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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, 1999
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 REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
AS OF OCTOBER 15, 1999, 250 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT PAR
VALUE, WERE OUTSTANDING.
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SIGNAL INVESTMENT & MANAGEMENT CO.
INDEX
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of August 31, 1999
and November 30, 1998 ................................................................ 3
Statements of Income for the Three and Nine Months
Ended August 31, 1999 and 1998 ....................................................... 4
Statements of Cash Flows for the Nine Months Ended
August 31, 1999 and 1998 ............................................................. 5
Notes to Financial Statements........................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................................. 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................. 9
SIGNATURES ................................................................................. 10
EXHIBIT 27 - Financial Data Schedule
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIGNAL INVESTMENT & MANAGEMENT CO.
BALANCE SHEETS
(In thousands, except for number of shares)
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AUGUST 31, NOVEMBER 30,
1999 1998
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ASSETS (Unaudited)
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Current Assets:
Cash and cash equivalents.................................. $ 25 $ 11
Available-for-sale security - at market value.............. -- 415
Royalties receivable from Chattem, Inc..................... 3,607 2,669
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Total current assets.................................. 3,632 3,095
Trademarks and Other Purchased Product Rights, Net......... 352,694 267,817
---------- ----------
TOTAL ASSETS...................................... $ 356,326 $ 270,912
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LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Payable to Chattem, Inc.................................... $ 348,550 $ 262,330
Deferred income taxes...................................... 5,741 5,741
Other...................................................... -- 20
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Total liabilities...................................... 354,291 268,091
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Stockholder's Equity:
Common shares, without par value, 500 shares authorized,
250 shares issued and outstanding...................... 2 2
Retained earnings.......................................... 2,033 2,819
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Total stockholder's equity............................. 2,035 2,821
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TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY......................................... $ 356,326 $ 270,912
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The accompanying notes are an integral part of these financial statements.
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SIGNAL INVESTMENT & MANAGEMENT CO.
STATEMENTS OF INCOME
(Unaudited and in thousands, except share data)
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<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
------------------------------- ----------------------------
1999 1998 1999 1998
--------- --------- --------- -----------
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REVENUES AND GAIN:
Royalties from Chattem, Inc. ...... $ 3,620 $ 2,932 $ 10,422 $ 7,222
Investment income ................. 2 1 3 2
Gain on sale of trademarks
and other product rights ......... -- (75) -- 10,328
--------- --------- --------- -----------
Total revenues and gain ...... 3,622 2,858 10,425 17,552
--------- --------- --------- -----------
EXPENSES AND LOSS:
Amortization of trademarks
and other product rights ......... 2,419 1,813 7,063 3,989
General and administrative ........ -- 5 -- 18
Loss on sale of investment ........ -- -- 8 --
--------- --------- --------- -----------
Total expenses and loss ...... 2,419 1,818 7,071 4,007
--------- --------- --------- -----------
INCOME BEFORE
PROVISION FOR INCOME
TAXES ............................. 1,203 1,040 3,354 13,545
PROVISION FOR INCOME
TAXES .............................. 409 380 1,140 4,880
--------- --------- --------- -----------
NET INCOME .......................... $ 794 $ 660 $ 2,214 $ 8,665
--------- --------- --------- -----------
--------- --------- --------- -----------
OUTSTANDING COMMON
SHARES ............................. 250 250 250 250
--------- --------- --------- -----------
NET INCOME PER
COMMON SHARE ....................... $ 3,176 $ 2,640 $ 8,856 $ 34,660
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
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SIGNAL INVESTMENT & MANAGEMENT CO.
STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
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FOR THE NINE MONTHS ENDED
AUGUST 31,
-----------------------------
1999 1998
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OPERATING ACTIVITIES:
Net income .............................................................. $ 2,214 $ 8,665
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization ........................................................ 7,063 3,989
Income tax provision ................................................ 1,140 4,880
Gain on sale of trademarks and other product rights.................. -- (10,328)
Loss on sale of investment .......................................... 8 --
Changes in operating assets and liabilities:
Increase in royalties receivable from
Chattem, Inc..................................................... (938) (1,396)
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Net cash provided by operating activities...................... 9,487 5,810
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INVESTING ACTIVITIES:
Purchase of investment.................................................. -- (395)
Proceeds from sale of investment........................................ 387 --
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Net cash provided by (used in) investing activities............ 387 (395)
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FINANCING ACTIVITIES:
Payments to Chattem, Inc................................................ (6,860) (2,248)
Dividends paid to Chattem, Inc.......................................... (3,000) (3,000)
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Net cash used in financing activities.......................... (9,860) (5,248)
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CASH AND CASH EQUIVALENTS:
Increase for the period................................................. 14 167
At beginning of period.................................................. 11 55
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At end of period........................................................ $ 25 $ 222
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SUPPLEMENTAL SCHEDULE OF NON-CASH
TRANSACTIONS:
INCREASE (DECREASE) IN PAYABLE TO CHATTEM, INC. IN
CONNECTION WITH-
Purchase of trademarks and other product rights....................... $ 91,940 $ 171,724
Provision for income taxes............................................ $ 1,140 $ 4,880
Gain on sale of trademarks and other product rights................... $ -- $ (10,328)
DIVIDENDS PER SHARE ....................................................... $ 12 $ 12
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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SIGNAL INVESTMENT & MANAGEMENT CO.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. The Company is a wholly-owned subsidiary of Chattem, Inc. ("Chattem") and
is included in Chattem'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, 1998
and with the audited consolidated financial statements and related notes
thereto included in Chattem's Annual Report to Shareholders for the year
ended November 30, 1998. 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 the primary obligor as of the
periods presented and therefore incurred no interest expense. See notes 8,
9 and 10 below for certain of the indebtedness of Chattem guaranteed by the
Company.
5. A summary analysis of the activity between the Company and Chattem is as
follows:
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Payable balance - November 30, 1998 .............. $ 262,330,000
Repayments ............................... (6,860,000)
Income tax provision ..................... 1,140,000
Purchase of trademarks and other
product rights .......................... 91,940,000
--------------
Payable balance - August 31, 1999 ................ $ 348,550,000
--------------
--------------
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The weighted average balance due Chattem during the nine months ended
August 31, 1999 was $328,249,000.
6. The Company is a wholly-owned subsidiary of Chattem which provides the
Company with the use of all of its information technology ("IT") systems.
Chattem has replaced most of its current IT systems which are approximately
20 years old; consequently, the new IT system will be year 2000 compliant.
As a result, the year 2000 compliance requirements are considered only a
portion of Chattem's systems replacement effort. This replacement is
substantially complete. The total cost to Chattem will be approximately
$3,000,000. Such costs are being capitalized as incurred.
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Chattem is also reviewing the possible impact of the year 2000 problem on
its customers and suppliers and has requested and received from a majority
of its principal customers and suppliers written statements regarding their
knowledge of and plans for meeting the year 2000 compliance requirements.
The Company's business could be adversely affected should Chattem or other
entities with which Chattem does business be unsuccessful in completing
critical modifications in a timely manner.
7. On December 21, 1998 the Company and Chattem acquired the DEXATRIM,
SPORTSCREME, ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands
from Thompson Medical Company, Inc. (the "Thompson Medical brands") for
$95,000,000. The purchase price consisted of $90,000,000 cash and 125,500
shares of Chattem's common stock. The cash portion of the purchase price
was financed with a new senior credit facility.
8. On December 21, 1998, Chattem, with the Company as guarantor, refinanced
its existing credit facilities with $165,000,000 in senior secured credit
facilities (the "Credit Facilities"). The Credit Facilities were provided
by a syndicate of commercial banks. The Credit Facilities include a
$50,000,000 revolving credit facility and a $115,000,000 term loan. The
Credit Facilities were used to refinance existing senior debt, to finance
the acquisition of the Thompson Medical brands and related fees and
expenses and to finance working capital and other general corporate needs.
The $50,000,000 revolving credit facility matures on the earlier of (i)
December 21, 2003 and (ii) the date on which the term loan is repaid in
full. The $115,000,000 term loan matures on December 21, 2003. The Credit
Facilities contain covenants, representations, warranties and other
agreements by Chattem that are customary in loan agreements and securities
instruments relating to financing of this type.
9. On May 7, 1999 Chattem, with the Company as guarantor, issued an additional
$75,000,000 of 8.875% (priced to yield 8.8125%) senior subordinated notes
under its indenture relating to the issuance of its $200,000,000 of 8.875%
notes on March 24, 1998. The additional notes mature on April 1, 2008 and
were issued under Chattem's $250,000,000 shelf registration statement filed
on December 21, 1998 with the Securities and Exchange Commission. The
proceeds from the issuance of the additional notes were used to retire
$41,500,000 of the then outstanding balance of Chattem's $115,000,000 term
bank loan and the outstanding balance of $25,500,000 of its revolving bank
loan under the Credit Facilities.
Concurrent with the closing of the $75,000,000 note issue, Chattem amended
its Credit Facilities. The amended Facilities, provided by a syndicate of
banks, consists of a $70,000,000 term loan and a $50,000,000 revolving
credit facility. The revolving credit facility and the term loan both
mature on December 21, 2003. The amended Credit Facilities contain
covenants, representations, warranties and other agreements by Chattem that
are customary in loan agreements relating to financing of this type. At
August 31, 1999 the outstanding balances of the term loan and the revolving
credit facility were $61,000,000 and $0, respectively.
10. For the nine months ended August 31, 1999, Chattem retired $11,750,000 face
amount of its 12.75% Senior Subordinated Notes, due 2004, for which notes
the Company is guarantor. The remaining principal amount outstanding is
$37,901,000. For the three months ended August 31, 1999, Chattem prepaid
$7,000,000 of its term loan.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
On December 21, 1998 the Company and Chattem acquired the DEXATRIM, SPORTSCREME,
ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands from Thompson
Medical Company, Inc. for $95,000,000. The purchase price consisted of
$90,000,000 cash and 125,500 shares of Chattem's common stock. The cash portion
of the purchase price was financed with a new senior credit facility.
On May 7, 1999 Chattem, with the Company as guarantor, issued an additional
$75,000,000 of 8.875% (priced to yield 8.8125%) senior subordinated notes under
its indenture relating to the issuance of its $200,000,000 of 8.875% notes on
March 24, 1998. The additional notes mature on April 1, 2008 and were issued
under Chattem's $250,000,000 shelf registration statement filed on December 21,
1998 with the Securities and Exchange Commission. The proceeds from the issuance
of the additional notes were used to retire $41,500,000 of the then outstanding
balance of Chattem's $115,000,000 term bank loan and the outstanding balance of
$25,500,000 of its revolving bank loan dated December 21, 1998.
Concurrent with the closing of the $75,000,000 note issue, Chattem amended its
senior credit facility. The amended facility, provided by a syndicate of banks,
consists of a $70,000,000 term loan and a $50,000,000 revolving credit facility.
The revolving credit facility and the term loan both mature on December 21,
2003. The credit facility contains covenants, representations, warranties and
other agreements by Chattem that are customary in loan agreements relating to
financing of this type. At August 31, 1999 the outstanding balances of the term
loan and the revolving credit facility were $61,000,000 and $0, respectively.
For the nine months ended August 31, 1999, Chattem retired $11,750,000 face
amount of its 12.75% Senior Subordinated Notes, due 2004, for which notes the
Company is guarantor. The remaining principal amount outstanding is $37,901,000.
For the three months ended August 31, 1999, Chattem prepaid $7,000,000 of its
term loan.
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COMPARISON OF NINE MONTHS ENDED AUGUST 31, 1999 AND 1998
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:
Royalty income increased $3,200,000, or 44.3%, for the nine months ended August
31, 1999 from the corresponding period of the prior year. The increase was
primarily due to increased sales resulting from the acquisition of the BAN and
Thompson Medical brands' trademarks in March and December 1998, respectively.
Amortization expense increased $3,074,000, or 77.1%, for the nine months ended
August 31, 1999, from the corresponding period of the prior year. The increase
was primarily due to the purchase of the BAN and Thompson Medical brands'
trademarks in March and December 1998, respectively.
A pretax gain of $10,328,000 on the sale of trademarks and other product rights
associated with the CORNSILK product line divestiture was recognized during the
fiscal 1998 period.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Financial data schedule (Exhibit 27)
b. No reports on Form 8-K were filed with the Securities and Exchange
Commission during the three months ended August 31, 1999.
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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 14, 1999 /s/ A. Alexander Taylor II
-------------------------------------------
A. Alexander Taylor II
President and Director
(principal executive officer)
/s/ Stephen M. Powell
-------------------------------------------
Stephen M. Powell
Vice-President, Treasurer and
Director
(principal accounting officer)
10
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<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-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 25
<SECURITIES> 0
<RECEIVABLES> 3,607
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,632
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 356,326
<CURRENT-LIABILITIES> 0
<BONDS> 348,550
0
0
<COMMON> 2
<OTHER-SE> 2,033
<TOTAL-LIABILITY-AND-EQUITY> 356,326
<SALES> 0
<TOTAL-REVENUES> 10,425
<CGS> 0
<TOTAL-COSTS> 7,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,354
<INCOME-TAX> 1,140
<INCOME-CONTINUING> 2,214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,214
<EPS-BASIC> 8,856
<EPS-DILUTED> 8,856
</TABLE>
