<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, 1997
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, 1997, 9,080,747 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
Consolidated Balance Sheets as of August 31, 1997 and
November 30, 1996..................................... 3
Consolidated Statements of Income for the Three and Nine
Months Ended August 31, 1997 and 1996................. 5
Consolidated Statements of Cash Flows for the Nine
Months Ended August 31, 1997 and 1996................. 6
Notes to Consolidated Financial Statements.............. 7
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 11
PART II.OTHER INFORMATION
Item 2.Changes in Securities.......................... 19
Item 6.Exhibits and Reports on Form 8-K............... 19
SIGNATURES.............................................. 20
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
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
ASSETS 1997 1996
- ------------------------------------------------------------------- ----------- ---------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 2,489 $ 9,254
Accounts receivable, net......................................... 26,399 20,276
Refundable and deferred income taxes............................. 3,019 5,405
Inventories...................................................... 15,364 10,295
Prepaid expenses and other current assets........................ 544 912
----------- ---------------
Total current assets........................................... 47,815 46,142
----------- ---------------
PROPERTY, PLANT AND EQUIPMENT, NET................................. 10,232 9,774
----------- ---------------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc......................................... 6,476 5,984
Patents, trademarks and other purchased product rights, net...... 104,290 76,024
Debt issuance costs, net......................................... 3,215 3,819
Other............................................................ 2,344 10,440
----------- ---------------
Total other noncurrent assets.................................. 116,325 96,267
----------- ---------------
TOTAL ASSETS................................................. $ 174,372 $ 152,183
----------- ---------------
----------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) 1997 1996
- ------------------------------------------------------------ ----------- ---------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 5,270 $ 3,906
Accounts payable.......................................... 2,327 6,602
Payable to bank........................................... 1,416 1,710
Accrued liabilities....................................... 17,996 14,131
----------- ---------------
Total current liabilities............................... 27,009 26,349
----------- ---------------
LONG-TERM DEBT, less current maturities..................... 139,395 127,438
----------- ---------------
DEFERRED INCOME TAXES....................................... 2,917 2,917
----------- ---------------
OTHER NONCURRENT LIABILITIES................................ 2,831 2,659
----------- ---------------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred shares, without par value, authorized 1,000,
none issued............................................. -- --
Common shares, without par value, authorized 20,000,
issued 9,005 at August 31, 1997 and 8,592 at
November 30, 1996....................................... 2,104 1,843
Paid-in surplus........................................... 63,055 58,561
Accumulated deficit....................................... (61,443) (66,114)
----------- ---------------
3,716 (5,710)
Minimum pension liability adjustment...................... (112) (112)
Foreign currency translation adjustment................... (1,384) (1,358)
----------- ---------------
Total shareholders' equity (deficit).................... 2,220 (7,180)
----------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)...................................... $ 174,372 $ 152,183
----------- ---------------
----------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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CHATTEM, INC. AND SUBSIDIARIES
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,
-------------------- ---------------------
1997 1996 1997 1996
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
NET SALES............................................................ $ 38,909 $ 38,841 $ 106,033 $ 87,968
--------- --------- ---------- ---------
COSTS AND EXPENSES:
Cost of sales...................................................... 10,100 11,388 29,382 26,466
Advertising and promotion.......................................... 14,979 14,433 40,848 32,799
Selling, general and administrative................................ 5,522 6,144 15,946 15,204
--------- --------- ---------- ---------
Total costs and expenses......................................... 30,601 31,965 86,176 74,469
--------- --------- ---------- ---------
INCOME FROM OPERATIONS............................................... 8,308 6,876 19,857 13,499
--------- --------- ---------- ---------
OTHER INCOME (EXPENSE):
Interest expense................................................... (4,205) (3,902) (11,838) (9,533)
Investment and other income........................................ 337 279 1,350 1,192
Gain on product divestitures....................................... -- -- -- 877
--------- --------- ---------- ---------
Total other income (expense)..................................... (3,868) (3,623) (10,488) (7,464)
--------- --------- ---------- ---------
Income from continuing operations before income taxes................ 4,440 3,253 9,369 6,035
Provision for income taxes........................................... 1,593 1,122 3,329 1,931
--------- --------- ---------- ---------
Income before extraordinary loss..................................... 2,847 2,131 6,040 4,104
Extraordinary loss on early extinguishment of debt, net.............. (1,370) -- (1,370) (532)
--------- --------- ---------- ---------
NET INCOME........................................................... $ 1,477 $ 2,131 $ 4,670 $ 3,572
--------- --------- ---------- ---------
Weighted average number of common and common equivalent shares
outstanding........................................................ 9,332 8,808 9,020 7,934
--------- --------- ---------- ---------
NET INCOME PER COMMON SHARE:
Continuing operations.............................................. $ 0.31 $ 0.24 $ 0.67 $ 0.52
Extraordinary loss................................................. (0.15) -- (0.15) (0.07)
--------- --------- ---------- ---------
Net income per common share...................................... $ 0.16 $ 0.24 $ 0.52 $ 0.45
--------- --------- ---------- ---------
</TABLE>
See accompanying notes to 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,
-------------------------
1997 1996
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.......................................... S 4,670 $ 3,572
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization....................... 4,646 3,736
Extraordinary loss on early extinguishment of
debt.............................................. 1,370 532
Gain on sale of trademarks and other product
rights............................................ -- (877)
Dividend receivable from Elcat, Inc................. (492) (492)
Other, net.......................................... 902 (632)
Changes in operating assets and liabilities:
Increase in accounts receivable................... (6,313) (13,267)
Increase in inventories........................... (5,069) (1,680)
Decrease (increase) in prepaid expenses........... 368 (29)
Decrease in refundable and deferred
income taxes.................................... 2,386 83
Decrease in accounts payable and accrued
liabilities..................................... (2,936) (2,671)
-------- ----------
Net cash used in operating
activities.................................... (468) (11,725)
-------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment.......... (1,557) (1,033)
Proceeds from notes receivable...................... 190 245
Purchase of trademarks and other product
rights............................................ (22,718) (42,410)
Proceeds from sale of trademarks and other
product rights.................................... -- 1,000
Increase in other assets............................ (592) --
-------- ----------
Net cash used in investing
activities...................................... (24,677) (42,198)
-------- ----------
FINANCING ACTIVITIES:
Repayment of long-term debt......................... (74,319) (26,281)
Proceeds from long-term debt borrowings............. 87,500 77,750
Payment to terminate interest rate swaps............ (384) --
Proceeds from exercise of stock options............. 705 --
Proceeds from issuance of common stock.............. -- 5,750
Proceeds from borrowings against
insurance policies................................ -- 1,441
Debt issuance costs................................. (1,587) (2,096)
Increase (decrease) in payable to bank.............. (294) 792
-------- ----------
Net cash provided by financing
activities...................................... 11,621 57,356
-------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS.................................... (26) 6
-------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period.................. (13,550) 3,439
At beginning of period.............................. 16,039 3,636
-------- ---------
At end of period.................................... $ 2,489 $ 7,075
-------- ---------
PAYMENTS FOR:
Interest............................................ $13,916 $ 11,311
Taxes............................................... $ 161 $ 1,251
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Issuance of 154,887 shares of common stock
at $6.42 per share to partially fund
the GOLD BOND acquisition........................... -- $ 1,000
Issuance of 300,000 Shares of common stock
at $13.50 per share to fund portion of
SUNSOURCE acquisition............................. 4,050 --
Additions to trademarks and other product
rights by assumption of certain liabilities....... 3,750 1,707
</TABLE>
See accompanying notes to consolidated financial statements.
6
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CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and related notes
thereto included in the Company's Annual Report to Shareholders for the year
ended November 30, 1996. The 1996 Annual Report has previously been filed with
the Securities and Exchange Commission as an exhibit to the Company's Form 10-K.
The accompanying unaudited consolidated financial statements, in the opinion of
management, include all adjustments necessary for a fair presentation. All such
adjustments are of a normal recurring nature.
2. The results of operations for the periods presented 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 traditionally trailing the other fiscal quarters.
3. 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 of sales on an interim basis based upon anticipated annual
sales and advertising expenditures (in accordance with APB Opinion No. 28) and
adjusting that accrual to the actual expenses incurred at the end of the year.
4. Certain amounts in the prior years' financial information have been
reclassified to conform to the current period presentation.
5. For purposes of reporting cash flows, the Company considers all
short-term deposits and investments with original maturities of three months or
less to be cash equivalents, including cash and cash equivalents available
exclusively for the repayment of long-term debt.
7
<PAGE>
6. On June 26, 1997, the Company purchased certain assets of Sunsource
International, Inc. and an affiliated company ("SUNSOURCE") including the
exclusive worldwide rights to five leading branded dietary supplement products.
The purchase price for the trademarks, inventory and receivables was
approximately $32,000. Additional payments may be earned by SUNSOURCE over a six
year period from the date of closing if sales exceed certain levels as defined
in the purchase agreement, but such additional payments are not to exceed
$15,750 in the aggregate. Financing of the SUNSOURCE acquisition was provided by
an expansion of the Company's senior bank credit agreement and the issuance of
300,000 shares of Chattem, Inc. common stock to SUNSOURCE.
7. On August 26, 1997, the Company terminated the license agreement for
ULTRASWIM and purchased the trademark for $450.
8. Inventories consisted of the following at August 31, 1997 and November
30, 1996:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1997 1996
----------- ------------
<S> <C> <C>
Raw materials.............................. $ 7,525 $ 5,365
Finished goods and work in process......... 10,393 7,484
Excess of current cost over LIFO values.... (2,554) (2,554)
----------- ------------
Total inventories.......................... $ 15,364 $ 10,295
----------- ------------
----------- ------------
</TABLE>
9. Accrued liabilities consisted of the following at August 31, 1997 and
November 30, 1996:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1997 1996
----------- ------------
<S> <C> <C>
Income and other taxes............... $ 2,887 $ --
Salaries, wages and commissions...... 943 1,287
Advertising and promotion............ 5,310 2,827
Interest............................. 2,639 3,996
Accrued pension benefits............. 594 2,076
Product acquisitions................. 2,104 614
Other................................ 3,519 3,331
--------- ----------
Total accrued liabilities............ $ 17,996 $ 14,131
--------- ----------
--------- ----------
</TABLE>
10. Long-term debt consisted of the following as of August 31, 1997:
<TABLE>
<S> <C>
Revolving line of credit payable to banks at variable
rates (8.63% as of August 31,1997).................. $ 14,000
Term loans payable to banks at variable rates (8.90%
weighted average as of August 31, 1997)............. 65,000
12.75% Series B Subordinated Notes, due 2004, net of
unamortized discount of $1,335 as of August 31, 1997 65,665
---------
Total long-term debt.................................. 144,665
Less: current maturities.............................. 5,270
---------
Total long-term debt, net of current maturities....... $139,395
---------
---------
</TABLE>
8
<PAGE>
The Company expanded its existing credit agreement with a syndicate of
banks on June 26, 1997 to finance the SUNSOURCE acquisition and repay all
existing bank debt. The credit agreement is divided into a $30,000 revolving
line of credit for working capital purposes, a 5 year $30,000 Term A loan
facility and a 6 3/4 year $35,000 Term B loan facility.
The combined Term A and B loans are payable in quarterly installments as
follows:
<TABLE>
<S> <C>
December 31, 1997--September 30, 1998......... $ 1,318
December 31, 1998--September 30, 1999......... 1,488
December 31, 1999--June 30, 2001.............. 1,738
September 30, 2001............................ 2,650
December 31, 2001--March 31, 2002............. 4,900
June 30, 2002................................. 5,000
September 30, 2002--December 31, 2003......... 3,250
February 14, 2004............................. 3,350
</TABLE>
During June, 1997, the Company prepaid previously outstanding long-term
debt, with funds from the new credit agreement. In connection with the
prepayment of those borrowings, the Company incurred an extraordinary loss of
$1,370 (net of income taxes), or $0.15 per share. The loss primarily related to
the write-off of debt issuance costs and the termination of two interest rate
swap agreements.
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
August 31, 1998....................... $ 5,270
August 31, 1999....................... 5,780
August 31, 2000....................... 6,700
August 31, 2001....................... 6,950
August 31, 2002....................... 31,450
Later Years........................... 89,850
----------
146,000
Less: unamortized discount............ (1,335)
----------
$ 144,665
----------
</TABLE>
The August 31, 2002 maturities include the revolving line of credit which
was $14,000 as of August 31, 1997.
The revolving line of credit is available to the Company up to a maximum of
$30,000 with a maturity date of June 26, 2002. Cash is advanced on the revolving
line of credit based on the Company's receivables and inventory.
9
<PAGE>
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 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 2.00% for the prime
interest rate option and 3.00% for the Eurodollar rate option. The maximum
floating rate margin for the Term B loan under the credit agreement is 2.50%
for the prime interest rate option and 3.50% for the Eurodollar rate option.
The credit agreement is secured by substantially all of the Company's
assets.
On July 21, 1997, the Company entered into two interest rate swap
agreements with NationsBank, N.A. in notional amounts of $40,000 and $5,000.
The Company entered into these agreements as hedges on its variable rate debt
and not for trading purposes. The term of the $40,000 swap is for a five year
period ending July 22, 2002. The Company will receive interest payments on
the notional amount at a rate equal to the one month London Interbank offered
rate (LIBOR) (5.625% as of August 31, 1997) and will pay interest on the same
notional amount at a fixed interest rate of 6.38%. The term of the $5,000
swap is for a five year period ending July 22, 2002. The agreement may be
terminated by NationsBank, N.A. at each quarterly date. The Company will
receive interest payments on the notional amount at a rate equal to the three
month LIBOR (5.75% as of August 31, 1997) and will pay interest on the same
notional amount at a fixed interest rate of 5.62%.
The Company is exposed to credit losses in the event of nonperformance by
the counterparty to its interest rate swap agreements but has no off-balance
sheet credit risk of accounting loss. The Company anticipates, however, that the
counterparty will be able to fully satisfy its obligations under the agreements.
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 June 26, 1997, the Company acquired certain assets of Sunsource
International, Inc. and an affiliated company (collectively, "SUNSOURCE")
consisting primarily of the exclusive worldwide rights to five leading
branded dietary supplement products. The products acquired are GARLIQUE,
REJUVEX, MELATONEX, ECHINEX and PROPALMEX. The purchase price of the assets
was approximately $32,000, including inventories and accounts receivable.
Financing was provided by an expansion of the Company's senior bank credit
agreement and the issuance of 300,000 shares of the common stock of the
Company to SUNSOURCE. Additional payments, based on the attainment of certain
sales levels of the products acquired, may be made to SUNSOURCE in the six
years following the purchase, but such payments are not to exceed $15,750 in
the aggregate.
For the third quarter, net sales increased .2% to $38,909 from $38,841 in
1996, while operating income grew 20.8% to $8,308 in 1997 from $6,876 in 1996.
Income from continuing operations increased 33.6% to $2,847 from $2,131 in 1996.
Despite a 14.0% increase in average common shares outstanding from the issuance
of new shares in conjunction with the financing of the GOLD BOND and SUNSOURCE
acquisitions plus an increase in common stock equivalents associated with the
rise in stock price, earnings per share from continuing operations increased to
$.31 from $.24 in 1996.
Earnings per share from continuing operations increased $0.07 per share for
the quarter and $.15 for the nine months ended August 31, 1997, as compared to
the respective corresponding periods in 1996. The increase in earnings per share
from continuing operations was due to increased income from operations,
primarily from reductions of cost of sales and selling, general and
administrative expenses, less an increase in interest expense.
An extraordinary loss of $1,370, net of tax benefit, on the early
extinguishment of debt was recorded during the third quarter of 1997. This loss
resulted from the refinancing of all bank debt in connection with the SUNSOURCE
acquisition.
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 line extensions.
During the nine months ended August 31, 1997, new additions to the ICY HOT
(Arthritis Therapy Gel), GOLD BOND (Medicated Foot Powder and CORNSTARCH PLUS
Medicated Baby Powder), MUDD (5 Minute Mask) and PAMPRIN and PREMSYN PMS (Gel
Caps) product lines as well as a newly repackaged CORNSILK line were introduced.
11
<PAGE>
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,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES........................................ 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales.................................. 25.9 29.3 27.7 30.1
Advertising and promotion...................... 38.5 37.2 38.5 37.3
Selling, general and administrative............ 14.2 15.8 15.1 17.3
------ ------ ------ ------
Total costs and expenses..................... 78.6 82.3 81.3 84.7
------ ------ ------ ------
INCOME FROM OPERATIONS........................... 21.4 17.7 18.7 15.3
------ ------ ------ ------
OTHER INCOME (EXPENSE):
Interest expense............................... (10.8) (10.0) (11.2) (10.8)
Investment and other income.................... .8 .7 1.3 1.4
Gain on product divestitures................... -- -- -- 1.0
------ ------ ------ ------
Total other income (expense)................. (10.0) (9.3) (9.9) (8.4)
------ ------ ------ ------
INCOME BEFORE INCOME TAXES....................... 11.4 8.4 8.8 6.9
PROVISION FOR INCOME TAXES....................... 4.1 2.9 3.1 2.2
------ ------ ------ ------
NET INCOME FROM CONTINUING OPERATIONS............ 7.3% 5.5% 5.7% 4.7%
------ ------ ------ ------
</TABLE>
12
<PAGE>
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 1997 AND 1996 FOR CONTINUING
OPERATIONS
Net sales for the three months ended August 31, 1997 increased $68, or .2%,
to $38,909 from $38,841 for the same period last year. The increase in net sales
was attributable to a $167, or .5%, decrease in domestic consumer products sales
to $34,870 from $35,037 last year and an increase of $235, or 6.2%, in
international consumer products sales to $4,039 from $3,804.
For domestic consumer products in the 1997 period, increases over sales in
the corresponding fiscal 1996 period were realized for the ICY HOT (44.1%),
HERPECIN-L (36.4%) and the SUNSOURCE products acquired at the end of June 1997.
All of the other product lines recorded either declines or relatively flat sales
in the current period, with the largest percentage sales reductions being for
the BULLFROG (22.2%), FLEX-ALL (36.8%), CORNSILK (55.9%), and PHISODERM (23.8%)
brands. All sales variances were principally due to volume changes.
The lack of growth in sales for the 1997 quarter is principally the
result of five distinct factors. First, in the third quarter of 1996, GOLD
BOND sales were extremely strong due to the high level of shipments to reduce
out-of-stock situations that existed at the time of the acquisition of the
brand. Thus, factory shipments of the Adult Medicated Powders in the third
quarter of 1997 were substantially lower than last year, while retail sales,
the true measure of the strength of the business, were significantly higher.
Second, initial shipments associated with the launch of FLEX-ALL Ultra Plus
were made in the third quarter of 1996 as retailers built inventory of this
new product. Third, CORNSILK sales were significantly higher in the first
half of 1997 as the brand was completely repackaged and relaunched beginning
in February. As a result, returns of the old CORNSILK product were higher
than normal in the third quarter of 1997, with both of these factors
adversely impacting the year-to-year third quarter sales comparisons. Fourth,
PHISODERM sales comparisons were affected by the introduction of the
Antibacterial Skin Cleanser and an unfragranced sensitive skin product in May
1996. Finally, the decline in BULLFROG sales is primarily associated with the
loss of a major customer. In spite of the decline, retail sales of BULLFROG
remain strong.
International consumer product sales for the 1997 period increased $196, or
16.0%, for the Canadian operation and $87, or 3.8%, for the United Kingdom
business. U.S. export sales decreased $49, or 17.9%, from the prior year period.
In Canada, sales increases for all of the product lines, except for CORNSILK and
PHISODERM, were realized. Sales increases for all brands, except for ULTRASWIM,
were recorded in the current period by the United Kingdom division. The decline
in U.S. export sales is largely the result of differences in the timing of sales
between the two quarterly periods. All sales variances were principally due to
volume changes.
Cost of sales as a percentage of net sales declined to 25.9% for the quarter
from 29.3% for the prior year period. The decline was essentially due to a shift
in product mix of sales of domestic consumer products to higher margin brands.
Advertising and promotion expenses increased $546, or 3.8%, in the 1997
period and were 38.5% of net sales for the current quarter as compared to 37.2%
for the prior year period. The increase in the 1997 period was primarily
associated with the SUNSOURCE products, although substantial reductions were
made for the functional toiletries and cosmetics brands.
13
<PAGE>
Selling, general and administrative expenses decreased $622, or 10.1%, and
also declined as a percentage of net sales to 14.2% compared to 15.8% for the
prior year period. While selling expenses increased nominally, as a result of
increased sales, reductions in expenses of service departments, research and
development, financial services, incentive compensation and legal services
more than offset the selling expenses increase in the current period.
Interest expense increased $303, or 7.8%, in the 1997 third quarter,
principally as a result of increased outstanding long-term debt which was
incurred to fund the GOLD BOND, HERPECIN-L and SUNSOURCE acquisitions.
Investment and other income increased marginally during this period.
Income from continuing operations before extraordinary loss increased $716,
or 33.6%, in the 1997 period. The increase resulted primarily from reductions in
cost of sales and selling, general and administrative expenses, offset in part
by increases in interest expense and income taxes.
14
<PAGE>
COMPARISON OF NINE MONTHS ENDED AUGUST 31, 1997 AND 1996 FOR CONTINUING
OPERATIONS
Net sales for the nine months ended August 31, 1997 increased $18,065, or
20.5%, to $106,033 from $87,968 for the same period last year. The increase in
net sales consisted of a $17,005, or 21.7%, increase in domestic consumer
product sales to $95,321 from $78,316 last year and an increase of $1,060, or
11.0%, in international consumer products sales to $10,712 from $9,652.
For domestic consumer products in the fiscal 1997 period, increases in sales
were realized for the ICY HOT (38.2%), MUDD (17.6%), PREMSYN PMS (7.1%), SUN-IN
(5.3%), GOLD BOND (acquired in the second quarter of fiscal 1996), HERPECIN-L
(obtained in June, 1996) and SUNSOURCE (purchased in June, 1997) product lines.
The GOLD BOND, HERPECIN-L and SUNSOURCE brands accounted for approximately 98%
of the total sales increase.
Domestic consumer products experiencing the greatest percentage sales
declines in the 1997 period were BULLFROG (19.7%), NORWICH Aspirin (18.8%),
ULTRASWIM (8.6%) and CORNSILK (9.1%). BULLFROG sales reflected primarily the
loss of a major customer, while CORNSILK was affected by significantly higher
1997 first half sales as the brand was completely repackaged and relaunched
during February. As a result, returns of the old CORNSILK products were
higher than normal in the third quarter of the current period, with both of
these factors adversely impacting the year-to-date sales comparisons. The
sales decrease for NORWICH Aspirin was largely the result of the maturation of
this product line and increased competition in the respective category and
markets. ULTRASWIM sales are stable at the retail level but were negatively
impacted by the cool and wet spring. All sales variances were principally due
to volume changes.
International consumer product sales for 1997 increased $812, or 29.2%, for
the Canadian operation and $99, or 1.6%, for the United Kingdom business. U.S.
export sales increased $149, or 20.7%, over the prior year period. For the
Canadian business, increases over sales in the corresponding fiscal 1996 period
were recognized for all of the product lines except ULTRASWIM, ROSEMILK and
CORNSILK. Sales increases for the SUN-IN and MUDD brands were realized in the
current period by the United Kingdom division, while sales declines were
recorded for the ULTRASWIM and CORNSILK product lines. ICY HOT was the principal
increased sales producer for the U.S. export division in the current period. All
sales variances were principally due to volume changes.
Cost of sales as a percentage of net sales decreased to 27.7% from 30.1% in
the 1996 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 $8,049, or 24.5%, in the 1997
period and were 38.5% of net sales compared to 37.3% in the corresponding 1996
period. Increased expenditures were provided in the current period for the ICY
HOT, PREMSYN PMS, ULTRASWIM, CORNSILK and the recently acquired GOLD BOND,
HERPECIN-L and SUNSOURCE product lines. The newly purchased GOLD BOND,
HERPECIN-L and SUNSOURCE brands accounted for approximately 83% of the total
advertising and promotion increase.
15
<PAGE>
Selling, general and administrative expenses increased $742, or 4.9%, in the
1997 period but were reduced to 15.1% of net sales compared to 17.3% in the
corresponding 1996 period. The increase was primarily due to increased selling
expense as a result of increased sales, although significant reductions were
realized in financial and legal services expenses.
Interest expense increased $2,305, or 24.2%, in the current period largely
as a result of the increased outstanding debt incurred to finance the GOLD BOND,
HERPECIN-L and SUNSOURCE acquisitions. A gain of $877 on the sale of the SOLTICE
and BLIS-TO-SOL brands was recognized in the 1996 period.
Income from continuing operations before extraordinary loss increased
$1,936, or 47.2%, in the 1997 period. The increase resulted primarily from
increased sales and an improved cost of sales percentage of net sales, offset in
part by increased interest expense and income taxes.
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, acquisitions, working capital, capital expenditures
and long-term debt servicing.
Cash of $468 and $11,725 was used in operations for the nine months ended
August 31, 1997 and 1996, respectively. The increase in cash flows from
operations over the prior year period was primarily the result of changes in
net income, depreciation and amortization, accounts receivable, inventories,
refundable and deferred income taxes, accounts payable and accrued
liabilities. The changes were due in part to the SUNSOURCE acquisition.
Investing activities used cash of $24,677 in the nine months ended August
31, 1997 compared to $42,198 for the comparable prior year period. The change
in cash used resulted from the acquisitions of SUNSOURCE in June, 1997 and
GOLD BOND and HERPECIN-L in April, 1996 and June, 1996, respectively.
Financing activities provided cash of $11,621 in the nine months ended
August 31, 1997 compared to $57,356 for the comparable prior year period. In
fiscal 1997, the Company financed the acquisition of SUNSOURCE and repaid all
outstanding bank indebtedness with the proceeds of a new bank credit
agreement and the issuance of 300,000 shares of the Company's common stock.
In the fiscal 1996 period, the Company financed the acquisition of GOLD BOND
and repaid all outstanding bank indebtedness.
16
<PAGE>
The following table presents working capital data at August 31, 1997 and
November 30, 1996 or for the respective periods then ended:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
ITEM 1997 1996
-------- ----------- -------------
<S> <C> <C>
Working capital (current assets less current liabilities).......... $ 20,806 $ 19,793
Current ratio (current assets divided by current liabilities)...... 1.77 1.75
Quick ratio (cash and cash equivalents and accounts
receivable divided by current liabilities)....................... 1.07 1.12
Average accounts receivable turnover............................... 5.87 6.51
Average inventory turnover......................................... 2.96 3.70
Working capital as a percentage of total assets.................... 11.93% 13.01%
</TABLE>
The improvement in the current ratio as of August 31, 1997 compared to
November 30, 1996, reflect primarily the increase in accounts receivable,
inventories and accrued liabilities and decrease in cash and cash equivalents
and accounts payable.
The change in the quick ratio as of August 31, 1997 as compared to
November 30, 1996 reflect primarily the decrease in cash and cash equivalents
and increases in accounts receivable and total current liabilities.
The decline in the average accounts receivable turnover as of August 31,
1997 as compared to November 30, 1996 is primarily due to the increase in the
average receivable balance. This increase is due primarily to the SUNSOURCE
acquisition.
Total loans outstanding were $144,665 as of August 31, 1997 compared to
$131,344 as of November 30, 1996. The net increase reflects the acquisition
of SUNSOURCE in June, 1997 and repayments by the Company during the year. The
availability of credit under the working captial line of credit is determined
based on the Company's accounts receivable and inventories. The Company had
$14,000 outstanding on its $30,000 working capital line of credit as of
August 31, 1997.
Management of the Company believes that cash flows generated by
operations, along with funds available from its working capital line of
credit, will be sufficient to fund the Company's current commitments and
proposed operations.
17
<PAGE>
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, 1997 and 1996, these subsidiaries accounted for 9% and 10% of total
revenues, respectively, and 4% and 5% 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. Losses of $47 and of $33 for the nine months ended August 31,
1997 and 1996, respectively, resulted from foreign currency transactions.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contain forward looking statements that are based on management's
current beliefs and assumptions about expectations, estimates, strategies and
projections for the Company. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual outcomes and results may differ materially from
what is expressed or forecasted in such forward looking statements. The Company
undertakes no obligation to update publicly any forward looking statements
whether as a result of new information, future events or otherwise. The risks,
uncertainties and assumptions regarding forward looking statements include, but
are not limited to, product demand and market acceptance risks; product
development risks, such as delays or difficulties in developing, producing and
marketing new products or line extensions; the impact of competitive products,
pricing and advertising; constraints resulting from financial condition of the
Company, including the degree to which the Company is leveraged, debt service
requirements and restrictions under bank loan agreements and the indenture; and
other risks described in the Company's Securities and Exchange Commission
filings.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(1) On June 26, 1997, the Company acquired the exclusive worldwide rights
to five leading branded dietary supplement products from SUNSOURCE. As part
of the purchase price, the Company issued 300,000 shares of its common stock
to SUNSOURCE and its assigns in reliance upon an exemption from the
registration requirements of the Securities Act of 1933 pursuant to Section
4(2) thereof. The closing price of the Company's common stock on June 26,
1997 was $13.50, and thus the aggregate value of the common stock issued was
$4,050,000.
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) Form 8-K, dated June 26, 1997, relating to the purchase of the SUNSOURCE
product line, was filed with the Securities and Exchange Commission during the
three months ended August 31, 1997.
19
<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, 1997 \s\ Robert E. Bosworth
---------------- -----------------------
Robert E. Bosworth,
Executive Vice President
and Chief Financial Officer
(principal financial officer)
20
<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,
-------------------------- -------------------------
1997 1996 1997 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
NET INCOME:
Continuing operations....................... $2,847 $2,131 $6,040 $4,104
Extraordinary loss.......................... (1,370) -- (1,370) (532)
------- ------ -------- -------
Net income................................ $1,477 $2,131 $ 4,670 $3,572
------- ------ -------- -------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING:
Weighted average number of common
shares outstanding...................... 8,882 8,582 8,700 7,874
Shares issued upon assumed exercise of
outstanding stock options and stock
warrants................................ 450 226 320 60
------- ------ -------- -------
Weighted average number of common
and common equivalent shares
outstanding............................... 9,332 8,808 9,020 7,934
------- ------ -------- -------
NET INCOME PER COMMON SHARE:
Continuing operations....................... $0.31 $0.24 $ 0.67 $ 0.52
Extraordinary loss.......................... (0.15) -- (0.15) (0.07)
------- ------ -------- -------
Net income per common share............... $0.16 $0.24 $ 0.52 $ 0.45
------- ------ -------- -------
</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-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 2,489
<SECURITIES> 0
<RECEIVABLES> 26,799
<ALLOWANCES> 400
<INVENTORY> 15,364
<CURRENT-ASSETS> 47,815
<PP&E> 27,798
<DEPRECIATION> 17,566
<TOTAL-ASSETS> 174,372
<CURRENT-LIABILITIES> 27,009
<BONDS> 139,395
0
0
<COMMON> 2,104
<OTHER-SE> 116
<TOTAL-LIABILITY-AND-EQUITY> 174,372
<SALES> 106,033
<TOTAL-REVENUES> 106,033
<CGS> 29,382
<TOTAL-COSTS> 86,176
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,838
<INCOME-PRETAX> 9,369
<INCOME-TAX> 3,329
<INCOME-CONTINUING> 6,040
<DISCONTINUED> 0
<EXTRAORDINARY> (1,370)
<CHANGES> 0
<NET-INCOME> 4,670
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
</TABLE>
