-----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, O4bJ+6b+YU138VIwX03X1k0iZMM7Fq9rmNUsyhWnit7RMfmINWDGlBWaBZD/DKYR ooEyozhxGoHTkmsaPyeoyA== 0001047469-98-008271.txt : 19980304 0001047469-98-008271.hdr.sgml : 19980304 ACCESSION NUMBER: 0001047469-98-008271 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980302 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-K SEC ACT: SEC FILE NUMBER: 000-05905 FILM NUMBER: 98554656 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-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 30, 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 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and has been subject to such filing requirements for the past 90 days. Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K will be contained in the definitive Proxy Statement incorporated by reference in Part III of this Form 10-K. As of February 20, 1998, the aggregate market value of voting shares held by non-affiliates was $138,304,452. As of February 20, 1998, 9,090,854 common shares were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Annual Report to Shareholders for Fiscal year ended November 30, 1997 (the "1997 Annual Report to Shareholders") are incorporated by reference in Parts I, II and IV of this Report. Portions of the registrant's definitive Proxy Statement dated March 6, 1998 (the "Proxy Statement") are incorporated by reference in Part III of this Report. PART I Item 1. Business General Chattem, Inc. (the "Company") was incorporated in Tennessee in 1909 after having commenced business operations in 1879. The Company is a diversified manufacturer and marketer of consumer products. The Company manufactures and markets branded over-the-counter ("OTC") pharmaceuticals, such as FLEXALL, ICY HOT, PAMPRIN, PREMSYN PMS, BENZODENT, NORWICH Aspirin, GOLD BOND and HERPECIN-L; functional toiletries and cosmetics, including CORNSILK, BULLFROG, ULTRASWIM, SUN-IN, MUDD and PHISODERM; dietary supplements represented by GARLIQUE, REJUVEX, MELATONEX, ECHINEX and PROPALMEX; and a small line of homeopathic medicines. In the OTC drug market, the Company believes that its topical analgesic, menstrual and premenstrual internal analgesic brands and medicated powder and cream are among the market leaders in the U.S. in their categories. Certain of the Company's functional toiletries and cosmetics products, such as SUN-IN and ULTRASWIM, are believed by the Company to be brand leaders in the U.S. in their categories. The Company's dietary supplement products are also considered to be major brands in that U.S. market. The Company's growth strategy is to seek continued growth through a combination of brand acquisitions and internal growth while maintaining high operating income. As a part of this strategy, the Company continually evaluates its products and businesses, and in instances in which products or businesses fail to realize the Company's objectives, the Company will dispose of these products or businesses and redeploy resulting assets to products and businesses with greater growth potential or to reduce indebtedness. The Company conducts certain aspects of its business through four wholly owned subsidiaries. One subsidiary owns or licenses substantially all of the trademarks and intangibles associated with its domestic consumer products business and licenses the Company's use thereof. Certain foreign sales operations are conducted through Canadian and United Kingdom subsidiaries. Product liability insurance is provided by a captive insurance subsidiary incorporated in Bermuda. 2 For purposes of this report, the "Company" refers to Chattem, Inc. and its wholly-owned subsidiaries. Trademarks of the Company appear in this report in all capitalized letters. Developments During Fiscal 1997 On June 26, 1997, the Company purchased certain assets of Sunsource International, Inc. and an affiliated company ("SUNSOURCE") including the exclusive worldwide rights to five leading branded dietary supplement products. The purchase price for the trademarks, inventory and receivables was approximately $32,000,000. Additional payments may be earned by SUNSOURCE over a six year period from the date of closing if sales exceed certain levels as defined in the purchase agreement, but such additional payments are not to exceed $15,750,000 in the aggregate. Financing of the SUNSOURCE acquisition was provided by an expansion of the Company's senior bank credit agreement and the issuance of 300,000 shares of Chattem, Inc. common stock to SUNSOURCE. The Company expanded its existing credit agreement with a syndicate of banks on June 26, 1997 to finance the SUNSOURCE acquisition and repay all existing bank debt. The credit agreement is divided into a $30,000,000 revolving line of credit for working capital purposes, a 5 year $30,000,000 Term A loan facility and a 6 3/4 year $35,000,000 Term B loan facility. During June 1997, the Company prepaid previously outstanding long-term bank debt, with funds from the new credit agreement. In connection with the prepayment of those borrowings, the Company incurred an extraordinary loss of $1,370,000 (net of income taxes), or $0.15 per share. The loss primarily related to the write-off of debt issuance costs and the termination of two interest rate swap agreements. Unless otherwise indicated, the following discussion relates only to the continuing operations of the Company, which are the domestic and international consumer products business. The results of operations and the gain on disposal of the specialty chemical division in 1995 have been separately classified as discontinued operations in the accompanying consolidated statements of income. 3 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 year ended November 30, 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. Products The objective of the Company is to offer high quality brand name products in niche market segments in which its products can be among the market leaders. The Company strives to achieve its objective by identifying brands with favorable demographic appeal, being flexible in modifying products and promotions in response to changing consumer demands and developing creative and cost-effective marketing and advertising programs. The Company manufactures substantially all of its products at its manufacturing facility in Chattanooga, Tennessee, with the exception of GOLD BOND, the SUNSOURCE brands and NORWICH Aspirin, which are manufactured by contract manufacturers. 4 The Company's product brands are: OTC Pharmaceuticals -------------------- - GOLD BOND - medicated powders and anti-itch cream - FLEXALL - topical analgesic - ICY HOT - topical analgesic - BENZODENT - topical oral analgesic - NORWICH Aspirin - internal analgesic - HERPECIN-L - cold sore and fever blister product - PAMPRIN - menstrual internal analgesic - PREMSYN PMS - premenstrual internal analgesic Functional Toiletries and Cosmetics ------------------------------------ - CORNSILK - oil absorbing facial make-up - BULLFROG - sunscreen and sunblock - ULTRASWIM - chlorine removing shampoo - SUN-IN - spray-on hair lightener - MUDD - facial mask and cleanser - PHISODERM - facial and hand cleanser Dietary Supplements --------------------- - REJUVEX - menopausal supplement - GARLIQUE - garlic extract - MELATONEX - sleep aid - PROPALMEX - prostate health product - ECHINEX - infections resistance enhancer 5 The following table sets forth the Company's net sales attributable to domestic and international OTC pharmaceutical, functional toiletries and cosmetics, dietary supplement and homeopathic products, other products and total consumer products during the past three fiscal years (dollars in thousands):
Fiscal Year Ended November 30, ------------------------------------------------------------------------------ 1997 1996 1995 ------- ------ ------ Product Class Sales Percentage Sales Percentage Sales Percentage -------- ---------- -------- ---------- --------- ---------- Domestic: OTC Pharmaceuticals ................. $ 83,121 58.0% $ 67,214 56.5% $ 48,700 48.4% Functional Toiletries and Cosmetics .......................... 33,887 23.7 36,232 30.5 37,519 37.3 Dietary Supplements and Homeopathics*....................... 9,102 6.4 - - - - International: OTC Pharmaceuticals .................. 3,053 2.1 2,255 1.9 2,463 2.5 Functional Toiletries and Cosmetics .......................... 12,154 8.5 12,204 10.3 10,885 10.8 Other Products ......................... 1,918 1.3 998 .8 1,031 1.0 -------- ---------- -------- ---------- ---------- ------ Total Consumer Products .......... $143,235 100.0% $118,903 100.0% $100,598 100.0% -------- ---------- -------- ---------- ---------- ------ -------- ---------- -------- ---------- ---------- ------
*From the date of acquisition, June 26, 1997. 6 Growth Strategy The Company seeks to expand its business through: - - ACQUISITION OF ESTABLISHED BRANDS. Brand acquisitions afford the Company the opportunity to leverage its advertising and promotional capabilities and utilize existing distribution channels to attain incremental sales increases accompanied by higher operating margins. An example of this strategy is the Company's acquisition of GOLD BOND in April 1996. GOLD BOND is the leading brand in the medicated powder market with a rapidly growing presence in the anti-itch cream market. Annual sales of GOLD BOND have increased by more than 20% from less than $30 million at the time of the acquisition, while operating margins have also increased during the same period. The Company's acquisition of the SUNSOURCE Products is another example of this strategy. The SUNSOURCE Products are leaders in small to medium sized markets that have an older and growing demographic profile. In addition, the dietary supplements market is a media driven business that is compatible with the Company's marketing and distribution capabilities. The Company believes that growth of the SUNSOURCE brand can be achieved through the utilization of television advertising, new product introductions and improved distribution. - - EXPANSION OF EXISTING PRODUCT LINES. The Company seeks to increase its market share in established markets through the introduction of new product lines for existing brands. Product line extensions allow the Company to maximize the value of the base brand through an increased market presence and new market entry. Recent examples of product line extensions include ICY HOT Arthritis Therapy Gel and two GOLD BOND line extensions, GOLD BOND Medicated Foot Powder and GOLD BOND Cornstarch Plus Medicated Baby Powder. - - DEVELOPMENT OF BRANDS WITH UNREALIZED POTENTIAL. The Company seeks to acquire brands with unrealized potential that have been under-marketed by larger firms or have achieved success in limited geographic regions. The Company uses its marketing ability, sales force and manufacturing capabilities to build on the unrealized potential of the brand. ICY HOT was an under-marketed brand which the Company acquired from a major consumer products company, while FLEXALL had only a regional market presence when acquired by the Company. Both of these brands have achieved significant sales growth following their acquisition by the Company. 7 OTC Pharmaceuticals The Company markets a diversified portfolio of brand name OTC pharmaceutical products, many of which are among the market leaders in the U.S. in their respective categories. The GOLD BOND brand, which is approximately 100 years old, competes in the adult and baby medicated powder and anti-itch cream markets. GOLD BOND is the leading brand in the medicated powder market and has a rapidly growing presence in the anti-itch cream market. The product line is heavily supported by national television and radio advertising, as well as with consumer promotions. The Company believes GOLD BOND represents a major growth opportunity and is currently pursuing various line extensions. FLEXALL is an aloe-vera based topical analgesic used primarily by people with arthritic symptoms to alleviate pain and irritation in joints and secondarily by persons suffering from muscle strain. In fiscal 1996 FLEXALL Ultra Plus, containing menthol, methyl salicylate and camphor as active ingredients, was added to the line. The Company believes that the advancing age of the U.S. population and the emphasis on fitness and physical activity will increase the overall market size of the topical analgesic market. The Company supports the brand with a marketing program that utilizes extensive television and print media advertising. ICY HOT provides the Company with a second entry into the topical analgesic market segment. ICY HOT is an extra strength dual action product, as distinguished from FLEXALL. In fiscal 1997 ICY HOT Arthritis Therapy Gel, containing capcaicin in an aloe vera based gel, was introduced. The Company supports this brand with national advertising and strong promotional programs. BENZODENT is a dental analgesic cream in an adhesive base for use as an oral topical analgesic for pain related to dentures. The Company acquired BENZODENT in 1994 and seeks to increase the market share of this brand by providing samples to consumers when they are initially fitted for dentures. 8 NORWICH is a pharmaceutical-quality, aspirin-based analgesic which complements the Company's other OTC pharmaceuticals by offering consumers another choice in the analgesic market segment and by permitting shared product promotions. The Company positions the brand as a reasonably priced alternative between private label generic aspirin and high-priced, heavily-advertised brands. In the lip care category, HERPECIN-L balm stick treats and protects cold sores three ways. The unique formula moisturizes lips to help prevent cracking, reduce soreness and promote healing. Also, HERPECIN-L contains an SPF 15 sunblock to help protect lips from the harmful rays of the sun. The Company supports the brand with television and radio advertising as well as consumer promotions designed to generate trial during the peak winter and summer cold sore seasons. In the menstrual analgesic segment, the Company markets PAMPRIN, a combination drug specifically designed for relief of menstrual symptoms, and PREMSYN PMS, a product formulated to relieve mild to moderate symptoms of premenstrual syndrome. PAMPRIN was developed internally by the Company over 30 years ago, while PREMSYN PMS was introduced by the Company in 1983. In fiscal 1997 both PAMPRIN and PREMSYN PMS were introduced in gel capsule form. Functional Toiletries and Cosmetics The Company also markets a portfolio of brand name functional toiletries and cosmetics, many of which are among the market leaders in the U.S. in their respective categories. The CORNSILK brand is a line of facial makeup products for women with oily or combination skin. All CORNSILK products utilize an exclusive ingredient for absorbing the excess facial oils that break down the color and coverage of other makeup. The CORNSILK brand includes powder used by women to fix and finish their makeup and also liquid makeup, blush and concealer. Liquid makeup is used to even skin tone, blush to add color and concealer to cover blemishes. The Company supports the brand by print advertising in selected women's magazines. In fiscal 1997 the entire CORNSILK product line was relaunched in completely new packaging. 9 In the sunscreen and sunblock category, BULLFROG provides long-lasting, water-durable protection from the sun. Positioned as a line of highly efficacious sunblock products in a unique, highly concentrated formula, the Company believes that the BULLFROG brand should continue to benefit from this overall market growth as well as increasing brand awareness, broader product offerings and increased consumer advertising, promotion and sampling programs. ULTRASWIM is a leading line of chlorine removing shampoo, conditioner and soap. ULTRASWIM has a patented formula that the Company believes makes it superior to formulations of other products in removing chlorine. ULTRASWIM has also benefited as it has moved beyond the competitive swim segment to include exercise and recreational swimmers. The Company supports this brand by selected television advertising companies by print advertising. SUN-IN is a leading product line in the spray-on hair lightener market. The target customers within this market segment are light-haired women between the ages of 12 and 24. The Company supports SUN-IN's position as a market leader through recent improvements in the formula and package, seasonal advertising to teens and consumer promotions in retail stores. MUDD is a line of clay-based products which provide deep cleansing of the face for healthier, cleaner skin. Target customers for MUDD are women between the ages of 18 and 49. In fiscal 1995, the Company relaunched MUDD with improved formulas and updated packaging and added a 5 Minute Mask to the line in fiscal 1997. PHISODERM is a line of facial cleansers consisting of several formulas of liquid cleansers, including one for infants, and a bar soap. Acquired in 1994, PHISODERM is the Company's second entry into the facial cleanser category. Positioned as a deep cleaning but gentle facial cleanser, the Company, in fiscal 1995, improved the formula, updated the packaging and provided television advertising and promotional support to enable this brand to regain the larger market share it once enjoyed. In fiscal 1996, PHISODERM Antibacterial Hand Cleanser was introduced in the domestic and certain international markets. 10 DIETARY SUPPLEMENTS The Company markets a line of predominantly herbal, branded dietary supplements and homeopathic medicines under the SUNSOURCE name. The SUNSOURCE line was acquired by the Company in June 1997. The dietary supplement products in the SUNSOURCE line have national distribution in food, drug and mass merchandiser accounts and are supported by national television and/or radio ad campaigns. SUNSOURCE dietary supplements are natural, drug-free aids to supporting and maintaining good health. REJUVEX, first introduced in late 1991 and the oldest of the SUNSOURCE brands, is a dietary supplement for women in the peri- and post-menopausal age group. REJUVEX helps women to maintain comfort during a phase of life that is often fraught with numerous discomforts. Additionally, REJUVEX, high in magnesium, helps to promote strong healthy bones in a population that is at risk for development of osteoporosis. REJUVEX provides an estrogen-free avenue of natural support. GARLIQUE garlic tablets support cardiovascular health. The tablets are uniquely positioned in the marketplace as a "one per day" high potency garlic supplement. The major GARLIQUE competitor is a six per day product. Consumers have a strong and growing interest in this odor-less, drug-free, all natural approach to maintaining normal cholesterol levels. GARLIQUE entered the market place in 1992 and has continued as a strong product. MELATONEX is formulated to support a natural sleep cycle, by supplementing the body's natural production of melatonin, a hormone necessary for a good night's sleep. As we age, we produce less and less melatonin, tend to sleep less and have more difficulty falling asleep and staying asleep. Supplementing our natural melatonin production is the sensible solution for people over forty. MELATONEX is a scored, time-release tablet offering important and desired dosage control to consumers. 11 PROPALMEX is an herbal supplement for men over forty. PROPALMEX supports prostate health and promotes free urinary flow. As men age, natural changes in hormone balance result in conditions which tend to precipitate a swelling of the prostate. This benign condition plagues most men past middle age and PROPALMEX is the all natural, drug-free approach to maintenance of a healthy prostate. ECHINEX is a standardized herbal complex of echinacea, ginger and Siberian ginseng. This effective combination supports our natural resistance against infection helping us to stay well. ECHINEX is a seasonal product that provides adults with added protection during times of high risk for cold and flu. SUNSOURCE offers a line of nine homeopathic OTC products. Homeopathic medicines represent a growing segment of the OTC marketplace. These all natural products are safe and effective and have no side effects. The SUNSOURCE line includes six tablet products: Sinus Relief, Cold Relief, Insomnia Relief, Allergy Relief, Flu Relief and Arthritis Relief; and three topical creams: Sports Injury Relief, Arthritis Relief and Psoriasis/Eczema Relief. International The Company's products are also sold in foreign countries. This international business is concentrated in Canada, Europe and Central and South America. Sales in Canada and Europe are conducted by subsidiary companies located and locally staffed in Canada and the United Kingdom. General export sales are handled by the Company from its offices in Chattanooga. Most of the products sold in international markets are manufactured by the Company at its Chattanooga and United Kingdom facilities and are packaged by subsidiary companies in small facilities in Canada and the United Kingdom with the assistance, from time to time, of outside contract packagers. 12 Many of the Company's major domestic products are currently sold in Canada, including the FLEXALL, PAMPRIN, SUN-IN, CORNSILK, MUDD, ULTRASWIM, PHISODERM, BULLFROG and GOLD BOND brands. Consumer product sales in the United Kingdom and on the continent of Western Europe are currently limited to toiletry and cosmetic products. The Company's hair lightener product is sold on the continent under the SPRAY BLOND trademark and in the United Kingdom as SUN-IN. MUDD, CORNSILK and ULTRASWIM are the other primary consumer products sold by the Company's international division in Europe. The Company's export division services various distributors primarily located in the Caribbean, Mexico and Peru. The Company sells various products into these markets with the primary focus being the development of its OTC pharmaceuticals, principally ICY HOT, PAMPRIN, PHISODERM and GOLD BOND. The Company continues to look for established distributors in Central and South America. Manufacturing and Quality Control The Company manufactures a substantial portion of its products at its Chattanooga plant, with the exception of GOLD BOND, the SUNSOURCE brands and NORWICH Aspirin, which are manufactured by contract manufacturers. Currently, the Company has adequate capacity to meet anticipated demand for its products. New products can generally be manufactured with the adaptation of existing equipment and facilities, with the addition of new equipment at relatively small cost or through readily available contract manufacturers. For additional information about the extent of utilization of the Company's manufacturing facilities, see "Properties", Item 2 in this report. To monitor the quality of its products, the Company maintains an internal quality control system supported by an on-site microbiology laboratory. Outside consultants also are employed from time to time to monitor product development and the effectiveness of the Company's operations. The Company has not experienced any material adverse effect on its business as a result of shortages of energy or other raw materials used in the manufacture of its products. At present, the Company does not foresee any significant problems in obtaining its requirements at reasonable prices, but no assurances can be given that raw material or energy shortages will not adversely affect its operations in the future. 13 Research and Development The Company's research and development expenditures were $1,207,000, $1,117,000, and $1,140,000 in the fiscal years ended November 30, 1997, 1996 and 1995, respectively. No material customer-sponsored research and development activities were undertaken during these periods. The Company expects to maintain the same general level of expenditures in fiscal 1998. The research and development effort focuses on developing improved formulations for existing products and on the creation of formulations for product line extensions. The preservation and improvement of the quality of the Company's products are also integral parts of its overall strategy. Distribution The Company's domestic products are sold primarily through thousands of food, drug and mass merchandiser accounts. Internationally, the products are sold by a national broker in Canada and the Company's own sales force in the United Kingdom and by exclusive distributors in Western Europe and Central and South America to mass distribution channels. Wal-Mart Stores, Inc. accounts for more than 10% of the sales of the Company's consolidated net sales. No other customer accounts for more than 10% of consolidated net sales. Boots Plc, a U.K. retailer, and Shoppers Drug Mart, a Canadian retailer, each account for more than 10% of the international consumer products segment's sales. The Company generally maintains sufficient inventories to meet customer orders as received absent unusual and infrequent situations. At present, the Company has no significant backlog of customer orders and is promptly meeting customer requirements. The Company does not generally experience wide variances in the amount of inventory it maintains. Inventory levels were increased during fiscals 1997 and 1996 largely as a result of product acquisitions and line extensions in both years. In certain circumstances, the Company allows its customers to return unsold merchandise and, for seasonal products, provides extended payment terms to its customers. 14 Marketing The Company allocates a significant portion of its revenues to the advertising and promotion of its products. Expenditures for these purposes were 39.2%, 38.3% and 37.0%, respectively, as a percentage of net sales during each of the fiscal years ended November 30, 1997, 1996 and 1995. The Company's marketing objective is to develop and execute creative and cost-effective advertising and promotional programs. The manner in which the Company executes promotional programs and purchases advertising time creates more flexibility in terms of adjusting spending levels. The Company believes that balancing advertising, trade promotions and consumer promotions expenditures on a cost effective basis is an essential element in its ability to compete successfully. The Company develops for each of its major brands advertising strategies and executions that focus on the particular attributes and market positions of the products. The Company achieves cost-effective advertising by minimizing certain expenses, such as production of commercials and payments to advertising agencies. The Company works directly with retailers to develop for each brand promotional calendars and campaigns that are customized to the particular requirements of the individual retailer. The programs, which include cooperative advertising, temporary price reductions, in-store displays and special events, are designed to obtain or enhance distribution at the retail level and to reach the ultimate consumers of the product. The Company also utilizes consumer promotions such as coupons, samples and trial sizes to increase the trial and consumption of the products. Seasonality During recent fiscal years, the Company's first quarter net sales and gross profit have trailed the other fiscal quarters on average from 25% to 35% because of slower sales of international consumer products and the relative absence of promotional campaigns during this quarter. 15 Competition The OTC pharmaceutical, functional toiletry and dietary supplements products' markets in which the Company competes are highly competitive. The markets are characterized by the frequent introduction of new products including the movement of prescription drugs to the OTC market, often accompanied by major advertising and promotional programs. The Company competes primarily on the basis of product quality, price, brand loyalty and consumer acceptance. The Company's competitors include other OTC pharmaceutical companies and large consumer products companies, many of which have considerably greater financial and marketing resources than the Company. The products offered by these companies are often supported by much larger advertising and promotional expenditures and are generally backed by larger sales forces. In addition, the Company's competitors have often been willing to use aggressive spending on trade promotions as a strategy for building market share at the expense of their competitors, including the Company. The private label or generic category has also become more competitive in certain of the Company's product markets. Another factor affecting the OTC pharmaceutical, toiletry and dietary supplement products' business is the consolidation of retailers and increasingly more competitive negotiations for access to shelf space. Trademarks and Patents The Company's trademarks are of material importance to its business and are among its most important assets, although, except in the case of the GOLD BOND, SUNSOURCE, FLEXALL, PHISODERM and ICY HOT trademarks, its business as a whole is not materially dependent upon ownership of any one trademark. The Company, either through a wholly-owned subsidiary or directly, owns or licenses all of the trademarks associated with its business. All of the Company's brands have recognized trademarks associated with them, and the Company's significant domestic trademarks have been registered on the principal register of the United States Patent and Trademark Office. Federally registered trademarks have a perpetual life as long as they are timely renewed and used properly as trademarks, subject to the right of third parties to seek cancellation of the marks. The Company also owns patents related to the ULTRASWIM shampoo and CORNSILK facial powder, both of which expire in 1998, and ICY HOT stick topical analgesic, which expires in 2007. After expiration of the patents, the Company expects that these products will continue to compete in the market primarily on the basis of the goodwill associated with the brands. 16 Government Regulation The manufacturing, processing, formulation, packaging, labeling and advertising of the Company's products are subject to regulation by one or more federal agencies, including the FDA, the FTC, the Consumer Product Safety Commission, the United States Department of Agriculture, the United States Postal Service, the United States Environmental Protection Agency and the Occupational Safety and Health Administration. These activities are also regulated by various agencies of the states, localities and foreign countries in which the Company's products are sold. In particular, the FDA regulates the safety, manufacturing, labeling and distribution of dietary supplements, including vitamins, minerals and herbs, food additives, OTC and prescription drugs and cosmetics. The regulations that are promulgated by the FDA relating to the manufacturing process are known as GMPs, and are different for drug and food products. In addition, the FTC has overlapping jurisdiction with the FDA to regulate the promotion and advertising of OTC pharmaceuticals, functional toiletries and cosmetics, dietary supplements and foods. All of the Company's OTC drug products are regulated pursuant to the FDA's monograph system for OTC drugs. The monographs set out the active ingredients and labeling indications that are permitted for certain broad categories of OTC drug products, such as topical analgesics. Compliance with the monograph provisions means that the product is generally recognized as safe and effective and is not misbranded. Future changes in the monographs could result in the Company having to revise product labeling and formulations. The Company responded to certain questions with respect to efficacy received from the FDA in connection with clinical studies for pyrilamine maleate, one of the active ingredients used in certain of the PAMPRIN and PREMSYN PMS products. While the Company addressed all of the FDA questions in detail, the final monograph for menstrual drug products will determine if the FDA considers pyrilamine maleate safe and effective for menstrual relief products. The Company has been actively monitoring the process and does not believe that either PAMPRIN or PREMSYN PMS will be materially adversely affected by the FDA review. The Company believes that any adverse finding by the FDA would likewise affect the Company's principal competitor in the menstrual product category. As a result of an order issued by the Consumer Products Safety Commission, there are new packaging requirements for products containing lidocaine. The Company has until January 1998 to develop child resistant packaging for its GOLD BOND Cream products that are sold in tubes or change the product formulation. DSHEA was enacted on October 25, 1994. DSHEA amends the Federal Food, Drug and Cosmetic Act by defining dietary supplements, which include vitamins, minerals, nutritional supplements, herbs and botanicals, as a new category of food separate from conventional food. DSHEA provides a regulatory framework to ensure safe, quality dietary supplements and to foster the dissemination of accurate information about such products. Under DSHEA, the FDA is generally prohibited from regulating dietary supplements as food additives or as drugs unless product claims, such as claims that a product may diagnose, mitigate, cure or prevent an illness, disease or malady, trigger drug status. DSHEA provides for specific nutritional labeling requirements for dietary supplements effective January 1, 1997, although final regulations have not been published and the FDA has indicated that implementation will be delayed. DSHEA permits substantiated, truthful, and non-misleading statements of nutritional support to be made in labeling, such as statements describing general well-being resulting from consumption of a dietary ingredient or the role of a nutrient or dietary ingredient in affecting or maintaining a structure or function of the body. The Company anticipates that the FDA will promulgate GMPs which are specific to dietary supplements and require at least some of the quality control provisions contained in the GMPs for drugs, which are more rigorous than the GMPs for foods. The FDA has proposed, but not finalized, regulations to implement DSHEA, including those relating to nutritional labeling requirements. The Company cannot determine what effect such regulations, when promulgated, will have on its business in the future. Such regulations are likely to require expanded or different labeling for the Company's vitamin and nutritional dietary supplement products and could, among other things, require the recall, reformulation or discontinuance of certain products, additional recordkeeping, warnings, notification procedures and expanded documentation of the properties of certain products and scientific substantiation regarding ingredients, product claims, safety or efficacy. Failure to comply with applicable FDA requirements can result in sanctions being imposed on the Company or the manufacture of its products, including warning letters, product recalls and seizures, injunctions or criminal prosecution. 17 Environmental The Company is continuously engaged in assessing compliance of its operations with applicable federal, state and local environmental laws and regulations. The Company's policy is to record liabilities for environmental matters when loss amounts are probable and reasonably determinable. The Company's manufacturing site utilizes chemicals and other potentially hazardous materials and generates both hazardous and non-hazardous waste, the transportation, treatment, storage and disposal of which are regulated by various governmental agencies. The Company is a member of the Chattanooga Manufacturers Association, a trade association which promotes industry awareness of developments in environmental matters, and has engaged environmental consultants on a regular basis to assist its compliance efforts. The Company is currently in compliance with all applicable environmental permits and is aware of its responsibilities under applicable environmental laws. Any expenditures necessitated by changes in law and permitting requirements cannot be predicted at this time, although such costs are not expected to be material to the Company's financial position or results of operations. Since the early 1980's, the U.S. Environmental Protection Agency ("EPA") has been investigating the extent of, and the health effects resulting from, contamination of Chattanooga Creek, which runs through a major manufacturing area of Chattanooga in the vicinity of the Company's manufacturing facilities. The contamination primarily stems from the dumping of coal tar into the creek during World War II when the federal government was leasing and operating a coke and chemical plant adjacent to the creek. However, the EPA has been investigating virtually all businesses that have discharged any wastewater into the creek. A 2 1/2 mile stretch of Chattanooga Creek was placed on the National Priorities List as a Superfund site under the Comprehensive Environmental Response, Compensation and Recovery Act in September of 1995 and remediation of the creek bed commenced in mid-1997. The Company could be named as a potentially responsible party in connection with such site due to the Company's historical discharge of wastewater into the creek. However, considering the nature of the Company's wastewater, as well as the fact that the Company's discharge point is downstream from the old coke and chemical plant that was operated by the government, and the availability of legal defenses and expected cost sharing, the Company does not believe that any liability associated with such site will be material to its financial position or results of operations. 18 Product Liability and Insurance An inherent risk of the Company's business is exposure to product liability claims brought by users of the Company's products or by others. The Company has not had any material claims in the past and is not aware of any material claims pending or threatened against the Company or its products. While the Company will continue to attempt to take what it considers to be appropriate precautions, there can be no assurance that it will avoid significant product liability exposure. The Company maintains product liability insurance, principally through a captive insurance subsidiary, that it believes to be adequate; however, there can be no assurance that it will be able to retain its existing coverage or that such coverage will be cost-justified or sufficient to satisfy future claims, if any. Employees The Company employs approximately 303 persons on a full-time basis in the U.S. and 37 persons at its foreign subsidiaries' offices. The Company's employees are not represented by any organized labor union, and management considers its labor relations to be good. 19 Item 2. Properties The Company's headquarters and administrative offices are located at 1715 West 38th Street, Chattanooga, Tennessee. The Company's primary production facilities are adjacent to the Company's headquarters on land owned by the Company. The Company leases the primary warehouse and distribution center, located at 3100 Williams Street, Chattanooga, Tennessee, for its domestic consumer products. The following table describes in detail the principal properties owned and leased by the Company:
FACILITY TOTAL ---------------------------- TOTAL AREA BUILDINGS (SQUARE (ACRES) (SQUARE FEET) USE FEET) ----------- ------------- --------------- ----------- Owned Properties: Chattanooga, Tennessee 10 111,200 Manufacturing 71,800 Office & Administration 39,400 Leased Properties: Chattanooga, Tennessee (1) 4.0 100,000 Warehousing 103,800 Chattanooga, Tennessee (2) 1.0 35,200 Warehousing & Chattanooga, Tennessee (3) 0.1 3,800 Manufacturing 35,200 Mississauga, Ontario, Canada (4) 0.3 15,000 Warehousing 10,500 Office & Administration 3,000 Packaging 1,500 Basingstoke, Hampshire, England (5) 0.3 21,900 Warehousing 13,900 Office & Administration 6,500 Packaging 1,500
NOTES: (1) Leased under a five year lease ending January 31, 2001 for a monthly rental of $25,000. (2) Leased under a five year lease ending January 31, 2001 for a monthly rental of $9,547. (3) Leased under a one year lease ending in July 1998 for a monthly rental of $1,575. (4) Leased under a lease ending November 1999 at a monthly rental, including property taxes and other incidentals, of approximately $5,397. (5) Leased under leases ending in 2014 and 2015 at a monthly rental, including property taxes and other incidentals, of approximately $22,707. 20 The Company is currently operating its facilities at approximately 70% of total capacity. These facilities are FDA registered and are capable of further utilization through the use of full-time second and third shifts. Item 3. Legal Proceedings Note 10 to the Consolidated Financial Statements on page 32 of the Company's 1997 Annual Report to Shareholders is incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders None. 21 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters The information found on pages 17, 30 and 31 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference. On June 26, 1997, the Company issued to the sellers of the SUNSOURCE product line 300,000 shares of its common stock at a value of $13.50 per share as a portion of the purchase price for the brand. Item 6. Selected Financial Data The information found on page 17 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information found on pages 11 to 15 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference. Item 8. Financial Statements and Supplemental Data The information found on pages 17 to 37 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None. 22 PART III Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant (a) Directors The information found in the Company's 1998 Proxy Statement under the heading "Information about Nominees and Continuing Directors" is hereby incorporated by reference. (b) Executive Officers The following table lists the names of the executive officers of the Company as of February 20, 1998, their ages, their positions and offices with the Company and the year in which they were first elected to these positions:
POSITION WITH FIRST NAME AGE REGISTRANT ELECTED - ---------------------- ---- ------------------------------- ------------ Zan Guerry 49 Chairman of the Board and Chief Executive Officer; Director 1990 A. Alexander Taylor II 44 President and Chief Operating Officer; Director 1998
Mr. Guerry was elected to his present positions with the Company in June 1990. Previously he served as Vice President and Chief Financial Officer from 1980 until 1983, as Executive Vice President from 1983 to 1990, as President of Chattem Consumer Products from 1989 to 1994, as Chief Operating Officer from 1989 to 1990 and as President of the Company from 1990 to 1998. Mr. Guerry was first elected as a director of the Company in 1981. Mr. Taylor was elected to his present positions with the Company in January 1998. Previously he was a partner from 1983 to 1998 with the law firm of Miller & Martin, general counsel to the Company. Mr. Taylor was first elected as a director of the Company in 1993. (c) Promoters and Control Persons Not applicable. 23 Item 11. Executive Compensation The information found in the Company's 1998 Proxy Statement under the heading "Executive Compensation and Other Information" is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information found in the Company's 1998 Proxy Statement under the heading "Voting Securities and Principal Holders Thereof" is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions Louis H. Barnett, a director of the Company, received $33,000 in consulting fees during fiscal 1997 for services rendered to the Company in a capacity other than as a director. 24 PART IV Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K (a) 1. The consolidated financial statements and the related report of independent public accountants required to be filed with this Report are incorporated by reference from pages 18 to 37 of the Company's 1997 Annual Report to Shareholders. 2. The following documents are filed or incorporated by reference as exhibits to this report: Exhibit Number Description of Exhibit References - ------- ---------------------- ---------- 3 Amended and Restated Charter of Chattem, Inc. (1) 4 Form of Indenture dated August 3, 1994 between Chattem, Inc. and SouthTrust Bank of Alabama, N.A. relating to the 12.75% Series B Senior Subordinated Notes due 2004 (2) Amended and Restated By-Laws of Chattem, Inc. (3) 10 Material Contracts - Non-Competition and Severance Agreements as amended - Zan Guerry Robert E. Bosworth Gary M. Galante B. Derrill Pitts Charles M. Stafford A. Alexander Taylor II (3) 25 Exhibit Number Description of Exhibit References - ------- ---------------------- ---------- Lease Agreements as amended dated February 1, 1996 between Tammy Development Company and Chattem, Inc. for warehouse space at 3100 Williams Street, Chattanooga, Tennessee (3) and (5) Asset Purchase Agreement dated April 29, 1996 between Martin Himmel Inc., seller, and Chattem, Inc. and Subsidiaries, purchaser, for the GOLD BOND business (4) Credit Agreement dated April 29, 1996 among Chattem, Inc., as borrower, Signal Investment & Management Co., as guarantor, NationsBank, N.A., as agent, and the Lenders named therein (5) Credit Agreement dated April 29, 1996, (secondary working capital facility) among Chattem, Inc., as borrower, Signal Investment & Management Co., as guarantor, NationsBank, N.A., as agent, and the Lenders named therein. (5) Asset Purchase Agreement dated June 6, 1996 between Campbell Laboratories, Inc., seller, and Chattem, Inc. and Signal Investment & Management Co., purchasers, for the HERPECIN-L business. (5) Amendment to the Credit Agreement (HERPECIN-L Acquisition) dated June 6, 1996 among Chattem, Inc., as borrower, Signal Investment & Management Co., as guarantor, NationsBank, N.A., as agent and the Lenders named therein. (5) 26 Exhibit Number Description of Exhibit References - ------- ---------------------- ---------- 10 Asset Purchase and Sale Agreement dated May 23, 1997 by and among Chattem, Inc., Signal Investment & Management Co. and Sunsource International, Inc. and Mindbody, Inc. (without schedules and exhibits) (6) Amended and Restated Credit Agreement (New Credit Agreement) dated June 26, 1997 by and among Chattem, Inc., Signal Investment & Management Co. and the Lenders identified therein (6) Amended and Restated Credit Agreement (Supplemental Credit Agreement) dated June 26, 1997 by and among Chattem, Inc., Signal Investment & Management Co. and the Lenders identified therein (6) First Amended and Restated Master Trademark License Agreement between Signal Investment & Management Co. and Chattem, Inc., effective June 30, 1992 (7) Chattem, Inc. Non-Statutory Stock Option Plan - 1998 (7) 11 Computation of Per Share Earnings 13 1997 Annual Report to Shareholders of Chattem, Inc. 22 Subsidiaries of the Company 24 Consent of Independent Public Accountants 27 References: Previously filed as an exhibit to and incorporated by reference from: (1) Form 10-K for the year ended November 30, 1992. (2) Form S-2 Registration Statement (No. 33-80770). (3) Form 10-K for the year ended November 30, 1995. (4) Form 8-K dated April 29, 1996. (5) Form 10-K for the year ended November 30, 1996. (6) Form 8-K dated June 26, 1997. (7) Form 10-K for the year ended November 30, 1997 (b) There were no Form 8-K's filed with the Securities and Exchange Commission during the three months ended November 30, 1997. (d) The Financial Statements and the related report of independent public accountants required to be filed with this report pursuant to Rule 3-10(a) of Article 3 of Regulation S-X are incorporated by reference from pages 6 to 14 of Signal Investment & Management Co.'s Form 10-K for the fiscal year ended November 30, 1997. 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 23, 1998 CHATTEM, INC. By: /s/ Zan Guerry --------------------- Zan Guerry Title: Chairman and Chief Executive Officer By: /s/ Stephen M. Powell --------------------- Stephen M. Powell Title: Controller (Chief Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- /s/ Zan Guerry Chairman of the Board 2/22/98 - --------------------------- and Director ------- Zan Guerry (Chief Executive Officer) /s/ A. Alexander Taylor, II President and 2/22/98 - --------------------------- Director ------- A. Alexander Taylor, II (Chief Operating officer) /s/ Samuel E. Allen Director 2/22/98 - --------------------------- ------- Samuel E. Allen /s/ Louis H. Barnett 2/22/98 - --------------------------- Director ------- Louis H. Barnett /s/ Robert E. Bosworth Director 2/22/98 - --------------------------- ------- Robert E. Bosworth /s/ Richard E. Cheney Director 2/22/98 - --------------------------- ------- Richard E. Cheney /s/ Scott L. Probasco, Jr. Director 2/22/98 - --------------------------- ------- Scott L. Probasco, Jr. 29 CHATTEM, INC. AND SUBSIDIARIES EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - --------- -------------------------------------------------------------------- 10.1 First Amended and Restated Master Trademark Agreement between Signal Investment & Management Company and Chattem, Inc., effective June 30, 1992 10.2 Chattem, Inc. Non-Statutory Stock Option Plan--1998 11 Computation of per share earnings 13 1997 Annual Report to Shareholders of Chattem, Inc. 22 Subsidiaries of the Company 24 Consent of Independent Public Accountants 27 Financial Data Schedule
EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 FIRST AMENDED AND RESTATED MASTER TRADEMARK LICENSE AGREEMENT BETWEEN SIGNAL INVESTMENT & MANAGEMENT COMPANY AND CHATTEM, INC. (As amended and Restated Effective June 30, 1992) This First Amended and Restated Master Trademark License Agreement is made and entered into by and between Signal Investment & Management Co., a Delaware corporation ("Signal"), having its principal place of business at Suite 1300, 1105 Market Street, Wilmington, Delaware 19890, and Chattem, Inc., a Tennessee corporation ("Chattem"), having its principal place of business located at 1715 W. 38th Street, Chattanooga, Tennessee 37409, effective as of June 30, 1992. WHEREAS, Signal and Chattem are parties to that certain Trademark License Agreement effective as of June 30, 1992, pursuant to which Signal licenses to Chattem certain trademark rights; and WHEREAS, Signal and Chattem are parties to that certain License Agreement dated May 12, 1994, pursuant to which Signal licenses certain BENZODENT-Registered Trademark- trademark rights to Chattem; and WHEREAS, Signal and Chattem are parties to that certain Sublicense Agreement dated June 17, 1994, pursuant to which Signal sublicenses certain pHisoderm-Registered Trademark- trademark rights to Chattem; and WHEREAS, Signal and Chattem desire to merge all of the aforementioned agreements relating to the licensing and sublicensing of trademark rights between the parties together under this Master Trademark License Agreement effective as of the dates of the respective prior agreements; and WHEREAS, Signal and Chattem desire to set forth a framework in this Master Trademark License Agreement under which the licensing and sublicensing of all future trademark rights from Signal to Chattem will be controlled, such licensing to take effect immediately upon the date of Signal's future adoption, acquisition or licensing of such trademark rights; and WHEREAS, Signal and Chattem desire to confirm their agreements relating to the licensing and sublicensing of such trademark rights and to supersede, replace and restate such prior licensing and sublicensing agreements currently in effect between the parties; NOW, THEREFORE, in consideration of the premises and covenants herein, and in further consideration of the mutual benefits to the parties, the parties hereby covenant and agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the following meanings: "Agreement": this Master Trademark License Agreement, as amended, supplemented or otherwise modified from time to time. "Default": any of the events specified in Section 3.1, provided any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Effective Date": shall mean June 30, 1992. "FDA Requirements": shall mean any requirements of the Federal Food, Drug and Cosmetic Act, as amended, and any rules or regulations promulgated thereunder which are or may be applicable to the manufacture, sale, labeling or distribution of the Products. "Governmental Authority": any nation or government, any state or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Licensed Assets": shall mean the Trademarks, the Trade Dress and the Product Standards. "Licensee": Chattem, Inc., a Tennessee corporation. "Licensor": Signal Investment & Management Co., a Delaware corporation. "Net Sales": shall mean sales of the Products at the invoiced price after deduction of (a) all trade and promotional discounts and allowances; (b) allowance for credits for returns; and (c) sales taxes and/or freight charges, if any, included in the invoice. "Person": An individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or entity of whatever nature. "Products": shall mean all products sold in any jurisdiction under any of the Trademarks. 2 "Product Standards": shall mean the formulas, specifications and manufacturing procedures provided to the Licensee by the Licensor as the same shall hereinafter be amended from time to time with the consent and approval of the Licensor. "Subsidiary": as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership, limited liability company or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Licensee other than the undersigned. "Termination Date": shall mean the date on which this Agreement shall terminate pursuant to Section 2.2 hereof. "Trademarks": shall mean and collectively include all trademarks, trademark registrations, applications for trademark registration, and goodwill associated with all trademarks presently owned, licensed or hereafter adopted, acquired or licensed by Licensor, including, but not limited to all trademarks identified on Schedule 1 hereto as the same may hereinafter be amended from time to time. "Trade Dress": shall mean the existing trade dress of the Products as the same may hereinafter be modified from time to time with the consent and approval of the Licensor. 1.2 Other Definitional Provisions. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in any other document and/or certificate delivered pursuant hereto. (b) The words "whereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole, not to any particular provision of this Agreement, and Section, Subsection and Schedule references are to this Agreement unless otherwise specified. (c) The meanings given to the terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 2.1 Grant of License. Subject to the terms and conditions herein set forth, Licensor hereby grants to Licensee the exclusive right and license in each jurisdiction where a Trademark is registered, with the right to grant sublicenses to other Subsidiaries: 3 (a) To produce, have produced, process or otherwise manufacture, and to use, sell and distribute the Products in accordance with the Product Standards; (b) To use any one or more of the Trademarks, alone or in conjunction with any other trademarks or trade names of Licensee of any of its Subsidiaries, on any Products which are sold by Licensee or by any of its sublicensed Subsidiaries under the provisions of this Agreement; (c) To the extent permitted pursuant to the provisions of Section 6.1 hereof, to bring and prosecute a suit or suits against any party (i) to preclude the unauthorized use of any of the Trademarks or any confusingly similar trademarks, and (ii) to preclude the unauthorized disclosure or use of any of the Product Standards. (d) To the extent permitted pursuant to provisions of Section 6.1 hereof, to defend any settle, at Licensee's expense, infringement suits brought by others based upon the use or prospective use by Licensee and/or its affiliates of any of the Trademarks. (e) To grant sublicenses to its Subsidiaries, provided such sublicenses are expressly made subject to all the terms and conditions of this Agreement, and, if applicable, the terms and conditions of any license to Licensor. 2.2 Term. This Agreement shall commence on the effective date unless sooner terminated pursuant to Section 3.1 hereof, and shall continue thereafter for a period of five (5) years through and including June 30, 1997 (the "Initial Term") and for successive renewal terms of five (5) years each (individually or collectively, a "Renewal Term") unless the Licensor or Licensee shall give written notice of cancellation pursuant to the notice provisions of Section II.1(f) hereof to the other party at least ninety (90) days prior to the end Initial Term or the Renewal Term then ending, as the case may be. 3.1 Defaults. This Agreement may be terminated by the Licensor at any time upon the occurrence of one or more of the following Defaults: (a) Licensee or any of its sublicensed Subsidiaries shall materially breach any of the terms, conditions or agreements contained in this Agreement which are required to be kept, observed or performed by Licensee or its Subsidiaries if such Licensee or Subsidiary fails to cure such breach within thirty (30) days of written notice thereof giving reasonably full particulars. (b) Licensee or any of its sublicensed Subsidiaries shall become insolvent or shall suspend business, or shall file a voluntary petition or an answer admitting the jurisdiction of the Court and the material allegations of, or shall consent to, an involuntary petition pursuant to or purporting to be pursuant to any bankruptcy, reorganization or insolvency law of any jurisdiction. 4.1 Royalty. Licensee and its sublicensed Subsidiaries shall pay to Licensor a five percent (5%) royalty on Net Sales of all Products sold under the Trademarks (the "Royalty"). The 4 Royalty shall be payable quarterly within forty-five (45) days of the end of each of the Licensee's fiscal quarters. 4.2 Sales by Subsidiaries. In the event that Licensee grants a sublicense to any Subsidiary, Licensee agrees to pay the five percent (5%) royalty due under Section 4.1 on all Net Sales of Products by such Subsidiary. 4.3 When Sales Made. For purposes of this Agreement, Products sold by Licensee or by any sublicensed Subsidiary shall be considered sold when invoiced, or if not invoiced, when delivered, shipped or mailed, or when paid for, if paid for before delivery. No royalty shall be due and payable hereunder in connection with any inter-company sale between the Licensee and any sublicensed Subsidiary. Royalties paid on Products not accepted by the customer and/or returned to Licensee or its Subsidiary shall be credited against and deducted from future royalties, provided, however, that if such returned Products are subsequently resold by Licensee or its Subsidiary, Royalties shall then be paid thereon. 4.4 Payments. Unless otherwise mutually agreed in writing, on or before the forty-fifth (45th) day following the end of each of Licensee's fiscal quarters, Licensee will pay to Licensor the Royalty applicable to sales during such quarter. All Royalty payments hereunder shall be made in United States currency. 5.1 Records. Licensee, on behalf of itself and its sublicensed Subsidiaries, agrees to keep adequate and complete records showing all sales of Products sold under the Trademarks. Such records shall include all information necessary to verify the total amount of Net Sales and the royalties due hereunder and Licensee shall make such records available to Licensor at its offices in Wilmington, Delaware upon reasonable notice during reasonable business hours to the extent necessary to verify the amount thereof. 5.2 Reports. Within forty-five (45) days of the last day of the Licensee's fiscal quarters, Licensee shall furnish to Licensor a written report, signed by an authorized representative of the Licensee, showing (a) the total Net Sales of all Products during such fiscal quarter; and (b) the total amount of royalties due the Licensor hereunder. 6.1 Infringement. (a) If Licensee discovers third-parties infringing any enforceable rights contained in the Licensed Assets, Licensee shall notify Licensor promptly thereof. In the event that Licensee, at its discretion elects to initiate and prosecute any such suit or suits pursuant to the rights granted to Licensee in accordance with the provisions of Section 2.1(c) hereof, then (i) all expenses incurred in such legal action shall be borne by Licensee and all damages and costs that may be recovered or may be assessed as a result of such suit or suits shall inure to Licensee; and (ii) Licensee shall have the right to join Licensor as a nominal party plaintiff in any such suit or suits, and the Licensor agrees 5 to sign all papers and perform all acts which Licensee may reasonable request to enable Licensee to enforce such rights. (b) In the event Licensee notifies Licensor that it will not initiate and/or, if initiated, will not prosecute such suit or suits against third-party infringers, then Licensor shall have the right to initiate and/or prosecute such suit or suits to protect the Licensor's interest in the Licensed Assets. Whenever Licensor exercises its rights under this Section 6.1(b), then all expenses incurred in such legal action shall be borne by Licensor and all damages and costs that may be recovered or may be assessed as a result of such suit or suits shall inure to the Licensor. (c) Whenever Licensor or Licensee discovers that a third-party has filed an application for trademark registration in any country and/or has been granted a trademark registration for any trademark which is confusingly similar to any of the Trademarks, then Licensor and Licensee shall promptly exchange information concerning such application and/or registration and either Licensor or Licensee may, at its sole discretion and at its own expense, bring and prosecute an appropriate proceeding under the trademark laws in the jurisdiction in question to oppose such application and/or to cancel such registration. Licensee shall have the right to join Licensor as an opposer or petitioner in any such opposition and/or cancellation proceedings, and Licensor agrees to sign all papers and perform all acts which Licensee may reasonably request to enable Licensee to oppose such application and/or to cancel such registration. (d) In the event that any third-party claims that one or more of the Trademarks or other Licensed Assets infringe any trademark or other right of such party, Licensee shall have the right, at its option, to contest and defend such claim. If Licensee declines to contest or defend such claim, Licensor shall then have the right, at its option, to defend and contest such claim. In the event that Licensee exercises it rights to contest and defend any claim of infringement brought by a third-party in connection with any of the Licensed Assets, Licensee agrees that it will not settle or compromise such claim without the prior approval and consent of the Licensor whose approval shall not be unreasonably withheld. 7. Maintenance of Product Quality. Licensee hereby agrees that all products sold in connection with the Trademarks shall fully comply with (i) all FDA Requirements (ii) all other legal requirements imposed by any other Governmental Authority, and (iii) the applicable Product Standards. Licensee further agrees to furnish to Licensor at its offices in Wilmington, Delaware with such samples of its and any sublicensed Subsidiary's Products sold under the Trademarks, as may be reasonably required by Licensor for examination and testing, to verify compliance by Licensee and its sublicensed Subsidiary with the Product Standards. Licensee further agrees on behalf of itself and its affiliates to fully cooperate with Licensor and meet all Licensor's reasonable requests intended to facilitate Licensee's compliance with its obligations under this Section. The Product Standards may be changed only with the consent and approval of the Licensor. As between Licensor and Licensee, Licensee shall be fully responsible for and shall indemnify and hold Licensor harmless against any and all products liability or negligence claims. 6 8.1 Maintenance and Renewal of Trademark Registrations. Until the Termination Date, Licensee agrees to maintain and/or renew, as agent for Licensor, the federal registrations and applications for all of the Trademarks by duly filing at the United States Patent and Trademark Office in Washington, D.C. all papers, responses, fees, applications for renewal, affidavits of use (and/or incontestability, if appropriate) and all other necessary papers required for such purpose by the Trademark Laws of the United States. Licensor agrees to execute all applications for renewal and other documents, and to perform all other acts, which Licensee may reasonably request in order to enable Licensee to maintain and renew such registrations as agent for Licensor. All costs incurred by Licensor in connection with such maintenance and renewal shall be borne by Licensee. 8.2 Continued Use. Until the Termination Date, unless otherwise agreed by Licensor, Licensee agrees to continue to use each of the Trademarks in accordance with applicable trademark laws and the license granted under the provisions of this Agreement. 8.3 Confidentiality. Licensee agrees to maintain the Product Standards as confidential and is to refrain from disclosing such information to any third parties except as necessary in accordance with its reasonable business judgment. 9.1 Licensor's Representations. Licensor hereby represents and warrants to Licensee as follows: (a) Licensor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) Licensor has all necessary corporate power to enter into and perform its obligations under this Agreement and, as of the effective date of this Agreement, will have taken all necessary corporate action to authorize the execution and consummation of this Agreement. (c) Licensor is not in default with respect to any term or provision of any charter, bylaw, mortgage, indenture, statute, rule or regulation applicable to it, or with respect to any order, writ, injunction, decree, rule or regulation of any court or administrative agency, which would preclude the performance of its obligations under this Agreement. (d) Neither the execution nor the delivery of this Agreement, nor the consummation of the transactions herein contemplated, nor the fulfillment of or compliance with the terms and provisions hereof will (i) violate any provision of law, administrative regulations or court decree applicable to Licensor; or (ii) conflict with or result in a breach of any of the terms, conditions or provisions of or constitute a default under the charter or bylaws of Licensee, or of any agreement or instrument to which Licensee is a party or by which it is bound. (e) Licensor has good and marketable title and rights to the Licensed Assets and/or an appropriate license for the Licensed Assets subject only to such liens as may exist from time 7 to time under an applicable credit or security agreement to Licensor and/or Licensee. Licensor has no knowledge of any third-party rights which would be infringed by the use of the Licensed Assets. 9.2 Licensee's Representations. Licensee hereby represents and warrants to Licensor as follows: (a) Licensee is a corporation duly organized, validly existing and in good standing under the laws of the State of Tennessee. (b) Licensor has all necessary corporate power to enter into and perform its obligations under this Agreement and, as of the effective date of this Agreement, will have taken all necessary corporate action to authorize the execution and consummation of this Agreement. (c) Licensor is not in default with respect to any term or provision of any charter, bylaw, mortgage, indenture, statute, rule or regulation applicable to it, or with respect to any order, writ, injunction, decree, rule or regulation of any court or administrative agency, which would preclude the performance of its obligations under this Agreement. 10.1 Sublicenses. All sublicenses extended by Licensee to any Subsidiary regarding any of the Licensed Assets shall be made expressly subject to the terms and conditions of this Agreement, including but not limited to an express undertaking by such affiliate to comply with all Product Standards. Prior to granting any such sublicense, Licensee will provide a copy of the Product Standards to such Subsidiary. No sublicensed Subsidiary shall have the right to grant a further sublicense without the express written approval of the Licensor. 11.1 Miscellaneous Provisions. The following miscellaneous provisions shall apply to this Agreement. (a) Superseding Effect. This Agreement supersedes and replaces all prior licensing agreements between the Licensor and the Licensee with respect to the Trademarks and Products. (b) Non-Waiver. No delay or omission by either party in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by a party on one occasion is effective only in that instance and will not be construed as a bar or a waiver of any right on any other occasion. (c) Non-Assignment of Trademarks. Nothing in this Agreement shall be deemed to constitute an assignment by Licensor of the Trademarks or any right therein or thereto, or give Licensee or any Subsidiary or affiliate of Licensee any interest therein, except as herein provided. (d) Binding Effect. All terms and conditions of this Agreement shall bind and inure to the benefit and burden of the parties hereto with respect to successors and assigns. 8 (e) Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware, without giving effect to any conflict of law provisions thereof. (f) Notices. Any notice required or desired to be served, given or delivered hereunder shall be in writing, and shall be deemed to have been validly served, given or delivered (i) three (3) days after depositing in the United States mail with postage prepaid, (ii) when sent after receipt of confirmation if sent by telecopy or by other similar facsimile transmission, (iii) one (1) business day after deposit with a reputable overnight courier with all charges prepaid, or (iv) when delivered, if hand delivered by messenger, all of which shall be properly addressed to the parties to be notified and sent to the address or number indicated as follows: (i) If to Licensor at: Signal Investment & Management Company Suite 1300 1105 Market Street Wilmington, Delaware 19801 Attention: Robert E. Bosworth Telecopy: (302) 651-8464 Confirmation: (302) 651-8868 (ii) If to Licensee at: Chattem, Inc. 1715 West 38th Street Chattanooga, Tennessee 37409 Attention: Zan Guerry Telecopy: (423) 821-2037 Confirmation: (423) 821-0395 or to such other address or number as each party designates to the other in the manner herein prescribed. (g) Entire Understanding. This Agreement constitutes the entire understanding between the parties hereto with respect to the subject matter hereof. No modifications, extensions or waivers of any of the provisions hereof or any release or any right there under shall be valid unless the same is in writing signed by the party to be bound thereby. (h) Sales of Trademarks. Licensor reserves the right to sell one or more of the Trademarks identified on Schedule 1 hereto on reasonable notice to the Licensee and, upon such sale, Licensee's licensed rights to such Trademark shall cease and terminate. 9 (i) Licensing of Trademarks to Third Parties. Upon the prior consent of Licensee, Licensor may license one or more of the Trademarks identified on Schedule I hereto to a third party and, upon such licensing, Licensee's licensed rights to such Trademark shall cease and terminate. (j) Consent to Collateral Assignment. The parties hereby acknowledge that Licensee has assigned or may assign its right, title and interest under this Agreement as security for financing provided to Licensee by one or more lenders. Nothwithstanding any other provisions contained in this Agreement, the Licensor consents to the collateral assignment of this Agreement to such lenders or their agents, for the benefit of the lenders. Unless and until such lenders give notice to the undersigned of their intention to succeed to the rights of Licensee under the Agreement, the lenders shall not be obligated to perform any of the obligations of Licensee under the Agreement. (k) Headings. The headings of this Agreement are intended solely for convenience of reference and shall be given no effect in the construction and interpretation of this Agreement. 10 IN WITNESS WHEREOF, Licensor and Licensee have caused this Agreement to be signed in Wilmington, Delaware, effective as of June 30, 1992. SIGNAL INVESTMENT & MANAGEMENT CO. By: /s/ Robert E. Bosworth --------------------------------- Robert E. Bosworth, President CHATTEM, INC. By: /s/ Zan Guerry --------------------------------- Zan Guerry, President 11 SCHEDULE I LICENSED TRADEMARKS
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE - --------- --------- ------------ ----------- AMPHIBIOUS FORMULA California 67887 11/12/2002 AMPHIBIOUS FORMULA Canada 332,073 09/18/2002 AMPHIBIOUS FORMULA Florida 928164 11/05/2002 AMPHIBIOUS FORMULA Hawaii 149564 12/09/2002 AMPHIBIOUS FORMULA Texas 40988 11/08/2002 BRONZ SILK United Kingdom Ser.#1,523,350 BULLFROG Brazil BULLFROG California 67888 11/12/2002 BULLFROG Canada 332,935 10/09/2002 BULLFROG Chile BULLFROG Florida 928165 11/05/2002 BULLFROG Hawaii 149562 12/09/2002 BULLFROG Mexico 422988 12/30/2001 BULLFROG Peru 102006 03/05/2003 BULLFROG Texas 40989 11/08/2002 BULLFROG (Design Only) United States 1763958 04/13/2003 CARDUI (Calendars) United States 1,738,319 12/08/2007 CHATTEM Uruguay 267255 07/03/2005 CHATTEM, INC. Hong Kong 831 of 1979 12/14/1999 CORN SILK Australia A208,545 06/03/2002 CORN SILK Benelux 011,672 03/05/2005 CORN SILK Brunei 19394 12/21/2000 CORN SILK Canada 144,355 03/11/2011 CORN SILK Chile 374,978 09/23/2001 CORN SILK China 753821 07/06/2005 CORN SILK Costa Rica 36,183 R:6856 10/11/2002 CORN SILK El Salvador 241 05/24/2002 CORN SILK Great Britain 1,160,480 08/29/2002 CORN SILK Guatemala 18,987 11/14/1997 CORN SILK Honduras 40,059 06/15/2002 CORN SILK Indonesia 332,234 01/29/2004 CORN SILK Ireland 99,464 08/24/2002
1
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE - --------- --------- ------------ ----------- CORN SILK Italy 433,426 08/23/2004 CORN SILK Japan 1,571,445 03/28/2003 CORN SILK Malaysia 93/08798 11/09/2000 CORN SILK Mexico CORN SILK New Zealand B78,955 06/30/2001 CORN SILK Nicaragua 22,811 06/02/2000 CORN SILK Panama 25,020 07/01/2000 CORN SILK Philippines 25,031 10/07/1997 CORN SILK Singapore Ser.#77050193 CORN SILK South Africa 65/2799 07/14/2005 CORN SILK South Africa 7014734 10/22/2000 CORN SILK Spain 1797781 01/07/2004 CORN SILK Venezuela 53,774 12/05/1997 CORN SILK & DESIGN Puerto Rico 24,727 05/20/2003 CORN SILK (Words) Puerto Rico 24,726 05/20/2003 EXELLE United States 1,229,147 03/08/2003 FLEX-ALL Austria 127,693 10/31/1999 FLEX-ALL Benelux 515044 07/10/2002 FLEX-ALL Canada 374,278 10/12/2005 FLEX-ALL Denmark 0534/1991 01/25/2001 FLEX-ALL Finland 116,143 01/20/2002 FLEX-ALL France 1,542,430 07/20/1999 FLEX-ALL Greece 95,610 09/14/1999 FLEX-ALL Ireland 136135 07/21/2006 FLEX-ALL Italy 570,574 07/20/1999 FLEX-ALL Japan Ser.#54524/91 FLEX-ALL Mexico 471468 12/30/2001 FLEX-ALL Norway 146157 07/25/2001 FLEX-ALL Portugal 257,341 12/10/2002 FLEX-ALL 454[device] Spain 1,535,531 12/05/1999 FLEX-ALL 454 & Design Sweden 374890 07/21/2009 FLEX-ALL Sweden 225,489 08/02/2001 FLEX-ALL 454 & Design Switzerland 674,890 07/21/2009 FLEX-ALL United Kingdom 1,392,101 07/17/2006 FLEX-ALL 454 Germany 39504534 02/02/2005 FLEX-ALL 454 Spain 1,513,531 12/05/1999 FLEXALL ICE Canada TMA 374 278 03/11/1999 FREE & FIRM Puerto Rico 22,025 04/26/1999 GO ZONE New Zealand Z17068 03/23/1999
2
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE - --------- ---------- -------------- ----------- GO-ZONE Australia MUDD Argentina Ser.#1,953,665 MUDD Australia Ser.#590031 MUDD Bahamas 11,119 11/24/1997 MUDD Barbados 81/2822 (new) 11/29/2000 MUDD Benelux 352,798 06/05/1998 MUDD Brazil 810,808,315 04/05/1992 MUDD Canada 319,044 MUDD Chile 374,979 09/23/2001 MUDD Costa Rica 59,614 10/16/2001 MUDD Denmark 807/1979 03/23/1999 MUDD Dominican Republic 37,144 06/30/2004 MUDD Ecuador 4624-95 12/20/2005 MUDD Finland 77,509 05/05/2001 MUDD France 1,457,621 03/25/1998 MUDD Guatemala 41,967 09/30/2001 MUDD Haiti 478/62 01/23/2001 MUDD Honduras 29,800 08/03/2001 MUDD Italy Ser.#94 617 08/23/2004 MUDD Italy 433,428 08/23/2004 MUDD Jamaica 19,636 03/05/2002 MUDD Japan 2,348,136 10/30/2001 MUDD Mexico 422,990 12/30/2001 MUDD Namibia Ser.#96/1086 MUDD New Zealand B123,667 06/06/1999 MUDD Nicaragua 12.301C.C. 01/29/2001 MUDD Panama 027001 09/01/2001 MUDD Puerto Rico 23,176 11/07/2000 MUDD Scandanavia MUDD South Africa B78/2675 06/06/1998 MUDD Spain 922,501 10/20/2000 MUDD State of Tennesse 04/06/2000 MUDD Sweden 168,193 06/21/1999 MUDD Trinidad/Tobago 11,892 03/16/2008 MUDD United Kingdom 1274157 08/09/2007 MUDD Uruguay 267256 07/03/2005 MUDD Venezuela 96,629 01/09/1996
3
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE - --------- --------- --------------- ------------- MUDD West Germany Ser.#C27222/3WZ MUDD (Stylized-very old) Great Britain B1,096,797 06/08/1999 MUDD (Katakana Characters) Japan 1,597,970 03/30/1993 MUDD SCRUB Peru 4365 12/24/2003 NORDIC LOOK Benelux 480,589 04/05/2000 NORDIC LOOK France 831290 NORDIC LOOK Germany 1191126 03/29/2000 NORDIC LOOK Italy 583,576 04/05/2000 NORWICH Canada UCA017,241 08/27/2002 PAMPRIN Argentina 1,206,098 08/05/1996 PAMPRIN Australia A314,192 12/21/1998 PAMPRIN Bahamas 11,118 11/24/1997 PAMPRIN Barbados 8,298 11/29/1991 PAMPRIN Benelux 350,181 12/29/1997 PAMPRIN Colombia 191034 09/18/2006 PAMPRIN Costa Rica 21618 05/17/1998 PAMPRIN Denmark 2186/1978 06/23/1998 PAMPRIN Dominican Republic 27745 07/28/1998 PAMPRIN Ecuador 5441-90 12/20/2005 PAMPRIN El Salvador 100 07/21/2001 PAMPRIN Finland 76987 03/20/2001 PAMPRIN France 1,433,022 10/30/1997 PAMPRIN Great Britain 1,088,745 12/28/1998 PAMPRIN Guatemala 35,443 09/27/1998 PAMPRIN Haiti 476/62 01/23/1991 PAMPRIN Honduras 25,094 09/05/1998 PAMPRIN Ireland 92259 12/22/1998 PAMPRIN Italy 357,789 01/18/1998 PAMPRIN Mexico 254,691 PAMPRIN Netherland Antilles PAMPRIN New Zealand 122,127 12/22/1998 PAMPRIN Nicaragua 8968C.C. 09/09/1998 PAMPRIN Norway 102,879 08/28/1999 PAMPRIN Panama 22,932 01/05/1999 PAMPRIN Peru 102005 03/05/2003 PAMPRIN Puerto Rico 21,511 07/21/1998 PAMPRIN Singapore 446/93 06/14/2003 PAMPRIN South Africa 77/5755 12/20/1997 PAMPRIN Sweden 167,905 06/01/1999 PAMPRIN Switzerland 314910
4
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE - --------- --------- ------------ ----------- PAMPRIN Trinidad 14,470 12/07/1997 PAMPRIN Venezuela 94,884 06/20/1995 PAMPRIN West Germany 993,141 01/02/1998 PAMPRIN (Block Letters) Canada 234,475 07/20/2009 PAMPRIN (Block Letters) Honduras 25,094 09/05/1998 PREMSYN PMS (Stress mark over "E") France 1,253,522 12/08/2003 PREMSYN PMS (Stress mark over "E") Italy Ser.#94 6167 08/23/2004 PREMSYN PMS (Stress mark over "E") Italy 433,427 08/23/2004 PREMSYN PMS (Stress mark over "E") United Kingdom 1,327,285 11/18/2004 SHY (Applicator) Canada N.S.177/45151 11/27/1997 SHY (Liquid Douche) Canada TMA192,381 06/29/2003 SOLTICE Hong Kong SOLTICE Taiwan SOMETHING PERSONAL Canada TMA259,143 05/22/2011 SPRAY BLOND Benelux 431,162 04/29/1997 SPRAY BLOND Denmark 2330/1989 05/12/1999 SPRAY BLOND International [France] IR.548,336 SPRAY BLOND Italy 433,425 08/23/2004 SPRAY BLOND Italy Ser.#94 6170 SPRAY BLOND & Device France 1,385,650 07/29/2006 SPRAY BLOND (logo) Switzerland 374349 SUMBRELLA Australia Ser.#576225 SUMBRELLA New Zealand 217069 03/23/1999 SUMMER HIGHLIGHTS United States 1784718 07/27/2003 SUN IN Australia A235,497 01/06/2005 SUN IN Bahamas 11,120 11/24/1997 SUN IN Benelux 365,077 03/20/1990 SUN IN Bophuthatswana 69/6154 12/22/1999 SUN IN Canada 171,191 09/11/1985 SUN IN Great Britain B1,123,580 11/06/2000 SUN IN Ireland 102,340 03/14/2001 SUN IN Namibia Ser.#96/1087 SUN IN New Zealand B96253 02/24/2006 SUN IN South Africa 69/6154 12/22/1999 SUN IN Transkei 69/6154 12/22/1999 SUN IN Venezuela Ser.#009791 SUN-IN Bophuthatswana 69/6154 12/22/1999 SUN-IN Colombia Ser.#97004674 SUN-IN New Zealand B96,253 02/24/2006
5
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE - --------- --------- ------------ ----------- SUN-IN Peru 421 06/23/2003 SUN-IN Puerto Rico 32,056 11/16/2002 SUN-IN State of Tennesse 04/06/2002 SUN-IN Venda 69/6154 12/22/1999 SUN-IN STREAKER United Kingdom B1,197,101 06/03/2004 THERA CARE Canada TMA239,954 02/15/2010 THERACARE (One Word) Great Britain 1,083,159 09/03/1998 THERACARE (One Word) Great Britain 1,083,160 09/03/1998 ULTRASWIM Brazil Ser.#819848093 ULTRASWIM Colombia Ser.#97004673 ULTRASWIM Mexico 422,987 12/30/2001 ULTRASWIM Peru Ser.#30771 ULTRASWIM (Swimmer Design) United States 1760924 03/30/2003 454 United States 1,999,980 09/10/2006 AMPHIBIOUS FORMULA United States 1,279,505 05/29/2004 BENZODENT Algeria 041014 BENZODENT Argentina 1,213,551 11/11/1996 BENZODENT Argentina Ser.#2052012 BENZODENT Australia A123157 05/13/2007 BENZODENT Austria 64286 BENZODENT Benelux 073989 11/05/2005 BENZODENT Bophuthatswana 68/5776 BENZODENT Brazil BENZODENT Canada UCA49940 04/24/1999 BENZODENT Chile Ser.#374.245 BENZODENT Colombia Ser.#97006870 BENZODENT Cuba 92753 04/05/2005 BENZODENT Denmark 8454/1995 12/15/2005 BENZODENT Finland 79829 12/21/2001 BENZODENT France 1517062 BENZODENT Germany 670221 04/30/2004 BENZODENT Greece 52099 01/29/2004 BENZODENT Hong Kong A1202/69 BENZODENT Iceland 458/1989 BENZODENT Ireland 57722 06/14/1997 BENZODENT Italy 683,120 05/21/2004 BENZODENT Jordan 10491 BENZODENT Lebanon 45293 BENZODENT Mexico Ser.#289490
6
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE - --------- --------- ------------ ----------- BENZODENT Monaco R-83,956613 BENZODENT New Zealand 56682 BENZODENT Norway 106535 BENZODENT Peru 34940 04/10/2007 BENZODENT Philippines 16996 BENZODENT Portugal 152583 BENZODENT South Africa 68/5776.A BENZODENT Sweden 174246 11/07/2000 BENZODENT Switzerland 270209 BENZODENT Transkei Tr68/5776 BENZODENT United Kingdom BR742143 BENZODENT United States 595,101 09/14/2004 BENZODENT Venda 68/5776 BENZOGEL United States Ser.#74/650,485 BENZOGEL United States 1767890 04/27/2003 BULLFROG United States 1,279,506 05/29/2004 BULLFROG & DESIGN (MultiClass Registration) United States Ser.#75/126427 CHATTEM, INC. LOGO (Design Registration) United States Ser.#75/113557 10/08/1997 CHILL STICK Canada Ser.#780659 CHILL STICK United States Ser.#74/630,796 CORN SILK Brazil CORN SILK United States 799,233 11/23/2005 CORN SILK & DESIGN United States 1,457,919 09/22/2007 CORN SILK (Block Letters & Bckgrnd) United States 1,193,832 04/20/2002 DAY ONE United States 1,608,789 08/07/2000 ECHINEX United States Ser.#75/125,773 FLEX-ALL United States 1,999,979 09/10/2006 FLEX-ALL 454 (Block Letters) United States 1,569,189 12/05/1999 FLEX-ALL 454 [Stylized] United States 1,481,352 03/22/2008 FLEX-ALL OF COLORADO United States COMMONLAW FLEX-ALL-SOUTHWEST United States COMMONLAW FOR THE PERIOD BEFORE YOUR PERIOD United States 1,674,764 02/11/2002 GARLIQUE United States 1,972,070 GB in Seal (GOLD BOND Design) United States Ser.#75/213265 GOLD BOND Benelux 525,883 01/22/2003 GOLD BOND Brazil GOLD BOND Bulgaria 23,523 03/26/2003 GOLD BOND Canada TMA368196 04/27/2005 GOLD BOND Chile Ser.#374,247 GOLD BOND Colombia Ser.#97006868 GOLD BOND Czech Republic 187,034 03/30/2003 GOLD BOND Ghana GOLD BOND India Ser.#590366
7
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE - --------- --------- ------------ ----------- GOLD BOND Indonesia 310,981 02/27/2003 GOLD BOND Israel 86,125 01/21/2000 GOLD BOND Japan Ser.#124676/1996 GOLD BOND Korea Ser.#96-41744 GOLD BOND Malaysia Ser.#93/00761 GOLD BOND Mexico 448,844 02/19/2003 GOLD BOND Morocco 50,654 02/19/2013 GOLD BOND Peru 35150 04/21/2007 GOLD BOND Singapore Ser.#S/1856/93 GOLD BOND Slovak Republic 172,163 03/25/2003 GOLD BOND Spain 1,745,203 02/18/2003 GOLD BOND United Arab Emirates Ser.#8458 GOLD BOND United Kingdom 1,422,292 04/18/2007 GOLD BOND United States 1,209,453 09/21/2002 GOLD BOND Venezuela Ser.#1233-95 GOLD BOND (Stylized) United States Ser.#75/217,379 GOLD BOND (Border Design) United States Ser.#75/213266 HERPECIN-L Benelux 536,533 09/14/2003 HERPECIN-L Canada 320,789 11/21/2001 HERPECIN-L France 1,317,148 07/16/2005 HERPECIN-L Italy 465,797 10/31/2005 HERPECIN-L Japan 2,423,899 06/30/2002 HERPECIN-L Portugal 233,930 11/28/2001 HERPECIN-L United States 912,472 06/08/2001 HERPESALVE Benelux 539,513 09/14/2003 HERPESALVE France 1,317,146 07/19/2005 HERPESALVE Germany 1 094 118/5 07/31/2005 HERPESALVE Italy 465,798 10/31/2005 HERPESALVE Japan 2,473,050 10/30/2002 HERPESALVE Portugal 233,931 11/28/2001 HI-THERM United States 708,677 12/02/2000 ICY HOT Bophuthatswana 77/2159 05/24/1997 ICY HOT Canada TMA409013 03/05/2008 ICY HOT Chile Ser.#374,246 ICY HOT El Salvador Ser.#18455-1 ICY HOT Italy 344450 05/23/2007 ICY HOT Mexico 384016 10/03/2004 ICY HOT Panama 69596 09/29/2005 ICY HOT Puerto Rico ICY HOT Singapore Ser.#B4461/93 06/14/2000 ICY HOT South Africa 77/2159 05/24/1997 ICY HOT Taiwan 161832 10/31/2001
8
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE - --------- --------- ------------ ----------- ICY HOT Venda 77/2159 05/24/1997 ICY TO DULL THE PAIN AND HOT TO RELAX IT AWAY United States Ser.#75/113558 ICY-HOT Argentina 1376579 03/30/2000 ICY-HOT Australia A310924 09/05/1998 ICY-HOT Barbados 6708 07/31/1999 ICY-HOT Benelux 345750 05/17/1997 ICY-HOT Bermuda 8647 10/23/1999 ICY-HOT Bolivia 36996-A 09/19/1997 ICY-HOT Brazil 770139868 02/07/2004 ICY-HOT Colombia 186677 04/09/2006 ICY-HOT Costa Rica 87581 07/20/2004 ICY-HOT Denmark VR00.611/78 02/17/1998 ICY-HOT Dominican Republic 26636 07/26/1997 ICY-HOT Dutch Antilles 10476 11/22/2007 ICY-HOT Ecuador 409.88 11/22/2002 ICY-HOT El Salvador 170/84 09/02/2000 ICY-HOT France 1,409,746 05/20/2007 ICY-HOT Greece 60897 04/05/1998 ICY-HOT Guatemala 34605/226/84 05/21/1998 ICY-HOT Haiti 74/80 10/28/1997 ICY-HOT Honduras 24388 01/17/1998 ICY-HOT Indonesia 247,234 03/04/1999 ICY-HOT Jamaica B18633 06/09/1998 ICY-HOT Malaysia M/B75961 08/11/1998 ICY-HOT Nicaragua 7766-C.C. 12/19/1997 ICY-HOT Paraguay 126,430 10/19/1997 ICY-HOT Peru 82345 12/15/2004 ICY-HOT Philippines 36,541 01/21/2007 ICY-HOT Spain 868743 07/17/1998 ICY-HOT Trinidad B10689 05/21/2006 ICY-HOT United States 970,575 10/16/2003 ICY-HOT Uruguay 218786 10/10/2000 ICY-HOT Venezuela 99,844-F 07/06/1997 ICYHOT Great Britain B1,078,443 05/13/1996 ICYHOT Ireland B92568 05/17/1998 ICYHOT Sarawak B17,092 05/15/1998 INGRAM'S IQU United States 1,286,791 07/24/2004 KYLICIN Benelux 539616 09/14/2003 KYLICIN Canada 326,967 05/01/2002 KYLICIN France 1317147 07/16/2005 KYLICIN Italy 465799 10/31/2005 KYLICIN Portugal 233932 11/28/2001 KYLICIN United States 1,395,494 06/03/2006
9
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE - --------- --------- ------------ ----------- LIP-ADE United States Ser.#74/422640 05/10/1997 LIVING WITH PAIN (for use with ICY HOT) United States Ser.#75/113559 MELATONEX United States Ser.#74/734,613 META CINE United States 732,963 11/21/1999 MICRON United States 1,499,169 08/09/2008 MUDD United States 1,011,938 05/27/2005 MUDD FACIAL TREATMENT United States Ser.#74/571539 MUDD MOISTURIZER United States 1,290,647 08/21/2004 MUDD SPA TREATMENT United States Ser.#74/537,103 N and Design (Norwich) United States 1,765,513 04/20/2003 NORWICH Puerto Rico 6172 08/08/1996 NORWICH United States 1732425 11/17/2002 PAMPRIN Brazil PAMPRIN Philippines 61832 11/10/2015 PAMPRIN United States 709,866 01/17/2001 PAMPRIN IB United States 1,499,182 08/09/2008 PAMPRIN (Stylized "A" in decorative italics) United States 1,982,586 06/25/2006 PREMSYN PMS (stress mark over "E") United States 1,471,156 01/05/2008 PREVENTIVE CLEANSING United States PROPALMEX United States Ser.#75/007,842 QUIK GEL United States Ser.#74/654830 QUIK GEL United States 1,951,563 01/12/2006 REJUVEX United States 1,730,604 SILKENOL United States 1,604,279 07/03/2000 SUN IN (without hyphen) United States 908,769 02/03/2001 SUN-IN Brazil SUN-IN Chile Ser.#367,799 SUN-IN (BLOCK LETTERS) United States 1,456,006 09/08/2007 SUNRISE (Design) United States 2,006,261 SUNSOURCE United States 1,287,627 SUNSOURCE United States 1,947,948 SUNSOURCE & design United States Ser.#75/057,292 SUNSOURCE TRADITIONAL HOMEOPATHIC MEDICINES United States COMMONLAW T-ZONE United States Ser.#75/217,386 TADPOLE United States 1,339,919 06/11/2005 THE DAILY PRESCRIPTION FOR United States Ser.# THE ONCE A DAY, ALL DAY SUNSCREEN United States Ser.# THE QUICKEST PROTECTION UNDER THE SUN United States Ser.#75/184,903 THE ULTIMATE WATERPROOF SUNBLOCK United States 1,996,473 08/27/2006 THERA CARE United States 1,092,610 06/06/1998
10
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE - --------- --------- ------------ ----------- TRAINER'S CHOICE United States Ser.#74/609150 WEIGHTLESS (Corn Silk) United States WEIGHTLESS BY CORN SILK United States Ser.# MACCEL United States Ser.# MAXCEL United States Ser.# - -------------------------------------------------------------------------------------
INTELLECTUAL PROPERTY RIGHTS TRADEMARKS LICENSED BY VALMONT, INC. TO SIGNAL INVESTMENT & MANAGEMENT CO.
TRADEMARK COUNTRY REGIST NO. RENEWAL DUE - --------- --------- ------------ ----------- PHISO Canada 157674 07/12/1998 PHISOAC Canada 118977 07/29/2005 PHISOAC (Stylized) United States 699720 06/21/2000 PHISOCARE Canada 196899 01/18/2004 PHISODAN Canada 132672 09/13/2008 PHISODAN Puerto Rico 13379 06/01/1995 PHISODAN (Stylized) United States 764556 02/11/2004 PHISODERM Canada 78/20300 03/15/2005 PHISODERM Puerto Rico 19097 09/18/1994 PHISODERM United States 408558 08/15/2004 PHISOFOAM Canada 157673 07/12/1998 PHISOLAN Canada 240802 03/07/1995 PHISOPUFF (Block) United States 1294345 09/11/2004 PHISODERM Canada PHISOPUFF Canada PHISODERM ADVANCE Canada PHISODERM ADVANTAGE Canada ADVANTAGE BY PHISODERM Canada ADVANCE BY PHISODERM Canada
11 INTELLECTUAL PROPERTY RIGHTS TRADEMARKS LICENSED BY ELJENN INTERNATIONAL TO SIGNAL INVESTMENT & MANAGEMENT CO.
TRADEMARK COUNTRY REGISTRATION RENEWAL DUE - --------- ------- ------------ ----------- ULTRASWIM Argentina 1,582,406 12/14/2005 ULTRASWIM Australia A38,027 09/14/2003 ULTRASWIM Bahamas 11,284 05/09/1998 ULTRASWIM Barbados 81/2968 05/17/2001 ULTRASWIM Benelux 397,277 03/01/2004 ULTRASWIM Bermuda 10,234 05/23/2005 ULTRASWIM Canada 280,281 06/10/1998 ULTRASWIM Denmark 1694-1986 07/25/2006 ULTRASWIM Finland 96011 09/05/2006 ULTRASWIM France 1,212,873 09/14/2002 ULTRASWIM Germany 1,054,979 09/17/2002 ULTRASWIM Italy 668,401 03/30/2003 ULTRASWIM Japan 137833/87 05/31/2000 ULTRASWIM Malaysia 85/00685 02/12/2006 ULTRASWIM Netherlands Antilles 18574 01/26/2005 ULTRASWIM Norway 124,666 04/03/2006 ULTRASWIM Panama 037265 09/23/2005 ULTRASWIM Singapore 2664/84 05/17/2001 ULTRASWIM South Africa/Cisk 84/3387 04/13/1994 ULTRASWIM Sweden 200155 03/07/2006 ULTRASWIM Thailand KOR12235 06/14/2004 ULTRASWIM United Kingdom 1,181,846 TM 09/16/2003 ULTRASWIM (Block Ltrs/Soap & Shampoo) United States 1,197,606 06/15/2002 ULTRASWIM (Condition/Body Lotion) United States 1,681,731 04/07/2002 ULTRASWIM (Shampoo & Conditioner) Puerto Rico 26,209 07/03/2005 ULTRASWIM (Soap) Puerto Rico 26,208 07/03/2005 ULTRASWIM (With Dolphin Design) United States 1,471,131 01/05/2008 - -----------------------------------------------------------------------------------
12 EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 CHATTEM, INC. NON-STATUTORY STOCK OPTION PLAN - 1998 1. PURPOSE The Chattem, Inc. Non-Statutory Stock Option Plan - 1998 (the "Plan") is designed to enable officers and key management employees of Chattem, Inc. (the "Company") and its Subsidiaries to continue to acquire shares of the Company's common stock and thus to share in the future success of the Company's business. Accordingly, the Plan is intended as a further means not only of attracting and retaining outstanding management personnel, but also of promoting a closer identity of interest between key management employees and the Company and its shareholders. 2. DEFINITIONS Unless the context clearly indicates otherwise, the following terms, when used in the Plan, shall have the meanings set forth in this Section 2. (a) "Beneficiary" means the person or persons designated in writing by the Optionee or, in the absence of such a designation or if the designated person or persons predecease the Options, the Optionee's Beneficiary shall be the person or persons who acquire the right to exercise the Option by bequest or inheritance. In order to be effective, an Optionee's designation of a Beneficiary must be on file with the Committee before the Optionee's death. Any such designation may be revoked in writing and a new written designation substituted therefor at any time before the Optionee's death. (b) "Board of Directors" or "Board" means the board of directors of the Company. (c) "Change in Control" means: (i) Change of 1/3 or more of the directors of the Company within any twelve (12) month period; or (ii) Change of 1/2 or more of the directors of the Company within any twenty-four (24) month period; or (iii) Acquisition by any person of the ownership of or right to vote thirty-five percent (35%) or more of the Company's outstanding voting stock. For purposes of this paragraph (iii): (A) "person" shall mean any person, corporation, partnership or other entity and any affiliate or associate thereof and (B) "affiliate" and "associate" shall have the meanings given to them in Rule 12b-2 promulgated under the Exchange Act. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (e) "Committee" means the Compensation Committee of the Board of Directors. The Committee shall consist of three (3) directors of the Company who are not employees of the Company and its subsidiaries. No member of the Committee shall be eligible to participate in the Plan. Each member of the Committee shall be a "disinterested person," as such term may be defined for purposes of Rule 16b-3 or its successors under the Exchange Act. (f) "Company" means Chattem, Inc., a corporation incorporated under the laws of the State of Tennessee. (g) "Disability" means a disability that entitles the Optionee to benefits under the Company's Long-Term Disability Plan, as amended from time to time. (h) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (i) "Fair Market Value" means the closing sale price on the last business day prior to the date on which Fair Market Value needs to be determined as reported in the Wall Street Journal, or the average of the high and low bids on such day if no sale exists. (j) "Option" means an option to purchase a share or shares of the Company's common stock. (k) "Option Agreement" means the written agreement to be entered into by the Company and the Optionee, as provided in Section 7 hereof. (l) "Optionee" means a person to whom an Option has been granted under the Plan. (m) "Retirement" means retirement from employment with the Company and its Subsidiaries, as determined by the Committee in its sole discretion. (n) "Shares" means shares of the Company's common stock. (o) "Subsidiary" means a subsidiary corporation as defined in Section 425(f) of the Code (or a successor provision of similar import). (p) "Term" means the period during which a particular Option may be exercised in accordance with Section 10 hereof. 2 3. EFFECTIVE DATE OF THE PLAN The Plan shall become effective when adopted by the Board of Directors and an appropriate registration statement filed with the Securities and Exchange Commission becomes effective; provided, however, that if the Plan is not approved by the holders of a majority of the outstanding Shares present, or represented, and entitled to vote at the meeting before the first anniversary of its adoption by the board, the Plan and all Options granted under the Plan prior to such anniversary shall be null and void and shall be of no effect. 4. NUMBER AND SOURCE OF SHARES SUBJECT TO THE PLAN (a) The Company may grant Options under the Plan for not more than Three Hundred Fifty Thousand (350,000) Shares (subject, however, to adjustment as provided in Section 14 hereof) which shall be provided by the issuance of Shares authorized but unissued. (b) In the event that an Option shall for any reason lapse or be terminated without being exercised in whole or in part, the Shares subject to the Option shall be restored to the total number of Shares with respect to which Options may be granted under the Plan, but only to the extent that the Option has not been exercised previously. 5. ADMINISTRATION OF THE PLAN (a) The Plan shall be administered by the Committee. (b) The Committee shall adopt such rules and regulations (including amendments thereto) as it may deem proper; provided, however, that it may take action only upon the agreement of a majority of its members then in office. Any action that the Committee may take through a written instrument signed by a majority of its members then in office shall be as effective as though taken at a meeting duly called and held. (c) The powers of the Committee shall include plenary authority to interpret the Plan, and, subject to the provisions hereof, the Committee shall determine the persons to whom Options shall be granted, the number of Shares subject to each Option, the Term of each Option, the date on which each Option shall be granted, and the provisions of each Option Agreement. 6. PLAN PARTICIPANTS ELIGIBLE TO RECEIVE OPTIONS (a) Options may be granted under the Plan to key management employees of the Company or any Subsidiary, including officers and directors who, in the judgment of the 3 Committee, have a substantial impact on the Company's attainment of corporate goals. All determinations by the Committee as to the identity of the persons to whom Options shall be granted hereunder shall be conclusive. No director who is a member of the Committee shall be entitled to participate in the Plan. (b) An individual employee may receive no more than one Option hereunder during any three (3) year period. The grant of an Option in any year shall not give the Optionee any right to Options in future years or any right to be retained in the employ of the Company or its Subsidiaries. 7. OPTION AGREEMENTS (a) No Option shall be exercised by an Optionee unless the Optionee shall have executed and delivered an Option Agreement. (b) Appropriate officers of the Company are hereby authorized to execute and deliver Option Agreements in the name of the Company as directed from time to time by the Committee. 8. NON-STATUTORY OPTIONS It is intended that the Options granted hereunder shall not be "incentive stock options" within the meaning of the Code. 9. OPTION PRICE The Option price to be paid by the Optionee to the Company for each Share purchased upon the exercise of the Option shall be determined by the Committee and shall not be less than the Fair Market Value of the Share on the date the Option is granted, but may exceed Fair Market Value in the sole discretion of the Committee. 10. TERM OF OPTION; EXERCISE OF OPTION (a) Each Option granted under the Plan shall be exercisable as provided in this Section 10. In no event may an Option be exercised before the approval of the Plan by the holders of a majority of the outstanding Shares present, or represented, and entitled to vote at the meeting within the period specified by Section 3 hereof. The Term of each Option shall end (unless the Option shall have terminated earlier under any other provisions of the Plan) on a date ten (10) years from the date of grant of the Option. 4 (b) Each Option shall become exercisable and vested with respect to twenty-five percent (25%) of the Shares purchasable thereunder on the first anniversary of the date of the grant of the Option. The option to purchase an additional twenty-five percent (25%) of such Shares shall become exercisable and vested, on a cumulative basis, on each of the three succeeding anniversaries of the date of the grant of the Option, so that four (4) years from the date of such grant the option to purchase all such Shares shall have become exercisable and vested. Notwithstanding the foregoing vesting schedule (i) each Option shall become exercisable in full immediately upon a Change in Control and (ii) upon the death, disability or retirement of an Optionee or termination of an Optionee's employment pursuant to Section 12(e), any Option held by such Optionee shall be exercisable in full in accordance with the provisions of Section 12. When exercising an Option, the Optionee may purchase less than the full number of Shares then available under the Option. (c) Options shall be exercised by delivering or mailing to the Committee: (1) a notice, in the form and in the manner prescribed by the Committee, specifying the number of Shares to be purchased, and (2) payment in full of the Option price for the Shares in cash and/or by the tender of Shares (by delivering the appropriate stock certificates) to the Committee; provided, however, that (i) the Committee shall determine acceptable methods for tendering shares to exercise an Option under the Plan, and may impose such limitations and prohibitions on the use of Shares to exercise an Option as it deems appropriate and (ii) the Committee may permit Optionees to pay for any Shares subject to an Option by delivering to the Committee a properly executed exercise notice together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price. The Company may enter into agreements for coordinated procedures with one or more brokerage firms in connection with exercises of Options. The value of any Shares tendered in accordance with this Paragraph (c) shall be determined on the basis of their Fair Market Value on the date of exercise. 5 (d) Subject to the provisions of Section 11(a) hereof, upon receipt of the notice of exercise and upon payment of the Option price, the Company shall promptly deliver to the Optionee a certificate or certificates for the Shares purchased, without charge to the Optionee for issue or transfer tax. 11. CONDITIONS ON EXERCISE (a) The exercise of each Option granted under the Plan shall be subject to the condition that if at any time the Company shall determine in its discretion that the satisfaction of withholding tax or other withholding liabilities, or that the listing, registration or qualification of any Shares otherwise deliverable upon such exercise upon any securities exchange or under any State or Federal law, or the consent or approval of any regulatory body, is necessary or desirable as a condition of, or in connection with, such exercise or the delivery or purchase of Shares, then in any such event such exercise or payment shall not be effective or be made unless such withholding, listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. Any such postponement shall not extend the time within which the Option may be exercised; and neither the Company nor its directors or officers shall have any obligation or liability to the Optionee or to a Beneficiary with respect to any Shares as to which the Option shall lapse because of such postponement. (b) All Options granted under the Plan shall be non-transferable other than by will or by the laws of descent and distribution in accordance with Section 12(a) hereof, and an Option may be exercised during the lifetime of the Optionee only by the Optionee. Further, to the extent required by Rule 16-3 or its successors under the Exchange Act, Shares acquired by persons subject to Section 16 of the Exchange Act may not be transferred for at least six (6) months after the later of (i) the grant of the Option pursuant to which such Shares were acquired or (ii) approval of the Plan by the holders of a majority of the outstanding Shares present, or represented, and entitled to vote at the meeting. (c) Subject to the provisions of Section 11(b), upon the purchase of Shares under an Option, the stock certificate or certificates may, at the request of the Optionee (or the Optionee's Beneficiary, where the Option is exercised by the Beneficiary), be issued in the name of the 6 Optionee (or Beneficiary) and the name of another person as joint tenants with the right of survivorship. 12. EXERCISE OF OPTION AFTER DEATH, DISABILITY, RETIREMENT, OR OTHER TERMINATION OF EMPLOYMENT. (a) Death. If an Optionee's employment with the Company or a Subsidiary shall cease due to the Optionee's death, any Option held by the Optionee on the date of the Optionee's death may be exercised only with three (3) years after the Optionee's death and only by the Optionee's Beneficiary. If an Optionee shall die within three (3) years after cessation of employment while the Option is exercisable pursuant to Paragraph (b) below, or if the Optionee shall die within three (3) years after cessation of employment while the Option is exercisable pursuant to Paragraph (c) below, any Option held by the Optionee on the date of this death may be exercised after the Optionee's death only within the remainder of the period prescribed by Paragraph (b) or Paragraph (c), as the case may be, and only by the the Optionee's Beneficiary. Notwithstanding the foregoing, in no event shall the Option be exercisable after the expiration date thereof specified in the Option Agreement. (b) Disability. If an Optionee's employment with the Company or a Subsidiary ceases due to Disability, the Optionee may exercise the Option at any time within three (3) years after the Optionee shall so cease to be an employee; provided, however, that in no event shall the Option be exercisable after the expiration date thereof specified in the Option Agreement. (c) Retirement. If an Optionee's employment with the Company or a Subsidiary ceases due to Retirement, the Optionee may exercise the Option at any time within three (3) years after the Optionee shall so cease to be an employee; provided, however, that in no event shall the Option be exercisable after the expiration date thereof specified in the Option Agreement. (d) Leave of Absence. The Committee shall have the sole authority to determine whether, in any particular case, a leave of absence shall result in a termination of employment for purposes of this Section 12. (e) Divestiture. If an Optionee's employment with the Company or a Subsidiary ceases due to divestiture of a Subsidiary or other distinct business unit of the Company, the Optionee may exercise the Option at any time within ninety (90) days after the divestiture, provided that the Optionee is an employee on the actual date of the divestiture; and further provided, that in no event 7 shall the Option be exercisable after the expiration date thereof specified in the Option Agreement. (f) Termination for Other Reasons. Upon termination of an Optionee's employment with the Company or a Subsidiary for any reason other than those specified in a Paragraphs (a) through (e) above, the Optionee may exercise the Option (to the extent vested) at any time within thirty (30) days after such termination; provided, however, that in no event shall the Option be exercisable after the expiration date thereof specified in the Option Agreement. 13. STOCKHOLDER RIGHTS No person shall have any rights of a stockholder by virtue of an Option Except with respect to Shares actually issued to him or her, and the issuance of Shares shall confer no retroactive right to dividends. 14. ADJUSTMENTS FOR CHANGES IN CAPITALIZATION In the event that there is a change in the Shares through merger, consolidation, reorganization, recapitalization, or otherwise, or if there shall be any dividend on the Company's Shares, payable in such Shares, or if there shall be a stock split or combination of Shares, the Aggregate number of Shares available for Options, the number of Shares subject to outstanding Options, and the Option price per shares of each outstanding Option shall be proportionately adjusted by the Committee as it deems equitable in its absolute discretion, to prevent dilution or enlargement of the rights of the Optionee; provided, that any fractional Shares resulting from such adjustments shall be eliminated. The Committee's determination with respect to any such adjustments shall be conclusive. 15. EFFECT OF MERGER OR OTHER REORGANIZATION If the Company shall be the surviving corporation in a merger or other reorganization, Options shall extend to stock and securities of the Company to the same extent that a holder of that number of shares immediately before the merger or consolidation corresponding to the number of Shares covered by the Option would be entitled to have or obtain stock and securities of the Company under the terms of the merger or consolidation. 16. TERMINATION, SUSPENSION OR MODIFICATION OF PLAN The Committee may at any time terminate, suspend or modify the Plan, except that the Committee shall not, without the authorization of the holders of a majority of the Company's outstanding Shares at a shareholders' meeting duly called and held, change (other than through adjustment for changes in capitalization 8 as provided in Section 14 hereof): (a) the aggregate number of Shares with respect to which Options may be granted; (b) the class of persons eligible for Options; (c) the Option price; or (d) the maximum duration of the Plan. No termination, suspension or modification of the Plan shall adversely affect any right acquired by an Optionee, or by any Beneficiary, under the terms of an Option granted before the date of such termination, suspension or modification, unless such Optionee or Beneficiary shall consent; but it shall be presumed conclusively that any adjustment for changes in capitalization in accordance with Section 14 hereof does not adversely affect any such right. 17. APPLICATION OF PROCEEDS The proceeds received by the Company from the sale of Shares under the Plan shall be used for general corporate purposes. 18. DURATION OF THE PLAN Unless sooner terminated in accordance with Section 16 hereof, the Plan shall remain effect for a period of five (5) years from the date of its adoption by the Board of Directors. Expiration of such five (5) year period shall not affect the vesting of previously granted Options pursuant to Section 10(b) hereof. 19. COMPLIANCE WITH RULE 16b-3 With respect to persons subject to Section 16 of the Exchange Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 20. GOVERNING LAW The Plan shall be construed and its provisions enforced and administered in accordance with the laws of the State of Tennessee except to the extent that such laws may be superseded by any Federal law. 9 EX-11 4 EXHIBIT 11 EXHIBIT 11 CHATTEM, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 (In thousands, except per share amounts)
1997 1996 1995 --------- --------- --------- NET INCOME (LOSS): Continuing operations............................................................. $ 7,255 $ 3,804 $ 2,325 Discontinued operations........................................................... -- -- 10,008 Extraordinary loss on early extinguishment of debt, net........................... (1,370) (532) (367) --------- --------- --------- Net income...................................................................... $ 5,885 $ 3,272 $ 11,966 --------- --------- --------- --------- --------- --------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Weighted number of common shares outstanding...................................... 8,793 8,052 7,292 Shares issued upon assumed exercise of outstanding stock options and warrants..... 331 101 -- --------- --------- --------- Weighted average number of common and common equivalent shares outstanding...... 9,124 8,153 7,292 --------- --------- --------- --------- --------- --------- NET INCOME (LOSS) PER COMMON SHARE: Continuing operations............................................................. $ .80 $ .47 $ .32 Discontinued operations........................................................... -- -- 1.37 Extraordinary loss on early extinguishment of debt, net........................... (.15) (.07) (.05) --------- --------- --------- Net income per common share..................................................... $ .65 $ .40 $ 1.64 --------- --------- --------- --------- --------- ---------
1 EX-13 5 EXHIBIT 13 Exhibit 13 January 26, 1998 1997--A RECORD BREAKING YEAR Fiscal 1997 was quite simply the best year in Chattem's 119 year history. Sales increased 20% to $143 million and earnings per share from continuing operations jumped 70% to $.80 per share. At Chattem, we continually talk of the importance of maintaining momentum. This year's 70% increase in EPS, on top of last year's 47% increase, establishes this period as an all time record breaking one. Our goal for 1998 is to keep this momentum going strongly as we head towards $200 million in sales. 1997 HIGHLIGHTS For the second consecutive year, GOLD BOND was the number one reason for our strong results. GOLD BOND Medicated Powder maintained its dominance of the adult powder market. GOLD BOND Cream continued to grow and gain market share in the anti-itch cream category. Finally, our two new products, GOLD BOND Foot Powder and GOLD BOND Cornstarch Plus Baby Powder, were both successfully introduced. A second notable highlight was the continued strong growth of ICY HOT. ICY HOT has been on a growth track ever since its acquisition in 1991, but fiscal 1997 was the best year ever for ICY HOT, with sales increasing over 35%, led by the introduction of ICY HOT Arthritis Therapy Gel. The SUNSOURCE acquisition including the brands GARLIQUE, REJUVEX, MELATONEX, PROPALMEX and ECHINEX was another driving factor behind 1997 results. The SUNSOURCE acquisition not only brought us five important herbal brands, but more importantly positioned us as a leader in the dramatically growing herbal market. Through five months, SUNSOURCE performed on plan with very strong results from GARLIQUE offsetting lower results from ECHINEX. In addition to the above highlights, we had another very good year in terms of controlling expenses leading to improved profitability. Areas of focus were improving profitability on our toiletries brands, controlling people expenses and reducing overall general and administrative expenses. These efforts resulted in a record operating income of almost 17.8% of sales versus 14% last year. Selling, general and administrative expenses declined from 18.2% to 15.6% of sales. These results were achieved while we continued to invest in advertising and promotion to drive our brands' growth. For the year, advertising and promotion expenses increased 23.4% to 39.2% of sales, versus 38.3% last year. On the negative side, we had a few brands that didn't meet our expectations. BULLFROG was down about 16%, reflecting a couple of key accounts which did not run expected programs. In 1998, BULLFROG sales should jump dramatically, as we have several major accounts committed to strong programs. PHISODERM and FLEXALL also failed to meet expectations. We are planning major new creative and media support to rejuvenate these two brands. 1998--THE YEAR OF NEW PRODUCTS As we look to continue our momentum into 1998, two extremely exciting new products will be major factors. The first which began shipping February 15 is HARMONEX. When we acquired SUNSOURCE last year, a major reason for the acquisition was that it provided a platform to introduce new herbal products, and we believe HARMONEX is potentially one of SUNSOURCE'S biggest opportunities ever. HARMONEX is a combination of St. John's Wort, proven to help emotional balance, with Siberian Ginseng, an herb providing a boost to our physical well being. This product harkens back to the Roman concept of a sound mind and a sound body. The market for such a product is huge, as almost half of American adults suffer some combination of mild depression, low spirits, chronic anxiety or severe mood swings. Also, it is a widely held belief that continued anxiety, stress or low spirits can lead to physical health problems. Dr. Harold Bloomfield is perhaps America's number one expert on anxiety and depression and author of the best seller, HYPERCIUM AND DEPRESSION (Hypercium is the active ingredient in St. John's Wort) and the upcoming book, HEALING ANXIETY WITH HERBS. His books are full of exciting material for people more interested in the power of herbs to provide emotional and physical well being. Dr. Bloomfield is a proponent of the HARMONEX formula and will work with us as a consultant for the next year. Given the exciting opportunity for HARMONEX, we will be spending more advertising dollars on this launch than any other in our history. For the six months starting May 1, we will be spending at a reported annual rate of $15- $20 million. Our other major launch is a GOLD BOND extension in the second half of the year. This new product will extend the strong GOLD BOND franchise into its largest category ever. This line extension is the most researched new product in our history. We will be launching it with annual media spending of approximately $15 million, plus the distribution of 4 million samples. We have targeted to invest amounts equal to $.20 to $.25 per share to support these two launches for 1998. CONTINUED BRAND DEVELOPMENT Over the last several years, we have invested in advertising and promotions to grow our brands. We will continue this in 1998 with several strong and innovative programs, which I will briefly highlight. ICY HOT will receive another record year of advertising support behind both the growing base franchise, plus new ARTHRITIS THERAPY GEL, which in January, 1998 had its best Nielsen ever. BULLFROG should achieve its highest sales volume in history, due to several major accounts making strong commitments to BULLFROG. BULLFROG will be supported by record media spending on national radio starting with Spring Break. Several brands will receive new advertising programs for 1998. FLEXALL will receive significant new creative as well as radio support. CORN SILK will have its largest print campaign starting in January. For SUNSOURCE, all the brands will have major advertising support. At this point, GARLIQUE appears to be responding the most dramatically, although REJUVEX and PROPALMEX are doing well. CONCLUSIONS Finally, 1998 started with a significant management change at Chattem. Bob Bosworth, Executive Vice-President and Chief Financial Officer, left us after an outstanding eighteen year record at Chattem. He will remain on our Board. Fortunately, Alec Taylor, a Board member for four years as well as our legal counsel for eight years, joined us as President and Chief Operating Officer. In addition to the fact that no one worked closer with Bob than Alec, he brings outstanding managerial skills to us. Someone asked me how I felt about this, and I replied that "It is like having Joe Montana retire but Steve Young sitting on the bench." Our profit plan for 1998 shows that we should be able to continue our growth with sales forecasted up 20% and earnings per share up 15-20% after investing $.20-$.25 per share in new product launches. I hope I can again next year have another superior story to report to you. DOMESTIC PRODUCT OVERVIEW OTC Pharmaceuticals - Topical Analgesics The Company competes in the topical analgesic category, a $217 million market, with its FLEXALL and ICY HOT brands. BENZODENT competes in the $62 million internal irritation segment of the topical oral analgesic category. Overall, Chattem's position in the topical analgesic market improved by over one share point during 1997. FLEXALL, an aloe-based topical analgesic clinically proven to provide long lasting relief for arthritis and other muscle and joint pain, became the number two brand in the category. The brand's current product line includes Original Vitamin E Enriched and Maximum Strength FLEXALL, which contain menthol, as well as Ultra Plus which contains three active ingredients: menthol, methyl salicylate and camphor. With its sixth consecutive year of sales growth in 1997, ICY HOT moved up to the number four position in the category. The brand's double digit growth was the result of new packaging, increased marketing support, new unique television commercials as well as the launch of Arthritis Therapy Gel which contains the active ingredient doctor's recommend most: capsaicin. ICY HOT offers the most complete product form line-up in the category with a cream, a balm and the unique chill stick. Further, consumer research continues to indicate that the brand's distinctive Icy and Hot Therapy for Pain positioning enjoys high awareness and is viewed as the most compelling in the category. BENZODENT, a topical oral analgesic, is the only brand positioned to be applied directly to dentures to relieve the pain. The product contains the maximum amount of benzocaine allowable in the category and is widely recommended by dentists. Marketing efforts are focused on providing samples to consumers when they are initially fitted for dentures, the point of entry for the category. 1 OTC Pharmaceuticals - Medicated Powder and Cream The Company competes in the medicated powder ($80 million) and cream ($170 million) markets with its GOLD BOND Medicated Powder and GOLD BOND Medicated Cream. GOLD BOND is America's number one medicated powder brand as well as one of the fastest growing brands in the anti-itch cream segment. During 1997, GOLD BOND successfully launched two new products: GOLD BOND Foot Powder and GOLD BOND CORNSTARCH PLUS Medicated Baby Powder. In addition to these two products, the GOLD BOND line includes GOLD BOND Medicated Powder, GOLD BOND Extra Strength Medicated Powder, GOLD BOND Medicated Baby Powder and GOLD BOND Medicated Cream. Looking to 1998, the brand has plans to further expand the franchise with a major line extension. For the year, the brand will benefit from record levels of advertising and promotional support. OTC Pharmaceuticals - Internal Analgesics The Company competes in the $60 million menstrual pain relief category with its PAMPRIN and PREMSYN PMS brands. NORWICH aspirin competes in the general analgesics category. PAMPRIN, the number two brand in the menstrual analgesics category, is a combination drug specifically designed for relief of menstrual symptoms. Multi-symptom PAMPRIN effectively relieves multiple menstrual discomforts with three active ingredients. Maximum Pain Relief PAMPRIN is formulated to provide superior cramp relief and is the only cramp relief product with two pain relievers. Maximum Strength PREMSYN PMS, the third largest brand in the category, effectively relieves the physical and emotional symptoms of PMS. NORWICH, a high-quality, reasonably priced aspirin, complements the other OTC pharmaceuticals of the division. The brand is principally focused in sales and marketing support in the northeast, midwest and west coast. 2 OTC Pharmaceuticals - Lip Care The Company competes in the $210 million lip care category with the HERPECIN-L brand. 1998 includes two major HERPECIN-L initiatives. In January, a reformulated HERPECIN-L stick was launched. This stick offers a new skin protectant and a significantly higher SPF. Consumer testing indicates a strong preference for the new formulation by both loyal HERPECIN-L consumers as well as general category users. In addition, HERPECIN-L jar began shipping in February. The new jar product promotes cold sore healing, is a moisturizer and protects lips from the harmful rays of the sun with a SPF of 30 in a form that is extremely popular within the lip care category. These two initiatives will receive national television advertising and promotional support. Toiletries & Cosmetics - Face Makeup The Company competes in the oil control face makeup segment which is an $83 million niche within the overall cosmetics category with its CORNSILK brand. CORNSILK, the number three brand in the oil control makeup segment, is the original face makeup line specially formulated to absorb excess facial oil. These formula properties guarantee users a long-lasting, shineless makeup finish. The CORNSILK product line includes loose and pressed powders in two finishes and four shade variations; liquid makeup in six shades; a cream concealer and an enriched coverstick concealer. In 1997, CORNSILK introduced a contemporary new blue package which was successfully transitioned at retail. In 1998, to benefit from important new makeup trends, CORNSILK will be adding a six shade line of light liquid makeup under the sub-brand Weightless. Also in 1998, CORNSILK will build on its successful yellow enriched coverstick launch with the addition of a green enriched coverstick. CORNSILK is supported with an extensive print campaign in women's magazines touting the long-lasting and natural looking brand benefits. Toiletries & Cosmetics - Skincare Within the skincare category, the Company competes in the $428 million facial cleanser category with its PHISODERM brand and in the $20 million face masque sub-segment with MUDD Spa Treatment masque products. 3 PHISODERM is a specialty facial cleanser positioned as the daily prescription for healthy skin. The dermatologist developed, pH balanced formulas are available in four different varieties: Normal to Dry, Normal to Oily, Sensitive Skin and for Baby. Every PHISODERM product delivers superior cleansing without the harsh drying effects of soap. In 1997, PHISODERM introduced a bold, green, ethical new label design. This bolstered the therapeutic image of the brand as well as its tie to dermatology. Also in 1997, PHISODERM was prominently featured in an extensive print advertising campaign. In 1998, PHISODERM will claim leading share of voice advertising for facial cleansers on radio. The radio campaign will build on the idea of being the daily prescription for healthy skin with strong consumer testimonials. PHISODERM is also represented with a two size product offering in the $212 million antibacterial hand cleanser category. This product launched in 1996, extends brand recognition into a complementary category to facial cleansing. PHISODERM Antibacterial Hand Cleanser is primarily sold through a broker sales force established to provide national retail coverage for the food class of trade. The MUDD brand continues to show strong retail growth stemming from the relaunch of MUDD Original Masque under the Spa Treatment banner and the introduction of Sea Masque and Aloe Masque which are all top 10 selling masque items. These products were joined in 1997 by MUDD 5 Minute Masque which revolutionized the category by providing all of the deep cleansing benefits of a clay-based masque product but in one third of the time. Toiletries & Cosmetics - Seasonal The Company competes in three seasonal product categories: SPF 15 + suncare, spray-on hair lightener and chlorine removal haircare and skincare. In the suncare category, the Company competes with products that have a sun protection factor (SPF) of greater than 15, a $270 million category, with its BULLFROG Sunblock line. SUN-IN competes in the $9 million spray-on hair lightener category, while ULTRASWIM Shampoo, Conditioner, Soap and Shower Gel strongly dominate the small chlorine removal category. 4 Over the past several years BULLFROG Sunblock has been one of the fastest growing brands in the category. BULLFROG Sunblock products are available in ten unique gels and lotions and provide all day protection in or out of the water. BULLFROG is positioned as the Ultimate Waterproof Sunblock and is the essential sun protection product for an outdoor active lifestyle. In 1997, BULLFROG Quick Gel SPF 36 was added to the line providing higher protection in its revolutionary quick-applying formula. BULLFROG awareness was driven in 1997 by strong levels of regional, seasonal television advertising. Dramatic growth is forecast for BULLFROG in 1998. During 1998, two products will be added with the introduction of BULLFROG for Babies and SUPERBLOCK SPF45. In 1998, BULLFROG will have additional advertising support with new Spring Break radio advertising and strong levels of national radio advertising during an expanded Summer schedule. SUN-IN, which is available in three formulas, (Super, Super with Lemon and for Men), enjoyed a renewed interest by consumers in the spray-on category and a return to brand growth. In 1997, SUN-IN was supported by regional, seasonal television advertising and earlier display distribution which drove consumer awareness during Spring Break. In 1998, SUN-IN will introduce bright, contemporary new packaging and a formula enhancement with the addition of illuminators for healthy shine. A public relations campaign to teen magazines will play a significant role in driving brand awareness for SUN-IN in 1998. ULTRASWIM has maintained its leadership position as the standard product for chlorine removal. The ULTRASWIM product line includes shampoo, conditioner, soap and shower gel. In 1997, ULTRASWIM utilized targeted print advertising featuring our spokesperson Olympic Swimmer Janet Evans to communicate to target consumers: competitive swimmers, fitness swimmers and recreational swimmers. In 1998, ULTRASWIM Shampoo and Conditioner will be introduced in an improved bottle with formula enhancements. The shampoo product will be repositioned as ULTRASWIM Shampoo Plus and the conditioner will be repositioned as ULTRASWIM Ultra Repair Conditioner. Targeted advertising for ULTRASWIM with a product focused message will continue in 1998. 5 Dietary Supplements The Company competes in the $6.5 billion U.S. vitamin/mineral marketplace with its products REJUVEX, GARLIQUE, PROPALMEX, ECHINEX, HARMONEX, MELATONEX and SUNSOURCE Traditional Homeopathic medicines. These products are distributed primarily through mass trade channels consisting of food, drug and discount stores. In 1997, mass trade vitamin/mineral sales totaled $2.6 billion, up 25% from the previous year, while the category of nutritional supplements generated an unprecedented $918 million in sales, up 48% from the same period. In the past year, sales of herbal products have risen an average of 56% in food, drug and discount stores and have reached $339 million. REJUVEX, introduced in 1991, is the oldest SUNSOURCE brand and the number one selling product in the women's supplement category. REJUVEX is uniquely positioned to support menopausal comfort and healthy bones for women in the peri- and post-menopausal age group. A winner of the prestigious Rex award in 1995 for best nutritional supplement in the chain drug industry, REJUVEX is a unique natural formula containing a combination of magnesium, vitamins, antioxidants and other important nutrients, which helps meet the changing nutritional needs of women. The Company competes in the herbal category with its GARLIQUE, PROPALMEX and ECHINEX brands. Introduced in 1993, GARLIQUE now owns a 12% share of the $75 million garlic category, and is presently its number one selling product. Backed by extensive clinical research on the benefits of garlic, GARLIQUE is positioned for its positive benefits in support of cardiovascular health. In recent years scientists have identified allicin as the active ingredient in garlic. GARLIQUE'S unique production process insures the maximum amount of allicin in each tablet, and is further positioned as the world leader in product potency. GARLIQUE is rapidly ascending to the pinnacle of the herbal category, aided by spokesperson Larry King. PROPALMEX, the top selling brand in the $18 million saw palmetto herbal category, owns a 23% market share, and is positioned to support health and free urinary flow for men over 40. As men age, natural changes in hormone balance result in conditions which tend to precipitate a swelling of the prostate gland. This benign condition plaques most men past middle age. PROPALMEX contains clinically tested, standardized saw palmetto, and is the all-natural, drug-free approach to maintenance of a healthy prostate. PROPALMEX was introduced to the mass trade consumer in 1996. 6 ECHINEX, the last of three herbal products introduced by SUNSOURCE in 1996, is a standardized herbal complex of echinacea, ginger and Siberian ginseng. This unique and effective combination is positioned to support natural resistance against infection. ECHINEX is a seasonal product that provides added protection during times of high risk for colds and flu. It presently holds a 3.7% of the $43 million echinacea category. In May 1998, SUNSOURCE will introduce its newest herbal product, HARMONEX. HARMONEX contains a unique combination of St. John's Wort for emotional well-being and Siberian ginseng for physical well-being. HARMONEX enters the fast growing St. John's Wort category, up 1,137% through the first three quarters of 1997, and now selling at an annual rate of $100 million in sales. The HARMONEX new product launch will be the largest ever by SUNSOURCE or Chattem. In addition to unprecedented consumer advertising levels planned for its promotion, HARMONEX will also be supported by a powerful public relations campaign. The Company competes and is a leader in the $48 million melatonin category with MELATONEX. MELATONEX, the third largest melatonin brand, is positioned to support a natural sleep cycle and owns a 13% share of the category. The product uses a unique time-release delivery system, releasing melatonin as the body does, gradually, while you sleep. MELATONEX contains the finest pure melatonin (not of animal origin) made in accordance with strict quality control requirements. Melatonin sold under the MELATONEX name is tested regularly by independent laboratories to meet SUNSOURCE'S rigorous quality control requirements. The Company also competes in the homeopathic category with its line of SUNSOURCE traditional homeopathic medicines. Sales of homeopathic products through mass trade channels total $29 million, up 29% from the previous year. 7 SUNSOURCE owns a 10% share of the category. The line, based on the principles of homeopathy, was introduced by SUNSOURCE in 1994. Homeopathic medicine was developed by Dr. Samuel Hahnemann (1755-1843), who based his medicine on the law of similars which states a substance which caused symptoms of an illness when given in large dose to a healthy person will help to aid the healing when given in a small dose to a sick person. The nine products in the line include six tablet products: Sinus relief, Allergy relief, Cold relief, Flu relief, Arthritis relief, Insomnia relief and three cream products: Sports Injury Cream, Arthritis Relief Cream, and Psoriasis Eczema Relief Cream. All SUNSOURCE homeopathic medicines are manufactured using state of the art production, insuring optimum quality and effectiveness. SUNSOURCE Traditional Homeopathic Medicines are the top selling homeopathic line of products in food, drug and discount stores. The Company plans to continue the expansion of the SUNSOURCE line of products, and is presently in the process of evaluating new product opportunities to be introduced in the future. INTERNATIONAL MARKET OVERVIEW Canada Chattem (Canada) Inc. is a wholly-owned subsidiary based in Mississauga, Ontario which markets and distributes Chattem's consumer products throughout Canada. The manufacturing of the brands is principally done in the Company's facilities in Chattanooga while some packaging takes place in Mississauga. The division utilizes a national broker for its sales efforts. Brands marketed and sold in Canada include GOLD BOND, PAMPRIN, FLEX-ALL, CORNSILK, MUDD, SUN-IN, BULLFROG, ULTRASWIM and PHISODERM. In addition, Chattem owns the marketing and distribution rights for SHY, a line of feminine hygiene and douche products; ACNOMEL, a medicated acne mask; as well as AQUA CARE and ROSE MILK. 8 Europe Chattem's European business is conducted through Chattem (U.K.) Limited, a wholly-owned subsidiary located in Basingstoke, Hampshire, England. This unit also services distributors in Australia and the Middle East. Manufacturing and packaging of the products is performed principally in the U.K. with a limited number of ingredients purchased from Chattem. Chattem (U.K.), the division employs its own sales force while exclusive distributors are used to market and sell its products on the Western European Continent. Due to the difficulty and expense involved in the registration of OTC pharmaceuticals in Europe, the unit markets exclusively the Company's toiletry products. Chattem's products in Europe include SUN-IN, a range of MUDD Face and Body products, ULTRASWIM and CORNSILK. SPRAY BLOND Spray-In Hair Lightener is only marketed on the continent. U.S. Export The U.S. Export division services various distributors primarily located in the Caribbean, Mexico and Peru. The Company sells ICY HOT, GOLD BOND, PAMPRIN, MUDD and PHISODERM into these markets with the primary focus being the development of its OTC pharmaceuticals. The Company continues to look for established distributors in Central and South America. 9 Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------- GENERAL On June 26, 1997, the Company purchased certain assets of Sunsource International, Inc. and an affiliated company ("SUNSOURCE") including the exclusive worldwide rights to five leading branded dietary supplement products. The purchase price of the trademarks, inventory and receivables was approximately $32,000,000. Additional payments may be earned by SUNSOURCE over a six year period from the date of closing if sales, net of certain assumed liabilities, exceed certain levels as defined in the purchase agreement, but such additional payments are not to exceed $15,750,000 in the aggregate. Financing of the SUNSOURCE acquisition was provided by an expansion of the Company's senior bank credit agreement and the issuance of 300,000 shares of Chattem common stock to SUNSOURCE. The Company expanded its existing credit agreement with a syndicate of banks on June 26, 1997 to finance the SUNSOURCE acquisition and repay all existing bank debt. The credit agreement is divided into a $30,000,000 revolving line of credit for working capital purposes, a 5 year $30,000,000 Term A loan facility and a 6 3/4 year $35,000,000 Term B loan facility. During June 1997, the Company prepaid previously outstanding long-term bank debt with funds from the new credit agreement. In connection with the prepayment of those borrowings, the Company incurred an extraordinary loss of $1,370,000 (net of income taxes), or $0.15 per share. The loss primarily related to the write-off of debt issuance costs and the termination of two interest rate swap agreements. Unless otherwise indicated, the following discussion relates only to the continuing operations of the Company, which are the domestic and international consumer products business. The results of operations and the gain on disposal of the specialty chemical division in 1995 have been separately classified as discontinued operations in the accompanying consolidated statements of income. The Company experienced an increase in net sales, operating income and income from continuing operations for the year ended November 30, 1997. Net sales increased 20.5% to $143,235,000 from $118,903,000 in 1996. Operating income increased 52.8% to $25,503,000 from $16,689,000 in 1996. Income from continuing operations increased 90.7% to $7,255,000 from $3,804,000 in 1996, while net income, which includes extraordinary charges of $1,370,000 and $532,000 in 1997 and 1996, respectively, relating to the early extinguishment of debt in those respective years, increased 79.9% to $5,885,000 from $3,272,000 in fiscal year 1996. 2 In fiscal year 1997, earnings per share from continuing operations increased $0.33, or 70.2%, to $0.80 while total earnings per share increased $0.25, or 62.5% to $0.65 when compared to the 1996 fiscal year. The results of operations for fiscal year 1997 reflect a full year of operations of the GOLD BOND and HERPECIN-L product lines, both of which were acquired in mid-1996, and approximately five months' operations of the SUNSOURCE brands, which were purchased in mid-1997. 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 year ended November 30, 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. 3 RESULTS OF OPERATIONS The following table sets forth for continuing operations certain items from the Company's consolidated statements of income, for the periods indicated, expressed as a percentage of net sales:
YEAR ENDED NOVEMBER 30, ------------------------------- 1997 1996 1995 --------- --------- --------- Net Sales.................................................. 100.0% 100.0% 100.0% ----- ----- ----- Costs and Expenses: Cost of sales.............................................. 27.4 29.5 29.6 Advertising and promotion.................................. 39.2 38.3 37.0 Selling, general and administrative........................ 15.6 18.2 19.0 ----- ----- ----- Total costs and expenses................................... 82.2 86.0 85.6 ----- ----- ----- Income From Operations..................................... 17.8 14.0 14.4 Other Expense, Net......................................... (9.9) (9.3) (10.8) ----- ----- ----- Income Before Income Taxes................................. 7.9 4.7 3.6 Provision For Income Taxes................................. 2.8 1.5 1.3 ----- ----- ----- Income From Continuing Operations.......................... 5.1% 3.2% 2.3% ----- ----- ----- ----- ----- -----
FISCAL 1997 COMPARED TO FISCAL 1996 FOR CONTINUING OPERATIONS For the year ended November 30, 1997, net sales increased $24,332,000, or 20.5%, to $143,235,000 from $118,903,000 for the previous fiscal year. This increase consisted of a $23,580,000, or 22.6%, increase in domestic consumer products sales from $104,444,000 in 1996 to $128,024,000 in 1997 and an increase of $752,000, or 5.2%, in international sales to $15,211,000 from $14,459,000. 4 For domestic consumer products, sales of the GOLD BOND, HERPECIN-L, ICY HOT and the SUNSOURCE products accounted for the majority of the sales increase in 1997. Sales increases were also realized for the SUN-IN and MUDD brands. Sales declines were recognized for FLEXALL, NORWICH Aspirin, CORNSILK, BULLFROG and PHISODERM. The remaining domestic brands were basically flat or had modest declines over the prior fiscal year. All sales variances were largely the result of changes in volume. The increase in sales of the SUN-IN brand was largely the result of increased marketing support, while the MUDD sales increase was primarily due to the addition of the 5 Minute Mask to the line in 1997 and the continuing effect of new packaging in late 1995. The sales increase of the ICY HOT brand reflects the line extension launched in early 1997 and a 68.0% increase in advertising and promotion expenditures in 1997 over 1996. Sales declines for the remainder of the domestic products are primarily due to increased competition in their respective product categories, the maturation of these brands and in most cases reduced marketing support. The decline in sales of the BULLFROG brand reflects the loss of a major customer and the cool, wet spring experienced in 1997. 5 In fiscal 1997, sales for the international consumer products' segment increased $847,000, or 21.0%, for the Canadian operation but declined $252,000, or 2.6%, for the United Kingdom business. The GOLD BOND product line accounted for practically all of the net sales increase in Canada, although increases were also realized for the remainder of the product lines marketed in that country, except for ULTRASWIM and CORNSILK. Sales declines were recognized for all of the product lines marketed by the United Kingdom operation, except for MUDD. These sales decreases were largely due to a change in the United Kingdom from a dealer distribution system to one operated by the Company's U.K. subsidiary in that country. U.S. export sales increased $157,000, or 17.5%, in 1997 over 1996, with essentially all of the increase being associated with the ICY HOT brand. All sales variances were principally due to volume changes. Cost of goods sold as a percentage of net sales in 1997 decreased to 27.4% from 29.5% in 1996. The decrease was largely the result of a shift in product mix of sales of domestic consumer products to higher margin products and the addition of GOLD BOND and SUNSOURCE. 6 Advertising and promotion expenses increased $10,664,000, or 23.4%, to $56,176,000 in 1997 from $45,512,000 in 1996 and were 39.2% of net sales compared to 38.3% in 1996. This increase was principally associated with the GOLD BOND and HERPECIN-L brands, which were acquired in 1996; the SUNSOURCE product line, acquired in mid-1997; and ICY HOT. Increases in 1997 were also recorded for the PAMPRIN, PREMSYN PMS, ULTRASWIM and SUN-IN brands. Selling, general and administrative expenses increased $721,000, or 3.3%, to $22,303,000 in 1997 from $21,582,000 in 1996, but decreased as a percentage of net sales to 15.6% in 1997 as compared to 18.2% in 1996. This increase was largely associated with increases in direct selling costs, freight and field sales expenses, resulting from increased sales, offset in part by reductions in financial and legal services expenses. Interest expense increased $2,540,000, or 19.0%, to $15,934,000 in 1997 from $13,394,000 in 1996 primarily as a result of increased indebtedness associated with the GOLD BOND and HERPECIN-L product acquisitions in 1996 and the SUNSOURCE brands purchase in mid-1997. Interest expense is expected to increase in 1998 due to the full year impact of the higher debt levels associated with product acquisitions. Until the Company's indebtedness is reduced substantially, interest expense will continue to represent a significant percentage of the Company's net sales. 7 Investment and other income increased $229,000, or 15.8%, to $1,679,000 in 1997 from $1,450,000 in 1996. Provisions for income taxes were 35.5% of before tax income in 1997 as compared to 32.3% in 1996. See Note 8 of Notes to Consolidated Financial Statements. Income from continuing operations increased $3,451,000, or 90.7%, to $7,255,000 in 1997 from $3,804,000 in 1996. This increase resulted primarily from increased sales and a more favorable product sales mix with regard to gross margins in 1997. 8 FISCAL 1996 COMPARED TO FISCAL 1995 FOR CONTINUING OPERATIONS Net sales for the year ended November 30, 1996 increased $18,305,000, or 18.2%, to $118,903,000 from $100,598,000 for the previous fiscal year. The increase consisted of a $17,194,000, or 19.7%, increase in domestic consumer products sales from $87,250,000 in 1995 to $104,444,000 in 1996 and an increase of $1,111,000, or 8.3%, in international sales to $14,459,000 from $13,348,000. For domestic consumer products, net sales of the GOLD BOND and HERPECIN-L product lines, both of which were acquired in 1996, and PHISODERM Antibacterial Hand Cleanser accounted for essentially all of the sales increase in 1996, although sales increases were also realized for the BULLFROG, ICY HOT and MUDD product lines. Sales declines were recognized for CORNSILK, NORWICH Aspirin and PHISODERM facial. The remaining domestic brands were basically flat or had modest declines over the prior fiscal year. All sales variances were largely the result of changes in sales volume. The increase in sales of the BULLFROG and MUDD brands in 1996 was largely the result of new product introductions and/or new packaging in late 1995 and increased marketing support. Sales growth for the ICY HOT product line was primarily due to increased advertising and promotional expenditures. 9 Sales declines for the remainder of the domestic products are essentially the result of increased competition in their respective product categories, the maturation of these brands and in most cases reduced marketing support. In fiscal 1996, sales for the international consumer products' segment increased $121,000, or 3.1%, for the Canadian operation and $1,446,000, or 17.9%, for the United Kingdom business. The addition of the GOLD BOND product line in Canada accounted for more than the total of the net sales increase in that country, although increases were also realized for the SUN-IN, ULTRASWIM and MUDD product lines. Declines in sales of the other brands in Canada largely offset the increases enumerated above. Sales increases for all of the product lines sold by the United Kingdom operation were realized with the exception of the CORNSILK brand. U.S. export sales decreased $456,000, or 33.8%, in 1996 largely resulting from unfavorable general economic conditions in Peru and Mexico. All sales variances were principally due to volume changes. Cost of goods sold as a percentage of net sales in 1996 was essentially unchanged at 29.5% versus 29.6% for 1995. Cost of goods sold was affected by the partial year positive impact of GOLD BOND which was offset by increased inventory obsolesence charges. 10 Advertising and promotion expenses increased $8,270,000, or 22.2%, to $45,512,000 in 1996 from $37,242,000 in 1995 and were 38.3% of net sales compared to 37.0% in 1995. This increase was principally associated with the GOLD BOND and HERPECIN-L brands, which were acquired in 1996, and with the introduction of PHISODERM Antibacterial Hand Cleanser in that year. Increases in 1996 were also recorded for the BULLFROG, FLEXALL, ICY HOT, SUN-IN and MUDD product lines. Selling, general and administrative expenses increased $2,449,000, or 12.8%, to $21,582,000 in 1996 from $19,133,000 in 1995, but decreased as a percentage of net sales to 18.2% for 1996 as compared to 19.0% in 1995. This increase was largely associated with increases in direct selling costs, freight and field sales expenses, resulting from increased sales. Interest expense increased $2,318,000, or 20.9%, to $13,394,000 in 1996 from $11,076,000 in 1995 largely as a result of increased indebtedness associated with the acquisition of the GOLD BOND and HERPECIN-L product lines in April and June, 1996, respectively. 11 Investment income increased $893,000 to $1,420,000 in 1996 from $527,000 in 1995. This increase consisted of $113,000 of interest income, resulting from the temporary investment of excess funds; $328,000 of dividends on the cumulative, convertible preferred stock of Elcat, Inc. received as part of the proceeds from the sale of the specialty chemical division in 1995; and a gain of $452,000 on the sale of an investment. In 1996, a gain of $875,000 from the sale of the two minor product lines, SOLTICE and BLIS-TO-SOL, was realized. Provisions for income taxes were 32.3% of before tax income in 1996 as compared to 35.6% in 1995. See Note 8 of Notes to Consolidated Financial Statements. Income from continuing operations increased $1,479,000, or 63.6%, to $3,804,000 in 1996 from $2,325,000 in 1995. This increase resulted primarily from increased sales in 1996 which more than offset increased interest expense. 12 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company has historically financed its operations and acquisitions with a combination of internally generated funds and borrowings. The Company's principal uses of cash are operating expenses, acquisitions, working capital, capital expenditures and long-term debt servicing. Cash provided by operating activities was $10,116,000 and $2,858,000 for 1997 and 1996, respectively. The increase in cash flows from operations from 1996 to 1997 was primarily the result of increased net income, depreciation and amortization and changes in accounts receivable, refundable and deferred income taxes and inventories. These changes were impacted by the acquisition of the SUNSOURCE product line in 1997. Investing activities used cash of $32,722,000 and $47,708,000 in 1997 and 1996, respectively. The usage of cash in 1997 reflects the expenditures required for the purchase of the SUNSOURCE brands, while the 1996 amount represents the cost of the GOLD BOND and HERPECIN-L product lines acquired in that year. In 1997, capital expenditures totaled $2,758,000 compared to $1,785,000 in 1996. Expenditures of this nature are expected to be approximately $3,000,000 in fiscal 1998. 13 Financing activities provided cash of $11,434,000 in 1997 and $57,125,000 in 1996. The Company financed the acquisition of the SUNSOURCE brands and repaid all outstanding bank indebtedness with the proceeds of a new $95,000,000 bank credit agreement and the issuance of 300,000 new shares of the Company's common stock at a value of $13.50 a share to the sellers of SUNSOURCE. In the 1996 period, the Company financed the acquisition of GOLD BOND and repaid all outstanding bank indebtedness. The following table presents certain working capital data at November 30, 1997 and 1996 or for the respective years then ended:
ITEM 1997 1996 - ----------------------------------------------------------------------------------- ------------- ------------- Working capital (current assets less current liabilities).......................... $ 15,520,000 $ 19,793,000 Current ratio (current assets divided by current liabilities)...................... 1.45 1.75 Quick ratio (cash and cash equivalents, and receivables divided by current liabilities)..................................................................... .96 1.12 Average accounts receivable turnover............................................... 5.92 6.51 Average inventory turnover......................................................... 3.17 3.70 Working capital as a percentage of total assets.................................... 8.68% 13.01%
The decrease in the current and quick ratios at November 30, 1997 as compared to November 30, 1996 was primarily due to decreases in cash and refundable and deferred income taxes as well as increases in all components of current liabilities, particularly the current maturities of long-term debt. 14 Total debt outstanding was $142,394,000 at November 30, 1997 compared to $131,344,000 at November 30, 1996. The net increase of $11,050,000 in 1997 reflects the acquisition of the SUNSOURCE product line in June, 1997 and repayments by the Company during the year. The availability of credit under the working capital line of credit is determined based on the Company's accounts receivable and inventories. The Company had $13,000,000 outstanding on its $30,000,000 working capital line of credit as of November 30, 1997. The Company had $4,349,000 invested in highly liquid short-term investments as of November 30, 1997. Management of the Company believes that cash generated by operations, along with funds available from its short-term, highly liquid investments and available funds under its credit facility, will be sufficient to fund the Company's current commitments and proposed operations. YEAR 2000 - --------- The Company recognizes the need to ensure its operations will not be adversely impacted by year 2000 software failures. Software failures due to processing errors potentially arising from calculations using the year 2000 date are a known risk. The Company has developed a plan to ensure its systems are compliant with the requirements to process transactions in the year 2000. The majority of the Company's internal information systems will be replaced with fully compliant new systems. The total cost of the software and implementation is estimated to be $1,500,000 to $2,000,000 which will be capitalized as 15 incurred. The majority of actual cash payments will be made in 1998 with the remainder to be paid in early 1999. This new system implementation is expected to be completed during 1999. The Company does not currently have any information concerning the year 2000 compliance status of its suppliers and customers. In the event that any of the Company's significant suppliers or customers does not successfully and timely achieve year 2000 compliance, the Company's business or operations could be adversely affected. 16 FOREIGN OPERATIONS - ------------------ The Company's primary foreign operations are conducted through its Canadian and U.K. subsidiaries. The functional currencies of these subsidiaries are Canadian dollars and British pounds, respectively. Fluctuations in exchange rates can impact operating results, including total revenues and expenses, when translations of the subsidiary financial statements are made in accordance with SFAS No. 52, "Foreign Currency Translation." For the years ended November 30, 1997 and 1996, these subsidiaries accounted for 9.9% and 11.4% of total revenues, respectively, and 4.5% and 5.8% of total assets, respectively. It has not been the Company's practice to hedge its assets and liabilities in the Canada and U.K. or its intercompany transactions due to the inherent risks associated with foreign currency hedging transactions and the timing of payment between the Company and its two foreign subsidiaries. Historically, gains or losses from foreign currency transactions have not had a material impact on the Company's operating results. Losses of $68,000 and $28,000 for the years ended November 30, 1997 and 1996, respectively, resulted from foreign currency transactions. See "Foreign Currency Translation" in Note 2 of Notes to the Consolidated Financial Statements. 17 FORWARD LOOKING STATEMENTS - -------------------------- This Management's Discussion and Analysis of Financial Condition and Results of Operations, the Chairman's Letter and other sections of this Annual Report contain forward looking statements that are based upon management's current beliefs and assumptions about expectations, estimates, strategies and projections for the Company. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward looking statements. 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. 18 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 the 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. 19 SELECTED FINANCIAL DATA (In thousands, except per share amounts)
YEAR ENDED NOVEMBER 30, -------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- --------- --------- INCOME STATEMENT DATA NET SALES............................................. $ 143,235 $ 118,903 $ 100,598 $ 94,370 $ 89,861 OPERATING COSTS AND EXPENSES.............................................. 117,732 102,214 86,130 81,830 88,111 ---------- ---------- ---------- --------- --------- INCOME FROM OPERATIONS................................ 25,503 16,689 14,468 12,540 1,750 OTHER EXPENSE, NET.................................... (14,255) (11,069) (10,858) (9,248) (3,489) ---------- ---------- ---------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.................................. 11,248 5,620 3,610 3,292 (1,739) PROVISION FOR (BENEFIT FROM) INCOME TAXES......................................... 3,993 1,816 1,285 1,182 (639) ---------- ---------- ---------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS................................ $ 7,255 $ 3,804 $ 2,325 $ 2,110 $ (1,100) PER COMMON SHARE DATA INCOME (LOSS) FROM CONTINUING OPERATIONS................................ $ .80 $ .47 $ .32 $ .29 $ (.17) DIVIDENDS............................................. $ -- $ -- $ -- $ -- $ 20.20 BALANCE SHEET DATA (At End of Period) TOTAL ASSETS.......................................... $ 178,744 $ 152,183 $ 83,410 $ 85,442 $ 69,534 LONG-TERM DEBT, less current maturities................................... $ 133,475 $ 127,438 $ 78,089 $ 94,486 $ 83,000
13 MARKET PRICES The Company's common shares trade over-the-counter on the National Market System under the NASDAQ symbol CHTT. A quarterly summary of the high and low market prices per common share as reported by NASDAQ is shown below:
1997 1996 -------------------- -------------------- QUARTER ENDED: HIGH LOW HIGH LOW --------- --------- --------- --------- February...................................................................... 10 8 1/8 5 5/8 4 1/4 May........................................................................... 10 7/8 8 9 1/4 4 1/8 August........................................................................ 18 3/4 10 1/4 10 1/4 7 3/4 November...................................................................... 20 5/8 14 3/8 11 1/4 8 3/8
Based upon transfer agent records, the Company's common shares were held by approximately 2,500 shareholders as of February 20, 1998. 14 Consolidated Balance Sheets November 30, 1997 and 1996 (In thousands)
ASSETS 1997 1996 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents........................ $ 4,858 $ 9,254 Accounts receivable, less allowance for doubtful accounts of $500 in 1997 and $450 in 1996......................................... 28,078 20,276 Refundable and deferred income taxes............. 1,876 5,405 Inventories...................................... 14,493 10,295 Prepaid expenses and other current assets.......................................... 667 912 ---------- --------- Total current assets........................... 49,972 46,142 ---------- --------- PROPERTY, PLANT AND EQUIPMENT, NET................. 10,988 9,774 ---------- --------- OTHER NONCURRENT ASSETS: Investment in Elcat, Inc......................... 6,640 5,984 Patents, trademarks and other purchased product rights, net............................. 104,972 76,024 Debt issuance costs, net......................... 3,118 3,819 Other............................................ 3,054 10,440 ---------- --------- Total other noncurrent assets.................. 117,784 96,267 ---------- --------- TOTAL ASSETS................................. $178,744 $152,183 ---------- --------- ---------- ---------
The accompanying notes are an integral part of these consolidated financial statements. 15 Consolidated Balance Sheets November 30, 1997 and 1996 (In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) 1997 1996 ---------- ---------- CURRENT LIABILITIES: Current maturities of long-term debt.................................... $ 8,919 $ 3,906 Accounts payable........................................................ 9,319 6,602 Payable to bank......................................................... 2,618 1,710 Accrued liabilities..................................................... 13,596 14,131 ---------- ---------- Total current liabilities............................................. 34,452 26,349 ---------- ---------- LONG-TERM DEBT, less current maturities................................... 133,475 127,438 ---------- ---------- DEFERRED INCOME TAXES..................................................... 3,290 2,917 ---------- ---------- OTHER NONCURRENT LIABILITIES.............................................. 3,157 2,659 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 5, 10 and 12) SHAREHOLDERS' EQUITY (DEFICIT): Preferred shares, without par value, authorized 1,000, none issued.......................................... -- -- Common shares, without par value, authorized 20,000, issued 9,082 in 1997 and 8,592 in 1996................................. 1,945 1,843 Paid-in surplus......................................................... 63,975 58,561 Accumulated deficit..................................................... (60,229) (66,114) ---------- ---------- 5,691 (5,710) Minimum pension liability adjustment.................................... -- (112) Foreign currency translation adjustment................................. (1,321) (1,358) ---------- ---------- Total shareholders' equity (deficit).................................. 4,370 (7,180) ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT).................................................... $ 178,744 $ 152,183 ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. 16 Consolidated Statements of Income For the Years Ended November 30, 1997, 1996 and 1995 (In thousands, except per share amounts)
1997 1996 1995 ---------- ---------- ---------- NET SALES.................................................................... $ 143,235 $ 118,903 $ 100,598 ---------- ---------- ---------- COSTS AND EXPENSES: Cost of sales.............................................................. 39,253 35,120 29,755 Advertising and promotion.................................................. 56,176 45,512 37,242 Selling, general and administrative........................................ 22,303 21,582 19,133 ---------- ---------- ---------- Total costs and expenses................................................. 117,732 102,214 86,130 ---------- ---------- ---------- INCOME FROM OPERATIONS....................................................... 25,503 16,689 14,468 ---------- ---------- ---------- OTHER INCOME (EXPENSE): Interest expense........................................................... (15,934) (13,394) (11,076) Investment and other income, net........................................... 1,679 1,450 218 Gain on product divestitures............................................... -- 875 -- ---------- ---------- ---------- Total other income (expense)............................................. (14,255) (11,069) (10,858) ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES......................................................... 11,248 5,620 3,610 PROVISION FOR INCOME TAXES................................................... 3,993 1,816 1,285 ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS............................................ 7,255 3,804 2,325 ---------- ---------- ---------- DISCONTINUED OPERATIONS: Income from operations, less provision for income taxes of $417...................................................... -- -- 674 Gain on disposal, less provision for income taxes of $5,696.................................................... -- -- 9,334 ---------- ---------- ---------- Income from discontinued operations........................................ -- -- 10,008 ---------- ---------- ---------- INCOME BEFORE EXTRAORDINARY LOSS............................................. 7,255 3,804 12,333 EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES (Note 5)...................................... (1,370) (532) (367) ---------- ---------- ---------- NET INCOME................................................................... $ 5,885 $ 3,272 $ 11,966 ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS) PER COMMON SHARE: Continuing operations...................................................... $ .80 $ .47 $ .32 Discontinued operations.................................................... -- -- 1.37 Extraordinary loss......................................................... (.15) (.07) (.05) ---------- ---------- ---------- Net income per common share.............................................. $ .65 $ .40 $ 1.64 ---------- ---------- ---------- ---------- ---------- ---------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING................................................................. 9,124 8,153 7,292 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. 17 Consolidated Statements of Shareholders' Equity (Deficit) For the Years Ended November 30, 1997, 1996 and 1995 (In thousands)
MINIMUM FOREIGN PENSION CURRENCY COMMON PAID-IN ACCUMULATED LIABILITY TRANSLATION SHARES SURPLUS DEFICIT ADJUSTMENT ADJUSTMENT TOTAL ----------- --------- ------------ ------------- ----------- ---------- Balance, November 30, 1994....................... $ 1,519 $ 51,797 $ (81,352) -- $ (1,515) $ (29,551) Net income...................................... -- -- 11,966 -- -- 11,966 Stock options granted........................... -- 302 -- -- -- 302 Foreign currency translation adjustment......... -- -- -- -- (138) (138) ----------- --------- ------------ --- ----------- ---------- Balance, November 30, 1995....................... 1,519 52,099 (69,386) -- (1,653) (17,421) Net income...................................... -- -- 3,272 -- -- 3,272 Stock options exercised......................... 63 223 -- -- -- 286 Issuance of common shares....................... 261 6,239 -- -- -- 6,500 Foreign currency translation adjustment......... -- -- -- -- 295 295 Minimum pension liability adjustment............ -- -- -- (112) -- (112) ----------- --------- ------------ --- ----------- ---------- Balance, November 30, 1996....................... 1,843 58,561 (66,114) (112) (1,358) (7,180) Net income...................................... -- -- 5,885 -- -- 5,885 Stock options exercised......................... 25 962 -- -- -- 987 Stock warrants exercised........................ 15 464 -- -- -- 479 Issuance of common shares....................... 62 3,988 -- -- -- 4,050 Foreign currency translation adjustment......... -- -- -- -- 37 37 Minimum pension liability adjustment............ -- -- -- 112 -- 112 ----------- --------- ------------ --- ----------- ---------- Balance, November 30, 1997....................... $ 1,945 $ 63,975 $ (60,229) $ -- $ (1,321) $ 4,370 ----------- --------- ------------ --- ----------- ---------- ----------- --------- ------------ --- ----------- ----------
The accompanying notes are an integral part of these consolidated financial statements. 18 Consolidated Statements of Cash Flows For the Years Ended November 30, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 --------- --------- --------- OPERATING ACTIVITIES: Net income....................................................................... $ 5,885 $ 3,272 $ 11,966 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................... 6,381 4,829 4,072 Deferred income tax provision................................................... 1,120 1,797 645 Gain on sale of specialty chemicals division.................................... -- -- (9,334) Gain on product divestitures.................................................... -- (875) -- Gain on sale of investment...................................................... -- (452) -- Proceeds from sale of investment................................................ -- 452 -- Gain on termination of interest rate cap........................................ -- (281) (454) Extraordinary loss on early extinguishment of debt, net......................... 1,370 532 367 Dividend receivable from Elcat, Inc............................................. (656) (656) (328) Other, net...................................................................... (106) (379) 2,251 Changes in operating assets and liabilities: Accounts receivable............................................................ (5,140) (3,063) 1,973 Refundable and deferred income taxes........................................... 3,425 (2,519) 106 Inventories.................................................................... (2,401) 745 (2,488) Prepaid expenses and other current assets...................................... 252 (359) (166) Accounts payable and accrued liabilities....................................... (14) (185) (7,780) --------- --------- --------- Net cash provided by operating activities....................................... 10,116 2,858 830 --------- --------- --------- INVESTING ACTIVITIES: Purchases of property, plant and equipment....................................... (2,758) (1,785) (2,836) Proceeds from sale of specialty chemicals division, net.......................... -- -- 19,397 Proceeds from product divestitures............................................... -- 1,000 -- Proceeds from notes and sales of assets.......................................... 75 253 227 Purchases of patents, trademarks and other product rights........................ (29,293) (43,048) -- Increase in other assets......................................................... (746) (4,128) (26) --------- --------- --------- Net cash provided by (used in) investing activities............................. (32,722) (47,708) 16,762 --------- --------- --------- FINANCING ACTIVITIES: Repayment of long-term debt...................................................... (76,636) (15,032) (48,704) Proceeds from long-term debt..................................................... 87,500 67,944 31,100 Change in payable to bank........................................................ 908 526 (117) Proceeds from sale of interest rate cap.......................................... -- -- 984 Proceeds from issuance of common stock, net...................................... -- 5,500 -- Exercise of stock options and warrants........................................... 1,274 286 -- Debt issuance costs.............................................................. (1,612) (2,099) (253) --------- --------- --------- Net cash provided by (used in) financing activities............................. 11,434 57,125 (16,990) --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS............................................................ (10) 129 -- CASH AND CASH EQUIVALENTS: Increase (decrease) for the year................................................. (11,182) 12,404 602 At beginning of year............................................................. 16,040 3,636 3,034 --------- --------- --------- At end of year................................................................... $ 4,858 $ 16,040 $ 3,636 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE: All monetary amounts are expressed in thousands of dollars unless contrarily evident. (1) NATURE OF OPERATIONS Chattem, Inc. and its wholly-owned subsidiaries (the Company) manufacture and market branded consumer products consisting primarily of over-the-counter pharmaceuticals, cosmetics, toiletries, dietary supplements and homeopathics. The consumer products are sold primarily through independent and chain drug stores, drug wholesalers, mass merchandisers and food stores in the United States and in various markets in approximately 50 countries throughout the world. Geographic data for 1997, 1996 and 1995 is included in the schedule of geographical information on page 37, which is an integral part of these financial statements. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Chattem, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, the Company considers all short-term deposits and investments with original maturities of three months or less to be cash equivalents, including cash and cash equivalents available exclusively for the repayment of long-term debt (Note 5). INVENTORIES Inventory costs include materials, labor and factory overhead. Inventories in the United States are valued at the lower of last-in, first-out (LIFO) cost or market, while international inventories are valued at the lower of first-in, first-out (FIFO) cost or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is provided using both straight-line and accelerated methods over the estimated useful lives of 10 to 40 years for buildings and improvements and 3 to 12 years for machinery and equipment. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation expense for 1997, 1996 and 1995 was $1,502, $1,352 and $1,319, respectively. 20 PATENTS, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS The costs of acquired patents, trademarks and other purchased product rights are capitalized and amortized over periods ranging from 5 to 40 years. Total accumulated amortization of these assets at November 30, 1997 and 1996 was $11,246 and $8,369, respectively. Amortization expense for 1997, 1996 and 1995 was $2,877, $2,086 and $1,467, respectively. Royalty expense related to other purchased product rights for 1997, 1996 and 1995 was $522, $1,140 and $1,030, respectively. Amortization and royalty expense are included in advertising and promotion expense in the accompanying consolidated statements of income. DEBT ISSUANCE COSTS The Company has incurred debt issuance costs in connection with its long-term debt. These costs are capitalized and amortized over the term of the debt. Amortization expense related to debt issuance costs was $490, $498 and $471 in 1997, 1996 and 1995, respectively. Accumulated amortization of these costs was $1,004 and $817 at November 30, 1997 and 1996, respectively. PAYABLE TO BANK Payable to bank includes checks outstanding in excess of certain cash balances. REVENUE RECOGNITION Revenue is recognized when the Company's products are shipped to its customers. RESEARCH AND DEVELOPMENT Research and development costs relate primarily to the development of new products and are expensed as incurred. Such expenses were $1,207, $1,117 and $1,140 in 1997, 1996 and 1995, respectively. ADVERTISING EXPENSES The cost of advertising is expensed when the related advertising first takes place. Advertising expense for 1997, 1996 and 1995 was $29,923, $22,789 and $18,015, respectively. At November 30, 1997 and 1996, the Company reported $1,066 and $1,293, respectively, of advertising paid for in 1997 and 1996 which will run or did in 1998 and 1997 as other noncurrent assets in the accompanying consolidated balance sheets. 21 NET INCOME PER COMMON SHARE Net income per common share is based on the weighted average number of common shares outstanding after consideration of common share equivalents having a dilutive effect. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's Canadian and UK Subsidiaries are translated to United States dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated as a separate component of shareholders' equity (deficit). Gains and losses which result from foreign currency transactions are included in the accompanying consolidated statements of income. INCOME TAXES The Company uses the asset and liability approach to accounting for deferred income taxes based on currently enacted tax rates and estimated differences in financial reporting and income tax bases of assets and liabilities. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. DERIVATIVE FINANCIAL INSTRUMENTS The Company has entered into interest rate swap agreements as a means of managing its interest rate exposure and not for trading purposes. These agreements have the effect of converting a portion of the Company's variable rate obligations to fixed rate obligations. Net amounts paid or received are reflected as adjustments to interest expense. 22 CONCENTRATIONS OF CREDIT RISK Financial instruments which subject the Company to concentrations of credit risk consist primarily of accounts receivable, short-term cash investments and the investment in Elcat, Inc. (Note 3). The Company's exposure to credit risk associated with nonpayment of accounts receivable is affected by conditions or occurrences within the retail industry. As a result, the Company performs ongoing credit evaluations of its customers' financial position but generally requires no collateral from its customers. The Company's largest customer accounted for 16% of sales in 1997. No other customer exceeded 10% of the Company's sales in 1997, 1996 or 1995. Short-term cash investments are placed with high credit-quality financial institutions or in low risk, liquid instruments. No losses have been experienced on such investments. RECENT ACCOUNTING PRONOUNCEMENT In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 changes the criteria for reporting earnings per share (EPS) by replacing primary EPS with basic EPS and fully diluted EPS with diluted EPS. The Company is required to adopt SFAS No. 128 for periods ending after December 15, 1997, and all prior periods' EPS data must be restated. The impact of adopting SFAS No.128 will not have a material impact on EPS for any period presented. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 1997 presentation. (3) INVESTMENT IN ELCAT, INC. Investment in Elcat, Inc. (Elcat) consists of 40,000 shares of 13.125% cumulative, convertible preferred stock of Elcat (the Elcat Preferred Shares) which was received as part of the consideration from the sale of the Company's specialty chemicals division in 1995 (Note 14). The Elcat Preferred Shares are nonvoting and are convertible, in whole or in part, at any time on or after April 1, 1998, into a 21% common stock ownership of Elcat. At the option of Elcat, the Elcat Preferred Shares may be redeemed, in whole or in part, on or after April 1, 1998, at par value ($125 per share) plus any accrued and unpaid dividends. If all of the then outstanding Elcat Preferred Shares are not converted or redeemed on or before April 1, 2005, Elcat is obligated to redeem all of the then outstanding Elcat Preferred Shares at par value plus any accrued and unpaid dividends. The dividends, which amount to $656 annually, on the Elcat Preferred Shares accumulate quarterly but are non-payable until the shares are called or redeemed. After three years, however, if the shares are still outstanding, a cash dividend of $200 will be received by the Company in fiscal year 1999, increasing ratably to the full $656 in fiscal year 2002. This investment is classified as held-to-maturity and is accounted for using the cost method of accounting. As Elcat stock is not publicly traded in the open market and a market price is not readily available, it is not practicable to estimate the fair value of the investment in Elcat at November 30, 1997. In the opinion of management, however, the fair value of this investment is in excess of its carrying value as of November 30, 1997. (4) PENSION PLANS The Company has a noncontributory defined benefit pension plan (the Plan) which covers substantially all employees. The Plan provides benefits based upon years of service and the employee's compensation. The Company's contributions are based on computations by independent actuaries. Plan assets at November 30, 1997 and 1996 were invested primarily in United States government and agency securities, corporate debt securities and equity securities. 23 Pension cost for the years ended November 30, 1997, 1996 and 1995 included the following components:
1997 1996 1995 --------- --------- --------- Service cost (benefits earned during the period)............... $ 545 $ 610 $ 544 Interest cost on projected benefit obligation.................. 741 775 745 Actual return on plan assets................................... (845) (637) (828) Net amortization and deferral.................................. 365 107 98 --------- --------- --------- Net pension cost............................................... $ 806 $ 855 $ 559 --------- --------- --------- --------- --------- ---------
In addition to net pension cost, a net lump-sum settlement loss of $598 was recorded in 1996 related to lump-sum distributions to certain employees. This expense is included in selling, general and administrative expenses in the accompanying consolidated statements of income. In 1995, as a result of the sale of the Company's specialty chemicals division, a charge of $662 was recognized for pension curtailment and settlement expense and is included in the gain on the sale of discontinued operations for 1995 (Note 14). The following table sets forth the funded status of the Plan as of November 30, 1997 and 1996:
1997 1996 --------- --------- Actuarial present value of benefit obligations: Vested benefit obligation................................................. $ 7,108 $ 7,152 Nonvested benefit obligation.............................................. 57 129 --------- --------- Accumulated benefit obligation............................................ $ 7,165 $ 7,281 --------- --------- --------- --------- Plan assets at fair market value.......................................... $ 6,471 $ 5,069 Projected benefit obligation.............................................. (11,072) (9,340) --------- --------- Plan assets less than projected benefit obligation........................ (4,601) (4,271) Unrecognized net loss..................................................... 4,186 2,898 Unrecognized prior service cost........................................... (131) (147) Unrecognized initial asset................................................ (369) (511) Minimum pension liability adjustment...................................... -- (181) --------- --------- Pension liability recognized in balance sheets at end of year............. $ (915) $ (2,212) --------- --------- --------- ---------
The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5% and 5.0%, respectively, in both 1997 and 1996. The expected long-term rate of return on plan assets was 9.0%. 24 In accordance with the provisions of SFAS No. 87, "Employers' Accounting for Pensions," the Company recorded an additional liability at November 30, 1996 representing the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension liability for its pension plan. At November 30, 1997, the unrecognized prior service cost exceeded the minimum liability, and the minimum pension liability was eliminated. The Company has a defined contribution plan covering substantially all employees. Eligible participants can contribute up to 10% of their annual compensation and receive a 25% matching employer contribution up to 6% of their annual compensation. The defined contribution plan expense was $155 for 1997, $120 for 1996 and $141 for 1995. (5) LONG-TERM DEBT Long-term debt consisted of the following at November 30, 1997 and 1996:
1997 1996 ----------------- ----------------- Revolving line of credit payable to banks at variable rate (8.44% at November 30, 1997)............. $ 13,000 $ -- Term loans payable to banks at variable rates (8.71% weighted average at November 30, 1997)..... 63,683 -- Revolving line of credit payable to banks at variable rates, repaid in 1997.............................. -- 24,000 Term loans payable to banks at variable rates, repaid in 1997.... -- 41,819 12.75% Senior Subordinated Notes, due 2004, net of unamortized discount of $1,289 for 1997 and $1,475 for 1996................... 65,711 65,525 ----------------- ----------------- Total long-term debt................ 142,394 131,344 Less: current maturities............ 8,919 3,906 ----------------- ----------------- Total long-term debt, net of current maturities........................ $133,475 $127,438 ----------------- ----------------- ----------------- -----------------
The Company entered into a new credit agreement with a syndicate of banks (the New Credit Agreement) on June 26, 1997. The purpose of the New Credit Agreement was to finance the acquisition of SUNSOURCE (Note 12), and to repay all existing bank debt. The New Credit Agreement is divided into a $30,000 revolving line of credit for working capital purposes, a five year $30,000 Term A loan and a six and three-quarter year $35,000 Term B loan facility. The combined Term A and B loans are payable in remaining quarterly installments as follows: December 31, 1997 to September 30, 1998................. $ 1,318 December 31, 1998 to September 30, 1999................. $ 1,488 December 31, 1999 to June 30, 2001...................... $ 1,738 September 30, 2001...................................... $ 2,650 December 31, 2001 to March 31, 2002..................... $ 4,900 June 30, 2002........................................... $ 5,000 September 30, 2002 to December 31, 2003................. $ 3,250 February 14, 2004....................................... $ 3,350
25 Under the New Credit Agreement the Company may elect either a prime rate or Eurodollar interest rate option applicable to the term and revolving line loans. The prime rate and Eurodollar interest rate options are based on a base rate plus a rate margin that fluctuates on the basis of the Company's leverage ratio. The maximum rate margin for the Term A and revolving line loans is 2.0% for the prime rate option and 3.0% for the Eurodollar rate option. The maximum rate margin for the Term B loan is 2.5% for the prime rate option and 3.5% for the Eurodollar rate option. The New Credit Agreement is secured by substantially all of the Company's assets. The more restrictive financial covenants require the maintenance of minimum amounts of consolidated tangible net worth, fixed charge coverage, interest coverage and leverage ratios. The provisions of the New Credit Agreement also include restrictions on capital expenditures and the payment of dividends. The New Credit Agreement is guaranteed by one of the Company's subsidiaries, Signal Investment & Management Co. The revolving line of credit is available to the Company up to $30,000 or such lesser amount as is determined to be available under the terms of the New Credit Agreement, and is due and payable on June 26, 2002. The availability of credit under the revolver is determined based on the Company's accounts receivable and inventories. The Company entered into a credit agreement with a syndicate of banks (the Credit Agreement) on April 29, 1996 and as amended on June 6, 1996. The purpose of the Credit Agreement was to finance the acquisitions of GOLD BOND and HERPECIN-L (Note 12), and to repay all existing bank debt. The Credit Agreement was divided into a $24,000 revolving line of credit for working capital purposes, a five year $20,000 Term A loan facility, and a seven and one-half year $22,500 Term B loan facility. These loans were repaid in 1997 with part of the proceeds from the New Credit Agreement. The amount of cash and cash equivalents on deposit up to the calculated availability was included in other noncurrent assets in the accompanying consolidated balance sheet at November 30, 1996 and was available exclusively for the repayment of long-term bank debt. 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 at November 30, 1996 and was available for general operating purposes. All of the above cash and cash equivalents were invested in highly liquid short-term investments. In 1994, the Company issued $75,000 of 12.75% Senior Subordinated Notes due 2004 (the Notes) with five year warrants to purchase 417,182 shares of common stock (the Warrants). The Notes consisted of 75,000 units, each consisting of $1,000 principal amount of the Notes and a warrant to purchase shares of the Company's common stock (Note 9). The price of the Notes was $73,967, or 98.6% of the original principal amount of the Notes, resulting in a discount of $1,033. The value assigned to the Warrants was $955 (Note 9), resulting in a total original issue discount of $1,988. The proceeds of the Notes were used to repay a prior credit agreement. 26 The Notes mature on June 15, 2004, and interest is payable semi-annually on June 15 and December 15 of each year. The Notes are senior subordinated obligations of the Company and are subordinated in right of payment to all existing and future senior debt of the Company. The Notes, which were registered under the Securities Act of 1933, may not be redeemed until June 15, 2001, after which they may be redeemed at the option of the Company. Upon the occurrence of certain events constituting a change of control, the holders of the Notes may require the Company to repurchase the Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest. The Notes are guaranteed by Signal Investment & Management Co., a wholly-owned subsidiary of the Company. The Notes are issued under an indenture with an indenture trustee, which restricts, among other things, the ability of the Company and its subsidiaries to (i) incur additional indebtedness, (ii) pay dividends, (iii) sell or issue capital stock of a subsidiary, (iv) create encumbrances on the ability of any subsidiary to pay dividends or make other restricted payments, (v) engage in certain transactions with affiliates, (vi) dispose of certain assets, (vii) merge or consolidate with or into, or sell or otherwise transfer all or substantially all their properties and assets as an entirety to another person, or (viii) create additional liens. During 1997, 1996 and 1995 the Company prepaid previously outstanding long-term debt, with funds received from refinancing in 1997 and 1996 and the sale of the specialty chemicals division in 1995. In connection with the prepayment of those borrowings, the Company incurred extraordinary losses, net of income taxes, in 1997, 1996 and 1995 of $1,370, $532 and $367, respectively, or $.15, $.07 and $.05 per share, respectively. The losses related to the write-off of debt issuance and other deferred costs. The 1997 amount includes costs associated with the termination of two interest rate swap agreements. Future maturities of long-term debt are as follows: 1998............................... $ 8,919 1999............................... 5,950 2000............................... 6,950 2001............................... 7,863 2002............................... 31,050 Thereafter......................... 82,951 --------- 143,683 Less: unamortized discount......... (1,289) --------- $ 142,394 --------- ---------
The 2002 maturities include the amount outstanding under the revolving line of credit which was $13,000 as of November 30, 1997. The Company is also required to pay $3,649 during 1998. This amount was determined based upon the excess cash flow calculation, as defined in the New Credit Agreement, and is included in the 1998 maturities. Cash interest payments during 1997, 1996 and 1995 were $15,259, $12,710 and $10,811, respectively. 27 (6) DERIVATIVE FINANCIAL INSTRUMENTS On July 21, 1997, the Company entered into two interest rate swap agreements with NationsBank, N.A. in notional amounts of $40,000 and $5,000. The Company entered into these agreements as hedges on its variable rate debt and not for trading purposes. The term of the $40,000 swap is for a five year period ending July 22, 2002. The Company will receive interest payments on the notional amount at a rate equal to the one month London Interbank Offered Rate (LIBOR) (5.59% as of November 30, 1997) and will pay interest on the same notional amount at a fixed interest rate of 6.38%. The term of the $5,000 swap is for a five year period ending July 22, 2002. The agreement may be terminated by NationsBank, N.A. at each quarterly date. The Company will receive interest payments on the notional amount at a rate equal to the three month LIBOR (5.64% as of November 30, 1997) and will pay interest on the same notional amount at a fixed interest rate of 5.62%. The Company is exposed to credit losses in the event of nonperformance by the counterparty to its interest rate swap agreements but has no off-balance sheet credit risk of accounting loss. The Company anticipates, however, that the counterparty will be able to fully satisfy its obligations under the agreements. At November 30, 1996, the Company had two interest rate swap agreements outstanding with financial institutions, each in a notional amount of $15,000. Both of these interest rate swaps were terminated in 1997 in connection with the refinancing of long-term debt. (Note 5). The resulting extraordinary loss, net of tax, is included in the 1997 consolidated statement of income as part of the extraordinary loss on the early extinguishment of debt. During June 1993, the Company entered into an interest rate cap agreement in a notional principal amount of $30,000. On January 12, 1995, the interest rate cap was terminated resulting in a gain of approximately $729 to the Company. The gain was deferred and was amortized over the remaining life of the original cap agreement as a reduction of interest expense. In 1996, the remaining deferred gain of $281 was recognized. (7) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," and SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments" require the disclosure of the fair value of all financial instruments. Unless otherwise indicated elsewhere in the notes to the consolidated financial statements, the carrying value of the Company's financial instruments approximates fair value. At November 30, 1997, the estimated fair values of the revolving line of credit and the term loans payable to banks approximate the carrying amounts of such debt because the interest rates change with market interest rates. The estimated fair value of the Notes at November 30, 1997 exceeded their carrying value by approximately $9,600. The fair value was estimated based on quoted market prices for the same or similar issues. 28 The fair values of the interest rate swap agreements are the estimated amounts that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current credit worthiness of the counterparties. At November 30, 1997, the Company estimates it would have paid $603 to terminate the agreements. (8) INCOME TAXES The provision for income taxes from continuing operations includes the following components:
1997 1996 1995 --------- --------- --------- Current: Federal........... $ 2,639 $ (203) $ 470 State............. 234 222 170 Deferred............ 1,120 1,797 645 --------- --------- --------- $ 3,993 $ 1,816 $ 1,285 --------- --------- --------- --------- --------- ---------
Deferred income tax assets and liabilities for 1997 and 1996 reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting and income tax reporting purposes. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities at November 30, 1997 and 1996 are as follows:
1997 1996 --------- --------- Deferred tax assets: Reserves and accruals................................ $ 2,005 $ 1,790 Accrued promotional expenses......................... 720 770 Accrued postretirement health care benefits.......... 559 535 Repriced stock option expense........................ 251 690 Accruals for discontinued operations................. -- 237 Other................................................ 310 260 --------- --------- Gross deferred tax assets.......................... 3,845 4,282 --------- --------- Deferred tax liabilities: Excess tax depreciation and amortization............. 4,486 3,317 Prepaid advertising.................................. 318 309 Inventory............................................ 190 190 Other................................................ 277 772 --------- --------- Gross deferred tax liabilities..................... 5,271 4,588 --------- --------- Net deferred liability............................. $ (1,426) $ (306) --------- --------- --------- ---------
29 The difference between the provision for income taxes and the amount computed by multiplying income from continuing operations before income taxes by the U.S. statutory rate is summarized as follows:
1997 1996 1995 --------- --------- --------- Expected tax provision........................................... $ 3,837 $ 1,911 $ 1,227 Dividend exclusion benefit....................................... (178) (140) (78) State income taxes, net of federal income tax benefit............ 154 147 112 Other, net....................................................... 180 (102) 24 --------- --------- --------- $ 3,993 $ 1,816 $ 1,285 --------- --------- --------- --------- --------- ---------
Included in "refundable and deferred income taxes" in current assets in the accompanying consolidated balance sheets are income tax refunds receivable of $12 and $2,794 at November 30, 1997 and 1996, respectively. Income taxes paid in 1997, 1996 and 1995 were $2,162, $2,459 and $5,026, respectively. The Company received income tax refunds of $2,719, $215 and $163 during 1997, 1996 and 1995, respectively. (9) SHAREHOLDERS' EQUITY (DEFICIT) STOCK ISSUANCE On June 26, 1997, the Company issued to the sellers of the SUNSOURCE product line 300,000 shares of its common stock at a value of $13.50 per share to fund a portion of the purchase price for the brands. In April 1996, the Company issued 1,100,000 shares of common stock to a group of investors, including certain officers, directors and affiliates, in order to partially fund the acquisition of GOLD BOND (Note 12). In addition, the Company issued to the seller of GOLD BOND, 155,792 shares of the Company's common stock at $6.42 per share. STOCK OPTIONS Although the Company adopted SFAS No. 123, Accounting For Stock-Based Compensation, during 1997, it elected to continue to account for compensation expense under its stock option plans under APB No. 25. Accordingly, no compensation cost has been recognized for stock option grants since the options have exercise prices equal to the market value of the common stock at the date of grant. 30 The Company's 1993 Non-Statutory Stock Option Plan (1993 Plan) provides for issuance of up to 350,000 shares of common stock to key employees. In addition, the Company's 1994 Non-Statutory Stock Option Plan and the 1994 Non-Statutory Stock Option Plan for Non-Employee Directors (1994 Plans) provide for the issuance of up to 350,000 and 80,000 shares, respectively, of common stock. Options vest ratably over four years and are exercisable for a period of up to ten years from the date of grant. For SFAS No. 123 purposes, the fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1997 and 1996: expected dividend yield of 0%, expected volatility of 49%, risk-free interest rates of 6.48% and 5.39%, and expected lives of 6 years. Had compensation cost for 1997 and 1996 stock option grants been determined based on the fair value at the grant dates consistent with the method prescribed by SFAS No. 123, the Company's net income and net income per share would have been adjusted to the pro forma amounts indicated below:
1997 1996 --------- --------- Net income: As reported...................... $ 5,885 $ 3,272 Pro forma........................ $ 5,683 $ 2,877 Net income per share: As reported...................... $ 0.65 $ 0.40 Pro forma........................ $ 0.62 $ 0.35
The pro forma effect on net income in this disclosure is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996. 31 A summary of the activity of stock options during 1997, 1996, and 1995 is presented below (shares in thousands):
1997 1996 1995 --------------------- --------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE OPTION PRICE OPTION PRICE OPTION PRICE -------- -------- -------- -------- ------ -------- Outstanding at beginning of year....................... 613 $ 6.39 646 $ 7.60 675 $ 7.69 Granted.............................................. 91 9.01 318 5.07 18 4.79 Exercised............................................ (120) 6.65 (44) 6.93 -- -- Cancelled............................................ -- -- (307) 7.48 (47) 7.83 ----- ----- --- ----- --- ----- Outstanding at end of year............................. 584 $ 6.75 613 $ 6.39 646 $ 7.60 ----- ----- --- ----- --- ----- ----- ----- --- ----- --- ----- Options exercisable at year-end........................ 262 $ 7.43 221 $ 7.73 305 $ 7.72 ----- ----- --- ----- --- ----- ----- ----- --- ----- --- ----- Weighted average fair value of options granted......... $ 5.24 $ 2.62 N/A ----- ----- ----- ----- ----- -----
A summary of the exercise prices for options outstanding under the Company's stock-based compensation plans at November 30, 1997, is presented below (shares in thousands):
WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE EXERCISE SHARES UNDER EXERCISE AVERAGE SHARES PRICE OF SHARES PRICE RANGE OPTION PRICE REMAINING LIFE EXERCISABLE EXERCISABLE - ------------ ------------ -------- -------------- ----------- ---------------- $4.63--$5.25 249 $ 4.87 8.2 29 $ 4.85 $7.50--$9.50 330 7.99 6.5 233 7.76 $18.00 5 18.00 9.8 -- N/A ---- ------- --- --- ------ Total 584 $ 6.75 7.2 262 $ 7.43 ---- ------- --- --- ------ ---- ------- --- --- ------
32 PREFERRED SHARES The Company is authorized to issue up to 1,000,000 preferred shares in series and with rights established by the board of directors. At November 30, 1997 and 1996, no shares of any series of preferred stock were issued and outstanding. EMPLOYEE STOCK OWNERSHIP PLAN Effective June 1, 1989, the Company established an Employee Stock Ownership Plan providing for the issuance of up to 360,000 shares of the Company's common stock. At November 30, 1997, no contributions had been made to the plan. COMMON STOCK WARRANTS As described in Note 5, the Company issued the Warrants at an assigned value of $955. The Warrants are exercisable for five years. In the aggregate, 75,000 warrants were issued which, when exercised, would entitle the holders thereof to acquire an aggregate of 417,182 shares of the Company's common stock. The number of shares of common stock and the price per share at which a warrant is exercisable are subject to adjustment upon the occurrence of certain events. A warrant does not entitle the holder to receive any cash dividends paid on common stock or to exercise any other rights as a shareholder of the Company. During 1996, as a result of the issuance of 1,100,000 shares of common stock (Note 9), the number of shares of common stock and the price per share at which a warrant is exercisable were adjusted from 5.56242 shares and $7.15, respectively, to 5.85733 shares and $6.79, respectively. During 1997, 12,030 warrants were exercised to acquire 70,464 shares. At November 30, 1997, 62,970 warrants were outstanding which, when exercised, would entitle the holders thereof to acquire an aggregate of 368,836 shares of the Company's common stock. (10) CONTINGENCIES - ----------------------------------------------------------------------------- Claims, suits and complaints arise in the ordinary course of the Company's business involving such matters as patents and trademarks, product liability and other alleged injuries or damage. The outcome of such litigation cannot be predicted, but, in the opinion of management, based in part upon the opinion of counsel, all such pending matters are without merit or are of such kind or involve such amounts as would not have a material adverse effect on the consolidated operating results or financial position of the Company if disposed of unfavorably. 33 (11) SUPPLEMENTAL FINANCIAL INFORMATION - ----------------------------------------------------------------------------- A--Inventories consisted of the following at November 30, 1997 and 1996:
1997 1996 --------- --------- Raw materials and work in process........................................................... $ 9,107 $ 5,365 Finished goods.............................................................................. 7,850 7,484 Excess of current cost over LIFO value...................................................... (2,464) (2,554) --------- --------- Total inventories......................................................................... $ 14,493 $ 10,295 --------- --------- --------- ---------
International inventories included above, valued on a lower of FIFO cost or market at November 30, 1997 and 1996, were $2,546 and $2,039, respectively. B--Property, plant and equipment consisted of the following at November 30, 1997 and 1996:
1997 1996 --------- --------- Land......................................................................................... $ 138 $ 208 Buildings and improvements................................................................... 3,150 3,014 Machinery and equipment...................................................................... 23,416 21,973 Construction in progress..................................................................... 2,221 1,046 Less--accumulated depreciation............................................................... (17,937) (16,467) --------- --------- Property, plant and equipment, net......................................................... $ 10,988 $ 9,774 --------- --------- --------- ---------
C--Accrued liabilities consisted of the following at November 30, 1997 and 1996:
1997 1996 --------- --------- Accrued interest expense.................................................................... $ 4,119 $ 3,996 Salaries, wages and commissions............................................................. 1,696 1,287 Promotion expense........................................................................... 2,840 2,827 Product acquisitions........................................................................ 1,489 614 Accrued pension benefits.................................................................... 435 2,076 Other....................................................................................... 3,619 3,331 --------- --------- Total accrued liabilities................................................................. $ 14,198 $ 14,131 --------- --------- --------- ---------
34 (12) ACQUISITION AND SALE OF BRANDS - ----------------------------------------------------------------------------- On June 26, 1997, the Company purchased certain assets of Sunsource International, Inc. and an affiliated company (SUNSOURCE) including the exclusive worldwide rights to five leading branded dietary supplement products. The purchase price for the trademarks, inventory and receivables was approximately $32,000, net of certain assumed liabilities. Additional payments may be earned by SUNSOURCE over a six year period from the date of closing if sales exceed certain levels as defined in the purchase agreement, but such additional payments are not to exceed $15,750 in the aggregate. Financing of the SUNSOURCE acquisition was provided by an expansion of the Company's senior bank credit agreement (Note 5) and the issuance of 300,000 shares of Chattem, Inc. common stock to SUNSOURCE (Note 9). On April 29, 1996, the Company purchased the worldwide rights for the GOLD BOND line of medicated powders and anti-itch cream for approximately $40,000. The assets acquired consisted of the trademarks ($38,000) and inventory. Additionally, the Company assumed certain liabilities of approximately $500. The Company financed the GOLD BOND acquisition with bank borrowings (Note 5) and issuance of common stock (Note 9). On June 6, 1996, the Company purchased the rights for the HERPECIN-L line of medicated lip balm for $5,607 plus a royalty payment equal to the greater of $214 or 5% of net sales. The royalty payment is payable annually for each of the seven twelve-month periods beginning July 1, 1996 and ending June 30, 2003. The assets acquired consisted primarily of the trademark ($5,159), receivables and inventory. Additionally, the Company assumed certain liabilities of approximately $500. The purchase was financed by the Company with additional bank borrowings of $5,000 with the remaining $607 being funded by the Company (Note 5). During April 1996, the Company sold the trademarks and inventory of two of its minor consumer products brands, SOLTICE and BLIS-TO-SOL, for $1,200 consisting of $1,000 cash received at closing and a $200 promissory note requiring payments of $100 per year for the next two years contingent upon the brands meeting specific future sales levels. On June 17, 1994, the Company acquired a license to the PHISODERM trademark in the United States, Canada and Puerto Rico ("the Territory"), together with certain other assets from Sterling Winthrop Inc. (Sterling). If net sales of PHISODERM products in the United States exceed $11,000 for either of the 12-month periods beginning July 1, 1995 and July 1, 1996 and ending June 30, 1996 and June 30, 1997, then the Company will pay Sterling an additional $1,000 per year. Net sales of PHISODERM products exceeded $11,000 for each of the 12-month periods ended June 30, 1997 and 1996. As a result, an additional $2,000 was recorded to patents, trademarks and other purchased product rights as of November 30, 1997. 35 (13) ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS - ----------------------------------------------------------------------------- The Company maintains certain postretirement health care benefits for eligible employees. Employees become eligible for these benefits if they meet certain age and service requirements. The Company pays a portion of the cost of medical benefits for certain retired employees over the age of 65. Effective January 1, 1993, the Company's contribution is a service-based percentage of the full premium. The Company pays these benefits as claims are incurred. Net periodic postretirement health care benefits cost for the years ended November 30, 1997, 1996 and 1995, included the following components:
1997 1996 1995 --------- --------- --------- Service cost (benefits earned during the period).......................................... $ 29 $ 36 $ 30 Interest cost on accumulated postretirement benefits obligation........................... 115 101 102 Amortization of net loss.................................................................. 2 -- -- --------- --------- --------- Net periodic postretirement benefits cost................................................. $ 146 $ 137 $ 132 --------- --------- --------- --------- --------- ---------
The following table sets forth the funded status of the plan, reconciled to the accrued postretirement health care benefits recognized in the Company's balance sheets at November 30, 1997 and 1996:
1997 1996 --------- --------- Accumulated postretirement benefits obligation: Retirees..................................................................................... $ 715 $ 912 Fully eligible active plan participants...................................................... 502 275 Other active participants.................................................................... 377 260 Unrecognized net loss.......................................................................... (160) -- --------- --------- Accrued postretirement health care benefits.................................................... $ 1,434 $ 1,447 --------- --------- --------- ---------
For measurement purposes, a 6.0% annual rate of increase in the per capita cost of covered health care benefits was assumed in 1997 and 1996. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% at November 30, 1997 and 1996. A 1% increase in the assumed health care cost trend rate would not affect the accumulated postretirement benefit obligation as of November 30, 1997 or the aggregate of the service and interest cost components of the net annual postretirement benefit cost for the year ended November 30, 1997. 36 (14) DISCONTINUED OPERATIONS - ----------------------------------------------------------------------------- On May 26, 1995, the Company completed the sale of its specialty chemicals division to privately-held Elcat. The Company received $25,000 from the sale of the specialty chemicals division consisting of $20,000 in cash and $5,000 of 13.125% cumulative, convertible preferred stock of Elcat. The net cash proceeds were used to repay long-term debt of approximately $12,000. The Company recognized a gain of $9,334, (after tax) from the sale and extraordinary charge (after tax) of $367 relating to the early extinguishment of the debt. The results of operations and the gain on disposal of the specialty chemicals division have been separately classified as discontinued operations in the accompanying consolidated statements of income. Net sales of the specialty chemicals division were $6,739 through May 26, 1995. Interest expense of $351 for 1995 was allocated to discontinued operations based upon the ratio of net assets discontinued to the total net assets of the consolidated entity. 15) SUBSEQUENT EVENT On February 22, 1998, the Company entered into a definitive agreement to acquire the BAN anti-perspirant and deodorant brand from Bristol-Myers Squibb Company. Pursuant to the terms of the acquisition agreement, the Company will purchase all the assets, including, inventories, patents and trademarks of BAN (excluding the rights in Japan), for $165 million in cash, plus assumed liabilities. The purchase price will be funded by debt financing. This acquisition transaction is expected to close no later than March 31, 1998. 37 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Chattem, Inc.: We have audited the accompanying consolidated balance sheets of Chattem, Inc. (a Tennessee corporation) and subsidiaries as of November 30, 1997 and 1996 and the related consolidated statements of income, shareholders' equity (deficit) and cash flows for each of the three years in the period ended November 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Chattem, Inc. and subsidiaries as of November 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chattanooga, Tennessee January 19, 1998 (except with respect to the matter discussed in Note 15 as to which the date is February 23, 1998) 38 Quarterly Information (Unaudited and in thousands, except per share amounts)
QUARTER ENDED ---------------------- TOTAL FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30 ---------- ----------- --------- ----------- ------------- FISCAL 1997: Continuing operations: Net sales............................................ $ 143,235 27,946 39,178 38,909 37,202 Gross profit......................................... $ 103,982 19,552 28,290 28,809 27,331 Income (1)........................................... $ 7,255 136 3,057 2,847 1,215 Income per share (1)................................. $ .80 .02 .35 .31 .13 Total: Net income........................................... $ 5,885 136 3,057 1,477 1,215 Net income per share(2).............................. $ .65 .02 .35 .16 .13 FISCAL 1996: Continuing operations: Net sales............................................ $ 118,903 18,697 30,430 38,841 30,935 Gross profit......................................... $ 83,783 12,948 21,101 27,453 22,281 Income (loss) (1).................................... $ 3,804 (38) 2,010 2,131 (299) Income (loss) per share (1).......................... $ .47 (.01) .26 .24 (.02) Total: Net income (loss).................................... $ 3,272 (38) 1,478 2,131 (299) Net income (loss) per share(2)....................... $ .40 (.01) .19 .24 (.02)
- ------------------------ (1) Before extraordinary loss on early extinguishment of debt. (2) The sum of the quarterly earnings per share amounts may differ from annual earnings per share because of the differences in the weighted average number of common shares and common share equivalents used (where dilutive) in the quarterly and annual computations. 39 Geographical Segment Information (In thousands)
YEAR ENDED NOVEMBER 30, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- NET SALES: Domestic..................................................................... $ 128,024 $ 104,444 $ 87,250 International................................................................ 15,211 14,459 13,348 ---------- ---------- ---------- Consolidated............................................................... $ 143,235 $ 118,903 $ 100,598 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING INCOME: Domestic..................................................................... $ 27,393 $ 18,929 $ 16,719 International................................................................ 1,710 1,613 1,292 ---------- ---------- ---------- Total...................................................................... 29,103 20,542 18,011 Other unallocated expenses, net (1).......................................... (17,855) (14,922) (14,401) ---------- ---------- ---------- Income from continuing operations before income taxes...................... $ 11,248 $ 5,620 $ 3,610 ---------- ---------- ---------- ---------- ---------- ---------- IDENTIFIABLE ASSETS: Domestic..................................................................... $ 164,175 $ 135,238 $ 69,732 International................................................................ 7,929 10,961 8,350 ---------- ---------- ---------- Total...................................................................... 172,104 146,199 78,082 Investment in Elcat, Inc..................................................... 6,640 5,984 5,328 ---------- ---------- ---------- Consolidated............................................................... $ 178,744 $ 152,183 $ 83,410 ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------ (1) Principally interest expense and corporate overhead not allocated. 40 Board of Directors Officers Chattem, Inc. 1715 West 38th Street ZAN GUERRY ZAN GUERRY Chattanooga, TN 37409 Chairman and Chief Executive Chairman and Chief Corporate Office Officer Executive Officer Chattem, Inc. Chattanooga, TN A. ALEXANDER TAYLOR II Subsidiaries and Affiliated Companies President and Chief Operating A. ALEXANDER TAYLOR II Officer CHATTEM (U.K.) LIMITED President and Chief Operating Guerry House Officer HUGH F. SHARBER Ringway Centre Chattem, Inc., Secretary Edison Road Chattanooga, TN Basingstoke, Hampshire RG21 2YH ADDITIONAL England SAMUEL E. ALLEN FINANCIAL Chairman INFORMATION CHATTEM (CANADA) INC. GLOBALT, Inc. Copies of quarterly press 2220 Argentia Road Atlanta, GA releases and/or quarterly Mississauga, Ontario L5N 2K7 reports on Form 10-Q and LOUIS H. BARNETT annual report on Form 10-K, HBA INSURANCE LTD. Business Consultant both forms filed with the P.O. Box HM 2062 Fort Worth, TX Securities and Exchange Hamilton 5, Bermuda Commission, may be obtained ROBERT E. BOSWORTH without charge by writing to SIGNAL INVESTMENT & Business Consultant the Controller, Chattem, Inc. MANAGEMENT CO. Chattanooga, TN or by calling- 1105 North Market Street 1-800-366-6077, Ext. 769. Suite 1300 RICHARD E. CHENEY Wilmington, DE 19890 Former Chairman Emeritus Hill and Knowlton, Inc. COMMON STOCK LISTING New York, NY Over-the-Counter NASDAQ Symbol: CHTT SCOTT L. PROBASCO, JR. Chairman of the Executive TRANSFER AGENT AND Committee REGISTRAR SunTrust Bank, Tennessee, N.A. SunTrust Bank, Atlanta, N.A. Chattanooga, TN P.O. Box 4625 Atlanta, GA 30302
EX-22 6 EXHIBIT 22 EXHIBIT 22 CHATTEM, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE COMPANY
NAME OF SUBSIDIARY STATE OR COUNTRY OF INCORPORATION - ---------------------------- ----------------------------------------- Chattem (Canada) Inc. Canada Chattem (U.K.) Limited England HBA Insurance Ltd. Bermuda Signal Investment & Management Co. Delaware
EX-24 7 EXHIBIT 24 EXHIBIT 24 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (Nos. 33-35386, 33-78524 and 33-78522). /s/ ARTHUR ANDERSEN LLP Chattanooga, Tennessee February 26, 1998 EX-27 8 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHATTEM, INC.'S AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS NOV-30-1997 DEC-01-1998 NOV-30-1997 508 4,349 28,570 600 14,493 48,872 28,825 17,837 178,744 34,452 142,394 0 0 1,945 2,425 178,744 143,236 143,236 38,263 117,732 0 0 15,834 11,249 3,993 7,255 0 (1,370) 0 5,886 .65 .65
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