-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wlidv06cPWydkwFvf1x50ta+zDGTg1gFZS2TuV7D5iDpWSIeRqSCLRABlO2sSeUu 68QVBVCmi3az+bH+ZsOS3Q== 0000912057-97-024259.txt : 19970716 0000912057-97-024259.hdr.sgml : 19970716 ACCESSION NUMBER: 0000912057-97-024259 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970715 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHATTEM INC CENTRAL INDEX KEY: 0000019520 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 620156300 STATE OF INCORPORATION: TN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-05905 FILM NUMBER: 97640766 BUSINESS ADDRESS: STREET 1: 1715 W 38TH ST CITY: CHATTANOOGA STATE: TN ZIP: 37409 BUSINESS PHONE: 4238214571 MAIL ADDRESS: STREET 1: 1715 W 38TH ST CITY: CHATTANOOGA STATE: TN ZIP: 37409 FORMER COMPANY: FORMER CONFORMED NAME: CHATTEM DRUG & CHEMICAL CO DATE OF NAME CHANGE: 19790111 10-Q 1 FORM 10-Q 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, 1997 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 8, 1997, 8,917,344 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT PAR VALUE, WERE OUTSTANDING. 1 CHATTEM, INC. INDEX
PAGE NO. --------------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of May 31, 1997 and November 30, 1996.................... 3 Condensed Consolidated Statements of Income for the Three and Six Months Ended May 31, 1997 and 1996............................................................................................. 5 Consolidated Statements of Cash Flows for the Six Months Ended May 31, 1997 and 1996.............. 6 Notes to Condensed Consolidated Financial Statements.............................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................................................ 16 SIGNATURES............................................................................................ 17 EXHIBIT 11--STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS EXHIBIT 27--FINANCIAL DATA SCHEDULE
2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHATTEM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MAY 31, NOVEMBER 30, ASSETS 1997 1996 - ----------------------------------------------------------------------------------- ----------- --------------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents........................................................ $ 13,449 $ 9,254 Accounts receivable, net......................................................... 26,950 20,276 Refundable and deferred income taxes............................................. 3,019 5,405 Inventories...................................................................... 10,340 10,295 Prepaid expenses and other current assets........................................ 510 912 ----------- --------------- Total current assets........................................................... 54,268 46,142 ----------- --------------- PROPERTY, PLANT AND EQUIPMENT, NET................................................. 9,696 9,774 ----------- --------------- OTHER NONCURRENT ASSETS: Investment in Elcat, Inc. ....................................................... 6,312 5,984 Patents, trademarks and other purchased product rights, net...................... 75,944 76,024 Debt issuance costs, net......................................................... 3,936 3,819 Other............................................................................ 2,491 10,440 ----------- --------------- Total other noncurrent assets.................................................. 88,683 96,267 ----------- --------------- TOTAL ASSETS................................................................. $ 152,647 $ 152,183 ----------- --------------- ----------- ---------------
See accompanying notes to condensed consolidated financial statements. 3 CHATTEM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MAY 31, NOVEMBER 30, LIABILITIES AND SHAREHOLDERS' DEFICIT 1997 1996 - ----------------------------------------------------------------------------------- ----------- --------------- (UNAUDITED) CURRENT LIABILITIES: Current maturities of long-term debt............................................. $ 3,725 $ 3,906 Accounts payable................................................................. 3,654 6,602 Payable to bank.................................................................. 2,289 1,710 Accrued liabilities.............................................................. 15,456 14,131 ----------- --------------- Total current liabilities...................................................... 25,124 26,349 ----------- --------------- LONG-TERM DEBT, less current maturities............................................ 125,668 127,438 ----------- --------------- DEFERRED INCOME TAXES.............................................................. 2,917 2,917 ----------- --------------- OTHER NONCURRENT LIABILITIES....................................................... 2,936 2,659 ----------- --------------- SHAREHOLDERS' DEFICIT: Preferred shares, without par value, authorized 1,000, none issued............... -- -- Common shares, without par value, authorized 20,000, issued 8,614 at May 31, 1997 and 8,592 at November 30, 1996................................................. 1,867 1,843 Paid-in surplus.................................................................. 58,620 58,561 Accumulated deficit.............................................................. (62,921) (66,114) ----------- --------------- (2,434) (5,710) Minimum pension liability adjustment............................................. (112) (112) Foreign currency translation adjustment.......................................... (1,452) (1,358) ----------- --------------- Total shareholders' deficit.................................................... (3,998) (7,180) ----------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT.................................. $ 152,647 $ 152,183 ----------- --------------- ----------- ---------------
See accompanying notes to condensed consolidated financial statements. 4 CHATTEM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED MAY 31, ENDED MAY 31, -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- NET SALES....................................................... $ 39,178 $ 30,430 $ 67,124 $ 49,127 --------- --------- --------- --------- COSTS AND EXPENSES: Cost of sales................................................. 10,888 9,329 19,282 15,078 Advertising and promotion..................................... 14,602 11,365 25,869 18,366 Selling, general and administrative........................... 5,767 4,836 10,424 9,060 --------- --------- --------- --------- Total costs and expenses.................................... 31,257 25,530 55,575 42,504 --------- --------- --------- --------- INCOME FROM OPERATIONS.......................................... 7,921 4,900 11,549 6,623 --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest expense.............................................. (3,835) (3,014) (7,633) (5,631) Investment and other income................................... 694 260 1,013 913 Gain on product divestitures.................................. -- 877 -- 877 --------- --------- --------- --------- Total other income (expense)................................ (3,141) (1,877) (6,620) (3,841) --------- --------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES........... 4,780 3,023 4,929 2,782 PROVISION FOR INCOME TAXES...................................... 1,723 1,013 1,736 809 --------- --------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY LOSS .... 3,057 2,010 3,193 1,973 EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET......... -- (532) -- (532) --------- --------- --------- --------- NET INCOME...................................................... $ 3,057 $ 1,478 $ 3,193 $ 1,441 --------- --------- --------- --------- --------- --------- --------- --------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING................................................... 8,852 7,794 8,830 7,547 --------- --------- --------- --------- --------- --------- --------- --------- NET INCOME PER COMMON SHARE: Continuing operations......................................... $ 0.35 $ 0.26 $ 0.36 $ 0.26 Extraordinary loss............................................ -- (0.07) -- (0.07) --------- --------- --------- --------- Net income per common share................................. $ 0.35 $ 0.19 $ 0.36 $ 0.19 --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements. 5 CHATTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS)
FOR THE SIX MONTHS ENDED MAY 31, ----------------------- 1997 1996 --------- ------------ OPERATING ACTIVITIES: Net income.......................................................................... $ 3,193 $ 1,441 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization..................................................... 2,979 2,109 Extraordinary loss on early extinguishment of debt................................ -- 532 Gain on sale of trademarks and other product rights............................... -- (877) Dividend receivable from Elcat, Inc............................................... (328) (328) Other, net........................................................................ 266 414 Changes in operating assets and liabilities: Increase in accounts receivable................................................. (6,774) (8,213) Increase in inventories......................................................... (45) (3,600) Decrease in refundable and deferred income taxes................................ 2,386 -- Decrease in prepaid and other current assets.................................... 1,384 16 Decrease in accounts payable and accrued liabilities............................ (1,623) (2,285) --------- ------------ Net cash provided by (used in) operating activities........................... 1,438 (10,791) --------- ------------ INVESTING ACTIVITIES: Purchases of property, plant and equipment........................................ (619) (710) Proceeds from notes receivable.................................................... 100 245 Purchase of trademarks and other product rights................................... (1,000) (37,000) Proceeds from sale of trademarks and other product rights......................... -- 1,000 Other, net........................................................................ (651) (812) --------- ------------ Net cash used in investing activities......................................... (2,170) (37,277) --------- ------------ FINANCING ACTIVITIES: Repayment of long-term debt....................................................... (2,044) (25,600) Proceeds from long-term debt...................................................... -- 72,750 Proceeds from issuance of common stock............................................ 83 5,500 Proceeds from borrowings against insurance policies............................... -- 1,412 Debt issuance costs............................................................... (383) (1,847) Increase in payable to bank....................................................... 579 830 --------- ------------ Net cash provided by (used in) financing activities........................... (1,765) 53,045 --------- ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS.......................... (94) (31) --------- ------------ CASH AND CASH EQUIVALENTS: Increase (decrease) for the period................................................ (2,591) 4,946 At beginning of period............................................................ 16,040 3,636 --------- ------------ At end of period.................................................................. $ 13,449 $ 8,582 --------- ------------ PAYMENTS FOR: Interest.......................................................................... $ 7,274 $ 5,525 Taxes............................................................................. $ 153 $ 950 SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY: Issuance of 154,887 shares of common stock at $6.46 per share to partially fund the GOLD BOND acquisition............................................................. -- $ 1,000,000
See accompanying notes to condensed consolidated financial statements. 6 CHATTEM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note: All monetary amounts are expressed in thousands of dollars unless contrarily evident. 1. The accompanying unaudited condensed 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, 1996. The 1996 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 condensed 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 results of operations for the periods presented are not necessarily indicative of the results to be expected for the respective full years. Seasonality is a factor in the Company's overall business, with the first quarter sales and income traditionally trailing the other fiscal quarters. 3. The Company incurs significant expenditures on television, radio and print advertising to support its nationally branded over-the-counter pharmaceuticals and functional toiletries and cosmetics. 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 to 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. 4. Certain amounts in the prior years' financial information have been reclassified to conform to the current period presentation. 5. 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, including cash and cash equivalents available exclusively for the repayment of long-term debt. 7 6. Inventories consisted of the following at May 31, 1997 and November 30, 1996:
MAY 31, NOVEMBER 30, 1997 1996 --------- ------------ Raw materials....................................................... $ 5,415 $ 5,365 Finished goods and work in process.................................. 7,479 7,484 Excess of current cost over LIFO values............................. (2,554) (2,554) --------- ------------ Total inventories................................................. $ 10,340 $ 10,295 --------- ------------ --------- ------------
7. Accrued liabilities consisted of the following at May 31, 1997 and November 30, 1996:
MAY 31, NOVEMBER 30, 1997 1996 --------- ------------ Income and other taxes.............................................. $ 1,849 $ -- Salaries, wages and commissions..................................... 683 1,287 Advertising and promotion........................................... 3,771 2,827 Interest............................................................ 3,928 3,996 Accrued pension benefits............................................ 2,076 2,076 Other............................................................... 3,149 3,945 --------- ------------ Total accrued liabilities......................................... $ 15,456 $ 14,131 --------- ------------ --------- ------------
8 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 May 23, 1997, the Company announced the signing of an agreement to purchase certain assets of Sunsource International, Inc. and an affiliated company (collectively, "Sunsource") consisting primarily of the exclusive worldwide rights to five leading branded dietary supplement products. The products being acquired are GARLIQUE, REJUVEX, MELATONEX, ECHINEX and PROPALMEX. The purchase price of the assets was approximately $32,000, including inventories and accounts receivable. Financing was provided by an expansion of the Company's senior bank credit agreement and the issuance of 300,000 shares of the common stock of the Company to the seller. Additional payments, based on the attainment of certain sales levels of the products acquired, may be made to Sunsource in the six years following the purchase, but such payments are not to exceed $15,750 in the aggregate. The purchase of the assets was completed on June 26, 1997. The GOLD BOND and HERPECIN-L product lines, which were acquired in the second and third quarters of fiscal 1996, respectively, were largely responsible for the improvement in the Company's operating results for the three and six months ended May 31, 1997. For the second quarter of the 1997 fiscal year, net sales increased 28.7%, to $39,178 from $30,430 for the corresponding prior year period, while operating income rose more rapidly than sales, growing 61.7% to $7,921 for 1997, from $4,900 in 1996. Income from continuing operations increased $1,047, or 52.1%, to $3,057, or $0.35 per share, from $2,010, or $0.26 per share in 1996. This increase for the second quarter in income and earnings per share was impacted by the rapid growth in operating income and a complete quarter of sales of the GOLD BOND and HERPECIN-L product lines. Earnings per share from continuing operations increased $0.09 per share, or 34.6%, for the quarter and $0.10, or 38.5%, for the six months ended May 31, 1997. The increase in earnings per share from continuing operations was primarily due to increased income from operations, less an increase in interest expense. The per share amounts for the quarter and six months ended May 31, 1997 reflect the increase in the total number of shares outstanding due to the issuance of additional shares of the Company's common stock during the second quarter of 1996 in conjunction with the GOLD BOND acquisition and the increase in the price of the Company's common stock. The Company will continue to seek increases in sales through a combination of acquisitions and internal growth while maintaining high operating income. As previously high growth brands mature, sales increases will become even more dependent on acquisitions and the development of successful line extensions. During the six months ended May 31, 1997, new additions to the ICY HOT (Arthritis Therapy Gel), GOLD BOND (Medicated Foot Powder and CORNSTARCH PLUS Medicated Baby Powder), MUDD (5 Minute Mask) and PAMPRIN and PREMSYN PMS (Gel Caps) product lines as well as a newly repackaged CORNSILK line were introduced. 9 Strategically, the Company continually evaluates its products and businesses as part of its growth strategy and in instances where the Company's objectives are not realized, will dispose of the brands and redeploy the assets to products or businesses with greater growth potential or to reduce indebtedness. RESULTS OF OPERATIONS The following table sets forth, for continuing operations and for the periods indicated, certain items from the Company's Condensed Consolidated Statements of Income expressed as a percentage of net sales:
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED MAY 31, ENDED MAY 31, -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- NET SALES.................................................................... 100.0% 100.0% 100.0% 100.0% --------- --------- --------- --------- COSTS AND EXPENSES: Cost of sales.............................................................. 27.8 30.7 28.7 30.7 Advertising and promotion.................................................. 37.3 37.3 38.6 37.4 Selling, general and administrative........................................ 14.7 15.9 15.5 18.4 --------- --------- --------- --------- Total costs and expenses................................................. 79.8 83.9 82.8 86.5 --------- --------- --------- --------- INCOME FROM OPERATIONS....................................................... 20.2 16.1 17.2 13.5 --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest expense........................................................... (9.8) (9.9) (11.4) (11.5) Investment and other income................................................ 1.8 .9 1.6 1.9 Gain on product divestitures............................................... -- 2.9 -- 1.8 --------- --------- --------- --------- Total other income (expense)............................................. (8.0) (6.1) (9.8) (7.8) --------- --------- --------- --------- INCOME BEFORE INCOME TAXES................................................... 12.2 10.0 7.4 5.7 PROVISION FOR INCOME TAXES................................................... 4.4 3.3 2.6 1.6 --------- --------- --------- --------- NET INCOME FROM CONTINUING OPERATIONS........................................ 7.8% 6.7% 4.8% 4.1% --------- --------- --------- ---------
10 COMPARISON OF THREE MONTHS ENDED MAY 31, 1997 AND 1996 FOR CONTINUING OPERATIONS Net sales for the three months ended May 31, 1997 increased $8,748, or 28.7%, to $39,178 from $30,430 for the same period of 1996. This increase in net sales was attributable to an $8,096, or 30.3% increase in domestic consumer products sales to $34,837 from $26,741 last year and an increase of $652, or 17.7%, in international consumer products sales to $4,341 from $3,689. For domestic consumer products in the 1997 period, increases over sales in the corresponding 1996 period were realized for FLEX-ALL, ICY HOT, PREMSYN, MUDD, GOLD BOND and HERPECIN-L. Decreases in sales from the corresponding 1996 period were realized for BULLFROG, SUN-IN, ULTRASWIM, NORWICH Aspirin and CORNSILK. Sales of the summer seasonal products (BULLFROG, SUN-IN and ULTRASWIM) were affected by the cool and wet Spring experienced in most sections of the country in 1997. BULLFROG sales were also impacted by the loss of a large customer. The decline in CORNSILK sales for the second quarter of the 1997 period reflects the effect of the reintroduction of that entire line in completely new packaging in the first quarter of the current fiscal year in which sales were unusually high. The ICY HOT sales increase reflects the introduction in February 1997 of Arthritis Therapy Gel to the product line. The over-all increase in sales is largely attributable to the GOLD BOND and HERPECIN-L brands which were acquired in April and June of 1996, respectively. All other product lines were basically flat compared to the 1996 period. All sales variances were principally due to volume changes. International consumer product sales for the second quarter of the 1997 period increased $313, or 31.0%, for the Canadian operation and $126, or 5.1%, for the United Kingdom business. U.S. export sales increased $213, or 96.8%, over the prior year period. Sales from the introduction of the BULLFROG brand in the 1997 period along with a full three months' sales of the GOLD BOND line, introduced in June 1996, accounted for practically all of the Canadian sales increase in the three months ended May 31, 1997. Sales increases for the SUN-IN and MUDD brands were realized in the current period by the United Kingdom division, while sales declines were recognized for the ULTRASWIM and CORNSILK product lines. U.S. export sales' increases in the 1997 period were entirely associated with the ICY HOT and GOLD BOND brands. All sales variances were largely the result of changes in volume. Cost of sales as a percentage of net sales decreased to 27.8% for the 1997 quarter from 30.7% for the same prior year period. This decline was essentially due to a shift in product mix of sales of domestic consumer products to higher margin brands. Advertising and promotion expenses increased $3,237, or 28.5%, in the 1997 period and were 37.3% of net sales for both the 1997 and 1996 quarters. This increase in the 1997 period was primarily associated with the GOLD BOND, HERPECIN-L and ICY HOT brands. Selling, general and administrative expenses increased $931, or 19.2%, in the 1997 period but declined as a percentage of net sales to 14.7% compared to 15.9% for the prior year period. The increase was primarily due to increases in direct selling expenses, as a result of increased sales. Interest expense increased $821, or 27.2%, in the 1997 period, reflecting primarily the additional debt incurred for the GOLD BOND and HERPECIN-L product acquisitions in fiscal 1996. A gain of $877 on the sale of SOLTICE and BLIS-TO-SOL product lines was recognized in the 1996 period. 11 Income from continuing operations increased by $1,047, or 52.1%, in the 1997 period. The net increase resulted primarily from increased sales and an improved cost of sales percentage of net sales, offset in part by increased interest expense and income taxes. COMPARISON OF SIX MONTHS ENDED MAY 31, 1997 AND 1996 FOR CONTINUING OPERATIONS Net sales for the six months ended May 31, 1997 increased $17,997, or 36.6%, to $67,124 from $49,127 for the same period last year. The increase in net sales was associated with a $17,172, or 39.7%, increase in domestic consumer product sales to $60,451 from $43,279 last year and an increase of $825, or 14.1%, in international consumer products sales to $6,673 from $5,848. For domestic consumer products in the 1997 period, increases over sales in the corresponding 1996 period were realized for FLEX-ALL, ICY HOT, PREMSYN, SUN-IN, MUDD, CORNSILK, BENZODENT, PHISODERM Anti-bacterial Hand Cleanser, GOLD BOND and HERPECIN-L. Decreases in sales from the corresponding 1996 period were realized for BULLFROG, NORWICH Aspirin, ULTRASWIM and PHISODERM. Sales of BULLFROG and ULTRASWIM were affected by the cool and wet Spring experienced in most sections of the country in 1997. BULLFROG sales were also impacted by the loss of a large customer. ICY HOT Arthritis Therapy Gel, introduced in February 1997, and the reintroduction of the CORNSILK line in completely new packaging in the first quarter of that year had a very favorable impact on sales of those respective brands for the 1997 period. All other product lines were basically flat compared to the 1996 period. All sales variances were principally due to volume changes. International consumer product sales for the 1997 period increased $616, or 39.6%, for the Canadian operation, and $11, or .3%, for the United Kingdom business. U.S. export sales increased $198, or 44.0%, over the prior year period. Sales from the introduction of the BULLFROG brand in the 1997 period along with a full six months' sales of the GOLD BOND product line, introduced in June 1996, accounted for practically all of the Canadian sales increase in the six months ended May 31, 1997. U.S. export sales' increases in the 1997 period were entirely associated with the ICY HOT and GOLD BOND product lines. All sales variances were largely the result of volume changes. Cost of sales as a percentage of net sales decreased to 28.7% for the 1997 period from 30.7% for the prior year's first six months. This decline was essentially due to a shift in product mix of sales of domestic consumer products to higher margin brands. Advertising and promotion expenses increased $7,053, or 40.8%, in the 1997 period and were 38.6% of net sales compared to 37.4% in the corresponding 1996 period. This increase in the 1997 period was primarily associated with the GOLD BOND, HERPECIN-L and ICY HOT brands. 12 Selling, general and administrative expenses increased $1,364, or 15.1%, in the 1997 period but were reduced to 15.5% of net sales compared to 18.4% in the corresponding 1996 period. The increase was primarily due to increases in direct selling expenses, as a result of increased sales. Interest expense increased $2,002, or 35.6%, in the 1997 period, reflecting primarily the additional debt incurred for the GOLD BOND and HERPECIN-L product acquisitions in fiscal 1996. A gain of $877 on the sale of the SOLTICE and BLIS-TO-SOL brands was recognized in the 1996 period. Income from continuing operations increased by $1,220, or 61.8%, in the current period. The net increase resulted primarily from increased sales and an improved cost of sales percentage of net sales, offset in part by increased interest expense and income taxes. 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, acquisitions, working capital, capital expenditures and long-term debt servicing. Cash of $1,438 was provided by operations for the six months ended May 31, 1997 while cash of $10,791 was used in operations of the prior year period. The increase in cash flows provided by operations was primarily a result of changes in net income, accounts receivable, inventories, refundable and deferred income taxes, prepaid and other current assets, accounts payable and accrued liabilities. The changes were due in part to the acquisitions of GOLD BOND and HERPECIN-L. Investing activities used cash of $2,170 in the six months ended May 31, 1997 compared to $37,277 for the comparable prior year period. The decrease in cash used primarily resulted from the acquisition of GOLD BOND during the second quarter of the fiscal 1996 period. Financing activities used cash of $1,765 in the six months ended May 31, 1997 while cash of $53,045 was provided by financing activities in the prior year period. In the fiscal 1996 period, the Company financed the acquisition of GOLD BOND and repaid all outstanding bank indebtedness with the proceeds of a new bank credit agreement and the issuance of 1,100,000 new shares of the Company's common stock. As previously discussed, the Company has expanded its senior bank credit agreement to fund the acquisition of Sunsource. The transaction was completed on June 26, 1997. 13 The following table presents working capital data at May 31, 1997 and November 30, 1996 or for the respective years then ended:
MAY 31, NOVEMBER 30, ITEM 1997 1996 - -------------------------------------------------------------------- --------- ------------ Working capital (current assets less current liabilities)........... $ 29,144 $ 19,793 Current ratio (current assets divided by current liabilities)....... 2.16 1.75 Quick ratio (cash and cash equivalents and accounts receivable divided by current liabilities)................................... 1.61 1.12 Average accounts receivable turnover................................ 5.35 6.51 Average inventory turnover.......................................... 3.48 3.70 Working capital as a percentage of total assets..................... 19.09% 13.01%
The improvement in the current and quick ratios at May 31, 1997 as compared to November 30, 1996 reflected primarily the increase in cash and cash equivalents, increase in accounts receivable and decrease in accounts payable. The decline in the average accounts receivable turnover as of May 31, 1997 as compared to November 30, 1996 is primarily due to the increase in the average receivable balance. This increase is due to the acquisition of GOLD BOND and the dated receivables which are included in the May receivable balances but not in the November receivable balances. Total loans outstanding were $129,393 as of May 31, 1997 compared to $131,344 as of November 30, 1996, a decrease of $1,951. The revolving line of credit is available to the Company up to $24,000 or such lesser amount as is determined to be available under the terms of the Company's bank credit agreement. The availability of credit under the revolvers is determined based on the Company's cash, accounts receivable and inventories. The amount of cash and cash equivalents on deposit in excess of the calculated availability is included as a current asset in the accompanying consolidated balance sheet as of May 31, 1997 and is available for general operating purposes. The amount of cash and cash equivalents on deposit up to the calculated availability is included in other non-current assets in the accompanying consolidated balance sheet as of May 31, 1997 and is available exclusively for the repayment of long-term bank debt. As of May 31, 1997, the Company had total cash and cash equivalents of $13,449. The Company had $8,550 invested in highly liquid short-term investments as of May 31, 1997 and has no further availability under its credit facility. The dated receivables related to the seasonal sales of BULLFROG, SUN-IN and ULTRASWIM are due August 15, 1997 and are approximately $5,000 to $6,000 as of May 31, 1997. Management of the Company believes that cash flows generated by operations, along with funds available under its short-term highly liquid investments, will be sufficient to fund the Company's current commitments and proposed operations. 14 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, 1997 and 1996, these subsidiaries accounted for 9% and 11% of total revenues, respectively, and 5% of total assets for both periods. It has not been the Company's practice to hedge its assets and liabilities in the U.K. and Canada or its intercompany transactions due to the inherent risks associated with foreign currency hedging transactions and the timing of payment between the Company and its two foreign subsidiaries. Historically, gains or losses from foreign currency transactions have not had a material impact on the Company's operating results. Losses of $49 and of $23 for the six months ended May 31, 1997 and 1996, respectively, resulted from foreign currency transactions. FORWARD LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward looking statements that 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 the indenture; and other risks described in the Company's Securities and Exchange Commission filings. 15 PART II. OTHER INFORMATION 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). (b) No reports on Form 8-K were filed with the Securities and Exchange Commission during the three months ended May 31, 1997. 16 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 15, 1997 /s/ ROBERT E. BOSWORTH ------------------------------------------ Robert E. Bosworth, Executive Vice President and Chief Financial Officer (principal financial officer) 17 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 15, 1997 ------------------------------------------ Robert E. Bosworth, Executive Vice President and Chief Financial Officer (principal financial officer) 18 EX-11 2 EXHIBIT 11 EXHIBIT 11 CHATTEM, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (Unaudited and in thousands, except per share amounts)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED MAY 31, MAY 31, -------------------- ---------------------- 1997 1996 1997 1996 --------- --------- --------- ----------- NET INCOME: Continuing operations................................................... $ 3,057 $ 2,010 $ 3,193 $ 1,973 Extraordinary loss...................................................... -- (532) -- (532) --------- --------- --------- ----------- Net income............................................................ $ 3,057 $ 1,478 $ 3,193 $ 1,441 --------- --------- --------- ----------- --------- --------- --------- ----------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Weighted average number of common shares outstanding.................... 8,613 7,743 8,608 7,519 Shares issued upon assumed exercise of outstanding stock options and stock warrants........................................................ 239 51 222 28 --------- --------- --------- ----------- Weighted average number of common and common equivalent shares outstanding........................................................... 8,852 7,794 8,830 7,547 --------- --------- --------- ----------- NET INCOME PER COMMON SHARE: Continuing operations................................................... $ 0.35 $ 0.26 $ 0.36 $ 0.26 Extraordinary loss...................................................... -- (0.07) -- (0.07) --------- --------- --------- ----------- Net income per common share........................................... $ 0.35 $ 0.19 $ 0.36 $ 0.19 --------- --------- --------- ----------- --------- --------- --------- -----------
EX-27 3 EXHIBIT 27
5 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. 1000 6-MOS NOV-30-1997 DEC-01-1996 MAY-31-1997 13449 0 27350 400 10340 54268 26860 17164 152647 25124 125668 0 0 1867 (5865) 152647 67124 67124 19282 55575 0 0 7633 4929 1736 3193 0 0 0 3193 .36 .36
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