<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, 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 OCTOBER 13, 2000, 250 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT PAR
VALUE, WERE OUTSTANDING.
<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, 2000
and November 30, 1999................................................................ 3
Statements of Income for the Three and Nine Months
Ended August 31, 2000 and 1999....................................................... 4
Statements of Cash Flows for the Nine Months Ended
August 31, 2000 and 1999............................................................. 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 1. Legal Proceedings............................................................... 10
Item 6. Exhibits and Reports on Form 8-K................................................ 10
SIGNATURES................................................................................. 11
EXHIBIT 27 - Financial Data Schedule
</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,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS (Unaudited)
------
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 11 $ 16
Royalties receivable from Chattem, Inc.................................... 3,353 3,320
---------- -----------
Total current assets................................................. 3,364 3,336
TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS, NET.......................... 344,083 350,762
---------- -----------
TOTAL ASSETS....................................................... $ 347,447 $ 354,098
========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
LIABILITIES:
Payable to Chattem, Inc................................................... $ 334,591 $ 339,932
Deferred income taxes..................................................... 12,550 12,550
---------- -----------
Total liabilities.................................................... 347,141 352,482
---------- -----------
SHAREHOLDER'S EQUITY:
Common shares, without par value, 500 shares authorized,
250 shares issued and outstanding ...................................... 2 2
Retained earnings......................................................... 304 1,614
---------- -----------
Total shareholder's equity........................................... 306 1,616
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY.......................................................... $ 347,447 $ 354,098
========== ===========
</TABLE>
The accompanying notes are an integral part of these 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,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
REVENUES:
Royalties from Chattem,Inc............ $ 3,354 $ 3,620 $ 9,856 $ 10,422
Investment income .................... 1 2 2 3
------------- ------------ ------------ -----------
Total revenues................... 3,355 3,622 9,858 10,425
------------- ------------ ------------ -----------
EXPENSES AND LOSSES:
Amortization of trademarks
and other product rights ........... 2,431 2,419 7,288 7,063
General and administrative........... 5 -- 10 --
Loss on sale of investment........... -- -- -- 8
------------- ------------ ------------ -----------
Total expenses and losses....... 2,436 2,419 7,298 7,071
------------- ------------ ------------ -----------
INCOME BEFORE PROVISION FOR INCOME
TAXES ............................... 919 1,203 2,560 3,354
PROVISION FOR INCOME TAXES............. 312 409 870 1,140
------------- ------------ ------------ -----------
NET INCOME ............................ $ 607 $ 794 $ 1,690 $ 2,214
============= ============ ============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES - BASIC AND DILUTED............ 250 250 250 250
============= ============ ============ ===========
NET INCOME PER COMMON SHARE - BASIC
AND DILUTED........................... $ 2,428 $ 3,176 $ 6,760 $ 8,856
============= ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these 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,
-------------------------------
2000 1999
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................ $ 1,690 $ 2,214
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization...................................................... 7,288 7,063
Income tax provision.............................................. 870 1,140
Loss on sale of investment........................................ -- 8
Changes in operating assets and liabilities:
Increase in royalties receivable from Chattem, Inc............. (33) (938)
---------- -----------
Net cash provided by operating activities................... 9,815 9,487
---------- -----------
INVESTING ACTIVITIES:
Proceeds from sale of investment...................................... -- 387
---------- -----------
Net cash provided by investing activities................... -- 387
---------- -----------
FINANCING ACTIVITIES:
Payments to Chattem, Inc.............................................. (6,820) (6,860)
Dividends paid to Chattem, Inc........................................ (3,000) (3,000)
---------- -----------
Net cash used in financing activities....................... (9,820) (9,860)
---------- -----------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period.................................... (5) 14
At beginning of period................................................ 16 11
---------- -----------
At end of period...................................................... $ 11 $ 25
========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
TRANSACTIONS:
Increase in payable to Chattem, Inc. in connection with -
Purchase of trademarks and other product rights..................... $ 609 $ 91,940
Provision for income taxes.......................................... $ 870 $ 1,140
DIVIDENDS PER SHARE..................................................... $ 12 $ 12
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
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 is as
follows:
<TABLE>
<S> <C>
Payable balance - November 30, 1999 ..................... $ 339,932,000
Repayments ...................................... (6,820,000)
Income tax provision ............................ 870,000
Purchase of trademarks and other
products rights.............................. 609,000
-------------
Payable balance - August 31, 2000........................ $ 334,591,000
=============
</TABLE>
The weighted average balance due Chattem during the nine months ended August
31, 2000 was $337,279,000.
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 August 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
$31,788,000 and $275,241,000, respectively, at August 31, 2000.
6
<PAGE>
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 through December 21, 2003. The outstanding balances as of
August 31, 2000 were $47,600,000 for the term loan and $4,500,000 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 a FDA advisory panel is scheduled to meet on October 19, 2000 to
discuss the results of this study. The CHPA has questioned the execution of
the study and disagreed with its conclusions.
Chattem continues to review alternative formulae for DEXATRIM that would
not contain PPA. 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. Approximately 30% of DEXATRIM's sales are
derived from DEXATRIM Natural.
Chattem has recently received correspondence from the FDA that concludes
that certain data submitted by Thompson Medical Company, Inc., a
previous owner of certain of Chattem's over-the-counter topical
analgesic drug products, was inadequate to support the effectiveness as
a topical analgesic of 10% trolamine salicylate, the active ingredient
in SPORTSCREME and ASPERCREME. The correspondence, which is not a formal
ruling, states that Chattem has 30 days to indicate whether it intends
to conduct any additional studies. Chattem intends to respond to the FDA
during the 30 day period. It is unclear when the FDA might make a final
determination about the regulatory status of OTC topical analgesics that
contain 10% trolamine salicylate or whether Chattem will be given a
sufficient transition period to comply with any new requirements without
affecting products currently on the market. If the FDA determines that
Chattem must submit a new drug application, including clinical data, to
show that the products with trolamine salicylate are for their intended
use, Chattem will be required to expend significant resources to develop
clinical data. Alternatively, if Chattem decides to reformulate the
products with a different active ingredient that the FDA has already
determined is safe and effective, Chattem would likely be able to
market the products without submitting additional clinical data
or filing a new drug application, but sales of the products in their
current forms could be adversely affected. Chattem cannot predict with
certainty the timing or outcome of any FDA decision, although an FDA
decision on the issue and subsequent action taken by Chattem, if
necessary, is not expected to occur until at least fiscal 2001.
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.
7
<PAGE>
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. 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.
8. On September 15, 2000 Chattem completed the sale of its BAN product line to
The Andrew Jergens Company, a wholly owned subsidiary of Kao Corporation.
Under the terms of the contract, Chattem received $160,000,000 cash at
closing, plus the right to receive up to an additional $6,500,000 in future
payments based upon levels of sales of BAN in 2001 and 2002. Of the
proceeds from the sale, $52,194,000 was used to retire all of the
outstanding balances of the revolver and the term loans and accrued
interest thereon, with the balance of the net proceeds being retained by
Chattem for future product acquisitions or the retirement of senior
subordinated debt. A loss, net of income tax, of approximately $2,600,000
is expected to be recognized on the sale.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED AUGUST 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 $566,000, or 5.4%, in the nine months ended August 31,
2000, from the corresponding period of the prior year. The decrease was due to a
decline in the net sales of the brands subject to royalty payments.
Amortization expense increased $225,000, or 3.2%, in the nine months ended
August 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.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 of the Notes to Financial Statements included in Part I,
Item 1 of this Report.
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, 2000.
10
<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 16, 2000 /s/ A. Alexander Taylor II
---------------------------------------
A. Alexander Taylor II
President and Director
(Principal Executive Officer)
/s/ Lisa C. Wilder
---------------------------------------
Lisa C. Wilder
Assistant Corporate Controller
(Acting Chief Accounting Officer)
11
