<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 June 30, 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 July 21, 1998, 4,145,372
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
- June 30, 1998 (unaudited)
- December 31, 1997
Condensed Consolidated Income Statements 4
- Six months ended June 30, 1998 (unaudited)
- Six months ended June 30, 1997 (unaudited)
- Three months ended June 30, 1998 (unaudited)
- Three months ended June 30, 1997 (unaudited)
Condensed Consolidated Statement of Stockholders' Equity (Deficit) 5
- For the six months ended June 30, 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows 6
- Six months ended June 30, 1998 (unaudited)
- Six months ended June 30, 1997 (unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements 7
Independent Auditors' Review Report 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
2
<PAGE> 3
INSILCO CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSILCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1998 1997
-------- --------
Assets
------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 6,983 10,651
Trade receivables, net 85,142 67,209
Other receivables 3,501 3,477
Inventories, net 61,869 60,718
Prepaid expenses and other current assets 3,262 2,993
-------- --------
Total current assets 160,757 145,048
Property, plant and equipment, net 113,318 113,971
Investment in Thermalex 9,862 9,736
Goodwill, net 13,077 13,408
Other assets and deferred charges 17,104 20,510
-------- --------
Total assets $314,118 302,673
======== ========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Current portion of long-term debt $ 15 1,684
Current portion of other long-term obligations 3,489 5,393
Accounts payable 36,755 39,757
Accrued expenses and other 56,249 58,706
-------- --------
Total current liabilities 96,508 105,540
Long-term debt, excluding current portion 264,799 256,059
Deferred taxes 1,307 -
Other long-term obligations, excluding current portion 42,308 43,402
Stockholders' deficit (90,804) (102,328)
-------- --------
Contingencies (See Note 8)
Total liabilities and stockholders' deficit $314,118 302,673
======== ========
</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 Income Statements
(Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 287,323 276,215 170,018 169,671
Cost of products sold 200,671 189,953 115,053 112,647
Depreciation and amortization 10,643 9,604 6,403 5,733
Selling, general and administrative expenses 52,044 47,857 34,372 31,879
--------- --------- --------- ---------
Operating income 23,965 28,801 14,190 19,412
--------- --------- --------- ---------
Other income (expense):
Interest expense (13,805) (7,762) (6,928) (4,119)
Interest income 72 2,038 21 1,589
Equity in net income of Thermalex 1,450 1,547 734 830
Other income, net 2,026 68 1,413 276
--------- --------- --------- ---------
Total other income (expense) (10,257) (4,109) (4,760) (1,424)
--------- --------- --------- ---------
Income from continuing operations before
income taxes 13,708 24,692 9,430 17,988
Income tax expense (6,494) (9,124) (4,997) (6,781)
--------- --------- --------- ---------
Income from continuing operations 7,214 15,568 4,433 11,207
Discontinued operations, net of tax:
Income from operations, net of tax of $1,037 - 1,170 - -
Gain on disposal, net of tax of $37,213 - 57,788 - -
--------- --------- --------- ---------
- 58,958 - -
--------- --------- --------- ---------
Net income $ 7,214 74,526 4,433 11,207
========= ========= ========= =========
Basic earnings per common share:
Income from continuing operations $ 1.74 1.63 1.06 1.16
Discontinued operations - 6.15 - -
--------- --------- --------- ---------
Basic net income per share $ 1.74 7.78 1.06 1.16
========= ========= ========= =========
Weighted average number of common
shares outstanding 4,141,471 9,585,025 4,198,060 9,652,793
========= ========= ========= =========
Diluted earnings per common share:
Income from continuing operations $ 1.69 1.58 1.02 1.14
Discontinued operations - 5.97 - -
--------- --------- --------- ---------
Diluted net income per share $ 1.69 7.55 1.02 1.14
========= ========= ========= =========
Weighted average number of common
shares outstanding and potential common stock 4,270,078 9,875,401 4,346,798 9,872,287
========= ========= ========= =========
</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 Six Months Ended June 30, 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 - - 7,214 - - 7,214
Shares issued upon exercise of stock options - 3,281 - - - 3,281
Tax benefit from exercise of stock options - 939 - - - 939
Other comprehensive income - - - - 90 90
-------- ------ ------- ------- ------ --------
Balance at June 30, 1998 $ 5 4,220 (75,542) (16,268) (3,219) (90,804)
======== ====== ======= ======= ====== ========
</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>
Six Months Six Months
Ended Ended
June 30, June 30,
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,214 74,526
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 10,643 9,604
Deferred tax expense 3,917 5,579
Other noncash charges and credits (1,822) (911)
Change in operating assets and liabilities:
Receivables (18,009) (25,181)
Inventories (1,189) (90)
Payables and other (4,564) 2,946
Discontinued operations:
Gain on disposal of segment - (95,001)
Deferred tax expense - 25,687
Depreciation - 194
Change in operating assets and liabilities - (2,512)
-------- -------
Net cash used in operating activities (3,810) (5,159)
-------- -------
Cash flows from investing activities:
Capital expenditures (10,884) (10,315)
Other investing activities 1,621 3,039
Proceeds from divestiture, net - 112,610
-------- -------
Net cash provided by (used in) investing activities (9,263) 105,334
-------- -------
Cash flows from financing activities:
Proceeds from debt borrowing 8,952 15,340
Proceeds from sale of stock 3,281 1,944
Payment of prepetition liabilities (1,647) (1,708)
Retirement of long-term debt (1,166) (5,917)
Purchase of treasury stock - (1,887)
-------- -------
Net cash provided by financing activities 9,420 7,772
-------- -------
Effect of exchange rate changes on cash (15) (228)
-------- -------
Net increase (decrease) in cash and cash equivalents (3,668) 107,719
Cash and cash equivalents at beginning of period 10,651 3,481
-------- -------
$ 6,983 111,200
======== =======
Interest paid $ 13,453 7,332
-------- -------
Income taxes paid $ 1,114 6,293
======== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
<PAGE> 7
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 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) Discontinued Operations
On March 5, 1997, the Company completed the sale of its Office Products
Business (consisting of the Rolodex Business, Rolodex Electronics and
Curtis, each as defined below) 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.
On July 7, 1998, the Company amended its Form 10-K for the year ended
December 31, 1997 and its Form 10-Q for the quarter ended March 31, 1998
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 first quarter of 1997 were $10,797,000.
(3) 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:
o On July 3, 1997, the Company refinanced its existing debt under a new
six year $200 million amended and restated Credit Agreement.
o 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 of $112,610,000, net
of transaction costs, and the proceeds received on the issuance of
the $150 million aggregate principal amount of 10.25% Senior
Subordinated Notes due 2007 (the "Notes").
(4) Merger Agreement
The Company and Silkworm Acquisition Corporation, an affiliate of DLJ
Merchant Banking Partners II (and affiliated funds) ("DLJMB"), have
entered into a definitive merger agreement pursuant to which the
stockholders of the Company will be paid $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
7
<PAGE> 8
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 1998
will receive approximately $180.2 million in cash and retain 140,031
shares in the surviving entity. The retained shares will constitute
approximately 10% of the common stock of the surviving company post-
recapitalization.
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.
In connection with the merger, DLJMB entered into a voting agreement
with the Company's largest shareholder, Water Street Corporate Recovery
Fund I, L.P. ("Water Street"), an affiliate of Goldman Sachs, & Co., in
which Water Street has committed, subject to certain exceptions, to vote
1,783,878 shares, approximately 43% of the voting stock of the Company,
in favor of the merger.
As a result of the proposed merger, the Company and DLJMB will incur
approximately $28,244,000 of 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 payments in respect to those vested
options is estimated to be $9,094,000 to employees representing the
excess of the $45.00 purchase price per share over the exercise prices
of all outstanding options.
In the second quarter of 1998, the Company incurred and paid $1,341,000
of costs related to the proposed merger. In addition, the Company's
effective income tax rate of 53% for the second quarter of 1998
increased significantly from both the 1997 second quarter rate of 38%
and the 1998 first quarter rate of 35% primarily due to the effects of
the proposed merger transaction with DLJMB. Certain transaction costs
expected to be incurred as part of this transaction will not be
deductible for tax purposes.
(5) Inventories
Inventories consisted of the following at June 30, 1998 (in thousands):
Raw materials and supplies $26,755
Work-in-process 21,367
Finished goods 13,747
-------
Total inventories $61,869
=======
(6) 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
8
<PAGE> 9
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 1998
modifies disclosures and has no impact on the Company's financial
position, results of operations or cash flows. Comprehensive income for
the second quarters of 1998 and 1997 totaled $4,504,000 and $10,332,000,
respectively, including other comprehensive income consisting of foreign
currency translation adjustments (losses) totaling $71,000 and
($875,000), respectively. Comprehensive income for the first six months
of 1998 and 1997 totaled $7,304,000 and $71,876,000, respectively,
including other comprehensive income consisting of foreign currency
translation adjustment (losses) totaling $90,000 and ($2,650,000),
respectively.
(7) Earnings Per Share
In 1997, the Company adopted Financial Accounting Standards Board
("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 diluted EPS. Basic EPS is calculated
based on the weighted average number of shares of common stock
outstanding for the period. Diluted EPS is based on the weighted average
number of shares of common stock outstanding for the period, including
potential common stock which reflect the dilutive effect of stock
options granted to employees and directors. Potential common stock for
the quarters ended June 30, 1998 and 1997 totaled 148,738 and 219,494,
respectively, and for the first six months of 1998 and 1997 totaled
128,607 and 290,376, respectively.
(8) Contingencies
The Company is implicated in various claims and legal actions arising in
the ordinary course of business. Those claims or liabilities 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 these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
(9) 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.
9
<PAGE> 10
INSILCO CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 1998
(10) Pro Forma Results 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 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>
Six Months Ended Three Months Ended
June 30, June 30,
---------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $287,323 276,215 170,018 169,671
Income from continuing
operations 7,214 10,077 4,433 8,193
Basic income from continuing
operations per share $ 1.74 2.60 1.06 2.08
Diluted income from continuing
operations per share $ 1.69 2.42 1.02 1.97
</TABLE>
(11) Contingency Gain
On January 14, 1997, the Company's subsidiary, Taylor Publishing Company
("Taylor"), sued one of its principal competitors in the yearbook
business, Jostens, Inc. ("Jostens"), in the U.S. District Court for the
Eastern District of Texas, alleging violations of the federal antitrust
laws as well as various claims arising under state law. On May 13, 1998,
a verdict was rendered in favor of Taylor and on June 12, 1998, the judge
presiding over the litigation in the U.S. District Court rendered his
judgment in the amount of $25,225,000 plus interest at the rate of 5.434
percent. Jostens has announced that it will seek to overturn the verdict
in post trial motions or on appeal. There can be no assurance as to the
actual amount, if any, that Taylor will recover from Jostens. In the
second quarter and first six months of 1998, the Company incurred legal
fees in connection with the Jostens lawsuit of $570,000 and $768,000,
respectively.
10
<PAGE> 11
INDEPENDENT AUDITORS' REVIEW REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
INSILCO CORPORATION
We have reviewed the condensed consolidated balance sheet of Insilco Corporation
and subsidiaries as of June 30, 1998, the related condensed consolidated income
statements for the three-month and six-month periods ended June 30, 1998 and
1997, the condensed consolidated statement of stockholders' equity (deficit) for
the six months ended June 30, 1998, and the condensed consolidated statements of
cash flows for the six-month periods ended June 30, 1998 and 1997. 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 June 8, 1998, and Note 2, which is as of July 7,
1998, we expressed an unqualified opinion on those consolidated financial
statements. 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
July 22, 1998 KPMG Peat Marwick LLP
11
<PAGE> 12
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 school yearbooks and other
specialty publishing products. The Company's Automotive Components Group
manufactures transmission components and other stamped automotive components and
subassemblies at the Steel Parts unit, heat exchangers and heat exchanger tubing
at the Thermal Components unit, and stainless steel tubing used predominantly in
non-automotive applications at the Romac Metals unit. The Technologies Group
manufactures wire and cable 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, which consists of Taylor Publishing, produces student
yearbooks and other specialty publishing products. The Company completed the
divestiture of its Office Products business with the sale of the Rolodex
Business in the first quarter of 1997. The Office Products Business is being
accounted for as a discontinued operation and, accordingly, the consolidated
statements of operations and cash flows for the periods prior to the sale have
been reclassified.
Summarized sales and operating income (loss) by business segment for the six
months and three months ended June 30, 1998 compared to the corresponding
periods in 1997 are set forth in the following table (in thousands) and
discussed below:
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES
Automotive Components Group $123,765 116,266 61,688 60,083
Technologies Group 99,017 97,961 48,807 50,867
Specialty Publishing 64,541 61,988 59,523 58,721
-------- ------- ------- -------
$287,323 276,215 170,018 169,671
======== ======= ======= =======
OPERATING INCOME (LOSS)
Automotive Components Group $ 11,471 12,600 5,979 6,924
Technologies Group 10,590 11,371 5,319 6,397
Specialty Publishing 3,281 5,114 4,251 6,113
Unallocated corporate costs (36) (284) (18) (22)
Unallocated corporate merger expenses (1,341) - (1,341) -
-------- ------- ------- -------
$ 23,965 28,801 14,190 19,412
======== ======= ======= =======
</TABLE>
12
<PAGE> 13
SALES AND OPERATING INCOME. Total net sales from continuing operations of
$170,018,000 for the second quarter of 1998 were relatively flat compared to the
corresponding period in 1997 as increased sales at the Automotive Components
Group and Taylor Publishing were essentially offset by a decline in the
Technologies Group. In the first six months of 1998, net sales from continuing
operations of $287,323,000 increased 4% or $11,108,000 from 1997 primarily due
to increased sales of automotive tubing and industrial and off-road radiators at
the Automotive Components Group and, to a lesser degree, increases at the
Technologies Group and Specialty Publishing.
The Automotive Components Group's net sales increased 3% or $1,605,000 in the
second quarter of 1998 and 6% or $7,499,000 in the first six months of 1998
compared to the corresponding periods of 1997 due to increased automotive tubing
sales and increased sales of radiators to original equipment manufacturers
("OEMs") serving the off-road and industrial equipment markets. These increases
were partially offset by a decline in sales at the Company's heat exchanger
equipment manufacturing unit, McKenica, which continues to experience a
substantial decline in order backlog. In addition, Steel Parts reported lower
sales from the prior year periods due to the timing of a major automotive OEM's
scheduled annual plant shutdown.
The Technologies Group's net sales decreased 4% or $2,060,000 in the second
quarter of 1998 compared to the corresponding period in 1997 due to sales
declines at Escod, Signal Transformer and Stewart Stamping primarily due to a
general weakness in the electronics market. These declines were partially offset
by increased sales at the El Paso stamping facility which moved from the
start-up phase in 1997 to production phase in 1998 and increased sales of
Stewart Connector's modular data interconnect products due to increased demand
from a major telecommunications customer. Sales in the Technologies Group
increased 1% or $1,056,000 in the first six months of 1998 compared to the
corresponding period in 1997 due to increased sales from the El Paso stamping
facility, increased second quarter sales of Stewart Connector's modular data
interconnect products and increased first quarter sales of wire and cable
assembly products. These increases were partially offset by declines at Signal
Transformer and Stewart Stamping in the second quarter of 1998.
Taylor Publishing's net sales for the second quarter and first six months of
1998 increased 1% and 4%, respectively, compared to the corresponding periods in
1996 in response to certain Taylor initiatives to increase yearbook revenues.
Operating income for the second quarter decreased $5,222,000 from $19,412,000 in
1997 to $14,190,000 in 1998. The decline in operating income was due in part to
increased selling, general and administrative expenses as follows: $1,341,000 of
expenses related to the Company's pending merger with DLJMB, $570,000 in legal
expenses (compared to $200,000 in 1997) associated with the Company's antitrust
lawsuit against Jostens, Inc. (for which the Company received a favorable
judgment totaling $25,225,000 which judgment is likely to be appealed and has
not been reflected in the Company's operating results), and corporate officers
severance expenses totaling $370,000. In addition, the Company experienced an
operating loss in the second quarter at its McKenica unit due to a lack of
available order backlog, increased costs, primarily higher shipping costs, from
production delays at Taylor Publishing during its peak yearbook production
season, and lower operating margins at Stewart Connector and Steel Parts
compared to the year ago quarter. In the first six months of 1998, operating
income decreased $4,836,000 to $23,965,000 from $28,801,000 in 1997. In the
first six months of 1998, selling, general and administrative expenses increased
over 1997 due to $1,341,000 of expense related to the merger transaction,
$768,000 of expenses related to the Company's antitrust lawsuit against Jostens,
Inc. (compared to $200,000 in 1997) and $700,000 of corporate officers severance
expenses. Additionally, the Company experienced increased costs at Taylor
Publishing and lower operating margins at Steel Parts and Stewart Connector.
The Automotive Components Group's operating income in the second quarter of 1998
compared to the corresponding period of 1997 decreased to $5,979,000 from
$6,924,000. The Automotive Components Group was impacted by an operating loss at
the Company's McKenica unit, caused by a significant sales decline from the
second quarter of 1997, and lower operating margins at Steel Parts. These
declines were partially offset by improved operating income at the automotive
tubing and heat exchanger businesses of Thermal Components
13
<PAGE> 14
Group. For the first six months of 1998, the Automotive Components Group's
operating income compared to the corresponding period of 1997 decreased to
$11,471,000 from $12,600,000 due to an operating loss at the Company's McKenica
unit caused by a significant sales decline from 1997, and lower operating
margins at Steel Parts. These declines were partially offset by gains in
operating performance at the Company's heat exchanger and automotive tubing
business.
The Technologies Group's operating income decreased to $5,319,000 in the second
quarter of 1998 from $6,397,000 in the same period of 1997 due to lower demand
and inventory correction by electronics market customers. Operating income at
Stewart Connector decreased from the prior year period due to a less favorable
sales mix of products and price degradation on certain mature connector
products. At Signal Transformer operating income decreased significantly due to
the lower sales volume caused by weak demand in the electronics market. For the
first six months of 1998, the Technologies Group's operating income, compared to
the corresponding period of 1997, decreased to $10,590,000 from $11,371,000.
Operating income was impacted by the decreased sales of power transformers and
competitive pricing pressures in the connector market. Partially offsetting
these declines, operating income improved over the prior year at Escod, Stewart
Stamping and the El Paso stamping facility.
Taylor Publishing's operating income decreased to $4,251,000 from $6,113,000 in
the second quarter of 1998 compared to the same period of 1997 and to $3,281,000
from $5,114,000 in the first half of 1998 compared to the prior year. These
decreases from 1997 were due to increased costs of air freight following
production delays in the second quarter which is the peak yearbook production
and delivery period. In addition, Taylor had increased administrative expenses,
including legal fees related to its lawsuit against Jostens, Inc. (see Note 11
to the Unaudited Condensed Consolidated Financial Statements).
OTHER INCOME (EXPENSE). Other income for the second quarters of 1998 and 1997
included $734,000 and $830,000, respectively, of equity income from the
Company's unconsolidated joint venture, Thermalex, which manufactures extruded
aluminum tubing primarily for automotive air conditioning condensers. For the
first six months of 1998, other income included $1,450,000 of equity income from
Thermalex compared to $1,547,000 in the first six months of 1997. Interest
expense increased 68% or $2,809,000 and 78% or $6,043,000 in the second quarter
and first six months of 1998, respectively, from the corresponding 1997 periods
due to the issuance of $150 million of 10.25% Senior Subordinated Notes (the
"Notes") completed in the third quarter of 1997 (see Note 3 to the Unaudited
Condensed Consolidated Financial Statements). Interest income decreased
$1,568,000 and $1,966,000 in the second quarter and first six months of 1998,
respectively, from the corresponding 1997 periods because the Company had
substantial interest income in 1997 the proceeds on the sale of the Rolodex
Business. (See Note 2 to the Unaudited Condensed Consolidated Financial
Statements).
"Other income, net", included in Other income (expense), for the second quarter
and first six months of 1998 increased $1,137,000 and $1,958,000 from the
corresponding periods of 1997, respectively. Other income in the second quarter
of 1998 included gains on the sale of idle assets.
INCOME TAX EXPENSE. The Company's effective income tax rate of 53% for the
second quarter of 1998 increased significantly from both the 1997 second quarter
rate of 38% and the 1998 first quarter rate of 35% primarily due to the effects
of the proposed merger transaction with DLJMB (see Note 4 to the Unaudited
Condensed Consolidated Financial Statements). Certain transaction costs expected
to be incurred as part of this transaction will not be deductible for tax
purposes. Considering the effects of the proposed merger transaction with DLJMB,
and other favorable permanent and temporary timing items, the Company does not
expect to incur any significant additional cash outlay for 1998 income taxes.
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES. Operations used $3,810,000 of
cash in the first six months of 1998 as compared to using $5,159,000 in the
first six months of 1997. Cash flows from operations improved over the prior
year period due to the timing of cash receipts and lower tax payments. These
improvements were
14
<PAGE> 15
partially offset by higher interest payments related to the Notes (which are
payable semi-annually in the first and third quarters). The Company's cash flow
for periods prior to the six months ended June 30, 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 the first six months of 1997,
the Company sold its Rolodex Business for a net sales price of $112,610,000. In
the first six months of 1998 and 1997, the Company received dividend
distributions from Thermalex of $1,324,000 and $1,460,000, respectively. The
Company's other investing activities consist principally of capital expenditures
which totaled $10,884,000 and $10,315,000 for the first six months of 1998 and
1997, respectively.
CASH FLOWS FROM FINANCING ACTIVITIES. Financing activities provided $9,420,000
and $7,772,000 in the first six months of 1998 and 1997, respectively. In the
first six months of 1998, the Company borrowed a net amount of $8,952,000 on its
revolving credit facility compared to borrowings of $15,340,000 in 1997. Term
loan payments of $5,625,000 were made in the first six months of 1997. In
addition, the Company paid $1,647,000 and $1,708,000 of prepetition liabilities
in the first six months of 1998 and 1997, respectively.
SEASONALITY. The Company's yearbook publishing business, Taylor Publishing, is
highly seasonal, with a majority of its 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.
IMPACT OF INFLATION AND CHANGING PRICES. Inflation and changing prices have not
significantly affected the Company's operating results or markets.
LIQUIDITY. At June 30, 1998, the Company's cash and cash equivalents and net
working capital amounted to $6,983,000 and $64,249,000, respectively,
representing a decrease in cash and cash equivalents of $3,668,000 and an
increase in net working capital of $24,741,000 from year end 1997. The borrowing
ability under the Company's revolving credit facility as of the end of the
quarter was $77,859,000, including $42,450,000 available for letters of credit.
Trade receivables, net, at June 30, 1998 increased 27% or $17,933,000 over the
December 31, 1997 amount primarily due to increased receivables at Taylor
Publishing following its peak yearbook production period (see Seasonality).
MERGER AGREEMENT. The Company and Silkworm Acquisition Corporation, an affiliate
of DLJ Merchant Banking Partners II (and affiliated funds) ("DLJMB"), have
entered into a definitive merger agreement pursuant to which the stockholders of
the Company will be paid $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
constitute approximately 10% of the common stock of the surviving company
post-recapitalization.
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.
In connection with the merger, DLJMB entered into a voting agreement with the
Company's largest shareholder, Water Street Corporate Recovery Fund I, L.P.
("Water Street"), an affiliate of Goldman Sachs, & Co., in which Water Street
has committed, subject to certain exceptions, to vote 1,783,878 shares,
approximately 43% of the
15
<PAGE> 16
voting stock of the Company, in favor of the merger.
As a result of the proposed merger, the Company and DLJMB will incur
approximately $28,244,000 of estimated 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 payments in respect of those vested options is estimated to be $9,094,000
to employees representing the excess of the $45.00 purchase price per share over
the exercise prices of all outstanding options.
In the second quarter of 1998, the Company incurred and paid $1,341,000 of costs
related to the proposed merger. In addition, the Company's effective income tax
rate of 53% for the second quarter of 1998 increased significantly from both the
1997 second quarter rate of 38% and the 1998 first quarter rate of 35% primarily
due to the effects of the proposed merger transaction with DLJMB. Certain
transaction costs expected to be incurred as part of this transaction will not
be deductible for tax purposes.
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.
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(a) Agreement and Plan of Merger, dated as of March 24, 1998, among
the Company, INR Holding Co., and Silkworm Acquisition Corporation
(attached as Annex A to the prospectus included in the Company's
Registration Statement on Form S-4, as amended, dated as of July
8, 1998, File No. 333-51145).
10(b) Voting Agreement, dated as of March 24, 1998, among Silkworm
Acquisition Corporation, the Company and Water Street Corporate
Recovery Fund I, L.P. (attached as Annex C to the prospectus
included in the Company's Registration Statement on Form S-4, as
amended, dated as of July 8, 1998, File No. 333-51145).
10(c) Amendment No. 1 to the Agreement and Plan of Merger, dated June 8,
1998, among the Company, INR Holding Co. and Silkworm Acquisition
Corporation (attached as Annex A to the prospectus included in the
Company's Registration Statement on Form S-4, as amended, dated as
of July 8, 1998, File No. 333-51145).
10(d) Letter Agreement dated June 8, 1998, amending the Voting
Agreement, dated as of March 24, 1998, among Silkworm Acquisition
Corporation, the Company, and Water Street Corporation Recovery
Fund I, L.P. (attached as Annex C to the prospectus included in
the Company's Registration Statement on Form S-4, as amended,
dated as of July 8, 1998. File No. 333-51145).
27 Financial Data Schedule
*Incorporated by reference as indicated.
(b) Reports on Form 8-K
A report, dated June 9, 1998, on Form 8-K was filed during the quarter
ending June 30, 1998, pursuant to Item 5 of that form.
A report, dated May 14, 1998, on Form 8-K was filed during the quarter
ending June 30, 1998, pursuant to Item 5 of that form.
A report, dated April 29, 1998, on Form 8-K was filed during the quarter
ending June 30, 1998, pursuant to Item 5 of that form.
17
<PAGE> 18
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: July 24, 1998 By: /s/ David A. Kauer
------------------
David A. Kauer
Vice President and
Chief Financial Officer
18
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