<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-22098
INSILCO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 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) (Zip Code)
614-792-0468
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. (X) Yes ( ) No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 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. (X) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of May 12, 1998, 4,121,960
shares of common stock, $.001 par value, were outstanding.
<PAGE> 2
INSILCO CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
- March 31, 1998 (unaudited)
- December 31, 1997
Condensed Consolidated Statements of Income 4
- Three months ended March 31, 1998 (unaudited)
- Three months ended March 31, 1997 (unaudited)
Condensed Consolidated Statement of Stockholders' Equity (Deficit) 5
- Three months ended March 31, 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows 6
- Three months ended March 31, 1998 (unaudited)
- Three months ended March 31, 1997 (unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements 7
Independent Auditors' Review Report 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSILCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
(unaudited)
March 31, December 31,
1998 1997
---------- ---------------
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,777 10,651
Trade receivables, net 71,688 67,209
Other receivables 5,850 3,477
Inventories, net 72,570 60,718
Deferred tax asset 371 277
Prepaid expenses and other current assets 8,993 2,716
-------- ---------
Total current assets 167,249 145,048
Property, plant and equipment, net 114,770 113,971
Deferred tax asset 654 1,054
Investment in Thermalex 9,128 9,736
Goodwill, net 13,167 13,408
Other assets and deferred charges 18,436 19,456
-------- --------
Total assets $ 323,404 302,673
======= ========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,113 1,684
Current portion of other long-term obligations 5,114 5,393
Accounts payable 39,118 39,757
Income taxes payable 709 1,112
Accrued expenses and other 63,933 57,594
------- --------
Total current liabilities 109,987 105,540
Long-term debt, excluding current portion 267,685 256,059
Other long-term obligations, excluding current portion 41,933 43,402
Stockholders' deficit (96,201) (102,328)
------- --------
Total liabilities and stockholders' deficit $ 323,404 302,673
======= ========
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1997 has
been derived from the audited balance sheet as of that date.
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE> 4
INSILCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1998 1997
----------- ------------
<S> <C> <C>
Sales $ 117,305 117,341
Cost of products sold 85,618 82,789
Depreciation and amortization 4,240 4,065
Selling, general and administrative expenses 17,672 18,932
-------- --------
Operating income 9,775 11,555
-------- --------
Other income (expense):
Interest expense (6,877) (3,643)
Interest income 51 489
Gain on sale of Rolodex Business - 95,001
Other income, net 1,329 510
-------- ---------
Total other income (expense) (5,497) 92,357
-------- --------
Income before income taxes 4,278 103,912
Income tax expense (1,497) (40,593)
-------- ---------
Net income $ 2,781 63,319
======== ========
Earnings per common share:
Basic net income per share $ 0.68 6.65
========= =========
Weighted average number of common shares outstanding 4,086,100 9,516,504
========= =========
Earnings per common share - assuming dilution:
Diluted net income per share $ 0.66 6.39
========== =========
Weighted average number of common shares and
common share equivalents 4,194,577 9,912,314
========== =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE> 5
INSILCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
For the Three Months Ended March 31, 1998
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Retained Other Total
Par Value Paid-in Earnings Treasury Comprehensive Stockholders'
$ 0.001 Capital (Deficit) Stock Income Equity (Deficit)
----------- -------- --------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 5 -- (82,756) (16,268) (3,309) (102,328)
Net income -- -- 2,781 -- -- 2,781
Shares issued upon exercise
of stock options -- 2,549 -- -- -- 2,549
Tax benefit from exercise of
stock options -- 778 -- -- -- 778
Other comprehensive income -- -- -- -- 19 19
----------- -------- --------- ------------- ------------- --------
Balance at March 31, 1998 $ 5 3,327 (79,975) (16,268) (3,290) (96,201)
=========== ======== ========= ============= ============= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
5
<PAGE> 6
INSILCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1998 1997
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,781 63,319
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 4,240 4,065
Deferred tax expense 617 27,956
Gain on sale of Rolodex Business - (95,001)
Other noncash charges and credits (239) (388)
Change in operating assets and liabilities:
Receivables (6,986) (10,552)
Inventories (11,945) (12,162)
Payables and other 310 18,551
--------- --------
Net cash used in operating activities (11,222) (4,212)
--------- --------
Cash flows from investing activities:
Capital expenditures (5,813) (4,505)
Other investing activities 1,193 579
Proceeds from sale of Rolodex Business - 112,610
--------- --------
Net cash provided by (used in) investing activities (4,620) 108,684
--------- --------
Cash flows from financing activities:
Proceeds from debt borrowings 12,125 8,440
Proceeds from sale of stock 2,549 1,777
Payment of prepetition liabilities (1,647) (1,708)
Purchase of treasury stock - (576)
Retirement of long-term debt (25) (161)
--------- --------
Net cash provided by financing activities 13,002 7,772
--------- --------
Effect of exchange rate changes on cash (34) (202)
--------- --------
Net increase (decrease) in cash and cash equivalents (2,874) 112,042
Cash and cash equivalents at beginning of period 10,651 3,481
--------- --------
Cash and cash equivalents at end of period $ 7,777 115,523
========= ========
Interest paid $ 10,353 3,821
========= ========
Income taxes paid $ 840 183
========= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
<PAGE> 7
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 1998
(1) Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all determinable adjustments
have been made which are considered necessary to present fairly the
financial position and the results of operations and cash flows at the
dates and for the periods presented.
(2) 1997 Transactions
-----------------
In 1997, the Company completed several material transactions affecting
its ongoing operations and debt and capital structure (the "1997
Transactions") as described more fully below:
* 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 Rolodex office products business
(the "Rolodex Business") for $112,610,000, net of transaction costs.
* On July 3, 1997, the Company refinanced its existing debt under a new
six year $200 million amended and restated Credit Agreement.
* In the third quarter of 1997, the Company purchased an aggregate of
5,714,284 shares of its common stock in two transactions using the
proceeds from the sale of the Rolodex Business and the proceeds
received on the issuance of the $150 million aggregate principal
amount of 10.25% Senior Subordinated Notes due 2007 (the "Notes").
(3) Inventories
-----------
Inventories consisted of the following at March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Raw materials and supplies $ 25,324
Work-in-process 34,149
Finished goods 13,097
-------
Total inventories $ 72,570
======
</TABLE>
(4) Comprehensive Income
--------------------
On January 1, 1998, the Company adopted the Financial Accounting
Standards Board ("FASB") Statement No. 130 ("SFAS 130"), "Reporting
Comprehensive Income". 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. This statement expands or modifies disclosures and has
no impact on the Company's financial position, results of operations or
cash flows. Comprehensive income for the first quarters of 1998 and 1997
totaled $2,800,000 and $61,544,000, respectively, including other
comprehensive income consisting of foreign currency translation
adjustments (losses) totaling $19,000 and ($1,775,000), respectively.
7
<PAGE> 8
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 1998
(5) Earnings Per Share
------------------
The Company has adopted the FASB Statement No. 128 ("SFAS 128"),
"Earnings per Share", which simplifies the computation of earnings per
share ("EPS"). 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.
(6) Contingencies
-------------
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 such claims or liabilities
will not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
(7) 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.
(8) Pro Forma Result of Operations
------------------------------
The following financial information presents 1998 actual and 1997 pro
forma consolidated net sales and results of operations. The 1997 pro
forma consolidated net sales and results of operations are presented as
if the 1997 Transactions (see Note 2) had occurred at the beginning of
1997, exclusive of nonrecurring items directly attributable to the
transaction. The pro forma results of operations are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
1998 1997
---- ----
<S> <C> <C>
Net sales $ 117,305 106,544
Net income 2,781 1,697
Basic net income per share 0.68 0.45
Diluted net income per share 0.66 0.40
</TABLE>
8
<PAGE> 9
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 1998
(9) Merger Agreement
----------------
On March 24, 1998, the Company announced that it had entered into a
definitive merger agreement with DLJ Merchant Banking Partners II, L.P.
(and affiliated funds) ("DLJMB"). Under the terms of the agreement, the
stockholders of the Company will receive total consideration of $44.50
per share, consisting of $42.98 in cash and 0.03419 shares of retained
stock of the surviving corporation. In aggregate, stockholders will
receive approximately $177.2 million in cash and retain approximately
140,930 shares in the surviving entity. The retained shares will
represent approximately 10% of the common stock outstanding
post-recapitalization.
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.
The transaction, which is estimated to have a value of approximately $454
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 expiration of
applicable waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, 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.
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 and financing
costs. Such fees are estimated to be approximately $19 million.
Pursuant to the terms of the merger, all outstanding stock options
(whether vested or unvested) will be canceled and each holder of an
option will receive (subject to any required tax withholding) a cash
payment from the Company for each option share equal to the excess of
$44.50 less the exercise price of the option. The compensation expense
associated with the payments in respect of the canceled options
will be approximately $9.1 million.
(10) Subsequent Event
----------------
On May 14, 1998, the Company announced that a jury has awarded its Taylor
Publishing unit approximately $36 million in damages in connection with
Taylor's suit against Jostens, Inc. which alleged that Jostens had
violated federal antitrust laws, unfairly interfered with Taylor's sales
representatives, improperly encouraged Taylor employees to divulge
confidential Taylor information and otherwise engaged in unfair
competition. The verdict also entitles Taylor to recover approximately $1
million in legal fees. The verdict is subject to any post trial motions
and appeals by Jostens, and Taylor's receipt of the judgment is
contingent on the results of any appeals.
9
<PAGE> 10
INDEPENDENT AUDITORS' REVIEW REPORT
-----------------------------------
THE BOARD OF DIRECTORS
INSILCO CORPORATION
We have reviewed the condensed consolidated balance sheet of Insilco Corporation
and subsidiaries as of March 31, 1998, the related condensed consolidated
statements of income and cash flows for the three-month periods ended March 31,
1998 and 1997 and the condensed consolidated statement of stockholders' equity
(deficit) for the three-month period ended March 31, 1998. These condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Insilco Corporation and
subsidiaries as of December 31, 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year then
ended (not presented herein); and in our report dated January 30, 1998, except
as to Note 21, which is as of March 24, 1998, we expressed an unqualified
opinion on those consolidated financial statements. We did not audit the 1997
financial statements of Thermalex, Inc., a 50 percent owned investee company
which is accounted for under the equity method. The 1997 financial statements of
Thermalex, Inc. were audited by other auditors whose report has been furnished
to us, and in our opinion, insofar as it relates to the amounts included for
Thermalex, Inc., was based solely on the report of the other auditors. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1997, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
Columbus, Ohio
April 22, 1998, except as to KPMG Peat Marwick, LLP
Note 10 which is as of
May 14, 1998
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a diversified manufacturer of automotive, telecommunications and
electronics components and is a publisher of specialty publishing products,
chiefly student yearbooks. The Company's Automotive Components Group
manufactures transmission components and assemblies at the Steel Parts unit,
heat exchangers and heat exchanger tubing at the Thermal Components unit and
stainless steel tubing used in predominantly non-automotive applications at the
Romac Metals operating unit. The Technologies Group manufactures cable and wire
assemblies for the telecommunications industry, high performance data-grade
connectors, precision metal stampings and power transformers through its Escod
Industries, Stewart Connector Systems, Stewart Stamping, and Signal Transformer
operating units, respectively. The Specialty Publishing Group consists of Taylor
Publishing which produces primarily student yearbooks. The Company completed the
divestiture of its Office Products business with the sale of the Rolodex office
products business (the "Rolodex Business") in the first quarter of 1997.
Summarized sales and operating income (loss) by business segment for the three
months ended March 31, 1998 compared to the corresponding period in 1997 are set
forth in the following table (in thousands) and discussed below:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1998 1997
---- ----
<S> <C> <C>
SALES
Automotive Components Group $ 62,077 56,183
Technologies Group 50,210 47,094
Office Products/Specialty Publishing Group:
Specialty Publishing 5,018 3,267
Office Products -- 10,797
--------- ---------
5,018 14,064
--------- ---------
$ 117,305 117,341
========= =========
OPERATING INCOME (LOSS)
Automotive Components Group $ 5,492 5,676
Technologies Group 5,271 4,974
Office Products/Specialty Publishing Group:
Specialty Publishing (970) (999)
Office Products -- 1,926
--------- ---------
(970) 927
--------- ---------
Unallocated Corporate (18) (22)
--------- ---------
$ 9,775 11,555
========= =========
</TABLE>
11
<PAGE> 12
SALES AND OPERATING INCOME. Total net sales in the first quarter of 1998 were
relatively flat compared to the corresponding period in 1997 due to the
inclusion of the Rolodex Business sales in the first quarter of 1997 prior to
its divestiture. Sales of the Rolodex Business totaled $10,797,000 in the first
quarter of 1997. Excluding the Rolodex Business, the Company's sales increased
10% ($10,761,000) in the first quarter of 1998 compared to the first quarter of
1997 primarily due to 10% ($5,894,000) and 7% ($3,116,000) increases in the
Automotive Components Group and Technologies Group, respectively. In
addition, the Specialty Publishing Group's sales increased 54% ($1,751,000)
in its seasonally slow first quarter due to the timing of yearbook deliveries
compared to the prior year.
The 10% increase in the Automotive Components Group's sales was primarily due to
increased sales of automotive tubing and increased sales of radiators to
original equipment manufacturers serving the off-road and industrial equipment
markets. In addition, sales of transmission components and other stamped steel
parts increased over the prior year due to increased volumes of components
supplied for light truck and sport utility transmissions.
The Technologies Group's sales increase of 7% was due to growth in sales of wire
and cable assemblies which reflects increased sales to existing customers and
continued expansion of the customer base. Sales of power transformers and
precision stampings for the first quarter of 1998 were also up over the prior
year. In addition, the El Paso stamping facility contributed to the
year-over-year increase in sales as it has moved from the start-up phase in 1997
to production phase in the first quarter of 1998. Sales of Stewart Connector's
modular data interconnect products were essentially flat compared to the first
quarter of 1997.
In a seasonally slow quarter, Taylor Publishing sales increased 54% ($1,751,000)
in the first quarter of 1998 from the corresponding period of the prior year
primarily due to timing differences in the delivery of yearbooks.
(See Seasonality.)
Operating income decreased to $9,775,000 in the first quarter of 1998 from
$11,555,000 in the first quarter of 1997 due to the divestiture of the Rolodex
Business. Operating income in the first quarter of 1997 included $1,926,000 from
the divested Rolodex Business. Excluding the Rolodex Business, operating income
increased 2% ($146,000) over the corresponding period of 1997 primarily due to
improved operating margins in the Technologies Group.
The Automotive Components Group's operating income in the first quarter of 1998
compared to the corresponding period of 1997 decreased from $5,676,000 to
$5,492,000. Increased operating margins and sales volume at the Company's
automotive heat exchanger and related components and equipment business were
offset by lower operating margins at the Company's transmission components
business and tube mill manufacturing business.
The Technologies Group's operating income in the first quarter of 1998 compared
to the corresponding period of 1997 increased from $4,974,000 to $5,271,000.
Operating margins increased at Escod, Signal Transformer and Stewart Stamping.
In addition, the El Paso manufacturing facility recorded a smaller operating
loss in the quarter compared to last year. The operating margin in the first
quarter of 1998 at Stewart Connector declined slightly from the prior year
primarily due to competitive pricing pressures on mature products.
In the Specialty Publishing Group, Taylor Publishing's operating loss of
$970,000 in the first quarter of 1998 was relatively flat with the prior year.
OTHER INCOME (EXPENSE). Other income for the first quarter of 1997 included a
pretax gain on the sale of the Rolodex Business totaling $95,001,000. Other
income for the first quarters of 1998 and 1997 included $716,000 and $717,000,
respectively, of equity income from the Company's unconsolidated joint venture,
Thermalex, which manufactures extruded aluminum tubing primarily for automotive
air conditioning
12
<PAGE> 13
condensers. Interest expense increased 89% ($3,234,000) in the first quarter of
1998 compared to the first quarter of 1997 due to the issuance of $150,000,000
of 10.25% Senior Subordinated Notes (the "Notes") completed in the third quarter
of 1997 (see Note 2 to the Unaudited Condensed Consolidated Financial
Statements.)
INCOME TAX EXPENSE. The Company's effective income tax rate decreased from 39.1%
for the first quarter of 1997 to 35.0% for the first quarter of 1998. The higher
1997 rate was primarily due to the recognition of the tax expense related to the
gain on the sale of the Rolodex Business in the first quarter of 1997.
CASH FLOWS USED IN OPERATING ACTIVITIES. Operations used $11,222,000 cash in the
first quarter of 1998 as compared to a cash usage of $4,212,000 in the first
quarter of 1997. Cash flows from operations decreased from the prior year
primarily due to higher interest payments related to the Notes which are payable
semi-annually in the first and third quarters.
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES. In the first quarter of 1998,
the Company received a $1,324,000 dividend distribution from Thermalex and spent
$5,813,000 in capital expenditures for its operating units. In the first quarter
of 1997, the Company sold its Rolodex Business for cash in the net amount of
$112,610,000 and spent $4,505,000 in capital expenditures.
CASH FLOWS FROM FINANCING ACTIVITIES. In the first quarter of 1998, the Company
borrowed a net amount of $12,125,000 on its revolving credit facility and paid
$1,647,000 of prepetition liabilities. In the first quarter of 1997, the Company
borrowed a net amount of $8,440,000 on its revolving credit facility and paid
$1,708,000 of prepetition liabilities.
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 first and fourth quarters of each year. The Company's other businesses are
not highly seasonal.
IMPACT OF INFLATION AND CHANGING PRICES. Inflation and changing prices have not
significantly affected the Company's operating results or markets.
LIQUIDITY. At March 31, 1998, the Company's cash and cash equivalents and net
working capital amounted to $7,777,000 and $57,262,000, respectively, compared
to $10,651,000 and $39,508,000, respectively, at December 31, 1997. The
borrowing ability under the Company's revolving credit facility as of the end of
the first quarter of 1998 was $74,318,000, including $42,050,000 available for
letters of credit.
MERGER AGREEMENT. On March 24, 1998, the Company announced that it had entered
into a definitive merger agreement with DLJ Merchant Banking Partners II, L.P.
(and affiliated funds) ("DLJMB"). Under the terms of the agreement, the
stockholders of the Company will receive total consideration of $44.50 per
share, consisting of $42.98 in cash and 0.03419 shares of retained stock of the
surviving corporation. In aggregate, stockholders will receive approximately
$177.2 million in cash and retain approximately 140,930 shares in the surviving
entity. The retained shares will represent approximately 10% of the common
stock outstanding post-recapitalization.
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.
The transaction, which is estimated to have a value of approximately $454
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 expiration of applicable
waiting periods
13
<PAGE> 14
INSILCO CORPORATION AND SUBSIDIARIES
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 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.
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 and financing costs. Such fees are
estimated to be approximately $19 million.
Pursuant to the terms of the merger, all outstanding stock options (whether
vested or unvested) will be canceled and each holder of an option will receive
(subject to any required tax withholding) a cash payment from the Company
for each option share equal to the excess of $44.50 less the exercise
price of the option. The compensation expense associated with the payments in
respect of the canceled options will be approximately $9.1 million.
SUBSEQUENT EVENT. On May 14, 1998, the Company announced that a jury has awarded
its Taylor Publishing unit approximately $36 million in damages in connection
with Taylor's suit against Jostens, Inc. which alleged that Jostens had violated
federal antitrust laws, unfairly interfered with Taylor's sales representatives,
improperly encouraged Taylor employees to divulge confidential Taylor
information and otherwise engaged in unfair competition. The verdict also
entitles Taylor to recover approximately $1 million in legal fees. The verdict
is subject to any post trial motions and appeals by Jostens, and Taylor's
receipt of the judgment is contingent on the results of any appeals.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Except for the historical information contained herein, the matters
discussed in this Form 10-Q included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" include "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.
Although the Company 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.
14
<PAGE> 15
INSILCO CORPORATION AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10(n) First Amendment to the Value Appreciation
Agreement
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
A report, dated March 24, 1997, on Form 8-K was filed during the
quarter ending March 31, 1998, pursuant to Item 5 of that form.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSILCO CORPORATION
---------------------------
Registrant
Date: May 14, 1998 By: /s/ David A. Kauer
---------------------
David A. Kauer
Vice President and Chief Financial Officer
16
<PAGE> 17
INSILCO CORPORATION
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
10(n) First Amendment to the Value Appreciation
Agreement
27 Financial Data Schedule
<PAGE> 1
Exhibit 10(n)
FIRST AMENDMENT TO VALUE APPRECIATION AGREEMENT
-----------------------------------------------
THIS FIRST AMENDMENT TO VALUE APPRECIATION AGREEMENT (this "Amendment")
is entered into as of the ____ day of April, 1998, by INSILCO CORPORATION, a
Delaware corporation (the "Company"), and DAVID M. ARONOWITZ, ROBERT F. HEFFRON,
LES G. JACOBS, DAVID A. KAUER, KENNETH H. KOCH, PHILIP K. WOODLIEF
(collectively, the "Executives").
RECITALS:
--------
A. The parties have previously entered into a certain Value
Appreciation Agreement, dated December 17, 1996 (the "Agreement"). (All
capitalized terms used herein and not otherwise defined herein shall have the
meanings ascribed to them in the Agreement.)
B. The Agreement provides that, for purposes of determining the
Commissions payable under Section 5 of the Agreement upon a Sale of fewer than
all of the outstanding shares of the capital stock of the Company, the Purchase
Price is to be increased by the amount of the indebtedness of the Company at the
time of the Sale, however the parties intended that the Purchase Price be
increased only by the amount, if any, by which the indebtedness of the Company
at the time of the Sale exceeds the amount of the indebtedness of the Company at
the time the Agreement was executed and, further, that such adjustment apply in
the case of any Sale of stock of the Company, whether such Sale includes all or
fewer than all of the outstanding shares.
C. The Company has entered into a certain Agreement and Plan of Merger
with Silkworm Acquisition Corporation, a subsidiary of DLJ Merchant Banking
Partners II, L.P., dated as of March 24, 1998 (the "Silkworm Merger Agreement"),
pursuant to which, subject to the satisfaction of certain conditions, the
Company, in a series of transactions, will merge with Silkworm Acquisition
Corporation (the "Silkworm Merger") and the current shareholders of the Company
will receive total consideration of approximately $44.50 per share, consisting
of $42.98 in cash and 0.03419 shares of retained stock of the surviving
corporation in the merger (collectively, the "Merger Consideration"), in
exchange for their shares of common stock of the Company.
D. The parties desire to modify the Agreement to correctly reflect the
original intention of the parties as discussed in the Recital B above, to
specify the amount of the Commissions payable under the Agreement upon the
consummation of the Silkworm Merger, and to clarify certain other matters.
AGREEMENT:
---------
NOW, THEREFORE, in consideration of the foregoing Recitals and the
mutual covenants contained herein, the parties hereby agree as follows:
<PAGE> 2
1. ADJUSTMENT TO THE PURCHASE PRICE FOR INDEBTEDNESS. Effective as
of the date hereof, the Agreement shall be supplemented, modified, and amended
as follows:
1.1 The following shall be added as a new subparagraph 1(v) of the
Agreement:
(v) "Incremental Increase in Indebtedness" shall mean the
positive difference, if any, obtained by subtracting $161,100,000,
which represents the principal amount of indebtedness for borrowed
money of the Company as set forth on the audited consolidated balance
sheet of the Company as of December 31, 1996, from the principal
amount of indebtedness for borrowed money of the Company as set forth
on the most recent quarterly consolidated balance sheet of the Company
prior to the Closing Date.
1.2 Subparagraph 1(q)(i) of the Agreement shall be deleted and the
following shall be substituted in lieu thereof:
(i) if any part or all of the Purchase Price is payable in
property other than cash, the Purchase Price shall include the amount
of cash payable in the Sale plus the fair market value of the non-cash
property to be conveyed, transferred, or assigned to the Company, an
Affiliate or Affiliates of the Company, or the shareholders of the
Company in the Sale;
1.3 Subparagraph 1(q)(iii) of the Agreement shall be deleted and the
following shall be substituted in lieu thereof:
(iii) in the case of a sale, transfer, or disposition by the
Company of all of the assets of the Company, the Purchase Price shall include
the amount of all indebtedness for borrowed money of the Company that is assumed
by the buyer or buyers in the Sale; and in the case of the sale, transfer, or
disposition by the Company of less than all of the assets of the Company, the
Purchase Price shall include the fair market value of any current assets of the
Company not sold by the Company and the amount of all indebtedness for borrowed
money of the Company that is assumed by the buyer or buyers in the Sale;
1.4 Subparagraph 1(q)(iv) of the Agreement shall be deleted
and the following shall be substituted in lieu thereof:
(iv) in the case of the sale, exchange, or purchase of all or
fewer than all of the outstanding shares of the capital stock of the Company,
the Purchase Price shall include the total consideration that would have been
paid if all such stock had been
- 2 -
<PAGE> 3
purchased, on a fully diluted basis, taking into account all shares
subject to outstanding stock options, on the same terms, and the
amount of the Incremental Increase in Indebtedness;
2. BALANCE OF AGREEMENT UNCHANGED. Except as specifically supplemented,
modified, or amended herein, the Agreement shall remain unchanged and in full
force and effect.
3. COMMISSIONS ON THE CONSUMMATION OF THE SILKWORM MERGER. The parties
hereby agree that, notwithstanding the express terms of the Agreement, as
amended herein, if the Silkworm Merger is consummated pursuant to the terms of
the Silkworm Merger Agreement on or before September 30, 1998, and if the Merger
Consideration is as stated in Recital C above, then the total amount of
Commissions payable under Section 5 of the Agreement, as so amended, on account
of the consummation of such merger, to all of the Executives, in the aggregate,
will be $2,600,000.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
INSILCO CORPORATION
By:
--------------------------------- ---------------------------
Robert L. Smialek, President David A. Kauer
- ------------------------------------ ---------------------------
David M. Aronowitz Kenneth H. Koch
- ------------------------------------ ---------------------------
Robert F. Heffron Philip K. Woodlief
- ------------------------------------
Les G. Jacobs
- 3 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,777
<SECURITIES> 0
<RECEIVABLES> 73,886
<ALLOWANCES> (2,198)
<INVENTORY> 72,570
<CURRENT-ASSETS> 167,249
<PP&E> 182,587
<DEPRECIATION> (67,817)
<TOTAL-ASSETS> 323,404
<CURRENT-LIABILITIES> 109,987
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> (96,206)
<TOTAL-LIABILITY-AND-EQUITY> 323,404
<SALES> 117,305
<TOTAL-REVENUES> 117,305
<CGS> 88,987
<TOTAL-COSTS> 88,987
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 234
<INTEREST-EXPENSE> 6,877
<INCOME-PRETAX> 4,278
<INCOME-TAX> (1,497)
<INCOME-CONTINUING> 2,781
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,781
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.66
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 115,523
<SECURITIES> 0
<RECEIVABLES> 74,476
<ALLOWANCES> (3,101)
<INVENTORY> 70,500
<CURRENT-ASSETS> 282,454
<PP&E> 159,539
<DEPRECIATION> (50,257)
<TOTAL-ASSETS> 432,520
<CURRENT-LIABILITIES> 151,540
<BONDS> 0
10
0
<COMMON> 0
<OTHER-SE> 97,450
<TOTAL-LIABILITY-AND-EQUITY> 432,520
<SALES> 117,341
<TOTAL-REVENUES> 117,341
<CGS> 82,789
<TOTAL-COSTS> 82,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 137
<INTEREST-EXPENSE> 3,643
<INCOME-PRETAX> 103,912
<INCOME-TAX> 40,593
<INCOME-CONTINUING> 63,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,319
<EPS-PRIMARY> 6.65
<EPS-DILUTED> 6.39
</TABLE>
