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