UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 21, 2003
BEL FUSE INC.
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(Exact name of registrant as specified in charter)
New Jersey 0-11676 22-1463699
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) Number)
206 Van Vorst Street, Jersey City, New Jersey 07302
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (201) 432-0463
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(Former name or former address, if changed since
last report)
Item 2. Acquisition or Disposition of Assets.
-------------------------------------
On March 21, 2003, Bel Fuse Inc., a New Jersey corporation (the
"Registrant"), completed its acquisition of the Passive Components Group of
Insilco Technologies, Inc. ("Insilco"). Pursuant to a stock and asset purchase
agreement, dated as of December 15, 2002, as amended by Amendment No. 1 to such
stock and asset purchase agreement, dated as of March 21, 2003 (as so amended,
the "Purchase Agreement"), among the Registrant, certain subsidiaries of the
Registrant, Insilco and certain of Insilco's subsidiaries, the Registrant and
Registrant's subsidiaries acquired substantially all of the assets, subject to
certain of the liabilities, of Stewart Connector Systems, Inc., InNet
Technologies, Inc. and Signal Transformer Co., Inc., as well as the stock of
several of Insilco's foreign subsidiaries. The net purchase price paid by the
Registrant amounted to $35 million in cash plus the assumption of certain
liabilities. The Registrant funded approximately $10 million of the purchase
price by means of a loan made in the ordinary course of business by a banking
institution, whose name has been omitted from this Report but furnished by
separate correspondence to the SEC, and the remainder of the purchase price from
internally generated funds.
The transactions contemplated by the Purchase Agreement were approved
by the United States Bankruptcy Court for the District of Delaware on March 10,
2003 as part of Chapter XI bankruptcy proceedings commenced voluntarily by
Insilco and several of its affiliated companies.
The Registrant intends to continue the use of the assets acquired in
the passive components business.
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Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
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a. With respect to the acquisition of the Passive Components Group of
Insilco Technologies, Inc. by Bel Fuse Inc. and subsidiaries of
Bel Fuse Inc., the following financial statements are included
herein:
Passive Components Group Financial Statements:
(1) Report of Independent Accountants
(2) Combined Balance Sheets at November 1, 2002 and December 31,
2001 and 2000
(3) Combined Statements of Operations for the ten months ended
November 1, 2002 and for the years ended December 31, 2001
and 2000
(4) Combined Statements of Equity and Comprehensive Income (Loss)
for the ten months ended November 1, 2002 and for the years
ended December 31, 2001 and 2000
(5) Combined Statements of Cash Flows for the ten months ended
November 1, 2002 and for the years ended December 31, 2001
and 2000
(6) Notes to Combined Financial Statements, November 1, 2002 and
December 31, 2001 and 2000
b. The following unaudited financial statements of the Passive
Components Group are included herein:
(1) Combined Balanced Sheet at December 31, 2002
(2) Combined Statement of Operations for the year ended December
31, 2002
(3) Combined Statement of Cash Flows for the year ended December
31, 2002
(4) Notes to Combined Financial Statements, December 31, 2002
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c. The following unaudited pro forma financial statements are
included herein:
(1) Introduction to Unaudited Pro Forma Condensed Combining
Financial Statements of Registrant and the Passive Component
Group of Insilco Technologies, Inc. as of December 31, 2002
and for the year then ended
(2) Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 2002
(3) Unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 2002
(4) Notes to the Unaudited Pro Forma Condensed Combining Financial
Statements as of and for the year ended December 31, 2002
d. Exhibits:
2.1 Stock and Asset Purchase Agreement, among Bel Fuse Ltd., Bel
Fuse Macau, L.D.A., Bel Connector Inc. and Bel Transformer,
Inc. and Insilco Technologies, Inc. and Certain of its
Subsidiaries, dated as of December 15, 2002, as amended by
Amendment No. 1 to Stock and Asset Purchase Agreement, dated
as of March 21, 2003, among Bel Fuse Inc., Bel Fuse Ltd., Bel
Fuse Macau, L.D.A., Bel Connector Inc. and Bel Transformer,
Inc. and Insilco Technologies, Inc. and Certain of its
Subsidiaries are incorporated by reference to Exhibit 10.6 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002.
23.1 Consent of Pricewaterhouse Coopers LLP
99.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of the Vice President of Finance pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of Insilco Technologies, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of equity and comprehensive income (loss) and
of cash flows present fairly, in all material respects, the combined financial
position of the Passive Components Group (the Companies), wholly owned
subsidiaries of Insilco Technologies, Inc. (Insilco), at November 1, 2002 and
December 31, 2001 and 2000, and the results of their combined operations and
their combined cash flows for the ten months ended November 1, 2002 and for the
years ended December 31, 2001 and 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of Insilco's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As explained in Note 1, the combined financial statements include certain costs
allocated by Insilco that are not necessarily indicative of the amounts that
would have been recorded by the Companies on a stand-alone basis.
As explained in Note 12, there is substantial doubt about Insilco's and the
Companies' ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
January 14, 2003
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PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
COMBINED BALANCE SHEETS
AT NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000 (IN THOUSANDS)
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DECEMBER 31,
NOVEMBER 1, -------------------
2002 2001 2000
----------- ------- -------
ASSETS
Cash and cash equivalents $10,545 $ 6,445 $ 2,772
Trade receivables, net 14,140 14,074 17,738
Other receivables 1,171 398 577
Inventories, net 13,177 14,796 19,061
Prepaid expenses and other current assets 896 734 872
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Total current assets 39,929 36,447 41,020
------- ------- -------
Property, plant and equipment, net 11,992 14,231 16,634
Other assets and deferred charges 1,400 1,620 913
------- ------- -------
Total assets $53,321 $52,298 $58,567
======= ======= =======
LIABILITIES AND EQUITY
Current liabilities
Current portion of long-term debt $24,713 $24,780 $ 15
Accounts payable 4,352 5,133 10,701
Accrued expenses and other current liabilities 4,902 3,493 3,917
Income taxes payable 730 333 1,127
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Total current liabilities 34,697 33,739 15,760
------- ------- -------
Long-term debt, excluding current portion 138 160 169
Other long-term liabilities 60 805 1,629
------- ------- -------
Total liabilities 34,895 34,704 17,558
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Commitments and contingencies
Equity
Insilco Technologies, Inc.
Net investment and advances 15,718 13,932 40,545
Accumulated other comprehensive income 2,708 3,662 464
------- ------- -------
Total equity 18,426 17,594 41,009
------- ------- -------
Total liabilities and equity $53,321 $52,298 $58,567
======= ======= =======
The accompanying notes are an integral part
of these combined financial statements.
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PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
COMBINED STATEMENTS OF OPERATIONS
FOR THE TEN MONTHS ENDED NOVEMBER 1, 2002 AND FOR THE
YEARS ENDED DECEMBER 31, 2001 AND 2000 (IN THOUSANDS)
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DECEMBER 31,
NOVEMBER 1, ------------------------
2002 2001 2000
----------- --------- ---------
Net sales $ 60,541 $ 78,781 $ 105,113
--------- --------- ---------
Cost of products sold 46,708 63,373 71,558
Depreciation and amortization 3,635 8,429 4,564
Selling, general and administrative expenses 13,809 16,924 17,163
Goodwill impairment charge -- 35,105 --
Restructuring charge 1,744 181 --
Allocated corporate costs, Insilco Technologies, Inc. 1,160 1,980 1,248
--------- --------- ---------
Operating (loss) income (6,515) (47,211) 10,580
--------- --------- ---------
Other (expense) income:
Interest expense (1,267) (1,624) (8)
Allocated interest expense, Insilco Technologies, Inc. (2,773) (7,120) (4,213)
Interest income 178 45 2
Other income (expense), net 1,389 (1,075) (1,130)
--------- --------- ---------
Total other (expense) income (2,473) (9,774) (5,349)
--------- --------- ---------
(Loss) Income from operations before
income taxes (8,988) (56,985) 5,231
Income tax expense 730 30 2,796
--------- --------- ---------
Net (loss) income $ (9,718) $ (57,015) $ 2,435
========= ========= =========
The accompanying notes are an integral part
of these combined financial statements.
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PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
COMBINED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE TEN MONTHS ENDED NOVEMBER 1, 2002 AND FOR THE
YEARS ENDED DECEMBER 31, 2001 AND 2000 (IN THOUSANDS)
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INSILCO
TECHNOLOGIES INC.
NET ACCUMULATED
INVESTMENT OTHER
AND COMPREHENSIVE TOTAL
ADVANCES INCOME (LOSS) EQUITY
----------------- ------------- --------
Balances at December 31, 1999 $ 40,256 $ 584 $ 40,840
Net income 2,435 -- 2,435
Foreign currency translation -- (120) (120)
--------
Total comprehensive income 2,315
Changes in Insilco Technologies, Inc. net investment
and advances (2,146) -- (2,146)
-------- -------- --------
Balances at December 31, 2000 40,545 464 41,009
Net loss (57,015) -- (57,015)
Foreign currency translation -- 3,198 3,198
--------
Total comprehensive loss (53,817)
Changes in Insilco Technologies, Inc. net investment
and advances 30,402 -- 30,402
-------- -------- --------
Balances at December 31, 2001 13,932 3,662 17,594
Net loss (9,718) -- (9,718)
Foreign currency translation -- (954) (954)
--------
Total comprehensive loss (10,672)
Changes in Insilco Technologies, Inc. net investment
and advances 11,504 -- 11,504
-------- -------- --------
Balances at November 1, 2002 $ 15,718 $ 2,708 $ 18,426
======== ======== ========
The accompanying notes are an integral part
of these combined financial statements.
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PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE TEN MONTHS ENDED NOVEMBER 1, 2002 AND FOR THE
YEARS ENDED DECEMBER 31, 2001 AND 2000 (IN THOUSANDS)
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DECEMBER 31,
NOVEMBER 1, ------------------------
2002 2001 2000
----------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (9,718) $(57,015) $ 2,435
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,635 8,429 4,564
Deferred tax benefit (provision) -- (806) (255)
Write-down of fixed assets -- 1,138 --
Goodwill impairment charge -- 35,105 --
Changes in operating assets and liabilities:
Trade and other receivables (186) 8,713 (2,641)
Inventories 1,846 8,836 (5,100)
Prepaid expenses and other current assets (178) 214 180
Accounts payable (799) (8,738) 4,837
Other current liabilities and other (1,000) (151) 3,543
-------- -------- --------
Net cash (used in) provided by operating activities (6,400) (4,275) 7,563
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired -- (44,174) --
Capital expenditures and other investing activities (1,594) (1,913) (2,885)
-------- -------- --------
Net cash used in investing activities (1,594) (46,087) (2,885)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 25,000 --
Payments on long-term debt (89) (454) (14)
Debt issuance and tender costs (59) (808) (794)
Net change in Insilco Technologies, Inc. net investment
and advances 11,504 30,402 (2,146)
-------- -------- --------
Net cash provided by (used in) financing activities 11,356 54,140 (2,954)
-------- -------- --------
Effect of exchange rate changes on cash 738 (105) (50)
-------- -------- --------
Net increase in cash and cash equivalents 4,100 3,673 1,674
Cash and cash equivalents at beginning of period 6,445 2,772 1,098
-------- -------- --------
Cash and cash equivalents at end of period $ 10,545 $ 6,445 $ 2,772
======== ======== ========
The accompanying notes are an integral part
of these combined financial statements.
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PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
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1. BASIS OF PRESENTATION
The combined financial statements reflect the financial position, results
of operations and cash flows of the Passive Components Group for the ten
months ended November 1, 2002 and the years ended December 31, 2001 and
2000. The Passive Components Group consists of three business units and
their subsidiaries (all of which are wholly owned subsidiaries of Insilco
Technologies, Inc.) (Insilco or the Parent): Signal Transformer Co., Inc.
(Signal); InNet Technologies, Inc. (InNet), which was purchased on January
10, 2001; and Stewart Connector Systems, Inc. (SCS), herein referred to as
Passive Components or the Companies. The Companies' operations consist of
the manufacturing and sale of telecommunications and electrical component
products. Passive Components is not a separate legal entity and since no
direct ownership in the Companies as a combined group exists, Insilco's net
investment and advances in the Companies is shown in lieu of stockholder's
equity in the combined financial statements and includes the accumulation
of transactions between the Companies and Insilco described below. All
intercompany accounts and transactions amongst the Passive Components Group
have been eliminated. Sales to other subsidiaries of Insilco were
approximately $45,000 for the ten months ended November 1, 2002 and $20,000
and $41,000 for the years ended December 31, 2001 and 2000, respectively.
Management believes the assumptions underlying the combined financial
statements are reasonable. However, the combined financial position,
results of operations and cash flows presented herein may not be the same
as would have occurred had the Companies operated as stand-alone entities
during the periods presented and may not be indicative of future financial
results.
INTERCOMPANY RELATIONSHIP WITH THE PARENT
The combined financial statements include allocations of Insilco's
corporate overhead, executive management and administrative expenses
amounting to $1.2 million for the ten months ended November 1, 2002 and
$2.0 million and $1.2 million for the years ended December 31, 2001 and
2000, respectively, which are included in the Allocated corporate costs
line in the statement of operations. These allocations include the general
administrative expenses of Insilco's corporate office, such as accounting,
information technology, human resources, legal, environmental, treasury,
and tax. As specific identification of these expenses was not practical,
allocations were charged based on a formula factoring in the ratio of the
Companies' forecasted annual sales, forecasted assets, and actual number of
employees in proportion to Insilco's consolidated numbers for these
categories. The resulting ratio was applied to Insilco's forecasted
corporate expenses and allocated to the Companies rateably over each year.
Insilco's management believes that this allocation method is reasonable,
however, the allocations do not necessarily represent what the Companies
would have incurred on a stand-alone basis. As the Companies were operated
in a decentralized manner with their own administrative infrastructure, and
the Companies would likely make different decisions regarding
administrative initiatives, their overhead expenses as a separate company
would be different than that reflected in the combined financial
statements.
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PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
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The Companies' combined financial statements also include allocations of
Insilco's interest expense totalling $2.8 million for the ten months ended
November 1, 2002 and $7.1 million and $4.2 million for the years ended
December 31, 2001 and 2000, respectively, which are included in the
Allocated interest expense line in the statement of operations. Interest
expense has been allocated generally based on the Companies' net assets in
proportion to Insilco's consolidated net assets. The interest rate applied
was 10.0% in 2002, 2001 and 2000, which represents an estimated weighted
average cost of capital.
The amounts used to calculate interest expense do not necessarily reflect
the level of indebtedness the Companies would incur as a separate entity.
Insilco's management believes these are reasonable estimates of the cost of
financing the Companies' assets and operations in the past. However, the
Companies may not be able to obtain financing at interest rates similar to
those used for the interest expense calculation. Accordingly, the
Companies' interest expense and financing costs as a separate entity may be
different than that reflected in the combined financial statements.
Insilco uses a centralized approach to cash management and the financing of
its operations. The Companies' cash accounts are swept on a daily basis and
are netted against the net investment and advances account. As a result,
none of Insilco's cash, cash equivalents or debt at the corporate level has
been allocated to the Companies in the combined financial statements, other
than the $25 million portion of the credit facility drawn specifically to
fund the acquisition of InNet in 2001. Cash in the combined financial
statements primarily represents amounts held locally by the Companies'
operations in their various geographic areas.
ACQUISITION
On January 10, 2001, Insilco acquired the outstanding equity interests in
InNet, excluding approximately 16% of the outstanding equity interests that
Insilco already owned. InNet, now a wholly owned subsidiary of Insilco, is
a California-based designer, developer and marketer of a broad range of
magnetic interface products for networking, computer and telecommunications
original equipment manufacturers. The gross purchase price paid for the
remaining equity interests was $44.9 million and was financed with cash and
additional borrowings of $25.0 million under the Parent's credit facility.
The purchase method of accounting has been used to account for the
purchase; accordingly, the results of operations of InNet have been
included in the Companies' combined financial statements from January 10,
2001. The purchase price, net of cash acquired and including costs incurred
directly related to the transaction, was $44.2 million. The excess of the
purchase price over identifiable assets acquired was $37.9 million, which
was being amortized on a straight-line basis over 20 years. InNet
subsequently evaluated the recoverability of the goodwill and recorded a
pretax impairment charge of $35.1 million in 2001. For further discussion,
see Note 11, Impairment of Goodwill.
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PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 $1.8 million, $1.5 million and $1.2 million at November 1,
2002, December 31, 2001 and 2000, respectively.
INVENTORIES
Inventories are valued at the lower of cost or net realizable value. 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. The cost of assets sold or
retired and the related accumulated depreciation are removed from the
accounts, with any resulting gain or loss included in net income.
Maintenance and repairs are charged to expense as incurred. Major renewals
and betterments that extend service lives are capitalized.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that full recoverability is questionable. Factors
used in the valuation include, but are not limited to, management's plans
for future operations, recent operating results and projected cash flows.
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the effective interest
method over the life of the related debt. Deferred financing costs were
$1,134,000, $1,313,000 and $749,000, net of accumulated amortization of
approximately $528,000, $289,000 and $45,000 at November 1, 2002 and
December 31, 2001 and 2000, respectively. Amortization expense was
approximately $239,000 for the period ended November 1, 2002, $244,000 in
2001 and $45,000 in 2000.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment to customers.
Provisions for returns and other adjustments are provided for in the same
period the related sales are recorded.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Companies' foreign subsidiaries are
translated at the balance sheet date exchange rates and statement of
operations accounts are translated at the average rates prevailing during
the period. Adjustments resulting from the translation are recorded as a
separate component of equity.
- 13 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
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ENVIRONMENTAL REMEDIATION AND COMPLIANCE
Environmental remediation and compliance expenditures are expensed or
capitalized in accordance with accounting principles generally accepted in
the United States of America. 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 November 1, 2002, December 31, 2001
and 2000. Due to the situation described in Notes 12 and 13, management is
not able to make a fair determination of the fair value of the debt.
CONCENTRATIONS OF CREDIT RISK
The Companies are subject to concentration of credit risk relating to cash
and equivalents. The Companies maintain cash and cash equivalents with
various financial institutions. The Companies monitor the relative credit
standing of these financial institutions and other entities and limit the
amounts of credit exposure with any one entity. The Companies also monitor
the creditworthiness of the entities to which they grant credit terms in
the normal course of business.
The Companies are exposed to market risk for changes in interest rates.
No customer accounted for more than 10% of the Companies' combined revenues
in 2002, 2001 or 2000.
INCOME TAXES
Passive Components is not a separate tax paying entity. Passive Components
is included in Insilco's combined federal and certain state income tax
groups for income tax reporting purposes and is responsible for its
proportionate share of income taxes calculated upon its federal taxable
income at a current estimate of the annual effective tax rate.
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. Determination of the amount
of valuation allowance recognized is based upon an assessment of whether it
is more likely than not that all or some portion of the deferred tax assets
will not be realized.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income (loss) and foreign
currency translation adjustments and is presented in the combined
statements of equity and comprehensive income (loss).
- 14 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
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ESTIMATES
In conformity with accounting principles generally accepted in the United
States of America, the preparation of 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. Statement No. 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Statement No. 146 eliminates the
definition and requirement for recognition of exit costs in Emerging Issues
Task Force (EITF) Issue No. 94-3 where a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. This
statement is effective for exit or disposal activities initiated after
December 31, 2002. The Companies believe that the adoption of this
statement will not have a significant impact on the results of operations
or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34. FIN 45 clarifies the requirements of FASB Statement No. 5,
Accounting for Contingencies, relating to the guarantor's accounting for,
and disclosure of, the issuance of certain types of guarantees. This
interpretation clarifies that a guarantor is required to recognize, at the
inception of certain types of guarantees, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition
and measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure
requirements in this interpretation are effective for financial statements
of annual periods ending after December 15, 2002. The Companies are
assessing the impact the adoption of this interpretation will have on the
results of operations or financial position.
- 15 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
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3. INVENTORIES
A summary of inventories at November 1, 2002 and December 31, 2001 and 2000
follows (in thousands):
DECEMBER 31,
NOVEMBER 1, ---------------------
2002 2001 2000
----------- ------- -------
Raw materials and supplies $ 5,139 $ 5,528 $ 6,221
Work in process 2,880 3,317 6,225
Finished goods 5,158 5,951 6,615
------- ------- -------
Total inventories $13,177 $14,796 $19,061
======= ======= =======
4. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at November 1, 2002 and December
31, 2001 and 2000 follows (in thousands):
DECEMBER 31,
NOVEMBER 1, ---------------------
2002 2001 2000
----------- ------- -------
Land $ 623 $ 623 $ 623
Buildings 4,313 4,067 4,100
Machinery and equipment 39,088 40,095 37,257
-------- -------- --------
44,024 44,785 41,980
Less accumulated depreciation (32,032) (30,554) (25,346)
-------- -------- --------
$ 11,992 $ 14,231 $ 16,634
======== ======== ========
- 16 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
A summary of accrued expenses and other current liabilities at November 1,
2002 and December 31, 2001 and 2000 follows (in thousands):
DECEMBER 31,
NOVEMBER 1, -------------------
2002 2001 2000
----------- ------ ------
Salaries and wages payable $1,230 $ 970 $1,901
Pension 413 213 87
Insurance 487 542 504
Commissions 431 468 526
Miscellaneous taxes 99 188 699
Restructuring 1,728 -- --
Other accrued expenses 514 1,112 200
------ ------ ------
$4,902 $3,493 $3,917
====== ====== ======
6. LONG-TERM DEBT
On January 10, 2001, Insilco increased its credit facility by $25.0 million
to fund the acquisition of InNet. This debt is reflected in the combined
balance sheets of the Companies at December 31, 2001 and November 1, 2002.
The related interest expense, deferred financing costs, amortization
expense and accumulated amortization have also been reflected on the
combined balance sheets and combined statements of operations of the
Companies.
The outstanding balance under the credit facility is subject to
twenty-three mandatory quarterly payments of $62,500 and two payments of
$11,781,250 in each of year six and seven. Interest accrues under the
credit facility at floating rates calculated with respect to either the
London Interbank Offered Rate (LIBOR) or Bank One's Base Rate, plus an
applicable margin. The margin, in turn, fluctuates based on Insilco's debt
covenant ratios. LIBOR at November 1, 2002 was 1.66%. At November 1, 2002,
the applicable margin for the credit facility was LIBOR plus 4.5%.
The credit facilities of the Parent are guaranteed by all of Insilco's
subsidiaries, including the Companies. In addition, the obligations
thereunder are collateralized by substantially all assets of the Companies.
The credit facility contains certain financial covenants including, but not
limited to, covenants related to minimum EBITDA, maximum debt and a limit
on annual capital expenditures. The credit facility also contains certain
negative covenants typical of credit agreements of this type including, but
not limited to, a prohibition on the ability of Insilco and its domestic
subsidiaries to incur additional indebtedness in excess of certain agreed
upon amounts, and to make investments other than permitted investments, and
also restricts Insilco and its subsidiaries from paying any
- 17 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
dividends, redeeming, repurchasing or acquiring any Insilco or Insilco
Holding Co. shares or paying any principal, premium or interest (in excess
of certain agreed upon amounts) on any subordinated obligations.
As a result of the situation described in Notes 12 and 13, the outstanding
debt obligation under the credit facility has been classified as current.
7. BENEFIT PLANS
Certain Signal and SCS employees participate in Insilco's defined benefit
pension plans. The benefits under these plans are based primarily on
employees' years of service and compensation near retirement. The
Companies' funding policy is consistent with the funding requirements of
federal laws and regulations. The net periodic pension cost allocated to
the Companies associated with Insilco's defined benefit pension plans was
$164,000 during the ten months ended November 1, 2002, $127,000 during 2001
and $(71,000) during 2000.
Signal also contributes to a multi-employer plan sponsored by a bargaining
unit for its union employees. Signal recognized expenses of $201,000 during
the ten months ended November 1, 2002, $295,000 in 2001, and $313,000 in
2000 related to contributions to this multi-employer plan.
In addition to the defined benefit plans described above, Signal and SCS
employees may participate in a qualified defined contribution 401(k) plan
sponsored by Insilco, which covers substantially all nonunion employees of
the Companies and their subsidiaries, and which covers union employees at
one of the Companies' subsidiaries. The Companies match 50% of
participants' voluntary contributions up to a maximum of 3% of each
participant's eligible compensation, subject to limitations required by
government laws or regulations. The Companies' expense related to this plan
was approximately $76,000 during the ten months ended November 1, 2002, and
$119,000 and $174,000 for the years ended December 31, 2001 and 2000,
respectively.
InNet sponsors a SIMPLE IRA plan for its employees. InNet's contributions
to this plan on behalf of its employees were $36,000 during the ten months
ended November 1, 2002 and $37,000 for the year ended December 31, 2001.
- 18 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
8. INCOME TAXES
The Passive Components combined financial statements reflect a charge
(benefit) for federal, state and foreign income taxes as if Passive
Components had been subject to tax on a separate company basis during the
periods presented.
The components of total income tax expense follow (in thousands):
DECEMBER 31,
NOVEMBER 1, ----------------------
2002 2001 2000
----------- ------- -------
Current
Federal $ -- $ -- $ 1,247
State 3 3 43
Foreign 727 833 1,761
------- ------- -------
730 836 3,051
------- ------- -------
Deferred
Federal -- (739) (322)
State -- (67) 67
Foreign -- -- --
------- ------- -------
-- (806) (255)
------- ------- -------
Total income tax provision $ 730 $ 30 $ 2,796
======= ======= =======
Domestic current income tax obligations (benefits) are treated as having
been settled through the intercompany account as if Passive Components were
filing its income tax returns on a separate company basis. Such amounts
were insignificant for the ten months ended November 1, 2002 and the year
ended December 31, 2001 and approximately $1,006,000 for the year ended
December 31, 2000. Foreign income tax obligations have been paid directly
by the foreign subsidiaries.
- 19 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
The significant components of deferred income tax expense (benefit) follow
(in thousands):
DECEMBER 31,
NOVEMBER 1, ---------------------
2002 2001 2000
----------- -------- --------
Deferred tax expense (benefit)
exclusive of the effects
of the following component $(1,528) $(8,348) $ (255)
Changes in the valuation allowance
for deferred tax assets
allocated to income tax expense 1,528 7,542 --
------- ------- -------
$ -- $ (806) $ (255)
======= ======= =======
Pretax income (loss) by domestic and foreign sources follows (in
thousands):
DECEMBER 31,
NOVEMBER 1, ---------------------
2002 2001 2000
----------- -------- --------
Domestic $(13,609) $(60,108) $ 1,913
Foreign 4,621 3,123 3,318
-------- -------- --------
$ (8,988) $(56,985) $ 5,231
======== ======== ========
Income tax expense differs from the amount computed by applying the Federal
statutory rate to pretax income due to the following (in thousands):
DECEMBER 31,
NOVEMBER 1, ---------------------
2002 2001 2000
----------- -------- --------
Computed statutory expense $ (3,146) $(19,945) $ 1,831
Goodwill book write off/amortization -- 13,368 --
State and local taxes (332) (691) 94
Foreign tax rate differential (890) (260) 600
U.S. possession income -- -- 265
Subpart foreign income deemed
taxable in the U.S. 3,545 -- --
Other 25 16 6
Valuation allowance 1,528 7,542 --
-------- -------- --------
Income tax expense $ 730 $ 30 $ 2,796
======== ======== ========
- 20 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities follows
(in thousands):
DECEMBER 31,
NOVEMBER 1, --------------------
2002 2001 2000
----------- ------- -------
Deferred tax assets
Net operating loss carryforwards $ 8,293 $ 7,437 $ 104
Accrued liabilities-receivables 329 308 205
Accrued liabilities-inventory 350 442 351
Accrued liabilities-other 898 828 496
------- ------- -------
Total gross deferred tax asset 9,870 9,015 1,156
Less: valuation allowance (9,093) (7,565) (23)
------- ------- -------
Total gross deferred tax asset
after valuation allowance 777 1,450 1,133
Deferred tax liabilities
Plant and equipment (777) (1,450) (1,894)
------- ------- -------
Net deferred tax (liability) $ -- $ -- $ (761)
======= ======= =======
Deferred taxes were not provided on cumulative unremitted earnings of
$8,961,000 and $9,238,000 at December 31, 2001 and 2000, respectively, for
certain subsidiaries outside the United States because it was expected that
the earnings would be permanently reinvested and determination was not
practical. In 2002, current taxes were provided on the earnings of those
foreign subsidiaries because it is expected that the earnings will not be
permanently reinvested due to financial obligations of Insilco.
At November 1, 2002, the Companies had net operating loss carryforwards for
Federal tax purposes of $20.9 million, which will begin to expire in 2022.
Insilco and its domestic subsidiaries file a consolidated U.S. federal
income tax return.
9. RESTRUCTURING AND PLANT CLOSING COSTS
During the ten months ended November 1, 2002 and the year ended December
31, 2001, the Companies recorded $1,744,000 and $181,000, respectively, of
restructuring and plant closing costs relating to the closure of facilities
in New York and the Dominican Republic and a sales office located in Japan.
These closings were under taken to reduce operating costs. During 2001, the
Companies paid approximately $181,000 related to these restructuring
charges. There were no charges during 2000.
- 21 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
All of these costs have been reflected in the Restructuring charge line
item on the combined statements of operations.
As of November 1, 2002, the Companies had an accrual of $1,728,000 relating
to these restructuring charges, which is included in accrued expenses on
the balance sheet. A summary of this accrual is as follows (in thousands):
AS OF AS OF
DECEMBER 31, RESTRUCTURING CASH NOVEMBER 1,
2001 CHARGE OUTLAYS 2002
------------ ------------- ------- -----------
Restructuring charges:
Employee separations $ -- $1,037 $ -- $1,037
Other exit costs -- 16 (16) --
Remaining noncancelable
lease costs -- 691 -- 691
------ ------ ------- ------
Total restructuring charge $ -- $1,744 $ (16) $1,728
====== ====== ====== ======
The headcount reduction from these activities was approximately 73
employees.
10. COMMITMENTS AND CONTINGENCIES
Rental expense for operating leases totaled $1.2 million, $2.0 million, and
$824,000 for the ten months ended November 1, 2002 and the years ended
December 31, 2001 and 2000, respectively. These leases primarily relate to
production facilities.
Future minimum lease payments under contractually noncancelable operating
leases (with initial lease terms in excess of one year) for years
subsequent to November 1, 2002 are as follows (in thousands):
2003 $ 1,050
2004 504
2005 258
2006 207
2007 30
Thereafter -
The Companies are subject to various claims and legal actions arising in
the ordinary course of business. The Companies accrue for amounts related
to legal matters if it is probable that a liability has been incurred and
an amount is reasonably estimable. No amounts were accrued related to legal
matters at November 1, 2002, December 31, 2001 or 2000.
The Companies' operations are subject to extensive federal, state and local
laws and regulations relating to the generation, storage, handling,
emission, transportation and discharge of materials
- 22 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
into the environment. The Companies have a program for monitoring its
compliance with applicable environmental regulations, the interpretation of
which often is subjective. The Companies have taken significant measures to
(1) address emissions, discharges and waste generation and disposal, (2)
improve management practices and operations in response to legal
requirements, and (3) internally review compliance with applicable
environmental regulations and approved practices. In order to achieve these
goals, the Companies have instituted several programs including (1) raw
material and process substitution, recycling and material management, (2)
periodic review of hazardous waste storage and disposal practices, and (3)
review of compliance and financial status and management practices of our
offsite third-party waste management firms.
In the opinion of management, the ultimate disposition of the matters
discussed above will not have a material adverse effect on the Companies'
combined financial position, results of operations or liquidity.
11. IMPAIRMENT OF GOODWILL
During the first half of 2001, the Companies experienced a significant
decrease in the rate of growth due to a dramatic decline in capital
spending in the telecommunications industry. During the second quarter of
2001, major customers further reduced their order forecasts and canceled
orders already placed. Management believed that the growth prospects for
these business segments were significantly less than previously expected
and those of historical periods.
The Companies review the value of their long-lived assets when events or
changes in circumstances occur that indicate the carrying value of the
asset may be impaired. As a result of the business conditions noted above,
Insilco concluded such a review was required for its recent acquisition of
InNet, acquired in January 2001, and the related goodwill. The review was
completed in a series of tests. The first test included the following
steps: (1) management estimated the undiscounted future cash flows of the
asset based on estimated growth levels; (2) management estimated the
terminal value of the asset based on an appropriate multiple of EBITDA; and
(3) management compared the sum of the future cash flows and terminal value
to the carrying value of long lived assets to determine if an impairment
has occurred. If an impairment had occurred, management performed a second
test as follows: (1) management discounted the future cash flows and
terminal value, using EBITDA as a proxy for cash flow, to a present value
using an appropriate discount rate; and (2) management compared the
discounted net present value to the carrying value of long lived assets to
determine the amount of the impairment.
As a result of this review, management determined that the goodwill related
to the acquisition of InNet was impaired and, in accordance with Insilco's
policy it was necessary to write down the goodwill. Thus in 2001, InNet
recorded a pretax impairment charge of $35.1 million.
- 23 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
12. GOING CONCERN MATTERS
On February 15, 2002, the Parent failed to make a required interest payment
on its 12% Senior Subordinated Notes Due 2007 (the 12% Notes). The 30-day
grace period for such payment expired on March 18, 2002, resulting in an
event of default under the indenture governing the 12% Notes, as well as a
cross-default under the Parent's Senior Secured Credit facility (the
Amended Credit Agreement). Further, on March 31, 2002, the Parent failed to
meet the EBITDA covenant under its Amended Credit Agreement and was in
default on its Amended Credit Agreement and its 12% Notes. Subsequently,
the Parent did not make the $7.2 million August 15, 2002 required interest
payment on its 12% Notes and did not meet the EBITDA covenants under its
Amended Credit Agreement for June 30 and September 30, 2002. At September
30, 2002, the Parent continued to operate under these defaults and,
therefore, has classified as current, its debt obligations under the
Amended Credit Agreement, the 12% Notes and the 14% Senior Discount Notes
Due 2008 (the 14% Notes).
On May 3, 2002, the Parent and the lenders under the Amended Credit
Agreement (the Lenders) entered into a forbearance agreement (Forbearance
Agreement). Under the Forbearance Agreement, the Lenders agreed that,
absent a further default, they would not (a) accelerate the maturity of the
debt under the Amended Credit Agreement, (b) take enforcement action
against any collateral, including effecting any rights of setoff, or (c)
commence any legal action to enforce rights or remedies pursuant to the
terms of the Amended Credit Agreement, for the period from May 3, 2002
until July 10, 2002 (the Forbearance Period). This agreement was
subsequently amended to extend the Forbearance Period through November 4,
2002. The purpose of the Forbearance Period was to allow the Parent time to
evaluate and pursue strategic alternatives, such as a sale of all or some
of the business, a Chapter 11 bankruptcy filing, or other remedies
appropriate for the circumstances. To that end, the Parent engaged in
active discussions with potential purchasers of substantially all of the
assets of its three business segments, including the Passive Components
Group, which the Parent anticipates will result in multiple sales of these
business segments through Chapter 11 bankruptcy proceedings.
The Parent's recent losses and highly leveraged position raise substantial
doubt about the Parent's and the Companies' ability to continue as a going
concern. The combined financial statements do not include any adjustments
relating to recoverability and classification of recorded asset amounts or
the amount and classification of liabilities that might be necessary should
the Parent and the Companies become unable to continue as a going concern.
13. SUBSEQUENT EVENT
On December 16, 2002, Insilco Holding Co., the parent company of Insilco,
Insilco and several of Insilco's subsidiaries, including the Companies,
filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code with the United States Bankruptcy Court for the District of
Delaware. The debtors continue to manage their properties and operate their
businesses as "debtors-in-possession" under the jurisdiction of the
Bankruptcy Code.
- 24 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 1, 2002 AND DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
In addition, Insilco Holding Co. completed its review of strategic
alternatives for addressing its capital structure issues and its primary
operating subsidiary, Insilco, has entered into definitive agreements to
sell substantially all of the assets of its three business segments,
including the Passive Components Group, for which the Parent and certain of
its subsidiaries have agreed to sell to Bel Fuse Ltd. for approximately $35
million.
None of Insilco's operations located outside of the United States were
included in the Chapter 11 filings, though the shares of certain foreign
subsidiaries and certain foreign assets will be included in the sale
transactions. The Chapter 11 filings allow the sale of the assets of the
domestic entities to be free and clear from certain liabilities that the
prospective purchasers do not wish to assume.
On January 14, 2003, the Parent notified the Pension Benefit Guaranty
Corporation (PBGC) that a reportable event occurred in regards to the
defined benefit pension plan due to the Chapter 11 filing. The Parent
intends to terminate the plan as the potential buyers of the various
businesses will not sponsor the existing plan. The plan was in an
under-funded position of approximately $17 million, on a termination basis,
as of December 31, 2002. Management expects the PBGC to take over as
trustee of the plan and that the PBGC will make all future benefit payments
to the covered employees after such time.
- 25 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
COMBINED BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 31, 2002 (IN THOUSANDS)
- --------------------------------------------------------------------------
December 31,
2002
----------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalants $ 10,849
Trade receivables, net 13,181
Other Receivables 1,544
Inventories, net 12,326
Prepaid expenses and other current assets 793
----------------
Total current assets 38,693
----------------
Property, plant and equipment, net 11,384
Other assets and deferred charges 262
----------------
Total Assets $ 50,339
================
LIABILITIES AND EQUITY
Current liabilities
Current portion of long term debt $ 24,711
Accounts payable 2,522
Prepetition liability 2,467
Accrued expenses and other accrued liabilities 4,602
Income taxes payable 730
----------------
Total current liabilities 35,032
----------------
Long term debt, excluding current portion 137
Other long term liabilities --
----------------
Total liabilities 35,169
----------------
Comitments and contingencies
Equity
Insilco Technologies, Inc
Net investment and advances 13,969
Accumulated other comprehensive income 1,201
----------------
Total equity 15,170
----------------
Total liabilities and equity $ 50,339
================
See notes to unaudited financial statements.
- 26 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002 (IN THOUSANDS)
- ----------------------------------------------------------------------------
December 31,
2002
----------------
(Unaudited)
NET SALES 71,561
COST OF PRODUCTS SOLD 54,263
DEPRECIATION AND AMORTIZATION 4,471
SELLING. GENERAL AND ADMINISTRATIVE EXP 16,894
GOODWILL IMPAIRMENT CHARGES --
RESTRUCTURING CHARGE 1,744
ALLOCATED CORPORATE COSTS 1,391
----------------
OPERATING (LOSS) INCOME (7,202)
----------------
OTHER INCOME (EXPENSE)
INTEREST EXPENSE (1,522)
ALLOCATED CAPITAL COSTS (3,270)
INTEREST INCOME 210
OTHER INCOME(EXPENSE), NET (619)
----------------
TOTAL OTHER INCOME (EXPENSE) (5,201)
----------------
LOSS (INCOME)FROM OPERATIONS BEFORE INCOME TAX (12,403)
INCOME TAX EXPENSE 730
----------------
NET (LOSS) INCOME $ (13,133)
================
See notes to unaudited financial statements.
- 27 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
December 31,
2002
----------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income (13,133)
Adjustments to reconcile net (loss) income to net
cash (used in) provided for by operating activies:
Depreciation and amortization 4,471
Changes in operating assets and liabilities:
Trade and other receivables 893
Inventories 2,470
Prepaid expenses and other current assets (59)
Accounts payable (2,611)
Other current liabilities and other 291
-----------------
Net cash provided by operating activties (7,678)
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures and other investing activities (1,783)
-----------------
Net cash used in investing activities (1,783)
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (90)
Debt issuance and tender cost (59)
Net changes to Insilco Technologies, Inc. net
investment and advances 10,697
-----------------
Net cash provided by(used in) financing activities 10,548
-----------------
Effect of exchange rates on cash 850
-----------------
Net increase in cash and equivalents 1,937
Cash and equivalents at beginning of period 6,445
-----------------
Cash and equivalents at end of period $ 8,382
=================
See notes to unaudited financial statements.
- 28 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
1. BASIS OF PRESENTATION
The combined financial statements reflect the financial position,
results of operations and cash flows of the Passive Components Group
for the year ended December 31, 2002. The Passive Components Group
consists of three business units and their subsidiaries (all of which
are wholly owned subsidiaries of Insilco Technologies, Inc.) (Insilco
or the Parent): Signal Transformer Co., Inc. (Signal); InNet
Technologies, Inc. (InNet), which was purchased on January 10, 2001;
and Stewart Connector Systems, Inc. (SCS), herein referred to as
Passive Components or the Companies. The Companies' operations consist
of the manufacturing and sale of telecommunications and electrical
component products. Passive Components is not a separate legal entity
and since no direct ownership in the Companies as a combined group
exists, Insilco's net investment and advances in the Companies is shown
in lieu of stockholder's equity in the combined financial statements
and includes the accumulation of transactions between the Companies and
Insilco described below. All intercompany accounts and transactions
amongst the Passive Components Group have been eliminated. Sales to
other subsidiaries of Insilco were approximately $28,000 for the year
ended December 31, 2002.
Management believes the assumptions underlying the combined financial
statements are reasonable. However, the combined financial position,
results of operations and cash flows presented herein may not be the
same as would have occurred had the Companies operated as stand-alone
entities during the period presented and may not be indicative of
future financial results.
INTERCOMPANY RELATIONSHIP WITH THE PARENT
The combined financial statements include allocations of Insilco's
corporate overhead, executive management and administrative expenses
amounting to $1.4 million for the year ended December 31, 2002,, which
are included in the Allocated corporate costs line in the statement of
operations. These allocations include the general administrative
expenses of Insilco's corporate office, such as accounting, information
technology, human resources, legal, environmental, treasury, and tax.
As specific identification of these expenses was not practical,
allocations were charged based on a formula factoring in the ratio of
the Companies' forecasted annual sales, forecasted assets, and actual
number of employees in proportion to Insilco's consolidated numbers for
these categories. The resulting ratio was applied to Insilco's
forecasted corporate expenses and allocated to the Companies rateably
for the year.
Insilco's management believes that this allocation method is
reasonable, however, the allocations do not necessarily represent what
the Companies would have incurred on a stand-alone basis. As the
Companies were operated in a decentralized manner with their own
administrative infrastructure, and the Companies would likely make
different decisions regarding administrative initiatives, their
overhead expenses as a separate company would be different than that
reflected in the combined financial statements.
- 29 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
The Companies' combined financial statements also include allocations of
Insilco's interest expense totaling $3.3 million for the year ended December 31,
2002, which are included in the Allocated interest expense line in the statement
of operations. Interest expense has been allocated generally based on the
Companies' net assets in proportion to Insilco's consolidated net assets. The
interest rate applied was 10.0%, which represents an estimated weighted average
cost of capital.
The amounts used to calculate interest expense do not necessarily reflect the
level of indebtedness the Companies would incur as a separate entity. Insilco's
management believes these are reasonable estimates of the cost of financing the
Companies' assets and operations in the past. However, the Companies may not be
able to obtain financing at interest rates similar to those used for the
interest expense calculation. Accordingly, the Companies' interest expense and
financing costs as a separate entity may be different than that reflected in the
combined financial statements.
Insilco uses a centralized approach to cash management and the financing of its
operations. The Companies' cash accounts are swept on a daily basis and are
netted against the net investment and advances account. As a result, none of
Insilco's cash, cash equivalents or debt at the corporate level has been
allocated to the Companies in the combined financial statements, other than the
$25 million portion of the credit facility drawn specifically to fund the
acquisition of InNet in 2001. Cash in the combined financial statements
primarily represents amounts held locally by the Companies' operations in their
various geographic areas.
ACQUISITION
On January 10, 2001, Insilco acquired the outstanding equity interests in InNet,
excluding approximately 16% of the outstanding equity interests that Insilco
already owned. InNet, now a wholly owned subsidiary of Insilco, is a
California-based designer, developer and marketer of a broad range of magnetic
interface products for networking, computer and telecommunications original
equipment manufacturers. The gross purchase price paid for the remaining equity
interests was $44.9 million and was financed with cash and additional borrowings
of $25.0 million under the Parent's credit facility. The purchase method of
accounting has been used to account for the purchase; accordingly, the results
of operations of InNet have been included in the Companies' combined financial
statements from January 10, 2001. The purchase price, net of cash acquired and
including costs incurred directly related to the transaction, was $44.2 million.
The excess of the purchase price over identifiable assets acquired was $37.9
million, which was being amortized on a straight-line basis over 20 years. InNet
subsequently evaluated the recoverability of the goodwill and recorded a pretax
impairment charge of $35.l million in 2001. For further discussion, see Note 11,
Impairment of Goodwill.
- 30 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF LNSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 $1.7 million at December 31, 2002.
INVENTORIES
Inventories are valued at the lower of cost or net realizable value.
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. The cost of assets sold
or retired and the related accumulated depreciation are removed from
the accounts, with any resulting gain or loss included in net income.
Maintenance and repairs are charged to expense as incurred. Major
renewals and betterments that extend service lives are capitalized.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that full recoverability is
questionable. Factors used in the valuation include, but are not
limited to, management's plans for future operations, recent operating
results and projected cash flows.
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the effective
interest method over the life of the related debt. Amortization expense
was approximately $1,373,000 for 2002 which includes a $1,098,000 write
off of the remaining balance during December 2002.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment to customers.
Provisions for returns and other adjustments are provided for in the
same period the related sales are recorded.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Companies' foreign subsidiaries are
translated at the balance sheet date exchange rates and statement of
operations accounts are translated at the average rates prevailing
during the period. Adjustments resulting from the translation are
recorded as a separate component of equity.
- 31 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
ENVIRONMENTAL REMEDIATION AND COMPLIANCE
Environmental remediation and compliance expenditures are expensed or
capitalized in accordance with accounting principles generally accepted
in the United States of America. 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, 2002. Due to the
situation described in Notes 12 and 13, management is not able to make
a fair determination of the fair value of the debt.
CONCENTRATIONS OF CREDIT RISK
The Companies are subject to concentration of credit risk relating to
cash and equivalents. The Companies maintain cash and cash equivalents
with various financial institutions. The Companies monitor the relative
credit standing of these financial institutions and other entities and
limit the amounts of credit exposure with any one entity. The Companies
also monitor the creditworthiness of the entities to which they grant
credit terms in the normal course of business.
The Companies are exposed to market risk for changes in interest rates.
No customer accounted for more than 10% of the Companies' combined
revenues in 2002.
INCOME TAXES
Passive Components is not a separate tax paying entity. Passive
Components is included in Insilco's combined federal and certain state
income tax groups for income tax reporting purposes and is responsible
for its proportionate share of income taxes calculated upon its federal
taxable income at a current estimate of the annual effective tax rate.
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.
Determination of the amount of valuation allowance recognized is based
upon an assessment of whether it is more likely than not that all or
some portion of the deferred tax assets will not be realized.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income (loss) and foreign
currency translation adjustments and is presented in the combined
statements of equity and comprehensive income (loss).
- 32 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF LNSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
ESTIMATES
In conformity with accounting principles generally accepted in the
United States of America, the preparation of 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. Statement No. 146 requires
that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Statement No.
146 eliminates the definition and requirement for recognition of exit
costs in Emerging Issues Task Force (EITF) Issue No. 94-3 where a
liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. This statement is effective for exit or
disposal activities initiated after December 31, 2002. The Companies
believe that the adoption of this statement will not have a significant
impact on the results of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FA SB Statements No. 5, 57, and 107 and Rescission of
FASB Interpretation No. 34. FIN 45 clarifies the requirements of FASB
Statement No. 5, Accounting for Contingencies, relating to the
guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. This interpretation clarifies that a guarantor is
required to recognize, at the inception of certain types of guarantees,
a liability for the fair value of the obligation undertaken in issuing
the guarantee. The initial recognition and measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in this
interpretation are effective for financial statements of annual periods
ending after December 15, 2002. The Companies are assessing the impact
the adoption of this interpretation will have on the results of
operations or financial position.
- 33 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
3. INVENTORIES
A summary of inventories at December 31, 2002 follows (in thousands):
December 31,
-----------------
2002
-----------------
Raw material and supplies $ 4,609
Work in process 2,378
Finished goods 5,339
-----------------
Total inventories = $ 12,326
=================
4. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment December 31, 2002 follows
(in thousands):
December 31,
-----------------
2002
-----------------
Land $ 623
Buildings 4,359
Machinery and equipment 39,231
-----------------
44,213
Less accumulated
depreciation (32,829)
-----------------
$ 11,384
=================
- 34 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF LNSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
A summary of accrued expenses and other current liabilities at December
31, 2002 follows (in thousands):
December 31,
-----------------
2002
-----------------
Salaries and wages payable $ 787
Pension 473
Insurance 418
Commissions 427
Miscellaneous taxes 93
Restructuring 1,728
Other accrued expenses 676
-----------------
$ 4,602
=================
6. LONG-TERM DEBT
On January 10, 2001, Insilco increased its credit facility by $25.0
million to fund the acquisition of InNet. This debt is reflected in the
combined balance sheet of the Companies at December 31, 2002. The
related interest expense, deferred financing costs, amortization
expense and accumulated amortization have also been reflected on the
combined balance sheets and combined statements of operations of the
Companies.
The outstanding balance under the credit facility is subject to
twenty-three mandatory quarterly payments of $62,500 and two payments
of $l1,781,250 in each of year six and seven. Interest accrues under
the credit facility at floating rates calculated with respect to either
the London Interbank Offered Rate (LIBOR) or Bank One's Base Rate, plus
an applicable margin. The margin, in turn, fluctuates based on
Insilco's debt covenant ratios. LIBOR at December 31, 2002 was 1.45%.
At December 31, 2002, the applicable margin for the credit facility was
LJBOR plus 4.5%.
The credit facilities of the Parent are guaranteed by all of Insilco's
subsidiaries, including the Companies. In addition, the obligations
thereunder are collateralized by substantially all assets of the
Companies.
The credit facility contains certain financial covenants including, but
not limited to, covenants related to minimum EBITDA, maximum debt and a
limit on annual capital expenditures. The credit facility also contains
certain negative covenants typical of credit agreements of this type
including, but not limited to, a prohibition on the ability of Insilco
and its domestic subsidiaries to incur additional indebtedness in
excess of certain agreed upon amounts, and to make investments other
than permitted investments, and also restricts Insilco and its
subsidiaries from paying any
- 35 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF LNSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
dividends, redeeming, repurchasing or acquiring any Insilco or Insilco
Holding Co. shares or paying any principal, premium or interest (in
excess of certain agreed upon amounts) on any subordinated obligations.
As a result of the situation described in Notes 12 and 13, the
outstanding debt obligation under the credit facility has been
classified as current.
7. BENEFIT PLANS
Certain Signal and SCS employees participate in Insilco's defined
benefit pension plans. The benefits under these plans are based
primarily on employees' years of service and compensation near
retirement. The Companies' funding policy is consistent with the
funding requirements of federal laws and regulations. The net periodic
pension cost allocated to the Companies associated with Insilco's
defined benefit pension plans was $213,000 during 2002.
Signal also contributes to a multi-employer plan sponsored by a
bargaining unit for its union employees. Signal recognized expenses of
$249,000 in 2002 related to contributions to this multi-employer plan.
In addition to the defined benefit plans described above, Signal and
SCS employees may participate in a qualified defined contribution
401(k) plan sponsored by lnsilco, which covers substantially all
nonunion employees of the Companies and their subsidiaries, and which
covers union employees at one of the Companies' subsidiaries. The
Companies match 50% of participants' voluntary contributions up to a
maximum of 3% of each participant's eligible compensation, subject to
limitations required by government laws or regulations. The Companies'
expense related to this plan was approximately $79,000 for the year
ended December 31, 2002.
InNet sponsors a SIMPLE IRA plan for its employees. InNet's
contributions to this plan on behalf of its employees were $42,000 for
the year ended December 31, 2002.
- 36 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF LNSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
8. INCOME TAXES
The Passive Components combined financial statements reflect a charge
(benefit) for federal, state and foreign income taxes as if Passive
Components had been subject to tax on a separate company basis during
the periods presented.
The components of total income tax expense follow (in thousands):
December 31,
2002
-----------------
Current
Federal --
State 3
Foreign 727
-----------------
730
-----------------
Deferred
Federal --
State --
Foreign --
-----------------
--
-----------------
Total income tax
provision $ 730
=================
Domestic current income tax obligations (benefits) are treated as
having been settled through the intercompany account as if Passive
Components were filing its income tax returns on a separate company
basis. Such amounts were insignificant for the year ended December 31,
2002. Foreign income tax obligations have been paid directly by the
foreign subsidiaries.
- 37 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF LNSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
The significant components of deferred income tax expense (benefit)
follow (in thousands):
December 31,
2002
-----------------
Deferred tax expense (benefit)
exclusive of the effects of
the following component (2,725)
Changes in the valuation allowance
for deferred tax assets
allocated to income tax expense 2,725
-----------------
$ --
=================
Pretax income (loss) by domestic and foreign sources follows (in
thousands):
December 31,
2002
------------------
Domestic (16,668)
Foreign 4,265
------------------
$ (12,403)
==================
Income tax expense differs from the amount computed by applying the
Federal statutory rate to pretax income due to the following (in
thousands):
December 31,
2002
------------------
Computed statutory expense $ (4,343)
Goodwill book write off/amortization --
State and local taxes (332)
Foreign tax rate differential (890)
U.S. possession income --
Subpart foreign income deemed taxable in the U.S. 3,545
Other 25
Valuation allowance 2,725
------------------
Income tax expense $ 730
==================
- 38 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF LNSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
The tax effects of temporary differences that gives rise to significant
portions of deferred tax assets and deferred tax liabilities are offset
by valuation allowances resulting in no net deferred tax assets or
liabilities.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities
follows (in thousands):
In 2002, current taxes were provided on the earnings of foreign
subsidiaries because it is expected that the earnings will not be
permanently reinvested due to financial obligations of Insilco.
At December 31, 2002, the Companies had net operating loss
carryforwards for Federal tax purposes of $20.9 million, which will
begin to expire in 2022.
Insilco and its domestic subsidiaries file a consolidated U.S. federal
income tax return.
9. RESTRUCTURING AND PLANT CLOSING COSTS
During the years ended December 31, 2002, the Companies recorded
$1,744,000 of restructuring and plant closing costs relating to the
closure of facilities in New York and the Dominican Republic and a
sales office located in Japan. These closings were under taken to
reduce operating costs.
All of these costs have been reflected in the Restructuring charge line
item on the combined statements of operations.
As of December 31, 2002, the Companies had an accrual of $l,728,000
relating to these restructuring charges, which is included in accrued
expenses on the balance sheet. A summary of this accrual is as follows
(in thousands):
As of As of
December 31, Restructuring Cash December 31,
2001 Charge Outlays 2002
----------------- ----------------- ----------------- ------------------
Restructuring charges:
Employee separations $ -- $ 1,037 $ -- $ 1,037
Other exit costs -- 16 (16) --
Remaining noncancelable
lease costs -- 691 -- 691
----------------- ----------------- ----------------- ------------------
Total restructuring charge $ -- $ 1,744 $ (16) $ 1,728
================= ================= ================= ==================
The headcount reduction from these activities was approximately 73
employees.
- 39 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
10. COMMITMENTS AND CONTINGENCIES
Rental expense for operating leases totaled $l.4 million, for the year
ended December 31, 2002. These leases primarily relate to production
facilities.
Future minimum lease payments under contractually noncancelable
operating leases (with initial lease terms in excess of one year) for
years subsequent to December 31, 2002 are as follows (in thousands):
2003 $1,050
2004 540
2005 269
2006 177
2007 --
Thereafter --
The Companies are subject to various claims and legal actions arising
in the ordinary course of business. The Companies accrue for amounts
related to legal matters if it is probable that a liability has been
incurred and an amount is reasonably estimable. No amounts were accrued
related to legal matters at December 31, 2002.
The Companies' 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 Companies have a program for monitoring its compliance
with applicable environmental regulations, the interpretation of which
often is subjective. The Companies have taken significant measures to
(1) address emissions, discharges and waste generation and disposal,
(2) improve management practices and operations in response to legal
requirements, and (3) internally review compliance with applicable
environmental regulations and approved practices. In order to achieve
these goals, the Companies have instituted several programs including
(1) raw material and process substitution, recycling and material
management, (2) periodic review of hazardous waste storage and disposal
practices, and (3) review of compliance and financial status and
management practices of our offsite third-party waste management firms.
In the opinion of management, the ultimate disposition of the matters
discussed above will not have a material adverse effect on the
Companies' combined financial position, results of operations or
liquidity.
- 40 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF LNSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
11. IMPAIRMENT OF GOODWILL
During the first half of 2001, the Companies experienced a significant
decrease in the rate of growth due to a dramatic decline in capital
spending in the telecommunications industry. During the second quarter
of 2001, major customers further reduced their order forecasts and
canceled orders already placed. Management believed that the growth
prospects for these business segments were significantly less than
previously expected and those of historical periods.
The Companies review the value of their long-lived assets when events
or changes in circumstances occur that indicate the carrying value of
the asset may be impaired. As a result of the business conditions noted
above, Insilco concluded such a review was required for its recent
acquisition of InNet, acquired in January 2001, and the related
goodwill. The review was completed in a series of tests. The first test
included the following steps: (1) management estimated the undiscounted
future cash flows of the asset based on estimated growth levels; (2)
management estimated the terminal value of the asset based on an
appropriate multiple of EBITDA; and (3) management compared the sum of
the future cash flows and terminal value to the carrying value of long
lived assets to determine if an impairment has occurred. If an
impairment had occurred, management performed a second test as follows:
(1) management discounted the future cash flows and terminal value,
using EBITDA as a proxy for cash flow, to a present value using an
appropriate discount rate; and (2) management compared the discounted
net present value to the carrying value of long lived assets to
determine the amount of the impairment.
As a result of this review, management determined that the goodwill
related to the acquisition of InNet was impaired and, in accordance
with Insilco's policy it was necessary to write down the goodwill. Thus
in 2001, InNet recorded a pretax impairment charge of $35.1 million.
- 41 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF INSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
12. GOING CONCERN MATTERS
On February 15, 2002, the Parent failed to make a required interest
payment on its 12% Senior Subordinated Notes Due 2007 (the 12% Notes).
The 30-day grace period for such payment expired on March 18, 2002,
resulting in an event of default under the indenture governing the 12%
Notes, as well as a cross-default under the Parent's Senior Secured
Credit facility (the Amended Credit Agreement). Further, on March 31,
2002, the Parent failed to meet the EBITDA covenant under its Amended
Credit Agreement and was in default on its Amended Credit Agreement and
its 12% Notes. Subsequently, the Parent did not make the $7.2 million
August 15, 2002 required interest payment on its 12% Notes and did not
meet the EBITDA covenants under its Amended Credit Agreement for June
30 and September 30, 2002. At September 30, 2002, the Parent continued
to operate under these defaults and, therefore, has classified as
current, its debt obligations under the Amended Credit Agreement, the
12% Notes and the 14% Senior Discount Notes Due 2008 (the 14% Notes).
On May 3, 2002, the Parent and the lenders under the Amended Credit
Agreement (the Lenders) entered into a forbearance agreement
(Forbearance Agreement). Under the Forbearance Agreement, the Lenders
agreed that, absent a further default, they would not (a) accelerate
the maturity of the debt under the Amended Credit Agreement, (b) take
enforcement action against any collateral, including effecting any
rights of setoff, or (c) commence any legal action to enforce rights or
remedies pursuant to the terms of the Amended Credit Agreement, for the
period from May 3, 2002 until July 10, 2002 (the Forbearance Period).
This agreement was subsequently amended to extend the Forbearance
Period through November 4, 2002. The purpose of the Forbearance Period
was to allow the Parent time to evaluate and pursue strategic
alternatives, such as a sale of all or some of the business, a Chapter
11 bankruptcy filing, or other remedies appropriate for the
circumstances. To that end, the Parent engaged in active discussions
with potential purchasers of substantially all of the assets of its
three business segments, including the Passive Components Group, which
the Parent anticipates will result in multiple sales of these business
segments through Chapter 11 bankruptcy proceedings.
The Parent's recent losses and highly leveraged position raise
substantial doubt about the Parent's and the Companies' ability to
continue as a going concern. The combined financial statements do not
include any adjustments relating to recoverability and classification
of recorded asset amounts or the amount and classification of
liabilities that might be necessary should the Parent and the Companies
become unable to continue as a going concern.
13. SUBSEQUENT EVENT
On December 16, 2002, Insilco Holding Co., the parent company of
Insilco, Insilco and several of Insilco's subsidiaries, including the
Companies, filed voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code with the United States Bankruptcy Court
for the District of Delaware. The debtors continue to manage their
properties and operate their businesses as "debtors-in-possession"
under the jurisdiction of the Bankruptcy Code.
- 42 -
PASSIVE COMPONENTS GROUP
(WHOLLY OWNED SUBSIDIARIES OF LNSILCO TECHNOLOGIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (Unaudited)
In addition, Insilco Holding Co. completed its review of strategic
alternatives for addressing its capital structure issues and its
primary operating subsidiary, Insilco, has entered into definitive
agreements to sell substantially all of the assets of its three
business segments, including the Passive Components Group, for which
the Parent and certain of its subsidiaries have agreed to sell to Bel
Fuse Ltd. for approximately $35 million.
None of Insilco's operations located outside of the United States were
included in the Chapter 11 filings, though the shares of certain
foreign subsidiaries and certain foreign assets will be included in the
sale transactions. The Chapter 11 filings allow the sale of the assets
of the domestic entities to be free and clear from certain liabilities
that the prospective purchasers do not wish to assume.
On January 14, 2003, the Parent notified the Pension Benefit Guaranty
Corporation (PBGC) that a reportable event occurred in regards to the
defined benefit pension plan due to the Chapter 11 filing. The Parent
intends to terminate the plan as the potential buyers of the various
businesses will not sponsor the existing plan. The plan was in an
under-funded position of approximately $17 million, on a termination
basis, as of December 31, 2002. Management expects the PBGC to take
over as trustee of the plan and that the PBGC will make all future
benefit payments to the covered employees after such time.
- 43 -
Unaudited Pro Forma Condensed
Combining Financial Statements of Registrant and the Passive Component
Group of Insilco Technologies, Inc.
as of December 31, 2002 and for the year then ended
The following unaudited pro forma condensed combining financial
statements give pro forma effect to the acquisition using the purchase method of
accounting and the assumptions and adjustments set forth in the accompanying
notes to the pro forma condensed combining financial statements. This
presentation assumes a purchase price of approximately $35 million in cash and
the assumption of certain liabilities.
The purchase price has been allocated based on preliminary estimates of
the fair market value of Passive Components assets and liabilities. See Note 1
to the Notes to Unaudited Pro Forma Condensed Combining Financial Statements.
The pro forma adjustments are subject to change pending a final analysis of the
fair values of the assets acquired and liabilities assumed. The impact of these
changes could be material.
Periods Covered
The unaudited pro forma condensed combing balance sheet as of December
31, 2002 is based on the individual historical balance sheets of Bel Fuse Inc.
and Passive Components and gives effect to the acquisition as if it had occurred
on December 31, 2002. The unaudited pro forma condensed combining statement of
operations for the year ended December 31, 2002 is based on the individual
historical statements of operations of Bel Fuse Inc. and Passive Components and
combines the results of operations of Bel Fuse Inc. and Passive Components for
the year ended December 31, 2002, as if the merger had occurred on January 1,
2002.
The unaudited pro forma condensed combining financial statements are
based on estimates and assumptions. These estimates and assumptions are
preliminary and have been made solely for the purpose of developing this pro
forma information. Unaudited pro forma condensed combining financial information
is presented for illustrative purposes only and is not necessarily indicative of
the operating results that would have been achieved if the acquisition of
Passive Components had been consummated as of the beginning of the period
indicated, nor is it necessarily indicative of future results of operations. The
pro forma condensed combining financial information does not give effect to any
cost savings or restructuring and integration costs that may result from the
integration of Bel Fuse Inc. and Passive Components businesses. Costs related to
restructuring and integration have not yet been determined.
- 44 -
BEL FUSE INC - PASSIVE COMPONENTS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2002
(AMOUNTS IN THOUSANDS)
Adjusted
Passive Passive
Components Components Pro Forma
Bel Fuse Group Adjustments Group Adjustments Total
------------- ------------- ------------- ----------- ----------- -------------
Current Assets:
Cash and cash equivalents $ 59,003 $ 10,849 $ (10,849)(1) $ -- 9,950 3d| $ 33,953
(35,000) 3d|
Marketable securities 4,966 4,966
Accounts receivable - net 16,840 13,181 13,181 30,021
Inventories 12,384 12,326 12,326 24,710
Prepaid expenses and other current
assets 190 2,337 2,337 2,527
Refundable income taxes 682 682
Deferred income taxes 439 -- -- -- -- 439
------------- ------------- ------------- ----------- ----------- -------------
Total Current Assets 94,504 38,693 (10,849) 27,844 (25,050) 97,298
------------- ------------- ------------- ----------- ----------- -------------
Property, plant and equipment - net 37,605 11,384 11,384 48,989
Goodwill - net 4,820 4,820
919 3f|
274 3a| 6,632
Identifiable intangible assets-net 2,805 2,634 3b|
50 3d|
Other assets 7,159 262 -- 262 (919) 3f| 6,552
------------- ------------- ------------- ----------- ----------- -------------
TOTAL ASSETS $ 146,893 $ 50,339 $(10,849) $39,490 $(22,092) $ 164,291
============= ============= ============= =========== =========== =============
See notes to unaudited pro forma condensed combining financial statements.
- 45 -
BEL FUSE INC - PASSIVE COMPONENTS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2002
(AMOUNTS IN THOUSANDS)
Adjusted
Passive Passive
Components Components Pro Forma
Bel Fuse Group Adjustments Group Adjustments Total
------------- ------------- ------------- ----------- ----------- -------------
Accounts payable 5,100 2,522 2,522 7,622
Accrued expenses 6,203 4,602 4,602 274 3a 11,079
Current portion of LT Debt 24,711 (24,711)(1) -- 2,000 3d 2,000
Prepetition liability 2,467 (2,467)(1) -- --
Income taxes payable 730 (730)(1) -- --
Dividends payable 412 -- -- -- 412
------------- ------------- ------------- ----------- ----------- -------------
Total Current Liabilities 11,715 35,032 (27,908) 7,124 2,274 21,113
------------- ------------- ------------- ----------- ----------- -------------
Long term debt, excluding current
portion 137 (137)(1) -- 8,000 3d 8,000
Deferred income taxes 4,519 -- -- -- -- 4,519
------------- ------------- ------------- ----------- ----------- -------------
Total Liabilities 16,234 35,169 (28,045) 7,124 10,274 33,632
------------- ------------- ------------- ----------- ----------- -------------
Commitments and Contingencies
Stockholders' Equity:
Common stock 1,094 -- 1,094
Additional paid-in capital 13,982 -- 13,982
Retained earnings 115,633 -- 115,633
Net investment and advances 13,969 17,196 31,165 (31,165) 3b --
Cumulative other comprehensive
income (50) 1,201 -- 1,201 (1,201) (50)
------------- ------------- ------------- ----------- ----------- -------------
Total Stockholders' Equity 130.659 15,170 17,196 32,366 (32,366) 130,659
------------- ------------- ------------- ----------- ----------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 145,893 $ 50,339 $ (10,849) $ 39,490 $ (22,092) $ 164,291
============= ============= ============= =========== =========== =============
See notes to unaudited pro forma condensed combining financial statements.
- 46 -
BEL FUSE INC - PASSIVE COMPONENTS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(AMOUNTS IN THOUSANDS)
Pro Forma
Passive Combined
Components Pro Forma Statement of
Bel Fuse Group Adjustments Operations
----------- ------------- ------------- --------------
Net sales $ 95,528 $ 71,561 $ 167,089
---------- ------------- --------------
Costs and expenses:
Cost of sales 72,420 58,734 131,154
Selling, general and
administrative 22,270 20,029 a 765 3c 43,064
----------- ------------- ------------- --------------
94,690 78,763 765 174,218
----------- ------------- ------------- --------------
Income (loss) from operations 838 (7,202) (765) (7,129)
----------- ------------- ------------- --------------
Other income (expense)
Interest Expense (1,522) b (357) 3d (1,879)
Allocated capital costs (3,270) c (3,270)
Interest income 210 d 210
Other income (expense), net 940 (619) e (420) 3e (99)
----------- ------------- ------------- --------------
940 (5,201) (777) (5,038)
----------- ------------- ------------- --------------
Earnings (loss) before provision
for income taxes
1,778 (12,403) (1,542) (12,167)
Provision (benefit) for income
taxes 1,199 730 -- 1,929
----------- ------------- ------------- --------------
Net earnings (loss) $ 579 $ (13,133) $ (1,542) $ (14,096)
=========== ============= ============= ==============
Earnings (loss) per common share-
basic $ 0.05 $ (1.29)
=========== ==============
Earnings (loss) per common share-
diluted $ 0.05 $ (1.29)
=========== ==============
Weighted average number of
common shares outstanding-
basic 10,907 10,907
=========== ==============
Weighted average number of
common shares outstanding-
diluted 11,086 10,907
=========== ==============
a Includes $1,391 of allocated corporate expenses that are charged by an
unconsolidated entity of Insilco. Management believes that this charge will
not be required after the consumation of the acquisition.
b Represents interest expense on Long-term debt charged by an unconsolidated
entity of Insilco. Management believes that this charge will not be required
after the consumation of the acquisition.
c Represents interest expense on intercompany loans. Bel Fuse Inc. is not
assuming the affiliated company liabilities and would not necessarily incur
this interest cost.
d Represents interest income on cash balances. Bel Fuse Inc. is not acquiring
any cash and would not receive the interest income.
e Includes the write-off of deferred financing charges in the amount of $1,373
relating to the prepayment of long-term debt. This would not be a recurring
cost to Bel Fuse Inc.
See notes to unaudited pro forma condensed combining financial statements.
- 47 -
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)
1. Adjustments to Passive Components Financial Statements
The proforma condensed balance sheet of Passive Components
Group as at December 31, 2002 eliminates certain assets and
liabilities that are excluded from the acquisition agreement.
These comprise the following:
Cash $ 10,849
Long-term debt 24,711
Prepetition liabilities 2,467
Income taxes payable 730
Notes payable 137
2. Allocation of Purchase Price
The allocation of Passive Components purchase price among the tangible
and intangible assets acquired and liabilities assumed is based on
management's preliminary estimates of fair market value. These
estimates of fair market value could change based on Bel Fuse Inc's
finalization of an independent appraisal of the assets acquired.
The following table sets forth the estimated purchase price:
Cash paid $ 35,000
Accrued transaction costs 1,193
-----------
Total purchase price $ 36,193
===========
The following table is a preliminary allocation of the purchase price:
Assets
Accounts receivable $ 13,181
Inventories 12,326
Prepaid expenses and other 2,337
Property, plant and equipment 11,384
Goodwill --
Identifiable intangible assets (other than
goodwill) 3,827
Other non current assets 262
Liabilities
Accounts payable and other accrued
liabilties (7,124)
-------------
Total purchase price $ 36,193
=============
- 48 -
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to an impairment
test at least annually. Other intangible assets will continue to be
amortized over their useful lives. Identifiable intangibles in
connection with this acquisition include patents and product
information.
3. Pro Forma Adjustments
(a) Estimated unpaid transaction costs.
(b) Elimination of outstanding equity balances of Passive Components
as of December 31, 2002.
(c) Amortization expense of identifiable intangible assets based on a
five-year amortization period.
(d) Bel Fuse Inc. intends to finance $10 million under a term loan
agreement with The Bank of New York. Principal and interest are
payable in arrears quarterly over five years with interest of
Libor plus 1.25% (3.75% at December 31, 2002). Under the terms of
the agreement, Bel Fuse Inc. will pay a $50 fee and provide an
unconditional joint and several guarantee, as defined, by all
direct and indirect domestic subsidiaries secured by a first
priority security interest in and lien on 65% of all of the issued
and outstanding shares of the capital stock of each direct
Material Foreign Subsidiary, as defined in the loan agreement, of
such subsidiaries and all other personal property of such
subsidiaries.
(e) Estimated reduction of interest income related to the cash portion
of the purchase price of $35,000.
(f) Reflects reclassification of transaction costs incurred by Bel
Fuse Inc. as of December 31, 2002 to identifiable intangible
assets from other assets.
(g) No tax benefit has been provided on the proforma adjustments
because the tax jurisdictions that the adjustments apply to
preclude such a tax benefit.
- 49 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BEL FUSE INC.
By: /s/ Daniel Bernstein
---------------------
Daniel Bernstein
President
Dated: March 26, 2003
- 50 -
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-93572, 33-45809, 33-53462, 333-65627 and
333-89376) of Bel Fuse Inc. of our report dated January 14, 2003 relating to the
financial statements of the Passive Components Group, which appears in the
Current Report on Form 8-K of Bel Fuse Inc. dated MARCH 26, 2003.
PricewaterhouseCoopers LLP
Columbus, Ohio
MARCH 26, 2003
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
---------------------------------------------
In connection with the current report of Bel Fuse Inc (the "Company") on Form
8-K as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Daniel Bernstein, President and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934;and
(2) The information contained in the Report fairly presents, in all material
respects, the pro forma financial condition and results of operations of the
Company and Passive Components Group as of December 31, 2002 and for the year
then ended.
(3) A signed original of this written statement required by Section 906 has been
provided to Bel Fuse Inc. and will be retained by Bel Fuse Inc. and furnished to
the Securities and Exchange Commission or its staff upon request.
Dated: March 26, 2003
By: /s/ Daniel Bernstein
---------------------------
Daniel Bernstein, President
and Chief Executive Officer
This certification has been furnished solely pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
---------------------------------------------
In connection with the current report of Bel Fuse Inc (the "Company") on Form
8-K as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Colin Dunn, Vice-President of Finance, of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934;and
(2) The information contained in the Report fairly presents, in all material
respects, the pro forma financial condition and results of operations of the
Company and Passive Components Group as of December 31, 2002 and for the year
then ended.
(3) A signed original of this written statement required by Section 906 has been
provided to Bel Fuse Inc. and will be retained by Bel Fuse Inc. and furnished to
the Securities and Exchange Commission or its staff upon request.
Dated: March 26, 2003
By: /s/ Colin Dunn
-------------------------------
Colin Dunn, Vice - President
of Finance
This certification has been furnished solely pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
