10-K 1 a2039698z10-k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 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, SUITE 1300 WILMINGTON, DELAWARE 19890 TELEPHONE: 302-656-3950 THIS REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1)(a) AND (b) OF FORM 10-K 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 FEBRUARY 28, 2001, 250 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT PAR VALUE, WERE OUTSTANDING. PART I ITEM 1. BUSINESS GENERAL Signal Investment & Management Co. ("Signal" or "Company") was incorporated in 1986. The Company is a wholly-owned subsidiary of Chattem, Inc. ("Chattem") and is included in Chattem's consolidated financial statements and tax returns. The Company was formed for the sole purpose of holding certain of Chattem's trademarks and other purchased product rights and certain investments. The Company owns or licenses substantially all of the trademarks and intangibles associated with Chattem's consumer products business and licenses Chattem's use thereof. In exchange for this license, Chattem pays to the Company a royalty on net sales of licensed products. The Company has no other active operations. The Company is a guarantor of Chattem's $75,000,000 of 12.75% Senior Subordinated Notes due 2004 and $275,000,000 of 8.875% Senior Subordinated Notes due 2008, which guarantees and notes were registered under the Securities Act of 1933. During 1995, 1998, 1999 and 2000 Chattem repurchased in the aggregate approximately $45,855,000 of the 12.75% notes. On December 11, 2000, Chattem initiated a consent solicitation and tender offer for certain of its outstanding senior subordinated notes. On January 17, 2001 Chattem announced the successful completion of the consent solicitation and tender offer pursuant to which it retired $70,462,000 principal amount of its 8.875% Senior Subordinated Notes due 2008 and $7,397,000 principal amount of its 12.75% Senior Subordinated Notes due 2004. Total consideration paid for the consent solicitation and tender offer was $64,737,000, which was provided by the proceeds of the Ban-Registered Trademark- sale. TRADEMARKS The Company's trademarks are of material importance to its business and are its most important asset. In fiscal year 2000, substantially all of Chattem's sales were from products bearing proprietary brand names, including GOLD BOND, DEXATRIM, FLEXALL, ICY HOT, ASPERCREME, PAMPRIN, GARLIQUE, PHISODERM and BULLFROG. Accordingly, the Company's future success may depend in part upon the goodwill associated with the brand names. The Company owns or licenses substantially all of the trademarks associated with Chattem's domestic consumer products business. The Company's significant domestic trademarks have been registered on the principal register of the United States Patent and Trademark Office. Federally registered trademarks have a perpetual life as long as they are renewed in a timely manner and used properly as trademarks, subject to the right of third parties to seek cancellation of the marks. GOVERNMENT REGULATION 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 certain of the DEXATRIM products (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 FDA. The investigators concluded that the results of the Yale Study suggest that PPA increases the risk of hemorrhagic stroke. The FDA indicated at that time that no immediate action was required and scheduled an FDA advisory panel to meet in October 2000 to discuss the results of this study. The CHPA questioned the execution of the Yale Study and disagreed with its conclusions. Ban-Registered Trademark- is the registered trademark of Kao Corporation. 2 On October 19, 2000, a Nonprescription Drugs Advisory Committee ("NDAC"), commissioned by the FDA to review the safety of PPA determined that there is an association between PPA and hemorrhagic stroke and recommended that PPA not be considered generally recognized as safe for OTC use as a nasal decongestant or for weight control. In response to a request from the FDA to voluntarily cease marketing DEXATRIM with PPA, Chattem announced on November 7, 2000 its decision to immediately cease shipping DEXATRIM with PPA and to accept product returns from any retailers who decide to discontinue marketing DEXATRIM with PPA. To date, the FDA has not issued any final determination concerning PPA or products containing PPA. The NDAC'S determination and the FDA's request to voluntarily cease marketing DEXATRIM with PPA may increase the likelihood that claims relating to the existence of PPA in DEXATRIM will be filed against Chattem. While Chattem maintains product liability insurance through third party insurers that it believes to be adequate, there can be no assurance that such coverage will be sufficient to satisfy such claims. Certain states and localities have enacted, or are considering enacting, restrictions on the sale of products that contain PPA, synthetic ephedrine or naturally-occurring sources of ephedrine. These restrictions include the prohibition of over-the-counter (OTC) sales, required warnings or labeling statements, recordkeeping and reporting requirements, the prohibition of sales to minors, per transaction limits on the quantity of product that may be purchased, and limitations on advertising and promotion. In such states or localities these restrictions could adversely affect the sale of DEXATRIM Natural, which contains naturally-occurring sources of ephedrine. Failure to comply with these restrictions could also lead to regulatory enforcement action, including the seizure of violative products, product recalls, and civil or criminal fines or other penalties. Chattem was notified in October, 2000 that the FDA denied the citizens petition submitted by Thompson Medical Company, Inc., previous owner of SPORTSCREME and ASPERCREME, seeking a determination that 10% trolamine salicylate was clinically proven to be an effective active ingredient in external analgesic OTC drug products, and thus should be included in the FDA's yet-to-be finalized monograph for external analgesics. In the same correspondence the FDA recommended that Chattem meet with the FDA to agree on an acceptable clinical study protocol to determine the efficacy of 10% trolamine salicylate as an active ingredient in OTC external analgesic drug products. Chattem cannot predict the timing or outcome of any FDA decision on the proposed protocol, although an agreement is not expected to occur until at least the middle of fiscal 2001. If the study protocol is approved, Chattem expects that it will take one to two years to produce the clinical data for FDA review. The FDA could finalize the OTC external analgesic monograph before the protocol and clinical data results are finalized, which would place 10% trolamine salicylate in non-monograph status. Chattem is working to develop alternate formulas for SPORTSCREME and ASPERCREME in the event that clinical data does not support the efficacy of trolamine salicylate. EMPLOYEES The Company has no employees. ITEM 2. PROPERTIES None. ITEM 3. LEGAL PROCEEDINGS 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 3 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. The plaintiffs in the two separate actions have been granted leave by the court to file separate amended complaints that would include a claim based upon the allegation that zinc oxide allegedly also contains cadmium. The plaintiffs have not yet done so, as they are awaiting a ruling by the court at their request to file a consolidated amended complaint. Chattem intends to vigorously defend these claims. At this stage of the proceedings, it is not possible 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 will 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 results of operations for some period or on Chattem's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not required pursuant to reduced disclosure conditions set forth in General Instruction I(1) (a) and (b) of Form 10-K. 4 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS None. ITEM 6. SELECTED FINANCIAL DATA Not required pursuant to reduced disclosure conditions set forth in General Instruction I(1) (a) and (b) of Form 10-K. 5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL 2000 COMPARED TO FISCAL 1999 The following narrative represents management's comparative analysis of the results of the Company's operations for the fiscal year ended November 30, 2000 to the fiscal year ended November 30, 1999 pursuant to General Instruction I (1) (a) and (b) of Form 10-K: In exchange for the licensed use of the Company's trademarks, the Company receives royalties from Chattem of 5% of net sales of certain defined domestic consumer products. Royalty income decreased by $1,692,000, or 12.3%, in fiscal 2000 from fiscal 1999 primarily due to decreased sales of the products subject to the royalty, especially Ban which was sold in September 2000. The Company recognized in 2000 a loss of $5,018,000 on the sale of the Ban product line and the pending divestiture of NORWICH Aspirin. Amortization expense decreased by $622,000, or 6.6%, in fiscal 2000 from fiscal 1999 primarily due to the sale and pending sale of trademarks of Ban and NORWICH Aspirin, respectively. FISCAL 1999 COMPARED TO FISCAL 1998 The following narrative represents management's comparative analysis of the results of the Company's operations for the fiscal year ended November 30, 1999 to the fiscal year ended November 30, 1998 pursuant to General Instruction I (1) (a) and (b) of Form 10-K: In exchange for the licensed use of the Company's trademarks, the Company receives royalties from Chattem of 5% of net sales of certain defined domestic consumer products. Royalty income increased by $3,852,000, or 38.9%, in fiscal 1999 from fiscal 1998 primarily due to a full year of sales for Ban, which was purchased in March 1998, and eleven months of sales of the products acquired from Thompson Medical Company, Inc. ("Thompson Medical brands") in December 1998. The Company recognized in 1998 a gain of $9,548,000 on the sale of the Cornsilk-Registered Trademark- product line. Amortization expense increased by $3,628,000, or 61.9%, in fiscal 1999 from fiscal 1998 primarily due to the acquisition of the trademarks of Ban and the Thompson Medical brands in March and December 1998, respectively. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Page 7 for the index to the Company's financial statements. ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE None. Cornsilk-Registered Trademark- is the registered trademark of Del Laboratories, Inc. 6 SIGNAL INVESTMENT & MANAGEMENT CO. INDEX TO FINANCIAL STATEMENTS

7 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Signal Investment & Management Co.: We have audited the accompanying balance sheets of Signal Investment & Management Co. (a Delaware corporation and wholly owned subsidiary of Chattem, Inc.) as of November 30, 2000 and 1999, and the related statements of income, shareholder's equity (deficit) and cash flows for each of the three years in the period ended November 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Signal Investment & Management Co. as of November 30, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2000 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Chattanooga, Tennessee January 26, 2001 8 SIGNAL INVESTMENT & MANAGEMENT CO. BALANCE SHEETS NOVEMBER 30, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS

The accompanying notes are an integral part of these financial statements. 9 SIGNAL INVESTMENT & MANAGEMENT CO. STATEMENTS OF INCOME FOR THE THREE YEARS ENDED NOVEMBER 30, 2000 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The accompanying notes are an integral part of these financial statements. 10 SIGNAL INVESTMENT & MANAGEMENT CO. STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT) FOR THE THREE YEARS ENDED NOVEMBER 30, 2000 (IN THOUSANDS)

The accompanying notes are an integral part of these financial statements. 11 SIGNAL INVESTMENT & MANAGEMENT CO. STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED NOVEMBER 30, 2000 (IN THOUSANDS)

The accompanying notes are an integral part of these financial statements. 12 SIGNAL INVESTMENT & MANAGEMENT CO. NOTES TO FINANCIAL STATEMENTS (ALL MONETARY AMOUNTS ARE EXPRESSED IN THOUSANDS OF DOLLARS UNLESS CONTRARILY EVIDENT) 1. GENERAL Signal Investment & Management Co. ("Signal" or the "Company") is a wholly-owned subsidiary of Chattem, Inc. ("Chattem") and is included in Chattem's consolidated financial statements and tax returns. Signal was formed for the sole purpose of holding certain of Chattem's trademarks and other purchased product rights and certain investments. The Company owns or licenses substantially all of the trademarks and intangibles associated with Chattem's domestic consumer products business and licenses Chattem's use thereof. Signal has no other active operations. Signal is a guarantor of Chattem's $75,000 of 12.75% Senior Subordinated Notes due 2004 and $275,000 of 8.875% Senior Subordinated Notes due 2008, which guarantees and notes were registered under the Securities Act of 1933. During 1995, 1998, 1999 and 2000 Chattem repurchased in the aggregate approximately $45,855 of the 12.75% Notes. On December 11, 2000, Chattem initiated a consent solicitation and tender offer for certain of its outstanding senior subordinated notes. On January 17, 2001 Chattem announced the successful completion of the consent solicitation and tender offer pursuant to which it retired $70,462 principal amount of its 8.875% Senior Subordinated Notes due 2008 and $7,397 principal amount of its 12.75% Senior Subordinated Notes due 2004. Total consideration paid for the consent solicitation and tender offer was $64,737, which was provided by the proceeds of the Ban sale. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS The costs of acquired trademarks and other purchased product rights are capitalized and amortized over periods ranging from 20 to 40 years. At November 30, 2000 the weighted average life of patents, trademarks and other purchased product rights was 34.8 years. Total accumulated amortization of these assets at November 30, 2000 and 1999 was $21,393 and $23,032, respectively. Amortization expense for 2000, 1999 and 1998 was $8,865, $9,487 and $5,859, respectively. INVESTMENTS In fiscal 1998, the Company purchased $395 of available-for-sale equity securities, which were sold in December 1998 at a loss of $8. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 13 CASH AND CASH EQUIVALENTS The Company considers all short-term deposits and investments with original maturities of three months or less to be cash equivalents. 3. INCOME TAXES The provision for (benefit from) income taxes includes the following components for the years ended November 30:

The temporary difference which gives rise to the deferred tax liability at November 30, 2000 and 1999, consists primarily of the differences between carrying values of trademarks and other purchased product rights for income tax and financial statement reporting purposes. 4. ACQUISITION AND SALE OF TRADEMARKS On September 15, 2000 Chattem and the Company completed the sale of the 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 cash at closing, plus the right to receive up to an additional $6,500 in future payments based upon sales levels of Ban in 2001 and 2002. The Company sold the trademarks, while Chattem sold the inventory and other related assets. Concurrent with the closing of the sale of Ban Chattem used $52,194 of the net proceeds to retire all of the outstanding balances of its revolving line of credit and term loans and accrued interest thereon, with the balance of the net proceeds being retained by Chattem. The Company was the guarantor of the revolving line of credit and term loans of Chattem. On March 24, 1998, Chattem and the Company acquired the Ban line of antiperspirant and deodorant products from Bristol-Myers Squibb Company for a purchase price of approximately $165,000 and assumed liabilities of $8,000. The purchase price of $173,000 was allocated $8,200 to inventory (purchased by Chattem) and $164,800 to trademarks and other product rights (acquired by the Company) which were assigned a useful life of 40 years. On December 21, 1998 Chattem and the Company acquired the DEXATRIM, SPORTSCREME, ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands from Thompson Medical Company, Inc. for $95,000. The purchase price consisted of $90,000 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 purchase price of $95,000 was allocated $3,493 to inventory (purchased by Chattem) and $91,507 to the trademarks and other product rights (acquired by the Company) which were assigned a useful life of 40 years. On May 12, 1998, Chattem and the Company sold the Cornsilk oil control makeup brand 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 $9,548 was recognized. Chattem sold the inventory and other related assets but will continue to operate the Cornsilk business in the United Kingdom pursuant to a licensing agreement. Chattem used the net proceeds from the sale to reduce bank indebtedness. 14 5. RELATED PARTY TRANSACTIONS In exchange for the licensed use of the Company's trademarks, the Company receives royalties from Chattem of 5% of net sales of certain defined domestic consumer products. Payable to Chattem represents net advances received from Chattem used to fund the acquisitions of trademarks as discussed in Note 4. Such advances are noninterest bearing and are not expected to be paid prior to November 30, 2001. Certain general and administrative expenses of the Company are occasionally paid by Chattem on behalf of the Company. Such amounts are not significant. A summary analysis of the activity between the Company and Chattem for the two years ended November 30, 2000 is as follows:

The weighted average balance due Chattem during the year ended November 30, 2000 was $325,717. 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Not required pursuant to reduced disclosure conditions set forth in General Instruction I(1) (a) and (b) of Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Not required pursuant to reduced disclosure conditions set forth in General Instruction I(1) (a) and (b) of Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Not required pursuant to reduced disclosure conditions set forth in General Instruction I(1) (a) and (b) of Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not required pursuant to reduced disclosure conditions set forth in General Instruction I(1) (a) and (b) of Form 10-K. 16 PART IV ITEM 14. EXHIBITS AND REPORT ON FORM 8-K (a) 2. The following documents are filed or incorporated by reference as exhibits to this report:

18 REFERENCES: Previously filed as an exhibit to and incorporated by reference from: (1) Form S-2 Registration Statement (No.33-80770) of Chattem, Inc. (2) Form 10-K for Chattem, Inc. for the year ended November 30, 1996. (3) Form 10-K for Signal Investment & Management Co. for the year ended November 30, 1996. (4) Form 8-K for Chattem, Inc. dated June 26, 1997. (5) Form 8-K for Chattem, Inc. dated March 24, 1998. (6) Form 8-K for Chattem, Inc. dated May 12, 1998. (7) Form S-4/A Registration Statement (No. 333-53627) of Chattem, Inc., effective June 4, 1998. (8) Form 8-K for Chattem, Inc. dated December 21, 1998. (9) Form 8-K for Chattem, Inc. dated September 15, 2000. (10) Form 10-K for Chattem, Inc. for the year ended November 30, 2000. (b) No reports on Form 8-K were filed with the Securities and Exchange Commission during the three months ended November 30, 2000. 19 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: February 28, 2001 /s/ A. Alexander Taylor II ----------------------------------- A. Alexander Taylor II President (principal executive officer) /s/ Christopher S. Keller ----------------------------------- Vice President, Treasurer and Director (principal financial officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated: Dated: February 28, 2001 /s/ A. Alexander Taylor II ----------------------------------- A. Alexander Taylor II, President and Director (principal executive officer) Dated: February 28, 2001 /s/ Christopher S. Keller ----------------------------------- Vice President, Treasurer and Director (principal financial officer) Dated: February 28, 2001 /s/ Margaret Pulgini ----------------------------------- Margaret Pulgini Assistant Vice President and Director Dated: February 28, 2001 /s/ Hugh F. Sharber ----------------------------------- Hugh F. Sharber Secretary and Director 20 SIGNAL INVESTMENT AND MANAGEMENT CO. EXHIBIT INDEX

SIGNAL INVESTMENT & MANAGEMENT CO 10-K