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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 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.
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PART I
ITEM 1. BUSINESS
GENERAL
Chattem, Inc. (the "Company") is a leading marketer and manufacturer of a
variety of branded consumer products, including over-the-counter ("OTC")
healthcare and toiletries and skin care products. Our high-quality branded
products target niche market segments and are among the market leaders in
their respective categories. Through creative and cost effective marketing
techniques, we support these brands on a national level across all major
distribution channels, including food, drug and mass merchandisers.
Our portfolio of branded products includes:
o OTC health care products, including the GOLD BOND line
of medicated powder, cream and lotion products;
topical analgesics such as FLEXALL and ICY HOT;
menstrual internal analgesics including PAMPRIN;
dietary supplements under the SUNSOURCE label,
including GARLIQUE, HARMONEX and REJUVEX; and other
branded OTC health care products;
o Toiletries and skin care products, including BAN
antiperspirants and deodorants, PHISODERM skin
cleansers and BULLFROG sunblock.
Several of these brands have the number one market share in their categories,
including GOLD BOND (medicated powders), BAN (roll-on antiperspirant/deodorant)
and GARLIQUE (garlic extracts).
The Company conducts a portion of its business through four wholly owned
subsidiaries. One subsidiary owns or licenses substantially all of the
trademarks and intangibles associated with its domestic consumer products
business and licenses the Company's use thereof. Certain foreign sales
operations are conducted through Canadian and United Kingdom subsidiaries.
Product liability insurance is provided by a captive insurance subsidiary
incorporated in Bermuda and other third party insurers.
For purposes of this report, the "Company" or "we" refers to Chattem, Inc. and
its wholly-owned subsidiaries. Trademarks of the Company appear in this report
in all capitalized letters.
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DEVELOPMENTS DURING FISCAL 1998
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
$165,000,000 and 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.
Also on March 24, 1998, the Company issued $200,000,000 of 8 7/8% Senior
Subordinated Notes due 2008 (the "Notes") and entered into an amended and
restated senior secured bank credit agreement. The proceeds of the Notes
offering were used to fund the BAN purchase and related fees and expenses, repay
revolving bank indebtedness and provide additional working capital.
On May 12, 1998, the Company sold the CORNSILK oil control makeup brand for
$10,750,000, plus inventories and the assumption of certain liabilities. The
Company sold, at a gain of $9,548,000, 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 December 21, 1998, the Company acquired the DEXATRIM, SPORTSCREME,
ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands from Thompson
Medical Company, Inc. for $95,000,000. The purchase price consisted of
$90,000,000 cash and 125,500 shares of the Company's common stock. The cash
portion of the purchase price was financed by a senior credit facility.
On December 21, 1998, the Company also announced, the filing of a shelf
registration with the Securities and Exchange Commission for $250,000,000 of
debt and equity securities. This shelf filing will allow the Company to access
the capital markets on a more immediate basis to fund internal growth and
acquisitions and strengthen its balance sheet.
The Company will continue to seek increases in sales through a combination of
acquisitions and internal growth while maintaining high levels of operating
income. As previously high growth brands mature, sales increases will become
more dependent on acquisitions and the development of successful line
extensions. During the year ended November 30, 1998, new additions to the
GOLD BOND (Medicated Lotion), BULLFROG (for Babies and SUPERBLOCK SPF45),
HERPECIN-L (jar lip balm) and SUNSOURCE (HARMONEX) product lines were
introduced.
GROWTH STRATEGY
The Company seeks to expand its business through:
ACQUISITION OF ESTABLISHED BRANDS. Brand acquisitions afford the Company the
opportunity to leverage its advertising and promotional capabilities and utilize
existing distribution channels to attain incremental sales increases accompanied
by higher operating margins. The Company focuses its acquisition efforts on
niche markets in the consumer products sector, where it is able to gain a
significant market position. As many of the Company's competitors rationalize
their product lines or businesses, we anticipate an increase in the number and
size of attractive brand acquisition opportunities.
Three recent examples of the execution of this strategy are the Company's
acquisitions of:
BAN in March 1998. BAN, introduced in 1955, is a leading
antiperspirant/deodorant brand with the number one U.S. market share in
the roll-on brand segment. The Company believes that BAN represents a major
growth opportunity and two new line extensions and new packaging are planned
for introduction in fiscal 1999.
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The SUNSOURCE line of dietary supplements in June 1997. Certain of the SUNSOURCE
products are leaders in small to medium sized markets that have an older and
growing demographic profile. In addition, the dietary supplements market is a
media driven business that is compatible with the Company's marketing and
distribution capabilities. The Company believes that growth of the SUNSOURCE
brands can be achieved through the utilization of television and radio
advertising, new product introductions and improved distribution.
GOLD BOND in April 1996. GOLD BOND is the leading medicated powder with a
rapidly growing presence in the anti-itch cream and lotion markets. Annual
sales of GOLD BOND have increased by more than 20% since the time of the
acquisition, while operating margins have increased during the same period.
EXPANSION OF EXISTING PRODUCT LINES. The Company seeks to increase its market
share for its existing brands by focusing on increased market penetration and
brand awareness and introducing product line extensions. Product line extensions
allow the Company to maximize the value of the base brand through an increased
market presence and new market entry. Recent examples of product line extensions
include ICY HOT Arthritis Therapy Gel; GOLD BOND Medicated Foot Powder, GOLD
BOND Cornstarch Plus Medicated Baby Powder and GOLD BOND Medicated Lotion; and
HARMONEX from SUNSOURCE.
DEVELOPMENT OF BRANDS WITH UNREALIZED POTENTIAL. The Company seeks to acquire
brands with unrealized potential that have been under-marketed by larger firms
or have achieved success in limited geographic regions. The Company uses its
marketing ability, sales force and manufacturing capabilities to build on the
unrealized potential of the brand. BULLFROG and FLEXALL each had only regional
market presence when acquired by the Company. Both of these brands have achieved
significant sales growth following their acquisition by the Company
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PRODUCTS
The objective of the Company is to offer high quality brand name products in
niche market segments in which its products can be among the market leaders in
their respective categories. The Company strives to achieve its objective by
identifying brands with favorable demographic appeal, quickly modifying products
and promotions in response to changing consumer demands, and developing creative
and cost-effective marketing and advertising programs. The Company competes in
the following product categories: OTC health care and toiletries and skin
care. The Company manufactures products accounting for approximately half of
its sales volume at its facility in Chattanooga, Tennessee, with the BAN,
GOLD BOND powders, the SUNSOURCE brands and NORWICH Aspirin, being
manufactured by contract manufacturers.
The Company's product brands are:
OTC HEALTH CARE
GOLD BOND- medicated powders, lotion and anti-itch cream
FLEXALL - topical analgesic
ICY HOT- topical analgesic
PAMPRIN - menstrual internal analgesic
PREMSYN PMS - premenstrual internal analgesic
BENZODENT - topical oral analgesic
NORWICH Aspirin - internal analgesic
HERPECIN-L - cold sore and fever blister balm
GARLIQUE - garlic extract
REJUVEX - menopausal supplement
HARMONEX - emotional and physical well being
PROPALMEX - prostate health
MELATONEX - sleep aid
ECHINEX - resistance to infections
TOILETRIES AND SKIN CARE
BAN - antiperspirants and deodorants
BULLFROG - sunscreen and sunblock
PHISODERM - facial and hand cleanser
ULTRASWIM - chlorine removing shampoo
SUN-IN - spray-on hair lightener
MUDD - facial mask and cleanser
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The following table sets forth the Company's net sales attributable to
domestic and international OTC health care, toiletries and skin care, other
products and total consumer products during the past three fiscal years:
<TABLE>
<CAPTION>
Fiscal Year Ended November 30,
------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ------------------
Sales Percentage Sales Percentage Sales Percentage
----- ---------- ----- ---------- ----- ----------
$(000)
<S> <C> <C> <C> <C> <C> <C>
Domestic:
OTC Health Care ........... $114,060 51.8% $ 92,223 64.4% $ 67,214 56.5%
Toiletries and Skin Care .. 84,850 38.6 33,887 23.7 36,232 30.5
International:
OTC Health Care ........... 5,863 2.7 3,053 2.1 2,255 1.9
Toiletries and Skin Care .. 14,390 6.5 12,154 8.5 12,204 10.3
Other Products ............... 901 .4 1,918 1.3 998 .8
-------- ----- -------- ----- -------- -----
Total Consumer
Products ............. $220,064 100.0% $143,235 100.0% $118,903 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
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OTC HEALTH CARE
The Company markets a diversified portfolio of brand name OTC health care
products, many of which are among the market leaders in the U.S. in their
respective categories.
The GOLD BOND brand, which is approximately 100 years old, competes in the adult
and baby medicated powder, therapeutic lotion and anti-inch cream markets. GOLD
BOND is the leading brand in the medicated powder market and has a rapidly
growing presence in the anti-itch cream market. GOLD BOND medicated lotion was
introduced in the last quarter of fiscal 1998. The product line is heavily
supported by national television and radio advertising, as well as consumer
promotions. The Company believes GOLD BOND represents a major growth opportunity
and is currently considering various additional line extensions including GOLD
BOND Ointment, which will be introduced in fiscal 1999.
FLEXALL is an aloe-vera based topical analgesic used primarily by arthritic
sufferers to alleviate pain and irritation in joints and secondarily by
sufferers from muscle strain. The Company believes that the advancing age of the
U.S. population and the emphasis on fitness and physical activity will increase
the overall market size of the topical analgesic market. The Company supports
the brand with a marketing program that utilizes extensive television
advertising. In fiscal 1999, FLEXALL QUIK GEL will be introduced as well as a
new advertising campaign for the FLEXALL brand featuring former NFL star Joe
Montana.
ICY HOT provides the Company with a second entry into the topical analgesic
market segment. ICY HOT is an extra strength dual action product. The Company
supports this brand with national advertising and strong promotional programs.
In the menstrual analgesic segment, the Company markets PAMPRIN, a combination
drug specifically designed for relief of menstrual symptoms, and PREMSYN PMS, a
product formulated to relieve mild to moderate symptoms of premenstrual
syndrome. PAMPRIN and PREMSYN PMS are together the number one selling
premenstrual internal analgesic, based on units sold, on the market today.
BENZODENT is a dental analgesic cream in an adhesive base for use as an oral
topical analgesic for pain related to dentures. In 1994 the Company acquired
BENZODENT and principally supports the brand by providing samples to consumers
when they are initially fitted for dentures.
NORWICH is a pharmaceutical-quality aspirin-based analgesic which complements
the Company's other OTC pharmaceuticals by offering consumers another choice in
the analgesic market segment. The Company positions the brand as a reasonably
priced alternative between private label generic aspirin and high-priced,
heavily-advertised brands.
In the lip care category, the unique formula of HERPECIN-L treats and
protects cold sores by moisturizing lips to help prevent cracking, reduce
soreness and promote healing. Also, HERPECIN-L contains an SPF 36 sunblock to
help protect lips from the harmful sun rays. In fiscal 1998 HERPECIN-L lip
balm was introduced in a jar container. The Company supports the brand with
radio advertising as well as consumer promotions designed to generate trial
during the peak winter and summer cold sore seasons.
GARLIQUE garlic tablets support cardiovascular health. The tablets are uniquely
positioned in the marketplace as a "one per day" high potency garlic supplement.
Most major GARLIQUE competitors require multiple daily dosages. Consumers have a
strong and growing interest in this odorless, drug-free, all natural approach to
maintaining normal cholesterol levels. GARLIQUE entered the market in 1992
and is the number one selling domestic garlic extract product.
REJUVEX is a dietary supplement for women in the pre- and post-menopausal age
group. REJUVEX helps women during a phase of life that is often fraught with
numerous discomforts. Additionally, REJUVEX, high in magnesium, helps promote
strong healthy bones in a population that is at risk for development of
osteoporosis.
HARMONEX is a combination of St. John's Wort, proven to help emotional balance,
and Siberian ginseng, an herb providing a boost to physical well being. In
clinical trials, the scientifically standardized St. John's Wort extract used in
HARMONEX helped maintain a healthy emotional balance in study subjects.
PROPALMEX is an herbal supplement for men over 40. PROPALMEX supports
prostate health and promotes free urinary flow. As men age, natural changes in
hormone balance result in conditions which tend to cause a swelling of the
prostate. This benign condition plagues most men past middle age and PROPALMEX
is the all natural, drug-free approach to maintenance of a healthy prostate.
MELATONEX is formulated to support a natural sleep cycle by supplementing the
body's production of melatonin, a hormone necessary for a good night's sleep. As
we age, we produce less melatonin, tend to sleep less and have more difficulty
falling asleep and staying asleep. MELATONEX is a scored, time-release tablet
offering dosage control to users.
ECHINEX is a standardized herbal complex of echinacea, ginger and Siberian
ginseng. This effective combination supports our natural resistance against
infection. ECHINEX is a seasonal product that provides adults with added
protection during times of high risk for cold and flu.
SUNSOURCE offers a line of nine homeopathic OTC products. Homeopathic medicines
represent a growing segment of the OTC marketplace. These all natural products
are safe and effective and have no side effects. The SUNSOURCE line includes six
tablet products: Sinus Relief, Cold Relief, Insomnia Relief, Allergy Relief, Flu
Relief and Arthritis Relief; and three topical creams: Sports Injury Relief,
Arthritis Relief and Psoriasis/Eczema Relief.
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TOILETRIES AND SKIN CARE
The Company also markets a portfolio of brand name toiletries and skin care
products, many of which are among the market leaders in the U.S. in their
respective categories.
BAN antiperspirant and deodorant products provide advanced protection from odor
and wetness. Originally introduced in 1955, BAN is the number one roll-on brand
in the U.S. The proven maximum strength protection of BAN is available in five
advanced forms - Original Roll-On, Clear Roll-On, Solid Stick, Clear Stick, and
the revolutionary Clear Soft Solid. The product line is supported with
significant national television and radio advertising. In addition, business
building consumer promotions are planned for 1999 as the antiperspirant and
deodorant category is highly responsove to promotion. The Company believes that
BAN represents a major growth opportunity and two exciting new line extensions
and new packaging are planned for introduction in the 1999 fiscal year.
BULLFROG is positioned as a line of highly efficacious sunblock products in a
unique, long-lasting, water-durable formula. The Company believes that the
BULLFROG brand should continue to benefit from an increasing brand awareness,
broader product offerings and increased consumer advertising, promotion and
sampling programs. BULLFROG for Babies and SUPERBLOCK SPF 45 were added to the
BULLFROG line in fiscal 1998. BULLFROG MAGICBLOCK, a disappearing color sun
block, will be introduced in fiscal 1999.
PHISODERM is a line of facial cleansers consisting of several formulas of liquid
cleansers, including one for infants, and a bar soap. In fiscal 1998 PHISODERM
was repositioned as "The Daily Prescription for Healthy Skin" which expanded its
consumer audience and resulted in steady brand growth. The problem skin
positioning, communicated through strong radio advertising, sets the stage for
further line extensions, increased advertising support and continued sales
momentum. PHISODERM Acne will be introduced during fiscal 1999.
ULTRASWIM is a leading line of chlorine removing shampoos, conditioners and
soaps. ULTRASWIM has a unique formula that the Company believes makes it
superior to formulations of other products in removing chlorine. The Company
supports this brand through targeted print and consumer promotions, including
event sponsorships and sampling.
SUN-IN is a leading product line in the spray-on hair lightener market. The
target customers within this market segment are light-haired men and women
between the ages of 12 and 24. The Company supports SUN-IN's position as a
market leader through recent improvements in the formula and package, seasonal
advertising to teens and consumer promotions in retail stores.
MUDD is a line of clay-based products which provide deep cleansing of the face
for healthier, cleaner skin. Target customers for MUDD are women between the
ages of 18 and 49. The MUDD line is a market leader in the masque category with
four top selling varieties. The Company anticipates expansion of the brand
through line extensions, sampling and radio advertising. MUDD Sauna Masque, a
self-heating facial mask, will be introduced during fiscal 1999.
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INTERNATIONAL
Certain of the Company's products are sold in foreign countries. The
international business is concentrated in Canada, Europe and Central and South
America.
Sales in Canada and Europe are conducted by subsidiary companies located and
locally staffed in Canada and the United Kingdom, respectively. General export
sales are handled by the Company from its offices in Chattanooga. Most of the
products sold in international markets are manufactured by the Company at its
Chattanooga and United Kingdom facilities and are packaged by subsidiary
companies in small facilities in Canada and the United Kingdom with the
assistance, from time to time, of outside contract packagers.
The BAN, GOLD BOND, FLEXALL, PAMPRIN, BULLFROG, PHISODERM, ULTRASWIM, SUN-IN and
MUDD brands are sold in Canada. Consumer product sales in the United Kingdom and
on the continent of Western Europe are currently limited to toiletry and
cosmetic products. The Company's hair lightener is sold on the continent under
the SPRAY BLOND trademark and in the United Kingdom as SUN-IN. MUDD, CORNSILK
and ULTRASWIM are the other products sold by the Company's U.K. subsidiary in
Europe.
The Company's export division services various distributors primarily located in
Central and South America and the Caribbean. The Company sells various products
into these markets including BAN, GOLD BOND, ICY HOT and PHISODERM.
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MANUFACTURING AND QUALITY CONTROL
The Company manufactures approximately half of the sales volume of its
products at its Chattanooga plant. BAN, GOLD BOND powders, the SUNSOURCE
brands and NORWICH Aspirin are manufactured by third party contract
manufacturers. With the addition of a newly purchased facility and through
third party manufacturers the Company has adequate capacity to meet
anticipated demand for its products. New products with formulations and
packaging that are consistent with currently manufactured products can
generally be manufactured with the adaptation of existing equipment and
facilities, the addition of new equipment at relatively small cost or through
readily available contract manufacturers. For additional information about
the extent of utilization of the Company's manufacturing facilities, see
"Properties", Item 2, in this report.
Third party manufacturers produce certain products including GOLD BOND
powders and the SUNSOURCE line. Additionally, the Company entered into a
manufacturing agreement with Bristol-Myers Squibb Company ("BMS"), whereby
BMS manufactures BAN until March 2001. In most cases, other than
with BAN, the manufacturer is not obligated under a contract that fixes the
term of its commitment. Manufacturers may experience problems with product
quality or timeliness of product delivery. Manufacturers may also discontinue
production of brands upon little or no advance notice. In each case, the
Company believes that it could find other contract manufacturers quickly if
any of its current contractors cease to perform adequately. However, if this
occurs and the Company cannot find other contract manufacturers, the Company
may be forced to shift production to in-house facilities. This may cause
manufacturing delays, which would cause disruption in the Company's ability to
fill orders. This could adversely affect the Company's business.
To monitor the quality of its products, the Company maintains an internal
quality control system supported by an on-site microbiology laboratory. The
Company's quality control inspectors who regularly test its products and
processes and shepherd the products through the manufacturing cycle. Outside
consultants also are employed from time to time to monitor product
development and the effectiveness of the Company's operations.
The Company has not experienced any material adverse effect on its business
as a result of shortages of energy, raw materials or packaging materials used
in the manufacture of its products. Certain of the Company's products contain
specialized ingredients that are obtained from international and domestic
third party suppliers. An unexpected interruption or a shortage in supply
could adversely affect the Company's business derived from these products.
The Company may not be able to raise prices quickly enough to immediately
offset the effects of any increase in the costs of these specialized
ingredients or fill customer orders in the event of a supply shortage. At
present, the Company does not foresee any significant problems in obtaining
its ingredients requirements at reasonable prices, but an unexpected
interruption of a shortage in supply could adversely affect its business in
the future.
PRODUCT DEVELOPMENT
The Company's product development expenditures were $1,369,000, $1,207,000 and
$1,117,000 in the fiscal years ended November 30, 1998, 1997 and 1996,
respectively. No material customer-sponsored product development activities were
undertaken during these periods. The Company expects product development
expenditures to increase in fiscal 1999 due to recent acquisitions.
The product development effort focuses on developing improved formulations for
existing products and on the creation of formulations for product line
extensions. The preservation and improvement of the quality of the Company's
products are also integral parts of the Company's overall strategy.
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DISTRIBUTION
The Company's domestic products are sold primarily through food, drug and mass
merchandiser accounts. Internationally, the products are sold by a national
broker in Canada and the Company's own sales force in the United Kingdom and by
exclusive distributors in Western Europe and Central and South America.
Wal-Mart Stores, Inc. accounts for more that 10% of the sales of the Company's
consolidated net sales. No other customer accounts for more that 10% of
consolidated net sales. Boots Plc, a U.K. retailer, accounts for more than 10%
of the international consumer products segment's sales.
The Company generally maintains sufficient inventories to meet customer orders
as received absent unusual and infrequent situations. At present, the Company
has no significant backlog of customer orders and is promptly meeting customer
requirements.
The Company does not generally experience wide variances in the amount of
inventory it maintains. Inventory levels were increased during fiscals 1998,
1997 and 1996 largely as a result of product acquisitions and line extensions in
those years. In certain circumstances, the Company allows its customers to
return unsold merchandise and, for seasonal products, provides extended payment
terms to its customers.
MARKETING
The Company allocates a significant portion of its revenues to the advertising
and promotion of its products. Expenditures for these purposes were 39.3%, 39.2%
and 38.3%, respectively, as a percentage of net sales during each of the fiscal
years ended November 30, 1998, 1997 and 1996.
The Company's marketing objective is to develop and execute professionaly
designed, creative and cost-effective advertising and promotional programs. The
manner in which the Company executes promotional programs and purchases
advertising time creates more flexibility in terms of adjusting spending levels.
The Company believes that balancing advertising, trade promotion and consumer
promotion expenditures on a cost effective basis is essential to its ability to
compete successfully.
The Company develops for each of its major brands advertising strategies and
executions that sell the product by focusing on the particular strengths and
market position of the product. The Company achieves cost-effective
advertising by minimizing certain expenses, such as production of commercials
and payments to advertising agencies. New product launches are supported with
a substantial level of advertising and promotional spending. The Company
occasionally uses celebrity endorsements to increase awareness of our
products, such as Larry King's endorsement of GARLIQUE and HARMONEX. The
Company recently reached an agreement with Joe Montana for an advertising
campaign in support of FLEXALL, which began in December 1998. Where
appropriate, the Company uses radio advertising and 15-second television
advertisements. In its advertisements, the Company has successfully used
personal testimonials from individuals attesting to the effectiveness of our
products.
The Company works directly with retailers to develop for each brand promotional
calendars and campaigns that are customized to the particular requirements of
the individual retailer. The programs, which include cooperative advertising,
temporary price reductions, in-store displays and special events, are designed
to obtain or enhance distribution at the retail level and to reach the ultimate
consumers of the product. The Company also utilizes consumer promotions such as
coupons, samples and trial sizes to increase the trial and consumption of the
products.
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SEASONALITY
During recent fiscal years, the Company's first quarter net sales and gross
profit have trailed the other fiscal quarters on average from 25% to 35% because
of slower sales of 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, seasonality should not be as pronounced as in
years past; however, because of seasonal products, net sales and profit during
the first quarter will continue to trail the other fiscal quarters.
COMPETITION
The Company competes in the OTC health care and toiletries and skin care
markets. These markets are highly competitive and are characterized by the
frequent introduction of new products, including the movement of prescription
drugs to the OTC market, often accompanied by major advertising and
promotional programs. We compete primarily on the basis of product quality,
price, brand loyalty and consumer acceptance. Our competitors include other
OTC pharmaceutical companies and large consumer products companies, many of
which have considerably greater financial and marketing resources than us. In
addition, our competitors have often been willing to use aggressive spending
on trade promotions and advertising as a strategy for building market share
at the expense of their competitors, including us. The private label or
generic category has also become increasingly more competitive in certain of
the Company's product markets. Our products continue to compete for shelf
space among retailers who are increasingly consolidating.
TRADEMARKS AND PATENTS
Our trademarks are of material importance to our business and are among our most
important assets. In fiscal year 1998, substantially all of our net sales were
from products bearing proprietary brands names, including BAN, GOLD BOND,
FLEXALL, ICY HOT, PAMPRIN, GARLIQUE, PHISODERM and BULLFROG. Accordingly, our
future success may depend in part upon the goodwill associated with our brand
names, particularly BAN and GOLD BOND.
Our principal brand names are registered in the United States and certain
foreign countries. However, we cannot assure you that the steps we take to
protect our proprietary rights in our brand names will be adequate to prevent
the misappropriation of these registered brand names in the United States or
abroad. In addition, the laws of some foreign countries do not protect
proprietary rights in brand names to the same extent as do the laws of the
United States.
Through our subsidiary, Signal Investment & Management Co., we maintain and have
applied for patent, trademark and copyright protection in the United States
relating to certain of our existing and proposed products and processes. We
cannot assure you that we will be able to successfully protect our intellectual
property, and the loss of our intellectual property protection could adversely
affect our business. Additionally, we license certain intellectual property from
third parties, and we cannot assure you that these third parties can
successfully maintain their intellectual property rights. The sales of certain
of our products rely on our ability to maintain and extend our licensing
agreements with third parties, and we cannot assure you that we will be
successful in maintaining these licensing agreements. If we lose the right to
use these licenses, our business could be adversely affected.
The Company also owns patents related to the ICY HOT stick topical analgesics,
which expires in 2007, and numerous patents related to the BAN antiperspirant
and deodorant products. After expiration of the patents, the Company expects
that these products will continue to compete in the market primarily on the
basis of the goodwill associated with the brands.
12
<PAGE>
GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling and advertising
of the Company's products are subject to regulation by federal agencies,
including:
o the United States Food and Drug Administration ("FDA");
o the Federal Trade Commission ("FTC");
o the Consumer Product Safety Commission;
o the United States Department of Agriculture;
o the United States Postal Service;
o the United States Environmental Protection Agency ("EPA"); and
o the Occupational Safety and Health Administration ("OSHA").
These activities are also regulated by various agencies of the states,
localities and foreign countries in which the Company's products are sold. In
particular, the FDA regulates the safety, manufacturing, labeling and
distribution of OTC health care and toiletries and skin care products. The FDA
regulations relating to the manufacturing process are known as current Good
Manufacturing Practices ("GMP") and are different for drug and food products. In
addition, the FTC has overlapping jurisdiction with the FDA to regulate the
promotion and advertising of OTC health care and toiletries and skin care
products.
All of the Company's OTC drug products are regulated pursuant to the FDA's
monograph system for OTC drugs. The monographs set out the active ingredients
and labeling indications that are permitted for certain broad categories of OTC
drug products, such as topical analgesics. Compliance with the monograph
provisions means that the product is generally recognized as safe and effective
and is not misbranded. Future changes in the monographs could result in the
Company having to revise product labeling and formulations. The Company
responded to certain questions with respect to efficacy received from the FDA in
connection with clinical studies for pyrilamine maleate, one of the active
ingredients used in certain of the PAMPRIN and PREMSYN PMS products. While the
Company addressed all of the FDA questions in detail, the final monograph for
menstrual drug products will determine if the FDA considers pyrilamine maleate
safe and effective for menstrual relief products. The Company has been actively
monitoring the process and does not believe that either PAMPRIN or PREMSYN PMS
will be materially adversely affected by the FDA review. The Company believes
that any adverse finding by the FDA would likewise affect the Company's
principal competitor in the menstrual product category.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was enacted on
October 25, 1994. DSHEA amends the Federal Food, Drug, and Cosmetic Act by
defining dietary supplements, which include vitamins, mineral, nutritional
supplements, herbs and botanicals, as a new category of food separate from
conventional food. DSHEA provides a regulatory framework to ensure safe, quality
dietary supplements and to foster the dissemination of accurate information
about such products. Under DSHEA, the FDA is generally prohibited from
regulating dietary supplements as food additives or as drugs unless product
claims, such as claims that a product may diagnose, mitigate, cure or prevent an
illness, disease or malady, trigger drug status.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements effective January 1, 1997, and FDA's final regulations require that
all dietary supplements must be labeled in compliance with the regulations no
later than March 23, 1999. DSHEA permits substantiated, truthful and
non-misleading statements of nutritional support to be make in labeling, such as
statements describing general well-being resulting from consumption of a dietary
ingredient or the role of a nutrient or dietary ingredient in affecting or
maintaining a structure or function of the body. The Company anticipates that
the FDA will promulgate GMPs which are specific to dietary supplements and
require at least some of the quality control provisions contained in the GMPs
for drugs, which are more rigorous than the GMPs for foods.
13
<PAGE>
The FDA has finalized some if its regulations to implement DSHEA, including
those relating to nutritional labeling requirements. The FDA also has under
development additional regulations to implement DSHEA. Final labeling
regulations require expanded or different labeling for our vitamin and
nutritional products. We cannot determine what effect these regulations, when
fully implemented, will have on our business in the future. These regulations
could require the recall, reformulation or discontinuance of certain products,
additional record keeping, warnings, notifications procedures and expanded
documentation of the properties of certain products and scientific
substantiation regarding ingredients, product claims, safety or efficacy.
Failure to comply with applicable FDA requirements can result in sanctions being
imposed on the Company or the manufacture of our products, including warning
letters, product recalls and seizures, injunctions or criminal prosecution.
As part of its regulatory authority, the FDA may periodically conduct audits of
the physical facilities, machinery, processes and procedures that we and our
competitors use to manufacture products. The FDA may perform these audits at any
time without advanced notice. As a result of these audits, the FDA may order us
to make certain changes in our manufacturing facilities and processes. We may
have to make additional expenditures to comply with these orders or possibly
stop selling certain products until we comply with these orders. As a result,
our business could be adversely affected. In December 1998, the FDA conducted an
audit of our manufacturing facility in Chattanooga, Tennessee. In connection
with that audit, the FDA issued a report citing certain processes and procedures
it requires us to change or improve. We have responded to the FDA's report and
are in the process of complying with its requirements.
In 1994, the Nonprescription Drug Manufacturers Association initiated a large
scale study in conjunction with the Yale University School of Medicine to
investigate the increased risk, if any, of stroke in obese women using
phenylpropanolamine ("PPA"), the active ingredient in DEXATRIM, for weight loss
(the "Yale Study"). The Yale Study was designed in collaboration with the FDA.
The results of the Yale Study are expected to be issued in mid- to late-1999.
If the Yale Study results indicate an increased likelihood of stroke among obese
women using PPA for weigh loss, we could be forced to reformulate DEXATRIM or
discontinue manufacturing and selling it in its current form. As a result, the
DEXATRIM business would suffer, which would adversely affect our business.
14
<PAGE>
ENVIRONMENTAL
The Company continuously assesses compliance of its operations with applicable
federal, state and local environmental laws and regulations. The Company's
policy is to record liabilities for environmental matters when loss amounts are
probable and reasonably determinable. The Company's manufacturing site utilizes
chemicals and other potentially hazardous materials and generates both hazardous
and non-hazardous waste, the transportation, treatment, storage and disposal of
which are regulated by various government agencies, and has engaged
environmental consultants on a regular basis to assist its compliance efforts.
The Company is currently in compliance with all applicable environmental permits
and is aware of its responsibilities under applicable environmental laws. Any
expenditures necessitated by changes in law and permitting requirements cannot
be predicted at this time, although such costs are not expected to be material
to the Company's financial position or results of operations.
Since the early 1980's, the U.S. Environmental Protection Agency ("EPA") has
been investigating the extent of, and the health effects resulting from,
contamination of Chattanooga Creek, which runs through a major manufacturing
area of Chattanooga in the vicinity of the Company's manufacturing facilities.
The contamination primarily stems from the dumping of coal tar into the creek
during World War II when the federal government was leasing and operating a coke
and chemical plant adjacent to the creek. However, the EPA has been
investigating virtually all businesses that have discharged any wastewater into
the creek. A 2 1/2 mile stretch of Chattanooga Creek was placed on the National
Priorities List as a Superfund site under the Comprehensive Environmental
Response, Compensation and Recovery Act in September of 1995 and remediation of
the creek bed commenced in mid-1997. The Company could be named as a potentially
responsible party in connection with such site due to the Company's historical
discharge of wastewater into the creek. However, considering the nature of the
Company's wastewater, as well as the fact that the Company's discharge point is
downstream from the old coke and chemical plant that was operated by the
government, and the availability of legal defenses and expected cost sharing,
the Company does not believe that any liability associated with such site will
be material to its financial position or results of operations.
In December 1998, the Company was named in a lawsuit with 37 other companies as
potentially responsible parties for the disposal of waste materials found at a
site in Birmingham, Alabama. Although the facts surrounding this case are
unclear, the lawsuit alleges that a company we used periodically during 1986 and
1987 to treat, store and dispose of waste materials from its manufacturing
processes improperly disposed of these waste materials. The Company cannot
currently assess its potential liability resulting from this lawsuit, but if the
Company is found liable its business could be adversely affected.
PRODUCT LIABILITY AND INSURANCE
An inherent risk of the Company's business is exposure to product liability
claims brought by users of the Company's products or by others. The Company has
not had any material claims in the past and is not aware of any material claims
pending or threatened against the Company or its products that if adversely
decided would negatively affect us. While the Company will continue to attempt
to take what it considers to be appropriate precautions, there can be no
assurance that it will avoid significant product liability exposure. The Company
maintains product liability insurance, principally through third party insurers,
that it believes to be adequate; however, there can be no assurance that it will
be able to retain its existing coverage or that such coverage will be
cost-justified or sufficient to satisfy future claims, if any.
EMPLOYEES
The Company employs approximately 364 persons on a full-time basis in the U.S.
and 37 persons at its foreign subsidiaries' offices. The Company's employees are
not represented by any organized labor union, and management considers its labor
relations to be good.
15
<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters and administrative offices are located at 1715 West
38th Street, Chattanooga, Tennessee. The Company's primary production facilities
are adjacent to the Company's headquarters on land owned by the Company. The
Company leases its primary warehouse and distribution centers in Chattanooga,
Tennessee for its domestic consumer products. The following table describes in
detail the principal properties owned and leased by the Company:
<TABLE>
<CAPTION>
Total Area Total Buildings Square
(Acres) (Square Feet) Use Feet
---------- --------------- --------------- ------
<S> <C> <C> <C> <C>
Owned Properties:
Chattanooga, Tennessee 10.0 111,200 Manufacturing 71,800
Office &
Administration 39,400
*Chattanooga, Tennessee 8.5 68,300 Manufacturing
& Warehousing 50,600
Office 17,700
Leased Properties:
Chattanooga, Tennessee (1) 3.1 135,200 Warehousing 103,800
Chattanooga, Tennessee (2) 0.1 3,800 Warehousing &
Manufacturing 35,200
Chattanooga, Tennessee (3) 3.1 134,000 Warehousing 124,000
Office 10,000
Mississauga, Ontario, Canada (4) 0.3 15,000 Warehousing 10,500
Office &
Administration 3,000
Packaging 1,500
Basingstoke, Hampshire, England(5) 0.5 21,900 Warehousing 13,900
Office &
Administration 6,500
Packaging 1,500
</TABLE>
*Acquired in October 1998 and not currently occupied by the Company.
NOTES:
(1) Leased under a five year lease ending January 31, 2001 for a monthly
rental of $34,547.
(2) Leased on a month-to-month basis for a monthly rental of $1,575.
(3) Leased on a month-to-month basis for a monthly rental of $31,000.
(4) Leased under a lease ending November 1999 at a monthly rental, including
property taxes and other incidentals, of approximately $5,397.
(5) Leased under leases ending in 2014 and 2015 at a monthly rental, including
property taxes and other incidentals, of approximately $22,865.
The Company is currently operating its facilities at approximately 70% of total
capacity. These facilities are FDA registered and are capable of further
utilization through the use of full-time second and the addition of a third
shift.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In February 1999 a complaint was filed by Genderm Corporation ("Genderm") in
U.S. District Court for the District of Arizona. The complaint alleges, among
other things, that the formulations of CAPZASIN-P, CAPZASIN-HP and ICY-HOT
Arthritis Therapy Gel infringe upon U.S. Patent 4,486,450 owned by Joel
Bernstein, M.D. and licensed to Genderm. The complaint requests injunctive
relief, compensatory and treble damages, costs and attorneys fees. A hearing
on the requested injunctive relief is currently scheduled for April 1999.
Note 10 to the Consolidated Financial Statements on page 37 of the Company's
1998 Annual Report to Stockholders is incorporated herein by reference.
See the "Environmental Section" in Item 1., Business, of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information found on pages 21 and 35 to 37 of the Company's 1998 Annual
Report to Stockholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information found on page 21 of the Company's 1998 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information found on pages 13 to 20 of the Company's 1998 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information found on pages 22 to 43 of the Company's 1998 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
(a) DIRECTORS
The information found in the Company's 1999 Proxy Statement under
the heading "Information about Nominees and Continuing Directors"
is hereby incorporated by reference.
(b) EXECUTIVE OFFICERS
The following table lists the names of the executive officers of
the Company as of February, 1999, their ages, their positions and
offices with the Company and the year in which they were first
elected or appointed to these positions:
<TABLE>
<CAPTION>
Name Age Position With Registrant First Elected
- ---------------------- --- -------------------------------------- -------------
<S> <C> <C> <C>
Zan Guerry 50 Chairman of the Board and 1990
Chief Executive Officer; Director
A. Alexander Taylor II 45 President and Chief Operating Officer; 1998
Director
Andrea M. Crouch 40 Vice-President - Toiletries Marketing 1995
Gary M. Galante 51 Vice-President - Research and 1995
Development
Ron Galante 54 Vice-President - New Buisness 1993
Development
Robert S. Marshall 33 Vice-President - OTC Marketing 1996
B. Derrill Pitts 55 Vice-President - Operations 1984
Charles M. Stafford 48 Vice-President - Sales 1994
Stephen M. Powell 37 Controller 1995
</TABLE>
Mr. Guerry was elected to his present positions with the Company in June 1990.
Previously he served as Vice President and Chief Financial Officer from 1980
until 1983, as Executive Vice President from 1983 to 1990, as President of
Chattem Consumer Products from 1989 to 1994, as Chief Operating Officer from
1989 to 1990 and as President of the Company from 1990 to 1998. Mr. Guerry was
first elected as a director of the Company in 1981.
Mr. Taylor was elected to his present positions with the Company in January
1998. Previously he was a partner from 1983 to 1998 with the law firm of
Miller & Martin, general counsel to the Company. Mr. Taylor was first elected
as a director of the Company in 1993.
Ms. Crouch joined the Company in 1985 as an Assistant Brand Manager. In 1995,
she was named to her current position. Previously she worked with Hayes
Microcomputer Products and Arthur Andersen LLP. She was denoted an executive
officer of the Company in January 1999.
Mr. G. Galante was appointed to his present position in September 1995.
Previously he was Director of Research and Development. He joined the Company in
1983 as Manager of New Product Development and was denoted an executive officer
in January 1999.
19
<PAGE>
Mr. R. Galante was appointed to his present position with the Company in June
1993. Previously he served as General Manager of Chattem (Canada) Inc. from June
1990 until May 1993 and as Director of Marketing for many of the Company's
domestic brands from 1980 until 1993. He was denoted an executive officer of the
Company in January 1999.
Mr. Marshall joined the Company in 1994 as a Brand Manager. In 1995, he was
promoted to Group Marketing Manager in Toiletries and in 1996 he was named to
his current position. Previously he worked in brand management at Procter &
Gamble. He was denoted an executive officer of the Company in January 1999.
Mr. Pitts is a long-term employee and has served in all manufacturing operation
disciplines since joining Chattem in 1966. He was promoted to Vice President in
1984 and was denoted an executive officer in January 1999.
Mr. Stafford was appointed to his present position in June 1994. Previously he
served as Director of Field Sales and Zone Sales Manager. Prior to joining the
Company in 1983, Mr. Stafford held sales management positions with Johnson &
Johnson and Schering Plough. He was denoted an executive officer of the Company
in January 1999.
Mr. Powell, a Certified Public Accountant, was appointed to his present position
with the Company in June 1995. Previously he was the Financial Reporting Manager
for Brock Candy Company. He worked for Joseph Decosimo and Co., CPA's from 1985
to 1993 where he was a manager in the audit department.
(c) PROMOTERS AND CONTROL PERSONS
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION
The information found in the Company's 1999 Proxy Statement under the heading
"Executive Compensation and Other Information" is hereby incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information found in the Company's 1999 Proxy Statement under the heading
"Voting Securities and Principal Holders Thereof" is hereby incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Louis H. Barnett, a director of the Company, received $33,000 in consulting fees
during fiscal 1998 for services rendered to the Company in a capacity other than
as a director.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
(a) 1. The consolidated financial statements and the related report
of independent public accountants required to be filed with this
Report are incorporated by reference from pages 22 to 43 of the
Company's 1998 Annual Report to Shareholders.
2. The following documents are filed or incorporated by
reference as exhibits to this report:
Exhibit
Number Description of Exhibit References
- ------- ---------------------- ----------
3 Amended and Restated Charter of
Chattem, Inc. (1)
4 Form of Indenture Dated August 3, 1994
between Chattem, Inc. and SouthTrust
Bank of Alabama, N.A. relating to the
12.75% Series B Senior Subordinated
Notes due 2004 (2)
Form of Indenture dated March 24, 1998
between Chattem, Inc. and SouthTrust Bank
of Alabama, N.A. relating to the 8.875%
Senior Subordinated Notes due 2008 (3)
10 Material Contracts -
Non-Competition and Severance
Agreements as amended -
Zan Guerry
A. Alexander Taylor II
Robert E. Bosworth
Gary M. Galante
B. Derrill Pitts
Charles M. Stafford (4)
Lease Agreements, as amended, dated
February 1, 1996 between Tammy
Development Company and Chattem,
Inc. for warehouse space at 3100
Williams Street, Chattanooga, Tennessee (4) and (6)
Asset Purchase Agreement dated April 29,
1996 between Martin Himmel Inc., seller,
and Chattem, Inc. and Subsidiaries,
purchaser, for the GOLD BOND
business (5)
Credit Agreement dated April 29, 1996
among Chattem, Inc., as borrower,
Signal Investment & Management Co., as
guarantor, NationsBank, N.A., as agent,
and the Lenders named therein (6)
21
<PAGE>
Exhibit
Number Description of Exhibit References
- ------- ---------------------- ----------
10 Credit Agreement dated April 29, 1996
(Secondary Working Capital Facility)
among Chattem, Inc., as borrower, Signal
Investment & Management Co., as
guarantor, NationsBank, N.A., as agent,
and the Lenders named therein (6)
Asset Purchase Agreement dated June 6,
1996 between Campbell Laboratories,
Inc., seller, and Chattem, Inc. and Signal
Investment & Management Co.,
purchasers, for the HERPECIN-L
business (6)
Amendment to the Credit Agreement
(HERPECIN-L Acquisition) dated June 6,
1996 among Chattem, Inc., as borrower,
Signal Investment & Management Co., as
guarantor, Nationsbank, N.A., as agent,
and the Lenders named therein (6)
Asset Purchase and Sale Agreement dated
May 23, 1997 by and among Chattem,
Inc., Signal Investment & Management
Co., and Sunsource International, Inc.
and Mindbody, Inc. (without schedules
and exhibits) for the SUNSOURCE
business (7)
Amended and Restated Credit Agreement
dated June 26, 1997 by and among Chattem,
Inc., Signal Investment & Management Co.
and the Lenders named therein (8)
Amended and Restated Credit Agreement
(Supplemental Credit Agreement) dated
June 26, 1997 by and among Chattem,
Inc., Signal Investment & Management
Co. and the Lenders named therein (9)
First Amended and Restated Master
Trademark License Agreement between
Signal Investment & Management Co.
and Chattem, Inc., effective
June 30, 1992 (8)
Chattem, Inc. Non-Statutory Stock
Option Plan- 1998 (8)
22
<PAGE>
Exhibit
Number Description of Exhibit References
- ------- ---------------------- ----------
10 Asset Purchase Agreement dated
February 22, 1998 by and among
Bristol-Myers Squibb Company, Chattem,
Inc. and Signal Investment &
Management Co. for the BAN business (9)
Asset Purchase and Sale Agreement dated
May 12, 1998 by and among Chattem,
Inc., Signal Investment & Management
Co. and Del Laboratories, Inc for the
sale of the CORNSILK business (10)
Commerical Lease dated April 1, 1998
between Chattem Inc., lessee, and Kenco
Group, Inc., lessor, for warehouse
space located at 4309 Distribution
Avenue, Chattanooga, Tennessee. (11)
Purchase and Sale Agreement dated
November 16, 1998 by and among Thompson
Medical Company, Inc., Chattem, Inc. and
Signal Investment & Management Co. for
certain products (12)
Amended and Restated Credit Agreement
(New Credit Agreement) dated
December 21, 1998 among Chattem, Inc.,
its domestic subsidiaries, identified
Lenders and NationsBank, N.A., as agent (12)
Amended and Restated Credit Agreement
(Supplemental Credit Agreement) dated
December 21, 1998 among Chattem Inc.,
its domestic subsidiaries, identified
Lenders and NationsBank, N.A., as agent (12)
11 Computation of Per Share Earnings
1998 Annual Report to Shareholders of
13 Chattem, Inc.
22 Subsidiaries of the Company
24 Consent of Independent Public
Accountants
23
<PAGE>
REFERENCES:
Previously filed as an exhibit to and incorporated by reference from:
(1) Form 10-K for the year ended November 30, 1992
(2) Form S-2 Registration Statement (No. 33-80770).
(3) Form S-4 Registration Statement (No. 333-53627) effective
June 4, 1998.
(4) Form 10-K for the year ended November 30, 1995.
(5) Form 8-K dated April 29, 1996.
(6) Form 10-K for the year ended November 30, 1996.
(7) Form 8-K dated June 26, 1997.
(8) Form 10-K for the year ended November 30, 1997.
(9) Form 8-K dated March 24, 1998.
(10) Form 8-K dated May 12, 1998.
(11) Form 10-K for the year ended November 30, 1998.
(12) Form 8-K dated December 21, 1998.
(b) Form 8-K, dated November 16, 1998, was filed with the
Securities and Exchange Commission during the three
months ended November 30, 1998.
(c) The Financial Statements and related report of
independent public accountants required to be filed
with this report pursuant to Rule 3-10(a) of Article 3
of Regulation S-X are incorporated by reference from
pages 6 to 14 of Signal Investment & Management Co.'s
Form 10-K for the fiscal year ended November 30, 1998.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: February 26, 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)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Zan Guerry Chairman of the Board 2/22/99
- ---------------------------- and Director
Zan Guerry (Chief Executive Officer)
/s/ A. Alexander Taylor, II President and Director 2/22/99
- ---------------------------- (Chief Operating Officer)
A. Alexander Taylor, II
/s/ Samuel E. Allen Director 2/22/99
- ----------------------------
Samuel E. Allen
/s/ Louis H. Barnett Director 2/22/99
- ----------------------------
Louis H. Barnett
/s/ Robert E. Bosworth Director 2/22/99
- ----------------------------
Robert E. Bosworth
/s/ Richard E. Cheney Director 2/22/99
- ----------------------------
Richard E. Cheney
/s/ Scott L. Probasco, Jr. Director 2/22/99
- ----------------------------
Scott L. Probasco, Jr.
25
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- -----------------------------------------------------
10.1 Commercial Lease dated April 1, 1998 between Chattem,
Inc, lessee, and Kenco Group, Inc., lessor, for
warehouse space located at 4309 Distribution Avenue,
Chattanooga, Tennessee.
11 Computation of per share earnings
13 1998 Annual Report to Shareholders of Chattem, Inc.
22 Subsidiaries of the Company
24 Consent of Independent Public Accountants
27 Financial Data Schedule
26
<PAGE>
EXHIBIT 10.1
------------
COMMERCIAL LEASE
CHATTEM, INC., INC. hereafter referred to as Lessee, hereby offers to Lease
from KENCO GROUP, INC., hereafter referred to as Lessor, the Premises
situated in the city of Chattanooga, county of Hamilton, state of Tennessee,
described as 100,000 Sq. Ft. of warehouse space located in that certain
building owned by Lessor located at 4309 Distribution Avenue, Chattanooga,
TN, (the "Premises") upon the following TERMS and CONDITIONS:
1. TERM: The term hereof shall commence on or about April 1, 1998 and
expires July 1, 1998 (the "Initial Term"); provided, however, Lessee
shall have the right to terminate this Lease at anytime upon 30 days
prior written notice thereof to Lessor. In the event the Lease is
not terminated prior to expiration of the initial term or if Lessee
does not deliver written notice to Lessor of its election not to
renew this Lease, the term thereof shall automatically renew on a
month-to-month basis upon expiration of the initial term subject to
the terms hereof, and subject to the right of either party
thereafter to terminate the Lease subject to 30 days prior written
notice. Rent for partial month shall be prorated.
2. RENT: Rent shall be a gross payment of $25,000 per month calculated
a $0.25 per S.F. times 100,000 S.F. per month, which shall include
all real estate taxes, insurance and all other charges except as
provided in paragraph 11 and paragraph 12. All rents shall be paid
to Owner or his authorized agent, at the following address: P.O. Box
1607, Chattanooga, Tennessee 37401, or at such other places as may
be designated by Owner from time to time.
3. USE: Distribution shall be defined as warehousing, light assembly
and product distribution.
4. USE PROHIBITED: Lessee shall not use any portion of the Premises
for purposes other than those specified hereinabove, and no use
shall be made or permitted to be made upon the Premises, nor acts
done, which will increase the existing rate of insurance upon the
Premises, or cause cancellation of insurance policies covering said
Premises. Lessee shall not conduct or permit any sale by auction on
the Premises.
5. ASSIGNMENT AND SUBLETTING: Lessee shall not assign this Lease or
sublet any portion of the Premises without prior written consent of
the Lessor, which shall not be unreasonably withheld. Any such
assignment or subletting without consent shall be void and, at the
option of the Lessor, may terminate this Lease.
"Notwithstanding the foregoing; Lessor in executing this Lease
acknowledges that Lessee has assigned or may assign its right, title
and
<PAGE>
interest under this Lease as security for financing provided to
Lessee by one or more lenders. Notwithstanding any other provisions
contained in this Lease, Lessor consents to the collateral
assignment of this Lease to such lenders or their agents, for the
benefit of the lenders. Unless and until such lenders give notice to
the undersigned of their intention to succeed to the rights of Lease
under this Lease, the lenders shall not be obligated to perform any
of the obligations of Lessee under the Lease."
6. ORDINANCES AND STATUTES: Lessee shall comply with all statutes,
ordinances and requirements of all municipal, state and federal
authorities now in force, or which may hereafter be in force,
pertaining to the Premises, and the use thereof by Lessee. The
commencement of pendency of any state or federal court abatement
proceeding affecting the use of the Premises shall, at the option of
the Lessor, by deemed a breach thereof.
7. MAINTENANCE, REPAIRS, ALTERATIONS: Lessee acknowledges that the
Premises are in good order and repair, unless otherwise indicated
herein, Lessee shall, at its own expense and at all times, maintain
the Premises in good and safe condition, normal wear and tear
expected, including plate glass, electrical wiring, plumbing and
heating installations and any other system or equipment which serves
solely the Premises and shall surrender the same, at termination
hereof, in as good condition as received, normal wear and tear
expected. Lessee shall be responsible for all repairs required for
the Premises as specified herein, excepting the rood, exterior
walls, structural foundations, which shall be maintained by Lessor
and any repairs to the Premises required due to the negligence or
willful misconduct of Lessor or Lessor's Employees or Agents or
which result due to the failure of Lessor to comply with its
obligation pursuant hereto. Lessee shall also maintain in good
condition such portions adjacent to the Premises, such as sidewalks,
driveways, lawns and shrubbery, which would otherwise be required to
be maintained by Lessor. All other maintenance obligations not
otherwise assumed by Lessee shall be the responsibility of Lessor.
No improvement or alteration of the Premises shall be made without
the prior written consent of the Lessor which consent shall not be
unreasonably withheld. Prior to the commencement of any substantial
repair, improvement, or alteration, Lessee shall give Lessor at
least two (2) days written notice in order that Lessor may post
appropriate notices to avoid any liability for liens.
Lessee shall not commit any waste upon the Premises, or any nuisance
or act which may disturb the quiet enjoyment of any Lessee in the
building.
8. ENTRY AND INSPECTION: Lessee shall permit Lessor or Lessor's agents
enter upon the Premises at reasonable times and upon reasonable
notice, for the purpose of inspecting the same, and will permit
Lessor at any time within sixty (60) days prior to the expiration of
this Lease, to place upon the Premises any usual "To Let" or "For
Lease" signs, and permit persons
<PAGE>
desiring to Lease the same to inspect the Premises thereafter.
9. INDEMNIFICATION OF LESSOR: Lessor shall not be liable for any
damage or injury to Lessee, or any other person, or to any Premises,
occurring on the Premises or any part thereof, and Lessee agrees to
hold Lessor harmless from any claims for damages; provided however,
such indemnification obligations shall not apply to claims for
damages or injuries which are attributed to the act or negligence of
Lessor or Lessor's Agents or Employees.
10. POSSESSION: If Lessor is unable to deliver possession of the
Premises at the commencement hereof, Lessor shall not be liable for
any damage caused thereby, nor shall this Lease be void or
voidable, but Lessee shall not be liable for any rent until
possession is delivered. Lessee may terminate this Lease at anytime
if possession is not delivered within 1 days of the commencement of
the term hereof without further obligations hereunder.
11. INSURANCE: Lessee, at its expense, shall maintain plate glass and
public liability insurance including bodily injury and Premises
damage insuring Lessee and Lessor with minimum coverage as follows:
$1,000,000.00
Lessee shall provide Lessor with a Certificate of Insurance showing
Lessor as additional insured. The Certificate shall provide for a
ten-day written notice to Lessor in the event of cancellation or
material change of coverage.
To the maximum extent permitted by insurance policies which may be
owned by Lessor or Lessee, Lessee and Lessor, for the benefit of
each other, waive any and all rights of subrogation which might
otherwise exist.
12. UTILITIES: Lessor shall be responsible for all gas and water
service utilities. Lessee shall be responsible for all electricity
service which shall be paid by Lessor and billed back to Lessee
without additional charges. Lessee shall pay a quarterly fee for
fire service charged by Tennessee-American Water Company for the
Premises on a pro rata share of such fee based upon the square
footage of the Premises. The fire service charge will be paid to
Tennessee-American Water Company by Lessor and billed back to Lessee
without additional charges. Lessor will complete installation of
burglary protection by ADT at Lessor's expense and Lessee will pay
monthly charges for ADT service.
13. SIGNS: Lessor reserves the exclusive right to the roof, side and
rear walls of the Premises. Lessee shall not construct
any projecting sign or awning without the prior written consent of
Lessor which consent shall not be unreasonably withheld.
14. ABANDONMENT OF PREMISES: Lessee shall not vacate or abandon the
<PAGE>
Premises at any time during the term hereof, and if Lessee shall
abandon or vacate the Premises, or be dispossessed by process, of
law, or otherwise, any personal Premises belonging to Lessee left
upon the Premises shall be deemed to be abandoned at the option of
Lessor.
15. CONDEMNATION: If any part of the Premises shall be taken or
condemned for public use, and a part thereof remains which is
susceptible of occupation hereunder, this Lease shall, as to the
part taken, terminate as of the date the condemnor acquires
possession, and thereafter Lessee shall be required to pay such
proportion of the rent for the remaining term as the value of the
Premises remaining bears to the total value of the Premises at the
date of condemnation; provided however, the Lessor may at its
option, terminate this Lease as of the date the condemnor acquires
possession. In the even that the deemed Premises are condemned in
whole, or that such portion is condemned that the remainder is not
susceptible for use hereunder, this Lease shall terminate upon the
date of such taking. All sums which may be payable on account of any
condemnation shall belong to the Lessor, and Lessee shall not be
entitled to any part thereof, provided however, that Lessee shall be
entitled to retain any amount awarded to it or its trade fixtures or
moving expenses.
16. TRADE FIXTURES: Any and all improvements made to the Premises
during the term hereof shall belong to the Lessor, except trade
fixtures of the Lessee. Lessee may, upon termination hereof remove
all his trade fixtures, but shall repair or pay for all repairs
necessary for damages to the Premises occasioned by removal, normal
wear and tear expected.
17. DESTRUCTION OF PREMISES: In the event of a partial destruction of
the Premises during the term hereof, from any cause, Lessor shall
forthwith repair the same, provided that such repairs can be made
within thirty (30) days under existing governmental laws and
regulations, but such partial destruction shall not terminate this
Lease, except that Lessee shall be entitled to a proportionate
reduction of rent while such repairs are being made, based upon the
extent to which the making of such repairs shall interfere with the
business of Lessee on the Premises. If such repairs cannot be made
within said sixty (60) days, Lessor, at its option, may make the
same within a reasonable time, this Lease continuing in effect with
the rent proportionately abated as aforesaid, and in the event that
Lessor shall not elect to make such repairs which cannot be made
within thirty (30) days, this Lease may be terminated at the option
of either party.
In the event that the building in which the Premises may be situated
is destroyed to an extent of not less than one-third of the
replacement costs thereof, Lessor may elect to terminate this Lease
whether the Premises be injured or not. A total destruction of the
building in which the Premises may be situated shall terminate this
Lease.
18. INSOLVENCY: In the event a receiver is appointed to take over the
business
<PAGE>
of Lessee, or in the event Lessee makes a general assignment for the
benefit of creditors, or Lessee takes or suffers any action under
any insolvency or bankruptcy act, the same shall constitute breach of
this Lease by Lessee.
19. REMEDIES OF OWNER ON DEFAULT: In the event of any breach of this
Lease by Lessee, Lessor may, at its option, terminate the Lease and
recover from Lessee: (a) the worth at the time of award of the
unpaid rent which was earned at the time of termination; (b) the
worth at the time of award of the amount by which the unpaid rent
which would have been earned after termination until the time of the
award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided: and (c) the worth at the time of
award of the amount by which the unpaid rent for the balance or the
term after the time of award exceeds the amount of such rental loss
that Lessee proves could be reasonably avoided.
Lessor may, in the alternative, continue this Lease in effect, as
long as Lessor does not terminate Lessee's right to possession, and
Lessor may enforce all his rights and remedies under the Lease,
including the right to recover the rent as it becomes due under the
Lease. If said breach of Lease continues, Lessor may, at any time
thereafter, elect to terminate the Lease.
Nothing contained herein shall be deemed to limit any other rights
or remedies which Lessor may have.
20. SECURITY: The security deposit set forth above, if any, shall
secure the performance of the Lessee's obligations hereunder Lessor
may, but shall not be obligated to apply all or portions of said
deposit on account or Lessee's obligations hereunder. Any balance
remaining upon termination shall be returned to Lessee. Lessee shall
not have the right to apply the Security Deposit in payment of the
last month's rent.
21. DEPOSIT REFUNDS: The balance of all deposits shall be refunded
within two weeks from date possession is delivered to Owner or
authorized Agent, together with a statement showing any charges made
against such deposits by Owner.
22. ATTORNEY'S FEES: In case suit should be brought for recovery or the
Premises, or for any sum due hereunder, or because of any act which
may arise out of the possession of the Premises, by either party,
the prevailing party shall be entitled to all costs incurred in
connection with such action, including a reasonable attorney's fee.
23. WAIVER: No failure of Lessor to enforce any term hereof shall be
deemed to be a waiver.
24. NOTICES: Any notice which either party may or is required to give,
shall be
<PAGE>
given by mailing the same, postage prepaid, to Lessee at the
Premises, or Lessor at the address shown below, or at such other
places as may be designated by the parties from time to time.
25. TIME: Time is of the essence of this Lease.
26. HEIRS, ASSIGNS, SUCCESSORS: This Lease is binding upon and inures
to the benefit of the heirs, assigns and successors in interest to
the parties.
27. SALES TAX: In the event that any federal, state or local law is
passed during the term of this Lease on any extension or extensions
thereof, requiring the payment of a sales tax based on the amount
of rent to be paid by the Lessee under this Lease or in any manner
subjecting the rent provided in this Lease to any form of sales tax
by whatever name it may be designated such tax shall be the
obligation of and shall be paid Lessee as specified in this Lease.
28. LESSOR'S LIABILITY: The term "Lessor", as used in this paragraph,
shall mean only the owner of the real Premises or a Lessee's
interest in a ground Lease of the Premises. In the event of any
transfer of such title or interest, the Lessor named herein (or the
grantor in case of any subsequent transfers) shall be relieved of
all liability related to Lessor's obligations to be performed after
such transfer. Provided, however, that any funds in the hands of
Lessor or Grantor at the time of such transfer shall be delivered to
Grantee. Lessor's aforesaid obligations shall be binding upon
Lessor's successors and assigns only during their respective periods
of ownership.
29. ESTOPPEL CERTIFICATE:
(a) Lessee shall at any time upon not less than ten (10) days' prior
written notice from Lessor execute, acknowledge and deliver to
Lessor a statement in writing (1) certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating
the nature of such modification and certifying that this Lease, as
so modified, is in full force and effect), the amount of any
security deposit, and the date to which the rent and other charges
are paid in advance, if any, and (2) acknowledging that there are
not, to Lessee's knowledge, any uncured defaults on the part of
Lessor hereunder, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any
prospective purchaser or encumbrance to the Premises.
(b) At Lessor's option, Lessee's failure to deliver such statement
within such time shall be a material breach of this Lease or shall
be conclusive upon Lessee (1) that this Lease is in full force and
effect, without modification except as may be represented by Lessor,
(2) that there are no uncured defaults in Lessor's performance, and
(3) that not more than one month's rent has been paid in advance or
such failure may be considered by Lessor as a default by Lessee
under this Lease.
<PAGE>
30. HAZARDOUS MATERIALS - LESSOR'S PRIOR CONSENT:
Notwithstanding anything contained in this Lease to the contrary,
Lessee shall not cause or permit any Hazardous Materials to be
brought upon, kept, stored, discharged, released or used in, under
or about the Premises by Lessee, its agents, employees, contractors,
subcontractors, licensees or invitees, unless Hazardous Materials
are used, and stored in a manner that complies with all OSHA
regulations concerning handling and storage of hazardous materials.
31. Lessee shall have quiet enjoyment of the Premises during term of
this Lease provided all covenants of the Agreement are adhered to.
32. Lessor shall indemnify and hold Lessee harmless from and against all
claims, liabilities, damages, penalties and fines attributable or
arising out of the presence of environmental contamination at the
Premises or the property upon which the Premises are located which is
the result of the activities, actions or negligence of parties
other than Lessee or which results from the violation of any
federal, state or local statute, regulation or ordinances applicable
to the environment (The "Environment Laws") by a party other than
Lessee. Lessor represents and warrants that it is unaware of the
presence of any environmental contamination at the Premises or the
property upon which the Premises is located or the violation of any
Environment Laws.
ENTIRE AGREEMENT: The foregoing constitutes the entire agreement between
the parties and may be modified only by a writing signed by both parties.
The parties' execution hereof:
ACCEPTANCE
Chattem, Inc. Kenco Group, Inc.
By: /s/ A. ALEXANDER TAYLOR By: /s/ SAM SMART
---------------------------- ----------------------------
Title: Pres. Title: V.P./Sec
------------------------- -------------------------
522 N. 31st St
Address: 1715 W 38th St. Address: P.O. Box 1607
------------------------ ------------------------
Chattanooga, TN 37409 Chattanooga, TN 37401
------------------------ ------------------------
Phone: (423) 821-2037 x 281 Phone: 423-757-7574
------------------------ ------------------------
<PAGE>
EXHIBIT 11
CHATTEM, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 1996
-------- -------- ----------
NET INCOME:
Income before extraordinary loss ......... $ 18,128 $ 7,255 $ 3,804
Extraordinary loss ....................... (2,859) (1,370) (532)
-------- -------- ----------
Net income ........................ $ 15,269 $ 5,885 $ 3,272
======== ======== ==========
COMMON SHARES:
Weighted average number outstanding ...... 9,374 8,793 8,052
Number issued upon assumed exercise of
of outstanding stock options and stock
warrants ............................... 361 330 91
-------- -------- ----------
Weighted average number of common and
common equivalent shares 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
======== ======== ==========
<PAGE>
Exhibit 13
Message from Zan Guerry
Chairman and CEO of Chattem
Last year I reported to you that 1997 was quite simply the best year in
Chattem's 119 year history. Led by two large acquisitions, a 56% increase in
diluted earnings per share before product divestitures and extraordinary
items and strong performances from several key brands, 1998 quickly replaced
1997 as the greatest year in our history.
These two amazing years are the result of major accomplishments by our
managers, our strong advertising support for our brands, the continued success
of our acquisition program and no small dose of good fortune.
1998 HIGHLIGHTS
1998 could well be labeled the year of acquisitions. During the
calendar year we acquired BAN, DEXATRIM, ASPERCREME, SPORTSCREME, CAPZASIN-H
and -HP, and ARTHRITIS HOT, which had combined annual sales of approximately
$150 million, which is more than our total sales for 1997. Included in this
year's results are eight months of BAN sales but none for the other brands
which we acquired just after our fiscal year end. For 1999, we will have a
full year of BAN and eleven months of the other brands which means total
sales should exceed $300 million.
Specifically, for 1998, sales rose 54% to $220 million while diluted
earnings per share, before product divestitures and extraordinary items,
increased 56% to $1.25. Our earnings per share for the last four years are
$.32, $.47, $.80 and $1.25, which represent a compound annual growth rate of
57%. Given a forecasted increase in earnings per share of about 80% for
1999, this is truly a remarkable period of dynamic growth for Chattem.
For 1998, this growth was led by BAN, a full year of SUNSOURCE and strong
performances from GOLD BOND, PAMPRIN, GARLIQUE and BULLFROG.
In addition to these accomplishments, we continue to invest in our
brands' future by spending approximately 40% of sales behind advertising and
promotional programs to build market share.
1999: THE MOMENTUM CONTINUES
Even more important than the strong 1998 results, I am excited to report
to you our great enthusiasm for 1999. We have numerous major initiatives for
our brands which hopefully will continue our momentum. These programs
include the first full year of GOLD BOND Medicated Lotion; the launch of GOLD
BOND Triple Antibiotic Ointment; dynamic new BAN packaging plus two new BAN
products; the introduction of REPOSE, a new SUNSOURCE product; and the launch
of FLEXALL QUIKGEL and PHISODERM 4 Way Daily Acne Cleanser. Finally, we will
have new advertising campaigns for our newly acquired brands, DEXATRIM,
SPORTSCREME, ASPERCREME and CAPZASIN-P and -HP.
Overall 1999 will be a tremendously challenging and exciting year as it
represents an unprecedented year of new products. The following are some
brief highlights of these introductions:
GOLD BOND Medicated Lotion was introduced in mid-1998 with advertising
starting in the Fall. From the start we have had great expectations for
GOLD BOND Medicated Lotion. It was the most extensively researched product
introduction in our history and all research showed outstanding potential of
a $25 million plus brand. We are entering the major category of hand and
body lotion with a unique point of difference in terms of itch relief and
skin protection. We have launched this product with annual advertising and
promotion spending measuring in excess of $15 million. So far our
expectations for this exciting product are coming through. Although it is
still early, retail sales data supports a major success.
<PAGE>
BAN will have a brand new look in 1999 with dynamic new packaging that will
significantly increase the presence of BAN at retail. In addition, we will
launch two significantly unique new products, BAN Ultra Dry Roll-On and BAN
Ultra Dry Stick. The Ultra Dry Roll-On will be the first roll-on to go on dry.
Ultra Dry Stick will be the only stick deodorant that goes on dry and is clear.
REPOSE Stress Relief Formula could be the most exciting herbal introduction
by SUNSOURCE. With 75% of Americans suffering from stress and stress related
symptoms, the market is huge. REPOSE brings a multidimensional formula to
stress relief. REPOSE contains kava and magnesium for rapid relaxation and
assorted vitamins, minerals and herbs for longer term relief. REPOSE will be
backed by a major multimillion dollar marketing campaign starting this summer.
FLEXALL QUIKGEL represents a truly breakthrough technology in the topical
analgesic category. The product is completely greaseless and vanishes quickly
while promoting fast pain relief, and will be supported by commercials
featuring football star Joe Montana.
Other new products to be launched in 1999 are PHISODERM 4 Way Daily Acne
Cleanser, an opportunity to extend the well known PHISODERM name into the acne
category; SUN-IN Super Streaks, a unique new form to deliver SUN-IN highlights
in a gel form; and MUDD Aromatherapy Deep Cleanser, a revolutionary self
heating product; BULLFROG MAGICBLOCK, a disappearing color sun block which
should increase BULLFROG'S share of the exciting, fast growing children's
sunblock segment; and GOLD BOND Triple Antibiotic Ointment which affords an
opportunity to leverage the unique itch relief heritage of GOLD BOND in the
first aid category.
<PAGE>
STRATEGIC PERSPECTIVE
The last several years have elevated Chattem to a new level. Our goal
is to take advantage of our increased size and financial capabilities. We
have proven that we can make sizable acquisitions and assimilate them with
significant positive impact on earnings per share.
During the early part of 1999 we will be digesting our recent acquisitions
and focusing on new product launches. However, by mid-year we should be
aggressively looking for significant acquisition opportunities to move toward
$500 million in sales.
The remarkable results achieved in 1998 and the exciting prospects for 1999
could not be achieved without the equally remarkable effort of our people. We
ask much of all of our employees, particularly when we make an acquisition or
launch a new brand. We have been able to achieve our strong growth without any
significant increase in headcount, as evidenced by selling, general and
administrative expense margin which has declined from 21% to 12% over the past
four years. I am indebted to each of our employees for their dedication to our
business.
<PAGE>
CHATTEM CONSUMER PRODUCTS
DOMESTIC PRODUCT OVERVIEW
OTC HEALTH CARE PRODUCTS
MEDICATED SKIN PRODUCTS
GOLD BOND is America's number one medicated powder brand in the $65 million
powder category and has successfully extended beyond its flagship Medicated
Body Powder line into other skin care segments. GOLD BOND Cream is one of
the fastest growing brands in the $170 million anti-itch cream market.
Introduced in 1997, both GOLD BOND Foot Powder and GOLD BOND Cornstarch Plus
Medicated Baby Powder have added incremental sales to the franchise. In
mid-1998, GOLD BOND entered the $1 billion hand and body lotion category with
GOLD BOND Medicated Body Lotion, a unique product that shows promise for
significant growth. Looking to 1999, the Company plans to further expand the
franchise with the introduction of GOLD BOND Triple Antibiotic Ointment.
GOLD BOND will continue to benefit from record levels of advertising and
promotional support.
<PAGE>
TOPICAL ANALGESICS
The Company competes in the $217 million topical analgesic category with its
FLEXALL and ICY HOT brands. On December 21, 1998, after the end of the fiscal
year, Chattem acquired the ASPERCREME, SPORTSCREME, CAPZASIN-P, CAPZASIN-HP and
ARTHRITIS HOT topical analgesics from Thompson Medical Company, Inc. As a
result of this acquisition, Chattem will be the leader in the external analgesic
category with approximately a 38% share, compared to an approximately 20% share
for the next closest competitor. BENZODENT competes in the $62 million internal
irritation segment of the topical oral analgesic category.
FLEXALL is an aloe-based topical analgesic clinically proven to provide long
lasting relief for arthritis and other muscle and joint pain. The brand's
current product line includes Original Vitamin E Enriched and Maximum Strength
FLEXALL, which contain menthol, as well as Ultra Plus which contains three
active ingredients: menthol, methyl salicylate and camphor. In 1999, a new
line extension will be added with the introduction of FLEXALL QUIKGEL. The
product is completely greaseless and vanishes quickly while promoting fast pain
relief. The entire FLEXALL line will be supported by a new advertising campaign
featuring Joe Montana.
ICY HOT offers the most complete product form line-up in the category with a
cream, a balm and the unique CHILL STICK. Further, consumer research continues
to indicate that the brand's distinctive Icy and Hot Therapy for Pain
positioning enjoys high awareness and is viewed as the most compelling in the
category.
BENZODENT, a topical oral analgesic, is the only brand positioned to be
applied directly to dentures to relieve pain. The product contains the
maximum amount of benzocaine allowable and is widely recommended by dentists.
Marketing efforts are focused on providing samples to consumers when they
are initially fitted for dentures, the point of entry for the category.
INTERNAL ANALGESICS
The Company competes in the $65 million menstrual pain relief category with its
PAMPRIN and PREMSYN PMS brands. NORWICH aspirin competes in the general
analgesics category.
PAMPRIN and PREMSYN PMS combined outsell any other OTC premenstrual internal
analgesic in the market based on units sold. PAMPRIN, the number two brand in
the menstrual analgesics category, is a combination drug specifically designed
for relief of menstrual symptoms. Multi-symptom PAMPRIN effectively relieves
multiple menstrual discomforts with three active ingredients. Maximum Pain
Relief PAMPRIN is formulated to provide superior cramp relief and is the only
cramp relief product with two pain relievers. Maximum Strength PREMSYN PMS,
the third largest brand in the category, effectively relieves the physical and
emotional symptoms of PMS.
NORWICH, a high-quality, reasonably priced aspirin, complements Chattem's
other OTC healthcare products. This brand principally focuses its sales and
marketing support in the northeast, midwest and west coast.
<PAGE>
Chattem competes in the $32 million cold sore market with HERPECIN-L. In 1998
three major new initiatives were undertaken: the stick product was
reformulated, a jar line extension was launched and a national radio
advertising plan was begun. The new stick and jar contain a skin protectant
and several sun block ingredients. Since the middle of 1998 sales of this
brand have increased 19%.
DIETARY SUPPLEMENTS
The Company competes in the U.S. nutritional supplement category with its
SUNSOURCE products: GARLIQUE, HARMONEX, REJUVEX, PROPALMEX, ECHINEX,
MELATONEX and its newest product, REPOSE Stress Relief Formula. These
products are distributed primarily through the food, drug and mass
merchandiser trade channels.
GARLIQUE holds a 16% share of the $87 million garlic category, and is
presently the number one selling product in the category. Clinical research
on the benefits of garlic support the position of GARLIQUE as a dietary
supplement for good cardiovascular health. Larry King is the spokesperson for
radio advertising of GARLIQUE.
HARMONEX is a unique combination of two herbs: St. John's Wort for emotional
well-being and Siberian ginseng for physical well-being. HARMONEX competes in
the St. John's Wort category now selling at the rate of $130 million per
year. HARMONEX is supported by strong consumer advertising and a public
relations campaign. HARMONEX is presently the number three selling product in
the St. John's Wort category, holding a 6.2% share.
REJUVEX is uniquely positioned to support menopausal comfort and healthy
bones for women in the pre- and post-menopausal age group. REJUVEX is a
unique natural formula containing a combination of magnesium, vitamins,
anti-oxidants and other important nutrients, which help meet the changing
nutritional needs of women.
<PAGE>
PROPALMEX, the top selling brand in the $32 million saw palmetto herbal
category, holds a 11% share, and is positioned to support prostate health and
free urinary flow in men over 40. PROPALMEX is the all-natural, drug-free
approach to maintenance of a healthy prostate.
ECHINEX is a standardized herbal complex of echinacea, ginger and Siberian
ginseng. This unique and effective combination is positioned to support natural
resistance against infection. ECHINEX is a seasonal product that provides added
protection during times of high risk for colds and flu.
The newest addition to the SUNSOURCE line of herbal products is REPOSE Stress
Relief Formula. REPOSE blends kava and magnesium for relaxation with
revitalizing Siberian ginseng to help the body deal with stress effectively.
Vitamins B and C complete the formula by replenishing nutrients that are lost
due to stress. REPOSE will be shipped to the trade in April 1999 and will be
supported by a powerful media and public relations campaign.
The Company competes in the $38 million melatonin category with
MELATONEX, the third largest melatonin brand. The brand is positioned to
support a natural sleep cycle and holds a 10% share of the category. The
product uses a unique time-release delivery system, releasing melatonin as
the body does, gradually, while you sleep. Each tablet of MELATONEX is
scored so it can easily be divided to provide the desired dosage that
consumers are looking for.
The Company also competes in the homeopathic category with its line of SUNSOURCE
Traditional Homeopathic Medicines. Sales of homeopathic products through mass
trade channels total $33 million, up 33% from the previous year. SUNSOURCE holds
a 7% share of the category.
The Company plans to continue the expansion of the SUNSOURCE line of products,
and is presently evaluating new product opportunities for future introduction.
TOILETRIES AND SKIN CARE
ANTIPERSPIRANTS AND DEODORANTS
The Company competes in the $1.7 billion antiperspirant and deodorant category
with BAN. BAN was acquired from Bristol-Myers Squibb Company in March
1998. Originally introduced in 1955, BAN is the number one roll-on brand in the
United States. BAN provides advanced protection from odor and wetness with five
forms - Original Roll-On, Clear Roll-On, White Solid Stick, Clear Solid Stick
and the revolutionary Clear Soft Solid.
The Company believes BAN represents a major growth opportunity and has developed
a strong 1999 marketing plan. A comprehensive business-building consumer
promotion plan has been developed for 1999, as the antiperspirant and deodorant
category responds well to promotion. Two major line extensions are being
introduced:
* Ultra Dry Roll-On, which is quick drying and non-sticky. This product
should help strengthen the number one share of market in the roll-on
business that BAN currently enjoys.
* Ultra Dry Solid Stick, which goes on clear and keeps you dry. While the
solid stick segment of the category represents over 60% of sales, there
are no other ultra dry sticks that go on clear.
BAN is being repackaged in the spring of 1999 to provide a more consistent and
contemporary image and an improved shelf presence. As a complement to its
strong 1999 marketing plan, BAN will be supported with a record breaking level
of national television and radio advertising that is comparable with the levels
of the market leaders.
FACIAL CLEANSERS AND MASQUES
Within the skin care category, the Company competes in the $480 million facial
cleanser category with its PHISODERM brand and in the $30 million facial masque
sub-segment with MUDD Spa Treatment Masque products.
PHISODERM is a specialty facial cleanser positioned as the daily prescription
for healthy skin. The dermatologist developed, pH balanced formulas are
available in four different varieties of liquid, a bar product and a
cleansing puff product. The liquids are available in Normal to Dry, Normal
to Oily, Sensitive Skin and for Baby. In 1998 PHISODERM facial cleansers
drove consumer awareness as well as solid sales growth through a year round
testimonial radio campaign. The effort allowed PHISODERM to claim the
dominant share of voice for facial cleansers on radio and laid the groundwork
for expansion in 1999. In 1999 PHISODERM will introduce contemporary
packaging and two line extensions: PHISODERM 4 Way Daily Acne Cleanser,
which will compete in the $80 million acne cleanser category, and the new
PHISODERM Kids Bar which targets toddlers with a PHISODERM quality bar in a
playful, floatable animal soap dish.
In 1998 MUDD focused advertising on promoting its revolutionary 5 Minute
Masque in print ads in women's magazines. In 1999 MUDD plans two key
initiatives: a permanent bonus size in bold new packaging and the new MUDD
Aromatherapy Self-Heating Deep Cleanser.
SEASONALS
The Company competes in three seasonal product categories: suncare, spray-on
hair lighteners and chlorine removal haircare. The Company competes in the $285
million suncare category among products with a sun protection factor (SPF) of
greater than 15 with the BULLFROG Sunblock line. SUN-IN competes in the $12
million spray-on hair lightener category, while ULTRASWIM Shampoo, Conditioner,
Soap and Shower Gel dominate the small chlorine removal category.
BULLFROG Sunblock is positioned as the ultimate waterproof sunblock and is an
essential sun protection product for an outdoor active lifestyle. BULLFROG
Sunblock products are available in ten unique gels and lotions and provide
all-day protection in or out of the water. In 1998 BULLFROG enjoyed its
strongest year ever as a result of strong support by several accounts.
Across all classes of trade, BULLFROG was the fastest growing high protection
sunblock, charting retail sales growth in excess of 19%. In 1998, growth
was also fueled by the introduction of BULLFROG for Babies SPF 45 and
BULLFROG SUPERBLOCK SPF 45. In 1999 BULLFROG will continue the momentum with
the introduction of BULLFROG MAGICBLOCK SPF 30, a disappearing green lotion
product, and BULLFROG QUIK STICK SPF 36, which is the highest protection
product in the lipcare sub-segment of the sun protection category. BULLFROG
drives consumer awareness with national radio advertising during an expanded
summer schedule.
<PAGE>
SUN-IN, which is available in three formulas (Super, Super With Lemon, and for
Men), enjoyed renewed interest by consumers in the spray-on category and strong
brand growth. In 1998, SUN-IN introduced dramatic new packaging that accented
its leading position in the category and a promotional buy-one-get-one-free
pack. Both efforts were successful in growing sales by almost 20% at retail.
In 1999, SUN-IN will capitalize on new levels of consumer interest with an
innovative line extension: SUN-IN Super Streaks, a hair highlighter in a clear
gel base. SUN-IN Super Streaks will be advertised through seasonal teen radio
advertising.
ULTRASWIM has been the gold standard for chlorine removal from hair and skin
since its introduction in the early 1980's. The ULTRASWIM product line includes
shampoo, conditioner, soap and shower gel. In 1998, ULTRASWIM retained its
leadership position and achieved solid retail sales growth despite a major
competitive product launch. The key elements of the 1998 program were the
introduction of a sporty new bottle and package graphics, reformulation of the
shampoo and conditioner as ULTRASWIM Shampoo Plus and ULTRASWIM Ultra Repair
Conditioner. A targeted print advertising campaign to competitive, fitness and
recreational swimmers was also continued in 1998. Sampling and event marketing
are additional ongoing efforts driving awareness of the ULTRASWIM brand.
INTERNATIONAL MARKET OVERVIEW
EUROPE
Chattem's European business is conducted through Chattem (U.K.) Limited, a
wholly-owned subsidiary located in Basingstoke, Hampshire, England. This
unit also services distributors in Australia and the Middle East.
Manufacturing and packaging of the products is performed principally in the
U.K. with a limited number of ingredients purchased from Chattem. Chattem
(U.K.) employs its own sales force in the United Kingdom while exclusive
distributors are used to market and sell its products on the Western European
Continent. Due to the difficulty and expense involved in the registration of
OTC pharmaceuticals in Europe, the unit markets exclusively the Company's
toiletry and skin care products. Chattem's products in Europe include
SUN-IN, a range of MUDD face and body products, and ULTRASWIM. CORNSILK is
sold under a licensing arrangement with another company. SPRAY BLOND Spray-In
Hair Lightener is only marketed on the continent.
<PAGE>
CANADA
Chattem (Canada) Inc. is a wholly-owned subsidiary based in Mississauga, Ontario
which markets and distributes Chattem's consumer products throughout Canada.
The manufacturing of the brands is principally done in the Company's facilities
in Chattanooga while some packaging takes place in Mississauga. The division
utilizes a national broker for its sales efforts. Brands marketed and sold in
Canada include BAN, GOLD BOND, PAMPRIN, FLEXALL, MUDD, SUN-IN, ULTRASWIM and
PHISODERM.
U.S. EXPORT
The U.S. Export division services various distributors primarily located in the
Caribbean and Central and South America. The Company sells BAN, ICY HOT, GOLD
BOND, PAMPRIN, MUDD, and PHISODERM into these markets with the primary focus
being the development of its OTC healthcare products.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
should be read in conjunction with the audited consolidated financial statements
and related notes thereto included elsewhere in this Annual Report.
GENERAL
Fiscal 1998 was highlighted by the purchase of BAN, the issuance of $200,000,000
of senior subordinated notes, the sale of CORNSILK and the acquisition of
certain products from Thompson Medical Company, Inc. and related refinancing of
senior debt that occurred shortly after the end of Company's 1998 fiscal year.
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 $165,000,000, 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.
<PAGE>
Also on March 24, 1998, the Company issued at par value $200,000,000 of 8.875%
Senior Subordinated Notes due 2008 (the "Notes") and entered into an amended and
restated senior secured bank credit agreement. The proceeds of the Notes
offering were used to fund the BAN purchase and related fees and expenses, repay
revolving bank indebtedness and provide additional working capital.
On May 12, 1998, the Company sold the CORNSILK oil control makeup brand to Del
Laboratories, Inc. for $10,750,000 plus inventories and the assumption of
certain liabilities. The Company sold, at a gain of $9,548,000, 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.
<PAGE>
During the year ended November 30, 1998, the Company prepaid previously
outstanding long-term bank debt and a portion of its 12.75% Senior Subordinated
Notes. In connection with the prepayment of those borrowings, the Company
recorded an extraordinary loss of $2,859,000 (net of income taxes), or $.29 per
share. The loss primarily related to the write-off of debt issuance costs.
The Company experienced an increase in net sales, operating income and income
before extraordinary loss for the year ended November 30, 1998. Net sales
increased $76,829,000, or 53.6%, to $220,064,000 from $143,235,000 in 1997.
Operating income increased $19,716,000, or 77.3%, to $45,219,000 from
$25,503,000 in 1997. Income before extraordinary loss increased $10,873,000, or
149.9%, to $18,128,000 from $7,255,000 in 1997. Net income, which includes
extraordinary charges of $2,859,000 and $1,370,000 in 1998 and 1997,
respectively, relating to the early extinguishment of debt in those respective
years, increased $9,384,000, or 159.5%, to $15,269,000 from $5,885,000 in
fiscal year 1997.
In fiscal year 1998, earnings per share before extraordinary loss increased
$1.06, or 132.5%, to $1.86 while earnings per share after the extraordinary loss
increased $.92, or 141.5%, to $1.57 when compared to the 1997 fiscal year.
<PAGE>
The results of operations for fiscal year 1998 reflect a full year of operations
of the SUNSOURCE product line, which was acquired in mid-1997, approximately
eight months' operations of the BAN brand, which was purchased in March 1998 and
approximately five and one half months of the CORNSILK brand, which was sold in
May, 1998.
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
more dependent on acquisitions and the development of successful line
extensions. During the year ended November 30, 1998, new additions to the
GOLD BOND (Medicated Lotion), BULLFROG (for Babies and SUPERBLOCK SPF45),
HERPECIN-L (jar lip balm) and SUNSOURCE (HARMONEX) product lines were
introduced.
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:
<PAGE>
YEAR ENDED NOVEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
NET SALES 100.0% 100.0% 100.0%
------ ------ ------
COST AND EXPENSES:
Cost of sales 27.7 27.4 29.5
Advertising and promotion 39.3 39.2 38.3
Selling, general and administrative 12.4 15.6 18.2
------ ------ ------
Total costs and expenses 79.4 82.2 86.0
------ ------ ------
INCOME FROM OPERATIONS 20.6 17.8 14.0
------ ------ ------
OTHER INCOME (EXPENSE):
Interest expense (12.1) (11.1) (11.3)
Investment and other income .4 1.2 1.2
Gain on product divestitures 4.3 -- .8
------ ------ ------
Total other income (expense) (7.4) (9.9) (9.3)
------ ------ ------
INCOME BEFORE INCOME TAXES 13.2 7.9 4.7
PROVISION FOR INCOME TAXES 4.9 2.8 1.5
------ ------ ------
INCOME BEFORE EXTRAORDINARY LOSS 8.3% 5.1% 3.2%
====== ====== ======
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales for the year ended November 30, 1998 increased $76,829,000, or 53.6%,
to $220,064,000 from $143,235,000 for the previous fiscal year. The increase
consisted of a $71,787,000, or 56.1%, increase in domestic consumer products
sales from $128,024,000 in 1997 to $199,811,000 in 1998 and an increase of
$5,042,000, or 33.1%, in international sales to $20,253,000 from $15,211,000.
<PAGE>
For domestic consumer products, sales of the BAN, SUNSOURCE and GOLD BOND
products accounted for the majority of the sales increase in 1998. Sales
increases were also realized for the PAMPRIN, SUN-IN and BULLFROG brands. Sales
declines were recognized for FLEXALL, ICY HOT, NORWICH Aspirin, MUDD and
PHISODERM. The remaining domestic brands were basically flat or had modest
declines over the prior fiscal year. All sales variances were largely the
result of changes in the volume of unit sales of the particular brands.
The increase in sales of the GOLD BOND brand was due primarily to the
introduction of the lotion line extension in 1998 and also to growth of the
existing business. The sales increases for the PAMPRIN and BULLFROG product
lines were principally the result of increased marketing expenditures. Also
for the BULLFROG brand, the introduction of two new products and a new major
customer had a favorable impact on that product line's 1998 sales. The BAN
brand was acquired in March 1998 and the SUNSOURCE product line was purchased
in June 1997.
The sales declines for the FLEXALL, ICY HOT, MUDD and PHISODERM brands were
principally the result of decreased advertising and promotional support.
CORNSILK was sold in May 1998. The modest sales declines experienced by certain
of the other domestic products were essentially due to increased competition
in their respective categories, the maturation of these brands and, in
certain cases, reduced marketing expenditures.
<PAGE>
In fiscal 1998, sales for the international consumer products segment increased
$447,000, or 9.2%, for the Canadian operation and $1,808,000, or 19.5%, for the
United Kingdom business. The BAN product line accounted for the majority of the
net sales increase in Canada, while increases were also realized for the
PAMPRIN, SUN-IN and GOLD BOND brands. Sales increases were realized for all of
the product lines marketed by the United Kingdom operation. U.S. export sales
increased $2,787,000, or 264.8%, to $3,839,000 in 1998 to $1,052,000 in 1997,
with essentially all of the increase being associated with the BAN brand. 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 in 1998 was essentially
unchanged at 27.7% versus 27.4% for 1997. Cost of sales was affected by the
full year favorable impact of the SUNSOURCE line which was slightly more than
offset by the unfavorable impact of the BAN acquisition.
Advertising and promotion expenses increased $30,416,000, or 54.1%, to
$86,592,000 in 1998 from $56,176,000 in 1997 and were 39.3% of net sales
compared to 39.2% in 1997. This increase was principally associated with
advertising and promotional expenses incurred in connection with the BAN
product line, acquired in March 1998, a full year of the SUNSOURCE brands
and the introduction of GOLD BOND Lotion. Increases in advertising and
promotion in 1998 were also recorded for the PAMPRIN and BULLFROG brands.
<PAGE>
Selling, general and administrative expenses increased $5,061,000, or 22.7%, to
$27,364,000 in 1998 from $22,303,000 in 1997, but decreased as a percentage of
net sales to 12.4% in 1998 as compared to 15.6% in 1997. This dollar increase
was largely associated with increases in direct selling costs, freight, bad
debts and field sales expenses as a result of increased sales from acquired
brands and associated increases in administrative, financial and legal services.
Interest expense increased $10,742,000, or 67.4%, to $26,676,000 in 1998 from
$15,934,000 in 1997 primarily as a result of increased indebtedness associated
with the BAN product acquisition in March 1998 and the SUNSOURCE brand purchase
in mid-1997. Interest expense is expected to increase in 1999 due to the full
year impact of the higher debt levels associated with product acquisitions.
Until the Company's indebtedness is reduced substantially, interest expense will
continue to represent a significant percentage of the Company's net sales.
Investment and other income decreased $798,000, or 47.5%, to $881,000 in 1998
from $1,679,000 in 1997. The decrease was due primarily to the Company's sale
of a portion of its investment in Elcat, Inc.
A gain of $9,548,000 on the sale of the CORNSILK brand was recognized in 1998.
The provision for income taxes was 37.4% of income before income taxes in 1998
as compared to 35.5% in 1997. See Note 8 of Notes to Consolidated Financial
Statements.
Income before extraordinary loss increased $10,873,000, or 149.9%, to
$18,128,000 in 1998 from $7,255,000 in 1997. This increase resulted primarily
from increased sales and the gain on the sale of the CORNSILK brand.
<PAGE>
FISCAL 1997 COMPARED TO FISCAL 1996
For the year ended November 30, 1997, net sales increased $24,332,000, or 20.5%,
to $143,235,000 from $118,903,000 for the previous fiscal year. This increase
consisted of a $23,580,000, or 22.6%, increase in domestic consumer products
sales from $104,444,000 in 1996 to $128,024,000 in 1997 and an increase of
$752,000, or 5.2%, in international sales to $15,211,000 from $14,459,000.
For domestic consumer products, sales of the GOLD BOND, HERPECIN-L, ICY HOT and
the SUNSOURCE products accounted for the majority of the sales increase in 1997.
Sales increases were also realized for the SUN-IN and MUDD brands. Sales
declines were recognized for FLEXALL, NORWICH Aspirin, CORNSILK, BULLFROG and
PHISODERM. The remaining domestic brands were basically flat or had modest
declines over the prior fiscal year. All sales variances were largely the
result of changes in volume of unit sales of the particular brands.
The increase in sales of the SUN-IN brand was largely the result of increased
marketing support, while the MUDD sales increase was primarily due to the
addition of the 5 Minute Mask to the line in 1997 and the continuing effect of
new packaging in late 1995. The sales increase of the ICY HOT brand reflected
the line extension launched in early 1997 and a 68.0% increase in advertising
and promotion expenditures in 1997 over 1996.
Sales declines for the remainder of the domestic products were primarily due to
increased competition in their respective product categories, the maturation of
these brands and in most cases reduced marketing support. The decline in sales
of the BULLFROG brand reflected the loss of a major customer and the cool, wet
spring experienced in 1997.
<PAGE>
In fiscal 1997, sales for the international consumer products' segment increased
$847,000, or 21.0%, for the Canadian operation but declined $252,000, or 2.6%,
for the United Kingdom business. The GOLD BOND product line accounted for
practically all of the net sales increase in Canada, although increases were
also realized for the remainder of the product lines marketed in that country,
except for ULTRASWIM and CORNSILK. Sales declines were recognized for all of the
product lines marketed by the United Kingdom operation, except for MUDD. These
sales decreases were largely due to a change in the United Kingdom from a dealer
distribution system to one operated by the Company's U.K. subsidiary in that
country. U.S. export sales increased $157,000, or 17.5%, in 1997 over 1996,
with essentially all of the increase being associated with the ICY HOT brand.
All sales variances were largely the result of changes in volume of unit sales
of the particular brands.
Cost of goods sold as a percentage of net sales in 1997 decreased to 27.4% from
29.5% in 1996. The decrease was largely the result of a shift in product mix of
sales of domestic consumer products to higher margin products and the addition
of GOLD BOND and SUNSOURCE.
Advertising and promotion expenses increased $10,664,000, or 23.4%, to
$56,176,000 in 1997 from $45,512,000 in 1996 and were 39.2% of net sales
compared to 38.3% in 1996. This increase was principally associated with the
GOLD BOND and HERPECIN-L brands, which were acquired in 1996; the SUNSOURCE
product line, acquired in mid-1997; and ICY HOT. Increases in 1997 were also
recorded for the PAMPRIN, PREMSYN PMS, ULTRASWIM and SUN-IN brands.
<PAGE>
Selling, general and administrative expenses increased $721,000, or 3.3%, to
$22,303,000 in 1997 from $21,582,000 in 1996, but decreased as a percentage of
net sales to 15.6% in 1997 as compared to 18.2% in 1996. This increase was
largely associated with increases in direct selling costs, freight and field
sales expenses, resulting from increased sales, offset in part by reductions in
financial and legal services expenses.
Interest expense increased $2,540,000, or 19.0%, to $15,934,000 in 1997 from
$13,394,000 in 1996 primarily as a result of increased indebtedness associated
with the GOLD BOND and HERPECIN-L product acquisitions in 1996 and the SUNSOURCE
brands' purchase in mid-1997.
Investment and other income increased $229,000, or 15.8%, to $1,679,000 in 1997
from $1,450,000 in 1996.
The provision for income taxes was 35.5% of income before income taxes in 1997
as compared to 32.3% in 1996. See Note 8 of Notes to Consolidated Financial
Statements.
Income before extraordinary loss increased $3,451,000, or 90.7%, to $7,255,000
in 1997 from $3,804,000 in 1996. This increase resulted primarily from
increased sales and a more favorable product sales mix with regard to gross
margins in 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and acquisitions with a
combination of internally generated funds and borrowings. The Company's
principal uses of cash are operating expenses, working capital, capital
expenditures, acquisitions and servicing long-term debt.
Cash provided by operating activities was $20,790,000 and $10,116,000 for 1998
and 1997, respectively. The increase in cash flows from operations from 1997 to
1998 was primarily the result of increases in net income, depreciation and
amortization, accounts receivable, accounts payable and accrued liabilities.
The operating activities were favorably impacted by the acquisition of the
SUNSOURCE product line in 1997 and the BAN brand in 1998.
Investing activities used cash of $161,595,000 and $32,722,000 in 1998 and
1997, respectively. The use of cash in 1998 reflected the expenditures
required for the purchase of BAN, while the 1997 amount represented the
purchase of the SUNSOURCE product line. In 1998, capital expenditures
totaled $9,050,000 compared to $2,758,000 in 1997. The increase was due
primarily to the machinery and equipment purchased as a part of the BAN
acquisition and the purchase of the 68,000 square foot manufacturing and
warehouse facility in Chattanooga, Tennessee. Capital expenditures are
expected to be approximately $7,000,000 in fiscal 1999.
<PAGE>
Financing activities provided cash of $138,090,000 in 1998 and $11,434,000 in
1997. In 1998, the Company financed the acquisition of BAN and repaid all
revolving bank indebtedness with the proceeds from its issuance of $200,000,000
of 8.875% Senior Subordinated Notes due 2008. In the 1997 period, the Company
financed the SUNSOURCE acquisition with the proceeds of a $95,000,000 credit
agreement and with the issuance of 300,000 shares of the Company's common stock
at a value of $13.50 per share to the sellers of SUNSOURCE. In December 1998
the Company financed the acquisition of the Thompson Products with the
proceeds of a $165,000,000 bank credit agreement and 125,500 shares of common
stock valued at approximately $39.85 per share.
In connection with certain of its acquisitions, the Company has agreed to make
certain deferred payments. The Company is obligated to make additional
payments, not to exceed $7.9 million in the aggregate, over a six year period
from the June 1997 closing if sales of the SUNSOURCE business exceed certain
levels as defined in the purchase agreement. In addition, for two new dietary
supplement products introduced in the first three years following the
acquisition of the SUNSOURCE business, the Company is obligated to pay a 3.5%
royalty on net sales of such new products for a period of seven years. The
Company is obligated to pay a royalty on HERPECIN-L equal to the greater of
$214,000, or 5% of net sales, for each twelve month period ending June 30, 2003.
<PAGE>
The following table presents certain working capital data at November 30, 1998
and 1997 or for the respective years then ended:
ITEM 1998 1997
- ----------------------------------------------- ----------- -----------
Working capital (current assets less
current liabilities) $ 684,000 $15,520,000
Current ratio (current assets divided
by current liabilities) 1.01 1.45
Quick ratio (cash and cash equivalents
and receivables divided by current
liabilities) .63 .96
Average accounts receivable turnover 6.81 5.92
Average inventory turnover 3.57 3.17
Working capital as a percentage of total assets 0.19% 8.68%
The decrease in the current and quick ratios at November 30, 1998 as compared to
November 30, 1997 was primarily due to a decrease in cash and cash equivalents
and increases in current maturities of long-term debt, accounts payable and
accrued liabilities.
<PAGE>
Total debt outstanding at November 30, 1998 was $291,357,000 compared to
$142,394,000 at November 30, 1997. The net 1998 increase of $148,963,000
reflects the financing of the acquisition of the BAN product line in March,
1998, offset by debt repayments from cash generated from operations, net
proceeds of brand and investment sales and scheduled principal amortization.
The availability of credit under the working capital line of credit is
determined based on the Company's accounts receivable and inventories. The
Company had $2,000,000 of outstanding borrowings on its $30,000,000 working
capital line of credit as of November 30, 1998. The Company had $1,528,000
invested in highly liquid short-term investments as of November 30, 1998.
Management of the Company believes that cash generated by operations, along with
funds available from its short-term, highly liquid investments and available
funds under its credit facility, will be sufficient to fund the Company's
current commitments and proposed operations. Also on December 21, 1998, the
Company filed with the Securities and Exchange Commission a shelf registration
for $250,000,000 of debt and equity securities.
<PAGE>
YEAR 2000
The Company recognizes the need to ensure its operations will not be adversely
impacted by year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the year 2000 date are a
known risk. The Company has developed a plan to ensure its systems are
compliant with the requirements to process transactions in the year 2000. The
following is a status report of the Company's efforts to date for 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 systems 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.
<PAGE>
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
from $1,500,000 to $2,000,000. Plan costs have been budgeted in the Company's
capital expenditures budget. The projected costs are based on management's best
estimates and actual results could differ as the new system is implemented.
Approximately $957,000 had been expended and capitalized on this system at
November 30, 1998.
RISKS 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.
<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 $500,000 and $1,000,000.
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 years
ended November 30, 1998 and 1997, these subsidiaries accounted for 7.5% and
9.9% of total revenues, respectively, and 2.4% and 4.5% 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 payment between the Company and its two foreign subsidiaries.
Historically, gains or losses from foreign currency transactions have not had
a material impact on the Company's operating results. Losses of $74,000 and
$68,000 for the years ended November 30, 1998 and 1997, respectively,
resulted from foreign currency transactions. See "Foreign Currency
Translation" in Note 2 of Notes to Consolidated Financial Statements.
<PAGE>
RECENTLY ISSUED 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.
<PAGE>
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post Retirement Benefits." The
statement amends SFAS Nos. 87, 88 and 106. SFAS No. 132 revises employers'
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
allows 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, 1998).
<PAGE>
The Company has not yet quantified the impacts 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.
SEASONALITY
During recent fiscal years, the Company's first quarter's 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, 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.
<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, risks related to acquisitions; 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 regulation; risks of loss of material
customers; public perception regarding our products; dependence on third party
manufacturers; reliance on brands and intellectual property concerns;
availability of raw materials; environmental matters; product liability and
insurance; year 2000; and other risks described in the Company's Securities
and Exchange Commission filings.
<PAGE>
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>
QUARTERLY INFORMATION
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------
TOTAL FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30
----- ----------- ------ --------- -----------
<S> <C> <C> <C> <C> <C>
FISCAL 1998:
Before extraordinary loss:
Net sales ................... $220,064 34,921 58,545 67,600 58,998
Gross profit ................ $159,175 25,239 42,691 48,219 43,026
Income (1) .................. $ 18,128 609 10,069 4,391 3,059
Income per share,
diluted (1), (2) ........... $ 1.86 .06 1.02 .45 .31
Total:
Net income (1) .............. $ 15,269 609 8,168 3,433 3,059
Net income per share,
diluted (1), (2) ........... $ 1.57 .06 .83 .35 .31
FISCAL 1997:
Before extraordinary loss:
Net sales ................... $143,235 27,946 39,178 38,909 37,202
Gross profit ................ $103,982 19,552 28,290 28,809 27,331
Income ...................... $ 7,255 136 3,057 2,847 1,215
Income per share, diluted (2) $ .80 .02 .35 .31 .13
Total:
Net income .................. $ 5,885 136 3,057 1,477 1,215
Net income per share,
diluted (2) ................ $ .65 .02 .35 .16 .13
</TABLE>
(1) INCLUDES THE EFFECT OF THE DIVESTITURE OF CORNSILK.
(2) THE SUM OF THE QUARTERLY EARNINGS PER SHARE AMOUNTS MAY DIFFER
FROM ANNUAL EARNINGS PER SHARE BECAUSE OF THE DIFFERENCES IN
THE WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND DILUTIVE
POTENTIAL SHARES USED IN THE QUARTERLY AND ANNUAL
COMPUTATIONS.
<PAGE>
GEOGRAPHICAL SEGMENT INFORMATION
(IN THOUSANDS)
YEAR ENDED NOVEMBER 30,
-------------------------------------
1998 1997 1996
--------- --------- ---------
NET SALES:
Domestic ........................... $ 199,811 $ 128,024 $ 104,444
International ...................... 20,253 15,211 14,459
--------- --------- ---------
Consolidated .................... $ 220,064 $ 143,235 $ 118,903
========= ========= =========
OPERATING INCOME:
Domestic ........................... $ 47,482 $ 27,393 $ 18,929
International ...................... 2,902 1,710 1,613
--------- --------- ---------
Total ........................... 50,384 29,103 20,542
Other unallocated expenses, net (1) . (21,412) (17,855) (14,922)
--------- --------- ---------
Income before income taxes and
extraordinary loss .......... $ 28,972 $ 11,248 $ 5,620
========= ========= =========
IDENTIFIABLE ASSETS:
Domestic ........................... $ 357,568 $ 164,175 $ 135,238
International ...................... 8,342 7,929 10,961
--------- --------- ---------
Total ........................... 365,910 172,104 146,199
Investment in Elcat, Inc. .......... 3,102 6,640 5,984
--------- --------- ---------
Consolidated .................... $ 369,012 $ 178,744 $ 152,183
========= ========= =========
(1) PRINCIPALLY INTEREST EXPENSE AND CORPORATE OVERHEAD NOT ALLOCATED.
<PAGE>
EXHIBIT 22
CHATTEM, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE COMPANY
NAME OF SUBSIDIARY STATE OR COUNTRY OF INCORPORATION
------------------ ---------------------------------
Chattem (Canada) Inc. Canada
Chattem (U.K.) Limited England
HBA Insurance Ltd. Bermuda
Signal Investment & Management Co. Delaware
<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 S-4 (No. 33-53627).
/s/ ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
February 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Chattem,
Inc.'s audited financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> NOV-30-1998
<CASH> 2,076
<SECURITIES> 0
<RECEIVABLES> 37,356
<ALLOWANCES> 750
<INVENTORY> 19,606
<CURRENT-ASSETS> 62,096
<PP&E> 36,152
<DEPRECIATION> 18,006
<TOTAL-ASSETS> 369,012
<CURRENT-LIABILITIES> 61,412
<BONDS> 273,913
0
0
<COMMON> 1,944
<OTHER-SE> 22,757
<TOTAL-LIABILITY-AND-EQUITY> 369,012
<SALES> 220,064
<TOTAL-REVENUES> 220,064
<CGS> 60,889
<TOTAL-COSTS> 174,845
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,676
<INCOME-PRETAX> 28,972
<INCOME-TAX> 10,844
<INCOME-CONTINUING> 18,128
<DISCONTINUED> 0
<EXTRAORDINARY> 2,859
<CHANGES> 0
<NET-INCOME> 15,269
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.57
</TABLE>
