SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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F O R M 10 - K
[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 COMMISSION FILE NUMBER 0-19737
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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NOEL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-2649262
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
667 MADISON AVENUE, NEW YORK, NEW YORK 10021
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 371-1400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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NONE NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.10 PER SHARE
(TITLE OF CLASS)
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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 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. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant on March 25, 1997, was approximately $130,541,626. On such date,
the last sale price of registrant's common stock was $6.50 per share. Solely for
the purposes of this calculation, shares beneficially owned by directors and
officers of the registrant and beneficial owners of in excess of 10% of the
registrant's common stock have been excluded, except shares with respect to
which such persons or entities disclaim beneficial ownership. Such exclusion
should not be deemed a determination or admission by registrant that such
individuals or entities are, in fact, affiliates of registrant.
Indicate number of shares outstanding of each of the registrant's
classes of common stock, as of March 25, 1997.
CLASS OUTSTANDING ON MARCH 25, 1997
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Common Stock, par value $.10 per share 20,421,039
DOCUMENTS INCORPORATED BY REFERENCE:
PART OF THE FORM 10-K INTO WHICH
Document THE DOCUMENT IS INCORPORATED
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Definitive Proxy Statement to Shareholders Part III, Items 10, 11, 12 and 13
for 1997 Annual Meeting
This Annual Report on Form 10-K contains, in addition to historical
information, certain forward-looking statements regarding future financial
condition and results of operations. The words "expect," "estimate,"
"anticipate," "predict," "believe," and similar expressions are intended to
identify forward-looking statements. Such statements involve certain risks and
uncertainties. Should one or more of these risks or uncertainties materialize,
actual outcomes may vary materially from those indicated.
PART I
ITEM 1. BUSINESS.
(a) General development of business.
On May 21, 1996, the Board of Directors of Noel Group, Inc. ("Noel" or
the "Company") adopted a Plan of Complete Liquidation and Dissolution (the
"Plan") which was approved by the shareholders at a Special Meeting of
Shareholders held on March 19, 1997.
PRINCIPAL PROVISIONS OF THE PLAN
Pursuant to the Plan:
(a) The Company will distribute pro rata to its shareholders, in-kind
or sell or otherwise dispose of all its property and assets. The liquidation is
expected to be concluded prior to the third anniversary of the date of the
approval of the Plan by the shareholders by a final liquidating distribution
either directly to the shareholders or to one or more liquidating trusts. Any
sales of the Company's assets will be made, in private or public transactions,
on such terms as are approved by the Board of Directors. It is not anticipated
that any further shareholder votes will be solicited with respect to the
approval of the specific terms of any particular sales of assets approved by the
Board of Directors as the Company has been advised by its counsel that such
further votes are not required by the Delaware General Corporate Law ("DGCL").
See "Sales of the Company's Assets." Reference is made to "Factors to be
Considered with Respect to Distribution or Sale of the Company's Assets" for a
discussion of the factors to be considered by the Board in making its
determination of which assets will be sold and which will be distributed
in-kind.
(b) Subject to the payment or the provision for payment of the
Company's indebtedness and other obligations, the cash proceeds of any asset
sales together with other available cash will be distributed from time to time
pro rata to the holders of the Common Stock on record dates selected by the
Board of Directors with respect to each such distribution. Only shareholders of
record on the record date set for a particular distribution will receive
distributions with respect to such record date. The Company may establish a
reasonable reserve (a "Contingency Reserve") in an amount determined by the
Board of Directors to be sufficient to satisfy the liabilities, expenses and
obligations of the Company not otherwise paid, provided for or discharged. The
net balance, if any, of any such Contingency Reserve remaining after payment,
provision or discharge of all such liabilities, expenses and obligations will
also be distributed to the Company's shareholders pro rata. The Company itself
has no current or long-term indebtedness. Bank indebtedness reflected in the
Company's consolidated financial statements consists of the bank indebtedness of
the Company's consolidated subsidiaries. Lenders generally have no recourse to
the Company for the ultimate collection of loans to the Company's subsidiaries.
The Company's accrued obligations at December 31, 1996 were approximately $8.2
million, including $4.8 million accrued with respect to outstanding options,
with the balance accrued with respect to Federal income taxes payable, the
Company's obligations under its Supplemental Executive Retirement Plan (the
"Supplemental Plan") and other accrued expenses. No assurances can be given that
available cash and amounts received on the sale of assets will be adequate to
provide for the Company's obligations, liabilities, expenses and claims and to
make cash distributions to shareholders. The Company currently has no plans to
repurchase shares
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of Common Stock from its shareholders. However, if the Company were to
repurchase its shares of Common Stock, par value $.10 per share ("Common
Stock"), from its shareholders, such repurchases would be open market purchases
and would decrease amounts distributable to other shareholders if Noel were to
pay amounts in excess of the per share values distributable in respect of the
shares purchased and would increase amounts distributable to other shareholders
if Noel were to pay amounts less than the per share values distributable in
respect of such shares. See "Liquidating Distributions; Nature; Amount; Timing"
and "Contingent Liabilities; Contingency Reserve; Liquidating Trust" below.
(c) Any distribution in-kind of the Company's holdings of securities
will be made pro rata to the holders of Common Stock on record dates selected by
the Board of Directors with respect to each such distribution. Only shareholders
of record on the record date set for a particular distribution will receive
distributions with respect to such record date. A distribution of the Company's
holdings in a security may also be effected by the distribution to Noel
shareholders of interests in a trust holding such security. If securities held
by the Company are to be distributed directly to shareholders (other than in
trust), applicable rules and regulations of the Securities and Exchange
Commission (the "Commission") will be complied with so that all shareholders
(with the possible exception of affiliates of the Company or of the issuer of
the securities which are distributed) will receive securities which will
thereafter be freely transferable by them under applicable Federal securities
laws. The securities to be distributed to the shareholders will have been
registered under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and, if required by applicable law and regulation, the Securities Act of
1933, as amended (the "Securities Act"). Accordingly, the corporation issuing
such securities will be subject to substantially the same reporting and proxy
rules as currently apply to the Company. As described under "Principal Assets of
the Company" only certain of Noel's holdings constitute securities which are
currently registered under the Exchange Act. Securities which under current law
and regulation may not be distributed without such registration will not be
distributed unless and until the required registration has been effectuated. In
addition, assuming satisfaction of required eligibility standards, the Company
may seek to cause any of its holdings of securities not currently listed on an
securities exchange or authorized for quotation on Nasdaq, to be so authorized
for quotation or listed, although there can be no assurance that the Company
will do so. If any distributed securities are not authorized for quotation
through Nasdaq or listed on an exchange, the effect may be to render such
securities illiquid and/or to diminish the price realizable upon sale. In any
event, the sale or distribution of the Company's holdings and the anticipation
of such sale or distribution resulting from the approval of the Plan may reduce,
at least temporarily, the market price of such securities and therefore the
values realized by the shareholders. See "Factors to be Considered with Respect
to Distribution or Sale of the Company's Assets."
(d) If deemed necessary by the Board of Directors for any reason, the
Company may, from time to time, transfer any of its unsold assets to one or more
trusts established for the benefit of the then shareholders which property would
thereafter be sold or distributed on terms approved by its trustees. If all of
the Company's assets (other than the Contingency Reserve) are not sold or
distributed prior to the third anniversary of the approval of the Plan by the
Company's shareholders, the Company must transfer in final distribution such
remaining assets to a trust. The Board of Directors may also elect in its
discretion to transfer the Contingency Reserve, if any, to such a trust. Any of
such trusts are referred to herein as "liquidating trusts." Notwithstanding the
foregoing, to the extent that a distribution or transfer of any asset cannot be
effected without the consent of a governmental authority, no such distribution
or transfer shall be effected without such consent. In the event of a transfer
of assets to a liquidating trust, the Company would distribute, pro rata to the
holders of its Common Stock, beneficial interests in any such liquidating trust
or trusts. It is anticipated that the interests in any such trusts will not be
transferable; hence, although the recipients of the interests would be treated
for tax purposes as having received their pro rata share of property transferred
to the liquidating trust or trusts and will thereafter take into account for tax
purposes their allocable portion of any income, gain or loss realized by such
liquidating trust or trusts, the recipients of the interests will not realize
the value thereof unless and until such liquidating trust or trusts distributes
cash or other assets to them. The Plan authorizes the Board of Directors to
appoint one or more individuals or entities to act as trustee or trustees of the
liquidating trust or trusts and to cause the Company to enter into a liquidating
trust agreement or agreements with such trustee or trustees on such terms
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and conditions as may be approved by the Board of Directors. Approval of the
Plan by the shareholders constituted the approval by such shareholders of any
such appointment and any liquidating trust agreement or agreements. For further
information relating to liquidating trusts, the appointment of trustees and the
liquidating trust agreements, reference is made to "Contingent Liabilities;
Contingent Reserve; Liquidating Trusts."
(e) The Company will close its stock transfer books and discontinue
recording transfers of shares of Common Stock on the earlier to occur of (i) the
close of business on the record date fixed by the Board of Directors for the
final liquidating distribution, or (ii) the date on which the dissolution
becomes effective under the DGCL (the "Final Record Date"), and thereafter
certificates representing shares Common Stock will not be assignable or
transferable on the books of the Company except by will, intestate succession or
operation of law. After the Final Record Date the Company will not issue any new
stock certificates, other than replacement certificates. See "Listing and
Trading of the Common Stock and interests in the Liquidating Trust or Trusts"
and "Final Record Date" below.
(f) Following completion of the foregoing steps, a Certificate of
Dissolution will be filed with the State of Delaware dissolving the Company. The
dissolution of the Company will become effective, in accordance with the DGCL
upon proper filing of the Certificate of Dissolution with the Secretary of State
or upon such later date as may be specified in the Certificate of Dissolution.
Pursuant to the DGCL, the Company will continue to exist for three years after
the dissolution becomes effective or for such longer period as the Delaware
Court of Chancery shall direct, for the purpose of prosecuting and defending
suits, whether civil, criminal or administrative, by or against it, and enabling
the Company gradually to settle and close its business, to dispose of and convey
its property, to discharge its liabilities and to distribute to its shareholders
any remaining assets, but not for the purpose of continuing the business for
which the Company was organized.
ABANDONMENT; AMENDMENT
Under the Plan, the Board of Directors may modify, amend or abandon the
Plan, notwithstanding shareholder approval, to the extent permitted by the DGCL.
The Company will not amend or modify the Plan under circumstances that would
require additional shareholder solicitations under the DGCL or the federal
securities laws without complying with the DGCL and the federal securities laws.
The Executive Committee of the Board of Directors may exercise all of
the powers of the Board of Directors in implementing the Plan. Accordingly,
references to the Board of Directors herein should be deemed also to refer to
such committee.
LIQUIDATING DISTRIBUTIONS; NATURE; AMOUNT; TIMING
Although the Board of Directors has not established a firm timetable
for distributions to shareholders, the Board of Directors will, subject to
exigencies inherent in winding up the Company's business, make such
distributions as promptly as practicable. The liquidation is expected to be
concluded prior to the third anniversary of the approval of the Plan by the
shareholders by a final liquidating distribution either directly to the
shareholders or to a liquidating trust. The Board of Directors is, however,
currently unable to predict the precise nature, amount or timing of any
distributions pursuant to the Plan. The actual nature, amount and timing of, and
record date for all distributions will be determined by the Board of Directors,
in its sole discretion, and will depend in part upon the Board of Directors'
determination as to whether particular assets are to be distributed in-kind or
otherwise disposed of through sale or other means. Reference is made to "Factors
to be Considered with Respect to Distribution or Sale of the Company's Assets"
for a discussion of the factors to be considered by the Board in making its
determination of which assets will be sold and which will be distributed
in-kind.
The Company does not plan to satisfy all of its liabilities and
obligations prior to making distributions to its shareholders, but instead will
reserve assets deemed by management and the Board of Directors to be
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adequate to provide for such liabilities and obligations. See "Contingent
Liabilities; Contingency Reserve; Liquidating Trust." Management and the Board
of Directors believe that the Company has sufficient cash to pay its current and
accrued obligations, without the sale of any of its assets. It is anticipated,
however, that the sale or distribution of all of the Company's holdings will
result in the net realization of substantial net gain and the recognition of tax
obligations. The Company believes that it has sufficient cash to enable it to
pay its estimated tax obligations. In the event this is not the case the Company
may need to raise additional cash through the sale of a portion of its holdings.
See "Factors to be Considered with Respect to Distribution or Sale of the
Company's Assets."
Uncertainties as to the precise net value of Noel's assets and the
ultimate amount of its liabilities make it impracticable to predict the
aggregate net values ultimately distributable to shareholders. Claims,
liabilities and expenses from operations (including operating costs, salaries,
income taxes, payroll and local taxes and miscellaneous office expenses),
although currently declining, will continue to occur during execution of the
Plan, and the Company anticipates that expenses for professional fees and other
expenses of liquidation will be significant. These expenses will reduce the
amount of assets available for ultimate distribution to shareholders, and, while
the Company does not believe that a precise estimate of those expenses can
currently be made, management and the Board of Directors believe that available
cash and amounts received on the sale of assets will be adequate to provide for
the Company's obligations, liabilities, expenses and claims (including
contingent liabilities) and to make cash distributions to shareholders. However,
no assurances can be given that available cash and amounts received on the sale
of assets will be adequate to provide for the Company's obligations,
liabilities, expenses and claims and to make cash distributions to shareholders.
If such available cash and amounts received on the sale of assets are not
adequate to provide for the Company's obligations, liabilities, expenses and
claims, distributions of cash and other assets to the Company's shareholders
will be reduced.
PRINCIPAL ASSETS OF THE COMPANY
Set forth below is a table setting forth Noel's principal holdings as
of March 10, 1997.
Approximate Approximate
% of % of
Outstanding Outstanding
No. of Shares of No. of Shares of
Shares of Common Stock Shares of Preferred Stock
Common as of Common Stock Preferred as of
Name of Company Stock Held March 10, 1997 Traded on Stock March 10, 1997
- --------------- ---------- -------------- ------------ ---------- --------------
HealthPlan Services 4,275,846(1) 29% New York -- --
Corporation Stock Exchange
Staffing Resources, Inc. 2,026,104(2) 16% --(3) -- --
Carlyle Industries, Inc. 2,205,814(1) 30% New York 19,312,837.5 93%
Stock Exchange Series B
Lincoln Snacks 3,769,755(1) 60% Nasdaq Small -- --
Company Cap Market
Curtis Industries, Inc. 163,449(2) 62% -- 141,000 67%
Series B
1,619
Series A 100%
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Approximate Approximate
% of % of
Outstanding Outstanding
No. of Shares of No. of Shares of
Shares of Common Stock Shares of Preferred Stock
Common as of Common Stock Preferred as of
Name of Company Stock Held March 10, 1997 Traded on Stock March 10, 1997
- --------------- ---------- -------------- ------------ ---------- --------------
Ferrovia Novoeste, 1,200,000(2) 20% -- 5,657,142 42%
S.A.
(1) These securities are registered under the Exchange Act.
(2) These securities are not registered under the Exchange Act.
(3) A limited number of shares of common stock of Staffing Resources, Inc.
("Staffing Resources") are traded in the over the counter market and prices
are quoted in the "pink sheets."
FACTORS TO BE CONSIDERED WITH RESPECT TO DISTRIBUTION OR SALE OF THE COMPANY'S
ASSETS
The sale by the Company or the distribution by the Company to its
shareholders of an appreciated asset will result in the recognition of taxable
gain by the Company to the extent the fair market value of such asset exceeds
the Company's tax basis in such asset. Accordingly, it is anticipated that the
sale or distribution by the Company of certain of its assets, including its
holdings in HealthPlan Services and Staffing Resources, will result in the
recognition by the Company of significant taxable gain. The greater the amount
of assets that are required to be sold in order to pay the taxes, the lesser the
amount of such assets available for distribution to Noel's shareholders. On
February 7, 1997, pursuant to a Stock Purchase Agreement dated as of December
18, 1996 by and among Noel. Automatic Data Processing, Inc. ("ADP") and
HealthPlan Services (the "ADP Agreement"), Noel sold to ADP 1,320,000 shares of
its common stock of HealthPlan Services for an aggregate purchase price of $26.4
million. Noel anticipates that the proceeds of such sale will be made available
to pay (i) the taxes payable as a result of the sale or disposition of the
Company's assets pursuant to the Plan and (ii) other expenses incurred in
connection with the consummation of the Plan. Any proceeds remaining after
payment of such taxes and expenses will be made available for cash distributions
to the shareholders. The Company currently believes that the proceeds of such
sale will be sufficient to pay such taxes and expenses, although there can be no
assurance that this will be the case. In the event that sale proceeds and other
available cash are insufficient to pay such taxes and expenses the Company may
be required to sell additional assets. The determination by the Board of
Directors as to which additional assets would be sold to pay any additional
taxes and expenses will depend on a variety of factors, including, the Board's
opinion as to the future prospects of the issuer of the securities, the amount
of additional cash required to be raised, the liquidity of the Company's assets,
the prices obtainable for such assets in public or privately negotiated
transactions, and a review of the Company's public holdings to ascertain which
holdings could be sold with the least disruption to the public market and
possible resultant depression in the values realizable by the Company and its
shareholders and, with respect to assets to be sold in private transactions, the
availability of purchasers for such assets. Currently, all of the Company's
public holdings are thinly traded. Accordingly, a public sale thereof might
result in a disruption in the public market. See "Liquidating Distributions;
Nature; Amount; Timing."
Set forth below is a brief description of the status of Noel's current
plans to sell or distribute its principal holdings. Except as set forth below,
the Board of Directors and management have not yet determined whether or when to
sell or distribute any of its holdings. The determination of which holdings will
be sold and which will be distributed in-kind to the Company's shareholders will
be based on the judgment of the Board of Directors and management as to whether
the sale or distribution of a particular holding will result in realization of
the
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highest possible value to Noel's shareholders and will be based on several
factors, including, in addition to the factors referred to in the preceding
paragraph and not necessarily in order of priority (i) the Board's opinion as to
the future prospects of the issuer of the securities; (ii) whether the security
in question is publicly traded; (iii) the anticipated effect on the market price
of a distribution as opposed to a sale; (iv) whether a distribution or a sale
would require registration under the Securities Act and the Exchange Act; (v)
the need to raise cash through sales of securities to pay corporate taxes
payable upon the distribution and sale of the Company's assets; (vi) whether an
orderly public market exists and would continue to exist after distribution; and
(vii) the availability of one or more purchasers of the security in a private
sale. With respect to securities held by the Company which are expected to be
distributed to shareholders (other than in trust), applicable laws and
regulations of the Commission will be complied with so that all shareholders
(with the possible exception of affiliates of the Company or of the issuer the
securities of which are distributed) will receive securities which will
thereafter be freely transferable by them under applicable Federal securities
laws. The securities to be distributed to the shareholders will have been
registered under the Exchange Act and, if required by applicable law and
regulation, the Securities Act. Accordingly, the corporation issuing such
securities will be subject to substantially the same reporting and proxy rules
as currently apply to the Company. Securities which under current law and
regulation may not be distributed without such registration will not be
distributed unless and until the required registration has been effectuated. In
addition, assuming satisfaction of required eligibility standards, the Company
may seek to cause any of its holdings of securities not currently listed on an
securities exchange or authorized for quotation through Nasdaq to be so
authorized for quotation or listed, although there can be no assurance that the
Company will do so. If any distributed securities are not authorized for
quotation through Nasdaq or listed on an exchange, the effect may be to render
such securities illiquid and/or to diminish the price realizable upon sale.
The sale or distribution of the Company's holdings and the anticipation
of such sale or distribution resulting from the approval of the Plan may, at
least temporarily, reduce the market price of such securities and therefore the
values realized by the shareholders.
HealthPlan Services Corporation
Noel holds 4,275,846 shares of common stock of HealthPlan Services,
representing approximately 29% of the outstanding common stock, with an
estimated value as of March 10, 1997 of approximately $77.5 million. The Company
currently intends to distribute most of its shares of common stock of HealthPlan
Services to its shareholders and such distributed shares in the hands of the
distributees may be subject to temporary restrictions on transferability. Noel
may, however, engage in one or more private or registered public sales, as
market conditions permit, of shares of HealthPlan Services to raise cash to pay
the estimated taxes payable upon distribution or sale of Noel's assets, which
cash is not available from existing cash resources or defrayed by the proceeds
from the sale of other assets. On February 7, 1997, pursuant to the ADP
Agreement, ADP purchased from Noel 1,320,000 shares (approximately 9%) of the
shares of common stock of HealthPlan Services at a price of $20 per share in
cash or $26.4 million in the aggregate. Other than pursuant to a distribution to
Noel's shareholders, pursuant to the ADP Agreement, Noel has agreed not to
transfer its remaining shares of common stock of HealthPlan Services prior to
September 30, 1997.
Staffing Resources, Inc.
Noel currently holds 2,026,104 shares of common stock of Staffing
Resources, representing approximately 16% of the outstanding shares of such
common stock, with an estimated value as of March 10, 1997 of approximately
$32.4 million. Noel has not determined the method of disposition of its interest
in Staffing Resources or whether this asset or a portion thereof will be sold or
distributed in-kind or the timing of any such decision. Staffing Resources is
contemplating filing a registration statement with the Commission prior to the
end of the third quarter of 1997 with respect to a public offering of its common
stock. There can be no assurance that such public offering will be consummated.
In the event a public offering is consummated, it is anticipated that the shares
would be listed for trading on Nasdaq's National Market, although there can be
no assurance that
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this will be the case. Although it is not anticipated that Noel's shares of
common stock of Staffing Resources will be included in the proposed registration
statement, Noel's determination as to the disposition of its shares of common
stock of Staffing Resources may depend on the consummation and timing of such
offering.
Carlyle Industries, Inc.
Noel currently holds 2,205,814 shares of common stock of Carlyle
Industries, Inc., (which prior to March 26, 1997 was known as Belding Heminway
Company, Inc.) ("Carlyle"), representing approximately 30% of the outstanding
shares of such common stock, with an estimated value, based upon market price,
as of March 10, 1997 of approximately $4.7 million. In addition, Noel currently
holds 19,312,837.5 shares of Series B preferred stock of Carlyle, representing
approximately 93% of the outstanding shares of such Series B preferred stock,
with an estimated value as of March 10, 1997 of approximately $22.0 million. In
January 1997, the Pension Benefit Guarantee Corporation ("PBGC") notified
Carlyle that it was considering whether the sale of its Thread Division would
create an obligation under ERISA to immediately fund, in whole or in part,
Carlyle's unfunded liability to its defined benefit plan. In February 1997, at
the request of the PBGC, Carlyle agreed to provide the PBGC with at least 30
days advance notice of any proposed dividend, stock redemption, stockholder
buyback or other distribution to shareholders of any class of equity prior to
March 31, 2002. In consideration of such agreement, the PBGC agreed not to take
action solely with respect to the proposed sale transaction. If the PBGC takes
the position that Carlyle should fund, in whole or in part, the unfunded
liability to the defined benefit plan, after receiving notice of a proposed
dividend, stock redemption, stockholder buyback or other distribution to
shareholders, and if such position is upheld, the ability of Carlyle to take any
such proposed action would be adversely affected. Carlyle's unfunded liability
to its deferred benefit plan is estimated to be approximately $1.5 million as of
December 31, 1996, when measured in accordance with financial accounting
standards. Were the plan to be terminated or were the PBGC to require that the
plan be funded according to different standards, Carlyle's obligation to
transfer cash to the plan could be $3.5 million to $4.5 million higher than this
amount. Any actual amounts transferred in the event of a plan termination, would
depend on PBGC action and market conditions at the time of transfer and could
differ significantly from this estimate. Noel currently has not determined the
method or timing of the disposition of its interest in Carlyle.
Lincoln Snacks Company
Noel holds 3,769,755 shares of common stock of Lincoln Snacks,
representing approximately 62% of the outstanding shares of Lincoln Snacks'
common stock, with an estimated value as of March 10, 1997 of approximately $4.7
million. Noel has not determined the method of disposition of its interest in
Lincoln Snacks or whether this asset or a portion thereof will be sold or
distributed in-kind or the timing of any such decision.
Curtis Industries, Inc.
Noel holds 163,449 shares of common stock of Curtis Industries, Inc.
("Curtis") representing approximately 62% of the outstanding shares of Curtis'
common stock. In addition, Noel holds 141,000 shares of Curtis' Series B
convertible preferred stock (representing 67% of such outstanding shares) and
1,619 shares of Curtis' Series A convertible preferred stock (representing 100%
of such outstanding shares). The estimated value as of March 10, 1997 of Noel's
holdings in Curtis is approximately $18.4 million. Noel has not yet decided upon
the method of disposition of its interest in Curtis or whether this asset or a
portion thereof will be sold or distributed in-kind or the timing of any such
decision. Noel is currently considering (i) the sale of its interest in Curtis
in one or more private transactions; and (ii) the registration of its shares of
common stock of Curtis under the Securities Act and the Exchange Act followed by
the sale or distribution in-kind of such shares.
Ferrovia Novoeste, S.A.
Noel holds 1,200,000 shares of common stock of Novoeste, representing
20% of the outstanding shares of common stock and 5,657,142 shares of preferred
stock of Novoeste, representing approximately 42% of such
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outstanding shares. It is anticipated that such ownership will be reduced to 18%
of the common stock and 42.3% of the preferred stock following the proposed
issuance of additional shares to certain employees. The estimated value of
Noel's interest in Novoeste as of March 10, 1997 is $8.0 million. The transfer
of Noel's interest in Novoeste is subject to certain restrictions, both
regulatory and contractual. Noel does not anticipate a public distribution to
its shareholders of its interest in Novoeste and expects to dispose of its
interest therein through private sales or sales on the public market in Brazil
as permitted by Brazilian law and the terms of its investment therein.
Other Holdings
Noel holds interests in various other entities with an aggregate
estimated liquidation value of $2.7 million as of March 10, 1997 none of which
is material to the Company. It is anticipated that Noel will dispose of its
interests in such entities for cash.
SALES OF THE COMPANY'S ASSETS
The Plan gives the Board of Directors the authority to sell all of the
assets of the Company. As of March 31, 1997, no sale has been effected pursuant
to the Plan and no agreement to sell any of the assets of the Company has been
reached. Sales of the Company's assets will be made on such terms as are
approved by the Board of Directors and may be conducted by competitive bidding,
public sales on applicable stock exchanges or over-the-counter or privately
negotiated sales. Any sales will only be made after the Board of Directors has
determined that any such sale is in the best interests of the shareholders. It
is not anticipated that any further shareholder votes will be solicited with
respect to the approval of the specific terms of any particular sales of assets
approved by the Board of Directors, as the Company has been advised by its
counsel that such further votes are not required by the DGCL. The prices at
which the Company will be able to sell its various assets will depend largely on
factors beyond the Company's control, including, without limitation, the rate of
inflation, changes in interest rates, the condition of financial markets, the
availability of financing to prospective purchasers of the assets and United
States and foreign regulatory approvals. In addition, the Company may not obtain
as high a price for a particular property as it might secure if the Company were
not in liquidation.
The Board of Directors will not engage in a sale of all or
substantially all of its assets to an affiliate or group of affiliates. At this
stage, the Company cannot exclude the possibility, however, that some of the
Company's assets may be sold to one or more of the Company's officers, directors
or affiliates, but such a transaction will be effectuated only if such
transaction is approved by a disinterested majority of the Board of Directors.
There have been no negotiations regarding any such sale.
CONDUCT OF THE COMPANY FOLLOWING ADOPTION OF THE PLAN
Since the adoption of the Plan by the Board of Directors, the Board and
management have effectively terminated the Company's participation in
acquisitions. Consequently, since the adoption of the Plan by the Board of
Directors, Louis Marx, Jr., has resigned as a director and as Chairman of the
Executive Committee, and John A. MacDonald and Thomas C. Israel have resigned as
directors. It is anticipated that certain of the present directors and principal
executive officers of the Company will continue to serve in such capacities. The
continuing officers and directors will receive compensation for the duties then
being performed as determined by the Compensation Committee of the Board of
Directors. Neither the Board of Directors nor the Compensation Committee have
established specific guidelines for determination of the compensation to be paid
to directors and officers of the Company. Such compensation will be determined
by evaluation of all relevant factors, including, without limitation, the
efforts of such individuals in successfully implementing the Plan and
compensation payable in the financial community to individuals exercising
similar authority and bearing similar responsibilities.
-8-
As a consequence of the approval of the Plan by Noel's shareholders,
Noel's activities are limited to winding up its affairs, taking such action as
may be necessary to preserve the value of its assets and distributing its assets
in accordance with the Plan. The Company will seek to distribute or liquidate
all of its assets in such manner and upon such terms as the Board of Directors
determines to be in the best interests of the Company's shareholders.
The Company shall continue to indemnify its officers, directors,
employees and agents in accordance with its certificate of incorporation, as
amended, and by-laws and any contractual arrangements, for actions taken in
connection with the Plan and the winding up of the affairs of the Company. The
Company's obligation to indemnify such persons may be satisfied out of the
assets of any liquidating trust. The Board of Directors and the trustees of any
liquidating trust, in their absolute discretion, are authorized to obtain and
maintain insurance as may be necessary to cover the Company's indemnification
obligations under the Plan.
CONTINGENT LIABILITIES; CONTINGENCY RESERVE; LIQUIDATING TRUST
Under the DGCL the Company is required, in connection with its
dissolution, to pay or provide for payment of all of its liabilities and
obligations. The Company will pay all expenses and fixed and other known
liabilities, or set aside as a Contingency Reserve assets which it believes to
be adequate for payment thereof. The Company is currently unable to estimate
with precision the amount of any Contingency Reserve, which may be required, but
any such amount (in addition to any cash contributed to a liquidating trust, if
one is utilized) will be deducted before the determination of amounts available
for distribution to shareholders.
The actual amount of the Contingency Reserve will be based upon
estimates and opinions of management and the Board of Directors and derived from
consultations with outside experts and review of the Company's estimated
operating expenses, including, without limitation, anticipated compensation
payments, estimated investment banking, legal and accounting fees, rent, payroll
and other taxes payable, miscellaneous office expenses and expenses accrued in
the Company's financial statements. There can be no assurance that the
Contingency Reserve in fact will be sufficient. Subsequent to the establishment
of the Contingency Reserve, the Company will distribute to its shareholders any
portions of the Contingency Reserve which it deems no longer to be required.
After the liabilities, expenses and obligations for which the Contingency
Reserve had been established have been satisfied in full, the Company will
distribute to its shareholders any remaining portion of the Contingency Reserve.
If deemed necessary, appropriate or desirable by the Board of Directors
for any reason, the Company may, from time to time, transfer any of its unsold
assets to one or more liquidating trusts established for the benefit of the then
shareholders which property would thereafter be sold or distributed on terms
approved by its trustees. The Board of Directors and management may determine to
transfer assets to a liquidating trust in circumstances where the nature of an
asset is not susceptible to distribution (for example, interests in intangibles)
or where, in view of the limited trading market for the publicly traded
securities in question, it would not be in the best interests of Noel and its
shareholders for such securities to be distributed directly to the shareholders
at such time. If all of the Company's assets (other than the Contingency
Reserve) are not sold or distributed prior to the third anniversary of the
approval of the Plan by the Company's shareholders, the Company must transfer in
final distribution such remaining assets to a liquidating trust. The Board of
Directors may also elect in its discretion to transfer the Contingency Reserve,
if any, to such a liquidating trust. Notwithstanding the foregoing, to the
extent that the distribution or transfer of any asset cannot be effected without
the consent of a governmental authority, no such distribution or transfer shall
be effected without such consent. The purpose of a liquidating trust would be to
distribute such property or to sell such property on terms satisfactory to the
liquidating trustees, and distribute the proceeds of such sale after paying
those liabilities of the Company, if any, assumed by the trust, to the Company's
shareholders. Any liquidating trust acquiring all the unsold assets of the
Company will assume all of the liabilities and obligations of the Company and
will be obligated to pay any expenses and liabilities of the Company which
remain unsatisfied. If the Contingency Reserve transferred to the
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liquidating trust is exhausted, such expenses and liabilities will be satisfied
out of the liquidating trust's other unsold assets.
The Plan authorizes the Board of Directors to appoint one or more
individuals or entities to act as trustee or trustees of the liquidating trust
or trusts and to cause the Company to enter into a liquidating trust agreement
or agreements with such trustee or trustees on such terms and conditions as may
be approved by the Board of Directors. It is anticipated that the Board of
Directors will select such trustee or trustees on the basis of the experience of
such individual or entity in administering and disposing of assets and
discharging liabilities of the kind to be held by the liquidating trust or
trusts and the ability of such individual or entity to serve the best interests
of the Company's shareholders. It is anticipated that a majority of the trustees
would be required to be independent of Noel's management. Approval of the Plan
by the shareholders constituted the approval by the Company's shareholders of
any such appointment and any liquidating trust agreement or agreements.
The Company has no present plans to use a liquidating trust or trusts,
but the Board of Directors believes the flexibility provided by the Plan with
respect to the liquidating trusts to be advisable. The trust would be evidenced
by a trust agreement between the Company and the trustees. The purpose of the
trust would be to serve as a temporary repository for the trust property prior
to its disposition or distribution to Noel's shareholders. The transfer to the
trust and distribution of interests therein to Noel's shareholders would enable
Noel to divest itself of the trust property and permit Noel's shareholders to
enjoy the economic benefits of ownership thereof. Pursuant to the trust
agreement, the trust property would be transferred to the trustees immediately
prior to the distribution of interests in the trust to Noel's shareholders, to
be held in trust for the benefit of the shareholder beneficiaries subject to the
terms of the trust agreement. It is anticipated that the interests would be
evidenced only by the records of the trust and there would be no certificates or
other tangible evidence of such interests and that no holder of Common Stock
would be required to pay any cash or other consideration for the interests to be
received in the distribution or to surrender or exchange shares of Common Stock
in order to receive the interests. It is further anticipated that pursuant to
the trust agreements (i) a majority of the trustees would be required to be
independent of Noel's management; (ii) approval of a majority of the trustees
would be required to take any action; (iii) the trust would be irrevocable and
would terminate after, the earlier of (x) the trust property having been fully
distributed, or (y) a majority in interest of the beneficiaries of the trust, or
a majority of the trustees, having approved of such termination, or (z) a
specified number of years having elapsed after the creation of the trust.
UNDER THE DGCL, IN THE EVENT THE COMPANY FAILS TO CREATE AN ADEQUATE
CONTINGENCY RESERVE FOR PAYMENT OF ITS EXPENSES AND LIABILITIES, OR SHOULD SUCH
CONTINGENCY RESERVE AND THE ASSETS HELD BY THE LIQUIDATING TRUST OR TRUSTS BE
EXCEEDED BY THE AMOUNT ULTIMATELY FOUND PAYABLE IN RESPECT OF EXPENSES AND
LIABILITIES, EACH SHAREHOLDER COULD BE HELD LIABLE FOR THE PAYMENT TO CREDITORS
OF SUCH SHAREHOLDER'S PRO RATA SHARE OF SUCH EXCESS, LIMITED TO THE AMOUNTS
THERETOFORE RECEIVED BY SUCH SHAREHOLDER FROM THE COMPANY OR FROM THE
LIQUIDATING TRUST OR TRUSTS.
If the Company were held by a court to have failed to make adequate
provision for its expenses and liabilities or if the amount ultimately required
to be paid in respect of such liabilities exceeded the amount available from the
Contingency Reserve and the assets of the liquidating trust or trusts, a
creditor of the Company could seek an injunction against the making of
distributions under the Plan on the ground that the amounts to be distributed
were needed to provide for the payment of the Company's expenses and
liabilities. Any such action could delay or substantially diminish the cash
distributions to be made to shareholders and/or interest holders under the Plan.
-10-
FINAL RECORD DATE
The Company will close its stock transfer books and discontinue
recording transfers of shares of Common Stock on the Final Record Date, and
thereafter certificates representing shares of Common Stock will not be
assignable or transferable on the books of the Company except by will, intestate
succession or operation of law. After the Final Record Date the Company will not
issue any new stock certificates, other than replacement certificates. It is
anticipated that no further trading of the Company's shares will occur on or
after the Final Record Date. All liquidating distributions from the Company or a
liquidating trust on or after the Final Record Date will be made to shareholders
according to their holdings of Common Stock as of the Final Record Date.
Subsequent to the Final Record Date, the Company may at its election require
shareholders to surrender certificates representing their shares of the Common
Stock in order to receive subsequent distributions. Shareholders should not
forward their stock certificates before receiving instructions to do so. If
surrender of stock certificates should be required, all distributions otherwise
payable by the Company or the liquidating trust, if any, to shareholders who
have not surrendered their stock certificates may be held in trust for such
shareholders, without interest, until the surrender of their certificates
(subject to escheat pursuant to the laws relating to unclaimed property). If a
stockholder's certificate evidencing the Common Stock has been lost, stolen or
destroyed, the stockholder may be required to furnish the Company with
satisfactory evidence of the loss, theft or destruction thereof, together with a
surety bond or other indemnity, as a condition to the receipt of any
distribution.
LISTING AND TRADING OF THE COMMON STOCK AND INTERESTS IN THE LIQUIDATING TRUST
OR TRUSTS
The Common Stock is currently listed for trading on the Nasdaq Stock
Market's National Market. For continued listing, a company, among other things,
must have $1 million in net tangible assets (or $4 million if the issuer has
sustained losses from continuing operations and/or net losses in three of its
four most recent fiscal years), $1 million in market value of securities in the
public float and a minimum bid price of $1.00 per share (or, in the alternative,
$3 million in market value of securities in the public float and $4 million of
net tangible assets). If the Company is unable to satisfy the Nasdaq Stock
Market's National Market maintenance criteria in the future, its Common Stock
may be delisted therefrom prior to the Final Record Date. In such event, the
Company may seek to list its securities on the Nasdaq Stock Market's Small Cap
Market. However, if it was unsuccessful, trading, if any, in the Common Stock
would thereafter be conducted in the over-the-counter market in the so-called
"pink sheets" or the NASD's "Electronic Bulletin Board". As a consequence of
such delisting, an investor would likely find it more difficult to dispose of,
or to obtain quotations as to, the price of the Common Stock. Delisting of the
Common Stock may result in lower prices for the Common Stock than would
otherwise prevail.
It is anticipated that the interests in a liquidating trust or trusts
will not be transferable, although no determination has yet been made. Such
determination will be made by the Board of Directors and management prior to the
transfer of unsold assets to the liquidating trust and will be based on, among
other things, the Board of Directors and managements' estimate of the value of
the assets being transferred to the liquidating trust or trusts, tax matters and
the impact of compliance with applicable securities laws. Should the interests
be transferable, the Company plans to distribute an information statement with
respect to the liquidating trust or trusts at the time of the transfer of assets
and the liquidating trust or trusts may be required to comply with the periodic
reporting and proxy requirements of the Exchange Act. The costs of compliance
with such requirements would reduce the amount which otherwise could be
distributed to interest holders. Even if transferable, the interests are not
expected to be listed on a national securities exchange or quoted through Nasdaq
and the extent of any trading market therein cannot be predicted. Moreover, the
interests may not be accepted by commercial lenders as security for loans as
readily as more conventional securities with established trading markets.
As shareholders will be deemed to have received a liquidating
distribution equal to their pro rata share of the value of the net assets
distributed to an entity which is treated as a liquidating trust for tax
purposes, the
-11-
distribution of non-transferable interests could result in tax liability to the
interest holders without their being readily able to realize the value of such
interests to pay such taxes or otherwise.
BUSINESS OF NOEL PRIOR TO ADOPTION OF PLAN
Prior to the approval of the Plan by Noel's shareholders on March 19,
1997, Noel conducted its principal operations through small and medium-sized
operating companies in which Noel holds controlling or other significant equity
interests. Noel's holdings in operating companies currently include holdings in
(i) HealthPlan Services, a provider of marketing, administration and rush
management services and solutions for health and other benefit programs; (ii)
Staffing Resources, a provider of diversified staffing services to a broad range
of businesses in various industries throughout the Mid-Atlantic, Southeastern,
Southwestern and Rocky Mountain regions of the United States; (iii) Carlyle, a
distributor of a line of home sewing and craft products, principally buttons;
(iv) Curtis, a national distributor of fasteners, security products, chemicals,
automotive replacement parts, fittings and connectors, tools and hardware; (v)
Lincoln Snacks, a manufacturer and marketer of caramelized pre-popped popcorn in
the United States and Canada; and (vi) Novoeste, a Brazilian corporation which
operates the concession for the western network of the Brazilian federal rail
system which was privatized by the Brazilian government.
Noel was incorporated in New York in December 1969 and reincorporated
in Delaware in December 1986. Noel was originally a closely-held special purpose
investment vehicle until March 1988, when under new management organized by
Louis Marx, Jr., the former Chairman of the Executive Committee, Noel adopted
its strategy of concentrating on the acquisition of control and other
significant equity interests in established operating entities. Noel's principal
office is located at 667 Madison Avenue, New York, New York 10021-8029 and its
telephone number is (212) 371-1400.
Prior to the approval of the Plan, Noel's business strategy was to
acquire controlling and other significant equity interests in established
privately and publicly-held operating companies with superior risk/return
characteristics. Noel sought to forge strong working relationships with the
management of its operating companies and to apply Noel's experience to key
strategic, operating and financial decisions. Generally, Noel worked with
operating management to identify opportunities to enhance revenue, operating
income and cash flow. In other cases, Noel had identified and attracted new
management to its operating companies. In order to participate actively in the
management of Noel's operating companies, Noel was generally represented on the
boards of directors of such companies, and members of Noel's management from
time to time, acted as executive officers of such companies.
(b) Financial information about industry segments.
The information required is set forth in Note 17 under the caption
"Notes to Consolidated Financial Statements" on page F-30 hereof.
(c) Narrative description of business.
The following information relates to Noel's principal operating
companies. The percentage appearing next to the name of each company indicates
the common equity ownership currently held by Noel.
HEALTHPLAN SERVICES CORPORATION (29%)
HealthPlan Services, including its newly acquired operating units,
Consolidated Group, Inc. ("Consolidated Group") and Harrington Services
Corporation ("Harrington"), is a provider of marketing, administration, and risk
management services and solutions for health and other benefit programs.
HealthPlan Services provides these services for over 125,000 small businesses,
plan holders and large, self-funded
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organizations, covering approximately 2.6 million members in the United States.
HealthPlan Services' clients include managed care organizations, insurance
companies, integrated health care delivery systems, self-funded benefit plans,
and health care purchasing alliances. HealthPlan Services and its operating
units function solely as service providers generating fee-based income and do
not assume any underwriting risk.
HealthPlan Services' principal executive offices are located at 3501
Frontage Road, Tampa, Florida 33607; its telephone number is (813) 289-1000. Two
Noel executive officers, Joseph S. DiMartino (who is also a director of Noel)
and Samuel F. Pryor, IV, and three additional Noel directors, William L.
Bennett, James K. Murray, Jr. and James G. Niven, currently serve on HealthPlan
Services' Board of Directors.
STRATEGY
HealthPlan Services' strategy is to grow revenue and increase earnings
through new product development, broader distribution of existing managed care
products, and the addition of new payors, such as health maintenance
organizations ("HMO's"), integrated health care delivery systems, and other
managed care providers. HealthPlan Services desires to build economies of scale
by adding administrative services contracts with larger groups and by
opportunistic expansion of its small employer business. HealthPlan Services also
intends to further support the development of information-based products for its
payors and other customers.
RECENT TRANSACTIONS AND COMPANY REORGANIZATION
Health Risk Management, Inc.
On September 12, 1996, HealthPlan Services entered into a Plan and
Agreement of Merger (the "Merger Agreement") with HealthPlan Services Alpha
Corporation, a Delaware corporation and wholly owned subsidiary of HealthPlan
Services, and Health Risk Management, Inc., a Minnesota corporation ("HRM"),
which provides for the acquisition of HRM by HealthPlan Services in a merger
transaction (the "HRM Merger"). In March 1997, HealthPlan Services and HRM
mutually agreed to terminate the Merger Agreement due to unexpected delays and
the parties' unwillingness to consummate a transaction that might be of less
value and dilutive to their respective shareholders in the near term. In
connection with the termination, HealthPlan Services purchased 200,000 shares of
HRM common stock, representing approximately 4.5% of HRM shares outstanding, at
a price of $12.50 per share. These shares are not registered under the federal
or state securities laws and are subject to restrictions on transfer. HealthPlan
Services and HRM also have committed to continue to jointly market their
respective products and services under the terms of a marketing agreement
established in September 1996. HRM provides comprehensive, integrated healthcare
management, information, and health benefit administration services to
employers, insurance companies, unions, HMOs, preferred provider organizations
("PPOs"), physician hospital organizations ("PHOs"), hospitals, and governmental
units in the United States and Canada.
Consolidated Group, Inc. and Harrington Services Corporation Acquisitions;
Company Reorganization
On July 1, 1996, HealthPlan Services acquired all of the issued and
outstanding stock of Consolidated Group and three affiliated entities for
approximately $61.9 million in cash. Consolidated Group, headquartered in
Framingham, Massachusetts, specializes in providing medical benefits
administration and other related services for health care plans. As of December
31, 1996, Consolidated Group provided these services for over 23,000 small
businesses covering approximately 250,000 members. Consolidated Group was
founded in 1971, and was a principal competitor of HealthPlan Services in the
small employer market prior to the acquisition. Between July 1, 1996 and
December 31, 1996, Consolidated Group had revenues of $32.1 million.
On July 1, 1996, HealthPlan Services acquired all of the issued and
outstanding stock of Harrington for $32.5 million cash and 1,400,110 shares of
HealthPlan Services' common stock valued at $30.1 million. Harrington,
headquartered in Columbus, Ohio, provides administrative services to large
self-funded benefit plans
-13-
covering approximately 960,000 members as of December 31, 1996. Its revenues
between July 1, 1996 and December 31, 1996 were $42 million.
In the third quarter of 1996, after the consummation of the
Consolidated Group and Harrington acquisitions, HealthPlan Services implemented
a reorganization of its management structure. In connection with this
reorganization, a chief operating officer was appointed for each of HealthPlan
Services' four business units: Health Care Alliances, Small Group Business,
Large Group Business, and The New England. Timothy T. Clifford, the President
and Chief Executive Officer of Consolidated Group, became Chief Operating
Officer Small Group Business, and Robert R. Parker, the Chairman and Chief
Executive Officer of Harrington, became Chief Operating Officer - Large Group
Business. Richard M. Bresee became Chief Operating Officer - Health Care
Alliances, and Gary L. Raeckers became Chief Operating Officer - The New
England.
Medirisk, Inc. Transaction
On January 8, 1996, HealthPlan Services entered into an agreement with
Medirisk, Inc. ("Medirisk"), a provider of proprietary information products that
track the price and utilization of medical procedures, to purchase $2.0 million
of Medirisk preferred stock. HealthPlan Services also agreed to lend up to $10.0
million over four years in the form of debt, for which HealthPlan Services would
receive detachable warrants to purchase Medirisk common stock at $0.015 per
share. As of December 31, 1996, HealthPlan Services had purchased $2.0 million
of preferred stock of Medirisk, and loaned Medirisk $6.9 million to finance the
acquisition of two health care data companies. Medirisk used the funds to
finance its expansion through the development of additional products and the
acquisition of additional health care information businesses. On January 29,
1997, Medirisk completed an initial public offering of 2.3 million shares of its
common stock at a purchase price of $11.00 per share, and Medirisk subsequently
fully satisfied its debt obligation to HealthPlan Services. In connection with
the offering, HealthPlan Services' Medirisk preferred stock was converted into
Medirisk common stock. As of January 29, 1997, HealthPlan Services beneficially
owned 480,442 shares (representing approximately 11.1%) of Medirisk common stock
on a fully diluted basis, assuming exercise of all outstanding warrants.
Third Party Claims Management, Inc. and Diversified Brokerage Corporation
Acquisitions
During 1995, HealthPlan Services also acquired all of the stock of a
small, self funded benefits administrator known as Third Party Claims
Management, Inc. ("TPCM"), and substantially all of the assets of another
administrator known as Diversified Group Brokerage Corporation ("DGB"). After
performing a review for impairment of goodwill related to TPCM and DGB, in the
third quarter of 1996 HealthPlan Services recorded a charge against earnings of
$7.1 million relating to the TPCM transaction and $6.6 million relating to the
DGB transaction. The $6.6 million of goodwill written off in connection with the
DGB acquisition, is due to, among other things, higher than originally expected
attrition rates resulting in ongoing decreases in net revenues on a quarterly
basis, due in part to increased pricing resulting from a reinsurance carrier's
departure from DGB's market, and an inadequate distribution system, as evidenced
by an underperforming sales force and greater than anticipated operating costs.
The $7.1 million of goodwill written off in connection with the TPCM
acquisition, due to, among other things, higher than originally expected
attrition rates, significantly higher than expected claims experience (claims
filed per enrollee), and greater than anticipated operating costs due to the
limited capability of TPCM's infrastructure. HealthPlan Services has worked to
consolidate the operations of TPCM and DGB, resulting in the termination of
substantially all of the operations at the Memphis, Tennessee and Irving, Texas
offices of TPCM in 1996 and 1997.
PRODUCTS AND SERVICES
HealthPlan Services provides marketing, administration, and risk
management outsourcing services and solutions for managed care organizations,
insurance companies, integrated health care delivery systems, self-funded
benefit plans, and health care purchasing alliances.
-14-
Marketing
HealthPlan Services, through its Small Group Operating Unit, provides
managed care companies, insurance companies, and integrated health care delivery
systems with marketing services targeting the individual and small business
market. HealthPlan Services' marketing activity includes sales support for
insurance agents through a direct field sales force and telephone sales
representatives, and master brokers. HealthPlan Services maintains relationships
with over 100,000 insurance agents, including independent brokers and captive
insurance agents who work exclusively for underwriters that have contracted with
HealthPlan Services to provide individual and small group health plans through
their agent force. This agent relationship provides HealthPlan Services with a
significant distribution conduit to the small business market in the United
States. HealthPlan Services also helps design managed care products based on
market research, actuarial analysis of claims adjudicated, and interaction with
payor organizations. These products often include features that address the
particular needs of the small business employer, including specialized dental
and disability coverage. On behalf of its payors, HealthPlan Services designs
and implements communications programs that are aimed at educating insurance
agents about the relative merits of particular product offerings. In addition,
HealthPlan Services develops consumer awareness programs, including advertising
and media planning, for state-sponsored health care purchasing alliances.
Administration
HealthPlan Services provides enrollment, premium billing and
collection, and claims administration services for all types of benefit plans.
HealthPlan Services' enrollment services include underwriting, issuance of
enrollment cards, and case renewal. As a provider of billing and collection
services, HealthPlan Services sends monthly bills on behalf of payors to insured
parties, receives premium payments from the insureds, and pays service fees to
agents. HealthPlan Services also implements premium changes due to rate changes,
employee hiring or termination, and other group changes. HealthPlan Services'
claims administration services include eligibility verification, copayment
calculation, repricing, claims adjudication, and preparation of explanation of
benefits forms. HealthPlan Services also processes claims on behalf of
self-funded companies and other payors by issuing checks to health care
providers on payor accounts.
Risk Management
HealthPlan Services' risk management products include traditional
utilization review services as well as information and analysis services.
HealthPlan Services provides utilization review through its Care Management
units. These units are staffed by qualified nurses and other qualified medical
personnel to provide precertification approval (a review mechanism for screening
costs in advance of medical care); medical case management (to contain the costs
of prolonged and catastrophic cases); and special claims review services.
HealthPlan Services has broad reporting and analytic capabilities relating to
all aspects of its services. HealthPlan Services' information services include
preparation of reports regarding agent production, enrollment, and frequency and
type of claims. HealthPlan Services intends to continue to enhance its
information-based products. In particular, HealthPlan Services plans to pursue
opportunities with its strategic partner, Medirisk, to develop information-based
products from HealthPlan Services' database of administered claims. HealthPlan
Services also expects to expand its risk management business unit significantly
through the consummation of the HRM Merger.
CUSTOMERS
HealthPlan Services provides services on behalf of a wide range of
health care payors, including managed care organizations, insurance companies,
integrated health-care delivery systems, self-funded benefit plans, and health
care purchasing alliances.
-15-
Small Group Customers
Through its Small Business Operating Unit, HealthPlan Services has over
25 years of experience in helping insurance companies and other payors access
the small employer market. Since October 1994, HealthPlan Services has expanded
its customer base from traditional indemnity carriers to include HMOs, PPOs, and
other managed care entities, and has worked with its traditional indemnity
carriers to develop managed care products. HealthPlan Services provides
marketing and administrative services for several major managed care products
through relationships with The New England Mutual Life Insurance Company and New
England Life Insurance Company (together, "The New England"), United HealthCare
Corporation ("United HealthCare"), Kaiser Permanente Insurance Company, and U.S.
Healthcare, Inc. Effective January 1, 1997, HealthPlan Services assumed
marketing and administrative services for TMG Life Insurance Company's ("TMG's")
medical, dental, and group life benefit business. Based on TMG's 1996 revenues,
HealthPlan Services expects that TMG's employee benefits business will generate
over $20 million in revenue in 1997. This figure is, however, a forward looking
estimate and is not necessarily indicative of actual results, which could be
different upon the occurrence of any one of several factors, including greater
than expected attrition.
HealthPlan Services continues to pursue relationships with several new
managed care clients. In July 1995, HealthPlan Services began providing services
in Florida for an affiliate of Physicians Corporation of America ("PCA"). In the
first quarter of 1996, HealthPlan Services expanded its services to include
PCA's Alabama affiliate. In the fourth quarter of 1996, PCA transferred its
Alabama operations to Health Partners of Alabama, Inc. HealthPlan Services and
Health Partners of Alabama, Inc. are currently negotiating a continuation of the
Alabama relationship. In April 1996, HealthPlan Services and an affiliate of
Foundation Health Corporation, a national managed care company, entered into an
agreement whereby HealthPlan Services will be Foundation's exclusive marketer
and administrator in the State of Florida for individual and small group
products (for groups with 15 or fewer employees). In addition, HealthPlan
Services will market and administer Foundation's individual program and will
offer a dual option PPO/HMO for small groups with between 15 and 50 employees.
In July 1996, HealthPlan Services entered into an agreement with Provident
Indemnity Life Insurance Company to market and administer its managed indemnity
product to individuals in several states.
HealthPlan Services also established relationships with integrated
delivery systems. In May 1996, HealthPlan Services entered into an agreement to
provide administrative services for an affiliate of the Florida Independent
Physicians Association ("FIPA"), a network of independent physicians
associations representing physicians in the State of Florida.
In 1996 HealthPlan Services explored new distribution channels for its
indemnity and managed care products. In the third quarter of 1996, HealthPlan
Services established a computer "home page" on the Internet. In addition to
providing information about HealthPlan Services, the home page offers price
quotations for a Celtic Life Insurance Company product marketed through
HealthPlan Services.
To date, HealthPlan Services has not generated any significant revenue
from any of its new managed care, integrated delivery system, or distribution
relationships, and it is unclear when, if ever, significant revenue will
materialize from these ventures.
In the first quarter of 1996, HealthPlan Services and Employers Life
Insurance Company of Wausau ("ELOW") entered into an agreement to offer health
care products to small businesses in several states. In the fourth quarter of
1996, HealthPlan Services and ELOW agreed to discontinue this product offering
due to unexpected market conditions. In 1995, HealthPlan Services entered into a
memorandum of understanding with Coastal Healthcare Group, Inc. ("Coastal")
regarding possible marketing and administrative services arrangements.
HealthPlan Services has not entered into a definitive agreement with Coastal
regarding such arrangements and is not currently engaged in negotiations with
Coastal. In 1995 HealthPlan Services and Mutual of Omaha agreed to expand their
existing marketing relationship to include Mutual of Omaha's HMOs. The
-16-
pricing and other terms of this relationship have not been negotiated, and
HealthPlan Services is not currently providing services for Mutual of Omaha's
HMO product.
Typically, HealthPlan Services' insurance and managed care payors sign
contracts with HealthPlan Services that are cancelable by either party without
penalty upon advance written notice of between 90 days and one year, and are
also cancelable upon a significant change of ownership of HealthPlan Services.
The New England, Celtic Life Insurance Company, and Ameritas Life Insurance
Corporation accounted for approximately 31.0%, 23.0%, and 10.7%, respectively,
of HealthPlan Services' consolidated revenue in 1995 and approximately 16.2%,
12.5%, and 6.5%, respectively, of HealthPlan Services' consolidated revenue for
the year ended December 31, 1996. Although this decline is due primarily to
HealthPlan Services' expansion through acquisitions, which has diluted its
concentration of revenues from these sources. It should be noted that HealthPlan
Services continues to experience higher lapses than originations in the business
written with these payors, and it is not certain when, if ever, this trend will
be reversed.
The difficulty experienced by HealthPlan Services in originating
business for HealthPlan Services' indemnity payors during the 1990s is
representative of the problems facing the industry in general. Escalating
medical costs have rendered fee-for-service products less competitive, as
evidenced by the explosive growth during this decade of HMO products, which
utilize a higher degree of demand and disease management applications.
HealthPlan Services cannot predict the success with which indemnity payors will
be able to manage their medical loss ratios in the future, which ability affects
the competitive nature of the pricing they can offer with respect to their
products. Such pricing could have a direct effect on HealthPlan Services'
ability to originate, maintain, and grow indemnity business in the future.
In the third quarter of 1996, Metropolitan Life Insurance Company
completed a merger with The New England. HealthPlan Services is unable to
predict what effect, if any, such merger will ultimately have on HealthPlan
Services' relationship with The New England.
Historically, the majority of Consolidated Group's business was written
with Travelers Insurance Company, which recently combined with the health
insurance business of Metropolitan Life Insurance Company to form MetraHealth.
Subsequently, MetraHealth was acquired by United HealthCare, one of the nation's
leading HMO companies. Between July 1, 1996 and December 31, 1996, this business
represented approximately 75% of Consolidated Group's revenue, or approximately
13% of HealthPlan Services' consolidated revenue. HealthPlan Services is
dependent on United HealthCare's commitment to the small group market and on
Healthcare Services' ultimate success in converting the MetraHealth business to
United HealthCare's new products. Should Healthcare Services have to move this
business to another payor, it could experience higher than normal lapse rates
and lower than normal margins.
The abandonment of the small group market by either The New England,
Celtic Life Insurance Company, or Ameritas Life Insurance Corporation, indemnity
payor's to manage medical costs and the degree to which HealthPlan Services is
successful with respect to the MetraHealth conversion, could have a material
adverse effect on HealthPlan Services. With respect to the business serviced by
HealthPlan Services, a decision by any one of these payors to administer and
distribute a significant portion of its products directly to small businesses
could also have a material adverse effect on HealthPlan Services.
Large Group Customers
HealthPlan Services has been in the administrative services only
("ASO") business since 1987, when HealthPlan Services assumed administrative
responsibility for the employee health insurance plan of D&B. Harrington,
HealthPlan Services' newly acquired subsidiary, was founded in 1953 and is an
administrator of self- funded health care plans for large corporations,
government sector employers, Taft-Hartley plans, and associations. In addition
to providing claims administration services, the Large Group Operating Unit also
offers its clients workers' compensation and unemployment cost control programs.
As a result of the TPCM, DGB,
-17-
and Harrington acquisitions, HealthPlan Services added multiple operating
facilities throughout the country for its ASO business. Through these
acquisitions, as well as new business sales and case acquisition, as of December
31, 1996 this business unit provided administrative services to approximately
3,500 clients with over 850,000 employees, representing approximately 1.6
million members.
Health Care Purchasing Alliances
During the 1990's, many small businesses were unable to obtain health
care coverage at affordable prices. In response, some states have formed
state-sponsored health care purchasing alliances. Several privately funded
groups also have formed health care purchasing alliances, in some cases with
state support. HealthPlan Services is the administrator for four state-sponsored
health care purchasing alliances (in Florida, Kentucky, North Carolina, and the
State of Washington) and three private alliances.
In 1996, the alliance unit was still not profitable. HealthPlan
Services' 1996 alliance revenues were $6.5 million, or approximately 3% of
HealthPlan Services' consolidated revenues. Management continues to review
operating procedures to improve profitability and has entered into discussions
with its Florida alliance customers to renegotiate the existing contracts, which
are scheduled to expire in 1997. Unless HealthPlan Services is successful in
renegotiating its alliance contracts, it may elect to exit the alliance
business.
HealthPlan Services is currently the administrator for each of the
regional Florida Community Health Purchasing Alliances ("CHPAs"), established by
the State of Florida. In the fourth quarter of 1994, and in the third quarter of
1996, HealthPlan Services took significant charges to reflect the estimated loss
HealthPlan Services would incur over the life of the Florida CHPA contracts. In
February 1995, HealthPlan Services was selected as the statewide administrator
for North Carolina's State Health Plan Purchasing Alliance program, which was
launched in the fourth quarter of 1995. Insurance carriers in North Carolina
have not yet shown significant support for this alliance. In April 1995,
HealthPlan Services was selected as the statewide administrator for Kentucky's
health care purchasing alliance program, which commenced in July 1995. In the
third quarter of 1995, HealthPlan Services opened an office in Lexington,
Kentucky to administer the Kentucky program. The Kentucky plan is fully
operational and was profitable in 1996, with over 270,000 members covered as of
December 31, 1996. In February 1997, the Kentucky alliance announced that at the
expiration of the current term of HealthPlan Services' contract on June 30,
1997, the alliance will break out various services currently being performed
under the contract and seek separate bids for those services. HealthPlan
Services chose not to submit a formal bid to provide such services. In December
1995, HealthPlan Services was selected to develop and implement statewide
marketing and selected administrative services for the "Basic Health Plan," the
State of Washington's health care purchasing alliance program, beginning in the
second quarter of 1996. The Washington contract is still in the developmental
stage, and its ultimate success and acceptance by the residents of the State of
Washington cannot be predicted at this time.
HealthPlan Services has incurred substantial expenses in connection
with the start-up of its Florida, Kentucky, North Carolina, and Washington
alliance administration contracts and will incur similar start-up expenses in
connection with other state health care purchasing alliance business obtained by
HealthPlan Services in the future. HealthPlan Services does not anticipate
recovering all of its start-up expenses incurred in connection with the alliance
administration contracts during their initial terms, and there can be no
assurance that the health care purchasing alliance contracts will be profitable
for HealthPlan Services. In addition, each of the health care purchasing
alliance contracts currently held by HealthPlan Services contains a broad
cancellation provision that enables the alliance to cancel the contract on
relatively short notice without penalty. HealthPlan Services has developed
marketing expertise and proprietary software to handle the enrollment, billing,
disbursement, and reporting services required under the Alliance contracts,
including client-server technology. HealthPlan Services believes that its
marketing expertise and proprietary software may provide it with a competitive
advantage in pursuing alliance contracts.
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Prior to bidding for a health care purchasing alliance contract,
HealthPlan Services estimates the revenues to be derived over the life of the
contract, along with the costs to perform the services connected therewith.
HealthPlan Services reviews for adverse commitments at each reporting date. This
review includes an evaluation of actual results during the period and other
factors, such as anticipated rates, volume, and costs. HealthPlan Services
management then updates its estimates of expected revenues and expenses over the
remaining life of the contract. If the revised estimates show a net loss over
the remaining life of the contract, HealthPlan Services recognizes the loss
immediately.
The primary material risks associated with alliance contracts are:
1. Private enterprises will not accept the use of a
government-sponsored program and will therefore fail to
provide an adequate number of enrollees to support a revenue
base (over which fixed costs may be spread).
2. The number of enrollees per group will be so low that margins
are insufficient to cover the fixed costs of set up for the
group.
3. The level of marketing, enrollment, and customer service
required will be materially higher than expected, thereby
increasing the variable costs required under the contract.
4. The independent agents on whom HealthPlan Services relies to
distribute the product are not enthusiastic about the alliance
programs, as a result, program enrollment fails to meet
expectations.
Since 1985, Consolidated Group has worked with Associated Industries of
Massachusetts ("A.I.M") to offer specially designed health care plans to A.I.M.
member companies. In September 1995, Small Business United of Texas ("SBUT"), a
non-profit business association, selected HealthPlan Services to provide
administrative services for its affiliated health care purchasing alliance.
HealthPlan Services has not entered into a definitive agreement with the SBUT
alliance. In November 1995, HealthPlan Services began administering health care
benefits for the South Broward Hospital District self-funded benefits plans. In
January 1996, HealthPlan Services began providing claims administration services
for some of the member employers of Healthcare Sarasota, Inc., a coalition of
employers in Sarasota, Florida.
In 1996, the alliance unit, in the aggregate, was still not profitable.
Management continues to review operating procedures to improve profitability,
and has entered into discussions with several Florida CHPA Boards in order to
renegotiate the existing contracts, which are scheduled to expire in 1997.
Unless HealthPlan Services is successful in renegotiating its contracts, it may
elect to exit the alliance business.
INFORMATION TECHNOLOGY
HealthPlan Services' central data processing facilities are located in
its Tampa, Florida, Framingham, Massachusetts, Columbus, Ohio and Elmonte,
California. HealthPlan Services operates in a three tiered architectural
environment. A large IBM mainframe and a DEC platform supports the large volume
of data and transactions processed by HealthPlan Services on an annual basis.
Since 1990, HealthPlan Services has invested in client-server technology to
support the front-end sales and marketing function. HealthPlan Services utilizes
personal computer workstations in a local-area and wide area network to deliver
information and images to the desktop. HealthPlan Services also utilizes a
variety of other technologies to meet specific business needs, including
interactive voice response for sales and services, point-of-service devices for
claims processing, and optical character recognition for entry of data from
forms.
-19-
HealthPlan Services completed four acquisitions during 1995 and 1996
and intends to create a common technology platform for all of its business
operations. In addition, HealthPlan Services expects to eliminate redundant
facilities and personnel as part of its ongoing integration of acquired
businesses. These efforts could take several years and the costs, though
significant, cannot be determined at this time.
COMPETITION
HealthPlan Services faces competition and potential competition from
traditional indemnity insurance carriers, Blue Cross/Blue Shield organizations,
managed care organizations, third party administrators and utilization review
companies, risk management companies and healthcare informatics companies.
HealthPlan Services competes principally on the basis of the price and quality
of services. Many large insurers have actively sought the claims administration
business of self-funded programs and have begun to offer utilization review and
other managed health care services similar to the services offered by HealthPlan
Services. Many of HealthPlan Services' competitors and potential competitors are
considerably larger and have significantly greater resources than HealthPlan
Services.
GOVERNMENT REGULATION
HealthPlan Services is subject to regulation under the health care and
insurance laws and other statutes and regulations of all 50 states, the District
of Columbia and Puerto Rico. Many states in which HealthPlan Services provides
claims administration services require HealthPlan Services or its employees to
receive regulatory approval or licensure to conduct such business. Provider
networks are also regulated in many states and certain states require the
licensure of companies, such as HealthPlan Services, which provide utilization
review services. HealthPlan Services' operations are dependent upon its
continued good standing under applicable licensing laws and regulations. Such
laws and regulations are subject to amendment or interpretation by regulatory
authorities in each jurisdiction. Generally, such authorities have relatively
broad discretion when granting, renewing, or revoking licenses or granting
approvals. These laws and regulations are intended to protect insured parties
rather than stockholders, and differ in content, interpretation and enforcement
practices from state to state. Moreover, with respect to many issues affecting
HealthPlan Services, there is a lack of guiding judicial and administrative
precedent. Certain of these laws could be construed by state regulators to
prohibit or restrict practices which have been significant factors in HealthPlan
Services' operating procedure for many years. HealthPlan services could risk
major erosion and even "rebate" exposure in these states if state regulators
were to deem HealthPlan Services' practices to be impermissible.
The Employment Retirement Income Security Act of 1974, as amended
("ERISA"), governs the relationships between certain health benefit plans and
the fiduciaries of those plans. In general, ERISA is designed to protect the
ultimate beneficiaries of the plans from wrongdoing by the fiduciaries. ERISA
provides that a person is a fiduciary of a plan to the extent that such person
has discretionary authority in the administration of the plan or with respect to
the plan's assets. Each employer is a fiduciary of the plan it sponsors, but
there can also be other fiduciaries of a plan. ERISA imposes various express
obligations on fiduciaries. These obligations include barring a fiduciary from
permitting a plan to engage in certain prohibited transactions with parties in
interest or from acting under an impermissible conflict of interest with a plan.
Generally, a party in interest with respect to a plan includes a fiduciary of
the plan and persons that provide services to the plan. The application of ERISA
to the operations of HealthPlan Services and its customers is an evolving area
of law and is subject to ongoing regulatory and judicial interpretations of
ERISA. Although HealthPlan Services strives to minimize the applicability of
ERISA to its business and to ensure that HealthPlan Services' practices are not
inconsistent with ERISA, there can be no assurance that courts or the Department
of Labor (the "DOL") will not in the future take positions contrary to the
current or future practices of HealthPlan Services. Any such contrary positions
could require changes to HealthPlan Services business practices (as well as
industry practices generally) or result in liabilities of the type referred to
above. Similarly, there can be no assurance that future statutory changes to
ERISA will not significantly affect HealthPlan Services and its industry.
-20-
HealthPlan Services' Consolidated Group subsidiary is undergoing a DOL
audit in which the DOL has raised various questions about the application of
ERISA to the way that subsidiary does business. This audit is ongoing, and there
can be no assurance that the DOL will not take positions which could require
changes to the way this subsidiary operates, or result in the imposition of
administrative fines and penalties.
EMPLOYEES
With the acquisitions of Consolidated Group and Harrington and the
assumption of the employee benefits business of TMG, HealthPlan Services
employed 3,364 employees as of March 20, 1997. HealthPlan Services' labor force
is not unionized with the exception of Harrington's subsidiary, American Benefit
Plan Administrators, Inc., which administers Taft-Hartley plans. HealthPlan
Services believes its relationship with its employees is good.
TRADEMARKS
HealthPlan Services utilizes various service marks, trademarks and
trade names in connection with its products and services, most of which are the
property of HealthPlan Services' payors. Although HealthPlan Services considers
its service marks, trademarks and trade names important in the operation of its
business, the business of HealthPlan Services is not dependent on any individual
service mark, trademark or trade name.
STAFFING RESOURCES, INC. (16%)
Staffing Resources, which was formed in August 1993 in connection with
the acquisition of a group of five staffing businesses located in the Southwest
region of the United States, is a provider of diversified staffing services to a
broad range of businesses in various industries throughout the Mid-Atlantic,
Southeastern, Southwestern and Rocky Mountain regions of the United States.
Staffing Resources' principal executive offices are located at 222 West
Las Colinas Boulevard, Suite 1250, Irving, Texas 75039 and its telephone number
is (214) 432-3000. Stanley R. Rawn, Jr., the Chief Executive Officer of Noel, is
Chairman of the Executive Committee of Staffing Resources. Mr. Rawn and Joseph
S. DiMartino, Chairman of the Board of Noel, currently serve on Staffing
Resources' seven member Board of Directors.
Staffing Resources currently operates approximately 148 branches under
a variety of brand names in 16 states, and is organized into two core groups --
support services and strategic services.
SUPPORT SERVICES. Staffing Resources' support services group offers
traditional secretarial, clerical and light industrial support, including
numerous light duty manufacturing applications.
STRATEGIC SERVICES. Staffing Resources' strategic services group
provides clients with industry specialists in financial information, information
technology, skilled manufacturing and transportation services.
Financial and Accounting. Staffing Resources' financial and accounting
personnel provide its client base with a means of handling the uneven or peak
workloads that arise from periodic financial and tax reporting requirements,
accounting system conversions, acquisitions and special projects. As a result,
assignments for these employees tend to be for a longer term than a typical
support services assignment. Clients are provided with staffing employees
qualified to work as auditors, tax accountants, controllers, financial
executives, bookkeepers and data entry clerks.
-21-
Information Technology. The strategic services group also provides
clients requiring information technology expertise with staffing employees
qualified to work as software developers, business analysts, network engineers
and network and program analysts.
Skilled Manufacturing Support. The strategic services group's
manufacturing support personnel act in a variety of capacities requiring (i)
electronics manufacturing skills, including PCB solderers, electronic and
mechanical assemblers, engineering technicians and quality control specialists;
(ii) machine tool and manufacturing skills, including machinists, tool and die
makers, welders and machine operators; and (iii) engineering assistance,
including software engineers, circuit designers, industrial engineers and
production control specialists.
Transportation Specialists. Staffing Resources' truck drivers and
machine operators offer clients a means of handling the uneven or peak workloads
for short and long-haul over the road truck driving. Staffing Resources has
Class "A", "B" and "C" Certified Drivers, short and long-haul over the road
drivers and heavy equipment operators.
SALES AND MARKETING
The needs for each of the staffing services provided by Staffing
Resources differ significantly by locale and by type of service. Staffing
Resources obtains clients through its sales force and by referrals from existing
clients. Staffing Resources' sales force consists primarily of full-time
employees whose duties include calling on potential clients and maintaining
relationships with existing clients.
OPERATIONS
Field Offices. Staffing Resources operates approximately 148 branches
throughout the Mid-Atlantic, Southwest, Rocky Mountain and Southeast regions of
the United States. Staffing Resources typically commences operations in a market
by offering support services followed by the introduction of strategic services
as dictated by each market. Because all services are not appropriate for all
markets, Staffing Resources evaluates each market individually as it expands.
Corporate Services. Staffing Resources is in the process of integrating
the operational, financial and administrative functions of its field offices
into its corporate headquarters in Irving, Texas. The corporate services
provided by corporate headquarters include centralized payroll, billing,
finance, accounting, risk management, systems, marketing support, training and
human resources services for the field offices.
Management Information Systems. Staffing Resources has undertaken a
program to integrate the management information systems of its various branch
offices into a national information network. This network will allow the branch
offices to connect with the corporate systems of E-mail, accounting, payroll and
administration. Following its implementation, this system will also permit local
access to jobs and employee databases.
FACILITIES
Staffing Resources currently operates in 16 states through a network of
approximately 148 branches, including its corporate headquarters in Irving,
Texas. All of these offices are leased. A full-service branch office typically
occupies approximately 1,500 to 2,500 square feet, with lease terms that range
from three to five years.
-22-
REGULATION
Certain states in which Staffing Resources operates, or may operate in
the future, have licensing requirements and other regulations specifically
governing the provision of staffing services. There can be no assurance that
states in which Staffing Resources operates, or may in the future operate, will
not adopt more strict licensing requirements or other regulations that would
affect or limit Staffing Resources' operations.
In May 1994, Staffing Resources established a partially self-insured
workers' compensation program with CNA Insurance. Staffing Resources maintains
workers' compensation insurance for all claims in excess of $250,000 per
occurrence. Staffing Resources and its insurer have established appropriate
reserves for the uninsured portion of claims, but such reserves are only
estimates of future claims payments and there can be no assurance that Staffing
Resources' future workers' compensation obligations will not exceed the amount
of its reserves. Staffing Resources has limited experience with its workers'
compensation program and workers' compensation costs may increase as a result of
changes in Staffing Resources' experience rating or applicable laws. Staffing
Resources may also incur costs related to claims made at a higher rate in the
future due to such causes as higher than anticipated losses from known claims,
an increase in the number and severity of new claims or a catastrophic accident.
An increase in the number of overall cost of workers' compensation claims could
significantly increase Staffing Resources' premiums and might have a material
adverse effect on its results.
EMPLOYEES
As of January 1, 1997, Staffing Resources employed approximately 1,100
full-time employees. None of Staffing Resources' employees, including its
staffing employees, are represented by a collective bargaining agreement.
In order to recruit its staffing employees, Staffing Resources uses
classified newspaper advertising, supported by its recruiting offices, and makes
direct contact through trained recruiters with public and private agencies,
trade schools and colleges who can refer personnel seeking employment. Staffing
Resources also compensates its workforce for referring other applicants.
Training of staffing employees, when required, is accomplished by
computerized tutorials, videos, on-the-job training by clients and by
specialized skill training. Reference checking is performed on a selective basis
according to the judgment of recruiting personnel and the requirements of each
assignment.
CARLYLE INDUSTRIES, INC. (30%)
Carlyle (which prior to March 26, 1997 was known as Belding Heminway
Company, Inc.) and its subsidiaries currently distribute a line of home sewing
and craft products, principally buttons. Carlyle and its subsidiaries operate in
one industry segment: Consumer Products. Consumer products are principally
buttons used in consumer product applications.
Carlyle was the surviving corporation in a merger (the "Merger") with
BH Acquisition Corporation, a Delaware corporation wholly-owned by Noel. The
Merger, completed on October 29, 1993, was the second step of a transaction
pursuant to which Noel acquired the entire equity interest in Carlyle.
On July 31, 1996, Carlyle completed the sale of its Home Furnishing's
Division. Proceeds received on the sale adjusted for closing costs and changes
in net asset value of the division subsequent to the contract date totaled $8.2
million, which proceeds were used to pay down Carlyle's revolving credit
facility. The Home Furnishing's Division operated under the name Belding Hausman
and produced low to medium priced fabrics for use in decorative home furnishing
products such as draperies, upholstery, slip covers and pillows.
-23-
On March 26, 1997, pursuant to an Asset Purchase Agreement dated as of
December 12, 1996 (the "Sale Agreement"), among Carlyle, certain of its
subsidiaries and Hicking Pentecost PLC and its subsidiary, HP Belt Acquisition
Corporation, Carlyle sold its Thread Division to Hicking Pentecost PLC for an
aggregate cash consideration of $54,924,200, subject to adjustment, plus the
assumption of certain liabilities. The Thread Division was engaged in the
manufacturing and marketing of industrial thread and special engineered yarn
used in non-sewing products. As part of the sale of the Thread Division, the
corporate name "Belding Heminway" was transferred to Hicking Pentecost PLC.
Carlyle's principal executive offices are located at 1430 Broadway, New
York, New York; its telephone number is (212) 556-4700. Karen Brenner, a
Managing Director of Noel, is currently Chairman, President and Chief Executive
Officer of Carlyle and Ms. Brenner, Joseph S. DiMartino, Chairman of Noel,
Samuel F. Pryor, IV, a Managing Director of Noel and William L. Bennett, a Noel
director, currently serve on Carlyle's eight member Board of Directors.
As a result of the sale of the Thread Division and the Home Furnishings
Division, Carlyle is currently principally engaged in the distribution of home
sewing and craft products, mainly buttons. Carlyle's button business is
conducted through the Blumenthal/Lansing Company, which was formed from the
merger of B. Blumenthal & Co., Inc., a wholly-owned subsidiary of Carlyle, and
Lansing Company, Blumenthal's wholly-owned subsidiary. The corporate name was
changed to Blumenthal/Lansing Company on January 1, 1995.
Set forth below is a description of Carlyle's Button Division as
described in Carlyle's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1996 filed with the Commission on March 14, 1997.
PRODUCTS. The Button Division packages and distributes an extensive
variety of buttons for home sewing and crafts to mass merchandisers, specialty
chains, and independent retailers and wholesalers throughout the United States.
Buttons and buckles, sold under the La Mode'r' and Le Chic'r' registered
trademarks and the Le Bouton, La Petites, Classic and Boutique brands names, are
available in thousands of styles, colors, materials and sizes to meet every
consumer need. The Button Division also produces and distributes private-label
lines for some of the nation's best-known retailers. The Button Division also
markets complementary product lines, including appliques, craft kits, and
fashion and jewelry accessories to its home sewing and craft customers.
MARKETS. The Button Division's products are sold primarily for use in
the home sewing market where buttons are used for garment construction,
replacement, and the upgrading and/or restyling of ready-to-wear clothing. More
modest button usage is found in craft projects, home decorating, and garment
manufacturing on a small scale and done by dressmakers and other cottage
industry consumers. The market is served by large fabric specialty chains, mass
merchandisers (such as Wal-Mart), local and regional fabric specialty chains of
4 to 25 stores, independent fabric stores, notions wholesalers, and craft stores
and chains.
PRODUCT SOURCING, DISTRIBUTION AND SALES. The button lines are sourced
from more than 75 button manufacturers around the world, with most buttons
coming from the traditional markets of Holland, Italy, and the Orient. Button
manufacturers specialize in different materials (plastic, wood, glass, leather,
metal, jewel, pearl, etc.) and have varying approaches to fashion, coloration,
finishing, and other factors.
All imported and domestically purchased buttons are shipped to the
Lansing, Iowa facility for carding and distribution to customers. As thousands
of button styles are received in bulk, computerized card printing systems enable
Blumenthal/Lansing to economically imprint millions of button cards with such
necessary data as style number, price, number of buttons, bar code, country of
origin, and care instructions. The Button Division also blister-packages and
shrink-wraps some products. Shipments are made primarily to individual stores
with a small percentage to warehouse locations.
The Button Division's accounts include major fabric specialty chains,
most mass merchandisers carrying buttons, most regional fabric specialty chains
and many independent stores. Mass merchandisers and specialty
-24-
chain customers are characterized by the need for sophisticated electronic
support, rapid turn-around of merchandise and direct-to-store service for
hundreds to thousands of locations nationwide. The Button Division enjoys
long-standing ties to all of its key accounts and the average relationship with
its ten largest customers extends over 20 years. Although the Button Division
has more than 1,000 accounts, its sales are highly concentrated and the loss of
one or more of its large customers would have a material adverse effect on the
Button Division. Due to the large account nature of its customer base, most
customer contact is coordinated by management; additional sales coverage is
provided by regional sales managers. Certain retailers are serviced by
independent representatives and representative organizations.
COMPETITIVE FACTORS. The retail button market is served by several
competitors. Carlyle competes primarily with JHB International and Streamline
Industries, Inc., which are full-line button packagers and distributors in the
general button market and several smaller competitors in the promotional button
market. Carlyle management believes that the principal bases for competition are
product innovation, range of selection, brand names, price, display techniques
and speed of distribution.
Carlyle management believes that retail button distribution depends on
trends in the home-sewing market, which Carlyle management believes is mature.
The retail customer base for buttons has changed substantially over the past two
decades as department stores and small independent fabric stores have been
replaced by mass merchandisers and specialty retail chains which have continued
to consolidate recently through mergers and store closings.
The bulk of the Button Division's revenues are derived in the United
States. In 1996, less than 1% of revenues related to export sales. Inventory
levels remain relatively constant throughout the year. The Button Division's
policies related to merchandise return and payment terms are in accordance with
industry standards.
EMPLOYEES; LABOR RELATIONS. The Button Division has approximately 165
employees, two of whom are covered by a collective bargaining agreement with the
United Auto Workers which expires on May 31, 1997. Carlyle management believes
relations with both the non-union and unionized employees are satisfactory.
PROPERTIES. The Button Division operates from a 104,000 square foot
packaging and distribution facility located in Lansing, Iowa which is owned by
Carlyle. Divisional management, sales and marketing, product development,
fashion and purchasing are headquartered in a 6,300 square foot office facility
in Carlstadt, New Jersey which is leased by Carlyle. Carlyle management believes
that the Button Division's facilities are in good condition and adequate for the
Division's present and reasonably foreseeable future needs.
In addition to these properties, Carlyle owns a 214,000 square foot
former dye facility located in Emporia, Virginia, which facility is leased to
the purchaser of the Home Furnishings' Division under a triple net fifty-year
lease with a nominal base rent.
LEGAL PROCEEDINGS
General. Carlyle is not currently a party to any significant
litigation except as indicated below.
Environmental Matters. Carlyle is subject to a number of federal, state
and local environmental laws and regulations, including those concerning the
treatment, storage and disposal of waste, the discharge of effluents into
waterways, the emissions of substances into the air and various health and
safety matters. In addition, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA") and comparable
state statutes generally impose joint and several liability on present and
former owners and operators, transporters and generators for remediation of
contaminated properties regardless of fault. These parties are typically
identified as "potentially responsible parties" or PRPs.
-25-
Several years ago a property, owned by the Carlyle Manufacturing
Company, Inc. (which prior to March 26, 1997 was known as Heminway & Bartlett
Manufacturing Company, Inc.), a subsidiary wholly-owned by Carlyle prior to
consummating the sale of the Thread Division ("H&B"), located at 30 Echo Lake
Road in Watertown, Connecticut was being investigated by the United States
Environmental Protection Agency ("EPA") for possible inclusion on the National
Priorities List promulgated pursuant to CERCLA but no such listing has yet
occurred. A Site Inspection conducted at this location detected certain on-site
soil and groundwater contamination, as well as contamination of nearby water.
This site is listed on the Connecticut State Hazardous Waste Disposal Site list,
but remediation activity has not been required by the Connecticut Department of
Environmental Protection ("CTDEP").
Carlyle Chemicals, Inc. (which prior to March 26, 1997 was known as
Belding Chemical Industries, Inc.), a subsidiary of Carlyle, owns an inactive
facility located in North Grosvenordale, Connecticut at which soil contamination
has been found. Carlyle reported this contamination to the CTDEP in 1989 and is
presently working with the CTDEP to define remedial options for the site, which
it expects will focus primarily on removal and possible stabilization of
contaminated soil onsite. Carlyle estimates the cost of remediation at this site
to be approximately $100,000 based upon information on the costs incurred by
others in remediating similar contamination at other locations. As the actual
cost of remediation at this site will depend on the areal extent of soil
contamination and the remediation options approved for this site in the future
by the CTDEP, no assurances can be given that the actual cost will not be higher
than Carlyle's current estimate.
In or about June 1992, Carlyle received notice from the EPA that
Carlyle, Belding Corticelli Thread Company, a division of Carlyle prior to the
sale of the Thread Division, and H&B had been identified, along with 1,300 other
parties, as potentially responsible parties in connection with the alleged
release of hazardous substances from the Solvents Recovery Superfund site in
Southington, Connecticut. Carlyle has settled its alleged liability with the EPA
by paying $1,626 in connection with the de minimis settlement approved by EPA in
June 1994. Carlyle's subsidiaries, along with other potentially responsible
parties have committed to perform the Remedial Investigation and Feasibility
Study (RIFS) and two Non-Time Critical Removal Actions at the site. The
aggregate cost to complete the first Non-Time Critical Removal Action is
approximately $6 million. Carlyle is not obligated to pay the entire cost of the
first Non-Time Critical Removal Action at the Solvents Recovery Superfund site.
It is obligated to pay a portion of the cost of that removal action, which is
based upon the pro rata share of the waste its subsidiaries allegedly disposed
of at the site. H&B's alleged contribution of waste disposed of at this site is
approximately 1%. Belding Corticelli's alleged contribution of waste is de
micromis. Carlyle is unable, at this time, to estimate the ultimate cost of the
remedy for this site, remedial investigation for the site is underway and EPA
does not expect to be able to determine a remedy for the site until some time in
late 1998.
By letter dated January 21, 1994, the EPA notified H&B that it was a
potentially responsible party, along with approximately 335 other parties, with
respect to the Old Southington Landfill in Southington, Connecticut. H&B's
alleged contribution of waste disposed of at this site is 0.0637%. H&B's alleged
contribution of waste at the Old Southington Landfill, along with the waste
contributions of other PRP's whose waste was transshipped from the Solvents
Recovery Superfund site to the Old Southington Landfill, was determined by EPA,
using information that EPA had compiled for the Solvents Recovery Superfund
site, and factoring in shipments of waste that were made directly to Old
Southington Landfill. The ultimate cost of the remedy for this site has not yet
been determined and EPA has not yet offered to settle with parties that
allegedly sent less than 1% of total waste to the site, like H&B. Accordingly,
Carlyle's liability with respect to this site cannot accurately be estimated.
However, given the de minimis nature of H&B's alleged contribution, and assuming
EPA offers a settlement to de minimis parties, Carlyle currently believes that
its liability for this site should not exceed $50,000, although no assurance can
be given that the ultimate cost will not exceed such amount.
Carlyle received notice in April 1995 that the State of New Jersey has
made a $34 million demand for payment for expenses incurred for cleanup and
claims at the Chemical Control Superfund Site. H&B, identified as a PRP at this
site, was one of the 167 parties that settled its liability with the EPA. The
State's demand,
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however, is separate from the federal settlement. H&B's alleged contribution of
waste disposed at the site was identified as 0.89342%. H&B's alleged
contribution of waste at the Chemical Control Superfund site, along with the
waste contributions of other potentially responsible parties, was determined
initially by EPA based upon a list it developed. EPA then established a process
whereby PRPs were allowed to supply additional information, including defenses
to liability and challenges to EPA's information, and, in addition, were given a
credit if the PRPs could prove that they either removed waste from the site or
paid for the same waste disposal at another site. There is a larger number of
PRPs in the state proceeding involving the site than in the EPA proceeding, and
it is possible that H&B's percentage share of waste allegedly sent to the site
may be adjusted in connection with the state proceeding to reflect the
contribution of additional PRPs. However, based on the $34 million demand and
the current percentage for H&B's alleged waste contribution (0.89342%), the
amount that H&B would likely be required to pay to settle its liability is
approximately $322,000.
By third-party summons and complaint dated November 27, 1991, H&B has
been named as a third-party defendant in an action pending in the United States
District Court for the District of Rhode Island entitled United States vs.
Williams M. Davis et al vs. American Cyanamid Company et al. In addition to H&B,
approximately 60 other companies have been joined as third-party defendants. The
third-party complaint alleges claims for contribution under CERCLA. The
third-party complaint alleges that H&B and the majority of the other third-party
defendants shipped waste to Chemical Control Corporation, which was commingled
with other wastes and shipped to the Davis Liquid Waste Site located in
Smithfield, RI. H&B had entered into an agreement to settle its liability in
connection with these claims for payment of the sum of $200,000. The agreement
has not yet been approved by the court.
The estimates provided above do not include costs that Carlyle may
incur for consultants or attorney's fees or for administrative expenses in
connection with their participation as part of the PRP group at the Solvents
Recovery, Old Southington Landfill or Chemical Control Superfund sites. The
reserve Carlyle has established for environmental liabilities, in the amount of
$5.1 million, represents Carlyle's best current estimate of the costs of
addressing all identified environmental problems, including the obligations of
Carlyle and its subsidiaries relating to the Remedial Investigation and two
Non-Time Critical Removal Actions at the Solvents Recovery Superfund site, based
on Carlyle's review of currently available evidence, and takes into
consideration Carlyle's prior experience in remediation and that of other
companies, as well as public information released by EPA and by the PRP groups
in which Carlyle or its subsidiaries are participating. Although the reserve
currently appears to be sufficient to cover these environmental liabilities,
there are uncertainties associated with environmental liabilities, and no
assurances can be given that Carlyle's estimate of any environmental liability
will not increase or decrease in the future. The uncertainties relate to the
difficulty of estimating the ultimate cost of any remediation that may be
undertaken, including any operating costs associated with remedial measures, the
duration of any remediation required, the amount of consultants' or attorneys'
fees that may be incurred, the administrative costs of participating in the PRP
groups, and any additional regulatory requirements that may be imposed by the
federal or state environmental agencies.
Under the terms of the Sale Agreement, all of the matters described in
this section under the heading "Environmental Matters" are excluded liabilities
and were not assumed by Hicking Pentecost upon consummation of the sale of the
Thread Division.
NOEL DOES NOT BELIEVE, BASED ON CURRENT APPLICABLE ENVIRONMENTAL LAW,
THAT IT WILL BE RESPONSIBLE FOR ANY OF CARLYLE'S ENVIRONMENTAL LIABILITIES.
HOWEVER, IN VIEW OF THE RAPIDLY DEVELOPING ENVIRONMENTAL LAWS, NO ASSURANCE CAN
BE GIVEN AT THIS TIME THAT NOEL WOULD NOT HAVE SUCH RESPONSIBILITY NOR, IF SUCH
LIABILITY EXISTED, CAN ANY DETERMINATION BE MADE OF THE AMOUNT THEREOF. ANY
FINDING OF LIABILITY ON THE PART OF NOEL WOULD REDUCE THE AMOUNT AVAILABLE FOR
DISTRIBUTION TO NOEL'S SHAREHOLDERS. IN ADDITION, IN THE EVENT THAT THE AMOUNT
OF ANY SUCH LIABILITY EXCEEDED THE AMOUNT OF NOEL'S ASSETS (AND THE ASSETS OF
ANY LIQUIDATING TRUST), THE SHAREHOLDERS COULD BE REQUIRED TO RETURN ALL AMOUNTS
PREVIOUSLY DISTRIBUTED.
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Other Litigation. Carlyle purchased Carlyle International, Inc. (which
prior to March 26, 1997 was known as Culver International, Inc.) from Bruce
Goldwyn ("Goldwyn") in August of 1995. Carlyle filed suit in September 1996 in
the Superior Court for New York County against Goldwyn for breach of the
representations and warranties made about the quality, merchantability and
salability of the inventory acquired in the transaction, seeking damages of
approximately $1.4 million. As part of the acquisition, Carlyle had given
Goldwyn a note (the "Goldwyn Note") in the face amount of $530,964 (representing
the discounted value of Carlyle's obligation to pay $200,000 per year for three
years), the first $200,000 payment of which was due in August 1996. The Goldwyn
Note allowed Carlyle to set-off its damages arising from violations of the
representations and warranties in the purchase agreement and, based on its
claims, Carlyle withheld the entire August 1996 payment. Goldwyn filed a
counter-claim seeking the face value of the Goldwyn Note plus attorneys' fees
and moved to dismiss the action on the grounds that his representations and
warranties were not breached, which motion was granted in December 1996 and has
been appealed by Carlyle. In addition, there is a pending motion by Goldwyn
seeking summary judgment on his counter-claim for the full, accelerated amount
of the Goldwyn Note ($530,964) together with accumulated interest and his
attorneys' fees for the collection of the Goldwyn Note. Carlyle has opposed
Goldwyn's motion for summary judgment and cross moved for summary judgment in
its favor on the counter-claim. Carlyle has also moved for reconsideration of
Goldwyn's motion to dismiss. All of the motions are sub judice.
In January 1997, the Pension Benefit Guarantee Corporation ("PBGC")
notified Carlyle that it was considering whether the sale of the Thread Division
would create an obligation under ERISA to immediately fund, in whole or in part,
Carlyle's unfunded liability to its defined benefit plan. In February 1997, at
the request of the PBGC, Carlyle agreed to provide the PBGC with at least 30
days advance notice of any proposed dividend, stock redemption, stockholder
buyback or other distribution to shareholders of any class of equity prior to
March 31, 2002. In consideration of such agreement, the PBGC agreed not to take
action solely with respect to the proposed sale transaction. If the PBGC takes
the position that Carlyle should fund, in whole or in part, the unfunded
liability to the defined benefit plan, after receiving notice of a proposed
dividend, stock redemption, stockholder buyback or other distribution to
shareholders, and if such position is upheld, the ability of Carlyle to take any
such proposed action would be adversely affected. Carlyle's unfunded liability
to its deferred benefit plan is estimated to be approximately $1,500,000 as of
December 31, 1996, when measured in accordance with financial accounting
standards. Were the plan to be terminated or were the PBGC to require that the
plan be funded according to different standards, Carlyle's obligation to
transfer cash to the plan could be $3,500,000 to $4,500,000 higher than this
amount. Any actual amounts transferred in the event of a plan termination, would
depend on PBGC action and market conditions at the time of transfer and could
differ significantly from this estimate.
Noel received a letter from the PBGC dated August 15, 1996 stating that
the PBGC believed that a "controlled group" existed between Noel and Carlyle.
The letter indicated that the PBGC would like to discuss the pending Plan of
Liquidation and its impact on the Carlyle pension plan. Noel submitted a
memorandum to the PBGC setting forth Noel's position that a controlled group did
not exist between Noel and Carlyle. In the event that the PBGC's belief was
correct, Noel could in certain circumstances be jointly and severally liable for
obligations of Carlyle with respect to its pension plan including the
obligations referred to above.
Under the terms of the Sale Agreement, the Goldwyn Note is included as
an assumed liability under the Sale Agreement, although Hicking Pentecost will
be entitled to seek indemnification from Carlyle for any amounts required to be
paid by Hicking Pentecost in respect of this litigation (including reasonable
legal fees), other than any payment in respect of the Goldwyn Note.
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CURTIS INDUSTRIES, INC. (62%)
Curtis is a major national distributor of fasteners, security products,
chemicals, automotive replacement parts, fittings and connectors, and tools and
hardware. Curtis distributes products to customers in the vehicle and industrial
maintenance and repair markets. Curtis' products are sold through a sales force
of approximately 700 sales representatives to over 40,000 active customer
accounts located principally in the United States, Canada and the United
Kingdom. Products distributed by Curtis are purchased from multiple suppliers
with the majority of these products purchased in bulk and repackaged by Curtis
in smaller quantities which are compatible with the repair and maintenance needs
of its customers. Following the 1995 shutdown of its manufacturing operations,
Curtis purchases all of its products from outside vendors.
On November 13, 1995, Curtis sold certain assets of its retail division
to SDI Operating Partners L.P. for $7.5 million in order to focus on its
automotive and industrial division. The proceeds from the sale of the division
in excess of net assets offset the expenses related to the transaction and
operating losses incurred prior to the sale. Therefore, no gain or loss was
recorded on the sale. In 1995, a one time charge of $1.1 million was recorded,
primarily for severance and benefits, following the close of its manufacturing
operations at its Eastlake, Ohio facility.
On May 13, 1996, Curtis acquired certain assets of the Mechanics Choice
business of Avnet Inc. for $6.5 million. Mechanics Choice is a distributor,
selling industrial maintenance and repair operations products similar to the
existing product line Curtis offers.
The business conducted by Curtis and its predecessors has been in
continuous operation since 1932. Curtis' principal executive offices are located
at 6140 Parkland Boulevard, Mayfield Heights, OH 44124-4103; telephone number
(216) 446-9700. Two Noel executive officers, Joseph S. DiMartino and Donald T.
Pascal, and two directors of Noel, William L. Bennett and Livio M. Borghese,
currently serve on Curtis' seven-member Board of Directors.
PRODUCTS
Curtis distributes approximately 29,000 SKUs (stock keeping units),
which are grouped into six major product categories: fasteners, security
products, chemicals, automotive replacement parts, fittings and connectors, and
tools and hardware. Historically, net sales of products in the fasteners and
security products categories have accounted for approximately two-thirds of
Curtis' total net sales.
Fasteners. Curtis distributes a broad line of fasteners, including
bolts, nuts, screws, washers and rivets which range from light duty (used
primarily in consumer applications) to heavy-duty (used in industrial
applications), maintaining an emphasis on premium quality products. Most of
Curtis' fasteners are manufactured in the United States and Canada.
Security Products. Curtis distributes a line of security products,
including key blanks, key duplicating machines, computerized and manual key code
cutters, padlocks, combination locks and a line of key accessories.
Chemicals. Curtis distributes a broad line of chemicals including
solvents, lubricants, cleaners, adhesives and sealants designed for vehicle and
building maintenance applications.
Automotive Replacement Parts. Curtis distributes a variety of
automotive replacement parts, including specialty fasteners such as molding
clips for body shop applications, fuses, lamps and bulbs, cables, clamps and
small parts kits.
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Fittings and Connectors. Curtis distributes a variety of fittings and
connectors, which include wire products, electrical connectors, adapters and
terminals and standard brass fittings for vehicle and industrial maintenance
applications.
Tools and Hardware. Curtis distributes a variety of tools and hardware
including saw blades, cutting blades, welding products, drill bits, and
specialized application tools, as well as standard tools such as screwdrivers,
wrenches and pliers.
SALES AND MARKETING
Curtis markets its products to customers in two broad classifications:
the vehicle maintenance market and the industrial maintenance market. All of the
markets served by Curtis are large and highly fragmented.
The vehicle maintenance market consists of passenger car, truck, and
recreational vehicle dealers; business and governmental entities performing
internal fleet maintenance functions; and independent sales and service
establishments. Franchised new car dealers represent the most important segment
in terms of sales by Curtis to the vehicle maintenance market.
The industrial maintenance market consists of private and public
institutions such as transportation facilities, hotels, health care facilities,
schools and manufacturing plants.
CUSTOMERS
Curtis sells its products to over 40,000 active customer accounts in
the United States, Canada and the United Kingdom. No single customer accounted
for more than 10% of Curtis' annual sales during the year ended December 28,
1996.
COMPETITION
Curtis competes with other national distributors as well as a large
number of regional distributors and local suppliers. Competition for national
accounts is intense. Local and regional distributors pose a significant
challenge to national distributors by virtue of their aggressive pricing
strategies and ability to deliver certain items faster than national
distributors. There is also intense competition among national distributors.
Because of the similarity of product types, competitive advantage is determined,
among other things, by sales representative performance and reliability, product
presentation, product quality, order fill rates, timing and, to a lesser extent,
price. Curtis' ability to maintain and improve financial performance will be
influenced strongly by its management of these factors.
FOREIGN OPERATIONS
Curtis maintains sales and warehouse facilities in Canada and the
United Kingdom. Sales to customers in Canada and the United Kingdom accounted
for approximately 15% of Curtis' revenue for the year ended December 28, 1996.
SUPPLIERS
All of Curtis' sales are derived from products manufactured by others.
There are many sources of supply for Curtis' requirements.
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PATENTS AND TRADEMARKS
Curtis has developed various patents in connection with its security
products, some of which have expired. The expiration of these patents, however,
has not, in Curtis' management's opinion, had any significant effect on Curtis'
business. Most of Curtis' products are sold under Curtis'r', Fullwell'tm' and
Mechanics Choice'tm' brand names. None of Curtis' trademarks or copyrights is,
in Curtis' management's opinion, critical to the success of Curtis' business.
EMPLOYEES
As of December 28, 1996, Curtis employed 1,047 employees. Curtis'
management believes Curtis' relationship with employees is good.
FACILITIES
The following is a summary description of Curtis' facilities:
SQUARE OWNED/
LOCATION FUNCTION FEET LEASED
Mayfield Heights, Ohio Headquarters 33,600 Leased
Shelbyville, Kentucky Repackaging/Warehouse 100,000 Owned
Atlanta, Georgia Warehouse 60,000 Leased
Sparks, Nevada Warehouse 50,000 Owned
Mississauga, Canada Warehouse 38,000 Leased
Andover, United Kingdom Warehouse 15,000 Leased
Corby Northants, United Kingdom Warehouse 3,800 Leased
Curtis' management believes that Curtis' facilities are adequate for
the needs of its business over the foreseeable future.
LINCOLN SNACKS COMPANY (60%)
Lincoln Snacks Company ("Lincoln Snacks") is one of the leading
manufacturers and marketers in the United States and Canada of caramelized
pre-popped popcorn. The primary product line includes glazed popcorn/nut mixes
and sweet glazed popcorn sold under the brand names Poppycock'r', Fiddle
Faddle'r' and Screaming Yellow Zonkers'r'. Lincoln Snacks also processes and
distributes ten different nut varieties.
Lincoln Snacks was formed in August 1992 by Noel and a management team
of former executives of Nestle Foods Corporation. On August 31, 1992, Lincoln
Snacks acquired the business and certain assets of Lincoln Snack Company, a
division of Sandoz Nutrition Corporation, an indirect subsidiary of the
Swiss-based drug, pharmaceutical and hospital care company, Sandoz Ltd. In March
1993, Carousel Nut Company, a newly formed wholly-owned subsidiary of Lincoln
Snacks ("Carousel"), acquired the business and certain assets of Carousel Nut
Products, Inc., a producer and marketer of roasted, dry roasted, coated, raw and
mixed nuts. In December 1993, Carousel was merged with and into Lincoln Snacks,
and the operations of Carousel were integrated with Lincoln Snacks' plant in
Lincoln, Nebraska in the first quarter of 1994.
On June 6, 1995, Lincoln Snacks entered into the Distribution Agreement
with Planters pursuant to which Planters was the exclusive distributor of
Lincoln Snacks' Fiddle Faddle and Screaming Yellow Zonkers in the United States
for an initial term which was originally scheduled to expire on June 30, 1997
unless renewed
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for additional one year periods. The Distribution Agreement required Planters to
purchase an annual minimum number of equivalent cases of Fiddle Faddle and
Screaming Yellow Zonkers during the initial term. On February 28, 1997, Lincoln
Snacks and Planters entered into an amendment to the Distribution Agreement
pursuant to which, among other things, (i) the distribution arrangement was
extended for an additional period of six months expiring December 31, 1997, with
Planters continuing to distribute Fiddle Faddle through that date at which time
the distribution arrangement will terminate; and (ii) effective May 1, 1997,
Planters will cease, and Lincoln will resume marketing and distributing
Screaming Yellow Zonkers. Although the amendment contains provisions designed to
effect a smooth transfer of the distribution business back to Lincoln Snacks,
there can be no assurance that this will be the case. In addition, pursuant to
the amendment to the Distribution Agreement, Planters has agreed to negotiate in
good faith an agreement pursuant to which Planters will grant Lincoln a license
to use the Planters' trademarks in connection with the sale by Lincoln of its
products for a period of five years commencing January 1, 1998.
Net sales to Planters for the year ended June 30, 1996 were equal to
the minimum number of equivalent cases required to be purchased during that
fiscal year as part of the Distribution Agreement. Sales to Planters represented
43% of net sales for the year ended June 30, 1996. Net sales to Planters for six
month periods ended December 31, 1996 and 1995 represented 46% and 48%,
respectively, of the minimum number of equivalent cases required to be purchased
annually as part of the Distribution Agreement. Sales to Planters represented
32% and 36% of net sales for the three months ended December 31, 1996 and 1995,
respectively, and 41% and 32% of net sales for the six months period ended
December 31, 1996 and 1995, respectively.
Lincoln Snacks' principal executive offices are located at 4 High Ridge
Park, Stamford, Connecticut 06905; telephone number (203) 329-4545. Karen
Brenner, a Managing Director of Noel is the Chairman and Chief Executive Officer
of Lincoln Snacks. Ms. Brenner and James G. Niven, a director of Noel, currently
serve on Lincoln Snacks' four-member Board of Directors.
PRODUCTS
Lincoln Snacks manufactures and markets three nationally-recognized
branded products. Poppycock is a premium priced mixture of nuts and popcorn in a
deluxe buttery glaze. Fiddle Faddle is a more moderately priced brand of popcorn
and peanut clusters with a candied glaze; a fat free version of Fiddle Faddle
consists of popcorn with a caramel glaze. Screaming Yellow Zonkers is produced
by coating popcorn clusters with a sweet buttery glaze. In addition, Lincoln
Snacks processes and distributes ten different nut varieties. The finished
products comprise a full line of nuts for the retail market: raw, roasted and
salted, dry roasted, and specially coated (honey roasted).
MARKETING, SALES AND DISTRIBUTION
Lincoln Snacks markets and distributes its Poppycock and nut products
directly. On July 17, 1995, Planters commenced exclusively distributing Fiddle
Faddle and Screaming Yellow Zonkers in the United States (including Puerto Rico
and United States territories and possessions). Effective May 1, 1997, Lincoln
Snacks will commence marketing and distributing its Screaming Yellow Zonkers
product directly and will resume marketing and distributing its Fiddle Faddle
product directly on January 1, 1998.
Lincoln Snacks' brands are broadly distributed through grocery stores,
supermarkets, convenience stores, drug stores, mass merchandise outlets,
warehouse clubs, vending channels, military commissaries and other military food
outlets, and other retailers. Selling responsibilities for Poppycock and the nut
products in the United States are currently handled by four regional business
managers located strategically across the United States. These regional business
managers manage approximately 80 brokers across the United States in all classes
of trade. These brokers receive a commission on net sales plus incentive
payments. Certain exports and
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large volume customers are handled directly by Lincoln Snacks personnel. Lincoln
Snacks intends to distribute its Fiddle Faddle and Screaming Yellow Zonkers
products by means of its existing distribution network.
Sales of Lincoln Snacks' products are seasonal, peaking during the
third and fourth calendar quarters.
COMPETITION
Lincoln Snacks' primary products participate in the pre-popped caramel
popcorn segment of the snack food market. Poppycock competes with other premium
quality snack products while Fiddle Faddle and Screaming Yellow Zonkers compete
directly with Crunch N'Munch (American Home Products Corp., Food Division),
Cracker Jack (Borden, Inc.) and a number of other regional and local brands.
Lincoln Snacks' products also compete indirectly with traditional confections
and other snack food products.
RAW MATERIALS AND MANUFACTURING
Substantially all of the raw materials used in Lincoln Snacks'
production process are commodity items, including corn syrup, butter, margarine,
brown and granulated sugar, popcorn, various nuts, and oils. These commodities
are purchased directly from various suppliers.
The Lincoln manufacturing facility includes, among other things,
continuous process equipment for enrobing popcorn and nuts, as well as four
distinct high speed filling and packing lines for canisters, jars, single
serving packs and bag-in-box packages. The manufacturing and packaging equipment
is sufficiently flexible to allow for the manufacture of other similar product
lines or packaging formats. The facility is being operated at an overall rate
varying from approximately 40% to 75% of capacity depending on the season.
Lincoln Snacks' management believes that the facility is generally in good
repair and does not anticipate capital expenditures other than normal
maintenance and selected equipment modernization programs.
TRADEMARKS
Poppycock'r', Fiddle Faddle'r' and Screaming Yellow Zonkers'r' are
registered trademarks of Lincoln Snacks. Lincoln Snacks believes all its
trademarks enjoy a strong market reputation denoting high product quality.
GOVERNMENTAL REGULATION
The production, distribution and sale of Lincoln Snacks' products are
subject to the Federal Food, Drug and Cosmetic Act; the Occupational Safety and
Health Act; the Lanham Act; various federal environmental statutes; and various
other federal, state and local statutes regulating the production, packaging,
sale, safety, advertising, ingredients and labeling of such products. Compliance
with the above described governmental entities and regulations has not had and
is not reasonably anticipated to have a material adverse effect on Lincoln
Snacks' capital expenditures, earnings or competitive position.
EMPLOYEES
As of February 28, 1997, Lincoln Snacks had 75 full-time employees and
one part time employee. Employment at the Lincoln plant varies according to
weekly and seasonal production needs. None of Lincoln Snacks' work force is
unionized. Lincoln Snacks' management believes that Lincoln Snacks' relationship
with its employees is good.
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EXPORT SALES
Foreign operations accounted for less than 10% of Lincoln Snacks'
sales, assets and net income in each of Lincoln Snacks' last three fiscal years.
FACILITIES
Lincoln Snacks manufactures and packages all of its products at its
owned Lincoln, Nebraska manufacturing facility. The Lincoln plant, constructed
in 1968, is a modern 74,000 square foot one-story building on a 10.75 acre site
in a light industrial area in the city of Lincoln. Approximately 67,000 square
feet of the facility is dedicated to production with the balance utilized for
administration. Also in Lincoln, Nebraska is Lincoln Snacks' 66,500 square foot
leased warehousing facility, which is located near Lincoln Snacks' plant. This
modern facility can accommodate all of Lincoln Snacks' current warehousing
needs. Lincoln Snacks' lease on this facility has been extended until January
31, 1998, and there is a five year renewal option beyond 1998. The initial term
of the lease of Lincoln Snacks principal executive offices expires on September
30, 1999. Lincoln Snacks believes its properties are sufficient for the current
and anticipated needs of its business.
LEGAL PROCEEDINGS
Lincoln Snacks is not involved in any material legal proceedings.
FERROVIA NOVOESTE, S.A. (20%)
In March, 1996, Ferrovia Novoeste, S.A., a Brazilian corporation
("Novoeste"), was the successful bidder, at approximately $63.6 million, for the
concession for the operation of the Brazilian federal railroad's western
network. The principal investors in Novoeste include Noel, Chase Latin America
Equity Associates ("Chase"), Brazil Rail Partners, Inc. ("BRP"), Western Rail
Investors, LLC ("WRI") and Brazilian Victory LLC ("Victory"). Noel's and Chase's
investment in Novoeste is approximately $8 million each, Victory's investment is
approximately $2 million, WRI's investment is approximately $1.6 million, and
BRP's investment is approximately $1.4 million. The purchase of the network
consisted of a 30-year concession and a lease of the federal railroad's
equipment. The western network links Bauru, in Sao Paulo state, with Corumba on
the Bolivian border, and covers approximately 1,000 miles of track.
OTHER HOLDINGS
Noel also had other holdings with a liquidation value of approximately
$2.7 million at March 10, 1997. None of these holdings, either individually or
in the aggregate, would be considered material with respect to Noel's
consolidated financial position.
(d) Financial information about foreign and domestic operations and export
sales.
Not material.
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ITEM 2. PROPERTIES.
Noel's executive offices occupy approximately 10,600 square feet in an
office building located in New York, New York, of which 5,400 square feet are
rented pursuant to a lease expiring in 1998 and the remainder is sublet from The
Prospect Group Inc. pursuant to a sublease expiring in 1998. For descriptions of
certain principal properties of Noel's operating companies, see "Narrative
Description of Business" above. Management of Noel and of each of Noel's
operating companies believe that the properties owned or leased by each such
company are adequate for the conduct of their respective businesses for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
Other than as described below, there are no pending material legal
proceedings to which Noel or any of its subsidiaries or principal operating
companies is a party or to which any of their property is subject, other than
ordinary routine litigation incidental to their respective businesses.
Carlyle and its subsidiaries are party to various proceedings and
possible proceedings under state and federal laws and regulations concerning the
discharge of materials into the environment. Reference is made to the
description of Carlyle Industries, Inc. under "Business of the Company".
In 1995, Self Funded Strategies, L.L.C. ("SFS"), a former provider of
marketing services to HealthPlan Services, filed a complaint against HealthPlan
Services claiming wrongful termination of an exclusive marketing agreement and
breach of contract. The complaint asserted damages of $25,000,000. The parties
to the dispute agreed to binding arbitration, and the arbitration proceedings
occurred during the week of October 29, 1996. The arbitration panel's decision,
rendered in December 1996, is not expected to materially alter the amount or
timing of future payments that HealthPlan Services is contractually obligated to
make to SFS under the marketing agreement, and thus is not expected to
materially affect the cash flows of HealthPlan Services' business.
Pursuant to the Harrington acquisition agreement (the "Harrington
Agreement"), HealthPlan Services agreed to use its best efforts to file a
registration statement sufficient to permit the public offering and sale of the
HealthPlan Services common shares issued to the Harrington stockholders in the
acquisition, with such registration statement to become effective on or before
October 31, 1996. On October 30, 1996, HealthPlan Services received a letter
from Harrington stockholders' representative notifying HealthPlan Services that
it was in violation of the Harrington Agreement and reserving all rights under
such Agreement. As of the date hereof, it is not possible for HealthPlan
Services to evaluate what, if any, damages might result from such notice. In
November 1996, HealthPlan Services filed a form S-3 registration statement with
the SEC registering the restricted shares of HealthPlan common stock held by the
former Harrington and Consolidated Group stockholders. This registration
statement became effective on February 14, 1997.
HealthPlan Services' Consolidated Group subsidiary is undergoing a DOL
audit in which the DOL has raised various questions about the application of
ERISA to the way that subsidiary does business. This audit is ongoing, and there
can be no assurance that the DOL will not take positions that could require
changes to the way this subsidiary operates, or result in the imposition of
administrative fines and penalties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
(a) Market Information.
Noel's Common Stock trades on the Nasdaq Stock Market's National Market
under the symbol NOEL. The following table sets forth the range of high and low
sales prices for shares of Noel Common Stock for each fiscal quarter during 1996
and 1995 as reported by NASDAQ.
1996 High Low
---- ---- ---
First Quarter $7.625 $6.000
Second Quarter 9.750 7.125
Third Quarter 8.750 6.875
Fourth Quarter 8.125 6.125
1995
First Quarter $6.500 $5.000
Second Quarter 7.625 5.750
Third Quarter 6.250 4.750
Fourth Quarter 7.000 5.000
(b) Holders.
As of March 25, 1997, 20,421,039 shares of Common Stock were issued and
outstanding and were held of record by approximately 116 persons, including
several holders who are nominees for an undetermined number of beneficial
owners. Noel believes that there are approximately 3,500 beneficial owners of
Noel Common Stock.
(c) Dividends.
Noel has not declared or paid any cash dividends on its shares of
capital stock. Pursuant to the Plan, Noel will be liquidated (i) by the sale of
such of its assets as are not to be distributed in-kind to its shareholders, and
(ii) after paying or providing for all its claims, obligations and expenses, by
cash and in-kind distributions to its shareholders pro rata and, if required by
the Plan or deemed necessary by the Board of Directors, by distributions of its
assets from time to time to one or more liquidating trusts established for the
benefit of the then shareholders, or by a final distribution of its then
remaining assets to a liquidating trust established for the benefit of the then
shareholders.
ITEM 6. SELECTED FINANCIAL DATA.
The selected historical financial information for the five years ended
December 31, 1996 are derived from the historical financial statements of Noel
and should be read in conjunction with Noel's Consolidated Financial Statements
and related notes included elsewhere in this Form 10-K.
-36-
YEAR ENDED DECEMBER 31,
-----------------------
1996(1) 1995(1) 1994(2) 1993 1992(3)(4)
------- ------- ------- ---- ----------
(dollars in thousands, except per share amounts)
Revenue $189,325 $181,709 $119,121 $93,962 $32,417
Operating income (loss) $9,194 $(29,451) $(12,731) $(6,935) $(8,384)
Loss from continuing operations $(3,105) $(15,581) $(9,453) $(5,345) $(7,289)
Loss from continuing operations
per common and common
equivalent share $(0.15) $(0.77) $(0.47) $(0.26) $(0.37)
Total assets $230,521 $239,757 $313,980 $186,845(4) $185,542
Long-term debt $60,983 $69,197 $ 75,734 $33,635(4) $28,550
Stockholders' equity $97,360 $92,920 $100,269 $123,122 $134,942
- ---------------
Historical information has been restated to reflect discontinued operations. See
Note 1 of Notes to Consolidated Financial Statements on page F-9.
See Notes 3 and 4 of Notes to Consolidated Financial Statements on pages F-12
and F-16 for factors that affect the comparability of the information presented
above.
(1) Includes the results of Carlyle for the full period and reflects the
results of HealthPlan Services under the equity method of accounting.
(2) Includes the results of HealthPlan Services from September 30, 1994, the
date of its acquisition. Carlyle is included in the balance sheet at
December 31, 1994.
(3) Includes the results of Curtis and Lincoln Snacks from August 17, 1992 and
August 31, 1992, the respective dates of their acquisitions.
(4) Due to the restatement of the historical financial statements this data is
considered to be derived from unaudited financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of financial condition and results
of operations of Noel Group, Inc. ("Noel") and its consolidated subsidiaries
(collectively the "Company") should be read in conjunction with the Company's
Consolidated Financial Statements and Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Parent Company
On December 31, 1996, Noel had cash and liquid investments of $9.2
million. The future cash needs of Noel will be dependent on the implementation
of the Plan which was approved by the shareholders on March 19, 1997. It is
management's intention that Noel's liquidity will be available to fund Noel's
working capital requirements and to meet its other obligations. Pursuant to the
Plan, subject to the payment or the provision for payment of the Company's
indebtedness and other obligations, the cash proceeds of any asset sales
together with other available cash will be distributed from time to time pro
rata to the holders of the Common Stock on record dates selected by the Board of
Directors with respect to each such distribution.
Noel believes that its cash and liquid investments are sufficient to
fund its working capital requirements through the completion of the Plan,
following Noel's sale of 1.32 million shares of HealthPlan Services common stock
to ADP for $26.4 million on February 7, 1997. Noel expects that its operating
subsidiaries will be able to meet their own working capital requirements,
including debt service. None of the debt on the consolidated balance sheet
relates to Noel. Subject to the restrictions set forth in the Plan, if an
operating subsidiary requires additional funding for the purpose of making an
acquisition or to otherwise support growth, or suffers operating or cash flow
deficits, a portion of Noel's liquidity may be utilized to fund such
requirements.
HealthPlan Services' operations have no impact on the Company's
liquidity and capital resources, since Noel has no obligation to fund HealthPlan
Services' operations and HealthPlan Services does not anticipate paying cash
dividends in the foreseeable future. While HealthPlan Services is included in
the Company's financial statements on the equity method of accounting, the
Company will record its proportional share of
-37-
HealthPlan Services' income or loss. Noel's share of HealthPlan Services' loss
for the year ended December 31, 1996, was $.5 million.
Sources of potential liquidity include the sale or refinancing of
current holdings, dividends and preferred stock redemptions from current
holdings. Noel does not currently receive, nor expect to receive in the
immediate future, cash dividends from any of its subsidiaries. Except for
Carlyle, Noel's subsidiaries are prohibited from paying dividends by existing
borrowing agreements.
CARLYLE INDUSTRIES, INC.
On March 26, 1997, Carlyle sold its thread division to Hicking Pentecost
PLC for an aggregate cash consideration of $54.9 million, subject to adjustment,
plus the assumption of certain liabilities. The current estimate of the loss on
the disposal of this division is $11.3 million, but the actual loss recorded
could vary significantly from this estimate, depending on the resolution of
certain contingencies. The net proceeds of the sale of the thread division were
used to pay off Carlyle's outstanding bank indebtedness. Accordingly, Carlyle
currently has no outstanding bank indebtedness. Carlyle management believes that
Carlyle has sufficient cash to support its operations for the foreseeable
future.
Carlyle has agreed to notify the PBGC thirty (30) days prior to taking
certain actions including the payment of any dividend on or any redemption of
stock. Accordingly, Carlyle's decision to make any such payments will depend on
the successful resolution of any issues which may arise with the PBGC.
All of Noel's discontinued operations have been disposed of except for
TDX Corporation ("TDX"). TDX's operations are immaterial to Noel, and there is
no future requirement for additional cash or capital infusions for TDX.
In 1995 and 1994, Noel's subsidiaries sold stock in initial public
offerings, raising net proceeds of $50.8 million and $9.6 million, respectively,
thereby improving their respective liquidity. Noel's subsidiaries may raise cash
from time to time using equity offerings in the future.
RESULTS OF OPERATIONS:
OVERVIEW
The Company's consolidated statements of operations include Carlyle in
1996 and 1995 and HealthPlan Services for the period from September 30, 1994,
through December 31, 1994. Noel's equity in HealthPlan Services' income or loss
for the years ended December 31, 1996 and 1995, is included in income or loss
from equity investments. The consolidated selling, general, administrative and
other expenses include salaries, employee benefits, rent and other routine
overhead expenses of the Company, including legal, accounting and consulting
fees. The following year to year comparisons are based on the Company's
consolidated results. An analysis of each subsidiary is included in the
comparison of segments section.
The results of operations for the year ended December 31, 1994, have
been restated to reflect (i) Simmons Outdoor Corporation, (ii) Carlyle's Home
Furnishings division, (iii) Curtis Industries, Inc. ("Curtis") retail division,
and (iv) TDX as discontinued operations due to their sale in 1995 or their
expected or actual sale in 1996 and to account for HealthPlan Services under the
equity method of accounting from January 1, 1995. Noel's voting interest in
HealthPlan Services dropped below 50% following HealthPlan Services' initial
public offering May 19, 1995 and Noel's simultaneous exchange of its holding of
HealthPlan Services preferred stock and accrued dividends into HealthPlan
Services common stock.
-38-
1996 VERSUS 1995
Sales increased by $7.6 million to $189.3 million due to an increase in
sales at Curtis of $8.2 million and a decrease in sales at Lincoln of $.6
million. Cost of sales increased by $1.1 million to $106.4 million from $105.3
million in 1995, related to increases at Curtis and Lincoln of $3.7 million and
$.2 million, respectively, offset by a decrease at Carlyle of $2.8 million.
Selling, general, administrative and other expenses decreased to $69.2 million
in 1996 from $71.8 million in 1995. The decrease of $2.6 million primarily
relates to decreased expenses at Lincoln and Carlyle of $3.2 million and $2.0
million, respectively, offset by increased expenses at Curtis at $2.5 million.
Other income decreased by $6.1 million primarily due to a 1995 gain recognized
by Noel on the receipt of payment of the Subordinated Note from Brae Group, Inc.
("Brae"). The loss from equity investments of $4.7 million in 1996 versus income
of $3.8 million in 1995 primarily results from Noel's equity in the losses of
HealthPlan Services, Staffing Resources and Novoeste in 1996 of $.5 million,
$1.2 million and $3.1 million, respectively, versus income from HealthPlan
Services of $3.4 million in 1995.
After performing a review for impairment of long-lived assets related to
each of HealthPlan Services' acquired businesses and applying the principles of
measurement contained in FASB 121, HealthPlan Services recorded a charge against
earnings of $13.7 million in the third quarter of 1996, representing
approximately 7.6% of HealthPlan Services' pre-charge goodwill. This charge was
attributable to impairment of goodwill recorded on the acquisitions made in
1995. Any further significant declines in HealthPlan Services' projected net
cash flows, with respect to such acquisitions, may result in additional
write-downs of remaining goodwill.
Starting in 1994, HealthPlan Services pursued contracts with
state-sponsored health care purchasing alliances, initially in Florida, and in
1995 and 1996, in North Carolina, Kentucky, and Washington. HealthPlan Services
has incurred substantial expenses in connection with the start-up of these
contracts, and, to date, the alliance business has been unprofitable. HealthPlan
Services recorded a pre-tax charge related to these contracts in the amount of
$2.6 million in the third quarter of 1996 resulting from increased costs and
lower than anticipated revenues in Florida and North Carolina. In Florida,
HealthPlan Services is negotiating a new contract which is scheduled to commence
in 1997.
In the third quarter of 1996, HealthPlan Services recorded a charge of
$1.4 million to reflect the cost of exiting certain excess office space and
terminating employees.
Noel and each of its subsidiaries file a separate federal income tax
return. As a result, the income tax provisions recorded by certain subsidiaries
cannot be offset by the losses reported by other entities on the Company's
consolidated financial statements.
1995 VERSUS 1994
The increases from 1994 to 1995 in sales of $87.8 million and cost of
sales of $66.6 million principally reflect the inclusion of Carlyle's sales of
$88.7 million and cost of sales of $66.0 million in 1995 only. The increase in
selling, general, administrative and other expenses of $2.8 million to $71.8
million in 1995 reflects the inclusion of Carlyle's 1995 expenses of $14.3
million, offset both by Noel's decrease of $5.4 million primarily related to a
1994 charge for its non-incentive stock option plan and by a $5.5 million
decrease at Lincoln.
The 1995 impairment charge relates to Carlyle's thread division. This
charge of $29.2 million includes Noel's write-off of $4.2 million of related
goodwill.
Other income decreased by $1.6 million to $6.7 million. In 1995, other
income includes a $6.6 million capital gain recognized by Noel on the payment of
the subordinated note from Brae. Other income in 1994 includes capital gains of
$9.0 million primarily from Noel's sale of marketable securities and $2.2
million of dividend income from Noel's holding of Carlyle preferred stock,
offset by a $3.9 million loss recognized on Noel's exchange of Carlyle preferred
stock for Carlyle common stock.
-39-
Income (Loss) from equity investments increased by $3.9 million to
income of $3.8 million reflecting primarily Noel's equity in the income of
HealthPlan Services of $3.4 million in 1995.
Interest expense increased by $4.1 million, primarily due to the
inclusion of Carlyle's interest expense of $4.0 million in 1995 only.
COMPARISON OF SEGMENTS:
General
Noel and its subsidiaries are collectively referred to in this section
as the "Company". The segment discussion which follows analyzes the results of
operations for each of the Company's segments. Since the amounts presented in
the comparison of segments are on a full year basis, they are not comparable
with the amounts included in the Company's consolidated statements of operations
in the year in which the segment was acquired or newly included in the
consolidated operating results.
1996 VERSUS 1995
FASTENERS AND SECURITY PRODUCTS DISTRIBUTION (CURTIS)
On May 13, 1996, Curtis acquired certain assets of the Mechanics Choice
business of Avnet, Inc. Mechanics Choice is a distributor, selling industrial
maintenance and repair operations products similar to the existing product line
Curtis offers.
Sales for Curtis for 1996 increased $8.3 million or approximately 12% to
$77.1 million from $68.8 million in 1995. Sales by Curtis' Mechanics Choice
Division accounted for $8.2 million of the increase. Sales of a new code cutting
machine utilizing state of the art technology contributed an additional $1.7 in
1996. The sales gains from the new code cutter were partially offset by both a
loss of the sales of the Puerto Rican branch totaling $.7 million and an
emergency key cutting program of $.3 million. These businesses were discontinued
as a result of the sale of the retail division and the shutdown of manufacturing
operations in 1996.
The gross margin percentage decreased from 66.5% in 1995 to 65.3% in
1996. The decline in the margin is attributable to the lower margins of the
Mechanics Choice division. Mechanics Choice's customer base has a larger
concentration of large, corporate and national accounts which are more price
sensitive.
Selling, general, and administrative expenses, exclusive of the $.7
million reserve recorded for the 1995 manufacturing shutdown, increased $1.9
million for the year ended December 31, 1996, when compared to the same period
in 1995. The majority of the increase is selling and distribution costs of the
Mechanics Choice division.
SNACK FOODS (LINCOLN)
On June 6, 1995, Lincoln entered into an exclusive distribution
agreement with Planters Company, a division of Nabisco, Inc., ("Planters"),
commencing on July 17, 1995, for the sales and distribution of Fiddle Faddle'r'
and Screaming Yellow Zonkers'r' ("the Products"). Under the agreement, which
requires Planters to purchase a minimum number of cases during each year ending
on June 30, Lincoln sells the Products to Planters at prices which are less than
historical selling prices. Planters in turn is responsible for the sales and
distribution of the Products to its customers and therefore Lincoln does not
have any selling, marketing or distribution costs on the Products. The financial
impact of the agreement versus historical results is a reduction in revenue and
gross profit which is offset by reduced selling, marketing and distribution
costs.
-40-
On February 28, 1997, this agreement was amended, extending the term
until December 31, 1997, at which time the distribution arrangement will
terminate. Under the amendment, Lincoln will resume sales and distribution of
Screaming Yellow Zonkers on May 1, 1997. Although the amendment and extension
contain provisions designed to effect a smooth transfer of the distribution
business back to Lincoln, there can be no assurance that this will be the case.
Sales decreased $.6 million to $23.6 million for the twelve months ended
December 31, 1996, versus $24.2 million in the corresponding period of 1995. The
decrease in sales is due to a decrease in Lincoln's nut division sales which
were partially offset by increases in sales related to the Planter's agreement
and of Lincoln's other branded product. Sales related to the Planter's agreement
represented 49% and 44% of sales for the twelve months ended December 31, 1996
and 1995, respectively.
Gross profit decreased $.8 million to $7.1 million for the twelve months
ended December 31, 1996, versus $7.9 million in the corresponding period of
1995. Gross profit decreased as a result of lower selling prices under the
Planter's agreement.
Selling, general and administrative expenses decreased $2.7 million to
$5.6 million in the twelve months ended December 31, 1996, versus $8.3 million
the same period in 1995. These expenses decreased primarily due to cost
reductions resulting from the Planter's agreement.
INDUSTRIAL THREADS AND BUTTONS (CARLYLE)
Sales for the year ended December 31, 1996 totaled $88.6 million as
compared to $88.7 million in 1995 for a decrease of $.1 million. Sales in
Carlyle's industrial product segment totaled $39.4 million in 1996 as compared
to $45.1 million in 1995, for a decrease of $5.7 million or 12.6%. The softness
in customer order volume which began during the third quarter of 1995 continued
throughout all of 1996 creating the negative sales comparison. The reduced order
volume was experienced across a broad range of customers and products. During
the second half of 1996, sales in this segment were generally at comparable
levels as compared to the second half of 1995. Sales in Carlyle's consumer
product segment totaled $49.2 million in 1996 for an increase of $5.6 million
over 1995 sales of $43.6 million. The increase in consumer sales was largely
attributable to the inclusion of Culver Textile Corporation ("Culver") full year
sales in 1996. Culver's sales are included from the date of its acquisition on
August 31, 1995. Sales increases of Carlyle's button division also contributed
$1.8 million to the sales increase of this segment.
Gross margin in 1996 was $25.5 million or 28.7% of sales as compared to
$22.7 million or 25.7% of sales in 1995 for an increase of $2.8 million. Gross
margin in the industrial segment during 1996 totaled $9.9 million or 25.1% of
net sales. In 1995, gross margin in the industrial segment totaled $8.9 million
or 19.8% of sales. The increase in both gross margin dollars and percent was
attributable to cost reduction efforts which were begun during the fourth
quarter of 1995 and continued throughout 1996. These cost reduction efforts were
especially concentrated in the areas of product waste management and headcount
control. Gross margin in the consumer product segment during 1996 totaled $15.6
million dollars or 31.7% of net sales. In 1995, gross margin in the consumer
product segment totaled $13.8 million or 31.7% of net sales. The increase in
gross margin dollars of $1.8 million was the result of a combination of gross
margin dollars contributed by Culver, which results were included for a full
year in 1996 as compared to four months in 1995, and incremental gross margin
dollars provided by increased sales in Carlyle's button division.
Selling, general and administrative expenses totaled $14.1 million in
1996 as compared to $15.9 million in 1995. Selling, general and administrative
expenses in the industrial segment totaled $4.9 million in 1996 as compared to
$8.3 million in 1995 for a decline of $3.4 million. The reduction in selling,
general and administrative expenses was mostly the result of lower headcount in
the areas of marketing, research and engineering. In addition, goodwill
amortization was $.7 million less in 1996 than 1995. Selling, general and
administrative expenses in the consumer product segment totaled $5.6 million as
compared to $6.5 million in 1995
-41-
for a decline of $.9 million. The reduction in selling, general and
administrative expenses during 1996 was primarily the result of the closing of
separate Culver facilities at the end of 1995 and the elimination of redundant
administrative functions.
1995 VERSUS 1994
FASTENERS AND SECURITY PRODUCTS DISTRIBUTION (CURTIS)
On November 13, 1995, Curtis Industries, Inc. ("Curtis") sold its retail
division to SDI Operating Partners, LP. The results of the retail division have
been reported as discontinued operations in the 1995 consolidated financial
statements. Prior periods have been restated to present the retail division as a
discontinued operation. All costs and expenses incurred as a result of the
retail division sale have been recorded in 1995 and no additional expenses are
anticipated.
Sales for Curtis for 1995 increased by $2.2 million or 3.3% to $68.8
million from $66.6 million in 1994. A telemarketing program, created in January
1995, accounts for $1.2 million of the sales increase. Increased sales in Canada
of $.6 million and the core domestic business of $.7 million were offset by a
decline in United Kingdom sales of $.3 million.
A one-time charge of $1.1 million was recorded, primarily for severance
and benefits following the close of its manufacturing operations at its
Eastlake, Ohio facility, in June 1995.
The gross margin decreased from 67.4% in 1994 to 66.5% in 1995. The 1995
decline in gross margin can be attributed to the high cost of manufacturing keys
and key duplicating machines prior to closing the manufacturing operations. Cost
savings associated with the purchase of keys and key machines from an outside
source were realized in the fourth quarter of 1995 when the gross margin
increased to approximately 67% compared to 66.3% for the first three quarters.
For the year, selling, general and administrative expenses, exclusive of
one-time charges, increased $.6 million. The increase results from variable
selling expenses associated with the higher 1995 sales volumes and increased
expenses associated with the recruitment and retention of sales representatives
of approximately $1 million in 1995, as management intensified efforts to build
up the domestic sales force in the second half of the year. The increased
domestic selling costs were offset by administrative staff reductions, reduced
health care costs and other cost containment measures.
SNACK FOODS (LINCOLN)
Sales decreased approximately 11% or $3.1 million to $24.2 million for
the twelve months ended December 31, 1995, versus $27.3 million in the
corresponding period of 1994. Gross sales decreased primarily due to lower
selling prices resulting from the Planters agreement. In addition, non-Planters
sales declined 5% due to increased domestic competition and changing market
conditions in the Far East. Case sales to Planters for the six months ended
December 31, 1995, represent 44% of the minimum number of cases required to be
purchased during Lincoln's fiscal year which ends June 30, 1996. Lincoln's
business is seasonal due to buying patterns of both Poppycock'r' and nut
products during the traditional holiday season. As a result, third and fourth
quarter sales account for a significant portion of annual sales.
Gross profit decreased by $2.4 million to $7.9 million for the twelve
months ended December 31, 1995, from $10.3 million in the corresponding period
of 1994 primarily due to lower revenue under the Planters agreement.
-42-
Selling, general, administrative and other expenses decreased $6.4
million to $8.3 million in the twelve months ended December 31, 1995, from $14.7
million in the same period in 1994. This decrease is primarily due to lower
freight costs, reduced trade and consumer promotional spending and reduced
administrative expenses resulting from the Planters agreement.
INDUSTRIAL THREADS AND BUTTONS (CARLYLE)
Sales for 1995 were $88.7 as compared with $76.8 million in 1994, an
increase of $11.9 million or approximately 16%. Sales in Carlyle's consumer
segment were $43.6 million in 1995, an increase of $13.4 million over 1994 sales
of $30.2 million. The increase in these sales during 1995 was primarily driven
by the full year inclusion of Carlyle Threads, Inc. (which prior to March 26,
1997 was known as Danfield Threads, Inc. ("Carlyle Threads") in 1995 results.
Carlyle Threads was acquired on June 30, 1994 and had sales of $18.9 million
during 1995 versus $9.0 million in the six months ended December 31, 1994. Also
contributing to the favorable sales variance in 1995 was $2.1 million of sales
contributed by Culver which was acquired on August 31, 1995 and a $1.4 million
increase in sales by Carlyle's button and consumer thread divisions. Sales in
Carlyle's industrial segment were $45.1 million in 1995 as compared with $46.6
million in 1994, for a decline of $1.5 million. Weakness in customers' primary
markets resulted in approximately a 3% sales decline during 1995.
The gross margin in 1995 was $22.7 million or 25.7% of sales as compared
with $22.7 million in 1994 or 29.6% of sales. The consumer segment gross margin
in 1995 was $13.8 million as compared with $11.7 million in 1994. The gross
margin percentage in 1995 was 31.7% compared with 38.9% in 1994. The gross
margin dollar improvement in 1995 was primarily the result of Carlyle Threads
which was included for a full year in 1995 as compared to six months in 1994.
The gross margin percentage decline was principally the result of lower margin
on Culver sales. The gross margin in the industrial segment in 1995 was $8.9
million or 19.8% of sales as compared with $11.0 million in 1994 or 23.6% of
sales, for a decline of $2.1 million. During 1995, the industrial segment
experienced higher raw material and labor costs and higher than historical
levels of manufacturing inefficiencies due to the effects of the consolidation
and relocation of facilities that occurred in 1994 and implementation issues
related to the new management information system. These increased costs were not
fully recouped through sales price increases.
Selling, general and administrative expenses totaled $15.9 million or
18.0% of sales in 1995 as compared to $15.8 million or 20.6% of sales in 1994.
Selling, general and administrative expenses in the consumer segment
totaled $4.8 million in 1995 or 11.0% of sales as compared with $3.7 million in
1994 or 12.3% of sales. The dollar increase in consumer segment selling, general
and administrative expenses was the result of a full year of Carlyle Threads
activity in 1995 versus six months in 1994 in addition to the inclusion of four
months of Culver activity in 1995 versus none in 1994. Selling, general and
administrative expenses in the industrial segment was $7.3 million in 1995
versus $7.1 million in 1994.
An impairment charge was recorded during 1995 related to Carlyle
Threads. The charge represented a $6.4 million adjustment to the book value of
assets to estimated fair value as of December 31, 1995 and the write off of a
proportionate amount of goodwill allocated to the thread division in connection
with the 1993 acquisition. The goodwill write-off was $17.4 million and other
related charges were $1.2 million. There were no such impairment charges in
1994.
Interest expense increased to $4.0 million in 1995 compared to $3.2
million in 1994. The increase was attributable to an increase in average
outstanding debt during 1995 to $45.9 million from $41.4 million in 1994. In
addition to the increase in the average debt level there was also an increase in
the weighted average interest rate from 7.8% in 1994 to 8.7% in 1995.
-43-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Certain of the information required is set forth under the captions
"Consolidated Balance Sheets," "Consolidated Statements of Operations,"
"Consolidated Statements of Cash Flows," "Consolidated Statements of Changes in
Stockholders' Equity" and "Notes to Consolidated Financial Statements" on pages
F-1 through F-33 hereof. See also the Noel Group, Inc. Financial Statement
Schedule included elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required with respect to directors and the information
required by Rule 405 of Regulation S-K is set forth under the caption "Election
of Directors" in the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A and is incorporated herein by reference.
The executive officers of the Company are as follows:
Officer
Name Position(s) Age Since
- ---- ----------- --- -------
Joseph S. DiMartino Chairman of the Board 53 March 1995
Stanley R. Rawn, Jr. Chief Executive Officer 69 March 1995
Karen Brenner Managing Director 41 April 1989
Donald T. Pascal Managing Director 37 May 1988
Samuel F. Pryor, IV Managing Director 41 November 1991
Todd K. West Vice President-Finance, Chief 36 August 1990
Financial Officer and Secretary
There is no arrangement or understanding between any director or
executive officer and any other person pursuant to which he was selected as a
director or officer. Directors hold office until the next Annual Meeting of
Shareholders and until their successors have been elected and qualified. The
executive officers of the Company are elected at the Annual Meeting of the Board
of Directors immediately following the Annual Meeting of Shareholders held in
the month of May. With the exception of Messrs. Samuel F. Pryor, III, a director
of Noel and Samuel F. Pryor, IV, a Managing Director of Noel, who are father and
son, no family relationship exists among any of the executive officers and
directors of the Company.
Biographical Information
Joseph S. DiMartino has served as a director of Noel since October 1990
and became Chairman of the Board of Noel effective March 20, 1995. Mr. DiMartino
serves as Chairman of the Dreyfus Group of mutual funds and served as President
and Chief Operating Officer of The Dreyfus Corporation, an investment adviser
and manager of the Dreyfus Group of mutual funds, from 1982 until December 31,
1994. Mr. DiMartino is also a director of Carlyle Industries, Inc. ("Carlyle"),
a leading manufacturer and marketer of industrial sewing
-44-
threads, and a distributor of a line of home sewing and craft products,
principally buttons, Staffing Resources, a provider of diversified staffing
services to a broad range of businesses in various industries throughout the
Mid- Atlantic, Southeastern, Southwestern and Rocky Mountain regions of the
United States, HealthPlan Services Corporation, a leading managed healthcare
services company, and Curtis Industries, Inc. ("Curtis"), a national distributor
of fasteners, security products, chemicals, automotive replacement parts,
fittings and connectors, and tools and hardware. Mr. DiMartino is also a
director of numerous funds in the Dreyfus Group of mutual funds. Mr. DiMartino
is a director of the National Muscular Dystrophy Association and a trustee of
Bucknell University.
Stanley R. Rawn, Jr. served as a director of Noel and its predecessor
company from 1969 until January 1987 and has served as a director of Noel since
June 1990. Mr. Rawn became Chief Executive Officer of Noel effective March 20,
1995. From November 1985 until May 1992, Mr. Rawn was Chairman and Chief
Executive Officer and a director of Adobe Resources Corporation, an oil and gas
exploration and production company which merged into Santa Fe Energy Resources,
Inc. in May 1992. Mr. Rawn is also a director of The Prospect Group, Inc.
("Prospect"), a company which, prior to its adoption of a Plan of Complete
Liquidation and Dissolution in 1990 and subsequent dissolution in 1997,
conducted its major operations through subsidiaries acquired in leveraged buyout
transactions, a Senior Managing Director and director of Swiss Army Brands, Inc.
("Swiss Army"), the exclusive United States and Canadian importer and
distributor of Victorinox Original Swiss Army Officers' knives and professional
cutlery, as well as the marketer of Swiss Army Brand watches and other products,
Chairman of the Executive Committee and a director of Staffing Resources, and a
trustee of the California Institute of Technology.
Karen Brenner has been a Managing Director of Noel since November 1991.
Previously, Ms. Brenner served as a director of Noel from October 1989 until
November 1991, and as a Vice President of Noel from April 1989 until November
1991. Prior to joining Noel, Ms. Brenner was a principal in a management and
financial consulting business, specializing in managing turnaround situations
for venture capital and leveraged buyout companies. Since June 1994 Ms. Brenner
has served as Chairman and Chief Executive Officer of Lincoln Snacks and has
also served as a director of Lincoln Snacks since its inception. Ms. Brenner was
formerly Chairman of the Board of Swiss Army Brands. Ms. Brenner has served as
Chairman of Carlyle since May 1996, as President and Chief Executive Officer
since October 1996, and as a director since February 1996. Ms. Brenner is
currently a director of On Assignment, Inc., a leading nationwide provider of
science professionals on temporary assignments to laboratories in the
biotechnology, environmental, chemical, pharmaceutical, food and beverage and
petrochemical industries, a member of the Board of Trustees of Prep for Prep, a
charitable organization dedicated to providing preparatory education to
disadvantaged children, and a trustee of the City Parks Foundation of New York.
Donald T. Pascal has been a Managing Director of Noel since November
1991. Previously, Mr. Pascal served as a director of Noel from October 1989
until November 1991, and as a Vice President and Secretary of Noel from May 1988
until November 1991, when he became a Managing Director. He served as a Vice
President of Prospect from March 1986 until February 1989. Prior to joining
Prospect, Mr. Pascal worked in the venture capital operations of E. M. Warburg
Pincus & Co., Inc. and for Strategic Planning Associates, a management
consulting firm. Mr. Pascal has served as Chairman of the Board of Connectivity
since May 1996. Mr. Pascal also serves as a director of Connectivity and as a
director of Sylvan Inc. ("Sylvan"), a company which produces mushroom spawn and
fresh mushrooms.
Samuel F. Pryor, IV has been a Managing Director of Noel since
November 1991. Previously, Mr. Pryor served as a director of Noel from October
1990 until November 1991. Mr. Pryor is also President, Chief Executive Officer
and a director of Prospect. Mr. Pryor joined Prospect in 1986 as a Vice
President, and served as Managing Director from 1988 until October 1991, when he
became President of Prospect. Before joining Prospect, Mr. Pryor worked at the
private banking firm of Brown Brothers Harriman & Co. from 1979 to 1986. Mr.
Pryor is a director of HealthPlan Services, Carlyle and Illinois Central
Corporation, a railroad holding company.
-45-
Todd K. West has served as Vice President-Finance since August 1990, as
Secretary since November 1991 and as Chief Financial Officer since January 27,
1993. Mr. West also served as Treasurer and Chief Financial Officer from August
1990 until November 1991. Mr. West joined Prospect in September 1988 and served
as Assistant Vice President-Finance, Assistant Treasurer and Assistant Secretary
from February 1989 until November 1990, when he became Vice President-Finance,
Chief Financial Officer, Treasurer and Secretary of Prospect. Mr. West became a
certified public accountant in 1987.
ITEM 11. EXECUTIVE COMPENSATION.
The information required is set forth under the captions "Management
Compensation" and "Certain Transactions" in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required is set forth under the caption "Security
Ownership of Certain Beneficial Owners" in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required is set forth under the caption "Certain
Transactions" in the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)
(1) - (2) Financial statements and financial statement schedules.
-------------------------------------------------------
The consolidated financial statements and financial statement
schedules listed in the accompanying Index to Consolidated Financial
Statements and Financial Statement Schedules are filed as part of this
annual report.
(3) Exhibits.
The exhibits listed on the accompanying Index of Exhibits are
filed as part of this annual report.
(b) Reports on Form 8-K.
None
-46-
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.
NOEL GROUP, INC.
(Registrant)
By /s/ Stanley R. Rawn, Jr.
-------------------------
Stanley R. Rawn, Jr.
Chief Executive Officer
Date: April 15, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ Joseph S. DiMartino April 15, 1997
- -----------------------------------------------------
Joseph S. DiMartino
Chairman of the Board; Director
/s/ Stanley R. Rawn, Jr. April 15, 1997
- -----------------------------------------------------
Stanley R. Rawn, Jr.
Chief Executive Officer;
Director (Principal Executive Officer)
/s/ Todd K. West April 15, 1997
- ------------------------------------------------------
Todd K. West
Vice President-Finance, Chief Financial Officer
and Secretary (Principal Financial Officer and
Principal Accounting Officer)
/s/ William L. Bennett April 15, 1997
- ------------------------------------------------------
William L. Bennett
Director
/s/ Livio M. Borghese April 15, 1997
- ----------------------------------------------------
Livio M. Borghese
Director
/s/ Vincent D. Farrell, Jr. April 15, 1997
- ----------------------------------------------------
Vincent D. Farrell, Jr.
Director
-47-
/s/ Herbert M. Friedman April 15, 1997
- ----------------------------------------------------
Herbert M. Friedman
Director
/s/ James K. Murray, Jr. April 15, 1997
- ----------------------------------------------------
James K. Murray, Jr.
Director
/s/ James G. Niven April 15, 1997
- ----------------------------------------------------
James G. Niven
Director
/s/ Samuel F. Pryor, III April 15, 1997
- ----------------------------------------------------
Samuel F. Pryor, III
Director
/s/ James A. Stern April 15, 1997
- ----------------------------------------------------
James A. Stern
Director
/s/ Edward T. Tokar April 15, 1997
- ----------------------------------------------------
Edward T. Tokar
Director
-48-
NOEL GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULES
Item 14(a)(1) - (2)
Page Reference
--------------
NOEL GROUP, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants F-3
Consolidated Balance Sheets
December 31, 1996 and December 31, 1995 F-4
Consolidated Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994 F-6
Consolidated Statements of Changes in
Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-9
HEALTHPLAN SERVICES CORPORATION AND SUBSIDIARIES:
Report of Independent Certified Public Accountants F-34
Consolidated Balance Sheets
December 31, 1996 and December 31, 1995 F-35
Consolidated Statements of Operations
For the year ended December 31, 1996, and December 31,
1995 and for the period from Inception (October 1, 1994)
through December 31, 1994 F-36
F-1
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 1996, December 31, 1995 and December 31, 1994
F-37
Consolidated Statements of Cash Flows
For the years ended December 31, 1996
and December 31, 1995 and for the Period
from Inception through December 31, 1994 F-38
Notes to Consolidated Financial Statements F-40
HEALTHPLAN SERVICES DIVISION
Report of Independent Accountants F-55
Statement of Financial Position
September 30, 1994 F-56
Statement of Income Nine-Month Period ended
September 30, 1994 F-57
Statement of Cash Flows Nine-Month Period ended
September 30, 1994 F-58
Notes to Financial Statements F-59
STAFFING RESOURCES, INC.
Report of Independent Accountants F-66
Financial statement schedules not included in this report have been omitted
because they are not applicable.
Schedule
No.
- ------
II Valuation and Qualifying Accounts
For the Years Ended December 31, 1996, 1995 and 1994 S-1
Financial statement schedules not included in this report have been omitted
because they are not applicable or the required information is shown in the
consolidated financial statements or the notes thereto.
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF NOEL GROUP, INC.
We have audited the accompanying consolidated balance sheets of Noel
Group, Inc., a Delaware corporation, and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 did not audit the financial
statements of HealthPlan Services Corporation ("HPS"), the investment in which
is reflected in the accompanying financial statements using the equity method of
accounting in 1996 and 1995. The investment in HPS represents 18% and 14% of
consolidated total assets as of December 31, 1996 and 1995, respectively, and
the equity in its net loss is $.5 million for 1996. The equity in its net income
is $3.4 million for 1995. In 1994, when HPS was a consolidated subsidiary of
Noel Group Inc. (see Note 3), the financial statements of HPS reflect total
assets and total revenues of 18% and 21%, respectively, of the consolidated
totals. We also did not audit the financial statements of Staffing Resources,
Inc. ("Staffing"), the investment in which is reflected in the accompanying
financial statements using the equity method of accounting in 1996. The
investment in Staffing represents 9% of consolidated total assets as of December
31, 1996 and the equity in its net loss is $1.2 million for 1996. The statements
of HPS and Staffing were audited by other auditors whose reports have been
furnished to us and our opinion, insofar as it relates to the amounts included
for HPS in 1996, 1995 and 1994, and for Staffing in 1996 is based solely on the
reports of the other auditors.
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 statements presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
As described in Note 1 to the financial statements, the shareholders of
Noel Group, Inc. approved a plan of liquidation and dissolution on March 19,
1997. As a result, the Company has changed its basis of accounting for periods
subsequent to March 19, 1997, from the going-concern basis to the liquidation
basis.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Noel Group, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
April 3, 1997 Arthur Andersen LLP
F-3
NOEL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1996 1995
---- ----
(DOLLARS IN THOUSANDS EXCEPT
PAR VALUES)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 1,117 $ 10,446
Short-term investments.......................................... 8,983 18,378
Accounts receivable, less allowances
of $3,718 and $2,867.......................................... 24,023 21,111
Inventories..................................................... 34,157 30,460
Other current assets............................................ 4,232 4,294
----- -----
Total current assets............................................ 72,512 84,689
Equity investments (Note 3)............................................ 68,026 34,520
Other investments (Note 5)............................................. 639 20,174
Property, plant and equipment, net (Note 6)............................ 37,671 40,563
Intangible assets, net................................................. 46,015 44,562
Other assets........................................................... 5,658 15,249
----- ------
Total assets........................................................... $230,521 $239,757
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt
(Note 7)...................................................... $4,719 $5,233
Trade accounts payable.......................................... 13,226 12,339
Accrued compensation and benefits............................... 5,567 5,769
Net liabilities of discontinued
operations (Note 4)........................................... 3,597 793
Other current liabilities....................................... 8,417 18,408
----- ------
Total current liabilities....................................... 35,526 42,542
Long-term debt (Note 7)................................................ 60,983 69,197
Other long-term liabilities............................................ 29,085 28,913
Minority interest...................................................... 7,567 6,185
----- -----
Total liabilities.......................................... 133,161 146,837
------- -------
STOCKHOLDERS' EQUITY: (NOTES 9 AND 10)
Preferred stock, $.10 par value,
2,000,000 shares authorized, none
outstanding................................................... -- --
Common stock, $.10 par value, 48,000,000
shares authorized, 20,222,642 and
20,203,233 issued, respectively............................... 2,022 2,020
Capital in excess of par value.................................. 211,633 204,466
Accumulated deficit............................................. (115,123) (112,466)
Cumulative translation adjustment............................... (481) (613)
Treasury stock at cost, 34,937 and 11,000
shares, respectively.......................................... (691) (487)
----- -----
Total stockholder's equity................................. 97,360 92,920
------ ------
Total liabilities and stockholders' equity................. $230,521 $239,757
======== ========
The accompanying notes are an integral part of these financial statements.
F-4
NOEL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
REVENUE ITEMS:
Sales .................................... $ 189,325 $ 181,709 $ 93,888
HealthPlan Services revenue from
services ............................... -- -- 25,233
------------ ------------ ------------
189,325 181,709 119,121
------------ ------------ ------------
COST AND EXPENSE ITEMS:
Cost of sales ............................ 106,426 105,318 38,761
HealthPlan Services costs of
services ............................... -- -- 21,299
Selling, general, administrative
and other expenses ..................... 69,246 71,799 68,993
Impairment charge (Note 3) ............... -- 29,155 --
Depreciation and amortization ............ 4,459 4,888 2,799
------------ ------------ ------------
180,131 211,160 131,852
------------ ------------ ------------
Operating income (loss) ......................... 9,194 (29,451) (12,731)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Other income (Note 11) ................... 599 6,703 8,328
Income (Loss) from equity
investments ............................ (4,707) 3,761 (182)
Interest expense ......................... (7,970) (7,801) (3,748)
Minority interest ........................ (1,363) 10,923 575
------------ ------------ ------------
(13,441) 13,586 4,973
------------ ------------ ------------
Loss from continuing operations
before income taxes ........................... (4,247) (15,865) (7,758)
Benefit (Provision) for income taxes
(Note 12) ..................................... 1,142 284 (1,695)
------------ ------------ ------------
Loss from continuing operations ................. (3,105) (15,581) (9,453)
Income (Loss) from discontinued
operations (Note 4) ........................... 448 (6,544) (7,614)
------------ ------------ ------------
Net loss ............................ $ (2,657) $ (22,125) $ (17,067)
============ ============ ============
LOSS PER COMMON AND COMMON
EQUIVALENT SHARE FROM:
Continuing operations .................... $ (0.15) $ (0.77) $ (0.47)
Discontinued operations .................. 0.02 (0.33) (0.38)
------------ ------------ ------------
Net loss per common and
common equivalent share ........... $ (0.13) $ (1.10) $ (0.85)
============ ============ ============
Weighted average common and common
equivalent shares ............................. 20,187,705 20,192,233 20,192,233
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
NOEL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Cash Flows from Operating Activities:
Net Loss .................................................. $ (2,657) $(22,125) $(17,067)
Adjustments to reconcile net income
to net cash provided from (used for)
operating activities:
(Income) Loss from equity
investments ............................................. 4,707 (3,761) 182
Depreciation and amortization ............................. 6,873 7,717 5,196
Net gain (loss) on securities ............................. 85 (5,533) (5,203)
Provisions for doubtful accounts
and valuation of inventories ............................ (40) 1,554 599
(Benefit) Provision for deferred
income taxes ............................................ 2,729 (674) 244
(Gain) Loss on property and
equipment ............................................... (131) 418 105
Minority interest, net .................................... 1,363 (10,923) (513)
Non-incentive stock option
expense ................................................. -- -- 4,853
Impairment charge ......................................... -- 29,155 --
Accrued dividends ......................................... -- -- (2,217)
(Income) Loss on disposal of
discontinued operations ................................. (448) 5,234 5,915
Other, net ................................................ 530 889 555
Changes in certain assets and liabilities, net of acquisitions:
Accounts receivable ....................................... (2,885) 2,160 137
Inventories ............................................... (1,101) 2,147 (1,284)
Restricted cash ........................................... -- -- (2,150)
Trade accounts payable .................................... 53 491 3,282
Accrued compensation and benefits ......................... (209) 221 (321)
Other, net ................................................ (5,534) (6,136) 1,933
Discontinued operations .......................................... (1,331) 8,872 --
-------- -------- --------
Total adjustments ............................... 4,661 31,831 11,313
-------- -------- --------
Net cash provided from (used for)
operating activities ........................................... 2,004 9,706 (5,754)
-------- -------- --------
F-6
For the Years Ended December 31,
--------------------------------
1996 1995 1995
---- ---- ----
(Dollars in thousands)
Cash Flows From Investing Activities:
Payments for companies purchased,
net of cash acquired .............. (6,716) (3,050) (17,391)
Cash of deconsolidated subsidiary ... -- (4,303) --
Sales of short-term investments,
net ............................... 9,399 3,845 7,395
Purchases of marketable
securities ........................ -- -- (840)
Sales of marketable securities ...... -- -- 14,415
Purchases of investments ............ (8,084) (11,105) (11,976)
Sales of investments ................ -- 972 3,683
Sales of discontinued operations .... 8,190 23,977 899
Purchases of property, plant and
equipment ......................... (4,313) (4,857) (1,804)
Sales of property, plant
and equipment ..................... 2,175 1,724 328
Other, net .......................... (1,653) (845) (214)
--------- --------- ---------
Net cash provided from (used for)
investing activities ..................... (1,002) 6,358 (5,505)
--------- --------- ---------
Cash Flows From Financing Activities:
Borrowings from revolving credit
line and long-term debt ........... 135,441 143,848 115,176
Repayments of revolving credit
line and long-term debt ........... (144,528) (154,950) (119,568)
Issuance of common stock, net ....... -- 25 14,884
Change in other long-term
liabilities ....................... (1,287) (3,012) --
Other, net .......................... (95) -- (708)
--------- --------- ---------
Net cash provided from (used for)
financing activities ..................... (10,469) (14,089) 9,784
--------- --------- ---------
Effect of exchange rates on cash ........... 138 22 8
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents ......................... (9,329) 1,997 (1,467)
Cash and cash equivalents at
beginning of year ........................ 10,446 8,449 9,916
--------- --------- ---------
Cash and cash equivalents at end of
year ..................................... $ 1,117 $ 10,446 $ 8,449
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-7
NOEL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
Common Stock Capital in
------------ Excess of Accumulated
Shares Amount Par Value Deficit
------ ------ --------- -------
Balance, January 1, 1994........................... 20,203 $2,020 $188,837 $(73,274)
Net loss........................................... -- -- -- (17,067)
Distribution to stockholders (Note 9).............. -- -- (708) --
Subsidiary stock transaction (Note 3).............. -- -- 2,424 --
Unrealized holding gains........................... -- -- -- --
Cumulative translation adjustment.................. -- -- -- --
Other.............................................. -- -- (837) --
------- ------ -------- ---------
Balance, December 31, 1994......................... 20,203 2,020 189,716 (90,341)
Net loss........................................... -- -- -- (22,125)
Subsidiary stock transaction (Note 3).............. -- -- 14,442 --
Cumulative translation adjustment.................. -- -- -- --
Other.............................................. -- -- 308 --
------- ------ -------- ---------
Balance, December 31, 1995......................... 20,203 2,020 204,466 (112,466)
Net loss........................................... -- -- -- (2,657)
Subsidiary stock transactions (Note 3)............. -- -- 7,004 --
Purchase of treasury stock......................... -- -- -- --
Issuance of common stock........................... 19 2 163 --
Cumulative translation adjustment.................. -- -- -- --
------- ------ -------- ----------
Balance, December 31, 1996......................... 20,222 $2,022 $211,633 $(115,123)
======= ====== ======== ==========
Unrealized Cumulative
Holding Translation Treasury Stock Stockholders'
Gains Adjustment Shares Amount Equity
----- ---------- ------ ------ ------
Balance, January 1, 1994........................... $6,592 $(566) 11 $(487) $123,122
Net loss........................................... -- -- -- -- (17,067)
Distribution to stockholders (Note 9).............. -- -- -- -- (708)
Subsidiary stock transaction (Note 3).............. -- -- -- -- 2,424
Unrealized holding gains........................... (6,592) -- -- -- (6,592)
Cumulative translation adjustment.................. -- (73) -- -- (73)
Other.............................................. -- -- -- -- (837)
------- ------ --- ------- -------
Balance, December 31, 1994......................... 0 (639) 11 (487) 100,269
Net loss........................................... -- -- -- -- (22,125)
Subsidiary stock transaction (Note 3).............. -- -- -- -- 14,442
Cumulative translation adjustment.................. -- 26 -- -- 26
Other.............................................. -- -- -- -- 308
------- ------ --- ------- -------
Balance, December 31, 1995......................... 0 (613) 11 (487) 92,920
Net loss........................................... -- -- -- -- (2,657)
Subsidiary stock transactions (Note 3)............. -- -- -- -- 7,004
Purchase of treasury stock......................... -- -- 24 (204) (204)
Issuance of common stock........................... -- -- -- -- 165
Cumulative translation adjustment.................. -- 132 -- -- 132
------- ------ --- ------ -------
Balance, December 31, 1996......................... $0 $(481) $35 $(691) $97,360
======= ====== === ====== =======
The accompanying notes are an integral part of these financial statements.
F-8
NOEL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION
On March 19, 1997, the Shareholders of Noel Group, Inc.'s ("Noel") approved
a Plan of Complete Liquidation and Dissolution (the "Plan") which had been
adopted by Noel's Board of Directors on May 21, 1996. Under the Plan, Noel will
be liquidated (i) by the sale of such of its assets as are not to be distributed
in-kind to its shareholders, and (ii) after paying or providing for all its
claims, obligations and expenses, by cash and in-kind distributions to its
shareholders pro rata, and, if required by the Plan or deemed necessary by the
Board of Directors, by distributions of its assets from time to time to one or
more liquidating trusts established for the benefit of the then shareholders, or
by a final distribution of its then remaining assets to a liquidating trust
established for the benefit of the then shareholders. Noel adopted the
liquidation basis of accounting as of March 19, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General:
Prior to the approval of the Plan, Noel conducted its principal operations
through small and medium-sized companies in which Noel held controlling or other
significant equity interests. The 1994 financial statements have been restated
to reflect Simmons Outdoor Corporation ("Simmons"), the home furnishings
division of Carlyle Industries, Inc., formerly known as Belding Heminway
Company, Inc. ("Carlyle"), Curtis Industries, Inc. ("Curtis") retail division
and TDX Corporation ("TDX") as discontinued operations. See Note 4. In addition,
the historical financial statements have been reclassified to conform with the
current year's presentation.
Consolidation:
The consolidated financial statements include the accounts of Noel and its
subsidiaries, Carlyle, Curtis, and Lincoln Snacks Company ("Lincoln"),
(collectively the "Company"), after the elimination of significant intercompany
transactions. Carlyle is included in the consolidated statement of operations
from January 1, 1995, following Noel's December 1994, exchange of Carlyle
preferred stock and accrued dividends for 30% of Carlyle's common equity and
maintenance of voting control through Noel's remaining holding of Carlyle's
preferred stock.
HealthPlan Services Corporation ("HPS"), which was acquired by Noel on
September 30, 1994, is included in the 1994 consolidated financial statements.
Following HPS' initial public offering on May 19, 1995 and Noel's simultaneous
exchange of its entire holding of HPS preferred stock and accrued dividends into
HPS common stock, Noel's voting interest in HPS dropped below 50%. Therefore,
for the year ended December 31, 1995, HPS is accounted for under the equity
method of accounting as if HPS had been an equity investment for all of 1995.
Noel's equity in HPS' results for the years ended December 31, 1996 and 1995, is
included in income (loss) from equity investments on the consolidated statements
of operations.
Cash and Cash Equivalents and Short-term Investments:
The Company considers all highly liquid investments with a maturity of
three months or less, at the date of acquisition, to be cash equivalents.
Carrying amounts of short-term investments approximate fair value.
F-9
Investments in Debt and Equity Securities:
The Company's marketable securities and its other investments in equity
securities that have readily determinable fair values are classified as
available-for-sale securities. The equity method of accounting is used for (i)
common equity investments in which the Company's voting interest is from 20%
through 50%, (ii) for investments where Noel's voting interest is below 20% but
Noel has the ability to exercise significant influence over an investee and
(iii) for limited partnership investments. The cost method of accounting is used
for common equity investments in which the Company's voting interest is less
than 20% for which fair values are not readily determinable and for which
significant influence cannot be exercised. A non-temporary decline in the value
of any equity or cost basis investment is expensed at the time such decline is
identified.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
Inventories:
Inventories, net of reserves, consist of the following (dollars in
thousands):
December 31,
---------------------------
1996 1995
----------- --------
Raw materials and supplies $ 7,189 $ 6,088
Work in process 4,201 6,033
Finished goods 22,767 18,339
-------- -------
$34,157 $30,460
======== =======
Inventories are stated at lower of cost or market, determined principally
by the FIFO method. At December 31, 1996 and 1995, inventories of $18,533,000
and $12,455,000, respectively, are valued by the LIFO method, and inventories of
$5,905,000 are valued by the average cost method in 1995. If the FIFO method had
been used, the stated amounts of inventories would not have been materially
affected.
Property, Plant and Equipment:
Property, plant and equipment are carried at cost. Depreciation is
provided primarily using the straight-line method over the estimated useful
lives of the related assets as follows:
Machinery and equipment 3 - 25 years
Buildings and leasehold improvements 7 - 35 years
Furniture and fixtures 3 - 30 years
Leasehold improvements are depreciated using the straight-line method over
the lives of the related leases or their estimated useful lives, whichever are
shorter. The cost of repairs and maintenance is charged to expense as incurred,
while renewals and betterments are capitalized.
F-10
Intangible Assets:
Intangible assets, primarily costs in excess of the fair value of net
assets acquired, are being amortized using the straight-line method over periods
ranging from 3 to 30 years. Intangible assets consist of the following (dollars
in thousands):
December 31,
----------------------
1996 1995
---- ----
Goodwill $ 53,180 $ 49,680
Other 612 839
-------- --------
53,792 50,519
Less: Accumulated amortization (7,777) (5,957)
-------- --------
$ 46,015 $ 44,562
======== ========
The realizability of goodwill is evaluated by segment. The Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
("SFAS 121"), effective January 1, 1995. The adoption of SFAS 121 did not have a
material impact on the Company's financial position or results of operations.
Minority Interest:
Minority interest includes $4,193,000 and $2,741,000 related to redeemable
preferred stock of subsidiaries at December 31, 1996 and 1995, respectively.
Financial Instruments:
The carrying amount of the Company's financial instruments, for which it
was practicable to determine fair value, approximates fair value.
Foreign Currency Translation:
Assets and liabilities of foreign operations are translated into U.S.
dollars using period-end exchange rates, while revenue and expenses are
translated at average exchange rates throughout the period. Adjustments
resulting from translation are recorded as a separate component of stockholders'
equity. Gains and losses resulting from foreign currency transactions are
recognized in the results of operations in the period incurred.
Revenue:
Revenue from product sales is recorded at the time of shipment.
HPS derives revenue from services and its revenue and expenses are shown as
revenue from services and costs of services in the 1994 statement of operations.
HPS recognizes contractual and service revenue ratably over contractual periods
or as claims processing and administrative services are performed. Revenue
collected in advance is recorded as deferred revenue and recognized when the
related services are performed.
F-11
Other Income:
Interest income is accrued and reported as earned only to the extent that
management anticipates such amounts to be collectible. Accrued interest is
evaluated periodically and an allowance for uncollectible interest income is
established when necessary.
Loss Per Common and Common Equivalent Share:
Loss per share is computed based on the weighted average number of shares
of Noel Common Stock and dilutive equivalents outstanding during the respective
periods. Fully diluted earnings per share have not been presented since the
computation would be antidilutive.
3. INVESTMENTS AND ACQUISITIONS
Ferrovia Novoeste, S.A.
On March 5, 1996, a consortium led by Noel and Chase Capital Partners,
formerly Chemical Venture Partners, purchased by auction the concession for the
Brazilian federal railroad's western network for approximately $63.6 million.
The purchase of the network consists of a 30-year concession and a lease of the
federal railroad's equipment. Noel invested $8.0 million for approximately 34%
of the concession holder, Ferrovia Novoeste, S.A., ("Novoeste"), which began
operating the railroad on July 1, 1996. Noel's share of Novoeste's loss for the
period ended December 31, 1996 is $3,066,000.
Summarized financial information for Novoeste is as follows (dollars in
thousands):
December 31,
1996
----
Current assets $ 4,999
Noncurrent assets $71,652
Current liabilities $ 3,178
Noncurrent liabilities $61,311
Six Months Ended
December 31, 1996
-----------------
Revenue from services $17,498
Operating costs and expenses $19,959
Net loss $(7,350)
Staffing Resources, Inc.
On July 31, 1995, Noel received 1,026,104 shares of common stock of
Staffing Resources, Inc. ("Staffing") as payment for its $8,190,000 face value
subordinated note from Brae Group, Inc. ("Brae Note"), plus accrued interest of
$3,097,000. Noel recognized a gain of $6,598,000 on the payment of the Brae
Note.
On November 15, 1995, Noel purchased an additional 1,000,000 shares of
Staffing common stock for $11,000,000 in a private placement offering.
F-12
Staffing was recorded as a cost basis investment at December 31, 1995.
During 1996, Noel began accounting for Staffing under the equity method of
accounting and recorded an equity loss of $1,174,000 representing its share of
Staffing's losses from July 31, 1995, the date of Noel's acquisition of the
Staffing shares, through December 31, 1996. Staffing issued additional common
shares in 1996 and 1995, diluting Noel's common ownership percentage to
approximately 16%. These share issuances were recorded as subsidiary stock
transactions by Noel with an increase of $1,199,000, net of taxes of $618,000,
recorded directly to capital in excess of par value in 1996.
Summarized financial information for Staffing is as follows (dollars in
thousands):
December 31,
1996
----
Current assets $ 43,714
Noncurrent assets $140,514
Current liabilities $ 25,220
Noncurrent liabilities $ 69,340
Year Ended December 31,
1996
----
Revenue from services $300,898
Operating costs and expenses $296,908
Net income (loss) $ (1,758)
Staffing is a provider of staffing services to businesses in various
industries in the Mid-Atlantic, Southwest, Southeast and Rocky Mountain regions
of the United States.
HealthPlan Services Corporation
Pursuant to a Stock Purchase Agreement dated September 2, 1994, by and
among The Dun & Bradstreet Corporation, its wholly-owned subsidiary Dun &
Bradstreet Plan Services, Inc., Noel, HPS, formerly GMS Acquisition Company, and
certain other investors, HPS purchased all of the outstanding stock of
HealthPlan Services, Inc. for a cash purchase price of $19,000,000, excluding
$1,309,000 of related expenses, and the assumption of designated liabilities.
Noel and other investors capitalized HPS with $20,000,000 and arranged a
$20,000,000 line of credit to support working capital requirements.
The acquisition was accounted for as a purchase. The excess of the
allocated purchase price over the fair value of the net tangible assets
acquired, $30,730,000 was recorded as goodwill and is being amortized over a 25
year period.
On May 19, 1995, HPS completed an initial public offering of 4,025,000
newly issued common shares, raising net proceeds of $50,806,000. Following HPS'
initial public offering and Noel's exchange of its entire holding of HPS
preferred stock and accrued dividends into common equity, Noel's common equity
ownership percentage of HPS decreased from approximately 58% to approximately
42%. The offering was recorded as a subsidiary stock transaction by Noel with an
increase of $14,421,000, net of taxes of $1,012,000, recorded directly to
capital in excess of par value. Following Noel's exchange of its holding of HPS
preferred stock, Noel's holding of HPS common stock increased to 5,595,846
shares.
During 1996, Noel's ownership percentage of HPS was further diluted to
approximately 37% when HPS issued 1,561,067 common shares related to the
acquisition of two new operating units. These and other share
F-13
issuances were also recorded as subsidiary stock transactions by Noel, with an
increase of $5,792,000, net of taxes of $2,984,000, recorded directly to capital
in excess of par value.
On February 7, 1997, Noel sold 1,320,000 shares of HPS. See Note 19.
Summarized financial information for HPS is as follows (dollars in
thousands):
December 31,
1996 1995
---- ----
Current assets $ 46,495 $ 53,116
Noncurrent assets $198,206 $ 59,551
Current liabilities $ 73,424 $ 30,103
Noncurrent liabilities $ 62,494 $ 1,598
Year Ended December 31,
1996 1995
---- ----
Revenue from services $191,493 $ 98,187
Operating costs and expenses $199,314 $ 84,550
Net income (loss) $ (6,716) $ 9,535
After performing a review for impairment of long-lived assets related to
each of HPS' acquired businesses and applying the principles of measurement
contained in FASB 121, HPS recorded a charge against earnings of $13,700,000 in
the third quarter of 1996, representing approximately 7.6% of HPS' pre-charge
goodwill. This charge was attributable to impairment of goodwill recorded on the
acquisitions made in 1995. Any further significant declines in HPS' projected
net cash flows, with respect to such acquisitions, may result in additional
write-downs of remaining goodwill.
Starting in 1994, HPS pursued contracts with state-sponsored health care
purchasing alliances, initially in Florida, and in 1995 and 1996, in North
Carolina, Kentucky, and Washington. HPS incurred substantial expenses in
connection with the start-up of these contracts, and, to date, the alliance
business has been unprofitable. HPS recorded a pre-tax charge related to these
contracts in the amount of $2,600,000 in the third quarter of 1996 resulting
from increased costs and lower than anticipated revenues in Florida and North
Carolina. In Florida, HPS is negotiating a new contract which is scheduled to
commence in 1997.
In the third quarter of 1996, HPS recorded a charge of $1,400,000 to
reflect the cost of exiting certain excess office space and terminating
employees.
HPS is a leading provider of marketing, administrative and risk management
services and solutions for benefit programs. HPS' clients include managed care
organizations, insurance companies, integrated health care delivery systems,
self-funded benefit plans, and health care purchasing alliances.
Carlyle Industries, Inc.
On July 21, 1993, BH Acquisition Corporation ("BH Acquisition"), a wholly
owned subsidiary of Noel, concluded a tender offer (the "Offer") for the
outstanding common stock of Carlyle at $30.25 per share in cash. Following the
Offer, on October 29, 1993, BH Acquisition owned 72.8% of the outstanding shares
and was merged with and into Carlyle (the "Merger"). The Offer and the Merger
are referred to together as the "Acquisition".
F-14
The Acquisition was financed by a $41,500,000 equity contribution from Noel
and by borrowings from a group of banks. The total purchase price including
banking, advisory and other fees, and shares acquired following the Offer was
approximately $64,500,000.
The acquisition was accounted for as a purchase. The excess of the
allocated purchase price over the fair value of the net tangible assets
acquired, $40,000,000, was recorded as goodwill and is being amortized over a 30
year period.
In February 1994, Noel spun off its entire common equity interest in the
recapitalized Carlyle to Noel stockholders at a rate of .175434 new Carlyle
share for every Noel share held. Pursuant to the accounting rules for spin-offs,
no gain was recognized.
In December 1994, Noel exchanged $18,813,000 of preferred stock and
$3,216,000 of accrued dividends for 30% of Carlyle's outstanding common stock.
Noel retained voting control through its remaining holding of Carlyle preferred
stock. Because Noel had both a substantial common equity interest and voting
control of Carlyle as of December 31, 1994, Carlyle was consolidated as of that
date. In 1994, Noel recognized a loss of $3,912,000 on the preferred stock
exchange and recorded preferred dividend income of $2,217,000 through the date
of the exchange.
During 1995, Carlyle's thread division results were substantially below
historical levels and the levels expected when Carlyle was acquired in 1993.
Based on this performance and projected future levels of operations, Carlyle's
management determined that certain assets were impaired and recorded an
impairment charge of $25,000,000. This charge represents a write-off of goodwill
of $17,400,000, a charge of $6,400,000 to adjust the book value of assets to
their December 1995 fair value and other related charges of $1,200,000. Noel
also recorded a charge of $4,155,000 to write off its goodwill related to
Carlyle's thread division.
In July 1996, Carlyle completed the sale of its home furnishing division.
See Note 4. In December 1996, Carlyle announced an agreement to sell the assets
of its thread division. See Note 19.
Carlyle distributes a line of home sewing and craft products, principally
buttons.
Curtis Industries, Inc.
On August 17, 1992, Noel purchased newly-issued equity securities of Curtis
for $15,000,000 for approximately 65% of Curtis' equity. The acquisition was
accounted for as a purchase. The excess of the allocated purchase price over the
fair value of the net tangible assets acquired, $17,592,000, was recorded as
goodwill and is being amortized over a 30 year period. On November 13, 1995,
Curtis sold its retail division to SDI Operating Partners, LP, ("SDI") in order
to focus on its automotive and industrial division. See Note 4.
In May, 1996, Curtis acquired certain assets of the Mechanics Choice
business of Avnet, Inc. for approximately $6,600,000. Mechanics choice is a
distributor, selling industrial maintenance and repair operations products
similar to the existing product line Curtis offers. The acquisition was
accounted for as a purchase by Curtis. The excess of the allocated purchase
price over the fair value of net tangible assets acquired, $2,900,000 was
recorded as goodwill and is being amortized over a 20 year period.
Curtis is a national distributor of fasteners, security products,
chemicals, automotive replacement parts, fittings and connectors, tools and
hardware.
F-15
Lincoln Snacks Company
On August 31, 1992, Lincoln purchased certain assets of the Lincoln Snack
Company, a division of Sandoz Nutrition Corporation ("Sandoz"). The purchase
price, which was paid in cash, was $13,000,000, including expenses. The
acquisition was accounted for as a purchase. The excess of the allocated
purchase price over the fair value of the net tangible assets acquired,
$3,528,000, was recorded as goodwill and is being amortized over a 30 year
period.
On January 14, 1994, Lincoln completed an initial public offering of
2,472,500 shares of newly issued common stock which raised $9,593,000 for
Lincoln, net of expenses. At the time of the offering, Noel converted its entire
holding of shares of Lincoln preferred stock and accrued dividends for 1,728,755
shares of Lincoln common stock. Noel's interest in Lincoln's common equity was
approximately 58% following the offering. The offering was recorded as a
subsidiary stock transaction by Noel, with an increase of $2,438,000 recorded
directly to capital in excess of par value.
Lincoln is one of the leading manufacturers and marketers in the United
States and Canada of caramelized pre-popped popcorn with a product line that
includes Poppycock'r', Fiddle Faddle'r', and Screaming Yellow Zonkers'r'. On
July 17, 1995, an exclusive distribution agreement with the Planters Company, an
operating unit of Nabisco, Inc., commenced for the sale and distribution of
Fiddle Faddle and Screaming Yellow Zonkers in the United States. On February 28,
1997, this agreement was amended, extending the term until December 31, 1997, at
which time the distribution arrangement will terminate. Also, under the
amendment, Lincoln will resume sales and distribution of Screaming Yellow
Zonkers on May 1, 1997. Although the amendment and extension contain provisions
designed to effect a smooth transfer of the distribution business back to
Lincoln, there can be no assurance that this will be the case.
4. DISCONTINUED OPERATIONS
The historical financial statements have been restated to reflect Simmons,
Carlyle's home furnishings division, Curtis' retail division and TDX as
discontinued operations.
As a result of Carlyle's decision to divest its home furnishings
operations, Carlyle recorded an estimated loss on disposal of $18,000,000, net
of income tax benefit, including $7,599,000 of goodwill write-off, in the fourth
quarter of 1995. Noel recorded a charge of $1,813,000 to write off its goodwill
related to Carlyle's home furnishings division. These charges, the related
minority interest benefit of $8,584,000 and Carlyle's best estimate of the
amounts to be realized on the sale of its home furnishings division were
included in discontinued operations in the 1995 statement of operations. On July
31, 1996, Carlyle completed the sale of the division. Proceeds received on the
sale, adjusted for closing costs and changes in the net asset value of the
division subsequent to the contract date totaling $8,200,000 were used to repay
outstanding bank indebtedness. This division had sales of approximately
$19,200,000 and $30,084,000 for the period ended July 31, 1996 and the year
ended December 31, 1995, respectively.
On December 19, 1995, S.O.C. Corporation, a wholly-owned subsidiary of
Blount Inc., completed a $10.40 per share cash tender offer for the outstanding
shares of common stock of Simmons. Pursuant to the tender offer, Noel sold
1,666,163 shares for $17,328,000. Simmons had revenue of $40,857,000 through
December 19, 1995, and revenue of $51,977,000 for the year ended December 31,
1994. Simmons imports, distributes and markets optical products for the sporting
goods industry in the United States and Canada, including riflescopes,
binoculars and telescopes.
F-16
On November 13, 1995, Curtis sold its retail division to SDI for $7,200,000
and no gain or loss was realized on this sale. Retail sales for the period ended
November 13, 1995, were $13,937,000, and were $19,412,000 for the year ended
December 31, 1994.
In December 1995, Noel's Board of Directors authorized the sale of Noel's
holding of TDX common stock. TDX had revenue of approximately $5,110,000,
$6,700,000 and $3,143,000 during 1996, 1995 and 1994, respectively, and had a
net loss of approximately $501,000 during 1996. Noel expects to sell TDX during
1997.
The remaining net liabilities of Carlyle's home furnishings division at
December 31, 1996, of $3,597,000 and the liabilities of this division net of the
expected sales proceeds at December 31, 1995, of $793,000 have been segregated
in the consolidated balance sheets. The net assets of TDX in 1996 of $268,000
and TDX and Curtis' retail division totaling $779,000 in 1995 are included in
other assets at December 31, 1996 and 1995.
The components of loss from discontinued operations are as follows (dollars
in thousands):
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Income (Loss) from operations:
Simmons $ - $ 832 $ 4,935
Carlyle - 46 -
Curtis - (1,489) (1,095)
TDX - (306) (3,882)
--------- --------- --------
- (917) (42)
Less: Income tax provision - (393) (1,657)
--------- --------- --------
$ - $ (1,310) $ (1,699)
========= ========= ========
Income (Loss) on disposal:
Simmons $ - $ 7,026 $ -
Carlyle 709 (14,819) -
TDX - (379) (5,915)
--------- --------- --------
709 (8,172) (5,915)
Add: Income tax (provision)
benefit (261) 2,938 -
--------- --------- --------
$ 448 $ (5,234) $ (5,915)
========= ========= ========
The 1994 loss on disposal relates to TDX's 1994 decision to dispose of two
of its subsidiaries. In September 1994, substantially all of the operations of
TDX's subsidiary Safe Way Disposal Systems, Inc. ("Safe Way"), a
F-17
regional medical waste disposal company, were sold to a third party. Noel's
portion of the estimated losses of Safe Way was $2,230,000. The operations of
another TDX subsidiary, Transactional Media, Inc. ("TMI"), an infomercial
company, were also discontinued during 1994. In connection with this
discontinuance, Noel recorded a charge of $3,685,000 to adjust the carrying
value of its investment to estimated realizable value.
5. OTHER INVESTMENTS
Other investments at December 31, 1995, were primarily Noel's holding of
Staffing as described in Note 3.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in
thousands):
December 31,
--------------------------
1996 1995
---- ----
Land $ 2,157 $ 3,536
Buildings and leasehold improvements 20,330 20,015
Machinery and equipment 27,816 27,469
Furniture and fixtures 170 446
----------- ----------
50,473 51,466
Less: Accumulated depreciation (12,802) (10,903)
----------- ----------
$ 37,671 $ 40,563
=========== ==========
F-18
7. LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
December 31,
----------------------------
1996 1995
----------- ----------
Carlyle senior bank facilities $ 36,929 $ 46,100
Carlyle Connecticut Development Authority note payable,
5%, due 1999 65 87
Curtis note payable on equipment purchase, 9 1/2%, due 1997 71 -
Curtis revolving line of credit, LIBOR plus 3% or prime
plus 1%, due 1999 7,898 3,602
Curtis senior secured subordinated notes, 12%, due 1999 12,000 12,000
Curtis subordinated debentures, 13 1/8%, due 2002 9,189 9,189
Curtis Delaware Industrial Revenue Bond, variable rate,
due 2003 - 1,000
Curtis note payable on leasehold improvement, 10% due 2006 491 -
Lincoln term loan, prime plus 1 3/4% or
a Eurodollar rate plus 3 1/4%, due 1997 450 1,509
Capital lease obligations 276 2,968
----------- ----------
67,369 76,455
Less:
Current portion (4,719) (5,233)
Unamortized discount (1,667) (2,025)
----------- ----------
$ 60,983 $ 69,197
=========== ==========
On December 30, 1996, Carlyle entered into a new credit facility in the
aggregate amount of $42,000,000, consisting of two term loans aggregating
$22,000,000 and a $20,000,000 revolving credit facility. The term loans bear
interest, at Carlyle's option, at prime plus 1.5% or LIBOR plus 3.5% on the
first $14,000,000 borrowed ("Term Loan A") and prime plus 1.75% or LIBOR plus
3.75% on the remaining $8,000,000 in borrowings ("Term Loan B"). The revolving
loan bears interest, at Carlyle's option, at prime plus 1.25% or LIBOR plus
3.25%.
Loans outstanding as of December 31, 1996, under Term Loan B total
$8,000,000 and are repayable in consecutive quarterly installments of $1,000,000
each beginning March 31, 1997. Loans outstanding under Term Loan A total
$14,000,000 and are repayable in consecutive quarterly installments of
$1,000,000 beginning March 31, 1999 through December 31, 2000 and consecutive
quarterly installments of $1,500,000 from December 31, 2001, to December 30,
2001.
The senior bank facilities are secured by a first priority lien or security
interest in substantially all the assets of Carlyle. The senior bank facilities
contain representations and warranties, covenants and events of default
customary for credit facilities of this nature. Such customary covenants include
restrictions on the ability to borrow more debt, acquire other companies, pay
dividends, and the use of proceeds from the sale of assets. Carlyle must
maintain certain current asset and debt to equity ratios. In addition, Carlyle
must meet certain coverage tests related to interest and cash flow. The Loan and
Security Agreement also provides that it shall be an event of default if, prior
to December 31, 1997, Noel ceases to control at least 35% of the voting stock of
Carlyle as a result of Noel's "private sale" (as defined) of shares of preferred
stock of Carlyle without the
F-19
consent of the lenders (which consent may be withheld only under certain
circumstances). The term "private sale" does not include any distribution by
Noel of preferred stock or common stock of Carlyle to Noel's stockholders or the
redemption by Carlyle of such shares pursuant to the terms of Carlyle's Restated
Certificate of Incorporation.
In 1996, Curtis entered into a new credit facility which provides for a
revolving line of credit which aggregates up to a maximum principal amount of
$15,000,000. At December 31, 1996, based on available collateral, $7,102,000 was
available under the line of credit. A fee of 3/8% per annum is required on the
unused portion of the revolving credit commitment. The credit agreement is
secured by substantially all of the assets of Curtis and contains financial and
other covenants and ratios. At December 28, 1996, Curtis was in violation of a
covenant limiting capital expenditures, for which it received a waiver. Curtis
was in compliance with all other loan covenants. Included in the agreement is a
provision for the issuance of letters of credit up to a maximum of $2,000,000.
There were no letters of credit outstanding at December 31, 1996. Curtis'
subordinated debentures are redeemable at the option of Curtis.
The Lincoln term loan bears interest at a variable rate which was 8.65% at
December 31, 1996, and is expected to be repaid in 1997.
The carrying amount of long-term debt, for which it was practicable to
determine fair value, approximates fair value at December 31, 1996. At December
31, 1996, long-term debt, including capital leases, matures as follows (dollars
in thousands):
1997 $ 4,719
1998 4,106
1999 24,014
2000 4,067
2001 20,974
Thereafter 9,489
-------
$67,369
=======
8. LEASES
At December 31, 1996, the Company's minimum future rental payments under
noncancelable operating leases are as follows (dollars in thousands):
1997 $ 2,178
1998 1,899
1999 1,130
2000 1,023
2001 953
Thereafter 5,094
-------
$12,277
=======
The Company's rent expense for the years ended December 31, 1996, 1995 and
1994 was $2,438,000, $2,789,000, and $2,468,000, respectively. Noel has a
sublease with a company with certain executive officers who are also executive
officers of Noel for certain office space currently used by Noel.
F-20
9. STOCKHOLDERS' EQUITY
Preferred Stock:
Noel is authorized to issue 2,000,000 shares of Preferred Stock. Noel's
Certificate of Incorporation provides that the Board of Directors of Noel,
without stockholder approval, has the authority to issue Preferred Stock from
time to time in series and to fix the designation, powers (including voting
powers, if any), preferences and relative, participating, conversion, optional,
and other special rights, and the qualifications, limitations, and restrictions
of each series.
Distributions:
In 1994, 1993 and 1992, Noel made distributions of certain common equity
holdings to its stockholders (the "Distributions"). On February 28, 1994, Noel
distributed to Noel stockholders substantially all of Noel's holdings in Carlyle
common stock. On December 6, 1993, Noel distributed to Noel stockholders
substantially all of Noel's holdings in Sylvan Inc. ("Sylvan"). On September 21,
1992, Noel distributed to Noel stockholders substantially all of Noel's holdings
in Global Natural Resources Inc. ("Global"), Garnet Resources Corporation
("Garnet") and VISX, Incorporated ("VISX").
For financial accounting purposes, the Distributions have been treated as
common stock dividends recorded at the book values of the shares distributed,
which were $708,000, $9,124,000 and $22,329,000 in 1994, 1993 and 1992,
respectively, and deducted from capital in excess of par value. The excesses of
the fair values of the shares distributed over their book values on the date of
distribution, $2,620,000 and $30,760,000, in 1993 and 1992, respectively, were
not reflected as income in the Company's financial statements in accordance with
the financial accounting requirements for the spin-off of equity basis
affiliates. The fair value of the Carlyle shares distributed approximated their
book value on the date of their distribution in 1994.
The fair market value on the date of distribution of one share of common
stock of Carlyle, Sylvan, Global, Garnet and VISX was $.20, $8.375, $6.56, $4.92
and $9.57, respectively. The value of the Distributions per Noel share was
$.035, $.58 and $2.63, in 1994, 1993 and 1992, respectively. The Distributions
were classified for tax purposes as a dividend in 1994 and as returns of capital
to Noel stockholders in 1993 and 1992.
10. STOCK BASED COMPENSATION
In the first quarter of 1995, Noel issued a total of 1,120,000 warrants to
certain Noel officers. Each warrant represents the right to purchase one share
of Noel Common Stock. Warrants were issued to purchase 800,000 and 320,000
shares at $5.00 and $5.625 per share, respectively, the trading price of Noel
Common Stock on the date that the warrants were granted. The weighted average
grant-date fair value of these warrants was $2.01 and $2.22, respectively, using
the Black-Scholes option-pricing model with risk-free interest rates of 7.8% and
7.04%, respectively, expected lives of 3 years, expected volatility of 48%, and
no expected dividends. The warrants vest 50% at issuance, 75% after one year and
100% after two years and expire ten years after the date of grant. The warrants
are 75% vested and have not been exercised as of December 31, 1996.
Noel adopted a stock option plan in 1988 (as amended, the "1988 Plan") and
in 1995 (the "1995 Plan"; and together with the 1988 Plan, the "Employee Plans",
each being an Employee Plan), providing for the grant of options to purchase up
to an aggregate of 2,000,000 shares and 1,000,000 shares, respectively, of
Noel's Common Stock. Options under the Employee Plans may be granted to
employees of Noel and its subsidiaries, including officers who are directors,
and any other persons who perform substantial services for or on behalf of Noel,
or any of its subsidiaries, affiliates or any entity in which Noel has an
interest. Each option granted under either Employee Plan terminates no later
than ten years from the date of grant. Options issued under either Employee Plan
may be either incentive options or non-incentive options.
F-21
To date, non-incentive options have been granted under the 1988 Plan at the
fair market value on the date of grant. No options have been granted under the
1995 Plan. Non-incentive options previously granted to employees under the 1988
Plan generally vest over a four-year period, so that 20% of the option is
exercisable immediately and an additional 20% of the option becomes exercisable
on each of the first four anniversaries of the date of grant. Non-incentive
options previously granted to non-employees under the 1988 Plan generally vest
immediately. Non-incentive options previously granted under the 1988 Plan
generally terminate ten years after the date of grant or, in the case of
employees, one year after the termination of the status with Noel which
qualified the option holder to receive such option, if earlier.
Incentive options granted under either Employee Plan may only be exercised
while an option holder is employed by Noel or one of its subsidiaries or within
three months after the termination of employment, to the extent that the right
to exercise such incentive option had accrued at the time of termination. The
terms of incentive options, none of which has been granted under either Employee
Plan, are subject to additional restrictions.
In 1995, Noel adopted a non-employee directors' stock option plan (the
"Directors' Plan"), providing for the grant of non-incentive options to purchase
an aggregate of 50,000 shares of Noel Common Stock to directors who are not
employees of Noel. Under the Directors' Plan each non-employee director serving
as a director immediately following the 1995 Annual Meeting of Shareholders, who
had not previously been granted an option to purchase Noel Common Stock under
any of Noel's stock option plans, was granted a fully vested option to purchase
8,334 shares of Common Stock at an exercise price per share equal to the fair
market value on the date of shareholder approval of the plan (the "Plan Approval
Date"). Every individual who becomes a director after the Plan Approval Date,
who has not previously been granted options to purchase shares of Common Stock
under any of Noel's stock option plans and who is not an employee of Noel, shall
be granted a vested option to purchase 8,334 shares of Noel Common Stock, to
have an exercise price equal to the fair market value on the date of grant. Each
option granted under the Directors' Plan terminates no later than 10 years from
the date of grant.
The outstanding options expire in 1999-2005. Share and price information
for the 1988 Plan, the 1995 Plan and the Directors' Plan is as follows:
Number of Option Price Weighted Average
Shares per Share Exercise Price
------ --------- --------------
Outstanding, January 1, 1994 1,869,459 $5.50 - $45.00 $8.494
Redeemed 8,334 8.355 8.355
Outstanding, December 31, 1994 1,861,125 5.50 - 45.00 8.470
Granted 116,668 5.25 - 6.875 5.366
Outstanding, December 31, 1995 1,977,793 5.25 - 45.00 8.289
Exercised (24,352) 8.355 8.355
Outstanding, December 31, 1996 1,953,441 5.25 - 45.00 8.289
Available for grant, December 31, 1996 1,072,207
F-22
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price
--------------- -------------- ---------------- -------------- -------------- --------------
$45.00 5,556 3 years $45.00 5,556 $45.00
5.25 to 7.125 133,336 8 years 5.531 73,336 5.761
8.355 1,797,881 5 years 8.355 1,797,881 8.355
11.00 16,668 6 years 11.00 16,668 11.00
----------- -----------
1,953,441 1,893,441
In connection with the 1993 and 1992 Distributions, Noel retained shares of
the distributees to give to the 1988 Plan option holders upon the exercise of
options granted prior to the Distributions. Accordingly, the option exercise
prices were not adjusted for the Distributions. In February 1994, the retained
shares of common stock were unstapled from the options and sold, recognizing a
$8,476,000 capital gain. Upon exercise, Option holders with options outstanding
at the time of the Distributions will therefore receive cash, representing the
value of the distributed shares sold, along with Noel shares. Noel recorded both
a long-term liability and an expense in the amount of $4,853,000 representing
the value of the outstanding options on the new measurement date. This liability
is valued at $4,784,000 at December 31, 1996.
F-23
Noel applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. Had compensation expense for 1996 and 1995 option and warrant
grants of Noel have been determined consistent with FASB Statement No. 123
"Accounting for Stock Based Compensation"("SFAS 123"), net loss and net loss per
common share for 1996 and 1995 would approximate the pro forma amounts below
(dollars in thousands, except per share amounts):
1996 1995
As Reported Pro Forma As Reported Pro Forma
Net loss $(2,657) $(3,040) $(22,125) $(22,891)
======= ======= ======== ========
Net loss per common
and common equivalent
share $(0.13) $(0.15) $(1.10) $(1.13)
======= ======= ======== ========
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995.
11. OTHER INCOME (EXPENSE)
Other income consists of the following (dollars in thousands):
Years Ended December 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
Interest income $ 856 $ 1,148 $ 1,621
Gain (Loss) on sale of marketable securities - (1,052) 9,017
Gain (Loss) on sale of non-marketable securities (85) 6,657 (3,813)
Dividend income - 10 2,217
Other (172) (60) (714)
----------- ---------- ------
$ 599 $ 6,703 $8,328
=========== ========== ======
Income (Loss) from equity investments includes a loss of $500,000 in 1996
and income of $3,371,000 in 1995 related to Noel's investment in HPS, and losses
of $1,174,000 and $3,066,000 in 1996 related to Noel's investments in Staffing
and Novoeste, respectively.
F-24
12. INCOME TAXES
The components of the benefit (provision) for income taxes are as follows
(dollars in thousands):
Years Ended December 31,
---------------------------------
1996 1995 1994
Current tax benefit (expense):
Federal $ 4,063 $ - $(1,105)
State (195) (375) (223)
Foreign (63) (15) (123)
------- ----- -------
$ 3,805 $(390) $(1,451)
======= ===== =======
Deferred tax benefit (expense):
Federal $(2,484) $ 681 $ (216)
State (179) (7) (28)
------- ----- -------
$(2,663) $ 674 $ (244)
======= ===== =======
A reconciliation of the Company's income tax benefit (provision) and the
amount computed by applying the statutory tax rate of 34% to loss before income
taxes is as follows (dollars in thousands):
Years Ended December 31,
----------------------------
1996 1995 1994
---- ---- ----
Tax benefit (provision) at statutory rates $1,444 $ 5,394 $ 2,638
State and local, net of Federal benefit (231) (257) (245)
Minority interest (463) 3,714 195
Reversal of prior valuation allowances - 904 -
Losses generating no current benefit - (820) (3,806)
Amortization and write-off of excess
purchase costs (485) (8,703) (237)
Benefit from book loss carryforward 879 - -
Other (2) 52 (240)
------ ------- -------
Benefit (Provision) for income taxes $1,142 $ 284 $(1,695)
====== ======= =======
F-25
Significant components of the Company's net deferred income tax assets and
liabilities are as follows (dollars in thousands):
December 31,
-----------------------
1996 1995
---- ----
Accounts receivable allowances $ 1,201 $ 959
Inventories valuation differences (63) 420
Accruals 2,799 3,788
Depreciation and amortization (6,272) (6,068)
Investments (3,325) (1,201)
Deferred compensation and benefits 6,104 7,428
Loss on discontinued operations 264 6,658
Tax net operating loss carryforwards 20,148 17,320
Other 2,337 1,931
-------- --------
Subtotal 23,193 31,235
Valuation allowance (20,813) (22,419)
-------- --------
$ 2,380 $ 8,816
======== ========
The deferred tax assets and liabilities include the following (dollars in
thousands):
December 31,
-----------------------
1996 1995
---- ----
Current deferred tax asset $ 4,153 $ 2,906
Valuation allowance (2,180) (2,593)
--------
Net current deferred tax asset $ 1,973 $ 313
======== ========
Long-term deferred tax asset $ 19,755 $ 29,341
Valuation allowance (19,030) (19,826)
-------- --------
Net long-term deferred tax asset $ 725 $ 9,515
======== ========
Long-term deferred tax liability $ (1,860) $ (1,012)
Valuation allowance -- --
-------- --------
$ (1,860) $ (1,012)
======== ========
Lincoln and Curtis recorded a valuation allowance equal to 100% of their
net deferred tax assets based upon their historical losses and significant net
operating loss carryforwards. Noel recorded a valuation allowance on certain of
its deferred tax assets because they are not projected to be realized through
future taxable income. The valuation allowance at December 31, 1996, includes
$10,365,000 related to temporary differences which existed on the dates of
acquisitions of certain of Noel's subsidiaries. Any future recognition of the
tax benefits related to this portion of the valuation allowance would be
recorded as a reduction to the goodwill associated with the acquisitions.
Noel had net operating loss carryforwards of approximately $17,059,000 at
December 31, 1996, which expire from 2003 through 2011. Noel has undergone
"ownership changes" within the meaning of Section 382 of the
F-26
Internal Revenue Code of 1986, as amended. Consequently, future utilization of
Noel's Federal tax loss carryforwards is limited.
13. RETIREMENT PLANS
The Company sponsors a number of defined contribution retirement plans.
Participation in these plans is available to substantially all employees. The
Company's contributions to these plans are based on a percentage of employee
contributions. The expense of these plans for the years ended December 31, 1996,
1995, and 1994 totaled $763,000, $898,000 and $516,000, respectively.
Carlyle and Curtis sponsor defined benefit pension plans. Carlyle's plan
covers substantially all of its employees and requires no contributions from
employees. Benefits are based on years of service and compensation levels within
these years. Carlyle's plan was frozen as of December 31, 1994, after which no
new employees were eligible to join the plan. Additionally, employees covered
under Carlyle's plan will not receive any additional accruals for service
rendered after December 31, 1994. Curtis' plan covers former manufacturing
employees who were members of UAW Local 70, based on years of service. In 1995,
Curtis recorded a $480,000 curtailment loss as a result of shutting down its
manufacturing operations. Both plans fund pension costs as required by ERISA.
The projected unit cost method is used to determine both pension costs and
funding requirements for the plans. The net periodic pension costs included in
the statement of operations for the years ended December 31, 1996 and 1995 were
a benefit of $109,000 and an expense of $634,000, respectively. The 1994 amounts
are not material.
As of December 31, 1994, as required by the purchase method of accounting,
a liability was recorded by Carlyle reflecting the excess of Carlyle's projected
benefit obligation measured at an 8.5% discount rate over the fair value of plan
assets.
The actuarial present value of accumulated benefit obligations ("ABO") is
as follows (dollars in thousands):
December 31,
-------------------------------------------------------------------------------
1996 1996 1995 1995
Pension ABO Pension Assets Pension ABO Pension Assets
Exceeds Assets Exceed ABO Exceeds Assets Exceed ABO
-------------- ---------- -------------- ----------
Vested benefit obligation $ 19,488 $ 1,860 $ 19,352 $ 1,877
--------- ---------- ---------- ----------
Accumulated benefit obligation $ 19,525 $ 1,860 $ 19,407 $ 1,905
========= ========== ========== ==========
Projected benefit obligation $ 19,525 $ 1,860 $ 19,407 $ 1,905
Plan assets at fair value 19,877 2,188 17,202 2,284
--------- ---------- ---------- ----------
Plan assets less projected benefit obligation 352 328 (2,205) 379
Unrecognized net gain (1,854) - (583) -
---------- ---------- ----------- ----------
Net pension asset (liability) $ (1,502) $ 328 $ (2,788) $ 379
========== ========== =========== ==========
Major assumptions at year end:
1996 1995
--------- --------
Discount rate 7.7% 7.5%
Rate of increase of compensation levels n/a n/a
Expected long-term rate of return on assets 9.4% 9.4%
F-27
At December 31, 1996, Curtis' plan assets were invested in a bank fixed
income fund, and Carlyle's plan assets consisted principally of common stock,
United States government and corporate obligations.
14. POSTRETIREMENT BENEFITS
Carlyle provides certain health and life insurance benefits for eligible
retirees and their dependents. Curtis provides health care benefits for retired
members of UAW Local 70. Both plans are not funded and pay the costs of benefits
as incurred. The net periodic postretirement benefit costs included in the
statements of operations for the years ended December 31, 1996, 1995 and 1994
are not material.
Carlyle's predecessor adopted, effective January 1, 1993, Statement of
Financial Accounting Standards No. 106 and elected to amortize the accrual for
postretirement benefits over a 20 year period. As required by the purchase
method of accounting, a similar accrual was recorded when Carlyle was acquired
by Noel.
The estimated accumulated postretirement benefit obligation at December 31,
1996 and 1995, at weighted average discount rates of 7.7% and 7.5%,
respectively, is estimated as follows (dollars in thousands):
December 31,
--------------------
1996 1995
---- ----
Retirees $ 5,861 $ 5,722
Fully eligible active plan participants 299 647
Other active participants 371 769
------- -------
6,531 7,138
Unrecognized net loss (133) (555)
------- -------
$ 6,398 $ 6,583
======= =======
The assumed health care cost trend rate used by Carlyle in measuring the
accumulated postretirement benefit obligation at December 31, 1996, was 10.0%
for 1996, gradually declining to 5.5% in 2005. For Curtis' measurement purposes,
a 7.5% annual rate of increase in the per capita cost of covered health care
claims was assumed for 1997 and the rate was assumed to decrease gradually to
5.5% by the year 2000 and remain at that level thereafter. A one percentage
point increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1996, by
$190,000 and the sum of service costs and interest costs on an annual basis by
$14,000.
15. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings generally incidental
to its businesses. While the result of any litigation contains an element of
uncertainty, management believes that the outcome of any known, pending or
threatened legal proceeding or claim, or all of them combined, will not have a
material adverse effect on the Company's consolidated financial position.
Lincoln has outstanding purchase order commitments as of December 31, 1996,
of $413,000.
Following a field examination in 1995, the Internal Revenue Service ("IRS")
alleged that as a result of certain tax law changes enacted in 1989 and 1991,
Curtis' expense reimbursement policy for its field sales force
F-28
does not meet the definition of an accountable plan, and contended that all
reimbursed expenses for 1994 and 1993 should be treated as taxable wages.
Consequently in January 1996, Curtis received a proposed assessment from the IRS
for unpaid federal withholding, FICA and FUTA taxes totaling approximately
$2,000,000. Curtis believes it has meritorious legal defenses to the IRS
position, and since the ultimate liability of Curtis, if any, arising from the
forgoing will not have a material adverse impact on the financial condition or
results of operations of Curtis, no provision has been recorded related to this
claim.
16. SUPPLEMENTAL CASH FLOWS INFORMATION
Non-cash investing and financing activities are as follows (dollars in
thousands):
Year ended December 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
Increase in investment in HPS related
to share issuances $8,776 $ - $ -
====== ======= ====
Increase in investment in Staffing related
to share issuances $1,817 $ - $ -
====== ======= ====
Gain on payment of Brae Note with
Staffing common stock $ - $ 6,598 $ -
====== ======= ====
Increase in investment in HPS related
to HPS' initial public offering $ - $15,433 $ -
====== ======= ====
Conversion of TDX debt into TDX equity $ - $ - $ 8,780
====== ======= =======
Loss on exchange of Carlyle preferred stock
for Carlyle common stock $ - $ - $(3,912)
====== ======= ========
Acquisitions:
Fair value of assets acquired $ - $ - $50,982
Less: Cash paid - - 18,406
------ ----- -------
Liabilities assumed $ - $ - $32,576
====== ======= =======
Distributions to stockholders $ - $ - $ 708
====== ======= =======
Interest paid $7,883 $ 8,184 $ 4,433
====== ======= =======
Income taxes paid $ 784 $ 1,473 $ 813
====== ======= =======
F-29
17. INDUSTRY SEGMENT INFORMATION
The Company is classified into three business segments. Summarized
financial information by business segment for the periods of Noel's consolidated
control is as follows (dollars in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Identifiable Depreciation and Capital
1996 Sales income (loss) assets amortization expenditures
- ------------------------------------------------------------------------------------------------------------------------------------
Fasteners & Security $ 77,072 $4,331 $ 49,806 $2,537 $3,120
Products Distribution
Snack Foods 23,648 1,471 13,158 796 164
Industrial Threads &
Buttons 88,605 11,131 85,160 3,462 1,003
Noel - Investments - - 68,026 -
-
Noel - Corporate - (7,739) 14,371 78 26
-------- --------- -------- -------- ------
$189,325 $9,194 $230,521 $6,873(1) $4,313
======== ========= ======== ======= ======
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Identifiable Depreciation and Capital
1995 Sales income (loss) assets amortization expenditures
- ------------------------------------------------------------------------------------------------------------------------------------
Fasteners & Security $ 68,842 $ 2,067 $ 43,680 $ 3,046 $ 743
Products Distribution
Snack Foods 24,213 (1,118) 14,335 944 214
Industrial Threads &
Buttons 88,654 (22,715) 98,066 3,646 3,820
Noel -
Investments - - 34,520 - -
Noel - Corporate - (7,685) 49,156 81 80
-------- -------- -------- -------- ------
$181,709 $(29,451) $239,757 $ 7,717(1) $4,857
======== ======== ======== ======== ======
F-30
- -----------------------------------------------------------------------------------------------------------------------------------
Sales and
revenue from Operating Identifiable Depreciation and Capital
1994 services income (loss) assets amortization expenditures
- -----------------------------------------------------------------------------------------------------------------------------------
Fasteners & Security
Products Distribution $ 66,614 $ 858 $ 49,244 $3,115 $ 698
Snack Foods 27,274 (4,477) 18,049 1,069 870
Health Care
Administration 25,233 3,934 57,135 948 182
Industrial Threads &
Buttons n/a n/a 107,939 n/a n/a
Noel - Investments - - 3,041 - -
Noel - Corporate - (13,046) 78,572 64 54
-------- -------- --------- ---------- ------
$119,121 $(12,731) $ 313,980 $ 5,196(1) $1,804
======== ======== ========= ========== ======
(1) Amounts include $2,414,000, $2,829,000, and $1,449,000 which were included
in cost of sales for the years ended December 31, 1996, 1995 and 1994,
respectively and $948,000 included in HealthPlan Services costs of revenue
for the year ended December 31, 1994.
The snack foods segment had one customer that accounted for approximately 49% of
sales in 1996.
The Company's revenue and assets attributable to operations outside of the
United States are not significant.
F-31
18. QUARTERLY FINANCIAL DATA (unaudited)
(Dollars in thousand, except per share amounts)
Quarters Ended March 31, June 30, September 30, December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1996
Revenue $ 43,119 $ 47,139 $ 50,266 $ 48,801
Operating Income 824 1,862 3,372 3,136
Income (Loss) from continuing operations (297) 717 (3,016) (509)
Income from discontinued operations 42 - 290 116
Net income (loss) (255) 717 (2,726) (393)
Income (Loss) per common and common
equivalent share from:
(0.01) 0.03 (0.15) (0.02)
Continuing operations
Discontinued operations - - 0.02 --
Net income (loss) (0.01) 0.03 (0.13) (0.02)
- ------------------------------------------------------------------------------------------------------------------------------------
1995
Revenue $ 45,079 $ 44,286 $ 44,694 $ 47,650
Operating income (loss) (278) (481) 1,377 (30,069)(1)
Income (Loss) from continuing operations (2,137) (2,557) 6,926 (17,813)(1)
Loss from discontinued operations (452) (341) (517) (5,234)
Net income (loss) (2,589) (2,898) 6,409 (23,047)
Income (loss) per common and common
equivalent share from:
Continuing operations (0.11) (0.12) 0.33 (0.88)
Discontinued operations (0.02) (0.02) (0.02) (0.26)
Net income (loss) (0.13) (0.14) 0.31 (1.14)
(1) Amount includes an impairment charge of $29,155,000 related to Carlyle's
thread division. See Note 3.
F-32
19. SUBSEQUENT EVENT
On February 7, 1997, pursuant to an agreement dated December 18, 1996
by and among Noel, Automated Data Processing, Inc. ("ADP") and HPS, Noel sold to
ADP 1,320,000 shares of its common stock of HPS for an aggregate purchase price
of $26,400,000 in cash. Following the transaction, Noel's ownership percentage
of HPS dropped to approximately 26%.
On March 26, 1997, pursuant to an asset purchase agreement dated as of
December 12, 1996, Belding sold its thread division to Hicking Pentecost PLC for
aggregate cash consideration of approximately $54,900,000, subject to
adjustment, plus the assumption of certain liabilities. The current estimate of
the loss on disposal on the sale of this division is $11,300,000, but the actual
loss recorded could differ significantly from this estimate depending on the
resolution of certain contingencies. The net proceeds from this sale were used
to pay off Carlyle's outstanding bank indebtedness. Accordingly, Carlyle
currently has no outstanding bank indebtedness.
F-33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of
HealthPlan Services Corporation
In our opinion, the accompanying consolidated balance sheet and related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
HealthPlan Services Corporation and its Subsidiaries (the "Company") at December
31, 1996 and 1995, and the results of their operations and their cash flows for
the years ended December 31, 1996 and 1995 and for the period from inception
(October 1, 1994) through December 31, 1994, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Tampa, Florida
March 14, 1997
F-34
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
DECEMBER 31,
1996 1995
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 3,725 $ 4,738
Restricted cash....................................... 10,062 1,005
Short-term investments................................. - 36,723
Accounts receivable, net of allowance for
doubtful accounts of $99 and $23, respectively ..... 17,899 6,411
Refundable income taxes ............................... 6,083 1,041
Prepaid commissions................................... 223 748
Prepaid expenses and other current assets.............. 4,022 1,485
Deferred taxes ....................................... 4,481 965
-------- --------
Total current assets ......................... 46,495 53,116
Property and equipment, net ............................. 21,102 9,241
Other assets, net ....................................... 2,182 1,463
Deferred taxes ......................................... 8,327 -
Note receivable ........................................ 6,389 -
Investments ............................................. 3,685 -
Goodwill, net............................................ 156,521 48,847
-------- --------
Total assets ................................. $244,701 $112,667
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 18,464 $ 3,407
Premiums payable to carriers........................... 29,536 17,209
Commissions payable ................................... 4,691 2,897
Deferred revenue ................................... 1,560 947
Accrued liabilities ................................... 14,905 5,093
Accrued contract commitments ......................... 1,089 482
Accrued restructure costs. ............................ 462 -
Current portion of long-term debt payable ............. 2,717 68
-------- --------
Total current liabilities .................... 73,424 30,103
Note payable ....................................... 59,581 1,214
Deferred taxes ......................................... - 354
Other long-term liabilities ........................... 2,913 30
-------- --------
Total liabilities ............................. 135,918 31,701
-------- --------
Commitments and contingencies (Note 11) .................
Stockholders' equity:
Common stock voting, $0.01 par value, 100,000,000
authorized and 14,974,126 issued and outstanding at
December 31, 1996; 25,000,000 authorized and 13,395,357
issued and outstanding at December 31, 1995 ........ 150 134
Additional paid-in capital ............................ 106,153 71,636
Retained earnings ..................................... 2,480 9,196
-------- --------
Total stockholders' equity .................... 108,783 80,966
-------- --------
Total liabilities and stockholders' equity .... $244,701 $112,667
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
F-35
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE PERIOD
FROM INCEPTION
FOR THE YEAR ENDED DECEMBER 31, (OCTOBER 1, 1994)
------------------------------- THROUGH
1996 1995 DECEMBER 31, 1994
---- ---- -----------------
Operating revenues .............................................. $ 191,493 $ 98,187 $ 25,132
Interest income ................................................. 2,346 2,063 101
--------- --------- ---------
Total revenues ........................................... 193,839 100,250 25,233
Expenses:
Agent commissions ............................................. 48,507 36,100 10,047
Personnel ..................................................... 72,209 25,433 5,972
General and administrative .................................... 41,614 16,967 4,226
Pre-operating and contract start-up costs ..................... 812 1,664 -
Contract commitment .......................................... 2,685 - 3,623
Restructure charge ............................................ 1,425 - -
Integration ................................................... 7,804 - -
Loss on impairment of goodwill ............................... 13,710 - -
Depreciation and amortization ................................. 10,548 4,386 870
--------- --------- ---------
Total expenses ........................................... 199,314 84,550 24,738
--------- --------- ---------
(Loss) income before interest expense and income taxes ........ (5,475) 15,700 495
Interest expense .............................................. 2,601 69 105
--------- --------- ---------
(Loss) income before income taxes ............................ (8,076) 15,631 390
(Benefit) provision for income taxes .......................... (1,360) 6,096 159
--------- --------- ---------
Net (loss) income ........................................ $ (6,716) $ 9,535 $ 231
========= ========= =========
Dividends on Redeemable Preferred Stock ....................... $ - $ 285 $ 285
========= ========= =========
Net (loss) income attributable to common stock ................ $ (6,716) $ 9,250 $ (54)
========= ========= =========
Pro forma net income per share ............................... $ 0.71 $ 0.03
========= =========
Pro forma weighted average shares outstanding ................. 13,414 9,339
========= ==========
Historical weighted average net (loss) income per share ...... $ (0.47) $ 0.82
========= =========
Historical weighted average shares outstanding .................. 14,266 11,336
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
F-36
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
--------- ------ ---------- -------- -----
Non-voting Voting Additional
Common Common Paid-in Retained
Stock Stock Capital Earnings Total
--------- ------ ---------- -------- -----
Initial issuance of Common Stock
(October 1, 1994) ...................... $ 75 $ - $ 925 $ - $ 1,000
Issuance of management stock ............. 5 - 1,226 - 1,231
Unvested interest in management stock .... - - (1,170) - (1,170)
Dividends on Redeemable Preferred Stock .. - - - (285) (285)
Net income ............................... - - - 231 231
---------- --------- --------- --------- ---------
Balance at December 31, 1994 ............. $ 80 $ - $ 981 $ (54) $ 1,007
Issuance of management stock ............. - - 30 - 30
Unvested interest in management stock .... - - (27) - (27)
Vesting of management stock .............. - - 330 - 330
Net proceeds of initial public offering .. - 40 50,766 - 50,806
Conversion of Non-Voting Common Stock
to Voting Common Stock ................. (80) 80 - - -
Exchange of Redeemable Preferred Stock
Series A and Series B for Common Stock - 14 19,556 - 19,570
Dividends on Redeemable Preferred
Stock .................................. - - - (285) (285)
Net income ............................... - - - 9,535 9,535
---------- --------- --------- --------- ---------
Balance at December 31, 1995 ............. $ - $ 134 $ 71,636 $ 9,196 $ 80,966
Vesting of management stock ............. - - 456 - 456
Issuance of 11,400 shares in connection
with stock options plans ............... - - 160 - 160
Issuance of 1,400,110 shares in connection
with acquisition of Harrington Services
Corporation ............................ - 14 30,088 - 30,102
Issuance of 160,957 shares to former
affiliates of Consolidated Group, Inc. . - 2 3,700 - 3,702
Issuance of 6,302 shares in connection
with the employee stock purchase plan .. - - 113 - 113
Net loss ................................. - - - (6,716) (6,716)
---------- --------- --------- --------- ---------
Balance at December 31, 1996 ............. $ - $ 150 $ 106,153 $ 2,480 $ 108,783
========== ========= ========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
F-37
HEALTHPLAN SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PAGE 1 OF 2
FOR THE PERIOD
FROM INCEPTION
FOR THE YEAR ENDED (OCTOBER 1, 1994)
DECEMBER 31, THROUGH
1996 1995 DECEMBER 31, 1994
----------- ------ -------------------
Cash flows from operating activities:
Net (loss) income .......................... $ (6,716) $ 9,535 $ 231
Adjustments to reconcile net (loss) income
to net cash provided by operating
activities:
Depreciation ................................. 5,729 2,657 511
Amortization of goodwill ................... 4,464 1,524 307
Amortization of other assets ............... 355 205 51
Contract commitment, net ................... 607 (2,633) 3,115
Charge for restructuring, net .............. 462 - -
Loss on impairment of goodwill ............. 13,710 - -
Issuance of Common Stock to management ..... 456 332 62
Deferred taxes ............................. (804) 935 244
Changes in assets and liabilities, net of
effect from acquisitions:
Restricted cash ............................ (9,057) 1,807 (2,150)
Accounts receivable ........................ 1,415 (702) (975)
Refundable income taxes .................... (5,043) (1,041) --
Prepaid commissions ........................ 525 200 222
Prepaid expenses and other current assets .. (811) (64) (56)
Other assets ............................... 565 (188) --
Accounts payable ........................... 10,608 643 1,425
Premiums payable to carriers .............. 12,327 (1,262) 2,061
Commissions payable ........................ 149 (12) 216
Deferred revenue ........................... (490) (1,018) (256)
Accrued liabilities ........................ (7,728) (1,707) (1,835)
Income taxes payable ....................... (54) (135) 135
-------- -------- --------
Net cash provided by operating
activities ....................... 20,669 9,076 3,308
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ........ (5,731) (5,286) (182)
Sales (purchases) of short-term
investments, net ......................... 36,723 (36,723) -
Payment for purchase of Predecessor
Company, net of cash acquired ............ - - (18,406)
Payment for purchase of Diversified
Group Brokerage .......................... - (10,075) -
Payment for purchase of Third Party
Claims Management, net of cash
acquired ................................. - (7,328) -
Cash paid for purchase of Harrington
Services Corporation, net of cash
acquired ................................. (29,274) - -
Payment for purchase of Consolidated
Group, Inc., net of cash acquired ........ (60,210) - -
Increase in investments .................... (3,311) - -
Increase in note receivable ................ (6,388) - -
-------- -------- --------
Net cash used in investing
activities ....................... (68,191) (59,412) (18,588)
-------- -------- --------
Cash flows from financing activities:
Net borrowings under line of credit ........ 55,000 - -
Payments on other debt ..................... (12,466) (35) (17)
Net proceeds from initial public
offering of Common Stock ................. - 50,806 -
Payments of loan origination costs ......... - - (400)
Issuance of Redeemable Preferred
Stock .................................... - - 19,000
Proceeds from exercise of stock
options .................................. 160 - -
Proceeds from Common Stock issued .......... 3,815 - 1,000
-------- -------- --------
Net cash provided by
financing activities ............. 46,509 50,771 19,583
-------- -------- --------
Net (decrease) increase in cash and
cash equivalents ............................ (1,013) 435 4,303
Cash and cash equivalents at beginning of
period ...................................... 4,738 4,303 -
-------- -------- --------
Cash and cash equivalents at end of period ... $ 3,725 $ 4,738 $ 4,303
======== ======== ========
F-38
PAGE 2 OF 2
Supplemental disclosure of cash flow
information:
Cash paid for interest ..................... $ 1,573 $ 65 $ 122
======= ======= =======
Cash paid for income taxes ................. $ 4,968 $ 6,321 $ -
======= ======= =======
Supplemental disclosure of noncash activities:
Exchange of Redeemable Preferred Stock
Series A and Series B for Common
Stock .................................. $ - $19,570 $ -
======= ======= =======
Issuance of Common Stock to management ..... $ 456 $ 332 $ 62
======= ======= =======
Common Stock issued for purchase of
Harrington Services Corporation ........ $30,102 $ - $ -
======= ======= =======
Dividends on redeemable preferred
stock .................................. $ - $ 285 $ 285
======= ======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
F-39
HEALTHPLAN SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
HealthPlan Services Corporation (together with its direct and indirect
wholly owned subsidiaries, the "Company") provides marketing,
administration, and risk management services and solutions for benefit
programs. The Company provides these services for over 125,000 small
businesses and large, self-funded organizations, covering approximately 2.6
million members in the United States. The Company's customers include
managed care organizations, insurance companies, integrated health care
delivery systems, self-funded benefit plans, and health care purchasing
alliances.
On May 19, 1995, the Company completed an initial public offering of
4,025,000 shares of its Common Stock, shares of which are presently traded
on the New York Stock Exchange. Concurrent with the initial public offering,
the Company also exchanged Redeemable Preferred Stock for 1,398,000 shares
of Common Stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
METHOD OF ACCOUNTING
The Company prepares its financial statements in conformity with generally
accepted accounting principles. These principles require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, (i) HealthPlan Services, Inc., together
with its wholly owned subsidiaries ("HPSI"), (ii) Harrington Services
Corporation, together with its direct and indirect wholly owned subsidiaries
("Harrington"), (iii) Consolidated Group, Inc., together with its affiliates
("Consolidated Group"), and (iv) Healthcare Informatics Corporation. All
intercompany transactions and balances have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as highly liquid investments that have
original maturities of three months or less. Cash and cash equivalents
consist of bank deposits to meet anticipated short-term needs.
RESTRICTED CASH
The Company has established a bank account for the sole purpose of
administering the contracts with the Florida Community Health Purchasing
Alliances. This cash may be withdrawn only to meet current obligations
connected with servicing these contracts.
SHORT-TERM INVESTMENTS
Investments in marketable securities at December 31, 1995 consisted of a
professionally managed portfolio of short-term financial instruments
including short-term municipal bonds. As of January 1, 1995, the Company
adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities." The
effect of SFAS 115 is dependent upon classification of the investment.
Because the investments are classified as available for sale, they were
measured at fair market value, which approximated cost. There were no
investments with maturities of greater than one year. The
F-40
remainder of the Company's short-term investments were liquidated in July
1996 in order to provide a portion of the cash needed for the Harrington and
Consolidated Group acquisitions.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Costs of the assets acquired have
been recorded at their respective fair values at the date of acquisition.
Expenditures for maintenance and repairs are expensed as incurred. Major
improvements that increase the estimated useful life of an asset are
capitalized. Depreciation is computed using the straight-line method over
the following estimated useful lives of the related assets:
YEARS
--------------
Building 19
Furniture and fixtures 3-10
Computers and equipment 2-5
Computer software 3
Leasehold improvements Lease term
PREPAID COMMISSIONS
Prepaid commissions consist primarily of commissions paid to certain agents
at the initiation of a policy. These commissions are expensed on a
straight-line basis as revenues related to the policy are earned.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist primarily of prepaid rent,
insurance, postage, and repair and maintenance contracts.
GOODWILL AND IMPAIRMENT OF LONG-LIVED ASSETS
The excess of cost over the fair value of net assets acquired is recorded as
goodwill and amortized on a straight-line basis over 25 years. The Company
reviews long-lived assets, including goodwill, for impairment whenever
events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable. The Company compares the expected future
undiscounted cash flows to the carrying values of the long-lived assets at
the lowest level of identifiable cash flows. When the expected future
undiscounted cash flows are less than the carrying amount, the asset is
written down to its estimated fair value. The Company calculates estimated
fair value as the discounted future value of anticipated cash flows (see
Note 5).
OTHER ASSETS
Other assets consist primarily of loan origination fees and covenants not to
compete, which are amortized over the terms of the respective agreements.
PREMIUMS PAYABLE
The Company collects insurance premiums on behalf of its insurance carrier
and managed care customers and remits such amounts to the customers when
due.
REVENUE RECOGNITION
Revenues are recognized ratably over contractual periods or as claims
processing and administrative services are being performed. Revenue
collected in advance is recorded as deferred revenue until the related
services are performed.
F-41
ADVERSE CONTRACT COMMITMENTS
On an ongoing basis, the Company estimates the revenues to be derived over
the life of service contracts, as well as the costs to perform the services
connected therewith, in order to identify adverse commitments. This process
includes evaluating actual results during the period and analyzing other
factors, such as anticipated rates, volume, and costs. If the revised
estimates indicate that a net loss is expected over the remaining life of
the contract, the Company recognizes the loss immediately.
PRE-OPERATING AND CONTRACT START-UP COSTS
The Company has elected to expense as incurred, and segregate from other
operating costs, those costs related to the preparation for and
implementation of new products and contracts for services to new customers
prior to the initiation of significant revenue activity from those new
revenue initiatives.
INTEGRATION EXPENSE
Certain costs amounting to $6.9 million incurred by the Company in 1996 in
relation to the post-acquisition integration of information systems at
Consolidated Group, Inc. and Harrington Services Corporation are recorded as
integration expense. Other non-information systems costs amounting to
$883,000 for items such as travel, recruiting, and moving have also been
recorded as integration expense.
RESTRUCTURE CHARGES
The Company recognizes a liability for restructuring charges and a
corresponding charge to results of operations when the following conditions
exist: management approves and commits the Company to a plan of termination
of employees, or an exit plan, and establishes the benefits that current
employees will receive upon termination; the benefit arrangement is
communicated to employees; the plan of termination identifies the number and
type of employees; and the exit plan or plan of termination will begin as
soon as possible, and significant changes are not likely.
In 1996, the Company recorded a restructure charge of $1.4 million to
reflect the cost of exiting certain excess office space ($650,000) and
terminating employees ($775,000). The Company's restructure plan was for the
elimination of an estimated 80 jobs in management, claims administration,
and information systems operations in its Tampa and Memphis offices.
Seventy-seven employees were actually terminated.
AGENT COMMISSIONS
The Company recognizes agent commissions expense in the same period that the
related revenues are recognized.
INCOME TAXES
The Company recognizes deferred assets and liabilities for the expected
future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. For federal income tax
purposes, the Company files a consolidated tax return with its wholly owned
subsidiaries.
EARNINGS PER SHARE
Earnings per share in 1996 and 1995 have been computed based on the
historical weighted average number of shares of Common Stock outstanding
during the period. Pro forma earnings per share was computed in 1995 and
1994 based on the weighted average number of common shares outstanding
during the periods, after giving retroactive effect for the mandatory
conversion of the Company's Redeemable Series A and Series B Preferred
Stock, which occurred upon completion of the Company's initial public
offering, as well as the shares issued at the time of that offering.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, all stock options and common shares issued have been included as
outstanding for the entire period using the treasury stock method.
F-42
STOCK-BASED COMPENSATION
The Company applies the intrinsic value method currently prescribed by
Accounting Principles Board Opinion No. 25 ("APB 25") and discloses the pro
forma effects of the fair value based method, as prescribed by Statement of
Financial Accounting Standards No. 123 ("SFAS 123").
3. ACQUISITIONS
CONSOLIDATED GROUP
On July 1, 1996, the Company acquired all the issued and outstanding stock
of Consolidated Group, Inc. and three affiliated entities (collectively,
"Consolidated Group") for approximately $61.9 million in cash. Consolidated
Group, headquartered in Framingham, Massachusetts, specializes in providing
medical benefits administration and other related services for health care
plans. As of December 31, 1996, Consolidated Group provided these services
for over 23,000 small businesses in a variety of industries covering
approximately 250,000 members in 50 states. At December 31, 1996,
Consolidated Group employed approximately 500 people. The purchase price of
Consolidated Group was allocated to the fair value of the net assets
acquired as follows:
Tangible assets acquired $ 19.7 million
Goodwill 59.7 million
Liabilities assumed (17.5) million
-----------------
$ 61.9 million
=================
HARRINGTON SERVICES CORPORATION
On July 1, 1996, the Company also acquired all the issued and outstanding
stock of Harrington for approximately $32.5 million cash and 1,400,110
shares of the Company's Common Stock valued at $30.1 million. Harrington,
headquartered in Columbus, Ohio, provides administrative services to
self-funded benefit plans. As of December 31, 1996, Harrington provided
these services to over 3,000 large, self-funded plans for employers in a
variety of industries covering approximately 960,000 members in 47 states.
At December 31, 1996, Harrington employed approximately 1,500 employees,
with principal offices in Columbus, Ohio, Chicago, Illinois, and El Monte,
California. The purchase price of Harrington, which totaled $62.6 million in
cash and stock, was allocated to the fair value of the net assets acquired
as follows:
Tangible assets acquired $ 27.7 million
Goodwill 66.7 million
Liabilities assumed (31.8) million
----------------
$ 62.6 million
================
DIVERSIFIED GROUP BROKERAGE
On October 12, 1995, HPSI acquired substantially all of the assets and
assumed certain liabilities of the third party administration business of
Diversified Group Brokerage Corporation ("DGB"), effective as of October 1,
1995. As of December 31, 1996, the DGB business served approximately 300
medium-sized businesses covering 45,000 members. The purchase price for the
DGB business consisted of (i) approximately $5.1 million paid at closing and
(ii) for the seven-year period following the closing date, semi-monthly
payments based on the number of enrollees in accounts that were DGB accounts
as of the closing date, to be reduced by any attrition of enrollees. HPSI
placed $5.0 million in escrow, as required by the agreement to fund those
payments, and the present value of those estimated payments was recorded as
goodwill. Additionally, HPSI assumed approximately $1.0 million in
liabilities related to this purchase. The success of the DGB business is
heavily dependent on its ability to maintain and grow market share in a
narrowly defined geographic market -- the self-funded health care plans of
primarily medium-sized businesses with an emphasis on the New England
geographic market (see Note 5).
F-43
THIRD PARTY CLAIMS MANAGEMENT, INC.
On August 31, 1995, HPSI acquired all of the issued and outstanding shares
of capital stock of Third Party Claims Management, Inc. ("TPCM"). As of
December 31, 1996, TPCM served approximately 100 mid-to-large sized
organizations covering approximately 140,000 members. In connection with
this acquisition, the Company recorded (i) a cash investment of
approximately $7.5 million, subject to a post-closing adjustment based on
the balance sheet of TPCM as of August 31, 1995, (ii) liabilities of
approximately $2.7 million, representing an assumption of liabilities and
additional accruals related to the transaction, and (iii) an additional
payment equal to $2.00 multiplied by the number of employees enrolled in any
TPCM account as of the anniversary date of the contract which was
administered by the Company on the closing date and continued to be a TPCM
account administered by the Company on the anniversary date. This payment
was estimated at approximately $210,000 by the Company at the time of the
acquisition and was recorded as a liability and an increase in goodwill
resulting from the acquisition. TPCM is focused on providing services to
hospitals and other related health care institutions that offer self-funded
health care benefits. The development of integrated delivery systems by the
entities making up this target market is expected to increase. The services
provided by these customers' systems may include the ability to replace
those provided by the Company and possibly result in competition with the
Company (see Note 5).
UNAUDITED PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
The following unaudited pro forma consolidated results of operations of the
Company give effect to all of the above acquisitions, accounted for as
purchases, as if they occurred on January 1, 1995 (in thousands):
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------- -------------
Revenues......................... $ 269,476 $ 245,167
Net income....................... (7,839) 6,897
Net income per common share...... (0.53) 0.46
The above pro forma information is not necessarily indicative of the results
of operations that would have occurred had the acquisitions been made as of
January 1, 1995 or of the results which may occur in the future.
4. CONCENTRATION OF CUSTOMERS
The Company is party to a variety of contracts with insurance companies,
preferred provider organizations ("PPOs"), health maintenance organizations
("HMOs"), integrated delivery systems, health care alliances, and their
business customers located throughout the United States to provide third
party, marketing, administration, and risk management services for the small
business market. For the year ended December 31, 1996, the Company's three
largest payors accounted for approximately 16%, 13%, and 13%, respectively,
of total revenues. For the year ended December 31, 1995, the Company's three
largest payors accounted for approximately 31%, 23%, and 11%, respectively,
of total revenues.
The Company grants credit, without collateral, to some of its self-funded
clients under certain contracts.
F-44
5. GOODWILL
At December 31, 1996 and 1995, goodwill resulting from the excess of cost
over the fair value of the respective net assets acquired was as follows (in
thousands):
1996 1995
------------- ------------
HealthPlan Services............... $ 32,841 $ 32,841
Consolidated Group................ 59,734 -
Harrington........................ 66,705 -
Diversified Group Brokerage....... 2,388 9,750
Third Party Claims Management 490 8,087
------------- ------------
162,158 50,678
Accumulated Amortization.......... (5,637) (1,831)
------------- ------------
$ 156,521 $ 48,847
============= ============
In the third quarter of 1996, the Company recorded a charge for impairment
of goodwill originally recorded upon the acquisitions of DGB and TPCM of
$6.6 million and $7.1 million, respectively. Other adjustments were recorded
to reduce the DGB and TPCM goodwill balances as a result of final resolution
of acquisition contingencies.
DGB, located in Marlborough, Connecticut, is a third party administrator
providing managed health care administrative services to self-funded
employers, typically having between 250 and 2,000 employees in the New
England market. At the time of this acquisition, the Company projected a 10%
to 15% growth rate in net cash flows at DGB. Since this acquisition, DGB has
not achieved, and does not expect to achieve, the revenue and net cash flow
projections prepared at the time of the acquisition due to, among other
things, higher than originally expected attrition rates resulting in ongoing
decreases in net revenues (due in part to increased pricing resulting from a
reinsurance carrier's departure from DGB's market) and an inadequate
distribution system, as evidenced by an underperforming sales force and
greater than anticipated operating costs. The Company's efforts to correct
these deficiencies have not enabled it to meet its original projections.
Accordingly, the Company recorded an impairment charge of $6.6 million
associated with the DGB acquisition. Any further significant declines in the
DGB's projected net cash flows may result in additional write-downs of
remaining goodwill.
TPCM is a third party administrator providing managed health care
administrative services to hospitals and other health care institutions that
offer self-funded health care benefits. At the time of this acquisition, the
Company projected a 10% to 15% growth rate in net cash flows at TPCM. Since
this acquisition, TPCM has not achieved, and does not expect to achieve, the
revenue and net cash flow projections prepared at the time of the
acquisition due to, among other things, higher than originally expected
attrition rates, significantly higher than expected claims experience
(claims filed per enrollee), and greater than anticipated operating costs
due to the inability to obtain economies of scale through integration. The
Company's efforts to correct these deficiencies have not enabled it to meet
its original projections. In 1996, TPCM lost one customer that represented
over $1.0 million in annualized revenues resulting in a decision to close
one of its operating facilities. Accordingly, the Company has recorded an
impairment charge of $7.1 million associated with the TPCM acquisition. Any
further significant declines in TPCM's projected net cash flows may result
in additional write-downs of remaining goodwill.
The Company will continue to evaluate on a regular basis whether events and
circumstances have occurred that indicate the carrying amount of goodwill
may not be recoverable. Although the net unamortized balance of goodwill at
December 31, 1996 is not considered to be impaired, any such future
determination requiring the recognition of an impairment charge could have a
material adverse effect on the Company's results.
F-45
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31,
1996 1995
------------- ------------
Land............................... $ 438 $ -
Building........................... 1,133 -
Furniture and fixtures............. 14,478 3,433
Computers and equipment............ 14,961 4,747
Computer software.................. 15,377 3,452
Leasehold improvements............. 4,076 1,117
------------- ------------
50,463 12,749
Less - accumulated depreciation.. (29,361) (3,508)
------------- ------------
$ 21,102 $ 9,241
============= ============
7. INVESTMENTS AND NOTES RECEIVABLE
On January 8, 1996, the Company entered into an agreement with Medirisk,
Inc., a provider of health care information, to purchase $2.0 million of
Medirisk preferred stock representing a 9% ownership interest and, in
addition, to lend Medirisk up to $10.0 million over four years in the form
of debt for which the Company would receive detachable warrants to purchase
up to 432,101 shares of Medirisk's common stock for $0.015 per share, based
on the amount of debt actually acquired. This investment is recorded at
cost.
On March 13, 1996, Medirisk borrowed $6.9 million from the Company. The debt
bears interest of 10% payable quarterly and is due upon the earliest to
occur of (i) an initial public offering by Medirisk; (ii) a change of
control of Medirisk; or (iii) at maturity on January 8, 2003. In accordance
with the agreement, warrants to purchase 298,150 shares of Medirisk's common
stock were issued to the Company.
The Company discounted the note receivable by the relative fair value of the
warrants, which was determined to be $573,000. The value of the warrants is
accreted to income over the life of the note based on the maturity date.
On January 28, 1997, Medirisk completed an initial public offering and
satisfied the $6.9 million debt balance in accordance with the agreement.
The remaining value of the warrants will be accreted to income in the first
quarter of 1997. Upon completion of the public offering, Medirisk's
preferred stock was converted to common stock. The Company has agreed not to
sell its shares of Medirisk in the public market for 180 days after the
effective date of the initial public offering without the prior consent of
the offering's underwriters. After the 180 day period has lapsed, the shares
will be eligible for sale in the public market, subject to the conditions
and restrictions of Rule 144 under the Securities Act of 1933. Assuming full
conversion of the warrants issued to the Company, its ownership amounts to
480,442 shares of common stock after the public offering, which represents
an approximate 11% ownership interest. On March 14, 1997, Medirisk's shares
closed at $8.38 per share of common stock.
8. NOTE PAYABLE AND CREDIT FACILITIES
The Company expanded its credit facility (the "Line of Credit") from $20
million to the lesser of (i) three times earnings before interest expense,
income taxes, and depreciation and amortization expense (with certain
adjustments called for in the credit agreement) or (ii) $175 million during
1996. The maximum amount available through the Line of Credit as of December
31, 1996 was approximately $109 million. The facility operates on a
revolving basis until May 18, 1998, on which date the outstanding balance
shall be paid over a three year period with the first principal payment due
November 30, 1998 and the final payment due April 30, 2001. The Company's
borrowing under the Line of Credit includes interest ranging from LIBOR plus
125 to 175 basis points to New York prime plus 25 to 75 basis points. The
Line of Credit carries a commitment fee of 0.25% of the unused portion and
is secured by the stock of the Company's subsidiaries. The agreement
contains provisions which include (among other covenants) maintenance of
certain minimum financial ratios,
F-46
limitations on capital expenditures, limitations on acquisition activity,
and limitations on the payment of dividends. The Company incurred $2.1
million of interest expense on the Line of Credit for year ended December
31, 1996.
Subsequent to obtaining the Line of Credit, the Company entered into two
separate interest rate swap agreements as a hedge against interest rate
exposure on the variable rate debt. The agreements, which expire in October
1999 and September 2001, effectively convert $40.0 million of variable debt
under the Line of Credit to fixed rate debt at a weighted average rate of
6.42% plus a margin ranging from 125 to 175 basis points. For the year ended
December 31, 1996, the Company recorded $110,000 of interest expense related
to the swap agreements. The Company considers the fixed rate and variable
rate financial instruments to be representative of current market interest
rates and, accordingly, the recorded amounts approximate their present fair
market value.
In conjunction with the acquisition of the Company in 1994 by certain
Company officers and Noel Group, Inc. ("Noel"), the Company assumed a note
payable to the Cal Group (the "Cal Group Note") of $1.3 million, which bears
interest at 5% per annum. The note payable requires semi-annual principal
payments in May and November of $18,000 to $78,000 through November 2008.
Interest expense relating to the note payable was approximately $62,000 and
$64,000 for the years ended December 31, 1996 and 1995, respectively.
On July 1, 1996, the Company assumed several notes payable previously
entered into by Consolidated Group (the "Consolidated Group Notes"), which
were secured primarily by computer equipment. The interest rates on those
notes are LIBOR plus 150 to 175 basis points. The Company also assumed an
operating note (the "Consolidated Operating Note"), which is also secured by
purchased equipment and has a fixed interest rate of 7.82%.
Consolidated Group also has a mortgage outstanding secured by a building
with a book value at December 31, 1996 of $1.1 million. The interest rate on
the mortgage is fixed at 8.75%, with a final payment due in May 2016.
On July 1, 1996, the Company assumed certain equipment notes as a result of
a prior agreement that had been executed by Harrington ("Harrington
Equipment Notes"). The notes, which are secured primarily by telephone
equipment, have interest rates ranging from 7.2% to 9.0% with the final
payment due in July 2004.
The balances outstanding on the above debt instruments at December 31, 1996
are as follows (in thousands):
Line of Credit..................... $ 55,000
Cal Group Note..................... 1,214
Consolidated Group Notes........... 2,237
Consolidated Operating Note........ 528
Consolidated Group Mortgage........ 1,481
Harrington Equipment Notes......... 1,838
---------
$62,298
Less: Amounts due within one year.. (2,717)
---------
Long-term debt..................... $59,581
=========
Future minimum principal payments for all notes as of December 31, 1996 are
as follows (in thousands):
1997................ $ 2,717
1998................ 8,737
1999................ 16,942
2000................ 20,455
2001................ 11,165
Thereafter.......... 2,282
----------
$ 62,298
==========
F-47
As of March 14, 1997, the Company had liquidated approximately $7.5 million
of the above debt before its scheduled maturity, including a pay-off of the
Consolidated Group Notes.
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
DECEMBER 31,
1996 1995
--------- ---------
Adverse lease commitments............ $ 5,215 $ -
Salaries and wages................... 3,573 1,297
Office closure costs................. 919 325
Interest............................. 906 10
Accrued legal and regulatory......... 555 683
State and local taxes................ 545 71
Severance............................ 276 356
Other................................ 2,916 2,351
------- -------
$14,905 $ 5,093
======= =======
Adverse lease commitments relate to office and equipment leases assumed by
the Company upon its acquisitions of Consolidated Group and Harrington at
prices in excess of market rates or for property that will not be utilized
for the full term of the lease. Severance and office closure costs at
December 31, 1996 refer to costs connected with the Company's acquisitions
of Consolidated Group and Harrington. Through December 31, 1996, $496,000
had been charged against these accruals. Other includes approximately $1.3
million and $1.1 million of other acquisition-related costs at December 31,
1996 and 1995, respectively.
10. ACCRUED CONTRACT COMMITMENTS
Starting in 1994, the Company pursued contracts with state-sponsored health
care purchasing alliances, initially in Florida, and in 1995-1996, in North
Carolina, Kentucky, and Washington. The Company has incurred substantial
expenses in connection with the start-up of these contracts, and, to date,
the alliance business in North Carolina and Florida has been unprofitable.
During the quarter ended December 31, 1994, the Company recorded a pre-tax
charge of approximately $3.6 million related to state-sponsored health care
purchasing alliances in Florida. The Company recorded a pre-tax charge
related to these contracts in the amount of $2.6 million in 1996 resulting
from increased costs and lower than anticipated revenues in Florida and
North Carolina.
The balance of the accrual at December 31, 1996 is approximately $608,000
for Florida and $481,000 for North Carolina. The balance at December 31,
1995 was approximately $482,000 for Florida.
11. EMPLOYEE BENEFIT PLANS
Defined Contribution Plan
The Company has a defined contribution employee benefit plan established
pursuant to Section 401(k) of the Internal Revenue Code covering
substantially all employees. Through December 31, 1996, the Company matched
up to 50% of the employee contribution limited to 6% of the employee's
salary for its HPSI and Harrington employees, and it matched 50% of the
employee contribution limited to 4% of the employee's salary for its
Consolidated Group employees. Effective January 1, 1997, the Company began
to match one-third of such employee contributions limited to 6% of the
employee's salary. Under the provisions of the plan, participants' rights to
employer contributions vest 40% after completion of three years of qualified
service and increase by 20% for each additional year of qualified service
completed thereafter. Expense in connection with this plan for the years
ended December 31, 1996 and 1995 was approximately $884,000 and $339,000,
respectively, and for the period from inception (October 1, 1994) through
December 31, 1994 was approximately $82,000.
F-48
Post-Retirement Benefit Plan
Harrington, the Company's wholly owned subsidiary acquired on July 1, 1996,
provides medical and term life insurance benefits to certain retired
employees of its subsidiary, American Benefit Plan Administrators, Inc. The
Company funds the benefit costs on a current basis, because there are no
plan assets. The post-retirement benefit cost incurred since the Company's
acquisition of Harrington is $38,000. At December 31, 1996, an accrued
post-retirement liability of $1.4 million is included in the balance of
other long-term liabilities. Actuarial assumptions used in calculating the
obligation include a discount rate of 7.5% and a health care cost trend rate
of 7% in 1997, 6% in 1998, and 5% in 1999 and thereafter.
Management Stock
From the period 1994 through January 1995, certain members of management
received 473,000 shares of Common Stock, which carries limitations on
vesting over a four-year period and restrictions regarding the sale of stock
in a public market. Should the employee terminate employment prior to the
completion of the vesting period, the Company will be entitled to purchase
from the executive the number of shares that have not vested at a purchase
price equal to the lower of fair market value or the initial issuance price.
The Company recognizes compensation expense based on the vesting period of
the shares.
F-49
12. COMMITMENTS AND CONTINGENCIES
Lease commitments
The Company rents office space and equipment under non-cancelable operating
leases. Rental expense under the leases approximated $7.7 million (net of
$422,000 charged to adverse lease accruals) and $4.0 million for the years
ended December 31, 1996 and 1995, respectively, and $932,000 for the period
from inception (October 1, 1994) through December 31, 1994. Future minimum
rental payments under these leases are as follows (in thousands):
1997 $10,166
1998 9,107
1999 8,538
2000 6,373
2001 4,962
Thereafter 15,242
-------
$54,388
=======
Litigation
In 1995, a former provider of marketing services for the Company filed a
complaint against the Company claiming wrongful termination of an exclusive
marketing agreement and breach of contract. The parties to the dispute
agreed to binding arbitration, and the arbitration proceedings occurred
during the week of October 29, 1996. The arbitration panel's decision,
rendered in December 1996, is not expected to materially alter the amount or
timing of future payments that the Company is contractually obligated to
make to the plaintiff under the marketing agreement, and this is not
expected to materially affect the cash flows of the Company's business.
Pursuant to the Harrington acquisition agreement (the "Harrington
Agreement"), the Company agreed to use its best efforts to file a
registration statement sufficient to permit the public offering and sale of
the shares of the Company's Common Stock issued to the Harrington
stockholders in the acquisition, with such registration statement to become
effective on or before October 31, 1996. On October 30, 1996, the Company
received a letter from a representative of Harrington's shareholders stating
that the Company was in violation of the Harrington Agreement and reserving
all rights under such Agreement. It is not possible for the Company to
evaluate what, if any, damages might result from such notice. In November
1996, the Company filed a Form S-3 registration statement with the
Securities and Exchange Commission registering the restricted shares of the
Company's Common Stock held by the former Harrington and Consolidated Group
shareholders. This registration statement became effective on February 14,
1997.
The Company's Consolidated Group subsidiary is undergoing a DOL audit in
which the DOL has raised various questions about the application of ERISA to
the way that subsidiary does business. This audit is ongoing, and there can
be no assurance that the DOL will not take positions that could require
changes to the way this subsidiary operates, or result in the imposition of
administrative fines and penalties.
The Company is involved in various litigation arising in the normal course
of business. In the opinion of the Company's management, although the
outcomes of these claims are uncertain, in the aggregate they are not likely
to have a material adverse effect of the Company's business, financial
condition, or results of operations.
Regulatory compliance
The Company's activities are highly regulated by state and federal
regulatory agencies under requirements that are subject to broad
interpretations. The Company cannot predict the position that may be taken
by these third parties that could require changes to the manner in which the
Company operates.
F-50
13. INCOME TAXES
The (benefit) provision for income taxes is as follows (in thousands):
Period from Inception
For the Year Ended For the Year Ended (October 1, 1994) through
December 31, 1996 December 31, 1995 December 31, 1994
--------------------- ----------------- ----------------------
Current
Federal $ 429 $ 3,211 $ 120
State 61 458 15
------------------- --------------- --------------------
490 3,669 135
=================== =============== ====================
Deferred
Federal (1,619) 2,116 21
State (231) 311 3
------------------- --------------- --------------------
(1,850) 2,427 24
=================== =============== ====================
(Benefit) provision
for income taxes $(1,360) $ 6,096 $ 159
=================== =============== ====================
The components of deferred taxes recognized in the accompanying financial
statements are as follows (in thousands):
December 31,
------------
1996 1995
----------- -----------
Deferred tax asset - current
Accrued expenses not currently deductible $ 4,617 $ 1,120
Prepaid expenses currently deductible (136) (155)
--------- ----------
4,481 965
========= ==========
Deferred tax asset (liability) - non-current
Deferred compensation 537 -
Post retirement benefits 641 -
Depreciation (657) 80
Intangibles 7,806 (434)
--------- ----------
$ 8,327 $ (354)
========= ==========
The deferred tax asset resulting from intangibles relates to certain
intangible assets acquired by the Company that are amortizable for tax
purposes and to the tax treatment of the goodwill impairment charge (see
Note 5).
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. No valuation
allowance is considered necessary at December 31, 1996 and 1995, based on
the Company's expectations of future taxable income.
The provision for income taxes varies from the federal statutory income tax
rate due to the following:
1996 1995 1994
----------- --------- -----------
Federal statutory rate applied to pre-tax (35.0)% 34.0 % 35.0%
income (loss)
State income taxes net of federal tax benefit (5.0)% 5.0 % 4.5%
Goodwill amortization 20.1 % 0.2 % 1.3%
Tax exempt interest income (2.6)% (1.3)% -
Non-deductible items 5.7 % 1.1 % -
----------- --------- -----------
Effective tax rate (16.8)% 39.0 % 40.8%
=========== ========= ===========
F-51
14. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN
Stock Option Plans
The Company's stock option plans authorize the granting of both incentive
and non-incentive stock options for a total of 1,840,000 shares of Common
Stock to key executives, management, consultants, and, with respect to
240,000 shares, to directors. Under the plans, all options have been granted
at prices not less than market value on the date of grant. Certain
non-qualified incentive stock options may be granted at less than market
value. Options generally vest over a four-year period from the date of
grant, with 20% of the options becoming exercisable on the date of the grant
and 20% becoming exercisable on each of the next four anniversaries of the
date of the grant.
A summary of option transactions during each of the two years ended December
31, 1996 is shown below:
Number Weighted
of Average
Shares Option Price
------------- -----------------
Under option, December 31, 1994
Granted 545,000 $ 18.11
Exercised - -
-----------
Under option, December 31, 1995
(112,000 exercisable) 545,000 18.11
Granted 922,500 18.75
Exercised (11,400) 14.00
Cancelled (12,600) 19.35
-----------
Under option, December 31, 1996
(278,200 exercisable) 1,443,500 18.54
===========
There were 372,500 and 795,000 shares available for the granting of options
at December 31, 1996 and 1995, respectively.
The following table summarizes the stock options outstanding at December 31,
1996:
Range Number Weighted Average Weighted
of outstanding at Remaining Average
Exercise Prices December 31, 1996 Contractual Life Exercise Price
----------------- ----------------- ----------------- -----------------
$14.00 - $18.50 979,500 9 years $16.09
19.38 - 25.50 464,000 9 years 23.72
Employee Stock Purchase Plan
Under the 1996 Employee Stock Purchase Plan ("Employee Plan"), the Company
is authorized to issue up to 250,000 shares of common stock to its employees
who have completed one year of service. The Employee Plan is intended to
provide a method whereby employees have an opportunity to acquire shares of
Common Stock of the Company. The Employee Plan was implemented by
consecutive quarterly offerings of the Company's Common Stock commencing on
July 1, 1996.
Under the terms of the Employee Plan, an employee may authorize a payroll
deduction of a specified dollar amount per pay period. The proceeds of that
deduction are used to acquire shares of the Company's Common
F-52
Stock on the offering date. The number of shares acquired is determined
based on 85% of the closing price of the Company's Common Stock on the New
York Stock Exchange on the offering date.
During 1996, the Company sold 6,302 shares to employees under the Employee
Plan.
Measurement of Fair Value
The Company applies APB 25 and related interpretations in accounting for its
stock option plans and employee stock purchase plan. Accordingly, no
compensation cost has been recognized related to these plans. Had
compensation cost for the Company's stock option and employee stock purchase
plans been determined based on the fair value at the grant dates, as
prescribed in Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FASB 123"), the Company's net income and net
income per share would have been as follows:
Year Ended December 31,
1996 1995
----------- -----------
Net (loss) income attributable to common
stock (in thousands):
As reported $(6,716) $9,250
Pro forma (8,596) 8,627
======= ======
Net (loss) income per share:
As reported $ (0.47) $ 0.82
Pro forma (0.60) 0.76
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for grants during the applicable year: dividend yield of 0.0% for both
years; expected volatility of 30% for each of the years ended December 31,
1996 and 1995; risk-free interest rates of 6.30% to 6.69% for options
granted during the year ended December 31, 1996 and 5.51% to 7.05% for
options granted during the year ended December 31, 1995; and a weighted
average expected option term of four years for both years.
15. SUBSEQUENT EVENTS
On February 7, 1997, Noel, Automatic Data Processing, Inc. ("ADP"), and the
Company completed a transaction in which Noel sold to ADP 1,320,000 shares
of the Company's Common Stock at a purchase price of $20 per share. Upon
completion of the transaction, Noel and ADP owned approximately 29% and 9%,
respectively, of the Company's Common Stock. The agreement governing such
purchase generally requires that: (i) ADP may not agree to acquire
additional shares of the Company's Common Stock prior to December 31, 1997,
unless such acquisition is approved by the Company's Board of Directors, or
unless the Company entertains alternative offers; (ii) Noel may not dispose
of its remaining shares of the Company's Common Stock prior to September 30,
1997 other than through a direct distribution to Noel's shareholders,
subject to specified conditions; and (iii) the Company may not take any
action prior to December 31, 1997 that could interfere with
"pooling-of-interests" accounting. On March 19, 1997, Noel's shareholders
approved a plan of liquidation and dissolution. In connection with such
approval, the Company expects to file a Form S-3 Registration Statement with
the Securities and Exchange Commission to register the shares of the
Company's Common Stock held by Noel, after which Noel has announced it
intends to make a distribution of the Company's stock to Noel's
shareholders.
On March 5, 1997, the Company and Health Risk Management, Inc. ("HRM")
mutually agreed to terminate a merger agreement previously entered into on
September 12, 1996. In connection with the termination, the Company
purchased 200,000 shares of HRM common stock, representing approximately
4.5% of HRM shares outstanding, at a price of $12.50 per share. On March 14,
1997, HRM's shares closed at $10.25 per share of common stock. These shares
were not registered and are subject to restrictions on transfer. HRM
provides comprehensive, integrated health care management, information, and
health benefit administration services to employers, insurance companies,
unions, HMOs, PPOs, hospitals, and governmental units in the United States
and Canada.
F-53
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED; IN THOUSANDS EXCEPT PER
SHARE DATA)
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- ------- ------- -------
Year ended December 31, 1996
Revenues $63,963 $67,006 $31,863 $31,007
Net income (5,530) (7,961) 3,441 3,334
Net income per common share $ (0.37) $ (0.53) $ 0.26 $ 0.25
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- ------- ------- -------
Year ended December 31, 1995
Revenues $29,361 $24,115 $23,198 $23,576
Net income 2,985 2,623 2,072 1,570
Net income per common share 0.22 0.20 0.20 N/A
Net income - pro forma basis 2,985 2,623 2,072 1,855
Pro forma net income per common
share $ 0.22 $ 0.20 $ 0.15 $ 0.20
First quarter earnings per share in 1995 has not been provided, because it
preceded the Company's initial public offering.
F-54
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Board of Directors of
Healthcare Informatics Corporation
and
To The Dun & Bradstreet Corporation
We have audited the accompanying statement of financial position of
HealthPlan Services Division (formerly Plan Services Division, a wholly owned
division of The Dun & Bradstreet Corporation) as of September 30, 1994 and the
related statements of income and cash flows for the nine-month period then
ended. These financial statements are the responsibility of the companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HealthPlan Services Division
as of September 30, 1994 and the results of its operations and its cash flows
for the nine-month period then ended, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, on September 30, 1994,
HealthPlan Services Division was sold to Healthcare Informatics Corporation,
pursuant to a purchase agreement dated September 2, 1994.
Coopers & Lybrand L.L.P.
Tampa, Florida
December 2, 1994
F-55
HEALTHPLAN SERVICES DIVISION
STATEMENT OF FINANCIAL POSITION
September 30, 1994
(in thousands)
ASSETS
Current assets:
Cash $ 1,255
Accounts receivable 3,252
Prepaid expenses 2,303
-------
Total current assets 6,810
Property and equipment, net 2,715
Computer software, net 1,327
Other intangible assets, net 5,483
Goodwill, net 11,436
Deferred taxes 85
Other assets 28
-------
Total assets $27,884
=======
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Current portion of note payable $ 92
Accounts payable 19,581
Accrued liabilities 3,585
Deferred revenue 1,294
-------
Total current liabilities 24,552
Note payable 1,162
Commitments and contingencies (Notes 9 and 13)
Divisional equity 2,170
-------
Total liabilities and divisional equity $27,884
=======
The accompanying notes are an integral part of these financial statements.
F-56
HEALTHPLAN SERVICES DIVISION
STATEMENT OF INCOME
Nine-month period ended September 30, 1994
(in thousands)
Revenues $81,945
-------
Costs and expenses:
Agents' commissions 33,213
Personnel expenses 24,476
Rent and maintenance 4,106
Postage and communication 3,563
Depreciation and amortization 3,347
Staff reductions and office closings (Note 3) 4,671
Other operating expenses (Note 8) 5,322
-------
78,698
-------
Income before provision for income taxes 3,247
Provision for income taxes 1,500
-------
Net income $ 1,747
=======
The accompanying notes are an integral part of these financial statements.
F-57
HEALTHPLAN SERVICES DIVISION
STATEMENT OF CASH FLOWS
Nine-month period ended September 30, 1994
(in thousands)
Cash flows from operating activities:
Net income $ 1,747
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization 3,347
Staff reductions and office closings provisions 4,671
Staff reductions and office closings payments (1,992)
Deferred taxes 2
Accounts receivable 484
Prepaid expenses (269)
Accounts payable (2,312)
Accrued liabilities (892)
Deferred revenue (512)
-------
Net cash provided by operating activities 4,274
-------
Cash flows for investing activities:
Purchase of property and equipment, net (931)
Purchases of and additions to computer software (534)
Acquisitions of other intangible assets
(net of deferred payments) (21)
Other assets 11
-------
Net cash used in investing activities (1,475)
-------
Cash flows for financing activities:
Net amount remitted to The Dun & Bradstreet
Corporation and affiliates (Note 7) (3,602)
Payments on note payable (46)
-------
Net cash used in financing activities (3,648)
-------
Net change in cash (849)
Cash, beginning of period 2,104
-------
Cash, end of period $ 1,255
=======
The accompanying notes are an integral part of these financial statements.
F-58
HEALTHPLAN SERVICES DIVISION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
Organization--HealthPlan Services Division (HSI) (formerly Plan Services
Division, a wholly-owned division of The Dun & Bradstreet Corporation (D&B)), is
engaged in the business of providing distribution and administration services
for group-health-insurance programs throughout the United States.
Basis of Presentation--The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles. On
September 30, 1994, HSI was sold to Healthcare Informatics Corporation, pursuant
to a purchase agreement dated September 2, 1994.
These financial statements present the results of operations for the
nine-month period to September 30, 1994 and financial position at September 30,
1994. Purchase accounting by the acquirer has not been reflected in these
financial statements. Expenses and liabilities which were incurred by HSI in
connection with the sale, which would not otherwise have been incurred, are
reflected in the nine-month period ended September 30, 1994. See Note 3.
Expense Allocations--D&B provides certain services to, and incurs certain
costs on behalf of its subsidiaries and divisions. These costs, which include
employee benefit and executive compensation programs, retirement savings and
health plans, treasury and business insurance, are allocated to D&B's
subsidiaries, including HSI, on a pro-rata basis. The costs of D&B's general
corporate overheads are not allocated as such costs related to HSI are deemed to
be immaterial. Liabilities related to the benefit plans described above are not
fully reflected in the Statement of Financial Position. As such, these financial
statements may not necessarily be indicative of the financial position or the
results of operations had HSI been operated as an unaffiliated company. However,
management believes that with respect to general and administrative expenses
(see Note 8), the amounts reflected in the Statement of Income are not less than
the amounts HSI would have incurred had HSI been an unaffiliated company in
those periods.
2. SIGNIFICANT ACCOUNTING POLICIES:
Cash--Substantially all of the net cash flow of HSI was remitted to D&B
pursuant to a centralized cash management system. The related interest income
which would otherwise have been earned by HSI is not reflected in these
statements. Cash held by D&B has historically resulted in negative working
capital for HSI.
Property and Equipment--Property and equipment are stated at cost, net of
accumulated depreciation computed using the straight-line method over estimated
useful lives of three to ten years. Additions and major renewals are
capitalized. Repairs and maintenance are charged to expense as incurred. Upon
disposal, the related cost and accumulated depreciation are removed from the
accounts, with the resulting gain or loss included in income.
Computer Software--HSI capitalizes the direct expenses of internally
produced software. As of September 30, 1994, capitalized software costs, net of
amortization was (in thousands) $627. Software is generally amortized over three
years. Amortization expense was (in thousands) $184 for the nine months ended
September 30, 1994.
Other Intangible Assets--Other intangible assets represent the costs of
acquiring new blocks of insurance administration business which are deferred and
amortized on an accelerated basis over periods of up to seven years. Amounts
included in the accompanying Statement of Financial Position are net of
accumulated amortization of (in thousands) $3,491 as of September 30, 1994.
Goodwill--Goodwill relates to D&B's original acquisition of HSI and is being
amortized on a straight-line basis over periods of expected benefit, not
exceeding 40 years. Goodwill represents the excess purchase price over the fair
value of identifiable net assets. Amounts included in the accompanying Statement
of Financial Position are net of accumulated amortization of $4,620 (in
thousands) as of September 30, 1994. At the balance sheet date, HSI reviews the
recoverability of goodwill and other intangible assets.
F-59
Revenue Recognition--Revenues consist primarily of fees for services
provided to insurance carriers as a third party administrator. Revenues are
recognized ratably over the applicable contract period, which is generally one
year, and represents the period such services are performed. HSI accounts for
revenues received in advance by deferring such amounts until the related
services are performed. During the nine months ended September 30, 1994, HSI had
three customers that accounted for approximately 27%, 26%, and 11%,
respectively, of revenues.
Agents' Commissions--Agents' commission expense is accrued in the same
period that the related revenues are recognized.
Income Taxes--HSI participates in the consolidated federal income tax return
of D&B. For financial reporting purposes, HSI computes a provision for income
taxes on a separate return basis based on statutory rates in effect. HSI's
current income taxes payable are included in divisional equity in the
accompanying Statement of Financial Position. Effective January 1, 1992 HSI
adopted SFAS No. 109, "Accounting for Income Taxes," applying the provisions of
this statement retroactively to prior years' financial statements.
Postemployment Benefits--Effective January 1, 1993, D&B and HSI adopted SFAS
No. 112, "Employers' Accounting for Postemployment Benefits." HSI accrues for
such costs at the time it is probable that a liability to employees has been
incurred and it can be reasonably estimated. The implementation of this
statement did not have a material impact upon HSI's financial position or
results of operations.
Postretirement Benefits--Effective January 1, 1993, D&B and HSI adopted SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions." As a member of D&B's Plan, HSI recognized as net postretirement
benefit cost the required contribution to the plan based upon an allocation and
formula used by D&B. As a participant in D&B's postretirement benefit plan,
amounts related to liabilities to HSI employees existing at the date of adoption
of SFAS No. 106 are not reflected in the accompanying Statement of Financial
Position.
3. STAFF REDUCTIONS AND OFFICE CLOSINGS:
HSI has recorded charges for certain staff reductions and office closings.
In March 1994, HSI closed its Fresno, California processing center and recorded
a charge totaling $1,050,000. Such charge consisted of the following: $355,000
of lease termination costs; $380,000 of severance costs; $175,000 of fixed asset
write-offs; and $140,000 of other office closing costs. On September 30, 1994,
immediately prior to the sale of HSI, as required pursuant to the terms of the
related purchase agreement, HSI terminated 125 employees throughout its Tampa
operations and recorded a severance charge totaling $1,860,000. In addition, HSI
recorded a $1,761,000 charge for severance of two former officers in 1994. All
severance and office closing costs were paid as of September 30, 1994 or assumed
by D&B as part of the sale of HSI.
Subsequent to September 30, 1994, HSI discontinued its contract with The
Centennial Life Insurance Company. The revenues related to Centennial were (in
thousands) $4,680 for the nine months ended September 30, 1994.
F-60
4. PROPERTY AND EQUIPMENT:
Property and equipment at September 30, 1994 consists of the following (in
thousands):
Computers and equipment $ 13,372
Furniture and fixtures 4,611
Leasehold improvements 3,791
--------
21,774
Accumulated depreciation and amortization (19,059)
--------
Net property and equipment $ 2,715
========
Depreciation expense for the nine months ended September 30, 1994 was (in
thousands) $1,284.
5. ACCRUED LIABILITIES:
Accrued liabilities at September 30, 1994 consist of the following (in
thousands):
Accrued salaries and wages $2,315
Deferred payments--other intangible assets 657
Other 613
------
Total accrued liabilities $3,585
======
6. NOTE PAYABLE:
On May 27, 1993, HSI entered into an agreement with Cal/Group for the
purchase of its claims processing business at a price of $2,000,000. The
purchase price consisted of $500,000 cash paid at closing with the balance in
the form of a note payable of $1,500,000. On March 25, 1994 the original
agreement was modified and the purchase price was reduced by $150,000. This
purchase is collateralized by the claims business. The note payable requires
semi-annual payments of $50,000 to $80,000, including interest at 6%, through
November 2008. Interest paid by the Company was insignificant for the nine
months ended September 30, 1994.
Future minimum principal payments as of September 30, 1994 are as follows
(in thousands):
Year ending December 31,
1994 (3 months) $ 46
1995 90
1996 97
1997 92
1998 93
Thereafter 836
------
Total $1,254
======
F-61
7. DIVISIONAL EQUITY:
Divisional equity reflects the historical activity between D&B and HSI. An
analysis of the changes in divisional equity is as follows (in thousands):
Balance at beginning of period $ 634
Net income 1,747
Net remittances to D&B (211)
-----
Balance at end of period $2,170
=====
For the nine months ended September 30,1994, net remittances include (in
thousands) $3,391 of non-cash charges related to severance expenses to be paid
by D&B in connection with the purchase agreement. These amounts have been
excluded for purposes of the Statement of Cash Flows. Other non-cash charges and
allocations reflected in net remittances to D&B have not been separately
identified for purposes of the Statement of Cash Flows.
8. OTHER OPERATING EXPENSES:
Other operating expenses for the nine months ended September 30, 1994
consist of the following (in thousands):
General and administrative expenses $2,188
Professional services 1,488
Insurance, taxes and licenses 451
Travel and entertainment 597
Utilities 384
Advertising and promotion 217
Gain on property and equipment (3)
-----
$5,322
=====
9. LEASES:
HSI leases certain facilities and equipment under long-term leases which are
accounted for as operating leases.
Future minimum lease payments for long-term operating leases as of September
30, 1994 are approximately as follows (in thousands):
Year ending December 31,
1994 (3 months) $ 930
1995 2,780
1996 880
-----
Total $4,590
=====
Rent expense for the nine months ended September 30, 1994 was (in thousands)
$3,331.
F-62
10. POSTRETIREMENT AND DEFERRED COMPENSATION PLANS:
HSI's participation in D&B's postretirement medical plan, defined benefit
pension plan and deferred compensation plan terminated as of September 30, 1994.
Prior to September 30, 1994, HSI recognized postretirement benefit costs
based upon an allocation and formula determined by D&B. The amount allocated to
HSI as its share of the total pension costs for the nine months ended September
30, 1994 was (in thousands) $611. The costs allocated to HSI and recognized as
net postretirement benefit costs were not material to HSI's results of
operations for the nine months ended September 30, 1994.
As a participant in D&B's postretirement and deferred compensation plans,
amounts related to liabilities to HSI employees existing at the date of adoption
of new accounting standards for pensions and other postretirement benefits are
not reflected in the accompanying Statement of Financial Position. Amounts due
to D&B relating to HSI's allocated costs under the above plans are included in
divisional equity in the accompanying Statement of Financial Position. The
following information relates to the D&B plans HSI participates in as of
December 31, 1993, the most recent valuation date. Such information is not
available on a separate company or divisional basis.
D&B has defined benefit pension plans covering substantially all associates
in the United States. The benefits to be paid to associates under these plans
are based on years of credited service and average final compensation. Pension
costs are determined actuarially and funded to the extent allowable under the
Internal Revenue Code. Supplemental plans in the United States are maintained to
provide retirement benefits in excess of levels allowed by ERISA.
The status of D&B's U.S. defined benefit pension plans at December 31, 1993
is as follows (millions of dollars):
Funded Unfunded(1)
------ -----------
1993 1993
---- ----
Fair value of plan assets $1,008.9 $ -
-------- ---------
Actuarial present value of
benefit obligations:
Vested benefits 708.0 69.1
Non-vested benefits 29.4 7.2
----- ----
Accumulated benefit obligations 737.4 76.3
Effect of projected future
salary increases 128.1 37.4
----- ----
Projected benefit obligations 865.5 113.7
Plan assets in excess of (less than) ----- -----
projected benefit obligations 143.4 (113.7)
Unrecognized net (gain) loss 56.2 38.4
Unrecognized prior service cost 15.4 18.2
Unrecognized net transition (asset)
obligation (93.6) 2.9
Adjustment to recognize minimum
liability - (22.1)
-------- -------
Prepaid (accrued) pension cost $ 121.4 $ (76.3)
======== ========
(1) Represents supplemental plans for which grantor trusts (with
assets of $60 million at December 31, 1993) have been established
to pay plan benefits.
The weighted average expected long-term rate of return on pension plan
assets was 9.75% for 1993. At December 31, 1993, the projected benefit
obligations were determined using a weighted average discount rate of 7.25% and
a weighted average rate of increase in future compensation levels of 5.7%. Plan
assets are invested in diversified portfolios that consist primarily of equity
and debt securities.
F-63
In addition to providing pension benefits, D&B provides various medical
benefits for retired associates. Substantially all of D&B's associates in the
United States become eligible for these benefits if they reach normal retirement
age while working for D&B.
Deferred Compensation Plans--HSI also participated in D&B's Profit
Participation Plan and Investment Plan for which substantially all of its
employees were eligible. D&B had also granted stock options to purchase shares
of D&B common stock to certain key employees of HSI. In addition, certain key
employees participated in incentive plans sponsored by D&B the cost of which to
HSI for such plans (in thousands) amounted to $589 for the nine months ended
September 30, 1994.
11. OTHER TRANSACTIONS WITH AFFILIATES:
D&B provides HSI with payroll processing and administration, general
treasury services and various business insurance coverages through policies
issued to D&B. Expenses allocated to HSI for these services, which are included
in the Statement of Income, were (in thousands) $326 for the nine months ended
September 30, 1994. Amounts due to D&B relating to the above activities are
included in divisional equity in the Statement of Financial Position.
HSI provides computer services to an affiliate totaling (in thousands)
$1,312 for the nine months ended September 30, 1994. These amounts are included
in revenues in the Statement of Income.
HSI provides health plan claims administration for D&B, totaling (in
thousands) $1,647 for the nine months ended September 30, 1994. HSI records as
revenues services provided to D&B.
12. FEDERAL INCOME TAXES:
HSI joins in filing a consolidated federal income tax return with D&B and
its affiliates. For financial reporting purposes, HSI computes a provision for
income taxes on a separate-return basis.
The reasons for the difference between HSI's effective income tax rate and
the statutory rate for the nine months ended September 30, 1994 are as follows
(thousands of dollars):
Federal income tax calculated at statutory rate
(35% for 1994) $1,136
State income tax, net of federal benefit 220
Goodwill 109
Other 35
-----
Income tax provision $1,500
=====
F-64
The income tax provision for the nine months ended September 30, 1994 is
summarized as follows (thousands of dollars):
Current:
Federal $1,160
State 338
-----
1,498
=====
Deferred:
Federal 2
State 0
-----
2
-----
Income tax provision $1,500
=====
The primary sources of temporary differences that give rise to significant
portions of the deferred tax asset and liability at September 30, 1994 are as
follows (thousands of dollars):
Deferred tax assets:
Property and equipment $144
Deferred tax liabilities:
Other intangible assets (59)
----
Net deferred tax asset $ 85
====
13. COMMITMENTS AND CONTINGENCIES:
HSI is involved in litigation arising during the normal course of its
business. In the opinion of management, the resolution of these matters will not
have a material effect on the financial position or results of operations of
HSI.
F-65
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Staffing Resources, Inc.:
We have audited the accompanying consolidated balance sheet of Staffing
Resources, Inc. as of December 31, 1996, and the related consolidated statements
of operations, changes in shareholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in
accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated 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
audit provides a reasonable basis for our opinion.
Included in trade accounts receivable at December 31, 1996, are accounts
receivable from one customer amounting to approximately $1,209,000 that have not
been collected as of March 28, 1997. We were unable to obtain sufficient,
competent, evidential matter to satisfy ourselves as to the collectibility of
these accounts receivable. Management believes these accounts receivable are
collectible.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had we been able to obtain sufficient,
competent, evidential matter to assess management's assessment of the
collectibility of the aforementioned accounts receivable, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Staffing Resources, Inc. as of December
31, 1996 and the consolidated results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
As discussed in Note 17 to the consolidated financial statements, during the
year ended December 31, 1996, the Company changed its method of accounting for
staff employees' vacation accruals and adjusted its previously reported December
31, 1995 retained earnings for this change in accounting and for understatements
of its workers' compensation claim accrual and its accounts payable.
Coopers & Lybrand L.L.P.
Dallas, Texas
March 31, 1997
F-66
Noel Group, Inc. and Subsidiaries SCHEDULE II
Valuation and Qualifying Accounts
For the Years Ended December 31, 1996, 1995 and 1994
(dollars in thousands)
Column A Column B Column C Column D Column E
Additions
----------------------------------------------------
(1) (2) (3)
Acquisition
Balance Charged to Charged to Cost Allocated Payments Balance at
Beginning of Costs and Other to Assets and End of
Description Period Expenses Accounts Purchased Charges Period
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Allowance for doubtful accounts $2,013 $ 724 $ - $ - $907 (a) $1,830
Allowance for returns and discounts $ 854 $1,181 $ - $ - $147 (a) $1,888
Inventory reserve $641 (a)
$3,113 $ 274 $ 135 $1,800 $974 (b) $3,707
Year Ended December 31, 1995
Allowance for doubtful accounts $2,075 $ 823 $ 433 $ 161 $1,479 (a) $2,013
Allowance for returns and discounts $1,017 $ 289 $ - $ - $ 452 (a) $ 854
Inventory reserve $2,247 $2,190 $ 399 $ - $1,723 (a) $3,113
Year Ended December 31, 1994
Allowance for doubtful accounts $ 722 $ 645 $ - $1,433 $ 725 (a) $2,075
Allowance for returns and discounts $ - $ 481 $ 80 $ 943 $ 487 (a) $1,017
Inventory reserve $1,361 $ 284 $ 101 $ 917 $ 416 (a) $2,247
(a) Write-Offs
(b) Dispositions
S-1
INDEX OF EXHIBITS
Item No. Item Title Exhibit No.
- -------- ---------- -----------
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession:
(A) Stock Purchase Agreement dated as of December 18, 1996 by and among (a)
Noel Group, Inc., Automatic Data Processing, Inc. and HealthPlan Services
Corporation.
(B) Plan of Complete Liquidation and Dissolution of Noel Group, Inc. (b)
(3) Articles of Incorporation and By-Laws:
(A) Certificate of Incorporation, as amended. (c)
(B) Composite copy of the Certificate of Incorporation, as amended. (d)
(C) By-Laws, as amended and restated. (e)
(4) Instruments defining the rights of security holders, including indentures:
(A) Excerpts from Certificate of Incorporation, as amended. (c)
(B) Excerpts from By-Laws, as amended and restated. (e)
(9) Voting Trust Agreements: None
(10) Material Contracts:
(A) Noel Group, Inc. Retirement Plan (401(k) Plan), as amended. (f)
(B) Noel Group, Inc. 1995 Stock Option Plan. (g)
(C) Noel Group, Inc. 1995 Non-Employee Directors' Plan. (g)
(D) Common Stock Purchase Warrant granted January 4, 1995 to Joseph S. (e)
DiMartino.
(E) Employment Agreement dated as of February 15, 1995, by and between (e)
Noel Group, Inc. and Joseph S. DiMartino.
(F) Employment Agreement dated as of March 20, 1995 by and between Noel (h)
Group, Inc. and Stanley R. Rawn, Jr.
(G) Common Stock Purchase Warrant granted March 9, 1995 to Stanley R. (h)
Rawn, Jr.
-i-
Item No. Item Title Exhibit No.
- -------- ---------- -----------
(H) Letter Agreement dated March 22, 1995 by and between Noel Group, Inc. (e)
and Karen Brenner with respect to Ms. Brenner serving as Chairman and
Acting Chief Executive Officer of Lincoln Snacks Company.
(I) Letter Agreement dated March 1, 1996 by and between Noel Group, Inc. (f)
and Karen Brenner with respect to Ms. Brenner's employment by Noel.
(J) Letter Agreements dated March 9, 1995 by and between Noel Group, Inc. (e)
and William L. Bennett.
(K) Sublease Agreement dated January 1, 1995 by and between The Prospect (f)
Group, Inc. and Noel Group, Inc.
(L) Life Insurance Agreement dated July 27, 1995 between Noel Group, Inc. (f)
and Howard M. Stein as Trustee u/a dated June 10, 1993 between
Joseph S. DiMartino, Grantor and Howard M. Stein, Trustee.
(M) Assignment of Life Insurance Policy as Collateral (f)
dated as of July 27, 1995 by Howard M. Stein
as Trustee u/a dated June 10, 1993 between Joseph
S. DiMartino, Grantor and Howard M. Stein,
Trustee, to Noel Group, Inc.
(N) Life Insurance Agreement dated as of May 17, 1995 between Noel Group, (h)
Inc. and Karen Brenner.
(O) Assignment of Life Insurance Policy as Collateral (h)
dated as of May 17, 1995 by Karen Brenner to
Noel Group, Inc.
(P) Tax Allocation Agreement dated as of January 20, 1995 by and between (f)
Noel Group, Inc. and Carlyle Industries, Inc.
(Q) Exclusive Distribution Agreement dated June 6, (h)
1995 between Lincoln Snacks Company and
Planters' Company, a unit of Nabisco, Inc.
(R) Tender and Option Agreement dated November 13, 1995 by and among (i)
Blount, Inc., S.O.C. Corporation, Noel Group, Inc. and The Forschner
Group, Inc.
(S) Asset Purchase Agreement dated as of December 12, 1996 among Carlyle (j)
Heminway Company, Inc., certain of its subsidiaries, Hicking Pentecost
PCC and HP Belt-Acquisition Corporation.
-ii-
Item No. Item Title Exhibit No.
- -------- ---------- -----------
(11) Statement re computation of per share earnings is not required because the
relevant computations can be clearly determined from the material contained in
the financial statements included herein.
(12) Statements re Computation of Ratios: Not Applicable.
(13) Annual Report to security holders: Not Applicable
(16) Letter re Change in Certifying Accountant: Not Applicable.
(18) Letter re Change in Accounting Principles: Not Applicable.
(21) Subsidiaries of the registrant. (21)
(22) Published Report re Matters Submitted to Vote of Security Holders: Not
Applicable
(23) Consent of Arthur Andersen LLP (23)-1
Consent of Price Waterhouse LLP (23)-2
Consent of Coopers & Lybrand L.L.P. (23)-3
Consent of Coopers & Lybrand L.L.P. (23)-4
(24) Power of Attorney: Not Applicable
(27) Financial Data Schedules (27)
(28) Information from Reports Furnished to State Insurance Regulatory Authorities:
None
(99) Additional Exhibits: None
- --------------
(a) This exhibit was filed as an exhibit to the Company's Current Report on
Form 8-K dated February 7, 1997 and is incorporated herein by reference.
(b) This exhibit was filed as an exhibit to the Company's Proxy Statement for
the Special Meeting of Shareholders held on March 19, 1997 and is
incorporated herein by reference.
(c) These exhibits were filed as exhibits to the Company's Registration
Statement on Form S-1, Registration No. 33-44178, effective January 29,
1992, and are incorporated herein by reference.
(d) These exhibits were filed as exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992, and are incorporated
herein by reference.
-iii-
(e) These exhibits were filed as exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, and are incorporated
herein by reference.
(f) These exhibits were filed as exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, and are incorporated
herein by reference.
(g) These exhibits were filed as exhibits to the Company's Proxy Statement for
the 1995 Annual Meeting of Stockholders and are incorporated herein by
reference.
(h) These exhibits were filed as exhibits to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995 and are incorporated
herein by reference.
(i) This exhibit was filed as an exhibit to the Company's Current Report on
Form 8-K dated December 29, 1995, and is incorporated herein by reference.
(j) This exhibit was filed as an exhibit to the Proxy Statement for the Special
Meeting of Stockholders of Belding Heminway Company, Inc. held on March 26,
1997, and is incorporated herein by reference.
-iv-
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as .................... 'tm'
The registered trademark symbol shall be expressed as ......... 'r'