<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1999
COMMISSION FILE NUMBER 0-5905
CHATTEM, INC.
A TENNESSEE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
TELEPHONE: 423-821-4571
REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
AS OF OCTOBER 13, 1999, 9,821,681 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT
PAR VALUE, WERE OUTSTANDING.
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<PAGE>
CHATTEM, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of August 31, 1999 and
November 30, 1998...................................... 3
Consolidated Statements of Income for the Three and Nine
Months Ended August 31, 1999 and 1998.................. 4
Consolidated Statements of Cash Flows for the Nine
Months Ended August 31, 1999 and 1998.................. 5
Notes to Consolidated Financial Statements.............. 6
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................. 25
SIGNATURES.................................................. 26
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>
AUGUST 31,
1999
(AS RESTATED, NOVEMBER 30,
SEE NOTE 16) 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,575 $ 2,076
Accounts receivable, less allowance for doubtful accounts
of $850 at August 31, 1999 and $775 at November 30,
1998.................................................... 50,704 36,581
Refundable and deferred income taxes...................... 3,058 3,049
Inventories............................................... 23,700 19,606
Prepaid expenses and other current assets................. 1,042 784
-------- --------
Total current assets.................................... 89,079 62,096
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 22,092 18,146
-------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc.................................. 3,312 3,102
Patents, trademarks and other purchased product rights,
net..................................................... 358,449 272,226
Debt issuance costs, net.................................. 12,001 10,091
Other..................................................... 4,413 3,351
-------- --------
Total other noncurrent assets........................... 378,175 288,770
-------- --------
TOTAL ASSETS.......................................... $489,346 $369,012
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 10,000 $ 17,444
Accounts payable.......................................... 7,091 12,733
Payable to bank........................................... 10,183 1,026
Accrued liabilities....................................... 46,056 30,209
-------- --------
Total current liabilities............................... 73,330 61,412
-------- --------
LONG-TERM DEBT, less current maturities..................... 363,641 273,913
-------- --------
DEFERRED INCOME TAXES....................................... 6,826 6,826
-------- --------
OTHER NONCURRENT LIABILITIES................................ 1,966 2,110
-------- --------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000,
none issued............................................. -- --
Common shares, without par value, authorized 50,000,
issued 9,821 at August 31, 1999 and 9,574 at
November 30, 1998....................................... 2,045 1,994
Paid-in surplus........................................... 73,682 69,068
Accumulated deficit....................................... (30,622) (44,960)
-------- --------
45,105 26,102
Cumulative other comprehensive income--
Foreign currency translation adjustment................. (1,522) (1,351)
-------- --------
Total shareholders' equity.............................. 43,583 24,751
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $489,346 $369,012
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<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 NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
-------------------------- --------------------------
(AS RESTATED, (AS RESTATED,
SEE NOTE 16) SEE NOTE 16)
1999 1998 1999 1998
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
NET SALES.................................... $78,661 $67,600 $224,830 $161,066
------- ------- -------- --------
COSTS AND EXPENSES:
Cost of sales.............................. 21,045 19,381 59,719 44,917
Advertising and promotion.................. 30,390 26,088 88,443 64,470
Selling, general and administrative........ 8,401 7,366 23,085 19,266
------- ------- -------- --------
Total costs and expenses................. 59,836 52,835 171,247 128,653
------- ------- -------- --------
INCOME FROM OPERATIONS....................... 18,825 14,765 53,583 32,413
------- ------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense........................... (9,313) (7,720) (27,492) (19,232)
Investment and other income................ 101 97 345 571
Gain (loss) on product divestiture......... -- (75) -- 10,328
------- ------- -------- --------
Total other income (expense)............. (9,212) (7,698) (27,147) (8,333)
------- ------- -------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
LOSS....................................... 9,613 7,067 26,436 24,080
PROVISION FOR INCOME TAXES................... 3,656 2,676 9,981 9,011
------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY LOSS............. 5,957 4,391 16,455 15,069
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF
DEBT, NET.................................. (533) (958) (2,117) (2,859)
------- ------- -------- --------
NET INCOME................................... $ 5,424 $ 3,433 $ 14,338 $ 12,210
======= ======= ======== ========
COMMON SHARES:
Weighted average number outstanding
(basic).................................. 9,774 9,483 9,742 9,165
======= ======= ======== ========
Weighted average and dilutive potential
number outstanding....................... 10,039 9,846 10,037 9,507
======= ======= ======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income before extraordinary loss......... $ .61 $ .46 $ 1.69 $ 1.64
Extraordinary loss....................... (.05) (.10) (.22) (.31)
------- ------- -------- --------
Total basic............................ $ .56 $ .36 $ 1.47 $ 1.33
------- ------- -------- --------
Diluted:
Income before extraordinary loss......... $ .59 $ .45 $ 1.64 $ 1.58
Extraordinary loss....................... (.05) (.10) (.21) (.30)
------- ------- -------- --------
Total diluted.......................... $ .54 $ .35 $ 1.43 $ 1.28
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED AUGUST 31,
------------------------
(AS RESTATED,
SEE NOTE 16)
1999 1998
------------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 14,338 $ 12,210
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 10,988 6,881
Extraordinary loss on early extinguishment of debt,
net.................................................... 2,117 2,859
Gain on sale of trademarks and other product rights..... -- (10,328)
Dividend receivable from Elcat, Inc..................... (210) (392)
Other, net.............................................. (10) (32)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable................................... (14,123) (12,696)
Inventories........................................... (601) 2,130
Refundable and deferred income taxes.................. (9) --
Prepaid and other current assets...................... (182) 675
Accounts payable and accrued liabilities.............. 10,351 9,089
-------- --------
Net cash provided by operating activities............. 22,659 10,396
-------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (5,260) (4,157)
Proceeds from sale of investment.......................... 387 --
Purchase of trademarks and other related assets........... (91,051) (173,084)
Proceeds from sale of trademarks and other product
rights.................................................. -- 11,750
Increase in other assets.................................. (1,679) (977)
-------- --------
Net cash used in investing activities................. (97,603) (166,468)
-------- --------
FINANCING ACTIVITIES:
Repayment of long-term debt............................... (140,909) (107,065)
Proceeds from long-term debt.............................. 223,193 262,365
Proceeds from exercise of stock options and warrants...... 1,229 3,208
Repurchase of common stock................................ (1,564) --
Debt issuance costs....................................... (6,494) (7,873)
Cancellation of interest rate swap agreements............. (1,155) --
Increase in payable to bank............................... 9,157 2,137
-------- --------
Net cash provided by financing activities............. 83,457 152,772
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (14) (26)
-------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period........................ 8,499 (3,326)
At beginning of period.................................... 2,076 4,858
-------- --------
At end of period.......................................... $ 10,575 $ 1,532
-------- --------
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....................... $ 1,025 $ 8,000
PAYMENTS FOR:
Interest.................................................. $ 21,405 $ 12,849
Taxes..................................................... $ 6,227 $ 448
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. These consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes thereto included in the Company's
Annual Report to Shareholders for the year ended November 30, 1998. The 1998
Annual Report has previously been filed with the Securities and Exchange
Commission as an exhibit to the Company's Form 10-K. The accompanying
unaudited consolidated financial statements, in the opinion of management,
include all adjustments necessary for a fair presentation. All such
adjustments are of a normal recurring nature. All significant intercompany
transactions and balances have been eliminated.
See note 16 regarding the restatement of financial statements.
2. The Company incurs significant expenditures on television, radio and print
advertising to support its nationally branded over-the-counter health 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. The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the respective full years.
4. Inventories consisted of the following at August 31, 1999 and November 30,
1998:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1999 1998
---------- ------------
<S> <C> <C>
Raw materials and work in process..................... $ 9,636 $ 7,903
Finished goods........................................ 16,474 14,113
Excess of current cost over LIFO values............... (2,410) (2,410)
------- -------
Total inventories............................... $23,700 $19,606
======= =======
</TABLE>
6
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
5. Accrued liabilities consisted of the following at August 31, 1999 and
November 30, 1998:
<TABLE>
<CAPTION>
AUGUST 31,
1999 NOVEMBER 30,
AS RESTATED 1998
----------- ------------
<S> <C> <C>
Income and other taxes............................... $ 5,746 $ 3,881
Salaries, wages and commissions...................... 2,618 2,850
Advertising and promotion............................ 18,201 8,896
Interest............................................. 11,453 5,969
Product acquisitions and divestitures................ 3,681 3,290
Royalties............................................ 2,255 2,889
Other................................................ 2,102 2,434
------- -------
Total accrued liabilities...................... $46,056 $30,209
======= =======
</TABLE>
6. Effective December 1, 1998, the Company adopted Statements of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"; SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related
Information" and SFAS No. 132, "Employers' Disclosure about Pensions and
other Retirement Benefits."
SFAS No. 130 requires the Company to include a financial statement
presentation of comprehensive income and its components. Note 7 of these
Notes to Consolidated Financial Statements presents this information. The
Shareholders' Equity sections of the accompanying Consolidated Balance
Sheets as of August 31, 1999 and November 30, 1998 also present the
"Cumulative other comprehensive income" portion of the respective cumulative
comprehensive income.
SFAS No. 131 requires the Company to expand the financial statement
disclosures for operating segments, products and services and geographic
areas. For fiscal 1999, the Company, in accordance with the provisions of
this statement, has elected not to provide the disclosures for interim
reporting periods, but will present the required information in its annual
report for fiscal 1999 on a comparative annual basis.
SFAS No. 132 revises the Company's disclosures about pension and other post
retirement benefits plans. These revisions will be reflected in the
Company's annual report for fiscal 1999.
7
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
7. Comprehensive income consisted of the following components for the three and
nine months ended August 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
---------------------- ----------------------
AS RESTATED AS RESTATED
1999 1998 1999 1998
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Net income............................ $5,424 $3,433 $14,338 $12,210
Other--foreign currency translation
adjustment.......................... (48) (133) (171) (124)
------ ------ ------- -------
Total........................... $5,376 $3,300 $14,167 $12,086
====== ====== ======= =======
</TABLE>
8. On December 21, 1998, the Company acquired the DEXATRIM, SPORTSCREME,
ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands from Thompson
Medical Company, Inc. (the "Thompson Medical brands") for $95,000. The
purchase price consisted of $90,000 cash and 125,500 shares of the Company's
common stock. The cash portion of the purchase price was financed by a new
senior credit facility. The purchase price of $95,000 was allocated $3,493
to inventory and $91,507 to the trademarks.
9. On December 21, 1998, the Company refinanced its existing credit facilities
with $165,000 in senior secured credit facilities (the "Credit Facilities").
The Credit Facilities were provided by a syndicate of commercial banks. The
Credit Facilities included a $50,000 revolving credit facility and a
$115,000 term loan. The Credit Facilities were used to refinance existing
senior debt, to finance the acquisition of the Thompson Medical brands and
related fees and expenses and to finance working capital and other general
corporate needs. The $50,000 revolving credit facility matures on the
earlier of (i) December 21, 2003 and (ii) the date on which the term loan is
repaid in full. The $115,000 term loan matures on December 21, 2003. The
Credit Facilities contain covenants, representations, warranties and other
agreements by the Company that are customary in loan agreements and security
instruments relating to financing of this type.
The Company may elect either (i) the greater of the prime rate or federal
funds rate plus .5% or (ii) a floating rate or Eurodollar interest rate
option applicable to the term and revolving line loans under the Credit
Facilities. The prime rate and Eurodollar interest rate options are based on
a base rate plus a rate margin that fluctuates on the basis of the Company's
senior leverage ratio.
10. On May 7, 1999 the Company issued an additional $75,000 of its 8.875%
(priced to yield 8.8125%) senior subordinated notes under its indenture
relating to the issuance of its $200,000 of 8.875% notes on March 24, 1998.
The additional notes mature on April 1, 2008 and were issued under the
Company's $250,000 shelf registration statement filed on December 21, 1998
with the Securities and Exchange Commission. The net proceeds from the
issuance of the additional notes were used to retire $41,500 of the then
outstanding balance of the Company's $115,000 bank term loan and the
outstanding balance of $25,500 of its bank revolving loan under the Credit
Facilities.
Concurrent with the closing of the $75,000 note issue, the Company amended
the Credit Facilities. The amended Credit Facilities, provided by a
syndicate of banks, consists of a $70,000 term loan and a $50,000 revolving
credit facility. The revolving credit facility and the term loan both mature
on December 21, 2003. The amended Credit Facilities contain covenants,
representations, warranties and other agreements by the Company that are
customary in loan agreements relating to financing of this type. At
August 31, 1999 the outstanding balances of the term loan and the revolving
credit facility
8
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
were $61,000 and $0, respectively. The entire $50,000 of the revolving
credit facility was available for use by the Company at August 31, 1999.
11. In February 1999 a complaint was filed against the Company by Genderm
Corporation ("Genderm") in the U.S. District Court for the District of
Arizona. The complaint alleged, among other things, that the formulations of
CAPZASIN-P, CAPZASIN-HP and ICY HOT Arthritis Therapy Gel infringed U.S.
Patent 4,485,450 owned by Joel Bernstein, M.D. and licensed to Genderm (the
"Patent"). The complaint requested injunctive relief, compensatory and
treble damages, costs and attorney fees. A hearing on the preliminary
injunction was held on April 13-14, 1999. On May 6, 1999 U.S. District Court
for the District of Arizona held that Genderm had carried its burden of
proving a substantial likelihood of success and ultimately showing that the
Patent was infringed and issued a preliminary injunction prohibiting the
Company from shipping CAPZASIN-P cream, CAPZASIN-HP cream and ICY HOT
Arthritis Therapy Gel. Following the issuance of the preliminary injunction,
the Company reached a settlement with Genderm pursuant to which the Company
made a single payment of $750 in exchange for the dismissal of the complaint
and a fully paid license to use the Patent until its expiration. The
settlement cost was recorded as a settlement of a pre-acquisition
contingency.
12. During the nine months ended August 31, 1999 the Company retired $11,750
face amount of its 12.75% Senior Subordinated Notes, due 2004. The remaining
principal amount outstanding is $37,901. During the three months ended
August 31, 1999 the Company prepaid $9,000 of its bank term loan.
In connection with the repayment of portions of its bank loans and its
12.75% notes, the Company recognized an extraordinary loss on early
extinguishment of debt of $2,117, net of taxes, for the nine months ended
August 31, 1999. This loss primarily related to the write-off of debt
issuance costs connected with outstanding long-term debt retired before
maturity in the current period and the premium paid on the retirement of the
12.75% notes.
13. During the nine months ended August 31, 1999 the Company repurchased for
$1,564, and returned to unissued, 55,000 shares of its common stock, without
par value.
14. For purposes of reporting cash flows, the Company considers all short-term
deposits and investments with original maturities of three months or less to
be cash equivalents
15. Certain prior periods' amounts have been reclassified to conform to the
current periods' presentation.
16. Restatement
In May 1999 the Company terminated its interest rate swap agreements and in
connection therewith recorded a $716 loss, net of tax, as an extraordinary
item. The Company recently determined that the proper accounting for this
transaction was to defer the loss and amortize it as interest expense over
the remaining original life of the swap agreements because the swap was
redesignated as a hedge of other continuing debt with similar terms.
As a result of adjustments recorded previously by the Company to defer and
amortize the loss, the Company has revised its previously reported results
of operations for the three and nine months ended August 31, 1999. This
Form 10-Q/A reflects the results of these adjustments. A summary of the
9
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
effect of the adjustments for the three and nine months ended August 31,
1999 on certain previously reported amounts is as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1999
------------------------ ------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Interest expense................... $9,222 $9,313 $27,370 $27,492
Total other income (expense)....... (9,121) (9,212) (27,025) (27,147)
Income before income taxes and
extraordinary loss............... 9,704 9,613 26,558 26,436
Provision for income taxes......... 3,691 3,656 10,028 9,981
Income before extraordinary loss... 6,013 5,957 16,530 16,455
Extraordinary loss on early
extinguishment of debt, net...... 533 533 2,833 2,117
Net income......................... 5,480 5,424 13,697 14,338
Net income (loss) per common share:
Basic:
Income before extraordinary
loss......................... .61 .61 1.70 1.69
Extraordinary loss............. (.05) (.05) (.29) (.22)
Total basic.................. .56 .56 1.41 1.47
Diluted:
Income before extraordinary
loss......................... .60 .59 1.65 1.64
Extraordinary loss............. (.05) (.05) (.29) (.21)
Total diluted................ .55 .54 1.36 1.43
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, 1999
------------------------
AS PREVIOUSLY
REPORTED RESTATED
------------- --------
<S> <C> <C>
Other noncurrent assets................................ $ 3,379 $ 4,413
Accrued liabilities.................................... 45,663 46,056
Accumulated deficit.................................... (31,263) (30,622)
</TABLE>
17. 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>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
AUGUST 31, 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........................... $ 8,708 $ 25 $1,842 $ -- $ 10,575
Accounts receivable, less allowance for doubtful
accounts of $850.................................. 47,173 -- 3,531 -- 50,704
Refundable and deferred income taxes................ 3,058 -- -- -- 3,058
Inventories......................................... 21,131 -- 2,569 -- 23,700
Prepaid expenses and other current assets........... 725 -- 317 -- 1,042
-------- -------- ------ ------- --------
Total current assets.............................. 80,795 25 8,259 -- 89,079
-------- -------- ------ ------- --------
PROPERTY, PLANT AND EQUIPMENT, NET.................... 21,724 -- 368 -- 22,092
-------- -------- ------ ------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc............................ 3,312 -- -- -- 3,312
Patents, trademarks and other purchased product
rights, net....................................... 5,755 352,694 -- -- 358,449
Debt issuance costs, net............................ 12,001 -- -- -- 12,001
Investment in subsidiaries.......................... 9,930 -- -- (9,930) --
Other............................................... 3,902 -- 511 -- 4,413
-------- -------- ------ ------- --------
Total other noncurrent assets..................... 34,900 352,694 511 (9,930) 378,175
-------- -------- ------ ------- --------
TOTAL ASSETS.................................... $137,419 $352,719 $9,138 $(9,930) $489,346
======== ======== ====== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................ $ 10,000 $ -- $ -- $ -- $ 10,000
Accounts payable.................................... 6,440 -- 651 -- 7,091
Payable to bank..................................... 10,183 -- -- -- 10,183
Accrued liabilities................................. 44,801 -- 1,255 -- 46,056
-------- -------- ------ ------- --------
Total current liabilities......................... 71,424 -- 1,906 -- 73,330
-------- -------- ------ ------- --------
LONG-TERM DEBT, less current maturities............... 363,641 -- -- -- 363,641
-------- -------- ------ ------- --------
DEFERRED INCOME TAXES................................. 1,085 5,741 -- -- 6,826
-------- -------- ------ ------- --------
OTHER NONCURRENT LIABILITIES.......................... 1,966 -- -- -- 1,966
-------- -------- ------ ------- --------
INTERCOMPANY ACCOUNTS................................. (343,416) 344,943 (1,527) -- --
-------- -------- ------ ------- --------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized
1,000, none issued................................ -- -- -- -- --
Common shares, without par value, authorized 50,000,
issued 9,821...................................... 2,045 2 9,928 9,930 2,045
Paid-in surplus..................................... 73,682 -- -- -- 73,682
Accumulated deficit................................. (32,503) 2,033 (152) -- (30,622)
-------- -------- ------ ------- --------
43,224 2,035 9,776 9,930 45,105
Cumulative other comprehensive income -
Foreign currency translation adjustment............. (505) -- (1,017) -- (1,522)
-------- -------- ------ ------- --------
Total shareholders' equity........................ 42,719 2,035 8,759 9,930 43,583
-------- -------- ------ ------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $137,419 $352,719 $9,138 $ 9,930 $489,346
======== ======== ====== ======= ========
</TABLE>
Note 17.
11
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
NOVEMBER 30, 1998
(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........................... $ (95) $ 11 $2,160 $ -- $ 2,076
Accounts receivable, less allowance for doubtful
accounts of $775.................................. 32,920 -- 3,661 -- 36,581
Refundable and deferred income taxes................ 3,049 -- -- -- 3,049
Inventories......................................... 16,607 -- 2,999 -- 19,606
Prepaid expenses and other current assets........... 93 415 276 -- 784
-------- -------- ------ ------- --------
Total current assets.............................. 52,574 426 9,096 -- 62,096
-------- -------- ------ ------- --------
PROPERTY, PLANT AND EQUIPMENT, NET.................... 17,675 -- 471 -- 18,146
-------- -------- ------ ------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc............................ 3,102 -- -- -- 3,102
Patents, trademarks and other purchased product
rights, net....................................... 4,409 267,817 -- -- 272,226
Debt issuance costs, net............................ 10,091 -- -- -- 10,091
Investment in subsidiaries.......................... 9,930 -- -- (9,930) --
Other............................................... 2,979 -- 372 -- 3,351
-------- -------- ------ ------- --------
Total other noncurrent assets..................... 30,511 267,817 372 (9,930) 288,770
-------- -------- ------ ------- --------
TOTAL ASSETS.................................... $100,760 $268,243 $9,939 $(9,930) $369,012
======== ======== ====== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................ $ 17,444 $ -- $ -- $ -- $ 17,444
Accounts payable.................................... 12,090 -- 643 -- 12,733
Payable to bank..................................... 1,026 -- -- -- 1,026
Accrued liabilities................................. 28,963 20 1,226 -- 30,209
-------- -------- ------ ------- --------
Total current liabilities......................... 59,523 20 1,869 -- 61,412
-------- -------- ------ ------- --------
LONG-TERM DEBT, less current maturities............... 273,913 -- -- -- 273,913
-------- -------- ------ ------- --------
DEFERRED INCOME TAXES................................. 1,085 5,741 -- -- 6,826
-------- -------- ------ ------- --------
OTHER NONCURRENT LIABILITIES.......................... 2,110 -- -- -- 2,110
-------- -------- ------ ------- --------
INTERCOMPANY ACCOUNTS................................. (259,582) 259,661 (79) -- --
-------- -------- ------ ------- --------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized
1,000, none issued................................ -- -- -- -- --
Common shares, without par value, authorized 50,000,
issued 9,574...................................... 1,994 2 9,928 9,930 1,994
Paid-in surplus..................................... 69,068 -- -- -- 69,068
Accumulated deficit................................. (46,846) 2,819 (933) -- (44,960)
-------- -------- ------ ------- --------
24,216 2,821 8,995 9,930 26,102
Cumulative other comprehensive income -
Foreign currency translation adjustment........... (505) -- (846) -- (1,351)
-------- -------- ------ ------- --------
Total shareholders' equity........................ 23,711 2,821 8,149 9,930 24,751
-------- -------- ------ ------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $100,760 $268,243 $9,939 $ 9,930 $369,012
======== ======== ====== ======= ========
</TABLE>
Note 17.
12
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED AUGUST 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........................... $212,773 $ -- $12,057 $ -- $224,830
-------- -------- ------- ---- --------
COSTS AND EXPENSES:
Costs of sales.................... 55,669 -- 4,050 -- 59,719
Advertising and promotion......... 77,124 7,063 4,256 -- 88,443
Selling, general and
administrative.................. 20,708 -- 2,377 -- 23,085
-------- -------- ------- ---- --------
Total costs and expenses...... 153,501 7,063 10,683 -- 171,247
-------- -------- ------- ---- --------
INCOME FROM OPERATIONS.............. 59,272 (7,063) 1,374 -- 53,583
-------- -------- ------- ---- --------
OTHER INCOME (EXPENSE):
Interest expense.................. (27,492) -- -- -- (27,492)
Investment and other income....... 304 (5) 46 -- 345
Royalties......................... (10,233) 10,422 (189) -- --
Corporate allocations............. 26 -- (26) -- --
-------- -------- ------- ---- --------
Total other income
(expense)................... (37,395) 10,417 (169) -- (27,147)
-------- -------- ------- ---- --------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS................ 21,877 3,354 1,205 -- 26,436
PROVISION FOR INCOME TAXES.......... 8,185 1,140 656 -- 9,981
-------- -------- ------- ---- --------
INCOME BEFORE EXTRAORDINARY LOSS.... 13,692 2,214 549 -- 16,455
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET....... (2,117) -- -- -- (2,117)
-------- -------- ------- ---- --------
NET INCOME.......................... $ 11,575 $ 2,214 $ 549 $ -- $ 14,338
======== ======== ======= ==== ========
</TABLE>
Note 17.
13
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED AUGUST 31, 1998
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
-------- -------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES......................................... $149,224 $ -- $11,842 $-- $161,066
-------- ------- ------- --- --------
COSTS AND EXPENSES:
Cost of sales................................... 41,064 -- 3,853 -- 44,917
Advertising and promotion....................... 56,127 3,989 4,354 -- 64,470
Selling, general and administrative............. 16,885 18 2,363 -- 19,266
-------- ------- ------- --- --------
Total costs and expenses.................... 114,076 4,007 10,570 -- 128,653
-------- ------- ------- --- --------
INCOME FROM OPERATIONS............................ 35,148 (4,007) 1,272 -- 32,413
-------- ------- ------- --- --------
OTHER INCOME (EXPENSE):
Interest expense................................ (19,232) -- -- -- (19,232)
Investment and other income..................... 525 2 44 -- 571
Gain on product divestiture..................... -- 10,328 -- -- 10,328
Intercompany insurance.......................... (263) -- 263 -- --
Royalties....................................... (7,033) 7,222 (189) -- --
Corporate allocations........................... 25 -- (25) -- --
-------- ------- ------- --- --------
Total other income (expense)................ (25,978) 17,552 93 -- (8,333)
-------- ------- ------- --- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
LOSS............................................ 9,170 13,545 1,365 -- 24,080
PROVISION FOR INCOME TAXES........................ 3,929 4,880 202 -- 9,011
-------- ------- ------- --- --------
INCOME BEFORE EXTRAORDINARY LOSS.................. 5,241 8,665 1,163 -- 15,069
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF
DEBT, NET....................................... (2,859) -- -- -- (2,859)
-------- ------- ------- --- --------
NET INCOME........................................ $ 2,382 $ 8,665 $ 1,163 $-- $ 12,210
======== ======= ======= === ========
</TABLE>
Note 17.
14
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 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.............................................. $ 11,575 $2,214 $ 549 $ -- $ 14,338
Adjustments to reconcile net income to net cash provided
by operating activities:.............................. --
Depreciation and amortization......................... 3,824 7,063 101 -- 10,988
Extraordinary loss on early extinguishment of debt,
net................................................. 2,117 -- -- -- 2,117
Dividend receivable from Elcat, Inc................... (210) -- -- -- (210)
Deferred income tax provision......................... (1,140) 1,140 -- -- --
Other, net............................................ (18) 8 -- -- (10)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable................................. (14,169) -- 46 -- (14,123)
Inventories......................................... (968) -- 367 -- (601)
Refundable and deferred income taxes................ (9) -- -- -- (9)
Prepaid and other current assets.................... 22 -- (204) -- (182)
Accounts payable and accrued liabilities............ 11,000 (938) 289 -- 10,351
--------- ------ ------- -------- ---------
Net cash provided by operating activities......... 12,024 9,487 1,148 -- 22,659
--------- ------ ------- -------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment.............. (5,247) -- (13) -- (5,260)
Proceeds from sale of investment........................ -- 387 -- -- 387
Purchase of trademarks and other related assets......... (91,051) -- -- -- (91,051)
Increase in other assets................................ (1,679) -- -- -- (1,679)
--------- ------ ------- -------- ---------
Net cash provided by (used in) investing
activities...................................... (97,977) 387 (13) -- (97,603)
--------- ------ ------- -------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt............................. (140,909) -- -- -- (140,909)
Proceeds from long-term debt............................ 223,193 -- -- -- 223,193
Proceeds from exercise of stock options and warrants.... 1,229 -- -- -- 1,229
Repurchase of common stock.............................. (1,564) -- -- -- (1,564)
Debt issuance costs..................................... (6,494) -- -- -- (6,494)
Cancellation of interest rate swap agreements........... (1,155) -- -- -- (1,155)
Increase in payable to bank............................. 9,157 -- -- -- 9,157
Dividends paid.......................................... 3,000 (3,000) -- -- --
Changes in intercompany accounts........................ 8,320 (6,860) (1,460) -- --
--------- ------ ------- -------- ---------
Net cash provided by (used in) financing
activities...................................... 94,777 (9,860) (1,460) -- 83,457
--------- ------ ------- -------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................. (21) -- 7 -- (14)
--------- ------ ------- -------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period...................... 8,803 14 (318) -- 8,499
At beginning of period.................................. (95) 11 2,160 -- 2,076
--------- ------ ------- -------- ---------
At end of period........................................ $ 8,708 $ 25 $ 1,842 $ -- $ 10,575
========= ====== ======= ======== =========
</TABLE>
Note 17.
15
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 31, 1998
(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.................................... $ 2,382 $ 8,665 $1,163 $ -- $ 12,210
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 2,786 3,989 106 -- 6,881
Extraordinary loss on early extinguishment
of debt, net.............................. 2,859 -- -- -- 2,859
Gain on sale of trademarks and other product
rights.................................... -- (10,328) -- -- (10,328)
Dividend receivable from Elcat, Inc......... (392) -- -- -- (392)
Deferred income tax provision............... (4,880) 4,880 -- -- --
Intercompany insurance...................... 263 -- (263) -- --
Other, net.................................. (32) -- -- -- (32)
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable....................... (12,317) -- (379) -- (12,696)
Inventories............................... 2,535 -- (405) -- 2,130
Prepaid and other current assets.......... 755 -- (80) -- 675
Accounts payable and accrued
liabilities............................. 10,375 (1,396) 110 -- 9,089
--------- -------- ------ ---- ---------
Net cash provided by operating
activities............................ 4,334 5,810 252 -- 10,396
--------- -------- ------ ---- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment.... (4,130) -- (27) -- (4,157)
Purchase of trademarks and other related
assets...................................... (173,084) -- -- -- (173,084)
Proceeds from sale of trademarks and other
product rights.............................. 11,750 -- -- -- 11,750
Increase in other assets...................... (582) (395) -- -- (977)
--------- -------- ------ ---- ---------
Net cash used in investing activities... (166,046) (395) (27) -- (166,468)
--------- -------- ------ ---- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt................... (107,065) -- -- -- (107,065)
Proceeds from long-term debt.................. 262,365 -- -- -- 262,365
Proceeds from exercise of stock options and
warrants.................................... 3,208 -- -- -- 3,208
Debt issuance costs........................... (7,873) -- -- -- (7,873)
Increase in payable to bank................... 2,137 -- -- -- 2,137
Dividends paid................................ 3,000 (3,000) -- -- --
Changes in intercompany accounts.............. 2,543 (2,248) (295) -- --
--------- -------- ------ ---- ---------
Net cash provided by (used in) financing
activities............................ 158,315 (5,248) (295) -- 152,772
--------- -------- ------ ---- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS................................... 23 -- (49) -- (26)
--------- -------- ------ ---- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period............ (3,374) 167 (119) -- (3,326)
At beginning of period........................ 2,997 55 1,806 -- 4,858
--------- -------- ------ ---- ---------
At end of period.............................. $ (377) $ 222 $1,687 $ -- $ 1,532
========= ======== ====== ==== =========
</TABLE>
Note 17.
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
On December 21, 1998, the Company acquired the DEXATRIM, SPORTSCREME,
ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands from Thompson
Medical Company, Inc. for $95,000. The purchase price consisted of $90,000 cash
and 125,500 shares of the Company's common stock. The cash portion of the
purchase price was financed by a new senior credit facility. The purchase price
of $95,000 was allocated $3,493 to inventory and $91,507 to the trademarks.
On May 7, 1999 the Company issued an additional $75,000 of its 8.875%
(priced to yield 8.8125%) senior subordinated notes under its indenture relating
to the issuance of its $200,000 of 8.875% notes on March 24, 1998. The
additional notes mature on April 1, 2008 and were issued under the Company's
$250,000 shelf registration statement filed on December 21, 1998 with the
Securities and Exchange Commission. The net proceeds from the issuance of the
additional notes were used to retire $41,500 of the then outstanding balance of
the Company's $115,000 term bank loan and the outstanding balance of $25,500 of
its revolving bank loan dated December 21, 1998.
Concurrent with the closing of the $75,000 note issue, the Company amended
its senior credit facility. The amended facility, provided by a syndicate of
banks, consists of a $70,000 term loan and a $50,000 revolving credit facility.
The revolving credit facility and the term loan both mature on December 21,
2003. The credit facility contains covenants, representations, warranties and
other agreements by the Company that are customary in loan agreements relating
to financing of this type. At August 31, 1999 the outstanding balances of the
term loan and the revolving credit facility were $61,000 and $0, respectively.
The entire $50,000 of the revolving credit facility was available for use by the
Company at August 31, 1999.
For the third quarter of fiscal 1999, net sales increased 16.4% to $78,661
from $67,600 for the corresponding prior year period, while operating income
rose more rapidly than sales, growing 27.5% to $18,825 for 1999 from $14,765 in
1998. Net income before extraordinary loss and product divestiture for the 1999
period was $5,957, or $.59 per share, as compared to $4,438, or $.45 per share,
for the comparable 1998 period, an increase of 34.2%. Cash earnings (net income
before extraordinary items and product divestiture plus non-cash amortization)
for the third quarter of 1999 were $7,761, or $.77 per share, an increase of
35.5% from $5,727, or $.58 per share, in the corresponding period of 1998.
For the first nine months of fiscal 1999, net sales were $224,830 compared
to $161,066 for the same period of 1998, a 39.6% increase. Income from
operations for the 1999 period was $53,583 versus $32,413 in the comparable 1998
period, a 65.3% increase. Net income before extraordinary loss for the first
nine months of fiscal 1999 was $16,455, or $1.64 per share, compared to $8,666,
or $.91 per share, excluding the gain on the sale of CORNSILK completed in the
second fiscal quarter of 1998, an increase of 89.9%. For the first nine months
of fiscal 1999, cash earnings were $21,634, or $2.16 per share, compared to
$11,704, or $1.23 per share, for the comparable fiscal 1998 period.
The BAN brand, acquired in March 1998, the Thompson Medical brands,
purchased in December 1998, and the continuing strong performance of the GOLD
BOND family of products, including the continuing strength of GOLD BOND
Medicated Body Lotion, were primarily responsible for the revenue growth and the
improvement in the Company's operating results for the nine months ended
August 31, 1999.
The Company achieved its results for the third consecutive quarter of its
1999 fiscal year despite weakening trends in its SUNSOURCE and DEXATRIM brands
and U.K. business. The effect of these trends could be offset by sales prior to
the implementation of selected price increases to be effective at the beginning
of the next fiscal year, sales for newly launched products and lower than
anticipated returns on certain brands, but it is too early in the fourth quarter
of 1999 to judge the effect, if any, of these factors.
17
<PAGE>
Regarding SUNSOURCE, DEXATRIM and the U.K. businesses, the Company is
aggressively assessing various strategic options, including the launch of
DEXATRIM NATURAL in early 2000, reduced new product launch and advertising
spending levels for SUNSOURCE and reduction in expenses and new product
introductions in the U.K.
During the nine months ended August 31, 1999 the Company retired $11,750
face amount of its 12.75% Senior Subordinated Notes, due 2004. During the three
months ended August 31, 1999 the Company prepaid $9,000 of its bank term loan.
In connection with the repayment of portions of its bank loans and its
12.75% notes, the Company recognized an extraordinary loss on early
extinguishment of debt of $2,117, net of taxes, for the nine months ended
August 31, 1999. This loss primarily related to the write-off of debt issuance
costs connected with outstanding long-term debt retired before maturity in the
current period and the premium paid on the retirement of the 12.75% notes.
During the nine months ended August 31, 1999 the Company repurchased for
$1,564, and returned to unissued, 55,000 shares of its common stock, without par
value.
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 of
existing products. During the first nine months of fiscal 1999, the Company
introduced the following line extensions/new products: BAN Ultra Dry Roll-On,
BAN Ultra Dry Solid Stick, GOLD BOND Triple Antibiotic Ointment, REPOSE Stress
Relief Formula, BULLFROG MAGICBLOCK, SUN-IN Super Streaks, FLEXALL QUIKGEL, MUDD
Self Heating Skin Cleanser and PHISODERM 4 Way Daily Acne Cleanser. Also, new
packaging for the entire BAN brand was introduced in the second quarter of
fiscal 1999. 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 reduce
indebtedness.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for income before extraordinary loss and for
the periods indicated, certain items from the Company's Consolidated Statements
of Income expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS MONTHS
ENDED AUGUST ENDED AUGUST
31, 31,
---------------------- ----------------------
AS RESTATED AS RESTATED
1999 1998 1999 1998
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
NET SALES................................................ 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
COSTS AND EXPENSES:
Cost of sales.......................................... 26.8 28.7 26.6 27.9
Advertising and promotion.............................. 38.6 38.6 39.3 40.0
Selling, general and administrative.................... 10.7 10.9 10.3 12.0
----- ----- ----- -----
Total costs and expenses............................. 76.1 78.2 76.2 79.9
----- ----- ----- -----
INCOME FROM OPERATIONS................................... 23.9 21.8 23.8 20.1
----- ----- ----- -----
OTHER INCOME (EXPENSE):
Interest expense....................................... (11.8) (11.4) (12.3) (11.9)
Investment and other income............................ .1 .1 .2 .3
Gain on product divestiture............................ -- (.1) -- 6.4
----- ----- ----- -----
Total other income (expense)......................... (11.7) (11.4) (12.1) (5.2)
----- ----- ----- -----
INCOME BEFORE INCOME TAXES............................... 12.2 10.4 11.7 14.9
PROVISION FOR INCOME TAXES............................... 4.6 3.9 4.4 5.6
----- ----- ----- -----
NET INCOME BEFORE EXTRAORDINARY LOSS..................... 7.6% 6.5% 7.3% 9.3%
===== ===== ===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 1999 AND 1998
Net sales for the three months ended August 31, 1999 increased $11,061, or
16.4%, to $78,661 from $67,600 for the same period last year. Domestic consumer
products sales increased $10,940, or 17.7%, to $72,659 from $61,719 for last
year's comparable period. Net sales of international consumer products increased
$121, or 2.1%, from $5,881 in the 1998 period to $6,002 in the current period.
The increase in domestic consumer products sales in the 1999 period was
primarily due to the Thompson Medical brands acquired in December 1998. Sales
increases were also registered for the FLEXALL, MUDD, BULLFROG, HERPECIN-L and
PHISODERM product lines, while decreases were experienced by the SUNSOURCE line
of dietary supplements. With the exception of the CORNSILK brand, which was sold
in May 1998, sales in the current period of the remaining product lines were
essentially flat or showed modest declines as compared to the corresponding
period of 1998. Sales variances were largely the result of changes in the volume
of unit sales of the particular brands.
The increase in sales of the FLEXALL and MUDD product lines was primarily
the result of the introduction of FLEXALL QUICKGEL and MUDD Self Heating Skin
Cleanser, respectively, in the third quarter of fiscal 1999. The sales increase
for BULLFROG reflects the strong demand for sun screen products by the general
public during the summer of 1999. PHISODERM sales increases in the current
period were largely due to the introduction of the 4 Way Daily Acne Cleanser
line extension earlier in fiscal 1999 and increased marketing support, while the
increase in sales of HERPECIN-L was principally the result of more effective
advertising.
19
<PAGE>
The sales decline in the current period for the SUNSOURCE products reflected
the general softening of sales in the dietary supplements' market.
International consumer products sales for the third quarter of fiscal 1999
increased $308, or 19.4%, for the Canadian operation and $121, or 3.7%, for the
United Kingdom business. The increase in Canadian sales was primarily associated
with certain of the Thompson Medical brands and GOLD BOND, while sales decreases
were recorded for all of the remaining brands currently being sold in Canada.
The modest increase in United Kingdom sales was entirely associated with sales
of BAN to that division's Asian markets. Largely due to slow orders from
customers, sales declines were recorded for the other United Kingdom brands.
U.S. export sales decreased $308, or 30.6%, for the 1999 period as compared to
the same period in fiscal 1998, as a result of a book transfer in the current
period of BAN year to date sales in Thailand to the international operations of
the United Kingdom which manages all of the Company's Asian operations. Sales
variances were largely the result of changes in the volume of unit sales of the
particular brands.
Cost of goods sold as a percentage of net sales improved to 26.8% from 28.7%
in the 1998 period. The improvement was primarily the result of increased sales
of higher gross margin product lines in the current period.
Advertising and promotion expenses increased $4,302, or 16.5%, and were
38.6% of net sales in both the current quarter and the corresponding 1998
period. The majority of the increase in the 1999 period was related to the
Thompson Medical brands acquired in December 1998, and to the FLEXALL, SUN-IN,
SUNSOURCE and PHISODERM product lines. Decreases in spending related to the
PAMPRIN, ICY HOT, BENZODENT, BULLFROG, GOLD BOND and CORNSILK brands. The
CORNSILK product line was sold in May 1998.
The increase of $1,035, or 14.1%, in selling, general and administrative
expenses in the 1999 period was largely associated with direct selling expenses,
resulting from increased sales, with research and development costs and with
various expenses of the general service departments of the Company. The selling,
general and administrative expenses were 10.7% of net sales in the current
period as compared to 10.9% in the same period of last fiscal year, reflecting
the increase in sales from newly acquired brands without a corresponding
increase in overhead costs.
Interest expense increased $1,593, or 20.6%, in the 1999 period, reflecting
primarily the additional debt incurred for the Thompson Medical brands'
acquisition in December 1998.
An extraordinary loss of $533, net of taxes, related to 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 debt retired before maturity in the current period and the premium
paid on the retirement of $5,000 principal amount of the 12.75% notes.
Net income of $5,957 before extraordinary loss in the 1999 period was
$1,566, or 35.7%, greater than the comparable 1998 amount of $4,391. This
increase was largely the result of increased sales, offset in part by increased
interest expense, advertising and promotion expense and selling, general and
administrative costs.
20
<PAGE>
COMPARISON OF NINE MONTHS ENDED AUGUST 31, 1999 AND 1998
Net sales for the nine months ended August 31, 1999 increased $63,764, or
39.6%, to $224,830 from $161,066 for the same period last year. Domestic
consumer products sales increased $62,515, or 42.4%, to $209,997 from $147,482
for last year's comparable period. Net sales of international consumer products
increased $1,249, or 9.2%, from $13,584 in the 1998 period to $14,833 in the
current period.
The increase in domestic consumer products sales in the 1999 period was
primarily due to the BAN and Thompson Medical brands acquired in March and
December 1998, respectively, and the continuing strong performance of the GOLD
BOND family of products, especially GOLD BOND Medicated Body Lotion. Sales
increases were also registered for the MUDD, SUN-IN, HERPECIN-L and PHISODERM
product lines, while decreases were experienced by the SUNSOURCE products and
BULLFROG brands. With the exception of the CORNSILK brand, which was sold in
May 1998, sales in the current period of the remaining product lines were
essentially flat or showed modest declines as compared to the corresponding
period of 1998. Sales variances were largely the result of changes in the volume
of unit sales of the particular brands.
The increase in sales of the GOLD BOND product line was led by the
introductions of the Medicated Body Lotion product in the third quarter of
fiscal 1998 and the Triple Antibiotic Ointment in the first fiscal quarter of
1999, although sales increases were also realized for the medicated powders and
cream products. GOLD BOND sales in the current period were also favorably
affected by increased marketing support. SUN-IN, MUDD and PHISODERM sales
increases in the current period were largely the result of introductions of line
extensions previously noted for these brands, as well as increased advertising
and promotional expenditures. The increase in sales of the HERPECIN-L product
lines is primarily due to more effective advertising.
The sales decline in the current period for the SUNSOURCE products reflected
the general softening of sales in the dietary supplements' market. The decline
in BULLFROG sales in the current period was largely the result of reduced sales
to two larger customers.
International consumer products sales for the first nine months of fiscal
1999 increased $1,232, or 33.0%, for the Canadian operation but declined $1,018,
or 12.6%, for the United Kingdom business. The increase in Canadian sales was
primarily associated with the BAN and certain of the Thompson Medical brands,
although sales increases were recorded for all of the remaining brands currently
being sold in Canada except for PAMPRIN and FLEXALL. Largely due to slow orders
from customers, sales declines were recorded for all of the United Kingdom
brands, except BAN and GOLD BOND. U.S. export sales increased $1,035, or 59.4%,
for the 1999 period as compared to the same period in fiscal 1998, with
practically all of the increase being associated with the BAN product line.
Sales variances were largely the result of changes in the volume of unit sales
of the particular brands.
Cost of goods sold as a percentage of net sales improved to 26.6% from 27.9%
in the 1998 period. The improvement was primarily the result of increased sales
of higher gross margin product lines in the current period.
Advertising and promotion expenses increased $23,973, or 37.2%, and were
39.3% of net sales compared to 40.0% in the corresponding 1998 period. The
majority of the dollar increase in the 1999 period was related to the BAN and
Thompson Medical brands acquired in March and December 1998, respectively, and
to the GOLD BOND, SUN-IN, FLEXALL, MUDD and PHISODERM product lines. Declines in
spending were recorded for the BENZODENT, HERPECIN-L, the SUNSOURCE products and
CORNSILK brands. The CORNSILK product line was sold in May 1998.
The increase of $3,819, or 19.8%, in selling, general and administrative
expenses in the 1999 period was largely associated with direct selling expenses,
resulting from increased sales, with research and development costs and with
various expenses of the general service departments of the Company. The selling,
general and administrative expenses were 10.3% of net sales in the current
period as compared to
21
<PAGE>
12.0% in the same period of last fiscal year, reflecting the increase in sales
from newly acquired brands without a corresponding increase in overhead costs.
Interest expense increased $8,260, or 42.9%, in the 1999 period, reflecting
primarily the additional debt incurred for the BAN and Thompson Medical brands'
acquisitions in March and December 1998, respectively.
An extraordinary loss of $2,117, net of taxes, related to 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 debt retired before maturity in the current period and the premium
paid on the retirement of the 12.75% notes.
Net income of $16,455 before extraordinary loss in the 1999 period was
$7,789, or 89.9% greater than the comparable 1998 amount of $8,666 after
excluding the gain of $6,403, net of taxes, on the sale of the CORNSILK brand.
This increase was largely the result of increased sales, offset in part by
increased interest expense, advertising and promotion expense and selling,
general and administrative costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with a combination of
internally generated funds and borrowings. The Company's principal uses of cash
are for operating expenses, long-term debt servicing, acquisitions, working
capital and capital expenditures.
Cash of $22,659 and $10,396 was provided by operations for the nine months
ended August 31, 1999, and 1998, respectively. The increase in cash flows from
operations over the prior year period was primarily the result of increases in
net income (after considering the gain on the sale of the CORNSILK product line
in the fiscal 1998 period) and depreciation and amortization.
Investing activities used cash of $97,603 and $166,468 in the nine months
ended August 31, 1999 and 1998, respectively. The decrease of $68,865 in the
current period primarily represented the difference in the size of the
acquisitions of BAN in March 1998 and the Thompson Medical brands in
December 1998.
Financing activities provided cash of $83,457 in the nine months ended
August 31, 1999 compared to $152,772 for the comparable prior year period. The
decrease of $69,315 in the current period reflected principally the difference
in the financing required for the BAN acquisition in March 1998 and for the
Thompson Medical brands in December 1998.
The following table presents working capital data at August 31, 1999 and
November 30, 1998 or for the respective periods then ended:
<TABLE>
<CAPTION>
AUGUST 31,
1999 NOVEMBER 30,
ITEM AS RESTATED 1998
- ---- ----------- ------------
<S> <C> <C>
Working capital (current assets less current
liabilities)....................................... $15,749 $684
Current ratio (current assets divided by current
liabilities)....................................... 1.21 1.01
Quick ratio (cash and cash equivalents and accounts
receivable divided by current liabilities)......... .84 .63
Twelve month average accounts receivable turnover.... 6.19 6.81
Twelve month average inventory turnover.............. 3.52 3.57
Working capital as a percentage of total assets...... 3.22% .19%
</TABLE>
The improvement in the current and quick ratios at August 31, 1999 as
compared to November 30, 1998 reflected primarily increases in accounts
receivable and inventories, which were largely associated with the Thompson
Medical brands acquired in December 1998, and the reduction of the current
maturities of long-term debt.
22
<PAGE>
Total loans outstanding were $373,641 at August 31, 1999 compared to
$291,357 at November 30, 1998, an increase of $82,284 during the first nine
months of fiscal 1999. This increase was primarily the result of additional
amounts borrowed to purchase the Thompson Medical brands in December 1998. The
balances outstanding at August 31, 1999 of the term loan, the revolving credit
facility and total senior subordinated notes were $61,000, $--0- and $312,641,
respectively. The entire $50,000 of the revolving credit facility was available
for use by the Company at August 31, 1999.
Management of the Company believes that projected cash flows generated by
operations along with funds available under its credit facilities will be
sufficient to fund the Company's current commitments and proposed operations.
Also, on December 21, 1998, the Company filed a shelf registration statement
with the Securities and Exchange Commission for $250,000 of debt and equity
securities of which $75,000 of notes were issued during the first nine months of
fiscal 1999.
YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the year 2000 date
are a known risk. The Company has developed a plan to ensure its systems are
compliant with the requirements to fulfilling those compliance requirements:
THE COMPANY'S STATE OF READINESS
The Company has replaced its information technology ("IT") systems with a
new fully integrated computer system that replaces all hardware and software
that the Company uses in its financial, manufacturing and customer services
functions. Management believes the new IT system is year 2000 compliant.
Accordingly, the year 2000 compliance requirements are considered only a portion
of the Company's system replacement effort. This replacement is substantially
complete.
COST TO ADDRESS YEAR 2000 ISSUES
The total cost of the new software and hardware is approximately $3,000.
Plan costs have been budgeted in the Company's capital expenditures budget.
RISK OF YEAR 2000 ISSUES
The Company is requesting from certain of its principal customers and
suppliers written statements regarding their knowledge of and plans for meeting
the year 2000 compliance requirements. All respondents indicate that they have
knowledge of and are in the process of fulfilling these requirements. These
companies have stated that they are at various stages of completion of their
compliance plans, but all have indicated that they expect to be in full year
2000 compliance by or before the end of their 1999 fiscal year.
In the event that the Company or any of the Company's significant customers
or suppliers does not successfully and timely achieve year 2000 compliance, the
Company's business or operations could be adversely affected.
FOREIGN OPERATIONS
The Company's primary foreign operations are conducted through its Canadian
and United Kingdom 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 nine months ended
August 31, 1999 and 1998, these subsidiaries accounted for 5% and 7% of total
revenues, respectively, and 2% of total assets for each period, respectively. It
has not been the Company's practice to hedge its assets and liabilities in
Canada
23
<PAGE>
and the United Kingdom 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 $21 and $83 for the nine
months ended August 31, 1999 and 1998, respectively, resulted from foreign
currency transactions.
GOVERNMENT REGULATION
In December 1998, the United States Food and Drug Administration ("FDA")
conducted an audit of the Company's manufacturing facility in Chattanooga,
Tennessee. In connection with that audit, the FDA issued a report citing certain
processes and procedures that it requires the Company to change or improve. The
Company has responded to the report of the FDA and believes that it has complied
with the requirements of the report. No further contact by the FDA has been made
to date, but the Company expects a follow-up visit by FDA personnel in the
future. There have been no further material developments to date relating to the
other matters described in the Company's "Business-Government Regulation"
section of its Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended November 30, 1998.
ENVIRONMENTAL
There have been no material changes to date relating to the matters
discussed in the Company's "Business-Environmental" section of its Annual Report
on Form 10-K filed with the Securities and Exchange commission for the year
ended November 30, 1998.
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.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Statement regarding computation of per share earnings, as restated
(Exhibit 11).
(2) Financial data schedule, as restated (Exhibit 27).
(b) No Form 8-K reports were filed with the Securities and Exchange
Commission during the three months ended August 31, 1999.
25
<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.
<TABLE>
<S> <C> <C>
CHATTEM, INC.
(Registrant)
Dated: January 11, 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)
</TABLE>
26
<PAGE>
EXHIBIT 11
CHATTEM, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
---------------------- -----------------------
As Restated As Restated
1999 1998 1999 1998
----------- --------- ---------- -----------
<S> <C> <C> <C> <C>
NET INCOME:
Income before extraordinary loss ....... $ 5,957 $ 4,391 $ 16,455 $ 15,069
Extraordinary loss ..................... (533) (958) (2,117) (2,859)
--------- -------- ---------- ----------
Net income ........................... $ 5,424 $ 3,433 $ 14,338 $ 12,210
========= ======== ========== ==========
COMMON SHARES:
Weighted average number outstanding .... 9,774 9,483 9,742 9,165
Number issued upon assumed exercise
of outstanding stock options and stock
warrants ............................. 265 363 295 342
--------- -------- ---------- ----------
Weighted average and dilutive potential
number outstanding .................... 10,039 9,846 10,037 9,507
========= ======== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income before extraordinary loss .... $ .61 $ .46 $ 1.69 $ 1.64
Extraordinary loss .................. (.05) (.10) (.22) (.31)
--------- -------- ---------- ----------
Total basic ..................... $ .56 $ .36 $ 1.47 $ 1.33
========= ======== ========== ==========
Diluted:
Income before extraordinary loss .... $ .59 $ .45 $ 1.64 $ 1.58
Extraordinary loss .................. (.05) (.10) (.21) (.30)
--------- -------- ---------- ----------
Total diluted ................... $ .54 $ .35 $ 1.43 $ 1.28
========= ======== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHATTEM,
INC.'S UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 10,575
<SECURITIES> 0
<RECEIVABLES> 51,554
<ALLOWANCES> 850
<INVENTORY> 23,700
<CURRENT-ASSETS> 89,079
<PP&E> 41,426
<DEPRECIATION> 19,334
<TOTAL-ASSETS> 489,346
<CURRENT-LIABILITIES> 73,330
<BONDS> 363,641
0
0
<COMMON> 2,045
<OTHER-SE> 41,538
<TOTAL-LIABILITY-AND-EQUITY> 489,346
<SALES> 224,830
<TOTAL-REVENUES> 224,830
<CGS> 59,719
<TOTAL-COSTS> 171,247
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,492
<INCOME-PRETAX> 26,436
<INCOME-TAX> 9,981
<INCOME-CONTINUING> 16,455
<DISCONTINUED> 0
<EXTRAORDINARY> (2,117)
<CHANGES> 0
<NET-INCOME> 14,338
<EPS-BASIC> 1.47
<EPS-DILUTED> 1.43
</TABLE>
