<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 FEBRUARY 28, 1999
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 APRIL 12, 1999, 9,765,799 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT
PAR VALUE, WERE OUTSTANDING.
1
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CHATTEM, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of February 28, 1999 and
November 30, 1998.......................................................................3
Consolidated Statements of Income for the Three
Months Ended February 28, 1999 and 1998.................................................5
Consolidated Statements of Cash Flows for the Three Months Ended
February 28, 1999 and 1998..............................................................6
Notes to Consolidated Financial Statements................................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................18
Item 6. Exhibits and Reports on Form 8-K..................................................18
SIGNATURES...................................................................................19
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>
FEBRUARY 28, NOVEMBER 30,
ASSETS 1999 1998
- ------ -------------- ---------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents.................................. $ 3,120 $ 2,076
Accounts receivable, net................................... 52,633 36,581
Refundable and deferred income taxes....................... 3,049 3,049
Inventories................................................ 23,341 19,606
Prepaid expenses and other current assets.................. 925 784
--------------- ----------------
Total current assets..................................... 83,068 62,096
--------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, NET .......................... 18,463 18,146
--------------- ----------------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc................................... 3,172 3,102
Patents, trademarks and other purchased product rights, net 361,798 272,226
Debt issuance costs, net................................... 11,402 10,091
Other...................................................... 2,715 3,351
--------------- ----------------
Total other noncurrent assets............................ 379,087 288,770
--------------- ----------------
TOTAL ASSETS................................... $ 480,618 $ 369,012
--------------- ----------------
--------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ------------------------------------ ----------- ------------
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Current maturities of long-term debt......................... $ 14,000 $ 17,444
Accounts payable............................................. 11,453 12,733
Payable to bank.............................................. 5,531 1,026
Accrued liabilities.......................................... 40,132 30,209
------------- -------------
Total current liabilities.................................. 71,116 61,412
------------- -------------
LONG-TERM DEBT, less current maturities ....................... 367,379 273,913
------------- -------------
DEFERRED INCOME TAXES ......................................... 6,826 6,826
------------- -------------
OTHER NONCURRENT LIABILITIES .................................. 2,127 2,110
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000,
none issued................................................ -- --
Common shares, without par value, authorized 20,000,
issued 9,763 at February 28, 1999 and 9,574 at
November 30, 1998.......................................... 2,033 1,994
Paid-in surplus.............................................. 74,369 69,068
Accumulated deficit.......................................... (41,810) (44,960)
------------- -------------
34,592 26,102
Cumulative other comprehensive income -
foreign currency translation adjustment .................... (1,422) (1,351)
------------- -------------
Total shareholders' equity................................. 33,170 24,751
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 480,618 $ 369,012
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these 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 ENDED
FEBRUARY 28,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
NET SALES....................................... $ 62,728 $ 34,921
--------- ---------
COSTS AND EXPENSES:
Cost of sales.................................. 16,880 9,682
Advertising and promotion...................... 24,738 15,180
Selling, general and administrative............ 6,700 5,159
--------- ---------
Total costs and expenses..................... 48,318 30,021
--------- ---------
INCOME FROM OPERATIONS .......................... 14,410 4,900
--------- ---------
OTHER INCOME (EXPENSE):
Interest expense............................... (8,806) (4,180)
Investment and other income, net............... 131 192
--------- ---------
Total other income (expense)................. (8,675) (3,988)
--------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS ............................ 5,735 912
PROVISION FOR INCOME TAXES ...................... 2,158 303
--------- ---------
INCOME BEFORE EXTRAORDINARY LOSS ................ 3,577 609
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET .................... (427) --
--------- ---------
NET INCOME........................................ $ 3,150 $ 609
--------- ---------
--------- ---------
COMMON SHARES:
Weighted average number outstanding (basic) ..... 9,712 9,087
--------- ---------
--------- ---------
Weighted average number and dilutive potential number
outstanding.................................... 10,118 9,481
--------- ---------
--------- ---------
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income before extraordinary loss................. $ .37 $ .07
Extraordinary loss............................... (.04) --
--------- ---------
Total basic $ .33 $ .07
--------- ---------
--------- ---------
Diluted:
Income before extraordinary loss $ .35 $ .06
Extraordinary loss (.04) --
--------- ---------
Total diluted $ .31 $ .06
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED FEBRUARY 28,
----------------------
1999 1998
--------- ---------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income .................................................. $ 3,150 $ 609
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ........................... 3,488 1,691
Dividend receivable from Elcat, Inc. .................... (70) (164)
Extraordinary loss on extinguishment of debt, net ....... 427 --
Other, net .............................................. 8 (285)
Changes in operating assets and liabilities:
Increase in accounts receivable ....................... (16,052) (2,518)
Increase in inventories ............................... (3,735) (2,244)
(Increase) decrease in prepaid expenses and
other current assets ................................ (12) 659
Decrease in accounts payable .......................... (1,280) (5,359)
Increase (decrease) in other accrued liabilities ...... 9,581 (518)
--------- ---------
Net cash used in operating activities .............. (4,495) (8,129)
--------- ---------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment ............... (864) (566)
Additions to patents, trademarks and other product rights (86,324) (96)
Proceeds from sale of investment ........................ 387 --
Increase in other assets, net ........................... (214) --
--------- ---------
Net cash used in investing activities .............. (87,015) (662)
--------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt ............................. (48,515) (3,318)
Proceeds from long-term debt ............................ 138,500 6,000
Proceeds from exercise of stock options and warrants .... 429 88
Change in payable to bank ............................... 4,505 2,750
Debt issuance costs ..................................... (2,355) (169)
--------- ---------
Net cash provided by financing activities .......... 92,564 5,351
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS ................................................. (10) (20)
--------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period ...................... 1,044 (3,460)
At beginning of period .................................. 2,076 4,858
--------- ---------
At end of period ........................................ $ 3,120 $ 1,398
--------- ---------
--------- ---------
PAYMENTS FOR:
Interest ................................................ $ 4,283 $ 6,057
Taxes ................................................... $ 2,232 $ 221
</TABLE>
The accompanying notes are an integral part of these 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, 1998. The
1998 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 health care
and toiletries and skin care products. 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. On December 21, 1998, the Company acquired the DEXATRIM, SPORTSCREME,
ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands from Thompson
Medical Company, Inc. ("Thompson") for $95,000. The purchase price
consisted of $90,000 cash and 125,500 shares of the Company's common stock.
The cash portion of the purchase price was financed by a new senior credit
facility consisting of a $115,000 term loan and a $50,000 working capital
revolving line of credit of which $17,500 was outstanding at February 28,
1999. The proceeds of the new credit facility were used to fund the
Thompson acquisition and related fees and expenses and refinance existing
bank indebtedness.
4. The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the respective full years.
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 domestic seasonal and international consumer
products and the relative absence of promotional campaigns during this
quarter. As a result of the Company's acquisitions of BAN and the Thompson
products in March and December 1998, respectively, seasonality should not
be as pronounced as in years past; however, because of seasonal products,
net sales and gross profit during the first fiscal quarter will continue
to trail the other fiscal quarters.
7
<PAGE>
5. Inventories consisted of the following at February 28, 1999 and
November 30, 1998:
<TABLE>
<CAPTION>
February 28, November 30,
1999 1998
------------ ------------
<S> <C> <C>
Raw materials and work in process........ $ 9,270 $ 7,903
Finished goods........................... 16,481 14,113
Excess of current cost over LIFO
values ................................ (2,410) (2,410)
----------- ------------
Total inventories ................... $ 23,341 $ 19,606
----------- ------------
----------- ------------
</TABLE>
6. Accrued liabilities consisted of the following at February 28, 1999 and
November 30, 1998:
<TABLE>
<CAPTION>
February 28, November 30,
1999 1998
------------ ------------
<S> <C> <C>
Income and other taxes ................... $ 3,674 $ 3,881
Salaries, wages and commissions .......... 1,526 2,850
Advertising and promotion ................ 16,535 8,896
Interest ................................. 10,075 5,969
Product acquisitions and
divestitures ........................... 4,059 3,290
Royalties ................................ 329 2,889
Other .................................... 3,934 2,434
--------- ---------
Total accrued liabilities .............. $ 40,132 $ 30,209
--------- ---------
--------- ---------
</TABLE>
7. Effective December 1, 1998, the Company adopted Statements of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income";
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" and SFAS No. 132, "Employers' Disclosure about Pensions and
other Retirement Benefits."
SFAS No.130 requires the Company to include a financial statement
presentation of comprehensive income and its components. Note 8 of these
Notes to Consolidated Financial Statements presents this information. The
Shareholders' Equity sections of the accompanying Consolidated Balance
Sheets as of February 28, 1999 and November 30, 1998 also present the
"Cumulative other comprehensive income" portion of the respective
cumulative comprehensive income.
SFAS No. 131 requires the Company to expand the financial statement
disclosures for operating segments, products and services and geographic
areas. For fiscal 1999 only, the Company has elected not to provide the
required disclosures for interim reporting periods, as allowed under the
provisions of this statement, but will present the required information in
its annual report for fiscal 1999 on a comparative annual basis.
SFAS No. 132 revises the Company's disclosures about pension and other
post retirement benefits plans. These revisions will be reflected in the
Company's annual report for fiscal 1999.
8
<PAGE>
8. Comprehensive income consisted of the following components for the three
months ended February 28, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net income............................ $ 3,150 $ 609
Other - foreign currency
translation adjustment............... (71) (93)
-------- --------
Total comprehensive income...... $ 3,079 $ 516
-------- --------
-------- --------
</TABLE>
9. On December 21, 1998, the Company refinanced its existing credit facilities
with $165,000 in senior secured credit facilities (the "Credit
Facilities"). The Credit Facilities were provided by a syndicate of
commercial banks, led by Bank of America as agent. The Credit Facilities
include a $50,000 revolving credit facility and a $115,000 term loan. The
Credit Facilities were used to refinance existing senior debt, to finance
the acquisition of the Thompson products and related fees and expenses and
to finance working capital and other general corporate needs. The $50,000
revolving credit facility matures on the earlier of (i) December 21, 2003
and (ii) the date on which the term loan is repaid in full. The $115,000
term loan matures on December 21, 2003. The Credit Facilities contain
covenants, representations, warranties and other agreements by the Company
that are customary in loan agreements and securities instruments relating
to financing of this type.
The Company may elect either the greater of (i) the prime rate or federal
funds rate plus .5% or (ii) a floating rate or Eurodollar interest rate
option applicable to the term and revolving line loans under the Credit
Facilities. 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 senior leverage ratio.
10. 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.
9
<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 December 21, 1998, the Company acquired the DEXATRIM, SPORTSCREME,
ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands from Thompson
Medical Company, Inc. for $95,000. The purchase price consisted of $90,000 cash
and 125,500 shares of the Company's common stock. The cash portion of the
purchase price was financed by a new senior credit facility consisting of a
$115,000 term loan and a $50,000 working capital revolving line of credit of
which $17,500 was outstanding at February 28, 1999. The proceeds of the new
credit facility were used to fund the Thompson acquisition and related fees and
expenses and refinance existing bank indebtedness.
For the three months ended February 28, 1999, the Company experienced a $27,807,
or 79.6%, increase in sales to $62,728 from $34,921 in the first quarter of
fiscal 1998. Operating income during the period likewise increased $9,510, or
194.1%, to $14,410 from $4,900. Income before an extraordinary loss of $3,577,
or $.35 per diluted share, was recorded during the period compared to $609, or
$.06 per diluted share, during the same period last year.
The BAN brand, acquired in March 1998, and the Thompson products, purchased in
December 1998, were primarily responsible for the improvement in the Company's
operating results for the three months ended February 28, 1999.
The Company recorded a loss of $427, net of income taxes, on the early
extinguishment of debt in the first quarter of fiscal 1999. The charge
consisted of bank fees and expenses which were written off in conjunction
with the refinancing of the Company's senior debt to fund the Thompson
acquisition.
The Company will continue to seek sales increases through a combination of
acquisitions and internal growth while maintaining high operating income levels.
As previously high-growth brands mature, sales increases will become even more
dependent on acquisitions and the development of successful line extensions.
During the first quarter of fiscal 1999, the Company introduced the following
line extensions/new products: GOLD BOND Triple Antibiotic Ointment, REPOSE
Stress Relief Formula, BULLFROG MAGICBLOCK and PHISODERM 4 Way Daily Acne
Cleanser. Strategically, the Company continually evaluates its products as part
of its growth strategy and, in instances where the Company's objectives are not
realized, will dispose of these brands and redeploy the assets to reduce
indebtedness.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for 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
ENDED FEBRUARY 28,
------------------------
1999 1998
---- ----
<S> <C> <C>
NET SALES .................................................. 100.0% 100.0%
----- -----
COSTS AND EXPENSES:
Cost of sales ............................................ 26.9 27.7
Advertising and promotion ................................ 39.4 43.5
Selling, general and administrative ...................... 10.7 14.8
----- -----
Total costs and expenses ............................... 77.0 86.0
----- -----
INCOME FROM OPERATIONS...................................... 23.0 14.0
----- -----
OTHER INCOME (EXPENSES):
Interest expense ......................................... (14.0) (11.9)
Investment and other income, net ......................... .2 .5
----- -----
Total other income (expense) ........................... (13.8) (11.4)
----- -----
INCOME BEFORE INCOME TAXES ................................. 9.2 2.6
PROVISION FOR INCOME TAXES ................................. 3.5 .9
----- -----
INCOME BEFORE EXTRAORDINARY
LOSS ..................................................... 5.7% 1.7%
----- -----
----- -----
</TABLE>
11
<PAGE>
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
Net sales for the three months ended February 28, 1999 increased $27,807, or
79.6%, to $62,728 from $34,921 for the same period last year. Domestic consumer
products sales increased $27,726, or 87.1%, to $59,544 from $31,818 for last
year's comparable period. Net sales of international consumer products increased
$81, or 2.6%, from $3,103 in the 1998 period to $3,184 in the current period.
The increase in domestic consumer products sales in the 1999 period was
primarily due to the BAN brand and the Thompson products acquired in March and
December 1998, respectively. Sales increases were also registered for the GOLD
BOND and PHISODERM product lines, while decreases were experienced by the
BULLFROG and SUNSOURCE brands. With the exception of the CORNSILK brand, which
was sold in May 1998, sales in the current period of the remaining product lines
were essentially flat or showed modest declines as compared to the corresponding
period of 1998. All sales variances were largely the result of changes in the
volume of unit sales of the particular brands.
The increase in sales of the GOLD BOND product line was led by the introductions
of the Medicated Lotion product in the third quarter of fiscal 1998 and the
Triple Antibiotic Ointment in the first quarter of 1999, although major sales
increases were realized for the medicated powders and cream products. GOLD BOND
sales in the current period were favorably affected by increased marketing
support. PHISODERM sales increases in the current period were largely the result
of the introduction of the 4 Way Daily Acne Cleanser line extension and
increased advertising and promotional expenditures.
The sales decline in the current period for the SUNSOURCE products reflected the
absence of a major distribution effort for those products unlike the same 1998
period in which HARMONEX was launched, and the general softening of the
dietary supplements' market. The decline in BULLFROG sales in the current period
was largely a result of sales falling into the second fiscal quarter of 1999 as
compared to the first quarter of fiscal 1998.
International consumer products sales for the first quarter of fiscal 1999
increased $235, or 25.7%, for the Canadian operation but declined $792 or 42.2%,
for the United Kingdom business. The increase in Canadian sales was almost
entirely associated with the BAN brand, although sales increases were recorded
for FLEXALL and the Thompson products, the latter of which were acquired in
December 1998. Sales declines were recorded for all of the United Kingdom brands
largely due to generally weak economic conditions presently existing in the
United Kingdom and Western Europe. U.S. export sales increased $638, or 203.8%,
for the 1999 period as compared to the same period in fiscal 1998, with
practically all of the increase being associated with the BAN product line. All
sales variances were largely the result of changes in the volume of unit sales
of the particular brands.
Cost of goods sold as a percentage of net sales improved to 26.9% from 27.7%
in the 1998 period. The improvement was primarily the result of increased
sales of higher gross margin product lines in the current period.
12
<PAGE>
Advertising and promotion expenses increased $9,558, or 63.0%, and were 39.4% of
net sales compared to 43.5% in the corresponding 1998 period. The majority of
the increase in the 1999 period was related to the BAN and Thompson products,
acquired in March and December 1998, respectively, and to the GOLD BOND and
PHISODERM brands. Declines were recorded for the FLEXALL, HERPECIN-L,
SUNSOURCE and CORNSILK brands. The CORNSILK product line was sold in May 1998.
The increase of $1,541, or 29.9%, in selling, general and administrative
expenses in the 1999 period was largely associated with direct selling expenses,
resulting from increased sales, and with various expenses of the general service
departments of the Company. The selling, general and administrative expenses
were 10.7% of net sales in the current period as compared to 14.8% in the same
period of last fiscal year, reflecting the increase in sales from newly acquired
brands without any significant corresponding increase in overhead costs.
Interest expense increased $4,626, or 110.7%, in the 1999 period, reflecting
primarily the additional debt incurred for the BAN and Thompson products'
acquisitions in March and December 1998, respectively.
Investment and other income decreased $61, or 31.8%, largely due to the decrease
in dividends from a reduced investment in Elcat, Inc.
An extraordinary loss of $427, net of income tax benefit, related to the early
extinguishment of debt was recorded in 1999 period. The loss primarily related
to the write-off of debt issuance costs connected with outstanding long-term
bank debt retired before maturity in the current period.
The increase of $2,968, or 487.4%, in net income before extraordinary loss in
the 1999 period was largely the result of increased sales, offset in part by
increased interest expense, advertising and promotion expenses and selling,
general and administrative costs.
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, long-term debt servicing, acquisitions, working
capital and capital expenditures.
Cash of $4,495 and $8,129 was used in operations for the three months ended
February 28, 1999 and 1998, respectively. The increase in cash flows from
operations over the prior year period was primarily the result of increases in
net income, depreciation and amortization and accrued liabilities. The increases
were due in part to the BAN and Thompson products' acquisitions in March and
December 1998, respectively.
Investing activities used cash of $87,015 and $662 in the three months ended
February 28, 1999 and 1998, respectively. The increase of $86,353 in the current
period was largely the result of increased property, plant and equipment
additions and the acquisition of the Thompson products' trademarks and related
assets in December 1998.
Financing activities provided cash of $92,564 in the three months ended February
28, 1999 compared to $5,351 for the comparable prior year period. The increase
of $87,213 in the current period reflects additional bank borrowings required
for the purchase of the Thompson products in December 1998.
13
<PAGE>
The following table presents working capital data at February 28, 1999 and
November 30, 1998 or for the respective periods then ended:
<TABLE>
<CAPTION>
ITEM 1999 1998
------------ ------------ ------------
<S> <C> <C>
Working capital (current assets less current liabilities) ....... $ 11,952 $ 684
Current ratio (current assets divided by current liabilities) ... 1.17 1.01
Quick ratio (cash and cash equivalents and accounts
receivable divided by current liabilities) .................... .78 .63
Average accounts receivable turnover ............................ 5.96 6.81
Average inventory turnover ...................................... 3.40 3.57
Working capital as a percentage of total assets ................. 2.49% .19%
</TABLE>
The improvement in the current and quick ratio at February 28, 1999 as compared
to November 30, 1998, reflects primarily increases in accounts receivable and
inventories, which were largely associated with the Thompson products acquired
in December 1998, the seasonal products, e.g., BULLFROG and SUN-IN, and the
reduction of accounts payable.
Total loans outstanding were $381,379 at February 28, 1999 compared to $291,357
at November 30, 1998, an increase of $90,022 during the first quarter of 1999.
This increase is primarily the result of additional loans required to purchase
the Thompson products in December 1998.
The new credit facility consists of a $115,000 term loan and a $50,000 working
capital revolving loan of which $17,500 was outstanding at February 28, 1999.
The proceeds of the new credit facility were used to fund the Thompson
acquisition and related fees and expenses and refinance existing bank
indebtedness.
Management of the Company believes that projected cash flows generated by
operations along with funds available under its credit facilities will be
sufficient to fund the Company's current commitments and proposed operations.
Also, on December 21, 1998, the Company filed a shelf registration statement
with the Securities and Exchange Commission for $250,000 of debt and equity
securities.
14
<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 calcuations using the year 2000 date are a known
risk. The Company has develped a plan to ensure its systems are compliant with
the requirements to fulfilling those compliance requirements:
THE COMPANY'S STATE OF READINESS
The Company is in the process of replacing its current information technology
("IT") systems with a new fully integrated computer system to replace all
hardware and software that the Company uses in its financial, manufacturing and
customer services functions. The new IT system will be year 2000 compliant.
Accordingly, the year 2000 compliance requirements are considered only a portion
of the Company's system replacement effort. This replacement is expected to be
completed on or before December 1, 1999, the beginning of the Company's 2000
fiscal year. Although the Company believes that the new IT system will be year
2000 compliant, the Company uses third party equipment and software that may not
be year 2000 compliant. If any of this software or equipment does not operate
properly in the year 2000 and thereafter, the Company could be forced to make
unanticipated expenditures to cure these problems, which could adversely affect
the Company's business.
COST TO ADDRESS YEAR 2000 ISSUES
The total cost of the new software and implementation necessary to replace the
Company's current IT system plus address the year 2000 issues is estimated to be
approximately $2,000. Plan costs have been budgeted in the Company's capital
expenditures budget. The projected costs are based on management's best
estimate and actual results could differ as the new system is implemented.
Approximately $1,150 had been expended and capitalized on this system at
February 28, 1999.
RISK OF YEAR 2000 ISSUES
The Company is in the process of execution of its formal year 2000 compliance
plan and expects to achieve implementation on or before December 1, 1999.
The Company is requesting from certain of its principal customers and suppliers
written statements regarding their knowledge of and plans for meeting the year
2000 compliance requirements. All respondents indicate that they have knowledge
of and are in the process of fulfilling these requirements. These companies have
stated that they are at various stages of completion of their compliance plans,
but all have indicated that they expect to be in full year 2000 compliance by or
before the end of their 1999 fiscal year.
In the event that the Company or any of its significant customers or suppliers
does not successfully and timely achieve year 2000 compliance, the Company's
business or operations could be adversely affected.
15
<PAGE>
CONTINGENCY PLANS
The Company is currently developing a "Worst Case Contingency Plan", which will
include generally an environment of utilizing "Work Force", "Spreadsheet" and
"Work Around" programming and procedural efforts. This contingency system will
be activated by December 1, 1999. The cost of these temporary measures is
estimated between $500 and $1,000.
The Company's current existing systems are fully capable (except for year 2000
date handling) of processing all present and future transactions of the
business. Accordingly, no major efforts have been delayed or avoided which
affect normal business operations as a result of the incomplete implementation
of the year 2000 IT systems. These current systems will become the foundation of
the Company's contingency system.
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 three months ended February
28, 1999 and 1998, these subsidiaries accounted for 4% and 8% of total revenues,
respectively, and 2% and 4% of total assets, respectively. It has not been the
Company's practice to hedge its assets and liabilities in Canada and the U.K. or
its intercompany transactions due to the inherent risks associated with foreign
currency hedging transactions and the timing of payments 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 $2 and $49 for the three months ended February 28, 1999 and
1998, respectively, resulted from foreign currency transactions.
16
<PAGE>
FORWARD LOOKING STATEMENTS
The Company may from time to time make written and oral forward looking
statements. Written forward looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases and in reports to
shareholders. The Private Securities Litigation Reform Act of 1995 contains a
safe harbor for forward looking statements. The Company relies on this safe
harbor in making such disclosures. The forward looking statements 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 indentures; government regulations; risks of loss of material customers;
public perception regarding the Company's products; dependence on third party
manufacturers; environmental matters; public perception regarding the Company's
products; dependence on third party manufacturers; environmental matters;
product liability and insurance; year 2000; and other risks described in the
Company's Securities and Exchange Commission filings.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1999 a complaint was filed by Genderm Corporation ("Genderm")
in the U.S. District Court alleging, among other things, that the formulations
of CAPZASIN-P, CAPZASIN-HP and ICY HOT Arthritis Therapy Gel infringe upon a
patent licensed to Genderm. The complaint requests injunctive relief,
compensatory and treble damages, costs and attorneys' fees. A hearing on the
injunctive relief is currently scheduled for April 1999.
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 February 28, 1999:
Report dated December 21, 1998 relating to signing by the Company of a
purchase and sale agreement to acquire certain products from Thompson
Medical Company, Inc.
Amendment No.1 to Report dated December 21, 1998 above, providing
financial and pro-forma financial information.
18
<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: APRIL 14, 1999 /s/ A. ALEXANDER TAYLOR II
----------------------- -------------------------------
A. Alexander Taylor II
President and Director
(Chief Operating Officer)
/s/ STEPHEN M. POWELL
-------------------------------
Stephen M. Powell
(Chief Accounting Officer)
19
<PAGE>
EXHIBIT 11
CHATTEM, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FEBRUARY 28,
----------------------------
1999 1998
---- ----
<S> <C> <C>
NET INCOME:
Income before extraordinary loss ............ $ 3,577 $ 609
Extraordinary loss .......................... (427) --
-------- -------
Net income ................................ $ 3,150 $ 609
-------- -------
-------- -------
COMMON SHARES:
Weighted average number outstanding.......... 9,712 9,087
Number issued upon assumed exercise
of outstanding stock options and stock
warrants................................... 406 394
-------- -------
Weighted average number and dilutive
potential number outstanding ............... 10,118 9,481
-------- -------
-------- -------
NET INCOME ( LOSS) PER COMMON
SHARE:
Basic:
Income before extraordinary loss ......... $ .37 $ .07
Extraordinary loss ....................... (.04) --
-------- -------
Total basic .......................... $ .33 $ .07
-------- -------
Diluted: -------- -------
Income before extraordinary loss ......... $ .35 $ .06
Extraordinary loss ....................... (.04) --
-------- -------
Total diluted ........................ $ .31 $ .06
-------- -------
-------- -------
</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> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 3,120
<SECURITIES> 0
<RECEIVABLES> 53,408
<ALLOWANCES> 775
<INVENTORY> 23,341
<CURRENT-ASSETS> 83,068
<PP&E> 36,998
<DEPRECIATION> 18,535
<TOTAL-ASSETS> 480,618
<CURRENT-LIABILITIES> 71,116
<BONDS> 367,379
0
0
<COMMON> 2,033
<OTHER-SE> 31,137
<TOTAL-LIABILITY-AND-EQUITY> 480,618
<SALES> 62,728
<TOTAL-REVENUES> 62,728
<CGS> 16,880
<TOTAL-COSTS> 48,318
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,806
<INCOME-PRETAX> 5,735
<INCOME-TAX> 2,158
<INCOME-CONTINUING> 3,577
<DISCONTINUED> 0
<EXTRAORDINARY> (427)
<CHANGES> 0
<NET-INCOME> 3,150
<EPS-PRIMARY> .33
<EPS-DILUTED> .31
</TABLE>
