<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1998
COMMISSION FILE NUMBER 0-5905
CHATTEM, INC.
A TENNESSEE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
TELEPHONE: 423-821-4571
REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
AS OF JULY 10, 1998, 9,481,260 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT PAR
VALUE, WERE OUTSTANDING.
<PAGE>
CHATTEM, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of May 31, 1998 and
November 30, 1997 ......................................................... 3
Consolidated Statements of Income for the Three and Six
Months Ended May 31, 1998 and 1997 ........................................ 5
Consolidated Statements of Cash Flows for the Six Months Ended
May 31, 1998 and 1997 ..................................................... 6
Notes to Consolidated Financial Statements .................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................... 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .................. 19
Item 6. Exhibits and Reports on Form 8-K ..................................... 19
SIGNATURES ...................................................................... 20
EXHIBIT 11 - Statement Regarding Computation of Per Share Earnings
EXHIBIT 27 - Financial Data Schedule
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
ASSETS 1998 1997
- ------- ------------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 8,463 $ 4,858
Accounts receivable, net ............................................ 44,727 28,078
Refundable and deferred income taxes ................................ 1,876 1,876
Inventories ......................................................... 20,503 14,493
Prepaid expenses and other current assets ........................... 701 667
-------- --------
Total current assets .............................................. 76,270 49,972
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET .................................... 17,324 10,988
-------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc. ........................................... 6,968 6,640
Patents, trademarks and other purchased product rights, net ......... 259,634 104,972
Debt issuance costs, net ............................................ 10,775 3,118
Other ............................................................... 2,076 3,054
-------- --------
Total other noncurrent assets ..................................... 279,453 117,784
-------- --------
TOTAL ASSETS .................................................... $373,047 $178,744
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- ------------------------------------ ------------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt ................................ $ 5,610 $ 8,919
Accounts payable .................................................... 8,186 9,319
Payable to bank ..................................................... 1,753 2,618
Accrued liabilities ................................................. 32,869 13,596
-------- -------
Total current liabilities ......................................... 48,418 34,452
-------- -------
LONG-TERM DEBT, less current maturities ............................... 303,401 133,475
-------- -------
DEFERRED INCOME TAXES ................................................. 3,290 3,290
-------- --------
OTHER NONCURRENT LIABILITIES .......................................... 2,337 3,157
-------- -------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000,
none issued ....................................................... - -
Common shares, without par value, authorized 20,000,
issued 9,450 at May 31, 1998 and 9,082 at
November 30, 1997 ................................................. 1,968 1,945
Paid-in surplus ..................................................... 66,410 63,975
Accumulated deficit ................................................. (51,465) (60,229)
-------- -------
16,913 5,691
Foreign currency translation adjustment ............................. (1,312) (1,321)
-------- -------
Total shareholders' equity ...................................... 15,601 4,370
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ...................................................... $373,047 $178,744
-------- -------
-------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
--------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES ......................................... $58,545 $39,178 $93,466 $67,124
-------- -------- ------- -------
COSTS AND EXPENSES:
Cost of sales ................................... 15,854 10,888 25,536 19,282
Advertising and promotion ....................... 23,202 14,602 38,382 25,869
Selling, general and administrative ............. 6,741 5,767 11,900 10,424
-------- -------- ------- -------
Total costs and expenses ...................... 45,797 31,257 75,818 55,575
-------- -------- ------- -------
INCOME FROM OPERATIONS .......................... 12,748 7,921 17,648 11,549
-------- -------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense ................................ (7,332) (3,835) (11,512) (7,633)
Investment and other income ..................... 243 694 435 1,013
Gain on product divestiture ..................... 10,442 -- 10,442 --
-------- -------- ------- -------
Total other income (expense) .................. 3,353 (3,141) (635) (6,620)
-------- -------- ------- -------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS .............................. 16,101 4,780 17,013 4,929
PROVISION FOR INCOME TAXES ........................ 6,032 1,723 6,335 1,736
-------- -------- ------- -------
INCOME BEFORE EXTRAORDINARY LOSS .................. 10,069 3,057 10,678 3,193
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET ..................... (1,901) - (1,901) -
-------- -------- ------- -------
NET INCOME ........................................ $ 8,168 $ 3,057 $ 8,777 $ 3,193
-------- -------- ------- -------
COMMON SHARES:
Weighted average number outstanding ............. 9,370 8,613 9,149 8,608
-------- -------- ------- -------
Weighted average and equivalent number
outstanding ................................... 9,829 8,852 9,548 8,830
-------- -------- ------- -------
NET INCOME PER COMMON SHARE:
Basic:
Income before extraordinary loss .............. $ 1.07 $ .35 $ 1.17 $ .37
Extraordinary loss ............................ (.20) - (.21) -
-------- -------- ------- -------
Total basic ................................. $ .87 $ .35 $ .96 $ .37
-------- -------- ------- -------
-------- -------- ------- -------
Diluted:
Income before extraordinary loss .............. $ 1.02 $ .35 $ 1.12 $ .36
Extraordinary loss ............................ (.19) - (.20) -
-------- -------- ------- -------
Total diluted ............................... $ .83 $ .35 $ .92 $ .36
-------- -------- ------- -------
-------- -------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MAY 31,
--------------------------------------
1998 1997
----------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ....................................................... $ 8,777 $ 3,193
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................ 4,121 2,979
Extraordinary loss on early extinguishment of debt ........... 1,901 --
Gain on sale of trademarks and other product rights .......... (10,442) --
Dividend receivable from Elcat, Inc. ......................... (328) (328)
Other, net ................................................... 111 266
Changes in operating assets and liabilities:
Increase in accounts receivable ............................ (16,434) (6,774)
Increase in inventories .................................... (7,225) (45)
Decrease in refundable and deferred income taxes ........... -- 2,386
Decrease in prepaid and other current assets ............... 729 1,384
Increase (decrease) in accounts payable and accrued
liabilities............................................... 15,624 (1,623)
--------- -------
Net cash provided by (used in) operating activities ..... (3,166) 1,438
--------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ................... (7,348) (619)
Proceeds from notes receivable ............................... -- 100
Purchase of trademarks and other product rights .............. (156,993) (1,000)
Proceeds from sale of trademarks and other product rights .... 11,750 --
Other, net ................................................... (293) (651)
--------- -------
Net cash used in investing activities ................... (152,884) (2,170)
--------- -------
FINANCING ACTIVITIES:
Repayment of long-term debt .................................. (95,998) (2,044)
Proceeds from long-term debt ................................. 262,365 --
Proceeds from exercise of stock options and warrants ......... 2,458 83
Debt issuance costs .......................................... (8,297) (383)
(Decrease) increase in payable to bank ....................... (865) 579
--------- -------
Net cash provided by (used in) financing activities ..... 159,663 (1,765)
--------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS ................................................. (8) (94)
--------- -------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period ........................... 3,605 (2,591)
At beginning of period ....................................... 4,858 16,040
--------- -------
At end of period ............................................. $ 8,463 $13,449
--------- -------
--------- -------
PAYMENTS FOR:
Interest ..................................................... $ 8,053 $ 7,274
Taxes ........................................................ $ 272 $ 153
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. These consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in
the Company's Annual Report to Shareholders for the year ended November
30, 1997. The 1997 Annual Report has previously been filed with the
Securities and Exchange Commission as an exhibit to the Company's Form
10-K. The accompanying unaudited consolidated financial statements, in
the opinion of management, include all adjustments necessary for a fair
presentation. All such adjustments are of a normal recurring nature.
2. The Company incurs significant expenditures on television, radio and print
advertising to support its nationally branded over-the-counter
pharmaceuticals, functional toiletries, dietary supplements and
antiperspirant/deodorants. Customers purchase products from the Company
with the understanding that the brands will be supported by the
Company's extensive media advertising. This advertising supports the
retailers' sales effort and maintains the important brand franchise with
the consuming public. Accordingly, the Company considers its advertising
program to be clearly implicit in its sales arrangements with its
customers. Therefore, the Company believes it is appropriate to allocate
a percentage of the necessary supporting advertising expenses to each
dollar of sales by charging a percentage of sales on an interim basis
based upon anticipated annual sales and advertising expenditures (in
accordance with APB Opinion No. 28) and adjusting that accrual to the
actual expenses incurred at the end of the year.
3. The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the respective full years.
Seasonality is a factor in the Company's overall business, with the
first quarter sales and income traditionally trailing the other fiscal
quarters.
7
<PAGE>
4. Inventories consisted of the following at May 31, 1998 and November 30,
1997:
<TABLE>
<CAPTION>
May 31, November 30,
1998 1997
---------------- -------------
<S> <C> <C>
Raw materials and work in process ............ $ 12,632 $ 9,107
Finished goods ............................... 10,335 7,850
Excess of current cost over LIFO values ...... (2,464) (2,464)
---------------- -------------
Total inventories ....................... $ 20,503 $ 14,493
---------------- -------------
---------------- -------------
</TABLE>
5. Accrued liabilities consisted of the following at May 31, 1998 and
November 30, 1997:
<TABLE>
<CAPTION>
May 31, November 30,
1998 1997
-------- ------------
<S> <C> <C>
Income and other taxes ....................... $ 5,336 $ --
Salaries, wages and commissions .............. 1,339 1,696
Advertising and promotion .................... 10,927 2,840
Interest ..................................... 7,079 4,119
Product acquisitions and divestitures ........ 3,637 1,489
Other ........................................ 4,551 3,452
------- -------
Total accrued liabilities .............. $32,869 $13,596
------- -------
------- -------
</TABLE>
6. Effective December 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (FAS 128), "Earnings per share". This new
standard requires dual presentation of basic and diluted earnings per
share (EPS) on the face of the income statement and requires a
reconciliation of the numerators and denominators of the basic and
diluted EPS calculations. The earnings per share for the three and six
months ended May 31, 1997 have been restated to conform to FAS 128.
7. On March 24, 1998, the Company acquired the BAN line of deodorant and
antiperspirant products from Bristol-Myers Squibb Company for a purchase
price of $165,000 (subject to an inventory adjustment), plus the
assumption of up to $5,000 of liabilities. The Company acquired the BAN
trademarks, formulae, certain patents pertaining to
anti-perspirant/deodorant technology, technical information, inventory,
manufacturing equipment and packaging related assets used in the
manufacture of BAN but not the right to sell BAN in Japan.
8. Also on March 24, 1998, the Company issued $200,000 of 8 7/8% Senior
Subordinated Notes due 2008 (the "Notes") to NationsBanc Montgomery
Securities LLC (the "Initial Purchaser") and entered into an amended and
restated senior secured bank credit agreement. The proceeds of the note
offering were used to fund the BAN purchase and related fees and
expenses, repay revolving bank indebtedness and provide additional
working capital.
8
<PAGE>
The Notes mature on April 1, 2008 and interest is payable semi-annually
on April 1 and October 1 of each year, commencing October 1, 1998. The
Notes are senior subordinated obligations of the Company and are
subordinated in right of payment to all existing and future senior debt
of the Company. The Notes may not be redeemed until April 1, 2003, 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 issued under an indenture with SouthTrust Bank, National
Association, as indenture trustee, which restricts, among other things,
the ability of the Company and its subsidiaries to (i) incur additional
indebtedness and issue preferred stock, (ii) incur liens, (iii) pay
dividends or make certain other restricted payments, (iv) apply net
proceeds from certain asset sales, (v) enter into certain transactions
with affiliates, (vi) merge or consolidate with any other person, (vii)
sell stock of its subsidiaries, or (viii) assign, transfer, lease,
convey or otherwise dispose of substantially all of the assets of the
Company.
The Notes were issued by the Company to the Initial Purchaser in a
transaction not registered under the Securities Act of 1933 ("Securities
Act") in reliance upon the exemption provided in Section 4(2) of the
Securities Act. The Initial Purchaser subsequently placed the Notes with
qualified institutional buyers and certain accredited investors in
reliance upon Rule 144A under the Securities Act.
Pursuant to a Registration Rights Agreement between the Company and the
Initial Purchaser, the Company filed with the Securities and Exchange
Commission on May 26, 1998 a Registration Statement on Form S-4, which
became effective on June 8, 1998, with respect to its Series B Notes
that are identical in all material respects to the original Notes. The
Company has offered the holders of the original Notes the opportunity to
exchange their Notes for a like amount of Series B Notes on or before
July 23, 1998, unless extended by the Company in its sole discretion.
9. The bank credit agreements, of which NationsBank of Tennessee, N.A. is
agent, include term loans of $27,500 and $34,800 and a working capital
facility of $30,000 (the "Credit Agreements"). The working capital
facility and the $27,500 term loan mature on June 26, 2002 and the
$34,800 term loan matures on June 14, 2004. The Company may elect either
the greater of the prime rate or federal funds plus 1/2% or a floating
rate or Eurodollar interest rate option applicable to loans under the
Credit Agreements. The floating rate and Eurodollar interest rate
options are based on a base rate plus a floating rate margin that
fluctuates on the basis of the Company's leverage ratio. In addition to
the foregoing, the Credit Agreements contain covenants, representations
and other agreements by the Company that are customary in loan
agreements and security instruments relating to financings of this type.
9
<PAGE>
10. On May 12, 1998, the Company sold the CORNSILK oil control makeup brand to
Del Laboratories, Inc. for $10,750 plus inventories and the assumption of
certain liabilities. The Company sold the CORNSILK trademarks, formulae,
technical information, inventory and other related assets but will continue
to operate the CORNSILK business in the United Kingdom pursuant to a
license agreement. The Company used the net proceeds from the sale to
reduce bank indebtedness.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
GENERAL
On March 24, 1998, the Company acquired the BAN line of deodorant and
anti-perspirant products from Bristol-Myers Squibb Company for a purchase
price of $165,000 (subject to an inventory adjustment), plus the assumption
of up to $5,000 of liabilities. The Company acquired the BAN trademarks,
formulae, certain patents pertaining to anti-perspirant/deodorant
technology, technical information, inventory, manufacturing equipment and
packaging related assets used in the manufacture of BAN but not the right to
sell BAN in Japan.
Also on March 24, 1998, the Company issued $200,000 of 8 7/8% Senior
Subordinated Notes due 2008 (the "Notes") to NationsBanc Montgomery
Securities LLC and entered into an amended and restated senior secured bank
credit agreement. The proceeds of the Notes offering were used to fund the
BAN purchase and related fees and expenses, repay revolving bank indebtedness
and provide additional working capital.
On May 12, 1998, the Company sold the CORNSILK oil control makeup brand to
Del Laboratories, Inc. for $10,750, plus inventories and the assumption of
certain liabilities. The Company sold the CORNSILK trademarks, formulae,
technical information, inventory and other related assets but will continue
to operate the CORNSILK business in the United Kingdom pursuant to a license
agreement. The Company used the net proceeds from the sale to reduce bank
indebtedness.
For the second quarter of fiscal 1998, net sales increased 49.4% to $58,545
from $39,178 for the corresponding prior year period, while operating income
rose more rapidly than sales, growing 61.0% to $12,748 for 1998 from $7,921
in 1997. Net income before extraordinary loss for the 1998 period was
$10,069, or $1.02 per share, as compared to $3,057, or $.35 per share, for
the comparable 1997 period, an increase of 229.4%. The 1998 net income amount
includes a gain net of taxes of $6,474, or $.65 per share, from the sale of
the CORNSILK brand, which was completed on May 12, 1998. Excluding this gain,
net income before extraordinary loss was $3,595, a 17.6% increase, or $.37
per share. The increase in earnings per share was achieved despite the
weighted average number of shares increasing 8.8% from 1997 to 1998, and
compares to a strong fiscal 1997 second quarter highlighted by three major
line extensions and a major repackaging launch.
During the second quarter of fiscal 1998 the Company experienced an
extraordinary loss net of taxes of $1,901, or $.19 per share, on the early
extinguishment of bank and 12 3/4% Notes debt.
11
<PAGE>
For the first six months of fiscal 1998, net sales were $93,466 compared to
$67,124 for the same period of 1997, a 39.2% increase. Income from operations
for the 1998 period was $17,648 versus $11,549 in the comparable 1997 period,
a 52.8% increase. Net income before extraordinary loss for the first six
months of fiscal 1998 was $10,678 (including the gain from the sale of the
CORNSILK brand), or $1.12 per share, and $4,204, or $.44 per share, excluding
the CORNSILK gain, while in the fiscal 1997 corresponding period net income
was $3,193, or $.36 per share. The increase in net income before
extraordinary loss and excluding the CORNSILK gain period to period was
31.7%. A 6.3% increase in the weighted average number of outstanding shares
of the Company's common stock for the period ended May 31, 1998 had a
material impact on the calculation of earnings per share for the first six
months of fiscal 1998.
The Company will continue to seek increases in sales through a combination of
acquisitions and internal growth while maintaining high operating income. As
brands which formerly had high growth rates mature, sales increases will
become more dependent on acquisitions and the development of successful line
extensions or new products under existing brand names.
Strategically, the Company continually evaluates its products and businesses
as part of its growth strategy and in instances where the Company's
objectives are not realized, will dispose of the brands and redeploy the
assets to products or businesses with greater growth potential or to reduce
indebtedness.
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for net income before extraordinary loss and
for the periods indicated, certain items from the Company's Consolidated
Statements of Income expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- -----
<S> <C> <C> <C> <C>
NET SALES .............................................. 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
COSTS AND EXPENSES:
Cost of sales ........................................ 27.1 27.8 27.3 28.7
Advertising and promotion ............................ 39.6 37.3 41.1 38.6
Selling, general and administrative .................. 11.5 14.7 12.7 15.5
----- ----- ----- -----
Total costs and expenses ........................... 78.2 79.8 81.1 82.8
----- ----- ----- -----
INCOME FROM OPERATIONS ................................. 21.8 20.2 18.9 17.2
----- ----- ----- -----
OTHER INCOME (EXPENSE):
Interest expense ..................................... (12.5) (9.8) (12.3) (11.4)
Investment and other income .......................... .4 1.8 .4 1.6
Gain on product divestitures ......................... 17.8 -- 11.2 --
----- ----- ----- -----
Total other income (expense) ...................... 5.7 (8.0) (.7) (9.8)
----- ----- ----- -----
INCOME BEFORE INCOME TAXES ............................. 27.5 12.2 18.2 7.4
PROVISION FOR INCOME TAXES ............................. 10.3 4.4 6.8 2.6
----- ----- ----- -----
NET INCOME BEFORE EXTRAORDINARY LOSS .................. 17.2% 7.8% 11.4% 4.8%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
13
<PAGE>
COMPARISON OF THREE MONTHS ENDED MAY 31, 1998 AND 1997
Net sales for the three months ended May 31, 1998 increased $19,367, or
49.4%, to $58,545 from $39,178 for the same period of 1997. This increase in
net sales was attributable to a $19,108, or 54.8%, increase in domestic
consumer products sales to $53,945 from $34,837 last year and an increase of
$259, or 6.0%, in international consumer products sales to $4,600 from $4,341.
The increase in net sales in the 1998 period over the corresponding 1997
period for domestic consumer products was due primarily to the acquisitions
of the BAN and SUNSOURCE product lines. BAN was acquired on March 24, 1998
while the SUNSOURCE line was acquired on June 26, 1997. Strong sales
increases were also realized for the BULLFROG, PAMPRIN, SUN-IN and HERPECIN-L
brands, principally as a result of increased advertising and promotional
expenditures. Decreases in sales from the corresponding 1997 period were
recognized for ICY HOT, FLEXALL, CORNSILK, MUDD, BENZODENT, PREMSYN PMS and
GOLD BOND Baby Powders and Cream. The decline in sales of the ICY HOT and
GOLD BOND Baby Powders reflects the introduction of line extensions in the
late first or second quarter of 1997 in which sales of these products were
unusually high. In early 1997, the CORNSILK brand was relaunched in
completely new packaging. Due to the relaunch, sales of the brand were
significantly higher in the first and second quarters of 1997 as retailers
ordered the new packaging. The CORNSILK brand was sold on May 12, 1998. The
sales decreases for the remainder of the brands listed above reflect the
maturation of these product lines, increased competition in their respective
categories and markets and, in most cases, reduced marketing support. All
sales variances were principally due to volume changes.
International consumer product sales for the 1998 period decreased $84, or
6.3%, for the Canadian operation but increased $353, or 13.7%, for the United
Kingdom business. U.S. export sales declined $10, or 2.4%, over the prior
year period. Sales increases were realized for the PAMPRIN, PHISODERM,
FLEXALL, GOLD BOND and BAN brands in Canada, while the remainder of the
product lines sold in that country showed modest declines. Sales of all of
the brands sold by the United Kingdom operation recorded increases, except
for the SUN-IN product line. All sales variances were largely the result of
changes in volume.
Cost of sales as a percentage of net sales decreased to 27.1% for the 1998
quarter from 27.8% for the same prior year period. This decline was
essentially due to a shift in product mix of sales of domestic consumer
products to higher margin brands and the addition of the SUNSOURCE product
line in the 1998 period.
Advertising and promotion expenses increased $8,600, or 58.9%, in the 1998
period and were 39.6% and 37.3% of net sales for the 1998 and 1997 quarters,
respectively. This increase in the 1998 period was primarily associated with
the SUNSOURCE and BAN product lines. Increased spending was also realized for
PAMPRIN, BULLFROG and PHISODERM.
Selling, general and administrative expenses increased $974, or 16.9%, in the
1998 period but declined as a percentage of net sales to 11.5% compared to
14.7% for the prior year period. The increase was primarily due to increases
in direct selling expenses, as a result of increased sales, and special
transitional services fees relating to the BAN brand acquisition.
14
<PAGE>
Interest expense increased $3,497, or 91.2%, in the 1998 period, reflecting
primarily the additional debt incurred for the SUNSOURCE and BAN product
acquisitions. A gain of $10,442 on the sale of the CORNSILK brand was
recognized in the 1998 period.
Income before extraordinary loss increased by $7,012, or 129.4%, in the 1998
period. The net increase resulted primarily from the gain on the sale of the
CORNSILK product line, increased sales and an improved cost of sales
percentage of net sales, offset in part by increased advertising and
promotion expenditures, selling, general and administrative expenses,
interest expense and income taxes.
COMPARISON OF SIX MONTHS ENDED MAY 31, 1998 AND 1997
Net sales for the six months ended May 31, 1998 increased $26,342, or 39.2%,
to $93,466 from $67,124 for the same period last year. The increase in net
sales was associated with a $25,312, or 41.9%, increase in domestic consumer
product sales to $85,763 from $60,451 last year and an increase of $1,030, or
15.4%, in international consumer products sales to $7,703 from $6,673.
The net sales increase over the prior year period for domestic consumer
products was due primarily to the acquisitions of the BAN and SUNSOURCE
product lines. BAN was acquired on March 24, 1998 while the SUNSOURCE line
was acquired on June 26, 1997. Strong sales increases were also realized for
the PAMPRIN, SUN-IN, ULTRASWIM and BULLFROG brands, principally as a result
of increased advertising and promotion expenditures. Decreases in sales from
the corresponding 1997 period were recorded for FLEXALL, ICY HOT, PREMSYN
PMS, CORNSILK, and GOLD BOND Baby Powders. The decline in sales of the ICY
HOT and GOLD BOND Baby Powders reflects the introduction of line extensions
in the first six month period of 1997 in which sales of these products were
unusually high. In early 1997, the CORNSILK brand was relaunched in
completely new packaging. Due to the relaunch, sales of the brand were
significantly higher in the first and second quarters of 1997 as retailers
ordered the new packaging. The CORNSILK brand was sold on May 12, 1998. The
sales decreases for the balance of the brands listed above reflect the
maturation of these product lines, increased competition in their respective
categories and markets and, in most cases, reduced marketing support. All
sales variances were primarily due to volume changes.
International consumer product sales for the 1998 period decreased $18, or
.8%, for the Canadian operation but increased $960, or 24.9%, for the United
Kingdom business. U.S. export sales increased $88, or 13.5%, over the prior
period, largely as a result of BAN brand sales being reflected solely in the
current period. Sales of all of the product lines sold by the United Kingdom
operation increased in the 1998 period. All sales variances were largely the
result of changes in volume.
Cost of sales as a percentage of net sales decreased to 27.3% for the 1998
period from 28.7% for the prior year's first six months. This decline was
essentially due to a shift in product mix of sales of domestic consumer
products to higher margin brands and the addition of the SUNSOURCE product
line in the 1998 period.
15
<PAGE>
Advertising and promotion expenses increased $12,513, or 48.4%, in the 1998
period and were 41.1% of net sales compared to 38.6% in the corresponding
1997 period. This increase in the 1998 period was primarily associated with
the SUNSOURCE and BAN brands. Increased spending was also realized for
PAMPRIN, BULLFROG and HERPECIN-L.
Selling, general and administrative expenses increased $1,476, or 14.2%, in
the 1998 period but were reduced to 12.7% of net sales compared to 15.5% in
the corresponding 1997 period. The increase was primarily due to increases in
direct selling expenses, as a result of increased sales, and special
transitional service fees relating to the BAN brand acquisition.
Interest expense increased $3,879, or 50.8%, in the 1998 period, reflecting
primarily the additional debt incurred for the SUNSOURCE and BAN product
acquisitions in fiscals 1997 and 1998, respectively. A gain of $10,422 on the
sale of the CORNSILK brand was recognized in the 1998 period.
Income before extraordinary loss increased by $7,485, or 134.4%, in the
current period. The net increase resulted primarily from the gain on the
CORNSILK product line sale, increased sales and an improved cost of sales as
a percentage of net sales, offset in part by increased advertising and
promotion expenditures, selling, general and administrative expenses,
interest expense and income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with a combination of
internally generated funds and borrowings. The Company's principal uses of
cash are for operating expenses, acquisitions, working capital, capital
expenditures and long-term debt servicing.
Cash of $3,166 was used in operations for the six months ended May 31, 1998,
whereas cash of $1,438 was provided by operations for the corresponding
period of fiscal 1997. The decrease in cash flows from operations over the
prior year period was primarily the result of changes in accounts receivable,
inventories, accounts payable and accrued liabilities. The changes were due
primarily to the BAN acquisition in the second quarter of fiscal 1998 and the
SUNSOURCE acquisition in the third quarter of fiscal 1997.
Investing activities used cash of $152,884 and $2,170 in the six months ended
May 31, 1998 and 1997, respectively. The increase of $150,714 in the current
period was largely the result of increased property, plant and equipment
additions and the purchase of the BAN trademarks and other product rights,
offset in part by the proceeds from the sale of the CORNSILK product line.
Financing activities provided cash of $159,663 in the six months ended May
31, 1998 compared to the use of cash of $1,765 for the comparable prior year
period. The increase of $161,428 in the current period reflects the issuance
of $200,000 of 8 7/8% notes and the refinancing of bank debt, the proceeds of
both being used primarily to fund the purchase of the BAN brand. In addition,
$8,599 of the 12 3/4% notes and certain bank loans were retired. The Company
incurred an extraordinary loss of $1,901 as a result of the early retirement
of debt.
16
<PAGE>
The following table presents working capital data at May 31, 1998 and
November 30, 1997 or for the respective periods then ended:
<TABLE>
<CAPTION>
May 31, November 30,
Item 1998 1997
---- ---- -----
<S> <C> <C>
Working capital (current assets less current liabilities) .......... $27,852 $15,520
Current ratio (current assets divided by current liabilities) ...... 1.58 1.45
Quick ratio (cash and cash equivalents and accounts
receivable divided by current liabilities) ....................... 1.10 .96
Average accounts receivable turnover ............................... 4.73 5.92
Average inventory turnover ......................................... 2.95 3.17
Working capital as a percentage of total assets .................... 7.47% 8.68%
</TABLE>
The improvement in the current and quick ratios at May 31, 1998 as compared
to November 30, 1997 reflected primarily the increase in accounts receivable
and inventories, which was largely associated with the BAN acquisition and
the seasonal products, e.g., BULLFROG and SUN-IN.
Total loans outstanding were $309,011 at May 31, 1998 compared to $142,394 as
of November 30, 1997, an increase of $166,617 during the first six months of
1998. The increase in the 1998 period reflects principally the additional
borrowings required to fund the BAN brand acquisition on March 24, 1998. 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
Company's bank credit agreement. The availability of credit under the
revolver is determined based on the Company's accounts receivable and
inventories. As of May 31, 1998, the Company had $5,000 outstanding on its
$30,000 working capital line of credit.
The dated receivables related to the seasonal sales of BULLFROG, SUN-IN and
ULTRASWIM are due August 15, 1998 and are approximately $6,000 as of May 31,
1998.
Management of the Company believes that the projected cash flows to be
generated by operations, along with funds available from its bank credit
facilities, will be sufficient to fund the Company's current commitments and
proposed operations.
FOREIGN OPERATIONS
The Company's primary foreign operations are conducted through its Canadian
and U.K. subsidiaries. The functional currencies of these subsidiaries are
Canadian dollars and British pounds, respectively. Fluctuations in exchange
rates can impact operating results, including total revenues and expenses,
when translations of the subsidiary financial statements are made in
accordance with SFAS No. 52. "Foreign Currency Translation." For the six
months ended May 31, 1998 and 1997, these subsidiaries accounted for 7% and
9% of total revenues, respectively, and 2% and 5% of total assets,
respectively. It has not been the Company's practice to hedge its assets and
liabilities in the U.K. and Canada or its intercompany transactions due to
the inherent risks associated with foreign currency hedging transactions and
the timing of payment between the Company and its two foreign subsidiaries.
Historically, gains or losses from foreign currency transactions have not had
a material impact on the Company's operating results. Losses of $45 and of
$49 for the six months ended May 31, 1998 and 1997, respectively, resulted
from foreign currency transactions.
17
<PAGE>
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 to $2,000 which will be capitalized
as 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 the first half of fiscal 1999. Approximately
$745 had been expended on this system at May 31, 1998.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contain forward looking statements that are based on
management's current beliefs and assumptions about expectations, estimates,
strategies and projections for the Company. These statements are not
guarantees of future performance and involve risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward looking statements. The Company undertakes no obligation to update
publicly any forward looking statements whether as a result of new
information, future events or otherwise. The risks, uncertainties and
assumptions regarding forward looking statements include, but are not limited
to, product demand and market acceptance risks; product development risks,
such as delays or difficulties in developing, producing and marketing new
products or line extensions; the impact of competitive products, pricing and
advertising; constraints resulting from financial condition of the Company,
including the degree to which the Company is leveraged, debt service
requirements and restrictions under bank loan agreements and the indenture;
and other risks described in the Company's Securities and Exchange Commission
filings.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on April 8, 1998 in
Chattanooga, Tennessee. At the meeting, the following persons were elected as
directors to serve for a three year term: Scott L. Probasco, Jr. and Zan
Guerry. With respect to Mr. Probasco, 6,631,594 votes were in favor and
37,974 abstain. With respect to Mr. Guerry, 6,656,424 votes were in favor and
13,144 abstain. The following directors' terms of office continued after the
annual meeting: Samuel E. Allen, Louis H. Barnett, Robert E. Bosworth,
Richard E. Cheney and A. Alexander Taylor, II.
The 1998 Chattem, Inc. Non-Statutory Stock Option Plan was approved
by the shareholders with 4,803,759 in favor, 126,567 votes opposed, 55,224
votes abstaining and 1,684,018 broker non-votes.
The shareholders approved Arthur Andersen LLP as auditors for the next year
with 6,666,168 votes in favor, 2,900 against and 500 abstain.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Statement regarding computation of per share earnings
(Exhibit 11).
(2) Financial data schedule (Exhibit 27).
(b) The following Form 8-K reports were filed with the Securities and
Exchange Commission during the three months ended May 31, 1998:
Report, dated March 9, 1998, relating to proposed private
placement of $175 million of senior subordinated notes.
Report, dated March 24, 1998, relating to the acquisition of the
BAN line of deodorant and anti-perspirant products, the issuance
of $200 million of 8 7/8% senior subordinated notes due 2008 and
the execution of an amended and restated senior secured bank
credit agreement.
Report, as amended, dated May 12, 1998, relating to the sale of
the CORNSILK product line to Del Laboratories, Inc.
19
<PAGE>
CHATTEM, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHATTEM, INC.
(Registrant)
Dated: July 14, 1998 /s/ A. Alexander Taylor II
---------------------- ---------------------------------------
A. Alexander Taylor II,
President and Chief Operating Officer
/s/ Stephen M. Powell
---------------------------------------
Stephen M. Powell
(Chief Accounting Officer)
20
<PAGE>
EXHIBIT 11
CHATTEM, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MAY 31, MAY 31,
-------------------------- ------------------------
1998 1997 1998 1997
---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
NET INCOME:
Income before extraordinary loss............ $10,069 $3,057 $10,678 $3,193
Extraordinary loss.......................... (1,901) - (1,901) -
---------- ----------- ---------- ---------
Net income................................ $ 8,168 $3,057 $ 8,777 $3,193
---------- ----------- ---------- ---------
COMMON SHARES:
Weighted average number outstanding......... 9,370 8,613 9,149 8,608
Number issued upon assumed exercise
of outstanding stock options and stock
warrants.................................. 459 239 399 222
---------- ----------- ---------- ---------
Weighted average number of common
and common equivalent shares
outstanding............................... 9,829 8,852 9,548 8,830
---------- ----------- ---------- ---------
NET INCOME PER COMMON SHARE:
Basic:
Income before extraordinary loss.......... $ 1.07 $ 0.35 $ 1.17 $ 0.37
Extraordinary loss........................ (.20) - (.21) -
---------- ----------- ---------- ---------
Total basic............................. $ 0.87 $ 0.35 $ 0.96 $ 0.37
---------- ----------- ---------- ---------
---------- ----------- ---------- ---------
Diluted:
Income before extraordinary loss.......... $ 1.02 $ 0.35 $ 1.12 $ 0.36
Extraordinary loss........................ (.19) - (.20) -
---------- ----------- ---------- ---------
Total diluted........................... $ 0.83 $ 0.35 $ 0.92 $ 0.36
---------- ----------- ---------- ---------
---------- ----------- ---------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHATTEM,
INC.'S UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 8,463
<SECURITIES> 0
<RECEIVABLES> 45,327
<ALLOWANCES> 600
<INVENTORY> 20,503
<CURRENT-ASSETS> 76,270
<PP&E> 36,005
<DEPRECIATION> 18,681
<TOTAL-ASSETS> 373,047
<CURRENT-LIABILITIES> 48,418
<BONDS> 303,401
0
0
<COMMON> 1,968
<OTHER-SE> 13,633
<TOTAL-LIABILITY-AND-EQUITY> 373,047
<SALES> 93,466
<TOTAL-REVENUES> 93,466
<CGS> 25,536
<TOTAL-COSTS> 75,818
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,512
<INCOME-PRETAX> 17,013
<INCOME-TAX> 6,335
<INCOME-CONTINUING> 10,678
<DISCONTINUED> 0
<EXTRAORDINARY> (1,901)
<CHANGES> 0
<NET-INCOME> 8,777
<EPS-PRIMARY> .96
<EPS-DILUTED> .92
</TABLE>
