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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 MAY 31, 2000
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 JULY 14, 2000, 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 May 31, 2000
and November 30, 1999................................................... 3
Statements of Income for the Three and Six Months
Ended May 31, 2000 and 1999............................................. 4
Statements of Cash Flows for the Six Months Ended
May 31, 2000 and 1999................................................... 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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2
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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>
May 31, November 30,
2000 1999
----------- ------------
ASSETS (Unaudited)
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Current Assets:
Cash and cash equivalents .............................. $ 14 $ 16
Royalties receivable from Chattem, Inc. ................ 3,631 3,320
-------- --------
Total current assets .............................. 3,645 3,336
Trademarks and Other Purchased Product Rights, Net ....... 346,171 350,762
-------- --------
TOTAL ASSETS .................................... $349,816 $354,098
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Liabilities:
Payable to Chattem, Inc. ............................... $336,567 $339,932
Deferred income taxes .................................. 12,550 12,550
-------- --------
Total liabilities ................................. 349,117 352,482
-------- --------
Shareholder's Equity:
Common shares, without par value, 500 shares authorized,
250 shares issued and outstanding .................... 2 2
Retained earnings ...................................... 697 1,614
-------- --------
Total shareholder's equity ........................ 699 1,616
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY ....................................... $349,816 $354,098
======== ========
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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 For the Six
Months Ended May 31, Months Ended May 31,
-------------------- --------------------
2000 1999 2000 1999
------- ------ ------- -----
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REVENUES:
Royalties from Chattem,Inc ... $3,631 $3,841 $6,502 $6,802
Investment income ............ -- -- 1 1
------ ------ ------ ------
Total revenues .......... 3,631 3,841 6,503 6,803
------ ------ ------ ------
EXPENSES AND LOSSES:
Amortization of trademarks
and other product rights .... 2,429 2,419 4,857 4,644
General and administrative ... -- -- 5 --
Loss on sale of investment ... -- -- -- 8
------ ------ ------ ------
Total expenses and losses 2,429 2,419 4,862 4,652
------ ------ ------ ------
INCOME BEFORE
PROVISION FOR INCOME
TAXES ........................ 1,202 1,422 1,641 2,151
PROVISION FOR INCOME
TAXES ......................... 409 483 558 731
------ ------ ------ ------
NET INCOME ..................... $ 793 $ 939 $1,083 $1,420
====== ====== ====== ======
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES - BASIC AND
DILUTED ....................... 250 250 250 250
====== ====== ====== ======
NET INCOME PER
COMMON SHARE -
BASIC AND DILUTED ............. $3,172 $3,756 $4,332 $5,680
====== ====== ====== ======
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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 CASH FLOWS
(Unaudited and in thousands)
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For the Six Months Ended
May 31,
------------------------
2000 1999
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OPERATING ACTIVITIES:
Net income ............................................... $ 1,083 $ 1,420
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization ......................................... 4,857 4,644
Income tax provision ................................. 558 731
Loss on sale of investment ........................... -- 8
Changes in operating assets and liabilities:
Increase in royalties receivable from Chattem, Inc. (311) (1,171)
-------- --------
Net cash provided by operating activities ...... 6,187 5,632
-------- --------
INVESTING ACTIVITIES:
Proceeds from sale of investment ......................... -- 387
-------- --------
Net cash provided by investing activities ...... -- 387
-------- --------
FINANCING ACTIVITIES:
Payments to Chattem, Inc. ................................ (4,189) (4,011)
Dividends paid to Chattem, Inc. .......................... (2,000) (2,000)
-------- --------
Net cash used in financing activities .......... (6,189) (6,011)
-------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period ....................... (2) 8
At beginning of period ................................... 16 11
-------- --------
At end of period ......................................... $ 14 $ 19
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH
TRANSACTIONS:
Increase in payable to Chattem, Inc. in connection with -
Purchase of trademarks and other product rights ........ $ 266 $ 91,275
Provision for income taxes ............................. $ 558 $ 731
DIVIDENDS PER SHARE ........................................ $ 8 $ 8
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The accompanying notes are an integral part of these financial statements.
5
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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, 1999
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, 1999. 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, Inc. is
as follows:
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Payable balance - November 30, 1999 .... $ 339,932,000
Repayments ..................... (4,189,000)
Income tax provision ........... 558,000
Purchase of trademarks and other
products rights ............ 266,000
-------------
Payable balance - May 31, 2000 ......... $ 336,567,000
=============
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The weighted average balance due Chattem, Inc. during the six months ended
May 31, 2000, was $338,175,000.
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6. The Company is a guarantor of Chattem's $75,000,000 of 12.75% Series B
Senior Subordinated Notes due 2004 and $275,000,000 of 8.875% Series B
Senior Subordinated Notes due 2008, which guarantees and notes were
registered under the Securities Act of 1933. Through May 31, 2000 Chattem
had repurchased approximately $42,506,000 of the 12.75% Notes. The
outstanding book values of the 12.75% and 8.875% Notes were $31,764,000 and
$275,249,000, respectively, at May 31, 2000.
Signal is also guarantor of Chattem's current bank credit facility which
consists of a term loan and a working capital revolving loan maturing at
various dates from December 31, 1999 to December 21, 2003. The outstanding
balances as of May 31, 2000 were $50,600,000 for the term loan and
$16,000,000 for the working capital revolving loan.
7. As previously disclosed in "Item 1. Business-Governmental Regulation" of
the Company's Annual Report on Form 10-K for the year ended November 30,
1999 (the "1999 Form 10-K"), in 1994 the Nonprescription Drug Manufacturers
Association (now the Consumer Healthcare Products Association ("CHPA")
initiated a large scale study in conjunction with the Yale University
School of Medicine to investigate a possible association, if any, of stroke
in women aged 18 to 49 using phenylpropanolamine ("PPA"), the active
ingredient in DEXATRIM, for weight loss (the "Yale Study"). PPA is also
used in other over-the-counter medications which are also part of the
study. In May 2000, the results of the Yale Study were filed with the Food
and Drug Administration ("FDA"). The investigators concluded that the
results of the study suggest that PPA increases the risk of hemorrhagic
stroke. The FDA has indicated that no immediate action is required at this
time and that it will likely convene an advisory panel to discuss the
results in the future. The CHPA has questioned the execution of the study
and disagreed with its conclusions.
Because of the FDA's position that no immediate action is required and the
issues raised by the CHPA concerning the execution of the study and its
conclusions, Chattem does not plan any immediate change to its formulation
of DEXATRIM or in manufacturing and selling DEXATRIM in its current form.
There continues to be the possibility that DEXATRIM will have to be
reformulated or discontinued due to FDA requirements or adverse consumer
perception. As a result, the DEXATRIM business would suffer, which would
adversely affect the business of Chattem and the Company. Chattem has
launched a complementary product, DEXATRIM Natural, an all-natural diet aid
that does not include PPA.
Chattem has been named as a defendant in a lawsuit brought by the Center
for Environment Health (CEH) contending that Chattem violated the
California Safe Drinking Water and Toxic Enforcement Act of 1998
(Proposition 65) by selling to California consumers without a warning
topical skin care products containing zinc oxide which in turn contains
lead. On December 30, 1999, Chattem was sent a notice of intent to sue
letter from CEH alleging that Chattem had violated Proposition 65
because zinc oxide allegedly also contains cadmium. The lawsuit contends
that the purported failure to comply with Proposition 65 requirements
also constitutes a violation of the California Business & Profession
Code Section 1700, ET SEQ. Violations of either Proposition 65 or
Business & Profession Code Section 1700, ET SEQ. render a defendant
liable for civil penalties of up to $2,500 per day per violation.
Chattem has also been named as a defendant in a lawsuit filed in San
Francisco Superior Court on December 29, 1999, JOHNSON ET AL. V.
BRISTOL-MYERS SQUIBB CO., ET AL., Case No. 308872. This is a putative
class action brought by two named plaintiffs on behalf of the general
public in California, against the same entities that are defendants in
the CEH lawsuit. As with the CEH lawsuit, the Johnson lawsuit alleges
that Chattem violated Proposition 65 by selling to California consumers
without a warning topical skin care product containing zinc oxide which
in turn contains lead. The lawsuit does not assert claims directly under
Proposition 65, but asserts that the alleged failure to comply with
Proposition 65 gives rise to claims under California's Business and
Professions Code Sections 17200 ET SEQ., and 17500 ET SEQ., and the
Civil Code Section 1750 ET SEQ. The lawsuit seeks injunctive and
equitable relief, restitution, the disgorgement of allegedly wrongfully
obtained revenues, and damages.
Chattem intends to vigorously defend these claims. These actions have
only recently been filed, however, and it is not possible at this time
to determine the outcome of these matters or the effect of their
resolution on Chattem's financial position or operating results.
Management believes that Chattem's defenses have merit; however, there
can be no assurance that Chattem will be successful in its defense or
that these lawsuits will not have a material adverse effect on Chattem's
operations for some period or on Chattem's financial position.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED MAY 31, 2000 AND 1999
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 decreased $300,000, or 4.4%, in the six months ended May 31,
2000, from the corresponding period of the prior year. The decrease was due to
decline in the net sales of the brands subject to royalty payments.
Amortization expense increased $213,000, or 4.6%, in the six months ended May
31, 2000, from the corresponding period of the prior year. The increase was
largely due to the purchase of the Thompson Medical brands' trademarks in
December 1998, and the additional amounts paid in fiscal 1999 to the former
owners of the SUNSOURCE product line for cancellation of their rights to receive
any future payments under the purchase agreement for these brands.
8
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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 May 31, 2000.
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: July 14, 2000 /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
