<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 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 JULY 12, 2000, 9,254,439 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT
PAR VALUE, WERE OUTSTANDING.
1
<PAGE>
CHATTEM, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of May 31, 2000 and
November 30, 1999 .............................................. 3
Consolidated Statements of Income for the Three and Six
Months Ended May 31, 2000 and 1999 ............................. 5
Consolidated Statements of Cash Flows for the Six Months Ended
May 31, 2000 and 1999 .......................................... 6
Notes to Consolidated Financial Statements ....................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ........ 25
Item 6. Exhibits and Reports on Form 8-K ........................... 25
SIGNATURES ............................................................ 26
EXHIBIT 11 - Statement Regarding Computation of Per Share Earnings
EXHIBIT 27 - Financial Data Schedule
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
ASSETS 2000 1999
------ ---------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 2,325 $ 2,308
Accounts receivable, less allowance for doubtful accounts
of $850 at May 31, 2000 and $900 at November 30, 1999 ............. 61,462 55,032
Deferred income taxes................................................ 6,951 6,951
Inventories ......................................................... 25,129 27,818
Prepaid expenses and other current assets ........................... 1,218 929
---------- ---------
Total current assets .............................................. 97,085 93,038
---------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET .................................... 28,906 25,752
---------- ---------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product rights, net ......... 351,576 356,295
Debt issuance costs, net ............................................ 10,778 11,469
Other ............................................................... 3,367 5,070
---------- ---------
Total other noncurrent assets ..................................... 365,721 372,834
---------- ---------
TOTAL ASSETS .................................................... $ 491,712 $ 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>
MAY 31, NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
------------------------------------ ------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt ................................. $ 12,750 $ 11,000
Accounts payable ..................................................... 10,885 18,573
Payable to bank ...................................................... 417 4,905
Accrued liabilities .................................................. 35,414 32,147
---------- ---------
Total current liabilities .......................................... 59,466 66,625
---------- ---------
LONG-TERM DEBT, less current maturities ................................ 360,864 358,950
---------- ---------
DEFERRED INCOME TAXES .................................................. 15,326 15,326
---------- ---------
OTHER NONCURRENT LIABILITIES ........................................... 2,049 2,022
---------- ---------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000,
none issued ........................................................ -- --
Common shares, without par value, authorized 50,000, issued 9,496 at
May 31, 2000 and 9,707 at November 30, 1999 ......................... 1,977 2,021
Paid-in surplus ...................................................... 69,291 72,850
Accumulated deficit .................................................. (15,629) (24,804)
---------- ---------
55,639 50,067
Cumulative other comprehensive income -
foreign currency translation adjustment ............................ (1,632) (1,366)
---------- ---------
Total shareholders' equity ........................................ 54,007 48,701
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... $ 491,712 $ 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 FOR THE SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
------------------------ -------------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES ........................................... $ 79,636 $ 83,441 $ 142,007 $ 146,169
----------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales ..................................... 21,455 21,794 38,137 38,674
Advertising and promotion ......................... 30,757 33,315 54,339 58,053
Selling, general and administrative ............... 8,255 7,984 15,658 14,684
----------- ---------- ---------- ----------
Total costs and expenses ........................ 60,467 63,093 108,134 111,411
----------- ---------- ---------- ----------
INCOME FROM OPERATIONS .............................. 19,169 20,348 33,873 34,758
----------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense .................................. (9,216) (9,373) (18,190) (18,179)
Investment and other income, net .................. 53 113 127 244
----------- ---------- ---------- ----------
Total other income (expense) .................... (9,163) (9,260) (18,063) (17,935)
----------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND CHANGE IN
ACCOUNTING PRINCIPLE .............................. 10,006 11,088 15,810 16,823
PROVISION FOR INCOME TAXES .......................... 3,787 4,167 5,983 6,325
----------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY LOSS AND
CHANGE IN ACCOUNTING PRINCIPLE .................... 6,219 6,921 9,827 10,498
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET ....................... (110) (1,157) (110) (1,584)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET.......................... -- -- (542) --
----------- ---------- ---------- ----------
NET INCOME .......................................... $ 6,109 $ 5,764 $ 9,175 $ 8,914
=========== ========== ========== ==========
COMMON SHARES:
Weighted average number outstanding (basic) ....... 9,525 9,741 9,609 9,726
=========== ========== ========== ==========
Weighted average number and dilutive potential
number outstanding .............................. 9,594 10,112 9,732 10,105
=========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income before extraordinary loss and change in
accounting principle .......................... $ .65 $ .71 $ 1.02 $ 1.08
Extraordinary loss .............................. (.01) (.12) (.01) (.16)
Change in accounting principle .................. -- -- (.06) --
----------- ---------- ---------- ----------
Total basic ................................... $ .64 $ .59 $ .95 $ .92
=========== ========== ========== ==========
Diluted:
Income before extraordinary loss and change in
accounting principle............................ $ .65 $ .69 $ 1.01 $ 1.04
Extraordinary loss .............................. (.01) (.12) (.01) (.16)
Change in accounting principle .................. -- -- (.06) --
----------- ---------- ---------- ----------
Total diluted ................................. $ .64 $ .57 $ .94 $ .88
=========== ========== ========== ==========
</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 SIX MONTHS ENDED
MAY 31,
-----------------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................................ $ 9,175 $ 8,914
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 7,530 7,144
Dividend receivable from Elcat, Inc. .............................. -- (140)
Extraordinary loss on early extinguishment of debt, net ........... 110 1,584
Cumulative effect of change in accounting principle, net .......... 542 --
Other, net ........................................................ (153) 19
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable.............................................. (6,430) (21,819)
Inventories...................................................... 2,689 119
Prepaid expenses and other current assets ....................... 504 (149)
Accounts payable and accrued liabilities ........................ (4,023) 13,464
------------- ---------------
Net cash provided by operating activities .................... 9,944 9,136
------------- ---------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ............................ (4,294) (2,473)
Additions to trademarks and other product rights ...................... (43) (91,293)
Proceeds from sale of investment ...................................... -- 387
Increase in other assets, net.......................................... (494) (1,147)
------------- ---------------
Net cash used in investing activities ........................ (4,831) (94,526)
------------- ---------------
FINANCING ACTIVITIES:
Repayment of long-term debt ........................................... (25,496) (126,493)
Proceeds from long-term debt .......................................... 29,000 221,781
Proceeds from exercise of stock options and warrants .................. 210 675
Repurchase of common stock ............................................ (4,122) (885)
Change in payable to bank ............................................. (4,488) (898)
Debt issuance costs.................................................... (174) (4,829)
Cancellation of interest rate swap agreements ......................... -- (1,155)
------------- ---------------
Net cash provided by (used in) financing activities .......... (5,070) 88,196
------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS ...................................................... (26) (13)
------------- ---------------
CASH AND CASH EQUIVALENTS:
Increase for the period ............................................... 17 2,793
At beginning of period ................................................ 2,308 2,076
------------- ---------------
At end of period ...................................................... $ 2,325 $ 4,869
============= ===============
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
CASH PAYMENTS FOR:
Interest ............................................................ $ 16,995 $ 17,170
Taxes ............................................................... $ 6,035 $ 3,981
</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 May 31, 2000 and November 30,
1999:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Raw materials and work in process $ 11,124 $ 12,542
Finished goods ......................... 15,919 17,190
Excess of current cost over LIFO
values ............................... (1,914) (1,914)
-------------- --------------
Total inventories ................... $ 25,129 $ 27,818
============== ==============
</TABLE>
4. Accrued liabilities consisted of the following at May 31, 2000 and November
30, 1999:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Income and other taxes ................. $ 1,634 $ 2,859
Salaries, wages and commissions ........ 918 2,098
Advertising and promotion .............. 20,524 15,880
Interest................................ 6,484 6,326
Product acquisitions and
divestitures ......................... 3,041 2,999
Pension benefits........................ 1,215 781
Royalties............................... 124 56
Other .................................. 1,474 1,148
----------- ----------
Total accrued liabilities............. $ 35,414 $ 32,147
========== ==========
</TABLE>
7
<PAGE>
5. Comprehensive income consisted of the following components for the three
and six months ended May 31, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
--------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net income ................................. $ 6,109 $ 5,764 $ 9,175 $ 8,914
Other - foreign currency
translation adjustment .................. (232) (52) (266) (123)
------------ ------------ ------------ ------------
Total ............................... $ 5,877 $ 5,712 $ 8,909 $ 8,791
============ ============ ============ ===========
</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 the second quarter of fiscal 2000 the Company retired $2,400 face amount
of its 12.75% Notes, which resulted in the recognition of an extraordinary
loss of $110, net of income taxes, or $.01 per share, on the early
extinguishment of debt. This loss related to the write off of debt issuance
costs and the premium paid on the retirement of these notes.
8. 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 235,000
shares at a cost of $4,122 were repurchased in the first half of fiscal
2000. The repurchased shares were retired and returned to unissued. In
April 2000, the Company's board of directors authorized repurchases of up
to an additional $10,000 of the Company's common stock. The amount of
shares that can be repurchased for the remainder of fiscal 2000 are limited
by the Company's bank agreements. As of May 31, 2000, $5,878 was available
for share repurchases under the terms of the Company's bank agreement.
9. 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-hundredth 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.
10. As previously disclosed in "Item 1. Business-Governmental Regulation" of
the Company's Annual Report on Form 10-K for the year ended November 30,
1999 (the "1999 Form 10-K"), in 1994 the Nonprescription Drug
Manufacturers Association (now the Consumer Healthcare Products
Association ("CHPA") initiated a large scale study in conjunction with
the Yale University School of Medicine to investigate a possible
association, if any, of stroke in women aged 18 to 49 using
phenylpropanolamine ("PPA"), the active ingredient in DEXATRIM, for
weight loss (the "Yale Study"). PPA is also used in other
over-the-counter medications which are also part of the study. In May
2000, the results of the Yale Study were filed with the Food and Drug
Administration ("FDA"). The investigators concluded that the results of
the study suggest that PPA increases the risk of hemorrhagic stroke. The
FDA has indicated that no immediate action is required at this time and
that it will likely convene an advisory panel to discuss the results in
the future. The CHPA has questioned the execution of the study and
disagreed with its conclusions.
Because of the FDA's position that no immediate action is required and the
issues raised by the CHPA concerning the execution of the study and its
conclusions, the Company does not plan any immediate
8
<PAGE>
change to its formulation of DEXATRIM or in manufacturing and selling
DEXATRIM in its current form. There continues to be the possibility that
DEXATRIM will have to be reformulated or discontinued due to FDA
requirements or adverse consumer perception. As a result, the DEXATRIM
business would suffer, which would adversely affect the Company's
business. The Company has launched a complementary product, DEXATRIM
Natural, an all-natural diet aid that does not include PPA.
The Company has been named as a defendant in a lawsuit brought by the
Center for Environment Health (CEH) contending that the Company violated
the California Safe Drinking Water and Toxic Enforcement Act of 1998
(Proposition 65) by selling to California consumers without a warning
topical skin care products containing zinc oxide which in turn contains
lead. On December 30, 1999, Chattem was sent a notice of intent to sue
letter from CEH alleging that Chattem had violated Proposition 65
because zinc oxide allegedly also contains cadmium. The lawsuit contends
that the purported failure to comply with Proposition 65 requirements
also constitutes a violation of the California Business & Professions
Code Section 1700, ET SEQ. Violations of either Proposition 65 or
Business & Profession Code Section 1700, ET SEQ., render a defendant
liable for civil penalties of up to $2.5 per day per violation.
The Company has also been named as a defendant in a lawsuit filed in San
Francisco Superior Court on December 29, 1999. JOHNSON ET AL. V
BRISTOL-MYERS SQUIBB CO., et al., Case No. 308872. This is a putative
class action brought by two named plaintiffs on behalf of the general
public in California, against the same entities that are defendants in
the CEH lawsuit. As with the CEH lawsuit, the Johnson lawsuit alleges
that Chattem violated Proposition 65 by selling to California consumers
without a warning topical skin care product containing zinc oxide which
in turn contains lead. The lawsuit does not assert claims directly under
Proposition 65, but asserts that the alleged failure to comply with
Proposition 65 gives rise to claims under California's Business and
Professions Code Sections 17200 ET. SEQ., and 17500 ET SEQ. and the
Civil Code Section 1750 ET SEQ. The lawsuit seeks injunctive and
equitable relief, restitution, the disgorgement of allegedly wrongfully
obtained revenues, and damages.
The Company intends to vigorously defend these claims. These actions
have only recently been filed, however, and it is not possible at this
time to determine the outcome of these matters or the effect of their
resolution on the Company's financial position or operating results.
Management believes that the Company's defenses have merit; however,
there can be no assurance that the Company will be successful in its
defense or that these lawsuits will not have a material adverse effect
on the Company's results of operations for some period or on the
Company's financial position.
11. 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 products from Thompson Medical Company in March and
December 1998, respectively, seasonality has not been as pronounced as in
years past; however, net sales and gross profit during the first fiscal
quarter continue to trail the other fiscal quarters.
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.
9
<PAGE>
<TABLE>
<CAPTION>
Product Classifications
--------------------------------------------------------
OTC Toiletries
Health and Not
Total Care Skincare Classified
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
For the three months ended May 31, 2000:
Net sales.................................. $ 79,636 $ 46,855 $ 32,074 $ 707
Variable contribution margin............... 30,871 20,587 10,015 269
Depreciation and amortization.............. 3,788 1,317 1,218 1,253
Identifiable assets/total assets (at
May 31, 2000)............................ 491,712 194,472 190,384 106,856
For the three months ended May 31, 1999:
Net sales.................................. $ 83,441 $ 46,800 $ 36,403 $ 238
Variable contribution margin............... 31,201 18,659 13,511 (969)
Depreciation and amortization.............. 3,656 1,321 1,238 1,097
Identifiable assets/total assets (at
May 31, 1999)............................ 490,901 195,491 193,343 102,067
For the six months ended May 31, 2000:
Net sales.................................. $ 142,007 $ 85,349 $ 56,394 $ 264
Variable contribution margin............... 55,901 37,455 18,371 75
Depreciation and amortization.............. 7,530 2,641 2,436 2,453
Identifiable assets/total assets (at
May 31, 2000)............................ 491,712 194,472 190,384 106,856
For the six months ended May 31, 1999:
Net sales.................................. $ 146,169 $ 83,072 $ 62,576 $ 521
Variable contribution margin............... 56,897 33,395 24,579 (1,077)
Depreciation and amortization.............. 7,144 2,443 2,474 2,227
Identifiable assets/total assets (at
May 31, 1999)............................ 490,901 195,491 193,343 102,067
</TABLE>
10
<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 and six months ended May 31, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended May 31, Ended May 31,
-------------------------- --------------------
2000 1999 2000 1999
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Variable contribution margin.................................... $ 30,871 $ 31,201 $ 55,901 $ 56,897
Less divisional and corporate overhead not allocated to
product groups................................................ 11,702 10,853 22,028 22,139
---------- ---------- ---------- ---------
Income from operations.......................................... 19,169 20,348 33,873 34,758
---------- ---------- ---------- ---------
Other income (expense):
Interest expense.............................................. (9,216) (9,373) (18,190) (18,179)
Investment and other income, net.............................. 53 113 127 244
------------- ------------- ------------- ------------
Total other income (expense)................................. (9,163) (9,260) (18,063) (17,935)
----------- ----------- ----------- -----------
Income before income taxes, extraordinary loss and
change in accounting principle................................ $ 10,006 $ 11,088 $ 15,810 $ 16,823
============ ============ =========== ==========
</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.
11
<PAGE>
<TABLE>
<S> <C>
Note 13
</TABLE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
MAY 31, 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............... $ 13 $ 14 $ 2,298 $ -- $ 2,325
Accounts receivable, less allowance for
doubtful accounts of $850............. 56,857 -- 4,605 -- 61,462
Deferred income taxes................... 6,951 -- -- -- 6,951
Inventories............................. 22,811 -- 2,318 -- 25,129
Prepaid expenses and other current
assets................................. 522 -- 696 -- 1,218
------------- ------------- -------------- ------------ -------------
Total current assets.................. 87,154 14 9,917 -- 97,085
------------- ------------- -------------- ------------ -------------
PROPERTY, PLANT AND EQUIPMENT, NET........ 28,587 -- 319 -- 28,906
------------- ------------- -------------- ------------ -------------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased
product rights, net................... 5,405 346,171 -- -- 351,576
Debt issuance costs, net................ 10,778 -- -- -- 10,778
Investment in subsidiaries.............. 9,930 -- -- (9,930) --
Other................................... 3,367 -- -- -- 3,367
------------- ------------- -------------- ------------ -------------
Total other noncurrent assets......... 29,480 346,171 -- (9,930) 365,721
------------- ------------- -------------- ------------ -------------
TOTAL ASSETS........................ $ 145,221 $ 346,185 $ 10,236 $ (9,930) $ 491,712
============= ============= ============== ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt..... $ 12,750 $ -- $ -- $ -- $ 12,750
Accounts payable......................... 10,260 -- 625 -- 10,885
Payable to bank.......................... 417 -- -- -- 417
Accrued liabilities...................... 34,714 -- 700 -- 35,414
------------- ------------- -------------- ------------ -------------
Total current liabilities.............. 58,141 -- 1,325 -- 59,466
------------- ------------- -------------- ------------ -------------
LONG-TERM DEBT, less current maturities.... 360,864 -- -- -- 360,864
------------- ------------- -------------- ------------ -------------
DEFERRED INCOME TAXES...................... 2,776 12,550 -- -- 15,326
------------- ------------- -------------- ------------ -------------
OTHER NONCURRENT LIABILITIES............... 2,049 -- -- -- 2,049
------------- ------------- -------------- ------------ -------------
INTERCOMPANY ACCOUNTS...................... (332,507) 332,936 (429) -- --
------------- ------------- -------------- ------------ -------------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued.......... -- -- -- -- --
Common shares, without par value,
authorized 50,000, issued 9,496........ 1,977 2 9,928 9,930 1,977
Paid-in surplus.......................... 69,291 -- -- -- 69,291
Accumulated deficit...................... (16,896) 697 570 -- (15,629)
------------- ------------- -------------- ------------ -------------
Total.................................. 54,372 699 10,498 9,930 55,639
Cumulative other comprehensive income -
Foreign currency translation
adjustment............................. (474) -- (1,158) -- (1,632)
------------- ------------- -------------- ------------ -------------
Total shareholders' equity............. 53,898 699 9,340 9,930 54,007
------------- ------------- -------------- ------------ -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.............. $ 145,221 $ 346,185 $ 10,236 $ 9,930 $ 491,712
============= ============= ============== ============ =============
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Note 13
</TABLE>
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>
13
<PAGE>
<TABLE>
<S> <C>
Note 13
</TABLE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED MAY 31, 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................................. $ 134,079 $ -- $ 7,928 $ -- $ 142,007
------------- ------------- -------------- ------------ -------------
COSTS AND EXPENSES:
Cost of sales........................... 35,402 -- 2,735 -- 38,137
Advertising and promotion............... 46,376 4,857 3,106 -- 54,339
Selling, general and administrative..... 14,223 5 1,430 -- 15,658
------------- ------------- -------------- ------------ -------------
Total costs and expenses.............. 96,001 4,862 7,271 -- 108,134
------------- ------------- -------------- ------------ -------------
INCOME FROM OPERATIONS.................... 38,078 (4,862) 657 -- 33,873
------------- ------------- -------------- ------------ -------------
OTHER INCOME (EXPENSE):
Interest expense......................... (18,190) -- -- -- (18,190)
Investment and other income.............. 111 1 15 -- 127
Royalties................................ (6,377) 6,502 (125) -- --
Corporate allocations.................... 16 -- (16) -- --
------------- ------------- -------------- ------------ -------------
Total other income (expense).......... (24,440) 6,503 (126) -- (18,063)
------------- ------------- -------------- ------------ -------------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND CHANGE IN
ACCOUNTING PRINCIPLE..................... 13,638 1,641 531 -- 15,810
PROVISION FOR INCOME TAXES................. 5,104 558 321 -- 5,983
------------- ------------- -------------- ------------ -------------
INCOME BEFORE EXTRAORDINARY
LOSS AND CHANGE IN ACCOUNTING
PRINCIPLE................................ 8,534 1,083 210 -- 9,827
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET.............. (110) -- -- -- (110)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET................ (542) -- -- -- (542)
------------- ------------- -------------- ------------ -------------
NET INCOME................................. $ 7,882 $ 1,083 $ 210 $ -- $ 9,175
============= ============= ============== ============ =============
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
Note 13
</TABLE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED MAY 31, 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................................ $ 139,417 $ -- $ 6,752 $ -- $ 146,169
------------- ------------- -------------- ------------ -----------
COSTS AND EXPENSES:
Cost of sales.......................... 36,343 -- 2,331 -- 38,674
Advertising and promotion.............. 51,182 4,644 2,227 -- 58,053
Selling, general and administrative.... 13,161 -- 1,523 -- 14,684
------------- ------------- -------------- ------------ -----------
Total costs and expenses............. 100,686 4,644 6,081 -- 111,411
------------- ------------- -------------- ------------ -----------
INCOME FROM OPERATIONS................... 38,731 (4,644) 671 -- 34,758
------------- ------------- -------------- ------------ -----------
OTHER INCOME (EXPENSE):
Interest expense....................... (18,179) -- -- -- (18,179)
Investment and other income............ 210 (7) 41 -- 244
Royalties.............................. (6,688) 6,802 (114) -- --
Premium revenue........................ (19) -- 19 -- --
Corporate allocations.................. 18 -- (18) -- --
------------- ------------- -------------- ------------ -----------
Total other income (expense)........ (24,658) 6,795 (72) -- (17,935)
------------- ------------- -------------- ------------ -----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS..................... 14,073 2,151 599 -- 16,823
PROVISION FOR INCOME TAXES............... 5,321 731 273 -- 6,325
------------- ------------- -------------- ------------ -----------
INCOME BEFORE EXTRAORDINARY
LOSS................................... 8,752 1,420 326 -- 10,498
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET............ (1,584) -- -- -- (1,584)
------------- ------------- -------------- ------------ -----------
NET INCOME............................... $ 7,168 $ 1,420 $ 326 $ -- $ 8,914
============= ============= ============== ============ ===========
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
Note 13
</TABLE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 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................................ $ 7,882 $ 1,083 $ 210 $ -- $ 9,175
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization............ 2,625 4,857 48 -- 7,530
Extraordinary loss on early
extinguishment of debt, net............. 110 -- -- -- 110
Cumulative effect of change in
accounting principle, net.............. 542 -- -- -- 542
Income tax provision..................... (558) 558 -- -- --
Other net................................ (153) -- -- -- (153)
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable................... (6,168) -- (262) -- (6,430)
Inventories........................... 2,774 -- (85) -- 2,689
Prepaid and other current assets...... 674 -- (170) -- 504
Accounts payable and accrued
liabilities.......................... (3,785) -- (238) -- (4,023)
------------- ------------- -------------- ------------ -----------
Net cash provided by (used in)
operating activities................. 3,943 6,498 (497) -- 9,944
------------- ------------- -------------- ------------ -----------
INVESTING ACTIVITIES:
Purchases of property, plant and
equipment................................ (4,267) -- (27) -- (4,294)
Purchase of trademarks and other related
assets................................... (43) -- -- -- (43)
Increase in other assets, net............. (494) -- -- -- (494)
------------- ------------- -------------- ------------ -----------
Net cash used in investing
activities.......................... (4,804) -- (27) -- (4,831)
------------- ------------- -------------- ------------ -----------
FINANCING ACTIVITIES:
Payments on long- term debt............... (25,496) -- -- -- (25,496)
Proceeds from long-term debt.............. 29,000 -- -- -- 29,000
Proceeds from exercise of stock options
and warrants............................. 210 -- -- -- 210
Debt issuance costs....................... (174) -- -- -- (174)
Change in payable to bank................. (4,488) -- -- -- (4,488)
Changes in intercompany accounts.......... 3,382 (4,500) 1,118 -- --
Dividends paid............................ 2,000 (2,000) -- -- --
Repurchases of common stock............... (4,122) -- -- -- (4,122)
------------- ------------- -------------- ------------ -----------
Net cash provided by (used in)
financing activities................. 312 (6,500) 1,118 -- (5,070)
------------- ------------- -------------- ------------ -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS....................... 12 -- (38) -- (26)
------------- ------------- -------------- ------------ -----------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period........ (537) (2) 556 -- 17
At beginning of period.................... 550 16 1,742 -- 2,308
------------- ------------- -------------- ------------ -----------
At end of period.......................... $ 13 $ 14 $ 2,298 $ -- $ 2,325
============= ============= ============== ============ ===========
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
Note 13
</TABLE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 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............................... $ 7,168 $ 1,420 $ 326 $ -- $ 8,914
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........... 2,432 4,644 68 -- 7,144
Extraordinary loss on early
extinguishment of debt, net............ 1,584 -- -- -- 1,584
Dividend receivable from Elcat, Inc. ... (140) -- -- -- (140)
Income tax provision.................... (731) 731 -- -- --
Other net............................... 11 8 -- -- 19
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable.................. (22,161) -- 342 -- (21,819)
Inventories.......................... (346) -- 465 -- 119
Prepaid and other current assets.... 56 -- (205) -- (149)
Accounts payable and accrued
liabilities........................ 13,166 -- 298 -- 13,464
------------- ------------- -------------- ------------ -----------
Net cash provided by operating
activities....................... 1,039 6,803 1,294 -- 9,136
------------- ------------- -------------- ------------ -----------
INVESTING ACTIVITIES:
Purchases of property, plant and
equipment.............................. (2,460) -- (13) -- (2,473)
Purchase of trademarks and other related
assets................................. (91,293) -- -- -- (91,293)
Proceeds from sale of investment......... -- 387 -- -- 387
Other assets............................. (1,147) -- -- -- (1,147)
------------- ------------- -------------- ------------ -----------
Net cash provided by (used in)
investing activities.............. (94,900) 387 (13) -- (94,526)
------------- ------------- -------------- ------------ -----------
FINANCING ACTIVITIES:
Payments on long- term debt.............. (126,493) -- -- -- (126,493)
Proceeds from long-term debt............. 221,781 -- -- -- 221,781
Proceeds from exercise of stock options
and warrants........................... 675 -- -- -- 675
Debt issuance costs...................... (4,829) -- -- -- (4,829)
Increase in payable to bank.............. (898) -- -- -- (898)
Repurchase of common stock............... (885) -- -- -- (885)
Cancellation of interest rate swap (1,155) -- -- -- (1,155)
agreements..............................
Dividends paid........................... 2,000 (2,000) -- -- --
Changes in intercompany accounts......... 7,040 (5,182) (1,858) -- --
------------- ------------- -------------- ------------ -----------
Net cash provided by (used in)
financing activities.............. 97,236 (7,182) (1,858) -- 88,196
------------- ------------- -------------- ------------ -----------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS............... (32) -- 19 -- (13)
------------- ------------- -------------- ------------ -----------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period....... 3,343 8 (558) -- 2,793
At beginning of period................... (95) 11 2,160 -- 2,076
------------- ------------- -------------- ------------ -----------
At end of period......................... $ 3,248 $ 19 $ 1,602 $ -- $ 4,869
============= ============= ============== ============ ===========
</TABLE>
17
<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 May 31, 2000, the Company experienced a $3,805, or
4.6%, decrease in net sales to $79,636 from $83,441 in the second quarter of
fiscal 1999. Operating income during the period declined $1,179, or 5.8%, to
$19,169 from $20,348. Income before extraordinary loss and change in accounting
principle of $6,219, or $.65 per share, was recorded during the period compared
to $6,921, or $.69 per diluted share, during the same period last year.
For the first half of fiscal 2000, net sales decreased $4,162, or 2.8%, to
$142,007 from $146,169 for the comparable period last year. Income from
operations declined $885, or 2.5%, for the period, to $33,873 as compared to
$34,758 for the same period of fiscal 1999. Income before extraordinary loss and
change in accounting principle decreased $671, or 6.4%, to $9,827 from $10,498
in the related fiscal 1999 period.
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 measurements
defined and required by generally accepted accounting principles. Cash earnings
for the six months ended May 31, 2000 were $13,146, or $1.35 per share, as
compared to $13,860, or $1.37 per share, for the comparable 1999 period.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were
$40,352, or 28.4% of net sales, in the first half of fiscal 2000 compared to
$41,064, or 28.1% of net sales, in the same 1999 period.
During the second quarter and first half of fiscal 2000, the Company enjoyed
strong sales performances from its topical analgesic franchise, HERPECIN-L and
MUDD brands and its international division. These results were offset by
continued sales weakness from the Company's SUNSOURCE line and sales declines of
BAN due to increased competition.
In the second quarter of fiscal 2000, the Company recognized an extraordinary
loss of $110, net of income taxes, or $.01 per share, on the early
extinguishment of debt. This loss related to the write-off of debt issuance
costs and premium paid on the retirement of $2,400 face amount of the Company's
12.75% Notes.
The Company recorded a charge of $542, net of income taxes, or $.06 per share,
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 repurchased 235,000 shares of its common stock in the first half
of fiscal 2000 for $4,122. The repurchased shares were retired and returned
to unissued.
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. The
Company introduced DEXATRIM Natural in the first quarter of fiscal 2000 and BAN
Naturals in the second quarter as line extensions. 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 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, acquire its stock
or reduce indebtedness.
18
<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 FOR THE SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
------------------------ -------------------------
2000 1999 2000 1999
--------- --------- --------- -------
<S> <C> <C> <C> <C>
NET SALES............................... 100.0% 100.0% 100.0% 100.0%
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of sales......................... 26.9 26.1 26.9 26.5
Advertising and promotion............. 38.6 39.9 38.3 39.7
Selling, general and administrative... 10.4 9.6 11.0 10.0
------- ------- ------- -------
Total costs and expenses............ 75.9 75.6 76.2 76.2
------- ------- ------- -------
INCOME FROM OPERATIONS ................. 24.1 24.4 23.8 23.8
------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense...................... (11.6) (11.2) (12.8) (12.4)
Investment and other income........... .1 .1 .1 .1
------- ------- ------- -------
Total other income (expense)....... (11.5) (11.1) (12.7) (12.3)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES ............. 12.6 13.3 11.1 11.5
PROVISION FOR INCOME TAXES ............. 4.8 5.0 4.2 4.3
------- ------- ------- -------
NET INCOME BEFORE EXTRAORDINARY
LOSS AND CHANGE IN ACCOUNTING
PRINCIPLE............................. 7.8% 8.3% 6.9% 7.2%
======= ======= ======= =======
</TABLE>
19
<PAGE>
COMPARISON OF THREE MONTHS ENDED MAY 31, 2000 AND 1999
Net sales for the three months ended May 31, 2000 decreased $3,805, or 4.6%, to
$79,636 from $83,441 for the same period last year. Domestic consumer products
sales declined $4,173, or 5.4%, to $73,622 from $77,795 for last years's
comparable period. Net sales of international consumer products increased $368,
or 6.5%, from $5,646 in the 1999 period to $6,014 in the current period.
For the three months ended May 31, 2000 sales of OTC health care products
increased $55, or .1%, to $46,855 from $46,800 in the same period last year,
while sales of toiletries and skin care brands decreased $4,329, or 11.9%, from
$36,403 in the comparable fiscal 1999 period to $32,074 in the current period.
Other sales increased $469, or 197.1%, to $707 in the second quarter of fiscal
2000 from $238 in the same period of fiscal 1999.
In the domestic OTC health care product segment in the 2000 period sales
increases were recognized for all of the principal topical analgesic products,
most notably FLEXALL and ICY HOT, and HERPECIN-L. Declines in sales were
recorded for the SUNSOURCE products, as a result of continuing weakness of the
dietary supplements' market, PAMPRIN, PREMSYN PMS and, to a lesser extent, GOLD
BOND. In the current period all of the domestic toiletries and skin care brands
experienced increased sales, except BULLFROG and BAN. Sales variances were
largely the result of changes in the volume of unit sales of the particular
brands.
The increase in sales of the principal topical analgesics products was
attributed principally to increased marketing support, especially for the
Thompson Medical brands, and in the case of FLEXALL the introduction of the QUIK
GEL line extension in the third quarter of fiscal 1999. HERPECIN-L sales were
affected by increased and more effective marketing support. For the skin care
products, except for BULLFROG, sales increases were largely due to increased
advertising. PHISODERM sales have continued to benefit from the introduction of
the 4-Way Daily Acne Cleanser line extension in the first quarter of 1999 and
increased advertising and promotion expenditures.
BAN and GOLD BOND sales declined primarily as a result of reduced marketing
support and increased competition--BAN, from the introduction of a new, heavily
promoted antiperspirant and deodorant product in the first half of fiscal 2000
and GOLD BOND, principally from the continuing introduction of new competitive
private label brands. BULLFROG sales were affected principally by the loss of a
major customer in the first half of fiscal 2000, while PAMPRIN and PREMSYN PMS
sales were largely influenced by reduced advertising and promotion expenditures.
Sales of the remaining brands were relatively flat or showed modest declines in
the current period.
International sales for the second quarter of fiscal 2000 increased $445, or
23.1%, for the Canadian operation but declined $213, or 8.2%, for the United
Kingdom business. The increase in Canadian sales was primarily associated
with GOLD BOND Medicated Body Lotion of the OTC health care product segment,
while the United Kingdom sales decline, all in the skin care category,
reflected increased competition and the maturity of the limited number of
products offered. U.S. export sales increased $136, or 12.1%, for the 2000
period as compared to the same period in fiscal 1999, with the principal
increases being associated with ICY HOT, GOLD BOND and DEXATRIM, all of the
OTC health care product segment. 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 was 26.9% for the current period
compared to 26.1% for the same period last year. This unfavorable comparison
represented start-up costs associated with the Company's additional
manufacturing facility, which commenced operations in the current period, and
changes in product mix.
Advertising and promotion expenses decreased $2,558, or 7.7%, and were 38.6% of
net sales compared to 39.9% in the corresponding 1999 period. Increases in the
2000 period were related to the Thompson Medical topical analgesic products and
to all of the skin care brands. Declines were recorded for the GOLD BOND, BAN
and SUNSOURCE product lines.
20
<PAGE>
The increase of $271, or 3.4%, in selling, general and administrative
expenses in the 2000 period was largely associated with corporate service
department, research and development and foreign exchange expenses. The
selling, general and administrative expenses were 10.4% of net sales in the
current period as compared to 9.6% in the same period of last fiscal year.
Interest expense decreased $157, or 1.7%, in the 2000 period, reflecting
primarily lower interest-bearing debt outstanding.
Investment and other income decreased $60, or 53.1%, largely due to the absence
of dividends from the Company's previous investment in Elcat, Inc., which was
liquidated in November 1999. The proceeds were used to reduce bank debt.
In the second quarter of fiscal 2000, the Company recognized an extraordinary
loss of $110, net of income taxes, on the early extinguishment of debt. This
loss related to the write-off of debt issuance costs and premium paid on the
retirement of $2,400 face amount of the Company's 12.75% Notes. A similar loss
of $1,157, net of income taxes, was also recorded in the same period of fiscal
1999.
Income before extraordinary loss in the current period was $702, or 10.1%, less
than that recognized in the same period of last year. This decline was largely
the result of reduced sales.
COMPARISON OF SIX MONTHS ENDED MAY 31, 2000 AND 1999
Net sales for the six months ended May 31, 2000 decreased $4,162, or 2.8%, to
$142,007 from $146,169 for the same period last year. Domestic consumer products
sales declined $5,629, or 4.1%, to $131,709 from $137,338 for last year's
comparable period. Net sales of international consumer products increased
$1,467, or 16.6%, from $8,831 in the 1999 period to $10,298 in the current
period.
For the first half of fiscal 2000, sales of the OTC health care products
increased $2,277, or 2.7%, to $85,349 from $83,072 in the same period last year,
while sales of toiletries and skin care brands decreased $6,182, or 9.9%, from
$62,576 in the comparable fiscal 1999 period to $56,394 in the current period.
Other sales declined $257, or 49.3%, to $264 in the six months ended May 31,
2000 from $521 in the same period of fiscal 1999.
In the domestic OTC health care product segment in the 2000 period sales
increases were recognized for all of topical analgesic products, most notably
FLEXALL and ICY HOT, HERPECIN-L and DEXATRIM. Declines in sales were recorded
for the SUNSOURCE brands, as a result of continuing weakness of the dietary
supplements' market, PAMPRIN, PREMSYN PMS and, to a lesser extent, GOLD BOND. In
the current period sales increases were realized for MUDD and PHISODERM of the
domestic toiletries and skin care product category, while sales decreased for
BAN, SUN-IN and BULLFROG. Sales variances were largely the result of changes in
the volume of unit sales of the particular brand.
The increase in sales of the topical analgesic products was attributed
principally to increased marketing support, especially for the Thompson Medical
brands, and in the case of FLEXALL the introduction of the QUIK GEL line
extension in the third quarter of fiscal 1999. MUDD and PHISODERM sales
benefited from line extension introductions in fiscal 1999 (MUDD Self-Heating
Skin Cleanser and PHISODERM 4-Way Daily Acne Cleanser) and increased marketing
support, while HERPECIN-L sales were affected by increased and more effective
advertising and promotion expenditures. The DEXATRIM sales increase largely
represented the introduction of DEXATRIM Natural in the first quarter of fiscal
2000.
BAN and GOLD BOND sales declined primarily as a result of reduced marketing
support and increased competition--BAN, from the introduction of a new, heavily
promoted antiperspirant and deodorant product in the first half of fiscal 2000
and GOLD BOND, principally from the continuing introduction of new competitive
private label brands. BULLFROG sales were affected principally by the loss of a
major customer, while PAMPRIN, PREMSYN PMS and SUN-IN sales were largely
influenced by reduced
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advertising and promotion expenditures. Sales of the remaining brands were
relatively flat or showed modest declines in the current period.
International sales for the first six months of fiscal 2000 increased $863, or
28.1%, for the Canadian operation and $313, or 8.5%, for the United Kingdom
business. The increase in Canadian sales was primarily associated with the GOLD
BOND product line, especially GOLD BOND Medicated Lotion, of the OTC health care
product segment, while BAN of the toiletries and skin care product group
constituted the principal increase in United Kingdom sales. U.S. export sales
increased $291, or 14.0%, for the current period as compared to the same period
last year, with the increase being largely associated with ICY HOT, GOLD BOND
and DEXATRIM, all of the OTC health care product category. Sales variances were
principally the result of changes in the volume of unit sales of the particular
brand.
Cost of goods sold as a percentage of net sales was essentially flat at 26.9%
for the current period compared to 26.5% for the same period last year. This
slightly unfavorable comparison represents start-up costs associated with the
Company's additional manufacturing facility, which commenced operations in the
current period, and changes in product mix.
Advertising and promotion expenses decreased $3,714, or 6.4%, and were 38.3% of
net sales compared to 39.7% in the corresponding 1999 period. Increases in the
current period were associated with the Thompson Medical products, BULLFROG,
PHISODERM, MUDD and FLEXALL. Declines were recorded for the GOLD BOND, BAN and
SUNSOURCE product lines.
The increase of $974, or 6.6%, in selling, general and administrative expenses
in the current period was largely associated with direct selling expenses,
freight costs on shipments to customers, research and development expenditures
and corporate service departments' costs. The selling, general and
administrative expenses were 11.0% of net sales in the 2000 period as compared
to 10.0% in the same period of last fiscal year.
Investment and other income decreased $117, or 48.0%, in the current period,
primarily due to the absence of dividends from the Company's previous
investment in Elcat Inc., which was liquidated in November 1999. The proceeds
were used to reduce bank debt.
In the 2000 period the Company recognized an extraordinary loss of $110, net of
income taxes, on the early extinguishment of debt. This loss related to the
write-off of debt issuance costs and premium paid on the retirement of $2,400
face amount of the Company's 12.75% Notes. A similar loss of $1,584, net of
income taxes, was also recorded in the same period of fiscal 1999.
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."
Income before extraordinary loss and change in accounting principle in the
current period was $671, or 6.4%, less than that recognized in the same period
of last year. This decline was largely the result of reduced sales.
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, its own stock repurchases,
acquisitions, working capital and capital expenditures.
Cash of $9,944 and $9,136 was provided by operations for the six months ended
May 31, 2000 and 1999, respectively. The increase in cash flows from operations
over the prior year period was primarily the result of increases in net income
and depreciation and amortization and a substantial reduction in the increase in
accounts receivables.
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<PAGE>
Investing activities used cash of $4,831 and $94,526 in the six months ended May
31, 2000 and 1999, respectively. The decrease of $89,695 in the current period
primarily represented the absence of acquisitions comparable to that of the
Thompson Medical brands in the prior year period.
Financing activities used cash of $5,070 in the six months ended May 31, 2000
compared to $88,196 of cash provided in the comparable prior year period. The
decrease of $93,266 in the current period reflected principally the absence of
financing required for acquisitions comparable to that necessitated by the
Thompson Medical brands' purchase in the same period of last year.
The following table presents working capital data at May 31, 2000 and
November 30, 1999 or for the respective years then ended:
<TABLE>
<CAPTION>
May 31, November 30,
ITEM 2000 1999
------------ ---------------- ------------
<S> <C> <C>
Working capital (current assets less current liabilities) ....... $ 37,619 $ 26,413
Current ratio (current assets divided by current liabilities).... 1.63 1.40
Quick ratio (cash and cash equivalents and accounts
receivable divided by current liabilities)..................... 1.07 .86
Average accounts receivable turnover............................. 4.91 6.51
Average inventory turnover....................................... 3.12 3.19
Working capital as a percentage of total assets.................. 7.65% 5.37%
</TABLE>
The change in the current and quick ratios at May 31, 2000 as compared to
November 30, 1999, reflected primarily an increase in accounts receivable and
reductions of accounts payable and the payable to bank. Accounts receivable
turnover is adversely impacted by seasonal sales which resulted in a higher
receivables balance on May 31, 2000 and 1999.
Total loans outstanding were $373,614 at May 31, 2000 compared to $369,950 at
November 30, 1999, an increase of $3,664 during the first half of fiscal 2000.
This increase was primarily the result of borrowings on the revolving credit
facility to repurchase 235,000 shares of the Company's common stock in the
current period. The principal balances outstanding at May 31, 2000 of the term
loan, the revolving credit facility and total senior subordinated notes were
$50,600, $16,000 and $307,014, respectively.
Management of the Company believes that projected cash flows generated by
operations along with funds available under its credit facilities will be
sufficient to fund the Company's current commitments and proposed operations.
The Company intends to utilize its significant debt-free cash flow (cash flow
after capital expenditures and scheduled amortization of principal of debt) to
continue to repurchase the Company's common stock up to the $10,000 per fiscal
year limitation under the Company's bank agreement authorization as well as to
prepay debt. As of July 12, 2000, the remaining amount available to the Company
in fiscal 2000 under its bank loan agreement stock repurchase authorization was
$2,845. 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.
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<PAGE>
FOREIGN OPERATIONS
The Company's primary foreign operations are conducted through its Canadian and
U.K. subsidiaries. The functional currencies of these subsidiaries are Canadian
dollars and British pounds, respectively. Fluctuations in exchange rates can
impact operating results, including total revenues and expenses, when
translations of the subsidiary financial statements are made in accordance with
SFAS No. 52, "Foreign Currency Translation." For the six months ended May 31,
2000 and 1999, these subsidiaries accounted for 6% and 5% of total revenues,
respectively, and 2% of total assets for each period. 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 $39 and $1 for the six months ended May 31, 2000 and 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; and other
risks described in the Company's Securities and Exchange Commission filings.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on April 19, 2000 in
Chattanooga, Tennessee. At the meeting, the following persons were elected as
directors to serve for a three year term: Louis H. Barnett, Robert E.
Bosworth and Richard E. Cheney. With respect to Mr. Barnett, 8,420,762 were
in favor and 85,875 abstained. With respect to Mr. Bosworth, 8,459,787 were
in favor and 46,850 abstained. With respect to Mr. Cheney, 8,459,087 were in
favor and 47,550 abstained. The following directors' terms of office
continued after the annual meeting: Zan Guerry, Samuel E. Allen, Scott L.
Probasco, Jr., Philip H. Sanford and A. Alexander Taylor II.
The 2000 Chattem, Inc. Non-Statutory Stock Option Plan was approved by
shareholders with 6,391,782 votes in favor, 488,340 opposed, 16,205 abstaining
and 1,610,310 broker non-votes.
The shareholders approved Arthur Andersen LLP as auditors for the next
fiscal year with 8,493,284 votes in favor, 5,695 opposed and 7,658 abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Statement regarding computation of per share earnings
(Exhibit 11).
(2) Financial data schedule (Exhibit 27).
(3) Audit Committee Charter (Exhibit 99).
(b) No Form 8-K reports were filed with the Securities and Exchange
Commission during the three months ended May 31, 2000.
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<PAGE>
CHATTEM, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHATTEM, INC.
(Registrant)
Dated: July 14, 2000 /s/ A. ALEXANDER TAYLOR II
---------------- -------------------------------------------
A. Alexander Taylor II
President and Director
(Chief Operating Officer)
/s/ STEPHEN M. POWELL
-------------------------------------------
Stephen M. Powell
Corporate Controller
(Chief Accounting Officer)
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