<PAGE>
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, 1995
COMMISSION FILE NUMBER 0-5905
CHATTEM, INC.
A TENNESSEE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
TELEPHONE: 615-821-4571
REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
AS OF JULY 12, 1995, 7,292,199 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT PAR
VALUE, WERE OUTSTANDING.
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CHATTEM, INC.
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, May 31, 1995 and
November 30, 1994 .............................................. 3
Condensed Consolidated Statements of Income for the Three and Six
Months Ended May 31, 1995 and 1994 ............................. 5
Consolidated Statements of Cash Flows for the Six Months Ended
May 31, 1995 and 1994 .......................................... 6
Notes to Condensed Consolidated Financial Statements ............. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ......................... 14
SIGNATURES .......................................................... 15
EXHIBIT 11 - Statement Regarding Computation of Per Share Earnings...
EXHIBIT 27 - Financial Data Schedule ................................
EXHIBIT 28 - Sales and Income of Continuing Operations by Business Unit
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1995 1994
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $2,996 $3,034
Accounts receivable - net.................................. 21,571 18,059
Refundable and deferred income taxes....................... 852 1,015
Inventories................................................ 6,716 6,247
Prepaid expenses and other current assets.................. 1,425 1,745
Net current assets of discontinued operations.............. - 2,584
-------------- --------------
Total current assets..................................... 33,560 32,684
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT - NET.......................... 9,076 8,491
-------------- --------------
OTHER NONCURRENT ASSETS:
Investment in cumulative, convertible preferred stock...... 5,000 -
Patents, trademarks and other
purchased product rights, net............................. 31,537 32,455
Debt issuance costs, net................................... 3,237 3,771
Deferred income tax benefit................................ 1,856 1,598
Other...................................................... 3,769 4,012
Net noncurrent assets of discontinued operations........... - 2,788
-------------- --------------
Total other noncurrent assets............................ 45,399 44,624
-------------- --------------
TOTAL ASSETS........................................... $88,035 $85,799
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited and in thousands)
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1995 1994
-------------- ---------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt................. $1,400 $2,500
Accounts payable..................................... 3,302 4,942
Payable to bank...................................... - 1,301
Accrued income taxes................................. 6,373 123
Accrued advertising and promotion.................... 2,928 1,994
Accrued interest payable............................. 4,419 4,340
Other accrued liabilities............................ 6,247 4,375
-------------- ---------------
Total current liabilities........................ 24,669 19,575
-------------- ---------------
LONG-TERM DEBT, less current maturities................ 81,373 94,486
-------------- ---------------
ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS..... 1,337 1,289
-------------- ---------------
SHAREHOLDERS' DEFICIT:
Common shares, without par value, at stated value.... 1,519 1,519
Paid-in surplus...................................... 51,797 51,797
Accumulated deficit.................................. (71,127) (81,352)
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Total.............................................. (17,811) (28,036)
Foreign currency translation adjustment.............. (1,533) (1,515)
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Total shareholders' deficit...................... (19,344) (29,551)
-------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS'
DEFICIT....................................... $88,035 $85,799
-------------- ---------------
-------------- ---------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MAY 31, MAY 31,
-------------------------- --------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES.............................................................. $27,114 $23,642 $46,486 $41,356
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales........................................................ 8,557 6,764 14,785 12,558
Advertising and promotion............................................ 9,853 7,868 17,268 14,897
Selling, general and administrative.................................. 4,729 4,750 8,597 9,040
------------ ------------ ------------ ------------
Total costs and expenses........................................... 23,139 19,382 40,650 36,495
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS................................................. 3,975 4,260 5,836 4,861
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense..................................................... (2,964) (1,848) (5,847) (3,518)
Investment income.................................................... 52 32 84 72
Loss on product divestiture.......................................... - (512) - (512)
Other, net........................................................... 7 (6) 8 (6)
------------ ------------ ------------ ------------
Total other income (expense)....................................... (2,905) (2,334) (5,755) (3,964)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES.......................................................... 1,070 1,926 81 897
PROVISION FOR INCOME TAXES............................................. 400 728 22 337
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS...................................... 670 1,198 59 560
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Income from operations, less provisions for income taxes of
$192, $208, $414 and $444, respectively............................. 314 355 675 740
Gain on disposal, less provision for income taxes of $6,046.......... 9,863 - 9,863 -
------------ ------------ ------------ ------------
Total discontinued operations..................................... 10,177 355 10,538 740
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY LOSS....................................... 10,847 1,553 10,597 1,300
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET.......................................................... (367) - (367) -
------------ ------------ ------------ ------------
NET INCOME............................................................. $10,480 $1,553 $10,230 $1,300
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING.................................. 7,292 7,292 7,292 7,292
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET INCOME PER COMMON SHARE:
Continuing operations................................................ $0.09 $0.16 $0.01 $0.08
Discontinued operations.............................................. 1.40 0.05 1.44 0.10
Extraordinary loss................................................... (0.05) - (0.05) -
------------ ------------ ------------ ------------
Net income per common share........................................ $1.44 $0.21 $1.40 $0.18
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MAY 31,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................................................ $ 10,230 $ 1,300
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization........................................................ 2,029 1,703
Gain on sale of specialty chemicals business ........................................ (9,863) -
Loss on product divestiture.......................................................... - 513
Extraordinary loss on early extinguishment of debt, net.............................. 367 -
Other, net .......................................................................... 45 (782)
Changes in operating assets and liabilities:
Increase in accounts receivable.................................................... (3,010) (2,747)
Decrease (increase) in inventories ................................................ (554) 1,837
Decrease (increase) in prepaid expenses............................................ 302 (415)
Decrease (increase) in refundable and deferred income taxes........................ (95) 515
Decrease in accounts payable and accrued liabilities .............................. (2,327) (2,949)
Decrease in payable to bank ....................................................... (1,301) (1,058)
Increase in income taxes payable .................................................. 552 844
------------ ------------
Net cash used in operating activities............................................ (3,625) (1,239)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ............................................ (1,912) (995)
Proceeds from sale of specialty chemicals business, net................................ 18,747 -
Additions to notes receivable.......................................................... (14) (22)
Collections of notes receivable........................................................ 250 343
Benzodent acquisition.................................................................. - (3,500)
Other, net ............................................................................ 112 (229)
------------ ------------
Net cash provided by (used in) investing activities.............................. 17,183 (4,403)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings................................................ 15,000 9,500
Repayment of long-term debt............................................................ (29,425) (8,000)
Insurance policy loans ................................................................ - 1,706
Proceeds from sale of interest rate cap................................................ 984 -
Deferred cost of recapitalization...................................................... - (276)
Other, net ............................................................................ (159) (100)
------------ ------------
Net cash provided by (used in) financing activities.............................. (13,600) 2,830
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS ............................................................................ 4 11
------------ ------------
CASH AND CASH EQUIVALENTS:
Decrease for the period................................................................ (38) (2,801)
At beginning of period ................................................................ 3,034 4,462
------------ ------------
At end of period ...................................................................... $ 2,996 $ 1,661
------------ ------------
------------ ------------
CASH PAYMENTS FOR:
Interest .............................................................................. $ 5,996 $ 3,790
------------ ------------
------------ ------------
Income taxes .......................................................................... $ 173 $ 61
------------ ------------
------------ ------------
</TABLE>
NONCASH INVESTING ACTIVITIES-Received $5,000 of 13.125% cumulative,
convertible preferred stock in connection with sale of specialty chemicals
business on May 26, 1995.
See accompanying notes to condensed consolidated financial statements.
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CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note: All monetary amounts are expressed in thousands of dollars.
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The accompanying unaudited
condensed consolidated financial statements, in the opinion of management,
include all adjustments necessary for a fair presentation. All such
adjustments are of a normal recurring nature.
2. The Company incurs significant expenditures on television, radio and print
advertising to support its nationally branded over-the-counter
pharmaceuticals and functional toiletries and cosmetics. Customers
purchase products from the Company with the understanding that the brands
will be supported by the Company's extensive media advertising. This
advertising supports the retailers' sales effort and maintains the
important brand franchise with the consuming public. Accordingly, the
Company considers its advertising program to be clearly implicit in its
sales arrangements with its customers. Therefore, the Company believes it
is appropriate to allocate a percentage of the necessary supporting
advertising expenses to each dollar of sales by charging a percentage to
sales on an interim basis based upon anticipated annual sales and
advertising expenditures (in accordance with APB Opinion No. 28) and
adjusting that accrual to the actual expenses incurred at the end of the
year. The adoption in fiscal 1995 of the provisions of SOP93-7,
"Advertising Costs", issued by the American Institute of Certified Public
Accountants, did not have a material impact on the Company's financial
position or operating results.
3. The results of operations for the three and six months ended May 31, 1995
and 1994 are not necessarily indicative of the results to be expected for
the respective full years. Seasonality is a factor in the Company's overall
business, with the first quarter sales and income trailing the other fiscal
quarters.
4. Certain amounts in the prior years' financial information have been
reclassified to conform to the 1995 presentation.
5. As of May 31, 1995, there is a remaining accrual of approximately $224
related to the nonrecurring and unusual charges discussed in Note 13 of
Notes to Consolidated Financial Statements of the Annual Report on Form
10-K for the year ended November 30, 1994.
6. Inventories consisted of the following at May 31, 1995 and November 30,
1994:
<TABLE>
<CAPTION>
May 31, Nov. 30,
1995 1994
-------- --------
<S> <C> <C>
Raw materials ........................... $ 6,671 $ 3,312
Finished goods and work in process....... 2,534 5,334
Excess of current cost over LIFO
values ................................ (2,489) (2,399)
-------- --------
Total inventories ......... $ 6,716 $ 6,247
-------- --------
-------- --------
</TABLE>
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7. On May 26, 1995, the Company completed the sale of its specialty chemicals
division to Chattem Chemicals, Inc., a wholly-owned subsidiary of Elcat,
Inc. (the "Parent"). The Company received $25,000 from the sale of the
specialty chemicals division consisting of $20,000 in cash and $5,000 of
13.125% cumulative, convertible preferred stock of the Parent. The net cash
proceeds were used to repay approximately $12,000 of long-term debt. The
Company recognized a gain of $9,863 from the sale and an extraordinary
charge (after tax) of $367 relating to the early extinguishment of the
debt.
The results of operations and the gain on disposal of the specialty
chemicals division have been separately classified as discontinued
operations in the accompanying condensed consolidated statements of income.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
GENERAL
For continuing operations, in the quarter and six months ended May 31,
1995, the Company experienced an increase in sales of $3,472, or 14.7%, to
$27,114 from $23,642 for the quarter, and an increase of $5,130, or 12.4%, to
$46,486 from $41,356 for the six months period. Operating income declined by
$285, or 6.7%, to $3,975 from $4,260 for the quarter but increased by $975, or
20.0%, to $5,836 from $4,861 for the six months period. The decline in
operating income for the second quarter of 1995 as compared to the same period
of 1994 was largely due to increases in both cost of goods sold and advertising
and promotion expenses.
Discontinued operations, representing the specialty chemicals business sold
to Elcat, Inc.'s wholly-owned subsidiary company, Chattem Chemicals, Inc., on
May 26, 1995, experienced income from operations of $314 and $675, respectively,
for the quarter and six months ended May 31, 1995. A net gain of $9,863 on the
sale was also recorded during the same quarter and six months period.
A net extraordinary loss of $367, resulting from the early extinguishment
of debt using the net cash proceeds received from the sale of the specialty
chemicals business, was also recognized in the quarter and six months ended May
31, 1995.
Earnings per share from continuing operations declined $.07 per share for
the quarter and for the six months, while total earnings per share increased
$1.23 and $1.22 a share for the two respective periods. Total earnings per
share for the two periods include the net income and net gain on disposition of
the specialty chemicals business and the net loss on early extinguishment of
debt. The decrease in the earnings per share from continuing operations for
both periods was principally due to higher interest costs associated with the
refinancing of the Company's long-term debt and increased outstanding
indebtedness related to the acquisitions of BENZODENT and PHISODERM, all of
which occurred mainly in the third quarter of 1994. The reduction in interest
expense as a result of the retirement of long-term debt discussed previously is
estimated to be approximately $1,400 on an annual basis.
The Company also expects to recognize annually approximately $656 in
dividends on the cumulative, convertible preferred stock of Elcat, Inc., which
was received as part of the proceeds from the sale of the specialty chemicals
business. The dividend accumulates annually but is non-payable until the stock
is called or redeemed. After three years, however, if the shares are still out-
standing, a cash dividend of $200 will be received by the Company in fiscal year
1999, increasing ratably to the full $656 in fiscal year 2002.
The Company will continue to seek increases in sales through a combination
of acquisitions and internal growth while maintaining high operating income. As
previously high growth brands such as FLEX-ALL 454 mature, sales increases will
become even more dependent on acquisitions and the development of successful
line extensions. Strategically, the Company continually evaluates its products
and business as part of its sales growth strategy and, in instances where the
Company's
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<PAGE>
objectives are not realized, will dispose of these brands or businesses and
redeploy the assets to products or businesses with greater upside potential or
to pay down indebtedness.
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 revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31, May 31,
------------------ -----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES ....................................... 100.0% 100.0% 100.0% 100.0%
-------------- ---------------
COSTS AND EXPENSES:
Cost of sales ................................. (31.6) (28.6) (31.8) (30.4)
Advertising and promotion ..................... (36.3) (33.3) (37.1) (36.0)
Selling, general and administrative ........... (17.4) (20.1) (18.5) (21.8)
--------------- ----------------
Total costs and expenses ................... (85.3) (82.0) (87.4) (88.2)
--------------- ----------------
INCOME FROM OPERATIONS .......................... 14.7 18.0 12.6 11.8
--------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense .............................. (10.9) (7.8) (12.6) (8.5)
Investment income ............................. 0.2 0.1 0.2 0.2
Loss on product divestiture ................... - (2.2) - (1.3)
Other, net .................................... - - - -
--------------- ----------------
Total other income (expense) .............. (10.7) (9.9) (12.4) (9.6)
--------------- ----------------
INCOME BEFORE INCOME TAXES ...................... 4.0 8.1 0.2 2.2
PROVISION FOR INCOME TAXES ...................... (1.5) (3.0) (0.1) (0.8)
--------------- ----------------
NET INCOME FROM CONTINUING
OPERATIONS ..................................... 2.5% 5.1% 0.1% 1.4%
--------------- ----------------
--------------- ----------------
</TABLE>
COMPARISON OF THREE MONTHS ENDED MAY 31, 1995 AND 1994 FOR CONTINUING OPERATIONS
Net sales for the three months ended May 31, 1995 increased $3,472, or
14.7%, to $27,114 as compared to $23,642 for the comparable period of the
previous year. The increase in net sales was attributable to a $2,839, or
13.4%, increase in domestic consumer products sales to $24,026 from $21,187 last
year and an increase of $633, or 25.8%, in international consumer products sales
to $3,088 from $2,455.
Increases in sales for the 1995 period were realized for the domestic
consumer products' lines of BULLFROG (39.1%), ICY HOT (11.3%), CORNSILK (20.0%)
and NORWICH Aspirin, while decreases were recognized for PAMPRIN (9.7%),
FLEX-ALL 454 (26.2%), SUN-IN, ULTRASWIM and MUDD. Sales of BENZODENT and
PHISODERM, products acquired in May and June 1994, respectively, were a combined
$3,170 for the three months ended May 31, 1995. The decline in sales of the
brands listed above reflects the maturation of these product lines and the
increased competition in their respective product categories and markets.
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International consumer product sales for the 1995 period increased $559, or
125.7%, for the Canadian operation and $213, or 12.1%, for the United Kingdom
business. U.S. export sales declined by $139 or 65.9% during the 1995 period.
The addition of PHISODERM to the product line in Canada accounted for
practically all of the net increase in sales in that country, although an
increase was realized for the PAMPRIN brand. Sales increases for the SUN-IN and
CORN SILK brands were realized in the current period by the United Kingdom
division, while sales declines were recognized for the MUDD, BRONZ SILK and
ULTRASWIM product lines.
Cost of goods sold as a percentage of net sales increased to 31.6% from
28.6% in the 1994 period. The increase was largely the result of a shift in the
product mix of sales of domestic consumer products to lower gross margin brands,
e.g., BULLFROG, CORN SILK and PHISODERM, in the 1995 period.
Advertising and promotion expenses increased by $1,985, or 25.2%, in the
1995 period and were 36.3% of net sales compared to 33.3% in the corresponding
1994 period. Increased expend-itures were provided in the current period for
the BULLFROG, ICY HOT, PREMSYN PMS, SUN-IN, MUDD and CORNSILK brands as well as
for the most recently acquired BENZODENT and PHISODERM product lines.
The decrease of $21, or 0.4%, in selling, general and administrative
expenses in the 1995 period was largely associated with reductions in
administrative personnel costs.
Interest expense increased by $1,116, or 60.4%, in the current period
principally as a result of the refinancing of long-term debt in fiscal 1994 at
higher interest rates and increased outstanding indebtedness related to the
acquisitions of BENZODENT and PHISODERM. The loss on a product divestiture in
the 1994 period was the result of the sale of the ALGEMARIN-TM- product line in
Canada.
Income from continuing operations decreased by $528, or 44.1%, in the 1995
period. The decline mainly resulted from higher cost of goods sold,
advertising, promotion and interest expenses despite an increase in sales.
COMPARISON OF SIX MONTHS ENDED MAY 31, 1995 AND 1994 FOR CONTINUING OPERATIONS
Net sales for the six months ended May 31, 1995 increased $5,130, or 12.4%,
to $46,486 as compared to $41,356 for the same period of the previous year. The
increase in net sales was attributable to a $3,750, or 10.0%, increase in
domestic consumer products sales to $41,431 from $37,681 last year, and a
$1,380, or 37.6%, increase in international consumer products sales to $5,055
from $3,675.
For domestic consumer products, net sales increases in 1995 over 1994 were
realized for the BULLFROG (33.1%), ICY HOT (8.1%) and CORN SILK (18.3%) brands,
while decreases were recognized for the major product lines of NORWICH Aspirin,
PAMPRIN (6.9%), FLEX-ALL 454 (25.8%), PREMSYN PMS, SUN-IN, ULTRASWIM and MUDD.
Sales of BENZODENT and PHISODERM, products acquired in May and June of 1994,
respectively, were a combined $5,345 for the six months ended May 31, 1995. The
decline in sales of NORWICH Aspirin, PAMPRIN, FLEX-ALL 454, PREMSYN PMS, SUN-IN,
ULTRASWIM and MUDD reflects the maturation of these product lines and the
increased competition in their respective product categories and markets.
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International consumer product sales the first half of 1995 increased $973,
or 136.9%, for the Canadian operation and $470, or 20.7%, for the United Kingdom
business. The addition of PHISODERM to the product line in Canada accounted for
practically all of the net increase in sales in that country, although increases
were also realized for the PAMPRIN and MUDD brands. Sales increases for the
SUN-IN and CORN SILK brands were realized in the current period by the United
Kingdom division, while sales declines were recognized for the MUDD, BRONZ SILK
and ULTRASWIM product lines. U.S. export sales showed a modest decline in the
1995 period.
Cost of goods sold as a percentage of net sales increased to 31.8% from
30.4% in the 1994 period. The increase was primarily the result of a shift in
the mix of sales of domestic consumer products to lower gross margin brands,
e.g., BULLFROG, CORN SILK and PHISODERM, in the 1995 period.
Advertising and promotion expenses increased by $2,371, or 15.9%, in the
1995 period and were 37.1% of net sales compared to 36.0% in the corresponding
1994 period. Increased expenditures were provided in the current period for the
ICY HOT, PREMSYN PMS, MUDD and CORN SILK brands as well as for the most recently
acquired BENZODENT and PHISODERM product lines.
The decrease of $443, or 4.9%, in selling, general and administrative
expenses in the 1995 period was largely associated with reductions in
administrative personnel costs, short and long-term incentive plan accruals and
outside legal services.
Interest expense increased by $2,329, or 66.2%, in the current period
principally as a result of the refinancing of long-term debt in fiscal 1994 at
higher interest rates and increased outstanding indebtedness related to the
acquisitions of BENZODENT and PHISODERM. The loss on a product divestiture in
the 1994 period was the result of the sale of the ALGEMARIN-TM- product line in
Canada.
Income from continuing operations decreased by $501, or 89.5%, in the 1995
period. The decline mainly resulted from higher cost of goods sold,
advertising, promotion and interest expenses despite an increase in sales.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1995, the Company had working capital of $8,891 compared to
$13,109 at November 30, 1994, a decrease of $4,218 in the first six months of
fiscal 1995. This represented 10.1% of total assets at May 31, 1995 and 15.3%
of total assets at November 30, 1994.
The Company's current ratio (current assets divided by current liabilities)
was 1.36 at May 31, 1995 compared to 1.67 at November 30, 1994. The Company's
quick ratio (cash equivalents, short-term investments and receivables divided by
current liabilities) was 1.00 at May 31, 1995 compared to 1.08 at November 30,
1994.
The decline in working capital and the current and quick ratios for the six
months ended May 31, 1995 was largely due to the recognition of an additional
estimated income tax payable of $6,046 associated with the sale of the specialty
chemicals business.
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<PAGE>
The payment of a special cash dividend of $20.00 per share in June 1993 and
the indebtedness related thereto resulted in a significant increase in the
Company's debt and a substantial shareholders' deficit at the time of the
transaction and at May 31, 1995. Payments of principal and interest on the
indebtedness incurred to finance the special dividend and the refinancing of
such indebtedness have been a significant new use of the Company's funds.
During the six months ended May 31, 1995, the Company decreased its
long-term debt by a net amount of $14,213, which reflects primarily the
application of the net cash proceeds from the sale of the specialty chemicals
business previously discussed.
Capital expenditures in the first six months of 1995 were $1,912, an
increase of $917 over the corresponding 1994 period, and are not expected to
exceed $3,500 for the 1995 fiscal year.
In connection with the sale of the specialty chemicals business, management
of the Company believes that it has recorded adequate amounts to cover costs
related to environmental remediation of the property sold and other costs
associated with the separation of the consumer products and specialty chemicals
businesses. These estimated costs have been charged to the gain on the disposal
of the specialty chemicals business.
The Company believes that cash flows generated by operations, along with
funds available under its bank credit facility and from borrowings against
approximately $2,000 of cash value under certain insurance policies should be
sufficient to fund the Company's current commitments and proposed operations.
The Company's primary foreign operations are conducted through its Canadian
and U.K. subsidiaries. The functional currencies of these subsidiaries are
Canadian dollars and British pounds, respectively. Fluctuations in exchange
rates can impact operating results, including total revenues and expenses, when
translations of the subsidiary financial statements are made in accordance with
SFAS No. 52, "Foreign Currency Translation." For the six months ended May 31,
1995 and 1994, these subsidiaries accounted for 9% and 7% of total revenues,
respectively, and 8% and 14% of total assets, respectively. It has not been the
Company's practice to hedge its assets and liabilities in the U.K. and Canada or
its intercompany transactions due to the inherent risks associated with foreign
currency hedging transactions and the timing of payment between the Company and
its two foreign subsidiaries. Historically, gains or losses from foreign
currency transactions have not had a material impact on the Company's operating
results. A gain of $7 and a loss of $33 for the six months ended May 31, 1995
and 1994, respectively, resulted from foreign currency transactions.
-13-
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Statement regarding computation of per share earnings
(Exhibit 11).
(2) Financial data schedule (Exhibit 27).
(3) Sales and income of continuing operations by business unit
(Exhibit 28).
(b) The following reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended May 31, 1995:
Form 8-K, dated April 11, 1995, regarding the announcement of the
contract for the sale of the Company's specialty chemicals division to
Chattem Chemicals, Inc., a wholly-owned subsidiary of Elcat, Inc.
Form 8-K, dated May 26, 1995, regarding the closing of the sale of the
Company's specialty chemicals division to Chattem Chemicals, Inc., a
wholly-owned subsidiary of Elcat, Inc.
-14-
<PAGE>
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 12, 1995 \s\ Robert E. Bosworth
---------------------- ------------------------------
Robert E. Bosworth,
Executive Vice President
and Chief Financial Officer
(principal financial officer)
10QMAY
-15-
<PAGE>
EXHIBIT 11
CHATTEM, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MAY 31, MAY 31,
-------------------------- --------------------------
1995 1994 1995 1994
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
NET INCOME:
Continuing operations.............................. $ 670 $ 1,198 $ 59 $ 560
Discontinued operations............................ 10,177 355 10,538 740
Extraordinary loss................................. (367) - (367) -
----------- ------------ ----------- -----------
Net Income....................................... $ 10,480 $ 1,553 $ 10,230 $ 1,300
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING................ 7,292 7,292 7,292 7,292
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
NET INCOME PER COMMON SHARE:
Continuing operations.............................. $ 0.09 $ 0.16 $ 0.01 $ 0.08
Discontinued operations............................ 1.40 0.05 1.44 0.10
Extraordinary loss................................. (0.05) - (0.05) -
----------- ------------ ----------- -----------
Net income per common share.................... $ 1.44 $ 0.21 $ 1.40 $ 0.18
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Chattem, Inc.'s unaudited financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> MAY-31-1995
<CASH> 2,996
<SECURITIES> 0
<RECEIVABLES> 21,821
<ALLOWANCES> 250
<INVENTORY> 6,716
<CURRENT-ASSETS> 33,560
<PP&E> 23,593
<DEPRECIATION> 14,517
<TOTAL-ASSETS> 88,035
<CURRENT-LIABILITIES> 24,669
<BONDS> 81,373
<COMMON> 1,519
0
0
<OTHER-SE> (20,863)
<TOTAL-LIABILITY-AND-EQUITY> 88,035
<SALES> 46,486
<TOTAL-REVENUES> 46,486
<CGS> 14,785
<TOTAL-COSTS> 40,650
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,847
<INCOME-PRETAX> 81
<INCOME-TAX> 22
<INCOME-CONTINUING> 59
<DISCONTINUED> 10,538
<EXTRAORDINARY> (367)
<CHANGES> 0
<NET-INCOME> 10,230
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
</TABLE>
<PAGE>
EXHIBIT 28
CHATTEM, INC. AND SUBSIDIARIES
SALES AND INCOME OF CONTINUING OPERATIONS BY BUSINESS UNIT
(Unaudited and in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
May 31, May 31,
-------------------------- ---------------------------
1995 1994 1995 1994
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
NET SALES:
Domestic consumer products........................ $ 24,026 $ 21,187 $ 41,431 $ 37,681
International consumer products................... 3,088 2,455 5,055 3,675
----------- ----------- ------------ -----------
Total consolidated net sales.................... $ 27,114 $ 23,642 $ 46,486 $ 41,356
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
OPERATING INCOME (LOSS):
Domestic consumer products........................ $ 4,832 $ 5,197 $ 7,334 $ 7,604
International consumer products................... 65 (85) 11 (863)
----------- ----------- ------------ -----------
Total consolidated operating income before
corporate overhead and other income
(expense)...................................... 4,897 5,112 7,345 6,741
CORPORATE OVERHEAD AND OTHER
INCOME (EXPENSE)................................... (3,827) (3,186) (7,264) (5,844)
----------- ----------- ------------ -----------
INCOME BEFORE INCOME TAXES.......................... 1,070 1,926 81 897
PROVISION FOR INCOME TAXES.......................... 400 728 22 337
----------- ----------- ------------ -----------
NET INCOME FROM CONTINUING
OPERATIONS......................................... $ 670 $ 1,198 $ 59 $ 560
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
