<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A NO. 2
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) FOR THE
SECURITIES EXCHANGE ACT OF 1934
for the Fiscal Year Ended December 31, 1997
Commission File number: 0-22098
INSILCO CORPORATION
(Exact name for Registrant as specified in its charter)
DELAWARE NO. 06-0635844
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
425 METRO PLACE NORTH, FIFTH FLOOR
DUBLIN, OHIO 43017
(Address of principal executive offices,
including zip code)
(614) 792-0468
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) for the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to the filing requirements for at least the past 90 days. Yes [x/]
No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x/]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates for the Registrant was approximately $98,046,524 on July 1,
1998.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes [x/] No [ ]
There were 4,145,372 shares of the Registrant's Common Stock outstanding
on July 1, 1998.
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
Part I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 18
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure 28
Part III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and Management 40
Item 13. Certain Relationships and Related Transactions 41
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 43
Signatures 50
Consolidated Financial Statements F-1
</TABLE>
<PAGE> 3
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-K, including without
limitation the statements under "Business", "Properties" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are
forward-looking statements. Although the Company (as defined below) believes
that the expectations reflected in the forward-looking statements contained
herein are reasonable, no assurance can be given that such expectations will
prove to have been correct. Certain important factors that could cause actual
results to differ materially from expectations ("Cautionary Statements")
include, but are not limited to the following: delays in new product
introductions, lack of market acceptance of new products, changes in demand for
the Company's products, changes in market trends, operating hazards, general
competitive pressures from existing and new competitors, effects of governmental
regulations, changes in interest rates, and adverse economic conditions which
could affect the amount of cash available for debt servicing and capital
investments. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
PART I
ITEM 1. BUSINESS
----------------
THE COMPANY
Insilco Corporation, a Delaware corporation originally incorporated in New
Jersey in 1898 (collectively with its subsidiaries, the "Company," unless the
context indicates otherwise), directly and through its subsidiaries, is a
diversified manufacturer of automotive components and telecommunications and
electronics components and a publisher of specialty publishing products, chiefly
student yearbooks. The Company with three reporting segments (the Automotive
Components Group, the Technologies Group, and Specialty Publishing) conducts its
business in eight separate operating units, including both divisions and
subsidiaries. The Company's Specialty Publishing segment, formerly the Company's
Office Products/Specialty Publishing segment, was renamed following the
divestiture of the Rolodex Business (as defined below) in March 1997. The
Company's principal executive offices are located at 425 Metro Place North,
Fifth Floor, Dublin, Ohio 43017, telephone (614) 792-0468.
GENERAL DEVELOPMENT OF THE BUSINESS
The Company has undergone significant change and restructuring in the past five
years. A review of the most significant developments follows, in chronological
order:
- On April 1, 1993 (the "Reorganization Date"), the Company emerged from
Chapter 11 bankruptcy proceedings (the "Chapter 11 cases") pursuant to
an Amended and Restated Plan of Reorganization dated November 23, 1992
(the "Plan of Reorganization"). The Plan of Reorganization resulted in
a reduction in the Company's liabilities totaling $532.3 million, an
extraordinary gain realized in 1993 of $448.3 million attributable to
the discharge of such liabilities, and a change in control of the
Company.
The Plan of Reorganization among other matters provided for: (i) the
issuance of 9,230,839 shares of the Company's common stock, par value
$.001 per share (the "Common Stock"), in exchange
-3-
<PAGE> 4
for allowed unsecured claims; (ii) deferred payment of certain
pre-petition claims, including various state and Federal taxes and
trade debt; and (iii) provisions to issue additional stock to other
unsecured creditors over time at the pre-determined rate of 18 shares
of stock per $1,000 of allowed claim as those claims are determined.
Settlements were reached in 1997 on all remaining claims pending in the
Bankruptcy Court and the Bankruptcy Case was closed on June 12, 1997.
- In 1994, the Company sold its paint products segment for $50.8 million,
and entered into a long-term $285 million credit facility that allowed
it to retire the Company's outstanding 10 3/8% Senior Secured
Guarantied Notes due July 1, 1997 and 9 1/2% Notes due 1997.
- In 1996, the Company acquired, for an aggregate purchase price of
approximately $37 million, an aftermarket automotive, heavy truck and
industrial radiator manufacturer, Great Lake, and the automotive
aluminum tube business of Helmut Lingemann GmbH & Co.
- The Company divested the Office Products Business of the Company's
Office Products/Specialty Publishing Group in three separate
transactions during 1996 and the first quarter of 1997. The 1996
transactions included the divestitures of the Company's computer
accessories business, Curtis Manufacturing Co., Inc. ("Curtis") and
electronic organizer business ("Rolodex Electronics") for an aggregate
$21.8 million. On March 5, 1997, the remainder of the Office Products
Business, which consisted of Rolodex office products (the "Rolodex
Business"), was sold for net cash proceeds of approximately $112
million. As a result of the sale of the Rolodex Business, the Office
Products Business segment is accounted for as a discontinued operation
(See Item 7 "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Discontinued Operations.")
- Following the sale of the Rolodex Business, the Company refinanced its
existing debt and entered into an Amended and Restated Credit Agreement
as of July 3, 1997 (the "Bank Credit Agreement") to secure a $200
million revolving credit facility.
- On July 10, 1997, the Company, using the proceeds from the sale of the
Rolodex Business purchased an aggregate of 2,857,142 shares of its
common stock and commenced a tender offer (the "Tender Offer"),
pursuant to which it purchased an additional 2,857,142 shares. The
purchase of shares tendered in the Tender Offer was paid for from the
proceeds received on the issuance of the $150 million aggregate
principal amount of 10.25% Senior Subordinated Notes due 2007 (the
"Notes").
[This space intentionally left blank]
-4-
<PAGE> 5
BUSINESS
For additional business segment information, See Note 18 to the Consolidated
Financial Statements. The percentages of the Company's total sales by segment in
each of its last three fiscal years were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Automotive Components Group:
Tubing and heat transfer 31.1 % 29.9 % 27.3 %
Transmissions and other 12.6 12.7 12.8
---- ---- ----
Subtotal 43.7 42.6 40.1
---- ---- ----
Technologies Group 37.7 37.3 38.0
---- ---- ----
Specialty Publishing 18.6 20.1 21.9
---- ---- ----
Total 100.0 % 100.0 % 100.0 %
==== ==== ====
</TABLE>
AUTOMOTIVE COMPONENTS GROUP
The Automotive Components Group is made up of three operating units, Thermal
Components Group ("Thermal"), Romac Metals ("Romac") and a wholly owned
subsidiary, Steel Parts Corporation ("Steel Parts"). The businesses in this
segment manufacture automotive heat exchangers and related tubing, stainless
steel tubing, and automatic transmission and suspension components,
respectively.
AUTOMOTIVE SALES BY MARKET SEGMENT
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Automotive OEM 45.9 % 45.9 % 43.0 %
OEM Other 27.2 22.6 21.9
Automotive Aftermarket 16.2 18.8 19.4
Other 10.7 12.7 15.7
---- ---- ----
Total 100.0 % 100.0 % 100.0 %
==== ==== ====
</TABLE>
TUBING AND HEAT TRANSFER. Thermal is a vertically integrated manufacturer of
heat exchangers for the automotive, specialty vehicle, truck, heavy equipment
and off-road vehicle and industrial equipment markets. Its products include thin
wall aluminum and brass tubes used principally in heat transfer applications,
radiators, air conditioning condensers, oil coolers and heaters and production
machinery and equipment used in the manufacture and assembly of automotive heat
exchangers.
Thermal uses a direct sales force and independent sales representatives to
market its products. Thermal sells to both original equipment manufacturers
("OEMs") and aftermarket customers.
Thermalex, a joint venture owned equally by the Company (through a holding
company subsidiary), and Mitsubishi Aluminum Co., Ltd., manufactures multiport
aluminum extrusions used principally in automotive air conditioning condensers.
-5-
<PAGE> 6
The markets for automobile heat-exchanger products are highly competitive and
have many participants, particularly automobile OEMs that produce for their own
use and several large independent manufacturers. Thermal supplies tubes and,
through Thermalex, extrusions to domestic automobile OEMs and independent
manufacturers. Thermal is an established supplier of welded radiator tubes to
manufacturers and repair shops in the heat-exchanger aftermarket.
Thermal has manufacturing facilities in Alabama, Michigan, New York, South
Carolina, Wisconsin and Germany. At December 31, 1997, Thermal (excluding
Thermalex) had 936 employees.
STAINLESS STEEL TUBING. Romac manufactures stainless steel tubing for a variety
of marine, architectural, automotive and decorative applications at its facility
in North Carolina. Substantially all of its sales are domestic.
The markets for these products are highly competitive. Competition is based
principally on price and, to a lesser extent, on the shapes and finishes that
can be achieved with the tubing.
At December 31, 1997, Romac had 129 employees.
TRANSMISSION COMPONENTS. Steel Parts manufactures automotive parts consisting of
close-tolerance precision metal stampings at its facility in Indiana. Its
products include clutch plates for automatic transmissions, suspension parts for
vibration-reducing assemblies and engine mounts.
Substantially all Steel Parts' sales are made to the domestic automobile
industry, either directly or indirectly through other independent automotive
parts suppliers. As a result, the demand for Steel Parts' products historically
has been heavily dependent on the level of new car production by the domestic
automobile industry. Steel Parts has also seen its production content per
automobile increase in recent years as automobile manufacturers have moved from
three-speed to four- and five-speed automatic transmissions. The strong domestic
automotive market resulted in Steel Parts operating at or near capacity for most
of 1997 and 1996.
The market for original equipment automobile parts is highly competitive and has
many participants, principally the automobile manufacturers themselves because
of their ability to make their own parts. Approximately 70%, 70% and 67% of
Steel Parts' sales were to one of the "Big 3" domestic automotive manufacturers
in 1997, 1996 and 1995, respectively.
At December 31, 1997, Steel Parts had 383 employees.
TECHNOLOGIES GROUP
The Technologies Group consists of four operating units, Stewart Connector,
Signal Transformer, Stewart Stamping and Escod Industries, which manufacture
telecommunication and electrical component products for the computer networking,
telephone digital switching, premises wiring, main frame computer, automotive
and medical equipment markets.
SPECIALIZED CONNECTOR SYSTEMS. Stewart Connector designs and manufactures
specialized high speed data connector systems, including modular plugs, modular
jacks, shielded and nonshielded specialized connectors, and cable assemblies for
telecommunications, cellular communications and data transmission, including
local and wide area networks. Its primary manufacturing facility is located in
Pennsylvania, with an assembly operation in Mexico.
-6-
<PAGE> 7
Stewart Connector sells its products throughout the world, directly and through
sales subsidiaries, and through a network of manufacturers' representatives.
Foreign sales accounted for approximately 41% of Stewart Connector's sales in
1997, 40% in 1996 and 43% in 1995. It maintains direct sales offices (and to a
lesser extent, distribution operations) in England, Japan, Germany and has
numerous domestic and foreign competitors, some of which are substantially
larger than Stewart Connector. Competition is based principally on price with
respect to older product lines, and on technology and product features for newer
products and to a lesser extent, patent protection.
At December 31, 1997, Stewart Connector had 796 employees, of which 372 were
employed in the U.S., 20 in Japan, 7 in Germany, 4 in the United Kingdom, and
393 in Mexico.
POWER TRANSFORMERS. Signal Transformer manufactures both standard
"off-the-shelf" and custom-made power transformers serving a broad customer base
in a variety of industries. Signal's markets include telecommunications, home
and retail security systems, medical instrumentation, gaming and entertainment
and process controls. Signal markets its products directly, utilizing catalogs
and print advertising, and indirectly through selective independent sales
representatives in targeted regions of the country. It has a customer base of
over nine thousand accounts, consisting of both OEMs and aftermarket resellers.
The electronic transformer industry includes both domestic and foreign
manufacturers and there are numerous competitors to Signal. Competition is based
on price and availability of product to meet customers' needs. Signal has
directed its marketing efforts for many years towards engineers and other
customers having specialized, low-volume demand and prompt delivery
requirements. To capitalize on an identified market niche, Signal has a service
that guarantees 24 hour delivery for small order quantities of certain
"off-the-shelf" transformers.
Signal manufactures its transformers at production facilities located in the
Dominican Republic, Puerto Rico and New York. The New York facility also serves
as Signal's major sales, administration and distribution center.
At December 31, 1997, Signal had 645 employees, of which 153 were employed in
the U.S., 250 in the Dominican Republic and 242 in Puerto Rico.
PRECISION STAMPINGS AND WIREFORMS. Stewart Stamping is a tool designer and
subcontract manufacturer of precision stampings and wireformed parts. Stewart
Stamping manufactures components used in electrical devices such as circuit
breakers, electric fuses, lighting and process controls and the electronic
industries, including passive components such as capacitor cans and connector
contacts. Stewart Stamping sells its products to a broad customer base primarily
in the U.S. through a network of manufacturers representatives. Stewart Stamping
manufactures its products at its plant in Yonkers, New York. In early 1997,
Stewart Stamping leased a manufacturing facility in El Paso, Texas to better
serve the Southwestern U.S. and Mexican assembly operations of telecommunication
and electronics customers.
Stewart Stamping's competitors in each of its product lines are numerous
(including, in the case of metal stampings, its own customers), but Stewart
Stamping traditionally has focused on products that, because of the engineering
and manufacturing capability required to produce them, have the potential for
repeat business.
At December 31, 1997, Stewart Stamping had 320 employees.
-7-
<PAGE> 8
CABLE AND WIRE ASSEMBLIES. Escod Industries produces electronic cable
assemblies, specialized wire harnesses and certain telecommunication equipment
subassemblies for sale to manufacturers of telecommunications, computer and
other electronics equipment. Escod's markets generally are regional in nature,
and Escod's production facilities (three in the Carolinas and one in Florida)
are operated principally to serve local plants of OEMs. Because substantially
all of Escod's customers are OEMs having a number of production facilities, the
demand for Escod's products depends not only on the demand for its customers'
products, but also on its customers' varying utilization of their production
sites.
Telecommunications and computer OEMs account for the bulk of Escod's sales. Two
telecommunications OEMs together accounted for approximately 68%, 66% and 60% of
Escod's total revenues in 1997, 1996 and 1995, respectively. Escod's dependence
on these two major customers makes its revenues and operating income sensitive
to changes in demand from those customers. Beginning in 1995, Escod has focused
its efforts on developing a broader customer base and a broader product line.
Competition in Escod's markets is based primarily on price and, to a lesser
extent, on responsiveness to customers' needs. The profitability of Escod's
sales generally depend on the relative raw material content, labor productivity,
quality of the products sold, proximity to customers and timeliness of delivery.
As a result of the low barriers to entry into Escod's business and increased,
low-cost foreign competition in recent years, Escod's business has become
intensely competitive.
At December 31, 1997, Escod had 798 employees.
SPECIALTY PUBLISHING
Taylor Publishing Company is engaged primarily in the contract design and
printing of student yearbooks from which it derived at least 87% of its revenues
in each of the last three years. Its principal yearbook customers are secondary
(middle and senior high) schools. Other yearbook customers include elementary
schools, colleges and academies. Taylor also publishes a variety of specialty
books on a contract basis and a limited number of its own publishing titles and
provides reunion planning and other services for alumni of schools, colleges and
academies.
Competition in the yearbook industry is based upon customer service, quality and
price. The market for yearbooks is affected more by demographic trends than by
business cycles. Taylor offers several yearbook lines with different graphic and
typographic options and capabilities. Taylor has expended significant resources
in recent years to develop a system of electronic copy preparation designed to
enhance the quality and consistency of photographs, reduce production costs and
shorten the time required for yearbook production. Taylor has developed
proprietary software programs for use by its customers in developing yearbooks.
This software facilitates the yearbook design work performed by schools and
improves the overall production process.
Taylor markets its yearbook services through commissioned independent sales
representatives who maintain contact with yearbook faculty advisors, school
principals and other key purchasing personnel. It also trains students and their
advisors in layout, design and marketing, conducts seminars and workshops and
provides supporting materials, including software, to assist student yearbook
staffs in the production process.
Yearbook production is highly seasonal. Orders are normally obtained in the fall
and finished yearbooks are delivered at or near the end of the school year,
typically late spring to early summer and to a lesser degree, in the fall of the
following school year. Deposits representing approximately 25% of the yearbook
contract price are due from the yearbook customer upon its submission of the
first set of yearbook pages.
-8-
<PAGE> 9
Given the seasonal production cycle, the Company typically receives significant
cash deposits commencing each November and continuing through each March. These
deposits are available to fund the working capital requirements of the yearbook
production cycle, and to a lesser extent, to provide the Company working capital
for general corporate purposes.
Taylor operates six production facilities in Texas (two owned and four leased)
and one leased production facility in Pennsylvania. Its work force reflects the
seasonality of its business, typically ranging from 1,000 to 1,700 full-time
employees. At December 31, 1997, it had 168 salaried and 1,194 hourly employees.
DIVESTED OFFICE PRODUCTS BUSINESSES. On September 3, 1996, the Company sold
Curtis, its computer accessories business. On October 4, 1996, the Company sold
the Rolodex Electronics product line. On March 5, 1997, the Company sold the
Rolodex Business. Curtis, Rolodex Electronics and the Rolodex Business are
referred to collectively as the "Office Products Business." See Item 7
"Managements Discussion and Analysis of Financial Condition and Results of
Operations Discontinued Operations."
PATENTS AND TRADEMARKS
The Company holds patents or trademarks in most of its businesses which have
expiration dates ranging from 1998 to 2018. The Company expects to maintain such
patents and to renew the trademarks important to its business prior to their
expiration and does not believe the expiration of any one of its patents will
have material adverse effect on any of its businesses.
RAW MATERIALS AND SUPPLIES
The principal raw materials and supplies used by the Company include: (i) steel,
aluminum, copper, zinc, brass and nickel (Automotive Components Group); (ii)
copper wire, steel, brass, aluminum, plastics, ceramics and precious metals
(Technologies Group); and (iii) paper, film and other photographic and printing
supplies (Specialty Publishing). The Company purchases these materials and
supplies on the open market to meet its current requirements and believes its
sources of supply are adequate for its needs.
BACKLOG
The Company's backlog by industry segment, believed to be firm, at December 31,
1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
December 31
----------------------
1997 1996
---- ----
<S> <C> <C>
Automotive Components Group $ 59,396 52,372
Technologies Group 51,245 50,955
Specialty Publishing 113,232 101,857
-------- --------
Total $223,873 205,184
======== ========
</TABLE>
Management believes that approximately $195 million of its 1997 backlog will be
filled in 1998, and the remainder in 1999.
-9-
<PAGE> 10
EMPLOYEES AND LABOR RELATIONS
At December 31, 1997, the Company employed approximately 5,418 people on a
full-time basis, of whom approximately 25% were covered by collective bargaining
agreements with various unions. The largest collective bargaining unit (at
Taylor) covers approximately 563 employees. The Company's union agreement with
Taylor expired and a new contract was negotiated in early 1998. Among the union
agreements that will expire in 1998 are those covering certain union employees
of McKenica and Stewart Stamping. The Company considers relations with its
employees to be good.
The Company has defined benefit and defined contribution pension plans covering
substantially all employees. For information respecting defined benefit pension
plans, See Note 12 to the Consolidated Financial Statements.
ENVIRONMENTAL REGULATION AND PROCEEDINGS
ENVIRONMENTAL MATTERS. The Company's manufacturing operations involve the
generation of a variety of waste materials and are subject to extensive federal,
state and local environmental laws and regulations. The waste materials
generated include metal scrap from stamping operations, cutting and cooling
oils, degreasing agents, chemicals from plating and tinning operations, etching
acids and photographic and printing chemicals. The Company uses offsite disposal
facilities owned by others to dispose of its wastes and does not store wastes it
generates to the extent such storage would require a permit. The Company does
not treat, store or dispose of waste for others. The Company is required to
obtain permits to operate various of its facilities, and these permits generally
are subject to revocation or modification.
The Company has taken significant measures to address emissions, discharges and
waste generation and disposal; improve management practices and operations in
response to legal requirements; and internally audit compliance with applicable
environmental regulations and approved practices. These measures include: raw
material and process substitution; recycling and material management programs;
periodic review of hazardous waste storage and disposal practices; and reviewing
the compliance and financial status and management practices of its offsite
third-party waste management firms.
As a result of the Company's reorganization, much uncertainty has been removed
concerning the Company's potential liability for environmental contamination at
sites owned or operated by the Company (and at third party disposal and waste
management facilities used by the Company) prior to the filing of its bankruptcy
petition. During the reorganization, the Company settled all claims of the
United States relating to the Company's pre-Petition Date conduct at previously
owned or third party sites arising under the federal Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA"). This settlement (i)
discharged the Company's liability to the United States at a number of hazardous
waste sites; (ii) protects the Company from contribution claims of the remaining
potentially responsible parties; (iii) limits the amount the Company may be
required to pay the United States in any one year on pre-petition claims; and
(iv) provides that any such payment may be made in cash or, at the Company's
option, common stock valued at 30% of the allowed claim.
The Company is also currently engaged in clean up programs at sites located in
Newtown, Connecticut, Mount Vernon, New York and Oak Creek, Wisconsin. The
Company has established what it believes are appropriate reserves for
anticipated remedial obligations. Due to the establishment of these reserves and
the environmental settlements reached during the Company's reorganization,
management does not believe that environmental compliance or remedial
requirements are likely to have a material adverse effect on the Company.
-10-
<PAGE> 11
FINANCIAL INFORMATION ABOUT EXPORT SALES
In 1997, the Company's export sales were $55.4 million or 10% of consolidated
sales. Export sales in 1997 to Europe, Asia, Canada and Mexico were $21.2
million, $14.0 million, $9.7 million and $4.3 million, respectively. All other
export sales in 1997 totaled $6.2 million. In 1996 and 1995 export sales were
$58.2 million and $53.1 million, respectively or 12% of consolidated sales in
each year. The Company's transactions are primarily in U.S. dollars.
ITEM 2. PROPERTIES
------------------
PROPERTIES
The Company manufactures its products in various locations, primarily in the
United States. Management believes that the Company's facilities generally are
well maintained and adequate for the purposes of which they are used. The
Company's principal operating plants and offices at December 31, 1997 included
the following properties:
[This space intentionally left blank]
-11-
<PAGE> 12
<TABLE>
<CAPTION>
APPROXIMATE TERMS OF
BUSINESS SEGMENT LOCATION PRINCIPAL USE SQUARE FOOTAGE OCCUPANCY
<S> <C> <C> <C> <C>
Automotive Components Group
- ---------------------------
Thermal Components Montgomery, AL Office/Manufacturing 137,325 Owned(1)
Montgomery, AL Manufacturing 45,000 Leased
Buffalo, NY Office/Manufacturing 78,800 Leased
Iron Ridge, WI Office/Manufacturing 44,000 Owned
Oak Creek, WI Office/Manufacturing 39,250 Owned
Oak Creek, WI Office/Manufacturing 33,600 Leased
Montgomery, AL Office/Warehouse 10,890 Leased
Detroit, MI Office/Manufacturing 28,000 Leased
Romulus, MI Office/Manufacturing 16,000 Leased
Duncan, SC Office/Manufacturing 100,000 Owned
Dortmund, Germany Office/Manufacturing 45,000 Owned
Steel Parts Tipton, IN Office/Manufacturing 235,350 Owned
Romac Metals Troutman, NC Office/Manufacturing 110,000 Owned
Technologies Group
- ------------------
Escod Durham, NC Office 3,205 Leased
N. Myrtle Beach, SC Office/Manufacturing 46,506 Owned
Myrtle Beach, SC Office 2,893 Leased
Lake Wales, FL Office/Manufacturing 42,000 Owned
Taylorsville, NC Office/Manufacturing 44,350 Owned
Loris, SC Office/Manufacturing 36,960 Owned
Canon City, CO Office/Manufacturing 21,000 Owned
Signal Transformer Inwood, NY Office/Manufacturing 39,361 Owned
St. Just, PR Office/Manufacturing 41,214 Leased
San Cristobal,
Dominican Republic Office/Manufacturing 14,685 Leased
Stewart Connector Glen Rock, PA Office/Manufacturing 84,000 Owned
Santa Clara, CA Office 210 Leased
Essex, UK Office 485 Leased
Freidrichsdorf/Ts.,
Germany Office 1,500 Leased
Yokohama, Japan Office/Warehouse 4,750 Leased
Cananea, Mexico Warehouse/
Manufacturing 22,646 Leased
Stewart Stamping Yonkers, NY Office/Manufacturing 190,000 Owned
El Paso, TX Office/Manufacturing 41,400 Leased
</TABLE>
-12-
<PAGE> 13
<TABLE>
<CAPTION>
APPROXIMATE TERMS OF
BUSINESS SEGMENT LOCATION PRINCIPAL USE SQUARE FOOTAGE OCCUPANCY
- ---------------- -------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
Specialty Publishing
- -------------------
Taylor Dallas, TX Office/Manufacturing 320,000 Owned
Dallas, TX Office/Manufacturing 25,000 Owned
San Angelo, TX Office/Manufacturing 33,200 Leased
El Paso, TX Office/Manufacturing 31,000 Leased
El Paso, TX Manufacturing 52,000 Leased
Malvern, PA Office/Manufacturing 41,000 Leased
San Angelo, TX Manufacturing 7,800 Leased
Dallas, TX Office 1,282 Leased
Orange, CA Office 3,373 Leased
Galveston, TX Office 1,200 Leased
Garden Grove, CA Office 662 Leased
Corporate Dublin, OH Office 18,300 Leased
</TABLE>
(1)Property is "leased" from an industrial development authority in connection
with an expired industrial revenue bond and is eligible for purchase by the
Company for a nominal consideration at the expiration of the lease term.
Substantially all of the Company's material domestic assets, including owned
properties, are subject to major encumbrances securing the Company's obligations
under the Bank Credit Agreement.
The Company believes that all of its production facilities have additional
production capacity, except for certain Steel Parts and Thermal plants that are
operating at or near full capacity.
-13-
<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS
-------------------------
LEGAL PROCEEDINGS
The U. S. Federal Trade Commission ("FTC"), in response to certain third party
complaints, investigated Insilco's acquisition of the automotive aluminum heat
exchanger tubing business of Helima-Helvetion International, Inc. ("HHI"), to
determine if the acquisition violated federal antitrust laws. The Company and
the FTC subsequently entered into a Consent Order to resolve this matter that,
among other things, requires Insilco to divest certain assets acquired from HHI.
The divestiture will not have material impact on the Company's consolidated
financial condition, results of operations, or liquidity.
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of its business. The Company
maintains insurance coverage against potential general liability and certain
other claims in an amount it believes to be adequate. In the Company's opinion,
the outcome of these matters will not have a material adverse effect on the
Company's financial condition, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
Not Applicable.
[This space intentionally left blank.]
-14-
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
-------------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The Common Stock is the Company's only class of authorized equity securities.
Water Street Corporate Recovery Fund I, L.P. ("Water Street"), an investment
partnership of which Goldman, Sachs & Co. ("Goldman Sachs") is the general
partner, is now the Company's principal stockholder, owning approximately 45% of
the 4,016,711 shares outstanding at March 16, 1998.
The Company's Common Stock has traded on the Nasdaq National Market under the
symbol "INSL" since November 29, 1993. The following table sets forth, for the
periods indicated, the high and low sale prices for the Company's Common Stock
as reported by the Nasdaq National Market. The number of record holders of the
Common Stock of the Company on March 16, 1998 was 770. The closing sales price
of the Common Stock of the Company on March 16, 1998 was $40.00.
<TABLE>
<CAPTION>
Low Sale High Sale
-------- ---------
<S> <C> <C>
1997:
First Quarter $ 34.000 $ 41.000
Second Quarter $ 36.750 $ 39.000
Third Quarter $ 36.000 $ 39.250
Fourth Quarter $ 33.000 $ 38.500
1996:
First Quarter $ 27.750 $ 36.375
Second Quarter $ 33.500 $ 36.875
Third Quarter $ 31.000 $ 37.250
Fourth Quarter $ 36.500 $ 41.063
</TABLE>
The Company did not pay any cash dividends during the past two fiscal years.
Future dividend policy will depend upon the earnings and financial condition of
the Company and the Company's need for funds and other factors. The payment of
dividends is restricted by the terms of the Bank Credit Agreement and the 10.25%
Senior Subordinated Notes issued by the Company August 12, 1997 (the "Notes").
On July 10, 1997, the Company, using the proceeds from the sale of the Rolodex
Business, purchased an aggregate of 2,857,142 shares of its common stock for
$109,999,967 (See Note 11 to the Consolidated Financial Statements). On August
12, 1997, the Company completed a tender offer (the "Tender Offer"), pursuant to
which it purchased an additional 2,857,142 shares for $109,999,967. The purchase
of shares tendered in the Tender Offer was paid for from the proceeds received
on the issuance of $150 million aggregate amount of the Notes (See Note 8 to the
Consolidated Financial Statements).
Pursuant to a $15.0 million stock buyback program adopted July 26, 1995, 97,500
shares of Insilco's common stock were purchased in 1996 at prices ranging from
$30.60 to $36.125 per share. In 1995, 197,500 shares of Insilco's common stock
were purchased at prices ranging from $32.375 to $36.875 per share. In 1997, the
Company made no purchases of its common stock under the stock buyback program.
-15-
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
-------------------------------
The following table sets forth selected financial information (dollars in
thousands) derived from the Company's Consolidated Financial Statements.
<TABLE>
<CAPTION>
Predecessor (6)
---------------
1993
----------------------
From | To
1997 1996 1995 1994 4/1 | 3/31
---- ---- ---- ---- --- | ----
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA |
Sales (net)(1) $ 528,233 492,405 449,506 438,434 332,927 | 79,223
Depreciation and amortization 18,377 15,357 13,352 12,251 8,979 | 3,781
Amortization of Reorganization Goodwill -- -- 16,205 34,812 27,265 | --
Operating income (loss)(2) 51,102 48,433 38,881 9,491 (3,530) | 4,162
|
Other income (expense)(3) |
Interest expense(4) (20,562) (18,378) (19,546) (29,113) (26,905) | (9,609)
Interest income 2,837 724 1,472 1,788 1,700 | 347
Other income (expense), net 3,441 7,706 13,893 3,257 884 | (68)
|
Income (loss) from continuing operations |
before reorganization items, extraordinary |
item and income taxes 36,818 38,485 34,700 (14,577) (27,851) | (5,168)
Reorganization items, net -- -- -- -- -- | 21,767
Income tax expense (13,404) (13,272) (16,694) (5,718) (398) | (628)
|
Income (loss) from continuing operations |
before extraordinary items 23,414 25,213 18,006 (20,295) (28,249) | 15,971
|
Income (loss) from discontinued operations, |
net of tax 58,958 13,840 (15,431) (9,683) (18,360) | (15,360)
|
Income (loss) before extraordinary items 82,372 39,053 2,575 (29,978) (46,609) | 611
|
Extraordinary items, net of tax (728) -- -- (2,156) -- | 448,334
|
Net income (loss) 81,644 39,053 2,575 (32,134) (46,609) | 448,945
|
BALANCE SHEET DATA AT PERIOD END |
Working capital 39,508 51,436 47,436 35,327 98,054 | 94,144
Total assets 302,673 348,393 340,129 368,669 517,738 | 562,011
Long-term debt 257,743 161,042 186,489 198,109 307,406 | 306,682
Other long-term liabilities 43,402 44,156 48,153 60,529 65,352 | 64,451
Stockholders' equity (deficit) (102,328) 33,402 (15,779) (13,451) 18,505 | 64,214
|
CASH FLOW DATA |
Net cash provided by (used in) |
operating activities 45,511 55,423 37,744 34,305 52,524 | (16,361)
Net cash provided by (used in) |
investing activities 95,217 (29,783) (14,678) 36,295 (14,146) | 2,668
Net cash provided by (used in) |
financing activities (133,256) (32,053) (21,862) (115,648) (6,774) | (9,109)
|
|
PER SHARE DATA |
Basic income (loss) per share from |
continuing operations(5) 3.25 2.65 1.83 (2.09) (2.93) | N/A
Diluted income (loss) per share from |
continuing operations(5) 3.19 2.55 1.77 (2.09) (2.93) | N/A
Book value per share (25.08) 3.52 (1.64) (1.37) 1.89 | N/A
</TABLE>
See accompanying notes to the Selected Financial Data
-16-
<PAGE> 17
The notes to the selected financial data follow:
(1) Sales in 1997 and 1996 include sales of $31.6 million and $13.1
million, respectively, of the Lingemann Business.
(2) Operating income in 1997 and 1996 includes operating income, before
allocation of corporate overhead, of $0.2 million and $0.3 million,
respectively, of the Lingemann Business.
Operating income includes the deduction for the amortization of
Reorganization Goodwill in the period from April 1, 1993 and years
ended December 31, 1994 and 1995.
Operating income in 1995 includes a gain of $4.3 million related to a
change in the Company's pension plan (See Note 12 to the Consolidated
Financial Statements).
(3) Other income in 1996 included a third quarter $2.2 million adjustment
related to the satisfaction of certain of the Company's environmental
liabilities, following completion of a site clean-up for an amount less
than previously estimated. Other income in 1995 included favorable
adjustments of $3.6 million related to the Company's environmental
liabilities, $1.5 million related to the resolution of several legal
disputes and a $4.0 million gain on the sale of idle corporate assets.
(4) Excluding $19.8 million contractual interest not accrued on unsecured
debt during the Chapter 11 proceedings in the three months ended March
31, 1993.
(5) Earnings per share information for the Predecessor is not presented
because the Predecessor was closely held and the revision of the
Company's capital structure pursuant to the Plan of Reorganization
makes such information not meaningful.
(6) As of March 31, 1993, the Company adopted "fresh start" accounting as
described under "Fresh Start Accounting" on page 19 of this Annual
Report.
-17-
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
OVERVIEW
The Company directly and through its subsidiaries, is a diversified manufacturer
of automotive components and telecommunications and electronics components and a
publisher of specialty publishing products, chiefly student yearbooks. The
Company, with three reporting segments (the Automotive Components Group, the
Technologies Group, and Specialty Publishing), conducts its business in eight
separate operating units, including both divisions and subsidiaries. The
Company's Specialty Publishing segment, formerly the Company's Office
Products/Specialty Publishing segment, was renamed following the divestiture of
the Rolodex Business in March 1997.
The Automotive Components Group is comprised of businesses that produce
radiators and other heat exchanger components, equipment and systems used in the
production of heat exchanges, heavy gauged stamped automotive parts
(principally, transmission clutch plates) and welded stainless steel tubing, and
a 50% owned joint venture, Thermalex, which produces precision extruded aluminum
tubing. The Automotive Components Group serves both original equipment
manufacturers and aftermarket customers in the automotive, specialty vehicle,
truck and off-road vehicle and industrial equipment markets and also serves the
marine and architectural markets with decorative stainless steel tubing.
The Technologies Group manufactures high-performance data transmission
connectors, small electric power transformers, precision stampings and wire and
cable assemblies. The Technologies Group serves the computer networking,
microwave relay, telephone digital switching, data processing, automotive
medical equipment and other markets.
Specialty Publishing consists of Taylor, a publisher of specialty publishing
products, chiefly elementary, middle school, high school and college yearbooks.
During 1996 and 1997, the Company completed several material transactions
affecting its ongoing operations and debt and capital structure. A summary of
these transactions follows:
- - ACQUISITIONS: In 1996, the Company acquired Great Lake, Inc. which serves
the automotive, heavy truck and industrial manufacturing radiator
replacement market and the automotive aluminum tube business of Helmut
Lingemann GmbH & Co. (the "Lingemann Business"). These acquisitions have
been accounted for as purchases and, accordingly, the purchase prices have
been allocated to the assets and liabilities acquired based on their fair
values at the acquisition dates. The operating results of the businesses
acquired have been included for the periods subsequent to the acquisition
date.
- - DIVESTITURES: The Office Products Business of the Company's Office
Products/Specialty Publishing Group was divested in three separate
transactions during 1996 and the first quarter of 1997. The 1996
transactions included the divestitures of the Company's computer
accessories business (Curtis) and electronic organizer business (Rolodex
Electronics) for $21.8 million in the aggregate which was used to reduce
the outstanding amounts on the Company's bank loans. On March 5, 1997, the
remainder of the Office Products Business, which consisted of the Rolodex
Business, was sold for net cash proceeds of approximately $112 million (the
"Rolodex Proceeds"). As a result of the sale of the Rolodex Business, the
Office Products Business segment is being accounted for as a discontinued
operation (See "Discontinued Operations")
-18-
<PAGE> 19
- - REFINANCING: The Company entered into an Amended and Restated Credit
Agreement as of July 3, 1997 (the "Bank Credit Agreement") that among other
things, provides for (i) a $200 million revolving credit facility, (ii) a
$50 million sublimit for commercial and standby letters of credit and (iii)
a $50 million sublimit for advances in selected foreign currencies.
- - ISSUANCE OF SUBORDINATED DEBT: On August 12, 1997, the Company issued $150
million aggregate principal amount of 10.25% Senior Subordinated Notes due
2007 (the "Notes"), realizing therefrom net proceeds of $145.9 million.
- - SELF TENDER: On July 10, 1997, the Company, using the Rolodex Proceeds
purchased an aggregate of 2,857,142 shares of its common stock for $110.0
million. On August 12, 1997, the Company completed a tender offer (the
"Tender Offer"), pursuant to which it purchased an additional 2,857,142
shares for $110.0 million. The purchase of shares tendered in the Tender
Offer was paid for from the proceeds received on the issuance of the Notes.
The discussion that follows of the financial condition and results of operations
includes the effect of the transactions discussed above in the respective
periods in which they were recorded. As a result, the comparability of the
results is significantly impacted. Pro forma results of operations, assuming all
these transactions occurred at the beginning of the respective periods, are
presented in Note 20 to the Consolidated Financial Statements.
"THE FRESH START" ACCOUNTING
On March 31, 1993, the Company adopted the "fresh start" accounting principles
prescribed by the Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code" (the "Reorganization SOP"), issued
by the American Institute of Certified Public Accountants. The "fresh start"
accounting principles required the Company to value its assets and liabilities
at fair values and eliminate its accumulated deficit.
"Fresh start" accounting was required because on April 1, 1993, the Company and
certain of its subsidiaries emerged from Chapter 11 of the United States
Bankruptcy Code (the "Chapter 11 cases") pursuant to a plan of reorganization
(the "Plan of Reorganization"). For financial reporting purposes, the effective
date of the Plan of Reorganization was March 31, 1993 (the "Plan Effective
Date"). For periods prior to the Plan Effective Date, the Company sometimes is
referred to herein as the "Predecessor". The Chapter 11 cases were commenced on
January 13, 1991 (the "Petition Date"). (See Item 1 - "Business - Reorganization
History.")
One effect of "fresh start" accounting on the financial statements was the
negative impact on the reported operating income of each business segment and
the consolidated net income resulting from the noncash amortization of the
Reorganization Goodwill. Such amortization expense totaled $32.2 million in
1995. At December 31, 1995, Reorganization Goodwill was fully amortized.
DISCONTINUED OPERATIONS
On March 5, 1997, the Company completed the sale of its Office Products Business
within the Office Products/Specialty Publishing Group with the divestiture of
its traditional office products business (the "Rolodex Business") for $112.6
million, net of transaction costs. The divestiture of the Rolodex Business was
preceded in 1996 by the divestiture of Rolodex Electronics and Curtis for
aggregate proceeds of $21.8 million. The Office Products Business segment is
being accounted for as a discontinued operation and,
-19-
<PAGE> 20
accordingly, the consolidated statements of operations and cash flows for the
periods prior to the sale have been reclassified.
RESULTS OF OPERATIONS
Summarized sales and operating income (loss) by business segment for the years
ended December 31, 1997, 1996 and 1995, are set forth in the following table (in
thousands) and discussed below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SALES
Automotive Components Group $ 231,070 209,722 180,251
Technologies Group 198,941 183,663 170,615
Specialty Publishing 98,222 99,020 98,640
--------- --------- ---------
Consolidated sales $ 528,233 492,405 449,506
========= ========= =========
OPERATING INCOME (LOSS)(1)(2)
Automotive Components Group $ 23,070 23,915 20,407
Technologies Group 23,006 24,453 20,310
Specialty Publishing 5,355 1,650 (753)
Unallocated corporate (329) (1,585) (1,083)
--------- --------- ---------
Consolidated operating income $ 51,102 48,433 38,881
========= ========= =========
</TABLE>
(1) Segment operating income (loss) reflects the allocation of corporate
overhead. In 1995 corporate overhead was reduced by a $4.3 million gain
relating to a change in the Company's pension plan (See Note 12 to the
Consolidated Financial Statements). The allocation of corporate overhead
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Automotive Components Group $3,537 2,981 1,282
Technologies Group 3,728 3,152 1,412
Specialty Publishing 1,744 1,986 881
------ ------ ------
$9,009 8,119 3,575
====== ====== ======
</TABLE>
(2) Segment operating income (loss) includes a deduction for the amortization
of Reorganization Goodwill by segment as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Automotive Components Group $ -- -- 3,404
Technologies Group -- -- 7,176
Specialty Publishing -- -- 5,625
---------- ------ ------
$ -- -- 16,205
========== ====== ======
</TABLE>
-20-
<PAGE> 21
1997 COMPARED TO 1996
SALES. Consolidated net sales from continuing operations of $528.2 million
increased 7% ($35.8 million) in 1997 compared to 1996 net sales from continuing
operations of $492.4 million primarily due to a 10% ($21.4 million) increase at
the Automotive Components Group and an 8% ($15.2 million) increase at the
Technologies Group.
Sales in the Automotive Components Group segment were $231.1 million, an
increase of 10% over 1996 sales of $209.7 million. The increased sales were
attributable to Thermal's increased sales of automotive heat exchangers and
related components from the July 1996 acquisition of the Lingemann Business and
higher sales of transmission and other stamped automotive parts at Steel Parts.
The Lingemann Business contributed $31.6 million of sales in 1997 compared to
$13.1 million in 1996. Approximately 30% of Thermal's sales are to the
automotive OEM market. Steel Parts achieved sales growth over 1996 due to higher
parts content per automobile, as automobile manufacturers have moved from
three-speed to four and five-speed automatic transmissions. Steel Parts is
primarily an OEM supplier of transmission and other automotive components.
Sales in the Technologies Group were $198.9 million, an increase of 8% over 1996
sales of $183.7 million. Sales of the wire and cable assembly business, Escod,
were up 19% over 1996 due to strong demand from one of its major customers as
well as continued expansion of its customer base. Sales at Signal Transformer
increased 9% over 1996 primarily due to higher demand for internationally
certified products from electronic OEMs. Sales of precision stampings at the
segment's Stewart Stamping unit increased 6% due to new product introductions,
as well as the continued strength of the automotive, electrical control and
circuit protection markets. Stewart Connector, the Company's manufacturer of
high speed data transmission connectors which serves the computer networking
market, had a 1% decrease in sales from the prior year principally as a result
of price erosion of existing products and delayed new product availability.
Foreign sales accounted for approximately 41% and 40% of Stewart Connector's
sales in 1997 and 1996, respectively.
Sales at Taylor Publishing were $98.2 million, relatively flat compared to prior
year sales of $99.0 million.
OPERATING INCOME. The Company's operating income from continuing operations of
$51.1 million increased 6% ($2.7 million) in 1997 compared to 1996 operating
income from continuing operations of $48.4 million, primarily due to higher
operating income at Taylor Publishing caused by increased productivity and a
$1.5 million restructuring charge recorded in 1996.
The Automotive Components Group's operating income in 1997 compared to 1996
decreased to $23.1 million from $23.9 million. Lower operating income from
Thermal was partially offset by increased operating income at the Company's
stainless steel tubing business and stamped steel parts business. Thermal's
operating performance was impacted by (i) decreased sales at the Company's heat
exchanger equipment manufacturer which continues to experience a substantial
decline in order backlog; (ii) increased research and development costs
associated with the Group's new technical center; (iii) additional expenses
related to the integration of the Lingemann Business into the Company's
operations; and (iv) soft aftermarket demand for automotive heat exchangers.
The Technologies Group's operating income in 1997 compared to 1996 decreased to
$23.0 million from $24.5 million primarily due to decreased operating margins at
Stewart Connector caused principally by competitive price pressure in the
connector market and delayed introductions of new connector products. In
addition, the Company incurred additional start-up costs at its El Paso stamping
facility. These declines
-21-
<PAGE> 22
were partially offset by the improved sales and operating margin at Escod.
In 1997, the operating income of the Specialty Publishing business, Taylor
Publishing, improved to $5.4 million from $1.7 million in 1996 due to improved
operating margins from increased productivity and a $1.5 million restructuring
charge incurred in 1996.
OTHER INCOME (EXPENSE). Interest expense increased approximately 12% or $2.2
million in 1997 compared to 1996 due to the refinancing completed in the third
quarter of 1997. Interest income increased $2.1 million over 1996 due to
interest income earned on the proceeds from the sale of the Rolodex Business
prior to its use in the Tender Offer transaction. Other income for 1996 included
a favorable adjustment of $2.2 million related to the Company's environmental
liabilities for 1996 following completion of a site clean-up for an amount less
than previously estimated.
Equity income from the Company's unconsolidated joint venture, Thermalex, was
$2.6 million in 1997 compared to $2.9 million in 1996. Thermalex incurred
additional expenses in 1997 related to the start-up of a new extrusion press and
plant expansion.
INCOME TAX EXPENSE. The Company's actual income tax obligations during 1997
($10.5 million) and 1996 ($2.4 million) were substantially less than the total
amount of income taxes recognized ($47.9 million and $12.4 million,
respectively) because previously generated net operating losses and other
deferred tax assets were utilized to reduce the tax obligations. During 1996,
additional deferred tax assets of $10.7 million were recognized and recorded on
the balance sheet because it was concluded that it was more likely than not that
such amounts would be realized in future years. In accordance with the
Reorganization SOP, the tax benefits associated with the recognition of
pre-effective date deferred tax assets, ($10.2 million in 1996) were recorded as
an increase to additional paid-in capital.
DISCONTINUED OPERATIONS. On March 5, 1997, the Company completed the sale of its
Office Products Business within the Office Products/Specialty Publishing Group
with the sale of the Rolodex Business for $112.6 million, net of transaction
costs. The divestiture of the Rolodex Business was preceded in 1996 by the
divestiture of Rolodex Electronics and Curtis for aggregate sales proceeds of
$21.8 million.
As a result of the sale, the Office Products Business is being accounted for as
a discontinued operation and, accordingly the accompanying consolidated
statements of operations and cash flows for the periods prior to the sale have
been reclassified. Revenues associated with the discontinued Office Products
Business for the years 1997, 1996, and 1995 were $10.8 million, $80.1 million,
and $111.7 million, respectively.
1996 COMPARED TO 1995
SALES. Net sales from continuing operations in 1996 were $492.4 million, an
increase of 10% over 1995 net sales from continuing operations of $449.5 million
primarily due to a 16% ($29.4 million) increase at the Automotive Components
Group and an 8% ($13.1 million) increase at the Technologies Group.
Sales in the Automotive Components Group segment were $209.7 million, an
increase of 16% over 1995 sales of $180.3 million. The increased sales were
attributable to $20.5 million of sales from the 1996 acquisitions of the
Lingemann automotive aluminum tube business and Great Lake as well as higher
content per automobile of clutch plates in transmissions and higher sales of
aluminum heat exchangers and related products and equipment manufactured by the
segment's Thermal unit. Approximately 29% of Thermal's sales are to the
automotive OEM market. Steel Parts achieved sales growth over 1995 due to higher
parts content per automobile, as automobile manufacturers have moved from
three-speed to four and five-speed
-22-
<PAGE> 23
automatic transmissions. Steel Parts is primarily an OEM supplier of
transmission and other automotive components. The increased sales at Thermal and
Steel Parts were partially offset by a decline from the prior year at Romac, the
Company's manufacturer of stainless steel tubing sold principally in marine and
distribution markets.
Sales in the Technologies Group were $183.7 million, an increase of 8% over 1995
sales of $170.6 million. Sales of the wire and cable assembly business, Escod,
were up 23% over 1995, reflecting continued expansion of its customer base and a
rebound in orders from its largest telecommunications customer. Stewart
Connector, the Company's manufacturer of high speed data transmission connectors
which serves the computer networking market, had an 8% increase in sales over
the prior year with 15% growth in the fourth quarter of the year, primarily as a
result of a new contract with a major telecommunications customer for
connector/cable assemblies. Foreign sales accounted for approximately 40% and
43% of Stewart Connector's sales in 1996 and 1995, respectively. Sales at the
segment's Signal Transformer unit were flat compared to the prior year. Sales of
precision stampings at the segment's Stewart Stamping unit increased 5% due to
the underlying strength of the markets that it serves, including the housing
construction and automotive markets.
Sales at Taylor Publishing were $99.0 million, relatively flat compared to prior
year sales of $98.6 million.
OPERATING INCOME. Operating income (loss) comparisons between 1996 and 1995 are
more difficult to present than the sales comparisons because of the effects of
"fresh start" accounting on the results of operations. Due to the effects of
"fresh start" accounting, the Company's 1995 operating results were depressed by
a $16.2 million charge for the amortization of Reorganization Goodwill. The
consolidated reported operating income from continuing operations in 1996
improved to $48.4 million from $38.9 million in 1995. (See the table on page 20
for the impact of "fresh start" accounting on the reported operating income as
well as the comparability between the periods).
Excluding the effects of "fresh start" accounting, as described above, the
operating performance decreased $6.7 million or 12% due to higher corporate
overhead, decreased operating margins in the Technologies Group and a $1.5
million restructuring charge recorded by Taylor Publishing. The higher corporate
overhead in 1996 is primarily due to a $4.3 million gain recorded in 1995
related to a change in the Company's pension plan which temporarily reduced
corporate overhead. These items and other operational year-to-year changes are
discussed below in the analysis of each segment's operating income.
The Automotive Components Group's operating income in 1996 compared to 1995
increased to $23.9 million from $20.4 million. The results in 1995 were
negatively impacted by the amortization of Reorganization Goodwill totaling $3.4
million. Excluding amortization of Reorganization Goodwill, the segment's
operating performance was relatively flat compared to 1995, as the effect of
higher sales was offset by a $1.7 million increase in allocated corporate
overhead due to the 1995 pension gain noted above.
The Technologies Group's operating income in 1996 compared to 1995 increased to
$24.5 million from $20.3 million. The results in 1995 were negatively impacted
by a $7.2 million amortization charge for Reorganization Goodwill. Excluding the
amortization of Reorganization Goodwill, the segment's operating income
decreased $3.0 million in 1996 compared to 1995, an 11% decline, due to
decreased operating margins and a $1.7 million increase in allocated corporate
overhead due to the 1995 pension gain noted above. The lower operating margins
were caused principally by competitive price pressure in the connector market
and delayed introductions of new connector products.
In 1996, the operating income of the Specialty Publishing business, Taylor
Publishing, improved to $1.7
-23-
<PAGE> 24
million from an operating loss of $0.8 million in 1995 due principally to the
reduction in amortization of Reorganization Goodwill, which totaled $5.6 million
in 1995. Excluding the amortization of Reorganization Goodwill, the unit's
operating performance decreased $3.2 million in 1996 compared to 1995 due to a
$1.5 million restructuring charge incurred in 1996, following Taylor's adoption
of a restructuring plan to improve profitability, a $1.1 million increase in
allocated corporate overhead which was primarily attributable to the 1995
pension gain noted above and increased administrative costs.
OTHER INCOME (EXPENSE). Interest expense decreased approximately 6% or $1.2
million in 1996 compared to 1995 due to a lower effective interest rate and
lower debt balances. Other income included a favorable adjustment of $2.2
million related to the Company's environmental liabilities following completion
of a site clean-up for an amount less than previously estimated. Other income
for 1995 included favorable adjustments of $3.6 million related to the Company's
environmental liabilities following a review of its liabilities from previously
divested operations and $1.5 million related to the resolutions of several legal
disputes. In addition, other income included a $4.0 million gain on the sale of
idle corporate assets.
INCOME TAX EXPENSE. The Company's actual income tax obligations during 1996
($2.4 million) and 1995 ($2.6 million) were substantially less than the total
amount of income taxes recognized ($12.4 million and $16.1 million respectively)
because previously generated net operating losses and other net deferred tax
assets were utilized to reduce the tax obligations. During 1996 and 1995,
additional deferred tax assets of $10.7 million and $9.2 million respectively,
were recognized and recorded on the balance sheet because it was concluded that
it was more likely than not that such amounts would be realized in future years.
In accordance with the Reorganization SOP, the tax benefits associated with the
recognition of pre-effective date deferred tax assets ($10.2 million and $1.6
million in 1996 and 1995, respectively), were recorded as an increase to
additional paid-in capital and $7.2 million in 1995 was recorded as a reduction
to Reorganization Goodwill. The 1995 reduction eliminated the remaining
unamortized Reorganization Goodwill.
DISCONTINUED OPERATIONS. For information regarding the Company's discontinuance
of its Office Products Business, see "1997 Compared to 1996 - Discontinued
Operations."
FINANCIAL CONDITION
Factors that are expected in the future to affect the Company's financial
position are discussed below.
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES. Operations provided $45.5
million in cash in 1997 compared to providing $55.4 million in cash in 1996.
Cash flows from operations decreased from the prior year primarily due to cash
flows from the discontinued Office Products business included in 1996 results.
The Company's cash for each year of the three year period ended December 31,
1997 was favorably impacted by tax loss carryforwards, which reduced the actual
cash payments for the years to well below the financial statement income tax
expense. The tax loss carryforwards were substantially reduced in 1997 due to
the gain from the sale of the Rolodex Business.
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES. In 1997, the Company sold its
Rolodex Business for a net sales price of $112.6 million. In addition, the
Company received a $1.5 million dividend distribution from Thermalex and $4.4
million from the liquidation of idle assets in 1997. In 1996, the Company
acquired the automotive aluminum tube business of Helmut Lingemann GmbH & Co.,
and two affiliated businesses serving the automotive, heavy truck and industrial
manufacturing radiator replacement market, Great Lake, Inc. and Kar Tool Co.
Inc., for approximately $37.7 million including transaction fees and expenses.
In 1996, the Company received proceeds totaling $21.8 million from the sales of
Curtis and
-24-
<PAGE> 25
Rolodex Electronics; $3.6 million from Thermalex for full repayment of loans
outstanding; a $3.4 million dividend distribution from Thermalex; and $1.3
million from the disposal of idle assets. In 1995, the Company received $2.5
million from Thermalex relating to the partial repayment of loans, a $0.4
million dividend distribution from Thermalex and $4.7 million from the disposal
of idle assets.
The Company's capital expenditures totaled $23.6 million in 1997 and the Company
has budgeted expenditures totaling approximately $22.1 million in 1998. The
Company expects to finance these expenditures and investments with internally
generated funds. The Company does not anticipate that limitations on capital
expenditures under the Bank Credit Agreement will adversely affect its ability
to meet its operating goals.
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES. On July 3, 1997, the Company
refinanced its existing bank debt (See Note 8 to the Consolidated Financial
Statements). On July 10, 1997 using the Rolodex Proceeds, the Company purchased
2,857,142 shares of its common stock, at $38.50 per share in cash, for an
aggregate purchase price of $110.0 million. On August 12, 1997, the Company
completed the Tender Offer, in which it purchased an additional 2,857,142 shares
at a price of $38.50 per share in cash for an aggregate purchase price of $110.0
million. On August 12, 1997, the Company issued $150 million of the Notes, for
net proceeds of approximately $145.9 million (the "Offering"). The Company used
the net proceeds from the Offering to fund the purchase of shares tendered in
the Tender Offer, repay loans under the Bank Credit Agreement, pay fees and
expenses of the aforementioned transactions and for general corporate purposes.
The Company incurred $10.7 million in costs for the refinancing, Tender Offer
and issuance of the Notes.
During 1996, the Company repaid $22.8 million of its initial $155.0 million term
loan. The Company also repurchased an additional 97,500 shares of its common
stock at prices ranging from $30.60 to $36.125 per share under the Company's
$15.0 million stock buyback program. During 1995, the Company repaid $12.6
million of its initial $155.0 million term loan and repurchased 197,500 shares
of its common stock at prices ranging from $32.375 to $36.875 per share.
The interest expense requirements during the next five years will fluctuate
based on the outstanding debt balances as well as changes in interest rates. The
interest rate on bank borrowings bear interest at various fluctuating rates, at
the Company's option, which approximate the one to six month LIBOR rates plus
1.25% (such LIBOR rates approximated 5.72% to 5.84% at December 31, 1997)
subject to performance versus a leverage ratio. The Company reduces its exposure
to potential increases in interest rates by entering into forward rate, interest
rate cap and interest rate swap agreements with major financial institutions. A
summary of the terms of those agreements is contained in Note 9 to the
Consolidated Financial Statements.
ACCUMULATED EQUITY (DEFICIT). At December 31, 1997, the Company had a
stockholders' deficit totaling $102.3 million compared to stockholders' equity
totaling $33.4 million at December 31, 1996. The deficit was attributable to the
effect of the repurchase of shares as described in "Cash Flow From (Used In)
Financing Activities" above.
SEASONALITY. The Company's yearbook publishing business, Taylor Publishing, is
highly seasonal, with a majority of sales occurring in the second and third
quarters of the year. Taylor receives significant customer advance deposits in
the second half of the year. The Company's other businesses are not highly
seasonal. See "Item 1. Business - Specialty Publishing".
-25-
<PAGE> 26
IMPACT OF INFLATION AND CHANGING PRICES. Inflation and changing prices have not
significantly affected the Company's operating results or markets. The Company
is generally able to pass through to its customers price changes in its major
steel, copper and aluminum based product lines.
LIQUIDITY. At December 31, 1997, the Company's cash and cash equivalents and net
working capital amounted to $10.7 million and $39.5 million, respectively,
compared to $3.5 million and $51.4 million, respectively, in 1996. The borrowing
ability under the Company's revolving credit facility at December 31, 1997 was
$85.1 million, including $41.1 million available for additional letters of
credit. The Company believes it has adequate sources of liquidity to meet its
working capital, capital expenditures and debt service requirements for the
foreseeable future.
YEAR 2000 COMPLIANCE. The Company is currently in the process of evaluating its
information technology infrastructure for the year 2000 ("Year 2000")
compliance. The Company's primary information systems either have recently been
or are in process of being replaced with new systems to meet the Company's
growing capacity and performance requirements. These replacements are generally
expected to be completed by early 1999.
The Company does not expect that the cost to be Year 2000 compliant will be
material to its financial condition or results of operations. The costs are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those plans. The Company does not anticipate any material
disruption in its operations as a result of any failure by the Company to be in
compliance.
The Company does not currently have complete information concerning the Year
2000 compliance status of it suppliers and customers. In the event that any of
the Company's significant suppliers or customers do not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
adversely affected.
The Company has not incurred significant costs including internal costs to
evaluate the extent of compliance related to Year 2000 compliance prior to
December 31, 1997.
FOREIGN SALES. In 1997 the Company had export sales of $55.4 million which were
10% of total sales. Export sales in 1997 to Europe, Asia, Canada and Mexico were
$21.2 million, $14.0 million, $9.7 million and $4.3 million, respectively. All
other export sales in 1997 totaled $6.2 million. In 1996, the Company had export
sales of $58.2 million which were 12% of total sales. In 1995, export sales were
$53.1 million or 12% of total sales. The Company's transactions are primarily in
U.S. dollars.
SUBSEQUENT EVENT. On March 24, 1998, it was announced that the Company and an
affiliate of DLJ Merchant Banking Partners II (and affiliated funds) ("DLJMB")
signed a definitive merger agreement. Under the initial terms of the agreement,
the stockholders of the Company would have received total consideration of
$42.98 in cash and 0.03419 shares of retained stock (having a nominal value of
$44.50 per share) of the surviving corporation. On June 8, 1998, DLJMB agreed to
increase the total consideration to be paid by $0.50 in cash to $43.48 in cash
and 0.03378 shares of retained stock (having a nominal value of $45.00 per
share) of the surviving corporation. In aggregate, stockholders will receive
approximately $180.2 million in cash and retain 140,031 shares in the surviving
entity. The retained shares will represent approximately 10% of the common stock
outstanding post-recapitalization.
-26-
<PAGE> 27
The transaction, which is estimated to have a value of approximately $448
million including existing indebtedness to be assumed or refinanced, is subject
to terms and conditions customary in transactions of this type, including
approval by the Company's shareholders, and will be treated as a
recapitalization for accounting purposes. Affiliates of Donaldson, Lufkin &
Jenrette Securities Corporation, which acted as financial advisors to DLJMB,
have committed to provide all debt financing required for the transaction.
DLJMB also announced that it entered into a voting agreement in support of the
transaction with respect to 1,783,878 shares, approximately 43% of the voting
stock of the Company, with Water Street, an affiliate of Goldman Sachs, which is
the Company's largest shareholder.
As a result of the proposed merger, the Company and DLJMB will incur various
costs and expenses in connection with consummating the transaction including
professional fees, registration costs, financing costs, and compensation costs.
Pursuant to the terms of the merger, all issued employee stock options will
vest. The compensation expense associated with the option payments will include
approximately $9.1 million to employees for the excess of the $45.00 purchase
price per share over the exercise price of all outstanding vested and unvested
options.
-27-
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------
The Consolidated Financial Statements of the Company, together with the reports
thereon of KPMG Peat Marwick LLP (dated January 30, 1998 except as to Note 21,
which is as of June 8, 1998 and Note 2, which is as of July 7, 1998, are set
forth on pages F-1 through F-34 hereof (see Item 14 of this Annual Report for
the Index).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------------------------
DIRECTORS
The following table sets forth name, age and business experience of the
directors of the Company. Each director has held the occupation indicated for
more than the past five years unless otherwise indicated.
<TABLE>
<CAPTION>
NAME AND BUSINESS EXPERIENCE AGE
---------------------------- ---
<S> <C>
JAMES J. GAFFNEY 57
Mr. Gaffney specializes in the turnaround of financially troubled companies,
serving with such companies as the chief executive officer, as a director or as
an independent consultant. Mr. Gaffney provides consulting services to GS
Capital Partners II, L.P. (a private investment fund affiliated with Water
Street Corporate Recovery Fund I, L.P. and Goldman, Sachs & Co.) and other
affiliated investment funds in relation to an investment held by those funds
and, pursuant to such arrangement, is currently serving as Chairman of Vermont
Investments, Ltd., a conglomerate based in New Zealand. He previously served as
the President and Chief Executive Officer of General Aquatics, Inc., a successor
to KDI Corporation , from September 1993 until it was sold in May 1997, as Chief
Executive Officer of International Tropic-Cal, Inc. from August 1991 to July
1992, and as an independent consultant from September 1989 to August 1991, and
from July 1992 to the present. He also is a director of Koll Real Estate Group
Inc., Advantica Food Group, Inc., and several private companies.
TERENCE M. O'TOOLE 39
Mr. O'Toole has been a Managing Director of Goldman, Sachs & Co. ("Goldman Sachs")
since November 1996. Previously, he was a general partner of Goldman Sachs from 1992
to 1996. Mr. O'Toole is also a member of Goldman Sachs' Investment Committee. He was
previously a Vice President of Goldman Sachs. Mr. O'Toole is a director of Amscan
Holdings, Inc., AMF Bowling Inc., AMF Bowling Worldwide, Inc., Western Wireless
Corporation, and several private companies.
</TABLE>
-28-
<PAGE> 29
<TABLE>
<S> <C>
THOMAS E. PETRY 58
Mr. Petry is the retired Chairman of the Board (a position he held from March
1989 to March 1998) of Eagle-Picher Industries, Inc., which is engaged in the
manufacture of earthmoving equipment and other machinery, automotive parts and
other industrial products. A voluntary petition under Chapter 11 of the Federal
Bankruptcy Laws was filed by Eagle-Picher Industries, Inc. on January 7, 1991.
An amended plan of reorganization was filed during August 1996, and approved by
U.S. Bankruptcy Court during November 1996, whereby Eagle-Picher emerged from
bankruptcy reorganization. Mr. Petry is a director of Eagle- Picher, The Union
Central Life Insurance Co., The William Powell Co., CINergy Corp., Star Banc
Corp., and Star Bank, N.A.
ROBERT L. SMIALEK 54
Mr. Smialek has served as Chairman of the Board, President and Chief Executive Officer of
the Company since May 1, 1993. From October 1992 to May 1993, Mr. Smialek served as
the President and Chief Operating Officer of the Temperature and Appliance Controls Group
of Siebe plc, a global controls and engineering firm. From September 1990 to October 1992,
Mr. Smialek served as President and Chief Operating Officer of Ranco, Inc., a subsidiary of
Siebe, Inc. Mr. Smialek is a director of General Cable Corporation and Gleason Corporation.
BARRY S. VOLPERT 38
Mr. Volpert has been a Managing Director of Goldman Sachs and a Participating
Limited Partner in Goldman Sachs Group, L.P. ("GS Group") since November 1996.
He was a general partner of Goldman Sachs from 1994 to 1996. He was previously a
Vice President of Goldman Sachs from 1990 to 1994 and the Manager of Water
Street Corporate Recovery Fund I, L.P., an investment partnership of which
Goldman Sachs is the general partner ("Water Street"), from 1991 to 1994. From
1989 to 1991, Mr. Volpert was the head of Goldman Sachs' workout and
restructuring advisory business. He also is a director of Elifin S.A.
(Luxembourg), Vermont Investments, Ltd. (New Zealand), Starwood Hotels & Resorts
Worldwide, Inc., IDB Holding Corporation Ltd., and Rockefeller Center
Properties, Inc.
</TABLE>
The nonemployee directors were first elected to the Board of Directors effective
April 1, 1993. Mr. Smialek, as the Company's Chief Executive Officer, became a
director effective May 1, 1993. Each has served as a director continuously since
his election.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company had a total of four regular meetings and
four special meetings. Each of the directors attended 75% or more of the total
number of the Board of Directors meetings held during 1997. The Board of
Directors has standing Audit and Compensation Committees. The members of the
Audit Committee are James J. Gaffney, Terence M. O'Toole, Thomas E. Petry and
Barry S. Volpert. The Audit Committee oversees the work of the internal audit
staff and external auditors and met three times during 1997. All members of the
Audit Committee attended 75% or more of the total number of the Audit Committee
meetings held during 1997. The Compensation Committee, comprised of James J.
Gaffney and Thomas E. Petry, reviews officer compensation, administers the 1993
Long-Term Incentive Plan, and met two times during 1997, with both members
attending all meetings.
-29-
<PAGE> 30
As required by the Company's Amended and Restated Plan of Reorganization filed
with the United States Bankruptcy Court for the Western District of Texas in
November 1992 (the "Plan of Reorganization"), a Litigation Committee, comprised
of Messrs. Gaffney and Petry, investigated potential claims against Merrill
Lynch & Co., Inc., and its subsidiary Merrill Lynch, Pierce, Fenner & Smith
Inc., in connection with certain aspects of the leveraged buyout of the Company
in 1988. The Litigation Committee concluded its task in March 1997.
DIRECTOR COMPENSATION
In 1993, the Company adopted the 1993 Nonemployee Director Stock Incentive Plan
(the "1993 Director Plan") covering 360,000 shares of Common Stock for
nonemployee directors in lieu of paying annual or other directors' fees. Each
present nonemployee director, having purchased 6,666 shares of Common Stock
issued by the Company at $15 per share, was awarded 13,334 shares of restricted
stock and has been granted options to purchase up to 40,000 shares of Common
Stock from the Company under the 1993 Director Plan. The terms of the options
and the restricted stock awards, including forfeiture provisions, generally are
the same as those described under "Employment and Severance Benefit Agreements"
respecting the options and restricted stock awarded Mr. Smialek. Water Street
owns the options granted to Messrs. O'Toole and Volpert and the stock sold or
awarded to them. Each nonemployee director participating in the 1993 Director
Plan has become fully vested in all of the options and restricted stock awarded
to them under the 1993 Director Plan.
EXECUTIVE OFFICERS
Set forth below are the name, age and office of each "executive officer" of the
Company (as defined by the Securities and Exchange Commission).
<TABLE>
<S> <C>
Robert L. Smialek, age 54 President and Chief Executive Officer
Kenneth H. Koch, age 42 Vice President, General Counsel and Secretary
Leslie G. Jacobs, age 47 Vice President, Human Resources and Assistant Secretary
David A. Kauer, age 42 Vice President and Chief Financial Officer
</TABLE>
Executive officers are elected annually to serve for a year or until their
successors are elected. During the past five years, Mr. Smialek has had the
business experience set forth above under "Directors," while the other executive
officers have had the business experience described below. Unless otherwise
stated, positions are with the Company.
Mr. Koch: Vice President, General Counsel and Secretary (since October 1993);
prior thereto, attorney and partner with the law firm of Porter, Wright, Morris
& Arthur.
Mr. Jacobs: Vice President, Human Resources (since August 1993); Director of
Human Resources from January 1990 to August 1993; prior thereto, Director,
Compensation and Employee Programs, of Rockwell International.
-30-
<PAGE> 31
Mr. Kauer: Vice President and Chief Financial Officer (since May 1998) Vice
President and Treasurer (April 1997 to May 1998); Treasurer from September 1993
to April 1997; Controller and Treasurer of Johnson Yokogawa Corporation (a joint
venture of Yokogawa Electric Corporation and Johnson Controls, Inc.), October
1989 - September 1993.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and greater than 10% stockholders, to file reports of
ownership and changes in ownership of the Company's securities with the
Securities and Exchange Commission ("SEC"). Copies of the reports are required
by SEC regulation to be furnished to the Company. Based on its review of such
reports and written representations from reporting persons, the Company believes
that all reporting persons complied with all filing requirements during fiscal
1997.
ITEM 11. EXECUTIVE COMPENSATION
-------------------------------
The aggregate remuneration of the Chief Executive Officer during 1997 and the
four other most highly compensated executive officers of the Company whose
salary and bonus exceeded $100,000 for the fiscal year ended December 31, 1997,
is set forth in the following table:
-31-
<PAGE> 32
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
-----------------------------------------------------------------
Annual Compensation | Awards |
-----------------------------------------------------------------
(a) (b) (c) (d) | (f) (g) | (i)
| Securities | All Other
<S> <C> <C> <C> <C> <C> <C>
Name and Principal |Restricted Stock Underlying | Compensation
Position Year Salary ($) Bonus ($) | Award(s) ($) Options (#) | ($)
- ----------------------------------------------------------------------------------------------------------------------------------
Robert L. Smialek 1997 $550,000 $300,000 | -- -- | $ 9,901(1)
President and CEO 1996 537,499 235,000 | -- -- | 13,251(2)
1995 500,000 180,000 | -- -- | 13,817(3)
Robert F. Heffron(4) 1997 276,250 135,000 | -- 15,000 | 6,372(5)
Executive Vice President 1996 252,500 150,000 | -- 4,000 | 5,920(6)
and Chief Operating Officer 1995 237,500 110,000 | -- -- | 3,671(7)
Philip K. Woodlief(8) 1997 174,667 80,000 | -- 10,000 | 3,285(9 )
Vice President and 1996 157,000 65,000 | -- 1,500 | 3,039(10)
Corporate Controller 1995 145,000 45,000 | -- -- | 2,412(11)
David A. Kauer 1997 164,000 80,000 | -- 10,000 | 3,369(12)
Vice President and 1996 143,917 58,000 | -- 1,500 | 3,109(13)
Treasurer 1995 130,833 40,000 | -- -- | 2,447(14)
Kenneth H. Koch 1997 162,833 75,000 | -- 10,000 | 3,314(15)
Vice President, General 1996 151,167 78,373 | -- 2,500 | 3,114(16)
Counsel and Secretary 1995 138,667 50,000 | -- -- | 2,693(17)
</TABLE>
- --------------
(1) Includes employer contributions under the Company's Employee Thrift Plan
401(k) (the "Thrift Plan") ($2,400) and insurance premiums paid by the
Company ($7,501).
(2) Includes Thrift Plan contributions ($2,250) and insurance premiums paid by
the Company ($10,509).
(3) Includes Thrift Plan contributions ($2,250) and insurance premiums paid by
the Company ($8,354).
(4) Mr. Heffron was employed by the Company from July 1, 1993 to February 24,
1998.
(5) Includes Thrift Plan contributions ($2,400) and insurance premiums paid by
the Company ($3,661).
(6) Includes Thrift Plan contributions ($2,250) and insurance premiums paid by
the Company ($3,301).
(7) Includes Thrift Plan contributions ($2,250) and insurance premiums paid by
the Company ($1,136).
(8) Mr. Woodlief was employed by the Company from January 30, 1989 to May 8,
1998.
(9) Includes Thrift Plan contributions ($2,400) and insurance premiums paid by
the Company ($885).
(10) Includes Thrift Plan contributions ($2,250) and insurance premiums paid by
the Company ($733).
(11) Includes Thrift Plan contributions ($2,198) and insurance premiums paid by
the Company ($214).
(12) Includes Thrift Plan contributions ($2,400) and insurance premiums paid by
the Company ($969).
(13) Includes Thrift Plan contributions ($2,250) and insurance premiums paid by
the Company ($859).
(14) Includes Thrift Plan contributions ($2,250) and insurance premiums paid by
the Company ($197).
(15) Includes Thrift Plan contributions ($2,400) and insurance premiums paid by
the Company ($791).
(16) Includes Thrift Plan contributions ($2,250) and insurance premiums paid by
the Company ($733).
(17) Includes Thrift Plan contributions ($2,250) and insurance premiums paid by
the Company ($198).
-32-
<PAGE> 33
STOCK OPTIONS
The following table shows information regarding options to purchase shares of
the Company's Common Stock granted to executive officers named in the summary
compensation table in 1997 under the 1993 Long-Term Incentive Plan.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
- -------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
NAME INDIVIDUAL GRANTS FOR OPTION TERM(1)
- --------------------------- ---------------------------------------------------- -------------------------------------------
% OF TOTAL
OPTIONS
OPTIONS GRANTED TO EXERCISE
GRANTED EMPLOYEES IN PRICE EXPIRATION
(#) FISCAL YEAR ($/SHARE) DATE 0%($) 5%($) 10%($)
---------- ------------- ---------- ------------ ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert L. Smialek -- -- -- -- -- -- --
Robert F. Heffron 15,000 9.9% $36.75 6/25/02 $0 $152,300 $336,544
Philip K. Woodlief 10,000 6.6% $36.75 6/25/02 $0 $101,533 $224,362
David A. Kauer 10,000 6.6% $36.75 6/25/02 $0 $101,533 $224,362
Kenneth H. Koch 10,000 6.6% $36.75 6/25/02 $0 $101,533 $224,362
</TABLE>
- --------------
(1) The amounts under the columns labeled "5%($)" and "10%($)" are included
by the Company pursuant to certain rules promulgated by the Securities
and Exchange Commission and are not intended to forecast future
appreciation, if any, in the price of the Company's Common Stock. Such
amounts are based on the assumption that the option holders hold the
options granted for their full term. The actual value of the options will
vary in accordance with the market price of the Company's Common Stock.
The column headed "0%($)" is included to illustrate that the options were
granted at fair market value and option holders will not recognize any
gain without an increase in the stock price, which increase benefits all
shareholders commensurately.
The following table provides certain information regarding the number and the
value of stock options held by the named executive officers at fiscal year end.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL
OPTIONS AT FISCAL YEAR-END (#) YEAR-END ($)(2)
------------------------------ --------------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ---------- ----------- ------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Smialek 160,000 $3,460,000 160,000 80,000 $480,000 $760,000
Robert F. Heffron 5,000 $ 111,875 29,332 17,668 $384,000 $ 0
Philip K. Woodlief 9,488 $ 212,690 11,012 11,000 $114,216 $ 0
David A. Kauer 5,000 $ 111,875 10,500 11,000 $105,000 $ 0
Kenneth H. Koch 7,500 $ 167,813 10,332 11,668 $ 96,000 $ 0
</TABLE>
- --------------
(1) Value realized represents the difference between the exercise price of
the option shares and the market price of the option shares on the date
the option was exercised. The value realized was determined without
consideration for any taxes or brokerage expenses which may have been
owed.
(2) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and per share fair market value of $33.00 on
December 31, 1997.
-33-
<PAGE> 34
The following table provides certain information regarding long-term incentive
plan awards of the Company's Common Stock granted to executive officers named in
the summary compensation table in 1997 under the 1993 Long-Term Incentive Plan.
LONG -TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
(a) (b) (c)
Number of Shares,
Units or Other Performance or Other Period Until
Name Rights (#)(1)(2) Maturation or Payout
- ---------------------------------------- ------------------------ -------------------------------------
<S> <C> <C> <C>
Robert L. Smialek -- --
Robert F. Heffron 14,964 6/24/00
Philip K. Woodlief 9,506 6/24/00
David A. Kauer 9,252 6/24/00
Kenneth H. Koch 9,088 6/24/00
- --------------
</TABLE>
(1) Under the terms of the Company's 1993 Long-Term Incentive Plan, the
Company adopted a Share Investment Program, effective June 25, 1997 (the
"Program"), to create a significant increase in shareholder value and to
retain key management personnel necessary to achieve such objective. The
Compensation Committee designated certain members of executive management
to participate in the Program. Under the terms of the Program,
participants were required to maintain an investment of shares of the
Company's Common Stock up to an amount equal to the participant's annual
salary (the "Initial Investment") until certain conditions are satisfied.
The Program provides for the award of two tranches of restricted stock,
each in an amount equal to the Initial Investment. The first tranche is
awarded if the Company's Common Stock achieves a market price of $47.77
for 20 consecutive trading days and the second tranche is awarded if the
Company's Common Stock achieves a market price of $58.80 for 20
consecutive trading days. The shares awarded under the Program upon
satisfaction of the market price conditions do not vest to the
participants until June 24, 2000 and any earned or awarded shares may be
forfeited if the participant voluntarily terminates his or her employment
prior to such vesting.
(2) The number of shares reported in the table assumes that the goals for
the first and second tranche established under the Program have been
achieved.
RETIREMENT PLAN AND SUPPLEMENTAL ARRANGEMENTS
The Company's Retirement Plan for Salaried Employees (the "Retirement Plan")
provides retirement benefits for salaried employees, including officers. The
Company compensates employees for the loss of benefits which otherwise would
result because of the limitations the Internal Revenue Code places on pensions
that may be paid under tax-qualified retirement plans such as the Retirement
Plan. The unfunded supplemental retirement payments are accounted for as
operating expenses when earned.
The following table shows the estimated annual retirement allowances payable
after retirement at normal retirement age to persons in the following specified
remuneration and years-of-service classifications (before any deductions for
joint or survivorship payments) without regard to any statutory limitations
imposed by the Internal Revenue Code. Normal retirement allowances, beginning at
age 65, equal (i) 50% of final average compensation minus (ii) 50% of the
retiree's primary social security benefit, pro-rated if total service is less
than 25 years or, in certain cases, is less than 35 years. Five years of service
is required for vesting.
-34-
<PAGE> 35
<TABLE>
<CAPTION>
FINAL
AVERAGE Years of Service
EARNINGS(1)
15 20 25 30 35
<S> <C> <C> <C> <C> <C> <C>
$125,000 $ 33,385 $ 44,514 $ 55,642 $ 55,642 $ 55,642
150,000 40,885 54,514 68,142 68,142 68,142
175,000 48,385 64,514 80,642 80,642 80,642
200,000 55,885 74,514 93,142 93,142 93,142
250,000 70,885 94,514 118,142 118,142 118,142
300,000 85,885 114,514 143,142 143,142 143,142
350,000 100,885 134,514 168,142 168,142 168,142
400,000 115,885 154,514 193,142 193,142 193,142
450,000 130,885 174,514 218,142 218,142 218,142
500,000 145,885 194,514 243,142 243,142 243,142
550,000 160,885 214,514 268,142 268,142 268,142
600,000 175,885 234,514 293,142 293,142 293,142
650,000 190,885 254,514 318,142 318,142 318,142
</TABLE>
- ---------------
(1) The higher of (i) average annual compensation for any five consecutive
calendar years during the final 10 years of employment or (ii) the
average annual compensation for the last 60 months of employment.
Compensation consists of salary (including voluntary salary deferrals)
and bonus. Supplemental payments are based on average earnings in excess
of $160,000.
At December 31, 1997, Messrs. Smialek, Heffron, Koch, Woodlief, and Kauer were
credited, under the Retirement Plan and various supplemental arrangements, with
approximately 3.7, 6.8, 3.2, 7.9, and 3.3 years of service, respectively, for
purposes of determining their pensions.
EMPLOYMENT AND SEVERANCE BENEFIT AGREEMENTS
The Company employs Mr. Smialek under an agreement providing that Mr. Smialek
will serve indefinitely as President and Chief Executive Officer of the Company.
Under the agreement, Mr. Smialek receives an annual base salary of $550,000. Mr.
Smialek will be eligible to receive annual bonuses and salary increases in such
amounts as may be reasonably determined by the Compensation Committee. Mr.
Smialek received an annual bonus for 1997 in the amount of $300,000. Mr. Smialek
also is entitled to participate in all incentive, savings, retirement and
welfare benefit plans and arrangements in which certain other senior executive
officers are eligible to participate, other than any restricted stock or option
plans in which his participation will be at the discretion of the Company.
If Mr. Smialek's employment is terminated by the Company without "Cause" or by
Mr. Smialek for "Good Reason" (as the quoted terms are used in the agreement),
he will be entitled to a lump sum amount equal to his accrued salary, annual
bonus and vacation pay and any compensation previously deferred by him
(collectively, the "Accrued Obligations") as well as a severance payment equal
to his annual salary plus the greater of $150,000 or his most currently
determined annual bonus, together with the continuation of certain benefits for
a one-year period.
In 1993, Mr. Smialek purchased from the Company 33,333 restricted shares of
Common Stock issued under the Plan at a cash purchase price per share of $15,
whereupon 66,667 restricted shares were awarded to him under the Plan for a
nominal price (all of such restricted shares are referred to collectively herein
as the "Restricted Shares"). Restrictions on the Restricted Shares expired March
31, 1996, and Mr. Smialek has
-35-
<PAGE> 36
all the rights of a holder of common stock with respect to such shares. Mr.
Smialek has the option to settle the tax withholding obligations of the Company
resulting from expiration of the restrictions with shares of Common Stock.
In December 1996, the Company entered into a Value Appreciation Agreement with
Messrs. Heffron, Jacobs, Koch, Woodlief, Kauer and certain other officers. The
Value Appreciation Agreement provides that the executives will be entitled to
receive a commission from the Company in certain circumstances following a
transaction giving rise to a change in control. The amount of the commission is
dependent on achieving a threshold price per share in any such transaction and
is determined based on the amount realized per share in excess of the threshold
price taking into account increases in the Company's enterprise value since
December 1996. The Value Appreciation Agreement has a term of two years. On
March 24, 1998, the Company announced that it had entered into a definitive
merger agreement with DLJ Merchant Banking Partners II, L.P. ("DLJMB") at a
price of $42.98 in cash and the right to retain 0.03419 of a share of common
stock (having a nominal value of $44.50 per share) of the surviving corporation.
On June 8, 1998, DLJMB agreed to increase the total price by $0.50 in cash to
$43.48 in cash and 0.03378 shares of retained stock (having a nominal value of
$45.00 per share) of the surviving corporation. If the Company consummates the
pending merger with DLJMB, the commission on the sale under the Value
Appreciation Agreement will be $2.6 million.
In December 1996, the Company entered into Income Protection Agreements with
Messrs. Heffron, Jacobs, Koch, Woodlief, Kauer and certain other officers. The
Income Protection Agreements provide that in the event of termination of an
executive's employment by the Company without cause, or, in certain
circumstances, by the executive, the executive will be entitled to receive
certain severance benefits. The benefits payable to the executive in the event
of a termination of employment covered by the Income Protection Agreement are as
follows: (i) one year's base salary; (ii) a bonus equal to the bonus paid to
executive in 1996 or the target bonus for the year in which employment is
terminated, as well as a pro rated bonus for the year in which the termination
occurs; (iii) continued participation in the Company's benefit plans for the
duration of the severance period; (iv) accelerated vesting of all stock options
and stock appreciation rights; (v) continuation of any rights to indemnification
from the Company; and (vi) certain outplacement services. The Income Protection
Agreements have three year terms and automatically renew for subsequent one year
terms, unless terminated by either party.
The following Compensation Committee Report and Performance Graph will not be
deemed incorporated by reference by any general statement incorporating by
reference this Form 10-K/A No. 2 into any of the Company's filings under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, except to the extent that the Company specifically incorporates this
information by reference, and will not otherwise be deemed filed under such
Acts.
BOARD COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
OVERVIEW
The Compensation Committee (the "Committee") has been given the authority to
review and evaluate individual executive officers and to determine the
compensation for each executive officer. In general, the Committee's philosophy
is to attract, motivate and retain qualified key executives, reward individual
performance, relate compensation to Company goals and objectives and enhance
shareholder value. The Company's compensation program includes competitive base
salaries, annual bonus opportunities, competitive benefits and long-term awards
under the 1993 Long-Term Incentive Plan (the "Plan").
-36-
<PAGE> 37
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Robert L. Smialek became the Company's Chief Executive Officer effective May 1,
1993. The Compensation Committee, by approval of the Second Extension Agreement
between the Company and Mr. Smialek dated September 25, 1997, extended the
employment agreement indefinitely. Mr. Smialek's compensation for 1997 consisted
of a base salary of $550,000 and a bonus of $300,000. Determination of Mr.
Smialek's base salary was primarily based on Mr. Smialek's background and
experience, and compensation levels of executives in similar positions in
comparable businesses. The cash bonus paid to Mr. Smialek for 1997 was based
primarily on the Company achieving certain specified financial performance goals
and the perceptions of the Committee. Mr. Smialek will also be eligible to
receive annual bonuses in such amounts as may be reasonably determined from time
to time by the Compensation Committee.
COMPENSATION OF EXECUTIVE OFFICERS
The Company's compensation program for its executive officers is based on
the following objectives:
o Total compensation of the executive officers should be linked to the
financial performance of the Company and enhancement of shareholder
value.
o The compensation paid to the executive officers of the Company should
be competitive with executive compensation levels of similar companies
so that the Company can attract, motivate and retain qualified key
executives.
o The compensation program should reward outstanding individual
performance and contributions to the Company as well as experience.
Compensation for executive officers in 1997 consisted of base salary, bonuses
and stock option awards under the Plan. Base salaries and bonuses were paid to
executive officers (excluding the Chief Executive Officer) based upon each such
executive officer's individual performance, duties, responsibilities, experience
and tenure, general economic conditions, the recent financial performance of the
Company, and other factors. Bonuses paid to the executive officers were
determined in accordance with a bonus plan that required 70% of the bonus to be
determined on the basis of the Company's achieving certain specified financial
performance goals, and 30% on the basis of the Committee's and the Chief
Executive Officer's evaluation of the performance of each executive officer. In
addition, the Chief Executive Officer has the discretion to make
performance-related individual awards.
Stock options were awarded under the Plan to executive officers (excluding the
Chief Executive Officer) in June 1997. The number of options awarded to each
executive officer was determined by the Committee based on a recommendation of
the Chief Executive Officer. Determination of such awards was based on the
executive officer's length of services and the perceptions of the Committee and
the Chief Executive Officer of the individual contributions and performance and
ability to impact overall business results. The Committee considered the levels
of options awarded to executives in similar positions and at similar salary
levels as compared to surveys published by compensation consulting firms.
IMPACT OF 1993 TAX ACT CHANGES
The Budget Reconciliation Act of 1993 (the "Act") amended the Internal Revenue
Code to add Section 162(m) that bars a deduction to any publicly held
corporation for compensation paid to a "covered employee" in excess of
$1,000,000 per year (the "Dollar Limitation"). A covered employee of the Company
is any
-37-
<PAGE> 38
employee who appears in the Summary Compensation Table who is also employed by
the Company on December 31. The Dollar Limitation applies to tax years beginning
after 1993.
The legislation potentially impacts three components of the Company's executive
compensation package. These include base salaries, bonuses, and awards under the
Plan. The Company does not believe that the legislation as amended will have any
effect on the deductibility of compensation payable in 1997 to any of its
executive officers.
The Company believes that the Plan currently qualifies for the exemption
provided for performance based compensation and awards under the Plan will not
be subject to the Dollar Limitation.
COMPENSATION COMMITTEE:
James J. Gaffney
Thomas E. Petry
-38-
<PAGE> 39
PERFORMANCE GRAPH
The following Performance Graph compares the performance of the Company
with that of the Russell 2000 Index and the Standard & Poor's Conglomerates
Index. The comparison of cumulative total return to shareholders assumes that
$100 was invested in the Common Stock of the Company on September 15, 1993 (the
effective date of the registration of the Company's Common Stock under the
Securities Exchange Act of 1934, as amended), and in the Russell 2000 Index and
the Standard & Poor's Conglomerates Index on August 31, 1993, and that all
dividends were reinvested.
Comparison of 52 Month Cumulative Total Return*
Among Insilco Corporation, The S & P Conglomerate Index
And The Russell 2000 Index
<TABLE>
<CAPTION>
8/93 12/93 12/94 12/95 12/96 12/97
<S> <C> <C> <C> <C> <C> <C>
Insilco Corporation $100.00 $113.00 $207.00 $268.00 $323.00 $277.00
Russell 2000 100.00 105.00 104.00 129.00 148.00 181.00
S & P Conglomerates 100.00 99.00 94.00 122.00 139.00 156.00
</TABLE>
* Assumes $100 invested on 09/15/93 in Insilco common stock or on 08/31/93 in
each index. Total return assumes dividends are reinvested.
-39-
<PAGE> 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
------------------------------------------------------------
MANAGEMENT
----------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the only persons known by the Company to be the
beneficial owners of more than five percent (5%) of the outstanding shares of
Common Stock of the Company on April 3, 1998:
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE
OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
<S> <C> <C>
Water Street Corporate Recovery 1,863,878(1)(2) 45.2%
Fund I, L.P.
85 Broad Street
New York, NY 10004
Neuberger & Berman, LLC 546,818 13.3%
605 Third Avenue
New York, NY 10158-3698
</TABLE>
- -------------
(1) Represents shares beneficially owned by Water Street. Goldman Sachs is
the general partner of Water Street and thus may be deemed to be the
beneficial owner of shares held by Water Street. GS Group is a general
partner of Goldman Sachs and directly owns 334 shares of Common Stock not
included in the amount shown. The address of Goldman Sachs and GS Group
is 85 Broad Street, New York, NY 10004. Goldman Sachs disclaims
beneficial ownership of the shares held by Water Street except to the
extent such ownership corresponds to its interests in Water Street and
disclaims beneficial ownership of the shares held by GS Group. GS Group
disclaims beneficial ownership of the shares held by Water Street to the
extent partnership interests in Water Street are held by persons other
than GS Group, Goldman Sachs or their affiliates.
(2) Includes an aggregate of 80,000 shares of Common Stock acquired from the
Company by Water Street through Messrs. O'Toole and Volpert pursuant to
the director plan described under "Director Compensation."
-40-
<PAGE> 41
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of April 3, 1998, the beneficial ownership of
the Company's Common Stock by each officer named in the Summary Compensation
Table who owns shares of the Common Stock, each director of the Company and by
all directors and executive officers as a group:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
<S> <C> <C>
James J. Gaffney 8,000 *
Terence M. O'Toole 1,863,878(1) 45.2%
Thomas E. Petry 8,000 *
Robert L. Smialek 315,066(2) 7.2%
Barry S. Volpert 1,863,878(1) 45.2%
Robert F. Heffron(3) 31,564(4) *
Kenneth H. Koch 12,464(5) *
Philip K. Woodlief(6) 12,013(7) *
David A. Kauer 11,800(8) *
All directors and executive
officers as a group (9 persons) 2,245,429(9) 50.9%
</TABLE>
- --------------
* Less than 1%
(1) The shares listed for Mr. O'Toole and Mr. Volpert are beneficially owned by
Water Street or by Goldman Sachs or GS Group of which Mr. O'Toole and Mr.
Volpert are general partners; however, Mr. O'Toole and Mr. Volpert disclaim
beneficial ownership of such shares except to the extent of their indirect
pecuniary interest in such shares.
(2) Includes 240,000 shares subject to stock options exercisable within 60 days
of April 3, 1998.
(3) Mr. Heffron's employment with the Company terminated effective February 24,
1998.
(4) Includes 30,664 shares subject to stock options exercisable within 60 days
of April 3, 1998.
(5) Includes 11,164 shares subject to stock options exercisable within 60 days
of April 3, 1998.
(6) Mr. Woodlief's employment with the Company terminated effective May 8,
1998.
(7) Includes 11,512 shares subject to stock options exercisable within 60 days
of April 3, 1998.
(8) Includes 11,000 shares subject to stock options exercisable within 60 days
of April 3, 1998.
(9) Includes 287,484 shares subject to stock options exercisable within 60 days
of April 3, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
The Compensation Committee of the Board of Directors has been comprised of two
nonemployee directors, James J. Gaffney and Thomas E. Petry. None of the current
directors on the Compensation Committee was an officer or employee of the
Company or any of its subsidiaries during 1997 or had any relationships during
1997 that would require disclosure under SEC rules, except as follows:
In 1995, the Company loaned $210,000 to James J. Gaffney, a director of the
Company, in two separate loan transactions. Each loan bears interest at a
variable rate equal to the applicable federal rate at the date of the loan,
adjusted semi-annually in accordance with changes in the applicable federal rate
and is payable to the Company on demand. Mr. Gaffney pledged 13,334 shares of
restricted stock of the Company to secure his repayment obligation under the
terms of the loans. The loan was repaid in full on February 19, 1997.
-41-
<PAGE> 42
Terence M. O'Toole and Barry S. Volpert are partners in Goldman Sachs and
directors of the Company. Goldman Sachs has from time to time provided the
Company with financial advisory services in connection with significant
transactions, including debt offerings, debt refinancings, purchases and sales
of businesses, and the sale of the Company. Goldman Sachs has performed such
financial advisory and other investment banking services for the Company on
terms and conditions no less favorable to it than it could obtain from an
unaffiliated firm of comparable rank, and provide for the payment of fees, the
reimbursement of Goldman Sachs' reasonable expenses and the indemnification of
Goldman Sachs against various liabilities, including liabilities under the
federal securities laws. Goldman Sachs may also hold or acquire from time to
time equity or creditor interests in entities with which the Company transacts
business in the ordinary course. The Company is not aware of any transaction or
of any currently proposed transaction, in which Goldman Sachs has any material
direct or indirect interest as a result of its ownership position in a party to
the transaction other than the Company, except as follows:
On July 3, 1997, the Company refinanced its existing credit facility under a new
six year $200 million credit facility with a bank group consisting of Citicorp
USA, Inc., Goldman Sachs Credit Partners L.P. (formerly Pearl Street, L.P.), an
affiliate of Goldman Sachs, and First National Bank of Chicago. Goldman Sachs
Credit Partners L.P. had an initial participating interest of $66.7 million in
the credit facility. Goldman Sachs Credit Partners L.P. received $0.6 million
from the agent bank for its portion of the arrangement fee paid by the Company
in 1997.
During 1997, Goldman Sachs was retained to assist the Company in the sale of the
Rolodex Business. The business was sold March 5, 1997 and the Company paid
Goldman Sachs approximately $2.0 million in investment banking fees and expenses
related to the sale.
During 1997, Goldman Sachs was also retained to provide the Company with
investment banking services in connection with the Company's issuance of $150
million aggregate principal amount of 10.25% Senior Subordinated Notes due 2007
which was completed on August 12, 1997 (the "Notes"), as well as the self tender
offer to acquire 2,857,142 shares of Common Stock which was completed on August
12, 1997 (the "Tender Offer"). The Company paid Goldman Sachs $3.1 million in
underwriting fees related to the Notes, $2.0 million in investment banking fees
in connection with the refinancing and the issuance of the Notes, and $0.2
million for services rendered in connection with the Tender Offer.
The Company announced on March 24, 1998, that it has entered into a definitive
merger agreement with DLJMB. Goldman Sachs advised the Company in connection
with this transaction pursuant to the engagement described in the preceding
paragraph which was still in effect. Goldman Sachs will receive a fee of $2
million payable on the consummation of the merger.
The Company believes that the terms of all the transactions and existing
arrangements set forth above are no less favorable to the Company than similar
transactions and arrangements which might have been entered into with unrelated
parties.
-42-
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
----------------------------------------------------------------
FORM 8-K
--------
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) Financial Statements
- Statement of Management's Responsibility for Financial
Statements
- Independent Auditors' Report
- Consolidated Balance Sheets
- December 31, 1997
- December 31, 1996
- Consolidated Statements of Operations
- Year ended December 31, 1997
- Year ended December 31, 1996
- Year ended December 31, 1995
- Consolidated Statements of Stockholders' Equity (Deficit)
- For the years ended December 31, 1997, 1996 and 1995
- Consolidated Statements of Cash Flows
- Year ended December 31, 1997
- Year ended December 31, 1996
- Year ended December 31, 1995
- Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
See Exhibit 99(a) - Schedule II - Valuation and Qualifying
Accounts.
All other schedules are omitted because of the absence of the
conditions under which they are required or because the required
information is included in financial statements or the notes
thereto.
-43-
<PAGE> 44
(3) Exhibits:
*2(a) - Amended and Restated Plan of Reorganization Jointly Proposed
by the Debtors and the Official Joint Committee of Unsecured
Creditors dated November 23, 1992 (Form T-3, Exhibit T3E-3,
File No. 22-23356).
*2(b) - Order Confirming Plan of Reorganization and Approving
Settlements Pursuant to Bankruptcy Rule 9019 dated November
24, 1992 (Form T-3, Exhibit T3E-4, File No.
22-23356).
*2(c) - Order on Motion for Order in Aid of Implementation of Plan
dated March 23, 1993 (Form T-3, Exhibit T3E-5, File No.
22-23356).
*2(d) - Order on Debtors' Supplemental Motion for Order in Aid of
Implementation of Plan dated March 23, 1993 (Form T-3,
Exhibit T3E-6, File No. 22-23356).
*2(e) - Notice of (1) Order Confirming Plan of Reorganization, (2)
Effective Date and (3) Administrative Claims Bar Date dated
April 1, 1993 (Form 10, Exhibit 2(e), File No. 0-22098).
*2(f) - Order on Motion for Order in Aid of Implementation of Plan
dated September 14, 1993 (Form 10/A, Amendment No. 2 to Form
10, Exhibit 2(f), File No. 0-22098).
*2(g) - Share Purchase Agreement, dated as of June 28, 1996, between
the Company's subsidiary, GUVAB Gesellschaft fur
Unternehmensbeteililgungen und Vermogensverwaltung im
aluminiumverarbeitenden Bereich mbH ("GUVAB"), and Lingemann
(Form 8-K dated July 10, 1996, File No. 0-22098).**
*2(h) - Asset Purchase Agreement, dated as of July 1, 1996, among
the Company's subsidiary, HHI Acquisition Corp., Lingemann,
and Helima-Helvetion International, Inc. (Form 8-K dated
July 10, 1996, File No. 0-22098).**
*2(i) - Stock Purchase Agreement, dated as of September 3, 1996,
between the Company's subsidiary and Esselte Corporation
(Form 8-K dated September 6, 1996, File No. 0- 22098).**
*2(j) - Asset Purchase Agreement, dated as of October 4, 1996,
between the Company and Franklin Electronic Publishers, Inc.
and List of Omitted Schedules (Form 8-K dated October 4,
1996, File No. 0-22098).**
*2(k) - Asset Purchase Agreement, dated as of February 12, 1997,
between the Company and Newell Co. (Form 8-K dated March 5,
1997, File No. 0-22098).**
*3(a) - Amended and Restated Certificate of Incorporation of the
Company (Form 10, Exhibit 3(a), File No. 0-22098).
*3(b) - Amended and Restated Bylaws of the Company (Form 10, Exhibit
3(b), File No. 0- 22098).
-44-
<PAGE> 45
*4(a) - Settlement Agreement and Stipulated Order by and between the
Company, certain subsidiaries of the Registrant, the Valspar
Corporation and the United States of America by order of the
United States District Court for the Western District of
Texas, San Antonio Division, dated January 19, 1993 (Form 10,
Exhibit 4(h), File No. 0- 22098.
*4(b) - Stipulation regarding Settlement Agreement and Stipulated
Order amending Exhibit 4(h) (Form 10, Exhibit 4(i),
File No. 0-22098).
*4(c) - Credit Agreement, dated as of October 21, 1994, among the
Company, the institutions from time to time parties thereto as
Lenders, the institutions from time to time parties thereto as
Issuing Banks, Citicorp USA, Inc. and Pearl Street L.P., as
Co-Agents, and Citicorp USA, Inc., as Administrative Agent
(Form S-8 Registration Statement, as amended, Exhibit 4(o),
File No. 33-86938).**
*4(d) - First Amendment to Credit Agreement, dated as of November
21, 1994, among the Company, the institutions from time to
time parties thereto as Lenders, the institutions from time to
time parties thereto as Issuing Banks, Citicorp USA, Inc. and
Pearl Street L.P., as Co-Agents, and Citicorp USA, Inc., as
Administrative Agent (Form S-8 Registration Statement, as
amended, Exhibit 4(p), File No. 33-86938).**
*4(e) - Second Amendment to Credit Agreement, dated as of March 8,
1995, among the Company, the institutions from time of time
parties thereto as Lenders, the institutions from time to time
parties thereto as Issuing Banks, Citicorp USA, Inc. and Pearl
Street L.P., as Co-Agents, and Citicorp USA, Inc., as
Administrative Agent (Form 10-K for the year ended December
31, 1994, Exhibit 4(f), File No. 0-22098).**
*4(f) - Third Amendment to Credit Agreement, dated as of July 18,
1995, among the Company, the institutions from time to time
parties thereto as Lenders, the institutions from time to time
parties thereto as Issuing Banks, Citicorp USA, Inc. and Pearl
Street L.P., as Co-Agents, and Citicorp USA, Inc., as
Administrative Agent (Form 10-Q for the quarter ended June 30,
1995, Exhibit 4(g), File No. 0-22098).**
*4(g) - Fourth Amendment to Credit Agreement, dated as of June 21,
1996, among the Company, the institutions from time to time
parties thereto as Lenders, the Institutions from time to time
parties thereto as Issuing Banks, Citicorp USA, Inc. and Pearl
Street L.P., as Co-Agents, and Citicorp USA, Inc., as
Administrative Agent (Form 8-K dated July 10, 1996, File No.
0-22098).
*4(h) - Fifth Amendment to Credit Agreement, dated as of March 3,
1997, among the Company, the institutions from time to time
parties thereto as Lenders, the institutions from time to time
parties thereto as Issuing Banks, Citicorp USA, Inc. and Pearl
Street L.P., as Co-Agents, and Citicorp USA, Inc., as
Administrative Agent (Form 10-K to the year ended December 31,
1996, Exhibit 4(h), File No. 0-022098).
*4(i) - Amended and Restated Credit Agreement, dated July 3, 1997
(Schedule 13E-4, Exhibit (b)(1), dated July 11, 1997).
*4(j) - Indenture, dated as of August 12, 1997 between the Company
and the Trustee (Form S-4 Registration Statement, dated
October 15, 1997, Exhibit 4(j), File No. 333- 36523).
-45-
<PAGE> 46
*4(k) - Form of New Note (included in Exhibit 4(j) above) (Form S-4
Registration Statement, dated October 15, 1997, Exhibit
4(k), File No. 333-36523).
*4(l) - Purchase Agreement, dated as of August 7, 1997, among the
Company and Goldman, Sachs & Co., McDonald & Company
Securities, Inc. and Citicorp Securities Inc. (the "Initial
Purchasers") (Form S-4 Registration Statement, dated October
15, 1997, Exhibit 4(l), File No. 333-36523).
*4(m) - Exchange and Registration Rights Agreement, dated as of
August 12, 1997, between the Company and the Initial
Purchasers (Form S-4 Registration Statement, dated October 15,
1997, Exhibit 4(m), File No. 333-36523).
The following are management contracts and compensatory plans or arrangements in
which directors or executive officers participate:
*10(a) - The Company's 1993 Long-Term Incentive Plan (Form 10,
Exhibit 10 (j), File No. 0-22098).
*10(b) - Supplemental Terms and Conditions Applicable to December
1993 Option Awards Under the Company 1993 Long-Term
Incentive Plan (Form S-8 Registration Statement, as amended,
Exhibit 4(b), File No. 33-86938).
*10(c) - Employment Agreement dated as of May 1, 1993 between the
Company and Robert L. Smialek, as amended and restated (Form
10/A, Amendment No. 1 to Form 10, Exhibit 10(k), File No.
0-22098).
*10(d) - Form of Indemnification Agreement adopted by the Company as
of July 30, 1990, entered into between the Registrant and
certain of its officers and directors individually, together
with a schedule identifying the other documents omitted and
the material details in which such documents differ (Form 10,
Exhibit 10(n), File No. 0- 22098).
*10(e) - The Company's 1993 Nonemployee Director Stock Incentive Plan
(Form 10/A, Amendment No. 1 to Form 10, Exhibit 10(p), File
No. 0-22098).
*10(f) - Value Appreciation Agreement as of December 1996, entered
into between the Registrant and the following officers:
David M. Aronowitz, Robert F. Heffron, Les G. Jacobs, David
A. Kauer, Kenneth H. Koch and Philip K. Woodlief (Form 10-K
for the year ended December 31, 1996, Exhibit 10(g), File
No. 0-22098).
*10(g) - Form for Income Protection Agreement adopted by the Company
as of December, 1996, entered into between the Registrant
and the officers identified in Exhibit 10(g) (Form 10-K for
the year ended December 31, 1996, Exhibit 10(h), File No. 0-
22098).
*10(h) - Stock Purchase Agreement by and between the Company and
Water Street Corporate Recovery Fund I, L.P., dated July 10,
1997 (Schedule 13E-4, Exhibit (c)(2), filed July 11, 1997).
*10(i) - Stock Purchase Agreement by and between the Company and
Robert L. Smialek, dated July 10, 1997 (Schedule 13E-4,
Exhibit (c)(1), filed July 11, 1997).
-46-
<PAGE> 47
*10(j) - Amendment, dated August 11, 1997, Stock Purchase Agreement
by and between the Company and Water Street Corporate
Recovery Fund I, L.P., dated July 10, 1997 (Form S-4
Registration Statement, dated October 15, 1997,
Exhibit 4(k), File No. 333-36523).
***10(k) - First Amendment to the Insilco Corporation 1993 Long-Term
Incentive Plan dated November 26, 1996.
***10(l) - Extension Agreement between the Company and Robert L.
Smialek dated May 1, 1996.
***10(m) - Second Extension Agreement between the Company and Robert
L. Smialek dated September 25, 1997.
*21 - Subsidiaries of the Registrant (Form 10-Q for the quarter
ended September 30, 1996, File No. 0-22098).
23(a) - Consent of KPMG Peat Marwick LLP.
24 - Power of Attorney of officers and directors of the
Registrant appearing on the signature page hereof.
*25 - Statement of Eligibility and Qualification Under the Trust
Indenture Act of 1939 (T-1) of The Bank of New York (bound
separately) (Form S-4 Registration Statement, dated October
15, 1997, Exhibit 25, File No. 333-36523).
27 - Financial Data Schedule.
***99(a) - Schedule II - Valuation and Qualifying Accounts.
* Incorporated by reference, as indicated.
** The Registrant agrees to furnish to the Securities and Exchange
Commission upon request copies of any omitted schedule or exhibit to
Exhibits 2(g), (h), (i), (j) and (k) and 4(c), 4(d), 4(e), and 4(f).
*** Previously filed with this Form 10-K for the year ended
December 31, 1997.
-47-
<PAGE> 48
(B) REPORTS ON FORM 8-K
A report, dated March 5, 1997, on Form 8-K was pursuant to Item 2 of
that form. The following financial statements were filed as part of
that report:
(1) Pro Forma Financial Information.
Unaudited Pro Forma Condensed Balance Sheet as of December
31, 1996
Unaudited Pro Forma Condensed Consolidated Statements of
Operations Year Ended December 31, 1996
A report, dated October 23, 1997, on Form 8-K was filed pursuant to
Item 2 of that form.
A report, dated November 19, 1997, on Form 8-K was filed pursuant to
Item 2 of that form.
-48-
<PAGE> 49
(C) EXHIBITS
The Exhibits to this report begin on page 85.
(D) FINANCIAL STATEMENT SCHEDULES:
See Exhibit 99(a) - Schedule II - Valuation and Qualifying Accounts.
Note: All other schedules called for under Regulation S-X not
included herein have been omitted because they are not
applicable, the required information is not material or the
required information is included in the financial
statements or notes thereto.
[This space intentionally left blank]
-49-
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INSILCO CORPORATION
Date July 7, 1998 By: /s/ David A. Kauer
------------------
David A. Kauer
Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the date indicated.
<TABLE>
<S> <C> <C>
Robert L. Smialek* President, Chief Executive )
------------------------- Officer and Director )
Robert L. Smialek (Principal Executive Officer) )
David A. Kauer* Vice President and Chief )
------------------------ Financial Officer
David A. Kauer (Principal Accounting Officer) )
James J. Gaffney* )
------------------------
James J. Gaffney Director )
Terence M. O'Toole* Director ) July 7, 1998
------------------------
Terence M. O'Toole
Thomas E. Petry* )
------------------------
Thomas E. Petry Director )
Barry S. Volpert* )
------------------------
Barry S. Volpert Director )
/s/ David A. Kauer
------------------------
By: *David A. Kauer
Attorney-in-Fact
</TABLE>
-50-
<PAGE> 51
INSILCO CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Statement of Management's Responsibility for Financial Statements F-2
Independent Auditors' Report F-3
Consolidated Balance Sheets F-4
- December 31, 1997
- December 31, 1996
Consolidated Statements of Operations F-5
- Year ended December 31, 1997
- Year ended December 31, 1996
- Year ended December 31, 1995
Consolidated Statement of Stockholders' Equity (Deficit)
- For the years ended December 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows F-7
- Year ended December 31, 1997
- Year ended December 31, 1996
- Year ended December 31, 1995
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 52
Statement of Management's Responsibility for Financial Statements
-----------------------------------------------------------------
The Consolidated Financial Statements and accompanying Notes of Insilco
Corporation and subsidiaries have been prepared by management using the best
available information and applying judgment. These statements have been prepared
in accordance with generally accepted accounting principles in the United
States. Management is responsible for the selection of appropriate accounting
principles and the fairness and integrity of such statements.
The Company maintains a system of internal controls designed to provide
reasonable assurance that accounting records are reliable for the preparation of
financial statements and for safeguarding assets. The Company's system of
internal controls includes financial written policies, guidelines and
procedures; organizational structures, staffed through the careful selection of
people that provide an appropriate division of responsibility and
accountability; and an internal audit program. Professional financial personnel
are responsible for implementing and overseeing the system of financial
controls, reporting on management's stewardship of assets and maintaining
accurate records.
KPMG Peat Marwick LLP, independent auditors, provide an objective, independent
review of management's discharge of its obligations relating to the fairness of
financial reporting. Their opinion is based on procedures believed by them to be
sufficient to provide reasonable assurance that the Consolidated Financial
Statements are not materially misstated. The independent auditors' report of
KPMG Peat Marwick LLP follows.
The Board of Directors pursues its oversight responsibility for the financial
statements through its Audit Committee, composed of Directors who are not
employees of the Company. The Audit Committee meets regularly to review with
management and KPMG Peat Marwick LLP the Company's accounting policies, internal
and external audit plans and results of audits performed. To ensure complete
independence, KPMG Peat Marwick LLP and the internal auditors have full access
to the Audit Committee and meet with the Audit Committee without the presence of
management.
Robert L. Smialek
Chairman of the Board,
President and CEO
David A. Kauer
Vice President and Chief Financial Officer
F-2
<PAGE> 53
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Insilco Corporation:
We have audited the consolidated financial statements of Insilco Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule of valuation and qualifying accounts. These consolidated
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Insilco Corporation
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Columbus, Ohio
January 30, 1998, except as
to Note 21, which is as of
June 8, 1998 and Note 2,
which is as of July 7, 1998
F-3
<PAGE> 54
INSILCO CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,651 3,481
Trade receivables, net 67,209 73,874
Other receivables 3,477 8,499
Inventories 60,718 66,385
Deferred tax asset 277 29,859
Prepaid expenses and other current assets 2,716 3,403
--------- ---------
Total current assets 145,048 185,501
--------- ---------
Property, plant and equipment, net 113,971 114,379
Deferred tax asset 1,054 7,542
Other assets 42,600 40,971
--------- ---------
Total assets $ 302,673 348,393
========= =========
Liabilities and Stockholders' Equity (Deficit)
---------------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,684 24,272
Accounts payable 39,757 37,984
Customer deposits 20,346 23,490
Accrued expenses and other 43,753 48,319
--------- ---------
Total current liabilities 105,540 134,065
Long-term debt, excluding current portion 256,059 136,770
Other long-term obligations, excluding current portion 43,402 44,156
--------- ---------
Total liabilities 405,001 314,991
--------- ---------
Stockholders' equity (deficit):
Common stock, $.001 par value; 15,000,000 shares authorized;
4,548,373 shares
issued (9,810,794 in 1996) and 4,080,693
shares outstanding (9,487,740 in 1996) 5 10
Treasury stock, at cost (16,268) (10,745)
Additional paid-in capital -- 81,496
Accumulated deficit (82,756) (37,115)
Foreign currency translation adjustments (3,309) (244)
--------- ---------
Total stockholders' equity (deficit) (102,328) 33,402
--------- ---------
Commitments and contingencies (See Notes 10,11,14 and 17)
Total liabilities and stockholders' equity (deficit) $ 302,673 348,393
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 55
INSILCO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996 and 1995
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales $ 528,233 492,405 449,506
Cost of products sold 370,845 344,912 311,315
Depreciation and amortization 18,377 15,357 13,352
Selling, general and administrative expenses 87,909 83,703 69,753
Amortization of Reorganization Goodwill -- -- 16,205
----------- ----------- -----------
Operating income 51,102 48,433 38,881
----------- ----------- -----------
Other income (expense):
Interest expense (20,562) (18,378) (19,546)
Interest income 2,837 724 1,472
Equity in net income of Thermalex 2,647 2,922 2,335
Other income, net 794 4,784 11,558
----------- ----------- -----------
Total other income (expense) (14,284) (9,948) (4,181)
----------- ----------- -----------
Income from continuing operations before income taxes
and extraordinary item 36,818 38,485 34,700
Income tax expense (13,404) (13,272) (16,694)
----------- ----------- -----------
Income from continuing operations before extraordinary
item 23,414 25,213 18,006
Discontinued operations, net of tax:
Income (loss) from operations 1,170 8,741 (15,431)
Gain on disposal 57,788 5,099 --
----------- ----------- -----------
Income (loss) from discontinued operations 58,958 13,840 (15,431)
----------- ----------- -----------
Income before extraordinary item 82,372 39,053 2,575
Extraordinary item, net of tax (728) -- --
----------- ----------- -----------
Net income $ 81,644 39,053 2,575
=========== =========== ===========
Earnings (loss) per common share:
Income from continuing operations $ 3.25 2.65 1.83
Discontinued operations 8.19 1.45 (1.57)
Extraordinary item (0.10) -- --
----------- ----------- -----------
Basic net income per share $ 11.34 4.10 0.26
=========== =========== ===========
Weighted average number of common shares outstanding 7,200,103 9,517,123 9,815,109
=========== =========== ===========
Earnings (loss) per common share - assuming dilution:
Income from continuing operations $ 3.19 2.55 1.77
Discontinued operations 8.03 1.40 (1.52)
Extraordinary item (0.10) -- --
----------- ----------- -----------
Diluted net income per share $ 11.12 3.95 0.25
=========== =========== ===========
Weighted average number of common shares outstanding
and common share equivalents 7,345,045 9,891,631 10,132,174
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 56
INSILCO CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Deficit) For the Years Ended December 31, 1997,
1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
Total
Additional Cumulative Stockholders'
Common Stock Treasury Paid-in Accumulated Translation Equity
Par Value $.001 Stock Capital Deficit Adjustment (Deficit)
--------------- ------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 10 -- 65,282 (78,743) -- (13,451)
Net income -- -- -- 2,575 -- 2,575
Shares issued upon exercise of stock options -- -- 226 -- -- 226
Purchase of treasury stock -- (6,813) -- -- -- (6,813)
Tax benefit from reduction of valuation
allowance for deferred tax assets -- -- 1,612 -- -- 1,612
Tax benefit from exercise of stock options -- -- 72 -- -- 72
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 10 (6,813) 67,192 (76,168) -- (15,779)
Net income -- -- -- 39,053 -- 39,053
Tax benefit from reduction of valuation
allowance for deferred tax assets -- -- 10,237 -- -- 10,237
Purchase of treasury stock -- (3,932) -- -- -- (3,932)
Restricted stock -- -- 3,300 -- -- 3,300
Shares issued upon exercise of stock options -- -- 1,071 -- -- 1,071
Reserved shares -- -- (706) -- -- (706)
Tax benefit from exercise of stock options -- -- 402 -- -- 402
Foreign currency translation adjustment -- -- -- -- (244) (244)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 10 (10,745) 81,496 (37,115) (244) 33,402
Net income -- -- -- 81,644 -- 81,644
Repurchase of shares (5) -- (92,710) (127,285) -- (220,000)
Costs of Tender Offer -- -- (889) -- -- (889)
Purchase of treasury stock -- (5,523) -- -- -- (5,523)
Restricted stock -- -- 571 -- -- 571
Shares issued upon exercise of stock options -- -- 8,255 -- -- 8,255
Tax benefit from exercise of stock options -- -- 3,277 -- -- 3,277
Foreign currency translation adjustment -- -- -- -- (3,065) (3,065)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 $ 5 (16,268) -- (82,756) (3,309) (102,328)
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 57
INSILCO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 81,644 39,053 2,575
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,377 15,357 45,524
Deferred tax expense 11,679 11,667 13,868
Other noncash charges and credits (127) (4,904) (6,143)
Changes in operating assets and liabilities:
Receivables (1,297) (3,370) (439)
Inventories (3,304) 791 (1,212)
Payables and other 12,515 958 (10,077)
Other long-term liabilities (2,344) (2,329) (3,463)
Discontinued operations:
Gain on disposal Office Products Business (95,001) (2,493) --
Deferred tax expense 25,687 (1,651) (1,207)
Depreciation 194 1,474 1,406
Change in operating assets and liabilities (2,512) 870 (3,088)
--------- --------- ---------
Net cash provided by operating activities 45,511 55,423 37,744
--------- --------- ---------
Cash flows from investing activities:
Proceeds from divestitures, net 112,610 21,818 --
Other investing activities 6,190 8,704 7,481
Capital expenditures (23,583) (20,009) (20,190)
Discontinued operations -- (2,570) (1,969)
Acquisitions of businesses, net of cash acquired -- (37,726) --
--------- --------- ---------
Net cash provided by (used in) investing activities 95,217 (29,783) (14,678)
--------- --------- ---------
Cash flows from financing activities:
Repurchase of shares (220,000) -- --
Retirement of long-term debt (117,246) (26,330) (12,926)
Debt issuance and Tender Offer costs (10,689) -- --
Payment of prepetition liabilities (2,811) (2,862) (2,949)
Purchase of treasury stock (1,887) (3,932) (6,813)
Proceeds from sale of subordinated notes 150,000 -- --
Proceeds from debt borrowings 64,759 -- 600
Proceeds from sale of stock 4,618 1,071 226
--------- --------- ---------
Net cash used in financing activities (133,256) (32,053) (21,862)
--------- --------- ---------
Effect of exchange rate changes on cash (302) -- --
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 7,170 (6,413) 1,204
Cash and cash equivalents at beginning of period 3,481 9,894 8,690
--------- --------- ---------
Cash and cash equivalents at end of period $ 10,651 3,481 9,894
========= ========= =========
Supplemental information - cash paid for:
Interest, net of capitalized amount $ 13,305 17,820 18,199
========= ========= =========
Income taxes $ 7,062 2,081 2,407
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 58
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial
statements of Insilco Corporation (the "Company") and its wholly
owned subsidiaries. The Company's investments in companies for
which the Company does not have operational control are accounted
for under the equity method. All significant intercompany balances
and transactions have been eliminated.
(B) PRO FORMA RESULTS OF OPERATIONS
During 1996, the Company entered into two acquisition transactions
(See Note 3). In addition, during 1997, the Company completed a
self tender and share repurchase of approximately 59% of its
outstanding shares (See Note 11) partially with the proceeds from
the divestiture of its traditional office products business (See
Note 2) and partially through the issuance of subordinated notes
and refinancing of its bank credit agreement (See Note 8). These
transactions affect the understanding of the Company's financial
position, results of operations and cash flows for 1997 compared to
prior periods. As a result of these transactions, the Company has
presented pro forma results of operations for 1997 and 1996 as if
all of these transactions except the divestiture of the Office
Products Business (which is being accounted for as a discontinued
operation) occurred at the beginning of the respective periods in
Note 20.
(C) CASH EQUIVALENTS
Cash equivalents include time deposits and highly liquid
investments with original maturities of three months or less.
(D) TRADE RECEIVABLES
Trade receivables are presented net of allowances for doubtful
accounts and sales returns of $2,132,000 and $4,978,000 at December
31, 1997 and 1996, respectively.
(E) INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
generally determined using the first-in, first-out cost method.
(F) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of
plant and equipment is calculated on the straight-line method over
the assets' estimated useful lives which is 25 years for new
buildings, 9 years for machinery and equipment and ranges from 3 to
7 years for other property, plant and equipment.
F-8
<PAGE> 59
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(G) "FRESH START" ACCOUNTING AND REORGANIZATION GOODWILL
On March 31, 1993, the Company adopted the "fresh start" accounting
principles prescribed by the Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code"
(the "Reorganization SOP"), issued by the American Institute of
Certified Public Accountants. The "fresh start" accounting
principles required the Company to value its assets and liabilities
at fair values and eliminate its accumulated deficit.
Reorganization Goodwill consisted of the excess of the Company's
reorganization value over the aggregate fair value of its tangible
and identified intangible assets on March 31, 1993 and was
amortized over a three year period. Reorganization Goodwill was
fully amortized at December 31, 1995.
(H) DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the effective
interest method over the life of the related debt.
` (I) GOODWILL
Goodwill represents the excess of cost of net assets acquired in
business combinations over their fair values. It is amortized on a
straight-line basis over estimated periods to be benefited (not
exceeding 40 years). Goodwill is periodically reviewed for
impairment based upon an assessment of future operations to insure
it is appropriately valued.
(J) INTEREST RATE HEDGES
The Company periodically uses interest rate hedges to limit its
exposure to the interest rate risk associated with its floating
rate long-term bank debt. Unamortized premium related to purchased
interest rate caps is included in other assets in the balance sheet
and is amortized using the interest method over the life of the
related agreements. Amounts received under cap agreements and net
amounts received (or paid) under swap agreements are recorded as a
reduction (addition) to interest expense.
(K) ENVIRONMENTAL REMEDIATION AND COMPLIANCE
Environmental remediation and compliance expenditures are expensed
or capitalized in accordance with generally accepted accounting
principles. Liabilities are recorded when it is probable the
obligations have been incurred and the amounts can be reasonably
estimated.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of cash, accounts receivable, accounts payable and
accrued liabilities approximate book value at December 31, 1997.
Fair value of debt is based upon market value, if traded, or
discounted at the estimated rate the Company would incur currently
on similar debt (See Note 9).
F-9
<PAGE> 60
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(M) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are determined based
upon differences between the financial reporting and tax basis of
assets and liabilities and are measured by applying enacted tax
rates and laws to taxable years in which such differences are
expected to reverse.
(N) EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128 ("SFAS 128"), "Earnings per Share", which
simplifies the computation of earnings per share ("EPS"). SFAS 128
is effective for financial statements issued for periods after
December 15, 1997. All prior period earnings per share amounts have
been restated to conform with SFAS 128 requirements. Under SFAS
128, the Company computes two earnings per share amounts basic EPS
and EPS assuming dilution. Basic EPS is calculated based on the
weighted average number of shares of common stock outstanding for
the period. EPS assuming dilution is based on the weighted average
number of shares of common stock outstanding for the period,
including common stock equivalents which reflect the dilutive
effect of stock options granted to employees and directors.
(O) ESTIMATES
In conformity with generally accepted accounting principles, the
preparation of our financial statements requires our management to
make estimates and assumptions that affect the amounts reported in
our financial statements and accompanying actual results may
ultimately differ from those estimates.
(P) RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified to conform
with 1997 presentation.
(Q) ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130 ("SFAS 130"),
"Reporting Comprehensive Income" and Statement No. 131 ("SFAS
131"), "Disclosures About Segments of an Enterprise and Related
Information". SFAS 130 establishes standards for reporting and
display of comprehensive income in the financial statements.
Comprehensive income is the total of net income and most other
non-owner changes in equity. SFAS 131 requires that companies
disclose segment data based on how management makes decisions about
allocating resources to segments and measuring their performance.
In addition, in February 1998, the FASB issued Statement No. 132
("SFAS 132"), "Employers' Disclosures About Pensions and Other
Postretirement Benefits", concerning employer disclosure about
pension plans and other post-retirement benefits. SFAS 130, SFAS
131 and SFAS 132 are effective for 1998. These statements expand or
modify disclosures and will have no impact on the Company's
financial position, results of operations or cash flows.
F-10
<PAGE> 61
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) DISCONTINUED OPERATIONS
On March 5, 1997, the Company completed the sale of its Office Products
Business within the Office Products/Specialty Publishing Group with the
divestiture of its traditional office products business (the "Rolodex
Business") for $112,610,000, net of transaction costs, resulting in a
gain of $57,788,000, net of taxes of $37,213,000. The divestiture of the
Rolodex Business was preceded in 1996 by the divestiture of the Rolodex
electronics product line ("Rolodex Electronics") and the Company's
computer accessories business, Curtis Manufacturing Co., Inc. ("Curtis").
The proceeds from these sales aggregated $21,818,000. (See Note 20 for
unaudited pro forma financial information with respect to these
divestitures).
On July 7, 1998, the Company amended its Form 10-K to account for the
sale of the Office Products Business as a discontinued operation and,
accordingly, the accompanying consolidated statements of operations and
cash flows for the periods prior to the sale have been reclassified.
Revenues associated with the discontinued Office Products Business for
the years 1997, 1996, and 1995 were $10,797,000, $80,069,000 and
$111,697,000, respectively. At December 31, 1996, the current and
non-current net assets of the Office Products Business were $6,531,000
and $8,934,000, respectively.
(3) ACQUISITIONS
In 1996, the Company acquired Great Lake, Inc. ("Great Lake"), which
serves the automotive, heavy truck and industrial manufacturing radiator
replacement market and the automotive aluminum tube business of Helmut
Lingemann GmbH & Co. (the "Lingemann Business") for approximately
$37,726,000 including transaction fees and expenses. The Lingemann
transactions include the purchase of stock of Lingemann's German
subsidiary, ARUP Alu-Rohr und-Profil GmbH, and the automotive aluminum
tube business assets of its Duncan, South Carolina based Helima-Helvetion
International, Inc. This cash transaction was financed principally from
borrowings under the Company's prior bank credit agreement (See Note 8).
These acquisitions have been accounted for as purchases and, accordingly,
the purchase prices have been allocated to the assets and liabilities
acquired based on their fair values at the acquisition dates. The
operating results of the businesses acquired have been included for the
period subsequent to their acquisition dates. (See Note 20 for pro forma
results). The fair value of the assets acquired totaled $47,478,000 and
the liabilities assumed totaled $9,752,000.
(4) INVENTORIES
A summary of inventories at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials and supplies $ 25,396 27,677
Work in process 23,427 25,570
Finished goods 11,895 13,138
--------- ------
$ 60,718 66,385
========= ======
</TABLE>
F-11
<PAGE> 62
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at December 31 follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 6,267 6,310
Buildings 33,718 32,772
Machinery and equipment 137,310 125,211
--------- ---------
177,295 164,293
Less accumulated depreciation (63,324) (49,914)
--------- ---------
$ 113,971 114,379
========= =========
</TABLE>
(6) OTHER ASSETS
A summary of other assets at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Goodwill, net $13,408 13,659
Equity investment in Thermalex 9,736 8,550
Deferred financing costs 9,246 1,666
Cash surrender value of life insurance 4,636 5,635
Other 5,574 11,461
------- -------
$42,600 40,971
======= =======
</TABLE>
Thermalex, Inc. ("Thermalex") is a joint venture, formed in 1985 between
the Company's Thermal Components Division and Mitsubishi Aluminum, Ltd.,
which sells aluminum extruded products to the automobile industry. The
Company received $1,461,000 and $3,400,000 of dividend distributions from
Thermalex in 1997 and 1996, respectively.
Sales for Thermalex for the years ended December 31, 1997, 1996 and 1995
were $47,152,000, $48,057,000 and $44,839,000, respectively. Net income
for the years ended December 31, 1997, 1996 and 1995 was $5,294,000,
$5,844,000 and $4,670,000, respectively. Total assets were $36,348,000
and $28,629,000 at December 31, 1997 and 1996, respectively.
Stockholders' equity was $19,475,000 and $17,102,000 at December 31, 1997
and 1996, respectively.
F-12
<PAGE> 63
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) ACCRUED EXPENSES AND OTHER
A summary of accrued expenses and other at December 31 follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Salaries and wages payable $ 9,445 9,838
Accrued interest payable 8,038 3,113
Current portion of the long term obligations 5,393 6,661
Accrued taxes payable 1,112 116
Pension 5,523 5,682
Other accrued expenses 14,242 22,909
-------- --------
$ 43,753 48,319
======== ========
</TABLE>
(8) LONG-TERM DEBT
A summary of long-term debt at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Subordinated notes $ 150,000 --
Bank revolving credit facility 87,500 41,300
Alternative currency borrowings 18,348 --
Bank term loan -- 116,677
Miscellaneous 1,895 3,065
--------- ---------
257,743 161,042
Less current portion (1,684) (24,272)
--------- ---------
$ 256,059 136,770
========= =========
</TABLE>
On July 3, 1997, the Company refinanced its existing debt under a new six
year $200 million amended and restated credit agreement with a bank group
consisting of Citicorp USA, Inc., Goldman Sachs Credit Partners L.P., (an
affiliate of the Company's principal stockholder) and First National Bank
of Chicago (the "Bank Credit Agreement"). The Bank Credit Agreement
provides for a $200 million revolving credit facility with a $50 million
sublimit for issuance of letters of credit ($9.0 million outstanding at
December 31, 1997) and a $50 million sublimit for alternative currency
borrowings. The $200 million revolving credit facility is permanently
reduced by $20 million per year beginning July 2000 through July 2002.
The bank loans and letters of credit bear interest at various floating
rates, which approximate the one to six month LIBOR rates plus 1.25%
(such LIBOR rates approximated 5.72% to 5.84% at December 31, 1997)
subject to performance versus a leverage ratio. The revolving credit
facility will terminate and all amounts outstanding, if any, will be due
on July 8, 2003. Annual commitment fees consist of 0.3% of the average
daily unused commitment.
As of December 31, 1997, under the sublimit for alternative currency
borrowings, the Company had borrowed $18.3 million (33.0 million Deutsche
Marks). The Company's alternative currency borrowing is designed to hedge
the Company's net investment in its German operations. The change, if
any, to the net investment as a result of foreign currency fluctuations
is included in stockholders' equity as a foreign currency translation
adjustment. The alternative currency
F-13
<PAGE> 64
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
borrowing is denominated in German Deutsche Marks and bears interest
based on one to six month German LIBOR rates plus 1.25% (such LIBOR rates
approximated 3.53% to 3.75% at December 31, 1997).
The Bank Credit Agreement is guaranteed on a joint and several basis by
the Company's material directly and indirectly wholly owned subsidiaries
(the "Guarantors") and has been secured by substantially all assets of
the Guarantors. The Bank Credit Agreement contains certain financial and
other covenants usual and customary for a secured credit agreement. The
Company was in compliance with these covenants as of December 31, 1997.
In 1997, proceeds from the Bank Credit Agreement were used to prepay
amounts outstanding under the prior bank credit agreement. As a result of
the prepayment, the Company recorded an extraordinary charge of $728,000
(net of a tax benefit of $465,000) due to expensing the related
unamortized debt financing costs.
On August 12, 1997, the Company completed the issuance of $150,000,000 of
10.25% senior subordinated notes (the "Notes"). Interest is payable
semi-annually, with a maturity date of August 15, 2007.
The Company may redeem the Notes, in whole or in part, upon certain
conditions, at any time on or after August 15, 2002 and prior to
maturity. The Notes have certain covenants that have restrictions on
dividends and distributions. Upon a change of control, holders of the
Notes may require the Company to purchase all or a portion of the Notes
at a purchase price equal to 101% of their aggregate principal amount,
plus accrued interest, if any.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value at December 31 of financial instruments, other
than current assets and liabilities, follow (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ----------------------------
Estimated Estimated
Book Value Fair Value Book Value Fair Value
---------- ---------- ---------- ----------
Debt:
<S> <C> <C>
Subordinated notes $ 150,000 154,500 - -
Bank revolving credit facility 105,848 105,848 41,300 41,300
Bank term loan - - 116,677 116,677
Miscellaneous 1,895 1,895 3,065 3,065
--------- --------- -------- ----------
$ 257,743 262,243 161,042 161,042
======== ======== ======= ========
Hedges:
Interest rate (asset) $ - 423 (163) 1,281
============ ========== ========= =========
</TABLE>
At December 31, 1997, the Company's only interest rate hedge consisted of
a swap agreement which fixed the interest rate on $45,000,000 (from
5/30/95 to 5/30/98) of borrowings at 8.99%.
F-14
<PAGE> 65
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company is exposed to market risk for changes in interest rates, but
has no off-balance sheet risk of accounting loss. The Company manages
exposure to counterparty credit risk by entering into such transactions
with major financial institutions that are expected to perform under the
terms of such agreements.
(10) OTHER LONG-TERM LIABILITIES
A summary of other long-term liabilities at December 31 follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Post-retirement benefits, other than pensions (Note 12) $ 22,191 22,112
Prepetition and other tax liabilities 15,762 16,722
Environmental liabilities 8,625 9,208
Deferred compensation and other 2,217 2,775
------- ------
48,795 50,817
Less current portion (5,393) (6,661)
-------- --------
$ 43,402 44,156
======= =======
</TABLE>
PREPETITION AND OTHER TAX LIABILITIES
On April 1, 1993, the Company and certain of its subsidiaries emerged
from Chapter 11 of the United States Bankruptcy Code (the "Chapter 11
cases") pursuant to a plan of reorganization (the "Plan of
Reorganization"). The Chapter 11 cases were commenced on January 13, 1991
(the "Petition Date"). The Company entered into an agreement with the
Internal Revenue Service ("IRS") settling Federal income tax claims filed
in the Chapter 11 cases for open taxable years through 1990. In addition
to this agreement, the tax liabilities include Prepetition state tax
claim settlements, negotiated payment terms on certain foreign
Prepetition tax liabilities, and an estimate of the Company's obligation
for curative action required by the IRS to cure certain operational
defects in one of the Company's defined contribution plans.
ENVIRONMENTAL LIABILITIES
The Company's operations are subject to extensive Federal, state and
local laws and regulations relating to the generation, storage, handling,
emission, transportation and discharge of materials into the environment.
The Company has a program for monitoring its compliance with applicable
environmental regulations, the interpretation of which often is
subjective. This program includes, but is not limited to, regular reviews
of the Company operations' obligations to comply with environmental laws
and regulations in order to determine the adequacy of the recorded
liability for remediation activities.
The environmental liabilities included in other long-term obligations
represent the estimate of cash obligations that will be required in
future years for these environmental remediation activities. The Company
has estimated the exposure and accrued liability to be approximately
$8,625,000 relating to these environmental matters at December 31, 1997.
These liabilities are undiscounted and do not assume any possible
recoveries from insurance coverage or claims which the Company may have
against third parties. The estimate is based upon in-house engineering
expertise and the professional services of outside consulting and
engineering firms. Because of uncertainty associated with the
F-15
<PAGE> 66
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
estimation of these liabilities and potential regulatory changes, it is
reasonably possible that these estimated liabilities could change in the
near term but it is not expected that the effect of any such change would
be material to the consolidated financial statements in the near term.
(11) STOCKHOLDERS' EQUITY (DEFICIT)
The Company's authorized capital stock consists of 15,000,000 shares of
common stock. Each share entitles its holder to one vote on matters
submitted to stockholders. At December 31, 1997 and 1996, the issued
shares of common stock included 67,483 and 163,557 shares of common
stock, respectively, available to satisfy Prepetition claims.
On July 10, 1997, the Company, using the proceeds from the sale of the
Rolodex Business, purchased (i) 2,805,194 shares from Water Street
Corporate Recovery Fund I, L.P. ("Water Street") (the Company's largest
stockholder which is an investment partnership of which Goldman, Sachs &
Co. is the general partner) at $38.50 per share in cash for an aggregate
purchase price of $107,999,969 and (ii) 51,948 shares from Robert L.
Smialek, the President and Chairman of the Board of the Company, at
$38.50 per share in cash, for an aggregate purchase price of $1,999,998.
On August 12, 1997, the Company completed a tender offer (the "Tender
Offer"), pursuant to which it purchased 2,857,142 shares at a price of
$38.50 per share in cash. At the completion of the Tender Offer, the
number of outstanding shares were reduced to approximately 4.1 million.
The Company repurchased 97,500 shares of its common stock during 1996 at
prices ranging from $30.60 to $36.125 under the $15,000,000 stock buyback
program approved by the Company's Board of Directors on July 26, 1995.
During the last half of 1995, the Company had repurchased 197,500 shares
of its common stock at prices ranging from $32.375 to $36.875 under the
stock buyback program.
Water Street, an investment partnership of which Goldman, Sachs & Co.
("Goldman Sachs") is the general partner, is the Company's principal
stockholder, owning approximately 45% of the Company's outstanding shares
of common stock.
(12) PENSION PLANS AND POST-RETIREMENT BENEFITS
PENSION PLANS
The Company has defined benefit pension plans covering certain of its
employees. The benefits under these plans are based primarily on
employees' years of service and compensation near retirement. The
Company's funding policy is consistent with the funding requirements of
Federal laws and regulations. Plan assets consist principally of equity
investments, government obligations and corporate debt securities. The
Company also contributes to various multi-employer plans sponsored by
bargaining units for its union employees.
F-16
<PAGE> 67
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of the plans' funded status reconciled with amounts recognized
in the consolidated balance sheet at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
--------- -------- ------- -------
<S> <C> <C> <C> <C>
Plan assets at fair value $ 86,888 11,086 81,025 11,467
--------- -------- ------- -------
Actuarial present value of benefit
obligations:
Vested benefits 69,088 14,122 62,230 14,078
Nonvested benefits 1,217 698 906 606
--------- -------- ------- -------
Accumulated obligation 70,305 14,820 63,136 14,684
Benefits attributable to future
compensation increases 5,177 666 2,504 549
--------- -------- ------- -------
Projected benefit obligations 75,482 15,486 65,640 15,233
--------- -------- ------- -------
Plan assets less projected
benefit obligation 11,406 (4,400) 15,385 (3,766)
Unrecognized losses (gains) (13,072) (323) (17,227) (550)
Unrecognized prior service costs (1,188) 2,054 (1,260) 1,736
--------- -------- ------- -------
Pension liability $ (2,854) (2,669) (3,102) (2,580)
========= ======== ======== =======
</TABLE>
The components of pension cost follow (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost $ 2,320 2,113 1,620
Interest cost 5,639 5,794 9,949
Actual return on assets (14,689) (6,565) (9,993)
Net amortization and deferral 7,741 (44) 118
------- ------- --------
Net pension cost $ 1,011 1,298 1,694
======= ======= ========
</TABLE>
In addition, the Company recognized pension costs of $597,000 in 1997,
$880,000 in 1996 and $580,000 in 1995 related to contributions to
multi-employer plans.
In the fourth quarter of 1995, the Company adopted a lump sum settlement
feature for retirees and certain vested plan participants which resulted
in the settlement of more than $42,000,000 in pension obligations. The
Company recorded a gain on the settlement of $4,300,000 in the fourth
quarter of 1995.
F-17
<PAGE> 68
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The assumptions used in accounting for the pension plans as of December
31 follow:
1997 1996
---- ----
Discount rates 7.25% 7.75%
Rates of increase in compensation levels 4.50% 4.50%
Expected long-term rate of return on assets 9.00% 9.00%
In addition to the defined benefit plans described above, the Company
sponsors a qualified defined contribution 401(k) plan, which covers
substantially all non-union employees of the Company and its
subsidiaries, and which covers union employees at one of the Company's
subsidiaries. The Company matches 50% of non-union participants'
voluntary contributions up to a maximum of 3% of the participant's
compensation. The Company's expense was approximately $819,000 in 1997,
$738,000 in 1996 and $666,000 in 1995.
POST-RETIREMENT BENEFITS, OTHER THAN PENSIONS
The Company maintains nine post-retirement health care and life insurance
benefit plans, four of which cover approximately 500 present retirees
(the "Retiree Plans") and five of which cover certain retirees and
current employees of four operating units (the "Open Plans"). The Company
pays benefits under the plans when due and does not fund its plan
obligations as they accrue. The Company's accrued post-retirement benefit
cost is attributable to the Retiree Plans and one of the Open Plans, in
which approximately 100 retirees and 300 current employees were
participants. It has been assumed that plan participant contributions, if
any, under these five plans will increase as a result of increases in
medical costs. The other Open Plans have been, and are assumed will
continue to be, fully self-funded by their participants.
During 1996, the Company amended its Retiree Plans and the one Open Plan
to limit the Company's contributions and to adopt a cost-sharing method
based upon a retiree's years of service. As a result, the accumulated
post-retirement benefit obligation for these retiree health care plans
was reduced by approximately $3.4 million.
The components of net periodic post-retirement benefit cost follow (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost $ 400 492 503
Interest cost 1,099 1,154 1,401
Amortization of prior service cost (437) (365) (145)
------- ----- ------
$ 1,062 1,281 1,759
======= ===== ======
</TABLE>
F-18
<PAGE> 69
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of the plans' status reconciled with amounts recognized in the
consolidated balance sheet at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accumulated post-retirement benefit obligations:
Retirees $ 8,421 7,828
Other fully eligible plan participants 2,616 2,302
Other active plan participants 5,811 4,440
------- -------
Total 16,848 14,570
Prior service cost 4,425 4,777
Unrecognized net gain 918 2,765
------- -------
Accrued post-retirement benefit costs $22,191 22,112
======= =======
</TABLE>
At December 31, 1997 and 1996, the weighted-average discount rates used
in determining the accumulated post-retirement benefit obligation were
7.25% and 7.75%, respectively. The recorded health care cost trend rate
assumed in measuring the accumulated post-retirement benefit obligation
was 8% in 1998, declining to an ultimate rate of 5% in 2010 and
thereafter. If these trend rate assumptions were increased by 1%, the
accumulated post-retirement benefits obligation would increase by
approximately 16% ($2,751,000). The effect of this change on the sum of
service cost and interest cost components of the net periodic
post-retirement benefit cost for the year ending December 31, 1997 would
be an increase of approximately 21% ($320,000).
(13) STOCK-BASED COMPENSATION PLANS
The Company's 1993 Long-term Incentive Plan (the "Incentive Plan"), as
amended, and the 1993 Nonemployee Director Stock Incentive Plan (the
"Director Plan") provides for the issuance of no more than 2,000,000 and
360,000, respectively, shares of common stock to eligible employees and
nonemployee directors. As of December 31, 1997, the shares available for
future awards under the Incentive Plan and the Director Plan have been
reduced to 694,136, and 146,664, due to stock options and restricted
stock awards granted since the inception of the plans.
STOCK OPTIONS
Under Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock- Based Compensation", companies can either record
expense based on the fair value of stock-based compensation upon issuance
or elect to remain under the "APB Opinion No. 25" method whereby no
compensation cost is recognized upon grant if certain conditions are met.
The Company is continuing to account for its stock-based compensation
under APB Opinion No. 25. However, pro forma disclosures as if the
Company had adopted the cost recognition requirements under SFAS 123 are
presented below.
F-19
<PAGE> 70
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options granted in 1997, 1996 and 1995 under
SFAS 123, the Company's net income and earnings per share would have
approximated the pro forma amounts below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net income As reported $ 81,644 39,053 2,575
Pro forma 81,069 38,748 2,562
Basic earnings per share As reported 11.34 4.10 0.26
Pro forma 11.26 4.07 0.26
Diluted earnings per share As reported 11.12 3.95 0.25
Pro forma 11.06 3.92 0.25
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to grants prior to
1995, and additional awards in the future are anticipated.
A summary of the options granted follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Price
------ -----
<S> <C> <C>
Options outstanding December 31, 1994 1,092,168 $ 21.84
Granted 12,850 32.30
Forfeited (28,369) 21.03
Exercised (12,646) 15.39
------------
Options outstanding December 31, 1995 1,064,003 22.07
Granted 102,900 34.82
Forfeited (36,670) 26.69
Exercised (59,668) 17.95
------------
Options outstanding December 31, 1996 1,070,565 23.36
Granted 151,500 36.87
Forfeited (30,938) 24.79
Exercised (450,860) 18.27
------------
Options outstanding December 31, 1997 740,267 29.17
===========
Options exercisable at December 31:
1995 471,614 20.87
1996 682,681 21.45
1997 421,033 27.18
</TABLE>
F-20
<PAGE> 71
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options follow:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------------
Weighted
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices December 31, 1997 Life Price December 31, 1997 Price
-------- ----------------- ------ ------- ----------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
$15.00-20.00 148,255 2.6 $ 16.33 92,255 $ 15.92
25.01-30.00 355,779 2.3 29.91 299,079 29.89
30.01-35.00 90,168 7.9 34.66 26,968 34.64
35.01-39.00 146,065 4.7 37.03 2,731 37.58
-------- ---------
740,267 421,033
======== ========
</TABLE>
The per share weighted-average fair value of stock options granted during
1997, 1996 and 1995 was $13.87, $19.20 and $18.58, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1997 - expected dividend yield
0.0%, risk- free interest rate of 5.57%, and an expected life of 4.14
years.
RESTRICTED STOCK
The awards of restricted common stock to employees and directors has been
contingent upon the participants maintaining certain investments in the
Company's common stock and the restrictions on the awards lapse only if:
(1) the market value of the Company's common stock attains targeted
levels during a specified period; and, (2) generally only after the
participants complete a required service period. The compensation expense
associated with the restricted stock awards is recorded over the employee
service period if it is determined probable that the restrictions based
upon attaining the probable targets will lapse. The compensation expense
was $397,000, $465,000 and $1,290,000 in 1997, 1996, and 1995,
respectively. As of December 31, 1997, awards of 70,324 shares are
subject to the restrictions and will be forfeited if the restrictions are
not met prior to August 2000.
F-21
<PAGE> 72
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) INCOME TAX EXPENSE
The components of total income taxes and a reconciliation of total income
taxes to the actual income tax obligation follow (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Total income taxes:
From continuing operations before
extraordinary item:
Current:
Federal $ 588 563 620
State and local 515 745 1,000
Foreign 622 297 364
-------- -------- --------
1,725 1,605 1,984
-------- -------- --------
Deferred:
Federal 10,203 10,033 13,840
State and local 988 882 870
Foreign 488 752 --
-------- -------- --------
11,679 11,667 14,710
-------- -------- --------
Total from continuing operations
before extraordinary item 13,404 13,272 16,694
Discontinued operations 38,250 (462) (495)
Extraordinary item (465) -- --
Stockholders' equity (3,277) (402) (72)
-------- -------- --------
Total income taxes 47,912 12,408 16,127
Noncash allocations:
Deferred income taxes - continuing operations (11,679) (11,667) (13,868)
Deferred income taxes - discontinued operations (25,687) 1,651 1,207
Charges in lieu of taxes -- -- (842)
-------- -------- --------
Actual income tax obligations $ 10,546 2,392 2,624
======== ======== ========
</TABLE>
In accordance with the Reorganization SOP, pre-reorganization deferred
tax assets not previously recognized on the balance sheet are recorded
as a reduction to Reorganization Goodwill (until reduced to zero and
then as an addition to paid-in capital) when realized and are
presented as "charges in lieu of taxes."
Pretax income from continuing operations by domestic and foreign
source follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Domestic $ 33,577 34,606 31,275
Foreign 3,241 3,879 3,425
-------- ------ -------
$ 36,818 38,485 34,700
======= ====== ======
</TABLE>
F-22
<PAGE> 73
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income tax expense attributable to income from continuing operations
differs from the amount computed by applying the Federal statutory rate
to pretax income due to the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense $ 12,886 13,470 12,145
State and local taxes 1,323 1,422 1,582
Equity in earnings of affiliates (733) (818) (817)
Foreign tax rate differential (373) (296) (651)
Goodwill amortization 20 22 5,672
Other, net 281 (102) (870)
Valuation allowance - (426) (367)
-------- ------- --------
Income tax expense $ 13,404 13,272 16,694
======= ====== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31 follow (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 9,526 38,783
Accrued liabilities 13,882 18,474
Pension and other post-retirement benefits 11,026 11,105
Alternative Minimum Tax Credit 7,965 1,872
Capital loss carryforwards - 8,812
Other 1,127 2,537
--------- ----------
Total gross deferred tax assets 43,526 81,583
Less valuation allowance (29,870) (34,116)
-------- ---------
13,656 47,467
-------- ---------
Deferred tax liabilities:
Plant and equipment (11,472) (9,199)
Other (853) (867)
--------- ----------
Total gross deferred tax liabilities (12,325) (10,066)
-------- ---------
Net deferred tax asset $ 1,331 37,401
========= ========
</TABLE>
The net reduction in the valuation allowance for deferred tax assets for
the years ended December 31, 1997, 1996, and 1995 was $4,246,000,
$10,836,000 and $7,623,000, respectively, which primarily resulted from
the reduction of the deferred tax assets in 1997 and the recognition of
additional deferred tax assets and the expiration of capital loss
carryforwards in 1996 and 1995. During the fourth quarters of 1996 and
1995, deferred tax assets of $10,663,000 and $9,180,000, respectively,
were recognized because it was concluded that it was more likely than not
that additional deferred tax assets would be realized in future years
following an evaluation of the actual 1994, 1995 and 1996 taxable income
and projections of future taxable income. In 1996, the projections
included an assessment of the impact of the decision to pursue a sale of
the Rolodex Business (completed in March 1997) on future taxable income.
Accordingly, the recognition of a pre-reorganization deferred tax asset
of $7,201,000 in 1995 was recorded as a reduction to Reorganization
Goodwill, $10,237,000 and $1,612,000, in 1996 and 1995 respectively, was
recorded as an increase to paid-in capital and $426,000 and $367,000 was
recorded as a component
F-23
<PAGE> 74
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
of deferred income tax benefit in 1996 and 1995, respectively.
Recognition, if any, of tax benefits subsequent to December 31, 1997
relating to unrecognized deferred tax assets are expected to be allocated
to the consolidated statements of operations and additional paid-in
capital in the amounts of $17,676,000 and $12,194,000, respectively. At
December 31, 1997, the Company had Federal net operating loss
carryforwards of approximately $16,682,000 which begin to expire in 2008.
The Company and its domestic subsidiaries file a consolidated U.S.
Federal income tax return. The IRS is presently examining the
consolidated Federal income tax returns for 1991 through 1996. Management
believes that the ultimate outcome of this examination will not have a
material adverse effect on the financial condition, results of operations
or liquidity of the Company.
(15) OTHER INCOME AND NONRECURRING CHARGES
Other income for 1996 included a favorable adjustment of $2,200,000
related to the Company's environmental liabilities following completion
of a site clean-up for an amount less than previously estimated. Other
income for 1995 included favorable adjustments of $3,600,000 related to
the Company's environmental liabilities following a review of its
liabilities from previously divested operations, $1,494,000 related to
the resolutions of several legal disputes and a $3,973,000 gain on the
sale of idle corporate assets.
(16) RELATED PARTY TRANSACTIONS
During 1997, the Company paid Goldman Sachs $1,996,000 in investment
banking fees and expenses related to the sale of the Rolodex Business,
$2,042,000 of fees in connection with the refinancing and issuance of the
Notes and $204,000 for services rendered in connection with the Tender
Offer. During 1997, the Company paid Goldman Sachs $3,094,000 in
underwriting fees related to the issuance of the Notes.
As discussed in Note 8, the Company entered into a new bank credit
agreement in 1997. Goldman Sachs Credit Partners L.P., an affiliate of
Goldman Sachs, had an initial participating interest of $66,667,000 in
the Bank Credit Agreement. Goldman Sachs Credit Partners L.P. received
$583,000 from the agent bank for its portion of the arrangement fee paid
by the Company in 1997.
During 1996, the Company paid Goldman Sachs $1,000,000 in transaction
fees in connection with the purchase of Lingemann (See Note 3). In
connection with such services, the Company provides for the
indemnification of Goldman Sachs against various liabilities, including
liabilities under the Federal securities laws.
F-24
<PAGE> 75
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) COMMITMENTS AND CONTINGENCIES
Rental expense for operating leases totaled $4,283,000, $3,291,000 and
$2,468 ,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. These leases primarily relate to production facilities.
Rentals received for subleases for operating leases totaled $248,000 in
1997 and none in both 1996 and 1995.
Future minimum lease payments under contractually noncancellable
operating leases (with initial lease terms in excess of one year) for
years subsequent to December 31, 1997 are as follows: 1998, $3,774,000;
1999, $2,861,000; 2000, $2,209,000; 2001, $1,596,000; 2002, $874,000; and
thereafter, $1,324,000. Future minimum rentals to be received under
noncancellable subleases for years subsequent to December 31, 1997 are as
follows: 1998, $260,000; 1999, $260,000; 2000, $260,000; 2001, $22,000;
and thereafter, none.
The Company is implicated in various claims and legal actions arising in
the ordinary course of business. Those claims or liabilities not subject
to Bankruptcy Court litigation will be addressed in the ordinary course
of business and be paid in cash as expenses are incurred.
In the opinion of management, the ultimate disposition of the matters
discussed above will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
(18) BUSINESS SEGMENT INFORMATION
The Company manufactures and supplies a diversity of products in three
primary business segments. The segments and products are discussed below:
(a) AUTOMOTIVE COMPONENTS GROUP
The Automotive Components Group is made up of three operating
units, Thermal Components Group ("Thermal"), Steel Parts
Corporation ("Steel Parts") and Romac Metals ("Romac"). The
businesses in this segment manufacture automotive heat exchangers
and related tubing, automatic transmission and suspension
components and stainless steel tubing, respectively.
In 1997, the group's sales to the automotive OEM market,
aftermarket and non-automotive OEM manufacturers were 46%, 16%
and 27% of total sales, respectively, compared to 46%, 19% and
23% of total sales, respectively, in 1996 and 43%, 19% and 22% of
total sales, respectively, in 1995.
Thermal's heat-transfer products have a broad range of
applications in motor vehicles, railroad locomotives,
construction and other industrial equipment.
Steel Parts is a manufacturer of close tolerance precision metal
stampings for the automotive industry including clutch plates for
automatic transmissions, suspension parts for vibration- reducing
assemblies and engine mounts. Approximately 70%, 70% and 67% of
Steel Parts' sales were to one of the "Big 3" domestic automobile
manufacturers in 1997, 1996 and 1995, respectively.
F-25
<PAGE> 76
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Romac manufactures stainless steel tubing for a variety of
marine, architectural, automotive and decorative applications at
its facility in North Carolina. Competition is based principally
on price and, to a lesser extent, on the shapes and finishes that
can be achieved with the tubing.
(b) TECHNOLOGIES GROUP
The Technologies Group consists of four operating units,
Stewart Connector Systems, Inc. ("Stewart Connector"),
Signal Transformer Co., Inc. ("Signal"), Stewart Stamping
Corporation ("Stewart Stamping"), and Escod Industries
("Escod"). These units manufacture telecommunication and
electrical component products for the computer networking,
telephone digital switching, precision wiring, main frame
computer, automotive and medical equipment markets.
Stewart Connector designs and manufactures specialized high speed
data connector systems for telecommunications, cellular
communications and data transmission, including local and wide
area networks. Foreign sales accounted for approximately 41% of
Stewart Connector's sales in 1997, 40% in 1996 and 43% in 1995.
Competition is based principally on price with respect to older
product lines and on technology and product features for newer
products and to a lesser extent, patent protection.
Signal manufactures both standard off-the-shelf and custom-made
power transformers serving a broad customer base in a variety of
industries. It has a customer base of over nine thousand
accounts, consisting of both OEMs and aftermarket resellers.
Stewart Stamping is a tool designer and subcontract manufacturer
of precision stampings and wireformed parts. Stewart Stamping
sells it products to a broad customer base primarily in the U.S.
Stewart Stamping traditionally has focused on products that
because of the engineering and manufacturing capability required
to produce them, have the potential for repeat business.
Escod produces electronic cable assemblies, specialized wire
harnesses and certain telecommunication equipment subassemblies
for sale to manufacturers of telecommunications, computer and
other electronics equipment. Two telecommunications OEMs together
accounted for approximately 68%, 66% and 60% of Escod's total
revenues in 1997, 1996 and 1995, respectively.
(c) SPECIALTY PUBLISHING
Specialty Publishing consists of Taylor Publishing Company
("Taylor"), a wholly owned subsidiary engaged in yearbook and
other specialty publishing.
Taylor is engaged primarily in the contract design and printing
of student yearbooks from which it derived at least 87% of its
revenues in each of the last three years. The market for
yearbooks is affected more by demographic trends than by business
cycles. Taylor markets its yearbook services through commissioned
independent sales representatives who maintain contact with
yearbook faculty advisors, school principals and other key
purchasing personnel.
F-26
<PAGE> 77
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(d) ALLOCATION OF INTANGIBLES
In accordance with the Reorganization SOP, the Company has
allocated Reorganization Goodwill and resulting amortization to
its identifiable segments.
(e) ALLOCATED CORPORATE OVERHEAD
Segment operating income (loss) reflects the allocation of
corporate overhead.
F-27
<PAGE> 78
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Operating information of each business segment, excluding
divested subsidiaries, follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
AUTOMOTIVE COMPONENTS GROUP
Sales $ 231,070 209,722 180,251
Cost of sales 171,375 156,481 134,673
Selling, general and administrative
expenses 23,889 19,389 15,811
Allocated corporate overhead 3,537 2,981 1,282
Depreciation and amortization 9,199 6,956 4,674
Amortization of Reorganization Goodwill - - 3,404
------------ ----------- --------
Segment operating income $ 23,070 23,915 20,407
======== ======= =======
TECHNOLOGIES GROUP
Sales $ 198,941 183,663 170,615
Cost of sales 140,683 127,337 116,253
Selling, general and administrative
expenses 25,365 23,190 19,750
Allocated corporate overhead 3,728 3,152 1,412
Depreciation and amortization 6,159 5,531 5,714
Amortization of Reorganization Goodwill - - 7,176
------------ ----------- --------
Segment operating income $ 23,006 24,453 20,310
======== ======= =======
SPECIALTY PUBLISHING GROUP
Sales $ 98,222 99,020 98,640
Cost of sales 58,787 61,094 60,389
Selling, general and administrative
expenses 29,406 31,504 29,594
Allocated corporate overhead 1,744 1,986 881
Depreciation and amortization 2,930 2,786 2,904
Amortization of Reorganization Goodwill - - 5,625
------------ ----------- --------
Segment operating income (loss) $ 5,355 1,650 (753)
========= ======== ========
</TABLE>
A reconciliation of segment operating income to consolidated
operating income follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Total segment operating income $ 51,431 50,018 39,964
Corporate depreciation (89) (84) (60)
Unallocated corporate overhead (240) (1,501) (1,023)
--------- --------- ----------
Consolidated operating income $ 51,102 48,433 38,881
======= ======= ========
</TABLE>
F-28
<PAGE> 79
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of identifiable assets of each business segment at
December 31 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Automotive Components Group $ 144,847 143,628
Technologies Group 87,252 80,740
Specialty Publishing 42,767 40,664
Corporate 27,807 56,208
Discontinued operations - 27,153
------------ -------
$ 302,673 348,393
======== =======
</TABLE>
Corporate assets include cash, deferred taxes and other assets.
A summary of capital expenditures of each business segment
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Automotive Components Group $ 12,194 7,447 10,244
Technologies Group 8,166 9,597 7,044
Specialty Publishing Group 3,161 2,876 2,776
Corporate 62 89 126
Discontinued operations - 2,570 1,969
--------- -------- --------
$ 23,583 22,579 22,159
========= ======== =======
</TABLE>
A summary of export sales by geographic region follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Europe $ 21,193 20,584 17,058
Asia 14,007 16,708 17,955
Canada 9,758 7,752 6,928
Mexico 4,292 6,660 5,153
Other 6,155 6,449 5,972
---------- -------- --------
$ 55,405 58,153 53,066
======= ======= =======
</TABLE>
F-29
<PAGE> 80
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of quarterly financial information follows (in thousands):
<TABLE>
<CAPTION>
1997
----- DEC. 31 SEPT. 30(1) JUNE 30 MARCH 31(2)
------- -------- ------- -----------
<S> <C> <C> <C> <C>
Sales $ 120,624 131,394 169,671 106,544
Gross profit 29,508 34,269 52,170 26,011
Net income from continuing
operations before extraordinary item 3,531 4,315 11,207 4,361
Discontinued operations - - - 58,958
Extraordinary item - (728) - -
--------- -------- -------- --------
Net income $ 3,531 3,587 11,207 63,319
========= ======== ======== ========
Per Basic Share:
Continuing operations $ 0.87 0.77 1.16 0.45
Discontinued operations - - - 6.20
Extraordinary item - (0.13) - -
--------- -------- -------- --------
Net income $ 0.87 0.64 1.16 6.65
========= ======== ======== ========
Per Diluted Share:
Continuing operations $ 0.85 0.75 1.14 0.44
Discontinued operations - - - 5.95
Extraordinary item - (0.13) - -
--------- -------- -------- --------
Net income $ 0.85 0.62 1.14 6.39
========= ========= ======== ========
1996
----- DEC. 31(3) SEPT. 30(4) JUNE 30 MARCH 31
-------- -------- ------- --------
Sales $ 115,522 122,164 156,566 98,153
Gross profit 29,237 31,102 47,950 25,550
Net income from continuing
operations 4,795 6,152 10,320 3,946
Discontinued operations 7,825 2,330 1,485 2,200
--------- --------- -------- ---------
Net income $ 12,620 8,482 11,805 6,146
========= ========= ======= =========
Per Basic Share:
Continuing operations $ 0.50 0.65 1.08 0.41
Discontinued operations 0.83 0.25 0.16 0.23
--------- --------- -------- ---------
Net income $ 1.33 0.90 1.24 0.64
========= ========= ======== =========
Per Diluted Share:
Continuing operations $ 0.48 0.62 1.05 0.40
Discontinued operations 0.79 0.24 0.15 0.22
--------- --------- -------- ---------
Net income $ 1.27 0.86 1.20 0.62
========= ========= ======== =========
</TABLE>
(1) Includes a pretax extraordinary loss of $1,193,000 (or $.21 per share on
both a basic and diluted basis) related to the extinguishment of debt (See
Note 8).
(2) Includes a pretax gain on the sale of the Rolodex Business totaling
$95,001,000.
F-30
<PAGE> 81
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Includes the following: (a) pretax gain of $3,125,000 on the sale of
Rolodex Electronics (See Note 2), (b) recognition of a tax benefit of
$3,207,000 primarily related to a capital loss carryforward.
(4) Includes a pretax favorable adjustment of $2,200,000 to the Company's
environmental liabilities.
(20) PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
Set forth below is certain unaudited pro forma consolidated financial
information of the Company based on historical information that has been
adjusted to reflect all transactions directly or indirectly related to
the transactions discussed in Notes 8 and 11. In addition, the historical
financial information for 1996 has been adjusted to reflect the
acquisition of the Lingemann Business (See Note 3).
The income statement data give effect to the following transactions as if
all had occurred at the beginning of each period presented; (i) the
Company's purchase of 2,805,194 shares of common stock from Water Street
and 51,948 shares from Mr. Smialek at a price of $38.50 per share; (ii)
the Company's purchase of 2,857,142 shares at a price of $38.50 per share
pursuant to the Tender Offer; (iii) the closing of the Bank Credit
Agreement (including advances to refinance in full outstanding
indebtedness under the prior credit agreement); and (iv) the issuance of
$150 million of the Notes. The income statement data for the 1996 period
has been adjusted to reflect the acquisition of the Lingemann Business as
if it had occurred at the beginning of the period. The Lingemann Business
acquisition actually occurred in the third quarter of 1996. The
nonrecurring transactions directly related to the aforementioned
transaction are excluded from the pro forma income statement data. The
unaudited summary pro forma consolidated financial data is based on
certain assumptions and estimates, and therefore does not purport to be
indicative of the results that would actually have been obtained had the
transactions been completed as of such dates or indicative of future
results of operations and financial position.
F-31
<PAGE> 82
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Statement of Income
Year Ended December 31, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
Refinancing
and
Historical Tender Offer(1) Pro Forma
---------- --------------- ---------
<S> <C> <C> <C>
Net sales $ 528,233 - 528,233
Cost of goods sold 370,845 - 370,845
Depreciation and amortization 18,377 - 18,377
Selling, general and administrative expenses 87,909 - 87,909
---------- ------------ --------
Operating income 51,102 - 51,102
Interest expense (20,562) (8,879) (29,441)
Interest income 2,837 (2,091) 746
Equity in net income of Thermalex 2,647 - 2,647
Other income, net 794 - 794
---------- ------------ ---------
Income from continuing operations before
income taxes and extraordinary item 36,818 (10,970) 25,848
Income tax expense (13,404) 4,223 (9,181)
--------- --------- --------
Income from continuing operations before
extraordinary item $ 23,414 (6,747) 16,667
========== ========== =======
Basic income from continuing operations before
extraordinary item per share $ 3.25 4.20
========== ========
Weighted average number of
common shares outstanding 7,200 (3,233) 3,967
========== ======= =======
Diluted income from continuing operations before
extraordinary item per common share $ 3.19 4.05
========= ========
Weighted average number of common shares and
common share equivalents outstanding 7,345 (3,233) 4,112
========= ======== =======
</TABLE>
F-32
<PAGE> 83
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Statement of Income
Year Ended December 31, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
Refinancing
and
Historical Acquisition(2) Subtotal Tender Offer(1) Pro Forma
---------- -------------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 492,405 14,735 507,140 - 507,140
Cost of goods sold 344,912 12,704 357,616 - 357,616
Depreciation and amortization 15,357 1,577 16,934 - 16,934
Selling, general and administrative
expenses 83,703 2,193 85,896 - 85,896
-------- --------- ------- ------------ --------
Operating income 48,433 (1,739) 46,694 - 46,694
Interest expense (18,378) (68) (18,446) (13,770) (32,216)
Interest income 724 - 724 - 724
Equity in net income of Thermalex 2,922 - 2,922 - 2,922
Other income, net 4,784 - 4,784 - 4,784
-------- ------------ -------- ------------ ---------
Income from continuing
operations before income
taxes 38,485 (1,807) 36,678 (13,770) 22,908
Income tax expense (13,272) 1,032 (12,240) 5,301 (6,939)
--------- --------- -------- --------- ----------
Income from continuing
operations $ 25,213 (775) 24,438 (8,469) 15,969
======== ========== ======= ========= ========
Basic income from continuing
operations per share $ 2.65 4.20
========= =========
Weighted average number of
common shares outstanding 9,517 (5,714) 3,803
========= ======== =========
Diluted income from continuing
operations per share $ 2.55 3.82
========= =========
Weighted average number of
common shares and common
share equivalents outstanding 9,892 (5,714) 4,178
======== ======== =========
</TABLE>
F-33
<PAGE> 84
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Notes to the Unaudited Pro Forma Condensed Consolidated Statements of
Income follow:
(1) To record the effect on interest expense and the related income tax effect
of (i) the purchase of 2,805,194 shares from Water Street and 51,948 shares
from Mr. Smialek at $38.50 per share in cash for an aggregate purchase
price of $109,999,967, (ii) the entering into of the Bank Credit Agreement
and the issuance and sale of $150,000,000 aggregate principal amount of the
Notes, and (iii) the purchase of 2,857,142 shares at $38.50 per share in
cash for an aggregate purchase price of $109,999,967 pursuant to the Tender
Offer, as if the aforementioned transactions had occurred at the beginning
of the periods presented.
(2) To record the effect on sales, costs and expenses assuming that the
acquisition of the Lingemann Business had occurred as of the beginning of
the period presented. Proceeds from the sales of Rolodex Electronics and
Curtis were assumed to have been applied to reduce the Company's
outstanding debt at the beginning of the period, reducing interest expense
and the related income tax expense. The acquisition of the Lingemann
Business was assumed to have occurred and to have been funded through
borrowings under the prior bank agreement as of the beginning of the period
presented.
(21) SUBSEQUENT EVENT
On March 24, 1998, it was announced that the Company and an affiliate of
DLJ Merchant Banking Partners II (and affiliated funds) ("DLJMB") signed
a definitive merger agreement. Under the initial terms of the agreement,
the stockholders of the Company would have received total consideration
of $42.98 in cash and 0.03419 shares of retained stock (having a nominal
value of $44.50 per share) of the surviving corporation. On June 8, 1998
DLJMB agreed to increase the total consideration to be paid by $0.50 in
cash to $43.48 in cash and 0.03378 shares of retained stock (having a
nominal value of $45.00 per share) of the surviving corporation. In
aggregate, stockholders will receive approximately $180.2 million in cash
and retain 140,031 shares in the surviving entity. The retained shares
will represent approximately 10% of the common stock outstanding
post-recapitalization.
The transaction, which is estimated to have a value of approximately $448
million including existing indebtedness to be assumed and/or refinanced,
is subject to terms and conditions customary in transactions of this
type, including approval by the Company's shareholders, and will be
treated as a recapitalization for accounting purposes. Affiliates of
Donaldson, Lufkin & Jenrette Securities Corporation, which acted as
financial advisors to DLJMB, have committed to provide all debt financing
required for the transaction.
DLJMB also announced that it entered into a voting agreement in support
of the transaction with respect to 1,783,878 shares, approximately 43% of
the voting stock of the Company, with Water Street, an affiliate of
Goldman Sachs, which is the Company's largest shareholder.
As a result of the proposed merger, the Company and DLJMB will incur
various costs and expenses in connection with consummating the
transaction including professional fees, registration costs, financing
costs, and compensation costs. Pursuant to the terms of the merger, all
issued employee stock options will vest. The compensation expense
associated with the option payments will include approximately $9.1 million
to employees for the excess of the $45.00 purchase price per share over the
exercise price of all outstanding vested and unvested options.
F-34
<PAGE> 1
EXHIBIT 23(a)
Consent of Independent Auditors'
The Board of Directors
Insilco Corporation:
We consent to incorporation by reference in the registration statements of the
Insilco Corporation Employee Thrift Plan, the 1993 Nonemployee Director Stock
Incentive Plan and the 1993 Long-term Incentive Plan on Form S-8 of Insilco
Corporation of our report dated January 30, 1998, except as to note 21, which is
as of June 8, 1998 and note 2, which is as of July 7, 1998, relating to the
consolidated balance sheets of Insilco Corporation and subsidiaries as of
December 31, 1997, and 1996, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the years
in the three-year period ended December 31, 1997, and the related schedule,
which report appears in the December 31, 1997, annual report on Form 10-K/A
No. 2 of Insilco Corporation.
KPMG Peat Marwick LLP
Columbus, Ohio
July 7, 1998
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose signatures appear
below, constitute and appoint Robert L. Smialek, Kenneth H. Koch, and David A.
Kauer, and each of them as their true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for them and in their names,
places, and steads, in any and all capacities, to sign the Insilco Corporation
Annual Report on Form 10-K, and any amendments thereto, pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year
ended December 31, 1997, and to file the same, with all exhibits thereto, and
the other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as they might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
DATED: June 23, 1998
/s/ Robert L. Smialek /s/ David A. Kauer
- ---------------------- ----------------------
Robert L. Smialek David A. Kauer
/s/ Terence M. O'Toole /s/ Barry S. Volpert
- ---------------------- ----------------------
Terence M. O'Toole Barry S. Volpert
/s/ Thomas E. Petry /s/ James J. Gaffney
- ---------------------- ----------------------
Thomas E. Petry James J. Gaffney
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 10,651 3,481
<SECURITIES> 0 0
<RECEIVABLES> 67,209 73,874
<ALLOWANCES> (2,132) (4,978)
<INVENTORY> 60,718 66,385
<CURRENT-ASSETS> 145,048 185,501
<PP&E> 177,295 164,293
<DEPRECIATION> (63,324) (49,914)
<TOTAL-ASSETS> 302,673 348,393
<CURRENT-LIABILITIES> 105,540 134,065
<BONDS> 150,000 0
<COMMON> 5 10
0 0
0 0
<OTHER-SE> (102,333) 33,392
<TOTAL-LIABILITY-AND-EQUITY> 302,673 348,393
<SALES> 528,233 492,405
<TOTAL-REVENUES> 528,233 492,405
<CGS> 370,845 344,912
<TOTAL-COSTS> 370,845 344,912
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 701 1,355
<INTEREST-EXPENSE> 20,562 18,378
<INCOME-PRETAX> 36,818 38,485
<INCOME-TAX> 13,404 13,272
<INCOME-CONTINUING> 23,414 25,213
<DISCONTINUED> 58,958 13,840
<EXTRAORDINARY> (728) 0
<CHANGES> 0 0
<NET-INCOME> 81,644 39,053
<EPS-PRIMARY> 11.34 4.10
<EPS-DILUTED> 11.12 3.95
</TABLE>
