-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VG+pmyn9xVhb1FrTX2nuokacgdTN/ebcj2TWR1B0tkVVqWQyaYbBd8WhNY5uGrOV jw1IGUtkQPw13pOLnUCxxg== 0000950152-98-006157.txt : 19980727 0000950152-98-006157.hdr.sgml : 19980727 ACCESSION NUMBER: 0000950152-98-006157 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980724 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSILCO CORP/DE/ CENTRAL INDEX KEY: 0000863204 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 060635844 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22098 FILM NUMBER: 98670816 BUSINESS ADDRESS: STREET 1: 425 METRO PL N STE 500 STREET 2: FIFTH FL CITY: DUBLIN STATE: OH ZIP: 43017 BUSINESS PHONE: 6147920468 MAIL ADDRESS: STREET 1: 425 METRO PLACE NORTH STREET 2: FIFTH FLOOR SUITE 500 CITY: DUBLIN STATE: OH ZIP: 43017 10-Q 1 INSILCO 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number: 0-22098 INSILCO CORPORATION (Exact name of registrant as specified in its charter) Delaware 06-0635844 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 425 Metro Place North Fifth Floor Dublin, Ohio 43017 (Address of principal executive offices) (Zip Code) 614-792-0468 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (X) Yes ( ) No Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. (X) Yes ( ) No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of July 21, 1998, 4,145,372 shares of common stock, $.001 par value, were outstanding. 2 INSILCO CORPORATION AND SUBSIDIARIES INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets 3 - June 30, 1998 (unaudited) - December 31, 1997 Condensed Consolidated Income Statements 4 - Six months ended June 30, 1998 (unaudited) - Six months ended June 30, 1997 (unaudited) - Three months ended June 30, 1998 (unaudited) - Three months ended June 30, 1997 (unaudited) Condensed Consolidated Statement of Stockholders' Equity (Deficit) 5 - For the six months ended June 30, 1998 (unaudited) Condensed Consolidated Statements of Cash Flows 6 - Six months ended June 30, 1998 (unaudited) - Six months ended June 30, 1997 (unaudited) Notes to Unaudited Condensed Consolidated Financial Statements 7 Independent Auditors' Review Report 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 17
2 3 INSILCO CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INSILCO CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands)
(Unaudited) June 30, December 31, 1998 1997 -------- -------- Assets ------ Current assets: Cash and cash equivalents $ 6,983 10,651 Trade receivables, net 85,142 67,209 Other receivables 3,501 3,477 Inventories, net 61,869 60,718 Prepaid expenses and other current assets 3,262 2,993 -------- -------- Total current assets 160,757 145,048 Property, plant and equipment, net 113,318 113,971 Investment in Thermalex 9,862 9,736 Goodwill, net 13,077 13,408 Other assets and deferred charges 17,104 20,510 -------- -------- Total assets $314,118 302,673 ======== ======== Liabilities and Stockholders' Deficit ------------------------------------- Current liabilities: Current portion of long-term debt $ 15 1,684 Current portion of other long-term obligations 3,489 5,393 Accounts payable 36,755 39,757 Accrued expenses and other 56,249 58,706 -------- -------- Total current liabilities 96,508 105,540 Long-term debt, excluding current portion 264,799 256,059 Deferred taxes 1,307 - Other long-term obligations, excluding current portion 42,308 43,402 Stockholders' deficit (90,804) (102,328) -------- -------- Contingencies (See Note 8) Total liabilities and stockholders' deficit $314,118 302,673 ======== ========
Note: The condensed consolidated balance sheet at December 31, 1997 has been derived from the audited balance sheet as of that date. See accompanying notes to unaudited condensed consolidated financial statements. 3 4 INSILCO CORPORATION AND SUBSIDIARIES Condensed Consolidated Income Statements (Unaudited) (In thousands, except share and per share data)
Six Months Six Months Three Months Three Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 1998 1997 1998 1997 --------- --------- --------- --------- Sales $ 287,323 276,215 170,018 169,671 Cost of products sold 200,671 189,953 115,053 112,647 Depreciation and amortization 10,643 9,604 6,403 5,733 Selling, general and administrative expenses 52,044 47,857 34,372 31,879 --------- --------- --------- --------- Operating income 23,965 28,801 14,190 19,412 --------- --------- --------- --------- Other income (expense): Interest expense (13,805) (7,762) (6,928) (4,119) Interest income 72 2,038 21 1,589 Equity in net income of Thermalex 1,450 1,547 734 830 Other income, net 2,026 68 1,413 276 --------- --------- --------- --------- Total other income (expense) (10,257) (4,109) (4,760) (1,424) --------- --------- --------- --------- Income from continuing operations before income taxes 13,708 24,692 9,430 17,988 Income tax expense (6,494) (9,124) (4,997) (6,781) --------- --------- --------- --------- Income from continuing operations 7,214 15,568 4,433 11,207 Discontinued operations, net of tax: Income from operations, net of tax of $1,037 - 1,170 - - Gain on disposal, net of tax of $37,213 - 57,788 - - --------- --------- --------- --------- - 58,958 - - --------- --------- --------- --------- Net income $ 7,214 74,526 4,433 11,207 ========= ========= ========= ========= Basic earnings per common share: Income from continuing operations $ 1.74 1.63 1.06 1.16 Discontinued operations - 6.15 - - --------- --------- --------- --------- Basic net income per share $ 1.74 7.78 1.06 1.16 ========= ========= ========= ========= Weighted average number of common shares outstanding 4,141,471 9,585,025 4,198,060 9,652,793 ========= ========= ========= ========= Diluted earnings per common share: Income from continuing operations $ 1.69 1.58 1.02 1.14 Discontinued operations - 5.97 - - --------- --------- --------- --------- Diluted net income per share $ 1.69 7.55 1.02 1.14 ========= ========= ========= ========= Weighted average number of common shares outstanding and potential common stock 4,270,078 9,875,401 4,346,798 9,872,287 ========= ========= ========= =========
See accompanying notes to unaudited condensed consolidated financial statements. 4 5 INSILCO CORPORATION AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders' Equity (Deficit) For the Six Months Ended June 30, 1998 (unaudited) (In thousands)
Accumulated Common Stock Additional Retained Other Total Par Value Paid-In Earnings Treasury Comprehensive Stockholders' $0.001 Capital (Deficit) Stock Income Equity (Deficit) -------- --------- ---------- ------- -------- ---------------- Balance at December 31, 1997 $ 5 - (82,756) (16,268) (3,309) (102,328) Net income - - 7,214 - - 7,214 Shares issued upon exercise of stock options - 3,281 - - - 3,281 Tax benefit from exercise of stock options - 939 - - - 939 Other comprehensive income - - - - 90 90 -------- ------ ------- ------- ------ -------- Balance at June 30, 1998 $ 5 4,220 (75,542) (16,268) (3,219) (90,804) ======== ====== ======= ======= ====== ========
See accompanying notes to unaudited condensed consolidated financial statements. 5 6 INSILCO CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Six Months Six Months Ended Ended June 30, June 30, 1998 1997 -------- ------- Cash flows from operating activities: Net income $ 7,214 74,526 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 10,643 9,604 Deferred tax expense 3,917 5,579 Other noncash charges and credits (1,822) (911) Change in operating assets and liabilities: Receivables (18,009) (25,181) Inventories (1,189) (90) Payables and other (4,564) 2,946 Discontinued operations: Gain on disposal of segment - (95,001) Deferred tax expense - 25,687 Depreciation - 194 Change in operating assets and liabilities - (2,512) -------- ------- Net cash used in operating activities (3,810) (5,159) -------- ------- Cash flows from investing activities: Capital expenditures (10,884) (10,315) Other investing activities 1,621 3,039 Proceeds from divestiture, net - 112,610 -------- ------- Net cash provided by (used in) investing activities (9,263) 105,334 -------- ------- Cash flows from financing activities: Proceeds from debt borrowing 8,952 15,340 Proceeds from sale of stock 3,281 1,944 Payment of prepetition liabilities (1,647) (1,708) Retirement of long-term debt (1,166) (5,917) Purchase of treasury stock - (1,887) -------- ------- Net cash provided by financing activities 9,420 7,772 -------- ------- Effect of exchange rate changes on cash (15) (228) -------- ------- Net increase (decrease) in cash and cash equivalents (3,668) 107,719 Cash and cash equivalents at beginning of period 10,651 3,481 -------- ------- $ 6,983 111,200 ======== ======= Interest paid $ 13,453 7,332 -------- ------- Income taxes paid $ 1,114 6,293 ======== =======
See accompanying notes to unaudited condensed consolidated financial statements. 6 7 INSILCO CORPORATION AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements June 30, 1998 (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all determinable adjustments have been made which are considered necessary to present fairly the financial position and the results of operations and cash flows at the dates and for the periods presented. (2) Discontinued Operations On March 5, 1997, the Company completed the sale of its Office Products Business (consisting of the Rolodex Business, Rolodex Electronics and Curtis, each as defined below) within the Office Products/Specialty Publishing Group with the divestiture of its traditional office products business (the "Rolodex Business") for $112,610,000, net of transaction costs, resulting in a gain of $57,788,000, net of taxes of $37,213,000. The divestiture of the Rolodex Business was preceded in 1996 by the divestiture of the Rolodex electronics product line ("Rolodex Electronics") and the Company's computer accessories business, Curtis Manufacturing Co., Inc. ("Curtis"). The proceeds from these sales aggregated $21,818,000. On July 7, 1998, the Company amended its Form 10-K for the year ended December 31, 1997 and its Form 10-Q for the quarter ended March 31, 1998 to account for the sale of the Office Products Business as a discontinued operation and, accordingly, the accompanying consolidated statements of operations and cash flows for the periods prior to the sale have been reclassified. Revenues associated with the discontinued Office Products Business for the first quarter of 1997 were $10,797,000. (3) 1997 Transactions In 1997, the Company completed several material transactions affecting its ongoing operations and debt and capital structure (the "1997 Transactions") as described more fully below: o On July 3, 1997, the Company refinanced its existing debt under a new six year $200 million amended and restated Credit Agreement. o In the third quarter of 1997, the Company purchased an aggregate of 5,714,284 shares of its common stock in two transactions using the proceeds from the sale of the Rolodex Business of $112,610,000, net of transaction costs, and the proceeds received on the issuance of the $150 million aggregate principal amount of 10.25% Senior Subordinated Notes due 2007 (the "Notes"). (4) Merger Agreement The Company and Silkworm Acquisition Corporation, an affiliate of DLJ Merchant Banking Partners II (and affiliated funds) ("DLJMB"), have entered into a definitive merger agreement pursuant to which the stockholders of the Company will be paid $43.48 in cash and 0.03378 shares of retained stock (having a nominal value of $45.00 per share) of the surviving corporation. In aggregate, stockholders 7 8 INSILCO CORPORATION AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements June 30, 1998 will receive approximately $180.2 million in cash and retain 140,031 shares in the surviving entity. The retained shares will constitute approximately 10% of the common stock of the surviving company post- recapitalization. The transaction, which is estimated to have a value of approximately $448 million including existing indebtedness to be assumed or refinanced, is subject to terms and conditions customary in transactions of this type, including approval by the Company's shareholders, and will be treated as a recapitalization for accounting purposes. Affiliates of Donaldson, Lufkin & Jenrette Securities Corporation, which acted as financial advisors to DLJMB, have committed to provide all debt financing required for the transaction. In connection with the merger, DLJMB entered into a voting agreement with the Company's largest shareholder, Water Street Corporate Recovery Fund I, L.P. ("Water Street"), an affiliate of Goldman Sachs, & Co., in which Water Street has committed, subject to certain exceptions, to vote 1,783,878 shares, approximately 43% of the voting stock of the Company, in favor of the merger. As a result of the proposed merger, the Company and DLJMB will incur approximately $28,244,000 of costs and expenses in connection with consummating the transaction including professional fees, registration costs, financing costs, and compensation costs. Pursuant to the terms of the merger, all issued employee stock options will vest. The compensation expense associated with payments in respect to those vested options is estimated to be $9,094,000 to employees representing the excess of the $45.00 purchase price per share over the exercise prices of all outstanding options. In the second quarter of 1998, the Company incurred and paid $1,341,000 of costs related to the proposed merger. In addition, the Company's effective income tax rate of 53% for the second quarter of 1998 increased significantly from both the 1997 second quarter rate of 38% and the 1998 first quarter rate of 35% primarily due to the effects of the proposed merger transaction with DLJMB. Certain transaction costs expected to be incurred as part of this transaction will not be deductible for tax purposes. (5) Inventories Inventories consisted of the following at June 30, 1998 (in thousands): Raw materials and supplies $26,755 Work-in-process 21,367 Finished goods 13,747 ------- Total inventories $61,869 ======= (6) Comprehensive Income On January 1, 1998, the Company adopted the Financial Accounting Standards Board ("FASB") Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 establishes standards for reporting and display of comprehensive income in the financial statements. Comprehensive income is the total of net income and most other non-owner changes in equity. This statement expands or 8 9 INSILCO CORPORATION AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements June 30, 1998 modifies disclosures and has no impact on the Company's financial position, results of operations or cash flows. Comprehensive income for the second quarters of 1998 and 1997 totaled $4,504,000 and $10,332,000, respectively, including other comprehensive income consisting of foreign currency translation adjustments (losses) totaling $71,000 and ($875,000), respectively. Comprehensive income for the first six months of 1998 and 1997 totaled $7,304,000 and $71,876,000, respectively, including other comprehensive income consisting of foreign currency translation adjustment (losses) totaling $90,000 and ($2,650,000), respectively. (7) Earnings Per Share In 1997, the Company adopted Financial Accounting Standards Board ("FASB") Statement No. 128 ("SFAS 128"), "Earnings per Share", which simplifies the computation of earnings per share ("EPS"). All prior period earnings per share amounts have been restated to conform with SFAS 128 requirements. Under SFAS 128, the Company computes two earnings per share amounts - basic EPS and diluted EPS. Basic EPS is calculated based on the weighted average number of shares of common stock outstanding for the period. Diluted EPS is based on the weighted average number of shares of common stock outstanding for the period, including potential common stock which reflect the dilutive effect of stock options granted to employees and directors. Potential common stock for the quarters ended June 30, 1998 and 1997 totaled 148,738 and 219,494, respectively, and for the first six months of 1998 and 1997 totaled 128,607 and 290,376, respectively. (8) Contingencies The Company is implicated in various claims and legal actions arising in the ordinary course of business. Those claims or liabilities will be addressed in the ordinary course of business and be paid in cash as expenses are incurred. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. (9) Estimates In conformity with generally accepted accounting principles, the preparation of our financial statements requires our management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying actual results may ultimately differ from those estimates. 9 10 INSILCO CORPORATION AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements June 30, 1998 (10) Pro Forma Results of Operations The following financial information presents 1998 actual and 1997 pro forma consolidated net sales and results of operations. The 1997 pro forma consolidated net sales and results of operations are presented as if the 1997 Transactions had occurred at the beginning of 1997, exclusive of nonrecurring items directly attributable to the transaction. The pro forma results of operations are as follows (in thousands, except per share data):
Six Months Ended Three Months Ended June 30, June 30, ---------------- ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Net sales $287,323 276,215 170,018 169,671 Income from continuing operations 7,214 10,077 4,433 8,193 Basic income from continuing operations per share $ 1.74 2.60 1.06 2.08 Diluted income from continuing operations per share $ 1.69 2.42 1.02 1.97
(11) Contingency Gain On January 14, 1997, the Company's subsidiary, Taylor Publishing Company ("Taylor"), sued one of its principal competitors in the yearbook business, Jostens, Inc. ("Jostens"), in the U.S. District Court for the Eastern District of Texas, alleging violations of the federal antitrust laws as well as various claims arising under state law. On May 13, 1998, a verdict was rendered in favor of Taylor and on June 12, 1998, the judge presiding over the litigation in the U.S. District Court rendered his judgment in the amount of $25,225,000 plus interest at the rate of 5.434 percent. Jostens has announced that it will seek to overturn the verdict in post trial motions or on appeal. There can be no assurance as to the actual amount, if any, that Taylor will recover from Jostens. In the second quarter and first six months of 1998, the Company incurred legal fees in connection with the Jostens lawsuit of $570,000 and $768,000, respectively. 10 11 INDEPENDENT AUDITORS' REVIEW REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS INSILCO CORPORATION We have reviewed the condensed consolidated balance sheet of Insilco Corporation and subsidiaries as of June 30, 1998, the related condensed consolidated income statements for the three-month and six-month periods ended June 30, 1998 and 1997, the condensed consolidated statement of stockholders' equity (deficit) for the six months ended June 30, 1998, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 1998 and 1997. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Insilco Corporation and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year then ended (not presented herein); and in our report dated January 30, 1998, except as to Note 21, which is as of June 8, 1998, and Note 2, which is as of July 7, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Columbus, Ohio July 22, 1998 KPMG Peat Marwick LLP 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is a diversified manufacturer of automotive, telecommunications and electronics components and is a publisher of school yearbooks and other specialty publishing products. The Company's Automotive Components Group manufactures transmission components and other stamped automotive components and subassemblies at the Steel Parts unit, heat exchangers and heat exchanger tubing at the Thermal Components unit, and stainless steel tubing used predominantly in non-automotive applications at the Romac Metals unit. The Technologies Group manufactures wire and cable assemblies for the telecommunications industry, high performance data-grade connectors, precision metal stampings and power transformers through its Escod Industries, Stewart Connector Systems, Stewart Stamping, and Signal Transformer operating units, respectively. The Specialty Publishing Group, which consists of Taylor Publishing, produces student yearbooks and other specialty publishing products. The Company completed the divestiture of its Office Products business with the sale of the Rolodex Business in the first quarter of 1997. The Office Products Business is being accounted for as a discontinued operation and, accordingly, the consolidated statements of operations and cash flows for the periods prior to the sale have been reclassified. Summarized sales and operating income (loss) by business segment for the six months and three months ended June 30, 1998 compared to the corresponding periods in 1997 are set forth in the following table (in thousands) and discussed below:
Six Months Three Months Ended June 30, Ended June 30, -------------- -------------- 1998 1997 1998 1997 ---- ---- ---- ---- SALES Automotive Components Group $123,765 116,266 61,688 60,083 Technologies Group 99,017 97,961 48,807 50,867 Specialty Publishing 64,541 61,988 59,523 58,721 -------- ------- ------- ------- $287,323 276,215 170,018 169,671 ======== ======= ======= ======= OPERATING INCOME (LOSS) Automotive Components Group $ 11,471 12,600 5,979 6,924 Technologies Group 10,590 11,371 5,319 6,397 Specialty Publishing 3,281 5,114 4,251 6,113 Unallocated corporate costs (36) (284) (18) (22) Unallocated corporate merger expenses (1,341) - (1,341) - -------- ------- ------- ------- $ 23,965 28,801 14,190 19,412 ======== ======= ======= =======
12 13 SALES AND OPERATING INCOME. Total net sales from continuing operations of $170,018,000 for the second quarter of 1998 were relatively flat compared to the corresponding period in 1997 as increased sales at the Automotive Components Group and Taylor Publishing were essentially offset by a decline in the Technologies Group. In the first six months of 1998, net sales from continuing operations of $287,323,000 increased 4% or $11,108,000 from 1997 primarily due to increased sales of automotive tubing and industrial and off-road radiators at the Automotive Components Group and, to a lesser degree, increases at the Technologies Group and Specialty Publishing. The Automotive Components Group's net sales increased 3% or $1,605,000 in the second quarter of 1998 and 6% or $7,499,000 in the first six months of 1998 compared to the corresponding periods of 1997 due to increased automotive tubing sales and increased sales of radiators to original equipment manufacturers ("OEMs") serving the off-road and industrial equipment markets. These increases were partially offset by a decline in sales at the Company's heat exchanger equipment manufacturing unit, McKenica, which continues to experience a substantial decline in order backlog. In addition, Steel Parts reported lower sales from the prior year periods due to the timing of a major automotive OEM's scheduled annual plant shutdown. The Technologies Group's net sales decreased 4% or $2,060,000 in the second quarter of 1998 compared to the corresponding period in 1997 due to sales declines at Escod, Signal Transformer and Stewart Stamping primarily due to a general weakness in the electronics market. These declines were partially offset by increased sales at the El Paso stamping facility which moved from the start-up phase in 1997 to production phase in 1998 and increased sales of Stewart Connector's modular data interconnect products due to increased demand from a major telecommunications customer. Sales in the Technologies Group increased 1% or $1,056,000 in the first six months of 1998 compared to the corresponding period in 1997 due to increased sales from the El Paso stamping facility, increased second quarter sales of Stewart Connector's modular data interconnect products and increased first quarter sales of wire and cable assembly products. These increases were partially offset by declines at Signal Transformer and Stewart Stamping in the second quarter of 1998. Taylor Publishing's net sales for the second quarter and first six months of 1998 increased 1% and 4%, respectively, compared to the corresponding periods in 1996 in response to certain Taylor initiatives to increase yearbook revenues. Operating income for the second quarter decreased $5,222,000 from $19,412,000 in 1997 to $14,190,000 in 1998. The decline in operating income was due in part to increased selling, general and administrative expenses as follows: $1,341,000 of expenses related to the Company's pending merger with DLJMB, $570,000 in legal expenses (compared to $200,000 in 1997) associated with the Company's antitrust lawsuit against Jostens, Inc. (for which the Company received a favorable judgment totaling $25,225,000 which judgment is likely to be appealed and has not been reflected in the Company's operating results), and corporate officers severance expenses totaling $370,000. In addition, the Company experienced an operating loss in the second quarter at its McKenica unit due to a lack of available order backlog, increased costs, primarily higher shipping costs, from production delays at Taylor Publishing during its peak yearbook production season, and lower operating margins at Stewart Connector and Steel Parts compared to the year ago quarter. In the first six months of 1998, operating income decreased $4,836,000 to $23,965,000 from $28,801,000 in 1997. In the first six months of 1998, selling, general and administrative expenses increased over 1997 due to $1,341,000 of expense related to the merger transaction, $768,000 of expenses related to the Company's antitrust lawsuit against Jostens, Inc. (compared to $200,000 in 1997) and $700,000 of corporate officers severance expenses. Additionally, the Company experienced increased costs at Taylor Publishing and lower operating margins at Steel Parts and Stewart Connector. The Automotive Components Group's operating income in the second quarter of 1998 compared to the corresponding period of 1997 decreased to $5,979,000 from $6,924,000. The Automotive Components Group was impacted by an operating loss at the Company's McKenica unit, caused by a significant sales decline from the second quarter of 1997, and lower operating margins at Steel Parts. These declines were partially offset by improved operating income at the automotive tubing and heat exchanger businesses of Thermal Components 13 14 Group. For the first six months of 1998, the Automotive Components Group's operating income compared to the corresponding period of 1997 decreased to $11,471,000 from $12,600,000 due to an operating loss at the Company's McKenica unit caused by a significant sales decline from 1997, and lower operating margins at Steel Parts. These declines were partially offset by gains in operating performance at the Company's heat exchanger and automotive tubing business. The Technologies Group's operating income decreased to $5,319,000 in the second quarter of 1998 from $6,397,000 in the same period of 1997 due to lower demand and inventory correction by electronics market customers. Operating income at Stewart Connector decreased from the prior year period due to a less favorable sales mix of products and price degradation on certain mature connector products. At Signal Transformer operating income decreased significantly due to the lower sales volume caused by weak demand in the electronics market. For the first six months of 1998, the Technologies Group's operating income, compared to the corresponding period of 1997, decreased to $10,590,000 from $11,371,000. Operating income was impacted by the decreased sales of power transformers and competitive pricing pressures in the connector market. Partially offsetting these declines, operating income improved over the prior year at Escod, Stewart Stamping and the El Paso stamping facility. Taylor Publishing's operating income decreased to $4,251,000 from $6,113,000 in the second quarter of 1998 compared to the same period of 1997 and to $3,281,000 from $5,114,000 in the first half of 1998 compared to the prior year. These decreases from 1997 were due to increased costs of air freight following production delays in the second quarter which is the peak yearbook production and delivery period. In addition, Taylor had increased administrative expenses, including legal fees related to its lawsuit against Jostens, Inc. (see Note 11 to the Unaudited Condensed Consolidated Financial Statements). OTHER INCOME (EXPENSE). Other income for the second quarters of 1998 and 1997 included $734,000 and $830,000, respectively, of equity income from the Company's unconsolidated joint venture, Thermalex, which manufactures extruded aluminum tubing primarily for automotive air conditioning condensers. For the first six months of 1998, other income included $1,450,000 of equity income from Thermalex compared to $1,547,000 in the first six months of 1997. Interest expense increased 68% or $2,809,000 and 78% or $6,043,000 in the second quarter and first six months of 1998, respectively, from the corresponding 1997 periods due to the issuance of $150 million of 10.25% Senior Subordinated Notes (the "Notes") completed in the third quarter of 1997 (see Note 3 to the Unaudited Condensed Consolidated Financial Statements). Interest income decreased $1,568,000 and $1,966,000 in the second quarter and first six months of 1998, respectively, from the corresponding 1997 periods because the Company had substantial interest income in 1997 the proceeds on the sale of the Rolodex Business. (See Note 2 to the Unaudited Condensed Consolidated Financial Statements). "Other income, net", included in Other income (expense), for the second quarter and first six months of 1998 increased $1,137,000 and $1,958,000 from the corresponding periods of 1997, respectively. Other income in the second quarter of 1998 included gains on the sale of idle assets. INCOME TAX EXPENSE. The Company's effective income tax rate of 53% for the second quarter of 1998 increased significantly from both the 1997 second quarter rate of 38% and the 1998 first quarter rate of 35% primarily due to the effects of the proposed merger transaction with DLJMB (see Note 4 to the Unaudited Condensed Consolidated Financial Statements). Certain transaction costs expected to be incurred as part of this transaction will not be deductible for tax purposes. Considering the effects of the proposed merger transaction with DLJMB, and other favorable permanent and temporary timing items, the Company does not expect to incur any significant additional cash outlay for 1998 income taxes. CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES. Operations used $3,810,000 of cash in the first six months of 1998 as compared to using $5,159,000 in the first six months of 1997. Cash flows from operations improved over the prior year period due to the timing of cash receipts and lower tax payments. These improvements were 14 15 partially offset by higher interest payments related to the Notes (which are payable semi-annually in the first and third quarters). The Company's cash flow for periods prior to the six months ended June 30, 1997 was favorably impacted by tax loss carryforwards, which reduced the actual cash payments for the years to well below the financial statement income tax expense. The tax loss carryforwards were substantially reduced in 1997 due to the gain from the sale of the Rolodex Business. CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES. In the first six months of 1997, the Company sold its Rolodex Business for a net sales price of $112,610,000. In the first six months of 1998 and 1997, the Company received dividend distributions from Thermalex of $1,324,000 and $1,460,000, respectively. The Company's other investing activities consist principally of capital expenditures which totaled $10,884,000 and $10,315,000 for the first six months of 1998 and 1997, respectively. CASH FLOWS FROM FINANCING ACTIVITIES. Financing activities provided $9,420,000 and $7,772,000 in the first six months of 1998 and 1997, respectively. In the first six months of 1998, the Company borrowed a net amount of $8,952,000 on its revolving credit facility compared to borrowings of $15,340,000 in 1997. Term loan payments of $5,625,000 were made in the first six months of 1997. In addition, the Company paid $1,647,000 and $1,708,000 of prepetition liabilities in the first six months of 1998 and 1997, respectively. SEASONALITY. The Company's yearbook publishing business, Taylor Publishing, is highly seasonal, with a majority of its sales occurring in the second and third quarters of the year. Taylor receives significant customer advance deposits in the second half of the year. The Company's other businesses are not highly seasonal. IMPACT OF INFLATION AND CHANGING PRICES. Inflation and changing prices have not significantly affected the Company's operating results or markets. LIQUIDITY. At June 30, 1998, the Company's cash and cash equivalents and net working capital amounted to $6,983,000 and $64,249,000, respectively, representing a decrease in cash and cash equivalents of $3,668,000 and an increase in net working capital of $24,741,000 from year end 1997. The borrowing ability under the Company's revolving credit facility as of the end of the quarter was $77,859,000, including $42,450,000 available for letters of credit. Trade receivables, net, at June 30, 1998 increased 27% or $17,933,000 over the December 31, 1997 amount primarily due to increased receivables at Taylor Publishing following its peak yearbook production period (see Seasonality). MERGER AGREEMENT. The Company and Silkworm Acquisition Corporation, an affiliate of DLJ Merchant Banking Partners II (and affiliated funds) ("DLJMB"), have entered into a definitive merger agreement pursuant to which the stockholders of the Company will be paid $43.48 in cash and 0.03378 shares of retained stock (having a nominal value of $45.00 per share) of the surviving corporation. In aggregate, stockholders will receive approximately $180.2 million in cash and retain 140,031 shares in the surviving entity. The retained shares will constitute approximately 10% of the common stock of the surviving company post-recapitalization. The transaction, which is estimated to have a value of approximately $448 million including existing indebtedness to be assumed or refinanced, is subject to terms and conditions customary in transactions of this type, including approval by the Company's shareholders, and will be treated as a recapitalization for accounting purposes. Affiliates of Donaldson, Lufkin & Jenrette Securities Corporation, which acted as financial advisors to DLJMB, have committed to provide all debt financing required for the transaction. In connection with the merger, DLJMB entered into a voting agreement with the Company's largest shareholder, Water Street Corporate Recovery Fund I, L.P. ("Water Street"), an affiliate of Goldman Sachs, & Co., in which Water Street has committed, subject to certain exceptions, to vote 1,783,878 shares, approximately 43% of the 15 16 voting stock of the Company, in favor of the merger. As a result of the proposed merger, the Company and DLJMB will incur approximately $28,244,000 of estimated costs and expenses in connection with consummating the transaction including professional fees, registration costs, financing costs, and compensation costs. Pursuant to the terms of the merger, all issued employee stock options will vest. The compensation expense associated with payments in respect of those vested options is estimated to be $9,094,000 to employees representing the excess of the $45.00 purchase price per share over the exercise prices of all outstanding options. In the second quarter of 1998, the Company incurred and paid $1,341,000 of costs related to the proposed merger. In addition, the Company's effective income tax rate of 53% for the second quarter of 1998 increased significantly from both the 1997 second quarter rate of 38% and the 1998 first quarter rate of 35% primarily due to the effects of the proposed merger transaction with DLJMB. Certain transaction costs expected to be incurred as part of this transaction will not be deductible for tax purposes. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Except for the historical information contained herein, the matters discussed in this Form 10-Q included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" include "Forward Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in the Forward-Looking Statements contained herein are reasonable, no assurance can be given that such expectations will prove to have been correct. Certain important factors that could cause actual results to differ materially from expectations ("Cautionary Statements") include, but are not limited to the following: delays in new product introductions, lack of market acceptance of new products, changes in demand for the Company's products, changes in market trends, operating hazards, general competitive pressures from existing and new competitors, effects of governmental regulations, changes in interest rates, and adverse economic conditions which could affect the amount of cash available for debt servicing and capital investments. All subsequent written and oral Forward-Looking Statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. 16 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10(a) Agreement and Plan of Merger, dated as of March 24, 1998, among the Company, INR Holding Co., and Silkworm Acquisition Corporation (attached as Annex A to the prospectus included in the Company's Registration Statement on Form S-4, as amended, dated as of July 8, 1998, File No. 333-51145). 10(b) Voting Agreement, dated as of March 24, 1998, among Silkworm Acquisition Corporation, the Company and Water Street Corporate Recovery Fund I, L.P. (attached as Annex C to the prospectus included in the Company's Registration Statement on Form S-4, as amended, dated as of July 8, 1998, File No. 333-51145). 10(c) Amendment No. 1 to the Agreement and Plan of Merger, dated June 8, 1998, among the Company, INR Holding Co. and Silkworm Acquisition Corporation (attached as Annex A to the prospectus included in the Company's Registration Statement on Form S-4, as amended, dated as of July 8, 1998, File No. 333-51145). 10(d) Letter Agreement dated June 8, 1998, amending the Voting Agreement, dated as of March 24, 1998, among Silkworm Acquisition Corporation, the Company, and Water Street Corporation Recovery Fund I, L.P. (attached as Annex C to the prospectus included in the Company's Registration Statement on Form S-4, as amended, dated as of July 8, 1998. File No. 333-51145). 27 Financial Data Schedule *Incorporated by reference as indicated. (b) Reports on Form 8-K A report, dated June 9, 1998, on Form 8-K was filed during the quarter ending June 30, 1998, pursuant to Item 5 of that form. A report, dated May 14, 1998, on Form 8-K was filed during the quarter ending June 30, 1998, pursuant to Item 5 of that form. A report, dated April 29, 1998, on Form 8-K was filed during the quarter ending June 30, 1998, pursuant to Item 5 of that form. 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INSILCO CORPORATION ------------------- Registrant Date: July 24, 1998 By: /s/ David A. Kauer ------------------ David A. Kauer Vice President and Chief Financial Officer 18 EX-27.1 2 EXHIBIT 27.1
5 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 111,200 0 94,009 (3,089) 57,681 275,867 164,989 (54,592) 423,211 130,897 0 0 0 10 108,452 423,211 276,215 276,215 198,034 198,034 0 437 7,762 24,692 9,124 15,568 58,958 0 0 74,526 7.78 7.55
EX-27.2 3 EXHIBIT 27.2
5 6-MOS DEC-31-1997 JAN-01-1998 JUN-30-1998 6,983 0 87,583 (2,441) 61,869 160,757 185,131 (71,813) 314,118 96,508 0 0 0 5 (90,809) 314,118 287,323 287,323 209,361 209,361 0 835 13,805 13,708 (6,494) 7,214 0 0 0 7,214 1.74 1.69
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