INCOME (EXPENSE):
Interest expense .................. (27,370) -- -- -- (27,370)
Investment and other income ....... 304 (5) 46 -- 345
Royalties ......................... (10,233) 10,422 (189) -- --
Corporate allocations ............. 26 -- (26) -- --
--------- --------- -------- ------- ---------
Total other income (expense) ... (37,273) 10,417 (169) -- (27,025)
--------- --------- -------- ------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS ................ 21,999 3,354 1,205 -- 26,558
PROVISION FOR INCOME TAXES .......... 8,232 1,140 656 -- 10,028
--------- --------- -------- ------- ---------
INCOME BEFORE EXTRAORDINARY
LOSS .............................. 13,767 2,214 549 -- 16,530
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET ....... (2,833) -- -- -- (2,833)
--------- --------- -------- ------- ---------
NET INCOME .......................... $ 10,934 $ 2,214 $ 549 $ -- $ 13,697
--------- --------- -------- ------- ---------
--------- --------- -------- ------- ---------
Note 16.
13
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED AUGUST 31, 1998
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
--------- --------- ------------- ------------ ------------
NET SALES ........................... $ 149,224 $ -- $ 11,842 $ -- $ 161,066
--------- --------- --------- ------- ---------
COSTS AND EXPENSES:
Cost of sales ..................... 41,064 -- 3,853 -- 44,917
Advertising and promotion ......... 56,127 3,989 4,354 -- 64,470
Selling, general and administrative 16,885 18 2,363 -- 19,266
--------- --------- --------- ------- ---------
Total costs and expenses ........ 114,076 4,007 10,570 -- 128,653
--------- --------- --------- ------- ---------
INCOME FROM OPERATIONS .............. 35,148 (4,007) 1,272 -- 32,413
--------- --------- --------- ------- ---------
OTHER INCOME (EXPENSE):
Interest expense .................. (19,232) -- -- -- (19,232)
Investment and other income ....... 525 2 44 -- 571
Gain on product divestiture ....... -- 10,328 -- -- 10,328
Intercompany insurance ............ (263) -- 263 -- --
Royalties ......................... (7,033) 7,222 (189) -- --
Corporate allocations ............. 25 (25) --
--------- --------- --------- ------- ---------
Total other income (expense) ... (25,978) 17,552 93 -- (8,333)
--------- --------- --------- ------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS ................ 9,170 13,545 1,365 -- 24,080
PROVISION FOR INCOME TAXES .......... 3,929 4,880 202 -- 9,011
--------- --------- --------- ------- ---------
INCOME BEFORE EXTRAORDINARY
LOSS .............................. 5,241 8,665 1,163 -- 15,069
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET ....... (2,859) -- -- -- (2,859)
--------- --------- --------- ------- ---------
NET INCOME .......................... $ 2,382 $ 8,665 $ 1,163 $ -- $ 12,210
--------- --------- --------- ------- ---------
--------- --------- --------- ------- ---------
Note 16.
14
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 31, 1999
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
--------- -------- ------------- ------------ ------------
OPERATING ACTIVITIES:
Net income ....................................... $ 10,934 $ 2,214 $ 549 $ -- $ 13,697
Adjustments to reconcile net income to ........... --
net cash provided by operating activities:
Depreciation and amortization .................. 3,702 7,063 101 -- 10,866
Extraordinary loss on early
extinguishment of debt, net ................. 2,833 -- -- -- 2,833
Dividend receivable from Elcat, Inc ............ (210) -- -- -- (210)
Deferred income tax provision .................. (1,140) 1,140 -- -- --
Other, net ..................................... (18) 8 -- -- (10)
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable .......................... (14,169) -- 46 -- (14,123)
Inventories .................................. (968) -- 367 -- (601)
Refundable and deferred income taxes ......... (9) -- -- -- (9)
Prepaid and other current assets ............. 22 -- (204) -- (182)
Accounts payable and accrued liabilities ..... 11,047 (938) 289 -- 10,398
--------- -------- ------- -------- ---------
Net cash provided by operating activities 12,024 9,487 1,148 -- 22,659
--------- -------- ------- -------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ....... (5,247) -- (13) -- (5,260)
Proceeds from sale of investment ................. -- 387 -- -- 387
Purchase of trademarks and other related assets .. (91,051) -- -- -- (91,051)
Increase in other assets ......................... (1,679) -- -- -- (1,679)
--------- -------- ------- -------- ---------
Net cash provided by (used in) investing
activities .............................. (97,977) 387 (13) -- (97,603)
--------- -------- ------- -------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt ...................... (140,909) -- -- -- (140,909)
Proceeds from long-term debt ..................... 223,193 -- -- -- 223,193
Proceeds from exercise of stock options
and warrants .................................... 1,229 -- -- -- 1,229
Repurchase of common stock ....................... (1,564) -- -- -- (1,564)
Debt issuance costs .............................. (6,494) -- -- -- (6,494)
Cancellation of interest rate swap agreements .... (1,155) -- -- -- (1,155)
Increase in payable to bank ...................... 9,157 -- -- -- 9,157
Dividends paid ................................... 3,000 (3,000) -- -- --
Changes in intercompany accounts ................. 8,320 (6,860) (1,460) -- --
--------- -------- ------- -------- ---------
Net cash provided by (used in) financing
activities ............................... 94,777 (9,860) (1,460) -- 83,457
--------- -------- ------- -------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS ............................... (21) -- 7 -- (14)
--------- -------- ------- -------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period ............... 8,803 14 (318) -- 8,499
At beginning of period ........................... (95) 11 2,160 -- 2,076
--------- -------- ------- -------- ---------
At end of period .................................$ 8,708 $ 25 $ 1,842 $ -- $ 10,575
--------- -------- ------- -------- ---------
--------- -------- ------- -------- ---------
Note 16.
15
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 31, 1998
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
--------- --------- -------------- ------------ ------------
OPERATING ACTIVITIES:
Net income ....................................... $ 2,382 $ 8,665 $ 1,163 $ -- $ 12,210
Adjustments to reconcile net income to net cash
provided by operating activities: ................ --
Depreciation and amortization .................. 2,786 3,989 106 -- 6,881
Extraordinary loss on early
extinguishment of debt, net ................... 2,859 -- -- -- 2,859
Gain on sale of trademarks and other
product rights ................................ -- (10,328) -- -- (10,328)
Dividend receivable from Elcat, Inc. ........... (392) -- -- -- (392)
Deferred income tax provision .................. (4,880) 4,880 -- -- --
Intercompany insurance ......................... 263 -- (263) --
Other, net ..................................... (32) -- -- -- (32)
Changes in operating assets and liabilities, net
of acquisitions:
Accounts receivable .......................... (12,317) -- (379) -- (12,696)
Inventories .................................. 2,535 -- (405) -- 2,130
Prepaid and other current assets ............. 755 -- (80) -- 675
Accounts payable and accrued liabilities ..... 10,375 (1,396) 110 -- 9,089
--------- --------- ------- ------- ---------
Net cash provided by operating activities . 4,334 5,810 252 -- 10,396
--------- --------- ------- ------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ....... (4,130) -- (27) -- (4,157)
Purchase of trademarks and other related assets .. (173,084) -- -- -- (173,084)
Proceeds from sale of trademarks and other
product rights .................................. 11,750 -- -- -- 11,750
Increase in other assets ......................... (582) (395) -- -- (977)
--------- --------- ------- ------- ---------
Net cash used in investing activities ..... (166,046) (395) (27) -- (166,468)
--------- --------- ------- ------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt ...................... (107,065) -- -- -- (107,065)
Proceeds from long-term debt ..................... 262,365 -- -- -- 262,365
Proceeds from exercise of stock options and
warrants ........................................ 3,208 -- -- -- 3,208
Debt issuance costs .............................. (7,873) -- -- -- (7,873)
Increase in payable to bank ...................... 2,137 -- -- -- 2,137
Dividends paid ................................... 3,000 (3,000) -- -- --
Changes in intercompany accounts ................. 2,543 (2,248) (295) -- --
--------- --------- ------- ------- ---------
Net cash provided by (used in) financing
activities ............................... 158,315 (5,248) (295) -- 152,772
--------- --------- ------- ------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS ............................... 23 -- (49) -- (26)
--------- --------- ------- ------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period ............... (3,374) 167 (119) -- (3,326)
At beginning of period ........................... 2,997 55 1,806 -- 4,858
--------- --------- ------- ------- ---------
At end of period ................................. $ (377) $ 222 $ 1,687 $ -- $ 1,532
--------- --------- ------- ------- ---------
--------- --------- ------- ------- ---------
Note 16.
16
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 December 21, 1998, the Company acquired the DEXATRIM, SPORTSCREME,
ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands from Thompson
Medical Company, Inc. for $95,000. The purchase price consisted of $90,000 cash
and 125,500 shares of the Company's common stock. The cash portion of the
purchase price was financed by a new senior credit facility. The purchase price
of $95,000 was allocated $3,493 to inventory and $91,507 to the brands'
trademarks.
On May 7, 1999 the Company issued an additional $75,000 of its 8.875% (priced to
yield 8.8125%) senior subordinated notes under its indenture relating to the
issuance of its $200,000 of 8.875% notes on March 24, 1998. The additional notes
mature on April 1, 2008 and were issued under the Company's $250,000 shelf
registration statement filed on December 21, 1998 with the Securities and
Exchange Commission. The net proceeds from the issuance of the additional notes
were used to retire $41,500 of the then outstanding balance of the Company's
$115,000 term bank loan and the outstanding balance of $25,500 of its revolving
bank loan dated December 21, 1998.
Concurrent with the closing of the $75,000 note issue, the Company amended its
senior credit facility. The amended facility, provided by a syndicate of banks,
consists of a $70,000 term loan and a $50,000 revolving credit facility. The
revolving credit facility and the term loan both mature on December 21, 2003.
The credit facility contains covenants, representations, warranties and other
agreements by the Company that are customary in loan agreements relating to
financing of this type. At August 31, 1999 the outstanding balances of the term
loan and the revolving credit facility were $61,000 and $0, respectively. The
entire $50,000 of the revolving credit facility was available for use by the
Company at August 31, 1999.
For the third quarter of fiscal 1999, net sales increased 16.4% to $78,661 from
$67,600 for the corresponding prior year period, while operating income rose
more rapidly than sales, growing 27.5% to $18,825 for 1999 from $14,765 in 1998.
Net income before extraordinary loss and product divestiture for the 1999 period
was $6,013, or $.60 per share, as compared to $4,438, or $.45 per share, for the
comparable 1998 period, an increase of 35.5%. Cash earnings (net income before
extraordinary items and product divestiture plus non-cash amortization) for the
third quarter of 1999 were $7,782, or $.78 per share, an increase of 35.9% from
$5,727, or $.58 per share, in the corresponding period of 1998.
For the first nine months of fiscal 1999, net sales were $224,830 compared to
$161,066 for the same period of 1998, a 39.6% increase. Income from operations
for the 1999 period was $53,583 versus $32,413 in the comparable 1998 period, a
65.3% increase. Net income before extraordinary loss for the first nine months
of fiscal 1999 was $16,530, or $1.65 per share, compared to $8,666, or $.91 per
share, excluding the gain on the sale of CORNSILK completed in the second fiscal
quarter of 1998, an increase of 90.7%. For the first nine months of fiscal 1999,
cash earnings were $21,662, or $2.16 per share, compared to $11,704, or $1.23
per share, for the comparable fiscal 1998 period.
The BAN brand, acquired in March 1998, the Thompson Medical brands, purchased in
December 1998, and the continuing strong performance of the GOLD BOND family of
products, including the continuing strength of GOLD BOND Medicated Body Lotion,
were primarily responsible for the revenue growth and the improvement in the
Company's operating results for the nine months ended August 31, 1999.
The Company achieved its results for the third consecutive quarter of its 1999
fiscal year despite weakening trends in its SUNSOURCE and DEXATRIM brands and
U.K. business. The effect of these trends could be offset by sales prior to the
implementation of selected price increases to be effective at the beginning of
the next fiscal year, sales for newly launched products and lower than
anticipated returns on certain brands, but it is too early in the fourth quarter
of 1999 to judge the effect, if any, of these factors.
17
Regarding SUNSOURCE, DEXATRIM and the U.K. businesses, the Company is
aggressively assessing various strategic options, including the launch of
DEXATRIM NATURAL in early 2000, reduced new product launch and advertising
spending levels for SUNSOURCE and reduction in expenses and new product
introductions in the U.K.
During the nine months ended August 31, 1999 the Company retired $11,750 face
amount of its 12.75% Senior Subordinated Notes, due 2004. During the three
months ended August 31, 1999 the Company prepaid $7,000 of its bank term loan.
In connection with the repayment of portions of its bank loans and its 12.75%
notes, the Company recognized an extraordinary loss on early extinguishment of
debt of $2,833, net of taxes, for the nine months ended August 31, 1999. This
loss primarily related to the write-off of debt issuance costs connected with
outstanding long-term debt retired before maturity in the current period, the
premium paid on the retirement of the 12.75% notes and the cost of the
termination of interest rate swaps.
During the nine months ended August 31, 1999 the Company repurchased for
$1,564, and returned as unissued, 55,000 shares of its common stock, without
par value.
The Company will continue to seek sales increases through a combination of
acquisitions and internal growth while maintaining high operating income levels.
As previously high-growth brands mature, sales increases will become even more
dependent on acquisitions and the development of successful line extensions of
existing products. During the first nine months of fiscal 1999, the Company
introduced the following line extensions/new products: BAN Ultra Dry Roll-On,
BAN Ultra Dry Solid Stick, GOLD BOND Triple Antibiotic Ointment, REPOSE Stress
Relief Formula, BULLFROG MAGICBLOCK, SUN-IN Super Streaks, FLEXALL QUIKGEL, MUDD
Self Heating Skin Cleanser and PHISODERM 4 Way Daily Acne Cleanser. Also, new
packaging for the entire BAN brand was introduced in the second quarter of
fiscal 1999. Line extensions, product introductions and acquisitions require a
significant amount of introductory advertising and promotional support. For a
period of time these products do not generate a commensurate amount of sales
and/or earnings. As a result, the Company may experience a short-term impact
on its profitability. Strategically, the Company continually evaluates its
products as part of its growth strategy and, in instances where the Company's
objectives are not realized, will dispose of these brands and redeploy the
assets to reduce indebtedness.
18
RESULTS OF OPERATIONS
The following table sets forth, for income before extraordinary loss and for the
periods indicated, certain items from the Company's Consolidated Statements of
Income expressed as a percentage of net sales:
FOR THE THREE MONTHS FOR THE NINE MONTHS
-------------------- -------------------
ENDED AUGUST 31, ENDED AUGUST 31,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- ------- --------
NET SALES ........................... 100.0% 100.0% 100.0% 100.0%
-------- -------- ------- --------
COSTS AND EXPENSES:
Cost of sales ..................... 26.8 28.7 26.6 27.9
Advertising and promotion ......... 38.6 38.6 39.3 40.0
Selling, general and administrative 10.7 10.9 10.3 12.0
-------- -------- ------- --------
Total costs and expenses ........ 76.1 78.2 76.2 79.9
-------- -------- ------- --------
INCOME FROM OPERATIONS .............. 23.9 21.8 23.8 20.1
-------- -------- ------- --------
OTHER INCOME (EXPENSE):
Interest expense .................. (11.7) (11.4) (12.2) (11.9)
Investment and other income ....... .1 .1 .2 .3
Gain on product divestiture ....... -- (.1) -- 6.4
-------- -------- ------- --------
Total other income (expense) ... (11.6) (11.4) (12.0) (5.2)
-------- -------- ------- --------
INCOME BEFORE INCOME TAXES .......... 12.3 10.4 11.8 14.9
PROVISION FOR INCOME TAXES .......... 4.7 3.9 4.5 5.6
-------- -------- ------- --------
NET INCOME BEFORE EXTRAORDINARY
LOSS .............................. 7.6% 6.5% 7.3% 9.3%
-------- -------- ------- --------
-------- -------- ------- --------
19
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 1999 AND 1998
Net sales for the three months ended August 31, 1999 increased $11,061, or
16.4%, to $78,661 from $67,600 for the same period last year. Domestic consumer
products sales increased $10,940, or 17.7%, to $72,659 from $61,719 for last
year's comparable period. Net sales of international consumer products increased
$121, or 2.1%, from $5,881 in the 1998 period to $6,002 in the current period.
The increase in domestic consumer products sales in the 1999 period was
primarily due to the Thompson Medical brands acquired in December 1998. Sales
increases were also registered for the FLEXALL, MUDD, BULLFROG, HERPECIN-L and
PHISODERM product lines, while decreases were experienced by the SUNSOURCE line
of dietary supplements. With the exception of the CORNSILK brand, which was sold
in May 1998, sales in the current period of the remaining product lines were
essentially flat or showed modest declines as compared to the corresponding
period of 1998. Sales variances were largely the result of changes in the volume
of unit sales of the particular brands.
The increase in sales of the FLEXALL and MUDD product lines was primarily the
result of the introduction of FLEXALL QUICKGEL and MUDD Self Heating Skin
Cleanser, respectively, in the third quarter of fiscal 1999. The sales increase
for BULLFROG reflects the strong demand for sun screen products by the general
public during the summer of 1999. PHISODERM sales increases in the current
period were largely due to the introduction of the 4 Way Daily Acne Cleanser
line extension earlier in fiscal 1999 and increased marketing support, while the
increase in sales of HERPECIN-L was principally the result of more effective
advertising.
The sales decline in the current period for the SUNSOURCE products reflected the
general softening of sales in the dietary supplements' market.
International consumer products sales for the third quarter of fiscal 1999
increased $308, or 19.4%, for the Canadian operation and $121, or 3.7%, for the
United Kingdom business. The increase in Canadian sales was primarily associated
with certain of the Thompson Medical brands and GOLD BOND, while sales decreases
were recorded for all of the remaining brands currently being sold in Canada.
The modest increase in United Kingdom sales was entirely associated with sales
of BAN to that division's Asian markets. Largely due to slow orders from
customers, sales declines were recorded for the other United Kingdom brands.
U.S. export sales decreased $308, or 30.6%, for the 1999 period as compared
to the same period in fiscal 1998, as a result of a book transfer in the
current period of BAN year to date sales in Thailand to the international
operations of the United Kingdom which manages all of the Company's Asian
operations. Sales variances were largely the result of changes in the volume
of unit sales of the particular brands.
Cost of goods sold as a percentage of net sales improved to 26.8% from 28.7% in
the 1998 period. The improvement was primarily the result of increased sales of
higher gross margin product lines in the current period.
Advertising and promotion expenses increased $4,302, or 16.5%, and were 38.6% of
net sales in both the current quarter and the corresponding 1998 period. The
majority of the increase in the 1999 period was related to the Thompson Medical
brands acquired in December 1998, and to the FLEXALL, SUN-IN, SUNSOURCE and
PHISODERM product lines. Decreases in spending related to the PAMPRIN, ICY HOT,
BENZODENT, BULLFROG, GOLD BOND and CORNSILK brands. The CORNSILK product line
was sold in May 1998.
The increase of $1,035, or 14.1%, in selling, general and administrative
expenses in the 1999 period was largely associated with direct selling expenses,
resulting from increased sales, with research and development costs and with
various expenses of the general service departments of the Company. The selling,
general and administrative expenses were 10.7% of net sales in the current
period as compared to 10.9% in the same period of last fiscal year, reflecting
the increase in sales from newly acquired brands without a corresponding
increase in overhead costs.
Interest expense increased $1,502, or 19.5%, in the 1999 period, reflecting
primarily the additional debt incurred for the Thompson Medical brands'
acquisition in December 1998.
20
An extraordinary loss of $533, net of taxes, related to the early extinguishment
of debt was recorded in the 1999 period. The loss primarily related to the
write-off of debt issuance costs connected with outstanding long-term debt
retired before maturity in the current period and the premium paid on the
retirement of $5,000 principal amount of the 12.75% notes.
Net income of $6,013 before extraordinary loss in the 1999 period was $1,622, or
36.9%, greater than the comparable 1998 amount of $4,391. This increase was
largely the result of increased sales, offset in part by increased interest
expense, advertising and promotion expense and selling, general and
administrative costs.
21
COMPARISON OF NINE MONTHS ENDED AUGUST 31, 1999 AND 1998
Net sales for the nine months ended August 31, 1999 increased $63,764, or 39.6%,
to $224,830 from $161,066 for the same period last year. Domestic consumer
products sales increased $62,515, or 42.4%, to $209,997 from $147,482 for last
year's comparable period. Net sales of international consumer products increased
$1,249, or 9.2%, from $13,584 in the 1998 period to $14,833 in the current
period.
The increase in domestic consumer products sales in the 1999 period was
primarily due to the BAN and Thompson Medical brands acquired in March and
December 1998, respectively, and the continuing strong performance of the GOLD
BOND family of products, especially GOLD BOND Medicated Body Lotion. Sales
increases were also registered for the MUDD, SUN-IN, HERPECIN-L and PHISODERM
product lines, while decreases were experienced by the SUNSOURCE products and
BULLFROG brands. With the exception of the CORNSILK brand, which was sold in May
1998, sales in the current period of the remaining product lines were
essentially flat or showed modest declines as compared to the corresponding
period of 1998. Sales variances were largely the result of changes in the volume
of unit sales of the particular brands.
The increase in sales of the GOLD BOND product line was led by the introductions
of the Medicated Body Lotion product in the third quarter of fiscal 1998 and the
Triple Antibiotic Ointment in the first fiscal quarter of 1999, although sales
increases were also realized for the medicated powders and cream products. GOLD
BOND sales in the current period were also favorably affected by increased
marketing support. SUN-IN, MUDD and PHISODERM sales increases in the current
period were largely the result of introductions of line extensions previously
noted for these brands, as well as increased advertising and promotional
expenditures. The increase in sales of the HERPECIN-L product lines is primarily
due to more effective advertising.
The sales decline in the current period for the SUNSOURCE products reflected the
general softening of sales in the dietary supplements' market. The decline in
BULLFROG sales in the current period was largely the result of reduced sales to
two larger customers.
International consumer products sales for the first nine months of fiscal 1999
increased $1,232, or 33.0%, for the Canadian operation but declined $1,018, or
12.6%, for the United Kingdom business. The increase in Canadian sales was
primarily associated with the BAN and certain of the Thompson Medical brands,
although sales increases were recorded for all of the remaining brands currently
being sold in Canada except for PAMPRIN and FLEXALL. Largely due to slow orders
from customers, sales declines were recorded for all of the United Kingdom
brands, except BAN and GOLD BOND. U.S. export sales increased $1,035, or 59.4%,
for the 1999 period as compared to the same period in fiscal 1998, with
practically all of the increase being associated with the BAN product line.
Sales variances were largely the result of changes in the volume of unit sales
of the particular brands.
Cost of goods sold as a percentage of net sales improved to 26.6% from 27.9% in
the 1998 period. The improvement was primarily the result of increased sales of
higher gross margin product lines in the current period.
22
Advertising and promotion expenses increased $23,973, or 37.2%, and were 39.3%
of net sales compared to 40.0% in the corresponding 1998 period. The majority of
the dollar increase in the 1999 period was related to the BAN and Thompson
Medical brands acquired in March and December 1998, respectively, and to the
GOLD BOND, SUN-IN, FLEXALL, MUDD and PHISODERM product lines. Declines in
spending were recorded for the BENZODENT, HERPECIN-L, the SUNSOURCE products and
CORNSILK brands. The CORNSILK product line was sold in May 1998.
The increase of $3,819, or 19.8%, in selling, general and administrative
expenses in the 1999 period was largely associated with direct selling expenses,
resulting from increased sales, with research and development costs and with
various expenses of the general service departments of the Company. The selling,
general and administrative expenses were 10.3% of net sales in the current
period as compared to 12.0% in the same period of last fiscal year, reflecting
the increase in sales from newly acquired brands without a corresponding
increase in overhead costs.
Interest expense increased $8,138, or 42.3%, in the 1999 period, reflecting
primarily the additional debt incurred for the BAN and Thompson Medical brands'
acquisitions in March and December 1998, respectively.
An extraordinary loss of $2,833, net of taxes, related to the early
extinguishment of debt was recorded in the 1999 period. The loss primarily
related to the write-off of debt issuance costs connected with outstanding
long-term debt retired before maturity in the current period, the premium paid
on the retirement of the 12.75% notes and the cost of the termination of
interest rate swaps.
Net income of $16,530 before extraordinary loss in the 1999 period was $7,864,
or 90.7% greater than the comparable 1998 amount of $8,666 after excluding the
gain of $6,403, net of taxes, on the sale of the CORNSILK brand. This increase
was largely the result of increased sales, offset in part by increased interest
expense, advertising and promotion expense and selling, general and
administrative costs.
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, long-term debt servicing, acquisitions, working
capital and capital expenditures.
Cash of $22,659 and $10,396 was provided by operations for the nine months ended
August 31, 1999, and 1998, respectively. The increase in cash flows from
operations over the prior year period was primarily the result of increases in
net income (after considering the gain on the sale of the CORNSILK product line
in the fiscal 1998 period) and depreciation and amortization.
Investing activities used cash of $97,603 and $166,468 in the nine months ended
August 31, 1999 and 1998, respectively. The decrease of $68,865 in the current
period primarily represented the difference in the size of the acquisitions of
BAN in March 1998 and the Thompson Medical brands in December 1998.
Financing activities provided cash of $83,457 in the nine months ended August
31, 1999 compared to $152,772 for the comparable prior year period. The decrease
of $69,315 in the current period reflected principally the difference in the
financing required for the BAN acquisition in March 1998 and for the Thompson
Medical brands in December 1998.
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The following table presents working capital data at August 31, 1999 and
November 30, 1998 or for the respective periods then ended:
AUGUST 31, NOVEMBER 30,
ITEM 1999 1998
------------ ---------- -----------
Working capital (current assets less current liabilities) ...... $ 16,142 $ 684
Current ratio (current assets divided by current liabilities) .. 1.22 1.01
Quick ratio (cash and cash equivalents and accounts
Receivable divided by current liabilities) ................... .84 .63
Twelve month average accounts receivable turnover .............. 6.19 6.81
Twelve month average inventory turnover ........................ 3.52 3.57
Working capital as a percentage of total assets ................ 3.31% .19%
The improvement in the current and quick ratios at August 31, 1999 as compared
to November 30, 1998 reflected primarily increases in accounts receivable and
inventories, which were largely associated with the Thompson Medical brands
acquired in December 1998, and the reduction of the current maturities of
long-term debt.
Total loans outstanding were $373,641 at August 31, 1999 compared to $291,357 at
November 30, 1998, an increase of $82,284 during the first nine months of fiscal
1999. This increase was primarily the result of additional amounts borrowed to
purchase the Thompson Medical brands in December 1998. The balances outstanding
at August 31, 1999 of the term loan, the revolving credit facility and total
senior subordinated notes were $61,000, $-0- and $312,641, respectively. The
entire $50,000 of the revolving credit facility was available for use by the
Company at August 31, 1999.
Management of the Company believes that projected cash flows generated by
operations along with funds available under its credit facilities will be
sufficient to fund the Company's current commitments and proposed operations.
Also, on December 21, 1998, the Company filed a shelf registration statement
with the Securities and Exchange Commission for $250,000 of debt and equity
securities of which $75,000 of notes were issued during the first nine months of
fiscal 1999.
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YEAR 2000
The Company recognizes the need to ensure its operations will not be adversely
impacted by year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the year 2000 date are a
known risk. The Company has developed a plan to ensure its systems are compliant
with the requirements to fulfilling those compliance requirements:
THE COMPANY'S STATE OF READINESS
The Company has replaced its information technology ("IT") systems with a new
fully integrated computer system that replaces all hardware and software that
the Company uses in its financial, manufacturing and customer services
functions. Management believes the new IT system is year 2000 compliant.
Accordingly, the year 2000 compliance requirements are considered only a portion
of the Company's system replacement effort. This replacement is substantially
complete.
COST TO ADDRESS YEAR 2000 ISSUES
The total cost of the new software and hardware is approximately $3,000. Plan
costs have been budgeted in the Company's capital expenditures budget.
RISK OF YEAR 2000 ISSUES
The Company is requesting from certain of its principal customers and suppliers
written statements regarding their knowledge of and plans for meeting the year
2000 compliance requirements. All respondents indicate that they have knowledge
of and are in the process of fulfilling these requirements. These companies have
stated that they are at various stages of completion of their compliance plans,
but all have indicated that they expect to be in full year 2000 compliance by or
before the end of their 1999 fiscal year.
In the event that the Company or any of the Company's significant customers or
suppliers does not successfully and timely achieve year 2000 compliance, the
Company's business or operations could be adversely affected.
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FOREIGN OPERATIONS
The Company's primary foreign operations are conducted through its Canadian and
United Kingdom 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 nine
months ended August 31, 1999 and 1998, these subsidiaries accounted for 5%
and 7% of total revenues, respectively, and 2% of total assets for each
period, respectively. It has not been the Company's practice to hedge its
assets and liabilities in Canada and the United Kingdom or its intercompany
transactions due to the inherent risks associated with foreign currency
hedging transactions and the timing of payments 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 $21 and $83 for the nine months ended August 31, 1999 and
1998, respectively, resulted from foreign currency transactions.
GOVERNMENT REGULATION
In December 1998, the United States Food and Drug Administration ("FDA")
conducted an audit of the Company's manufacturing facility in Chattanooga,
Tennessee. In connection with that audit, the FDA issued a report citing certain
processes and procedures that it requires the Company to change or improve. The
Company has responded to the report of the FDA and believes that it has complied
with the requirements of the report. No further contact by the FDA has been made
to date, but the Company expects a follow-up visit by FDA personnel in the
future. There have been no further material developments to date relating to the
other matters described in the Company's "Business-Government Regulation"
section of its Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended November 30, 1998.
ENVIRONMENTAL
There have been no material changes to date relating to the matters discussed in
the Company's "Business-Environmental" section of its Annual Report on Form 10-K
filed with the Securities and Exchange commission for the year ended November
30, 1998.
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FORWARD LOOKING STATEMENTS
The Company may from time to time make written and oral forward looking
statements. Written forward looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases and in reports to
shareholders. The Private Securities Litigation Reform Act of 1995 contains a
safe harbor for forward looking statements. The Company relies on this safe
harbor in making such disclosures. The forward looking statements 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 indentures; government regulations; risks of loss of material customers;
public perception regarding the Company's products; dependence on third party
manufacturers; environmental matters; product liability and insurance; year
2000; and other risks described in the Company's Securities and Exchange
Commission filings.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Statement regarding computation of per share earnings
(Exhibit 11).
(2) Financial data schedule (Exhibit 27).
(b) No Form 8-K reports were filed with the Securities and Exchange
Commission during the three months ended August 31, 1999.
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CHATTEM, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHATTEM, INC.
(Registrant)
Dated: October 14, 1999 \s\ A. Alexander Taylor II
-------------------- --------------------------
A. Alexander Taylor II
President and Director
(Chief Operating Officer)
\s\ Stephen M. Powell
--------------------------
Stephen M. Powell
(Chief Accounting Officer)
29