<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 2000
COMMISSION FILE NUMBER 0-5905
CHATTEM, INC.
A TENNESSEE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
TELEPHONE: 423-821-4571
REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
AS OF APRIL 12, 2000, 9,523,464 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT
PAR VALUE, WERE OUTSTANDING.
<PAGE>
CHATTEM, INC.
-------------
INDEX
-----
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of February 29, 2000 and
November 30, 1999 ........................................................ 3
Consolidated Statements of Income for the Three
Months Ended February 29, 2000 and February 28, 1999...................... 5
Consolidated Statements of Cash Flows for the Three Months Ended
February 29, 2000 and February 28, 1999 .................................. 6
Notes to Consolidated Financial Statements ................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................. 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .................................... 22
SIGNATURES ..................................................................... 23
EXHIBIT 11 - Statement Regarding Computation of Per Share Earnings
EXHIBIT 27 - Financial Data Schedule
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
<TABLE>
<CAPTION>
FEBRUARY 29, NOVEMBER 30,
ASSETS 2000 1999
- ------ ------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 2,481 $ 2,308
Accounts receivable, less allowance for doubtful accounts
of $900 at February 29, 2000 and November 30, 1999 ...... 51,861 55,032
Deferred income taxes ..................................... 6,951 6,951
Inventories ............................................... 29,450 27,818
Prepaid expenses and other current assets ................. 1,069 929
-------- --------
Total current assets .................................... 91,812 93,038
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET .......................... 28,019 25,752
-------- --------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product rights, net 354,063 356,295
Debt issuance costs, net .................................. 11,225 11,469
Other ..................................................... 3,419 5,070
-------- --------
Total other noncurrent assets ........................... 368,707 372,834
-------- --------
TOTAL ASSETS .......................................... $488,538 $491,624
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
<TABLE>
<CAPTION>
FEBRUARY 29, NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
- ------------------------------------ ------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt ................................................... $ 12,000 $ 11,000
Accounts payable ....................................................................... 12,235 18,573
Payable to bank ........................................................................ 2,347 4,905
Accrued liabilities .................................................................... 38,481 32,147
--------- ---------
Total current liabilities ............................................................ 65,063 66,625
--------- ---------
LONG-TERM DEBT, less current maturities .................................................. 355,968 358,950
--------- ---------
DEFERRED INCOME TAXES .................................................................... 15,326 15,326
--------- ---------
OTHER NONCURRENT LIABILITIES ............................................................. 2,037 2,022
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000,
none issued .......................................................................... -- --
Common shares, without par value, authorized 50,000,
issued 9,628 at February 29, 2000 and 9,707 at
November 30, 1999 .................................................................... 2,005 2,021
Paid-in surplus ........................................................................ 71,277 72,850
Accumulated deficit .................................................................... (21,738) (24,804)
--------- ---------
51,544 50,067
Cumulative other comprehensive income -
foreign currency translation adjustment .............................................. (1,400) (1,366)
--------- ---------
Total shareholders' equity .......................................................... 50,144 48,701
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ......................................................................... $ 488,538 $ 491,624
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28,
2000 1999
------------- ------------
<S> <C> <C>
NET SALES ............................................. $ 62,371 $ 62,728
-------- --------
COSTS AND EXPENSES:
Cost of sales ....................................... 16,682 16,880
Advertising and promotion ........................... 23,582 24,738
Selling, general and administrative ................. 7,403 6,700
-------- --------
Total costs and expenses .......................... 47,667 48,318
-------- --------
INCOME FROM OPERATIONS ................................ 14,704 14,410
-------- --------
OTHER INCOME (EXPENSE):
Interest expense .................................... (8,974) (8,806)
Investment and other income, net .................... 74 131
-------- --------
Total other income (expense) ....................... (8,900) (8,675)
-------- --------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND CHANGE IN
ACCOUNTING PRINCIPLE ................................ 5,804 5,735
PROVISION FOR INCOME TAXES ............................ 2,196 2,158
-------- --------
INCOME BEFORE EXTRAORDINARY LOSS
AND CHANGE IN ACCOUNTING PRINCIPLE .................. 3,608 3,577
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET ......................... -- (427)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET ........................... (542) --
-------- --------
NET INCOME ............................................ $ 3,066 $ 3,150
======== ========
COMMON SHARES:
Weighted average number outstanding - basic ......... 9,693 9,712
======== ========
Weighted average number and dilutive potential number
outstanding ........................................ 9,861 10,118
======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income before extraordinary loss and change in
accounting principle ............................ $ .37 $ .37
Extraordinary loss ................................. -- (.04)
Change in accounting principle ..................... (.05) --
-------- --------
Total basic ....................................... $ .32 $ .33
======== ========
Diluted:
Income before extraordinary loss and change in
accounting principle ............................ $ .37 $ .35
Extraordinary loss ................................. -- (.04)
Change in accounting principle ..................... (.06) --
-------- --------
Total diluted .................................... $ .31 $ .31
======== ========
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
5
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited and in thousands except share and per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .......................................................... $ 3,066 $ 3,150
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................... 3,742 3,488
Dividend receivable from Elcat, Inc. ............................ -- (70)
Extraordinary loss on extinguishment of debt, net ............... -- 427
Cumulative effect of change in accounting principle, net ........ 542 --
Other, net ...................................................... 29 8
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ........................................... 3,171 (16,052)
Inventories ................................................... (1,632) (242)
Prepaid expenses and other current assets ..................... 511 (12)
Accounts payable .............................................. (6,338) (1,280)
Accrued liabilities ........................................... 6,532 9,581
--------- ---------
Net cash provided by (used in) operating activities ........ 9,623 (1,002)
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ...................... (2,814) (864)
Additions to trademarks and other product rights ................ (20) (89,817)
Proceeds from sale of investment ................................ -- 387
Increase in other assets, net ................................... (122) (214)
--------- ---------
Net cash used in investing activities ...................... (2,956) (90,508)
--------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt ..................................... (8,500) (48,515)
Proceeds from long-term debt .................................... 6,500 138,500
Proceeds from exercise of stock options and warrants ............ 190 429
Repurchase of common shares ..................................... (1,954) --
Change in payable to bank ....................................... (2,558) 4,505
Debt issuance costs ............................................. (158) (2,355)
--------- ---------
Net cash provided by (used in) financing activities ........ (6,480) 92,564
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS .......... (14) (10)
--------- ---------
CASH AND CASH EQUIVALENTS:
Increase for the period ......................................... 173 1,044
At beginning of period .......................................... 2,308 2,076
--------- ---------
At end of period ................................................ $ 2,481 $ 3,120
========= =========
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of 125,500 shares of common stock at $39.84 per share
to fund portion of Thompson Medical brands' acquisition ....... -- $ 5,000
Additions to trademarks and other product rights by assumption
of certain liabilities ....................................... $ 266 $ 500
PAYMENTS FOR:
Interest ........................................................ $ 3,363 $ 4,283
Taxes ........................................................... $ 3,994 $ 2,232
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
6
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. These consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes thereto included in the Company's
Annual Report to Shareholders for the year ended November 30, 1999. The
1999 Annual Report has previously been filed with the Securities and
Exchange Commission as an exhibit to the Company's Form 10-K. The
accompanying unaudited consolidated financial statements, in the opinion of
management, include all adjustments necessary for a fair presentation. All
such adjustments are of a normal recurring nature.
2. The Company incurs significant expenditures on television, radio and print
advertising to support its nationally branded over-the-counter health care
and toiletries and skin care products. Customers purchase products from the
Company with the understanding that the brands will be supported by the
Company's extensive media advertising. This advertising supports the
retailers' sales effort and maintains the important brand franchise with
the consuming public. Accordingly, the Company considers its advertising
program to be clearly implicit in its sales arrangements with its
customers. Therefore, the Company believes it is appropriate to allocate a
percentage of the necessary supporting advertising expenses to each dollar
of sales by charging a percentage of sales on an interim basis based upon
anticipated annual sales and advertising expenditures (in accordance with
APB Opinion No. 28) and adjusting that accrual to the actual expenses
incurred at the end of the year.
3. Inventories consisted of the following at February 29, 2000 and November
30, 1999:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Raw materials and work in process $ 13,667 $ 12,542
Finished goods .................. 17,697 17,190
Excess of current cost over LIFO
values ........................ (1,914) (1,914)
-------- --------
Total inventories ........... $ 29,450 $ 27,818
======== ========
</TABLE>
4. Accrued liabilities consisted of the following at February 29, 2000 and
November 30, 1999:
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Income and other taxes .................. $ 673 $ 2,859
Salaries, wages and commissions ......... 658 2,098
Advertising and promotion ............... 20,616 15,880
Interest ................................ 11,441 6,326
Product acquisitions and
divestitures ........................... 1,174 2,999
Accrued pension benefits ................ 981 781
Royalties ............................... 117 56
Other ................................... 2,821 1,148
----------- ----------
Total accrued liabilities ............ $ 38,481 $ 32,147
========= =========
</TABLE>
7
<PAGE>
5. Comprehensive income consisted of the following components for the three
months ended February 29, 2000 and February 28, 1999, respectively:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net income .................. $ 3,066 $ 3,150
Other - foreign currency
translation adjustment .... (34) (71)
------- -------
Total comprehensive income $ 3,032 $ 3,079
======= =======
</TABLE>
6. Effective December 1, 1999, the Company adopted Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-up Activities" issued by the
American Institute of Certified Public Accountants. SOP 98-5 requires costs
of start-up activities to be expensed as incurred. The initial adoption of
this SOP was recorded as the cumulative effect of a change in an accounting
principle. The one-time charge, net of taxes, was $542, or $0.06 per
diluted share.
7. In fiscal 1999 the Company's board of directors authorized repurchases of
the Company's common stock not to exceed $10,000. Under this authorization,
172,500 shares at a cost of $3,912 were reacquired in 1999 and 100,000
shares at a cost of $1,954 were repurchased in the first quarter of fiscal
2000, leaving $4,134 available for future repurchases. The repurchased
shares were retired and returned to unissued.
8. On January 26, 2000, the Company's board of directors adopted a new
Shareholder Rights Plan. Under the plan, Rights were constructively
distributed as a dividend at the rate of one Right for each share of common
stock, without par value, of the Company held by shareholders of record as
the close of business on February 11, 2000. Each right initially will
entitle shareholders to buy one one-hundreth of a share of a new Series A
Junior Participating Preferred Stock at an exercise price of $90.00 per
Right, subject to adjustment. The Rights generally will be exercisable only
if a person or group acquires beneficial ownership of 15% or more of the
Company's common stock. The Rights will expire on February 11, 2010.
9. There have been no material changes as of February 29, 2000 with regard to
the matters discussed in Item 1. Business - Government Regulation and
Environmental and Item 3. Legal Proceedings sections of the Company's
Annual Report on Form 10-K filed on February 28, 2000 with the Securities
and Exchange Commission for the year ended November 30, 1999.
10. The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the respective full years.
During recent fiscal years, the Company's first quarter net sales and gross
profit have trailed the other fiscal quarters on average from 25% to 35%
because of slower sales of consumer products and lower levels of
promotional campaigns during this quarter. As a result of the Company's
acquisitions of BAN and the Thompson products in March and December 1998,
respectively, seasonality should not be as pronounced as in years past;
however, net sales and gross profit during the first fiscal quarter should
continue to trail the other fiscal quarters.
11. The Company considers all short-term deposits and investments with original
maturities of three months or less to be cash equivalents.
8
<PAGE>
12. The Company operates in two primary segments that are based on the
different types of products offered. The OTC health care segment includes
medicated skin care products, topical analgesics, internal analgesics, lip
care, appetite suppressant and dietary supplement products. The toiletries
and skin care segment includes antiperspirants and deodorants, facial
cleaners and masques and seasonal products. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies contained in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the year ended
November 30, 1999. Certain assets, including the majority of property,
plant and equipment and deferred tax assets are not allocated to the
identifiable segments.
In the table below the following items are included in the indicated
captions:
Variable contribution margin: net sales less variable cost of goods
sold, advertising, promotion, market research, freight out, sales
commissions, royalties, bad debts and inventory obsolescence. The
Company evaluates the performance of its operating segments based on
variable contribution margins.
Depreciation and amortization: amortization of the cost of trademarks
and other product rights with unallocated depreciation and other
amortization expense being shown under the "Not Classified" caption.
Identifiable/total assets: primarily identified unamortized cost of
trademarks and other product rights and total inventory cost with the
remainder of total assets being shown under the "Not Classified"
heading.
<TABLE>
<CAPTION>
Product Classifications
-----------------------
OTC Toiletries
Health and Not
Total Care Skincare Classified
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
For the three months ended February 29,
2000:
Net sales................................ $ 62,371 $ 38,494 $ 24,320 $ (443)
Variable contribution margin............. 25,030 16,868 8,356 (194)
Depreciation and amortization............ 3,742 1,324 1,218 1,200
Identifiable assets/total assets......... 488,538 199,361 193,027 96,150
For the three months ended February 28,
1999:
Net sales................................ $ 62,728 $ 36,272 $ 26,173 $ 283
Variable contribution margin............. 25,696 14,736 11,068 (108)
Depreciation and amortization............ 3,488 1,122 1,236 1,130
Identifiable assets/total assets (at
November 30, 1999)..................... 491,624 196,602 198,450 96,572
</TABLE>
9
<PAGE>
The reconciliation of variable contribution margin, as shown above, to
income before income taxes, extraordinary loss and change in accounting
principle is as follows for the three months ended February 29, 2000 and
February 28, 1999, respectively:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Variable contribution margin ............................ $ 25,030 $ 25,696
Less divisional and corporate overhead not allocated to
product groups ....................................... 10,326 11,286
-------- --------
Income from operations .................................. 14,704 14,410
-------- --------
Other income (expense):
Interest expense ...................................... (8,974) (8,806)
Investment and other income, net ...................... 74 131
-------- --------
Total other income (expense) ......................... (8,900) (8,675)
-------- --------
Income before income taxes, extraordinary loss and change
in accounting principle .............................. $ 5,804 $ 5,735
======== ========
</TABLE>
13. The condensed consolidating financial statements, for the dates or periods
indicated, of Chattem, Inc. ("Chattem"), Signal Investment & Management Co.
("Signal"), the guarantor of the long-term debt of Chattem, and the
non-guarantor wholly-owned subsidiary companies of Chattem are presented
below. Signal is a wholly-owned subsidiary of Chattem; the guarantee of
Signal is full and unconditional and joint and several.
10
<PAGE>
Note 13
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING BALANCE SHEETS
----------------------------
FEBRUARY 29, 2000
-----------------
(Unaudited and in thousands)
<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR,(CR.) CONSOLIDATED
------- ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents ......................... $ (44) $ 12 $ 2,513 $ -- $ 2,481
Accounts receivable, less allowance for
doubtful accounts of $900 ...................... 48,392 -- 3,469 -- 51,861
Deferred income taxes ............................. 6,951 -- -- -- 6,951
Inventories ....................................... 27,100 -- 2,350 -- 29,450
Prepaid expenses and other current assets ......... 536 -- 533 -- 1,069
--------- --------- --------- --------- ---------
Total current assets ............................ 82,935 12 8,865 -- 91,812
--------- --------- --------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET .................. 27,678 -- 341 -- 28,019
--------- --------- --------- --------- ---------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased
product rights, net ............................. 5,463 348,600 -- -- 354,063
Debt issuance costs, net .......................... 11,225 -- -- -- 11,225
Investment in subsidiaries ........................ 9,930 -- -- (9,930) --
Other ............................................. 3,419 -- -- -- 3,419
--------- --------- --------- --------- ---------
Total other noncurrent assets ................... 30,037 348,600 -- (9,930) 368,707
--------- --------- --------- --------- ---------
TOTAL ASSETS .................................. $ 140,650 $ 348,612 $ 9,206 $ (9,930) $ 488,538
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt .............. $ 12,000 $ -- $ -- $ -- $ 12,000
Accounts payable .................................. 11,941 -- 294 -- 12,235
Payable to bank ................................... 2,347 -- -- -- 2,347
Accrued liabilities ............................... 37,743 -- 738 -- 38,481
--------- --------- --------- --------- ---------
Total current liabilities ....................... 64,031 -- 1,032 -- 65,063
--------- --------- --------- --------- ---------
LONG-TERM DEBT, less current maturities ............. 355,968 -- -- -- 355,968
--------- --------- --------- --------- ---------
DEFERRED INCOME TAXES ............................... 2,776 12,550 -- -- 15,326
--------- --------- --------- --------- ---------
OTHER NONCURRENT LIABILITIES ........................ 2,037 -- -- -- 2,037
--------- --------- --------- --------- ---------
INTERCOMPANY ACCOUNTS ............................... (333,480) 335,156 (1,676) -- --
--------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued ................... -- -- -- -- --
Common shares, without par value,
authorized 50,000, issued 9,628 ................. 2,005 2 9,928 9,930 2,005
Paid-in surplus ................................... 71,277 -- -- -- 71,277
Accumulated deficit ............................... (23,481) 904 839 -- (21,738)
--------- --------- --------- --------- ---------
49,801 906 10,767 9,930 51,544
Cumulative other comprehensive income -
Foreign currency translation adjustment .......... (483) -- (917) -- (1,400)
--------- --------- --------- --------- ---------
Total shareholders' equity ...................... 49,318 906 9,850 9,930 50,144
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ... $ 140,650 $ 348,612 $ 9,206 $ 9,930 $ 488,538
========= ========= ========= ========= =========
</TABLE>
11
<PAGE>
Note 13
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING BALANCE SHEETS
----------------------------
NOVEMBER 30, 1999
-----------------
(Unaudited and in thousands)
<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR,(CR.) CONSOLIDATED
------- ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 550 $ 16 $ 1,742 $ -- $ 2,308
Accounts receivable, less allowance for
doubtful accounts of $900 ....................... 50,541 -- 4,491 -- 55,032
Deferred income taxes ............................. 6,951 -- -- -- 6,951
Inventories ....................................... 25,519 -- 2,299 -- 27,818
Prepaid expenses and other current assets ......... 739 -- 190 -- 929
--------- --------- --------- --------- ---------
Total current assets ............................ 84,300 16 8,722 -- 93,038
--------- --------- --------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET .................. 25,399 -- 353 -- 25,752
--------- --------- --------- --------- ---------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased
product rights, net ............................. 5,533 350,762 -- -- 356,295
Debt issuance costs, net .......................... 11,469 -- -- -- 11,469
Investment in subsidiaries ........................ 9,930 -- -- (9,930) --
Other ............................................. 4,709 -- 361 -- 5,070
--------- --------- --------- --------- ---------
Total other noncurrent assets ................... 31,641 350,762 361 (9,930) 372,834
--------- --------- --------- --------- ---------
TOTAL ASSETS .................................. $ 141,340 $ 350,778 $ 9,436 $ (9,930) $ 491,624
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt .............. $ 11,000 $ -- $ -- $ -- $ 11,000
Accounts payable .................................. 18,053 -- 520 -- 18,573
Payable to bank ................................... 4,905 -- -- -- 4,905
Accrued liabilities ............................... 30,630 -- 1,517 -- 32,147
--------- --------- --------- --------- ---------
Total current liabilities ....................... 64,588 -- 2,037 -- 66,625
--------- --------- --------- --------- ---------
LONG-TERM DEBT, less current maturities ............. 358,950 -- -- -- 358,950
--------- --------- --------- --------- ---------
DEFERRED INCOME TAXES ............................... 2,776 12,550 -- -- 15,326
--------- --------- --------- --------- ---------
OTHER NONCURRENT LIABILITIES ........................ 2,022 -- -- -- 2,022
--------- --------- --------- --------- ---------
INTERCOMPANY ACCOUNTS ............................... (334,574) 336,612 (2,038) -- --
--------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued ................... -- -- -- -- --
Common shares, without par value,
authorized 50,000, issued 9,707 ................. 2,021 2 9,928 9,930 2,021
Paid-in surplus ................................... 72,850 -- -- -- 72,850
Accumulated deficit ............................... (26,819) 1,614 401 -- (24,804)
--------- --------- --------- --------- ---------
Total ........................................... 48,052 1,616 10,329 9,930 50,067
Cumulative other comprehensive income -
Foreign currency translation adjustment........... (474) -- (892) -- (1,366)
--------- --------- --------- --------- ---------
Total shareholders' equity ...................... 47,578 1,616 9,437 9,930 48,701
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ... $ 141,340 $ 350,778 $ 9,436 $ 9,930 $ 491,624
========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
Note 13
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING STATEMENTS OF INCOME
----------------------------------
FOR THE THREE MONTHS ENDED FEBRUARY 29, 2000
--------------------------------------------
(Unaudited and in thousands)
<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR,(CR.) CONSOLIDATED
------- ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES ........................... $ 59,194 $ -- $ 3,177 $ -- $ 62,371
-------- -------- -------- ------------ --------
COSTS AND EXPENSES:
Cost of sales ..................... 15,535 -- 1,147 -- 16,682
Advertising and promotion ......... 19,878 2,428 1,276 -- 23,582
Selling, general and administrative 6,739 5 659 -- 7,403
-------- -------- -------- ------------ --------
Total costs and expenses ........ 42,152 2,433 3,082 -- 47,667
-------- -------- -------- ------------ --------
INCOME FROM OPERATIONS .............. 17,042 (2,433) 95 -- 14,704
-------- -------- -------- ------------ --------
OTHER INCOME (EXPENSE):
Interest expense .................. (8,974) -- -- -- (8,974)
Investment and other income, net .. 68 1 5 -- 74
Royalties ......................... (2,818) 2,871 (53) -- --
Corporate allocations ............. 8 -- (8) -- --
-------- -------- -------- ------------ --------
Total other income (expense) ... (11,716) 2,872 (56) -- (8,900)
-------- -------- -------- ------------ --------
INCOME BEFORE INCOME TAXES AND
CHANGE IN ACCOUNTING PRINCIPLE .... 5,326 439 39 -- 5,804
PROVISION FOR INCOME TAXES .......... 1,931 149 116 -- 2,196
-------- -------- -------- ------------ --------
INCOME BEFORE CHANGE IN
ACCOUNTING PRINCIPLE .............. 3,395 290 (77) -- 3,608
CUMMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET ......... (542) -- -- -- (542)
-------- -------- -------- ------------ --------
NET INCOME .......................... $ 2,853 $ 290 $ (77) $ -- $ 3,066
======== ======== ======== ============ ========
</TABLE>
13
<PAGE>
Note 13
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING STATEMENTS OF INCOME
----------------------------------
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999
--------------------------------------------
(Unaudited and in thousands)
<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR,(CR.) CONSOLIDATED
------- ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES ........................... $ 60,495 $ -- $ 2,233 $ -- $ 62,728
-------- -------- -------- ------------ --------
COSTS AND EXPENSES:
Cost of sales ..................... 16,025 -- 855 -- 16,880
Advertising and promotion ......... 21,750 2,225 763 -- 24,738
Selling, general and administrative 6,038 -- 662 -- 6,700
-------- -------- -------- ------------ --------
Total costs and expenses ........ 43,813 2,225 2,280 -- 48,318
-------- -------- -------- ------------ --------
INCOME FROM OPERATIONS .............. 16,682 (2,225) (47) -- 14,410
-------- -------- -------- ------------ --------
OTHER INCOME (EXPENSE):
Interest expense .................. (8,806) -- -- -- (8,806)
Investment and other income, net .. 121 (7) 17 -- 131
Royalties ......................... (2,924) 2,961 (37) -- --
Premium revenue ................... (20) -- 20 -- --
Corporate allocations ............. 8 -- (8) -- --
-------- -------- -------- ------------ --------
Total other income (expense) ... (11,621) 2,954 (8) -- (8,675)
-------- -------- -------- ------------ --------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS ................ 5,061 729 (55) -- 5,735
PROVISION FOR INCOME TAXES .......... 1,815 248 95 -- 2,158
-------- -------- -------- ------------ --------
INCOME BEFORE EXTRAORDINARY
LOSS .............................. 3,246 481 (150) -- 3,577
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET ....... (427) -- -- -- (427)
-------- -------- -------- ------------ --------
NET INCOME .......................... $ 2,819 $ 481 $ (150) $ -- $ 3,150
======== ======== ======== ============ ========
</TABLE>
14
<PAGE>
Note 13
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING STATEMENTS OF CASH FLOWS
--------------------------------------
FOR THE THREE MONTHS ENDED FEBRUARY 29, 2000
--------------------------------------------
(Unaudited and in thousands)
<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR,(CR.) CONSOLIDATED
------- ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ....................................... $ 2,853 $ 290 $ (77) $ -- $ 3,066
Adjustments to reconcile net income to net cash .. --
provided by operating activities:
Depreciation and amortization .................. 1,290 2,428 24 -- 3,742
Cumulative effect of change in accounting
principle, net ............................... 542 -- -- -- 542
Income tax provision ........................... (149) 149 -- -- --
Other, net ..................................... 29 -- -- -- 29
Changes in operating assets and liabilities, net
of acquisitions:
Accounts receivable .......................... 2,172 -- 999 -- 3,171
Inventories .................................. (1,582) -- (50) -- (1,632)
Prepaid and other current assets ............. 499 -- 12 -- 511
Accounts payable and accrued liabilities ..... 643 -- (449) -- 194
------- ------- ------- ------- -------
Net cash provided by operating activities . 6,297 2,867 459 -- 9,623
------- ------- ------- ------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ....... (2,799) -- (15) -- (2,814)
Purchases of trademarks and other related assets . (20) -- -- -- (20)
Increase in other assets ......................... (122) -- -- -- (122)
------- ------- ------- ------- -------
Net cash used in investing activities ..... (2,941) -- (15) -- (2,956)
------- ------- ------- ------- -------
FINANCING ACTIVITIES:
Payment of long-term debt ........................ (8,500) -- -- -- (8,500)
Proceeds from long-term debt ..................... 6,500 -- -- -- 6,500
Proceeds from exercise of stock options .......... 190 -- -- -- 190
Debt issuance costs .............................. (158) -- -- -- (158)
Decrease in payable to bank ..................... (2,558) -- -- -- (2,558)
Repurchases of common stock ...................... (1,954) -- -- -- (1,954)
Changes in intercompany accounts ................. 1,554 (1,871) 317 -- --
Dividends paid ................................... 1,000 (1,000 -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities ............................. (3,926) (2,871) 317 -- (6,480)
------- ------- ------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS ......................... (24) -- 10 -- (14)
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period ............... (594) (4) 771 -- 173
At beginning of period ........................... 550 16 1,742 -- 2,308
------- ------- ------- ------- -------
At end of period ................................. $ (44) $ 12 $ 2,513 $ -- $ 2,481
======= ======= ========== ======= =======
</TABLE>
15
<PAGE>
Note 13
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING STATEMENTS OF CASH FLOWS
--------------------------------------
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999
--------------------------------------------
(Unaudited and in thousands)
<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR,(CR.) CONSOLIDATED
------- ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income .............................................. $ 2,819 $ 481 $ (150) $ -- $ 3,150
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: ........... --
Depreciation and amortization ......................... 1,229 2,225 34 -- 3,488
Extraordinary loss on early extinguishment of
debt, net ........................................... 427 -- -- -- 427
Dividend receivable from Elcat, Inc. .................. (70) -- -- -- (70)
Income tax provision .................................. (248) 248 -- -- --
Other, net ............................................ 1 7 -- -- 8
Changes in operating assets and liabilities, net
of acquisitions:
Accounts receivable ................................. (17,967) -- 1,915 -- (16,052)
Inventories ......................................... (440) -- 198 -- (242)
Prepaid and other current assets .................... 209 -- (221) -- (12)
Accounts payable and accrued liabilities ............ 8,893 -- (592) -- 8,301
--------- --------- --------- ----------- ---------
Net cash provided by (used in) operating
activities ..................................... (5,147) 2,961 1,184 -- (1,002)
--------- --------- --------- ----------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment .............. (864) -- -- -- (864)
Purchases of trademarks and other related assets ........ (89,817) -- -- -- (89,817)
Proceeds from sale of investment ........................ -- 387 -- -- 387
Increase in other assets ................................ (214) -- -- -- (214)
--------- --------- --------- ----------- ---------
Net cash provided by (used in) investing
activities ..................................... (90,895) 387 -- -- (90,508)
--------- --------- --------- ----------- ---------
FINANCING ACTIVITIES:
Payment of long-term debt ............................... (48,515) -- -- -- (48,515)
Proceeds from long-term debt ............................ 138,500 -- -- -- 138,500
Proceeds from exercise of stock options and warrants .... 429 -- -- -- 429
Debt issuance costs ..................................... (2,355) -- -- -- (2,355)
Increase in payable to bank ............................ 4,505 -- -- -- 4,505
Changes in intercompany accounts ........................ 2,733 (2,343) (390) -- --
Dividends paid .......................................... 1,000 (1,000) -- -- --
--------- --------- --------- ----------- ---------
Net cash provided by (used in) financing
activities.....................................4 96,297 (3,343) (390) -- 92,564
--------- --------- --------- ----------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS ............................... (19) -- 9 -- (10)
--------- --------- --------- ----------- ---------
CASH AND CASH EQUIVALENTS:
Increase for the period ................................. 236 5 803 -- 1,044
At beginning of period .................................. (95) 11 2,160 -- 2,076
--------- --------- --------- ----------- ---------
At end of period ........................................ $ 141 $ 16 $ 2,963 $ -- $ 3,120
========= ========= ========= =========== =========
</TABLE>
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
GENERAL
For the three months ended February 29, 2000, the Company experienced a $357, or
.6%, decrease in sales to $62,371 from $62,728 in the first quarter of fiscal
1999. Operating income during the period, however, increased $294, or 2.0%, to
$14,704 from $14,410. Income before extraordinary loss and change in accounting
principle of $3,608, or $.37 per diluted share, was recorded during the period
compared to $3,577, or $.35 per diluted share, during the same period last year.
Cash earnings (net income before extraordinary items plus non-cash amortization)
is one of the key standards used by the Company to measure operating
performance. Cash earnings is used to supplement operating income as an
indicator of operating performance and not as an alternative to measures defined
and required by generally accepted accounting principles. Cash earnings for the
three months ended February 29, 2000 were $5,268, or $.53 per share, as compared
to $5,163, or $.51 per share, for the comparable 1999 period.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were
$17,934, or 28.8% of net sales, in the first quarter of fiscal 2000 compared to
$17,506, or 27.9% of net sales, in the same 1999 period.
During the first quarter of fiscal 2000, the Company enjoyed strong sales
performances from its topical analgesic franchise, GOLD BOND Medicated Body
Lotion, MUDD and HERPECIN-L brands and its international division. These results
were offset by continued sales weakness from the Company's SUNSOURCE line.
The Company repurchased 100,000 shares of its common stock in the first quarter
of fiscal 2000 for $1,954.
The Company recorded a charge of $542, net of income taxes, representing the
cumulative effect of a change in an accounting principle in the first quarter of
fiscal 2000. This charge represents costs of start-up activities required to be
expensed upon the initial adoption of SOP 98-5, "Reporting on the Costs of
Start-up Activities".
The Company will continue to seek sales increases through a combination of
acquisitions and internal growth while maintaining high operating income levels.
As previously high-growth brands mature, sales increases will become even more
dependent on acquisitions and the development of successful line extensions.
During the first quarter of fiscal 2000, the Company introduced DEXATRIM Natural
as a line extension. Line extensions, product introductions and acquisitions
require a significant amount of introductory advertising and promotional
support. For a period of time these products do not generate a commensurate
amount of sales and/or earnings. As a result, the Company may experience a
short-term impact on its profitability. Strategically, the Company continually
evaluates its products as part of its growth strategy and, in instances where
the Company's objectives are not realized, will dispose of these brands and
redeploy the assets to acquire other brands or reduce indebtedness.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for income before extraordinary loss and change
in accounting principle and for the periods indicated, certain items from the
Company's Consolidated Statements of Income expressed as a percentage of net
sales:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28,
2000 1999
------ ----
<S> <C> <C>
NET SALES ....................................................... 100.0% 100.0%
------- -------
COSTS AND EXPENSES:
Cost of sales ................................................. 26.7 26.9
Advertising and promotion ..................................... 37.8 39.4
Selling, general and administrative ........................... 11.9 10.7
------- -------
Total costs and expenses .................................... 76.4 77.0
------- -------
INCOME FROM OPERATIONS .......................................... 23.6 23.0
------- -------
OTHER INCOME (EXPENSE):
Interest expense .............................................. (14.4) (14.0)
Investment and other income, net .............................. .1 .2
------- -------
Total other income (expense) ................................ (14.3) (13.8)
------- -------
INCOME BEFORE INCOME TAXES ...................................... 9.3 9.2
PROVISION FOR INCOME TAXES ...................................... 3.5 3.5
------- -------
INCOME BEFORE EXTRAORDINARY
LOSS AND CHANGE IN
ACCOUNTING PRINCIPLE .......................................... 5.8% 5.7%
======= =======
</TABLE>
18
<PAGE>
COMPARISON OF THREE MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
Net sales for the three months ended February 29, 2000 decreased $357, or .6%,
to $62,371 from $62,728 for the same period last year. Domestic consumer
products sales declined $1,456, or 2.4%, to $58,088 from $59,544 for last year's
comparable period. Net sales of international consumer products increased
$1,099, or 34.5%, from $3,184 in the 1999 period to $4,283 in the current
period.
Increases in net sales in the 2000 period were recognized for all of the topical
analgesics products, GOLD BOND Medicated Body Lotion, HERPECIN-L, DEXATRIM and
MUDD, while declines were recorded for the SUNSOURCE, BAN, SUN-IN and BULLFROG
brands. The increased sales of the product lines listed above were largely the
result of increased marketing support along with the introduction of the
DEXATRIM Natural line extension. SUNSOURCE continues to suffer from increased
competition and lower sales in general in the dietary supplements' market in
which it competes. The sales declines of the other brands listed above were
primarily due to reduced advertising and promotion expenditures as well as
increased competition in the antipersperant/deodorant market, which affected BAN
sales. Sales in the current period of the remaining product lines were
essentially flat or showed modest declines as compared to the corresponding
period of 1999. All sales variances were largely the result of changes in the
volume of unit sales of the particular brand.
International consumer product sales for the first quarter of fiscal 2000
increased $418, or 36.4%, for the Canadian operation and $526, or 48.5%, for the
United Kingdom business. The increase in Canadian sales was primarily associated
with the Thompson products and GOLD BOND Medicated Body Lotion, while the United
Kingdom sales increase was largely the result of increased BAN sales to the Far
East. U.S. export sales increased $155, or 16.3%, for the 2000 period as
compared to the same period in fiscal 1999, with the principal increases being
associated with BAN, ICY HOT, GOLD BOND and DEXATRIM. All sales variances were
largely the result of changes in the volume of unit sales of the particular
brand.
Cost of goods sold as a percentage of net sales improved to 26.7% from 26.9% in
the 1999 period. This continuing improvement was primarily the result of
increased sales of higher gross margin product lines in the current period.
Advertising and promotion expenses decreased $1,156, or 4.7%, and were 37.8% of
net sales compared to 39.4% in the corresponding 1999 period. Increases in the
2000 period were related to the Thompson products, acquired in December 1998,
and to the FLEXALL, MUDD and BULLFROG brands. Declines were recorded for the
GOLD BOND, SUN-IN, BAN and SUNSOURCE product lines.
The increase of $703, or 10.5%, in selling, general and administrative expenses
in the 2000 period was largely associated with direct selling expenses, freight
costs on shipments to customers and research and development expenditures. The
selling, general and administrative expenses were 11.9% of net sales in the
current period as compared to 10.7% in the same period of last fiscal year.
Interest expense increased $168, or 1.9%, in the 2000 period, reflecting
primarily the additional debt incurred for the acquisition of DEXATRIM and the
topical analgesics from Thompson in December 1998.
Investment and other income decreased $57, or 43.5%, largely due to the absence
of dividends from the Company's previous investment in Elcat, Inc, which was
liquidated in November 1999.
The cumulative effect of a change in accounting principle of $542, net of taxes,
was recorded in the current period. This charge related to costs of start-up
activities required to be expensed upon the Company's initial adoption of SOP
98-5 in December 1999.
19
<PAGE>
An extraordinary loss of $427, net of income tax benefit, associated with the
early extinguishment of debt, was recorded in the 1999 period. The loss
primarily related to the write-off of debt issuance costs connected with
outstanding long-term bank debt retired before maturity in the prior year's
period.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with a combination of
internally generated funds and borrowings. The Company's principal uses of cash
are for operating expenses, long-term debt servicing, acquisitions, working
capital and capital expenditures.
Cash of $9,623 was provided by operations for the three months ended February
29, 2000 whereas $1,002 was used in operations in the comparable 1999 period.
The increase in cash flows from operations over the prior year period was
primarily the result of an increase in depreciation and amortization and a
decrease in accounts receivable.
Investing activities used cash of $2,956 and $90,508 in the three months ended
February 29, 2000 and February 28, 1999, respectively. The decrease of $87,552
in the current period was largely the result of increased property, plant and
equipment additions more than offset by the absence of a major product
acquisition such as the Thompson brands acquired in the 1999 period.
Financing activities used cash of $6,480 in the current period, while cash of
$92,564 was provided in the 1999 period. The decrease of $99,044 reflects the
absence of financing required of a major product acquisition such as the
Thompson brands acquired in the 1999 period.
The following table presents working capital data at February 29, 2000 and
November 30, 1999 or for the respective periods then ended:
<TABLE>
<CAPTION>
ITEM 2000 1999
------------ ------------- ------------
<S> <C> <C>
Working capital (current assets less current liabilities) ...... $ 26,749 $ 26,413
Current ratio (current assets divided by current liabilities) .. 1.41 1.40
Quick ratio (cash and cash equivalents and accounts
receivable divided by current liabilities) ................... .84 .86
Average accounts receivable turnover ........................... 5.70 6.51
Average inventory turnover ..................................... 2.86 3.19
Working capital as a percentage of total assets ................ 5.48% 5.37%
</TABLE>
The change in the quick ratio at February 29, 2000 as compared to November 30,
1999, reflects primarily a decrease in accounts receivable and an increase in
accrued liabilities represented primarily by interest and advertising.
Total debt outstanding was $367,968 at February 29, 2000 compared to $369,950 at
November 30, 1999, a decrease of $1,982 during the first quarter of 2000.
The current credit facility consists of a $70,000 term loan and a $50,000
working capital revolving loan of which $53,600 and $5,000, respectively, were
outstanding at February 29, 2000.
Management of the Company believes that projected cash flows generated by
operations along with funds available under its credit facility will be
sufficient to fund the Company's current commitments and proposed operations. As
of February 29, 2000, the remaining amount authorized by the Company's board of
directors under the stock buyback plan was $4,134. Also, on December 21, 1998,
the Company filed a shelf registration statement with the Securities and
Exchange Commission for $250,000 of debt and equity securities of which $75,000
was utilized in the sale of the 8.875% Notes in May 1999.
20
<PAGE>
YEAR 2000
The Company has successfully completed the replacement of its previous
information technology (IT) systems with those that are year 2000 compliant. The
cost of the new IT systems to date is approximately $3,271, which has been
capitalized.
To date the Company has experienced no major problems with its implementation,
nor has it encountered any unusual situations with its principal customers and
suppliers in connection with their year 2000 IT systems' compliance. However, if
unanticipated problems arise in the future with regard to year 2000 compliance
with the Company's new IT systems or those of its principal customers and
suppliers, the Company's business could be adversely affected.
FOREIGN OPERATIONS
The Company's primary foreign operations are conducted through its Canadian and
U.K. subsidiaries. The functional currencies of these subsidiaries are Canadian
dollars and British pounds, respectively. Fluctuations in exchange rates can
impact operating results, including total revenues and expenses, when
translations of the subsidiary financial statements are made in accordance with
SFAS No. 52, "Foreign Currency Translation." For the three months ended February
29, 2000 and February 28, 1999, these subsidiaries accounted for 5% and 4% of
total revenues, respectively, and 2% of total assets. It has not been the
Company's practice to hedge its assets and liabilities in Canada and the U.K. or
its intercompany transactions due to the inherent risks associated with foreign
currency hedging transactions and the timing of payments between the Company and
its two foreign subsidiaries. Historically, gains or losses from foreign
currency transactions have not had a material impact on the Company's operating
results. Losses of $1 and $2 for the three months ended February 29, 2000 and
February 28, 1999, respectively, resulted from foreign currency transactions.
FORWARD LOOKING STATEMENTS
The Company may from time to time make written and oral forward looking
statements. Written forward looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases and in reports to
shareholders. The Private Securities Litigation Reform Act of 1995 contains a
safe harbor for forward looking statements. The Company relies on this safe
harbor in making such disclosures. The forward looking statements are based on
management's current beliefs and assumptions about expectations, estimates,
strategies and projections for the Company. These statements are not guarantees
of future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward looking
statements. The Company undertakes no obligation to update publicly any forward
looking statements whether as a result of new information, future events or
otherwise. The risks, uncertainties and assumptions regarding forward looking
statements include, but are not limited to, product demand and market acceptance
risks; product development risks, such as delays or difficulties in developing,
producing and marketing new products or line extensions; the impact of
competitive products, pricing and advertising; constraints resulting from
financial condition of the Company, including the degree to which the Company is
leveraged, debt service requirements and restrictions under bank loan agreements
and indentures; government regulations; risks of loss of material customers;
public perception regarding the Company's products; dependence on third party
manufacturers; environmental matters; product liability and insurance; year
2000; and other risks described in the Company's Securities and Exchange
Commission filings.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Exhibits:
(1) Statement regarding computation of per share earnings (Exhibit 11).
(2) Financial data schedule (Exhibit 27).
(b) The following Form 8-K report was filed with the Securities and
Exchange Commission during the three months ended February 29, 2000:
Report dated January 27, 2000 relating to adoption of Stockholders Rights Plan.
</TABLE>
22
<PAGE>
CHATTEM, INC.
-------------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHATTEM, INC.
(Registrant)
Dated: April 14, 2000 \s\ A. ALEXANDER TAYLOR II
----------------------- --------------------------
A. Alexander Taylor II
President and Director
(Chief Operating Officer)
\s\ STEPHEN M. POWELL
---------------------------
Stephen M. Powell
(Chief Accounting Officer)
23
<PAGE>
EXHIBIT 11
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
-----------------------------------------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28,
2000 1999
--------- --------
<S> <C> <C>
NET INCOME:
Income before extraordinary loss and
change in accounting principle .................. $ 3,608 $ 3,577
Extraordinary loss ................................ -- (427)
Change in accounting principle .................... (542) --
--------- --------
Net income ...................................... $ 3,066 $ 3,150
========= ========
COMMON SHARES:
Weighted average number outstanding ............... 9,693 9,712
Number issued upon assumed exercise of
of outstanding stock options and stock
warrants ........................................ 168 406
--------- --------
Weighted average number and dilutive
potential number outstanding..................... 9,861 10,118
========= ========
NET INCOME (LOSS) PER COMMON
SHARE:
Basic:
Income before extraordinary loss and
change in accounting principle................ $ .37 $ .37
Extraordinary loss ............................. -- (.04)
Change in accounting principle ................. (.05) --
--------- --------
Total basic ................................ $ .32 $ .33
========= ========
Diluted:
Income before extraordinary loss and
change in accounting principle ............... $ .37 $ .35
Extraordinary loss ............................. -- (.04)
Change in accounting principle ................. (.06) --
--------- --------
Total diluted .............................. $ .31 $ .31
========= ========
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Chattem,
Inc.'s unaudited financial statements and its qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-2000
<PERIOD-START> DEC-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 2,481
<SECURITIES> 0
<RECEIVABLES> 52,761
<ALLOWANCES> 900
<INVENTORY> 29,450
<CURRENT-ASSETS> 91,812
<PP&E> 48,487
<DEPRECIATION> 20,468
<TOTAL-ASSETS> 488,538
<CURRENT-LIABILITIES> 65,063
<BONDS> 355,968
0
0
<COMMON> 2,005
<OTHER-SE> 48,139
<TOTAL-LIABILITY-AND-EQUITY> 488,538
<SALES> 62,371
<TOTAL-REVENUES> 62,371
<CGS> 16,682
<TOTAL-COSTS> 47,667
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,974
<INCOME-PRETAX> 5,804
<INCOME-TAX> 2,196
<INCOME-CONTINUING> 3,608
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (542)
<NET-INCOME> 3,066
<EPS-BASIC> .32
<EPS-DILUTED> .31
</TABLE>
