<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998
COMMISSION FILE NUMBER 0-5905
CHATTEM, INC.
A TENNESSEE CORPORATION
IRS 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 THE FORM 10-K.
AS OF FEBRUARY 26, 1999 THE AGGREGATE MARKET VALUE OF VOTING SHARES HELD BY
NON-AFFILIATES WAS $261,715,366
AS OF FEBRUARY 26, 1999 9,760,371 COMMON SHARES WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED
NOVEMBER 30, 1998 (THE "1998 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 8, 1999 (THE "PROXY STATEMENT") ARE
INCORPORATED BY REFERENCE IN PART III OF THIS REPORT.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
NET SALES ................. $ 220,064 $ 143,235 $ 118,903 $ 100,598 $ 94,370
OPERATING COSTS AND
EXPENSES .............. 174,845 117,732 102,214 86,130 81,830
--------- --------- --------- --------- --------
INCOME FROM OPERATIONS .... 45,219 25,503 16,689 14,468 12,540
OTHER EXPENSE, NET ........ (16,247) (14,255) (11,069) (10,858) (9,248)
--------- --------- --------- --------- --------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES AND
EXTRAORDINARY LOSS .... 28,972 11,248 5,620 3,610 3,292
PROVISION FOR INCOME
TAXES ................. 10,844 3,993 1,816 1,285 1,182
--------- --------- --------- --------- --------
INCOME FROM CONTINUING
OPERATIONS BEFORE
EXTRAORDINARY LOSS .... $ 18,128 $ 7,255 $ 3,804 $ 2,325 $ 2,110
========= ========= ========= ========= ========
PER SHARE DATA
INCOME PER DILUTED SHARE
FROM CONTINUING
OPERATIONS BEFORE
EXTRAORDINARY LOSS .... $ 1.86 $ .80 $ .47 $ .32 $ .29
BALANCE SHEET DATA
(At End of Period)
TOTAL ASSETS ............. $ 369,012 $ 178,744 $ 152,183 $ 83,410 $ 85,442
LONG-TERM DEBT, less
current maturities .... $ 273,913 $ 133,475 $ 127,438 $ 78,089 $ 94,486
</TABLE>
<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:
1998 1997
----------------- ----------------
QUARTER ENDED: HIGH LOW HIGH LOW
----------------- ----------------
February ............... 23 5/8 12 7/8 10 8 1/8
May .................... 30 1/2 19 3/8 10 7/8 8
August ................. 33 7/8 18 5/8 18 3/4 10 1/4
November ............... 43 1/8 18 5/8 20 5/8 14 3/8
Based upon transfer agent records, the Company's common shares were held by
approximately 2,500 shareholders as of February 26, 1999.
<PAGE>
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1998 AND 1997
(IN THOUSANDS)
ASSETS 1998 1997
-------- --------
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 2,076 $ 4,858
Accounts receivable, less allowance for doubtful accounts
of $775 in 1998 and $500 in 1997 ........................ 36,581 28,078
Deferred income taxes .................................... 3,049 1,864
Inventories .............................................. 19,606 14,493
Prepaid expenses and other current assets ................ 784 679
-------- --------
Total current assets ................................. 62,096 49,972
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET ......................... 18,146 10,988
-------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc. ................................ 3,102 6,640
Patents, trademarks and other purchased
product rights, net .................................... 272,226 104,972
Debt issuance costs, net ................................. 10,091 3,118
Other .................................................... 3,351 3,054
-------- --------
Total other noncurrent assets ........................ 288,770 117,784
-------- --------
TOTAL ASSETS ...................................... $369,012 $178,744
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt ...................... $ 17,444 $ 8,919
Accounts payable .......................................... 12,733 9,319
Payable to bank ........................................... 1,026 2,618
Accrued liabilities ....................................... 30,209 13,596
--------- ---------
Total current liabilities ............................... 61,412 34,452
--------- ---------
LONG-TERM DEBT, less current maturities ..................... 273,913 133,475
--------- ---------
DEFERRED INCOME TAXES ....................................... 6,826 3,290
--------- ---------
OTHER NONCURRENT LIABILITIES ................................ 2,110 3,157
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 5, 10 and 12)
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000,
none issued ............................................. -- --
Common shares, without par value, authorized 20,000, issued
9,574 in 1998 and 9,082 in 1997 ......................... 1,994 1,945
Paid-in surplus ........................................... 69,068 63,975
Accumulated deficit ....................................... (44,960) (60,229)
--------- ---------
26,102 5,691
Foreign currency translation adjustment ................... (1,351) (1,321)
--------- ---------
Total shareholders' equity ............................. 24,751 4,370
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ............................................ $ 369,012 $ 178,744
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
NET SALES ........................................ $ 220,064 $ 143,235 $ 118,903
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales .................................. 60,889 39,253 35,120
Advertising and promotion ...................... 86,592 56,176 45,512
Selling, general and administrative ............ 27,364 22,303 21,582
--------- --------- ---------
Total costs and expenses ..................... 174,845 117,732 102,214
--------- --------- ---------
INCOME FROM OPERATIONS ........................... 45,219 25,503 16,689
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense ............................... (26,676) (15,934) (13,394)
Investment and other income, net ............... 881 1,679 1,450
Gain on product divestitures ................... 9,548 -- 875
--------- --------- ---------
Total other income (expense) ................. (16,247) (14,255) (11,069)
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS ........................... 28,972 11,248 5,620
PROVISION FOR INCOME TAXES ....................... 10,844 3,993 1,816
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS ................. 18,128 7,255 3,804
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET OF INCOME
TAXES (Note 5) ............................... (2,859) (1,370) (532)
--------- --------- ---------
NET INCOME ....................................... $ 15,269 $ 5,885 $ 3,272
========= ========= =========
COMMON SHARES:
Weighted average number outstanding (basic) .. 9,374 8,793 8,052
========= ========= =========
Weighted average and dilutive potential number
outstanding ................................. 9,735 9,123 8,143
========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income before extraordinary loss ............. $ 1.93 $ .83 $ .47
Extraordinary loss ........................... (.30) (.16) (.06)
--------- --------- ---------
Total basic ............................ $ 1.63 $ .67 $ .41
========= ========= =========
Diluted:
Income before extraordinary loss ............ $ 1.86 $ .80 $ .47
Extraordinary loss .......................... (.29) (.15) (.07)
--------- --------- ---------
Total diluted .......................... $ 1.57 $ .65 $ .40
========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
(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, 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
Net income ............................ -- -- 15,269 -- -- 15,269
Stock options exercised ............... 28 3,699 -- -- -- 3,727
Stock warrants exercised .............. 21 1,394 -- -- -- 1,415
Foreign currency translation
adjustment .......................... -- -- -- -- (30) (30)
------ ------- -------- ----- ------- --------
Balance, November 30, 1998 .............. $1,994 $69,068 $(44,960) $ -- $(1,351) $ 24,751
====== ======= ======== ===== ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income .................................................. $ 15,269 $ 5,885 $ 3,272
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization ......................... 9,827 6,381 4,829
Deferred income tax provision ......................... 2,351 1,120 1,797
Gain on product divestitures .......................... (9,548) -- (875)
Gain on sale of trading securities .................... -- -- (452)
Gain on termination of interest rate cap .............. -- -- (281)
Extraordinary loss on early extinguishment of debt, net 2,859 1,370 532
Dividend receivable from Elcat, Inc ................... (462) (656) (656)
Other, net ............................................ (28) (106) (379)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable ............................... (12,054) (5,140) (3,063)
Inventories ....................................... 1,836 (2,401) 745
Prepaid expenses and other current assets ......... (102) 3,034 (2,878)
Accounts payable and accrued liabilities .......... 10,842 629 (185)
--------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 20,790 10,116 2,406
--------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ................... (9,050) (2,758) (1,785)
Proceeds from sale of investments ............................ 4,000 -- 452
Proceeds from product divestitures ........................... 11,965 -- 1,000
Proceeds from notes and sales of assets ...................... 1,085 75 253
Purchases of patents, trademarks and other product rights .... (168,402) (29,293) (43,048)
Increase in other assets ..................................... (1,193) (746) (4,128)
--------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES ..................... (161,595) (32,722) (47,256)
--------- -------- --------
FINANCING ACTIVITIES:
Repayment of long-term debt .................................. (145,028) (76,636) (15,032)
Proceeds from long-term debt ................................. 291,365 87,500 67,944
Change in payable to bank .................................... (1,592) 908 526
Proceeds from issuance of common stock, net .................. -- -- 5,500
Exercise of stock options and warrants ....................... 3,316 1,274 286
Debt issuance costs .......................................... (9,971) (1,612) (2,099)
--------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................ 138,090 11,434 57,125
--------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS ........................................ (67) (10) 129
--------- -------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year ............................. (2,782) (11,182) 12,404
At beginning of year ......................................... 4,858 16,040 3,636
--------- -------- --------
At end of year ............................................... $ 2,076 $ 4,858 $ 16,040
========= ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
<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, antiperspirants and deodorants, toiletries
and skin care, and dietary supplements. The consumer products are sold
primarily through mass merchandisers, independent and chain drug stores, drug
wholesalers, and food stores in the United States and in various markets in
approximately 50 countries throughout the world.
Geographic data for 1998, 1997 and 1996 is included in the
schedule of geographical information on page 43 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.
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 computed using the straight-line method 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 1998, 1997 and 1996 was $1,597,
$1,502 and $1,352, respectively.
<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, 1998
and 1997 was $17,382 and $11,246, respectively. Amortization expense for
1998, 1997 and 1996 was $6,180, $2,877 and $2,086, respectively. Royalty
expense related to other purchased product rights for 1998, 1997 and 1996 was
$523, $522 and $1,140, 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 $986,
$490 and $498 in 1998, 1997 and 1996, respectively. Accumulated amortization
of these costs was $1,814 and $1,004 at November 30, 1998 and 1997,
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
$1,369, $1,207 and $1,117 in 1998, 1997 and 1996, respectively.
ADVERTISING EXPENSES
The cost of advertising is expensed in the fiscal year in which
the related advertising takes place. Advertising expense for 1998, 1997 and
1996 was $44,386, $29,923 and $22,789, respectively. At November 30, 1998 and
1997, the Company reported $646 and $1,066, respectively, of advertising paid
for in 1998 and 1997 which will run or did run in the next fiscal year. These
amounts are included in other noncurrent assets in the accompanying
consolidated balance sheets. <PAGE>
NET INCOME PER COMMON SHARE
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 adopted SFAS No. 128 on December 1,
1997. All prior periods' EPS data have been restated. The impact of adopting
SFAS No. 128 did not have a material impact on EPS for any period presented.
For the years ended November 30, 1998, 1997 and 1996, the
weighted average and dilutive potential common shares outstanding consisted
of the following:
1998 1997 1996
----- ----- -----
Weighted average common shares
outstanding ...................................... 9,374 8,793 8,052
Dilutive potential shares:
Stock options ................................... 332 207 54
Warrants ........................................ 29 123 37
----- ----- -----
Weighted average and dilutive potential common
shares outstanding ............................... 9,735 9,123 8,143
===== ===== =====
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's Canadian and U.K.
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. Gains and losses which result
from foreign currency transactions are included in the accompanying
consolidated statements of income.
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.
<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 17%, 16% and 16% of sales in
1998, 1997 and 1996, respectively. No other customer exceeded 10% of the
Company's sales in 1998, 1997 or 1996. 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 PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income." The statement must be adopted
by the Company on December 1, 1998. Under provisions of this statement, the
Company will be required to include a financial statement presentation of
comprehensive income and its components to conform to these new requirements.
As a consequence of this change, certain reclassifications will be necessary
for previously reported amounts to achieve the required presentation of
comprehensive income. Implementation of this disclosure standard will not
affect the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." The statement must be adopted by the Company for fiscal 1999.
Under provisions of this statement, the Company will be required to modify or
expand the financial statement disclosures for operating segments, products
and services and geographic areas. Implementation of this disclosure standard
will not affect the Company's financial position or results of operations.
In February 1998, the Financial Accounting Standards Board issued
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits". The statement amends SFAS Nos. 87, 88 and 106. SFAS No. 132
revises employer's disclosures about pension and other post retirement
benefit plans. The Company is required to adopt SFAS No. 132 for fiscal 1999.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No.133 established accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allow a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. A company may also implement SFAS
No.133 as of the beginning of any fiscal quarter after issuance (that is,
fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot
be applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantively modified after December
31, 1997 (and, at the Company's election, before January 1, 1999).
<PAGE>
The Company has not yet quantified the impact of adopting SFAS No. 133 on its
financial statements and has not determined the timing of or method of its
adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
the current period's presentation.
(3) INVESTMENT IN ELCAT, INC.
As part of the consideration for the sale of the Company's
specialty chemicals division in 1995, the Company received 40,000 shares of
13.125% cumulative, convertible preferred stock of Elcat, Inc. (the Elcat
Preferred Shares) having a total par value of $5,000.
In 1998, Elcat, Inc. (Elcat) redeemed 22,960 of these shares for
$4,000 ($2,870 par value and $1,130 accumulated dividends). The remaining
17,040 Elcat Preferred Shares are nonvoting and convertible, in whole or in
part, into a 8.95% ownership interest in Elcat. At the option of Elcat, the
Elcat Preferred Shares may be redeemed, in whole or in part, at par value
($125 per share) plus any accrued and unpaid dividends. If all of the
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.
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, 1998. In the opinion of management, however, the
fair value of this investment is in excess of its carrying value as of
November 30, 1998.
<PAGE>
(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, 1998 and 1997 were invested primarily in United
States government and agency securities and corporate debt and equity
securities.
Pension cost for the years ended November 30, 1998, 1997 and 1996
included the following components:
1998 1997 1996
------- ----- -----
Service cost (benefits earned during the
period) ............................................ $ 661 $ 545 $ 610
Interest cost on projected benefit obligation ........ 739 741 775
Actual return on plan assets ......................... (3,226) (845) (637)
Net amortization and deferral ........................ 2,677 365 107
------- ----- -----
Net pension cost ..................................... $ 851 $ 806 $ 855
======= ===== =====
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.
The following table sets forth the funded status of the Plan as
of November 30, 1998 and 1997:
1998 1997
-------- --------
Actuarial present value of benefit obligations:
Vested benefit obligation .............................. $ 7,462 $ 7,108
Nonvested benefit obligation ........................... 103 57
-------- --------
Accumulated benefit obligation ....................... $ 7,565 $ 7,165
======== ========
Plan assets at fair market value ......................... $ 9,879 $ 6,471
Projected benefit obligation ............................. (11,275) (11,072)
-------- --------
Plan assets less than projected benefit obligation ....... (1,396) (4,601)
Unrecognized net loss .................................... 1,043 4,186
Unrecognized prior service cost .......................... (115) (131)
Unrecognized initial asset ............................... (227) (369)
-------- --------
Pension liability recognized in balance sheets
at end of year ......................................... $ (695) $ (915)
======== ========
The discount rates used in determining the actuarial present
value of the projected benefit obligation were 6.75% and 7.5% in 1998 and
1997, respectively. The rates of increase in future compensation levels used
were 4.0% and 5.0% in 1998 and 1997, respectively. The expected long-term
rate of return on plan assets was 9.0% in 1998 and 1997. <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 $148, $155 and $120 in 1998, 1997 and 1996, respectively.
(5) LONG-TERM DEBT
Long-term debt consisted of the following at November 30, 1998 and
1997:
1998 1997
-------- --------
Revolving line of credit payable to banks at variable
rates (8.23% at November 30, 1998) .................... $ 2,000 $ 13,000
Term loans payable to banks at variable rates
(8.34% weighted average at November 30, 1998) ......... 40,514 63,683
8.875% Senior Subordinated Notes, due 2008 ............... 200,000 --
12.75% Senior Subordinated Notes, due 2004, net
of unamortized discount of $808 for 1998 and
$1,289 for 1997 ....................................... 48,843 65,711
-------- --------
Total long-term debt ..................................... 291,357 142,394
Less: current maturities ................................. 17,444 8,919
-------- --------
Total long-term debt, net of current maturities .......... $273,913 $133,475
======== ========
On March 24, 1998, the Company issued at par value $200,000 of
8.875% Senior Subordinated Notes due 2008 (the 8.875% Notes). 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.
The 8.875% Notes mature on April 1, 2008 and interest is payable
semi-annually on April 1 and October 1 of each year. The 8.875% 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 8.875% Notes, which
were registered under the Securities Act of 1933, are not callable 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 8.875% Notes may require the Company to repurchase the 8.875% Notes at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest. The 8.875% Notes are guaranteed by Signal Investment &
Management Co., a wholly-owned subsidiary of the Company.
<PAGE>
The 8.875% 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.
In conjunction with the acquisition of BAN, the Company entered into
a credit agreement with a syndicate of banks, also on March 24, 1998 (the New
Credit Agreement). This credit agreement was divided into a $30,000 revolving
line of credit for working capital purposes, a $27,540 Term A loan, maturing on
June 26, 2002, and a $34,825 Term B loan, maturing on June 14, 2003.
The combined Term A and B loans are payable in remaining quarterly
installments as follows:
December 31, 1998 to September 30, 1999 ...... $1,488
December 31, 1999 to March 31, 2001 .......... $1,738
June 30, 2001 ................................ $ 777
September 30, 2001 ........................... $1,000
December 31, 2001 to March 31, 2003 .......... $3,250
June 30, 2003 ................................ $2,861
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 New Credit
Agreement. 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 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.
In 1994, the Company issued $75,000 of 12.75% Senior Subordinated
Notes due 2004 (the 12.75% Notes) with five year warrants to purchase 417,182
shares of common stock (the Warrants). The 12.75% Notes consisted of 75,000
units, each consisting of $1,000 principal amount of the 12.75% Notes and a
warrant to purchase shares of the Company's common stock (Note 9). The price of
the 12.75% Notes was $73,967, or 98.6% of the original principal amount of the
12.75% 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 12.75% Notes were used to repay amounts outstanding
under a prior credit agreement.
<PAGE>
The 12.75% Notes mature on June 15, 2004, and interest is payable
semi-annually on June 15 and December 15 of each year. The 12.75% 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 12.75% Notes,
which were registered under the Securities Act of 1933, are not callable 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 12.75% Notes may require the Company to repurchase the 12.75%
Notes at a purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest. The 12.75% Notes are guaranteed by Signal
Investment & Management Co., a wholly-owned subsidiary of the Company.
The 12.75% Notes are issued under an indenture with an indenture
trustee. The indenture places on the Company restrictions similar to those
required under the terms of the indenture associated with the 8.875% Notes.
During 1998, 1997 and 1996, the Company prepaid previously
outstanding long-term debt, with funds received from refinancings, the sale of
CORNSILK (Note 12) and the redemption of the Elcat Preferred Shares. During
1998, the Company also repurchased $17,349 of the 12.75% Notes. In connection
with the repurchase of those borrowings, the Company incurred extraordinary
losses, net of income taxes, in 1998, 1997 and 1996 of $2,859, $1,370 and $532,
respectively, or $.29, $.15 and $.07 per share, respectively. These 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:
1999 .............................................. $ 17,444
2000 .............................................. 6,950
2001 .............................................. 5,252
2002 .............................................. 15,000
2003 .............................................. 9,361
Thereafter ........................................ 238,158
---------
292,165
Less: unamortized discount ........................ (808)
---------
$ 291,357
=========
The 2002 maturities include the amount outstanding under the
revolving line of credit which was $2,000 as of November 30, 1998.
Cash interest payments during 1998, 1997 and 1996 were $23,669,
$15,259 and $12,710, respectively.
<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)
(5.62% as of November 30, 1998) 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 (5.28%
as of November 30, 1998) 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.
(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, 1998, 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 values of the 12.75% and 8.875% notes at November
30, 1998 exceeded their carrying values by approximately $6,400 and $6,082,
respectively. The fair value was estimated based on quoted market prices for the
same or similar issues.
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, 1998, the
Company estimates it would have paid $1,888 to terminate the agreements.
<PAGE>
(8) INCOME TAXES
The provision for income taxes from income before extraordinary loss
includes the following components for the years ending November 30, 1998, 1997
and 1996:
1998 1997 1996
------- ------ -------
Current:
Federal .......... $ 8,034 $2,639 $ (203)
State ............ 459 234 222
Deferred ........... 2,351 1,120 1,797
------- ------ -------
$10,844 $3,993 $ 1,816
======= ====== =======
Deferred income tax assets and liabilities for 1998 and 1997 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, 1998 and 1997 are as follows:
1998 1997
------- -------
Deferred tax assets:
Allowances and accruals .......... $ 2,303 $ 2,005
Accrued promotional expenses ..... 1,316 720
Accrued postretirement health care
benefits ....................... 558 559
Repriced stock option expense .... -- 251
Other ............................ 643 310
------- -------
Gross deferred tax assets ...... 4,820 3,845
------- -------
Deferred tax liabilities:
Depreciation and amortization .... 7,829 4,486
Prepaid advertising .............. 252 318
Inventory ........................ 196 190
Other ............................ 320 277
------- -------
Gross deferred tax liabilities . 8,597 5,271
------- -------
Net deferred liability ......... $(3,777) $(1,426)
======= =======
<PAGE>
The difference between the provision for income taxes and the amount
computed by multiplying income before income taxes and extraordinary loss by the
U.S. statutory rate for the years ended November 30, 1998, 1997 and 1996 is
summarized as follows:
1998 1997 1996
-------- ------- -------
Expected tax provision ........... $ 10,140 $ 3,837 $ 1,911
Dividend exclusion benefit ....... (85) (178) (140)
State income taxes, net of federal
income tax benefit ............. 298 154 147
Other, net ....................... 491 180 (102)
-------- ------- -------
$ 10,844 $ 3,993 $ 1,816
======== ======= =======
Income taxes paid in 1998, 1997 and 1996 were $1,980, $2,162 and
$2,459, respectively. The Company received income tax refunds of $350, $2,719
and $215 during 1998, 1997 and 1996, respectively.
(9) SHAREHOLDERS' EQUITY
STOCK OPTIONS
The Company adopted SFAS No. 123, "Accounting For Stock-Based
Compensation," during 1997, and 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 having exercise
prices equal to or greater than the market value of the common stock at the date
of grant. Compensation expense for stock option grants with exercise prices
below the market price at the date of grant is recognized ratably over the
vesting period. Compensation expense recorded for stock option grants was $350
in 1998.
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. The Company's 1998 Non-Statutory Stock Option Plan (1998 Plan) provides
for issuance of up to 700,000 shares of common stock to key employees. 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 1998 and
1997: expected dividend yield of 0%, expected volatility of 51% and 49%,
risk-free interest rates of 5.42% and 6.48%, and expected lives of 6 years.
<PAGE>
Had compensation expense for 1998 and 1997 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 for the years ended November
30, 1998 and 1997 as indicated below:
1998 1997
--------- --------
Net income:
As reported ............... $ 15,269 $ 5,885
Pro forma ................. $ 14,599 $ 5,683
Net income per share, basic:
As reported ............... $ 1.63 $ 0.67
Pro forma ................. $ 1.56 $ 0.65
Net income per share, diluted:
As reported ............... $ 1.57 $ 0.65
Pro forma ................. $ 1.50 $ 0.62
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.
<PAGE>
A summary of the activity of stock options during 1998, 1997, and
1996 is presented below (shares in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year ............................ 584 $ 6.75 613 $ 6.39 646 $ 7.60
Granted .................... 470 13.89 91 9.01 318 5.07
Exercised .................. (292) 6.70 (120) 6.65 (44) 6.93
Canceled ................... -- -- -- -- (307) 7.48
---- ------ ---- ------ ---- ------
Outstanding at end of
year ............................ 762 $11.17 584 $ 6.75 613 $ 6.39
==== ====== ==== ====== ==== ======
Options exercisable at
year-end ........................ 96 $ 7.48 262 $ 7.43 221 $ 7.73
==== ====== ==== ====== ==== ======
Weighted average fair value
of options
granted ......................... $ 7.69 $ 5.24 $ 2.62
====== ====== ======
</TABLE>
A summary of the exercise prices for options outstanding under the
Company's stock-based compensation plans at November 30, 1998, is presented
below (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Weighted Weighted Exercise
Exercise Shares Under Average Average Shares Price of Shares
Price Range Option Exercise Price Remaining Life Exercisable Exercisable
- --------------- ----------- -------------- -------------- ----------- ---------------
<C> <C> <C> <C> <C> <C>
$ 4.63 - $ 5.25 145 $ 4.87 7.15 24 $ 4.86
$ 7.50 - $ 9.50 143 8.37 6.67 71 8.19
$13.50 - $18.00 469 13.78 9.16 1 18.00
$25.63 - $26.31 5 25.90 9.55 -- N/A
--- ------ ---- -- ------
Total 762 $11.17 8.31 96 $ 7.48
=== ====== ==== == ======
</TABLE>
<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,
1998 and 1997, 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, 1998, 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 1998, 35,568 warrants were exercised to acquire 208,337
shares. During 1997, 12,030 warrants were exercised to acquire 70,464 shares. At
November 30, 1998, 23,626 warrants were outstanding which, when exercised, would
entitle the holders thereof to acquire an aggregate of 138,386 shares of the
Company's common stock.
(10) CONTINGENCIES
GENERAL LITIGATION
Claims, suits and complaints arise in the ordinary course of the
Company's business involving such matters as patents and trademarks, product
liability, environmental matters and other alleged injuries or damage.
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.
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 (with the exception of the Genderm litigation as to which
litigation management is not yet in a position to form an opinion) 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.
REGULATORY
The manufacturing, processing, formulation, packaging, labeling and
advertising of the Company's products are subject to regulation by federal
agencies, including the United States Food and Drug Administration (FDA). As
part of its regulatory authority, the FDA may periodically conduct audits of the
physical facilities, machinery, processes and procedures which the Company uses
to manufacture products. In December 1998, the FDA conducted an audit of the
Company's manufacturing facility in Chattanooga, Tennessee. The FDA issued a
report citing certain processes and procedures it requires the Company to change
or improve. The Company has responded to the FDA's report and is in the process
of complying with its requirements.
<PAGE>
YEAR 2000 (Unaudited)
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 service functions. The new IT system
will be year 2000 compliant. As a result, the year 2000 compliance
requirements are considered only a portion of the Company's systems
replacement effort. This replacement is expected to be completed by December
1, 1999 at a total cost of $1,500 to $2,000. Such costs are being capitalized
as incurred.
The Company is also reviewing the possible impact of the year 2000
problem on its customers and suppliers and has requested and received from a
majority of its principal customers and suppliers written statements regarding
their knowledge of and plans for meeting the year 2000 compliance requirements.
The Company's business could be adversely affected should the
Company or other entities with whom the Company does business be unsuccessful in
completing critical modifications in a timely manner.
<PAGE>
(11) SUPPLEMENTAL FINANCIAL INFORMATION
Inventories consisted of the following at November 30, 1998 and
1997:
1998 1997
--------- ---------
Raw materials and work in process .................... $ 7,903 $ 9,107
Finished goods ....................................... 14,113 7,850
Excess of current cost over LIFO value ............... (2,410) (2,464)
--------- ---------
Total inventories .................................. $ 19,606 $ 14,493
========= =========
International inventories included above, valued on a lower of FIFO
cost or market at November 30, 1998 and 1997, were $3,004 and $2,546,
respectively.
Property, plant and equipment consisted of the following at November
30, 1998 and 1997:
1998 1997
--------- ---------
Land ................................................. $ 140 $ 138
Buildings and improvements ........................... 3,434 3,150
Machinery and equipment .............................. 29,678 23,416
Construction in progress ............................. 2,900 2,221
Less -- accumulated depreciation ..................... (18,006) (17,937)
--------- ---------
Property, plant and equipment, net ................. $ 18,146 $ 10,988
========= =========
Accrued liabilities consisted of the following at November 30, 1998
and 1997:
1998 1997
--------- ---------
Accrued interest expense ............................. $ 5,969 $ 4,119
Salaries, wages and commissions ...................... 2,850 1,696
Promotion expense .................................... 8,896 2,840
Product acquisitions ................................. 3,290 1,489
Accrued pension benefits ............................. 700 435
Accrued royalties .................................... 2,889 1,670
Other ................................................ 5,615 1,347
--------- ---------
Total accrued liabilities .......................... $ 30,209 $ 13,596
========= =========
<PAGE>
(12) ACQUISITION AND SALE OF BRANDS
On March 24, 1998, the Company acquired the BAN line of
antiperspirant and deodorant products from Bristol-Myers Squibb Company for a
purchase price of approximately $165,000, plus assumed liabilities. The Company
acquired the BAN trademarks, formulae, certain patents pertaining to
antiperspirant /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.
The following unaudited consolidated pro forma information assumes
the acquisition of BAN and related long-term borrowings had occurred on December
1, 1998 and 1997, respectively:
PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
1998 1997
-------- --------
Net sales .................................. $239,508 $239,387
Income before
extraordinary loss (1) ................... 15,780 15,029
Net income ................................. 12,921 13,659
Earnings per share (basic):
Income before extraordinary
loss ................................... 1.68 1.71
Net income ............................... 1.38 1.55
Earnings per share (diluted):
Income before extraordinary
loss ................................... 1.62 1.65
Net income ............................... 1.33 1.50
(1) Includes gain on the sale of CORNSILK.
The pro forma consolidated results of operations include adjustments to give
effect to amortization of intangible assets, interest expense on acquisition
debt and certain other adjustments, together with related income tax effects.
The pro forma information is not necessarily indicative of the combined results
that would have occurred had the acquisition and borrowings occurred at the
beginning of the periods presented, nor is it indicative of the results that may
occur in the future.
<PAGE>
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, at a gain of $9,548, 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.
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. 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. 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. In 1998, the Company paid the former owners
of SUNSOURCE $2,500 and forgave $5,625 of amounts due the Company, in exchange
for a 50% reduction in any future additional payments under the purchase
agreement. Under the amended agreement, future additional payments may not
exceed $7,875 in the aggregate.
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).
<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, 1998, 1997 and 1996, included the following components:
1998 1997 1996
---- ---- ----
Service cost (benefits earned during the period) ...... $ 19 $ 29 $ 36
Interest cost on accumulated postretirement
benefits obligation ................................. 82 115 101
Amortization of net loss (gain) ....................... (18) 2 --
---- ---- ----
Net periodic postretirement benefits cost ............. $ 83 $146 $137
==== ==== ====
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, 1998 and 1997:
1998 1997
------ -------
Accumulated postretirement benefits obligation:
Retirees ............................................. $ 722 $ 715
Fully eligible active plan participants .............. 246 502
Other active participants ............................ 252 377
Unrecognized net gain (loss) ........................... 210 (160)
------ -------
Accrued postretirement health care benefits ............ $1,430 $ 1,434
====== =======
For measurement purposes, a 6.0% annual rate of increase in the per
capita cost of covered health care benefits was assumed in 1998 and 1997. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at November 30, 1998 and 1997. A 1%
increase in the assumed health care cost trend rate would not affect the
accumulated postretirement benefit obligation as of November 30, 1998 or the
aggregate of the service and interest cost components of the net annual
postretirement benefit cost for the year ended November 30, 1998.
(14) SUBSEQUENT EVENT
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.
The new $165,000 senior credit facility consists of a $115,000 term loan and a
$50,000 working capital revolving line of credit of which $21,500 was initially
drawn. The proceeds of the new credit facility were used to fund the Thompson
acquisition and related fees and expenses and refinance existing bank
indebtedness.
<PAGE>
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.
<PAGE>
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
TO CHATTEM, INC.:
We have audited the accompanying consolidated balance sheets of Chattem, Inc. (a
Tennessee corporation) and subsidiaries as of November 30, 1998 and 1997 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, 1998.
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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended November 30, 1998 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
January 22, 1999
(except with respect to the
matter discussed in the
second paragraph of Note 10
as to which the date is
February 19, 1999)
<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: March 12, 1999 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)
<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 the Form 10-K into the Company's previously
filed Registration Statements on Form S-8 (Nos. 33-35386, 33-78524, 33-78922,
and 33-61267), Form S-3 (Nos. 33-69961, 33-69397, 33-31113, 33-03091 and
33-85348), Form S-2 (No. 33-80770) and Form S-4 (No. 33-53627).
/s/ ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
March 10, 1999
