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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1994 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
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.
DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K WILL NOT
BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN THE DEFINITIVE PROXY
STATEMENT INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K.
AS OF FEBRUARY 22, 1995, THE AGGREGATE MARKET VALUE OF VOTING SHARES HELD BY
NON-AFFILIATES WAS $34,939,795.
AS OF FEBRUARY 22, 1995, 7,292,199 COMMON SHARES WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR 1994 (THE "1994
ANNUAL REPORT TO SHAREHOLDERS") ARE INCORPORATED BY REFERENCE IN PARTS I, II AND
IV OF THIS REPORT. PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT
DATED MARCH 10, 1995 (THE "PROXY STATEMENT") ARE INCORPORATED BY REFERENCE IN
PART III OF THIS REPORT.
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PART I
ITEM 1. BUSINESS
GENERAL
Chattem, Inc. (the "Company") was incorporated in Tennessee in 1909 after
having commenced business operations in 1879. The Company is a diversified
manufacturer and marketer of consumer products and specialty chemicals. Through
its consumer products division, the Company manufactures and markets branded
over-the-counter ("OTC") pharmaceuticals, such as FLEX-ALL 454, ICY HOT,
PAMPRIN, PREMSYN PMS, BENZODENT and NORWICH aspirin, and functional toiletries
and cosmetics, including CORN SILK, BULLFROG, ULTRASWIM, SUN-IN, MUDD and
PHISODERM. In the OTC drug market, the Company believes that its topical
analgesic and menstrual and premenstrual internal analgesic brands are among the
market leaders in the U.S. in their categories. Certain of the Company's
functional toiletries and cosmetics products, such as SUN-IN and ULTRASWIM, are
believed by the Company to be brand leaders in the U.S. in their categories.
The Company's specialty chemicals division develops, manufactures and sells
value-added specialty chemicals such as aluminum hydroxides, aluminum
derivatives and glycine to selected industries, including the pharmaceutical and
printing ink industries. The Company markets its specialty chemicals to
manufacturers either directly by its own sales personnel or through sales
agents.
The Company's growth strategy for the consumer products division is to seek
continued growth through a combination of brand acquisitions and internal
growth. For the specialty chemicals division, the Company seeks growth through
the development of new products and application of existing products to new
uses. As a part of this strategy, the Company continually evaluates its products
and businesses, and in instances in which businesses fail to realize the
Company's objectives, the Company will dispose of these businesses and redeploy
these assets to products and businesses with greater growth potential.
The Company conducts certain aspects of its business through four wholly
owned subsidiaries. One subsidiary owns or licenses substantially all of the
trademarks and intangibles associated with its domestic consumer products
business and licenses the Company's use thereof. Certain foreign sales
operations are conducted through Canadian and United Kingdom subsidiaries,
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and product liability insurance is provided by a captive insurance subsidiary
incorporated in Bermuda.
For purposes of this report, the "Company" refers to Chattem, Inc. and its
wholly-owned subsidiaries. Trademarks of the Company appear in this report in
all capitalized letters.
DEVELOPMENTS DURING FISCAL 1994
On May 12, 1994, the Company acquired BENZODENT, a topical oral analgesic,
from The Procter & Gamble Company ("Proctor & Gamble") for $3,500,000. The
BENZODENT business acquired consisted principally of trademarks and finished
product inventories. The Company financed the purchase of BENZODENT with
borrowings under its existing credit agreement with First Union National Bank of
North Carolina (the "Old Credit Agreement").
On June 17, 1994, the Company acquired a perpetual license to the PHISODERM
trademark in the United States, Canada and Puerto Rico (the "Territory"),
together with certain other assets from Sterling Winthrop Inc. ("Sterling"). The
purchase price for the license of PHISODERM in the Territory and certain other
assets was $17,276,000. If net sales of PHISODERM products in the United States
only exceed (i) $10,000,000 for the 12-month period beginning July 1, 1994 and
ending June 30, 1995 or (ii) $11,000,000 for either of the 12-month periods
beginning July 1, 1995 and July 1, 1996, respectively, and ending June 30, 1996
and June 30, 1997, respectively, then within 45 days after the end of the
applicable 12-month period with respect to which the applicable net sales
threshold specified in (i) or (ii) above has been exceeded, the Company will pay
Sterling an additional $1,000,000 for such year.
Also on June 17, 1994, the Company entered into a $55,000,000 senior
secured bank credit agreement (the "New Credit Agreement") and issued
$75,000,000 of 12.75% Series A Senior Subordinated Notes due 2004 (the "Series A
Notes") with five year warrants to purchase 417,182 shares of common stock at a
price of $7.15 per share (the "Warrants") to Kidder, Peabody & Co. Incorporated
(the "Initial Purchaser"). The New Credit Agreement, of which The First National
Bank of Chicago is agent, includes a $20,000,000 term loan, a $22,500,000
working capital facility and a $12,500,000 facility for future acquisitions. The
Series A Notes consist of 75,000 units, each consisting of $1,000 principal
amount of the Series A Notes and a warrant to purchase 5.56242 shares of the
Company's common stock at a price of $7.15 per share. The Series A Notes and the
Warrants were separable on August 16, 1994. The price to the Initial Purchaser
of the Series A Notes was $73,967,250, or 98.6% of the original principal amount
of the Series A Notes. The proceeds of the financing were used to fund the
PHISODERM purchase and repay all existing bank indebtedness under the Old Credit
Agreement.
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On September 19, 1994, the Company completed an exchange offer of 12.75%
Series B Senior Subordinated Notes due 2004 ("Series B Notes"), which were
registered under the Securities Act of 1933, as amended ("Securities Act"), for
all outstanding Series A Notes. The form and terms of the Series A Notes and the
Series B Notes are the same, except that the Series B Notes are registered under
the Securities Act and the holders of Series B Notes are not entitled to the
rights of the holders of the Series A Notes following completion of the exchange
offer.
The Company's operations continue to be affected by the payment of a
special cash dividend ("Special Dividend") of $20.00 per share in June 1993 to
holders of its common stock. In order to pay the Special Dividend and related
fees and expenses the Company borrowed approximately $97.0 million. The
funding of the Special Dividend resulted in a substantial negative balance in
the Company's shareholders' equity and significantly increased the use of
leverage in the Company's capital structure. The consequences to the Company
have been significantly increased interest expense and repayment obligations and
more vulnerability to adverse business conditions.
CONSUMER PRODUCTS
The objective of the Company's consumer products division is to offer high
quality brand name products in niche market segments in which the Company's
products can be among the market leaders. The Company strives to achieve its
objective by identifying brands with favorable demographic appeal, being
flexible in modifying products and promotions in response to changing consumer
demands and developing creative and cost-effective marketing and advertising
programs. The Company manufactures substantially all of its consumer products.
The Company's consumer products brands are:
OTC PHARMACEUTICALS
- FLEX-ALL 454 - topical analgesic
- ICY HOT - topical analgesic
- PAMPRIN - menstrual internal analgesic
- PREMSYN PMS - premenstrual internal analgesic
- NORWICH Aspirin - internal analgesic
- BENZODENT - topical oral analgesic
- SOLTICE - analgesic balm
- BLIS-TO-SOL - anti-fungal product
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FUNCTIONAL TOILETRIES AND COSMETICS
- CORN SILK - oil absorbing facial make-up
- BULLFROG - sunscreen and sunblock
- ULTRASWIM - chlorine removing shampoo
- SUN-IN - spray-on hair lightener
- MUDD - facial mask and cleanser
- PHISODERM - facial cleanser
The following table sets forth the Company's net sales attributable to
domestic and international OTC pharmaceutical products and functional
toiletries and cosmetics products, other products and total consumer products
during the past three fiscal years (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------
PRODUCT NOVEMBER 30, 1992 NOVEMBER 30, 1993 NOVEMBER 30, 1994
------- ----------------- ----------------- -----------------
SALES PERCENTAGE SALES PERCENTAGE SALES PERCENTAGE
----- ---------- ----- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Domestic
OTC Pharmaceuticals ..................... $49,950 55.4% $49,590 55.2% $51,673 54.8%
Functional Toiletries and
Cosmetics ............................. 24,898 27.6 25,920 28.9 29,888 31.7
International
OTC Pharmaceuticals ..................... 1,802 2.0 3,361 3.7 2,243 2.4
Functional Toiletries and
Cosmetics ............................. 12,574 13.9 9,908 11.0 9,484 10.0
Other Products ............................ 997 1.1 1,082 1.2 1,082 1.1
------- ----- ------- ----- ------- -----
Total Consumer Products ............... $90,221 100.0% $89,861 100.0% $94,370 100.0%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
</TABLE>
GROWTH STRATEGY
The consumer products division has historically grown through acquisition
of new brands and expansion of existing brands. The Company seeks acquisitions
of embryonic brands which have achieved success in limited geographic regions or
of more developed brands with unrealized potential. With embryonic brands, the
Company utilizes its marketing ability, sales force and manufacturing
capabilities to build on the regional strength of the brand and launch the
product nationally. For example, prior to its acquisition by the Company,
FLEX-ALL 454 had developed a significant market share in Denver and Phoenix, but
was virtually unknown in the balance of the country. After its acquisition by
the Company in 1989, FLEX-ALL 454, which had sales of less than $1 million at
the time of acquisition, exceeded $20 million in gross sales in 1993 and 1994.
As to brands with unrealized potential, the Company seeks to acquire from larger
firms brands that have been undermarketed because the products are not of
sufficient size to warrant attention by the
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larger firms. Two products in this category were acquired in 1994: BENZODENT, a
dental analgesic cream acquired from Procter & Gamble and PHISODERM, a line of
facial cleaners acquired from Sterling. ICY HOT is an earlier example of this
type of acquisition and has experienced significant growth since its acquisition
in 1991. In considering product acquisitions, the Company also seeks products
that complement existing brands through increased marketing presence, shared
promotions and shared distribution channels.
The Company endeavors to expand its existing products through line
extensions of existing brands, which capitalize on consumer awareness of the
brand names. An example of this strategy was the introduction and national
launch of Maximum Strength FLEX-ALL 454 in August 1993. Efforts are also made to
develop new and creative marketing strategies and executions to expand both
trade distribution and consumer usage.
OTC PHARMACEUTICALS
The Company markets a diversified portfolio of brand name OTC
pharmaceutical products, many of which are among the market leaders in the U.S.
in their respective categories.
FLEX-ALL 454 is an aloe-vera based topical analgesic used primarily by
people with arthritic symptoms to alleviate pain and irritation in joints and
secondarily by persons suffering from muscle strain. The Company believes that
the advancing age of the U.S. population and the emphasis on fitness and
physical activity will increase the overall market size of the topical analgesic
market. The Company supports the brand with a marketing program that features
Joe Namath and the endorsement of all the professional trainers of the National
Football League, the National Hockey League, the National Basketball Association
and Major League Baseball.
ICY HOT, a topical analgesic brand acquired from Procter & Gamble in 1991,
provides the Company with a second entry into the topical analgesic market
segment. ICY HOT is an extra strength dual action product, as distinguished from
FLEX-ALL 454. The Company supports this brand with national advertising and
strong promotional programs.
In the menstrual analgesic segment, the consumer products division markets
PAMPRIN, a combination drug specifically designed for relief of menstrual
symptoms, and PREMSYN PMS, a product formulated to relieve mild to moderate
symptoms of premenstrual syndrome. PAMPRIN was developed internally by the
Company over 30 years ago, while PREMSYN PMS was introduced by the Company in
1983. Factors affecting the menstrual analgesic segment include the introduction
of competing general analgesic brands of ibuprofen for OTC distribution in 1986,
the introduction by Procter & Gamble of another non-steroidal general analgesic
product in 1994 along with demographic trends of target consumers, women aged 18
to 49.
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NORWICH is a pharmaceutical-quality aspirin-based analgesic which
complements the Company's other OTC pharmaceuticals by offering consumers
another choice in the analgesic market segment and by permitting shared product
promotions. The Company positions the brand as a reasonably priced alternative
between private label generic aspirin and high-priced, heavily-advertised
brands.
BENZODENT is a dental analgesic cream in an adhesive base for use as an
oral, topical analgesic for pain related to dentures. The Company acquired
BENZODENT from Procter & Gamble in 1994 and will seek to increase the market
share of this brand through advertising and promotional programs.
Additionally, the Company's consumer products division manufactures and
markets on a regional basis two smaller proprietary drug brands: SOLTICE, an
external analgesic, and BLIS-TO-SOL, an anti-fungal product.
FUNCTIONAL TOILETRIES AND COSMETICS
The Company also markets a portfolio of brand name functional toiletries
and cosmetics, many of which are among the market leaders in the U.S. in their
respective categories.
The CORN SILK brand is a line of facial makeup products for women with oily
or combination skin. All CORN SILK products utilize an exclusive ingredient for
absorbing the excess facial oils that break down the color and coverage of other
makeup. The CORN SILK brand includes powder used by women to fix and finish
their makeup and also liquid makeup, blush and concealer. Liquid makeup is used
to even skin tone, blush to add color and concealer to cover blemishes. The
Company supports the brand by a television advertising campaign complemented by
print advertising in selected women's magazines.
In the sunscreen and sunblock category, BULLFROG provides long-lasting,
water-durable protection from the sun. Due to escalating consumer awareness of
skin damage from sun exposure, the Company expects the sun protection segment of
the sun care market to continue to expand rapidly. Positioned as a line of
highly efficacious sunblock products in a unique, highly concentrated formula,
the Company believes that the BULLFROG brand should continue to benefit from
this overall market growth as well as increasing brand awareness, broader
product offerings and increased consumer advertising, promotion and sampling
programs.
ULTRASWIM is a leading line of chlorine removing shampoo, conditioner and
soap. ULTRASWIM has a patented formula that the Company believes makes it
superior to formulations of other products in removing chlorine. ULTRASWIM has
also benefited as it has moved beyond the competitive swim segment to include
exercise and recreational swimmers.
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SUN-IN is the number one product line in the spray-on hair lightener
market. The target customers within this market segment are light-haired women
between the ages of 12 and 24. The Company supports SUN-IN's position as the
market leader through recent improvements in the formula and package, seasonal
advertising to teens and consumer promotions in retail stores.
MUDD is a line of clay-based products which provide deep cleansing of the
face for healthier, cleaner skin. Target customers for MUDD are women between
the ages of 18 and 49. The Company plans to relaunch MUDD with improved formulas
and updated packaging. The relaunch will be supported by television advertising
and promotional programs.
PHISODERM is a line of facial cleansers made up of several formulas of
liquid cleansers, including one for infants, and a bar soap. Acquired from
Sterling in 1994, PHISODERM is the Company's second entry into the facial
cleanser category. Positioned as a deep cleaning but gentle facial cleanser, the
Company plans to regain the larger market share this brand once held by
improving the formula, updating the packaging and providing television
advertising and promotional support.
INTERNATIONAL
The Company's consumer products are also sold in foreign countries. This
international business is concentrated in Canada, Europe and Central and South
America.
Sales in Canada and Europe are conducted by subsidiary companies located
and locally staffed in Canada and the United Kingdom. General export sales are
handled by the Company from its offices in Chattanooga. Most of the products
sold in international markets are manufactured by the Company at its Chattanooga
facilities and are packaged by subsidiary companies in small facilities in
Canada and the United Kingdom with the assistance, from time to time, of outside
contract packagers.
Many of the Company's major domestic products are currently sold in Canada,
including the FLEX-ALL 454, PAMPRIN, SUN-IN, CORN SILK, MUDD, ULTRASWIM and
PHISODERM brands.
Consumer product sales in the United Kingdom and on the continent of
Western Europe are currently limited to toiletry and cosmetic products. The
Company's hair lightener product is sold on the continent under the SPRAY BLOND
trademark and in the United Kindgom as SUN-IN. MUDD, CORN SILK and ULTRASWIM
are the other primary consumer products sold by the Company's international
division in Europe.
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SPECIALTY CHEMICALS
The objective of the Company's specialty chemicals division is to develop,
manufacture and sell value-added specialty chemicals to selected industry
segments in which the Company is or can be among the market leaders and a low
cost producer. The division competes by offering high-quality specialty
products at competitive prices, responding promptly to customer needs and
providing technical assistance. Products supplied by the Company's chemicals
division are generally essential elements of a customer's manufacturing process
but represent only a relatively small portion of the customer's overall cost in
such process.
The principal products manufactured by the Company's chemicals division are
based on organo-aluminum technology with the following principal applications:
PRODUCT APPLICATION
------- -----------
Aluminum Hydroxides/DASC Active ingredients in antacids
Aluminum Derivatives Reactive intermediates used in printing
inks
Glycine Amino acid used in the formulation of
certain intravenous solutions and other
pharmaceutical applications
PRODUCTS
ALUMINUM HYDROXIDES/DASC. The Company's specialty chemical division
provides active aluminum hydroxide compounds and DASC which are principally used
in pharmaceutical-quality liquid antacids, tablet antacids and a growing generic
antacid market. These compounds are also used in water treatment and other
industrial specialty areas.
ALUMINUM DERIVATIVES. Aluminum derivatives act as reactive intermediates
and are primarily utilized as viscosity builders and cross-linkers in printing
inks and other industrial coatings. They also serve as a unique source of
reactive aluminum metal. With an expanding number of possible uses for these
specialty compounds, the aluminum derivative segment is expected to be a growth
vehicle for the division. Although printing ink applications form the core
product market, new technologies for industrial lubricants and high-purity
reactive aluminum compounds offer a number of new opportunities.
GLYCINE. Glycine is an amino acid used in the formulation of certain
intravenous solutions and other pharmaceutical applications and as a buffer in
anti-perspirant compounds. It also serves
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as a taste modifier in foods, including certain seafood and pet food products.
Although the glycine market has historically been highly volatile, the Company's
specialty chemicals division capitalizes on periodic opportunities which arise
from fluctuating market conditions.
NEW PRODUCTS. The Company's specialty chemicals division is actively
pursuing new product opportunities that will supplement its core business. The
division expects to develop and market a custom food grade purification process
during fiscal 1995.
MANUFACTURING
The Company manufactures a substantial portion of its consumer products and
all of its specialty chemicals products at its Chattanooga plant. Currently, the
Company has adequate capacity to meet anticipated demand for its consumer
products. New consumer products can generally be manufactured with the
adaptation of existing equipment and facilities, with the addition of new
equipment at relatively small cost or through readily available contract
manufacturers. The Company has sufficient capacity to manufacture its existing
requirements of specialty chemicals products and the anticipated increase in
demand of such products in the near term. For additional information about the
extent of utilization of the Company's manufacturing facilities, see
"Properties", Item 2 in this report.
To monitor the quality of its products, the Company maintains an internal
quality control system supported by an on-site microbiology laboratory. Outside
consultants also are employed from time to time to monitor product development
and the effectiveness of the Company's operations.
The Company has not experienced any substantial adverse effect on its
business as a result of shortages of energy or other raw materials used in the
manufacture of the Company's products. At present, the Company does not foresee
any significant problems in obtaining its requirements at reasonable prices, but
no assurances can be given that raw material or energy shortages will not
adversely affect the Company's operations in the future.
In recent years, fluctuations in the prices of key raw materials, such as
aluminum, isopropyl alcohol and monochloracetic acid, have had an adverse impact
on profitability in the Company's specialty chemicals division in the short
term. Generally, over time, the Company can offset increases in prices of raw
materials through increased selling prices to its customers.
RESEARCH AND DEVELOPMENT
The Company's research and development expenditures were $1.3 million, $1.3
million and $1.2 million in the fiscal years ended November 30, 1994, 1993 and
1992, respectively. No
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material customer-sponsored research and development activities were undertaken
during these periods. The Company expects to maintain the same general level of
expenditures in fiscal 1995.
The research and development effort in the consumer products division
focuses on developing improved formulations for existing products and on the
creation of formulations for product line extensions. The preservation and
improvement of the quality of the Company's products is also an integral part of
its overall strategy.
In the specialty chemicals division, the Company is committed to the
development of new products and the adaptation of existing products to new uses.
The research and development effort is conducted at the Company's facility in
Chattanooga. Often, products are developed in conjunction with the technical
representatives of the Company's customers. The joint development process
provides the Company with access to greater resources and insures a close
working relationship with the customer.
DISTRIBUTION
The Company's domestic consumer products are sold through thousands of
food, drug and mass merchandiser accounts. Internationally, the products are
sold by a national broker in Canada and the Company's own sales force in the
United Kingdom and by exclusive distributors on the continent of Western Europe
and Central and South America to mass distribution channels. Specialty chemicals
are sold by Company personnel and sales agents to approximately 250 customers.
Wal-Mart Stores, Inc. accounts for more than 10% of the sales of the
Company's consolidated net sales. No other customer accounts for more than 10%
of consolidated net sales. Boots Plc, a U.K. retailer, accounts for more than
10% of the international consumer products segment's sales. One customer also
accounts for at least 10% of the Company's specialty chemicals division's sales
The Company's specialty chemicals division has been a supplier to a number
of its principal customers for many years. In some instances, the continuation
of the relationship is subject to factors beyond the control of the Company,
such as consumer acceptance of its customer's products. If such products fail to
achieve or maintain consumer acceptance or if such products are reformulated in
response to changing consumer demand, the customers of the specialty chemicals
division could reduce their purchases from the Company, which would adversely
affect the Company's profitability. For example, in July 1993, the
Warner-Lambert Company discontinued purchases of DASC, the sole active
ingredient in original formula ROLAIDS-Registered Trademark-, from the Company's
specialty chemicals division due to a product reformulation.
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The Company generally maintains sufficient inventories to meet customer
orders as received absent unusual and infrequent situations. At present, the
Company has no significant backlog of customer orders and is promptly meeting
customer requirements.
The Company does not generally experience wide variances in the amount of
inventory it carries; however, inventory levels were reduced in the Company's
consumer products and international divisions during fiscal 1994. In certain
circumstances, the Company allows its customers to return unsold merchandise
and, for seasonal products, provides extended payment terms to its customers.
MARKETING
The Company allocates a significant portion of its revenues to the
advertising and promotion of its products. Expenditures for these purposes were
30.9%, 34.4% and 32.0%, respectively, as a percentage of net sales during each
of the fiscal years ended November 30, 1994, 1993 and 1992. Due to the
maturation of the brand, advertising and promotion expenses to support FLEX-ALL
454 were reduced in fiscal 1994 by 21.1%, which produced a sales decline of
2.1%, thereby increasing the profitability of the brand.
The Company's marketing objective is to develop and execute creative and
cost-effective advertising and promotion programs. The manner in which the
Company executes promotional programs and purchases advertising time creates
more flexibility in terms of adjusting spending levels. The Company believes
that balancing advertising, trade promotions and consumer promotions
expenditures on a cost effective basis is an essential element in its ability to
compete successfully.
The Company develops advertising strategies and executions for each of its
major brands that focus on the particular attributes and market positions of the
products. The Company achieves cost-effective advertising by minimizing certain
expenses, such as production of commercials and payments to advertising
agencies.
The Company works directly with retailers to develop promotional calendars
and campaigns for each brand that are customized to the particular requirements
of the individual retailer. The programs, which include cooperative advertising,
temporary price reductions, in-store displays and special events, are designed
to obtain or enhance distribution at the retail level and to reach the ultimate
consumers of the product. The Company also utilizes consumer promotions such as
coupons, samples and trial sizes to increase the trial and consumption of the
products.
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SEASONALITY
During recent fiscal years, the Company's first quarter net sales and gross
profit have trailed the other fiscal quarters on average from 25% to 35% because
of slower sales of international consumer products and the relative absence of
promotional campaigns during this quarter.
COMPETITION
The OTC pharmaceutical and functional toiletry products' markets in which
the Company competes are highly competitive. The markets are characterized by
the frequent introduction of new products including the movement of prescription
drugs to the OTC market, often accompanied by major advertising and promotional
programs. The Company competes primarily on the basis of product quality, price,
brand loyalty and consumer acceptance. The Company's competitors include other
OTC pharmaceutical companies and large consumer products companies, many of
which have considerably greater financial and marketing resources than the
Company. The products offered by these companies are often supported by much
larger advertising and promotional expenditures and are generally backed by
larger sales forces. In addition, the Company's competitors have often been
willing to use aggressive spending on trade promotions as a strategy for
building market share at the expense of their competitors, including the
Company. The private label or generic category has also become more competitive
in certain of the Company's product markets. Another factor affecting the OTC
pharmaceutical and toiletry products business is the consolidation of retailers
and increasingly more competitive negotiations for access to shelf space.
In the specialty chemicals business, the Company competes on the basis of
product quality, technical service and price. In the major markets currently
served by the specialty chemicals division, there are a limited number of firms
with which the Company competes.
TRADEMARKS AND PATENTS
The Company's consumer products' trademarks are of material importance to
its consumer products business and are among its most important assets,
although, except in the case of the FLEX-ALL 454 trademark, its business as a
whole is not materially dependent upon ownership of any one trademark. The
Company, either through a wholly-owned subsidiary or directly, owns or licenses
all of the trademarks associated with its domestic consumer products business.
All of the Company's consumer products brands have recognized trademarks
associated with them, and the
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Company's significant domestic trademarks have been registered on the principal
register of the United States Patent and Trademark Office. Federally registered
trademarks have a perpetual life as long as they are timely renewed and used
properly as trademarks, subject to the right of third parties to seek
cancellation of the marks.
Trademarks pertaining to the Company's specialty chemical business are much
less significant as the products compete primarily on the basis of quality,
price, technical service and direct marketing.
The Company also owns patents related to the ULTRASWIM shampoo and CORN
SILK facial powder, which expire in 1998, and ICY HOT stick topical analgesic,
which expires in 2007. After expiration of the patents, the Company expects that
these products will continue to compete in the market primarily on the basis of
the goodwill associated with the brands.
GOVERNMENT REGULATION
The Company's products are generally subject to government regulations,
primarily those of the Federal Food and Drug Administration (the "FDA"). Certain
of the Company's consumer products are regulated by the FDA as OTC drugs, with
the rest of the products being regulated as "cosmetics". All such products must
comply with FDA regulations governing the safety of the products themselves or
the ingredients used in their manufacture. FDA regulations for all
pharmaceutical products also include requirements for product labeling and for
adherence to "current good manufacturing practices".
All of the Company's OTC drug products are regulated pursuant to the FDA's
"monograph" system for OTC drugs. The monographs set out the active ingredients
and labeling indications that are permitted for certain broad categories of OTC
drug products (e.g., topical analgesics). Compliance with the monograph
provisions means that the product is generally recognized as safe and effective,
and is not misbranded. Future changes in the monographs could result in the
Company having to revise product labeling and formulations.
The Company supplied data during 1993 to the FDA in connection with the OTC
review process with respect to pyrilamine maleate, one of the three active
ingredients used in the PAMPRIN and PREMSYN PMS products, to support the
reclassification of pyrilamine maleate as a generally recognized safe and
effective ingredient for menstrual relief products. In 1995 the FDA responded
with certain questions regarding this data. A response to the FDA is being
prepared. Based on study results and marketing experience, the Company believes
that further clinical testing of pyrilamine may be required. Although the exact
requirements of the final monographs cannot be predicted, it is possible that
pyrilamine maleate will no longer be permitted to be indicated for relief from
the "negative effects cluster", including tension and irritability. The
14
<PAGE>
Company has been actively monitoring the process and does not believe that
either its OTC drug brands or the antacid compounds sold by the specialty
chemicals division will be materially adversely affected by the FDA review. The
Company believes that any adverse finding by the FDA would likewise affect the
Company's principal competitors in the menstrual product category.
With regard to all of the Company's products, the FDA may revise applicable
regulations or provide new interpretations of existing regulations which could
necessitate product labeling changes, reformulations or other changes in the
Company's products or the conduct of its business. While it is impossible to
predict the impact of future FDA actions, to date the Company has not been
adversely affected as a result of compliance with FDA or state regulations.
In addition to the FDA regulations discussed above, the Company is subject
to numerous other statutory and regulatory restrictions, including regulations
relating to product packaging. The application of these product packaging
regulations has required the Company to convert certain of its PAMPRIN products
sold in foil pouches to bottles with child resistant caps. The new packaging
requirements will necessitate certain plant modifications and the purchase of
additional packaging equipment in the first quarter of 1995.
ENVIRONMENTAL
The Company is continuously engaged in assessing compliance of its
operations with applicable federal, state and local environmental laws and
regulations. The Company's policy is to record liabilities for environmental
matters when loss amounts are probable and reasonably estimable.
The Company's manufacturing site utilizes chemicals and other potentially
hazardous materials and generates both hazardous and non-hazardous waste, the
transportation, treatment, storage and disposal of which are regulated by
various governmental agencies. The Company completed a Phase I environmental
survey conducted at its manufacturing sites in August 1991 (the "1991 Survey")
and most of the recommendations of this survey have been implemented. Among
other things, the Company, as a result of the 1991 Survey, conducted further
sampling and monitoring at its manufacturing facility, especially with respect
to underground storage tanks. The results of such studies indicated the presence
in certain isolated areas of slightly elevated levels of Total Petroleum
Hydrocarbons in soil samples and elevated levels of methanol in a groundwater
pocket. Additional remediation efforts or costs cannot be predicted, although
such costs are not expected to be material to the Company's financial position
or results of operations.
The federal Clean Air Act Amendments of 1990 mandate a new Title V
operating permit program that is scheduled for full implementation by 1995.
Certain organic hazardous air
15
<PAGE>
pollutants which are emitted by the Company will be subject to this permitting
program. The National Emissions Standard for Hazardous Air Pollutants, the first
comprehensive regulations under the Clean Air Act, were proposed at year-end
1992 and published in final form in February 1994. Primary responsibility for
enforcement of these provisions and permitting as they relate to the Company has
been delegated to The Chattanooga/Hamilton County Air Pollution Control Bureau.
The Company is a member of the Chattanooga Manufacturers Association, a trade
association which promotes industry awareness of developments in this area, has
engaged environmental consultants on a regular basis to assist its compliance
efforts, is currently in compliance with all applicable Clean Air Act permits
and is aware of its responsibilities under these laws. Any expenditures
necessitated by changes in law and permitting requirements cannot be predicted
at this time, although such costs are not expected to be material to the
Company's financial position or results of operations.
The Environmental Protection Agency ("EPA") has conducted a survey of
Chattanooga Creek, which runs through a major manufacturing area of Chattanooga
in the vicinity of the Company's manufacturing facilities. The Company
understands that state environmental authorities have recommended that all or
portions of Chattanooga Creek be placed on the National Priorities List as a
Superfund site under the Comprehensive Environmental Response, Compensation
and Recovery Act. Such a listing was formally proposed by the EPA in January
1994. The Company is likely to be named as a potentially responsible party in
connection with such site, although as a result of the lack of a final
determination by the EPA regarding the Chattanooga Creek area, the Company's
preliminary assessment of actions that may be required and the availability of
legal defenses and expected cost sharing, the Company does not believe that any
liability associated with such site will be material to its financial position
or results of operations. The Company is continually reviewing its reporting
obligations under environmental laws and is not aware of any reporting
deficiencies that would have a material adverse effect on the Company's
financial position or results of operations.
PRODUCT LIABILITY AND INSURANCE
An inherent risk of the Company's business is exposure to product liability
claims brought by users of the Company's products or by others. The Company has
not had any material claims in the past and is not aware of any material claims
pending or threatened against the Company or its products. While the Company
will continue to attempt to take what it considers to be appropriate
precautions, there can be no assurance that it will avoid significant product
liability exposure. The Company maintains product liability insurance,
principally through a captive insurance subsidiary, that it believes to be
adequate; however, there can be no assurance that it will be able to retain its
existing coverage or that such coverage will be cost-justified or sufficient to
satisfy future claims, if any.
16
<PAGE>
EMPLOYEES
The Company employs approximately 357 persons on a full-time basis in the
U.S. and 31 persons at its foreign subsidiaries' offices. The Company's
employees are not represented by any organized labor union, and management
considers its labor relations to be good.
17
<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters and administrative offices are located at 1715
West 38th Street, Chattanooga, Tennessee. The Company's primary production
facilities are adjacent to the Company's headquarters on land owned by the
Company. The Company owns the primary ware- house for its specialty chemicals
division, which is located adjacent to the Company's headquarters, and leases
the primary warehouse and distribution center for its domestic consumer products
division, which is located at 3100 Williams Street, Chattanooga, Tennessee. The
following table describes in detail the principal properties owned and leased by
the Company:
<TABLE>
<CAPTION>
FACILITY
-------------------------
Total
Total Area Buildings Square
Acres (Square Feet) Use Feet
---------- ------------- ------------- -------
<S> <C> <C> <C> <C>
Owned Properties:
Chattanooga, Tennessee 25 185,700 Manufacturing 114,900
Warehousing 35,600
Office &
Administration 35,200
Leased Properties:
Chattanooga, Tennessee(1) 2.0 100,000 Warehousing 100,000
Chattanooga, Tennessee(2) 0.1 9,600 Warehousing &
Manufacturing 9,600
Mississauga, Ontario,
Canada (3) 0.3 15,000 Warehousing 10,500
Office &
Administration 3,000
Packaging 1,500
Basingstoke, Hampshire,
England (4) 0.3 13,300 Warehousing 8,300
Office &
Administration 4,000
Packaging 1,000
<FN>
NOTES:
(1) Leased under a five year lease ending January 31, 1996 for a monthly rental
of $23,750.
(2) Leased under a four year lease ending January 31, 1996 for a monthly rental
of $2,280.
(3) Leased under a lease ending November 1996, with an option to extend the
lease until November 2004, at a monthly rental including property taxes and
other incidentals of $4,709.
(4) Leased under a lease ending in 2014 at a monthly rental including property
taxes and other incidentals of approximately $13,884.
</TABLE>
18
<PAGE>
The productive capacity and utilization of the Company's manufacturing
facilities varies by division. The consumer products division, which accounts
for approximately 75% of total revenues, is currently operating its facilities
at approximately 50% of total capacity. These facilities are FDA approved and
are capable of further utilization through the use of full-time second and third
shifts. The capacity of the specialty chemicals division varies by product line
and can be affected by small changes in setup and additional equipment
purchases. The utilization of the specialty chemical division's manufacturing
facility based upon current processes ranges from 40% to 80% among the
division's four principal product lines. The specialty chemical division's
facility is also FDA approved.
ITEM 3. LEGAL PROCEEDINGS
Note 9 to the Consolidated Financial Statements on page 28 of the Company's
1994 Annual Report to Shareholders is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information found on pages 15, 27 and 28 of the Company's 1994 Annual
Report to Shareholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information found on page 14 of the Company's 1994 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information found on pages 9 to 12 of the Company's 1994 Annual Report
to Shareholders is incorporated herein by reference.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information found on pages 13 to 32 of the Company's 1994 Annual Report
to Shareholders is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
(a) DIRECTORS
The information found in the Company's 1995 Proxy Statement under the
heading "Information about Nominees and Continuing Directors" is hereby
incorporated by reference.
(b) EXECUTIVE OFFICERS
The following table lists the names of the executive officers of the
Company as of February 22, 1995, their ages, their positions and offices with
the Company and the year in which they were first elected to these positions:
POSITION WITH FIRST
NAME AGE REGISTRANT ELECTED
- - - ------------------ --- -------------------------------------- -------
Zan Guerry 46 Chairman of the Board;
President and Chief Executive Officer;
Director 1990
Robert E. Bosworth 47 Executive Vice President and Chief
Financial Officer; Director 1990
Mr. Zan Guerry was elected to his present positions with the Company in
June 1990. Previously he served as Vice President and Chief Financial Officer
from 1980 until 1983, and as Executive Vice President from 1983 to 1990. Mr.
Guerry was first elected as a director of the Company in 1981.
Mr. Bosworth was elected to his present positions with the Company in June
1990. Previously he served as Vice President and Chief Financial Officer of the
Company from 1985 to 1990. Mr. Bosworth was first elected as a director of the
Company in 1986.
(c) PROMOTERS AND CONTROL PERSONS
Not applicable.
21
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information found in the Company's 1995 Proxy Statement under the
heading "Executive Compensation and Other Information" is hereby incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information found in the Company's 1995 Proxy Statement under the
heading "Voting Securities and Principal Holders Thereof" is hereby incorporated
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
(a) 1. The consolidated financial statements and the related report of
independent public accountants required to be filed with this Report are
incorporated by reference from pages 16 to 32 of the Company's 1994 Annual
Report to Shareholders.
2. The following documents are filed or incorporated by reference as
exhibits to this report:
Exhibit
Number Description of Exhibit References
------- -------------------------------------- ----------
3 Amended and Restated Charter of
Chattem, Inc. (7)
4 Amended and Restated By-Laws of
Chattem, Inc. (9)
Form of Indenture dated August 3, 1994
between Chattem, Inc. and SouthTrust
Bank of Alabama, N.A. relating to the
12.75% Series B Senior Subordinated
Notes due 2004 (10)
10 Material Contracts -
ULTRASWIM License Agreement (1)
BULLFROG Purchase Agreement (2)
Purchase and sale agreement dated
March 6, 1989 between Chattem, Inc.
and Ari-Med Pharmaceuticals, Inc.
relating to the products FLEX-ALL
454 and FLEX-ALL 5000 (3)
Chattem, Inc. Employee Stock Ownership
Plan dated August 25, 1989 (4)
23
<PAGE>
Exhibit
Number Description of Exhibit References
------- -------------------------------------- ----------
10 Chattem, Inc. Savings and Investment
Plan dated June 11, 1990 (5)
Lease Agreement dated February 1, 1991
between Tammy Development Company
and Chattem, Inc. for warehouse space at
3100 Williams Street, Chattanooga,
Tennessee (6)
Non-Competition and Severance Agree-
ments as Amended -
Zan Guerry
Robert E. Bosworth
Robert M. Boyd, Jr.
J. Pemberton Guerry (6)
Lease agreement between Atlantis Real
Estate Corporation and Chattem
(Canada) Inc. and Chattem, Inc. for Unit
1, 2220 Argentia Road, Mississauga,
Ontario, Canada (7)
Lease agreement between Guildhall
Property Holdings Limited and Chattem
(U.K.) Limited for Unit 7, Ringway
Centre, Edison Road, Basingstoke,
Hampshire, England (7)
Chattem, Inc. Non-Statutory Stock Option
Plan - 1993 (8)
Manufacturing agreement dated May 12,
1993 between Chattem, Inc. and Procter &
Gamble Pharmaceuticals, Inc. relating
to NORWICH aspirin products (9)
Stock Purchase Agreement dated June 11,
1993 between Chattem, Inc. and First
Union Capital Partners, Inc. (10)
Registration Agreement dated June 11,
1993 between Chattem, Inc. and First
Union Capital Partners, Inc. (10)
24
<PAGE>
Exhibit
Number Description of Exhibit References
------- -------------------------------------- ----------
10 Chattem, Inc. Non-Statutory Stock Option
Plan - 1994 (10)
Chattem, Inc. Non-Statutory Stock
Option Plan for Non-Employee Directors
- 1994 (11)
Asset Purchase and Sale Agreement dated
May 12, 1994 between The Procter &
Gamble Company and Signal Investment
& Management Co. for the
BENZODENT Business (12)
Purchase and Sale Agreement dated
June 3, 1994 between Chattem (Canada)
Inc. and Cosmetic Import Company
Limited (13)
Purchase Agreement dated June 10, 1994
between Chattem, Inc.and Kidder,
Peabody & Co. Incorporated (13)
Note Registration Rights Agreement dated
June 17, 1994 between Chattem, Inc.
and Kidder, Peabody & Co. Incorporated (13)
Warrant Registration Rights Agreement
dated June 17, 1994 between Chattem,
Inc. and Kidder, Peabody & Co.
Incorporated (13)
Asset Purchase and Sale Agreement dated
June 17, 1994 between Sterling
Winthrop Inc. and Signal Investment
& Management Co. (13)
Working Capital Credit Agreement dated
June 17, 1994 among Chattem, Inc.,
the lenders named therein and The First
National Bank of Chicago, as Agent. (13)
25
<PAGE>
Exhibit
Number Description of Exhibit References
------- -------------------------------------- ----------
10 Acquisition Credit Agreement dated
June 17, 1994 among Chattem, Inc.,
the lenders named therein and The First
National Bank of Chicago, as Agent. (13)
Renewal lease agreement dated
December 5, 1994 between Atlantis
Real Estate Corporation and Chattem
(Canada) Inc. and Chattem, Inc. for Unit
1, 2220 Argentia Road, Mississauga,
Ontario, Canada (14)
11 Computation of per share earnings (14)
13 1994 Annual Report to Shareholders of
Chattem, Inc. (14)
22 Subsidiaries of the Company (14)
24 Consent of Independent Public
Accountants (14)
REFERENCES:
Previously filed as an exhibit to and incorporated by reference from:
(1) Form 10-K for the year ended May 31, 1986.
(2) Form 10-Q for the quarter ended February 28, 1987.
(3) Form 10-K for the year end May 31, 1989.
(4) Form S-8 Registration Statement (No. 33-30742).
(5) Form S-8 Registration Statement (No. 33-35386).
(6) Form 10-K for the year ended November 30, 1991.
(7) Form 10-K for the year ended November 30, 1992.
(8) Form S-8 Registration Statement (No. 33-55640).
(9) Form 10-K for the year ended November 30, 1993.
(10) Form S-8 Registration Statement (No. 33-78524).
(11) Form S-8 Registration Statement (No. 33-78522).
(12) Form 8-K dated May 12, 1994.
(13) Form S-2 Registration Statement (No. 33-80770).
(14) Filed as an exhibit to this Form 10-K for the year ended November 30,
1994.
(b) There were no Form 8-K's filed with the Securities and Exchange
Commission during the three months ended November 30, 1994.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: February 22, 1995 CHATTEM, INC.
By: /s/
-----------------------------
Title: Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
Signature Title Date
- - - --------------------------- -------------------------- ---------------
/s/ Zan Guerry Chairman of the Board, 2/22/95
- - - --------------------------- President and Director ---------------
Zan Guerry (Chief Executive Officer)
/s/ Samuel E. Allen Director 2/22/95
- - - --------------------------- ---------------
Samuel E. Allen
/s/ Louis H. Barnett Director 2/22/95
- - - --------------------------- ---------------
Louis H. Barnett
/s/ Robert E. Bosworth Executive Vice President and 2/22/95
- - - --------------------------- Chief Financial Officer and ---------------
Robert E. Bosworth Director (Principal Financial
and Accounting Officer)
/s/ Robert M. Boyd, Jr. Director 2/22/95
- - - --------------------------- ---------------
Robert M. Boyd, Jr.
/s/ Francis L. Capers Director 2/22/95
- - - --------------------------- ---------------
Francis L. Capers
/s/ Richard E. Cheney Director 2/22/95
- - - --------------------------- ---------------
Richard E. Cheney
/s/ Scott L. Probasco, Jr. Director 2/22/95
- - - --------------------------- ---------------
Scott L. Probasco, Jr.
/s/ A. Alexander Taylor, II Director 2/22/95
- - - --------------------------- ---------------
A. Alexander Taylor, II
27
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- -----------------------------------------------------------------
10.1 Renewal lease agreement dated December 5, 1994 between Atlantis
Real Estate Corporation and Chattem (Canada) Inc. and Chattem,
Inc. for Unit I, 2220 Argentia Road, Mississauga, Ontario, Canada
11 Computation of per share earnings
13 1994 Annual Report to Shareholders of Chattem, Inc.
22 Subsidiaries of the Company
<PAGE>
EXHIBIT 10.1
RENEWAL LEASE
THIS INDENTURE made this 5th day of December, 1994.
IN PURSUANCE OF THE SHORT FORMS OF LEASES ACT.
BETWEEN: ATLANTIS REAL ESTATE CORPORATION
as agents for the owner;
(hereinafter called the "LandLord")
OF THE FIRST PART;
- and -
CHATTEM (CANADA) INC.
(hereinafter called the "TENANT")
OF THE SECOND PART;
- and -
CHATTEM, INC.
(hereinafter called the "Guarantor")
OF THE THIRD PART;
WHEREAS by Lease dated the 23rd day of April, 1992, (hereinafter called the
"Original Lease"), ATLANTIS REAL ESTATE CORPORATION as agents for the owners
leased to CHATTEM (CANADA) INC. premises having a gross floor area of
approximately 15,069 square feet of space at Unit 1, 2220 Argentia Road City of
Mississauga, Ontario, for a term of three (3) years to be computed from the 1st
day of April, 1992 and ending March 31, 1995, and subject to the terms and
conditions set forth in the Original Lease.
NOW THEREFORE, in consideration of the premises and the execution of this
Renewal Lease by the Tenant and the Landlord, the term as outlined on the Lease
dated the 23rd day of April, 1992, shall be amended so that the termination date
will be November 30, 1994.
FURTHERMORE, in consideration of the premises and of the covenants and
agreements hereinafter respectively reserved and contained on the part of the
Tenant, its successors and assigns, to be respectively paid, observed and
performed, the Landlord hereby demises the premises referred to in the Original
Lease to the Tenant, to have and to hold such premises for and during the term
of two (2) years, from the 1st day of December 1994, and from thenceforth next
ensuing and fully to be completed on the 30th day of November 1996.
<PAGE>
YIELDING AND PAYING THEREFORE, for the first year to the Landlord, its
successors and assigns, a basic annual rent of FIFTY-SIX THOUSAND, FIVE HUNDRED
AND EIGHT DOLLARS AND SEVENTY-FIVE CENTS ($56,508.75) per annum, to be paid in
advance in equal monthly installments of FOUR THOUSAND, SEVEN HUNDRED AND NINE
DOLLARS AND SIX CENTS ($4,709.06) on the first day of each month of the term,
commencing the first day of December, 1994.
YIELDING AND PAYING THEREFORE, for the second year to the Landlord, its
successors and assigns, a basic annual rent of SIXTY THOUSAND, TWO HUNDRED AND
SEVENTY-SIX DOLLARS AND NO CENTS ($60,276.00) per annum, to be paid in advance
in equal monthly installments of FIVE THOUSAND AND TWENTY-THREE DOLLARS NO CENTS
($5,023.00) on the first day of each month of the term, commencing the first day
of December, 1995. The Tenant agrees to pay to the Landlord, its successors and
assignees, a lump sum payment of $18,836.25 to be paid by the first day of May,
1996.
PROVIDED the Tenant is not in default, the Tenant shall have the option to
renew its Lease for a further period of three (3) years under the same terms and
conditions, save as to further renewal and save as to be the basic annual rent
which shall be $64,043.25 per annum, to be paid in advance in equal monthly
installments of $5,336.94. The Tenant agrees to notify the Landlord in writing
of its intent to renew at least six (6) months prior to the expiration of the
Lease Term. Once written confirmation of the three (3) year renewal is received
from the Tenant the lump sum payment of $18,836.25 will be forgiven from the
second year Lease payment.
UPON acceptance by the Tenant of the three (3) year renewal from December
30, 1996 to November 30, 1999, the following leasehold improvements will be
performed.
a. New carpet supplied and installed in the offices.
b. Removal of the demising wall between two existing offices.
c. Repair and/or replacement of problematic unit heaters.
d. Painting of entire office area.
PROVIDED the Tenant is not in default, the Tenant shall have the option to
renew its Lease for a further period of five (5) years under the same terms and
conditions, save as to further renewal and save as to the rental rate which
shall be at a rate agreed upon at least six (6) months prior to the expiration
of the Lease Term.
THE LANDLORD AND TENANT, hereby mutually covenant and agree that they will
perform and observe the several covenants, provisos and conditions in the
Original Lease and as herein amended as fully as if such covenants, provisos and
conditions had been repeated herein in full with such modification only as are
necessary to make them applicable to this Renewal Lease.
THIS RENEWAL LEASE shall endure to the benefit of and be binding upon the
Parties hereto and their respective successors and assigns.
<PAGE>
IN WITNESS WHEREOF the Parties hereto have executed this Lease.
ATLANTIS REAL ESTATE CORPORATION
as agents for the owners:
Per:
- - - -------------------------- ----------------------------------
Witness Landlord
CHATTEM (CANADA) INC.
Per:
- - - -------------------------- ----------------------------------
Witness Tenant
<PAGE>
EXHIBIT 11
CHATTEM, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED NOVEMBER 30, 1994, 1993 AND 1992
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------
<S> <C> <C> <C>
NET INCOME:
Income before extraordinary loss and cumulative
effect of accounting changes.................. $ 3,610 $ 1,279 $ 8,072
Extraordinary loss on early extinguishment
of debt, net.................................. (1,556) (480) --
Cumulative effect of accounting changes, net.... -- 569 --
------- ------- -------
Net income.................................. $ 2,054 $ 1,368 $ 8,072
------- ------- -------
------- ------- -------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Weighted average number of common shares
outstanding................................... 7,292 6,303 4,787
Shares issued upon assumed exercise of
outstanding stock options..................... -- 38 246
------- ------- -------
Weighted average number of common and common
equivalent shares outstanding ................ 7,292 6,341 5,033
------- ------- -------
------- ------- -------
NET INCOME PER COMMON SHARE:
Before extraordinary loss and cumulative effect
of accounting changes......................... $ .50 $ .20 $ 1.60
Extraordinary loss on early extinguishment
of debt, net.................................. (.21) (.07) --
Cumulative effect of accounting changes, net.... -- .09 --
------- ------- -------
Net income per common share................. $ .29 $ .22 $ 1.60
------- ------- -------
------- ------- -------
</TABLE>
<PAGE>
CONTENTS
FINANCIAL HIGHLIGHTS...................................................... 1
PRESIDENT'S LETTER........................................................ 2
CHATTEM CONSUMER PRODUCTS................................................. 4
CHATTEM CHEMICALS......................................................... 6
CHATTEM INTERNATIONAL..................................................... 7
MANAGEMENT'S DISCUSSION AND ANALYSIS...................................... 9
SALES AND INCOME BY LINE OF BUSINESS...................................... 13
SELECTED FINANCIAL DATA................................................... 14
CONSOLIDATED BALANCE SHEETS............................................... 16
CONSOLIDATED STATEMENTS OF INCOME......................................... 18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)................. 19
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................... 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................................. 32
<PAGE>
CHATTEM, INC.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
EARNINGS PER SHARE
BEFORE EXTRAORDINARY LOSS
AND ACCOUNTING CHANGES $ 0.50 $ 0.20 $ 1.60
COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 7,292 6,341 5,033
DIVIDENDS PER SHARE $ -- $ 20.20 $ 0.30
</TABLE>
NET SALES
Consolidated ($ Millions)
<TABLE>
<S> <C>
94 108.0
93 105.4
92 108.2
91 100.7
90 84.4
</TABLE>
INCOME FROM OPERATIONS(1)
Before Nonrecurring and Unusual Charges ($ Millions)
<TABLE>
<S> <C>
94 16.2
93 11.4
92 13.7
91 9.6
90 8.0
<FN>
(1)AS A RESULT OF SIGNIFICANT NONRECURRING AND UNUSUAL CHARGES IN FISCALS 1993
AND 1994 AND THE INTEREST EXPENSE ASSOCIATED WITH FINANCING THE $20 SPECIAL
DIVIDEND TO SHAREHOLDERS, OPERATING INCOME BEFORE NONRECURRING AND UNUSUAL
CHARGES IS BELIEVED TO BE THE MOST MEANINGFUL MEASURE FOR COMPARING CHATTEM'S
FINANCIAL RESULTS.
</TABLE>
<PAGE>
I am pleased to report to you that 1994 was a very good year led by a 42%
increase in operating income before nonrecurring and unusual charges to an all
time record of $16.2 million. Also, we made two important acquisitions,
PHISODERM and BENZODENT, which should provide excellent growth opportunities for
several years.
It was a particularly critical year as we bounced back from a disappointing 1993
in which operating income had declined 17%. I am optimistic that we are back on
track to achieve solid future growth as we did with our 30% annual earnings
growth from 1990 through 1992, although probably not at quite that pace. Also,
it was meaningful that the excellent results for 1994 were done "the old
fashioned way, we earned it." Without any single development leading the surge,
we increased profit by cutting costs, improving manufacturing operations,
reducing inventories and using advertising and promotion expenditures more
efficiently.
To cite some key numbers, total sales of $108 million increased 2% over 1993.
Increased sales of about $7 million from the two newly acquired brands offset a
decline of $2 million in Chattem Chemicals during the first full year without
the ROLAIDS-Registered Trademark- business and a $2 million decrease in Chattem
International's sales due to refocusing our efforts overseas.
We believe that operating income before nonrecurring and unusual charges is the
most meaningful measure for a comparison of earnings at Chattem given the impact
on interest expense of the Special Dividend transaction in June 1993 and of the
$75 million senior subordinated notes issue in mid-1994. Operating income
before nonrecurring and unusual charges of $16.2 million increased 42% compared
with $11.4 million. This $16.2 million figure and the underlying 15% operating
margin both represent all time
<PAGE>
records for Chattem. Earnings per share before extraordinary loss and
accounting changes were $.50 compared with last year's $.20.
The significant increase in operating income came from two key areas: the two
newly acquired brands and improved margins on domestic consumer products due to
expense control in all areas with a particular focus on our advertising and
promotion dollars.
In the consumer products area, the highlights were strong results from ICY HOT,
PAMPRIN, PREMSYN PMS, PHISODERM and BENZODENT. MUDD and NORWICH had poor years
due to increased competition while BULLFROG lost a major retail customer which
impacted what could have been a reasonable year. FLEX-ALL 454, which has
enjoyed strong sales growth in recent years, and CORN SILK both were relatively
stable.
Chattem Chemicals, which operated for its first full year without the
ROLAIDS-Registered Trademark- business, performed solidly with slight increases
in sales and operating income, after adjusting for the ROLAIDS-Registered
Trademark- loss. Chattem Chemicals also maintained its historically strong
operating margin.
Chattem International's sales and profits declined in 1994, but as a result of
steps initiated in 1993, along with the acquisition of PHISODERM, the unit is
poised for significant profit improvements. Sales and profits declined
principally due to the sale of ALGEMARIN in Canada, the continued commitment to
the development of FLEX-ALL 454 in Canada in the face of increased competition
and reduced sales due to downsizing efforts begun in 1993 on the Western
European continent as well as within the U. S. export businesses.
<PAGE>
Although our managers feel good about 1994, they are enthusiastic about 1995 and
committed to another strong performance. I cannot ever recall having more
significant programs in progress as we have at the outset of this year.
Clearly, the relaunch of PHISODERM is critical with new formulas, redesigned
packaging and record levels of advertising. Additionally, we will be testing
important line extensions for PHISODERM for launching in 1996. Another key
program will be the first ever advertising campaign for BENZODENT as we attempt
to grow the underdeveloped market for products that relieve denture pain.
The new programs for our existing products are too numerous to cover, but I will
mention a few highlights. A major relaunch of MUDD is planned with two line
extensions - Sea Mask and Aloe Mask. We will have an exciting new addition to
the BULLFROG line of products with BULLFROG Quick Gel, a unique, non-greasy
formula that is waterproof and dries quickly with no residue. SUN-IN will
introduce SUN-IN for Men this summer, capitalizing on research indicating a
strong interest in blonding by male teens and young adults. ULTRASWIM should
benefit from exciting new packaging. CORN SILK will perhaps have the most
changes with improved packaging, the introduction of shaded natural matte
powders and a new liquid formula.
As we begin the year, we are also excited about advertising campaigns just
created for ICY HOT, FLEX-ALL 454, PREMSYN PMS, PAMPRIN, ULTRASWIM, SUN-IN and
MUDD. Finally, we will be testing line extension concepts for FLEX-ALL 454 and
ICY HOT. In summary, we are going to have a very proactive and eventful year
enhancing and marketing our brands.
Our proven strategy for growth has been through acquiring products and then
developing marketing programs and advertising support to grow the brands. We
will continue our
<PAGE>
acquisition efforts in 1995, and the recent wave of mergers should afford a
number of opportunities over the next several years as companies rationalize
their product portfolios. We will also continue to evaluate our existing
businesses and products, and in instances where our objectives are not realized,
will dispose of these businesses or brands and redeploy the assets to products
or businesses with greater growth potential, or to pay down indebtedness.
In conclusion, we are excited about this important upcoming year, and I look
forward to reporting to you during the year about the progress of many of our
new programs.
<PAGE>
CHATTEM CONSUMER PRODUCTS
MISSION
Chattem Consumer Products' mission is the satisfaction of consumer needs in
personal and health care areas through the marketing of brand name products
which are of excellent quality and proven efficacy. These products are
advertised through national media and are distributed through the food, drug and
mass merchandiser classes of trade. The objective is to create or maintain a
leadership position in each of Chattem's domestic markets and to thereby provide
superior earnings while also building the value of each brand.
FISCAL 1994 SUMMARY
The highlight of the year was the consummation and assimilation of two newly
acquired brands into the division's portfolio. Chattem acquired the trademark
and inventory of BENZODENT, a topical oral analgesic, from Procter & Gamble in
May 1994 and acquired a perpetual license for use of the PHISODERM trademark in
North America from Sterling Winthrop Inc. in June 1994.
Sales for the division were up 7.9% to $82,643,000 from $76,592,000 in 1993
principally due to the PHISODERM and BENZODENT business, as the remaining
product lines were essentially flat. The two acquired products exceeded sales
expectations both at the trade and retail levels even with minimal amounts spent
during 1994 on consumer advertising. Positive news included the continued
expansion of ICY HOT, a retail share increase by PAMPRIN and significant sales
growth by PREMSYN
<PAGE>
PMS, MUDD, NORWICH and ULTRASWIM registered sales decreases due to competition
and short-term reductions in support levels while BULLFROG lost a major
customer. Sales of FLEX-ALL 454, CORN SILK and SUN-IN were consistent with
1993. The sales of FLEX-ALL 454 in 1994 reflected the maturing of a brand that
has added significant growth to the division's sales in prior years.
Operating income rose 68% to $16,981,000 from $10,127,000 in 1993. This
increase was due to incremental income generated from the two acquired brands
and, recognizing the maturation of FLEX-ALL and the marginal benefits of a
national advertising campaign for NORWICH in 1993, a reduction in advertising
and promotion expenditures for these two brands. ICY HOT, PAMPRIN and CORN SILK
had increases in advertising and promotion levels for 1994 as compared to 1993.
Additionally, the division continues to improve margins and also limit overhead
through aggressive cost containment measures.
BRAND OVERVIEW AND FISCAL 1995 OUTLOOK
OTC PHARMACEUTICALS
ICY HOT, a topical analgesic and the fastest growing brand in the category,
completed its second straight year of double digit sales growth. Its unique
positioning as the product offering "extra strength dual action relief" together
with compelling consumer promotions and expanded national advertising should
continue to enable ICY HOT to gain market share.
<PAGE>
FLEX-ALL 454, an aloe vera-based topical analgesic used by the trainers of all
102 professional football, baseball, basketball and hockey teams, is the
official locker room product of the National Football League. Sales were down
slightly for the first time in this important brand's history principally due to
competitive pressures from both private label and nationally branded products.
In an effort to resume growth in 1995, the brand will seek to capitalize on new
advertising which will continue to feature former football superstar Joe Namath
and the ongoing support of professional trainers in addition to new targeted
consumer programs.
BENZODENT, a topical oral analgesic, is the only brand applied directly to
dentures to relieve denture pain. After the acquisition in May 1994, product
manufacturing was successfully transitioned to Chattem in September. After a
period of extensive research, the first integrated marketing plan ever for the
brand was developed. This plan includes advertising on a national basis as well
as a very focused effort to gain additional support from medical professionals.
PAMPRIN, the number two brand in the menstrual analgesics category, is a
combination drug specifically designed for relief of menstrual symptoms.
Following a year of trade inventory adjustments, PAMPRIN's factory sales were up
almost 9%, which approximated retail sales movement. The growth was experienced
by both the Multi-Symptom and Maximum Pain Relief products due to effective
consumer advertising and promotional support, although anticipated competitive
pressure from general analgesics
<PAGE>
could make this performance difficult to repeat. Nighttime PAMPRIN has not met
the original expectations since its launch in late 1993 and will not be a factor
in 1995.
PREMSYN PMS, the division's other menstrual product, was a particularly positive
surprise with a sales increase in spite of a decrease in media support. After a
year of reduced spending, the brand will be advertised at much higher levels in
1995.
NORWICH, a high-quality, reasonably-priced aspirin franchise, complements the
other OTC pharmaceuticals of the division. The brand continues to decline in
excess of 10% per year principally due to the continued expansion of private
label aspirin, heavy returns after the disappointing launch of NORWICH Enteric-
Coated Aspirin and reduced support in lieu of other portfolio priorities.
Additionally, the division manufactures and markets two smaller proprietary
drugs, SOLTICE, an external analgesic, and BLIS-TO-SOL, an antifungal product.
Limited regional support will continue on an opportunistic basis.
COSMETICS
CORN SILK, the face make-up especially formulated to be oil free and able to
absorb excess facial oils, had a good year with sales growing both at factory
and retail during a year when the oil-control face make-up category and all of
CORN SILK's major competitors were down in retail sales. The successful
introduction of CORN SILK's new Natural Matte Loose and Pressed Powders in the
summer of 1994, the initial repackaging of loose and pressed compacts and liquid
bottles to a contemporary squared
<PAGE>
design and an expanded support program contributed to a very good year. Chattem
should capitalize in 1995 on the full year effects of the product and packaging
efforts begun in the second half of 1994. In addition, plans are in place to
expand the new Natural Matte line into shades and to introduce new Bronzing
powders and new shades for the liquid line. CORN SILK will once again increase
its programs to support all of these new items. CORN SILK's goal of being the
market's number one specialty face make-up continues to be a focus of the
Company.
TOILETRIES
PHISODERM, a specialty face cleanser, has surpassed initial expectations as
consumer sales are growing following three years of decline and, more
importantly, after only one month of consumer advertising. The key program for
Chattem in 1995 is the relaunch of PHISODERM with improved formulas, new
packaging and record levels of advertising. Additionally, testing of important
line extensions for late 1995 or early 1996 will be a priority. Also, the
integration of the manufacturing into Chattem's facilities in early 1995 affords
significant cost savings to support the brand.
After two years of minimal support and declining sales, Chattem will relaunch
MUDD, a line of clay-based facial mask products, with new packaging and two line
extensions - Sea Mask and Aloe Mask. New creative and promotional support will
complement the product changes in order to stabilize the brand and, together
with PHISODERM, to strengthen the Company's presence in the specialty face
cleanser category.
<PAGE>
BULLFROG AMPHIBIOUS FORMULA SUNBLOCK had disappointing factory sales in 1994.
Consolidation among the large warehouse clubs resulted in a loss of distribution
equal to almost $700,000. On the positive side, the reformulation and
repackaging of the BULLFROG for Kids product and the return of BULLFROG to
television during the summer season resulted in retail sales being up 16% for
the year. This retail performance and the addition of BULLFROG Quick Gel, a
unique waterproof, non-greasy formula that dries quickly with no residue,
provides optimism for 1995.
The other seasonal products, SUN-IN Hair Lighteners and ULTRASWIM Chlorine
Removal Shampoo and Conditioner, had combined sales which were down slightly
versus 1993. While both products still remain the market share leaders of their
respective categories, competitive pressures combined with a reduction in
marketing support due to other portfolio priorities limited upside potential.
In 1995 both brands will be repackaged and returned to regional TV support, and
Chattem will introduce SUN-IN for Men in response to research indicating a
strong interest in blonding by male teens and young adults.
<PAGE>
CHATTEM CHEMICALS
MISSION
Chattem Chemicals is committed to the development, manufacture and sale of high
value-added specialty chemicals for which Chattem is or can be a market leader
and low-cost producer. The division offers high-quality specialty products at
competitive prices, responds promptly and professionally to customer needs and
provides technical assistance as required. Growth will occur through the
application of current and new technologies to existing as well as emerging
markets. It is Chattem's further commitment to consistently act in an
environmentally responsible manner.
FISCAL 1994 SUMMARY
Both sales and profits for Chattem Chemicals in 1994 were below those recorded
in 1993 due primarily to the previously reported reformulation of
ROLAIDS-Registered Trademark- which occurred in mid-1993. Net sales declined
12.6% from $15,544,000 in 1993 to $13,586,000. Operating income was down from
$4,111,000 to $3,093,000 in 1994. Sales from continuing operations, after
adjusting for the loss of the ROLAIDS-Registered Trademark- volume, increased
modestly from $12,915,000 in the prior year to $13,586,000 in 1994.
Efforts throughout fiscal 1994 were focused on further strengthening all
division profit centers as new opportunities have been identified and work has
begun to supplement the strong contribution from core businesses. Future growth
will be driven by the division's expertise as a producer of unique specialty
chemicals. As in the past, new products and applications are most often jointly
developed by technical teams representing both
<PAGE>
Chattem and end users working closely together to solve a particular problem or
fill a specific need. These product development relationships continue to be
the building blocks for future division growth.
PRODUCT OVERVIEW AND FISCAL 1995 OUTLOOK
ALUMINUM HYDROXIDES
Aluminum hydroxide compounds are used in the manufacture of many antacids and
also in the formulation of water treatment chemicals, industrial catalysts and
other industrial specialty compounds. In the antacid sector, the division
anticipates sales increases through new product introductions and a broader
customer base. Chattem Chemicals is a major bulk supplier to the expanding
private label antacid market. Demand for active ingredients used in water
treatment compounds and other industrial applications is increasing and should
continue to grow in the years ahead.
ALUMINUM DERIVATIVES
Aluminum derivatives act as reactive intermediates and are primarily utilized as
viscosity builders and cross linkers in printing inks and other industrial
coatings. These materials also serve as a unique source of reactive aluminum
metal. With an expanding number of possible uses for Chattem's specialty
compounds, the aluminum derivative segment continues to provide growth
opportunities for the division. Although specialty additives for the printing
ink industry form the core product market, new technologies for industrial
lubricants, high-purity reactive aluminum compounds, plastics additives and
catalyst bases offer a number of exciting opportunities for products now in
development.
<PAGE>
GLYCINE
Glycine is an amino acid used in the formulation of certain intravenous
solutions and other pharmaceutical applications and as a buffer in highly
effective antiperspirant compounds. It also serves as a taste modifier in
foods, including certain seafood and pet food products. As the glycine market
has historically been volatile, Chattem Chemicals capitalizes on periodic
opportunities which arise from fluctuating market conditions and continues in
its role as a leading U.S. producer.
Beginning in 1992, but escalating significantly in 1993 and 1994, imports of
glycine into the U.S. from China have increased. These lower-priced imports
forced reduced selling prices for U.S.-produced material and ultimately led to
an industry-sponsored petition for relief to the U. S. Department of Commerce.
Its final report made in November concluded that these Chinese imports were sold
far below fair value, and the International Trade Commission will render its
final determination this year.
NEW PRODUCT DEVELOPMENT
Future growth of the division is largely dependent on the successful
introduction of new products. Major commercial development emphasis for 1995
and beyond is focused on the expansion of Chattem Chemicals' product and
technology base into markets and industries not currently being served.
Research efforts are concentrated on developing products which utilize the
Company's technical expertise to solve specific problems identified by the
customer. Specialty products for new resin systems, for coatings applications
and for the catalyst, plastics and printing markets should significantly
contribute to the division's growth in the years ahead.
<PAGE>
CHATTEM INTERNATIONAL
MISSION
Chattem International directs the international business development of Chattem
Consumer Products. The division's goal is to leverage the value of Chattem's
consumer brands and thereby expand the Company's revenues and profits.
FISCAL 1994 SUMMARY
The highlight of the year was the continued reorganization of the international
businesses to improve the profitability of the division. This was accomplished
through the sale of ALGEMARIN, an unprofitable line of bath products in Canada,
and through the reduction of division overhead and the restructuring of European
operations. Also, the addition of PHISODERM in Canada will more than offset the
revenue loss from the disposition of ALGEMARIN while adding substantially more
profits. The reduced sales caused operating income to decline somewhat to
$120,000 from $381,000 in 1993. Chattem International's net sales in fiscal
1994 decreased 12% to $11,727,000 from $13,269,000 in fiscal 1993, primarily due
to the rationalization of operations.
Advertising and promotion expenses were maintained at 1993 levels while fixed
expenses in all units continue to be managed aggressively with total fixed costs
down almost $500,000. Another positive note in 1994 was the aggressive
management of working capital which allowed approximately $3,000,000 in
intercompany accounts to be repaid and used to reduce overall bank debt.
<PAGE>
CANADA
The divestiture of ALGEMARIN and the acquisition of PHISODERM in June 1994 were
of major significance to the unit's long-term profitability. As in the U.S.,
sales of PHISODERM exceeded initial expectations with no consumer advertising
support. CORN SILK had an exceptional year of sales growth during its first
year ever of television support. The brand benefited from its strength in the
U.S. and also capitalized on a strong sales and marketing effort to gain
distribution in Wal-Mart. In spite of a tough competitive environment, FLEX-ALL
454 sales remained consistent with continued support on national television.
ULTRASWIM, ACNOMEL and SUN-IN had stable years while PAMPRIN declined due to
competitive pressures.
EUROPE
While overall sales in the United Kingdom were up marginally, the core brands
had another good year. SUN-IN Hair Lightener and CORN SILK experienced double
digit sales growth while the MUDD Mask brands were flat and ULTRASWIM Shampoo
was down slightly. The BRONZ SILK products that were launched in 1993 fell
short of expectations after the large initial sell-in. Sales on the Western
European continent were down significantly principally due to the restructuring
that took place in 1993. The division's distributor in Spain was terminated and
efforts in Germany reduced, but sales to the remaining eight distributor markets
were essentially flat.
<PAGE>
U.S. EXPORTS
Sales were down following the restructuring of the division in 1993. Sales of
ICY HOT to Mexico, Peru and Singapore were even with the launch in 1993, and
sales of existing product lines in the Caribbean were flat. Chattem continues
to explore other profitable distributor arrangements in the growing markets of
Central and South America.
1995 OUTLOOK AND MARKET OVERVIEW
The primary goal for the division in 1995 and in the future will be to
contribute significantly more profits while continuing to build worldwide brand
equities. This earnings growth should come from several areas. The
stabilization and subsequent growth of PHISODERM, while being advertised for the
first time in several years in Canada, will be a key for 1995 and the years
following. As FLEX-ALL 454 matures in Canada, a slow down in investment
spending will result in improved earnings. Capitalizing on the successful
launch of ICY HOT in Central and South America, established and profitable
distribution networks can be aggressively pursued. All distributors and brands
in each market on the Western European continent will continue to be evaluated
relative to its capability to provide long-term profits. Also, fixed expenses
in all markets will be managed aggressively to afford more support for the
brands and also higher profits.
CANADA
Chattem (Canada) Inc. is a wholly-owned subsidiary based in Mississauga,
Ontario, which markets and distributes Chattem's consumer products throughout
the country. The
<PAGE>
brands are principally manufactured in Chattanooga with some packaging completed
in Mississauga. A national broker handles sales efforts. Brands marketed in
Canada include PAMPRIN, FLEX-ALL 454, CORN SILK, MUDD, SUN-IN, ULTRASWIM and
PHISODERM. In addition, Chattem owns the marketing and distribution rights for
SHY, a line of feminine hygiene and douche products; ACNOMEL, a medicated acne
mask; and also AQUA CARE and ROSE MILK, two smaller brands for skin care.
EUROPE
Chattem's European business is conducted through Chattem (U.K.) Limited, a
wholly-owned subsidiary located in Basingstoke, Hampshire. This unit also
services distributors in Australia and the Middle East. Manufacturing and
packaging of the products are performed in the Company's Chattanooga facilities
as well as in the U.K. The division employs its own sales force in the U.K.
while exclusive distributors are used to market and sell its products on the
Western European continent. Due to the difficulty and expense involved in the
registration of OTC pharmaceuticals in Europe, the focus is exclusively on the
Company's toiletry brands. Chattem's products in Europe include SUN-IN, a range
of MUDD Face and Body products, ULTRASWIM, BRONZ SILK and CORN SILK. SPRAY
BLOND Spray-In Hair Lightener is only marketed on the Continent.
U.S. EXPORTS
The division services various distributors located in the Caribbean, Mexico,
Peru and two markets within the Pacific Rim, Singapore and the Philippines.
Various products are sold into these markets but with the primary focus on OTC
pharmaceuticals, principally
<PAGE>
ICY HOT and PAMPRIN. The Company continues to look for established distributors
in Central and South America to capitalize on the success and heritage of ICY
HOT in these regions.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company experienced an increase in net sales, operating income and net
income for the fiscal year ended November 30, 1994. Net sales increased 2.4% to
$107,956,000 from $105,405,000 in 1993. Operating income before nonrecurring
and unusual charges increased 42.2% to $16,191,000 from $11,388,000 in 1993.
Net income increased 50.1% to $2,054,000 from $1,368,000 in 1993.
The Company's results of operations and liquidity in 1994 were affected by the
acquisition of two new brands, BENZODENT and PHISODERM, and the refinancing of
indebtedness with the proceeds of the senior subordinated notes and new bank
credit facilities in June 1994. The Company's new financing arrangement has
fixed the interest rate payable on a significant portion of the Company's
indebtedness and provided a $12.5 million bank credit facility available for
acquisitions. The new financing at higher interest rates, along with higher
outstanding borrowings, resulted in an increase of interest expense of
$5,883,000 to $10,112,000 in 1994 from $4,229,000 in 1993. Until the Company's
indebtedness is reduced significantly, net income will likely continue to be
adversely impacted by interest expense.
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. The Company continually evaluates its products and businesses
as part of its sales growth strategy and, in instances where the Company's
objectives are not realized, will dispose of these brands or businesses and
redeploy the assets to products or businesses with greater upside potential
or to pay down indebtedness.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's Consolidated Statements of Income, expressed as a percentage of
revenues:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 34.4 34.6 34.2
Gross profit 65.6 65.4 65.8
Costs and expenses:
Advertising and promotion 30.9 34.4 32.0
Selling, general and administrative 19.7 20.2 21.1
Nonrecurring and unusual charges 0.5 5.2 --
Total costs and expenses 51.1 59.8 53.1
Operating income 14.5 5.6 12.7
Other income (expense), net (9.3) (3.7) (1.4)
Income before income taxes, extraordinary loss
and cumulative effect of accounting changes 5.2 1.9 11.3
Provision for income taxes 1.9 0.7 3.8
Income before extraordinary loss and
cumulative effect of accounting changes 3.3 1.2 7.5
Extraordinary loss on early extinguishment
of debt, net (1.4) (0.4) --
Cumulative effect of accounting changes, net -- 0.5 --
Net income 1.9% 1.3% 7.5%
----- ----- -----
</TABLE>
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales rose 2.4% to $107,956,000 from $105,405,000 in 1993. This was led by
a 7.9% increase in domestic consumer product sales to $82,643,000 from
$76,592,000 in 1993. The domestic consumer products sales growth was offset by
an 11.6% decrease in international consumer product sales to $11,727,000 from
$13,269,000 in 1993 and a 12.6% decrease in specialty chemical sales to
$13,586,000 from $15,544,000 in 1993.
The growth in domestic consumer products sales resulted primarily from
$6,257,000 of partial year sales from the two newly acquired products, PHISODERM
and BENZODENT. The remaining brands were basically flat with sales in 1994
declining $206,000. Absent the new products, sales of the division's OTC
pharmaceuticals increased 1.8% in 1994 led by strong sales of PAMPRIN, PREMSYN
PMS and ICY
<PAGE>
HOT. Sales of FLEX-ALL 454 decreased by 2.1% from 1993 sales levels for the
first time while NORWICH sales declined 22.8% from 1993 due to continued inroads
by private label products and general analgesics. Although revenues from CORN
SILK and SUN-IN increased in 1994, the division's overall sales of cosmetic and
toiletry brands declined 4.3%. The loss of a major retail customer due to
account consolidation in 1994 resulted in a 15.4% sales drop for BULLFROG versus
1993. ULTRASWIM and MUDD also registered sales decreases of 9.3% and 19.5%,
respectively.
The decline in sales of the international division reflected the efforts
initiated in 1993 to reorganize the division to a more profitable unit. In
Canada, ALGEMARIN, an unprofitable line of bath products, was sold in June. Due
to heavy returns in the spring following the Christmas season, this event had a
negative impact on sales. During the fourth quarter of 1993, certain
distributor arrangements were terminated on the Western European continent and
within the U.S. export unit, and marketing efforts to others were significantly
reduced leading to decreased sales in 1994. The acquisition of PHISODERM in
Canada added $796,000 in partial year sales.
Reduced sales in the specialty chemicals division in 1994 were primarily the
result of the loss of Warner-Lambert as a customer in July 1993 due to the
reformulation of its ROLAIDS-Registered Trademark- product line. On an
annualized basis, Warner-Lambert had accounted for about $4,000,000 of the
division's sales of DASC and recovered alcohol by-products and was the most
significant contributor to the division's margins. Partial year sales in 1993
related to the Warner-Lambert business were $2,629,000. Sales from continuing
operations, after adjusting for the loss of the ROLAIDS-Registered Trademark-
volume, increased modestly by 5.2%, from $12,915,000 in 1993 to $13,586,000
with all product groups contributing to the increase.
Cost of goods as a percentage of net sales improved to 34.4% from 34.6% in 1993.
The decline was primarily the result of a shift in mix of sales between the
divisions with sales of the higher margin domestic consumer products
representing about 76.6% of consolidated sales in 1994 compared to 72.7% in
1993. This overall improvement
<PAGE>
included the write-off of approximately $425,000 of inventory related to the
unsuccessful launch of Nighttime PAMPRIN.
Advertising and promotion expense, almost all of which is attributable to the
consumer products division, dropped by $2,927,000, or 8.1%, to $33,346,000 in
1994 from $36,273,000 in the previous year. The decrease was primarily the
result of $2,988,000 in reduced advertising spending for FLEX-ALL 454 and
NORWICH. The reduction in advertising spending for these two brands reflected
management's recognition of the maturation of FLEX-ALL 454 and the marginal
benefits of the national advertising campaign for NORWICH in 1993. The division
also spent $1,310,000 in advertising and promotion expenditures on the two
acquired brands, PHISODERM and BENZODENT.
Selling, general and administrative expenses decreased by $34,000 to $21,244,000
from $21,278,000 in 1993 and declined as a percentage of the Company's net sales
to 19.7% from 20.2% in 1993. This slight improvement compared to 1993 was
realized even with the incremental expense of incentive bonuses to management
and of additional compensation to sales personnel and independent sales agents
as a result of increased sales for the year.
In 1994, the Company recognized a nonrecurring and unusual charge of $559,000
related to the repricing of the Company's stock options in connection with the
payment of the Special Dividend in June 1993. The total charge related to the
noncash, remeasured compensation was $1,987,000 and is being amortized over the
vesting period of the options. The amount recorded in 1993 as part of the
nonrecurring and unusual charge was $956,000.
Interest expense increased to $10,112,000 from $4,229,000 in 1993 as a result of
higher outstanding indebtedness related to the payment of the Special Dividend
in June 1993, the consummation of the two acquisitions and higher interest rates
related to the senior subordinated notes issue in June of 1994. Until the
Company's indebtedness is reduced substantially, interest expense will continue
to represent a significant percentage of the Company's net sales.
<PAGE>
Net investment income increased substantially to $186,000 from a loss of
$522,000 in 1993. The loss incurred in 1993 related to liquidation of the
investment portfolio with the proceeds being used to reduce bank debt and
partially fund the payment of the Special Dividend. During 1994, the Company
also realized a loss of $513,000 from the sale of the distribution rights to
ALGEMARIN in Canada and a gain of $484,000 on the sale of an interest rate swap.
Income taxes decreased to 35.9% of income from continuing operations before
income taxes, extraordinary loss and cumulative effect of accounting changes
from 36.7% in 1993. See Note 6 of Notes to Consolidated Financial Statements.
In conjunction with the refinancing of existing debt with the proceeds from the
issuance of the senior subordinated notes and the new bank facility in 1994,
the Company incurred an extraordinary loss of $1,556,000 (net of taxes) related
to the early extinguishment of debt. This compares to an extraordinary loss of
$480,000 (net of taxes) recognized in 1993 in connection with an earlier
extinguishment of debt.
Based on increased sales, planned reductions in advertising and promotion and
the reduction in nonrecurring and unusual charges, but offset by increases in
interest expense and extraordinary charges, net income rose 50.1% to $2,054,000
in 1994 from $1,368,000 in 1993.
FISCAL 1993 COMPARED TO FISCAL 1992
Net sales decreased 2.5% in 1993 to $105,405,000 from $108,151,000 in 1992. The
decline was a result of a 13.3% decrease in specialty chemical sales to
$15,544,000 from $17,930,000 in 1992 and a 7.7% decrease in international
consumer product sales to $13,269,000 from $14,376,000 in 1992, partially offset
by a 1.0% increase in domestic consumer product sales to $76,592,000 from
$75,845,000 in 1992.
The increase in domestic consumer product sales resulted from the growth of CORN
SILK, FLEX-ALL 454, BULLFROG and ICY HOT. The Company also introduced
<PAGE>
Maximum Strength FLEX-ALL 454 in August 1993 and Nighttime PAMPRIN in September
1993 as line extensions, although initial sales levels were lower than the
Company had anticipated. Contributing significantly to the inability of the
division to expand sales volume were inventory reductions at the trade level.
These reductions were reflected in the fact that factory sales during the second
half of 1993 trailed retail sales as measured by A.C. Nielsen for several
brands, including FLEX-ALL 454, PAMPRIN, ICY HOT, PREMSYN PMS and NORWICH.
The decline in sales of the international division reflected unfavorable
translational variances in foreign currency exchange rates which reduced sales
in U.S. dollars by about $2 million in comparison with 1992. Sales increases in
the U.K. and from export sales to Central and South America during 1993 were
more than offset by declining sales in Spain and Germany together with the
reduced sales volume of ALGEMARIN in Canada.
The drop in sales in the specialty chemicals division was primarily the result
of the loss of Warner-Lambert as a customer in July 1993 due to the
reformulation of its ROLAIDS-Registered Trademark- product line. On an
annualized basis, Warner-Lambert had accounted for about $4 million of the
division's sales of DASC and recovered alcohol by-products and was the most
significant contributor to the division's gross margin. Also contributing to
the shortfall was the loss of certain very low margin, opportunistic sales of
glycine and a write-off of approximately $400,000 of inventory related to new
product development.
Cost of goods sold as a percentage of net sales increased to 34.6% in 1993 from
34.2% in 1992. The increase in fiscal 1993 reflected a reduction in gross
margin percentages of the specialty chemicals division resulting from a shift in
sales and product mix.
Advertising and promotion expense, almost all of which is attributable to the
consumer products division, increased 4.9% to $36,273,000 in 1993 from
$34,589,000 in 1992. This increase reflected major expenditures associated with
the marketing of PAMPRIN, ICY HOT and BULLFROG, as efforts were focused on
expanding these brands, and the introduction of two product line extensions,
Maximum Strength FLEX-ALL 454 and
<PAGE>
Nighttime PAMPRIN. The Company increased advertising and promotion expenses in
1993 during a period in which sales failed to attain projected levels in order
to expand the market positions of its products and to support the launch of the
line extensions.
Selling, general and administrative expenses decreased to $21,278,000 in 1993
from $22,893,000 in 1992 and also improved as a percentage of the Company's net
sales to 20.2% from 21.1% in 1992. The majority of the decline in these
expenses reflected the fact that no bonuses were paid to management on the basis
of operating performance in 1993.
Interest expense increased by 68.8% in 1993 to $4,229,000 from $2,505,000 in
1992. The increase was attributable to the higher outstanding indebtedness
under the Company's credit facility relating to the financing of the Special
Dividend transaction.
An investment loss of $522,000 in 1993 reflected a decline of $1,263,000 from
income of $741,000 in 1992. The decrease was primarily due to losses on the
liquidation of the investment portfolio, which was sold in conjunction with the
repayment of bank debt and the payment of the Special Dividend.
The net other income in 1993 was primarily the result of a gain from the sale of
BLACK DRAUGHT and NULLO, two minor consumer product brands.
Income taxes increased in 1993 to 36.7% of income from continuing operations
before income taxes, extraordinary loss and cumulative effect of accounting
changes from 34.0% in 1992. See Note 6 of Notes to Consolidated Financial
Statements.
In 1993, the Company recognized $5,527,000 of pretax nonrecurring and unusual
charges reflecting the restructuring of the Company's international division, a
noncash expense related to the repricing of stock options undertaken as a result
of the Special Dividend transaction and, to a lesser extent, a reduction in
corporate staffing. The most significant charges were related to the
restructuring of the Company's distribution
<PAGE>
operations in Spain, the write-down of certain assets to net realizable value
associated with the proposed sale of the ALGEMARIN product line, termination and
employee severance costs in both the domestic and international consumer
products operations and a write-off of certain assets related to the Company's
German operations. While the full benefit will not be realized until 1994, the
corporate and international restructuring should save approximately $1 million
on an annualized basis. See Note 13 of Notes to Consolidated Financial
Statements.
The Company also incurred an extraordinary loss of $480,000 (net of taxes)
related to the early extinguishment of debt and a net benefit of $569,000
resulting from the adoption of SFAS No. 106 and SFAS No. 109.
Based on lower operating income, increased interest expense, the nonrecurring
and unusual charges and the extraordinary loss, net income fell to $1,368,000 in
1993 from $8,072,000 in 1992.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at November 30, 1994 was $13,109,000 compared to $18,630,000 a
year earlier and the current ratio (current assets divided by current
liabilities) declined to 1.65 at November 30, 1994 from 1.96 for the prior year-
ended. Working capital represents 15.2% of total assets at November 30, 1994,
compared to 26.5% of total assets at November 30, 1993. The decrease in working
capital was due principally to two factors. The Company began a program which
reduced inventories by $3,892,000, while maintaining high quality service levels
to customers. Also as a result of the issuance of the senior subordinated notes
and its semi-annual interest payments due in December and June, accrued
liabilities were up $2,668,000. With the new bank credit facility, current
maturities of long-term bank debt decreased by $2,500,000, partially offsetting
the decreases to working capital mentioned above.
In 1994, capital expenditures totaled $2,764,000 compared to $2,297,000 in 1993.
Three major projects were not yet completed at year-end with approximately
$1,350,000 remaining to be spent in the first half of 1995. These projects
include capital required to bring the manufacturing of PHISODERM into the
Company's current facilities, to
<PAGE>
support a new product opportunity in the chemicals division and to support
packaging changes for the PAMPRIN and PREMSYN PMS product lines. Capital
expenditures for 1995 are not anticipated to exceed $3,500,000.
Total debt outstanding was $96,986,000 at November 30, 1994 compared to
$88,000,000 the prior year. Under the terms of the current bank facility,
$15,422,000 was available at November 30, 1994 under a working capital line of
credit for general operating purposes. The availability of credit is determined
based on the Company's accounts receivable and inventories. Also, a separate
$12,500,000 revolving line of credit was available at year end for acquisition
purposes. The Company also has additional borrowing capacity of up to
$2,000,000 against life insurance policies owned by the Company, all of which
was available at November 30, 1994.
During the fourth quarter of 1993, the Company recorded nonrecurring and unusual
charges of $5,527,000. These charges included an accrual of $1,842,000 at
November 30, 1993, which covered severance payments for executives leaving the
Company, fees related to the termination of distributors and other international
restructuring charges. The accrual balance at November 30, 1994 of $331,000 is
adequate to cover any remaining liabilities.
Management believes that cash flow from operations together with funds available
under its credit facility and borrowings available under insurance policies
should be sufficient to fund the Company's current commitments and proposed
operations.
FOREIGN OPERATIONS
The Company's primary foreign operations are conducted through its Canadian and
U.K. subsidiaries. The functional currencies of these subsidiaries are Canadian
dollars and British pounds, respectively. Fluctuations in exchange rates can
impact operating results, including total revenues and expenses, when
translations of the subsidiary financial statements are made in accordance with
SFAS No. 52, "Foreign Currency Translation." For the years ended November 30,
1994 and 1993, these subsidiaries accounted for 11%
<PAGE>
and 13% of total revenues, respectively, and 9% and 18% 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 $82,000 and a
loss of $257,000 for the years ended November 30, 1994 and 1993, respectively,
resulted rom foreign currency transactions. See "Foreign Currency Translation"
in Note 2 of Notes to the Consolidated Financial Statements.
<PAGE>
SALES AND INCOME BY LINE OF BUSINESS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
---- ---- ----
CONSUMER PRODUCTS:
Net sales
Domestic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82,643 $ 76,592 $ 75,845
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,727 13,269 14,376
--------- --------- ---------
$ 94,370 $ 89,861 $ 90,221
--------- --------- ---------
Operating income
Domestic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,981 $ 10,127 $ 12,140
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 381 174
--------- --------- ---------
$ 17,101 $ 10,508 $ 12,314
--------- --------- ---------
Identifiable assets
Domestic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,423 $ 45,024 $ 41,249
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,032 12,768 12,669
--------- --------- ---------
$ 73,455 $ 57,792 $ 53,918
--------- --------- ---------
Capital expenditures
Domestic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,772 $ 1,402 $ 1,966
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 55 47
--------- --------- ---------
$ 1,845 $ 1,457 $ 2,013
--------- --------- ---------
Depreciation and amortization
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,335 $ 2,300 $ 2,330
International. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 544 209
--------- --------- ---------
$ 3,408 $ 2,844 $ 2,539
--------- --------- ---------
SPECIALTY CHEMICALS:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,586 $ 15,544 $ 17,930
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,093 4,111 5,555
Identifiable assets . . . . . . . . . . . . . . . . . . . . . . . . . 9,649 8,119 8,329
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . 919 840 1,102
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 628 543 518
CONSOLIDATED:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 107,956 $ 105,405 $ 108,151
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . 20,194 14,619 17,869
Other unallocated expenses, net(1). . . . . . . . . . . . . . . . . . (14,562) (12,597) (5,637)
Income before income taxes. . . . . . . . . . . . . . . . . . . . . . 5,632 2,022 12,232
Identifiable assets . . . . . . . . . . . . . . . . . . . . . . . . . 83,104 65,911 62,247
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . 2,764 2,297 3,115
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 4,036 3,387 3,057
SALES BETWEEN INDUSTRY SEGMENTS ARE NOT MATERIAL
<FN>
(1) Principally interest expense, corporate overhead not allocated to the
divisions and nonrecurring and unusual charges.
</TABLE>
13
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended November 30,
------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
NET SALES. . . . . . . . . . . . . . . . . . $107,956 $105,405 $108,151 $100,655 $ 84,364
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . 37,175 36,466 36,938 37,324 32,052
Operating expenses. . . . . . . . . . . . . 54,590 57,551 57,482 53,699 44,310
Nonrecurring and unusual charges. . . . . . 559 5,527 -- -- --
-------- -------- -------- -------- --------
Total . . . . . . . . . . . . . . . . . . 92,324 99,544 94,420 91,023 76,362
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS . . . . . . . . . . . 15,632 5,861 13,731 9,632 8,002
OTHER EXPENSE, NET . . . . . . . . . . . . . 10,000 3,839 1,499 2,527 2,599
-------- -------- -------- -------- --------
INCOME BEFORE INCOME
TAXES, EXTRAORDINARY
LOSS AND CUMULATIVE
EFFECT OF ACCOUNTING
CHANGES. . . . . . . . . . . . . . . . . . 5,632 2,022 12,232 7,105 5,403
PROVISION FOR INCOME
TAXES . . . . . . . . . . . . . . . . . . 2,022 743 4,160 2,276 2,1000
-------- -------- -------- -------- --------
INCOME BEFORE EXTRA-
ORDINARY LOSS AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES . . . . . . . . . . . . 3,610 1,279 8,072 4,829 3,303
EXTRAORDINARY LOSS ON
EARLY EXTINGUISHMENT OF
DEBT, NET. . . . . . . . . . . . . . . . . (1,556) (480) -- -- --
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES, NET. . . . . . . . . . -- 569 -- -- --
-------- -------- -------- -------- --------
NET INCOME . . . . . . . . . . . . . . . . . $ 2,054 $ 1,368 $ 8,072 $ 4,829 $ 3,303
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
PER COMMON SHARE DATA
INCOME BEFORE EXTRA-
ORDINARY LOSS AND
ACCOUNTING CHANGES . . . . . . . . . . . . $ .50 $ .20 $ 1.60 $ 1.20 $ .87
NET INCOME . . . . . . . . . . . . . . . . . .29 .22 1.60 1.20 . 87
DIVIDENDS. . . . . . . . . . . . . . . . . . -- 20.20 .300 .217 .187
BALANCE SHEET DATA
(At End Of Period)
CURRENT ASSETS . . . . . . . . . . . . . . . $ 33,30 $ 38,137 $ 66,970 $ 33,712 $ 25,324
CURRENT LIABILITIES. . . . . . . . . . . . . 20,192 19,507 16,579 16,914 20,378
TOTAL ASSETS . . . . . . . . . . . . . . . . 86,416 70,194 98,451 65,201 52,994
LONG-TERM DEBT, less current
maturities . . . . . . . . . . . . . . . . 94,486 83,000 22,784 29,278 19,282
SHAREHOLDERS' EQUITY
(DEFICIT). . . . . . . . . . . . . . . . . (29,551) (33,473) 58,607 18,692 13,187
</TABLE>
14
<PAGE>
MARKET PRICES
The Company's common shares trade over-the-counter on the National Market
System under the NASDAQ symbol CHTT. A quarterly summary of the high and low
market prices per common share as reported by NASDAQ is shown below:
<TABLE>
<CAPTION>
--------------------------------------------
1994 1993
--------------------------------------------
High Low High Low
--------------------------------------------
<S> <C> <C> <C> <C>
QUARTER ENDED:
February................ 8 5/8 6 3/4 30 24 3/4
May..................... 7 3/4 5 3/4 31 1/2 25
August.................. 6 1/2 5 32 9 1/4
November................ 7 3/8 5 1/8 11 7
</TABLE>
The sharp decline in market price in the August 1993 quarter is related to the
$20 per share Special Dividend paid on June 11, 1993. Based upon transfer agent
records, the Company's common shares were held by approximately 2,500
shareholders as of February 22, 1995.
<TABLE>
<CAPTION>
QUARTERLY DATA (unaudited)
(In thousands of dollars, except per share amounts)
___________ ___________ __________ ____________
NET
NET GROSS INCOME EARNINGS
FISCAL 1994 SALES PROFIT (LOSS) PER SHARE(1)
_______________________________________________________
<S> <C> <C> <C> <C>
QUARTER ENDED:
February . . . . . . . . . . . . . . . . . . $ 20,820 $ 13,038 $ (252) $ (.03)
May. . . . . . . . . . . . . . . . . . . . . 26,906 18,018 1,553 . 21
August . . . . . . . . . . . . . . . . . . . 29,328 19,689 (105) (.01)
November . . . . . . . . . . . . . . . . . . 30,902 20,036 858 .12
-------- -------- --------
Total. . . . . . . . . . . . . . . . . . . $107,956 $ 70,781 $ 2,054 .29
-------- -------- --------
-------- -------- --------
FISCAL 1993(2)
QUARTER ENDED:
February . . . . . . . . . . . . . . . . . . $ 21,182 $ 13,541 $ 1,496 $ .28
May. . . . . . . . . . . . . . . . . . . . . 29,054 19,206 3,087 .57
August . . . . . . . . . . . . . . . . . . . 26,597 18,326 1,269 .17
November . . . . . . . . . . . . . . . . . . 28,572 17,866 (4,484) (.61)
-------- -------- --------
Total. . . . . . . . . . . . . . . . . . . $105,405 $ 68,939 $ 1,368 .22
-------- -------- --------
-------- -------- --------
<FN>
(1)The sum of the quarterly earnings per share amounts may differ from
annual earnings per share because of the differences in the weighted average
number of common shares and common share equivalents used (where dilutive) in
the quarterly and annual computations.
(2)Effective December 1, 1992, the Company adopted SFAS No 106 and SFAS No
109 (Note 3). Previously reported quarterly data for fiscal 1993 has been
restated to reflect the adoption of these new accounting standards.
</TABLE>
15
<PAGE>
DIVIDENDS
Dividend payments by quarter for common shares are presented below:
<TABLE>
<CAPTION>
_____________ ______________
1994(1) 1993
_____________ ______________
<S> <C> <C>
First Quarter..................... $ -- $ .10
Second Quarter.................... -- .10
Third Quarter..................... -- 20.00
Fourth Quarter.................... -- -- (1)
------ -----------
$ -- $ 20.20
------ -----------
------ -----------
<FN>
(1) The quarterly dividend was suspended after payment of the Special Dividend
of $20 per share in 1993.
</TABLE>
16
<PAGE>
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1994 1993
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 3,034 $ 4,462
Accounts receivable, less allowance for doubtful accounts
of $850 in 1994 and $350 in 1993 . . . . . . . . . . . . . 20,288 18,959
Refundable and deferred income taxes. . . . . . . . . . . . 1,015 1,746
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 7,219 11,111
Prepaid expenses and other current assets . . . . . . . . . 1,745 1,859
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . 33,301 38,137
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET . . . . . . . . . . . . . 11,279 10,083
--------- ---------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased
product rights, net. . . . . . . . . . . . . . . . . . . . 32,455 13,628
Debt issuance costs, net . . . . . . . . . . . . . . . . . 3,771 2,453
Deferred income taxes . . . . . . . . . . . . . . . . . . . 1,598 1,852
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,012 4,041
--------- ---------
Total other noncurrent assets . . . . . . . . . . . . . . 41,836 21,974
--------- ---------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $ 86,416 $ 70,194
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
17
<PAGE>
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT 1994 1993
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt. . . . . . . . . . . . . . $ 2,500 $ 5,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 5,559 5,285
Payable to bank . . . . . . . . . . . . . . . . . . . . . . . . 1,301 1,058
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 10,832 8,164
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . 20,192 19,507
--------- ---------
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . 94,486 83,000
--------- ---------
ACCRUED POSTRETIREMENT HEALTH CARE
BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,289 1,160
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 5, 9 and 11)
SHAREHOLDERS' DEFICIT:
Preferred shares, without par value, authorized
1,000, none issued . . . . . . . . . . . . . . . . . . . . . . -- --
Common shares, without par value, authorized 20,000, issued
7,292 in 1994 and 1993 . . . . . . . . . . . . . . . . . . . . 1,519 1,519
Paid-in surplus . . . . . . . . . . . . . . . . . . . . . . . . 51,797 50,283
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (81,352) (83,406)
--------- ---------
(28,036) (31,604)
Foreign currency translation adjustment. . . . . . . . . . . . . (1,515) (1,869)
--------- ---------
Total shareholders' deficit . . . . . . . . . . . . . . . . . . (29,551) (33,473)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT . . . . . . . . . $ 86,416 $ 70,194
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
18
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 1994, 1993 AND 1992
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
NET SALES. . . . . . . . . . . . . . . . . . . . . . . . . . $107,956 $105,405 $108,151
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 37,175 36,466 36,938
Advertising and promotion . . . . . . . . . . . . . . . . . 33,346 36,273 34,589
Selling, general and administrative . . . . . . . . . . . . 21,244 21,278 22,893
Nonrecurring and unusual charges (Note 13). . . . . . . . . 559 5,527 --
-------- -------- --------
Total costs and expenses . . . . . . . . . . . . . . . . . 92,324 99,544 94,420
-------- -------- --------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . 15,632 5,861 13,731
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . . . . . . . . . . . . (10,112) (4,229) (2,505)
Investment income (loss). . . . . . . . . . . . . . . . . . 186 (522) 741
Other income (expense), net . . . . . . . . . . . . . . . . (74) 912 265
-------- -------- --------
Total other income (expense) . . . . . . . . . . . . . . . (10,000) (3,839) (1,499)
-------- -------- --------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES. . . . . . . . . . . . . . . . 5,632 2,022 12,232
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . 2,022 743 4,160
-------- -------- --------
INCOME BEFORE EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGES . . . . . . . . . . . . . . . . . . . . . . . . . . 3,610 1,279 8,072
EXTRAORDINARY LOSS ON EARLY EXTINGUISH-
MENT OF DEBT, NET (Note 5). . . . . . . . . . . . . . . . . (1,556) (480) --
CUMULATIVE EFFECT OF ACCOUNTING
CHANGES, NET (Note 3) . . . . . . . . . . . . . . . . . . . -- 569 --
-------- -------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,054 $ 1,368 $ 8,072
-------- -------- --------
-------- -------- --------
NET INCOME PER COMMON SHARE:
Before extraordinary loss and cumulative effect of
accounting changes . . . . . . . . . . . . . . . . . . . . $ .50 $ .20 $ 1.60
Extraordinary loss. . . . . . . . . . . . . . . . . . . . . (.21) (.07) --
Cumulative effect of accounting changes . . . . . . . . . . -- .09 --
-------- -------- --------
Net income per common share. . . . . . . . . . . . . . . . $ .29 $ .22 $ 1.60
-------- -------- --------
-------- -------- --------
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING . . . . . . . . . . . . . . . . . . . . . . . . 7,292 6,341 5,033
-------- -------- --------
-------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
19
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED NOVEMBER 30, 1994, 1993 AND 1992
(IN THOUSANDS)
(NOTE 7)
<TABLE>
<CAPTION>
Net Unrealized Foreign
Retained Loss on Currency
Common Paid-in Earnings Long-Term Translation
Shares Surplus (Deficit) Investments Adjustment Total
------- -------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1991 . . . . . . . . . $ 789 $ 1,692 $ 18,171 $ (1,849) $ (111) $18,692
Net income. . . . . . . . . . . . . . . . . -- -- 8,072 -- -- 8,072
Dividends . . . . . . . . . . . . . . . . . -- -- (1,447) -- -- (1,447)
Issuance of common shares . . . . . . . . . 228 27,876 -- -- -- 28,104
Exercise of stock options . . . . . . . . . 77 2,344 -- -- -- 2,421
Tax benefit from exercise of stock
options. . . . . . . . . . . . . . . . . . -- 3,026 -- -- -- 3,026
Decrease in net unrealized loss on
long-term investments. . . . . . . . . . . -- -- -- 1,052 -- 1,052
Foreign currency translation adjustment . . -- -- -- -- (1,313) (1,313)
------- -------- --------- ----------- ----------- -------
Balance, November 30, 1992 . . . . . . . . . 1,094 34,938 24,796 (797) (1,424) 58,607
Net income. . . . . . . . . . . . . . . . . -- -- 1,368 -- -- 1,368
Dividends . . . . . . . . . . . . . . . . . -- -- (109,570) -- -- (109,570)
Issuance of common shares . . . . . . . . . 389 12,016 -- -- -- 12,405
Stock options granted . . . . . . . . . . . -- 956 -- -- -- 956
Exercise of stock options . . . . . . . . . 36 1,120 -- -- -- 1,156
Tax benefit from exercise of stock
options. . . . . . . . . . . . . . . . . . -- 1,253 -- -- -- 1,253
Decrease in net unrealized loss on
long-term investments. . . . . . . . . . . -- -- -- 797 -- 797
Foreign currency translation adjustment . . -- -- -- -- (445) (445)
------- -------- --------- ----------- ----------- -------
Balance, November 30, 1993 . . . . . . . . . 1,519 50,283 (83,406) -- (1,869) (33,473)
Net income. . . . . . . . . . . . . . . . . -- -- 2,054 -- -- 2,054
Issuance of warrants. . . . . . . . . . . . -- 955 -- -- -- 955
Stock options granted . . . . . . . . . . . -- 559 -- -- -- 559
Foreign currency translation adjustment . . -- -- -- -- 354 354
------- -------- --------- ----------- ----------- -------
Balance, November 30, 1994 . . . . . . . . . $ 1,519 $ 51,797 $ (81,352) $ -- $ (1,515) $ (29,551)
------- -------- --------- ----------- ----------- -------
------- -------- --------- ----------- ----------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1994, 1993 AND 1992
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 2,054 $ 1,368 $ 8,072
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 4,036 3,387 3,057
Cumulative effect of accounting changes, net . . . . . . . -- (569) --
Deferred income tax provision. . . . . . . . . . . . . . . 303 393 164
Repriced stock option expense. . . . . . . . . . . . . . . 559 956 --
Loss (gain) on sales of assets . . . . . . . . . . . . . . 518 (757) (40)
Extraordinary loss on extinguishment of debt, net. . . . . 1,556 480 --
Other, net . . . . . . . . . . . . . . . . . . . . . . . . 983 (343) (253)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . (1,704) 1,682 (1,333)
Refundable and deferred income taxes. . . . . . . . . . . 828 (941) (62)
Inventories . . . . . . . . . . . . . . . . . . . . . . . 3,832 495 (3,377)
Prepaid expenses and other current assets . . . . . . . . 133 317 (437)
Accounts payable and accrued liabilities. . . . . . . . . 3,064 1,852 (1,808)
Payable to bank . . . . . . . . . . . . . . . . . . . . . 243 230 659
-------- -------- --------
Net cash provided by operating activities. . . . . . . . 16,405 8,550 4,642
-------- -------- --------
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment. . . . . . . . . (2,764) (2,297) (3,115)
Net decrease in long-term investments . . . . . . . . . . . -- 5,062 2,982
Proceeds from (purchases of) short-term investments . . . . -- 23,212 (23,212)
Proceeds from notes and sales of assets . . . . . . . . . . 549 619 419
Purchases of patents, trademarks and other product rights . (20,272) (1,750) (159)
Increase in other assets. . . . . . . . . . . . . . . . . . (1,266) (790) (1,836)
-------- -------- --------
Net cash provided by (used in) investing activities . . . (23,753) 24,056 (24,921)
-------- -------- --------
-------- -------- --------
FINANCING ACTIVITIES:
Repayment of long-term debt . . . . . . . . . . . . . . . . (112,831) (42,900) (32,279)
Proceeds from long-term debt. . . . . . . . . . . . . . . . 48,706 104,116 26,535
Proceeds from issuance of senior subordinated notes . . . . 73,012 -- --
Proceeds from issuance of common stock, net . . . . . . . . -- 12,405 28,104
Common stock dividends paid . . . . . . . . . . . . . . . . -- (109,570) (1,447)
Proceeds from issuance of stock warrants. . . . . . . . . . 955 -- --
Exercise of stock options . . . . . . . . . . . . . . . . . -- 1,156 2,421
Tax benefit from exercise of stock options. . . . . . . . . -- 1,253 3,026
Debt issuance costs . . . . . . . . . . . . . . . . . . . . (4,011) (2,630) --
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . -- (712) --
-------- -------- --------
Net cash provided by (used in) financing activities . . . 5,831 (36,882) 26,360
-------- -------- --------
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . 89 30 200
-------- -------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year. . . . . . . . . . . . . . (1,428) (4,246) 6,281
At beginning of year. . . . . . . . . . . . . . . . . . . . 4,462 8,708 2,427
-------- -------- --------
At end of year. . . . . . . . . . . . . . . . . . . . . . . $ 3,034 $ 4,462 $ 8,708
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE: ALL MONETARY AMOUNTS ARE EXPRESSED IN THOUSANDS OF DOLLARS UNLESS
CONTRARILY EVIDENT.
(1) GENERAL
--------------------------------------------------------------------------
Chattem, Inc. and its wholly owned subsidiaries (the Company) are
primarily engaged in manufacturing and marketing branded consumer products
and specialty chemicals. The consumer products are sold nationwide and in
many international markets, primarily through independent and chain drug
stores, drug wholesalers, mass merchandisers and food stores. Specialty
chemicals are sold primarily to other manufacturing companies.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Chattem, Inc. and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
INVENTORIES
Inventory costs include materials, labor and factory overhead.
Inventories in the United States are valued at the lower of last-in, first-
out (LIFO) cost or market, while international inventories are valued at
the lower of first-in, first-out (FIFO) cost or market.
REVENUE RECOGNITION
Revenue is recognized when the Company's products are shipped to its
customers.
INCOME TAXES
As discussed in Note 3, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
effective December 1, 1992. SFAS No. 109 requires an asset and liability
approach to accounting for deferred income taxes based on currently
enacted tax rates and differences in financial reporting and income tax
bases of assets and liabilities. In prior years, the Company accounted for
income taxes using the deferral method in accordance with Accounting
Principles Board Opinion No. 11 (Note 6).
PATENTS, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS
The costs of acquired patents, trademarks and other purchased product
rights are capitalized and amortized over periods ranging from 5 to 40
years. Total accumulated amortization of these assets at November 30, 1994
and 1993 was $5,824 and $5,382, respectively. Amortization expense for
1994, 1993 and 1992 was $1,309, $1,179 and $1,233, respectively. Royalty
expense related to other purchased product rights for
22
<PAGE>
1994, 1993 and 1992 was $1,703, $1,974 and $2,365, respectively.
Amortization and royalty expense are included in advertising and promotion
expense in the accompanying statements of income.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
provided using both straight-line and accelerated methods over the
estimated useful lives of 10 to 40 years for buildings and improvements and
5 to 12 years for machinery and equipment. Expenditures for maintenance
and repairs are charged to expense as incurred.
RESEARCH AND DEVELOPMENT
Research and development costs relate primarily to the development of
new products and are expensed as incurred. Such expenses were $1,255,
$1,292 and $1,232 in 1994, 1993 and 1992, respectively.
ADVERTISING EXPENSES
The cost of advertising is expensed in the fiscal year in which the
related advertising takes place. In December 1993, the Accounting
Standards Division of the American Institute of Certified Public
Accountants issued Statement of Position No. 93-7, "Reporting on
Advertising Costs" (SOP 93-7). SOP 93-7 is effective for fiscal years
beginning after June 15, 1994 and provides guidance on the recognition of
advertising expenses. Adoption of SOP 93-7 in fiscal 1995 will not have a
material impact on the Company's financial position or operating results.
NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of
common shares outstanding after consideration of common share equivalents
having a dilutive effect (Note 7).
INVESTMENTS
Short-term investments are stated at cost plus accrued interest, which
approximates market value. Realized gains and losses are computed on a
specific identification basis. The Company's short-term investment
portfolio was liquidated in 1993.
PAYABLE TO BANK
Payable to bank includes checks outstanding in excess of certain cash
balances.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
1994 financial statement presentation.
23
<PAGE>
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash and cash
equivalents include time deposits and money market accounts with original
maturities of three months or less.
DEBT ISSUANCE COSTS
The Company has incurred debt issuance costs in connection with its
long-term debt (Note 5). These costs are capitalized and amortized over
the term of the debt. Amortization expense related to debt issuance costs
was $439, $214 and $122 in 1994, 1993 and 1992, respectively. Accumulated
amortization of these costs was $240 and $177 at November 30, 1994 and
1993, respectively. During 1994, the Company refinanced its long-term
debt and incurred debt issuance costs of $4,011. As a result of the
refinancing, the Company incurred an extraordinary loss of $1,556 (net of
income taxes) related to the write-off of previously capitalized debt
issuance costs.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's Canadian and U.K.
subsidiaries are translated into United States currency in accordance with
SFAS No. 52, "Foreign Currency Translation." Assets and liabilities are
translated to United States dollars at year-end exchange rates. Income and
expense items are translated at average rates of exchange prevailing
during the year. Translation adjustments are accumulated as a separate
component of shareholders' deficit. Gains and losses which result from
foreign currency transactions are included in the accompanying statements
of income.
(3) ACCOUNTING CHANGES
--------------------------------------------------------------------------
Effective December 1, 1992, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and SFAS No. 109, "Accounting for Income Taxes," using the cumulative
catch-up method. Prior year financial statements have not been restated.
SFAS No. 106 requires that the expected cost of providing postretirement
health care benefits be charged to expense during the years in which the
employees render service (Note 12). The cost of these benefits was
historically recognized as expense when paid. The adoption of SFAS No. 106
resulted in a net charge to income of $731 ($1,160 before income taxes), or
$.12 per share, for the cumulative effect of this change in accounting
principle. The adoption of SFAS No. 106 did not have a significant effect
on 1993 income before the cumulative effect of accounting changes.
SFAS No. 109 requires a change from the deferral method to the asset
and liability method of accounting for income taxes. Adoption of SFAS No.
109 resulted in a net credit to income of $1,300, or $.21 per share, for
the cumulative effect of this change in accounting principle. The adoption
of SFAS No. 109 did not have a significant effect on 1993 income before the
cumulative effect of accounting changes.
24
<PAGE>
(4) PENSION PLAN
The Company has a noncontributory defined benefit pension plan (the
Plan) which covers substantially all employees. The Plan provides benefits
based upon years of service and the employee's compensation. The Company's
contributions are based on computations by independent actuaries. Due to
the overfunded status of the Plan prior to 1994, no contributions have been
made since 1986. Plan assets at November 30, 1994 and 1993 were
invested primarily in United States government and agency securities,
corporate debt securities and common stocks.
Pension cost (credit) for the years ended November 30, 1994, 1993 and
1992 included the following components:
<TABLE>
<CAPTION>
------- ------- -------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Service cost (benefits earned during the
period). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 581 $ 456 $ 389
Interest cost on projected benefit obligation. . . . . . . . . . 743 618 511
Actual loss (return) on plan assets. . . . . . . . . . . . . . . 220 (815) (1,439)
Net amortization and deferral. . . . . . . . . . . . . . . . . . (1,223) (206) 484
------- ------- -------
Net pension cost (credit). . . . . . . . . . . . . . . . . . . . $ 321 $ 53 $ (55)
------- ------- -------
------- ------- -------
</TABLE>
25
<PAGE>
The following table sets forth the funded status of the Plan as of November 30,
1994 and 1993:
<TABLE>
<CAPTION>
-------- ---------
1994 1993
-------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation . . . . . . . . . . . . . . . . . . . $ 5,585 $ 5,578
Nonvested benefit obligation. . . . . . . . . . . . . . . . . . 912 786
-------- ---------
Accumulated benefit obligation . . . . . . . . . . . . . . . . $ 6,497 $ 6,364
-------- ---------
-------- ---------
Plan assets at fair market value. . . . . . . . . . . . . . . . $ 8,137 $ 9,450
Projected benefit obligation. . . . . . . . . . . . . . . . . . (9,119) (9,383)
-------- ---------
Plan assets in excess (deficiency) of projected
benefit obligation . . . . . . . . . . . . . . . . . . . . . . (982) 67
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . 2,265 1,486
Unrecognized prior service cost . . . . . . . . . . . . . . . . (211) 21
Unrecognized initial asset. . . . . . . . . . . . . . . . . . . (1,171) (1,351)
-------- ---------
Pension asset (liability) recognized in balance
sheets at end of year. . . . . . . . . . . . . . . . . . . . . $ (99) $ 223
-------- ---------
-------- ---------
</TABLE>
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 8.5% and 6.0%, respectively, in 1994, and 7.75% and 5.0%,
respectively, in 1993 The expected long-term rate of return on plan assets was
9.5%.
(5) LONG-TERM DEBT
--------------------------------------------------------------------------
Long-term debt consisted of the following at November 30, 1994 and 1993:
<TABLE>
<CAPTION>
-------- -------
1994 1993
-------- -------
<S> <C> <C>
Revolving line of credit payable to banks at variable
rates (9.33% weighted average at November 30,
1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,500 $ --
Note payable to banks at variable rates (8.625% at
November 30, 1994). . . . . . . . . . . . . . . . . . . . . . . 19,375 --
12.75% Series B Senior Subordinated Notes, due
2004, net of unamortized discount of $1,889 . . . . . . . . . . 73,111 --
Revolving line of credit payable to bank at variable
rates, paid during 1994 . . . . . . . . . . . . . . . . . . . . -- 16,000
Note payable to banks at variable rates, paid during
1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 60,000
Note payable to banks at variable rates, paid during
1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 12,000
-------- -------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . 96,986 88,000
Less -- current maturities . . . . . . . . . . . . . . . . . . . (2,500) (5,000)
-------- -------
Total long-term debt, net of current maturities. . . . . . . . . $ 94,486 $83,000
-------- -------
-------- -------
</TABLE>
26
<PAGE>
The Company entered into a new credit agreement with a syndicate of
banks (the New Credit Agreement) on June 17, 1994 providing for maximum
borrowings of up to $55,000. The New Credit Agreement is divided into a
$22,500 facility for working capital purposes, a $12,500 facility for
product/brand acquisitions and a six year $20,000 term loan facility.
The term loan is payable in 24 quarterly installments commencing
November 30, 1994, as follows: from November 30, 1994 through August 31,
1996, in quarterly installments of $625; from November 30, 1996 through
August 31, 1997, in quarterly installments of $750; and from November 30,
1997 through May 31, 2000, in quarterly installments of $1,000. The
working capital facility is available to the Company up to $22,500 or such
lesser amount as is determined to be available under the terms of the New
Credit Agreement and is due and payable on June 17, 2000, if the commitment
is not earlier terminated under the terms of the New Credit Agreement. The
acquisition facility provides for loans on a revolving credit basis which
shall be repaid at the option of the Company either in a single installment
on June 16, 1995, or in 12 equal, consecutive quarterly installments
payable on the last day of each fiscal quarter, commencing at the end of
the first fiscal quarter following the date such acquisition loan is made
and continuing thereafter until the third anniversary of such acquisition
loan, on which date the final installment shall be payable.
The Company may elect either a floating rate or Eurodollar interest
rate option applicable to loans under the New Credit Agreement. The
floating rate and Eurodollar interest rate options are based on a base rate
plus a floating rate margin that fluctuates on the basis of the Company's
leverage ratio. The initial floating rate margin under the New Credit
Agreement is 1.75% for the floating rate option and 3.0% for the Eurodollar
rate option.
The New Credit Agreement is secured by substantially all of the
Company's accounts receivables, inventory and currently owned brand
trademarks and associated intellectual property held by the Company. The
New Credit Agreement contains (i) cross-collateralization and cross-default
provisions, (ii) a negative pledge on the brand trademarks not pledged,
(iii) restrictions on prepayment of the Notes without the lender's consent
and (iv) a pledge of the outstanding shares of various subsidiaries. The
more restrictive financial covenants require the maintenance of minimum
amounts of consolidated tangible net worth, cash flow coverage, fixed
charges coverage and leverage ratios.
Also on June 17, 1994, the Company issued $75,000 of 12.75% Series A
Senior Subordinated Notes due 2004 (the Series A Notes) with five year
warrants to purchase 417,182 shares of common stock at a price of $7.15 per
share (the Warrants) to an investment banking firm (the Initial Purchaser).
The Series A Notes consisted of 75,000 units, each consisting of $1,000
principal amount of the Series A Notes and a warrant to purchase 5.56242
shares of the Company's common stock at a price of $7.15 per share. The
price to the Initial Purchaser of the Series A Notes was $73,967, or 98.6%
of the original principal amount of the Series A Notes, resulting in a
discount of $1,033. The value assigned to the Warrants was $955 (Note 7),
resulting in a total original issue discount of $1,988. The proceeds of
the Series A Notes were used to repay the Old Credit Agreement (as defined
below).
27
<PAGE>
On September 19, 1994, the Company completed an exchange offer of
12.75% Series B Senior Subordinated Notes (the Notes) due 2004, which were
registered under the Securities Act of 1933, for all of the outstanding
Series A Notes. The form and terms of the Series A Notes and the Notes are
the same, except that the Notes are registered under the Securities Act of
1933 and the holders of the Notes are not entitled to the rights of the
holders of Series A Notes following the completion of the exchange offer.
The Notes mature on June 15, 2004, and interest is payable semi-
annually on June 15 and December 15 of each year, commencing December 15,
1994. On December 15, 1994, the Company made an interest payment of $4,728
on the Notes. The Notes are senior subordinated obligations of the
Company, and are subordinated in right of payment to all existing and
future senior debt of the Company. The Notes may not be redeemed until June
15, 2001, after which they may be redeemed at the option of the Company.
Upon the occurrence of certain events constituting a change of control, the
holders of the Notes may require the Company to repurchase the Notes at a
purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest. The Notes are guaranteed by one of the Company's
subsidiaries, Signal Investment & Management Co. (Note 14).
The Notes are issued under an indenture with an indenture trustee,
which restricts, among other things, the ability of the Company and its
subsidiaries to (i) incur additional indebtedness, with the exception of
indebtedness incurred under the New Credit Agreement up to an aggregate of
$50,000 outstanding at any time, (ii) pay dividends and make other
distributions, (iii) sell or issue capital stock of a subsidiary, (iv)
create encumbrances on the ability of any subsidiary to pay dividends or
make other restricted payments, (v) engage in certain transactions with
affiliates, (vi) dispose of certain assets, (vii) merge or consolidate with
or into, or sell or otherwise transfer all or substantially all their
properties and assets as an entirety to, another person, (viii) incur
indebtedness that would rank senior in right of payment to the Notes and be
subordinated to any other indebtedness of the Company or (ix) create
additional liens. The Company is allowed to incur additional indebtedness
over and above the $50,000 allowable under the New Credit Agreement if
after the incurrence of the additional indebtedness, the Company's fixed
charge coverage ratio for the four full fiscal quarters preceding the date
such additional indebtedness is incurred, is at least 1.75:1 for the fiscal
years 1994 and 1995, and 2.00:1 thereafter, is determined on a pro forma
basis as if the additional indebtedness had been incurred and applied at
the beginning of such four-quarter period.
In order to pay the Special Dividend (Note 7) and related fees and
expenses, the Company entered into a credit agreement in June 1993 with a
syndicate of banks (the Old Credit Agreement). The Old Credit Agreement
included a $75,000 term loan and a $25,000 revolving line of credit.
During June 1994, the Old Credit Agreement was repaid with funds from the
New Credit Agreement and the Notes. In connection with the prepayment of
those borrowings, the Company incurred an extraordinary loss of $1,556 (net
of income taxes) related to the write-off of debt issuance and other
deferred costs.
During June 1993, the Company entered into separate interest rate swap
and cap agreements in notional principal amounts of $30,000 each. The
Company entered into both of these agreements as hedges on its variable
rate debt and not for trading purposes. The term of each agreement was for
a three-year period ending May 31, 1996. The interest rate on the swap was
fixed at 4.95% LIBOR, and the rate on the cap was 5% LIBOR. The
28
<PAGE>
differences paid or received on the swap and cap have been included as
interest expense as payments have been made or received. In connection
with the New Credit Agreement and the issuance of the Notes, the swap was
terminated in June 1994, resulting in a gain of approximately $484 which is
included in other income in the accompanying statements of income. On
January 12, 1995, the interest rate cap was terminated resulting in a gain
of approximately $729 to the Company. The gain will be deferred and
amortized over the remaining life of the original cap agreement as a
reduction of interest expense.
During April 1993, the Company prepaid previously outstanding long-
term debt with available cash funds. In connection with the prepayment of
those borrowings, the Company incurred an extraordinary loss of $480 (net
of income taxes), or $.07 per share. The loss primarily related to the
write-off of debt issuance and other deferred costs.
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1995 ............................ $ 2,500
1996 ............................ 2,625
1997 ............................ 3,250
1998 ............................ 4,000
1999 ............................ 4,000
Thereafter ...................... 82,500
--------
98,875
Less -- unamortized discount ................ (1,889)
--------
$96,986
--------
--------
</TABLE>
Cash interest payments during 1994, 1993 and 1992 were $7,114, $2,612
and $2,425, respectively.
29
<PAGE>
(6) INCOME TAXES
--------------------------------------------------------------------------
The provision for income taxes includes the following components:
<TABLE>
<CAPTION>
--------- ------- ---------
1994 1993 1992
--------- ------- ---------
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . . . $ 1,363 $ 300 $ 3,856
State . . . . . . . . . . . . 356 50 140
Deferred . . . . . . . . . . . 303 393 164
--------- ------- ---------
$ 2,022 $ 743 $ 4,160
--------- ------- ---------
--------- ------- ---------
</TABLE>
Deferred income tax assets and liabilities for 1994 and 1993 reflect
the impact of temporary differences between the amounts of assets and
liabilities for financial reporting and income tax reporting purposes. Temporary
differences and carryforwards which give rise to deferred tax assets and
liabilities at November 30, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
-------- --------
1994 1993
-------- --------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards. . . . . . . . . $ 1,175 $ 1,002
Reserves and accruals . . . . . . . . . . . . 1,713 547
Deferred promotional expenses . . . . . . . . 701 720
Accrued postretirement health care
benefits . . . . . . . . . . . . . . . . . . 490 429
Repriced stock option expense . . . . . . . . 576 364
Nonrecurring and unusual charges. . . . . . . 126 1,643
Other . . . . . . . . . . . . . . . . . . . . 25 193
-------- --------
Gross deferred tax assets. . . . . . . . . . 5,006 4,898
-------- --------
Deferred tax liabilities:
Excess tax depreciation and
amortization . . . . . . . . . . . . . . . . 2,133 1,840
Prepaid advertising . . . . . . . . . . . . . 216 257
-------- --------
Other . . . . . . . . . . . . . . . . . . . . 157 144
Gross deferred tax liabilities . . . . . . . 2,506 2,241
-------- --------
Net deferred tax asset . . . . . . . . . . . $ 2,500 $ 2,657
-------- --------
-------- --------
</TABLE>
The Company did not record a valuation allowance against the net
deferred income tax asset at November 30, 1994 or 1993 because it is more likely
than not, in management's opinion, that the income tax asset will be realized
in future years.
Included in "refundable and deferred income taxes" in current assets
in the accompanying balance sheets are income tax refunds receivable of $113 and
$941 at November 30, 1994 and 1993, respectively.
30
<PAGE>
The provision for deferred income taxes in 1992 resulted from income
and expense items which are recognized for financial reporting purposes in
periods other than those in which they are recognized for income tax purposes
and consisted primarily of excess tax depreciation and amortization, accrued
expenses and reserves, and deferred taxes which were reinstated.
The difference between the provision for income taxes and the amount
computed by multiplying income before income taxes by the U.S. statutory rate is
summarized as follows:
<TABLE>
<CAPTION>
-------- ------- --------
1994 1993 1992
-------- ------- --------
<S> <C> <C> <C>
Expected tax provision . . . . . . . . . . $ 1,915 $ 687 $ 4,159
Nontaxable interest. . . . . . . . . . . . (6) (23) (135)
State income taxes, net of federal
income tax benefit . . . . . . . . . . . . 269 76 393
Contributed inventory. . . . . . . . . . . (66) (47) (53)
Other net. . . . . . . . . . . . . . . . . (90) 50 (204)
-------- ------- --------
$ 2,022 $ 743 $ 4,160
-------- ------- --------
-------- ------- --------
</TABLE>
Income taxes paid in 1994, 1993 and 1992 were $727, $1,170 and $1,117,
respectively. The Company received income tax refunds of $790 during 1994
(7) SHAREHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------
SPECIAL DIVIDEND AND 1993 STOCK ISSUANCE
On May 14, 1993, the board of directors declared a special cash
dividend (the Special Dividend) of $20 per common share to holders of
record on June 4, 1993. The Special Dividend was paid on June 11, 1993 and
approximated $108,511. In order to pay the Special Dividend and related
fees and expenses, the Company entered into a $75,000 term loan agreement
and a $25,000 revolving credit facility with a group of banks (Note 5). In
addition, the Company sold 1,866,667 common shares at $7.50 per share to an
affiliate of one of the Company's lending banks. The net proceeds to the
Company, after offering expenses, were $12,405. These shares did not
qualify for the Special Dividend.
1992 STOCK ISSUANCE
In March 1992, the Company issued 1,092,500 common shares through a
public offering, resulting in net proceeds of $28,104.
STOCK OPTIONS
The Company has stock option plans adopted in 1983 and 1988 which
provided for issuance of options during a five-year period to purchase up
to 600,000 and 375,000 common shares, respectively. There are no more
options available for grant under the 1983 and 1988 plans. All options
granted under the 1983 and 1988 plans had been exercised as of November 30,
1993.
31
<PAGE>
During 1993, the shareholders approved the 1993 Non-Statutory Stock
Option Plan (1993 Plan). The 1993 Plan provides for issuance of up to
350,000 shares of common stock to key employees. The Company granted
options to purchase 349,000 shares during 1993 at prices ranging from $6.25
to $8.125 per share, as repriced as a result of the Special Dividend.
During 1994, the Company granted options to purchase 1,000 shares at $7.00
per share under the 1993 Plan. Options are exercisable for a period of up
to ten years from date of grant.
During 1994, the shareholders approved the Company's 1994 Non-
Statutory Stock Option Plan which provides for the issuance to key
employees of up to 350,000 shares of common stock in accordance with the
plan, of which 294,750 shares were granted in 1994. In addition, during
1994, the shareholders approved the 1994 Non-Statutory Stock Option Plan
for Non-Employee Directors, which provides for the issuance of up to 80,000
shares of common stock. The Company granted 30,000 options under this plan
during 1994. The per share exercise price for the options granted under
these 1994 plans ranged from $6.25 to $10.375. These options are
exercisable for a period of up to ten years from date of grant.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Shares Price Range
-------------------------------
<S> <C> <C>
Outstanding at November 30, 1991 546,081 $5.67 -$7.75
Exercised (372,645) 5.67 - 7.75
--------
Outstanding at November 30, 1992 173,436 5.67 - 7.75
Exercised (173,436) 5.67 - 7.75
Granted 349,000 7.50 - 8.125
--------
Outstanding at November 30, 1993 349,000 7.50 - 8.125
Granted 325,750 6.25 - 10.375
--------
Outstanding at November 30, 1994 674,750 6.25 - 10.375
--------
--------
</TABLE>
As a result of the Special Dividend paid in 1993, the Company reduced
the exercise price on stock options granted under the 1993 Plan and the two
1994 plans. There were 634,250 options granted under these plans which had
original exercise prices ranging from $26.25 to $28.125 per share. After
the Special Dividend, the board of directors approved new exercise prices
in the range of $6.25 to $8.125 per share. As a result of the new
measurement date, the repricing of these options resulted in unusual
noncash charges of $559 and $956 in 1994 and 1993, respectively, and
corresponding increases in paid-in surplus. These expense amounts are
included in "nonrecurring and unusual charges" in the accompanying
statements of income (Note 13).
During 1993, the Company recognized certain tax benefits related to
the exercise of stock options in the amount of $1,253. Such benefit was
recorded as an increase in paid-in surplus. No stock options were
exercised in 1994.
PREFERRED SHARES
The Company is authorized to issue up to 1,000,000 preferred shares in
series and with rights established by the board of directors. At November
30, 1994 and 1993, no shares of any series of preferred stock were issued
and outstanding.
32
<PAGE>
EMPLOYEE STOCK OWNERSHIP PLAN
Effective June 1, 1989, the Company established an Employee Stock
Ownership Plan providing for the issuance of up to 360,000 shares of the
Company's common stock. At November 30, 1994, no contributions had been
made to the plan.
COMMON STOCK WARRANTS
As described in Note 5, the Company issued the Warrants at an assigned
value of $955. The Warrants are exercisable for five years. In the
aggregate there are 75,000 warrants, which when exercised would entitle the
holders thereof to acquire an aggregate of 417,182 shares of the Company's
common stock at a price of $7.15 per share. The number of shares of common
stock and the price per share at which a warrant is exercisable are subject
to adjustment upon the occurrence of certain events. A warrant does not
entitle the holder to receive any cash dividends paid on common stock or to
exercise any other rights as a shareholder of the Company.
33
<PAGE>
(8) SEGMENT INFORMATION
--------------------------------------------------------------------------
Industry segment data for 1994, 1993 and 1992 is included in the
schedule of sales and income by line of business on page 13, which is an
integral part of these financial statements.
(9) CONTINGENCIES
---------------------------------------------------------------------------
Claims, suits and complaints arise in the ordinary course of the
Company's business involving such matters as patents and trademarks,
product liability and other alleged injuries or damage. The outcome of
such litigation cannot be predicted, but, in the opinion of management,
based in part upon the opinion of counsel, all such pending matters are
without merit or are of such kind or involve such amounts as would not have
a material adverse effect on the consolidated operating results or
financial position of the Company if disposed of unfavorably.
(10) SUPPLEMENTAL FINANCIAL INFORMATION
--------------------------------------------------------------------------
A - Inventories consisted of the following at November 30, 1994 and
1993:
<TABLE>
<CAPTION>
--------- ---------
1994 1993
--------- ---------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . $ 4,480 $ 6,514
Finished goods and work in process. . . . . . 5,640 7,452
Excess of current cost over LIFO value. . . . (2,901) (2,855)
--------- ---------
Total inventories . . . . . . . . . . . . . $ 7,219 $11,111
--------- ---------
--------- ---------
International inventories included above, valued on a lower of FIFO
cost or market basis at November 30, 1994 and 1993, were $1,780 and $2,299,
respectively
B - Accrued liabilities consisted of the following at November 30, 1994
and 1993:
--------- ---------
1994 1993
--------- ---------
Accrued interest expense. . . . . . . . . . . $ 4,341 $ 1,343
Salaries, wages and commissions . . . . . . . 1,519 1,999
Promotion expense . . . . . . . . . . . . . . 1,994 1,896
Other . . . . . . . . . . . . . . . . . . . . 2,978 2,926
--------- ---------
Total accrued liabilities . . . . . . . . . $10,832 $ 8,164
--------- ---------
--------- ---------
C - Property, plant and equipment consisted of the following at
November 30, 1994 and 1993:
--------- ---------
1994 1993
--------- ---------
Land. . . . . . . . . . . . . . . . . . . . . $ 235 $ 222
Buildings and improvements. . . . . . . . . . 3,812 3,712
Machinery and equipment . . . . . . . . . . . 23,366 21,462
Less -- accumulated depreciation. . . . . . . (16,134) (15,313)
--------- ---------
Property, plant and equipment, net. . . . . $ 11,279 $ 10,083
--------- ---------
--------- ---------
</TABLE>
34
<PAGE>
(11) ACQUISITION OF BRANDS
--------------------------------------------------------------------------
On May 12, 1994, the Company acquired BENZODENT, a topical oral
analgesic, for approximately $3,500 from The Procter & Gamble Company. The
assets acquired consisted primarily of the trademark ($3,246) and finished
product inventories. The Company financed the purchase of BENZODENT with
bank borrowings.
On June 17, 1994, the Company acquired a license to the PHISODERM
trademark in the United States, Canada and Puerto Rico (the Territory),
together with certain other assets from Sterling Winthrop Inc. (Sterling).
The purchase price for the license of PHISODERM in the Territory and
certain other assets approximated $17,276. The assets acquired consisted
primarily of the trademark ($16,826) and inventories. If net sales of
PHISODERM products in the United States exceed (i) $10,000 for the 12-month
period beginning July 1, 1994 and ending June 30, 1995 or (ii) $11,000 for
either of the 12-month periods beginning July 1, 1995 and July 1, 1996 and
ending June 30, 1996 and June 30, 1997 then within 45 days after the end of
the applicable 12-month period with respect to which the applicable net
sales threshold specified in (i) or (ii) above has been exceeded, the
Company will pay Sterling an additional $1,000 per year.
(12) ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS
--------------------------------------------------------------------------
As discussed in Note 3, the Company adopted SFAS No. 106 as of
December 1,1992 and the cumulative effect of this change is reported in the
accompanying statement of income for fiscal 1993. The Company maintains
certain postretirement health care benefits for eligible employees.
Employees become eligible for these benefits if they meet certain age and
service requirements. The Company pays a portion of the cost of medical
benefits for certain retired employees over the age of 65. Effective
January 1, 1993, the Company's contribution is a service-based percentage
of the full premium. The Company pays these benefits as claims are
incurred.
Net periodic postretirement health care benefits cost for the years
ended November 30, 1994 and 1993, included the following components:
<TABLE>
<CAPTION>
------ ------
1994 1993
------ ------
<S> <C> <C>
Service cost (benefits earned during the period) $ 35 $ 35
Interest cost on accumulated postretirement
benefits obligation 94 84
------ ------
Net periodic postretirement benefits cost $ 129 $ 119
------ ------
------ ------
</TABLE>
The following table sets forth the funded status of the plan,
reconciled to the accrued postretirement health care benefits recognized in
the Company's balance sheet at November 30, 1994 and 1993:
<TABLE>
<CAPTION>
------ ------
1994 1993
------ ------
<S> <C> <C>
Accumulated postretirement benefits obligation:
Retirees $ 803 $ 621
Fully eligible active plan participants 306 296
Other active participants 180 243
------ ------
Accrued postretirement health care benefits $1,289 $1,160
------ ------
------ ------
</TABLE>
35
<PAGE>
For measurement purposes, a 6% and 5% annual rate of increase in the
per capita cost of covered health care benefits was assumed in 1994 and
1993, respectively. The weighted-average discount rate used in determining
the accumulated postretirement benefit obligation was 8.5% and 7.75% at
November 30, 1994 and 1993, respectively. The effect of a 1% increase in
the assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation as of November 30, 1994 and 1993 by
approximately 5.1% and 5.3%, respectively, and the aggregate of the service
and interest cost components of the net annual postretirement benefit cost
by approximately 3.9% for each of the years then ended.
(13) NONRECURRING AND UNUSUAL CHARGES
-------------------------------------------------------------------------
During the fourth quarter of 1993, the Company recorded nonrecurring
and unusual charges of $5,527. The nonrecurring and unusual charges
consisted of the following: (A) International Restructuring Charges - (1)
Write-down of a product trademark to net realizable value in the amount of
$742. Based on management's best estimate of the net realizable value of
the brand, a write-down of the trademark was recorded in the fourth quarter
of 1993. During fiscal 1994, the Company sold the brand and recorded an
additional loss of $512. (2) Write-down of accounts receivable in the
amount of $1,775. During the fourth quarter of fiscal 1993, the Company
terminated its distribution operations in Spain. As a result, the
Company's U.K. subsidiary wrote off uncollectible accounts receivable from
its Spanish distributor in the amount of $728. In addition, restructuring
of the Company's German distribution operations in connection with a change
in distribution methods resulted in a reserve for uncollectible accounts
receivable in the amount of $1,047. (3) Write-down of inventories in the
amount of $212 related to Spanish and discontinued brand inventories to
their net realizable values [see (1) and (2) above]. (4) Accrued severance
payments and lease and distributor termination fees in the amount of $375
consisted of severance for terminated international employees, accrual of
fees for termination of the Spanish distributor and European distributor
and lease termination fees. (5) Other accrued international restructuring
charges of approximately $230 primarily related to the shutdown of the
Spanish operations and scaling back of the Canadian operations. (B)
Noncash compensation expense related to repricing of stock options in the
amount of $956 was recorded (Note 7). (C) Accrued severance of
approximately $1,237 for executives leaving the Company was recorded during
the fourth quarter of fiscal 1993.
During 1994, the Company recorded nonrecurring and unusual charges of $559
related to the stock options which were repriced in 1993 (Note 7). As of
November 30, 1994, there is a remaining accrual of approximately $331 related to
the nonrecurring and unusual charges.
36
<PAGE>
(14) SUBSIDIARY GUARANTOR OF THE NOTES
--------------------------------------------------------------------------
As discussed in Note 5, the Company filed a registration statement
with the Securities and Exchange Commission (SEC) to register the Notes
under the Securities Act of 1933. In accordance with the SEC rules, the
following consolidating condensed financial data illustrates the
composition of the Company's subsidiary, Signal Investment & Management Co.
(Signal), which guarantees the Notes, and the nonguarantor subsidiaries:
<TABLE>
<CAPTION>
Parent
and its Guarantor Nonguarantor Consolidated
Divisions(1) Subsidiary(2) Subsidiaries(3) Eliminations(4) Total
<S> <C> <C> <C> <C> <C>
Year Ended November 30, 1994:
Net sales . . . . . . . . . . . . . . . . . . $ 96,229 $ 3,950 $ 12,077 $ (4,300) $107,956
Income from operations. . . . . . . . . . . . 16,492 3,011 429 (4,300) 15,632
Income before income taxes,
extraordinary loss and
accounting changes . . . . . . . . . . . . . 6,422 3,175 483 (4,448) 5,632
Net income. . . . . . . . . . . . . . . . . . 3,918 2,101 483 (4,448) 2,054
Cash flows from operating
activities . . . . . . . . . . . . . . . . . 15,279 2,632 (1,506) -- 16,405
Cash flows from investing
activities . . . . . . . . . . . . . . . . . (743) (22,809) (201) -- (23,753)
Cash flows from financing
activities . . . . . . . . . . . . . . . . . (13,017) 18,848 -- -- 5,831
Net increase (decrease)in
cash and cash equivalents. . . . . . . . . . 1,117 (1,329) (1,216) -- (1,428)
Year Ended November 30, 1993:
Net Sales . . . . . . . . . . . . . . . . . . $ 92,136 $ 3,501 $ 13,619 $ (3,851) $105,405
Income from operations. . . . . . . . . . . . 6,616 2,417 679 (3,851) 5,861
Income before income taxes,
extraordinary loss and
accounting changes . . . . . . . . . . . . . 2,362 2,774 737 (3,851) 2,022
Net income. . . . . . . . . . . . . . . . . . 2,574 1,908 737 (3,851) 1,368
Cash flows from operating
activities . . . . . . . . . . . . . . . . . 4,970 2,513 1,067 -- 8,550
Cash flows from investing
activities . . . . . . . . . . . . . . . . . (2,033) 26,144 (55) -- 24,056
Cash flows from financing
activities . . . . . . . . . . . . . . . . . (8,262) (27,020) (1,600) -- (36,882)
Net increase (decrease) in
cash and cash equivalents. . . . . . . . . . (5,325) 1,637 (558) -- (4,246)
Year Ended November 30, 1992:
Net Sales . . . . . . . . . . . . . . . . . . $ 93,775 $ 1,880 $ 14,726 $ (2,230) $108,151
Income from operations. . . . . . . . . . . . 13,936 1,552 473 (2,230) 13,731
Income before income taxes,
extraordinary loss and
accounting changes . . . . . . . . . . . . . 11,496 2,398 568 (2,230) 12,232
Net income. . . . . . . . . . . . . . . . . . 7,916 1,818 568 (2,230) 8,072
Cash flows from operating
activities . . . . . . . . . . . . . . . . . 2,767 1,370 505 -- 4,642
Cash flows from investing
activities . . . . . . . . . . . . . . . . . (4,702) (20,171) (48) -- (24,921)
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Parent
and its Guarantor Nonguarantor Consolidated
Divisions(1) Subsidiary(2) Subsidiaries(3) Eliminations(4) Total
<S> <C> <C> <C> <C> <C>
Cash flows from financing
activities . . . . . . . . . . . . . . . . 7,392 18,968 -- -- 26,360
Net increase in cash and
cash equivalents . . . . . . . . . . . . . 5,456 167 658 -- 6,281
At November 30, 1994:
Current assets. . . . . . . . . . . . . . . $ 24,170 $ 1,548 $ 13,838 $ (6,255) $ 33,301
Noncurrent assets . . . . . . . . . . . . . 21,616 33,753 10,092 (12,346) 53,115
Current liabilities . . . . . . . . . . . . 18,471 -- 4,396 (2,675) 20,192
Noncurrent liabilities. . . . . . . . . . . 59,951 29,311 11,773 (5,260) 95,775
Shareholders' equity (deficit) . . . . . . (32,636) 5,990 7,761 (10,666) (29,551)
At November 30, 1993:
Current assets. . . . . . . . . . . . . . . $ 23,482 $ 2,469 $ 18,115 $ (5,929) $ 38,137
Noncurrent assets . . . . . . . . . . . . . 18,864 11,883 11,119 (9,809) 32,057
Current liabilities . . . . . . . . . . . . 18,170 -- 3,918 (2,581) 19,507
Noncurrent liabilities. . . . . . . . . . . 63,493 8,463 15,544 (3,340) 84,160
Shareholders' equity (deficit) . . . . . . (39,317) 5,889 9,772 (9,817) (33,473)
<FN>
(1) Investments in the subsidiaries are accounted for by the parent on
the cost basis for supplemental combining presentation purposes. Earnings
of subsidiaries are therefore not reflected in the parent's investment
account or earnings. Under the equity method of accounting, earnings of
subsidiaries would be reflected in the parent's investment account and
earnings.
(2) Signal was founded by the Company for the sole purpose of holding
certain of the Company's patents and trademarks and investments Signal has
no active operations
(3) The financial information of the nonguarantor subsidiaries
includes the Company's two wholly-owned foreign subsidiaries, Chattem
(Canada) Inc and Chattem (UK) Limited and the Company's wholly-owned
captive insurance subsidiary, HBA Insurance Limited.
(4) The principal elimination entries eliminate investments in
subsidiaries and intercompany amounts.
</TABLE>
38
<PAGE>
Report of Independent
Public Accountants
To the Shareholders and Board of Directors of
Chattem, Inc.:
We have audited the accompanying consolidated balance sheets of Chattem, Inc.
(a Tennessee corporation) and subsidiaries as of November 30, 1994 and 1993 and
the related consolidated statements of income, shareholders' equity (deficit)
and cash flows for each of the three years in the period ended November 30,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chattem, Inc. and subsidiaries
as of November 30, 1994 and 1993 and the results of their operations and their
cash flows for each of the three years in the period ended November 30, 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in 1993 the
Company changed its methods of accounting for income taxes and for
postretirement health care benefits.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
January 20, 1995
39
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
BOARD OF DIRECTORS OFFICERS CHATTEM, INC.
1715 West 38th Street
ZAN GUERRY ZAN GUERRY Corporate Office
Chairman and President Chairman and President Chattem Consumer Products
Chattem, Inc. Chattem Chemicals
Chattanooga, Tennessee ROBERT E. BOSWORTH
Executive Vice President
SAMUEL E. ALLEN and Chief Financial Officer SUBSIDIARIES AND
Chairman AFFILIATED COMPANIES
GLOBALT, Inc. HUGH F. SHARBER
Atlanta, Georgia Secretary CHATTEM (U.K.) LIMITED
Guerry House
LOUIS H. BARNETT Ringway Centre
Business Consultant Edison Road
Fort Worth, Texas Basingstoke, Hampshire RG21 2Y
England
ROBERT E. BOSWORTH
Executive Vice President CHATTEM (CANADA) INC.
and Chief Financial Officer 2220 Argentia Road
Chattem, Inc. Mississauga, Ontario L5N 2K7
Chattanooga, Tennessee
HBA INSURANCE LIMITED
ROBERT M. BOYD, JR. P. O. Box HM 2062
Business Consultant Hamilton 5, Bermuda
Chattanooga, Tennessee
SIGNAL INVESTMENT &
FRANCIS L. CAPERS MANAGEMENT CO.
Business Consultant 1100 North Market Street
Riverside, Connecticut Suite 780, Wilmington Trust Center
Wilmington, Delaware 19801-1239
RICHARD E. CHENEY
Former Chairman Emeritus
Hill and Knowlton, Inc. COMMON STOCK LISTING
New York, New York Over-the-Counter
NASDAQ Symbol: CHTT
SCOTT L. PROBASCO, JR.
Chairman of the Executive
Committee TRANSFER AGENT AND REGISTRAR
American National Bank TRUST COMPANY BANK
and Trust Company P. O. Box 4625
Chattanooga, Tennessee Atlanta, GA 30302
A. ALEXANDER TAYLOR II FORM 10-K AVAILABLE
Partner The Company's annual report on
Miller and Martin Form 10-K filed with the Securities
Chattanooga, Tennessee and Exchange Commission may be
obtained without charge by writing
to the Chief Financial Officer,
Chattem, Inc.
</TABLE>
<PAGE>
EXHIBIT 22
CHATTEM, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE COMPANY
NAME OF SUBSIDIARY STATE OR COUNTRY OF INCORPORATION
- - - ------------------------------ ---------------------------------
Chattem (Canada) Inc. Canada
Chattem (U.K.) Limited England
HBA Insurance Limited Bermuda
Signal Investment & Management Co. Delaware
