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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 FEBRUARY 28, 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 APRIL 10, 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 February 28, 1999
and November 30, 1998 ............................................. 3
Statements of Income for the Three Months
Ended February 28, 1999 and 1998 .................................. 4
Statements of Cash Flows for the Three Months Ended
February 28, 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. Reports on Form 8-K .......................................... 9
SIGNATURES .............................................................. 10
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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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<CAPTION>
FEBRUARY 28, NOVEMBER 30,
1999 1998
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................ $ 16 $ 11
Available-for-sale security--at market value ............. -- 415
Royalties receivable from Chattem, Inc. .................. 2,952 2,669
-------- --------
Total current assets ................................ 2,968 3,095
Trademarks and Other Purchased Product Rights, Net ......... 356,867 267,817
-------- --------
TOTAL ASSETS .................................... $359,835 $270,912
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-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Payable to Chattem, Inc. ................................. $351,792 $262,330
Deferred income taxes .................................... 5,741 5,741
Other .................................................... -- 20
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Total liabilities .................................. 357,533 268,091
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Stockholder's Equity:
Common shares, without par value, 500 shares
authorized, 250 shares issued and outstanding ........ 2 2
Retained earnings ...................................... 2,300 2,819
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Total stockholder's equity ......................... 2,302 2,821
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ...... $359,835 $270,912
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</TABLE>
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 ENDED
FEBRUARY 28,
--------------------------
1999 1998
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REVENUES:
Royalties from Chattem, Inc. .............. $2,961 $1,559
Investment income ......................... 1 --
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Total revenues ....................... 2,962 1,559
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EXPENSES AND LOSSES:
Amortization of trademarks and other
purchased product rights ................ 2,225 770
General and administrative ................ -- 2
Loss on sale of investment ................ 8 --
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Total expenses and losses ............ 2,233 772
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INCOME BEFORE PROVISION FOR INCOME TAXES .... 729 787
PROVISION FOR INCOME TAXES .................. 248 280
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NET INCOME .................................. $ 481 $ 507
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES .... 250 250
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NET INCOME PER COMMON SHARE ................. $1,924 $2,028
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</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)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FEBRUARY 28,
--------------------------
1999 1998
---- ----
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OPERATING ACTIVITIES:
Net income ............................................. $ 481 $ 507
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization ....................................... 2,225 770
Income tax provision ............................... 248 280
Loss on sale of investment ......................... 8 --
Changes in operating assets and liabilities:
(Increase) decrease in royalties receivable
from Chattem, Inc. ............................. (283) 30
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Net cash provided by operating activities .... 2,679 1,587
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INVESTING ACTIVITIES:
Proceeds from sale of investment ...................... 386 --
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Net cash provided by investing activities .... 386 --
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FINANCING ACTIVITIES:
Payments to Chattem, Inc. ............................. (2,060) (600)
Dividends paid to Chattem, Inc. ....................... (1,000) (1,000)
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Net cash used in financing activities ........ (3,060) (1,600)
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CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period .................... 5 (13)
At beginning of period ................................ 11 55
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At end of period ...................................... $ 16 $ 42
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SUPPLEMENTAL SCHEDULE OF NON-CASH
TRANSACTIONS:
INCREASE IN PAYABLE TO CHATTEM, INC. IN
CONNECTION WITH--
Purchase of trademarks and other product rights ....... $ 91,275 $ --
Provision for income taxes ............................ $ 248 $ 280
DIVIDENDS PER SHARE ...................................... $ 4 $ 4
</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 of the periods presented and
therefore incurred no interest expense.
5. A summary analysis of the activity between the Company and Chattem is as
follows:
Payable balance--November 30, 1998 ................. $ 262,330,000
Repayments .......................... (2,060,000)
Income tax provision, etc ........... 247,000
Purchase of trademarks and other
product rights .................... 91,275,000
-------------
Payable balance--February 28, 1999 ................. $ 351,792,000
-------------
-------------
The weighted average balance due Chattem during the three months ended
February 28, 1999, was $307,861,000.
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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 is currently in the process of replacing 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 expected to be completed on or before December
1, 1999 at a total cost to Chattem of approximately $2,000,000. Such costs
are being capitalized as incurred.
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 whom 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. ("Thompson") 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 (the "Credit Facilities"). The Company is
the guarantor of the new $165,000,000 credit facility, which consists of a
$115,000,000 term loan and a $50,000,000 working capital revolving loan of
which $17,500,000 was outstanding at February 28, 1999. The proceeds of the
new facility were used to fund the Thompson acquisition and related fees
and expenses and refinance existing bank indebtedness for which the Company
was guarantor.
8. The Credit Facilities were provided by a syndicate of commercial banks, led
by Bank of America as agent. 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 products 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.
Chattem may elect either the greater of (i) the prime rate or federal funds
rate plus .5% or (ii) a floating rate or Eurodollar interest rate option
applicable to the term and revolving line loans under the Credit
Facilities. The prime rate and Eurodollar interest rate options are based
on a base rate plus a rate margin that fluctuates on the basis of Chattem's
senior leverage ratio.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
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. The Company is the guarantor of the new $165,000,000 credit
facility, which consists of a $115,000,000 term loan and a $50,000,000
working capital revolving loan of which $17,500,000 was outstanding at
February 28, 1999. The proceeds of the new facility were used to fund the
Thompson acquisition and related fees and expenses and refinance existing
bank indebtedness for which the Company was guarantor.
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 $1,402,000, or 89.9%, for the three months ended
February 28, 1999, from the corresponding period of the prior year. The increase
was primarily due to the acquisition of the BAN brand and the Thompson products
in March and December 1998, respectively.
Amortization expense increased $1,455,000, or 189.0%, for the three months ended
February 28, 1999, from the corresponding period of the prior year. The increase
was largely due to the purchase of the BAN and Thompson products' trademarks in
March and December 1998, respectively.
8
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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 February 28, 1999.
9
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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: APRIL 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 statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 2,952
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,968
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 259,835
<CURRENT-LIABILITIES> 0
<BONDS> 351,792
0
0
<COMMON> 2
<OTHER-SE> 2,300
<TOTAL-LIABILITY-AND-EQUITY> 359,835
<SALES> 0
<TOTAL-REVENUES> 2,962
<CGS> 0
<TOTAL-COSTS> 2,225
<OTHER-EXPENSES> 8
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 729
<INCOME-TAX> 248
<INCOME-CONTINUING> 481
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 481
<EPS-PRIMARY> 1,924
<EPS-DILUTED> 1,924
</TABLE>
