<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1998
Commission file number 33-80770-01
SIGNAL INVESTMENT & MANAGEMENT CO.
A DELAWARE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 62-1290284
1105 NORTH MARKET STREET, SUITE 1300
WILMINGTON, DELAWARE 19890
TELEPHONE: 302-656-3950
This registrant meets the conditions set forth in General Instruction H(1) (a)
and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
Registrant has filed all reports to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months, and has been
subject to such filing requirements for the past 90 days.
As of October 15, 1998, 250 shares of the Company's common stock, without par
value, were outstanding.
1
<PAGE>
SIGNAL INVESTMENT & MANAGEMENT CO.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of August 31, 1998 and November 30, 1997 ................ 3
Statements of Income for the Three and Nine Months Ended
August 31, 1998 and 1997 ................................................ 4
Statements of Cash Flows for the Nine Months Ended August 31, 1998
and 1997 ................................................................ 5
Notes to Financial Statements ............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................. 9
PART II. OTHER INFORMATION
Item 6. Reports on Form 8-K ................................................ 11
SIGNATURES .................................................................... 12
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIGNAL INVESTMENT & MANAGEMENT CO.
BALANCE SHEETS
(In Thousands, Except for Number of Shares)
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .............................. $ 222 $ 55
Available-for-sale security - at market value .......... 304 --
Royalties receivable from Chattem, Inc. ................ 2,984 1,588
--------- ---------
Total current assets .............................. 3,510 1,643
Trademarks and other purchased product rights, net ....... 269,161 101,426
--------- ---------
TOTAL ASSETS....................................... $ 272,671 $ 103,069
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Liabilities:
Payable to Chattem, Inc. ............................... $ 266,601 $ 102,573
Deferred income taxes .................................. 2,628 2,628
--------- ---------
Total liabilities ................................. 269,229 105,201
--------- ---------
Shareholder's equity (deficit):
Common shares, without par value, 500 shares authorized,
250 shares issued and outstanding ..................... 2 2
Retained earnings (deficit) ............................ 3,531 (2,134)
Unrealized holding loss on investment .................. (91) --
--------- ---------
Total shareholder's equity (deficit) .............. 3,442 (2,132)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY (DEFICIT)................................. $ 272,671 $ 103,069
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
SIGNAL INVESTMENT & MANAGEMENT CO.
STATEMENTS OF INCOME
(Unaudited and in Thousands, Except Share Data)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED AUGUST 31, MONTHS ENDED AUGUST 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES AND GAINS:
Royalties from Chattem, Inc. ................... $ 2,932 $ 1,638 $ 7,222 $ 4,593
Investment income............................... 1 3 2 26
Gain on sale of
trademarks and other
product rights................................ (75) -- 10,328 --
------- ------- ------ -------
Total revenues and
gains 2,858 1,641 17,552 4,619
----- ----- ------ -----
EXPENSES:
Amortization of trademarks
and other purchased product
rights ........................................ 1,813 708 3,989 1,857
General and administrative ..................... 5 3 18 15
------- ------- ------ -------
Total expenses ............................ 1,818 711 4,007 1,872
------- ------- ------ -------
INCOME BEFORE
PROVISION FOR INCOME
TAXES ........................................... 1,040 930 13,545 2,747
PROVISION FOR INCOME
TAXES ........................................... 380 310 4,880 930
------- ------- ------ -------
NET INCOME ....................................... $ 660 $ 620 $ 8,665 $ 1,817
------- ------- ------ -------
------- ------- ------ -------
OUSTANDING COMMON
SHARES .......................................... 250 250 250 250
------- ------- ------ -------
NET INCOME PER
COMMON SHARE .................................... $ 2,640 $ 2,480 $34,660 $ 7,268
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
SIGNAL INVESTMENT & MANAGEMENT CO.
STATEMENTS OF CASH FLOWS
(Unaudited and in Thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
AUGUST 31,
-------------------------
1998 1997
------- ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .......................................................... $ 8,665 $ 1,817
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization .................................................... 3,989 1,857
Gain on sale of trademarks and other product rights ............. (10,328) --
Income taxes .................................................... 4,880 930
Other ........................................................... -- 2
Changes in operating assets and liabilities:
Increase in royalties receivable from Chattem, Inc. ........... (1,396) (351)
----- -----
Net cash provided by operating activities ................. 5,810 4,255
----- -----
INVESTING ACTIVITIES -
Purchase of available-for-sale securities ........................... (395) --
----- -----
FINANCING ACTIVITIES:
Payments to Chattem, Inc. ........................................... (2,248) (3,250)
Dividends paid to Chattem, Inc. ..................................... (3,000) (3,750)
------ ------
Net cash used in financing activities ..................... (5,248) (7,000)
------ ------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period .................................. 167 (2,745)
At beginning of period .............................................. 55 2,911
----- -----
At end of period .................................................... $ 222 $ 166
------- -------
------- -------
SUPPLEMENTAL SCHEDULE OF NON-CASH
TRANSACTIONS - Increase (decrease) in payable to
Chattem, Inc. in connection with:
Gain on sale of trademarks and other product rights ............. $(10,328) $ --
Purchase of trademarks and other product rights ................. 171,724 29,870
Provision for income taxes ...................................... 4,880 930
Payment of certain items on behalf of the Company ............... -- 2
DIVIDENDS PER SHARE ................................................... $ 12 $ 15
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
SIGNAL INVESTMENT & MANAGEMENT CO.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
1. The Company is a wholly-owned subsidiary of Chattem, Inc. and is included
in the parent company's consolidated financial statements and tax returns.
2. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in
conjunction with the audited financial statements and related notes thereto
included in the Company's Form 10-K for the year ended November 30, 1997
and with the audited consolidated financial statements and related notes
thereto included in Chattem, Inc.'s Annual Report to Shareholders for the
year ended November 30, 1997. The accompanying unaudited financial
statements, in the opinion of management, include all adjustments necessary
for a fair presentation. All such adjustments are of a normal recurring
nature.
3. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the respective
full years.
4. The Company had no outstanding debt as of the periods presented and
therefore incurred no interest expense.
5. Certain amounts in the prior periods' financial information have been
reclassified to conform to the current presentation.
6. A summary of the changes in the payable to Chattem, Inc. for the year to
date is as follows:
<TABLE>
<S> <C>
Balance - November 30, 1997 .................... $ 102,573
Repayments ........................... (2,248)
Income tax provision ................. 4,880
Gain on sale of trademarks and
other product rights ............... (10,328)
Purchase of trademarks and other
product rights ...................... 171,724
----------
Balance - August 31, 1998 ...................... $ 266,601
----------
----------
</TABLE>
6
<PAGE>
The weighted average balance due Chattem, Inc. during the nine months ended
August 31, 1998, was $180,737.
7. On March 24, 1998, Chattem, Inc. and the Company acquired the BAN line of
deodorant and antiperspirant products from Bristol-Myers Squibb Company for
a purchase price of $167,718. The Company acquired the BAN trademarks,
formulae, certain patents pertaining to antiperspirant/deodorant technology
and technical information. Chattem, Inc. purchased the inventory,
manufacturing equipment and packaging related assets used in the
manufacture of BAN, but not the right to sell BAN in Japan.
8. Also on March 24, 1998, Chattem, Inc., with the Company as guarantor,
issued $200,000 of 8 7/8% Senior Subordinated Notes due 2008 (the "Notes")
to NationsBanc Montgomery Securities LLC (the "Initial Purchaser") and
entered into an amended and restated senior secured bank credit agreement.
The proceeds of the note offering were used to fund the BAN purchase and
related fees and expenses, repay revolving bank indebtedness and provide
additional working capital.
The Notes mature on April 1, 2008 and interest is payable semi-annually on
April 1 and October 1 of each year, commencing October 1, 1998. The Notes
are senior subordinated obligations of Chattem, Inc. and are subordinated
in right of payment to all existing and future senior debt of that company.
The Notes may not be redeemed until April 1, 2003, after which they may be
redeemed at the option of Chattem, Inc. Upon the occurrence of certain
events constituting a change of control, the holders of the Notes may
require Chattem, Inc. to repurchase the Notes at a purchase price equal to
101% of the principal amount thereof, plus accrued and unpaid interest.
The Notes are issued under an indenture with SouthTrust Bank, National
Association, as indenture trustee, which restricts, among other things, the
ability of Chattem, Inc. and its subsidiaries to (i) incur additional
indebtedness and issue preferred stock, (ii) incur liens, (iii) pay
dividends or make certain other restricted payments, (iv) apply net
proceeds from certain asset sales, (v) enter into certain transactions with
affiliates, (vi) merge or consolidate with any other person, (vii) sell
stock of its subsidiaries, or (viii) assign, transfer, lease, convey or
otherwise dispose of substantially all of the assets of that company.
The Notes were issued by Chattem, Inc. to the Initial Purchaser in a
transaction not registered under the Securities Act of 1933 ("Securities
Act") in reliance upon the exemption provided in Section 4(2) of the
Securities Act. The Initial Purchaser subsequently placed the Notes with
qualified institutional buyers and certain accredited investors in reliance
upon Rule 144A under the Securities Act.
7
<PAGE>
Pursuant to a Registration Rights Agreement between Chattem, Inc. and the
Initial Purchaser, Chattem, Inc. filed with the Securities and Exchange
Commission on May 26, 1998 a Registration Statement on Form S-4, which
became effective on June 8, 1998, with respect to its Series B Notes that
are identical in all material respects to the original Notes. Chattem, Inc.
offered the holders of the original Notes the opportunity to exchange their
Notes for a like amount of Series B Notes on or before July 23, 1998.
Chattem's credit agreements, of which the Company is guarantor, include
term loans of $27,500 and $34,800 and a working capital facility of $30,000
(the "Credit Agreements"). The working capital facility and the $27,500
term loan mature on June 26, 2002 and the $34,800 term loan matures on June
14, 2004. Chattem, Inc. may elect either the greater of the prime rate or
federal funds plus 1/2% or a floating rate or Eurodollar interest rate
option applicable to loans under the Credit Agreements. The floating rate
and Eurodollar interest rate options are based on a base rate plus a
floating rate margin that fluctuates on the basis of Chattem, Inc.'s
leverage ratio. In addition to the foregoing, the Credit Agreements contain
covenants, representations and other agreements by Chattem, Inc. that are
customary in loan agreements and security instruments relating to
financings of this type. The Company is also a guarantor of Chattem, Inc.'s
12.75% Senior Subordinated Notes due 2004. Bank loans of $49,331, 12 3/4%
Senior Subordinated Notes due 2004 of $49,657 and 8 7/8% Senior
Subordinated Notes due 2008 of $200,000 were outstanding at August 31,
1998.
9. On May 12, 1998, Chattem, Inc. and the Company sold the CORNSILK oil
control makeup brand to Del Laboratories, Inc. for $10,750 plus inventories
and the assumption of certain liabilities. The Company sold the CORNSILK
trademarks, formulae and technical information. Chattem, Inc. sold the
inventory and other related assets but will continue to operate the
CORNSILK business in the United Kingdom pursuant to a license agreement.
Chattem, Inc. used the net proceeds from the sale to reduce bank
indebtedness.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Note: All monetary amounts are expressed in thousands of dollars unless
contrarily evident.
The following narrative represents management's comparative analysis of the
material changes in the year-to-date results of operations of the Company
pursuant to General Instruction H(2)(a) of Form 10-Q:
General
On March 24, 1998, Chattem, Inc. and the Company, acquired the BAN line of
deodorant and antiperspirant products from Bristol-Myers Squibb Company for a
purchase price of $167,718. The Company acquired the BAN trademarks, formulae,
certain patents pertaining to antiperspirant/deodorant technology and technical
information. Chattem, Inc. purchased the inventory, manufacturing equipment and
packaging related assets used in the manufacture of BAN, but not the right to
sell BAN in Japan.
Also on March 24, 1998, Chattem, Inc., with the Company as guarantor, issued
$200,000 of 8 7/8% Senior Subordinated Notes due 2008 (the "Notes") to
NationsBanc Montgomery Securities LLC and entered into an amended and restated
senior secured bank credit agreement. The proceeds of the note offering were
used to fund the BAN purchase and related fees and expenses, repay revolving
bank indebtedness and provide additional working capital.
See Notes 8 and 9 of the accompanying Notes to Financial Statements for
additional information relating to the Notes and the amended and restated senior
secured bank credit agreement.
On May 12, 1998, Chattem, Inc. and the Company sold the CORNSILK oil control
makeup brand to Del Laboratories, Inc. for $10,750, plus inventories and the
assumption of certain liabilities. The Company sold the CORNSILK trademarks,
formulae and technical information for which a gain of $10,328 was recognized.
Chattem, Inc. sold the inventory and other related assets but will continue to
operate the CORNSILK business in the United Kingdom pursuant to a license
agreement. Chattem, Inc. used the net proceeds from the sale to reduce bank
indebtedness.
9
<PAGE>
RESULTS OF OPERATIONS - COMPARISON OF NINE MONTHS ENDED
AUGUST 31, 1998 AND 1997
Royalty income increased $2,629, or 57.2%, in the nine months ended August 31,
1998, from the corresponding period of the prior year. Royalty income is
computed on the sales of the various brands on which the Company owns
trademarks. The increase was primarily due to sales of the SUNSOURCE products
acquired in the third quarter of fiscal 1997, and of the BAN
antiperspirant/deodorant brand purchased in the second quarter of fiscal 1998.
Investment income decreased by $24, or 92.3%, in the nine months ended August
31, 1998 from the corresponding prior year period. The decrease was primarily
due to a reduced amount of income producing cash equivalents.
The gain of $10,328 on the sale of trademarks and other product rights is
associated exclusively with the CORNSILK product line divestiture in the second
quarter of fiscal 1998.
Amortization expense increased $2,132, or 114.8%, in the nine months ended
August 31, 1998, from the corresponding period of the prior year. The increase
was primarily due to the acquisitions of the trademarks and other product rights
of the SUNSOURCE products in the third quarter of fiscal 1997 and of the BAN
antiperspirant/deodorant brand in the second quarter of fiscal 1998.
Year 2000
The Company is a wholly-owned subsidiary of Chattem, Inc. which provides the
Company with the use of all of its information technology (IT) systems. Chattem,
Inc. is currently replacing its IT systems with ones that will be year 2000
compliant. See Chattem, Inc.'s discussion of its year 2000 compliance progress
to date as reported in its Report on Form 10-Q for the quarter ended August 31,
1998.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the three months ended August 31, 1998.
11
<PAGE>
SIGNAL INVESTMENT & MANAGEMENT CO.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNAL INVESTMENT & MANAGEMENT CO.
(Registrant)
Dated: October 15, 1998 /s/ Stephen M. Powell
--------------------- ----------------------
Stephen M. Powell
Vice-President and Treasurer
(duly authorized signatory and
principal accounting officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SIGNAL
INVESTMENT & MANAGEMENT CO.'S UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 222
<SECURITIES> 304
<RECEIVABLES> 2,984
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,510
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 272,671
<CURRENT-LIABILITIES> 0
<BONDS> 269,229
2
0
<COMMON> 0
<OTHER-SE> 3,440
<TOTAL-LIABILITY-AND-EQUITY> 272,671
<SALES> 0
<TOTAL-REVENUES> 17,552
<CGS> 0
<TOTAL-COSTS> 4,007
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,545
<INCOME-TAX> 4,880
<INCOME-CONTINUING> 8,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,665
<EPS-PRIMARY> 34,660
<EPS-DILUTED> 34,660
</TABLE>
