<PAGE> 1
PROSPECTUS SUPPLEMENT Filed Pursuant to Rule
424(b)(3) of the Rules and
(To Prospectus dated November 10, 1998) Regulations Under the
Securities Act of 1933
Registration Statement No.
333-65039
INSILCO HOLDING CO.
14% Senior Discount Notes Due 2008
---------------------------------
RECENT DEVELOPMENTS
- -------------------
Attached hereto and incorporated by reference herein is the Form 10-Q
Quarterly Report of Insilco Holding Co. for the quarterly period ended September
30, 1998.
---------------------------------
This Prospectus Supplement, together with the Prospectus, is to be used by
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC") in connection with
offers and sales of the above-referenced securities in market-making
transactions at negotiated prices related to prevailing market prices at the
time of the sale. DLJSC may act as principal or agent in such transactions.
November 18, 1998
<PAGE> 2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number:
INSILCO HOLDING CO.
(Exact name of registrant as specified in its charter)
Delaware 06-1158291
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
425 Metro Place North
Fifth Floor
Dublin, Ohio 43017
(Address of principal executive offices) (Zip Code)
614-792-0468
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. (X) Yes ( ) No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. (X) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of November 12, 1998,
1,384,614 shares of common stock, $.001 par value, were outstanding.
<PAGE> 3
INSILCO HOLDING CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
- September 30, 1998 (unaudited)
- December 31, 1997
Condensed Consolidated Statements of Operations 4
- Nine months ended September 30, 1998 (unaudited)
- Nine months ended September 30, 1997 (unaudited)
- Three months ended September 30, 1998 (unaudited)
- Three months ended September 30, 1997 (unaudited)
Condensed Consolidated Statement of Stockholders' Equity (Deficit) 5
- For the nine months ended September 30, 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows 6
- Nine months ended September 30, 1998 (unaudited)
- Nine months ended September 30, 1997 (unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements 7
Independent Auditors' Review Report 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSILCO HOLDING CO. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,659 10,651
Trade receivables, net 84,167 67,209
Other receivables 3,651 3,477
Inventories, net 60,989 60,718
Deferred taxes 4,622 277
Prepaid expenses and other current assets 4,135 2,716
--------- ---------
Total current assets 162,223 145,048
Property, plant and equipment, net 114,131 113,971
Investment in Thermalex 10,556 9,736
Goodwill, net 13,219 13,408
Other assets and deferred charges 23,063 20,510
--------- ---------
Total assets $ 323,192 302,673
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 15 1,684
Current portion of other long-term obligations 2,104 5,393
Accounts payable 36,624 39,757
Accrued expenses and other 45,424 58,706
--------- ---------
Total current liabilities 84,167 105,540
Long-term debt, excluding current portion 383,923 256,059
Deferred taxes 2,627 --
Other long-term obligations, excluding current portion 45,171 43,402
Preferred Stock 32,722 --
Stockholders' deficit (225,418) (102,328)
--------- ---------
Contingencies (See Note 9)
Total liabilities and stockholders' deficit $ 323,192 302,673
========= =========
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1997 has
been derived from the audited balance sheet as of that date.
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE> 5
INSILCO HOLDING CO. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 422,388 407,609 135,065 131,394
Cost of products sold 298,743 283,203 98,072 93,250
Depreciation and amortization 15,787 14,353 5,144 4,749
Selling, general and administrative expenses 74,698 70,289 23,995 22,432
Merger expenses 25,529 -- 24,188 --
--------- --------- --------- ---------
Operating income (loss) 7,631 39,764 (16,334) 10,963
--------- --------- --------- ---------
Other income (expense):
Interest expense (21,840) (13,460) (8,035) (5,698)
Interest income 94 2,808 22 770
Equity in net income of Thermalex 2,144 2,154 693 607
Other income, net 2,430 188 405 120
--------- --------- --------- ---------
Total other income (expense) (17,172) (8,310) (6,915) (4,201)
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes and extraordinary item (9,541) 31,454 (23,249) 6,762
Income tax benefit (expense) (467) (11,571) 6,027 (2,447)
--------- --------- --------- ---------
Income (loss) from continuing operations
before extraordinary item (10,008) 19,883 (17,222) 4,315
Discontinued operations, net of tax:
Income from operations, net of tax of $1,037 -- 1,170 -- --
Gain on disposal, net of tax of $37,213 -- 57,788 -- --
--------- --------- --------- ---------
-- 58,958 -- --
--------- --------- --------- ---------
Income (loss) before extraordinary item (10,008) 78,841 (17,222) 4,315
Extraordinary item -- (728) -- (728)
--------- --------- --------- ---------
Net income (loss) (10,008) 78,113 (17,222) 3,587
Preferred stock accretion (673) -- (673) --
--------- --------- --------- ---------
Net income (loss) available to common $ (10,681) 78,113 (17,895) 3,587
========= ========= ========= =========
Basic earnings (loss)
available per common share:
Income (loss) from continuing operations $ (2.90) 2.41 (6.53) 0.77
Discontinued operations -- 7.15 -- --
Extraordinary item -- (0.09) -- (0.13)
--------- --------- --------- ---------
Basic net income (loss) per share $ (2.90) 9.47 (6.53) 0.64
========= ========= ========= =========
Diluted earnings (loss) available per common share:
Income (loss) from continuing operations $ (2.90) 2.34 (6.53) 0.74
Discontinued operations -- 6.94 -- --
Extraordinary item -- (0.09) -- (0.12)
--------- --------- --------- ---------
Diluted net income (loss) per share $ (2.90) 9.19 (6.53) 0.62
========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE> 6
INSILCO HOLDING CO. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
For the Nine Months Ended September 30, 1998
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Retained Other Total
Par Value Paid-in Earnings Treasury Comprehensive Stockholders'
$0.001 Capital (Deficit) Stock Income Equity (Deficit)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 5 -- (82,756) (16,268) (3,309) (102,328)
Net income (loss) -- -- (10,008) -- -- (10,008)
Cash merger consideration -- -- (180,241) -- -- (180,241)
Issuance of Common stock 1 56,007 -- -- -- 56,008
Issuance of warrants -- -- 4,969 -- -- 4,969
Issuance of equity units to management -- 2,659 -- -- -- 2,659
Issuance of Insilco shares upon exercise
of stock options -- 3,281 -- -- -- 3,281
Tax benefit from exercise of Insilco
stock options -- 939 -- -- -- 939
Merger Eliminations (5) (4,220) (12,043) 16,268 -- --
Amortization of warrants -- -- (673) -- -- (673)
Other comprehensive income -- -- -- -- (24) (24)
-------- -------- -------- -------- -------- --------
Balance at September 30, 1998 $ 1 58,666 (280,752) -- (3,333) (225,418)
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE> 7
INSILCO HOLDING CO. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1998 1997
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (10,008) 78,113
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 15,787 14,353
Deferred tax expense (268) 7,672
Other noncash charges and credits (1,295) (42)
Change in operating assets and liabilities:
Receivables (16,665) (17,432)
Inventories 27 3,050
Payables and other (13,822) (2,461)
Discontinued operations:
Gain on disposal of segment -- (95,001)
Deferred tax expense -- 25,687
Depreciation -- 194
Change in operating assets and liabilities -- (2,512)
--------- ---------
Net cash provided by (used in) operating activities (26,244) 11,621
--------- ---------
Cash flows from investing activities:
Capital expenditures (15,714) (15,022)
Other investing activities 711 3,437
Proceeds from divestiture, net -- 112,610
--------- ---------
Net cash provided by (used in) investing activities (15,003) 101,025
--------- ---------
Cash flows from financing activities:
Proceeds from sale of 14% Notes and warrants 70,205 --
Proceeds from revolving credit facility 56,684 87,038
Issuance of common stock 56,008 --
Issuance of preferred stock and warrants 35,000 --
Proceeds from stock option exercise 3,281 4,618
Issuance of equity units to management 2,659 --
Cash merger consideration (180,241) --
Debt issuance and tender costs (4,559) (11,126)
Payment of prepetition liabilities (2,735) (2,811)
Retirement of long-term debt (1,171) (117,071)
Purchase of treasury stock -- (1,887)
Repurchase of shares -- (220,000)
Proceeds from sale of 10 1/4% Notes -- 150,000
--------- ---------
Net cash provided by (used in) financing activities 35,131 (111,239)
--------- ---------
Effect of exchange rate changes on cash 124 (259)
--------- ---------
Net increase (decrease) in cash and cash equivalents (5,992) 1,148
Cash and cash equivalents at beginning of period 10,651 3,481
--------- ---------
$ 4,659 4,629
========= =========
Interest paid $ 23,722 10,635
--------- =========
Income taxes paid (refunded) $ (3,592) 6,683
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
<PAGE> 8
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all determinable adjustments
have been made which are considered necessary to present fairly the
financial position and the results of operations and cash flows at the
dates and for the periods presented.
(2) THE MERGERS
On August 17, 1998, the Company completed a series of transactions.
These transactions included, among other things, the formation by
Insilco Holding Co. ("Holdings" or the "Company") then a wholly owned
subsidiary of Insilco Corporation ("Insilco") of a wholly owned
subsidiary ("ReorgSub"), followed by the merger of ReorgSub with and
into Insilco Corporation (the "Reorganization Merger"), pursuant to
which each stockholder of Insilco had his or her shares of Insilco
converted into the same number of shares of Holdings and the right to
receive $0.01 per share in cash, and Holdings became the parent of
Insilco.
Promptly following the Reorganization Merger, a second merger took place
pursuant to which Silkworm Acquisition Corporation ("Silkworm"), an
affiliate DLJMB, merged with and into Holdings (the "Merger," and
together with the Reorganization Merger, the "Mergers") and each share
of Holdings Common Stock was converted into the right to receive $43.47
in cash and 0.03378 of a share of Holdings Common Stock. Thus, as a
result of the Mergers, each stockholder of Insilco, in respect of each
of his or her shares, received $43.48 in cash and retained 0.03378 of a
share of Holdings Common Stock.
Following the Mergers, (i) Insilco's existing stockholders retained, in
the aggregate, approximately 10.1% (9.4% on a fully diluted basis) of
the outstanding shares of Holdings Common Stock; (ii) the DLJMB Funds
held approximately 69.0% (69.8% on a fully diluted basis) of the
outstanding shares of Holdings Common Stock; (iii) 399 Venture Partners
Inc., an affiliate of Citibank, N.A. ("CVC"), purchased shares of
Silkworm which in the Merger were converted into approximately 19.3%
(17.8% on a fully diluted basis) of the outstanding shares of Holdings
Common Stock; and (iv) management of the Company purchased approximately
1.7% (1.5% on a fully diluted basis) of the outstanding shares of
Holdings Common Stock.
Immediately prior to the effectiveness of the Reorganization Merger,
each outstanding option to acquire shares of the common stock of Insilco
granted to employees and directors, whether or not vested (the
"Options") was canceled and in lieu thereof, each holder of an Option
received a cash payment in an amount equal to (x) the excess, if any, of
$45.00 over the exercise price of the Option multiplied by (y) the
number of shares subject to the Option, less applicable withholding
taxes (the "Option Cash Payments"). Certain holders of such Options
elected to utilize amounts otherwise receivable by them to purchase
$1,009,000 in equity and $2,659,000 in equity units of Holdings.
The total amount of cash required to consummate the foregoing
transactions was approximately $204.4
7
<PAGE> 9
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1998
million. This amount was financed with (i) gross proceeds of
approximately $70.2 million from the issuance by Silkworm of units
(which were converted into units of Holdings (the "Holdings Units") in
the Merger), each unit consisting of $1,000 principal amount at maturity
of 14% Senior Discount notes due 2008 (the "Holdings Senior Discount
Notes") and one warrant to purchase 0.325 of a share of Holdings Common
Stock at an exercise price of $0.01 per share, (ii) the issuance by
Silkworm to the DLJMB Funds, CVC and certain members of management of
Insilco, for an aggregate consideration of approximately $56.1 million,
of 1,245,138 shares of Silkworm common stock (which was converted into
Holdings Common Stock in the Merger), (iii) the issuance by Holdings to
the DLJMB Funds, for an aggregate consideration, of $35.0 million of
1,400,000 shares of Holdings' 15% Senior Exchangeable Preferred Stock
due 2012 of (the "PIK Preferred Stock") and the DLJMB Warrants to
purchase 65,603 shares of Holdings Common Stock at an exercise price of
$0.01 per share, and (iv) approximately $43.1 million of new borrowings
under the Company's existing credit facility (the "Existing Credit
Facility").
In the third quarter and first nine months of 1998 the Company incurred
$24,188,000 and $25,529,000, respectively, of costs related to the
merger.
(3) 1997 TRANSACTIONS
In 1997, the Company completed several material transactions affecting
its ongoing operations and debt and capital structure (the "1997
Transactions") as described more fully below:
- On July 3, 1997, the Company refinanced its existing debt under a
new six year $200 million amended and restated Credit Agreement.
- In the third quarter of 1997, the Company purchased an aggregate of
5,714,284 shares of its common stock in two transactions using the
proceeds from the sale of its traditional office products business
( the "Rolodex Business") within the Office Products/Specialty
Publishing Group of $112,610,000, net of transaction costs, and the
proceeds received on the issuance of the $150 million aggregate
principal amount of 10 1/4% Senior Subordinated Notes due 2007 (the
"10 1/4% Notes").
Insilco remains a separate reporting entity under the Securities
Exchange Act of 1934 because the 10 1/4% Notes are registered debt
securities under the Securities Act of 1933.
(4) DISCONTINUED OPERATIONS
On March 5, 1997, the Company completed the sale of its Office Products
Business (consisting of the Rolodex Business, Rolodex Electronics and
Curtis, each as defined below) within the Office Products/Specialty
Publishing Group with the divestiture of the Rolodex Business for
$112,610,000, net of transaction costs, resulting in a gain of
$57,788,000, net of taxes of $37,213,000. The divestiture of the Rolodex
Business was preceded in 1996 by the divestiture of the Rolodex
electronics product line ("Rolodex Electronics") and the Company's
computer accessories business, Curtis Manufacturing Co., Inc.
("Curtis"). The proceeds from these sales aggregated $21,818,000.
On July 7, 1998, the Company amended its Form 10-K for the year ended
December 31, 1997 and its
8
<PAGE> 10
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1998
Form 10-Q for the quarter ended March 31, 1998 to account for the sale
of the Office Products Business as a discontinued operation and,
accordingly, the accompanying consolidated statements of operations and
cash flows for the periods prior to the sale have been reclassified.
Revenues associated with the discontinued Office Products Business for
the first quarter of 1997 were $10,797,000.
(5) INVENTORIES
Inventories consisted of the following at September 30, 1998 (in
thousands):
Raw materials and supplies $27,848
Work-in-process 19,134
Finished goods 14,007
-------
Total inventories $60,989
=======
(6) RELATED PARTY TRANSACTIONS
In connection with the mergers, the Company paid Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJSC") an advisory fee of $3,500,000.
Donaldson, Lufkin & Jenrette Capital Funding received $1,750,000 of fees
from Insilco to secure a backstop credit facility in the event that the
Company's Existing Revolving Credit Facility required refinancing. DLJSC
also received from the Company the gross spread of $2,456,000 related to
the Holdings Senior Discount Notes and $1,100,000 of fees related to a
bridge loan facility commitment. In addition, the Company reimbursed
DLJSC $110,000 for expenses related to the merger.
(7) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted the Financial Accounting
Standards Board ("FASB") Statement No. 130 ("SFAS 130"), "Reporting
Comprehensive Income". SFAS 130 establishes standards for reporting and
display of comprehensive income in the financial statements.
Comprehensive income is the total of net income and most other non-owner
changes in equity. This statement expands or modifies disclosures and
has no impact on the Company's financial position, results of operations
or cash flows. Comprehensive income (loss) for the third quarters of
1998 and 1997 totaled ($17,336,000) and $3,403,000, respectively,
including other comprehensive income consisting of foreign currency
translation adjustments (losses) totaling ($114,000) and ($184,000),
respectively. Comprehensive income (loss) for the first nine months of
1998 and 1997 totaled ($10,032,000) and $75,279,000, respectively,
including other comprehensive income consisting of foreign currency
translation adjustment (losses) totaling ($24,000) and ($2,834,000),
respectively.
(8) EARNINGS PER SHARE
In 1997, the Company adopted Financial Accounting Standards Board
("FASB") Statement No. 128 ("SFAS 128"), "Earnings per Share", which
simplifies the computation of earnings per share ("EPS"). All prior
period earnings per share amounts have been restated to conform with
SFAS 128 requirements. Under SFAS 128, the Company computes two earnings
per share amounts - basic EPS and diluted EPS. Basic EPS is calculated
based on the weighted average number of shares of common stock
outstanding for the period. Diluted EPS is based on the weighted average
number of shares of common stock outstanding for the period, including
potential common stock which reflect the dilutive
9
<PAGE> 11
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1998
effect of stock options granted to employees and directors.
The components of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ (10,008) 78,113 (17,222) 3,587
Preferred stock dividends (673) -- (673) --
----------- ----------- ----------- -----------
Net income (loss) available for common $ (10,681) 78,113 (17,895) 3,587
=========== =========== =========== ===========
Average outstanding shares of common
stock 3,677,306 8,251,332 2,738,775 5,626,656
Dilutive effect of stock options -- 251,189 -- 172,816
----------- ----------- ----------- -----------
Common stock and common
stock equivalents 3,677,306 8,502,521 2,738,775 5,799,472
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $ (2.90) 9.47 (6.53) (0.64)
=========== =========== =========== ===========
Diluted $ (2.90) 9.19 (6.53) (0.62)
=========== =========== =========== ===========
</TABLE>
(9) CONTINGENCIES
The Company is implicated in various claims and legal actions arising in
the ordinary course of business. Those claims or liabilities will be
addressed in the ordinary course of business and will be paid as
expenses are incurred. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
(10) ESTIMATES
In conformity with generally accepted accounting principles, the
preparation of our financial statements requires our management to make
estimates and assumptions that affect the amounts reported in our
financial statements and accompanying actual results may ultimately
differ from those estimates.
(11) CONTINGENCY GAIN
On January 14, 1997, the Company's subsidiary, Taylor Publishing Company
("Taylor"), sued one of its principal competitors in the yearbook
business, Jostens, Inc. ("Jostens"), in the U.S. District Court for the
Eastern District of Texas, alleging violations of the federal antitrust
laws as well as various claims arising under state law. On May 13, 1998,
a verdict was rendered in favor of Taylor and on June 12, 1998, the
judge presiding over the litigation in the U.S. District Court rendered
a judgment in the amount of $25,225,000 plus interest at the rate of
5.434 percent. Jostens has announced that it will seek to overturn the
verdict in post trial motions or on appeal and accordingly the Company
has not recorded the gain. There can be no assurance as to the actual
amount, if any, that Taylor will recover from Jostens. In the third
quarter and first nine months
10
<PAGE> 12
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1998
of 1998, the Company incurred legal fees in connection with the Jostens
lawsuit of $132,000 and $900,000, respectively.
(12) DIVIDEND RESTRICTIONS
The Company is a holding company and its ability to make payments in
respect of the Holding Company Senior Discount Notes is dependent upon
the receipt of dividends or other distributions from its direct and
indirect subsidiaries. Insilco and its subsidiaries are parties to the
Existing Credit Facility and Insilco is party to the 10 1/4% Note
Indenture, each of which imposes substantial restrictions on Insilco's
ability to pay dividends or make other distributions to the Company. Any
payment of dividends or other distributions will be subject to certain
financial conditions set forth in such indenture and is subject to
certain prohibitions contained in the Existing Credit Facility. Under
the most restrictive covenants, $4.25 million was free of limitations on
the payment of dividends or other distributions at September 30, 1998.
(13) SUBSEQUENT EVENTS -THE REFINANCING
As a result of the Merger, the Company was required to make an Offer to
Purchase (as defined in the indenture relating to the 10 1/4% Notes (the
"10 1/4% Note Indenture") for all of the outstanding 10 1/4% Notes at
101% of their aggregate principal amount, plus accrued interest. The
Offer to Purchase expires on November 16, 1998 and the Company intends
to repurchase all 10 1/4% Notes validly tendered and not withdrawn as
promptly as practicable following acceptance of the 10 1/4% Notes. There
is an aggregate of $150 million principal amount of 10 1/4% Notes
outstanding.
On November 9, 1998, the Insilco completed the sale of $120 million of
12% Senior Subordinated Notes due 2007 (the "New Notes") with warrants
to purchase 62,400 shares of Holdings common stock at $45 per share. The
net proceeds from the offer and sale of the New Notes was approximately
$116.0 million after payment of $3.6 million in underwriting fees to
DLJSC and other expenses. These proceeds will be used to fund the
repurchase of the 10 1/4% Notes validly tendered at a purchase price of
101% of principal amount plus accrued and unpaid interest.
The Indenture relating to the New Notes (the "Indenture") provides for a
mandatory special redemption at par plus accrued interest to the extent
that less than $120 million of the 10 1/4% Notes are tendered in the
Offer to Purchase. The Indenture also provides for an 1/8% increase in
the interest rate on the New Notes if the holders of the 10 1/4% Notes
do not consent to an amendment to the 10 1/4% Note Indenture to permit
the Company provide subsidiary guarantees to holders of the New Notes.
DLJ Capital Funding Inc. ("DLJ Capital Funding") has committed to lend
up to $300 million to the Insilco (the "New Credit Facility"). The New
Credit Facility will be used to refinance the Existing Credit Facility
and to fund a portion of the repurchase of the 10 1/4% Notes. The New
Credit Facility will include a term loan facility (the "Term Loan
Facility") and a revolving credit facility which will provide for
revolving loans and up to $50 million of letters of credit (the
"Revolving Credit Facility"). The Term Loan Facility will have a
maturity of seven years. The Revolving Credit Facility will terminate on
July 8, 2003. DLJ Capital Funding's commitment, however, is subject to
significant conditions. The New Credit Facility together with the sale
of the New Notes will be referred to herein as "The Refinancing".
11
<PAGE> 13
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1998
(14) PRO FORMA RESULTS OF OPERATIONS
The following financial information presents 1998 and 1997 pro forma
consolidated net sales and results of operations as if the mergers
including the merger refinancing (see Note 2) and the Refinancing (see
Note 13) had occurred as of the beginning of each respective period. The
1997 pro forma consolidated net sales and results of operations are
presented as if the 1997 Transactions had occurred at the beginning of
1997, exclusive of nonrecurring items directly attributable to the
transaction. The pro forma results of operations are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------ --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 422,388 407,609 135,065 131,394
Loss from continuing operations
available to common (1,771) (77) (2,952) (1,491)
Basic loss per share available to
common (1.08) (0.05) (1.79) (0.94)
Diluted loss per share
available to common (1.08) (0.05) (1.79) (0.91)
</TABLE>
12
<PAGE> 14
INDEPENDENT AUDITORS' REVIEW REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
INSILCO HOLDING CO:
We have reviewed the condensed consolidated balance sheet of Insilco Holding Co.
and subsidiaries as of September 30, 1998, the related condensed consolidated
income statements for the three-month and nine-month periods ended September 30,
1998 and 1997, the condensed consolidated statement of stockholders' equity
(deficit) for the nine months ended September 30, 1998, and the condensed
consolidated statements of cash flows for the nine-month periods ended September
30, 1998 and 1997. These condensed consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Insilco Corporation and
subsidiaries as of December 31, 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year then
ended (not presented herein); and in our report dated January 30, 1998, except
as to Note 21, which is as of June 8, 1998, and Note 2, which is as of July 7,
1998, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1997, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Columbus, Ohio
November 13, 1998 KPMG Peat Marwick LLP
13
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is a diversified manufacturer of automotive, telecommunications and
electronics components and is a publisher of school yearbooks and other
specialty publishing products. The Company's Automotive Components Group
manufactures transmission components and other stamped automotive components and
subassemblies at the Steel Parts unit, heat exchangers and heat exchanger tubing
at the Thermal Components unit, and stainless steel tubing used predominantly in
non-automotive applications at the Romac Metals unit. The Technologies Group
manufactures wire and cable assemblies for the telecommunications industry, high
performance data-grade connectors, precision metal stampings and power
transformers through its Escod Industries, Stewart Connector Systems, Stewart
Stamping, and Signal Transformer operating units, respectively. The Specialty
Publishing Group, which consists of Taylor Publishing, produces student
yearbooks and other specialty publishing products. The Company completed the
divestiture of its Office Products business with the sale of the Rolodex
Business in the first quarter of 1997. The Office Products Business is being
accounted for as a discontinued operation and, accordingly, the consolidated
statements of operations and cash flows for the periods prior to the sale have
been reclassified.
Summarized sales and operating income (loss) by business segment for the nine
months and three months ended September 30, 1998 compared to the corresponding
periods in 1997 are set forth in the following table (in thousands) and
discussed below:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
SALES
<S> <C> <C> <C> <C>
Automotive Components Group $ 185,710 171,912 61,945 55,646
Technologies Group 144,756 148,063 45,739 50,102
Specialty Publishing 91,922 87,634 27,381 25,646
--------- --------- --------- ---------
$ 422,388 407,609 135,065 131,394
========= ========= ========= =========
OPERATING INCOME (LOSS)
Automotive Components Group $ 15,809 17,211 4,338 4,611
Technologies Group 14,183 17,326 3,593 5,955
Specialty Publishing 3,222 5,535 (59) 421
Unallocated corporate costs (54) (308) (18) (24)
Unallocated corporate merger expenses (25,529) -- (24,188) --
--------- --------- --------- ---------
$ 7,631 39,764 (16,334) 10,963
========= ========= ========= =========
</TABLE>
14
<PAGE> 16
SALES. Total net sales from continuing operations of $135,065,000 for the third
quarter of 1998 were up 3% or $3,671,000 over the corresponding period in 1997,
due to increased sales of automotive tubing at the Automotive Components Group
and increased sales at Taylor Publishing, due to the timing of yearbook
shipments. These sales increases were partially offset by a decline in the
Technologies Group caused by the continued weakness in the electronics market.
In the first nine months of 1998, net sales from continuing operations of
$422,388,000 increased 4% or $14,779,000 from 1997 primarily due to increased
sales at the Automotive Components Group of automotive tubing and industrial and
off-road radiators, and, to a lesser degree, increased sales at Specialty
Publishing related to the timing of yearbook shipments, partially offset by a
decline at the Technologies Group.
The Automotive Components Group's sales increased 11% or $6,299,000 and 8% or
$13,798,000 in the third quarter and first nine months of 1998, respectively,
compared to the corresponding periods of 1997 due to increased automotive tubing
sales in both the quarter and year-to-date periods. In addition, sales for the
first nine months of 1998 improved over the prior year due to increased sales of
radiators to OEMs serving the off-road and industrial equipment markets. These
increases were partially offset by a significant decline in sales at the
Company's heat exchanger capital equipment manufacturing division, McKenica,
which continues to experience a substantial decline in order backlog. Sales of
transmission and other stamped automotive parts at Steel Parts and of stainless
steel tubing for non-automotive applications, were both up slightly in the third
quarter of 1998 and were relatively flat on a year-to-date basis.
The Technologies Group's sales decreased 9% or $4,363,000 in the third quarter
of 1998 compared to the corresponding period in 1997 due to declines at Escod
and Signal Transformer primarily due to the weakness in the electronics market
which has continued in the third quarter. These declines were partially offset
by increased sales of Stewart Connector's modular data interconnect products due
to increased demand from a major telecommunications customer. Sales in the
Technologies Group decreased 2% or $3,307,000 in the first nine months of 1998
compared to the corresponding period in 1997 due to the weak demand in the
electronics market in the second and third quarters of 1998. These sales
decreases were partially offset by increased sales from Stewart Stamping and
increased sales of Stewart Connector's modular data interconnect products.
Taylor Publishing's sales of $27,381,000 and $91,922,000 for the third quarter
and first nine months of 1998, respectively, increased 7% and 5% compared to the
corresponding periods in 1997 primarily due to timing of yearbook shipments.
OPERATING INCOME. In the third quarter of 1998, the Company had an operating
loss of $16,334,000 compared to operating income of $10,963,000 in the prior
year period primarily due to $24,188,000 of expenses related to the merger. In
addition, the Company incurred $1,258,000 of expenses related to management
severance, the consolidation of two facilities and a noncompete infringement
lawsuit filed by the Company. The Company also experienced an operating loss at
its McKenica business unit due to a lack of available order backlog, lower
operating margins at Signal and Escod due to the weakness in the electronics
market and lower margins at Stewart Connector due to a less favorable mix of
products and price degradation on certain mature connector products.
For the first nine months of 1998, operating income decreased to $7,631,000 from
$39,764,000 in 1997 primarily due to $25,529,000 of expenses related to the
merger, approximately $900,000 in legal expenses (compared to $200,000 in 1997)
associated with Taylor's antitrust lawsuit against Jostens for which Taylor
received a favorable judgement totaling $25,225,000 (see Note 11) and $2,152,000
of expenses related to management severance, the consolidation of two facilities
and a noncompete infringement lawsuit filed by the Company. In addition, the
Company incurred increased costs, primarily higher shipping costs, from
production delays during its peak yearbook production season at Taylor
Publishing and lower margins at Steel Parts primarily due to increased costs
incurred to improve future operational efficiency and for the reasons cited
above, an operating loss at its McKenica business unit and lower operating
margins at Signal and Stewart Connector.
The Automotive Components Group's operating income in the third quarter of 1998
compared to the
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<PAGE> 17
corresponding period of 1997 decreased to $4,338,000 from $4,611,000 primarily
due to an operating loss of $225,000 at its McKenica business unit which
represented a $628,000 decline from the third quarter of 1997 operating income.
This decline was partially offset by improved operating income results at the
Company's heat exchanger and automotive tubing business. For the first nine
months of 1998, the Automotive Components Group's operating income compared to
the corresponding period of 1997 decreased to $15,809,000 from $17,211,000 due
to an operating loss of $535,000 at its McKenica business unit which represented
a $2,259,000 decline from 1997 and increased costs at Steel Parts incurred to
improve future operational efficiency. These declines were partially offset by
improved operating results at the other operating units of the Thermal
Components Group.
The Technologies Group's operating income decreased to $3,593,000 in the third
quarter of 1998 from $5,955,000 in the same period of 1997 as the continued
weakness in the electronics market caused significant declines in operating
income at Signal Transformer and Escod. Operating income at Stewart Connector
decreased from the prior year period due to a less favorable sales mix of
products and price degradation on certain mature connector products. For the
first nine months of 1998, the Technologies Group's operating income, compared
to the corresponding period of 1997, decreased to $14,183,000 from $17,326,000.
Operating income was impacted by the decreased sales of power transformers, wire
and cable assemblies and competitive pricing pressures in the connector market.
Partially offsetting these declines, operating income improved over the prior
year at Stewart Stamping.
Taylor Publishing had an operating loss of $59,000 in the third quarter of 1998
compared to operating income of $421,000 in 1997 primarily due to $300,000 of
severance expenses incurred in the third quarter of 1998 and $132,000 of legal
expenses associated with Taylor's antitrust lawsuit against Jostens. For the
first nine months of 1998, operating income decreased to $3,222,000 from
$5,535,000 in the prior year period primarily due to increased costs of labor
and air freight following production delays in the second quarter during its
peak yearbook production and delivery period. In addition, Taylor incurred
$900,000 of legal expenses associated with Taylor's antitrust lawsuit against
Jostens in the first nine months of 1998 compared to $200,000 in 1997.
OTHER INCOME (EXPENSE). Other income for the third quarters of 1998 and 1997
included $693,000 and $607,000, respectively, of equity income from the
Company's unconsolidated joint venture, Thermalex, which manufactures extruded
aluminum tubing primarily for automotive air conditioning condensers. For the
first nine months of 1998, other income included $2,144,000 of equity income
from Thermalex compared to $2,154,000 in 1997. Interest expense increased
$2,337,000 and $8,380,000 in the third quarter and first nine months of 1998,
respectively, from the corresponding 1997 periods due to the issuance of the
$150,000,000 of the 10 1/4% Notes completed in the third quarter of 1997 and the
issuance of the $70.2 million of 14% Senior Discount Notes in August 1998 (See
"The Merger Financing"). Interest income decreased $748,000 and $2,714,000 in
the third quarter and first nine months of 1998, respectively, from the
corresponding 1997 periods as a result of interest income earned on the proceeds
from the sale of the Rolodex Business in 1997.
"Other income, net", included in Other income (expense), for the third quarter
and first nine months of 1998 increased $285,000 and $2,242,000, respectively,
from the corresponding periods of 1997, respectively. Other income for the first
nine months of 1998 included gains on the sale of idle assets.
INCOME TAX EXPENSE. The Company incurred a net loss of $10,008,000 primarily due
to $25,529,000 of merger expenses incurred. Consequently, the tax benefit
arising from these losses was mitigated by the fact that a significant amount of
these costs were not deductible for tax, resulting in the 26% third quarter 1998
effective tax rate and a 5% effective tax rate for the nine month period ending
September 30, 1998.
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES. Operations used $26,244,000 of
cash in the first nine months of 1998 as compared to providing $11,621,000 in
the first nine months of 1997. Cash flows from operations in the first nine
months of 1998 were impacted by $25,529,000 of merger expenses incurred and
interest payments
16
<PAGE> 18
related to the 10 1/4% Notes totaling $15,504,000 partially offset by Federal
income tax refund of $5,110,000. The Company's cash flow for periods prior to
the nine months ended September 30, 1997 was favorably impacted by tax loss
carryforwards, which reduced the actual cash payments for the years to well
below the financial statement income tax expense. The tax loss carryforwards
were substantially reduced in 1997 due to the gain from the sale of the Rolodex
Business.
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES. In March 1997, the Company sold
its Rolodex Business for a net sales price of $112,610,000. In the first nine
months of 1998 and 1997, the Company received dividend distributions from
Thermalex of $1,324,000 and $1,460,000, respectively. The Company's other
investing activities consisted principally of capital expenditures which totaled
$15,714,000 and $15,022,000 for the first nine months of 1998 and 1997,
respectively.
CASH FLOWS FROM (USED IN)FINANCING ACTIVITIES. Financing activities provided
$32,472,000 in the first nine months of 1998 compared to using $111,239,000 in
the first nine months of 1997. On August 17, 1998 a series of transactions
involving the Company were completed. (See "The Merger Financing" below.)
On July 3, 1997, the Company refinanced its bank debt (See Note 3 to the
condensed consolidated financial statements) and using the Rolodex Proceeds
purchased 2,857,142 shares of its common stock, at $38.50 per share in cash, for
an aggregate purchase price of $109,999,967. On August 12, 1997, the Company
completed the Tender Offer, in which it purchased an additional 2,857,142 shares
at a price of $38.50 per share in cash for an aggregate purchase price of
$109,999,967. On August 12, 1997, the Company issued $150 million of the 10 1/4%
Notes, for net proceeds of approximately $145.9 million (the "Offering"). The
Company used the net proceeds from the Offering to fund the repurchase of shares
tendered in the Tender Offer, repay loans under the Bank Credit Agreement, pay
fees and expenses of the aforementioned transactions and for general corporate
purposes. The Company incurred $11,126,000 in costs for the refinancing, Tender
Offer and issuance of the Notes.
SEASONALITY. The Company's yearbook publishing business, Taylor Publishing, is
highly seasonal, with a majority of its sales occurring in the second and third
quarters of the year. Taylor receives significant customer advance deposits in
the second half of the year. The Company's other businesses are not highly
seasonal.
IMPACT OF INFLATION AND CHANGING PRICES. Inflation and changing prices have not
significantly affected the Company's operating results or markets.
LIQUIDITY. At September 30, 1998, the Company's cash and cash equivalents and
net working capital amounted to $4,659,000 and $78,056,000, respectively,
representing a decrease in cash and cash equivalents of $5,992,000 and an
increase in net working capital of $38,548,000 from year end 1997. The borrowing
ability under the Insilco's revolving credit facility as of the end of the
quarter was $27,840,000 which is also available for issuing of letters of
credit.
Trade receivables, net, at September 30, 1998 increased 25% or $16,958,000 over
the December 31, 1997 amount primarily due to increased receivables at Taylor
Publishing following its peak yearbook production period (see Seasonality).
THE MERGER. On August 17, 1998, a series of transactions involving the Company
was completed. These transactions included, among other things, the formation by
Insilco Holding Co. ("Holdings" or the "Company") (then a wholly owned
subsidiary of Insilco) of a wholly owned subsidiary ("ReorgSub"), followed by
the merger of ReorgSub with and into Insilco (the "Reorganization Merger"),
pursuant to which each stockholder of Insilco had his or her shares of Insilco
converted into the same number of shares of Holdings and the right to receive
$0.01 per share in cash, and Holdings became the parent of the Company.
Promptly following the Reorganization Merger, a second merger took place
pursuant to which Silkworm
17
<PAGE> 19
Acquisition Corporation ("Silkworm"), an affiliate DLJMB, merged with and into
Holdings (the "Merger," and together with the Reorganization Merger, the
"Mergers") and each share of Holdings Common Stock was converted into the right
to receive $43.47 in cash and 0.03378 of a share of Holdings Common Stock. Thus,
as a result of the Mergers, each stockholder of Insilco, in respect of each of
his or her shares, received $43.48 in cash and retained 0.03378 of a share of
Holdings Common Stock. Concurrently with the consummation of the Mergers, the
DLJMB Funds purchased 1,400,000 shares of Holdings 15% Senior Exchangeable
Preferred Stock due 2012 (the "PIK Preferred Stock"), and warrants to purchase
65,603 shares of Holdings Common Stock at an exercise price of $0.01 per share.
Following the Mergers, (i) Insilco's existing stockholders retained, in the
aggregate, approximately 10.1% (9.4% on a fully diluted basis) of the
outstanding shares of Holdings Common Stock; (ii) the DLJMB Funds held
approximately 69.0% (69.8% on a fully diluted basis) of the outstanding shares
of Holdings Common Stock; (iii) 399 Venture Partners Inc., an affiliate of
Citibank, N.A. ("CVC"), purchased shares of Silkworm which in the Merger were
converted into approximately 19.3% (17.8% on a fully diluted basis) of the
outstanding shares of Holdings Common Stock; and (iv) management of the Company
purchased approximately 1.7% (1.5% on a fully diluted basis) of the outstanding
shares of Holdings Common Stock.
Immediately prior to the effectiveness of the Reorganization Merger, each
outstanding option to acquire shares of the common stock of Insilco granted to
employees and directors, whether or not vested (the "Options") was canceled and
in lieu thereof, each holder of an Option received a cash payment in an amount
equal to (x) the excess, if any, of $45.00 over the exercise price of the Option
multiplied by (y) the number of shares subject to the Option, less applicable
withholding taxes (the "Option Cash Payments"). Certain holders of such Options
elected to utilize amounts otherwise receivable by them to purchase equity or
equity units of Holdings.
THE MERGER FINANCING. The total amount of cash required to consummate the
foregoing transactions was approximately $204.4 million. This amount was
financed with (i) gross proceeds of approximately $70.2 million from the
issuance by Silkworm of units (which were converted into units of Holdings (the
"Holdings Units") in the Merger), each unit consisting of $1,000 principal
amount at maturity of 14% Senior Discount notes due 2008 (the "Holdings Senior
Discount Notes") and one warrant to purchase 0.325 of a share of Holdings Common
Stock at an exercise price of $0.01 per share, (ii) the issuance by Holdings to
the DLJMB Funds, CVC and certain members of management of the Company, for an
aggregate consideration of approximately $56.1 million, of 1,245,138 shares of
Silkworm common stock (which was converted into Holdings Common Stock in the
Merger), (iii) the issuance to the DLJMB Funds for an aggregate consideration of
$35.0 million of 1,400,000 shares of the PIK Preferred Stock by Holdings and the
DLJMB Warrants to purchase 65,603 shares of Holdings Common Stock at an exercise
price of $0.01 per share, and (iv) approximately $43.1 million of new borrowings
under the Company's existing credit facility (the "Existing Credit Facility").
THE YEAR 2000 ISSUES. Many existing computer programs utilized globally use only
two digits to identify a year in the date field. These programs, if not
corrected, could fail or create erroneous results after the century date changes
on January 1, 2000 or when otherwise dealing with dates later than December 31,
1999. This " Year 2000" issue is believed to affect virtually all companies and
organizations, including the Company.
The Company relies on computer-based technology and primarily utilizes a variety
of third-party hardware and software and to a minimal degree some proprietary
software. In addition to such information technology ('IT") systems, the
Company's operations rely on various non-IT equipment and systems that contain
embedded computer technology. Third parties with whom the Company has commercial
relationships, including raw materials suppliers and service providers used by
the Company in its operations (such as banking and financial services, data
processing services, telecommunications services and utilities), are also highly
reliant on computer-based technology.
In 1996, the Company commenced an assessment of the potential effects of the
Year 2000 issue on the Company's
18
<PAGE> 20
business, financial condition and results of operations. In conjunction with
such assessment, the Company developed and implemented a "Year 2000" compliance
program as described below.
THIRD-PARTY IT SYSTEMS. The majority of the Company's IT systems are third party
systems for which the Company has received Year 2000 compliant versions. The
Company does not expect any significant outlay of cash for these systems as all
of the third party systems are under current maintenance agreements which
provide for continuing operation including functions involving Year 2000. The
strategy instituted by the Company to identify and address Year 2000 issues
affecting third-party IT Systems includes contacting all third-party providers
of computer hardware and software to secure appropriate representations to the
effect that such hardware or software is or will timely be Year 2000 compliant.
PROPRIETARY IT SYSTEMS. The Company does not rely heavily on Company developed
proprietary IT systems. Pursuant to the Company's Year 2000 compliance program,
the Company has examined its proprietary IT systems for Year 2000 problems. All
such systems that were identified as relating to a critical function and were
not Year 2000 compliant are being fixed. The Company believes that nearly all of
the proprietary IT systems have been fixed and placed into production. The
Company is in the process of testing the remediated systems for Year 2000
compliance.
NON-IT SYSTEMS. The Company has undertaken a review of its non-IT systems and is
in the process of fixing such systems that are within the control of its
Company. The Company expects to complete this remediation effort by April 30,
1999.
NON-IT VENDORS AND SUPPLIERS. The Company procures its raw materials and
operating and supplies from a vast network of vendors located both within and
outside the United States. As a part of its contingency planning effort, the
Company is continually assessing the Year 2000 readiness of its important
vendors in order to identify any significant exposures that may exist and
establish alternate sources or strategies where necessary.
COSTS. Costs incurred to implement the Company's Year 2000 compliance program
have been immaterial to date and the Company presently expects to incur less
that $1.0 million of costs in the aggregate. All of the Company's Year 2000
compliance costs have been or are expected to be funded from the Company's
operating cash flow. The Company's Year 2000 compliance budget does not include
material amounts for hardware replacement because the Company has historically
employed a strategy to continually upgrade its business systems. Consequently,
the Company's Year 2000 budget has not required the diversion of funds from or
the postponement of the implementation of other planned IT projects.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES. The Company's Year 2000 compliance
program is directed primarily towards ensuring that the Company will be able to
continue to perform three critical functions: (i) make and sell its products,
(ii) order and receive raw material and supplies, and (iii) pay its employees
and vendors. It is difficult, if not impossible, to assess with any degree of
accuracy the impact on any of these three areas of the failure of one or more
aspects of the Company's compliance program.
The novelty and complexity of the issues presented and the proposed solutions
therefore and the Company's dependence on the technical skills of employees and
independent contractors and on the representations and preparedness of third
parties are among the factors that could cause the Company's efforts to be less
than fully effective. Moreover, Year 2000 issues present a number of risks that
are beyond the Company's reasonable control, such as the failure of utility
companies to deliver electricity, the failure of telecommunications companies to
provide voice and data services, the failure of financial institutions to
process transactions and transfer funds, the failure of vendors to deliver
materials or perform services required by the Company and the collateral effects
on the Company of the effects of Year 2000 issues on the economy in general or
on the Company's customers in particular. Although the Company believes that its
Year 2000 compliance program is designed to appropriately identify and address
those Year 2000 issues that are subject to the Company's reasonable control,
there can be no
19
<PAGE> 21
assurance that the Company's efforts in this regard will be fully effective or
that Year 2000 issues will not have a material adverse effect on the Company's
business, financial condition or results of operations.
SUBSEQUENT EVENTS. As a result of the Merger, the Company was required to make
an Offer to Purchase (as defined in the indenture (the "10 1/4% Note Indenture")
relating to the 10 1/4% Notes) for all of the outstanding 10 1/4% Notes at 101%
of their aggregate principal amount, plus accrued interest. The Offer to
Purchase expires on November 16, 1998 and the Company intends to repurchase all
10 1/4% Notes validly tendered and not withdrawn as promptly as practicable
following acceptance of the 10 1/4% Notes. There is an aggregate of $150 million
principal amount of 10 1/4% Notes outstanding.
On November 9, 1998 the Company completed the offering of $120 million of 12%
Senior Subordinated Notes (the "New Notes") due 2007 with warrants to purchase
62,400 shares of Holdings common stock. The net proceeds from the offer and sale
of the New Notes will be used to fund the repurchase of the 10 1/4% Notes
validly tendered at a purchase price of 101% of principal amount plus accrued
and unpaid interest.
DLJ Capital Funding Inc. ("DLJ Capital Funding") has committed to lend up to
$300 million to the Company (the "New Credit Facility"). The New Credit Facility
will be used to refinance the Existing Credit Facility and to fund any remaining
portion of the repurchase of 10 1/4% Notes. The New Credit Facility will include
a term loan facility (the "Term Loan Facility") and a revolving credit facility
(subject to adjustment), which will provide for revolving loans and up to $50
million of letters of credit (the "Revolving Credit Facility"). The Term Loan
Facility will have a maturity of seven years. The Revolving Credit Facility will
terminate on July 8, 2003. DLJ Capital Funding's commitment, however, is subject
to significant conditions.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Except for the historical information contained herein, the matters
discussed in this Form 10-Q included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" include "Forward Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Although the Company believes that the expectations reflected in the
Forward-Looking Statements contained herein are reasonable, no assurance can be
given that such expectations will prove to have been correct. Certain important
factors that could cause actual results to differ materially from expectations
("Cautionary Statements") include, but are not limited to the following: delays
in new product introductions, lack of market acceptance of new products, changes
in demand for the Company's products, changes in market trends, operating
hazards, general competitive pressures from existing and new competitors,
effects of governmental regulations, changes in interest rates, and adverse
economic conditions which could affect the amount of cash available for debt
servicing and capital investments. All subsequent written and oral
Forward-Looking Statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
20
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4(a) - Warrant Agreement between the Company and the Warrant Agent
dated November 9, 1998.
4(b) - Warrant and Registration Rights Agreement, dated as of
November 9, 1998, between the Company and the Initial
Purchaser.
10(a) - Purchase Agreement between Insilco Corporation, Insilco
Holding Co. and the Initial Purchaser dated as of
November 2, 1998.
27 - Financial Data Schedule.
(b) Reports on Form 8-K
A report, dated August 17, 1998, on Form 8-K was filed during the quarter
ending September 30, 1998, pursuant to Items 5 and 7 of that form.
A report, dated August 25, 1998, on Form 8-K was filed during the quarter
ending September 30, 1998, pursuant to Items 5 and 7 of that form.
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<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSILCO HOLDING CO.
--------------------------------
Registrant
Date: November 13, 1998 By: /s/ David A. Kauer
-----------------------------
David A. Kauer
Vice President and
Chief Financial Officer
22
