<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) FOR THE
SECURITIES EXCHANGE ACT OF 1934
for the Fiscal Year Ended December 31, 1998
Commission File number: 0-24813
INSILCO HOLDING CO.
(Exact name for Registrant as specified in its charter)
DELAWARE NO. 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,
including zip code)
(614) 792-0468
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) for 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 the filing requirements for at least 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. [x]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates for the Registrant was approximately $3,343,240 on April
28, 1999.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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. Yes [x] No [ ]
There were 1,472,487 shares of the Registrant's common stock outstanding
on April 28, 1999.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 29
Part III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial
Owners and Management 42
Item 13. Certain Relationships and Related Transactions 43
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 45
Signatures 50
Consolidated Financial Statements F-1
</TABLE>
<PAGE> 3
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K includes "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. All statements other than
statements of historical facts included in this Form 10-K, including without
limitation the statements under "Business", "Properties" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are
forward-looking statements. Although the Company (as defined below) 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.
PART I
ITEM 1. BUSINESS
THE COMPANY
On August 17, 1998, Insilco Corporation, a Delaware corporation originally
incorporated in New Jersey in 1898 (collectively with its subsidiaries is
referred to hereinafter as "Insilco"), 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) 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 converted their shares into 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 of
Donaldson, Lufkin & Jenrette Merchant Banking Partners, II, L.P. ("DLJMB"),
merged with and into Holdings (the "Merger", and together with the
Reorganization Merger, the "Mergers").
The Company, a Delaware corporation, is a diversified producer of automotive,
telecommunications and electronics components, and is a leading specialty
publisher of student yearbooks. Its principal executive offices are located at
425 Metro Place North, Fifth floor, Dublin, Ohio 43017, telephone (614)
792-0468.
3
<PAGE> 4
BUSINESS
BUSINESS SEGMENT INFORMATION
The Company operates in three primary business segments: Automotive Components,
Technologies, which produces telecommunications and electronics components, and
Specialty Publishing. The percentages of the Company's total net sales by
segment in each of its last three fiscal years were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Automotive Components 40 % 37 % 35 %
Technologies 35 38 37
Specialty Publishing 19 18 20
Other(1) 6 7 8
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
(1) This segment includes two operating units that fall below the quantitative
reporting thresholds. They are a manufacturer of machinery and equipment for
the heat exchanger market and a welded stainless steel tubing manufacturer.
For additional business segment information, see Note 21 to the Consolidated
Financial Statements.
AUTOMOTIVE COMPONENTS SEGMENT
The Automotive Components Segment is made up of two operating units, Thermal
Components Group ("Thermal"), and Steel Parts Corporation ("Steel Parts"). The
businesses in this segment manufacture automotive heat exchangers and related
tubing, and automatic transmission and suspension components, respectively.
Tubing and Heat Transfer. Thermal is a vertically integrated manufacturer of
heat exchangers for the automotive, specialty vehicle, truck, heavy equipment
and off-road vehicle and industrial equipment markets. Its products include thin
wall aluminum and brass tubes used principally in heat transfer applications,
radiators, air conditioning condensers, and oil coolers and heaters used in the
manufacture and assembly of automotive heat exchangers.
Thermal uses a direct sales force and independent sales representatives to
market its products. Thermal sells to both original equipment manufacturers
("OEMs") and aftermarket customers.
Thermalex, a joint venture owned equally by the Company (through a holding
company subsidiary), and Mitsubishi Aluminum Co., Ltd., manufactures multiport
aluminum extrusions used principally in automotive air conditioning condensers.
The markets for automobile heat-exchanger products are highly competitive and
have many participants, particularly automobile OEMs that produce for their own
use and several large independent manufacturers. Thermal supplies tubes and,
through Thermalex, extrusions to domestic automobile OEMs and independent
manufacturers. Thermal is an established supplier of welded radiator tubes to
manufacturers and repair shops in the heat-exchanger aftermarket.
4
<PAGE> 5
Thermal has manufacturing facilities in Alabama, Michigan, South Carolina,
Wisconsin and Germany. At December 31, 1998, Thermal (excluding Thermalex) had
883 employees.
Transmission Components. Steel Parts manufactures automotive parts consisting of
close-tolerance precision metal stampings at its facility in Indiana. Its
products include clutch plates for automatic transmissions, suspension parts for
vibration-reducing assemblies and engine mounts.
Substantially all Steel Parts' sales are made to the domestic automobile
industry, either directly or indirectly through other independent automotive
parts suppliers. As a result, the demand for Steel Parts' products historically
has been heavily dependent on the level of new car production by the domestic
automobile industry. Steel Parts has also seen its production content per
automobile increase in recent years as automobile manufacturers have moved from
three-speed to four- and five-speed automatic transmissions. The market for
original equipment automobile parts is highly competitive and has many
participants, principally the automobile manufacturers themselves because of
their ability to make their own parts. Approximately 72%, 70% and 70% of Steel
Parts' sales were to one of the "Big 3" domestic automotive manufacturers in
1998, 1997 and 1996, respectively.
At December 31, 1998, Steel Parts had 361 employees.
TECHNOLOGIES SEGMENT
The Technologies Segment consists of four operating units, Stewart Connector,
Signal Transformer, Stewart Stamping and Escod Industries, which manufacture
telecommunication and electrical component products for the computer networking,
telephone digital switching, premises wiring, main frame computer, automotive
and medical equipment markets.
Specialized Connector Systems. Stewart Connector designs and manufactures
specialized high speed data connector systems, including modular plugs, modular
jacks, shielded and nonshielded specialized connectors, and cable assemblies for
telecommunications, cellular communications and data transmission, including
local and wide area networks. Its primary manufacturing facility is located in
Pennsylvania, with an assembly operation in Mexico.
Stewart Connector sells its products throughout the world, directly and through
sales subsidiaries, and through a network of manufacturers' representatives.
Foreign sales accounted for approximately 36% of Stewart Connector's sales in
1998, 41% in 1997 and 40% in 1996. It maintains direct sales offices (and to a
lesser extent, distribution operations) in England, Japan, Germany and has
numerous domestic and foreign competitors, some of which are substantially
larger than Stewart Connector. Competition is based principally on price with
respect to older product lines, and on technology and product features for newer
products and to a lesser extent, patent protection.
At December 31, 1998, Stewart Connector had 1,139 employees.
Power Transformers. Signal Transformer manufactures both standard
"off-the-shelf" and custom-made power transformers serving a broad customer base
in a variety of industries. Signal's markets include telecommunications, home
and retail security systems, medical instrumentation, gaming and entertainment
and process controls. Signal markets its products directly, utilizing catalogs
and print advertising, and indirectly through selective independent sales
representatives in targeted regions of the country. It has a customer base of
over nine thousand accounts, consisting of both OEMs and aftermarket resellers.
5
<PAGE> 6
The electronic transformer industry includes both domestic and foreign
manufacturers and there are numerous competitors to Signal. Competition is based
on price and availability of product to meet customers' needs. Signal has
directed its marketing efforts for many years towards engineers and other
customers having specialized, low-volume demand and prompt delivery
requirements. To capitalize on an identified market niche, Signal has a service
that guarantees 24 hour delivery for small order quantities of certain
"off-the-shelf" transformers.
Signal manufactures its transformers at production facilities located in the
Dominican Republic, Puerto Rico and New York. The New York facility also serves
as Signal's major sales, administration and distribution center.
At December 31, 1998, Signal had 519 employees.
Precision Stampings and Wireforms. Stewart Stamping is a tool designer and
subcontract manufacturer of precision stampings and wireformed parts. Stewart
Stamping manufactures components used in electrical devices such as circuit
breakers, electric fuses, lighting and process controls and the electronics
industries, including passive components such as capacitor cans and connector
contacts. Stewart Stamping sells its products to a broad customer base primarily
in the U.S. through a network of manufacturers' representatives. Stewart
Stamping manufactures its products at its plants in Yonkers, New York and El
Paso, Texas.
Stewart Stamping's competitors in each of its product lines are numerous
(including, in the case of metal stampings, its own customers), but Stewart
Stamping traditionally has focused on products that, because of the engineering
and manufacturing capability required to produce them, have the potential for
repeat business.
At December 31, 1998, Stewart Stamping had 320 employees.
Cable and Wire Assemblies. Escod Industries produces electronic cable
assemblies, specialized wire harnesses and certain telecommunication equipment
subassemblies for sale to manufacturers of telecommunications, computer and
other electronics equipment. Escod's markets generally are regional in nature.
Escod has three production facilities in the Carolinas, one in Florida, one in
Northern Ireland and one in Ireland, which are operated principally to serve
local plants of OEMs. Because substantially all of Escod's customers are OEMs
having a number of production facilities, the demand for Escod's products
depends not only on the demand for its customers' products, but also on its
customers' varying utilization of their production sites.
Telecommunications and computer OEMs account for the bulk of Escod's sales. Two
telecommunications OEMs directly or indirectly together accounted for
approximately 64%, 68% and 66% of Escod's total revenues in 1998, 1997 and 1996,
respectively. Escod's dependence on these two major customers makes its revenues
and operating income sensitive to changes in demand from those customers.
Competition in Escod's markets is based primarily on price and, to a lesser
extent, on responsiveness to customers' needs. The profitability of Escod's
sales generally depend on the relative raw material content, labor productivity,
quality of the products sold, proximity to customers and timeliness of delivery.
As a result of the low barriers to entry into Escod's business and increased,
low-cost foreign competition in recent years, Escod's business has become
intensely competitive.
6
<PAGE> 7
At December 31, 1998, Escod had 292 employees.
SPECIALTY PUBLISHING SEGMENT
Taylor Publishing Company ("Taylor") is engaged primarily in the contract design
and printing of student yearbooks from which it derived at least 88% of its
revenues in each of the last three years. Its principal yearbook customers are
secondary (middle and senior high) schools. Other yearbook customers include
elementary schools, colleges and academies. Taylor also publishes a variety of
specialty books on a contract basis and a limited number of its own publishing
titles and provides reunion planning and other services for alumni of schools,
colleges and academies.
Competition in the yearbook industry is based upon customer service, quality and
price. The market for yearbooks is affected more by demographic trends than by
business cycles. Taylor offers several yearbook lines with different graphic and
typographic options and capabilities. Taylor has expended significant resources
in recent years to develop a system of electronic copy preparation designed to
enhance the quality and consistency of photographs, reduce production costs and
shorten the time required for yearbook production. Taylor has developed
proprietary software programs for use by its customers in developing yearbooks.
This software facilitates the yearbook design work performed by schools and
improves the overall production process.
Taylor markets its yearbook services through commissioned independent sales
representatives who maintain contact with yearbook faculty advisors, school
principals and other key purchasing personnel. It also trains students and their
advisors in layout, design and marketing, conducts seminars and workshops and
provides supporting materials, including software, to assist student yearbook
staffs in the production process.
Yearbook production is highly seasonal. Orders are normally obtained in the fall
and finished yearbooks are delivered at or near the end of the school year,
typically late spring to early summer and to a lesser degree, in the fall of the
following school year. Deposits representing approximately 25% of the yearbook
contract price are due from the yearbook customer upon its submission of the
first set of yearbook pages. Given the seasonal production cycle, the Company
typically receives significant cash deposits commencing each November and
continuing through each March. These deposits are available to fund the working
capital requirements of the yearbook production cycle, and to a lesser extent,
to provide the Company working capital for general corporate purposes.
Taylor operates six production facilities in Texas (two owned and four leased)
and one leased production facility in Pennsylvania. Its work force reflects the
seasonality of its business, typically ranging from 1,000 to 1,700 full-time
employees. At December 31, 1998, it had 1,327 employees.
OTHER SEGMENT
Stainless Steel Tubing. Romac manufactures stainless steel tubing for a variety
of marine, architectural, automotive and decorative applications at its facility
in North Carolina. Substantially all of its sales are domestic.
The markets for these products are highly competitive. Competition is based
principally on price and, to a lesser extent, on the shapes and finishes that
can be achieved with the tubing.
At December 31, 1998, Romac had 130 employees.
7
<PAGE> 8
Heat exchanger machinery and equipment. McKenica manufactures high speed welded
tube mills and other machinery and equipment for the heat exchanger market. It
sells its products predominately to automotive suppliers and automotive OEMs.
At December 31, 1998, McKenica had 80 employees.
DIVESTED OFFICE PRODUCTS BUSINESSES
On September 3, 1996, the Company sold Curtis, its computer accessories
business. On October 4, 1996, the Company sold the Rolodex Electronics product
line. On March 5, 1997, the Company sold the Rolodex Business. Curtis, Rolodex
Electronics and the Rolodex Business are referred to collectively as the "Office
Products Business." See Item 7 "Managements Discussion and Analysis of Financial
Condition and Results of Operations Discontinued Operations."
PATENTS AND TRADEMARKS
The Company holds patents or trademarks in most of its businesses which have
expiration dates ranging from 1999 to 2019. The Company expects to maintain such
patents and to renew the trademarks important to its business prior to their
expiration and does not believe the expiration of any one of its patents will
have material adverse effect on any of its businesses.
RAW MATERIALS AND SUPPLIES
The principal raw materials and supplies used by the Company include: (i) steel,
aluminum, copper, zinc, brass and nickel (Automotive Components Group); (ii)
copper wire, steel, brass, aluminum, plastics, ceramics and precious metals
(Technologies Group); and (iii) paper, film and other photographic and printing
supplies (Specialty Publishing). The Company purchases these materials and
supplies on the open market to meet its current requirements and believes its
sources of supply are adequate for its needs.
BACKLOG
The Company's backlog by industry segment, believed to be firm, at December 31,
1998 and 1997 follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Automotive Components $ 54,986 56,049
Technologies 46,528 51,245
Specialty Publishing 120,017 113,232
Other 5,190 3,347
--------- -------
Total $ 226,721 223,873
========= =======
</TABLE>
Management believes that approximately $211 million of its 1998 backlog will be
filled in 1999, and the remainder in 2000.
8
<PAGE> 9
EMPLOYEES AND LABOR RELATIONS
At December 31, 1998, the Company employed approximately 5,541 people on a
full-time basis, of whom approximately 25% were covered by collective bargaining
agreements with various unions. The largest collective bargaining unit covers
approximately 563 employees. Among the union agreements that will expire in 1999
are those covering certain union employees of McKenica and Steel Parts. The
Company considers relations with its employees to be good.
The Company has defined benefit and defined contribution pension plans covering
substantially all employees. For information respecting defined benefit pension
plans, See Note 12 to the Consolidated Financial Statements.
ENVIRONMENTAL REGULATION AND PROCEEDINGS
The Company's manufacturing operations involve the generation of a variety of
waste materials and are subject to extensive federal, state and local
environmental laws and regulations. The waste materials generated include metal
scrap from stamping operations, cutting and cooling oils, degreasing agents,
chemicals from plating and tinning operations, etching acids and photographic
and printing chemicals. The Company uses offsite disposal facilities owned by
third parties to dispose of its wastes and does not store wastes it generates to
the extent such storage would require a permit. The Company does not treat,
store or dispose of waste for others. The Company is required to obtain permits
to operate various of its facilities, and these permits generally are subject to
revocation or modification.
The Company has taken significant measures to address emissions, discharges and
waste generation and disposal; improve management practices and operations in
response to legal requirements; and internally audit compliance with applicable
environmental regulations and approved practices. These measures include: raw
material and process substitution; recycling and material management programs;
periodic review of hazardous waste storage and disposal practices; and reviewing
the compliance and financial status and management practices of its offsite
third-party waste management firms.
As a result of the Company's 1993 reorganization, much uncertainty has been
removed concerning the Company's potential liability for environmental
contamination at sites owned or operated by the Company (and at third party
disposal and waste management facilities used by the Company) prior to the
filing of its bankruptcy petition. During the reorganization, the Company
settled all claims of the United States relating to the Company's pre-petition
date conduct at previously owned or third party sites arising under the federal
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"). This settlement (i) discharged the Company's liability to the United
States at a number of hazardous waste sites; (ii) protects the Company from
contribution claims of the remaining potentially responsible parties; (iii)
limits the amount the Company may be required to pay the United States in any
one year on pre-petition claims; and (iv) provides that any such payment may be
made in cash or, at the Company's option, common stock valued at 30% of the
allowed claim.
The Company is also currently engaged in clean up programs at sites located in
Newtown, Connecticut, Mount Vernon, New York and Oak Creek, Wisconsin. The
Company has established what it believes are appropriate reserves for
anticipated remedial obligations. Due to the establishment of these reserves and
the environmental settlements reached during the Company's reorganization,
management does not believe that environmental compliance or remedial
requirements are likely to have a material adverse effect on the Company.
9
<PAGE> 10
FINANCIAL INFORMATION ABOUT EXPORT SALES
In 1998, the Company's export sales were $46.7 million or 9% of consolidated
sales. Export Sales in 1998 to Europe, Asia, Canada and Mexico were $ 22.8
million, $ 8.8 million and $ 7.7 million and $3.0, respectively. All other
export sales in 1998 totaled $4.4 million. In 1997, the Company's export sales
were $55.4 million or 10% of consolidated sales. Export sales in 1997 to Europe,
Asia, Canada and Mexico were $21.2 million, $14.0 million, $9.7 million and $4.3
million, respectively. All other export sales in 1997 totaled $6.2 million. In
1996, export sales were $58.2 million or 12% of consolidated sales. The
Company's transactions are primarily in U.S. dollars.
ITEM 2. PROPERTIES
PROPERTIES
The Company manufactures its products in various locations, primarily in the
United States. Management believes that the Company's facilities generally are
well maintained and adequate for the purposes of which they are used. The
Company's principal operating plants and offices at December 31, 1998 included
the following properties:
[This space intentionally left blank]
10
<PAGE> 11
<TABLE>
<CAPTION>
APPROXIMATE TERMS OF
BUSINESS SEGMENT LOCATION PRINCIPAL USE SQUARE FOOTAGE OCCUPANCY
- ---------------- -------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
Automotive Components
Montgomery, AL Office/Manufacturing 137,325 Owned(1)
Montgomery, AL Manufacturing 45,000 Leased
Franklin, WI Office/Manufacturing 123,200 Leased
Iron Ridge, WI Office/Manufacturing 44,000 Owned
Oak Creek, WI Office/Manufacturing 39,250 Owned
Montgomery, AL Office/Warehouse 10,890 Leased
Belleville, MI Office/Manufacturing 42,000 Leased
Duncan, SC Office/Manufacturing 100,000 Owned
Dortmund, Germany Office/Manufacturing 45,000 Owned
Dortmund, Germany Office 8,500 Leased
Tipton, IN Office/Manufacturing 235,350 Owned
Technologies
Durham, NC Office 3,205 Leased
N. Myrtle Beach, SC Office/Manufacturing 46,506 Owned
Lake Wales, FL Office/Manufacturing 42,000 Owned
Taylorsville, NC Office/Manufacturing 44,350 Owned
Loris, SC Office/Manufacturing 36,960 Owned
Canon City, CO Office/Manufacturing 21,000 Owned
Colorado Springs,
Co. Warehouse 1,400 Leased
Loris, SC Office/Warehouse 9,500 Leased
Winterhaven, FL Warehouse 3,000 Leased
Galway, Ireland
Carraoe County Manufacturing 25,120 Leased
Larne, County
Antrim, Northern
Ireland Manufacturing 25,000 Leased
Inwood, NY Office/Manufacturing 39,361 Owned
St. Just, PR Office/Manufacturing 41,214 Leased
San Cristobal,
Dominican Republic Office/Manufacturing 27,773 Leased
Glen Rock, PA Office/Manufacturing 84,000 Owned
Santa Clara, CA Office 133 Leased
Essex, UK Office 485 Leased
Freidrichsdorf/Ts.,
Germany Office 1,500 Leased
Yokohama, Japan Office/Warehouse 4,695 Leased
Cananea, Mexico Warehouse/
Manufacturing 22,646 Leased
Yonkers, NY Office/Manufacturing 190,000 Owned
El Paso, TX Office/Manufacturing 41,400 Leased
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
APPROXIMATE TERMS OF
BUSINESS SEGMENT LOCATION PRINCIPAL USE SQUARE FOOTAGE OCCUPANCY
- ---------------- -------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
Specialty Publishing
Dallas, TX Office/Manufacturing 320,000 Owned
Dallas, TX Office/Manufacturing 25,000 Owned
San Angelo, TX Office/Manufacturing 33,200 Leased
El Paso, TX Office/Manufacturing 31,000 Leased
El Paso, TX Manufacturing 52,000 Leased
Malvern, PA Office/Manufacturing 41,000 Leased
San Angelo, TX Manufacturing 7,800 Leased
Dallas, TX Office 1,282 Leased
Orange, CA Office 3,373 Leased
Galveston, TX Office 1,200 Leased
Garden Grove, CA Office 662 Leased
Other
Troutman, NC Office/Manufacturing 110,000 Owned
Buffalo, NY Office/Manufacturing 78,800 Leased
Corporate
Dublin, OH Office 18,300 Leased
</TABLE>
(1) Property is leased from an industrial development authority in connection
with an expired industrial revenue bond and is eligible for purchase by the
Company for a nominal consideration at the expiration of the lease term.
Substantially all of the Company's material domestic assets, including owned
properties, are subject to major encumbrances securing the Company's obligations
under the Bank Credit Agreement.
The Company believes that all of its production facilities have additional
production capacity.
12
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
On January 14, 1997, 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, the jury in the
case returned a verdict in favor of Taylor, and, on June 12, 1998, the judge
rendered his judgment in the amount of $25.2 million plus interest at an annual
rate of 5.434%. On January 14, 1999, in response to a motion by Jostens, the
judge entered an order vacating the jury verdict and granting judgment in
Jostens' favor. The Company will seek to overturn the order and reinstate the
jury verdict on appeal, but is uncertain what the actual amount is, if any, that
Taylor will recover from Jostens.
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of its business. The Company
maintains insurance coverage against potential general liability and certain
other claims in an amount it believes to be adequate. In the Company's opinion,
the outcome of these matters will not have a material adverse effect on the
Company's financial condition, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
[This space intentionally left blank.]
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
DLJMB is now the Company's principal stockholder, owning approximately 69% of
the 1,472,487 shares outstanding at March 26, 1999.
From November 29, 1993 to August 17, 1998, the Common Stock of the Company's
subsidiary, Insilco Corporation, traded on the Nasdaq National Market under the
symbol "INSL". After the Mergers, the Common Stock of the Company was traded on
Nasdaq temporarily (initially under the temporary symbol "INSLD" before resuming
the "INSL" designation) but is now traded in the over-the-counter market under
the symbol "INSL". The number of record holders of the Common Stock of the
Company on March 26, 1999 was 63. The closing sales price of the Common Stock of
the Company on March 26, 1999 was $23.875. The following table sets forth, for
the periods indicated, the high and low closing sale prices for the Company's
Common Stock.
<TABLE>
<CAPTION>
Low Sale High Sale
--------------- ----------------
<S> <C> <C>
1999:
First Quarter (through March 26, 1999) $ 22.000 $ 25.000
1998:
First Quarter $ 32.000 $ 43.375
Second Quarter $ 42.875 $ 44.625
Third Quarter $ 35.000 $ 45.000
Fourth Quarter $ 20.000 $ 30.000
1997:
First Quarter $ 34.000 $ 41.000
Second Quarter $ 36.750 $ 39.000
Third Quarter $ 36.000 $ 39.250
Fourth Quarter $ 33.000 $ 38.500
</TABLE>
Since its incorporation, the Company has not paid any cash dividends. Future
dividend policy will depend upon the earnings and financial condition of the
Company and the Company's need for funds and other factors. The payment of
dividends is restricted by the terms of the Bank Credit Agreement and the 14%
Senior Discount Notes due 2008 (the "14% Notes") issued by the Company on August
17, 1998.
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 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.
14
<PAGE> 15
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
$0.001 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.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information (dollars in
thousands, except per share data) derived from the Company's Consolidated
Financial Statements.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA (1)
Sales (net) $ 535,629 528,233 492,405 449,506 438,434
Depreciation and amortization 20,159 18,377 15,357 13,352 12,251
Merger Expenses 25,529 - - - -
Severance and write-downs 2,542 - 1,500 - -
Amortization of Reorganization Goodwill (2) - - - 16,205 34,812
Operating income (3) 12,642 51,102 48,433 38,881 9,491
Other income (expense)
Interest expense (32,894) (20,562) (18,378) (19,546) (29,113)
Interest income 979 2,837 724 1,472 1,788
Other income (expense), net (4) 5,877 3,441 7,706 13,893 3,257
Income (loss) from continuing operations
before extraordinary item and income taxes (13,396) 36,818 38,485 34,700 (14,577)
Income tax benefit (expense) 1,253 (13,404) (13,272) (16,694) (5,718)
Income (loss) from continuing operations
before extraordinary items (12,143) 23,414 25,213 18,006 (20,295)
Income (loss) from discontinued operations,
net of tax - 58,958 13,840 (15,431) (9,683)
Income (loss) before extraordinary items (12,143) 82,372 39,053 2,575 (29,978)
Extraordinary items, net of tax (5,888) (728) - - (2,156)
Net income (loss) (18,031) 81,644 39,053 2,575 (32,134)
BALANCE SHEET DATA AT PERIOD END (1)
Working capital 66,576 39,508 51,436 47,436 35,327
Total assets 327,274 302,673 348,393 340,129 368,669
Long-term debt 383,062 257,743 161,042 186,489 198,109
Other long-term liabilities 46,329 43,402 44,156 48,153 60,529
Redeemable preferred stock 34,094 - - - -
Stockholders' equity (deficit) (236,322) (102,328) 33,402 (15,779) (13,451)
CASH FLOW DATA (1)
Net cash provided by
operating activities 432 45,511 55,423 37,744 34,305
Net cash provided by (used in)
investing activities (23,366) 95,217 (29,783) (14,678) 36,295
Net cash provided by (used in)
financing activities 19,602 (133,256) (32,053) (21,862) (115,648)
PER SHARE DATA
Basic income (loss) per share from
continuing operations (4.49) 3.25 2.65 1.83 (2.09)
Diluted income (loss) per share from
continuing operations (4.49) 3.19 2.55 1.77 (2.09)
Book value per share (170.68) (25.08) 3.52 (1.64) (1.37)
</TABLE>
See accompanying notes to the Selected Financial Data.
16
<PAGE> 17
The notes to the selected financial data follow:
(1) The Company has consummated several material transactions over the
five-year period presented here, which significantly affect the
comparability of the information shown. (See Note 1 to the Consolidated
Financial Statements.)
(2) Amortization of Reorganization Goodwill for 1995 and 1994 resulted from the
Company's emergence from Chapter 11 bankruptcy proceedings (the "Chapter 11
Cases") on April 1, 1993 (the "Reorganization Date") pursuant to an Amended
and Restated Plan of Reorganization dated November 23, 1992 (the "Plan of
Reorganization").
(3) Operating income in 1995 includes a gain of $4.3 million related to a
change in the Company's pension plan (see Note 12 to the Consolidated
Financial Statements). In addition, operating income for 1995 and 1994
includes the deduction for Amortization of Reorganization Goodwill.
(4) Other income in 1995 includes favorable adjustments of $3.6 million related
to the Company's environmental liabilities, $1.5 million related to the
resolution of several legal disputes, and a $4.0 million gain on the sale
of idle corporate assets.
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's three primary business segments have different operating and
growth characteristics.
The Company's Automotive Components Segment designs, manufactures, and
distributes component products used in automotive, heavy-equipment, and other
transportation vehicles. Growth and performance in this segment is tied closely
to the vehicle production rates of automotive and heavy-equipment manufacturers
as well as after-market demand for replacement products.
The growth and performance of the Company's Technologies Segment is dependent on
the demand for its customers' end products and network infrastructure
build-outs. The Company feels it has aligned itself with market leaders in the
electric, electrical, telecommunications and data communications markets.
The Company is one of the largest producers of yearbooks to middle and high
school markets and colleges. The growth and performance of the Company's
Specialty Publishing Segment is dependent on the growth rate of the domestic
school age population and on increasing the proportion of students who purchase
school yearbooks.
The Company's Other Segment includes two operating units that fall below the
quantitative reporting thresholds and do not meet all of the criteria for
aggregation with the Company's reportable segments. These operations are a
manufacturer of high speed welded tube mills and other machinery and equipment
for the heat exchanger market to automotive suppliers and OEMs and a welded
stainless steel tubing manufacturer that provides tubing and tubing products to
a variety of markets, including pipe and tube distributors, recreational marine
and construction.
The Company consummated several material transactions in 1998, 1997 and 1996
that resulted in significant changes to its debt and capital structure. A
summary of these transactions is as follows:
The Mergers: 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 Insilco.
Promptly following the Reorganization Merger, a second merger took place
pursuant to which Silkworm Acquisition Corporation ("Silkworm"), an affiliate of
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 $0.001 per share.
18
<PAGE> 19
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 Company incurred $25,529,000 of costs related to the Merger in 1998.
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 were 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 $0.001 per share, and (iv) approximately $43.1 million of new
borrowings under the Company's existing credit facility (the "Existing Credit
Facility").
Refinancing of 10 1/4% Subordinated Debt: As a result of the Merger, Insilco was
required to make an Offer to Purchase (as defined in the indenture relating to
the 10 1/4% Notes) all of the outstanding 10 1/4% Notes at 101% of their
aggregate principal amount, plus accrued interest. To fund a portion of the
repurchase of the 10 1/4% Notes, Insilco, on November 9, 1998, completed the
sale of $120 million of 12% Senior Subordinated Notes due 2007 (the "12% Notes")
with warrants to purchase 62,400 shares of Holdings common stock at $45 per
share. The net proceeds from the sale of the 12% Notes, which was approximately
$116.4 million after payment of $3.6 million in underwriting fees to DLJSC and
other expenses, along with approximately $30.0 million in borrowings under
Insilco's Credit Facilities, were used to repurchase the 10 1/4% Notes plus the
accrued and unpaid interest. As of December 31, 1998, Insilco purchased $148.5
million of these notes and in February 1999, purchased an additional $1.5
million. As of March 26, 1999, there is an aggregate of $26,000 principal amount
of 10 1/4% Notes outstanding.
In addition, on November 24, 1998, Insilco amended and restated its Bank Credit
Agreement to, among other things, provide for two credit facilities: a $175
million revolving loan and $125 million term loan.
Acquisitions: In 1996, the Company acquired Great Lake, Inc. ("Great Lake"),
which serves the automotive, heavy truck and industrial manufacturing radiator
replacement market and the automotive
19
<PAGE> 20
aluminum tube business of Helmut Lingemann GmbH & Co. (the "Lingemann Business")
for approximately $37,726,000 in the aggregate including transaction fees and
expenses. The Lingemann transactions include the purchase of stock of
Lingemann's German subsidiary, ARUP Alu-Rohr und-Profil GmbH, and the automotive
aluminum tube business assets of its Duncan, South Carolina based
Helima-Helvetion International, Inc. This cash transaction was financed
principally from borrowings under the Company's prior bank credit agreement (See
Note 7).
These acquisitions have been accounted for as purchases and, accordingly, the
purchase prices have been allocated to the assets and liabilities acquired based
on their fair values at the acquisition dates. The operating results of the
businesses acquired have been included for the period subsequent to their
acquisition dates. (See Note 22 for pro forma results). The fair value of the
assets acquired totaled $47,478,000 and the liabilities assumed totaled
$9,752,000.
Divestitures: The Office Products Business of the Company's Office
Products/Specialty Publishing Group was divested in three separate transactions
during 1996 and the first quarter of 1997. The 1996 transactions included the
divestitures of the Company's computer accessories business (Curtis) and
electronic organizer business (Rolodex Electronics) for $21.8 million in the
aggregate which was used to reduce the outstanding amounts on the Company's bank
loans. On March 5, 1997, the remainder of the Office Products Business, which
consisted of the Rolodex Business, was sold for net cash proceeds of
approximately $112 million (the "Rolodex Proceeds"). As a result of the sale of
the Rolodex Business, the Office Products Business segment is being accounted
for as a discontinued operation (See "Discontinued Operations").
1997 Amended and Restated Credit Agreement: Insilco entered into an Amended and
Restated Credit Agreement as of July 3, 1997 (the "1997 Bank Credit Agreement")
that among other things, provided for (i) a $200 million revolving credit
facility, (ii) a $50 million sublimit for commercial and standby letters of
credit, and (iii) a $50 million sublimit for advances in selected foreign
currencies.
Issuance of 10 1/4% Subordinated Debt: On August 12, 1997, Insilco issued $150
million aggregate principal amount of 10.25% Senior Subordinated Notes due 2007
(the "10 1/4% Notes"), realizing therefrom net proceeds of $145.9 million.
Share Repurchase: On July 10, 1997, Insilco, using the proceeds from the sale of
the Rolodex Business, purchased an aggregate of 2,857,142 shares of its common
stock for $109,999,967. On August 12, 1997, Insilco completed a tender offer
pursuant to which it purchased an additional 2,857,142 shares for $109,999,967.
These shares were purchased with proceeds received from the issuance of $150
million aggregate amount of the 10 1/4% Notes.
These transactions have had a significant impact on the Company's results of
operations and financial position. Results of operations have been affected by
increases in the amortization of intangibles, inventory costs, depreciation,
interest expense, and deferred financing and prepayment fees. As a result of
these transactions, the Company's consolidated results for 1998, 1997 and 1996
are not directly comparable. Pro forma results of operations, which assume these
transactions occurred at the beginning of their respective periods, are
presented in Note 22 of the Notes to the Consolidated Financial Statements.
20
<PAGE> 21
RESULTS OF OPERATIONS
The table below is a summary (in thousands) of net sales from continuing
operations, operating income from continuing operations and net income (loss)
for the periods ended December 31, 1998, 1997, and 1996, respectively. This
presentation and the discussion that follows is based on a management approach
and is consistent with the basis and manner in which the Company's management
internally disaggregates financial information for the purposes of assisting in
making internal operating decisions (see Note 20 of the Consolidated Financial
Statements).
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES FROM CONTINUING OPERATIONS
Automotive Components Segment $213,365 193,839 169,280
Technologies Segment 189,781 198,941 183,663
Specialty Publishing Segment 101,325 98,222 99,020
Other Segment 31,158 37,231 40,442
-------- ------- -------
Total $535,629 528,233 492,405
======== ======= =======
OPERATING INCOME FROM CONTINUING OPERATIONS
Automotive Components Segment $ 23,015 21,859 21,722
Technologies Segment 21,169 26,734 27,604
Specialty Publishing Segment 4,945 7,299 5,136
Other Segment 1,290 4,748 5,175
Unallocated amounts:
Corporate operating expenses (7,752) (9,138) (9,704)
Significant legal expenses (1,954) (400) -
Severance and writedowns (2,542) - (1,500)
Merger fees and expenses (25,529) - -
-------- ------- -------
Total operating income from
continuing operations $ 12,642 51,102 48,433
======== ======= =======
NET INCOME (LOSS) $(18,031) 81,644 39,053
======== ======= =======
</TABLE>
1998 COMPARED TO 1997
Consolidated Results of Operations: Net sales from continuing operations in 1998
increased $7.4 million, or 1%, to $535.6 million from $528.2 million in 1997.
The increase in sales was due primarily to higher sales from the Automotive
Components Segment, which increased $19.5 million or 10% over 1997. This
increase was due primarily to higher heat exchanger and tubing sales, which were
up 16%. These increased sales were partially offset by a 2% decrease in the
sales of transmission related components. The increase in automotive component
sales was partly offset by a decrease in sales of technologies related
components, which declined $9.1 million or 5%. Although connector product sales
increased 7%, sales of wire and cable assembles,
21
<PAGE> 22
transformers and precision stampings declined a combined 9%. In addition, sales
of heat exchanger machinery and equipment and welded stainless steel tubing
products decreased a combined $6.1 million or 16%.
Operating income from continuing operations in 1998 decreased $38.5 million, or
75%, to $12.6 million from $51.1 million in 1997. Contributing to this decrease
in operating income were merger expenses relating to the Company's August 1998
merger with DLJMB, charges for severance expenses totaling $2.3 million related
to workforce reductions at Corporate, and in the Specialty Publishing and
Technologies Segments and writedowns related to lease cancellation costs of $0.2
million. In addition, the Company incurred higher legal expenses relating to two
significant lawsuits. Excluding the effects of these items, operating income in
1998 would have decreased $8.4 million, or 17% to $42.7 million from $51.5
million in 1997. This decrease (excluding the legal, and non-recurring charges)
was due to lower operating income from the Technologies, Specialty Publishing,
and Other Segments, which were partly offset by a $1.2 million increase in
operating income from the Automotive Components Segment.
Operating income from the Technologies Segment declined $5.6 million, or 21%,
from 1997 due mainly to the decline in sales and related decrease in gross
profits and higher depreciation expense. Operating income from the Specialty
Publishing Segment was down $2.4 million from 1997 due to higher delivery
expenses and higher commissions and new marketing initiatives. Operating income
from the Company's Other Segment declined $3.5 million as a result of a $3.6
million decrease in operating income relating to its tube-mill equipment and
machinery product line, which had a 45% decrease in sales.
Interest expense in 1998 increased $12.3 million to $32.9 million from $20.6
million in 1997, reflecting higher interest rates on the Company's 1998 debt
offerings and higher debt levels as a result of the August 1998 Merger and the
July 1997 Share Repurchase.
Interest income in 1998 decreased $1.8 million to $1.0 million from $2.8 million
in 1997, due to lower investment levels. Other income in 1998 increased $2.2
million to $3.0 million from $0.8 million in 1997, due to various non-operating,
non-recurring items. Equity income from the Company's unconsolidated joint
venture, Thermalex, in 1998 increased $0.2 million to $2.9 million from $2.7
million in 1997, due to an improvement in Thermalex's net income as a result of
higher sales.
The Company had an income tax benefit in 1998 of $1.3 million compared to an
expense of $13.4 million in 1997 due to the loss generated from continuing
operations in 1998. For information concerning the provision for income taxes,
as well as information regarding differences between effective tax rates and
statutory rates, see Note 14 of the Notes to the Consolidated Financial
Statements.
The Company recorded income from discontinued operations of $59.0 million in
1997 and $13.8 million in 1996 relating to the sale of its Office Products
Business, a significant line of business within the Company's then Office
Products/Specialty Publishing Segment. The sale of this line of business was
completed on March 5, 1997 with the sale of Rolodex for $112.6 million, net of
transaction costs. This sale was preceded in 1996 by the sale of Rolodex
Electronics and Curtis for an aggregate $21.8 million, net of transaction costs.
As a result of these sales, the Office Products Business has been accounted for
as a discontinued operation and, accordingly, the accompanying consolidated
statements of operations and cash flows for the periods prior to the sales have
been reclassified. Revenues associated with the discontinued Office Products
Business for the years 1998, 1997 and 1996 were $0, $10.8 million and $80.1
million, respectively.
The Company recorded an extraordinary item of $5.9 million, net of tax, in 1998
relating to the write-off of deferred financing fees associated with the 1997
Bank Credit Agreement and 10 1/4% Notes.
22
<PAGE> 23
Automotive Components Segment: Net sales in 1998 increased $19.5 million, or
10%, to $213.4 million from $193.8 million in 1997. The increase was due to
higher aluminum and charged-air-cooler tubing, aluminum heat exchangers, and
radiator sales. These sales increases were partially offset by lower
transmission component and brass tubing sales.
Operating income in 1998 increased $1.2 million, or 5%, to $23.0 million from
$21.8 million in 1997 due to higher sales and the resulting increase in gross
profits while selling, general, administrative and depreciation expenses were
flat compared to 1997. Operating margins in 1998 decreased to 10.8% from 11.3%
in 1997. This decrease is attributable to lower gross profit margins due to a
product mix shift to lower margin products offset by a decline in selling,
general and administrative expenses as a percent of sales, which fell to 8.9% in
1998 from 9.7% in 1997.
Technologies Segment: Net sales in 1998 decreased $9.1 million, or 5%, to $189.8
million from $198.9 million in 1997. While connector sales were up 7% from 1997,
sales of wire and cable assemblies, transformers and precision stampings were
collectively down 9% due a continuing slowdown in global electronics markets and
weak demand for electronic end products.
Operating income in 1998 decreased $5.5 million, or 21%, to $21.2 million from
$26.7 million in 1997. The decrease was due primarily to the decrease in sales
and a slight decrease in gross profit margins, which resulted in lower gross
profits. In addition, selling, general and administrative expenses increased 3%
and depreciation expense increased 17%. The majority of the increase in
depreciation was due to tooling investments for new connector and precision
stamped products.
Specialty Publishing Segment: Net sales in 1998 increased $3.1 million, or 3%,
to $101.3 million from $98.2 million in 1997. A 5% increase in yearbook sales
was partially offset by a $2.0 million decrease in non-yearbook publication
sales.
Operating income in 1998 decreased $2.4 million, or 32%, to $4.9 million from
$7.3 million in 1997 due to higher yearbook delivery expenses and increased
selling, general and administrative expenses due to new marketing initiatives
and increased sales commissions to sales representatives on higher yearbook
revenues.
Other Segment: Net sales in 1998 decreased $6.0 million, or 16%, to $31.2
million from $37.2 million in 1997. A 45% decrease in tube-mill capital
equipment sales, as a result of weak domestic and international demand for
milling equipment accounted for the decline.
Operating income in 1998 decreased $3.5 million, or 73%, to $1.3 million from
$4.8 million in 1997 due to the decline in tube-mill capital equipment sales.
1997 COMPARED TO 1996
Consolidated Results of Operations: Net sales from continuing operations in 1997
increased $35.8 million, or 7%, to $528.2 million from $492.4 million in 1996.
This increase was due to a $21.4 million, or 10%, increase in automotive
component sales due to the acquisition of Lingemann, which was not owned for the
full year in 1996. In addition, electronic and telecommunications component
sales increased $15.2 million, or 8%, primarily due to higher sales of wire and
cable assemblies, transformers, and precision stampings.
Operating income from continuing operations in 1997 increased $2.7 million, or
6%, to $51.1 million from $48.4 million in 1996. This increase was due to
increased productivity in the Specialty Publishing Segment, which accounted for
$2.2 million of the increase. In addition, the Company recorded a $1.5 million
23
<PAGE> 24
restructuring charge in 1996 for severance expenses relating to a salaried
workforce reduction in its Specialty Publishing Segment. A $0.9 million decrease
in operating income from the Technologies Segment due to higher selling, general
and administrative expenses partially offset these gains. Operating margins in
1997 were flat at 9.7% compared to 9.8% in 1996.
Interest expense in 1997 increased $2.2 million to $20.6 million from $18.4
million in 1996 due to higher interest costs relating to the 1997 debt financing
and higher debt levels due to the July 1997 Share Repurchase. Interest income in
1997 increased $2.1 million to $2.8 million from $0.7 million in 1996. The
increase reflects higher interest income earned on the sales proceeds derived
from the Company's sale of its Rolodex Business on March 5, 1997, which were
later used in the Company's 1997 Share Repurchase. Other income in 1997
decreased $4.0 million to $0.8 million from $4.8 million in 1996, due to the
inclusion in 1996 of a $2.2 million environmental liability settlement for an
amount less than previously estimated and several other smaller items. Equity
income from Thermalex in 1997 decreased $0.3 million to $2.6 million from $2.9
million in 1996 due to additional expenses relating to Thermalex's plant
expansion and the start-up of a new extrusion press.
Automotive Components Segment: Net sales in 1997 increased $24.6 million, or
15%, to $193.8 million from $169.2 million in 1996. The increase is primarily
attributable to the acquisition of Lingemann, which was not owned for the full
year in 1996. Sales for the full year in 1997 and the partial year of 1996
relating to this acquisition were $31.6 million and $13.1 million, respectively.
The Company also experienced higher sales of aluminum tubing, charged-air-cooler
tubing, radiators, and transmission components due to strong OEM and supplier
demand. The increase in transmission sales was also due to the shift from
three-speed to four and five-speed automatic transmissions, which increased the
Company's content per vehicle produced.
Operating income in 1997 was flat at $21.9 million compared to $21.7 million in
1996 due to increased expenses relating to the integration of Lingemann.
Selling, general and administrative expenses increased $4.8 million, of which
$2.5 million was due to the acquisition of Lingemann and $0.5 million related to
the Company's new R&D tech center.
Technologies Segment: Net sales in 1997 increased $15.2 million, or 8%, to
$198.9 million from $183.7 million in 1996. The increase is primarily due to
increased sales across all product lines except connectors. Sales of wire and
cable assemblies were up 19% due to strong demand from existing
telecommunication customers and additional sales from new customers. Transformer
sales increased 9% over 1996 due to higher demand for internationally certified
products from electronic OEMs. Precision stampings sales were up 7% due to new
products and strong demand from automotive, electrical control and circuit
protection markets. Connector sales decreased 1% from the prior year as a result
of price erosion within older product lines and delayed new product
introductions. International connector sales grew to 41% of sales in 1997 from
40% of sales in 1996.
Operating income in 1997 decreased $0.9 million, or 3%, to $26.7 million from
$27.6 million in 1996, as a result of lower operating margins on connector
products caused by competitive price pressures and delays in introducing new,
higher margin connector products. Also, impacting operating income were
additional start-up costs relating to the Company's new El Paso stamping
facility. Higher sales and gross profits from wire and cable assemblies offset a
portion of these declines.
Specialty Publishing Segment: Net sales in 1997 were flat at $98.2 million
compared to $99.0 million in 1996. The lack of growth is attributable to flat
yearbook sales and a $1.9 million decrease in non-yearbook publication sales.
24
<PAGE> 25
Operating income in 1997 increased $2.2 million, or 42%, to $7.3 million from
$5.1 million in 1996 due to increased productivity relating to workflow
improvements.
Other Segment: Net sales in 1997 decreased $3.2 million, or 8%, to $37.2 million
from $40.4 million in 1996. Heat exchanger capital equipment sales decreased 15%
and sales of welded stainless steel tubing products were down 4%.
Operating income in 1997 decreased $0.4 million, or 8%, to $4.8 million from
$5.2 million in 1996. A $1.5 million decrease in operating income from heat
exchanger capital equipment sales was offset by a $1.1 million increase in
operating income from welded stainless steel tubing products.
LIQUIDITY AND CAPITAL RESOURCES
In general, the Company requires liquidity for working capital, capital
expenditures, interest, taxes, debt repayment and its acquisition strategy. Of
primary importance are the Company's working capital requirements, which
increase whenever the Company experiences strong incremental demand or
geographical expansion. The Company expects to satisfy its liquidity
requirements through a combination of funds generated from operating activities
and the funds available under its Bank Credit Agreement.
Operating activities: For the year ended December 31, 1998, net cash provided
from operating activities was $0.4 million compared to $45.5 million provided
from operating activities during the same period in 1997. The increase in cash
requirements was primarily the result of the merger expenses and lower operating
income as previously discussed. In addition, the Company required additional
working capital due to the timing of year-end collections from a large
automotive components customer and two large technologies customers, which
accounted for a significant increase in accounts receivable and were collected
in January.
Investing activities: For the year ended December 31, 1998, capital expenditures
were $3.4 million less than the comparable period for 1997. Capital spending for
equipment in the Automotive Components Segment accounted for approximately 47%
and spending related to connector and precision stamping equipment and tooling
in the Technologies Segment accounted for 39%. The Company expects its 1999
capital expenditures to be flat compared to 1998. The Company also acquired two
small cable assembly operations for a total of $2.3 million during 1998. These
operations are located in Ireland and Northern Ireland and are being integrated
into the Technologies Segment.
The Company received cash dividends from its investment in Thermalex in 1998 and
1997 of $1.3 million and $1.5 million, respectively. In addition, as of December
31, 1998, the Company had a dividend receivable from this investment of $2.9
million relating to the declaration of a dividend that was paid in February
1999.
Financing activities: The Company has completed several transactions during
1998, 1997 and 1996 relating to its Merger with DLJMB and changes in its debt
and equity structure. For details regarding these transactions see the beginning
of this section.
The Company's annual cash interest expense on Insilco's 12% Notes, which are due
2007, is approximately $14.4 million. Interest on these notes is payable
semi-annually on February 15 and August 15 of each year commencing February 15,
1999. Cash interest on Holdings' 14% Senior Discount Notes, which are due 2008,
is payable semi-annually beginning February 15, 2004. Dividends on Holdings' 15%
Senior Exchangeable Preferred Stock ("PIK Preferred Stock") are payable in
additional shares of PIK Preferred Stock until August 1, 2003. After August 1,
2003, dividends are payable in cash.
25
<PAGE> 26
Insilco is party to a Bank Credit Agreement, which includes a $125.0 million
Term Facility and a $175.0 million Revolving Facility, which provides for
revolving loans and up to $50 million of letters of credit. The Revolving
Facility can be used to fund acquisitions, provide working capital, and for
other general corporate purposes. The Term Facility has a maturity of seven
years and is subject to mandatory quarterly prepayments of $0.3 million for the
first six years and quarterly payments of approximately $29.4 million in the
seventh year. Cash interest on the Term Facility is based on a leverage ratio.
At December 31, 1998, the applicable spread was LIBOR plus 3.75%. Payments of
principal and interest on the Term Facility are due quarterly each March, June,
September and December. The Revolving Facility terminates on July 8, 2003 and
interest is based on a leverage ratio. At December 31, 1998, the applicable
spread was LIBOR plus 3.00%. Availability under the Revolving Facility will
decrease by $21.4 million in May 1999 absent a signed definitive acquisition
agreement entered into prior to this date, and by $17.5 million on each of July
10, 2001 and July 10, 2002.
The Bank Credit Agreement is secured by a first-priority perfected lien on
substantially all of Insilco's assets, including a pledge of all of the stock of
Insilco's domestic subsidiaries and 65% of the stock of Insilco's foreign
subsidiaries. Payment of principal and interest on amounts borrowed under the
Bank Credit Agreement are guaranteed by substantially all of Insilco's domestic
subsidiaries. As of March 24, 1999, Insilco has approximately $83.0 million of
available funds under this agreement.
Future cash uses during fiscal 1999 include the purchase of Insilco's remaining
$1.5 million in outstanding 10 1/4% Notes. The Company, through Insilco, also
acquired the stock of EFI, a precision stamping operation, on January 25, 1999
for approximately $23.6 million including acquisition costs. EFI will be
integrated into the Technologies Segment. See Note 23 of the Notes to
Consolidated Financial Statements.
The Company expects its principal sources of liquidity to be from its operating
activities and funding from the Revolving Credit Facility. The Company further
expects that these sources will enable it to meet its long-term cash
requirements for working capital, capital expenditures, interest, taxes, debt
repayment, and future acquisitions for the foreseeable future.
Accumulated Deficit: At December 31, 1998, the Company had a stockholders'
deficit totaling $236.3 million, which is a result of both the 1998 merger and
1997 share repurchases previously described in this section.
MARKET RISK AND RISK MANAGEMENT
Foreign currency exchange rate movements create a degree of risk to the
Company's operations by affecting the U.S. dollar value of sales made in foreign
currencies and the U.S. dollar value of costs incurred in foreign currencies.
Foreign currency exchange rate movements also affect our competitive position,
as exchange rate changes may affect business practices and/or pricing strategies
of non-U.S. based competitors.
The Company's general policy is to use foreign currency borrowings as needed to
finance its foreign currency denominated assets. The Company uses such
borrowings to reduce its asset exposure to the effects of changes in exchange
rates - not as speculative investments.
As of December 31, 1998, the Company did not have any derivative instruments in
place for managing foreign currency exchange rate risks. Considering both the
anticipated cash flows from operations for the next quarter and the foreign
loans in place at year end, a hypothetical 10% weakening of the U.S. dollar
relative to all other currencies would not materially adversely affect expected
first quarter 1999 earnings or cash flows. This analysis is dependent on actual
foreign sales and costs during the next quarter occurring within
26
<PAGE> 27
10% of the budgeted forecasts. The effect of the hypothetical change in exchange
rates ignores the affect this movement may have on other variables including
competitive risk. If it were possible to quantify the competitive impact, the
results could well be different than the sensitivity effects noted above. In
addition, it is unlikely that all currencies would uniformly strengthen or
weaken relative to the U.S. dollar. In reality, some currencies may weaken while
others may strengthen.
The Company also is exposed to changes in interest rates primarily from its
long-term debt arrangements. As of December 31, 1998, the Company had no
interest rate derivative instruments to manage exposure to interest rate
changes.
A comparison of the net fair value of all interest sensitive financial
instruments using a hypothetical 100 basis point increase in interest rates
along the entire interest rate yield curve as of December 31, 1998 is as follows
(in thousands):
<TABLE>
<CAPTION>
Hypothetical
Fair Market Fair Market
Description of Security Value Value
- ----------------------- ----------- ------------
<S> <C> <C>
12% Senior Subordinated Notes
due 2007 $ 123,600 $ 117,852
14% Senior Discounts Notes
due 2008 62,100 57,518
</TABLE>
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 (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 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.
27
<PAGE> 28
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 that
were not Year 2000 compliant are being fixed. The Company believes that nearly
all of its proprietary IT systems have been fixed and 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 its control. 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 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. The costs incurred to implement the Company's Year 2000 compliance
program have been immaterial to date and the Company presently expects to incur
less than $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 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.
SEASONALITY AND INFLATION
The Company's specialty publishing segment is highly seasonal, with a majority
of sales occurring in the second and third quarter of the year. The Company
receives significant advance deposits from its Specialty
28
<PAGE> 29
Publishing customers in the first and fourth quarters of each year. The
Company's other segments are not highly seasonal. See "Item 1. Business -
Specialty Publishing."
The impact of inflation on the Company's operations has not been significant.
However, there can be no assurance that a high rate of inflation in the future
would not have an adverse effect on the Company's operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, "Market Risk and Risk Management".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, together with the reports
thereon of KPMG LLP (dated February 10, 1999 except as to the fourth paragraph
of Note 7, which is as of March 26, 1999) are set forth on pages F-1 through
F-38 hereof (see Item 14 of this Annual Report for the Index).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
29
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------------------------
DIRECTORS
The following table sets forth name, age and business experience of the
directors of the Company. Directors are elected annually to serve for one year
or until their successors are elected. Each director has held the occupation
indicated for more than the past five years unless otherwise indicated.
NAME AND BUSINESS EXPERIENCE AGE
---------------------------- ---
ROBERT L. SMIALEK 54
Mr. Smialek has served as Chairman of the Board, President and Chief
Executive Officer of the Company and Insilco since May 1, 1993. From
October 1992 to May 1993, Mr. Smialek served as the President and
Chief Operating Officer of the Temperature and Appliance Controls Group
of Siebe plc, a global controls and engineering firm. From September
1990 to October 1992, Mr. Smialek served as President and Chief Operating
Officer of Ranco, Inc., a subsidiary of Siebe, Inc. Mr. Smialek is a
director of General Cable Corporation and Gleason Corporation.
THOMPSON DEAN 40
Mr. Dean has been the Managing Partner of DLJMB Inc. since November
1996. Prior thereto, Mr. Dean was a Managing Director of DLJMB Inc.
(and its predecessor). Mr. Dean serves as a director of Commvault Inc.,
Von Hoffman Corporation, Manufacturers' Services Limited, Phase
Metrics, Inc., and Arcade Holding Corporation.
WILLIAM F. DAWSON, JR. 34
Mr. Dawson has been a Principal of DLJMB Inc. since August 1997. From
December 1995 to August 1997, he was a Senior Vice President in DLJ's
High Yield Capital Markets Group. Prior thereto, Mr. Dawson was a Vice
President in the Leveraged Finance Group within DLJ's Investment
Banking Group. Mr. Dawson serves as a director of Von Hoffman
Corporation and Thermadyne Holdings Corporation.
DAVID Y. HOWE 34
Mr. Howe has been a Vice President of Citicorp Venture Capital, Ltd.
since 1993. Mr. Howe serves as a director of Aetna Industries, Inc.,
American Italian Pasta Company, IPC Information Systems, Inc. and
PenTab Industries, Inc.
30
<PAGE> 31
RANDALL E. CURRAN 43
Mr. Curran has been a Director, Chairman of the Board, President and
Chief Executive Officer of Thermadyne LLC since May 1998. Mr. Curran
has also served as a Director of Thermadyne Holdings since February
1994 and was elected Chairman of the Board and Chief Executive Officer
of Thermadyne Holdings in February 1995, having previously served as
President of Thermadyne Holdings since August 1994 and as Executive
Vice President and Chief Operating Officer of Thermadyne Holdings since
February 1994. He also serves as President of Thermadyne Industries,
Inc., a position he has held since 1992. From 1986 to 1992, Mr. Curran
was Chief Financial Officer of Thermadyne Holdings and/or its
predecessors. Prior to 1986, Mr. Curran held various executive
positions with Cooper Industries, Inc.
KEITH PALUMBO 34
Mr. Keith Palumbo has been a Vice President of DLJMB Inc. since
December 1997. Prior thereto, Mr. Palumbo was an Associate in DLJ's
investment banking group.
JOHN F. FORT III 57
Mr. Fort has served as Chairman of the Board of the Directors of Tyco
International, Inc. from 1982 to December 1992, and as Chief Executive
Officer from 1982 to June 1992. Mr. Fort serves as a director of Tyco
International, Inc., Dover Corporation and Roper Industries.
Messrs. Howe, Dawson and Dean were first elected to the Board of Directors
effective August 17, 1998. Mr. Curran became a director on October 21, 1998 and
Messrs. Fort and Palumbo became directors on January 26, 1999. Mr. Smialek, as
the Company's Chief Executive Officer, became a director effective May 1, 1993.
Each has served as a director continuously since his election.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company had a total of one regular meeting and one
special meeting. Each of the directors attended 75% or more of the total number
of the Board of Directors meetings held during 1998. The Board of Directors has
no standing Audit and Compensation Committees.
Insilco, the registrant prior to the Mergers, had one regular and seven special
board meetings prior to the Mergers. On August 13, 1998, all of the directors of
Insilco resigned, except for Mr. Smialek, and vacancies on the Board of Insilco
created by the resignations were filled by Messrs. Dean and Dawson. The members
of the Insilco Audit Committee prior to the Mergers were James J. Gaffney,
Terence M. O'Toole, Thomas E. Petry and Barry S. Volpert. The Audit Committee
oversaw the work of the internal audit staff and external auditors. The
Compensation Committee, prior to the Mergers, was comprised of James J. Gaffney
and Thomas E. Petry, and it reviewed officer compensation, administered the 1993
Long-Term Incentive Plan, and met once during 1998, with both members attending
both meetings. The Board of Directors of the Company currently performs the
functions formerly performed by the Audit and Compensation Committees of
Insilco.
DIRECTOR COMPENSATION
During fiscal 1998 no director received compensation for director services
except for reimbursement of
31
<PAGE> 32
reasonable and customary travel expenses.
EXECUTIVE OFFICERS
Set forth below are the name, age and office of each "executive officer" of the
Company (as defined by the Securities and Exchange Commission).
<TABLE>
<S> <C>
Robert L. Smialek, age 54 President and Chief Executive Officer
David A. Kauer, age 43 Vice President and Chief Financial Officer
Kenneth H. Koch, age 43 Vice President, General Counsel and Secretary
Leslie G. Jacobs, age 48 Vice President, Human Resources and Assistant Secretary
Michael R. Elia, age 40 Vice President and Controller
</TABLE>
Executive officers are elected annually to serve for a year or until their
successors are elected. During the past five years, Mr. Smialek has had the
business experience set forth above under "Directors," while the other executive
officers have had the business experience described below. Unless otherwise
stated, positions are with the Company.
Mr. Kauer: Vice President and Chief Financial Officer (since May 1998) Vice
President and Treasurer (April 1997 to May 1998); Treasurer from September 1993
to April 1997; Controller and Treasurer of Johnson Yokogawa Corporation (a joint
venture of Yokogawa Electric Corporation and Johnson Controls, Inc.), October
1989 to September 1993.
Mr. Koch: Vice President, General Counsel and Secretary (since October 1993);
prior thereto, attorney and partner with the law firm of Porter, Wright, Morris
& Arthur.
Mr. Jacobs: Vice President, Human Resources (since August 1993); Director of
Human Resources from January 1990 to August 1993; prior thereto, Director,
Compensation and Employee Programs, of Rockwell International.
Mr. Elia: Vice President and Controller (since August 1998); was Chief Financial
Officer of Jordan Telecommunication Products from February 1997 to August 1998;
Director of Strategic Planning Fieldcrest Cannon, Inc. from 1994 to 1997; prior
thereto held senior financial positions with Insilco's Technologies Group.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and greater than 10% stockholders, to file reports of
ownership and changes in ownership of the Company's securities with the
Securities and Exchange Commission ("SEC"). Copies of the reports are required
by SEC regulation to be furnished to the Company. Based on its review of such
reports and written representations from reporting persons, the Company believes
that all reporting persons complied with all filing requirements during fiscal
1998.
32
<PAGE> 33
ITEM 11. EXECUTIVE COMPENSATION
The aggregate remuneration of the Chief Executive Officer during 1998 and the
four other most highly compensated executive officers of the Company whose
salary and bonus exceeded $100,000 for the fiscal year ended December 31, 1998,
is set forth in the following table:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
--------------------------------------
Annual Compensation Awards
Other Annual Securities All Other
Name and Principal Compensation Underlying Compensation
Position Year Salary ($) Bonus ($) ($) Options (#) ($)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Smialek 1998 $ 550,000 -- -- -- $13,519(4)
President and CEO 1997 550,000 $300,000 -- -- 9,901(5)
1996 537,499 235,000 -- -- 13,251(6)
David A. Kauer 1998 196,667 40,000 -- -- 93,830(7)
Vice President and Chief 1997 164,000 80,000 -- 10,000 3,369(8)
Financial Officer 1996 143,917 58,000 -- 1,500 3,109(9)
Kenneth H. Koch 1998 173,500 27,500 -- -- 393,254(10)
Vice President, General 1997 162,833 75,000 -- 10,000 3,314(11)
Counsel and Secretary 1996 151,167 78,373 -- 2,500 3,114(12)
Leslie G. Jacobs 1998 174,167 13,500 13,500(2) -- 388,921(13)
Vice President, Human 1997 165,000 70,000 -- 10,000 4,031(14)
Resources and Assistant 1996 155,833 62,500 -- -- 3,762(15)
Secretary
Michael R. Elia 1998 70,288(1) 44,875(17) 14,875(3) -- 99,294(16)
Vice President and 1997 -- - - -- --
Corporate Controller 1996 -- - - -- --
</TABLE>
- --------------
(1) Joined the Company August 1, 1998.
(2) Portion of bonus deferred to purchase equity units (see Long-term
Incentive Plan Table).
(3) Portion of bonus deferred to purchase equity units (see Long-term
Incentive Plan Table).
(4) Includes employer contributions under the Company's Employee Thrift
Plan 401(k) (the "Thrift Plan") ($2,400), insurance premiums paid by
the Company ($7,643) and medical reimbursements ($3,476).
(5) Includes Thrift Plan contributions ($2,250) and insurance premiums paid
by the Company ($7,501).
(6) Includes Thrift Plan contributions ($2,250) and insurance premiums paid
by the Company ($10,509).
(7) Includes monies received from the Value Appreciation Agreement
($90,300), Thrift Plan contributions ($2,400) and insurance premiums
paid by the Company ($1,130).
(8) Includes Thrift Plan contributions ($2,400) and insurance premiums paid
by the Company ($969).
(9) Includes Thrift Plan contributions ($2,250) and insurance premiums paid
by the Company ($859).
(10) Includes monies received from the Value Appreciation Agreement
($390,000), Thrift Plan contributions ($2,400) and insurance premiums
paid by the Company ($854).
33
<PAGE> 34
(11) Includes Thrift Plan contributions ($2,400) and insurance premiums paid
by the Company ($791).
(12) Includes Thrift Plan contributions ($2,250) and insurance premiums paid
by the Company ($733).
(13) Includes monies received from the Value Appreciation Agreement
($384,800), Thrift Plan contributions ($2,400) and insurance premiums
paid by the Company ($1,721).
(14) Includes Thrift Plan contributions ($2,400) and insurance premiums paid
by the Company ($1,631).
(15) Includes Thrift Plan contributions ($2,250) and insurance premiums paid
by the Company ($1,512).
(16) Includes moving expenses ($98,728) and Thrift Plan contributions ($319)
and insurance premiums paid by the Company ($247).
(17) Includes $30,000 sign-on bonus.
STOCK OPTIONS
None of the executive officers were granted any stock options in 1998.
The following table provides certain information regarding the number and the
value of stock options exercised during 1998 and the value of stock options held
by the named executive officers at fiscal year end.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL
OPTIONS AT FISCAL YEAR-END (#) YEAR-END ($)(2)
------------------------------ --------------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED
NAME (#) ($)(5) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ---------- ------------ ------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Smialek N/A(1) $ 3,120,010 - - - -
David A. Kauer N/A(2) $ - - - - -
Kenneth H. Koch N/A(3) $ 17,530 - - - -
Leslie G. Jacobs N/A(4) $ 271,790 - - - -
Michael R. Elia N/A $ - - - - -
</TABLE>
- --------------
(1) Option gain of $999,990 rolled over into Equity Unit Plan.
(2) Option gain of $322,500 rolled over into Equity Unit Plan.
(3) Option gain of $299,970 rolled over into Equity Unit Plan.
(4) Option gain of $99,990 rolled over into Equity Unit Plan.
(5) Represents gain from Option Cash Payments net of amounts rolled over into
Equity Unit Plan. (See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations).
34
<PAGE> 35
The following table provides certain information regarding long-term incentive
plan awards of the Company's Common Stock granted to executive officers named in
the summary compensation table in 1998 under the 1993 Long-Term Incentive Plan.
LONG -TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
(a) (b) (c)
Number of Shares,
Units or Other Performance or Other Period Until
Name Rights (#) Maturation or Payout (1)
- ------------------------------ ------------------------ -------------------------------------
<S> <C> <C>
Robert L. Smialek 22,222 --
David A. Kauer 14,000 --
Kenneth H. Koch 6,666 --
Leslie G. Jacobs 4,444 --
Michael R. Elia 3,777 --
</TABLE>
- --------------
(1) The shares of the Company's Common Stock were sold to such persons at a
purchase price of $45 per share. Holders of such common stock are not
permitted to transfer it until (i) sixty days after they are terminated
from Insilco or (ii) a Significant Event (as defined) occurs. Upon the
occurrence of any Significant Event Prior to August 17, 2008, or the
person's termination, Company has a right to purchase from such person,
and the holder has a right to sell to the Company, the Company's Common
Stock at a price equal to the common stock's Fair Market Value (as
defined) thereof or, if such holder was terminated for Cause (as
defined), at the lesser of $45 and the Fair Market Value. Holders of the
equity units purchased them for a price equal to their Fair Market Value
(which could have been paid for in cash, the termination of options or
the agreement to forego future salary and bonus payments). Such equity
units are cancelled upon the occurrence of a Significant Event or the
holder's termination from Insilco, at which time the holder will receive
a payment equal to the Fair Market Value of the equity units or, if such
holder was terminated for Cause (as defined), a payment equal to the
lesser of $45 and the Fair Market Value (which amount may be paid, at the
committee's discretion, either in cash or shares of the Company's Common
Stock).
RETIREMENT PLAN AND SUPPLEMENTAL ARRANGEMENTS
The Company's Retirement Plan for Salaried Employees (the "Retirement Plan")
provides retirement benefits for salaried employees, including officers. The
Company compensates employees for the loss of benefits which otherwise would
result because of the limitations the Internal Revenue Code places on pensions
that may be paid under tax-qualified retirement plans such as the Retirement
Plan. The unfunded supplemental retirement payments are accounted for as
operating expenses when earned.
35
<PAGE> 36
The following table shows the estimated annual retirement allowances payable
after retirement at normal retirement age to persons in the following specified
remuneration and years-of-service classifications (before any deductions for
joint or survivorship payments) without regard to any statutory limitations
imposed by the Internal Revenue Code. Normal retirement allowances, beginning at
age 65, equal (i) 50% of final average compensation minus (ii) 50% of the
retiree's primary social security benefit, pro-rated if total service is less
than 25 years or, in certain cases, is less than 35 years. Five years of service
is required for vesting.
<TABLE>
<CAPTION>
FINAL
AVERAGE Years of Service
EARNINGS(1) 15 20 25 30 35
<S> <C> <C> <C> <C> <C> <C>
$125,000 $ 33,385 $ 44,514 $ 55,642 $ 55,642 $ 55,642
150,000 40,885 54,514 68,142 68,142 68,142
175,000 48,385 64,514 80,642 80,642 80,642
200,000 55,885 74,514 93,142 93,142 93,142
250,000 70,885 94,514 118,142 118,142 118,142
300,000 85,885 114,514 143,142 143,142 143,142
350,000 100,885 134,514 168,142 168,142 168,142
400,000 115,885 154,514 193,142 193,142 193,142
450,000 130,885 174,514 218,142 218,142 218,142
500,000 145,885 194,514 243,142 243,142 243,142
550,000 160,885 214,514 268,142 268,142 268,142
600,000 175,885 234,514 293,142 293,142 293,142
650,000 190,885 254,514 318,142 318,142 318,142
</TABLE>
- ---------------
(1) The higher of (i) average annual compensation for any five consecutive
calendar years during the final 10 years of employment or (ii) the
average annual compensation for the last 60 months of employment.
Compensation consists of salary (including voluntary salary deferrals)
and bonus. Supplemental payments are based on average earnings in excess
of $160,000.
At December 31, 1998, Messrs. Smialek, Koch, Kauer, Jacobs and Elia were
credited, under the Retirement Plan and various supplemental arrangements, with
approximately 4.7, 4.2, 4.3, 7.9, and 9.7 years of service, respectively, for
purposes of determining their pensions.
EMPLOYMENT AND SEVERANCE BENEFIT AGREEMENTS
The following is a description of the current employment agreements with certain
of Insilco's executive officers.
The Company employs Mr. Smialek under an agreement providing that Mr. Smialek
will serve indefinitely as President and Chief Executive Officer of the Company.
Under the agreement, Mr. Smialek receives an annual base salary of $550,000. Mr.
Smialek will be eligible to receive annual bonuses and salary increases in such
amounts as may be reasonably determined by the Board of Directors. Mr. Smialek
received no bonus in 1998. Mr. Smialek also is entitled to participate in all
incentive, savings, retirement and welfare benefit plans and arrangements in
which certain other senior executive officers are eligible to participate, other
than any restricted stock or option plans in which his participation will be at
the discretion of the Company.
If Mr. Smialek's employment is terminated by the Company without "Cause" or by
Mr. Smialek for "Good Reason" (as the quoted terms are used in the agreement),
he will be entitled to a lump sum amount equal to his accrued salary, annual
bonus and vacation pay and any compensation previously deferred by him
36
<PAGE> 37
(collectively, the "Accrued Obligations") as well as a severance payment equal
to his annual salary plus the greater of $150,000 or his most currently
determined annual bonus, together with the continuation of certain benefits for
a one-year period.
In 1993, Mr. Smialek purchased from the Company 33,333 restricted shares of
Common Stock issued under the Plan at a cash purchase price per share of $15,
whereupon 66,667 restricted shares were awarded to him under the Plan for a
nominal price (all of such restricted shares are referred to collectively herein
as the "Restricted Shares"). Restrictions on the Restricted Shares expired March
31, 1996, and Mr. Smialek has all the rights of a holder of common stock with
respect to such shares. Mr. Smialek has the option to settle the tax withholding
obligations of the Company resulting from expiration of the restrictions with
shares of Common Stock.
In December 1996, the Company entered into a Value Appreciation Agreement with
Messrs. Jacobs, Koch, Kauer and certain other officers. The Value Appreciation
Agreement provided that the executives would be entitled to receive a commission
from the Company in certain circumstances following a transaction giving rise to
a change in control. Upon consummation of the Mergers, a commission on the sale
of $2.6 million was paid and the Value Appreciation Agreement was terminated.
In December 1996, the Company entered into Income Protection Agreements with
Messrs. Jacobs, Koch, Kauer and certain other officers. The Income Protection
Agreements provide that in the event of termination of an executive's employment
by the Company without cause, or, in certain circumstances, by the executive,
the executive will be entitled to receive certain severance benefits. The
benefits payable to the executive in the event of a termination of employment
covered by the Income Protection Agreement are as follows: (i) one year's base
salary; (ii) a bonus equal to the bonus paid to executive in 1996 or the target
bonus for the year in which employment is terminated, as well as a pro rated
bonus for the year in which the termination occurs; (iii) continued
participation in the Company's benefit plans for the duration of the severance
period; (iv) accelerated vesting of all stock options and stock appreciation
rights; (v) continuation of any rights to indemnification from the Company; and
(vi) certain outplacement services. The Income Protection Agreements have three
year terms and automatically renew for subsequent one year terms, unless
terminated by either party.
The following Report on Executive Compensation and Performance Graph will not be
deemed incorporated by reference by any general statement incorporating by
reference this Form 10-K/A No. 1 into any of the Company's filings under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, except to the extent that the Company specifically incorporates this
information by reference, and will not otherwise be deemed filed under such
Acts.
REPORT ON EXECUTIVE COMPENSATION
OVERVIEW
The Board of Directors, with the advice of the Chief Executive Officer, reviews
and evaluates individual executive officers and determines the compensation for
each executive officer. In general, the Board's philosophy is to attract,
motivate and retain qualified key executives, reward individual performance,
relate compensation to Company goals and objectives and enhance shareholder
value. The Company's compensation program includes competitive base salaries,
annual bonus opportunities, competitive benefits and long-term awards under the
Insilco Holding Co. Stock Option Plan (the "Plan").
37
<PAGE> 38
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Robert L. Smialek became the Company's Chief Executive Officer effective May 1,
1993. The Compensation Committee then in place, by approval of the Second
Extension Agreement between the Company and Mr. Smialek dated September 25,
1997, extended the employment agreement indefinitely. In 1998, Mr. Smialek
received a base salary of $550,000. Determination of Mr. Smialek's base salary
was primarily based on Mr. Smialek's background and experience, and compensation
levels of executives in similar positions in comparable businesses. Although Mr.
Smialek did not receive a bonus in 1998, he is eligible to receive annual
bonuses in such amounts as may be reasonably determined from time to time by the
Board of Directors.
COMPENSATION OF EXECUTIVE OFFICERS
The Company's compensation program for its executive officers is based on
the following objectives:
- Total compensation of the executive officers should be linked to the
financial performance of the Company and enhancement of shareholder
value.
- The compensation paid to the executive officers of the Company should
be competitive with executive compensation levels of similar companies
so that the Company can attract, motivate and retain qualified key
executives.
- The compensation program should reward outstanding individual
performance and contributions to the Company as well as experience.
Compensation for executive officers in 1998 consisted of base salary, bonuses
and related stock option and incentives related to the Merger. Base salaries and
bonuses were paid to executive officers (excluding the Chief Executive Officer)
based upon each such executive officer's individual performance, duties,
responsibilities, experience and tenure, general economic conditions, the recent
financial performance of the Company, and other factors. Bonuses paid to the
executive officers were determined in accordance with a bonus plan that required
70% of the bonus to be determined on the basis of the Company's achieving
certain specified financial performance goals, and 30% on the basis of the Board
of Directors' and the Chief Executive Officer's evaluation of the performance of
each executive officer. In addition, the Chief Executive Officer has the
discretion to make performance-related individual awards.
The Insilco Insilco Holding Co. Stock Option Plan was adopted in 1998, but no
stock options were awarded under the plan to executive officers in 1998. The
future determination of such awards will be based on: (i) the executive
officer's length of service; (ii) the levels of options awarded to executives in
similar positions and at similar salary levels as compared to surveys published
by compensation consulting firms; and (iii) the executive's contributions,
performance and perceived ability to impact overall business results.
IMPACT OF 1993 TAX ACT CHANGES
The Budget Reconciliation Act of 1993 (the "Act") amended the Internal Revenue
Code to add Section 162(m) that bars a deduction to any publicly held
corporation for compensation paid to a "covered employee" in excess of
$1,000,000 per year (the "Dollar Limitation"). A covered employee of the Company
is any employee who appears in the Summary Compensation Table who is also
employed by the Company on December 31. The Dollar Limitation applies to tax
years beginning after 1993.
The legislation potentially impacts three components of the Company's executive
compensation package.
38
<PAGE> 39
These include base salaries, bonuses, and awards under the Plan. The Company
does not believe that the legislation as amended will have any effect on the
deductibility of compensation payable in 1998 to any of its executive officers.
The Company believes that the Plan currently qualifies for the exemption
provided for performance based compensation and awards under the Plan will not
be subject to the Dollar Limitation.
BOARD OF DIRECTORS:
Robert L. Smialek
Thompson Dean
William F. Dawson, Jr.
David Y. Howe
Randall E. Curran
Keith Palumbo
John F. Fort III
39
<PAGE> 40
PERFORMANCE GRAPHS
As a result of the Mergers on August 17, 1998, the holders of Insilco Common
Stock received $43.48 in cash and 0.03378 of a share of Company Common Stock for
each share of Insilco Common Stock.
The following Performance Graph compares the performance of the Company with
that of the Russell 2000 Index and the Standard & Poor's Conglomerates Index.
The comparison of cumulative total return to shareholders assumes that $100 was
invested in the Common Stock of the Company and in the Russell 2000 Index and
the Standard & Poor's Conglomerates Index on August 17, 1998, the date of
Mergers and that all dividends were reinvested.
COMPARISON OF 4 MONTH CUMULATIVE TOTAL RETURN
AMONG INSILCO HOLDING CO., THE S&P CONGLOMERATE INDEX
AND THE RUSSELL 2000 INDEX
Insilco S&P
Holding Co. Russell 2000 Conglomerates
----------- ------------ -------------
8/17/98 $100 $100 $100
12/98 49 102 108
40
<PAGE> 41
The following Performance Graph compares the performance of Insilco with that of
the Russell 2000 Index and the Standard & Poor's Conglomerates Index through the
date of the Merger, August 17, 1998. The comparison of cumulative total return
to shareholders assumes that $100 was invested in the Common Stock of Insilco on
September 15, 1993 (the effective date of the registration of the Insilco's
Common Stock under the Securities Exchange Act of 1934, as amended), and in the
Russell 2000 Index and the Standard & Poor's Conglomerates Index on August 31,
1993, and that all dividends were reinvested.
COMPARISON OF 60 MONTH CUMULATIVE TOTAL RETURN
AMONG INSILCO CORPORATION, THE S&P CONGLOMERATE INDEX
AND THE RUSSELL 2000 INDEX
Insilco S&P
Holding Co. Russell 2000 Conglomerates
----------- ------------ -------------
8/93 $100 $100 $100
12/93 113 105 99
12/94 207 104 94
12/95 268 129 122
12/96 323 148 139
12/97 277 181 156
8/17/98 369 168 155
41
<PAGE> 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth certain information with respect to the
beneficial ownership of Company Common Stock as of April 28, 1999 by (i) any
person or group who beneficially owns more than five percent of Company Common
Stock, (ii) each of our directors and executive officers and (iii) all directors
and officers as a group.
<TABLE>
<CAPTION>
Shares
Beneficially Percentage of
Owned After the Outstanding
Mergers Common Stock (3)
--------------- -----------------
<S> <C> <C>
NAME AND ADDRESS OF BENEFICIAL OWNER:
DLJ Merchant Banking Partners II, L.P.
and related investors(1)(2) 1,043,584 70.8%
399 Venture Partners, Inc.(4) 266,666 19.3
Thompson Dean(5) - -
William F. Dawson, Jr.(5) - -
Keith Palumbo(5) - -
David Y. Howe(6) - -
Randall E. Curran - -
John F. Fort III - -
Robert L. Smialek 21,354 1.5%
Kenneth H. Koch 300 *
David A. Kauer 27 *
Leslie G. Jacobs 13 *
Michael R. Elia - -
All directors and officer as a group
(11 persons)(5)(6) 21,694 1.5%
-------- -----
</TABLE>
- ------------------
* Less than 1%
(1) Includes 75,603 shares of the Company's Common Stock issued following
exercise on March 12, 1999 of the DLJMB Warrants issued in connection with
the PIK Preferred Stock. Also includes 22,425 shares of the Company's
Common Stock issued following exercise on March 12, 1999 of warrants,
which were issued as part of the Company's Units purchased by the DLJ
Mezzanine Investors (as defined herein).
(2) Consists of shares held directly by the following investors related to
DLJMB: DLJ Offshore Partners II, C.V. ("Offshore"), a Netherlands Antilles
limited partnership, DLJ Diversified Partners, L.P. ("Diversified"), a
Delaware limited partnership, DLJMB Funding II, Inc. ("Funding"), a
Delaware corporation, DLJ Merchant Banking Partners II-A, L.P.
("DLJMBPIIA"), a Delaware limited partnership, DLJ Diversified Partners-A.
L.P. ("Diversified A"), a Delaware limited partnership, DLJ Millennium
Partners, L.P. ("Millennium"), a Delaware limited partnership, DLJ
Millennium Partners-A, L.P. ("Millennium A"), a Delaware limited
partnership, DLJ EAB Partners, L.P. ("EAB"), UK Investment Plan 1997
Partners ("UK Partners"), a Delaware partnership, DLJ First ESC L.P., a
Delaware limited partnership ("DLJ First ESC"), and DLJ ESC II, L.P., a
Delaware limited partnership ("DLJESCII"). See "Certain Relationships and
Related Transactions"). The address of each of DLJMB, Diversified,
Funding, DLJMBPIIA, Diversified A, Millennium, Millennium A, DLJ First
ESC, DLJ ESC II and EAB is 277 Park Avenue, New York, New York 10172. The
address of Offshore is John B. Gorsiraweg 14, Willemstad, Curacao,
Netherlands Antilles. The address of UK Partners is 2121 Avenue of the
Stars, Fox Plaza, Suite 3000, Los Angeles, California 90067.
(3) Does not give effect to the issuance of the Warrants issued together with
the notes.
(4) The address of 399 Venture Partners, Inc. is 399 Park Avenue, New York,
New York, 10022-4614.
42
<PAGE> 43
(5) Messrs. Dean, Dawson and Palumbo are officers of KLJMB Inc., an affiliate
of DLJMB and the Initial Purchaser. The business address of Messrs. Dean ,
Dawson and Palumbo is KLJMB Inc., 277 Park Avenue, New York, New York
10172. Share data shown for such individuals excludes shares shown as held
by the DLJMB Funds, as to which such individuals disclaim beneficial
ownership.
(6) Mr. Howe is an officer of Citicorp Venture Capital, Ltd., an affiliate of
399 Venture Partners, Inc. The business address of Mr. Howe is 399 Park
Avenue, New York, NY 10022-4614. Share data shown for Mr. Howe excludes
shares shown as held by 399 Venture Partners, Inc., as to which Mr. Howe
disclaims beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
The DLJMB Funds own approximately 69.0% of the outstanding shares of the
Company's Common Stock (67.0% on a fully diluted basis after giving effect to
the issuance of the Warrants). Messrs. Dean and Dawson are officers of DLJMB and
directors of Insilco and Holdings. Neither Holdings nor Insilco is aware of any
transaction or of any currently proposed transaction, in which DLJ has any
material direct or indirect interest as a result of its ownership position in a
party to the transaction other than Insilco, except as follows:
Donaldson Lufkin & Jenrette Securities Corporation ("DLJSC") received customary
fees in connection with the distribution of the units of which the Old Notes
were part, received customary fee in connection with the arranging of the
syndication of the new credit facility, received customary fees in connection
with the distribution of the Company's Units and received an advisory fee in
connection with the Mergers. In connection with the sale of the Company's Units,
Company's granted registration rights to DLJSC in connection with its
market-making activities and agreed to indemnify DLJSC against certain
liabilities, including liabilities under the Securities Act. In addition, DLJ
Capital Funding is an agent and lender under the new credit facility. DLJ
Capital Funding and DLJSC have and will receive customary fees in connection
with the provision of the new credit facility. Further, DLJ Capital Funding,
Inc., an affiliate of DLJSC, acted as syndication agent in connection with the
new credit facility for which it received certain customary fees and expenses
and DLJ Bridge Finance Inc., an affiliate of DLJSC, purchased the Bridge Notes,
for which it received customary fees and expenses. DLJSC has, from time to time,
provided investment banking and other financial advisory services to Insilco in
the past for which it has received customary compensation, and will provide such
services and financial advisory services to Insilco in the future. DLJSC acted
as purchaser in connection with the initial sale of the Old Notes and received
an underwriting discount of approximately $3.6 million in connection therewith.
In addition, DLJSC received a merger advisory fee of $3.5 million in cash from
the Company after the consummation of the Merger. The aggregate fees to be
received by DLJ entities for its various services in 1998 were approximately
$15.6 million.
DLJ Investment Partners, L.P., DLJ ESC II, L.P. and DLJ Investment Funding, Inc.
(the "DLJ Mezzanine Investors"), each of which is an affiliate of DLJMB,
purchased and aggregate of approximately 50% of the Company Units and are
entitled to certain registration rights in connection therewith.
In connection with the Mergers, DLJMB and the Company entered into an agreement
with respect to registration and certain other rights.
Prior to the Mergers, Water Street Corporate Recovery Fund I, L.P. ("Water
Street"), an affiliate of Goldman, Sachs & Co. ("Goldman Sachs"), beneficially
owned approximately 45% (62% prior to the Share Repurchase) of Insilco's common
stock. Neither the Company nor Insilco is aware of any transaction or of any
currently proposed transaction in which Goldman Sachs has any material direct or
indirect interest
43
<PAGE> 44
as a result of its ownership position in a party to the transaction other than
the Company, except as follows:
Goldman Sachs advised Insilco in connection with the Mergers and received a fee
of $2.0 million payable on the consummation of the Mergers. In the Mergers,
Water Street received approximately $81.0 million and retained 62,962 shares of
the Company. The Company entered into a Registration Rights Agreement with Water
Street in which Water Street has certain registration rights with respect to
such 62,962 shares.
BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION
Currently, none of the directors of the Company, with the exception of Mr.
Smialek, are employees of the Company. Mr. Smialek serves as the Company's
President and Chief Executive Officer.
44
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) Financial Statements
- Independent Auditors' Report
- Consolidated Balance Sheets
- December 31, 1998
- December 31, 1997
- Consolidated Statements of Operations
- Year ended December 31, 1998
- Year ended December 31, 1997
- Year ended December 31, 1996
- Consolidated Statements of Stockholders' Equity (Deficit)
- For the years ended December 31, 1998, 1997 and 1996
- Consolidated Statements of Cash Flows
- Year ended December 31, 1998
- Year ended December 31, 1997
- Year ended December 31, 1996
- Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
See Exhibit 99(a) - Schedule II - Valuation and Qualifying Accounts.
All other schedules are omitted because of the absence of the
conditions under which they are required or because the required
information is included in financial statements or the notes thereto.
45
<PAGE> 46
(3) Exhibits:
*2(a) - Agreement and Plan of Merger, dated as of March 24, 1998, among
Insilco, INR Holding Co., and Silkworm Acquisition Corporation
(Exhibit 10(n) to the Registration Statement on Form S-4 (File
No. 333-51145) of Insilco).
*2(b) - Amendment No. 1 to the Agreement and Plan of Merger, dated June
8, 1998, among Insilco, INR Holding Co. and Silkworm
Acquisition Corporation (Exhibit 10(r) to the Registration
Statement on Form S-4 (File No. 333-51145) of Insilco).
*3(a) - Certificate of Incorporation (Exhibit 3.1 to the Current
Report on Form 8-K filed on August 18, 1998 (File No. 0-24813).
*3(b) - Bylaws incorporated by reference to Exhibit 3.2 to the Current
Report on Form 8-K filed on August 18, 1998 (File No. 0-24813).
*4(a) - Investors' Agreement, dated as of August 17, 1998, among Insilco
Holding Co. and the investors named therein (Exhibit 4.5 to the
Registration Statement on Form S-1 (File No. 333-65039)).
*4(b) - Indenture, dated as of November 9, 1998, between Insilco and the
Trustee (Exhibit 4(a) to the Form 10-Q filed by Insilco on
November 16, 1998 (File No. 0-22098)).
*4(c) - First Supplemental Indenture, dated as of December 21, 1998,
between Insilco and the Trustee (Exhibit 4.3 to the Registration
Statement on Form S-1 (File No. 333-71947) of Insilco).
*4(d) - Warrant Agreement, dated as of August 17, 1998, between
Silkworm Acquisition Corporation and National City Bank, as
Warrant Agent (Exhibit 4.1 to the Registration Statement on
Form S-1 (File No. 333-65039)).
*4(e) - Assumption Agreement, dated as of August 17, 1998, between
Insilco Holding Co. and National City Bank, as Warrant Agent
(Exhibit 4.2 to the Registration Statement on Form S-1 (File
No. 333-65039)).
*4(f) - Form of Class A Warrant (Exhibit 4.3 to the Registration
Statement on Form S-1 (File No. 333-65039)).
*4(g) - Certificate of Designation with respect to Pay-in-kind 15%
Senior Exchangeable Preferred Stock due 2010 (Exhibit 4.4 to
the Registration Statement on Form S-1 (File No. 333-65039)).
*4(h) - Indenture, dated as of August 17, 1998, between Silkworm
Acquisition Corporation and the Trustee (Exhibit 4.5 to the
Registration Statement on Form S-1 (File No. 333-65039)).
*4(i) - First Supplemental Indenture, dated as of August 17, 1998,
between Insilco Holding Co., and the Trustee (Exhibit 4.6 to the
Registration Statement on Form S-1 (File No. 333-65039)).
*4(j) - Indenture, dated as of August 12, 1997, between Insilco and
the Trustee (Exhibit 4(j) to the Registration Statement on Form
S-4 (File No. 333-36523) of Insilco).
46
<PAGE> 47
*4(k) - Form of New Note (included in Exhibit 4(j) above) (Exhibit 4(k)
to the Registration Statement on Form S-4 (File No. 333-36523)
of Insilco).
*4(l) - Purchase Agreement, dated as of August 7, 1997, among
Insilco and Goldman, Sachs & Co., McDonald & Company
Securities, Inc. and Citicorp Securities Inc. (the "Initial
Purchasers") (Exhibit 4(l) to the Registration Statement on Form
S-4 (File No. 333-36523) of Insilco).
*4(m) - Exchange and Registration Rights Agreement, dated as of August
12, 1997, between Insilco and the Initial Purchasers (Exhibit
4(m) to the Registration Statement on Form S-4 (File No.
333-36523) of Insilco).
*4(n) - Warrant Agreement, dated as of November 9, 1998, between
Insilco Holding Co. and the Warrant Agent (Exhibit 4(a) to the
Form 10-Q for the Quarter Ended September 30, 1998 (File No.
0-24813)).
*4(o) - Warrant and Registration Rights Agreement, dated as of November
9, 1998, between Insilco Holding Co. and the Initial Purchaser
(Exhibit 4(b) to the Form 10-Q for the Quarter Ended September
30, 1998 (File No. 0-24813)).
*4(p) - Exchange and Registration Rights Agreement, dated as of November
9, 1998, between Insilco and DLJ (Exhibit 4(b) to the Form 10-Q
of Insilco for the Quarter Ended September 30, 1998 (File No.
0-22098)).
***4(q) - Second Supplemental Indenture, dated as of January 25, 1999
between Insilco and the Trustee.
*10(a) - Insilco Holding Co. Direct Investment Program (Exhibit 4(c) to
the Registration Statement on Form S-8 (File No. 333-61809)).**
*10(b) - Insilco Holding Co. Stock Option Plan (Exhibit 4(d) to the
Registration Statement on Form S-8 (File No. 333-61809)).**
*10(c) - Insilco Holding Co. and Insilco Corporation Equity Unit
Plan (Exhibit 4(c) to the Registration Statement on Form S-8
(File No. 333-61811)).**
*10(d) - Credit Agreement, among Insilco and a syndicate of banks and
other financial institutions led by Donaldson, Lufkin & Jenrette
Securities Corporation, DLJ Capital Funding and The First
National Bank of Chicago (Exhibit 10.4 to the Registration
Statement on Form S-1 (File No. 333-71947) of Insilco).
*10(e) - Purchase Agreement, between Insilco Corporation, Insilco
Holding Co. and Donaldson, Lufkin & Jenrette Securities
Corporation (Exhibit 10(a) to Form 10-Q Filed by Insilco on
November 16, 1998 (File No. 0-22098)).
*10(f) - Employment Agreement dated as of May 1, 1993 between Insilco
and Robert L. Smialek, as amended and restated (Exhibit 10(k)
to the Form 10/A, Amendment No. 1 to Form 10 (File No. 0-22098)
of Insilco).**
47
<PAGE> 48
*10(g) - Form of Indemnification Agreement adopted by Insilco as of July
30, 1990, entered into between Insilco and certain of its
officers and directors individually, together with a schedule
identifying the other documents omitted and the material details
in which such documents differ (Exhibit 10(n) to the Form 10
(File No. 0-22098) of Insilco).
*10(h) - Form for Income Protection Agreement adopted by Insilco as of
December, 1996, entered into between Insilco and the officers
identified in Exhibit 10(g) (Exhibit 10(h) of the Form 10-K of
Insilco for the Year Ended December 31, 1996 (File No.
0-22098)).
*10(i) - Extension Agreement between Insilco and Robert L. Smialek
dated May 1, 1996 (Exhibit 10(l) to the Form 10-K of Insilco for
the Year Ended December 31, 1997 (File No. 0-22098)).**
*10(j) - Second Extension Agreement between Insilco and Robert L.
Smialek dated September 25, 1997 (Exhibit 10(m) to the Form 10-K
of Insilco for the Year Ended December 31, 1997 (File No.
0-22098)).**
*21 - Subsidiaries of Insilco Holding Co. (Exhibit 21 to the
Registration Statement on Form S-1 (File No. 333-65039)).
23(a) - Consent of KPMG LLP.
***24 - Power of Attorney of officers and directors of Insilco
Holding Co. appearing on the signature page hereof.
*25(a) - Statement of Eligibility and Qualification Under the Trust
Indenture Act of 1939 (T-1) of The Bank of New York (bound
separately) (Exhibit 25 to the Registration Statement on Form
S-4 (File No. 333-36523) of Insilco).
*25(b) - Statement of Eligibility of Star Bank, N.A. on Form T-1
(Exhibit 25.1 to the Registration Statement on Form S-1 (File
No. 333-65039)).
***27 - Financial Data Schedule.
***99(a) - Schedule II - Valuation and Qualifying Accounts.
* Incorporated by reference, as indicated.
** Designates management contracts and compensatory plans or arrangements in
which directors or executive officers participate.
*** Previously filed
48
<PAGE> 49
(B) REPORTS ON FORM 8-K
A report, dated October 15, 1998, on Form 8-K was pursuant to Items 5
and 7 of that form.
A report, dated October 29, 1998, on Form 8-K was filed pursuant to
Items 5 and 7 of that form.
(C) EXHIBITS
The Exhibits to this report begin immediately following the
Consolidated Financial Statements.
(D) FINANCIAL STATEMENT SCHEDULES:
See Exhibit 99(a) - Schedule II - Valuation and Qualifying Accounts.
Note: All other schedules called for under Regulation S-X not included
herein have been omitted because they are not applicable, the
required information is not material or the required information
is included in the financial statements or notes thereto.
49
<PAGE> 50
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.
INSILCO HOLDING CO.
Date: April 30, 1999 By: /s/ David A. Kauer
---------------------------------------
David A. Kauer
Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the date indicated.
<TABLE>
<S> <C> <C>
Robert L. Smialek* President, Chief Executive )
- ----------------------------- Officer and Director )
Robert L. Smialek (Principal Executive Officer) )
David A. Kauer* Vice President and Chief )
- ----------------------------- Financial Officer )
David A. Kauer (Principal Accounting Officer)
Thompson Dean* )
- -----------------------------
Thompson Dean Director )
William F. Dawson* )
- -----------------------------
William F. Dawson Director )
Keith Palumbo* Director ) April 30, 1999
- -----------------------------
Keith Palumbo )
Randall E. Curran* Director )
- -----------------------------
Randall E. Curran )
John F. Fort III* )
- -----------------------------
John F. Fort III Director )
David Y. Howe* )
- -----------------------------
David Y. Howe Director )
/s/ David A. Kauer
- -----------------------------
B*David A. Kauer
Attorney-in-Fact
</TABLE>
50
<PAGE> 51
INSILCO HOLDING CO. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
- December 31, 1998
- December 31, 1997
Consolidated Statements of Operations F-4
- Year ended December 31, 1998
- Year ended December 31, 1997
- Year ended December 31, 1996
Consolidated Statement of Stockholders' Equity (Deficit)
- For the years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows F-7
- Year ended December 31, 1998
- Year ended December 31, 1997
- Year ended December 31, 1996
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 52
Independent Auditors' Report
The Board of Directors and Stockholders
Insilco Holding Co.:
We have audited the accompanying consolidated financial statements of Insilco
Holding Co. and subsidiaries as listed in the accompanying index. In conjunction
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule of valuation and qualifying accounts. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Insilco Holding Co.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
Columbus, Ohio KPMG LLP
February 10, 1999, except as
to the fourth paragraph
of Note 7, which
is as of March 26, 1999
F-2
<PAGE> 53
INSILCO HOLDING CO. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
Assets 1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,404 10,651
Trade receivables, net 74,969 67,209
Other receivables 4,337 3,477
Receivables from related party 4,882 -
Inventories, net 64,565 60,718
Deferred taxes 6,143 277
Prepaid expenses and other current assets 4,387 2,716
------- ------
Total current assets 166,687 145,048
Property, plant and equipment, net 114,756 113,971
Deferred taxes 1,902 1,054
Other assets and deferred charges 43,929 42,600
------- ------
Total assets $327,274 302,673
======== =======
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of long-term debt $ 1,265 1,684
Accounts payable 34,513 39,757
Customer deposits 24,981 20,346
Accrued expenses and other 39,352 43,753
------- ------
Total current liabilities 100,111 105,540
Long-term debt, excluding current portion 383,062 256,059
Other long-term obligations, excluding current portion 46,329 43,402
15% Preferred Stock; 3,000,000 shares
authorized, 1,400,000 shares issued and outstanding at
December 31, 1998 (none at December 31, 1997) 34,094 -
Stockholders' equity (deficit):
Common stock, $.001 par value; 15,000,000 shares authorized;
1,384,614 shares issued and outstanding, 15,000,000 shares
authorized in 1997, 4,548,373 shares issued and 4,080,693
shares outstanding 1 5
Treasury stock, at cost - (16,268)
Additional paid-in capital 63,890 -
Accumulated deficit (295,115) (82,756)
Accumulated other comprehensive income (5,098) (3,309)
------- ------
Total stockholders' equity (deficit) (236,322) (102,328)
------- ------
Commitments and contingencies (See Notes 10, 14 and 19)
Total liabilities and stockholders' equity (deficit) $327,274 302,673
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 54
INSILCO HOLDING CO. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales $ 535,629 528,233 492,405
Cost of products sold 383,269 370,845 344,912
Depreciation and amortization 20,159 18,377 15,357
Selling, general and administrative expenses 91,488 87,909 82,203
Merger expenses 25,529 - -
Severance and write-downs 2,542 - 1,500
--------- ------- -------
Operating income 12,642 51,102 48,433
--------- ------- -------
Other income (expense):
Interest expense (32,894) (20,562) (18,378)
Interest income 979 2,837 724
Equity in net income of Thermalex 2,850 2,647 2,922
Other income, net 3,027 794 4,784
--------- ------- -------
Total other expense (26,038) (14,284) (9,948)
--------- ------- -------
Income (loss) from continuing operations before
income taxes and extraordinary item (13,396) 36,818 38,485
Income tax benefit (expense) 1,253 (13,404) (13,272)
--------- ------- -------
Income (loss) from continuing operations before
extraordinary item (12,143) 23,414 25,213
Discontinued operations, net of tax:
Income from operations - 1,170 8,741
Gain on disposal - 57,788 5,099
--------- ------- -------
Income from discontinued operations - 58,958 13,840
--------- ------- -------
Income (loss) before extraordinary item (12,143) 82,372 39,053
Extraordinary items, net of tax (5,888) (728) -
--------- ------- -------
Net income (loss) (18,031) 81,644 39,053
Preferred stock accretion (2,044) - -
--------- ------- -------
Net income (loss) available to common $(20,075) 81,644 39,053
========= ======= =======
Basic earnings (loss) available per common share:
Income (loss) from continuing operations $ (4.49) 3.25 2.65
Discontinued operations - 8.19 1.45
Extraordinary item (1.86) (0.10) -
--------- ------- -------
Basic net income (loss) per share $ (6.35) 11.34 4.10
========= ======= =======
Diluted earnings (loss) available per common share:
Income (loss) from continuing operations $ (4.49) 3.19 2.55
Discontinued operations - 8.03 1.40
Extraordinary item (1.86) (0.10) -
--------- ------- -------
Diluted net income (loss) per share $ (6.35) 11.12 3.95
========= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 55
INSILCO HOLDING CO. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit) For
the Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Accumulated Total
Additional Other Stockholders'
Common Stock Treasury Paid-in Accumulated Comprehensive Equity
Par Value $.001 Stock Capital Deficit Income (Deficit)
--------------- -------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 10 (6,813) 67,192 (76,168) - (15,779)
Comprehensive income:
Net income - - - 39,053 - 39,053
Other comprehensive income:
Foreign currency translation adjustment - - - - (244) (244)
-- ------- ------ ------- ---- ------
Total comprehensive income 38,809
-- ------- ------ ------- ---- ------
Tax benefit from reduction of valuation
allowance for deferred tax assets - - 10,237 - - 10,237
Purchase of treasury stock - (3,932) - - - (3,932)
Restricted stock - - 3,300 - - 3,300
Issuance of shares upon exercise of
stock options - - 1,071 - - 1,071
Reserved shares - - (706) - - (706)
Tax benefit from exercise of stock options - - 402 - - 402
-- ------- ------ ------- ---- ------
Balance at December 31, 1996 10 (10,745) 81,496 (37,115) (244) 33,402
Comprehensive income:
Net income - - - 81,644 - 81,644
Other comprehensive income:
Foreign currency translation - - - - (3,065) (3,065)
adjustment
-- ------- ------ ------- ---- ------
Total comprehensive income 78,579
-- ------- ------ ------- ---- ------
Repurchase of shares (5) - (92,710) (127,285) - (220,000)
Costs of Tender Offer - - (889) - - (889)
Purchase of treasury stock - (5,523) - - - (5,523)
Restricted stock - - 571 - - 571
Issuance of shares upon exercise of
stock options - - 8,255 - - 8,255
Tax benefit from exercise of stock options - - 3,277 - - 3,277
-- ------- ------ ------- ---- ------
Balance at December 31, 1997 5 (16,268) - (82,756) (3,309) (102,328)
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 56
INSILCO HOLDING CO. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit) For
the Years Ended December 31, 1998, 1997 and 1996
(In thousands)
(continued)
<TABLE>
<CAPTION>
Accumulated Total
Additional Other Stockholders'
Common Stock Treasury Paid-in Accumulated Comprehensive Equity
Par Value $.001 Stock Capital Deficit Income (Deficit)
--------------- -------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 5 (16,268) - (82,756) (3,309) (102,328)
Comprehensive income:
Net loss - - - (18,031) - (18,031)
Other Comprehensive income:
Foreign currency - - - - 16 16
translation adjustment
Minimum pension
liability adjustment, net of
tax of $1,130 - - - - (1,805) (1,805)
-- ------- ------ ------- ---- ------
Total comprehensive income (19,820)
- -------
Cash merger consideration - - - (180,241) - (180,241)
Merger Eliminations (Note 1) (5) 16,268 (4,220) (12,043) - -
Accretion of preferred stock - - - (1,994) - (1,994)
Amortization of issuance discounts - - - (50) - (50)
Issuance of common stock 1 - 56,007 - - 56,008
Issuance of warrants - - 5,226 - - 5,226
Issuance of shares upon exercise of stock
options - - 3,281 - - 3,281
Issuance of equity units to management - - 2,657 - - 2,657
Tax benefit from exercise of stock options - - 939 - - 939
-- ------- ------ ------- ---- ------
Balance at December 31, 1998 $ 1 - 63,890 (295,115) (5,098) (236,322)
=== ======= ====== ======== ====== ========
</TABLE>
F-6
<PAGE> 57
INSILCO HOLDING CO. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (18,031) 81,644 39,053
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 20,159 18,377 15,357
Deferred tax expense (benefit) (5,773) 11,679 11,667
Other noncash charges and credits 8,993 (127) (4,904)
Changes in operating assets and liabilities:
Receivables (7,224) (1,297) (3,370)
Inventories (2,360) (3,304) 791
Payables and other 4,668 10,171 (1,371)
Discontinued operations - (71,632) (1,800)
------- ------ -------
Net cash provided by operating 432 45,511 55,423
activities
------- ------ -------
Cash flows from investing activities:
Capital expenditures (20,155) (23,583) (20,009)
Acquisitions of businesses, net of cash acquired (2,308) - (37,726)
Other investing activities (903) 6,190 8,704
Proceeds from divestitures, net - 112,610 21,818
Discontinued operations - - (2,570)
------- ------ -------
Net cash provided by (used in) investing (23,366) 95,217 (29,783)
------- ------ -------
activities
Cash flows from financing activities:
Cash merger consideration (180,241) - -
Sale (retirement) of 10 1/4% Notes (148,474) 150,000 -
Borrowings (repayments) of Revolving Facility (41,498) 64,759 -
Debt issuance and tender costs (16,394) (10,689) -
Payment of prepetition liabilities (2,735) (2,811) (2,862)
Funds deposited in excess of retired 10 1/4% Notes (2,032) - -
Borrowing (retirement) of Term Facility 123,825 (117,246) (26,330)
Proceeds from 12% Notes and warrants 120,000 - -
Proceeds from sale of 14% Notes and warrants 70,205 - -
Issuance of common stock 56,008 - -
Issuance of preferred stock and warrants 35,000 - -
Proceeds from stock option exercise 3,281 4,618 1,071
Issuance of equity units to management 2,657 - -
Repurchase of shares - (220,000) -
Purchase of treasury stock - (1,887) (3,932)
------- ------ -------
Net cash provided by (used in) financing 19,602 (133,256) (32,053)
activities
------- ------ -------
Effect of exchange rate changes on cash 85 (302) -
------- ------ -------
Net increase (decrease) in cash and cash (3,247) 7,170 (6,413)
equivalents
Cash and cash equivalents at beginning of period 10,651 3,481 9,894
------- ------ -------
Cash and cash equivalents at end of period 7,404 10,651 3,481
======= ====== =======
Supplemental information - cash paid for:
Interest, net of capitalized amount $ 31,744 13,305 17,820
======= ====== =======
Income taxes paid (refunded) $ (4,908) 7,062 2,081
======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 58
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) History of the Company
Insilco Holding Co. ("Holdings" or the "Company"), a Delaware corporation,
is a diversified producer of automotive, telecommunications and electronics
components and is a specialty publisher of student yearbooks. 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 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. 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
$0.001 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 Company incurred $25,529,000 of costs related to the Merger in 1998.
Discontinued Operations
On March 5, 1997, the Company completed the sale of its Office Products
Business, a significant line of business within the Company's Office
Products/Specialty Publishing Group, with the
F-8
<PAGE> 59
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
divestiture of its traditional office products business (the "Rolodex
Business") for $112,610,000, net of transaction costs, which resulted in a
net 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.
The accompanying consolidated statements of operations and cash flows are
reclassified to account for the sale of the Office Products Business as a
discontinued operation. Revenues associated with the discontinued Office
Products Business for the years 1997 and 1996 were $10,797,000 and
$80,069,000, respectively. At December 31, 1996, the current and
non-current net assets of the Office Products Business were $6,531,000 and
$8,934,000, respectively.
Acquisitions
In 1996, the Company acquired Great Lake, Inc. ("Great Lake"), which serves
the automotive, heavy truck and industrial manufacturing radiator
replacement market and the automotive aluminum tube business of Helmut
Lingemann GmbH & Co. (the "Lingemann Business") for approximately
$37,726,000 in the aggregate including transaction fees and expenses. The
Lingemann transactions include the purchase of stock of Lingemann's German
subsidiary, ARUP Alu-Rohr und-Profil GmbH, and the automotive aluminum tube
business assets of its Duncan, South Carolina based Helima-Helvetion
International, Inc. This cash transaction was financed principally from
borrowings under the Company's prior bank credit agreement (See Note 7).
These acquisitions have been accounted for as purchases and, accordingly,
the purchase prices have been allocated to the assets and liabilities
acquired based on their fair values at the acquisition dates. The operating
results of the businesses acquired have been included for the period
subsequent to their acquisition dates. (See Note 22 for pro forma results).
The fair value of the assets acquired totaled $47,478,000 and the
liabilities assumed totaled $9,752,000.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial statements
of the Company and its wholly owned subsidiaries. The Company's
investments in companies for which the Company does not have
operational control are accounted for under the equity method. All
significant intercompany balances and transactions have been
eliminated.
Pro Forma Results of Operations
In 1998 the Company completed the Mergers (See Note 1). In addition,
during 1997, the Company completed a Share Repurchase of approximately
59% of its outstanding shares partially with the proceeds from the
divestiture of its traditional office products business (See Note 1)
and partially through the issuance of subordinated notes and
refinancing of its bank credit agreement (See Note 7). These
transactions affect the comparability of the Company's financial
position, results of operations and cash flows for 1998 compared to
prior periods. As a result of these transactions, the Company has
presented pro forma results of operations for 1998 and 1997 as if all
of these transactions except the divestiture of the Office Products
F-9
<PAGE> 60
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Business (which is being accounted for as a discontinued operation)
occurred at the beginning of the respective periods in Note 22.
Cash Equivalents
Cash equivalents include time deposits and highly liquid investments
with original maturities of three months or less.
Trade Receivables
Trade receivables are presented net of allowances for doubtful
accounts and sales returns of $2,780,000 and $2,132,000 at December
31, 1998 and 1997, respectively.
Inventories
Inventories are valued at the lower of cost or market. Cost is
generally determined using the first-in, first-out cost method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of
plant and equipment is calculated on the straight-line method over the
assets' estimated useful lives, which is 25 years for new buildings
and ranges from 3 to 9 years for machinery and equipment.
Deferred Financing Costs
Deferred financing costs are being amortized using the effective
interest method over the life of the related debt.
Goodwill
Goodwill represents the excess of cost of net assets acquired in
business combinations over their fair values. It is amortized on a
straight-line basis over estimated periods to be benefited (not
exceeding 40 years). The recovery of the carrying value of goodwill is
periodically evaluated in relation to the operating performance and
future undiscounted net cash flows of the related businesses acquired.
Interest Rate Hedges
The Company periodically uses interest rate hedges to limit its
exposure to the interest rate risk associated with its floating rate
long-term bank debt. Unamortized premium related to purchased interest
rate caps is included in other assets in the balance sheet and is
amortized using the interest method over the life of the related
agreements. Amounts received under cap agreements and net amounts
received (or paid) under swap agreements are recorded as a reduction
(addition) to interest expense. As of December 31, 1998, the Company
had no interest rate derivative instruments to manage exposure to
interest changes.
F-10
<PAGE> 61
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Environmental Remediation and Compliance
Environmental remediation and compliance expenditures are expensed or
capitalized in accordance with generally accepted accounting
principles. Liabilities are recorded when it is probable the
obligations have been incurred and the amounts can be reasonably
estimated.
Fair Value of Financial Instruments
Fair value of cash, accounts receivable, accounts payable and accrued
liabilities approximate book value at December 31, 1998. Fair value of
debt is based upon market value, if traded, or discounted at the
estimated rate the Company would incur currently on similar debt (See
Note 8).
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are determined based upon
differences between the financial reporting and tax basis of assets
and liabilities and are measured by applying enacted tax rates and
laws to taxable years in which such differences are expected to
reverse.
Earnings Per Share
The Company accounts for earnings per share ("EPS") under Statement of
Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per
Share". Under SFAS 128, the Company computes two earnings per share
amounts - basic EPS and EPS assuming dilution. Basic EPS is calculated
based on the weighted average number of shares of common stock
outstanding for the period. EPS assuming dilution is based on the
weighted average number of shares of common stock outstanding for the
period, including common stock equivalents which reflect the dilutive
effect of stock options granted to employees and directors.
Estimates
In conformity with generally accepted accounting principles, the
preparation of our financial statements requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and therefore actual results may ultimately
differ from those estimates.
Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform with
1998 presentation.
Impact of Recently Issued Accounting Standards
In January 1998, the Company adopted 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. In addition, in January 1998, the
Company adopted Statement No. 132 ("SFAS 132"), "Employers'
Disclosures About Pensions
F-11
<PAGE> 62
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
and Other Post-retirement Benefits", which revises employer disclosure
about pension plans and other post-retirement benefits. SFAS 132 does
not change the method of accounting for such plans. Prior year amounts
in the notes to the consolidated financial statements have been
reclassified to conform to the requirements of SFAS 132.
On January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". SFAS 131 establishes
standards for reporting information about operating segments in annual
financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
The adoption of SFAS 131 did not affect results of operations or
financial position, but did affect the disclosure of segment
information (See Note 20).
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which is required to
be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after
its issuance. The Company expects to adopt the new Statement effective
January 1, 2000. The Statement will require companies to recognize all
derivatives on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through income. If a
derivative is a hedge, depending on the nature of the hedge, changes
in the fair value of the derivative will either be offset against the
change in fair value of the hedged asset, liability, or firm
commitment through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not anticipate
that the adoption of this Statement will have a significant effect on
its results of operations or financial position.
(3) Inventories
A summary of inventories at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials and supplies $ 27,238 25,396
Work in process 23,559 23,427
Finished goods 13,768 11,895
------ ------
$ 64,565 60,718
====== ======
</TABLE>
F-12
<PAGE> 63
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Property, Plant and Equipment
A summary of property, plant and equipment at December 31 follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 6,285 6,267
Buildings 37,311 33,718
Machinery and equipment 151,714 137,310
------- -------
195,310 177,295
Less accumulated depreciation (80,554) (63,324)
------- -------
$ 114,756 113,971
======= =======
</TABLE>
(5) Other Assets
A summary of other assets at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Goodwill, net $ 13,566 13,408
Equity investment in Thermalex 8,412 9,736
Deferred financing costs 14,085 9,246
Cash surrender value of life insurance 1,758 4,636
Other 6,108 5,574
----- -----
$ 43,929 42,600
======= ======
</TABLE>
Thermalex, Inc. ("Thermalex") is a joint venture, formed in 1985 between a
subsidiary of the Company and Mitsubishi Aluminum, Ltd., which sells
aluminum extruded products to the automobile industry. The Company received
$1,324,000 and $1,461,000 of dividend distributions from Thermalex in 1998
and 1997, respectively.
Sales for Thermalex for the years ended December 31, 1998, 1997 and 1996
were $49,547,000, $47,152,000 and $48,057,000, respectively. Net income for
the years ended December 31, 1998, 1997 and 1996 was $5,699,000, $5,294,000
and $5,844,000, respectively. Total assets were $35,717,000 and $36,348,000
at December 31, 1998 and 1997, respectively. Stockholders' equity was
$16,828,000 and $19,475,000 at December 31, 1998 and 1997, respectively.
(6) Accrued Expenses and Other
A summary of accrued expenses and other at December 31 follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Salaries and wages payable $ 7,977 9,445
Pension 8,837 5,523
Accrued interest payable 4,227 8,038
Current portion of the long term obligations 1,945 5,393
Accrued taxes payable 1,623 1,112
Other accrued expenses 14,743 14,242
------ ------
$ 39,352 43,753
======= ======
</TABLE>
F-13
<PAGE> 64
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Long-term Debt and Warrants
A summary of long-term debt at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Term Facility $ 125,000 -
12% Senior Subordinated Notes 119,747 -
14% Senior Discount Notes 71,918 -
Revolving Facility 44,922 87,500
Alternative currency borrowings 21,000 18,348
10 1/4% Senior Subordinated Notes 1,526 150,000
Miscellaneous 214 1,895
------ ------
384,327 257,743
Less current portion (1,265) (1,684)
------ ------
$ 383,602 256,059
======= =======
</TABLE>
On August 12, 1998, the Company issued and sold $138,000,000 principal
amount at maturity ($70,204,740 initial accreted value) of Holdings' 14%
Senior Discount Notes due 2008 (the "14% Notes") and detachable warrants to
purchase 44,850 shares of Holdings' Common Stock. The 14% Notes will
accrete at a rate of 14%, compounded semi-annually, to par by August 15,
2003. Commencing August 15, 2003, the 14% Notes bear interest at a rate of
14% per annum, payable semi-annually in cash arrears on February 15 and
August 15 of each year, commencing on February 15, 2004.
The 14% Notes are not redeemable prior to August 15, 2003. Thereafter, they
are subject to redemption for 107.000% of the accreted value from August
15, 2003 to August 14, 2004, 104.667% from August 15, 2004 to August 14,
2005, 102.333% from August 15, 2005 to August 14, 2006 and 100.000% on or
after August 15, 2006, plus any accrued and unpaid interest from August 15,
2003 to the redemption date. As of December 31, 1998, all of the 138,000
warrants to purchase 44,850 shares of the Company's Common Stock at a
purchase price of $0.01 per share remained outstanding and expire on August
15, 2008.
The indentures governing the 14% Notes contain certain covenants, which
limit the Company's ability to (i) incur additional indebtedness; (ii) make
restricted payments (including dividends); (iii) enter into certain
transactions with affiliates; (iv) create certain liens; (v) sell certain
assets; and (vi) merge, consolidate or sell substantially all of the
Company's assets.
As a result of the Merger (See Note 1), Insilco 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 the entire $150 million of
outstanding 10 1/4% Notes, which were issued on August 12, 1997, at 101% of
their aggregate principal amount, plus accrued interest. Through March 26,
1999, Insilco repurchased $149,974,000 of the 10 1/4% Notes.
On November 9, 1998, the Company completed the sale of $120 million of
Insilco 12% Senior Subordinated Notes due 2007 (the "12% Notes") with
120,000 warrants to purchase 62,400 shares of Holdings common stock at $45
per share. The net proceeds of approximately $116.4 million, after payment
of $3.6 million in underwriting fees to Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJSC") and other expenses, was used (along with
borrowings from the credit facilities) to fund the repurchase of the 10
1/4% Notes. As of December 31, 1998, all of the 120,000 warrants to
purchase 62,400 shares of the Company's Common Stock at a purchase price of
$45.00 per share remained outstanding and expire on August 15, 2007.
F-14
<PAGE> 65
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On November 24, 1998, the Company amended and restated Insilco's Bank
Credit Agreement ("Bank Credit Agreement"). The Bank Credit Agreement
provides for two credit facilities (the "Credit Facilities"): a $175
million, 4.8 year senior secured revolving loan ("Revolving Facility") and
a $125 million, 7 year senior secured amortizing term loan ("Term
Facility").
In 1998, the Company recorded an extraordinary charge of $5,888,000, (net
of a tax benefit of $3,958,000) related to the write-off of deferred
financing costs associated with its 1997 Bank Credit Agreement and 10 1/4%
Notes.
The Revolving Facility provides for a $50 million sublimit for issuance of
letters of credit and a $40 million sublimit for alternative currency
borrowings. The Revolving Facility is permanently reduced by $17.5 million
per year in July 2001 and July 2002.
The Term Facility is subject to mandatory quarterly prepayments of $312,500
for the first six years and quarterly payments of approximately $29.4
million in the seventh year.
Interest accrues under the Credit Facilities at floating rates calculated
with respect to either the London Interbank Offered Rate ("LIBOR") or The
First National Bank of Chicago's Base Rate, plus an applicable margin. The
margin, in turn, fluctuates based on the leverage ratio (as defined in the
Bank Credit Agreement). The Company also pays an unused commitment fee,
which also fluctuates based upon the leverage ratio of the Company and is
based upon availability under the Revolving Facility. At December 31, 1998,
the applicable margin for the Term Facility and the Revolving Facility were
LIBOR plus 3.75% and LIBOR plus 3.00%, respectively. The unused commitment
fee at December 31, 1998 was 0.625%. The applicable margins and unused
commitment fee are fixed through May 1999 and thereafter are determined by
the Company's leverage ratio.
Both the Term Facility and Revolving Facility are subject to mandatory
prepayments due to, but not limited to, 100% of the net cash proceeds from
assets sales and issuance of debt and 50% of the net cash proceeds from the
issuance of equity.
The Credit Facilities are guaranteed by Insilco and by all of Insilco's
present and future domestic subsidiaries. The obligations thereunder are
secured by (i) all of the common stock of the Company; (ii) all or a
substantial portion of the common stock or other interests in the Company's
present and future subsidiaries; (iii) the present and future property and
assets, including all accounts receivable, inventory, equipment, fixtures,
patents, trademarks and specified real property of the Company and its
present and future domestic subsidiaries (subject to certain qualifications
and exceptions); and, (iv) a collateral assignment of intercompany notes
and junior security agreements securing all obligations of the domestic
subsidiaries to the Company.
The Credit Facilities contain certain consolidated financial covenants
including, but not limited to, covenants related to maximum leverage ratio,
minimum fixed charge coverage ratio, minimum interest coverage ratio, and a
limit on annual capital expenditures. The Credit Facilities also contain
certain negative covenants typical of credit agreements of this type
including, but not limited to a prohibition on the ability of the Company
and its domestic subsidiaries to incur additional indebtedness in excess of
certain agreed upon amounts, the ability to make investments other than
permitted investments, and restricts the Company and its subsidiaries from
paying any dividends, redeem or repurchase or acquire any of the Company or
Holdings shares or pay any principal,
F-15
<PAGE> 66
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
premium or interest (in excess of certain agreed upon amounts) on any
subordinated obligations.
The Company was in compliance with the covenants of its Credit Facilities
as of December 31, 1998.
As of December 31, 1998, under the sublimit for alternative currency
borrowings, the Company had borrowed $21.0 million (35.0 million German
Deutsche Marks). The Company's alternative currency borrowing is designed
to hedge the Company's net investment in its German operations. The change,
if any, to the net investment as a result of foreign currency fluctuations
is included in stockholders' equity as a foreign currency translation
adjustment. The alternative currency borrowing is denominated in German
Deutsche Marks and bears interest based on one to six month German LIBOR
rates plus an applicable margin based on the Company's leverage ratio (such
LIBOR rates approximated 3.22% to 3.25% at December 31, 1998).
In 1997, the Company refinanced its then existing debt under a six year
$200 million amended and restated credit agreement (the "1997 Bank Credit
Agreement") which provided for the 1997 Credit Facility.
In 1997, proceeds from the 1997 Bank Credit Agreement were used to prepay
amounts outstanding under the prior bank credit agreement. As a result of
the prepayment, the Company recorded an extraordinary charge of $728,000
(net of a tax benefit of $465,000) due to expensing the related unamortized
debt financing costs.
(8) Fair Value of Financial Instruments
The estimated fair value at December 31 of financial instruments, other
than current assets and liabilities, follow (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Estimated Estimated
Book Value Fair Value Book Value Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Debt:
12% Senior Subordinated Notes $ 119,747 123,600 - -
14% Senior Discount Notes 71,918 62,100 - -
10 1/4% Senior Subordinated
Notes 1,526 1,541 $ 150,000 154,500
Bank revolving credit facility 65,922 65,922 105,848 105,848
Bank term loan 125,000 125,000 - -
Miscellaneous 214 214 1,895 1,895
------- ------- ------- -------
$ 384,327 378,377 $ 257,743 262,243
======= ======= ======= =======
Hedges:
Interest rate $ - - $ - 423
======= ======= ======= =======
</TABLE>
The Company is exposed to market risk for changes in interest rates, but
has no off-balance sheet risk of accounting loss. The Company manages
counterparty credit risk by entering into derivative transactions with high
quality financial institutions that, because of their credit profile, are
expected to perform under the terms associated with such transactions.
F-16
<PAGE> 67
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) 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 Credit
Facilities and the 12% Note indenture and Insilco is party to the 12% 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 Credit Facilities. Under the most restrictive
covenants, $5.0 million was free of limitations on the payment of dividends
or other distributions at December 31, 1998.
(10) Other Long-Term Liabilities
A summary of other long-term liabilities at December 31 follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Post-retirement benefits, other than pensions (Note 12) $ 22,263 22,191
Prepetition and other tax liabilities 16,165 15,762
Environmental liabilities 7,351 8,625
Deferred compensation and other 2,495 2,217
------- -------
48,274 48,795
Less current portion (1,945) (5,393)
------- -------
$ 46,329 43,402
======= =======
</TABLE>
Prepetition and Other Tax Liabilities
On April 1, 1993, the Company and certain of its subsidiaries emerged from
Chapter 11 of the United States Bankruptcy Code (the "Chapter 11 Cases")
pursuant to a plan of reorganization. The Chapter 11 Cases were commenced
on January 13, 1991. The Company entered into an agreement with the
Internal Revenue Service ("IRS") settling Federal income tax claims filed
in the Chapter 11 Cases for open taxable years through 1990. In addition to
this agreement, the tax liabilities include prepetition state tax claim
settlements, negotiated payment terms on certain foreign prepetition tax
liabilities, and an estimate of the Company's obligation for curative
action required by the IRS to cure certain operational defects in one of
the Company's defined contribution plans.
Environmental Liabilities
The Company's operations are subject to extensive Federal, state and local
laws and regulations relating to the generation, storage, handling,
emission, transportation and discharge of materials into the environment.
The Company has a program for monitoring its compliance with applicable
environmental regulations, the interpretation of which often is subjective.
This program includes, but is not limited to, regular reviews of the
Company operations' obligations to comply with environmental laws and
regulations in order to determine the adequacy of the recorded liability
for remediation activities.
F-17
<PAGE> 68
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The environmental liabilities included in other long-term obligations
represent the estimate of cash obligations that will be required in future
years for these environmental remediation activities. The Company has
estimated the exposure and accrued liability to be approximately $7,351,000
relating to these environmental matters at December 31, 1998. These
liabilities are undiscounted and do not assume any possible recoveries from
insurance coverage or claims which the Company may have against third
parties. The estimate is based upon in-house engineering expertise and the
professional services of outside consulting and engineering firms. Because
of uncertainty associated with the estimation of these liabilities and
potential regulatory changes, it is reasonably possible that these
estimated liabilities could change in the near term but it is not expected
that the effect of any such change would be material to the consolidated
financial statements in the near term.
(11) Preferred Stock and Warrants
On August 12, 1998, the Company issued and sold $73,000,000 principal
amount at maturity ($35,000,000 initial accreted value) of the Company's
15% Senior Exchangeable Preferred Stock Due 2010 ("PIK Preferred Stock")
and detachable warrants to purchase 65,603 shares of the Company's Common
Stock. As of December 31, 1998, all of the 65,603 warrants to purchase
65,603 shares of the Company's Common Stock at a purchase price of $0.001
per share remained outstanding and expire August 1, 2010.
The Company has authorized 3,000,000 shares of PIK Preferred Stock, par
value $0.001 per share. Each share of PIK Preferred Stock accretes
cumulative, quarterly dividends at a compound rate of 15% per annum. Prior
to August 1, 2003, dividends on the PIK Preferred Stock are payable in
additional shares of PIK Preferred Stock. After August 1, 2003, dividends
are payable in cash. Shares of PIK Preferred Stock have a liquidation
preference equal to the sum of $25 plus, subject to certain conditions,
accreted dividends. The PIK Preferred Stock is subject to redemption at the
option of the Company at any time, at 115.00% of liquidation preference
prior to August 1, 2003, at 107.50% of liquidation preference from August
1, 2003 to July 31, 2004, at 105.00% of liquidation preference from August
1, 2004 to July 31, 2005, at 102.50% of liquidation preference from August
1, 2005 to July 31, 2006, and at 100.00% of liquidation preference
thereafter.
The PIK Preferred Stock is non-voting and is mandatorily redeemable on
August 1, 2010.
On January 31, 1999, the Company accreted $2.5 million toward the payment
of dividends on the PIK Preferred Stock.
(12) Pension Plans and Post-retirement Benefits
Pension Plans
The Company has defined benefit pension plans covering certain of its
employees. The benefits under these plans are based primarily on employees'
years of service and compensation near retirement. The Company's funding
policy is consistent with the funding requirements of Federal laws and
regulations. Plan assets consist principally of equity investments,
government and corporate debt securities and real estate investments. The
Company also contributes to various multi-employer plans sponsored by
bargaining units for its union employees.
F-18
<PAGE> 69
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of the plans' funded status reconciled with amounts recognized in
the consolidated balance sheet at December 31 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of
year $ 67,312 23,564 66,824 12,979
Service cost 2,241 808 1,967 352
Interest cost 4,562 1,655 4,743 895
Amendments - - - 475
Actuarial (gain) loss (658) 1,904 10,412 1,563
Benefits paid (7,141) (1,362) (8,464) (870)
------ ------ ------ ------
Benefit obligation at end of year $ 66,316 26,569 75,482 15,394
------ ------ ------ ------
Change in plan assets:
Fair value of plan assets at beginning
of year $ 78,440 19,535 82,046 9,718
Actual return on assets 3,274 786 13,091 1,597
Employer contribution 77 781 215 641
Benefits paid (7,141) (1,362) (8,464) (870)
------ ------ ------ ------
Fair value of plan assets at end of year 74,650 19,740 86,888 11,086
------ ------ ------ ------
Funded status 8,334 (6,829) 11,406 (4,308)
Unrecognized net actuarial (gain) loss (10,299) 2,131 (13,073) (414)
Unrecognized prior service cost (1,136) 1,738 (1,188) 2,054
------ ------ ------ ------
Accrued benefit cost $ (3,101) (2,960) (2,855) (2,668)
======= ====== ====== ======
Amounts recognized in the statement of
financial position consist of:
Accrued benefit liability $ (3,101) (5,736) (2,855) (3,674)
Intangible asset - 971 - 1,006
Accumulated other comprehensive
income - 1,805 - -
------ ------ ------ ------
Net amount recognized $ (3,101) (2,960) (2,855) (2,668)
======= ====== ====== =====
</TABLE>
F-19
<PAGE> 70
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The components of pension cost follow (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost $ 3,049 2,320 2,162
Interest cost 6,217 5,639 5,745
Actual return on assets (8,135) (6,826) (6,564)
Net amortization and deferral 263 86 97
Recognized net actuarial loss (gain) 2 (208) (142)
------- ----- ------
Net pension cost $ 1,396 1,011 1,298
======= ===== =====
</TABLE>
In addition, the Company recognized pension costs of $740,000 in 1998,
$597,000 in 1997 and $880,000 in 1996 related to contributions to
multi-employer plans.
The assumptions used in accounting for the pension plans as of December 31
follow:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Discount rates 7.00% 7.25%
Rates of increase in compensation levels 4.50% 4.50%
Expected long-term rate of return on assets 9.00% 9.00%
</TABLE>
In addition to the defined benefit plans described above, the Company
sponsors a qualified defined contribution 401(k) plan, which covers
substantially all non-union employees of the Company and its subsidiaries,
and which covers union employees at one of the Company's subsidiaries. The
Company matches 50% of non-union participants' voluntary contributions up
to a maximum of 3% of the participant's compensation. The Company's expense
was approximately $821,000 in 1998, $819,000 in 1997 and $738,000 in 1996.
Post-retirement benefits, other than pensions
The Company maintains nine post-retirement health care and life insurance
benefit plans, four of which cover approximately 500 present retirees (the
"Retiree Plans") and five of which cover certain retirees and current
employees of four operating units (the "Open Plans"). The Company pays
benefits under the plans when due and does not fund its plan obligations as
they accrue. The Company's accrued post-retirement benefit cost is
attributable to the Retiree Plans and one of the Open Plans, in which
approximately 100 retirees and 300 current employees were participants. It
has been assumed that plan participant contributions, if any, under these
five plans will increase as a result of increases in medical costs. The
other Open Plans have been, and are assumed will continue to be, fully
self-funded by their participants.
F-20
<PAGE> 71
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The components of net periodic post-retirement benefit cost follow (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 384 400 492
Interest cost 1,104 1,099 1,154
Amortization of prior service cost (352) (352) (274)
Recognized net actuarial gain (45) (85) (91)
------ ----- -----
$1,091 1,062 1,281
====== ===== =====
</TABLE>
A summary of the plans' status reconciled with amounts recognized in the
consolidated balance sheet at December 31 follows (in thousands):
<TABLE>
<CAPTION>
Change in benefit obligation: 1998 1997
---- ----
<S> <C> <C>
Benefit obligation at beginning of year $ 16,848 14,570
Service cost 384 400
Interest cost 1,104 1,099
Actuarial gain (loss) (620) 1,762
Benefits paid (1,019) (983)
------ ------
Benefit obligation at end of year 16,697 16,848
------ ------
Funded status (16,697) (16,848)
Unrecognized net actuarial gain (1,493) (918)
Unrecognized prior service cost (4,073) (4,425)
------- -------
Accrued benefit cost $(22,263) (22,191)
======= =======
</TABLE>
At December 31, 1998 and 1997, the weighted-average discount rates used in
determining the accumulated post-retirement benefit obligation were 7.00%
and 7.25%, respectively. The recorded healthcare cost trend rate assumed in
measuring the accumulated post-retirement benefit obligation was 7.5% in
1999, declining to an ultimate rate of 4.5% in 2011 and thereafter. Assumed
healthcare cost trend rates have a significant effect on the amounts
reported for the healthcare plan. A one-percentage point change in assumed
healthcare cost trend rates in 1998 would have the following effects:
<TABLE>
<CAPTION>
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
<S> <C> <C>
Effect on total of service and interest cost components $ 255 (250)
Effect on post-retirement benefit obligation 3,264 (2,025)
</TABLE>
F-21
<PAGE> 72
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Stock-Based Compensation Plans
In connection with the Mergers, the Company adopted on August 17, 1998, the
following plans: the Equity Unit Plan, Direct Investment Program, and the
Stock Option Plan. Following is a description of each respective plan.
Equity Unit Plan
The Equity Unit Plan allowed members of management of the Company to
purchase Equity Units, which are considered share equivalents of Holdings
stock. The purchase price per unit was $45.00. Participants were allowed to
use either deferred compensation or the deferral of future compensation to
satisfy the purchase price of the units. The value of the units is
determined under an Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") formula or by market-related value if the actual
common shares of Holdings are listed or quoted for trading on a national
exchange or NASDAQ and the aggregate market value held by non-affiliates is
$25,0000,000 or greater. The total number of units available for purchase
under this plan is 88,194. As of December 31, 1998 the number of units
actually purchased was 77,457. Upon the occurrence of a Significant Event,
(as defined in the Equity Unit Plan), the Company is obligated to pay the
participant, at the Company's discretion in cash, common shares, or a
combination of both, the value of any units purchased less any purchase
price that has not been paid. If the value of the units is less than the
amount of remaining purchase price the participant is obligated to satisfy
the difference or the Company has the right to offset any amounts owed the
participant against the remaining purchase price.
Direct Investment Program
The Direct Investment Program allowed members of management of the Company
to purchase actual Holdings shares of common stock at a price of $45.00 per
share. There are certain restrictions on the sale or transfer of these
shares upon the occurrence of a Significant Event such as termination,
future recapitalization or other defined situations. The total number of
shares available for purchase by management was 22,916 shares, with 22,361
shares actually purchased and outstanding as of December 31, 1998.
Stock Options
The Insilco Holding Co. Stock Option Plan provides for the issuance of no
more than 200,000 shares of Holdings common stock to eligible employees of
the Company. As of December 31, 1998, the Company has 200,000 shares
available for future awards under the plan.
Prior to the Mergers, the Company had the 1993 Long-term Incentive Plan, as
amended, and the 1993 Nonemployee Director Stock Incentive Plan which
provided for the issuance of no more than 2,000,000 and 360,000,
respectively, shares of common stock to eligible employees and nonemployee
directors. In connection with the Mergers, each of the 607,751 outstanding
options whether or not vested was canceled and in lieu thereof, each holder
of an option received a cash payment in an amount equal to the excess, if
any, of $45.00 over the exercise price of the option multiplied the number
of shares subject to the option, less applicable withholding taxes.
Under Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation", companies can either record
expense based on the fair value of stock-based
F-22
<PAGE> 73
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
compensation upon issuance or elect to remain under the "APB Opinion No.
25" method whereby no compensation cost is recognized upon grant if certain
conditions are met. The Company is continuing to account for its
stock-based compensation under APB Opinion No. 25. Had the Company
determined compensation cost based on the fair value at the grant date for
its stock options granted in 1998, 1997 and 1996 under SFAS 123, the
Company's net income and earnings per share would have approximated the pro
forma amounts below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss)
available to common As reported $ (20,075) 81,644 39,053
Pro forma (20,118) 81,069 38,748
Basic earnings per share
available to common As reported (6.35) 11.34 4.10
Pro forma (6.36) 11.26 4.07
Diluted earnings per share
available to common As reported (6.35) 11.12 3.95
Pro forma (6.36) 11.06 3.92
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to grants prior to
1995, and additional awards in the future are anticipated.
A summary of the options granted follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Price
------ -----
<S> <C> <C>
Options outstanding December 31, 1995 1,064,003 $22.07
Granted 102,900 34.82
Forfeited (36,670) 26.69
Exercised (59,668) 17.95
---------
Options outstanding December 31, 1996 1,070,565 23.36
Granted 151,500 36.87
Forfeited (30,938) 24.79
Exercised (450,860) 18.27
---------
Options outstanding December 31, 1997 740,267 29.17
Granted 15,500 33.02
Forfeited (39,067) 35.17
Exercised (108,949) 24.07
Cancelled at Merger Date (607,751) 30.04
---------
Options outstanding December 31, 1998 -
=========
Options exercisable at December 31:
1996 682,681 21.45
1997 421,033 27.18
1998 - -
</TABLE>
F-23
<PAGE> 74
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $12.84, $13.87 and $19.20, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1998 expected dividend yield 0.0%,
risk-free interest rate of 5.18%, and an expected life of 4.00 years.
(14) Income Tax Expense
The components of total income tax expense (benefit) follow (in thousands):
<TABLE>
<CAPTION>
Total income taxes: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
From continuing operations before
extraordinary item:
Current:
Federal $ 206 588 563
State and local 20 515 745
Foreign 336 622 297
------ ------ ------
562 1,725 1,605
------ ------ ------
Deferred:
Federal (1,605) 10,203 10,033
State and local (430) 988 882
Foreign 220 488 752
------ ------ ------
(1,815) 11,679 11,667
------ ------ ------
Total from continuing operations
before extraordinary item (1,253) 13,404 13,272
Discontinued operations - 38,250 (462)
Extraordinary item (3,958) (465) -
Stockholders' equity (941) (3,277) (402)
------ ------ ------
Total income taxes $ (6,152) 47,912 12,408
====== ====== ======
</TABLE>
The significant components of deferred income tax expense (benefit)
attributable to income from continuing operations follow (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax expense (benefit) exclusive of the
effects of other components $ (1,841) 11,679 12,093
Changes in the valuation allowance for deferred
tax assets allocated to income tax expense 26 - (426)
------ ------ ------
$ (1,815) 11,679 11,667
======= ====== ======
</TABLE>
F-24
<PAGE> 75
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Pretax income (loss) from continuing operations by domestic and foreign
sources follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Domestic $(17,596) 33,577 34,606
Foreign 4,200 3,241 3,879
------- ------ ------
$(13,396) 36,818 38,485
======= ====== ======
</TABLE>
Income tax expense (benefit) attributable to income from continuing
operations differs from the amount computed by applying the Federal
statutory rate to pretax income due to the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed statutory tax expense $ (4,688) 12,886 13,470
State and local taxes (410) 1,323 1,422
Equity in earnings of affiliates (798) (733) (818)
Merger fees 4,039 - -
Foreign tax rate differential 535 (373) (296)
Other, net 43 301 (80)
Valuation allowance 26 - (426)
-------- ------ ------
Income tax expense (benefit) $ (1,253) 13,404 13,272
======== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31 follow (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 24,728 $ 9,526
Accrued liabilities 13,212 13,882
Pension and other post-retirement benefits 11,426 11,026
Tax credits 9,639 8,877
Other 650 215
------ ------
Total gross deferred tax assets 59,655 43,526
Less valuation allowance (36,506) (29,870)
------ ------
23,149 13,656
Deferred tax liabilities:
Plant and equipment (14,364) (11,472)
Other (740) (853)
------ ------
Total gross deferred tax liabilities (15,104) (12,325)
------- ------
Net deferred tax asset $ 8,045 $ 1,331
======= =======
</TABLE>
The net reduction in the valuation allowance for deferred tax assets for
the year ended December 31, 1997 was $4,246,000. Recognition, if any, of
tax benefits subsequent to December 31, 1998 relating to unrecognized
deferred tax assets are expected to be allocated to the consolidated
statements of operations and additional paid-in capital in the amounts of
$20,931,000 and
F-25
<PAGE> 76
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
$15,575,000, respectively. At December 31, 1998, the Company had Federal
net operating loss carryforwards of approximately $52,852,000 which begin
to expire in 2007.
In order to fully realize the net deferred tax assets recognized, the
Company will need to generate future taxable income. Combined cumulative
taxable income, before utilization of net operating loss carryforwards for
1996 and 1997 approximated $45 million. Based upon an evaluation of
historical and projected future taxable income, the Company believes it is
more likely than not that it will generate sufficient future taxable income
to realize its net deferred tax asset of $8,045,000 at December 31, 1998.
The amount of deferred tax assets considered realizable, however, could be
reduced if estimates of future taxable income are reduced.
The Company and its domestic subsidiaries file a consolidated U.S. Federal
income tax return. The IRS is presently examining the consolidated Federal
income tax returns for tax years 1991 through 1996. Management believes
that the ultimate outcome of this examination will not have a material
adverse effect on the financial condition, results of operations or
liquidity of the Company.
(15) Severance and Write-downs
In 1998, the Company incurred charges for severance expenses totaling
$2,342,000 related to workforce reductions and write-downs of $200,000
related to lease cancellations.
(16) Other Income
Other income for 1996 included a favorable adjustment of $2,200,000 related
to the Company's environmental liabilities following completion of a site
clean-up for an amount less than previously estimated.
F-26
<PAGE> 77
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) Earnings per share
The components of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ (18,031) 81,644 39,053
Preferred stock dividends (2,044) - -
------------ --------- ---------
Net income (loss) available for common stockholders $ (20,075) 81,644 39,053
------------ --------- ---------
Average outstanding shares of common stock 3,160,967 7,200,103 9,517,123
Dilutive effect of stock options - 144,942 374,508
------------ --------- ---------
Common stock and common stock equivalents 3,160,967 7,345,045 9,891,631
============ ========= =========
Earnings (loss) per share:
Basic $ (6.35) 11.34 4.10
============ ========= =========
Diluted $ (6.35) 11.12 3.95
============ ========= =========
</TABLE>
(18) Related Party Transactions
As of December 31, 1998, the Company had a dividend receivable of
$2,850,000 from its Thermalex Joint Venture and a receivable from DLJSC of
$2,032,000 for funds deposited in excess of the retired 10 1/4% Notes,
which are included in Receivables from Related Parties.
In connection with the sale of the 12% Notes, the Company paid $3,600,000
in underwriting fees to DLJSC. In addition, the Company paid DLJSC fees of
approximately $3,181,000 for services as Lead Arranger and Syndication
Agent in connection with the Company's amended and restated Bank Credit
Agreement. In connection with the Mergers, Donaldson Lufkin & Jenrette
Capital Funding received $1,750,000 in fees from the Company to provide a
backstop credit facility and the Company reimbursed DLJSC approximately
$184,000 for expenses.
The Company paid DLJSC an advisory fee of $3,500,000 in connection with the
Mergers. The Company also paid an underwriting fee of approximately
$2,457,000 to DLJSC for the sale and distribution of the 14% Senior
Discount Notes and a fee of $1,100,000 to DLJ Bridge Finance, Inc. to
secure a bridge loan facility to backstop the issuance of the Discount
Notes.
Prior to the Mergers in 1998, Water Street Corporate Recovery Fund I, L.P.
("Water Street"), an affiliate of Goldman, Sachs & Co. ("Goldman Sachs"),
beneficially owned approximately 45% (62% prior to the Share Repurchase) of
the Company's common stock. Neither Holdings nor the Company is aware of
any transaction or of any currently proposed transaction in which Goldman
Sachs has any material direct or indirect interest as a result of its
ownership position in the Company,
F-27
<PAGE> 78
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
except as follows:
Goldman Sachs advised the Company in connection with the Mergers and
received a fee of $2.0 million upon the consummation of the Mergers. In the
Mergers, Water Street received approximately $81.0 million and retained
62,962 shares of Holdings. Holdings entered into a Registration Rights
Agreement with Water Street in which Water Street has certain registration
rights with respect to such 62,962 shares.
During 1997, the Company paid Goldman Sachs $1,996,000 in investment
banking fees and expenses related to the sale of the Rolodex Business,
$2,042,000 of fees in connection with the refinancing and issuance of the
Notes and $204,000 for services rendered in connection with the Share
Repurchase. During 1997, the Company paid Goldman Sachs $3,094,000 in
underwriting fees related to the issuance of the 10 1/4% Notes.
As discussed in Note 7, the Company entered into the 1997 Bank Credit
Agreement and Goldman Sachs Credit Partners L.P., an affiliate of Goldman
Sachs, had an initial participating interest of $66,667,000. Goldman Sachs
Credit Partners L.P. received $583,000 from the agent bank for its portion
of the arrangement fee paid by the Company in 1997.
During 1996, the Company paid Goldman Sachs $1,000,000 in transaction fees
in connection with the purchase of Lingemann (See Note 1). In connection
with such services, the Company provided for the indemnification of Goldman
Sachs against various liabilities, including liabilities under the Federal
securities laws.
(19) Commitments and Contingencies
Rental expense for operating leases totaled $4,625,000, $4,283,000 and
$3,291,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. These leases primarily relate to production facilities.
Rental income received for subleases for operating leases totaled, $260,000
in 1998, $248,000 in 1997 and none in 1996.
Future minimum lease payments under contractually noncancellable operating
leases (with initial lease terms in excess of one year) for years
subsequent to December 31, 1998 are as follows: 1999, $4,409,000; 2000,
$3,785,000; 2001, $2,746,000; 2002, $1,920,000; 2003, $1,319,000; and
thereafter, $1,675,000. Future minimum rental income to be received under
noncancellable subleases for years subsequent to December 31, 1998 are as
follows: 1999, $260,000; 2000, $260,000; 2001, $260,000; 2002, $22,000; and
thereafter, none.
The Company is implicated in various claims and legal actions arising in
the ordinary course of business. Those claims or liabilities not subject to
Bankruptcy Court litigation will be addressed in the ordinary course of
business and be paid in cash as expenses are incurred.
In the opinion of management, the ultimate disposition of the matters
discussed above will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
F-28
<PAGE> 79
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) Segment Data
Description of Segments
The Company provides a broad spectrum of products through three business
segments: automotive components, technologies related components, and
specialty publishing.
The Company's Automotive Components Segment provides products and services
to automotive OEMs and suppliers. These products include heat-transfer
products and related tubing, clutch plates for automatic transmissions,
suspension parts for vibration-reducing assemblies and engine mounts used
by automotive manufacturers and suppliers, railroad locomotive and other
heavy industrial equipment manufacturers and suppliers. Revenues from one
of the "Big 3" domestic automobile manufacturers accounted for
approximately 23%, 28%, and 29% of the Company's Automotive Component
Segment revenues for 1998, 1997, and 1996, respectively.
Through its Technologies Segment, the Company provides a broad range of
telecommunication and electrical component products and services to the
computer networking, telephone digital switching, main frame computer,
automotive and medical equipment markets. The products include high-speed
data connectors and systems, off-the-shelf and custom power transformers,
precision stampings and wire-formed parts, and custom cable and wire
assemblies used by computer networking, telecommunications, computer,
automotive and medical equipment OEMs and suppliers. Two telecommunications
OEMs directly or indirectly accounted for approximately 24%, 26%, and 24%
of the Company's Technologies Segment revenues for 1998, 1997, and 1996,
respectively.
The Specialty Publishing Segment provides student yearbooks and other
specialty publishing services through the Company's wholly owned
subsidiary, Taylor Publishing Company ("Taylor"). Taylor is primarily
engaged in the contract design and printing of student yearbooks, which
accounted for approximately 88% of its annual revenues. Taylor markets its
yearbook services through commissioned independent sales representatives.
The Company has included in its Other Segment two operating units that fall
below the quantitative reporting thresholds and do not meet all the
criteria for aggregation with the Company's reportable segments. These
operations are a manufacturer of high speed welded tube mills and other
machinery and equipment for automotive suppliers and OEMs and a welded
stainless steel tubing manufacturer that provides tubing and tubing
products to distributors, recreational marine and transportation markets.
Measurement of Segment Profit or Loss and Segment Assets
The Company evaluates performance and allocates resources to its operating
segments based on profit or loss from operations before certain severance
costs and write-downs, other income or expense, interest and income taxes.
The accounting policies of the reportable segments are the same as those
described in Note 2, "Significant Accounting Policies." The Company has
intra-segment sales and transfers, which are recorded at cost or, if agreed
upon, a price comparable to unaffiliated customer sales. These
intra-segment sales and related profits are eliminated in consolidation and
are not presented in the segment disclosure. Identifiable assets are those
used by each segment in its operations. Corporate assets consist primarily
of cash, deferred financing fees and deferred tax assets.
F-29
<PAGE> 80
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Factors Used to Identify the Enterprise's Reportable Segments
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because they
manufacture and distribute distinct products with different production
processes. Reportable segments were determined by using a management
approach and are consistent with the basis and manner in which the
Company's management internally disaggregates financial information for the
purposes of assisting in making internal operating decisions.
Operations within segments have been aggregated on the basis of similar
economic characteristics, products or services, purposes or end uses,
production processes, geographic marketing areas and methods, distribution
methods, and regulatory environments. Due to the diverse nature of the
Company's products, consideration has been given to ensure that the
aggregation of the Company's operations helps users better understand the
Company's performance and assess its future cash flows.
F-30
<PAGE> 81
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Summary financial information by business segment is as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
Net Sales: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Automotive Components $ 213,365 193,839 169,280
Technologies 189,781 198,941 183,663
Specialty Publishing 101,325 98,222 99,020
Other 31,158 37,231 40,442
------- ------ ------
$ 535,629 528,233 492,405
======= ======= =======
Operating income:
Automotive Components $ 23,015 21,859 21,722
Technologies 21,169 26,734 27,604
Specialty Publishing 4,945 7,299 5,136
Other 1,290 4,748 5,175
Unallocated amounts:
Corporate expenses (7,752) (9,138) (9,704)
Significant legal expenses (1,954) (400) -
Severance and write-downs (2,542) - (1,500)
Merger fees (25,529) - -
------- ------ ------
Total operating income 12,642 51,102 48,433
Interest expense (32,894) (20,562) (18,378)
Interest income 979 2,837 724
Equity in net income of Thermalex 2,850 2,647 2,922
Other income, net 3,027 794 4,784
------- ------ ------
Income (loss) from continuing
operations before income taxes
and extraordinary item $ (13,396) 36,818 38,485
======= ======= =======
Depreciation and amortization expense:
Automotive Components $ 8,508 8,104 5,883
Technologies 7,216 6,159 5,531
Specialty Publishing 3,319 2,930 2,786
Other 1,044 1,095 1,073
Corporate 72 89 84
------- ------ ------
Total $ 20,159 18,377 15,357
======= ======= =======
Capital expenditures:
Automotive Components $ 9,132 10,531 6,747
Technologies 7,926 8,166 9,597
Specialty Publishing 2,197 3,161 2,876
Other 850 1,663 700
Corporate 50 62 89
------- ------ ------
Total $ 20,155 23,583 20,009
======= ======= =======
</TABLE>
F-31
<PAGE> 82
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of identifiable assets by segment at December 31 follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Automotive Components $ 135,525 117,602
Technologies 96,742 87,252
Specialty Publishing 42,073 42,767
Other 17,342 27,245
Corporate 35,592 27,807
------ -------
Total $ 327,274 302,673
======= =======
</TABLE>
A summary of long-lived assets by geographic region is as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
United States $ 113,293 113,322
Germany 15,029 14,057
------- -------
Total $ 128,322 127,379
======= =======
</TABLE>
Summary of export sales by geographic region is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Europe $ 22,838 21,193 20,584
Asia 8,829 14,007 16,708
Canada 7,692 9,758 7,752
Mexico 3,005 4,292 6,660
Other 4,335 6,155 6,449
------ ------ ------
Total $ 46,699 55,405 58,153
======= ====== ======
</TABLE>
Net sales are attributed to countries based on the location of customers.
Major Customers
Revenues from one of the "Big 3" domestic automobile manufacturers
accounted for approximately 9%, 10%, and 10% of the Company's consolidated
revenues for 1998, 1997, and 1996, respectively.
F-32
<PAGE> 83
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) Quarterly Financial Information (unaudited)
A summary of quarterly financial information follows (in thousands):
<TABLE>
<CAPTION>
1998
----
Dec. 31(1) Sept. 30(2) June 30(3) March 31
---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Sales $ 113,241 135,065 170,018 117,305
Gross profit 25,252 32,873 49,644 28,318
Income (loss) before extraordinary item (2,135) (17,222) 4,433 2,781
Extraordinary item (5,888) - - -
------ ------- ----- -----
Net income (loss) $ (8,023) (17,222) 4,433 2,781
====== ======= ===== =====
</TABLE>
<TABLE>
<CAPTION>
1997
----
Dec. 31 Sept. 30(4) June 30 March 31(5)
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Sales $ 120,624 131,394 169,671 106,544
Gross profit 29,508 34,269 52,170 26,011
Income from continuing
operations before extraordinary item 3,531 4,315 11,207 4,361
Discontinued operations - - - 58,958
Extraordinary item - (728) - -
------ ------- ------ ------
Net income $ 3,531 3,587 11,207 63,319
====== ======= ====== ======
</TABLE>
(1) Includes a pretax extraordinary loss of $ 9,846,000 related to the
extinguishment of debt.
(2) Includes $19,549,000 of expenses related to the Mergers (See Note 1).
(3) Includes $1,341,000 of expenses related to the Mergers (See Note 1).
(4) Includes a pretax extraordinary loss of $1,193,000 related to the
extinguishment of debt (See Note 7).
(5) Includes a pretax gain on the sale of the Rolodex Business totaling
$95,001,000.
(22) Pro Forma Results of Operations (unaudited)
Set forth below is certain unaudited pro forma condensed consolidated
financial information of the Company based upon historical consolidated
financial statements of the Company that has been adjusted to give effect
to the Refinancing (as defined below), the Mergers, including the Merger
Financing and application of the proceeds thereof (See Note 1). In
addition, the operating results for 1997 have been adjusted to give effect
to the 1997 Transactions. A summary of these adjustments follows.
The Refinancing includes the following transactions: (i) the issuance of
the 12% Notes which generated gross proceeds to the Company of
approximately $120.0 million; (ii) the repurchase of the 10 1/4% Notes at a
purchase price of 101% of principal amount plus accrued and unpaid
interest; (iii) the execution and delivery of the New Credit Facility and
borrowings thereunder to refinance the 1997 Credit Facility and to purchase
the 10 1/4% Notes at a purchase price of 101% of principal amount plus
accrued and unpaid interest; (iv) payment of fees and expenses in
connection with the
F-33
<PAGE> 84
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
offering of the Notes, the New Credit Facilities and the purchase of the 10
1/4% Notes.
The Reorganization Merger was accounted for as a reorganization of entities
under common control, and had no impact on the historical basis of the
assets or liabilities of the Company. The Merger was accounted for as a
recapitalization and had no impact on the historical basis of the assets or
liabilities of the Company.
The Mergers included the following transactions: (i) the issuance of the
Holdings Senior Discount Notes which generated gross proceeds of
approximately $70.2 million, and new borrowings under the Company's 1997
Credit Facility of approximately $43.1 million, of which $26.8 million was
paid as a dividend from Insilco to Holdings to fund a portion of the Merger
Consideration; (ii) the initial capitalization of Silkworm through the
issuance of 1,245,138 shares of Silkworm common stock for $56.1 million and
the issuance of 1,400,000 shares of PIK Preferred Stock and warrants to
purchase 65,603 shares of Holdings Common Stock for aggregate consideration
of $35.0 million; (iii) payment of the Merger Consideration for each share
of the Company's common stock outstanding immediately prior to the Mergers
(4,145,372 shares) consisting of $43.48 in cash and 0.03378 of a share of
Holdings; (iv) payment of fees and expenses associated with the issuance of
the Holdings Senior Discount Notes, the waiver of certain Events of Default
under the Existing Credit Facility, and the Mergers; and (v) vesting of all
outstanding options and payment of the Option Cash Proceeds (and applicable
withholding taxes) and payments pursuant to employment related agreements.
The 1997 Transactions consisted of the following: (i) the Company entered
into the 1997 Credit Facility on July 3, 1997; (ii) on August 12, 1997, the
Company issued $150 million aggregate principal amount of the 10 1/4%
Notes; (iii) on July 10, 1997, the Company, using the proceeds of its sale
of the Rolodex Business, purchased an aggregate of 2,857,142 shares for
$110 million; and (iv) on August 12, 1997, the Company completed a tender
offer pursuant to which it purchased an additional 2,857,142 shares of
common stock for $110 million. The purchase of shares of common stock of
the Company in the tender offer was paid for with proceeds received through
the issuance by the Company of the 10 1/4% Notes.
The unaudited pro forma condensed consolidated income statements have been
prepared as if the Refinancing, the Mergers and the 1997 Transactions all
occurred on January 1 of the relevant period; however, the expenses
directly related to the aforementioned transactions (other than interest
expense) are excluded from the unaudited pro forma condensed consolidated
income statements. The Unaudited Pro Forma Condensed Consolidated Financial
Data are based on certain assumptions and estimates, and therefore do not
purport to be indicative of the results that would have been obtained had
the transactions been completed as of such dates or indicative of future
results of operations and financial position.
F-34
<PAGE> 85
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Statement of Income
Year Ended December 31, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Merger Refinancing
Historical Adjustments Adjustments Pro Forma
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 535,629 535,629
Cost of goods sold 383,269 383,269
Depreciation and amortization 20,159 20,159
Selling, general and administrative expenses 119,559 (25,529)(1) 94,030
------- ------ ------ -------
Operating income 12,642 25,529 - 38,171
Interest expense (32,894) (8,752)(2) (4,167)(3) (45,813)
Interest income 979 979
Equity in net income of Thermalex 2,850 2,850
Other income, net 3,027 3,027
------- ------ ------ -------
Income (loss) from continuing operations
before income taxes and extraordinary item (13,396) 16,777 (4,167) (786)
Income tax benefit (expense) 1,253 (6,710)(1)
3,744(4) 1,604(4) (109)
------- ------ ------ -------
Income (loss) from continuing
operations before extraordinary item $ (12,143) 13,811 (2,563) (895)
Preferred stock dividend (2,044) (3,651) - (5,695)
------- ------ ------ -------
Income (loss) to common from continuing
operations before extraordinary item $ (14,187) 10,160 (2,563) (6,590)
======= ====== ====== ======
Earnings (loss) from continuing operations per share
Basic $ (4.49) (4.16)
Basic shares 3,161 1,583
Diluted $ (4.49) (4.16)
Diluted shares 3,161 1,583
</TABLE>
F-35
<PAGE> 86
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Statement of Income
Year Ended December 31, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 Merger Refinancing
Historical Transactions Adjustments Adjustments Pro Forma
---------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $528,233 528,233
Cost of goods sold 370,845 370,845
Depreciation and amortization 18,377 18,377
Selling, general and administrative
expenses 87,909 87,909
------ ------ ------ ------ -----
Operating income 51,102 - - 51,102
Interest expense (20,562) (8,879)(5) (13,621)(2) (4,683)(3) (47,745)
Interest income 2,837 (2,091)(5) 746
Equity in net income of Thermalex 2,647 2,647
Other income, net 794 794
------ ------ ------ ------ -----
Income (loss) from continuing
operations before income taxes 36,818 (10,970) (13,621) (4,683) 7,544
Income tax expense (13,404) 4,223(5) 4,181(4) 1,803(4) (3,197)
------ ------ ------ ------ -----
Income (loss) from
continuing operations 23,414 (6,747) (9,440) (2,880) 4,347
Preferred stock dividend - - (5,695) - (5,695)
------ ------ ------ ------ -----
Income (loss) to common from
continuing operations before
extraordinary item $ 23,414 (6,747) (15,135) (2,880) (1,348)
======== ====== ======= ===== ======
Earnings (loss) from continuing
operations per share
Basic $ 3.25 (0.85)
Basic shares 7,200 1,583
Diluted $ 3.19 (0.85)
Diluted shares 7,345 1,583
</TABLE>
F-36
<PAGE> 87
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Notes to the Unaudited Pro Forma Condensed Consolidated Statements of Income
follow:
(1) To exclude nonrecurring Merger expenses and the related income tax
effect recorded in the year ended December 31, 1998.
(2) To record the incremental interest expense for the years ended
December 31 1997 and 1998 as follows: (i) $3.1 million and $2.0
million, respectively, increase in interest expense associated with
the Company $43.1 million incremental borrowings under the 1997 Credit
Facility in connection with the Merger, (ii) $10.2 million and $6.5
million, respectively, in increased interest expense associated with
the 14% Discount Notes issued at Holdings to finance the Merger and
(iii) amortization of Holdings debt issuance costs over the 10 year
term of the 14% Discount notes under the effective interest method.
(3) To record the net increase in interest expense for the years ended
December 31, 1997 and 1998 as follows: (i) $1.8 million and $1.8
million, respectively, increase in interest expense associated with
the increase in LIBOR spreads from 125 basis points ("bps") under the
1997 Credit Facility to a spread of 375 bps for the Term Loan Facility
under the New Credit Facility and to a spread of 300 bps for the
Revolving Credit Facility and based on an assumed LIBOR rate of 4.98%
thereunder, (ii) $3.3 million and $2.9 million increase in interest
expense related to the additional borrowings under the 1997 Revolving
Credit Facility, incurred in connection with the Refinancing, (iii)
and $14.4 million and $12.6 increase in interest expense relating to
the issuance of the 12% Notes offset by a $15.4 million and $13.6
million reduction in interest expense relating to the repayment of the
10 1/4% Notes and the amortization expense relating to the issuance of
the 12% Notes and the New Credit Facility partially offset by a
reduction in amortization expense relating to the repurchase of the 10
1/4% Notes and the 1997 Credit Facility.
(4) To record the tax benefit of the transaction at the statutory rate of
each respective entity. Statutory tax rates used to calculate the tax
benefit of (i) Insilco Corporation was 38.5% (35.0% federal rate and
an estimated 3.5% average state rate) and (ii) Holdings was
approximately 28.4%, which is the 35.0% federal tax rate adjusted for
the non-deductible portion of accreted interest on the 14% Discount
Notes due to excess Original Issue Discount ("OID") over the allowable
yield to maturity.
(5) To record the effect on interest expense and the related income tax
effect of (i) the purchase on July 10, 1997 of 2,857,142 shares at
$38.50 per share in cash for an aggregate purchase price of $110.0
million, (ii) the entering into of the 1997 Credit Facility on July 3,
1997 and the issuance and sale of $150.0 million aggregate principal
amount of the 10 1/4% Notes on August 12, 1997, and (iii) the purchase
on August 12, 1997 of 2,857,142 shares at $38.50 per share in cash for
an aggregate purchase price of $110.0 million, as if the
aforementioned transactions had occurred as of the beginning of the
periods presented. Statutory tax rates used to calculate the income
tax effect was 38.5% (35.0% federal rate and an estimated 3.5% average
state rate).
(23) Subsequent Event
On January 25, 1999, the Company purchased the stock of Eyelets for
Industries, Inc. and EFI Metal Forming, Inc., collectively referred to as
EFI, a precision stamping manufacturer for the battery,
F-37
<PAGE> 88
INSILCO HOLDING CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
electrical, electronic and automotive markets. EFI has operations in
Connecticut and Texas.
The initial purchase price of $23,600,000, including estimated costs
incurred directly related to the transaction, has not yet been allocated
and is pending appraisals of property, plant and equipment, actuarial
valuations of retiree medical benefits, and estimated costs of plans to
exit certain EFI activities. The Company expects to have these items
quantified within one year of the date of acquisition. The acquisition will
be accounted for as a purchase and the Company is currently determining the
appropriate period for amortizing any resulting goodwill from this
transaction. The acquisition did not result in a significant business
combination within the definition provided by the Securities and Exchange
Commission and therefore, pro forma financial information has not been
presented.
F-38
<PAGE> 89
EXHIBIT LISTING
*2(a) - Agreement and Plan of Merger, dated as of March 24, 1998,
among Insilco, INR Holding Co., and Silkworm Acquisition
Corporation (Exhibit 10(n) to the Registration Statement on Form
S-4 (File No. 333-51145) of Insilco).
*2(b) - Amendment No. 1 to the Agreement and Plan of Merger, dated
June 8, 1998, among Insilco, INR Holding Co. and Silkworm
Acquisition Corporation (Exhibit 10(r) to the Registration
Statement on Form S-4 (File No. 333-51145) of Insilco).
*3(a) - Certificate of Incorporation (Exhibit 3.1 to the Current
Report on Form 8-K filed on August 18, 1998 (File No. 0-24813)).
*3(b) - Bylaws incorporated by reference to Exhibit 3.2 to the Current
Report on Form 8-K filed on August 18, 1998 (File No. 0-24813).
*4(a) - Investors' Agreement, dated as of August 17, 1998, among
Insilco Holding Co. and the investors named therein (Exhibit 4.5
to the Registration Statement on Form S-1 (File No. 333-65039)).
*4(b) - Indenture, dated as of November 9, 1998, between Insilco and
the Trustee (Exhibit 4(a) to the Form 10-Q filed by Insilco on
November 16, 1998 (File No. 0-22098)).
*4(c) - First Supplemental Indenture, dated as of December 21, 1998,
between Insilco and the Trustee (Exhibit 4.3 to the Registration
Statement on Form S-1 (File No. 333-71947) of Insilco).
*4(d) - Warrant Agreement, dated as of August 17, 1998, between Silkworm
Acquisition Corporation and National City Bank, as Warrant Agent
(Exhibit 4.1 to the Registration Statement on Form S-1 (File No.
333-65039)).
*4(e) - Assumption Agreement, dated as of August 17, 1998, between
Insilco Holding Co. and National City Bank, as Warrant Agent
(Exhibit 4.2 to the Registration Statement on Form S-1 (File No.
333-65039)).
*4(f) - Form of Class A Warrant (Exhibit 4.3 to the Registration
Statement on Form S-1 (File No. 333-65039)).
*4(g) - Certificate of Designation with respect to Pay-in-kind 15%
Senior Exchangeable Preferred Stock due 2010 (Exhibit 4.4 to the
Registration Statement on Form S-1 (File No. 333-65039)).
*4(h) - Indenture, dated as of August 17, 1998, between Silkworm
Acquisition Corporation and the Trustee (Exhibit 4.5 to the
Registration Statement on Form S-1 (File No. 333- 65039)).
*4(i) - First Supplemental Indenture, dated as of August 17, 1998,
between Insilco Holding Co., and the Trustee (Exhibit 4.6 to the
Registration Statement on Form S-1 (File No. 333-65039)).
<PAGE> 90
*4(j) - Indenture, dated as of August 12, 1997, between Insilco and
the Trustee (Exhibit 4(j) to the Registration Statement on Form
S-4 (File No. 333-36523) of Insilco).
*4(k) - Form of New Note (included in Exhibit 4(j) above) (Exhibit
4(k) to the Registration Statement on Form S-4 (File No.
333-36523) of Insilco).
*4(l) - Purchase Agreement, dated as of August 7, 1997, among Insilco
and Goldman, Sachs & Co., McDonald & Company Securities, Inc.
and Citicorp Securities Inc. (the "Initial Purchasers") (Exhibit
4(l) to the Registration Statement on Form S-4 (File No.
333-36523) of Insilco).
*4(m) - Exchange and Registration Rights Agreement, dated as of August
12, 1997, between Insilco and the Initial Purchasers (Exhibit
4(m) to the Registration Statement on Form S-4 (File No.
333-36523) of Insilco).
*4(n) - Warrant Agreement dated as of November 9, 1998, between Insilco
Holding Co. and the Warrant Agent (Exhibit 4(a) to the Form 10-Q
for the quarter ended September 30, 1998 (File No. 0-24813)).
*4(o) - Warrant and Registration Rights Agreement, dated as of November
9, 1998, between Insilco Holding Co. and the Initial Purchaser
(Exhibit 4(b) to the Form 10-Q for the Quarter Ended September
30, 1998 (File No. 0-24813)).
*4(p) - Exchange and Registration Rights Agreement, dated as of November
9, 1998, between Insilco and DLJ (Exhibit 4(b) to the Form 10-Q
of Insilco for the Quarter Ended September 30, 1998 (File No.
0-22098)).
***4(q) - Second Supplemental Indenture, dated as of January 25, 1999
between Insilco and the Trustee.
*10(a) - Insilco Holding Co. Direct Investment Program (Exhibit 4(c) to
the Registration Statement on Form S-8 (File No. 333-61809)).**
*10(b) - Insilco Holding Co. Stock Option Plan (Exhibit 4(d) to the
Registration Statement on Form S-8 (File No. 333-61809)).**
*10(c) - Insilco Holding Co. and Insilco Corporation Equity Unit Plan
(Exhibit 4(c) to the Registration Statement on Form S-8 (File
No. 333-61811)).**
*10(d) - Credit Agreement, among Insilco and a syndicate of banks
and other financial institutions led by Donaldson, Lufkin &
Jenrette Securities Corporation, DLJ Capital Funding and
The First National Bank of Chicago (Exhibit 10.4 to the
Registration Statement on Form S-1 (File No. 333-71947)
of Insilco).
*10(e) - Purchase Agreement, between Insilco Corporation, Insilco Holding
Co. and Donaldson, Lufkin & Jenrette Securities Corporation
(Exhibit 10(a) to Form 10-Q filed by Insilco on November 16,
1998 (File No. 0-22098)).
*10(f) - Employment Agreement dated as of May 1, 1993 between Insilco
and Robert L. Smialek, as amended and restated (Exhibit 10(k) to
the Form 10/A, Amendment No. 1 to Form 10 (File No. 0-22098) of
Insilco).**
<PAGE> 91
*10(g) - Form of Indemnification Agreement adopted by Insilco as of
July 30, 1990, entered into between Insilco and certain of its
officers and directors individually, together with a schedule
identifying the other documents omitted and the material details
in which such documents differ (Exhibit 10(n) to the Form 10
(File No. 0-22098) of Insilco).
*10(h) - Form for Income Protection Agreement adopted by Insilco as of
December, 1996, entered into between Insilco and the officers
identified in Exhibit 10(g) (Exhibit 10(h) of the Form 10-K of
Insilco for the Year Ended December 31, 1996 (File No. 0-
22098)).
*10(i) - Extension Agreement between Insilco and Robert L. Smialek
dated May 1, 1996 (Exhibit 10(l) to the Form 10-K of Insilco for
the year ended December 31, 1997 (File No. 0-22098)).
*10(j) - Second Extension Agreement between Insilco and Robert L.
Smialek dated September 25, 1997 (Exhibit 10(m) to the Form 10-K
of Insilco for the Year Ended December 31, 1997 (File No.
0-22098)).**
*21 - Subsidiaries of Insilco Holding Co. (Exhibit 21 to the
Registration Statement on Form S-1 (File No. 333-65039)).
23(a) - Consent of KPMG LLP.
***24 - Power of Attorney of officers and directors of Insilco Holding
Co. appearing on the signature page hereof.
*25(a) - Statement of Eligibility and Qualification Under the Trust
Indenture Act of 1939 (T-1) of The Bank of New York (bound
separately) (Exhibit 25 to the Registration Statement on Form
S-4 (File No. 333-36523) of Insilco).
*25(b) - Statement of Eligibility of Star Bank, N.A. on Form T-1
(Exhibit 25.1 to the Registration Statement on Form S-1 (File
No. 333-65039)).
***27 - Financial Data Schedule.
***99(a) - Schedule II - Valuation and Qualifying Accounts.
* Incorporated by reference, as indicated.
** Designates management contracts and compensatory plans or arrangements in
which directors or executive officers participate.
*** Previously filed.
<PAGE> 1
EXHIBIT 23(a)
Consent of Independent Auditors'
--------------------------------
The Board of Directors
Insilco Holding Co.:
We consent to incorporation by reference in the registration statement Nos.
333-61809 and 333-61811 on Form S-8, and registration No. 333-63563 on Form S-3
of Insilco Holding Co. of our report dated February 10, 1999, except as to the
fourth paragraph of Note 7, which is as of March 26, 1999, relating to the
consolidated balance sheets of Insilco Holding Co. and subsidiaries as of
December 31, 1998, and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the years
in the three-year period ended December 31, 1998, and the related schedule,
which report appears in the December 31, 1998, annual report on Form 10-K of
Insilco Holding Co.
KPMG LLP
Columbus, Ohio
April 30, 1999
