0001072613-01-500977.txt : 20011019
0001072613-01-500977.hdr.sgml : 20011019
ACCESSION NUMBER: 0001072613-01-500977
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 20010831
FILED AS OF DATE: 20011012
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CHATTEM INC
CENTRAL INDEX KEY: 0000019520
STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834]
IRS NUMBER: 620156300
STATE OF INCORPORATION: TN
FISCAL YEAR END: 1130
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-05905
FILM NUMBER: 1758172
BUSINESS ADDRESS:
STREET 1: 1715 W 38TH ST
CITY: CHATTANOOGA
STATE: TN
ZIP: 37409
BUSINESS PHONE: 4238214571
MAIL ADDRESS:
STREET 1: 1715 W 38TH ST
CITY: CHATTANOOGA
STATE: TN
ZIP: 37409
FORMER COMPANY:
FORMER CONFORMED NAME: CHATTEM DRUG & CHEMICAL CO
DATE OF NAME CHANGE: 19790111
10-Q
1
form10q_10852.txt
FORM 10-Q (FOR PERIOD ENDED 08/31/01)
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2001
COMMISSION FILE NUMBER 0-5905
CHATTEM, INC.
-------------
A TENNESSEE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
TELEPHONE: 423-821-4571
REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
AS OF OCTOBER 12, 2001, 8,973,156 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT
PAR VALUE, WERE OUTSTANDING.
================================================================================
CHATTEM, INC.
-------------
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
August 31, 2001 and November 30, 2000 ................. 3
Consolidated Statements of Income for
the Three and Nine Months Ended August
31, 2001 and 2000 ..................................... 5
Consolidated Statements of Cash Flows for
the Nine Months Ended August 31, 2001 and 2000 ........ 6
Notes to Consolidated Financial Statements ............ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 19
PART II. OTHER INFORMATION
Item 3. Legal Proceedings...................................... 28
Item 6. Exhibits and Reports on Form 8-K ...................... 28
SIGNATURES .............................................................. 29
EXHIBIT 11 - Statement Regarding Computation of Per Share Earnings
2
PART 1. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
AUGUST 31, NOVEMBER 30,
ASSETS 2001 2000
------ ------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 27,965 $ 102,534
Accounts receivable, less allowance for doubtful accounts
of $1,100 at August 31, 2001 and $1,025 at November 30, 2000 24,476 40,691
Refundable and deferred income taxes .......................... 11,801 12,401
Inventories ................................................... 12,975 15,052
Prepaid expenses and other current assets ..................... 3,183 884
------------ ------------
Total current assets ....................................... 80,400 171,562
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET ............................... 26,689 27,059
------------ ------------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product rights, net ... 186,819 191,980
Debt issuance costs, net ...................................... 7,937 8,829
Other ......................................................... 1,609 2,646
------------ ------------
Total other noncurrent assets .............................. 196,365 203,455
------------ ------------
TOTAL ASSETS ............................................ $ 303,454 $ 402,076
============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
3
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
AUGUST 31, NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
------------------------------------ ------------ ------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable .............................................. $ 4,806 $ 8,790
Payable to bank ............................................... -- 1,529
Accrued liabilities ........................................... 27,336 35,214
------------ ------------
Total current liabilities .................................. 32,142 45,533
------------ ------------
LONG-TERM DEBT ................................................... 204,748 304,077
------------ ------------
DEFERRED INCOME TAXES ............................................ 12,919 12,919
------------ ------------
OTHER NONCURRENT LIABILITIES ..................................... 1,765 1,894
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000, none issued -- --
Common shares, without par value, authorized 50,000, issued
8,982 at August 31, 2001 and 8,861 at November 30, 2000 .... 1,870 1,845
Paid-in surplus ............................................... 65,936 64,443
Accumulated deficit ........................................... (12,772) (26,463)
------------ ------------
55,034 39,825
Unamortized value of restricted common shares issued .......... (921) --
Cumulative other comprehensive income -
foreign currency translation adjustment .................... (2,233) (2,172)
------------ ------------
Total shareholders' equity ................................. 51,880 37,653
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............. $ 303,454 $ 402,076
============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
4
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited and in thousands, except per share amounts)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
NET SALES .................................... $ 49,641 $ 73,253 $ 153,603 $ 215,260
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales ............................. 12,663 19,159 40,553 57,296
Advertising and promotion ................. 18,528 28,108 61,391 82,447
Selling, general and administrative ....... 9,348 8,539 25,670 24,197
------------ ------------ ------------ ------------
Total costs and expenses ............... 40,539 55,806 127,614 163,940
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS ....................... 9,102 17,447 25,989 51,320
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense .......................... (4,959) (9,139) (17,024) (27,329)
Investment and other income, net .......... 289 1 1,910 128
------------ ------------ ------------ ------------
Total other income (expense) ........... (4,670) (9,138) (15,114) (27,201)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY GAIN
(LOSS) AND CHANGE IN ACCOUNTING PRINCIPLE ... 4,432 8,309 10,875 24,119
PROVISION FOR INCOME TAXES ................... 1,684 3,158 4,132 9,141
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY GAIN (LOSS) AND
CHANGE IN ACCOUNTING PRINCIPLE .............. 2,748 5,151 6,743 14,978
EXTRAORDINARY GAIN (LOSS) ON EARLY
EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES.. (603) -- 6,948 (110)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF INCOME TAX BENEFIT ........ -- -- -- (542)
------------ ------------ ------------ ------------
NET INCOME ................................... $ 2,145 $ 5,151 $ 13,691 $ 14,326
============ ============ ============ ============
NUMBER OF COMMON SHARES:
Weighted average outstanding-basic ........ 8,876 9,310 8,871 9,508
============ ============ ============ ============
Weighted average and potential dilutive
outstanding .............................. 9,031 9,379 8,917 9,611
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income before extraordinary gain (loss)
and change in accounting principle .... $ .31 $ .55 $ .76 $ 1.58
Extraordinary gain (loss) .............. (.07) -- .78 (.01)
Change in accounting principle ......... -- -- -- (.06)
------------ ------------ ------------ ------------
Total basic ......................... $ .24 $ .55 $ 1.54 $ 1.51
============ ============ ============ ============
Diluted:
Income before extraordinary gain (loss)
and change in accounting principle .... $ .30 $ .55 $ .76 $ 1.56
Extraordinary gain (loss) .............. (.06) -- .78 (.01)
Change in accounting principle ......... -- -- -- (.06)
------------ ------------ ------------ ------------
Total diluted ....................... $ .24 $ .55 $ 1.54 $ 1.49
============ ============ ============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
5
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited and in thousands, except share and per share amounts)
FOR THE NINE MONTHS ENDED
AUGUST 31,
-----------------------------
2001 2000
------------ ------------
OPERATING ACTIVITIES:
Net income .................................................... $ 13,691 $ 14,326
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .............................. 7,627 11,403
Gain on product divestiture ................................ (79) --
Extraordinary (gain) loss on early extinguishment of
debt, net ................................................. (6,948) 110
Cumulative effect of change in accounting principle, net ... -- 542
Stock option charge ........................................ 394 398
Other, net ................................................. (59) 66
Changes in operating assets and liabilities, net of product
divestitures:
Accounts receivable ..................................... 16,215 1,916
Refundable and deferred income taxes .................... 600 --
Inventories ............................................. 2,077 4,470
Prepaid expenses and other current assets ............... (2,309) 576
Accounts payable and accrued liabilities ................ (16,331) (7,478)
------------ ------------
Net cash provided by operating activities ............ 14,878 26,329
------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment .................... (1,512) (5,293)
Additions to trademarks and other product rights .............. (277) (241)
Proceeds from product divestiture ............................. 1,179 --
Change in other assets, net ................................... 374 (1,148)
------------ ------------
Net cash used in investing activities ................ (236) (6,682)
------------ ------------
FINANCING ACTIVITIES:
Repayment of long-term debt ................................... (84,453) (39,996)
Payment of consent fees related to repayment of long-term debt. (3,293) --
Proceeds from long-term debt .................................. -- 29,000
Proceeds from exercise of stock options ....................... 95 210
Repurchase of common shares ................................... -- (7,155)
Change in payable to bank ..................................... (1,529) (367)
Debt issuance costs ........................................... -- (317)
------------ ------------
Net cash used in financing activities ................ (89,180) (18,625)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ..... (31) (93)
------------ ------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period ............................ (74,569) 929
At beginning of period ........................................ 102,534 2,308
------------ ------------
At end of period .............................................. $ 27,965 $ 3,237
============ ============
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Additions to trademarks and other product rights by assumption
of certain liabilities ....................................... $ -- $ 542
Issuance of 100,000 shares of restricted common stock at an
average value of $9.93 each .................................. $ 993 $ --
PAYMENTS FOR:
Interest ...................................................... $ 14,331 $ 20,627
Taxes ......................................................... $ 266 $ 7,580
The accompanying notes are an integral
part of these consolidated financial statements.
6
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. These consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes thereto included in the Chattem,
Inc. (the "Company") Annual Report on Form 10-K for the year ended
November 30, 2000. The accompanying unaudited consolidated financial
statements, in the opinion of management, include all adjustments
necessary for a fair presentation. All such adjustments are of a normal
recurring nature.
2. The Company incurs significant expenditures on television, radio and print
advertising to support its nationally branded over-the-counter ("OTC")
health care and toiletries and skin care products. Customers purchase
products from the Company with the understanding that the brands will be
supported by the Company's extensive media advertising. This advertising
supports the retailers' sales effort and maintains the important brand
franchise with the consuming public. Accordingly, the Company considers
its advertising program to be clearly implicit in its sales arrangements
with its customers. Therefore, the Company believes it is appropriate to
allocate a percentage of the necessary supporting advertising expenses to
each dollar of sales by charging a percentage of sales on an interim basis
based upon anticipated annual sales and advertising expenditures (in
accordance with Accounting Principles Board Opinion No. 28) and adjusting
that accrual to the actual expenses incurred at the end of the year.
3. Inventories consisted of the following at August 31, 2001 and November
30, 2000:
2001 2000
-------- --------
Raw materials and work in process......... $ 5,030 $ 6,793
Finished goods ........................... 9,933 10,247
Excess of current cost over LIFO values .. (1,988) (1,988)
-------- --------
Total inventories .................... $ 12,975 $ 15,052
======== ========
4. Accrued liabilities consisted of the following at August 31, 2001 and
November 30, 2000:
2001 2000
-------- --------
Income and other taxes ................... $ 7,581 $ --
Salaries, wages and commissions .......... 2,315 1,103
Advertising and promotion ................ 4,840 7,663
Interest ................................. 7,589 5,810
Product acquisitions and divestitures .... 2,215 10,413
Allowance for product returns............. 1,473 9,600
Legal fees................................ 500 --
Other .................................... 823 625
-------- --------
Total accrued liabilities ............ $ 27,336 $ 35,214
======== ========
7
5. Comprehensive income consisted of the following components for the three
and nine months ended August 31, 2001 and 2000, respectively:
For the Three Months For the Nine Months
Ended August 31, Ended August 31,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income................. $ 2,145 $ 5,151 $ 13,691 $ 14,326
Other - foreign currency
translation adjustment... (20) (209) (61) (475)
-------- -------- -------- --------
Total.................. $ 2,125 $ 4,942 $ 13,630 $ 13,851
======== ======== ======== ========
6. Effective December 1, 1999 the Company adopted Statement of Position
("SOP") 98-5, "Reporting on the Costs of Start-up Activities"("SOP 98-5"),
issued by the American Institute of Certified Public Accountants
("AICPA"). SOP 98-5 requires costs of start-up activities to be expensed
as incurred. The initial adoption of SOP 98-5 was recorded as the
cumulative effect of a change in accounting principle. The one-time
charge, net of income tax benefit, was $542, or $0.06 per diluted share in
the first quarter of fiscal 2000.
7. In fiscal 1999 and 2000 the Company's board of directors authorized
repurchases of the Company's common stock not to exceed an aggregate total
of $20,000. Under these authorizations, 1,049,000 shares at a cost of
$13,401 have been reacquired through August 31, 2001, leaving $6,599
available for future repurchases. The Company, however, is limited in its
ability to repurchase shares due to restrictions under the terms of the
indenture with respect to which its senior subordinated notes were issued.
The repurchased shares were retired and returned to unissued. No shares
were repurchased in the first nine months of fiscal 2001.
8. On September 15, 2000 the Company completed the sale of its Ban(R) product
line ("Ban") to The Andrew Jergens Company, a wholly owned subsidiary of
Kao Corporation. Under the terms of the sale agreement the Company
received $160,000 cash at closing, plus the right to receive up to an
additional $6,500 in future payments based upon sales levels of Ban in
2001 and 2002. Concurrent with the closing of the sale of Ban, the Company
used $52,194 of the net proceeds to retire all of the outstanding balances
of the Company's revolving line of credit and term loans and accrued
interest thereon, with the balance of the net proceeds being retained by
the Company.
9. On January 17, 2001 the Company completed the consent solicitation and
tender offer pursuant to which it retired $70,462 principal amount of its
8.875% senior subordinated notes due 2008 and $7,397 principal amount of
its 12.75% senior subordinated notes due 2004. The consideration paid for
the consent solicitation and tender offer was $64,937, which was provided
by the proceeds of the Ban sale. An extraordinary gain on the early
extinguishment of debt of $7,551, net of income taxes, was recognized in
the first six months of fiscal 2001. On June 15, 2001 the Company retired
all of the remaining outstanding principal balance of $21,748 of its
12.75% senior subordinated notes due 2004 and accrued interest thereon. As
a result of this transaction, the Company recognized a loss on the early
extinguishment of debt of $603, net of income tax benefit, in the third
quarter of fiscal 2001. This loss primarily consisted of the premium paid
on the retirement of the notes and the write-off of the related
unamortized deferred issuance and initial discount costs.
10. The Company has been named as a defendant in a lawsuit brought by the
Center for Environment Health ("CEH") contending that the Company violated
the California Safe Drinking Water and Toxic Enforcement Act of 1998
(Proposition 65) by selling to California consumers without a warning
topical skin care products containing zinc oxide which in turn contains
lead. The lawsuit contends that the purported failure to comply with
Proposition 65 requirements also constitutes a violation of the California
Business & Professions Code Section 1700 et seq. Violations of either
8
Proposition 65 or Business & Profession Code 1700 et seq. render a
defendant liable for civil penalties of up to $2.5 per day per violation.
The Company has also been named as a defendant in a lawsuit filed in San
Francisco Superior Court on December 29, 1999, JOHNSON, et al v.
BRISTOL-MYERS SQUIBB CO., et al., Case No. 308872. This is a putative
class action brought by two named plaintiffs on behalf of the general
public in California, against the same entities that are defendants in the
CEH lawsuit. As with the CEH lawsuit, the Johnson lawsuit alleges that the
Company violated Proposition 65 by selling to California consumers without
a warning topical skin care product containing zinc oxide which in turn
contains lead. The lawsuit does not assert claims directly under
Proposition 65, but asserts that the alleged failure to comply with
Proposition 65 gives rise to claims under California's Business and
Professions Code Sections 17200 et seq., 17500 et seq., and the Civil Code
Section 1750 et seq. The lawsuit seeks injunctive and equitable relief,
restitution, the disgorgement of allegedly wrongfully obtained revenues
and damages.
The plaintiffs in the two separate actions have filed a consolidated
amended complaint that includes a claim based upon the allegation that
zinc oxide allegedly also contains cadmium.
The Company has been named as a defendant in over eighteen different
lawsuits, most of which were filed in the months of April through
September 2001. Each of the lawsuits alleges that the plaintiffs were
injured as a result of ingestion of products containing
phenylpropanolamine ("PPA"), which until November 2000 was the active
ingredient in certain of the Company's DEXATRIM products. The lawsuits
seek an unspecified amount of compensatory and exemplary damages. Other
defendants to the lawsuits include Thompson Medical Company, Inc. and its
successor-in-interest DELACO, which owned the DEXATRIM brand until it was
acquired by the Company in December 1998, and certain other major consumer
products companies that manufactured and sold cough/cold products
containing PPA. Under the Company's purchase agreement for DEXATRIM,
Thompson Medical Company, Inc. is responsible for indemnifying the Company
for any liability arising from DEXATRIM products sold on or prior to the
December 1998 closing, and the Company is responsible for indemnifying
Thompson Medical Company, Inc. for any liability arising from DEXATRIM
products sold after the closing. The Company maintains product liability
insurance coverage for claims asserted in the lawsuits, although the
insurance coverage is subject to the limitations described within the
terms of the policies. The Company anticipates that additional lawsuits in
which similar allegations are made could be filed.
The Company intends to vigorously defend these claims. At this stage of
the proceedings, it is not possible to determine the outcome of these
matters or the effect of their resolution on the Company's financial
position or operating results. Management believes that the Company's
defenses will have merit; however, there can be no assurance that the
Company will be successful in its defense or that these lawsuits will not
have a material adverse effect on the Company's results of operations for
some period or on the Company's financial position.
Certain states and localities have enacted, or are considering enacting,
restrictions on the sale of products that contain synthetic ephedrine or
naturally-occurring sources of ephedrine. These restrictions include the
prohibition of OTC sales, required warnings or labeling statements,
recordkeeping and reporting requirements, the prohibition of sales to
minors, per transaction limits on the quantity of product that may be
purchased, and limitations on advertising and promotion. In such states or
localities these restrictions could adversely affect the sale of DEXATRIM
Natural, which contains naturally occurring sources of ephedrine. Failure
to comply with these restrictions could also lead to regulatory
enforcement action, including the seizure of violative products, product
recalls, and civil or criminal fines or other penalties.
The Company was notified in October, 2000 that the FDA denied a Citizen
Petition submitted by Thompson Medical Company, Inc., the previous owner
of SPORTSCREME and ASPERCREME, seeking a determination that 10% trolamine
salicylate was clinically proven to be an effective active ingredient in
9
external analgesic OTC drug products, and thus should be included in the
FDA's yet-to-be finalized monograph for external analgesics. The Company
has met with the FDA and submitted a proposed protocol study to evaluate
the efficacy of 10% trolamine salicylate as an active ingredient in OTC
external analgesic drug products. Based on comments received from the FDA
at the meeting, the Company will revise and resubmit the protocol. The
Company cannot predict the timing or outcome of any FDA decision on the
proposed protocol. After final comments from the FDA, the Company expects
that it will take one to two years to produce the clinical data for FDA
review. Although unlikely, the FDA could finalize the OTC external
analgesic monograph before the protocol and clinical data results are
finalized, which would place 10% trolamine salicylate in non-monograph
status, thus requiring the submission of a new drug application to market
and sell OTC products with 10% trolamine salicylate. The Company is
working to develop alternate formulas for SPORTSCREME and ASPERCREME in
the event that clinical data does not support the efficacy of trolamine
salicylate.
11. The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the respective full years.
During recent fiscal years, the Company's first quarter net sales and
gross profit have trailed the other fiscal quarters on average from 25% to
35% because of slower sales of consumer products, the seasonality of
BULLFROG and SUN-IN and lower levels of promotional campaigns during this
quarter.
12. The Company considers all short-term deposits and investments with
original maturities of three months or less to be cash equivalents.
13. The Company operates in two primary segments that are based on the
different types of products offered. The OTC health care segment includes
medicated skin care products, topical analgesics, internal analgesics, lip
care, appetite suppressant and dietary supplement products. The toiletries
and skin care segment includes antiperspirants and deodorants (sold in
September 2000), facial cleaners and masques and seasonal products. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies contained in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended November 30, 2000. Certain assets, including
the majority of property, plant and equipment and deferred tax assets are
not allocated to the identifiable segments.
In the table below the following items are included in the indicated
captions:
Variable contribution margin: net sales less variable cost of sales,
advertising, promotion, market research, freight out, sales commissions,
royalties, bad debts and inventory obsolescence. The Company evaluates the
performance of its operating segments based on variable contribution
margins.
Depreciation and amortization: amortization of the cost of trademarks and
other product rights with unallocated depreciation and other amortization
expense being shown under the "Not Classified" caption.
Identifiable/total assets: primarily identified unamortized cost of
trademarks and other product rights and total domestic inventory cost with
the remainder of total assets being shown under the "Not Classified"
caption. 10
Product Classifications
---------------------------------------------------------------
OTC Toiletries Not
Total Health Care and Skin Care Classified
------------ ------------ ------------ ------------
For the three months ended August 31, 2001:
Net sales ................................. $ 49,641 $ 41,328 $ 8,035 $ 278
Variable contribution margin .............. 21,208 17,812 3,293 103
Depreciation and amortization ............. 2,579 1,291 180 1,108
Identifiable assets/total assets (at August
31, 2001) .............................. 303,454 182,448 24,848 96,158
For the three months ended August 31, 2000:
Net sales ................................. $ 73,253 $ 41,050 $ 32,112 $ 91
Variable contribution margin .............. 28,830 18,413 10,573 (156)
Depreciation and amortization ............. 3,873 1,293 1,150 1,430
Identifiable assets/total assets (at August
31, 2000) .............................. 482,076 192,408 188,804 100,864
For the nine months ended August 31, 2001:
Net sales ................................. $ 153,603 $ 124,659 $ 28,365 $ 579
Variable contribution margin .............. 60,335 50,968 9,181 186
Depreciation and amortization ............. 7,627 3,865 522 3,240
Identifiable assets/total assets (at August
31, 2001) .............................. 303,454 182,448 24,848 96,158
For the nine months ended August 31, 2000:
Net sales ................................. $ 215,260 $ 126,399 $ 88,506 $ 355
Variable contribution margin .............. 84,731 55,868 28,944 (81)
Depreciation and amortization ............. 11,403 3,934 3,586 3,883
Identifiable assets/total assets (at August
31, 2000) .............................. 482,076 192,408 188,804 100,864
11
The reconciliation of variable contribution margin, as shown above, to
income before income taxes, extraordinary gain (loss) and change in
accounting principle is as follows for the three and nine months ended
August 31, 2001 and 2000, respectively:
For the Three Months For the Nine Months
Ended August 31, Ended August 31,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Variable contribution margin ............ $ 21,208 $ 28,830 $ 60,335 $ 84,731
Less divisional and corporate overhead
not allocated to product groups ....... 12,106 11,383 34,346 33,411
-------- -------- -------- --------
Income from operations .................. 9,102 17,447 25,989 51,320
-------- -------- -------- --------
Other income (expense):
Interest expense ...................... (4,959) (9,139) (17,024) (27,329)
Investment and other income, net ...... 289 1 1,910 128
-------- -------- -------- --------
Total other income (expense) ....... (4,670) (9,138) (15,114) (27,201)
-------- -------- -------- --------
Income before income taxes, extraordinary
gain (loss) and change in accounting
principle ............................. $ 4,432 $ 8,309 $ 10,875 $ 24,119
======== ======== ======== ========
14. The condensed consolidating financial statements, for the dates or periods
indicated, of Chattem, Inc. ("Chattem"), Signal Investment & Management
Co. ("Signal"), the guarantor of the long-term debt of Chattem, and the
non-guarantor wholly-owned subsidiary companies of Chattem are presented
below. Signal is a wholly-owned subsidiary of Chattem; the guarantee of
Signal is full and unconditional and joint and several.
Ban(R) is the registered trademark of Kao Corporation.
12
Note 14
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING BALANCE SHEETS
----------------------------
AUGUST 31, 2001
---------------
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
------------ ------------ ------------ ------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents .........................$ 15,385 $ 9,073 $ 3,507 $ -- $ 27,965
Accounts receivable, less allowance for doubtful
accounts of $1,100 .............................. 21,105 -- 3,371 -- 24,476
Refundable and deferred income taxes .............. 11,801 -- -- -- 11,801
Inventories ....................................... 10,859 -- 2,116 -- 12,975
Prepaid expenses and other current assets ......... 3,010 -- 173 -- 3,183
------------ ------------ ------------ ------------ ------------
Total current assets .......................... 62,160 9,073 9,167 -- 80,400
------------ ------------ ------------ ------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET .................. 26,427 -- 262 -- 26,689
------------ ------------ ------------ ------------ ------------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product
rights, net ..................................... 4,039 182,780 -- -- 186,819
Debt issuance costs, net .......................... 7,937 -- -- -- 7,937
Investment in subsidiaries ........................ 8,280 -- -- (8,280) --
Other ............................................. 1,562 -- 47 -- 1,609
------------ ------------ ------------ ------------ ------------
Total other noncurrent assets ................. 21,818 182,780 47 (8,280) 196,365
------------ ------------ ------------ ------------ ------------
TOTAL ASSETS ...............................$ 110,405 $ 191,853 $ 9,476 $ (8,280) $ 303,454
============ ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable ..................................$ 4,314 $ -- $ 492 $ -- $ 4,806
Accrued liabilities ............................... 26,468 -- 868 -- 27,336
------------ ------------ ------------ ------------ ------------
Total current liabilities ..................... 30,782 -- 1,360 -- 32,142
------------ ------------ ------------ ------------ ------------
LONG-TERM DEBT ...................................... 204,748 -- -- -- 204,748
------------ ------------ ------------ ------------ ------------
DEFERRED INCOME TAXES ............................... 2,948 10,121 (150) -- 12,919
------------ ------------ ------------ ------------ ------------
OTHER NONCURRENT LIABILITIES ........................ 1,765 -- -- -- 1,765
------------ ------------ ------------ ------------ ------------
INTERCOMPANY ACCOUNTS ............................... (183,121) 184,521 (1,400) -- --
------------ ------------ ------------ ------------ ------------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred shares, without par value, authorized
1,000, none issued .............................. -- -- -- -- --
Common shares, without par value, authorized
50,000, issued 8,982 ............................ 1,870 2 8,278 8,280 1,870
Paid-in surplus ................................... 65,936 -- -- -- 65,936
Retained earnings (accumulated deficit) ........... (13,115) (2,791) 3,134 -- (12,772)
------------ ------------ ------------ ------------ ------------
Total ......................................... 54,691 (2,789) 11,412 8,280 55,034
Unamortized value of restricted common shares
issued .......................................... (921) -- -- -- (921)
Cumulative other comprehensive income -
foreign currency translation adjustment ......... (487) -- (1,746) -- (2,233)
------------ ------------ ------------ ------------ ------------
Total shareholders' equity (deficit) .......... 53,283 (2,789) 9,666 8,280 51,880
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..$ 110,405 $ 191,853 $ 9,476 $ 8,280 $ 303,454
============ ============ ============ ============ ============
13
Note 14
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING BALANCE SHEETS
----------------------------
NOVEMBER 30, 2000
-----------------
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
------------ ------------ ------------ ------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents......................... $ 5,515 $ 95,747 $ 1,272 $ -- $ 102,534
Accounts receivable, less allowance for
doubtful accounts of $1,025..................... 35,772 1,154 3,765 -- 40,691
Refundable and deferred income taxes.............. 12,250 -- 151 -- 12,401
Inventories....................................... 12,596 -- 2,456 -- 15,052
Prepaid expenses and other current assets......... 711 -- 173 -- 884
------------ ------------ ------------ ------------ ------------
Total current assets.......................... 66,844 96,901 7,817 -- 171,562
------------ ------------ ------------ ------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET.................. 26,759 -- 300 -- 27,059
------------ ------------ ------------ ------------ ------------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product
rights, net..................................... 4,198 187,782 -- -- 191,980
Debt issuance costs, net.......................... 8,829 -- -- -- 8,829
Investment in subsidiaries........................ 8,280 -- -- (8,280) --
Other............................................. 2,646 -- -- -- 2,646
------------ ------------ ------------ ------------ ------------
Total other noncurrent assets................. 23,953 187,782 -- (8,280) 203,455
------------ ------------ ------------ ------------ ------------
TOTAL ASSETS............................... $ 117,556 $ 284,683 $ 8,117 $ (8,280) $ 402,076
============ ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable.................................. $ 8,426 $ -- $ 364 $ -- $ 8,790
Payable to bank................................... 1,529 -- -- -- 1,529
Accrued liabilities............................... 33,898 -- 1,316 -- 35,214
------------ ------------ ------------ ------------ ------------
Total current liabilities..................... 43,853 -- 1,680 -- 45,533
------------ ------------ ------------ ------------ ------------
LONG-TERM DEBT...................................... 304,077 -- -- -- 304,077
------------ ------------ ------------ ------------ ------------
DEFERRED INCOME TAXES............................... 2,798 10,121 -- -- 12,919
------------ ------------ ------------ ------------ ------------
OTHER NONCURRENT LIABILITIES........................ 1,894 -- -- -- 1,894
------------ ------------ ------------ ------------ ------------
INTERCOMPANY ACCOUNTS............................... (275,101) 277,272 (2,171) -- --
------------ ------------ ------------ ------------ ------------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred shares, without par value, authorized
1,000, none issued.............................. -- -- -- -- --
Common shares, without par value, authorized
50,000, issued 8,861............................ 1,845 2 8,278 8,280 1,845
Paid-in surplus................................... 64,443 -- -- -- 64,443
Retained earnings (accumulated deficit)........... (25,771) (2,712) 2,020 -- (26,463)
------------ ------------ ------------ ------------ ------------
Total......................................... 40,517 (2,710) 10,298 8,280 39,825
Cumulative other comprehensive income -
foreign currency translation adjustment....... (482) -- (1,690) -- (2,172)
------------ ------------ ------------ ------------ ------------
Total shareholders' equity (deficit).......... 40,035 (2,710) 8,608 8,280 37,653
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. $ 117,556 $ 284,683 $ 8,117 $ 8,280 $ 402,076
============ ============ ============ ============ ============
14
Note 14
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING STATEMENTS OF INCOME
----------------------------------
FOR THE NINE MONTHS ENDED AUGUST 31, 2001
-----------------------------------------
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
------------ ------------ ------------ ------------ ------------
NET SALES ......................................... $ 142,773 $ -- $ 10,830 $ -- $ 153,603
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales ................................... 36,849 -- 3,704 -- 40,553
Advertising and promotion ....................... 53,721 4,179 3,491 -- 61,391
Selling, general and administrative ............. 23,682 15 1,973 -- 25,670
------------ ------------ ------------ ------------ ------------
Total costs and expenses .................... 114,252 4,194 9,168 -- 127,614
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS ............................ 28,521 (4,194) 1,662 -- 25,989
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense ................................ (17,024) -- -- -- (17,024)
Investment and other income, net ................ 337 1,537 36 -- 1,910
Royalties ....................................... (6,895) 7,083 (188) -- --
Premium revenue ................................. (40) -- 40 -- --
Corporate allocations ........................... 23 -- (23) -- --
------------ ------------ ------------ ------------ ------------
Total other income (expense) ................ (23,599) 8,620 (135) -- (15,114)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY GAIN.. 4,922 4,426 1,527 -- 10,875
PROVISION FOR INCOME TAXES ........................ 2,292 1,505 335 -- 4,132
------------ ------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY GAIN .................. 2,630 2,921 1,192 -- 6,743
EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT,
NET OF INCOME TAXES ............................. 6,948 -- -- -- 6,948
------------ ------------ ------------ ------------ ------------
NET INCOME ........................................ $ 9,578 $ 2,921 $ 1,192 $ -- $ 13,691
============ ============ ============ ============ ============
15
Note 14
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING STATEMENTS OF INCOME
----------------------------------
FOR THE NINE MONTHS ENDED AUGUST 31, 2000
-----------------------------------------
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
------------ ------------ ------------ ------------ ------------
NET SALES .......................................... $ 202,733 $ -- $ 12,527 $ -- $ 215,260
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales .................................... 53,042 -- 4,254 -- 57,296
Advertising and promotion ........................ 70,190 7,288 4,969 -- 82,447
Selling, general and administrative .............. 22,060 10 2,127 -- 24,197
------------ ------------ ------------ ------------ ------------
Total costs and expenses ..................... 145,292 7,298 11,350 -- 163,940
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS ............................. 57,441 (7,298) 1,177 -- 51,320
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense ................................. (27,329) -- -- -- (27,329)
Investment and other income, net ................. 88 2 38 -- 128
Royalties ........................................ (9,654) 9,856 (202) -- --
Corporate allocations ............................ 23 -- (23) -- --
------------ ------------ ------------ ------------ ------------
Total other income (expense) ................. (36,872) 9,858 (187) -- (27,201)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND
CHANGE IN ACCOUNTING PRINCIPLE ................... 20,569 2,560 990 -- 24,119
PROVISION FOR INCOME TAXES ......................... 8,271 870 -- -- 9,141
------------ ------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY LOSS AND CHANGE IN
ACCOUNTING PRINCIPLE ............................. 12,298 1,690 990 -- 14,978
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
NET OF INCOME TAX BENEFIT ........................ (110) -- -- -- (110)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF INCOME TAX BENEFIT ........................ (542) -- -- -- (542)
------------ ------------ ------------ ------------ ------------
NET INCOME ......................................... $ 11,646 $ 1,690 $ 990 $ -- $ 14,326
============ ============ ============ ============ ============
16
Note 14
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING STATEMENTS OF CASH FLOWS
--------------------------------------
FOR THE NINE MONTHS ENDED AUGUST 31, 2001
-----------------------------------------
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
------------ ------------ ------------ ------------ ------------
OPERATING ACTIVITIES:
Net income ........................................$ 9,578 $ 2,921 $ 1,192 $ -- $ 13,691
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................. 3,398 4,179 50 -- 7,627
Gain on product divestiture ................... -- (79) -- -- (79)
Income tax provision .......................... (1,505) 1,505 -- -- --
Extraordinary gain on early extinguishment of
debt, net ................................... (6,948) -- -- -- (6,948)
Stock option charge ........................... 394 -- -- -- 394
Other, net .................................... (59) -- -- -- (59)
Changes in operating assets and liabilities,
net of product divestitures:
Accounts receivable ........................ 14,703 1,154 358 -- 16,215
Refundable and deferred income taxes ....... 600 -- -- -- 600
Inventories ................................ 1,760 -- 317 -- 2,077
Prepaid expenses and other current assets .. (2,261) -- (48) -- (2,309)
Accounts payable and accrued liabilities ... (15,986) -- (345) -- (16,331)
------------ ------------ ------------ ------------ ------------
Net cash provided by operating activities 3,674 9,680 1,524 -- 14,878
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ........ (1,496) -- (16) -- (1,512)
Additions to trademarks and other product rights .. -- (277) -- -- (277)
Proceeds from product divestiture ................. 1,179 -- -- -- 1,179
Decrease in other assets, net ..................... 374 -- -- -- 374
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities ..................... 57 (277) (16) -- (236)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Repayment of long - term debt ..................... (84,453) -- -- -- (84,453)
Payment of consent fees related to repayment of
long-term debt .................................. (3,293) -- -- -- (3,293)
Proceeds from exercise of stock options ........... 95 -- -- -- 95
Change in payable to bank ......................... (1,529) -- -- -- (1,529)
Changes in intercompany accounts .................. 92,351 (93,077) 726 -- --
Dividends paid .................................... 3,000 (3,000) -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities ..................... 6,171 (96,077) 726 -- (89,180)
------------ ------------ ------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS ......................................... (32) -- 1 -- (31)
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period ................ 9,870 (86,674) 2,235 -- (74,569)
At beginning of period ............................ 5,515 95,747 1,272 -- 102,534
------------ ------------ ------------ ------------ ------------
At end of period ..................................$ 15,385 $ 9,073 $ 3,507 $ -- $ 27,965
============ ============ ============ ============ ============
17
Note 14.
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATING STATEMENTS OF CASH FLOWS
--------------------------------------
FOR THE NINE MONTHS ENDED AUGUST 31, 2000
-----------------------------------------
(Unaudited and in thousands)
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR. (CR.) CONSOLIDATED
------------ ------------ ------------ ------------ ------------
OPERATING ACTIVITIES:
Net income ........................................$ 11,646 $ 1,690 $ 990 $ -- $ 14,326
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................. 4,041 7,288 74 -- 11,403
Extraordinary loss on early extinguishment of
debt, net ................................... 110 -- -- -- 110
Cumulative effect of change in accounting
principle, net .............................. 542 -- -- -- 542
Income tax provision .......................... (870) 870 -- -- --
Stock option charge ........................... 398 -- -- -- 398
Other, net .................................... 66 -- -- -- 66
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable ........................ 1,905 -- 11 -- 1,916
Inventories ................................ 4,631 -- (161) -- 4,470
Prepaid and other current assets ........... 616 -- (40) -- 576
Accounts payable and accrued liabilities ... (7,004) -- (474) -- (7,478)
------------ ------------ ------------ ------------ ------------
Net cash provided by operating activities 16,081 9,848 400 -- 26,329
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ........ (5,204) -- (89) -- (5,293)
Additions to trademarks and other product rights .. (241) -- -- -- (241)
Increase in other assets, net ..................... (1,148) -- -- -- (1,148)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities .... (6,593) -- (89) -- (6,682)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Repayment of long - term debt ..................... (39,996) -- -- -- (39,996)
Proceeds from long - term debt .................... 29,000 -- -- -- 29,000
Proceeds from exercise of stock options ........... 210 -- -- -- 210
Repurchase of common shares ....................... (7,155) -- -- -- (7,155)
Change in payable to bank ......................... (367) -- -- -- (367)
Debt issuance costs ............................... (317) -- -- -- (317)
Changes in intercompany accounts .................. 5,612 (6,853) 1,241 -- --
Dividends paid .................................... 3,000 (3,000) -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities ............................... (10,013) (9,853) 1,241 -- (18,625)
------------ ------------ ------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS ....................................... (14) -- (79) -- (93)
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period ................ (539) (5) 1,473 -- 929
At beginning of period ............................ 550 16 1,742 -- 2,308
------------ ------------ ------------ ------------ ------------
At end of period...................................$ 11 $ 11 $ 3,215 $ -- $ 3,237
============ ============ ============ ============ ============
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
The following year to year comparisons of the results of operations were
materially affected by the sale of Ban in September 2000, including lower sales,
decreased advertising and promotion expense, higher selling, general and
administrative expense as a percentage of sales and reduced interest expense,
among other things. Consequently, certain aspects of the results of operations
are discussed on an actual and pro forma basis. The terms "pro forma" and "pro
forma basis" refer to the respective reported financial data for the three and
nine months ended August 31, 2000, respectively, after giving effect to the Ban
sale.
GENERAL
-------
On January 17, 2001 the Company completed the consent solicitation and tender
offer pursuant to which it retired $70,462 principal amount of its 8.875% senior
subordinated notes due 2008 and $7,397 principal amount of its 12.75% senior
subordinated notes due 2004. The consideration paid for the consent solicitation
and tender offer was $64,937, which was provided by the proceeds of the Ban
sale. An extraordinary gain on the early extinguishment of debt of $7,551, net
of income taxes, was recognized in the first six months of fiscal 2001. On June
15, 2001 the Company retired all of the remaining outstanding principal balance
of $21,748 of its 12.75% senior subordinated notes due 2004 and accrued interest
thereon. As a result of this transaction, the Company recognized a loss on the
early extinguishment of debt of $603, net of income tax benefit, in the third
quarter of fiscal 2001. This loss primarily consisted of the premium paid on the
retirement of the notes and the write-off of related unamortized deferred
issuance and initial discount costs.
For the three months ended August 31, 2001, the Company experienced a $23,612,
or 32.2%, decrease in sales to $49,641 from $73,253 in the third quarter of
fiscal 2000. Net sales for the current quarterly period decreased $2,152, or
4.2%, from pro forma net sales for the same period last year. Operating income
during the period likewise decreased $8,345, or 47.8%, to $9,102 from $17,447.
Income before extraordinary gain (loss) and change in accounting principle of
$2,748, or $.30 per diluted share, was recorded during the period compared to
$5,151, or $.55 per diluted share, during the same period last year.
For the first nine months of fiscal 2001, net sales decreased $61,657, or 28.6%,
to $153,603 from $215,260 for the comparable period last year. On a pro forma
basis, however, net sales for the current nine month period declined $3,342, or
2.1%, over comparable sales for the same period last year. Income from
operations for the current nine month period decreased $25,331, or 49.4%, to
$25,989 as compared to $51,320 for the same period of fiscal 2000. Income before
extraordinary gain (loss) and change in accounting principle declined $8,235, or
55.0%, to $6,743 from $14,978 in the related fiscal 2000 period.
Cash earnings (net income before extraordinary items plus non-cash amortization)
is one of the key standards used by the Company to measure operating
performance. Cash earnings and EBITDA, defined below, are used to supplement
operating income as an indicator of operating performance and not as an
alternative to measures defined and required by generally accepted accounting
principles. Cash earnings for the three months ended August 31, 2001 were
$3,741, or $.41 per share, as compared to $6,823, or $.73 per share, for the
comparable 2000 period. For the nine months ended August 31, 2001 cash earnings
were $9,690, or $1.09 per share, as compared to $19,969, or $2.08 per share for
the same period last year.
Earnings before interest, taxes, depreciation and amortization ("EBITDA") were
$11,347, or 22.9% of net sales, in the third quarter of fiscal 2001 compared to
$20,792, or 28.4% of net sales, in the same 2000 period. For the nine months
ended August 31, 2001 EBITDA was $32,654, or 21.3% of net sales, compared to
$61,144, or 28.4% of net sales, for the same period last year.
19
During the third quarter and first nine months of fiscal 2001, the Company
enjoyed favorable sales performances from its ICY HOT, CAPZASIN and BULLFROG
product lines. GOLD BOND sales responded favorably to strong advertising support
during the third quarter of 2001. While DEXATRIM sales declined from the same
periods of fiscal 2000, the sales performance of this brand was achieved in
spite of the discontinuance of DEXATRIM with PPA in November 2000.
During the fourth quarter of fiscal 2000 the Company recorded allowances for
estimated product returns of $5,600 and inventory write-offs of $2,788, for
DEXATRIM with PPA, which was discontinued in November 2000. During the nine
months ended August 31, 2001, the allowance for product returns was increased
$1,350, while $6,850 was charged against the allowance, leaving a balance of
$100 at August 31, 2001. Also, during this same period the allowance for
inventory write-offs recorded charges of $2,455, leaving a $333 balance at the
end of the nine month period.
The Company will continue to seek sales increases through a combination of
acquisitions and internal growth while maintaining high operating income levels.
As previously high-growth brands mature, sales increases will become even more
dependent on acquisitions and the development of successful line extensions.
During the first nine months of fiscal 2001 the Company introduced DEXATRIM
Natural Ephedrine Free, ICY HOT Patch, BULLFROG Fast Blast and BULLFROG
Sensitive Skin as line extensions. Line extensions, product introductions and
acquisitions require a significant amount of introductory advertising and
promotional support. For a period of time these products do not generate a
commensurate amount of sales and/or earnings. As a result, the Company may
experience a short-term impact on its profitability. Strategically, the Company
continually evaluates its products as part of its growth strategy and, in
instances where the Company's objectives are not realized, will dispose of
certain brands and redeploy the assets to acquire other brands or reduce
indebtedness.
RESULTS OF OPERATIONS
---------------------
The following table sets forth, for income before extraordinary gain (loss) and
change in accounting principle and for the periods indicated, certain items from
the Company's Consolidated Statements of Income expressed as a percentage of net
sales:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
NET SALES ........................... 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales ..................... 25.5 26.1 26.4 26.6
Advertising and promotion ......... 37.4 38.4 40.0 38.3
Selling, general and administrative 18.8 11.7 16.7 11.3
-------- -------- -------- --------
Total costs and expenses ....... 81.7 76.2 83.1 76.2
-------- -------- -------- --------
INCOME FROM OPERATIONS .............. 18.3 23.8 16.9 23.8
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense .................. (10.0) (12.5) (11.1) (12.7)
Investment and other income, net .. .6 -- 1.3 .1
-------- -------- -------- --------
Total other income (expense) ... (9.4) (12.5) (9.8) (12.6)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES .......... 8.9 11.3 7.1 11.2
PROVISION FOR INCOME TAXES .......... 3.4 4.3 2.7 4.2
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY
GAIN (LOSS) AND CHANGE IN
ACCOUNTING PRINCIPLE .............. 5.5% 7.0% 4.4% 7.0%
======== ======== ======== ========
20
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 2001 AND 2000
---------------------------------------------------------
For the three months ended August 31, 2001, net sales decreased $23,612, or
32.2%, to $49,641 from $73,253 for the same period last year. The decrease was
largely the result of the sale of Ban in September 2000. Domestic consumer
products sales declined $22,443, or 33.0%, to $45,561 for the three months ended
August 31, 2001 from $68,004 for the comparable period of fiscal 2000. Net sales
of international consumer products also decreased $1,169, or 22.3%, to $4,080
for the three months ended August 31, 2001 from $5,249 in the comparable 2000
period. On a pro forma basis, net domestic consumer products sales for the three
months ended August 31, 2001 decreased $2,247, or 4.7%, but international sales
increased $95, or 2.4%, for a net decline of $2,152, or 4.2%.
For the three months ended August 31, 2001, sales of OTC health care products
increased $278, or .7%, to $41,328 from $41,050 in the same period last year,
and sales of toiletries and skin care brands decreased $24,077, or 75.0%, to
$8,035 for the three months ended August 31, 2001 from $32,112 in the comparable
fiscal 2000 period. On a pro forma basis, net sales of the toiletries and skin
care brands for the three months ended August 31, 2001 decreased $2,617, or
24.6%.
In the domestic OTC health care product segment, sales increases were recognized
for the ICY HOT, CAPZASIN and GOLD BOND product lines, while sales declines were
recorded for PAMPRIN, PREMSYN PMS, FLEXALL and DEXATRIM for the three months
ended August 31, 2001. In the domestic toiletries and skin care segment, sales
of all product lines declined, especially those of SUN-IN and PHISODERM. Sales
variances were largely the result of changes in the volume of unit sales of the
particular brands.
The increase in sales of ICY HOT resulted from the introduction of the ICY HOT
Patch line extension in the first quarter of fiscal 2001 and an effective
marketing campaign, while increased sales of CAPZASIN were primarily attributed
to strong advertising support and distribution gains. GOLD BOND sales responded
favorably to increased advertising during the third quarter of fiscal 2001. The
decline in sales of PAMPRIN and PREMSYN PMS was largely due to the introduction
of a new competitive product in the menstrual category in the first quarter of
fiscal 2001, while FLEXALL sales were affected by reduced marketing support. The
less than expected sales decline of DEXATRIM reflected the continued growth of
the DEXATRIM Natural products, which offset much of the sales lost by the
discontinuance of the DEXATRIM with PPA in November 2000. The sales decline of
the SUN-IN and PHISODERM product lines was primarily associated with reduced
marketing support for these brands, and in the case of SUN-IN, the unfavorable
effect of the introduction of new competitive products during the second quarter
of fiscal 2001.
The decline in net sales of the international division for the three months
ended August 31, 2001 was almost entirely associated with the loss of sales of
Ban, which was sold in September 2000. In the third quarter of fiscal 2001 sales
declined 14.7% for the Canadian operation, 16.3% for the United Kingdom business
and 69.1% for the U.S. export segment as compared to the same period last year.
On a pro forma basis, net sales for the three months ended August 31, 2001
decreased 1.9% for the Canadian operation, increased 3.3% for the United Kingdom
business and increased 24.8% for the U.S. export segment. Sales variances were
largely the result of changes in volume of unit sales of the particular brands.
Cost of sales as a percentage of net sales was 25.5% for the three months ended
August 31, 2001 as compared to 26.1% for the same period last year. The
favorable comparison reflects a change in product mix to higher gross margin
product lines in the third quarter of fiscal 2001.
Advertising and promotion expenses decreased $9,580, or 34.1%, for the three
months ended August 31, 2001 and were 37.4% and 38.4% of net sales for the 2001
and 2000 periods, respectively. The decline in expenditures was primarily the
result of the Ban sale. Increases in advertising and promotional spending were
recorded for PAMPRIN, ICY HOT, ASPERCREME, DEXATRIM and GOLD BOND, while
spending for the FLEXALL, SPORTSCREME, SUN-IN, PHISODERM and SUNSOURCE product
lines decreased.
21
The increase of $809, or 9.5%, in selling, general and administrative expenses
in the third quarter of fiscal 2001 was largely associated with normal annual
increases in employee compensation and increases in the cost of legal services
and corporate insurance. The increase was offset in part by reduced freight,
shipping and general sales expenses, due primarily to decreased sales, along
with lower credit and human services costs. The selling, general and
administrative expenses were 18.8% of net sales in the three months ended August
31, 2001 as compared to 11.7% in the same period last year. The selling, general
and administrative expenses as a percentage of sales computation in the current
period was adversely affected by the absence of sales of Ban, which was sold in
September 2000.
Interest expense decreased $4,180, or 45.7%, in the third quarter of fiscal
2001, reflecting primarily the payment of all of the outstanding balances of the
revolving line of credit and term loans in September 2000 and $99,607 principal
amount of the Company's senior subordinated notes in the first nine months of
fiscal 2001.
Investment and other income for the three months ended August 31, 2001 increased
$288 due to interest income from temporary investments made from a portion of
the proceeds from the Ban sale in September 2000.
Income before extraordinary gain (loss) and change in accounting principle
decreased $2,403, or 46.7%, to $2,748 for the three months ended August 31, 2001
from $5,151 for the comparable period of the prior year. This decrease resulted
primarily from lower sales attributable to the sale of Ban in September 2000.
An extraordinary loss of $603, net of income tax benefit, on the early
extinguishment of debt was incurred in the current period. This loss primarily
consisted of the premium paid on the retirement of the remaining principal
balance of $21,748 of the Company's 12.75% senior subordinated notes due 2004
and the write-off of related unamortized deferred issuance and initial discount
costs.
COMPARISON OF NINE MONTHS ENDED AUGUST 31, 2001 AND 2000
--------------------------------------------------------
Net sales for the nine months ended August 31, 2001 decreased $61,657, or 28.6%,
to $153,603 from $215,260 for the same period last year. The decrease in sales
was largely the result of the sale of Ban in September 2000. Domestic consumer
products sales declined $58,032, or 29.1%, to $141,681 for the nine months ended
August 31, 2001 from $199,713 for the comparable period of fiscal 2000. Net
sales of international consumer products also decreased $3,625, or 23.3%, to
$11,922 in the nine months ended August 31, 2001 from $15,547 in the comparable
2000 period. On a pro forma basis, domestic consumer product net sales for the
nine months ended August 31, 2001 decreased $4,128, or 2.8%, but international
sales increased $786, or 7.1%, for a net decline of $3,342, or 2.1%.
For the nine months ended August 31, 2001 sales of OTC health care products
declined $1,740, or 1.4%, to $124,659 from $126,399 in the same period last
year. Sales of toiletries and skin care brands decreased $60,141, or 68.0%, to
$28,365 in the nine months ended August 31, 2001 from $88,506 in the comparable
fiscal 2000 period. On a pro forma basis, net sales of the toiletries and skin
care brands for the nine months ended August 31, 2001 decreased $1,826, or 6.0%.
In the domestic OTC health care product segment, sales increases were recognized
for ICY HOT, CAPZASIN and ARTHRITIS HOT in the nine months ended August 31,
2001, while sales declines were recorded for FLEXALL, PAMPRIN and GOLD BOND. In
the domestic toiletries and skin care segment, BULLFROG recorded increased
sales, SUN-IN, PHISODERM and ULTRASWIM experienced declines in sales and the
remaining brands showed modest sales decreases in the nine months ended August
31, 2001. Sales variances were largely the result of changes in the volume of
unit sales of the particular brands.
22
The increase in sales of ICY HOT largely resulted from the introduction of the
ICY HOT Patch line extension in the first quarter of fiscal 2001 and an
effective marketing campaign, while increased sales of CAPZASIN and ARTHRITIS
HOT were primarily attributed to strong advertising support and distribution
gains. The decline in sales of FLEXALL was principally due to reduced marketing
support, and the sales decrease of PAMPRIN was largely due to the introduction
of a new competitive product in the menstrual category during this period. The
GOLD BOND sales decrease was primarily the result of continuing competition,
which management countered to a great extent in the third quarter of fiscal 2001
with a strong media campaign. The less than expected sales decline of DEXATRIM
reflected the continued growth of DEXATRIM Natural products, which offset much
of the sales lost by the discontinuance of the DEXATRIM with PPA in November
2000. The sales increase of BULLFROG was largely due to strong retail sales of
the product line during the summer season of 2000 which required substantial
inventory restocking by customers for the 2001 season, and more effective
promotional campaigns. The reduced sales of SUN-IN were principally associated
with the introduction of new competitive products in the nine months ended
August 31, 2001 and decreased marketing support. The decrease in sales of the
PHISODERM product line was largely the result of reduced marketing support. The
sales decline for ULTRASWIM reflected the transition to new packaging for this
product line.
The decline in net sales of the international division in the nine months ended
August 31, 2001 was almost entirely associated with the loss of sales of Ban,
which was sold in September 2000. In the nine months ended August 31, 2001,
sales declined 11.8% for the Canadian operation, 15.0% for the United Kingdom
business and 63.9% for the U.S. export segment as compared to the same period
last year. On a pro forma basis, net sales for the nine months ended August 31,
2001 increased 2.1% for the Canadian operation, 6.7% for the United Kingdom
business and 39.2% for the U.S. export segment. Sales variances were largely the
result of changes in volume of unit sales of the particular brands.
Advertising and promotion expenses decreased $21,056, or 25.5%, for the nine
months ended August 31, 2001 and were 40.0% of net sales compared to 38.3% in
the corresponding 2000 period. The decline in expenditures was primarily the
result of the Ban sale. Increases in advertising and promotion spending were
recorded for PAMPRIN, ICY HOT, ASPERCREME, DEXATRIM and GOLD BOND, while
expenditures for the FLEXALL, SPORTSCREME, SUN-IN, PHISODERM and SUNSOURCE
product lines decreased.
The increase of $1,473, or 6.1%, in selling, general and administrative expenses
in the nine months ended August 31, 2001 was largely associated with normal
annual increases in employee compensation and increases in the cost of legal
services and corporate insurance. The increase was offset in part by reduced
freight, shipping and general sales expenses, associated with decreased sales,
along with lower credit and human services costs. Selling, general and
administrative expenses were 16.7% of net sales in the nine months ended August
31, 2001 as compared to 11.3% in the same period last year. The selling, general
and administrative expenses as a percentage of sales computation in the current
period was adversely affected by the absence of sales of Ban, which was sold in
September 2000.
Interest expense decreased $10,305, or 37.7%, in the 2001 period, reflecting
primarily the retirement of all of the outstanding balances of the revolving
line of credit and term loans in September 2000 and $99,607 principal amount of
the Company's senior subordinated notes in the first nine months of fiscal 2001.
Investment and other income for the nine months ended August 31, 2001 increased
$1,782, largely due to interest income from temporary investments made from a
portion of the proceeds from the Ban sale in September 2000, and the gain of $79
on the sale of the Norwich Aspirin brand during the 2001 period.
An extraordinary gain of $6,948, net of income taxes, on the early
extinguishment of debt was recognized in the 2001 period. The gain resulted from
the retirement of $99,607 principal amount of the Company's senior subordinated
notes. An extraordinary loss of $110, net of income tax benefit, on the early
extinguishment of debt was incurred in the prior year period.
23
Income before extraordinary gain (loss) and change in accounting principle
decreased $8,235, or 55.0%, to $6,743 for the nine months ended August 31, 2001
from $14,978 for the comparable period of the prior year. This decrease resulted
primarily from lower sales attributable to the sale of Ban in September 2000.
Norwich(R)is the trademark of The Monticello Companies, Inc.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has historically financed its operations with a combination of
internally generated funds and borrowings. The Company's principal uses of cash
are for operating expenses, interest and principal payments with respect to
long-term debt, acquisitions, working capital, repurchases of its common shares
and capital expenditures.
Cash provided by operations was $14,878 and $26,329 for the nine months ended
August 31, 2001 and 2000, respectively. The decrease in cash flows from
operations over the prior year period was primarily the result of decreases in
net income (after adjustment for the extraordinary net gain on the early
extinguishment of debt), reduced depreciation and amortization expense, largely
as a result of the sale of the Ban trademark on September 15, 2000, and
decreases in accounts payable and accrued liabilities.
Investing activities used cash of $236 and $6,682 in the nine months ended
August 31, 2001 and 2000, respectively. The decrease of $6,446 in the use of
cash in the nine months ended August 31, 2001 was largely the result of fewer
additions to property, plant and equipment and the proceeds of $1,179 from the
sale of the Norwich Aspirin brand.
Financing activities used cash of $89,180 and $18,625 in the first nine months
of fiscal 2001 and 2000, respectively. The increase of $70,555 reflected
primarily the funds required for the retirement of $99,607 principal amount of
the Company's senior subordinated notes, offset by the absence of repurchases of
the Company's common shares during the first nine months of fiscal 2001.
The following table presents working capital data at August 31, 2001 and
November 30, 2000 or for the respective years then ended:
Item 2001 2000
------------ ---------- ----------
Working capital (current assets less current liabilities) ...... $ 48,258 $ 126,029
Current ratio (current assets divided by current liabilities) .. 2.50 3.77
Quick ratio (cash and cash equivalents and accounts receivable
divided by current liabilities) ............................. 1.63 3.15
Average accounts receivable turnover ........................... 4.92 5.28
Average inventory turnover ..................................... 3.21 3.50
Working capital as a percentage of total assets ................ 15.90% 31.34%
The change in the current and quick ratios at August 31, 2001 as compared to
November 30, 2000, reflected primarily the reduction in cash used for the
partial retirement of the Company's senior subordinated notes in the first nine
months of fiscal 2001.
Total long-term debt outstanding was $204,748 at August 31, 2001 compared to
$304,077 at November 30, 2000, a decrease of $99,329 during the first nine
months of 2001.
As of August 31, 2001, the remaining amount authorized by the Company's board of
directors under the stock buyback plan was $6,599; however, the Company is
limited in its ability to repurchase shares due to restrictions under the terms
of the indenture with respect to which its senior subordinated notes were
issued.
24
Management of the Company believes that projected cash flows generated by
operations along with its cash and cash equivalents position and a $10,000
revolving credit facility will be sufficient to fund the Company's current
commitments and proposed operations. Also, on December 21, 1998, the Company
filed a shelf registration statement with the Securities and Exchange Commission
for $250,000 of debt and equity securities of which $75,000 was utilized in the
sale of the 8.875% notes in May 1999.
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
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation." For the nine months ended August 31, 2001 and 2000 these
subsidiaries accounted for 7% and 6% of total revenues, respectively, and 3% and
2% of total assets, respectively. It has not been the Company's practice to
hedge its assets and liabilities in Canada and the U.K. or its intercompany
transactions due to the inherent risks associated with foreign currency hedging
transactions and the timing of payments between the Company and its two foreign
subsidiaries. Historically, gains or losses from foreign currency transactions
have not had a material impact on the Company's operating results. Losses of $2
and $50 for the nine months ended August 31, 2001 and 2000, respectively,
resulted from foreign currency transactions.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company recorded the initial application of SOP 98-5 in December 1999 as the
cumulative effect of a change in accounting principle of approximately $542, net
of income tax benefit.
In September 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") reached a final consensus on Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10").
EITF 00-10 is effective the fourth quarter of 2001 and addresses the income
statement classification of amounts charged to customers for shipping and
handling, as well as costs incurred related to shipping and handling. The EITF
concluded that amounts billed to a customer in a sale transaction related to
shipping and handling should be classified as revenue. The EITF also concluded
that if costs incurred related to shipping and handling are significant and not
included in cost of sales, an entity should disclose both the amount of such
costs and the line item on the income statement that includes them. Costs
incurred related to shipping and handling included in revenues will be required
to be reclassified to cost of sales. The Company currently classifies shipping
and handling costs billed to the customer as revenues and costs related to
shipping and handling as a selling expense. The amount of shipping and handling
costs included in selling expense for the third quarter of fiscal 2001 and 2000
was $1,350 and $2,014, respectively, and for the first nine months of fiscal
2001 and 2000 was $4,060 and $5,215, respectively. The adoption in fiscal 2001
will not have an impact on the results of operations or the financial position
of the Company.
In November 2000, the EITF finalized Issue No. 00-14, "Accounting for Certain
Sales Incentives" ("EITF 00-14"). EITF 00-14 addresses the recognition,
measurement and income statement classification for sales incentives offered to
its customers. Sales incentives include discounts, coupons, rebates, "buy one
get one free" promotions and generally any other offers that entitle a customer
to receive a reduction in the price of a product or service by submitting a
claim for a refund or rebate. Under EITF 00-14, the reduction in or refund of
the selling price of the product or service resulting from any cash sales
incentives should be classified as a reduction of revenue. Currently, the
25
company recognizes all sales incentives as an advertising and promotion expense.
Although this pronouncement will not have any impact on the results of
operations or financial position of the Company, the presentation prescribed
will have an effect of reducing net sales and advertising and promotion expenses
in comparison to prior years. The Company must adopt EITF 00-14 for all periods
presented in the fourth quarter of fiscal 2001. The impact of adopting would
have decreased net sales and advertising and promotion expense by $1,310 and
$2,455 for the three months ended August 31, 2001 and 2000, respectively, and by
$3,731 and $8,598 for the first nine months of fiscal 2001 and 2000,
respectively.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). The provisions of SFAS 142 indicate that the Company will
no longer be required to amortize the cost of intangible assets resulting from
acquired brands for accounting purposes and requires certain fair value based
tests of the carrying value of intangible assets with an indefinite life. The
Company plans to early adopt the provisions of SFAS 142 effective December 1,
2001. The amount of amortization, net of income tax benefit, for these
intangible assets was $864 and $2,591 for the three and nine months ended August
31, 2001, respectively. For fiscal 2001, this expense is expected to be
approximately $3,500, net of income tax benefit, or $.39 per share.
In July 2001, the EITF finalized Issue No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products
("EITF 00-25"). EITF 00-25 requires the adoption of its provisions for all
periods beginning after December 15, 2001, but encourages earlier
implementation. Management of the Company has not yet determined the
applicability of the provisions of EITF 00-25 to the Company's operations. If
the provisions of EITF 00-25 are determined to be applicable to the Company, a
reclassification of certain marketing expenses to a reduction of net sales will
be required. The results of operations or the financial position of the Company,
therefore, will not be affected.
SEASONALITY
-----------
Seasonality is an important factor affecting the operations of the Company.
During recent fiscal years, the Company's first quarter's net sales and gross
profit have trailed the other fiscal quarters on average from 25% to 35% because
of slower sales of consumer products, the seasonality of BULLFROG and SUN-IN and
lower levels of promotional campaigns during this quarter.
RISK FACTORS
------------
The Company's business is subject to a number of risks, including the risks
described in the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 2000.
FORWARD-LOOKING STATEMENTS
--------------------------
The Company may from time to time make written and oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases and in reports to
shareholders. The Private Securities Litigation Reform Act of 1995 contains a
safe harbor for forward-looking statements. The Company relies on this safe
harbor in making such disclosures. The forward-looking statements are based on
management's current beliefs and assumptions about expectations, estimates,
strategies and projections for the Company. These statements are not guarantees
of future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements whether as a result of new information, future events
or otherwise. The risks, uncertainties and assumptions regarding forward-looking
statements include, but are not limited to, the impact of brand acquisitions and
divestitures; the impact of extraordinary gains or losses resulting from product
acquisitions or divestitures, financings or debt repayments; the impact of the
26
possible loss of sales of DEXATRIM with ephedrine; the increased likelihood that
claims relating to the existence of PPA in DEXATRIM will be filed against the
Company; 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 indentures; government regulations; risks of
loss of material customers; public perception regarding the Company's products;
dependence on third party manufacturers; environmental matters; the
availability, cost and scope of coverage afforded by product liability insurance
and other risks described in the Company's Securities and Exchange Commission
filings.
27
PART II. OTHER INFORMATION
--------------------------
ITEM 3. LEGAL PROCEEDINGS
See Note 10 of Notes to Consolidated Financial Statements included in
Part 1, Item 1 of this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Statement regarding computation of per share earnings (Exhibit 11).
(b) No Form 8-K reports were filed with the Securities and Exchange
Commission during the three months ended August 31, 2001.
28
CHATTEM, INC.
-------------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHATTEM, INC.
(Registrant)
Dated: October 12, 2001 \s\ A. Alexander Taylor II
---------------- --------------------------
A. Alexander Taylor II
President and Director
(Chief Operating Officer)
\s\ Christopher S. Keller
--------------------------
Christopher S. Keller
(Chief Financial Officer)
\s\ Scott J. Sloat
--------------------------
Scott J. Sloat
Controller
(Chief Accounting Officer)
29
EX-11
3
exh11_10852.txt
STATEMENT - COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11
----------
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
-----------------------------------------------------
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
---------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
NET INCOME:
Income before extraordinary gain (loss)
and change in accounting principle ......... $ 2,748 $ 5,151 $ 6,743 $ 14,978
Extraordinary gain (loss) ..................... (603) -- 6,948 (110)
Change in accounting principle ................ -- -- -- (542)
------------ ------------ ------------ ------------
Net income ............................. $ 2,145 $ 5,151 $ 13,691 $ 14,326
============ ============ ============ ============
NUMBER OF COMMON SHARES:
Weighted average outstanding .................. 8,876 9,310 8,871 9,508
Issued upon assumed exercise of outstanding
stock options .............................. 142 69 40 103
Effect of issuance of restricted common shares 13 -- 6 --
------------ ------------ ------------ ------------
Weighted average and potential dilutive
outstanding ................................ 9,031 9,379 8,917 9,611
============ ============ ============ ============
NET INCOME ( LOSS) PER COMMON SHARE:
Basic:
Income before extraordinary gain (loss)
and change in accounting principle ...... $ .31 $ .55 $ .76 $ 1.58
Extraordinary gain (loss) .................. (.07) -- .78 (.01)
Change in accounting principle ............. -- -- -- (.06)
------------ ------------ ------------ ------------
Total basic ............................ $ .24 $ .55 $ 1.54 $ 1.51
============ ============ ============ ============
Diluted:
Income before extraordinary gain (loss)
and change in accounting principle ...... $ .30 $ .55 $ .76 $ 1.56
Extraordinary gain (loss) .................. (.06) -- .78 (.01)
Change in accounting principle ............. -- -- -- (.06)
------------ ------------ ------------ ------------
Total diluted .......................... $ .24 $ .55 $ 1.54 $ 1.49
============ ============ ============ ============