-----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, J9JHfm1u8DfL34am5fMe3AmK9Dd2VK64s1Lx0mJ9ohG4K9DAX/TUV3UX8tqKVQI9 /20Hk4ICdjDJL+3B2SpOyg== 0000912057-01-508370.txt : 20010416 0000912057-01-508370.hdr.sgml : 20010416 ACCESSION NUMBER: 0000912057-01-508370 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010228 FILED AS OF DATE: 20010412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHATTEM INC CENTRAL INDEX KEY: 0000019520 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 620156300 STATE OF INCORPORATION: TN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-05905 FILM NUMBER: 1601285 BUSINESS ADDRESS: STREET 1: 1715 W 38TH ST CITY: CHATTANOOGA STATE: TN ZIP: 37409 BUSINESS PHONE: 4238214571 MAIL ADDRESS: STREET 1: 1715 W 38TH ST CITY: CHATTANOOGA STATE: TN ZIP: 37409 FORMER COMPANY: FORMER CONFORMED NAME: CHATTEM DRUG & CHEMICAL CO DATE OF NAME CHANGE: 19790111 10-Q 1 a2044962z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2001 COMMISSION FILE NUMBER 0-5905 CHATTEM, INC. A TENNESSEE CORPORATION I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300 1715 WEST 38TH STREET CHATTANOOGA, TENNESSEE 37409 TELEPHONE: 423-821-4571 REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. AS OF APRIL 12, 2001, 8,867,751 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT PAR VALUE, WERE OUTSTANDING. CHATTEM, INC. INDEX
PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of February 28, 2001 and November 30, 2000 ................................................... 3 Consolidated Statements of Income for the Three Months Ended February 28, 2001 and February 29, 2000................. 5 Consolidated Statements of Cash Flows for the Three Months Ended February 28, 2001 and February 29, 2000.............................. 6 Notes to Consolidated Financial Statements............................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................ 25 SIGNATURES................................................................. 26 EXHIBIT 11 - Statement Regarding Computation of Per Share Earnings
2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHATTEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
FEBRUARY 28, NOVEMBER 30, ASSETS 2001 2000 - ------ ---------------- ---------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents............................................. $ 37,581 $ 102,534 Accounts receivable, less allowance for doubtful accounts of $1,075 at February 28, 2001 and $1,025 at November 30, 2000.................... 31,977 40,691 Refundable and deferred income taxes.................................. 12,401 12,401 Inventories........................................................... 16,085 15,052 Prepaid expenses and other current assets............................. 1,214 884 ------------- ------------- Total current assets 99,258 171,562 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT, NET ..................................... 26,753 27,059 ------------- ------------- OTHER NONCURRENT ASSETS: Patents, trademarks and other purchased product rights, net........... 190,737 191,980 Debt issuance costs, net.............................................. 8,771 8,829 Other................................................................. 1,954 2,646 ------------- ------------- Total other noncurrent assets....................................... 201,462 203,455 ------------- ------------- TOTAL ASSETS...................................................... $ 327,473 $ 402,076 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 3 CHATTEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
FEBRUARY 28, NOVEMBER 30, LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 - ------------------------------------ ------------------ ------------------ (Unaudited) CURRENT LIABILITIES: Accounts payable..................................................... $ 5,826 $ 8,790 Payable to bank...................................................... 1,416 1,529 Accrued liabilities.................................................. 33,041 35,214 ----------------- ----------------- Total current liabilities.......................................... 40,283 45,533 ----------------- ----------------- LONG-TERM DEBT........................................................ 226,306 304,077 ----------------- ----------------- DEFERRED INCOME TAXES ................................................ 12,916 12,919 ----------------- ----------------- OTHER NONCURRENT LIABILITIES ......................................... 1,916 1,894 ----------------- ----------------- SHAREHOLDERS' EQUITY: Preferred shares, without par value, authorized 1,000, none issued........................................................ -- -- Common shares, without par value, authorized 50,000, issued 8,868 at February 28, 2001 and 8,861 at November 30, 2000................... 1,846 1,845 Paid-in surplus...................................................... 64,608 64,443 Accumulated deficit.................................................. (18,318) (26,463) ----------------- ----------------- 48,136 39,825 Cumulative other comprehensive income - foreign currency translation adjustment ....................................................... (2,084) (2,172) ----------------- ----------------- Total shareholders' equity........................................ 46,052 37,653 ----------------- ----------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $ 327,473 $ 402,076 ================= =================
The accompanying notes are an integral part of these consolidated financial statements. 4 CHATTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited and in thousands, except per share amounts)
FOR THE THREE MONTHS ENDED FEBRUARY 28, FEBRUARY 29, 2001 2000 ----------------- ----------------- NET SALES.......................................................... $ 47,420 $ 62,371 ------------------ ----------------- COSTS AND EXPENSES: Cost of sales.................................................... 12,484 16,682 Advertising and promotion........................................ 21,065 23,582 Selling, general and administrative.............................. 7,510 7,403 ------------------ ----------------- Total costs and expenses....................................... 41,059 47,667 ------------------ ----------------- INCOME FROM OPERATIONS ............................................ 6,361 14,704 ------------------- ------------------ OTHER INCOME (EXPENSE): Interest expense................................................. (6,504) (8,974) Investment and other income, net................................. 1,089 74 ------------------- ------------------- Total other income (expense) (5,415) (8,900) ------------------- ------------------- INCOME BEFORE INCOME TAXES, EXTRAORDINARY GAIN AND CHANGE IN ACCOUNTING PRINCIPLE............................................. 946 5,804 PROVISION FOR INCOME TAXES......................................... 360 2,196 ------------------- ------------------- INCOME BEFORE EXTRAORDINARY GAIN AND CHANGE IN ACCOUNTING PRINCIPLE............................... 586 3,608 EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES...................... 7,559 -- CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAX BENEFIT...................................................... -- (542) ------------------- ------------------- NET INCOME $ 8,145 $ 3,066 ================== ================= NUMBER OF COMMON SHARES: Weighted average outstanding - basic ............................ 8,867 9,693 ================== ================= Weighted average and dilutive potential outstanding.............. 8,889 9,861 ================== ================= NET INCOME (LOSS) PER COMMON SHARE: Basic: Income before extraordinary gain and change in accounting principle.......................................... $ .07 $ .37 Extraordinary gain............................................... .85 -- Change in accounting principle................................... -- (.05) ------------------- ------------------- Total basic .................................................... $ .92 $ .32 ================== ================= Diluted: Income before extraordinary gain and change in accounting principle.......................................... $ .07 $ .37 Extraordinary gain............................................... .85 -- Change in accounting principle................................... -- (.06) ------------------- ------------------- Total diluted.................................................. $ .92 $ .31 ================== =================
The accompanying notes are an integral part of these consolidated financial statements. 5 CHATTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited and in thousands)
FOR THE THREE MONTHS ENDED FEBRUARY 28, FEBRUARY 29, 2001 2000 -------------- ------------ OPERATING ACTIVITIES: Net income........................................................... $ 8,145 $ 3,066 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................... 2,533 3,742 Extraordinary gain on early extinguishment of debt, net.......... (7,559) -- Cumulative effect of change in accounting principle, net......... -- 542 Other, net....................................................... 29 29 Changes in operating assets and liabilities, net of product divestiture: Accounts receivable............................................ 8,714 3,171 Inventories.................................................... (1,033) (1,632) Prepaid expenses and other current assets...................... 340 511 Accounts payable and accrued liabilities....................... (9,838) 194 -------------- ------------ Net cash provided by operating activities................... 1,331 9,623 -------------- ------------ INVESTING ACTIVITIES: Purchases of property, plant and equipment........................... (332) (2,814) Additions to trademarks and other product rights..................... (203) (20) Increase in other assets, net........................................ (32) (122) -------------- ------------ Net cash used in investing activities....................... (567) (2,956) -------------- ------------ FINANCING ACTIVITIES: Repayment of long-term debt.......................................... (61,644) (8,500) Payment of consent fees related to repayment of long-term debt....... (3,293) -- Payment of other costs related to repayment of long-term debt........ (699) -- Proceeds from long-term debt......................................... -- 6,500 Proceeds from exercise of stock options.............................. 4 190 Repurchase of common shares.......................................... -- (1,954) Change in payable to bank............................................ (113) (2,558) Deferred debt issuance costs......................................... -- (158) -------------- ------------ Net cash used in financing activities....................... (65,745) (6,480) -------------- ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS........... 28 (14) -------------- ------------ CASH AND CASH EQUIVALENTS: Increase (decrease) for the period................................... (64,953) 173 At beginning of period............................................... 102,534 2,308 -------------- ------------ At end of period..................................................... $ 37,581 $ 2,481 ============== ============ SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Additions to trademarks and other product rights by assumption of certain liabilities............................................ $ -- $ 266 PAYMENTS FOR: Interest............................................................. $ 3,806 $ 3,363 Taxes................................................................ $ 191 $ 3,994
The accompanying notes are an integral part of these consolidated financial statements. 6 CHATTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note: All monetary amounts are expressed in thousands of dollars unless contrarily evident. 1. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company's Annual Report on Form-10K for the year ended November 30, 2000. The accompanying unaudited consolidated financial statements, in the opinion of management, include all adjustments necessary for a fair presentation. All such adjustments are of a normal recurring nature. 2. The Company incurs significant expenditures on television, radio and print advertising to support its nationally branded over-the-counter ("OTC") health care and toiletries and skin care products. Customers purchase products from the Company with the understanding that the brands will be supported by the Company's extensive media advertising. This advertising supports the retailers' sales effort and maintains the important brand franchise with the consuming public. Accordingly, the Company considers its advertising program to be clearly implicit in its sales arrangements with its customers. Therefore, the Company believes it is appropriate to allocate a percentage of the necessary supporting advertising expenses to each dollar of sales by charging a percentage of sales on an interim basis based upon anticipated annual sales and advertising expenditures (in accordance with Accounting Principles Board Opinion No. 28) and adjusting that accrual to the actual expenses incurred at the end of the year. 3. Inventories consisted of the following at February 28, 2001 and November 30, 2000:
2001 2000 ------------ ------------ Raw materials and work in process.............. $ 5,845 $ 6,793 Finished goods................................. 12,228 10,247 Excess of current cost over LIFO values........ (1,988) (1,988) -------------- -------------- Total inventories $ 16,085 $ 15,052 ============== ==============
4. Accrued liabilities consisted of the following at February 28, 2001 and November 30, 2000:
2001 2000 ------------ ------------ Income and other taxes ........................ $ 4,147 $ -- Salaries, wages and commissions ............... 1,315 1,103 Advertising and promotion ..................... 10,229 7,663 Interest....................................... 8,180 5,810 Product acquisitions and divestitures.......... 2,155 10,413 Allowance for product returns.................. 5,690 9,600 Other.......................................... 1,325 625 ------------ ------------ Total accrued liabilities.................. $ 33,041 $ 35,214 ============ ============
7 5. Comprehensive income consisted of the following components for the three months ended February 28, 2001 and February 29, 2000, respectively:
2001 2000 ------- ------- Net income............................... $8,145 $3,066 Other - foreign currency translation ajustment................. 88 (34) ------- ------- Total comprehensive income.......... $8,233 $3,032 ======== ========
6. Effective December 1, 1999 the Company adopted Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities", issued by the American Institute of Certified Public Accountants ("AICPA"). SOP 98-5 requires costs of start-up activities to be expensed as incurred. The initial adoption of this SOP was recorded as the cumulative effect of a change in accounting principle. The one-time charge, net of income tax benefit, was $542, or $0.06 per diluted share. 7. In fiscal 1999 and 2000 the Company's board of directors authorized repurchases of the Company's common stock not to exceed an aggregate total of $20,000. Under these authorizations, 1,049,000 shares at a cost of $13,401 have been reacquired through February 28, 2001, leaving $6,599 available for future repurchases. The Company, however, is limited in its ability to repurchase shares due to restrictions under the terms of the indentures with respect to which its senior subordinated notes were issued. The repurchased shares were retired and returned to unissued. No shares were repurchased in the first quarter of fiscal 2001. 8. On September 15, 2000 the Company completed the sale of its Ban(R) product line to The Andrew Jergens Company, a wholly owned subsidiary of Kao Corporation. Under the terms of the sale agreement the Company received $160,000 cash at closing, plus the right to receive up to an additional $6,500 in future payments based upon sales levels of Ban in 2001 and 2002. Concurrent with the closing of the sale of Ban, the Company used $52,194 of the net proceeds to retire all of the outstanding balances of the Company's revolving line of credit and term loans and accrued interest thereon, with the balance of the net proceeds being retained by the Company. 9. On December 11, 2000 the Company initiated a consent solicitation and tender offer for certain of its outstanding senior subordinated notes. On January 17, 2001 the Company announced the successful completion of the consent solicitation and tender offer pursuant to which it retired $70,462 principal amount of its 8.875% senior subordinated notes due 2008 and $7,397 principal amount of its 12.75% senior subordinated notes due 2004. The consideration paid for the consent solicitation and tender offer was $64,937, which was provided by the proceeds of the Ban sale. An extraordinary gain on the early extinguishment of debt of $7,559, net of income taxes, was recognized in the first quarter of fiscal 2001. 10. The Company has been named as a defendant in a lawsuit brought by the Center for Environment Health ("CEH") contending that the Company violated the California Safe Drinking Water and Toxic Enforcement Act of 1998 (Proposition 65) by selling to California consumers without a warning topical skin care products containing zinc oxide which in turn contains lead. The lawsuit contends that the purported failure to comply with Proposition 65 requirements also constitutes a violation of the California Business & Professions Code Section 1700 ET SEQ. Violations of either Proposition 65 or Business & Profession Code 1700 ET SEQ. render a defendant liable for civil penalties of up to $2.5 per day per violation. The Company has also been named as a defendant in a lawsuit filed in San Francisco Superior Court on December 29, 1999, JOHNSON, et al v. BRISTOL-MYERS SQUIBB CO., et al., Case No. 308872. This is a putative class action brought by two named plaintiffs on behalf of the general public in California, against the same entities that are defendants in the CEH lawsuit. As with the CEH lawsuit, the Johnson lawsuit alleges that the Company violated Proposition 65 by selling to California consumers without a warning topical skin care product containing zinc oxide 8 which in turn contains lead. The lawsuit does not assert claims directly under Proposition 65, but asserts that the alleged failure to comply with Proposition 65 gives rise to claims under California's Business and Professions Code Sections 17200 ET SEQ., 17500 ET SEQ., and the Civil Code Section 1750 ET SEQ. The lawsuit seeks injunctive and equitable relief, restitution, the disgorgement of allegedly wrongfully obtained revenues and damages. The plaintiffs in the two separate actions have been granted leave by the court to file separate amended complaints that would include a claim based upon the allegation that zinc oxide allegedly also contains cadmium. The plaintiffs were granted leave to file a consolidated amended complaint by April 4, 2001. The Company intends to vigorously defend these claims. At this stage of the proceedings, it is not possible to determine the outcome of these matters or the effect of their resolution on the Company's financial position or operating results. Management believes that the Company's defenses will have merit; however, there can be no assurance that the Company will be successful in its defense or that these lawsuits will not have a material adverse effect on the Company's results of operations for some period or on the Company's financial position. In 1994, the Nonprescription Drug Manufacturers Association (now the Consumer Healthcare Products Association) ("CHPA") initiated a large-scale study in conjunction with the Yale University School of Medicine to investigate a possible association, if any, of stroke in women aged 18 to 49 using phenylpropanolamine ("PPA"), the active ingredient in certain of the DEXATRIM products (the "Yale Study"). PPA is also used in other over-the-counter medications which were also part of the Study. In May 2000, the results of the Yale Study were filed with the Food and Drug Administration ("FDA"). The investigators concluded that the results of the Yale Study suggest that PPA may increase the risk of hemorrhagic stroke. The FDA indicated at that time that no immediate action was required and scheduled an FDA advisory panel to meet in October 2000 to discuss the results of the study. The CHPA has questioned the execution of the Yale Study and disagreed with its conclusions. On October 19, 2000 a Nonprescription Drugs Advisory Committee ("NDAC"), commissioned by the FDA to review the safety of PPA, determined that there is an association between PPA and hemorrhagic stroke and recommended that PPA not be considered generally recognized as safe for OTC use as a nasal decongestant or for weight loss. In response to a request from the FDA to voluntarily cease marketing DEXATRIM with PPA, the Company announced on November 7, 2000 its decision to immediately cease shipping DEXATRIM with PPA and to accept product returns from any retailers who decide to discontinue marketing DEXATRIM with PPA. As a result of these decisions, the Company recorded allowances for product returns of $5,600 and inventory write-offs of $2,788. Through February 28, 2001 the Company has charged $2,997 and $107 against the allowances for product returns and inventory write-offs, respectively. To date, the FDA has not issued any final determinations concerning PPA or products containing PPA in connection with the foregoing. The NDAC's determination and the FDA's request to voluntarily cease marketing DEXATRIM with PPA may increase the potential for additional claims relating to PPA in DEXATRIM to be filed against the Company. Certain states and localities have enacted, or are considering enacting, restrictions on the sale of products that contain synthetic ephedrine or naturally-occurring sources of ephedrine. These restrictions include the prohibition of OTC sales, required warnings or labeling statements, recordkeeping and reporting requirements, the prohibition of sales to minors, per transaction limits on the quantity of product that may be purchased, and limitations on advertising and promotion. In such states or localities these restrictions could adversely affect the sale of DEXATRIM Natural, which contains naturally occurring sources of ephedrine. Failure to comply with these restrictions could also lead to regulatory enforcement action, including the seizure of violative products, product recalls, and civil or criminal fines or other penalties. 9 The Company was notified in October, 2000 that the FDA denied a Citizen Petition submitted by Thompson Medical Company, Inc., previous owner of SPORTSCREME and ASPERCREME, seeking a determination that 10% trolamine salicylate was clinically proven to be an effective active ingredient in external analgesic OTC drug products, and thus should be included in the FDA's yet-to-be finalized monograph for external analgesics. In the same correspondence the FDA recommended that the Company meet with the FDA to agree on an acceptable clinical study protocol to determine the efficacy of 10% trolamine salicylate as an active ingredient in OTC external analgesic drug products. The Company has requested a meeting with the FDA and has submitted a proposed protocol study. The Company cannot predict the timing or outcome of any FDA decision on the proposed protocol, although an agreement is not expected to occur until at least the middle of fiscal 2001. If the study protocol is approved, the Company expects that it will take one to two years to produce the clinical data for FDA review. The FDA could finalize the OTC external analgesic monograph before the protocol and clinical data results are finalized, which would place 10% trolamine salicylate in non-monograph status. The Company is working to develop alternate formulas for SPORTSCREME and ASPERCREME in the event that clinical data does not support the efficacy of trolamine salicylate. 11. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the respective full years. During recent fiscal years, the Company's first quarter net sales and gross profit have trailed the other fiscal quarters on average from 25% to 35% because of slower sales of consumer products, the seasonality of BULLFROG and SUN-IN and lower levels of promotional campaigns during this quarter. 12. The Company considers all short-term deposits and investments with original maturities of three months or less to be cash equivalents. 13. The Company operates in two primary segments that are based on the different types of products offered. The OTC health care segment includes medicated skin care products, topical analgesics, internal analgesics, lip care, appetite suppressant and dietary supplement products. The toiletries and skin care segment includes antiperspirants and deodorants, facial cleaners and masques and seasonal products. The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended November 30, 2000. Certain assets, including the majority of property, plant and equipment and deferred tax assets are not allocated to the identifiable segments. In the table below the following items are included in the indicated captions: Variable contribution margin: net sales less variable cost of sales, advertising, promotion, market research, freight out, sales commissions, royalties, bad debts and inventory obsolescence. The Company evaluates the performance of its operating segments based on variable contribution margins. Depreciation and amortization: amortization of the cost of trademarks and other product rights with unallocated depreciation and other amortization expense being shown under the "Not Classified" caption. Identifiable/total assets: primarily identified unamortized cost of trademarks and other product rights and total inventory cost with the remainder of total assets being shown under the "Not Classified" caption. 10
PRODUCT CLASSIFICATIONS ----------------------------------------------------------- OTC TOILETRIES HEALTH AND NOT TOTAL CARE SKIN CARE CLASSIFIED --------- -------- --------- ---------- For the three months ended February 28, 2001: Net sales................................. $ 47,420 $ 39,314 $ 7,819 $ 287 Variable contribution margin.............. 16,791 14,962 1,480 349 Depreciation and amortization............. 2,533 1,288 173 1,072 Identifiable assets/total assets (at February 28, 2001)...................... 327,473 187,330 24,708 115,435 For the three months ended February 29, 2000: Net sales................................. $ 62,371 $ 38,494 $ 24,320 $ (443) Variable contribution margin.............. 25,030 16,868 8,356 (194) Depreciation and amortization............. 3,742 1,324 1,218 1,200 Identifiable assets/total assets (at February 29, 2000)...................... 488,538 199,361 193,027 96,150
The reconciliation of variable contribution margin, as shown above, to income before income taxes, extraordinary gain and change in accounting principle is as follows for the three months ended February 28, 2001 and February 29, 2000, respectively:
2001 2000 ------------ ----------- Variable contribution margin...................................... $ 16,791 $ 25,030 Less divisional and corporate overhead not allocated to product groups.......................................................... 10,430 10,326 ----------- --------- Income from operations............................................ 6,361 14,704 ----------- --------- Other income (expense): Interest expense................................................ (6,504) (8,974) Investment and other income, net................................ 1,089 74 ------------- ------------ Total other income (expense)................................... (5,415) (8,900) ------------- ------------ Income before income taxes, extraordinary gain and change in accounting principle............................................ $ 946 $ 5,804 ============= ============
14. The condensed consolidating financial statements, for the dates or periods indicated, of Chattem, Inc. ("Chattem"), Signal Investment & Management Co. ("Signal"), the guarantor of the long-term debt of Chattem, and the non-guarantor wholly-owned subsidiary companies of Chattem are presented below. Signal is a wholly-owned subsidiary of Chattem; the guarantee of Signal is full and unconditional and joint and several. Ban(R) is the registered trademark of Kao Corporation. 11 Note 14 CHATTEM, INC. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEETS FEBRUARY 28, 2001 (Unaudited and in thousands)
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ------- ------ --------------- ------------ ------------ ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents..................... $ 5,069 $ 30,472 $ 2,040 $ -- $ 37,581 Accounts receivable, less allowance for doubtful accounts of $1,075................. 29,232 -- 2,745 -- 31,977 Refundable and deferred income taxes.......... 12,248 -- 153 -- 12,401 Inventories................................... 13,351 -- 2,734 -- 16,085 Prepaid expenses and other current assets..... 1,045 -- 169 -- 1,214 -------- -------- --------- --------- -------- Total current assets........................ 60,945 30,472 7,841 -- 99,258 -------- -------- --------- --------- -------- PROPERTY, PLANT AND EQUIPMENT, NET.............. 26,465 -- 288 -- 26,753 -------- -------- --------- --------- -------- OTHER NONCURRENT ASSETS: Patents, trademarks and other purchased product rights, net......................... 4,145 186,592 -- -- 190,737 Debt issuance costs, net...................... 8,771 -- -- -- 8,771 Investment in subsidiaries.................... 8,280 -- -- (8,280) -- Other......................................... 1,954 -- -- -- 1,954 -------- -------- --------- --------- -------- Total other noncurrent assets............... 23,150 186,592 -- (8,280) 201,462 -------- -------- --------- --------- -------- TOTAL ASSETS.............................. $110,560 $217,064 $ 8,129 $ (8,280) $327,473 ======== ======== ========= ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable.............................. $ 5,614 $ -- $ 212 $ -- $ 5,826 Payable to bank............................... 1,416 -- -- -- 1,416 Accrued liabilities........................... 31,903 -- 1,138 -- 33,041 -------- -------- --------- --------- -------- Total current liabilities................... 38,933 -- 1,350 -- 40,283 -------- -------- --------- --------- -------- LONG-TERM DEBT.................................. 226,306 -- -- -- 226,306 -------- -------- --------- --------- -------- DEFERRED INCOME TAXES........................... 2,795 10,121 -- -- 12,916 -------- -------- --------- --------- -------- OTHER NONCURRENT LIABILITIES.................... 1,916 -- -- -- 1,916 -------- -------- --------- --------- -------- INTERCOMPANY ACCOUNTS........................... (206,479) 208,431 (1,952) -- -- -------- -------- --------- --------- -------- SHAREHOLDERS' EQUITY (DEFICIT): Preferred shares, without par value, authorized 1,000, none issued.............. -- -- -- -- -- Common shares, without par value, authorized 50,000, issued 8,868............ 1,846 2 8,278 8,280 1,846 Paid-in surplus.............................. 64,608 -- -- -- 64,608 Retained earnings (accumulated deficit)...... (18,883) (1,490) 2,055 -- (18,318) -------- -------- --------- --------- -------- Total...................................... 47,571 (1,488) 10,333 8,280 48,136 Cumulative other comprehensive income - foreign currency translation adjustment..... (482) -- (1,602) -- (2,084) -------- -------- --------- --------- -------- Total shareholders' equity (deficit)....... 47,089 (1,488) 8,731 8,280 46,052 -------- -------- --------- --------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $110,560 $217,064 $ 8,129 $ 8,280 $327,473 ======== ======== ========= ========= ========
12 Note 14 CHATTEM, INC. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEETS NOVEMBER 30, 2000 (Unaudited and in thousands)
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ------- ------ --------------- ------------ ------------ ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents................... $ 5,515 $ 95,747 $ 1,272 $ -- $102,534 Accounts receivable, less allowance for doubtful accounts of $1,025............... 35,772 1,154 3,765 -- 40,691 Refundable and deferred income taxes........ 12,250 -- 151 -- 12,401 Inventories................................. 12,596 -- 2,456 -- 15,052 Prepaid expenses and other current assets... 711 -- 173 -- 884 -------- -------- --------- --------- -------- Total current assets...................... 66,844 96,901 7,817 -- 171,562 -------- -------- --------- --------- -------- PROPERTY, PLANT AND EQUIPMENT, NET............ 26,759 -- 300 -- 27,059 -------- -------- --------- --------- -------- OTHER NONCURRENT ASSETS: Patents, trademarks and other purchased product rights, net....................... 4,198 187,782 -- -- 191,980 Debt issuance costs, net.................... 8,829 -- -- -- 8,829 Investment in subsidiaries.................. 8,280 -- -- (8,280) -- Other....................................... 2,646 -- -- -- 2,646 -------- -------- --------- --------- -------- Total other noncurrent assets............. 23,953 187,782 -- (8,280) 203,455 -------- -------- --------- --------- -------- TOTAL ASSETS............................ $117,556 $284,683 $ 8,117 $ (8,280) $402,076 ======== ======== ========= ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable............................ $ 8,426 $ -- $ 364 $ -- $ 8,790 Payable to bank............................. 1,529 -- -- -- 1,529 Accrued liabilities......................... 33,898 -- 1,316 -- 35,214 -------- -------- --------- --------- -------- Total current liabilities................. 43,853 -- 1,680 -- 45,533 -------- -------- --------- --------- -------- LONG-TERM DEBT................................ 304,077 -- -- -- 304,077 -------- -------- --------- --------- -------- DEFERRED INCOME TAXES......................... 2,798 10,121 -- -- 12,919 -------- -------- --------- --------- -------- OTHER NONCURRENT LIABILITIES.................. 1,894 -- -- -- 1,894 -------- -------- --------- --------- -------- INTERCOMPANY ACCOUNTS......................... (275,101) 277,272 (2,171) -- -- -------- -------- --------- --------- -------- SHAREHOLDERS' EQUITY (DEFICIT): Preferred shares, without par value, authorized 1,000, none issued............. -- -- -- -- -- Common shares, without par value, authorized 50,000, issued 8,861........... 1,845 2 8,278 8,280 1,845 Paid-in surplus............................. 64,443 -- -- -- 64,443 Retained earnings (accumulated deficit)..... (25,771) (2,712) 2,020 -- (26,463) -------- -------- --------- --------- -------- Total..................................... 40,517 (2,710) 10,298 8,280 39,825 Cumulative other comprehensive income - foreign currency translation adjustment.... (482) -- (1,690) -- (2,172) -------- -------- --------- --------- -------- Total shareholders' equity (deficit)...... 40,035 (2,710) 8,608 8,280 37,653 -------- -------- --------- --------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $117,556 $284,683 $ 8,117 $ 8,280 $402,076 ======== ======== ========= ========= ========
13 Note 14 CHATTEM, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED FEBRUARY 28, 2001 (Unaudited and in thousands)
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ------- ------ --------------- ------------ ------------ NET SALES..................................... $ 44,813 $ -- $ 2,607 $ -- $ 47,420 -------- -------- --------- --------- -------- COSTS AND EXPENSES: Cost of sales............................... 11,553 -- 931 -- 12,484 Advertising and promotion................... 18,724 1,393 948 -- 21,065 Selling, general and administrative......... 6,886 5 619 -- 7,510 -------- -------- --------- --------- -------- Total costs and expenses.................. 37,163 1,398 2,498 -- 41,059 -------- -------- --------- --------- -------- INCOME (LOSS) FROM OPERATIONS................. 7,650 (1,398) 109 -- 6,361 -------- -------- --------- --------- -------- OTHER INCOME (EXPENSE): Interest expense............................ (6,504) -- -- -- (6,504) Investment and other income, net............ 78 1,003 8 -- 1,089 Royalties................................... (2,204) 2,246 (42) -- -- Corporate allocations....................... 7 -- (7) -- -- -------- -------- --------- --------- -------- Total other income (expense)............. (8,623) 3,249 (41) -- (5,415) -------- -------- --------- --------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY GAIN...................... (973) 1,851 68 -- 946 PROVISION FOR (BENEFIT FROM) INCOME TAXES....................................... (302) 629 33 -- 360 -------- -------- --------- --------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY GAIN....... (671) 1,222 35 -- 586 EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES................ 7,559 -- -- -- 7,559 -------- -------- --------- --------- -------- NET INCOME.................................... $ 6,888 $ 1,222 $ 35 $ -- $ 8,145 ======== ======== ========= ========= ========
14 Note 14 CHATTEM, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED FEBRUARY 29, 2000 (Unaudited and in thousands)
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ------- ------ --------------- ------------ ------------ NET SALES..................................... $ 59,194 $ -- $ 3,177 $ -- $ 62,371 -------- -------- --------- --------- -------- COSTS AND EXPENSES: Cost of sales............................... 15,535 -- 1,147 -- 16,682 Advertising and promotion................... 19,878 2,428 1,276 -- 23,582 Selling, general and adinistrative.......... 6,739 5 659 -- 7,403 -------- -------- --------- --------- -------- Total costs and expenses.................. 42,152 2,433 3,082 -- 47,667 -------- -------- --------- --------- -------- INCOME (LOSS) FROM OPERATIONS................. 17,042 (2,433) 95 -- 14,704 -------- -------- --------- --------- -------- OTHER INCOME (EXPENSE): Interest expense............................ (8,974) -- -- -- (8,974) Investment and other income, net............ 68 1 5 -- 74 Royalties................................... (2,818) 2,871 (53) -- -- Corporate allocations....................... 8 -- (8) -- -- -------- -------- --------- --------- -------- Total other income (expense)............. (11,716) 2,872 (56) -- (8,900) -------- -------- --------- --------- -------- INCOME BEFORE INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE........................ 5,326 439 39 -- 5,804 PROVISION FOR INCOME TAXES.................... 1,931 149 116 -- 2,196 -------- -------- --------- --------- -------- INCOME (LOSS) BEFORE CHANGE IN ACCOUNTING PRINCIPLE........................ 3,395 290 (77) -- 3,608 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAX BENEFIT.................................. (542) -- -- -- (542) -------- -------- --------- --------- -------- NET INCOME (LOSS).............................. $ 2,853 $ 290 $ (77) $ -- $ 3,066 ======== ======== ========= ========= ========
15 Note 14 CHATTEM, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2001 (Unaudited and in thousands)
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ------- ------ --------------- ------------ ------------ OPERATING ACTIVITIES: Net income................................... $ 6,888 $ 1,222 $ 35 $ -- $ 8,145 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.............. 1,125 1,392 16 -- 2,533 Income tax provision....................... (629) 629 -- -- -- Extraordinary gain on early extinguishment of debt, net.............................. (7,559) -- -- -- (7,559) Other, net................................. 29 -- -- -- 29 Changes in operating assets and liabilities: Accounts receivable...................... 6,540 1,154 1,020 -- 8,714 Inventories.............................. (755) -- (278) -- (1,033) Prepaid expenses and other current assets.................................. 334 -- 6 -- 340 Accounts payable and accrued liabilities............................. (9,489) -- (349) -- (9,838) -------- -------- --------- --------- -------- Net cash provided by (used in) operating activities.................. (3,516) 4,397 450 -- 1,331 -------- -------- --------- --------- -------- INVESTING ACTIVITIES: Purchases of property, plant and equipment.................................. (332) -- -- -- (332) Additions to trademarks and other product rights..................................... -- (203) -- -- (203) Increase in other assets, net................ (32) -- -- -- (32) -------- -------- --------- --------- -------- Net cash used in investing activities.. (364) (203) -- -- (567) -------- -------- --------- --------- -------- FINANCING ACTIVITIES: Repayment of long- term debt................. (61,644) -- -- -- (61,644) Payment of consent fees related to repayment of long-term debt................ (3,293) -- -- -- (3,293) Payment of other costs related to repayment of long-term debt................ (699) -- -- -- (699) Change in payable to bank.................... (113) -- -- -- (113) Proceeds from exercise of stock options...... 4 -- -- -- 4 Changes in intercompany accounts............. 69,247 (69,469) 222 -- -- -------- -------- --------- --------- -------- Net cash provided by (used in) financing activities................. 3,502 (69,469) 222 -- (65,745) -------- -------- --------- --------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS......................... (68) -- 96 -- 28 -------- -------- --------- --------- -------- CASH AND CASH EQUIVALENTS: Increase (decrease) for the period........... (446) (65,275) 768 -- (64,953) At beginning of period....................... 5,515 95,747 1,272 -- 102,534 -------- -------- --------- --------- -------- At end of period............................. $ 5,069 $ 30,472 $ 2,040 $ -- $ 37,581 ======== ======== ========= ========= ========
16 Note 14 CHATTEM, INC. AND SUBSIDIARIES CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED FEBRUARY 29, 2000 (Unaudited and in thousands) -
NON-GUARANTOR SUBSIDIARY ELIMINATIONS CHATTEM SIGNAL COMPANIES DR.(CR.) CONSOLIDATED ------- ------ --------------- ------------ ------------ OPERATING ACTIVITIES: Net income................................... $ 2,853 $ 290 $ (77) $ -- $ 3,066 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............. 1,290 2,428 24 -- 3,742 Cumulative effect of change in accounting principle, net................ 542 -- -- -- 542 Income tax provision....................... (149) 149 -- -- -- Other, net................................. 29 -- -- -- 29 Changes in operating assets and liabilities, net of product divestiture: Accounts receivable...................... 2,172 -- 999 -- 3,171 Inventories.............................. (1,582) -- (50) -- (1,632) Prepaid expenses and other current assets................................ 499 -- 12 -- 511 Accounts payable and accrued liabilities........................... 643 -- (449) -- 194 -------- -------- --------- --------- -------- Net cash provided by operating activities......................... 6,297 2,867 459 -- 9,623 -------- -------- --------- --------- -------- INVESTING ACTIVITIES: Purchases of property, plant and equipment................................... (2,799) -- (15) -- (2,814) Additions to trademarks and other product rights...................................... (20) -- -- -- (20) Increase in other assets, net................ (122) -- -- -- (122) -------- -------- --------- --------- -------- Net cash used in investing activities.......................... (2,941) -- (15) -- (2,956) -------- -------- --------- --------- -------- FINANCING ACTIVITIES: Repayment of long-term debt.................. (8,500) -- -- -- (8,500) Proceeds from long-term debt................. 6,500 -- -- -- 6,500 Proceeds from exercise of stock options...... 190 -- -- -- 190 Deferred debt issuance costs................. (158) -- -- -- (158) Change in payable to bank.................... (2,558) -- -- -- (2,558) Repurchases of common shares................. (1,954) -- -- -- (1,954) Changes in intercompany accounts............. 1,554 (1,871) 317 -- -- Dividends paid............................... 1,000 (1,000) -- -- -- -------- -------- --------- --------- -------- Net cash provided by (used in) financing activities................. (3,926) (2,871) 317 -- (6,480) -------- -------- --------- --------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS......................... (24) -- 10 -- (14) -------- -------- --------- --------- -------- CASH AND CASH EQUIVALENTS: Increase (decrease) for the period............ (594) (4) 771 -- 173 At beginning of period........................ 550 16 1,742 -- 2,308 -------- -------- --------- --------- -------- At end of period.............................. $ (44) $ 12 $ 2,513 $ -- $ 2,481 ======== ======== ========= ========= ========
17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Note: All monetary amounts are expressed in thousands of dollars unless contrarily evident. The following year to year comparisons of the results of operations were materially affected by the sale of Ban in September 2000. Consequently, certain aspects of the results of operations are discussed on an actual and pro forma basis. The terms "pro forma" or "pro forma basis" refer to the respective reported financial data for the three months ended February 29, 2000 after giving effect to the Ban sale. GENERAL On December 11, 2000 the Company initiated a consent solicitation and tender offer for certain of its outstanding senior subordinated notes. On January 17, 2001 the Company completed the consent solicitation and tender offer pursuant to which it retired $70,462 principal amount of its 8.875% senior subordinated notes due 2008 and $7,397 principal amount of its 12.75% senior subordinated notes due 2004. The consideration paid for the consent solicitation and tender offer was $64,937, which was provided by the proceeds of the Ban sale. An extraordinary gain on the early extinguishment of debt of $7,559, net of income taxes, was recognized in the first quarter of fiscal 2001. For the three months ended February 28, 2001 the Company experienced a $14,951, or 24.0%, decrease in sales to $47,420 from $62,371 in the first quarter of fiscal 2000. However, net sales for the current quarterly period increased $1,999, or 4.4%, over pro forma net sales for the same period last year. Operating income during the period likewise decreased $8,343, or 56.7%, to $6,361 from $14,704. Income before extraordinary gain and change in accounting principle of $586, or $.07 per diluted share, was recorded during the period compared to $3,608, or $.37 per diluted share, during the same period last year. Cash earnings (net income before extraordinary items plus non-cash amortization) is one of the key standards used by the Company to measure operating performance. Cash earnings and EBITDA, defined below, are used to supplement operating income as an indicator of operating performance and not as an alternative to measures defined and required by generally accepted accounting principles. Cash earnings for the three months ended February 28, 2001 were $1,564, or $.18 per share, as compared to $5,268, or $.53 per share, for the comparable 2000 period. Earnings before interest, taxes, depreciation and amortization (EBITDA) were $8,566, or 18.1% of net sales, in the first quarter of fiscal 2001 compared to $17,934, or 28.8% of net sales, in the same 2000 period. During the first quarter of fiscal 2001 the Company enjoyed solid sales performances from its DEXATRIM, GOLD BOND, topical analgesic (FLEXALL, ICY HOT, SPORTSCREME, ASPERCREME, CAPZASIN and ARTHRITIS HOT), BULLFROG and PHISODERM brands. The Company will continue to seek sales increases through a combination of acquisitions and internal growth while maintaining high operating income levels. As previously high-growth brands mature, sales increases will become even more dependent on acquisitions and the development of successful line extensions. During the first quarter of fiscal 2001 the Company introduced DEXATRIM Natural Ephedrine Free and ICY HOT Patch as line extensions. Line extensions, product introductions and acquisitions require a significant amount of introductory advertising and promotional support. For a period of time these products do not generate a commensurate amount of sales and/or earnings. As a result, the Company may experience a short-term impact on its profitability. Strategically, the Company continually evaluates its products as part of its growth strategy and, in instances where the Company's objectives are not realized, will dispose of these brands and redeploy the assets to acquire other brands or reduce indebtedness. 18 RESULTS OF OPERATIONS The following table sets forth, for income before extraordinary gain and change in accounting principle and for the periods indicated, certain items from the Company's Consolidated Statements of Income expressed as a percentage of net sales:
FOR THE THREE MONTHS ENDED FEBRUARY 28, FEBRUARY 29, 2001 2000 ------------- ------------ NET SALES............................................ 100.0% 100.0% -------- ---------- COSTS AND EXPENSES: Cost of sales...................................... 26.3 26.7 Advertising and promotion.......................... 44.4 37.8 Selling, general and administrative ............... 15.9 11.9 -------- ---------- Total costs and expenses......................... 86.6 76.4 -------- ---------- INCOME FROM OPERATIONS............................... 13.4 23.6 -------- ---------- OTHER INCOME (EXPENSE): Interest expense................................... (13.7) (14.4) Investment and other income, net .................. 2.3 .1 -------- ---------- Total other income (expense)..................... (11.4) (14.3) -------- ---------- INCOME BEFORE INCOME TAXES .......................... 2.0 9.3 PROVISION FOR INCOME TAXES .......................... .8 3.5 -------- ---------- INCOME BEFORE EXTRAORDINARY GAIN AND CHANGE IN ACCOUNTING PRINCIPLE............ 1.2% 5.8% ======== ==========
19 COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 Net sales for the three months ended February 28, 2001 decreased $14,951, or 24.0%, to $47,420 from $62,371 for the same period last year. Domestic consumer products sales declined $13,698, or 23.6%, to $44,390 from $58,088 for last year's comparable period. Net sales of international consumer products also decreased $1,253, or 29.3%, from $4,283 in the 2000 period to $3,030 in the current period. On a pro forma basis net sales for the three months ended February 28, 2001 increased $1,631, or 3.8%, for the domestic market, $368, or 13.8%, for the international operation and $1,999, or 4.4%, in total. For the three months ended February 28, 2001 sales of OTC health care products increased $820, or 2.1%, to $39,314 from $38,494 in the same period last year, while sales of toiletries and skin care brands decreased $16,501, or 67.8%, from $24,320 in the comparable fiscal 2000 period to $7,819 in the current period. On a pro forma basis net sales of the toiletries and skin care brands for the three months ended February 28, 2001 increased $449, or 6.1%. In the domestic OTC health care product segment in the 2001 period, sales increases were recognized for DEXATRIM, GOLD BOND and the topical analgesic products as a group. Decreases in sales were recorded for the SUNSOURCE products, as a result of continuing weakness of the dietary supplements' market, but the rate of decline slowed from earlier periods. In the current period BULLFROG and PHISODERM of the domestic toiletries and skin care brands experienced increased sales, while all of the remaining product lines of this category recorded modest sales declines. Sales variances were largely the result of changes in the volume of unit sales of the particular brands. The increase in sales of DEXATRIM was attributed principally to the successful introduction of DEXATRIM Natural in early fiscal 2000, the launch of DEXATRIM Natural Ephedrine Free in the first quarter of fiscal 2001 and increased marketing support. The increase in DEXATRIM sales was accomplished despite the discontinuation of sales in the fourth quarter of fiscal 2000 of DEXATRIM products containing PPA. The GOLD BOND sales increase in the current period was principally associated with the GOLD BOND Medicated Body Lotion product line and increased advertising and promotion expenditures, while the topical analgesic product group's increased sales were largely the result of additional overall marketing support and the continuing favorable performance of ICY HOT, including the recently introduced ICY HOT Patch. BULLFROG sales increases were primarily due to strong retail sales of the product line during the summer season of 2000 which required substantial inventory restocking by customers for the 2001 season. PHISODERM sales have continued to benefit from the introduction of the 4-Way Daily Acne Cleanser line extension in fiscal 1999. The decline in net sales of the international division in the current period was almost entirely associated with the loss of sales of Ban, which was sold in September 2000. In the current period sales declined 5.5% for the Canadian operation, 30.0% for the United Kingdom business and 61.8% for the U.S. export segment as compared to the same period last year. On a pro forma basis, net sales for the three months ended February 28, 2001 increased 23.2% for the Canadian operation, 11.9% for the United Kingdom business and 88.8% for the U.S. export segment. Sales variances were largely the result of changes in volume of unit sales of the particular brand. Cost of sales as a percentage of net sales improved to 26.3% from 26.7% in the 2000 period. The improvement was primarily the result of a favorable change in product mix to higher gross margin product lines in the current period. Advertising and promotion expenses decreased $2,517, or 10.7%, for the three months ended February 28, 2001 and were 44.4% of net sales compared to 37.8% in the corresponding 2000 period. The decline in expenditures was the result of the Ban sale, while the increase as a percentage of net sales from year-to-year was due to spending increases on DEXATRIM, GOLD BOND, the topical analgesic brands, PAMPRIN and BENZODENT. Declines were recorded for the PHISODERM and SUNSOURCE product lines. 20 The increase of $107, or 1.4%, in selling, general and administrative expenses in the 2001 period was largely associated with normal annual increases in employee compensation, offset in part by continuing cost containment and reduced freight, shipping and field sales expenses due primarily to decreased sales. The selling, general and administrative expenses were 15.9% of net sales in the current period as compared to 11.9% in the same period of last year. Interest expense decreased $2,470, or 27.5%, in the 2001 period, reflecting primarily the retirement of all of the outstanding balances of the revolving line of credit and term loans in September 2000 and $77,859 principal amount of the Company's senior subordinated notes in January 2001. Investment and other income for the three months ended February 28, 2001 increased $1,015, largely due to interest income from temporary investments made with the remaining proceeds from the sale of Ban after the retirement of the Company's revolver and term bank loans in September 2000. An extraordinary gain of $7,559, net of income taxes, on the early extinguishment of debt was recognized in the current period. This gain resulted from the retirement of $77,859 principal amount of the Company's senior subordinated notes. The cumulative effect of a change in accounting principle of $542, net of income tax benefit, was recorded in the prior year's period. This charge related to costs of start-up activities required to be expensed upon the Company's initial adoption of SOP 98-5 in December 1999. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations with a combination of internally generated funds and borrowings. The Company's principal uses of cash are for operating expenses, long-term debt servicing, acquisitions, working capital, repurchases of its common stock and capital expenditures. Cash of $1,331 and $9,623 was provided by operations for the three months ended February 28, 2001 and February 29, 2000, respectively. The decrease in cash flows from operations over the prior year period was primarily the result of decreases in net income, reduced by the extraordinary net gain on the early extinguishment of debt; depreciation and amortization expense, largely as a result of the sale of the Ban trademark on September 15, 2000; and accounts payable and accrued liabilities. Investing activities used cash of $567 and $2,956 in the three months ended February 28, 2001 and February 29, 2000, respectively. The decrease of $2,389 in the current period was largely the result of decreased property, plant and equipment additions. Financing activities used cash of $65,745 and $6,480 in the first fiscal quarter of 2001 and 2000, respectively. The increase of $59,265 reflected primarily the funds required for the retirement of $77,859 principal amount of the Company's senior subordinated notes in the current period. The following table presents working capital data at February 28, 2001 and November 30, 2000 or for the respective years then ended: 21
ITEM 2001 2000 ------------ ---------- ---------- Working capital (current assets less current liabilities) ....... $ 58,975 $ 126,029 Current ratio (current assets divided by current liabilities) ... 2.46 3.77 Quick ratio (cash and cash equivalents and accounts receivable divided by current liabilities)..................... 1.73 3.15 Average accounts receivable turnover............................. 5.67 5.28 Average inventory turnover....................................... 3.11 3.50 Working capital as a percentage of total assets ................. 18.01% 31.34%
The change in the current and quick ratios at February 28, 2001 as compared to November 30, 2000 reflects primarily the reduction in cash required for the partial retirement of the Company's senior subordinated notes in the first quarter of fiscal 2001. Total debt outstanding was $226,306 at February 28, 2001 compared to $304,077 at November 30, 2000, a decrease of $77,871 during the first quarter of 2001. Management of the Company believes that projected cash flows generated by operations along with its cash and cash equivalents position will be sufficient to fund the Company's current commitments and proposed operations. As of February 28, 2001, the remaining amount authorized by the Company's board of directors under the stock buyback plan was $6,599; however, the Company is limited in its ability to repurchase shares due to restrictions under the terms of the indentures with respect to which its senior subordinated notes were issued. Also, on December 21, 1998, the Company filed a shelf registration statement with the Securities and Exchange Commission for $250,000 of debt and equity securities of which $75,000 was utilized in the sale of the 8.875% notes in May 1999. 22 FOREIGN OPERATIONS The Company's primary foreign operations are conducted through its Canadian and U.K. subsidiaries. The functional currencies of these subsidiaries are Canadian dollars and British pounds, respectively. Fluctuations in exchange rates can impact operating results, including total revenues and expenses, when translations of the subsidiary financial statements are made in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." For both of the three months ended February 28, 2001 and February 29, 2000 these subsidiaries accounted for 5% of total revenues and 2% of total assets. It has not been the Company's practice to hedge its assets and liabilities in Canada and the U.K. or its intercompany transactions due to the inherent risks associated with foreign currency hedging transactions and the timing of payments between the Company and its two foreign subsidiaries. Historically, gains or losses from foreign currency transactions have not had a material impact on the Company's operating results. Losses of $3 and $1 for the three months ended February 28, 2001 and February 29, 2000, respectively, resulted from foreign currency transactions. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The Company recorded the initial application of this SOP in December 1999 as the cumulative effect of a change in accounting principle of approximately $542, net of income tax benefit. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allow a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 137 delayed the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1999). SFAS No. 133 could increase volatility in earnings and other comprehensive income. However, as the Company did not have any derivative instruments as of February 28, 2001 and November 30, 2000, there was no impact of adoption at the Company's effective date of December 1, 2000. In September 2000, the Emerging Issues Task Force ("EITF") of the FASB reached a final consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs". EITF 00-10 is effective the fourth quarter of 2001 and addresses the income statement classification of amounts charged to customers for shipping and handling, as well as costs incurred related to shipping and handling. The EITF concluded that amounts billed to a customer in a sale transaction related to shipping and handling should be classified as revenue. The EITF also concluded that if costs incurred related to shipping and handling are significant and not included in cost of sales, an entity should disclose both the amount of such costs and the line item on the income statement that includes them. Costs incurred related to shipping and handling included in revenues will be required to be reclassified to cost of sales. The Company currently classifies shipping and handling costs billed to the customer as revenues and costs related to shipping and handling as a selling expense. The amount of shipping and handling costs included in selling expense for the first quarter of fiscal 2001 and 2000 23 was $1,164 and $1,478, respectively. The adoption of this pronouncement in 2001 will not have an impact on the Company's results of operations or the financial position of the Company. In November 2000, the EITF finalized EITF Issue No. 00-14, "Accounting for Certain Sales Incentives". EITF 00-14 addresses the recognition, measurement and income statement classification for sales incentives offered to its customers. Sales incentives include discounts, coupons, rebates, "buy one get one free" promotions and generally any other offers that entitle a customer to receive a reduction in the price of a product or service by submitting a claim for a refund or rebate. Under EITF 00-14, the reduction in or refund of the selling price of the product or service resulting from any cash sales incentives should be classified as a reduction of revenue. Currently, the company recognizes all sales incentives as an advertising and promotion expense. Although this pronouncement will not have any impact on the results of operations or financial position of the Company, the presentation prescribed will have an effect of reducing net sales and advertising and promotion expenses in comparison to prior years. The Company must adopt EITF 00-14 for all periods presented in the fourth quarter of fiscal 2001. The impact of adopting for the first quarter of fiscal 2001 and 2000 would have decreased net sales and advertising and promotion expense by approximately $818 and $1,023, respectively. SEASONALITY Seasonality is an important factor affecting the operations of the Company. During recent fiscal years, the Company's first quarter's net sales and gross profit have trailed the other fiscal quarters on average from 25% to 35% because of slower sales of consumer products, the seasonality of BULLFROG and SUN-IN and lower levels of promotional campaigns during this quarter. FORWARD LOOKING STATEMENTS The Company may from time to time make written and oral forward looking statements. Written forward looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases and in reports to shareholders. The Private Securities Litigation Reform Act of 1995 contains a safe harbor for forward looking statements. The Company relies on this safe harbor in making such disclosures. The forward looking statements are based on management's current beliefs and assumptions about expectations, estimates, strategies and projections for the Company. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward looking statements. The Company undertakes no obligation to update publicly any forward looking statements whether as a result of new information, future events or otherwise. The risks, uncertainties and assumptions regarding forward looking statements include, but are not limited to, the impact of the loss of sales of DEXATRIM with PPA; the increased likelihood that claims relating to the existence of PPA in DEXATRIM will be filed against the Company; product demand and market acceptance risks; product development risks, such as delays or difficulties in developing, producing and marketing new products or line extensions; the impact of competitive products, pricing and advertising; constraints resulting from financial condition of the Company, including the degree to which the Company is leveraged; debt service requirements and restrictions under indentures; government regulations; risks of loss of material customers; public perception regarding the Company's products; dependence on third party manufacturers; environmental matters; product liability and insurance; and other risks described in the Company's Securities and Exchange Commission filings. 24 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Statement regarding computation of per share earnings (Exhibit 11). (b) No reports on Form 8-K report were filed with the Securities and Exchange Commission during the three months ended February 28, 2001. 25 CHATTEM, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHATTEM, INC. (Registrant) Dated: April 12, 2001 \s\ A. ALEXANDER TAYLOR II ----------------------- --------------------------- A. Alexander Taylor II President and Director (Chief Operating Officer) \s\ CHRISTOPHER S. KELLER ---------------------------- Christopher S. Keller Director of Finance \s\ SCOTT J. SLOAT ---------------------------- Scott J. Sloat Controller (Chief Accounting Officer) 26 EX-11 2 a2044962zex-11.txt EXHIBIT 11 EXHIBIT 11 CHATTEM, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (In thousands, except per share amounts)
FOR THE THREE MONTHS ENDED FEBRUARY 28, FEBRUARY 29, 2001 2000 ------------- ------------- NET INCOME: Income before extraordinary gain and change in accounting principle..................... $ 586 $ 3,608 Extraordinary gain................................... 7,559 -- Change in accounting principle....................... -- (542) ------------- -------------- Net income......................................... $ 8,145 $ 3,066 ============= ============== NUMBER OF COMMON SHARES: Weighted average outstanding......................... 8,867 9,693 Issued upon assumed exercise of outstanding stock options........................... 22 168 ------------- -------------- Weighted average and dilutive potential outstanding......................................... 8,889 9,861 ============= ============== NET INCOME ( LOSS) PER COMMON SHARE: Basic: Income before extraordinary gain and change in accounting principle............... $ .07 $ .37 Extraordinary gain................................ .85 -- Change in accounting principle.................... -- (.05) ------------- -------------- Total basic................................... $ .92 $ .32 ------------- -------------- Diluted: Income before extraordinary gain and change in accounting principle............... $ .07 $ .37 Extraordinary gain................................ .85 -- Change in accounting principle.................... -- (.06) ------------- -------------- Total diluted................................. $ .92 $ .31 ============= ==============
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