SCHULLER INTERNATIONAL GROUP INC, 10-K405, 1997-03-31

SCHULLER INTERNATIONAL GROUP INC
10-K405, 1997-03-31
ABRASIVE, ASBESTOS & MISC NONMETALLIC MINERAL PRODS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 1-13574
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SCHULLER INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)

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DELAWARE 84-1196355
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)

717 17TH STREET, DENVER, COLORADO 80202
(Address of principal executive offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 978-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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10 7/8% Senior Notes Due 2004 New York Stock Exchange, Inc.
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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.

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 the 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.

Yes [X] No [ ]

Schuller International Group, Inc. is a wholly owned subsidiary of Schuller
Corporation, and there is no market for the registrant's common stock. As of
March 3, 1997, there were 100 shares of the registrant's sole class of common
stock outstanding.

The registrant meets the conditions set forth in, and is filing this form with
the reduced disclosure format prescribed by, General Instruction J of Form 10-K.

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TABLE OF CONTENTS

PART I

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PAGE
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ITEM 1. BUSINESS.................................................... 1
Introduction................................................ 1
Significant Developments in 1996............................ 1
Description of the Business................................. 1
Building Products........................................... 2
Engineered Products......................................... 3
Materials................................................... 4
Research and Development.................................... 5
Patents..................................................... 5
Labor Relations............................................. 5
Seasonality................................................. 5
Environmental Regulations................................... 5
Occupational Health and Safety Aspects of the Company's
Products.................................................. 5
ITEM 2. PROPERTIES.................................................. 8
Headquarters................................................ 8
Manufacturing and Development Facilities.................... 8
ITEM 3. LEGAL PROCEEDINGS........................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 9

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 9
ITEM 6. SELECTED FINANCIAL DATA..................................... 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 44

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 44
ITEM 11. EXECUTIVE COMPENSATION...................................... 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 44

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K....................................................... 45
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The "Company" or "Schuller" when used in this Form 10-K refers to Schuller
International Group, Inc., incorporated in the State of Delaware in 1992,
including, where applicable, its consolidated subsidiaries.

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PART I

ITEM 1. BUSINESS

INTRODUCTION

Schuller is a leading manufacturer of insulation and building products with
1996 sales of approximately $1.55 billion. Schuller manufactures and markets
insulation products for buildings and equipment, commercial and industrial
roofing systems, high-efficiency filtration media and fibers and nonwoven mats
used as reinforcements in building and industrial applications.

SIGNIFICANT DEVELOPMENTS IN 1996

Effective January 1, 1996, Schuller formed a joint venture with China
National New Building Materials Corporation and Tianma Corporation to
manufacture fiber glass mat in China. The joint venture, in which Schuller has a
60 percent interest, will operate and expand an existing fiber glass mat
facility in the City of Changzhou, Jiansu Province. In early 1996, Schuller
acquired Nord Bitumi SpA, Nord Bitumi Mexico, S.A. de C.V. and Nord Bitumi U.S.,
Inc., manufacturers of modified bitumen roofing products, and Web Dynamics
Corporation, a manufacturer of polymer filtration products. In August 1996,
Schuller acquired, in separate transactions, NRG Barriers, Inc., a U.S.
manufacturer of commercial roofing insulation, and the assets of Dibiten USA and
Dibiten Mexico, manufacturers of modified bitumen roofing products. In January
1997, Schuller acquired the assets of Ergon Nonwovens, Inc., a manufacturer of
synthetic meltblown nonwoven products. In February 1997, Schuller announced its
agreement to acquire the Mitex group of companies, subject to certain
conditions, including regulatory approvals. The Mitex group manufactures fiber
glass wall covering fabrics used primarily in commercial and industrial
buildings and has manufacturing facilities in Sweden and the United Kingdom.

DESCRIPTION OF THE BUSINESS

Schuller operates 50 manufacturing facilities in North America, Europe and
China and is comprised of two principal business segments, as set forth in the
following table:

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PRODUCT GROUPS BY BUSINESS SEGMENT(1) PRODUCTS AND APPLICATIONS
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BUILDING PRODUCTS
Building Insulation Fiber glass wool insulation for walls,
floors and attics; residential foam
sheathing
Commercial and Industrial Roofing Roofing systems, including membranes,
Systems insulation, accessories and related
guarantees
Mechanical Insulations Pipe and duct insulation for various
commercial applications

ENGINEERED PRODUCTS
Specialty Insulations and Filtration Thermal and acoustic insulation for
aircraft; marine vessels; automobiles;
heating, ventilating and air
conditioning ("HVAC"); and other
equipment
Air filtration media for buildings;
ultra-fine fibers for clean room air
filters and battery separators; liquid
filtration media; medical/surgical and
protective apparel products; and
industrial oil sorbent products
Mats and Fibers Continuous filament fiber glass and
nonwoven fiber glass mats for roofing
and flooring substrates, plastics
reinforcements, electrical grade yarn
and wall coverings
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(1) For additional business segment information and geographical data, see Note
20 to the Company's Consolidated Financial Statements contained in this
report.
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BUILDING PRODUCTS

Schuller's Building Products segment with 1996 net sales of $960.5 million,
or 60.6 percent of Schuller's total net sales (before elimination of
intersegment sales), is comprised of the building insulation, commercial and
industrial roofing systems and mechanical insulations product groups.

BUILDING INSULATION

Products. Schuller's building insulation business manufactures a complete
line of fiber glass wool insulation products for walls, attics and floors in
residential and commercial buildings. Schuller's building insulation products
include fiber glass batts, rolls, blowing wool and related products. Schuller
also produces polyisocyanurate foam sheathing for use in residential structures.

Schuller operates six manufacturing and two support facilities throughout
North America to serve regional population and construction centers. This
regional structure, which keeps most shipping distances within a 500-mile
radius, improves Schuller's customer service and reduces its total
transportation costs.

Markets and Distribution. Demand for Schuller's building insulation
products is driven primarily by North American housing starts. Schuller
estimates that during 1996, 75 percent of its wall, attic and floor insulation
was sold to residential markets and the remaining 25 percent was sold to
commercial markets. Other important influences are the repair/remodel market and
commercial construction of warehouses and light manufacturing facilities. In
addition, implementation of various federal and state energy conservation codes
serves to increase the amount of insulation per unit built.

Building insulation products typically reach end users through contractors,
retailers and distributors. Schuller's marketing efforts are normally directed
toward insulation contractors and national retailers.

Competition. Schuller's building insulation business competes primarily
with Owens-Corning Corporation ("OC") and CertainTeed Corporation, the U.S.
subsidiary of Compagnie de Saint-Gobain ("CSG"). Schuller competes in the
building insulation business primarily on the basis of price,
packaging/merchandising and service.

COMMERCIAL AND INDUSTRIAL ROOFING SYSTEMS

Products. Schuller is a full-line supplier of roofing systems and
components for low-slope commercial and industrial roofs, including a wide range
of membranes, insulations, accessories and roofing system guarantees.

Schuller's commercial roofing systems business operates 18 manufacturing
facilities and seven distribution facilities in North America, and one
manufacturing facility in Italy. In early 1996, Schuller expanded its roofing
business by acquiring Nord Bitumi SpA, Nord Bitumi Mexico, S.A. de C.V. and Nord
Bitumi U.S., Inc., manufacturers of modified bitumen roofing products. In August
1996, Schuller acquired NRG Barriers, Inc. ("NRG"), a U.S. manufacturer of
commercial roofing insulation. Through the NRG acquisition, Schuller now
produces various polyisocyanurate foam roofing insulation and building
insulation products. Also in August 1996, Schuller acquired the assets of
Dibiten USA and Dibiten Mexico, manufacturers of modified bitumen roofing
products.

Markets and Distribution. Demand for Schuller's roofing systems products is
driven primarily by commercial and industrial reroofing needs. Schuller
estimates that approximately 75 percent of its commercial and industrial roofing
sales during 1996 were attributable to reroofing, with the balance attributable
to new construction. While sales of roofing systems are affected by levels of
new construction and general economic conditions, sales attributable to
reroofing are less sensitive to these factors, thus mitigating the adverse
effect of recessionary periods.

Schuller targets, owners, architects, specifiers and roofing consultants
who generally recommend premium roofing systems. Approximately 95 percent of
Schuller's commercial and industrial roofing sales during 1996 were sold through
wholesale distributors; the remainder was sold through contractors.

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Competition. The commercial roofing business is a highly fragmented market.
Competitors include several large national participants, such as Firestone
Roofing Products, GAF Corporation, Tamko Asphalt Products Inc., Carlisle
Companies Incorporated, and various smaller regional companies. Schuller
competes in the commercial roofing business primarily on the basis of breadth of
product line, specifications, guarantees, systems reliability and price.

MECHANICAL INSULATIONS

Products. Schuller's mechanical insulations business produces pipe and duct
insulation for use in commercial buildings, factories, refineries and other
industrial applications. In response to industry attention to indoor
environmental quality, Schuller offers EnviroSystem(TM), a group of products
sold together aimed at indoor environmental quality improvement. Such products
include duct insulation with enhanced thermal and acoustical properties with an
antimicrobial agent for improved air filtration. To further broaden its pipe
insulation product lines, in October 1996 the Company entered into a strategic
alliance with Nomaco, Inc., a leading manufacturer of engineered polyolefin foam
insulation products. Under the strategic alliance, Schuller has exclusive rights
in North America to sell engineered polyolefin foam pipe insulation products
manufactured by Nomaco.

Mechanical insulation products are manufactured at seven facilities in the
United States.

Markets and Distribution. Demand for Schuller's mechanical insulations is
driven primarily by commercial construction activity. Mechanical insulation
products reach the market through Schuller's network of distributors,
contractors and fabricators.

Competition. Schuller's mechanical insulations business primarily competes
with OC, CSG and Knauf Fiberglass USA. Schuller competes in the mechanical
insulations business primarily on the basis of price, breadth of product line
and strength of fabricator and distributor networks.

ENGINEERED PRODUCTS

Schuller's Engineered Products segment with 1996 net sales of $623.2
million, or 39.4 percent of Schuller's total net sales (before elimination of
intersegment sales), is comprised of the specialty insulations and filtration
and mats and fibers product groups.

SPECIALTY INSULATIONS AND FILTRATION

Products. Schuller's specialty insulations and filtration businesses
produce thermal and acoustic insulation for aircraft, marine vessels,
automobiles, HVAC and other equipment; air filtration media for commercial and
industrial buildings; and ultra-fine fibers for clean room air filters and
battery separators; and liquid filtration cartridges and media for use in
commercial and industrial applications. Specialty insulations and filtration
products generally require extremely fine and uniform fibers to provide the
required insulation and filtration properties, and therefore command higher
prices than other fiber glass products. As an alternative to fiber glass
insulation, the Company manufactures and sells polyimide foam insulation
products for applications on naval vessels.

In 1996, Schuller expanded its specialty insulations and filtration
businesses through the acquisition of Web Dynamics Corporation, a manufacturer
of synthetic meltblown nonwoven products. In January 1997, Schuller further
expanded its synthetic manufacturing capabilities and its product lines by
acquiring the assets of Ergon Nonwovens, Inc. With these acquisitions, Schuller
produces a full line of synthetic meltblown nonwoven products used in air and
liquid filtration applications, medical/surgical, personal care, protective
apparel products, and in industrial oil sorbent applications.

Specialty insulations and filtration products are manufactured at twelve of
Schuller's U.S. facilities.

Markets and Distribution. Demand for Schuller's specialty insulations and
filtration products is driven primarily by commercial construction (HVAC and
other insulations), commercial building occupancy (air filtration media), the
construction of clean rooms requiring dust-free environments which are primarily
used

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by the pharmaceutical and semiconductor industries (ultra-fine fibers), the need
for high-efficiency filtration of water, paints, inks, chemicals, resins and
oils in industrial manufacturing operations (liquid filtration media) and the
production of aircraft, marine vessels and automobiles (specialty insulations).
Increasing public attention to environmental issues also stimulates demand for
filtration media and industrial oil sorbent products.

Schuller typically sells specialty insulations and filtration products to
distributors and fabricators who, in turn, sell to original equipment
manufacturers. Air filtration media products are sold to producers of air
filtration systems for use in commercial buildings. Liquid filtration media
products are sold to producers of liquid filtration systems and products for use
in commercial and industrial manufacturing operations. Schuller also sells
finished cartridges for use in high-efficiency liquid filtration applications.
Schuller sells ultra-fine fibers to specialty filtration paper manufacturers.
Schuller sells its synthetic nonwoven products primarily to distributors and
fabricators.

Competition. Schuller's specialty insulations and filtration businesses
compete with a variety of large and small companies in its various niche
markets. Schuller competes in the specialty insulations and filtration business
primarily on the basis of quality and product customization.

MATS AND FIBERS

Products. Schuller's mats and fibers business manufactures continuous
filament fiber glass-based products (chopped fiber and fiber glass mat) used for
reinforcing roofing, flooring, wall covering and plastics. Schuller is a
worldwide supplier of nonwoven fiber glass mat products, which are used as
substrates in roofing and flooring. Schuller focuses primarily on roofing and
flooring substrates and also sells products for plastics reinforcements and
electrical-grade yarn.

The business operates three manufacturing plants and one support facility
in the United States. Schuller GmbH, Schuller's German subsidiary, operates
three plants in Germany and one plant in Poland. Schuller GmbH was the pioneer
in wet fiber glass mat technology and also developed the unique sliver fiber
glass process, which created the market for fiber glass wall coverings in
Europe.

In February 1997, Schuller announced its agreement to acquire the Mitex
group of companies, subject to certain conditions, including regulatory
approvals. The Mitex group manufactures fiber glass wall covering fabrics used
primarily in commercial and industrial buildings and has manufacturing
facilities in Sweden and the United Kingdom.

Markets and Distribution. Demand for Schuller's mats and fibers products is
driven primarily by the worldwide commercial construction and retrofit markets,
as well as by U.S. residential construction and reroofing. These products are
sold directly to roofing and flooring manufacturers as well as to European
textile weavers. Schuller's U.S. mats and fibers business provides fiber glass
mat to Schuller's commercial roofing systems business for its fiber glass-based
roofing products.

Competition. Schuller's primary competitors in the worldwide mats and
fibers business are OC, CSG and Elk Corporation of Dallas. Schuller competes in
the mats and fibers business primarily on the basis of quality and service.

MATERIALS

Fiber glass is the basic material in a significant number of Schuller's
products. The principal raw materials used to manufacture fiber glass products
include sand, soda ash, lime, borate minerals and aluminous materials.
Phenol-formaldehyde, urea extended phenol-formaldehyde and other resins are also
used to bind glass fibers. All of these raw materials are readily available in
sufficient quantities from various sources for Schuller to maintain and expand
its current production levels.

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Schuller's products contain materials other then fiber glass to satisfy the
broader needs of its customers. For example, calcium silicate pipe insulation
products and plastic accessories complement Schuller's product offerings to
commercial/industrial insulation distributors. Schuller manufactures polyimide
foam for marine insulation which is used by the United States Navy in
shipbuilding. Commercial roofing systems use perlite insulation board, rubber
membranes and polyester substrates. In addition, the Company uses several
advanced polymers in roll goods for roofing substrates. The Company manufactures
polyisocyanurate foam sheathing and roof insulation using liquid chemicals
comprised primarily of polyol and polyisocyanurate. In order to further broaden
its product lines, Schuller is pursuing expansion into certain polymer fiber
applications for filtration, substrates, and equipment insulation, apparel and
industrial oil sorbents as evidenced by the acquisitions of Web Dynamics
Corporation and the assets of Ergon Nonwovens, Inc. The raw materials used in
these various products are readily available in sufficient quantities from
various sources for Schuller to maintain and expand its current production
levels.

RESEARCH AND DEVELOPMENT

The Company carries out research and development activities at its
facilities in Littleton, Colorado; Waterville, Ohio; Richmond, Indiana and
Wertheim, Germany. Research, development and engineering expenses for the years
ended December 31, 1996, 1995 and 1994 were $32.7 million, $30.0 million and
$29.7 million, respectively.

PATENTS

The Company presently owns, controls or holds licenses to approximately 650
U.S. and foreign patents and patent applications. While the Company regards its
patents and licenses as valuable, it does not consider any of its businesses to
be materially dependent upon any single patent or license.

LABOR RELATIONS

At March 28, 1997, the Company employed approximately 8,100 persons
worldwide, of whom approximately 3,700 were covered by collective bargaining
agreements. The Company has experienced a long history of good working
relationships with its employees and labor unions.

SEASONALITY

The Company's quarterly results of operations are moderately seasonal due
to increases in construction activity that typically occur in the second and
third quarters of the calendar year, thereby increasing sales and gross profits
in those periods.

ENVIRONMENTAL REGULATIONS

All of the Company's domestic operations are subject to a variety of
federal, state and local environmental laws and regulations. These laws and
regulations regulate the discharge of materials into the air, land and water and
govern the use and disposal of hazardous substances. The most significant of the
federal laws are the Clean Air Act, the Clean Water Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act ("RCRA") and the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"). These environmental regulatory programs are administered by the
federal Environmental Protection Agency ("EPA"). In addition, states and local
jurisdictions have adopted equivalent or more stringent environmental laws and
regulations, or have enacted their own parallel environmental programs, which
are enforced through various state and local administrative agencies. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 15 to the Company's
Consolidated Financial Statements.

OCCUPATIONAL HEALTH AND SAFETY ASPECTS OF THE COMPANY'S PRODUCTS

The Company has an ongoing product stewardship program to facilitate
compliance with existing laws, and to protect the health and safety of the
Company's employees, customers and the general public. This

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program is implemented, in important part, through extensive research, a
continuing process of workplace and product evaluation and an extensive
communications program. National and international scientific authorities are
involved on an ongoing basis in the assessment of potential human health
hazards. The results of these evaluations are reported regularly to employees
and customers as part of the Company's communications program.

The Company manufactures, processes and sells products, and has in the past
manufactured, processed and sold products, that contain certain chemicals or
substances, including man-made vitreous fibers ("MMVF") such as fiber glass,
refractory ceramic fiber ("RCF") and mineral wools classified by the
International Agency for Research on Cancer ("IARC") as possible human
carcinogens. In 1987, the IARC evaluated the carcinogenicity of MMVF. Fiber
glass wool, RCF and mineral wool were classified as "possibly carcinogenic to
humans." The IARC concluded that continuous glass filament (chopped strand) was
"not classifiable as to human carcinogenicity." Crystalline silica exists in
trace amounts in the Company's calcium silicate insulation products and is a
major constituent of the diatomaceous earth products produced by a former
subsidiary. In 1996, the IARC classified crystalline silica as "known
carcinogenic to humans." The IARC classification of crystalline silica was based
upon animal and human studies. Asphalt used by the Company's roofing operations
presently is being evaluated by the National Institute of Occupational Safety
and Health to determine its carcinogenic potential.

Although crystalline silica is a contaminant in one of the raw materials
used in Schuller's calcium silicate insulation products, the silica content
constitutes less than one percent of the finished product. Crystalline silica
exposures have been measured under conditions of foreseeable use and found to be
nondetectable. Hazard communication materials reflecting the potential cancer
risk have been developed and are used by the Company to address the proper
handling of these products by employees and customers.

The Company sold most of its RCF operations in 1990 and agreed to indemnify
the purchaser for pre-closing liabilities, including claims by transferred
employees arising out of pre-closing occupational exposures incurred in the
course of their employment with the Company or its predecessors. RCF products
have been labeled as a possible cause of cancer since 1985. Subsequently, RCF
product labels were revised to warn of the additional potential hazard
associated with exposure to crystalline silica, which can be formed after use of
RCF products at high temperatures.

For purposes of occupational exposure, the Occupational Safety and Health
Administration regulates all MMVF as nuisance dusts. The Company believes that
it is in substantial compliance with all applicable workplace exposure
regulations and product "right-to-know" labeling requirements with respect to
MMVF. The language on these labels not only advises of the possible health
hazards, but includes proper handling and protective measures to be followed.

In 1987, the IARC reviewed epidemiological studies involving occupational
exposure to fiber glass wool, including a large U.S. and a large European study
of fiber glass manufacturing workers that had reported modest but statistically
significant increases of lung cancer deaths compared to national mortality
rates. The IARC concluded that evidence of cancer in humans from such
epidemiological studies was "inadequate" to permit a conclusion regarding the
presence or absence of a causal relationship with fiber glass exposure. The IARC
also concluded, however, that the evidence from animal studies was "sufficient"
to establish a causal relationship. That finding was based entirely on positive
laboratory results achieved through implantation or other artificial techniques
of exposing animals to fibrous materials. The relevance of such implantation
studies to the evaluation of risk to humans has been questioned by many
scientists, who believe that animal inhalation studies are more appropriate than
animal implantation studies to assess the potential risk to humans.

In 1990, the authors of the large U.S. epidemiological study reviewed by
the IARC in 1987 noted a small, but statistically significant, excess in
respiratory cancer deaths of fiber glass manufacturing workers compared with
local mortality rates. However, as in the IARC assessment, the authors, after
looking at the cumulative evidence from the relevant factors that might support
a causal relationship, concluded that the evidence of an association between
exposure to fiber glass wool and respiratory cancer was actually "somewhat
weaker" than that at the time of the IARC assessment. The U.S. investigation is
continuing to determine if the small excess in lung cancer was associated with
lifestyle factors such as smoking or other workplace exposures. The next

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update is expected in 1997. Data contained in a recent draft report of an update
of the large European epidemiological study show mortality findings for fiber
glass wool similar to those from the large U.S. study.

On June 24, 1994, the U.S. Department of Health and Human Services ("HHS")
announced its decision to act on the recommendation of the National Toxicology
Program ("NTP") and list fiber glass wool and RCF in the Seventh Annual Report
on Carcinogens ("ARC") as substances which "may be reasonably anticipated" to be
a carcinogen. The NTP listing criteria provide that a substance must be listed
if there are two or more animal studies showing carcinogenic effect, regardless
of route of exposure and notwithstanding any other evidence. As a result, the
NTP concluded that the results of the experimental animal implantation studies
provided sufficient evidence to support the listing. HHS explained that the NTP
"reasonably anticipated" category for fiber glass essentially corresponds to the
IARC 1987 "possibly carcinogenic" classification.

Labels and other hazard communication materials reflecting the potential
cancer risk have been developed and are used by the Company to address the
proper handling of fiber glass wool products by employees and customers. In
addition, the Company has agreed to indemnify certain purchasers, under certain
circumstances, for personal injury claims arising out of exposure to the
Company's fiber glass wool products.

Since 1988, the Company has funded, in conjunction with other companies in
the industry, several epidemiological and chronic animal inhalation studies to
assess the cancer-causing potential of MMVF. In August 1995, the industry
expanded the animal research it had begun in 1988 to include exposure of
hamsters to a building insulation/wool fiber and a special purpose glass fiber
used in some filtration and a few thermal high performance applications. As with
previous research involving exposure of rats to glass fibers, this study also is
a two year chronic inhalation study which is now in its eighteenth month.
Preliminary findings indicate that some of the hamsters exposed to special
purpose fibers have developed fibrosis of the lung, and one animal also exposed
to special purpose fibers has developed mesothelioma. The building insulation
fibers have not, consistent with the previous inhalation study of this fiber,
produced any adverse respiratory results. These preliminary findings have been
reported to the EPA under the Toxic Substances Control Act, and the Company has
notified its employees and customers.

In 1997, the Institute of Occupation Medicine ("IOM") in Edinburgh,
Scotland released preliminary results from a chronic inhalation study of E glass
microfiber using rats. Some of the animals that inhaled this fiber developed
lung fibrosis and tumors. E glass microfiber is no longer manufactured in the
United States, however, Schuller produced small quantities until 1994 at one
manufacturing location. E glass microfiber is different than the large diameter
E glass continuous filaments that Schuller manufactures in its mats and fibers
business. E glass continuous filaments are too thick to be inhaled into the deep
lung and are not considered to be respirable. The findings of the IOM study have
also been reported to the EPA and the Company has notified its employees and
former customers.

The results of an industry supported epidemiological study of RCF workers
was published in 1996. This case-control morbidity study evaluated chest x-rays
of workers at two RCF manufacturing plants owned by Carborundum Corporation.
Although no significant increase in lung fibrosis was seen, an exposure-related
increase in pleural plaques was observed.

While there is some disagreement within the scientific and medical
community regarding the interpretation of the studies, based upon its analysis
to date, the Company does not believe that the IARC classification, the listing
in the ARC, or any action taken by federal and state regulatory agencies will
have a material adverse effect on the Company. The foregoing statement
constitutes a "forward-looking statement" under federal securities laws. The
Company's analysis of available data and it expectations concerning human health
hazards associated with its products are subject to risks and uncertainties.
Because domestic and international regulatory and scientific authorities are
involved on an ongoing basis in the assessment of potential human health
hazards, and there can be no assurance that future actions taken by such
authorities or other developments relating to the Company's liability for its
products will not have an adverse effect on the Company.

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ITEM 2. PROPERTIES

HEADQUARTERS

The Company's headquarters are located in Denver, Colorado. The Company
leases approximately 150,000 square feet of office space at Manville Plaza in
downtown Denver.

MANUFACTURING AND DEVELOPMENT FACILITIES

The following table sets forth certain information with respect to the
Company's major manufacturing and development plants and buildings. All of the
buildings are adequate and suitable for the business of the Company, have been
well maintained and are in sound operating condition and regular use. The
Southgate, California; Lakewood, Colorado; Kansas City, Kansas; Edison, New
Jersey; and Kent, Washington facilities are leased.

<TABLE>
<CAPTION>
LOCATION BUSINESS SEGMENT
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UNITED STATES AND CANADA
Innisfail, Alberta, Canada........................... Building Products
Tucson, Arizona...................................... Engineered and Building Products
Corona, California................................... Engineered Products
Pittsburg, California................................ Building Products
Southgate, California................................ Building Products
Willows, California.................................. Building Products
Lakewood, Colorado................................... Building Products
Jacksonville, Florida................................ Building Products
Littleton, Colorado.................................. Engineered and Building Products
Macon, Georgia....................................... Building Products
Winder, Georgia...................................... Building Products
Rockdale, Illinois................................... Building Products
Waukegan, Illinois................................... Building Products
Bluffton, Indiana.................................... Engineered Products
Bremen, Indiana...................................... Building Products
Richmond, Indiana.................................... Building Products
Kansas City, Kansas.................................. Building Products
McPherson, Kansas.................................... Building Products
Lewiston, Maine...................................... Building Products
Saco, Maine.......................................... Building Products
Natchez, Mississippi................................. Building Products
Richland, Mississippi................................ Engineered Products
Edison, New Jersey................................... Building Products
Penbryn, New Jersey.................................. Building Products
Plattsburg, New York................................. Building Products
Defiance, Ohio....................................... Engineered and Building Products
Waterville, Ohio..................................... Engineered Products
Oklahoma City, Oklahoma.............................. Building Products
East Stroudsburg, Pennsylvania....................... Engineered Products
Hazelton, Pennsylvania............................... Building Products
Etowah, Tennessee.................................... Engineered Products
Baytown, Texas....................................... Building Products
Cleburne, Texas...................................... Engineered and Building Products
Ft. Worth, Texas..................................... Building Products
Edinburg, Virginia................................... Building Products
Richmond, Virginia................................... Building Products
Kent, Washington..................................... Building Products
Parkersburg, West Virginia........................... Engineered Products
</TABLE>

8
<PAGE> 11

<TABLE>
<CAPTION>
LOCATION BUSINESS SEGMENT
-------- ----------------
<S> <C>
INTERNATIONAL
Changzhou, Jiangsu, China............................ Engineered Products
Karlstein, Bavaria, Germany.......................... Engineered Products
Steinach, Thuringen, Germany......................... Engineered Products
Wertheim, Baden-Wuerttemberg, Germany................ Engineered Products
Verona, Italy........................................ Building Products
Altamira, Mexico..................................... Building Products
Lubliniec, Poland.................................... Engineered Products
</TABLE>

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in various legal actions occurring in the normal
course of its business. In the opinion of the Company's management, adequate
provision has been made for losses which may result from these actions and,
accordingly, the outcome of these proceedings is not expected to have a material
adverse effect on the financial condition of Schuller. For additional
information concerning certain of these proceedings, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources -- Contingent Product Liability
and -- Environmental Contingencies."

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of 1996, there were no matters submitted to a
vote of security holders.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company is a wholly owned subsidiary of Schuller Corporation, and there
is not a market for the Company's common stock.

ITEM 6. SELECTED FINANCIAL DATA

Omitted under the reduced disclosure format pursuant to General Instruction
J(2)(a) of Form 10-K.

9
<PAGE> 12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The Company, a wholly owned subsidiary of Schuller Corporation,
manufactures and markets insulation for buildings and equipment, commercial
roofing systems, high-efficiency filtration media, and fibers and nonwoven mats
used as reinforcements in building and industrial applications. The Company
operates 50 manufacturing facilities in North America, Europe and China, and is
comprised of two principal business segments: Building Products and Engineered
Products.

The Building Products segment consists of the Company's building insulation
business, which manufactures fiber glass wool insulation for walls, attics and
floors in residential and commercial buildings and polyisocyanurate foam
sheathing for residential structures; commercial and industrial roofing systems
business, which supplies roofing membranes, insulations, accessories and related
guarantees; and mechanical insulations business, which manufactures pipe and
duct insulation for use in commercial buildings, factories, refineries and other
industrial applications.

The Engineered Products segment consists of the Company's mats and fibers
business, which manufactures continuous filament fiber glass-based products used
for reinforcing roofing, flooring, wall covering and plastic products. The
Engineered Products segment also includes the Company's specialty insulations
and filtration business, which manufactures thermal and acoustic insulation for
aircraft, marine vessels, automobiles and heating, ventilating and air
conditioning ("HVAC") and other equipment; filtration media for commercial and
industrial buildings; ultra-fine fibers for clean room air filters and battery
separators; liquid filtration cartridges and media for use in commercial and
industrial applications; and synthetic meltblown products used in various other
applications.

RESULTS OF OPERATIONS

The following table sets forth, for each of the years ended December 31,
1996 and 1995, certain income and expense items.

<TABLE>
<CAPTION>
PERCENTAGE
(IN THOUSANDS OF DOLLARS) INCREASE
1996 1995 (DECREASE)
----------- ----------- ----------
<S> <C> <C> <C>
Net Sales:
Building Products............................... $ 960,497 $ 805,615 19.2
Engineered Products............................. 623,231 612,526 1.7
Corporate and Eliminations...................... (31,299) (26,619)
---------- ----------
Total Net Sales......................... 1,552,429 1,391,522 11.6
Cost of Sales..................................... 1,111,811 993,111 12.0
---------- ----------
Gross Profit...................................... 440,618 398,411 10.6
Other Operating Expenses.......................... 192,907 164,674 17.1
Nonrecurring Charges.............................. 49,156
Other Expense, net................................ 574 17,787
---------- ----------
Income from Operations:
Building Products............................... 135,437 133,025 1.8
Engineered Products............................. 113,127 108,219 4.5
Corporate and Eliminations...................... (50,583) (25,294)
---------- ----------
Total Income from Operations............ $ 197,981 $ 215,950 (8.3)
========== ==========
</TABLE>

Net sales increased $160.9 million, or 11.6 percent, to $1,552.4 million in
1996 from $1,391.5 million in 1995.

The Building Products segment's net sales increased $154.9 million, or 19.2
percent, for 1996 compared with 1995. These increases are due primarily to the
inclusion of the operating results of the businesses acquired during 1996 by the
commercial and industrial roofing systems business. The building insulation

10
<PAGE> 13

business' net sales improved moderately as higher volumes from increased housing
starts in the U.S. and Canada for most of 1996 more than offset the effects of
continuing pricing pressures. Net sales of mechanical insulations increased on
higher sales volumes, reflecting market share gains and strength in commercial
and industrial construction markets.

The Engineered Products segment's net sales increased $10.7 million, or 1.7
percent, for 1996 compared with 1995. The U.S. mats and fibers business had
significantly higher net sales due to increased sales volumes as the Company
expanded its production capacity during 1996. Meanwhile, continuing
industry-wide capacity constraints led to slightly higher 1996 selling prices.
The U.S. operating results were partially offset by continuing weakness in
European construction markets and decreases in the U.S. dollar-reported results
of the Company's German operations due to the strengthening of the U.S. dollar
against the German mark. The specialty insulations and filtration businesses
experienced slightly higher overall net sales due to increased sales of HVAC
equipment insulation and expanded markets for ultra-fine fibers. These increases
were partially offset by weakness in sales of automotive insulation products due
to competition from alternate materials.

Gross profit for 1996 increased $42.2 million, or 10.6 percent, compared
with 1995, due primarily to the increased sales volumes of the acquisitions
discussed above. Gross profit margins were 28.4 percent for 1996 and 28.6
percent for 1995 as the effects of lower building insulation prices were
substantially offset by improved operating efficiencies, particularly in the
roofing business.

Other operating expenses include selling, general, administrative and
research, development and engineering and services provided by parent. These
expenses increased $28.2 million and were slightly higher as a percentage of net
sales at 12.4 percent for 1996 compared with 11.8 percent for 1995. The increase
is principally due to additional expenses as a result of recent acquisitions and
acquisition related activities.

In 1996, the Company recorded the following pretax nonrecurring charges
totaling $49.2 million.

During the fourth quarter of 1996, the Company completed an evaluation of a
manufacturing facility with both current and former operations and determined
that its best course of action is closure of the facility. Consequently, the
Company recorded nonrecurring charges of $41.7 million for the shutdown of
current operations, demolition of facilities and site restoration, of which $30
million and $11.7 million related to corporate and eliminations and the Building
Products segment, respectively. Of these charges, $7.5 million are noncash asset
write-downs, and $3 million are classified as other current liabilities. Upon
completion of these actions, the Company intends to relinquish the remaining
properties and does not expect to incur significant future monitoring and
maintenance costs. The Company expects to fund the charges requiring cash
outlays from existing cash balances and cash generated from operations. Pending
federal and state regulatory agency approval, the demolition phase of the
project is expected to begin in 1997 and be substantially completed during 1998,
with the majority of the liabilities settled over the next two years. The
nonrecurring charges are based on estimates and, therefore, are subject to risks
and uncertainties related to the Company's ability to secure agreements with
third parties, relinquish the properties and obtain regulatory approvals to
execute the actions described above. As a result, the Company believes it is
reasonably possible that these estimates may be revised in the near-term.
However, the impacts of such revisions, if any, are not expected to be material.

The Company also recorded nonrecurring charges in the Engineered Products
segment of $7.5 million consisting of asset write-downs to estimated fair values
in the automotive molded parts business, which is expected to be disposed of in
1997, partially offset by a gain on the sale of other manufacturing assets.

Other expense, net, was $0.6 million for 1996 compared with other expense,
net, of $17.8 million for 1995. Included in 1996 was a $7.2 million gain
relating to the receipt of surplus pension assets in connection with the
settlement of defined benefit pension plans in which the Company's Canadian
employees previously participated. Other expense for 1996 also included higher
amortization of goodwill resulting from acquisitions completed during the year.
Other expense for 1995 included net asset write-offs/dispositions of $6.7
million related primarily to nonproductive assets. In addition, 1995 included a
$2.9 million charge for legal costs in connection with litigation brought by the
Company against the former owner of the phenolic roofing business.

The Company's income from operations, including $49.2 million of
nonrecurring charges, decreased $18 million, or 8.3 percent, to $198 million in
1996 from $216 million in 1995.

11
<PAGE> 14

Compared with 1995, interest income in 1996 decreased by $0.8 million, due
primarily to changes in average cash and marketable securities balances.
Interest expense increased $1.7 million to $47.8 million in 1996 from $46.2
million in 1995, due to the execution of an additional $50 million of notes
payable to Schuller Corporation in August 1996 to partially finance the
acquisition of NRG Barriers, Inc., along with the assumption of debt related to
acquisitions.

The Company's effective tax rate on income before income taxes was 44
percent and 43 percent for the years ended December 31, 1996 and 1995,
respectively. These rates are higher than the U.S. federal statutory tax rate
principally due to higher foreign effective tax rates and state taxes.

LIQUIDITY AND CAPITAL RESOURCES

The Company broadly defines liquidity as the ability to generate sufficient
cash flow to satisfy operating requirements, fund capital expenditures and meet
existing obligations and commitments. In addition, liquidity also includes the
ability to obtain appropriate financing and convert into cash those assets that
are no longer required to meet the Company's strategic objectives. Therefore,
liquidity should not be considered separately from capital resources, which
consist of currently or potentially available funds for use in achieving
long-range business objectives and meeting debt service commitments. In
addition, the Company's relationship with Schuller Corporation should be
considered in evaluating liquidity.

The Company's agreements with its lenders contain a number of financial and
general covenants. These include, among others, restrictions on borrowings,
investments, stock issuances and repurchases, dividends and other distributions,
restrictions on intercompany transactions including transfers of cash, and
transactions with Schuller Corporation. As of December 31, 1996 and 1995, the
maximum amount available for dividends to be paid to Schuller Corporation under
debt covenants of the Company's Senior Notes was approximately $227 million and
$172 million, respectively. Noncompliance with the these or other covenants, or
the occurrence of any other event of default, could result in the termination of
existing credit agreements and the acceleration of debt owed by the Company and
its subsidiaries. At December 31, 1996, the Company was in compliance with these
covenants.

The Company's cash and marketable securities balances decreased $20.5
million during 1996 to $140.9 million at December 31, 1996, from $161.4 million
at December 31, 1995. At December 31, 1996, $108.8 million of the cash and
marketable securities balances was available for domestic operating purposes.

Cash provided by operations increased $24.9 million during 1996 to $185.6
million at December 31, 1996, from $160.7 million at December 31, 1995. The
improvement in the Company's cash flow from operations from 1995 to 1996 is
primarily attributable to improved operating results, driven by increased sales.
During 1996, most of the Company's businesses reported increased sales volume,
offset in part by lower selling prices for building insulation.

Cash used in investing activities totaled $223.3 million and $118.6 million
for the years ended December 31, 1996 and 1995, respectively. The Company's
investing activities included the combined cash purchase prices for acquisitions
and contributions to a joint venture which totaled $153.1 million during 1996.
Capital expenditures during 1996 totaled $103 million, of which approximately
$45 million related to capacity expansion projects. Capital expenditures during
1995 totaled $111.1 million, of which approximately $60 million related to
capacity expansion projects.

The Company's financing activities for 1996 included the proceeds from a
$50 million note payable to Schuller Corporation, due October 1, 1998. The
proceeds were used to partially finance the acquisition of NRG Barriers, Inc.
during the third quarter of 1996. In addition, the Company's total outstanding
external debt increased to $442.4 million at December 31, 1996 from $408.9
million at December 31, 1995. This increase was primarily attributable to the
assumption of debt in connection with the Company's 1996 acquisitions. During
January 1997, the Company repaid approximately $30 million of debt assumed in
connection with acquisitions. This debt, all of which was classified as
short-term debt at December 31, 1996, consisted of a line of credit and
industrial revenue bonds with original maturities through 2007, and was
refinanced with $30 million of notes payable to Schuller Corporation at
prevailing market terms.

12
<PAGE> 15

At December 31, 1996, the Company had $84 million available under a
receivables sale facility (the "Receivables Facility") for its domestic
short-term working capital requirements. Amounts available for borrowing under
the Receivables Facility, up to a maximum of $100 million, are based on the
daily balance of certain outstanding trade accounts receivable, adjusted for
various factors as defined under the terms of the Receivables Facility. There
were borrowings and repayments totaling $5 million during 1996. The Company's
international subsidiaries also had borrowing and working capital facilities
totaling $85 million at December 31, 1996. These facilities, of which
approximately $84 million was available for borrowing at December 31, 1996, are
principally secured by the Company's equity ownership in certain international
subsidiaries and joint ventures.

CYCLICALITY OF DEMAND/COMPETITIVE ENVIRONMENT

Demand for the Company's products has historically been cyclical due to
macroeconomic factors affecting residential and commercial construction markets.
Due to their specific market niches, the Company's replacement roofing,
filtration and specialty products are less sensitive to business cycles. Selling
prices are subject to factors influenced by the competitive environment in which
the Company operates, including fluctuations in overall capacity utilization.

During 1996, sales volumes increased due to continued strength in U.S.
construction markets, businesses acquired in 1996 and increases in operating
capacity, partially offset by softness in European construction markets. The
Company's building insulation business continued to experience price declines
which began in the second quarter of 1995 due to new industry capacity. Building
insulation benefited from strong housing starts for most of 1996. While pricing
for the Company's mats and fibers was strong in 1996 as industry production was
constrained, recently added capacity may adversely impact future pricing.

CAPITAL SPENDING AND CAPACITY EXPANSION

In order to increase its U.S. production of continuous filament fiber glass
to meet the demand for its mats and fibers products, the Company recently
expanded existing capacity and is in the process of reconstructing a furnace,
with completion expected by mid-1997. In addition, the Company entered into a
joint venture in China and began expansion of an existing fiber glass mat
facility, with completion also expected in 1997. The Company completed the
expansion of its filtration business' ultra-fine fiber production capacity
during 1996 through capital spending programs. The Company estimates capital
spending in 1997 of approximately $120 million excluding acquisitions, of which
approximately $65 million will be used primarily in the capacity expansion
programs described above. As of December 31, 1996, outstanding purchase
commitments relating to capital spending and capacity expansion projects totaled
$24.8 million. The Company plans to fund these projects from existing cash
balances and cash flows generated by operations. The Company's capacity
expansion programs are periodically revised to reflect changes in demand,
industry capacity and the results of productivity improvements and technological
innovations.

In response to the implementation of the 1990 Amendments to the federal
Clean Air Act and requirements of various state air emissions regulations, the
Company will be obligated to monitor and reduce air emissions at its
manufacturing sites. Because many of the anticipated regulations have not yet
been proposed, neither the costs nor timing of compliance can be reasonably
anticipated at this time. Provisions of Titles III and VII of the 1990
Amendments and the related regulations will likely require capital expenditures
in the years 1997-2001, with most of the expenditures occurring in the latter
part of that time frame.

ACQUISITIONS

The Company completed several acquisitions in 1996 with combined cash
purchase prices totaling $153.1 million. The 1996 acquisitions consisted of NRG
Barriers, Inc.; the assets of Dibiten USA and Dibiten Mexico; Nord Bitumi SpA,
Nord Bitumi U.S., Inc. and Nord de Mexico S.A. de C.V.; all manufacturers of
commercial roofing products. The Company also acquired Web Dynamics Corporation,
a manufacturer of polymer filtration products and entered into a joint venture
to operate and expand an existing fiber glass mat facility in China.

13
<PAGE> 16

During January 1997, the Company acquired the assets of Ergon Nonwovens,
Inc., a manufacturer of synthetic meltblown nonwoven products. During February
1997, the Company announced it had signed an agreement to acquire the Mitex
group of companies subject to certain conditions, including regulatory
approvals. Mitex is a leading manufacturer of fiber glass wall covering fabrics
used primarily in commercial and industrial buildings, and has manufacturing
facilities in Sweden and the United Kingdom. These 1997 transactions will be
financed from existing cash balances and borrowings from international credit
facilities. The Company intends to continue its acquisition strategy and is
considering additional acquisitions, some of which could be significant and may
require the Company to access capital markets for financing.

CONTINGENT PRODUCT LIABILITY

Between 1988 and 1992, the Company manufactured phenolic roofing insulation
which may, under certain circumstances, contribute to the corrosion of metal
decks on which it is installed. Subsequently, the Company began a voluntary
program to inspect such metal decks and remediate where appropriate. The Company
has accrued for costs relating to future inspections, remediation and
anticipated claims. These accruals are based on the Company's historical
experience regarding the incidence of corrosion and the cost of remediation and
include a number of assumptions related to the types of roofs on which phenolic
insulation has been installed as well as the assumption that the Company's past
remediation experience will continue over the remaining lives of roofs insulated
with the Company's phenolic roofing insulation.

Pursuant to settlement agreements with the Company's liability carriers and
former owner of the phenolic roofing insulation business, the Company has been
reimbursed for a portion of historical costs incurred and is entitled to receive
reimbursement for a substantial portion of future costs to be incurred by the
Company for inspection and remediation.

In 1996, the Company and a third party were named as defendants in two
class action cases filed in U.S. District Court in Boston, Massachusetts. The
plaintiffs purport to represent all building owners in the United States with
phenolic insulation installed on their roof decks and seek damages and
injunctive relief, including an order requiring the removal and replacement of
the phenolic insulation and remediation of any deck corrosion. The Company
intends to defend these allegations vigorously.

The Company has reviewed its historical inspection and remediation
experience and the terms and collectibility of amounts payable under the
reimbursement agreements in light of the contingencies described above. Based on
the information available to date and subject to the assumptions described
above, if additional costs are incurred in excess of the accrued amounts, such
costs are not expected to have a material adverse effect on the Company's
financial condition, liquidity or results of operations.

ENVIRONMENTAL CONTINGENCIES

At December 31, 1996, the Company had remediation activities in progress at
11 sites, out of a total of 23 such sites for which the Company has identified
environmental conditions requiring remediation. In addition, the Company has
been identified as a potentially responsible party at 20 non-Company owned or
operated sites under the federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") or similar state legislation, and as
such could be jointly and severally liable for costs of remediating these sites.

In 1994, the U.S. government and Schuller Corporation settled certain
litigation concerning the Company's disposal activities prior to consummation of
Schuller Corporation's plan of reorganization. The settlement agreement, which
was made an order of the court, limits the Company's future liability under both
CERCLA and the Resource Conservation and Recovery Act ("RCRA") to 55 percent of
its share of site-wide response costs and natural resources damages without
regard to joint and several liability for disposals made by the Company prior to
consummation of Schuller Corporation's plan of reorganization. The agreement
resolved the Company's liability at certain historical sites and also covers
CERCLA and RCRA liability for other disposal sites at which the Environmental
Protection Agency ("EPA") has incurred or may incur response costs and which
were used by the Company prior to consummation of Schuller Corporation's plan of
reorganization. The agreement provides that the amount the Company will be
obligated to pay, in the

14
<PAGE> 17

aggregate, for such sites shall never exceed $850,000 during any given year. The
EPA and others from time to time commence cleanup activities at such sites and
in the future the EPA and others may assert claims against the Company with
respect to such sites. The Company believes that all such activities and claims,
if any, will be subject to the agreement.

At December 31, 1996 and 1995, the Company's balance sheet included
undiscounted accruals for environmental remediation costs, including ongoing
compliance, maintenance and monitoring costs, of $31.1 million and $30.3
million, respectively. The Company paid $1.8 million each year for environmental
cleanup in 1996 and 1995. The Company believes that amounts paid in 1996 and
1995 are representative of the Company's future annual environmental cleanup
costs and anticipates expenditures relating to costs currently accrued to be
made over the next 15 years.

As a result of factors such as changes in federal and state regulations,
the application and effectiveness of remedial actions, the difficulty in
assessing the extent of environmental contamination, and the allocation of costs
among potentially responsible parties, actual costs to be incurred for
environmental cleanup may vary from previous estimates. Subject to the
uncertainties inherent in evaluating environmental exposures, and based on
information presently available, including the Company's historical remediation
experience, currently enacted environmental laws and regulations, and existing
remediation technology, the Company believes that if additional costs are
incurred in excess of the accrued amounts, such costs are not expected to have a
material adverse effect on the Company's financial condition, liquidity or
results of operations.

The Company believes that its current cash position, cash generated from
operations, the Receivables Facility and foreign working capital facilities will
enable it to satisfy debt service requirements, ongoing capital spending and
capacity expansion program and other ongoing operating costs. However, the
Company may need to access capital markets to pay the principal of its $400
million Senior Notes due in 2004.

RELATIONSHIP WITH SCHULLER CORPORATION

The Company is a wholly owned subsidiary of Schuller Corporation.
Accordingly, Schuller Corporation could cause the Company to pay dividends,
subject to the terms of the Senior Notes indenture, certain other contractual
limitations and applicable law.

In connection with the public offering of the Senior Notes during 1994, the
Company and Schuller Corporation entered into a Corporate Agreement that, among
other things, prohibits the Company and certain of its subsidiaries from issuing
any capital stock or rights, warrants or options to purchase their capital stock
(collectively, "Capital Stock Rights") without the approval of Schuller
Corporation's Board of Directors. In addition, the Corporate Agreement prohibits
the Company and certain of its subsidiaries from issuing any of their Capital
Stock Rights if, immediately after such issuance, the Company or any of such
subsidiaries would no longer be a member of the Schuller Corporation
consolidated federal income tax group. Schuller Corporation has agreed with
Manville Personal Injury Settlement Trust (the "Trust") that, without the
consent of the Trust, Schuller Corporation will not waive any provisions of the
Corporate Agreement.

Also in connection with the public offering of the Senior Notes, the
Company and Schuller Corporation entered into a Tax Sharing Agreement that
provides that as long as the Company and Schuller Corporation are included in
the same consolidated tax group, the Company will pay to Schuller Corporation
amounts equal to the U.S. federal and state income taxes (for states requiring
consolidated or combined income tax returns) that the Company would otherwise
have to pay if it were to file separate returns, and that Schuller Corporation
has the authority to make tax elections for the Company. U.S. federal and state
income taxes paid to Schuller Corporation for 1996, 1995 and 1994 totaled $52.5
million, $50.4 million and $38.7 million, respectively.

15
<PAGE> 18

provided. Expenses incurred by the Company under the terms of the Intercompany
Agreement and the Treasury Management Agreement for services provided by
Schuller Corporation totaled $7 million, $11.8 million and $14.3 million for the
years ended December 31, 1996, 1995 and 1994, respectively.

During 1996, Schuller Corporation divested its investment in Riverwood
International Corporation, (the "Riverwood Disposition"). In connection with the
Riverwood Disposition, certain management and financial services maintained by
Schuller Corporation were reorganized and transferred to the Company. Because
Schuller Corporation maintained these administrative functions for the benefit
of all three entities, management is unable to differentiate between the amounts
allocated on a fee basis under the terms of the services agreements and the
amounts that will be incurred as these functions are administered by the
Company.

FORWARD-LOOKING STATEMENTS

This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Statements of the Company
contained in this report concerning matters that are not historical facts,
including, without limitation, statements concerning (i) the Company's estimates
concerning nonrecurring charges taken in 1996, (ii) the Company's expectations
as to contingencies related to phenolic roofing insulation and environmental
liabilities, (iii) possible price decreases due to increased capacity in the
mats and fibers industry, (iv) the Company's planned expansion of production
capacity of continuous filament fiber glass and fiber glass mat and (v) the
Company's expectations concerning levels of capital spending and funding of
current operations, debt service, dividends and future acquisitions, constitute
such forward-looking statements. See "Liquidity and Capital Resources."

Forward-looking statements of the Company are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in such statements. Important factors relating to such risks and
uncertainties are set forth below.

Factors that could affect the forward-looking statements generally are
related to demand for the Company's products and to overall capacity levels in
the industry. Demand for such products is generally cyclical and is influenced
by macroeconomic factors that affect demand in residential and commercial
construction and replacement markets and demand from original equipment
manufacturers, including the general rate of inflation, interest rates,
employment rates and overall consumer confidence. Approximately half of the
Company's annual sales are made to customers in commercial and industrial
construction markets, while approximately one-third are made to customers in
residential construction markets. The remainder of the Company's annual sales
are made to original equipment manufacturers.

Overall capacity levels in the industry directly affect prices for the
Company's products. Other factors that may affect prices include the overall
competitive environment in which the Company operates, the availability and
pricing of raw materials, rates of technological development and changes in
productivity. In addition, overall demand for the Company's products could be
affected by the factors described in "BUSINESS -- Occupational Health and Safety
Aspects of the Company's Products."

Factors relating to the Company's estimates concerning nonrecurring charges
are discussed in "Results of Operations." For a discussion of factors concerning
contingencies related to phenolic roofing insulation and environmental matters,
see "Liquidity and Capital Resources -- Contingent Product Liability
and -- Environmental Contingencies."

Other factors also could affect the Company's expected levels of capital
spending and funding of current operations, debt service and dividends,
including, without limitation, the contingencies and commitments discussed in
the Company's financial statements included in this report for the year ended
December 31, 1996. In addition, the Company's ability to make future
acquisitions depends upon the ability of the Company to identify and reach
agreement with viable acquisition candidates and the availability of sources of
financing for such acquisitions on terms which are acceptable to the Company.

16
<PAGE> 19

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheet, December 31, 1996 and 1995...... 18

Consolidated Statement of Income, for each of the three
years in the period ended December 31, 1996............... 19

Consolidated Statement of Cash Flows, for each of the three
years in the period ended December 31, 1996............... 20

Consolidated Statement of Stockholder's Equity, for each of
the three years in the period ended December 31, 1996..... 21

Notes to Consolidated Financial Statements.................. 22

Report of Independent Accountants........................... 43

Selected Quarterly Financial Data, for each of the two years
in the period ended December 31, 1996 (unaudited)......... 44
</TABLE>

17
<PAGE> 20

SCHULLER INTERNATIONAL GROUP, INC.

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS:
Current Assets
Cash and equivalents...................................... $ 138,216 $ 140,328
Marketable securities, at cost, which approximates
market................................................. 2,698 21,043
Receivables............................................... 229,585 192,426
Inventories............................................... 101,041 77,121
Receivable from parent.................................... 28,176 10,920
Prepaid expenses.......................................... 6,590 4,932
Deferred tax assets....................................... 31,063 31,957
---------- ----------
Total Current Assets.............................. 537,369 478,727
Property, Plant and Equipment, net.......................... 769,968 715,903
Receivable from Parent...................................... 10,115 9,698
Other Assets................................................ 350,089 202,461
---------- ----------
Total Assets...................................... $1,667,541 $1,406,789
========== ==========
LIABILITIES:
Current Liabilities
Short-term debt........................................... $ 31,748 $ 111
Accounts payable.......................................... 121,099 91,095
Compensation and employee benefits........................ 102,136 98,081
Income taxes.............................................. 15,863 11,564
Note payable to parent.................................... 25,000
Other accrued liabilities................................. 50,049 64,600
---------- ----------
Total Current Liabilities......................... 320,895 290,451
Long-Term Debt, less current portion........................ 410,658 408,807
Notes Payable to Parent..................................... 80,000
Deferred Income Taxes....................................... 41,242 47,362
Postretirement Benefits Other Than Pensions................. 199,473 203,107
Other Noncurrent Liabilities................................ 292,608 240,628
---------- ----------
Total Liabilities................................. 1,344,876 1,190,355
---------- ----------
Commitments and Contingencies (Notes 2, 6, 15 and 16)

STOCKHOLDER'S EQUITY:
Common Stock, $1 par value; 100 shares authorized, issued
and outstanding...........................................
Capital in Excess of Par Value.............................. 80,869 57,082
Retained Earnings........................................... 215,125 126,668
Cumulative Currency Translation Adjustment.................. 26,671 32,684
---------- ----------
Total Stockholder's Equity........................ 322,665 216,434
---------- ----------
Total Liabilities and Stockholder's Equity........ $1,667,541 $1,406,789
========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

18
<PAGE> 21

SCHULLER INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales............................................ $1,552,429 $1,391,522 $1,277,818
Cost of Sales........................................ 1,111,811 993,111 935,951
Selling, General and Administrative.................. 153,278 122,902 116,763
Research, Development and Engineering................ 32,663 29,979 29,670
Services Provided by Parent.......................... 6,966 11,793 14,305
Nonrecurring Charges................................. 49,156
Other Expense, net................................... 574 17,787 22,171
---------- ---------- ----------
Income from Operations............................... 197,981 215,950 158,958
Interest Income...................................... 8,692 9,481 4,433
Interest Expense..................................... 44,610 43,963 4,287
Interest Expense -- Parent........................... 3,235 2,223 15,298
---------- ---------- ----------
Income before Income Taxes........................... 158,828 179,245 143,806
Income Tax Expense................................... 69,884 77,016 63,503
---------- ---------- ----------
Net Income........................................... $ 88,944 $ 102,229 $ 80,303
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

19
<PAGE> 22

SCHULLER INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 88,944 $ 102,229 $ 80,303
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 70,898 63,085 58,411
Pension and postretirement benefits expense......... 11,126 20,613 21,274
Product guarantee income............................ 8,651 9,352 7,857
Provision for furnace rebuilds...................... 8,270 8,349 8,657
Deferred taxes...................................... (14,680) 4,348 14,993
Nonrecurring charges................................ 49,870
Other, net.......................................... 17,360 17,033 12,755
Changes in current assets and liabilities:
Receivables............................................ 8,137 (568) (22,871)
Inventories............................................ (2,680) (19,327) 6,099
Prepaid expenses....................................... (1,276) 1,071 (1,079)
Receivable from Parent................................. 6,114 (3,754) (2,328)
Accounts payable....................................... (5,288) (731) 15,645
Compensation and employee benefits..................... (9,160) (10,888) (2,388)
Income taxes........................................... 3,364 1,644 2,703
Other accrued liabilities.............................. (21,952) 977 (3,036)
Changes in noncurrent liabilities:
Postretirement benefits other than pensions............ (16,347) (19,742) (24,981)
Other noncurrent liabilities........................... (15,774) (12,965) (29,876)
--------- --------- --------
Net Cash Provided by Operating Activities................ 185,577 160,726 142,138
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............... (102,973) (111,066) (73,712)
Acquisitions............................................. (153,113)
Proceeds from sales of assets............................ 14,055 2,023 7,744
Purchases of available-for-sale marketable securities.... (4,986) (6,082)
Purchases of held-to-maturity marketable securities...... (8,774) (55,519) (91,064)
Proceeds from sales of available-for-sale marketable
securities............................................. 6,082 2,077
Proceeds from maturities of held-to-maturity marketable
securities............................................. 26,446 58,356 72,482
(Increase) decrease in other assets...................... (40) (6,342) 1,298
--------- --------- --------
Net Cash Used in Investing Activities.................... (223,303) (118,630) (81,175)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt -- external............................. 63 6,622 8,707
Issuance of debt -- Parent............................... 55,000 30,338
Payments on debt -- external............................. (18,109) (1,756) (11,277)
Payments on debt -- Parent............................... (20,000)
--------- --------- --------
Net Cash Provided by Financing Activities................ 36,954 4,866 7,768
--------- --------- --------
Effect of Exchange Rate Changes on Cash.................. (1,340) (62) (320)
--------- --------- --------
Net Increase (Decrease) in Cash and Equivalents.......... (2,112) 46,900 68,411
Cash and Equivalents at Beginning of Year................ 140,328 93,428 25,017
--------- --------- --------
Cash and Equivalents at End of Year...................... $ 138,216 $ 140,328 $ 93,428
========= ========= ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

20
<PAGE> 23

SCHULLER INTERNATIONAL GROUP, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
CUMULATIVE
CAPITAL IN INTERCOMPANY CURRENCY TOTAL
EXCESS OF RETAINED RECEIVABLE, TRANSLATION STOCKHOLDER'S
PAR VALUE EARNINGS NET ADJUSTMENT EQUITY
---------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993........ $ 666,973 $ 280,154 $(632,405) $20,511 $ 335,233
Net income for the year.............. 80,303 80,303
Currency translation................. 5,908 5,908
Cancellation of intercompany
receivable, net.................... (632,405) 632,405
Loan assignment from parent.......... 111,496 111,496
Dividend of Original Senior Notes and
Demand Note........................ (88,982) (336,018) (425,000)
--------- --------- --------- ------- ---------
BALANCES AT DECEMBER 31, 1994........ 57,082 24,439 26,419 107,940
Net income for the year.............. 102,229 102,229
Currency translation................. 6,265 6,265
--------- --------- --------- ------- ---------
BALANCES AT DECEMBER 31, 1995........ 57,082 126,668 32,684 216,434
Net income for the year.............. 88,944 88,944
Currency translation................. (6,013) (6,013)
Dividends to parent.................. (487) (487)
Contribution from parent............. 23,787 23,787
--------- --------- --------- ------- ---------
BALANCES AT DECEMBER 31, 1996........ $ 80,869 $ 215,125 $26,671 $ 322,665
========= ========= ========= ======= =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

21
<PAGE> 24

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Schuller International Group, Inc. (the "Company"), a wholly owned
subsidiary of Schuller Corporation, manufactures and markets insulation for
buildings and equipment, commercial roofing systems, high-efficiency filtration
media, and fibers and nonwoven mats used as reinforcements in building and
industrial applications. The Company estimates that approximately half of its
annual sales are to commercial and industrial construction markets, while
approximately one-third are to residential markets, and the remainder are to
original equipment manufacturers. The Company's products are sold to
contractors, mass merchants, wholesale distributors and fabricators throughout
North America, Europe and Asia.

Principles of Consolidation

The consolidated financial statements include the accounts of Schuller
International Group, Inc., and its majority-owned subsidiaries. All significant
intercompany transactions have been eliminated.

Use of Estimates

The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in these
financial statements, including disclosures of contingent liabilities.

Cash and Equivalents

Cash and equivalents include time deposits, certificates of deposit and
other marketable securities with original maturities of three months or less.

Financial Instruments

The Company uses the amortized cost method of accounting for investments in
held-to-maturity debt securities for which it has the positive intent and
ability to hold to maturity. Fair value accounting is used for debt securities
that are classified as available-for-sale securities. Realized gains and losses
are computed on the specific identification method.

The Company does not obtain collateral or other security to support
financial instruments subject to credit risk, but monitors the credit standing
of counterparties.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined
principally on the last-in, first-out (LIFO) basis for all domestic
subsidiaries. The first-in, first-out (FIFO) basis is used to determine the cost
of inventories for all foreign subsidiaries.

Related Party Transactions

The Company receives certain services from Schuller Corporation and
provides various other services to Schuller Corporation. Fees for the cost of
such services are based on actual costs incurred, estimates of time spent to
provide such services and other appropriate bases that management believes to be
reasonable and representative of the services provided. Since the companies
maintain certain administrative functions for the benefit of both entities,
management is unable to differentiate between the amount allocated and the
amount that would have been incurred on a stand-alone basis. Charges for
services received are included in services provided by parent in the
consolidated statement of income. During 1996, certain management and financial
services previously provided by Schuller Corporation were reorganized and
transferred to the Company (see Note 6).

22
<PAGE> 25

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation expense is
computed using the straight-line method, based upon the estimated useful lives
of the assets. Buildings are depreciated principally over 20 to 40 years, and
machinery and equipment are depreciated principally over 20 years.

Maintenance and repairs are charged to current period earnings, while
replacements and betterments are capitalized.

Goodwill

Goodwill associated with acquisitions in excess of fair value of net assets
acquired is amortized on a straight-line basis generally over 20 years. Included
in other assets is goodwill of $128 million and $2 million at December 31, 1996
and 1995, respectively. The Company evaluates the recoverability of goodwill
through its annual strategic planning process.

Provision for Rebuilding Furnaces

The Company's glass furnaces have an estimated useful life of approximately
30 years. During that time, the refractory components of the glass furnaces are
periodically rebuilt, typically every six to seven years. The timing of the
periodic rebuilds is dependent upon a number of variables including production
volumes, product mix, and the extent and timing of interim repair and
maintenance work performed.

The estimated cost to rebuild the refractory components of the Company's
glass furnaces is credited to an allowance and charged to operations on a
straight-line basis over the estimated period to the next rebuild date. Unusual,
nonrecurring adjustments to previously established allowances, if required, are
included in operating results.

Revenue Recognition

The Company recognizes revenue from product sales upon shipment. The
Company estimates and records provisions for cash discounts, quantity rebates,
sales returns, allowances and original warranties in the period the sale is
reported, based on its experience.

The Company also sells extended roofing product guarantees for periods of 5
to 20 years. These extended guarantees cover the water tightness of roofing
systems resulting from defects in materials or deficiencies in workmanship.
Revenue on these product guarantees is recognized over the contract period in
proportion to costs incurred.

Workers' Compensation

The Company accrues a liability for workers' compensation claims at present
value, due to the fixed and determinable nature of the claim payments, based
upon an evaluation of historical claims data and expected future claims. In
addition, the Company records a receivable at present value for the portion of
outstanding claims covered by third-party insurers.

Income Taxes

The U.S. entities of the Company are members of the Schuller Corporation
affiliated group of corporations, which file a consolidated federal income tax
return and certain consolidated state income tax returns. For all periods
presented, the Company's U.S. federal tax liability and certain state tax
liabilities have been computed as if these U.S. entities were filing a separate
consolidated return using elections generally consistent with those employed by
Schuller Corporation. In addition, certain state and local tax liabilities have

23
<PAGE> 26

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

been computed as if the Company's U.S. entities were not a member of the
Schuller Corporation affiliated group.

Pursuant to the terms of a tax sharing agreement with Schuller Corporation
(the "Tax Sharing Agreement"), beginning in 1994, the Company's U.S. federal and
consolidated state tax obligations were paid to Schuller Corporation. The
Company's U.S. federal and consolidated state tax obligations for periods prior
to 1994 have been included in the intercompany receivable, net.

Schuller Corporation and the Company have also agreed that any material
assessments that will result in a future taxable benefit to the Company (as
determined by Schuller Corporation) and attributable to open tax years beginning
before January 1, 1994 will be paid by the Company.

Reclassifications

Certain prior year information has been reclassified to conform with the
current year presentation.

NOTE 2 -- FINANCIAL INSTRUMENTS

The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company enters into
foreign exchange forward contracts to hedge against currency fluctuations on
certain material foreign currency exposures and records a receivable/payable
which is classified consistently with the related outstanding foreign currency
exposure. At December 31, 1995, the Company had forward contracts maturing
through July 1996 to sell deutsche marks in exchange for $10.8 million. The
carrying value of these contracts approximated their fair value at December 31,
1995.

Gains and losses on foreign currency transactions and forward exchange
contracts are included in other expense, net, for the period in which the
exchange rate changes. The discount or premium on forward contracts is accounted
for separately from the gain or loss on the contracts and is amortized to other
expense, net, over the life of the contract.

The Company had outstanding letters of credit totaling $15.1 million and
$10.8 million as of December 31, 1996 and 1995, respectively. All letters of
credit are collateralized by cash.

The Company maintains cash and cash equivalents and certain other financial
instruments with various financial institutions throughout the world. The
Company invests excess cash in a diversified portfolio of high-quality money
market instruments consistent with the preservation of capital and the
maintenance of liquidity. The Company's investment policies require
diversification of investments and include restrictions on maturity and credit
quality. The Company monitors compliance with these restrictions on an ongoing
basis. The Company has not experienced any material losses related to these
investments.

The Company is exposed to credit losses in the event of nonperformance by
the counterparties to its financial instruments, but does not anticipate any
significant off-balance-sheet credit risk of accounting loss. The Company
anticipates that counterparties will be able to fully satisfy their obligations
under the contracts.

At December 31, 1996, the Company held investments in debt securities that
were classified as held-to-maturity with an amortized cost basis of $106
million, which approximated fair value. The Company's investments in
held-to-maturity debt securities at December 31, 1996 were classified on the
balance sheet as cash equivalents of $93.7 million, marketable securities of
$2.7 million and other assets of $9.6 million, depending upon the nature and
maturity of the investments. Of these securities, $96.2 million had contractual
maturities within one year; the remainder mature in one to five years.
Additionally, at December 31, 1996, the Company had investments in
available-for-sale debt securities that were classified on the balance sheet as
other assets of $5 million. The amortized cost basis of these securities
approximated fair value. Of these securities, $4.9 million had contractual
maturities of one to five years; the remainder mature in less than one year.

24
<PAGE> 27

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 1995, the Company held investments in debt securities that
were classified as held-to-maturity with an amortized cost basis of $137.6
million, which approximated fair value. The Company's investments in
held-to-maturity debt securities at December 31, 1995, were classified on the
balance sheet as cash equivalents of $107.6 million, marketable securities of
$21 million and other assets of $9 million, depending upon the nature and
maturity of the investments. Of these securities, $128.6 million had contractual
maturities within one year; the remainder mature in one to five years.
Additionally, at December 31, 1995, the Company had investments in
available-for-sale debt securities that were classified on the balance sheet as
other assets of $6.1 million. The amortized cost basis of these securities
approximated fair value. Of these securities, $6 million had contractual
maturities of one to five years; the remainder mature in less than one year.

During 1996 and 1994, the Company sold securities that had been classified
as available-for-sale, resulting in proceeds of $6.1 million and $2.1 million,
respectively, which approximated carrying value each year.

NOTE 3 -- RECEIVABLES

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995
----------- -----------
<S> <C> <C>
Trade....................................................... $242,530 $194,484
Less allowances............................................. 30,016 27,110
-------- --------
212,514 167,374
Other....................................................... 17,071 25,052
-------- --------
$229,585 $192,426
======== ========
</TABLE>

Included in allowances are doubtful accounts of $7.6 million and $6.5
million at December 31, 1996 and 1995, respectively. The Company generally
requires no collateral on receivables. The provision for doubtful accounts
charged to costs and expenses was $1.1 million for 1996, $0.8 million for 1995,
and $1.4 million for 1994.

NOTE 4 -- INVENTORIES

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995
----------- ----------
<S> <C> <C>
Finished goods.............................................. $ 60,456 $46,432
Work-in-process............................................. 8,472 7,345
Raw materials............................................... 23,383 15,569
Supplies.................................................... 8,730 7,775
-------- -------
$101,041 $77,121
======== =======
</TABLE>

Inventories in the amounts of $29.5 million and $18.3 million at December
31, 1996 and 1995, respectively, were valued using FIFO. The balance of the
inventories was valued using LIFO. The excess of current values over amounts for
financial reporting purposes was $51.5 million and $54.4 million at December 31,
1996 and 1995, respectively.

25
<PAGE> 28

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT, NET

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995
----------- -----------
<S> <C> <C>
Land and improvements....................................... $ 47,977 $ 42,543
Buildings................................................... 237,132 218,650
Machinery and equipment..................................... 1,113,341 1,032,830
---------- ----------
1,398,450 1,294,023
Less accumulated depreciation............................... 628,482 578,120
---------- ----------
$ 769,968 $ 715,903
========== ==========
</TABLE>

NOTE 6 -- RELATED PARTY TRANSACTIONS

Recapitalization of the Company and Issuance of Senior Notes

During 1994, the Company completed the following noncash transactions. In
connection with the renegotiation of a receivables sales facility, a $111.5
million subordinated promissory note of the Company held by Schuller Corporation
was assigned to the Company, increasing stockholder's equity. In addition, the
Company declared and paid a $425 million dividend to Schuller Corporation in the
form of $400 million aggregate principal amount 10.375 percent Senior Notes due
2004 (the "Original Senior Notes") and a $25 million demand note. Concurrent
with the declaration of the dividend, the Company canceled an intercompany
receivable from Schuller Corporation totaling $632.4 million. In connection with
a public debt offering, the Original Senior Notes were surrendered and replaced
by $400 million of the Company's 10.875 percent Senior Notes due 2004. The
Company did not receive any proceeds from the Senior Notes offering.

Stock Compensation Plans

Certain executives and other eligible employees of the Company participated
in Schuller Corporation stock compensation plans, which grant deferred stock
rights, restricted stock and options to purchase stock. The Company's share of
compensation expense related to these stock compensation plans was $1.5 million,
$0.6 million and $0.4 million in 1996, 1995 and 1994, respectively.

During 1996, 5.3 million options to purchase shares of Schuller Corporation
common stock were granted. The options were issued at exercise prices ranging
from $10.63 to $13.28 per share, expire in ten years, and the majority vest by
December 31, 1997. The Company accounts for compensation expense related to the
options under APB Opinion 25 and related interpretations and, since the exercise
prices on the grant date equaled or exceeded market prices on grant dates, no
compensation expense was recognized. Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") was issued
in 1995, and if fully adopted, changes, among other things, the methods for
recognition of expense on plans involving Schuller Corporation's stock options.
Recognition of compensation under SFAS No. 123 is optional. However, as required
by SFAS No. 123, the following discloses the pro forma impact on the Company's
1996 net income if recognition requirements were adopted (in thousands of
dollars):

<TABLE>
<S> <C>
Net Income -- As reported................................... $88,944
Pro forma..................................... $86,008
</TABLE>

The pro forma compensation expense based on the fair value of the options
is estimated on the grant date using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants: dividend yield of
$0.12 per share; expected volatility of 32 percent; a risk free rate of return
of 6.6 percent and an expected life of the options of four years. The weighted
average fair values of options granted during 1996 were $3.02 per share for
options with exercise prices equal to market prices on grant

26
<PAGE> 29

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

dates, and $2.71 per share for options with exercise prices exceeding market
prices on grant dates. The effects of applying SFAS No. 123 in this pro forma
disclosure are not indicative of future amounts. Additional awards in future
years are possible.

Notes Payable to Parent

During August 1996, the Company executed a $50 million note payable to
Schuller Corporation, due October 1, 1998. The proceeds were used to partially
finance the acquisition of NRG Barriers, Inc. -- see Note 19. Also during 1996,
$5 million was advanced to the Company to pay off debt to third parties and a
$25 million note to Schuller Corporation was reclassified from current
liabilities to long-term debt.

Intercompany Agreements

In connection with the public offering of the Senior Notes during 1994, the
Company and Schuller Corporation entered into a Corporate Agreement that, among
other things, prohibits the Company and certain of its subsidiaries from issuing
any capital stock or rights, warrants or options to purchase their capital stock
(collectively, "Capital Stock Rights") without the approval of Schuller
Corporation's Board of Directors. In addition, the Corporate Agreement prohibits
the Company and certain of its subsidiaries from issuing any of their Capital
Stock Rights if, immediately after such issuance, the Company or any of such
subsidiaries would no longer be a member of Schuller Corporation consolidated
federal income tax group. Schuller Corporation has agreed with Manville Personal
Injury Settlement Trust (the "Trust") that, without the consent of the Trust,
Schuller Corporation will not waive any provisions of the Corporate Agreement.

Also in connection with the public offering of the Senior Notes, the
Company and Schuller Corporation entered into a Tax Sharing Agreement that
provides that as long as the Company and Schuller Corporation are included in
the same consolidated tax group, the Company will pay to Schuller Corporation
amounts equal to the U.S. federal and state income taxes (for states requiring
consolidated or combined income tax returns) that the Company would otherwise
have to pay if it were to file separate returns, and that Schuller Corporation
has the authority to make tax elections for the Company. Amounts paid to
Schuller Corporation for 1996, 1995 and 1994 U.S. federal and state income taxes
totaled $52.5 million, $50.4 million and $38.7 million, respectively.

In addition, the Company and Schuller Corporation entered into certain
agreements that formalized various relationships between the two companies.
Principal among these are an Intercompany Agreement by which Schuller
Corporation provides certain management services to the Company for a fee and a
Treasury Management Agreement by which Schuller Corporation provides certain
financial services for a fee. Fees for the cost of such services are based on
actual costs incurred, estimates of time spent to provide such services and
other appropriate bases that management believes to be reasonable and
representative of the services provided. Expenses incurred by the Company under
the terms of the Intercompany Agreement and the Treasury Management Agreement
for services provided by Schuller Corporation totaled $7 million, $11.8 million
and $14.3 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Cash settlements are made for all products or services provided
and/or received, with interest accruing at the prime rate on past due balances.
Amounts payable or receivable for transactions with Schuller Corporation have
been reported as a current payable or receivable on the consolidated balance
sheet.

During 1996, Schuller Corporation divested its investment in Riverwood
International Corporation (the "Riverwood Disposition"). In connection with the
Riverwood Disposition, certain management and financial services maintained by
Schuller Corporation were reorganized and transferred to the Company. Because
Schuller Corporation maintained these administrative functions for the benefit
of all three entities, manage-

27
<PAGE> 30

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ment is unable to differentiate between the amounts allocated on a fee basis
under the terms of the services agreements and the amount that will be incurred
as these functions are administered by the Company.

Other related party transactions

During 1996, the Company advanced $23.8 million to Schuller Corporation to
acquire Nord Bitumi U.S., Inc. (see Note 19). The assets of Nord Bitumi U.S.,
Inc. were subsequently contributed to the Company. The contribution was
accounted for as an increase in the Company's stockholder's equity. The advance,
included in current receivable from parent at December 31, 1996, was repaid in
February, 1997.

Schuller Corporation maintains an escrow account on behalf of the Company
for its workers' compensation surety bonds which is reported as a long-term
receivable from parent in the consolidated balance sheet of $10.1 million and
$9.7 million at December 31, 1996 and 1995, respectively.

NOTE 7 -- INCOME TAXES

Income taxes payable consists of the following:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995
--------- ---------
<S> <C> <C>
U.S. federal and foreign income taxes....................... $13,998 $ 8,858
Deferred income taxes....................................... 1,250 2,070
State and local taxes....................................... 615 636
------- -------
$15,863 $11,564
======= =======
</TABLE>

The current receivable from parent at December 31, 1996 and 1995 included
$3.2 million and $5.3 million, respectively, for the overpayment of the
Company's 1996 and 1995 federal and state income tax obligations paid to
Schuller Corporation under the terms of the Tax Sharing Agreement.

The approximate tax effect of the temporary differences giving rise to the
net deferred tax asset is follows:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995
----------- -----------
<S> <C> <C>
U.S. Deferred Tax Assets:
Employee benefit accruals................................. $108,006 $110,105
Reserves.................................................. 56,251 44,293
Provision for furnace rebuilds............................ 7,805 7,842
Deferred state and local taxes............................ 7,488 6,146
Accounts receivable allowances............................ 3,830 3,659
Other..................................................... 9,111 7,003
-------- --------
Total U.S. Deferred Tax Assets.............................. 192,491 179,048
Foreign Deferred Tax Assets................................. 842 444
-------- --------
Total Deferred Tax Assets................................... 193,333 179,492
-------- --------
U.S. Deferred Tax Liabilities:
Property, plant and equipment............................. 97,688 97,544
Prepaid pension asset..................................... 45,821 40,940
Other..................................................... 6,675 5,840
-------- --------
Total U.S. Deferred Tax Liabilities......................... 150,184 144,324
-------- --------
Net Deferred Tax Asset...................................... $ 43,149 $ 35,168
======== ========
</TABLE>

28
<PAGE> 31

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company believes, based upon its past earnings, forecasts of future
earnings and potential tax planning strategies that as of December 31, 1996 and
1995, all of the deferred tax assets will be realized. Accordingly, a valuation
allowance has not been provided.

Deferred income tax liabilities of $41.2 million and $47.4 million as of
December 31, 1996 and 1995, respectively, related to foreign operations and were
primarily attributable to temporary differences on property, plant and
equipment.

The U.S. and foreign components of income before income taxes consist of
the following:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
U.S.................................................. $110,885 $136,878 $109,487
Foreign.............................................. 47,943 42,367 34,319
-------- -------- --------
$158,828 $179,245 $143,806
======== ======== ========
</TABLE>

The provision for income tax expense (benefit) on income before income
taxes consists of the following:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Current:
U.S. federal....................................... $ 48,274 $46,281 $27,005
U.S. state and local............................... 11,798 9,784 8,742
Foreign............................................ 24,492 16,603 12,763
-------- ------- -------
84,564 72,668 48,510
-------- ------- -------
Deferred:
U.S................................................ (8,705) 2,252 11,640
Foreign............................................ (5,975) 2,096 3,353
-------- ------- -------
(14,680) 4,348 14,993
-------- ------- -------
$ 69,884 $77,016 $63,503
======== ======= =======
</TABLE>

The effective tax rate on income before income taxes differs from the U.S.
federal statutory income tax rate for the following reasons:

<TABLE>
<CAPTION>
PERCENT OF PRE-TAX INCOME: 1996 1995 1994
- -------------------------- ---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate................................. 35.0% 35.0% 35.0%
Increase resulting from:
U.S. state and local taxes, net of federal benefit........ 3.8 3.8 5.6
Foreign income taxed at higher rates...................... 2.4 3.3 2.0
Non-deductible goodwill................................... .5
Change in statutory tax rates............................. 1.2
Other, net................................................ 2.3 0.9 0.4
---- ---- ----
44.0% 43.0% 44.2%
==== ==== ====
</TABLE>

Undistributed earnings intended to be reinvested indefinitely by the
foreign subsidiaries totaled $149.6 million at December 31, 1996. The
determination of the deferred tax liability related to these undistributed
earnings is not practicable. Accordingly, no U.S. deferred income tax has been
recorded.

29
<PAGE> 32

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 -- PENSIONS

The Company maintains noncontributory defined benefit pension plans for its
U.S. and German employees. Pension expense (income) and projected benefit
obligations under each of these plans are determined using assumptions regarding
discount rates, rates of increase in future compensation levels and expected
long-term rates of return on assets. These assumptions are subject to prevailing
economic conditions and, accordingly, the Company believes it is reasonably
possible that a change in these assumptions may occur in the near-term.

U.S. Pension Plans

Substantially all of the Company's U.S. employees are covered by
noncontributory defined benefit pension plans. Pension benefits are based
primarily on years of service and the employee's compensation or pension rate
near retirement. The Company's funding policy is to contribute funds to a trust
as necessary to at least meet the minimum funding requirements of the Internal
Revenue Code. Plan assets are invested primarily in fixed income and equity
securities.

(A) Pension Expense (Income):

The Company's pension expense (income) related to the U.S. defined benefit
pension plans for the years ended December 31 consists of the following:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the year.... $ 7,971 $ 6,436 $ 8,739
Interest cost on projected benefit obligation...... 43,689 45,460 42,137
Estimated return on assets:
Actual (gain) loss............................... (46,263) (145,180) 27,531
Deferred gain (loss)............................. (6,033) 100,928 (77,500)
Net amortization................................... (3,558) (4,212) (2,846)
-------- -------- --------
Total pension expense (income)..................... $ (4,194) $ 3,432 $ (1,939)
======== ======== ========
</TABLE>

Assumptions used in determining the pension expense (income) for the years
ended December 31 are as follows:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rates.............................................. 7.00% 9.00% 7.00%
Rates of increase in future compensation levels............. 5.50% 6.50% 5.50%
Expected long-term rates of return on assets................ 8.00% 8.00% 8.00%
</TABLE>

30
<PAGE> 33

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(B) Funded Status:

The funded status of the Company's defined benefit plans covering U.S.
employees as of December 31 is as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995
----------- -----------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation................................. $575,851 $594,166
======== ========
Accumulated benefit obligation............................ $602,370 $614,010
======== ========
Projected benefit obligation.............................. $621,842 $642,770
Plan assets at fair value................................... 682,788 676,483
-------- --------
Plan assets in excess of projected benefit obligation....... 60,946 33,713
Unrecognized net loss....................................... 66,391 86,199
Unrecognized prior service costs............................ 12,431 12,687
Unrecognized transition adjustment.......................... (19,585) (27,653)
-------- --------
Prepaid pension asset....................................... $120,183 $104,946
======== ========
</TABLE>

The projected benefit obligations for the U.S. plans were determined in
1996 and 1995 using discount rates of 7.5 percent and seven percent,
respectively, and rates of increase in future compensation levels for
salary-related plans of 5.5 percent. The Company utilizes a discount rate based
on available high-quality corporate bonds. The vested U.S. benefit obligation is
calculated on the benefits the employees are entitled to receive if they were to
separate immediately.

As of December 31, 1996 and 1995, accrued U.S. retirement contributions
included in compensation and employee benefits on the balance sheet were $10.7
million and $12 million, respectively.

German Pension Plan

The German subsidiary of the Company provides a defined benefit plan. This
plan is noncontributory and is unfunded. The pension or termination benefits are
based primarily on years of service and the employee's compensation.

(A) Pension Expense:

The pension expense, determined using a discount rate of seven percent and
a rate of increase in future compensation of five percent for each year, for the
years ended December 31 consists of the following:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service cost -- benefits earned during the year.......... $ 881 $ 909 $ 751
Interest cost on projected benefit obligation............ 1,861 1,869 1,580
Net amortization......................................... 105 111 117
------ ------ ------
Total pension expense.................................... $2,847 $2,889 $2,448
====== ====== ======
</TABLE>

31
<PAGE> 34

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(B) Funded Status:

The status of the Company's unfunded German plan as of December 31 is as
follows:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995
---------- ----------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation................................. $24,691 $24,910
======= =======
Accumulated benefit obligation............................ $25,861 $26,272
======= =======
Projected benefit obligation.............................. $28,204 $28,676
Unrecognized net gain....................................... 2,972 3,052
Unrecognized transition adjustment.......................... (863) (1,057)
------- -------
Pension liability........................................... $30,313 $30,671
======= =======
</TABLE>

Projected benefit obligations were determined using a discount rate of
seven percent for both 1996 and 1995. The rate of increase in future
compensation levels for salary-related plans was five percent for both 1996 and
1995. The vested benefit obligation is calculated on the benefits the employees
are entitled to receive if the employees were to separate immediately.

Voluntary Savings Plans

The Company provides voluntary savings plans in which eligible U.S.
employees of the Company may participate. Employees may make contributions of up
to 16 percent of their compensation. The Company matches up to six percent of
certain contributions at rates ranging from 15 percent to 100 percent, depending
on the Company's performance. Company contributions to the savings plans were
$7.2 million in 1996, $7.1 million in 1995 and $6.3 million in 1994.

NOTE 9 -- SHORT-TERM DEBT AND CREDIT FACILITIES

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995
---------- -------
<S> <C> <C>
Short-term borrowings....................................... $22,634 $ 70
Current portion of long-term debt........................... 9,114 41
------- ----
$31,748 $111
======= ====
</TABLE>

At December 31, 1996, the Company had $84 million available under a
receivables sale facility (the "Receivables Facility") for its domestic
short-term working capital requirements. Amounts available for borrowing under
the Receivables Facility, up to a maximum of $100 million, are based on the
daily balance of certain outstanding trade accounts receivable, adjusted for
various factors as defined under the terms of the Receivables Facility. The
Company's international subsidiaries also had borrowing and working capital
facilities totaling $85 million at December 31, 1996. These facilities, of which
approximately $84 million was available for borrowing at December 31, 1996, are
principally secured by the Company's equity ownership in certain international
subsidiaries and joint ventures.

32
<PAGE> 35

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 -- COMPENSATION AND EMPLOYEE BENEFITS

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995
----------- ----------
<S> <C> <C>
Vacation, compensation and payroll deductions............... $ 51,912 $45,317
Self insured medical and group life coverage................ 34,812 36,351
Other....................................................... 15,412 16,413
-------- -------
$102,136 $98,081
======== =======
</TABLE>

NOTE 11 -- ALLOWANCE FOR FURNACE REBUILDS

The activity in the allowance for furnace rebuilds, included in other
noncurrent liabilities, for the years ended December 31, was as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995
---------- -----------
<S> <C> <C>
Balance at beginning of year................................ $22,405 $ 26,356
Provisions for estimated costs.............................. 8,270 8,349
Rebuild expenditures........................................ (8,375) (12,300)
------- --------
22,300 22,405
Less current portion........................................ 1,947 10,763
------- --------
$20,353 $ 11,642
======= ========
</TABLE>

NOTE 12 -- LONG-TERM DEBT

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995
----------- -----------
<S> <C> <C>
UNSECURED
Senior Notes with interest at 10.875%, payable 2004......... $400,000 $400,000
COLLATERALIZED
Industrial revenue bonds with interest at floating rates,
from 2% to 8.625%, payable through 2009, collateralized by
a letter of credit, real property and equipment........... 15,702 8,639
Notes payable with interest from 5.98% to 9.25%, payable
through 2008.............................................. 4,070 209
-------- --------
419,772 408,848
Less current portion........................................ 9,114 41
-------- --------
$410,658 $408,807
======== ========
</TABLE>

In the fourth quarter of 1994, the Company issued $400 million of 10.875
percent Senior Notes, due 2004. Interest on these notes is payable semiannually.
These notes may be redeemed on or after December 15, 1999 at prices ranging from
100 percent to 105 percent of the principal amount, plus accrued interest.

33
<PAGE> 36

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Long-term debt maturities at December 31, 1996 are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
-------------------------
<S> <C>
1997........................................................ $ 9,114
1998........................................................ 5,841
1999........................................................ 230
2000........................................................ 165
2001........................................................ 166
Thereafter.................................................. 404,256
-----------
$419,772
===========
</TABLE>

The Company's agreements with its lenders contain a number of financial and
general covenants. These include, among others, restrictions on borrowings,
investments, stock issuances and repurchases, dividends and other distributions
by the Company and restrictions on intercompany transactions including transfers
of cash, and transactions with Schuller Corporation. As of December 31, 1996 and
1995, the maximum amount available for dividends to be paid to Schuller
Corporation under debt covenants of the Company's Senior Notes was approximately
$227 million and $172 million, respectively. Noncompliance with these or other
covenants, or the occurrence of any other event of default, could result in the
termination of existing credit agreements and the acceleration of debt owed by
the Company and its subsidiaries. At December 31, 1996, the Company was in
compliance with these covenants.

At December 31, 1996, the Company's long-term debt totaled $419.8 million
and had an estimated fair value of $464.9 million. At December 31, 1995, the
Company's long-term debt totaled $408.8 million and had an estimated fair value
of $458.2 million. Generally, the fair value of the Company's long-term debt is
an estimate based on quoted market prices, when available, or the discounted
cash flow method.

NOTE 13 -- OTHER POSTRETIREMENT BENEFITS

Medical and life insurance coverage is provided to eligible U.S. and
Canadian retirees of the Company and their dependents under defined benefit
plans. The postretirement benefit expense for the years ended December 31
consists of the following:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the year......... $ 1,352 $ 1,538 $ 3,260
Interest cost on accumulated postretirement benefit
obligation............................................ 12,913 15,383 17,689
Net amortization........................................ (1,552) (2,433) 35
------- ------- -------
Total postretirement benefit expense.................... $12,713 $14,488 $20,984
======= ======= =======
</TABLE>

The postretirement benefit expense was calculated using a discount rate of
seven percent in 1996, nine percent in 1995 and seven percent in 1994.

34
<PAGE> 37

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company's unfunded postretirement benefit obligation reconciled with
the amounts shown in the Company's consolidated balance sheet as of December 31
is as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995
----------- -----------
<S> <C> <C>
Actuarial present value of the accumulated postretirement
benefit obligation:
Retirees............................................... $151,123 $160,730
Fully eligible plan participants....................... 8,474 7,858
Other active plan participants......................... 25,013 34,827
-------- --------
184,610 203,415
Unrecognized net gain....................................... 8,360 4,204
Unrecognized prior service costs............................ 25,950 17,402
-------- --------
Postretirement Benefit Obligation........................... $218,920 $225,021
======== ========
</TABLE>

The current portions of $19.5 million and $21.9 million of the
postretirement benefit obligation were recorded in compensation and employee
benefits as of December 31, 1996 and 1995, respectively. The accumulated
postretirement benefit obligations were determined in 1996 and 1995 using
discount rates of 7.5 percent and seven percent, respectively. The Company
utilizes a discount rate based on available high-quality corporate bonds. For
measurement purposes, a six percent annual rate of increase in the per capita
cost of covered medical benefits was assumed for 1997; the rate was assumed to
decrease gradually to 5.5 percent in 2002 and remain at that level thereafter.

The Company's assumptions regarding the discount rate and annual rate of
increase in the per capita cost of covered medical benefits are subject to
prevailing economic conditions. Accordingly, the Company believes it is
reasonably possible that a change in these assumptions may occur in the
near-term. To illustrate, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated benefit
obligation as of December 31, 1996, by $7.8 million, and the aggregate of the
service and interest cost components of the periodic cost for the year then
ended by $0.8 million.

NOTE 14 -- WORKERS' COMPENSATION

The workers' compensation liability and related receivable at gross and
present value at December 31 are:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995
----------- -----------
<S> <C> <C>
Workers' Compensation Liability:
Gross..................................................... $123,569 $130,724
Present value............................................. 69,002 69,484
Insurance Receivable:
Gross..................................................... $ 7,765 $ 7,245
Present value............................................. 4,818 4,460
</TABLE>

The liability and receivable were measured using risk-free discount rates
of 6.4 percent and 6.2 percent at December 31, 1996 and 1995, respectively,
which reflect rates of return on available U.S. Treasury securities with
maturities similar to the timing of expected claim payments. Although the
Company is exposed to credit losses in the event of nonperformance by its
insurers, the Company anticipates claims for insurance coverage will be fully
satisfied.

Discount rates of 6.2 percent, 8.2 percent and seven percent were used to
measure expense for the years ended December 31, 1996, 1995 and 1994,
respectively.

35
<PAGE> 38

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company expects to pay the following amounts for its workers'
compensation obligations:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
-------------------------
<S> <C>
1997........................................................ $ 8,300
1998........................................................ 7,700
1999........................................................ 7,400
2000........................................................ 7,000
2001........................................................ 6,600
Thereafter.................................................. 86,569
--------
$123,569
========
</TABLE>

NOTE 15 -- COMMITMENTS AND CONTINGENCIES

Total rental expense was $10.9 million in 1996, $13.5 million in 1995 and
$11.3 million in 1994.

At December 31, 1996, minimum rental commitments of the Company under
long-term, noncancelable operating leases are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
-------------------------
<S> <C>
1997........................................................ $ 5,838
1998........................................................ 5,151
1999........................................................ 1,300
2000........................................................ 894
2001........................................................ 755
-------
$13,938
=======
</TABLE>

Minimum rental commitments of the Company have not been reduced by
anticipated sublease income of approximately $3.7 million.

The Company has various purchase commitments for items used in the ordinary
conduct of business. In the aggregate, such commitments do not exceed market
prices or anticipated usage requirements.

Contingent Product Liability

36
<PAGE> 39

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

including an order requiring the removal and replacement of the phenolic
insulation and remediation of any deck corrosion. The Company intends to defend
these allegations vigorously.

Environmental Contingencies

37
<PAGE> 40

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 -- NONRECURRING CHARGES

In 1996, the Company recorded the following pretax nonrecurring charges
totaling $49.2 million.

NOTE 17 -- OTHER INCOME (EXPENSE), NET

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Postretirement benefits other than pensions........... $(5,219) $ (5,468) $ (7,547)
Amortization of intangible assets..................... (4,457) (677) (698)
Interest accretion on workers' compensation
liabilities......................................... (3,567) (3,910) (4,400)
Phenolic legal expenses............................... (600) (2,921) (8,898)
Settlement of pension plans........................... 7,216
Write-off/disposition of nonproductive assets......... (6,723) (3,558)
Other................................................. 6,053 1,912 2,930
------- -------- --------
$ (574) $(17,787) $(22,171)
======= ======== ========
</TABLE>

Postretirement benefit expenses are benefits other than pensions
attributable to retirees of the Company's former business operations. Interest
accretion on workers' compensation liabilities primarily relates to previous
asbestos operations.

During 1996, the Company recognized a gain of $7.2 million related to the
receipt of surplus pension assets in connection with the settlement of defined
benefit pension plans in which the Company's Canadian employees previously
participated.

38
<PAGE> 41

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18 -- SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and taxes during each of the years ended December 31
was as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Interest paid to:
Parent................................................ $ 2,051 $ 2,226 $15,326
Others................................................ 44,327 44,301 2,245
Taxes paid (and deemed paid) to:
Parent................................................ $52,470 $50,352 $38,729
Others................................................ 23,038 15,327 11,817
</TABLE>

NOTE 19 -- ACQUISITIONS

In the third quarter of 1996, the Company acquired NRG Barriers, Inc., a
U.S. manufacturer of commercial roofing insulation, and the assets of Dibiten
USA and Dibiten Mexico, manufacturers of commercial roofing products, in
separate transactions. Nord Bitumi SpA, Nord de Mexico S.A. de C.V. and Nord
Bitumi U.S., Inc., manufacturers of commercial roofing products, were acquired
in the first quarter of 1996. Also during the first quarter of 1996, the Company
acquired Web Dynamics Corporation, a manufacturer of polymer filtration
products. The acquisitions were accounted for under the purchase method, and
accordingly, the purchase prices were allocated on the basis of the estimated
fair value of assets acquired and liabilities assumed. In addition, a joint
venture, in which the Company has a 60 percent interest, to operate and expand
an existing fiber glass mat facility in China, became effective January 1, 1996,
and is accounted for under the equity method. The combined cash purchase price
for the 1996 acquisitions and the Company's contribution to the joint venture
totaled $153.1 million. In connection with these acquisitions, the Company
assumed $52 million of debt, $34 million of which was outstanding at December
31, 1996. The operating results of the acquired businesses have been included in
the consolidated statement of income from the dates of acquisition.

During January 1997, the Company acquired the assets of Ergon Nonwovens,
Inc., a U.S. manufacturer of synthetic meltblown nonwoven products. This
acquisition is associated with businesses of the Engineered Products segment and
will be accounted for under the purchase method.

During February 1997, the Company announced it had signed an agreement to
acquire the Mitex group of companies, subject to certain conditions, including
regulatory approvals. The acquisition is expected to complement existing
businesses of the Engineered Products segment. Mitex is a leading manufacturer
of fiber glass wall covering fabrics used primarily in commercial and industrial
buildings and has manufacturing facilities in Sweden and the United Kingdom.

NOTE 20 -- BUSINESS SEGMENTS AND GEOGRAPHIC AREA INFORMATION

The Company reports separately the results of the Building Products and
Engineered Products segments. The Building Products segment consists of the
Company's building insulation business, which manufactures fiber glass wool
insulation for walls, attics and floors in residential and commercial buildings
and polyisocyanurate foam sheathing for residential structures; commercial and
industrial roofing systems business, which supplies roofing membranes,
insulations, accessories and related guarantees; and mechanical insulations
business, which manufactures pipe and duct insulation for use in commercial
buildings, factories, refineries and other industrial applications.

39
<PAGE> 42

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Engineered Products segment consists of the Company's mats and fibers
business, which manufactures continuous filament fiber glass-based products used
for reinforcing roofing, flooring, wall covering and plastic products. The mats
and fibers business includes the Company's German subsidiary, Schuller GmbH. The
Engineered Products segment also includes the Company's specialty insulations
and filtration business, which manufactures thermal and acoustic insulation for
aircraft, marine vessels, automobiles and heating, ventilating and air
conditioning ("HVAC") and other equipment; filtration media for commercial and
industrial buildings; ultra-fine fibers for clean room air filters and battery
separators; liquid filtration cartridges and media for use in commercial and
industrial applications; and synthetic meltblown products used in various other
applications.

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
BUILDING PRODUCTS:
Net Sales (Note A)............................. $ 960,497 $ 805,615 $ 743,967
Costs and Expenses............................. 810,782 669,732 625,977
Nonrecurring Charges........................... 11,674
Other Expense, net (Note D).................... (2,604) (2,858) (8,057)
---------- ---------- ----------
Income from Operations...................... $ 135,437 $ 133,025 $ 109,933
---------- ---------- ----------
ENGINEERED PRODUCTS:
Net Sales (Note A)............................. $ 623,231 $ 612,526 $ 558,244
Costs and Expenses............................. 504,085 498,729 481,868
Nonrecurring Charges........................... 7,502
Other Income (Expense), net (Note D)........... 1,483 (5,578) 127
---------- ---------- ----------
Income from Operations...................... $ 113,127 $ 108,219 $ 76,503
---------- ---------- ----------
CORPORATE AND ELIMINATIONS:
Net Sales (Note A)............................. $ (31,299) $ (26,619) $ (24,393)
Costs and Expenses............................. (10,149) (10,676) (11,156)
Nonrecurring Charges........................... 29,980
Other Income (Expense), net (Note D)........... 547 (9,351) (14,241)
---------- ---------- ----------
Income from Operations...................... $ (50,583) $ (25,294) $ (27,478)
---------- ---------- ----------
CONSOLIDATED TOTAL COMPANY:
Net Sales (Note A)............................. $1,552,429 $1,391,522 $1,277,818
Costs and Expenses............................. 1,304,718 1,157,785 1,096,689
Nonrecurring Charges........................... 49,156
Other Expense, net............................. (574) (17,787) (22,171)
---------- ---------- ----------
Income from Operations...................... $ 197,981 $ 215,950 $ 158,958
========== ========== ==========
ASSETS (DECEMBER 31):
Building Products.............................. $ 789,778 $ 556,172 $ 514,873
Engineered Products............................ 604,806 573,739 532,159
Corporate (Note E)............................. 326,276 329,781 265,816
Eliminations and Adjustments (Note B).......... (53,319) (52,903) (50,200)
---------- ---------- ----------
Total....................................... $1,667,541 $1,406,789 $1,262,648
========== ========== ==========
- ---------------
See notes on page 41.
</TABLE>

40
<PAGE> 43

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION:
Building Products................................... $ 36,806 $ 28,765 $24,751
Engineered Products................................. 31,679 31,507 28,642
Corporate........................................... 2,413 2,813 5,018
-------- -------- -------
Total............................................ $ 70,898 $ 63,085 $58,411
======== ======== =======
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT:
Building Products................................... $ 76,985 $ 48,428 $53,621
Engineered Products................................. 75,658 60,787 26,991
Corporate........................................... 290 1,851 2,038
-------- -------- -------
Total............................................ $152,933 $111,066 $82,650
======== ======== =======
</TABLE>

- ---------------

NOTE A:

Net sales included in corporate and eliminations relate principally to the
elimination of intersegment and intergeographic sales (at prices approximating
market). Intersegment sales principally relate to sales from the Engineered
Products segment to the Building Products segment.

NOTE B:

Includes the elimination of intersegment and intergeographic inventory
profits and the adjustment of business segment and geographic inventories, which
are carried at standard costs, to the historical inventory bases used in
consolidation.

NOTE C:

Includes the elimination of intergeographic dividends between the Company's
foreign and U.S. segments.

NOTE D:

Other income (expense), net, as reported in each of the business segments,
represents specific operating income and expense items recognized by the
individual business units. Other income (expense), net, included in corporate
and eliminations consists of amounts primarily attributable to previous business
operations.

NOTE E:

Corporate assets are principally cash and equivalents, marketable
securities, certain investments, certain long-term receivables, receivables from
parent, a portion of prepaid pension assets and a portion of property, plant and
equipment.

41
<PAGE> 44

SCHULLER INTERNATIONAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ------------
<S> <C> <C> <C>
UNITED STATES:
Net Sales (Note A).......................... $1,341,216 $1,200,371 $1,109,682
Costs and Expenses.......................... 1,109,647 993,192 945,844
Nonrecurring Charges........................ 19,176
Other Income (Expense), net................. 9,863 (6,129) (5,984)
---------- ---------- ----------
Income from Operations.............. $ 222,256 $ 201,050 $ 157,854
---------- ---------- ----------

FOREIGN:
Net Sales (Note A).......................... $ 224,232 $ 199,356 $ 170,681
Costs and Expenses.......................... 188,770 158,444 138,530
Other Income (Expense), net................. 1,737 (363) (32)
---------- ---------- ----------
Income from Operations.............. $ 37,199 $ 40,549 $ 32,119
---------- ---------- ----------

CORPORATE AND ELIMINATIONS:
Net Sales (Note A).......................... $ (13,019) $ (8,205) $ (2,545)
Costs and Expenses.......................... 6,301 6,149 12,315
Nonrecurring Charges........................ 29,980
Other Expense, net (Note C)................. (12,174) (11,295) (16,155)
---------- ---------- ----------
INCOME FROM OPERATIONS.............. $ (61,474) $ (25,649) $ (31,015)
---------- ---------- ----------

CONSOLIDATED TOTAL COMPANY:
Net Sales (Note A).......................... $1,552,429 $1,391,522 $1,277,818
Costs and Expenses.......................... 1,304,718 1,157,785 1,096,689
Nonrecurring Charges........................ 49,156
Other Expense, net.......................... (574) (17,787) (22,171)
---------- ---------- ----------
Income from Operations.............. $ 197,981 $ 215,950 $ 158,958
========== ========== ==========
ASSETS (DECEMBER 31):
United States............................... $1,207,303 $ 936,453 $ 890,433
Foreign..................................... 187,281 193,458 156,789
Corporate (Note E).......................... 326,276 329,781 265,816
Eliminations and Adjustments (Note B)....... (53,319) (52,903) (50,390)
---------- ---------- ----------
Total............................... $1,667,541 $1,406,789 $1,262,648
========== ========== ==========
</TABLE>

- ---------------

See notes on page 41.

42
<PAGE> 45

REPORT OF INDEPENDENT ACCOUNTANTS

To the Securityholders and Directors of Schuller International Group, Inc.:

We have audited the consolidated financial statements and the financial
statement schedule of Schuller International Group, Inc. listed in Item 14(a) of
this Form 10-K. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with 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 consolidated financial position of
Schuller International Group, Inc. as of December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.

/s/ COOPERS & LYBRAND

Denver, Colorado
February 4, 1997, except for Note 19
as to which the date is February 13, 1997

43
<PAGE> 46

SCHULLER INTERNATIONAL GROUP, INC.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Net Sales................................ $326,109 $381,403 $422,978 $421,939 $1,552,429
Gross Profit............................. 93,559 108,502 121,439 117,118 440,618
Income from Operations (Note A).......... 57,152 59,080 70,313 11,436 197,981
Net Income............................... 27,139 28,135 33,550 120 88,944
======== ======== ======== ======== ==========
Year Ended December 31, 1995:
Net Sales................................ $328,401 $354,051 $363,094 $345,976 $1,391,522
Gross Profit............................. 99,735 102,269 98,025 98,382 398,411
Income from Operations................... 55,720 58,638 57,946 43,646 215,950
Net Income............................... 26,036 27,890 27,946 20,357 102,229
======== ======== ======== ======== ==========
</TABLE>

- ---------------

NOTE A:

During the fourth quarter of 1996, the Company recorded nonrecurring
charges totaling $49.2 million. These charges include $41.7 million for the
shutdown of current operations, demolition of facilities and site restoration
and $7.5 million of asset write-downs to estimated fair values, partially offset
by a gain on the sale of other manufacturing assets.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There were no changes in the Company's accountants during the two most
recent fiscal years. There were also no disagreements with accountants on
accounting or financial disclosures during such period.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Omitted under the reduced disclosure format pursuant to General Instruction
J(2)(a) of Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Omitted under the reduced disclosure format pursuant to General Instruction
J(2)(a) of Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Omitted under the reduced disclosure format pursuant to General Instruction
J(2)(a) of Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Omitted under the reduced disclosure format pursuant to General Instruction
J(2)(a) of Form 10-K.

44
<PAGE> 47

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

<TABLE>
<C> <S> <C> <C>
a. Financial Statements, financial statement schedules and exhibits filed in this
report:
1. The Company's Financial Statements and Selected Quarterly Financial Data are
contained in Item 8.
2. The Company is filing herewith Schedule II -- Valuation and Qualifying
Accounts.
b. No reports on Form 8-K were filed during the last quarter of 1996.
c. Exhibit Index to the Schuller International Group, Inc. Annual Report on Form 10-K
for Fiscal Year Ended December 31, 1996:
</TABLE>

<TABLE>
<CAPTION>
EXHIBIT REFERENCE
------- ---------
<C> <S> <C> <C>
3. (a) Certificate of Incorporation, as Filed as an exhibit to the Company's
amended. Registration Statement on Form S-1
filed September 30, 1994, and
incorporated herein by reference.
(b) Bylaws. Filed as an exhibit to the Company's
Registration Statement on Form S-1
filed September 30, 1994, and
incorporated herein by reference.
4. Amended and Restated Indenture between Filed as an exhibit to the Company's
the Company and The Bank of New York, 1994 Annual Report on Form 10-K
as Trustee, dated December 12, 1994. filed March 31, 1995, and
incorporated herein by reference.
10. (a) Intercompany Agreement, dated as of Filed as an exhibit to the Company's
September 2, 1994, between Schuller Registration Statement on Form S-1
Corporation and the Company. filed September 30, 1994, and
incorporated herein by reference.
(b) Treasury Management Agreement, dated Filed as an exhibit to the Company's
as of September 22, 1994, between Registration Statement on Form S-1
Schuller Corporation and the Company. filed September 30, 1994, and
incorporated herein by reference.
(c) Tax Sharing Agreement, dated as of Filed as an exhibit to the Company's
January 1, 1994, between Schuller Registration Statement on Form S-1
Corporation and the Company. filed September 30, 1994, and
incorporated herein by reference.
(d) Corporate Agreement, dated as of Filed as an exhibit to the Company's
September 22, 1994, between Schuller Registration Statement on Form S-1
Corporation and the Company. filed September 30, 1994, and
incorporated herein by reference.
(e) Selling Securityholders' Agreement, Filed as an exhibit to the Company's
dated as of September 22, 1994, Registration Statement Form S-1
between Schuller Corporation and the filed September 30, 1994, and
Trust. incorporated herein by reference.
(f) Amended and Restated Receivables Filed as an exhibit to the Company's
Purchase Agreement, dated as of August Registration Statement on Form S-1
15, 1994, between the Company and the filed September 30, 1994, and
banks and others named therein. incorporated herein by reference.
</TABLE>

45
<PAGE> 48

<TABLE>
<CAPTION>
EXHIBIT REFERENCE
------- ---------
<C> <S> <C> <C>
(g) Amended and Restated Purchase and Sale Filed as an exhibit to the Company's
Agreement, dated as of August 15, 1994, between Registration Statement on Form S-1 filed
Schuller International, Inc. and Schuller September 30, 1994, and incorporated herein by
Funding Corporation. reference.
21. Subsidiaries of the Registrant Page 49
24. Powers of attorney. Page 50 (included on signature page to this
report.
27. Financial Data Schedule Filed herewith.
</TABLE>

46
<PAGE> 49

SCHULLER INTERNATIONAL GROUP, INC.

INDEX TO FINANCIAL STATEMENT SCHEDULE
TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<S> <C> <C>
II -- Valuation and qualifying accounts, for each of the three
years in the period ended December 31, 1996................. 48
</TABLE>

47
<PAGE> 50

SCHULLER INTERNATIONAL GROUP, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGED
BALANCE AT TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
CLASSIFICATION OF YEAR EXPENSES ACCOUNTS(A) DEDUCTIONS(B) YEAR
- -------------- ---------- --------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1996
Allowances Reducing the Assets in the
Balance Sheet:
Doubtful accounts receivable.......... $ 6,497 $1,122 $ 2,022 $ 2,071 $ 7,570
Cash discounts........................ 1,967 -- 20,962 21,651 1,278
Other allowances...................... 18,646 -- 34,386 31,864 21,168
------- ------ ------- ------- -------
Total......................... $27,110 $1,122 $57,370 $55,586 $30,016
======= ====== ======= ======= =======
1995
Allowances Reducing the Assets in the
Balance Sheet:
Doubtful accounts receivable.......... $ 6,422 $ 776 $ -- $ 701 $ 6,497
Cash discounts........................ 1,537 -- 19,963 19,533 1,967
Other allowances...................... 15,765 -- 30,977 28,096 18,646
------- ------ ------- ------- -------
Total......................... $23,724 $ 776 $50,940 $48,330 $27,110
======= ====== ======= ======= =======
1994
Allowances Reducing the Assets in the
Balance Sheet:
Doubtful accounts receivable.......... $ 5,860 $1,600 $ -- $ 1,038 $ 6,422
Cash discounts........................ 1,489 -- 14,590 14,542 1,537
Other allowances...................... 14,634 -- 27,818 26,687 15,765
------- ------ ------- ------- -------
Total......................... $21,983 $1,600 $42,408 $42,267 $23,724
======= ====== ======= ======= =======
</TABLE>

- ---------------

NOTES:

(a) Charged against sales and additions due to acquisitions.

(b) Principally charges for which reserves were provided, net of
recoveries.

48
<PAGE> 51

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

Direct and indirect subsidiaries of the Company and the jurisdiction in
which each company was incorporated are listed below. Certain companies not
important to an understanding of the Company's businesses have been omitted and
which, if aggregated, would not constitute a significant subsidiary.

<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY INCORPORATION
---------- ---------------
<S> <C>
CHANGZHOU SCHULLER ZHONGXIN TIANMA FIBER GLASS PROD. CO.,
LTD. ..................................................... China
EUROPEAN OVERSEAS CORPORATION............................... Delaware
IACP, INC................................................... Delaware
NORD BITUMI MEXICO, S.A. DE C.V............................. Mexico
NORD BITUMI SpA............................................. Italy
ROCKY MOUNTAIN INTERNATIONAL INSURANCE LTD.................. Bermuda
SCHULLER FUNDING CORPORATION................................ Delaware
SCHULLER GmbH............................................... Germany
SCHULLER INTERNATIONAL B.V.................................. Netherlands
SCHULLER INTERNATIONAL CANADA INC........................... Canada
SCHULLER INTERNATIONAL CHANGZOU, B. V....................... Netherlands
SCHULLER INTERNATIONAL GROUP, INC........................... Delaware
SCHULLER INTERNATIONAL, INC................................. Delaware
SCHULLER POLSKA Sp. zo.o.................................... Poland
SEVENTEENTH STREET REALTY, INC.............................. Colorado
SCHULLER MEXICANA S.A. DE C.V............................... Mexico
WEB DYNAMICS CORPORATION.................................... New Jersey
</TABLE>

49
<PAGE> 52

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 as of the 28th day of
March, 1997.

POWER OF ATTORNEY

Know all men by these presents that each person whose signature appears
below does hereby constitute and appoint Charles L. Henry, Kenneth L. Jensen and
Richard B. Von Wald, and each of them, with full power to act without the other,
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign all amendments to this report, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission granting unto said attorney-in-fact and
agent, 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 and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agents or any of them, or his substitute or substitutes, lawfully do or cause to
be done by virtue hereof.

SCHULLER INTERNATIONAL GROUP, INC.
(Registrant)

By: CHARLES L. HENRY
------------------------------------
Charles L. Henry
Chairman of the Board,
Chief Executive Officer and
President

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 in the capacities indicated as of March 28, 1997.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>

CHARLES L. HENRY Chairman of the Board, Chief Executive Officer and
- ----------------------------------------------------- President (Principal Executive Officer)
(Charles L. Henry)

KENNETH L. JENSEN Director, Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer (Principal Accounting and Financial
(Kenneth L. Jensen) Officer)

RICHARD B. VON WALD Director, Executive Vice President, General Counsel
- ----------------------------------------------------- and Secretary
(Richard B. Von Wald)
</TABLE>

50
<PAGE> 53

ADDITIONAL INFORMATION

Individuals interested in receiving additional information may contact the
following:

<TABLE>
<S> <C>
FOR COMPANY INFORMATION FOR PRODUCT INFORMATION
Call (303) 978-2000 Call (303) 978-4900 or (800) 654-3103
or write to: or write to:
Schuller International Group, Inc. Schuller International Group, Inc.
Investor Relations Product Information
P. O. Box 5108 P. O. Box 5108
Denver, CO 80217-5108 Denver, CO 80217-5108

TRANSFER AGENT AND REGISTRAR INDEPENDENT ACCOUNTANTS
Call 1-800-526-0801 or write to: Coopers & Lybrand L.L.P.
The Bank of New York 370 Seventeenth Street, Suite 3300
120 Broadway Denver, CO 80202-5633
New York, NY 10005
</TABLE>
<PAGE> 54

INDEX TO EXHIBITS

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 FORM 10K OF SCHULLER INTERNATIONAL GROUP, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 138,216
<SECURITIES> 2,698
<RECEIVABLES> 242,530
<ALLOWANCES> 7,570
<INVENTORY> 101,041
<CURRENT-ASSETS> 537,369
<PP&E> 1,398,450
<DEPRECIATION> 628,482
<TOTAL-ASSETS> 1,667,541
<CURRENT-LIABILITIES> 320,895
<BONDS> 490,658
0
0
<COMMON> 0
<OTHER-SE> 322,665
<TOTAL-LIABILITY-AND-EQUITY> 1,667,541
<SALES> 1,552,429
<TOTAL-REVENUES> 1,552,429
<CGS> 1,111,811
<TOTAL-COSTS> 1,111,811
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,105
<INTEREST-EXPENSE> 47,845
<INCOME-PRETAX> 158,828
<INCOME-TAX> 69,884
<INCOME-CONTINUING> 88,944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88,944
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>