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Executive Summary

Chattem has been actively seeking and bidding on acquisitions and is targeting a deal in the next six months, the company disclosed in its recently released 1985 annual report. "Our acqusition effort is more intense than ever, and we are reviewing more prospective acquisitions than ever," declared Chairman Alex Guerry. "We would hope to make one or more acquisitions during the new fiscal year." To support its acquisition efforts, the company has $22 mil. readily available in net cash and long-term investments. The company has about $11 mil. in long and short debt and $12.1 mil. in an unused line of credit. Guerry reported that during the fiscal year ended May 31, the firm made an offer for two companies: a consumer products business, which would have been Chattem's "largest acquisition"; and a chemical company. In early 1984, when Chattem sold its petrochemicals business to DeSoto, the firm said it was looking for a business in the $10 mil. to $50 mil. annual sales range ("The Pink Sheet" March 12, 1984, T&G-1). In the intervening 18 months, Chattem sold the Quencher line to Del Labs. The 1985 Chattem annual report discloses that Chattem received $5.75 mil. Chattem had done a major job increasing Quencher sales (from $2.9 mil. in 1983 to $8.7 mil. in 1984); however, the brand only had $3.5 mil. sales in seven months prior to its sale to Del. The company noted candidly that it took a loss on the Quencher divestiture. "We were certainly not happy about having to take a loss on the sale," Guerry commented, "but we felt we could put these funds into other areas to better advantage. The firm rated its diversification efforts, saying that out of 12 purchases, four have been "outstanding successes," five have been "good" and The Chattanooga mfr. pointed out that its consumer products operation (OTCs and cosmetics) targets small to medium size markets or product categories in which its brands can achieve leading market share. Products are marketed domestically by Chattem's 42-person sales force to roughly 20,000 accounts, which are made up of drug chains, food chains, mass merchandisers and whslrs. Since 1980, consumer product sales have grown at a compound annual rate of 18%, Chattem said. According to the 1985 annual report, OTC drugs accounted for 30%, or roughly $19 mil., of Chattem's $63.6 mil. total sales. Despite increased compeition in the menstrual discomfort market (primarily form OTC ibuprofen), Pamprin realized a "small increase" in sales while Premesyn PMS grew at a rate in excess of 30%. The firm gave credit to the effectiveness of its advertising campaign for the improvement. The company's ad and promotion budget climbed to $19 mil. in 1985 from $18.6 mil. the year before. Chattem's chemical division ($14.1 mil. sales) was "unable to continue its strong growth trend in 1985," the company reported. A 6% decline in sales was attributed to an inventory reduction by one of its major customers, a flat antacid market and the strength of the dollar which encouraged foreign competition. Tight cost control kept selling and general administrative expenses at just under 25% of sales. Chattem reduced its long-term debt/equity ration from 17% to 16%. "This reduction was achieved in spite of the company's purchase of over $2.3 mil. of its own stock in open market and privately negotiated transactions," Chattem said. The firm also decreased its inventory by $1.8 mil. during the year, while increasing turnover from 2.6 to 3.3 times. Chart omitted.

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