<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1995
COMMISSION FILE NUMBER 0-5905
CHATTEM, INC.
A TENNESSEE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
TELEPHONE: 423-821-4571
REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
AS OF OCTOBER 13, 1995, 7,292,199 SHARES OF THE COMPANY'S COMMON STOCK,
WITHOUT PAR VALUE, WERE OUTSTANDING.
<PAGE>
CHATTEM, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, August 31, 1995 and
November 30, 1994................................................. 3
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended August 31, 1995 and 1994............................. 5
Consolidated Statements of Cash Flows for the Nine Months Ended
August 31, 1995 and 1994.......................................... 6
Notes to Condensed Consolidated Financial Statements............... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 15
SIGNATURES........................................................... 16
EXHIBIT 11 - Statement Regarding Computation of Per Share Earnings...
EXHIBIT 27 - Financial Data Schedule.................................
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1995 1994
--------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS........................................... $ 2,602 $ 3,034
ACCOUNTS RECEIVABLE - NET........................................... 18,132 18,059
REFUNDABLE AND DEFERRED INCOME TAXES................................ 852 1,015
INVENTORIES......................................................... 6,536 6,247
PREPAID EXPENSES AND OTHER CURRENT ASSETS........................... 1,647 1,745
NET CURRENT ASSETS OF DISCONTINUED OPERATIONS....................... - 2,584
------------ -----------
TOTAL CURRENT ASSETS.............................................. 29,769 32,684
------------ -----------
PROPERTY, PLANT AND EQUIPMENT - NET................................... 9,232 8,491
------------ -----------
OTHER NONCURRENT ASSETS:
INVESTMENT IN CUMULATIVE, CONVERTIBLE PREFERRED STOCK............... 5,000 -
PATENTS, TRADEMARKS AND OTHER
PURCHASED PRODUCT RIGHTS, NET...................................... 31,179 32,455
DEBT ISSUANCE COSTS, NET............................................ 3,135 3,771
DEFERRED INCOME TAXES............................................... 1,857 1,598
OTHER............................................................... 3,917 4,012
NET NONCURRENT ASSETS OF DISCONTINUED OPERATIONS.................... - 2,788
------------ -----------
TOTAL OTHER NONCURRENT ASSETS..................................... 45,088 44,624
------------ -----------
TOTAL ASSETS.................................................... $84,089 $85,799
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1995 1994
--------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
CURRENT MATURITIES OF LONG-TERM DEBT................................. $ 1,500 $ 2,500
ACCOUNTS PAYABLE..................................................... 3,898 4,942
PAYABLE TO BANK...................................................... - 1,301
ACCRUED INCOME TAXES................................................. 3,877 123
ACCRUED ADVERTISING AND PROMOTION.................................... 2,695 1,994
ACCRUED INTEREST PAYABLE............................................. 1,864 4,340
ACCRUED ESTIMATED SPECIALTY CHEMICALS DIVESTITURE COSTS.............. 1,662 -
OTHER ACCRUED LIABILITIES............................................ 3,432 4,375
-------------- -----------
TOTAL CURRENT LIABILITIES........................................ 18,928 19,575
-------------- -----------
LONG-TERM DEBT, LESS CURRENT MATURITIES................................ 81,544 94,486
-------------- -----------
ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS............................ 1,346 1,289
-------------- -----------
SHAREHOLDERS' DEFICIT:
COMMON SHARES, WITHOUT PAR VALUE, AT STATED VALUE.................... 1,519 1,519
PAID-IN SURPLUS...................................................... 51,780 51,797
ACCUMULATED DEFICIT.................................................. (69,454) (81,352)
-------------- -----------
TOTAL.............................................................. (16,155) (28,036)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT.............................. (1,574) (1,515)
-------------- -----------
TOTAL SHAREHOLDERS' DEFICIT...................................... (17,729) (29,551)
-------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
DEFICIT....................................................... $84,089 $85,799
============== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------------ --------------------------
1995 1994 1995 1994
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
NET SALES............................................. $28,990 $25,954 $75,476 $67,310
---------- ---------- ----------- ----------
COSTS AND EXPENSES:
COST OF SALES....................................... 8,362 7,380 23,147 19,938
ADVERTISING AND PROMOTION........................... 10,182 9,056 27,451 23,952
SELLING, GENERAL AND ADMINISTRATIVE................. 5,241 5,171 13,838 14,211
---------- ---------- ----------- ----------
TOTAL COSTS AND EXPENSES.......................... 23,785 21,607 64,436 58,101
---------- ---------- ----------- ----------
INCOME FROM OPERATIONS................................ 5,205 4,347 11,040 9,209
---------- ---------- ----------- ----------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE.................................... (2,701) (2,922) (8,548) (6,441)
INVESTMENT INCOME................................... 198 49 283 121
LOSS ON PRODUCT DIVESTITURE......................... - - - (512)
OTHER, NET.......................................... 11 483 19 477
---------- ---------- ----------- ----------
TOTAL OTHER INCOME (EXPENSE)...................... (2,492) (2,390) (8,246) (6,355)
---------- ---------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES......................................... 2,713 1,957 2,794 2,854
PROVISION FOR INCOME TAXES............................ 1,040 745 1,062 1,082
---------- ---------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS..................... 1,673 1,212 1,732 1,772
---------- ---------- ----------- ----------
DISCONTINUED OPERATIONS:
INCOME FROM OPERATIONS, LESS PROVISIONS FOR INCOME
TAXES OF $153, $414 AND $597, RESPECTIVELY........ - 239 675 979
GAIN ON DISPOSAL, LESS PROVISION FOR INCOME TAXES
OF $6,046......................................... - - 9,863 -
---------- ---------- ----------- ----------
TOTAL DISCONTINUED OPERATIONS.................... - 239 10,538 979
---------- ---------- ----------- ----------
INCOME BEFORE EXTRAORDINARY LOSS...................... 1,673 1,451 12,270 2,751
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET......................................... - (1,556) (367) (1,556)
---------- ---------- ----------- ----------
NET INCOME (LOSS)..................................... $ 1,673 $ (105) $11,903 $ 1,195
========== ========== =========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING................. 7,292 7,292 7,292 7,292
========== ========== =========== ==========
NET INCOME (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS............................... $ 0.23 $ 0.17 $ 0.24 $ 0.24
DISCONTINUED OPERATIONS............................. - 0.03 1.44 0.14
EXTRAORDINARY LOSS.................................. - (0.21) (0.05) (0.21)
---------- ---------- ----------- ----------
NET INCOME (LOSS) PER COMMON SHARE................ $ 0.23 $ (0.01) $ 1.63 $ 0.17
========== ========== =========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
AUGUST 31,
--------------------------
1995 1994
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
NET INCOME ................................................................ $ 11,903 $ 1,195
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION............................................ 2,961 2,720
GAIN ON SALE OF SPECIALTY CHEMICALS DIVISION............................. (9,863) -
LOSS ON PRODUCT DIVESTITURE.............................................. - 513
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET.................. 367 1,556
OTHER, NET............................................................... (221) 100
CHANGES IN OPERATING ASSETS AND LIABILITIES:
DECREASE IN ACCOUNTS RECEIVABLE........................................ 402 532
DECREASE (INCREASE) IN INVENTORIES..................................... (390) 3,588
DECREASE (INCREASE) IN PREPAID EXPENSES................................ 81 (474)
DECREASE (INCREASE) IN REFUNDABLE AND DEFERRED INCOME TAXES............ (97) 515
DECREASE IN ACCOUNTS PAYABLE AND ACCRUED LIABILITIES................... (5,534) (2,066)
DECREASE IN PAYABLE TO BANK............................................ (1,301) (1,058)
INCREASE (DECREASE) IN INCOME TAXES PAYABLE............................ (1,944) 123
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................. (3,636) 7,244
---------- ----------
INVESTING ACTIVITIES:
PURCHASES OF PROPERTY, PLANT AND EQUIPMENT................................. (2,398) (1,975)
PROCEEDS FROM SALE OF SPECIALTY CHEMICALS DIVISION, NET.................... 18,747 -
COST OF PRODUCT ACQUISITIONS............................................... - (19,500)
OTHER, NET................................................................. 173 135
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.................. 16,522 (21,340)
---------- ----------
FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM DEBT BORROWINGS.................................... 31,100 120,012
REPAYMENT OF LONG-TERM DEBT................................................ (45,225) (105,000)
DEFERRED FINANCING COSTS................................................... (167) (4,038)
PROCEEDS FROM SALE OF INTEREST RATE CAP.................................... 984 -
PROCEEDS FROM SALE OF STOCK WARRANTS....................................... - 955
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................. (13,308) 11,929
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS................................................................. (10) 8
---------- ----------
CASH AND CASH EQUIVALENTS:
DECREASE FOR THE PERIOD.................................................... (432) (2,159)
AT BEGINNING OF PERIOD..................................................... 3,034 4,462
---------- ----------
AT END OF PERIOD........................................................... $ 2,602 $ 2,303
========== ==========
CASH PAYMENTS FOR:
INTEREST................................................................... $11,196 $ 5,510
========== ==========
INCOME TAXES............................................................... $ 3,705 $ 61
========== ==========
</TABLE>
NONCASH INVESTING ACTIVITIES-RECEIVED $5,000 OF 13.125% CUMULATIVE,
CONVERTIBLE PREFERRED STOCK IN CONNECTION WITH SALE OF SPECIALTY CHEMICALS
DIVISION ON MAY 26, 1995.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note: All monetary amounts are expressed in thousands of dollars.
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
accompanying unaudited condensed consolidated financial statements, in the
opinion of management, include all adjustments necessary for a fair
presentation. All such adjustments are of a normal recurring nature.
2. The Company incurs significant expenditures on television, radio and print
advertising to support its nationally branded over-the-counter
pharmaceuticals and functional toiletries and cosmetics. Customers purchase
products from the Company with the understanding that the brands will be
supported by the Company's extensive media advertising. This advertising
supports the retailers' sales effort and maintains the important brand
franchise with the consuming public. Accordingly, the Company considers its
advertising program to be clearly implicit in its sales arrangements with
its customers. Therefore, the Company believes it is appropriate to
allocate a percentage of the necessary supporting advertising expenses to
each dollar of sales by charging a percentage to sales on an interim basis
based upon anticipated annual sales and advertising expenditures (in
accordance with APB Opinion No. 28) and adjusting that accrual to the
actual expenses incurred at the end of the year. The adoption in fiscal
1995 of the provisions of SOP93-7, "Advertising Costs", issued by the
American Institute of Certified Public Accountants, did not have a material
impact on the Company's financial position or operating results.
3. The results of operations for the three and nine months ended August 31,
1995 and 1994 are not necessarily indicative of the results to be expected
for the respective full years. Seasonality is a factor in the Company's
overall business, with the first quarter sales and income trailing the
other fiscal quarters.
4. Certain amounts in the prior years' financial information have been
reclassified to conform to the 1995 presentation.
5. As of August 31, 1995, there is a remaining accrual of approximately $224
related to the nonrecurring and unusual charges discussed in Note 13 of
Notes to Consolidated Financial Statements of the Annual Report on Form
10-K for the year ended November 30, 1994.
6. Inventories consisted of the following:
<TABLE>
<CAPTION>
August 31, November 30,
1995 1994
---------- ------------
<S> <C> <C>
Raw materials..................... $ 3,860 $ 3,312
Finished goods and work in process 5,160 5,334
Excess of current cost over LIFO
values........................... (2,484) (2,399)
---------- ------------
Total inventories.......... $ 6,536 $ 6,247
========== ============
</TABLE>
7
<PAGE>
7. On May 26, 1995, the Company completed the sale of its specialty chemicals
division to Chattem Chemicals, Inc., a wholly-owned subsidiary of Elcat,
Inc. (the "Parent"). The Company received $25,000 from the sale of the
specialty chemicals division consisting of $20,000 in cash and $5,000 of
13.125% cumulative, convertible preferred stock of the Parent. The net
cash proceeds of approximately $12,000 were used to repay long-term debt.
The Company recognized a gain of $9,863 from the sale and an extraordinary
charge (after tax) of $367 relating to the early extinguishment of the
debt.
The results of operations and the gain on disposal of the specialty
chemicals division have been separately classified as discontinued
operations in the accompanying condensed consolidated statements of
income.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
GENERAL
From continuing operations, in the quarter and nine months ended
August 31, 1995, the Company experienced an increase in sales of $3,036, or
11.7%, to $28,990 from $25,954 for the quarter, and an increase of $8,166, or
12.1%, to $75,476 from $67,310 for the nine month period. Operating income
increased by $858, or 19.7%, to $5,205 from $4,347 for the quarter and by
$1,831, or 19.9%, to $11,040 from $9,209 for the nine month period.
Discontinued operations, representing the specialty chemicals division
sold to Elcat, Inc.'s wholly-owned subsidiary, Chattem Chemicals, Inc., on
May 26, 1995, realized income from operations of $675 for the six months
ended May 31, 1995. A net gain of $9,863 on the sale was also recorded
during the same period.
A net extraordinary loss of $367, resulting from the early
extinguishment of debt with the net cash proceeds received from the sale of
the specialty chemicals division, was also recognized in the six months ended
May 31, 1995.
Earnings per share from continuing operations increased $.06 per share
for the quarter but were unchanged for the nine months, while total earnings
per share increased $.24 and $1.46 a share for the respective periods. Total
earnings per share for the nine months ended August 31, 1995 include the net
income and net gain on disposition of the specialty chemicals division and
the net loss on early extinguishment of debt. The reduction in interest
expense as a result of the retirement of long-term debt discussed previously
is estimated to be approximately $1,400 on an annual basis.
The Company also expects to recognize annually approximately $656 in
dividends on the cumulative, convertible preferred stock of Elcat, Inc.,
which was received as a part of the proceeds from the sale of the specialty
chemicals division. The dividend accumulates annually but is non-payable
until the stock is called or redeemed. After three years, however, if the
shares are still outstanding, a cash dividend of $200 will be received by
the Company in fiscal year 1999, increasing ratably to the full $656 in
fiscal year 2002.
The Company will continue to seek increases in sales through a
combination of acquisitions and internal growth while maintaining high
operating income. As high growth brands such as FLEX-ALL 454 mature, sales
increases will become even more dependent on acquisitions and the development
of successful line extensions. Strategically, the Company continually
evaluates its products and business as part of its sales growth strategy and,
in instances where the Company's objectives are not realized, will dispose of
these brands or businesses and redeploy the assets to products or businesses
with greater potential or to reduce indebtedness.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for continuing operations and for the
periods indicated, certain items from the Company's Condensed Consolidated
Statements of Income expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
------------------ -----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES......................................... 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales.................................... 28.8 28.4 30.7 29.6
Advertising and promotion........................ 35.1 34.9 36.4 35.6
Selling, general and administrative.............. 18.1 19.9 18.3 21.1
------ ------ ------ ------
Total costs and expenses....................... 82.0 83.2 85.4 86.3
------ ------ ------ ------
INCOME FROM OPERATIONS............................ 18.0 16.8 14.6 13.7
OTHER INCOME (EXPENSE):
Interest expense................................. (9.3) (11.3) (11.3) (9.6)
Investment income................................ 0.7 0.2 0.4 0.2
Loss on product divestiture...................... - - - (0.8)
Other, net....................................... - 1.9 - 0.7
------ ------ ------ ------
Total other income (expense)................... (8.6) (9.2) (10.9) (9.5)
------ ------ ------ ------
INCOME BEFORE INCOME TAXES........................ 9.4 7.6 3.7 4.2
PROVISION FOR INCOME TAXES........................ 3.6 2.9 1.4 1.6
------ ------ ------ ------
NET INCOME FROM CONTINUING OPERATIONS............. 5.8% 4.7% 2.3% 2.6%
====== ====== ====== ======
</TABLE>
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 1995 AND 1994 FOR CONTINUING
OPERATIONS
Net sales for the three months ended August 31, 1995 increased $3,036,
or 11.7%, to $28,990 as compared to $25,954 for the comparable period of the
previous year. The increase in net sales was attributable to a $2,073, or
9.0%, increase in domestic consumer products sales to $25,063 from $22,990 in
1994 and an increase of $963, or 32.5%, in international consumer products
sales to $3,927 from $2,964.
Increases in net sales for the 1995 period were realized for the
domestic consumer products lines of BULLFROG (26.3%), PAMPRIN (17.9%), SUN-IN
(39.8%), ICY HOT, ULTRASWIM MUDD, BENZODENT and PHISODERM, while decreases
were recognized for, CORNSILK (13.4%), FLEX-ALL 454 (10.7%) and NORWICH
Aspirin. The decline in sales of the brands listed above reflects the
maturation of these product lines or the increased competition in their
respective product categories and markets. All sales variances were largely
the result of changes in volume.
International consumer product sales for the 1995 period decreased
$15, or 1.7%, for the Canadian operation but increased $1,016, or 56.3%, for
the United Kingdom business. U.S. export sales declined by $38, or 15.9%,
during the 1995 period. Despite a 49.3% increase in sales of
10
<PAGE>
PHISODERM in Canada, declines in sales of the other major product lines
resulted in a modest net sales decrease in that country. Sales increases for
the SUN-IN, CORNSILK and MUDD brands were realized in the current period in
the United Kingdom, while sales declines were recognized for the BRONZ SILK
and ULTRASWIM product lines. All sales variances were principally due to
volume changes.
Cost of goods sold as a percentage of net sales increased to 28.8% in
1995 from 28.4% in the 1994 period. The small increase was largely the
result of a shift in product mix of sales of domestic consumer products to
lower gross margin brands, e.g., SUN-IN and MUDD, in the 1995 period and an
increase in fixed manufacturing overhead costs.
Advertising and promotion expenses increased by $1,126, or 12.4%, in
the 1995 period and were 35.1% of net sales compared to 34.9% in the
corresponding 1994 period. Increased expenditures were provided in the
current period for the PREMSYN PMS, MUDD and CORNSILK brands as well as for
the most recently acquired BENZODENT and PHISODERM product lines.
The increase of $70, or 1.4%, in selling, general and administrative
expenses in the 1995 period was largely associated with increases in direct
selling costs, e.g., sales commissions and field sales expenses, as a result
of the increased sales. Reductions in general and administrative expenses
were also recognized, especially in the administrative personnel and related
cost areas.
Interest expense decreased by $221, or 7.6%, in the current period
principally due to the retirement of long-term debt at the end of May, 1995
with the net proceeds from the sale of the specialty chemicals division.
Income from continuing operations increased by $461, or 38.0%, in the
1995 period. The increase mainly resulted from greater sales and a reduction
in interest expense.
COMPARISON OF NINE MONTHS ENDED AUGUST 31, 1995 AND 1994 FOR CONTINUING
OPERATIONS
Net sales for the nine months ended August 31, 1995 increased $8,166,
or 12.1%, to $75,476 as compared to $67,310 for the same period of the
previous year. The increase in net sales was attributable to a $5,823, or
9.6%, increase in domestic consumer products sales to $66,494 from $60,671
last year and a $2,343, or 35.3%, increase in international consumer products
sales to $8,982 from $6,639.
For domestic consumer products, net sales increases in 1995 over 1994
were realized for the BULLFROG (31.1%), ICY HOT (6.7%), CORNSILK (4.2%),
PAMPRIN, SUN-IN and MUDD brands, while decreases were recorded for the major
product lines of FLEX-ALL 454 (21.1%), PREMSYN PMS, ULTRASWIM and NORWICH
Aspirin. Sales of BENZODENT and PHISODERM, products acquired in May and June
1994, respectively, increased a combined $6,697 over their respective 1994
short periods. All sales variances, except for the PAMPRIN brand, were
largely the result of changes in volume.
International consumer product sales in the first nine months of 1995
increased $958, or 58.7%, for the Canadian operation and $1,487, or 36.5%,
for the United Kingdom business. The addition of PHISODERM to the product
line in Canada accounted for practically all of the net increase in sales in
that country, although increases were realized for the PAMPRIN, MUDD and
11
<PAGE>
SUN-IN brands. Decreases in sales of the CORNSILK and FLEX-ALL 454 products
were recorded also. Sales increases for the SUN-IN and CORNSILK brands were
recognized in the current period in the United Kingdom, while sales declines
were recorded for the BRONZ SILK and ULTRASWIM product lines. U.S. export
sales showed a modest decline in the 1995 period. All sales variances were
principally due to volume changes.
Cost of goods sold as a percentage of net sales increased to 30.7% in
1995 from 29.6% in the 1994 period. The 1995 increase was primarily the
result of a shift in the mix of sales of domestic consumer products to lower
gross margin brands, e.g., SUN-IN, MUDD and CORNSILK, and an increase in
fixed manufacturing overhead costs.
Advertising and promotion expenses increased $3,499, or 14.6%, in the
1995 period and were 36.4% of net sales compared to 35.6% in the
corresponding 1994 period. Increased expenditures were provided in the
current period for the BULLFROG, ICY HOT, PREMSYN PMS, SUN-IN, MUDD and
CORNSILK brands as well as for the most recently acquired BENZODENT and
PHISODERM product lines.
The decrease of $373, or 2.6%, in selling, general and administrative
expenses in the 1995 period was largely associated with reductions in
administrative personnel costs, short and long-term incentive plan accruals
and outside legal services.
Interest expense increased $2,107, or 32.7%, in the current period
principally as a result of the refinancing of long-term debt in fiscal 1994
at higher interest rates and increased outstanding indebtedness related to
the acquisitions of BENZODENT and PHISODERM. The loss on a product
divestiture in the 1994 period was the result of the sale of the ALGEMARIN-TM-
product line in Canada.
Income from continuing operations decreased by $40, or 2.3%, in the
1995 period. The decline mainly resulted from higher cost of goods sold,
advertising, promotion and interest expenses despite an increase in sales.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1995, the Company had working capital of $10,841
compared to $13,109 at November 30, 1994, a decrease of $2,268 in the first
nine months of fiscal 1995. This represented 12.9% of total assets at August
31, 1995 and 15.3% of total assets at November 30, 1994.
The Company's current ratio (current assets divided by current
liabilities) was 1.57 at August 31, 1995 compared to 1.67 at November 30,
1994. The Company's quick ratio (cash equivalents, short-term investments
and receivables divided by current liabilities) was 1.10 at August 31, 1995
compared to 1.08 at November 30, 1994.
The decline in working capital and the current ratio for the nine
months ended August 31, 1995 was largely due to the recognition of an
additional estimated income tax payable and accrued divestiture costs, both
of which were associated with the sale of the specialty chemicals division.
12
<PAGE>
Additional working capital ratios for the indicated periods are as
follows:
<TABLE>
<CAPTION>
Nine Months Ended
August 31,
----------------- Year Ended
Ratios 1995 1994 November 30, 1994
------ ---- ---- -----------------
<S> <C> <C> <C>
Average accounts receivable turnover ......... 4.03 3.80 5.30
Average inventory turnover ................... 3.51 2.50 3.78
</TABLE>
The payment of a special cash dividend of $20.00 per share in June
1993 and the indebtedness related thereto resulted in a significant increase
in the Company's debt and a substantial shareholders' deficit at the time of
the transaction and at August 31, 1995. Payments of principal and interest
on the indebtedness incurred to finance the special dividend and the
refinancing of such indebtedness have been a significant new use of the
Company's funds.
During the nine months ended August 31, 1995, the Company decreased
its long-term debt by a net amount of $13,942, which reflects the application
of the net cash proceeds from the sale of the specialty chemicals division
previously discussed.
Capital expenditures in the first nine months of 1995 were $2,398, an
increase of $423 over the corresponding 1994 period, and are not expected to
exceed $3,500 for the 1995 fiscal year.
In connection with the sale of the specialty chemicals division,
management of the Company believes that it has recorded adequate amounts to
cover costs related to environmental remediation of the property sold and
other costs associated with the separation of the consumer products and
specialty chemicals businesses. These estimated costs have been charged to
the gain on the disposal of the specialty chemicals division.
The negative cash flow from operating activities for the nine months
ended August 31, 1995, reflects the absence in the third quarter of fiscal
1995 of cash generated by the divested specialty chemicals division as well
as large payments for interest and income taxes related to the gain on the
sale of that division.
The Company believes that cash flows to be generated by operations,
along with funds available under its bank credit facility and from borrowings
against approximately $2,000 of cash value under certain insurance policies,
will be sufficient to fund the Company's current commitments and proposed
operations.
The Company's primary foreign operations are conducted through its
Canadian and U.K. subsidiaries. The functional currencies of these
subsidiaries are Canadian dollars and British pounds, respectively.
Fluctuations in exchange rates can impact operating results, including total
revenues and expenses, when translations of the subsidiary financial
statements are made in accordance with SFAS No. 52, "Foreign Currency
Translation." For the nine months ended August 31, 1995 and 1994, these
subsidiaries accounted for 11% and 9%, respectively, of total revenues and
10% of total assets for each period. It has not been the Company's practice
to hedge its assets and liabilities in the U.K. and Canada or its
intercompany transactions due to the inherent risks associated with foreign
currency hedging transactions and the timing of payment between the Company
and its two foreign subsidiaries. Historically, gains or losses from foreign
currency transactions have not had a material impact on the Company's
operating results. Losses of $9 and
13
<PAGE>
$24 for the nine months ended August 31, 1995 and 1994, respectively,
resulted from foreign currency transactions.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Statement regarding computation of per share earnings
(Exhibit 11).
(2) Financial data schedule (Exhibit 27).
(b) The following report on Form 8-K was filed with the Securities
and Exchange Commission during the quarter ended August 31, 1995:
Form 8-K, dated July 26, 1995, regarding note 14 to the
Company's audited financial statements included in its 1994
Annual Report to Shareholders, consolidating condensed financial
data of its wholly-owned subsidiary, Signal Investment &
Management Co.
15
<PAGE>
CHATTEM, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHATTEM, INC.
(Registrant)
Dated: October 13, 1995 \s\ Robert E. Bosworth
---------------------- ----------------------------------
Robert E. Bosworth,
Executive Vice President
and Chief Financial Officer
(principal financial officer)
10QMAY
16
<PAGE>
EXHIBIT 11
CHATTEM, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
-------------------------- -------------------------
1995 1994 1995 1994
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
NET INCOME (LOSS):
Continuing operations................................... $ 1,673 $ 1,212 $ 1,732 $ 1,772
Discontinued operations................................. - 239 10,538 979
Extraordinary loss...................................... - (1,556) (367) (1,556)
----------- --------- ----------- ---------
Net income (loss)..................................... $ 1,673 $ (105) $ 11,903 $ 1,195
=========== ========= =========== =========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING..................... 7,292 7,292 7,292 7,292
=========== ========= =========== =========
NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations................................... $ 0.23 $ 0.17 $ 0.24 $ 0.24
Discontinued operations................................. - 0.03 1.44 0.14
Extraordinary loss...................................... - (0.21) (0.05) (0.21)
----------- --------- ----------- ---------
Net income (loss) per common share.................. $ 0.23 $ (0.01) $ 1.63 $ 0.17
=========== ========= =========== =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHATTEM,
INC.'S UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> AUG-31-1995
<CASH> 2602
<SECURITIES> 0
<RECEIVABLES> 18382
<ALLOWANCES> 250
<INVENTORY> 6536
<CURRENT-ASSETS> 29769
<PP&E> 24069
<DEPRECIATION> 14837
<TOTAL-ASSETS> 84089
<CURRENT-LIABILITIES> 18928
<BONDS> 81544
<COMMON> 1519
0
0
<OTHER-SE> (19248)
<TOTAL-LIABILITY-AND-EQUITY> 84089
<SALES> 75476
<TOTAL-REVENUES> 75476
<CGS> 23147
<TOTAL-COSTS> 64436
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8548
<INCOME-PRETAX> 2794
<INCOME-TAX> 1062
<INCOME-CONTINUING> 1732
<DISCONTINUED> 10538
<EXTRAORDINARY> (367)
<CHANGES> 0
<NET-INCOME> 11903
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.63
</TABLE>
