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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1997 Commission file number 0-5905
CHATTEM, INC.
A TENNESSEE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
TELEPHONE: 423-821-4571
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months, and
has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K will
be contained in the definitive Proxy Statement incorporated by reference in
Part III of this Form 10-K.
As of February 20, 1998, the aggregate market value of voting shares held by
non-affiliates was $138,304,452.
As of February 20, 1998, 9,090,854 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's Annual Report to Shareholders for Fiscal year
ended November 30, 1997 (the "1997 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 6, 1998 (the "Proxy
Statement") are incorporated by reference in Part III of this Report.
PART I
Item 1. Business
General
Chattem, Inc. (the "Company") was incorporated in Tennessee in 1909 after
having commenced business operations in 1879. The Company is a diversified
manufacturer and marketer of consumer products. The Company manufactures and
markets branded over-the-counter ("OTC") pharmaceuticals, such as FLEXALL,
ICY HOT, PAMPRIN, PREMSYN PMS, BENZODENT, NORWICH Aspirin, GOLD BOND and
HERPECIN-L; functional toiletries and cosmetics, including CORNSILK,
BULLFROG, ULTRASWIM, SUN-IN, MUDD and PHISODERM; dietary supplements
represented by GARLIQUE, REJUVEX, MELATONEX, ECHINEX and PROPALMEX; and a
small line of homeopathic medicines. In the OTC drug market, the Company
believes that its topical analgesic, menstrual and premenstrual internal
analgesic brands and medicated powder and cream 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 dietary supplement products are also considered to be major brands
in that U.S. market.
The Company's growth strategy is to seek continued growth through a
combination of brand acquisitions and internal growth while maintaining high
operating income. As a part of this strategy, the Company continually
evaluates its products and businesses, and in instances in which products or
businesses fail to realize the Company's objectives, the Company will dispose
of these products or businesses and redeploy resulting assets to products and
businesses with greater growth potential or to reduce indebtedness.
The Company conducts certain aspects of its business through four wholly
owned subsidiaries. One subsidiary owns or licenses substantially all of the
trademarks and intangibles associated with its domestic consumer products
business and licenses the Company's use thereof. Certain foreign sales
operations are conducted through Canadian and United Kingdom subsidiaries.
Product liability insurance is provided by a captive insurance subsidiary
incorporated in Bermuda.
2
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 1997
On June 26, 1997, the Company purchased certain assets of Sunsource
International, Inc. and an affiliated company ("SUNSOURCE") including the
exclusive worldwide rights to five leading branded dietary supplement
products. The purchase price for the trademarks, inventory and receivables was
approximately $32,000,000. Additional payments may be earned by SUNSOURCE
over a six year period from the date of closing if sales exceed certain
levels as defined in the purchase agreement, but such additional payments are
not to exceed $15,750,000 in the aggregate. Financing of the SUNSOURCE
acquisition was provided by an expansion of the Company's senior bank credit
agreement and the issuance of 300,000 shares of Chattem, Inc. common stock to
SUNSOURCE.
The Company expanded its existing credit agreement with a syndicate of banks
on June 26, 1997 to finance the SUNSOURCE acquisition and repay all existing
bank debt. The credit agreement is divided into a $30,000,000 revolving line
of credit for working capital purposes, a 5 year $30,000,000 Term A loan
facility and a 6 3/4 year $35,000,000 Term B loan facility.
During June 1997, the Company prepaid previously outstanding long-term bank
debt, with funds from the new credit agreement. In connection with the
prepayment of those borrowings, the Company incurred an extraordinary loss of
$1,370,000 (net of income taxes), or $0.15 per share. The loss primarily
related to the write-off of debt issuance costs and the termination of two
interest rate swap agreements.
Unless otherwise indicated, the following discussion relates only to the
continuing operations of the Company, which are the domestic and
international consumer products business. The results of operations and the
gain on disposal of the specialty chemical division in 1995 have been
separately classified as discontinued operations in the accompanying
consolidated statements of income.
3
The Company will continue to seek increases in sales through a combination of
acquisitions and internal growth while maintaining high operating income. As
previously high growth brands mature, sales increases will become even more
dependent on acquisitions and the development of successful line extensions.
During the year ended November 30, 1997, new additions to the ICY HOT
(Arthritis Therapy Gel), GOLD BOND (Medicated Foot Powder and CORNSTARCH PLUS
Medicated Baby Powder), MUDD (5 Minute Mask) and PAMPRIN and PREMSYN PMS (Gel
Caps) product lines as well as a newly repackaged CORNSILK line were
introduced.
Products
The objective of the Company is to offer high quality brand name products in
niche market segments in which its products can be among the market leaders.
The Company strives to achieve its objective by identifying brands with
favorable demographic appeal, being flexible in modifying products and
promotions in response to changing consumer demands and developing creative
and cost-effective marketing and advertising programs. The Company
manufactures substantially all of its products at its manufacturing facility
in Chattanooga, Tennessee, with the exception of GOLD BOND, the SUNSOURCE
brands and NORWICH Aspirin, which are manufactured by contract manufacturers.
4
The Company's product brands are:
OTC Pharmaceuticals
--------------------
- GOLD BOND - medicated powders and anti-itch cream
- FLEXALL - topical analgesic
- ICY HOT - topical analgesic
- BENZODENT - topical oral analgesic
- NORWICH Aspirin - internal analgesic
- HERPECIN-L - cold sore and fever blister product
- PAMPRIN - menstrual internal analgesic
- PREMSYN PMS - premenstrual internal analgesic
Functional Toiletries and Cosmetics
------------------------------------
- CORNSILK - 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 and hand cleanser
Dietary Supplements
---------------------
- REJUVEX - menopausal supplement
- GARLIQUE - garlic extract
- MELATONEX - sleep aid
- PROPALMEX - prostate health product
- ECHINEX - infections resistance enhancer
5
The following table sets forth the Company's net sales attributable to
domestic and international OTC pharmaceutical, functional toiletries and
cosmetics, dietary supplement and homeopathic products, other products and
total consumer products during the past three fiscal years (dollars in
thousands):
Fiscal Year Ended November 30,
------------------------------------------------------------------------------
1997 1996 1995
------- ------ ------
Product Class Sales Percentage Sales Percentage Sales Percentage
-------- ---------- -------- ---------- --------- ----------
Domestic:
OTC Pharmaceuticals ................. $ 83,121 58.0% $ 67,214 56.5% $ 48,700 48.4%
Functional Toiletries and
Cosmetics .......................... 33,887 23.7 36,232 30.5 37,519 37.3
Dietary Supplements and
Homeopathics*....................... 9,102 6.4 - - - -
International:
OTC Pharmaceuticals .................. 3,053 2.1 2,255 1.9 2,463 2.5
Functional Toiletries and
Cosmetics .......................... 12,154 8.5 12,204 10.3 10,885 10.8
Other Products ......................... 1,918 1.3 998 .8 1,031 1.0
-------- ---------- -------- ---------- ---------- ------
Total Consumer Products .......... $143,235 100.0% $118,903 100.0% $100,598 100.0%
-------- ---------- -------- ---------- ---------- ------
-------- ---------- -------- ---------- ---------- ------
*From the date of acquisition, June 26, 1997.
6
Growth Strategy
The Company seeks to expand its business through:
- - ACQUISITION OF ESTABLISHED BRANDS. Brand acquisitions afford the
Company the opportunity to leverage its advertising and promotional
capabilities and utilize existing distribution channels to attain
incremental sales increases accompanied by higher operating margins.
An example of this strategy is the Company's acquisition of GOLD BOND in
April 1996. GOLD BOND is the leading brand in the medicated powder market
with a rapidly growing presence in the anti-itch cream market. Annual
sales of GOLD BOND have increased by more than 20% from less than $30
million at the time of the acquisition, while operating margins have also
increased during the same period.
The Company's acquisition of the SUNSOURCE Products is another example
of this strategy. The SUNSOURCE Products are leaders in small to medium
sized markets that have an older and growing demographic profile. In
addition, the dietary supplements market is a media driven business that
is compatible with the Company's marketing and distribution
capabilities. The Company believes that growth of the SUNSOURCE brand
can be achieved through the utilization of television advertising, new
product introductions and improved distribution.
- - EXPANSION OF EXISTING PRODUCT LINES. The Company seeks to increase its
market share in established markets through the introduction of new
product lines for existing brands. Product line extensions allow the
Company to maximize the value of the base brand through an increased
market presence and new market entry. Recent examples of product line
extensions include ICY HOT Arthritis Therapy Gel and two GOLD BOND line
extensions, GOLD BOND Medicated Foot Powder and GOLD BOND Cornstarch
Plus Medicated Baby Powder.
- - DEVELOPMENT OF BRANDS WITH UNREALIZED POTENTIAL. The Company seeks to
acquire brands with unrealized potential that have been under-marketed
by larger firms or have achieved success in limited geographic regions.
The Company uses its marketing ability, sales force and manufacturing
capabilities to build on the unrealized potential of the brand. ICY HOT
was an under-marketed brand which the Company acquired from a major
consumer products company, while FLEXALL had only a regional market
presence when acquired by the Company. Both of these brands have
achieved significant sales growth following their acquisition by the
Company.
7
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.
The GOLD BOND brand, which is approximately 100 years old, competes in the
adult and baby medicated powder and anti-itch cream markets. GOLD BOND is
the leading brand in the medicated powder market and has a rapidly growing
presence in the anti-itch cream market. The product line is heavily
supported by national television and radio advertising, as well as with
consumer promotions. The Company believes GOLD BOND represents a major growth
opportunity and is currently pursuing various line extensions.
FLEXALL 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. In fiscal 1996 FLEXALL
Ultra Plus, containing menthol, methyl salicylate and camphor as active
ingredients, was added to the line. 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 utilizes extensive television
and print media advertising.
ICY HOT provides the Company with a second entry into the topical analgesic
market segment. ICY HOT is an extra strength dual action product, as
distinguished from FLEXALL. In fiscal 1997 ICY HOT Arthritis Therapy Gel,
containing capcaicin in an aloe vera based gel, was introduced. The Company
supports this brand with national advertising and strong promotional programs.
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 in 1994 and seeks to increase the market share of this brand by
providing samples to consumers when they are initially fitted for dentures.
8
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.
In the lip care category, HERPECIN-L balm stick treats and protects cold sores
three ways. The unique formula moisturizes lips to help prevent cracking,
reduce soreness and promote healing. Also, HERPECIN-L contains an SPF 15
sunblock to help protect lips from the harmful rays of the sun. The Company
supports the brand with television and radio advertising as well as consumer
promotions designed to generate trial during the peak winter and summer cold
sore seasons.
In the menstrual analgesic segment, the Company markets PAMPRIN, a combination
drug specifically designed for relief of menstrual symptoms, and PREMSYN PMS, a
product formulated to relieve mild to moderate symptoms of premenstrual
syndrome. PAMPRIN was developed internally by the Company over 30 years ago,
while PREMSYN PMS was introduced by the Company in 1983. In fiscal 1997 both
PAMPRIN and PREMSYN PMS were introduced in gel capsule form.
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 CORNSILK brand is a line of facial makeup products for women with oily or
combination skin. All CORNSILK products utilize an exclusive ingredient for
absorbing the excess facial oils that break down the color and coverage of
other makeup. The CORNSILK 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 print advertising in selected
women's magazines. In fiscal 1997 the entire CORNSILK product line was
relaunched in completely new packaging.
9
In the sunscreen and sunblock category, BULLFROG provides long-lasting,
water-durable protection from the sun. 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. The Company supports this brand by
selected television advertising companies by print advertising.
SUN-IN is a leading 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 a market leader
through recent improvements in the formula and package, seasonal advertising to
teens and consumer promotions in retail stores.
MUDD is a line of clay-based products which provide deep cleansing of the face
for healthier, cleaner skin. Target customers for MUDD are women between the
ages of 18 and 49. In fiscal 1995, the Company relaunched MUDD with improved
formulas and updated packaging and added a 5 Minute Mask to the line in fiscal
1997.
PHISODERM is a line of facial cleansers consisting of several formulas of liquid
cleansers, including one for infants, and a bar soap. Acquired in 1994,
PHISODERM is the Company's second entry into the facial cleanser category.
Positioned as a deep cleaning but gentle facial cleanser, the Company, in fiscal
1995, improved the formula, updated the packaging and provided television
advertising and promotional support to enable this brand to regain the larger
market share it once enjoyed. In fiscal 1996, PHISODERM Antibacterial Hand
Cleanser was introduced in the domestic and certain international markets.
10
DIETARY SUPPLEMENTS
The Company markets a line of predominantly herbal, branded dietary supplements
and homeopathic medicines under the SUNSOURCE name. The SUNSOURCE line was
acquired by the Company in June 1997.
The dietary supplement products in the SUNSOURCE line have national
distribution in food, drug and mass merchandiser accounts and are
supported by national television and/or radio ad campaigns.
SUNSOURCE dietary supplements are natural, drug-free aids to
supporting and maintaining good health.
REJUVEX, first introduced in late 1991 and the oldest of the
SUNSOURCE brands, is a dietary supplement for women in the peri- and
post-menopausal age group. REJUVEX helps women to maintain comfort
during a phase of life that is often fraught with numerous
discomforts. Additionally, REJUVEX, high in magnesium, helps to
promote strong healthy bones in a population that is at risk for
development of osteoporosis. REJUVEX provides an estrogen-free
avenue of natural support.
GARLIQUE garlic tablets support cardiovascular health. The tablets are
uniquely positioned in the marketplace as a "one per day" high potency garlic
supplement. The major GARLIQUE competitor is a six per day product.
Consumers have a strong and growing interest in this odor-less, drug-free,
all natural approach to maintaining normal cholesterol levels. GARLIQUE
entered the market place in 1992 and has continued as a strong product.
MELATONEX is formulated to support a natural sleep cycle, by
supplementing the body's natural production of melatonin, a hormone
necessary for a good night's sleep. As we age, we produce less and
less melatonin, tend to sleep less and have more difficulty falling
asleep and staying asleep. Supplementing our natural melatonin
production is the sensible solution for people over forty.
MELATONEX is a scored, time-release tablet offering important and
desired dosage control to consumers.
11
PROPALMEX is an herbal supplement for men over forty. PROPALMEX
supports prostate health and promotes free urinary flow. As men
age, natural changes in hormone balance result in conditions which
tend to precipitate a swelling of the prostate. This benign
condition plagues most men past middle age and PROPALMEX is the all
natural, drug-free approach to maintenance of a healthy prostate.
ECHINEX is a standardized herbal complex of echinacea, ginger and
Siberian ginseng. This effective combination supports our natural
resistance against infection helping us to stay well. ECHINEX is a
seasonal product that provides adults with added protection during
times of high risk for cold and flu.
SUNSOURCE offers a line of nine homeopathic OTC products.
Homeopathic medicines represent a growing segment of the OTC
marketplace. These all natural products are safe and effective and
have no side effects. The SUNSOURCE line includes six tablet
products: Sinus Relief, Cold Relief, Insomnia Relief, Allergy
Relief, Flu Relief and Arthritis Relief; and three topical creams:
Sports Injury Relief, Arthritis Relief and Psoriasis/Eczema Relief.
International
The Company's products are also sold in foreign countries. This international
business is concentrated in Canada, Europe and Central and South America.
Sales in Canada and Europe are conducted by subsidiary companies located and
locally staffed in Canada and the United Kingdom. General export sales are
handled by the Company from its offices in Chattanooga. Most of the products
sold in international markets are manufactured by the Company at its Chattanooga
and United Kingdom 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.
12
Many of the Company's major domestic products are currently sold in Canada,
including the FLEXALL, PAMPRIN, SUN-IN, CORNSILK, MUDD, ULTRASWIM,
PHISODERM, BULLFROG and GOLD BOND 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 Kingdom as SUN-IN. MUDD, CORNSILK and ULTRASWIM are the other
primary consumer products sold by the Company's international division in
Europe.
The Company's export division services various distributors primarily located in
the Caribbean, Mexico and Peru. The Company sells various products into these
markets with the primary focus being the development of its OTC pharmaceuticals,
principally ICY HOT, PAMPRIN, PHISODERM and GOLD BOND. The Company continues to
look for established distributors in Central and South America.
Manufacturing and Quality Control
The Company manufactures a substantial portion of its products at its
Chattanooga plant, with the exception of GOLD BOND, the SUNSOURCE brands and
NORWICH Aspirin, which are manufactured by contract manufacturers.
Currently, the Company has adequate capacity to meet anticipated demand for
its products. New products can generally be manufactured with the adaptation
of existing equipment and facilities, with the addition of new equipment at
relatively small cost or through readily available contract manufacturers.
For additional information about the extent of utilization of the Company's
manufacturing facilities, see "Properties", Item 2 in this report.
To monitor the quality of its products, the Company maintains an internal
quality control system supported by an on-site microbiology laboratory. Outside
consultants also are employed from time to time to monitor product development
and the effectiveness of the Company's operations.
The Company has not experienced any material adverse effect on its business as a
result of shortages of energy or other raw materials used in the manufacture of
its products. At present, the Company does not foresee any significant problems
in obtaining its requirements at reasonable prices, but no assurances can be
given that raw material or energy shortages will not adversely affect its
operations in the future.
13
Research and Development
The Company's research and development expenditures were $1,207,000, $1,117,000,
and $1,140,000 in the fiscal years ended November 30, 1997, 1996 and 1995,
respectively. No material customer-sponsored research and development
activities were undertaken during these periods. The Company expects to
maintain the same general level of expenditures in fiscal 1998.
The research and development effort focuses on developing improved formulations
for existing products and on the creation of formulations for product line
extensions. The preservation and improvement of the quality of the Company's
products are also integral parts of its overall strategy.
Distribution
The Company's domestic products are sold primarily through thousands of food,
drug and mass merchandiser accounts. Internationally, the products are sold by
a national broker in Canada and the Company's own sales force in the United
Kingdom and by exclusive distributors in Western Europe and Central and South
America to mass distribution channels.
Wal-Mart Stores, Inc. accounts for more than 10% of the sales of the Company's
consolidated net sales. No other customer accounts for more than 10% of
consolidated net sales. Boots Plc, a U.K. retailer, and Shoppers Drug Mart, a
Canadian retailer, each account for more than 10% of the international consumer
products segment's sales.
The Company generally maintains sufficient inventories to meet customer orders
as received absent unusual and infrequent situations. At present, the Company
has no significant backlog of customer orders and is promptly meeting customer
requirements.
The Company does not generally experience wide variances in the amount of
inventory it maintains. Inventory levels were increased during fiscals 1997 and
1996 largely as a result of product acquisitions and line extensions in both
years. In certain circumstances, the Company allows its customers to return
unsold merchandise and, for seasonal products, provides extended payment terms
to its customers.
14
Marketing
The Company allocates a significant portion of its revenues to the advertising
and promotion of its products. Expenditures for these purposes were 39.2%,
38.3% and 37.0%, respectively, as a percentage of net sales during each of the
fiscal years ended November 30, 1997, 1996 and 1995.
The Company's marketing objective is to develop and execute creative and
cost-effective advertising and promotional 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 for each of its major brands advertising strategies and
executions that focus on the particular attributes and market positions of the
products. The Company achieves cost-effective advertising by minimizing certain
expenses, such as production of commercials and payments to advertising
agencies.
The Company works directly with retailers to develop for each brand promotional
calendars and campaigns that are customized to the particular requirements of
the individual retailer. The programs, which include cooperative advertising,
temporary price reductions, in-store displays and special events, are designed
to obtain or enhance distribution at the retail level and to reach the ultimate
consumers of the product. The Company also utilizes consumer promotions such as
coupons, samples and trial sizes to increase the trial and consumption of the
products.
Seasonality
During recent fiscal years, the Company's first quarter net sales and gross
profit have trailed the other fiscal quarters on average from 25% to 35% because
of slower sales of international consumer products and the relative absence of
promotional campaigns during this quarter.
15
Competition
The OTC pharmaceutical, functional toiletry and dietary supplements 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, toiletry and dietary supplement
products' business is the consolidation of retailers and increasingly more
competitive negotiations for access to shelf space.
Trademarks and Patents
The Company's trademarks are of material importance to its business and are
among its most important assets, although, except in the case of the GOLD
BOND, SUNSOURCE, FLEXALL, PHISODERM and ICY HOT trademarks, its business as
a whole is not materially dependent upon ownership of any one trademark. The
Company, either through a wholly-owned subsidiary or directly, owns or
licenses all of the trademarks associated with its business. All of the
Company's brands have recognized trademarks associated with them, and the
Company's significant domestic trademarks have been registered on the
principal register of the United States Patent and Trademark Office.
Federally registered trademarks have a perpetual life as long as they are
timely renewed and used properly as trademarks, subject to the right of third
parties to seek cancellation of the marks.
The Company also owns patents related to the ULTRASWIM shampoo and CORNSILK
facial powder, both of which expire in 1998, and ICY HOT stick topical
analgesic, which expires in 2007. After expiration of the patents, the Company
expects that these products will continue to compete in the market primarily on
the basis of the goodwill associated with the brands.
16
Government Regulation
The manufacturing, processing, formulation, packaging, labeling and
advertising of the Company's products are subject to regulation by one or
more federal agencies, including the FDA, the FTC, the Consumer Product
Safety Commission, the United States Department of Agriculture, the United
States Postal Service, the United States Environmental Protection Agency and
the Occupational Safety and Health Administration. These activities are also
regulated by various agencies of the states, localities and foreign countries
in which the Company's products are sold. In particular, the FDA regulates
the safety, manufacturing, labeling and distribution of dietary supplements,
including vitamins, minerals and herbs, food additives, OTC and prescription
drugs and cosmetics. The regulations that are promulgated by the FDA relating
to the manufacturing process are known as GMPs, and are different for drug
and food products. In addition, the FTC has overlapping jurisdiction with the
FDA to regulate the promotion and advertising of OTC pharmaceuticals,
functional toiletries and cosmetics, dietary supplements and foods.
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, such as 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 responded to certain questions with respect to efficacy received from
the FDA in connection with clinical studies for pyrilamine maleate, one of
the active ingredients used in certain of the PAMPRIN and PREMSYN PMS
products. While the Company addressed all of the FDA questions in detail, the
final monograph for menstrual drug products will determine if the FDA
considers pyrilamine maleate safe and effective for menstrual relief
products. The Company has been actively monitoring the process and does not
believe that either PAMPRIN or PREMSYN PMS will be materially adversely
affected by the FDA review. The Company believes that any adverse finding by
the FDA would likewise affect the Company's principal competitor in the
menstrual product category.
As a result of an order issued by the Consumer Products Safety Commission,
there are new packaging requirements for products containing lidocaine. The
Company has until January 1998 to develop child resistant packaging for its
GOLD BOND Cream products that are sold in tubes or change the product
formulation.
DSHEA was enacted on October 25, 1994. DSHEA amends the Federal Food, Drug
and Cosmetic Act by defining dietary supplements, which include vitamins,
minerals, nutritional supplements, herbs and botanicals, as a new category of
food separate from conventional food. DSHEA provides a regulatory framework
to ensure safe, quality dietary supplements and to foster the dissemination
of accurate information about such products. Under DSHEA, the FDA is
generally prohibited from regulating dietary supplements as food additives or
as drugs unless product claims, such as claims that a product may diagnose,
mitigate, cure or prevent an illness, disease or malady, trigger drug status.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements effective January 1, 1997, although final regulations have not
been published and the FDA has indicated that implementation will be delayed.
DSHEA permits substantiated, truthful, and non-misleading statements of
nutritional support to be made in labeling, such as statements describing
general well-being resulting from consumption of a dietary ingredient or the
role of a nutrient or dietary ingredient in affecting or maintaining a
structure or function of the body. The Company anticipates that the FDA will
promulgate GMPs which are specific to dietary supplements and require at
least some of the quality control provisions contained in the GMPs for drugs,
which are more rigorous than the GMPs for foods.
The FDA has proposed, but not finalized, regulations to implement DSHEA,
including those relating to nutritional labeling requirements. The Company
cannot determine what effect such regulations, when promulgated, will have on
its business in the future. Such regulations are likely to require expanded
or different labeling for the Company's vitamin and nutritional dietary
supplement products and could, among other things, require the recall,
reformulation or discontinuance of certain products, additional
recordkeeping, warnings, notification procedures and expanded documentation
of the properties of certain products and scientific substantiation regarding
ingredients, product claims, safety or efficacy. Failure to comply with
applicable FDA requirements can result in sanctions being imposed on the
Company or the manufacture of its products, including warning letters,
product recalls and seizures, injunctions or criminal prosecution.
17
Environmental
The Company is continuously engaged in assessing compliance of its operations
with applicable federal, state and local environmental laws and regulations.
The Company's policy is to record liabilities for environmental matters when
loss amounts are probable and reasonably determinable. The Company's
manufacturing site utilizes chemicals and other potentially hazardous materials
and generates both hazardous and non-hazardous waste, the transportation,
treatment, storage and disposal of which are regulated by various governmental
agencies. The Company is a member of the Chattanooga Manufacturers Association,
a trade association which promotes industry awareness of developments in
environmental matters, and has engaged environmental consultants on a regular
basis to assist its compliance efforts. The Company is currently in compliance
with all applicable environmental permits and is aware of its responsibilities
under applicable environmental laws. Any expenditures necessitated by changes
in law and permitting requirements cannot be predicted at this time, although
such costs are not expected to be material to the Company's financial position
or results of operations.
Since the early 1980's, the U.S. Environmental Protection Agency ("EPA") has
been investigating the extent of, and the health effects resulting from,
contamination of Chattanooga Creek, which runs through a major manufacturing
area of Chattanooga in the vicinity of the Company's manufacturing facilities.
The contamination primarily stems from the dumping of coal tar into the creek
during World War II when the federal government was leasing and operating a coke
and chemical plant adjacent to the creek. However, the EPA has been
investigating virtually all businesses that have discharged any wastewater into
the creek. A 2 1/2 mile stretch of Chattanooga Creek was placed on the National
Priorities List as a Superfund site under the Comprehensive Environmental
Response, Compensation and Recovery Act in September of 1995 and remediation of
the creek bed commenced in mid-1997. The Company could be named as a
potentially responsible party in connection with such site due to the Company's
historical discharge of wastewater into the creek. However, considering the
nature of the Company's wastewater, as well as the fact that the Company's
discharge point is downstream from the old coke and chemical plant that was
operated by the government, and the availability of legal defenses and expected
cost sharing, the Company does not believe that any liability associated with
such site will be material to its financial position or results of operations.
18
Product Liability and Insurance
An inherent risk of the Company's business is exposure to product liability
claims brought by users of the Company's products or by others. The Company has
not had any material claims in the past and is not aware of any material claims
pending or threatened against the Company or its products. While the Company
will continue to attempt to take what it considers to be appropriate
precautions, there can be no assurance that it will avoid significant product
liability exposure. The Company maintains product liability insurance,
principally through a captive insurance subsidiary, that it believes to be
adequate; however, there can be no assurance that it will be able to retain its
existing coverage or that such coverage will be cost-justified or sufficient to
satisfy future claims, if any.
Employees
The Company employs approximately 303 persons on a full-time basis in the U.S.
and 37 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.
19
Item 2. Properties
The Company's headquarters and administrative offices are located at 1715
West 38th Street, Chattanooga, Tennessee. The Company's primary production
facilities are adjacent to the Company's headquarters on land owned by the
Company. The Company leases the primary warehouse and distribution center,
located at 3100 Williams Street, Chattanooga, Tennessee, for its domestic
consumer products. The following table describes in detail the principal
properties owned and leased by the Company:
FACILITY
TOTAL ----------------------------
TOTAL AREA BUILDINGS (SQUARE
(ACRES) (SQUARE FEET) USE FEET)
----------- ------------- --------------- -----------
Owned Properties:
Chattanooga, Tennessee 10 111,200 Manufacturing 71,800
Office &
Administration 39,400
Leased Properties:
Chattanooga, Tennessee (1) 4.0 100,000 Warehousing 103,800
Chattanooga, Tennessee (2) 1.0 35,200 Warehousing &
Chattanooga, Tennessee (3) 0.1 3,800 Manufacturing 35,200
Mississauga, Ontario,
Canada (4) 0.3 15,000 Warehousing 10,500
Office &
Administration 3,000
Packaging 1,500
Basingstoke, Hampshire,
England (5) 0.3 21,900 Warehousing 13,900
Office &
Administration 6,500
Packaging 1,500
NOTES:
(1) Leased under a five year lease ending January 31, 2001 for a monthly
rental of $25,000.
(2) Leased under a five year lease ending January 31, 2001 for a monthly
rental of $9,547.
(3) Leased under a one year lease ending in July 1998 for a monthly rental
of $1,575.
(4) Leased under a lease ending November 1999 at a monthly rental, including
property taxes and other incidentals, of approximately $5,397.
(5) Leased under leases ending in 2014 and 2015 at a monthly rental, including
property taxes and other incidentals, of approximately $22,707.
20
The Company is currently operating its facilities at approximately 70% of
total capacity. These facilities are FDA registered and are capable of
further utilization through the use of full-time second and third shifts.
Item 3. Legal Proceedings
Note 10 to the Consolidated Financial Statements on page 32 of the Company's
1997 Annual Report to Shareholders is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
None.
21
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The information found on pages 17, 30 and 31 of the Company's 1997 Annual
Report to Stockholders is incorporated herein by reference.
On June 26, 1997, the Company issued to the sellers of the SUNSOURCE product
line 300,000 shares of its common stock at a value of $13.50 per share as a
portion of the purchase price for the brand.
Item 6. Selected Financial Data
The information found on page 17 of the Company's 1997 Annual Report to
Stockholders is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information found on pages 11 to 15 of the Company's 1997 Annual Report to
Stockholders is incorporated herein by reference.
Item 8. Financial Statements and Supplemental Data
The information found on pages 17 to 37 of the Company's 1997 Annual Report
to Stockholders is incorporated herein by reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
22
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons of the
Registrant
(a) Directors
The information found in the Company's 1998 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 20, 1998, 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 49 Chairman of the Board and
Chief Executive Officer; Director 1990
A. Alexander Taylor II 44 President and Chief Operating
Officer; Director 1998
Mr. Guerry was elected to his present positions with the Company in June
1990. Previously he served as Vice President and Chief Financial Officer from
1980 until 1983, as Executive Vice President from 1983 to 1990, as President
of Chattem Consumer Products from 1989 to 1994, as Chief Operating Officer
from 1989 to 1990 and as President of the Company from 1990 to 1998. Mr.
Guerry was first elected as a director of the Company in 1981.
Mr. Taylor was elected to his present positions with the Company in January
1998. Previously he was a partner from 1983 to 1998 with the law firm of
Miller & Martin, general counsel to the Company. Mr. Taylor was first
elected as a director of the Company in 1993.
(c) Promoters and Control Persons
Not applicable.
23
Item 11. Executive Compensation
The information found in the Company's 1998 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 1998 Proxy Statement under the heading
"Voting Securities and Principal Holders Thereof" is hereby incorporated by
reference.
Item 13. Certain Relationships and Related Transactions
Louis H. Barnett, a director of the Company, received $33,000 in consulting
fees during fiscal 1997 for services rendered to the Company in a capacity
other than as a director.
24
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 18 to 37 of the Company's 1997 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. (1)
4 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 (2)
Amended and Restated By-Laws of
Chattem, Inc. (3)
10 Material Contracts -
Non-Competition and Severance Agreements
as amended -
Zan Guerry
Robert E. Bosworth
Gary M. Galante
B. Derrill Pitts
Charles M. Stafford
A. Alexander Taylor II (3)
25
Exhibit
Number Description of Exhibit References
- ------- ---------------------- ----------
Lease Agreements as amended dated
February 1, 1996 between Tammy
Development Company and Chattem,
Inc. for warehouse space at 3100
Williams Street, Chattanooga, Tennessee (3) and (5)
Asset Purchase Agreement dated April 29,
1996 between Martin Himmel Inc., seller,
and Chattem, Inc. and Subsidiaries,
purchaser, for the GOLD BOND business (4)
Credit Agreement dated April 29, 1996
among Chattem, Inc., as borrower, Signal
Investment & Management Co.,
as guarantor, NationsBank, N.A., as
agent, and the Lenders named therein (5)
Credit Agreement dated April 29, 1996,
(secondary working capital facility)
among Chattem, Inc., as borrower, Signal
Investment & Management Co.,
as guarantor, NationsBank, N.A., as
agent, and the Lenders named therein. (5)
Asset Purchase Agreement dated June 6,
1996 between Campbell Laboratories,
Inc., seller, and Chattem, Inc. and Signal
Investment & Management Co.,
purchasers, for the HERPECIN-L business. (5)
Amendment to the Credit Agreement
(HERPECIN-L Acquisition) dated
June 6, 1996 among Chattem, Inc., as
borrower, Signal Investment &
Management Co., as guarantor,
NationsBank, N.A., as agent and the
Lenders named therein. (5)
26
Exhibit
Number Description of Exhibit References
- ------- ---------------------- ----------
10 Asset Purchase and Sale Agreement dated
May 23, 1997 by and among Chattem,
Inc., Signal Investment & Management Co.
and Sunsource International, Inc. and
Mindbody, Inc. (without schedules and
exhibits) (6)
Amended and Restated Credit Agreement
(New Credit Agreement) dated June 26, 1997
by and among Chattem, Inc., Signal
Investment & Management Co. and the
Lenders identified therein (6)
Amended and Restated Credit Agreement
(Supplemental Credit Agreement) dated
June 26, 1997 by and among Chattem, Inc.,
Signal Investment & Management Co. and
the Lenders identified therein (6)
First Amended and Restated Master
Trademark License Agreement between
Signal Investment & Management Co.
and Chattem, Inc., effective June 30, 1992 (7)
Chattem, Inc. Non-Statutory Stock
Option Plan - 1998 (7)
11 Computation of Per Share Earnings
13 1997 Annual Report to Shareholders of Chattem, Inc.
22 Subsidiaries of the Company
24 Consent of Independent Public Accountants
27
References:
Previously filed as an exhibit to and incorporated by reference from:
(1) Form 10-K for the year ended November 30, 1992.
(2) Form S-2 Registration Statement (No. 33-80770).
(3) Form 10-K for the year ended November 30, 1995.
(4) Form 8-K dated April 29, 1996.
(5) Form 10-K for the year ended November 30, 1996.
(6) Form 8-K dated June 26, 1997.
(7) Form 10-K for the year ended November 30, 1997
(b) There were no Form 8-K's filed with the Securities and Exchange
Commission during the three months ended November 30, 1997.
(d) The Financial Statements and the related report of independent public
accountants required to be filed with this report pursuant to Rule 3-10(a)
of Article 3 of Regulation S-X are incorporated by reference from pages 6
to 14 of Signal Investment & Management Co.'s Form 10-K for the fiscal year
ended November 30, 1997.
28
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 23, 1998 CHATTEM, INC.
By: /s/ Zan Guerry
---------------------
Zan Guerry
Title: Chairman and Chief
Executive Officer
By: /s/ Stephen M. Powell
---------------------
Stephen M. Powell
Title: Controller (Chief
Accounting 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 2/22/98
- --------------------------- and Director -------
Zan Guerry (Chief Executive Officer)
/s/ A. Alexander Taylor, II President and 2/22/98
- --------------------------- Director -------
A. Alexander Taylor, II (Chief Operating officer)
/s/ Samuel E. Allen Director 2/22/98
- --------------------------- -------
Samuel E. Allen
/s/ Louis H. Barnett 2/22/98
- --------------------------- Director -------
Louis H. Barnett
/s/ Robert E. Bosworth Director 2/22/98
- --------------------------- -------
Robert E. Bosworth
/s/ Richard E. Cheney Director 2/22/98
- --------------------------- -------
Richard E. Cheney
/s/ Scott L. Probasco, Jr. Director 2/22/98
- --------------------------- -------
Scott L. Probasco, Jr.
29
CHATTEM, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------
10.1 First Amended and Restated Master Trademark Agreement between
Signal Investment & Management Company and Chattem, Inc., effective
June 30, 1992
10.2 Chattem, Inc. Non-Statutory Stock Option Plan--1998
11 Computation of per share earnings
13 1997 Annual Report to Shareholders of Chattem, Inc.
22 Subsidiaries of the Company
24 Consent of Independent Public Accountants
27 Financial Data Schedule