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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 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
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months, and
has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K will
be contained in the definitive Proxy Statement incorporated by reference in
Part III of this Form 10-K.
As of February 20, 1998, the aggregate market value of voting shares held by
non-affiliates was $138,304,452.
As of February 20, 1998, 9,090,854 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's Annual Report to Shareholders for Fiscal year
ended November 30, 1997 (the "1997 Annual Report to Shareholders") are
incorporated by reference in Parts I, II and IV of this Report. Portions of
the registrant's definitive Proxy Statement dated March 6, 1998 (the "Proxy
Statement") are incorporated by reference in Part III of this Report.
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PART I
Item 1. Business
General
Chattem, Inc. (the "Company") was incorporated in Tennessee in 1909 after
having commenced business operations in 1879. The Company is a diversified
manufacturer and marketer of consumer products. The Company manufactures and
markets branded over-the-counter ("OTC") pharmaceuticals, such as FLEXALL,
ICY HOT, PAMPRIN, PREMSYN PMS, BENZODENT, NORWICH Aspirin, GOLD BOND and
HERPECIN-L; functional toiletries and cosmetics, including CORNSILK,
BULLFROG, ULTRASWIM, SUN-IN, MUDD and PHISODERM; dietary supplements
represented by GARLIQUE, REJUVEX, MELATONEX, ECHINEX and PROPALMEX; and a
small line of homeopathic medicines. In the OTC drug market, the Company
believes that its topical analgesic, menstrual and premenstrual internal
analgesic brands and medicated powder and cream are among the market leaders
in the U.S. in their categories. Certain of the Company's functional
toiletries and cosmetics products, such as SUN-IN and ULTRASWIM, are believed
by the Company to be brand leaders in the U.S. in their categories. The
Company's dietary supplement products are also considered to be major brands
in that U.S. market.
The Company's growth strategy is to seek continued growth through a
combination of brand acquisitions and internal growth while maintaining high
operating income. As a part of this strategy, the Company continually
evaluates its products and businesses, and in instances in which products or
businesses fail to realize the Company's objectives, the Company will dispose
of these products or businesses and redeploy resulting assets to products and
businesses with greater growth potential or to reduce indebtedness.
The Company conducts certain aspects of its business through four wholly
owned subsidiaries. One subsidiary owns or licenses substantially all of the
trademarks and intangibles associated with its domestic consumer products
business and licenses the Company's use thereof. Certain foreign sales
operations are conducted through Canadian and United Kingdom subsidiaries.
Product liability insurance is provided by a captive insurance subsidiary
incorporated in Bermuda.
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For purposes of this report, the "Company" refers to Chattem, Inc. and its
wholly-owned subsidiaries. Trademarks of the Company appear in this report
in all capitalized letters.
Developments During Fiscal 1997
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 $32,000,000. 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 $15,750,000 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.
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 $30,000,000 revolving line
of credit for working capital purposes, a 5 year $30,000,000 Term A loan
facility and a 6 3/4 year $35,000,000 Term B loan facility.
During June 1997, the Company prepaid previously outstanding long-term bank
debt, with funds from the new credit agreement. In connection with the
prepayment of those borrowings, the Company incurred an extraordinary loss of
$1,370,000 (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.
Unless otherwise indicated, the following discussion relates only to the
continuing operations of the Company, which are the domestic and
international consumer products business. The results of operations and the
gain on disposal of the specialty chemical division in 1995 have been
separately classified as discontinued operations in the accompanying
consolidated statements of income.
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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 year ended November 30, 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.
Products
The objective of the Company is to offer high quality brand name products in
niche market segments in which its products can be among the market leaders.
The Company strives to achieve its objective by identifying brands with
favorable demographic appeal, being flexible in modifying products and
promotions in response to changing consumer demands and developing creative
and cost-effective marketing and advertising programs. The Company
manufactures substantially all of its products at its manufacturing facility
in Chattanooga, Tennessee, with the exception of GOLD BOND, the SUNSOURCE
brands and NORWICH Aspirin, which are manufactured by contract manufacturers.
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The Company's product brands are:
OTC Pharmaceuticals
--------------------
- GOLD BOND - medicated powders and anti-itch cream
- FLEXALL - topical analgesic
- ICY HOT - topical analgesic
- BENZODENT - topical oral analgesic
- NORWICH Aspirin - internal analgesic
- HERPECIN-L - cold sore and fever blister product
- PAMPRIN - menstrual internal analgesic
- PREMSYN PMS - premenstrual internal analgesic
Functional Toiletries and Cosmetics
------------------------------------
- CORNSILK - oil absorbing facial make-up
- BULLFROG - sunscreen and sunblock
- ULTRASWIM - chlorine removing shampoo
- SUN-IN - spray-on hair lightener
- MUDD - facial mask and cleanser
- PHISODERM - facial and hand cleanser
Dietary Supplements
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- REJUVEX - menopausal supplement
- GARLIQUE - garlic extract
- MELATONEX - sleep aid
- PROPALMEX - prostate health product
- ECHINEX - infections resistance enhancer
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The following table sets forth the Company's net sales attributable to
domestic and international OTC pharmaceutical, functional toiletries and
cosmetics, dietary supplement and homeopathic products, other products and
total consumer products during the past three fiscal years (dollars in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended November 30,
------------------------------------------------------------------------------
1997 1996 1995
------- ------ ------
Product Class Sales Percentage Sales Percentage Sales Percentage
-------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
OTC Pharmaceuticals ................. $ 83,121 58.0% $ 67,214 56.5% $ 48,700 48.4%
Functional Toiletries and
Cosmetics .......................... 33,887 23.7 36,232 30.5 37,519 37.3
Dietary Supplements and
Homeopathics*....................... 9,102 6.4 - - - -
International:
OTC Pharmaceuticals .................. 3,053 2.1 2,255 1.9 2,463 2.5
Functional Toiletries and
Cosmetics .......................... 12,154 8.5 12,204 10.3 10,885 10.8
Other Products ......................... 1,918 1.3 998 .8 1,031 1.0
-------- ---------- -------- ---------- ---------- ------
Total Consumer Products .......... $143,235 100.0% $118,903 100.0% $100,598 100.0%
-------- ---------- -------- ---------- ---------- ------
-------- ---------- -------- ---------- ---------- ------
</TABLE>
*From the date of acquisition, June 26, 1997.
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Growth Strategy
The Company seeks to expand its business through:
- - ACQUISITION OF ESTABLISHED BRANDS. Brand acquisitions afford the
Company the opportunity to leverage its advertising and promotional
capabilities and utilize existing distribution channels to attain
incremental sales increases accompanied by higher operating margins.
An example of this strategy is the Company's acquisition of GOLD BOND in
April 1996. GOLD BOND is the leading brand in the medicated powder market
with a rapidly growing presence in the anti-itch cream market. Annual
sales of GOLD BOND have increased by more than 20% from less than $30
million at the time of the acquisition, while operating margins have also
increased during the same period.
The Company's acquisition of the SUNSOURCE Products is another example
of this strategy. The SUNSOURCE Products are leaders in small to medium
sized markets that have an older and growing demographic profile. In
addition, the dietary supplements market is a media driven business that
is compatible with the Company's marketing and distribution
capabilities. The Company believes that growth of the SUNSOURCE brand
can be achieved through the utilization of television advertising, new
product introductions and improved distribution.
- - EXPANSION OF EXISTING PRODUCT LINES. The Company seeks to increase its
market share in established markets through the introduction of new
product lines for existing brands. Product line extensions allow the
Company to maximize the value of the base brand through an increased
market presence and new market entry. Recent examples of product line
extensions include ICY HOT Arthritis Therapy Gel and two GOLD BOND line
extensions, GOLD BOND Medicated Foot Powder and GOLD BOND Cornstarch
Plus Medicated Baby Powder.
- - DEVELOPMENT OF BRANDS WITH UNREALIZED POTENTIAL. The Company seeks to
acquire brands with unrealized potential that have been under-marketed
by larger firms or have achieved success in limited geographic regions.
The Company uses its marketing ability, sales force and manufacturing
capabilities to build on the unrealized potential of the brand. ICY HOT
was an under-marketed brand which the Company acquired from a major
consumer products company, while FLEXALL had only a regional market
presence when acquired by the Company. Both of these brands have
achieved significant sales growth following their acquisition by the
Company.
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OTC Pharmaceuticals
The Company markets a diversified portfolio of brand name OTC pharmaceutical
products, many of which are among the market leaders in the U.S. in their
respective categories.
The GOLD BOND brand, which is approximately 100 years old, competes in the
adult and baby medicated powder and anti-itch cream markets. GOLD BOND is
the leading brand in the medicated powder market and has a rapidly growing
presence in the anti-itch cream market. The product line is heavily
supported by national television and radio advertising, as well as with
consumer promotions. The Company believes GOLD BOND represents a major growth
opportunity and is currently pursuing various line extensions.
FLEXALL is an aloe-vera based topical analgesic used primarily by people
with arthritic symptoms to alleviate pain and irritation in joints and
secondarily by persons suffering from muscle strain. In fiscal 1996 FLEXALL
Ultra Plus, containing menthol, methyl salicylate and camphor as active
ingredients, was added to the line. The Company believes that the advancing age
of the U.S. population and the emphasis on fitness and physical activity will
increase the overall market size of the topical analgesic market. The Company
supports the brand with a marketing program that utilizes extensive television
and print media advertising.
ICY HOT provides the Company with a second entry into the topical analgesic
market segment. ICY HOT is an extra strength dual action product, as
distinguished from FLEXALL. In fiscal 1997 ICY HOT Arthritis Therapy Gel,
containing capcaicin in an aloe vera based gel, was introduced. The Company
supports this brand with national advertising and strong promotional programs.
BENZODENT is a dental analgesic cream in an adhesive base for use as an oral
topical analgesic for pain related to dentures. The Company acquired
BENZODENT in 1994 and seeks to increase the market share of this brand by
providing samples to consumers when they are initially fitted for dentures.
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NORWICH is a pharmaceutical-quality, aspirin-based analgesic which complements
the Company's other OTC pharmaceuticals by offering consumers another choice in
the analgesic market segment and by permitting shared product promotions. The
Company positions the brand as a reasonably priced alternative between private
label generic aspirin and high-priced, heavily-advertised brands.
In the lip care category, HERPECIN-L balm stick treats and protects cold sores
three ways. The unique formula moisturizes lips to help prevent cracking,
reduce soreness and promote healing. Also, HERPECIN-L contains an SPF 15
sunblock to help protect lips from the harmful rays of the sun. The Company
supports the brand with television and radio advertising as well as consumer
promotions designed to generate trial during the peak winter and summer cold
sore seasons.
In the menstrual analgesic segment, the Company markets PAMPRIN, a combination
drug specifically designed for relief of menstrual symptoms, and PREMSYN PMS, a
product formulated to relieve mild to moderate symptoms of premenstrual
syndrome. PAMPRIN was developed internally by the Company over 30 years ago,
while PREMSYN PMS was introduced by the Company in 1983. In fiscal 1997 both
PAMPRIN and PREMSYN PMS were introduced in gel capsule form.
Functional Toiletries and Cosmetics
The Company also markets a portfolio of brand name functional toiletries and
cosmetics, many of which are among the market leaders in the U.S. in their
respective categories.
The CORNSILK brand is a line of facial makeup products for women with oily or
combination skin. All CORNSILK products utilize an exclusive ingredient for
absorbing the excess facial oils that break down the color and coverage of
other makeup. The CORNSILK brand includes powder used by women to fix and
finish their makeup and also liquid makeup, blush and concealer. Liquid
makeup is used to even skin tone, blush to add color and concealer to cover
blemishes. The Company supports the brand by print advertising in selected
women's magazines. In fiscal 1997 the entire CORNSILK product line was
relaunched in completely new packaging.
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In the sunscreen and sunblock category, BULLFROG provides long-lasting,
water-durable protection from the sun. Positioned as a line of highly
efficacious sunblock products in a unique, highly concentrated formula, the
Company believes that the BULLFROG brand should continue to benefit from this
overall market growth as well as increasing brand awareness, broader product
offerings and increased consumer advertising, promotion and sampling programs.
ULTRASWIM is a leading line of chlorine removing shampoo, conditioner and soap.
ULTRASWIM has a patented formula that the Company believes makes it superior to
formulations of other products in removing chlorine. ULTRASWIM has also
benefited as it has moved beyond the competitive swim segment to include
exercise and recreational swimmers. The Company supports this brand by
selected television advertising companies by print advertising.
SUN-IN is a leading product line in the spray-on hair lightener market. The
target customers within this market segment are light-haired women between the
ages of 12 and 24. The Company supports SUN-IN's position as a market leader
through recent improvements in the formula and package, seasonal advertising to
teens and consumer promotions in retail stores.
MUDD is a line of clay-based products which provide deep cleansing of the face
for healthier, cleaner skin. Target customers for MUDD are women between the
ages of 18 and 49. In fiscal 1995, the Company relaunched MUDD with improved
formulas and updated packaging and added a 5 Minute Mask to the line in fiscal
1997.
PHISODERM is a line of facial cleansers consisting of several formulas of liquid
cleansers, including one for infants, and a bar soap. Acquired in 1994,
PHISODERM is the Company's second entry into the facial cleanser category.
Positioned as a deep cleaning but gentle facial cleanser, the Company, in fiscal
1995, improved the formula, updated the packaging and provided television
advertising and promotional support to enable this brand to regain the larger
market share it once enjoyed. In fiscal 1996, PHISODERM Antibacterial Hand
Cleanser was introduced in the domestic and certain international markets.
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DIETARY SUPPLEMENTS
The Company markets a line of predominantly herbal, branded dietary supplements
and homeopathic medicines under the SUNSOURCE name. The SUNSOURCE line was
acquired by the Company in June 1997.
The dietary supplement products in the SUNSOURCE line have national
distribution in food, drug and mass merchandiser accounts and are
supported by national television and/or radio ad campaigns.
SUNSOURCE dietary supplements are natural, drug-free aids to
supporting and maintaining good health.
REJUVEX, first introduced in late 1991 and the oldest of the
SUNSOURCE brands, is a dietary supplement for women in the peri- and
post-menopausal age group. REJUVEX helps women to maintain comfort
during a phase of life that is often fraught with numerous
discomforts. Additionally, REJUVEX, high in magnesium, helps to
promote strong healthy bones in a population that is at risk for
development of osteoporosis. REJUVEX provides an estrogen-free
avenue of natural support.
GARLIQUE garlic tablets support cardiovascular health. The tablets are
uniquely positioned in the marketplace as a "one per day" high potency garlic
supplement. The major GARLIQUE competitor is a six per day product.
Consumers have a strong and growing interest in this odor-less, drug-free,
all natural approach to maintaining normal cholesterol levels. GARLIQUE
entered the market place in 1992 and has continued as a strong product.
MELATONEX is formulated to support a natural sleep cycle, by
supplementing the body's natural production of melatonin, a hormone
necessary for a good night's sleep. As we age, we produce less and
less melatonin, tend to sleep less and have more difficulty falling
asleep and staying asleep. Supplementing our natural melatonin
production is the sensible solution for people over forty.
MELATONEX is a scored, time-release tablet offering important and
desired dosage control to consumers.
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PROPALMEX is an herbal supplement for men over forty. PROPALMEX
supports prostate health and promotes free urinary flow. As men
age, natural changes in hormone balance result in conditions which
tend to precipitate a swelling of the prostate. This benign
condition plagues most men past middle age and PROPALMEX is the all
natural, drug-free approach to maintenance of a healthy prostate.
ECHINEX is a standardized herbal complex of echinacea, ginger and
Siberian ginseng. This effective combination supports our natural
resistance against infection helping us to stay well. ECHINEX is a
seasonal product that provides adults with added protection during
times of high risk for cold and flu.
SUNSOURCE offers a line of nine homeopathic OTC products.
Homeopathic medicines represent a growing segment of the OTC
marketplace. These all natural products are safe and effective and
have no side effects. The SUNSOURCE line includes six tablet
products: Sinus Relief, Cold Relief, Insomnia Relief, Allergy
Relief, Flu Relief and Arthritis Relief; and three topical creams:
Sports Injury Relief, Arthritis Relief and Psoriasis/Eczema Relief.
International
The Company's products are also sold in foreign countries. This international
business is concentrated in Canada, Europe and Central and South America.
Sales in Canada and Europe are conducted by subsidiary companies located and
locally staffed in Canada and the United Kingdom. General export sales are
handled by the Company from its offices in Chattanooga. Most of the products
sold in international markets are manufactured by the Company at its Chattanooga
and United Kingdom facilities and are packaged by subsidiary companies in small
facilities in Canada and the United Kingdom with the assistance, from time to
time, of outside contract packagers.
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Many of the Company's major domestic products are currently sold in Canada,
including the FLEXALL, PAMPRIN, SUN-IN, CORNSILK, MUDD, ULTRASWIM,
PHISODERM, BULLFROG and GOLD BOND brands.
Consumer product sales in the United Kingdom and on the continent of Western
Europe are currently limited to toiletry and cosmetic products. The Company's
hair lightener product is sold on the continent under the SPRAY BLOND trademark
and in the United Kingdom as SUN-IN. MUDD, CORNSILK and ULTRASWIM are the other
primary consumer products sold by the Company's international division in
Europe.
The Company's export division services various distributors primarily located in
the Caribbean, Mexico and Peru. The Company sells various products into these
markets with the primary focus being the development of its OTC pharmaceuticals,
principally ICY HOT, PAMPRIN, PHISODERM and GOLD BOND. The Company continues to
look for established distributors in Central and South America.
Manufacturing and Quality Control
The Company manufactures a substantial portion of its products at its
Chattanooga plant, with the exception of GOLD BOND, the SUNSOURCE brands and
NORWICH Aspirin, which are manufactured by contract manufacturers.
Currently, the Company has adequate capacity to meet anticipated demand for
its products. New products can generally be manufactured with the adaptation
of existing equipment and facilities, with the addition of new equipment at
relatively small cost or through readily available contract manufacturers.
For additional information about the extent of utilization of the Company's
manufacturing facilities, see "Properties", Item 2 in this report.
To monitor the quality of its products, the Company maintains an internal
quality control system supported by an on-site microbiology laboratory. Outside
consultants also are employed from time to time to monitor product development
and the effectiveness of the Company's operations.
The Company has not experienced any material adverse effect on its business as a
result of shortages of energy or other raw materials used in the manufacture of
its products. At present, the Company does not foresee any significant problems
in obtaining its requirements at reasonable prices, but no assurances can be
given that raw material or energy shortages will not adversely affect its
operations in the future.
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Research and Development
The Company's research and development expenditures were $1,207,000, $1,117,000,
and $1,140,000 in the fiscal years ended November 30, 1997, 1996 and 1995,
respectively. No material customer-sponsored research and development
activities were undertaken during these periods. The Company expects to
maintain the same general level of expenditures in fiscal 1998.
The research and development effort focuses on developing improved formulations
for existing products and on the creation of formulations for product line
extensions. The preservation and improvement of the quality of the Company's
products are also integral parts of its overall strategy.
Distribution
The Company's domestic products are sold primarily through thousands of food,
drug and mass merchandiser accounts. Internationally, the products are sold by
a national broker in Canada and the Company's own sales force in the United
Kingdom and by exclusive distributors in Western Europe and Central and South
America to mass distribution channels.
Wal-Mart Stores, Inc. accounts for more than 10% of the sales of the Company's
consolidated net sales. No other customer accounts for more than 10% of
consolidated net sales. Boots Plc, a U.K. retailer, and Shoppers Drug Mart, a
Canadian retailer, each account for more than 10% of the international consumer
products segment's sales.
The Company generally maintains sufficient inventories to meet customer orders
as received absent unusual and infrequent situations. At present, the Company
has no significant backlog of customer orders and is promptly meeting customer
requirements.
The Company does not generally experience wide variances in the amount of
inventory it maintains. Inventory levels were increased during fiscals 1997 and
1996 largely as a result of product acquisitions and line extensions in both
years. In certain circumstances, the Company allows its customers to return
unsold merchandise and, for seasonal products, provides extended payment terms
to its customers.
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Marketing
The Company allocates a significant portion of its revenues to the advertising
and promotion of its products. Expenditures for these purposes were 39.2%,
38.3% and 37.0%, respectively, as a percentage of net sales during each of the
fiscal years ended November 30, 1997, 1996 and 1995.
The Company's marketing objective is to develop and execute creative and
cost-effective advertising and promotional programs. The manner in which the
Company executes promotional programs and purchases advertising time creates
more flexibility in terms of adjusting spending levels. The Company believes
that balancing advertising, trade promotions and consumer promotions
expenditures on a cost effective basis is an essential element in its ability to
compete successfully.
The Company develops for each of its major brands advertising strategies and
executions that focus on the particular attributes and market positions of the
products. The Company achieves cost-effective advertising by minimizing certain
expenses, such as production of commercials and payments to advertising
agencies.
The Company works directly with retailers to develop for each brand promotional
calendars and campaigns that are customized to the particular requirements of
the individual retailer. The programs, which include cooperative advertising,
temporary price reductions, in-store displays and special events, are designed
to obtain or enhance distribution at the retail level and to reach the ultimate
consumers of the product. The Company also utilizes consumer promotions such as
coupons, samples and trial sizes to increase the trial and consumption of the
products.
Seasonality
During recent fiscal years, the Company's first quarter net sales and gross
profit have trailed the other fiscal quarters on average from 25% to 35% because
of slower sales of international consumer products and the relative absence of
promotional campaigns during this quarter.
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Competition
The OTC pharmaceutical, functional toiletry and dietary supplements products'
markets in which the Company competes are highly competitive. The markets are
characterized by the frequent introduction of new products including the
movement of prescription drugs to the OTC market, often accompanied by major
advertising and promotional programs. The Company competes primarily on the
basis of product quality, price, brand loyalty and consumer acceptance. The
Company's competitors include other OTC pharmaceutical companies and large
consumer products companies, many of which have considerably greater financial
and marketing resources than the Company. The products offered by these
companies are often supported by much larger advertising and promotional
expenditures and are generally backed by larger sales forces. In addition, the
Company's competitors have often been willing to use aggressive spending on
trade promotions as a strategy for building market share at the expense of their
competitors, including the Company. The private label or generic category has
also become more competitive in certain of the Company's product markets.
Another factor affecting the OTC pharmaceutical, toiletry and dietary supplement
products' business is the consolidation of retailers and increasingly more
competitive negotiations for access to shelf space.
Trademarks and Patents
The Company's trademarks are of material importance to its business and are
among its most important assets, although, except in the case of the GOLD
BOND, SUNSOURCE, FLEXALL, PHISODERM and ICY HOT trademarks, its business as
a whole is not materially dependent upon ownership of any one trademark. The
Company, either through a wholly-owned subsidiary or directly, owns or
licenses all of the trademarks associated with its business. All of the
Company's brands have recognized trademarks associated with them, and the
Company's significant domestic trademarks have been registered on the
principal register of the United States Patent and Trademark Office.
Federally registered trademarks have a perpetual life as long as they are
timely renewed and used properly as trademarks, subject to the right of third
parties to seek cancellation of the marks.
The Company also owns patents related to the ULTRASWIM shampoo and CORNSILK
facial powder, both of which expire in 1998, and ICY HOT stick topical
analgesic, which expires in 2007. After expiration of the patents, the Company
expects that these products will continue to compete in the market primarily on
the basis of the goodwill associated with the brands.
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Government Regulation
The manufacturing, processing, formulation, packaging, labeling and
advertising of the Company's products are subject to regulation by one or
more federal agencies, including the FDA, the FTC, the Consumer Product
Safety Commission, the United States Department of Agriculture, the United
States Postal Service, the United States Environmental Protection Agency and
the Occupational Safety and Health Administration. These activities are also
regulated by various agencies of the states, localities and foreign countries
in which the Company's products are sold. In particular, the FDA regulates
the safety, manufacturing, labeling and distribution of dietary supplements,
including vitamins, minerals and herbs, food additives, OTC and prescription
drugs and cosmetics. The regulations that are promulgated by the FDA relating
to the manufacturing process are known as GMPs, and are different for drug
and food products. In addition, the FTC has overlapping jurisdiction with the
FDA to regulate the promotion and advertising of OTC pharmaceuticals,
functional toiletries and cosmetics, dietary supplements and foods.
All of the Company's OTC drug products are regulated pursuant to the FDA's
monograph system for OTC drugs. The monographs set out the active ingredients
and labeling indications that are permitted for certain broad categories of
OTC drug products, such as topical analgesics. Compliance with the monograph
provisions means that the product is generally recognized as safe and
effective and is not misbranded. Future changes in the monographs could
result in the Company having to revise product labeling and formulations. The
Company responded to certain questions with respect to efficacy received from
the FDA in connection with clinical studies for pyrilamine maleate, one of
the active ingredients used in certain of the PAMPRIN and PREMSYN PMS
products. While the Company addressed all of the FDA questions in detail, the
final monograph for menstrual drug products will determine if the FDA
considers pyrilamine maleate safe and effective for menstrual relief
products. The Company has been actively monitoring the process and does not
believe that either PAMPRIN or PREMSYN PMS will be materially adversely
affected by the FDA review. The Company believes that any adverse finding by
the FDA would likewise affect the Company's principal competitor in the
menstrual product category.
As a result of an order issued by the Consumer Products Safety Commission,
there are new packaging requirements for products containing lidocaine. The
Company has until January 1998 to develop child resistant packaging for its
GOLD BOND Cream products that are sold in tubes or change the product
formulation.
DSHEA was enacted on October 25, 1994. DSHEA amends the Federal Food, Drug
and Cosmetic Act by defining dietary supplements, which include vitamins,
minerals, nutritional supplements, herbs and botanicals, as a new category of
food separate from conventional food. DSHEA provides a regulatory framework
to ensure safe, quality dietary supplements and to foster the dissemination
of accurate information about such products. Under DSHEA, the FDA is
generally prohibited from regulating dietary supplements as food additives or
as drugs unless product claims, such as claims that a product may diagnose,
mitigate, cure or prevent an illness, disease or malady, trigger drug status.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements effective January 1, 1997, although final regulations have not
been published and the FDA has indicated that implementation will be delayed.
DSHEA permits substantiated, truthful, and non-misleading statements of
nutritional support to be made in labeling, such as statements describing
general well-being resulting from consumption of a dietary ingredient or the
role of a nutrient or dietary ingredient in affecting or maintaining a
structure or function of the body. The Company anticipates that the FDA will
promulgate GMPs which are specific to dietary supplements and require at
least some of the quality control provisions contained in the GMPs for drugs,
which are more rigorous than the GMPs for foods.
The FDA has proposed, but not finalized, regulations to implement DSHEA,
including those relating to nutritional labeling requirements. The Company
cannot determine what effect such regulations, when promulgated, will have on
its business in the future. Such regulations are likely to require expanded
or different labeling for the Company's vitamin and nutritional dietary
supplement products and could, among other things, require the recall,
reformulation or discontinuance of certain products, additional
recordkeeping, warnings, notification procedures and expanded documentation
of the properties of certain products and scientific substantiation regarding
ingredients, product claims, safety or efficacy. Failure to comply with
applicable FDA requirements can result in sanctions being imposed on the
Company or the manufacture of its products, including warning letters,
product recalls and seizures, injunctions or criminal prosecution.
17
<PAGE>
Environmental
The Company is continuously engaged in assessing compliance of its operations
with applicable federal, state and local environmental laws and regulations.
The Company's policy is to record liabilities for environmental matters when
loss amounts are probable and reasonably determinable. The Company's
manufacturing site utilizes chemicals and other potentially hazardous materials
and generates both hazardous and non-hazardous waste, the transportation,
treatment, storage and disposal of which are regulated by various governmental
agencies. The Company is a member of the Chattanooga Manufacturers Association,
a trade association which promotes industry awareness of developments in
environmental matters, and has engaged environmental consultants on a regular
basis to assist its compliance efforts. The Company is currently in compliance
with all applicable environmental permits and is aware of its responsibilities
under applicable environmental laws. Any expenditures necessitated by changes
in law and permitting requirements cannot be predicted at this time, although
such costs are not expected to be material to the Company's financial position
or results of operations.
Since the early 1980's, the U.S. Environmental Protection Agency ("EPA") has
been investigating the extent of, and the health effects resulting from,
contamination of Chattanooga Creek, which runs through a major manufacturing
area of Chattanooga in the vicinity of the Company's manufacturing facilities.
The contamination primarily stems from the dumping of coal tar into the creek
during World War II when the federal government was leasing and operating a coke
and chemical plant adjacent to the creek. However, the EPA has been
investigating virtually all businesses that have discharged any wastewater into
the creek. A 2 1/2 mile stretch of Chattanooga Creek was placed on the National
Priorities List as a Superfund site under the Comprehensive Environmental
Response, Compensation and Recovery Act in September of 1995 and remediation of
the creek bed commenced in mid-1997. The Company could be named as a
potentially responsible party in connection with such site due to the Company's
historical discharge of wastewater into the creek. However, considering the
nature of the Company's wastewater, as well as the fact that the Company's
discharge point is downstream from the old coke and chemical plant that was
operated by the government, and the availability of legal defenses and expected
cost sharing, the Company does not believe that any liability associated with
such site will be material to its financial position or results of operations.
18
<PAGE>
Product Liability and Insurance
An inherent risk of the Company's business is exposure to product liability
claims brought by users of the Company's products or by others. The Company has
not had any material claims in the past and is not aware of any material claims
pending or threatened against the Company or its products. While the Company
will continue to attempt to take what it considers to be appropriate
precautions, there can be no assurance that it will avoid significant product
liability exposure. The Company maintains product liability insurance,
principally through a captive insurance subsidiary, that it believes to be
adequate; however, there can be no assurance that it will be able to retain its
existing coverage or that such coverage will be cost-justified or sufficient to
satisfy future claims, if any.
Employees
The Company employs approximately 303 persons on a full-time basis in the U.S.
and 37 persons at its foreign subsidiaries' offices. The Company's employees
are not represented by any organized labor union, and management considers its
labor relations to be good.
19
<PAGE>
Item 2. Properties
The Company's headquarters and administrative offices are located at 1715
West 38th Street, Chattanooga, Tennessee. The Company's primary production
facilities are adjacent to the Company's headquarters on land owned by the
Company. The Company leases the primary warehouse and distribution center,
located at 3100 Williams Street, Chattanooga, Tennessee, for its domestic
consumer products. The following table describes in detail the principal
properties owned and leased by the Company:
<TABLE>
<CAPTION>
FACILITY
TOTAL ----------------------------
TOTAL AREA BUILDINGS (SQUARE
(ACRES) (SQUARE FEET) USE FEET)
----------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Owned Properties:
Chattanooga, Tennessee 10 111,200 Manufacturing 71,800
Office &
Administration 39,400
Leased Properties:
Chattanooga, Tennessee (1) 4.0 100,000 Warehousing 103,800
Chattanooga, Tennessee (2) 1.0 35,200 Warehousing &
Chattanooga, Tennessee (3) 0.1 3,800 Manufacturing 35,200
Mississauga, Ontario,
Canada (4) 0.3 15,000 Warehousing 10,500
Office &
Administration 3,000
Packaging 1,500
Basingstoke, Hampshire,
England (5) 0.3 21,900 Warehousing 13,900
Office &
Administration 6,500
Packaging 1,500
</TABLE>
NOTES:
(1) Leased under a five year lease ending January 31, 2001 for a monthly
rental of $25,000.
(2) Leased under a five year lease ending January 31, 2001 for a monthly
rental of $9,547.
(3) Leased under a one year lease ending in July 1998 for a monthly rental
of $1,575.
(4) Leased under a lease ending November 1999 at a monthly rental, including
property taxes and other incidentals, of approximately $5,397.
(5) Leased under leases ending in 2014 and 2015 at a monthly rental, including
property taxes and other incidentals, of approximately $22,707.
20
<PAGE>
The Company is currently operating its facilities at approximately 70% of
total capacity. These facilities are FDA registered and are capable of
further utilization through the use of full-time second and third shifts.
Item 3. Legal Proceedings
Note 10 to the Consolidated Financial Statements on page 32 of the Company's
1997 Annual Report to Shareholders is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
None.
21
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The information found on pages 17, 30 and 31 of the Company's 1997 Annual
Report to Stockholders is incorporated herein by reference.
On June 26, 1997, the Company issued to the sellers of the SUNSOURCE product
line 300,000 shares of its common stock at a value of $13.50 per share as a
portion of the purchase price for the brand.
Item 6. Selected Financial Data
The information found on page 17 of the Company's 1997 Annual Report to
Stockholders is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information found on pages 11 to 15 of the Company's 1997 Annual Report to
Stockholders is incorporated herein by reference.
Item 8. Financial Statements and Supplemental Data
The information found on pages 17 to 37 of the Company's 1997 Annual Report
to Stockholders is incorporated herein by reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
22
<PAGE>
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons of the
Registrant
(a) Directors
The information found in the Company's 1998 Proxy Statement under the
heading "Information about Nominees and Continuing Directors" is hereby
incorporated by reference.
(b) Executive Officers
The following table lists the names of the executive officers of the
Company as of February 20, 1998, their ages, their positions and offices
with the Company and the year in which they were first elected to these
positions:
<TABLE>
<CAPTION>
POSITION WITH FIRST
NAME AGE REGISTRANT ELECTED
- ---------------------- ---- ------------------------------- ------------
<S> <C> <C> <C>
Zan Guerry 49 Chairman of the Board and
Chief Executive Officer; Director 1990
A. Alexander Taylor II 44 President and Chief Operating
Officer; Director 1998
</TABLE>
Mr. Guerry was elected to his present positions with the Company in June
1990. Previously he served as Vice President and Chief Financial Officer from
1980 until 1983, as Executive Vice President from 1983 to 1990, as President
of Chattem Consumer Products from 1989 to 1994, as Chief Operating Officer
from 1989 to 1990 and as President of the Company from 1990 to 1998. Mr.
Guerry was first elected as a director of the Company in 1981.
Mr. Taylor was elected to his present positions with the Company in January
1998. Previously he was a partner from 1983 to 1998 with the law firm of
Miller & Martin, general counsel to the Company. Mr. Taylor was first
elected as a director of the Company in 1993.
(c) Promoters and Control Persons
Not applicable.
23
<PAGE>
Item 11. Executive Compensation
The information found in the Company's 1998 Proxy Statement under the heading
"Executive Compensation and Other Information" is hereby incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information found in the Company's 1998 Proxy Statement under the heading
"Voting Securities and Principal Holders Thereof" is hereby incorporated by
reference.
Item 13. Certain Relationships and Related Transactions
Louis H. Barnett, a director of the Company, received $33,000 in consulting
fees during fiscal 1997 for services rendered to the Company in a capacity
other than as a director.
24
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K
(a) 1. The consolidated financial statements and the related report of
independent public accountants required to be filed with this Report are
incorporated by reference from pages 18 to 37 of the Company's 1997 Annual
Report to Shareholders.
2. The following documents are filed or incorporated by reference
as exhibits to this report:
Exhibit
Number Description of Exhibit References
- ------- ---------------------- ----------
3 Amended and Restated Charter of
Chattem, Inc. (1)
4 Form of Indenture dated August 3, 1994
between Chattem, Inc. and SouthTrust
Bank of Alabama, N.A. relating to the
12.75% Series B Senior Subordinated
Notes due 2004 (2)
Amended and Restated By-Laws of
Chattem, Inc. (3)
10 Material Contracts -
Non-Competition and Severance Agreements
as amended -
Zan Guerry
Robert E. Bosworth
Gary M. Galante
B. Derrill Pitts
Charles M. Stafford
A. Alexander Taylor II (3)
25
<PAGE>
Exhibit
Number Description of Exhibit References
- ------- ---------------------- ----------
Lease Agreements as amended dated
February 1, 1996 between Tammy
Development Company and Chattem,
Inc. for warehouse space at 3100
Williams Street, Chattanooga, Tennessee (3) and (5)
Asset Purchase Agreement dated April 29,
1996 between Martin Himmel Inc., seller,
and Chattem, Inc. and Subsidiaries,
purchaser, for the GOLD BOND business (4)
Credit Agreement dated April 29, 1996
among Chattem, Inc., as borrower, Signal
Investment & Management Co.,
as guarantor, NationsBank, N.A., as
agent, and the Lenders named therein (5)
Credit Agreement dated April 29, 1996,
(secondary working capital facility)
among Chattem, Inc., as borrower, Signal
Investment & Management Co.,
as guarantor, NationsBank, N.A., as
agent, and the Lenders named therein. (5)
Asset Purchase Agreement dated June 6,
1996 between Campbell Laboratories,
Inc., seller, and Chattem, Inc. and Signal
Investment & Management Co.,
purchasers, for the HERPECIN-L business. (5)
Amendment to the Credit Agreement
(HERPECIN-L Acquisition) dated
June 6, 1996 among Chattem, Inc., as
borrower, Signal Investment &
Management Co., as guarantor,
NationsBank, N.A., as agent and the
Lenders named therein. (5)
26
<PAGE>
Exhibit
Number Description of Exhibit References
- ------- ---------------------- ----------
10 Asset Purchase and Sale Agreement dated
May 23, 1997 by and among Chattem,
Inc., Signal Investment & Management Co.
and Sunsource International, Inc. and
Mindbody, Inc. (without schedules and
exhibits) (6)
Amended and Restated Credit Agreement
(New Credit Agreement) dated June 26, 1997
by and among Chattem, Inc., Signal
Investment & Management Co. and the
Lenders identified therein (6)
Amended and Restated Credit Agreement
(Supplemental Credit Agreement) dated
June 26, 1997 by and among Chattem, Inc.,
Signal Investment & Management Co. and
the Lenders identified therein (6)
First Amended and Restated Master
Trademark License Agreement between
Signal Investment & Management Co.
and Chattem, Inc., effective June 30, 1992 (7)
Chattem, Inc. Non-Statutory Stock
Option Plan - 1998 (7)
11 Computation of Per Share Earnings
13 1997 Annual Report to Shareholders of Chattem, Inc.
22 Subsidiaries of the Company
24 Consent of Independent Public Accountants
27
<PAGE>
References:
Previously filed as an exhibit to and incorporated by reference from:
(1) Form 10-K for the year ended November 30, 1992.
(2) Form S-2 Registration Statement (No. 33-80770).
(3) Form 10-K for the year ended November 30, 1995.
(4) Form 8-K dated April 29, 1996.
(5) Form 10-K for the year ended November 30, 1996.
(6) Form 8-K dated June 26, 1997.
(7) Form 10-K for the year ended November 30, 1997
(b) There were no Form 8-K's filed with the Securities and Exchange
Commission during the three months ended November 30, 1997.
(d) The Financial Statements and the related report of independent public
accountants required to be filed with this report pursuant to Rule 3-10(a)
of Article 3 of Regulation S-X are incorporated by reference from pages 6
to 14 of Signal Investment & Management Co.'s Form 10-K for the fiscal year
ended November 30, 1997.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: February 23, 1998 CHATTEM, INC.
By: /s/ Zan Guerry
---------------------
Zan Guerry
Title: Chairman and Chief
Executive Officer
By: /s/ Stephen M. Powell
---------------------
Stephen M. Powell
Title: Controller (Chief
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Zan Guerry Chairman of the Board 2/22/98
- --------------------------- and Director -------
Zan Guerry (Chief Executive Officer)
/s/ A. Alexander Taylor, II President and 2/22/98
- --------------------------- Director -------
A. Alexander Taylor, II (Chief Operating officer)
/s/ Samuel E. Allen Director 2/22/98
- --------------------------- -------
Samuel E. Allen
/s/ Louis H. Barnett 2/22/98
- --------------------------- Director -------
Louis H. Barnett
/s/ Robert E. Bosworth Director 2/22/98
- --------------------------- -------
Robert E. Bosworth
/s/ Richard E. Cheney Director 2/22/98
- --------------------------- -------
Richard E. Cheney
/s/ Scott L. Probasco, Jr. Director 2/22/98
- --------------------------- -------
Scott L. Probasco, Jr.
29
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
<S> <C>
10.1 First Amended and Restated Master Trademark Agreement between
Signal Investment & Management Company and Chattem, Inc., effective
June 30, 1992
10.2 Chattem, Inc. Non-Statutory Stock Option Plan--1998
11 Computation of per share earnings
13 1997 Annual Report to Shareholders of Chattem, Inc.
22 Subsidiaries of the Company
24 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 10.1
FIRST AMENDED AND RESTATED
MASTER TRADEMARK LICENSE AGREEMENT BETWEEN
SIGNAL INVESTMENT & MANAGEMENT COMPANY
AND CHATTEM, INC.
(As amended and Restated Effective June 30, 1992)
This First Amended and Restated Master Trademark License Agreement is
made and entered into by and between Signal Investment & Management Co., a
Delaware corporation ("Signal"), having its principal place of business at
Suite 1300, 1105 Market Street, Wilmington, Delaware 19890, and Chattem,
Inc., a Tennessee corporation ("Chattem"), having its principal place of
business located at 1715 W. 38th Street, Chattanooga, Tennessee 37409,
effective as of June 30, 1992.
WHEREAS, Signal and Chattem are parties to that certain Trademark
License Agreement effective as of June 30, 1992, pursuant to which Signal
licenses to Chattem certain trademark rights; and
WHEREAS, Signal and Chattem are parties to that certain License
Agreement dated May 12, 1994, pursuant to which Signal licenses certain
BENZODENT-Registered Trademark- trademark rights to Chattem; and
WHEREAS, Signal and Chattem are parties to that certain Sublicense
Agreement dated June 17, 1994, pursuant to which Signal sublicenses certain
pHisoderm-Registered Trademark- trademark rights to Chattem; and
WHEREAS, Signal and Chattem desire to merge all of the aforementioned
agreements relating to the licensing and sublicensing of trademark rights
between the parties together under this Master Trademark License Agreement
effective as of the dates of the respective prior agreements; and
WHEREAS, Signal and Chattem desire to set forth a framework in this
Master Trademark License Agreement under which the licensing and sublicensing
of all future trademark rights from Signal to Chattem will be controlled,
such licensing to take effect immediately upon the date of Signal's future
adoption, acquisition or licensing of such trademark rights; and
WHEREAS, Signal and Chattem desire to confirm their agreements relating
to the licensing and sublicensing of such trademark rights and to supersede,
replace and restate such prior licensing and sublicensing agreements
currently in effect between the parties;
<PAGE>
NOW, THEREFORE, in consideration of the premises and covenants herein,
and in further consideration of the mutual benefits to the parties, the
parties hereby covenant and agree as follows:
1. Definitions. As used in this Agreement, the following terms shall
have the following meanings:
"Agreement": this Master Trademark License Agreement, as amended,
supplemented or otherwise modified from time to time.
"Default": any of the events specified in Section 3.1, provided any
requirement for the giving of notice, the lapse of time, or both, or any
other condition, has been satisfied.
"Effective Date": shall mean June 30, 1992.
"FDA Requirements": shall mean any requirements of the Federal Food,
Drug and Cosmetic Act, as amended, and any rules or regulations promulgated
thereunder which are or may be applicable to the manufacture, sale, labeling
or distribution of the Products.
"Governmental Authority": any nation or government, any state or
political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Licensed Assets": shall mean the Trademarks, the Trade Dress and the
Product Standards.
"Licensee": Chattem, Inc., a Tennessee corporation.
"Licensor": Signal Investment & Management Co., a Delaware corporation.
"Net Sales": shall mean sales of the Products at the invoiced price
after deduction of (a) all trade and promotional discounts and allowances;
(b) allowance for credits for returns; and (c) sales taxes and/or freight
charges, if any, included in the invoice.
"Person": An individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated
association, joint venture, Governmental Authority or entity of whatever
nature.
"Products": shall mean all products sold in any jurisdiction under any
of the Trademarks.
2
<PAGE>
"Product Standards": shall mean the formulas, specifications and
manufacturing procedures provided to the Licensee by the Licensor as the same
shall hereinafter be amended from time to time with the consent and approval
of the Licensor.
"Subsidiary": as to any Person, a corporation, partnership or other
entity of which shares of stock or other ownership interests having ordinary
voting power (other than stock or such other ownership interests having such
power only by reason of the happening of a contingency) to elect a majority
of the board of directors or other managers of such corporation, partnership,
limited liability company or other entity are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through
one or more intermediaries, or both, by such Person. Unless otherwise
qualified, all references to a "Subsidiary" or to "Subsidiaries" in this
Agreement shall refer to a Subsidiary or Subsidiaries of the Licensee other
than the undersigned.
"Termination Date": shall mean the date on which this Agreement shall
terminate pursuant to Section 2.2 hereof.
"Trademarks": shall mean and collectively include all trademarks,
trademark registrations, applications for trademark registration, and
goodwill associated with all trademarks presently owned, licensed or
hereafter adopted, acquired or licensed by Licensor, including, but not
limited to all trademarks identified on Schedule 1 hereto as the same may
hereinafter be amended from time to time.
"Trade Dress": shall mean the existing trade dress of the Products as
the same may hereinafter be modified from time to time with the consent and
approval of the Licensor.
1.2 Other Definitional Provisions.
(a) Unless otherwise specified therein, all terms defined in this
Agreement shall have the defined meanings when used in any other document
and/or certificate delivered pursuant hereto.
(b) The words "whereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole,
not to any particular provision of this Agreement, and Section, Subsection
and Schedule references are to this Agreement unless otherwise specified.
(c) The meanings given to the terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
2.1 Grant of License. Subject to the terms and conditions herein set
forth, Licensor hereby grants to Licensee the exclusive right and license in
each jurisdiction where a Trademark is registered, with the right to grant
sublicenses to other Subsidiaries:
3
<PAGE>
(a) To produce, have produced, process or otherwise manufacture, and to
use, sell and distribute the Products in accordance with the Product
Standards;
(b) To use any one or more of the Trademarks, alone or in conjunction
with any other trademarks or trade names of Licensee of any of its
Subsidiaries, on any Products which are sold by Licensee or by any of its
sublicensed Subsidiaries under the provisions of this Agreement;
(c) To the extent permitted pursuant to the provisions of Section 6.1
hereof, to bring and prosecute a suit or suits against any party (i) to
preclude the unauthorized use of any of the Trademarks or any confusingly
similar trademarks, and (ii) to preclude the unauthorized disclosure or use
of any of the Product Standards.
(d) To the extent permitted pursuant to provisions of Section 6.1
hereof, to defend any settle, at Licensee's expense, infringement suits
brought by others based upon the use or prospective use by Licensee and/or
its affiliates of any of the Trademarks.
(e) To grant sublicenses to its Subsidiaries, provided such sublicenses
are expressly made subject to all the terms and conditions of this Agreement,
and, if applicable, the terms and conditions of any license to Licensor.
2.2 Term. This Agreement shall commence on the effective date unless
sooner terminated pursuant to Section 3.1 hereof, and shall continue
thereafter for a period of five (5) years through and including June 30, 1997
(the "Initial Term") and for successive renewal terms of five (5) years each
(individually or collectively, a "Renewal Term") unless the Licensor or
Licensee shall give written notice of cancellation pursuant to the notice
provisions of Section II.1(f) hereof to the other party at least ninety (90)
days prior to the end Initial Term or the Renewal Term then ending, as the
case may be.
3.1 Defaults. This Agreement may be terminated by the Licensor at any
time upon the occurrence of one or more of the following Defaults:
(a) Licensee or any of its sublicensed Subsidiaries shall materially
breach any of the terms, conditions or agreements contained in this Agreement
which are required to be kept, observed or performed by Licensee or its
Subsidiaries if such Licensee or Subsidiary fails to cure such breach within
thirty (30) days of written notice thereof giving reasonably full particulars.
(b) Licensee or any of its sublicensed Subsidiaries shall become
insolvent or shall suspend business, or shall file a voluntary petition or an
answer admitting the jurisdiction of the Court and the material allegations
of, or shall consent to, an involuntary petition pursuant to or purporting to
be pursuant to any bankruptcy, reorganization or insolvency law of any
jurisdiction.
4.1 Royalty. Licensee and its sublicensed Subsidiaries shall pay to
Licensor a five percent (5%) royalty on Net Sales of all Products sold under
the Trademarks (the "Royalty"). The
4
<PAGE>
Royalty shall be payable quarterly within forty-five (45) days of the end of
each of the Licensee's fiscal quarters.
4.2 Sales by Subsidiaries. In the event that Licensee grants a
sublicense to any Subsidiary, Licensee agrees to pay the five percent (5%)
royalty due under Section 4.1 on all Net Sales of Products by such Subsidiary.
4.3 When Sales Made. For purposes of this Agreement, Products sold by
Licensee or by any sublicensed Subsidiary shall be considered sold when
invoiced, or if not invoiced, when delivered, shipped or mailed, or when paid
for, if paid for before delivery. No royalty shall be due and payable
hereunder in connection with any inter-company sale between the Licensee and
any sublicensed Subsidiary. Royalties paid on Products not accepted by the
customer and/or returned to Licensee or its Subsidiary shall be credited
against and deducted from future royalties, provided, however, that if such
returned Products are subsequently resold by Licensee or its Subsidiary,
Royalties shall then be paid thereon.
4.4 Payments. Unless otherwise mutually agreed in writing, on or before
the forty-fifth (45th) day following the end of each of Licensee's fiscal
quarters, Licensee will pay to Licensor the Royalty applicable to sales
during such quarter. All Royalty payments hereunder shall be made in United
States currency.
5.1 Records. Licensee, on behalf of itself and its sublicensed
Subsidiaries, agrees to keep adequate and complete records showing all sales
of Products sold under the Trademarks. Such records shall include all
information necessary to verify the total amount of Net Sales and the
royalties due hereunder and Licensee shall make such records available to
Licensor at its offices in Wilmington, Delaware upon reasonable notice during
reasonable business hours to the extent necessary to verify the amount
thereof.
5.2 Reports. Within forty-five (45) days of the last day of the
Licensee's fiscal quarters, Licensee shall furnish to Licensor a written
report, signed by an authorized representative of the Licensee, showing (a)
the total Net Sales of all Products during such fiscal quarter; and (b) the
total amount of royalties due the Licensor hereunder.
6.1 Infringement.
(a) If Licensee discovers third-parties infringing any enforceable
rights contained in the Licensed Assets, Licensee shall notify Licensor
promptly thereof. In the event that Licensee, at its discretion elects to
initiate and prosecute any such suit or suits pursuant to the rights granted
to Licensee in accordance with the provisions of Section 2.1(c) hereof, then
(i) all expenses incurred in such legal action shall be borne by Licensee and
all damages and costs that may be recovered or may be assessed as a result of
such suit or suits shall inure to Licensee; and (ii) Licensee shall have the
right to join Licensor as a nominal party plaintiff in any such suit or
suits, and the Licensor agrees
5
<PAGE>
to sign all papers and perform all acts which Licensee may reasonable request
to enable Licensee to enforce such rights.
(b) In the event Licensee notifies Licensor that it will not initiate
and/or, if initiated, will not prosecute such suit or suits against
third-party infringers, then Licensor shall have the right to initiate and/or
prosecute such suit or suits to protect the Licensor's interest in the
Licensed Assets. Whenever Licensor exercises its rights under this Section
6.1(b), then all expenses incurred in such legal action shall be borne by
Licensor and all damages and costs that may be recovered or may be assessed
as a result of such suit or suits shall inure to the Licensor.
(c) Whenever Licensor or Licensee discovers that a third-party has filed
an application for trademark registration in any country and/or has been
granted a trademark registration for any trademark which is confusingly
similar to any of the Trademarks, then Licensor and Licensee shall promptly
exchange information concerning such application and/or registration and
either Licensor or Licensee may, at its sole discretion and at its own
expense, bring and prosecute an appropriate proceeding under the trademark
laws in the jurisdiction in question to oppose such application and/or to
cancel such registration. Licensee shall have the right to join Licensor as
an opposer or petitioner in any such opposition and/or cancellation
proceedings, and Licensor agrees to sign all papers and perform all acts
which Licensee may reasonably request to enable Licensee to oppose such
application and/or to cancel such registration.
(d) In the event that any third-party claims that one or more of the
Trademarks or other Licensed Assets infringe any trademark or other right of
such party, Licensee shall have the right, at its option, to contest and
defend such claim. If Licensee declines to contest or defend such claim,
Licensor shall then have the right, at its option, to defend and contest such
claim. In the event that Licensee exercises it rights to contest and defend
any claim of infringement brought by a third-party in connection with any of
the Licensed Assets, Licensee agrees that it will not settle or compromise
such claim without the prior approval and consent of the Licensor whose
approval shall not be unreasonably withheld.
7. Maintenance of Product Quality. Licensee hereby agrees that all
products sold in connection with the Trademarks shall fully comply with (i)
all FDA Requirements (ii) all other legal requirements imposed by any other
Governmental Authority, and (iii) the applicable Product Standards. Licensee
further agrees to furnish to Licensor at its offices in Wilmington, Delaware
with such samples of its and any sublicensed Subsidiary's Products sold under
the Trademarks, as may be reasonably required by Licensor for examination and
testing, to verify compliance by Licensee and its sublicensed Subsidiary with
the Product Standards. Licensee further agrees on behalf of itself and its
affiliates to fully cooperate with Licensor and meet all Licensor's
reasonable requests intended to facilitate Licensee's compliance with its
obligations under this Section. The Product Standards may be changed only
with the consent and approval of the Licensor. As between Licensor and
Licensee, Licensee shall be fully responsible for and shall indemnify and
hold Licensor harmless against any and all products liability or negligence
claims.
6
<PAGE>
8.1 Maintenance and Renewal of Trademark Registrations. Until the
Termination Date, Licensee agrees to maintain and/or renew, as agent for
Licensor, the federal registrations and applications for all of the
Trademarks by duly filing at the United States Patent and Trademark Office in
Washington, D.C. all papers, responses, fees, applications for renewal,
affidavits of use (and/or incontestability, if appropriate) and all other
necessary papers required for such purpose by the Trademark Laws of the
United States. Licensor agrees to execute all applications for renewal and
other documents, and to perform all other acts, which Licensee may reasonably
request in order to enable Licensee to maintain and renew such registrations
as agent for Licensor. All costs incurred by Licensor in connection with
such maintenance and renewal shall be borne by Licensee.
8.2 Continued Use. Until the Termination Date, unless otherwise agreed
by Licensor, Licensee agrees to continue to use each of the Trademarks in
accordance with applicable trademark laws and the license granted under the
provisions of this Agreement.
8.3 Confidentiality. Licensee agrees to maintain the Product Standards
as confidential and is to refrain from disclosing such information to any
third parties except as necessary in accordance with its reasonable business
judgment.
9.1 Licensor's Representations. Licensor hereby represents and warrants
to Licensee as follows:
(a) Licensor is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
(b) Licensor has all necessary corporate power to enter into and perform
its obligations under this Agreement and, as of the effective date of this
Agreement, will have taken all necessary corporate action to authorize the
execution and consummation of this Agreement.
(c) Licensor is not in default with respect to any term or provision of
any charter, bylaw, mortgage, indenture, statute, rule or regulation
applicable to it, or with respect to any order, writ, injunction, decree,
rule or regulation of any court or administrative agency, which would
preclude the performance of its obligations under this Agreement.
(d) Neither the execution nor the delivery of this Agreement, nor the
consummation of the transactions herein contemplated, nor the fulfillment of
or compliance with the terms and provisions hereof will (i) violate any
provision of law, administrative regulations or court decree applicable to
Licensor; or (ii) conflict with or result in a breach of any of the terms,
conditions or provisions of or constitute a default under the charter or
bylaws of Licensee, or of any agreement or instrument to which Licensee is a
party or by which it is bound.
(e) Licensor has good and marketable title and rights to the Licensed
Assets and/or an appropriate license for the Licensed Assets subject only to
such liens as may exist from time
7
<PAGE>
to time under an applicable credit or security agreement to Licensor and/or
Licensee. Licensor has no knowledge of any third-party rights which would be
infringed by the use of the Licensed Assets.
9.2 Licensee's Representations. Licensee hereby represents and warrants
to Licensor as follows:
(a) Licensee is a corporation duly organized, validly existing and in
good standing under the laws of the State of Tennessee.
(b) Licensor has all necessary corporate power to enter into and
perform its obligations under this Agreement and, as of the effective date of
this Agreement, will have taken all necessary corporate action to authorize
the execution and consummation of this Agreement.
(c) Licensor is not in default with respect to any term or provision of
any charter, bylaw, mortgage, indenture, statute, rule or regulation
applicable to it, or with respect to any order, writ, injunction, decree,
rule or regulation of any court or administrative agency, which would
preclude the performance of its obligations under this Agreement.
10.1 Sublicenses. All sublicenses extended by Licensee to any Subsidiary
regarding any of the Licensed Assets shall be made expressly subject to the
terms and conditions of this Agreement, including but not limited to an
express undertaking by such affiliate to comply with all Product Standards.
Prior to granting any such sublicense, Licensee will provide a copy of the
Product Standards to such Subsidiary. No sublicensed Subsidiary shall have
the right to grant a further sublicense without the express written approval
of the Licensor.
11.1 Miscellaneous Provisions. The following miscellaneous provisions
shall apply to this Agreement.
(a) Superseding Effect. This Agreement supersedes and replaces all prior
licensing agreements between the Licensor and the Licensee with respect to
the Trademarks and Products.
(b) Non-Waiver. No delay or omission by either party in exercising any
right under this Agreement shall operate as a waiver of that or any other
right. A waiver or consent given by a party on one occasion is effective
only in that instance and will not be construed as a bar or a waiver of any
right on any other occasion.
(c) Non-Assignment of Trademarks. Nothing in this Agreement shall be
deemed to constitute an assignment by Licensor of the Trademarks or any right
therein or thereto, or give Licensee or any Subsidiary or affiliate of
Licensee any interest therein, except as herein provided.
(d) Binding Effect. All terms and conditions of this Agreement shall
bind and inure to the benefit and burden of the parties hereto with respect
to successors and assigns.
8
<PAGE>
(e) Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Delaware, without giving effect
to any conflict of law provisions thereof.
(f) Notices. Any notice required or desired to be served, given or
delivered hereunder shall be in writing, and shall be deemed to have been
validly served, given or delivered (i) three (3) days after depositing in the
United States mail with postage prepaid, (ii) when sent after receipt of
confirmation if sent by telecopy or by other similar facsimile transmission,
(iii) one (1) business day after deposit with a reputable overnight courier
with all charges prepaid, or (iv) when delivered, if hand delivered by
messenger, all of which shall be properly addressed to the parties to be
notified and sent to the address or number indicated as follows:
(i) If to Licensor at:
Signal Investment & Management Company
Suite 1300
1105 Market Street
Wilmington, Delaware 19801
Attention: Robert E. Bosworth
Telecopy: (302) 651-8464
Confirmation: (302) 651-8868
(ii) If to Licensee at:
Chattem, Inc.
1715 West 38th Street
Chattanooga, Tennessee 37409
Attention: Zan Guerry
Telecopy: (423) 821-2037
Confirmation: (423) 821-0395
or to such other address or number as each party designates to the other in
the manner herein prescribed.
(g) Entire Understanding. This Agreement constitutes the entire
understanding between the parties hereto with respect to the subject matter
hereof. No modifications, extensions or waivers of any of the provisions
hereof or any release or any right there under shall be valid unless the same
is in writing signed by the party to be bound thereby.
(h) Sales of Trademarks. Licensor reserves the right to sell one or more
of the Trademarks identified on Schedule 1 hereto on reasonable notice to the
Licensee and, upon such sale, Licensee's licensed rights to such Trademark
shall cease and terminate.
9
<PAGE>
(i) Licensing of Trademarks to Third Parties. Upon the prior consent of
Licensee, Licensor may license one or more of the Trademarks identified on
Schedule I hereto to a third party and, upon such licensing, Licensee's
licensed rights to such Trademark shall cease and terminate.
(j) Consent to Collateral Assignment. The parties hereby acknowledge
that Licensee has assigned or may assign its right, title and interest under
this Agreement as security for financing provided to Licensee by one or more
lenders. Nothwithstanding any other provisions contained in this Agreement,
the Licensor consents to the collateral assignment of this Agreement to such
lenders or their agents, for the benefit of the lenders. Unless and until
such lenders give notice to the undersigned of their intention to succeed to
the rights of Licensee under the Agreement, the lenders shall not be
obligated to perform any of the obligations of Licensee under the Agreement.
(k) Headings. The headings of this Agreement are intended solely for
convenience of reference and shall be given no effect in the construction and
interpretation of this Agreement.
10
<PAGE>
IN WITNESS WHEREOF, Licensor and Licensee have caused this
Agreement to be signed in Wilmington, Delaware, effective as of June 30, 1992.
SIGNAL INVESTMENT & MANAGEMENT CO.
By: /s/ Robert E. Bosworth
---------------------------------
Robert E. Bosworth, President
CHATTEM, INC.
By: /s/ Zan Guerry
---------------------------------
Zan Guerry, President
11
<PAGE>
SCHEDULE I
LICENSED TRADEMARKS
<TABLE>
<CAPTION>
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE
- --------- --------- ------------ -----------
<S> <C> <C> <C>
AMPHIBIOUS FORMULA California 67887 11/12/2002
AMPHIBIOUS FORMULA Canada 332,073 09/18/2002
AMPHIBIOUS FORMULA Florida 928164 11/05/2002
AMPHIBIOUS FORMULA Hawaii 149564 12/09/2002
AMPHIBIOUS FORMULA Texas 40988 11/08/2002
BRONZ SILK United Kingdom Ser.#1,523,350
BULLFROG Brazil
BULLFROG California 67888 11/12/2002
BULLFROG Canada 332,935 10/09/2002
BULLFROG Chile
BULLFROG Florida 928165 11/05/2002
BULLFROG Hawaii 149562 12/09/2002
BULLFROG Mexico 422988 12/30/2001
BULLFROG Peru 102006 03/05/2003
BULLFROG Texas 40989 11/08/2002
BULLFROG (Design Only) United States 1763958 04/13/2003
CARDUI (Calendars) United States 1,738,319 12/08/2007
CHATTEM Uruguay 267255 07/03/2005
CHATTEM, INC. Hong Kong 831 of 1979 12/14/1999
CORN SILK Australia A208,545 06/03/2002
CORN SILK Benelux 011,672 03/05/2005
CORN SILK Brunei 19394 12/21/2000
CORN SILK Canada 144,355 03/11/2011
CORN SILK Chile 374,978 09/23/2001
CORN SILK China 753821 07/06/2005
CORN SILK Costa Rica 36,183 R:6856 10/11/2002
CORN SILK El Salvador 241 05/24/2002
CORN SILK Great Britain 1,160,480 08/29/2002
CORN SILK Guatemala 18,987 11/14/1997
CORN SILK Honduras 40,059 06/15/2002
CORN SILK Indonesia 332,234 01/29/2004
CORN SILK Ireland 99,464 08/24/2002
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE
- --------- --------- ------------ -----------
<S> <C> <C> <C>
CORN SILK Italy 433,426 08/23/2004
CORN SILK Japan 1,571,445 03/28/2003
CORN SILK Malaysia 93/08798 11/09/2000
CORN SILK Mexico
CORN SILK New Zealand B78,955 06/30/2001
CORN SILK Nicaragua 22,811 06/02/2000
CORN SILK Panama 25,020 07/01/2000
CORN SILK Philippines 25,031 10/07/1997
CORN SILK Singapore Ser.#77050193
CORN SILK South Africa 65/2799 07/14/2005
CORN SILK South Africa 7014734 10/22/2000
CORN SILK Spain 1797781 01/07/2004
CORN SILK Venezuela 53,774 12/05/1997
CORN SILK & DESIGN Puerto Rico 24,727 05/20/2003
CORN SILK (Words) Puerto Rico 24,726 05/20/2003
EXELLE United States 1,229,147 03/08/2003
FLEX-ALL Austria 127,693 10/31/1999
FLEX-ALL Benelux 515044 07/10/2002
FLEX-ALL Canada 374,278 10/12/2005
FLEX-ALL Denmark 0534/1991 01/25/2001
FLEX-ALL Finland 116,143 01/20/2002
FLEX-ALL France 1,542,430 07/20/1999
FLEX-ALL Greece 95,610 09/14/1999
FLEX-ALL Ireland 136135 07/21/2006
FLEX-ALL Italy 570,574 07/20/1999
FLEX-ALL Japan Ser.#54524/91
FLEX-ALL Mexico 471468 12/30/2001
FLEX-ALL Norway 146157 07/25/2001
FLEX-ALL Portugal 257,341 12/10/2002
FLEX-ALL 454[device] Spain 1,535,531 12/05/1999
FLEX-ALL 454 & Design Sweden 374890 07/21/2009
FLEX-ALL Sweden 225,489 08/02/2001
FLEX-ALL 454 & Design Switzerland 674,890 07/21/2009
FLEX-ALL United Kingdom 1,392,101 07/17/2006
FLEX-ALL 454 Germany 39504534 02/02/2005
FLEX-ALL 454 Spain 1,513,531 12/05/1999
FLEXALL ICE Canada TMA 374 278 03/11/1999
FREE & FIRM Puerto Rico 22,025 04/26/1999
GO ZONE New Zealand Z17068 03/23/1999
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE
- --------- ---------- -------------- -----------
<S> <C> <C> <C>
GO-ZONE Australia
MUDD Argentina Ser.#1,953,665
MUDD Australia Ser.#590031
MUDD Bahamas 11,119 11/24/1997
MUDD Barbados 81/2822 (new) 11/29/2000
MUDD Benelux 352,798 06/05/1998
MUDD Brazil 810,808,315 04/05/1992
MUDD Canada 319,044
MUDD Chile 374,979 09/23/2001
MUDD Costa Rica 59,614 10/16/2001
MUDD Denmark 807/1979 03/23/1999
MUDD Dominican Republic 37,144 06/30/2004
MUDD Ecuador 4624-95 12/20/2005
MUDD Finland 77,509 05/05/2001
MUDD France 1,457,621 03/25/1998
MUDD Guatemala 41,967 09/30/2001
MUDD Haiti 478/62 01/23/2001
MUDD Honduras 29,800 08/03/2001
MUDD Italy Ser.#94 617 08/23/2004
MUDD Italy 433,428 08/23/2004
MUDD Jamaica 19,636 03/05/2002
MUDD Japan 2,348,136 10/30/2001
MUDD Mexico 422,990 12/30/2001
MUDD Namibia Ser.#96/1086
MUDD New Zealand B123,667 06/06/1999
MUDD Nicaragua 12.301C.C. 01/29/2001
MUDD Panama 027001 09/01/2001
MUDD Puerto Rico 23,176 11/07/2000
MUDD Scandanavia
MUDD South Africa B78/2675 06/06/1998
MUDD Spain 922,501 10/20/2000
MUDD State of Tennesse 04/06/2000
MUDD Sweden 168,193 06/21/1999
MUDD Trinidad/Tobago 11,892 03/16/2008
MUDD United Kingdom 1274157 08/09/2007
MUDD Uruguay 267256 07/03/2005
MUDD Venezuela 96,629 01/09/1996
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE
- --------- --------- --------------- -------------
<S> <C> <C> <C>
MUDD West Germany Ser.#C27222/3WZ
MUDD (Stylized-very old) Great Britain B1,096,797 06/08/1999
MUDD (Katakana Characters) Japan 1,597,970 03/30/1993
MUDD SCRUB Peru 4365 12/24/2003
NORDIC LOOK Benelux 480,589 04/05/2000
NORDIC LOOK France 831290
NORDIC LOOK Germany 1191126 03/29/2000
NORDIC LOOK Italy 583,576 04/05/2000
NORWICH Canada UCA017,241 08/27/2002
PAMPRIN Argentina 1,206,098 08/05/1996
PAMPRIN Australia A314,192 12/21/1998
PAMPRIN Bahamas 11,118 11/24/1997
PAMPRIN Barbados 8,298 11/29/1991
PAMPRIN Benelux 350,181 12/29/1997
PAMPRIN Colombia 191034 09/18/2006
PAMPRIN Costa Rica 21618 05/17/1998
PAMPRIN Denmark 2186/1978 06/23/1998
PAMPRIN Dominican Republic 27745 07/28/1998
PAMPRIN Ecuador 5441-90 12/20/2005
PAMPRIN El Salvador 100 07/21/2001
PAMPRIN Finland 76987 03/20/2001
PAMPRIN France 1,433,022 10/30/1997
PAMPRIN Great Britain 1,088,745 12/28/1998
PAMPRIN Guatemala 35,443 09/27/1998
PAMPRIN Haiti 476/62 01/23/1991
PAMPRIN Honduras 25,094 09/05/1998
PAMPRIN Ireland 92259 12/22/1998
PAMPRIN Italy 357,789 01/18/1998
PAMPRIN Mexico 254,691
PAMPRIN Netherland Antilles
PAMPRIN New Zealand 122,127 12/22/1998
PAMPRIN Nicaragua 8968C.C. 09/09/1998
PAMPRIN Norway 102,879 08/28/1999
PAMPRIN Panama 22,932 01/05/1999
PAMPRIN Peru 102005 03/05/2003
PAMPRIN Puerto Rico 21,511 07/21/1998
PAMPRIN Singapore 446/93 06/14/2003
PAMPRIN South Africa 77/5755 12/20/1997
PAMPRIN Sweden 167,905 06/01/1999
PAMPRIN Switzerland 314910
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE
- --------- --------- ------------ -----------
<S> <C> <C> <C>
PAMPRIN Trinidad 14,470 12/07/1997
PAMPRIN Venezuela 94,884 06/20/1995
PAMPRIN West Germany 993,141 01/02/1998
PAMPRIN (Block Letters) Canada 234,475 07/20/2009
PAMPRIN (Block Letters) Honduras 25,094 09/05/1998
PREMSYN PMS (Stress mark over "E") France 1,253,522 12/08/2003
PREMSYN PMS (Stress mark over "E") Italy Ser.#94 6167 08/23/2004
PREMSYN PMS (Stress mark over "E") Italy 433,427 08/23/2004
PREMSYN PMS (Stress mark over "E") United Kingdom 1,327,285 11/18/2004
SHY (Applicator) Canada N.S.177/45151 11/27/1997
SHY (Liquid Douche) Canada TMA192,381 06/29/2003
SOLTICE Hong Kong
SOLTICE Taiwan
SOMETHING PERSONAL Canada TMA259,143 05/22/2011
SPRAY BLOND Benelux 431,162 04/29/1997
SPRAY BLOND Denmark 2330/1989 05/12/1999
SPRAY BLOND International [France] IR.548,336
SPRAY BLOND Italy 433,425 08/23/2004
SPRAY BLOND Italy Ser.#94 6170
SPRAY BLOND & Device France 1,385,650 07/29/2006
SPRAY BLOND (logo) Switzerland 374349
SUMBRELLA Australia Ser.#576225
SUMBRELLA New Zealand 217069 03/23/1999
SUMMER HIGHLIGHTS United States 1784718 07/27/2003
SUN IN Australia A235,497 01/06/2005
SUN IN Bahamas 11,120 11/24/1997
SUN IN Benelux 365,077 03/20/1990
SUN IN Bophuthatswana 69/6154 12/22/1999
SUN IN Canada 171,191 09/11/1985
SUN IN Great Britain B1,123,580 11/06/2000
SUN IN Ireland 102,340 03/14/2001
SUN IN Namibia Ser.#96/1087
SUN IN New Zealand B96253 02/24/2006
SUN IN South Africa 69/6154 12/22/1999
SUN IN Transkei 69/6154 12/22/1999
SUN IN Venezuela Ser.#009791
SUN-IN Bophuthatswana 69/6154 12/22/1999
SUN-IN Colombia Ser.#97004674
SUN-IN New Zealand B96,253 02/24/2006
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE
- --------- --------- ------------ -----------
<S> <C> <C> <C>
SUN-IN Peru 421 06/23/2003
SUN-IN Puerto Rico 32,056 11/16/2002
SUN-IN State of Tennesse 04/06/2002
SUN-IN Venda 69/6154 12/22/1999
SUN-IN STREAKER United Kingdom B1,197,101 06/03/2004
THERA CARE Canada TMA239,954 02/15/2010
THERACARE (One Word) Great Britain 1,083,159 09/03/1998
THERACARE (One Word) Great Britain 1,083,160 09/03/1998
ULTRASWIM Brazil Ser.#819848093
ULTRASWIM Colombia Ser.#97004673
ULTRASWIM Mexico 422,987 12/30/2001
ULTRASWIM Peru Ser.#30771
ULTRASWIM (Swimmer Design) United States 1760924 03/30/2003
454 United States 1,999,980 09/10/2006
AMPHIBIOUS FORMULA United States 1,279,505 05/29/2004
BENZODENT Algeria 041014
BENZODENT Argentina 1,213,551 11/11/1996
BENZODENT Argentina Ser.#2052012
BENZODENT Australia A123157 05/13/2007
BENZODENT Austria 64286
BENZODENT Benelux 073989 11/05/2005
BENZODENT Bophuthatswana 68/5776
BENZODENT Brazil
BENZODENT Canada UCA49940 04/24/1999
BENZODENT Chile Ser.#374.245
BENZODENT Colombia Ser.#97006870
BENZODENT Cuba 92753 04/05/2005
BENZODENT Denmark 8454/1995 12/15/2005
BENZODENT Finland 79829 12/21/2001
BENZODENT France 1517062
BENZODENT Germany 670221 04/30/2004
BENZODENT Greece 52099 01/29/2004
BENZODENT Hong Kong A1202/69
BENZODENT Iceland 458/1989
BENZODENT Ireland 57722 06/14/1997
BENZODENT Italy 683,120 05/21/2004
BENZODENT Jordan 10491
BENZODENT Lebanon 45293
BENZODENT Mexico Ser.#289490
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE
- --------- --------- ------------ -----------
<S> <C> <C> <C>
BENZODENT Monaco R-83,956613
BENZODENT New Zealand 56682
BENZODENT Norway 106535
BENZODENT Peru 34940 04/10/2007
BENZODENT Philippines 16996
BENZODENT Portugal 152583
BENZODENT South Africa 68/5776.A
BENZODENT Sweden 174246 11/07/2000
BENZODENT Switzerland 270209
BENZODENT Transkei Tr68/5776
BENZODENT United Kingdom BR742143
BENZODENT United States 595,101 09/14/2004
BENZODENT Venda 68/5776
BENZOGEL United States Ser.#74/650,485
BENZOGEL United States 1767890 04/27/2003
BULLFROG United States 1,279,506 05/29/2004
BULLFROG & DESIGN
(MultiClass Registration) United States Ser.#75/126427
CHATTEM, INC. LOGO
(Design Registration) United States Ser.#75/113557 10/08/1997
CHILL STICK Canada Ser.#780659
CHILL STICK United States Ser.#74/630,796
CORN SILK Brazil
CORN SILK United States 799,233 11/23/2005
CORN SILK & DESIGN United States 1,457,919 09/22/2007
CORN SILK
(Block Letters & Bckgrnd) United States 1,193,832 04/20/2002
DAY ONE United States 1,608,789 08/07/2000
ECHINEX United States Ser.#75/125,773
FLEX-ALL United States 1,999,979 09/10/2006
FLEX-ALL 454 (Block Letters) United States 1,569,189 12/05/1999
FLEX-ALL 454 [Stylized] United States 1,481,352 03/22/2008
FLEX-ALL OF COLORADO United States COMMONLAW
FLEX-ALL-SOUTHWEST United States COMMONLAW
FOR THE PERIOD BEFORE YOUR PERIOD United States 1,674,764 02/11/2002
GARLIQUE United States 1,972,070
GB in Seal (GOLD BOND Design) United States Ser.#75/213265
GOLD BOND Benelux 525,883 01/22/2003
GOLD BOND Brazil
GOLD BOND Bulgaria 23,523 03/26/2003
GOLD BOND Canada TMA368196 04/27/2005
GOLD BOND Chile Ser.#374,247
GOLD BOND Colombia Ser.#97006868
GOLD BOND Czech Republic 187,034 03/30/2003
GOLD BOND Ghana
GOLD BOND India Ser.#590366
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE
- --------- --------- ------------ -----------
<S> <C> <C> <C>
GOLD BOND Indonesia 310,981 02/27/2003
GOLD BOND Israel 86,125 01/21/2000
GOLD BOND Japan Ser.#124676/1996
GOLD BOND Korea Ser.#96-41744
GOLD BOND Malaysia Ser.#93/00761
GOLD BOND Mexico 448,844 02/19/2003
GOLD BOND Morocco 50,654 02/19/2013
GOLD BOND Peru 35150 04/21/2007
GOLD BOND Singapore Ser.#S/1856/93
GOLD BOND Slovak Republic 172,163 03/25/2003
GOLD BOND Spain 1,745,203 02/18/2003
GOLD BOND United Arab Emirates Ser.#8458
GOLD BOND United Kingdom 1,422,292 04/18/2007
GOLD BOND United States 1,209,453 09/21/2002
GOLD BOND Venezuela Ser.#1233-95
GOLD BOND (Stylized) United States Ser.#75/217,379
GOLD BOND (Border Design) United States Ser.#75/213266
HERPECIN-L Benelux 536,533 09/14/2003
HERPECIN-L Canada 320,789 11/21/2001
HERPECIN-L France 1,317,148 07/16/2005
HERPECIN-L Italy 465,797 10/31/2005
HERPECIN-L Japan 2,423,899 06/30/2002
HERPECIN-L Portugal 233,930 11/28/2001
HERPECIN-L United States 912,472 06/08/2001
HERPESALVE Benelux 539,513 09/14/2003
HERPESALVE France 1,317,146 07/19/2005
HERPESALVE Germany 1 094 118/5 07/31/2005
HERPESALVE Italy 465,798 10/31/2005
HERPESALVE Japan 2,473,050 10/30/2002
HERPESALVE Portugal 233,931 11/28/2001
HI-THERM United States 708,677 12/02/2000
ICY HOT Bophuthatswana 77/2159 05/24/1997
ICY HOT Canada TMA409013 03/05/2008
ICY HOT Chile Ser.#374,246
ICY HOT El Salvador Ser.#18455-1
ICY HOT Italy 344450 05/23/2007
ICY HOT Mexico 384016 10/03/2004
ICY HOT Panama 69596 09/29/2005
ICY HOT Puerto Rico
ICY HOT Singapore Ser.#B4461/93 06/14/2000
ICY HOT South Africa 77/2159 05/24/1997
ICY HOT Taiwan 161832 10/31/2001
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE
- --------- --------- ------------ -----------
<S> <C> <C> <C>
ICY HOT Venda 77/2159 05/24/1997
ICY TO DULL THE PAIN AND
HOT TO RELAX IT AWAY United States Ser.#75/113558
ICY-HOT Argentina 1376579 03/30/2000
ICY-HOT Australia A310924 09/05/1998
ICY-HOT Barbados 6708 07/31/1999
ICY-HOT Benelux 345750 05/17/1997
ICY-HOT Bermuda 8647 10/23/1999
ICY-HOT Bolivia 36996-A 09/19/1997
ICY-HOT Brazil 770139868 02/07/2004
ICY-HOT Colombia 186677 04/09/2006
ICY-HOT Costa Rica 87581 07/20/2004
ICY-HOT Denmark VR00.611/78 02/17/1998
ICY-HOT Dominican Republic 26636 07/26/1997
ICY-HOT Dutch Antilles 10476 11/22/2007
ICY-HOT Ecuador 409.88 11/22/2002
ICY-HOT El Salvador 170/84 09/02/2000
ICY-HOT France 1,409,746 05/20/2007
ICY-HOT Greece 60897 04/05/1998
ICY-HOT Guatemala 34605/226/84 05/21/1998
ICY-HOT Haiti 74/80 10/28/1997
ICY-HOT Honduras 24388 01/17/1998
ICY-HOT Indonesia 247,234 03/04/1999
ICY-HOT Jamaica B18633 06/09/1998
ICY-HOT Malaysia M/B75961 08/11/1998
ICY-HOT Nicaragua 7766-C.C. 12/19/1997
ICY-HOT Paraguay 126,430 10/19/1997
ICY-HOT Peru 82345 12/15/2004
ICY-HOT Philippines 36,541 01/21/2007
ICY-HOT Spain 868743 07/17/1998
ICY-HOT Trinidad B10689 05/21/2006
ICY-HOT United States 970,575 10/16/2003
ICY-HOT Uruguay 218786 10/10/2000
ICY-HOT Venezuela 99,844-F 07/06/1997
ICYHOT Great Britain B1,078,443 05/13/1996
ICYHOT Ireland B92568 05/17/1998
ICYHOT Sarawak B17,092 05/15/1998
INGRAM'S IQU United States 1,286,791 07/24/2004
KYLICIN Benelux 539616 09/14/2003
KYLICIN Canada 326,967 05/01/2002
KYLICIN France 1317147 07/16/2005
KYLICIN Italy 465799 10/31/2005
KYLICIN Portugal 233932 11/28/2001
KYLICIN United States 1,395,494 06/03/2006
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE
- --------- --------- ------------ -----------
<S> <C> <C> <C>
LIP-ADE United States Ser.#74/422640 05/10/1997
LIVING WITH PAIN
(for use with ICY HOT) United States Ser.#75/113559
MELATONEX United States Ser.#74/734,613
META CINE United States 732,963 11/21/1999
MICRON United States 1,499,169 08/09/2008
MUDD United States 1,011,938 05/27/2005
MUDD FACIAL TREATMENT United States Ser.#74/571539
MUDD MOISTURIZER United States 1,290,647 08/21/2004
MUDD SPA TREATMENT United States Ser.#74/537,103
N and Design (Norwich) United States 1,765,513 04/20/2003
NORWICH Puerto Rico 6172 08/08/1996
NORWICH United States 1732425 11/17/2002
PAMPRIN Brazil
PAMPRIN Philippines 61832 11/10/2015
PAMPRIN United States 709,866 01/17/2001
PAMPRIN IB United States 1,499,182 08/09/2008
PAMPRIN (Stylized "A" in
decorative italics) United States 1,982,586 06/25/2006
PREMSYN PMS
(stress mark over "E") United States 1,471,156 01/05/2008
PREVENTIVE CLEANSING United States
PROPALMEX United States Ser.#75/007,842
QUIK GEL United States Ser.#74/654830
QUIK GEL United States 1,951,563 01/12/2006
REJUVEX United States 1,730,604
SILKENOL United States 1,604,279 07/03/2000
SUN IN (without hyphen) United States 908,769 02/03/2001
SUN-IN Brazil
SUN-IN Chile Ser.#367,799
SUN-IN (BLOCK LETTERS) United States 1,456,006 09/08/2007
SUNRISE (Design) United States 2,006,261
SUNSOURCE United States 1,287,627
SUNSOURCE United States 1,947,948
SUNSOURCE & design United States Ser.#75/057,292
SUNSOURCE TRADITIONAL
HOMEOPATHIC MEDICINES United States COMMONLAW
T-ZONE United States Ser.#75/217,386
TADPOLE United States 1,339,919 06/11/2005
THE DAILY PRESCRIPTION FOR United States Ser.#
THE ONCE A DAY,
ALL DAY SUNSCREEN United States Ser.#
THE QUICKEST PROTECTION
UNDER THE SUN United States Ser.#75/184,903
THE ULTIMATE WATERPROOF
SUNBLOCK United States 1,996,473 08/27/2006
THERA CARE United States 1,092,610 06/06/1998
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE
- --------- --------- ------------ -----------
<S> <C> <C> <C>
TRAINER'S CHOICE United States Ser.#74/609150
WEIGHTLESS (Corn Silk) United States
WEIGHTLESS BY CORN SILK United States Ser.#
MACCEL United States Ser.#
MAXCEL United States Ser.#
- -------------------------------------------------------------------------------------
</TABLE>
INTELLECTUAL PROPERTY RIGHTS
TRADEMARKS LICENSED BY VALMONT, INC. TO
SIGNAL INVESTMENT & MANAGEMENT CO.
<TABLE>
<CAPTION>
TRADEMARK COUNTRY REGIST NO. RENEWAL DUE
- --------- --------- ------------ -----------
<S> <C> <C> <C>
PHISO Canada 157674 07/12/1998
PHISOAC Canada 118977 07/29/2005
PHISOAC (Stylized) United States 699720 06/21/2000
PHISOCARE Canada 196899 01/18/2004
PHISODAN Canada 132672 09/13/2008
PHISODAN Puerto Rico 13379 06/01/1995
PHISODAN (Stylized) United States 764556 02/11/2004
PHISODERM Canada 78/20300 03/15/2005
PHISODERM Puerto Rico 19097 09/18/1994
PHISODERM United States 408558 08/15/2004
PHISOFOAM Canada 157673 07/12/1998
PHISOLAN Canada 240802 03/07/1995
PHISOPUFF (Block) United States 1294345 09/11/2004
PHISODERM Canada
PHISOPUFF Canada
PHISODERM ADVANCE Canada
PHISODERM ADVANTAGE Canada
ADVANTAGE BY PHISODERM Canada
ADVANCE BY PHISODERM Canada
</TABLE>
11
<PAGE>
INTELLECTUAL PROPERTY RIGHTS
TRADEMARKS LICENSED BY ELJENN INTERNATIONAL TO
SIGNAL INVESTMENT & MANAGEMENT CO.
<TABLE>
<CAPTION>
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE
- --------- ------- ------------ -----------
<S> <C> <C> <C>
ULTRASWIM Argentina 1,582,406 12/14/2005
ULTRASWIM Australia A38,027 09/14/2003
ULTRASWIM Bahamas 11,284 05/09/1998
ULTRASWIM Barbados 81/2968 05/17/2001
ULTRASWIM Benelux 397,277 03/01/2004
ULTRASWIM Bermuda 10,234 05/23/2005
ULTRASWIM Canada 280,281 06/10/1998
ULTRASWIM Denmark 1694-1986 07/25/2006
ULTRASWIM Finland 96011 09/05/2006
ULTRASWIM France 1,212,873 09/14/2002
ULTRASWIM Germany 1,054,979 09/17/2002
ULTRASWIM Italy 668,401 03/30/2003
ULTRASWIM Japan 137833/87 05/31/2000
ULTRASWIM Malaysia 85/00685 02/12/2006
ULTRASWIM Netherlands Antilles 18574 01/26/2005
ULTRASWIM Norway 124,666 04/03/2006
ULTRASWIM Panama 037265 09/23/2005
ULTRASWIM Singapore 2664/84 05/17/2001
ULTRASWIM South Africa/Cisk 84/3387 04/13/1994
ULTRASWIM Sweden 200155 03/07/2006
ULTRASWIM Thailand KOR12235 06/14/2004
ULTRASWIM United Kingdom 1,181,846 TM 09/16/2003
ULTRASWIM (Block
Ltrs/Soap & Shampoo) United States 1,197,606 06/15/2002
ULTRASWIM
(Condition/Body Lotion) United States 1,681,731 04/07/2002
ULTRASWIM
(Shampoo & Conditioner) Puerto Rico 26,209 07/03/2005
ULTRASWIM (Soap) Puerto Rico 26,208 07/03/2005
ULTRASWIM
(With Dolphin Design) United States 1,471,131 01/05/2008
- -----------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
EXHIBIT 10.2
CHATTEM, INC.
NON-STATUTORY STOCK OPTION PLAN - 1998
1. PURPOSE
The Chattem, Inc. Non-Statutory Stock Option Plan - 1998 (the "Plan") is
designed to enable officers and key management employees of Chattem, Inc.
(the "Company") and its Subsidiaries to continue to acquire shares of the
Company's common stock and thus to share in the future success of the
Company's business. Accordingly, the Plan is intended as a further means not
only of attracting and retaining outstanding management personnel, but also
of promoting a closer identity of interest between key management employees
and the Company and its shareholders.
2. DEFINITIONS
Unless the context clearly indicates otherwise, the following terms, when
used in the Plan, shall have the meanings set forth in this Section 2.
(a) "Beneficiary" means the person or persons designated in writing by
the Optionee or, in the absence of such a designation or if the
designated person or persons predecease the Options, the Optionee's
Beneficiary shall be the person or persons who acquire the right
to exercise the Option by bequest or inheritance. In order to be
effective, an Optionee's designation of a Beneficiary must be on
file with the Committee before the Optionee's death. Any such
designation may be revoked in writing and a new written designation
substituted therefor at any time before the Optionee's death.
(b) "Board of Directors" or "Board" means the board of directors of the
Company.
(c) "Change in Control" means:
(i) Change of 1/3 or more of the directors of the Company within
any twelve (12) month period; or
(ii) Change of 1/2 or more of the directors of the Company within
any twenty-four (24) month period; or
(iii) Acquisition by any person of the ownership of or right to
vote thirty-five percent (35%) or more of the Company's
outstanding voting stock. For purposes of this paragraph
(iii): (A) "person" shall mean any person, corporation,
partnership or other entity and any affiliate or associate
thereof and (B) "affiliate" and "associate" shall have the
meanings given to them in Rule 12b-2 promulgated under the
Exchange Act.
<PAGE>
(d) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(e) "Committee" means the Compensation Committee of the Board of
Directors. The Committee shall consist of three (3) directors of the
Company who are not employees of the Company and its subsidiaries.
No member of the Committee shall be eligible to participate in the
Plan. Each member of the Committee shall be a "disinterested person,"
as such term may be defined for purposes of Rule 16b-3 or its
successors under the Exchange Act.
(f) "Company" means Chattem, Inc., a corporation incorporated under the
laws of the State of Tennessee.
(g) "Disability" means a disability that entitles the Optionee to
benefits under the Company's Long-Term Disability Plan, as amended
from time to time.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(i) "Fair Market Value" means the closing sale price on the last business
day prior to the date on which Fair Market Value needs to be
determined as reported in the Wall Street Journal, or the average
of the high and low bids on such day if no sale exists.
(j) "Option" means an option to purchase a share or shares of the
Company's common stock.
(k) "Option Agreement" means the written agreement to be entered into by
the Company and the Optionee, as provided in Section 7 hereof.
(l) "Optionee" means a person to whom an Option has been granted under
the Plan.
(m) "Retirement" means retirement from employment with the Company and
its Subsidiaries, as determined by the Committee in its sole
discretion.
(n) "Shares" means shares of the Company's common stock.
(o) "Subsidiary" means a subsidiary corporation as defined in Section
425(f) of the Code (or a successor provision of similar import).
(p) "Term" means the period during which a particular Option may be
exercised in accordance with Section 10 hereof.
2
<PAGE>
3. EFFECTIVE DATE OF THE PLAN
The Plan shall become effective when adopted by the Board of Directors
and an appropriate registration statement filed with the Securities and
Exchange Commission becomes effective; provided, however, that if the Plan is
not approved by the holders of a majority of the outstanding Shares present,
or represented, and entitled to vote at the meeting before the first
anniversary of its adoption by the board, the Plan and all Options granted
under the Plan prior to such anniversary shall be null and void and shall be
of no effect.
4. NUMBER AND SOURCE OF SHARES SUBJECT TO THE PLAN
(a) The Company may grant Options under the Plan for not more than Three
Hundred Fifty Thousand (350,000) Shares (subject, however, to
adjustment as provided in Section 14 hereof) which shall be provided
by the issuance of Shares authorized but unissued.
(b) In the event that an Option shall for any reason lapse or be
terminated without being exercised in whole or in part, the Shares
subject to the Option shall be restored to the total number of
Shares with respect to which Options may be granted under the Plan,
but only to the extent that the Option has not been exercised
previously.
5. ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by the Committee.
(b) The Committee shall adopt such rules and regulations (including
amendments thereto) as it may deem proper; provided, however, that
it may take action only upon the agreement of a majority of its
members then in office. Any action that the Committee may take
through a written instrument signed by a majority of its members
then in office shall be as effective as though taken at a meeting
duly called and held.
(c) The powers of the Committee shall include plenary authority to
interpret the Plan, and, subject to the provisions hereof, the
Committee shall determine the persons to whom Options shall be
granted, the number of Shares subject to each Option, the Term of
each Option, the date on which each Option shall be granted, and
the provisions of each Option Agreement.
6. PLAN PARTICIPANTS ELIGIBLE TO RECEIVE OPTIONS
(a) Options may be granted under the Plan to key management employees
of the Company or any Subsidiary, including officers and directors
who, in the judgment of the
3
<PAGE>
Committee, have a substantial impact on the Company's attainment of
corporate goals. All determinations by the Committee as to the
identity of the persons to whom Options shall be granted hereunder
shall be conclusive. No director who is a member of the Committee
shall be entitled to participate in the Plan.
(b) An individual employee may receive no more than one Option hereunder
during any three (3) year period. The grant of an Option in any year
shall not give the Optionee any right to Options in future years or
any right to be retained in the employ of the Company or its
Subsidiaries.
7. OPTION AGREEMENTS
(a) No Option shall be exercised by an Optionee unless the Optionee shall
have executed and delivered an Option Agreement.
(b) Appropriate officers of the Company are hereby authorized to execute
and deliver Option Agreements in the name of the Company as directed
from time to time by the Committee.
8. NON-STATUTORY OPTIONS
It is intended that the Options granted hereunder shall not be "incentive
stock options" within the meaning of the Code.
9. OPTION PRICE
The Option price to be paid by the Optionee to the Company for each Share
purchased upon the exercise of the Option shall be determined by the
Committee and shall not be less than the Fair Market Value of the Share on
the date the Option is granted, but may exceed Fair Market Value in the sole
discretion of the Committee.
10. TERM OF OPTION; EXERCISE OF OPTION
(a) Each Option granted under the Plan shall be exercisable as
provided in this Section 10. In no event may an Option be
exercised before the approval of the Plan by the holders of a
majority of the outstanding Shares present, or represented,
and entitled to vote at the meeting within the period specified
by Section 3 hereof. The Term of each Option shall end (unless the
Option shall have terminated earlier under any other provisions
of the Plan) on a date ten (10) years from the date of grant of
the Option.
4
<PAGE>
(b) Each Option shall become exercisable and vested with respect to
twenty-five percent (25%) of the Shares purchasable thereunder on
the first anniversary of the date of the grant of the Option. The
option to purchase an additional twenty-five percent (25%) of such
Shares shall become exercisable and vested, on a cumulative basis,
on each of the three succeeding anniversaries of the date of the
grant of the Option, so that four (4) years from the date of such
grant the option to purchase all such Shares shall have become
exercisable and vested. Notwithstanding the foregoing vesting
schedule (i) each Option shall become exercisable in full
immediately upon a Change in Control and (ii) upon the death,
disability or retirement of an Optionee or termination of an
Optionee's employment pursuant to Section 12(e), any Option held by
such Optionee shall be exercisable in full in accordance with the
provisions of Section 12. When exercising an Option, the Optionee
may purchase less than the full number of Shares then available
under the Option.
(c) Options shall be exercised by delivering or mailing to the Committee:
(1) a notice, in the form and in the manner prescribed by the
Committee, specifying the number of Shares to be purchased,
and
(2) payment in full of the Option price for the Shares in cash
and/or by the tender of Shares (by delivering the
appropriate stock certificates) to the Committee; provided,
however, that (i) the Committee shall determine acceptable
methods for tendering shares to exercise an Option under the
Plan, and may impose such limitations and prohibitions on
the use of Shares to exercise an Option as it deems
appropriate and (ii) the Committee may permit Optionees to
pay for any Shares subject to an Option by delivering to the
Committee a properly executed exercise notice together with
a copy of irrevocable instructions to a broker to deliver
promptly to the Company the amount of sale or loan proceeds
to pay the purchase price.
The Company may enter into agreements for coordinated
procedures with one or more brokerage firms in connection
with exercises of Options. The value of any Shares tendered
in accordance with this Paragraph (c) shall be determined on
the basis of their Fair Market Value on the date of exercise.
5
<PAGE>
(d) Subject to the provisions of Section 11(a) hereof, upon receipt of
the notice of exercise and upon payment of the Option price, the
Company shall promptly deliver to the Optionee a certificate or
certificates for the Shares purchased, without charge to the
Optionee for issue or transfer tax.
11. CONDITIONS ON EXERCISE
(a) The exercise of each Option granted under the Plan shall be subject
to the condition that if at any time the Company shall determine in
its discretion that the satisfaction of withholding tax or other
withholding liabilities, or that the listing, registration or
qualification of any Shares otherwise deliverable upon such exercise
upon any securities exchange or under any State or Federal law, or
the consent or approval of any regulatory body, is necessary or
desirable as a condition of, or in connection with, such exercise or
the delivery or purchase of Shares, then in any such event such
exercise or payment shall not be effective or be made unless such
withholding, listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions
not acceptable to the Company. Any such postponement shall not
extend the time within which the Option may be exercised; and neither
the Company nor its directors or officers shall have any obligation
or liability to the Optionee or to a Beneficiary with respect to any
Shares as to which the Option shall lapse because of such
postponement.
(b) All Options granted under the Plan shall be non-transferable other
than by will or by the laws of descent and distribution in
accordance with Section 12(a) hereof, and an Option may be exercised
during the lifetime of the Optionee only by the Optionee.
Further, to the extent required by Rule 16-3 or its successors
under the Exchange Act, Shares acquired by persons subject to
Section 16 of the Exchange Act may not be transferred for at least
six (6) months after the later of (i) the grant of the Option pursuant
to which such Shares were acquired or (ii) approval of the Plan by
the holders of a majority of the outstanding Shares present, or
represented, and entitled to vote at the meeting.
(c) Subject to the provisions of Section 11(b), upon the purchase of
Shares under an Option, the stock certificate or certificates may,
at the request of the Optionee (or the Optionee's Beneficiary, where
the Option is exercised by the Beneficiary), be issued in the name
of the
6
<PAGE>
Optionee (or Beneficiary) and the name of another person as joint
tenants with the right of survivorship.
12. EXERCISE OF OPTION AFTER DEATH, DISABILITY, RETIREMENT, OR OTHER
TERMINATION OF EMPLOYMENT.
(a) Death. If an Optionee's employment with the Company or a Subsidiary
shall cease due to the Optionee's death, any Option held by the
Optionee on the date of the Optionee's death may be exercised only
with three (3) years after the Optionee's death and only by the
Optionee's Beneficiary. If an Optionee shall die within three (3)
years after cessation of employment while the Option is exercisable
pursuant to Paragraph (b) below, or if the Optionee shall die within
three (3) years after cessation of employment while the Option is
exercisable pursuant to Paragraph (c) below, any Option held by the
Optionee on the date of this death may be exercised after the
Optionee's death only within the remainder of the period prescribed
by Paragraph (b) or Paragraph (c), as the case may be, and only by the
the Optionee's Beneficiary. Notwithstanding the foregoing, in no
event shall the Option be exercisable after the expiration date
thereof specified in the Option Agreement.
(b) Disability. If an Optionee's employment with the Company or a
Subsidiary ceases due to Disability, the Optionee may exercise the
Option at any time within three (3) years after the Optionee shall
so cease to be an employee; provided, however, that in no event
shall the Option be exercisable after the expiration date thereof
specified in the Option Agreement.
(c) Retirement. If an Optionee's employment with the Company or a
Subsidiary ceases due to Retirement, the Optionee may exercise the
Option at any time within three (3) years after the Optionee shall
so cease to be an employee; provided, however, that in no event
shall the Option be exercisable after the expiration date thereof
specified in the Option Agreement.
(d) Leave of Absence. The Committee shall have the sole authority to
determine whether, in any particular case, a leave of absence shall
result in a termination of employment for purposes of this Section 12.
(e) Divestiture. If an Optionee's employment with the Company or a
Subsidiary ceases due to divestiture of a Subsidiary or other
distinct business unit of the Company, the Optionee may exercise the
Option at any time within ninety (90) days after the divestiture,
provided that the Optionee is an employee on the actual date of the
divestiture; and further provided, that in no event
7
<PAGE>
shall the Option be exercisable after the expiration date thereof
specified in the Option Agreement.
(f) Termination for Other Reasons. Upon termination of an Optionee's
employment with the Company or a Subsidiary for any reason other
than those specified in a Paragraphs (a) through (e) above, the
Optionee may exercise the Option (to the extent vested) at any time
within thirty (30) days after such termination; provided, however,
that in no event shall the Option be exercisable after the
expiration date thereof specified in the Option Agreement.
13. STOCKHOLDER RIGHTS
No person shall have any rights of a stockholder by virtue of an Option
Except with respect to Shares actually issued to him or her, and the issuance
of Shares shall confer no retroactive right to dividends.
14. ADJUSTMENTS FOR CHANGES IN CAPITALIZATION
In the event that there is a change in the Shares through merger,
consolidation, reorganization, recapitalization, or otherwise, or if
there shall be any dividend on the Company's Shares, payable in such Shares,
or if there shall be a stock split or combination of Shares, the Aggregate
number of Shares available for Options, the number of Shares subject to
outstanding Options, and the Option price per shares of each outstanding
Option shall be proportionately adjusted by the Committee as it deems equitable
in its absolute discretion, to prevent dilution or enlargement of the rights of
the Optionee; provided, that any fractional Shares resulting from such
adjustments shall be eliminated. The Committee's determination with respect
to any such adjustments shall be conclusive.
15. EFFECT OF MERGER OR OTHER REORGANIZATION
If the Company shall be the surviving corporation in a merger or other
reorganization, Options shall extend to stock and securities of the Company
to the same extent that a holder of that number of shares immediately before
the merger or consolidation corresponding to the number of Shares covered by
the Option would be entitled to have or obtain stock and securities of the
Company under the terms of the merger or consolidation.
16. TERMINATION, SUSPENSION OR MODIFICATION OF PLAN
The Committee may at any time terminate, suspend or modify the Plan,
except that the Committee shall not, without the authorization of the holders
of a majority of the Company's outstanding Shares at a shareholders' meeting
duly called and held, change (other than through adjustment for changes in
capitalization
8
<PAGE>
as provided in Section 14 hereof): (a) the aggregate number of Shares with
respect to which Options may be granted; (b) the class of persons eligible
for Options; (c) the Option price; or (d) the maximum duration of the Plan.
No termination, suspension or modification of the Plan shall adversely affect
any right acquired by an Optionee, or by any Beneficiary, under the terms of
an Option granted before the date of such termination, suspension or
modification, unless such Optionee or Beneficiary shall consent; but it shall
be presumed conclusively that any adjustment for changes in capitalization in
accordance with Section 14 hereof does not adversely affect any such right.
17. APPLICATION OF PROCEEDS
The proceeds received by the Company from the sale of Shares under the
Plan shall be used for general corporate purposes.
18. DURATION OF THE PLAN
Unless sooner terminated in accordance with Section 16 hereof, the Plan
shall remain effect for a period of five (5) years from the date of its
adoption by the Board of Directors. Expiration of such five (5) year period
shall not affect the vesting of previously granted Options pursuant to
Section 10(b) hereof.
19. COMPLIANCE WITH RULE 16b-3
With respect to persons subject to Section 16 of the Exchange Act,
transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the
extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee.
20. GOVERNING LAW
The Plan shall be construed and its provisions enforced and administered
in accordance with the laws of the State of Tennessee except to the extent
that such laws may be superseded by any Federal law.
9
<PAGE>
EXHIBIT 11
CHATTEM, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
NET INCOME (LOSS):
Continuing operations............................................................. $ 7,255 $ 3,804 $ 2,325
Discontinued operations........................................................... -- -- 10,008
Extraordinary loss on early extinguishment of debt, net........................... (1,370) (532) (367)
--------- --------- ---------
Net income...................................................................... $ 5,885 $ 3,272 $ 11,966
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
Weighted number of common shares outstanding...................................... 8,793 8,052 7,292
Shares issued upon assumed exercise of outstanding stock options and warrants..... 331 101 --
--------- --------- ---------
Weighted average number of common and common equivalent shares outstanding...... 9,124 8,153 7,292
--------- --------- ---------
--------- --------- ---------
NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations............................................................. $ .80 $ .47 $ .32
Discontinued operations........................................................... -- -- 1.37
Extraordinary loss on early extinguishment of debt, net........................... (.15) (.07) (.05)
--------- --------- ---------
Net income per common share..................................................... $ .65 $ .40 $ 1.64
--------- --------- ---------
--------- --------- ---------
</TABLE>
1
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Exhibit 13
January 26, 1998
1997--A RECORD BREAKING YEAR
Fiscal 1997 was quite simply the best year in Chattem's 119 year
history. Sales increased 20% to $143 million and earnings per
share from continuing operations jumped 70% to $.80 per share.
At Chattem, we continually talk of the importance of maintaining
momentum. This year's 70% increase in EPS, on top of last year's
47% increase, establishes this period as an all time record
breaking one. Our goal for 1998 is to keep this momentum
going strongly as we head towards $200 million in sales.
1997 HIGHLIGHTS
For the second consecutive year, GOLD BOND was the number one
reason for our strong results. GOLD BOND Medicated Powder
maintained its dominance of the adult powder market. GOLD BOND
Cream continued to grow and gain market share in the anti-itch
cream category. Finally, our two new products, GOLD BOND Foot
Powder and GOLD BOND Cornstarch Plus Baby Powder, were both
successfully introduced.
A second notable highlight was the continued strong growth of ICY
HOT. ICY HOT has been on a growth track ever since its
acquisition in 1991, but fiscal 1997 was the best year ever for
ICY HOT, with sales increasing over 35%, led by the introduction
of ICY HOT Arthritis Therapy Gel.
<PAGE>
The SUNSOURCE acquisition including the brands GARLIQUE, REJUVEX,
MELATONEX, PROPALMEX and ECHINEX was another driving factor
behind 1997 results. The SUNSOURCE acquisition not only brought
us five important herbal brands, but more importantly positioned
us as a leader in the dramatically growing herbal market.
Through five months, SUNSOURCE performed on plan with very strong
results from GARLIQUE offsetting lower results from ECHINEX.
In addition to the above highlights, we had another very good
year in terms of controlling expenses leading to improved
profitability. Areas of focus were improving profitability on
our toiletries brands, controlling people expenses and reducing
overall general and administrative expenses. These efforts
resulted in a record operating income of almost 17.8% of sales
versus 14% last year. Selling, general and administrative
expenses declined from 18.2% to 15.6% of sales.
These results were achieved while we continued to invest in
advertising and promotion to drive our brands' growth. For the
year, advertising and promotion expenses increased 23.4% to 39.2%
of sales, versus 38.3% last year.
On the negative side, we had a few brands that didn't meet our
expectations. BULLFROG was down about 16%, reflecting a couple of
key accounts which did not run expected programs. In 1998,
BULLFROG sales should jump dramatically, as we have several major
accounts committed to strong programs.
PHISODERM and FLEXALL also failed to meet expectations. We are
planning major new creative and media support to rejuvenate these
two brands.
1998--THE YEAR OF NEW PRODUCTS
As we look to continue our momentum into 1998, two extremely
exciting new products will be major factors. The first which
began shipping February 15 is HARMONEX. When we acquired
SUNSOURCE last year, a major reason for the acquisition was that
it provided a platform to introduce new herbal products, and we
believe HARMONEX is potentially one of SUNSOURCE'S biggest
opportunities ever.
<PAGE>
HARMONEX is a combination of St. John's Wort, proven to help
emotional balance, with Siberian Ginseng, an herb providing a
boost to our physical well being. This product harkens back to
the Roman concept of a sound mind and a sound body.
The market for such a product is huge, as almost half of American
adults suffer some combination of mild depression, low spirits,
chronic anxiety or severe mood swings. Also, it is a widely held
belief that continued anxiety, stress or low spirits can lead to
physical health problems.
Dr. Harold Bloomfield is perhaps America's number one expert on
anxiety and depression and author of the best seller, HYPERCIUM
AND DEPRESSION (Hypercium is the active ingredient in St. John's
Wort) and the upcoming book, HEALING ANXIETY WITH HERBS. His
books are full of exciting material for people more interested in
the power of herbs to provide emotional and physical well being.
Dr. Bloomfield is a proponent of the HARMONEX formula and will
work with us as a consultant for the next year.
Given the exciting opportunity for HARMONEX, we will be spending
more advertising dollars on this launch than any other in our
history. For the six months starting May 1, we will be spending
at a reported annual rate of $15- $20 million.
Our other major launch is a GOLD BOND extension in the second
half of the year. This new product will extend the strong GOLD
BOND franchise into its largest category ever. This line
extension is the most researched new product in our history. We
will be launching it with annual media spending of approximately
$15 million, plus the distribution of 4 million samples.
We have targeted to invest amounts equal to $.20 to $.25 per
share to support these two launches for 1998.
CONTINUED BRAND DEVELOPMENT
Over the last several years, we have invested in advertising and
promotions to grow our brands. We will continue this in 1998
with several strong and innovative programs, which I will briefly
highlight.
<PAGE>
ICY HOT will receive another record year of advertising support
behind both the growing base franchise, plus new ARTHRITIS
THERAPY GEL, which in January, 1998 had its best Nielsen ever.
BULLFROG should achieve its highest sales volume in history, due
to several major accounts making strong commitments to BULLFROG.
BULLFROG will be supported by record media spending on national
radio starting with Spring Break.
Several brands will receive new advertising programs for 1998.
FLEXALL will receive significant new creative as well as radio
support. CORN SILK will have its largest print campaign starting
in January. For SUNSOURCE, all the brands will have major
advertising support. At this point, GARLIQUE appears to be
responding the most dramatically, although REJUVEX and PROPALMEX
are doing well.
CONCLUSIONS
Finally, 1998 started with a significant management change at
Chattem. Bob Bosworth, Executive Vice-President and Chief
Financial Officer, left us after an outstanding eighteen year
record at Chattem. He will remain on our Board.
Fortunately, Alec Taylor, a Board member for four years as well
as our legal counsel for eight years, joined us as President and
Chief Operating Officer. In addition to the fact that no one
worked closer with Bob than Alec, he brings outstanding
managerial skills to us.
Someone asked me how I felt about this, and I replied that "It is
like having Joe Montana retire but Steve Young sitting on the
bench."
Our profit plan for 1998 shows that we should be able to continue
our growth with sales forecasted up 20% and earnings per share up
15-20% after investing $.20-$.25 per share in new product
launches. I hope I can again next year have another superior
story to report to you.
<PAGE>
DOMESTIC PRODUCT OVERVIEW
OTC Pharmaceuticals - Topical Analgesics
The Company competes in the topical analgesic category, a $217 million market,
with its FLEXALL and ICY HOT brands. BENZODENT competes in the $62 million
internal irritation segment of the topical oral analgesic category.
Overall, Chattem's position in the topical analgesic market improved by over one
share point during 1997. FLEXALL, an aloe-based topical analgesic clinically
proven to provide long lasting relief for arthritis and other muscle and joint
pain, became the number two brand in the category. The brand's current product
line includes Original Vitamin E Enriched and Maximum Strength FLEXALL, which
contain menthol, as well as Ultra Plus which contains three active ingredients:
menthol, methyl salicylate and camphor.
With its sixth consecutive year of sales growth in 1997, ICY HOT moved up to the
number four position in the category. The brand's double digit growth was the
result of new packaging, increased marketing support, new unique television
commercials as well as the launch of Arthritis Therapy Gel which contains the
active ingredient doctor's recommend most: capsaicin. ICY HOT offers the most
complete product form line-up in the category with a cream, a balm and the
unique chill stick. Further, consumer research continues to indicate that the
brand's distinctive Icy and Hot Therapy for Pain positioning enjoys high
awareness and is viewed as the most compelling in the category.
BENZODENT, a topical oral analgesic, is the only brand positioned to be applied
directly to dentures to relieve the pain. The product contains the maximum
amount of benzocaine allowable in the category and is widely recommended by
dentists. Marketing efforts are focused on providing samples to consumers when
they are initially fitted for dentures, the point of entry for the category.
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OTC Pharmaceuticals -
Medicated Powder and Cream
The Company competes in the medicated powder ($80 million) and cream ($170
million) markets with its GOLD BOND Medicated Powder and GOLD BOND Medicated
Cream. GOLD BOND is America's number one medicated powder brand as well as one
of the fastest growing brands in the anti-itch cream segment. During 1997, GOLD
BOND successfully launched two new products: GOLD BOND Foot Powder and GOLD BOND
CORNSTARCH PLUS Medicated Baby Powder. In addition to these two products, the
GOLD BOND line includes GOLD BOND Medicated Powder, GOLD BOND Extra Strength
Medicated Powder, GOLD BOND Medicated Baby Powder and GOLD BOND Medicated Cream.
Looking to 1998, the brand has plans to further expand the franchise with a
major line extension. For the year, the brand will benefit from record levels
of advertising and promotional support.
OTC Pharmaceuticals - Internal Analgesics
The Company competes in the $60 million menstrual pain relief category with its
PAMPRIN and PREMSYN PMS brands. NORWICH aspirin competes in the general
analgesics category.
PAMPRIN, the number two brand in the menstrual analgesics category, is a
combination drug specifically designed for relief of menstrual symptoms.
Multi-symptom PAMPRIN effectively relieves multiple menstrual discomforts with
three active ingredients. Maximum Pain Relief PAMPRIN is formulated to provide
superior cramp relief and is the only cramp relief product with two pain
relievers. Maximum Strength PREMSYN PMS, the third largest brand in the
category, effectively relieves the physical and emotional symptoms of PMS.
NORWICH, a high-quality, reasonably priced aspirin, complements the other OTC
pharmaceuticals of the division. The brand is principally focused in sales and
marketing support in the northeast, midwest and west coast.
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OTC Pharmaceuticals - Lip Care
The Company competes in the $210 million lip care category with the HERPECIN-L
brand. 1998 includes two major HERPECIN-L initiatives. In January, a
reformulated HERPECIN-L stick was launched. This stick offers a new skin
protectant and a significantly higher SPF. Consumer testing indicates a strong
preference for the new formulation by both loyal HERPECIN-L consumers as well as
general category users. In addition, HERPECIN-L jar began shipping in February.
The new jar product promotes cold sore healing, is a moisturizer and protects
lips from the harmful rays of the sun with a SPF of 30 in a form that is
extremely popular within the lip care category. These two initiatives will
receive national television advertising and promotional support.
Toiletries & Cosmetics - Face Makeup
The Company competes in the oil control face makeup segment which is an $83
million niche within the overall cosmetics category with its CORNSILK brand.
CORNSILK, the number three brand in the oil control makeup segment, is the
original face makeup line specially formulated to absorb excess facial oil.
These formula properties guarantee users a long-lasting, shineless makeup
finish. The CORNSILK product line includes loose and pressed powders in two
finishes and four shade variations; liquid makeup in six shades; a cream
concealer and an enriched coverstick concealer. In 1997, CORNSILK introduced a
contemporary new blue package which was successfully transitioned at retail. In
1998, to benefit from important new makeup trends, CORNSILK will be adding a six
shade line of light liquid makeup under the sub-brand Weightless. Also in 1998,
CORNSILK will build on its successful yellow enriched coverstick launch with the
addition of a green enriched coverstick. CORNSILK is supported with an
extensive print campaign in women's magazines touting the long-lasting and
natural looking brand benefits.
Toiletries & Cosmetics - Skincare
Within the skincare category, the Company competes in the $428 million facial
cleanser category with its PHISODERM brand and in the $20 million face masque
sub-segment with MUDD Spa Treatment masque products.
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PHISODERM is a specialty facial cleanser positioned as the daily prescription
for healthy skin. The dermatologist developed, pH balanced formulas are
available in four different varieties: Normal to Dry, Normal to Oily, Sensitive
Skin and for Baby. Every PHISODERM product delivers superior cleansing without
the harsh drying effects of soap. In 1997, PHISODERM introduced a bold, green,
ethical new label design. This bolstered the therapeutic image of the brand as
well as its tie to dermatology. Also in 1997, PHISODERM was prominently
featured in an extensive print advertising campaign. In 1998, PHISODERM will
claim leading share of voice advertising for facial cleansers on radio. The
radio campaign will build on the idea of being the daily prescription for
healthy skin with strong consumer testimonials.
PHISODERM is also represented with a two size product offering in the $212
million antibacterial hand cleanser category. This product launched in 1996,
extends brand recognition into a complementary category to facial cleansing.
PHISODERM Antibacterial Hand Cleanser is primarily sold through a broker sales
force established to provide national retail coverage for the food class of
trade.
The MUDD brand continues to show strong retail growth stemming from the relaunch
of MUDD Original Masque under the Spa Treatment banner and the introduction of
Sea Masque and Aloe Masque which are all top 10 selling masque items. These
products were joined in 1997 by MUDD 5 Minute Masque which revolutionized the
category by providing all of the deep cleansing benefits of a clay-based masque
product but in one third of the time.
Toiletries & Cosmetics - Seasonal
The Company competes in three seasonal product categories: SPF 15 + suncare,
spray-on hair lightener and chlorine removal haircare and skincare. In the
suncare category, the Company competes with products that have a sun
protection factor (SPF) of greater than 15, a $270 million category, with its
BULLFROG Sunblock line. SUN-IN competes in the $9 million spray-on hair
lightener category, while ULTRASWIM Shampoo, Conditioner, Soap and Shower
Gel strongly dominate the small chlorine removal category.
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Over the past several years BULLFROG Sunblock has been one of the fastest
growing brands in the category. BULLFROG Sunblock products are available in
ten unique gels and lotions and provide all day protection in or out of the
water. BULLFROG is positioned as the Ultimate Waterproof Sunblock and is the
essential sun protection product for an outdoor active lifestyle. In 1997,
BULLFROG Quick Gel SPF 36 was added to the line providing higher protection
in its revolutionary quick-applying formula. BULLFROG awareness was driven
in 1997 by strong levels of regional, seasonal television advertising.
Dramatic growth is forecast for BULLFROG in 1998. During 1998, two products
will be added with the introduction of BULLFROG for Babies and SUPERBLOCK
SPF45. In 1998, BULLFROG will have additional advertising support with new
Spring Break radio advertising and strong levels of national radio
advertising during an expanded Summer schedule.
SUN-IN, which is available in three formulas, (Super, Super with Lemon and
for Men), enjoyed a renewed interest by consumers in the spray-on category and
a return to brand growth. In 1997, SUN-IN was supported by regional,
seasonal television advertising and earlier display distribution which drove
consumer awareness during Spring Break. In 1998, SUN-IN will introduce
bright, contemporary new packaging and a formula enhancement with the
addition of illuminators for healthy shine. A public relations campaign to
teen magazines will play a significant role in driving brand awareness for
SUN-IN in 1998.
ULTRASWIM has maintained its leadership position as the standard product for
chlorine removal. The ULTRASWIM product line includes shampoo, conditioner,
soap and shower gel. In 1997, ULTRASWIM utilized targeted print advertising
featuring our spokesperson Olympic Swimmer Janet Evans to communicate to target
consumers: competitive swimmers, fitness swimmers and recreational swimmers.
In 1998, ULTRASWIM Shampoo and Conditioner will be introduced in an improved
bottle with formula enhancements. The shampoo product will be repositioned as
ULTRASWIM Shampoo Plus and the conditioner will be repositioned as ULTRASWIM
Ultra Repair Conditioner. Targeted advertising for ULTRASWIM with a product
focused message will continue in 1998.
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Dietary Supplements
The Company competes in the $6.5 billion U.S. vitamin/mineral marketplace with
its products REJUVEX, GARLIQUE, PROPALMEX, ECHINEX, HARMONEX, MELATONEX and
SUNSOURCE Traditional Homeopathic medicines. These products are distributed
primarily through mass trade channels consisting of food, drug and discount
stores. In 1997, mass trade vitamin/mineral sales totaled $2.6 billion, up 25%
from the previous year, while the category of nutritional supplements generated
an unprecedented $918 million in sales, up 48% from the same period. In the
past year, sales of herbal products have risen an average of 56% in food, drug
and discount stores and have reached $339 million.
REJUVEX, introduced in 1991, is the oldest SUNSOURCE brand and the number one
selling product in the women's supplement category. REJUVEX is uniquely
positioned to support menopausal comfort and healthy bones for women in the
peri- and post-menopausal age group. A winner of the prestigious Rex award
in 1995 for best nutritional supplement in the chain drug industry, REJUVEX
is a unique natural formula containing a combination of magnesium, vitamins,
antioxidants and other important nutrients, which helps meet the changing
nutritional needs of women.
The Company competes in the herbal category with its GARLIQUE, PROPALMEX and
ECHINEX brands. Introduced in 1993, GARLIQUE now owns a 12% share of the $75
million garlic category, and is presently its number one selling product.
Backed by extensive clinical research on the benefits of garlic, GARLIQUE is
positioned for its positive benefits in support of cardiovascular health. In
recent years scientists have identified allicin as the active ingredient in
garlic. GARLIQUE'S unique production process insures the maximum amount of
allicin in each tablet, and is further positioned as the world leader in
product potency. GARLIQUE is rapidly ascending to the pinnacle of the herbal
category, aided by spokesperson Larry King.
PROPALMEX, the top selling brand in the $18 million saw palmetto herbal
category, owns a 23% market share, and is positioned to support health and
free urinary flow for men over 40. As men age, natural changes in hormone
balance result in conditions which tend to precipitate a swelling of the
prostate gland. This benign condition plaques most men past middle age.
PROPALMEX contains clinically tested, standardized saw palmetto, and is the
all-natural, drug-free approach to maintenance of a healthy prostate.
PROPALMEX was introduced to the mass trade consumer in 1996.
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<PAGE>
ECHINEX, the last of three herbal products introduced by SUNSOURCE in 1996, is a
standardized herbal complex of echinacea, ginger and Siberian ginseng. This
unique and effective combination is positioned to support natural resistance
against infection. ECHINEX is a seasonal product that provides added protection
during times of high risk for colds and flu. It presently holds a 3.7% of the
$43 million echinacea category.
In May 1998, SUNSOURCE will introduce its newest herbal product, HARMONEX.
HARMONEX contains a unique combination of St. John's Wort for emotional
well-being and Siberian ginseng for physical well-being. HARMONEX enters the
fast growing St. John's Wort category, up 1,137% through the first three
quarters of 1997, and now selling at an annual rate of $100 million in sales.
The HARMONEX new product launch will be the largest ever by SUNSOURCE or
Chattem. In addition to unprecedented consumer advertising levels planned for
its promotion, HARMONEX will also be supported by a powerful public relations
campaign.
The Company competes and is a leader in the $48 million melatonin category
with MELATONEX. MELATONEX, the third largest melatonin brand, is positioned
to support a natural sleep cycle and owns a 13% share of the category. The
product uses a unique time-release delivery system, releasing melatonin as
the body does, gradually, while you sleep. MELATONEX contains the finest
pure melatonin (not of animal origin) made in accordance with strict quality
control requirements. Melatonin sold under the MELATONEX name is tested
regularly by independent laboratories to meet SUNSOURCE'S rigorous quality
control requirements.
The Company also competes in the homeopathic category with its line of SUNSOURCE
traditional homeopathic medicines. Sales of homeopathic products through mass
trade channels total $29 million, up 29% from the previous year.
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SUNSOURCE owns a 10% share of the category. The line, based on the principles
of homeopathy, was introduced by SUNSOURCE in 1994. Homeopathic medicine was
developed by Dr. Samuel Hahnemann (1755-1843), who based his medicine on the law
of similars which states a substance which caused symptoms of an illness when
given in large dose to a healthy person will help to aid the healing when given
in a small dose to a sick person. The nine products in the line include six
tablet products: Sinus relief, Allergy relief, Cold relief, Flu relief,
Arthritis relief, Insomnia relief and three cream products: Sports Injury
Cream, Arthritis Relief Cream, and Psoriasis Eczema Relief Cream. All SUNSOURCE
homeopathic medicines are manufactured using state of the art production,
insuring optimum quality and effectiveness. SUNSOURCE Traditional Homeopathic
Medicines are the top selling homeopathic line of products in food, drug and
discount stores.
The Company plans to continue the expansion of the SUNSOURCE line of products,
and is presently in the process of evaluating new product opportunities to be
introduced in the future.
INTERNATIONAL MARKET OVERVIEW
Canada
Chattem (Canada) Inc. is a wholly-owned subsidiary based in Mississauga, Ontario
which markets and distributes Chattem's consumer products throughout Canada.
The manufacturing of the brands is principally done in the Company's facilities
in Chattanooga while some packaging takes place in Mississauga. The division
utilizes a national broker for its sales efforts. Brands marketed and sold in
Canada include GOLD BOND, PAMPRIN, FLEX-ALL, CORNSILK, MUDD, SUN-IN, BULLFROG,
ULTRASWIM and PHISODERM. In addition, Chattem owns the marketing and
distribution rights for SHY, a line of feminine hygiene and douche products;
ACNOMEL, a medicated acne mask; as well as AQUA CARE and ROSE MILK.
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Europe
Chattem's European business is conducted through Chattem (U.K.) Limited, a
wholly-owned subsidiary located in Basingstoke, Hampshire, England. This unit
also services distributors in Australia and the Middle East. Manufacturing and
packaging of the products is performed principally in the U.K. with a limited
number of ingredients purchased from Chattem. Chattem (U.K.), the division
employs its own sales force while exclusive distributors are used to market and
sell its products on the Western European Continent. Due to the difficulty and
expense involved in the registration of OTC pharmaceuticals in Europe, the unit
markets exclusively the Company's toiletry products. Chattem's products in
Europe include SUN-IN, a range of MUDD Face and Body products, ULTRASWIM and
CORNSILK. SPRAY BLOND Spray-In Hair Lightener is only marketed on the
continent.
U.S. Export
The U.S. Export division services various distributors primarily located in the
Caribbean, Mexico and Peru. The Company sells ICY HOT, GOLD BOND, PAMPRIN, MUDD
and PHISODERM into these markets with the primary focus being the development of
its OTC pharmaceuticals. The Company continues to look for established
distributors in Central and South America.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------
GENERAL
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 of the trademarks, inventory and receivables was
approximately $32,000,000. Additional payments may be earned by SUNSOURCE
over a six year period from the date of closing if sales, net of certain
assumed liabilities, exceed certain levels as defined in the purchase
agreement, but such additional payments are not to exceed $15,750,000 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 common stock to SUNSOURCE.
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 $30,000,000 revolving line
of credit for working capital purposes, a 5 year $30,000,000 Term A loan
facility and a 6 3/4 year $35,000,000 Term B loan facility.
<PAGE>
During June 1997, the Company prepaid previously outstanding long-term bank
debt with funds from the new credit agreement. In connection with the
prepayment of those borrowings, the Company incurred an extraordinary loss of
$1,370,000 (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.
Unless otherwise indicated, the following discussion relates only to the
continuing operations of the Company, which are the domestic and
international consumer products business. The results of operations and the
gain on disposal of the specialty chemical division in 1995 have been
separately classified as discontinued operations in the accompanying
consolidated statements of income.
The Company experienced an increase in net sales, operating income and income
from continuing operations for the year ended November 30, 1997. Net sales
increased 20.5% to $143,235,000 from $118,903,000 in 1996. Operating income
increased 52.8% to $25,503,000 from $16,689,000 in 1996. Income from
continuing operations increased 90.7% to $7,255,000 from $3,804,000 in 1996,
while net income, which includes extraordinary charges of $1,370,000 and
$532,000 in 1997 and 1996, respectively, relating to the early extinguishment
of debt in those respective years, increased 79.9% to $5,885,000 from
$3,272,000 in fiscal year 1996.
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In fiscal year 1997, earnings per share from continuing operations increased
$0.33, or 70.2%, to $0.80 while total earnings per share increased $0.25, or
62.5% to $0.65 when compared to the 1996 fiscal year.
The results of operations for fiscal year 1997 reflect a full year of
operations of the GOLD BOND and HERPECIN-L product lines, both of which were
acquired in mid-1996, and approximately five months' operations of the
SUNSOURCE brands, which were purchased in mid-1997.
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 year ended November 30, 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.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for continuing operations certain items from
the Company's consolidated statements of income, for the periods indicated,
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Net Sales.................................................. 100.0% 100.0% 100.0%
----- ----- -----
Costs and Expenses:
Cost of sales.............................................. 27.4 29.5 29.6
Advertising and promotion.................................. 39.2 38.3 37.0
Selling, general and administrative........................ 15.6 18.2 19.0
----- ----- -----
Total costs and expenses................................... 82.2 86.0 85.6
----- ----- -----
Income From Operations..................................... 17.8 14.0 14.4
Other Expense, Net......................................... (9.9) (9.3) (10.8)
----- ----- -----
Income Before Income Taxes................................. 7.9 4.7 3.6
Provision For Income Taxes................................. 2.8 1.5 1.3
----- ----- -----
Income From Continuing Operations.......................... 5.1% 3.2% 2.3%
----- ----- -----
----- ----- -----
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996 FOR CONTINUING OPERATIONS
For the year ended November 30, 1997, net sales increased $24,332,000, or
20.5%, to $143,235,000 from $118,903,000 for the previous fiscal year. This
increase consisted of a $23,580,000, or 22.6%, increase in domestic consumer
products sales from $104,444,000 in 1996 to $128,024,000 in 1997 and an
increase of $752,000, or 5.2%, in international sales to $15,211,000 from
$14,459,000.
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For domestic consumer products, sales of the GOLD BOND, HERPECIN-L, ICY HOT
and the SUNSOURCE products accounted for the majority of the sales increase
in 1997. Sales increases were also realized for the SUN-IN and MUDD brands.
Sales declines were recognized for FLEXALL, NORWICH Aspirin, CORNSILK,
BULLFROG and PHISODERM. The remaining domestic brands were basically flat or
had modest declines over the prior fiscal year. All sales variances were
largely the result of changes in volume.
The increase in sales of the SUN-IN brand was largely the result of increased
marketing support, while the MUDD sales increase was primarily due to the
addition of the 5 Minute Mask to the line in 1997 and the continuing effect
of new packaging in late 1995. The sales increase of the ICY HOT brand
reflects the line extension launched in early 1997 and a 68.0% increase in
advertising and promotion expenditures in 1997 over 1996.
Sales declines for the remainder of the domestic products are primarily due
to increased competition in their respective product categories, the
maturation of these brands and in most cases reduced marketing support. The
decline in sales of the BULLFROG brand reflects the loss of a major customer
and the cool, wet spring experienced in 1997.
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In fiscal 1997, sales for the international consumer products' segment
increased $847,000, or 21.0%, for the Canadian operation but declined
$252,000, or 2.6%, for the United Kingdom business. The GOLD BOND product
line accounted for practically all of the net sales increase in Canada,
although increases were also realized for the remainder of the product lines
marketed in that country, except for ULTRASWIM and CORNSILK. Sales declines
were recognized for all of the product lines marketed by the United Kingdom
operation, except for MUDD. These sales decreases were largely due to a
change in the United Kingdom from a dealer distribution system to one
operated by the Company's U.K. subsidiary in that country. U.S. export sales
increased $157,000, or 17.5%, in 1997 over 1996, with essentially all of the
increase being associated with the ICY HOT brand. All sales variances were
principally due to volume changes.
Cost of goods sold as a percentage of net sales in 1997 decreased to 27.4%
from 29.5% in 1996. The decrease was largely the result of a shift in product
mix of sales of domestic consumer products to higher margin products and the
addition of GOLD BOND and SUNSOURCE.
6
<PAGE>
Advertising and promotion expenses increased $10,664,000, or 23.4%, to
$56,176,000 in 1997 from $45,512,000 in 1996 and were 39.2% of net sales
compared to 38.3% in 1996. This increase was principally associated with the
GOLD BOND and HERPECIN-L brands, which were acquired in 1996; the SUNSOURCE
product line, acquired in mid-1997; and ICY HOT. Increases in 1997 were also
recorded for the PAMPRIN, PREMSYN PMS, ULTRASWIM and SUN-IN brands.
Selling, general and administrative expenses increased $721,000, or 3.3%, to
$22,303,000 in 1997 from $21,582,000 in 1996, but decreased as a percentage
of net sales to 15.6% in 1997 as compared to 18.2% in 1996. This increase was
largely associated with increases in direct selling costs, freight and field
sales expenses, resulting from increased sales, offset in part by reductions
in financial and legal services expenses.
Interest expense increased $2,540,000, or 19.0%, to $15,934,000 in 1997 from
$13,394,000 in 1996 primarily as a result of increased indebtedness
associated with the GOLD BOND and HERPECIN-L product acquisitions in 1996 and
the SUNSOURCE brands purchase in mid-1997. Interest expense is expected to
increase in 1998 due to the full year impact of the higher debt levels
associated with product acquisitions. Until the Company's indebtedness is
reduced substantially, interest expense will continue to represent a
significant percentage of the Company's net sales.
7
<PAGE>
Investment and other income increased $229,000, or 15.8%, to $1,679,000 in
1997 from $1,450,000 in 1996.
Provisions for income taxes were 35.5% of before tax income in 1997 as
compared to 32.3% in 1996. See Note 8 of Notes to Consolidated Financial
Statements.
Income from continuing operations increased $3,451,000, or 90.7%, to
$7,255,000 in 1997 from $3,804,000 in 1996. This increase resulted primarily
from increased sales and a more favorable product sales mix with regard to
gross margins in 1997.
8
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995 FOR CONTINUING OPERATIONS
Net sales for the year ended November 30, 1996 increased $18,305,000, or
18.2%, to $118,903,000 from $100,598,000 for the previous fiscal year. The
increase consisted of a $17,194,000, or 19.7%, increase in domestic consumer
products sales from $87,250,000 in 1995 to $104,444,000 in 1996 and an
increase of $1,111,000, or 8.3%, in international sales to $14,459,000 from
$13,348,000.
For domestic consumer products, net sales of the GOLD BOND and HERPECIN-L
product lines, both of which were acquired in 1996, and PHISODERM
Antibacterial Hand Cleanser accounted for essentially all of the sales
increase in 1996, although sales increases were also realized for the
BULLFROG, ICY HOT and MUDD product lines. Sales declines were recognized for
CORNSILK, NORWICH Aspirin and PHISODERM facial. The remaining domestic brands
were basically flat or had modest declines over the prior fiscal year. All
sales variances were largely the result of changes in sales volume.
The increase in sales of the BULLFROG and MUDD brands in 1996 was largely the
result of new product introductions and/or new packaging in late 1995 and
increased marketing support. Sales growth for the ICY HOT product line was
primarily due to increased advertising and promotional expenditures.
9
<PAGE>
Sales declines for the remainder of the domestic products are essentially the
result of increased competition in their respective product categories, the
maturation of these brands and in most cases reduced marketing support.
In fiscal 1996, sales for the international consumer products' segment
increased $121,000, or 3.1%, for the Canadian operation and $1,446,000, or
17.9%, for the United Kingdom business. The addition of the GOLD BOND product
line in Canada accounted for more than the total of the net sales increase in
that country, although increases were also realized for the SUN-IN, ULTRASWIM
and MUDD product lines. Declines in sales of the other brands in Canada
largely offset the increases enumerated above. Sales increases for all of the
product lines sold by the United Kingdom operation were realized with the
exception of the CORNSILK brand. U.S. export sales decreased $456,000, or
33.8%, in 1996 largely resulting from unfavorable general economic conditions
in Peru and Mexico. All sales variances were principally due to volume
changes.
Cost of goods sold as a percentage of net sales in 1996 was essentially
unchanged at 29.5% versus 29.6% for 1995. Cost of goods sold was affected by
the partial year positive impact of GOLD BOND which was offset by increased
inventory obsolesence charges.
10
<PAGE>
Advertising and promotion expenses increased $8,270,000, or 22.2%, to
$45,512,000 in 1996 from $37,242,000 in 1995 and were 38.3% of net sales
compared to 37.0% in 1995. This increase was principally associated with the
GOLD BOND and HERPECIN-L brands, which were acquired in 1996, and with the
introduction of PHISODERM Antibacterial Hand Cleanser in that year. Increases
in 1996 were also recorded for the BULLFROG, FLEXALL, ICY HOT, SUN-IN and
MUDD product lines.
Selling, general and administrative expenses increased $2,449,000, or 12.8%,
to $21,582,000 in 1996 from $19,133,000 in 1995, but decreased as a
percentage of net sales to 18.2% for 1996 as compared to 19.0% in 1995. This
increase was largely associated with increases in direct selling costs,
freight and field sales expenses, resulting from increased sales.
Interest expense increased $2,318,000, or 20.9%, to $13,394,000 in 1996 from
$11,076,000 in 1995 largely as a result of increased indebtedness associated
with the acquisition of the GOLD BOND and HERPECIN-L product lines in April
and June, 1996, respectively.
11
<PAGE>
Investment income increased $893,000 to $1,420,000 in 1996 from $527,000 in
1995. This increase consisted of $113,000 of interest income, resulting from the
temporary investment of excess funds; $328,000 of dividends on the cumulative,
convertible preferred stock of Elcat, Inc. received as part of the proceeds from
the sale of the specialty chemical division in 1995; and a gain of $452,000 on
the sale of an investment.
In 1996, a gain of $875,000 from the sale of the two minor product lines,
SOLTICE and BLIS-TO-SOL, was realized.
Provisions for income taxes were 32.3% of before tax income in 1996 as
compared to 35.6% in 1995. See Note 8 of Notes to Consolidated Financial
Statements.
Income from continuing operations increased $1,479,000, or 63.6%, to
$3,804,000 in 1996 from $2,325,000 in 1995. This increase resulted primarily
from increased sales in 1996 which more than offset increased interest
expense.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has historically financed its operations and acquisitions with a
combination of internally generated funds and borrowings. The Company's
principal uses of cash are operating expenses, acquisitions, working capital,
capital expenditures and long-term debt servicing.
Cash provided by operating activities was $10,116,000 and $2,858,000 for 1997
and 1996, respectively. The increase in cash flows from operations from 1996
to 1997 was primarily the result of increased net income, depreciation and
amortization and changes in accounts receivable, refundable and deferred
income taxes and inventories. These changes were impacted by the acquisition
of the SUNSOURCE product line in 1997.
Investing activities used cash of $32,722,000 and $47,708,000 in 1997 and
1996, respectively. The usage of cash in 1997 reflects the expenditures
required for the purchase of the SUNSOURCE brands, while the 1996 amount
represents the cost of the GOLD BOND and HERPECIN-L product lines acquired in
that year. In 1997, capital expenditures totaled $2,758,000 compared to
$1,785,000 in 1996. Expenditures of this nature are expected to be
approximately $3,000,000 in fiscal 1998.
13
<PAGE>
Financing activities provided cash of $11,434,000 in 1997 and $57,125,000 in
1996. The Company financed the acquisition of the SUNSOURCE brands and repaid
all outstanding bank indebtedness with the proceeds of a new $95,000,000 bank
credit agreement and the issuance of 300,000 new shares of the Company's
common stock at a value of $13.50 a share to the sellers of SUNSOURCE. In the
1996 period, the Company financed the acquisition of GOLD BOND and repaid all
outstanding bank indebtedness.
The following table presents certain working capital data at November 30,
1997 and 1996 or for the respective years then ended:
<TABLE>
<CAPTION>
ITEM 1997 1996
- ----------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Working capital (current assets less current liabilities).......................... $ 15,520,000 $ 19,793,000
Current ratio (current assets divided by current liabilities)...................... 1.45 1.75
Quick ratio (cash and cash equivalents, and receivables divided by current
liabilities)..................................................................... .96 1.12
Average accounts receivable turnover............................................... 5.92 6.51
Average inventory turnover......................................................... 3.17 3.70
Working capital as a percentage of total assets.................................... 8.68% 13.01%
</TABLE>
The decrease in the current and quick ratios at November 30, 1997 as compared
to November 30, 1996 was primarily due to decreases in cash and refundable
and deferred income taxes as well as increases in all components of current
liabilities, particularly the current maturities of long-term debt.
14
<PAGE>
Total debt outstanding was $142,394,000 at November 30, 1997 compared to
$131,344,000 at November 30, 1996. The net increase of $11,050,000 in 1997
reflects the acquisition of the SUNSOURCE product line in June, 1997 and
repayments by the Company during the year. The availability of credit under
the working capital line of credit is determined based on the Company's
accounts receivable and inventories. The Company had $13,000,000 outstanding
on its $30,000,000 working capital line of credit as of November 30, 1997.
The Company had $4,349,000 invested in highly liquid short-term investments
as of November 30, 1997.
Management of the Company believes that cash generated by operations, along
with funds available from its short-term, highly liquid investments and
available funds under its credit facility, will be sufficient to fund the
Company's current commitments and proposed operations.
YEAR 2000
- ---------
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the year 2000
date are a known risk. The Company has developed a plan to ensure its systems
are compliant with the requirements to process transactions in the year 2000.
The majority of the Company's internal information systems will be replaced
with fully compliant new systems. The total cost of the software and
implementation is estimated to be $1,500,000 to $2,000,000 which will be
capitalized as
15
<PAGE>
incurred. The majority of actual cash payments will be made in 1998 with the
remainder to be paid in early 1999. This new system implementation is
expected to be completed during 1999.
The Company does not currently have any information concerning the year 2000
compliance status of its suppliers and customers. In the event that any of
the Company's significant suppliers or customers does not successfully and
timely achieve year 2000 compliance, the Company's business or operations
could be adversely affected.
16
<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 years
ended November 30, 1997 and 1996, these subsidiaries accounted for 9.9% and
11.4% of total revenues, respectively, and 4.5% and 5.8% of total assets,
respectively. It has not been the Company's practice to hedge its assets and
liabilities in the Canada and U.K. 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 $68,000 and
$28,000 for the years ended November 30, 1997 and 1996, respectively,
resulted from foreign currency transactions. See "Foreign Currency
Translation" in Note 2 of Notes to the Consolidated Financial Statements.
17
<PAGE>
FORWARD LOOKING STATEMENTS
- --------------------------
This Management's Discussion and Analysis of Financial Condition and Results
of Operations, the Chairman's Letter and other sections of this Annual Report
contain forward looking statements that are based upon management's current
beliefs and assumptions about expectations, estimates, strategies and
projections for the Company. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and variations of such
words and similar expressions are intended to identify such forward looking
statements. 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.
18
<PAGE>
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 the
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.
19
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
NET SALES............................................. $ 143,235 $ 118,903 $ 100,598 $ 94,370 $ 89,861
OPERATING COSTS AND
EXPENSES.............................................. 117,732 102,214 86,130 81,830 88,111
---------- ---------- ---------- --------- ---------
INCOME FROM OPERATIONS................................ 25,503 16,689 14,468 12,540 1,750
OTHER EXPENSE, NET.................................... (14,255) (11,069) (10,858) (9,248) (3,489)
---------- ---------- ---------- --------- ---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES.................................. 11,248 5,620 3,610 3,292 (1,739)
PROVISION FOR (BENEFIT FROM)
INCOME TAXES......................................... 3,993 1,816 1,285 1,182 (639)
---------- ---------- ---------- --------- ---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS................................ $ 7,255 $ 3,804 $ 2,325 $ 2,110 $ (1,100)
PER COMMON SHARE DATA
INCOME (LOSS) FROM
CONTINUING OPERATIONS................................ $ .80 $ .47 $ .32 $ .29 $ (.17)
DIVIDENDS............................................. $ -- $ -- $ -- $ -- $ 20.20
BALANCE SHEET DATA
(At End of Period)
TOTAL ASSETS.......................................... $ 178,744 $ 152,183 $ 83,410 $ 85,442 $ 69,534
LONG-TERM DEBT, less
current maturities................................... $ 133,475 $ 127,438 $ 78,089 $ 94,486 $ 83,000
</TABLE>
13
<PAGE>
MARKET PRICES
The Company's common shares trade over-the-counter on the National Market
System under the NASDAQ symbol CHTT. A quarterly summary of the high and low
market prices per common share as reported by NASDAQ is shown below:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
QUARTER ENDED: HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
February...................................................................... 10 8 1/8 5 5/8 4 1/4
May........................................................................... 10 7/8 8 9 1/4 4 1/8
August........................................................................ 18 3/4 10 1/4 10 1/4 7 3/4
November...................................................................... 20 5/8 14 3/8 11 1/4 8 3/8
</TABLE>
Based upon transfer agent records, the Company's common shares were held by
approximately 2,500 shareholders as of February 20, 1998.
14
<PAGE>
Consolidated Balance Sheets
November 30, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $ 4,858 $ 9,254
Accounts receivable, less allowance for
doubtful accounts of $500 in 1997 and $450
in 1996......................................... 28,078 20,276
Refundable and deferred income taxes............. 1,876 5,405
Inventories...................................... 14,493 10,295
Prepaid expenses and other current
assets.......................................... 667 912
---------- ---------
Total current assets........................... 49,972 46,142
---------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET................. 10,988 9,774
---------- ---------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc......................... 6,640 5,984
Patents, trademarks and other purchased
product rights, net............................. 104,972 76,024
Debt issuance costs, net......................... 3,118 3,819
Other............................................ 3,054 10,440
---------- ---------
Total other noncurrent assets.................. 117,784 96,267
---------- ---------
TOTAL ASSETS................................. $178,744 $152,183
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
Consolidated Balance Sheets
November 30, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) 1997 1996
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt.................................... $ 8,919 $ 3,906
Accounts payable........................................................ 9,319 6,602
Payable to bank......................................................... 2,618 1,710
Accrued liabilities..................................................... 13,596 14,131
---------- ----------
Total current liabilities............................................. 34,452 26,349
---------- ----------
LONG-TERM DEBT, less current maturities................................... 133,475 127,438
---------- ----------
DEFERRED INCOME TAXES..................................................... 3,290 2,917
---------- ----------
OTHER NONCURRENT LIABILITIES.............................................. 3,157 2,659
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 10 and 12)
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred shares, without par value,
authorized 1,000, none issued.......................................... -- --
Common shares, without par value, authorized 20,000,
issued 9,082 in 1997 and 8,592 in 1996................................. 1,945 1,843
Paid-in surplus......................................................... 63,975 58,561
Accumulated deficit..................................................... (60,229) (66,114)
---------- ----------
5,691 (5,710)
Minimum pension liability adjustment.................................... -- (112)
Foreign currency translation adjustment................................. (1,321) (1,358)
---------- ----------
Total shareholders' equity (deficit).................................. 4,370 (7,180)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT).................................................... $ 178,744 $ 152,183
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
Consolidated Statements of Income
For the Years Ended November 30, 1997, 1996 and 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES.................................................................... $ 143,235 $ 118,903 $ 100,598
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales.............................................................. 39,253 35,120 29,755
Advertising and promotion.................................................. 56,176 45,512 37,242
Selling, general and administrative........................................ 22,303 21,582 19,133
---------- ---------- ----------
Total costs and expenses................................................. 117,732 102,214 86,130
---------- ---------- ----------
INCOME FROM OPERATIONS....................................................... 25,503 16,689 14,468
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense........................................................... (15,934) (13,394) (11,076)
Investment and other income, net........................................... 1,679 1,450 218
Gain on product divestitures............................................... -- 875 --
---------- ---------- ----------
Total other income (expense)............................................. (14,255) (11,069) (10,858)
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES......................................................... 11,248 5,620 3,610
PROVISION FOR INCOME TAXES................................................... 3,993 1,816 1,285
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS............................................ 7,255 3,804 2,325
---------- ---------- ----------
DISCONTINUED OPERATIONS:
Income from operations, less provision for
income taxes of $417...................................................... -- -- 674
Gain on disposal, less provision for
income taxes of $5,696.................................................... -- -- 9,334
---------- ---------- ----------
Income from discontinued operations........................................ -- -- 10,008
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY LOSS............................................. 7,255 3,804 12,333
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET OF INCOME TAXES (Note 5)...................................... (1,370) (532) (367)
---------- ---------- ----------
NET INCOME................................................................... $ 5,885 $ 3,272 $ 11,966
---------- ---------- ----------
---------- ---------- ----------
NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations...................................................... $ .80 $ .47 $ .32
Discontinued operations.................................................... -- -- 1.37
Extraordinary loss......................................................... (.15) (.07) (.05)
---------- ---------- ----------
Net income per common share.............................................. $ .65 $ .40 $ 1.64
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING................................................................. 9,124 8,153 7,292
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
Consolidated Statements of Shareholders' Equity (Deficit)
For the Years Ended November 30, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
MINIMUM FOREIGN
PENSION CURRENCY
COMMON PAID-IN ACCUMULATED LIABILITY TRANSLATION
SHARES SURPLUS DEFICIT ADJUSTMENT ADJUSTMENT TOTAL
----------- --------- ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1994....................... $ 1,519 $ 51,797 $ (81,352) -- $ (1,515) $ (29,551)
Net income...................................... -- -- 11,966 -- -- 11,966
Stock options granted........................... -- 302 -- -- -- 302
Foreign currency translation adjustment......... -- -- -- -- (138) (138)
----------- --------- ------------ --- ----------- ----------
Balance, November 30, 1995....................... 1,519 52,099 (69,386) -- (1,653) (17,421)
Net income...................................... -- -- 3,272 -- -- 3,272
Stock options exercised......................... 63 223 -- -- -- 286
Issuance of common shares....................... 261 6,239 -- -- -- 6,500
Foreign currency translation adjustment......... -- -- -- -- 295 295
Minimum pension liability adjustment............ -- -- -- (112) -- (112)
----------- --------- ------------ --- ----------- ----------
Balance, November 30, 1996....................... 1,843 58,561 (66,114) (112) (1,358) (7,180)
Net income...................................... -- -- 5,885 -- -- 5,885
Stock options exercised......................... 25 962 -- -- -- 987
Stock warrants exercised........................ 15 464 -- -- -- 479
Issuance of common shares....................... 62 3,988 -- -- -- 4,050
Foreign currency translation adjustment......... -- -- -- -- 37 37
Minimum pension liability adjustment............ -- -- -- 112 -- 112
----------- --------- ------------ --- ----------- ----------
Balance, November 30, 1997....................... $ 1,945 $ 63,975 $ (60,229) $ -- $ (1,321) $ 4,370
----------- --------- ------------ --- ----------- ----------
----------- --------- ------------ --- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
Consolidated Statements of Cash Flows
For the Years Ended November 30, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income....................................................................... $ 5,885 $ 3,272 $ 11,966
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................................... 6,381 4,829 4,072
Deferred income tax provision................................................... 1,120 1,797 645
Gain on sale of specialty chemicals division.................................... -- -- (9,334)
Gain on product divestitures.................................................... -- (875) --
Gain on sale of investment...................................................... -- (452) --
Proceeds from sale of investment................................................ -- 452 --
Gain on termination of interest rate cap........................................ -- (281) (454)
Extraordinary loss on early extinguishment of debt, net......................... 1,370 532 367
Dividend receivable from Elcat, Inc............................................. (656) (656) (328)
Other, net...................................................................... (106) (379) 2,251
Changes in operating assets and liabilities:
Accounts receivable............................................................ (5,140) (3,063) 1,973
Refundable and deferred income taxes........................................... 3,425 (2,519) 106
Inventories.................................................................... (2,401) 745 (2,488)
Prepaid expenses and other current assets...................................... 252 (359) (166)
Accounts payable and accrued liabilities....................................... (14) (185) (7,780)
--------- --------- ---------
Net cash provided by operating activities....................................... 10,116 2,858 830
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment....................................... (2,758) (1,785) (2,836)
Proceeds from sale of specialty chemicals division, net.......................... -- -- 19,397
Proceeds from product divestitures............................................... -- 1,000 --
Proceeds from notes and sales of assets.......................................... 75 253 227
Purchases of patents, trademarks and other product rights........................ (29,293) (43,048) --
Increase in other assets......................................................... (746) (4,128) (26)
--------- --------- ---------
Net cash provided by (used in) investing activities............................. (32,722) (47,708) 16,762
--------- --------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt...................................................... (76,636) (15,032) (48,704)
Proceeds from long-term debt..................................................... 87,500 67,944 31,100
Change in payable to bank........................................................ 908 526 (117)
Proceeds from sale of interest rate cap.......................................... -- -- 984
Proceeds from issuance of common stock, net...................................... -- 5,500 --
Exercise of stock options and warrants........................................... 1,274 286 --
Debt issuance costs.............................................................. (1,612) (2,099) (253)
--------- --------- ---------
Net cash provided by (used in) financing activities............................. 11,434 57,125 (16,990)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS............................................................ (10) 129 --
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year................................................. (11,182) 12,404 602
At beginning of year............................................................. 16,040 3,636 3,034
--------- --------- ---------
At end of year................................................................... $ 4,858 $ 16,040 $ 3,636
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
(1) NATURE OF OPERATIONS
Chattem, Inc. and its wholly-owned subsidiaries (the Company) manufacture
and market branded consumer products consisting primarily of over-the-counter
pharmaceuticals, cosmetics, toiletries, dietary supplements and homeopathics.
The consumer products are sold primarily through independent and chain drug
stores, drug wholesalers, mass merchandisers and food stores in the United
States and in various markets in approximately 50 countries throughout the
world.
Geographic data for 1997, 1996 and 1995 is included in the schedule of
geographical information on page 37, which is an integral part of these
financial statements.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Chattem, Inc. and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS
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 (Note 5).
INVENTORIES
Inventory costs include materials, labor and factory overhead. Inventories
in the United States are valued at the lower of last-in, first-out (LIFO) cost
or market, while international inventories are valued at the lower of first-in,
first-out (FIFO) cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is provided
using both straight-line and accelerated methods over the estimated useful lives
of 10 to 40 years for buildings and improvements and 3 to 12 years for machinery
and equipment. Expenditures for maintenance and repairs are charged to expense
as incurred. Depreciation expense for 1997, 1996 and 1995 was $1,502, $1,352 and
$1,319, respectively.
20
<PAGE>
PATENTS, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS
The costs of acquired patents, trademarks and other purchased product rights
are capitalized and amortized over periods ranging from 5 to 40 years. Total
accumulated amortization of these assets at November 30, 1997 and 1996 was
$11,246 and $8,369, respectively. Amortization expense for 1997, 1996 and 1995
was $2,877, $2,086 and $1,467, respectively. Royalty expense related to other
purchased product rights for 1997, 1996 and 1995 was $522, $1,140 and $1,030,
respectively. Amortization and royalty expense are included in advertising and
promotion expense in the accompanying consolidated statements of income.
DEBT ISSUANCE COSTS
The Company has incurred debt issuance costs in connection with its
long-term debt. These costs are capitalized and amortized over the term of the
debt. Amortization expense related to debt issuance costs was $490, $498 and
$471 in 1997, 1996 and 1995, respectively. Accumulated amortization of these
costs was $1,004 and $817 at November 30, 1997 and 1996, respectively.
PAYABLE TO BANK
Payable to bank includes checks outstanding in excess of certain cash
balances.
REVENUE RECOGNITION
Revenue is recognized when the Company's products are shipped to its
customers.
RESEARCH AND DEVELOPMENT
Research and development costs relate primarily to the development of new
products and are expensed as incurred. Such expenses were $1,207, $1,117 and
$1,140 in 1997, 1996 and 1995, respectively.
ADVERTISING EXPENSES
The cost of advertising is expensed when the related advertising first takes
place. Advertising expense for 1997, 1996 and 1995 was $29,923, $22,789 and
$18,015, respectively. At November 30, 1997 and 1996, the Company reported
$1,066 and $1,293, respectively, of advertising paid for in 1997 and 1996 which
will run or did in 1998 and 1997 as other noncurrent assets in the accompanying
consolidated balance sheets.
21
<PAGE>
NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of
common shares outstanding after consideration of common share equivalents having
a dilutive effect.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's Canadian and UK Subsidiaries are
translated to United States dollars at year-end exchange rates. Income and
expense items are translated at average rates of exchange prevailing during
the year. Translation adjustments are accumulated as a separate component of
shareholders' equity (deficit). Gains and losses which result from foreign
currency transactions are included in the accompanying consolidated
statements of income.
INCOME TAXES
The Company uses the asset and liability approach to accounting for deferred
income taxes based on currently enacted tax rates and estimated differences in
financial reporting and income tax bases of assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has entered into interest rate swap agreements as a means of
managing its interest rate exposure and not for trading purposes. These
agreements have the effect of converting a portion of the Company's variable
rate obligations to fixed rate obligations. Net amounts paid or received are
reflected as adjustments to interest expense.
22
<PAGE>
CONCENTRATIONS OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of accounts receivable, short-term cash investments and
the investment in Elcat, Inc. (Note 3). The Company's exposure to credit risk
associated with nonpayment of accounts receivable is affected by conditions or
occurrences within the retail industry. As a result, the Company performs
ongoing credit evaluations of its customers' financial position but generally
requires no collateral from its customers. The Company's largest customer
accounted for 16% of sales in 1997. No other customer exceeded 10% of the
Company's sales in 1997, 1996 or 1995. Short-term cash investments are placed
with high credit-quality financial institutions or in low risk, liquid
instruments. No losses have been experienced on such investments.
RECENT ACCOUNTING PRONOUNCEMENT
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 changes the criteria for reporting
earnings per share (EPS) by replacing primary EPS with basic EPS and fully
diluted EPS with diluted EPS. The Company is required to adopt SFAS No. 128
for periods ending after December 15, 1997, and all prior periods' EPS data
must be restated. The impact of adopting SFAS No.128 will not have a material
impact on EPS for any period presented.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
(3) INVESTMENT IN ELCAT, INC.
Investment in Elcat, Inc. (Elcat) consists of 40,000 shares of 13.125%
cumulative, convertible preferred stock of Elcat (the Elcat Preferred Shares)
which was received as part of the consideration from the sale of the Company's
specialty chemicals division in 1995 (Note 14). The Elcat Preferred Shares are
nonvoting and are convertible, in whole or in part, at any time on or after
April 1, 1998, into a 21% common stock ownership of Elcat. At the option of
Elcat, the Elcat Preferred Shares may be redeemed, in whole or in part, on or
after April 1, 1998, at par value ($125 per share) plus any accrued and unpaid
dividends. If all of the then outstanding Elcat Preferred Shares are not
converted or redeemed on or before April 1, 2005, Elcat is obligated to redeem
all of the then outstanding Elcat Preferred Shares at par value plus any accrued
and unpaid dividends.
The dividends, which amount to $656 annually, on the Elcat Preferred Shares
accumulate quarterly but are non-payable until the shares are 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.
This investment is classified as held-to-maturity and is accounted for using
the cost method of accounting. As Elcat stock is not publicly traded in the open
market and a market price is not readily available, it is not practicable to
estimate the fair value of the investment in Elcat at November 30, 1997. In the
opinion of management, however, the fair value of this investment is in excess
of its carrying value as of November 30, 1997.
(4) PENSION PLANS
The Company has a noncontributory defined benefit pension plan (the Plan)
which covers substantially all employees. The Plan provides benefits based upon
years of service and the employee's compensation. The Company's contributions
are based on computations by independent actuaries. Plan assets at November 30,
1997 and 1996 were invested primarily in United States government and agency
securities, corporate debt securities and equity securities.
23
<PAGE>
Pension cost for the years ended November 30, 1997, 1996 and 1995 included
the following components:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost (benefits earned during the period)............... $ 545 $ 610 $ 544
Interest cost on projected benefit obligation.................. 741 775 745
Actual return on plan assets................................... (845) (637) (828)
Net amortization and deferral.................................. 365 107 98
--------- --------- ---------
Net pension cost............................................... $ 806 $ 855 $ 559
--------- --------- ---------
--------- --------- ---------
</TABLE>
In addition to net pension cost, a net lump-sum settlement loss of $598 was
recorded in 1996 related to lump-sum distributions to certain employees. This
expense is included in selling, general and administrative expenses in the
accompanying consolidated statements of income. In 1995, as a result of the sale
of the Company's specialty chemicals division, a charge of $662 was recognized
for pension curtailment and settlement expense and is included in the gain on
the sale of discontinued operations for 1995 (Note 14).
The following table sets forth the funded status of the Plan as of
November 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................................. $ 7,108 $ 7,152
Nonvested benefit obligation.............................................. 57 129
--------- ---------
Accumulated benefit obligation............................................ $ 7,165 $ 7,281
--------- ---------
--------- ---------
Plan assets at fair market value.......................................... $ 6,471 $ 5,069
Projected benefit obligation.............................................. (11,072) (9,340)
--------- ---------
Plan assets less than projected benefit obligation........................ (4,601) (4,271)
Unrecognized net loss..................................................... 4,186 2,898
Unrecognized prior service cost........................................... (131) (147)
Unrecognized initial asset................................................ (369) (511)
Minimum pension liability adjustment...................................... -- (181)
--------- ---------
Pension liability recognized in balance sheets at end of year............. $ (915) $ (2,212)
--------- ---------
--------- ---------
</TABLE>
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
7.5% and 5.0%, respectively, in both 1997 and 1996. The expected long-term rate
of return on plan assets was 9.0%.
24
<PAGE>
In accordance with the provisions of SFAS No. 87, "Employers' Accounting
for Pensions," the Company recorded an additional liability at November 30,
1996 representing the excess of the accumulated benefit obligation over the
fair value of plan assets and accrued pension liability for its pension plan.
At November 30, 1997, the unrecognized prior service cost exceeded the
minimum liability, and the minimum pension liability was eliminated.
The Company has a defined contribution plan covering substantially all
employees. Eligible participants can contribute up to 10% of their annual
compensation and receive a 25% matching employer contribution up to 6% of their
annual compensation. The defined contribution plan expense was $155 for 1997,
$120 for 1996 and $141 for 1995.
(5) LONG-TERM DEBT
Long-term debt consisted of the following at November 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Revolving line of credit payable to
banks at variable rate (8.44%
at November 30, 1997)............. $ 13,000 $ --
Term loans payable to banks at
variable rates (8.71% weighted
average at November 30, 1997)..... 63,683 --
Revolving line of credit payable to
banks at variable rates, repaid in
1997.............................. -- 24,000
Term loans payable to banks at
variable rates, repaid in 1997.... -- 41,819
12.75% Senior Subordinated Notes,
due 2004, net of unamortized
discount of $1,289 for 1997 and
$1,475 for 1996................... 65,711 65,525
----------------- -----------------
Total long-term debt................ 142,394 131,344
Less: current maturities............ 8,919 3,906
----------------- -----------------
Total long-term debt, net of current
maturities........................ $133,475 $127,438
----------------- -----------------
----------------- -----------------
</TABLE>
The Company entered into a new credit agreement with a syndicate of banks
(the New Credit Agreement) on June 26, 1997. The purpose of the New Credit
Agreement was to finance the acquisition of SUNSOURCE (Note 12), and to repay
all existing bank debt. The New Credit Agreement is divided into a $30,000
revolving line of credit for working capital purposes, a five year $30,000 Term
A loan and a six and three-quarter year $35,000 Term B loan facility.
The combined Term A and B loans are payable in remaining quarterly
installments as follows:
<TABLE>
<S> <C>
December 31, 1997 to September 30, 1998................. $ 1,318
December 31, 1998 to September 30, 1999................. $ 1,488
December 31, 1999 to June 30, 2001...................... $ 1,738
September 30, 2001...................................... $ 2,650
December 31, 2001 to March 31, 2002..................... $ 4,900
June 30, 2002........................................... $ 5,000
September 30, 2002 to December 31, 2003................. $ 3,250
February 14, 2004....................................... $ 3,350
</TABLE>
25
<PAGE>
Under the New Credit Agreement the Company may elect either a prime rate
or Eurodollar interest rate option applicable to the term and revolving line
loans. The prime rate and Eurodollar interest rate options are based on a
base rate plus a rate margin that fluctuates on the basis of the Company's
leverage ratio. The maximum rate margin for the Term A and revolving line
loans is 2.0% for the prime rate option and 3.0% for the Eurodollar rate
option. The maximum rate margin for the Term B loan is 2.5% for the prime
rate option and 3.5% for the Eurodollar rate option.
The New Credit Agreement is secured by substantially all of the Company's
assets. The more restrictive financial covenants require the maintenance of
minimum amounts of consolidated tangible net worth, fixed charge coverage,
interest coverage and leverage ratios. The provisions of the New Credit
Agreement also include restrictions on capital expenditures and the payment
of dividends. The New Credit Agreement is guaranteed by one of the Company's
subsidiaries, Signal Investment & Management Co.
The revolving line of credit is available to the Company up to $30,000 or
such lesser amount as is determined to be available under the terms of the
New Credit Agreement, and is due and payable on June 26, 2002. The
availability of credit under the revolver is determined based on the
Company's accounts receivable and inventories.
The Company entered into a credit agreement with a syndicate of banks
(the Credit Agreement) on April 29, 1996 and as amended on June 6, 1996. The
purpose of the Credit Agreement was to finance the acquisitions of GOLD BOND
and HERPECIN-L (Note 12), and to repay all existing bank debt. The Credit
Agreement was divided into a $24,000 revolving line of credit for working
capital purposes, a five year $20,000 Term A loan facility, and a seven and
one-half year $22,500 Term B loan facility. These loans were repaid in 1997
with part of the proceeds from the New Credit Agreement.
The amount of cash and cash equivalents on deposit up to the calculated
availability was included in other noncurrent assets in the accompanying
consolidated balance sheet at November 30, 1996 and was available exclusively
for the repayment of long-term bank debt. The amount of cash and cash
equivalents on deposit in excess of the calculated availability is included
as a current asset in the accompanying consolidated balance sheet at November
30, 1996 and was available for general operating purposes. All of the above
cash and cash equivalents were invested in highly liquid short-term
investments.
In 1994, the Company issued $75,000 of 12.75% Senior Subordinated Notes
due 2004 (the Notes) with five year warrants to purchase 417,182 shares of
common stock (the Warrants). The Notes consisted of 75,000 units, each
consisting of $1,000 principal amount of the Notes and a warrant to purchase
shares of the Company's common stock (Note 9). The price of the Notes was
$73,967, or 98.6% of the original principal amount of the Notes, resulting in
a discount of $1,033. The value assigned to the Warrants was $955 (Note 9),
resulting in a total original issue discount of $1,988. The proceeds of the
Notes were used to repay a prior credit agreement.
26
<PAGE>
The Notes mature on June 15, 2004, and interest is payable semi-annually
on June 15 and December 15 of each year. The Notes are senior subordinated
obligations of the Company and are subordinated in right of payment to all
existing and future senior debt of the Company. The Notes, which were
registered under the Securities Act of 1933, may not be redeemed until June
15, 2001, after which they may be redeemed at the option of the Company. Upon
the occurrence of certain events constituting a change of control, the
holders of the Notes may require the Company to repurchase the Notes at a
purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest. The Notes are guaranteed by Signal Investment &
Management Co., a wholly-owned subsidiary of the Company.
The Notes are issued under an indenture with an indenture trustee, which
restricts, among other things, the ability of the Company and its
subsidiaries to (i) incur additional indebtedness, (ii) pay dividends, (iii)
sell or issue capital stock of a subsidiary, (iv) create encumbrances on the
ability of any subsidiary to pay dividends or make other restricted payments,
(v) engage in certain transactions with affiliates, (vi) dispose of certain
assets, (vii) merge or consolidate with or into, or sell or otherwise
transfer all or substantially all their properties and assets as an entirety
to another person, or (viii) create additional liens.
During 1997, 1996 and 1995 the Company prepaid previously outstanding
long-term debt, with funds received from refinancing in 1997 and 1996 and the
sale of the specialty chemicals division in 1995. In connection with the
prepayment of those borrowings, the Company incurred extraordinary losses,
net of income taxes, in 1997, 1996 and 1995 of $1,370, $532 and $367,
respectively, or $.15, $.07 and $.05 per share, respectively. The losses
related to the write-off of debt issuance and other deferred costs. The 1997
amount includes costs associated with the termination of two interest rate
swap agreements.
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998............................... $ 8,919
1999............................... 5,950
2000............................... 6,950
2001............................... 7,863
2002............................... 31,050
Thereafter......................... 82,951
---------
143,683
Less: unamortized discount......... (1,289)
---------
$ 142,394
---------
---------
</TABLE>
The 2002 maturities include the amount outstanding under the revolving
line of credit which was $13,000 as of November 30, 1997.
The Company is also required to pay $3,649 during 1998. This amount was
determined based upon the excess cash flow calculation, as defined in the New
Credit Agreement, and is included in the 1998 maturities.
Cash interest payments during 1997, 1996 and 1995 were $15,259, $12,710
and $10,811, respectively.
27
<PAGE>
(6) DERIVATIVE FINANCIAL INSTRUMENTS
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) (5.59% as of November 30, 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 (5.64% as of November 30, 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.
At November 30, 1996, the Company had two interest rate swap agreements
outstanding with financial institutions, each in a notional amount of
$15,000. Both of these interest rate swaps were terminated in 1997 in
connection with the refinancing of long-term debt. (Note 5). The resulting
extraordinary loss, net of tax, is included in the 1997 consolidated
statement of income as part of the extraordinary loss on the early
extinguishment of debt.
During June 1993, the Company entered into an interest rate cap agreement
in a notional principal amount of $30,000. On January 12, 1995, the interest
rate cap was terminated resulting in a gain of approximately $729 to the
Company. The gain was deferred and was amortized over the remaining life of
the original cap agreement as a reduction of interest expense. In 1996, the
remaining deferred gain of $281 was recognized.
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
and SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" require the disclosure of the fair value of
all financial instruments. Unless otherwise indicated elsewhere in the notes
to the consolidated financial statements, the carrying value of the Company's
financial instruments approximates fair value.
At November 30, 1997, the estimated fair values of the revolving line of
credit and the term loans payable to banks approximate the carrying amounts
of such debt because the interest rates change with market interest rates.
The estimated fair value of the Notes at November 30, 1997 exceeded their
carrying value by approximately $9,600. The fair value was estimated based on
quoted market prices for the same or similar issues.
28
<PAGE>
The fair values of the interest rate swap agreements are the estimated
amounts that the Company would receive or pay to terminate the agreements at
the reporting date, taking into account current interest rates and the
current credit worthiness of the counterparties. At November 30, 1997, the
Company estimates it would have paid $603 to terminate the agreements.
(8) INCOME TAXES
The provision for income taxes from continuing operations includes the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal........... $ 2,639 $ (203) $ 470
State............. 234 222 170
Deferred............ 1,120 1,797 645
--------- --------- ---------
$ 3,993 $ 1,816 $ 1,285
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income tax assets and liabilities for 1997 and 1996 reflect the
impact of temporary differences between the amounts of assets and liabilities
for financial reporting and income tax reporting purposes. Temporary
differences and carryforwards which give rise to deferred tax assets and
liabilities at November 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals................................ $ 2,005 $ 1,790
Accrued promotional expenses......................... 720 770
Accrued postretirement health care benefits.......... 559 535
Repriced stock option expense........................ 251 690
Accruals for discontinued operations................. -- 237
Other................................................ 310 260
--------- ---------
Gross deferred tax assets.......................... 3,845 4,282
--------- ---------
Deferred tax liabilities:
Excess tax depreciation and amortization............. 4,486 3,317
Prepaid advertising.................................. 318 309
Inventory............................................ 190 190
Other................................................ 277 772
--------- ---------
Gross deferred tax liabilities..................... 5,271 4,588
--------- ---------
Net deferred liability............................. $ (1,426) $ (306)
--------- ---------
--------- ---------
</TABLE>
29
<PAGE>
The difference between the provision for income taxes and the amount
computed by multiplying income from continuing operations before income taxes
by the U.S. statutory rate is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Expected tax provision........................................... $ 3,837 $ 1,911 $ 1,227
Dividend exclusion benefit....................................... (178) (140) (78)
State income taxes, net of federal income tax benefit............ 154 147 112
Other, net....................................................... 180 (102) 24
--------- --------- ---------
$ 3,993 $ 1,816 $ 1,285
--------- --------- ---------
--------- --------- ---------
</TABLE>
Included in "refundable and deferred income taxes" in current assets in
the accompanying consolidated balance sheets are income tax refunds
receivable of $12 and $2,794 at November 30, 1997 and 1996, respectively.
Income taxes paid in 1997, 1996 and 1995 were $2,162, $2,459 and $5,026,
respectively. The Company received income tax refunds of $2,719, $215 and
$163 during 1997, 1996 and 1995, respectively.
(9) SHAREHOLDERS' EQUITY (DEFICIT)
STOCK ISSUANCE
On June 26, 1997, the Company issued to the sellers of the SUNSOURCE
product line 300,000 shares of its common stock at a value of $13.50 per
share to fund a portion of the purchase price for the brands.
In April 1996, the Company issued 1,100,000 shares of common stock to a
group of investors, including certain officers, directors and affiliates, in
order to partially fund the acquisition of GOLD BOND (Note 12). In addition,
the Company issued to the seller of GOLD BOND, 155,792 shares of the
Company's common stock at $6.42 per share.
STOCK OPTIONS
Although the Company adopted SFAS No. 123, Accounting For Stock-Based
Compensation, during 1997, it elected to continue to account for compensation
expense under its stock option plans under APB No. 25. Accordingly, no
compensation cost has been recognized for stock option grants since the
options have exercise prices equal to the market value of the common stock at
the date of grant.
30
<PAGE>
The Company's 1993 Non-Statutory Stock Option Plan (1993 Plan) provides
for issuance of up to 350,000 shares of common stock to key employees. In
addition, the Company's 1994 Non-Statutory Stock Option Plan and the 1994
Non-Statutory Stock Option Plan for Non-Employee Directors (1994 Plans)
provide for the issuance of up to 350,000 and 80,000 shares, respectively, of
common stock. Options vest ratably over four years and are exercisable for a
period of up to ten years from the date of grant.
For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions for grants in 1997 and
1996: expected dividend yield of 0%, expected volatility of 49%, risk-free
interest rates of 6.48% and 5.39%, and expected lives of 6 years.
Had compensation cost for 1997 and 1996 stock option grants been
determined based on the fair value at the grant dates consistent with the
method prescribed by SFAS No. 123, the Company's net income and net income
per share would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net income:
As reported...................... $ 5,885 $ 3,272
Pro forma........................ $ 5,683 $ 2,877
Net income per share:
As reported...................... $ 0.65 $ 0.40
Pro forma........................ $ 0.62 $ 0.35
</TABLE>
The pro forma effect on net income in this disclosure is not
representative of the pro forma effect on net income in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to 1996.
31
<PAGE>
A summary of the activity of stock options during 1997, 1996, and 1995 is
presented below (shares in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
-------- -------- -------- -------- ------ --------
Outstanding at beginning of year....................... 613 $ 6.39 646 $ 7.60 675 $ 7.69
Granted.............................................. 91 9.01 318 5.07 18 4.79
Exercised............................................ (120) 6.65 (44) 6.93 -- --
Cancelled............................................ -- -- (307) 7.48 (47) 7.83
----- ----- --- ----- --- -----
Outstanding at end of year............................. 584 $ 6.75 613 $ 6.39 646 $ 7.60
----- ----- --- ----- --- -----
----- ----- --- ----- --- -----
Options exercisable at year-end........................ 262 $ 7.43 221 $ 7.73 305 $ 7.72
----- ----- --- ----- --- -----
----- ----- --- ----- --- -----
Weighted average fair value of options granted......... $ 5.24 $ 2.62 N/A
----- ----- -----
----- ----- -----
</TABLE>
A summary of the exercise prices for options outstanding under the
Company's stock-based compensation plans at November 30, 1997, is presented
below (shares in thousands):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE EXERCISE
EXERCISE SHARES UNDER EXERCISE AVERAGE SHARES PRICE OF SHARES
PRICE RANGE OPTION PRICE REMAINING LIFE EXERCISABLE EXERCISABLE
- ------------ ------------ -------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$4.63--$5.25 249 $ 4.87 8.2 29 $ 4.85
$7.50--$9.50 330 7.99 6.5 233 7.76
$18.00 5 18.00 9.8 -- N/A
---- ------- --- --- ------
Total 584 $ 6.75 7.2 262 $ 7.43
---- ------- --- --- ------
---- ------- --- --- ------
</TABLE>
32
<PAGE>
PREFERRED SHARES
The Company is authorized to issue up to 1,000,000 preferred shares in
series and with rights established by the board of directors. At November 30,
1997 and 1996, no shares of any series of preferred stock were issued and
outstanding.
EMPLOYEE STOCK OWNERSHIP PLAN
Effective June 1, 1989, the Company established an Employee Stock
Ownership Plan providing for the issuance of up to 360,000 shares of the
Company's common stock. At November 30, 1997, no contributions had been made
to the plan.
COMMON STOCK WARRANTS
As described in Note 5, the Company issued the Warrants at an assigned
value of $955. The Warrants are exercisable for five years. In the aggregate,
75,000 warrants were issued which, when exercised, would entitle the holders
thereof to acquire an aggregate of 417,182 shares of the Company's common
stock. The number of shares of common stock and the price per share at which
a warrant is exercisable are subject to adjustment upon the occurrence of
certain events. A warrant does not entitle the holder to receive any cash
dividends paid on common stock or to exercise any other rights as a
shareholder of the Company.
During 1996, as a result of the issuance of 1,100,000 shares of common
stock (Note 9), the number of shares of common stock and the price per share
at which a warrant is exercisable were adjusted from 5.56242 shares and
$7.15, respectively, to 5.85733 shares and $6.79, respectively.
During 1997, 12,030 warrants were exercised to acquire 70,464 shares. At
November 30, 1997, 62,970 warrants were outstanding which, when exercised,
would entitle the holders thereof to acquire an aggregate of 368,836 shares
of the Company's common stock.
(10) CONTINGENCIES
- -----------------------------------------------------------------------------
Claims, suits and complaints arise in the ordinary course of the
Company's business involving such matters as patents and trademarks, product
liability and other alleged injuries or damage. The outcome of such
litigation cannot be predicted, but, in the opinion of management, based in
part upon the opinion of counsel, all such pending matters are without merit
or are of such kind or involve such amounts as would not have a material
adverse effect on the consolidated operating results or financial position of
the Company if disposed of unfavorably.
33
<PAGE>
(11) SUPPLEMENTAL FINANCIAL INFORMATION
- -----------------------------------------------------------------------------
A--Inventories consisted of the following at November 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Raw materials and work in process........................................................... $ 9,107 $ 5,365
Finished goods.............................................................................. 7,850 7,484
Excess of current cost over LIFO value...................................................... (2,464) (2,554)
--------- ---------
Total inventories......................................................................... $ 14,493 $ 10,295
--------- ---------
--------- ---------
</TABLE>
International inventories included above, valued on a lower of FIFO cost
or market at November 30, 1997 and 1996, were $2,546 and $2,039, respectively.
B--Property, plant and equipment consisted of the following at November 30,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land......................................................................................... $ 138 $ 208
Buildings and improvements................................................................... 3,150 3,014
Machinery and equipment...................................................................... 23,416 21,973
Construction in progress..................................................................... 2,221 1,046
Less--accumulated depreciation............................................................... (17,937) (16,467)
--------- ---------
Property, plant and equipment, net......................................................... $ 10,988 $ 9,774
--------- ---------
--------- ---------
</TABLE>
C--Accrued liabilities consisted of the following at November 30, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accrued interest expense.................................................................... $ 4,119 $ 3,996
Salaries, wages and commissions............................................................. 1,696 1,287
Promotion expense........................................................................... 2,840 2,827
Product acquisitions........................................................................ 1,489 614
Accrued pension benefits.................................................................... 435 2,076
Other....................................................................................... 3,619 3,331
--------- ---------
Total accrued liabilities................................................................. $ 14,198 $ 14,131
--------- ---------
--------- ---------
</TABLE>
34
<PAGE>
(12) ACQUISITION AND SALE OF BRANDS
- -----------------------------------------------------------------------------
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, net of certain assumed liabilities. 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 (Note 5) and the issuance of 300,000
shares of Chattem, Inc. common stock to SUNSOURCE (Note 9).
On April 29, 1996, the Company purchased the worldwide rights for the
GOLD BOND line of medicated powders and anti-itch cream for approximately
$40,000. The assets acquired consisted of the trademarks ($38,000) and
inventory. Additionally, the Company assumed certain liabilities of
approximately $500. The Company financed the GOLD BOND acquisition with bank
borrowings (Note 5) and issuance of common stock (Note 9).
On June 6, 1996, the Company purchased the rights for the HERPECIN-L line
of medicated lip balm for $5,607 plus a royalty payment equal to the greater
of $214 or 5% of net sales. The royalty payment is payable annually for each
of the seven twelve-month periods beginning July 1, 1996 and ending June 30,
2003. The assets acquired consisted primarily of the trademark ($5,159),
receivables and inventory. Additionally, the Company assumed certain
liabilities of approximately $500. The purchase was financed by the Company
with additional bank borrowings of $5,000 with the remaining $607 being
funded by the Company (Note 5).
During April 1996, the Company sold the trademarks and inventory of two
of its minor consumer products brands, SOLTICE and BLIS-TO-SOL, for $1,200
consisting of $1,000 cash received at closing and a $200 promissory note
requiring payments of $100 per year for the next two years contingent upon
the brands meeting specific future sales levels.
On June 17, 1994, the Company acquired a license to the PHISODERM
trademark in the United States, Canada and Puerto Rico ("the Territory"),
together with certain other assets from Sterling Winthrop Inc. (Sterling). If
net sales of PHISODERM products in the United States exceed $11,000 for
either of the 12-month periods beginning July 1, 1995 and July 1, 1996 and
ending June 30, 1996 and June 30, 1997, then the Company will pay Sterling an
additional $1,000 per year. Net sales of PHISODERM products exceeded $11,000
for each of the 12-month periods ended June 30, 1997 and 1996. As a result,
an additional $2,000 was recorded to patents, trademarks and other purchased
product rights as of November 30, 1997.
35
<PAGE>
(13) ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS
- -----------------------------------------------------------------------------
The Company maintains certain postretirement health care benefits for
eligible employees. Employees become eligible for these benefits if they meet
certain age and service requirements. The Company pays a portion of the cost
of medical benefits for certain retired employees over the age of 65.
Effective January 1, 1993, the Company's contribution is a service-based
percentage of the full premium. The Company pays these benefits as claims are
incurred.
Net periodic postretirement health care benefits cost for the years ended
November 30, 1997, 1996 and 1995, included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost (benefits earned during the period).......................................... $ 29 $ 36 $ 30
Interest cost on accumulated postretirement benefits obligation........................... 115 101 102
Amortization of net loss.................................................................. 2 -- --
--------- --------- ---------
Net periodic postretirement benefits cost................................................. $ 146 $ 137 $ 132
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the funded status of the plan, reconciled
to the accrued postretirement health care benefits recognized in the
Company's balance sheets at November 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accumulated postretirement benefits obligation:
Retirees..................................................................................... $ 715 $ 912
Fully eligible active plan participants...................................................... 502 275
Other active participants.................................................................... 377 260
Unrecognized net loss.......................................................................... (160) --
--------- ---------
Accrued postretirement health care benefits.................................................... $ 1,434 $ 1,447
--------- ---------
--------- ---------
</TABLE>
For measurement purposes, a 6.0% annual rate of increase in the per
capita cost of covered health care benefits was assumed in 1997 and 1996. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at November 30, 1997 and 1996. A
1% increase in the assumed health care cost trend rate would not affect the
accumulated postretirement benefit obligation as of November 30, 1997 or the
aggregate of the service and interest cost components of the net annual
postretirement benefit cost for the year ended November 30, 1997.
36
<PAGE>
(14) DISCONTINUED OPERATIONS
- -----------------------------------------------------------------------------
On May 26, 1995, the Company completed the sale of its specialty
chemicals division to privately-held Elcat. 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 Elcat. The
net cash proceeds were used to repay long-term debt of approximately $12,000.
The Company recognized a gain of $9,334, (after tax) from the sale and
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 consolidated statements of income. Net sales of the
specialty chemicals division were $6,739 through May 26, 1995. Interest
expense of $351 for 1995 was allocated to discontinued operations based upon
the ratio of net assets discontinued to the total net assets of the
consolidated entity.
15) SUBSEQUENT EVENT
On February 22, 1998, the Company entered into a definitive agreement to
acquire the BAN anti-perspirant and deodorant brand from Bristol-Myers Squibb
Company. Pursuant to the terms of the acquisition agreement, the Company will
purchase all the assets, including, inventories, patents and trademarks of
BAN (excluding the rights in Japan), for $165 million in cash, plus assumed
liabilities. The purchase price will be funded by debt financing. This
acquisition transaction is expected to close no later than March 31, 1998.
37
<PAGE>
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Chattem, Inc.:
We have audited the accompanying consolidated balance sheets of Chattem,
Inc. (a Tennessee corporation) and subsidiaries as of November 30, 1997 and
1996 and the related consolidated statements of income, shareholders' equity
(deficit) and cash flows for each of the three years in the period ended
November 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Chattem, Inc. and
subsidiaries as of November 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
January 19, 1998
(except with respect to the
matter discussed in Note 15
as to which the date is
February 23, 1998)
38
<PAGE>
Quarterly Information
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------
TOTAL FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30
---------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
FISCAL 1997:
Continuing operations:
Net sales............................................ $ 143,235 27,946 39,178 38,909 37,202
Gross profit......................................... $ 103,982 19,552 28,290 28,809 27,331
Income (1)........................................... $ 7,255 136 3,057 2,847 1,215
Income per share (1)................................. $ .80 .02 .35 .31 .13
Total:
Net income........................................... $ 5,885 136 3,057 1,477 1,215
Net income per share(2).............................. $ .65 .02 .35 .16 .13
FISCAL 1996:
Continuing operations:
Net sales............................................ $ 118,903 18,697 30,430 38,841 30,935
Gross profit......................................... $ 83,783 12,948 21,101 27,453 22,281
Income (loss) (1).................................... $ 3,804 (38) 2,010 2,131 (299)
Income (loss) per share (1).......................... $ .47 (.01) .26 .24 (.02)
Total:
Net income (loss).................................... $ 3,272 (38) 1,478 2,131 (299)
Net income (loss) per share(2)....................... $ .40 (.01) .19 .24 (.02)
</TABLE>
- ------------------------
(1) Before extraordinary loss on early extinguishment of debt.
(2) The sum of the quarterly earnings per share amounts may differ from annual
earnings per share because of the differences in the weighted average number
of common shares and common share equivalents used (where dilutive) in the
quarterly and annual computations.
39
<PAGE>
Geographical Segment Information
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES:
Domestic..................................................................... $ 128,024 $ 104,444 $ 87,250
International................................................................ 15,211 14,459 13,348
---------- ---------- ----------
Consolidated............................................................... $ 143,235 $ 118,903 $ 100,598
---------- ---------- ----------
---------- ---------- ----------
OPERATING INCOME:
Domestic..................................................................... $ 27,393 $ 18,929 $ 16,719
International................................................................ 1,710 1,613 1,292
---------- ---------- ----------
Total...................................................................... 29,103 20,542 18,011
Other unallocated expenses, net (1).......................................... (17,855) (14,922) (14,401)
---------- ---------- ----------
Income from continuing operations before income taxes...................... $ 11,248 $ 5,620 $ 3,610
---------- ---------- ----------
---------- ---------- ----------
IDENTIFIABLE ASSETS:
Domestic..................................................................... $ 164,175 $ 135,238 $ 69,732
International................................................................ 7,929 10,961 8,350
---------- ---------- ----------
Total...................................................................... 172,104 146,199 78,082
Investment in Elcat, Inc..................................................... 6,640 5,984 5,328
---------- ---------- ----------
Consolidated............................................................... $ 178,744 $ 152,183 $ 83,410
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) Principally interest expense and corporate overhead not allocated.
40
<PAGE>
<TABLE>
<S> <C> <C>
Board of Directors Officers Chattem, Inc.
1715 West 38th Street
ZAN GUERRY ZAN GUERRY Chattanooga, TN 37409
Chairman and Chief Executive Chairman and Chief Corporate Office
Officer Executive Officer
Chattem, Inc.
Chattanooga, TN A. ALEXANDER TAYLOR II Subsidiaries and Affiliated Companies
President and Chief Operating
A. ALEXANDER TAYLOR II Officer CHATTEM (U.K.) LIMITED
President and Chief Operating Guerry House
Officer HUGH F. SHARBER Ringway Centre
Chattem, Inc., Secretary Edison Road
Chattanooga, TN Basingstoke, Hampshire RG21 2YH
ADDITIONAL England
SAMUEL E. ALLEN FINANCIAL
Chairman INFORMATION CHATTEM (CANADA) INC.
GLOBALT, Inc. Copies of quarterly press 2220 Argentia Road
Atlanta, GA releases and/or quarterly Mississauga, Ontario L5N 2K7
reports on Form 10-Q and
LOUIS H. BARNETT annual report on Form 10-K, HBA INSURANCE LTD.
Business Consultant both forms filed with the P.O. Box HM 2062
Fort Worth, TX Securities and Exchange Hamilton 5, Bermuda
Commission, may be obtained
ROBERT E. BOSWORTH without charge by writing to SIGNAL INVESTMENT &
Business Consultant the Controller, Chattem, Inc. MANAGEMENT CO.
Chattanooga, TN or by calling- 1105 North Market Street
1-800-366-6077, Ext. 769. Suite 1300
RICHARD E. CHENEY Wilmington, DE 19890
Former Chairman Emeritus
Hill and Knowlton, Inc. COMMON STOCK LISTING
New York, NY Over-the-Counter
NASDAQ Symbol: CHTT
SCOTT L. PROBASCO, JR.
Chairman of the Executive TRANSFER AGENT AND
Committee REGISTRAR
SunTrust Bank, Tennessee, N.A. SunTrust Bank, Atlanta, N.A.
Chattanooga, TN P.O. Box 4625
Atlanta, GA 30302
</TABLE>
<PAGE>
EXHIBIT 22
CHATTEM, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OR COUNTRY OF INCORPORATION
- ---------------------------- -----------------------------------------
<S> <C>
Chattem (Canada) Inc. Canada
Chattem (U.K.) Limited England
HBA Insurance Ltd. Bermuda
Signal Investment & Management Co. Delaware
</TABLE>
<PAGE>
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8 (Nos. 33-35386, 33-78524
and 33-78522).
/s/ ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
February 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHATTEM,
INC.'S AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1998
<PERIOD-END> NOV-30-1997
<CASH> 508
<SECURITIES> 4,349
<RECEIVABLES> 28,570
<ALLOWANCES> 600
<INVENTORY> 14,493
<CURRENT-ASSETS> 48,872
<PP&E> 28,825
<DEPRECIATION> 17,837
<TOTAL-ASSETS> 178,744
<CURRENT-LIABILITIES> 34,452
<BONDS> 142,394
0
0
<COMMON> 1,945
<OTHER-SE> 2,425
<TOTAL-LIABILITY-AND-EQUITY> 178,744
<SALES> 143,236
<TOTAL-REVENUES> 143,236
<CGS> 38,263
<TOTAL-COSTS> 117,732
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,834
<INCOME-PRETAX> 11,249
<INCOME-TAX> 3,993
<INCOME-CONTINUING> 7,255
<DISCONTINUED> 0
<EXTRAORDINARY> (1,370)
<CHANGES> 0
<NET-INCOME> 5,886
<EPS-PRIMARY> .65
<EPS-DILUTED> .65
</TABLE>
