-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rdn5dQ/DzUKeF0VJzsuexF0E74tiUsFm0r2QVRxIXGP5Kr/eKPq6KWYyauHSOlnt 1j/bJ14eSc1ConA98vuN1g== 0000912057-96-003241.txt : 19960229 0000912057-96-003241.hdr.sgml : 19960229 ACCESSION NUMBER: 0000912057-96-003241 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960228 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHATTEM INC CENTRAL INDEX KEY: 0000019520 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 620156300 STATE OF INCORPORATION: TN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-05905 FILM NUMBER: 96527316 BUSINESS ADDRESS: STREET 1: 1715 W 38TH ST CITY: CHATTANOOGA STATE: TN ZIP: 37409 BUSINESS PHONE: 6158214571 MAIL ADDRESS: STREET 1: 1715 W 38TH ST CITY: CHATTANOOGA STATE: TN ZIP: 37409 FORMER COMPANY: FORMER CONFORMED NAME: CHATTEM DRUG & CHEMICAL CO DATE OF NAME CHANGE: 19790111 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1995 COMMISSION FILE NUMBER 0-5905 CHATTEM, INC. A TENNESSEE CORPORATION I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300 1715 WEST 38TH STREET CHATTANOOGA, TENNESSEE 37409 TELEPHONE: 423-821-4571 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED NONE NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, WITHOUT PAR VALUE REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K WILL BE CONTAINED IN THE DEFINITIVE PROXY STATEMENT INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K. AS OF FEBRUARY 21, 1996, THE AGGREGATE MARKET VALUE OF VOTING SHARES HELD BY NON-AFFILIATES WAS $20,801,317. AS OF FEBRUARY 21, 1996, 7,292,199 COMMON SHARES WERE OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED NOVEMBER 30, 1995 (THE "1995 ANNUAL REPORT TO SHAREHOLDERS") ARE INCORPORATED BY REFERENCE IN PARTS I, II AND IV OF THIS REPORT. PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED MARCH 8, 1996 (THE "PROXY STATEMENT") ARE INCORPORATED BY REFERENCE IN PART III OF THIS REPORT. PART I ITEM 1. BUSINESS GENERAL Chattem, Inc. (the "Company") was incorporated in Tennessee in 1909 after having commenced business operations in 1879. The Company is a diversified manufacturer and marketer of consumer products. The Company manufactures and markets branded over-the-counter ("OTC") pharmaceuticals, such as FLEX-ALL 454, ICY HOT, PAMPRIN, PREMSYN PMS, BENZODENT and NORWICH Aspirin, and functional toiletries and cosmetics, including CORN SILK, BULLFROG, ULTRASWIM, SUN-IN, MUDD and PHISODERM. In the OTC drug market, the Company believes that its topical analgesic and menstrual and premenstrual internal analgesic brands are among the market leaders in the U.S. in their categories. Certain of the Company's functional toiletries and cosmetics products, such as SUN-IN and ULTRASWIM, are believed by the Company to be brand leaders in the U.S. in their categories. The Company's growth strategy is to seek continued growth through a combination of brand acquisitions and internal growth. As a part of this strategy, the Company continually evaluates its products and businesses, and in instances in which products or businesses fail to realize the Company's objectives, the Company will dispose of these products or businesses and redeploy these assets to products and businesses with greater growth potential. The Company conducts certain aspects of its business through four wholly owned subsidiaries. One subsidiary owns or licenses substantially all of the trademarks and intangibles associated with its domestic consumer products business and licenses the Company's use thereof. Certain foreign sales operations are conducted through Canadian and United Kingdom subsidiaries. Product liability insurance is provided by a captive insurance subsidiary incorporated in Bermuda. For purposes of this report, the "Company" refers to Chattem, Inc. and its wholly-owned subsidiaries. Trademarks of the Company appear in this report in all capitalized letters. 2 DEVELOPMENTS DURING FISCAL 1995 On May 26, 1995, the Company completed the sale of its specialty chemicals division to privately- held Elcat, Inc. ("Elcat"). The Company received $25,000,000 from the sale of the specialty chemicals division consisting of $20,000,000 in cash and $5,000,000 of 13.125% cumulative, convertible preferred stock of Elcat. The net cash proceeds were used to repay long-term debt of approximately $12,000,000. The Company recognized a net gain of $9,334,000 (net of tax)from the sale and an extraordinary charge (after tax) of $367,000 relating to the early extinguishment of the debt. The results of operations and the gain on disposal of the specialty chemicals division have been separately classified as discontinued operations in the accompanying consolidated statements of income. The Company's operations continue to be affected by the payment of a special cash dividend ("Special Dividend") of $20.00 per share in June, 1993 to holders of its common stock. In order to pay the Special Dividend and related fees and expenses, the Company borrowed approximately $97,000,000. The funding of the Special Dividend resulted in a substantial negative balance in the Company's shareholders' equity and significantly increased the use of leverage in the Company's capital structure. The consequences to the Company have been significantly increased interest expense and repayment obligations and more vulnerability to adverse business conditions. PRODUCTS The objective of the Company is to offer high quality brand name products in niche market segments in which its products can be among the market leaders. The Company strives to achieve its objective by identifying brands with favorable demographic appeal, being flexible in modifying products and promotions in response to changing consumer demands and developing creative and cost-effective marketing and advertising programs. The Company manufactures substantially all of its products at its manufacturing facility in Chattanooga, Tennessee. 3 The Company's product brands are: OTC PHARMACEUTICALS - FLEX-ALL 454 - topical analgesic - ICY HOT - topical analgesic - PAMPRIN - menstrual internal analgesic - PREMSYN PMS - premenstrual internal analgesic - NORWICH Aspirin - internal analgesic - BENZODENT - topical oral analgesic - SOLTICE - analgesic balm - BLIS-TO-SOL - anti-fungal product FUNCTIONAL TOILETRIES AND COSMETICS - CORN SILK - oil absorbing facial make-up - BULLFROG - sunscreen and sunblock - ULTRASWIM - chlorine removing shampoo - SUN-IN - spray-on hair lightener - MUDD - facial mask and cleanser - PHISODERM - facial cleanser The following table sets forth the Company's net sales attributable to domestic and international OTC pharmaceutical products, functional toiletries and cosmetics products, other products and total consumer products during the past three fiscal years (dollars in thousands):
FISCAL YEAR ENDED -------------------------------------------------------------- NOVEMBER 30, 1995 NOVEMBER 30, 1994 NOVEMBER 30, 1993 ----------------- ----------------- ----------------- PRODUCT CLASS SALES PERCENTAGE SALES PERCENTAGE SALES PERCENTAGE - ------------- ----- ---------- ----- ---------- ----- ---------- Domestic: OTC Pharmaceuticals................. $ 48,700 48.4% $51,673 54.8% $49,590 55.2% Functional Toiletries and Cosmetics.......................... 37,519 37.3 29,888 31.7 25,920 28.9 International: OTC Pharmaceuticals................. 2,463 2.5 2,243 2.4 3,361 3.7 Functional Toiletries and Cosmetics.......................... 10,885 10.8 9,484 10.0 9,908 11.0 Other Products....................... 1,031 1.0 1,082 1.1 1,082 1.2 -------- ----- ------- ----- ------- ----- Total Consumer Products............. $100,598 100.0% $94,370 100.0% $89,861 100.0% -------- ----- ------- ----- ------- -----
4 GROWTH STRATEGY The Company's consumer products have historically grown through acquisition of new brands and expansion of existing brands. The Company seeks acquisitions of embryonic brands which have achieved success in limited geographic regions or of more developed brands with unrealized potential. With embryonic brands, the Company utilizes its marketing ability, sales force and manufacturing capabilities to build on the regional strength of the brand and launch the product nationally. For example, prior to its acquisition by the Company, FLEX- ALL 454 had developed a significant market share in Denver and Phoenix, but was virtually unknown in the balance of the country. After its acquisition by the Company in 1989, FLEX-ALL 454, which had sales of less than $1,000,000 at the time of acquisition, had exceeded $15,000,000 in gross sales in each of 1995 and 1994. As to brands with unrealized potential, the Company seeks to acquire from larger firms brands that have been undermarketed because the products are not of sufficient size to warrant attention by the larger firms. Two products in this category were acquired in 1994: BENZODENT, a dental analgesic cream acquired from The Procter & Gamble Company ("Procter & Gamble"), and PHISODERM, a line of facial cleaners acquired from Sterling Winthrop Inc. ("Sterling"). ICY HOT is an earlier example of this type of acquisition and has experienced significant growth since its acquisition in 1991. In considering product acquisitions, the Company also seeks products that complement existing brands through increased marketing presence, shared promotions and shared distribution channels. The Company endeavors to expand its existing products through line extensions of existing brands, which capitalize on consumer awareness of the brand names. An example of this strategy was the introduction and national launch of Maximum Strength FLEX-ALL 454 in August 1993. As another example, the Company plans a national launch of PHISODERM Antibacterial skin cleanser during 1996. Efforts are also made to develop new and creative marketing strategies and executions to expand both trade distribution and consumer usage. OTC PHARMACEUTICALS The Company markets a diversified portfolio of brand name OTC pharmaceutical products, many of which are among the market leaders in the U.S. in their respective categories. 5 FLEX-ALL 454 is an aloe-vera based topical analgesic used primarily by people with arthritic symptoms to alleviate pain and irritation in joints and secondarily by persons suffering from muscle strain. The Company believes that the advancing age of the U.S. population and the emphasis on fitness and physical activity will increase the overall market size of the topical analgesic market. The Company supports the brand with a marketing program that features Joe Namath and the endorsement of all the professional trainers of the National Football League, the National Hockey League, the National Basketball Association and Major League Baseball. ICY HOT provides the Company with a second entry into the topical analgesic market segment. ICY HOT is an extra strength dual action product, as distinguished from FLEX-ALL 454. The Company supports this brand with national advertising and strong promotional programs. In the menstrual analgesic segment, the Company markets PAMPRIN, a combination drug specifically designed for relief of menstrual symptoms, and PREMSYN PMS, a product formulated to relieve mild to moderate symptoms of premenstrual syndrome. PAMPRIN was developed internally by the Company over 30 years ago, while PREMSYN PMS was introduced by the Company in 1983. Factors affecting the menstrual analgesic segment include the introduction of competing general analgesic brands of ibuprofen for OTC distribution in 1986, the introduction by Procter & Gamble of another non-steroidal general analgesic product in 1994 along with demographic trends of target consumers, women aged 18 to 49. NORWICH is a pharmaceutical-quality aspirin-based analgesic which complements the Company's other OTC pharmaceuticals by offering consumers another choice in the analgesic market segment and by permitting shared product promotions. The Company positions the brand as a reasonably priced alternative between private label generic aspirin and high-priced, heavily-advertised brands. BENZODENT is a dental analgesic cream in an adhesive base for use as an oral, topical analgesic for pain related to dentures. The Company acquired BENZODENT from Procter & Gamble in 1994 and will seek to increase the market share of this brand through advertising and promotional programs. Additionally, the Company manufactures and markets on a regional basis two smaller proprietary drug brands: SOLTICE, an external analgesic, and BLIS-TO- SOL, an anti-fungal product. 6 FUNCTIONAL TOILETRIES AND COSMETICS The Company also markets a portfolio of brand name functional toiletries and cosmetics, many of which are among the market leaders in the U.S. in their respective categories. The CORN SILK brand is a line of facial makeup products for women with oily or combination skin. All CORN SILK products utilize an exclusive ingredient for absorbing the excess facial oils that break down the color and coverage of other makeup. The CORN SILK brand includes powder used by women to fix and finish their makeup and also liquid makeup, blush and concealer. Liquid makeup is used to even skin tone, blush to add color and concealer to cover blemishes. The Company supports the brand by a television advertising campaign complemented by print advertising in selected women's magazines. In the sunscreen and sunblock category, BULLFROG provides long-lasting, water- durable protection from the sun. Due to escalating consumer awareness of skin damage from sun exposure, the Company expects the sun protection segment of the sun care market to continue to expand rapidly. Positioned as a line of highly efficacious sunblock products in a unique, highly concentrated formula, the Company believes that the BULLFROG brand should continue to benefit from this overall market growth as well as increasing brand awareness, broader product offerings and increased consumer advertising, promotion and sampling programs. ULTRASWIM is a leading line of chlorine removing shampoo, conditioner and soap. ULTRASWIM has a patented formula that the Company believes makes it superior to formulations of other products in removing chlorine. ULTRASWIM has also benefited as it has moved beyond the competitive swim segment to include exercise and recreational swimmers. SUN-IN is the number one product line in the spray-on hair lightener market. The target customers within this market segment are light-haired women between the ages of 12 and 24. The Company supports SUN-IN's position as the market leader through recent improvements in the formula and package, seasonal advertising to teens and consumer promotions in retail stores. MUDD is a line of clay-based products which provide deep cleansing of the face for healthier, cleaner skin. Target customers for MUDD are women between the ages of 18 and 49. In fiscal 1995, the Company relaunched MUDD with improved formulas and updated packaging. The relaunch was supported by television advertising and promotional programs. 7 PHISODERM is a line of facial cleansers consisting of several formulas of liquid cleansers, including one for infants, and a bar soap. Acquired in 1994, PHISODERM is the Company's second entry into the facial cleanser category. Positioned as a deep cleaning but gentle facial cleanser, the Company, in fiscal 1995, improved the formula, updated the packaging and provided television advertising and promotional support to enable this brand to regain the larger market share it once enjoyed. INTERNATIONAL The Company's products are also sold in foreign countries. This international business is concentrated in Canada, Europe and Central and South America. Sales in Canada and Europe are conducted by subsidiary companies located and locally staffed in Canada and the United Kingdom. General export sales are handled by the Company from its offices in Chattanooga. Most of the products sold in international markets are manufactured by the Company at its Chattanooga facilities and are packaged by subsidiary companies in small facilities in Canada and the United Kingdom with the assistance, from time to time, of outside contract packagers. Many of the Company's major domestic products are currently sold in Canada, including the FLEX-ALL 454, PAMPRIN, SUN-IN, CORN SILK, MUDD, ULTRASWIM and PHISODERM brands. Consumer product sales in the United Kingdom and on the continent of Western Europe are currently limited to toiletry and cosmetic products. The Company's hair lightener product is sold on the continent under the SPRAY BLOND trademark and in the United Kindgom as SUN-IN. MUDD, CORN SILK and ULTRASWIM are the other primary consumer products sold by the Company's international division in Europe. The Company's export division services various distributors primarily located in the Caribbean, Mexico and Peru. The Company sells various products into these markets with the primary focus being the development of its OTC pharmaceuticals, principally ICY HOT and PAMPRIN. The Company continues to look for established distributors in Central and South America. 8 MANUFACTURING The Company manufactures a substantial portion of its products at its Chattanooga plant. Currently, the Company has adequate capacity to meet anticipated demand for its products. New products can generally be manufactured with the adaptation of existing equipment and facilities, with the addition of new equipment at relatively small cost or through readily available contract manufacturers. For additional information about the extent of utilization of the Company's manufacturing facilities, see "Properties", Item 2 in this report. To monitor the quality of its products, the Company maintains an internal quality control system supported by an on-site microbiology laboratory. Outside consultants also are employed from time to time to monitor product development and the effectiveness of the Company's operations. The Company has not experienced any material adverse effect on its business as a result of shortages of energy or other raw materials used in the manufacture of its products. At present, the Company does not foresee any significant problems in obtaining its requirements at reasonable prices, but no assurances can be given that raw material or energy shortages will not adversely affect its operations in the future. RESEARCH AND DEVELOPMENT The Company's research and development expenditures were $1,140,000, $893,000 and $930,000 in the fiscal years ended November 30, 1995, 1994 and 1993, respectively. No material customer-sponsored research and development activities were undertaken during these periods. The Company expects to maintain the same general level of expenditures in fiscal 1996. The research and development effort focuses on developing improved formulations for existing products and on the creation of formulations for product line extensions. The preservation and improvement of the quality of the Company's products are also integral parts of its overall strategy. 9 DISTRIBUTION The Company's domestic products are sold through thousands of food, drug and mass merchandiser accounts. Internationally, the products are sold by a national broker in Canada and the Company's own sales force in the United Kingdom and by exclusive distributors in Western Europe and Central and South America to mass distribution channels. Wal-Mart Stores, Inc. accounts for more than 10% of the sales of the Company's consolidated net sales. No other customer accounts for more than 10% of consolidated net sales. Boots Plc, a U.K. retailer, accounts for more than 10% of the international consumer products segment's sales. The Company generally maintains sufficient inventories to meet customer orders as received absent unusual and infrequent situations. At present, the Company has no significant backlog of customer orders and is promptly meeting customer requirements. The Company does not generally experience wide variances in the amount of inventory it maintains. Inventory levels were increased during fiscal 1995 to support several promotions and normal buildup for orders on seasonal products. In certain circumstances, the Company allows its customers to return unsold merchandise and, for seasonal products, provides extended payment terms to its customers. 10 MARKETING The Company allocates a significant portion of its revenues to the advertising and promotion of its products. Expenditures for these purposes were 37.0%, 35.3%, and 40.4%, respectively, as a percentage of net sales during each of the fiscal years ended November 30, 1995, 1994 and 1993. Due to the maturation of the brand and the decision to strongly support other brands, advertising and promotion expenses to support FLEX-ALL 454 were reduced in fiscal 1995 by 18.9%. The Company's marketing objective is to develop and execute creative and cost- effective advertising and promotion programs. The manner in which the Company executes promotional programs and purchases advertising time creates more flexibility in terms of adjusting spending levels. The Company believes that balancing advertising, trade promotions and consumer promotions expenditures on a cost effective basis is an essential element in its ability to compete successfully. The Company develops advertising strategies and executions for each of its major brands that focus on the particular attributes and market positions of the products. The Company achieves cost-effective advertising by minimizing certain expenses, such as production of commercials and payments to advertising agencies. The Company works directly with retailers to develop for each brand promotional calendars and campaigns that are customized to the particular requirements of the individual retailer. The programs, which include cooperative advertising, temporary price reductions, in-store displays and special events, are designed to obtain or enhance distribution at the retail level and to reach the ultimate consumers of the product. The Company also utilizes consumer promotions such as coupons, samples and trial sizes to increase the trial and consumption of the products. SEASONALITY During recent fiscal years, the Company's first quarter net sales and gross profit have trailed the other fiscal quarters on average from 25% to 35% because of slower sales of international consumer products and the relative absence of promotional campaigns during this quarter. 11 COMPETITION The OTC pharmaceutical and functional toiletry products' markets in which the Company competes are highly competitive. The markets are characterized by the frequent introduction of new products including the movement of prescription drugs to the OTC market, often accompanied by major advertising and promotional programs. The Company competes primarily on the basis of product quality, price, brand loyalty and consumer acceptance. The Company's competitors include other OTC pharmaceutical companies and large consumer products companies, many of which have considerably greater financial and marketing resources than the Company. The products offered by these companies are often supported by much larger advertising and promotional expenditures and are generally backed by larger sales forces. In addition, the Company's competitors have often been willing to use aggressive spending on trade promotions as a strategy for building market share at the expense of their competitors, including the Company. The private label or generic category has also become more competitive in certain of the Company's product markets. Another factor affecting the OTC pharmaceutical and toiletry products business is the consolidation of retailers and increasingly more competitive negotiations for access to shelf space. TRADEMARKS AND PATENTS The Company's trademarks are of material importance to its business and are among its most important assets, although, except in the case of the FLEX-ALL 454 trademark, its business as a whole is not materially dependent upon ownership of any one trademark. The Company, either through a wholly-owned subsidiary or directly, owns or licenses all of the trademarks associated with its business. All of the Company's brands have recognized trademarks associated with them, and the Company's significant domestic trademarks have been registered on the principal register of the United States Patent and Trademark Office. Federally registered trademarks have a perpetual life as long as they are timely renewed and used properly as trademarks, subject to the right of third parties to seek cancellation of the marks. The Company also owns patents related to the ULTRASWIM shampoo and CORN SILK facial powder, both of which expire in 1998, and ICY HOT stick topical analgesic, which expires in 2007. After expiration of the patents, the Company expects that these products will continue to compete in the market primarily on the basis of the goodwill associated with the brands. 12 GOVERNMENT REGULATION The Company's products are generally subject to government regulations, primarily those of the U.S. Food and Drug Administration ("FDA"). Certain of the Company's consumer products are regulated by the FDA as OTC drugs, with the rest of the products being regulated as "cosmetics". All such products must comply with FDA regulations governing the safety of the products themselves or the ingredients used in their manufacture. FDA regulations for all pharmaceutical products also include requirements for product labeling and for adherence to "current good manufacturing practices". All of the Company's OTC drug products are regulated pursuant to the FDA's "monograph" system for OTC drugs. The monographs set out the active ingredients and labeling indications that are permitted for certain broad categories of OTC drug products (e.g., topical analgesics). Compliance with monograph provisions means that the product is generally recognized as safe and effective, and is not misbranded. Future changes in the monographs could result in the Company having to revise product labeling and formulations. The Company responded to certain questions received from FDA early in 1995 in connection with clinical studies for pyrilamine maleate, one of the active ingredients used in PAMPRIN and PREMSYN PMS. While the Company addressed all of the FDA questions in detail, the final monograph for menstrual drug products will determine if the FDA considers pyrilamine maleate safe and effective for menstrual relief products. Additional clinical testing of this ingredient may be required. The Company has been actively monitoring the process and does not believe that PAMPRIN and PREMSYN PMS will be materially adversely affected by the FDA review. The Company believes that any adverse finding by the FDA would likewise affect the Company's principal competitors in the menstrual product category. With regard to all of the Company's products, the FDA may revise applicable regulations or provide new interpretations of existing regulations which could necessitate product labeling changes, reformulations or other changes in the Company's products or the conduct of its business. While it is impossible to predict the impact of future FDA actions, to date the Company has not been adversely affected as a result of compliance with FDA regulations. 13 In addition to the FDA regulations discussed above, the Company is subject to numerous other statutory and regulatory restrictions, including regulations relating to product packaging. The application of these product packaging regulations has required the Company to convert certain of its PAMPRIN products sold in foil pouches to bottles with child resistant caps. This conversion was completed in 1995 and involved plant modification and the installation of additional packaging equipment. ENVIRONMENTAL The Company is continuously engaged in assessing compliance of its operations with applicable federal, state and local environmental laws and regulations. The Company's policy is to record liabilities for environmental matters when loss amounts are probable and reasonably determinable. The Company's manufacturing site utilizes chemicals and other potentially hazardous materials and generates both hazardous and non-hazardous waste, the transportation, treatment, storage and disposal of which are regulated by various governmental agencies. The Company is a member of the Chattanooga Manufacturers Association, a trade association which promotes industry awareness of developments in environmental matters, has engaged environmental consultants on a regular basis to assist its compliance efforts, is currently in compliance with all applicable environmental permits and is aware of its responsibilities under applicable environmental laws. Any expenditures necessitated by changes in law and permitting requirements cannot be predicted at this time, although such costs are not expected to be material to the Company's financial position or results of operations. 14 Since the early 1980's, the U.S. Environmental Protection Agency ("EPA") has been investigating the extent of, and the health effects resulting from, contamination of Chattanooga Creek, which runs through a major manufacturing area of Chattanooga in the vicinity of the Company's manufacturing facilities. The contamination primarily stems from the dumping of coal tar into the creek during World War II when the federal government was leasing and operating a coke and chemical plant adjacent to the creek. However, the EPA has been investigating virtually all businesses that have discharged any wastewater into the creek. A 2 1/2 mile stretch of Chattanooga Creek was placed on the National Priorities List as a Superfund site under the Comprehensive Environmental Response, Compensation and Recovery Act in September of 1995. The Company could be named as a potentially responsible party in connection with such site due to the Company's historical discharge of wastewater into the creek. However, considering the nature of the Company's wastewater, as well as the fact that the Company's discharge point is downstream from the old coke and chemical plant that was operated by the government, and the availability of legal defenses and expected cost sharing, the Company does not believe that any liability associated with such site will be material to its financial position or results of operations. PRODUCT LIABILITY AND INSURANCE An inherent risk of the Company's business is exposure to product liability claims brought by users of the Company's products or by others. The Company has not had any material claims in the past and is not aware of any material claims pending or threatened against the Company or its products. While the Company will continue to attempt to take what it considers to be appropriate precautions, there can be no assurance that it will avoid significant product liability exposure. The Company maintains product liability insurance, principally through a captive insurance subsidiary, that it believes to be adequate; however, there can be no assurance that it will be able to retain its existing coverage or that such coverage will be cost-justified or sufficient to satisfy future claims, if any. EMPLOYEES The Company employs approximately 305 persons on a full-time basis in the U.S. and 27 persons at its foreign subsidiaries' offices. The Company's employees are not represented by any organized labor union, and management considers its labor relations to be good. 15 ITEM 2. PROPERTIES The Company's headquarters and administrative offices are located at 1715 West 38th Street, Chattanooga, Tennessee. The Company's primary production facilities are adjacent to the Company's headquarters on land owned by the Company. The Company leases the primary warehouse and distribution center, located at 3100 Williams Street, Chattanooga, Tennessee, for its domestic consumer products. The following table describes in detail the principal properties owned and leased by the Company:
FACILITY TOTAL -------------------------- TOTAL AREA BUILDINGS SQUARE ACRES (SQUARE FEET) USE FEET ---------- ------------- ----- ------ Owned Properties: Chattanooga, Tennessee 10 109,800 Manufacturing 72,700 Warehousing 1,900 Office & Administration 35,200 Leased Properties: Chattanooga, Tennessee (1) 2.0 100,000 Warehousing 100,000 Chattanooga, Tennessee (2) 0.1 9,600 Warehousing & Manufacturing 9,600 Mississauga, Ontario, Canada (3) 0.3 15,000 Warehousing 10,500 Office & Administration 3,000 Packaging 1,500 Basingstoke, Hampshire, England (4) 0.3 21,900 Warehousing 13,900 Office & Administration 6,500 Packaging 1,500
NOTES: (1) Leased under a five year lease ending January 31, 2001 for a monthly rental of $23,750. (2) Leased under a five year lease ending January 31, 2001 for a monthly rental of $2,280. (3) Leased under a lease ending November 1996, with an option to extend the lease until November 2004, at a monthly rental including property taxes and other incidentals of approximately $6,433. (4) Leased under leases ending in 2014 and 2015 at a monthly rental including property taxes and other incidentals of approximately $18,960. 16 The Company is currently operating its facilities at approximately 70% of total capacity. These facilities are FDA registered and are capable of further utilization through the use of full-time second and third shifts. ITEM 3. LEGAL PROCEEDINGS Note 10 to the Consolidated Financial Statements on page 30 of the Company's 1995 Annual Report to Shareholders is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information found on pages 15, 28 and 29 of the Company's 1995 Annual Report to Shareholders is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information found on page 15 of the Company's 1995 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information found on pages 9 to 14 of the Company's 1995 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The information found on pages 15 to 35 of the Company's 1995 Annual Report to Shareholders is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 18 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT (a) DIRECTORS The information found in the Company's 1996 Proxy Statement under the heading "Information about Nominees and Continuing Directors" is hereby incorporated by reference. (b) EXECUTIVE OFFICERS The following table lists the names of the executive officers of the Company as of February 21, 1996, their ages, their positions and offices with the Company and the year in which they were first elected to these positions:
POSITION WITH FIRST NAME AGE REGISTRANT ELECTED - ---- --- ------------- ------- Zan Guerry 47 Chairman of the Board; President and Chief Executive Officer; Director 1990 Robert E. Bosworth 48 Executive Vice President and Chief Financial Officer; Director 1990
Mr. Guerry was elected to his present positions with the Company in June 1990. Previously he served as Vice President and Chief Financial Officer from 1980 until 1983, as Executive Vice President from 1983 to 1990, as President of Chattem Consumer Products from 1989 to 1994 and as Chief Operating Officer from 1989 to 1990. Mr. Guerry was first elected as a director of the Company in 1981. Mr. Bosworth was elected to his present positions with the Company in June 1990. Previously he served as Vice President and Chief Financial Officer of the Company from 1985 to 1990. Mr. Bosworth was first elected as a director of the Company in 1986. (c) PROMOTERS AND CONTROL PERSONS Not applicable. 19 ITEM 11. EXECUTIVE COMPENSATION The information found in the Company's 1996 Proxy Statement under the heading "Executive Compensation and Other Information" is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information found in the Company's 1996 Proxy Statement under the heading "Voting Securities and Principal Holders Thereof" is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS A. Alexander Taylor II, a director of the Company, is a partner in the law firm of Miller & Martin, general counsel to the Company. Robert M. Boyd, Jr., a director and former executive officer of the Company, received $84,167 in consulting fees during Fiscal 1995 for services rendered to the Company in a capacity other than as a director. Louis H. Barnett, a director of the Company, received $33,000 in consulting fees during Fiscal 1995 for services rendered to the Company other than as a director. Scott L. Probasco, Jr., a director of the Company, is the Chairman of the Executive Committee of SunTrust Bank, Tennessee, N.A. (SunTrust). SunTrust provides routine banking services to the Company and participates in the Company's credit facility. 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K (a) 1. The consolidated financial statements and the related report of independent public accountants required to be filed with this Report are incorporated by reference from pages 16 to 33 of the Company's 1995 Annual Report to Shareholders. 2. The following documents are filed or incorporated by reference as exhibits to this report:
Exhibit NUMBER Description of Exhibit References ------- ----------------------------------------- ---------- 3 Amended and Restated Charter of Chattem, Inc. (7) 4 Amended and Restated By-Laws of Chattem, Inc. (16) Form of Indenture dated August 3, 1994 between Chattem, Inc. and SouthTrust Bank of Alabama, N.A. relating to the 12.75% Series B Senior Subordinated Notes due 2004 (10) 10 Material Contracts - ULTRASWIM License Agreement (1) BULLFROG Purchase Agreement (2) Purchase and Sale Agreement dated March 6, 1989 between Chattem, Inc. and Ari-Med Pharmaceuticals, Inc. relating to the products FLEX-ALL 454 and FLEX-ALL 5000 (3) Chattem, Inc. Employee Stock Ownership Plan dated August 25, 1989 (4)
21
Exhibit NUMBER Description of Exhibit References ------- ----------------------------------------- ---------- 10 Chattem, Inc. Savings and Investment Plan dated June 11, 1990 (5) Non-Competition and Severance Agree- ments as Amended - Zan Guerry Robert E. Bosworth (6) and (16) Lease Agreement between Atlantis Real Estate Corporation and Chattem (Canada) Inc. and Chattem, Inc. for Unit 1, 2220 Argentia Road, Mississauga, Ontario, Canada (7) Lease Agreement between Guildhall Property Holdings Limited and Chattem (U.K.) Limited for Unit 7, Ringway Centre, Edison Road, Basingstoke, Hampshire, England (7) Chattem, Inc. Non-Statutory Stock Option Plan - 1993 (8) Manufacturing Agreement dated May 12, 1993 between Chattem, Inc. and Procter & Gamble Pharmaceuticals, Inc. relating to NORWICH Aspirin products (9) Stock Purchase Agreement dated June 11, 1993 between Chattem, Inc. and First Union Capital Partners, Inc. (10) Registration Agreement dated June 11, 1993 between Chattem, Inc. and First Union Capital Partners, Inc. (10)
22
Exhibit NUMBER Description of Exhibit References ------- ----------------------------------------- ---------- 10 Chattem, Inc. Non-Statutory Stock Option Plan - 1994 (10) Chattem, Inc. Non-Statutory Stock Option Plan for Non-Employee Directors - 1994 (11) Asset Purchase and Sale Agreement dated May 12, 1994 between The Procter & Gamble Company and Signal Investment & Management Co. for the BENZODENT Business (12) Purchase and Sale Agreement dated June 3, 1994 between Chattem (Canada) Inc. and Cosmetic Import Company Limited (13) Purchase Agreement dated June 10, 1994 between Chattem, Inc.and Kidder, Peabody & Co. Incorporated (13) Note Registration Rights Agreement dated June 17, 1994 between Chattem, Inc.and Kidder, Peabody & Co. Incorporated (13) Warrant Registration Rights Agreement dated June 17, 1994 between Chattem, Inc. and Kidder, Peabody & Co. Incorporated (13) Asset Purchase and Sale Agreement dated June 17, 1994 between Sterling Winthrop Inc. and Signal Investment & Management Co. (13) Working Capital Credit Agreement dated June 17, 1994 among Chattem, Inc., the lenders named therein and The First National Bank of Chicago, as Agent. (13)
23
Exhibit NUMBER Description of Exhibit References ------- ----------------------------------------- ---------- 10 Acquisition Credit Agreement dated June 17, 1994 among Chattem, Inc., the lenders named therein and The First National Bank of Chicago, as Agent. (13) Renewal Lease Agreement dated December 5, 1994 between Atlantis Real Estate Corporation and Chattem (Canada) Inc. and Chattem, Inc. for Unit 1, 2220 Argentia Road, Mississauga, Ontario, Canada (14) Agreement of Purchase and Sales dated April 11, 1995, by and among Chattem Chemicals, Inc., as buyer, Elcat, Inc., as parent, and Chattem, Inc., as seller, of Specialty Chemicals division (15) Lease Agreements dated February 1, 1996 between Tammy Development Company and Chattem, Inc. for warehouse space at 3100 Williams Street, Chattanooga, Tennessee (16) Non-Competition and Severance Agreements - Gary M. Galante Joey B. Hogan Howard E. Ottley B. Derrill Pitts Charles M. Stafford (16) 11 Computation of Per Share Earnings (16) 13 1995 Annual Report to Shareholders of Chattem, Inc. (16) 22 Subsidiaries of the Company (16) 24 Consent of Independent Public Accountants (16)
24 REFERENCES: Previously filed as an exhibit to and incorporated by reference from: (1) Form 10-K for the year ended May 31, 1986. (2) Form 10-Q for the quarter ended February 28, 1987. (3) Form 10-K for the year end May 31, 1989. (4) Form S-8 Registration Statement (No. 33-30742). (5) Form S-8 Registration Statement (No. 33-35386). (6) Form 10-K for the year ended November 30, 1991. (7) Form 10-K for the year ended November 30, 1992. (8) Form S-8 Registration Statement (No. 33-55640). (9) Form 10-K for the year ended November 30, 1993. (10) Form S-8 Registration Statement (No. 33-78524). (11) Form S-8 Registration Statement (No. 33-78522). (12) Form 8-K dated May 12, 1994. (13) Form S-2 Registration Statement (No. 33-80770). (14) Form 10-K for the year ended November 30, 1994. (15) Form 8-K dated April 11, 1995. (16) Filed as an exhibit to this Form 10-K for the year ended November 30, 1995. (b) There were no Form 8-K's filed with the Securities and Exchange Commission during the three months ended November 30, 1995. (d) The Financial Statements and the related report of independent public accountants required to be filed with this report pursuant to Rule 3-10(a) of Article 3 of Regulation S-X are incorporated by reference from pages 6 to 13 of Signal Investment & Management Co.'s Form 10-K for the fiscal year ended November 30, 1995. 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 22, 1996 CHATTEM, INC. By: /S/ Robert E. Bosworth ----------------------------------- Title: Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Zan Guerry Chairman of the Board, 2/22/96 - ------------------------- President and Director Zan Guerry (Chief Executive Officer) /s/ Samuel E. Allen Director 2/22/96 - ------------------------- Samuel E. Allen /s/ Louis H. Barnett Director 2/22/96 - -------------------------- Louis H. Barnett /s/ Robert E. Bosworth Executive Vice President and 2/22/96 - --------------------------- Chief Financial Officer and Robert E. Bosworth Director (Principal Financial and Accounting Officer) /s/ Robert M. Boyd, Jr. Director 2/22/96 - -------------------------- Robert M. Boyd, Jr. /s/ Richard E. Cheney Director 2/22/96 - -------------------------- Richard E. Cheney /s/ Scott L. Probasco, Jr. Director 2/22/96 - -------------------------- Scott L. Probasco, Jr. /s/ A. Alexander Taylor, II Director 2/22/96 - -------------------------- A. Alexander Taylor, II
26 CHATTEM, INC. AND SUBSIDIARIES EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 4 Amended and Restated By-Laws of Chattem, Inc. 10.1 Admendment to Non-Competition and Severance Agreements - Zan Guerry Robert E. Bosworth 10.2 Lease agreements dated February 1, 1996 between Tammy Development Company and Chattem, Inc. for warehouse space at 3100 Williams Street, Chattanooga, Tennessee 10.3 Non-Competition and Severance Agreements - Gary M. Galante Joey B. Hogan Howard E. Ottley B. Derrill Pitts Charles M. Stafford 11 Computation of per share earnings 13 1995 Annual Report to Shareholders of Chattem, Inc. 22 Subsidiaries of the Company 24 Consent of Independent Public Accountants
EX-4 2 EXHIBIT 4 EXHIBIT 4 AMENDED, 3/1/95 AMENDED AND RESTATED BY-LAWS ARTICLE I - SHAREHOLDERS Section 1. Annual Meeting. The annual meeting of shareholders shall be held on such date, at such time and place as may be designated by the board of directors. Section 2. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or entitled to vote at any meeting of shareholders, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the record date shall be fifteen days prior to the date on which the action requiring such determination of shareholders is to be taken. The board of directors may fix in advance another record date, not more than 70 days nor less than 10 days prior to the date on which the action is to taken. Section 3. Proxies. All proxies shall be filed with the secretary of the corporation before or at the time of the meeting. ARTICLE II - DIRECTORS (Effective 3/1/95) Section 1. Number and Compensation. There shall be from 7 to 12 directors of the corporation. Compensation of directors shall be determined by the board. Section 2. Regular Meetings. Regular meetings of the board, without notice, shall be held immediately after the annual meeting of shareholders and on the fourth Wednesday of January, April, and July, at the corporation headquarters in Chattanooga, or at such other date and place as may be determined by the board. Section 3. Special Meetings. Special meetings of the board may be called by the chairman of the board, the president or any three directors. Section 4. Notice. Notice of any special meeting shall be given at least one (1) day prior thereto by oral, telegraphic, electronic or written notice given or delivered personally to each director or at least three (3) days prior thereto if such notice is given by regular, registered or certified mail. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the director at his home or business address. AMENDED, 3/1/95 Section 5. Indemnification. Any person made or threatened to be made a party to a suit or proceeding by reason of the fact that he or his intestate was, is, or shall be a director or officer or Audit Committee member of the corporation or at the request of the corporation a director or officer or Audit Committee member of another corporation controlled by the corporation, shall be indemnified by this corporation to the maximum extent and upon the conditions provided by the laws of the State of Tennessee, including Tennessee Code Annotated, Sections 48-1-407 through 48-1-411. Section 6. Action Without Meeting. The board may take any action which it is required or permitted to take by law without a meeting upon written consent setting forth the action so taken and signed by all of the directors entitled to vote thereon. Section 7. Committees. The majority of the entire board, by resolution, may designate committees and delegate to them such authority of the board as it deems desirable within the limits prescribed by Tennessee law. Section 8. Advisory Directors. The board may appoint advisory directors who shall act only in the capacity of providing general policy advice to the board. In any action where a recorded vote of the directors is taken, the vote of elected directors shall determine the outcome. ARTICLE III - OFFICERS Section 1. Election. The board shall elect all officers for terms of one year. Assistant officers, if any, shall not be considered officers for the purposes of this section, and shall be appointed and subject to removal by the president. Section 2. Vacancies. A vacancy in any office subject to board election may be filled by the board. Section 3. Chairman of the Board. The chairman of the board shall be the chief executive officer. He shall preside at any meetings of the board and of the shareholders. Section 4. President. The President shall have management and control of the affairs of the corporation in accordance with policies promulgated by the board. - 2 - AMENDED, 3/1/95 Section 5. The Vice Presidents. In the event of the absence, death, or inability to act of the president, the executive vice president shall perform the duties and be vested with the powers of the president. The vice presidents shall perform such duties as from time to time may be assigned to them by the president or by the board of directors. Section 6. The Secretary. The secretary shall: (a) see that all notices are duly given in accordance with the provisions of these by-laws and as required by law; (b) take minutes of meetings of the directors and shareholders; (c) perform such other duties as may be assigned to him by the president or by the board. Section 7. Assistant Secretaries. The assistance secretaries shall perform such duties as may be assigned to them by the secretary. Section 8. Salaries. Salaries of officers shall be determined by the board and may be changed by the board at any time. ARTICLE IV - SHARES Section 1. Signatures. All certificates for shares shall be signed by the president or executive vice president or such vice president as may be designated by the board and the secretary or an assistant secretary. Section 2. Transfer. Transfer of shares shall be made only on the share transfer books of the corporation. Section 3. Voting upon Shares of Other Corporations Held by the Corporation. The president shall have authority to vote in person or by proxy on behalf of the corporation at any meeting of shareholders of any corporation in which the corporation may hold shares. The board may confer like powers upon any other officer. ARTICLE V -- FISCAL YEAR The fiscal year of the corporation shall begin on December 1 and end on November 30. - 3 - AMENDED, 3/1/95 ARTICLE VI - SEAL The corporate seal shall be circular, and the inscription thereof shall include the corporate name and state of incorporation. ARTICLE VII - AMENDMENT The by-laws may be amended by the vote of a majority of the board. - 4 - EX-10.1 3 EXHIBIT 10.1 EXHIBIT 10.1 AMENDMENT TO ------------ NON-COMPETITION AND SEVERANCE AGREEMENT --------------------------------------- THIS AMENDMENT is made this 31st day of May, 1995, by and between CHATTEM, INC., a Tennessee corporation (the "Company") and John Pemberton Guerry, an executive of the Company (the "Executive"), under the following circumstances: The Company and the Executive have entered into a Non-Competition and Severance Agreement dated May 16, 1990 (the "Agreement"), pursuant to which, among other things, the Executive agreed in certain circumstances not to compete with the Company and the Company agreed to pay the Executive a severance benefit upon the discharge or constructive discharge of the Executive following a Change in Control. The Company and the Executive now desire to amend the Agreement to provide that during the three (3) year period following the time when the Executive is entitled to receive the severance benefit, the Company will continue to provide to the Executive health, medical and life insurance benefits. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained in this Agreement, the parties agree: 1. The Agreement shall be amended by adding a new section, which shall provide as follows: CONTINUATION OF BENEFITS. The Company shall continue to provide to the Executive at its cost and expense health, medical and life insurance benefits at substantially the same level of benefits as the Executive has at the time he becomes entitled to the Severance Benefit in accordance with Section 4 hereof for a period of three (3) years following the date the Executive becomes entitled to such Severance Benefit. 2. Except as expressly set forth herein, this Amendment to the Agreement shall not supersede or otherwise modify the terms and conditions of the Agreement. _______________________________ JOHN PEMBERTON GUERRY CHATTEM, INC. By: ___________________________ ROBERT E. BOSWORTH Executive Vice President ATTEST: By: ___________________________ Secretary (SEAL) - 2 - EX-10.2 4 EXHIBIT 10.2 EXHIBIT 10.2 COMMERCIAL LEASE THIS LEASE, made as of the last date of execution as entered on the last page of this agreement between TAMMY DEVELOPMENT COMPANY hereinafter referred to as "Landlord", and CHATTEM, INC. hereinafter referred to as "Tenant". WITNESSETH: ARTICLE 1. PREMISES, TERM AND USE SECTION 1. PREMISES. Landlord hereby leases to Tenant, and Tenant, hereby leases from Landlord, in consideration of the rents to be paid and the covenants and agreements to be performed and observed by Tenant, the following described space of approximately 100,000 square feet known as PHASE II-A AND PHASE II-B, SOUTH BROAD STREET CENTER, CHATTANOOGA, TENNESSEE hereinafter referred to as "The Premises", including the ancillary parking area and the non-exclusive right to use the common driveway for ingress and egress. SECTION 2. TERM. The term of the lease shall be FIVE years commencing on the First day of FEBRUARY 1996 and ending on the last day of JANUARY 2001. SECTION 3. PERMITTED USE. The Premises shall be used for LIGHT MANUFACTURING, WAREHOUSING AND DISTRIBUTION and for no other use without Landlord's prior written consent. SECTION 4. ZONING. Landlord warrants that the premises are zoned to permit the uses setforth in Article 1, Section 3 and are in compliance with all applicable laws, ordinances, regulations of the United States and the State, County and City where the premises are located. The Premises are currently zoned M-1. ARTICLE 2. RENT SECTION 1. MINIMUM RENT. During the term of this lease, Tenant covenants and agrees to pay the Landlord a fixed minimum rent (hereinafter called the "Minimum Rent"), in equal monthly installments on the first day of each and every month in advance, payable to TAMMY DEVELOPMENT COMPANY - 4289 BONNY OAKS DRIVE, SUITE 201, CHATTANOOGA, TN 37406: (i) Commencing FEBRUARY 1, 1996 and Terminating JANUARY 31, 1998 a minimum rent of TWO HUNDRED EIGHTY FIVE THOUSAND AND 00/100 DOLLARS ($285,000) per year payable in equal monthly installments of TWENTY THREE THOUSAND SEVEN HUNDRED FIFTY AND 00/100 DOLLARS ($23,750.00); (i) Commencing February 1, 1998 and Terminating January 31, 2001 a minimum rent of Three Hundred Thousand and 00/100 DOLLARS ($300,000.00) per year payable in equal monthly installments of TWENTY FIVE THOUSAND AND 00/100 DOLLARS ($25,000.00); SECTION 2. TERMINATION NOTICE. At anytime after the end of the 48th month of the base term, both parties shall be required to provide a twelve month advance termination notice to the other party citing its intention to terminate the lease agreement. This condition specifically imposes an obligation upon both parties to either terminate the lease as of January 31, 2001 or the termination date of the lease will automatically be extended in consecutive monthly increments and the lease will continue under the same terms and conditions, except as to the rental, until otherwise modified or terminated in writing. The rental for the carryover term, if applicable, commencing February 1, 2001, will be calculated based on a rate of $3.15 per square foot, per annum. SECTION 3. PROMPT PAYMENT WITHOUT DEMAND. Time is of the essence of this lease and Tenant shall pay the rent herein reserved at the time and place specified without deduction, setoff, notice, or demand. Tenant expressly waives any and all requirements for written notice for nonpayment of rent. ARTICLE 3. TAXES AND INSURANCE SECTION 1. REAL ESTATE TAXES AND INSURANCE PREMIUMS. The landlord shall pay all real estate taxes and assessments ("real estate taxes") and insurance premiums imposed upon the land and building, provided,however, that Tenant shall reimburse Landlord for the increase in its proportionate share of any increases in the amount of real estate taxes and insurance premiums paid or payable by Landlord on the land and building for each calendar year during the term of this lease, and extensions, if any, over the amount which Landlord paid for such real estate taxes (which proportionate share is hereby agreed to be $29,453.88) and insurance premiums (which proportionate share is hereby agreed to be $4,114.69). For the purpose of this Article, it shall be presumed that any insurance premiums or taxes paid or payable will be for the calendar year in which it becomes due and irrespective of any policy year or period. In the event the total amount of taxes and insurance results in a net decrease below the base year amounts, no reduction in rent below the minimum rent set out in Article 2 will be allowed, nor will such decreases below the base year amounts offset future increases. SECTION 2. PROPORTIONATE SHARE. Tenant's proportionate share of any increases under Section 1 above shall be deemed to be 96.16 percent (%). 1 SECTION 3. LIMITATIONS ON INSURANCE PREMIUMS PAYABLE BY TENANT. Landlord and Tenant agree that the insurance coverage contemplated by this Article shall include fire and extended coverage, in an amount not to exceed the building replacement cost and in any amount sufficient to avoid co-insurance, public liability insurance, business interuption/rental abatement insurance, and may include other coverage commonly included in an All Risk Insurance Policy. SECTION 4. CONTEST OF TAX ASSESSMENT. In the event of an increase in real estate taxes hereunder, the Landlord may contest such increase through the appropriate proceedings (however, nothing herein shall require Landlord to contest any increases) and Tenant agrees to pay its proportionate share of Landlord's cost in contesting such taxes. Tenant may elect to contest such increase or participate with the Landlord to contest such increases through the appropriate proceedings. Tenant must agree in writing to the proportionate share of Landlord's cost of contesting such tax. SECTION 5. PERSONAL PROPERTY TAXES. Tenant shall pay and be liable for all taxes levied against personal property and trade fixtures placed by Tenant in the premises and for any real estate taxes assessed as a result of Tenant's improvements, alterations or installations. SECTION 6. PAYMENT OF TAXES OR INSURANCE BY TENANT. The amount of taxes or insurance premiums due from Tenant to Landlord hereunder, if any, shall be treated as rent for all purposes of this lease and shall be payable by Tenant to Landlord within 30 calender days after Landlord bills Tenant for such increases. Increases, if any, for the year during which this lease commences or terminates shall be prorated in accordance with the length of time Tenant occupied the premises in said year. SECTION 7. TAX ON RENTS. Should the United States of America, the State of Tennessee, Hamilton County, the City of Chattanooga, or any other governmental unit or agency, whether now existing or hereafter created, be given the power to levy and collect tax from Landlord on the rentals payable hereunder, other than general income taxes, inheritance or gift taxes, Tenant agrees to reimburse Landlord in full for the amount of taxes so paid by Landlord on the rentals payable under this lease. Any sums payable by Tenant hereunder shall constitute additional rent and be included in Tenant's monthly installment, in addition to the minimum rent, or in any payment of additional rent. SECTION 8. LIABILITY INSURANCE. Tenant, at Tenant's expense, shall procure and maintain throughout the term of this lease public liability insurance covering the premises, and the use and occupancy of same, including any adjoining sidewalks, and parking areas, in a company or companies acceptable to Landlord and licensed to do business in Tennessee under a policy satisfactory in form to Landlord, naming Hudson Companies Incorporated, as Landlord, as an additional insured, with limits of not less than $500,000.00 combined single limit. The policy or policies shall contain the provision that they may not be canceled without first giving Landlord not less than fifteen (15) days prior written notice. Duplicate policies or certificates of all insurance shall be delivered to Landlord not less than (5) days prior to each effective date. SECTION 9. PERSONAL PROPERTY INSURANCE. It shall be Tenant's sole responsibility to insure and keep insured, at Tenant's expense, all personal property which is owned by the Tenant, or any other authorized occupant of the leased premises, and which is placed or stored in the leased premises or elsewhere in the building of which they are a part; and it is agreed that Landlord shall have no responsibility to effect such insurance. ARTICLE 4. USES PROHIBITED The premises and all building and improvements thereon shall, during the term of this lease, be used only and exclusively for the purposes set forth in Article 1. Section 3, and no part of the premises or improvements thereon shall be used in any manner whatsoever for any purposes in violation of the laws, ordinances, regulations or orders of the United States, or of the State, County and/or City where the premises are located, or of any duly constituted subdivision, department or board thereof. Tenant shall not knowingly use or occupy the premises or any part thereof, or suffer or permit the same to be used or occupied for any business or purpose deemed extra hazardous on account of fire or otherwise; and if by reason of the use and occupancy of the premises, the policy covering the premises (Fire Insurance, Extended Coverage or Liability) is to be canceled or the rate of said insurance shall be increased, the Landlord shall have the option of terminating this lease, or on demand, Tenant will pay to Landlord the amount of such increase (but such increase in the rate of insurance shall not be deemed a breach of this covenant by Tenant). Tenant covenants and agrees that Tenant will not create or maintain, or permit others to create or maintain, any nuisances, including without limiting the foregoing language, loud noises, sound effects, offensive odors, smoke or dust in or about the leased premises. Tenant shall comply in all respects with all applicable federal, state and local laws, rules regulations and orders including without limitation, those relating to pollution, reclamation or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, or hazardous or toxic materials or waste into the air, water, or land, or otherwise relating to the manufacture, processing distribution, use, treatment, storage disposal, transport or handling of pollutants, contaminants, or hazardous or toxic materials or wastes. Tenant shall indemnify, defend and hold Landlord harmless from and against any loss, cost damage or expense, including without limitation, attorney's fees and costs of site investigation and clean up, incurred by or imposed upon landlord as a result of the breach by Tenant of its obligations in this Article 4. 2 ARTICLE 5. CONDITION AND CARE OF PREMISES Tenant acknowledges that he has examined the leased premises and accepts them as being in good condition and state of repair and that the capacity of the mechanical equipment (electrical, plumbing, heating and air conditioning), if any, is of adequate capacity for Tenant's use, and Landlord does not warrant their condition in any respect. Tenant, at his own expense, shall keep the premises clean, neat, and free from trash and rubbish, and shall not commit, or permit others to commit any waste, damage, or injury to the leased premises or the building by Tenant, invitees, or other persons whom Tenant permits to be in or about the leased premises. Tenant shall use reasonable diligence to keep the sidewalks adjoining the premises, if any, free from ice and snow and at all times broom clean and free of trash, litter, or obstructions of any kind. Tenant agrees to maintain a fully charged dry chemical fire extinguisher of adequate capacity of use within the premises. ARTICLE 6. MAINTENANCE, REPAIRS, AND ALTERATIONS SECTION 1. OBLIGATIONS OF TENANT. Except for the repairs required of Landlord pursuant to Sections 2 of this Article 6, Tenant shall repair and maintain the Demised Premises, inside in good order, condition, and repair (including any such replacement and restoration as is required for that purpose) without limitation, interior painting, all plate glass, windows, doors, hardware, plumbing fixtures, electric fixtures and equipment, light fixtures, bulbs & ballasts, the heating, ventilating, and air conditioning systems, walls, floors, floor coverings, ceilings and all machinery, equipment and facilities forming apart of the Premises. Should Tenant fail to make any repairs or restoration for which Tenant is responsible under this lease, Landlord may, but will not be obligated to, make same at Tenant's expense, and the cost thereof shall be considered additional rent due hereunder payable immediately. SECTION 2. OBLIGATIONS OF LANDLORD. Except for any repairs necessitated by the negligent act or omission of Tenant, its agents, servants, or invitees, or by any unusual use of the Premises by Tenant, Landlord shall repair and maintain in good order and condition and replace when necessary the electrical wiring, plumbing pipes, sprinkler systems, roof and structural portions of the building, including, but not limited to, bearing walls, foundations, roof, and all outside appurtenances to the building. SECTION 3. ALTERATIONS AND ADDITIONS. Tenant shall not make any alterations or additions to the premises without Landlord's prior written consent. Landlord shall not be liable for the cost of any alterations or additions, all of which are hereinafter referred to in this paragraph as "alterations" made by Tenant, and Tenant shall indemnify and save Landlord harmless on account of claims for mechanic's materialmen's or other liens in connection with any alterations made by Tenant, and any such liens shall exist only against Tenant's leasehold interest, and not against Landlord's interest, whether in fee or otherwise. Upon Landlord's request, Tenant shall provide Landlord a waiver of lien from any contractor performing work on the Premises. All alterations made by Tenant shall be in full compliance with all applicable building laws, ordinances and regulations. All alterations that may be made by either of the parties shall inure to Landlord's benefit and shall become a part of the premises and shall belong to Landlord absolutely as soon as made. ARTICLE 7. INDEMNIFICATION Landlord shall not be liable for any loss, damage or injury to person or property occurring, except due to the gross negligence or intentional conduct of the landlord or its agents, in or about the premises, and Tenant shall indemnify and hold Landlord harmless from any and all such injuries and damages, and shall defend any claims or legal actions arising, therefrom, and pay all judgements resulting therefrom and shall reimburse Landlord for all costs and expenses, including attorney's fees, paid or incurred by landlord as a result thereof. Without in any way limiting the general language of the sentence immediately proceeding, Landlord shall not be liable for loss of or damage to any property at any time located in or about the premises, whether or not Tenant is the owner hereof, including, but not limited to, any loss, damage or injury resulting from steam, gas or electricity, or from water, rain, snow, ice or other substance which may leak into, or issue or flow from any part of the premises or from the pipes or plumbing work of the premises, or from or into any other place or quarter. Landlord shall be under no liability to Tenant on account of any discontinuance of heat, electricity, sewer, water, air conditioning, sprinkler, gas and/or other utility, convenience, service or facility, however such discontinuance may be caused, and shall be under no obligation to see that such discontinuance is rectified, and no such discontinuance shall constitute conservative eviction or any ground for termination of this lease by Tenant. Landlord shall indemnify Tenant and hold Tenant harmless from any and all losses, damages and injuries resulting from the gross negligence of the Landlord or its agents, and shall defend any claims or legal actions arising therefrom and shall reimburse Tenant for all costs and expenses, including attorney fees, paid or incurred by Tenant as a result thereof. ARTICLE 8. DAMAGE OR DESTRUCTION BY FIRE OR OTHER CASUALTY If at any time the premises becomes totally untenantable by reason of damage or loss by fire or other casualty and such fire or other casualty shall not have been caused by the negligence or wrongful act or omission of Tenant, Tenant's servant, agents, licensees or invitees, the rent shall abate until the premises have been restored to tenantable condition, but nothing herein is to be constructed as requiring Landlord to rebuild or restore the premises. In the event of a loss from fire or other casualty, Landlord shall have the election not to rebuild or recondition the premises which such election may be exercised by written notice thereof to Tenant, given within thirty (30) days from the date of said loss. For purposes of this Article 8, "totally untenantable" shall mean that the premises had been damaged to the extent that the interior of the premises and the contents therein are exposed to the elements. 3 If Landlord exercises such election, this lease shall cease and terminate, effective on the date of such loss, and Tenant shall pay the accrued rent up to the date of such loss, or Landlord, if the rent has been paid beyond such date, will refund to Tenant the proportionate part of any such rent prepaid, and thereupon this lease shall become null and void, without further obligations on the part of either party hereto, even though the building may at a later date be rebuilt, restored or reconditioned. ARTICLE 9. SIGNS Except for the existing signs, no signs shall be constructed or painted on the windows, outside walls, roof or exterior of the premises without the prior written consent of Landlord. ARTICLE 10. LANDLORD'S RIGHT TO GO ON PREMISES Tenant shall permit Landlord and/or Landlord's agents or employees at all reasonable hours to enter the Premises and examine them or to show them to persons wishing to rent or purchase the same, or to make repairs, alternations, or other work thereto, taking any space needed therefor, and no compensation shall be asked or claim made by Tenant by reason of any inconvenience or annoyance arising from anything that may be done in repairing, altering, working on or protecting the Premises or Building of which same may be a part, however, the necessity may arise, but this paragraph shall not be construed as imposing any duty on Landlord to make any repairs, alterations or additions. Tenant shall permit Landlord and/or Landlord's agents, but only during the four months preceding the termination of this Lease, to place upon the windows, walls or doors of the premises "FOR SALE" and/or "FOR RENT" signs, and allow the same to remain there without molestation and without any claim being made by Tenant for compensation on account thereof. ARTICLE 11. UTILITIES AND SERVICES Tenant shall pay for all gas, electricity, heat, water, sewer charges, and all other utilities used on or about the Premises, and shall pay any charges of any company furnishing water or pressure for any sprinkler system, fire hydrants or standpipe serving the premises. Tenant shall pay its proportionate share of all special assessments imposed by any governmental entity on the Premises including, but not limited to, the Storm Water Fee instituted by the City to service the property. Tenant shall maintain heat in the premises as necessary to prevent the freezing of plumbing and sprinkler systems. Tenant shall also pay all charges for cleaning services or private garbage service used by Tenant. ARTICLE 12. NO ASSIGNMENT OR SUBLETTING Neither Tenant nor any court officer thereof, nor any receiver or trustee in bankruptcy shall assign or transfer this Lease or any part thereof nor shall the premises be sublet in whole or in part, without Landlord's prior written consent: such consent shall not be unreasonably withheld provided, however, that Tenant, while not in default hereunder, shall have the right to sub-let portions or sections of the premises for departments handling some of the items ordinarily handled in the business for which the premises may be used as provided in Article I hereinabove. Tenant shall always remain liable for any default of any assignee, transferee or sub-tenant. ARTICLE 13. REMOVAL OF FIXTURES Provided Tenant is not in default hereunder, Tenant shall have the right on or before the termination of this Lease, to remove any trade fixtures that were purchased and provided by Tenant, and which are susceptible of being removed without damage to the Building or the Premises, provided Tenant exercises such right before this lease is terminated, and provided Tenant furnishes Landlord in advance adequate security satisfactory to Landlord that the Building and Premises will be restored to their original condition at Tenant's expense immediately after such removal. This right of removal shall not include any right to remove any heating, air conditioning, plumbing, wiring, linoleum or carpeting, and shall not, as a matter of course, include any fixtures that were furnished or paid for by Landlord. Any such items remaining on the Premises or in the Building after such date of termination shall, at Landlord's option, be deemed the property of Landlord for such disposition as Landlord sees fit or Landlord may require Tenant to remove all of Tenant's property. ARTICLE 14. WAIVER PROVISION The failure of Landlord to insist on strict performance of any of the terms, conditions and covenants herein shall not be deemed to be a waiver of any rights of remedies that Landlord may have and shall not be deemed a waiver of any subsequent breach in the terms, conditions and covenants herein contained except as may expressly waived. ARTICLE 15. DEFAULT PROVISIONS If: (i) Tenant shall default in payment of the rent due hereunder and such default shall continue for a period of Ten (10) days after the due date of the rent, Landlord will give the Tenant written notice of default and five (5) business days following the notice to cure the default: or (ii) the leased premises become deserted or stand vacant or are used for purpose other than that stated in Article I herein: or (iii) Tenant be in under any other covenant, agreement, obligation or condition of this lease and fails to cure such default within thirty (30) days after written notice thereof from Landlord (or if such default shall be of such a nature that it cannot be cured completely within such thirty (30) day period. Tenant shall not have property commenced with such thirty (30) day period and shall not thereafter proceed with reasonable diligence and good faith to remedy such default): 4 (iv) Tenant shall file a voluntary petition in bankruptcy, reorganization or receivership, become insolvent, be adjudicated bankrupt, or make an assignment for the benefit of creditors, or if any involuntary petition in bankruptcy, reorganization or receivership is filed against Tenant and not dismissed within sixty (60) days, any such event shall, at Landlord's option, constitute a default of Tenant hereunder and Landlord, at Landlord's option and without further notice to Tenant, which is hereby expressly waived, may at any time declare this lease terminated and this lease shall expire as fully and completely as if that day were the date herein originally fixed for the expiration of the term, and Tenant shall quit and surrender the premises to Landlord, but Tenant shall nevertheless continue to remain liable hereunder. Landlord may at any time thereafter re-enter the leased premises and remove all persons and property therefrom by any suitable action or proceeding at law or in equity or by force or otherwise, without being liable for any prosecution thereof or any damages arising therefrom and repossess and enjoy the leased premises. Such re-entry shall not relieve Tenant of the obligation to make the rental payments required by this Lease at the time and in the manner provided herein. Upon such re-entry, Landlord may, but shall not be required to, repair, alter, remodel and/or change the character of the leased premises as Landlord may see fit and/or at any time relet the premises in whole or in part for any period or time that the Landlord elects, whether longer or shorter than the unexpired portion of the term of this lease, as agent of Tenant, or otherwise, in the name of Landlord or of Tenant, as Landlord may see fit and Landlord may receive the rents therefor, applying the same first to the payment of such reasonable expenses as Landlord may have incurred in entering, dispossessing, reletting, repairing or altering the premises, and then to the fulfillment of the covenants of Tenant herein, including but not limited to the rental payments required hereunder, retaining any such balances until the date the term of this lease would otherwise have expired as security for the payment of all obligations of Tenant which may arise and be unpaid during such period. In attempting to relet the leased premises, Landlord shall be the sole judge as to whether or not proposed tenant is suitable and acceptable. Landlord shall not, by receiving partial payments of rents in arrears, be deemed to have waived any rights herein for nonpayment of rent of for any other default on the part of Tenant. ARTICLE 16. NOTICE REQUIREMENTS All notices required or permitted by the terms of this lease shall be given by United States registered or certified mail, addressed to Tenant c/o Chattem, Attn: Derrill Pitts 1715 West 38th Street, Chattanooga, TN 37409 and addressed to Tammy Development Company 4289 Bonny Oaks Drive, Suite 201, Chattanooga, TN 37406. The date when such notice shall be deemed to have been given shall be the date when it is deposited in the United States Mails, postage prepaid, in accordance with the provisions of this paragraph. Any address or addressee herein specified may be changed from time to time by either party by written notice given to the other party as above provided, such change or address or addressee to become effective at the expiration of five (5) calendar days from the date of the notice of change. ARTICLE 17. SURRENDER Tenant, and Tenant's assignees and/or sub-tenants, if any, shall surrender the premises to Landlord at the expiration of the term hereof, or any extension hereof, or upon termination of this lease by virtue of Tenants' default, broom clean and in good condition, damage by fire or other casualty not caused by the negligence of Tenant, Tenant's employees, agents, officers and invitees, excepted. If Tenant shall default in so surrendering the premises, then Tenant's occupancy subsequent to such expiration shall be deemed to be that of a tenant at will, and in no event from month to month, or from year to year, subject to all of the terms, covenants and conditions of this lease applicable thereto, and no extension or renewal of this lease shall be deemed to have occurred by such holding over. ARTICLE 18. CONDEMNATION In the event that the term of this lease or any extension or renewal thereof either the entire premises or the building of which the premises are a part, or such substantial part of either as to render the remaining premises or building untenantable, are acquired by governmental or quasi-governmental authority by exercise of the power or eminent domain, this lease shall be adjusted at the time possession must be surrendered to such authority for all purposes, and prepaid or unpaid rent shall be adjusted between the parties as of such date. In the event that only such portion of the premises or the building is acquired by such authority by the exercise of such power as will leave the remaining premises in a condition suitable for use by Tenant in its business, the monthly rental payments from the date of such acquisition to the end of the original or any extended term hereof shall be reduced in proportion to the resulting loss of use of said premises by Tenant, but such reduction shall not exceed Landlord's award attributable to the premises. In the event such partial acquisition and reduction in rent, Landlord agrees to make promptly, at Landlord's expense, all necessary alterations and repairs which shall be required because of such partial acquisition by eminent domain, to restore the premises to a safe and tenable condition, but only to the extent of proceeds of condemnation make available to Landlord. Tenant shall have no claim against Landlord or the condemning authority for any acquisition of the leasehold interest, provided that nothing herein contained shall in any way prejudice or interfere with any claim which Tenant may have against the authority exercising the power of eminent domain for damages or otherwise for destruction or interference with the business of Tenant in the premises so long as such claim does not diminish Landlord's claim. For purposes of this section, acquisition of all or a part of the premises by governmental or quasi-governmental authority by means of voluntary negotiations and contract shall be deemed to be acquisition by exercise of the power of eminent domain. ARTICLE 19. WAIVER OF SUBROGATION Each of the parties hereto waives any and all rights to recovery against the other or against the officers, employees, agents, representatives, of such other party for loss of or damage to such waiving party or its property or the property of others under its control, arising from any cause insured against under the standard form of fire insurance policy 5 ARTICLE 19. WAIVER OF SUBROGATION Each of the parties hereto waives any and all rights of recovery against the other or against the officers, employees, agents, representatives of such other party for loss of or damage to such waiving party or its property or the property of others under its control, arising from any cause insured against under the standard form of fire insurance policy with all permissible extension endorsements covering additional perils or under any other policy of insurance carried by such waiving party in lieu thereof, provided said waiver does not adversely affect such insurance. ARTICLE 20. LEASE SUBORDINATION Tenant agrees that its interest in the leased premises shall be and remain subject and subordinate to the lien of any existing mortgage, deed of trust, security instrument, or other lien applicable to the leased premises, the property of which the leased premises are a part and/or its contents. Upon request of Landlord, Tenant will enter into a written agreement subordinating the lease to the lien of any future mortgage, deed of trust, security instrument, or other lien applicable to the leased premises and any extensions or renewals thereof and to all advances made or hereafter to be made on the security thereof, irrespective of the date of execution or recordation, provided that mortgagee consents that Tenant's possession of the premises and Tenant's rights and privileges under the lease, or any renewals, modifications, or extensions thereof shall not be diminished or interfered with by that mortgagee and Tenant's occupancy of the premises shall not be disturbed by that mortgagee during the term of the lease or any renewals, modifications, or extensions thereof for so long as Tenant is not in default (beyond any period given Tenant to cure such default) in the payment of rent or in the performance of any of the terms, covenants, or conditions of the lease on Tenant's part to be performed. ARTICLE 21. ATTORNMENT If, by reason of any default by Landlord as mortgagor or grantor under any present and/or future mortgage, deed of trust security instrument, or other lien, Landlord's equitable title or fee simple title is terminated through foreclosure or trustee sale or otherwise at the instance of the holder of such mortgage, deed of trust, security instrument, or other lien, Tenant hereby agrees to attorn to the purchaser at the foreclosure or trustee sale and will recognize such purchaser as Landlord under the lease. ARTICLE 22. QUIET ENJOYMENT Provided Tenant shall pay all rents as herein agreed and keep and perform all of the terms, covenants and conditions hereof, Tenant shall peaceably possess and quietly enjoy the demised premises without disturbance or interruption subject only to the terms and conditions of this Lease. ARTICLE 23. RIGHTS OF SUCCESSORS AND ASSIGNS The terms, covenants and conditions in this Lease shall apply to and inure to the benefit of and be binding upon the parties hereto and upon their respective executors, heirs, legal representatives, successors and assigns, as the case may be. ARTICLE 24. LANDLORD REPRESENTATIONS The Landlord represents and warrants that: (i) Landlord is the fee owner of the demised premises and has all right, power and authority to execute, deliver and perform this lease; (ii) the execution, delivery and performance of this Lease by Landlord do not violate any provision of applicable law or any agreement, instrument or document to which Landlord is a party or by which its assets may be bound or affected. ARTICLE 25. RECORDING Owner and Tenant hereby agree to execute a memorandum of lease in form satisfactory to Tenant. Tenant may, at Tenant's sole cost and expense, promptly record such memorandum of lease in the registrar's office of the County in which the Leased Premises are located. ARTICLE 26. ESTOPPEL CERTIFICATE Tenant agrees, with seven (7) days after written request by Landlord, to execute, acknowledge and deliver to and in favor of any proposed mortgagee or purchaser of the Premises, an estoppel certificate, in the form customarily used by such proposed mortgagee or purchaser, stating, among other things (i) whether this Lease is in full force and effect, (ii) whether this Lease has been modified or amended and, if so, identifying and describing any such modification or amendment, (iii) the date to which rent and other charge has been paid, and (iv) whether the party furnishing such certificate knows of any default on the part of the Landlord or has any claim against such Landlord and, if so, specifying the nature of such default or claim. ARTICLE 27. TERMINOLOGY Whenever Landlord and Tenant are herein referred to, such reference shall be construed as applying to their respective successors in interest, and in the singular or plural number, and in the masculine, feminine or neuter gender, whichever is properly applicable. 6 ARTICLE 28. CAPTIONS The captions of this lease are for convenience only and are not a part of this lease and do not in any way limit or amplify the terms and provisions of this lease. ARTICLE 29. ENTIRE AGREEMENT This lease contains all of the agreements between the parties hereto and may not be modified in any manner unless by agreement in writing signed by all parties hereto or their successors in interest. DATE 8-1-95 DATE 7/21/95 ------------------------------- --------------------------- LANDLORD: Tammy Development Company TENANT: Chattem, Inc. By:-------------------------------- By:---------------------------- WITNESS: WITNESS: - ----------------------------------- ------------------------------- 7 EXHIBIT 10.2 COMMERCIAL LEASE THIS LEASE, made as of the last date of execution as entered on the last page of this agreement between TAMMY DEVELOPMENT COMPANY hereinafter referred to as "Landlord", and CHATTEM, INC. hereinafter referred to as "Tenant". WITNESSETH: ARTICLE 1. PREMISES, TERM AND USE SECTION 1. PREMISES. Landlord hereby leases to Tenant, and Tenant, hereby leases from Landlord, in consideration of the rents to be paid and the covenants and agreements to be performed and observed by Tenant, the following described space of approximately 9,600 square feet known as PHASE I, SOUTH BROAD STREET CENTER, CHATTANOOGA, TENNESSEE hereinafter referred to as "The Premises", including the ancillary parking area and the non-exclusive right to use the common driveway for ingress and egress. SECTION 2. TERM. The term of the lease shall be FIVE years commencing on the First day of FEBRUARY 1996 and ending on the last day of JANUARY 2001. SECTION 3. PERMITTED USE. The Premises shall be used for LIGHT MANUFACTURING, WAREHOUSING AND DISTRIBUTION and for no other use without Landlord's prior written consent. SECTION 4. ZONING. Landlord warrants that the premises are zoned to permit the uses setforth in Article 1, Section 3 and are in compliance with all applicable laws, ordinances, regulations of the United States and the State, County and City where the premises are located. The Premises are currently zoned M-1. ARTICLE 2. RENT SECTION 1. MINIMUM RENT. During the term of this lease, Tenant covenants and agrees to pay the Landlord a fixed minimum rent (hereinafter called the "Minimum Rent"), in equal monthly installments on the first day of each and every month in advance, payable to TAMMY DEVELOPMENT COMPANY - 4289 BONNY OAKS DRIVE, SUITE 201, CHATTANOOGA, TN 37406: (i) Commencing FEBRUARY 1, 1996 and Terminating JANUARY 31, 1998 a minimum rent of TWENTY-SEVEN THOUSAND THREE HUNDRED SIXTY AND 00/100 DOLLARS ($27,360) per year payable in equal monthly installments of TWO THOUSAND TWO HUNDRED EIGHTY AND 00/100 DOLLARS ($2,280.00); (i) Commencing FEBRUARY 1, 1998 and Terminating JANUARY 31, 2001 a minimum rent of TWENTY EIGHT THOUSAND EIGHT HUNDRED AND 00/100 DOLLARS ($28,800.00) per year payable in equal monthly installments of TWO THOUSAND FOUR HUNDRED AND 00/100 DOLLARS ($2,400.00); SECTION 2. TERMINATION NOTICE. At anytime after the end of the 48th month of the base term, both parties shall be required to provide a twelve month advance termination notice to the other party citing its intention to terminate the lease agreement. This condition specifically imposes an obligation upon both parties to either terminate the lease as of January 31, 2001 or the termination date of the lease will automatically be extended in consecutive monthly increments and the lease will continue under the same terms and conditions, except as to the rental, until otherwise modified or terminated in writing. The rental for the carryover term, if applicable, commencing February 1, 2001, will be calculated based on a rate of $3.15 per square foot, per annum. SECTION 3. PROMPT PAYMENT WITHOUT DEMAND. Time is of the essence of this lease and Tenant shall pay the rent herein reserved at the time and place specified without deduction, setoff, notice, or demand. Tenant expressly waives any and all requirements for written notice for nonpayment of rent. ARTICLE 3. TAXES AND INSURANCE SECTION 1. REAL ESTATE TAXES AND INSURANCE PREMIUMS. The landlord shall pay all real estate taxes and assessments ("real estate taxes") and insurance premiums imposed upon the land and building, provided,however, that Tenant shall reimburse Landlord for the increase in its proportionate share of any increases in the amount of real estate taxes and insurance premiums paid or payable by Landlord on the land and building for each calendar year during the term of this lease, and extensions, if any, over the amount which Landlord paid for such real estate taxes (which proportionate share is hereby agreed to be $3,345.37) and insurance premiums (which proportionate share is hereby agreed to be $490.19). For the purpose of this Article, it shall be presumed that any insurance premiums or taxes paid or payable will be for the calendar year in which it becomes due and irrespective of any policy year or period. In the event the total amount of taxes and insurance results in a net decrease below the base year amounts, no reduction in rent below the minimum rent set out in Article 2 will be allowed, nor will such decreases below the base year amounts offset future increases. SECTION 2. PROPORTIONATE SHARE. Tenant's proportionate share of any increases under Section 1 above shall be deemed to be 19.36 percent (%). 1 SECTION 3. LIMITATIONS ON INSURANCE PREMIUMS PAYABLE BY TENANT. Landlord and Tenant agree that the insurance coverage contemplated by this Article shall include fire and extended coverage: in an amount not to exceed the building replacement cost and in any amount sufficient to avoid co-insurance, public liability insurance, business interruption/rental abatement insurance, and may include other coverage commonly included in an All Risk Insurance Policy. SECTION 4. CONTEST OF TAX ASSESSMENT. In the event of an increase in real estate taxes hereunder, the Landlord may contest such increase through the appropriate proceedings (however, nothing herein shall require Landlord to contest any increases) and Tenant agrees to pay its proportionate share of Landlord's cost in contesting such taxes if these costs were additional taxes in the year paid. Landlord must notify Tenant of proposed increases in taxes. Tenant may elect to contest such increase or participate with the Landlord to contest such increases through the appropriate proceedings. Tenant must agree in writing to the proportionate share of Landlord's cost of contesting such tax. SECTION 5. PERSONAL PROPERTY TAXES. Tenant shall pay and be liable for all taxes levied against personal property and trade fixtures placed by Tenant in the premises and for any real estate taxes assessed as a result of Tenant's improvements, alterations or installations. SECTION 6. PAYMENT OF TAXES OR INSURANCE BY TENANT. The amount of taxes or insurance premiums due from Tenant to Landlord hereunder, if any, shall be treated as rent for all purposes of this lease and shall be payable by Tenant to Landlord within 30 calendar days after Landlord bills Tenant for such increases. Increases, if any, for the year during which this lease commences or terminates shall be prorated in accordance with the length of time Tenant occupied the premises in said year. SECTION 7. TAX ON RENTS. Should the United States of America, the State of Tennessee, Hamilton County, the City of Chattanooga, or any other governmental unit or agency, whether now existing or hereafter created, be given the power to levy and collect tax from Landlord on the rental payable hereunder, other than general income taxes, inheritance or gift taxes. Tenant agrees to reimburse Landlord in full for the amount of taxes so paid by Landlord on the rentals payable under this lease. Any sums payable by Tenant hereunder shall constitute additional rent and be included in Tenant's monthly installment, in addition to the minimum rent, or in any payment of additional rent. SECTION 8. LIABILITY INSURANCE. Tenant, at Tenant's expense, shall procure and maintain throughout the term of this lease public liability insurance covering the premises, and the use and occupancy of same, including any adjoining sidewalks, and parking areas, in a company or companies acceptable to Landlord and licensed to do business in Tennessee under a policy satisfactory in form to Landlord, naming Hudson Companies Incorporated, as Landlord, as an additional insured, with limits of not less than $500,000.00 combined single limit. The policy or policies shall contain the provision that they may not be canceled without first giving Landlord not less than fifteen (15) days prior written notice. Duplicate policies or certificates of all insurance shall be delivered to Landlord not less than five (5) days prior to each effective date. SECTION 9. PERSONAL PROPERTY INSURANCE. It shall be Tenant's sole responsibility to insure and keep insured, at Tenant's expense, all personal property which is owned by the Tenant, or any other authorized occupant of the leased premises, and which is placed or stored in the leased premises or elsewhere in the building of which they are a part: and it is agreed that Landlord shall have no responsibility to effect such insurance. ARTICLE 4. USES PROHIBITED The premises and all buildings and improvements thereon shall, during the term of this lease, be used only and exclusively for the purposes set fort in Article 1, Section 3, and no part of the premises or improvements thereon shall be used in any manner whatsoever for any purposes in violation of the laws, ordinances, regulations or orders of the United States, or of the State, County and/or City where the premises are located, or of any duly constituted subdivision, department or board thereof. Tenant shall not knowingly use or occupy the premises or any part thereof, or suffer or permit the same to be used or occupied for any business or purpose deemed extra hazardous on account of fire or otherwise: and if by reason of the use and occupancy of the premises, the policy covering the premises (Fire Insurance, Extended Coverage or Liability) is to be canceled or the rate of said insurance shall be increased, the Landlord shall have the option of terminating this lease, or on demand, Tenant will pay to Landlord the amount of such increase (but such increase in the rate of insurance shall not be deemed a breach of this covenant by Tenant). Tenant covenants and agrees that Tenant will not create or maintain, or permit others to create or maintain, any nuisances, including without limiting the foregoing language, loud noises, sound effects, offensive odors, smoke or dust in or about the leased premises, Tenant shall comply in all respects with all applicable federal, state and local laws, rules regulations and orders including without limitation, those relating to pollution, reclamation or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, or hazardous or toxic materials or waste into the air, water, or land, or otherwise relating to the manufacture, processing distribution, use, treatment, storage disposal, transport or handling of pollutants, contaminants or hazardous or toxic materials or wastes. Tenant shall indemnify, defend and hold Landlord harmless from and against any loss, cost damage or expense, including without limitation, attorney's fees and costs of site investigation and clean up, incurred by or imposed upon landlord as a result of the breach by Tenant of its obligations in this Article 4. 2 ARTICLE 5. CONDITION AND CARE OF PREMISES Tenant acknowledges that he has examined the leased premises and accepts them as being in good condition and state of repair and that the capacity of the mechanical equipment (electrical, plumbing, heating and air conditioning), if any, is of adequate capacity for Tenant's use, and Landlord does not warrant their condition in any respect. Tenant, at his own expense, shall keep the premises clean, neat, and free from trash and rubbish, and shall not commit, or permit others to commit any waste, damage, or injury to the leased premises or the building by Tenant, invitees, or other persons whom Tenant permits to be in or about the leased premises. Tenant shall use reasonable diligence to keep the sidewalks adjoining the premises, if any, free from ice and snow and at all times broom clean and free of trash, litter, or obstructions of any kind. Tenant agrees to maintain a fully charged dry chemical fire extinguisher of adequate capacity of use within the premises. ARTICLE 6. MAINTENANCE, REPAIRS, AND ALTERATIONS SECTION 1. OBLIGATIONS OF TENANT. Except for the repairs required of Landlord pursuant to Sections 2 of this Article 6, Tenant shall repair and maintain the Demised Premises, inside in good order, condition, and repair (including any such replacement and restoration as is required for that purpose) without limitation, interior painting, all plate glass, windows, doors, hardware, plumbing fixtures, electric fixtures and equipment, light fixtures, bulbs & ballasts, the heating, ventilating, and air conditioning systems, walls, floors, floor coverings, ceilings and all machinery, equipment and facilities forming apart of the Premises. Should Tenant fail to make any repairs or restoration for which Tenant is responsible under this lease, Landlord may, but will not be obligated to, make same at Tenant's expense, and the cost thereof shall be considered additional rent due hereunder payable immediately. SECTION 2. OBLIGATIONS OF LANDLORD. Except for any repairs necessitated by the negligent act or omission of Tenant, its agents, servants, or invitees, or by any unusual use of the Premises by Tenant, Landlord shall repair and maintain in good order and condition and replace when necessary the electrical wiring, plumbing pipes, sprinkler systems, roof and structural portions of the building, including, but not limited to, bearing walls, foundations, roof, and all outside appurtenances to the building. SECTION 3. ALTERATIONS AND ADDITIONS. Tenant shall not make any alterations or additions to the premises without Landlord's prior written consent. Landlord shall not be liable for the cost of any alterations or additions, all of which are hereinafter referred to in this paragraph as "alterations" made by Tenant, and Tenant shall indemnify and save Landlord harmless on account of claims for mechanic's materialmen's or other liens in connection with any alterations made by Tenant, and any such liens shall exist only against Tenant's leasehold interest, and not against Landlord's interest, whether in fee or otherwise. Upon Landlord's request, Tenant shall provide Landlord a waiver of lien from any contractor performing work on the Premises. All alterations made by Tenant shall be in full compliance with all applicable building laws, ordinances and regulations. All alterations that may be made by either of the parties shall inure to Landlord's benefit and shall become a part of the premises and shall belong to Landlord absolutely as soon as made. ARTICLE 7. INDEMNIFICATION Landlord shall not be liable for any loss, damage or injury to person or property occurring, except due to the gross negligence or intentional conduct of the landlord or its agents, in or about the premises, and Tenant shall indemnify and hold Landlord harmless from any and all such injuries and damages, and shall defend any claims or legal actions arising, therefrom, and pay all judgements resulting therefrom and shall reimburse Landlord for all costs and expenses, including attorney's fees, paid or incurred by landlord as a result thereof. Without in any way limiting the general language of the sentence immediately proceeding, Landlord shall not be liable for loss of or damage to any property at any time located in or about the premises, whether or not Tenant is the owner hereof, including, but not limited to, any loss, damage or injury resulting from steam, gas or electricity, or from water, rain, snow, ice or other substance which may leak into, or issue or flow from any part of the premises or from the pipes or plumbing work of the premises, or from or into any other place or quarter. Landlord shall be under no liability to Tenant on account of any discontinuance of heat, electricity, sewer, water, air conditioning, sprinkler, gas and/or other utility, convenience, service or facility, however such discontinuance may be caused, and shall be under no obligation to see that such discontinuance is rectified, and no such discontinuance shall constitute conservative eviction or any ground for termination of this lease by Tenant. Landlord shall indemnify Tenant and hold Tenant harmless from any and all losses, damages and injuries resulting from the gross negligence of the Landlord or its agents, and shall defend any claims or legal actions arising therefrom and shall reimburse Tenant for all costs and expenses, including attorney fees, paid or incurred by Tenant as a result thereof. ARTICLE 8. DAMAGE OR DESTRUCTION BY FIRE OR OTHER CASUALTY If at any time the premises becomes totally untenantable by reason of damage or loss by fire or other casualty and such fire or other casualty shall not have been caused by the negligence or wrongful act or omission of Tenant, Tenant's servant, agents, licensees or invitees, the rent shall abate until the premises have been restored to tenantable condition, but nothing herein is to be constructed as requiring Landlord to rebuild or restore the premises. In the event of a loss from fire or other casualty, Landlord shall have the election not to rebuild or recondition the premises which such election may be exercised by written notice thereof to Tenant, given within thirty (30) days from the date of said loss. For purposes of this Article 8, "totally untenantable" shall mean that the premises had been damaged to the extent that the interior of the premises and the contents therein are exposed to the elements. 3 If Landlord exercises such election, this lease shall cease and terminate, effective on the date of such loss, and Tenant shall pay the accrued rent up to the date of such loss, or Landlord, if the rent has been paid beyond such date, will refund to Tenant the proportionate part of any such rent prepaid, and thereupon this lease shall become null and void, without further obligations on the part of either party hereto, even though the building may at a later date be rebuilt, restored or reconditioned. ARTICLE 9. SIGNS Except for the existing signs, no signs shall be constructed or painted on the windows, outside walls, roof or exterior of the premises without the prior written consent of Landlord. ARTICLE 10. LANDLORD'S RIGHT TO GO ON PREMISES Tenant shall permit Landlord and/or Landlord's agents or employees at all reasonable hours to enter the Premises and examine them or to show them to persons wishing to rent or purchase the same, or to make repairs, alternations, or other work thereto, taking any space needed therefor, and no compensation shall be asked or claim made by Tenant by reason of any inconvenience or annoyance arising from anything that may be done in repairing, altering, working on or protecting the Premises or Building of which same may be a part, however, the necessity may arise, but this paragraph shall not be construed as imposing any duty on Landlord to make any repairs, alterations or additions. Tenant shall permit Landlord and/or Landlord's agents, but only during the four months preceding the termination of this Lease, to place upon the windows, walls or doors of the premises "FOR SALE" and/or "FOR RENT" signs, and allow the same to remain there without molestation and without any claim being made by Tenant for compensation on account thereof. ARTICLE 11. UTILITIES AND SERVICES Tenant shall pay for all gas, electricity, heat, water, sewer charges, and all other utilities used on or about the Premises, and shall pay any charges of any company furnishing water or pressure for any sprinkler system, fire hydrants or standpipe serving the premises. Tenant shall pay its proportionate share of all special assessments imposed by any governmental entity on the Premises including, but not limited to, the Storm Water Fee instituted by the City to service the property. Tenant shall maintain heat in the premises as necessary to prevent the freezing of plumbing and sprinkler systems. Tenant shall also pay all charges for cleaning services or private garbage service used by Tenant. ARTICLE 12. NO ASSIGNMENT OR SUBLETTING Neither Tenant nor any court officer thereof, nor any receiver or trustee in bankruptcy shall assign or transfer this Lease or any part thereof nor shall the premises be sublet in whole or in part, without Landlord's prior written consent: such consent shall not be unreasonably withheld provided, however, that Tenant, while not in default hereunder, shall have the right to sub-let portions or sections of the premises for departments handling some of the items ordinarily handled in the business for which the premises may be used as provided in Article I hereinabove. Tenant shall always remain liable for any default of any assignee, transferee or sub-tenant. ARTICLE 13. REMOVAL OF FIXTURES Provided Tenant is not in default hereunder, Tenant shall have the right on or before the termination of this Lease, to remove any trade fixtures that were purchased and provided by Tenant, and which are susceptible of being removed without damage to the Building or the Premises, provided Tenant exercises such right before this lease is terminated, and provided Tenant furnishes Landlord in advance adequate security satisfactory to Landlord that the Building and Premises will be restored to their original condition at Tenant's expense immediately after such removal. This right of removal shall not include any right to remove any heating, air conditioning, plumbing, wiring, linoleum or carpeting, and shall not, as a matter of course, include any fixtures that were furnished or paid for by Landlord. Any such items remaining on the Premises or in the Building after such date of termination shall, at Landlord's option, be deemed the property of Landlord for such disposition as Landlord sees fit or Landlord may require Tenant to remove all of Tenant's property. ARTICLE 14. WAIVER PROVISION The failure of Landlord to insist on strict performance of any of the terms, conditions and covenants herein shall not be deemed to be a waiver of any rights of remedies that Landlord may have and shall not be deemed a waiver of any subsequent breach in the terms, conditions and covenants herein contained except as may expressly waived. ARTICLE 15. DEFAULT PROVISIONS If: (i) Tenant shall default in payment of the rent due hereunder and such default shall continue for a period of Ten (10) days after the due date of the rent, Landlord will give the Tenant written notice of default and five (5) business days following the notice to cure the default: or (ii) the leased premises become deserted or stand vacant or are used for purpose other than that stated in Article I herein: or (iii) Tenant be in under any other covenant, agreement, obligation or condition of this lease and fails to cure such default within thirty (30) days after written notice thereof from Landlord (or if such default shall be of such a nature that it cannot be cured completely within such thirty (30) day period. Tenant shall not have property commenced with such thirty (30) day period and shall not thereafter proceed with reasonable diligence and good faith to remedy such default): 4 such thrity (30) day period, Tenant shall not have properly commenced with such thrity (30) day period and shall not thereafter proceed with reasonable diligence and good faith to remedy such default); (iv) Tenant shall file a voluntary petition in bankruptcy, reorganization or receivership, become insolvent, be adjudicated bankrupt, or make an assignment for the benefit of creditors, or if any involuntary petition in bankruptcy, reorganization or receivership is filed against Tenant and not dismissed within sixty (60) days, any such event shall, at Landlord's option, constitute a default of Tenant hereunder and Landlord, at Landlord's option and without further notice to Tenant, which is hereby expressly waived, may at any time declare this lease terminated and this lease shall expire as fully and completely as if that day were the date herein originally fixed for the expiration of the term, and Tenant shall quit and surrender the premises to Landlord, but Tenant shall nevertheless continue to remain liable hereunder. Landlord may at any time thereafter re-enter the leased premises and remove all persons and property therefrom by any suitable action or proceeding at law or in equity or by force or otherwise, without being liable for any prosecution thereof or any damages arising therefrom and repossess and enjoy the leased premises. Such re-entry shall not relieve Tenant of the obligation to make the rental payments required by this Lease at the time and in the manner provided herein. Upon such re-entry, Landlord may, but shall not be required to, repair, alter, remodel and/or change the character of the leased premises as Landlord may see fit and/or at any time relet the premises in whole or in part for any period or time that the Landlord elects, whether longer or shorter than the unexpired portion of the term of this lease, as agent of Tenant, or otherwise, in the name of Landlord or of Tenant, as Landlord may see fit and Landlord may receive the rents therefor, applying the same first to the payment of such reasonable expenses as Landlord may have incurred in entering, dispossessing, reletting, repairing or altering the premises, and then to the fulfillment of the covenants of Tenant herein, including but not limited to the rental payments required hereunder, retaining any such balances until the date the term of this lease would otherwise have expired as security for the payment of all obligations of Tenant which may arise and be unpaid during such period. In attempting to relet the leased premises, Landlord shall be the sole judge as to whether or not proposed tenant is suitable and acceptable. Landlord shall not, by receiving partial payments of rents in arrears, be deemed to have waived any rights herein for nonpayment of rent of for any other default on the part of Tenant. ARTICLE 16. NOTICE REQUIREMENTS All notices required or permitted by the terms of this lease shall be given by United States registered or certified mail, addressed to Tenant c/o Chattem, Attn: Derrill Pitts 1715 West 38th Street, Chattanooga, TN 37409 and addressed to Tammy Development Company 4289 Bonny Oaks Drive, Suite 201, Chattanooga, TN 37406. The date when such notice shall be deemed to have been given shall be the date when it is deposited in the United States Mails, postage prepaid, in accordance with the provisions of this paragraph. Any address or addressee herein specified may be changed from time to time by either party by written notice given to the other party as above provided, such change or address or addressee to become effective at the expiration of five (5) calendar days from the date of the notice of change. ARTICLE 17. SURRENDER Tenant, and Tenant's assignees and/or sub-tenants, if any, shall surrender the premises to Landlord at the expiration of the term hereof, or any extension hereof, or upon termination of this lease by virtue of Tenant's default, broom clean and in good condition, damage by fire or other casualty not caused by the negligence of Tenant, Tenant's employees, agents, officers and invitees, excepted. If Tenant shall default in so surrendering the premises, then Tenant's occupancy subsequent to such expiration shall be deemed to be that of a tenant at will, and in no event from month to month, or from year to year, subject to all of the terms, covenants and conditions of this lease applicable thereto, and no extension or renewal of this lease shall be deemed to have occurred by such holding over. ARTICLE 18. CONDEMNATION In the event that the term of this lease or any extension or renewal thereof either the entire premises or the building of which the premises are a part, or such substantial part of either as to render the remaining premises or building untenantable, are acquired by governmental or quasi-governmental authority by exercise of the power or eminent domain, this lease shall be adjusted at the time possession must be surrendered to such authority for all purposes, and prepaid or unpaid rent shall be adjusted between the parties as of such date. In the event that only such portion of the premises or the building is acquired by such authority by the exercise of such power as will leave the remaining premises in a condition suitable for use by Tenant in its business, the monthly rental payments from the date of such acquisition to the end of the original or any extended term hereof shall be reduced in proportion to the resulting loss of use of said premises by Tenant, but such reduction shall not exceed Landlord's award attributable to the premises. In the event such partial acquisition and reduction in rent, Landlord agrees to make promptly, at Landlord's expense, all necessary alterations and repairs which shall be required because of such partial acquisition by eminent domain, to restore the premises to a safe and tenable condition, but only to the extent of proceeds of condemnation made available to Landlord. Tenant shall have no claim against Landlord or the condemning authority for any acquisition of the leasehold interest, provided that nothing herein contained shall in any way prejudice or interfere with any claim which Tenant may have against the authority exercising the power of eminent domain for damages or otherwise for destruction or interference with the business of Tenant in the premises so long as such claim does not diminish Landlord's claim. For purposes of this section, acquisition of all or a part of the premises by governmental or quasi-governmental authority by means of voluntary negotiations and contract shall be deemed to be acquisition by exercise of the power of eminent domain. 5 ARTICLE 19. WAIVER OF SUBROGATION Each of the parties hereto waives any and all rights of recovery against the other or against the officers, employees, agents, representatives of such other party for loss of or damage to such waiving party or its property or the property of others under its control, arising from any cause insured against under the standard form of fire insurance policy with all permissible extension endorsements covering additional perils or under any other policy of insurance carried by such waiving party in lieu thereof, provided said waiver does not adversely affect such insurance. ARTICLE 20. LEASE SUBORDINATION Tenant agrees that its interest in the leased premises shall be and remain subject and subordinate to the lien of any existing mortgage, deed of trust, security instrument, or other lien applicable to the leased premises, the property of which the leased premises are a part and/or its contents. Upon request of Landlord, Tenant will enter into a written agreement subordinating the lease to the lien of any future mortgage, deed of trust, security instrument, or other lien applicable to the leased premises and any extensions or renewals thereof and to all advances made or hereafter to be made on the security thereof, irrespective of the date of execution or recordation, provided that mortgagee consents that Tenant's possession of the premises and Tenant's rights and privileges under the lease, or any renewals, modifications, or extensions thereof shall not be diminished or interfered with by that mortgagee and Tenant's occupancy of the premises shall not be disturbed by that mortgagee during the term of the lease or any renewals, modifications, or extensions thereof for so long as Tenant is not in default (beyond any period given Tenant to cure such default) in the payment of rent or in the performance of any of the terms, covenants, or conditions of the lease on Tenant's part to be performed. ARTICLE 21. ATTORNMENT If, by reason of any default by Landlord as mortgagor or grantor under any present and/or future mortgage, deed of trust security instrument, or other lien, Landlord's equitable title or fee simple title is terminated through foreclosure or trustee sale or otherwise at the instance of the holder of such mortgage, deed of trust, security instrument, or other lien, Tenant hereby agrees to attorn to the purchaser at the foreclosure or trustee sale and will recognize such purchaser as Landlord under the lease. ARTICLE 22. QUIET ENJOYMENT Provided Tenant shall pay all rents as herein agreed and keep and perform all of the terms, covenants and conditions hereof, Tenant shall peaceably possess and quietly enjoy the demised premises without disturbance or interruption subject only to the terms and conditions of this Lease. ARTICLE 23. RIGHTS OF SUCCESSORS AND ASSIGNS The terms, covenants and conditions in this Lease shall apply to and inure to the benefit of and be binding upon the parties hereto and upon their respective executors, heirs, legal representatives, successors and assigns, as the case may be. ARTICLE 24. LANDLORD REPRESENTATIONS The Landlord represents and warrants that: (i) Landlord is the fee owner of the demised premises and has all right, power and authority to execute, deliver and perform this lease; (ii) the execution, delivery and performance of this Lease by Landlord do not violate any provision of applicable law or any agreement, instrument or document to which Landlord is a party or by which its assets may be bound or affected. ARTICLE 25. RECORDING Owner and Tenant hereby agree to execute a memorandum of lease in form satisfactory to Tenant. Tenant may, at Tenant's sole cost and expense, promptly record such memorandum of lease in the registrar's office of the County in which the Leased Premises are located. ARTICLE 26. ESTOPPEL CERTIFICATE Tenant agrees, with seven (7) days after written request by Landlord, to execute, acknowledge and deliver to and in favor of any proposed mortgagee or purchaser of the Premises, an estoppel certificate, in the form customarily used by such proposed mortgagee or purchaser, stating, among other things (i) whether this Lease is in full force and effect, (ii) whether this Lease has been modified or amended and, if so, identifying and describing any such modification or amendment, (iii) the date to which rent and other charge has been paid, and (iv) whether the party furnishing such certificate knows of any default on the part of the Landlord or has any claim against such Landlord and, if so, specifying the nature of such default or claim. ARTICLE 27. TERMINOLOGY Whenever Landlord and Tenant are herein referred to, such reference shall be construed as applying to their respective successors in interest, and in the singular or plural number, and in the masculine, feminine or neuter gender, whichever is properly applicable. 6 ARTICLE 27. TERMINOLOGY Whenever Landlord and Tenant are herein referred to, such reference shall be contrued as applying to their respective successors, and in the singular or plural number, and in the masculine, feminine or neuter gender, whichever is properly applicable. ARTICLE 28. CAPTIONS The captions of this lease are for convenience only and are not a part of this lease and do not in any way limit or amplify the terms and provisions of this lease. ARTICLE 29. ENTIRE AGREEMENT This lease contains all of the agreements between the parties hereto and may not be modified in any manner unless by agreement in writing signed by all parties hereto or their successors in interest. DATE 8-1-95 DATE 7/21/95 ------------------------------- --------------------------- LANDLORD: Tammy Development Company TENANT: Chattem, Inc. By:-------------------------------- By:---------------------------- WITNESS: WITNESS: - ----------------------------------- ------------------------------- 7 EX-10.3 5 EXHIBIT 10.3 EXHIBIT 10.3 NON-COMPETITION AND SEVERANCE AGREEMENT This Agreement is made and entered into as of this 31st day of May, 1995 by and between Chattem, Inc., a Tennessee corporation (the "Company") and B. DERRILL PITTS (the "Executive"). WITNESSETH: ---------- WHEREAS, the Company is desirous of assuring itself of continuity of management through the retention of certain key Executives, and to foster their unbiased and analytical assessment of any offer to acquire control of the Company; and WHEREAS, the Company desires to impose upon the Executive obligations of confidentiality and to restrict his ability to obtain employment with certain competitors of the Company; and WHEREAS, the Executive is willing to accept obligations of confidentiality and non-competition in exchange for specified severance benefits; NOW, THEREFORE, the Company and the Executive do hereby agree as follows: 1. TERM. The Term of this Agreement shall commence as of the day and year first above written and continue indefinitely thereafter for a period ending two (2) years after the termination of the Executive's employment with the Company. 2. CONFIDENTIALITY OBLIGATIONS. During the term of this agreement the Executive agrees to maintain all confidential information and trade secrets obtained during the course of his employment with the Company as confidential and to disclose the same to no one, other than in the furtherance of the Company's business in the normal course or to a fellow employee with a reasonable need to know, unless the Executive can demonstrate by documentary evidence that such information was (1) known to him prior to his employment with the Company; (2) Subsequently became part of the public domain through no fault of his own; or (3) was subsequently disclosed to him by a third party not in violation of any obligation of confidentiality and non-use with the Company. 3. NON-COMPETE. In the event of a Change in Control (as hereinafter defined) while Executive is employed by the Company and during the term of this Agreement, Executive will not accept compensation or anything of value from, nor offer or provide any services, including consulting services, to any person, company, partnership, joint venture or other entity which has or does a significant business involving, in whole or in part, health and beauty aid products sold over-the-counter. This provision applies only to entities selling the above specified products in competition with the Company in the United States. 4. SEVERANCE BENEFITS. If the Company Discharges or Constructively Discharges the Executive during the term of this Agreement within twenty-four (24) months after the occurrence of a Change in Control, he shall receive a Severance Benefit. These terms are hereby defined as follows: A. "Change in Control": (i) Change of one-third (1/3) or more of any directors of the Company within any twelve (12) month period; or - 2 - (ii) Change of one-half (1/2) or more of the directors of the Company within any twenty-four (24) month period; or (iii) Acquisition by any person of the ownership or right to vote of thirty-five (35%) percent or more of the Company's outstanding voting shares. "Person" shall mean any person, corporation, partnership, or any entity and any affiliate or associate thereof. "Affiliate" and "associate" shall have the meanings assigned to them in Rule 12(b)(2) of the General Rules and Regulations under the Securities Exchange Act of 1934. B. "Discharges": terminates the Executive for any reason other than indictment or conviction for a felony or other crime involving substantial moral turpitude, disability, death, alcoholism, drug addiction or the gross, active misfeasance of the Executive with regard to his duties with the Company. C. "Constructively Discharges": changes location or reduces the Executive's status, duties, responsibilities or direct or indirect compensation, (including future increases commensurate with those given other managers - 3 - of the Company), or so alters the style or philosophy of the conduct of the Company's business, in the opinion of the Executive, as to cause it to be undesirable to the Executive to remain in the employ of the Company. D. "Severance Benefit": a payment equal to two hundred (200%) percent of the Executive's average annual includible compensation from the Company during the five (5) most recently completed taxable years before the date on which the Change in Control occurs. Any partial taxable years shall be annualized. In the event that the Executive's employment is less than five (5) years, the average annual compensation should be calculated based on the rate of compensation for the actual term of employment. 5. PAYMENT. The Severance Benefit shall be paid to the Executive in a lump sum or, at the Executive's election, in two (2) equal installments with the first to be made not later than thirty (30) days after discharge or constructive discharge and the second installment one (1) year after the first installment was paid. No interest shall be due upon the Severance Benefit unless it is not paid when due and in which case interest shall accrue thereon at the applicable Federal rate used to determine present value under Section 280(G) of the Internal Revenue Code of 1986 as amended. - 4 - 6. CONTINUATION OF BENEFITS. The Company shall continue to provide to the Executive at its cost and expense health, medical and life insurance benefits at substantially the same level of benefits as the Executive has at the date he becomes entitled to the Severance Benefit in accordance with Section 4 hereof for a period of two (2) years following the date the Executive becomes entitled to such Severance Benefit. 7. ARBITRATION OF ALL DISPUTES. Any controversy or claim arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration in the City of Chattanooga in accordance with the laws of the State of Tennessee by three (3) arbitrators, one of whom shall be appointed by the Company, one by the Executive and the third of whom shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association. The arbitrations shall be conducted in accordance with the rules of the American Arbitration Association. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any and all of his rights under this Agreement, the Company shall pay (or the Executive shall be entitled to recover from the Company, as the case may be) his reasonable attorneys' fees and costs and expenses in connection with the enforcement of his said rights (including the enforcement of any arbitration award in court), regardless of - 5 - the final outcome, unless the arbitrators shall determine that under the circumstances recovery by the Executive of all or a part of any such fees and costs and expenses would be unjust. 8. NOTICES. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal executive offices addressed to the President. 9. NO-ALIENATION. The Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law. Notwithstanding the foregoing provisions, in the event that the Executive dies following discharge or constructive discharge after a Change in Control, but before receiving all of his Severance Benefit, the unpaid Severance Benefit shall be paid to his estate in accordance with the terms of this Agreement. 10. GOVERNING LAW. The provisions of this Agreement shall be construed in accordance with the laws of the State of Tennessee. 11. AMENDMENT. This Agreement may not be amended or canceled except by the mutual agreement of the parties in writing. 12. SUCCESSORS TO THE COMPANY. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company. - 6 - 13. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reasons, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. ___________________________ B. DERRILL PITTS ATTEST: CHATTEM, INC. ___________________________ By ________________________ Secretary Robert E. Bosworth Executive Vice President (SEAL) EX-11 6 EXHIBIT 11 EXHIBIT 11 CHATTEM, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS FOR THE YEARS ENDED NOVEMBER 30, 1995, 1994 AND 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993 ------------------------------ NET INCOME (LOSS): Continuing operations ........................ $ 2,325 $ 2,110 $(1,100) Discontinued operations ...................... 10,008 1,500 2,379 Extraordinary loss on early extinguishment of debt, net ............................... (367) (1,556) (480) Cumulative effect of accounting change, net ........................................ -- -- 569 -------- -------- -------- Net income .............................. $11,966 $ 2,054 $ 1,368 ======== ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Weighted number of common shares outstanding .............................. 7,292 7,292 6,303 Shares issued upon assumed exercise of outstanding stock options ............. -- -- 38 -------- -------- -------- Weighted average number of common and common equivalent shares outstanding ..... 7,292 7,292 6,341 ======== ======== ======== NET INCOME (LOSS) PER COMMON SHARE: Continuing operations ...................... $ .32 $ .29 $ (.17) Discontinued operations .................... 1.37 .21 .38 Extraordinary loss on early extinguishment of debt, net ............................. (.05) (.21) (.08) Cumulative effect of accounting change, net ...................................... -- -- .09 -------- -------- -------- Net income per common share........... $ 1.64 $ .29 $ .22 ======== ======== ========
EX-13 7 EXHIBIT 13 (ANNUAL REPORT) CONTENTS Financial Highlights .................................................. 1 President's Letter .................................................... 2 Product and Market Summary ............................................ 5 Management's Discussion and Analysis .................................. 9 Selected Financial Data ............................................... 15 Consolidated Balance Sheets ........................................... 16 Consolidated Statements of Income ..................................... 18 Consolidated Statements of Shareholders' Equity (Deficit) ............. 19 Consolidated Statements of Cash Flows ................................. 20 Notes to Consolidated Financial Statements ............................ 21 Report of Independent Public Accountants .............................. 33 CHATTEM, INC. FINANCIAL HIGHLIGHTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993 EARNINGS PER SHARE FROM CONTINUING OPERATIONS $ 0.32 $ 0.29 $ (0.17) COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 7,292 7,292 6,341 DIVIDENDS PER SHARE $ -- $ -- $ 20.20 NET SALES ($ Millions) 95 100.6 94 94.4 93 89.9 92 90.2 91 84.1 INCOME FROM OPERATIONS Before Nonrecurring and Unusual Charges ($ Millions) 95 14.8 94 13.1 93 7.3 92 8.2 91 5.2
I am pleased to report that 1995 was another very successful year highlighted by record operating income before nonrecurring and unusual charges of $14.8 million and the strategic divestiture of Chattem Chemicals. The following is a list of significant accomplishments during the year: - - Operating income before nonrecurring and unusual charges rose 13% to $14.8 million, representing 14.7% of sales. - - International operating income surged to $1.3 million from $120 thousand a year ago. This was led by strong performances in Canada and the United Kingdom. - - BULLFROG sales increased 29% led by BULLFROG for Kids, the new BULLFROG Quick Gel, a revolutionary sunblock, and regained sales to a major customer. - - MUDD was successfully relaunched with two new products, Sea Mask and Aloe Mask, in bold, exciting new packaging. At year end, MUDD consumer sales were increasing 25% due to this relaunch. - - Net debt, funded debt less cash and cash equivalents and investments, was reduced by $23 million due to the Chattem Chemical divestiture and increased profits. - - The operating income increase was achieved through increased sales, a slight increase in gross margin percentage and reduced administrative costs. The sales increase was supported by a 12% rise in advertising and promotion expenses exemplifying our continuing commitment to our brands. - - Finally, we profitably divested Chattem Chemicals to Elcat, Inc., resulting in an after-tax gain of $9.3 million or $1.28 per share. In addition to reducing the Company's debt, this action completely focuses our efforts on the consumer products business. In terms of disappointments, the main issue was significant new competition in several of our larger markets. First, the topical analgesic market had unprecedented activity with the launch of two major new products, Zostrix-Registered Trademark- and CAPSAZIN-P-TM-, which at year end had garnered about 15% market share. In addition, Ben-Gay-Registered Trademark- relaunched its product line backed by strong advertising and promotion support. Due to this higher level of competition, FLEX-ALL sales declined 19%. I will address our response in my 1996 outlook section. Although not at the unprecedented level of competition encountered in the topical analgesics, the face cleanser and cosmetic markets also had significant new competition. In the cleanser category, Neutrogena-Registered Trademark-, Clean & Clear-Registered Trademark-, and OIL of OLAY-Registered Trademark- had strong new products and support levels. This made our PHISODERM relaunch more difficult. 2 In cosmetics, the major new product focus was on the "age defying" products from Revlon-Registered Trademark- and Maybelline-Registered Trademark-. CORN SILK factory sales were stable but at year end we saw some decline in consumer sales as these new products gained share and the oil control category declined. 1996 OUTLOOK 1996 will simply be Chattem's most aggressive year in our history in terms of new product activity. The biggest event is our May 1 launch of PHISODERM Antibacterial Skin Cleanser. This product has been our most tested product ever and we feel very good about its chances for success. The PHISODERM heritage of hospital and doctor usage is ideal for an antibacterial hand soap. Also, the category size of approximately $180 million is the correct size for our corporate strategy of being a leader in small to medium markets of $50 million-$200 million. We will support this exciting launch with strong advertising and promotional support. We should be the leading advertiser in the category during 1996. This new launch will come at an expense of approximately $.20 per share which we think is an appropriate investment to support this important new product. 3 A second major new product will be PHISODERM Sensitive which will continue our relaunch program for PHISODERM Face Cleansers. This new product will appeal to consumers with sensitive skin, which represents over 40% of all women. Also, PHISODERM Sensitive will be unfragranced, an important attribute for many face cleanser users. A third major new product is FLEX-ALL Ultra Plus. FLEX-ALL has been a Menthol only product in terms of active ingredients. Ultra Plus will add two more ingredients, Methyl Salicylate and Camphor, and will be positioned as three ingredient strength for fast and long lasting pain relief. In testing, many consumers prefer the Menthol only relief but also many prefer the strength of the three ingredient product. We think the combination of FLEX-ALL and FLEX-ALL Ultra Plus will meet all consumer's pain relief needs. In addition to these three major launches, we have several other new products for our other brands. CORN SILK Liquid has been reformulated to provide more natural, lighter coverage. ULTRASWIM will introduce a shower gel to address dry itchy skin caused by chlorine damage. Also, we will be continuing our support behind the new MUDD products which began shipping in the last half of 1995. 4 Our primary focus for the year will be to support these important product launches. However, we will continue our emphasis on cost-reduction efforts which have yielded savings of several million dollars over the past two years. We believe we can achieve further efficiencies in terms of material costs, commercial production and media buying. From a cultural and people standpoint, I am extremely proud of the effort our employees put forth to achieve the 1995 results in spite of the competition we faced. Also, I can tell you I have never seen the enthusiasm as high within the Company as it is for 1996. I hope and believe this enthusiasm and effort will enable Chattem to have another successful year. 5 PRODUCT AND MARKET SUMMARY MISSION AND OBJECTIVE The mission of the Company is the satisfaction of consumer needs in personal and health care areas through the marketing of brand name products which are of excellent quality and proven efficacy. These products compete in small to medium size over-the-counter (OTC) pharmaceuticals or functional toiletries and cosmetics markets, with an ideal retail market size of $50 million to $200 million, in which its products can be among the market leaders. These products are advertised through national media and are distributed through the food, drug and mass merchandiser classes of trade. The objective of the Company is to create or maintain a leadership position in each of its markets and to thereby provide superior earnings while also building the value of each brand. DOMESTIC PRODUCT OVERVIEW OTC PHARMACEUTICALS - TOPICAL ANALGESICS The Company competes in the topical external analgesic category, a $190 million market, with its FLEX-ALL 454, ICY HOT and SOLTICE brands. BENZODENT competes in the denture irritation segment, a $37 million segment, within the overall topical oral analgesic category. FLEX-ALL 454, the second largest brand in its category, is an aloe vera-based topical analgesic used by the trainers of all 102 professional football, baseball, basketball and hockey teams, and is the official locker room product of the National Football League. The brand's current product line includes Original and Maximum Strength FLEX-ALL 454, which contain menthol as the active ingredient. The new Ultra Plus product, which begins distribution in mid 1996, contains three active ingredients; menthol, methyl salicylate and camphor. 6 ICY HOT, the fifth largest brand in its category, completed 1995 with its third straight year of double digit sales growth. It is the only brand in the category with three product forms; a cream, a balm and a chill stick. Its unique positioning as the product offering "Icy and Hot Therapy for Pain" and high brand awareness among consumers continues to provide growth opportunities. BENZODENT, a topical oral analgesic, is the only brand positioned to be applied directly to dentures to relieve denture pain. For additional pain relief, the product contains the maximum amount of benzocaine allowable in the category. 1995 represented the first year in the brand's history in which it received a full year of targeted advertising and promotional support. Additionally, the Company manufactures and markets two smaller proprietary drug brands, SOLTICE, a topical external analgesic, and BLIS-TO-SOL, an antifungal foot care product. Limited regional support will continue to be done on an opportunistic basis. OTC PHARMACEUTICALS - INTERNAL ANALGESICS The Company competes in the menstrual pain relief category, a $63 million market, with its PAMPRIN and PREMSYN PMS brands. NORWICH Aspirin competes in the general analgesic category. PAMPRIN, the number two brand in the menstrual analgesics category, is a combination drug specifically designed for relief of menstrual symptoms. Multi-Symptom PAMPRIN effectively relieves multiple menstrual discomforts with three active ingredients. Maximum Pain Relief PAMPRIN provides superior relief from cramps by being the only non-ibuprofen, non-aspirin cramp relief product. Maximum Strength PREMSYN PMS, the third largest brand in the category, effectively relieves both the physical and emotional symptoms of PMS. 7 NORWICH, a high-quality, reasonably-priced aspirin franchise, complements the other OTC pharmaceuticals of the division. The brand is principally focused both in sales and marketing support in the northeast and west coast. The brand continues to decline about 10% per year principally due to the continued expansion of private label aspirin and reduced advertising and promotion support in lieu of other strategic brand priorities. COSMETICS The Company competes in the oil control face make-up segment, a $99 million market, within the overall cosmetics category with its CORNSILK brand. CORNSILK, the number three brand in the oil control make-up segment, is the original make-up especially formulated to be oil free as well as able to absorb excess facial oils. The product is available in translucent no-color and shades of the original powder Classic line, and also in shades of the new powder Natural Matte line. The line also includes shaded liquids. TOILETRIES - SKIN CLEANSERS AND MASKS The Company competes in the face cleanser category, a $335 million market, with its PHISODERM brand. MUDD, a line of clay-based facial mask products, is the Company's entry into the facial masks and scrubs category, a $42 million market. 8 PHISODERM, a specialty face cleanser, is a product that through its pH balanced formula provides the consumer with superior cleansing without the harsh, drying effect of soaps. The brand offers adult products available in different skin types, normal to oily or dry, as well as a product designed for use on babies. Following the acquisition of PHISODERM in mid 1994, the brand was completely restaged in 1995 with new packaging and products while being supported with meaningful advertising and promotion levels for the first time in four years. To complement the restaged line, an unfragranced PHISODERM Sensitive will be launched in 1996 appealing to consumers with sensitive skin. Capitalizing on the heritage of hospital and doctor usage, PHISODERM Antibacterial Skin Cleanser will also be launched in 1996. After two years of minimal support and declining sales, the Company relaunched MUDD in mid 1995 with new packaging and two line extensions, Sea Mask and Aloe Mask. The relaunch has been and will be supported by television and promotional support and as a result is the fastest growing brand in the mask and scrub category. TOILETRIES - SEASONALS The Company competes in the suncare category with products that have a sun protection factor(SPF) of greater than 15, a $221 million market, with its BULLFROG sunblock line. SUN-IN competes in the spray on hair lightener category, a $9 million market, while ULTRASWIM shampoo and conditioner are essentially the only products in the small chlorine removal market. For the second straight year BULLFROG AMPHIBIOUS FORMULA SUNBLOCK continues to be one of the fastest growing brands in its category. The product is a unique waterproof gel sunblock that provides all-day sun protection, in or out of the water, with just one application. The line includes body gels and lotions and a stick product, for adults and children, with SPF's ranging from 18 to 36. 9 The other seasonal products, SUN-IN hair lighteners and ULTRASWIM chlorine removal shampoo and conditioner, continue to be the market leaders in these small niche categories. ULTRASWIM has a patented formula and is endorsed by Janet Evans, four time Olympic gold medalist, in its marketing efforts. INTERNATIONAL MARKET OVERVIEW CANADA Chattem (Canada) Inc. is a wholly-owned subsidiary based in Mississauga, Ontario which markets and distributes Chattem's consumer products throughout the country. The manufacturing of the brands is principally done in the Company's facilities in Chattanooga while some packaging takes place in Mississauga. The division utilizes a national broker for its sales efforts. Brands marketed in Canada include PAMPRIN, FLEX-ALL, CORNSILK, MUDD, SUN-IN, ULTRASWIM and PHISODERM. In addition, Chattem owns the marketing and distribution rights for SHY, a line of feminine hygiene and douche products; ACNOMEL, a medicated acne mask; as well as AQUA CARE and ROSE MILK. 10 EUROPE Chattem's European business is conducted through Chattem (U.K.) Limited, a wholly-owned subsidiary located in Basingstoke, Hampshire, England. This unit also services distributors in Australia and the Middle East. Manufacturing and packaging of the products is performed principally in the U.K. with a limited number of ingredients purchased from Chattem. In the U.K., the division employs its own sales force while exclusive distributors are used to market and sell its products on the Western European Continent. Due to the difficulty and expense involved in the registration of OTC pharmaceuticals in Europe, the unit markets exclusively the Company's toiletry products. Chattem's products in Europe include SUN-IN, a range of MUDD Face and Body products, ULTRASWIM, BRONZ SILK and CORNSILK. SPRAY BLOND Spray-In Hair Lightener is only marketed on the continent. U.S. EXPORT The U.S. Export division services various distributors primarily located in the Caribbean, Mexico and Peru. The Company sells various products into these markets with the primary focus being the development of its OTC pharmaceuticals, principally ICY HOT and PAMPRIN. The Company continues to look for established distributors in Central and South America capitalizing on the success and heritage of ICY HOT in these regions. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL On May 26, 1995, the Company completed the sale of its specialty chemicals division to privately-held Elcat, Inc. ("Elcat"). The Company received $25,000,000 from the sale of the specialty chemicals division consisting of $20,000,000 in cash and $5,000,000 of 13.125% cumulative, convertible preferred stock of Elcat. The net cash proceeds were used to repay long-term debt of approximately $12,000,000. The Company recognized a gain of $9,334,000 (net of tax) from the sale and an extraordinary charge (after tax) of $367,000 relating to the early extinguishment of the debt. The results of operations and the gain on disposal of the specialty chemicals division have been separately classified as discontinued operations in the accompanying Consolidated Statements of Income. As a result of the sale of the specialty chemicals division, unless otherwise indicated, the following discussion and analysis of financial condition and results of operations relate only to the continuing operations of the Company, which are the domestic and international consumer products businesses. 12 The Company experienced an increase in net sales, operating income, income from continuing operations and net income for the year ended November 30, 1995. Net sales increased 6.6% to $100,598,000 from $94,370,000 in 1994. Operating income before nonrecurring and unusual charges increased 12.8% to $14,770,000 from $13,099,000 in 1994. Income from continuing operations increased 10.2% to $2,325,000 from $2,110,000 in 1994, while net income, which includes the net income from discontinued operations, the net gain on disposal of the specialty chemicals division and the extraordinary charge relating to the early extinguishment of debt, increased to $11,966,000 from $2,054,000 in fiscal year 1994. In fiscal year 1995 as compared to fiscal year 1994, earnings per share from continuing operations increased $.03, or 10.3%, to $.32 while total earnings per share increased $1.35 to $1.64. Total earnings per share for the year ended November 30, 1995 include the net income from discontinued operations, the net gain on disposition of the specialty chemicals division and the net loss on early extinguishment of debt. The reduction in interest expense as a result of the retirement of long-term debt discussed previously is estimated to be approximately $1,400,000 on an annual basis. Until the Company's indebtedness is reduced significantly, net income will likely continue to be adversely impacted by interest expense. 13 The Company also will recognize annually approximately $656,000 in dividends on the cumulative, convertible preferred stock of Elcat, which was received as a part of the proceeds from the sale of the specialty chemicals division. The Company will continue to seek increases in sales through a combination of acquisitions and internal growth while maintaining high operating income. As previously high growth brands mature, sales increases will become even more dependent on acquisitions and the development of successful line extensions. Strategically, the Company continually evaluates its products and business as part of its sales growth strategy and, in instances where the Company's objectives are not realized, will dispose of these brands or businesses and redeploy the assets to products or businesses with greater growth potential or to reduce indebtedness. 14 RESULTS OF OPERATIONS The following table sets forth for continuing operations certain items from the Company's Consolidated Statements of Income, for the periods indicated, expressed as a percentage of net sales:
YEAR ENDED NOVEMBER 30, ------------------------------ 1995 1994 1993 -------- -------- -------- Net Sales ................................................ 100.0% 100.0% 100.0% Costs and Expenses: Cost of sales ........................................ 29.6 30.2 29.7 Advertising and promotion ............................ 37.0 35.3 40.4 Selling, general and administrative .................. 18.7 20.6 21.8 Nonrecurring and unusual charges ..................... 0.3 0.6 6.1 ------ ------ ------ Total costs and expenses .......................... 85.6 86.7 98.0 ------ ------ ------ Income From Operations .................................. 14.4 13.3 2.0 Other Income (Expense), Net ............................. (10.8) (9.8) (3.9) ------ ------ ------ Income (Loss) Before Income Taxes ....................... 3.6 3.5 (1.9) Provision For (Benefit From) Income Taxes ............... 1.3 1.3 (0.7) ------ ------ ------ Income (loss) From Continuing Operations ................ 2.3% 2.2% (1.2)% ====== ====== ======
FISCAL 1995 COMPARED TO FISCAL 1994 FOR CONTINUING OPERATIONS Net sales for the year ended November 30, 1995 increased $6,228,000, or 6.6%, to $100,598,000 as compared to $94,370,000 for the previous fiscal year. The increase in net sales was attributable to a $4,607,000, or 5.6%, increase in domestic consumer products sales to $87,250,000 from $82,643,000 in fiscal 1994 and an increase of $1,621,000, or 13.8%, in international consumer products sales to $13,348,000 from $11,727,000. 15 For domestic consumer products, net sales increases in 1995 over 1994 were realized for the BULLFROG (28.8%), ICY HOT (8.6%), SUN-IN and MUDD brands, while decreases were recorded for the major product lines of FLEX-ALL 454 (19.4%), PREMSYN PMS, ULTRASWIM, PAMPRIN and NORWICH Aspirin. Sales of BENZODENT and PHISODERM, products acquired in May and June 1994, respectively, increased a combined $7,159,000 over their respective 1994 short periods. All sales variances were largely the result of changes in volume. The increase in sales of the BULLFROG and SUN-IN brands was led by new products, good summer weather, increased advertising and promotion expenditures and, in the case of BULLFROG, the addition of a previously lost major customer. The MUDD brand introduced new packaging and two new products in 1995 and both MUDD and the ICY HOT brand received increased marketing support. The decline in sales of FLEX-ALL 454 reflects increased competition in the topical analgesic product category and decreased advertising and promotion expenditures. Sales declines for the other products listed above are primarily the result of the maturation of these brands along with reduced marketing support in most cases. 16 International consumer products sales for fiscal year 1995 increased $756,000, or 24.0%, for the Canadian operation and $631,000, or 8.5%, for the United Kingdom business. The addition of PHISODERM to the product line in Canada accounted for practically all of the net increase in sales in that country, although increases were realized for the PAMPRIN, MUDD and SUN-IN brands. Decreases in sales of CORN SILK and FLEX-ALL 454 were recorded also. Sales increases for the SUN-IN and CORN SILK brands were recognized in 1995 for the United Kingdom business, while sales declines were registered for the BRONZ SILK, MUDD and ULTRASWIM product lines. U.S. export sales increased $234,000, or 21.0%, in fiscal 1995. All sales variances were principally due to volume changes. Cost of goods sold as a percentage of net sales decreased to 29.6% in 1995 from 30.2% in the 1994 fiscal year. This improvement in 1995 was essentially the result of a shift in the mix of sales of domestic consumer products to higher gross margin brands, a full year of in-house production for PHISODERM, and reduced inventory obsolescence charges. Advertising and promotion expenses increased by $3,906,000, or 11.7%, in 1995 and was 37.0% of net sales compared to 35.3% in the 1994 fiscal year. This increase was principally due to full year advertising and promotion support for the BENZODENT and PHISODERM product lines. 17 The decrease of $609,000, or 3.1%, in selling, general and administrative expenses in 1995 was largely associated with increases in direct selling costs, freight and field sales expenses, as a result of increased sales, with large decreases in administrative and corporate personnel and bonuses more than offsetting the increase in selling expenses. The Company recognized a nonrecurring and unusual charge of $302,000 in 1995 and $559,000 in 1994 related to the repricing of the Company's stock options in connection with the payment of the Special Dividend in 1993. Interest expense increased $1,716,000, or 18.3%, in the 1995 fiscal year as a result of the refinancing of long-term debt in 1994 at higher interest rates and increased outstanding indebtedness related to the acquisition of BENZODENT and PHISODERM in that year. Total long-term notes payable decreased by $17,297,000 in 1995, largely due to the application of the net proceeds from the sale of the specialty chemicals division to repay indebtedness. This debt reduction favorably impacted interest expense for approximately half the 1995 fiscal year. Until the Company's indebtedness is reduced substantially, interest expense will continue to represent a significant percentage of the Company's net sales. 18 In 1995 a gain of $729,000 on the sale of an interest rate cap was recognized but deferred. This amount is to be amortized over the remaining life of the original cap agreement. The portion allocated to fiscal 1995 was $454,000, which was credited to interest expense. The increase of $341,000 in investment income in 1995 primarily reflects the pro-rata accrual of the previously discussed dividend to be received on the cumulative, convertible preferred stock of Elcat. During 1994, the Company realized a loss of $512,000 from the sale of the distribution rights to ALGEMARIN in Canada. Other income and expense for 1995 includes a loss of $380,000 related to the disposition of certain assets. During 1994, the Company realized a gain of $484,000 on the sale of an interest rate swap. Income taxes decreased to 35.6% of income from continuing operations before income taxes from 35.9% in 1994. Income from continuing operations increased by $215,000, or 10.2%, in the 1995 fiscal year. The increase mainly resulted from increased sales and lower selling, general and administrative expenses. 19 FISCAL 1994 COMPARED TO FISCAL 1993 FOR CONTINUING OPERATIONS Net sales rose 5.0% to $94,370,000 from $89,861,000 in 1993. This was led by a 7.9% increase in domestic consumer product sales to $82,643,000 from $76,592,000 in 1993. The domestic consumer products sales growth was offset by a 11.6% decrease in international consumer product sales to $11,727,000 from $13,269,000 in 1993. The growth in domestic consumer products sales resulted primarily from $6,257,000 of partial year sales from the two newly acquired products, PHISODERM and BENZODENT. The remaining brands were basically flat with sales in 1994 declining $206,000. Absent the new products, sales of the division's OTC pharmaceuticals increased 1.8% in 1994 led by strong sales of PAMPRIN, PREMSYN PMS and ICY HOT. Sales of FLEX-ALL 454 decreased for the first time by 21.0% from 1993 sales levels, while NORWICH Aspirin sales declined 22.8% from 1993 due to continued inroads by private label products and general analgesics. Although revenues from CORN SILK and SUN-IN increased in 1994, the division's overall sales of cosmetic and toiletry brands declined 4.3%. The loss of a major retail customer due to account consolidation in 1994 resulted in a 15.4% sales drop for BULLFROG versus 1993. ULTRASWIM and MUDD also registered sales decreases of 9.3% and 19.5%, respectively. All sales variances were largely the result of changes in volume except for the CORN SILK and SUN-IN brands. 20 The decline in sales of the international division reflected the efforts initiated in 1993 to reorganize the division to a more profitable unit. In Canada, ALGEMARIN, an unprofitable line of bath products, was sold in June. As a result of a poor Christmas season, above normal returns of ALGEMARIN in the spring of 1994 had a negative impact on overall sales. During the fourth quarter of 1993, certain distributor arrangements were terminated on the Western European continent and within the U.S. export unit, and marketing efforts to others were significantly reduced leading to decreased sales in 1994. The acquisition of PHISODERM in Canada added $796,000 in partial year sales. All sales variances were primarily due to change in volume. Cost of goods as a percentage of net sales increased to 30.2% from 29.7% in 1993. The increase was primarily the result of a shift in mix of sales to lower gross margin brands, e.g., ICY HOT, CORN SILK and PHISODERM. Reflected also in this increase was the write-off of approximately $425,000 of inventory related to the unsuccessful launch of Nighttime PAMPRIN. Advertising and promotion expense decreased $2,926,000, or 8.1%, to $33,336,000 in 1994 from $36,262,000 in the previous year. The decrease was primarily the result of $2,988,000 in reduced advertising spending for FLEX-ALL 454 and NORWICH Aspirin. The reduction in advertising spending for these two brands reflected management's recognition of the maturation of FLEX-ALL 454 and the marginal benefits of the national advertising campaign for NORWICH Aspirin in 1993. The division also spent $1,310,000 in advertising and promotion expenditures on the two acquired brands, PHISODERM and BENZODENT. 21 Selling, general and administrative expenses decreased by $165,000 to $19,440,000 from $19,605,000 in 1993 and declined as a percentage of the Company's net sales to 20.6% from 21.8% in 1993. This slight improvement compared to 1993 was realized even with the incremental expense of incentive bonuses to management and for additional compensation to sales personnel and independent sales agents as a result of increased sales for the year. In 1994, the Company recognized a nonrecurring and unusual charge of $559,000 related to the repricing of the Company's stock options in connection with the payment of the Special Dividend in June 1993. The total charge related to the noncash, remeasured compensation was $1,987,000 and is being amortized over the vesting period of the options. The amount recorded in 1993 as part of the nonrecurring and unusual charge was $956,000. Interest expense increased to $9,360,000 from $3,879,000 in 1993 as a result of higher outstanding indebtedness related to the payment of the Special Dividend in June 1993, the consummation of the two acquisitions and higher interest rates related to the senior subordinated notes issue in June of 1994. Net investment income increased substantially to $186,000 from a loss of $522,000 in 1993. The loss incurred in 1993 related to liquidation of the investment portfolio with the proceeds being used to reduce bank debt and partially fund the payment of the Special Dividend. During 1994, the Company realized a loss of $512,000 from the sale of the distribution rights to ALGEMARIN in Canada. During 1993, the Company realized a gain of $867,000 from the sale of the BLACK-DRAUGHT and NULLO brands. 22 Other income and expense for 1994 includes a gain of $484,000 on the sale of an interest rate swap. Income taxes decreased to 35.9% of income from continuing operations before income taxes from 36.7% in 1993. See Note 7 of Notes to Consolidated Financial Statements. Based on increased sales, planned reductions in advertising and promotion and the reduction in nonrecurring and unusual charges, but offset in part by an increase in interest expense, income from continuing operations increased to $2,110,000 in 1994 from a loss of $1,100,000 in 1993. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations and acquisitions with a combination of internally generated funds and borrowings. The Company's principal uses of cash are operating expenses, working capital, capital expenditures and to service long-term debt. Cash provided by operating activities was $713,000 and $16,405,000 for 1995 and 1994, respectively. The decrease in cash flows from operations from 1994 to 1995 was primarily the result of changes in accounts receivable, inventories and accounts payable and accrued liabilities. Investing activities provided cash of $16,762,000 in 1995 and used cash of $23,753,000 in 1994. The 1995 amount includes the proceeds from the sale of the Company's specialty chemicals division. The acquisitions of PHISODERM and BENZODENT are reflected in 1994. In 1995, capital expenditures totaled $2,836,000 compared to $2,764,000 in 1994. Expenditures of this nature are expected to be approximately $2,500,000 in fiscal 1996. Financing activities used cash of $16,873,000 and provided cash of $5,831,000 in 1994. The use of cash in 1995 is primarily due to the net repayment of $17,297,000 long-term debt with the proceeds from the sale of the Company's specialty chemicals division and excess cash generated from operations. During 1994, the Company repaid a portion of its long-term debt with the proceeds from the issuance of Senior Subordinated notes. 23 The following table presents certain working capital data at November 30, 1995 and 1994 or for the respective years then ended:
ITEM 1995 1994* - ------------------------------------ ----------- ----------- Working capital (current assets less $10,254,000 $ 9,901,000 current liabilities) Current ratio (current assets divided 1.49 1.51 by current liabilities) Quick ratio (cash equivalents, short- .96 1.09 term investments and receivables divided by current liabilities) Average accounts receivable turnover 5.86 5.34 Average inventory turnover 3.99 3.47 Working capital as a percentage of total assets 12.29% 12.31%
*After removing the net assets of the specialty chemicals division, which was sold in 1995. The decrease in the current and quick ratios at November 30, 1995 as compared to November 30, 1994 was primarily due to a combination of a decrease in accounts receivable and increases in inventories, accounts payable and accrued liabilities related to the divestiture of the specialty chemicals division. 24 Total debt outstanding was $79,689,000 at November 30, 1995 compared to $96,986,000 at November 30, 1994. Under the terms of the current bank facility, $17,000,000 was available at November 30, 1995 under a working capital line of credit for general operating purposes. The availability of credit is determined based on the Company's accounts receivable and inventories. A separate $12,500,000 revolving line of credit for acquisition purposes was available and unused at year-end. The Company also has additional borrowing capacity of approximately $1,600,000 against life insurance policies owned by the Company, all of which was available at November 30, 1995. In connection with the sale of the specialty chemicals division, management of the Company believes that it has recorded adequate amounts to cover costs related to environmental remediation of the property sold and other costs associated with the separation of the consumer products and specialty chemicals businesses. These estimated costs have been charged to the gain on the disposal of that division. Management of the Company believes that cash flows generated by operations, along with funds available under its bank credit facility and from borrowing against approximately $1,600,000 of cash value under certain insurance policies, will be sufficient to fund the Company's current commitments and proposed operations. 25 FOREIGN OPERATIONS The Company's primary foreign operations are conducted through its Canadian and U.K. subsidiaries. The functional currencies of these subsidiaries are Canadian dollars and British pounds, respectively. Fluctuations in exchange rates can impact operating results, including total revenues and expenses, when translations of the subsidiary financial statements are made in accordance with SFAS No. 52, "Foreign Currency Translation." For the years ended November 30, 1995 and 1994, these subsidiaries accounted for 13% and 12% of total revenues, respectively, and 9% and 10% of total assets, respectively. It has not been the Company's practice to hedge its assets and liabilities in the U.K. and Canada or its intercompany transactions due to the inherent risks associated with foreign currency hedging transactions and the timing of payment between the Company and its two foreign subsidiaries. Historically, gains or losses from foreign currency transactions have not had a material impact on the Company's operating results. Gains of $129,000 and $82,000 for the years ended November 30, 1995 and 1994, respectively, resulted from foreign currency transactions. See "Foreign Currency Translation" in Note 2 of Notes to the Consolidated Financial Statements. 26 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED NOVEMBER 30, ---------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- INCOME STATEMENT DATA NET SALES .......................................... $100,598 $ 94,370 $ 89,861 $ 90,221 $ 84,085 OPERATING COSTS AND EXPENSES ....................... 86,130 81,830 88,111 82,045 78,899 -------- -------- -------- -------- -------- INCOME FROM OPERATIONS ............................... 14,468 12,540 1,750 8,176 5,186 OTHER INCOME (EXPENSE), NET .......................... (10,858) (9,248) (3,489) (1,328) (2,198) -------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ...................................... 3,610 3,292 (1,739) 6,848 2,988 PROVISION FOR (BENEFIT FROM) INCOME TAXES ............ 1,285 1,182 (639) 2,329 957 -------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS ............. $ 2,325 $ 2,110 $ (1,100) $ 4,519 $ 2,031 ======== ======== ======== ======== ======== PER COMMON SHARE DATA INCOME (LOSS) FROM CONTINUING OPERATIONS ............. $ .32 $ .29 $ (.17) $ .90 $ .50 DIVIDENDS ............................................ $ -- $ -- $ 20.20 $ .30 $ .22 BALANCE SHEET DATA (At End of Period) TOTAL ASSETS ......................................... $ 83,410 $ 85,442 $ 69,534 $ 97,571 $ 64,122 LONG-TERM DEBT, less current maturities .............. $ 78,089 $ 94,486 $ 83,000 $ 22,784 $ 29,278
27 MARKET PRICES The Company's common shares trade over-the-counter on the National Market System under the NASDAQ symbol CHTT. A quarterly summary of the high and low market prices per common share as reported by NASDAQ is shown below:
1995 1994 ----------------- ----------------- QUARTER ENDED: HIGH LOW HIGH LOW -------- ------- -------- ------- February ............................ 6 3/16 4 9/16 8 5/8 6 3/4 May ................................. 6 1/4 4 3/4 7 3/4 5 3/4 August .............................. 5 3/4 4 3/4 6 1/2 5 November ............................ 5 1/4 4 1/4 7 3/8 5 1/8
Based upon transfer agent records, the Company's common shares were held by approximately 2,500 shareholders as of February 21, 1996. 28 CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 1995 AND 1994 (IN THOUSANDS)
ASSETS 1995 1994 ---- ---- CURRENT ASSETS: Cash and cash equivalents ............................................ $ 3,636 $ 3,034 Accounts receivable, less allowance for doubtful accounts of $286 in 1995 and $850 in 1994 ................................... 16,248 18,069 Refundable and deferred income taxes ................................. 1,400 1,015 Inventories .......................................................... 8,678 6,247 Prepaid expenses and other current assets ............................ 1,112 929 Net current assets of discontinued operations ........................ - 2,402 ------- ------- Total current assets ............................................... 31,074 31,696 ------- ------- PROPERTY, PLANT AND EQUIPMENT, NET ..................................... 9,330 8,491 ------- ------- OTHER NONCURRENT ASSETS: Investment in Elcat, Inc. ............................................ 5,328 - Patents, trademarks and other purchased product rights, net .......... 31,007 32,455 Debt issuance costs, net ............................................. 3,073 3,771 Deferred income taxes ................................................ 98 1,598 Other ................................................................ 3,500 4,818 Net noncurrent assets of discontinued operations ..................... - 2,613 ------- ------- Total other noncurrent assets ..................................... 43,006 45,255 ------- ------- TOTAL ASSETS ................................................... $83,410 $85,442 ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 29 CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 1995 AND 1994 (IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' DEFICIT 1995 1994 ---- ---- CURRENT LIABILITIES: Current maturities of long-term debt ............................... $ 1,600 $ 2,500 Accounts payable ................................................... 5,462 4,942 Payable to bank .................................................... 1,184 1,301 Accrued liabilities ................................................ 12,574 10,650 ------- ------- Total current liabilities ........................................ 20,820 19,393 ------- ------- LONG-TERM DEBT, less current maturities .............................. 78,089 94,486 ------- ------- OTHER NONCURRENT LIABILITIES ......................................... 1,922 1,114 ------- ------- COMMITMENTS AND CONTINGENCIES (Notes 6, 10 and 12) SHAREHOLDERS' DEFICIT: Preferred shares, without par value, authorized 1,000, none issued ............................................... - - Common shares, without par value, authorized 20,000, issued 7,292 in 1995 and 1994 ........................................... 1,519 1,519 Paid-in surplus .................................................... 52,099 51,797 Accumulated deficit ................................................ (69,386) (81,352) ------- ------- (15,768) (28,036) Foreign currency translation adjustment ............................ (1,653) (1,515) ------- ------- Total shareholders' deficit ...................................... (17,421) (29,551) ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT ..................... $83,410 $85,442 ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 30 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED NOVEMBER 30, 1995, 1994 AND 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993 ---- ---- ---- NET SALES $100,598 $94,370 $89,861 -------- ------- ------- COSTS AND EXPENSES: Cost of sales ..................................................... 29,755 28,495 26,717 Advertising and promotion ......................................... 37,242 33,336 36,262 Selling, general and administrative ............................... 18,831 19,440 19,605 Nonrecurring and unusual charges (Note 14) ........................ 302 559 5,527 -------- ------- ------- Total costs and expenses ........................................ 86,130 81,830 88,111 -------- ------- ------- INCOME FROM OPERATIONS .............................................. 14,468 12,540 1,750 -------- ------- ------- OTHER INCOME (EXPENSE): Interest expense .................................................. (11,076) (9,360) (3,879) Investment income (loss) .......................................... 527 186 (522) Gain (loss) on product divestitures ............................... - (512) 867 Other income (expense), net ....................................... (309) 438 45 -------- ------- ------- Total other income (expense) .................................... (10,858) (9,248) (3,489) -------- ------- ------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ........ 3,610 3,292 (1,739) PROVISION FOR (BENEFIT FROM) INCOME TAXES ........................... 1,285 1,182 (639) -------- ------- ------- INCOME (LOSS) FROM CONTINUING OPERATIONS ............................ 2,325 2,110 (1,100) -------- ------- ------- DISCONTINUED OPERATIONS: Income from operations, less provision for income taxes of $417, $840 and $1,382, respectively .......................... 674 1,500 2,379 Gain on disposal, less provision for income taxes of $5,696 ....... 9,334 - - -------- ------- ------- Income from discontinued operations ............................... 10,008 1,500 2,379 -------- ------- ------- INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES ................................................ 12,333 3,610 1,279 EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES (Note 6) ............................................. (367) (1,556) (480) CUMULATIVE EFFECT OF ACCOUNTING CHANGES, NET OF INCOME TAXES (Note 3) .................................................... - -- 569 -------- ------- ------- NET INCOME .......................................................... $ 11,966 $ 2,054 $ 1,368 ======== ======= ======= NET INCOME (LOSS) PER COMMON SHARE: From continuing operations ........................................ $ .32 $ .29 $ (.17) Discontinued operations ........................................... 1.37 .21 .38 Extraordinary loss ................................................ (.05) (.21) (.08) Cumulative effect of accounting changes ........................... - - .09 -------- ------- ------- Net income per common share ..................................... $ 1.64 $ .29 $ .22 ======== ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING ................................................ 7,292 7,292 6,341 ======== ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 31 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED NOVEMBER 30, 1995, 1994 AND 1993 (IN THOUSANDS)
NET UNREALIZED FOREIGN RETAINED LOSS ON CURRENCY COMMON PAID-IN EARNINGS LONG-TERM TRANSLATION SHARES SURPLUS (DEFICIT) INVESTMENTS ADJUSTMENT TOTAL -------- --------- ---------- ------------ ----------- --------- Balance, November 30, 1992 ............................ $1,094 $34,938 $ 24,796 $(797) $(1,424) $ 58,607 Net income ........................................... -- -- 1,368 -- -- 1,368 Dividends ............................................ -- -- (109,570) -- -- (109,570) Issuance of common shares ............................ 389 12,016 -- -- -- 12,405 Stock options granted ................................ -- 956 -- -- -- 956 Exercise of stock options ............................ 36 1,120 -- -- -- 1,156 Tax benefit from exercise of stock options ........... -- 1,253 -- -- -- 1,253 Decrease in net unrealized loss on long-term investments ....................................... -- -- -- 797 -- 797 Foreign currency translation adjustment .............. -- -- -- -- (445) (445) ------ ------- -------- ----- ------- -------- Balance, November 30, 1993 ............................ 1,519 50,283 (83,406) -- (1,869) (33,473) Net income ........................................... -- -- 2,054 -- -- 2,054 Issuance of warrants ................................. -- 955 -- -- -- 955 Stock options granted ................................ -- 559 -- -- -- 559 Foreign currency translation adjustment .............. -- -- -- -- 354 354 ------ ------- -------- ----- ------- -------- Balance, November 30, 1994 ............................ 1,519 51,797 (81,352) -- (1,515) (29,551) Net income ........................................... -- -- 11,966 -- -- 11,966 Stock options granted ................................ -- 302 -- -- -- 302 Foreign currency translation adjustment .............. -- -- -- -- (138) (138) ------ ------- -------- ----- ------- -------- Balance, November 30, 1995 ............................ $1,519 $52,099 $(69,386) $ -- $(1,653) $(17,421) ====== ======= ======== ===== ======= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 32 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED NOVEMBER 30, 1995, 1994 AND 1993 (IN THOUSANDS)
1995 1994 1993 -------- -------- -------- OPERATING ACTIVITIES: Net income ........................................................ $ 11,966 $ 2,054 $ 1,368 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................... 4,072 4,036 3,387 Cumulative effect of accounting changes, net .................... -- -- (569) Deferred income tax provision ................................... 645 303 393 Gain on sale of specialty chemicals division .................... (9,334) -- -- Loss (gain) on product divestitures ............................. -- 512 (867) Repriced stock option expense ................................... 302 559 956 Loss (gain) on sales of assets .................................. (454) 6 (757) Extraordinary loss on extinguishment of debt, net ............... 367 1,556 480 Dividend receivable from Elcat, Inc. ............................ (328) -- -- Other, net ...................................................... 771 983 (343) Changes in operating assets and liabilities: Accounts receivable ........................................... 1,973 (1,704) 1,682 Refundable and deferred income taxes .......................... 106 828 (941) Inventories ................................................... (2,488) 3,832 495 Prepaid expenses and other current assets ..................... (166) 133 317 Accounts payable and accrued liabilities ...................... (6,602) 3,064 1,852 Payable to bank ............................................... (117) 243 230 -------- ------- ------- Net cash provided by operating activities ....................... 713 16,405 8,550 -------- ------- ------- INVESTING ACTIVITIES: Purchases of property, plant and equipment ........................ (2,836) (2,764) (2,297) Proceeds from sale of specialty chemicals division, net ........... 19,397 -- -- Net decrease in long-term investments ............................. -- -- 5,062 Proceeds from short-term investments .............................. -- -- 23,212 Proceeds from notes and sales of assets ........................... 227 549 619 Purchases of patents, trademarks and other product rights ......... -- (20,272) (1,750) Increase in other assets .......................................... (26) (1,266) (790) -------- ------- ------- Net cash provided by (used in) investing activities ............. 16,762 (23,753) 24,056 -------- ------- ------- FINANCING ACTIVITIES: Repayment of long-term debt ....................................... (48,704) (112,831) (42,900) Proceeds from long-term debt ...................................... 31,100 48,706 104,116 Proceeds from sale of interest rate cap ........................... 984 -- -- Proceeds from issuance of senior subordinated notes ............... -- 73,012 -- Proceeds from issuance of common stock, net ....................... -- -- 12,405 Common stock dividends paid ....................................... -- -- (109,570) Proceeds from issuance of stock warrants .......................... -- 955 -- Exercise of stock options ......................................... -- -- 1,156 Tax benefit from exercise of stock options ........................ -- -- 1,253 Debt issuance costs ............................................... (253) (4,011) (2,630) Other, net ........................................................ -- -- (712) -------- ------- ------- Net cash provided by (used in) financing activities ............. (16,873) 5,831 (36,882) -------- ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ........ -- 89 30 -------- ------- ------- CASH AND CASH EQUIVALENTS: Increase (decrease) for the year .................................. 602 (1,428) (4,246) At beginning of year .............................................. 3,034 4,462 8,708 -------- ------- ------- At end of year .................................................... $ 3,636 $ 3,034 $ 4,462 ======== ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE: ALL MONETARY AMOUNTS ARE EXPRESSED IN THOUSANDS OF DOLLARS UNLESS CONTRARILY EVIDENT. (1) GENERAL -------------------------------------------------------------------------- Chattem, Inc. and its wholly-owned subsidiaries (the Company) are primarily engaged in manufacturing and marketing branded consumer products. The consumer products are sold nationwide and in many international markets, primarily through independent and chain drug stores, drug wholesalers, mass merchandisers and food stores. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -------------------------------------------------------------------------- BASIS OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Chattem, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all short-term deposits and investments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventory costs include materials, labor and factory overhead. Inventories in the United States are valued at the lower of last-in, first-out (LIFO) cost or market, while international inventories are valued at the lower of first-in, first-out (FIFO) cost or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is provided using both straight-line and accelerated methods over the estimated useful lives of 10 to 40 years for buildings and improvements and 3 to 12 years for machinery and equipment. Expenditures for maintenance and repairs are charged to expense as incurred. 34 PATENTS, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS The costs of acquired patents, trademarks and other purchased product rights are capitalized and amortized over periods ranging from 5 to 40 years. Total accumulated amortization of these assets at November 30, 1995 and 1994 was $7,291 and $5,824, respectively. Amortization expense for 1995, 1994 and 1993 was $1,467, $1,309 and $1,179, respectively. Royalty expense related to other purchased product rights for 1995, 1994 and 1993 was $1,030, $1,703, and $1,974, respectively. Amortization and royalty expense are included in advertising and promotion expense in the accompanying consolidated statements of income. DEBT ISSUANCE COSTS The Company has incurred debt issuance costs in connection with its long-term debt (Note 6). These costs are capitalized and amortized over the term of the debt. Amortization expense related to debt issuance costs was $471, $439, and $214 in 1995, 1994 and 1993, respectively. Accumulated amortization of these costs was $711 and $240 at November 30, 1995 and 1994, respectively. PAYABLE TO BANK Payable to bank includes checks outstanding in excess of certain cash balances. REVENUE RECOGNITION Revenue is recognized when the Company's products are shipped to its customers. RESEARCH AND DEVELOPMENT Research and development costs relate primarily to the development of new products and are expensed as incurred. Such expenses were $1,140, $893, and $930, in 1995, 1994 and 1993, respectively. ADVERTISING EXPENSES The cost of advertising is expensed in the fiscal year in which the related advertising takes place. At November 30, 1995 and 1994, the Company reported $709 and $806, respectively, of advertising as prepaid assets included in other noncurrent assets in the accompanying consolidated balance sheets. The adoption of the AICPA's Statement of Position 93-7, "Reporting on Advertising Costs", did not have a significant effect on the Company's consolidated financial position. 35 NET INCOME PER COMMON SHARE Net income per common share is based on the weighted average number of common shares outstanding after consideration of common share equivalents having a dilutive effect (Note 8). FOREIGN CURRENCY TRANSLATION The financial statements of the Company's Canadian and U.K. subsidiaries are translated into United States currency in accordance with SFAS No. 52, "Foreign Currency Translation." Assets and liabilities are translated to United States dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated as a separate component of shareholders' deficit. Gains and losses which result from foreign currency transactions are included in the accompanying consolidated statements of income. INCOME TAXES As discussed in Note 3, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," effective December 1, 1992. SFAS No. 109 requires an asset and liability approach to accounting for deferred income taxes based on currently enacted tax rates and differences in financial reporting and income tax bases of assets and liabilities. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board issued SFAS No. 121 on accounting for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to assets to be held and used. SFAS No. 121 also establishes accounting standards for long-lived assets and certain identifiable intangibles to be disposed of. The Company is required to adopt the provisions of SFAS No. 121 no later than December 1, 1996, although earlier implementation is permitted. SFAS No. 121 is required to be applied prospectively for assets to be held and used. The initial application of SFAS No. 121 to assets held for disposition is required to be reported as the cumulative effect of a change in accounting principle. The adoption of SFAS No. 121 is not expected to have a significant impact on the consolidated financial position or results of operations of the Company. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 1995 presentation. 36 (3) ACCOUNTING CHANGES -------------------------------------------------------------------------- Effective December 1, 1992, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 109, "Accounting for Income Taxes," using the cumulative catch-up method. SFAS No. 106 requires that the expected cost of providing postretirement health care benefits be charged to expense during the years in which the employees render service (Note 13). The cost of these benefits was historically recognized as expense when paid. The adoption of SFAS No. 106 resulted in a net charge to income of $731 ($1,160 before income taxes), or $.12 per share, for the cumulative effect of this change in accounting principle. SFAS No. 109 requires a change from the deferral method to the asset and liability method of accounting for income taxes. Adoption of SFAS No. 109 resulted in a net credit to income of $1,300, or $.21 per share, for the cumulative effect of this change in accounting principle. (4) INVESTMENT IN ELCAT, INC. -------------------------------------------------------------------------- Investment in Elcat, Inc. (Elcat) consists of 40,000 shares of 13.125% cumulative, convertible preferred stock of Elcat (the Preferred Shares) which was received as part of the consideration from the sale of the Company's specialty chemicals division (Note 15). The Preferred Shares are nonvoting and are convertible, in whole or in part, at any time on or after April 1, 1998, into a 21% common stock ownership of Elcat. At the option of Elcat, the Preferred Shares may be redeemed, in whole or in part, on or after April 1, 1998, at par value ($125 per share) plus any accrued and unpaid dividends. If all of the then outstanding Preferred Shares are not converted or redeemed on or before April 1, 2005, Elcat is obligated to redeem all of the then outstanding Preferred Shares at par value plus any accrued and unpaid dividends. The dividends on the Preferred Shares accumulate annually but are non-payable until the shares are called or redeemed. After three years, however, if the shares are still outstanding, a cash dividend of $200 will be received by the Company in fiscal year 1999, increasing ratably to the full $656 in fiscal year 2002. This investment is classified as held-to-maturity and is accounted for using the cost method of accounting. (5) PENSION PLAN -------------------------------------------------------------------------- The Company has a noncontributory defined benefit pension plan (the Plan) which covers substantially all employees. The Plan provides benefits based upon years of service and the employee's compensation. The Company's contributions are based on computations by independent actuaries. Plan assets at November 30, 1995 and 1994 were invested primarily in United States government and agency securities, corporate debt securities and common stocks. 37 Pension cost for the years ended November 30, 1995, 1994 and 1993 included the following components:
1995 1994 1993 ------ ------ ------ Service cost (benefits earned during the period) ....................................... $ 544 $ 581 $ 456 Interest cost on projected benefit obligation ... 745 743 618 Actual loss (return) on plan assets ............. (828) 220 (815) Net amortization and deferral ................... 98 (1,223) (206) ------ ------ ------ Net pension cost ................................ $ 559 $ 321 $ 53 ====== ====== ======
The following table sets forth the funded status of the Plan as of November 30, 1995 and 1994:
1995 1994 ------ ------ Actuarial present value of benefit obligations: Vested benefit obligation ............................... $ 6,560 $ 5,585 Nonvested benefit obligation ............................ 686 912 ------- ------- Accumulated benefit obligation ........................ $ 7,246 $ 6,497 ======= ======= Plan assets at fair market value .......................... $ 6,166 $ 8,137 Projected benefit obligation .............................. (9,885) (9,119) ------- ------- Plan assets less than projected benefit obligation ........ (3,719) (982) Unrecognized net loss ..................................... 3,344 2,265 Unrecognized prior service cost ........................... (163) (211) Unrecognized initial asset ................................ (781) (1,171) ------- ------- Pension liability recognized in balance sheets at end of year ................................................. $(1,319) $ (99) ======= =======
The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5% and 6.0%, respectively, in 1995, and 8.5% and 6.0%, respectively, in 1994. The expected long-term rate of return on plan assets was 9.5%. As a result of the sale of the Company's specialty chemical division, a charge of $662 was recognized for pension curtailment and settlement expense. This expense is included in the gain on the sale of discontinued operations for fiscal 1995. (Note 15) The Company has a defined contribution plan covering substantially all employees. Eligible participants can contribute up to 10% of their annual compensation and receive a 25% matching employer contribution up to 6% of their annual compensation. The defined contribution plan expense was $141 for 1995, $141 for 1994 and $162 for 1993. 38 (6) LONG-TERM DEBT -------------------------------------------------------------------------- Long-term debt consisted of the following at November 30, 1995 and 1994:
1995 1994 ------ ------ Revolving line of credit payable to banks at variable rates (8.49% weighted average at November 30, 1995) ........................... $ 5,500 $ 4,500 Term loan payable to banks at variable rates 8.375% at November 30, 1995) ................. 8,850 19,375 12.75% Series B Senior Subordinated Notes, due 2004, net of unamortized discount of $1,581 for 1995 and $1,889 for 1994 .......... 65,339 73,111 ------- ------- Total long-term debt ........................... 79,689 96,986 Less: current maturities ....................... 1,600 2,500 ------- ------- Total long-term debt, net of current maturities ................................... $78,089 $94,486 ======= =======
The Company entered into a new credit agreement with a syndicate of banks (the New Credit Agreement) on June 17, 1994 and as amended on May 10, 1995 providing for maximum borrowings of up to $55,000. The New Credit Agreement is divided into a $22,500 revolving line of credit for working capital purposes, a $12,500 facility for product/brand acquisitions and a six year $20,000 term loan facility. The term loan is payable in remaining quarterly installments as follows: from February 28, 1996 through November 30, 1996, in quarterly installments of $400, from February 28, 1997 through November 30, 1997, in quarterly installments of $500, from February 28, 1998 through November 30, 1998, in quarterly installments of $600, from February 28, 1999 through May 31, 1999, in quarterly installments of $1,000 and a final payment of $850 on August 31, 1999. The revolving line of credit is available to the Company up to $22,500 or such lesser amount as is determined to be available under the terms of the New Credit Agreement and is due and payable on June 17, 2000, if the commitment is not earlier terminated under the terms of the New Credit Agreement. The acquisition facility provides for loans on a revolving credit basis which shall be repaid at the option of the Company either in a single installment on the renewal date of June 16th of each year or in 12 equal, consecutive quarterly installments payable on the last day of each fiscal quarter, commencing at the end of the first fiscal quarter following the date such acquisition loan is made and continuing thereafter until the third anniversary of such acquisition loan, on which date the final installment shall be payable. The Company may elect either a floating rate or Eurodollar interest rate option applicable to loans under the New Credit Agreement. The floating rate and Eurodollar interest rate options are based on a base rate plus a floating rate margin that fluctuates on the basis of the Company's leverage ratio. The maximum floating rate margin under the New Credit Agreement is 1.75% for the floating rate option and 3.0% for the Eurodollar rate option. 39 The New Credit Agreement is secured by substantially all of the Company's accounts receivables, inventory and currently owned brand trademarks and associated intellectual property held by the Company. The New Credit Agreement contains (i) cross- collateralization and cross-default provisions, (ii) a negative pledge on the brand trademarks not pledged, (iii) restrictions on prepayment of the notes without the lender's consent and (iv) a pledge of the outstanding shares of various subsidiaries. The more restrictive financial covenants require the maintenance of minimum amounts of consolidated tangible net worth, cash flow coverage, fixed charges coverage and leverage ratios. Also on June 17, 1994, the Company issued $75,000 of 12.75% Series A Senior Subordinated Notes due 2004 (the Series A Notes) with five year warrants to purchase 417,182 shares of common stock at a price of $7.15 per share (the Warrants) to an investment banking firm (the Initial Purchaser). The Series A Notes consisted of 75,000 units, each consisting of $1,000 principal amount of the Series A Notes and a warrant to purchase 5.56242 shares of the Company's common stock at a price of $7.15 per share. The price to the Initial Purchaser of the Series A Notes was $73,967, or 98.6% of the original principal amount of the Series A Notes, resulting in a discount of $1,033. The value assigned to the Warrants was $955 (Note 8), resulting in a total original issue discount of $1,988. The proceeds of the Series A Notes were used to repay the Old Credit Agreement (as defined below). On September 19, 1994, the Company completed an exchange offer of 12.75% Series B Senior Subordinated Notes (the Notes) due 2004, which were registered under the Securities Act of 1933, for all of the outstanding Series A Notes. The form and terms of the Series A Notes and the Notes are the same, except that the Notes are registered under the Securities Act of 1933 and the holders of the Notes are not entitled to the rights of the holders of Series A Notes following the completion of the exchange offer. The Notes mature on June 15, 2004, and interest is payable semi-annually on June 15 and December 15 of each year. The Notes are senior subordinated obligations of the Company, and are subordinated in right of payment to all existing and future senior debt of the Company. The Notes may not be redeemed until June 15, 2001, after which they may be redeemed at the option of the Company. Upon the occurrence of certain events constituting a change of control, the holders of the Notes may require the Company to repurchase the Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest. The Notes are guaranteed by one of the Company's subsidiaries, Signal Investment & Management Co. 40 The Notes are issued under an indenture with an indenture trustee, which restricts, among other things, the ability of the Company and its subsidiaries to (i) incur additional indebtedness, with the exception of indebtedness incurred under the New Credit Agreement up to an aggregate of $50,000 outstanding at any time, (ii) pay dividends and make other distributions, (iii) sell or issue capital stock of a subsidiary, (iv) create encumbrances on the ability of any subsidiary to pay dividends or make other restricted payments, (v) engage in certain transactions with affiliates, (vi) dispose of certain assets, (vii) merge or consolidate with or into, or sell or otherwise transfer all or substantially all their properties and assets as an entirety to, another person, (viii) incur indebtedness that would rank senior in right of payment to the Notes and be subordinated to any other indebtedness of the Company or (ix) create additional liens. The Company is allowed to incur additional indebtedness over and above the $50,000 allowable under the New Credit Agreement if after the incurrence of the additional indebtedness, the Company's fixed charge coverage ratio for the four full fiscal quarters preceding the date such additional indebtedness is incurred, is at least 1.75:1 for fiscal year 1995, and 2.00:1 thereafter, is determined on a pro forma basis as if the additional indebtedness had been incurred and applied at the beginning of such four-quarter period. In order to pay the Special Dividend (Note 8) and related fees and expenses, the Company entered into a credit agreement in June 1993 with a syndicate of banks (The Old Credit Agreement). During June 1994, the Old Credit Agreement was repaid with funds from the New Credit Agreement and the Notes. In connection with the prepayment of those borrowings, the Company incurred an extraordinary loss of $1,556 (net of income taxes) related to the write-off of debt issuance and other deferred costs. During June 1993, the Company entered into separate interest rate swap and cap agreements in notional principal amounts of $30,000 each. The Company entered into both of these agreements as hedges on its variable rate debt and not for trading purposes. The term of each agreement was for a three-year period ending May 31, 1996. The interest rate on the swap was fixed at 4.95% LIBOR, and the rate on the cap was 5% LIBOR. The differences paid or received on the swap and cap have been included as interest expense as payments have been made or received. In connection with the New Credit Agreement and the issuance of the Notes, the swap was terminated in June 1994, resulting in a gain of approximately $484 which is included in other income in the accompanying statements of income. On January 12, 1995, the interest rate cap was terminated resulting in a gain of approximately $729 to the Company. The gain was deferred and is being amortized over the remaining life of the original cap agreement as a reduction of interest expense. During May 1995, the Company prepaid previously outstanding long-term debt, with funds received from the sale of the specialty chemicals division. In connection with prepayment of those borrowings, the Company incurred an extraordinary loss of $367 (net of income taxes), or $.05 per share. The loss primarily related to the write-off of debt issuance and other deferred costs. During April 1993, the Company prepaid previously outstanding long-term debt with available cash funds. In connection with the prepayment of those borrowings, the Company incurred an extraordinary loss of $480 (net of income taxes), or $.08 per share. The loss primarily related to the write-off of debt issuance and other deferred costs. 41 Future maturities of long-term debt are as follows: 1996 ......................................... $ 1,600 1997 ......................................... 2,000 1998 ......................................... 2,400 1999 ......................................... 2,850 2000 ......................................... 5,500 Thereafter ................................... 66,920 ------- 81,270 Less: unamortized discount ................... (1,581) ------- $79,689 ======= Cash interest payments during 1995, 1994 and 1993 were $10,811, $7,114, and $2,612, respectively. 42 (7) INCOME TAXES -------------------------------------------------------------------------- The provision for (benefit from) income taxes from continuing operations includes the following components:
1995 1994 1993 ------ ------ ------ Current: Federal ....................... $ 470 $ 697 $ (884) State ......................... 170 182 (148) Deferred ........................ 645 303 393 ------ ------ ------ $1,285 $1,182 $ (639) ====== ====== ======
Deferred income tax assets and liabilities for 1995 and 1994 reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting and income tax reporting purposes. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities at November 30, 1995 and 1994 are as follows:
1995 1994 ------ ------ Deferred tax assets: Operating loss carryforwards .............. $ 675 $1,175 Reserves and accruals ..................... 1,156 1,713 Deferred promotional expenses ............. 545 701 Accrued postretirement health care benefits ................................ 511 490 Repriced stock option expense ............. 690 576 Accruals for discontinued operations ...... 472 - Gain on sale of interest rate cap ......... 108 - Nonrecurring and unusual charges .......... - 126 Other ..................................... 273 225 ------ ------ Gross deferred tax assets ............... 4,430 5,006 ------ ------ Deferred tax liabilities: Excess tax depreciation and amortization ............................ 2,359 2,133 Prepaid advertising ....................... 183 216 Inventory ................................. 190 - Other ..................................... 207 157 ------ ------ Gross deferred tax liabilities .......... 2,939 2,506 ------ ------ Net deferred tax asset .................. $1,491 $2,500 ====== ======
The Company did not record a valuation allowance against the net deferred income tax asset at November 30, 1995 or 1994 because it is more likely than not, in management's opinion, that the income tax asset will be realized in future years. Included in "refundable and deferred income taxes" in current assets in the accompanying consolidated balance sheets are income tax refunds receivable of $7 and $113 at November 30, 1995 and 1994, respectively. 43 The difference between the provision for (benefit from) income taxes and the amount computed by multiplying income from continuing operations before income taxes by the U.S. statutory rate is summarized as follows:
1995 1994 1993 ------ ------ ------ Expected tax provision (benefit) ...... $1,227 $1,119 $ (591) Dividend exclusion benefit ............ (78) - (35) State income taxes, net of federal income tax benefit .................. 112 225 (28) Other, net ............................ 24 (162) 15 ------ ------ ------ $1,285 $1,182 $ (639) ====== ====== ======
Income taxes paid in 1995, 1994 and 1993 were $5,026, $727 and $1,170, respectively. The Company received income tax refunds of $163 and $790 during 1995 and 1994, respectively. (8) SHAREHOLDERS' EQUITY (DEFICIT) -------------------------------------------------------------------------- SPECIAL DIVIDEND AND 1993 STOCK ISSUANCE On May 14, 1993, the board of directors declared a special cash dividend (the Special Dividend) of $20 per common share to holders of record on June 4, 1993. The Special Dividend was paid on June 11, 1993 and approximated $108,511. In order to pay the Special Dividend and related fees and expenses, the Company entered into a $75,000 term loan agreement and a $25,000 revolving credit facility with a group of banks. In addition, the Company sold 1,866,667 common shares at $7.50 per share to an affiliate of one of the Company's lending banks. The net proceeds to the Company, after offering expenses, were $12,405. These shares did not qualify for the Special Dividend. STOCK OPTIONS The Company had stock option plans adopted in 1983 and 1988 which provided for issuance of options during a five-year period to purchase up to 600,000 and 375,000 common shares, respectively. There are no more options available for grant under the 1983 and 1988 plans. All options granted under the 1983 and 1988 plans had been exercised as of November 30, 1993. During 1993, the shareholders approved the 1993 Non-Statutory Stock Option Plan (1993 Plan). The 1993 Plan provides for issuance of up to 350,000 shares of common stock to key employees. The Company granted options to purchase 349,000 shares during 1993 at prices ranging from $6.25 to $8.125 per share, as repriced as a result of the Special Dividend. During 1994, the Company granted options to purchase 1,000 shares at $7.00 per share under the 1993 Plan. Options are exercisable for a period of up to ten years from date of grant. 44 During 1994, the shareholders approved the Company's 1994 Non-Statutory Stock Option Plan which provides for the issuance to key employees of up to 350,000 shares of common stock in accordance with the plan, of which 294,750 shares were granted in 1994. In addition, during 1994, the shareholders approved the 1994 Non-Statutory Stock Option Plan for Non-Employee Directors, which provides for the issuance of up to 80,000 shares of common stock. The Company granted 30,000 options under this plan during 1994. The per share exercise price for the options granted under these 1994 plans ranged from $6.25 to $10.375. These options are exercisable for a period of up to ten years from date of grant. During 1995, the Company cancelled 20,500 and 27,000 options previously granted under the 1993 Plan and 1994 Plan, respectively. In addition, the Company granted 16,250 options from the 1993 Plan and 2,000 options from the 1994 Plans. The per share exercise price for the options granted under these plans ranged from $4.75 to $5.25. These options are exercisable for a period of up to ten years from date of grant. A summary of stock option activity is as follows:
SHARES PRICE RANGE Outstanding at November 30, 1992 173,436 $5.67 - $7.750 Exercised ........................ (173,436) 5.67 - 7.750 Granted .......................... 349,000 7.50 - 8.125 -------- Outstanding at November 30, 1993 349,000 7.50 - 8.125 Granted .......................... 325,750 6.25 - 10.375 -------- Outstanding at November 30, 1994 674,750 6.25 - 10.375 Cancelled ........................ (47,500) 6.25 - 8.125 Granted .......................... 18,250 4.75 - 5.250 -------- Outstanding at November 30, 1995 645,500 4.75 - 10.375 ========
As a result of the Special Dividend paid in 1993, the Company reduced the exercise price on stock options granted under the 1993 Plan and the two 1994 plans. There were 634,250 options granted under these plans which had original exercise prices ranging from $26.25 to $28.125 per share. After the Special Dividend, the board of directors approved new exercise prices in the range of $6.25 to $8.125 per share. As a result of the new measurement date, the repricing of these options resulted in unusual noncash charges of $302, $559 and $956 in 1995, 1994 and 1993, respectively, and corresponding increases in paid-in surplus. These expense amounts are included in "nonrecurring and unusual charges" in the accompanying statements of income (Note 14). During 1993, the Company recognized certain tax benefits related to the exercise of stock options in the amount of $1,253. Such benefit was recorded as an increase in paid-in surplus. No stock options were exercised in 1995 or 1994. PREFERRED SHARES The Company is authorized to issue up to 1,000,000 preferred shares in series and with rights established by the board of directors. At November 30, 1995 and 1994, no shares of any series of preferred stock were issued and outstanding. 45 EMPLOYEE STOCK OWNERSHIP PLAN Effective June 1, 1989, the Company established an Employee Stock Ownership Plan providing for the issuance of up to 360,000 shares of the Company's common stock. At November 30, 1995, no contributions had been made to the plan. COMMON STOCK WARRANTS As described in Note 6, the Company issued the Warrants at an assigned value of $955. The Warrants are exercisable for five years. In the aggregate there are 75,000 warrants which, when exercised, would entitle the holders thereof to acquire an aggregate of 417,182 shares of the Company's common stock at a price of $7.15 per share. The number of shares of common stock and the price per share at which a warrant is exercisable are subject to adjustment upon the occurrence of certain events. A warrant does not entitle the holder to receive any cash dividends paid on common stock or to exercise any other rights as a shareholder of the Company. (9) GEOGRAPHICAL SEGMENT INFORMATION -------------------------------------------------------------------------- The Company operates exclusively in the consumer products industry. Geographic data for 1995, 1994 and 1993 is included in the schedule of geographical information on page 35, which is an integral part of these financial statements. (10) CONTINGENCIES -------------------------------------------------------------------------- Claims, suits and complaints arise in the ordinary course of the Company's business involving such matters as patents and trademarks, product liability and other alleged injuries or damage. The outcome of such litigation cannot be predicted, but, in the opinion of management, based in part upon the opinion of counsel, all such pending matters are without merit or are of such kind or involve such amounts as would not have a material adverse effect on the consolidated operating results or financial position of the Company if disposed of unfavorably. 46 (11) SUPPLEMENTAL FINANCIAL INFORMATION -------------------------------------------------------------------------- A - Inventories consisted of the following at November 30, 1995 and 1994:
1995 1994 ------ ------ Raw materials .................................. $ 5,396 $ 3,451 Finished goods and work in process ............. 5,694 5,070 Excess of current cost over LIFO value ......... (2,412) (2,274) ------- ------- Total inventories ............................ $ 8,678 $ 6,247 ======= =======
International inventories included above, valued on a lower of FIFO cost or market basis at November 30, 1995 and 1994, were $1,720 and $1,780, respectively. B - Property, plant and equipment consisted of the following at November 30, 1995 and 1994:
1995 1994 ------ ------ Land ........................................... $ 150 $ 150 Buildings and improvements ..................... 2,957 2,900 Machinery and equipment ........................ 21,354 19,308 Less -- accumulated depreciation ............... (15,131) (13,867) ------- ------- Property, plant and equipment, net ........... $ 9,330 $ 8,491 ======= =======
C - Accrued liabilities consisted of the following at November 30, 1995 and 1994:
1995 1994 ------ ------ Accrued interest expense ....................... $ 3,942 $ 4,341 Salaries, wages and commissions ................ 1,317 1,377 Promotion expense .............................. 1,560 1,994 Accrued estimated specialty chemicals divestiture costs ............................ 1,231 - Other .......................................... 4,524 2,938 ------- ------- Total accrued liabilities .................... $12,574 $10,650 ======= =======
(12) ACQUISITION OF BRANDS -------------------------------------------------------------------------- On May 12, 1994, the Company acquired BENZODENT, a topical oral analgesic, for approximately $3,500 from The Procter & Gamble Company. The assets acquired consisted primarily of the trademark ($3,246) and finished product inventories. The Company financed the purchase of BENZODENT with bank borrowings. 47 On June 17, 1994, the Company acquired a license to the PHISODERM trademark in the United States, Canada and Puerto Rico (the Territory), together with certain other assets from Sterling Winthrop Inc. (Sterling). The purchase price for the license of PHISODERM in the Territory and certain other assets approximated $17,276. The assets acquired consisted primarily of the trademark ($16,826) and inventories. If net sales of PHISODERM products in the United States exceed $11,000 for either of the 12-month periods beginning July 1, 1995 and July 1, 1996 and ending June 30, 1996 and June 30, 1997 then within 45 days after the end of the applicable 12-month period with respect to which the applicable net sales threshold specified above has been exceeded, the Company will pay Sterling an additional $1,000 per year. (13) ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS -------------------------------------------------------------------------- As discussed in Note 3, the Company adopted SFAS No. 106 as of December 1, 1992 and the cumulative effect of this change is reported in the accompanying consolidated statement of income for fiscal 1993. The Company maintains certain postretirement health care benefits for eligible employees. Employees become eligible for these benefits if they meet certain age and service requirements. The Company pays a portion of the cost of medical benefits for certain retired employees over the age of 65. Effective January 1, 1993, the Company's contribution is a service-based percentage of the full premium. The Company pays these benefits as claims are incurred. Net periodic postretirement health care benefits cost for the years ended November 30, 1995 and 1994, included the following components:
1995 1994 1993 ------ ------ ------ Service cost (benefits earned during the period) .............................. $ 30 $ 35 $ 35 Interest cost on accumulated postretirement benefits obligation ...................... 102 94 84 ----- ----- ----- Net periodic postretirement benefits cost ..................................... $ 132 $ 129 $ 119 ===== ===== =====
The following table sets forth the funded status of the plan, reconciled to the accrued postretirement health care benefits recognized in the Company's balance sheets at November 30, 1995 and 1994:
1995 1994 ------ ------ Accumulated postretirement benefits obligation: Retirees ................................... $ 883 $ 803 Fully eligible active plan participants .... 292 197 Other active participants .................. 170 114 ------ ------ Accrued postretirement health care benefits ................................... $1,345 $1,114 ====== ======
48 For measurement purposes, a 6% annual rate of increase in the per capita cost of covered health care benefits was assumed in 1995 and 1994. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% and 8.5% at November 30, 1995 and 1994, respectively. The effect of a 1% increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of November 30, 1995 by approximately 4.8%, and the aggregate of the service and interest cost components of the net annual postretirement benefit cost by approximately 3.6% for November 30, 1995. (14) NONRECURRING AND UNUSUAL CHARGES -------------------------------------------------------------------------- During the fourth quarter of 1993, the Company recorded nonrecurring and unusual charges of $5,527. The nonrecurring and unusual charges consisted of the following: (A) International Restructuring Charges - (1) Write-down of a product trademark to net realizable value in the amount of $742. Based on management's best estimate of the net realizable value of the brand, a write-down of the trademark was recorded in the fourth quarter of 1993. During fiscal 1994, the Company sold the brand and recorded an additional loss of $512. (2) Write-down of accounts receivable in the amount of $1,775. During the fourth quarter of fiscal 1993, the Company terminated its distribution operations in Spain. As a result, the Company's U.K. subsidiary wrote off uncollectible accounts receivable from its Spanish distributor in the amount of $728. In addition, restructuring of the Company's German distribution operations in connection with a change in distribution methods resulted in a reserve for uncollectible accounts receivable in the amount of $1,047. (3) Write-down of inventories in the amount of $212 related to Spanish and discontinued brand inventories to their net realizable values [see (1) and (2) above]. (4) Accrued severance payments and lease and distributor termination fees in the amount of $375 consisted of severance for terminated international employees, accrual of fees for termination of the Spanish distributor and European distributor and lease termination fees. (5) Other accrued international restructuring charges of approximately $230 primarily related to the shutdown of the Spanish operations and scaling back of the Canadian operations. (B) Noncash compensation expense related to repricing of stock options in the amount of $956 was recorded (Note 8). (C) Accrued severance of approximately $1,237 for executives leaving the Company was recorded during the fourth quarter of fiscal 1993. The Company recorded nonrecurring and unusual charges of $302 for 1995 and $559 for 1994 related to the stock options which were repriced in 1993 (Note 8). There is no remaining accrual as of November 30, 1995 related to the nonrecurring and unusual charges. 49 (15) DISCONTINUED OPERATIONS -------------------------------------------------------------------------- On May 26, 1995, the Company completed the sale of its specialty chemicals division to privately-held Elcat. The Company received $25,000 from the sale of the specialty chemicals division consisting of $20,000 in cash and $5,000 of 13.125% cumulative, convertible preferred stock of Elcat. The net cash proceeds were used to repay long-term debt of approximately $12,000. The Company recognized a gain of $9,334, (after tax) from the sale and extraordinary charge (after tax) of $367 relating to the early extinguishment of the debt. The results of operations and the gain on disposal of the specialty chemicals division have been separately classified as discontinued operations in the accompanying consolidated statements of income. Net sales of the specialty chemicals division were $6,739 through May 26, 1995, $13,586 for 1994 and $15,544 for 1993. Interest expense of $351, $752 and $350 for 1995, 1994 and 1993, respectively, has been allocated to discontinued operations based upon the ratio of net assets discontinued to the total net assets of the consolidated entity. 50 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF CHATTEM, INC.: We have audited the accompanying consolidated balance sheets of Chattem, Inc. (a Tennessee corporation) and subsidiaries as of November 30, 1995 and 1994 and the related consolidated statements of income, shareholders' equity (deficit) and cash flows for each of the three years in the period ended November 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Chattem, Inc. and subsidiaries as of November 30, 1995 and 1994 and the results of their operations and their cash flows for each of the three years in the period ended November 30, 1995 in conformity with generally accepted accounting principles. As discussed in Note 3 to the consolidated financial statements, in 1993 the Company changed its methods of accounting for income taxes and for postretirement health care benefits. Chattanooga, Tennessee January 25, 1996 51 QUARTERLY INFORMATION (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED ------------------------------------------------------- TOTAL FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30 ----- ----------- ------ --------- ----------- FISCAL 1995: Continuing operations: Net sales ...................... $ 100,598 19,372 27,114 28,990 25,122 Gross profit ................... $ 70,843 13,144 18,557 20,628 18,514 Income (loss)(1) ............... $ 2,325 (611) 670 1,673 593 Income (loss) per share (1) .... $ .32 (.08) .09 .23 .08 Total: Net income (loss)............... $ 11,966 (250)(3) 10,480(3) 1,673 63(3) Net income (loss) per share (2) .................... $ 1.64 (.03)(3) 1.44(3) .23 .01(3) FISCAL 1994: Continuing operations: Net Sales ...................... $ 94,370 17,714 23,642 25,954 27,060 Gross profit ................... $ 65,875 11,920 16,878 18,574 18,503 Income (loss) (1) .............. $ 2,110 (638) 1,198 1,212 338 Income (loss) per share (1) .... $ .29 (.09) .16 .17 .05 Total: Net income (loss) .............. $ 2,054 (252)(4) 1,553(4) (105)(4) 858(4) Net income (loss) per share(2) ..................... $ .29 (.03)(4) .21(4) (.01)(4) .12(4)
(1) BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT. (2) THE SUM OF THE QUARTERLY EARNINGS PER SHARE AMOUNTS MAY DIFFER FROM ANNUAL EARNINGS PER SHARE BECAUSE OF THE DIFFERENCES IN THE WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS USED (WHERE DILUTIVE) IN THE QUARTERLY AND ANNUAL COMPUTATIONS. (3) INCLUDES INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX, OF $361 OR $.05 PER SHARE, $10,177 OR $1.40 PER SHARE AND $(530) OR $(.07) PER SHARE FOR THE QUARTERS ENDED FEBRUARY 28, MAY 31 AND NOVEMBER 30, RESPECTIVELY. (4) INCLUDES INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX, OF $385 OR $.05 PER SHARE, $355 OR $.05 PER SHARE, $239 OR $.03 PER SHARE AND $521 OR $.07 PER SHARE FOR THE QUARTERS ENDED FEBRUARY 28, MAY 31, AUGUST 31 AND NOVEMBER 30, RESPECTIVELY. 52 GEOGRAPHICAL SEGMENT INFORMATION (IN THOUSANDS)
YEAR ENDED NOVEMBER 30, --------------------------- 1995 1994 1993 ---- ---- ---- NET SALES: Domestic ................................ $ 87,250 $ 82,643 $ 76,592 International ........................... 13,348 11,727 13,269 -------- -------- -------- Consolidated ............................ $100,598 $ 94,370 $ 89,861 ======== ======== ======== OPERATING INCOME: Domestic ................................ $ 16,719 $ 16,981 $ 10,127 International ........................... 1,292 120 381 -------- -------- -------- Total ................................. 18,011 17,101 10,508 Other unallocated expenses, net (1) ..... (14,401) (13,809) (12,247) -------- -------- -------- Income (loss) from continuing operations before income taxes ...... $ 3,610 $ 3,292 $ (1,739) ======== ======== ======== IDENTIFIABLE ASSETS: Domestic ................................ $ 66,911 $ 69,361 $ 47,792 International ........................... 7,535 8,032 12,768 -------- -------- -------- Total ................................. 74,446 77,393 60,560 Investment in Elcat, Inc. ............... 5,000 - - Discontinued operations ................. - 5,015 4,512 Corporate ............................... 3,964 3,034 4,462 -------- -------- -------- Consolidated .......................... $ 83,410 $ 85,442 $ 69,534 ======== ======== ========
(1) PRINCIPALLY INTEREST EXPENSE, CORPORATE OVERHEAD NOT ALLOCATED AND NONRECURRING AND UNUSUAL CHARGES. 53
BOARD OF DIRECTORS OFFICERS CHATTEM, INC. ZAN GUERRY ZAN GUERRY Chattanooga, Tennessee 37409 Chairman and President Chairman and President Corporate Office Chattem, Inc. Chattanooga, Tennessee ROBERT E. BOSWORTH SUBSIDIARIES AND AFFILIATED COMPANIES Executive Vice President SAMUEL E. ALLEN and Chief Financial Officer CHATTEM (U.K.) LIMITED Chairman Guerry House GLOBALT, Inc. HUGH F. SHARBER Ringway Centre Atlanta, Georgia Secretary Edison Road Basingstoke, Hampshire RG21 2YH LOUIS H. BARNETT ADDITIONAL FINANCIAL England Business Consultant INFORMATION Fort Worth, Texas COMMENCING WITH THE 1996 CHATTEM (CANADA) INC. FISCAL YEAR, THE COMPANY 2220 Argentia Road ROBERT E. BOSWORTH WILL DISCONTINUE ISSUING Mississauga, Ontario L5N 2K7 Executive Vice President PRINTED QUARTERLY REPORTS and Chief Financial Officer TO STOCKHOLDERS. IN PLACE HBA INSURANCE LTD. Chattem, Inc. OF THESE REPORTS, THE P. O. Box HM 2062 Chattanooga, Tennessee COMPANY WILL FORWARD TO Hamilton 5, Bermuda REQUESTING SHAREHOLDERS ROBERT M. BOYD, JR. COPIES OF QUARTERLY PRESS SIGNAL INVESTMENT & Business Consultant RELEASES AND/OR QUARTERLY MANAGEMENT CO. Hilton Head, South Carolina REPORTS ON FORM 10-Q FILED 1100 North Market Street WITH THE SECURITIES AND Suite 780, Wilmington Trust Center RICHARD E. CHENEY EXCHANGE COMMISSION. Wilmington, Delaware 19801-1239 Former Chairman Emeritus BOTH THE QUARTERLY Hill and Knowlton, Inc. INFORMATION AND THE COMMON STOCK LISTING New York, New York COMPANY'S ANNUAL REPORT Over-the-Counter ON FORM 10-K FILED WITH THE NASDAQ Symbol: CHTT SCOTT L. PROBASCO, JR. COMMISSION MAY BE OBTAINED Chairman of the Executive WITHOUT CHARGE BY WRITING TO TRANSFER AGENT AND Committee THE DIRECTOR OF FINANCE, REGISTRAR SunTrust Bank, Tennessee, N.A. CHATTEM, INC. OR BY CALLING SunTrust Bank, Atlanta, N.A. Chattanooga, Tennesee 1-800-366-6077, EXT. 769 P. O. Box 4625 Atlanta, GA 30302 A. ALEXANDER TAYLOR II Partner Miller & Martin Chattanooga, Tennessee
EX-22 8 EXHIBIT 22 EXHIBIT 22 CHATTEM, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE COMPANY NAME OF SUBSIDIARY STATE OR COUNTRY OF INCORPORATION - --------------------- --------------------------------- Chattem (Canada) Inc. Canada Chattem (U.K.) Limited England HBA Insurance Ltd. Bermuda Signal Investment & Management Co. Delaware EX-24 9 EXHIBIT 24 EXHIBIT 24 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accounts, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement on Form S-8 (No. 33-78524) and Registration Statement on Form S-8 (No. 33-78522). ARTHUR ANDERSEN LLP Chattanooga, Tennessee February 26, 1996 EX-27 10 EXHIBIT 27
5 This schedule contains summary financial information extracted from Chattem, Inc.'s audited financial statements and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS NOV-30-1995 DEC-01-1994 NOV-30-1995 3,636 0 16,534 286 8,678 31,074 24,461 15,131 83,410 20,820 79,689 0 0 1,519 (18,940) 83,410 100,598 100,598 29,755 86,130 0 0 11,075 3,610 1,285 2,325 10,008 (367) 0 11,966 1.64 1.64
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