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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, 1994 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: 615-821-4571
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 NOT
BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN THE DEFINITIVE PROXY
STATEMENT INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K.
AS OF FEBRUARY 22, 1995, THE AGGREGATE MARKET VALUE OF VOTING SHARES HELD BY
NON-AFFILIATES WAS $34,939,795.
AS OF FEBRUARY 22, 1995, 7,292,199 COMMON SHARES WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR 1994 (THE "1994
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 10, 1995 (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 and specialty chemicals. Through
its consumer products division, 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 specialty chemicals division develops, manufactures and sells
value-added specialty chemicals such as aluminum hydroxides, aluminum
derivatives and glycine to selected industries, including the pharmaceutical and
printing ink industries. The Company markets its specialty chemicals to
manufacturers either directly by its own sales personnel or through sales
agents.
The Company's growth strategy for the consumer products division is to seek
continued growth through a combination of brand acquisitions and internal
growth. For the specialty chemicals division, the Company seeks growth through
the development of new products and application of existing products to new
uses. As a part of this strategy, the Company continually evaluates its products
and businesses, and in instances in which businesses fail to realize the
Company's objectives, the Company will dispose of these 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,
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and 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.
DEVELOPMENTS DURING FISCAL 1994
On May 12, 1994, the Company acquired BENZODENT, a topical oral analgesic,
from The Procter & Gamble Company ("Proctor & Gamble") for $3,500,000. The
BENZODENT business acquired consisted principally of trademarks and finished
product inventories. The Company financed the purchase of BENZODENT with
borrowings under its existing credit agreement with First Union National Bank of
North Carolina (the "Old Credit Agreement").
On June 17, 1994, the Company acquired a perpetual 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 was $17,276,000. If net sales of PHISODERM products in the United States
only exceed (i) $10,000,000 for the 12-month period beginning July 1, 1994 and
ending June 30, 1995 or (ii) $11,000,000 for either of the 12-month periods
beginning July 1, 1995 and July 1, 1996, respectively, and ending June 30, 1996
and June 30, 1997, respectively, then within 45 days after the end of the
applicable 12-month period with respect to which the applicable net sales
threshold specified in (i) or (ii) above has been exceeded, the Company will pay
Sterling an additional $1,000,000 for such year.
Also on June 17, 1994, the Company entered into a $55,000,000 senior
secured bank credit agreement (the "New Credit Agreement") and issued
$75,000,000 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 Kidder, Peabody & Co. Incorporated
(the "Initial Purchaser"). The New Credit Agreement, of which The First National
Bank of Chicago is agent, includes a $20,000,000 term loan, a $22,500,000
working capital facility and a $12,500,000 facility for future acquisitions. The
Series A Notes consist 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 Series A Notes and the
Warrants were separable on August 16, 1994. The price to the Initial Purchaser
of the Series A Notes was $73,967,250, or 98.6% of the original principal amount
of the Series A Notes. The proceeds of the financing were used to fund the
PHISODERM purchase and repay all existing bank indebtedness under the Old Credit
Agreement.
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On September 19, 1994, the Company completed an exchange offer of 12.75%
Series B Senior Subordinated Notes due 2004 ("Series B Notes"), which were
registered under the Securities Act of 1933, as amended ("Securities Act"), for
all outstanding Series A Notes. The form and terms of the Series A Notes and the
Series B Notes are the same, except that the Series B Notes are registered under
the Securities Act and the holders of Series B Notes are not entitled to the
rights of the holders of the Series A Notes following completion of the exchange
offer.
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 $97.0 million. 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.
CONSUMER PRODUCTS
The objective of the Company's consumer products division is to offer high
quality brand name products in niche market segments in which the Company's
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 consumer products.
The Company's consumer products 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
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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 and functional
toiletries and cosmetics products, other products and total consumer products
during the past three fiscal years (dollars in thousands):
FISCAL YEAR ENDED
-----------------------------------------------------------
PRODUCT NOVEMBER 30, 1992 NOVEMBER 30, 1993 NOVEMBER 30, 1994
------- ----------------- ----------------- -----------------
SALES PERCENTAGE SALES PERCENTAGE SALES PERCENTAGE
----- ---------- ----- ---------- ----- ----------
Domestic
OTC Pharmaceuticals ..................... $49,950 55.4% $49,590 55.2% $51,673 54.8%
Functional Toiletries and
Cosmetics ............................. 24,898 27.6 25,920 28.9 29,888 31.7
International
OTC Pharmaceuticals ..................... 1,802 2.0 3,361 3.7 2,243 2.4
Functional Toiletries and
Cosmetics ............................. 12,574 13.9 9,908 11.0 9,484 10.0
Other Products ............................ 997 1.1 1,082 1.2 1,082 1.1
------- ----- ------- ----- ------- -----
Total Consumer Products ............... $90,221 100.0% $89,861 100.0% $94,370 100.0%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
GROWTH STRATEGY
The consumer products division has 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 million at
the time of acquisition, exceeded $20 million in gross sales in 1993 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
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larger firms. Two products in this category were acquired in 1994: BENZODENT, a
dental analgesic cream acquired from Procter & Gamble and PHISODERM, a line of
facial cleaners acquired from 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. 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.
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, a topical analgesic brand acquired from Procter & Gamble in 1991,
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 consumer products division 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.
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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's consumer products division manufactures and
markets on a regional basis two smaller proprietary drug brands: SOLTICE, an
external analgesic, and BLIS-TO-SOL, an anti-fungal product.
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.
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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. The Company plans to relaunch MUDD with improved formulas
and updated packaging. The relaunch will be supported by television advertising
and promotional programs.
PHISODERM is a line of facial cleansers made up of several formulas of
liquid cleansers, including one for infants, and a bar soap. Acquired from
Sterling 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 plans to regain the larger market share this brand once held by
improving the formula, updating the packaging and providing television
advertising and promotional support.
INTERNATIONAL
The Company's consumer 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.
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SPECIALTY CHEMICALS
The objective of the Company's specialty chemicals division is to develop,
manufacture and sell value-added specialty chemicals to selected industry
segments in which the Company is or can be among the market leaders and a low
cost producer. The division competes by offering high-quality specialty
products at competitive prices, responding promptly to customer needs and
providing technical assistance. Products supplied by the Company's chemicals
division are generally essential elements of a customer's manufacturing process
but represent only a relatively small portion of the customer's overall cost in
such process.
The principal products manufactured by the Company's chemicals division are
based on organo-aluminum technology with the following principal applications:
PRODUCT APPLICATION
------- -----------
Aluminum Hydroxides/DASC Active ingredients in antacids
Aluminum Derivatives Reactive intermediates used in printing
inks
Glycine Amino acid used in the formulation of
certain intravenous solutions and other
pharmaceutical applications
PRODUCTS
ALUMINUM HYDROXIDES/DASC. The Company's specialty chemical division
provides active aluminum hydroxide compounds and DASC which are principally used
in pharmaceutical-quality liquid antacids, tablet antacids and a growing generic
antacid market. These compounds are also used in water treatment and other
industrial specialty areas.
ALUMINUM DERIVATIVES. Aluminum derivatives act as reactive intermediates
and are primarily utilized as viscosity builders and cross-linkers in printing
inks and other industrial coatings. They also serve as a unique source of
reactive aluminum metal. With an expanding number of possible uses for these
specialty compounds, the aluminum derivative segment is expected to be a growth
vehicle for the division. Although printing ink applications form the core
product market, new technologies for industrial lubricants and high-purity
reactive aluminum compounds offer a number of new opportunities.
GLYCINE. Glycine is an amino acid used in the formulation of certain
intravenous solutions and other pharmaceutical applications and as a buffer in
anti-perspirant compounds. It also serves
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as a taste modifier in foods, including certain seafood and pet food products.
Although the glycine market has historically been highly volatile, the Company's
specialty chemicals division capitalizes on periodic opportunities which arise
from fluctuating market conditions.
NEW PRODUCTS. The Company's specialty chemicals division is actively
pursuing new product opportunities that will supplement its core business. The
division expects to develop and market a custom food grade purification process
during fiscal 1995.
MANUFACTURING
The Company manufactures a substantial portion of its consumer products and
all of its specialty chemicals products at its Chattanooga plant. Currently, the
Company has adequate capacity to meet anticipated demand for its consumer
products. New consumer 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. The Company has sufficient capacity to manufacture its existing
requirements of specialty chemicals products and the anticipated increase in
demand of such products in the near term. 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 substantial adverse effect on its
business as a result of shortages of energy or other raw materials used in the
manufacture of the Company's 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 the Company's operations in the future.
In recent years, fluctuations in the prices of key raw materials, such as
aluminum, isopropyl alcohol and monochloracetic acid, have had an adverse impact
on profitability in the Company's specialty chemicals division in the short
term. Generally, over time, the Company can offset increases in prices of raw
materials through increased selling prices to its customers.
RESEARCH AND DEVELOPMENT
The Company's research and development expenditures were $1.3 million, $1.3
million and $1.2 million in the fiscal years ended November 30, 1994, 1993 and
1992, respectively. No
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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 1995.
The research and development effort in the consumer products division
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 is also an integral part of
its overall strategy.
In the specialty chemicals division, the Company is committed to the
development of new products and the adaptation of existing products to new uses.
The research and development effort is conducted at the Company's facility in
Chattanooga. Often, products are developed in conjunction with the technical
representatives of the Company's customers. The joint development process
provides the Company with access to greater resources and insures a close
working relationship with the customer.
DISTRIBUTION
The Company's domestic consumer 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 on the continent of Western Europe
and Central and South America to mass distribution channels. Specialty chemicals
are sold by Company personnel and sales agents to approximately 250 customers.
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. One customer also
accounts for at least 10% of the Company's specialty chemicals division's sales
The Company's specialty chemicals division has been a supplier to a number
of its principal customers for many years. In some instances, the continuation
of the relationship is subject to factors beyond the control of the Company,
such as consumer acceptance of its customer's products. If such products fail to
achieve or maintain consumer acceptance or if such products are reformulated in
response to changing consumer demand, the customers of the specialty chemicals
division could reduce their purchases from the Company, which would adversely
affect the Company's profitability. For example, in July 1993, the
Warner-Lambert Company discontinued purchases of DASC, the sole active
ingredient in original formula ROLAIDS-Registered Trademark-, from the Company's
specialty chemicals division due to a product reformulation.
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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 carries; however, inventory levels were reduced in the Company's
consumer products and international divisions during fiscal 1994. In certain
circumstances, the Company allows its customers to return unsold merchandise
and, for seasonal products, provides extended payment terms to its customers.
MARKETING
The Company allocates a significant portion of its revenues to the
advertising and promotion of its products. Expenditures for these purposes were
30.9%, 34.4% and 32.0%, respectively, as a percentage of net sales during each
of the fiscal years ended November 30, 1994, 1993 and 1992. Due to the
maturation of the brand, advertising and promotion expenses to support FLEX-ALL
454 were reduced in fiscal 1994 by 21.1%, which produced a sales decline of
2.1%, thereby increasing the profitability of the brand.
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 promotional calendars
and campaigns for each brand 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.
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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.
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.
In the specialty chemicals business, the Company competes on the basis of
product quality, technical service and price. In the major markets currently
served by the specialty chemicals division, there are a limited number of firms
with which the Company competes.
TRADEMARKS AND PATENTS
The Company's consumer products' trademarks are of material importance to
its consumer products 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 domestic consumer products business.
All of the Company's consumer products brands have recognized trademarks
associated with them, and the
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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.
Trademarks pertaining to the Company's specialty chemical business are much
less significant as the products compete primarily on the basis of quality,
price, technical service and direct marketing.
The Company also owns patents related to the ULTRASWIM shampoo and CORN
SILK facial powder, 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.
GOVERNMENT REGULATION
The Company's products are generally subject to government regulations,
primarily those of the Federal Food and Drug Administration (the "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 the monograph
provisions means that the product is generally recognized as safe and effective,
and is not misbranded. Future changes in the monographs could result in the
Company having to revise product labeling and formulations.
The Company supplied data during 1993 to the FDA in connection with the OTC
review process with respect to pyrilamine maleate, one of the three active
ingredients used in the PAMPRIN and PREMSYN PMS products, to support the
reclassification of pyrilamine maleate as a generally recognized safe and
effective ingredient for menstrual relief products. In 1995 the FDA responded
with certain questions regarding this data. A response to the FDA is being
prepared. Based on study results and marketing experience, the Company believes
that further clinical testing of pyrilamine may be required. Although the exact
requirements of the final monographs cannot be predicted, it is possible that
pyrilamine maleate will no longer be permitted to be indicated for relief from
the "negative effects cluster", including tension and irritability. The
14
Company has been actively monitoring the process and does not believe that
either its OTC drug brands or the antacid compounds sold by the specialty
chemicals division 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 or state regulations.
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. The new packaging
requirements will necessitate certain plant modifications and the purchase of
additional packaging equipment in the first quarter of 1995.
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 estimable.
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 completed a Phase I environmental
survey conducted at its manufacturing sites in August 1991 (the "1991 Survey")
and most of the recommendations of this survey have been implemented. Among
other things, the Company, as a result of the 1991 Survey, conducted further
sampling and monitoring at its manufacturing facility, especially with respect
to underground storage tanks. The results of such studies indicated the presence
in certain isolated areas of slightly elevated levels of Total Petroleum
Hydrocarbons in soil samples and elevated levels of methanol in a groundwater
pocket. Additional remediation efforts or costs cannot be predicted, although
such costs are not expected to be material to the Company's financial position
or results of operations.
The federal Clean Air Act Amendments of 1990 mandate a new Title V
operating permit program that is scheduled for full implementation by 1995.
Certain organic hazardous air
15
pollutants which are emitted by the Company will be subject to this permitting
program. The National Emissions Standard for Hazardous Air Pollutants, the first
comprehensive regulations under the Clean Air Act, were proposed at year-end
1992 and published in final form in February 1994. Primary responsibility for
enforcement of these provisions and permitting as they relate to the Company has
been delegated to The Chattanooga/Hamilton County Air Pollution Control Bureau.
The Company is a member of the Chattanooga Manufacturers Association, a trade
association which promotes industry awareness of developments in this area, has
engaged environmental consultants on a regular basis to assist its compliance
efforts, is currently in compliance with all applicable Clean Air Act permits
and is aware of its responsibilities under these 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.
The Environmental Protection Agency ("EPA") has conducted a survey of
Chattanooga Creek, which runs through a major manufacturing area of Chattanooga
in the vicinity of the Company's manufacturing facilities. The Company
understands that state environmental authorities have recommended that all or
portions of Chattanooga Creek be placed on the National Priorities List as a
Superfund site under the Comprehensive Environmental Response, Compensation
and Recovery Act. Such a listing was formally proposed by the EPA in January
1994. The Company is likely to be named as a potentially responsible party in
connection with such site, although as a result of the lack of a final
determination by the EPA regarding the Chattanooga Creek area, the Company's
preliminary assessment of actions that may be required 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. The Company is continually reviewing its reporting
obligations under environmental laws and is not aware of any reporting
deficiencies that would have a material adverse effect on the Company's
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.
16
EMPLOYEES
The Company employs approximately 357 persons on a full-time basis in the
U.S. and 31 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.
17
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 owns the primary ware- house for its specialty chemicals
division, which is located adjacent to the Company's headquarters, and leases
the primary warehouse and distribution center for its domestic consumer products
division, which is located at 3100 Williams Street, Chattanooga, Tennessee. 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 25 185,700 Manufacturing 114,900
Warehousing 35,600
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 13,300 Warehousing 8,300
Office &
Administration 4,000
Packaging 1,000
NOTES:
(1) Leased under a five year lease ending January 31, 1996 for a monthly rental
of $23,750.
(2) Leased under a four year lease ending January 31, 1996 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 $4,709.
(4) Leased under a lease ending in 2014 at a monthly rental including property
taxes and other incidentals of approximately $13,884.
18
The productive capacity and utilization of the Company's manufacturing
facilities varies by division. The consumer products division, which accounts
for approximately 75% of total revenues, is currently operating its facilities
at approximately 50% of total capacity. These facilities are FDA approved and
are capable of further utilization through the use of full-time second and third
shifts. The capacity of the specialty chemicals division varies by product line
and can be affected by small changes in setup and additional equipment
purchases. The utilization of the specialty chemical division's manufacturing
facility based upon current processes ranges from 40% to 80% among the
division's four principal product lines. The specialty chemical division's
facility is also FDA approved.
ITEM 3. LEGAL PROCEEDINGS
Note 9 to the Consolidated Financial Statements on page 28 of the Company's
1994 Annual Report to Shareholders is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information found on pages 15, 27 and 28 of the Company's 1994 Annual
Report to Shareholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information found on page 14 of the Company's 1994 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 12 of the Company's 1994 Annual Report
to Shareholders is incorporated herein by reference.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information found on pages 13 to 32 of the Company's 1994 Annual Report
to Shareholders is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
(a) DIRECTORS
The information found in the Company's 1995 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 22, 1995, 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 46 Chairman of the Board;
President and Chief Executive Officer;
Director 1990
Robert E. Bosworth 47 Executive Vice President and Chief
Financial Officer; Director 1990
Mr. Zan 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, and as Executive Vice President from 1983 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.
21
ITEM 11. EXECUTIVE COMPENSATION
The information found in the Company's 1995 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 1995 Proxy Statement under the
heading "Voting Securities and Principal Holders Thereof" is hereby incorporated
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
22
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 32 of the Company's 1994 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. (9)
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)
23
Exhibit
Number Description of Exhibit References
------- -------------------------------------- ----------
10 Chattem, Inc. Savings and Investment
Plan dated June 11, 1990 (5)
Lease Agreement dated February 1, 1991
between Tammy Development Company
and Chattem, Inc. for warehouse space at
3100 Williams Street, Chattanooga,
Tennessee (6)
Non-Competition and Severance Agree-
ments as Amended -
Zan Guerry
Robert E. Bosworth
Robert M. Boyd, Jr.
J. Pemberton Guerry (6)
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)
24
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)
25
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)
11 Computation of per share earnings (14)
13 1994 Annual Report to Shareholders of
Chattem, Inc. (14)
22 Subsidiaries of the Company (14)
24 Consent of Independent Public
Accountants (14)
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) Filed as an exhibit to this Form 10-K for the year ended November 30,
1994.
(b) There were no Form 8-K's filed with the Securities and Exchange
Commission during the three months ended November 30, 1994.
26
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, 1995 CHATTEM, INC.
By: /s/
-----------------------------
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, 2/22/95
- - - --------------------------- President and Director ---------------
Zan Guerry (Chief Executive Officer)
/s/ Samuel E. Allen Director 2/22/95
- - - --------------------------- ---------------
Samuel E. Allen
/s/ Louis H. Barnett Director 2/22/95
- - - --------------------------- ---------------
Louis H. Barnett
/s/ Robert E. Bosworth Executive Vice President and 2/22/95
- - - --------------------------- Chief Financial Officer and ---------------
Robert E. Bosworth Director (Principal Financial
and Accounting Officer)
/s/ Robert M. Boyd, Jr. Director 2/22/95
- - - --------------------------- ---------------
Robert M. Boyd, Jr.
/s/ Francis L. Capers Director 2/22/95
- - - --------------------------- ---------------
Francis L. Capers
/s/ Richard E. Cheney Director 2/22/95
- - - --------------------------- ---------------
Richard E. Cheney
/s/ Scott L. Probasco, Jr. Director 2/22/95
- - - --------------------------- ---------------
Scott L. Probasco, Jr.
/s/ A. Alexander Taylor, II Director 2/22/95
- - - --------------------------- ---------------
A. Alexander Taylor, II
27
CHATTEM, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- -----------------------------------------------------------------
10.1 Renewal lease agreement dated December 5, 1994 between Atlantis
Real Estate Corporation and Chattem (Canada) Inc. and Chattem,
Inc. for Unit I, 2220 Argentia Road, Mississauga, Ontario, Canada
11 Computation of per share earnings
13 1994 Annual Report to Shareholders of Chattem, Inc.
22 Subsidiaries of the Company