<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1996
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 8, 1996, 8,584,241 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT
PAR VALUE, WERE OUTSTANDING.
1
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CHATTEM, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of August 31, 1996 and
November 30, 1995................................................ 3
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended August 31, 1996 and 1995............................ 5
Consolidated Statements of Cash Flows for the Nine Months Ended
August 31, 1996 and 1995......................................... 6
Notes to Condensed Consolidated Financial Statements............... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES............................................................. 17
EXHIBIT 11 - Statement Regarding Computation of Per Share Earnings
EXHIBIT 27 - Financial Data Schedule
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
ASSETS 1996 1995
- ------ ----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 7,075 $ 3,636
Accounts receivable, net......................... 29,270 16,248
Refundable and deferred income taxes............. 1,400 1,400
Inventories...................................... 10,358 8,678
Prepaid expenses and other current assets........ 1,141 1,112
-------- -------
Total current assets........................... 49,244 31,074
-------- -------
PROPERTY, PLANT AND EQUIPMENT, NET ................ 9,340 9,330
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc. ....................... 5,820 5,328
Patents, trademarks and other purchased
product rights, net............................. 75,426 31,007
Debt issuance costs, net......................... 3,943 3,073
Deferred income taxes............................ 15 98
Other............................................ 2,403 3,500
-------- -------
Total other noncurrent assets.................. 87,607 43,006
-------- -------
TOTAL ASSETS................................. $146,191 $83,410
-------- -------
-------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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CHATTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' DEFICIT 1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt ............. $ 2,975 $ 1,600
Accounts payable.................................. 2,907 5,462
Payable to bank................................... 1,976 1,184
Accrued liabilities............................... 15,116 12,574
-------- --------
Total current liabilities....................... 22,974 20,820
-------- --------
LONG-TERM DEBT, less current maturities............. 128,322 78,089
OTHER NONCURRENT LIABILITIES........................ 1,971 1,922
-------- --------
SHAREHOLDERS' DEFICIT:
Common shares, without par value, at stated value. 1,836 1,519
Paid-in surplus................................... 58,532 52,099
Accumulated deficit............................... (65,814) (69,386)
-------- --------
(5,446) (15,768)
Foreign currency translation adjustment........... (1,630) (1,653)
-------- --------
Total shareholders' deficit................... (7,076) (17,421)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
DEFICIT.................................... $146,191 $ 83,410
-------- --------
-------- --------
</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 MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
-------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES .................... $38,841 $28,990 $87,968 $75,476
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of sales .............. 11,388 8,362 26,466 23,147
Advertising and promotion .. 14,433 10,182 32,799 27,451
Selling, general and
administrative ............ 6,144 5,241 15,204 13,838
------- ------- ------- -------
Total costs and expenses.. 31,965 23,785 74,469 64,436
------- ------- ------- -------
INCOME FROM OPERATIONS ....... 6,876 5,205 13,499 11,040
------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense ........... (3,902) (2,701) (9,533) (8,548)
Investment income .......... 234 198 1,157 283
Gain on product
divestitures .............. -- -- 877 --
Other, net ................. 45 11 35 19
------- ------- ------- -------
Total other income
(expense) ............... (3,623) (2,492) (7,464) (8,246)
------- ------- ------- -------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES ................ 3,253 2,713 6,035 2,794
PROVISION FOR INCOME TAXES ... 1,122 1,040 1,931 1,062
------- ------- ------- -------
INCOME FROM CONTINUING
OPERATIONS .................. 2,131 1,673 4,104 1,732
------- ------- ------- -------
DISCONTINUED OPERATIONS:
Income from operations,
less provision for
income taxes of $414 ....... -- -- -- 675
Gain on disposal, less
provision for income
taxes of $6,046 ............ -- -- -- 9,863
------- ------- ------- -------
Total discontinued
operations ............. -- -- -- 10,538
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY
LOSS ........................ 2,131 1,673 4,104 12,270
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET.. -- -- (532) (367)
------- ------- ------- -------
NET INCOME ................... $ 2,131 $ 1,673 $ 3,572 $11,903
------- ------- ------- -------
------- ------- ------- -------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING .......... 8,808 7,292 7,934 7,292
------- ------- ------- -------
------- ------- ------- -------
NET INCOME PER COMMON SHARE:
Continuing operations ....... $ 0.24 $ 0.23 $ 0.52 $ 0.24
Discontinued operations ..... -- -- -- 1.44
Extraordinary loss .......... -- -- (0.07) (0.05)
------- ------- ------- -------
$ 0.24 $ 0.23 $ 0.45 $ 1.63
------- ------- ------- -------
------- ------- ------- -------
</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,
-------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .................................... $ 3,572 $ 11,903
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization ............... 3,736 2,961
Gain on sale of specialty chemicals
business ................................... -- (9,863)
Extraordinary loss on early
extinguishment of debt ..................... 532 367
Gain on sale of trademarks and other
product rights ............................. (877) (-)
Dividend receivable from Elcat, Inc. ........ (492) (164)
Other, net .................................. (632) (57)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.. (13,267) 402
Increase in inventories ........... (1,680) (390)
Decrease (increase) in prepaid expenses .... (29) 81
Decrease (increase) in refundable and
deferred income taxes ..................... 83 (97)
Decrease in accounts payable and accrued
liabilities ............................... (964) (5,534)
Decrease in income taxes payable ........... -- (1,944)
------- -------
Net cash used in operating activities ..... (10,018) (2,335)
------- -------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment .. (1,033) (2,398)
Proceeds from sale of specialty
chemicals business, net ................... -- 18,747
Proceeds from notes receivable ............. 245 --
Purchase of trademarks and other
product rights ............................ (44,117) --
Proceeds from sale of trademarks and
other product rights ...................... 1,000 --
Other, net ................................. -- 173
------- -------
Net cash provided by (used in)
investing activities ..................... (43,905) 16,522
------- -------
FINANCING ACTIVITIES:
Repayment of long-term debt ................ (26,281) (45,225)
Proceeds from long-term debt borrowings .... 77,750 31,100
Proceeds from issuance of common stock ..... 5,750 --
Proceeds from borrowings against
insurance policies ........................ 1,441 --
Proceeds from sale of interest rate cap .... -- 984
Debt issuance costs ........................ (2,096) (167)
Increase (decrease) in payable to bank ..... 792 (1,301)
Other, net ................................. -- --
------- -------
Net cash provided by (used in)
financing activities ..................... 57,356 (14,609)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS .............................. 6 (10)
------- -------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period ........... 3,439 (432)
At beginning of period ....................... 3,636 3,034
------- -------
At end of period ............................. $ 7,075 $ 2,602
------- -------
------- -------
PAYMENTS FOR:
Interest ..................................... $11,311 $11,196
------- -------
------- -------
Taxes ........................................ $ 1,251 $ 3,705
------- -------
------- -------
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY:
Issuance of 155,792 shares of Common Stock
at $6.42 per share to fund GOLD BOND
Acquisition ................................. $ 1,000
-------
-------
</TABLE>
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 unless
contrarily evident.
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. 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.
3. The results of operations for the nine months ended August 31, 1996 and 1995
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 current period presentation.
5. Inventories consisted of the following:
<TABLE>
<CAPTION>
August 31, November 30,
1996 1995
---------- ------------
<S> <C> <C>
Raw materials ........... $ 3,816 $ 5,396
Finished goods and
work in process ........ 8,949 5,694
Excess of current
cost over LIFO
values ................. (2,407) (2,412)
------- -------
Total inventories ... $10,358 $ 8,678
------- -------
</TABLE>
7
<PAGE>
6. Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
August 31, November 30,
1996 1995
---------- ------------
<S> <C> <C>
Income and other taxes ... $ 1,654 $ 1,214
Salaries, wages and
commissions ............. 1,105 1,317
Advertising and
promotion ............... 6,127 1,560
Interest ................. 1,867 3,942
Estimated specialty
chemicals divestiture
costs ................... -- 1,231
Other .................... 4,363 3,310
------- -------
Total accrued
liabilities ........... $15,116 $12,574
------- -------
------- -------
</TABLE>
7. On April 29, 1996, the Company and Signal Investment & Management Co.
("Signal"), a wholly-owned subsidiary of Chattem, purchased the worldwide
rights for the GOLD BOND line of medicated powders and anti-itch cream.
GOLD BOND is the leading brand in the medicated powder market and has a
growing presence in the anti-itch cream market. The purchase price for the
trademarks and inventory was $40,000. Additionally, the Company assumed
certain liabilities of approximately $500. The Company financed the GOLD
BOND acquisition and repaid all existing bank indebtedness by entering into
a new $61,500 credit agreement, issuing 1,100,000 new shares of Chattem
stock at $5.00 per share to a group of investors, including certain
officers, directors and affiliates, and issued $1,000 of Chattem stock
valued at the average closing price of the stock ten days prior to closing
to the seller.
8. On June 6, 1996, the Company and Signal purchased the rights for the
HERPECIN-L line of medicated lip balm. HERPECIN-L is a cold sore and fever
blister treatment that also contains a sunscreen. The purchase price for
the trademark, receivables and inventory was $5,560 plus a royalty payment
equal to the greater of $214 or 5% of net sales. Receivables and inventory
were acquired by the Company. The royalty payment is payable annually for
each of the seven twelve-month periods beginning July 1, 1996 and ending
June 30, 2003. The purchase was financed by the Company with a $5,000
addition to its existing bank credit agreement with the remaining $560
being funded by Company cash.
8
<PAGE>
9. Long-term debt consisted of the following as of August 31, 1996:
Revolving lines of credit payable to banks at variable rates
(8.20% as of August 31, 1996) $ 24,000
Term loans payable to banks at variable rates (8.45% weighted
average as of August 31, 1996) 41,818
12.75% Series B Subordinated Notes, due 2004, net of
unamortized discount of $1,521 as of August 31, 1996) 65,479
--------
Total long-term debt 131,297
Less: current maturities 2,975
--------
Total long-term debt, net of current maturities $128,322
--------
--------
The Company entered into a new credit agreement with a syndicate of
banks on April 29, 1996. The purpose of the new credit agreement was to
finance the GOLD BOND purchase and repay all existing bank debt. The credit
agreement is divided into an aggregate of $24,000 revolving lines of
credit for working capital purposes, a five year $20,000 Term A loan
facility and a seven and one-half year $17,500 Term B loan facility.
The combined Term A and B loans are payable in quarterly installments
as follows:
August 31, 1996 to May 31, 1997 $ 681
August 31, 1997 to May 31, 1998 $ 931
August 31, 1998 to May 31, 1999 $1,056
August 31, 1999 to May 31, 2001 $1,306
August 31, 2001 to October 29, 2003 $2,138
The revolving lines of credit are available to the Company up to a maximum
$24,000 with a maturity date of April 29, 2001. Cash is advanced on the
revolving lines of credit based on the Company's cash, receivables and
inventory.
The Company may elect either a prime interest rate or Eurodollar interest
rate option applicable to the term and revolving line loans under the
credit agreement. The prime 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 maximum floating rate margin for
the Term A and revolving line loans under the credit agreement is 2.0% for
the prime interest rate option and 3.0% for the Eurodollar rate option. The
maximum floating rate margin for the Term B loan under the credit agreement
is 2.25% for the prime interest rate option and 3.25% for the Eurodollar
rate option.
The credit agreement is secured by substantially all of the Company's cash,
accounts receivables, inventory, real property, brand trademarks and
associated intellectual property held by the Company.
9
<PAGE>
During April, 1996, the Company prepaid previously outstanding long-term
debt, with funds received from the new credit agreement. In connection with
the prepayment of those borrowings, the Company incurred an extraordinary
loss of $532 (net of income taxes), or $0.07 per share. The loss primarily
related to the write-off of debt issuance and other deferred costs.
On April 29, 1996, the Company recognized the remaining unamortized gain of
$65 on an interest rate cap associated with the repaid bank debt.
Future maturities of long-term debt are as follows:
August 31, 1997 $ 2,975
August 31, 1998 3,850
August 31, 1999 4,475
August 31, 2000 5,225
August 31, 2001 30,056
Later years 86,237
--------
132,818
Less: unamortized discount (1,521)
--------
$131,297
--------
--------
The August 31, 2001 maturities include the $24,000 revolving lines of
credit.
On June 6, 1996, the Company amended the new credit agreement and increased
the outstanding balance of the Term B loan by $5,000 to fund a portion of
the HERPECIN-L purchase. The total outstanding balance of the Term B loan
as of June 6, was $22,500 increasing the total bank debt outstanding under
the new credit agreement to $66,500. The interest rate and $12.5 quarterly
principal payment dates of the additional $5,000 are identical to the
original outstanding Term B portion.
On May 31, 1996, the Company entered into two interest rate swap agreements
in notional principal amounts of $15,000 each. The company entered into
these agreements as hedges on its variable rate debt and not for trading
purposes. The term of each agreement is for a three year period ending
June 4, 1999. The interest rate on each swap for the prime interest rate
option was 5.50% and 6.27% for the LIBOR rate option plus the appropriate
floating rate margin. The difference to be paid or received on the swaps
will be included as interest expense as payments are made or received.
10. During April, 1996, the Company sold the trademarks and inventory of two of
its minor consumer products brands, SOLTICE and BLIS-TO-SOL. The purchase
price of $1,200 consisted of $1,000 cash received at closing and a $200
promissory note requiring payments of $100 in April, 1997 and 1998.
10
<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
On April 29, 1996, the Company purchased the worldwide rights for the GOLD
BOND line of medicated powders and anti-itch creams. GOLD BOND is the
leading brand in the medicated powder market and has a growing presence in
the anti-itch cream market. Concurrently with the closing of the GOLD BOND
acquisition, the Company entered into a $61,500 bank credit agreement, issued
1,100,000 new shares of Chattem stock at $5.00 per share to a group of
investors, including certain officers, directors and affiliates, and issued
to the seller 155,792 shares of Chattem stock at $6.42 per share. The
proceeds of the financing and stock issuance were used to fund the GOLD BOND
acquisition and repay all existing bank indebtedness of the Company.
As a result of the sale of the Company's specialty chemicals division in May,
1995, unless otherwise indicated, the following discussion and analysis of
financial condition and results of operations relate only to the continuing
operations of the Company, which are the domestic and international consumer
products businesses. The results of operations and the gain on disposal of the
specialty chemicals division have been separately classified as discontinued
operations in the consolidated statements of income for the nine months ended
August 31, 1995.
For the third quarter, net sales increased 34.0% to an all time record for a
quarter of $38,841 from $28,990 in 1995, while operating income grew 32.1% to
$6,876 in 1996 from $5,205 in 1995. Income from continuing operations
increased 27.4% to $2,131 from $1,673 in 1995. Despite a 17.7% increase in
common shares outstanding from the sale of new shares in conjunction with the
financing of the GOLD BOND acquisition plus an increase in common stock
equivalents associated with the rise in Chattem's stock price, earnings per
share from continuing operations increased to $.24 from $.23 in 1995.
Additionally, as previously disclosed on June 6, 1996, Chattem completed the
acquisition of HERPECIN-L cold sore lip balm, a small but growing line in the
oral care category.
Earnings per share from continuing operations increased $0.01 per share for
the quarter and $0.28 for the nine months ended August 31, 1996. The increase
in earnings per share from continuing operations was due to increased income
from operations, primarily GOLD BOND and HERPECIN-L, the gain on the sale of
the two brands discussed above and a gain on the sale of a non-cash producing
security.
11
<PAGE>
The Company will continue to seek increases in sales through a combination of
acquisitions and internal growth while maintaining high operating income. As
previously high growth brands mature, sales increases will become even more
dependent on acquisitions and the development of successful product line
extensions. On May 1, the Company began shipping PHISODERM Antibacterial Skin
Cleanser. Also on May 1, in an effort to expand the PHISODERM facial cleanser
business, the Company began shipping an unfragranced product for sensitive
skin. On July 1, FLEX-ALL ULTRA PLUS was introduced nationally while the
existing FLEX-ALL line was relaunched with new packaging and a completely new
advertising message.
Strategically, 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 the brands and redeploy the assets
to products or businesses with greater growth potential or to reduce
indebtedness.
RESULTS OF OPERATIONS
The following table sets forth, for continuing operations and for the periods
indicated, certain items from the Company's Condensed Consolidated Statements
of
Income expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
-------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES ............................ 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales ....................... 29.3 28.8 30.1 30.7
Advertising and promotion ........... 37.2 35.1 37.3 36.4
Selling, general and administrative . 15.8 18.1 17.3 18.3
------ ------ ------ ------
Total costs and expenses ........... 82.3 82.0 84.7 85.4
------ ------ ------ ------
INCOME FROM OPERATIONS ............... 17.7 18.0 15.3 14.6
------ ------ ------ ------
OTHER INCOME (EXPENSE):
Interest expense .................... (10.0) (9.3) (10.8 ) (11.3)
Investment income ................... .6 .7 1.3 .4
Gain on product divestitures ........ -- -- 1.0 --
Other, net .......................... .1 -- .1 --
------ ------ ------ ------
Total other income (expense) ....... (9.3) (8.6) (8.4) (10.9)
------ ------ ------ ------
INCOME BEFORE INCOME TAXES ........... 8.4 9.4 6.9 3.7
PROVISION FOR INCOME TAXES ........... 2.9 3.6 2.2 1.4
NET INCOME FROM CONTINUING
OPERATIONS .......................... 5.5% 5.8% 4.7% 2.3%
------ ------ ------ ------
</TABLE>
12
<PAGE>
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 1996 AND 1995 FOR CONTINUING
OPERATIONS
Net sales for the three months ended August 31, 1996 increased $9,851, or 34.0%,
to $38,841 from $28,990 for the same period last year. The increase in net sales
was attributable to a $9,974, or 39.8%, increase in domestic consumer products
sales to $35,037 from $25,063 last year and a decrease of $123, or 3.1%, in
international consumer products sales to $3,804 from $3,927.
For domestic consumer products in the fiscal 1996 period, increases over sales
in the corresponding fiscal 1995 period were realized for the FLEX-ALL (20.3%)
and BENZODENT (5.8%) brands, while decreases were recognized for the BULLFROG
(17.1%), PAMPRIN (7.8%), PREMSYN (7.7%), SUN-IN (14.4%), ULTRASWIM (22.4%), MUDD
(26.8%) and CORNSILK (18.3%) brands. The remaining brands were basically flat
versus a year ago.
GOLD BOND, HERPECIN-L and PHISODERM Antibacterial Skin Cleanser contributed to
the increase in net sales by $12,045 over the prior year period. The decline in
sales of the brands listed above reflects the maturation of these product lines
and increased competition in their respective product categories and markets.
All sales variances were principally due to volume changes.
International consumer product sales for the 1996 period increased $320, or
35.4%, for the Canadian operation and decreased $515, or 18.2%, for the United
Kingdom business. U.S. export sales increased $72, or 36.0%, over the prior year
period. Sales increases for the SUN-IN and ULTRASWIM brands were realized in
the current period by the United Kingdom division, while sales declines were
recognized for the MUDD and CORNSILK product lines. In Canada, sales increases
for the PHISODERM and CORNSILK brands were realized while sales declines were
recognized for the FLEX-ALL and ULTRASWIM brands. All sales variances were
principally due to volume changes.
Cost of goods sold as a percentage of net sales increased to 29.3% for the
quarter from 28.8% for the prior year period. The slight increase was in part
the result of the launch of PHISODERM Anti-bacterial Skin Cleanser in the
quarter and the shift in product mix of sales of domestic consumer products to
lower margin products.
Advertising and promotional expenses increased by $4,251, or 41.8%, in the 1996
period and were 37.2% of net sales compared to 35.1% in the corresponding 1995
period. Increased expenditures were provided in the current period for the
PHISODERM, ICY HOT, FLEX-ALL and PAMPRIN brands as well as for the most recently
acquired GOLD BOND product line.
Selling, general and administrative costs increased $903, or 17.2%, to $6,144
but decreased as a percentage of net sales to 15.8% compared to 18.1% for the
prior year period.
Interest expense increased $1,201, or 44.4%, principally as a result of the
increased outstanding long-term debt which was used to fund the GOLD BOND and
HERPECIN-L acquisitions and to pay off all previously outstanding bank debt.
Investment income increased in the 1996 period primarily due to the accrual
of the dividend on the cumulative, convertible preferred stock of Elcat,
Inc., which was received as a part of the proceeds from the sale in fiscal
1995 of the specialty chemicals division.
13
<PAGE>
Income from continuing operations increased by $458, or 27.4%, in the 1996
period. The increase resulted primarily from increased sales.
COMPARISON OF NINE MONTHS ENDED AUGUST 31, 1996 AND 1995 FOR CONTINUING
OPERATIONS
Net sales for the nine months ended August 31, 1996 increased $12,492, or 16.6%,
to $87,968 from $75,476 for the same period last year. The increase in net
sales was attributable to a $11,822, or 17.8%, increase in domestic consumer
products sales to $78,316 from $66,494 last year and an increase of $670, or
7.5%, in international consumer products sales to $9,652 from $8,982.
For domestic consumer products in the fiscal 1996 period, increases over
sales in the corresponding fiscal 1995 period were realized for the BULLFROG
(21.5%), ICY HOT (6.8%) and MUDD (11.3%) brands, while decreases were
recognized for the NORWICH (8.5%), PAMPRIN (5.8%), PREMSYN (7.8%), SUN-IN
(7.1%) and CORNSILK (20.4%) product lines. GOLD BOND, PHISODERM
Antibacterial Skin Cleanser and HERPECIN-L also contributed to the increase
in net sales by $14,638 over the prior year period.
GOLD BOND was acquired on April 29, 1996, PHISODERM Antibacterial began shipping
May 1, 1996 and HERPECIN-L was acquired on June 6, 1996. The decline in sales
of the brands listed above reflects the maturation of these product lines and
increased competition in their respective product categories and markets. The
remaining brands were basically flat versus a year ago. All sales variances
were principally due to volume changes.
International consumer product sales for the 1996 period increased $190, or
7.3%, for the Canadian operation and increased $586, or 10.5%, for the United
Kingdom business. U.S. export sales decreased $106, or 12.8%, over the prior
year period. Increases over the sales in the corresponding fiscal 1995
period were recognized for SUN-IN and MUDD, while decreases were recognized
for FLEX-ALL-454, PAMPRIN, CORNSILK and ULTRASWIM for the Canadian business.
GOLD BOND also contributed to the sales increase in Canada. Sales increases
for SUN-IN and ULTRASWIM brands were realized in the current period by the
United Kingdom division. All sales variances were principally due to volume
changes.
Cost of goods sold as a percentage of net sales decreased to 30.1% from 30.7% in
the 1995 period. The decrease was the result of a shift in product mix of sales
of domestic consumer products to higher margin products and the addition of GOLD
BOND.
Advertising and promotional expenses increased $5,348, or 19.5%, in the 1996
period and were 37.3% of net sales compared to 36.4% in the corresponding
1995 period. Increased expenditures were provided in the current period for
the BULLFROG, MUDD, SUN-IN and PHISODERM brands as well as for the most
recently acquired GOLD BOND product line.
Selling, general and administrative expenses increased $1,366, or 9.9%, in the
1996 period, but were reduced to 17.3% of net sales compared to 18.3% in the
corresponding 1995 period. The increase was primarily due to increased research
and development costs and selling expenses associated with the Company's new
product line extensions.
14
<PAGE>
Interest expense increased $985, or 11.5%, in the current period as a result of
the application of the net proceeds from the sale of the specialty chemicals
division in May 1995 and the increased outstanding debt used to finance the GOLD
BOND and HERPECIN-L acquisitions. Investment income increased in the 1996
period primarily due to the partial period accrual of the dividend on the
cumulative, convertible preferred stock of Elcat, Inc., which was received as a
part of the proceeds from the sale in fiscal 1995 of the specialty chemicals
division. A gain of $452 was recognized from the sale of a non-cash producing
security. A gain on the sale of SOLTICE and BLIS-TO-SOL of $877 was recognized.
Income from continuing operations increased by $2,372 in the 1996 period. The
increase resulted primarily from increased sales, increased investment income
and the gain on the product divestitures.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with a combination of
internally generated funds and borrowings. The Company's principal uses of
cash are for operating expenses, working capital, capital expenditures and
long-term debt servicing.
Cash used in operations was $10,018 for the nine months ended August 31, 1996.
The primary uses of cash for operations were accounts receivable,
inventories, accounts payable and accrued liabilities. The increase in
receivables is due to sales of product with seasonal dating and the
acquisition of GOLD BOND. The increase in inventory is due to the acquisitions
of GOLD BOND and HERPECIN-L and also the Company's new line extentions which
were launched in the second and third quarters. The decrease in accounts
payable and accrued liabilities is due primarily to the timing of payments
between the end of the fiscal year and August 31, 1996.
Cash used in investing activities was $43,905 for the nine months ended
August 31, 1996. The primary use was for the acquisition of GOLD BOND.
Financing activities provided cash of $57,356 for the nine months ended
August 31, 1996. The Company financed the acquisition of GOLD BOND and
HERPECIN-L and repaid all outstanding bank indebtedness with the proceeds of
a new $66,500 bank credit agreement and the issuance of 1,100,000 new shares
of Chattem Common Stock to a group of investors, including certain officers,
directors and affiliates at $5.00 per share and issued to the seller 155,792
new shares of Chattem Common Stock at $6.42. The Company also borrowed $1,441
against the cash surrender value of certain life insurance policies.
The following table presents working capital data at August 31, 1996 and
November 30, 1995 or for the respective years then ended:
<TABLE>
<CAPTION>
ITEM 1996 1995
---- ---- ----
<S> <C> <C>
Working capital (current assets less current liabilities) ....... $26,270 $10,254
Current ratio (current assets divided by current liabilities) ... 2.14 1.49
Quick ratio (cash and cash equivalents and accounts
receivable divided by current liabilities) ..................... 1.58 .96
Average accounts receivable turnover ............................ 4.77 5.86
Average inventory turnover ...................................... 3.92 3.99
Working capital as a percentage of total assets ................. 17.97% 12.29%
</TABLE>
The increase in the working capital and the improvement in the current and
quick ratios as of August 31, 1996 as compared to November 30, 1995 reflects
primarily the impact of the GOLD BOND acquisition which was funded with
long-term borrowings and the issuance of stock. The improvement is also due
to the receivables on seasonal products.
Total loans outstanding as of August 31, 1996 were $131,297 compared to
$79,689 as of November 30, 1995, an increase of $51,608. The availability of
credit is determined based on the Company's cash, accounts receivable and
inventories. The Company had $3,000 invested in highly liquid short-term
investments as of August 31, 1996 which was available for general operating
purposes as needed and has no further availability under its credit facility.
The dated receivables related to seasonal sales of BULLFROG, SUN-IN and
ULTRASWIM are due August 31, 1996 and are $9,500.
Management of the Company believes that cash flows generated by operations,
along with funds available from its short-term, highly liquid investments
will 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 nine months ended August
31, 1996 and 1995, these subsidiaries accounted for 10% and 11% of total
revenues, respectively, and 5% and 10% of total assets. 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 $33 and $9 for the nine months ended August 31, 1996 and
1995, respectively, resulted from foreign currency transactions.
15
<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 Company did not file a Form 8-K during the quarter ended August
31, 1996.
16
<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 15, 1996 \S\ ROBERT E. BOSWORTH
---------------- ----------------------------------------
Robert E. Bosworth,
Executive Vice President
and Chief Financial Officer
(principal financial officer)
17
<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,
-------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S><C><C><C><C>
NET INCOME (LOSS):
Continuing operations .......... $2,131 $1,673 $4,104 $ 1,732
Discontinued operations ......... -- -- -- 10,538
Extraordinary loss .............. -- -- (532) (367)
------ ------ ------ -------
Net Income (loss) ............. $2,131 $1,673 $3,572 $11,903
------ ------ ------ -------
------ ------ ------ -------
WEIGHTED AVERAGE
NUMBER OF COMMON
AND COMMON
EQUIVALENT SHARES
OUTSTANDING ..................... 8,808 7,292 7,934 7,292
------ ------ ------ -------
------ ------ ------ -------
NET INCOME (LOSS) PER
COMMON SHARE:
Continuing operations ........... $ 0.24 $ 0.23 $ 0.52 $ 0.24
Discontinued operations ......... -- -- -- 1.44
Extraordinary loss .............. -- -- (0.07) (0.05)
------ ------ ------ -------
Net income (loss) per
common share ................... $ 0.24 $ 0.23 $ 0.45 $ 1.63
------ ------ ------ -------
------ ------ ------ -------
</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-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> AUG-31-1996
<CASH> 7,075
<SECURITIES> 0
<RECEIVABLES> 29,670
<ALLOWANCES> 400
<INVENTORY> 10,358
<CURRENT-ASSETS> 49,244
<PP&E> 25,494
<DEPRECIATION> 16,154
<TOTAL-ASSETS> 146,191
<CURRENT-LIABILITIES> 22,974
<BONDS> 128,322
0
0
<COMMON> 1,836
<OTHER-SE> (8,912)
<TOTAL-LIABILITY-AND-EQUITY> 146,191
<SALES> 87,968
<TOTAL-REVENUES> 87,968
<CGS> 26,466
<TOTAL-COSTS> 74,469
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,533
<INCOME-PRETAX> 6,035
<INCOME-TAX> 1,931
<INCOME-CONTINUING> 4,104
<DISCONTINUED> 0
<EXTRAORDINARY> (532)
<CHANGES> 0
<NET-INCOME> 3,572
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
